Attached files
FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 06-1169935
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
132 West State Street
Medford, WI 54451
(Address of principal executive offices) (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 whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Date File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of "accelerated filer and large accelerated filer" in Rule
12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 6, 2009 there were 1,646,819 shares of $0.10 par value common
stock outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008 3
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 2009 and 2008 4
Consolidated Statements of Changes in
Stockholders' Equity
Nine Months Ended September 30, 2009 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2009 and 2008 6-7
Notes to Consolidated Financial Statements 8-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-45
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 46
Item 4. Controls and Procedures 46
PART II OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 1A. Risk Factors 46-47
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 47
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of
Security Holders 47
Item 5. Other Information 47
Item 6. Exhibits 47
Signatures 48
Exhibit Index 48
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheets ($000's)
September 30, 2009 December 31, 2008
(Unaudited) (Audited)
ASSETS
Cash and due from banks $7,985 $9,605
Interest-bearing deposits in other financial
institutions 2,358 20
Federal funds sold 6,223 22,300
Securities available for sale - at fair value 104,377 81,038
Loans held for sale 1,943 484
Loans, net of unamortized fees 357,865 364,381
Less: Allowance for loan losses (8,420) (4,542)
Net loans 349,445 359,839
Accrued interest receivable 2,258 1,986
Premises and equipment, net 8,391 8,965
Other investments - at cost 2,616 2,616
Other assets 9,277 9,128
TOTAL ASSETS $494,873 $495,981
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $51,261 $55,694
Interest-bearing deposits 326,109 329,981
Total deposits 377,370 385,675
Short-term borrowings 14,912 11,311
Long-term borrowings 45,929 49,429
Subordinated debentures 10,310 10,310
Accrued interest payable 1,310 1,718
Accrued expenses and other liabilities 321 1,733
Total liabilities 450,152 460,176
Stockholders' equity:
Preferred stock - No par value per share:
Authorized - 50,000 shares
Issued and outstanding -
10,500 shares in 2009 and 0 shares in 2008 10,054 0
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding -
1,646,819 shares in 2009 and 1,643,985 shares in 2008 165 164
Additional paid-in capital 11,858 11,804
Retained earnings 21,181 23,239
Accumulated other comprehensive income 1,463 598
Total stockholders' equity 44,721 35,805
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $494,873 $495,981
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 ($000's)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2009 September 30, 2008 September 30, 2009 September 30, 2008
Interest and dividend income:
Loans, including fees $5,589 $6,359 $17,229 $19,557
Securities
Taxable 929 802 2,584 2,370
Tax-exempt 118 143 373 458
Other interest and dividend income 29 52 123 188
Total interest and dividend income 6,665 7,356 20,309 22,573
Interest expense:
Deposits 1,843 2,434 5,997 7,792
Short-term borrowings 37 37 94 142
Long-term borrowings 520 593 1,492 1,790
Subordinated debentures 154 154 461 461
Total interest expense 2,554 3,218 8,044 10,185
Net interest income 4,111 4,138 12,265 12,388
Provision for loan losses 2,150 630 5,650 2,265
Net interest income after provision
for loan losses 1,961 3,508 6,615 10,123
Noninterest income:
Service fees 321 366 923 1,069
Trust service fees 262 285 748 860
Investment product commissions 51 89 169 207
Net realized gain on sale of securities
available for sale 0 0 449 0
Mortgage banking income 165 56 455 217
Other operating income 221 205 676 736
Total noninterest income 1,020 1,001 3,420 3,089
Other-than-temporary impairment losses, net
Total other-than-temporary impairment losses 316 0 374 0
Amount in other comprehensive income, before
taxes 27 0 73 0
Total impairment 289 0 301 0
Noninterest expenses:
Salaries and employee benefits 2,214 2,328 6,384 7,049
Occupancy 465 474 1,429 1,533
Data processing and information systems 157 196 485 579
Operation of other real estate 279 337 1,242 462
Legal and professional 234 198 680 558
FDIC assessment 181 47 791 68
Other operating expenses 451 580 1,651 1,819
Total noninterest expenses 3,981 4,160 12,662 12,068
Income (loss) before provision (benefit) for
income taxes (1,289) 349 (2,928) 1,144
Provision (benefit) for income taxes (614) 58 (1,437) (50)
Net income (loss) $(675) $291 $(1,491) $1,194
Preferred stock dividends, discount accretion, and
premium amortization $158 $- $387 $-
Net income (loss) attributable to common stockholders $(833) $291 $(1,878) $1,194
Basic earnings (loss) per common share $(0.51) $0.18 $(1.14) $0.73
Diluted earnings (loss) per common share $(0.51) $0.18 $(1.14) $0.73
Cash dividends declared per common share $- $0.11 $0.11 $0.44
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 ($000's)
September 30, 2009
(Unaudited)
Additional Other
Preferred Stock Common Stock Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Loss(1) Totals
Balance, December 31, 2008 0 $- 1,643,985 $164 $11,804 $23,239 $598 $35,805
Comprehensive Income:
Net income (loss) (1,491) (1,491)
Other comprehensive gain (loss) 865 865
Total comprehensive income (loss) (626)
Issuance of preferred stock 10,000 9,442 9,442
Issuance of preferred stock warrants 500 558 558
Accretion of preferred stock discount 60 (60) 0
Amortization of warrant preferred stock
premium (6) 6 0
Issuance of common stock
Proceeds from stock purchase plans 2,834 1 25 26
Common stock dividends (180) (180)
Preferred stock dividends (333) (333)
Stock-based compensation 29 29
Balance, September 30, 2009 10,500 $10,054 1,646,819 $165 $11,858 $21,181 $1,463 $44,721
(1) Disclosure of reclassification amount:
Unrealized gain arising during the period $1,294
Less: Tax expense on unrealized gains (518)
Less: Reclassification adjustment for gains realized and
included in net income 148
Less: Reclassification adjustment for tax expense
on realized gains (59)
Net unrealized losses on securities $865
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 Cash Flows ($000's)
(Unaudited)
Nine months ended September 30,
2009 2008
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income (loss) $(1,491) $1,194
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for depreciation and net amortization 727 770
Provision for loan losses 5,650 2,265
Provision for valuation allowance - other real estate 890 273
Gain on sale of investment securities (449) 0
Other-than-temporary impairment losses, net 301 0
Loss on premises and equipment disposals 4 3
Loss on sale of foreclosed real estate 149 26
Stock-based compensation 29 32
Changes in operating assets and liabilities:
Loans held for sale (1,459) 467
Other assets (840) (80)
Other liabilities (1,819) (1,336)
Net cash provided by operating activities 1,692 3,614
Cash flows from investing activities:
Net increase in interest-bearing deposits
in other financial institutions (2,338) (1)
Net decrease in federal funds sold 16,077 1,901
Securities available for sale:
Proceeds from sales 12,717 0
Proceeds from maturities 18,725 15,432
Payment for purchases (53,297) (14,973)
Net (increase) decrease in loans 2,941 (5,462)
Capital expenditures (141) (308)
Proceeds from sale of other real estate 696 223
Net cash provided by investing activities (4,620) (3,188)
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows ($000's)
(Unaudited)
Nine months ended September 30,
2009 2008
Cash flows from financing activities:
Net decrease in deposits (8,305) (5,233)
Net increase (decrease) in short-term borrowings 3,601 (6,079)
Proceeds from issuance of long-term borrowings 6,500 11,000
Principal payments on long-term borrowings (10,000) (5,000)
Proceeds from issuance of preferred stock 10,000 0
Issuance of common stock 25 29
Cash dividends paid on preferred stock (333) 0
Cash dividends paid on common stock (180) (723)
Net cash provided by (used in) financing activities 1,308 (6,006)
Net decrease in cash and due from banks (1,620) (5,580)
Cash and due from banks at beginning 9,605 15,371
Cash and due from banks at end $7,985 $9,791
Supplemental cash flow information: 2009 2008
Cash paid during the year for:
Interest $8,452 $11,107
Income taxes $395 $670
Noncash investing and financing activities:
Loans transferred to other real estate $1,804 $458
Loans charged-off $1,948 $1,472
Dividends declared but not yet paid on preferred stock $68 $-
Loans made in connection with the sale of
other real estate $- $-
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
Notes to Unaudited Consolidated Financial Statements
($000's)
Note 1 - Basis Of Presentation
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 (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 positions 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. We
have reviewed and evaluated subsequent events through the date this Form 10-Q
was filed.
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 our Annual Report on Form 10-K, for the year ended
December 31, 2008 ("2008 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, but
are not limited to, the determination of the allowance for loan losses, the
valuation of other real estate and repossessed assets, and the valuations of
investments.
New Accounting Pronouncements
On July 1, 2009, the Financial Accounting Standards Board ("FASB") issued the
Accounting Standards Codification ("ASC") which became the single source of
authoritative non-governmental U.S. Generally Accepted Accounting Principles
("GAAP"). The Codification, which became effective in the third quarter of
2009, did not have a material financial impact on the Company's financial
statements as the statement was not intended to change GAAP, but did change
references in financial statements and accounting policies.
On January 1, 2008, the Company adopted the FASB issued amendments within ASC
820-Fair Value Measurements and Disclosures regarding fair value measurements.
The Company adopted modifications within ASC 820-10 on January 1, 2009 for all
nonfinancial assets and liabilities with no material impact on its results of
operations, financial position and liquidity.
In April 2009, FASB issued amendments within ASC 320 Investments-Debt and
Equity Securities which provided guidance on how entities will evaluate
whether a debt or equity security is other than temporary impaired. The
adoption of the changes within this statement, ASC 320-10-65, did not have a
significant impact on our financial statements.
In April 2009, the FASB issued amendments within ASC 820-10-65 which provided
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. This
statement which was codified within ASC 820 also includes guidance on
identifying circumstances that indicate a transaction is not orderly. The
adoption of this statement did not have a significant impact on our financial
statements.
In April 2009, the FASB issued amendments within ASC 825 Financial Instruments
to require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual
statements. See Note 4- Fair Value Accounting for additional disclosure
requirements regarding the adoption of ASC 825-10-65 which did not have a
material impact on our financial statements.
In May 2009, the FASB issued an amendment within ASC 855 Reorganizations
established general standards for setting forth the period after the balance
sheet date during which management shall evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements,
and the circumstances under which entities shall recognize such events after
the balance sheet date in its financial statements. The adoption of this
standard and the required disclosures in ASC 855-10 did not have a material
impact on our consolidated financial statements.
In June 2009, the FASB issued an amendment to ASC 860 Transfers and Servicing
which among other things amends the criteria for whether a transfer qualifies
for sale accounting when only a portion of a financial asset is transferred.
This guidance impacts many types of financial assets (e.g. loan
participations, sales of mortgages or installment loans) occurring after the
effective date of November 15, 2009. The adoption of this amendment is not
expected to have a material effect on our consolidated financial statements.
In September 2009, the FASB also issued an amendment to ASC 810 Consolidation
which changes the consolidation rules as they apply to variable interest
entities. This guidance is effective January 1, 2010 and is intended to
address concerns about companies' ability to structure transactions to avoid
consolidation. The adoption of this amendment is not expected to have a
material effect on our consolidated financial statements.
In August 2009, the FASB amended ASC 820 by issuing Accounting Standards
Update ("ASU") 2009-05 which provides additional guidance on measuring the
fair value of liabilities. The guidance, which will become effective in the
fourth quarter of 2009, clarifies the application of certain valuation
techniques and addresses certain practical difficulties in measuring fair
value. No new fair value measurements are required by the guidance. The
adoption of ASU 2009-05 is not expected to have a material effect on our
consolidated financial statements.
