FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from..............to................
Commission file number: 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 06-1169935
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
132 West State Street
Medford, Wisconsin 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 748-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
(Title of Class)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act).
Yes No X
As of March 1, 2004, 1,685,646 shares of common stock were outstanding. The
aggregate market value of the voting stock held by non-affiliates as of June
30, 2003, was approximately $44,077,628. For purposes of this calculation, the
registrant has assumed its directors and executive officers are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 24, 2004 (to the extent specified herein): Part III
FORM 10-K
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business......................................................3
2. Properties....................................................7
3. Legal proceedings.............................................7
4. Submission of matters to a vote of security holders.......... 8
PART II
5. Market for registrant's common equity and related
stockholder matters...........................................9
6. Selected financial data..................................... 11
7. Management's discussion and analysis of financial
condition and results of operations......................... 12
7A. Quantitative and qualitative disclosures about market risk...34
8. Financial statements and supplementary data................. 35
9. Changes in and disagreements with accountants on
accounting and financial disclosure..........................77
9A. Controls and procedures......................................77
PART III
10. Directors and executive officers of the registrant...........77
11. Executive compensation...................................... 78
12. Security ownership of certain beneficial owners and
management and related stockholders matters..................79
13. Certain relationships and related transactions...............79
14. Principal accountant fees and services.......................80
PART IV
15. Exhibits, financial statement schedules, and reports on
Form 8-K.....................................................80
PART I
ITEM 1. BUSINESS
General
Mid-Wisconsin Financial Services, Inc. (the "Company") is a registered
financial holding company under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company's subsidiary operates under the name Mid-
Wisconsin Bank (the "Bank") and has its principal office in Medford, Wisconsin.
Except as may otherwise be noted, this annual report on Form 10-K describes the
business of the Company and the Bank as in effect on December 31, 2003.
Acquisitions
The Company has a policy of actively pursuing opportunities to acquire
additional bank subsidiaries so that, at any given time, it may be engaged in
some tentative or preliminary discussions for such purpose with officers,
directors or principal shareholders of other holding companies or banks. There
are no plans, understandings, or arrangements, written or oral, regarding other
acquisitions as of the date hereof.
Business of the Bank
The day-to-day management of the Bank rests with its officers and board of
directors. The Bank is engaged in general commercial and retail banking
services, including trust services. The Bank serves individuals, businesses
and governmental units and offers most forms of commercial and consumer
lending, including lines of credit, term loans, real estate financing, mortgage
lending and agricultural lending. In addition, the Bank provides a full range
of personal banking services, including checking accounts, savings and time
accounts, installment and other personal loans, as well as mortgage loans. New
services are frequently added to the Bank's retail banking departments.
The Trust and Investment Center offers a wide variety of fiduciary, investment
management and advisory services to individuals, corporations, charitable
trusts, and foundations. The Bank administers pension, profit sharing and
other employee benefit plans, and personal trusts and estates. The Bank also
provides discount and full-service brokerage services, including the sale of
fixed and variable annuities, mutual funds and securities.
The Bank
The Bank was incorporated on September 1, 1890, as a state bank under the laws
of Wisconsin. The Bank's principal office is located at 132 West State Street,
Medford, Wisconsin, 54451. The Bank's principal office and ten branches
provide service to northern and central Wisconsin markets in Taylor, Clark, Eau
Claire, Lincoln, Marathon, Price and Oneida counties.
The Bank's principal branch offices are located in Medford, Colby, Neillsville,
Phillips, Rhinelander, and Weston, Wisconsin. These branches provide
commercial and consumer banking services for customers located in the
surrounding market areas.
Bank Market Area and Competition
The Bank competes for loans, deposits, and financial services in all of its
principal markets. Much of this competition comes from companies which are
larger and have greater resources than the Company. The Bank competes directly
with other banks, savings associations, credit unions, finance companies,
mutual funds, life insurance companies and other financial and non-financial
companies. Many of these nonbank competitors offer products and services that
are functionally equivalent to the products and services offered by the Bank.
Competition involves efforts to obtain new deposits, interest rates paid on
deposits and charged on loans, as well as other aspects of banking.
Recent changes in banking laws have had a significant effect on the competitive
environment in which the Bank operates and are likely to continue to increase
competition for the Bank. For example, federal law permits adequately
capitalized and managed bank holding companies to engage in interstate banking
on a much broader scale than in the past. Banks are also permitted to create
interstate branching networks in states which do not "opt out" of the new laws.
The Gramm-Leach-Bliley Act of 1999 has also increased the competitive
environment for the Bank. Under this act, financial holding companies are now
permitted to conduct a broad range of banking, insurance and securities
activities. The Company believes that the combined effects of more interstate
banking and the development of greater "one-stop" availability for banking,
insurance and securities services will both increase the overall level of
competition and attract competitors with which the Bank may not now compete for
its customers.
Employees
All officers of the Company except the Chairman and the Vice President are
full-time employees of the Bank. As of March 1, 2004, the Company and its
subsidiaries had 130 full-time equivalent employees.
Executive Officers
The executive officers of the Company as of March 1, 2004, their ages, offices
and principal occupation during the last five years are set forth below.
Name Offices and Positions Held Date of Election
James F. Melvin Chairman of the Board of the Company May 2000
Age: 54
From August 1996 to May 2000 Vice
Chairman of the Board of the Company
From May 1998 to May 2000 Chairman
of the Board of the Bank
President of the Melvin Companies
Name Offices and Positions Held Date of Election
Norman A. Hatlestad Vice President of the Company May 2002
Age: 62
President of Medford Auto Supply, Inc.
Gene C. Knoll President of the Company October 1996
Age: 50
President, Chief Executive Officer
of the Bank
William A. Weiland Secretary and Treasurer of the May 1998
Age: 49 Company
Executive Vice President of the Bank
Rhonda R. Kelley Controller of the Company September 1998
Age: 30
Controller of the Bank
All executive officers are elected annually by the board of directors at its
annual meeting and hold office until the next annual meeting of the board of
directors, or until their respective successors are elected and qualified.
Regulation and Supervision
The Company and the Bank are subject to regulation under both federal and state
law. The Company is a registered financial holding company and is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") pursuant to the BHCA. The Bank is subject
to regulation and examination by the Federal Deposit Insurance Corporation
("FDIC") and, as a Wisconsin chartered bank, by the Wisconsin Department of
Financial Institutions.
The Federal Reserve Board expects a financial holding company to be a source of
strength for its subsidiary banks. As such, the Company may be required to
take certain actions or commit certain resources to the Bank when it might
otherwise choose not to do so. Under federal and state banking laws, the
Company and the Bank are also subject to regulations which govern the Company's
and the Bank's capital and reserve requirements, loans and loan policies
(including the extension of credit to affiliates), deposits, dividend
limitations, establishment of branch offices, mergers and other acquisitions,
investments in or the conduct of other lines of business, management personnel,
interlocking directors and other aspects of the operation of the Company and
the Bank.
Bank regulators having jurisdiction over the Company and the Bank generally
have the authority to impose civil fines or penalties and to impose regulatory
sanctions for noncompliance with applicable banking regulations and policies.
In particular, the FDIC has broad authority to take corrective action if the
Bank fails to maintain required capital levels. Information concerning the
Company's compliance with applicable capital requirements is set forth in Note
15 of the Notes to Consolidated Financial Statements.
Banking laws and regulations have undergone periodic revisions that often have
a direct effect on the Bank's operations and its competitive environment. From
time to time various formal or informal proposals, including new legislation,
relating to, among other things, changes with respect to deposit insurance,
permitted banking activities and restructuring of the federal regulatory scheme
have been made or may be made or adopted in the future. It is likely that such
changes may have a significant impact on the Company's competitive
circumstances and that such changes may have a material adverse effect on the
Company's consolidated financial condition, liquidity or results of operations.
Monetary Policy
The earnings and growth of the Bank, and therefore the Company, are affected by
the monetary and fiscal policies of the federal government and governmental
agencies. The Federal Reserve Board has a direct and indirect influence on the
costs of funds used by the Bank for lending and its actions have a substantial
effect on interest rates, the general availability of credit and the economy as
a whole. These policies therefore affect the growth of Bank loans and deposits
and the rates charged for loans and paid for deposits. Governmental and
Federal Reserve Board policies have had a significant effect on the operating
results of commercial banks in the past and are expected to do so in the
future. Management of the Company is not able to anticipate the future impact
of such policies and practices on the growth of the profitability of the
Company.
Cautionary Statement Regarding Forward Looking Information
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, reports to shareholders, in press releases,
and in other oral and written statements made by or with the approval of the
Company which are not statements of historical fact will constitute forward-
looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure and other financial
items; (ii) statements of plans and objectives of the Company or its management
or Board of Directors, including those relating to products or services; (iii)
statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as "believes", "anticipates",
"expects", "intends", "targeted", and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements. In making forward-looking statements within the
meaning of the Reform Act, the Company undertakes no obligation to publicly
update or revise any such statement.
Forward-looking statements of the Company are based on information available to
the Company as of the date of such statements, and reflect the Company's
expectations as of such date, but are subject to risks and uncertainties that
may cause actual results to vary materially. In addition to specific factors
which may be described in connection with any of the Company's forward-looking
statements, factors which could cause actual results to differ materially from
those discussed in the forward looking statements include, but are not limited
to the following: (i) the condition of the U.S. economy in general and the
condition of the local economies in which operations are conducted; (ii) the
effects of increased competition in the banking and financial services
industry; (iii) the effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal Reserve
Board which reduce interest margins; (iv) the effects of inflation, interest
rate, market, and monetary fluctuations; (v) the timely development of and
acceptance of new products and services and perceived overall value of these
products and services by users; (vi) changes in consumer spending, borrowing
and saving habits; (vii) technological changes, including increases in on-line
banking or delivery of financial services; (viii) the effect of acquisitions or
the inability to consummate acquisitions to expand the Company's service area;
(ix) the ability to increase market share and control expenses; (x) the effect
of changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities and insurance) with which the Company and its
subsidiaries must comply or which result in increased competition (xi) the
effect of changes in accounting policies and practices required by bank or
securities regulatory agencies or to comply with generally accepted accounting
principles; (xii) the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; and (xiii) the success of the Company at
managing the risks involved in the foregoing.
ITEM 2. PROPERTIES
The Company's operations are carried out at the Bank's administrative office
facility at 132 West State Street, Medford, Wisconsin. The Company does not
maintain any separate offices.
In addition to its administrative office, the Bank operates ten branch
facilities. The Bank owns nine of the buildings. All nine branches are free-
standing buildings that provide adequate customer parking and, with one
exception, all have drive-in facilities. The Weston branch occupies leased
space which is designed for commercial banking operations. The Company
considers its properties to be adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings before any court,
administrative agency or other tribunal. Further, the Company is not aware of
any litigation which is threatened against it in any court, administrative
agency or other tribunal.
The Bank engages in legal actions and proceedings, both as plaintiffs and
defendants, from time to time in the ordinary course of its business. In some
instances, such actions and proceedings involve substantial claims for
compensatory or punitive damages or involve claims for an unspecified amount of
damages. There are, however, presently no proceedings pending or contemplated
which, in the opinion of the Company's management, would have a material
adverse effect on the operations, liquidity or consolidated financial condition
of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter
of 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
There is no active established public trading market in the Company's common
stock, although two regional broker-dealers act as market makers for the stock.
Bid and ask quotations are published periodically in the MILWAUKEE JOURNAL
SENTINEL and prices are quoted on the OTC Bulletin Board under the symbol
"MWFS.OB". Transactions in the Company's common stock are limited and
sporadic.
Holders
As of March 1, 2004, there were approximately 765 holders of record of the
Company's $.10 per share par value common stock. Some of the Company's shares
are held in "street" name and the number of beneficial owners of such shares is
not known nor included in the foregoing number.
DIVIDEND POLICY
Dividends on the Company's common stock have historically been paid in cash on
a quarterly basis in March, June, September, and December, and the Company
expects to continue this practice for the immediate future. The Company's
Bylaws provide that, subject to the provisions of applicable law, the Board of
Directors may declare dividends from unreserved and unrestricted earned
surplus, at such times and in such amounts as the board shall deem advisable.
The Company's ability to pay dividends depends upon the receipt of dividends
from the Bank. Bank dividends are subject to limitation under banking laws and
regulations. As of December 31, 2003, the Bank could have paid $11.5 million of
additional dividends to the Company without prior regulatory approval. The
declaration of dividends by the Company is discretionary and will depend upon
operating results and financial condition, regulatory limitations, tax
considerations and other factors.
Market Prices and Dividends
The following table summarizes high and low bid prices and cash dividends paid
for the periods indicated. Bid prices represent the bid prices reported on the
OTC Bulletin Board. The prices do not reflect retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions. There is
no active established trading market.
2003 Prices 2002 Prices
Quarter High Low Dividends (1) High Low Dividends (1)
1st $28.00 $27.25 $0.22 $26.30 $26.00 $0.22
2nd 28.00 28.00 0.62 27.60 26.30 0.62
3rd 28.65 28.00 0.22 28.33 27.20 0.22
4th 29.00 28.50 0.22 27.25 27.20 0.22
(1) The $.62 per share dividend declared in the second quarter of 2003 and 2002
includes a special dividend of $.40 per share.
