FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 (IRS Employer Identification No.)
incorporation or organization)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-8300
(Registrant's telephone number, including area code)
(Former name, former address & former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of August 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
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Income
Three Months Ended June 30, 2004 and 2003
And Six Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Changes in
Stockholders' Equity
Six Months Ended June 30, 2004 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 8-22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Securities
Holders 23
Item 6. Exhibits and Reports of Form 8-K 24
Signatures 24
Exhibit Index 25
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheets
June 30, 2004 December 31, 2003
(Unaudited) (Audited)
ASSETS
Cash and due from banks $12,732,005 $13,694,114
Interest-bearing deposits in other financial institutions 15,767 614,128
Federal funds sold 536,202 1,628,359
Securities available for sale -At fair value 78,701,628 77,988,188
Federal Home Loan Bank stock (at cost) 2,250,000 2,154,100
Loans held for sale 559,400 330,775
Loans receivable, net of allowance for loan losses of
$2,849,871 in 2004 and $2,732,447 in 2003 274,720,789 266,372,637
Accrued interest receivable 1,493,917 1,613,617
Premises and equipment 6,240,866 5,596,313
Intangible assets 397,508 563,543
Goodwill 295,316 295,316
Other assets 4,565,844 4,373,457
TOTAL ASSETS $382,509,242 $375,224,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $42,241,701 $39,949,256
Interest-bearing deposits 242,758,870 247,700,052
Total deposits 285,000,571 287,649,308
Short-term borrowings 16,396,894 11,294,262
Long-term borrowings 45,000,000 40,000,000
Accrued interest payable 954,091 1,206,178
Accrued expenses and other liabilities 1,535,921 1,310,609
Total liabilities 348,887,477 341,460,357
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 10,985,736 10,975,920
Retained earnings 22,565,757 21,714,225
Accumulated other comprehensive income (loss) (98,293) 905,490
Total stockholders' equity 33,621,765 33,764,190
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $382,509,242 $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 Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Interest and Dividend Income:
Loans, including fees $4,061,517 $4,169,260 $8,091,031 $8,258,404
Securities
Taxable 592,867 563,790 1,198,372 1,253,613
Tax-exempt 253,762 298,186 502,505 562,836
Other interest and dividend income 3,744 (8,106) 13,727 40,932
Total interest and dividend income 4,911,890 5,023,130 9,805,635 10,115,785
Interest expense:
Deposits 964,258 1,284,768 2,002,693 2,587,277
Short-term borrowings 67,471 35,044 116,392 81,764
Long-term borrowings 396,198 436,029 788,863 884,779
Total interest expense 1,427,927 1,755,841 2,907,948 3,553,820
Net interest income 3,483,963 3,267,289 6,897,687 6,561,965
Provision for loan losses 70,000 158,334 110,000 316,667
Net interest income after provision
for loan losses 3,413,963 3,108,955 6,787,687 6,245,298
Noninterest income:
Service fees 208,845 217,364 406,773 414,630
Trust service fees 191,707 175,000 375,907 357,823
Investment product commissions 159,063 111,000 263,555 175,261
Other operating income 244,855 253,110 502,298 472,622
Total noninterest income 804,470 756,474 1,548,533 1,420,336
Noninterest expenses:
Salaries and employee benefits 1,457,789 1,390,332 2,881,793 2,797,252
Occupancy 309,669 311,572 641,603 623,366
Data processing and information systems 96,862 105,583 195,786 214,337
Purchase core deposit amortization 83,017 77,586 166,034 155,172
Other operating expenses 582,920 604,433 1,221,309 1,175,804
Total noninterest expenses 2,530,257 2,489,506 5,106,525 4,965,931
Income before provision for income taxes 1,688,176 1,375,923 3,229,695 2,699,703
Provision for income taxes 516,203 375,779 962,221 733,717
Net income $1,171,973 $1,000,144 $2,267,474 $1,965,986
Basic earnings per share $0.70 $0.59 $1.35 $1.17
Diluted earnings per share $0.69 $0.59 $1.34 $1.17
Cash dividends declared per share $0.62 $0.62 $0.84 $0.84
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Amount Capital Earnings Income (Loss) Totals
Balance, December 31, 2003 $168,555 $10,975,920 $21,714,225 $905,490 $33,764,190
Comprehensive Income:
Net Income 2,267,474 2,267,474
Other comprehensive loss (1,003,783) (1,003,783)
Total comprehensive income 1,263,691