In September 2009, the FASB issued the proposed statement which would increase
significantly the Allowance for Loan and Lease Losses ("ALLL") disclosures
required by financial institutions beginning in the fourth quarter of 2009.
This proposed statement addresses disclosures only and does not seek to change
recognition or measurement. However, the disclosures do represent a meaningful
change in practice. The adoption of this statement will expand the disclosures
of the ALLL in the 2009 Annual Report.
Note 2 - Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are based upon the net income (loss)
available to common stockholders and the weighted average number of common
shares outstanding. Diluted earnings (loss) per common share include the
potential common stock shares issued if outstanding stock options were
exercised. For 2009 and 2008, the impact of stock options on the calculation
of earnings per share has been anti-dilutive.
Presented below are the calculations for basic and diluted earnings (loss)
per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands, except per share data)
Net income (loss) $(675) $291 $(1,491) $(1,194)
Preferred dividends and discount accretion (158) 0 (387) 0
Net income (loss) available to common
stockholders (833) 291 (1,878) (1,194)
Weighted average shares outstanding 1,646 1,643 1,645 1,642
Effect of dilutive stock options outstanding 0 0 0 0
Diluted weighted average shares outstanding 1,646 1,643 1,645 1,642
Earnings (loss) per common share:
Basic $(0.51) $0.18 $(1.14) $(0.73)
Diluted $(0.51) $0.18 $(1.14) $(0.73)
Note 3 - Other Real Estate
(dollars in thousands)
A summary of Other Real Estate ("ORE"), which is included in other assets, is
as follows:
September 30, December 31,
2009 2008
Beginning Balance $2,556 $2,352
Transfer of loans at net realizable value to ORE 1,804 895
Sales/lease proceeds, net (696) (407)
Net loss from sale of ORE (149) (11)
Provision charged to operations-net (890) (273)
Total other real estate, net of valuation reserve $2,625 $2,556
During the third quarter of 2009, the amount of loans transferred at
realizable value to ORE totaled $1,099. Sales of ORE properties during the
third quarter of 2009 totaled $324 with losses generated on those sales of
$73. During the same period, additional impairment write-downs of $130 were
recorded.
Changes in the valuation reserve for losses on other real estate were as
follows:
September 30, December 31,
2009 2008
Beginning Balance $2,616 $2,343
Provision charged to operations-gross 890 273
Amounts related to ORE disposed of (334) 0
Balance at end of period $3,172 $2,616
In 2007, the collateral and properties which secured loans to a former car
dealership and its owners ("Impaired Borrower") were surrendered to Mid-
Wisconsin Bank ("Bank") as described in the 2008 Form 10-K. The properties of
the Impaired Borrower are the largest assets in ORE for each of the periods
shown above. The amounts remaining as nonperforming assets, included in ORE
or other repossessed assets related to the Impaired Borrower, totaled $1,495
and $2,514 at September 30, 2009 and December 31, 2008, respectively.
Note 4 - Fair Value Accounting
(dollars in thousands)
Effective January 1, 2008, the Company adopted the amendments within ASC 820
codified within ASC 820-10 regarding fair value measurements. The standard
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value. We measure or monitor selected assets
on a fair value basis. Fair value is used on a recurring basis for certain
assets, such as securities available for sale and loans held for sale, in
which fair value is the primary basis of accounting. This statement describes
three levels of inputs that may be used to measure fair value (the fair value
hierarchy). The level of an asset or liability within the fair value A
hierarchy is based on the lowest level of input significant to the fair value
measurement of that asset or liability.
In accordance with ASC 820-35, the following is a brief description of each
level of the fair value hierarchy:
LEVEL 1-Fair value measurement is based on quoted prices for identical
assets or liabilities in active markets.
LEVEL 2-Fair value measurement is based on 1) quoted prices for similar
assets or liabilities in active markets; 2) quoted prices for
identical or similar assets or liabilities in markets that are not
active; or 3) valuation models and methodologies for which all
significant assumptions are or can be corroborated by observable
market data.
LEVEL 3-Fair value measurement is based on valuation models and
methodologies that incorporate at least one significant assumption
that cannot be corroborated by observable market data. Level 3
measurements reflect the Company's estimate about assumptions
market participants would use in measuring fair value of the asset
or liability.
Some assets and liabilities, such as securities available for sale and
impaired loans, are measured at fair values on a recurring basis under
accounting principles generally accepted in the United States. Other assets
and liabilities, such as loans held for sale and other real estate, are
measured at fair values on a nonrecurring basis.
Following is a description of the valuation methodology used for each asset
and liability measured at fair value on a recurring or nonrecurring basis, as
well as the classification of the asset or liability within the fair value
hierarchy.
Securities available for sale - Securities available for sale may be
classified as Level 1, Level 2, or Level 3 measurements within the fair value
hierarchy. Level 1 securities include equity securities traded on a national
exchange. The fair value measurement of a Level 1 security is based on the
quoted price of the security. Level 2 securities include U.S. government and
agency securities, obligations of states and political subdivisions, corporate
debt securities, and mortgage related securities. The fair value measurement
of a Level 2 security is obtained from an independent pricing service and is
based on recent sales of similar securities and other observable market data.
Level 3 securities include trust preferred securities that are not traded in a
market and three non-agency mortgage-backed securities. The fair value
measurement of a Level 3 security is based on a discounted cash flow model
that incorporates assumptions market participants would use to measure the
fair value of the security.
Loans held for sale - Loans held for sale in the secondary market are carried
at the lower of aggregate cost or estimated fair value. The fair value
measurement of a loan held for sale is based on current secondary market
prices for similar loans, which is considered a Level 2 non recurring fair
value measurement.
Loans - Loans are not measured at fair value on a recurring basis. However,
loans considered to be impaired are measured at fair value on a nonrecurring
basis. The fair value measurement of an impaired loan that is collateral
dependent is based on the fair value of the underlying collateral. All other
impaired loan fair value measurements are based on the present value of
expected future cash flows discounted at the applicable effective interest
rate. Fair value measurements of underlying collateral that utilize
observable market data such as independent appraisals reflecting recent
comparable sales are considered Level 2 measurements. Other fair value
measurements that incorporate estimated assumptions market participants would
use to measure fair value, such as discounted cash flow measurements, are
considered Level 3 measurements.
Other real estate - Other real estate is recorded at the lower of the recorded
investment in the loan at the time of acquisition or the fair value of the
underlying property collateral, less estimated selling costs. The fair value
measurement of other real estate is based on observable market data such as
independent appraisals, tax bills or comparable sales, which are considered a
Level 2 measurement.
Information regarding the fair value of assets measured at fair value on a
recurring basis as of September 30, 2009 follows.
Assets and Liabilities Measured on a Recurring Basis
Fair Value Measurements Using
September 30, 2009 Level 1 Level 2 Level 3
Securities available for sale $104,377 $- $101,316 $3,061
Impaired loans $8,719 $- $- $8,719
The table below presents the balance sheet amounts for the nine months ended
September 30, 2009 for the financial instruments measured on a recurring basis
and classified within Level 3 of the fair value hierarchy.
Securities Impaired Loans
Balance, December 31, 2008 $1,952 $6,276
Total gains (losses) (realized/unrealized)
Included in earnings (301) (4,670)
Included in other comprehensive income (74) 0
Purchases, issuances and settlements 0 (1,166)
Transfers in and/or out of Level 3 1,484 8,279
Balance, September 30, 2009 $3,061 $8,719
See also Note 5 - Investment Securities for a discussion of Level 3 securities.
For purposes of impairment testing, nonaccrual loans greater than an
established threshold are individually evaluated for impairment. Substantially
all of these loans are collateral dependent. A valuation allowance is recorded
for the excess of the loan's recorded investment over the fair value of the
collateral less selling costs. This valuation allowance is a component of the
allowance for loan losses. The fair value is determined based on third-party
appraisals, tax bills, sales of similar properties less estimated selling
costs and other factors including estimated holding periods if foreclosure
occurs. The carrying value of the impaired loans that were substantially
collateral-dependent were $12,024 and $7,072 with a specific allocation for
loan losses of $3,305 and $800 at September 30, 2009 and December 31, 2008,
respectively.
Assets and Liabilities Measured on a Nonrecurring Basis
Fair Value Measurements Using
September 30, 2009 Level 1 Level 2 Level 3
Loans held for sale $1,943 $- $1,943 $-
Other real estate $2,625 $- $2,625 $-
The fair value of loans held for sale is based on observable current price in
the secondary market in which loans trade. All loans held for sale are
categorized based on commitments received from secondary sources that the
loans qualify for placement at the time of underwriting and at an agreed upon
price. A gain or loss is recognized at the time of sale reflecting the present
value of the difference between the contractual interest rate of the loan and
the yield to investors.
The fair value of other real estate is based on observable market data such as
independent appraisals or comparable sales. Any write-down in the carrying
value of a property at the time of acquisition is charged to the allowance for
loan losses. Any subsequent write-downs to reflect current fair market value,
as well as gains and losses on disposition are treated as period costs.
The following table summarizes the information required within ASC 820:
September 30, 2009 December 31, 2008
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term
investments $16,566 $16,566 $31,925 $31,925
Securities and other
investments 106,993 107,486 83,654 83,692
Net loans 351,388 351,565 360,323 358,716
Accrued interest receivable 2,258 2,258 1,986 1,986
Financial liabilities:
Deposits 377,370 383,558 385,675 383,389
Short-term borrowings 14,912 14,912 11,311 11,311
Long-term borrowings 45,929 46,941 49,429 50,742
Subordinated debentures 10,310 10,310 10,310 10,310
Accrued interest payable 1,310 1,310 1,718 1,718
The Company estimates fair value of all financial instruments regardless of
whether such instruments are measured at fair value. The following methods and
assumptions were used by the Company to estimate fair value of financial
instruments not previously discussed.
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.
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.
Deposits - 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 are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Subordinated Debentures - The carrying amount of the debt approximates fair
value.
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.
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 particular
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, intangibles, other assets and other
liabilities. The value of long-term relationships with depositors (core deposit
intangibles) is not reflected and this value is significant. 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.
Because of the wide range of valuation techniques and the numerous assumptions
which must be made, it may be difficult to compare our Company's fair value to
that of other financial institutions. It is important that the many assumptions
discussed above be considered when using the estimated fair value disclosures
and to realize that because of the uncertainties, the aggregate fair value
should in no way be construed as representative of the underlying value of the
Company.
Note 5- Investment Securities
(dollars in thousands)
The amortized cost and fair values of investment securities available for sale
were as follows.
Gross Gross
Amortized Unreal Unreal Fair
Cost Gains Losses Value
September 30, 2009:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $1,200 $2 $1 $1,201
Mortgage-backed securities 82,132 1,965 124 83,973
Obligations of states and political
subdivisions 17,246 621 - 17,867
Corporate debt securities 1,386 - 201 1,185
Total debt securities 101,964 2,588 326 104,226
Equity securities 151 0 0 151
Totals $102,115 $2,588 $326 $104,377
Gross Gross
Amortized Unreal Unreal Fair
Cost Gains Losses Value
December 31, 2008:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $200 $1 $- $201
Mortgage-backed securities 64,421 1,162 510 65,073
Obligations of states and political
subdivisions 13,693 318 5 14,006
Corporate debt securities 1,675 - 68 1,607
Total debt securities 79,989 1,481 583 80,887
Equity securities 151 0 0 151
Totals $80,140 $1,481 $583 $81,038
The amortized cost and fair values of investment securities available for sale
at September 30, 2009, 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.
