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 SEPTEMBER 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 November 3, 2004, there were 1,697,146 shares of $0.10 par value common
stock outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 3
Consolidated Statements of Income
Three Months Ended September 30, 2004 and 2003
And Nine Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Changes in Stockholders'
Equity
Nine Months Ended September 30, 2004 5
Consolidated Statements of Cash Flows
Nine Months Ended September 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 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 6. Exhibits 22
Signatures 23
Exhibit Index 24
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheets
September 30, 2004 December 31, 2003
(Unaudited) (Audited)
ASSETS
Cash and due from banks $9,496,990 $13,694,114
Interest-bearing deposits in other financial institutions 18,848 614,128
Federal funds sold 3,982,700 1,628,359
Securities available for sale -At fair value 81,908,655 77,988,188
Federal Home Loan Bank stock (at cost) 2,500,000 2,154,100
Loans held for sale 1,198,700 330,775
Loans receivable, net of allowance for loan losses of
$2,822,697 in 2004 and $2,732,447 in 2003 279,793,931 266,372,637
Accrued interest receivable 1,610,511 1,613,617
Premises and equipment 6,255,335 5,596,313
Intangible assets 314,491 563,543
Goodwill 295,316 295,316
Other assets 4,310,995 4,373,457
TOTAL ASSETS $391,686,472 $375,224,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $43,250,483 $39,949,256
Interest-bearing deposits 243,428,943 247,700,052
Total deposits 286,679,426 287,649,308
Short-term borrowings 22,117,408 11,294,262
Long-term borrowings 45,000,000 40,000,000
Accrued interest payable 1,021,531 1,206,178
Accrued expenses and other liabilities 1,779,790 1,310,609
Total liabilities 356,598,155 341,460,357
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 23,345,170 21,714,225
Accumulated other comprehensive income 588,846 905,490
Total stockholders' equity 35,088,317 33,764,190
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $391,686,472 $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 Nine Months Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
Interest and Dividend Income:
Loans, including fees $4,212,103 $4,179,868 $12,303,134 $12,438,272
Securities
Taxable 629,863 455,243 1,828,235 1,708,856
Tax-exempt 244,500 257,525 747,005 779,815
Other interest and dividend income 28,529 37,236 42,256 118,714
Total interest and dividend income 5,114,995 4,929,872 14,920,630 15,045,657
Interest expense:
Deposits 1,026,238 1,265,363 3,028,931 3,852,640
Short-term borrowings 86,755 32,642 203,147 114,406
Long-term borrowings 437,976 407,044 1,226,839 1,291,823
Total interest expense 1,550,969 1,705,049 4,458,917 5,258,869
Net interest income 3,564,026 3,224,823 10,461,713 9,786,788
Provision for loan losses 75,000 80,000 185,000 396,667
Net interest income after provision
for loan losses 3,489,026 3,144,823 10,276,713 9,390,121
Noninterest income:
Service fees 222,158 208,462 628,931 623,092
Trust service fees 189,817 182,916 565,724 540,739
Investment product commissions 88,410 161,556 351,965 336,817
Other operating income 241,373 334,748 743,671 807,370
Total noninterest income 741,758 887,682 2,290,291 2,308,018
Noninterest expenses:
Salaries and employee benefits 1,414,039 1,402,074 4,295,832 4,199,326
Occupancy 305,511 310,071 947,114 933,437
Data processing and information systems 96,596 104,151 292,382 318,488
Purchase core deposit amortization 83,018 77,586 249,052 232,758
Other operating expenses 603,017 599,385 1,824,326 1,775,189
Total noninterest expenses 2,502,181 2,493,267 7,608,706 7,459,198
Income before provision for income taxes 1,728,603 1,539,238 4,958,298 4,238,941
Provision for income taxes 578,347 438,451 1,540,568 1,172,168
Net income $1,150,256 $1,100,787 $3,417,730 $3,066,773
Basic earnings per share $0.68 $0.65 $2.03 $1.82
Diluted earnings per share $0.68 $0.65 $2.02 $1.82
Cash dividends declared per share $0.22 $0.22 $1.06 $1.06
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Amount Capital Earnings Income (Loss) Totals
Balance, December 31, 2003 $168,555 $10,975,920 $21,714,225 $905,490 $33,764,190
Comprehensive Income:
Net Income 3,417,730 3,417,730
Other comprehensive loss (316,644) (316,644)
Total comprehensive income 3,101,086
Proceeds from stock benefit plans 10 2,658 2,668
Stock-based compensation 7,158 7,158
Cash dividends paid, $1.06 per share (1,786,785) (1,786,785)
Balance, September 30, 2004 $168,565 $10,985,736 $23,345,170 $588,846 $35,088,317
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,417,730 $3,066,773
