Attached files
FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18542
MID-WISCONSIN FINANCIAL SERVICES,INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 06-1169935
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
132 West State Street
Medford, WI 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 715-748-8300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Date File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 3, 2010 there were 1,651,053 shares of $0.10 par value common
stock outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2010 (unaudited)
and December 31, 2009 (derived from audited
financial statements) 3
Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 2010 and 2009 (unaudited) 4
Consolidated Statements of Changes in
Stockholders' Equity
Nine Months Ended September 30, 2010 (unaudited) 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2010 and 2009
(unaudited) 6-7
Notes to Consolidated Financial Statements 8-20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-47
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 47
Item 4. Controls and Procedures 47
PART II OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 1A. Risk Factors 47
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Removed and Reserved 48
Item 5. Other Information 48
Item 6. Exhibits 48
Signatures 49
Exhibit Index 49
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheets ($ in Thousands)
September 30, 2010 December 31, 2009
(Unaudited) (Audited)
Assets
Cash and due from banks $8,959 $9,824
Interest-bearing deposits in other financial institutions 113 13
Federal funds sold 33,658 9,064
Investment securities available for sale, at fair value 81,514 103,477
Loans held for sale 5,745 5,452
Loans 344,197 358,616
Less: Allowance for loan losses (8,773) (7,957)
Loans, net 335,424 350,659
Accrued interest receivable 2,071 1,940
Premises and equipment, net 8,013 8,294
Other investments, at cost 2,616 2,616
Other assets 25,611 14,121
Total assets $503,724 $505,460
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $53,506 $55,218
Interest-bearing deposits 339,724 342,582
Total deposits 393,230 397,800
Short-term borrowings 10,030 7,983
Long-term borrowings 42,561 42,561
Subordinated debentures 10,310 10,310
Accrued interest payable 1,098 1,287
Accrued expenses and other liabilities 2,250 2,335
Total liabilities 459,479 462,276
Stockholders' equity:
Series A preferred stock - no par value
Authorized - 10,000 shares in 2010 and 2009
Issued and outstanding Series A - 10,000 shares in 2010 and 2009 9,607 9,527
Series B preferred stock - no par value
Authorized - 500 shares in 2010 and 2009
Issued and outstanding Series B - 500 shares in 2010 and 2009 541 549
Common stock - Par value $0.10 per share
Authorized - 6,000,000 shares in 2010 and 2009
Issued and outstanding - 1,651,053 shares in 2010 and
1,648,102 shares in 2009 165 165
Additional paid-in capital 11,904 11,862
Retained earnings 20,048 20,025
Accumulated other comprehensive income 1,980 1,056
Total stockholders' equity 44,245 43,184
Total liabilities and stockholders' equity $503,724 $505,460
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
($ in Thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2010 September 30, 2009 September 30, 2010 September 30, 2009
Interest and dividend income:
Loans, including fees $5,296 $5,589 $16,075 $17,229
Securities
Taxable 768 929 2,601 2,584
Tax-exempt 88 118 277 373
Other interest and dividend income 44 29 91 123
Total interest and dividend income 6,196 6,665 19,044 20,309
Interest expense:
Deposits 1,580 1,843 4,973 5,997
Short-term borrowings 29 37 68 94
Long-term borrowings 412 520 1,257 1,492
Subordinated debentures 154 154 461 461
Total interest expense 2,175 2,554 6,759 8,044
Net interest income 4,021 4,111 12,285 12,265
Provision for loan losses 900 2,150 3,255 5,650
Net interest income after provision
for loan losses 3,121 1,961 9,030 6,615
Noninterest income:
Service fees 283 321 887 923
Trust service fees 277 262 841 748
Investment product commissions 69 51 175 169
Net realized gain on sale of securities
available for sale 330 0 498 449
Mortgage banking income 250 165 548 455
Other operating income 258 221 725 676
Total noninterest income 1,467 1,020 3,674 3,420
Other-than-temporary impairment losses, net
Total other-than-temporary impairment losses 426 316 426 374
Amount in other comprehensive income, before taxes 14 27 14 73
Total impairment 412 289 412 301
Noninterest expenses:
Salaries and employee benefits 2,164 2,214 6,375 6,384
Occupancy 449 465 1,379 1,429
Data processing and information systems 165 157 493 485
Foreclosure/OREO expense 17 279 141 1,242
Legal and professional 147 234 528 680
FDIC assessment 232 181 697 791
Other operating expenses 819 451 2,107 1,651
Total noninterest expenses 3,993 3,981 11,720 12,662
Income (loss) before provision (benefit) for income taxes 183 (1,289) 572 (2,928)
Provision (benefit) for income taxes 21 (614) 69 (1,437)
Net income (loss) $162 ($675) $503 ($1,491)
Preferred stock dividends, discount accretion,
and premium amortization (160) (158) (481) (387)
Net income (loss) attributable to common stockholders $2 ($833) $22 ($1,878)
Basic and diluted earnings (loss) per common share $0.00 ($0.51) $0.01 ($1.14)
Cash dividends declared per common share $0.00 $0.00 $0.00 $0.11
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc. and
Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
September 30, 2010
(Unaudited)
Additional Other
Preferred Stock Common Stock Paid-In Retained Comprehensive
($ in Thousands except per share data) Shares Amount Shares Amount Capital Earnings Income Totals
Balance, December 31, 2009 10,500 $10,076 1,648,102 $165 $11,862 $20,025 $1,056 $43,184
Comprehensive Income:
Net income 503 503
Other comprehensive income 976 976
Reclassification adjustment for net realized
gains on securities available for
sale included in earnings, net of tax (52) (52)
Total comprehensive income 1,427
Accretion of preferred stock discount 80 (80) 0
Amortization of preferred stock premium (8) 8 0
Issuance of common stock:
Proceeds from stock purchase plans 2,951 0 24 24
Cash dividends:
Preferred stock (339) (339)
Dividends declared:
Preferred stock (69) (69)
Stock-based compensation 18 18
Balance, September 30, 2010 10,500 $10,148 1,651,053 $165 $11,904 $20,048 $1,980 $44,245
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows ($ in Thousands)
(Unaudited)
Nine months ended September 30,
2010 2009
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income (loss) $503 ($1,491)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for depreciation and net amortization 696 727
Provision for loan losses 3,255 5,650
Provision for valuation allowance - other real estate 75 890
Gain on sale of investment securities (498) (449)
Other-than-temporary impairment losses, net 412 301
Loss on premises and equipment disposals 0 4
(Gain) Loss on sale of foreclosed real estate (55) 149
Stock-based compensation 18 29
Changes in operating assets and liabilities:
Loans held for sale (293) (1,459)
Other assets (10,281) (840)
Other liabilities (273) (1,819)
Net cash provided by (used in) operating activities (6,441) 1,692
Cash flows from investing activities:
Net increase in interest-bearing deposits
in other financial institutions (100) (2,338)
Net (increase) decrease in federal funds sold (24,594) 16,077
Securities available for sale:
Proceeds from sales 20,295 12,717
Proceeds from maturities 25,539 18,725
Payment for purchases (22,382) (53,297)
Net decrease in loans 9,016 2,941
Capital expenditures (344) (141)
Proceeds from sale of other real estate 1,053 696
Net cash provided by (used in) investing activities 8,483 (4,620)
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows ($ in Thousands)
(Unaudited)
Nine months ended September 30,
2010 2009
Cash flows from financing activities:
Net decrease in deposits (4,570) (8,305)
Net increase in short-term borrowings 2,047 3,601
Proceeds from issuance of long-term borrowings 22,061 6,500
Principal payments on long-term borrowings (22,061) (10,000)
Proceeds from issuance of preferred stock 0 10,000
Issuance of common stock 24 25
Cash dividends paid on preferred stock (408) (333)
Cash dividends paid on common stock 0 (180)
Net cash provided by (used in) financing activities (2,907) 1,308
Net decrease in cash and due from banks (865) (1,620)
Cash and due from banks at beginning 9,824 9,605
Cash and due from banks at end $8,959 $7,985
Supplemental cash flow information: 2010 2009
Cash paid during the year for:
Interest $6,949 $8,452
Income taxes $0 $395
Noncash investing and financing activities:
Loans transferred to other real estate $3,450 $1,804
Loans charged-off $3,003 $1,948
Dividends declared but not yet paid on preferred stock $69 $68
Loans made in connection with the sale of
other real estate $486 $0
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
Notes to Unaudited Consolidated Financial Statements
($ in Thousands)
NOTE 1 - BASIS OF PRESENTATION
GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Mid-Wisconsin
Financial Services, Inc.'s and Subsidiary's (the "Company") consolidated
financial position, results of its operations, changes in stockholders' equity
and cash flows for the periods presented, and all such adjustments are of a
normal recurring nature. The consolidated financial positions include the
accounts of all subsidiaries. All material intercompany transactions and
balances are eliminated. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the entire year. We
have reviewed and evaluated subsequent events through the date this Form 10-Q
was filed.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial statements
and footnotes in our Annual Report on Form 10-K for the year ended December 31,
2009 ("2009 Form 10-K") should be referred to in connection with the reading of
these unaudited interim financial statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Estimates that are susceptible to significant change include, but
are not limited to, the determination of the allowance for loan losses, the
valuation of other real estate and repossessed assets, and the valuations of
investments.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the Financial Accounting Standards Board ("FASB") issued an
accounting standard intended to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This accounting
standard requires companies to disclose the date through which they have
evaluated subsequent events and the basis of that date, as to whether it
represents the date the financial statements were issued or were available to be
issued. It also provides guidance regarding circumstances under which companies
should and should not recognize events or transactions that occurred after the
balance sheet date, which were not recognized in the financial statements. This
accounting standard is effective for interim and annual periods ending after
June 15, 2009. The Company adopted this accounting standard for the year ended
December 31, 2009. In February 2010, the FASB amended this standard by
requiring companies who file financial statements with the Securities and
Exchange Commission ("SEC") to evaluate subsequent events through the date the
financial statements are issued, and exempts SEC filers from disclosing the date
through which subsequent events have been evaluated. The adoption of this
accounting standard had no material impact on the Company's consolidated
financial statements.
In June 2009, the FASB issued an accounting standard which requires a
qualitative rather than a quantitative analysis to determine the primary
beneficiary of a variable interest entity for consolidation purposes. The
primary beneficiary of a variable interest entity is the enterprise that has (1)
the power to direct the activities of the variable interest entity that most
significantly impact the variable interest entity's economic performance, and
(2) the obligation to absorb losses of the variable interest entity that could
potentially be significant to the variable interest entity or the right to
receive benefits of the variable interest entity that could potentially be
significant to the variable interest entity. This accounting standard was
effective as of the beginning of the first annual reporting period 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 June 2009, the FASB issued an accounting standard which amends current
generally accepted accounting principles related to the accounting for transfers
and servicing of financial assets and extinguishments of liabilities, including
the removal of the concept of a qualifying special-purpose entity. This new
accounting standard also clarifies that a transferor must evaluate whether it
has maintained effective control of a financial asset by considering its
continuing direct or indirect involvement with the transferred financial asset.
This accounting standard was effective as of the beginning of the first annual
reporting period beginning after November 15, 2009. The Company adopted this
accounting standard on January 1, 2010, with no material impact on the
consolidated financial statements of the Company.
In January 2010, the FASB issued an accounting standard providing additional
guidance relating to fair value measurement disclosures. Specifically,
companies will be required to separately disclose significant transfers into and
out of Level 1 and Level 2 measurements in the fair value hierarchy and the
reason for those transfers. Significance should generally be based on earnings
and total assets or liabilities, or when changes are recognized in other
comprehensive income, based on total equity. Companies may take different
approaches in determining when to recognize such transfers, including using the
actual date of the event or change in circumstances causing the transfer, or
using the beginning or ending of a reporting period. For Level 3 fair value
measurements, the new guidance required presentation of separate information
about purchases, sales, issuances and settlements. Additionally, the FASB also
clarified existing fair value measurement disclosure requirements relating to
the level of disaggregation, inputs, and valuation techniques. This accounting
standard became effective at the beginning of 2010, except for the detailed
Level 3 disclosures, which will be effective at the beginning of 2011. The
Company adopted the accounting standard, except for the detailed Level 3
disclosures, at January 1, 2010, with no material impact on the consolidated
financial statements of the Company.
In April 2010, the FASB issued updated guidance relating to how a loan that is
part of a pool should be accounted for if the loan is modified that it would
constitute a troubled debt restructuring. Modified loans that are accounted for
within a pool do not result in the removal of these loans from the pool even if
the loan modification would be considered trouble debt restructuring. This
accounting standard is effective for interim and annual periods ending on or
after July 15, 2010. Adoption of this amendment is not expected to have a
material impact on the consolidated financial statements of the Company.
In July 2010, the FASB issued an accounting standard update relating to improved
disclosures about the credit quality of financing receivables and the allowance
for credit losses. Companies would be required to disaggregate, by portfolio
segment or class of financing receivable, certain existing disclosures and
provide certain new disclosures about its financing receivables and related
allowance for credit losses. This accounting standard will be effective for
interim and annual reporting periods ending on or after December 15, 2010.
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.