Debt Securities Available for Sale Amortized Cost Fair Value
Due in one year or less $1,351 $1,361
Due after one year through five years 9,610 9,972
Due after five years through ten years 7,390 7,638
Due after ten years through fifteen years 1,481 1,282
Mortgage-backed securities 82,132 83,973
Total debt securities available for sale $101,964 $104,226
The following represents gross unrealized losses and the related fair value of
investment securities available for sale, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position, at September 30, 2009.
Less Than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
September 30, 2009:
US Treasury obligations and
direct obligations of U.S.
government agencies $199 $1 $- $- $199 $1
Mortgage-backed securities 2,931 7 1,630 116 4,561 123
Corporate securities 184 27 175 175 359 202
Obligations of states and
political subdivisions 0 0 0 0 0 0
Total $3,314 $35 $1,805 $291 $5,119 $326
December 31, 2008:
US Treasury obligations and
direct obligations of U.S.
government agencies $- $- $- $- $- $-
Mortgage-backed securities 159 2 9,420 508 9,579 510
Corporate securities - - 282 68 282 68
Obligations of states and
political subdivisions 494 5 - - 494 5
Total $653 $7 $9,702 $576 $10,355 $583
Each quarter the Company reviews its investment securities portfolio to
determine whether unrealized losses are temporary or other-than-temporary
impairment ("OTTI"), based on an evaluation of the creditworthiness of the
issuers/guarantors, as well as the underlying collateral, if applicable. The
analysis includes an evaluation of the type of security, the length of time and
extent to which the fair value has been less than the security's carrying
value, the characteristics of the underlying collateral, changes in security
ratings, the financial condition of the issuer discounted cash flow analysis
and industry specific economic conditions. In addition, to its debt securities,
the Company may also evaluate payment structure, whether there are defaulted
payments or expected defaults, prepayment speeds, and the value of any
underlying collateral. Independent pricing sources are utilized for selective
securities to obtain fair values and have discounted cash flow valuations
performed. When the discounted cash flow analysis from those independent
pricing sources indicates that it is probable that all future principal and
interest payments would be received in accordance with their original
contractual terms and the intent is not to sell the security and there is an
expectation of a recovery the cost basis of the security and more-likely-than-
not will not be required to sell the security before recovery, the unrealized
loss is deemed temporary. The Company's assessment of the creditworthiness and
the resultant expected cash flows are complicated by the significant
uncertainties surrounding not only the specific security and its underlying
collateral but also the severity of the current overall economic downturn. The
cash flow estimates for mortgage-backed securities are based on mortgage loan
types supporting the securities, delinquency and foreclosure rates, credit
support, and weighted average loan-to-value. Changes in assumptions can result
in material changes in expected cash flows. Therefore, unrealized losses that
have been determined to be temporary, may at a later date be determined to be
other-than-temporary and have a material impact on the statement of operations.
Included in the investment portfolio are four non-agency securities that have
had valuations performed quarterly throughout 2009 for OTTI. The purpose of the
quarterly valuations was to determine if the present value of the expected cash
flows was less than the amortized costs, thereby resulting in credit loss. The
2009 quarterly valuations determined an estimated fair value for each security
based on discounted cash flow analyses. The estimates were based on the
following key valuation assumptions - collateral cash flows, prepayment
assumptions, default rates, loss severity, liquidation lag, bond waterfall and
internal rate of return. Since there is currently no active secondary market
for these types of securities these valuations are considered Level 3 inputs.
Two of the four securities that had valuations performed were found to have
credit losses since a portion of the unrealized losses is due to an expected
cash flow shortfall and, as such, were determined to be OTTI. The Company
currently has both the intent and ability to hold the securities for a time
necessary to recover the amortized cost. The total credit loss related to
these non-agency securities in 2009 amounted to $301 of which $289 was
recognized in earnings in the third quarter of 2009. The remaining unrealized
loss on these securities, before taxes, of $73 at September 30, 2009 was
determined to be due to other factors such as liquidity and interest rate risk
rather than credit risk. Unrealized losses on the securities evaluated were
recognized through accumulated other comprehensive loss on the balance sheet,
net of tax in the amount of $44.
Moody's Value at September 30, 2009
Rating Collateral Book Value Fair Value
Security 1 B3 Manufactured housing $385 $338
Security 2 Aa1 Whole loans $522 $478
Security 3 Ba1 Whole loans $635 $608
Security 4 NR Trust preferred security $211 $184
Interest on the trust preferred security, noted above, is in deferral and we
have placed it on nonaccrual status during the third quarter 2009.
Based on the Company's evaluation, management believes any individual
unrealized loss on other securities at September 30, 2009 does not represent an
other-than-temporary impairment as these unrealized losses are primarily
attributable to changes in interest rates and the current volatile market
conditions, and not credit deterioration.
Note 6- Stockholders' Equity
(dollars in thousands)
The Company's Articles of Incorporation, as approved and amended at a
shareholder meeting on January 22, 2009, authorized the issuance of 50,000
shares of no par value preferred stock. In February 2009, under the United
States Department of the Treasury ("Treasury") Capital Purchase Program
("CPP"), the Company issued 10,000 shares of preferred stock (with a
liquidation preference of $1,000 per share) and 500 warrants to purchase
Warrant Preferred Stock, which were exercised immediately by the Treasury.
Amounts recorded for Preferred Stock and Warrant Preferred Stock were estimated
based on an allocation of the total proceeds from the issuance on the relative
fair values of both instruments. Fair value of the Preferred Stock was
determined based on assumptions regarding the discount rate (market rate) on
the Preferred Stock (estimated 12%). Fair value of the Warrant Preferred Stock
is based on the value of the underlying Preferred Stock based on the Treasury's
intent to immediately exercise the warrants. The allocation of the proceeds
received resulted in the recording of a discount on the Preferred Stock and a
premium on the Warrant Preferred Stock, which will be amortized on an effective
yield basis over a five-year term. The allocated carrying value of the
Preferred Stock and Warrant Preferred Stock on the date of issuance (based on
their relative fair values) was $9,442 and $558, respectively. The allocated
carrying value of the Preferred Stock and Warrant Preferred Stock on September
30, 2009 (based on their relative fair values) was $9,502 and $552
respectively. Cumulative dividends on the Preferred Stock are payable at 5% per
annum for the first five years and at a rate of 9% per annum thereafter on the
liquidation preference of $1,000 per share. The Company is prohibited from
paying any dividend with respect to shares of common stock unless all accrued
and unpaid dividends are paid in full on the Preferred Stock for all past
dividend periods. The Preferred Stock is non-voting, other than on matters
that could adversely affect the Preferred Stock. The Preferred Stock may be
redeemed at any time with regulatory approval. The Treasury may also transfer
the Preferred Stock to a third party at any time. All $10,000 of Preferred
Stock and the Preferred Stock Warrants, under the CPP program, qualifies as
Tier 1 Capital for regulatory purposes at the holding company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
We operate as a one bank holding company and own Mid-Wisconsin Bank, chartered
as a state bank in Wisconsin. We provide a wide variety of loan, deposit and
other banking products and services to our business, individual, and municipal
customers, as well as a full range of wealth management and cash management
services.
The following discussion and analysis is presented to assist in the
understanding and evaluation of our consolidated financial condition and
results of operations as of and for the three and nine month periods ended
September 30, 2009 and 2008. It is intended to supplement 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.
Special Note Regarding Forward-Looking Statements
Statements made in this document and in documents that are incorporated by
reference which are not purely historical are forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, including any
statements regarding descriptions of management's plans, objectives, or goals
for future operations, products or services, and forecasts of its revenues,
earnings, or other measures of performance. Forward-looking statements are
based on current management expectations and, by their nature, are subject to
risks and uncertainties. These statements may be identified by the use of words
such as "believe," "expect," "anticipate," "plan," "estimate," "should,"
"will," "intend," or similar expressions. Shareholders should note that many
factors, some of which are discussed elsewhere in this document and in the
documents that are incorporated by reference, could affect the future financial
results of the Company and could cause those results to differ materially from
those expressed in forward-looking statements contained or incorporated by
reference in this document. These factors, many of which are beyond the
Company's control, include the following:
o operating, legal and regulatory risks;
o economic, political and competitive forces affecting our banking and
wealth management businesses;
o impact on net interest income from changes in monetary policy and
general economic conditions;
o the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful;
o other factors discussed under Item 1A, "Risk Factors" in the 2008 Form
10-K and elsewhere herein, and from time to time in our other filings
with the Securities and Exchange Commission after the date of this
report.
These factors should be considered in evaluating the forward-looking
statements, and you should not place undue reliance on such statements. We
specifically disclaim any obligation to update factors or to publicly announce
the results of revisions to any of the forward-looking statements or comments
included herein to reflect future events or developments.
Critical Accounting Policy
Our consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America and
follow general practices within the industry in which we operate. 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. We
believe the following policies are important to the portrayal of our financial
condition and require subjective or complex judgments, and therefore, are
critical accounting policies.
FASB ASC 320 requires that available-for-sale securities be carried at fair
value. We utilize a third-party vendor to assist in the determination of fair
values. Adjustments to the available-for-sale securities impact our financial
condition by increasing or decreasing assets and stockholders' equity, and
possibly net income.
Declines in the fair value of available-for-sale securities below their cost
that are deemed to be other- than-temporarily impaired are reflected in
earnings as realized losses. In estimating other-than-temporary losses, we
consider many factors which include: (1) the length of time and the extent to
which fair value has been less than cost, (2) the financial condition and near-
term prospects of the issuer, and (3) the intent and ability of our financial
position to retain the investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. If a security has been
impaired, and the impairment is deemed other-than-temporary and material, a
write-down will occur in that quarter. If a loss is deemed to be other-than-
temporary, it is recognized as a realized loss in the financial statements of
income with the security assigned a new cost basis.
We consider 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 our results of operations. At least quarterly, we review the assumptions
and formulas by which additions are made to the specific and general allowance
for loan losses in an effort to refine such allowance in light of the current
status of the factors involved in the calculation. The total loan portfolio is
thoroughly reviewed at least quarterly for satisfactory levels of general and
specific reserves together with impaired loans to determine if write-downs are
necessary. As a community bank, our loan portfolio is comprised primarily of
commercial real estate loans to businesses. These loans are inherently larger
in amount than loans to individual consumers and, therefore, have higher
potential losses on an individual loan basis. The individually larger
commercial real estate loans can cause greater volatility in our reported
credit quality performance measures, such as total impaired or nonperforming
loans. Our current credit risk rating and loss estimate with respect to a
single sizable loan can have a material impact on our reported impaired loans
and related loss estimates. Because our loan portfolio contains a significant
number of commercial loans with relatively large balances, the deterioration of
any one or a few of these loans can cause a significant increase in
uncollectible loans and, therefore, our allowance for loan losses. We review
our estimates on a quarterly basis and, as we identify changes in estimates,
our allowance for loan losses is adjusted through the recording of a provision
for loan losses.
While our evaluation of the allowance for loan losses at September 30, 2009
considers the allowance to be adequate, under adversely different conditions or
assumptions, we would need to increase the allowance by an amount that cannot
be reasonably estimated at this time.
We also consider the accounting policy for other real estate to be a critical
accounting policy because of the uncertainty in the timing of the sale of the
asset, and ultimate selling price of the foreclosed properties. The fair value
is based on appraised or estimated values obtained less estimated costs to
sell, and adjusted based on highest and best use of the properties, or other
changes. There are uncertainties as to the price we ultimately may accept on
the sale of the properties, including the holding costs of properties for
expenses such as utilities, real estate taxes, and other ongoing expenses and
the amount of time before the properties are sold. Such uncertainties may
affect future earnings.