Sales of Unregistered Securities
During the three-fiscal year period ended December 31, 2003, the Company sold
common stock in connection with the various stock option plans as detailed in
Note 14 of the Notes to Consolidated Financial Statements. Shares under the
1991 Employee Stock Option Plan were not registered under the Securities Act of
1933, but were offered in reliance on the exemptions afforded under sections
4(2) and 3(a) (11) thereof as all optionees were officers of the Bank and all
are residents of the State of Wisconsin. All proceeds from the sale of such
shares were used for general corporate purposes. Sales of unregistered shares
during each fiscal year were as follows:
Aggregate
Aggregate Consideration
Year Ended Shares Sold Received
2003 674 $ 17,524
2002 1,393 $ 37,378
2001 604 $ 14,496
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
(In thousands, except per share data)
2003 2002 2001 2000 1999
FOR THE YEAR:
Interest income $19,962 $21,385 $23,712 $24,216 $21,239
Interest expense 6,864 7,582 11,317 12,911 9,844
Net interest income 13,098 13,803 12,395 11,305 11,395
Provision for loan losses 457 625 370 400 180
Net interest income after
provision for loan losses 12,641 13,178 12,025 10,905 11,215
Noninterest income 2,981 2,676 2,425 2,303 2,107
Noninterest expense 10,020 9,588 9,118 8,658 8,542
Income before provision for income taxes 5,602 6,266 5,332 4,550 4,780
Provision for income taxes 1,544 1,783 1,483 1,201 1,432
Net income $4,058 $4,483 $3,849 $3,349 $3,348
Return on average assets 1.10% 1.30% 1.18% 1.07% 1.16%
Return on average equity 12.44% 14.56% 13.36% 11.74% 11.79%
Equity to assets 9.00% 8.75% 8.68% 9.45% 9.26%
Net interest margin 3.97% 4.43% 4.24% 4.02% 4.47%
AVERAGE BALANCE SHEET:
Loans net of unearned income $263,764 $243,597 $228,170 $225,308 $200,497
Assets 367,412 344,815 325,261 314,318 288,287
Deposits 280,215 257,356 250,131 235,656 222,755
Stockholders' equity 32,618 30,790 28,806 28,520 28,396
ENDING BALANCE SHEET:
Loans net of unearned income $269,105 $254,939 $231,649 $226,942 $217,546
Assets 375,225 368,040 340,490 321,102 307,684
Deposits 287,649 274,492 258,401 244,691 230,170
Stockholders' equity 33,764 32,186 29,553 30,345 28,499
FINANCIAL CONDITION ANALYSIS:
Total risk-based capital 12.83% 12.69% 12.11% 13.17% 12.93%
Net loan charge-offs to average loans 0.16% 0.21% 0.16% 0.04% 0.03%
Nonperforming loans to gross loans 0.22% 0.85% 1.03% 1.11% 0.85%
Efficiency ratio 59.96% 56.05% 59.44% 61.34% 61.12%
Fee revenue to average assets 0.42% 0.43% 0.47% 0.46% 0.46%
STOCKHOLDERS' DATA:
Basic and diluted earnings per share $2.41 $2.65 $2.25 $1.85 $1.83
Book value per share $20.03 $19.11 $17.42 $16.75 $15.62
Dividends per share $1.28 $1.28 $1.22 $1.20 $1.17
Dividend payout ratio 53.1% 48.3% 54.2% 64.9% 63.9%
Average common shares outstanding 1,685 1,692 1,707 1,814 1,826
Shareholders of record at year end 773 838 818 803 816
STOCK PRICE INFORMATION
High $29.00 $28.33 $26.00 $27.50 $27.50
Low 27.25 26.00 20.12 21.50 25.50
Market Price at year end (1) 28.50 27.25 26.00 22.00 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.
Table 2: Selected Quarterly Financial Data
(In thousands, except per share data)
2003 Quarter Ended
December 31, September 30, June 30, March 31,
Interest income $4,917 $4,930 $5,023 $5,092
Interest expense 1,605 1,705 1,756 1,798
Provision for loan losses 61 80 158 158
Income before provision for income taxes 1,363 1,539 1,376 1,324
Net income 991 1,101 1,000 966
Basic and diluted earnings per share $0.59 $0.65 $0.59 $0.57
Average common shares outstanding 1,685 1,685 1,685 1,685
2002 Quarter Ended
December 31, September 30, June 30, March 31,
Interest income $5,303 $5,314 $5,380 $5,388
Interest expense 1,835 1,876 1,896 1,975
Provision for loan losses 120 150 175 180
Income before provision for income taxes 1,672 1,461 1,594 1,539
Net income 1,189 1,056 1,138 1,100
Basic and diluted earnings per share $0.71 $0.62 $0.67 $0.65
Average common shares outstanding 1,683 1,693 1,697 1,696
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis reviews significant factors
with respect to the Company's financial condition and results of operations at
and for the three-year period ended December 31, 2003. This discussion should
be read in conjunction with the consolidated financial statements, notes,
tables, and the selected financial data presented elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties that
may cause actual results to differ materially from those in such statements.
For a discussion of certain factors that may cause such forward-looking
statements to differ materially from actual results see Item 1, "Cautionary
Statement Regarding Forward Looking Information," in this Annual Report on Form
10-K for the year ended December 31, 2003.
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
2003 compared to 2002
Net income in 2003 was $4.1 million, a decrease of $425,000 or 8.9% from the
$4.5 million earned in 2002. Basic and diluted earnings per share for 2003
were $2.41 compared to $2.65 in 2002, a decrease of 9.1%. Return on average
common stockholders' equity and return on average assets were 12.44% and 1.10%
for 2003 compared to 14.56% and 1.30% for 2002. Cash dividends paid in 2003
and 2002 were $1.28 per share. Key factors affecting current year results
were:
Tax equivalent net interest income decreased $700,000 or 4.9% from
$14.4 million in 2002 to $13.7 million in 2003. Tax equivalent interest
income was $20.6 million for 2003, $1.4 million or 6.4% lower than 2002.
Interest expense decreased $700,000 or 9.2% to $6.9 million for 2003.
Increases in volume and changes in product mix added $630,000 to taxable
equivalent net interest income, whereas changes in the 2003 rate environment
resulted in a $1.3 million decrease.
The allowance for loan losses was $2.7 million for 2003 and 2002. Net
loan charge-offs decreased $94,000 from $520,000 in 2002 to $426,000 in
2003. Net charge-offs were .16% of average loans in 2003 compared to .21% in
2002. The ratio of allowance for loan losses to loans decreased to 1.02%
from 1.06% at 2002.
Noninterest income during 2003 increased $300,000 or 11.1% when
compared to 2002. The primary factors increasing noninterest income were an
increase in trust fees, gain on sale of loans, and bank owned life insurance
income offset by a decrease in deposit service fees and investment product
commissions.
Noninterest expense increased $400,000 during 2003 or 4.2% over 2002
levels. Factors contributing to the increase were increased personnel
expenses, occupancy expense, purchased core deposit amortization and other
operating expenses.
2002 compared to 2001
The Company's net income for 2002 was $4.5 million, an increase of
$634,000 or 16.5% over the $3.8 million earned in 2001. Basic and diluted
earnings per share for 2002 were $2.65, a 17.8% increase over 2001 basic and
diluted earnings per share of $2.25. Return on average common stockholders'
equity and return on average assets were 14.56% and 1.30% for 2002 compared
to 13.36% and 1.18% for 2001. Cash dividends paid in 2002 increased by 4.9%
to $1.28 per share over the $1.22 per share paid in 2001. Key factors
behind these results were:
Tax equivalent net interest income was $14.4 million for 2002, $1.5
million or 11.7% higher than 2001. Tax equivalent interest income decreased
by $2.2 million, while interest expense decreased $3.7 million. The volume
of average earning assets increased $20.5 million to $325.4 million, which
exceeded the $15.1 million increase in interest bearing liabilities to
$276.4 million. Increases in volume and changes in product mix added $1.1
million to taxable equivalent net interest income, whereas changes in the
rate environment of 2002 resulted in a $427,000 increase.
The allowance for loan losses increased to $2.7 million in 2002 from
$2.6 million in 2001. Net loan charge-offs were $520,000, an increase of
$154,000 from 2001, primarily due to two large commercial credits. Net
charge-offs were .21% of average loans compared to .16% in 2001. The ratio
of allowance for loan losses to loans was 1.06% and 1.12% at December 31,
2002 and 2001.
Noninterest income during 2002 increased $251,000 or 10.4% when
compared to 2001. The primary factors increasing noninterest income were an
increase in investment product commissions and other operating income offset
by a decrease in deposit service fees and trust service fees.
Noninterest expense increased $470,000 during 2002 or 5.2% over 2001
levels. Factors contributing to the increase were increased personnel
expenses and other operating expenses offset by a decrease in occupancy
expense, data processing expense and goodwill amortization.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. Management actively
monitors and manages its interest rate risk exposure. The measurement of the
market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair
value of financial instruments that reflect changes in market prices and rates
can be found in Notes 18 and 19 of the Notes to Consolidated Financial
Statements.
The Company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while adjusting the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase or decrease in interest rates may
adversely impact the Company's earnings, to the extent that the interest rates
borne by assets and liabilities do not change at the same speed, to the same
extent, or on the same basis. The Company does not engage in trading
activities.
Commitments and Contingencies
The Company, like many Wisconsin financial institutions, has a subsidiary
located in Nevada that holds and manages investment assets which have not been
subject to Wisconsin income tax. The Company is currently under audit by the
Wisconsin Department of Revenue for the use of this out-of-state subsidiary.
An unfavorable outcome of this audit would result in a negative impact on the
Company's 2004 earnings.
In addition, the Internal Revenue Service is currently conducting an audit of
the Company's open tax returns. At this time, the Company does not expect any
additional tax liability as a result of this audit.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income on a tax equivalent basis is the Company's principal source
of revenue accounting for 82.2% of total tax equivalent income in 2003, as
compared to 84.4% in 2002 and 84.2% in 2001. Net interest income represents
the difference between interest earned on loans, securities and other interest
earning assets, and the interest expense associated with the deposits and
borrowings that fund them. Interest rate fluctuations together with changes in
volume and types of earning assets and interest bearing liabilities combine to
affect total net interest income. Additionally, net interest income is
impacted by the sensitivity of the balance sheet to changes in interest rates,
contractual maturities, and repricing frequencies.
2003 compared to 2002
Fully taxable equivalent net interest income was $13.7 million for 2003, a
decrease of 4.9% from $14.4 million in 2002. The Company experienced a
shrinking interest margin during 2003 as long-term assets repriced at
significantly lower interest rates while interest bearing liabilities repriced
at or near the interest rate floors established by the Bank's Asset Liability
Committee.
In early 2001 and through mid-year 2002, the Company benefited from the falling
interest rate environment as its liability sensitive balance sheet repriced
faster at lower rates than long-term loans and securities resulting in
increased net interest income. In 2003 the opposite was true as assets
repriced in the lower interest rate environment which negatively impacted net
interest income. Interest bearing liabilities reached their interest rate
floors during 2003. During 2003 Company's management took a proactive asset
liability stance to match the repricing characteristics of assets and
liabilities by originating the majority of new or renewed loans at variable
rates. Management's intent was to use this as a hedge to protect the Company's
balance sheet in a rising rate environment. In 2003 this strategy reduced net
interest income further when the prime lending rate decreased twenty-five basis
points mid-year and a large portion of the loan portfolio repriced immediately.
Management expects the 2004 net interest margin to remain at current levels but
widen as interest rates begin to rise.
As indicated in Tables 3 and 4, increases in volume and changes in the mix of
both earning assets and interest bearing liabilities added $630,000 to fully
taxable equivalent net interest income, while the changes in the interest rates
resulted in a $1.3 million decrease, for a net decrease of $700,000. The
net interest margin and interest rate spread decreased to 3.97% and 3.62%
compared to 4.43% and 4.02% in 2002.
For 2003, the yield on earning assets decreased 80 basis points, decreasing
interest income by $1.4 million while the cost of interest bearing liabilities
decreased 40 basis points, decreasing interest expense by $718,000 for a net
decrease of $700,000 in tax equivalent net interest income. The interest rate
environment and repricing characteristics of the Company's balance sheet all
contributed to the shrinking interest margin.
Average earning assets were $345.8 million in 2003, an increase of 6.3% from
2002. Average interest bearing liabilities increased 6.3% to $293.8 million in
2003.
2002 compared to 2001
Net interest income was $13.8 million for 2002 compared to $12.4 million for
2001. Tax equivalent net interest income was $14.4 million for 2002, an
increase of $1.5 million or 11.7% from 2001. The increase in tax equivalent
net interest income was due to low interest rates, particularly on the cost of
interest bearing liabilities, and a higher level of earning assets.
Average earning assets were $325.4 million in 2002, an increase of $20.4
million, or 6.7% from 2001. During 2002, average loans accounted for over 75%
of the growth in earning assets. Average loans were $243.6 million in 2002, up
$15.4 million or 6.8% compared to 2001. Average securities and other
investments increased $5.0 million, or 6.5% from 2001.
Average interest bearing liabilities were $276.4 million, an increase of $15.1
million, or 5.8% from 2001. Average interest bearing deposits increased $4.3
million. Average short-term borrowings decreased $0.6 million and average
long-term borrowings increased $11.5 million. The mix of interest bearing
liabilities changed significantly compared to 2001. Average interest bearing
deposits were 80.8% of average interest bearing liabilities compared to 83.8%
in 2001. To take advantage of the lower interest rates, and mitigate interest
rate risk the Company took additional long-term borrowings. As a result, long-
term borrowings increased to 11.2% of average interest bearing liabilities from
7.5% at December 31, 2001.
The tax equivalent net interest margin improved to 4.43% compared to 4.24% in
2001. In 2002, the yield on earning assets decreased 119 basis points,
decreasing interest income by $2.2 million while the cost of interest bearing
liabilities decreased 159 basis points, decreasing interest expense by $3.7
million for a net increase of $1.5 million in tax equivalent net interest
income. Asset growth, a shift in the deposit mix and the liability sensitive
repricing characteristics of the Company's balance sheet in the declining rate
environment experienced in 2002 all contributed to the margin improvement.
The average loan yield was 7.03%, down 144 basis points from 2001. Despite the
loan growth, repricing of variable rate loans and competitive pressure on new
and refinanced loans in the 2002 interest rate environment put downward
pressure on the loan yield. Interest income declined $2.2 million in 2002
compared to 2001.
The decrease in yield on the securities and other investments portfolio
reflects increased prepayment activity and the resulting reinvestment of the
funds in the lower bond markets. Interest income declined $37,000 in 2002
compared to 2001.