Proceeds from stock benefit plans 10 2,658 2,668
Stock-based compensation 7,158 7,158
Cash dividends paid, $0.84 per share (1,415,942) (1,415,942)
Balance, June 30, 2004 $168,565 $10,985,736 $22,565,757 $(98,293) $33,621,765
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(Unaudited)
2004 2003
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $2,267,474 $1,965,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 473,853 535,936
Provision for loan losses 110,000 316,667
Loss on premises and equipment disposals 1,713 858
Loss on foreclosed real estate 8,639
Federal Home Loan Bank stock dividends (67,400) (83,600)
Stock-based compensation 7,158 5,760
Changes in operating assets and liabilities:
Loans held for sale (228,625) (144,660)
Other assets 195,462 277,911
Other liabilities (26,775) (468,788)
Net cash provided by (used in) operating activities 2,741,499 2,406,070
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(Unaudited)
2004 2003
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions 598,361 2,006
Net decrease in federal funds sold 1,092,157 9,694,449
Securities available for sale:
Proceeds from maturities 12,204,637 22,197,857
Payment for purchases (14,461,754) (20,736,884)
Payment for purchase of FHLB stock (28,500) -
Net increase in loans (8,308,152) (13,024,259)
Capital expenditures (953,714) (430,679)
Proceeds from sale of premises and equipment 1,600 -
Proceeds from sale of other real estate 111,136 291,006
Purchase of bank-owned life insurance (3,000,000)
Net cash used in investing activities (9,744,229) (5,006,504)
Cash flows from financing activities:
Net increase (decrease) in deposits (2,648,737) 8,971,402
Net increase (decrease) in short-term borrowings 5,102,632 (6,599,807)
Proceeds from issuance of long-term borrowings 5,000,000 2,000,000
Principal payments on long-term borrowings - (3,000,000)
Proceeds from stock benefit plans 2,668 3,198
Cash dividends paid (1,415,942) (1,415,036)
Net cash provided by (used in) financing activities 6,040,621 (40,243)
Net decrease in cash and due from banks (962,109) (2,640,677)
Cash and due from banks at beginning 13,694,114 15,484,360
Cash and due from banks at end $12,732,005 $12,843,683
Supplemental cash flow information:
Cash paid during the year for:
Interest $3,167,021 $3,593,343
Income taxes $900,000 $697,066
Noncash investing and financing activities:
Loans transferred to other real estate $- $615,359
Loans charged off $13,905 $241,606
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 June 30, Six Months Ended June 30,
2004 2003 2004 2003
Net income available to common stockholders $1,171,973 $1,000,144 $2,267,474 $1,965,986
Weighted average shares outstanding 1,685,646 1,684,518 1,685,646 1,684,497
Effect of dilutive stock options outstanding 789 482 673 453
Diluted weighted average shares outstanding 1,686,435 1,685,000 1,686,319 1,684,950
Basic earnings per common share $0.70 $0.59 $1.35 $1.17
Diluted earnings per common share $0.69 $0.59 $1.34 $1.17
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 June 30, Six Months Ended June 30,
2004 2003 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 $7,158 $5,760
NOTE 4 - CHANGES IN ACCOUNTING PRINCIPALS
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 did not have a material
impact on the Company's consolidated results of operations or financial
position, as the Company'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 Company's bank
subsidiary transferred investment assets to a Nevada investment subsidiary that
holds and manages these assets which have not been subject to Wisconsin income
tax. Prior to formation of the investment subsidiary, the Company sought and
obtained a private letter ruling from the Wisconsin Department of Revenue (the
"Department") regarding the non-taxability of the investment subsidiary in the
state of Wisconsin. The Department has 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 Company is currently undergoing such an audit; however, the Department has
not yet issued an assessment to the Company. The Department recently indicated
that it will offer to settle this issue on consistent terms with respect to all
Wisconsin banks which maintain out-of-state subsidiaries. The Company 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 Company is
prepared 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. Nevertheless, the Company intends to meet with
the Department in the third quarter to discuss the Department's current
position with respect to it and similarly situated Wisconsin banks.
