FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 06-1169935
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-8300
(Registrant's telephone number, including area code)
(Former name, former address & former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of May 3, 2004, there were 1,685,646 shares of $0.10 par value common stock
outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Changes in Stockholders'
Equity Three Months Ended March 31, 2004 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 9-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K 21
Signatures 22
Exhibit Index 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheet
March 31, 2004 December 31, 2003
(Unaudited) (Audited)
ASSETS
Cash and due from banks $10,850,355 $13,694,114
Interest-bearing deposits in other financial institutions 14,010 614,128
Federal funds sold 1,836,393 1,628,359
Securities available for sale -At fair value 80,905,455 77,988,188
Federal Home Loan Bank stock (at cost) 2,189,100 2,154,100
Loans held for sale 603,700 330,775
Loans receivable, net of allowance for loan losses of
$2,776,972 in 2004 and $2,732,447 in 2003 267,239,039 266,372,637
Accrued interest receivable 1,665,340 1,613,617
Premises and equipment 5,531,274 5,596,313
Intangible assets 480,526 563,543
Goodwill 295,316 295,316
Other assets 3,894,629 4,373,457
TOTAL ASSETS $375,505,137 $375,224,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $39,077,101 $39,949,256
Interest-bearing deposits 237,385,052 247,700,052
Total deposits 276,462,153 287,649,308
Short-term borrowings 21,674,561 11,294,262
Long-term borrowings 40,000,000 40,000,000
Accrued interest payable 970,921 1,206,178
Accrued expenses and other liabilities 1,700,533 1,310,609
Total liabilities 340,808,168 341,460,357
Stockholders' equity:
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares
Issued & outstanding - 1,685,646 shares in 2004
and 1,685,550 shares in 2003 168,565 168,555
Additional paid-in capital 10,982,157 10,975,920
Retained earnings 22,438,884 21,714,225
Accumulated other comprehensive income 1,107,363 905,490
Total stockholders' equity 34,696,969 33,764,190
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $375,505,137 $375,224,547
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31, 2004 March 31, 2003
Interest and dividend income:
Loans, including fees $4,029,514 $4,089,144
Securities
Taxable 605,505 689,823
Tax-exempt 248,743 264,650
Other 9,983 49,038
Total interest and dividend income 4,893,745 5,092,655
Interest expense:
Deposits 1,038,435 1,302,509
Short-term borrowings 48,921 46,720
Long-term borrowings 392,665 448,750
Total interest expense 1,480,021 1,797,979
Net interest income 3,413,724 3,294,676
Provision for loan losses 40,000 158,333
Net interest income after provision for loan losses 3,373,724 3,136,343
Noninterest income:
Service fees 197,928 197,266
Trust service fees 184,200 182,823
Investment product commissions 104,492 64,261
Other operating income 257,443 219,512
Total noninterest income 744,063 663,862
Noninterest expenses:
Salaries and employee benefits 1,424,004 1,406,920
Occupancy 331,934 311,794
Data processing and information systems 98,924 108,754
Purchased core deposit amortization 83,017 77,586
Other operating expenses 638,389 571,371
Total noninterest expenses 2,576,268 2,476,425
Income before provision for income taxes 1,541,519 1,323,780
Provision for income taxes 446,018 357,938
Net income $1,095,501 $965,842
Basic and diluted earnings per share $0.65 $0.57
Cash dividends declared per share $0.22 $0.22
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Amount Capital Earnings Income (Loss) Totals
Balance, December 31, 2003 $168,555 $10,975,920 $21,714,225 $905,490 $33,764,190
Comprehensive Income:
Net Income 1,095,501 1,095,501
Other comprehensive income 201,873 201,873
Total comprehensive income 1,297,374
Proceeds from stock benefit plans 10 2,658 2,668
Stock-based compensation 3,579 3,579
Cash dividends paid, $0.22 per share (370,842) (370,842)
Balance, March 31, 2004 $168,565 $10,982,157 $22,438,884 $1,107,363 $34,696,969
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $1,095,501 $965,842
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 221,495 277,379
Provision for loan losses 40,000 158,333
Loss on premises and equipment disposals 1,713 858
Loss on foreclosed real estate 8,639 -
Federal Home Loan Bank stock dividends (35,000) (51,000)
Stock-based compensation 3,579 2,880
Changes in operating assets and liabilities:
Loans held for sale (272,925) (282,250)
Other assets 45,959 292,164
Other liabilities 154,667 (314,231)
Net cash provided by operating activities 1,263,628 1,049,975
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