The assessment of tax assets and liabilities involves the use of estimates,
assumptions, interpretations, and judgment concerning certain accounting
pronouncements and federal and state tax codes. There can be no assurance that
future events, such as court decisions or positions of federal and state taxing
authorities, will not differ from management's current assessment, the impact
of which could be significant to the consolidated results of operations and
reported earnings. The Company believes the tax assets and liabilities are
adequate and properly recorded in the consolidated financial statements.
All information included in Management's Discussion and Analysis Of Financial
Condition and Results of Operations is shown in thousands of dollars.
Results of Operations
We reported a third quarter 2009 net loss attributable to common stockholders
of ($833), or ($.51) per diluted share compared to net income of $291 or $0.18
per diluted share for the third quarter of 2008. Financial results in the third
quarter of 2009, after-tax, compared with the related 2008 period were
impacted by an elevated provision for loan losses of ($912) or ($.55) per
share, higher FDIC assessments of ($80) or ($.05) per share, and dividends
paid to the CPP program of ($158) or ($.09) per share. For the nine months
ended September 30, 2009, the net loss attributable to common stockholders was
($1,878), or ($1.14) per diluted share, compared to net income of $1,194, or
$.73 per diluted share, in the comparable 2008 period. The 2008 net income
included a $243 tax benefit relating to a favorable Tax Court ruling.
Return on average assets for the nine months ended September 30, 2009 was
(.51%) compared to .34% for the same period in 2008. Return on average common
equity for the nine months ended September 30, 2009 was (5.73%) versus 4.52%
for the same period in 2008.
Other key factors affecting current quarter and year-to-date results were:
o Net interest income on a fully taxable-equivalent basis for the first
nine months of 2009 decreased $164 or 1.3% over the amount recorded in
the related 2008 period. Interest income decreased 10% while interest
expense on deposits and borrowings decreased 21% in a comparison of the
first nine months for 2009 and 2008. The increase in lower-costing core
deposits between periods allowed for a reduction in long-term borrowings
thereby aiding the net interest margin. Average core deposits of
$379,947, an improvement of $16,761 over the related nine-month period in
2008, help fund the growth in investment securities that occurred.
o Net interest income on a fully taxable-equivalent basis of $4,185 in
the third quarter of 2009 approximated the amount recorded in the second
quarter of 2009 and also, the amount recorded in the third quarter of
2008. The net interest income generated from increased volume of
investment securities in the third quarter of 2009 help offset a decline
in loan income resulting from decreased rates.
o Loans of $357,865 at September 30, 2009, decreased $6,516 from
December 31, 2008. Commercial loan demand decreased across all of our
markets during late 2008 and little growth is expected in 2009.
Competition among local and regional banks for credit- worthy borrowers
and core deposit customers remains high.
o Total deposits were $377,370 at September 30, 2009 or $8,305 below the
December 31, 2008 level due primarily to a reduction in brokered
deposits. During the current period, consumers have shifted funds from
lower-costing savings accounts to time deposits to take advantage of
higher interest rates.
o Net charge-offs for the third quarter of 2009 were $1,330, and $1,772
for the first nine months of 2009. Net charge-offs for the three and
nine month periods of 2008 were $432 and $1,247, respectively. The
provision for loan losses was $2,150 for the third quarter of 2009
compared with $630 in the related 2008 period, and $2,750 in the second
quarter of 2009. The elevated provision for loan losses in 2009 resulted
from increased delinquencies in existing commercial real estate and
construction credits which are a result of weakness in the local
economies and in certain participation loans, further deterioration in
collateral values, as well as internal assessments of currently
performing loans with increased risk for future delinquencies. The
increased provision in 2009 resulted in increasing the allowance for loan
losses to period-end loans to 2.35% of total loans at September 30, 2009
up from 1.25% at December 31, 2008.
o Nonperforming assets were $17,466 at September 30, 2009 as compared to
$12,115 at year-end 2008 and $11,646 at September 30, 2008. The growth in
collateral-dependent nonperforming assets in the loan portfolio is the
result of the slowdown in the local economies as well as deterioration in
loan participations purchased from other banks.
o Noninterest income during the first nine months of 2009 was $3,420, up
$ 331 from the first nine months of 2008 due primarily to a $449 second-
quarter gain on sale of securities and increases in mortgage banking
income of $238. These increases were partially offset by decreases in
wealth management fees of $150 due primarily to the decline in the value
of assets under management for customers on which fees are based, and a
decrease in deposit service fees of $146.
o Noninterest expense decreased $900 between the third and second
quarters of 2009. During the second quarter of 2009, a special FDIC
assessment of $230 was incurred along with higher impairment charges
related to other real estate. In a comparison of third quarter 2009 to
2008, noninterest expense was down $179 or 4%.
o Noninterest expense for the first nine months of 2009 was $12,662, an
increase of $594 compared to the related 2008 period. Excluding the $723
increase in FDIC assessments and the $780 increase in the cost of
operating other real estate between periods, noninterest expenses would
have decreased $909 or 8% between periods.
o Stockholders' equity at September 30, 2009 was $44,721 compared to
$35,805 at December 31, 2008. On February 20, 2009, as part of the CPP
program, we issued 10,000 shares of the Company's no par value Preferred
Stock and 500 warrants to purchase Warrant Preferred Stock, which were
exercised immediately by the Treasury, for total proceeds of $10,000.
The third quarter of 2009 continued to be challenging for many financial
institutions as they continued to feel the impact of the negative business
cycle. A variety of economic factors including the devaluation of home and
commercial real estate properties which is further impacted by rising
unemployment have negatively influenced our results. We expect to be challenged
throughout the remainder of the year with credit quality and demand being
impacted by foreclosures and related sales, refinancing activities, maintaining
and improving the net interest margin, and decreased noninterest income.
The following Table 1 presents quarterly summary results of operations.
Table 1: Summary Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended,
September 30, June 30, March 31, December 31, September 30,
2009 2009 2009 2008 2008
Results of operations:
Interest income $6,665 $6,822 $6,822 $7,159 $7,356
Interest expense 2,554 2,701 2,789 3,112 3,218
Net interest income 4,111 4,121 4,033 4,047 4,138
Provision for loan losses 2,150 2,750 750 935 630
Net interest income after provision for loan
losses 1,961 1,371 3,283 3,112 3,508
Non-interest income 1,020 1,505 895 937 1,001
Other-than-temporary impairment losses, net 289 12 0 0 0
Non-interest expenses 3,981 4,881 3,801 3,942 4,160
Income (loss) before provision (benefit) for
income taxes (1,289) (2,017) 377 107 349
Provision (benefit) for income taxes (614) (923) 100 59 58
Net income (loss) $(675) $(1,094) $277 $48 $291
Preferred stock dividends, discount accretion,
and premium amortization 158 158 70 0 0
Net income (loss) available to common
stockholders $(833) $(1,252) $207 $48 $291
Return on average assets -0.66% -1.00% 0.17% 0.04% 0.24%
Return on average equity -7.38% -10.84% 2.08% 0.54% 3.28%
Return on average common equity -9.51% -13.83% 2.33% 0.54% 3.28%
Equity to average assets 8.98% 9.26% 8.21% 7.35% 7.35%
Common equity to average assets 6.95% 6.92% 7.31% 7.35% 7.35%
Net interest margin (1) 3.48% 3.53% 3.56% 3.59% 3.69%
Average Balance Sheet
Loans net of unearned income $363,619 $365,438 $364,795 $363,129 $365,879
Assets 498,733 500,149 492,333 481,705 479,973
Deposits 376,476 382,045 381,375 369,248 367,905
Short-term borrowings 15,085 10,288 9,702 11,970 10,957
Long-term borrowings 49,352 47,698 57,822 51,298 52,429
Stockholders' equity 44,767 46,317 40,417 35,429 35,274
Ending Balance Sheet
Loans net of unearned income $357,865 $359,080 $362,913 $364,381 $362,445
Assets 494,873 497,540 500,405 495,981 474,699
Deposits 377,370 369,058 385,137 385,675 364,247
Stockholders' equity 44,721 44,627 46,268 35,805 35,558
Financial Condition Analysis
Total risk-based capital 15.67% 15.06% 15.96% 13.33% 13.48%
Net charge-offs to average loans 0.37% 0.08% 0.04% 0.44% 0.12%
Nonperforming loans to gross loans 4.02% 3.21% 3.19% 2.62% 2.58%
Efficiency ratio (1) 82.04% 85.85% 75.88% 77.92% 79.62%
Net interest income to average assets (1) 0.82% 0.82% 0.84% 0.86% 0.88%
Non-interest income to average assets 0.20% 0.30% 0.18% 0.19% 0.21%
Non-interest expenses to average assets 0.80% 0.98% 0.77% 0.82% 0.87%
Stockholders' Data
Diluted earnings (loss) per common share $(0.51) $(0.76) $0.13 $0.03 $0.18
Book value per common share $21.05 $21.02 $22.04 $21.78 $21.64
Dividends per common share $- N/A $0.11 $0.11 $0.11
Dividend payout ratio 0.0% N/A 87.4% 377.1% 62.2%
Average common shares outstanding-basic 1,646 1,645 1,643 1,643 1,643
Average common shares outstanding-diluted 1,646 1,645 1,643 1,643 1,643
Stock Price Information (2)
High $12.50 $16.25 $12.80 $18.00 $21.00
Low 8.30 8.50 7.55 12.25 18.00
Bid price at quarter end 8.30 13.15 8.50 12.25 18.00
(1) Fully taxable-equivalent basis, assuming a Federal tax rate of 34% and excluding disallowed interest expense.
(2) Bid price
NET INTEREST INCOME
For the third quarter 2009, net interest income on a taxable-equivalent basis
was $4,185 compared to $4,218 in the related 2008 period. This slight decrease
of $33 in net interest income between these periods was attributable to a $697
reduction in interest earned on assets which was partially offset by a
reduction of $664 in interest paid on liabilities. Average interest-earning
assets increased $22,158 or 5% between periods due to higher volume of short-
term investments and taxable securities. Average loans for the third quarter of
2009 were $363,619 or a decrease of $2,259 over the related 2008 balance of
$365,879. The impact of a higher level of nonaccrual loans and the reversal of
interest related to these loans negatively impacted the 2009 margin in
comparison with the third quarter of 2008. Average taxable securities and
short-term investments for the third quarter 2009 were $102,254, up $26,456
from the comparable quarter in 2008. With the softer loan demand, the
additional core deposits generated within our markets were invested in taxable
securities. Average deposits for the third quarter of 2009 increased $8,571
to $376,476 compared with $367,905 for the related 2008 period. Lower-cost
savings deposits increased $6,504 while time deposits increased $3,557 during
the period comparison. The growth in core deposits between periods has allowed
us to reduce our reliance on short-term and long-term wholesale funding
sources.
The net interest margin for the third quarter of 2009 was 3.48%, 21 basis
points lower than the same period in 2008. The reduction in rates earned on
assets decreased faster than the rates paid on liabilities, thereby reducing
the rate spread and net interest margin percentage. The yield on earning
assets was 5.60% for the third quarter of 2009 or 90 basis points lower than
the comparable period last year. This rate reduction was attributable to lower
loan yields (down 82 basis points to 6.11%), and short-term investments (down
164 basis points to .63%). Loan yields were impacted by higher levels of
nonaccrual loans, a decline in yields on the loan portfolio due to the
repricing of adjustable rate loans in a lower rate environment, and reduced
loan demand in our markets.
The rate paid on interest-bearing liabilities of 2.52% for the third quarter of
2009 was 76 basis points lower than the same period in 2008. Rates on time
deposits were down 98 basis points to 3.02%, and the cost of savings deposits
fell 65 basis points, to 1.20%. The cost of short-term borrowings was down 36
basis points, while the cost of long-term borrowings declined 32 basis points
to 4.18%.