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 725,686 798,267
Provision for loan losses 185,000 396,667
(Gain) loss on premises and equipment disposals 1,613 (542)
Loss on foreclosed real estate 8,639 2,000
Federal Home Loan Bank stock dividends (100,300) (117,100)
Stock-based compensation 7,158 5,760
Changes in operating assets and liabilities:
Loans held for sale (867,925) (364,035)
Other assets (33,486) 33,401
Other liabilities 284,534 (460,177)
Net cash provided by operating activities 3,628,649 3,361,014
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions 595,280 3,251
Net (increase) decrease in federal funds sold (2,354,341) 6,049,453
Securities available for sale:
Proceeds from maturities 16,970,215 34,212,641
Payment for purchases (21,394,569) (34,738,133)
Payment for purchase of FHLB stock (245,600) -
Net increase in loans (13,456,294) (8,763,269)
Capital expenditures (1,122,447) (662,868)
Proceeds from sale of premises and equipment 1,700 1,400
Proceeds from sale of other real estate 111,136 290,465
Purchase of bank-owned life insurance (3,000,000)
Net cash used in investing activities (20,894,920) (6,607,060)
Cash flows from financing activities:
Net increase (decrease) in deposits (969,882) 10,298,353
Net increase (decrease) in short-term borrowing 10,823,146 (4,742,755)
Proceeds from issuance of long-term borrowings 10,000,000 4,000,000
Principal payments on long-term borrowings (5,000,000) (9,000,000)
Proceeds from stock benefit plans 2,668 3,198
Cash dividends paid (1,786,785) (1,785,648)
Net cash provided by (used in) financing activities 13,069,147 (1,226,852)
Net decrease in cash and due from banks (4,197,124) (4,472,898)
Cash and due from banks at beginning 13,694,114 15,484,360
Cash and due from banks at end $9,496,990 $11,011,462
Supplemental cash flow information:
Cash paid during the year for:
Interest $4,654,312 $5,266,794
Income taxes $1,370,000 $1,193,066
Noncash investing and financing activities:
Loans transferred to other real estate $- $1,553,536
Loans charged off $117,372 $376,736
Loans made in connection with the sale of other real estate $150,000 $536,840
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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Net income available to common stockholders $1,150,256 $1,100,787 $3,417,730 $3,066,773
Weighted average shares outstanding 1,685,646 1,684,598 1,685,646 1,684,531
Effect of dilutive stock options outstanding 948 656 711 500
Diluted weighted average shares outstanding 1,686,594 1,685,254 1,686,357 1,685,031
Basic earnings per common share $0.68 $0.65 $2.03 $1.82
Diluted earnings per common share $0.68 $0.65 $2.02 $1.82
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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Stock options granted - - 3,719 3,541
Fair value of stock options $- $- $108,781 $99,608
Stock-based compensation expense
included in reported net income $- $- $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 had no 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 for the three and nine months ended September 30, 2004 and 2003.
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 those 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.
ALLOWANCE FOR LOAN LOSSES: Management's evaluation process used to determine
the adequacy of the allowance for loan losses is subject to the use of
estimates, assumptions, 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, an investment subsidiary
of the Company located in the state of Nevada holds and manages various
investment assets. Prior to beginning operations, the Company sought and
obtained a private letter ruling from the Wisconsin Department of Revenue (the
"Department") to the effect that the income of this subsidiary would not be
subject to Wisconsin income tax. In an audit program covering all Wisconsin
financial institutions which operate similar subsidiaries, the Department has
taken the position that a portion of the income of the out-of-state subsidiaries
is taxable in Wisconsin. The Company believes its practices were in compliance
with Wisconsin law. However, given the cost and risks associated with
litigation, the Company is discussing a settlement of this matter with the
Department on terms which are consistent with those offered by the Department to
other financial institutions subject to audit. The Company anticipates that
should the audit be settled on these terms, there would be no adverse material
effect on the results of operations for the year as no material increase in the
Company's tax accrual would be required to reflect the anticipated settlement
amount.