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
($ in Thousands, except per share data)
Net income (loss) $162 ($675) $503 ($1,491)
Preferred dividends, discount and premium (160) (158) (481) (387)
Net income (loss) available to common equity 2 (833) 22 (1,878)
Weighted average shares outstanding 1,650 1,646 1,649 1,645
Effect of dilutive stock options 0 0 0 0
Diluted weighted average common shares outstanding 1,650 1,646 1,649 1,645
Basic and diluted earnings (loss) per common share $0.00 ($0.51) $0.01 ($1.14)
NOTE 3 - 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.
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 nonrecurring 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.
In instances where the determination of the fair value measurements is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company's assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
specific to the asset or liability.
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.
Other real estate owned ("OREO") - Real estate acquired through or in lieu of
loan foreclosure, also known as OREO, is not measured at fair value on a
recurring basis. However, OREO 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 September 30, 2010 and December 31, 2009, 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
($ in Thousands)
September 30, 2010
Investment securities available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $8,895 $0 $8,895 $0
Mortgage-backed securities 54,093 0 53,175 918
Obligations of states and political subdivisions 17,416 0 16,889 527
Corporate debt securities 960 0 0 960
Total debt securities $81,364 $0 $78,959 $2,405
Equity securities 150 0 50 100
Total investment securities available for sale $81,514 $0 $79,009 $2,505
December 31, 2009
Investment securities available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $3,179 $0 $3,179 $0
Mortgage-backed securities 81,766 0 80,472 1,294
Obligations of states and political subdivisions 17,184 0 16,657 527
Corporate debt securities 1,198 0 0 1,198
Total debt securities $103,327 $0 $100,308 $3,019
Equity securities 150 0 50 100
Total investment securities available for sale $103,477 $0 $100,358 $3,119
The table below presents a roll forward of the balance sheet amounts for the
nine months ended September 30, 2010 and for the year ended December 31, 2009,
for assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3).
($ in Thousands) September 30, 2010 December 31, 2009
Balance at beginning of year $3,119 $1,952
Total gains (losses) (realized/unrealized)
Included in earnings (412) (301)
Included in other comprehensive income 276 (58)
Purchases, sales, issuances and settlements, net (478) (268)
Transfers in and/or out of Level 3 0 1,794
Balance at end of period $2,505 $3,119
Information regarding the fair values of assets measured at fair value on a
nonrecurring basis as of September 30, 2010 and December 31, 2009, were as
follows:
Nonrecurring Fair Value Measurements Using
Quoted Price in
Active Markets for Significant Other Significant
Assets Measured Identical Assets Observable Inputs Unobservable Inputs
at Fair Value Level 1 Level 2 Level 3
($ in Thousands)
September 30, 2010
Loans held for sale $5,745 $0 $5,745 $0
Impaired loans $7,255 $0 $0 $7,255
OREO $3,699 $0 $3,699 $0
December 31, 2009
Loans held for sale $5,452 $0 $5,452 $0
Impaired loans $9,535 $0 $0 $9,535
OREO $1,808 $0 $1,808 $0
The fair value of loans held for sale is based on observable current prices in
the secondary market in which loans trade. All loans held for sale are
categorized based on commitments received from secondary sources that the loans
qualify for placement at the time of underwriting and at an agreed upon price. A
gain or loss is recognized at the time of sale reflecting the present value of
the difference between the contractual interest rate of the loan and the yield
to investors.
At September 30, 2010 loans with a carrying amount of $8,688 were considered
impaired and were written down to their estimated fair value of $7,255. As a
result, the Company recognized a specific valuation allowance against these
impaired loans totaling $1,433. 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.
The fair value of OREO is based on observable market data such as independent
appraisals or comparable sales. Any writedown in the carrying value of a
property at the time of acquisition is charged to the allowance for loan losses.
Any subsequent writedowns to reflect current fair market value, as well as gains
and losses on disposition, are treated as period costs. During the period
ending September 30, 2010, the Bank acquired OREO of $3,450 measured at fair
value less selling costs. In addition, an impairment write down of $75 was made
against these real estate properties and charged to earnings for the nine months
ended September 30, 2010.
In 2009, the Bank acquired OREO of $1,652 measured at fair value less selling
costs. In addition, an impairment write down of $958 was made against these as
well as some of the other real estate properties acquired in prior years and
charged to earnings for the year ended December 31, 2009.
The Company is required to disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below
for the Company's financial instruments.
The estimated fair values of the Company's financial instruments on the balance
sheet at September 30, 2010 and December 31, 2009 were as follows:
September 30, 2010 December 31, 2009
Carrying Carrying
($ in Thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term investments $42,730 $42,730 $18,901 $18,901
Securities and other investments 84,130 84,381 106,093 106,649
Net loans 341,169 339,137 356,111 353,142
Accrued interest receivable 2,071 2,071 1,940 1,940
Financial liabilities:
Deposits $393,230 $398,508 $397,800 $396,069
Short-term borrowings 10,030 10,030 7,983 7,983
Long-term borrowings 42,561 42,990 42,561 43,446
Subordinated debentures 10,310 10,310 10,310 10,310
Accrued interest payable 1,098 1,098 1,287 1,287
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 noninterest-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.
Short-Term Borrowings - The carrying amount reported in the consolidated balance
sheets for short-term borrowings approximates the liability's fair value.
Long-Term Borrowings - The fair values are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Subordinated Debentures - The carrying amount of the debt approximates fair
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 income tax ramifications related
to the realization of the unrealized gains or losses can have a significant
effect on fair value estimates and have not been considered in the estimates.
Because of the wide range of valuation techniques and the numerous assumptions
which must be made, it may be difficult to compare our Company's fair value to
that of other financial institutions. It is important that the many assumptions
discussed above be considered when using the estimated fair value disclosures
and to realize that because of the uncertainties, the aggregate fair value
should in no way be construed as representative of the underlying value of the
Company.
NOTE 4- INVESTMENT SECURITIES
($ in thousands)
The amortized cost and fair values of investment securities available for sale
were as follows:
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value
($ in Thousands)
September 30, 2010
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $8,770 $125 $0 $8,895
Mortgage-backed securities 52,110 1,996 13 54,093
Obligations of states and political
subdivisions 16,413 1,003 0 17,416
Corporate debt securities 974 0 14 960
Total debt securities 78,267 3,124 27 81,364
Equity securities 150 0 0 150
Totals $78,417 $3,124 $27 $81,514
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value
($ in Thousands)
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 $103,477
The amortized cost and fair values of investment debt securities available for
sale at September 30, 2010, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
($ in Thousands) Amortized Cost Fair Value
Due in one year or less $2,530 $2,547
Due after one year but within five years 5,725 6,030
Due after five years but within ten years 13,170 13,947
Due in ten years or more 4,733 4,747
Mortgage-backed securities 52,109 54,093
Total debt securities available for sale $78,267 $81,364
The following represents gross unrealized losses and the related fair value of
investment securities available for sale, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position, at September 30, 2010 and December 31, 2009.
Less Than 12 Months 12 Months or More Total
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
($ in Thousands)
September 30, 2010
US Treasury obligations and
direct obligations of U.S.
government agencies $0 $0 $0 $0 $0 $0
Mortgage-backed securities 2,002 2 204 11 2,206 13
Corporate securities 0 0 136 14 136 14
Obligations of states and
political subdivisions 0 0 0 0 0 0
Total temporarily impaired
securities $2,002 $2 $340 $25 $2,342 $27
December 31, 2009
US Treasury obligations and
direct obligations of U.S.
government 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
Each quarter the Company reviews its investment securities portfolio to monitor
its exposure to other-than-temporary impairment ("OTTI") that may result due to
the current adverse economic conditions. We utilize a third party vendor to
assist in the determination of the fair value of our investment portfolio. A
determination as to whether a security's decline in market value is OTTI takes
into consideration numerous factors. Some factors the Company may consider in
the OTTI analysis include: the length of time and extent to which the fair value
has been less than the security's carrying value, the characteristics of the
underlying collateral, changes in security ratings, the financial condition of
the issuer, discounted cash flow analysis and industry specific economic
conditions. In addition, the Company may also evaluate payment structure,
whether there are defaulted payments or expected defaults, prepayment speeds,
and the value of any underlying collateral. To determine OTTI, we 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.
Based on the Company's evaluation, management does not believe any remaining
unrealized loss at September 30, 2010 represents an OTTI as these unrealized
losses are primarily attributable to changes in interest rates and the current
volatile market conditions, and not credit deterioration. At September 30,
2010, there were two investment securities in an unrealized loss position for
less than 12 months. There were three individual securities in an unrealized
loss positions for 12 months or more. The Company currently does not intend to
sell nor does it believe that it will be required to sell the securities
contained in the above table before recovery of their amortized cost basis.
In September 2010, the Company recognized OTTI write-downs of $412 consisting of
two private placement trust preferred securities because 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 than likely 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. Interest on these two trust preferred
securities is in deferral and the securities have been placed on nonaccrual
status.
During 2009, the Company determined that credit-related OTTI write-downs of $301
on the Company's holding of a trust preferred debt security and a pool of non-
agency mortgage backed security were necessary. At September 30, 2010 and
December 31, 2009, the fair values of these specific securities with OTTI were
$486 and $527, respectively.
The following is a summary of the credit loss portion of OTTI recognized in
earnings on investment securities.
($ in Thousands) September 30, 2010
Balance of credit-related OTTI at December 31, 2009 $301
Credit losses on newly identified impairment 412
Balance of credit-related OTTI at September 30, 2010 $713
NOTE 5 - OTHER REAL ESTATE OWNED
A summary of OREO, which is included in other assets, is as follows:
($ in Thousands) September 30, 2010 December 31, 2009
Balance at beginning of year $1,808 $2,556
Transfer of loans at net realizable value to OREO 3,450 1,652
Sale proceeds (1,053) (1,012)
Loans made in sale of OREO (486) (339)
Net gain (loss) from sale of OREO 55 (91)
Provision charged to operations (75) (958)
Balance at end of period $3,699 $1,808
Changes in the valuation reserve for losses on OREO were as follows:
($ in Thousands) September 30, 2010 December 31, 2009
Beginning Balance $2,994 $2,616
Provision charged to operations 75 958
Amounts related to OREO disposed of (365) (580)
Balance at end of period $2,704 $2,994
The largest asset in OREO as of September 30, 2010 is a participation loan where
the underlying collateral is commercial property comprised of a hotel/resort
property. The second largest asset consists of the remaining commercial real
estate property associated with a loan to a former car dealership ("Impaired
Borrower") received in 2007 from the surrender of assets as described in our
2009 Form 10-K. 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 $698 in 2009. Previous valuations on
the properties of the Impaired Borrower represented fair value based on
appraisals and an accepted offer to purchase which was subject to various
contingencies and subsequently not consummated. The remaining commercial real
estate property is under contract to be sold during the fourth quarter 2010 with
no additional valuation adjustments anticipated. The current carrying values
of the OREO represent the fair value based on the highest and best use of the
properties. There were 14 properties held as OREO at September 30, 2010 and
December 31, 2009, respectively.
NOTE 6- LONG-TERM BORROWINGS
Long-term borrowings were as follows.
($ in Thousands) September 30, 2010 December 31, 2009
Federal Home Loan Bank advances $32,561 $32,561
Structured repurchase agreements 10,000 10,000
Total long-term borrowings $42,561 $42,561
Federal Home Loan Bank Advances - Long-term advances from the Federal Home Loan
Bank ("FHLB") have maturities through 2015 and had weighted-average interest
rates of 3.72% and 4.04% at September 30, 2010 and December 31, 2009,
respectively.
On April 5, 2010, $22,061 of FHLB Advances ("Advances") was restructured to take
advantage of low interest rates and the ability to lock-in these rates for a
longer period. The average duration of all Advances when this transaction was
consummated was extended to 3.62 years from 1.83 years and the weighted-average
interest rate dropped to 3.72% from 4.04%. The rate of the restructured
Advances dropped from 4.71% to 3.02%, and after accounting for the amortization
of the cancellation penalties the effective rate equals 4.11%. Management
reviewed the present value of the cash flows before and after the restructuring
and determined the restructuring was closely related to the original contract
within accounting guidance that allows the prepayment penalty to be incorporated
into the new borrowing agreements.
Structured repurchase agreements - Fixed rate structured repurchase agreements,
which mature in 2014 and 2015, are callable in 2013, and have weighted-average
interest rates of 3.47% at September 30, 2010 and December 31, 2009.
NOTE 7- STOCKHOLDERS' EQUITY
($ in thousands)
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 shares of Series B, no
par value, Preferred Stock.
On February 20, 2009, under the United States Department of the Treasury
("Treasury") Capital Purchase Program ("CPP"), 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 are being amortized over
five years. The allocated carrying values of the Series A Preferred Stock and
Series B Preferred Stock on the date of issuance (based on their relative fair
values) were $9,442 and $558, respectively. The allocated carrying values of
the Series A Preferred Stock and Series B Preferred Stock on September 30, 2010
were $9,607 and $541, 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%. The Company is prohibited from paying any dividend
with respect to shares of its common stock unless all accrued and unpaid
dividends are paid in full on the Preferred Stock for all past dividend periods.
The Preferred Stock is non-voting, other than on matters that could adversely
affect the Preferred Stock. The Preferred Stock may be redeemed at any time
with regulatory approval. All $10,000 of the CPP proceeds qualify as Tier 1
Capital for regulatory purposes at the holding company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
We operate as a one-bank holding company and own all of the outstanding capital
stock of Mid-Wisconsin Bank (the "Bank"), chartered as a state bank in
Wisconsin. The Bank is engaged in general commercial and retail banking
services, including wealth management services.
