FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from.................to.....................
Commission file number: 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 06-1169935
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
132 West State Street
Medford, Wisconsin 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 748-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
(Title of Class)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act).
Yes ___ No X
As of March 1, 2005, 1,703,577 shares of common stock were outstanding. The
aggregate market value of the voting stock held by non-affiliates as of June
30, 2004, was approximately $47,122,350. For purposes of this calculation, the
registrant has assumed its directors and executive officers are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 23, 2005 (to the extent specified herein): Part III
FORM 10-K
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business.........................................................3
2. Properties.......................................................7
3. Legal proceedings................................................7
4. Submission of matters to a vote of security holders..............8
PART II
5. Market for registrant's common equity and related
stockholder matters..............................................8
6. Selected financial data.........................................10
7. Management's discussion and analysis of financial
condition and results of operations............................11
7A. Quantitative and qualitative disclosures about market
risk............................................................32
8. Financial statements and supplementary data.....................33
9. Changes in and disagreements with accountants on
accounting and financial disclosure.............................73
9A. Controls and procedures.........................................73
9B. Other Information...............................................73
PART III
10. Directors and executive officers of the registrant..............73
11. Executive compensation..........................................75
12. Security ownership of certain beneficial owners and
management and related stockholders matters.....................75
13. Certain relationships and related transactions..................76
14. Principal accountant fees and services..........................76
PART IV
15. Exhibits, financial statement schedules, and reports on
Form 8-K........................................................76
PART I
ITEM 1. BUSINESS
General
Mid-Wisconsin Financial Services, Inc. (the "Company") is a registered
financial holding company under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company's subsidiary operates under the name Mid-
Wisconsin Bank (the "Bank") and has its principal office in Medford, Wisconsin.
Except as may otherwise be noted, this annual report on Form 10-K describes the
business of the Company and the Bank as in effect on December 31, 2004.
The Bank
The Bank was incorporated on September 1, 1890, as a state bank under the laws
of Wisconsin. The Bank conducts is community banking business through twelve
retail locations serving central and northern Wisconsin markets in Taylor,
Clark, Eau Claire, Lincoln, Marathon, Price and Oneida counties.
The day-to-day management of the Bank rests with its officers and board of
directors. The Bank is engaged in general commercial and retail banking
services, including trust services. The Bank serves individuals, businesses
and governmental units and offers most forms of commercial and consumer
lending, including lines of credit, term loans, real estate financing, mortgage
lending and agricultural lending. In addition, the Bank provides a full range
of personal banking services, including checking accounts, savings and time
products, installment and other personal loans, as well as mortgage loans. New
services are frequently added to the Bank's commercial and retail banking
departments.
The Trust and Investment Center offers a wide variety of fiduciary, investment
management and advisory services to individuals, corporations, charitable
trusts, and foundations. The Bank administers pension, profit sharing and
other employee benefit plans, and personal trusts and estates. The Bank also
provides discount and full-service brokerage services, including the sale of
fixed and variable annuities, mutual funds and securities.
In addition to its banking operations, the Bank owns Excel Real Estate
Services, Inc (Excel). Excel, which commenced operations in January 2004,
provides real estate appraisal and title insurance services to the Bank. In
the future, Excel intends to offer its services to other financial institutions
and other individuals in the Bank's markets.
All of the Company's products and services are directly or indirectly related
to the business of community banking and all activity is reported as one
segment of operations. All revenue, profit and loss, and total assets are
reported in one segment and represent the entire operations of the Company.
The Company continues to pursue de novo branches in new markets. Bank branches
were opened in Weston, Wisconsin in 2003 and Minocqua, Wisconsin in 2004. A
new branch is currently under construction in Rib Mountain, Wisconsin to be
opened in July 2005. The Company believes opening branches in adjacent markets
capitalizes on existing management and customer relationships. The Company has
a policy of pursuing opportunities to acquire additional bank subsidiaries or
branch offices so that, at any given time, it may be engaged in some tentative
or preliminary discussions for such purpose with officers, directors or
principal shareholders of other holding companies or banks. There are no
plans, understandings, or arrangements, written or oral, regarding other
acquisitions as of the date hereof.
Employees
As of March 1, 2005, the Company and its subsidiaries had 128 full-time
equivalent employees. The Company considers relationship with its employees to
be good.
Bank Market Area and Competition
The Bank competes for loans, deposits, and financial services in all of its
principal markets. Much of this competition comes from companies which are
larger and have greater resources than the Company. The Bank competes directly
with other banks, savings associations, credit unions, finance companies,
mutual funds, life insurance companies and other financial and non-financial
companies. Many of these nonbank competitors offer products and services that
are functionally equivalent to the products and services offered by the Bank.
Competition involves efforts to obtain new deposits, interest rates paid on
deposits and charged on loans, as well as other aspects of banking.
Executive Officers
The executive officers of the Company as of March 1, 2005, their ages, offices
and principal occupation during the last five years are set forth below.
Name Offices and Positions Held Date of Election
James F. Melvin Chairman of the Board of the Company May 2000
Age: 55
From August 1996 to May 2000 Vice
Chairman of the Board of the Company
From May 1998 to May 2000 Chairman
of the Board of the Bank
President of the Melvin Companies
Norman A. Hatlestad Vice President of the Company May 2002
Age: 63
President of Medford Auto Supply, Inc.
Gene C. Knoll President of the Company October 1996
Age: 51
President, Chief Executive Officer
of the Bank
William A. Weiland Secretary and Treasurer of the May 1998
Age: 50 Company
Executive Vice President of the Bank
Rhonda R. Kelley Controller of the Company September 1998
Age: 31
Controller of the Bank
All executive officers are elected annually by the board of directors at its
annual meeting and hold office until the next annual meeting of the board of
directors, or until their respective successors are elected and qualified.
Regulation and Supervision
The Company and the Bank are subject to regulation under both federal and state
law. The Company is a registered financial holding company and is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") pursuant to the BHCA. The Bank is subject
to regulation and examination by the Federal Deposit Insurance Corporation
("FDIC") and, as a Wisconsin chartered bank, by the Wisconsin Department of
Financial Institutions.
The Federal Reserve Board expects a financial holding company to be a source of
strength for its subsidiary banks. As such, the Company may be required to
take certain actions or commit certain resources to the Bank when it might
otherwise choose not to do so. Under federal and state banking laws, the
Company and the Bank are also subject to regulations which govern the Company's
and the Bank's capital and reserve requirements, loans and loan policies
(including the extension of credit to affiliates), deposits, dividend
limitations, establishment of branch offices, mergers and other acquisitions,
investments in or the conduct of other lines of business, management personnel,
interlocking directors and other aspects of the operation of the Company and
the Bank.
Bank regulators having jurisdiction over the Company and the Bank generally
have the authority to impose civil fines or penalties and to impose regulatory
sanctions for noncompliance with applicable banking regulations and policies.
In particular, bank regulators have authority to take corrective action if the
Company or Bank fails to maintain required capital levels. Information
concerning the Company's compliance with applicable capital requirements is set
forth in Note 14 of the Notes to Consolidated Financial Statements.
In addition to changing the competitive environment in which the Company
operates, changes in the laws and regulations applicable to the Company can
increase operating costs or otherwise affect its profitability or operations.
For example, the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA
PATRIOT Act") requires banks and other financial services companies to
implement additional policies and procedures designed to address, among other
things, money laundering, terrorist financing, identifying and reporting
suspicious activities and currency transactions, and currency crimes.
Further changes with respect to permitted banking activities and other bank
regulatory matters may be made or adopted in the future. Such changes may have
a significant impact on the Company's competitive circumstances and such
changes may have a material adverse effect on the Company's consolidated
financial condition, liquidity or results of operations.
Monetary Policy
The earnings and growth of the Bank, and therefore the Company, are affected by
the monetary and fiscal policies of the federal government and governmental
agencies. The Federal Reserve Board has a direct and indirect influence on the
costs of funds used by the Bank for lending and its actions have a substantial
effect on interest rates, the general availability of credit and the economy as
a whole. These policies therefore affect the growth of Bank loans and deposits
and the rates charged for loans and paid for deposits. Governmental and
Federal Reserve Board policies have had a significant effect on the operating
results of commercial banks in the past and are expected to do so in the
future. Management of the Company is not able to anticipate the future impact
of such policies and practices on the growth of the profitability of the
Company.
Cautionary Statement Regarding Forward Looking Information
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, reports to shareholders, in press releases,
and in other oral and written statements made by or with the approval of the
Company which are not statements of historical fact will constitute forward-
looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure and other financial
items; (ii) statements of plans and objectives of the Company or its management
or Board of Directors, including those relating to products or services; (iii)
statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as "believes", "anticipates",
"expects", "intends", "targeted", and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements. In making forward-looking statements within the
meaning of the Reform Act, the Company undertakes no obligation to publicly
update or revise any such statement.
Forward-looking statements of the Company are based on information available to
the Company as of the date of such statements, and reflect the Company's
expectations as of such date, but are subject to risks and uncertainties that
may cause actual results to vary materially. In addition to specific factors
which may be described in connection with any of the Company's forward-looking
statements, factors which could cause actual results to differ materially from
those discussed in the forward looking statements include, but are not limited
to the following: (i) the condition of the U.S. economy in general and the
condition of the local economies in which operations are conducted; (ii) the
effects of increased competition in the banking and financial services
industry; (iii) the effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal Reserve
Board which reduce interest margins; (iv) the effects of inflation, interest
rate, market, and monetary fluctuations; (v) the timely development of and
acceptance of new products and services and perceived overall value of these
products and services by users; (vi) changes in consumer spending, borrowing
and saving habits; (vii) technological changes, including increases in on-line
banking or delivery of financial services; (viii) the effect of acquisitions or
the inability to consummate acquisitions to expand the Company's service area;
(ix) the ability to increase market share and control expenses; (x) the effect
of changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities and insurance) with which the Company and its
subsidiaries must comply or which result in increased competition (xi) the
effect of changes in accounting policies and practices required by bank or
securities regulatory agencies or to comply with generally accepted accounting
principles; (xii) the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; and (xiii) the success of the Company at
managing the risks involved in the foregoing.
ITEM 2. PROPERTIES
The Company's operations are carried out at the Bank's administrative office
facility at 132 West State Street, Medford, Wisconsin. The Company does not
maintain any separate offices.
In addition to its administrative office, the Bank operates eleven branch
facilities. The Bank owns nine of the buildings. All nine branches are free-
standing buildings that provide adequate customer parking and, with one
exception, all have drive-in facilities. The Bank leases its remaining two
offices from third parties. The Company is currently constructing a new branch
at Rib Mountain, Wisconsin that it will lease to the Bank. The Company
considers its properties to be adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings before any court,
administrative agency or other tribunal. Further, the Company is not aware of
any litigation which is threatened against it in any court, administrative
agency or other tribunal.
The Bank engages in legal actions and proceedings, both as plaintiffs and
defendants, from time to time in the ordinary course of its business. In
some instances, such actions and proceedings involve substantial claims for
compensatory or punitive damages or involve claims for an unspecified amount of
damages. There are, however, presently no proceedings pending or contemplated
which, in the opinion of the Company's management, would have a material
adverse effect on the operations, liquidity or consolidated financial condition
of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter
of 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
There is no active established public trading market in the Company's common
stock, although two regional broker-dealers act as market makers for the stock.
Bid and ask quotations are published periodically in the Milwaukee Journal
Sentinel and prices are quoted on the OTC Bulletin Board under the
symbol
"MWFS.OB". Transactions in the Company's common stock are limited and
sporadic.
Holders
As of March 1, 2005, there were approximately 770 holders of record of the
Company's $.10 per share par value common stock. Some of the Company's shares
are held in "street" name and the number of beneficial owners of such shares is
not known nor included in the foregoing number.
Dividend Policy
Dividends on the Company's common stock have historically been paid in cash on
a quarterly basis in March, June, September, and December, and the Company
expects to continue this practice for the immediate future. The Company's
Bylaws provide that, subject to the provisions of applicable law, the Board of
Directors may declare dividends from unreserved and unrestricted earned
surplus, at such times and in such amounts as the board shall deem advisable.
The Company's ability to pay dividends depends upon the receipt of dividends
from the Bank. Bank dividends are subject to limitation under banking laws and
regulations. As of December 31, 2004, the Bank could have paid $11.2 million of
additional dividends to the Company without prior regulatory approval. The
declaration of dividends by the Company is discretionary and will depend upon
operating results and financial condition, regulatory limitations, tax
considerations and other factors.
Market Prices and Dividends
The following table summarizes high and low bid prices and cash dividends paid
for the periods indicated. Bid prices represent the bid prices reported on the
OTC Bulletin Board. The prices do not reflect retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions. There is
no active established trading market.
2004 Prices 2003 Prices
Quarter High Low Dividends (1) High Low Dividends (1)
1st $29.00 $28.50 $0.22 $28.00 $27.25 $0.22
2nd 30.00 29.00 0.62 28.00 28.00 0.62
3rd 30.80 28.50 0.22 28.65 28.00 0.22
4th 34.00 30.80 0.22 29.00 28.50 0.22
(1) The $.62 per share dividend declared in the second quarter of 2004 and 2003
includes a special dividend of $.40 per share.