Results of Operations
Net income for the quarter ended September 30, 2004 totaled $1.2 million or
$0.68 for basic and diluted earnings per share. Comparatively, net income for
the quarter ended September 30, 2003 was $1.1 million or $0.65 for basic and
diluted earnings per share. Operating results for the third quarter 2004
generated an annualized return on average assets of 1.17% and an annualized
return on average equity of 13.54%, compared to 1.18% and 13.59% for the
comparable quarter in 2003. The net interest margin for the third quarter 2004
was 4.00% compared to 3.89% for the same period 2003.
For the nine months ended September 30, 2004, earnings increased $351,000 or
11.4%, to $3.4 million from $3.1 million for the same period in 2003. Basic
and fully diluted earnings per share of $2.03 and $2.02, respectively, were
reported for the nine months ended September 30, 2004 compared to $1.82 for
basic and diluted earnings per share for the same period last year.
The increase in net income for both the three-month and nine-month periods was
primarily due to an increase in net interest income, and a reduction in the
provision for loan loss. 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)
September 30, June 30, March 31, December 31, September 30,
2004 2004 2004 2003 2003
EARNINGS AND DIVIDENDS
Interest income $5,115 $4,912 $4,894 $4,916 $4,930
Interest expense 1,551 1,428 1,480 1,605 1,705
Net interest income 3,564 3,484 3,414 3,311 3,225
Provision for loan losses 75 70 40 60 80
Net interest income after
provision for loan losses 3,489 3,414 3,374 3,251 3,145
Noninterest income 742 804 744 673 888
Noninterest expense 2,503 2,530 2,576 2,561 2,494
Income before provision for income taxes 1,728 1,688 1,542 1,363 1,539
Provision for income taxes 578 516 446 372 438
Net income $1,150 $1,172 $1,096 $991 $1,101
Return on average assets 1.17% 1.23% 1.16% 1.07% 1.18%
Return on average equity 13.54% 13.79% 12.89% 11.92% 13.59%
Tangible equity to assets 8.50% 8.78% 8.82% 8.74% 8.48%
Net interest margin 4.00% 4.06% 4.02% 3.98% 3.89%
AVERAGE BALANCE SHEET
Loans net of unearned income $275,911 $272,187 $267,330 $264,362 $267,923
Assets 392,438 379,726 377,185 370,975 371,830
Deposits 289,556 280,249 282,835 284,134 285,698
Stockholders' equity 33,967 33,992 34,007 33,259 32,411
ENDING BALANCE SHEET
Loans net of unearned income $282,617 $277,571 $270,016 $269,105 $262,355
Assets 391,686 385,509 375,505 375,225 369,105
Deposits 286,679 285,001 276,462 287,649 284,790
Stockholders' equity 35,088 33,622 34,697 33,764 33,156
FINANCIAL CONDITION ANALYSIS
Total risk-based capital 12.84% 12.82% 12.85% 12.83% 12.85%
Net charge-offs to average loans 0.04% 0.00% 0.00% 0.16% 0.04%
Nonperforming assets to loans 0.65% 0.69% 0.61% 0.62% 0.69%
Efficiency ratio 56.34% 57.06% 59.83% 61.92% 58.37%
STOCKHOLDERS' DATA
Basic earnings per share $0.68 $0.70 $0.65 $0.59 $0.65
Diluted earnings per share $0.68 $0.69 $0.65 $0.59 $0.65
Dividends per share $0.22 $0.62 $0.22 $0.22 $0.22
Book value per share $20.82 $19.95 $20.58 $20.03 $19.68
Dividend payout ratio 32.2% 89.2% 33.9% 37.4% 33.7%
Average common shares outstanding 1,686 1,686 1,686 1,685 1,685
STOCK PRICE INFORMATION
High $30.80 $30.00 $29.00 $29.00 $28.65
Low 28.50 29.00 28.50 28.50 28.00
Market price at quarter end (1) 30.80 30.00 29.00 28.50 28.65
(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 is the Company's principal source of revenue, accounting
for 82.8% of total operating income for the third quarter of 2004, as compared
to 78.4% 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 $316,000, or
9.3%, from $3.4 million for the quarter ended September 30, 2003 to $3.7
million at September 30, 2004. For the comparable nine month periods ending
September 30, 2004 and 2003, tax adjusted net interest income increased
$624,000, or 6.2%, to $10.9 million.