The following management's discussion and analysis is presented to assist in the
understanding and evaluation of our consolidated financial condition as of
September 30, 2010 and December 31, 2009 and results of operations for the three
month and nine month periods ended September 30, 2010 and 2009. It is intended
to supplement the unaudited financial statements, footnotes, and supplemental
financial data appearing elsewhere in this Form 10-Q and should be read in
conjunction therewith. Quarterly comparisons reflect continued consistency of
operations and do not reflect any significant trends or events other than those
noted in the comments.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this document and in documents that are incorporated by
reference which are not purely historical are forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, including any
statements regarding descriptions of management's plans, objectives, or goals
for future operations, products or services, and forecasts of its revenues,
earnings, or other measures of performance. Forward-looking statements are based
on current management expectations and, by their nature, are subject to risks
and uncertainties. These statements may be identified by the use of words such
as "believe," "expect," "anticipate," "plan," "estimate," "should," "will,"
"intend," or similar expressions. Stockholders should note that many factors,
some of which are discussed elsewhere in this document and in the documents that
are incorporated by reference, could affect the future financial results of the
Company and could cause those results to differ materially from those expressed
in forward-looking statements contained or incorporated by reference in this
document. These factors, many of which are beyond the Company's control, include
the following:
o operating, legal and regulatory risks including the effects of the
recently enacted Dodd-Frank Wall Street Reform and Consumer Protection
Act and Regulations promulgated there under;
o economic, political and competitive forces affecting our banking and
wealth management businesses;
o impact on net interest income from changes in monetary policy and
general economic conditions;
o the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful;
o other factors discussed under Item 1A, "Risk Factors" in our 2009 Form
10-K and elsewhere herein, and from time to time in our other filings
with the Securities and Exchange Commission after the date of this
report.
These factors should be considered in evaluating the forward-looking statements,
and you should not place undue reliance on such statements. We specifically
disclaim any obligation to update factors or to publicly announce the results of
revisions to any of the forward-looking statements or comments included herein
to reflect future events or developments.
CRITICAL ACCOUNTING 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 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 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, size 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 and future 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 is held for sale and 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 may 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 income 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 IS SHOWN IN THOUSANDS OF DOLLARS.
SUMMARY
We reported net income to common stockholders of $2, or $0.00 per common share,
for the quarter ended September 30, 2010. This compares to net income to common
stockholders of $168, or $0.10 per common share, for the quarter ended June 30,
2010, and a net loss to common stockholders of $833, or $0.51 per common share,
for the quarter ended September 30, 2009. For the nine months ended September
30, 2010, net income to common stockholders was $22, or $0.01 per common share,
compared to a net loss to common stockholders of $1,878 or $1.14 per common
share, in the comparable 2009 period.
This is the second consecutive quarter a profit has been reported after three
consecutive loss quarters starting at June 30, 2009. Net interest income, has
remained relatively flat over the past two quarters in spite of the continued
"distressed" economic conditions and resulting level of non-accruing loans.
Financial results continue to be impacted mainly by historically high provision
for loan losses, foreclosure/OREO expenses and FDIC insurance costs. Despite
the continuing provisioning, we continue to believe that the Company's core
earnings (pre loan loss provisions, OREO expenses and FDIC insurance costs) and
basic fundamentals remain healthy. In order to preserve capital, no cash
dividends were paid to common stockholders in the third quarter of 2010 or 2009.
Other key factors affecting the current quarter were:
o Net interest income of $4,021 for the three months ended September 30,
2010, decreased by 2.9% from the prior quarter and 2.2% from the same
quarter in 2009. Interest income from loans and investments decreased $195
from the prior quarter, while interest expense on deposits and borrowings
decreased $80. In the past, declines in investment or loan rates due to
competition or the fluctuation in the trading market have been offset by
decreases in the rates on our deposit products. This quarter has seen a
larger drop in interest income due to the acquisition of greater amounts
of short-term lower yielding investments for purposes of having additional
liquidity capacity.
o Loans of $344,197 at September 30, 2010, decreased $14,419 from December
31, 2009. Contributing to the decline was $2,439 of net charge-offs,
$2,900 of loan pay-offs during the second quarter of 2010, and continued
weak loan demand in our markets. Although competition among local and
regional banks for creditworthy borrowers and core deposit customers
remains high, we remain committed to supporting our markets through
lending to creditworthy borrowers as opportunities arise.
o Total deposits were $393,230 at September 30, 2010 or $4,570 below the
December 31, 2009 level due primarily to normal customer inflows and
outflows. The Company's premier money market product has attracted
deposits and the Company has allowed $9,721 of brokered certificate of
deposits to mature and not be replaced.
o Net charge-offs were $479 in the third quarter of 2010, $1,473 during the
second quarter of 2010, and $1,330 for the third quarter of 2009. The
provision for loan losses was $900 for the third quarter of 2010 compared
with $955 for the second quarter of 2010 and $2,150 in the related 2009
period. The provision has been reduced from the elevated amounts recorded
in 2009, but still remains high versus historical levels. The high level
of provisions over the past two years mainly resulted from increases in
the economic factors applied to all loan types that include: the high
unemployment rate in our market areas, increased delinquencies in existing
commercial real estate and construction credits resulting from weakness in
the local economies, further deterioration in collateral values, and
internal assessments of currently performing loans with increased risk for
future delinquencies. The level of provisioning during the first nine
months of 2010 resulted in an increase in the allowance for loan losses to
2.55% of total loans at September 30, 2010 compared to 2.22% at December
31, 2009 and 2.35% at September 30, 2009.
o Nonperforming assets were $17,365 at September 30, 2010 as compared to
$17,286 at June 30, 2010, $16,562 at year-end 2009, and $18,356 for the
same quarter in 2009. The historically high level of collateral-dependent
nonperforming assets in the loan portfolio is the result of management's
continued monitoring of the effects of the slowdown in the local economies
on our loan portfolio. However, management feels that based on the
results of the last five quarters, the level of nonperforming assets has
stabilized.
o Noninterest income during the three months ended September 30, 2010 was
$1,467, up $247 from the second quarter of 2010 and up $447 from the same
period of 2009. If gain on sales of investment securities were excluded
from all periods, noninterest income would have been $1,137, $1,052, and
$1,020, respectively.
o Noninterest expense for the three months ended September 30, 2010 was
$3,993, an increase of $48 compared to the second quarter of 2010 and an
increase of $12 compared to the related 2009 period. While the results are
relatively similar when compared to the same period in 2009, areas
impacted varied. Expense categories increasing were: marketing costs, FDIC
costs, loan servicing costs, and valuation of director fees. Areas showing
a decrease included: Foreclosure/OREO expenses, and legal and professional
expenses. Management continues to monitor expenses very closely.
o Stockholders' equity at September 30, 2010 was $44,245 compared to
$43,184 at December 31, 2009, an increase of $1,061. The single largest
factor increasing capital was an increase in the fair value of the
investment portfolio (Other Comprehensive Income) of $924.
Additionally, on November 8, 2010, the Bank has entered into a formal written
agreement (the "Agreement") with the Federal Deposit Insurance Corporation (the
"FDIC") and the Wisconsin Department of Financial Institutions (the "DFI") to
take certain actions and operate in compliance with the Agreement's provisions
during its term. The Agreement is described in more detail in Item 5 to Part II
of this Form 10-Q and is attached hereto as an exhibit. Management believes
that the Bank has satisfied most of the conditions of this Agreement
and has taken action to resolve all other requirements and does not believe that
it will materially impact the Bank's business or operations.
The elevated level of provisions and collection expenses incurred over the past
four years is largely attributable to the significant losses incurred on loans
made to the owners of Smith Brothers Ford in Mosinee, WI in 2005. In September a
Marathon County jury found the owners of the dealership, Dean Smith and Carrie
Koskey, liable of intentionally misrepresenting the financial condition of the
dealership and conspiracy with the intent to deceive and induce Mid-Wisconsin
Bank to extend credit to them. The jury awarded Mid-Wisconsin Bank a judgment of
$4,041,957 against these individuals. This decision is subject to appeal;
therefore at this time it is unclear if or when we will ever receive any payment
under this judgment. We continue to pursue other avenues of collection including
filing claims with various insurance companies.
While results continue to show a general improvement, as evidenced in the third
and second quarters of 2010, we expect to be challenged for the remainder of the
year in reducing the level of non-performing assets and related collection
expenses, by an increasing number of real estate foreclosures, flat commercial
and agricultural loan demand, and maintaining and improving our net interest
margin. On the positive side, commodity prices have been increasing from
stabilized levels which should provide much needed relief for our agricultural
business customers, and unemployment rates, while still historically high, have
seen some downward movement. At the end of March 2010, the unemployment rate in
the counties we serve was almost 12%. As of September 30, 2010, it was 7.3%.
The following table presents a summary of our quarterly financial results.
Table 1: Summary Results of Operations
($ in Thousands, except per share data)
Three Months Ended,
September 30, June 30, March 31, December 31, September 30,
2010 2010 2010 2009 2009
Results of operations:
Interest income $6,196 $6,391 $6,457 $6,623 $6,665
Interest expense 2,175 2,255 2,328 2,456 2,554
Net interest income 4,021 4,136 4,129 4,167 4,111
Provision for loan losses 900 955 1,400 2,856 2,150
Net interest income after provision for loan losses 3,121 3,181 2,729 1,311 1,961
Noninterest income 1,467 1,220 987 1,001 1,020
Other-than-temporary impairment losses, net 412 0 0 0 289
Noninterest expenses 3,993 3,945 3,782 3,787 3,981
Income (loss) before income taxes 183 456 (66) (1,475) (1,289)
Income tax expense (benefit) 21 128 (79) (479) (614)
Net income (loss) 162 328 13 (996) (675)
Preferred stock dividends, discount, and premium (160) (160) (161) (159) (158)
Net income (loss) available to common equity $2 $168 ($148) ($1,155) ($833)
Earnings (loss) per common share:
Basic and diluted $0.00 $0.10 ($0.09) ($0.70) ($0.51)
Cash dividends per common share $0.00 N/A $0.00 N/A $0.00
Weighted average common shares outstanding:
Basic 1,650 1,649 1,648 1,647 1,646
Diluted 1,650 1,649 1,648 1,647 1,646
SELECTED FINANCIAL DATA
Period-End Balances:
Loans $344,197 $351,346 $357,064 $358,616 $357,865
Total assets 503,724 501,496 502,191 505,460 494,873
Deposits 393,230 390,583 393,193 397,800 377,370
Stockholders' equity 44,245 44,301 43,378 43,184 44,721
Book value per common share $20.65 $20.71 $20.18 $20.10
$21.05
Average Balance Sheet
Loans $352,928 $358,221 $360,731 $362,045 $363,619
Total assets 506,711 503,767 504,730 498,744 498,733
Deposits 393,291 395,057 395,747 382,668 376,476
Short-term borrowings 12,972 8,454 9,079 12,488 15,085
Long-term borrowings 42,561 42,561 42,561 42,561 45,929
Stockholders' equity 44,340 43,848 43,618 44,930 44,767
Financial Ratios:
Return on average equity 0.02% 1.54% -1.38% -10.20% -7.38%
Return on average common equity 0.02% 2.00% -1.79% -13.14% -9.51%
Average equity to average assets 8.75% 8.70% 8.64% 9.01% 8.98%
Common equity to average assets 6.73% 6.70% 6.59% 6.64% 6.95%
Net interest margin (1) 3.38% 3.52% 3.55% 3.53% 3.48%
Total risk-based capital 15.10% 14.93% 14.88% 14.49% 15.67%
Net charge-offs to average loans 0.14% 0.41% 0.14% 0.92% 0.37%
Nonperforming loans to total loans 3.93% 4.11% 3.59% 3.93% 4.02%
Efficiency ratio (1) 79.37% 72.86% 73.05% 72.33% 82.04%
Net interest income to average assets (1) 0.00% 0.82% 0.82% 0.84% 0.82%
Noninterest income to average assets 0.29% 0.24% 0.20% 0.20% 0.20%
Noninterest expenses to average assets 0.79% 0.78% 0.75% 0.76% 0.80%
Stock Price Information (2)
High $9.50 $11.00 $9.10 $8.30 $12.50
Low 7.85 9.00 6.00 7.00 8.30
Market price at quarter end 7.85 9.50 9.00 7.00 8.30
(1) Fully taxable-equivalent basis, assuming a Federal tax rate of 34% and excluding disallowed interest expense.
(2) Bid price
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis for the nine months ended
September 30, 2010, was $12,468, down from $12,493 in the related 2009 period.
The $25 decrease in taxable-equivalent net interest income was generally
attributable to unfavorable volume variances (as balance sheet changes in both
volume and mix decreased taxable-equivalent net interest income by $42) offset
by favorable interest rate changes (as the decrease of interest-bearing
liabilities still outpaces the decrease in earning assets by $17). The change
in mix and volume of earning assets increased taxable-equivalent net interest
income by $20, while the change in volume and composition of interest-bearing
liabilities decreased taxable-equivalent net interest expense by $62. Rate
changes on earning assets reduced interest income by $1,329, while changes in
rates on interest-bearing liabilities lowered interest expense by $1,346.