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
(dollars in thousands, except per share data)
Years Ended December 31, 2004 2003 2002 2001 2000
Results of operations:
Interest income $20,238 $19,962 $21,385 $23,712 $24,216
Interest expense 6,103 6,864 7,582 11,317 12,911
Net interest income 14,135 13,098 13,803 12,395 11,305
Provision for loan losses 215 457 625 370 400
Net interest income after
provision for loan losses 13,920 12,641 13,178 12,025 10,905
Noninterest income 3,021 2,981 2,676 2,425 2,303
Noninterest expense 10,272 10,020 9,588 9,118 8,658
Income before income taxes 6,669 5,602 6,266 5,332 4,550
Provision for income taxes 2,193 1,544 1,783 1,483 1,201
Net income $4,476 $4,058 $4,483 $3,849 $3,349
Return on average assets 1.16% 1.10% 1.30% 1.18% 1.07%
Return on average equity 13.01% 12.44% 14.56% 13.36% 11.74%
Equity to assets 8.78% 9.00% 8.75% 8.68% 9.45%
Net interest margin 4.03% 3.97% 4.43% 4.24% 4.02%
Average Balance Sheet:
Loans net of unearned income $276,755 $263,764 $243,597 $228,170 $225,308
Assets 387,216 367,412 344,815 325,261 314,318
Deposits 285,685 280,215 257,356 250,131 235,656
Long-term borrowings 43,478 38,170 31,027 19,575 18,086
Stockholders' equity 34,397 32,618 30,790 28,806 28,520
Ending Balance Sheet:
Loans net of unearned income $284,141 $269,105 $254,939 $231,649 $226,942
Assets 410,817 375,225 368,040 340,490 321,102
Deposits 303,387 287,649 274,492 258,401 244,691
Long-term borrowings 49,000 40,000 40,000 30,000 16,200
Stockholders' equity 36,084 33,764 32,186 29,553 30,345
Financial Condition Analysis:
Total risk-based capital 13.11% 12.83% 12.69% 12.11% 13.17%
Net charge-offs to average loans 0.05% 0.16% 0.21% 0.16% 0.04%
Nonperforming loans to gross loans 0.42% 0.22% 0.85% 1.03% 1.11%
Efficiency ratio 57.96% 59.96% 56.05% 59.44% 61.34%
Fee revenue to average assets 0.41% 0.42% 0.43% 0.47% 0.46%
Stockholders' Data:
Basic earnings per share $2.65 $2.41 $2.65 $2.25 $1.85
Diluted earnings per share $2.64 $2.41 $2.65 $2.25 $1.85
Book value per share $21.18 $20.03 $19.11 $17.42 $16.75
Dividends per share $1.28 $1.28 $1.28 $1.22 $1.20
Dividend payout ratio 48.3% 53.1% 48.3% 54.2% 64.9%
Average common shares outstanding-basic 1,689 1,685 1,692 1,707 1,814
Average common shares outstanding-diluted 1,690 1,685 1,692 1,707 1,814
Shareholders of record at year end 770 773 838 818 803
Stock Price Information:
High $34.00 $29.00 $28.33 $26.00 $27.50
Low 28.50 27.25 26.00 20.12 21.50
(1) Market value at year-end represents the bid price. The quotations reflect
prices, without retail mark-up, markdown, or commissions, and may not
necessarily represent actual transactions.
Table 2: Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
2004 Quarter Ended
December 31, September 30, June 30, March 31,
Interest income $5,317 $5,115 $4,912 $4,894
Interest expense 1,644 1,551 1,428 1,480
Provision for loan losses 30 75 70 40
Income before provision for income taxes 1,711 1,728 1,688 1,542
Net income 1,060 1,148 1,172 1,096
Basic earnings per share $0.62 $0.68 $0.70 $0.65
Diluted earnings per share $0.62 $0.68 $0.69 $0.65
Average common shares outstanding 1,686 1,686 1,686 1,686
2003 Quarter Ended
December 31, September 30, June 30, March 31,
Interest income $4,917 $4,930 $5,023 $5,092
Interest expense 1,605 1,705 1,756 1,798
Provision for loan losses 61 80 158 158
Income before provision for income taxes 1,363 1,539 1,376 1,324
Net income 991 1,101 1,000 966
Basic and diluted earnings per share $0.59 $0.65 $0.59 $0.57
Average common shares outstanding 1,685 1,685 1,685 1,685
2002 Quarter Ended
December 31, September 30, June 30, March 31,
Interest income $5,303 $5,314 $5,380 $5,388
Interest expense 1,835 1,876 1,896 1,975
Provision for loan losses 120 150 175 180
Income before provision for income taxes 1,672 1,461 1,594 1,539
Net income 1,189 1,056 1,138 1,100
Basic and diluted earnings per share $0.71 $0.62 $0.67 $0.65
Average common shares outstanding 1,683 1,693 1,697 1,696
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis reviews significant factors
with respect to the Company's financial condition and results of operations at
and for the three-year period ended December 31, 2004. This discussion should
be read in conjunction with the consolidated financial statements, notes,
tables, and the selected financial data presented elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties that
may cause actual results to differ materially from those in such statements.
For a discussion of certain factors that may cause such forward-looking
statements to differ materially from actual results see Item 1, "Cautionary
Statement Regarding Forward Looking Information," in this Annual Report on Form
10-K for the year ended December 31, 2004.
Critical Accounting Policy
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 industry in which its operates. This
preparation requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the consolidated 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 requires subjective or complex judgments
and, therefore, management considers the following to be a critical accounting
policy.
Management considers the accounting policy relating to the allowance for loan
losses to be a critical accounting policy because of the uncertainty and
subjectivity inherent in estimating the levels of allowance needed to cover
credit losses with the loan portfolio and the material effect that these
estimates can have on the Company's results of operations. While management's
evaluation of the allowance for loan losses at December 31, 2004 considers the
allowance to be adequate, under adversely different conditions or assumptions,
the Company would need to increase the allowance.
Management reviews the adequacy of the allowance for loan losses on a quarterly
basis to determine the allowance is adequate to provide for possible losses
inherent in the loan portfolio as of the balance sheet date. Factors considered
by management in evaluating the adequacy of the allowance for loan losses
include past loan loss experience, trends in past due and nonperforming loans,
risk characteristics of loan classifications, and current economic conditions.
The Company has an internal risk analysis and review staff that continuously
reviews loan quality.
Loans are initially graded when originated. They are regraded as they are
renewed, become delinquent, or facts demonstrate a heightened risk of
nonpayment. Loan reviews attempt to identify problem and watch list loans.
Problem and watch list loans generally exhibit repeated delinquencies,
managerial problems, customer's failure to provide financial information or
collateral documentation.
After problem and watch list loans are identified, management will allocate a
portion of the allowance for loan loss to cover management's estimate of
probable loss. Management then estimates the potential loss for the remainder
of the loan portfolio. Each loan type is broken into categories based on
delinquency, specialty credits and rating code and a percentage of the
allowance is allocated based on loan category balances. To the extent that the
current allowance is sufficient or insufficient to cover management's best
estimate of probable loss, management adjusts the provision for loan losses
accordingly.
Overview
Mid-Wisconsin Financial Services Inc. is a full-service financial services
company, providing a wide variety of loan, deposit and other banking products
and services to its business, Individual, retail, and municipal customers,
as well as a full range of trust, investment and cash management services. The
Company is the bank holding company of Mid-Wisconsin Bank.
From an industry and national perspective, the Company's profitability, like
most financial institutions, is dependent to a large extent upon net interest
income. Results of operations are also affected by the provision for loan
losses, operating expenses such as salaries and employee benefits, occupancy
and other operating expenses, including income taxes, non-interest income such
as trust revenues, loan servicing fees and service charge income derived from
deposit accounts. Economic conditions, competition and the monetary and fiscal
policies of the Federal government in general, significantly affect financial
institutions, including the Company. Lending activities are also influenced by
regional and local economic factors. Some specific factors may include the
demand for and supply of housing, competition among lenders, interest rate
conditions and prevailing market rates on competing investments, customer
preferences and levels of personal income and savings in the Company's market
area.
In recent years the Company has invested in management and branch personnel to
capitalize on relationships in existing and adjacent markets. The Company's
planned growth into adjacent markets minimizes costs for name recognition and
awareness while increasing speed in obtaining new customers from our branch
delivery system. In addition the Company has dedicated resources to improve
asset quality. Credit quality has improved in the commercial loan portfolio as
a result of improved underwriting and the addition of collection staff. The
Trust and Investment department has established a new direction to build long-
term relationships with new and existing clients by offering products that will
service the client's investment life cycle.
Along with industry-wide factors and competitive advantages, management
monitors several areas of risk, trends and challenges. In the coming year the
Company will be challenged to maintain and grow market share in new and
existing markets, retain and or improve the net interest margin in the rising
rate environment, and meet regulatory requirements such as Sarbanes-Oxley Act
of 2002, Section 404 "Management Reporting on Internal Controls Over Financial
Reporting".
Results of Operations
The Company reported net income of $4.5 million compared to $4.1 million and
$4.5 million for 2003 and 2002, respectively. Basic and diluted earnings per
share were $2.65 and $2.64, respectively, for 2004 compared to $2.41 for 2003
and $2.65 for 2002. Return on average assets for the year ended December 31,
2004 was 1.16% and 1.10% and 1.30% for 2003 and 2002, respectively. The return
on average common stockholders' equity was 13.01% for 2004 and 12.44% and
14.56% for 2003 and 2002, respectively. Cash dividends paid were $1.28 per
share for the years ended 2004, 2003 and 2002.
Key factors affecting current year results were:
Tax equivalent net interest income increased $970,000 or 7.1% from
$13.7 million in 2003 to $14.7 million in 2004. Tax equivalent interest
income was $20.8 million for 2004, $209,000 or 1.0% over 2003. Interest
expense decreased $761,000 or 11.1% to $6.1 million for 2004.
The allowance for loan losses was $2.8 million and $2.7 million in
2004 and 2003, respectively. The provision for loan losses was $215,000
in 2004 and $457,000 in 2003. The provisions reflect the decrease in net
loan charge-offs in 2004, the level of non-performing loans, inherent
risks in the loan portfolio, and the changing mix of the overall loan
portfolio. Net loan charge-offs decreased $299,000 from $426,000 in 2003
to $127,000 in 2004. Net charge-offs were 0.05% of average loans in 2004
compared to 0.16% in 2003. The ratio of allowance for loan losses to
loans decreased to 0.99% from 1.02% at 2003.
Noninterest income during 2004 increased $40,000 or 1.3% when
compared to 2003. Services fees, trust service fees, investment product
commissions, and gains from sales of loans continue to be the primary
components of noninterest income.
Noninterest expense was $10.3 million for 2004, a $252,000 increase
from 2003, or 2.5%. Primary categories impacting the change between 2004
and 2003 were increased salary and benefit expenses, occupancy expense,
purchased core deposit amortization and other operating expenses.
Income tax expense increased $649,000 from $1.6 million in 2003 to
$2.2 million in 2004. As a percent of pretax income state income tax
expense increased 2.5% and tax-exempt interest income decreased 2.0%.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management actively
monitors and manages its interest rate risk exposure. The measurement of the
market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair
value of financial instruments that reflect changes in market prices and rates
can be found in Note 19 of the Notes to Consolidated Financial Statements.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while adjusting the Company's asset liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset liability structure to control interest rate risk.
However, a sudden and substantial increase or decrease in interest rates may
adversely impact the Company's earnings, to the extent that the interest rates
borne by assets and liabilities do not change at the same speed, to the same
extent, or on the same basis.
Net Interest Income
Net interest income on a tax equivalent basis is the Company's principal source
of revenue accounting for 83.0% of total tax equivalent income in 2004, as
compared to 82.2% in 2003 and 84.4% in 2002. Net interest income represents
the difference between interest earned on loans, securities and other interest
earning assets, and the interest expense associated with the deposits and
borrowings that fund them. Interest rate fluctuations together with changes in
volume and types of earning assets and interest bearing liabilities combine to
affect total net interest income. The interest income and interest expense of
financial institutions are significantly affected by general economic
conditions, competition, and policies of regulatory authorities.
Fully taxable equivalent net interest income was $14.7 million in 2004,
compared to $13.7 million in 2003 and $14.4 million in 2002. The increase in
2004 net interest income of $1.0 million was attributed to an increase in the
volume of net average earning assets of $19.1 million and the rate environment.
The rising rate environment has impacted the repricing of assets, primarily
loans, to a greater degree than the liability side of the balance sheet.
The year 2004 saw the first increase in interest rates since June 2003. The net
interest margin for 2004 was 4.03% compared to 3.97% in 2003. The Company's
interest rate spread increased 9 basis points to 3.71% in 2004 from 3.62% in
2003. The average rate paid on interest bearing liabilities decreased 35 basis
points to 1.99% in 2004 while the average yield on earning assets decreased
only 26 basis to 5.70% over the same period. The Company lagged raising
interest-bearing liability rates as the interest rates increased.
The net interest margin for 2003 was 3.62% compared to 4.02% in 2002 as re-
pricing opportunities occurred more readily on the asset side of the balance
sheet relative to the funding side of the balance sheet.
Average loans outstanding grew to $276.8 million in 2004 from $263.8 million in
2003, an increase of 4.9%. Average loans outstanding increased to $263.8
million in 2003 from $243.6 million in 2002, an increase of 8.3%. The mix of
average loans to average total earning assets was 75.8% in 2004, 76.3% in 2003,
and 74.9% in 2002. The relationship of a higher volume of loans as a
percentage of the asset mix has provided a source of higher yielding assets,
which has contributed to net interest income.
Competition in the financial services industry will also affect the net
interest margin. The Company's net interest margin in 2005 will be primarily
impacted by the ability to retain and improve the percentage of variable rate
assets and control the funding costs of deposits and borrowings used to fund
the balance sheet.
Table 3: Average Balances and Interest Rates
Years Ended December 31,
2004 2003 2002
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(dollars in thousands)
ASSETS
Earnings Assets
Loans (1) (2) (3) $276,755 $16,748 6.05% $263,764 $16,603 6.29% $243,597 $17,134 7.03%
Investment securities:
Taxable 58,948 2,462 4.18% 52,940 2,371 4.48% 53,268 3,161 5.93%
Tax exempt (2) 22,955 1,504 6.55% 23,578 1,565 6.64% 24,346 1,650 6.78%
Other interest earning assets 6,253 90 1.44% 5,488 56 1.02% 4,232 66 1.56%
Total earning assets $364,911 $20,804 5.70% $345,770 $20,595 5.96% $325,443 $22,012 6.76%
Cash and due from banks 11,650 11,317 10,865
Allowance for loan losses (2,820) (2,810) (2,726)
Other assets 13,475 13,135 11,233
Total assets $387,216 $367,412 $344,815
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Interest bearing demand $27,444 $112 0.41% $28,178 $182 0.65% $24,967 $201 0.81%
Savings deposits 70,927 454 0.64% 69,895 515 0.74% 67,200 667 0.99%
Time deposits 144,808 3,555 2.45% 144,364 4,352 3.01% 131,103 4,801 3.66%
Short-term borrowings 20,525 309 1.51% 13,177 151 1.15% 22,095 388 1.76%
Long-term borrowings 43,478 1,673 3.85% 38,170 1,664 4.36% 31,027 1,525 4.92%
Total interest bearing liabilities $307,182 $6,103 1.99% $293,784 $6,864 2.34% $276,392 $7,582 2.74%
Demand deposits 42,507 37,778 34,086
Other liabilities 3,130 3,232 3,547
Stockholders' equity 34,397 32,618 30,790
Total liabilities and
stockholders' equity $387,216 $367,412 $344,815
Net interest income and rate spread $14,701 3.71% $13,731 3.62% $14,430 4.02%
Net interest margin 4.03% 3.97% 4.43%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and investment securities is computed on a tax equivalent basis using a tax rate of 34%.