The net interest margin was 4.00% at September 30, 2004 up 11 basis points from
3.89% for the comparable quarter in 2003. This increase was attributable to a
13 basis point increase in the interest rate spread, the net of a 31 basis
point reduction in the cost of interest bearing liabilities offset by an 18
basis point reduction in the yield on earning assets. During the nine months
ended September 30, 2004, the net interest margin was 4.03% compared to 3.98%
for the comparable period in 2003.
Recently the Company took the position that the majority of new or renewed
loans would be written at variable rates. The prolonged lower interest rate
environment favorably lowered the cost of funding, but also lowered yields on
earning assets, putting pressure on the interest margin. With the recent
increase in interest rates for the first time in several years the Company is
experiencing an improved yield on earning assets but also experiencing an
increase in the cost of interest bearing liabilities. During the quarter ended
September 30, 2004, the net interest margin has declined to 4.00% from 4.06% at
June 30, 2004. Although the yield on earning assets increased to 5.67% at
September 30, 2004 from 5.65% at June 30, 2004 the cost of liabilities has
increased nine basis points to 1.99% during the same period. The Company has
been able to control core deposit rates but the short-term borrowings which
averaged $20.3 million in the third quarter 2004 increased 49 basis points in
cost since June 30, 2004 due to the repricing of those funds. The net interest
margin in the upcoming quarter will be primarily impacted by the ability to
control the funding costs of deposits and borrowings used to fund the balance
sheet.
For the three months ended September 30, 2004, average-earning assets increased
$22.0 million, or 6.3%, when compared to the same period last year. The
Company recorded an increase in average loans of $10.8 million, or 4.0%, for
the third quarter of 2004 compared to the same period one year ago. For the
nine months ended September 30, 2004, average-earning assets increased $16.2
million, or 4.7%, compared to the same period last year. The Company recorded
an increase of average loans of $12.0 million, or 4.6%, for the nine months
ended September 30, 2004 compared to the same period one year ago.
Table 2: Quarterly Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended September 30, 2004 Three months ended September 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) $278,767 $4,222 6.06% $267,923 $4,206 6.28%
Investment securities:
Taxable 55,336 563 4.07% 48,003 421 3.51%
Tax exempt (2) 22,643 370 6.54% 23,590 390 6.61%
Other interest earning assets 13,412 95 2.85% 8,594 72 3.35%
Total earning assets $370,158 $5,250 5.67% $348,110 $5,089 5.85%
Cash and due from banks $11,965 $12,064
Other assets 13,172 $14,486
Allowance for loan losses (2,856) (2,830)
Total assets $392,438 $371,830
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $27,012 $25 0.38% $28,561 $44 0.62%
Savings deposits 69,200 107 0.62% 70,584 128 0.73%
Time deposits 149,838 893 2.39% 147,015 1,093 2.97%
Short-term borrowings 20,329 87 1.71% 12,647 33 1.04%
Long-term borrowings 45,435 438 3.86% 37,717 407 4.32%
Total interest bearing liabilities $311,814 $1,550 1.99% $296,524 $1,705 2.30%
Demand deposits 43,505 39,538
Other liabilities 3,152 3,357
Stockholders' equity 33,967 32,411
Total liabilities and stockholders' equity $392,438 $371,830
Net interest income and rate spread $3,700 3.68% $3,384 3.55%
Net interest margin 4.00% 3.89%
(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: Year-to-Date Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Nine months ended September 30, 2004 Nine months ended September 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) $274,632 $12,350 6.01% $262,627 $12,518 6.37%
Investment securities:
Taxable 53,723 1,641 4.08% 48,241 1,608 4.45%
Tax exempt (2) 23,018 1,131 6.56% 23,590 1,180 6.68%
Other interest earning assets 9,696 229 3.15% 10,418 221 2.83%
Total earning assets $361,069 $15,351 5.68% $344,876 $15,527 6.01%
Cash and due from banks $11,508 $11,323
Other assets 13,381 $12,834
Allowance for loan losses (2,808) (2,822)
Total assets $383,150 $366,211
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $27,472 $77 0.37% $28,869 $154 0.71%
Savings deposits 71,314 323 0.61% 69,313 395 0.76%