The decrease in rates paid on interest bearing liabilities contributed
approximately $4.4 million of the decrease in interest expense while the
increase in volume offset the benefit by approximately $0.6 million in 2002
compared to 2001.
Table 3: Average Balances and Interest Rates
2003 2002 2001
Average Yield Average Yield Average Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(dollars in thousands)
ASSETS
Earnings Assets
Loans (1) (2) (3) $263,764 $16,603 6.29% $243,597 $17,134 7.03% $228,170 $19,317 8.47%
Investment securities:
Taxable 52,940 2,371 4.48% 53,268 3,173 5.96% 52,818 3,406 6.45%
Tax exempt (2) 23,578 1,565 6.64% 24,346 1,650 6.78% 18,691 1,333 7.13%
Other interest earning assets 5,488 56 1.02% 4,232 55 1.30% 5,307 176 3.32%
Total earning assets $345,770 $20,595 5.96% $325,443 $22,012 6.76% $304,986 $24,232 7.95%
Cash and due from banks 11,317 10,865 11,253
Other assets 13,135 11,233 11,801
Allowance for loan losses (2,810) (2,726) (2,779)
Total assets $367,412 $344,815 $325,261
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $28,178 $182 0.65% $24,967 $201 0.81% $19,928 $240 1.20%
Savings deposits 69,895 515 0.74% 67,200 667 0.99% 66,928 1,703 2.54%
Time deposits 144,364 4,352 3.01% 131,103 4,801 3.66% 132,149 7,434 5.63%
Short-term borrowings 13,177 151 1.15% 22,095 388 1.76% 22,700 863 3.80%
Long-term borrowings 38,170 1,664 4.36% 31,027 1,525 4.92% 19,575 1,077 5.50%
Total interest bearing liabilities $293,784 $6,864 2.34% $276,392 $7,582 2.74% $261,280 $11,317 4.33%
Demand deposits 37,778 34,086 31,126
Other liabilities 3,232 3,547 4,049
Stockholders' equity 32,618 30,790 28,806
Total liabilities and
stockholders' equity $367,412 $344,815 $325,261
Net interest income and rate spread $13,731 3.62% $14,430 4.02% $12,915 3.62%
Net interest margin 3.97% 4.43% 4.24%
(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%.
(3) Interest income includes net loan fees.
Table 4: Interest Income and Expense Volume and Rate Analysis
2003 Compared to 2002 2002 Compared to 2001
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
Interest income:
Loans (2) $1,418 $(1,949) $(531) $1,307 $(3,490) $(2,183)
Investment securities:
Taxable (20) (782) (802) 29 (262) (233)
Tax exempt (2) (52) (33) (85) 403 (86) 317
Other interest income 16 (15) 1 (36) (85) (121)
Total earning assets (2) $1,362 $(2,779) $(1,417) $1,703 $(3,923) $(2,220)
Interest expense:
Interest bearing demand $26 $(45) $(19) $60 $(99) $(39)
Savings deposits 27 (179) (152) 7 (1,043) (1,036)
Time deposits 485 (934) (449) (59) (2,574) (2,633)
Short Term Borrowing (157) (80) (237) (23) (452) (475)
Long Term Borrowing 351 (212) 139 630 (182) 448
Total interest-bearing liabilities 732 (1,450) (718) 615 (4,350) (3,735)
Net interest income(2) $630 $(1,329) $(699) $1,088 $427 $1,515
(1) The change in interest due to both rate and volume has been allocated to rate.
(2) The yield on tax-exempt loans and securities is computed on a tax
equivalent basis using a tax rate of 34%.
Table 5: Yield on Earning Assets
December 31, 2003 December 31, 2002 December 31, 2001
Yield Change Yield Change Yield Change
Yield on earning assets (1) 5.96% -0.80% 6.76% -1.19% 7.95% -0.46%
Effective rate on all liabilities
as a percentage of earning assets 1.99% -0.34% 2.33% -1.38% 3.71% -0.68%
Net yield on earning assets 3.97% -0.46% 4.43% 0.19% 4.24% 0.22%
(1) The yield on tax-exempt loans and securities is computed on a tax
equivalent basis using a tax rate of 34%.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is assessed based upon loan
growth, past loan loss experience, 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
nonperforming and 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, these amounts are
promptly charged off against the allowance.
Net loan charge-offs in 2003 were $426,000 compared with net charge-offs of
$520,000 in 2002 and $366,000 in 2001. Net charge-offs to average loans as a
percentage of average loans is a key measure of asset quality. Net charge-offs
to average loans were 0.16% in 2003 compared to 0.21% in 2002 and 0.16% in
2001. Management believes that the current provision conforms with the
Company's allowance for loan loss policy and is adequate in view of the present
condition of the Company's loan portfolio. See additional discussion under
section, "Allowance for Loan Losses."
Noninterest Income
Noninterest income was $3.0 million for 2003, $305,000 or 11.4% higher than
2002. Fee income as a percentage of total revenues (defined as total
noninterest income less net realized gain on sale of securities available for
sale divided by total interest income plus total noninterest income) was 15.0%
for 2003 compared to 11.5% last year.
Table 6: Noninterest Income
Years Ended December 31, % Change from prior year
2003 2002 2001 2003 2002
Service fees $824 $850 $883 -3.1% -3.7%
Trust service fees 708 643 659 10.1% -2.4%
Net realized gain on sale of securities
available for sale - 17 8 NM 112.5%
Investment product commissions 420 437 182 -3.9% 140.1%
Other operating income 1,029 729 693 41.2% 5.2%
Total noninterest income $2,981 $2,676 $2,425 11.4% 10.4%
2003 compared to 2002
Service fees decreased $26,000, or 3.1%, to $824,000 in 2003 compared to 2002.
During 2002, the Bank closed chronic overdrawn demand deposit accounts and
continued to see the decreased non-sufficient fund charges during 2003.
Trust fees were $708,000, $65,000 or 10.1%, higher than 2002. During the
fourth quarter 2002, trust fees were increased which accounted for the majority
of the increase in trust service fees.
There were no sales of securities during 2003.
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions, and self-directed IRA fees.
Investment product commissions decreased $17,000, or 3.9%, to $420,000 in 2003
compared to 2002. In 2002 the Bank received a $107,000 settlement for an error
in a trade execution from the broker that serviced the Bank's brokerage
business in 2001. Excluding this item, investment product commissions
increased $90,000, or 27.3% from 2002. The increase in fees was due to
commissions from 401(k) plans administration and a one time commission earned
on the bank owned life insurance (BOLI) purchase the Bank made through the
Trust and Investment Center.
Other operating income during 2003 included additional income from the gain on
sale of residential mortgage loans to the secondary market and BOLI income.
Income from the sale of residential mortgage loans to the secondary market
increased from $154,000 in 2002 to $392,000 in 2003. The increase in sales of
loans to the secondary market was a result of existing and new customers taking
advantage of the historically low long-term fixed rates on residential
mortgages. During 2003 the Bank sold approximately $25 million of fixed rate
residential mortgages to the secondary market. The Company does not expect
this same level of refinancing to occur during 2004 as a significant number of
homeowners have already refinanced and management's expectation that interest
rates will rise in 2004. As a result of a purchase of $3 million in BOLI made
during the year, income earned during 2003 amounted to $89,000.
2002 compared to 2001
Service fees were $850,000, $33,000 or 3.7% lower than 2001. The majority of
the decrease was due to the loss of two large commercial demand deposit
accounts and the related service fees in 2002. Also non-sufficient fund
charges decreased due to the Bank making a conscious effort to close chronic
overdrawn demand deposit accounts in 2002.
Trust service fees for 2002 were $643,000, down 2.4% from 2001. The change was
predominately due to market performance of trust assets under management over
the past year. Trust assets under management were $117.9 million and $125.8
million at December 31, 2002 and 2001, respectively. Trust assets are excluded
from the assets of the Company.
Investment product commissions increased $255,000 or 140.1% from 2001. The
increased revenue was predominately due to an increase in annuity sales.
Annuity sales jumped during 2002 due to investors seeking an investment product
with a fixed-rate of return that annuities offer. Also included in investment
products commission is a $107,000 settlement from the broker that serviced the
Bank's brokerage business in 2001. During 2001, there was an error in a trade
execution on a security held for investment.
Noninterest Expense
Table 7: Noninterest Expense
Years Ended December 31, % Change from prior year
2003 2002 2001 2003 2002
Salaries and employee benefits $5,604 $5,441 $4,918 3.0% 10.6%
Occupancy 1,241 1,116 1,176 11.2% -5.1%
Data processing and information systems 413 418 456 -1.2% -8.3%
Goodwill and purchased core deposit
amortization 310 290 358 6.9% -19.0%
Other operating expenses 2,452 2,323 2,210 5.6% 5.1%
Total noninterest expenses $10,020 $9,588 $9,118 4.5% 5.2%
2003 compared to 2002
Salaries and employee benefits are the largest component of noninterest expense
and totaled $5.6 million in 2003, an increase of $200,000 or 3.0%, as compared
to 2002. Salary expense was $4.2 million in 2003, an increase of $285,000, or
7.3%, as compared to 2002. The number of full-time equivalent employees
remained at 133 in 2003. Health insurance costs rose $91,000, or 27.2%, in
2003. Beginning in 2003 the Company established an employee medical benefit
plan to self-insure claims. The Company and its covered employees contribute
to the fund to pay the claims and stop-loss premiums. Bonus expense in 2003
was $84,000 compared to $356,000 in 2002. The decrease occurred as a result of
the Company not meeting its key performance indicators as established by
management.
Occupancy expense increased $125,000, or 11.2%, to $1.2 million in 2003
compared to 2002. The majority of the increase was due to the new Weston
branch location that opened in February 2003.
During 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles," which requires that goodwill no
longer be amortized but tested annually for impairment. There was no
impairment of goodwill in 2003 and 2002. The purchased core deposit intangible
is amortized using a systematic method over an eight-year period.
Other operating expenses in 2003 increased $129,000 or 5.6%. Loan and
collection expenses increased $132,000 for 2003 compared to 2002. Additionally
marketing and public relations increased $83,000 for 2003 due to promotional
efforts used to raise Company awareness in the new branch market.
2002 compared to 2001
Salaries and employee benefits increased $523,000 or 10.6% over 2001 and
represented 56.7% of total noninterest expense in 2002 compared to 53.9% in
2001. Salary expense increased $302,000 or 8.7% in 2002. Average full-time
equivalent employees were 133 during 2002, up 7 or 5.6% from the 126 full-time
equivalent employees during 2001. Benefits increased $221,000 in 2002,
primarily due to incentive bonuses and pension plan expense.
Occupancy expense was $1.1 million for 2002 decreasing 5.1% from 2001. The
decrease is due to the combined effect of lower equipment maintenance costs and
depreciation expense in 2002. Data processing expenses essentially remained
unchanged from 2001. Goodwill and purchased core deposit amortization
decreased 19.0% from 2001 to $290,000 due to the discontinuation of
amortization of goodwill on January 1, 2002 in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets." See Note 2 "Changes in Accounting
Principles" and Note 7 "Intangible Assets" of the Notes to the Consolidated
Financial Statements.
Income Taxes
Income tax expense for 2003 was $1.6 million, a decrease of $200,000 from 2002
income tax expense of $1.8 million. The Company's effective tax rate was 27.6%
in 2003, 28.5% in 2002, and 27.8% in 2001. See Note 11 of the Notes to
Consolidated Financial Statements for additional tax information.
BALANCE SHEET ANALYSIS
Loans
Total loans as presented in Table 8 include construction loans not yet fully
disbursed. Total loans grew to $269.1 million at December 31, 2003, a 5.6%
increase from the end of 2002.
Table 8: Loan Composition
2003 2002 2001 2000 1999
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollars in thousands)
Commercial $47,268 17.6% $50,204 19.7% $44,320 19.1% $42,806 18.9% $43,406 20.0%
Real estate commercial 87,244 32.4% 75,534 29.6% 70,623 30.4% 60,933 26.8% 55,240 25.4%
Agricultural 35,739 13.3% 33,576 13.2% 36,815 15.9% 41,439 18.3% 40,283 18.5%
Real estate construction 9,306 3.5% 8,489 3.3% 5,375 2.3% 5,233 2.3% 4,871 2.2%
Real estate residential 80,498 29.9% 77,134 30.3% 64,798 27.9% 65,285 28.8% 62,616 28.8%
Installment 9,050 3.3% 10,001 3.8% 10,170 4.4% 11,177 4.9% 10,933 5.0%
Lease financing 0 0.0% 0 0.0% 0 0.0% 238 0.1% 247 0.1%
Total loans $269,105 100.0% $254,938 100.0% $232,101 100.0% $227,111 100.0% $217,596 100.0%
Commercial and real estate commercial loans remained steady as a percentage of
total loans. The change in the loan mix between the two categories was due to
normal economic activity and was not due to the Company's strategy.
Commercial loans were $47.3 million at the end of 2003, down $2.9 million since
year-end 2002, and comprised 17.6% of total loans, down from 19.7% at year-end
2002. The commercial loan classification consists of loans to sole
proprietors, partnerships, small businesses and corporations. Loans in this
category are to a wide range of industries.
Real estate commercial loans totaled $87.2 million at year end 2003 and
comprised 32.4% of the loan portfolio compared with 29.6% of the portfolio at
the end of 2002. Loans in this classification grew $11.7 million, or 15.5%,
during 2003. Loans of this type are in a broad range of industries.
Agricultural loans increased $2.2 million to $35.8 million, representing 13.3%
of the loan portfolio at the end of 2003, compared to $33.6 million or 13.2% at
year-end 2002. Agricultural loans consist of loans secured by farmland, and to
finance dairy production. The credit risk related to these types of loans is
influenced by milk prices and the resulting impact on the borrower's operations.
Real estate construction loans were $9.3 million at the end of 2003, up
$800,000 since year-end 2002, and comprised 3.5% of total loans, up from 3.3%
at year-end 2002. Loans in this classification provide short-term financing
for acquisition or development of commercial real estate, such as multifamily
residents or other commercial developments.
