Attached files
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2009
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
132 West State Street
Medford, Wisconsin 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 748-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$0.10 Par Value Common Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[X]
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 June 30, 2009 (the last business day of the registrant's most recently
completed second fiscal quarter) the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $19,576,721. For
purposes of this calculation, the registrant has assumed its directors and
executive officers are affiliates.
As of March 1, 2010, 1,648,102 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K Into Which
Proxy Statement for Annual Meeting of Portions of Documents are Incorporated
Shareholders on April 27, 2010 Part III
MID-WISCONSIN FINANCIAL SERVICES, INC.
2009 FORM 10-K TABLE OF CONTENTS
Page
PART I
ITEM 1. Business 4
ITEM 1A. Risk Factors 9
ITEM 1B. Unresolved Staff Comments 16
ITEM 2. Properties 17
ITEM 3. Legal Proceedings 17
ITEM 4. Reserved 18
PART II
ITEM 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 18
ITEM 6. Selected Financial Data 20
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
ITEM 7A. Quantitative and Qualitative Disclosures
About Market Risk 53
ITEM 8. Financial Statements and Supplementary Data 53
ITEM 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 94
ITEM 9A(T) Controls and Procedures 94
ITEM 9B. Other Information 95
PART III
ITEM 10. Directors and Executive Officers of the Registrant 95
ITEM 11. Executive Compensation 97
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholders Matters 97
ITEM 13. Certain Relationships and Related Transactions 97
ITEM 14. Principal Accounting Fees and Services 98
PART IV
ITEM 15. Exhibits and Financial Statement Schedules 98
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7, contains
forward-looking statements that involve risks, uncertainties, and assumptions.
Forward-looking statements are based on current management expectations and are
not guarantees of future performance, nor should they be relied upon as
representing management's view as of any subsequent date. If the risks or
uncertainties ever materialize or the assumptions prove incorrect, our results
may differ materially from those presented, either expressed or implied, in
this filing. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements. Forward-looking
statements may be identified by, among other things, expressions of beliefs or
expectations that certain events may occur or are anticipated, and projections
or statements of expectations. Such forward-looking statements include,
without limitation, statements regarding expected financial and operating
activities and results that are preceded by, followed by, or that include words
such as "may," "expects," "anticipates," "estimates," "plans," "believes," or
similar expressions. Such statements are subject to important factors that
could cause our actual results to differ materially from those anticipated by
the forward-looking statements. These factors, many of which are beyond our
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" 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.
PART I
ITEM 1. BUSINESS
General
Our subsidiary operates under the name Mid-Wisconsin Bank (the "Bank") and has
its principal office in Medford, Wisconsin. We, as the sole shareholder of the
Bank, are a bank holding company. As a bank holding company organized as a
Wisconsin corporation in 1986, we are registered with, and are subject to
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). This Annual Report on Form 10-K describes our business and
that of the Bank in effect on December 31, 2009, and any reference to the
"Company" refers to the consolidated operations of Mid-Wisconsin Financial
Services, Inc. and its subsidiary Mid-Wisconsin Bank.
The Bank
The Bank was incorporated on September 1, 1890, as a state bank under the laws
of Wisconsin. The Bank operates fourteen retail banking locations throughout
North Central Wisconsin serving markets in Clark, Eau Claire, Lincoln,
Marathon, Oneida, Price, Taylor and Vilas counties.
The day-to-day management of the Bank rests with its officers with oversight
provided by the board of directors. The Bank is engaged in general commercial
and retail banking services, including wealth management services. The Bank
serves individuals, businesses and governmental units and offers most forms of
commercial and consumer lending, including lines of credit, term loans, real
estate financing, mortgage lending and agricultural lending. In addition, the
Bank provides a full range of personal banking services, including checking
accounts, savings and time products, installment and other personal loans, as
well as mortgage loans. To expand services to its customers on a 24-hour
basis, the Bank offers ATM services, merchant capture, cash management, express
phone and online banking. New services are frequently added.
The Wealth Management area consists of two delivery methods of providing
financial products and services to assist customers in building, investing, or
protecting their wealth. Through its state granted trust powers, Wealth
Management provides fiduciary, administrative, and investment management
services to personal trusts, estates, individuals, businesses, non-profits, and
foundations for an asset based fee. Through a third party broker/dealer, UVEST
Financial Services, a registered broker/dealer, member SIPC, FINRA, Wealth
Management makes available a variety of retail investment and insurance
products including equities, bonds, fixed and variable annuities, mutual funds,
life insurance, long-term care insurance and brokered CDs which are commission
based transactions.
All of our products and services are directly or indirectly related to the
business of community banking and all activity is reported as one segment of
operations. All revenue, profit and loss, and total assets are reported in one
segment and represent our entire operations.
We have a policy of pursuing opportunities to acquire additional bank
subsidiaries or branch offices so that, at any given time, we may be engaged in
some tentative or preliminary discussions for such purpose with officers,
directors or principal shareholders of other holding companies or banks. There
are no plans, understandings, or arrangements, written or oral, regarding the
potential acquisition or sale of any business unit as of the date hereof.
Employees
As of December 31, 2009, we employed 158 full-time equivalent employees. None
of our employees are represented by unions. We consider the relationship with
our employees to be good.
Bank Market Area and Competition
The Bank competes for loans, deposits and financial services in all of its
principal markets. Much of this competition comes from companies which are
larger and have greater resources. The Bank competes directly with other
banks, savings associations, credit unions, finance companies, mutual funds,
life insurance companies, and other financial and non-financial companies.
Executive Officers of the Bank
Information related to executive officers of the Company is found in Part III
of this Form 10-K.
The management team of the Bank as of March 1, 2010, and their offices are set
forth below.
NAME OFFICES AND POSITIONS HELD
James F. Warsaw President, Chief Executive Officer
Mark A. King Chief Financial Officer and Chief Operating Officer
Robert E. Taubenheim Chief Credit Officer
Scot G. Thompson Regional President - Eastern Region
William A. Weiland Regional President - Central Region
Regulation and Supervision
We are subject to regulation under both federal and state law. As a bank
holding company, we are subject to regulation and examination by the Federal
Reserve Board pursuant to the BHC Act. The Bank is subject to regulation and
examination by the Federal Deposit Insurance Corporation ("FDIC") and, as a
Wisconsin chartered bank, by the Wisconsin Department of Financial Institutions
("WDFI").
The Federal Reserve Board expects a bank holding company to be a source of
strength for its subsidiary banks. As such, we may be required to take certain
actions or commit certain resources to the Bank when we might otherwise choose
not to do so. Under federal and state banking laws, bank holding companies and
banks are subject to regulations which govern capital and reserve requirements,
loans and loan policies (including the extension of credit to affiliates),
deposits, dividend limitations, establishment of branch offices, mergers and
other acquisitions, investments in or the conduct of other lines of business,
management personnel, interlocking directors and other aspects of the operation
of the Company and Bank.
We are subject to various regulatory capital requirements administered by bank
regulators. Failure to meet minimum capital requirements could result in
certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our financial
statements. We have consistently maintained regulatory capital ratios at or
above the well capitalized standards.
Our ability to pay dividends to our stockholders may be affected by both
general corporate law considerations and policies of the Federal Reserve Board
applicable to bank holding companies. Policies of the Federal Reserve Board
caution that a bank holding company should not pay cash dividends that exceed
its net income or that can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. In addition, compliance with
capital adequacy guidelines at both the bank subsidiary and the bank holding
company could affect our ability to pay dividends, if our capital levels
decrease. The Federal Reserve Board also possesses the enforcement powers over
bank holding companies to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations. Among
those powers is the ability to proscribe the payment of dividends by banks and
bank holding companies.
On February 20, 2009 we sold 10,000 shares of Series A Preferred Stock and 500
shares of Series B Preferred Stock to the United States Department of the
Treasury ("Treasury") pursuant to the TARP Capital Purchase Program ("CPP
Plan"). While any Series A or B 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 Series A and B Preferred Stock are fully
paid. Prior to the third anniversary of the Treasury's purchase of the
Preferred Stock, unless the Series A or B Preferred Stock has been redeemed,
the consent of the Treasury will be required for us to increase the annual
stock dividend above $0.44 per common share.
Emergency Economic Stabilization Act of 2008
On October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 ("EESA"), giving the Treasury authority to take
certain actions to restore liquidity and stability to the U.S. banking markets.
Based upon its authority in the EESA, a number of programs to implement EESA
have been announced. Those programs include the following:
o CPP Plan. Pursuant to this program, the Treasury, on behalf of the U.S.
Government, purchased preferred stock, along with warrants to purchase
preferred stock, from certain financial institutions, including bank
holding companies, savings and loan holding companies and banks or
savings associations not controlled by a holding company. The investment
has a dividend rate of 5% per year, until the fifth anniversary of the
Treasury's investment and a dividend of 9% thereafter.
During the time the Treasury holds securities issued pursuant to this
program, participating financial institutions are required to comply with
certain provisions regarding executive compensation and corporate
governance. Participation in this program also imposes certain
restrictions upon an institution's dividends to common shareholders and
stock repurchase activities. As described above, we elected to
participate in the CPP Plan and received $10 million pursuant to the
program on February 20, 2009. Detailed terms of participation in the CPP
Plan is set forth under the caption "Dividend Policy" in Item 5 and
"Capital" in Item 7 of this Annual Report on Form 10-K.
o Temporary Liquidity Guarantee Program. This program contained both (i) a
debt guarantee component, whereby the FDIC will guarantee until June 30,
2012, the senior unsecured debt issued by eligible financial institutions
between October 14, 2008 and October 31, 2009; and (ii) an account
transaction guarantee component, whereby the FDIC will insure 100% of
non-interest bearing deposit transaction accounts and certain NOW deposit
accounts held at eligible financial institutions, such as payment
processing accounts, payroll accounts and working capital accounts
originally through December 31, 2009 which has been extended to June 30,
2010. We elected to participate in these programs through June 30, 2010.
o Temporary increase in deposit insurance coverage. Pursuant to the EESA,
the FDIC temporarily raised the basic limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. The EESA provides that
the basic deposit insurance limit will return to $100,000 after December
31, 2013, but is permanent for certain retirement accounts.
Further changes with respect to permitted banking activities and other bank
regulatory matters may be made or adopted in the future. Such changes may have
a significant impact on our competitive circumstances and may have a material
adverse effect on our consolidated financial condition, liquidity or results of
operations.
Deposit Insurance Premiums
The FDIC maintains the Deposit Insurance Fund ("DIF") by assessing depository
institutions an insurance premium on a quarterly basis. The amount of the
insurance premium is a function of the institution's risk category, assessment
rate and assessment base. An institution's risk category and assessment rate is
determined according to its supervisory ratings, capital levels, certain
financial ratios and long-term debt ratings.
An insured institution's assessment base is determined by the balance of its
insured deposits. The assessment rate is then multiplied against the assessment
base. This system allows institutions to pay lower assessments to the FDIC as
their capital level and supervisory ratings improve and if these indicators
deteriorate, the institution will have to pay higher assessments.
The FDIC Board has the authority to set the annual assessment rate range for
the various risk categories within certain regulatory limits and to impose
special assessments upon insured depository institutions when deemed necessary
by the FDIC's Board. As part of the Deposit Insurance Fund Restoration Plan
adopted by the FDIC in October 2008, on February 27, 2009 the FDIC adopted the
final rule modifying the risk-based assessment system, which set initial base
assessment rates between 12 and 45 basis points, beginning April 1, 2009. The
FDIC imposed an emergency special assessment on June 30, 2009, which was
collected on September 30, 2009. In addition, in September 2009, the FDIC
extended the Restoration Plan period to eight years. On November 12, 2009, the
FDIC adopted a final rule requiring prepayment of 13 quarters of FDIC premiums.
Our required prepayment aggregated $3,226,000 in December 2009.
The FDIC is authorized to terminate a depository institution's deposit
insurance upon a finding by the FDIC that the institution's financial condition
is unsafe or unsound or that the institution has engaged in unsafe or unsound
practices or has violated any applicable rule, regulation, order or condition
enacted or imposed by the institution's regulatory agency. The termination of
deposit insurance for our state bank subsidiary would have a material adverse
effect on our earnings, operations and financial condition.
Depositor Preference
Under federal law, deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the liquidation
or other resolution of such an institution by any receiver.
Available Information
Our website is www.midwisc.com. We have made available on this website our
Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K as soon as
reasonably practical after we electronically file or furnish the information to
the SEC.
ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent to our business.
The material risks and uncertainties that management believes affect us are
described below. Before making an investment decision, you should carefully
consider the risks described below because they could materially and adversely
affect our business, liquidity, financial condition, results of operation, and
prospects. This report is qualified in its entirety by these risk factors.
See also, the cautionary statement in Item 1 regarding the use of forward-
looking statements in this Annual Report on Form 10-K.
External Risks
Our Stock Does Not Have a Significant Amount of Trading Activity.
There is no active public trading market for our stock. Therefore, low activity
may increase the volatility of the price of our stock and result in a greater
spread between the bid and ask prices as compared to more actively-traded
stocks. Investors may not be able to resell shares at the price or time they
desire. This may also limit our ability to raise additional capital through the
issuance of new stock.
Our Agreements with the Treasury Under the CPP Plan Imposes Restrictions and
Obligations on Us That Limit Our Ability to Increase Dividends, Repurchase Our
Common Stock or Preferred Stock and Access the Equity Capital Market.
In February 2009, we issued preferred stock to the Treasury under the CPP Plan.
Prior to February 20, 2012, unless we have redeemed all of the preferred stock,
the consent of the Treasury will be required for us to increase the annual
stock dividend above $0.44 per common share or to repurchase our common stock.
Our Profitability Depends Significantly on the Economic Conditions and the
Local Economy in Which We Operate.
Our success depends on the general economic conditions of North Central
Wisconsin where substantially all of our loans are originated. Local economic
conditions have a significant impact on the demand for our products and
services, the ability of our customers to repay loans, the value of the
collateral securing loans, and the stability of our deposit funding sources. A
significant decline in general local economic conditions, caused by inflation,
recession, unemployment, changes in securities markets, changes in housing
market prices, or other factors could impact local economic conditions and, in
turn, have a material adverse effect on our consolidated financial condition
and results of operations.
Increases in Competition Could Adversely Affect our Growth and Profitability.
We operate exclusively in North Central Wisconsin. Increased competition within
our markets may result in reduced demand for loans and deposits, increased
expenses, and difficulty in recruiting and retaining talented people. Many
competitors offer similar banking services in our market areas. Such
competitors include national, internet, regional, and other community banks, as
well as other types of financial institutions, including savings and loan
associations, trust companies, finance companies, brokerage firms, insurance
companies, credit unions, mortgage banks, and other financial intermediaries.
Some of these competitors may be better able to offer more desirable or cost-
effective products to customers thereby increasing the potential for loss of
our market share. Additionally, many of our larger competitors may be able to
achieve better economies of scale, offer a broader range of products and
services, and better pricing for these products and services than we can.
Our ability to compete successfully depends on a number of factors, including,
among other things:
o The ability to develop, maintain, and build upon long-term customer
relationships based on top quality service, and high ethical standards.
o The ability to expand our market position.
o The scope, relevance, and pricing of products and services offered to meet
customer needs and demands.
o The rate at which we introduce new products and services relative to our
competitors.
o Customer satisfaction with our level of service.
Failure to perform in any of these areas could significantly weaken our
competitive position and adversely affect our growth and profitability.
Strategic Risks
Our Financial Condition and Results of Operations could be Negatively Affected
if We Fail to Grow or Fail to Manage Our Growth Effectively.
Our ability to grow successfully will depend on a variety of factors including
the continued availability of desirable business opportunities, the competitive
responses from other financial institutions in our market areas, the
availability of capital, and our ability to manage our growth. While we believe
we have the management resources and internal systems in place to successfully
manage our future growth, there can be no assurance growth opportunities will
be available or growth will be successfully managed.
We Continually Encounter Technological Change.
The financial services industry is continually undergoing rapid technological
change with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our
future success depends on being able to effectively implement new technology
and in being successful in marketing these products and services to our
customers. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse impact
on our business and, in turn, our financial condition and results of
operations.
New Lines of Business or New Products and Services May Subject Us to Additional
Risk. From time to time, we may implement new lines of business or offer new
products and services within existing lines of business. There are substantial
risks and uncertainties associated with these efforts, particularly in
instances where the markets are not fully developed. In developing and
marketing new lines of business and/or new products and services, we may invest
significant time and resources. Initial timetables for the introduction and
development of new lines of business and/or new products or services may not be
achieved and price and profitability targets may not prove feasible. External
factors, such as compliance with regulations, competitive alternatives, and
shifting market preferences, may also impact the successful implementation of a
new line of business and/or a new product or service. Furthermore, any new line
of business and/or new product or service could have a significant impact on
the effectiveness of our system of internal controls. Failure to successfully
manage these risks in the development and implementation of new lines of
business and/or new products or services could have a material adverse effect
on our business, results of operations and financial condition.
Reputation Risks
Negative Publicity could Damage Our Reputation.
Reputation risk, or the risk to our earnings and capital from negative public
opinion, is inherent in our business. Negative public opinion could adversely
affect our ability to keep and attract customers and expose us to adverse legal
and regulatory consequences. Negative public opinion could result from our
actual or alleged conduct in any number of activities, including lending
practices, corporate governance, regulatory compliance, sharing or inadequate
protection of customer information, and from actions taken by government
regulators and community organizations in response to that conduct.
Ethics or Conflict of Interest Issues could Damage Our Reputation.
We have established a Code of Conduct and related policies and procedures to
address the ethical conduct of business and to avoid potential conflicts of
interest. Any system of controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable, assurances that
the objectives of the system are met. Any failure or circumvention of our
related controls and procedures or failure to comply with the established Code
of Conduct and Related Party Transaction Policies and Procedures could have a
material adverse effect on our reputation, business, results of operations,
and/or financial condition.
Credit Risks
We are Subject to Lending Concentration Risks.
As of December 31, 2009, approximately 59% of our loan portfolio consisted of
commercial loans. Commercial loans are generally viewed as having more
inherent risk of default than other loans. The balance per borrower is
typically larger than that for residential mortgage and installment loans, and
infers higher potential losses on an individual loan basis. An increase in
nonperforming loans could result in a net loss of earnings from these loans, an
increase in the provision for loan losses, and an increase in loan charge offs,
all of which could have a material adverse effect on our consolidated financial
condition and results of operations.
Changes in Economic Conditions could Adversely Affect Our Earnings, as Our
Borrowers' Ability to Repay Loans and the Value of the Collateral Securing Our
Loans Decline.
Our performance is dependent upon economic conditions, local and national, as
well as governmental monetary policies. Conditions such as inflation,
recession, unemployment/partial employment, changes in interest rates, money
supply and other factors beyond our control may adversely affect our asset
quality, deposit levels and loan demand and, therefore, our earnings. Because
many of our loans are secured in some fashion by real estate, decreases in real
estate values could adversely affect the value of property we hold as
collateral. Adverse changes in the economy may also have a negative effect on
the ability of our borrowers to make timely repayments of their loans, which
could have an adverse impact on our earnings. Consequently, any decline in the
local economy of our market area could have a material adverse effect on our
financial condition and results of operations.
Our Allowance for Loan Losses may be Insufficient.
All financial institutions maintain an allowance for loan losses to provide for
loans that may not be repaid in their entirety. All borrowers carry the
potential to default and our remedies to recover may not fully satisfy money
previously lent. We maintain an allowance for loan losses, which is a reserve
established through a provision for loan losses charged to expense, which
represents management's best estimate of potential credit losses that could be
incurred within the existing portfolio of loans. The allowance, in the judgment
of management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The level of the allowance for loan losses
reflects management's continuing evaluation of industry concentrations;
specific credit risks; loan loss experience; current loan portfolio quality;
present economic, environmental, and regulatory conditions; and unidentified
losses inherent in the current loan portfolio. The determination of the
appropriate level of the allowance for loan losses involves a high degree of
subjectivity and requires us to make significant estimates of current credit
risks using existing qualitative and quantitative information, all of which may
undergo material changes. Changes in economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem
loans, and other factors, both within and outside of our control, may require
an increase in the allowance for loan losses. In addition, bank regulatory
agencies periodically review our allowance for loan losses and may require an
increase in the provision for loan losses or the recognition of additional loan
charge offs, based on judgments different than those of management. An increase
in the allowance for loan losses results in a decrease in net income, and
possibly risk-based capital, and may have a material adverse effect on our
consolidated financial condition and results of operations.
We Depend on the Accuracy and Completeness of Information about Customers and
Counterparties.
In deciding whether to extend credit or enter into other transactions, we may
rely on information furnished by or on behalf of customers and counterparties,
including financial statements, credit reports, appraisals, and other financial
information. Reliance on inaccurate or misleading financial statements, credit
reports, appraisals, or other financial information could cause us to enter
into unfavorable transactions, which could have a material adverse effect on
our consolidated financial condition and results of operations.
Liquidity Risks
Liquidity is Essential to Our Business.
Our liquidity could be impaired by an inability to access the capital markets
or unforeseen outflows of cash. This situation may arise due to circumstances
that we may be unable to control, such as a general market disruption or an
operational problem that affects third parties or us. Our credit ratings are
important to our liquidity. A reduction in our credit ratings could adversely
affect our liquidity and competitive position, increase our borrowing costs,
limit our access to the capital markets or trigger unfavorable contractual
obligations.
We Rely on Dividends from Our Subsidiaries for most of Our Revenue.
The Company is a separate and distinct legal entity from its banking
subsidiary. A substantial portion of its revenue comes from dividends of its
bank subsidiary. These dividends are the principal source of funds to pay
dividends on our common and preferred stock, and to pay interest and principal
on our Subordinated Debentures. Various federal and/or state laws and
regulations limit the amount of dividends that the Bank may pay to the Company.
In the event the Bank is unable to pay dividends to the Company, the Company
may not be able to service debt, pay obligations, or pay dividends on our
common and preferred stock. The inability to receive dividends from our bank
subsidiary could have a material adverse effect on our business, consolidated
financial condition, and results of operations.
Interest Rate Risks
We are Subject to Interest Rate Risk.
