FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 06-1169935
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-8300
(Registrant's telephone number, including area code)
(Former name, former address & former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of May 3, 2005, there were 1,703,577 shares of $0.10 par value common stock
outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004 3
Consolidated Statements of Income
Three Months Ended March 31, 2005 and 2004 4
Consolidated Statements of Changes in
Stockholders' Equity
Three Months Ended March 31, 2005 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 8-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits 21
Signatures 22
Exhibit Index 23
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheets
March 31, 2005 December 31, 2004
(Unaudited) (Audited)
ASSETS
Cash and due from banks $10,028,867 $12,566,937
Interest-bearing deposits in other financial institutions 15,527 17,482
Federal funds sold 8,792,427 19,567,120
Securities available for sale -At fair value 83,730,319 81,081,597
Federal Home Loan Bank stock (at cost) 2,570,000 2,535,200
Loans held for sale 543,700 546,225
Loans receivable, net of allowance for loan losses of
$2,840,673 in 2005 and $2,820,034 in 2004 282,904,509 281,321,188
Accrued interest receivable 1,695,263 1,553,887
Premises and equipment 6,799,511 6,185,311
Intangible assets 154,316 231,474
Goodwill 295,316 295,316
Other assets 4,977,953 4,914,768
TOTAL ASSETS $402,507,708 $410,816,505
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $40,943,079 $50,813,737
Interest-bearing deposits 248,522,564 252,573,293
Total deposits 289,465,643 303,387,030
Short-term borrowings 25,299,699 19,216,097
Long-term borrowings 49,000,000 49,000,000
Accrued interest payable 1,152,044 1,147,527
Accrued expenses and other liabilities 1,589,940 1,982,042
Total liabilities 366,507,326 374,732,696
Stockholders' equity:
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares
Issued & outstanding -
1,703,577 shares in 2005 and 2004 170,358 170,358
Additional paid-in capital 11,545,673 11,541,644
Retained earnings 24,720,635 24,028,311
Accumulated other comprehensive income (loss) (436,284) 343,496
Total stockholders' equity 36,000,382 36,083,809
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $402,507,708 $410,816,505
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31, 2005 March 31, 2004
Interest and dividend income:
Loans, including fees $4,417,405 $4,029,514
Securities:
Taxable 637,090 605,505
Tax-exempt 242,674 248,743
Other 104,941 9,983
Total interest and dividend income 5,402,110 4,893,745
Interest expense:
Deposits 1,212,774 1,038,435
Short-term borrowings 141,116 48,921
Long-term borrowings 445,587 392,665
Total interest expense 1,799,477 1,480,021
Net interest income 3,602,633 3,413,724
Provision for loan losses 61,600 40,000
Net interest income after provision for loan losses 3,541,033 3,373,724
Noninterest income:
Service fees 176,399 197,928
Trust service fees 202,073 184,200
Investment product commissions 49,666 104,492
Other operating income 366,250 257,443
Total noninterest income 794,388 744,063
Noninterest expenses:
Salaries and employee benefits 1,549,245 1,424,004
Occupancy 345,408 331,934
Data processing and information systems 116,687 98,924
Amortization of intangibles 77,158 83,017
Other operating expenses 680,628 638,389
Total noninterest expenses 2,769,126 2,576,268
Income before provision for income taxes 1,566,295 1,541,519
Provision for income taxes 499,184 446,018
Net income $1,067,111 $1,095,501
Basic earnings per share $0.63 $0.65
Diluted earnings per share $0.63 $0.65
Cash dividends declared per share $0.22 $0.22
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
March 31, 2005
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Amount Capital Earnings Income (Loss) Totals
Balance, December 31, 2004 $170,358 $11,541,644 $24,028,311 $343,496 $36,083,809
Comprehensive Income:
Net Income 1,067,111 1,067,111
Other comprehensive loss (779,780) (779,780)
Total comprehensive income 287,331
Stock-based compensation 4,029 4,029
Cash dividends paid, $0.22
per share (374,787) (374,787)
Balance, March 31, 2005 $170,358 $11,545,673 $24,720,635 $(436,284) $36,000,382
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31, 2005 March 31, 2004
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $1,067,111 $1,095,501