Real estate residential loans totaled $80.5 million at the end of 2003, up $3.4
million since year-end 2002, and comprised 29.9% of the total loan portfolio,
down slightly from 30.3% at year-end 2002. Loans in this category include
conventional home mortgages, second mortgages, and home equity lines. During
2003, the housing market remained strong in the Company's market place in both
new construction and refinancing activities.
Installment loans decreased $900,000 to $9.1 million, representing 3.3% of the
loan portfolio at the end of 2003, compared to $10.0 million or 3.8% at year-
end 2002. Installment loans include short-term installment loans, automobile
loans, recreational vehicle loans, credit card loans, and other personal loans.
The decrease in installment loans was strongly influenced by extensive
competition from local credit unions offering low interest rates on installment
loans.
Table 9: Loan Maturity Distribution and Interest Rate Sensitivity
Loan Maturity
One Year Over one Year Over
or Less to Five Years Five Years
(dollars in thousands)
Commercial $31,724 $15,169 $375
Real estate commercial 34,284 50,627 2,333
Agricultural 12,897 18,461 4,381
Real estate construction 9,306
Real estate residential 26,815 28,913 24,770
Total $115,026 $113,170 $31,859
Fixed Rate $78,972 $60,593 $1,678
Variable Rate 36,054 52,577 30,181
Total $115,026 $113,170 $31,859
The loan portfolio is widely diversified by types of borrowers, industry
groups, and market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned to numerous
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic conditions. At December 31, 2003 no concentrations
existed in the Company's portfolio in excess of 10% of total loans.
Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. Credit risk is
controlled by detailed underwriting procedures, comprehensive loan
administration, and ongoing 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 inherent in the loan portfolio.
Management reviews the adequacy of the allowance for loan losses on a quarterly
basis. Factors considered by management include past loan loss experience,
trends in past due and nonperforming loans, risk characteristics of loan
classifications, and current economic conditions. The Company has an internal
risk analysis and review staff that continuously reviews loan quality.
Loans are initially graded when originated. They are regraded as they are
renewed, become delinquent, or facts demonstrate a heightened risk of
nonpayment. Loan reviews attempt to identify problem and watch list loans.
Problem and watch list loans generally exhibit repeated delinquencies,
managerial problems, customer's failure to provide financial information or
collateral documentation.
After problem and watch list loans are identified, management will allocate a
portion of the allowance for loan loss to cover management's estimate of
probable loss. Management then estimates the potential loss for the remainder
of the loan portfolio. Each loan type is broken into categories based on
delinquency, specialty credits and rating code and a percentage of the
allowance is allocated based on loan category balances. To the extent that the
current allowance is sufficient or insufficient to cover management's best
estimate of probable loss, management adjusts the provision for loan losses
accordingly.
Table 10: Loan Loss Experience
Years Ended December 31,
2003 2002 2001 2000 1999
(dollars in thousands)
Allowance for loan losses at
beginning of year $2,702 $2,597 $2,593 $2,286 $2,159
Loans charged off:
Commercial and agricultural 374 475 389 78 31
Real Estate Residential 11 10 21 12 11
Installment 94 75 81 103 86
Total loans charged off 479 560 491 193 128
Recoveries on loans previously charged off:
Commercial and agricultural 25 32 95 38 25
Real Estate Residential 10 0 10 34 30
Installment 18 8 20 28 20
Total recoveries 53 40 125 100 75
Net loans charged off 426 520 366 93 53
Provision for loan losses 456 625 370 400 180
Allowance for loan losses at
end of year $2,732 $2,702 $2,597 $2,593 $2,286
Ratio of allowance for loan
losses to net charge offs 6.4 5.2 7.1 27.9 43.1
Ratio of allowance for loan
losses to total loans at end of period 1.02% 1.06% 1.12% 1.14% 1.05%
Ratio of net charge-offs to
average loans 0.16% 0.21% 0.16% 0.04% 0.02%
The allowance for loan losses was $2.7 million at the end of 2003 and 2002.
The December 31, 2003 ratio of allowance for loan losses to outstanding loans
was 1.02% compared with 1.06% at December 31, 2002. Based on management's
analysis of the loan portfolio during 2003, a provision expense of $456,000 was
recorded for the year ended December 31, 2003 a decrease of $169,000 compared
to the same period in 2002. Net loans charged off were $426,000 or .16% of
average loans for 2003, compared to $520,000 or .21% of average loans for 2002,
and were $366,000 or .16% of average loans for 2001. Loans charged-off are
subject to continuous review and specific efforts are taken to achieve maximum
recovery of principal, accrued interest, and related expenses.
The allocation of the year-end allowance for loan losses for each of the past
five years based on management's estimates of loss exposure by category of
loans is shown in Table 11. The allocation methodology applied by the Company
focuses on changes in the size and character of the loan portfolio, current and
expected economic conditions, the geographic and industry mix of the
loan portfolio and historical losses by category. The total allowance is
available to absorb losses from any segment of the portfolio. Management
allocates the allowance for loan losses by pools of risk. The Company combines
estimates of the allowance needed for loans analyzed individually and loans
analyzed on a pool basis. The determination of allocated reserves for larger
commercial loans involves a review of individual higher-risk transactions,
focusing on loan grading, and assessment of specific loss content and possible
resolutions of problem credits.
Table 11: Allocation of the Allowance for Loan Losses
As of December 31,
2003 2002 2001 2000 1999
(dollars in thousands)
Commercial and agricultural $1,977 $1,771 $1,604 $1,459 $1,384
Real estate 474 592 487 478 536
Installment 181 189 195 202 181
Impaired Loans 67 150 226 341 156
Unallocated 33 0 85 117 29
Total $2,732 $2,702 $2,597 $2,597 $2,286
In the opinion of management, the allowance for loan losses was adequate as of
December 31, 2003. While management uses available information to recognize
losses on loans, future adjustments may be necessary based on changes in
economic conditions and the impact of such changes on borrowers.
Nonperforming Loans
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. Additionally, whenever
management becomes aware of facts that may adversely impact on the collection
of principal or interest on loans, it is practice to place such loans on
nonaccrual status immediately rather than waiting until the loans become 90
days past due. The accrual of interest income is discontinued when a loan
becomes 90 days past due as to principal or interest. Previously accrued and
uncollected interest on such loans is reversed, and income is recorded only to
the extent that interest payments are subsequently received and principal is
collectible.
Loans past due 90 days or more but still accruing interest are also included in
nonperforming loans. Also included in nonperforming loans are restructured
loans. Restructured loans involve the granting of concessions to the borrower
involving the modification of terms of the loan, such as changes in payment
schedule or interest rate.
Table 12: Nonperforming Loans and Other Real Estate Owned
December 31,
2003 2002 2001 2000 1999
(dollars in thousands)
Nonaccrual loans $136 $417 $221 $517 $505
Impaired loans 457 1,667 1,684 $1,691 $866
Accruing loans past due 90 days or more 35 62 30 24 64
Restructured loans 320 14 453 295 419
Total nonperforming loans $948 $2,160 $2,388 $2,527 $1,854
Other real estate owned $270 $- $90 $98 $70
Total nonperforming loans as a
percent of total loans 0.35% 0.85% 1.03% 1.11% 0.85%
Nonperforming loans at December 31, 2003 were $948,000 compared to $2.2 million
at December 31, 2002. Restructured loans represent $320,000 of nonperforming
loans at December 31, 2003 and $14,000 at December 31, 2002. These loans
consist of a commercial loan and agricultural loan that were granted various
concessions and have experienced cash flow problems in the past. The
restructured loans were current at December 31, 2003. Management is monitoring
these restructured loans to minimize any additional loss exposure. The ratio
of nonperforming loans to total loans at the end of 2003 was 0.35% compared to
0.85% at the end of 2002.
The following table shows the gross interest that would have been reported if
all loans had been current throughout the year in accordance with their
original terms.
Table 13: Forgone Loan Interest
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Interest income in accordance
with original terms $142 $162 $124
Interest income recognized (30) (44) (123)
Reduction in interest income 112 118 1
Investment Securities Portfolio
The investment securities portfolio is intended to provide the Company with
adequate liquidity, flexible asset liability management and a source of stable
income. All securities are classified as available for sale and reported at
estimated fair value. Unrealized gains and losses are excluded from earnings
but are reported as a separate component of equity, net of income tax.
Table 14: Investment Securities Portfolio
Years Ended December 31,
2003 2002 2001
(dollars in thousands)
Obligations of U.S. government
corporations and agencies $454 $1,473 $4,502
Mortgage-backed securities 50,018 47,730 51,210
Obligations of states and political
subdivisions 24,859 25,843 22,523
Corporate debt securities 2,506 1,125 125
Money market equity funds 0 0 5,003
Equity securities 151 151 151
Totals $77,988 $76,322 $83,514
Investment securities averaged $76.5 million in 2003 compared to $77.6 million
in 2002. The average balance of securities decreased partly as a result of the
large principal pay downs on mortgage-backed securities received during 2003.
The Company chose not to reinvest some of the pay downs back into investment
securities but instead use the funds to fund loan growth as loans yielded a
higher rate of return.
At December 31, 2003 the Company's securities portfolio did not contain
securities of any single issuer where the aggregate carrying value of such
securities exceeded 10% of stockholders' equity.
Table 15: Investment Securities Portfolio Maturities
After After
One But Five but
Within Within Within After
One Year Five Years Ten Years Ten Years
Weighted Weighted Weighted Weighted
Amount Yields Amount Yields Amount Yields Amount Yields
Obligations of U.S.
government corporations
and agencies - - - - $454 5.29% - -
Mortgage-backed securities 5,718 5.68% 41,478 4.41% 2,822 5.83% - -
Obligations of states and
political subdivisions (1) 1,785 3.50% 15,372 3.99% 7,175 4.35% 527 5.32%
Corporate debt securities - - 25 7.50% 100 3.29% 2,381 4.59%
Totals $7,503 5.16% $56,875 4.29% $10,551 4.78% $2,908 0.96%
(1) Weighted average yields on tax-exempt securities have been calculated on
a tax equivalent basis using a tax rate of 34%.
Deposits
Deposits are the Company's largest source of funds. At December 31, 2003,
deposits were $287.6 million, up $13.1 million or 4.8% from $274.5 million at
December 31, 2002. On average, total deposits were $280.2 million for 2003, an
increase of 8.9% over 2002.
Table 16: Average Deposits Distribution
2003 2002 2001
% of % of % of
Amount Total Amount Total Amount Total
(dollars in thousands)
Non-interest bearing demand $37,778 13.5% $34,086 13.2% $31,126 12.4%
Interest-bearing demand 28,178 10.1% 24,967 9.7% 19,928 8.0%
Savings deposits 69,895 24.9% 67,200 26.1% 66,928 26.8%
Time deposits 144,364 51.5% 131,103 51.0% 132,149 52.8%
Total $280,215 100.0% $257,356 100.0% $250,131 100.0%
The Company's retail deposit growth is continuously influenced by competitive
pressure from other financial institutions, as well as other investment
opportunities available to customers. Emphasis will be placed on generating
additional core deposits through competitive pricing of deposits and
established branch delivery systems.
Table 17: Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31, 2003
(dollars in thousands)
3 months or less $30,355
Over 3 months through 6 months 9,176
Over 6 months through 12 months 10,663
Over 12 months 7,227
Total $57,421
Other Funding Sources
Other funding sources, including short-term and long-term borrowings, were
$51.3 million at December 31, 2003, a decrease of $6.7 million from $58.0
million at December 31, 2002. Short-term borrowings consist of securities sold
under repurchase agreements and federal funds purchased. The repurchase
agreements are payable on demand. Long-term debt was $40.0 million at December
31, 2003 and 2002. Long-term debt consists of advances from the Federal Home
Loan Bank.
Table 18: Short-term Borrowings
December 31,
2003 2002 2001
(dollars in thousands)
Securities sold under repurchase agreements $11,294 $18,040 $18,465
Federal funds purchased 0 0 924
Totals $11,294 $18,040 $19,389
Average amounts outstanding during year $13,177 $22,095 $22,739
Average interest rates on amounts
outstanding during year 1.1% 1.8% 3.8%
Maximum month-end amounts outstanding $19,495 $34,937 $29,492
Average interest rates on amounts
outstanding at end of year 0.9% 1.2% 2.0%
Table 19: Contractual Obligations
Payments due by period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
(dollars in thousands)
Long-term borrowings $40,000 $11,000 $24,000 $5,000 $-
Liquidity and Interest Rate Sensitivity
The Bank's Asset Liability Management process provides a unified approach to
management of liquidity, capital, interest rate risk, and providing
adequate funds to support the borrowing requirements and deposit flow of its
customers. Management views liquidity as the ability to raise cash at a
reasonable cost or with a minimum of loss and as a measure of balance sheet
flexibility to react to marketplace, regulatory, and competitive changes.
Interest rate risk is the exposure to a bank's earnings and capital arising
from changes in future interest rates. In order to limit exposure to interest
rate risk, the Company has developed strategies to manage its liquidity,
shorten the maturities of certain interest- bearing assets and increase the
maturities of certain interest-bearing liabilities. The Company has
concentrated on writing variable rate loans and the use of funding sources to
provide longer term funding possibilities.
The Bank's primary funding source is deposits. Average deposits as a
percentage of other funding sources used were 82.5% in 2003 compared to 80.8%
in 2002 and 83.8% in 2001. The company employs non-deposit funding sources
such as Federal Home Loan Bank advances, federal funds purchased, and corporate
funds in the form of repurchase agreements. The company also relies on cash
flow from its investment and loan portfolios in the form of interest and
principal paydowns as a constant source of liquidity.