in other financial institutions 600,118 (399,103)
Net (increase) decrease in federal funds sold (208,034) 3,135,675
Securities available for sale:
Proceeds from maturities 5,655,682 10,064,204
Payment for purchases (8,244,301) (10,155,975)
Net increase in loans (756,402) (1,366,855)
Capital expenditures (92,156) (326,349)
Proceeds from sale of premises and equipment 1,600 -
Proceeds from sale of other real estate 111,136 279,402
Net cash provided (used) in investing activities (2,932,357) 1,230,999
Cash flows from financing activities:
Net decrease in deposits (11,187,155) (688,754)
Net increase (decrease) in short-term borrowing 10,380,299 (5,762,911)
Proceeds from stock benefit plans 2,668 -
Cash dividends paid (370,842) (370,586)
Net cash used in financing activities (1,175,030) (6,822,250)
Net decrease in cash and due from banks (2,843,759) (4,541,277)
Cash and due from banks at beginning 13,694,114 15,484,360
Cash and due from banks at end $10,850,355 $10,943,083
Supplemental cash flow information: 2004 2003
Cash paid during the year for:
Interest $1,718,247 $1,854,071
Income taxes $31,000 $7,000
Noncash investing and financing activities:
Loans transferred to other real estate $- $369,402
Loans charged off $11,110 $47,721
Loans made in connection with the sale of
other real estate $150,000 $-
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Mid-Wisconsin
Financial Services, Inc.'s ("Company") financial position, results of its
operations, changes in stockholders' equity and cash flows for the periods
presented, and all such adjustments are of a normal recurring nature. The
consolidated financial statements include the accounts of all subsidiaries.
All material intercompany transactions and balances are eliminated. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial
statements and footnotes in the Company's 2003 annual report on Form 10-K,
should be referred to in connection with the reading of these unaudited interim
financial statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Estimates that are susceptible to significant change include the
determination of the allowance for loan losses and the valuations of
investments.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per 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.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended March 31,
2004 2003
(In thousands, except per share data)
Net income available to common stockholders $1,096 $966
Weighted average shares outstanding 1,685 1,684
Effect of dilutive stock options outstanding 1 1
Diluted weighted average shares outstanding 1,686 1,685
Basic earnings per common share $0.65 $0.57
Diluted earnings per common share $0.65 $0.57
NOTE 3 - STOCK-BASED COMPENSATION
Under the terms of the incentive stock option plan, 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. The Company recognizes stock-based compensation expense using the fair
value based method at the grant date. Stock-based compensation expense is
recognized over the vesting period using a straight-line method. Options may
be exercised no earlier than six months after the grant date. These options
expire ten years after the grant date.
Three Months Ended March 31,
2004 2003
Stock options granted during the quarter 3,719 3,541
Fair value of stock options $108,781 $99,608
Stock-based compensation expense included in reported net income $3,579 $2,880
NOTE 4 - CHANGES IN ACCOUNTING PRINCIPALS
On December 11, 2003, the SEC staff announced its intention to release a Staff
Accounting Bulletin that would require all registrants to account for mortgage
loan interest rate lock commitments related to loans held for sale as written
options, effective no later than for commitments entered into after March 31,
2004. The Corporation enters into such commitments with customers in
connection with residential mortgage loan applications; however, the amount of
these commitments is not material to the Corporation's consolidated financial
statements. This guidance, if issued, would require the Corporation to
recognize a liability on its consolidated balance sheet equal to the fair value
of the commitment at the time the loan commitment is issued. As a result, this
guidance would delay the recognition of any revenue related to these
commitments until such time as the loan is sold, however, it would have no
effect on the ultimate amount of revenue or cash flows recognized over time.
The Corporation is currently assessing the impact of this pending guidance on
its consolidated results of operations and financial position, but does not
expect the implementation to have a significant impact on the consolidated
financial statements.