The net interest margin for the first nine months of 2010 was 3.48%, down from
3.52% in the related 2009 period. For 2010, the yield on earning assets of
5.37% was 42 basis points ("bps") lower than the comparable period last year.
Loan yields decreased 30 bps, to 6.03%, impacted by higher levels of nonaccrual
loans, lower loan yields given the repricing of adjustable rate loans, soft loan
demand, and competitive pricing pressures to retain and/or obtain creditworthy
borrowers. The yield on securities and short-term investments decreased 57 bps,
which was impacted by the lower interest rate environment available to invest
bank liquidity.
The cost of interest-bearing liabilities of 2.22% for the first nine months of
2010 was 47 bps lower than the related 2009 period. The average cost of
interest-bearing deposits was 1.93%, down 50 basis points, while the cost of
wholesale funding (comprised of short-term borrowings and long-term borrowings)
decreased 18 bps to 3.36% for the nine months ended September 30, 2010. The
$10,310 of subordinated debentures have a fixed rate of 5.98% until December 15,
2010, after which they will have a floating rate equal to the three-month LIBOR
plus 1.43%.
Average earning assets of $478,578 for the first nine months of 2010 were $4,514
higher than the comparable period last year. Average loans decreased $7,348 as
a result of soft loan demand, pay-offs and charge-offs while average investments
and other interest-earning assets grew $11,862 as a result of the lack of loan
growth to absorb the increase in deposits.
Average interest-bearing liabilities of $406,949 for the first nine months of
2010 were up $6,546 over the related 2009 period. Average interest-bearing
deposits grew $13,708, attributable to higher levels of interest-bearing demand
and savings deposits and time deposits while average noninterest-bearing
deposits increased $1,033. Given the soft loan demand and growth in deposits,
average short and long term borrowings decreased by $7,161.
Taxable equivalent net interest income during the third quarter of 2010 was
$4,083, $101 lower than the third quarter of 2009. Changes in balance sheet
volume and mix decreased taxable equivalent net interest income by $153, while
changes in the rate environment increased net interest income by $52. The net
interest margin between the comparable quarters was down 10 bp, to 3.38% in the
third quarter of 2010. Average earnings assets increased $2,058 to $479,381 in
the third quarter of 2010, with average loans down $10,692, while average
investments and other earning assets increased $12,750 (predominately in
overnight funds). On the funding side, average interest-bearing deposits were
up $15,111, while average demand deposits increased $1,703. On average, short
and long term borrowings were down $8,904.
Table 2: Year-To-Date Net Interest Income Analysis - Taxable Equivalent Basis
($ in Thousands)
Nine months ended September 30, 2010 Nine months ended September 30, 2009
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $357,265 $16,123 6.03% $364,613 $17,272 6.33%
Investment securities:
Taxable 89,258 2,601 3.90% 75,819 2,584 4.57%
Tax-exempt (2) 9,986 413 5.52% 11,995 558 6.22%
Other interest-earning assets 22,069 91 0.55% 21,637 123 0.76%
Total earning assets $478,578 $19,228 5.37% $474,064 $20,537 5.79%
Cash and due from banks $7,669 $7,665
Other assets 27,393 $21,449
Allowance for loan losses (8,552) (6,080)
Total assets $505,088 $497,097
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $34,758 $161 0.62% $30,053 $145 0.65%
Savings deposits 106,245 833 1.05% 106,593 1,102 1.38%
Time deposits 202,892 3,980 2.62% 193,541 4,750 3.28%
Short-term borrowings 10,183 68 0.90% 11,711 94 1.07%
Long-term borrowings 42,561 1,257 3.95% 48,194 1,492 4.14%
Subordinated debentures 10,310 461 5.98% 10,310 461 5.98%
Total interest-bearing liabilities $406,949 $6,760 2.22% $400,403 $8,044 2.69%
Demand deposits 50,793 49,760
Other liabilities 3,426 3,085
Stockholders' equity 43,920 43,850
Total liabilities and stockholders' equity $505,088 $497,097
Net interest income and rate spread $12,468 3.15% $12,493 3.10%
Net interest margin 3.48% 3.52%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and investments is computed on a tax-equivalent basis
using a Federal tax rate of 34% and excluding disallowed interest expense.
(3) Interest income includes loan fees of $274 in 2010 and $390 in 2009.
Table 3: Quarterly Net Interest Income Analysis - Taxable Equivalent Basis
($ in Thousands)
Three months ended September 30, 2010 Three months ended September 30, 2009
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
ASSETS
Earning Assets
Loans (1) (2) (3) $352,928 $5,315 5.97% $363,620 $5,604 6.11%
Investment securities:
Taxable 82,595 768 3.69% 83,934 929 4.39%
Tax-exempt (2) 9,597 131 5.43% 11,449 176 6.11%
Other interest-earning assets 34,261 44 0.51% 18,320 29 0.63%
Total earning assets $479,381 $6,258 5.18% $477,323 $6,738 5.60%
Cash and due from banks $7,879 $7,831
Other assets 28,066 $21,424
Allowance for loan losses (8,615) (7,845)
Total assets $506,711 $498,733
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $34,519 $54 0.62% $29,314 $46 0.62%
Savings deposits 110,564 301 1.08% 102,676 311 1.20%
Time deposits 196,906 1,225 2.47% 194,888 1,486 3.02%
Short-term borrowings 12,972 29 0.90% 15,085 37 0.97%
Long-term borrowings 42,561 412 3.84% 49,352 520 4.18%
Subordinated debentures 10,310 154 5.98% 10,310 154 5.98%
Total interest-bearing liabilities $407,832 $2,175 2.12% $401,625 $2,554 2.52%
Demand deposits 51,301 49,598
Other liabilities 3,238 2,742
Stockholders' equity 44,340 44,767
Total liabilities and stockholders' equity $506,711 $498,733
Net interest income and rate spread $4,083 3.06% $4,184 3.08%
Net interest margin 3.38% 3.48%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and investments is computed on a tax-equivalent basis
using a Federal tax rate of 34% and excluding disallowed interest expense.
(3) Interest income includes loan fees of $90 in 2010 and $101 in 2009.
Table 4: Volume/Rate Variance - Taxable Equivalent Basis
($ in Thousands)
Comparison of three months ended Comparison of nine months ended
September 30, 2010 versus 2009 September 30, 2010 versus 2009
Variance Attributable to Variance Attributable to
Income/Expense Income/Expense
Volume Rate Variance (1) Volume Rate Variance (1)
Interest Income: (2)
Loans ($165) ($124) ($289) ($348) ($801) ($1,149)
Taxable investments (15) (146) (161) 459 (442) 17
Nontaxable investments (28) (17) (45) (93) (52) (145)
Other interest income 25 (10) 15 2 (34) (32)
Total interest-earning assets (183) (297) (480) 20 (1,329) (1,309)
Interest Expense:
Interest-bearing demand 8 0 8 23 (7) 15
Savings deposits 24 (34) (10) (4) (265) (269)
Time deposits 15 (276) (261) 229 (999) (770)
Short-term borrowings (5) (2) (7) (12) (14) (26)
Long-term borrowings (72) (37) (109) (174) (61) (235)
Subordinated debentures 0 0 0 0 0 0
Total interest-bearing liabilities (30) (349) (379) 62 (1,346) (1,284)
Net interest income, taxable equivalent ($153) $52 ($101) ($42) $17 ($25)
(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.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first nine months of 2010 was $3,255,
compared to $5,650 for the same period in 2009 and $8,506 for the full year
2009. In the third quarter comparison, the provision for loan losses was $900
and $2,150 for 2010 and 2009, respectively. Net charge offs were $2,439 for the
first nine months of 2010, compared to $1,772 for the same period of 2009 and
$5,091 for the full year 2009. At September 30, 2010, the allowance for loan
losses was $8,773, compared to $7,957 reported at December 31, 2009. The
coverage ratio of the allowance for loan losses to total loans was 2.55% and
2.22% at September 30, 2010 and December 31, 2009, respectively. Nonperforming
loans at September 30, 2010 were $13,526, compared to $14,093 at December 31,
2009, representing 3.93% of total loans for both time periods.
While our credit quality metrics continue to show more stress than our
historical standards, management continued to be encouraged by improving trends
exhibited during the second and third quarters of 2010. We believe the current
level of provisioning and level of our allowance for loan losses followed the
direction of our policies and was adequate to cover anticipated and unexpected
loan losses inherent in our loan portfolio. However, we may need to increase
provisions in the future should the quality of the loan portfolio continue to
decline or other factors used to determine the allowance worsen. Please refer
to the discussion on "Allowance for Losses" on page 36 for further information.
NONINTEREST INCOME
Table 5: Noninterest Income
($ in Thousands)
Three months ended Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
2010 2009 Change 2010 2009 Change
Service fees $283 $321 -11.8% $887 $923 -3.9%
Wealth Management 346 313 10.5% 1,016 917 10.8%
Mortgage banking income 250 165 51.5% 548 455 20.4%
Net realized gain on sale of
securities available for sale 330 0 100.0% 498 449 10.9%
Other operating income 258 221 16.7% 725 676 7.2%
Total noninterest income $1,467 $1,020 43.8% $3,674 $3,420 7.4%
Noninterest income for the first nine months of 2010 was $3,674, up $254 from
the first nine months of 2009. All noninterest income item categories increased
from the 2009 levels with the exception of service fees which were down
slightly. Excluding the net realized gain on sale of securities available for
sale, noninterest income would have been $3,176, up $205 from the first nine
months of 2009.
Service fees on deposit accounts were $887, down $36 from the comparable nine
month period last year. The decrease was primarily attributable to a change in
regulations affecting how and when overdraft fees can be charged.
The Wealth Management Services Group generates trust service fees and investment
product commissions. Wealth Management income was $1,016 in the first nine
months of 2010, up $99 from the same period in 2009, primarily due to the
valuations of the assets under management on which fees are based.
Mortgage banking income was $548 for first nine months of 2010, up $93 compared
to the first nine months of 2010. Secondary mortgage production was $41,957 for
the first nine months of 2010, compared to $36,343 for the first nine months of
2009. This increase was primarily the result of the decrease in interest rates
and the higher than normal levels of home refinancing that occurred in 2010. We
generally sell such loans into the secondary markets.
Gain on the sale of investments of $498 for the first nine months of 2010 were
attributable to the sale of $20,295 of mortgage-related securities, compared to
a $449 gain on sale of $12,717 of mortgage-related securities for the comparable
period in 2009. The purpose of these sales is to take advantage of favorable
pricing, reduce extension risk as interest rates rise, and reduce odd lot
positions in the investment securities portfolio.
Other operating income increased $49 from the first nine months of 2009 due to
the increase in cash surrender value of bank owned life insurance.
Noninterest income for the third quarter of 2010 increased $447 to $1,467, or
43.8%, versus the third quarter of 2010. Much of the increase resulted from an
increase in gains on the sale of investments which were $330 for the third
quarter of 2010, compared to no gain in the third quarter of 2009. Service fees
of $283 were down $38 versus the comparable quarter in 2009, primarily due to a
change in regulations as set forth above. Wealth Management income was $346, up
$33, for third quarter 2010 primarily due to general improvements in the equity
markets. Mortgage banking income increased $85 from the third quarter of 2009,
due to increased secondary mortgage production over 2009, for the reasons stated
above.
NONINTEREST EXPENSE
Table 6: Noninterest Expense
($ in Thousands)
Three months ended Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
(dollars in thousands) 2010 2009 Change 2010 2009 Change
Salaries and employee benefits $2,164 $2,214 -2.3% $6,375 $6,384 -0.1%
Occupancy 449 465 -3.4% 1,379 1,429 -3.5%
Data processing 165 157 5.1% 493 485 1.6%
Foreclosure/OREO expense 17 279 -93.9% 141 1,242 -88.6%
Legal and professional 147 234 -37.2% 528 680 -22.4%
FDIC assessment 232 181 28.2% 697 791 -11.9%
Other operating expenses 819 451 81.6% 2,107 1,651 27.6%
Total noninterest expenses $3,993 $3,981 0.3% $11,720 $12,662 -7.4%
Noninterest expense was $11,720 for the first nine months of 2010, a decrease of
$942 from the first nine months of 2009. Data processing and other expenses
were up $464; while collectively all other noninterest expense categories
decreased $1,406 compared to 2009.
The cost containment initiatives implemented during the first quarter of 2009
have been sustained throughout 2010 as evidenced by overall noninterest expenses
decreasing 7.4% year-to-date and remaining relatively flat in the third quarter
2010.
In our continuing effort to control costs, salaries were frozen for 2010.
Salaries and employee benefits were $6,375 for the first nine months of 2010,
down $9 versus the first nine months of 2009. Salaries decreased $63,
predominately the result of a decrease in severance pay paid in 2010 compared to
2009 and employee benefits were up $55 due to the rise in health insurance
costs.
Occupancy expense of $1,379 for the first nine months of 2010 decreased $50 from
the comparable period last year, primarily due to decreased equipment
depreciation, building maintenance expenses, and utility costs.