(3) Interest income includes loan fees as follows: 2004-$454,000, 2003 - $381,000, 2002 - $353,000
Table 4: Interest Income and Expense Volume and Rate Analysis
2004 Compared to 2003 2003 Compared to 2002
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
(dollars in thousands)
Interest income:
Loans (2) $817 $(672) $145 $1,418 $(1,949) $(531)
Investment securities:
Taxable 269 (176) 93 (20) (782) (802)
Tax exempt (2) (41) (21) (62) (52) (33) (85)
Other interest income 8 26 34 16 (15) 1
Total earning assets $1,053 $(843) $210 $1,362 $(2,779) $(1,417)
Interest expense:
Interest bearing demand $(5) $(65) $(70) $26 $(45) $(19)
Savings deposits 8 (69) (61) 27 (179) (152)
Time deposits 13 (810) (797) 485 (934) (449)
Short term borrowings 85 73 158 (157) (80) (237)
Long term borrowings 231 (222) 9 351 (212) 139
Total interest-bearing liabilities 332 (1,093) (761) 732 (1,450) (718)
Net interest income $721 $250 $971 $630 $(1,329) $(699)
(1) The change in interest due to both rate and volume has been allocated to rate.
(2) The yield on tax-exempt loans and investment securities is computed on a
tax equivalent basis using a tax rate of 34%.
Table 5: Yield on Earning Assets
December 31, 2004 December 31, 2003 December 31, 2002
Yield Change Yield Change Yield Change
Yield on earning assets (1) 5.70% -0.26% 5.96% -0.80% 6.76% -1.19%
Effective rate on all liabilities as a
percentage of earning assets 1.67% -0.32% 1.99% -0.34% 2.33% -1.38%
Net yield on earning assets 4.03% 0.06% 3.97% -0.46% 4.43% 0.19%
(1) The yield on tax-exempt loans and investment securities is computed on a
tax equivalent basis using a tax rate of 34%.
Provision for Loan Losses
The adequacy of the allowance for loan losses is assessed based upon credit
quality, loan growth, past loan loss experience, loss exposure by loan category
and existing economic conditions. Accordingly, the amount charged to expense
is based on management's evaluation of the loan portfolio, especially
nonperforming and potential problem loans. It is the Company's policy that
when available information confirms that specific loans and leases, or portions
thereof, including impaired loans, are uncollectible, these amounts are
promptly charged off against the allowance.
The provision for loan losses in 2004 at $215,000 compares to a provision for
loan losses of $456,000 in 2003 and $625,000 in 2002. Factors evaluated were
primarily based upon calculations made as a result of various loss risk
percentages applied to various problem and watch type credits and the remainder
of the loan portfolio. The trend indicated a decrease in risk relative to the
loan portfolio at year-end 2004 compared to 2003. Net loan charge-offs in
2004 were $127,000 compared with net charge-offs of $426,000 in 2003 and
$520,000 in 2002. Net charge-offs as a percentage of average loans is a key
measurement of asset quality. Net charge-offs to average loans were 0.05% in
2004 compared to 0.16% in 2003 and 0.21% in 2002. Management believes that the
current provision conforms with the Company's allowance for loan loss policy
and is adequate in view of the present condition of the Company's loan
portfolio. See additional discussion under section, "Allowance for Loan
Losses."
Noninterest Income
Total noninterest income was $3.02 million for 2004, a $40,000 increase from
2003, or 1.3%. In 2003, total non-interest income was $305,000 more than 2002,
an 11.4% increase. Service fees, trust service fees, investment product
commissions, and gains from sales of loans continue to be the primary
components of noninterest income as evidenced in Table 6.
Table 6: Noninterest Income
Years Ended December 31, % Change from prior year
2004 2003 2002 2004 2003
(dollars in thousands)
Service fees $844 $824 $850 2.4% -3.1%
Trust service fees 753 708 643 6.4% 10.1%
Net realized gain on sale of securities
available for sale - - 17 - NM
Investment product commissions 408 420 437 -2.9% -3.9%
Gains from sale of loans 252 392 154 -35.7% 154.5%
Bank owned life insurance 117 89 - 31.5% NM
Other operating income 647 548 575 18.1% -4.7%
Total noninterest income $3,021 $2,981 $2,676 1.3% 11.4%
Service fees totaled $844,000 in 2004 and $824,000 in 2003 as the average
balance of deposits remained relatively unchanged between 2004 and 2003. The
results of 2003 provided a decrease of $26,000 from 2002 results resulting from
a decrease in NSF fees from the Bank making a conscious effort to close chronic
overdrawn deposit accounts.
Trust fees increased $45,000 to $753,000 in 2004 compared to 2003, primarily as
a result of new product offerings, such as proprietary research, from Northstar
Asset Management Inc., increase in the number of trust accounts, and increase
in the value of the portfolio. This compared to an increase of $65,000 in 2003
compared to 2002, primarily as a result of an increase to trust fees in the
fourth quarter 2002.
Securities gains for the year ended December 31, 2002 were $17,000. There were
no securities gains or losses during 2004 or 2003.
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions, and self-directed IRA fees.
Investment product commissions decreased $12,000 to $408,000 in 2004. The 2003
amount included a $72,000, one-time commission, on bank owned life insurance
(BOLI) purchased by the Company. Excluding this BOLI commission, investment
product commissions increased $66,000 between 2004 and 2003 due to strong
annuity sales. Investment product commissions decreased $17,000 in 2003
compared to 2002. The 2002 results included a $107,000 settlement received
from the Bank's former broker for an error in a trade execution.
Gains from the sale of mortgage loans totaled $252,000 in 2004 compared to
$392,000 in 2003. In 2004 there was a slowdown in mortgage refinance
activities throughout the industry due to higher mortgage rates. Sales of
mortgage loans to the secondary market were $14.9 million in 2004 compared to
$25.2 million in 2003. Gains from the sale of mortgage loans were $392,000 and
$154,000 at December 31, 2003 and 2002, respectively, due to attractive
mortgage market rates, strong home purchases and refinance activity throughout
2003.
The Company purchased $3.0 million of BOLI during 2003. Income derived during
2004 and 2003 amounted to $117,000 and $89,000, respectively. The purchase was
made the first half of 2003, therefore, the average investment held in BOLI was
significantly less in 2003.
Other operating income increased $99,000 to $647,000 in 2004 from $548,000 in
2003. Included in the 2004 other income was 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
Total noninterest expense was $10.3 million for 2004, a $252,000 increase from
2003, or 2.5%. In 2003, total non-interest expense was $432,000 more than 2002,
a 4.5% increase. Primary categories impacting the change between 2004 and 2003
are noted in Table 7 below.
Table 7: Noninterest Expense
Years Ended December 31, % Change from prior year
2004 2003 2002 2004 2003
(dollars in thousands)
Salaries and employee benefits $5,847 $5,604 $5,441 4.3% 3.0%
Occupancy 1,231 1,241 1,116 -0.8% 11.2%
Data processing and information
systems 399 413 418 -3.4% -1.2%
Goodwill and purchased core
deposit amortization 332 310 290 7.1% 6.9%
Other operating expenses 2,463 2,452 2,323 0.4% 5.6%
Total noninterest expenses $10,272 $10,020 $9,588 2.5% 4.5%
Salaries and employee benefits are the largest component of noninterest expense
and totaled $5.8 million in 2004, an increase of $243,000 or 4.3%, as compared
to 2003 results. Salary expense was $4.3 million in 2004, an increase of
$93,000, or 2.2%, as compared to 2003 as a result of normal salary increases
offset by a decrease in the number of full-time equivalent employees in 2004.
The number of full-time equivalent employees decreased to 130 in 2004 from 133
in 2003. Health insurance costs rose $40,000, or 8.9%, in 2004. In 2003 the
Company established an employee medical benefit plan to self-insure claims.
The Company and its covered employees contribute to the fund to pay the claims
and stop-loss premiums. Bonus expense in 2004 was $131,000 compared to $84,000
in 2003. The increase between the years occurred as a result of the Company
meeting its key performance indicators as established by the board of directors
at the beginning of the year.
Occupancy expense decreased $10,000 between 2004 and 2003 for a total of $1.2
million. In 2003 occupancy expense increased $125,000 from 2002. The
fluctuation between the three years is attributable to the opening of a new
branch and related expenses in February 2003.
During 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles," which requires that goodwill no
longer be amortized but tested annually for impairment. There was no
impairment of goodwill in 2004, 2003 and 2002. The purchased core deposit
intangible is amortized using a systematic method over an eight-year period.
The core deposit intangible will be fully amortized in September 2005.
Other operating expenses in 2004 remained unchanged at $2.4 million from 2003.
Other operating expenses in 2003 increased $129,000 or 5.6% compared to 2002,
primarily the result of an increase of $132,000 related to loan and collection
expenses, and additional marketing and public relations expense of $83,000 due
to promotional efforts used to raise Company awareness in the new branch
market.
Income Taxes
Income tax expense was $2.2 million in 2004, $1.5 million in 2003, and $1.8
million in 2002. The higher tax expense in 2004 reflected the Company's
decrease in tax-exempt interest income and an increase in state income taxes as
a result of the Wisconsin Department of Revenue (WDOR) audit. The Company's
effective tax rate was 32.9% in 2004, 27.6% in 2003, and 28.5% in 2002.
In January 2005 the Company signed a tax settlement with the WDOR regarding
taxation of certain investment subsidiary earnings from the Bank's investment
subsidiary located in Nevada. The amount of the settlement was appropriately
reserved for as of the balance sheet date. Future income tax expense will
increase as a result of the WDOR settlement.
The Company's open tax returns are currently under audit by the Internal
Revenue Service for an issue in connection with the investment subsidiary's
activities. The Company believes it has calculated and paid appropriate income
taxes in accordance with written tax code and regulations. The Company is
appealing the IRS's actions and interpretations. The Bank's net income would
be reduced if the IRS was successful in those actions.
BALANCE SHEET ANALYSIS
Loans
Total loans grew to $284.1 million at December 31, 2004, a 5.6% increase from
the end of 2003. This follows a 5.5% increase at December 31, 2003 over 2002
year-end.
Table 8: Loan Composition
2004 2003 2002 2001 2000
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollars in thousands)
Commercial $48,252 17.0% $47,316 17.6% $50,204 19.7% $44,352 19.2% $42,806 18.9%
Real estate commercial 94,349 33.2% 87,245 32.4% 75,577 29.7% 70,623 30.5% 60,933 26.9%
Agricultural 35,723 12.6% 35,740 13.3% 33,578 13.2% 36,819 15.9% 41,439 18.3%
Real estate construction 9,667 3.4% 9,306 3.5% 8,489 3.3% 5,375 2.3% 4,200 1.9%
Real estate residential 87,703 30.9% 80,526 29.9% 77,167 30.3% 64,375 27.8% 66,201 29.2%
Installment 8,525 2.9% 9,049 3.3% 10,001 3.8% 10,170 4.3% 11,177 4.7%
Lease financing 0 0.0% 0 0.0% 0 0.0% 0 0.0% 239 0.1%
Less: deferred loan fees 78 0.0% 77 0.0% 78 0.0% 65 0.0% 53 0.0%
Total loans $284,141 100.0% $269,105 100.0% $254,938 100.0% $231,649 100.0% $226,942 100.0%
Commercial loans totaled $48.3 million at year end 2004 and comprised 17.0% of
the loan portfolio compared with 17.6% of the portfolio at the end of 2003.
The commercial loan classification consists of loans to sole proprietors,
partnerships, small businesses and corporations. Loans in this category are to
a wide range of industries. Loan participations purchased from other
institutions are included in this category. During the year participation
loans decreased $11.0 million due to the lead banks buying back the loans or
the loans were refinanced with other financial institutions. Excluding
participation loans the Company grew commercial and real estate commercial
loans $12.0 million in 2004.
Real estate commercial loans totaled $94.3 million at year end 2004 and
comprised 33.2% of the loan portfolio compared with 32.4% of the portfolio at
the end of 2003. Loans in this classification grew $7.1 million, or 8.1%,
during 2004. Loans of this type are in a broad range of industries. The
Company has experienced additional loan opportunities in the new markets it has
entered.
Agricultural loans remained relatively unchanged at $35.7 million for the years
ended 2004 and 2003. As a percentage of the loan portfolio agricultural loans
were 12.6% in 2004 and 13.3% in 2003. Agricultural loans are made principally
to farmers engaged in dairy production. The credit risk related to these types
of loans is influenced by milk prices and the resulting impact on the
borrower's operations. The dairy industry saw improved milk prices during 2004
that allowed farmers to pay-down their current debt level and operate without
having to take additional loans. Agricultural loans have decreased as a
percentage of the loan portfolio due to the expansion of the Company into new
markets that are not agricultural dependent.
Real estate construction loans were $9.7 million at the end of 2004, up
$361,000 since year end 2003, and comprised 3.4% of the loan portfolio, a
decrease from 3.5% at year end 2003. Loans in this classification provide
short-term financing for acquisition or development of commercial real estate,
such as multifamily residents or other commercial developments.
Real estate residential loans totaled $87.7 million at the end of 2004, up $7.2
million from year end 2003, and comprised 30.9% of the loan portfolio, up from
29.9% at year-end 2003. Loans in this category include conventional home
mortgages, second mortgages, and home equity lines. During 2004, the housing
market remained strong in the Company's market place in both new construction
and refinancing activities.