On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105-Application
of Accounting Principles to Loan Commitments ("SAB 105"). SAB 105 summarizes
the views of the SEC staff regarding the application of generally accepted
accounting principles to loan commitments accounted for as derivative
instruments. The SEC staff believes that in recognizing a loan commitment,
entities should not consider expected future cash flows related to the
associated servicing of the loan until the servicing asset has been
contractually separated from the underlying loan by sale or securitization of
the loan with the servicing retained. The provisions of SAB 105 are applicable
to all loan commitments accounted for as derivatives and entered into
subsequent to March 31, 2004. The adoption of SAB 105 will not have a material
impact on the Corporation's consolidated results of operations or financial
position, as the Corporation's current accounting treatment for such loan
commitments is consistent with the provisions of SAB 105.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Company's financial condition and results
of operations. It is intended to complement the unaudited financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith. Quarterly
comparisons reflect continued consistency of operations and do not reflect any
significant trends or events other than those noted in the comments.
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. While the Company believes that these forward-looking
statements are based on reasonable assumptions, all such statements involve
risk and uncertainties that could cause actual results to differ materially
from these contemplated in this report.
The assumptions, risks and uncertainties relating to the forward-looking
statements in this report include those described under the caption "Cautionary
Statements Regarding Forward Looking Information" in Part I of the Company's
Form 10-K for the year ended December 31, 2003 and, from time to time, in the
Company's other filings with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
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 policy is 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."
COMMITMENTS AND CONTINGENCIES
Like many financial institutions located in Wisconsin, the Bank transferred
investment assets to a Nevada investment subsidiary that holds and manages
these assets which have not been subject to Wisconsin income tax. The
Wisconsin Department of Revenue (the "Department") recently implemented a
program to audit Wisconsin financial institutions which formed investment
subsidiaries located in Nevada. The Department has generally indicated that it
will assess income or franchise taxes on the income of the Nevada investment
subsidiaries of Wisconsin banks. The Bank is currently undergoing such an
audit; however, the Department has not yet issued an assessment to the Bank.
Based on information available to the Company with respect to the Department's
demands in similar bank audits, the Company believes that if the Department
successfully makes a similar demand against the Company's subsidiary in 2004,
it would likely have a material adverse effect on the Company's result of
operations for the year.
Prior to formation of the investment subsidiary, the Bank sought and obtained a
private letter ruling from the Department regarding the non-taxability of the
investment subsidiary in the state of Wisconsin. The Bank believes that it
complied with Wisconsin law and the private ruling received from the Department
and that it is not liable for any taxes or interest that the Department may
claim. Should an assessment be forthcoming, the Bank intends to defend its
position vigorously through the normal administrative appeals process in place
at the Department and through other judicial channels should they become
necessary. As of March 31, 2004, the Bank had not established a loss
contingency reserve for the matter.
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 2004 totaled $1.1 million or $0.65
for basic and diluted earnings per share. Comparatively, net income for the
quarter ended March 31, 2003 was $966,000 or $0.57 for basic and diluted
earnings per share. Operating results for the first quarter 2004 generated an
annualized return on average assets of 1.16% and an annualized return on
average equity of 12.89%, compared to 1.06% and 12.01% for the comparable
quarter in 2003. The net interest margin for the first quarter 2004 and 2003
was 4.02%.
The increase in net income for the period was primarily due to an increase in
net interest income, a reduction in the provision for loan loss, and an
increase in noninterest income. This was partially offset by increases in
other noninterest expenses and income tax expense.
The following Table 1 presents quarterly summary results of operations.