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 247,071 221,495
Provision for loan losses 61,600 40,000
Loss on premises and equipment disposals 1,358 1,713
Loss on foreclosed real estate - 8,639
Federal Home Loan Bank stock dividends (34,800) (35,000)
Stock-based compensation 4,029 3,579
Changes in operating assets and liabilities:
Loans held for sale 2,525 (272,925)
Other assets 142,971 45,959
Other liabilities (387,585) 154,667
Net cash provided by operating activities 1,104,280 1,263,629
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31, 2005 March 31, 2004
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions 1,955 600,118
Net (increase) decrease in federal funds sold 10,774,693 (208,034)
Securities available for sale:
Proceeds from maturities 4,607,731 5,655,682
Payment for purchases (8,466,873) (8,244,301)
Net increase in loans (1,604,214) (756,402)
Capital expenditures (774,035) (92,156)
Proceeds from sale of premises and equipment - 1,600
Proceeds from sale of other real estate 30,965 111,136
Net cash provided by (used in) investing activities 4,570,222 (2,932,357)
Cash flows from financing activities:
Net decrease in deposits (13,921,387) (11,187,155)
Net increase in short-term borrowing 6,083,602 10,380,299
Proceeds from stock benefit plans - 2,668
Cash dividends paid (374,787) (370,842)
Net cash used in financing activities (8,212,572) (1,175,030)
Net decrease in cash and due from banks (2,538,070) (2,843,759)
Cash and due from banks at beginning 12,566,937 13,694,114
Cash and due from banks at end $10,028,867 $10,850,355
Supplemental cash flow information: 2005 2004
Cash paid during the year for:
Interest $1,794,960 $1,718,247
Income taxes $195,000 $31,000
Noncash investing and financing activities:
Loans charged off $44,607 $11,110
Loans made in connection with the sale of
other real estate $40,707 $150,000
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Mid-Wisconsin
Financial Services, Inc.'s and Subsidiary (collectively, the "Company")
financial position, results of its operations, changes in stockholders' equity
and cash flows for the periods presented, and all such adjustments are of a
normal recurring nature. The consolidated financial statements include the
accounts of all subsidiaries. All material intercompany transactions and
balances are eliminated. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the entire year.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial
statements and footnotes in the Company's 2004 annual report on Form 10-K,
should be referred to in connection with the reading of these unaudited interim
financial statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Estimates that are susceptible to significant change include the
determination of the allowance for loan losses and the valuations of
investments.
Note 2 - Earnings Per Share
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share includes the potential common
stock shares issued if outstanding stock options were exercised.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended March 31,
2005 2004
(In thousands, except per share data)
Net income $1,067 $1,096
Weighted average common shares outstanding 1,704 1,686
Dilutive effect of stock options 2 0
Diluted weighted average shares outstanding 1,706 1,686
Basic earnings per share $0.63 $0.65
Diluted earnings per share $0.63 $0.65
Note 3 - Income Taxes
During the quarter ended March 31, 2005 the Company signed a tax settlement
agreement with the Wisconsin Department of Revenue (WDOR) regarding the
taxation of certain investment subsidiary earnings from the Bank's out-of-state
subsidiary. The Company accepted a standard settlement offered by the WDOR to
Wisconsin banks with out-of-state investment subsidiaries with no admission of
wrongdoing. The settlement amount was appropriately reserved for as of
December 31, 2004.
Note 4 - Contingencies
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Company's financial condition and results
of operations for the three months ended March 31, 2005 and 2004. It is
intended to complement the unaudited financial statements, footnotes, and
supplemental financial data appearing elsewhere in this Form 10-Q and should be
read in conjunction therewith. Quarterly comparisons reflect continued
consistency of operations and do not reflect any significant trends or events
other than those noted in the comments.