Installment loans totaled $8.5 million, or 2.9% of the loan portfolio at the
end of 2004 compared to $9.1 million or 3.3% at the end of 2003. Installment
loans include short-term installment loans, automobile loans, recreational
vehicle loans, credit card loans, and other personal loans. The decrease in
installment loans was strongly influenced by extensive competition from local
credit unions offering low interest rates on installment loans. The Company
has directed resources toward other loan categories such as commercial real
estate and real estate residential lending.
Table 9: Loan Maturity Distribution and Interest Rate Sensitivity
Loan Maturity
One Year Over one Year Over
or Less to Five Years Five Years
(dollars in thousands)
Commercial $21,015 $17,100 $275
Real estate commercial 38,886 53,184 2,279
Agricultural 21,383 18,292 3,808
Real estate construction 9,667
Real estate residential 24,239 36,722 26,714
Land Contracts 2,732 5,614 179
Total $117,922 $130,912 $33,255
Fixed rate $78,839 $74,558 $723
Variable rate 39,083 56,354 32,532
Total $117,922 $130,912 $33,255
The loan portfolio is widely diversified by types of borrowers, industry
groups, and market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned to numerous
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic conditions. At December 31, 2004 no concentrations
existed in the Company's portfolio in excess of 10% of total loans.
Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. To reflect
this credit risk, the Company sets aside an allowance for possible loan losses
through periodic charges to earnings. Credit risk is controlled by detailed
underwriting procedures, comprehensive loan administration, and ongoing review
of borrowers' outstanding loans and commitments.
Table 10: Loan Loss Experience
Years Ended December 31,
2004 2003 2002 2001 2000
(dollars in thousands)
Allowance for loan losses at
beginning of year $2,732 $2,702 $2,597 $2,593 $2,286
Loans charged off:
Commercial and agricultural 126 374 475 389 78
Real Estate Residential 17 11 10 21 12
Installment 43 94 75 81 103
Total loans charged off 186 479 560 491 193
Recoveries on loans previously charged off:
Commercial and agricultural 47 25 32 95 38
Real Estate Residential 0 10 0 10 34
Installment 12 18 8 20 28
Total loans recovered 59 53 40 125 100
Net loans charged off 127 426 520 366 93
Provision for loan losses 215 456 625 370 400
Allowance for loan losses at
end of year $2,820 $2,732 $2,702 $2,597 $2,593
Ratio of allowance for loan
losses to net charge offs 22.2 6.4 5.2 7.1 27.9
Ratio of allowance for loan
losses to total loans at end of
period 0.99% 1.02% 1.06% 1.12% 1.14%
Ratio of net charge-offs during
period to average loans
outstanding 0.05% 0.16% 0.21% 0.16% 0.04%
The allowance for loan losses at December 31, 2004 was $2.8 million compared
with $2.7 million at the end of 2003. The December 31, 2004 ratio of allowance
for loan losses to outstanding loans was 0.99% compared with 1.02% at December
31, 2003. Based on management's analysis of the loan portfolio during 2004,
a provisional expense of $215,000 was recorded for the year ended December 31,
2004 a decrease of $241,000 compared to the same period in 2003. Net loan
charge-offs of $127,000 occurred in 2004, and the ratio of net charge-offs to
average loans for the period ended December 31, 2004 was 0.05% compared to
0.16% at December 31, 2003. Loans charged-off are subject to continuous review
and specific efforts are taken to achieve maximum recovery of principal,
accrued interest, and related expenses.
The allocation of the year-end allowance for loan losses for each of the past
five years based on management's estimates of loss exposure by category of
loans is shown in Table 11. The allocation methodology applied by the Company
focuses on changes in the size and character of the loan portfolio, current and
expected economic conditions, the geographic and industry mix of the loan
portfolio and historical losses by category. The total allowance is available
to absorb losses from any segment of the portfolio. Management allocates the
allowance for loan losses by pools of risk. The Company combines estimates of
the allowance needed for loans analyzed individually and loans analyzed on a
pool basis. The determination of allocated reserves for larger commercial
loans involves a review of individual higher-risk transactions, focusing on
loan grading, and assessment of specific loss content and possible resolutions
of problem credits.
Table 11: Allocation of the Allowance for Loan Losses
As of December 31,
2004 2003 2002 2001 2000
(dollars in thousands)
Commercial and agricultural $1,862 $1,977 $1,771 $1,604 $1,459
Real estate 500 474 592 487 478
Installment 160 181 189 195 202
Impaired Loans 83 67 150 226 341
Unallocated 215 33 0 85 117
Total allowance $2,820 $2,732 $2,702 $2,597 $2,597
In the opinion of management, the allowance for loan losses was adequate as of
December 31, 2004. While management uses available information to recognize
losses on loans, future adjustments may be necessary based on changes in
economic conditions and the impact of such changes on borrowers.
Nonperforming Loans
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. Restructured loans involve the
granting of concessions to the borrower involving the modification of terms of
the loan, such as changes in payment schedule or interest rate. Additionally,
whenever management becomes aware of facts that may adversely impact the
collection of principal or interest on loans, it is the Company's practice to
place such loans on nonaccrual status immediately rather than waiting until the
loans become 90 days past due. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest.
Previously accrued and uncollected interest on such loans is reversed, and
income is recorded only to the extent that interest payments are subsequently
received and principal is collectible.
Table 12: Nonperforming Loans and Other Real Estate Owned
December 31,
2004 2003 2002 2001 2000
(dollars in thousands)
Nonaccrual loans $758 $136 $417 $221 $517
Impaired loans 432 457 1,667 1,684 $1,691
Accruing loans past due 90 days or
more 43 35 62 30 24
Restructured loans 322 320 14 453 295
Total nonperforming loans $1,555 $948 $2,160 $2,388 $2,527
Other real estate owned 72 270 - 90 98
Total nonperforming assets $1,627 $1,218 $2,160 $2,478 $2,625
Nonperforming loans to total loans 0.55% 0.35% 0.85% 1.03% 1.11%
Nonperforming assets to total assets 0.40% 0.32% 0.59% 0.73% 0.82%
Nonperforming loans at December 31, 2004 were $1,555,000 compared to $948,000
at December 31, 2003, mainly due to an increase in nonaccrual loans of
$622,000. The ratio of nonperforming loans to total loans at the end of
2004 was 0.55% compared to 0.35% at the end of 2003.
The following table shows the gross interest that would have been reported if
all loans had been current throughout the year in accordance with their
original terms.
Table 13: Forgone Loan Interest
Years Ended December 31,
2004 2003 2002
(dollars in thousands)
Interest income in accordance with
original terms $80 $142 $162
Interest income recognized (13) (30) (44)
Reduction in interest income 67 112 118
Investment Securities Portfolio
The investment securities portfolio is intended to provide the Company with
adequate liquidity, flexible asset liability management and a source of stable
income. All securities are classified as available for sale and reported at
estimated fair value. Unrealized gains and losses are excluded from earnings
but are reported as a separate component of equity, net of income tax.
Table 14: Investment Securities Portfolio at Estimated Fair Value
Years Ended December 31,
2004 2003 2002
(dollars in thousands)
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $648 $454 $1,473
Mortgage-backed securities 54,039 50,018 47,730
Obligations of states and
political subdivisions 23,743 24,859 25,843
Corporate debt securities 2,501 2,506 1,125
Equity securities 151 151 151
Totals $81,082 $77,988 $76,322
Investment securities averaged $81.9 million in 2004 compared to $76.5 million
in 2003. In 2004, the average balance of securities increased partly as a
result of excess liquidity used to purchase investments.
At December 31, 2004 the Company's securities portfolio did not contain
securities of any single issuer where the aggregate carrying value of
such
securities exceeded 10% of stockholders' equity.
Table 15: Investment Securities Portfolio Maturity Distribution
After After
One But Five but
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. treasury securities
and obligations of U.S.
government
corporations and agencies $200 1.56% $448 4.02% $- 0.00% - - $648 3.26%
Mortgage-backed securities 3,663 4.90% 48,715 4.37% 1,661 6.46% - - $54,039 4.47%
Obligations of states and
political
subdivisions (1) 3,671 3.94% 13,831 4.15% 5,714 4.28% 527 5.50% $23,743 4.18%
Corporate debt securities 25 7.50% - - 100 4.34% 2,376 5.91% $2,501 5.86%
Total carrying value $7,559 4.35% $62,994 4.32% $7,475 4.77% $2,903 5.84% $80,931 4.42%
(1) The yield on tax-exempt investment securities is computed on a tax equivalent basis using a tax rate of 34%.
Deposits
Deposits are the Company's largest source of funds. At December 31, 2004,
deposits were $303.4 million, up $15.7 million or 5.5% from $287.6 million at
December 31, 2003. On average, total deposits were $285.7 million for 2004, an
increase of 2.0% over 2003. Average brokered deposits were $15.3 million in
2004 and $10.5 million in 2003. The use of brokered deposits reflects the
Company's use of such instruments to provide additional funding to meet its
liquidity needs. The brokered deposits were acquired at funding rates similar
to the Company's own market area.
Table 16: Average Deposits Distribution
2004 2003 2002
% of % of % of
Amount Total Amount Total Amount Total
(dollars in thousands)
Non-interest bearing demand $42,506 14.9% $37,778 13.5% $34,086 13.2%
Interest-bearing demand 27,444 9.6% 28,178 10.1% 24,967 9.7%
Savings deposits 70,927 24.8% 69,895 24.9% 67,200 26.1%
Time deposits 129,504 45.3% 133,864 47.7% 120,967 47.0%
Brokered Certificates of Deposit 15,304 5.4% 10,500 3.8% 10,136 4.0%
Total $285,685 100.0% $280,215 100.0% $257,356 100.0%
Growth in local retail deposits has slowed during the past several years. The
Company's retail deposit growth is continuously influenced by competitive
pressure from other financial institutions, as well as other investment
opportunities available to customers. In 2005, emphasis will be placed
on generating additional core deposits through competitive pricing of deposits
and established branch delivery systems.
Table 17: Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31, 2004
(dollars in thousands)
3 months or less $25,607
Over 3 months through 6 months 13,975
Over 6 months through 12 months 13,261
Over 12 months 7,491
Total $60,334
Other Funding Sources
Other funding sources, including short-term and long-term borrowings, were
$68.2 million at December 31, 2004, an increase of $16.9 million from 2003.
Short-term borrowings consist of securities sold under repurchase agreements.
Average 2004 short-term borrowings were $20.5 million compared to $13.2 million
in 2003 due to a municipal repurchase agreement. Long-term debt consists of
advances from the Federal Home Loan Bank. Long-term debt was $49.0 million at
December 31, 2004 compared to $40.0 million in 2003. The Company took
additional advances during 2004 to meet liquidity needs and fix the funding
costs in the lower interest rate environment.
Table 18: Short-term Borrowings
December 31,
2004 2003 2002
Balance end of year $19,216 $11,294 $18,040
Average amounts outstanding during year $20,526 $13,177 $22,095
Maximum month-end amounts outstanding $29,641 $19,495 $34,937
Average interest rates on amounts outstanding
during year 1.51% 1.14% 1.76%
Average interest rates on amounts outstanding
at end of year 2.11% 0.90% 1.24%
Off-Balance Sheet Obligations
As of December 31, 2004 the Company has the following commitments, which do not
appear on its balance sheet:
2004 2003
Commitments to extend credit:
Fixed rate $16,302,170 $11,390,725
Adjustable rate 16,458,316 18,268,087
Standby and irrevocable letters of
credit-fixed rate 4,450,768 2,269,944
Credit card commitments 5,208,320 5,296,774
Further discussion of these commitments is included in Note 18, "Financial
Instruments with Off-Balance Sheet Risk" of the notes to the consolidated
financial statements.
Contractual Obligations
The Company is party to various contractual obligations requiring use of funds
as part of its normal operations. The table below outlines principal amounts
and timing of these obligations, excluding amounts due for interest, if
applicable. Most of these obligations are routinely refinanced into a similar
replacement obligation. However, renewal of these obligations is dependent on
the Company's ability to offer competitive interest rates or availability of
collateral for pledging mortgage loans or securities as in the case of advances
from the Federal Home Loan Bank.
Table 19: Contractual Obligations at December 31, 2004
Total < 1 year 1-3 years 3-5 years > 5 years
Time deposits $149,161 $113,974 $34,849 $338 $-
Long-term Federal Home Loan Bank advances 49,000 12,000 24,500 12,500 -
Deferred director fees 1,026 160 273 102 491
Premises and equipment purchase commitments 1,580 1,580
Total contractual obligations $200,767 $127,714 $59,622 $12,940 $491
Liquidity and Interest Rate Sensitivity
The Bank's Asset Liability Management process provides a unified approach to
management of liquidity, capital, interest rate risk, and providing adequate
funds to support the borrowing requirements and deposit flow of its customers.
Management views liquidity as the ability to raise cash at a reasonable cost or
with a minimum of loss and as a measure of balance sheet flexibility to react
to marketplace, regulatory, and competitive changes.
Interest rate risk is the exposure to a bank's earnings and capital arising
from changes in future interest rates. In order to limit exposure to interest
rate risk, the Company has developed strategies to manage its liquidity,
shorten the maturities of certain interest- bearing assets and increase the
maturities of certain interest-bearing liabilities. The Company has
concentrated on writing variable rate loans and the use of funding sources to
provide longer term funding possibilities.
The Bank's primary funding source is deposits. The overall average deposit
base grew $5.5 million during 2004. Affecting liquidity are core deposit
growth levels, certificates of deposit maturity structure and diversification
of wholesale funding sources. Deposit outflow will cause the Bank to
develop
alternative funding sources which may not be as liquid and potentially
more costly.
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.
Factors affecting the liquidity relative to loans are changes in interest
rates, the economy, and competition.
The Company employs non-deposit funding sources such as corporate funds in the
form of repurchase agreements, federal funds purchased, and Federal Home Loan
Bank (FHLB) advances. Repurchase agreements with corporate customers totaled
$19.2 million compared with $11.3 million at the end of 2003. Borrowings from
the FHLB totaled $49.0 million and $40.0 million at the end of year 2004
and
2003, respectively.