Our earnings are dependent upon our net interest income. Interest rates are
highly sensitive to many factors that are beyond our control, including general
economic conditions and policies of various governmental and regulatory
agencies and, in particular, the Federal Reserve. Changes in monetary policy,
including changes in interest rates, could influence not only the interest we
receive on loans and investments and the amount of interest we pay on deposits
and borrowings, but such changes could also affect (i) our ability to originate
loans and obtain deposits, (ii) the fair value of our financial assets and
liabilities, and (iii) the average duration of our mortgage-backed securities
portfolio and other interest-earning assets. If the interest rates paid on
deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, our net interest income, and therefore
earnings, could be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments fall
more quickly than the interest rates paid on deposits and other borrowings.
The Impact of Interest Rates on Our Mortgage Banking Activities can Have a
Significant Impact on Revenues.
Changes in interest rates can impact mortgage banking revenue. A decline in
mortgage rates generally increases the demand for mortgage loans as borrowers
refinance, but also generally leads to accelerated payoffs. Conversely, in a
constant or increasing rate environment, we would expect fewer loans to be
refinanced and a decline in payoffs.
Legal/Compliance Risks
We are Subject to Extensive Government Regulation and Supervision.
Like all banks, we are subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors'
funds, federal deposit insurance funds, and the banking system as a whole, not
shareholders. These regulations affect our lending practices, capital
structure, investment practices, dividend policy, and growth, among other
things. Congress and federal regulatory agencies continually review banking
laws, regulations, and policies for possible changes. Changes to statutes,
regulations, or regulatory policies, including changes in interpretation or
implementation of statutes, regulations, or policies, could affect us in
substantial and unpredictable ways. Such changes could subject us to additional
costs, decreased revenue, limit the types of financial services and products we
may offer, and/or increase the ability of nonbanks to offer competing financial
services and products, among other things. Failure to comply with laws,
regulations, or policies could result in sanctions by regulatory agencies,
civil money penalties, and/or reputation damage, which could have a material
adverse effect on our business, financial condition, and results of operations.
While we have policies and procedures in place to prevent any such violations,
there can be no assurance that such violations will not occur.
We may be a Defendant in a Variety of Litigation and Other Actions, Which may
have a Material Adverse Effect on our Financial Condition and Results of
Operation.
We may be involved from time to time in a variety of litigation arising out of
our business. Our insurance may not cover all claims that may be asserted
against us, regardless of merit or eventual outcome, may harm our reputation.
Should judgments or settlements in any litigation exceed our insurance
coverage, they could have a material adverse effect on our financial condition
and results of operation. In addition, we may not be able to obtain appropriate
types or levels of insurance in the future, nor may we be able to obtain
adequate replacement policies with acceptable terms, if at all.
Operational Risks
Changes in Our Accounting Policies or in Accounting Standards could Materially
affect how We Report Our Financial Results and Condition.
Our accounting policies are fundamental to understanding our financial
condition and results of operation. Some of these policies require use of
estimates and assumptions that may affect the value of our assets or
liabilities and results of operations. Some of our accounting policies are
critical because they require management to make difficult, subjective and
complex judgments about matters that are inherently uncertain and because it is
likely that materially different amounts would be reported under different
conditions or using different assumptions.
Our Internal Controls may be Ineffective.
Management regularly reviews and updates our internal controls, disclosure
controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, assurances that the
objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on our business, results of
operations, and financial condition.
Impairment of Investment Securities or Deferred Tax Assets could Require
Charges to Earnings, which could Result in a Negative Impact on Our Results of
Operations.
In assessing the impairment of investment securities, management considers the
length of time and extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuers, and the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The impact of each of
these impairment matters could have a material adverse effect on our business,
results of operations, and financial condition.
Loss of Key Employees may Disrupt Relationships with Certain Customers.
Our business is primarily relationship-driven in that many of our key employees
have extensive customer relationships. Loss of a key employee with such
customer relationships may lead to the loss of business if the customers were
to follow that employee to a competitor. While we believe our relationship with
our key personnel is good, we cannot guarantee that all of our key personnel
will remain with our organization. Loss of such key personnel, should they
enter into an employment relationship with one of our competitors, could result
in the loss of some of our customers.
Because the Nature of the Financial Services Business Involves a High Volume of
Transactions, We Face Significant Operational Risks.
Operational risk is the risk of loss resulting from our operations, including
but not limited to, the risk of fraud by employees or persons outside our
company, the execution of unauthorized transactions by employees, errors
relating to transaction processing and technology, breaches of the internal
control system and compliance requirements, and business continuation and
disaster recovery. This risk of loss also includes the potential legal actions
that could arise as a result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards, adverse business decisions
or their implementation, and customer attrition due to potential negative
publicity. In the event of a breakdown in the internal control system, improper
operation of systems or improper employee actions, we could suffer financial
loss, face regulatory action and suffer damage to our reputation.
We Rely on Other Companies to Provide Key Components of Our Business
Infrastructure.
Third party vendors provide key components of our business infrastructure such
as internet connections, online banking and core applications. While we have
selected these third party vendors carefully, we do not control their actions.
Any problems caused by these third parties, including, not providing us their
services for any reason or poor performance, could adversely affect our ability
to deliver products and services to our customers and otherwise to conduct our
business. Replacing these third party vendors could also entail significant
delay and expense.
Our Information Systems May Experience an Interruption or Breach in Security.
We rely heavily on communications and information systems to conduct our
business. Any failure, interruption, or breach in security or operational
integrity of these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan, and other
systems. While we have policies and procedures designed to prevent or limit the
effect of the failure, interruption, or security breach of our information
systems, we cannot assure you that any such failures, interruptions, or
security breaches will not occur or, if they do occur, that they will be
adequately addressed. The occurrence of any failures, interruptions, or
security breaches of our information systems could damage our reputation,
result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability,
any of which could have a material adverse effect on our financial condition
and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located at the Bank's administrative office facility at
132 West State Street, Medford, Wisconsin.
We own one building in Rib Mountain and lease the premises back to the Bank.
The Bank owns ten buildings and leases three. All buildings owned or leased by
the Bank are in good condition and considered adequate for present and near-
term requirements.
Branch Address Square Feet
Medford-Plaza 134 South 8th Street, Medford, WI 54451 20,000
Medford-Corporate 132 W. State Street, Medford, WI 54451 15,900
Rib Mountain 3845 Rib Mountain Drive, Wausau, WI 54401 13,000
Colby 101 South First Street, Colby, WI 54421 8,767
Neillsville 500 West Street, Neillsville, WI 54456 7,560
Minocqua* 8744 Highway 51 N, Suite 4, Minocqua, WI 54548 4,500
Rhinelander 2170 Lincoln Street, Rhinelander, WI 54501 4,285
Phillips 864 N Lake Avenue, Phillips, WI 54555 4,285
Eagle River* 325 West Pine Street, Eagle River, WI 54521 4,000
Abbotsford 119 North First Street, Abbotsford, WI 54405 2,986
Weston* 7403 Stone Ridge Drive, Weston, WI 54476 2,500
Rib Lake 717 McComb Avenue, Rib Lake, WI 54470 2,112
Lake Tomahawk 7241 Bradley St, Lake Tomahawk, WI 54539 1,887
Fairchild 111 N Front Street, Fairchild, WI 54741 1,040
*Branch leased from third party.
ITEM 3. LEGAL PROCEEDINGS
The Bank engages in legal actions and proceedings, both as plaintiffs and
defendants, from time to time in the ordinary course of business. In some
instances, such actions and proceedings involve substantial claims for
compensatory or punitive damages or involve claims for an unspecified amount of
damages. There are, however, presently no proceedings pending or contemplated
which, in our opinion, would have a material adverse effect on our consolidated
financial position, results of operations or liquidity of the Company.
In 2007, we commenced a legal action in circuit court against the guarantor of
a loan to a former car dealership ("Impaired Borrower") and others seeking
relief for damages. At this time, the outcome of this action cannot be
estimated.
ITEM 4. RESERVED
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
There is no active established public trading market in our common stock,
although two regional broker-dealers act as market makers for the stock. Bid
and ask prices are quoted on the OTC Bulletin Board under the symbol "MWFS.OB".
Transactions in our common stock are limited and sporadic.
Market Prices and Dividends
The following table summarizes price ranges of over-the-counter quotations and
cash dividends paid on our common stock for the periods indicated. Bid prices
represent the bid prices reported on the OTC Bulletin Board. The prices do not
reflect retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.
2009 Prices and Dividends 2008 Prices and Dividends
Quarter High Low Dividends Quarter High Low Dividends
1st $12.80 $7.55 $0.11 1st $24.00 $19.00 $0.22
2nd 16.25 8.50 * 2nd 23.50 20.67 0.11
3rd 13.15 8.30 0.00 3rd 21.00 18.00 0.11
4th 8.30 7.00 * 4th 18.00 12.25 0.11
* Dividend payment dates changed to semi-annual, payable in February and August
In August 2009, the Company announced that the 2009 semi-annual dividend,
payable in August 2009, to shareholders would be foregone. This decision was
made after evaluating the Company's year-to-date earnings, overall capital
position and uncertain economic climate.
Holders
As of March 1, 2010, there were approximately 822 holders of record of common
stock, $0.10 par value. Some of our common stock is held in "street" or
"nominee" name and the number of beneficial owners of such shares is not known
nor included in the foregoing number.
Dividend Policy
Dividends on our common stock have historically been paid in cash on a
quarterly basis in March, June, September, and December. In 2009, we declared a
first quarter dividend payable to stockholders in March. Subsequent to the
payment of the 2009 first quarter dividend we changed the dividend payment
dates on our common stock to semi-annual payable in August and February. 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 earnings, capital requirements, and the operating and
financial condition of the Company. We are prohibited from paying dividends on
our common stock if we fail to make distributions or scheduled payments on our
preferred stock or subordinated debentures.
On February 20, 2009, we sold 10,000 shares of our Series A Preferred Stock and
500 shares of Series B Preferred Stock to the Treasury pursuant to the CPP
Plan. Dividends on the Preferred Stock issued to the Treasury are payable on a
quarterly basis in February, May, August, and November. Cumulative dividends
on the Series A Preferred Stock will accrue and be payable quarterly at a rate
of 5% per annum for five years. The rate will increase to 9% per annum
thereafter if the shares are not redeemed by the Company. The Series B
Preferred Stock dividends will accrue and be payable quarterly at 9%. While
any Series A or B 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 Series A or B Preferred Stock are fully paid. As of
December 31, 2009, all required dividend payments have been paid to the
Treasury. Prior to the third anniversary of the Treasury's purchase of the
Preferred Stock, unless the Series A or B Preferred Stock has been redeemed,
the consent of the Treasury will be required for us to increase the annual
stock dividend above $0.44 per common share.
We maintain a dividend reinvestment plan that enables common shareholders the
opportunity to automatically reinvest their cash dividends in shares of our
common stock. Common stock shares issued under the plan will be either issued
common shares or common shares acquired in the market on behalf of the
shareholders at their then fair market value.
Stock Buy-Back
Under the CPP Plan, prior to the third anniversary of the Treasury's purchase
of the Preferred Stock (February 20, 2012), unless the Preferred Stock has
been redeemed, the consent of the Treasury will be required for us to redeem,
purchase or acquire any shares of our common stock, other than (i) redemptions,
purchases or other acquisitions of the Preferred Stock, (ii) redemptions,
purchases or other acquisitions of shares of our common stock in connection
with the administration of any employee benefit plan in the ordinary course of
business and consistent with past practice and (iii) certain other redemptions,
repurchases or other acquisitions as permitted under the CPP Plan.
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
(dollars in thousands, except per share data)
Years Ended December 31, 2009 2008 2007 2006 2005
Results of operations:
Interest income $26,932 $29,732 $32,144 $29,619 $23,950
Interest expense 10,500 13,297 16,564 14,052 8,781
Net interest income 16,432 16,435 15,580 15,567 15,169
Provision for loan losses 8,506 3,200 1,140 5,133 342
Net interest income after provision for loan losses 7,926 13,235 14,440 10,434 14,827
Noninterest income 4,421 4,026 4,057 3,448 3,312
Other-than-temporary impairment losses, net 301 0 0 0 0
Noninterest expense 16,450 16,010 17,334 12,746 11,476
Income (loss) before income taxes (4,404) 1,251 1,163 1,136 6,663
Income tax expense (benefit) (1,916) 9 45 41 2,275
Net income (loss) (2,488) 1,242 1,118 1,095 4,388
Preferred stock dividends, discount and premium (545) 0 0 0 0
Net income (loss) available to common equity ($3,033) $1,242 $1,118 $1,095 $4,388
Earnings (loss) per common share:
Basic ($1.84) $0.76 $0.68 $0.67 $2.57
Diluted ($1.84) $0.76 $0.68 $0.66 $2.57
Cash dividends per common share $0.11 $0.55 $0.66 $1.28 $1.28
Weighted average common shares outstanding:
Basic 1,645 1,643 1,640 1,644 1,704
Diluted 1,646 1,643 1,641 1,648 1,706
SELECTED FINANCIAL DATA
Year-End Balances:
Loans $358,616 $364,381 $357,988 $351,447 $310,370
Allowance for loan losses 7,957 4,542 4,174 8,184 3,028
Investment securities 103,477 81,038 82,551 82,472 76,823
Total assets 505,460 496,459 480,359 460,651 427,389
Deposits 397,800 385,675 369,479 342,253 312,653
Long-term borrowings 42,561 49,429 46,429 38,428 44,000
Subordinated debentures 10,310 10,310 10,310 10,310 10,310
Stockholders' equity 43,184 35,805 34,571 34,133 37,373
Book value per common share $20.10 $21.78 $21.06 $20.82 $21.93
Average Balances:
Loans $363,966 $361,883 $355,307 $330,490 $298,026
Investment securities 110,515 90,776 86,972 86,528 90,781
Total assets 497,994 477,274 470,209 440,865 412,526
Deposits 380,633 364,710 360,101 332,955 295,522
Short-term borrowings 11,907 11,634 17,939 21,890 26,615
Long-term borrowings 47,296 51,874 42,462 35,993 48,260
Stockholders' equity 44,122 35,317 34,348 35,642 36,437
Financial Ratios:
Return on average assets -0.61% 0.26% 0.24% 0.25% 1.06%
Return on average equity -6.87% 3.52% 3.25% 3.07% 12.04%
Equity to assets 8.86% 7.21% 7.20% 7.41% 8.74%
Net interest margin 3.53% 3.71% 3.60% 3.83% 4.03%
Total risk-based capital 14.18% 13.33% 13.32% 13.65% 15.70%
Net charge-offs to average loans 1.40% 0.78% 1.45% -0.01% 0.04%
Nonperforming loans to total loans 3.93% 2.62% 1.96% 2.03% 0.49%
Efficiency ratio (1) 79.20% 76.86% 86.71% 65.68% 60.42%
Noninterest income to average assets 0.89% 0.84% 0.86% 0.78% 0.80%
Noninterest expenses to average assets 3.30% 3.35% 3.69% 2.89% 2.78%
Dividend payout ratio -5.97% 72.68% 96.78% 191.04% 49.81%
Stock Price Information: (2)
High $16.25 $24.00 $38.00 $38.25 $35.50
Low 7.00 12.25 19.75 35.40 32.90
Market Price at year end 7.00 12.25 19.75 37.90 35.40
(1) Fully taxable equivalent basis, assuming a Federal tax rate of 34% and
excluding disallowed interest expense
(2) Bid Price
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis reviews significant factors
with respect to our consolidated financial condition at December 31, 2009 and
2008, and results of operations for the three-year period ended December 31,
2009. This discussion should be read in conjunction with the consolidated
financial statements, notes, tables, and the selected financial data presented
elsewhere in this report.
Our discussion and analysis contains forward-looking statements that are
provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties that
may cause actual results to differ materially from those in such forward-
looking statements. A cautionary statement regarding forward-looking
statements is set forth under the caption "Forward-Looking Statements" in Item
1 of this Annual Report on Form 10-K. This discussion and analysis should be
considered in light of such cautionary statements and the risk factors
disclosed elsewhere in this report.
Critical Accounting Policies
Our 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.
INVESTMENT SECURITIES: The fair value of our investment securities is
important to the presentation of the consolidated financial statements since
the investment securities are carried on the consolidated balance sheet at fair
value. We utilize a third party vendor to assist in the determination of the
fair value of our investment portfolio. Adjustments to the fair value of the
investment portfolio impact our consolidated financial condition by increasing
or decreasing assets and stockholders' equity, and possibly earnings. Declines
in the fair value of investment securities below their cost that are deemed to
be other-than temporarily impaired ("OTTI") are reflected in earnings as
realized losses and assigned a new cost basis. In estimating OTTI, 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. To determine OTTI, we may
utilize a discounted cash flow model to estimate the fair value of the
security. The use of a discounted cash flow model involves judgment,
particularly of interest rates, estimated default rates and prepayment speeds.
ALLOWANCE FOR LOAN LOSSES: Management's evaluation process used to determine
the adequacy of the allowance for loan losses is subject to the use of
estimates, assumptions, and judgments. The evaluation process combines several
factors: management's ongoing review and grading of the loan portfolio,
consideration of historical loan loss and delinquency experience, trends in
past due and nonperforming loans, risk characteristics of the various
classifications of loans, concentrations of loans to specific borrowers or
industries, existing economic conditions, the fair value of underlying
collateral, and other qualitative and quantitative factors which could affect
potential credit losses. Because current economic conditions can change and
future events are inherently difficult to predict, the anticipated amount of
estimated loan losses, and therefore the adequacy of the allowance for loan
losses, could change significantly. As an integral part of their examination
process, various regulatory agencies also review the allowance for loan losses.
Such agencies may require that certain loan balances be classified differently
or charged-off when their credit evaluations differ from those of management,
based on their judgments about information available to them at the time of
their examination. The Company believes the allowance for loan losses is
adequate as recorded in the consolidated financial statements.
OTHER REAL ESTATE OWNED ("OREO"): Real estate acquired through, or in lieu of,
loan foreclosure are held for sale and are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis. 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 receive on the sale of
the properties, potential property valuation allowances due to declines in the
fair values, and the carrying costs of properties for expenses such as
utilities, real estate taxes, and other ongoing expenses that may affect future
earnings.
INCOME TAXES: 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 REMAINING INFORMATION INCLUDED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE SHOWN IN THOUSANDS OF
DOLLARS.
Overview
THE MARKET/ECONOMY IN GENERAL
Since mid-year 2007, the financial services industry has felt the impact of
significant declines in the dollar values of all types of assets. This decline
ultimately led to a global liquidity crisis and the beginning of a prolonged
recession, which we are continuing to experience today.
LOCAL ECONOMIES EFFECT ON OUR COMPANY AND BORROWERS
In general, our Company's financial performance is highly dependent upon and
reflects the economic stability of our local markets. During 2009, the eight
counties we served continued to report elevated levels of unemployment. More
specifically the significant declines in the building trades and agricultural
industries has adversely impacted many of our borrowers' ability to make
scheduled payments on their commercial, commercial real estate, consumer and
residential mortgage loans. In addition, the value of the underlying collateral
securing those loans has declined due to an oversupply and lower demand for
real estate products in our local markets. Diminished consumer confidence in
the economy has led to much softer loan demand overall.
LOCAL ECONOMIES EFFECT ON CREDIT QUALITY
The weak economic conditions over the past three years have resulted in
elevated levels of delinquencies and nonperforming loans. We have also
experienced unprecedented levels of net charge offs over the same period.
Nonperforming loans were $14,093, $9,554, and $7,025 at December 31, 2009,
2008, and 2007, respectively. Net charge offs for 2009 were $5,091 or 1.40% of
average loans, compared to $2,832 or 0.78% of average loans for 2008, and
$5,150 or 1.45% of average loans for 2007. Approximately 45% of the charge-
offs recognized in 2009 were attributed to lending transactions initiated prior
to 2006.
Many of our loans are secured in some fashion by collateral consisting of
either consumer or commercial real estate. In a depressed real estate market
the value of the collateral securing those loans becomes an important factor in
determining the appropriate level of loan loss provisions required to maintain
an adequate level of allowance for estimated loan losses at any given point in
time. In evaluating the trends of our overall credit metrics, management
increased the level of loan loss provisions to $8,506 in 2009. This compares to
provisions of $3,200 in 2008 and $1,140 in 2007. As a result, the allowance for
loan losses was $7,957 or 2.22% of total loans at December 31, 2009, compared
to $4,542 or 1.25% of total loans at December 31, 2008, and $4,174 or 1.17% of
total loans at December 31, 2007. In years prior to 2006 the Company maintained
an allowance for loan losses of less than .90% of total loans. The allowance
for loan losses as a percentage of nonperforming loans was 56%, 48% and 59% for
the years ending December 31, 2009, 2008 and 2007, respectively.
COMPANY'S CREDIT MANAGEMENT PROCESS ENHANCEMENTS
Since 2007 and continuing through today, Executive Management has been focused
on implementing enhancements to the Company's credit management process. These
changes were necessary to support our move into new markets and to address the
effects of the deteriorating economic conditions. Throughout this period of
time the Board of Directors has substantially increased its involvement in the
credit oversight process. Policies and procedures have been substantially
modified and new training programs have been implemented to strengthen the
Bank's credit underwriting activities. These changes have resulted in
significant staff turnover and in some instances the reassignment of duties and
responsibilities among remaining staff members.
The company established a credit administration function and hired an
experienced Chief Credit Officer in November 2009 to oversee this initiative
and in January 2010 expanded its special assets and collection staff.
U. S. TREASURY'S CAPITAL PURCHASE PROGRAM (CPP PLAN)
As previously reported, in February 2009 the Company participated in the U. S.
Treasury's Capital Purchase Program and received $10,000, which is accounted
for as capital under regulatory guidelines. This money has proven to be
beneficial in addressing the credit needs of our customers and the communities
we serve.