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. While the Company believes that these forward-looking
statements are based on reasonable assumptions, all such statements involve
risk and uncertainties that could cause actual results to differ materially
from those contemplated in this report.
The assumptions, risks and uncertainties relating to the forward-looking
statements in this report include those described under the caption "Cautionary
Statements Regarding Forward Looking Information" in Part I of the Company's
Form 10-K for the year ended December 31, 2004 and, from time to time, in the
Company's other filings with the Securities and Exchange Commission.
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 industries in which it operates. This
preparation requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, actual results could differ from the estimates,
assumptions, and judgments reflected in the financial statements. Certain
policies inherently have a greater reliance on the use of estimates,
assumptions, and judgments and, as such, have a greater possibility of
producing results that could be materially different than originally reported.
Management 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 within 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 March 31, 2005 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 that 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 allocates a
portion of the allowance for loan loss to these loans 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.
Results of Operations
Net income for the quarter ended March 31, 2005 totaled $1.1 million or $0.63
for basic and diluted earnings per share. Comparatively, net income for the
quarter ended March 31, 2004 was $1.1 million or $0.65 for basic and diluted
earnings per share. Operating results for the first quarter 2005 generated an
annualized return on average assets of 1.05% and an annualized return on
average equity of 11.84%, compared to 1.16% and 12.89% for the comparable
quarter in 2004. The net interest margin for the first quarter 2005 was 3.89%
compared to 4.02% for the same period 2004.
The following Table 1 presents quarterly summary results of operations.
Table 1: Summary Results of Operations
(dollars in thousands, except per share data)
March 31, December 31, September 30, June 30, March 31,
2005 2004 2004 2004 2004
Results of operations:
Interest income $5,402 $5,317 $5,115 $4,912 $4,894
Interest expense 1,799 1,644 1,551 1,428 1,480
Net interest income 3,603 3,673 3,564 3,484 3,414
Provision for loan losses 62 30 75 70 40
Net interest income after
provision for loan losses 3,541 3,643 3,489 3,414 3,374
Noninterest income 794 731 742 804 744
Noninterest expense 2,769 2,663 2,503 2,530 2,576
Income before provision for income taxes 1,566 1,711 1,728 1,688 1,542
Provision for income taxes 499 651 580 516 446
Net income $1,067 $1,060 $1,148 $1,172 $1,096
Return on average assets 1.05% 1.06% 1.17% 1.23% 1.16%
Return on average equity 11.84% 11.91% 13.52% 13.79% 12.89%
Equity to assets 8.76% 8.80% 8.50% 8.78% 8.82%
Net interest margin 3.89% 4.05% 4.00% 4.06% 4.02%
Average Balance Sheet
Loans net of unearned income $282,065 $280,220 $275,911 $272,187 $270,097
Assets 406,510 399,326 392,438 379,726 377,185
Deposits 295,349 290,011 289,556 280,249 282,835
Stockholders' equity 36,041 35,613 33,967 33,992 34,007
Ending Balance Sheet
Loans net of unearned income $285,745 $284,141 $282,617 $277,571 $270,016
Assets 402,508 410,817 391,686 385,509 375,505
Deposits 289,466 303,387 286,679 285,001 276,462
Stockholders' equity 36,000 36,084 35,088 33,622 34,697
Financial Condition Analysis
Total risk-based capital 13.19% 13.11% 12.84% 12.82% 12.85%
Net charge-offs to average loans 0.01% 0.01% 0.04% 0.00% 0.00%
Nonperforming assets to gross loans 0.48% 0.57% 0.65% 0.69% 0.61%
Efficiency ratio 61.12% 58.67% 56.34% 57.06% 59.83%
Stockholders' Data
Basic earnings per share $0.63 $0.62 $0.68 $0.70 $0.65
Diluted earnings per share $0.63 $0.62 $0.68 $0.69 $0.65
Book value per share $21.13 $21.18 $20.82 $19.95 $20.58
Dividends per share $0.22 $0.22 $0.22 $0.62 $0.22
Dividend payout ratio 35.1% 48.3% 32.2% 89.2% 33.9%
Average common shares outstanding-basic 1,704 1,699 1,686 1,686 1,686
Average common shares outstanding-diluted 1,706 1,701 1,687 1,686 1,686
Stock Price Information
High $35.40 $34.00 $30.80 $30.00 $29.00
Low 33.10 30.80 28.50 29.00 28.50
Market price at quarter end (1) 34.90 34.00 30.80 30.00 29.00
(1) Market value at year-end represents the bid price. The quotations reflect
prices, without retail mark-up, markdown or commissions, and may not
necessarily represent actual transactions.