Foreclosure/OREO expense of $141 decreased $1,101, primarily due to an $815
reduction in OREO valuation write-downs year-to-year and a $204 decrease in
losses on sale of OREO from 2009. Legal and professional fees of $528 decreased
$152, primarily due to legal costs associated with issuing preferred stock to
participate in the Capital Purchase Program during 2009 and lower legal costs
associated with loan collection in 2010. A decrease in FDIC expense of $94 was
primarily due to a one-time FDIC special assessment expense of $230 in 2009
offset by deposit insurance rate increases and larger assessable deposit base.
Other operating expenses increased $456 from the first nine months of 2009,
primarily due to increased marketing costs, loan servicing costs and the
valuation methodology used in accounting for deferred director fees.
On a comparable quarter basis, noninterest expense remained relatively flat in
the third quarter of 2010. Salaries and benefits decreased $50 from the third
quarter of 2009, with salary expenses down $33 and benefit expenses down $17.
Foreclosure/OREO expense decreased $262, primarily attributable to a decline in
OREO write-downs. Legal and professional fees decreased $87, primarily due to
lower legal costs associated with loan collection. FDIC expense increased $51
reflecting deposit insurance rate increase and a larger assessable deposit base.
Other operating expenses increased $368, primarily due to increased loan
servicing costs, the valuation methodology used in accounting for deferred
director fees, and marketing costs.
INCOME TAXES
For the first nine months of 2010, the income tax expense was $69 compared to a
$1,437 income tax benefit for the comparable period in 2009. The tax benefit in
2009 was due to a relatively large operating loss for the first nine months of
2009. Management determined that a valuation allowance on deferred tax assets
was not necessary. Management further believes that tax benefits associated with
current and past years pre-tax losses will be realized through the Company's
ability to generate sufficient income in the future.
FINANCIAL CONDITION
INVESTMENT SECURITIES PORTFOLIO
At September 30, 2010, the total carrying value of investment securities was
$81,514, a decrease of $21,963, or 21.2%, since December 31, 2009. In the third
quarter of 2010, investment securities were sold to take advantage of
favorable pricing, reduce extension risk as interest rates rise, adjust mix of
portfolio, and reduce odd lot positions in the investment securities portfolio.
The investment securities portfolio is intended to provide the Bank with
adequate liquidity, flexible asset/liability management, a source of stable
income, while still being structured to limit credit exposure to the Bank. All
securities are classified as available for sale and are carried at market value.
Unrealized gains and losses are excluded from earnings, but are reported as
other comprehensive income in a separate component of stockholders' equity, net
of income tax. Premium amortization and discount accretion are recognized as
adjustments to interest income using various industry methods. Realized gains
or losses on sales are based on the net proceeds and the adjusted carrying value
amount of the securities sold using the specific identification method.
Table 7: Investments
($ in Thousands)
As of As of
Investment Category Rating September 30, 2010 December 31, 2009
Amount % Amount %
US Treasury & Agencies Debt
AAA $8,895 100% $3,179 100%
Total $8,895 100% $3,179 100%
US Treasury & Agencies Debt as % of Portfolio 11% 3%
Mortgage-backed securities
AAA $53,163 98% $80,898 99%
A+ 13 0% 0 0%
A2 0 0% 11 0%
Baa2 191 0% 0 0%
BA1 376 1% 514 1%
Ba3 350 1% 0 0%
B3 0 0% 343 0%
Total $54,093 100% $81,766 100%
Mortgage-Backed Securities as % of Portfolio 67% 79%
Obligations of State and Political Subdivisions
Aa1 $2,486 14% $0 0%
Aa2 2,886 17% 2,299 13%
AA3 2,076 12% 3,449 20%
A1 530 3% 336 2%
A2 0 0% 875 5%
A3 0 0% 536 3%
Baa1 348 2% 342 2%
NR 9,090 52% 9,347 55%
Total $17,416 100% $17,184 100%
Obligations of State and Political Subdivisions as % of Portfolio
21% 17%
Corporate Debt Securities
NR $1,110 100% $1,348 100%
Total $1,110 100% $1,348 100%
Corporate Debt Securities as % of Portfolio 1% 1%
Total Market Value of Securities $81,514 100% $103,477 100%
Obligations of State and Political Subdivisions (municipal securities): At
September 30, 2010 and December 31, 2009, municipal securities were $17,416 and
$17,184, respectively, and represented 21% and 17%, respectively, of total
investment securities based on market value. There were no municipal bond
insurance company downgrades in the last quarter; and there was one upgrade.
Mortgage-Backed Securities: At September 30, 2010 and December 31, 2009,
mortgage-related securities (which include predominantly mortgage-backed
securities and collateralized mortgage obligations) were $54,093 and $81,766,
respectively, and represented 67% and 79%, respectively, of total investment
securities based on fair value. The majority of the investment securities sold
in 2010 were from this category. 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. Management performs due diligence
before purchasing mortgage-backed securities. We invest in mature tranches with
proven payment history and underlying securities consisting of mortgages under
$200,000, which diversifies our exposure to loss.
Corporate Debt Securities: At September 30, 2010 and December 31, 2009,
corporate debt securities were $1,110 and $1,348, respectively, and represented
1% of total investment securities based on market value. Corporate debt
securities at September 30, 2010, consisted of trust preferred securities of
$960, and other securities of $150. Corporate debt securities at December 31,
2009, consisted of trust preferred securities of $1,198, and other securities of
$150. Two private placement trust preferred securities ("TPS") in the
investment security portfolio have been deferring quarterly interest payments;
one since June 2010 and the other since June 2009. Subsequently, these TPS were
placed on nonaccrual status and OTTI write-downs of $412 and $289 were recorded
in the third quarter of 2010 and 2009, respectively.
The Federal Home Loan Bank of Chicago ("FHLB") 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 Chicago 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 and owns
$2,306 of FHLB stock. 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 reflects 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.
LOANS
The Bank serves 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. During the current economic downturn, we have
concentrated our efforts on 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 $344,197 at September 30, 2010, a decrease of $14,419, or 4.0%,
from December 31, 2009. Loan volume growth period to period was negatively
impacted by the current credit environment and economic conditions, loan
payoffs, and charge-offs that were taken in 2010. Additionally we have
experienced continued weak loan demand from creditworthy borrowers.
Table 8: Loans
($ in Thousands)
As of,
September 30, 2010 June 30, 2010 March 31, 2010 December 31, 2009 September 30, 2009
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
Commercial $39,650 12% $37,928 11% $37,223 10% $35,673 10% $37,354 10%
Commercial real estate 132,104 38% 137,862 39% 140,122 39% 138,891 39% 124,654 35%
Real estate construction 32,197 9% 32,314 9% 33,939 10% 35,417 10% 47,256 13%
Agricultural 38,966 11% 40,038 12% 41,342 12% 42,280 12% 42,222 12%
Real estate residential 95,160 28% 96,322 27% 97,256 27% 99,116 27% 98,853 28%
Installment 6,120 2% 6,882 2% 7,182 2% 7,239 2% 7,526 2%
Total loans $344,197 100% $351,346 100% $357,064 100% $358,616 100% $357,865 100%
Owner occupied $82,562 62% $83,885 61% $86,677 62% $88,002 63% $55,790 45%
Non-owner occupied 49,542 38% 53,977 39% 53,445 38% 50,889 37% 68,864 55%
Commercial real estate $132,104 100% $137,862 100% $140,122 100% $138,891 100% $124,654 100%
1-4 family construction $1,351 4% $2,234 7% $3,283 10% $3,523 10% $3,909 8%
All other construction 30,846 96% 30,080 93% 30,656 90% 31,894 90% 43,347 92%
Real estate construction $32,197 100% $32,314 100% $33,939 100% $35,417 100% $47,256 100%
Our commercial loan portfolio consists primarily of commercial, commercial real
estate, and real estate construction which collectively comprised 59% of our
total portfolio as of September 30, 2010. These segments are considered to have
more inherent risk of default than residential mortgage or retail loans. As a
group, these loans decreased $6,030, or 2.9%, between December 31, 2009 and
September 30, 2010.
Commercial loans were $39,650 at September 30, 2010, up $3,977, or 11.1%, since
year-end 2009, and comprised 12% of total loans. The commercial loan
classification primarily consists of multifamily residential properties and
commercial loans to small businesses. Loans of this type represent 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
loans totaled $132,104 at September 30, 2010, a decrease of $6,787, or 4.9%,
from December 31, 2009. This segment represents 38% of total loans. The decrease
since year-end 2009 is primarily due to loan pay-offs, charge-offs, transfer of
collateral to OREO, and the reclassification of one loan to the commercial loan
category. Loans of this type are mainly secured by various types of commercial
income properties. Credit risk is managed by utilizing sound underwriting
guidelines and regular supervision of borrowers' financial condition. We lend
primarily to a diverse group of borrowers in local markets which affords us the
opportunity to periodically evaluate the underlying collateral and formally
review a borrower's financial condition and overall creditworthiness on an
ongoing basis.
Real estate construction loans declined $3,220, or 9.1%, from December 31, 2009
to September 30, 2010 with total balances of $32,197 representing 9% of the
total loan portfolio at quarter-end. The continued decline in this loan category
is indicative of the difficulties faced by businesses associated with the
building trades industry. 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 seeks to
control 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 totaling $38,966 represented 11% of our total loan portfolio
at September 30, 2010, down $3,314, or 7.8%, from year-end 2009. Loans in this
classification include loans secured by farmland and operating loans used for
agricultural production. Credit risk is managed by employing sound underwriting
guidelines, regularly evaluating the underlying collateral, and formally
reviewing the borrower's financial condition and overall creditworthiness on an
ongoing basis.
Real estate residential loans totaled $95,160 and comprised 28% of total loans
outstanding at September 30, 2010, down $3,956, or 4.0%, from year-end 2009.
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. Nearly all of the Company's
long-term fixed-rate residential real estate mortgage loans are sold into the
secondary market without retention of servicing rights. Those residential loans
held in our portfolio generally represent loans with maturities of between 3 and
5 years and provide for interest rate adjustments based on commonly used
indices.
Installment loans totaled $6,120 at September 30, 2010, down $1,119, or 15.5%,
compared to year-end 2009, and represented 2.0% of the loan portfolio. Loans in
this classification include short-term and other personal installment loans not
secured by real estate. Credit risk is primarily managed by reviewing the
creditworthiness of the borrowers, monitoring payment histories, and taking
appropriate collateral and guaranty positions.
An important element in managing the overall credit quality of our loan
portfolio stems from the experience level of our credit administration personnel
and our ability to implement and enforce sound loan underwriting and effective
loan monitoring and administration on an ongoing basis. This includes, but is
not limited to, a comprehensive loan policy to guide lending staff in their
daily lending activities; the systematic monitoring of existing loans and
commitments; the early identification of potential problem loans; an effective
external loan review process; and a methodology used to evaluate the adequacy of
our allowance for loan losses which incorporates nonaccrual and charge-off
policies. 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.
An active credit risk management process is used for commercial loans to further
ensure that sound and consistent credit decisions are being made. Credit risk is
managed 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 September 30, 2010, 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, including commercial real estate and loans
subject to supervisory limitations.
ALLOWANCE FOR LOAN LOSSES
The economic environment during 2009 and 2010 has presented unique credit
related issues that have required extensive management 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.
At September 30, 2010, the allowance for loan losses was $8,773, compared to
$7,957 at December 31, 2009. The allowance for loan losses as a percentage of
total loans at September 30, 2010, was 2.55% and covered 65% of nonperforming
loans, compared to 2.22% and 56%, respectively, at December 31, 2009.
Management's allowance methodology includes an impairment analysis on commercial
loans specifically identified by the Company as being impaired as well as other
qualitative and quantitative factors in determining the overall adequacy of the
allowance for loan losses.
Declining collateral values and elevated levels of unemployment have
significantly contributed to the elevated levels of nonperforming loans, net
charge offs, and allowance for loan losses over historical levels. 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 for new home equity and residential mortgage loans, to
reduce potential exposure within these portfolio categories.
The provision for loan losses for the first nine months of 2010 was $3,255,
compared to $5,650 for the first nine months of 2009, and $8,506 for the full
year 2009. Management reviews the value of the collateral securing loans,
nonperforming loan ratios, and levels of net charge offs in determining the
appropriate amount of allowance for loan losses to record at the measurement
date. Management believes these actions continue to recognize and appropriately
address any significant credit quality issues in the loan portfolio.
Gross charge offs were $3,002 for the nine months ended September 30, 2010,
$1,948 for the comparable period ended September 30, 2009, and $5,283 for the
full year 2009, while recoveries for the corresponding periods were $563, $176,
and $192, respectively. The increase in net charge offs in 2010 was partially
due to six commercial relationships totaling $921 and one real estate
residential loan totaling $100 that were specifically reserved for in prior
periods. Net charge offs in the fourth quarter 2009 included $1,880 in
participation loans related to an ethanol plant in South Eastern Wisconsin and a
hotel/resort in Northern Illinois. Gross charge offs have exceeded historical
levels as a result of challenging economic conditions caused by high levels of
unemployment, declining collateral values, higher energy costs, and a depressed
housing market. Together these conditions have had a negative impact on our
business and consumer loan customers. Loans that are charged off are subject to
continuous review, and specific efforts are taken to achieve maximum recovery of
principal, accrued interest, and related expenses.