Results of Operations
Performance Summary
We reported a net loss to common shareholders of $3,033 for the year-ended
December 31, 2009, compared to net income of $1,242 for the year-ended December
31, 2008. Basic and diluted loss per common share for 2009 was $1.84, compared
to 2008 basic and diluted earnings per common share of $0.76. Our financial
results for 2009 were impacted by a higher provision for loan losses, legal and
other expenses associated with credit collections and carrying expenses
associated with properties obtained from foreclosures and repossessions, and
industry-wide increases in FDIC insurance premiums. Cash dividends of $0.11 per
common share were paid in 2009, compared to cash dividends of $0.55 per common
share paid in 2008. Key factors behind these results are discussed below.
o The market conditions of the past two years have been marked with
economic and industry declines with a significant impact on business
and personal financial performance, and commercial and residential
markets, resulting in increased levels of nonperforming loans, net
charge-offs, and provision for loan losses. Nonperforming loans were
$14,093 at December 31, 2009, compared to $9,554 at December 31, 2008.
Net charge-offs were $5,091 in 2009 compared to $2,832 in 2008. The
provision for loan losses was $8,506 and $3,200, respectively, for
2009 and 2008. At year-end 2009, the allowance for loan losses
represented 2.22% of total loans (covering 56% of nonperforming
loans), compared to 1.25% (covering 48% of nonperforming loans) at
year-end 2008.
o At December 31, 2009, total loans were $358,616, down 2% from year-end
2008, primarily in commercial loans. Total deposits at December 31,
2009, were $397,800, up 3% from year-end 2008, primarily attributable
to increased time deposits.
o The net interest margin for 2009 was 3.53%, 18 basis points ("bp")
lower than 3.71% in 2008. The change in net interest margin was
attributable to a 91 bp decrease in the yield on earning assets
and a 78 bp decrease in the cost of interest-bearing liabilities.
o Taxable equivalent net interest income was $16,728 for 2009,
minimally changed from $16,788 for 2008. Taxable equivalent interest
income decreased $2,857, while interest expense decreased by $2,797.
The decrease in taxable equivalent net interest income was
attributable to the net of favorable volume/mix variances (increasing
taxable equivalent net interest income by $664) offset by unfavorable
rate variances (decreased taxable equivalent net interest income by
$724).
o Noninterest income was $4,421 for 2009, up $395 or 9.8% from 2008.
Fee-based revenues (including service fees on deposit accounts, trust
service fees, and investment product commissions) totaled $2,500 for
2009, down $275 or 10% from $2,775 for 2008. Mortgage banking income
was $564 for 2009, compared to $289 in 2008, an increase of $275 from
2008, because of increased mortgage production in the secondary market
in 2009. Gain on the sale of investments was $449 for 2009 compared
to none in 2008.
o The Company recognized OTTI write-downs of $301 during 2009,
consisting of a $289 write-down on a private placement trust
preferred security, and a $12 write-down on a non-agency mortgage
backed security since the unrealized losses on these securities appear
to be related in part to expected credit losses that will not be
recovered by the Company.
o Noninterest expense was $16,450 for 2009, up $440 or 2.7% over 2008,
impacted by increased legal and professional fees, foreclosure/OREO
expenses, and FDIC assessment totaling $3,217 for 2009, up $1,694 or
111% from $1,523 for 2008. During 2009 we focused on reducing
controllable expenditures. Salaries and employee benefits decreased
$657 or 7.2%, while all remaining noninterest expense categories on
a combined basis decreased $597 or 11.0% from 2008.
Net Interest Income
Our earnings are substantially dependent on net interest income which is the
difference between interest earned on loans, securities and other interest-
earning assets, and the interest paid on deposits and borrowings. Net interest
income is directly impacted by the sensitivity of the balance sheet to changes
in interest rates and by the amount and composition of earning assets and
interest-bearing liabilities, including characteristics such as the fixed or
variable nature of the financial instruments, contractual maturities, and
repricing frequencies.
Taxable equivalent net interest income was $16,728 for 2009, minimally changed
from $16,788 for 2008. This $60,000 decrease in taxable equivalent net
interest income was a function of favorable volume variances (as balance sheet
changes in both volume and mix increased taxable equivalent net interest income
by $664) offset by unfavorable interest rate changes (as the impact of changes
in the interest rate environment and product pricing decreased taxable
equivalent net interest income by $724). The change in mix and volume of
earning assets increased taxable equivalent net interest income by $837, while
the change in volume and composition of interest-bearing liabilities decreased
taxable equivalent net interest income by $173. The most significant impact to
net interest income was the rate changes on earning assets. Rate changes on
earning assets reduced interest income by $3,694, while changes in rates on
interest-bearing liabilities lowered interest expense by $2,970, for a net
unfavorable impact of $724.
The net interest margin for 2009 was 3.53%, compared to 3.71% in 2008. For
2009, the yield on earning assets of 5.74% was 91 bp lower than 2008. Loan
yields decreased 85 bp, to 6.27%, impacted by higher levels of nonaccrual
loans, lower loan yields given the repricing of adjustable rate loans and
competitive pricing pressures to retain and/or obtain creditworthy borrowers.
The yield on securities and short-term investments decreased 75 bp. Overall,
earning asset rate changes reduced interest income by $3,694, the combination
of $3,113 lower interest on loans and $581 lower interest on securities and
short-term investments.
The cost of interest-bearing liabilities of 2.62% in 2009 was 78 bp lower than
2008. The average cost of interest-bearing deposits was 2.36% in 2009, 84 bp
lower than 2008, reflecting the low interest rate environment, yet inflated
pricing to retain local deposits. The cost of wholesale funding (comprised of
short-term borrowings and long-term borrowings) decreased 49 bp to 3.52% for
2009. The subordinated debentures have a fixed rate of 5.98% until December
15, 2010, after which they will have a floating rate of the three-month LIBOR
plus 1.43%. The interest-bearing liability rate changes resulted in $2,970
lower interest expense, with $2,715 attributable to interest-bearing deposits
and $255 due to wholesale funding.
Average earning assets of $474,481 in 2009 were $21,822 higher than 2008.
Average loans grew minimally by $2,083. Average investments grew $19,739 as a
result of soft loan demand and excess liquidity position of the Bank.
Average interest-bearing liabilities of $400,194 in 2009 were up $9,669 over
2008, attributable to a higher level of interest-bearing deposits. Average
interest-bearing deposits grew $13,794, while average noninterest-bearing
deposits increased $1,949. Given the soft loan demand and growth in deposits,
average wholesale funding decreased by $4,305. In 2009, interest expense
increased $173 due to volume changes, with a $378 increase from higher volumes
of interest-bearing deposits, partially offset by a $205 decrease in wholesale
funding.
Table 2: Average Balances and Interest Rates
Years Ended December 31,
2009 2008 2007
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Earnings assets
Loans (1), (2), (3) $363,966 $22,814 6.27% $361,883 $25,779 7.12% $355,307 $28,156 7.92%
Investment securities:
Taxable 79,030 3,540 4.48% 65,908 3,174 4.82% 60,499 2,859 4.73%
Tax-exempt (2) 11,795 725 6.15% 14,154 888 6.28% 19,516 1,127 5.77%
Other interest-earning assets 19,690 149 0.75% 10,714 244 2.28% 6,957 356 5.12%
Total earning assets $474,481 $27,228 5.74% $452,659 $30,085 6.65% $442,279 $32,498 7.35%
Cash and due from banks 7,618 8,113 9,314
Allowance for loan losses (6,733) (4,854) (4,178)
Other assets 22,628 21,356 22,794
Total assets $497,994 $477,274 $470,209
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing demand $29,639 $187 0.63% $27,561 $232 0.84% $27,565 $536 1.94%
Savings deposits 105,330 1,393 1.32% 99,264 1,908 1.92% 96,321 3,160 3.28%
Time deposits 195,712 6,221 3.18% 189,882 7,998 4.21% 191,720 9,467 4.94%
Short-term borrowings 11,907 124 1.04% 11,634 180 1.55% 17,939 773 4.31%
Long-term borrowings 47,296 1,961 4.15% 51,874 2,365 4.56% 42,462 2,014 4.74%
Subordinated debentures 10,310 614 5.98% 10,310 614 5.98% 10,310 614 5.98%
Total interest-bearing liabilities $400,194 $10,500 2.62% $390,525 $13,297 3.40% $386,317 $16,564 4.29%
Demand deposits 49,952 48,003 44,495
Other liabilities 3,726 3,429 5,049
Stockholders' equity 44,122 35,317 34,348
Total liabilities and stockholders'
equity $497,994 $477,274 $470,209
Net interest income and rate spread $16,728 3.12% $16,788 3.25% $15,934 3.06%
Net interest margin 3.53% 3.71% 3.60%
(1) Nonaccrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and investment securities is computed on a tax-equivalent basis using a federal tax
rate of 34% and excluding disallowed interest expense.
(3) Interest income includes loan fees as follows: 2009- $489; 2008-$535; and 2007-$496
Table 3: Interest Income and Expense Volume and Rate Analysis
2009 vs. 2008 2008 vs. 2007
Due to Due to
Volume Rate (1) Net Volume Rate (1) Net
Loans (2) $148 $(3,113) $(2,965) $521 $(2,898) $(2,377)
Taxable investments 632 (266) 366 256 59 315
Tax-exempt investments (2) (148) (15) (163) (309) 70 (239)
Other interest income 205 (300) (95) 192 (304) (112)
Total earning assets $837 $(3,694) $(2,857) $660 $(3,073) $(2,413)
Interest-bearing demand $17 $(62) $(45) $(1) $(303) $(304)
Savings deposits 116 (631) (515) 97 (1,349) (1,252)
Time deposits 245 (2,022) (1,777) (91) (1,378) (1,469)
Short-term borrowings 4 (60) (56) (272) (321) (593)
Long-term borrowings (209) (195) (404) 446 (95) 351
Subordinated debenture 0 0 0 0 0 0
Total interest-bearing liabilities $173 $(2,970) $(2,797) $179 $(3,446) $(3,267)
Net Interest Income $664 $(724) $(60) $481 $373 $854
(1) The change in interest due to both rate and volume has been allocated to rate.
(2) The yield on tax-exempt loans and investment securities is computed on a tax-equivalent basis using
a tax rate of 34% adjusted for the disallowance of interest expense.
Table 4: Yield on Earning Assets
December 31, 2009 December 31, 2008 December 31, 2007
Yield Change Yield Change Yield Change
Yield on earning assets (1) 5.74% -0.91% 6.65% -0.70% 7.35% 0.15%
Effective rate on all liabilities
as a percentage of earning assets 2.21% -0.73% 2.94% -0.81% 3.75% 0.38%
Net yield on earning assets 3.53% -0.18% 3.71% 0.11% 3.60% -0.23%
(1) The yield on tax-exempt loans and investment securities is computed on a tax-equivalent
basis using a tax rate of 34% and adjusted for the disallowance of interest expense.
Provision for Loan Losses
The provision for loan losses is predominantly a function of the Company's
methodology and judgments as to qualitative and quantitative factors used to
determine the adequacy of the allowance for loan losses. The adequacy of the
allowance for loan losses is affected by changes in the size and character of
the loan portfolio, changes in levels of impaired and other nonperforming
loans, historical losses and delinquencies on each portfolio category, the risk
inherent in specific loans, concentrations of loans to specific borrowers or
industries, existing and future economic conditions, the fair value of
underlying collateral, and other factors which could affect potential credit
losses.
The provision for loan losses in 2009 was $8,506, compared to $3,200 and $1,140
for 2008 and 2007, respectively. Net charge offs were $5,091 for 2009, compared
to $2,832 for 2008 and $5,150 for 2007. Net charge offs as a percentage of
average loans were 1.40%, 0.78%, and 1.45% for 2009, 2008, and 2007,
respectively. At December 31, 2009, the allowance for loan losses was $7,957.
In comparison, the allowance for loan losses was $4,542 at December 31, 2008,
and $4,174 at December 31, 2007. The ratio of the allowance for loan losses to
total loans was 2.22%, 1.25%, and 1.17% at December 31, 2009, 2008, and 2007,
respectively. Nonperforming loans at December 31, 2009, were $14,093, compared
to $9,554 at December 31, 2008, and $7,025 at December 31, 2007, representing
3.93%, 2.62%, and 1.96% of total loans, respectively.
Noninterest Income
Noninterest income was $4,421 for 2009, up $395 or 9.8% from 2008. Mortgage
banking income and gain on the sale of investment securities was $1,013, up
$724, while collectively all other noninterest income categories decreased $329
compared to 2008.
Table 5: Noninterest Income
Years Ended December 31, % Change
2009 2008 2007 2009 2008
Service fees $1,239 $1,412 $1,352 -12.3% 4.4%
Trust service fees 1,024 1,114 1,218 -8.1% -8.5%
Investment product commissions 237 249 260 -4.8% -4.2%
Mortgage banking 564 289 304 95.2% -4.9%
Gain on sale of investments 449 0 0 100.0% 0.0%
Other operating income 908 962 923 -5.6% 4.3%
Total noninterest income $4,421 $4,026 $4,057 9.8% -0.8%
Service fees for 2009 were $1,239, down $173 from 2008, primarily due to
decreased fees on deposit charges.
The Wealth Management Services Group includes trust and brokerage services.
Wealth management income for 2009 was $1,261, down $102 from 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, mortgage banking income
was $564, up $275 from 2008. The sales of mortgages to the secondary market
were $47,436 for 2009, an increase of 121% versus $21,441 for 2008.
Gain on sale of investments was $449 for 2009 compared to none in 2008.
Investment security gains were from the sale of government mortgage backed
securities and collateralized mortgage obligation securities.
Noninterest Expense
Noninterest expense for 2009 was $16,450, an increase of $440 or 2.7% over
2008. Foreclosure/OREO expense and FDIC expense was up $1,574, while
collectively all other noninterest expenses decreased $1,134 compared to 2008.
Table 6: Noninterest Expense
Years Ended December 31, % Change
2009 2008 2007 2009 2008
Salaries and employee benefits $8,411 $9,068 $8,840 -7.2% 2.6%
Occupancy 1,893 1,996 1,967 -5.2% 1.5%
Data processing 648 748 777 -13.4% -3.7%
Foreclosure/OREO expense 1,278 541 2,527 NM NM
Legal and professional fees 882 762 650 15.7% 17.2%
Goodwill impairment 0 295 0 NM NM
FDIC expense 1,057 220 42 NM NM
Other 2,281 2,380 2,531 -4.2% -5.9%
Total noninterest expense $16,450 $16,010 $17,334 2.7% -7.6%
We focused on reducing controllable noninterest expenses in 2009. These cost
reductions have included staff reductions, renegotiated vendor contracts and
reduced discretionary spending. Despite these cost reduction efforts, increases
in FDIC insurance and foreclosure/OREO expenses resulted in an overall increase
in operating expenses.
Salaries and employee benefits were $8,411 for 2009, down $657 from 2008.
Salary expense decreased $357 from 2008 and was the result of full-time
equivalent employees decreasing to 158 in 2009, from 172 in 2008. In the fourth
quarter 2009, the Company hired a new Chief Credit Officer and a new Chief
Financial Officer/Chief Operating Officer to strengthen the management team.
Benefit expenses were down $300 from 2008 primarily due to the Company changing
from a self-funded health care plan to a fully insured HMO insurance plan
effective January 1, 2009.
Occupancy expense of $1,893 for 2009 was lower than 2008 (down $103, or 5.2%),
mostly due to lower equipment depreciation and utility costs. Compared to
2008, data processing of $648 was down $100 primarily due to renegotiation of
the data communication contract and decreased maintenance contract costs.
Foreclosure/OREO expenses of $1,278 increased $737, and include a $683 increase
in OREO valuation write-downs over 2008 (with $698 attributable to the Impaired
Borrower) and a general rise in foreclosure expenses and OREO carrying costs.
Legal and professional fees of $882 increased $120, primarily due to higher
legal costs related to increased foreclosure and other collection activities,
outsourcing of the internal audit function and other corporate activities and
projects. FDIC expense increased $837 as the industry-wide assessment rate
more than doubled during 2009 and the second quarter of 2009 included a one-
time special assessment of $230. Other expenses decreased $99 from 2008, due
to declines in miscellaneous other expense categories given the efforts to
control selected discretionary expenses.
The annual testing of goodwill during the fourth quarter 2008 indicated an
impairment of goodwill as the carrying value of the reporting unit's goodwill
exceeded its implied fair value. We recorded a $295 non-cash impairment charge
to expense for goodwill in 2008. There is no longer goodwill on our balance
sheet.
Income Taxes
Income tax benefit for 2009 was $1,916 compared to income tax expense of $9 for
2008. The Company's effective tax rate was -43.5% in 2009 and 0.7% in 2008.
The decline in the effective tax rate was due to the loss before taxes, caused
by the level of the provision for loan losses taken in 2009. In 2008, the
effective tax rate analysis was impacted by a $243 federal tax refund received
from a favorable appeal decision which was partially offset by the $295
goodwill impairment write-down. In 2005, the Internal Revenue assessed our
Bank and many other Wisconsin banks that hold Nevada subsidiaries additional
tax by disallowing a portion of the banks' interest deduction for federal
income tax returns for years 1999-2002. In March 2008, the Internal Revenue
Service notified banks that they would not appeal a recent Tax Court case which
ruled in the banks' favor.
BALANCE SHEET ANALYSIS
Loans
The Bank services a diverse customer base throughout North Central Wisconsin
including the following industries: agriculture (primarily dairy), retail,
manufacturing, service, resort properties, timber and businesses supporting the
general building industry. Although our total loan portfolio decreased, the
mix in the portfolio changed as we purposely withdrew from commercial loan
participations purchased from other banks. We concentrated our efforts in
originating loans in our local markets and assisting stressed loan customers by
restructuring their loans and utilizing government loan programs such as SBA,
USDA, and FSA to help them survive the current economic downturn and position
their businesses to return to profitability in the future.
Total loans were $358,616 at December 31, 2009, a decrease of $5,765 or 2% from
December 31, 2008. Loan volume growth was negatively impacted by the current
credit environment and economic conditions.
Table 7: Loan Composition
2009 2008 2007 2006 2005
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Commercial $35,673 10% $39,047 11% $39,892 11% $61,778 18% $55,685 18%
Commercial real estate 138,891 39% 127,209 34% 114,028 32% 113,738 32% 107,920 34%
Real estate construction 35,417 10% 45,665 13% 45,959 13% 26,105 7% 14,080 5%
Agricultural 42,280 12% 43,345 12% 40,804 11% 42,936 12% 36,243 12%
Real estate residential 99,116 27% 100,311 28% 107,239 30% 97,711 28% 87,920 28%
Installment 7,239 2% 8,804 2% 10,066 3% 9,179 3% 8,522 3%
Total loans $358,616 100% $364,381 100% $357,988 100% $351,447 100% $310,370 100%
Owner occupied $88,002 63% $54,749 43% $57,027 50% $65,312 57% $65,144 60%
Non-owner occupied 50,889 37% 72,460 57% 57,001 50% 48,426 43% 42,776 40%
Commercial real estate $138,891 100% $127,209 100% $114,028 100% $113,738 100% $107,920 100%
1-4 family construction $3,523 10% $4,757 10% $8,034 17% $9,447 36% $14,080 100%
All other construction 31,894 90% 40,908 90% 37,925 83% 16,658 64% 0 0%
Real estate construction $35,417 100% $45,665 100% $45,959 100% $26,105 100% $14,080 100%
Commercial loans are the largest component of our loan portfolio at 59% and are
considered to have more inherent risk of default than residential mortgage or
retail loans. The commercial balance per borrower is typically larger than
that for residential and mortgage loans, inferring higher potential losses on
an individual customer basis. Commercial loan growth throughout 2009 was
negatively impacted by soft loan demand in our markets, and the Company's
aggressive approach to recognizing risks associated with specific loans and in
recognizing charge-offs on nonperforming loans.
Commercial loans were $35,673 at the end of 2009, down $3,374 (9%) since year-
end 2008, and comprised 10% of total loans outstanding, down from 11% at the
end of 2008. The commercial loan classification primarily consists of
multifamily residential properties and commercial loans to small businesses.
Loans of this type are in a diverse range of industries. The credit risk
related to commercial loans is largely influenced by general economic
conditions and the resulting impact on a borrower's operations or on the value
of underlying collateral, if any.
Commercial real estate primarily includes commercial-based loans that are
secured by nonfarm/nonresidential real estate properties. Commercial real
estate totaled $138,891 at December 31, 2009, up $11,682 (9%) from December 31,
2008, and comprised 39% of total loans outstanding versus 34% at year-end 2008.
Loans of this type are mainly secured by commercial income properties. Credit
risk is managed by employing sound underwriting guidelines, lending primarily
to borrowers in local markets and businesses, periodically evaluating the
underlying collateral, and formally reviewing the borrower's financial
soundness and relationship on an ongoing basis.
Real estate construction loans declined $10,248 (22%) to $35,417, representing
10% of the total loan portfolio at the end of 2009, compared to 13% at the end
of 2008. Loans in this classification provide financing for the acquisition or
development of commercial income properties, multifamily projects or
residential development, both single and multi- family. The Company controls
the credit risk on these types of loans by making loans in familiar markets,
underwriting the loans to meet the requirements of institutional investors in
the secondary market, reviewing the merits of individual projects, controlling
loan structure, and monitoring project progress and construction advances.
Agricultural loans totaled $42,280 at December 31, 2009, down $1,065 (2%)
compared to 2008, and represented 12% of the 2009 year-end loan portfolio,
unchanged from year-end 2008. Loans in this classification include loans
secured by farmland and financing for agricultural production. Credit risk is
managed by employing sound underwriting guidelines, periodically evaluating the
underlying collateral, and formally reviewing the borrower's financial
soundness and relationship on an ongoing basis.
Real estate residential loans totaled $99,116 at the end of 2009, down $1,195
(1%) from the prior year-end and comprised 27% of total loans outstanding at
the end of 2009, compared to 28% at the end of 2008. Residential mortgage
loans include conventional first lien home mortgages and home equity loans.
Home equity loans consist of home equity lines, and term loans, some of which
are first lien positions. As part of its management of originating residential
mortgage loans, nearly all of the Company's long-term, fixed-rate residential
real estate mortgage loans are sold in the secondary market without retaining
the servicing rights.