Time deposits 143,937 2,629 2.44% 143,994 3,303 3.06%
Short-term borrowings 19,972 203 1.36% 12,852 115 1.20%
Long-term borrowings 41,934 1,227 3.91% 38,835 1,292 4.44%
Total interest bearing liabilities $304,629 $4,459 1.96% $293,863 $5,259 2.39%
Demand deposits 41,509 36,718
Other liabilities 3,023 3,227
Stockholders' equity 33,989 32,403
Total liabilities and stockholders' equity $383,150 $366,211
Net interest income and rate spread $10,892 3.72% $10,268 3.62%
Net interest margin 4.03% 3.98%
(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 nine months ended September 30, 2004 was
$185,000 compared to $397,000 for the nine months in 2003. Net loan charge-
offs for the first nine months of 2004 were $94,000 compared with net charge-
offs of $328,000 for the same period in 2003. Net charge-offs to average loans
were 0.03% for the first nine months of 2004 compared to 0.13% for the same
period in 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. However, a decline in the quality
of the loan portfolio or significant charge-offs against the allowance could
affect the adequacy of the allowance requiring higher provisions in the future.
See additional discussion under section "Allowance for Loan Losses."
Noninterest Income
Table 4: Noninterest Income
(dollars in thousands)
Three months ended Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
2004 2003 Change 2004 2003 Change
Service fees $222 $208 6.7% $629 $623 1.0%
Trust service fees 190 183 3.8% 566 541 4.6%
Investment product commissions 88 162 -45.7% 352 337 4.5%
Gains from sale of loans 59 157 -62.4% 173 335 -48.4%
Bank owned life insurance 23 38 -39.5% 90 57 57.9%
Other operating income 160 140 14.3% 480 415 15.7%
Total noninterest income $742 $888 -16.4% $2,290 $2,308 -0.8%
Trust service fees increased $7,000 for the third quarter of 2004 compared to
the same period in 2003. For the nine months ended September 30, 2004,
trust service fees increased $25,000 from the comparable period in 2003. The
Trust Department has experienced an increase in new accounts during 2004 as
clients are utilizing our alliance with Northstar Asset Management Inc. to
provide proprietary research. Also, the appreciation of the trust portfolio in
2004 has increased the amount of fees collected.
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 decreased $74,000 to
$88,000 for the third quarter of 2004 compared to the same quarter in 2003.
The 2003 amount included a $72,000, one-time commission, on bank owned life
insurance purchased by the Company in 2003 through the investment department.
Excluding this commission, investment product commissions decreased $2,000 or
2.2% between the quarters. For the nine months ended September 30, 2004,
investment product commissions increased $15,000 as investment clients are
employing funds that had been in bank deposits back into annuities and mutual
funds. Excluding the commission on the bank owned life insurance, investment
product commissions increased $87,000 between the nine month periods.
In the third quarter and the first nine months of 2004, gains from sales of
loans were affected by a slowdown in mortgage refinancing activities throughout
the industry due to higher mortgage rates. Sales of loans for the nine months
ended September 30, 2004 were $10.2 million compared to $21.4 million for the
same period a year earlier. Fee income from the sale of loans to the secondary
market decreased $98,000 between comparable quarters of 2004 and 2003. For the
nine months ended September 30, 2004 fee income from the sale of loans to the
secondary market decreased $162,000 compared to the first nine months of 2003.
The Company's decline in refinancing activities appears to have had less of an
impact on noninterest income as other financial institutions have experienced.
The monthly crediting rates on bank owned life insurance (BOLI) have averaged
40 to 50 basis points lower in 2004 than 2003. BOLI income decreased $15,000
between comparable quarters of 2004 and 2003. The Company feels crediting
rates are near the bottom and will slowly start to increase in the next
quarter. For the nine months ended September 30, 2004 BOLI income increased
$33,000 compared to the same time period in 2003. The Company purchased BOLI
of $1.5 million in April 2003 and purchased an additional $1.5 million in June
2003.