Table 9: Allowance for loan losses
($ in Thousands)
September 30, June 30, March 31, December 31, September 30,
2010 2010 2010 2009 2009
Allowance for loan losses:
Balance at beginning of period $8,352 $8,870 $7,957 $8,420 $7,600
Provision for loan losses 900 955 1,400 2,856 2,150
Charge-offs (776) (1,630) (596) (3,335) (1,393)
Recoveries 297 157 109 16 63
Net charge-offs (479) (1,473) (487) (3,319) (1,330)
Balance at end of period $8,773 $8,352 $8,870 $7,957 $8,420
Net loan charge-offs (recoveries):
Commercial ($47) $292 ($15) $355 $143
Agricultural 46 (18) 72 25 6
Commercial real estate (CRE) 179 780 104 1,845 (58)
Real estate construction 18 92 (12) 518 1,005
Total commercial 196 1,146 149 2,743 1,096
Residential mortgage 263 295 290 554 199
Home equity (13) 5 11 0 0
Installment 33 27 37 22 35
Total net charge-offs $479 $1,473 $487 $3,319 $1,330
CRE and Construction net charge-off detail:
Owner occupied ($68) $433 $55 $827 ($57)
Non-owner occupied 247 347 49 1,018 (1)
Commercial real estate $179 $780 $104 $1,845 ($58)
1-4 family construction $0 $0 $0 $0 $0
All other construction 18 92 (12) 518 1,005
Real estate construction $18 $92 ($12) $518 $1,005
Management's analysis of the allowance for loan losses consists of three
components: (1) establishment of specific reserve allocations on impaired
credits where a high risk of loss is anticipated but not yet realized; (2)
allocation for each loan category based on historical loan loss experience; and
(3) general reserve allocation made based on subjective economic and bank
specific factors such as unemployment, delinquency levels, industry
concentrations, lending staff experience, disposable income and changes in
regulatory or internal loan policies.
The specific reserve allocation of the allowance for loan losses is based on a
regular analysis of loans over a fixed-dollar amount where the internal credit
rating is at or below a predetermined classification. The fair value of the
loan is based on discounted cash flows of expected future payments using the
loan's initial effective interest rate or the fair value of the collateral if
the loan is collateral dependent. The historical loan loss allocations are
based on a five year rolling average of actual loss experience for specific loan
types and risk grades. The general portfolio allocation component is more
subjective and is reviewed at least quarterly as part of the overall analysis.
Our methodology reflects guidance by regulatory agencies to all financial
institutions, and is specifically reviewed by the Company's independent
auditors.
The allocation of the allowance for loans losses is based on our estimate of
loss exposure by category of loans shown in Table 10.
Table 10: Allocation of the Allowance for Loan Losses
($ in Thousands)
% of % of % of % of % of
Loan Loan Loan Loan Loan
Type to Type to Type to Type to Type to
Total Total Total Total Total
September 2010 Loans June 2010 Loans March 2010 Loans December 2009 Loans September 2009 Loans
Allowance allocation:
Commercial $509 12% $532 11% $531 10% $497 10% $514 10%
Agricultural 1,088 11% 1,065 12% 1,057 12% 981 12% 694 12%
Commercial real estate (CRE) 3,931 38% 3,913 39% 4,318 39% 3,954 39% 4,024 35%
Real estate construction 1,077 9% 907 9% 906 10% 685 10% 1,256 13%
Total commercial 6,605 70% 6,417 71% 6,812 71% 6,117 71% 6,488 70%
Residential mortgage 2,057 28% 1,829 27% 1,958 27% 1,753 27% 1,844 28%
Installment 111 2% 106 2% 100 2% 87 2% 88 2%
Total allowance for
loan losses $8,773 100% $8,352 100% $8,870 100% $7,957 100% $8,420 100%
Allowance category as a
percent of total allowance:
Commercial 5.8% 6.4% 6.0% 6.2% 6.1%
Agricultural 12.4% 12.6% 11.9% 12.3% 8.2%
Commercial real estate (CRE) 44.8% 46.9% 48.7% 49.8% 47.9%
Real estate construction 12.3% 10.9% 10.2% 8.6% 14.9%
Total commercial 75.3% 76.8% 76.8% 76.9% 77.1%
Residential mortgage 23.4% 21.9% 22.1% 22.0% 21.9%
Installment 1.3% 1.3% 1.1% 1.1% 1.0%
Total allowance for
loan losses 100.0% 100.0% 100.0% 100.0% 100.0%
The level of reserves as a percentage of the loan portfolio increased from 2.22%
at December 31, 2009 to 2.55% at September 30, 2010. The increase is consistent
with management's strategy of providing for known as well as unexpected losses
in the portfolio. The total of impaired and watch list loans was $24,159 at
September 30, 2010, down from the peak of $29,113 at March 31, 2010, but up from
$22,698 at December 31, 2009. The main components of the allowance for loan
losses at September 30, 2010 were 16.3% against impaired loans, 18.7% against
non-impaired watch-list credits, 12.1% against specific segments of the
portfolio, and 27.2% against environmental factors, such as unemployment,
disposable income, delinquency trends and portfolio management. Management and
our Board of Directors have reviewed the methodology and calculations for the
allowance for loan losses, and believe the reserve to be adequate; however,
there is no assurance losses will not exceed the allowance and any growth in the
loan portfolio, and the uncertainty of the general economy may require that
management continue to evaluate the adequacy of the allowance for loan losses
and make additional provisions in future periods as deemed necessary.
IMPAIRED LOANS AND NONPERFORMING ASSETS
Management continues to be committed to an aggressive problem loan
identification philosophy and work through our nonperforming assets. 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. A strong internal and external loan review
function is an integral part of risk management. Under the direction of the
Chief Credit Officer, the entire loan portfolio was reviewed in June 2010 and
then statistically sampled and reviewed by an independent third-party firm in
July 2010.
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, as 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 otherwise be considered. Generally,
such loans are included in nonaccrual loans until the customer has attained a
sustained period of repayment performance. Nonperforming loans were $13,526 and
$14,093 at September 30, 2010 and December 31, 2009, respectively, continuing to
reflect the impact of the economy on our customers.
Table 11: Nonperforming Loans and Other Real Estate Owned
($ in Thousands)
September 2010 June 2010 March 2010 December 2009 September 2009
Nonaccrual loans not considered impaired:
Commercial $2,644 $1,880 $1,991 $751 $1,317
Agricultural 136 0 163 371 511
Real estate residential 1,894 956 968 958 1,332
Installment 15 27 24 19 33
Total nonaccrual loans not considered impaired 4,689 2,863 3,146 2,099 3,193
Nonaccrual loans considered impaired:
Commercial 7,096 8,524 7,442 8,894 8,847
Agricultural 294 516 540 568 43
Residential mortgage 1,181 1,700 1,518 2,363 2,244
Installment 0 0 0 0 0
Total nonaccrual loans considered impaired 8,571 10,740 9,500 11,825 11,134
Impaired loans still accruing interest 118 704 14 0 890
Accruing loans past due 90 days or more (credit cards) 3 1 28 18 60
Restructured loans 145 148 148 151 0
Total nonperforming loans 13,526 14,456 12,836 14,093 15,277
Other real estate owned (OREO) 3,699 2,177 2,103 1,808 2,625
Other repossessed assets 0 442 470 450 454
Investment security (Trust Preferred) 140 211 211 211 0
Total nonperforming assets $17,365 $17,286 $15,620 $16,562 $18,356
RATIOS
Nonperforming loans to total loans 3.93% 4.11% 3.59% 3.93% 4.27%
Nonperforming assets to total loans plus OREO 4.99% 4.89% 4.35% 4.60% 5.09%
Nonperforming assets to total assets 3.45% 3.45% 3.11% 3.28% 3.71%
Allowance for loan losses to nonperforming loans 65% 58% 69% 56% 55%
Allowance for loan losses to total loans at end of period 2.55% 2.38% 2.48% 2.22% 2.35%
Nonperforming loans by type:
Commercial $621 $47 $15 $40 $389
Agricultural 536 516 703 939 810
Commercial real estate (CRE) 7,742 9,961 8,982 9,009 8,005
Real estate construction 1,523 1,235 585 747 2,404
Total commercial 10,422 11,759 10,285 10,735 11,608
Residential mortgage 3,086 2,669 2,499 3,321 3,576
Installment 18 28 52 37 93
Total nonperforming loans 13,526 14,456 12,836 14,093 15,277
Commercial real estate owned 3,198 1,463 1,530 1,523 2,297
Residential real estate owned 501 714 573 285 328
Total other real estate owned 3,699 2,177 2,103 1,808 2,625
Other repossessed assets 0 442 470 450 454
Investment security (Trust Preferred) 140 211 211 211 0
Total nonperforming assets $17,365 $17,286 $15,620 $16,562 $18,356
CRE and Construction nonperforming loan detail:
Owner occupied $6,259 $6,745 $5,203 $5,949 $3,411
Non-owner occupied 1,483 3,216 3,779 3,060 4,594
Commercial real estate $7,742 $9,961 $8,982 $9,009 $8,005
1-4 family construction $0 $0 $0 $0 $0
All other construction 1,523 1,235 585 747 2,404
Real estate construction $1,523 $1,235 $585 $747 $2,404
Nonperforming loans decreased $567 for the first nine months of 2010 to $13,526
since year-end 2009. The high level of nonperforming loans have been primarily
attributable 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.
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 September 30, 2010, potential
problem loans totaled $15,471 compared to December 31, 2009 of $10,873. This
large increase is due to much more aggressive recognition and supervision
procedures. This 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.
DEPOSITS
Deposits are the Company's largest source of funds. At September 30, 2010
deposits were $393,230, down $4,570 from year-end 2009, primarily due to
decreases in noninterest-bearing demand accounts and brokered deposits offset by
increases in savings. Savings deposits increased $7,572, or 7.2%, to 29% of
total deposits as a result of the popularity of our premier money market
account. Brokered certificates of deposit declined $9,721, or 24.8%, to 7% of
total deposits. The decrease in brokered certificates of deposit was initiated
by management in its desire to reduce the bank's dependency on brokered
deposits.
Table 12: Deposit Distribution
($ in Thousands)
September 30, % of December 31, % of
2010 total 2009 total
Noninterest-bearing demand $53,506 14% $55,218 14%
Interest-bearing demand 34,038 9% 33,375 8%
Savings deposits 112,394 29% 104,822 26%
Time deposits 163,832 41% 165,204 42%
Brokered deposits 29,460 7% 39,181 10%
Total $393,230 100% $397,800 100%
The retail markets we compete in are continuously influenced by economic
conditions, competitive pressure from other financial institutions, and other
out-of-market investment opportunities available to customers. Due to local
market competition, we are currently paying higher rates for local deposits than
what we would have to pay for brokered deposits and short-term borrowings. To
obtain local funding at more reasonable costs, the bank continues to cultivate
demand and savings deposits instead of time deposits and continues to focus on
expanding existing customer relationships.
CONTRACTUAL OBLIGATIONS
We are party to various contractual obligations requiring use of funds as part
of our normal operations. The table below outlines principal amounts and timing
of these obligations, excluding amounts due for interest, if applicable. Most
of these obligations are routinely refinanced into a similar replacement
obligation. However, renewal of these obligations is dependent on our ability
to offer competitive interest rates, availability of collateral for pledging
purposes or the availability of credit from other banks or sources.
Table 13: Contractual Obligations
($ in Thousands)
Total < 1year 1-3 years 3-5 years > 5 years
Long-term borrowings $42,561 $2,500 $6,000 $31,061 $3,000
Subordinated debentures 10,310 0 0 0 10,310
Total contractual obligations $52,871 $2,500 $6,000 $31,061 $13,310
LIQUIDITY
Liquidity management refers to the ability to ensure that cash or cash
equivalents is available in a timely and cost-effective manner to meet loan
demand, depositors' needs and to meet other commitments as they become due,
including the ability to pay dividends to stockholders, service debt, and
satisfy other operating requirements.
In assessing liquidity, historical information such as seasonality, local
economic cycles, and the economy in general are considered along with current
trends and management goals. The continuing reduction in loan growth experienced
during 2010 reflects the overall slowdown in the local economies in which we
operate. This in turn decreases the need for additional wholesale funding from
any source.
The Company's internal liquidity management analysis includes long-term
projection of uses and sources of funds, net noncore funding dependency ratio,
liquidity ratio, wholesale funding to total assets and maturity GAP.
The primary source of funds for the Company is dividends and management fee
income from the Bank, proceeds from issuance of shares related to stock options
and employee stock purchase plans. These sources could be limited or costly.
The primary use of funds are to provide for payments of dividends to
stockholders, purchase of assets, payment of salaries, benefits and other
related expenses, and to make interest payments on its debt. The Company has
not received dividends from the Bank since 2006.
The primary source of funds for the Bank are available from a number of sources,
primarily the core deposit base, loans and investment securities repayments,
calls, and maturities. Additionally, liquidity is provided from the sale of
investment securities, lines of credit with other banks, federal funds lines and
the ability to borrow from the FHLB.
Investment securities are an important tool to the Company's liquidity
objective. As of September 30, 2010, all investments securities are classified
as available for sale and are reported at fair value. Of the $81,514 available
for sale investment securities portfolio at September 30, 2010, $59,327 was
pledged to secure certain deposits and other purposes as required or permitted
by law. The majority of the remaining securities could be pledged or sold to
enhance liquidity, if necessary.