Installment loans totaled $7,239 at December 31, 2009, down $1,565 (18%)
compared to 2008, and represented 2% of the 2009and 2008 year-end loan
portfolio. Loans in this classification include short-term and other personal
installment loans not secured by real estate. Credit risk is primarily
controlled by reviewing the creditworthiness of the borrowers, monitoring
payment histories, and taking appropriate collateral and guaranty positions.
Factors that are important to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, early identification of
potential problems, an adequate allowance for loan losses, and sound nonaccrual
and charge-off policies. An active credit risk management process is used for
commercial loans to further ensure that sound and consistent credit decisions
are made. Credit risk is controlled by detailed underwriting procedures,
comprehensive loan administration, and periodic review of borrowers'
outstanding loans and commitments. Borrower relationships are formally reviewed
and graded on an ongoing basis for early identification of potential problems.
Further analyses by customer, industry, and geographic location are performed
to monitor trends, financial performance, and concentrations. Cash flows and
collateral values are analyzed in a range of projected operating environments.
The loan portfolio is widely diversified by types of borrowers, industry
groups, and market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned to multiple
numbers of borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. At December 31, 2009, no
significant industry concentrations existed in the Company's portfolio in
excess of 30% of total loans. The Bank has developed guidelines to manage its
exposure to various types of concentration risks.
Table 8: Loan Maturity Distribution
Loan Maturity
One Year Over One Year Over
or Less to Five Years Five Years
Commercial $14,089 $19,524 $2,070
Real estate commercial 50,865 79,400 8,602
Agricultural 18,151 20,872 3,257
Real estate construction 16,944 11,424 6,442
Real estate residential 17,926 39,008 42,792
Installment 2,120 4,888 242
Total $120,095 $175,116 $63,405
Fixed rate $92,074 $157,067 $10,007
Variable rate 28,021 18,049 53,398
Total $120,095 $175,116 $63,405
Allowance for Loan Losses
The economic environment during 2009 presented unique credit related issues
that required management's attention. As a result, the Company focused on
managing credit risk through enhanced asset quality administration, including
early problem loan identification and timely resolution of problems. Credit
risks within the loan portfolio are inherently different for each loan type.
Credit risk is controlled and monitored through the use of lending standards, a
thorough review of potential borrowers, and on-going attention to loan payment
performance.
The level of the allowance for loan losses represents management's estimate of
an amount of reserves which provides for potential credit losses in the loan
portfolio at the balance sheet date. To assess the adequacy of the allowance
for loan losses, an allocation methodology is applied by the Company which
focuses on evaluation of several factors, including but not limited to:
evaluation of facts and issues related to specific loans, management's ongoing
review and grading of the loan portfolio, consideration of historical loan loss
and delinquency experience on each portfolio category, trends in past due and
nonperforming loans, the risk characteristics of the various classifications of
loans, changes in the size and character of the loan portfolio, concentrations
of loans to specific borrowers or industries, existing and forecasted economic
conditions, the fair value of underlying collateral, and other qualitative and
quantitative factors which could affect potential credit losses. Our
methodology reflects guidance by regulatory agencies to all financial
institutions, and is specifically reviewed by the Company's independent
auditors.
At December 31, 2009, the allowance for loan losses was $7,957, compared to
$4,542 at December 31, 2008 and $4,174 at December 31, 2007. The allowance for
loan losses as a percentage of total loans was 2.22%, 1.25%, and 1.17% at
December 31, 2009, 2008 and 2007, respectively, and the allowance for loan
losses was 56%, 48% and 59% of nonperforming loans at December 31, 2009, 2008
and 2007, respectively. Management's allowance methodology includes an
impairment analysis on specifically identified commercial loans defined as
impaired by the Company in determining the overall appropriate level of the
allowance for loan losses.
With the accelerated deterioration of credit quality during 2009, rising net
charge off and nonperforming loan ratios, and management's assessment of the
adequacy of the allowance for loan losses, the provision for loan losses of
$8,506 for 2009 was higher than the 2008 provision of $3,200 and 2007 provision
of $1,140. Management believes these actions recognized and appropriately
addressed any significant credit quality issues in the loan portfolio.
The asset quality stress which began in 2007 with the $4,600 charge-off (88% of
total charge-offs in 2007) of the Impaired Borrower has accelerated
considerably during 2009 with the Company experiencing elevated net charge offs
and higher nonperforming loan levels compared to the Company's historical
trends. Issues impacting asset quality during this period included a general
deterioration in economic factors such as rising unemployment, declining
commercial and residential real estate markets, higher and more volatile energy
prices, and waning consumer confidence. Declining collateral values have
significantly contributed to the elevated levels of nonperforming loans, net
charge offs, and allowance for loan losses, resulting in the increase in the
provision for loan losses that the Company has experienced in recent periods.
During this time period, the Company has continued to review its underwriting
and risk-based pricing guidelines for commercial real estate and real estate
construction lending, as well as on new home equity and residential mortgage
loans, to reduce potential exposure within these portfolio categories. In
2007, we hired an experienced mortgage underwriter to centralize the
underwriting requirements for all residential real estate loans. In 2008, we
formed a Special Assets Group to lead the Bank's collection efforts focusing on
the acceleration and the disposition of certain problem assets. In the fourth
quarter 2009 we hired a new Chief Credit Officer to focus on credit related
issues and to strengthen the credit management process.
Gross charge offs were $5,283 for 2009, $3,040 for 2008, and $5,198 for 2007,
while recoveries for the corresponding periods were $192, $208, and $48,
respectively. As a result, net charge offs were $5,091 or 1.40% of average
loans for 2009, compared to $2,832 or 0.78% of average loans for 2008, and
$5,150 or 1.45% of average loans for 2007. Net charge-offs in 2009 included
$1,880 in participation loans related to an ethanol plant in South Eastern
Wisconsin and a recreational facility in Northern Illinois. For 2009, 79% of
net charge offs came from commercial loans, compared to 65% for 2008 and 92%
for 2007. Residential mortgages and home equity accounted for 19% of 2009 net
charge offs, compared to 30% and 6% for 2008 and 2007, respectively. For 2009,
installment loans accounted for 2% of net charge offs, compared to 5% for 2008
and 1% for 2007. Gross charge-offs have been rising over the past three years,
as economic conditions, such as rising unemployment, higher energy costs, and a
weakening housing market, have been impacting the business and personal
financial performance, while recoveries on these loans have remained relatively
low. Loans charged off are subject to continuous review, and specific efforts
are taken to achieve maximum recovery of principal, accrued interest, and
related expenses.
Table 9: Loan Loss Experience
Years Ended December 31,
2009 2008 2007 2006 2005
Allowance for loan losses:
Balance at beginning of year $4,542 $4,174 $8,184 $3,028 $2,820
Charge-offs (5,283) (3,040) (5,198) (113) (177)
Recoveries 192 208 48 136 43
Net (charge-offs) recoveries (5,091) (2,832) (5,150) 23 (134)
Provision for loan losses 8,506 3,200 1,140 5,133 342
Balance at end of year $7,957 $4,542 $4,174 $8,184 $3,028
Net loan charge offs (recoveries):
Commercial $603 $177 $1,442 ($59) ($16)
Agricultural 34 18 1 (1) (8)
Commercial real estate (CRE) 1,839 1,453 3,298 10 30
Real estate construction 1,556 186 6 11 0
Total commercial 4,032 1,834 4,747 (39) 6
Residential mortgage 945 721 331 0 88
Home equity 5 121 0 0 0
Installment 109 156 72 16 40
Total net charge offs (recoveries) $5,091 $2,832 $5,150 ($23) $134
CRE and Construction net charge-off detail:
Owner occupied $757 $1,078 ($11) $10 $30
Non-owner occupied 1,082 375 3,309 0 0
Commercial real estate $1,839 $1,453 $3,298 $10 $30
1-4 family construction $33 $186 $0 $11 $0
All other construction 1,523 0 6 0 0
Real estate construction $1,556 $186 $6 $11 $0
The allocation of the year-end allowance for loan losses for each of the past
five years based on our estimate of loss exposure by category of loans is shown
in Table 10.
Table 10: Allocation of the Allowance for Loan Losses
% of Loan % of Loan % of Loan % of Loan % of Loan
Type to Type to Type to Type to Type to
Total Total Total Total Total
2009 Loans 2008 Loans 2007 Loans 2006 Loans 2005 Loans
Allowance allocation:
Commercial $497 10% $295 11% $301 11% $2,452 18% $524 18%
Agricultural 981 12% 450 12% 374 11% 854 12% 545 12%
Commercial real estate
(CRE) 3,954 39% 1,836 34% 1,899 32% 3,048 32% 1,122 34%
Real estate construction 685 10% 836 13% 351 13% 219 7% 96 5%
Total commercial 6,117 71% 3,417 70% 2,925 67% 6,573 69% 2,287 69%
Residential mortgage 1,753 27% 1,010 28% 1,056 30% 1,232 28% 645 28%
Installment 87 2% 115 2% 193 3% 379 3% 96 3%
Total allowance for
loan losses $7,957 100% $4,542 100% $4,174 100% $8,184 100% $3,028 100%
Allowance category as a
percent of total allowance:
Commercial 6.2% 6.5% 7.2% 30.0% 17.3%
Agricultural 12.3% 9.9% 9.0% 10.4% 18.0%
Commercial real estate (CRE) 49.8% 40.4% 45.5% 37.2% 37.1%
Real estate construction 8.6% 18.4% 8.4% 2.7% 3.2%
Total commercial 76.9% 75.2% 70.1% 80.3% 75.6%
Residential mortgage 22.0% 22.2% 25.3% 15.1% 21.2%
Installment 1.1% 2.6% 4.6% 4.6% 3.2%
Total allowance for
loan losses 100.0% 100.0% 100.0% 100.0% 100.0%
The Company's process in evaluating the adequacy of the allowance for loan
losses follows a methodology which addresses various risks in the loan
portfolio. This process includes: (1) the analysis of specifically identified
loans that exhibit the most severe risks and thus are considered impaired; (2)
historical loss and delinquency experience on each loan category in the
portfolio; (3) trends in non-performing loans; (4) risk characteristics of
various types of loans; (5) changes in the size and mix of loans in the
portfolio; (6) concentrations of credit based on similar industries, borrowers
or types of loans; (7) existing and projected economic conditions; (8) changes
in the value of collateral securing loans; and (8) management's ongoing
evaluation of other qualitative and quantitative factors that may affect
potential loan losses.
The allocation methodology used at December 31, 2009, 2008, 2007 was
comparable. Loss factors are analyzed based on historical loss rates and on
other qualitative factors that may affect loan collectability. Management
allocates the allowance for loan losses by pools of risk. The loss factors
applied in the methodology are periodically re-evaluated. The loss factors
assigned to loan types were very similar between 2007 and 2009; however,
refinements were made in 2008 and 2009 to better align current and historical
loss experience.
During 2009, management of the Company was focused on the erosion of the credit
environment and the corresponding deterioration in its credit quality metrics.
Process improvements were implemented around credit evaluations, documentation,
appraisal processes and portfolio monitoring. The improved credit processes,
combined with enhanced credit information, have been incorporated into the
methodology management uses in determining the adequacy of the allowance for
loan losses. This process is reviewed by the Company's internal and external
auditors and the regulatory agencies.
Impaired Loans and Nonperforming Assets
Management is committed to an aggressive problem loan identification
philosophy. This philosophy is implemented through the ongoing monitoring and
review of all pools of risk in the loan portfolio to ensure that problem loans
are identified early and the risk of loss is minimized.
Nonperforming loans are considered one indicator of potential future loan
losses. Nonperforming loans are defined as nonaccrual loans, including those
defined as impaired under current accounting standards, loans 90 days or more
past due but still accruing, and restructured loans. Loans are generally 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
or circumstances that may adversely impact the collectability of principal or
interest on loans, management may place such loans on nonaccrual status
immediately. Previously accrued and uncollected interest on such loans is
reversed, amortization of related loan fees is suspended, and income is
recorded only to the extent that interest payments are subsequently received in
cash after a determination has been made that the principal balance of the loan
is collectible. If collectability of the principal is in doubt, payments
received are applied to loan principal. Loans past due 90 days or more but
still accruing interest are also included in nonperforming loans. Also
included in nonperforming loans are loans modified in a troubled debt
restructuring (or "restructured" loans). Restructured loans involve the
granting of some concession to the borrower involving the modification of terms
of the loan, such as changes in payment schedule or interest rate, which
generally would not be otherwise considered. Generally, such loans are included
in nonaccrual loans until the customer has attained a sustained period of
repayment performance. Nonperforming loans were $14,093, $9,554, and $7,025 at
December 31, 2009, 2008, and 2007 respectively, reflecting the impact of the
economy on our customers.
Table 11: Nonperforming Loans and OREO
2009 2008 2007 2006 2005(A)
Nonaccrual loans not considered impaired:
Commercial $751 $36 $32 $599 $960
Agricultural 371 521 0 24 66
Real estate residential 958 1,273 485 594 98
Installment 19 47 42 7 8
Total nonaccrual loans not considered impaired 2,099 1,877 559 1,224 1,132
Nonaccrual loans considered impaired:
Commercial 8,894 5,632 3,786 4,722 N/A
Agricultural 568 216 277 0 N/A
Residential mortgage 2,363 808 1,140 197 N/A
Installment 0 416 499 504 N/A
Total nonaccrual loans considered impaired 11,825 7,072 5,702 5,423 N/A
Accruing loans past due 90 days or more (credit cards) 18 36 64 4 19
Restructured loans 151 569 700 473 365
Total nonperforming loans 14,093 9,554 7,025 7,124 1,516
Other real estate owned (OREO) 1,808 2,556 2,352 130 N/A
Other repossessed assets 450 5 0 0 N/A
Investment security (Trust Preferred) 211 0 0 0 N/A
Total nonperforming assets $16,562 $12,115 $9,377 $7,254 $1,516
RATIOS
Nonperforming loans to total loans 3.93% 2.62% 1.96% 2.03% 0.49%
Nonperforming assets to total loans plus OREO 4.60% 3.30% 2.60% 2.06% 0.49%
Nonperforming assets to total assets 3.28% 2.44% 1.95% 1.57% 0.35%
Allowance for loan losses to nonperforming loans 56% 48% 59% 115% 200%
Allowance for loan losses to total loans at end of year 2.22% 1.25% 1.17% 2.33% 0.98%
Nonperforming assets by type:
Commercial $40 $411 $547 $2,225 $321
Agricultural 939 737 393 24 149
Commercial real estate (CRE) 9,009 3,501 3,855 3,077 486
Real estate construction 747 2,325 0 62 145
Total commercial 10,735 6,974 4,795 5,388 1,101
Residential mortgage 3,321 2,081 1,625 791 98
Installment 37 499 605 515 27
Total nonperforming loans 14,093 9,554 7,025 6,694 1,226
Commercial real estate owned 1,523 1,827 1,660 0 0
Residential real estate owned 285 729 692 130 0
Total other real estate owned 1,808 2,556 2,352 130 0
Other repossessed assets 450 5 0 0 0
Investment security (Trust Preferred) 211 0 0 0 0
Total nonperforming assets $16,562 $12,115 $9,377 $6,824 $1,226
CRE and Construction nonperforming loan detail:
Owner occupied $5,949 $2,255 $3,179 $195 $0
Non-owner occupied 3,060 1,246 676 2,882 486
Commercial real estate $9,009 $3,501 $3,855 $3,077 $486
1-4 family construction $0 $296 $0 $0 $145
All other construction 747 2,029 0 62 0
Real estate construction $747 $2,325 $0 $62 $145
(A) Break-down of impaired loans is not available for 2005.
Nonperforming loans have increased year-over-year since 2006 when the loans of
the Impaired Borrower were identified, charged-off in 2007 and the commercial
and residential real estate properties surrendered were taken into OREO. Since
2008 the increase in nonperforming loans was primarily due to the impact of
declining property values, decreased sales, longer holding periods, rising
costs brought on by deteriorating real estate conditions and the weakening
economy. At December 31, 2009 there were seven large individual credit
relationships (each over $500) that represented 44%, or $7,324, of
nonperforming loans. Subsequent to year-end we have received information on
two of our larger nonperforming loan relationships as noted above:
o We received a $1,139 payment on the ethanol plant participation loan
included in nonperforming loans in the first quarter 2010.
o The recreational facility participation loan is in bankruptcy
proceedings leading to a `363' sale. The current court schedule
indicates that the closing of the successful bid should occur by March
31, 2010.
Total nonperforming loans of $16,562 were up $4,539 or 48% since year-end 2008,
with commercial nonperforming loans up $3,761 (primarily attributable to
participation loans) and consumer-related nonperforming loans were up $778.
Between 2008 and 2007, total nonperforming loans increased $2,529, with
commercial nonperforming loans up $2,179 and consumer-related nonperforming
loans were up $350. The 2009 increase in provision for loan losses was the
primary cause for the increase in the ratio of the allowance for loan losses to
nonperforming loans at December 31, 2009, to 56% up from 48% in 2008.
The following table shows the approximate gross interest that would have been
recorded if the loans accounted for on a nonaccrual basis and restructured
loans for the years ended as indicated had performed in accordance with their
original terms in contrast to the amount of interest income that was included
in interest income for the period.
Table 12: Forgone Loan Interest
Years Ended December 31,
2009 2008 2007
Interest income in accordance with original terms $819 $704 $352
Interest income recognized (622) (423) (150)
Reduction in interest income $197 $281 $202
The level of potential problem loans is another predominant factor in
determining the relative level of risk in the loan portfolio and in determining
the adequacy 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 in performing status; however, there are circumstances
present which might adversely affect the 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 the Company expects
losses to occur, but that management recognizes 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 December 31, 2009, potential
problem loans totaled $10,873; due to more aggressive procedures undertaken in
2009. There is no comparable figure to year-end 2008. Potential problem loans
at December 31, 2009, consist of $1,873 of commercial loans, $7,222 of
commercial real estate, $136 of real estate construction, and $1,642 of real
estate residential loans. The current level of potential problem loans
requires a heightened management review of the pace at which a credit may
deteriorate, the duration of asset quality stress, and uncertainty around the
magnitude and scope of economic stress that may be felt by the Company's
customers and on underlying real estate values.
OREO was $1,808 at December 31, 2009, compared to $2,556 at December 31, 2008
and $2,352 at December 31, 2007. The largest asset in OREO as of December 31,
2009, consists of the remaining commercial and residential real estate
properties associated with the Impaired Borrower received in 2007 from the
surrender of assets. In March 2010, the remaining residential real estate
property of the Impaired Borrower was sold. Evaluations of the fair market
value of the properties are done quarterly and valuation adjustments, if
necessary, are recorded in our consolidated financial statements. Valuation
adjustments of the OREO from the Impaired Borrower totaled $698, $273, and
$2,353 pretax, in 2009, 2008 and 2007, respectively. Previous valuations on
the properties of the Impaired Borrower represented fair value based on
appraisals and an accepted offer to purchase which was subject to various
contingencies and subsequently not consummated. The current carrying values of
the OREO represent the fair value based on the highest and best use of the
properties. The amount remaining in OREO and repossessed property related to
the Impaired Borrower totaled $1,427, $2,514 and $2,796 as of December 31,
2009, 2008, and 2007 respectively.
Excluding the properties of the Impaired Borrower, the other properties held as
OREO in 2009 consists of $580 of commercial real estate, $208 real estate
construction loan and $35 residential real estate. OREO as of year-end 2008
consisted of $367 of commercial real estate, and $116 residential real estate.
OREO consisted of $16 residential real estate as of year-end 2007. Management
actively seeks to ensure properties held are monitored to minimize the
Company's risk of loss.
Investment Securities Portfolio
The investment securities portfolio is intended to provide the Bank with
adequate liquidity, flexible asset/liability management, a source of stable
income, and structured with minimum credit exposure to the Bank. 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 13: Investment Securities Portfolio at Estimated Fair Value
Years Ended December 31,
2009 2008 2007
U.S. treasury securities and obligations of U.S.
government corporations and agencies $3,179 $201 $449
Mortgage-backed securities 81,766 65,073 62,855
Obligations of states and political subdivisions 17,184 14,006 17,724
Corporate debt securities 1,198 1,607 1,372
Subtotal 103,327 80,887 82,400
Equity securities 150 151 151
Totals $103,477 $81,038 $82,551
At December 31, 2009, the total carrying value of investment securities was
$103,477, up $22,439 or 28% compared to December 31, 2008, and represented 20%
of total assets, compared to 16% of total assets at December 31, 2008. The
$22,439 increase in investment securities during 2009 was primarily
attributable to the soft loan demand and excess liquidity position of the Bank.
At December 31, 2009, the securities portfolio did not contain securities of
any single issuer that were payable from and secured by the same source of
revenue or taxing authority where the aggregate carrying value of such
securities exceeded 10% of stockholders' equity.
The Company recognized OTTI write-downs of $301 during 2009, consisting of a
$289 write-down on a private placement trust preferred security, and a $12
write-down on a non-agency mortgage backed security since the unrealized losses
on these securities appear to be related in part to expected credit losses that
will not be recovered by the Company. Since the Company does not intend to
sell the securities and it is not more likely than not that the Company will be
required to sell the securities, the portion of OTTI related to all other
factors was recognized in other comprehensive income.
A summary of the investment portfolio is shown below:
Table 14: Investments
Investment Category Rating December 31, 2009 December 31, 2008
Amount % Amount %
US Treasury & Agencies Debt
AAA $3,179 100% $201 100%
Total $3,179 100% $201 100%
US Treasury & Agencies Debt as % of Portfolio 3% < 1%
Mortgage-backed securities
AAA $80,898 99% $63,899 98%
A1 0 0% 874 1%
A2 11 0% 25 < 1%
BA1 514 1% 0 0%
BA3 0 0% 275 < 1%
B3 343 0% 0 0%
Total $81,766 100% $65,073 100%
Mortgage-Backed Securities as % of Portfolio 79% 80%
Obligations of State and Political Subdivisions
Aa2 $2,299 13% $237 2%
AA3 3,449 20% 0 0%
Aa3 0 0% 3,320 24%
A1 336 2% 331 2%
A2 875 5% 857 6%
A3 536 3% 533 4%
Baa1 342 2% 467 3%
NR 9,347 55% 8,261 59%
Total $17,184 100% $14,006 100%
Obligations of State and Political Subdivisions
as % of Portfolio 17% 17%
Corporate Debt Securities
NR $1,348 100% $1,758 100%
Total $1,348 100% $1,758 100%
Corporate Debt Securities as % of Portfolio 1% 2%
Total Market Value of Securities $103,477 100% $81,038 100%
Obligations of State and Political Subdivisions (municipal securities): At
December 31, 2009 and 2008, municipal securities were $17,184 and $14,006,
respectively, and represented 17% of total investment securities for both 2009
and 2008 based on fair value. Municipal bond insurance company downgrades have
resulted in credit downgrades in our municipal security holdings; however, it
has been determined that due to the nature of these obligations it is highly
likely we will be repaid in full.