Management's overall strategy is to coordinate the volume of maturing rate
sensitive assets and liabilities to minimize the impact of interest rate
movements on liquidity needs and net interest margin. Table 20, gap analysis,
represents a schedule of assets and liabilities maturing over various time
intervals. The table reflects a positive gap position, more assets than
liabilities maturing, for the individual categories in all time frames except
the 0 - 90 days and beyond five years. The cumulative gap ratio through the
one-year interval is negative, more liabilities maturing than assets. The
company evaluates the cumulative gap position at the one-year and two-year time
frames. At those time intervals the cumulative maturity gap was between the
guideline of 60% to 120%. Liquidity needs as a result of the negative gap
position will be accommodated with the funding sources listed.
In addition to the "gap analysis" the company uses simulation modeling to
determine its sensitivity to changes in interest rates. During this process
rates and volumes of balance sheet items are hypothetically adjusted to
simulate alternate rate environments. Assumptions are made for an immediate
rate increase/decrease of 100 basis points and 200 basis points proportionally
from current conditions. Under the proportional simulation, rates of maturing
assets and liabilities are increased or decreased by the same percentage of
change as the driver rate. For example, if prime, the driver rate, increases
from 4% to 5% or 100 basis points, the change is 25%. All other rates are
either increased or decreased by 25% of their original rate. Adjustments are
also made to rates of those asset and liability items that have repricing
opportunities built into their contracts. The net interest income under the
simulation is compared to projected net interest income under a stable rate
environment for a period of 12 months. The difference represents the company's
earnings sensitivity to a changing rate environment. The simulation results
indicated that net interest income would increase 14.18% under an immediate 200
basis point rise in rates, and net interest income would decrease by 14.93%
under an immediate 200 basis point fall in rates. The results of the 200 basis
points decline were outside the guidelines established by the Company of a
negative 10% change to net interest income and were not considered to be
detrimental at this time under our rate environment. Results are monitored
regularly for changing conditions.
Table 20: Interest rate sensitivity gap analysis
December 31, 2003
0-90 91-180 181-365 1-5 Beyond
Days Days Days Years 5 Years Total
(dollars in thousands)
Earning Assets:
Loans $25,948 $31,814 $54,568 $124,784 $31,991 $269,105
Securities 2,926 1,627 2,950 56,876 15,764 $80,143
Other earning assets 2,242 2,242
Total $31,116 $33,441 $57,518 $181,660 $47,755 $351,490
Cumulative rate sensitive assets $31,116 $64,557 $122,075 $303,735 $351,490
Interest-bearing liabilities:
Interest-bearing deposits (1) $62,684 $25,247 $35,912 $40,222 $83,635 $247,700
Other interest-bearing liabilities 11,294 11,000 29,000 0 51,294
Total $73,978 $25,247 $46,912 $69,222 $83,635 $298,994
Cumulative interest sensitive liabilities $73,978 $99,225 $146,137 $215,359 $298,994
Interest sensitivity gap $(42,862) $8,194 $10,606 $112,438 $(35,880)
Cumulative interest sensitivity gap $(42,862) $(34,668) $(24,062) $88,376 $52,496
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 42.1% 65.1% 83.5% 141.0% 117.6%
(1) The interest rate sensitivity assumptions for savings accounts, money market accounts, and
interest-bearing demand deposits accounts are based on current and historical experiences regarding
portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of
these balances are considered to be long-term and fairly stable and are included in the 1-5 year
category and beyond 5 years category.
Capital
Stockholders' equity at December 31, 2003 increased $1.6 million to $33.8
million compared with $32.2 million at year-end 2002. The $1.9 million
increase in stockholders' equity in 2003 was net income of $4.1 million, in
excess of cash dividends paid to shareholders of $2.2 million. Cash dividends
paid in 2003 and 2002 were $1.28 per share. Capital at year-end 2003 included
$905,000 of accumulated other comprehensive income, related to unrealized gains
on securities available for sale, net of the tax effect, compared to $1.3
million at December 31, 2002.
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of December 31, 2003, 2002, and
2001, the Company's Tier 1 risk-based capital ratios, total risk-based capital
ratios and Tier 1 leverage ratios were well in excess of regulatory
requirements. Management feels the capital structure of the Company is
adequate.
Table 21: Capital Ratios
At December 31,
2003 2002 2001
(In thousands, except per share data)
Total Stockholders' Equity $33,764 $32,186 $29,553
Tier 1 Capital 32,000 29,754 27,490
Total Regulatory Capital 34,732 32,456 30,087
Total equity to assets 9.0% 8.8% 8.7%
Tier 1 to average assets 8.7% 8.5% 8.3%
Tier 1 risk-based capital ratio 11.8% 11.6% 11.1%
Total risk-based capital ratio 12.8% 12.7% 12.1%
Off-Balance Sheet Arrangements
The Company is party to off-balance sheet arrangements that arise out of normal
Bank lending activities in accordance with Bank lending guidelines. Details of
such off-balance sheet arrangements are in Note 18 of the Notes to the
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is set forth in Item 6, "Selected
Financial Data" and under subcaptions "Results of Operations", "Market Risk",
"Net Interest Income", "Allowance for Loan Losses", "Investment Securities
Portfolio", "Deposits", and "Liquidity and Interest Rate Sensitivity" under
Item 7, Management's Discussion and Analysis of Financial Conditions.
Independent Auditor's Report
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We have audited the accompanying consolidated balance sheets of Mid-Wisconsin
Financial Services, Inc. and Subsidiary as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-Wisconsin
Financial Services, Inc. and Subsidiary at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
Wipfli LLP
January 16, 2004
Wausau, Wisconsin
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2003 and 2002
2003 2002
Assets
Cash and due from banks $13,694,114 $15,484,360
Interest-bearing deposits in other financial institutions 614,128 19,408
Federal funds sold 1,628,359 11,825,781
Securities available for sale - At fair value 77,988,188 76,321,696
Federal Home Loan Bank stock (at cost) 2,154,100 2,000,000
Loans held for sale 330,775 791,420
Loans receivable, net of allowance for loan losses of $2,732,447
in 2003 and $2,701,709 in 2002 266,372,637 252,236,394
Accrued interest receivable 1,613,617 1,716,413
Premises and equipment 5,596,313 5,487,421
Intangible assets 563,543 873,887
Goodwill 295,316 295,316
Other assets 4,373,457 987,427
TOTAL ASSETS $375,224,547 $368,039,523
Liabilities and Stockholders' Equity
Non-interest-bearing deposits $39,949,256 $38,108,392
Interest-bearing deposits 247,700,052 236,383,561
Total deposits 287,649,308 274,491,953
Short-term borrowings 11,294,262 18,039,517
Long-term borrowings 40,000,000 40,000,000
Accrued interest payable 1,206,178 1,294,227
Accrued expenses and other liabilities 1,310,609 2,028,019
Total liabilities 341,460,357 335,853,716
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding - 1,685,550 shares in 2003 and
1,684,475 shares in 2002 168,555 168,448
Additional paid-in capital 10,975,920 10,941,600
Retained earnings 21,714,225 19,812,670
Accumulated other comprehensive income 905,490 1,263,089
Total stockholders' equity 33,764,190 32,185,807
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $375,224,547 $368,039,523
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Interest income:
Interest and fees on loans $16,501,158 $17,068,344 $19,250,624
Interest and dividends on securities:
Taxable 2,371,461 3,161,464 3,409,726
Tax-exempt 1,033,170 1,089,107 879,670
Other interest and dividend income 55,922 66,030 171,954
Total interest income 19,961,711 21,384,945 23,711,974
Interest expense:
Deposits 5,049,375 5,668,506 9,376,858
Short-term borrowings 150,790 388,432 862,744
Long-term borrowings 1,663,778 1,524,597 1,077,425
Total interest expense 6,863,943 7,581,535 11,317,027
Net interest income 13,097,768 13,803,410 12,394,947
Provision for loan losses 456,667 625,000 370,000
Net interest income after provision for loan losses 12,641,101 13,178,410 12,024,947
Noninterest income:
Service fees 823,942 849,606 883,289
Trust service fees 707,633 642,737 658,555
Net realized gain on sale of securities available for sale 0 17,349 7,892
Investment product commissions 420,406 436,775 181,862
Other operating income 1,029,388 729,538 693,113
Total noninterest income 2,981,369 2,676,005 2,424,711
Noninterest expenses:
Salaries and employee benefits 5,603,896 5,441,313 4,918,212
Occupancy 1,241,398 1,116,205 1,175,876
Data processing and information systems 413,002 418,096 455,664
Goodwill and purchased core deposit amortization 310,344 290,042 357,500
Other operating expenses 2,451,659 2,322,843 2,211,081
Total noninterest expenses 10,020,299 9,588,499 9,118,333
Income before provision for income taxes 5,602,171 6,265,916 5,331,325
Provision for income taxes 1,544,236 1,783,080 1,482,575
Net income $4,057,935 $4,482,836 $3,848,750
Basic and diluted earnings per share $2.41 $2.65 $2.25
Cash dividends declared per share $1.28 $1.28 $1.22
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2003, 2002, and 2001
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Totals
Balance, January 1, 2001 1,811,356 $181,136 $11,698,317 $18,219,726 $245,915 $30,345,094
Comprehensive income:
Net income 3,848,750 3,848,750
Other comprehensive income 358,459 358,459
Total comprehensive income 4,207,209
Proceeds from stock benefit plans 1,258 126 30,217 30,343
Repurchase of common stock
returned to unissued (116,117) (11,612) (755,922) (2,193,450) (2,960,984)
Cash dividends paid, $1.22 per share (2,068,541) (2,068,541)
Balance, December 31, 2001 1,696,497 169,650 10,972,612 17,806,485 604,374 29,553,121
Comprehensive income:
Net income 4,482,836 4,482,836
Other comprehensive income 658,715 658,715
Total comprehensive income 5,141,551
Proceeds from stock benefit plans 2,334 234 61,950 62,184
Repurchase of common stock
returned to unissued (14,356) (1,436) (92,962) (307,571) (401,969)
Cash dividends paid, $1.28 per share (2,169,080) (2,169,080)
Balance, December 31, 2002 1,684,475 168,448 10,941,600 19,812,670 1,263,089 32,185,807
Comprehensive income:
Net income 4,057,935 4,057,935
Other comprehensive loss (357,599) (357,599)
Total comprehensive income 3,700,336
Proceeds from stock benefit plans 1,075 107 28,560 28,667
Stock-based compensation 5,760 5,760
Cash dividends paid, $1.28 per share (2,156,380) (2,156,380)
Balance, December 31, 2003 1,685,550 $168,555 $10,975,920 $21,714,225 $905,490 $33,764,190
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $4,057,935 $4,482,836 $3,848,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 1,062,130 947,914 1,092,114
Provision for loan losses 456,667 625,000 370,000
Provision (benefit) for deferred income taxes 12,826 (123,657) (37,461)
Gain on sale of investment securities 0 (17,349) (7,892)
(Gain) loss on premises and equipment disposals (542) 6,770 21,277
Loss on foreclosed real estate 80,896 18,329 0
Federal Home Loan Bank stock dividends (154,100) (82,200) (91,400)
Stock-based compensation 5,760 0 0
Changes in operating assets and liabilities:
Loans held for sale 460,645 (339,770) 449,650
Other assets 185,794 (22,813) 294,984
Other liabilities (805,459) 176,674 (761,778)
Net cash provided by operating activities 5,362,552 5,671,734 5,178,244
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in
other financial institutions (594,720) 5,694 (6,528)
Net (increase) decrease in federal funds sold 10,197,422 (11,112,936) (712,845)
Securities available for sale:
Proceeds from sales 0 497,921 1,622,892
Proceeds from maturities 43,798,257 33,340,989 36,561,064
Payment for purchases (46,133,173) (25,646,479) (51,578,956)
Payment for purchase of Federal Home Loan Bank stock 0 (417,800) (114,000)
Net increase in loans (15,696,749) (23,785,419) (5,901,643)
Capital expenditures (760,756) (410,208) (249,179)
Proceeds from sale of premises and equipment 1,400 9,355 78,840
Proceeds from sale of other real estate 751,134 47,404 105,099
Purchase of bank-owned life insurance (3,000,000) 0 0
Net cash used in investing activities (11,437,185) (27,471,479) (20,195,256)
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Cash flows from financing activities:
Net increase in deposits $13,157,355 $16,090,506 $13,710,900
Net decrease in short-term borrowings (6,745,255) (1,349,919) (6,569,317)
Proceeds from issuance of long-term borrowings 9,000,000 10,000,000 23,000,000
Principal payments on long-term borrowings (9,000,000) 0 (9,200,000)
Proceeds from stock benefit plans 28,667 62,184 30,343
Payment for repurchase of common stock 0 (401,969) (2,960,984)
Cash dividends paid (2,156,380) (2,169,080) (2,068,541)
Net cash provided by financing activities 4,284,387 22,231,722 15,942,401
Net increase (decrease) in cash and due from banks (1,790,246) 431,977 925,389
Cash and due from banks at beginning 15,484,360 15,052,383 14,126,994
Cash and due from banks at end $13,694,114 $15,484,360 $15,052,383
Supplemental cash flow information:
Cash paid during the year for:
Interest $6,951,992 $7,981,419 $12,356,111
Income taxes 1,608,066 2,034,775 1,505,941
Noncash investing and financing activities:
Loans transferred to other real estate 1,549,722 24,302 202,452
Loans charged off 478,948 560,134 490,791
Loans made in connection with the sale of other real estate 447,917 48,235 90,582
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Principal Business Activity
Mid-Wisconsin Financial Services, Inc. (the "Company") operates as a full-
service financial institution with a primary market area including, but not
limited to, Clark, Taylor, Price, Marathon, and Oneida Counties, Wisconsin. It
provides a variety of traditional banking products in addition to trust
services and uninsured investment product sales.
Principles of Consolidation
The consolidated financial statements include the accounts of Mid-Wisconsin
Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank (the "Bank"),
and the Bank's wholly owned subsidiary Mid-Wisconsin Investment Corporation.
All significant intercompany balances and transactions have been eliminated.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practice within the banking
industry.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks." Cash and due from banks includes cash on
hand and non-interest-bearing deposits at correspondent banks.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Securities
Securities are classified as available for sale and are carried at fair value,
with unrealized gains and losses reported in comprehensive income.
Amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the terms of the securities. Declines in
fair value of securities that are deemed to be other than temporary, if
applicable, are reflected in earnings as realized losses. Gains and losses on
the sale of securities are determined using the specific-identification method.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required
to hold stock in the FHLB based on the anticipated amount of FHLB borrowings to
be advanced. This stock is recorded at cost, which approximates fair value.
Transfer of the stock is substantially restricted.
Loans Held for Sale
Loans held for sale consist of the current origination of certain fixed-rate
mortgage loans and are recorded at the lower of aggregate cost or fair value.
A gain or loss is recognized at the time of the sale reflecting the present
value of the difference between the contractual interest rate of the loans sold
and the yield to the investor. Mortgage servicing rights are not retained.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on loans
is accrued and credited to income based on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest
method.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Loans (Continued)
The accrual of interest on loans is discontinued when, in the opinion of
management, there is an indication the borrower may be unable to make payments
as they become due. When loans are placed on nonaccrual or charged-off, all
unpaid accrued interest is reversed against interest income. The interest on
these loans is subsequently accounted for on the cash basis until qualifying
for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense as losses are estimated to have occurred. Loan
losses are charged against the allowance when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
Management periodically evaluates the adequacy of the allowance using the
Company's past loan loss experience, known and inherent risks in the portfolio,
composition of the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral, current
economic conditions, and other relevant factors. This evaluation is inherently
subjective since it requires material estimates that may be susceptible to
significant change. The Company has an internal risk analysis and review staff
that continuously reviews loan quality and reports the results of its
examinations to executive management and the Board of Directors. Such reviews
also assist management in establishing the level of the allowance.
The allowance for loan losses includes specific allowances related to loans
which have been judged to be impaired under current accounting standards. A
loan is impaired when, based on current information, it is probable that the
Company will not collect all amounts due in accordance with the contractual
terms of the loan agreement. Management has determined that commercial,
financial, and agricultural loans and commercial real estate loans that have a
nonaccrual status or have had their terms restructured meet this definition.
Losses on large groups of homogeneous loans, such as mortgage and consumer
loans and leases, are evaluated using historical loss rates.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
Specific allowances for impaired loans are based on discounted cash flows of
expected future payments using the loan's initial effective interest rate or
the fair value of the collateral if the loan is collateral dependent. The
allowance arrived at through this methodology is adjusted by management's
judgment concerning the effect of recent economic events on portfolio
performance.
In management's judgment, the allowance for loan losses is adequate to cover
probable losses relating to specifically identified loans, as well as probable
losses inherent in the balance of the loan portfolio.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation.
Maintenance and repair costs are charged to expense as incurred. Gains or
losses on disposition of premises and equipment are reflected in income.
Depreciation is computed on a straight-line method and is based on the
estimated useful lives of the assets.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of cost or fair value less estimated costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
foreclosed real estate.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Goodwill and Purchased Intangibles
The excess of cost over the net assets acquired (goodwill) was amortized using
the straight-line method over a 15-year period from the date of acquisition.
Amortization of goodwill ceased on January 1, 2002, in accordance with the
change in accounting discussed in Note 2. The Company tested for impairment
during the third quarter and determined that there was no impairment of
goodwill during 2003. No amortization or impairment expense was recognized in
2003.
The purchased core deposit intangible is amortized using a systematic method
over an eight-year period. The Company periodically evaluates the carrying
value of the intangible asset for impairment. Adjustments are recorded when
the value of the asset decreases or is determined to be impaired.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the differences between
the financial statement and tax bases of assets and liabilities, as measured by
the enacted tax rates which will be in effect when these differences are
expected to reverse. Deferred tax expense is the result of changes in the
deferred tax asset and liability.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commitments
under commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded in the financial statements when they become
payable.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Rate Lock Commitments
The Company enters into commitments to originate loans whereby the interest
rate on the loan is determined prior to funding (rate lock commitments). Rate
lock commitments on mortgage loans that are intended to be sold are considered
to be derivatives. Accordingly, such commitments, along with any related fees
received from potential borrowers, are recorded at fair value in derivative
assets or liabilities, with changes in fair value recorded in the net gain or
loss on sale of mortgage loans. Fair value is based on fees currently charged
to enter into similar agreements, and for fixed-rate commitments also considers
the difference between current levels of interest rates and the committed
rates. The Company's rate lock commitments were $862,795 at December 31, 2003.
Segment Information
The Company, through a branch network of its banking subsidiary, provides a
full range of consumer and commercial banking services to individuals,
businesses, and farms in north central Wisconsin. These services include
demand, time, and savings deposits; safe deposit services; credit cards; notary
services; night depository; money orders, traveler's checks, and cashier's
checks; savings bonds; secured and unsecured consumer, commercial, and real
estate loans; ATM processing; cash management; trust and financial planning.
While the Company's chief decision makers monitor the revenue streams of
various Company products and services, operations are managed and financial
performance is evaluated on a companywide basis. Accordingly, all of the
Company's banking operations are considered by management to be aggregated in
one reportable operating segment.
Advertising Costs
Advertising costs are expensed as incurred.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains and losses
on securities available for sale, net of tax, which are recognized as a
separate component of equity, accumulated other comprehensive income.
Earnings per Share
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share includes the potential common
stock shares issuable under the stock options granted. The weighted average
number of shares outstanding were 1,684,596 in 2003, 1,692,227 in 2002, and
1,706,958 in 2001. The diluted, weighted average number of shares outstanding
were 1,684,984 in 2003, 1,692,491 in 2002, and 1,706,958 in 2001.
Note 2 Changes in Accounting Principles
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires the use of the purchase method of accounting for business
combinations initiated after June 30, 2001.
SFAS No. 142 addresses how intangible assets acquired outside of a business
combination should be accounted for upon acquisition and how goodwill and other
intangible assets should be accounted for after they have been initially
recognized. SFAS No. 142 eliminates the amortization for goodwill and other
intangible assets with indefinite lives. Other intangible assets with a finite
life continue to be amortized over their useful life. Goodwill and other
intangible assets with indefinite useful lives are tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The Company adopted SFAS No. 142 on January 1,
2002.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2 Changes in Accounting Principles (Continued)
The following table illustrates the effect amortization of goodwill had on net
income previous to the adoption of SFAS No. 142 for the year ended December 31:
2003 2002 2001
Net income $4,057,935 $4,482,836 $3,848,750
Goodwill amortization, net of tax 0 0 51,860
Adjusted net income $4,057,935 $4,482,836 $3,900,610
Adjusted basic and diluted earnings
per share $2.41 $2.65 $2.28
Stock-Based Compensation
Effective January 1, 2003, the Company adopted the fair value recognition
provision 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 2001 or 2002 net income
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2 Changes in Accounting Principles (Continued)
Stock-Based Compensation (Continued)
The following table illustrates the effect of net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period:
2003 2002 2001
Net income, as reported $4,057,935 $4,482,836 $3,848,750
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 3,802 0 0
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards,
net of related tax effects (3,802) (3,061) (3,976)
Pro forma net income $4,057,935 $4,479,775 $3,844,774
Earnings per share - Basic and diluted:
As reported $2.41 $2.65 $2.25
Pro forma $2.41 $2.65 $2.25
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2 Changes in Accounting Principles (Continued)
Stock-Based Compensation (Continued)
The fair value of stock options granted in 2003, 2002, and 2001, was estimated
at the date of grant using the Black-Scholes methodology. The following
assumptions were made in estimating the fair value for options granted for the
years ended December 31:
2003 2002 2001
Dividend yield 4.70% 4.70% 4.73%
Risk-free interest rate 4.03% 4.03% 5.27%
Weighted average expected life (years) 10 10 10
Expected volatility 9.55% 9.55% 8.99%
The weighted average fair value of options at their grant date, using the
assumptions shown above, was computed at $1.63 per share for options granted in
2003, $1.54 per share for options granted in 2002, and $2.17 per share for
options granted in 2001.
New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 is effective for financial instruments, except mandatorily
redeemable financial instruments, entered into or modified after May 31, 2003.
For mandatorily redeemable financial instruments, the effective date has been
deferred indefinitely. The adoption had no effect on the Company's results of
operations, financial position, or liquidity.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2 Changes in Accounting Principles (Continued)
New Accounting Pronouncements (Continued)
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement amends SFAS No. 133 for decisions made
as part of the Derivatives Implementation Group process and in connection with
implementation issues raised in relation to the application of the definition
of a derivative. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption had no material impact on the
Company's results of operations, financial position, or liquidity.
In November 2002, the FASB issued Interpretation No. 45, an interpretation of
FASB Statements No. 5, 57, and 107, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others ("FIN 45"). This Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements regarding certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 were effective as of December 31, 2002, and require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 were
effective beginning January 1, 2003. The requirements of FIN 45 did not have a
material impact on the results of operations, financial position, or liquidity.
Note 3 Cash and Due From Banks
Cash and due from banks in the amount of $2,788,000 was restricted at December
31, 2003, to meet the reserve requirements of the Federal Reserve System.
In the normal course of business, the Bank maintains cash and due from bank
balances with correspondent banks. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. Total uninsured
balances at December 31, 2003, were approximately $3,852,954.
MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Securities
The amortized cost, fair value, and gross unrealized gains and losses for the
Company's securities available for sale follow:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2003
Obligations of U.S. government
corporations and agencies $449,784 $6,250 $1,724 $454,310
Mortgage-backed securities 49,895,168 354,358 231,424 50,018,102
Obligations of states and political
subdivisions 23,626,428 1,234,034 1,811 24,858,651
Corporate debt securities 2,475,000 31,500 0 2,506,500
Total debt securities 76,446,380 1,626,142 234,959 77,837,563
Equity securities 150,625 0 0 150,625
Totals $76,597,005 $1,626,142 $234,959 $77,988,188
December 31, 2002
Obligations of U.S. government
corporations and agencies $1,450,000 $22,891 $0 $1,472,891
Mortgage-backed securities 47,045,828 971,967 288,173 47,729,622
Obligations of states and political
subdivisions 24,591,415 1,252,143 0 25,843,558
Corporate debt securities 1,125,000 0 0 1,125,000
Total debt securities 74,212,243 2,247,001 288,173 76,171,071
Equity securities 150,625 0 0 150,625
Totals $74,362,868 $2,247,001 $288,173 $76,321,696
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 4 Securities (Continued)
The amortized cost and fair value of debt securities at December 31, 2003, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Debt Securities Available for Sale Cost Value
Due in one year or less $1,776,058 $1,785,053
Due after one year through five years 14,701,317 15,396,985
Due after five years through ten years 7,233,837 7,728,830
Due after ten years through fifteen years 490,000 527,093
Due after fifteen years 2,350,000 2,381,500
Mortgage-backed securities 49,895,168 50,018,102
Total debt securities available for sale $76,446,380 $77,837,563
There were no sales of securities during 2003. There were proceeds of $497,921
from sales of securities during 2002, with $17,349 of gross realized gains.
There were proceeds of $1,622,892 during 2001, with $7,892 of gross realized
gains.
Securities with a fair value of $34,089,558 and $39,527,000 at December 31,
2003 and 2002, respectively, were pledged to secure public deposits, short-term
borrowings, and for other purposes required by law.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 4 Securities (Continued)
The following table shows our investments' gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December 31,
2003:
Less Than 12 Months 12 Months or More Total
Description Fair Unrealized Fair Unrealized Fair Unrealized
of Securities Value Losses Value Losses Value Losses
U.S. Treasury obligations
and direct obligations of
U.S. government agencies $248,060 $1,724 $0 $0 $248,060 $1,724
Mortgage-backed
securities 14,724,052 188,778 1,716,634 42,646 16,440,686 231,424
Obligations of states and
political subdivisions 563,189 1,811 0 0 563,189 1,811
Total temporarily impaired
securities $15,535,301 $192,313 $1,716,634 $42,646 $17,251,935 $234,959
Investments in the portfolio with unrealized losses are considered to be
temporarily impaired due to the current interest rate environment and the
stated rate on the individual securities. The temporary impairment is not
considered to be severe and duration of the impairment is considered to be
manageable at this time.
MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Loans
The composition of loans at December 31 follows:
2003 2002
Commercial $47,315,814 $50,204,025
Agricultural 35,739,831 33,577,744
Real estate:
Construction 13,931,131 11,598,852
Commercial 87,244,649 75,577,244
Residential 80,526,023 77,167,182
Installment 9,049,756 10,001,291
Subtotals 273,807,204 258,126,338
Net deferred loan fees (76,652) (78,277)
Loans in process of disbursement (4,625,468) (3,109,958)
Allowance for loan losses (2,732,447) (2,701,709)
Net loans $266,372,637 $252,236,394
The aggregate amount of nonperforming loans was approximately $593,000 and
$2,084,000 at December 31, 2003 and 2002, respectively. Nonperforming loans
are those that are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual of interest status, or loans the terms of
which have been renegotiated to provide a reduction or deferral of interest or
principal. If nonperforming loans had been current, approximately $54,000,
$164,000, and $205,000 of interest income would have been recognized for the
years ended December 31, 2003, 2002, and 2001, respectively.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 5 Loans (Continued)
An analysis of impaired loans at December 31 follows:
2003 2002
Impaired loans with a valuation allowance $457,162 $1,474,069
Impaired loans without a valuation allowance 0 192,498
Total impaired loans 457,162 1,666,567
Less - Allowance for loan losses 66,955 150,000
Net investment in impaired loans $390,207 $1,516,567
An analysis of impaired loans for the years ended December 31 follows:
2003 2002 2001
Average recorded investment $1,352,165 $2,780,904 $2,469,376
Interest income recognized $18,298 $83,347 $124,371
Interest income recognized using the cash basis $17,770 $94,068 $122,893
An analysis of the allowance for loan losses for the years ended December 31
follows:
2003 2002 2001
Balance, January 1 $2,701,709 $2,597,416 $2,593,099
Provision charged to operating expense 456,667 625,000 370,000
Recoveries on loans 53,019 39,427 125,108
Loans charged off (478,948) (560,134) (490,791)
Balance, December 31 $2,732,447 $2,701,709 $2,597,416
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 5 Loans (Continued)
The Bank, in the ordinary course of business, grants loans to the Company's
executive officers and directors, including affiliated companies in which they
are principal owners. The Bank has a policy of making loans (limited to
$50,000 per individual) available to employees and executive officers at
interest rates slightly below those prevailing for comparable transactions with
other customers. In the opinion of management, such loans do not involve more
than the normal risk of collectibility or present other unfavorable features.