The Bank's liquidity resources were sufficient in 2004 to fund the growth in
loans and investments, increase the volume of interest earning assets and meet
other cash needs when necessary.
Management expects that deposit growth will continue to be the primary funding
source of the Bank's liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Although repurchase agreements with corporate
customers and borrowings from the FHLB provided funds in 2004, management
expects deposit growth, including brokered CD's, to be a reliable funding
source in the future as a result of branch expansion efforts and marketing
efforts to attract and retain core deposits. Shorter-term liquidity needs will
mainly be derived from growth in short-term borrowings, federal funds sold and
portfolio investments, loan maturities and access to other funding sources.
In assessing liquidity, historical information such as seasonality, local
economic cycles and the economy in general are considered along with the
current ratios, management goals and the unique characteristics of the Company.
Management believes that, in the current economic environment, the Bank's
liquidity position is adequate. To management's knowledge, there are no known
trends nor any known demands, commitments, events or uncertainties that will
result or are reasonably likely to result in a material increase or decrease in
the Bank's liquidity.
Management's overall strategy is to coordinate the volume of maturing rate
sensitive assets and liabilities to minimize the impact of interest rate
movements on liquidity needs and net interest margin. Table 20, gap analysis,
represents a schedule of assets and liabilities maturing over various time
intervals. The table reflects a positive gap position, more assets than
liabilities maturing, for the individual categories in all time frames except
the 0 - 90 days and beyond five years. The cumulative gap ratio through the
one-year interval is negative, more liabilities maturing than assets. The
Company evaluates the cumulative gap position at the one-year and two-year time
frames. At those time intervals the cumulative maturity gap was between the
guideline of 60% to 120%.
Table 20: Interest rate sensitivity gap analysis
December 31, 2004
0-90 91-180 181-365 1-5 Beyond
Days Days Days Years 5 Years Total
(dollars in thousands)
Earning Assets:
Loans $31,295 $28,740 $53,885 $136,923 $33,298 $284,141
Securities 1,564 3,376 2,619 62,747 13,311 $83,617
Other earning assets 19,585 19,585
Total $52,444 $32,116 $56,504 $199,670 $46,609 $387,343
Cumulative rate sensitive assets $52,444 $84,560 $141,064 $340,734 $387,343
Interest-bearing liabilities:
Interest-bearing deposits (1) $56,115 $30,102 $37,047 $42,617 $86,692 $252,573
Other interest-bearing liabilities 19,216 12,000 37,000 0 68,216
Total $75,331 $30,102 $49,047 $79,617 $86,692 $320,789
Cumulative interest sensitive liabilities $75,331 $105,433 $154,480 $234,097 $320,789
Interest sensitivity gap $(22,887) $2,014 $7,457 $120,053 $(40,083)
Cumulative interest sensitivity gap $(22,887) $(20,873 ) $(13,416) $106,637 $66,554
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 69.6% 80.2% 91.3% 145.6% 120.7%
(1) The interest rate sensitivity assumptions for savings accounts, money
market accounts, and interest-bearing demand deposits accounts are based on
current and historical experiences regarding portfolio retention and interest
rate repricing behavior. Based on these experiences, a portion of these
balances are considered to be long-term and fairly stable and are included in
the 1-5 year category and beyond 5 years category.
Capital
Stockholders' equity at December 31, 2004 increased $2.3 million to $36.1
million compared with $33.8 million at year-end 2003. The increase in
stockholders' equity in 2004 was primarily composed of the retention of
earnings, issuance of common stock and the proceeds from the exercise of stock
options with an offsetting decrease from the payment of dividends. Cash
dividends paid were $1.28 per share in 2004 and 2003. Stockholders' equity at
year-end 2004 included $343,000 of accumulated other comprehensive income,
related to unrealized gains on securities available for sale, net of the tax
effect, compared to $905,000 at December 31, 2003.
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of December 31, 2004, 2003, and
2002, the Company's Tier 1 risk-based capital ratios, total risk-based capital
ratios and Tier 1 leverage ratios were well in excess of regulatory
requirements. Management feels the capital structure of the Company is
adequate.
Table 21: Capital Ratios
At December 31,
2004 2003 2002
(In thousands, except per share data)
Total Stockholders' Equity $36,084 $33,764 $32,186
Tier 1 Capital 35,215 32,000 29,754
Total Regulatory Capital 38,035 34,732 32,456
Total equity to assets 8.8% 9.0% 8.8%
Tier 1 to average assets 9.1% 8.7% 8.5%
Tier 1 risk-based capital ratio 12.1% 11.8% 11.6%
Total risk-based capital ratio 13.1% 12.8% 12.7%
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is set forth in Item 6, "Selected
Financial Data" and under subcaptions "Results of Operations", "Market
Risk",
"Net Interest Income", "Allowance for Loan Losses", "Investment Securities
Portfolio", "Deposits", and "Liquidity and Interest Rate Sensitivity" under
Item 7, Management's Discussion and Analysis of Financial Conditions.
Independent Auditor's Report
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We have audited the accompanying consolidated balance sheets of Mid-Wisconsin
Financial Services, Inc. and Subsidiary as of December 31, 2004 and 2003, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-Wisconsin
Financial Services, Inc. and Subsidiary at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States.
Wipfli LLP
Wipfli LLP
January 14, 2005
Wausau, Wisconsin
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheets
December 31, 2004 and 2003
2004 2003
Assets
Cash and due from banks $12,566,937 $13,694,114
Interest-bearing deposits in other financial institutions 17,482 614,128
Federal funds sold 19,567,120 1,628,359
Securities available for sale - At fair value 81,081,597 77,988,188
Federal Home Loan Bank stock (at cost) 2,535,200 2,154,100
Loans held for sale 546,225 330,775
Loans receivable, net of allowance for loan losses of $2,820,034
in 2004 and $2,732,447 in 2003 281,321,188 266,372,637
Accrued interest receivable 1,553,887 1,613,617
Premises and equipment 6,185,311 5,596,313
Intangible assets 231,474 563,543
Goodwill 295,316 295,316
Other assets 4,914,768 4,373,457
TOTAL ASSETS $410,816,505 $375,224,547
Liabilities and Stockholders' Equity
Non-interest-bearing deposits $50,813,737 $39,949,256
Interest-bearing deposits 252,573,293 247,700,052
Total deposits 303,387,030 287,649,308
Short-term borrowings 19,216,097 11,294,262
Long-term borrowings 49,000,000 40,000,000
Accrued interest payable 1,147,527 1,206,178
Accrued expenses and other liabilities 1,982,042 1,310,609
Total liabilities 374,732,696 341,460,357
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding - 1,703,577 shares in 2004 and
1,685,550 shares in 2003 170,358 168,555
Additional paid-in capital 11,541,644 10,975,920
Retained earnings 24,028,311 21,714,225
Accumulated other comprehensive income 343,496 905,490
Total stockholders' equity 36,083,809 33,764,190
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $410,816,505 $375,224,547
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
Interest and dividend income:
Loans, including fees $16,692,806 $16,501,158 $17,068,344
Securities:
Taxable 2,462,332 2,371,461 3,161,464
Tax-exempt 992,309 1,033,170 1,089,107
Other 90,177 55,922 66,030
Total interest and dividend income 20,237,624 19,961,711 21,384,945
Interest expense:
Deposits 4,121,170 5,049,375 5,668,506
Short-term borrowings 309,118 150,790 388,432
Long-term borrowings 1,673,152 1,663,778 1,524,597
Total interest expense 6,103,440 6,863,943 7,581,535
Net interest income 14,134,184 13,097,768 13,803,410
Provision for loan losses 215,000 456,667 625,000
Net interest income after provision for loan losses 13,919,184 12,641,101 13,178,410
Noninterest income:
Service fees 843,513 823,942 849,606
Trust service fees 752,671 707,633 642,737
Net realized gain on sale of securities available
for sale 0 0 17,349
Investment product commissions 408,307 420,406 436,775
Other operating income 1,016,459 1,029,388 729,538
Total noninterest income 3,020,950 2,981,369 2,676,005
Noninterest expenses:
Salaries and employee benefits 5,846,868 5,603,896 5,441,313
Occupancy 1,231,338 1,241,398 1,116,205
Data processing and information systems 398,625 413,002 418,096
Goodwill and purchased core deposit amortization 332,069 310,344 290,042
Other operating expenses 2,462,715 2,451,659 2,322,843
Total noninterest expenses 10,271,615 10,020,299 9,588,499
Income before provision for income taxes 6,668,519 5,602,171 6,265,916
Provision for income taxes 2,192,956 1,544,236 1,783,080
Net income $4,475,563 $4,057,935 $4,482,836
Basic earnings per share $2.65 $2.41 $2.65
Diluted earnings per share $2.64 $2.41 $2.65
Cash dividends declared per share $1.28 $1.28 $1.28
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2004, 2003, and 2002
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Totals
Balance, January 1, 2002 1,696,497 $169,650 $10,972,612 $17,806,485 $604,374 $29,553,121
Comprehensive income:
Net income 4,482,836 4,482,836
Other comprehensive income 658,715 658,715
Total comprehensive income 5,141,551
Proceeds from stock benefit plans 2,334 234 61,950 62,184
Repurchase of common stock
returned to unissued (14,356) (1,436) (92,962) (307,571) (401,969)
Cash dividends paid,
$1.28 per share (2,169,080) (2,169,080)
Balance, December 31, 2002 1,684,475 168,448 10,941,600 19,812,670 1,263,089 32,185,807
Comprehensive income:
Net income 4,057,935 4,057,935
Other comprehensive loss (357,599) (357,599)
Total comprehensive income 3,700,336
Proceeds from stock benefit plans 1,075 107 28,560 28,667
Stock-based compensation 5,760 5,760
Cash dividends paid,
$1.28 per share (2,156,380) (2,156,380)
Balance, December 31, 2003 1,685,550 168,555 10,975,920 21,714,225 905,490 33,764,190
Comprehensive income:
Net income 4,475,563 4,475,563
Other comprehensive loss (561,994) (561,994)
Total comprehensive income 3,913,569
Issuance of common stock 17,500 1,750 542,150 543,900
Proceeds from stock benefit plans 527 53 16,416 16,469
Stock-based compensation 7,158 7,158
Cash dividends paid,
$1.28 per share (2,161,477) (2,161,477)
Balance, December 31, 2004 1,703,577 $170,358 $11,541,644 $24,028,311 $343,496 $36,083,809
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $4,475,563 $4,057,935 $4,482,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 955,972 1,062,130 947,914
Provision for loan losses 215,000 456,667 625,000
Provision (benefit) for deferred income taxes 73,506 12,826 (123,657)
Gain on sale of investment securities 0 0 (17,349)
(Gain) loss on premises and equipment disposals 1,613 (542) 6,770
Loss on foreclosed real estate 8,639 80,896 18,329
Federal Home Loan Bank stock dividends (135,500) (154,100) (82,200)
Stock-based compensation 7,158 5,760 0
Changes in operating assets and liabilities:
Loans held for sale (215,450) 460,645 (339,770)
Other assets (452,196) 185,794 (22,813)
Other liabilities 612,782 (805,459) 176,674
Net cash provided by operating activities 5,547,087 5,362,552 5,671,734
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
in other financial institutions 596,646 (594,720) 5,694
Net (increase) decrease in federal funds sold (17,938,761) 10,197,422 (11,112,936)
Securities available for sale:
Proceeds from sales 0 0 497,921
Proceeds from maturities 21,655,284 43,798,257 33,340,989
Payment for purchases (25,618,232) (46,133,173) (25,646,479)
Payment for purchase of Federal Home Loan Bank
stock (245,600) 0 (417,800)
Net increase in loans (15,085,223) (15,696,749) (23,785,419)
Capital expenditures (1,209,663) (760,756) (410,208)
Proceeds from sale of premises and equipment 1,700 1,400 9,355
Proceeds from sale of other real estate 111,136 751,134 47,404
Purchase of bank-owned life insurance 0 (3,000,000) 0
Net cash used in investing activities (37,732,713) (11,437,185) (27,471,479)
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
Cash flows from financing activities:
Net increase in deposits $15,737,722 $13,157,355 $16,090,506
Net increase (decrease) in short-term borrowings 7,921,835 (6,745,255) (1,349,919)
Proceeds from issuance of long-term borrowings 20,000,000 9,000,000 10,000,000
Principal payments on long-term borrowings (11,000,000) (9,000,000) 0
Issuance of common stock 543,900 0 0
Proceeds from stock benefit plans 16,469 28,667 62,184
Payment for repurchase of common stock 0 0 (401,969)
Cash dividends paid (2,161,477) (2,156,380) (2,169,080)
Net cash provided by financing activities 31,058,449 4,284,387 22,231,722
Net increase (decrease) in cash and due from banks (1,127,177) (1,790,246) 431,977
Cash and due from banks at beginning 13,694,114 15,484,360 15,052,383
Cash and due from banks at end $12,566,937 $13,694,114 $15,484,360
Supplemental cash flow information:
Cash paid during the year for:
Interest $6,162,091 $6,951,992 $7,981,419
Income taxes 1,976,000 1,608,066 2,034,775
Noncash investing and financing activities:
Loans transferred to other real estate 71,672 1,549,722 24,302
Loans charged off 185,819 478,948 560,134
Loans made in connection with the sale of
other real estate 150,000 447,917 48,235
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Principal Business Activity
Mid-Wisconsin Financial Services, Inc. (the "Company") operates as a full-
service financial institution with a primary market area including, but not
limited to, Clark, Taylor, Price, Marathon, and Oneida Counties, Wisconsin. It
provides a variety of traditional banking products in addition to trust
services, uninsured investment product sales, and appraisal and title services.
Principles of Consolidation
The consolidated financial statements include the accounts of Mid-Wisconsin
Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank (the "Bank"),
and the Bank's wholly owned subsidiaries, Mid-Wisconsin Investment Corporation
and Excel Real Estate Services, Inc. All significant intercompany balances and
transactions have been eliminated. The accounting and reporting policies of
the Company conform to generally accepted accounting principles and to general
practices within the banking industry.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks." Cash and due from banks includes cash on
hand and non-interest-bearing deposits at correspondent banks.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Securities
Securities are classified as available for sale and are carried at fair value,
with unrealized gains and losses reported in comprehensive income.
Amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the terms of the securities. Declines in
fair value of securities that are deemed to be other than temporary, if
applicable, are reflected in earnings as realized losses. Gains and losses on
the sale of securities are determined using the specific-identification method.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required
to hold stock in the FHLB based on the anticipated amount of FHLB borrowings to
be advanced. This stock is recorded at cost, which approximates fair value.
Transfer of the stock is substantially restricted.
Loans Held for Sale
Loans held for sale consist of the current origination of certain fixed-rate
mortgage loans and are recorded at the lower of aggregate cost or fair value.
A gain or loss is recognized at the time of the sale reflecting the present
value of the difference between the contractual interest rate of the loans sold
and the yield to the investor. All loans held for sale at December 31, 2004
and 2003, have a forward sale commitment from an investor. Mortgage servicing
rights are not retained.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on loans
is accrued and credited to income based on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest
method.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Loans (Continued)
The accrual of interest on loans is discontinued when, in the opinion of
management, there is an indication the borrower may be unable to make payments
as they become due. When loans are placed on nonaccrual or charged off, all
unpaid accrued interest is reversed against interest income. The interest on
these loans is subsequently accounted for on the cash basis until qualifying
for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense as losses are estimated to have occurred. Loan
losses are charged against the allowance when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
Management periodically evaluates the adequacy of the allowance using the
Company's past loan loss experience, known and inherent risks in the portfolio,
composition of the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral, current
economic conditions, and other relevant factors. This evaluation is inherently
subjective since it requires material estimates that may be susceptible to
significant change. The Company has an internal risk analysis and review staff
that continuously reviews loan quality and reports the results of its
examinations to executive management and the Board of Directors. Such reviews
also assist management in establishing the level of the allowance.
The allowance for loan losses includes specific allowances related to loans
which have been judged to be impaired under current accounting standards. A
loan is impaired when, based on current information, it is probable the company
will not collect all amounts due in accordance with the contractual terms of
the loan agreement. Management has determined that commercial, financial, and
agricultural loans and commercial real estate loans that have a nonaccrual
status or have had their terms restructured meet this definition. Losses on
large groups of homogeneous loans, such as mortgage and consumer loans and
leases, are evaluated using historical loss rates. Specific allowances for
impaired loans are based on discounted cash flows of expected future payments
using the loan's initial effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
The allowance arrived at through this methodology is adjusted by management's
judgment concerning the effect of recent economic events on portfolio
performance. In management's judgment, the allowance for loan losses is
adequate to cover probable losses relating to specifically identified loans, as
well as probable losses inherent in the balance of the loan portfolio.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation.
Maintenance and repair costs are charged to expense as incurred. Gains or
losses on disposition of premises and equipment are reflected in income.
Depreciation is computed on a straight-line method and is based on the
estimated useful lives of the assets.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of cost or fair value less estimated costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
foreclosed real estate.
Goodwill and Purchased Intangibles
The excess of cost over the net assets acquired (goodwill) is tested for
impairment annually. The Company tested for impairment during the third
quarter and determined there was no impairment of goodwill during 2004. No
impairment expense was recognized in 2004, 2003, or 2002.
The purchased core deposit intangible is amortized using a systematic method
over an eight-year period. The Company periodically evaluates the carrying
value of the intangible asset for impairment. Adjustments are recorded when
the value of the asset decreases or is determined to be impaired.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the differences between
the financial statement and tax bases of assets and liabilities, as measured by
the enacted tax rates which will be in effect when these differences are
expected to reverse. Deferred tax expense is the result of changes in the
deferred tax asset and liability.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commitments
under commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded in the financial statements when they become
payable.
Rate Lock Commitments
The Company enters into commitments to originate loans whereby the interest
rate on the loan is determined prior to funding (rate lock commitments). Rate
lock commitments on mortgage loans that are intended to be sold are considered
to be derivatives. Accordingly, such commitments, along with any related fees
received from potential borrowers, are recorded at fair value in derivative
assets or liabilities, with changes in fair value recorded in the net gain or
loss on sale of mortgage loans. Fair value is based on fees currently charged
to enter into similar agreements, and for fixed-rate commitments also considers
the difference between current levels of interest rates and the committed
rates. The Company's rate lock commitments were $2,731,155 at December 31,
2004.
Segment Information
The Company, through a branch network of its banking subsidiary, provides a
full range of consumer and commercial banking services to individuals,
businesses, and farms in north central Wisconsin. These services include
demand, time, and savings deposits; safe deposit services; credit cards; notary
services; night depository; money orders, traveler's checks, and cashier's
checks; savings bonds; secured and unsecured consumer, commercial, and real
estate loans; ATM processing; cash management; and trust and financial
planning.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Segment Information (Continued)
While the Company's chief decision makers monitor the revenue streams of
various Company products and services, operations are managed and financial
performance is evaluated on a companywide basis. Accordingly, all of the
Company's banking operations are considered by management to be aggregated in
one reportable operating segment.
Advertising Costs
Advertising costs are expensed as incurred.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains and losses
on securities available for sale, net of tax, which are recognized as a
separate component of equity, accumulated other comprehensive income.
Earnings per Share
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share includes the potential common
stock shares issuable under the stock options granted. The weighted average
number of shares outstanding were 1,689,035 in 2004, 1,684,596 in 2003, and
1,692,227 in 2002. The diluted, weighted average number of shares outstanding
were 1,690,012 in 2004, 1,684,984 in 2003, and 1,692,491 in 2002.
Stock-Based Compensation
Effective January 1, 2003, the Company adopted the fair value recognition
provision of Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2003. Awards under the
Company's plan vest six months after the grant date. The cost related to
stock-based employee compensation included in the determination of net income
is recognized over the vesting period using a straight-line method. Prior to
2003, the Company accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in 2002 net income as all options granted under those plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation (Continued)
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period:
2004 2003 2002
Net income, as reported $4,475,563 $4,057,935 $4,482,836
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 7,158 3,802 0
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax effects (7,158) (3,802) (3,061)
Pro forma net income $4,475,563 $4,057,935 $4,479,775
Basic earnings per share, as reported $2.65 $2.41 $2.65
Pro forma basic earnings per share $2.65 $2.41 $2.65
Diluted earnings per share, as reported $2.64 $2.41 $2.65
Pro forma diluted earnings per share $2.64 $2.41 $2.65
The fair value of stock options granted in 2004, 2003, and 2002 was estimated
at the date of grant using the Black-Scholes methodology. The following
assumptions were made in estimating the fair value for options granted for the
years ended December 31:
2004 2003 2002
Dividend yield 4.50% 4.70% 4.70%
Risk-free interest rate 4.21% 4.03% 4.03%
Weighted average expected life (years) 10 10 10
Expected volatility 9.24% 9.55% 9.55%
The weighted average fair value of options at their grant date, using the
assumptions shown above, was computed at $1.92 per share for options granted in
2004, $1.63 per share for options granted in 2003, and $1.54 per share for
options granted in 2002.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation (Continued)
In December 2004, the Financial Accounting Standards Board issued
SFAS no. 123R, Share-Based Payment, which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for Stock
Issued To Employees. SFAS no. 123R requires that the cost of share-based
payment transactions (including those with employees and nonemployees) be
recognized in the financial statements. SFAS no. 123R applies to all share-
based payment transactions in which an entity acquires goods or services by
issuing (or offering to issue) its shares, share options, or other equity
instruments (except for those held by an ESOP) or by incurring liabilities (1)
in amounts based (even in part) on the price of the entity's shares or other
equity instruments or (2) that require (or may require) settlement by the
issuance of an entity's shares or other equity instruments. As noted above,
the Company adopted SFAS No. 123 in January 2003; therefore, management expects
the adoption of SFAS No. 123R to have an immaterial effect on the consolidated
financial statements.
Note 2 Cash and Due From Banks
Cash and due from banks in the amount of $3,089,000 was restricted at
December 31, 2004, to meet the reserve requirements of the Federal Reserve
System.
In the normal course of business, the Bank maintains cash and due from bank
balances with correspondent banks. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. Total uninsured
balances at December 31, 2004 were approximately $2,757,000.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 3 Securities
The amortized cost, fair value, and gross unrealized gains and losses for the
Company's securities available for sale follow:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2004
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $649,771 $688 $2,233 $648,226
Mortgage-backed securities 54,320,992 159,118 441,636 54,038,474
Obligations of states and
political subdivisions 22,957,014 796,318 10,310 23,743,022
Corporate debt securities 2,475,000 26,250 0 2,501,250
Total debt securities 80,402,777 982,374 454,179 80,930,972
Equity securities 150,625 0 0 150,625
Totals $80,553,402 $982,374 $454,179 $81,081,597
December 31, 2003
Obligations of U.S. government
corporations and agencies $449,784 $6,250 $1,724 $454,310
Mortgage-backed securities 49,895,168 354,358 231,424 50,018,102
Obligations of states and
political subdivisions 23,626,428 1,234,034 1,811 24,858,651
Corporate debt securities 2,475,000 31,500 0 2,506,500
Total debt securities 76,446,380 1,626,142 234,959 77,837,563
Equity securities 150,625 0 0 150,625
Totals $76,597,005 $1,626,142 $234,959 $77,988,188
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 3 Securities (Continued)
The amortized cost and fair value of debt securities at December 31, 2004, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Debt Securities Available for Sale Cost Value
Due in one year or less $3,871,427 $3,896,530
Due after one year through five years 13,772,959 14,278,718
Due after five years through ten years 5,560,732 5,814,333
Due after ten years through fifteen years 526,667 526,667
Due after fifteen years 2,350,000 2,376,250
Mortgage-backed securities 54,320,992 54,038,474
Total debt securities available for sale $80,402,777 $80,930,972
There were no sales of securities during 2004 and 2003. There were proceeds of
$497,921 from sales of securities during 2002, with $17,349 of gross realized
gains.
Securities with a carrying value of $48,845,064 and $34,089,558 at December 31,
2004 and 2003, respectively, were pledged to secure public deposits, short-term
borrowings, and for other purposes required by law.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 3 Securities (Continued)
The following tables show our investments' gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December 31:
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
2004
U.S. Treasury obligations and
direct obligations of U.S.
government agencies $199,929 $28 $247,609 $2,205 $447,538 $2,233
Mortgage-backed securities 25,925,274 240,599 9,196,872 201,037 35,122,146 441,636
Obligations of states and
political subdivisions 1,472,074 7,926 317,616 2,384 1,789,690 10,310
Total temporarily impaired
Securities $27,597,277 $248,553 $9,762,097 $205,626 $37,359,374 $454,179
2003
U.S. Treasury obligations and
direct obligations of U.S.
government agencies $248,060 $1,724 $0 $0 $248,060 $1,724
Mortgage-backed securities 14,724,052 188,778 1,716,634 42,646 16,440,686 231,424
Obligations of states and
political subdivisions 563,189 1,811 0 0 563,189 1,811
Total temporarily impaired
Securities $15,535,301 $192,313 $1,716,634 $42,646 $17,251,935 $234,959
At December 31, 2004, 62 debt securities have unrealized losses with aggregate
depreciation of 1.2% from the Company's amortized cost. These unrealized
losses relate principally to the increase in interest rates and are not due to
changes in the financial condition of the issuer. In analyzing an issuer's
financial condition, management considers whether the securities are issued by
a government body or agency, whether a rating agency has downgraded the
securities, and industry analysts' reports. Since management has the ability
to hold debt securities until maturity (or the foreseeable future for
securities available for sale), no declines are deemed to be other than
temporary.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 4 Loans
The composition of loans at December 31 follows:
2004 2003
Commercial $48,252,170 $47,315,814
Agricultural 35,722,501 35,739,831
Real estate:
Construction 9,667,490 9,305,663
Commercial 94,348,965 87,244,649
Residential 87,702,766 80,526,023
Installment 8,525,168 9,049,756
Subtotals 284,219,060 269,181,736
Net deferred loan fees (77,838) (76,652)
Allowance for loan losses (2,820,034) (2,732,447)
Net loans $281,321,188 $266,372,637
The aggregate amount of nonaccrual loans was approximately $1,190,000 and
$593,000 at December 31, 2004 and 2003, respectively. Nonaccrual loans are
those that are contractually past due 90 days or more as to interest or
principal payments. If nonaccrual loans had been current, approximately
$62,000, $54,000, and $164,000 of interest income would have been recognized
for the years ended December 31, 2004, 2003, and 2002, respectively.
An analysis of impaired loans at December 31 follows:
2004 2003
Impaired loans with a valuation allowance $431,710 $457,162
Impaired loans without a valuation allowance 0 0
Total impaired loans 431,710 457,162
Less - Allowance for loan losses 82,500 66,955
Net investment in impaired loans $349,210 $390,207
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 4 Loans (Continued)
An analysis of impaired loans for the years ended December 31 follows:
2004 2003 2002
Average recorded investment $639,533 $1,352,165 $2,780,904
Interest income recognized $3,237 $18,298 $83,347
Interest income recognized using cash basis $11,638 $17,770 $94,068
An analysis of the allowance for loan losses for the years ended December 31
follows:
2004 2003 2002
Balance, January 1 $2,732,447 $2,701,709 $2,597,416
Provision charged to operating expense 215,000 456,667 625,000
Recoveries on loans 58,406 53,019 39,427
Loans charged off (185,819) (478,948) (560,134)
Balance, December 31 $2,820,034 $2,732,447 $2,701,709
The Bank, in the ordinary course of business, grants loans to the Company's
executive officers and directors, including affiliated companies in which they
are principal owners. The Bank has a policy of making loans (limited to
$50,000 per individual) available to employees and executive officers at
interest rates slightly below those prevailing for comparable transactions with
other customers. In the opinion of management, such loans do not involve more
than the normal risk of collectibility or present other unfavorable features.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 4 Loans (Continued)
Activity in related-party loans for the years ended December 31 is summarized
below:
2004 2003
Loans outstanding, January 1 $1,328,535 $1,087,859
Changes in related parties 40,396 (67,267)
New loans 679,664 1,293,091
Repayments (881,661) (985,148)
Loans outstanding, December 31 $1,166,934 $1,328,535
The Company grants residential, commercial, agricultural, and consumer loans
predominantly in central and northern Wisconsin. There were no significant
concentrations of credit to any one debtor or industry group.