Net Interest Income
Net interest income is the Company's principal source of revenue, accounting
for 81.9% of total operating income for the first quarter of 2005, as compared
to 82.1% for the same period in 2004. Net interest income represents the
difference between interest earned on loans, securities, and other interest
earning assets, and the interest expense associated with the deposits and
borrowings that fund them. Interest rate fluctuations together with changes in
volume and types of earning assets and interest bearing liabilities combine to
affect total net interest income. Additionally, net interest income is
impacted by the sensitivity of the balance sheet to changes in economic
conditions, competition and regulatory policies.
Net interest income on a taxable equivalent basis increased $174,000, or 4.9%,
from $3.6 million for the quarter ended March 31, 2004 to $3.7 million at March
31, 2005. The net interest margin for the first quarter 2005 decreased to
3.89% from 4.02% at March 31, 2004. The interest rate spread decreased 17
basis points to 3.55% at March 31, 2005 from 3.72% at March 31, 2004.
The decrease in the net interest margin is attributable to the mix of earning
assets in the first quarter of 2005 and the cost of interest bearing deposits
and short-term borrowings that are tied to an adjustable wholesale rate. For
the three months ended March 31, 2005, average earning assets increased $29.1
million, or 8.2%, when compared to the same period last year. Of that increase
average loans increased $12.0 million, or 4.4%, and average other interest
earning assets increased $13.9 million, or 152.5%. Loan growth during the
first quarter of 2005 was minimal and the Company's excess funds were invested
in short-term investments that were yielding 2.3% compared to loans that were
yielding on average 6.0%. As interest rates began to rise in 2004 the
Company's funding costs in the fourth quarter started to increase at a faster
pace than interest earning assets. Earning asset yields increased 8 basis
points to 5.77% at March 31, 2005 between comparable quarters while the average
rate paid on interest bearing liabilities increased 25 basis points to 2.22% at
March 31, 2005 from 1.97% at March 31, 2004. During 2005, the Company will be
challenged to control the costs of deposits and borrowings to fund the balance
sheet while growing interest earning assets.
Table 2: Quarterly Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended March 31, 2005 Three months ended March 31, 2004
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $282,065 $4,426 6.28% $270,097 $4,050 6.00%
Investment securities:
Taxable 56,227 566 4.02% 52,341 550 4.20%
Tax exempt (2) 22,468 368 6.55% 23,103 377 6.52%
Other interest earning assets 22,956 175 3.06% 9,090 65 2.87%
Total earning assets $383,716 $5,535 5.77% $354,631 $5,042 5.69%
Cash and due from banks $11,793 $11,263
Other assets 13,862 $14,058
Allowance for loan losses (2,861) (2,767)
Total assets $406,510 $377,185
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $31,838 $63 0.79% $28,719 $27 0.38%
Savings deposits 71,255 179 1.00% 74,136 111 0.60%
Time deposits 148,470 970 2.61% 140,471 900 2.56%
Short-term borrowings 22,948 141 2.46% 17,542 49 1.12%
Long-term borrowings 49,000 446 3.64% 40,000 393 3.93%
Total interest bearing liabilities $323,510 $1,799 2.22% $300,868 $1,480 1.97%
Demand deposits 43,785 39,509
Other liabilities 3,173 2,801
Stockholders' equity 36,041 34,007
Total liabilities and stockholders' equity $406,510 $377,185
Net interest income and rate spread $3,736 3.55% $3,562 3.72%
Net interest margin 3.89% 4.02%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
(3) Interest income includes net loan fees.