Activity in related-party loans for the years ended December 31 is summarized
below:
2003 2002
Loans outstanding, January 1 $1,087,859 $1,130,450
Changes in related parties (67,267) 0
New loans 1,293,091 674,699
Repayments (985,148) (717,290)
Loans outstanding, December 31 $1,328,535 $1,087,859
Note 6 Premises and Equipment
Premises and equipment consist of the following at December 31:
2003 2002
Land and improvements $922,281 $919,679
Buildings 5,969,718 5,811,103
Furniture and equipment 5,382,147 5,686,142
Total cost 12,274,146 12,416,924
Less - Accumulated depreciation 6,677,833 6,929,503
Totals $5,596,313 $5,487,421
Depreciation and amortization charged to operating expense totaled $651,006 in
2003, $611,118 in 2002, and $726,078 in 2001.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 7 Intangible Assets
The carrying values of intangible assets are summarized as follows:
2003 2002
Purchased core deposit intangible $2,218,437 $2,218,437
Less - Accumulated amortization 1,654,894 1,344,550
Totals $563,543 $873,887
Amortization expense for intangible assets was $310,344 in 2003, $290,042 in
2002, and $271,067 in 2001.
Amortization expense on intangible assets for each of the next two years is as
follows:
2004 $332,069
2005 231,474
Total $563,543
Note 8 Interest-Bearing Deposits
Aggregate annual maturities of certificate and IRA accounts at December 31,
2003, are as follows:
2004 $126,960,891
2005 17,600,960
2006 8,549,970
2007 6,216,445
Total $159,328,266
Deposits from the Company's directors, executive officers, and affiliated
companies in which they are principal owners totaled $4,617,839 and $3,317,046
at December 31, 2003 and 2002, respectively.
Interest-bearing deposits include $69,295,669 and $45,322,662 of certificates
of deposit in denominations of $100,000 or greater at December 31, 2003 and
2002, respectively.
MID-WISCONSIN FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 Short-Term Borrowings
Short-term borrowings at December 31 consist of the following:
2003 2002
Securities sold under repurchase agreements $11,294,262 $18,039,517
The Company pledges U.S. agency securities available for sale as collateral for
repurchase agreements. The fair value of pledged securities, including accrued
interest receivable, totaled $20,425,353 and $19,622,122 at December 31, 2003
and 2002, respectively.
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
2003 2002 2001
Weighted average rate at December 31 0.90% 1.24% 2.05%
For the year:
Highest month-end balance $19,495,101 $34,936,710 $29,492,473
Daily average balance 13,177,181 22,094,640 22,739,366
Weighted average rate 1.14% 1.76% 3.79%
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 10 Long-Term Borrowings
Long-term borrowings at December 31 consist of the following:
2003 2002
6.28% fixed rate FHLB advance, interest payable monthly with
principal due during 2003
$0 $4,000,000
4.65% to 4.67% fixed rate FHLB advances, interest payable
monthly with principal due during 2003 0 5,000,000
1.73% to 5.07% fixed rate FHLB advances, interest payable
monthly with principal due during 2004
11,000,000 10,000,000
2.39% to 4.14% fixed rate FHLB advances, interest payable
monthly with principal due during 2005 12,000,000 10,000,000
2.02% to 4.44% fixed rate FHLB advances, interest payable
monthly with principal due during 2006 12,000,000 8,000,000
3.67% to 5.51% fixed rate FHLB advances, interest payable
monthly with principal due during 2008 5,000,000 3,000,000
Totals $40,000,000 $40,000,000
The FHLB advances are secured by FHLB stock and a blanket lien consisting
principally of one- to four-family real estate loans totaling approximately
$66,000,000 at December 31, 2003 and 2002.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 11 Income Taxes
The components of the income tax provision are as follows:
2003 2002 2001
Current income tax expense:
Federal $1,423,837 $1,779,203 $1,512,939
State 107,573 127,534 7,097
Total current 1,531,410 1,906,737 1,520,036
Deferred income tax expense (credit):
Federal 10,156 (104,909) (44,702)
State 2,670 (18,748) 7,241
Total deferred 12,826 (123,657) (37,461)
Total provision for income taxes $1,544,236 $1,783,080 $1,482,575
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
2003 2002 2001
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax expense at
statutory rate $1,904,738 34.0 $2,130,411 34.0 $1,812,651 34.0
Increase (decrease)
in taxes resulting from:
Tax-exempt interest (407,020) (7.3) (402,261) (6.4) (328,452) (6.2)
State income taxes 72,760 1.3 71,798 1.1 9,463 0.2
Bank-owned life
insurance (30,249) (0.5) 0 0.0 0 0.0
Other 4,007 0.1 (16,868) (0.2) (11,087) (0.2)
Provision for income
taxes $1,544,236 27.6 $1,783,080 28.5 $1,482,575 27.8
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 11
Income Taxes (Continued)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The major components of the net deferred taxes are as follows:
2003 2002
Deferred tax assets:
Allowance for loan losses $717,197 $705,095
Deferred compensation 396,753 405,645
State net operating losses 38,000 36,654
Purchased deposit intangible 282,754 218,798
Totals 1,434,704 1,366,192
Less - Valuation allowance 38,000 36,654
Total deferred tax assets 1,396,704 1,329,538
Deferred tax liabilities:
Premises and equipment 175,669 156,346
FHLB stock 153,426 92,757
Unrealized gain on securities available for sale 485,693 695,739
Total deferred tax liabilities 814,788 944,842
Net deferred tax asset $581,916 $384,696
Both the Company and the Bank pay state income taxes on their individual net
earnings. At December 31, 2003, tax net operating losses at the Company of
approximately $729,000 existed to offset future state taxable income. These
net operating losses will begin to expire in 2007. The valuation allowance has
been recognized to adjust deferred tax assets to the amount of tax net
operating losses expected to be realized. If realized, the tax benefit for
this item will reduce current tax expense for that period.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 12 Retirement Plans
Effective December 1, 2002, the Company merged its noncontributory defined
contribution money purchase plan into its 401(k) profit sharing. The new plan
is referred to as the Profit Sharing and 401(k) Plan. The plan is available to
substantially all employees. Contributions to the plan are based on the
Company achieving desired profitability. Additional discretionary
contributions can be authorized by the Board of Directors. The Company also
matches 100% of participant contributions to the plan up to 5% of pay deferred.
Total expense associated with the plans was $362,432, $505,673, and $398,462
for the years ended December 31, 2003, 2002, and 2001, respectively.
The Company has a nonqualified deferred directors' fee compensation plan which
permits directors to defer a portion of their compensation into a stock
equivalent account or a cash account. The benefits are payable after a
director's resignation from the Board of the Company in a lump sum or in
installments over a period not in excess of five years. Included in other
liabilities is the estimated present value of future payments of approximately
$1,018,000 and $1,045,000 at December 31, 2003 and 2002, respectively. Expense
associated with this plan was approximately $164,000, $176,000, and $194,000 in
2003, 2002, and 2001, respectively.
Note 13 Stock Benefit Plans
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan adopted during 2000, the
Company is authorized to issue up to 50,000 shares of common stock to its full-
time employees, nearly all of whom are eligible to participate. Under the
terms of the plan, employees can choose each year to have up to 5% of their
annual gross earnings withheld to purchase the Company's common stock. Stock
is purchased by employees under the plan annually. The purchase price of the
stock is 95% of the lower of its beginning-of-year or end-of-year market price.
Approximately 22% of eligible employees participated in the plan during 2003.
Stock issued under this plan totaled 401, 413, and 441 shares during 2003,
2002, and 2001, respectively. As of December 31, 2003, 48,532 shares of common
stock remain reserved for future grants to employees under the Employee Stock
Purchase Plan approved by the stockholders.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 13 Stock Benefit Plans (Continued)
Incentive Stock Option Plan
Under the terms of an incentive stock option plan adopted during 2000, shares
of unissued common stock are reserved for options to officers and key employees
of the Company at prices not less than the fair market value of the shares at
the date of the grant. Options may be exercised no earlier than six months
after the grant date. These options expire ten years after the grant date.
Under the terms of a stock option plan terminated during 1999, 1,853
outstanding options may be exercised between the fourth and fifth anniversaries
of the date of the grant. All of the outstanding options under this plan were
exercised or forfeited during 2003.
The following table summarizes information regarding stock options at December
31, 2003:
Outstanding Options Exercisable Options
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/03 Life Price 12/31/03 Price
$25 to $29 10,738 8.6 years $27.19 10,738 $27.19
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 13 Stock Benefit Plans (Continued)
Incentive Stock Option Plan (Continued)
For the years ended December 31, 2001, 2002, and 2003, activity in stock
options outstanding was as follows:
Weighted
Average
Shares Price
December 31, 2000 8,599 $26.53
Options granted 2,776 25.50
Options exercised (604) (24.00)
Options forfeited (1,202) (24.00)
December 31, 2001 9,569 26.53
Options granted 3,012 26.63
Options exercised (1,921) (26.62)
Options forfeited (1,197) (27.44)
December 31, 2002 9,463 26.61
Options granted 3,541 28.13
Options exercised (674) (26.00)
Options forfeited (1,592) (26.30)
December 31, 2003 10,738 $27.19
As of December 31, 2003, 252,450 shares of common stock remain reserved for
future grants to officers and key employees under the incentive stock option
plan approved by the stockholders.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14 Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2003,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14 Capital Requirements (Continued)
The Company and the Bank's actual capital amounts and ratios are presented in
the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2003:
Total capital (to risk-
weighted assets):
Consolidated $34,732,000 12.8% > $21,658,000 > 8.0% N/A
Subsidiary Bank 33,104,000 12.2% > $21,647,000 > 8.0% > $27,058,000 > 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $32,000,000 11.8% > $10,829,000 > 4.0% N/A
Subsidiary Bank $30,372,000 11.2% > $10,823,000 > 4.0% > $16,235,000 > 6.0%
Tier I capital (to
average assets):
Consolidated $32,000,000 8.7% > $14,777,000 > 4.0% N/A
Subsidiary Bank $30,372,000 8.2% > $14,772,000 > 4.0% > $18,464,000 > 5.0%
As of December 31, 2002:
Total capital (to risk-
weighted assets):
Consolidated $32,456,000 12.7% > $20,460,000 > 8.0% N/A
Subsidiary Bank $31,520,000 12.3% > $20,450,000 > 8.0% > $25,563,000 > 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $29,754,000 11.6% > $10,230,000 > 4.0% N/A
Subsidiary Bank $28,818,000 11.3% > $10,225,000 > 4.0% > $15,338,000 > 6.0%
Tier I capital (to
average assets):
Consolidated $29,754,000 8.5% > $14,675,000 > 4.0% N/A
Subsidiary Bank $28,818,000 8.2% > $14,670,000 > 4.0% > $18,338,000 > 5.0%
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 15 Restrictions on Retained Earnings
At December 31, 2003, the Bank could have paid approximately $11,457,000 of
additional dividends to the Company without prior regulatory approval. The
payment of dividends is subject to the statutes governing state-chartered banks
and may be further limited because of the need for the Bank to maintain capital
ratios satisfactory to applicable regulatory agencies.
Note 16 Accumulated Other Comprehensive Income
Comprehensive income is shown in the consolidated statements of changes in
stockholders' equity. The Company's accumulated other comprehensive income is
comprised of the unrealized gain or loss on securities available for sale. The
following shows the activity in accumulated other comprehensive income:
2003 2002 2001
Accumulated other comprehensive income at
beginning $1,263,089 $604,374 $245,915
Activity:
Unrealized gain (loss) on securities available
for sale (569,678) 1,037,993 560,861
Less - Reclassification adjustment for gains 0 17,349 7,892
Net unrealized gains (losses) (569,678) 1,020,644 552,969
Tax effect (212,079) 361,929 194,510
Other comprehensive income (loss) (357,599) 658,715 358,459
Accumulated other comprehensive income
at end $905,490 $1,263,089 $604,374
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 17 Financial Instruments With Off-Balance-Sheet Risk
Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31, 2003 and 2002, are as follows:
2003 2002
Commitments to extend credit:
Fixed rate $11,390,725 $11,060,177
Adjustable rate 18,268,087 16,158,968
Standby and irrevocable letters of credit - Fixed rate 2,269,944 2,209,024
Credit card commitments 5,296,774 5,567,319
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 17 Financial Instruments With Off-Balance-Sheet Risk (Continued)
Credit Risk (Continued)
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing standby letters of credit is essentially the
same as that involved in extending loan facilities to customers. The
commitments are structured to allow for collateralization on all standby
letters of credit in the same manner and terms as exist on loans of similar
risk.
Credit card commitments are commitments on credit cards issued by the Company
and serviced by Elan Financial Services. These commitments are unsecured.
Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Like many Wisconsin financial institutions, the Company has a non-Wisconsin
subsidiary that holds and manages investment assets which have not been subject
to Wisconsin tax. The Wisconsin Department of Revenue has instituted an audit
program specifically aimed at out-of-state bank subsidiaries and has indicated
that it may withdraw favorable rulings previously issued in connection with
such subsidiaries. As a result of these developments, the Department may take
the position that the income of the out-of-state subsidiaries is taxable in
Wisconsin, which will likely be challenged by financial institutions in the
state. If the Department is successful in its efforts, it would result in a
negative impact on the earnings of the Company. In addition, the Internal
Revenue Service is currently conducting an audit of the Company's open tax
returns. At this time, the Company does not expect any additional tax
liability as a result of this audit.