Given the current interest rate environment, the level of nonaccrual loans and
competitive challenges we expect downward pressure on the net interest margin
for the remainder of 2009.
Table 2: Quarterly Net Interest Income Analysis - Taxable Equivalent Basis
(Dollars in thousands)
Three months ended September 30, 2009 Three months ended September 30, 2008
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $363,620 $5,604 6.11% $365,879 $6,374 6.93%
Investment securities:
Taxable 83,934 929 4.39% 66,888 802 4.77%
Tax-exempt (2) 11,449 176 6.11% 13,488 209 6.16%
Other interest-earning assets 18,320 29 0.63% 8,910 51 2.27%
Total earning assets $477,323 $6,739 5.60% $455,165 $7,436 6.50%
Cash and due from banks $7,831 $8,607
Other assets 21,424 $21,214
Allowance for loan losses (7,845) (5,013)
Total assets $498,733 $479,973
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $29,314 $46 0.62% $27,217 $54 0.79%
Savings deposits 102,676 311 1.20% 98,269 458 1.85%
Time deposits 194,888 1,486 3.02% 191,331 1,922 4.00%
Short-term borrowings 15,085 37 0.97% 10,957 37 1.33%
Long-term borrowings 49,352 520 4.18% 52,429 593 4.50%
Subordinated debentures 10,310 154 5.98% 10,310 154 5.98%
Total interest-bearing liabilities $401,625 $2,554 2.52% $390,513 $3,218 3.28%
Demand deposits 49,598 51,088
Other liabilities 2,742 3,098
Stockholders' equity 44,767 35,274
Total liabilities and stockholders' equity $498,733 $479,973
Net interest income and rate spread $4,185 3.08% $4,218 3.22%
Net interest margin 3.48% 3.69%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and investments is computed on a tax-equivalent basis
using a Federal tax rate of 34% and excluding disallowed interest expense.
(3) Interest income includes loan fees of $101 in 2009 and $76 in 2008.
Table 3: Quarterly Volume/Rate Variance - Taxable Equivalent Basis
(Dollars in thousands)
2009 vs 2008
Due to
Volume Rate Net
Loans ($39) ($731) $(770)
Taxable investments 205 (77) 128
Nontaxable investments (31) (2) (33)
Other interest income 54 (76) (22)
Total interest-earning assets 189 (886) (697)
Interest-bearing demand 4 (12) (8)
Savings deposits 21 (169) (147)
Time deposits 36 (472) (436)
Short-term borrowings 14 (14) 0
Long-term borrowings (35) (37) (73)
Subordinated debentures 0 0 0
Total interest-bearing liabilities 40 (704) (664)
Net Interest Income $149 ($182) ($33)
Table 4: Year-To-Date Net Interest Income Analysis - Taxable Equivalent Basis
(Dollars in thousands)
Nine months ended September 30, 2009 Nine months ended September 30, 2008
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $364,613 $17,272 6.33% $361,466 $19,602 7.24%
Investment securities:
Taxable 75,819 2,584 4.57% 65,697 2,370 4.82%
Tax-exempt (2) 11,995 558 6.22% 14,498 683 6.30%
Other interest-earning assets 21,637 123 0.76% 9,330 187 2.67%
Total earning assets $474,064 $20,537 5.79% $450,991 $22,842 6.77%
Cash and due from banks $7,665 $8,022
Other assets 21,449 $21,590
Allowance for loan losses (6,080) (4,816)
Total assets $497,097 $475,786
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $30,053 $145 0.65% $27,591 $183 0.89%
Savings deposits 106,593 1,102 1.38% 99,446 1,477 1.98%
Time deposits 193,541 4,750 3.28% 189,419 6,132 4.32%
Short-term borrowings 11,711 94 1.07% 11,521 142 1.65%
Long-term borrowings 48,194 1,492 4.14% 52,067 1,790 4.59%
Subordinated debentures 10,310 461 5.98% 10,310 461 5.98%
Total interest-bearing liabilities $400,403 $8,044 2.69% $390,355 $10,185 3.49%
Demand deposits 49,760 46,730
Other liabilities 3,085 3,421
Stockholders' equity 43,850 35,280
Total liabilities and stockholders' equity $497,097 $475,786
Net interest income and rate spread $12,493 3.10% $12,657 3.28%
Net interest margin 3.52% 3.75%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and investments is computed on a tax-equivalent basis
using a Federal tax rate of 34% and excluding disallowed interest expense.
(3) Interest income includes loan fees of $390 in 2009 and $422 in 2008.
Table 5: Year-To-Date Volume/Rate Variance - Taxable Equivalent Basis
(dollars in thousands)
2009 vs 2008
Due to
Volume Rate Net
Loans $170 ($2,500) $(2,330)
Taxable investments 365 (151) 214
Nontaxable investments (118) (7) (125)
Other interest income 246 (310) (64)
Total interest-earning assets 663 (2,968) (2,305)
Interest-bearing demand 16 (54) (38)
Savings deposits 106 (481) (375)
Time deposits 133 (1,515) 1,382)
Short-term borrowings 2 (50) (48)
Long-term borrowings (133) (165) (298)
Subordinated debentures 0 0 0
Total interest-bearing liabilities 124 (2,265) (2,141)
Net Interest Income $539 ($703) ($164)
For the nine months ended September 30, 2009, net interest income on a taxable-
equivalent basis was $12,493 compared with $12,657 in the related 2008 period a
decrease of 1%, between periods. Average interest-earning assets increased
$23,073 or 5% between periods, due to higher levels of taxable investments and
short-term investments. Average loans for the nine months of 2009 were $364,613
or a 1% increase over the related 2008 balance of $361,466. The decline in the
local economies we serve has diminished the demand for loans to qualified
borrowers. Average deposits for the first nine months of 2009 increased $16,761
to $379,947 compared with $363,186 for the related 2008 period. Lower-cost
savings deposits increased by $9,609, time deposit volume increased $4,122 and
demand deposits grew $3,030. This growth in core deposits between periods has
allowed us to reduce our reliance on short-term and long-term wholesale funding
sources. For the first nine months of 2009 and 2008, the overall net interest
margin was 3.52% and 3.75%, respectively.
Provision for Loan Losses
The largest contributing factor to our decreased earnings for the first nine
months of 2009 was the increased level of provisions for loan losses which were
taken to offset potential losses associated with our loan portfolio. The
provision for loan losses for the first nine months of 2009 totaled $5,650
compared to $2,265 for the same period in 2008. A third quarter comparison
shows that our provision for loan losses was $2,150 in 2009 compared to $630 in
2008. The elevated provisions taken during the second and third quarters of
2009 were attributed to increased delinquency rates, specific allocations made
for several commercial borrowers due to noticeable deterioration in their
operations, declines in underlying collateral values, our loan concentration in
the dairy industry and non-performing loan participations on projects located
in Wisconsin and Northern Illinois. At September 30, 2009 and December 31,
2008 our allowance for loan losses was 2.35 % and 1.25% of total loans,
respectively. The increase is warranted based on the impact the current
economic conditions have had on many of our loan customers.
Determining the appropriate level of the provision for loan losses is based on
a methodology using both qualitative and quantitative factors to determine the
periodic cost of providing an allowance for probable incurred losses. The
allowance consists of specific and general components. The specific components
relate to loans that are individually classified as impaired or loans otherwise
classified as substandard or doubtful due to weaknesses in a borrower's ability
to service his debts. The general component covers non-classified loans and is
based on historical loss experience adjusted for current factors such as:
delinquencies, collateral values, state and local unemployment rates, portfolio
composition and concentration, specific industry segment reserves, the overall
risk rating of our portfolio and other economic factors as deemed appropriate.
We believe that the current level of provisions supports our allowance for loan
loss policy and is adequate in view of the present condition of our loan
portfolio. However, should a decline in the quality of the loan portfolio or
significant charge-offs against the allowance occur, higher provisions may be
needed in the future.
The declining market conditions which started in 2008 and continue today,
present unique and ongoing asset quality issues for the banking industry as a
whole. The continued effects of weakening economic conditions, the softening
of commercial and residential real estate markets, waning consumer confidence
may continue to impact our earnings in the form of elevated levels of loan loss
provisions due to increased levels of non-performing loans. Based on current
market conditions and our continuous monitoring of nonperforming and potential
problem loans, we anticipate that net charge-offs and provision for loan losses
will remain elevated for the remainder of 2009 and carry into a portion of
2010. Given the uncertainty and the impact of our current economic weakness,
we cannot predict with certainty the duration of asset quality stress on our
loan portfolios.
Noninterest Income
Total noninterest income for the third quarter 2009 was $1,020, up $19 from
$1,001 earned in the third quarter 2008. Mortgage banking income grew $109 in
the same period comparison. This increase was partially offset by a decrease
in wealth management fees of $61 due primarily to the decline in the value of
assets under management for customers on which fees are based, and a decrease
in deposit service fees of $45.
Noninterest income for the nine months of 2009 was $3,420 up $331 from the
related period of 2008. Investment securities gains of $449 recorded in the
second quarter of 2009 and increased mortgage banking revenue of $238 offset
the declines in revenue from deposit service fees and wealth management
revenue.
Table 6: Noninterest Income
(dollars in thousands)
Three months ended Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
2009 2008 Change 2009 2008 Change
Service fees $321 $366 -12.3% $923 $1,069 -13.7%
Wealth Management 313 374 -16.3% 917 1,067 -14.1%
Mortgage banking income 165 56 194.6% 455 217 109.7%
Net realized gain on sale of
securities available for sale 0 0 0.0% 449 0 100.0%
Other operating income 221 205 7.8% 676 736 -8.2%
Total noninterest income $1,020 $1,001 1.9% $3,420 $3,089 10.7%
Deposit service fees for the first nine months of 2009 and for the third
quarter of 2009 were lower than the comparable periods last year. The decrease
was primarily attributable to lower overdraft fee income.
The Wealth Management Services Group includes trust and brokerage services.
Income from the group decreased $150 to $917 between a comparison of the first
nine months of 2009 and 2008, primarily due to the general decline in the
equities markets of the managed portfolios of trust customers on which fees are
based.
Mortgage banking income represents income received from the sale of residential
real estate loans into the secondary market. For 2009, $36,343 of loans were
originated compared to $16,374 for the first nine months of 2008. For the first
nine months of 2009, mortgage banking income was $455 up $238 over the related
2008 period. During much of 2009, the Federal Reserve stimulated the housing
market with lower interest rates. Many consumers took the opportunity to
refinance. Our mortgage loan origination unit closed $15,649 in new loan volume
during the third quarter 2009, an increase of $4,866 from the first quarter of
2009. For the third quarter 2009, mortgage banking income for loans sold in
the secondary market was $165 compared to $56 for the related quarter one year
ago.
For the first nine months of 2009, other operating income was 8% lower than the
first nine months of 2008, primarily from a decrease in prepayment fees on
early termination of loans and the receipt in 2008 of a one-time interest
refund from the Internal Revenue Service on a settlement of a tax case.
Noninterest Expense
Noninterest expense was $3,981 for the third quarter of 2009 or $179 below the
related period of 2008. In the same period comparison, salaries and employee
benefits decreased $114, impairment write-downs of other real estate declined
$143, and other operating expenses were lower by $129 between periods due to
decreased wealth management expenses and director fees. These expenses were
partially offset by increased FDIC costs of $134 and increased legal and
professional expense related to loan collection expenses.