Provision for Loan Losses
The provision for loan losses is the periodic cost of providing an allowance
for probable loan losses. The allowance for loan losses consists of specific
and general components. The specific component relates to loans that are
individually classified as impaired loans. The general component covers non-
classified loans and is based on historical loss experience adjusted for
current factors. These factors include credit quality, loan growth, past loan
loss experience, existing economic conditions and loss exposure by loan
category. It is the Company's policy that when available information confirms
specific loans, or portions thereof, including impaired loans, are
uncollectible, those amounts are promptly charged-off against the allowance.
The provision for loan losses for the three months ended March 31, 2005 was
$61,600 compared to $40,000 for comparable time period last year. Net loan
charge-offs for the first three months of 2005 were $41,000 compared with a net
loan recovery of $5,000 for the same period in 2004. Net charge-offs to
average loans were 0.06% for the first three months of 2005. 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. However, a decline in the quality of the loan
portfolio or significant charge-offs against the allowance could affect the
adequacy of the allowance requiring higher provisions in the future. See
additional discussion under section "Allowance for Loan Losses."
Noninterest Income
Table 3: Noninterest Income
(dollars in thousands)
Three months ended
March 31, March 31, Percent
2005 2004 Change
Service fees $176 $198 -11.1%
Trust service fees 202 184 9.8%
Investment product commissions 50 105 -52.4%
Gains from sale of loans 67 47 42.6%
Bank owned life insurance 28 35 -20.0%
Other operating income 271 175 54.9%
Total noninterest income $794 $744 6.7%
Service fees declined $22,000 to $176,000 in March 2005 compared to the
comparable quarter last year due to a change in relationship with two large
commercial depositors and an increase in the earnings credit paid to business
deposit customers. As a result of updated retail and commercial fees, which
became effective April 15, the Company expects service fee income to increase
going forward.
Trust service fees increased $18,000 in the first quarter of 2005 compared to
the same period in 2004 primarily as a result of new product offerings, such as
proprietary research, and new trust accounts. The trust department updated the
fee schedule and the new schedule became effective April 1, 2005.
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions and self-directed IRA fees.
Investment product commissions decreased $55,000 between comparable quarters
due to a significant decrease in annuity product sales and the sales staff
transitioning from transaction oriented business to an asset management
relationship.
In the first quarter, gains from the sales of loans increased as customers with
in-house loans were refinancing them with the secondary market to lock in a
long-term fixed rate as interest rates are increasing. Sales of loans for the
three months ended March 31, 2005 were $3.9 million compared to $3.2 million
for the same period a year earlier. Fee income from the sale of loans to the
secondary market increased $20,000 between comparable quarters of 2005 and
2004.
The monthly crediting rates on bank owned life insurance (BOLI) have averaged
70 basis points lower in 2005 than 2004. BOLI income decreased $7,000 between
comparable quarters of 2005 and 2004.
Other operating income increased $96,000 to $271,000 for the first three months
of 2005 compared to the same period in 2004. The Company received a $78,000
payout of our investment in the Pulse ATM system from its merger with Discover
Financial Services.
Noninterest Expense
Table 4: Noninterest Expense
(dollars in thousands)
Three months ended
March 31, March 31, Percent
2005 2004 Change
Salaries and employee benefits $1,549 $1,424 8.8%
Occupancy 345 332 3.9%
Data processing and information systems 117 99 18.2%
Amortization of intangibles 77 83 -7.2%
Other operating expenses 681 638 6.7%
Total noninterest expenses $2,769 $2,576 7.5%
Salaries and employee benefits increased $125,000 for the first quarter of 2005
compared to the same period in 2004. The number of full-time equivalent
employees increased to 138 at March 31, 2005 from 130 at March 31, 2004. The
Company is in the process of filling the new positions for the Rib Mountain
branch that will be opening in July 2005 and other new positions within the
Bank.