CAPITAL
Stockholders' equity at September 30, 2010 was $44,245 compared to $43,184 at
December 31, 2009. Stockholders' equity included $1,980 of accumulated other
comprehensive income related to unrealized net gains on securities available for
sale, net of the income tax effect. At December 31, 2009, stockholders' equity
included $1,056 of other comprehensive income related to unrealized net gains on
securities. There were no cash dividends paid to common stockholders in the
first nine months of 2010. This compared with $0.11 per common share for the
related period of 2009.
On August 10, 2009, the Board of Directors announced the suspension of dividends
on the Company's common stock. In view of the financial challenges presented by
the current economic environment and the likelihood that this economic downturn
will continue, the Board felt that the most prudent course of action was to
focus on preserving our capital position until market conditions improve.
On February 20, 2009, under CPP, the Company issued 10,000 shares of Series A
Preferred Stock and 500 shares of Series B Preferred Stock to the Treasury for
an aggregate purchase price of $10,000. Dividends on the Series A and Series B
Preferred Stock are paid on a quarterly basis in February, May, August, and
November. While any Series A and Series 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 Series B Preferred
Stock are fully paid. As of September 30, 2010, all required dividend payments
have been paid to the Treasury. Prior to the third anniversary of the Treasury's
purchase of the Series A and Series B Preferred Stock, unless the stock has been
redeemed, the consent of the Treasury will be required for us to increase our
annual stock dividend above $0.44 per common share. After the third
anniversary, Treasury's consent will be required for us to increase our common
stock dividend by more than 3% per year. In 2010, all $10,000 of the preferred
stock issued under the CPP qualify as Tier 1 Capital for regulatory purposes at
the holding company.
Table 14: Capital Ratios
($ in Thousands)
Regulatory
Holding Company At September 30, 2010 At December 31, 2009 Minimum
Total Stockholders' Equity $44,245 $43,184
Tier 1 Capital 49,675 48,493
Total Regulatory Capital 54,216 53,118
Tier 1 to average assets 9.9% 9.8% 5.0%
Tier 1 risk-based capital ratio 13.8% 13.2% 4.0%
Total risk-based capital ratio 15.1% 14.5% 8.0%
Regulatory
Bank At September 30, 2010 At December 31, 2009 Minimum
Total Stockholders' Equity $47,708 $43,825
Tier 1 Capital 44,079 40,313
Total Regulatory Capital 48,586 44,910
Tier 1 to average assets 8.8% 8.2% 5.0%
Tier 1 risk-based capital ratio 12.4% 11.1% 6.0%
Total risk-based capital ratio 13.6% 12.3% 10.0%
The adequacy of our capital is regularly reviewed to ensure that sufficient
capital is available for current and future needs and is in compliance with
regulatory guidelines. As of September 30, 2010 and December 31, 2009, the
Company's and Bank's Tier 1 risk-based capital ratios, total risk-based capital
ratios and Tier 1 leverage ratios were in excess of the minimum regulatory
requirements to be well capitalized. In connection with the Agreement entered
into with the FDIC and DFI, the Bank agreed to maintain ratios of Tier 1 capital
to each of total assets and total risk-weighted assets of at least 8.5% and
12.0%. The Bank's ratio were in excess of the agreed to ratios. The Board
continually evaluates short-term and long-term capital needs of the Company, and
has an expressed goal of maintaining sufficient capital to remain a well-
capitalized Bank and Company. The Company's 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. Pursuant to the Agreement with
the FDIC and DFI, the Bank needs the written consent of the regulators to pay
dividends to the Company. The Bank has not paid dividends to the Company since
2006. Our declaration of dividends to our stockholders is discretionary and
will depend upon operating results and our overall financial condition,
regulatory limitations, tax considerations, and other factors. We are also
prohibited from paying dividends on our common stock if we fail to make
distributions or required payments on the trust preferred securities or on our
preferred stock. The Company is current on its required payments on the trust
preferred securities and our preferred securities as of September 30, 2010.
RECENT LEGISLATION IMPACTING THE FINANCIAL SERVICES INDUSTRY
On July 21 2010, sweeping financial regulatory reform legislation entitled the
"Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank
Act") was signed into law. The Dodd-Frank Act implements far-reaching changes
across the financial regulatory landscape, including provisions that, among
other things:
o Create a Financial Services Oversight Council to identify emerging
systemic risks and improve interagency cooperation;
o Centralize responsibility for consumer financial protection by creating a
new agency, the Consumer Financial Protection Bureau, responsible for
implementing, examining and enforcing compliance with federal consumer
financial laws;
o Establish strengthened capital standards for banks and bank holding
companies, and disallow trust preferred securities from being included in
a bank's Tier 1 capital determination (subject to a grandfather provision
for existing trust preferred securities);
o Contain a series of provisions covering mortgage loan original
standards affecting, among other things, originator compensation, minimum
repayment standards and pre-payments;
o Requires that bank holding companies and banks must be both well-
capitalized and well-managed in order to acquire banks located outside
their home state;
o Grant the Federal Reserve the power to regulate debit card interchange
fees;
o Implement corporate governance revisions, including with regard to
executive compensation and proxy access by shareholders, that apply to all
public companies, not just financial institutions;
o Make permanent the $250 thousand limit for federal deposit insurance and
increase the cash limit of Securities Investor Protection Corporation
protection from $100 thousand to $250 thousand and provide unlimited
federal deposit insurance until January 1, 2013 for non-interest bearing
demand transaction accounts at all insured depository institutions;
o Repeal the federal prohibitions on the payment of interest on demand
deposits, thereby permitting depository institutions to pay interest on
business transaction and other accounts; and
o Increase the authority of the Federal Reserve to examine the Company
and its nonbank subsidiaries.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take
effect over several years, making it difficult to anticipate the overall
financial impact on the Company, its customers or the financial industry more
generally. Provisions in the legislation that affect deposit insurance
assessments, payment of interest on demand deposits and interchange fees could
increase the costs associated with deposits as well as place limitations on
certain revenues those deposits may generate. Provisions in the legislation that
revoke the Tier 1 capital treatment of trust preferred securities and otherwise
require revisions to the capital requirements of the Company and the Bank could
require them to seek other sources of capital in the future.
Management continues to review the provisions of the Dodd-Frank Act and
assessing its probable impact on our business, financial condition, and results
of operations. However, the ultimate effect of the Dodd-Frank Act on the
financial services industry in general, and on us in particular, is uncertain at
this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the
supervision, and with the participation, of our President and Chief Executive
Officer and the Chief Financial and Operations Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) pursuant to
Exchange Act Rule 13a-15. Based upon, and as of the date of, such evaluation,
the President and Chief Executive Officer and the Chief Financial and Operations
Officer concluded that our disclosure controls and procedures were effective
with respect to timely communication to them and other members of management
responsible for preparing periodic reports and material information required to
be disclosed in this report as it relates to us and our subsidiaries.
In designing and evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well-designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and that management necessarily was required to apply judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We believe that
the disclosure controls and procedures currently in place provide reasonable
assurance of achieving our control objectives.
There were no changes in the internal control over financial reporting during
the quarter ended September 30, 2010 that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may be involved from time to time in various routine legal proceedings
incidental to our business. We do not believe there are any threatened or
pending legal proceedings against us or our subsidiaries that, if determined
adversely, would have a material adverse effect on our results of operation or
financial condition.
ITEM 1A. RISK FACTORS
The Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not repurchase any of our equity securities during the quarter covered by
this report. As of September 30, 2010, we did not have in effect an approved
share repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
On November 9, 2010, the Bank entered into a formal written agreement (the
"Agreement") with the Federal Deposit Insurance Corporation (the "FDIC") and the
Wisconsin Department of Financial Institutions (the "DFI"). Pursuant to the
Agreement, the Bank has agreed to take certain actions and operate in compliance
with the Agreement's provisions during its terms. The Agreement is based on the
results of an annual examination of the Bank by the FDIC and DFI.
Under the terms of the Agreement, the Bank is required to: (i) maintain ratios
of Tier 1 capital to each of total assets and total risk-weighted assets of at
least 8.5% and 12%, respectively; (ii) refrain from declaring or paying any
dividend without the written consent of the FDIC and DFI; and (iii) refrain from
increasing its total assets by more than 5% during any three-month period
without first submitting a growth plan to the FDIC and DFI. Additionally, the
Bank is required to develop and maintain a number of policies and procedures and
to take certain actions related to its loan portfolio and budgeting process, all
as described in more detail in the Agreement.
A copy of the Agreement is attached hereto as Exhibit 10.1 and is incorporated
herein by reference. The description of the Agreement set forth above does not
purport to be complete, and is qualified by reference to the full text of the
Agreement.
As of November 12, 2010, the Bank believes it has satisfied most of
the conditions of the Agreement and has taken actions to resolve the other
requirements referenced in the Agreement.
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number Description
10.1 Consent Order with the Federal Deposit Insurance Corporation and the
Wisconsin Department of Financial Institutions, dated November
9, 2010
31.1 Certification of CEO pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2 Certification of Chief Financial and Operations Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a)
32.1 Certification of CEO and Chief Financial and Operations Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: November 12, 2010 JAMES F. WARSAW
James F. Warsaw
President and Chief Executive Officer
Date: November 12, 2010 MARK A. KING
Mark A. King
Chief Financial and Operations Officer
EXHIBIT INDEX
TO
FORM 10-Q
OF
MID-WISCONSIN FINANCIAL SERVICES, INC.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
PURSUANT TO SECTION 102(D) OF REGULATION S-T
(17 C.F.R. {section}232.102(D))
The following exhibits are filed as part this report:
10.1 Consent Order with the Federal Deposit Insurance Corporation and the
Wisconsin Department of Financial Institutions, dated November
9, 2010
31.1 Certification of CEO pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2 Certification of Chief Financial and Operations Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a)
32.1 Certification of CEO and Chief Financial and Operations Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
Exhibit 10.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
AND
STATE OF WISCONSIN
DEPARTMENT OF FINANCIAL INSTITUTIONS FOR THE STATE OF WISCONSIN MADISON,
WISCONSIN
In the Matter of CONSENT ORDER
MID-WISCONSIN BANK
MEDFORD, WISCONSIN FDIC-10-807b
(STATE CHARTERED)
(INSURED NONMEMBER BANK)
Mid-Wisconsin Bank, Medford, Wisconsin ("Bank"), having been advised of
its right to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound
banking practices and violations of law, rule, or regulation alleged to have
been committed by the Bank, and of its right to a hearing on the charges under
section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. {section}
1818(b), and under section 220.04(9) of the Wisconsin Statutes, Wis. Stat.
{section} 220.04(9), regarding hearings before the Department of Financial
Institutions for the State of Wisconsin ("WDFI"), and having waived those
rights, by and through its duly elected and acting Board of Directors ("Board")
entered into a STIPULATION TO THE ISSUANCE OF A CONSENT ORDER ("STIPULATION")
with representatives of the Federal Deposit Insurance Corporation ("FDIC") and
WDFI, dated November 9, 2010, whereby, solely for the purpose of this proceeding
and without admitting or denying any charges of unsafe or unsound banking
practices and without admitting or denying any violations of law, rule, or
regulation, the Bank consented to the issuance of a CONSENT ORDER ("ORDER") by
the FDIC and WDFI.
The FDIC and WDFI considered the matter and determined to accept the
STIPULATION.
Having also determined that the requirements for issuance of an order
under 12 U.S.C. {section} 1818(b) and section 220.04(9) of the Wisconsin
Statutes, Wis. Stat. {section} 220.04(9), have been satisfied, the FDIC and WDFI
HEREBY ORDER, that the Bank, its institution-affiliated parties, as that term is
defined in section 3(u) of the Act, 12 U.S.C. {section} 1813(u), and its
successors and assigns take affirmative action as follows:
MANAGEMENT
1. (a) During the life of this ORDER, the Bank shall have and retain
qualified management. Management shall be provided the necessary written
authority to implement the provisions of this ORDER. The qualifications of
management shall be assessed on its ability to:
(i) comply with the requirements of this ORDER;
(ii) operate the Bank in a safe and sound manner;
(iii) comply with applicable laws, rules, and regulations;
and
(iv) restore all aspects of the Bank to a safe and sound
condition, including capital adequacy, asset quality,
management effectiveness, earnings, liquidity, and
sensitivity to interest rate risk.
(b) During the life of this ORDER, prior to the addition of any
individual to the board of directors or the employment of any individual as a
senior executive officer, the Bank shall request and obtain WDFI's written
approval For purposes of this ORDER, "senior executive officer" is defined as
in section 32 of the Act, 12 U.S.C. {section} 1831i, and section 303.101(b) of
the FDIC Rules and Regulations, 12 C.F.R. {section} 303.101(b).
MANAGEMENT PLAN
2. (a) Within 90 days from the effective date of this ORDER, the Bank
shall retain an independent third party acceptable to the Regional Director of
the FDIC, Chicago Region ("Regional Director") and the Administrator of WDFI,
Division of Banking, ("Administrator"), who will develop a written analysis and
assessment of the Bank's management needs ("Management Study") for the purpose
of providing qualified management for the Bank.
(b) The Bank shall provide the Regional Director and the
Administrator with a copy of the proposed engagement letter or contract with the
independent third party for review.