Table 1: Summary Results of Operations
(dollars in thousands, except per share data)
March 31, December 31, September 30, June 30, March 31,
2004 2003 2003 2003 2003
EARNINGS AND DIVIDENDS
Interest income $4,894 $4,916 $4,930 $5,023 $5,092
Interest expense 1,480 1,605 1,705 1,756 1,798
Net interest income 3,414 3,311 3,225 3,267 3,294
Provision for loan losses 40 60 80 158 158
Net interest income after
provision for loan losses 3,374 3,251 3,145 3,109 3,136
Noninterest income 744 673 888 756 664
Noninterest expense 2,576 2,561 2,494 2,489 2,476
Income before provision for income taxes 1,542 1,363 1,539 1,376 1,324
Provision for income taxes 446 372 438 376 358
Net income $1,096 $991 $1,101 $1,000 $966
Return on average assets 1.16% 1.07% 1.18% 1.10% 1.06%
Return on average equity 12.89% 11.92% 13.59% 12.26% 12.01%
Tangible equity to assets 8.82% 8.74% 8.48% 8.72% 8.57%
Net interest margin 4.02% 3.98% 3.89% 4.00% 4.02%
AVERAGE BALANCE SHEET
Loans net of unearned income $267,330 $264,362 $267,923 $263,189 $253,853
Assets 377,185 370,975 371,830 363,264 363,448
Deposits 282,835 284,134 285,698 277,052 273,805
Stockholders' equity 34,007 33,259 32,411 32,631 32,163
ENDING BALANCE SHEET
Loans net of unearned income $270,016 $269,105 $262,355 $267,118 $255,890
Assets 375,505 375,225 369,105 369,657 361,784
Deposits 276,462 287,649 284,790 283,463 273,803
Stockholders' equity 34,697 33,764 33,156 32,901 32,696
FINANCIAL CONDITION ANALYSIS
Total risk-based capital 12.85% 12.83% 12.85% 12.45% 12.97%
Net charge-offs to average loans 0.00% 0.16% 0.04% 0.07% 0.02%
Nonperforming assets to loans 0.61% 0.62% 0.69% 1.00% 0.89%
Efficiency ratio 59.83% 61.92% 58.37% 59.47% 59.69%
STOCKHOLDERS' DATA
Basic and diluted earnings per share $0.65 $0.59 $0.65 $0.59 $0.57
Dividends per share $0.22 $0.22 $0.22 $0.62 $0.22
Book value per share $20.58 $20.03 $19.68 $19.53 $19.41
Dividend payout ratio 33.9% 37.4% 33.7% 104.4% 38.4%
Average common shares outstanding 1,686 1,685 1,685 1,685 1,685
STOCK PRICE INFORMATION
High $29.00 $29.00 $28.65 $28.00 $28.00
Low 28.50 28.50 28.00 28.00 27.25
Market price at quarter end (1) 29.00 28.50 28.65 28.00 28.00
(1) Market value at year-end represents the bid price. The quotations reflect
prices, without retail mark-up, markdown or commissions, and may not
necessarily represent actual transactions.
NET INTEREST INCOME
Net interest income on a tax equivalent basis is the Company's principal source
of revenue, accounting for 82.7% of total operating income for the first three
months of 2004, as compared to 83.9% for the same period in 2003. 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 interest earning assets and interest bearing liabilities
combine to affect total net interest income. Additionally, net interest income
is impacted by the sensitivity of the balance sheet to changes in interest
rates, contractual maturities, and repricing frequencies.
Net interest income on a fully taxable equivalent basis increased $107,000, or
3.1%, from $3.5 million for the quarter ended March 31, 2003 to $3.6 million at
March 31, 2004. The net interest margin was 4.02% at March 31, 2004 and 2003.
For the past year, the Company experienced a compressed interest margin as
long-term assets repriced at lower interest rates while interest bearing
liabilities repriced at or near interest rate floors that were established for
some of the bank's key funding liabilities. The decline in the net interest
margin appears to be ending as the net interest margin was 4.02% during March
2004 compared to 3.98% at December 31, 2003 and 3.89% at September 30, 2003.
Company's management continues to take 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. The Company's balance
sheet is poised to benefit if and when interest rates begin to rise.
The average yield on earning assets at March 31, 2004 decreased 42 basis points
to 5.69% between comparable quarters while the rate paid on interest bearing
liabilities decreased 48 basis points to 1.97% at March 31, 2004.