Data processing and information systems expenses increased due to new
maintenance agreements for equipment purchased during the fourth quarter 2004.
The purchased core deposit intangible is amortized using a systematic method
over an eight year period and will be fully amortized in September 2005.
Occupancy expense increased due to increased utility costs and additional
operating expenses of the Minocqua branch that opened in the fourth quarter
2004. Other operating expenses increased $43,000 as a result of marketing
expense and legal and accounting expense, primarily the result of increased
costs related to U.S. Securities and Exchange Commission (SEC) compliance.
This expense may be adjusted during 2005 as the SEC extended the original
compliance date of Section 404 of the Sarbanes-Oxley Act for non-accelerated
filers until 2006. Offsetting these increases was a $24,000 decrease in loan
servicing costs due to a reduction in holding costs associated with real estate
and repossessed property owned and losses taken upon sale of various properties
during the first quarter 2004.
Balance Sheet Analysis
Loans
At March 31, 2005, total loans increased $1.6 million, or 0.6%, to $286.3
million from $284.7 million at December 31, 2004. Loan growth was in
commercial real estate and real estate constructions loans growing $5.0 million
and $1.9 million, respectively. Growth in commercial real estate and
construction loans occurred principally from the newer bank markets. Real
estate residential loans decreased $2.5 million as customers with in-house bank
loans are refinancing their loans in the secondary market to lock in a long-
term fixed rate as interest rates are rising.
Table 5: Period End Loan Composition
(dollars in thousands)
March 31, % of March 31, % of December 31, % of
2005 total 2004 total 2004 total
Commercial $46,211 16.2% $42,853 15.8% $48,205 16.9%
Real estate commercial 99,357 34.7% 90,912 33.6% 94,349 33.1%
Agricultural 35,130 12.3% 36,381 13.4% 35,721 12.6%
Real estate construction 11,561 4.0% 9,671 3.6% 9,667 3.4%
Real estate residential 85,687 29.9% 81,667 30.2% 88,220 31.0%
Installment 8,343 2.9% 9,136 3.4% 8,525 3.0%
Total loans (including loans held for sale) $286,289 100.0% $270,620 100.0% $284,687 100.0%
Allowance for Loan Losses
The loan portfolio is the Company's primary asset subject to credit risk.
Credit risk is controlled by detailed underwriting procedures, comprehensive
loan administration, and ongoing review of borrowers' outstanding loans and
commitments. The allowance for loan losses represents management's estimate of
an amount adequate to provide for potential losses in the loan portfolio.
Asset quality administration, including early identification of problem loans
and timely resolution of problems, further enhances management of credit risk
and minimization of loan losses. Management reviews the adequacy of the
allowance for loan losses on a quarterly basis. Factors considered by
management include past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of loan classification, and current
economic conditions. The Company has an internal risk analysis and review
staff that continuously reviews loan quality.
After problem and watch list loans are identified, management will allocate a
portion of the allowance for loan loss to cover management's estimate of
probable loss. Management then estimates the potential loss for the remainder
of the loan portfolio. Each loan type is broken into categories based on
delinquency, specialty credits and rating code and a percentage of the
allowance is allocated based on loan category balances. To the extent that the
current allowance is sufficient or insufficient to cover management's best
estimate of probable loss, management adjusts the provision for loan losses
accordingly.
Based on management's analysis of the loan portfolio risk at March 31, 2005 a
provision for loan loss of $61,600 was recorded for the three months ended
March 31, 2005, an increase of $21,600 compared to the same period in 2004.