NOTE 5 Premises and Equipment
Premises and equipment consist of the following at December 31:
2004 2003
Land and improvements $1,729,174 $922,281
Buildings 5,997,655 5,969,718
Furniture and equipment 5,511,223 5,382,147
Total cost 13,238,052 12,274,146
Less - Accumulated depreciation 7,052,741 6,677,833
Totals $6,185,311 $5,596,313
Depreciation and amortization charged to operating expense totaled $617,352 in
2004, $651,006 in 2003, and $611,118 in 2002.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 6 Intangible Assets
The carrying values of intangible assets are summarized as follows:
2004 2003
Purchased core deposit intangible $2,218,437 $2,218,437
Less - Accumulated amortization 1,986,963 1,654,894
Totals $231,474 $563,543
Amortization expense for intangible assets was $332,069 in 2004, $310,344 in
2003, and $290,042 in 2002.
Amortization expense for intangible assets for 2005 will be $231,474.
Note 7 Interest-Bearing Deposits
Aggregate annual maturities of certificate and IRA accounts at December 31,
2004, are as follows:
2005 $113,973,907
2006 21,366,343
2007 8,095,912
2008 5,386,535
Thereafter 338,032
Total $149,160,729
Deposits from the Company's directors, executive officers, and affiliated
companies in which they are principal owners totaled $4,038,949 and $4,617,839
at December 31, 2004 and 2003, respectively.
Interest-bearing deposits include $60,433,115 and $57,421,494 of certificates
of deposit in denominations of $100,000 or greater at December 31, 2004 and
2003, respectively.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 8 Short-Term Borrowings
Short-term borrowings at December 31 consist of the following:
2004 2003
Securities sold under repurchase agreements $19,216,097 $11,294,262
The Company pledges U.S. agency securities available for sale as collateral for
repurchase agreements. The fair value of pledged securities, including accrued
interest receivable, totaled $30,329,292 and $20,425,353 at December 31, 2004
and 2003, respectively.
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
2004 2003 2002
Weighted average rate at December 31 2.11% 0.90% 1.24%
For the year:
Highest month-end balance $29,641,428 $19,495,101 $34,936,710
Daily average balance 20,525,726 13,177,181 22,094,640
Weighted average rate 1.51% 1.14% 1.76%
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 9 Long-Term Borrowings
Long-term borrowings at December 31 consist of the following:
2004 2003
1.73% to 5.07% fixed-rate FHLB advances, interest
payable monthly with principal due during 2004 $0 $11,000,000
2.39% to 4.14% fixed-rate FHLB advances, interest
payable monthly with principal due during 2005 12,000,000 12,000,000
2.02% to 4.44% fixed-rate FHLB advances, interest
payable monthly with principal due during 2006 17,000,000 12,000,000
3.58% to 3.87% fixed-rate FHLB advances, interest
payable monthly with principal due during 2007 7,500,000 0
3.67% to 5.51% fixed-rate FHLB advances, interest
payable monthly with principal due during 2008 5,000,000 5,000,000
3.87% to 4.61% fixed-rate FHLB advances, interest
payable monthly with principal due during 2009 7,500,000 0
Totals $49,000,000 $40,000,000
The FHLB advances are secured by FHLB stock and a blanket lien consisting
principally of one- to four-family real estate loans totaling approximately
$73,000,000 and $66,000,000 at December 31, 2004 and 2003, respectively. In
addition, the FHLB advances at December 31, 2004 were secured by securities
with an approximate carrying value of $1,939,000.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 10 Income Taxes
The components of the income tax provision are as follows:
2004 2003 2002
Current income tax expense:
Federal $1,740,743 $1,423,837 $1,779,203
State 378,707 107,573 127,534
Total current 2,119,450 1,531,410 1,906,737
Deferred income tax expense (credit):
Federal 68,258 10,156 (104,909)
State 5,248 2,670 (18,748)
Total deferred 73,506 12,826 (123,657)
Total provision for income taxes $2,192,956 $1,544,236 $1,783,080
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended
December 31 follows:
2004 2003 2002
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax expense at
statutory rate $2,267,296 34.0 $1,904,738 34.0 $2,130,411 34.0
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (356,207) (5.3) (407,020) (7.3) (402,261) (6.4)
State income taxes 253,410 3.8 72,760 1.3 71,798 1.1
Bank-owned life
Insurance (39,047) (0.6) (30,249) (0.5) 0 0.0
Other 67,504 1.0 4,007 0.1 (16,868) (0.2)
Provision for income
taxes $2,192,956 32.9 $1,544,236 27.6 $1,783,080 28.5
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 10 Income Taxes (Continued)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The major components of the net deferred taxes are as follows:
2004 2003
Deferred tax assets:
Allowance for loan losses $793,019 $717,197
Deferred compensation 401,441 396,753
State net operating losses 45,504 38,000
Purchased deposit intangible 355,264 282,754
Totals 1,595,228 1,434,704
Less - Valuation allowance 45,504 38,000
Total deferred tax assets 1,549,724 1,396,704
Deferred tax liabilities:
Premises and equipment 235,608 175,669
FHLB stock 206,773 153,426
Prepaid expense and other 113,240 0
Unrealized gain on securities available for sale 184,699 485,693
Total deferred tax liabilities 740,320 814,788
Net deferred tax asset $809,404 $581,916
Both the Company and the Bank pay state income taxes on their individual net
earnings. At December 31, 2004, tax net operating losses at the Company of
approximately $872,725 existed to offset future state taxable income. These
net operating losses will begin to expire in 2007. The valuation allowance has
been recognized to adjust deferred tax assets to the amount of tax net
operating losses expected to be realized. If realized, the tax benefit for
this item will reduce current tax expense for that period.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 10 Income Taxes (Continued)
Contingencies
The Bank has a non-Wisconsin subsidiary that holds and manages investment
assets that have not been subject to Wisconsin tax. Over the past year, the
Wisconsin Department of Revenue (WDOR) has conducted an audit of the
subsidiary. Subsequent to the balance sheet date, the Company settled with the
WDOR. The terms of the settlement are confidential; however, the settlement
does not substantially change the operations of the subsidiary going forward.
The settlement amount was appropriately reserved for as of the balance sheet
date.
In addition, the Internal Revenue Service (IRS) is currently conducting an
audit of the Company's open tax returns. The Company has been assessed
additional tax, interest, and penalties as a result of the IRS audit; however,
this assessment is in the process of being appealed. The Company believes all
tax returns were filed appropriately and, at this time, no additional tax
expense has been recorded.
Note 11 Self-Funded Insurance
Beginning on January 1, 2003, the company implemented a self-funded health care
plan which provides medical benefits to employees, retirees, and their
dependents. This health care cost is expensed as incurred. The health care
expense is based upon actual claims paid, reinsurance premiums, administration
fees, and unpaid claims at year-end. The company buys reinsurance to cover
catastrophic individual claims over $25,000. Prior to January 1, 2003, the
Company contracted with an outside insurance carrier to provide health care
benefits to its employees.
Health care expense for 2004, 2003, and 2002 was $464,594, $426,593, and
$335,498, respectively. A liability of approximately $203,000 has been
recognized for claims outstanding at December 31, 2004. Management believes
this liability is sufficient to cover estimated claims including claims
incurred but not yet reported.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 12 Retirement Plans
Effective December 1, 2002, the Company merged its noncontributory defined
contribution money purchase plan into its 401(k) profit sharing. The new plan
is referred to as the Profit Sharing and 401(k) Plan. The plan is available to
substantially all employees. The Company matches 100% of participant
contributions to the plan up to 5% of pay deferred. Additional discretionary
contributions can be authorized by the Board of Directors. Total expense
associated with the plans was $382,086, $362,432, and $505,673 for the years
ended December 31, 2004, 2003, and 2002, respectively.
The Company has a nonqualified deferred directors' fee compensation plan which
permits directors to defer all or a portion of their compensation into a stock
equivalent account or a cash account. The benefits are payable after a
director's resignation from the Board of the Company in a lump sum or in
installments over a period not in excess of five years. Included in other
liabilities is the estimated present value of future payments of approximately
$1,026,000 and $1,018,000 at December 31, 2004 and 2003, respectively.
Expense, including directors' fees, associated with this plan was approximately
$194,000, $164,000, and $176,000 in 2004, 2003, and 2002, respectively.
Note 13 Stock Benefit Plans
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan adopted during 2000, the
Company is authorized to issue up to 50,000 shares of common stock to its full-
time employees, nearly all of whom are eligible to participate. Under the
terms of the plan, employees can choose each year to have up to 5% of their
annual gross earnings withheld to purchase the Company's common stock. Stock
is purchased by employees under the plan annually. The purchase price of the
stock is 95% of the lower of its beginning-of-year or end-of-year market price.
Approximately 25% of eligible employees participated in the plan during 2004.
Stock issued under this plan totaled 527, 401, and 413 shares during 2004,
2003, and 2002, respectively. As of December 31, 2004, 48,005 shares of common
stock remain reserved for future grants to employees under the Employee Stock
Purchase Plan approved by the stockholders.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 13 Stock Benefit Plans (Continued)
Incentive Stock Option Plan
Under the terms of an incentive stock option plan adopted during 2000, shares
of unissued common stock are reserved for options to officers and key employees
of the Company at prices not less than the fair market value of the shares at
the date of the grant. Options may be exercised no earlier than six months
after the grant date. These options expire ten years after the grant date.
The following table summarizes information regarding stock options at December
31, 2004:
Outstanding Options Exercisable Options
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/04 Life Price 12/31/04 Price
$25 to $29 12,446 8.3 years $27.75 12,446 $27.75
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 13 Stock Benefit Plans (Continued)
Incentive Stock Option Plan (Continued)
For the years ended December 31, 2002, 2003, and 2004, activity in stock
options outstanding was as follows:
Weighted
Average
Shares Price
December 31, 2001 9,569 $26.53
Options granted 3,012 26.63
Options exercised (1,921) (26.62)
Options forfeited (1,197) (27.44)
December 31, 2002 9,463 26.61
Options granted 3,541 28.13
Options exercised (674) (26.00)
Options forfeited (1,592) (26.30)
December 31, 2003 10,738 27.19
Options granted 3,719 29.25
Options exercised 0
Options forfeited (2,011) (27.55)
December 31, 2004 12,446 27.75
As of December 31, 2004, 250,742 shares of common stock remain reserved for
future grants to officers and key employees under the incentive stock option
plan approved by the stockholders.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 14 Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2004,
that the Company and the Bank meet all capital adequacy requirements.
As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 14 Capital Requirements (Continued)
The Company and the Bank's actual capital amounts and ratios are presented in
the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2004:
Total capital (to risk-
weighted assets):
Consolidated $38,034,000 13.1% >$23,215,000 >8.0% N/A
Subsidiary Bank $34,282,000 11.9% >$23,118,000 >8.0% >$29,019,000 >10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $35,214,000 12.1% >$11,608,000 >4.0% N/A
Subsidiary Bank $31,462,000 10.9% >$11,559,000 >4.0% >$17,339,000 >6.0%
Tier I capital (to
average assets):
Consolidated $35,214,000 9.1% >$15,468,000 >4.0% N/A
Subsidiary Bank $31,462,000 8.2% >$15,438,000 >4.0% >$19,297,000 >5.0%
December 31, 2003:
Total capital (to risk-
weighted assets):
Consolidated $34,732,000 12.8% >$21,658,000 >8.0% N/A
Subsidiary Bank $33,104,000 12.2% >$21,647,000 >8.0% >$27,058,000 >10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $32,000,000 11.8% >$10,829,000 >4.0% N/A
Subsidiary Bank $30,372,000 11.2% >$10,823,000 >4.0% >$16,235,000 >6.0%
Tier I capital (to
average assets):
Consolidated $32,000,000 8.7% >$14,777,000 >4.0% N/A
Subsidiary Bank $30,372,000 8.2% >$14,772,000 >4.0% >$18,464,000 >5.0%
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 15 Restrictions On Retained Earnings
At December 31, 2004, the Bank could have paid approximately $11,164,000 of
additional dividends to the Company without prior regulatory approval. The
payment of dividends is subject to the statutes governing state-chartered banks
and may be further limited because of the need for the Bank to maintain capital
ratios satisfactory to applicable regulatory agencies.
Note 16 Accumulated Other Comprehensive Income
Comprehensive income is shown in the consolidated statements of changes in
stockholders' equity. The Company's accumulated other comprehensive income is
comprised of the unrealized gain or loss on securities available for sale. The
following shows the activity in accumulated other comprehensive income:
2004 2003 2002
Accumulated other comprehensive
income at beginning $905,490 $1,263,089 $604,374
Activity:
Unrealized gain (loss) on securities
available for sale (862,988) (569,678) 1,037,993
Less - Reclassification adjustment for gains 0 0 17,349
Net unrealized gains (losses) (862,988) (569,678) 1,020,644
Tax effect (300,994) (212,079) 361,929
Other comprehensive income (loss) (561,994) (357,599) 658,715
Accumulated other comprehensive
income at end $343,496 $905,490 $1,263,089
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 17 Commitments
As of December 31, 2004, the Company was committed for additions to premises
and equipment totaling approximately $1,580,000 for the construction of a bank
branch.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Note 18 Financial Instruments With Off-Balance-Sheet Risk
Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31, 2004 and 2003, are as follows:
2004 2003
Commitments to extend credit:
Fixed rate $16,302,170 $11,390,725
Adjustable rate 16,458,316 18,268,087
Standby and irrevocable letters of credit - Fixed rate 4,450,768 2,269,944
Credit card commitments 5,208,320 5,296,774
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 18 Financial Instruments With Off-Balance-Sheet Risk (Continued)
Credit Risk (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Standby and irrevocable letters of credit are conditional lending commitments
used by the Company to guarantee the performance of a customer to a third
party. Generally, all standby letters of credit issued have expiration dates
within one year. The credit risk involved in issuing standby and irrevocable
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company generally holds collateral supporting
these commitments. Standby letters of credit are not reflected in the
consolidated financial statements since recording the fair value of these
guarantees would not have a significant impact on the consolidated financial
statements.