Concentration of Credit Risk
The Company grants residential, commercial, agricultural, and consumer loans
predominantly in central and northern Wisconsin. There were no significant
concentrations of credit to any one debtor or industry group. It is felt that
the diversity of the local economy will prevent significant losses in the event
of an economic downturn.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 18 Fair Value of Financial Instruments
Current accounting standards require that the Company disclose estimated fair
values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments.
Cash and Short-Term Investments - The carrying amounts reported in the
consolidated balance sheets for cash and due from banks, interest-bearing
deposits in other financial institutions, and federal funds sold approximate
the fair value of these assets.
Securities - Fair values are based on quoted market prices, where available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. Federal Home Loan Bank stock is carried
at cost, which is its redeemable value since the market for this stock is
limited.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
residential mortgage, and other consumer. The fair value of loans is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the Company's
repayment schedules for each loan classification. In addition, for impaired
loans, marketability and appraisal values for collateral were considered in the
fair value determination.
Deposit Liabilities - The fair value of deposits with no stated maturity, such
as non-interest-bearing demand deposits, savings, NOW accounts, and money
market accounts, is equal to the amount payable on demand at the reporting
date. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate reflects the credit quality
and operating expense factors of the Company.
Short-Term Borrowings - The carrying amount reported in the consolidated
balance sheets for short-term borrowings approximates the liability's fair
value.
Long-Term Borrowings - The fair values of the Company's long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 18 Fair Value of Financial Instruments (Continued)
Accrued Interest - The carrying amount of accrued interest approximates its
fair value.
Off-Balance-Sheet Instruments - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the current interest rates, and
the present creditworthiness of the counter parties. Since this amount is
immaterial, no amounts for fair value are presented.
The carrying value and estimated fair value of financial instruments at
December 31, 2003 and 2002, were as follows:
2003 2002
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term
Investments $15,936,601 $15,936,601 $27,329,549 $27,329,549
Investment securities and
FHLB stock 80,142,288 80,142,288 78,321,696 78,321,696
Net loans 266,703,412 266,615,625 253,027,814 254,003,621
Accrued interest receivable 1,613,617 1,613,617 1,716,413 1,716,413
Financial liabilities:
Deposits 287,649,308 289,948,717 274,491,953 276,133,276
Short-term borrowings 11,294,262 11,294,262 18,039,517 18,039,517
Long-term borrowings 40,000,000 41,197,250 40,000,000 41,428,823
Accrued interest payable 1,206,178 1,206,178 1,294,227 1,294,227
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 18 Fair Value of Financial Instruments (Continued)
Limitations - Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment,
goodwill and intangibles, and other assets and other liabilities. In addition,
the tax ramifications related to the realization of the unrealized gains or
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 19 Condensed Financial Information - Parent Company Only
Balance Sheets
December 31, 2003 and 2002
2003 2002
Assets
Cash and due from banks $1,574,076 $992,712
Investment in subsidiary 32,136,473 31,250,328
Securities available for sale - At fair value 100,000 100,000
Other assets 39,691 32,947
TOTAL ASSETS $33,850,240 $32,375,987
Liabilities and Stockholders' Equity
Total liabilities $86,050 $190,180
Total stockholders' equity 33,764,190 32,185,807
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,850,240 $32,375,987
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 19 Condensed Financial Information - Parent Company Only (Continued)
Statements of Income
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Income:
Dividends from subsidiary $2,850,000 $2,850,000 $2,950,000
Interest 10,725 10,550 23,917
Rental income 70,000 180,000 180,000
Other 13,267 1,424 255
Total income 2,943,992 3,041,974 3,154,172
Expenses:
Salaries and benefits 40,307 44,507 55,010
Other 99,325 148,825 201,149
Total expenses 139,632 193,332 256,159
Income before credit for income taxes and equity
in undistributed net income of subsidiary 2,804,360 2,848,642 2,898,013
Credit for income taxes (15,591) (462) (17,676)
Income before equity in undistributed net
income of subsidiary 2,819,951 2,849,104 2,915,689
Equity in undistributed net income of subsidiary 1,237,984 1,633,732 933,061
Net income $4,057,935 $4,482,836 $3,848,750
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 19 Condensed Financial Information - Parent Company Only (Continued)
Statements of Cash Flows
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $4,057,935 $4,482,836 $3,848,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net
amortization 0 499 28,932
Gain on equipment disposals (1,400) 0 0
Equity in undistributed net income of
subsidiary (1,237,984) (1,633,732) (933,061)
Changes in operating assets and liabilities:
Other assets (6,744) 17,384 (15,263)
Liabilities (104,130) 68,672 (71,303)
Net cash provided by operating activities 2,707,677 2,935,659 2,858,055
Net cash provided by investing activities -
Proceeds from sale of equipment 1,400 0 0
Cash flows from financing activities:
Proceeds from stock benefit plans 28,667 62,184 30,343
Payments for repurchase of common stock 0 (401,969) (2,960,984)
Cash dividends paid (2,156,380) (2,169,080) (2,068,541)
Net cash used in financing activities (2,127,713) (2,508,865) (4,999,182)
Net increase (decrease) in cash and due from banks 581,364 426,794 (2,141,127)
Cash and due from banks at beginning 992,712 565,918 2,707,045
Cash and due from banks at end $1,574,076 $992,712 $565,918
Supplemental cash flow information:
Cash paid during the year for income taxes $1,490,066 $1,882,799 $1,504,441
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-K, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Controller (as the chief financial officer of the
Company), evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based
upon, and as of the date of such evaluation, the President and Chief Executive
Officer and the Controller 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by this
reference to the disclosure beginning with the sentence immediately preceding
the table under the caption "Proposal No. 1 - Election of Directors" in the
Company's 2004 Proxy Statement dated March 24, 2004 (the "2004 Proxy
Statement") and continuing through such table.
Information relating to executive officers is found in Part I of this Form 10-
K.
Information relating to compliance with Section 16 of the Exchange Act is
incorporated in this Form 10-K by reference to the disclosure in the 2004 Proxy
Statement under the subcaption "Beneficial Ownership of Common Stock - Section
16(a) Beneficial Ownership Reporting Compliance."
Code of Ethics
The Company has adopted an ethics policy for all employees and a conflict of
interest policy for its directors. The Company has also adopted a Code of
Compliance and Reporting Requirements for Senior Management and Senior
Financial Officers which covers the Company's Chief Executive Officer, each
Vice President, and the Secretary, Treasurer, and Controller (the chief
financial and accounting officer) and can be found at WWW.MIDWISC.COM\INVESTOR
RELATIONS.
Audit Committee
The Board of Directors has appointed an Audit Committee in accordance with
Section 3(a)(58)(A) of the Exchange Act. Mr. Schoofs, Ms. Hemer, and Mr.
Hallgren serve on the Audit Committee (the Company is not a "listed issuer" as
defined in SEC Rule 10A-3).
Financial Expert
The SEC has adopted rules which require the Company to disclose whether one of
the members of the Audit Committee qualifies under SEC rules as an "audit
committee financial expert." The Company is not required to have such an
expert on its Audit Committee. Based on its review of the SEC rules, the Board
does not believe that any member of the Audit Committee can be classified as an
"audit committee financial expert."
Under SEC regulations, an "audit committee financial expert," must have the
attributes and experience of a person who has been actively involved in the
preparation, auditing, or evaluation of public company financial statements.
While it may be possible to recruit a director having these specific
qualifications, the Company's size and geographic location make such a task
difficult, and the Board believes that it is more important that directors of
the Company satisfy the criteria described in the 2004 Proxy Statement under
"Governance of the Company - Nominations for Director - Qualifications." These
criteria include an understanding of the Company's market area, customer base,
and scope of operations. The Board believes that it is not in the best
interests of the Company to nominate a director who does not possess these
characteristics solely to acquire a director meeting the definition of an
"audit committee financial expert" under SEC regulations.
The Audit Committee has the authority under its charter to retain or dismiss
the independent auditor and to hire such other experts or legal counsel as it
deems appropriate in order to fulfill its duties. The Audit Committee, and the
Board of Directors as a whole, believe that the Committee has access to the
financial expertise required to adequately performs its duties under its
charter.
As part of its annual review of potential directors, the Board will consider
any potential candidates who meet its current general qualification criteria
and those of an "audit committee financial expert," but, for the time being,
the Board believes that the current members of the Committee, working with the
independent auditor, are qualified to perform the duties required in the
Committee's charter.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to director compensation is incorporated in this Form 10-K
by this reference to the disclosure in the 2004 Proxy Statement under the
subcaption "Governance of the Company - Compensation of Directors."
Information relating to the compensation of executive officers is incorporated
in this Form 10-K by this reference to the disclosure in the 2004 Proxy
Statement under (1) the subcaption "Executive Officer Compensation," through
the disclosure ending at the subcaption "- Committees' Report on Executive
Compensation Policies" and (2) the disclosure under the subcaption "-
Committees' Report on Executive Compensation Policies - Committee Interlocks
and Insider Participation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information relating to security ownership of certain beneficial owners is
incorporated in this Form 10-K by this reference to the disclosure in the 2004
Proxy Statement under the caption "Beneficial Ownership of Common Stock"
through the table ending at the subcaption "- Section 16(a) Beneficial
Ownership Reporting Compliance."
The following table sets forth, as of December 31, 2003, information with
respect to compensation plans under which the Company's common stock is
authorized for issuance:
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)(1)
Equity compensation
plans approved by
security holders 10,738 $27.19 300,982
Equity compensation
plans not approved by
security holders
Total 10,738 $27.19 300,982
(1) Includes 48,532 shares available under Employee Stock Purchase Plan. The purchase period for shares under the plan is the
last business day of the fiscal year and, accordingly, there was no ongoing purchase period in effect as of the date of the
table (December 31, 2003).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions with
directors and officers is incorporated in this Form 10-K by this reference to
the disclosure in the 2004 Proxy Statement under the subcaption "Governance of
the Company - Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES
Information relating to the fees and services of the Company's principal
accountant is incorporated into this Form 10-K by this reference to the
disclosure in the 2004 Proxy Statement under the subcaptions "Audit Committee
Report and Related Matters - Independent Auditor Fees," and "- Audit Committee
Pre-Approval Policy."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
DESCRIPTION PAGE
Mid-Wisconsin Financial Services, Inc.
Consolidated Financial Statements
Independent Auditor's Report 35
Consolidated Balance Sheets 36
Consolidated Statements of Income 37
Consolidated Statements of Changes in Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 41
(2) No financial statement schedules are required by Item 8 or Item 15(d)
(3) Exhibits Required by Item 601 of Regulation S-K:
The following exhibits required by Item 601 of Regulation S-K are filed
As part of this Form 10-K:
4.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
4.2 Bylaws, as amended September 20, 1995 (incorporated by reference to
Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
10.1* Mid-Wisconsin Financial Services, Inc. 1991 Employee Stock Option
Plan (incorporated by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000)
10.2* Mid-Wisconsin Financial Services, Inc. Directors' Deferred
Compensation Plan as last amended July 19, 2000 (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000)
10.3* Director Retirement Benefit Policy (incorporated by reference to
Exhibit 10(e) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999)
10.4* 1999 TeamBank Bonus Plan (incorporated by reference to Exhibit
10(f) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999)
10.5 Mid-Wisconsin Financial Services, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.6* Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan
(incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000)
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1) to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
23.1 Consent of Wipfli LLP
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
*Denotes executive compensation plans and arrangements
(b) Reports of Form 8-K
Form 8-K dated October 27, 2003; The Company filed a Form 8-K on October
27, 2003, reporting earnings information for the quarter ended September
30, 2003, under Item 5 and additional disclosure under Item 9, Regulation
FD disclosure, and Item 12, Results of Operations and Financial Condition.
The exhibits listed above are available upon request in writing to William A.
Weiland, Secretary, Mid-Wisconsin Financial Services, Inc., 132 West State
Street, Medford, Wisconsin 54451.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 24, 2004.
MID-WISCONSIN FINANCIAL SERVICES, INC.
JAMES F. MELVIN
James F. Melvin, Chairman of the
Board
WILLIAM A. WEILAND
William A. Weiland, Secretary and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant on
March 24, 2004, and in the capacities indicated.
NORMAN A. HATLESTAD GENE C. KNOLL
Norman A. Hatlestad, Vice Chairman of Gene C. Knoll, President and
the Board, and a Director Chief Executive Officer
(Principal Executive Officer and
a Director)
KIM A. GOWEY JAMES P. HAGER
Kim A. Gowey, DDS, Chairman of the James P. Hager, Director
Board of Mid-Wisconsin Bank and a Director
KURT D. MERTENS KATHRYN M. HEMER
Kurt D. Mertens, Director Kathryn M. Hemer, Director
ROBERT J. SCHOOFS BRIAN B. HALLGREN
Robert J. Schoofs, Director Brian B. Hallgren, Director
RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
to
FORM 10-K
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the period ended December 31, 2003
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R.232.102(d))
23.1 Consent of Wipfli LLP
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 an CFO pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
Exhibits required by Item 601 of Regulation S-K which have been
previously filed and are incorporated by reference are set forth in Part IV,
Item 15 of the Form 10-K to which this Exhibit Index relates.
Exhibit 23.1
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We consent to the incorporation by reference in the Registration Statement
(No. 33-37264) on Form S-8 of Mid-Wisconsin Financial Services, Inc. of our
report dated January 16, 2004, relating to the consolidated balance sheets of
Mid-Wisconsin Financial Services, Inc. and Subsidiary as of December 31, 2003
and 2002, and the related consolidated statements of income, stockholders'
equity, and cash flows for the three years in the period ended December 31,
2003, which appears in the December 31, 2003, Annual Report on Form 10-K of
Mid-Wisconsin Financial Services, Inc.
Wipfli LLP
Wausau, Wisconsin
March 24, 2004