Total noninterest expenses for the nine month period ending September 30, 2009
and 2008 were $12,662 and $12,068, respectively. FDIC assessment expense
increased $723 between periods due to an industry-wide increase in insurance
premiums and a special fee assessed to all banks. In the second quarter of
2009, a special FDIC assessment of $230 was recorded. In addition to the
special assessment and the general increase in rate assessments, we have also
elected to participate in the FDIC's Transaction Account Guarantee Program,
which has and is likely to continue to cause an increase in our insurance
premium. Excluding the $723 increase in FDIC assessments and the $780 increase
in operation of other real estate between periods relating to impairment write-
downs, expenses would have decreased $909.
Table 7: Noninterest Expenses
(dollars in thousands)
Three months ended Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
(dollars in thousands) 2009 2008 Change 2009 2008 Change
Salaries and employee benefits $2,214 $2,328 -4.9% $6,384 $7,049 -9.4%
Occupancy 465 474 -1.9% 1,429 1,533 -6.8%
Data processing and information systems 157 196 -19.9% 485 579 -16.2%
Operation of other real estate 279 337 -17.2% 1,242 462 168.8%
Legal and professional 234 198 18.2% 680 558 21.9%
FDIC assessment 181 47 NM 791 68 NM
Other operating expenses 451 580 -22.2% 1,651 1,819 -9.2%
Total noninterest expenses $3,981 $4,160 -4.3% $12,662 $12,068 4.9%
We have focused on reducing our controllable noninterest expenses in 2009 and
2008 by reducing expenditures wherever practical. These cuts have included
staff reductions, renegotiated vendor contracts and reduced discretionary
spending. Despite these cost reduction efforts, increases in FDIC insurance and
ORE impairment writedowns resulted in an overall increase in operating
expenses.
Salaries and employee benefits expense decreased $665 for the first nine months
of 2009 compared to 2008 due to the elimination of ten full-time equivalent
positions in January 2009, and other cost-saving measures. For the nine months
ended September 30, 2009 and 2008, salaries and employee benefits comprised
approximately 50% and 58%, respectively, of total noninterest expense. For the
third quarter of 2009 and 2008, salaries and benefit expense were $2,214 and
$2,328, respectively, a decline of $114. Salaries decreased $77 primarily from
a decrease in the number of full-time equivalent employees. Salary increases,
which are effective April 1{st} of each year, were limited to approximately 2%
for 2009. Benefit expense was down $376 in a comparison of the nine-month
periods of 2009 and 2008, primarily due to the decline in the Company's
contribution to the 401(k) plan, decreases in incentive and referral pay, and a
$125 second quarter 2009 recovery of the remaining balance of the self-funded
health insurance fund.
Occupancy and equipment expense of $465 for the third quarter of 2009 decreased
$9 versus the comparable period last year, mostly due to decreased equipment
depreciation and maintenance expenses, and decreased fuel costs for the bank's
autos. Data processing and information systems decreased $39 in a comparison
of third quarter expenses, and $94 for the first nine-month comparison between
years due primarily to the renegotiation of the data communication contract.
Expenses related to the operation of other real estate properties declined by
$58 in comparison of third quarter 2009 and 2008 expenses due to lower
impairment charges on ORE properties. For the first nine months of 2009
compared with 2008, expenses associated with other real estate have increased
by $780 due to increases in impairment write-downs of properties of $907 and
increased losses incurred on the sale of ORE properties of $149.
Legal and professional fees increased $36 in a comparison of third quarter 2009
to 2008 due to increased collection efforts associated with past due loans and
additional consulting services. Legal and professional fees for the first nine
months of 2009 and 2008 were up $122 due also in part to the outsourcing of the
internal audit function of the Bank.
Income Taxes
For the first nine months of 2009, the income tax benefit increased $1,387
compared to the first nine months of 2008 due to lower taxable income. Income
tax expense in 2008 was aided by a one-time $243 tax benefit recorded in first
quarter related to a recovery as a result of a favorable Tax Court ruling.
State income taxes will be higher than prior years due to the Wisconsin
combined reporting tax legislation which became effective January 1, 2009.
Management does not believe a valuation allowance is necessary. We made the
determination that the tax benefit associated with the pre-tax losses for the
nine months ended September 30, 2009 would be realized through the ability to
carry back losses to recover taxes paid in previous years.
BALANCE SHEET ANALYSIS
Investments
The investment securities portfolio is intended to provide the Bank with
adequate liquidity, flexible asset liability management, and a source of stable
income. All securities are classified as available for sale and are carried at
market value. Unrealized gains and losses are excluded from earnings, but are
reported as other comprehensive income in a separate component of stockholders'
equity, net of income tax. Premium amortization and discount accretion are
recognized as adjustments to interest income using the interest method.
Realized gains or losses on sales are based on the net proceeds and the
adjusted carrying value amount of the securities sold using the specific
identification method.
Table 8: Investments
(dollars in thousands)
Investment Category Rating September 30, 2009 December 31, 2008
Amount % Amount %
US Treasury & Agencies Debt
AAA $1,201 100% $201 100%
Total $1,201 100% $201 100%
US Treasury & Agencies Debt as % of Portfolio 1% 0%
Mortgage-backed securities
AAA $82,537 99% $63,899 99%
AA1 478 0% 0 0%
A1 0 0% 874 1%
A2 11 0% 25 0%
BA1 608 1% 0 0%
BA3 0 0% 275 0%
B3 340 0% 0 0%
NR 0 0% 0 0%
Total $83,974 100% $65,073 100%
Mortgage-backed securities as % of Portfolio 80% 80%
Obligations of States and Political Subdivisions
AAA $- 0% $- 0%
Aa2 2,333 13% 237 2%
AA3 2,732 15% 3,320 24%
A1 338 2% 331 2%
A2 880 5% 857 6%
A3 536 3% 533 4%
Baa1 468 3% 467 3%
NR 10,580 59% 8,261 59%
Total $17,867 100% $14,006 100%
Obligation of States and Political
Subdivisions as % of Portfolio 17% 18%
Corporate Debt Securities
NR $1,335 100% 1,758 100%
Total 1,335 100% 1,758 100%
Corporate Debt Securities as % of Portfolio 2% 2%
Total Market Value of Securities $104,377 100% $81,038 100%
At September 30, 2009 and December 31, 2008, 80% of the investment portfolio
consisted of mortgage-backed securities. Obligations of states and political
subdivisions represented 17% of the portfolio at September 30, 2009, compared
to 18% at December 31, 2008.
All credit sensitive sectors in the investment portfolio, which include trust
preferred securities and common equity securities, have been under severe
credit and liquidity stress which have impacted prices and introduced the risk
of impairment write-downs. See Note 5 - Investment Securities for those
securities whose fair value is less than its cost at September 30, 2009, and
because we do not intend to sell the investment nor it is not more likely than
not that we will be required to sell the investments before recovery of their
amortized cost basis we do not consider those securities to be OTTI except for
the following:
(1) one non-agency mortgage-backed security ("non-agency MBS") had $12 of
credit component OTTI recorded during the third and second quarters of
2009, respectively, and had amortized costs and unrealized losses
totaling $385 and $47, respectively at September 30, 2009.
(2) one trust preferred security had $289 of credit component OTTI
recorded during the third quarter 2009, and had amortized costs and
unrealized losses totaling $211 and $27, respectively.
We continue to monitor our exposure to OTTI that may result due to adverse
economic conditions currently being experienced. Based on our evaluation,
management does not believe any other individual security with unrealized loss
at September 30, 2009 represents OTTI as these unrealized losses are primarily
attributable to changes in interest rates and the current volatile market
conditions; they do not represent credit deterioration.
Securities available for sale with a carrying value of $57,689 and $47,794 at
September 30, 2009 and December 31, 2008, respectively, were pledged to support
current outstanding or contingently available deposits and borrowings with
public entities, FHLB advances, repurchase agreements, federal funds purchased
and for other purposes as required.
The FHLB of Chicago announced in October 2007 that it was under a consensual
cease and desist order with its regulator, which among other things, restricts
various future activities of the FHLB of Chicago. Such restrictions may stop
the FHLB from redeeming stock without prior approval. The FHLB of Chicago last
paid a dividend in September 2007. At both September 30, 2009 and December 31,
2008, we held $2,306 in FHLB Chicago stock, of which $2,046 and $1,971
respectively, was required stock holdings to maintain the level of borrowings
outstanding with the FHLB of Chicago.
Loans
Loans totaled $357,865 at September 30, 2009, a decrease of $6,516 from
December 31, 2008 reflecting an overall decline in all segments, with the one
exception being real estate construction. Commercial, agricultural, real estate
residential, and installment loans decreased $8,107 from year-end. Although
our residential real estate activity was much higher during 2009 our portfolio
balances have decreased due to the general softness in the residential real
estate market and the volume of loans that were sold into the secondary market
as interest rates declined mid-year. The decline in this segment of the
portfolio was partially offset by growth in real estate construction of $1,591.
Commercial loan demand began to decline across all of our markets during 2008
and has shown little improvement year-to-date, nor is it expected to improve
for the remainder of 2009 and into early 2010. Competition among local and
regional banks for credit worthy borrowers and core deposit customers remains
high. As it was for 2008, our primary focus for 2009 has been and continues to
be to improve the asset quality of our loan portfolio.
State and local economic conditions continue to exhibit stress. By the end of
2008 the unemployment rate in the State of Wisconsin was approaching double
digit levels and by March 2009 had risen above 12%. By June 30, the rate had
declined to 9.2% and for September 2009 it was reported to be 7.7%.
Unfortunately the unemployment rate in five of the eight counties we serve
equaled or exceeded the unemployment rate for the State of Wisconsin. At
September 30, 2009 the unemployment rate in Taylor County, our principal
market, was 12.1% compared to 6.2% a year earlier.
In 2007 and 2008, many of our agri-business customers were performing
reasonably well as the demand from two of the largest and fastest growing
economies of the world, China and India, helped push prices for their products
to record levels. Prices have now dropped sharply for corn and milk. Margins
have narrowed to a point where even some of our best dairy farmers are having
difficulty breaking even because of lower milk prices and shrinking foreign
demand. As of September 30, 2009 approximately 8.5% of our loans were to
customers in the dairy industry.
Table 9: Loans
(dollars in thousands)
September 30, % of December 31, % of
2009 total 2008 total
Commercial $37,354 10% $39,047 11%
Commercial real estate 124,654 35% 127,209 34%
Agricultural 42,222 12% 43,345 12%
Real estate construction 47,256 13% 45,665 13%
Real estate residential 98,853 29% 100,311 28%
Installment 7,526 1% 8,804 2%
Total loans $357,865 100% $364,381 100%
Allowance for Loan Losses
Our loan portfolio is the primary asset subject to credit risk. Credit risks
within the loan portfolio are inherently different for each loan type. Credit
risk is controlled and monitored through the use of underwriting procedures,
comprehensive loan administration techniques and vigilant monitoring of our
borrowers' financial performance, payment history and outstanding commitments
and indebtedness. Active asset quality administration which includes the early
identification and timely resolution of problem credits aids in the management
of credit risks and minimization of loan losses. We strengthened our credit
administration process with the hiring of an experienced Chief Credit Officer
in October 2009.
The Bank establishes an allowance for possible loan losses through periodic
charges to earnings. The change in the allowance for loan losses is ultimately
a function of the mix and credit quality rating of our loan portfolio,
delinquency, the level of nonperforming loans and actual net charge offs
incurred. Our allowance for loan losses at September 30, 2009 was $8,420
compared with $4,542 at December 31, 2008. The allowance for loan losses to
total loans was 2.35% and 1.25% at September 30, 2009 and December 31, 2008,
respectively. Net-charge-offs during the third quarter of 2009 were $1,330, up
$898 from the same period last year. For the first nine months of 2009, net
charge-offs totaled $1,772 or .49% of average loans. For the nine months ended
September 30, 2008, net charge-offs totaled $1,247 or .34% of average loans.