Table 6: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Three months ended Year ended
March 31, December 31,
2005 2004 2004
Allowance for loan losses at
beginning of year $2,820 $2,732 $2,732
Loans charged off (45) (11) (186)
Recoveries 4 16 59
Provision for loan losses 62 40 215
Allowance for loan losses at end
of period $2,841 $2,777 $2,820
Nonperforming assets
Nonaccrual loans not considered
Impaired $170 $810 $758
Impaired loans $854 $457 $432
Accruing loans past due 90 days
or more 16 23 43
Restructured loans 320 359 322
Total nonperforming loans 1,360 1,649 1,555
Other real estate owned 0 0 72
Total nonperforming assets $1,360 $1,649 $1,627
Ratios
Ratio of allowance for loan losses
to net charge offs 17.3 - 22.2
Ratio of allowance for loan losses
to total loans at end of period 0.99% 1.03% 0.99%
Ratio of net charge-offs during the
period to average loans outstanding 0.06% 0.00% 0.05%
Nonperforming loans to total loans 0.48% 0.61% 0.55%
Nonperforming assets to total assets 0.34% 0.44% 0.40%
In the opinion of management, the allowance for loan losses was adequate as of
March 31, 2005. While management uses available information to recognize
losses on loans, future adjustments to the allowance for loan losses may be
necessary based on changes in economic conditions and the impact of such
changes on borrowers.
Nonperforming Loans and Other Real Estate Owned
Nonperforming loans include non-accrual loans including those defined as
impaired under current accounting standards, guaranteed loans 90 days or more
past due but still accruing, and restructured loans. Additionally, whenever
management becomes aware of facts that may adversely impact on the collection
of principal or interest on loans, it is practice to place such loans on
nonaccrual status immediately rather than waiting until the loans become 90
days past due. All interest accrued but not collected for loans that are
placed on nonaccrual status or charged-off is reversed to interest income. The
interest on these loans is accounted for on the cash basis until qualifying for
return to accrual status. Loans are returned to accrual status when all the
principal and interest amounts contractually due have been collected and there
is reasonable assurance that repayment will continue within a reasonable time
frame.
Restructured loans involve the granting of a concession to the borrower
involving the modification of terms of the loan, such as changes in payment
schedule or interest rate.
Nonperforming loans were $1.4 million at March 31, 2005 compared to $1.6
million at December 31, 2004. Nonaccrual loans represented $170,000 of
nonperforming loans at March 31, 2005. During the first quarter of 2005 two
loan credits totaling $353,000 were reclassified from nonaccrual loans not
considered impaired to the impaired loan category. Restructured loans were
$320,000 at March 31, 2005 compared to $322,000 at December 31, 2004.
The Company did not own any other real estate at March 31, 2005. Other real
estate owned represents property that the Company acquired through foreclosure
or in satisfaction of debt. Other real estate owned at December 31, 2004
totaled $72,000 and consisted of two properties.
Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent
Liabilities
The Company utilizes a variety of financial instruments in the normal course of
business to meet the financial needs of its customers. These financial
instruments include commitments to extend credit, commitments to originate
residential mortgage loans held for sale, commercial letters of credit, and
standby letters of credit.
The following is a summary of the Company's off-balance sheet commitments, all
of which were lending-related commitments:
Table 7: Lending Related Commitments
March 31, 2005 December 31, 2004
Commitments to extend credit:
Fixed rate $14,148 $16,302
Adjustable rate 24,855 16,458
Standby and irrevocable
letters of credit-fixed rate 4,550 4,451
Credit Card Commitments 5,289 5,208
The following table summarizes the Company's significant contractual
obligations and commitments at March 31, 2005:
Table 8: Contractual Obligations
Total < 1year 1-3 years 3-5 years > 5 years
Long-term Federal Home Loan Bank
advances $49,000 $12,000 $24,500 $12,500 $-
Premises and equipment purchase
Commitments 1,580 1,580 - - -
Total contractual obligations $50,580 $13,580 $24,500 $12,500 $-
Liquidity
The Bank's Asset Liability Management process provides a unified approach to
management of liquidity, capital, interest rate risk, and providing adequate
funds to support the borrowing requirements and deposit flow of its customers.