Table 2: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended March 31, 2004 Three months ended March 31, 2003
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $270,097 $4,050 6.00% $256,647 $4,113 6.41%
Investment securities:
Taxable 52,341 550 4.20% 50,087 657 5.25%
Tax exempt (2) 23,103 377 6.52% 23,823 400 6.72%
Other interest earning assets 9,090 65 2.87% 13,394 83 2.48%
Total earning assets $354,631 $5,042 5.69% $343,951 $5,253 6.11%
Cash and due from banks $11,263 $11,052
Other assets 14,058 $11,240
Allowance for loan losses (2,767) (2,795)
Total assets $377,185 $363,448
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $28,719 $27 0.38% $29,899 $58 0.78%
Savings deposits 74,136 111 0.60% 68,094 131 0.77%
Time deposits 140,471 900 2.56% 141,418 1,113 3.15%
Short-term borrowings 17,542 49 1.12% 14,425 47 1.30%
Long-term borrowings 40,000 393 3.93% 40,000 449 4.49%
Total interest bearing liabilities $300,868 $1,480 1.97% $293,836 $1,798 2.45%
Demand deposits 39,509 34,394
Other liabilities 2,801 3,055
Stockholders' equity 34,007 32,163
Total liabilities and stockholders' equity $377,185 $363,448
Net interest income and rate spread $3,562 3.72% $3,455 3.66%
Net interest margin 4.02% 4.02%
(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.
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 non-
performing and potential problem loans. It is the Company's policy that when
available information confirms specific loans and leases, or portions thereof,
including impaired loans, are uncollectible, those amounts are promptly charged
off against the allowance.
The provision for loan losses for the three months ended March 31, 2004
decreased $118,000 to $40,000 compared to $158,000 for the first quarter of
2003. Management believes that the current allowance conforms with the
Company's loan loss reserve 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
Table 3: Noninterest Income
(dollars in thousands)
Three months ended
March 31, March 31, Percent
2004 2003 Change
Service fees $198 $197 0.5%
Trust service fees 184 183 0.5%
Investment product commissions 105 64 64.1%
Other operating income 257 220 16.8%
Total noninterest income $744 $664 12.0%
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions, self-directed IRA fees, and
financial planning fees. Investment product commissions increased $41,000 to
$105,000 in the first quarter of 2004 compared to the same quarter in 2003.
Consumers' confidence in the financial market appears to be improving as more
investment clients are employing funds that have been parked in bank deposits
back into the market.
Other operating income increased $37,000 to $257,000 in the first quarter of
2004, when compared to the same quarter in 2003. This increase included a
$30,000 settlement for mold clean-up costs at one of the branches and $12,000
restitution received from a loan customer. Income from bank owned life
insurance (BOLI) was $35,000 for the first quarter of 2004 compared to zero for
the first quarter 2003. The Company purchased $3.0 million of BOLI during the
second quarter of 2003. These increases were offset by a $40,000 decrease from
gains on sales of loans in the secondary market between the two quarters.
Gains on sales of such loans were $48,000 at March 31, 2004 compared to $88,000
at March 31, 2003.
Excel Real Estate Services, Inc., a subsidiary of Mid-Wisconsin Bank, that
performs residential real estate appraisals and title insurance services
commenced operations in January 2004. Net operating losses have been in line
with initial projections.
NONINTEREST EXPENSE
Table 4: Noninterest Expense
(dollars in thousands)
Three months ended
March 31, March 31, Percent
2004 2003 Change
Salaries and employee benefits $1,424 $1,407 1.2%
Occupancy 332 312 6.4%
Data processing and information systems 99 109 -9.2%
Amortization of intangibles 83 78 6.4%
Other operating expenses 638 570 11.9%
Total noninterest expenses $2,576 $2,476 4.0%
Salaries and employee benefits for the first quarter 2004 increased $17,000
over first quarter 2003. The incentive compensation program was reevaluated in
2004. The program will not accrue incentive expense monthly but will expense
the total bonus in the fourth quarter of each year as long as net income meets
a predetermined amount. By discontinuing the monthly accrual, benefit expense
decreased $42,000 for the quarter ended March 31, 2004 but this was offset by
an increase in salaries and health insurance premiums. 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.
Occupancy expense increased $20,000 due to higher utility costs and real estate
taxes in 2004. Data processing expenses decreased due to decreased software
maintenance and amortization expenses and data connection costs between the
branches. Other operating expenses increased $68,000 due to marketing and
public relations, additional expenses related to start-up costs of Excel Real
Estate Services, Inc., and loan servicing expense increased due to holding
costs associated with other real estate and repossessed property owned and
losses taken upon sale of various properties during the first quarter 2004.