Nonperforming loans at September 30, 2009 were $15,277 up $5,921 from the same
period one year ago primarily due to the increase in nonaccrual loans.
Nonaccrual loans were $14,327 at September 30, 2009 and $11,411 at June 30,
2009, as compared to $8,949 at December 31, 2008. The increase of $5,378 from
year end 2008 was primarily in commercial real estate and 1-4 family
residential properties secured by first liens.
Table 10: Allowance for loan losses
(dollars in thousands)
At and for the At and for the
Nine months ended Year ended
September 30, December 31,
2009 2008 2008
Allowance for loan losses:
Balance at beginning of period $4,542 $4,174 $4,174
Charge offs (1,948) (1,442) (3,040)
Recoveries 176 195 208
Net charge offs (1,772) (1,247) (2,832)
Provision for loan losses 5,650 2,265 3,200
Balance at end of period $8,420 $5,192 $4,542
Net loan charge offs (recoveries):
Commercial, financial and agricultural $257 $36 $175
Commercial real estate (CRE) (7) 564 1,453
Real estate construction 1,038 136 186
Total commercial 1,288 736 1,814
Installment 88 122 177
Total retail 1,376 858 1,991
Residential mortgage 396 389 841
Total net charge offs $1,772 $1,247 $2,832
RATIOS
Allowance for loan losses to net
charge offs 4.8 4.2 1.6
Allowance for loan losses to total
loans at end of period 2.35% 1.43% 1.25%
Net charge-offs during the period to
average loans outstanding 0.49% 0.34% 0.78%
Table 10: (continued) Allowance for loan losses
(dollars in thousands)
Quarterly Trends September 30, June 30, March 31, December 31, September 30,
2009 2009 2009 2008 2008
Allowance for loan losses:
Balance at beginning of period $7,600 $5,152 $4,542 $5,192 $4,994
Charge offs (1,393) (389) (166) (1,597) (445)
Recoveries 63 87 26 12 13
Net charge offs (1,330) (302) (140) (1,585) (432)
Provision for loan losses 2,150 2,750 750 935 630
Balance at end of period $8,420 $7,600 $5,152 $4,542 $5,192
Net loan charge offs (recoveries):
Commercial, financial and agricultural $150 $104 $3 $139 $47
Commercial real estate (CRE) (58) 23 28 889 121
Real estate construction 1,005 0 33 50 135
Total commercial 1,097 127 64 1,078 303
Installment 35 34 19 55 37
Total retail 1,132 161 83 1,133 340
Residential mortgage 198 141 57 452 92
Total net charge offs $1,330 $302 $140 $1,585 $432
Management's analysis of the allowance for loan losses consists of three
components: (1) establishment of specific reserve allocations on impaired
credits where a high risk of loss is anticipated but not yet realized; (2)
allocation for each loan category based on historical loan loss experience; and
(3) general reserve allocation made based on subjective economic and bank
specific factors such as unemployment, delinquency levels, industry
concentrations, lending staff experience, disposable income and changes in
regulatory or internal loan policies.
The specific credit allocation of the allowance for loan losses is based on a
regular analysis of loans over a fixed-dollar amount where the internal credit
rating is at or below a predetermined classification. The fair value of the
loan is 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. The historical loan loss allocations are
based on a five year rolling average of actual loss experience for specific
loan types and risk grades. The general portfolio allocation component is more
subjective and is reviewed at least quarterly as part of the overall analysis.
The allocation of the allowance for loans losses is based on our estimate of
loss exposure by category of loans shown in Table 11.
Table 11: Allocation of the Allowance for Loan Losses
(dollars in thousands)
September 30, December 31,
2009 2008 Change
Commercial & Agricultural $3,000 $2,957 $43
Real Estate 838 648 190
Installment 157 130 27
Impaired Loans 4,425 800 3,625
Unallocated 0 7 (7)
Total Reserve $8,420 $4,542 $3,878
The increase in the amount of the reserves at September 30, 2009 is the direct
result of increases in the level of nonperforming loans, rising delinquencies
and the economic factors applied to all loan types, including the unemployment
rate. It is difficult to predict the length or depth of the current economic
downturn and the impact it will have on businesses and individual consumers in
the markets we serve. We have seen substantial declines in local real estate
values. As many of our commercial and consumer loans are secured by real
estate, we are concerned that a prolonged downturn will further impair the
value of the real estate used to secure our loans. Such conditions have
already hindered our efforts to reduce the level of nonperforming loans.
Furthermore, we fully expect that business and individual borrowers may
encounter difficulties in meeting their debt service obligations until real
estate values stabilize and the overall economy strengthens. In the opinion of
management, the allowance for loan losses was appropriate as of September 30,
2009. 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 our
loan customers.
Nonperforming Loans and Other Real Estate Owned
The level of nonperforming loans remains a leading indicator of future loan
loss potential. Nonperforming loans are defined as loans 90 days or more past
due but still accruing, nonaccrual loans, including those defined as impaired
under current accounting standards, and restructured loans. Loans are placed
on nonaccrual status when contractually past due 90 days or more as to interest
or principal payments. Additionally, whenever management becomes aware of
facts that may adversely impact the collection of principal or interest on
loans, it is our practice to place such loans on nonaccrual status immediately
rather than waiting until the loans become 90 days past due. Previously accrued
and uncollected interest on such loans is reversed, and future payments
received are applied in full to reduce remaining loan principal. No income is
accrued or recorded on future payments until the loan is returned to accrual
status. Upon return to accrual status, the interest portion of past payments
that were applied to reduce nonaccrual principal is taken back into income.
Restructured loans involve granting of concessions to the borrower by modifying
the terms of the loan, such as changes in payment schedule or interest rate or
capitalization of unpaid real estate taxes or unpaid interest. The majority of
restructured loans represent capitalized loan interest and real estate taxes
that borrowers were unable to pay according to the original repayment terms.
Such loans are subject to senior management review and ongoing monitoring and
are made in cases where the borrower's delinquency is considered short-term
from circumstances the borrower is believed able to overcome and or the
underlying collateral value supporting the loan is more than sufficient to
cover the additional advance and no loss of principal is anticipated.
Table 12: Nonperforming Loans and Other Real Estate Owned
(dollars in thousands)
At and for the At and for the
Nine months ended Year ended
September 30, December 31,
2009 2008 2008
Nonaccrual loans not considered
impaired $3,193 $1,666 $1,877
Nonaccrual loans considered
impaired 11,134 7,347 7,072
Impaired loans still accruing
interest 890 0 0
Accruing loans past due 90 days or
more 60 21 36
Restructured loans 0 322 569
Total nonperforming loans 15,277 9,356 9,554
Other real estate owned 2,625 2,288 2,556
Other repossessed assets 454 2 5
Total nonperforming assets $18,356 $11,646 $12,115
RATIOS
Nonperforming loans to total loans 4.27% 2.58% 2.62%
Nonperforming assets to total assets 3.71% 2.45% 2.44%
At September 30, 2009, there were six borrowing relationships with nonaccrual
balances in excess of $500, while one borrower previously on nonaccrual was
returned to performing status during the quarter. These six relationships
accounted for approximately 55% of the total nonaccrual loans and consisted of
the following:
o $1,300 participation loan used to construct an ethanol plant in
southeastern Wisconsin was added to nonaccrual status in the
fourth quarter 2008. The loan is secured by real estate. A
partial charge-off of $680 was taken in third quarter 2009 and a
specific loan loss allocation of $320 remains as of September 30,
2009.
o $1,250 commercial real estate loan on nonaccrual status for
all of 2008 secured by retail/warehouse properties located in
northern Wisconsin. All payments required under an agreement with
the borrower have been made during 2009. A specific loan loss
allocation of $200 is allocated to this loan.
o $725 commercial real estate loan added to nonaccrual status
during the third quarter 2008 secured by retail/warehouse
properties in central Wisconsin. A specific loan loss allocation
of $100 was established in 2009.
Items added during the first quarter of 2009:
o $850 commercial real estate loan added to nonaccrual status
during the first quarter 2009 secured by land and modular homes in
northern Wisconsin. A specific loan loss allocation of $100 was
established in 2009.
o $725 real estate loan added to nonaccrual status during the
first quarter 2009 secured by multi-family residential rentals and
personal real estate in central Wisconsin. A specific loan loss
allocation of $50 was established in 2009.
Items added during the second quarter of 2009:
o $600 real estate loan added to nonaccrual status during the
second quarter 2009 secured by owner occupied commercial real
estate in northern Wisconsin. During the third quarter 2009 the
borrower paid down the loan. The loan was taken out of nonaccrual
and placed in performing.
Items added during the third quarter of 2009:
o $3,125 recreational facility participation loan added to
nonaccrual status during the third quarter 2009 secured by real
estate in northern Illinois. A specific loan loss allocation of
$1,600 was established in 2009.
While we believe that the value of the collateral securing the above referenced
nonaccrual loans approximates the net book value of the loans, we cannot
provide assurances that the value will be maintained or that there will be no
further losses with respect to these loans. We continue to monitor these
credits on a quarterly basis for any further deterioration. In general, the
level of non-performing assets are the direct result of loans secured by 1-4
family residential and commercial real estate properties and is a reflection of
the impact the economic conditions have had on customers in the markets we
serve. In view of current economic conditions, credit quality is not expected
to see any major signs of improvement through 2009.
The level of potential problem loans is another predominant factor in
determining the relative risk in the loan portfolio and in determining the
level of the allowance for loan losses. Potential problem loans are generally
defined by management to include loans rated as substandard by management but
that are not in nonperforming status; however, there are circumstances present
to create doubt as to the ongoing ability of the borrower to comply with
present repayment terms. The decision of management to include performing
loans in potential problem loans does not necessarily mean that we expect
losses to occur, but that management recognized a higher degree of risk
associated with these loans. The loans that have been reported as potential
problem loans are predominantly commercial loans covering a diverse range of
businesses and real estate property types. At September 30, 2009, potential
problem loans totaled $8,737, compared to $7,496 at June 30, 2009 and none at
December 31, 2008. At September 30, 2009 potential problem loans consisted of
$8,129 of commercial real estate, and $608 of commercial loans. The current
level of potential problem loans reflects management's heightened awareness of
the uncertainty of the pace at which a commercial credit may deteriorate, the
duration of asset quality stress, and uncertainty around the magnitude and
scope of economic stress that may be felt by our customers and on the
underlying real estate or other collateral values.
Other real estate totaled $2,625 and $2,556 at September 30, 2009 and December
31, 2008, respectively. The net decrease of $69 resulted from additional
properties acquired through foreclosure of $1,804 which were offset through
reductions in the balance due to impairment write-downs of $890, and losses of
$149 on sales of ORE properties of $696 in the first nine months of 2009. The
largest asset in other real estate is a former car dealership of the Impaired
Borrower. Other properties held as other real estate include six 1-4 family
residential properties, four nonfarm/nonresidential properties and 21 parcels
of recreational land in northern and central Wisconsin.
Deposits
Deposits were $377,370 at September 30, 2009, down $8,305 from year-end 2008,
including a shift in the mix of deposits. The shift in the deposit mix during
2009 was predominantly in a reduction of $9,558 in brokered deposits and an
$11,099 reduction in interest-bearing demand balances, which were offset by
growth of $16,265 in certificates of deposit since year end 2008.