Mortgage-Backed Securities: At December 31, 2009 and 2008, mortgage-related
securities (which include predominantly mortgage-backed securities and
collateralized mortgage obligations) were $81,766 and $65,073, respectively,
and represented 79% and 80%, respectively, of total investment securities based
on fair value. The fair value of mortgage-related securities is subject to
inherent risks based upon the future performance of the underlying collateral
(mortgage loans) for these securities. Future performance is impacted by
prepayment risk and interest rate changes. As a result of these risks, and as
noted above, the Company recorded a $12 OTTI write-down on one non-agency
mortgage backed security during the second quarter 2009.
Corporate Debt Securities: At December 31, 2009 and 2008, corporate debt
securities were $1,348 and $1,758, respectively, and represented 1% and 2%,
respectively, of total investment securities based on fair value. Corporate
debt securities at December 31, 2009, consisted of trust preferred securities
of $1,173, and other securities of $175. Corporate debt securities at December
31, 2008, consisted of trust preferred securities of $1,583, and other
securities of $175. We were notified in June 2009 that one private placement
trust preferred security ("TPS") in the investment security portfolio, will be
deferring the quarterly interest payments. Subsequently, this TPS has been
placed on non-accrual status and an OTTI write-down of $289 was recorded in the
third quarter of 2009.
The Federal Home Loan Bank ("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 limit or stop the FHLB from paying dividends or redeeming
stock without prior approval. The FHLB of Chicago last paid a dividend in the
third quarter of 2007. The Bank is a member of the FHLB Chicago. Accounting
guidance indicates that an investor in FHLB Chicago capital stock should
recognize impairment if it concludes that it is not probable that it will
ultimately recover the par value of its shares. The decision of whether
impairment exists is a matter of judgment that should reflect the investor's
view of FHLB Chicago's long-term performance, which includes factors such as:
(1) its operating performance, (2) the severity and duration of declines in the
market value of its net assets related to its capital stock amount, (3) its
commitment to make payments required by law or regulation and the level of such
payments in relation to its operating performance, (4) the impact of
legislation and regulatory changes on FHLB Chicago, and on the members of FHLB
Chicago and (5) its liquidity and funding position. After evaluating all of
these considerations, the Company believes the cost of the investment will be
recovered. Future evaluations of these factors could result in a different
conclusion.
Table 15: Investment Securities Portfolio Maturity Distribution
After After
One But Five but
Within Within Within After
One Year Five Years Ten Years Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $0 0.00% $2,979 2.55% $200 2.25% $0 0.00% $3,179 2.53%
Mortgage-backed securities 8,659 4.97% 70,225 4.49% 2,882 4.32% 0 0.00% 81,766 4.53%
Obligations of states and
political subdivisions (1) 2,221 6.75% 8,299 5.55% 6,664 4.82% 0 0.00% 17,184 5.42%
Corporate debt securities 0 0.00% 214 7.71% 0 0.00% 984 6.16% 1,198 6.44%
Total carrying value $10,880 5.33% $81,717 4.54% $9,746 4.62% $984 6.16% $103,327 4.64%
(1) The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a Federal tax rate of 34%
and excluding disallowed interest expense.
Deposits
Deposits are the Company's largest source of funds. At December 31, 2009
deposits were $397,800, up $12,125 or 3% from December 31, 2008, primarily
affected by a $25,135 increase in time deposits (defined as certificates of
deposit and IRA retirement accounts), offset partially by a $10,102 decline in
brokered certificates of deposits. Interest-bearing demand deposits declined
year-over-year due to the temporary prior year-end holdings of a large
depositor. Time deposits grew to represent 41% of total deposits at December
31, 2009 (compared to 36% at year-end 2008), while interest-bearing demand and
money market deposits decreased to 29% of total deposits (versus 31% last year
end), and brokered certificates of deposit declined to 10% of total deposits
(versus 13% for the prior year end). Non-interest bearing and savings deposits
remained unchanged at 20% of total deposits for the years ended 2009 and 2008.
On average, deposits were $380,633 for 2009, up $15,923 over the average for
2008. As seen for the period end deposits, the mix of average deposits was
impacted by the shift of customer preferences to time deposits (up $8,768 on
average between 2009 and 2008) and due to the decrease in loan demand. Brokered
certificates of deposits were not renewed as they matured. Time deposits grew
to 40% of total average deposits for 2009, while brokered deposits declined to
11% of total average deposits for 2009.
Table 16: Average Deposits Distribution
2009 2008 2007
% of % of % of
Amount Total Amount Total Amount Total
Noninterest-bearing demand deposits $49,952 13% $48,003 13% $44,495 12%
Interest-bearing demand deposits 29,639 8% 27,561 8% 27,565 8%
Savings deposits 105,330 28% 99,264 27% 96,321 27%
Time deposits 151,827 40% 143,059 39% 141,495 39%
Brokered certificates of deposit 43,885 11% 46,823 13% 50,225 14%
Total $380,633 100% $364,710 100% $360,101 100%
The retail markets we compete in 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 customer relationships.
Table 17: Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31, 2009 December 31, 2008
3 months or less $22,734 $24,848
Over 3 months through 6 months 12,646 20,102
Over 6 months through 12 months 21,471 8,187
Over 12 months 37,652 39,654
Total $94,503 $92,791
Other Funding Sources
Other funding sources, (includes short-term borrowings, long-term borrowings,
and subordinated debentures), were $60,854 at December 31, 2009, down $10,196
from $71,050 at December 31, 2008. Long-term borrowings at December 31, 2009,
were $42,561, down $6,868 from December 31, 2008 as matured borrowings were not
renewed due to the liquidity position of the Company. Short-term borrowings
consist of corporate funds in the form of repurchase agreements and were $7,983
at December 31, 2009, down $3,328 from December 31, 2008 as corporate customers
were impacted by the difficult economy and related cash demands.
Table 18: Short Term Borrowings
December 31,
2009 2008 2007
Balance end of year $7,983 $11,311 $15,346
Average amounts outstanding during year $12,031 $11,753 $17,939
Maximum month-end amounts outstanding $20,074 $13,654 $34,958
Average interest rates on amounts
outstanding during year 1.06% 1.53% 4.31%
Average interest rates on amounts
outstanding at end of year 0.48% 0.70% 1.82%
At December 31, 2009, the Bank and Company had available liquidity through
excess pre-approved overnight federal funds borrowing lines with corresponding
banks, the fed discount window or long-term borrowings agreements, totaling
approximately $31,000.
In 2005, Mid-Wisconsin Statutory Trust I (the "Trust"), a Delaware Business
Trust subsidiary of the Company, issued $10,000 in trust preferred securities.
The Trust used the proceeds from the offering along with Mid-Wisconsin's common
ownership investment to purchase $10,300 of the Company's subordinated
debentures (the "debentures"). The trust preferred securities and the
debentures mature on December 15, 2035, and have a fixed rate of 5.98% until
December 15, 2010, after which they will have a floating rate of the three-
month LIBOR plus 1.43%.
Off-Balance Sheet Obligations
As of December 31, 2009 and 2008, we have the following commitments, which do
not appear on our balance sheet.
Table 19: Commitments
2009 2008
Commitments to extend credit:
Fixed rate $25,405 $26,074
Adjustable rate 23,462 23,808
Standby and irrevocable letters of credit-fixed rate 3,792 3,872
Credit card commitments 4,250 4,456
Further discussion of these commitments is included in Note 19, "Financial
Instruments with Off-Balance Sheet Risk" of the Notes to Consolidated Financial
Statements.
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 offer competitive interest rates or availability of collateral for pledging
purposes supporting the long-term advances.
Table 20: Contractual Obligations
Payments due by period
Total < 1 year 1-3 years 3-5 years > 5 years
Subordinated debentures $10,310 $0 $0 $0 $10,310
Other long-term borrowings 10,000 0 5,000 5,000 0
FHLB borrowings 32,561 5,061 23,500 4,000 0
Total long-term borrowing obligations $52,871 $5,061 $28,500 $9,000 $10,310
Also, we have liabilities due to directors for services rendered with various
payment terms depending on their anticipated retirement date or their election
of payout terms following retirement. The total liability at December 31, 2009
for current and retired directors is $839, of which approximately 74% is
estimated to have a maturity in excess of five years.
Liquidity and Interest Rate Sensitivity
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.
Funds are available from a number of basic banking activity sources, primarily
from the core deposit base and from loans and investment securities repayments
and maturities. Additionally, liquidity is available from the sale of
investment securities, and brokered deposits. The current volatility and
disruptions in capital markets may impact the Company's ability to access
certain liquidity sources in the same manner as the Company had in the past.
While dividends and service fees from the Bank and proceeds from issuance of
capital are primary funding sources for the Company, these sources could be
limited or costly (such as by regulation or subject to the capital needs of its
subsidiary or by market appetite for company stock). No dividends were
received in cash from the Bank in 2009 and 2008.
Investment securities are an important tool to the Company's liquidity
objective. All investment securities are classified as available for sale and
are reported at fair value on the consolidated balance sheet. Of the $103,477
investment securities portfolio at December 31, 2009, $61,448 were pledged to
secure public deposits, short-term borrowings, and for other purposes as
required by law. The majority of the remaining securities could be sold to
enhance liquidity, if necessary.
The scheduled maturity of loans could also provide a source of additional
liquidity. The Bank has $141,944, or 40%, of total loans maturing within one
year. Factors affecting liquidity relative to loans are loan renewals,
origination volumes, prepayment rates, and maturity of the 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.
Deposits are another source of liquidity for the Bank. Deposit liquidity is
affected by core deposit growth levels, certificates of deposit maturity
structure, and retention and diversification of wholesale funding sources.
Deposit outflows would require the Bank to access alternative funding sources
which may not be as liquid and/or more costly.
Other funding sources for the Bank are in the form of short-term borrowings
(corporate repurchase agreements, and federal funds purchased), and long-term
borrowings. Short-term borrowings can be reissued and do not represent an
immediate need for cash. Long-term borrowings are used for asset/liability
matching purposes and to access more favorable interest rates than deposits.
The Bank's liquidity resources were sufficient in 2009 to fund the growth in
loans and investments, and to meet other cash needs when necessary.
For the year ended December 31, 2009, net cash used in operating and investing
activities was $2,844 and $8,251, respectively, while financing activities
provided net cash of $11,314, for a net increase in cash and cash equivalents
of $219 since year-end 2008. During 2009, average total assets increased to
$497,994 (up $20,720 or 4%) compared to year-end 2008, primarily in investment
securities. The increases in deposits and issuance of preferred equity in
February 2009 were predominantly used to fund the asset growth.
For the year ended December 31, 2008, net cash used in investing activities was
$26,482, while operating and financing activities provided net cash of $6,420
and $14,296, respectively, for a net decrease in cash and cash equivalents of
$5,766 since year-end 2007. Generally, during 2008, average total assets
increased to $477,274 (up $7,065 or 2%) compared to year-end 2007, primarily in
loans.
Table 21, Interest Rate Sensitivity Gap Analysis, represents a schedule of
assets and liabilities maturing over various time intervals. The table
reflects a cumulative negative interest sensitivity gap position, more rate
sensitive liabilities maturing than rate sensitive assets maturing at the one
year and less time frames. We evaluate the cumulative gap position at the one-
year and two-year time frames. At those time intervals the cumulative maturity
gap was between the guideline of 60% to 120%.
Table 21: Interest Rate Sensitivity Gap Analysis
December 31, 2009
0-90 91-180 181-365 1-5 Beyond
Days Days Days Years 5 Years Total
Earning Assets:
Loans $33,628 $48,252 $60,064 $178,582 $38,090 $358,616
Securities 2,055 468 9,187 81,563 10,204 103,477
Other earning assets 9,064 0 0 0 0 9,064
Total $44,747 $48,720 $69,251 $260,145 $48,294 $471,157
Cumulative rate sensitive assets $44,747 $93,467 $162,718 $422,863 $471,157
Interest-bearing liabilities:
Interest-bearing deposits (1) $55,646 $36,628 $68,141 $135,489 $46,678 $342,582
Borrowings 7,983 0 5,061 37,500 0 50,544
Subordinated debentures 0 0 0 0 10,310 10,310
Total $63,629 $36,628 $73,202 $172,989 $56,988 $403,436
Cumulative interest sensitive liabilities $63,629 $100,257 $173,459 $346,448 $403,436
Interest sensitivity gap ($18,882) $12,092 ($3,951) $87,156 ($8,694)
Cumulative interest sensitivity gap ($18,882) ($6,790) ($10,741) $76,415 $67,721
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 70.3% 93.2% 93.8% 122.1% 116.8%
(1) The interest rate sensitivity assumptions for savings accounts, money market accounts, and interest-bearing demand
deposits accounts are based on the Office of Thrift Supervision tables regarding portfolio retention and interest
rate repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and
fairly stable and are included in the 1-5 year category and beyond 5 years category.
In order to limit exposure to interest rate risk, we monitor the liquidity and
gap analysis on a monthly basis and adjust pricing, term and product offerings
when necessary to stay within our guidelines and maximize effectiveness of
asset/liability management.
We also estimate the effect a sudden change in interest rates could have on
expected net interest income through income simulation. The simulation is run
using the prime rate as the base with the assumption of rates increasing or
decreasing 200 basis points. All rates are increased or decreased
proportionally to the change in prime rate. The simulation assumes a static mix
of assets and liabilities. As a result of the simulation, over a 12-month time
period ending December 2010, net interest income is estimated to increase 15.7%
if rates increase 200 basis points. In a down 200 basis point rate environment
assumption, net interest income is estimated to decrease 17.0% during the same
period. These results are based solely on the modeled changes in the market
rates and do not reflect the earnings sensitivity that may arise from other
factors such as changes in the shape of the yield curve, changes in spreads
between key market rates, or changes in consumer or business behavior. These
results also do not include any management action to mitigate potential income
variances within the modeled process. We realize actual net interest income is
largely impacted by the allocation of assets, liabilities and product mix. The
simulation results are one indicator of interest rate risk.
Management continually reviews its interest rate risk position through our
Asset/Liability Committee process. This is also reported to the board through
the Board Investment Committee on a bi-monthly basis.
Capital
The Company regularly reviews the adequacy of its capital to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. Management actively reviews capital
strategies for the Company and the Bank in light of perceived business risks
associated with current and prospective earning levels, liquidity, asset
quality, economic conditions in the markets served, and level of dividends
available to shareholders. It is management's intent to maintain an optimal
capital and leverage mix for growth and for shareholder return.
The Company and Bank continue to have a strong capital base. As of December 31,
2009 and 2008, the tier 1 risk-based capital ratios, total risk-based capital
(tier 1 and tier 2) ratios, and tier 1 leverage ratios for the Company and Bank
were in excess of regulatory minimum requirements.
On October 14, 2008, the Treasury announced details of the CPP Plan whereby the
Treasury makes direct equity investments into qualifying financial institutions
in the form of preferred stock providing an immediate influx of Tier 1 capital
into the banking system. Participants also adopted the Treasury's standards for
executive compensation and corporate governance for the period during which the
Treasury holds equity issued under this program.
The Company's Articles of Incorporation, as approved and amended at a
shareholder meeting on January 22, 2009, authorized the issuance of 10,000
shares of Series A, no par value Preferred Stock and 500 share of Series B, no
par value Preferred Stock. On February 20, 2009, under the CPP Plan, the
Company issued 10,000 shares of Series A Preferred Stock and 500 shares of
Series B Preferred Stock to the Treasury. The warrants for the Series B
Preferred Stock were immediately exercised for 500 shares. Total proceeds
received were $10,000. The proceeds received were allocated between the Series
A Preferred Stock and the Series B Preferred Stock based upon their relative
fair values, which resulted in the recording of a discount on the Series A
Preferred Stock and a premium on the Series B Preferred Stock. The discount
and premium will be amortized over five years. The allocated carrying value of
the Series A Preferred Stock and Series B Preferred Stock on the date of
issuance (based on their relative fair values) was $9,442 and $558,
respectively. Cumulative dividends on the Series A Preferred Stock accrue and
are payable quarterly at a rate of 5% per annum for five years. The rate will
increase to 9% per annum thereafter if the shares are not redeemed by the
Company. The Series B Preferred Stock dividends accrue and are payable
quarterly at 9%. In 2009, all $10,000 of the CPP Plan qualify as Tier 1
Capital for regulatory purposes at the holding company.
Table 22: Capital
HOLDING COMPANY At December 31, Regulatory
2009 2008 2007 Minimum
Total Stockholders' Equity $43,184 $35,805 $34,571
Tier 1 Capital 48,493 45,207 44,491
Total Regulatory Capital 53,118 49,749 48,665
Tier 1 Leverage Ratio 9.8% 9.5% 9.4% 5.0%
Tier 1 risk-based capital ratio 13.2% 12.1% 12.2% 4.0%
Total risk-based capital ratio 14.5% 13.3% 13.3% 8.0%
BANK At December 31, Regulatory
2009 2008 2007 Minimum
Total Stockholders' Equity $43,825 $39,849 $37,295
Tier 1 Capital 40,313 39,251 37,215
Total Regulatory Capital 44,910 43,793 41,389
Tier 1 Leverage Ratio 8.2% 8.3% 7.9% 5.0%
Tier 1 risk-based capital ratio 11.1% 10.6% 10.3% 6.0%
Total risk-based capital ratio 12.3% 11.9% 11.5% 10.0%
Stockholders' equity at December 31, 2009 was $43,184, an increase of $7,379
from the year-end 2008 amount of $35,805. The increase in 2009 stockholders'
equity was due to $10,000 of proceeds received from the CPP Plan on February
20, 2009, improvement in the market value of securities of $458, net loss of
$2,488, preferred stock dividends of $469, and $181 of common stock dividends.
Selected Quarterly Financial Data
The following is selected financial data summarizing the results of operations
for each quarter in the years ended December 31, 2009, 2008 and 2007:
Table 23: Selected Quarterly Financial Data
2009 Quarter Ended
December September June March
Interest income $6,623 $6,665 $6,822 $6,822
Interest expense 2,456 2,554 2,701 2,789
Net interest income 4,167 4,111 4,121 4,033
Provision for loan losses 2,856 2,150 2,750 750
Income (loss) before income taxes (1,475) (1,289) (2,017) 377
Net income (loss) available to common equity (1,155) (833) (1,252) 207
Basic and diluted earnings (loss) per common share ($0.70) ($0.51) ($0.76) $0.13
2008 Quarter Ended
December September June March
Interest income $7,159 $7,356 $7,479 $7,738
Interest expense 3,112 3,218 3,304 3,663
Net interest income 4,047 4,138 4,175 4,075
Provision for loan losses 935 630 705 930
Income before income taxes 107 349 690 105
Net income available to common equity 48 291 500 403
Basic and diluted earnings per common share $0.03 $0.18 $0.30 $0.25
2007 Quarter Ended
December September June March
Interest income $8,104 $8,275 $7,966 $7,799
Interest expense 4,088 4,304 4,171 4,001
Net interest income 4,016 3,971 3,795 3,798
Provision for loan losses 690 150 150 150
Income (loss) before income taxes 580 (764) 320 1,027
Net income (loss) available to common equity 451 (365) 296 736
Basic and diluted earnings (loss) per common share $0.27 ($0.22) $0.18 $0.45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by this Item 7A is set forth in Item 6, "Selected
Financial Data" and under sub-captions "Results of Operations", "Market Risk",
"Net Interest Income", "Allowance for Loan Losses", "Investment Securities
Portfolio", "Deposits", and "Liquidity and Interest Rate Sensitivity" under
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and notes to related statements thereto
are set forth on the following pages.
Report of Independent Registered
Public Accounting Firm
Board of Directors and Stockholders
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We have audited the accompanying consolidated balance sheets of Mid-Wisconsin
Financial Services, Inc. and Subsidiary as of December 31, 2009 and 2008, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included considerations of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-Wisconsin
Financial Services, Inc. and Subsidiary at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States.