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2004 totaled $1.2 million or $0.70
for basic earnings per share and $0.69 for diluted earnings per share.
Comparatively, net income for the quarter ended June 30, 2003 was $1.0 million
or $0.59 for basic and diluted earnings per share. Operating results for the
second quarter 2004 generated an annualized return on average assets of 1.23%
and an annualized return on average equity of 13.79%, compared to 1.10% and
12.26% for the comparable quarter in 2003. The net interest margin for the
second quarter 2004 was 4.06% compared to 4.00% for the same period 2003.
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)
June 30, March 31, December 31, September 30, June 30,
2004 2004 2003 2003 2003
EARNINGS AND DIVIDENDS
Interest income $4,912 $4,894 $4,916 $4,930 $5,023
Interest expense 1,428 1,480 1,605 1,705 1,756
Net interest income 3,484 3,414 3,311 3,225 3,267
Provision for loan losses 70 40 60 80 158
Net interest income after
provision for loan losses 3,414 3,374 3,251 3,145 3,109
Noninterest income 804 744 673 888 756
Noninterest expense 2,530 2,576 2,561 2,494 2,489
Income before provision for income taxes 1,688 1,542 1,363 1,539 1,376
Provision for income taxes 516 446 372 438 376
Net income $1,172 $1,096 $991 $1,101 $1,000
Return on average assets 1.23% 1.16% 1.07% 1.18% 1.10%
Return on average equity 13.79% 12.89% 11.92% 13.59% 12.26%
Tangible equity to assets 8.78% 8.82% 8.74% 8.48% 8.72%
Net interest margin 4.06% 4.02% 3.98% 3.89% 4.00%
AVERAGE BALANCE SHEET
Loans net of unearned income $272,187 $267,330 $264,362 $267,923 $263,189
Assets 379,726 377,185 370,975 371,830 363,264
Deposits 280,249 282,835 284,134 285,698 277,052
Stockholders' equity 33,992 34,007 33,259 32,411 32,631
ENDING BALANCE SHEET
Loans net of unearned income $277,571 $270,016 $269,105 $262,355 $267,118
Assets 385,509 375,505 375,225 369,105 369,657
Deposits 285,001 276,462 287,649 284,790 283,463
Stockholders' equity 33,622 34,697 33,764 33,156 32,901
FINANCIAL CONDITION ANALYSIS
Total risk-based capital 12.82% 12.85% 12.83% 12.85% 12.45%
Net charge-offs to average loans 0.00% 0.00% 0.16% 0.04% 0.07%
Nonperforming assets to loans 0.69% 0.61% 0.62% 0.69% 1.00%
Efficiency ratio 57.06% 59.83% 61.92% 58.37% 59.47%
STOCKHOLDERS' DATA
Basic earnings per share $0.70 $0.65 $0.59 $0.65 $0.59
Diluted earnings per share $0.69 $0.65 $0.59 $0.65 $0.59
Dividends per share $0.62 $0.22 $0.22 $0.22 $0.62
Book value per share $19.95 $20.58 $20.03 $19.68 $19.53
Dividend payout ratio 89.2% 33.9% 37.4% 33.7% 104.4%
Average common shares outstanding 1,686 1,686 1,685 1,685 1,685
STOCK PRICE INFORMATION
High $30.00 $29.00 $29.00 $28.65 $28.00
Low 29.00 28.50 28.50 28.00 28.00
Market price at quarter end (1) 30.00 29.00 28.50 28.65 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 81.3% of total operating income for the second
quarter of 2004, as compared to 81.2% 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 $201,000, or
5.9%, from $3.4 million for the quarter ended June 30, 2003 to $3.6 million at
June 30, 2004. For the comparable six month periods ending June 30, 2004 and
2003, tax adjusted net interest income increased $308,000, or 4.5%, to $7.2
million. As indicated in Tables 3 and 4, the increase in taxable equivalent
net interest income was attributable to favorable volume variances of $815,000,
while changes in the interest rates resulted in a $507,000 decrease.