Credit card commitments are commitments on credit cards issued by the Company
and serviced by Elan Financial Services. These commitments are unsecured.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes To Consolidated Financial Statements
Note 19 Fair Value Of Financial Instruments
Current accounting standards require the Company to disclose estimated fair
values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments.
Cash and Short-Term Investments - The carrying amounts reported in the
consolidated balance sheets for cash and due from banks, interest-bearing
deposits in other financial institutions, and federal funds sold approximate
the fair value of these assets.
Securities - Fair values are based on quoted market prices, where available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. Federal Home Loan Bank stock is carried
at cost, which is its redeemable value since the market for this stock is
limited.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
residential mortgage, and other consumer. The fair value of loans is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the Company's
repayment schedules for each loan classification. In addition, for impaired
loans, marketability and appraisal values for collateral were considered in the
fair value determination.
Deposit Liabilities - The fair value of deposits with no stated maturity, such
as non-interest-bearing demand deposits, savings, NOW accounts, and money
market accounts, is equal to the amount payable on demand at the reporting
date. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate reflects the credit quality
and operating expense factors of the Company.
Short-Term Borrowings - The carrying amount reported in the consolidated
balance sheets for short-term borrowings approximates the liability's fair
value.
Long-Term Borrowings - The fair values of the Company's long-term borrowings
are estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 19 Fair Value Of Financial Instruments (Continued)
Accrued Interest - The carrying amount of accrued interest approximates its
fair value.
Off-Balance-Sheet Instruments - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the current interest rates, and
the present creditworthiness of the counter parties. Since this amount is
immaterial, no amounts for fair value are presented.
The carrying value and estimated fair value of financial instruments at
December 31, 2004 and 2003, were as follows:
2004 2003
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term
investments $32,151,539 $32,151,539 $15,936,601 $15,936,601
Investment securities
and FHLB stock 83,616,797 83,616,797 80,142,288 80,142,288
Net loans 281,867,413 282,082,654 266,703,412 266,615,625
Accrued interest receivable 1,553,887 1,553,887 1,613,617 1,613,617
Financial liabilities:
Deposits 303,387,030 305,709,384 287,649,308 289,948,717
Short-term borrowings 19,216,097 19,216,097 11,294,262 11,294,262
Long-term borrowings 49,000,000 49,315,780 40,000,000 41,197,250
Accrued interest payable 1,147,527 1,147,527 1,206,178 1,206,178
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes To Consolidated Financial Statements
Note 19 Fair Value Of Financial Instruments (Continued)
Limitations - Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment,
goodwill and intangibles, and other assets and other liabilities. In addition,
the tax ramifications related to the realization of the unrealized gains or
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 20 Condensed Financial Information - Parent Company Only
Balance Sheets
December 31, 2004 and 2003
2004 2003
Assets
Cash and due from banks $2,519,978 $1,574,076
Investment in subsidiary 32,332,388 32,136,473
Securities available for sale - At fair value 100,000 100,000
Land 790,011 0
Other assets 514,660 39,691
TOTAL ASSETS $36,257,037 $33,850,240
Liabilities and Stockholders' Equity
Total liabilities $173,228 $86,050
Total stockholders' equity 36,083,809 33,764,190
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,257,037 $33,850,240
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 20 Condensed Financial Information - Parent Company Only (Continued)
Statements of Income
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
Income:
Dividends from subsidiary $3,850,000 $2,850,000 $2,850,000
Interest 17,296 10,725 10,550
Rental income 0 70,000 180,000
Other 6,809 13,267 1,424
Total income 3,874,105 2,943,992 3,041,974
Expenses:
Salaries and benefits 60,819 40,307 44,507
Other 152,964 99,325 148,825
Total expenses 213,783 139,632 193,332
Income before credit for income taxes
and equity in undistributed net income
of subsidiary 3,660,322 2,804,360 2,848,642
Credit for income taxes (64,491) (15,591) (462)
Income before equity in undistributed net
income of subsidiary 3,724,813 2,819,951 2,849,104
Equity in undistributed net income
of subsidiary 750,750 1,237,984 1,633,732
Net income $4,475,563 $4,057,935 $4,482,836
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Note 20 Condensed Financial Information - Parent Company Only (Continued)
Statements of Cash Flows
Years Ended December 31, 2004, 2003, and 2002
2004 2003 2002
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $4,475,563 $4,057,935 $4,482,836
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and net
Amortization 0 0 499
Gain on equipment disposals 0 (1,400) 0
Equity in undistributed net income of
subsidiary (750,750) (1,237,984) (1,633,732)
Changes in operating assets and liabilities:
Other assets (301,742) (6,744) 17,384
Liabilities (86,050) (104,130) 68,672
Net cash provided by operating activities 3,337,021 2,707,677 2,935,659
Cash flows from investing activities:
Capital expenditures (790,011) 0 0
Proceeds from sale of equipment 0 1,400 0
Net cash provided by (used in) investing
activities (790,011) 1,400 0
Cash flows from financing activities:
Proceeds from stock benefit plans 16,469 28,667 62,184
Issuance of common stock 543,900 0 0
Payments for repurchase of
common stock 0 0 (401,969)
Cash dividends paid (2,161,477) (2,156,380) (2,169,080)
Net cash used in financing activities (1,601,108) (2,127,713) (2,508,865)
Net increase in cash and due from banks 945,902 581,364 426,794
Cash and due from banks at beginning 1,574,076 992,712 565,918
Cash and due from banks at end $2,519,978 $1,574,076 $992,712
Supplemental cash flow information:
Cash paid during the year for
income taxes $1,731,000 $1,490,066 $1,882,799
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-K, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Controller (as the chief financial officer of the
Company), evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based
upon, and as of the date of such evaluation, the President and Chief Executive
Officer and the Controller concluded that the Company's disclosure controls and
procedures were effective in all material respects. There have been no
significant changes in the Company's internal controls or in other factors
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation, nor were there any significant deficiencies
or material weaknesses identified which required any corrective action to be
taken.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by this
reference to the disclosure under the caption "Proposal No. 1 - Election of
Directors" in the Company's 2005 Proxy Statement dated March 23, 2005 (the
"2005 Proxy Statement") and continuing through such table.
Information relating to executive officers is found in Part I of this Form 10-
K.
Information relating to compliance with Section 16 of the Exchange Act is
incorporated in this Form 10-K by reference to the disclosure in the 2005 Proxy
Statement under the subcaption "Beneficial Ownership of Common Stock - Section
16(a) Beneficial Ownership Reporting Compliance."
Code of Ethics
The Company has adopted an ethics policy for all employees and a conflict of
interest policy for its directors. The Company has also adopted a Code of
Compliance and Reporting Requirements for Senior Management and Senior
Financial Officers which covers the Company's Chief Executive Officer, each
Vice President, and the Secretary, Treasurer, and Controller (the chief
financial and accounting officer). The Code of Compliance and Reporting
Requirements for Senior Management and Senior Financial Officers has been
posted on the website of Mid-Wisconsin Bank under "Mid-Wisconsin Financial
Services - Investor Relations."
See www.midwisc.com/invstrelation/invest_relation.htm. In the event the
Company amends or waives any provision of the Code of Compliance and Reporting
Requirements for Senior Management and Senior Financial Officers, the Company
intends to disclose such amendment or waiver at the website address where the
code may also be found.
Audit Committee
The Board of Directors has appointed an Audit Committee in accordance with
Section 3(a)(58)(A) of the Exchange Act. Mr. Schoofs (chairman), Ms. Hemer,
and Mr. Hallgren serve on the Audit Committee (the Company is not a "listed
issuer" as defined in SEC Rule 10A-3).
Financial Expert
The SEC has adopted rules which require the Company to disclose whether one of
the members of the Audit Committee qualifies under SEC rules as an "audit
committee financial expert." The Company is not required to have such an
expert on its Audit Committee. Based on its review of the SEC rules, the Board
does not believe that any member of the Audit Committee can be classified as an
"audit committee financial expert."
Under SEC regulations, an "audit committee financial expert," must have the
attributes and experience of a person who has been actively involved in the
preparation, auditing, or evaluation of public company financial statements.
While it may be possible to recruit a director having these specific
qualifications, the Company's size and geographic location make such a task
difficult, and the Board believes that it is more important that directors of
the Company satisfy the criteria described in the 2005 Proxy Statement under
"Governance of the Company - Nominations for Director - Qualifications." These
criteria include an understanding of the Company's market area, customer base,
and scope of operations. The Board believes that it is not in the best
interests of the Company to nominate a director who does not possess these
characteristics solely to acquire a director meeting the definition of an
"audit committee financial expert" under SEC regulations.
The Audit Committee has the authority under its charter to retain or dismiss
the independent auditor and to hire such other experts or legal counsel as it
deems appropriate in order to fulfill its duties. The Audit Committee, and the
Board of Directors as a whole, believe that the Committee has access to the
financial expertise required to adequately performs its duties under its
charter.
As part of its annual review of potential directors, the Board will consider
any potential candidates who meet its current general qualification criteria
and those of an "audit committee financial expert," but, for the time being,
the Board believes that the current members of the Committee, working with the
independent auditor, are qualified to perform the duties required in the
Committee's charter.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to director compensation is incorporated in this Form 10-K
by this reference to the disclosure in the 2005 Proxy Statement under the
subcaption "Governance of the Company - Compensation of Directors."
Information relating to the compensation of executive officers is incorporated
in this Form 10-K by this reference to the disclosure in the 2005 Proxy
Statement under (1) the caption "Executive Officer Compensation," through the
disclosure ending at the subcaption "- Committees' Report on Executive
Compensation Policies" and (2) the disclosure under the subcaption "-
Committees' Report on Executive Compensation Policies - Committee Interlocks
and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information relating to security ownership of certain beneficial owners is
incorporated in this Form 10-K by this reference to the disclosure in the 2005
Proxy Statement under the caption "Beneficial Ownership of Common Stock"
through the table ending at the subcaption "- Section 16(a) Beneficial
Ownership Reporting Compliance."
The following table sets forth, as of December 31, 2004, information with
respect to compensation plans under which the Company's common stock is
authorized for issuance:
Number of securities
remaining available for future
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
(a) (1) (b) (1) (c) (2)
Equity compensation
plans approved by
security holders 12,446 $27.75 298,843
Equity compensation
plans not approved by
security holders
Total 12,446 $27.75 298,843
(1) Shares issuable upon exercise of options granted pursuant to the 1999
Stock Option Plan.
(2) Includes 48,101 shares available under Employee Stock Purchase Plan.
The purchase period for shares under the plan is the last business day of
the fiscal year and, accordingly, there were no shares subject to option
as of December 31, 2004, under the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions with
directors and officers is incorporated in this Form 10-K by this reference to
the disclosure in the 2005 Proxy Statement under the subcaption "Governance of
the Company - Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES
Information relating to the fees and services of the Company's principal
accountant is incorporated into this Form 10-K by this reference to the
disclosure in the 2005 Proxy Statement under the subcaptions "Audit Committee
Report and Related Matters - Independent Auditor Fees," and "- Audit Committee
Pre-Approval Policy."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
DESCRIPTION PAGE
Mid-Wisconsin Financial Services, Inc.
Consolidated Financial Statements
Independent Auditor's Report 33
Consolidated Balance Sheets 34
Consolidated Statements of Income 35
Consolidated Statements of Changes in Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 39
(2) No financial statement schedules are required by Item 8 or Item 15(d)
(3) Exhibits Required by Item 601 of Regulation S-K:
The following exhibits required by Item 601 of Regulation S-K are filed
as part of this Form 10-K:
4.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
4.2 Bylaws, as amended September 20, 1995 (incorporated by reference to
Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
10.1* Mid-Wisconsin Financial Services, Inc. 1991 Employee Stock Option
Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000)
10.2* Mid-Wisconsin Financial Services, Inc. Directors' Deferred
Compensation Plan as last amended July 19, 2000 (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000)
10.3* Director Retirement Benefit Policy (incorporated by reference to
Exhibit 10(e) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999)
10.4* Executive Officer Bonus Program - Gene C. Knoll (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated January 19, 2005)
10.5 Mid-Wisconsin Financial Services, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.6* Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan, as
amended February 15, 2005
10.7* Form of Incentive Stock Option Agreement
10.8* Executive Officer Bonus Program - William A. Weiland (incorporated
by reference to Exhibit 10.2 to the Registrant's Current Report on Form
8-K dated January 19, 2005)
21.1 Subsidiaries of the Registrant
23.1 Consent of Wipfli LLP
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-
Oxley Act of 2002
*Denotes executive compensation plans and arrangements
The exhibits listed above are available upon request in writing to William A.
Weiland, Secretary, Mid-Wisconsin Financial Services, Inc., 132 West State
Street, Medford, Wisconsin 54451.
(b) Exhibits
See Item 15(a) (3)
(c) Financial Schedules
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 23, 2005.
MID-WISCONSIN FINANCIAL SERVICES, INC.
JAMES F. MELVIN
James F. Melvin, Chairman of the Board
WILLIAM A. WEILAND
William A. Weiland, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant on
March 23, 2005, and in the capacities indicated.
NORMAN A. HATLESTAD GENE C. KNOLL
Norman A. Hatlestad, Vice Chairman of Gene C. Knoll, President and Chief
the Board, and a Director Executive Officer
(Principal Executive Officer and a
Director)
KIM A. GOWEY JAMES P. HAGER
Kim A. Gowey, DDS, Chairman of the James P. Hager, Director
Board of Mid-Wisconsin Bank and a Director
KURT D. MERTENS KATHRYN M. HEMER
Kurt D. Mertens, Director Kathryn M. Hemer, Director
ROBERT J. SCHOOFS BRIAN B. HALLGREN
Robert J. Schoofs, Director Brian B. Hallgren, Director
RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
to
FORM 10-K
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the period ended December 31, 2004
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R.232.102(d))
10.6 Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan, as amended
February 15, 2005
10.7 Form of Incentive Stock Option Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of Wipfli LLP
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
Exhibits required by Item 601 of Regulation S-K which have been
previously filed and are incorporated by reference are set forth in Part IV,
Item 15 of the Form 10-K to which this Exhibit Index relates.