WIPFLI LLP
Wipfli LLP
February 12, 2010
Green Bay, Wisconsin
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2009 and 2008
($000's except share data)
2009 2008
Assets
Cash and due from banks $9,824 $9,605
Interest-bearing deposits in other financial institutions 13 20
Federal funds sold 9,064 22,300
Investment securities available for sale, at fair value 103,477 81,038
Loans held for sale 5,452 484
Loans 358,616 364,381
Less: Allowance for loan losses (7,957) (4,542)
Loans, net 350,659 359,839
Accrued interest receivable 1,940 1,986
Premises and equipment, net 8,294 8,965
Other investments, at cost 2,616 2,616
Other assets 14,121 9,606
Total assets $505,460 $496,459
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $55,218 $55,694
Interest-bearing deposits 342,582 329,981
Total deposits 397,800 385,675
Short-term borrowings 7,983 11,311
Long-term borrowings 42,561 49,429
Subordinated debentures 10,310 10,310
Accrued interest payable 1,287 1,718
Accrued expenses and other liabilities 2,335 2,211
Total liabilities 462,276 460,654
Stockholders' equity:
Series A preferred stock - no par value
Authorized - 10,000 shares in 2009 and 0 shares in 2008
Issued and outstanding Series A - 10,000 shares in 2009
and 0 shares in 2008 9,527 0
Series B preferred stock - no par value
Authorized - 500 shares in 2009 and 0 shares in 2008
Issued and outstanding Series B - 500 shares in 2009
and 0 shares in 2008 549 0
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding - 1,648,102 shares in 2009 and
1,643,985 shares in 2008 165 164
Additional paid-in capital 11,862 11,804
Retained earnings 20,025 23,239
Accumulated other comprehensive income 1,056 598
Total stockholders' equity 43,184 35,805
Total liabilities and stockholders' equity $505,460 $496,459
Mid-Wisconsin Financial Services, Inc and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2009, 2008, and 2007
($000's except share data)
2009 2008 2007
Interest Income
Loans, including fees $22,756 $25,718 $28,103
Securities:
Taxable 3,540 3,174 2,859
Tax-exempt 487 596 826
Other 149 244 356
Total interest income 26,932 29,732 32,144
Interest Expense
Deposits 7,801 10,138 13,163
Short-term borrowings 124 180 773
Long-term borrowings 1,961 2,365 2,014
Subordinated debentures 614 614 614
Total interest expense 10,500 13,297 16,564
Net interest income 16,432 16,435 15,580
Provision for loan losses 8,506 3,200 1,140
Net interest income after provision for loan losses 7,926 13,235 14,440
Noninterest Income
Service fees 1,239 1,412 1,352
Trust service fees 1,024 1,114 1,218
Investment product commissions 237 249 260
Mortgage banking 564 289 304
Gain on sale of investments 449 0 0
Other operating income 908 962 923
Total noninterest income 4,421 4,026 4,057
Other-than-temporary impairment losses, net
Total other-than-temporary impairment losses 374 0 0
Amount in other comprehensive income, before taxes 73 0 0
Total impairment 301 0 0
Noninterest Expense
Salaries and employee benefits 8,411 9,068 8,840
Occupancy 1,893 1,996 1,967
Data processing 648 748 777
Foreclosure/ORE expense 1,278 541 2,527
Legal and professional fees 882 762 650
Goodwill impairment 0 295 0
FDIC expense 1,057 220 42
Other 2,281 2,380 2,531
Total noninterest expense 16,450 16,010 17,334
Income (loss) before income taxes (4,404) 1,251 1,163
Income tax expense (benefit) (1,916) 9 45
Net income (loss) (2,488) 1,242 1,118
Preferred stock dividends, discount and premium (545) 0 0
Net income (loss) available to common equity ($3,033) $1,242 $1,118
Earnings (Loss) Per Common Share:
Basic and Diluted ($1.84) $0.76 $0.68
The accompanying notes are an integral part of the Consolidated Financial Statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2009, 2008, and 2007
($000's except share data)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income (Loss) Totals
Balance, January 1, 2007 0 $0 1,640 $164 $11,651 $22,865 ($547) $34,133
Comprehensive income:
Net income 1,118 1,118
Other comprehensive income 332 332
Total comprehensive income 1,450
Proceeds from stock purchase plans 2 44 44
Stock-based compensation 26 26
Cash dividends paid, $.66 per share (1,082) (1,082)
Balance, December 31, 2007 0 0 1,642 164 11,721 22,901 (215) 34,571
Comprehensive income:
Net income 1,242 1,242
Other comprehensive income 813 813
Total comprehensive income 2,055
Proceeds from stock purchase plans 2 39 39
Stock-based compensation 44 44
Cash dividends paid, $.55 per share (904) (904)
Balance, December 31, 2008 0 0 1,644 164 11,804 23,239 598 35,805
Comprehensive loss:
Net loss (2,488) (2,488)
Other comprehensive income 262 262
Reclassification adjustment for realized
losses on securities available for sale
included in earnings, net of tax 196 196
Total comprehensive loss
(2,030)
Issuance of preferred stock Series A 10,000 9,442 9,442
Issuance of preferred stock Series B 500 558 558
Accretion of preferred stock discount 85 (85) 0
Amortization of preferred stock premium (9) 9 0
Issuance of common stock: 0
Proceeds from stock purchase plans 4 1 34 35
Cash dividends:
Preferred stock (401) (401)
Common stock, $.11 per share (181) (181)
Dividends declared:
Preferred stock (68) (68)
Stock-based compensation 24 24
Balance, December 31, 2009 10,500 $10,076 1,648 $165 $11,862 $20,025 $1,056 $43,184
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(000's)
2009 2008 2007
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income (loss) ($2,488) $1,242 $1,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 961 1,017 975
Provision for loan losses 8,506 3,200 1,140
Provision for valuation allowance-other real estate 958 273 2,343
Provision (benefit) for deferred income taxes (1,578) (8) 546
Gain on sale of investment securities (449) 0 0
Other-than-temporary impairment losses, net 301 0 0
(Gain) loss on premises and equipment disposals 12 3 (2)
Loss on sale of foreclosed real estate 91 11 106
Stock-based compensation 24 44 26
Goodwill impairment 0 295 0
Changes in operating assets and liabilities:
Loans held for sale (4,968) 684 (952)
Other assets (3,906) 432 (297)
Other liabilities (308) (773) (22)
Net cash provided by (used in) operating activities (2,844) 6,420 4,981
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
in other financial institutions 8 13 (11)
Net (increase) decrease in federal funds sold 13,236 (19,120) (2,811)
Securities available for sale:
Proceeds from sales 12,717 0 0
Proceeds from maturities 25,238 18,668 18,242
Payment for purchases (59,552) (15,892) (17,792)
Net increase in loans (639) (10,120) (16,822)
Capital expenditures (280) (438) (1,251)
Proceeds from sale of premises and equipment 9 0 11
Proceeds from sale of other real estate 1,012 407 459
Net cash used in investing activities (8,251) (26,482) (19,975)
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
($000's)
2009 2008 2007
Cash flows from financing activities:
Net increase in deposits $12,125 $16,196 $27,226
Net decrease in short-term borrowings (3,328) (4,035) (15,935)
Proceeds from issuance of long-term borrowings 6,500 15,500 20,501
Principal payments on long-term borrowings (13,368) (12,500) (12,500)
Proceeds from issuance of preferred stock and common
stock warrants 10,000 0 0
Proceeds from stock benefit plans 35 39 44
Cash dividends paid preferred stock (469) 0 0
Cash dividends paid common stock (181) (904) (1,082)
Net cash provided by financing activities 11,314 14,296 18,254
Net increase (decrease) in cash and due from banks 219 (5,766) 3,260
Cash and due from banks at beginning 9,605 15,371 12,111
Cash and due from banks at end $9,824 $9,605 $15,371
Supplemental cash flow information:
Cash paid (refunded) during the year for:
Interest $10,931 $14,270 $16,053
Income taxes (19) 710 100
Noncash investing and financing activities:
Loans transferred to other real estate $1,652 $895 $5,258
Loans charged-off 5,283 3,040 5,198
Dividends declared by not yet paid on preferred stock 68 0 0
Loans made in connection with the sale of other real estate 339 0 128
Goodwill impairment 0 295 0
The accompanying notes are an integral part of the Consolidated Financial Statements
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 1- Summary of Significant Accounting Policies
PRINCIPAL BUSINESS ACTIVITY
Mid-Wisconsin Financial Services, Inc. (the "Company") operates as a full-
service financial institution with a primary market area including, but not
limited to, Clark, Eau Claire, Lincoln, Marathon, Oneida, Price, Taylor and
Vilas Counties, Wisconsin. It provides a variety of traditional banking product
sales, insurance services, and wealth management services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mid-Wisconsin
Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank (the "Bank"),
and the Bank's wholly-owned subsidiary, Mid-Wisconsin Investment Corporation.
All significant intercompany balances and transactions have been eliminated.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry.
The Company also owns Mid-Wisconsin Statutory Trust 1 ("Trust"), a wholly owned
subsidiary that is a variable interest entity because the Company is not the
primary beneficiary and, as a result, is not consolidated. The Trust is a
qualifying special-purpose entity established for the sole purpose of issuing
trust preferred securities. The proceeds from the issuance were used by the
Trust to purchase subordinated debentures of the Company, which is the sole
asset of the Trust. Liabilities on the consolidated balance sheets include the
subordinated debentures related to the Trust, as more fully described in Note
12.
ESTIMATES
The preparation of the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
CASH EQUIVALENTS
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks." Cash and due from banks include cash on hand
and non-interest-bearing deposits at correspondent banks.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
SECURITIES
Securities are classified as available for sale and are carried at fair value,
with unrealized gains and losses reported in comprehensive income. Amortization
of premiums and accretion of discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in fair value of
securities that are deemed to be other than temporary, if applicable, are
reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers the length of time and the extent to
which fair value has been less than cost, the financial condition and near-term
prospects of the issuer, and the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of securities
are determined using the specific-identification method.
LOANS HELD FOR SALE
Loans held for sale consist of the current origination of certain fixed rate
mortgage loans and are recorded at the lower of aggregate cost or fair value. A
gain or loss is recognized at the time of the sale reflecting the present value
of the difference between the contractual interest rate of the loans sold and
the yield to the investor. All loans held for sale at December 31, 2009 and
2008, have a forward sale commitment from an investor. Mortgage servicing
rights are not retained.
LOANS
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoffs generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on loans
is accrued and credited to income based on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest
method.
The accrual of interest on loans is discontinued when, in the opinion of
management, there is an indication the borrower may be unable to make payments
as they become due. When loans are placed on nonaccrual or charged-off, all
current year unpaid accrued interest is reversed against interest income. The
interest on these loans is subsequently accounted for on the cash basis until
qualifying for return to accrual status. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense as losses are estimated to have occurred. Loan losses
are charged against the allowance when management believes that the
collectability of the principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Management periodically evaluates the adequacy of the allowance using the
Company's past loan loss experience, known and inherent risks in the portfolio,
composition of the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral, current
economic conditions, and other relevant factors. This evaluation is inherently
subjective since it requires material estimates that may be susceptible to
significant change. The Company has an internal risk and evaluation process
that continuously reviews loan quality. As well, the Company employs an
independent third party to periodically review loan quality. The results of
these analyses are reported to executive management and the Board of Directors.
Such reviews also assist management in establishing the level of the allowance.
The allowance for loan losses includes specific allowances related to loans
which have been judged to be impaired under current accounting standards. A
loan is impaired when, based on current information, it is probable the Company
will not collect all amounts due in accordance with the contractual terms of
the loan agreement. Management has determined that commercial, financial,
agricultural loans and commercial real estate loans that have a nonaccrual
status meet this definition. Losses on large groups of homogeneous loans, such
as mortgage and consumer loans, are primarily evaluated using historical loss
rates. Specific allowances for impaired loans are based on an evaluation of the
customers' cash flow ability to repay or the fair value of the collateral if
the loan is collateral dependent.
The allowance arrived at through this methodology is adjusted by management's
judgment concerning the effect of recent economic events on portfolio
performance. In management's judgment, the allowance for loan losses is
adequate to cover probable losses relating to specifically identified loans, as
well as probable losses inherent in the balance of the loan portfolio.
PREMISES, EQUIPMENT, AND DEPRECIATION
Premises and equipment are stated at cost, net of accumulated depreciation.
Maintenance and repair costs are charged to expense as incurred. Gains or
losses on disposition of premises and equipment are reflected in income.
Depreciation is computed on a straight-line method and is based on the
estimated useful lives of the assets.
OTHER REAL ESTATE (ORE)
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Other real estate is included in
other assets. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
less estimated costs to sell. Rental income from properties is included in
other income. Property expenses which include carrying costs related to
foreclosed real estate, changes in the valuation allowance and losses (gains)
on sale of foreclosed real estate are classified as foreclosure/ORE expense
within noninterest expense.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
GOODWILL
The excess of cost over the net assets acquired (goodwill) from a bank
acquisition is tested for impairment annually in the fourth quarter. The
results of goodwill impairment testing in 2008 indicated that there was
impairment of goodwill as the carrying value of the reporting unit's goodwill
exceeded its implied fair value. During the fourth quarter 2008 the Company
recorded a $295 non-cash impairment charge to income for goodwill. The Company
no longer has goodwill on its balance sheet as of December 31, 2008.
FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the Federal Home Loan Bank system, the Company is required to
hold stock in the FHLB based on the outstanding amount of FHLB borrowings.
This stock is substantially restricted. The FHLB of Chicago is under regulatory
requirements which require approval of dividend restrictions and stock
redemptions. No dividends have been received since the third quarter of 2007.
The stock is evaluated for impairment on an annual basis. However, the stock is
viewed as a long-term investment therefore, its value is determined based on
the ultimate recovery of the par value rather than recognizing temporary
declines in value. FHLB stock is included in the balance sheet caption "Other
investments, at cost" and totals $2,306 at December 31, 2009 and 2008.
INCOME TAXES
Deferred tax assets and liabilities have been determined using the liability
method. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the current enacted tax rates which will be in
effect when these differences are expected to reverse. Provision (credit) for
deferred taxes is the result of changes in the deferred tax assets and
liabilities. The Company may also recognize a liability for unrecognized tax
benefits from uncertain tax positions. Unrecognized tax benefits represent the
differences between a tax position taken or expected to be taken in a tax
return and the benefit recognized and measured in the financial statements.
Interest and penalties related to unrecognized tax benefits are classified as
income taxes.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commitments under commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded in the financial statements when they
become payable.
RATE LOCK COMMITMENTS
The Company enters into commitments to originate mortgage loans whereby the
interest rate on the loan is determined prior to funding (rate lock
commitments). Rate lock commitments on mortgage loans that are intended to be
sold are considered to be derivatives. The mortgage loans are sold to the
secondary market shortly after the loan is closed. The fair value of the
mortgage loan rate lock commitments is immaterial to the financial statements.
The Company's rate lock commitments were $7,914 and $11,353 at December 31,
2009 and 2008, respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
SEGMENT INFORMATION
The Company, through a branch network of its banking subsidiary, provides a
full range of consumer and commercial banking services to individuals,
businesses, and farms in north central Wisconsin. These services include
demand, time, and savings deposits; safe deposit services; credit cards; notary
services; night depository; money orders, traveler's checks; cashier's checks;
savings bonds; secured and unsecured consumer, commercial, and real estate
loans; ATM processing; cash management; merchant capture; online banking; and
trust and financial planning.
While the Company's management monitors the revenue streams of various Company
products and services, operations are managed and financial performance is
evaluated on a companywide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other comprehensive
income (loss). Other comprehensive income (loss) includes unrealized gains and
losses on securities available for sale, net of tax, which are recognized as a
separate component of equity, and accumulated other comprehensive income
(loss).
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated by dividing net income (loss)
available to common equity by the weighted average number of common shares
outstanding. Diluted earnings (loss) per common share include the potential
common stock shares issuable under the stock options plans.
STOCK-BASED COMPENSATION
The Company accounts for employee stock compensation plans using the fair value
based method of accounting. Under this method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is also the vesting period.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2008 financial statements to
conform to the 2009 classifications.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued new accounting guidance for subsequent events.
This new guidance does not significantly change how subsequent events are
reported or disclosed in the financial statements. It does require disclosure
of the date through which the Company has evaluated subsequent events. The
Company adopted this new accounting standard for the year ended December 31,
2009. The adoption of this accounting standard did not have a significant
effect on the consolidated financial statements of the Company.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
In December 2007, the FASB issued new accounting guidance for noncontrolling
interests in consolidated financial statements. The primary purpose of this
new guidance is to require ownership interests in subsidiaries held by parties
other than the parent (noncontrolling interests) to be presented in the
consolidated balance sheet within equity, but separate from the parent's
equity. It also requires consolidated net income attributable to the parent
and to the noncontrolling interests be clearly presented on the face of the
consolidated statement of operations. The Company adopted this new accounting
standard for the year ended December 31, 2009. The adoption of this accounting
standard did not have an effect on the consolidated financial statements of the
Company.
In May 2009, the FASB issued new accounting guidance on the recognition and
presentation of other-than-temporary impairments, which changes the
determination of when other-than-temporary impairment of a debt security must
be recognized. It also changes the presentation and amount of the other-than-
temporary impairment recognized in the statement of operations. The Company
adopted this new accounting standard for the year ended December 31, 2009. See
Note 4 for the impact the adoption of this accounting standard had on the
Company's financial statements.
In June 2009, the FASB issued new accounting guidance that amends previous
guidance for determining whether an entity is a variable interest entity. The
new guidance also changes the required analysis performed by the Company to
determine whether it has a controlling interest in a variable interest entity
and, therefore, must consolidate the entity in the Company's financial
statements. In addition, it requires enhanced disclosures regarding the
Company's involvement in variable interest entities. This new accounting
standard is effective for interim and annual periods beginning after November
15, 2009. The Company adopted this accounting standard on January 1, 2010 and
the standard did not have a significant effect on the consolidated financial
statements of the Company.
In March 2008, the FASB issued new accounting guidance that changes the
disclosure requirements for derivative instruments and hedging activities.
Under this new guidance, entities will be required to provide enhanced
disclosures about: 1) how and why an entity uses derivative instruments; 2) how
derivative instruments and related hedged items are accounted for; and 3) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This new accounting standard
is effective for financial statements issued for fiscal years beginning after
November 15, 2008. The adoption of this accounting standard did not have an
effect on the consolidated financial statements of the Company.
In June 2009, the FASB issued new accounting guidance for transfers of
financial assets. This new guidance removes the exception from applying the
accounting requirements for transfers of financial assets to qualifying
special-purpose entities. It also modifies the financial-components approach
used in previous guidance and limits the circumstances in which a financial
asset, or a portion of a financial asset, should be derecognized. In addition,
the guidance requires enhanced disclosures regarding transfers of financial
assets and continuing involvement with transferred financial assets. This new
accounting standard is effective for financial statements issued for and
transfers of financial assets occurring in interim and annual periods beginning
after November 15, 2009. The Company adopted this accounting standard for the
year beginning January 1, 2010, and believes the adoption of this accounting
standard will not have a significant effect on the consolidated financial
statements of the Company.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 2- Earnings (Loss) per Common Share
Earnings (loss) per common share are calculated by dividing net income (loss)
available to common equity by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share are calculated by dividing net
income (loss) available to common equity by the weighted average number of
shares adjusted for the dilutive effect of common stock awards. Presented
below are the calculations for basic and diluted earnings (loss) per common
share.
For the Years Ended December 31,
2009 2008 2007
(In thousands, except per share data)
Net income (loss) ($2,488) $1,242 $1,118
Preferred dividends, discount and premium (545) 0 0
Net income (loss) available to common equity ($3,033) $1,242 $1,118
Weighted average common shares outstanding 1,645 1,643 1,640
Effect of dilutive stock options 1 0 1
Diluted weighted average common shares outstanding 1,646 1,643 1,641
Basic and diluted earnings (loss) per common share ($1.84) $0.76 $0.68
Note 3- Cash and Due From Banks
Cash and due from banks in the amount of $234 and $226 was restricted at
December 31, 2009 and 2008, respectively, to meet the reserve requirements of
the Federal Reserve System.
In the normal course of business, the Bank maintains cash and due from bank
balances with correspondent banks. Effective December 5, 2008, accounts at each
institution are insured in full by the Federal Deposit Insurance Corporation
Transaction Guarantee Program until June 30, 2010 upon which time the insurance
is expected to revert back to $250. Federal funds sold invested in other
institutions are not insured.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 4- Securities
The amortized cost and fair values of securities available for sale at December
31, 2009 and 2008, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2009
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $3,200 $0 $21 $3,179
Mortgage-backed securities 80,380 1,599 213 81,766
Obligations of states and
political subdivisions 16,739 481 36 17,184
Corporate debt securities 1,386 0 188 1,198
Total debt securities 101,705 2,080 458 103,327
Equity securities 150 0 0 150
Totals $101,855 $2,080 $458 $103,477
December 31, 2008
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $200 $1 $0 $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 0 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
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
The following tables represents gross unrealized losses and the related fair
value of investment securities available for sale, aggregated by investment
category and length of time individual securities have been in a continuous
unrealized loss position, at December 31:
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
2009
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $3,179 $21 $0 $0 $3,179 $21
Mortgage-backed securities 13,865 114 1,305 99 15,170 213
Corporate securities 184 27 189 161 373 188
Obligations of states and
political subdivisions 3,072 36 0 0 3,072 36
Total temporarily impaired
Securities $20,300 $198 $1,494 $260 $21,794 $458
2008
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $0 $0 $0 $0 $0 $0
Mortgage-backed securities 159 2 9,420 508 9,579 510
Corporate securities 0 0 282 68 282 68
Obligations of states and
political subdivisions 494 5 0 0 494 5
Total temporarily impaired
Securities $653 $7 $9,702 $576 $10,355 $583
At December 31, 2009, the number of investment securities in an unrealized loss
position for less than 12 months was 28. For investment securities in an
unrealized loss position for 12 months or more was five. The Company currently
has both the intent and ability to hold the securities contained in the
previous table for a time necessary to recover the amortized cost.
During 2009, the Company determined that other-than-temporary impairment
("OTTI") existed in a pool of non-agency mortgage backed security and a private
placement trust preferred security since the unrealized losses on these
securities appear to be related in part to expected credit losses that will not
be recovered by the Company. Since the Company does not intend to sell the
securities and it is not more likely than not that the Company will be required
to sell the securities, the portion of the OTTI related to all other factors
was recognized in other comprehensive income.
To determine the amount of OTTI related to credit loss, the Company utilized a
discounted cash flow model that measured the present value of cash flows
expected to be collected from the underlying collateral and the method of
repayment for each security. The difference in the discounted value and the
carrying basis of these securities represents the estimated credit loss.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Total OTTI related to these securities for 2009 was $301. As of December 31,
2009, the fair value of these securities was $527.
The following table is a rollforward of the amount of OTTI related to credit
loss that has been recognized in earnings for the year ended December 31, 2009:
2009
Balance at beginning of year $0
Credit loss on securities for which an OTTI was not previously
recognized 301
Balance at end of year $301
The amortized cost and fair value of investment securities at December 31,
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.
Fair values of securities are estimated based on financial models or prices
paid for similar securities. It is possible interest rates could change
considerably resulting in a material change in estimated fair value.
Amortized Fair
Cost Value
Due in one year or less $2,196 $2,221
Due after one year through five years 11,333 11,493
Due after five years through ten years 6,785 6,863
Due in ten years or more 1,011 984
Mortgage-backed securities 80,380 81,766
Total debt securities available for sale $101,705 $103,327
For 2009, proceeds from sales of investment securities available for sale were
$12,717 which resulted in investment security gains of $449. There were no
sales of investment securities during 2008 and 2007.