Other operating income increased $65,000 to $480,000 for the first nine 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 in
restitution received from a loan customer.
Noninterest Expense
Table 5: Noninterest Expense
(dollars in thousands)
Three months ended Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
2004 2003 Change 2004 2003 Change
Salaries and employee benefits $1,414 $1,402 0.9% $4,296 $4,199 2.3%
Occupancy 306 310 -1.3% 947 933 1.5%
Data processing and information systems 96 104 -7.7% 293 319 -8.2%
Amortization of intangibles 83 78 6.4% 249 233 6.9%
Other operating expenses 603 600 0.5% 1,824 1,775 2.8%
Total noninterest expenses $2,502 $2,494 0.3% $7,609 $7,459 2.0%
Salaries and employee benefits increased $12,000 for the third quarter of 2004
compared to the same period in 2003. For the nine months ended September 30,
2004, salaries and employee benefits increased $97,000 from the comparable
period in 2003. For the nine months ended September 30, 2004, salary-related
expenses increased $90,000 or 2.9% due to merit increases between the years
offset by reduced salary expense from open staff positions during 2004.
Employee benefit costs, principally for health insurance, represent the
majority of the increase in personnel-related costs. Employee benefits were
reduced $74,000 in 2004 due to revamping of the incentive compensation program.
The program will not accrue incentive compensation monthly but will expense the
total bonus, if any is awarded, in the fourth quarter annually.
For both the three and nine month periods, data processing and information
systems expenses decreased due to decreased software maintenance and
amortization expenses and data connection costs between the branches.
The Company will incur additional operating expense starting in the fourth
quarter of 2004 and all of 2005 for the new branch expansions in Minocqua and
Rib Mountain, Wisconsin.
Balance Sheet Analysis
Loans
At September 30, 2004, total loans increased $14.4 million, or 5.3%, to $283.8
million from $269.4 million at December 31, 2003. Loan growth was in mortgage
lending with both commercial real estate and residential real estate growing
$8.3 million and $7.3 million, respectively. Growth in commercial real estate
and residential real estate loans occurred principally as a result of the
Company's expansion into the Weston market and the economic growth in that
market. Commercial loans decreased $2.4 million between the periods due to a
$2.9 million commercial loan paid-off in February 2004.
Table 6: Period End Loan Composition
(dollars in thousands)
September 30, % of September 30, % of December 31, % of
2004 total 2003 total 2003 total
Commercial $44,854 15.8% $47,502 18.0% $47,268 17.5%
Real estate commercial 95,506 33.7% 82,206 31.2% 87,244 32.4%
Agricultural 36,620 12.9% 35,304 13.4% 35,739 13.3%
Real estate construction 9,649 3.4% 9,860 3.7% 9,306 3.5%
Real estate residential 88,145 31.1% 79,266 30.1% 80,829 30.0%
Installment 9,042 3.1% 9,372 3.6% 9,050 3.3%
Total loans (including loans held for sale) $283,816 100.0% $263,510 100.0% $269,436 100.0%
Allowance for Loan Losses
The loan portfolio is the Company's 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 September 30, 2004
a provision for loan loss of $185,000 was recorded for the nine months ended
September 30, 2004, a decrease of $211,000 or 53.3%, compared to the same
period in 2003.
Table 7: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Nine months ended Year ended
September 30, December 31,
2004 2003 2003
Allowance for loan losses at beginning of year $2,732 $2,702 $2,702
Loans charged off (117) (377) (479)
Recoveries 23 49 53
Provision for loan losses 185 396 456
Allowance for loan losses at end of period $2,823 $2,770 $2,732
Nonperforming assets
Nonaccrual loans $1,085 $502 $136
Impaired loans $350 $240 $457
Accruing loans past due 90 days or more 42 41 35
Restructured loans 363 321 320
Total nonperforming loans 1,840 1,104 948
Other real estate owned 0 724 270
Total nonperforming assets $1,840 $1,828 $1,218
Ratios
Allowance for loan losses to total loans at end of period 0.99% 1.05% 1.02%
Net charge-offs during the period to average loans outstanding 0.03% 0.13% 0.16%
In the opinion of management, the allowance for loan losses was adequate as of
September 30, 2004. While management uses available information to recognize
losses on loans, future adjustments to the allowance for loan losses 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 loans include non-accrual loans, guaranteed loans 90 days or more
past due but still accruing, and 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. 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 loans were $1.8 million at September 30, 2004 compared to $1.2
million at December 31, 2003. Nonaccrual loans increased $949,000 from year-
end and represented $1.1 million of nonperforming loans at September 30, 2004.