The net interest margin was 4.06% at June 30, 2004 up 6 basis points from 4.00%
for the comparable quarter in 2003. The net interest margin improved in the
second quarter 2004 due to the maturity of an eighteen month certificate of
deposit special that was yielding a high interest rate and maturity of a high
interest rate long-term Federal Home Loan Bank advance.
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. With the recent 50
basis point increase in the federal funds rate the net interest margin for the
remainder of 2004 should continue to widen as the majority of the loan
portfolio will reprice more rapidly than interest-bearing liabilities.
The average yield on earning assets at June 30, 2004 decreased 41 basis points
to 5.65% between comparable quarters while the rate paid on interest bearing
liabilities decreased 51 basis points to 1.90% at June 30, 2004.
Table 2: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended June 30, 2004 Three months ended June 30, 2003
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $274,986 $4,077 5.93% $263,189 $4,199 6.38%
Investment securities:
Taxable 53,474 528 3.95% 47,333 530 4.48%
Tax exempt (2) 22,873 384 6.72% 23,357 390 6.68%
Other interest earning assets 6,546 69 4.22% 8,645 66 3.05%
Total earning assets $357,879 $5,058 5.65% $342,524 $5,185 6.06%
Cash and due from banks $11,292 $10,840
Other assets 13,354 $12,742
Allowance for loan losses (2,799) (2,842)
Total assets $379,726 $363,264
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $26,688 $25 0.37% $28,163 $52 0.74%
Savings deposits 71,204 105 0.59% 69,233 136 0.79%
Time deposits 140,868 834 2.37% 143,489 1,097 3.06%
Short-term borrowings 22,042 67 1.22% 11,504 35 1.22%
Long-term borrowings 40,329 396 3.93% 38,813 436 4.49%
Total interest bearing liabilities $301,131 $1,428 1.90% $291,202 $1,756 2.41%
Demand deposits 41,491 36,167
Other liabilities 3,113 3,264
Stockholders' equity 33,991 32,631
Total liabilities and stockholders' equity $379,726 $363,264
Net interest income and rate spread $3,630 3.75% $3,429 3.66%
Net interest margin 4.06% 4.00%
(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 3: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Six months ended June 30, 2004 Six months ended June 30, 2003
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $272,542 $8,127 6.00% $259,936 $8,312 6.43%
Investment securities:
Taxable 52,782 1,078 4.11% 48,478 1,187 4.92%
Tax exempt (2) 23,208 761 6.59% 23,589 790 6.73%
Other interest earning assets 7,818 134 3.45% 11,231 149 2.67%
Total earning assets $356,350 $10,100 5.70% $343,234 $10,438 6.12%
Cash and due from banks $11,277 $10,946
Other assets 13,612 $11,993
Allowance for loan losses (2,783) (2,818)
Total assets $378,456 $363,355
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $27,704 $52 0.38% $29,026 $110 0.76%
Savings deposits 72,478 216 0.60% 68,667 267 0.78%
Time deposits 140,861 1,735 2.48% 142,459 2,210 3.12%
Short-term borrowings 19,792 116 1.18% 12,956 82 1.27%
Long-term borrowings 40,164 789 3.95% 39,403 885 4.52%
Total interest bearing liabilities $300,999 $2,908 1.94% $292,511 $3,554 2.44%
Demand deposits 40,501 35,285
Other liabilities 2,956 3,161
Stockholders' equity 34,000 32,398
Total liabilities and stockholders'
equity $378,456 $363,355
Net interest income and rate spread $7,192 3.76% $6,884 3.66%
Net interest margin 4.06% 4.04%
(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
(dollars in thousands)
2004 compared to 2003
Increase (Decrease) Due to
Volume Rate Net
Interest Income:
Loans (2) 811 (996) (185)
Investment securities:
Taxable 212 (321) (109)
Tax exempt (2) (26) (3) (29)
Other interest income (91) 76 (15)
Total earning assets (2) 906 (1,244) (338)
Interest Expense:
Interest bearing demand (10) (48) (58)
Savings deposits 30 (81) (51)
Time deposits (50) (425) (475)
Short-term borrowings 87 (53) 34
Long-term borrowings 34 (130) (96)
Total interest-bearing liabilities 91 (737) (646)
Net Interest Income (2) 815 (507) 308
(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%.