BALANCE SHEET ANALYSIS
LOANS
At March 31, 2004, total loans increased $1.2 million, or 0.4%, to $270.6
million from $269.4 million at December 31, 2003.
Table 5: Period End Loan Composition
(dollars in thousands)
March 31, % of March 31, % of December 31, % of
2004 total 2003 total 2003 total
Commercial $42,853 15.8% $49,151 19.1% $47,268 17.5%
Real estate commercial 90,912 33.6% 78,436 30.5% 87,244 32.4%
Agricultural 36,381 13.4% 33,901 13.2% 35,739 13.3%
Real estate construction 9,671 3.6% 8,843 3.4% 9,306 3.5%
Real estate residential 81,667 30.2% 77,243 30.1% 80,829 30.0%
Installment 9,136 3.4% 9,390 3.7% 9,050 3.3%
Total loans (including loans held for sale) $270,620 100.0% $256,964 100.0% $269,436 100.0%
During the first quarter 2004 the Company had loan payoffs of approximately
$7.0 million. One large substandard commercial credit was refinanced with
another financial institution. The remaining $4.0 million of loan payoffs were
from commercial participation loans. These payoffs were unexpected. In all
the situations either the lead bank was able to bring the participation loan
back in-house due to liquidity or the total loan was refinanced by the customer
with another financial institution. Participation loan customers generally
have very good asset quality and banks are being very competitive offering
fixed rate loans to these customers.
Traditionally, the Company experiences little growth during the first quarter
of each year due to the Wisconsin winters. As we move into the second quarter
of 2004 the Company is experiencing increased loan demand and expecting loan
growth similar to prior years.
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 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 classification,
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.
Based on management's analysis of the loan portfolio risk at March 31, 2004 a
provision for loan loss of $40,000 was recorded for the three months ended
March 31, 2004, a decrease of $118,000 or 74.7%, compared to a year ago. Net
loan recoveries were $5,000 for the three months ended March 31, 2004, compared
to net loan charge-offs of $45,000 for the same period 2003.
Table 6: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Three months ended Year ended
March 31, December 31,
2004 2003 2003
Allowance for loan losses at beginning of year $2,732 $2,702 $2,702
Loans charged off (11) (48) (479)
Recoveries 16 3 53
Provision for loan losses 40 158 456
Allowance for loan losses at end of period $2,777 $2,815 $2,732
Nonperforming assets
Nonaccrual loans $810 $1,112 $136
Impaired loans $457 $1,034 $457
Accruing loans past due 90 days or more 23 34 35
Restructured loans 359 0 320
Total nonperforming loans 1,649 2,180 948
Other real estate owned 0 90 270
Total nonperforming assets $1,649 $2,270 $1,218
Ratios
Allowance for loan losses to total loans at end of period 1.03% 1.10% 1.02%
Net charge-offs during the period to average loans outstanding 0.00% 0.02% 0.16%
In the opinion of management, the allowance for loan losses was adequate as of
March 31, 2004. 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 AND OTHER REAL ESTATE OWNED
Nonperforming assets include loans that are contractually past due 90 days or
more as to interest or principal payments, on nonaccrual status, or
restructured loans where the terms have been modified, because of deteriorating
financial condition of the borrower, to provide for a reduction of either
interest or principal and other real estate owned. 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.
All interest accrued but not collected for loans (including applicable impaired
loans) that are placed on nonaccrual or charged-off is reversed to interest
income. The interest on these loans is accounted for on the cash basis until
qualifying for return to accrual status. Loans are returned to accrual status
when all the principal and interest amounts contractually due have been
collected and there is reasonable assurance that repayment will continue within
a reasonable time frame.
Nonperforming assets were $1.6 million at March 31, 2004 compared to $1.2
million at December 31, 2003. Nonaccrual loans increased $700,000 from year-
end and represented $1.3 million of nonperforming assets at March 31, 2004.
Real estate nonaccrual loans accounted for $727,000 of the total, of which
$524,000 was residential real estate and $203,000 was agricultural real estate,
while commercial non-accruals accounted for $263,000. There was no other real
estate owned at March 31, 2004.
LIQUIDITY
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.