Pledged securities with a carrying value of $61,448 and $47,794 at December 31,
2009 and 2008, respectively, were pledged to secure public deposits, short-term
borrowings, and for other purposes as required by law.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
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 limit
or stop the FHLB from paying dividends or redeeming stock without prior
approval. The FHLB of Chicago last paid a dividend in the third quarter of
2007. Based on an evaluation of this investment as of December 31, 2009, the
Company believes the cost of the investment will be recovered.
Note 5- Loans
Loans at December 31 are summarized as follows:
2009 2008
Commercial $35,673 $39,047
Agricultural 42,280 43,345
Real estate:
Construction 35,417 45,665
Commercial 138,891 127,209
Residential 99,116 100,311
Installment 7,239 8,804
Total loans $358,616 $364,381
The Company serves the credit needs of its customers predominantly in central
and northern Wisconsin. Significant loan concentrations are considered to exist
for a financial institution when there are amounts loaned to multiple numbers
of borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. At December 31, 2009, no
significant concentrations existed in the Company's loan portfolio in excess of
10% of total loans.
The Bank, in the ordinary course of business, grants loans to their executive
officers and directors, including affiliated companies in which they are
principal owners. These loans were made on substantially the same terms,
including rates and collateral, as those prevailing at the time for comparable
transactions with other unrelated customers. In the opinion of management, such
loans do not involve more than the normal risk of collectability or present
other unfavorable features. These loans to related parties are summarized as
follows:
2009 2008
Balance at beginning of year $3,432 $4,036
New loans 1,427 1,226
Repayments (921) (1,830)
Changes due to status of executive officers and directors (21) 0
Balance at end of year $3,917 $3,432
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 6- Allowance for Loan Losses
A summary of the changes in the allowance for loan losses for the years
indicated is as follows:
2009 2008 2007
Balance at beginning of year $4,542 $4,174 $8,184
Provision for loan losses 8,506 3,200 1,140
Charge offs (5,283) (3,040) (5,198)
Recoveries 192 208 48
Balance at end of year $7,957 $4,542 $4,174
The following table presents nonperforming loans at December 31:
2009 2008
Nonaccrual loans $13,924 $8,949
Accruing loans past due 90 days or more 18 36
Restructured loans 151 569
Total nonperforming loans $14,093 $9,554
Nonaccrual loans are generally those that are contractually past due 90 days or
more as to interest or principal payments. If nonaccrual loans had been
current, approximately $1,155, $621, and $323 of interest income would have
been recognized for the years ended December 31, 2009, 2008, and 2007,
respectively.
An analysis of impaired loans at December 31 follows:
2009 2008
Impaired loans with a valuation allowance $10,731 $4,044
Impaired loans without a valuation allowance 1,094 3,032
Total impaired loans 11,825 7,076
Less-allowance for loan losses related to impaired loans 2,290 800
Net impaired loans $9,535 $6,276
2009 2008 2007
Average recorded investment $11,924 $5,985 $2,420
Interest income recognized $819 $704 $352
Interest income recognized using cash basis $622 $423 $150
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 7 - Premises and Equipment
A summary of premises and equipment at December 31 was as follows:
2009 2008
Land and improvements $2,082 $2,039
Buildings 9,063 9,086
Furniture and equipment 7,139 7,082
Total cost 18,284 18,207
Less-accumulated depreciation 9,990 9,242
Premises and equipment, net $8,294 $8,965
Depreciation and amortization of premises and equipment totaled $930 in 2009,
$1,048 in 2008, and $992 in 2007.
The Bank leases certain of its facilities and equipment, certain of which
provide for increased rentals based upon increases in cost of living
adjustments and other operating costs. The approximate minimum annual rentals
and commitments under these leases with remaining terms in excess of one year
are as follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 8- Other Real Estate
A summary of other real estate at December 31 was as follows:
2009 2008
Balance at beginning of year $2,556 $2,352
Transfer of loans at net realizable value to ORE 1,652 895
Sale proceeds (1,012) (407)
Loans made in sale of ORE (339) 0
Net loss from sale of ORE (91) (11)
Provision charge to operations (958) (273)
Balance at end of year $1,808 $2,556
An analysis of the valuation allowance on other real estate at December 31 was
follows:
2009 2008
Balance at beginning of year $2,616 $2,343
Provision charged to operations 958 273
Amounts related to ORE disposed of (580) 0
Balance at end of year $2,994 $2,616
The properties of a former car dealership and its owners are the largest assets
in other real estate as of December 31, 2009. The amount remaining as
nonperforming assets, included in ORE or nonaccrual loans, related to the
Impaired Borrower totaled $1,427 and $2,514 at December 31, 2009 and 2008,
respectively.
Note 9- Deposits
The distribution of deposits at December 31 was as follows:
2009 2008
Noninterest-bearing demand deposits $55,218 $55,694
Interest-bearing demand deposits 33,375 37,856
Money market deposits 81,436 81,265
Savings deposits 23,386 21,508
IRA retirement accounts 34,414 33,506
Brokered certificates of deposit 39,181 49,283
Certificates of deposit 130,790 106,563
Total deposits $397,800 $385,675
Time deposits of $100,000 or more were $94,503 and $92,791 at December 31, 2009
and 2008 respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Aggregate annual maturities of all time deposits at December 31, 2009, are as
follows:
2010 $132,189
2011 35,741
2012 22,028
2013 14,189
2014 235
Thereafter 3
Total $204,385
Deposits from the Company's directors, executive officers, and affiliated
companies in which they are principal owners totaled $2,492 and $3,458 at
December 31, 2009 and 2008, respectively.
Note 10- Short-Term Borrowings
Short-term borrowings consisted of $7,983 and $11,311 of securities sold under
repurchase agreements at December 31, 2009 and 2008, respectively.
The Company pledges U.S. agency securities available for sale as collateral for
repurchase agreements. The fair value of pledged securities totaled $15,486
and $18,224 at December 31, 2009 and 2008, respectively.
The following information relates to federal funds purchased and securities
sold under repurchase agreements at December 31:
2009 2008 2007
Weighted average rate at December 31 0.48% 0.70% 1.82%
For the year:
Highest month-end balance $20,074 $13,654 $34,958
Daily average balance 12,031 11,753 17,939
Weighted average rate 1.06% 1.53% 4.31%
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 11- Long-Term Borrowings
Long-term borrowings at December 31 were as follows:
2009 2008
Federal Home Loan Bank ("FHLB") advances $32,561 $39,429
Other borrowed funds 10,000 10,000
Total long-term borrowings $42,561 $49,429
FHLB advances at December 31 were as follows:
2009 2008
3.87% to 5.31% fixed rate, interest payable monthly
with principal due during 2009 $0 $13,368
4.74% to 5.37% fixed rate, interest payable monthly
with principal due during 2010 5,061 5,061
1.84% to 4.22% fixed rate, interest payable monthly
with principal due during 2011 9,000 6,500
2.17% to 5.12% fixed rate, interest payable monthly
with principal due during 2012 14,500 12,500
3.90% fixed rate, interest payable monthly
with principal due during 2013 2,000 2,000
1.79% fixed rate, interest payable monthly
with principal due during 2014, callable 2011 2,000 0
Total $32,561 $39,429
FHLB advances are secured by FHLB stock, qualifying mortgages of the subsidiary
bank (such as residential mortgage, home equity, and commercial real estate)
and by municipal bonds and mortgage-backed securities totaling approximately
$63,669 and $62,169 at December 31, 2009 and 2008, respectively.
Other borrowed funds include $10,000 of structured repurchase agreements at
December 31, 2009 and 2008, respectively. The fixed rate structured repurchase
agreements mature in 2014 and 2015, callable in 2013, and had weighted-average
interest rates of 3.47% and 3.53% at December 31, 2009 and 2008, respectively.
Other borrowings are secured by investment securities totaling $12,173 and
$12,436 at December 31, 2009 and 2008, respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 12- Subordinated Debentures
In 2005, Mid-Wisconsin Statutory Trust 1 (the "Trust") issued $10,000 in trust
preferred securities. The trust preferred securities were sold in a private
placement to institutional investors. The Trust used the proceeds from the
offering along with the Company's common ownership investment to purchase
$10,310 of the Company's subordinated debentures (the "debentures"). The
debentures are the sole asset of the Trust.
The trust preferred securities and the debentures mature on December 15, 2035,
and have a fixed rate of 5.98% until December 15, 2010, after which they will
have a floating rate of the three-month LIBOR plus 1.43%. The debentures may be
called at par in part or in full on or after December 15, 2010, or within 120
days of a special event. The trust preferred securities are mandatorily
redeemable upon the maturity or early redemption of the debentures.
The Company has fully and unconditionally guaranteed all of the obligations of
the Trust. The guarantee covers the quarterly distributions and payments on
liquidation or redemption of the trust preferred securities, but only to the
extent of funds held by the Trust. The trust preferred securities qualify under
the risk-based capital guidelines as Tier 1 capital for regulatory purposes.
Note 13- Income Taxes
The current and deferred amounts of income tax expense (benefit) were as
follows:
2009 2008 2007
Current income tax expense (benefit):
Federal ($338) $17 ($501)
State 0 0 0
Total current (338) 17 (501)
Deferred income tax expense (benefit):
Federal (1,223) (4) 642
State (355) (4) (96)
Total deferred (1,578) (8) 546
Total provision (benefit) for income taxes ($1,916) $9 $45
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
The effective income tax rate differs from the statutory federal tax rate. The
major reasons for this difference were as follows:
2009 2008 2007
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
Tax (benefit) expense at statutory rate ($1,497) -35.0% $425 34.0% $395 34.0%
Increase (decrease) in taxes resulting from:
Tax-exempt interest (190) (4.3) (246) (19.7) (266) (22.9)
Federal tax refund 0 0.0 (221) (17.7) 0 0.0
State income taxes (239) (5.4) (26) (2.1) (63) (5.4)
Bank-owned life insurance (36) (0.8) (39) (3.2) (38) (3.3)
Goodwill 0 0.0 100 8.0 0 0.0
Other 46 1.0 16 1.3 17 1.5
Provision (benefit) for income taxes ($1,916) -43.5% $9 0.7% $45 3.9%
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities resulted in deferred taxes.
Deferred tax assets and liabilities at December 31 were as follows:
2009 2008
Deferred tax assets:
Allowance for loan losses $2,140 $1,247
Valuation allowance for other real estate 1,179 1,030
Deferred compensation 388 394
State net operating losses 476 388
Federal net operating losses 488 0
Purchased deposit intangible 155 214
Other 87 0
Totals 4,913 3,273
Less - Valuation allowance 185 186
Total deferred tax assets 4,728 3,087
Deferred tax liabilities:
Premises and equipment 195 167
FHLB stock 215 215
Prepaid expense and other 117 82
Unrealized gain on securities available for sale 566 300
Total deferred tax liabilities 1,093 764
Net deferred tax asset $3,635 $2,323
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Both the Company and the Bank pay federal and state income taxes on their
consolidated net earnings. At December 31, 2009, tax net operating losses at
the Company of approximately $1,434 federal and $5,427 state existed to offset
future taxable income. The valuation allowance has been recognized to adjust
deferred tax assets to the amount of tax net operating losses that are expected
to be realized. If realized, the tax benefit for this item will reduce current
tax expense for that period.
Note 14- Self-Funded Insurance
The Company participated in a self-funded health care plan which provided
medical benefits to employees, retirees, and their dependents through December
31, 2008. Expenses under this plan were expensed as incurred and based upon
actual claims paid, reinsurance premiums, administration fees, and unpaid
claims at year-end. The Company purchased reinsurance to cover catastrophic
individual claims over $30. Health care expense for 2009, 2008 and 2007 was
$738, $1,025, and $850, respectively. During 2009, the Company recovered $140,
which represented the remaining balance of the self-funded health insurance
fund after all outstanding claims and expenses were paid.
Effective January 1, 2009, the Company moved to a fully insured HMO health
insurance plan.
Note 15- Retirement Plans
The Company sponsors a defined contribution plan referred to as the Profit
Sharing and 401(k) Plan covering substantially all full-time employees. The
plan consists of a fixed contribution and a discretionary matching contribution
by the Company. In 2009, the Company made the fixed contribution of 1% of
eligible employees' annual pay and matched 100% of the first 2% of employees'
deferrals and 50% on the next 4% of employees' deferrals to the plan up to 4%
matching contribution. In 2008, the Company made the fixed contribution of 5%
of eligible employees' annual pay. However, the Company did not make a
discretionary matching contribution in 2008. In 2007, the Company made the
fixed contribution to the plan of 5% of eligible employees' annual pay and
matched 100% of participants' deferrals to the plan up to 5%. Total expense
associated with the plan was $289, $274, and $533 for the years ended December
31, 2009, 2008, and 2007, respectively.
The Company has a nonqualified deferred directors' fee compensation plan which
permits directors to defer all or a portion of their compensation into a stock
equivalent account or a cash account. The benefits are payable after a
director's resignation from the Board of the Company in a lump-sum or in
installments over a period not in excess of five years. Included in other
liabilities is the estimated present value of future payments of $839 and $867
at December 31, 2009 and 2008, respectively. The expense (benefit) associated
with the deferred stock account is impacted by the market price of the
Company's stock. Expense (benefit), including directors' fees, associated with
this plan was $25, $2, and $(18) in 2009, 2008, and 2007, respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 16- Employee Stock Purchase, Stock Option, and Other Stock Purchase Plans
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, the Company is authorized to
issue up to 50,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the plan, employees
can choose each year to have up to 5% of their annual gross earnings withheld
to purchase the Company's common stock. Stock is purchased quarterly by
employees under the plan. The purchase price of the stock is 95% of the lower
of its market value on the first payroll date of the quarterly offering period
or the market price on the close of business on the day before the last
quarterly payroll date. There were 4,117 shares purchased in 2009.
Approximately 36% of eligible employees participated in the plan during 2009.
As of December 31, 2009, 38,371 shares of common stock remain reserved for
future grants to employees under the Employee Stock Purchase Plan approved by
the shareholders.
STOCK OPTION PLAN
Under the terms of an incentive stock option plan, 260,154 shares of unissued
common stock are reserved for options to officers and key employees of the
Company at prices not less than the fair market value of the shares at the date
of the grant. All options granted after January 1, 2006 are nonqualified
options and become exercisable over a four-year period following a one-year
waiting period from the grant date. These options expire ten years after the
grant date.
The fair value of stock options granted in 2009, 2008, and 2007 was estimated
on the date of grant using the Black-Scholes option pricing model. The
following assumptions were made in estimating the fair value for options
granted at December 31:
2009 2008 2007
Dividend yield 1.89% 2.16% 3.54%
Risk-free interest rate 3.00% 3.20% 4.69%
Expected volatility 29.87% 16.11% 11.43%
Weighted average expected life (years) 7 7 7
Weighted average per share fair value of options $2.71 $2.41 $2.08
Total compensation expense of $24, $44 and $26 was recognized during 2009, 2008
and 2007, respectively. As of December 31, 2009, there was $64 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements, which is expected to be recognized over the next three years.
Changes in estimated forfeitures will be recognized in the period of change and
will also impact the amount of stock compensation expense to be recognized in
future periods.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
The following table summarizes information regarding the Company's stock
options outstanding at December 31, 2009:
Outstanding Options Exercisable Options
Weighted Weighted Number Weighted
Range of Average Average Exercisable Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
$9.25 to $36.00 62,603 7.4 $26.54 31,119 $31.05
The intrinsic value of all outstanding options and exercisable options as of
December 31, 2009, was $0.
A summary of the Company's stock option activity for 2009, 2008, and 2007, is
presented below.
Weighted
Average
Shares Price
December 31, 2006 46,842 33.99
Options granted 6,500 32.50
Options exercised (233) 30.26
Options forfeited (3,321) 33.84
December 31, 2007 49,788 33.82
Options granted 34,250 21.50
Options forfeited (16,864) 31.50
December 31, 2008 67,174 28.12
Options granted 6,000 9.25
Options forfeited (10,571) 26.81
December 31, 2009 62,603 $26.54
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
A summary of nonvested shares as of December 31, 2009, and changes during the
year is presented below.
Average
Weighted Fair
Number Value
December 31, 2008 45,562 $1,184
Options granted 6,000 56
Options vested (10,888) (301)
Options forfeited (9,190) (244)
December 31, 2009 31,484 $695
As of December 31, 2009, 197,551 shares of common stock remain reserved for
future grants to officers and key employees under the incentive stock option
plan approved by the shareholders.
Note 17- Stockholders' Equity
The Company's Articles of Incorporation, as amended, authorized the issuance of
10,000 shares of Series A, no par value Preferred Stock and 500 share of Series
B, no par value Preferred Stock. In February 2009, under the TARP Plan, the
Company issued 10,000 shares of Series A Preferred Stock and 500 shares of
Series B Preferred Stock to the Treasury. The warrants for the Series B
Preferred Stock were immediately exercised for 500 shares. Total proceeds
received were $10,000. The proceeds received were allocated between the Series
A Preferred Stock and the Series B Preferred Stock based upon their relative
fair values, which resulted in recording of a discount on the Series A
Preferred Stock and premium on the Series B Preferred Stock. The discount and
premium will be amortized over five years. The allocated carrying value of the
Series A Preferred Stock and Series B Preferred Stock on the date of issuance
(based on their relative fair values) was $9,442 and $558, respectively.
Cumulative dividends on the Series A Preferred Stock will accrue and be payable
quarterly at a rate of 5% per annum for five years. The rate will increase to
9% per annum thereafter if the shares are not redeemed by the Company. The
Series B Preferred Stock dividends will accrue and be payable quarterly at 9%.
For as long as the Preferred Stock owned by the United States Treasury is
outstanding, no dividends may be declared or paid on junior preferred shares,
preferred shares ranking equal to the Series A or B Preferred Stock, or common
shares, nor may the Company repurchase or redeem any such shares, unless all
accrued and unpaid dividends for all past dividend periods on the Series A and
Series B Preferred Stock are fully paid. The consent of the United States
Treasury is required for any increase in the quarterly dividends of the
Company's common stock or for any share repurchases of junior preferred or
common shares, until the shorter of the third anniversary date of the Series A
Preferred Stock issuance or the date the Series A or B Preferred Stock is
redeemed in whole. Participation in this program also subjects the Company to
certain restrictions with respect to the compensation of certain executives.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
The American Recovery and Reinvestment Act of 2009 ("ARRA") requires the United
States Treasury, subject to consultation with appropriate banking regulators,
to permit participants in the Capital Purchase Program to repay any amounts
previously received without regard to whether the recipient has replaced such
funds from any other source or to any waiting period. All redemptions of the
Preferred Stock shall be at 100% of the issue price, plus any accrued and
unpaid dividends. The Series A and Series B Preferred Stock is nonvoting,
other than for class voting rights on any authorization or issuance of senior
ranking shares, any amendment to its rights, or any merger, exchange or similar
transaction which would adversely affect its rights.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. These requirements take into
account risk attributable to balance sheet assets and off-balance sheet
activities. All banks and bank holding companies must meet a minimum risk-based
capital ratio of 8%. Of the 8% required, at least half must be comprised of
core capital elements defined as "Tier 1" capital. The federal banking agencies
also have adopted leverage capital guidelines which banking organizations must
meet. Under these guidelines, the most highly rated banking organizations must
meet a minimum leverage ratio of at least 3% "Tier 1" capital to assets while
lower ranking organizations must maintain a ratio of at least 4% to 5%.
Failure to meet minimum capital requirements can initiate certain mandatory-and
possibly additional discretionary-actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and "Tier 1" capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined).
Management believes, as of December 31, 2009, that the Company and the Bank
meet all capital adequacy requirements.
As of December 31, 2009 and 2008, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There are no conditions
or events since notification that management believes have changed the Bank's
category.
The Company's risk-based capital and leverage ratios are as follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Risk-Based Capital Ratios
As of As of
December 31, 2009 December 31, 2008
Amount Ratio Amount Ratio
Tier 1 capital $48,493 13.22% $45,207 12.11%
Tier 1 capital adequacy minimum requirement 14,667 4.00% 14,932 4.00%
Excess $33,826 9.22% $30,275 8.11%
Total capital $53,118 14.49% $49,749 13.33%
Total capital adequacy minimum requirement 29,335 8.00% 29,865 8.00%
Excess $23,783 6.49% $19,884 5.33%
Risk-adjusted assets $366,687 $373,312
Leverage Ratios
As of December 31, 2009 As of December 31, 2008
Amount Ratio Amount Ratio
Tier 1 capital to adjusted total assets $48,493 9.82% $45,207 9.38%
Minimum leverage adequacy requirement $14,808-$24,680 3.00%-5.00% $14,453-$24,088 3.00%-5.00%
Excess $33,685-$23,813 6.82%-4.82% $30,754-$21,119 6.38%-4.38%
Adjusted average total assets $493,598 $481,764
The following table presents the risk-based capital ratios for the Bank as of:
Tier 1 Total Leverage
December 31, 2009 11.10% 12.03% 8.21%
December 31, 2008 10.62% 11.84% 8.21%
Banking subsidiaries are restricted by banking regulations from making dividend
payments to shareholders above prescribed amounts and are limited in making
loans and advances to the Company. The payment of dividends is subject to the
statutes governing state-chartered banks and may be further limited because of
the need for the Bank to maintain capital ratios satisfactory to applicable
regulatory agencies.
The Company has a Dividend Reinvestment Plan which provides shareholders the
opportunity to automatically reinvest their cash dividends in shares of the
Company's common stock. Common stock shares issued under the plan will be
either newly issued shares or shares purchased for plan participants in the
open market. In accordance with the plan, 150,000 shares of common stock are
reserved at December 31, 2009.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 18- Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is shown in the consolidated statements of changes
in stockholders' equity. The Company's accumulated other comprehensive income
(loss) is comprised of the unrealized gain or loss on securities available for
sale, net of the tax effect and a reclassification adjustment for losses
realized in income. A summary of activity in accumulated other comprehensive
income (loss) follows.