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 June 30, 2004
decreased $88,000 to $70,000 compared to $158,000 for the second 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 5: Noninterest Income
(dollars in thousands)
Three months ended Six months ended
June 30, June 30, Percent June 30, June 30, Percent
2004 2003 Change 2004 2003 Change
Service fees $209 $217 -3.7% $407 $415 -1.9%
Trust service fees 192 175 9.7% 376 358 5.0%
Investment product commissions 159 111 43.2% 263 175 50.3%
Gains from sale of loans 65 90 -27.8% 113 178 -36.5%
Bank owned life insurance 32 19 68.4% 67 19 252.6%
Other operating income 147 144 2.1% 322 275 17.1%
Total noninterest income $804 $756 6.3% $1,548 $1,420 9.0%
Trust service fees increased $17,000 between comparable quarters of 2004 and
2003. The Trust Department has seen an increase in new accounts during 2004 as
clients are utilizing our alliance with Northstar Asset Management Inc. to
provide proprietary research.
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 $48,000 to
$159,000 in the second quarter of 2004 compared to the same quarter in 2003.
Investment clients are employing funds that have been parked in bank deposits
back into annuities and mutual funds.
Gains from sales of loans were affected by a slowdown in mortgage refinancing
activities due to higher mortgage rates in 2004. As a direct result, fee
income from the sale of loans to the secondary market decreased $25,000 between
the comparable quarters.
Income from bank owned life insurance (BOLI) was $32,000 for the second quarter
2004 compared to $19,000 during the second quarter 2003. The Company made BOLI
purchases of $1.5 million in April 2003 and an additional $1.5 million purchase
in June 2003 that impacted those results.
For the first six months of 2004, noninterest income increased $128,000, or
9.0%, to $1.5 million from the same period one year ago.
Trust service fees increased $18,000 for the first six months of 2004 compared
to the same period in 2003. The majority of the increase occurred in the
second quarter 2004 as fees were collected on the appreciation of the trust
portfolio and the increase in new trust accounts since year-end.
Investment product commissions increased $88,000 to $263,000 for the first six
months of 2004 compared to the same period in 2003. The increase in fees
between years is attributable to the addition of staff offering investment
products to additional Bank market areas and increased sales of annuities and
mutual funds.
Gains from sales of loans were affected by a slowdown in mortgage refinancing
activities due to higher mortgage rates in 2004. Sales of loans for the six
months ended June 30, 2004 were $7.0 million compared to $11.0 million for the
same period a year earlier. While the Company has experienced a slowdown in
refinancing activity similar to industry this decline has been less of an
impact on noninterest income as other financial institutions have experienced.
Fee income from the sale of loans to the secondary market decreased $65,000
between the comparable periods.
Income from BOLI was $67,000 for the first six months of 2004 compared to
$19,000 during the same period in 2003. The Company made BOLI purchases of
$1.5 million in April 2003 and an additional $1.5 million purchase in June 2003
that impacted those results.