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet requirements of depositors and borrowers, as well as the operating
needs of the Company. Management views liquidity as the ability to raise cash
at a reasonable cost, or with a minimum of loss, and as a measure of balance
sheet flexibility to react to marketplace, regulatory and competitive changes.
The Bank's primary funding source is deposits. Average deposits as a
percentage of other funding sources used were 80.9% at March 31, 2004 and 81.5%
at March 31, 2003. The Bank 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 Bank 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.
Table 8: Period End Deposit Composition
(dollars in thousands)
March 31, % of March 31, % of December 31, % of
2004 total 2003 total 2003 total
Non-interest bearing demand $39,077 14.1% $35,581 13.0% $39,949 13.9%
Interest-bearing demand 25,863 9.4% 28,144 10.3% 28,242 9.8%
Savings deposits 71,578 25.9% 66,740 24.4% 73,082 25.4%
Time deposits 129,444 46.8% 132,838 48.5% 135,876 47.2%
Brokered deposits 10,500 3.8% 10,500 3.8% 10,500 3.7%
Total $276,462 100.0% $273,803 100.0% $287,649 100.0%
Total deposits at March 31, 2004 decreased $11.1 million, or 3.9%, to $276.5
million from December 31, 2003. Interest-bearing demand deposits decreased
$2.3 million during the first quarter 2004 from year-end. Typically at year-
end municipalities deposit their tax receipts and will use the monies during
the first quarter to pay expenditures. Time deposits decreased over $6.0
million from year-end. The majority of the decline is from a maturing
certificate of deposit special offered eighteen months ago. Also, other short-
term bank deposits are decreasing as consumers are employing funds back into
the fixed-income and equity markets.
The Company plans on generating additional core deposits in 2004 through
competitive pricing of deposit products. Other avenues of funding being
considered are brokered deposits, Federal Home Loan Bank Advances, and federal
funds purchased.
CAPITAL
Stockholders' equity at March 31, 2004 increased $900,000 to $34.7 million from
$33.8 million at December 31, 2003. The change in equity between the two
periods was primarily composed of the retention of earnings with offsetting
decreases to equity from the payment of dividends. Stockholders' equity at
March 31, 2004 included $1.1 million of accumulated other comprehensive income,
related to unrealized gains on securities available-for-sale, net of the tax
effect. At December 31, 2003 stockholders' equity included $905,000 of
accumulated other comprehensive income, related to unrealized gains on
securities available-for-sale, net of the tax effect.
Cash dividends of $0.22 per common share were paid for the quarters ended March
31, 2004 and 2003.
The adequacy of the Company's capital is reviewed regularly to ensure
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of March 31, 2004 the Company's
capital ratios were well in excess of regulatory minimums.
The following are the Company's risk based capital ratios for the previous five
quarters:
Table 8: Capital Ratios
Tier 1 Capital Total Capital
March 31, 2004 12.1% 13.1%
December 31, 2003 11.6% 12.6%
September 30, 2003 11.8% 12.9%
June 30, 2003 11.4% 12.5%
March 31, 2003 11.9% 13.0%
Regulatory minimum requirements 4.0% 8.0%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There was no material change in the information provided in response to Item 7A
of the Company's Form 10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Chief Accounting Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon,
and as of the date of such evaluation, the President and Chief Executive
Officer and the Chief Accounting Officer concluded that the Company's
disclosure controls and procedures were effective in all material respects.
There have been no significant changes in the Company's internal controls or in
other factors during the period covered by this report which could
significantly affect internal controls, nor were there any significant
deficiencies or material weaknesses identified which required any corrective
action to be taken.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
Exhibits required by Item 601 of Regulation S-K.
Exhibit
NUMBER DESCRIPTION
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K:
Form 8-K dated February 6, 2004. The Company filed a Form 8-K on February 6,
2004, reporting earning information for the quarter and fiscal year ended
December 31, 2003, under Item 5 and additional disclosures under Items 9,
Regulation FD Disclosure, and 12, Results of Operations and Financial
Condition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: MAY 14, 2004 GENE C. KNOLL
Gene C. Knoll, President and Chief Executive Officer
(Principal Executive Officer)
Date: MAY 14, 2004 RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Accounting Officer)
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the quarterly period ended March 31, 2004
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R.232.102(d))
The following exhibits are filed as part this report:
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act
of 2002