Real estate nonaccrual loans accounted for $1.1 million of the total, of which
$663,000 was residential real estate and $410,000 was agricultural real estate,
while commercial non-accruals accounted for $142,000. Restructured loans were
$363,000 at September 30, 2004 compared to $320,000 at December 31, 2003.
The Company did not have any other real estate owned at September 30, 2004.
Other real estate owned, represents property that the Company acquired through
foreclosure or in satisfaction of debt. Other real estate owned at December
31, 2003 totaled $270,000 and consisted of three properties.
Liquidity
The Company'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 Company's primary funding source is deposits. Average deposits as a
percentage of total funding sources were 82.1% at September 30, 2004 and 84.4%
at September 30, 2003. The Company employs non-deposit funding sources such as
Federal Home Loan Bank of Chicago (FHLB) advances, federal funds purchased, and
corporate funds in the form of repurchase agreements. The Company also relies
on cash flow from its investment and loan portfolios in the form of interest
and principal paydowns as a constant source of liquidity.
Table 8: Period End Deposit Composition
(dollars in thousands)
September 30, % of September 30, % of December 31, % of
2004 total 2003 total 2003 total
Non-interest bearing demand $43,250 15.1% $40,932 14.4% $39,949 13.9%
Interest-bearing demand 25,520 8.9% 25,893 9.1% 28,242 9.8%
Savings deposits 68,550 23.9% 72,309 25.3% 73,082 25.4%
Time deposits 131,360 45.8% 135,156 47.5% 135,876 47.2%
Brokered deposits 17,999 6.3% 10,500 3.7% 10,500 3.7%
Total $286,679 100.0% $284,790 100.0% $287,649 100.0%
Total deposits at September 30, 2004 decreased $970,000, or 0.3%, from $287.6
million at December 31, 2003. The Company acquired an additional $7.5 million
of brokered deposits in 2004 to fund asset growth. Increased competition for
consumer deposits and customer awareness of interest rates continue to limit
the Company's deposit growth. The Company will continue to attempt to attract
and retain deposits through competitive pricing of deposit products and
established product offerings.
The Company has alternative funding sources available such as lines with
correspondent banks and borrowing arrangements with the FHLB if liquidity
concerns arose. Short-term borrowings at September 30, 2004 consisted of
corporate funds in the form of repurchase agreements. Total short-term
borrowings at September 30, 2004 increased $10.8 million to $22.1 million from
$11.3 million at December 31, 2003. FHLB borrowings totaled $45.0 million at
September 30, 2004 compared to $40.0 million at December 31, 2003. Both short-
term and long-term borrowings have increased as a result of growth in the loan
portfolio coupled with a decrease in deposits. The Company believes it has
adequate funding sources to meet its liquidity needs.
Capital
Stockholders' equity at September 30, 2004 increased $1.3 million to $35.1
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 and the change in
unrealized gains on available for sale securities.
Cash dividends of $1.06 per common share were paid in the first nine months of
September 30, 2004 and 2003. Total funds utilized in the payment of dividends
were $1.8 million in the first nine months of 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 September 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 9: Capital Ratios
Tier 1 Capital Total Capital
September 30, 2004 11.9% 12.8%
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%
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
Exhibits required by Item 601 of Regulation S-K.
Exhibit
NUMBER DESCRIPTION
10.1 Form of Incentive Stock Option Agreement
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: NOVEMBER 15, 2004 GENE C. KNOLL
Gene C. Knoll, President and Chief Executive Officer
(Principal Executive Officer)
Date: NOVEMBER 15, 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 September 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:
10.1 Form of Incentive Stock Option Agreement
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