Other operating income increased $47,000 to $322,000 for the first six months
of 2004 compared to the same period 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.
NONINTEREST EXPENSE
Table 6: Noninterest Expense
(dollars in thousands)
Three months ended Six months ended
June 30, June 30, Percent June 30, June 30, Percent
2004 2003 Change 2004 2003 Change
Salaries and employee benefits $1,458 $1,390 4.9% $2,882 $2,797 3.0%
Occupancy 310 312 -0.6% 642 623 3.0%
Data processing and
information systems 97 105 -7.6% 196 215 -8.8%
Amortization of intangibles 83 78 6.4% 166 155 7.1%
Other operating expenses 582 604 -3.6% 1,220 1,176 3.7%
Total noninterest expenses $2,530 $2,489 1.6% $5,106 $4,966 2.8%
Salaries and employee benefits for the second quarter 2004 increased $68,000
over second 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 $27,000 for the quarter ended June 30, 2004 but this
was offset by an increase in salaries and health insurance premiums.
Data processing and information systems expenses decreased due to decreased
software maintenance and amortization expenses and data connection costs
between the branches. Other operating expenses decreased $22,000 due to loan
servicing expense and investment expense. Loan servicing expense decreased
$50,000 between comparable quarters due to holding costs associated with other
real estate in 2003 and the recovery of repossessed property expenses in the
second quarter 2004. Fees associated with funding the balance sheet increased
$25,000 between comparable quarters due to fees paid to attain brokered
deposits and expenses to provide pledging instruments for municipal deposits
and cash management accounts.
For the first six months of 2004, noninterest expense increased $140,000, or
2.8%, to $5.1 million from the same period one year ago.
Salaries and employee benefits for the first six months of 2004 increased
$85,000 compared to the same period in 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 $69,000 for the period ended June 30, 2004
but this was offset by an increase in salaries and health insurance premiums.
Data processing and information systems expenses decreased $19,000 due to
decreased software maintenance and amortization expenses and data connection
costs between the branches.
BALANCE SHEET ANALYSIS
LOANS
At June 30, 2004, total loans increased $8.7 million, or 3.2%, to $278.1
million from $269.4 million at December 31, 2003.
Table 7: Period End Loan Composition
(dollars in thousands)
June 30, % of June 30, % of December 31, % of
2004 total 2003 total 2003 total
Commercial $44,290 15.9% $53,966 20.1% $47,268 17.5%
Real estate commercial 94,233 33.9% 81,920 30.6% 87,244 32.4%
Agricultural 36,147 13.0% 34,395 12.8% 35,739 13.3%
Real estate construction 9,560 3.4% 9,071 3.4% 9,306 3.5%
Real estate residential 84,597 30.4% 79,399 29.6% 80,829 30.0%
Installment 9,303 3.4% 9,303 3.5% 9,050 3.3%
Total loans (including
loans held for sale) $278,130 100.0% $268,054 100.0% $269,436 100.0%
The Company's loan portfolio mix has remained relatively stable since December
31, 2003, with the exception of commercial and real estate commercial
categories. During the first quarter 2004 the Company had loan payoffs of
approximately $7.0 million in these two categories. One large commercial
credit was refinanced with another financial institution. The remaining $4.0
million of loan payoffs were from participation loans. During the second
quarter of 2004 the Company was able to grow its loan portfolio primarily in
real estate commercial and residential categories.
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 June 30, 2004 a
provision for loan loss of $70,000 was recorded for the three months ended June
30, 2004, a decrease of $88,000 or 55.7%, compared to a year ago. Improved
credit quality, decreased non-accruals and delinquencies in the loan portfolio
between comparable periods has led the Company to provide less for anticipated
losses. Net loan recoveries were $3,000 for the three months ended June 30,
2004, compared to net loan charge-offs of $183,000 for the same period 2003.