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 decreased $13.9 million from December 31, 2004. Historically, at year-end
municipalities and business customers temporarily deposit excess funds into
transaction accounts that are withdrawn during the first quarter. Increased
competition continues to limit the Company's deposit growth. The Company will
continue to attempt to attract and retain deposits through competitive pricing
of deposit products and established products. Continued deposit outflow will
cause the Bank to utilize alternative funding sources which may be 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
$25.3 million compared with $19.2 million at December 31, 2004. Borrowings
from the FHLB totaled $49.0 million. Typically FHLB borrowings will increase
in order to fund growth in the loan portfolio. The Company will borrow monies
if borrowing is a less costly form of funding loans compared to the cost of
acquiring deposits or if deposit growth is insufficient.
The Bank's liquidity resources were sufficient in the first three months of
2005 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 provided funds in 2005, 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.
Table 9: Period End Deposit Composition
(dollars in thousands)
March 31, % of March 31, % of December 31, % of
2005 total 2004 total 2004 total
Non-interest bearing demand $40,943 14.1% $39,077 14.1% $50,814 16.8%
Interest-bearing demand 30,579 10.6% 25,863 9.4% 34,533 11.4%
Savings deposits 69,597 24.0% 71,578 25.9% 69,250 22.8%
Time deposits 135,347 46.8% 129,444 46.8% 134,090 44.2%
Brokered certificates of deposit 13,000 4.5% 10,500 3.8% 14,700 4.9%
Total $289,466 100.0% $276,462 100.0% $303,387 100.0%
Capital
Stockholders' equity at March 31, 2005 remained relatively unchanged at $36.0
million in comparison to December 31, 2004. Stockholders' equity at March 31,
2005 included a $436,000 accumulated other comprehensive loss, related to the
fair market value of securities available for sale compared to a comprehensive
gain of $343,000 at December 31, 2004. The rising interest rate environment has
caused the fair market value of the investment portfolio to decrease from year-
end.
Cash dividends of $0.22 per common share were paid in the first three months of
March 31, 2005 and 2004. Total funds utilized in the payment of dividends were
$375,000 in the first three months of 2005, as compared to $371,000 in 2004.
The adequacy of the Company's capital is reviewed regularly to ensure
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of March 31, 2005 the Company's
capital ratios were well in excess of regulatory minimums.
The following are the Company's risk based capital ratios for the previous five
quarters:
Table 10: Capital Ratios
Tier 1 Capital Total Capital
March 31, 2005 12.2% 13.2%
December 31, 2004 12.1% 13.1%
September 30, 2004 11.9% 12.8%
June 30, 2004 11.8% 12.8%
March 31, 2004 12.1% 13.1%
Regulatory minimum requirements 4.0% 8.0%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There was no material change in the information provided in response to Item 7A
of the Company's Form 10-K for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Chief Accounting Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon,
and as of the date of such evaluation, the President and Chief Executive
Officer and the Chief Accounting Officer concluded that the Company's
disclosure controls and procedures were effective in all material respects.
There have been no significant changes in the Company's internal controls or in
other factors during the period covered by this report which could
significantly affect internal controls, nor were there any significant
deficiencies or material weaknesses identified which required any corrective
action to be taken.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K.
Exhibit
NUMBER DESCRIPTION
10.1 Mid-Wisconsin Financial Services, Inc. 2005 Directors' Deferred
Compensation Plan
10.2 Mid-Wisconsin Financial Services, Inc. Directors' Deferred Compensation
Plan as last amended May 1, 2005
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: MAY 16, 2005 GENE C. KNOLL
Gene C. Knoll, President and Chief Executive Officer
(Principal Executive Officer)
Date: MAY 16, 2005 RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Accounting Officer)
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the quarterly period ended March 31, 2005
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R.232.102(d))
The following exhibits are filed as part this report:
10.1 Mid-Wisconsin Financial Services, Inc. 2005 Directors' Deferred
Compensation Plan
10.2 Mid-Wisconsin Financial Services, Inc. Directors' Deferred Compensation
Plan as last amended May 1, 2005
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