(c) The Management Study shall be developed within 120 days from
the effective date of this ORDER. The Management Study shall include, at a
minimum:
(i) identification of both the type and number of senior
officer positions needed to properly manage and
supervise the affairs of the Bank;
(ii) identification and establishment of such Bank
committees as are needed to provide guidance and
oversight to active management;
(iii) evaluation of all senior Bank officers to determine
whether these individuals possess the ability,
experience and other qualifications required to perform
present and anticipated duties, including adherence to
the Bank's established policies and practices, and
restoration and maintenance of the Bank in a safe and
sound condition;
(iv) evaluation of all senior Bank officers' compensation,
including salaries, director fees, and other benefits;
and
(v) a plan to recruit and hire any additional or
replacement personnel with the requisite ability,
experience and other qualifications to fill those
senior officer positions identified by this paragraph
of this ORDER.
(d) Within 30 days after receipt of the Management Study the Bank
shall formulate a plan to implement the recommendations of the Management Study.
(e) A copy of the plan required by this paragraph shall be
submitted to the Regional Director and the Administrator.
CAPITAL
3. (a) During the life of this ORDER, the Bank shall have and
maintain its level of Tier 1 capital as a percentage of its total assets
("capital ratio") at a minimum of 8.5 percent and its level of qualifying total
capital as a percentage of risk-weighted assets ("total risk based capital
ratio") at a minimum of 12 percent. For purposes of this ORDER, Tier 1 capital,
qualifying total capital, total assets, and risk-weighted assets shall be
calculated in accordance with Part 325 of the FDIC Rules and Regulations ("Part
325"), 12 C.F.R. Part 325.
(b) If, while this ORDER is in effect, the Bank increases capital
by the sale of new securities, the board of directors of the Bank shall adopt
and implement a plan for the sale of such additional securities, including the
voting of any shares owned or proxies held by or controlled by them in favor of
said plan. Should the implementation of the plan involve public distribution of
Bank securities, including a distribution limited only to the Bank's existing
shareholders, the Bank shall prepare detailed offering materials fully
describing the securities being offered, including an accurate description of
the financial condition of the Bank and the circumstances giving rise to the
offering, and other material disclosures necessary to comply with Federal
securities laws. Prior to the implementation of the plan and, in any event, not
less than 20 days prior to the dissemination of such materials, the materials
used in the sale of the securities shall be submitted to the FDIC Registration
and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429 and to
WDFI, 345 W. Washington Avenue, 4[th] Floor, P.O. Box 7876, Madison, Wisconsin
53707-7876 for their review. Any changes requested to be made in the materials
by the FDIC or WDFI shall be made prior to their dissemination.
(c) In complying with the provisions of this paragraph, the Bank
shall provide to any subscriber and/or purchaser of Bank securities written
notice of any planned or existing development or other changes which are
materially different from the information reflected in any offering materials
used in connection with the sale of Bank securities. The written notice
required by this paragraph shall be furnished within 10 calendar days of the
date any material development or change was planned or occurred, whichever is
earlier, and shall be furnished to every purchaser and/or subscriber of the
Bank's original offering materials.
PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS
4. (a) As of the effective date of this ORDER, the Bank shall not
extend, directly or indirectly, any additional credit to, or for the benefit of,
any borrower who is already obligated in any manner to the Bank on any
extensions of credit (including any portion thereof) that has been charged off
the books of the Bank or classified "Loss" in the Joint Report, so long as such
credit remains uncollected.
(b) As of the effective date of this ORDER, the Bank shall not
extend, directly or indirectly, any additional credit to, or for the benefit of,
any borrower whose loan or other credit has been classified "Substandard",
"Doubtful", or is listed for Special Mention in the Joint Report, and is
uncollected unless the Bank's board of directors has adopted, prior to such
extension of credit, a detailed written statement giving the reasons why such
extension of credit is in the best interest of the Bank. A copy of the
statement shall be signed by each Director, and incorporated in the minutes of
the applicable board of directors' meeting. A copy of the statement shall be
placed in the appropriate loan file.
REDUCTION OF DELINQUENCIES AND CLASSIFIED ASSETS
5. (a) Within 60 days from the effective date of this ORDER, the Bank
shall adopt, implement, and adhere to, a written plan to reduce the Bank's risk
position in each asset in excess of $500,000 which is more than 90 days
delinquent or classified "Substandard" or "Doubtful" in the Joint Report. The
plan shall include, but not be limited to, provisions which:
(i) prohibit an extension of credit for the payment of
interest, unless the Board provides, in writing, a
detailed explanation of why the extension is in the
best interest of the Bank;
(ii) provide for review of the current financial condition
of each delinquent or classified borrower, including a
review of borrower cash flow and collateral value;
(iii) delineate areas of responsibility for loan officers;
(iv) establish dollar levels to which the Bank shall reduce
delinquencies and classified assets within 6 and 12
months from the effective date of this ORDER; and
(v) provide for the submission of monthly written progress
reports to the Bank's board of directors for review and
notation in minutes of the meetings of the board of
directors.
(b) As used in this paragraph, "reduce" means to: (1) collect; (2)
charge off; (3) sell; or (4) improve the quality of such assets so as to warrant
removal of any adverse classification by the FDIC and WDFI.
(c) A copy of the plan required by this paragraph shall be
submitted to the Regional Director and WDFI.
LIQUIDITY PLAN
6. Within 60 days of the effective date of this ORDER, the Bank shall
revise its written contingency funding plan ("Liquidity Plan"). The Liquidity
Plan shall identify sources of liquid assets to meet the Bank's contingency
funding needs over time horizons of one month, two months, and three months. At
a minimum, the Liquidity Plan shall be prepared in conformance with the
Liquidity Risk Management Guidance found at FIL-84-2008, as supplemented by FIL-
13-2010, and include provisions to address the issues as identified in the Joint
Report.
DIVIDEND RESTRICTION
7. As of the effective date of this ORDER, the Bank shall not declare
or pay any dividend without the prior written consent of the Regional Director
and WDFI.
ALLOWANCE FOR LOAN AND LEASE LOSSES
8. (a) After the effective date of this ORDER, and prior to the
submission of all Reports of Condition and Income required by the FDIC, the
board of directors of the Bank shall review the adequacy of the Bank's ALLL,
provide for an adequate ALLL, and accurately report the same. The minutes of the
board meeting at which such review is undertaken shall indicate the findings of
the review, the amount of increase in the ALLL recommended, if any, and the
basis for determination of the amount of ALLL provided. In making these
determinations, the board of directors shall consider the FFIEC Instructions for
the Reports of Condition and Income and any analysis of the Bank's ALLL provided
by the FDIC or Division.
(b) ALLL entries required by this paragraph shall be made prior to
any capital determinations required by this ORDER.
SPECIAL MENTION LOAN
IX. Within 60 days from the effective date of this ORDER,
the Bank shall correct all deficiencies in the loan listed for "Special Mention"
in the Joint Report.
PROFIT PLAN AND BUDGET
10. (a) Within 60 days from the effective date of this ORDER, the Bank
shall revise and adhere to its written profit plan and a realistic,
comprehensive budget for all categories of income and expense for calendar years
2011 and 2012. The plans required by this paragraph shall contain formal goals
and strategies, consistent with sound banking practices, to reduce discretionary
expenses and to improve the Bank's overall earnings, and shall contain a
description of the operating assumptions that form the basis for major projected
income and expense components.
(b) The written profit plan shall address, at a minimum:
(i) realistic and comprehensive budgets;
(ii) a budget review process to monitor the income and
expenses of the Bank to compare actual figures with
budgetary projections;
(iii) identification of major areas in, and means by which,
earnings will be improved; and
(iv) a description of the operating assumptions that form
the basis for and adequately support major projected
income and expense components.
(c) Within 30 days from the end of each calendar quarter following
completion of the profit plans and budgets required by this paragraph, the
Bank's board of directors shall evaluate the Bank's actual performance in
relation to the plan and budget, record the results of the evaluation, and note
any actions taken by the Bank in the minutes of the board of directors' meeting
at which such evaluation is undertaken.
(d) A written profit plan and budget shall be prepared for each
calendar year for which this ORDER is in effect.
(e) Copies of the plans and budgets required by this paragraph
shall be submitted to the Regional Director and WDFI.
STRATEGIC PLAN
11. (a) Within 90 days from the effective date of this ORDER, the Bank
shall revise its comprehensive strategic plan. The plan required by this
paragraph shall contain an assessment of the Bank's current financial condition
and market area, and a description of the operating assumptions that form the
basis for major projected income and expense components. The written strategic
plan shall address, at a minimum:
(i) strategies for pricing policies and asset/liability
management; and
(ii) financial goals, including pro forma statements for
asset growth, capital adequacy, and earnings.
(b) Within 30 days from the end of each calendar quarter following
the adoption and implementation of the Strategic Plan described in (a) above,
the Bank's board of directors shall evaluate the Bank's actual performance in
relation to the strategic plan required by this paragraph and record the results
of the evaluation, and any actions taken by the Bank, in the minutes of the
board of directors' meeting at which such evaluation is undertaken.
(c) The strategic plan required by this ORDER shall be revised 30
days prior to the end of each calendar year during which this ORDER is in
effect. Thereafter the Bank shall approve the revised plan, which approval shall
be recorded in the minutes of a board of directors' meeting, and the Bank shall
implement and adhere to the revised plan.
(d) Copies of the plan and revisions thereto required by this
paragraph shall be submitted to the Regional Director and WDFI.
CORRECTION OF VIOLATIONS
12. Within 30 days from the effective date of this ORDER, the Bank shall
eliminate and/or correct all violations of law, rule, or regulation listed in
the Joint Report.
RESTRICTION ON GROWTH
13. During the life of this ORDER, the Bank shall not increase its total
assets by more than 5 percent during any consecutive three-month period without
providing, at least 30 days prior to its implementation, a growth plan to the
Regional Director and WDFI. Such growth plan, at a minimum, shall include the
funding source to support the projected growth, as well as the anticipated use
of funds. This growth plan shall not be implemented without the prior written
consent of the Regional Director and Administrator. In no event shall the Bank
increase its total assets by more than 10 percent annually. For the purpose of
this paragraph, "total assets" shall be defined as in the Federal Financial
Institutions Examination Council's Instructions for the Consolidated Reports of
Condition and Income.
INTEREST RATE RISK
14. (a) Within 60 days of the effective date of this ORDER the Bank
shall revise its procedures for managing the Bank's sensitivity to interest rate
risk. The procedures shall comply with the Joint Agency Statement of Policy on
Interest Rate Risk (June 26, 1996), and the Joint Supervisory Statement on
Investment Securities and End-user Derivative Activities (April 23, 1998).
(b) A copy of the policy revisions and procedures required by this
paragraph shall be submitted to the Regional Director and WDFI.
NOTIFICATION TO SHAREHOLDER
15. Following the effective date of this ORDER, the Bank shall send to
its shareholder a copy of this ORDER: (1) in conjunction with the Bank's next
shareholder communication; or (2) in conjunction with its notice or proxy
statement preceding the Bank's next shareholder meeting.
MONITORING
16. Within 30 days from the effective date of this ORDER, the Bank's
board of directors shall have in place a program that will provide for
monitoring of the Bank's compliance with this ORDER.
PROGRESS REPORTS
17. Within 30 days from the end of each calendar quarter following the
effective date of this ORDER, the Bank shall furnish to the Regional Director
and WDFI written progress reports signed by each member of the Bank's board of
directors, detailing the actions taken to secure compliance with the ORDER and
the results thereof.
This ORDER shall be effective on the date of issuance.
The provisions of this ORDER shall be binding upon the Bank, its
institution-affiliated parties, and any successors and assigns thereof.
The provisions of this ORDER shall remain effective and enforceable except
to the extent that, and until such time as, any provision has been modified,
terminated, suspended, or set aside by the FDIC and WDFI.
Pursuant to delegated authority.
Dated: November 9, 2010.
__________________________ __________________________
M. Anthony Lowe Michael J. Mach
Regional Director Administrator, Division of
Chicago Regional Office Banking
Federal Deposit Insurance Department of Financial
Corporation Institutions
State of Wisconsin
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13A-14(A) AND RULE 15D-14(A)
I, James F. Warsaw, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Mid-Wisconsin
Financial Services, Inc. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(e))
for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for
external reporting purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2010 JAMES F WARSAW
James F. Warsaw
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13A-14(A) AND RULE 15D-14(A)
I, Mark A. King, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Mid-Wisconsin
Financial Services, Inc. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(e))for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for
external reporting purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2010 MARK A. KING
Mark A. King
Chief Financial and Operations Officer
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
SARBANES-OXLEY ACT OF 2002
The undersigned Chief Executive Officer and Principal Accounting Officer of Mid-
Wisconsin Financial Services, Inc. ("Mid-Wisconsin") certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that (1) the Quarterly Report on Form 10-Q of Mid-Wisconsin for the
quarterly period ended September 30, 2010 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
(15 U.S.C. 78m or 78o(d)), and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operation of Mid-Wisconsin.
Date: November 12, 2010 JAMES F. WARSAW
James F. Warsaw
President and Chief Executive Officer
MARK A. KING
Mark A. King
Chief Financial and Operations Officer
A signed original of this written statement required by 18 U.S.C. Section
1350, as adopted pursuant to Section 906, has been provided to Mid-
Wisconsin Financial Services, Inc. and will be retained by Mid-Wisconsin
Financial Services, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request. This certification accompanies this
Form 10-Q and shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, or otherwise subject to the liability
of that section