2009 2008 2007
Accumulated other comprehensive
income (loss) at beginning $598 ($215) ($547)
Activity:
Unrealized gain on securities available for sale 423 1,231 507
Reclassification adjustment for losses realized in income 301 0 0
Tax effect (266) (418) (175)
Other comprehensive income 458 813 332
Accumulated other comprehensive income
(loss) at end $1,056 $598 ($215)
Note 19- Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
CREDIT RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Company uses the same credit policies and approval process in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments for
commitments to extend credit and standby letters of credit is represented by
the contractual amount of those instruments. The following is a summary of
lending-related commitments at December 31.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
2009 2008
Commitments to extend credit:
Fixed rate $25,405 $26,074
Adjustable rate 23,462 23,808
Standby and irrevocable letters of credit - Fixed rate 3,792 3,872
Credit card commitments 4,250 4,456
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby and irrevocable letters of credit are conditional lending commitments
used by the Company to guarantee the performance of a customer to a third
party. Generally, all standby letters of credit issued have expiration dates
within one year. The credit risk involved in issuing standby and irrevocable
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company generally holds collateral supporting
these commitments. Standby letters of credit are not reflected in the
consolidated financial statements since recording the fair value of these
guarantees would not have a significant impact on the consolidated financial
statements.
Credit card commitments are commitments of credit issued by the Company and
serviced by Elan Financial Services. These commitments are unsecured.
Note 20- Fair Value Measurements
Effective January 1, 2008, FASB issued accounting guidance that applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements. It emphasized that fair value (i.e.,
the price that would be received in an orderly transaction that is not a forced
liquidation or distressed sale at the measurement date), among other things, is
based on exit price versus entry price, and is a market-based measurement, not
an entity-specific measurement. When considering the assumption that market
participants would use in pricing the asset or liability, the guidance
establishes a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent
of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity's own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 or
hierarchy). The fair value hierarchy prioritizes inputs used to measure fair
value into three broad levels.
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 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.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Level 3- Fair value measurement is based on valuation models and
methodologies that incorporate unobservable inputs, which are typically
based on an entity's own assumptions, as there is little, related market
activity.
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, are measured at fair values on a
nonrecurring basis.
As permitted, the Company did not apply the accounting standard on fair value
measurements as of December 31, 2008 to other real estate. Consequently, the
disclosures do not include amounts related to other real estate as of December
31, 2008.
Following is a description of the valuation methodology used for the Company's
more significant instruments measured on a recurring basis at fair value, as
well as the classification of the asset or liability within the fair value
hierarchy.
INVESTMENT 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 investment 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. 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. Examples of
these investment securities include U.S. government and agency securities,
obligations of states and political subdivisions, corporate debt securities,
and mortgage related securities. In certain cases where there is limited
activity or less transparency around inputs to the estimated fair value,
securities are classified within Level 3 of the fair value hierarchy. 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, which consist generally of current
production of certain fixed-rate, first-lien residential mortgage loans, are
carried at the lower of cost or estimated fair value. The estimated fair value
is based on current secondary market prices for similar loans, which is
considered a Level 2 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 is based on the fair
value of the underlying collateral. 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, are considered Level 3
measurements.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
OTHER REAL ESTATE - Real estate acquired through or in lieu of loan foreclosure
is not measured at fair value on a recurring basis. However, other real estate
is initially measured at fair value, less estimated costs to sell when it is
acquired and is also measured at fair value, less estimated costs to sell if it
becomes subsequently impaired.
The fair value measurement for each property may be obtained from an
independent appraiser or prepared internally. Fair value measurements obtained
from independent appraisers are generally based on sales of comparable assets
and other observable market data and are considered Level 2 measurements. Fair
value measurements prepared internally are based on observable market data but
include significant unobservable data and are therefore considered Level 3
measurements.
Information regarding the fair value of assets measured at fair value on a
recurring basis as of December 31, were as follows:
Recurring Fair Value Measurements Using
Quoted Price in
Active Markets for Significant Other Significant
Assets Measured Identical Assets Observable Inputs Unobservable Inputs
at Fair Value Level 1 Level 2 Level 3
2009
Securities available for sale $103,477 $0 $100,358 $3,119
2008
Securities available for sale $81,038 $0 $79,086 $1,952
The following reconciles the beginning and ending balances of assets measured
at fair value on a recurring basis using significant unobservable inputs (Level
3) during the years ended December 31:
2009 2008
Balance at beginning of year $1,952 $1,652
Total gains or losses (realized/unrealized)
Included in earnings (301) 0
Included in other comprehensive income (58) 0
Purchases, issuances and settlements 0 300
Transfers in and/or out of Level 3 1,526 0
Balance at end of year $3,119 $1,952
Information regarding the fair value of assets measured at fair value on a
nonrecurring basis as of December 31, were as follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Nonrecurring Fair Value Measurements Using
Quoted Price in
Active Markets for Significant Other Significant
Assets Measured Identical Assets Observable Inputs Unobservable Inputs
at Fair Value Level 1 Level 2 Level 3
2009
Loans held for sale $5,452 $0 $5,452 $0
Impaired loans $9,535 $0 $0 $9,535
Other real estate $1,808 $0 $1,808 $0
2008
Loans held for sale $484 $0 $484 $0
Impaired loans $6,276 $0 $0 $6,276
During the year ended December 31, 2009 loans with a carrying amount of $11,825
were considered impaired and were written down to their estimated fair value of
$9,535. As a result, the Company recognized a specific valuation allowance
against these impaired loans totaling $2,290. During the year ended December
31, 2008 loans with a carrying amount of $7,076 were considered impaired and
were written down to their estimated fair value of $6,276. As a result, the
Company recognized a specific valuation allowance against these impaired loans
totaling $800.
In 2009, the Bank acquired other real estate of $1,652 measured at fair value
less selling costs. In addition, an impairment write down of $958 was made
against these as well as some of the other real estate properties acquired in
prior years and charged to earnings for the year ended December 31, 2009.
The Company is required to disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below for the Company's financial instruments.
The estimated fair value of the Company's financial instruments on the balance
sheet at December 31, were as follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
2009 2008
Carrying Carrying
Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term investments $18,901 $18,901 $31,925 $31,925
Securities and other investments 106,093 106,649 83,654 83,692
Net loans 356,111 353,142 360,323 358,716
Accrued interest receivable 1,940 1,940 1,986 1,986
Financial liabilities:
Deposits 397,800 396,069 385,675 383,389
Short-term borrowings 7,983 7,983 11,311 11,311
Long-term borrowings 42,561 43,446 49,429 50,742
Subordinated debentures 10,310 10,310 10,310 10,310
Accrued interest payable 1,287 1,287 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.
DEPOSIT LIABILITIES - The fair value of deposits with no stated maturity, such
as non-interest-bearing demand deposits, savings, NOW accounts, and money
market accounts, is equal to the amount payable on demand at the reporting
date. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate reflects the credit quality
and operating expense factors of the Company.
SHORT-TERM BORROWINGS - The carrying amount reported in the consolidated
balance sheets for short-term borrowings approximates the liability's fair
value.
LONG-TERM BORROWINGS - The fair values are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
SUBORDINATED DEBENTURES - The carrying amount of the debt approximates fair
market as the terms are similar to recent issued subordinated debt by similar
companies.
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, goodwill and intangibles, and other
assets and other liabilities. In addition, the tax ramifications related to the
realization of the unrealized gains or losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 21- Condensed Financial Information- Parent Company Only
Balance Sheets
December 31, 2009 and 2008
2009 2008
ASSETS
Cash and due from banks $6,244 $2,570
Investment in bank subsidiary 43,825 39,849
Investment in nonbank subsidiary 310 310
Securities available for sale - at fair value 100 100
Premises and equipment 3,022 3,138
Other assets 340 423
Total assets $53,841 $46,390
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures $10,310 $10,310
Accrued interest payable 27 27
Accrued expense and other liabilities 320 248
Total liabilities 10,657 10,585
Stockholders' equity 43,184 35,805
Total liabilities and stockholders' equity $53,841 $46,390
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 21- Condensed Financial Information- Parent Company Only (Continued)
STATEMENTS OF INCOME
For the Years Ended December 31,
2009 2008 2007
INCOME
Interest $51 $65 $154
Management fee and service fees from subsidiaries 180 300 365
Rental income 164 145 137
Other 21 3 32
Total income 416 513 688
EXPENSE
Interest on subordinated debentures 614 614 614
Salaries and benefits 252 329 477
Other 348 259 220
Total expense 1,214 1,202 1,311
Loss before income tax benefit and equity in undistributed income (798) (689) (623)
Income tax benefit (316) (234) (212)
Loss before equity in undistributed net income of subsidiary (482) (455) (411)
Equity (loss) in undistributed net income (loss) of subsidiary (2,006) 1,697 1,529
Net income (loss) (2,488) 1,242 1,118
Preferred stock dividends, discount and premium (545) 0 0
Net income (loss) available to common equity ($3,033) $1,242 $1,118
Notes to Consolidated Financial Statements (Continued)
December 31, 2009, 2008, and 2007 ($000's except share data)
Note 21- Condensed Financial Information- Parent Company Only (Continued)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2009 2008 2007
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income (loss) ($2,488) $1,242 $1,118
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for depreciation 108 100 101
Stock-based compensation 24 44 26
(Equity) loss in undistributed net income of
subsidiary 1,806 (1,697) (1,529)
Changes in operating assets and liabilities:
Other assets 307 (198) 350
Other liabilities 72 (71) (36)
Net cash provided by (used in) operating activities (171) (580) 30
Cash flows from financing activities:
Investment in bank subsidiary (5,500) 0 0
Capital expenditures (40) (76) 0
Net cash used in investing activities (5,540) (76) 0
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrants 10,000 0 0
Proceeds from stock benefit plans 35 39 44
Cash dividends paid preferred stock (469) 0 0
Cash dividends paid common stock (181) (904) (1,082)
Net cash provided by (used in) financing activities 9,385 (865) (1,038)
Net increase (decrease) in cash and due from banks 3,674 (1,521) (1,008)
Cash and due from banks at beginning 2,570 4,091 5,099
Cash and due from banks at end $6,244 $2,570 $4,091
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A (T). CONTROLS AND PROCEDURES
DISCLOSURE 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 Chief Financial Officer and Chief
Operating Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as such term is defined in Rules 13a-
15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) pursuant to Exchange Act Rule 13a-15. The President and Chief
Executive Officer and the Chief Financial Officer and Chief Operating Officer
concluded that our disclosure controls and procedures were effective as of
December 31, 2009.
REPORT BY MID-WISCONSIN FINANCIAL SERVICES, INC's MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining an effective
system of internal control over financial reporting, as such term is defined in
section 13a-15(f) of the Securities and Exchange Act of 1934. The Company's
system of internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. There are inherent limitations in the
effectiveness of any system of internal control over financial reporting,
including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective system of internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the Company's system of internal controls over financial
reporting as of December 31, 2009. This assessment was based on criteria for
effective internal control over financial reporting described in INTERNAL
CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that as of December 31, 2009, the Company maintained effective
internal control over financial reporting based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the
Company's registered accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING: There were no changes in
the internal control over financial reporting during the quarter ended December
31, 2009, that have materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by this
reference to the disclosure under the caption "Proposal No.1- Election of
Directors - Election of Directors" in our 2010 Proxy Statement dated March 26,
2010 (the "2010 Proxy Statement").
The executive officers of the Company as of March 1, 2010, their ages, offices
and principal occupation during the past five years are set forth below:
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
James F. Warsaw President and Chief Executive December 2005
Age: 59 Officer of Company and Bank
Previously, Bank Consultant,
November 2003 to December 2005; and
President and Chief Credit Officer
of Amcore Bank, N.A.
Mark A. King Chief Financial Officer and Chief December 2009
Age: 48 Operations Officer of Company and Bank
Previously, CFO and Senior Vice
President of the Banks of Wisconsin,
Kenosha, WI, since 2000.
William A. Weiland Secretary and Treasurer of Company and May 1998
Age: 55 Regional President of Bank-Central
Region
All executive officers are elected annually by the board of directors at the
annual meeting and hold office until the next annual meeting of the board of
directors, or until their respective successors are elected and qualified.
Information relating to compliance with Section 16 of the Exchange Act is
incorporated in this Form 10-K by reference to the disclosure in the 2010 Proxy
Statement under the sub-caption "Beneficial Ownership of Common Stock - Section
16(a) Beneficial Ownership Reporting Compliance."
Code of Ethics
We have adopted an ethics policy for all employees and a conflict of interest
policy for our directors. We have also adopted a Code of Compliance and
Reporting Requirements for Senior Management and Senior Financial Officers
which covers the Chief Executive Officer, Chief Financial Officer/Chief
Operations Officer, each Vice President, Chief Credit Officer, and the
Secretary and Treasurer. The Code of Compliance and Reporting Requirements for
Senior Management and Senior Financial Officers has been posted on the website
of the Bank under "Mid-Wisconsin Financial Services - Investor Relations." See
www.midwisc.com/InvesterRelations/invest_relations.html In the event we amend
or waive any provision of the Code of Compliance and Reporting Requirements for
Senior Management and Senior Financial Officers, we intend to disclose such
amendment or waiver at the website address where the code may also be found.
Audit Committee
The Board of Directors has appointed an Audit Committee in accordance with
Section 3(a) (58) (A) of the Exchange Act. Mr. Lundin (chairman), Mr. Hallgren
and Mr. Schoofs serve on the Audit Committee (the Company is not a "listed
issuer" as defined in SEC Rule 10A-3).
Financial Expert
The SEC has adopted rules which require us to disclose whether one of the
members of the Audit Committee qualifies under SEC rules as an "audit committee
financial expert." We are not required to have such an expert on our Audit
Committee. Based on our review of the SEC rules, at this time, the Board does
not believe that any member of the Audit Committee can be classified as an
"audit committee financial expert."
Under SEC regulations, an "audit committee financial expert" must have the
attributes and experience of a person who has been actively involved in the
preparation, auditing, or evaluation of public company financial statements.
While it may be possible to recruit a director having these specific
qualifications, our size and geographic location make such a task difficult,
and the Board believes that it is more important that directors satisfy the
criteria described in the 2010 Proxy Statement under "Proposal No.1-Election of
Directors- Nominations for Director - QUALIFICATIONS." These criteria include
an understanding of our market area, customer base, and scope of operations.
The Board believes that it is not in our best interests to nominate a director
who does not possess these characteristics solely to acquire a director meeting
the definition of an "audit committee financial expert" under SEC regulations.
The Audit Committee has the authority under its charter to retain or dismiss
the independent auditor and to hire such other experts or legal counsel as it
deems appropriate in order to fulfill its duties. The Audit Committee, and the
Board of Directors as a whole, believes that the Committee has access to the
financial expertise required to adequately perform its duties under its
charter.
As part of its annual review of potential directors, the Board will consider
any potential candidates who meet its current general qualification criteria
and those of an "audit committee financial expert," but, for the time being,
the Board believes that the current members of the Committee, working with the
independent auditor, are qualified to perform the duties required in the
Committee's charter.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to director compensation is incorporated in this Form 10-K
by this reference to the disclosure in the 2010 Proxy Statement under the sub-
caption "Proposal No. 1 - Election of Directors - Director Compensation for
2009."
Information relating to the compensation of executive officers is incorporated
in this Form 10-K by this reference to the disclosure in the 2010 Proxy
Statement under the caption "Executive Officer Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information relating to security ownership of certain beneficial owners is
incorporated in this Form 10-K by this reference to the disclosure in the 2010
Proxy Statement under the caption "Beneficial Ownership of Common Stock"
through the table ending at the sub-caption "- Section 16(a) Beneficial
Ownership Reporting Compliance."
The following table sets forth, as of December 31, 2009, information with
respect to compensation plans under which our common stock is authorized for
issuance:
Number of securities remaining
Number of securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation
outstanding options, outstanding options, plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
Equity compensation
plans approved by
security holders 62,603(1) $26.54(1) 385,922(2)
(1) Shares issuable upon exercise of options granted pursuant to the 1999 Stock Option Plan.
(2) Includes 197,551 shares issuable under the 1999 Stock Option Plan, 150,000 shares available
under the Dividend Reinvestment Plan and 38,371 shares available under the Employee Stock
Purchase Plan. The purchase period for shares under the Employee Stock Purchase Plan is
quarterly, accordingly, there were no shares subject to option as of December 31,
2009, under the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions with
directors and officers, and the independence of directors, is incorporated in
the Form 10-K by this reference to the disclosure in the 2010 Proxy Statement
under the sub-caption "Governance of the Company - The Board - CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" and "Governance of the Company - The
Board- DIRECTOR INDEPENDENCE."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information relating to the fees and services of our principal accountant is
incorporated into this Form 10-K by this reference to the disclosure in the
2010 Proxy Statement under the sub-captions "Audit Committee Report and Related
Matters - Independent Auditor Fees," and "- Audit Committee Pre-Approval
Policy."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
DESCRIPTION PAGE
Mid-Wisconsin Financial Services, Inc.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 54
Consolidated Balance Sheets as of December 31, 2009 and 2008 55
Consolidated Statements of Income for the year ended
December 31, 2009, 2008, and 2007 56
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 2009, 2008, and 2007 57
Consolidated Statements of Cash Flows for the year ended
December 31, 2009, 2008, and 2007 58
Notes to Consolidated Financial Statements 60
(2) No financial statement schedules are required by Item 8 or
Item 15(c)
(3) Exhibits Required by Item 601 of Regulation S-K:
The following exhibits required by Item 601 of Regulation S-K are filed
as part of this Form 10-K:
3.1 Restated Articles of Incorporation, (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated February
20, 2009)
3.2 Bylaws, as amended February 20, 2009 (incorporated by reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated May 27,
2009)
4.1 Indenture dated October 14, 2005 between Mid-Wisconsin Financial
Services, Inc., as issuer, and Wilmington Trust Company, as trustee,
including the form of Junior Subordinated Debenture as Exhibit A thereto
(incorporated by reference to Exhibit 1.1 to the Registrant's Current
Report on Form 8-K dated October 14, 2005)
4.2 Guarantee Agreement dated October 14, 2005, between Mid-Wisconsin
Financial Services, Inc., as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee (incorporated by reference to Exhibit 1.2 to the
Registrant's Current Report on Form 8-K dated October 14, 2005)
4.3 Amended and Restated Declaration of Trust dated October 14, 2005,
among Mid-Wisconsin Financial Services, Inc., as Sponsor, Wilmington
Trust Company, Institutional and Delaware Trustees, and Administrators
named thereto, including the form of Trust Preferred Securities
(incorporated by reference to Exhibit 1.3 to the Registrant's Current
Report on Form 8-K dated October 14, 2005)
4.4 Warrant to Purchase Preferred Stock (incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February
20, 2009)
4.5 Form of Certificate for Senior Preferred Stock (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K
dated February 20, 2009)
4.6 Form of Certificate for Warrant Preferred Stock (incorporated by
reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K
dated February 20, 2009)
10.1* Mid-Wisconsin Financial Services, Inc. Directors' Deferred
Compensation Plan as last amended April 22, 2008 (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 10-Q
for the quarterly period ended March 31, 2008)
10.2* Mid-Wisconsin Financial Services, Inc. 2005 Directors' Deferred
Compensation Plan as last amended April 22, 2008 (incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on Form 10-Q
for the quarterly period ended March 31, 2008)
10.3* Director Retirement Bonus Policy as amended April 22, 2008
(incorporated by reference to Exhibit 10.3 to the Registrant's Current
Report on Form 10-Q for the quarterly period ended March 31, 2008)
10.4* Mid-Wisconsin Financial Services, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's Annual
Report on Form
10-K for the fiscal year ended December 31, 2000)
10.5* Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan, as
last amended April 22, 2008 (incorporated by reference to Exhibit 10.5 to
the Registrant's Current Report on Form 10-Q for the quarterly period
ended March 31, 2008)
10.6* Form of Incentive Stock Option Agreement (incorporated by reference
to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004)
10.7* Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2006)
10.8* Employment Agreement - James F. Warsaw (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
January 15, 2009)
10.9* Form of Letter Agreement with Senior Executive Officers
(incorporated by reference to Exhibit 10.4 to the Registrant's Current
Report on Form 8-K dated February 20, 2009)
10.10* 2007 Incentive Plan (incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 10-Q for the quarterly period
ended June 30, 2007)
10.11 Letter Agreement dated February 20, 2009, between Mid-Wisconsin
Financial Services, Inc. and the United States Treasury, which includes
the Securities Purchase Agreement attached thereto, with respect to the
issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock,
Series A and Warrant Preferred Stock under the TARP Capital Purchase
Program (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated February 20, 2009)
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2009)
23.1 Consent of Wipfli LLP
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-
Oxley Act of 2002
*Denotes executive compensation plans and arrangements
The exhibits listed above are available upon request in writing to William A.
Weiland, Secretary, Mid-Wisconsin Financial Services, Inc., 132 West State
Street, Medford, Wisconsin 54451.
(b) Exhibits
See Item 15(a) (3)
(c) Financial Schedules
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 26, 2010.
MID-WISCONSIN FINANCIAL SERVICES, INC.
JAMES F. WARSAW
James F. Warsaw, President and Chief
Executive Officer
WILLIAM A. WEILAND
William A. Weiland, Secretary and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant on
March 26, 2010, and in the capacities indicated.
KIM A. GOWEY JAMES F. WARSAW
Kim A. Gowey, Chairman of the Board, James F. Warsaw, President and
and a Director Chief Executive Officer and a Director
(Principal Executive Officer)
JAMES F. MELVIN MARK A. KING
James F. Melvin, Vice Chairman of Mark A. King
the Board, and a Director Chief Financial Officer and Chief
Operations Officer
JAMES P. HAGER BRIAN B. HALLGREN
James P. Hager, Director Brian B. Hallgren, Director
FREDERICK T. LUNDIN KURT D. MERTENS
Frederick T. Lundin, Director Kurt D. Mertens, Director
ROBERT J. SCHOOFS
Robert J. Schoofs, Director
EXHIBIT INDEX
to
FORM 10-K
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the period ended December 31, 2009
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. 232.102(d))
23.1 Consent of Wipfli LLP
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
Exhibits required by Item 601 of Regulation S-K which have been
previously filed and are incorporated by reference are set forth in Part IV,
Item 15 of the Form 10-K to which this Exhibit Index relates