Table 8: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Six months ended Year ended
June 30, December 31,
2004 2003 2003
Allowance for loan losses at
beginning of year $2,732 $2,702 $2,702
Loans charged off (14) (242) (479)
Recoveries 22 14 53
Provision for loan losses 110 317 456
Allowance for loan losses at
end of period $2,850 $2,791 $2,732
Nonperforming assets
Nonaccrual loans $1,154 $1,112 $136
Impaired loans $370 $1,034 $457
Accruing loans past due 90
days or more 31 34 35
Restructured loans 358 0 320
Total nonperforming loans 1,913 2,180 948
Other real estate owned 0 90 270
Total nonperforming assets $1,913 $2,270 $1,218
Ratios
Allowance for loan losses to
total loans at end of period 1.02% 1.04% 1.02%
Net charge-offs during the
period to average loans
outstanding 0.00% 0.09% 0.16%
In the opinion of management, the allowance for loan losses was adequate as of
June 30, 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 $1.9 million at June 30, 2004 compared to $1.2
million at December 31, 2003. Nonaccrual loans increased $765,000 from year-
end and represented $1.3 million of nonperforming assets at June 30, 2004.
Real estate nonaccrual loans accounted for $1.0 million of the total, of which
$608,000 was residential real estate and $428,000 was agricultural real estate,
while commercial non-accruals accounted for $239,000. There was no other real
estate owned at June 30, 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 minimal 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 79.3% at June 30, 2004 and 82.7%
at June 30, 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 9: Period End Deposit Composition
(dollars in thousands)
June 30, % of June 30, % of December 31, % of
2004 total 2003 total 2003 total
Non-interest bearing demand $42,242 14.8% $38,624 13.6% $39,949 13.9%
Interest-bearing demand 26,833 9.4% 30,115 10.6% 28,242 9.8%
Savings deposits 71,133 25.0% 68,954 24.3% 73,082 25.4%
Time deposits 124,794 43.8% 135,270 47.7% 135,876 47.2%
Brokered deposits 19,999 7.0% 10,500 3.8% 10,500 3.7%
Total $285,001 100.0% $283,463 100.0% $287,649 100.0%
Total deposits at June 30, 2004 decreased $2.6 million, or 0.9%, to $285.0
million from December 31, 2003. Time deposits decreased over $11.0 million
from year-end due to a maturing eighteen month certificate of deposit special.
The Company acquired an additional $9.5 million of brokered deposits in 2004 to
fund asset growth.
CAPITAL
Stockholders' equity at June 30, 2004 decreased $142,000 to $33.6 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
June 30, 2004 included $98,000 of accumulated other comprehensive loss, related
to unrealized losses 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 $0.62 per common share were paid for the quarters ended June
30, 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 June 30, 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 10: Capital Ratios
Tier 1 Capital Total Capital
June 30, 2004 11.8% 12.8%
March 31, 2004 12.1% 13.1%
December 31, 2003 11.8% 12.9%
September 30, 2003 11.4% 12.5%
June 30, 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of the Company was held on April 27, 2004.
The matters voted upon, including the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as to each
such matter were as follows:
MATTER SHARES
Broker
For Against Withheld Abstain Non-Vote
Election of Directors
1 Norman A. Hatlestad 1,512,875 N/A 17,969 N/A 0
James F. Melvin 1,514,475 N/A 16,369 N/A 0
Robert J. Schoofs 1,514,475 N/A 16,369 N/A 0
2 Approval of the
appointment of
independent auditors
for the year ending December
31, 2004 1,522,062 0 5,644 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
Exhibits required by Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K:
Form 8-K dated April 28, 2004. The Company filed a Form 8-K on April 28, 2004,
reporting earning information for the quarter ended March 31, 2004, under Item
5 and additional disclosures under Item12, Results of Operations and Financial
Condition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: AUGUST 13, 2004 GENE C. KNOLL
Gene C. Knoll, President and Chief Executive Officer
(Principal Executive Officer)
Date: AUGUST 13, 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 June 30, 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