Table 13: Deposit Distribution
(dollars in thousands)
September 30, % of December 31, % of
2009 total 2008 total
Non-interest bearing demand $51,261 14% $55,694 14%
Interest-bearing demand 26,757 7% 37,856 10%
Money market deposits 79,490 21% 81,655 21%
Other savings deposits 23,098 6% 21,508 6%
IRA and retirement accounts 34,601 9% 33,506 9%
Certificates of deposit 122,438 32% 106,173 27%
Brokered deposits 39,725 11% 49,283 13%
Total $377,370 100% $385,675 100%
The Bank participates in the Certificate of Deposit Account Registry Service
network ("CDARS"), which allows the Bank to accommodate depositors with large
funds seeking the full deposit insurance protection, by placing these funds in
CDs issued by other banks in the network. Through a matching system, the Bank
will receive funds back for CDs that it issues for other banks in the network,
thus allowing the Bank to retain the full amount of the original deposit. The
amount of CDARS deposits were $5,597 and $439 at September 30, 2009 and
December 31, 2008, respectively.
The retail markets we serve are continuously influenced by economic conditions,
competitive pressure from other financial institutions, and other out-of-market
investment opportunities available to customers. Due to local market
competition, we are currently paying higher rates for local deposits than what
we would have to pay for wholesale funding. We continue to focus on expanding
existing relationships and ensuring that new loan customers have deposit and
loan relationships with us.
Other Funding Sources
Other funding sources, including short-term borrowings, long-term borrowings,
and subordinated debentures, were $71,151 at September 30, 2009 compared with
$71,050 at December 31, 2008. Long-term borrowings were reduced as we increased
our short-term borrowings consisting of corporate funds in the form of
repurchase agreements at a lower funding cost. The decision of length of
maturity for these borrowings is dependent on our asset/liability position and
the amount of interest rate risk that we are willing to assume.
Contractual Obligations
We are party to various contractual obligations requiring use of funds as part
of our 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 our ability
to obtain competitive interest rates, availability of collateral for pledging
purposes supporting long-term advances, or the availability of credit from
other banks or sources.
Table 14: Contractual Obligations
(dollars in thousands)
Total < 1year 1-3 years 3-5 years > 5 years
Long-term borrowings $45,929 $10,868 $26,061 $4,000 $5,000
Subordinated debentures 10,310 - - - 10,310
Total contractual obligations $56,239 $10,868 $26,061 $4,000 $15,310
Liquidity
Liquidity management refers to the ability to ensure that cash is available in
a timely manner to meet loan demand and depositors' needs and to service
liabilities as they become due without undue cost or risk. Our holding company
and Bank have different liquidity considerations.
The primary source of funds for the holding company is dividends, management
fee income from the Bank, and proceeds from issuance of shares related to stock
options and employee stock purchase plans. These sources could be limited or
costly. The cash is used to provide for payments of dividends to shareholders,
purchase of assets, payment of salaries, benefits and other related expenses,
and to make interest payments on its debt. No dividends have been received
from the Bank since 2006. On February 20, 2009 we sold 10,000 shares of our
Preferred Stock and 500 shares of Warrant Preferred Stock to the Treasury
pursuant to the CPP program. Dividends on the Preferred Stock and Warrant
Preferred Stock issued to the Treasury will be paid on a quarterly basis in
February, May, August, and November. All dividends under this obligation have
been paid as required. While any Preferred Stock or Warrant Preferred Stock is
outstanding, we may pay dividends on our common stock, provided that all
accrued and unpaid dividends for all past dividend periods on the Preferred
Stock and Warrant Preferred Stock are fully paid. Prior to the third
anniversary of the Treasury's purchase of the Preferred Stock and Warrant
Preferred Stock, unless the stock has been redeemed or the Treasury has
transferred all of the Preferred Stock or Warrant Preferred Stock to third
parties, the consent of the Treasury will be required for us to increase our
annual common stock dividend above $.44 per common share.
The Bank meets its cash flow needs by having funding sources available to
satisfy the credit needs of customers as well as having available funds to
satisfy deposit withdrawal requests. Liquidity is derived from interest income
from loans and investments, maturities within the investment portfolio,
maturing loans, loan payments, deposit growth, other funding sources, and a
well-capitalized capital position.
Maturing investments can be a source of liquidity at the Bank, however, with
the soft loan demand to qualifying borrowers, more cash has been used to
purchase investment securities to utilize excess liquidity. Proceeds from
maturities totaling $18,725 were received during the first nine months of 2009
while investment purchases totaled $53,297 during the same period.
The scheduled maturity of loans can also provide a source of additional
liquidity. Factors affecting liquidity relative to loans are loan renewals,
loan origination volumes, loan prepayment rates, and the maturity of existing
loan portfolio. The Bank's liquidity position is influenced by changes in
interest rates, economic conditions, and competition. Conversely, loan demand
as a need for liquidity may cause us to acquire other sources of funding which
could be more costly than deposits. With the continuing slowdown of economic
activity during 2009, loans decreased $2,941 during the first nine months
compared to an increase in balances of $5,462 during the first nine months of
2008.
The decline in deposits resulted in $8,305 of cash outflow during the first
nine months of 2009. Affecting liquidity are core deposit growth levels,
certificates of deposit maturity structure, and retention and diversification
of wholesale funding sources.
Other funding sources for the Bank are in the form of corporate repurchase
agreements, federal funds purchased, FHLB advances, and long-term borrowings
with other financial institutions. Short-term borrowings increased $3,601 in
the first nine months of 2009 while long-term borrowings decreased $3,500
during the same period. Long-term borrowings and FHLB advances require the
pledging of collateral in the form of investment securities or loans.
We expect deposits 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. We expect deposit growth, including brokered deposits within our
prescribed policy limits, to be a reliable funding source in the future.
Shorter-term liquidity needs will mainly be derived from growth in short-term
borrowings, federal funds sold, 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 and management goals. The reduction in loans experienced during
the first nine months of 2009 reflects the overall slowdown in the local
economies and decreased need for additional wholesale funding.
Capital
Stockholders' equity at September 30, 2009 was $44,721 compared to $35,805 at
December 31, 2008 which reflects the additional capital acquired through the
issuance of Preferred Stock under the Treasury's CPP program. See terms of
Preferred Stock in Note 6 - Stockholders' Equity.
Stockholders' equity at September 30, 2009 included $1,463 of accumulated other
comprehensive income related to unrealized net gains on securities available
for sale, net of the tax effect. At December 31, 2008, stockholders' equity
included $598 of other comprehensive income related to unrealized net gains on
securities. Cash dividends paid in the first nine months of 2009 were $.11 per
common share compared with $.44 per common share for the related period of
2008. In the second quarter of 2009 and as disclosed in our 2008 Form 10-K, we
changed the frequency of payouts from quarterly to semi-annual dividends on our
common stock payable in August and February of each year. On August 10, 2009,
the Board of Directors announced the suspension of its dividend on its common
stock. In view of the financial challenges presented by the current economic
environment and the likelihood that this economic downturn will continue into
2010, the Board felt that the most prudent course of action was to focus on
preserving our capital position until market conditions improve.
Table 15: Capital Ratios
(dollars in thousands)
Holding Company At September 30, At December 31,
2009 2008 Minimum
Total Stockholders' Equity $44,721 $35,805
Tier 1 Capital 53,258 45,207
Total Regulatory Capital 57,927 49,749
Tier 1 to average assets 10.7% 9.4% 5.0%
Tier 1 risk-based capital ratio 14.4% 12.1% 4.0%
Total risk-based capital ratio 15.7% 13.3% 8.0%
Bank At September 30, At December 31,
2009 2008 Minimum
Total Stockholders' Equity $43,610 $39,849
Tier 1 Capital 42,147 39,251
Total Regulatory Capital 46,776 43,793
Tier 1 to average assets 8.5% 8.3% 5.0%
Tier 1 risk-based capital ratio 11.5% 10.6% 6.0%
Total risk-based capital ratio 12.8% 11.9% 10.0%
The adequacy of our 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 September 30, 2009 and December 31, 2008, the
Company's and Bank's Tier 1 risk-based capital ratios, total risk-based capital
ratios and Tier 1 leverage ratios were in excess of regulatory requirements.
The Board continually evaluates short-term and longer-term capital needs of the
holding company, and has an expressed goal of maintaining sufficient capital to
remain a well-capitalized bank and bank holding company. Our ability to pay
dividends depends in part upon the receipt of dividends from the Bank and these
dividends are subject to limitation under banking laws and regulations. Our
declaration of dividends to our shareholders is discretionary and will depend
upon operating results and our overall financial condition, regulatory
limitations, tax considerations, and other factors. We are also prohibited from
paying dividends on our common stock if we fail to make distributions or
required payments on the trust preferred securities or on our preferred stock.
New Accounting Pronouncements
A discussion of new accounting pronouncements that are applicable to the
Company and have been or will be adopted by the Company is included in Note 1-
Basis of Presentation in the Notes to the Financial Statements contained in
Item 1 herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information contained in this section of this quarterly report on Form 10-Q
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is incorporated herein by reference. There was no
material change in the information provided in response to Item 7A of our 2008
Form 10-K.
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 our President and Chief Executive
Officer and the Principal Accounting Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) pursuant to Exchange Act Rule
13a-15. Based upon, and as of the date of, such evaluation, the President and
Chief Executive Officer and the Principal Accounting Officer concluded that our
disclosure controls and procedures were effective.
In designing and evaluating the disclosure controls and procedures, we
recognize that any controls and procedures, no matter how well-designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and that management necessarily was required to apply
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. We believe that the disclosure of controls and procedures provide
reasonable assurance of achieving our control objectives.
There were no changes in the internal control over financial reporting during
the quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
We have engaged Jefferson Wells International, Inc. to assist with the
completion of the 2009 Internal Audit Plan.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may be involved from time to time in various routine legal proceedings
incidental to our business. Neither we nor our subsidiaries are currently
engaged in any legal proceedings that are expected to have a material adverse
effect on our results of operation or results of condition.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, this report
should be considered in light of the risk factors discussed in Item 1A "Risk
Factors" in our 2008 Form 10-K, which could materially affect our business,
financial condition, or future results of operations. The risks described in
the 2008 Form 10-K are not the only uncertainties we face.
We may be subject to further increases in FDIC insurance premiums and special
Assessments by the FDIC.
Effective January 1, 2007, the FDIC adopted a risk-based system for assessment
of deposit insurance premiums under which all institutions are required to pay
at least minimum annual premiums. In addition, in an effort to replenish the
Deposit Insurance Fund in the wake of the recent increase in bank failures in
the United States, the FDIC changed its rate structure in December 2008 to
generally increase premiums effective for assessments in the first quarter of
2009. Further, in May 2009, the FDIC issued a final rule to impose a special
one-time assessment against all financial institutions in the second quarter of
2009, payable in the third quarter of 2009. The system categorizes institutions
into one of four risk categories depending on capitalization and supervisory
rating criteria. Due to these changes to the FDIC rate structure, their FDIC
insurance premiums have increased significantly for 2009 and will have a
further material adverse effect on our future results of operations. Further
increases in 2009 and 2010 may also be possible.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition, and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K.
Exhibit
NUMBER DESCRIPTION
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and Principal Accounting Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: NOVEMBER 13, 2009 JAMES F. WARSAW
James F. Warsaw
President and Chief Executive Officer
(Principal Executive Officer)
Date: NOVEMBER 13, 2009 RHONDA R. KELLEY
Rhonda R. Kelley
Principal Accounting Officer
(Principal Accounting Officer)
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the quarterly period ended September 30, 2009
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. 232.102(d))
The following exhibits are filed as part this report:
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and Principal Accounting Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 200
