ITEM
1. Business.............................................. 3 2. Properties............................................ 7 3. Legal proceedings..................................... 7 4. Submission of matters to a vote of security holders... 8
PART II 5. Market for registrant's common equity and related stockholder matters................................... 8 6. Selected financial data.............................. 10 7. Management's discussion and analysis of financial condition and results of operations.................. 11 7A. Quantitative and qualitative disclosures about market risk.......................................... 24 8. Financial statements and supplementary data.......... 25 9. Changes in and disagreements with accountants on accounting and financial disclosure.................. 57
PART III
10. Directors and executive officers of the registrant... 57 11. Executive compensation............................... 57 12. Security ownership of certain beneficial owners and management....................................... 57 13. Certain relationships and related transactions....... 57
PART IV
14. Exhibits, financial statement schedules, and reports on Form 8-K.......................................... 58
PART I
ITEM 1. BUSINESS
General
Mid-Wisconsin Financial Services, Inc. ("the Company") is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's subsidiary operates under the name Mid-Wisconsin Bank (the "Bank") and has its principal office in Medford, Wisconsin. Except as may otherwise be noted, this annual report on Form 10-K describes the business of the Company and the Bank as in effect on December 31, 2001.
ACQUISITIONS
The Company has a policy of actively pursuing opportunities to acquire additional bank subsidiaries so that, at any given time, it may be engaged in some tentative or preliminary discussions for such purpose with officers, directors or principal shareholders of other holding companies or banks. There are no plans, understandings, or arrangements, written or oral, regarding other acquisitions as of the date hereof.
BUSINESS OF THE BANK
The day-to-day management of the Bank rests with its officers and board of directors. The Bank is engaged in general commercial and retail banking services, including trust services. The Bank serves individuals, businesses and governmental units and offers most forms of commercial and consumer lending, including lines of credit, term loans, real estate financing and mortgage lending. In addition, the Bank provides a full range of personal banking services, including checking accounts, savings and time accounts, installment and other personal loans, as well as mortgage loans. New services are frequently added to the Bank's retail banking departments.
The Trust and Investment Center located in Medford offers a wide variety of fiduciary, investment management and advisory services to individuals, corporations, charitable trusts, and foundations. The Bank administers pension, profit sharing and other employee benefit plans, and personal trusts and estates. The Bank also provides discount and full-service brokerage services, including the sale of fixed and variable annuities, mutual funds and securities.
THE BANK
The Bank was incorporated on September 1, 1890, as a state bank under the laws of Wisconsin. The Bank's principal office is located at 132 West State Street, Medford, Wisconsin, 54451. The Bank's principal office and nine branches provide various commercial and consumer banking services for customers located principally in Taylor County and portions of Eau Claire, Lincoln, Clark, Marathon, Price and Oneida Counties, Wisconsin.
The Bank's principal branch offices are located in Medford, Colby, Neillsville, Phillips and Rhinelander Wisconsin. These branches provide commercial and consumer banking services for customers located in the surrounding market areas.
BANK MARKET AREA AND COMPETITION
The Bank competes for loans, deposits, and financial services in all of its principal markets. Much of this competition comes from companies which are larger and have greater resources than the Company. The Bank competes directly with other banks, savings associations, credit unions, finance companies, mutual funds, life insurance companies and other financial and non-financial companies. Many of these nonbank competitors offer products and services that are functionally equivalent to the products and services offered by the Bank. Competition involves efforts to obtain new deposits, interest rates paid on deposits and charged on loans, as well as other aspects of banking.
Recent changes in banking laws have had a significant effect on the competitive environment in which the Bank operates and are likely to continue to increase competition for the Bank. For example, federal law permits adequately capitalized and managed bank holding companies to engage in interstate banking on a much broader scale than in the past. Banks are also permitted to create interstate branching networks in states which do not "opt out" of the new laws. The Gramm-Leach-Bliley Act of 1999 has also increased the competitive environment for the Bank. Under this act, financial holding companies are now permitted to conduct a broad range of banking, insurance and securities activities. The Company believes that the combined effects of more interstate banking and the development of greater "one-stop" availability for banking, insurance and securities services will both increase the overall level of competition and attract competitors with which the Bank may not now compete for its customers.
EMPLOYEES
All officers of the Company except the Chairman and the Vice President are full-time employees of the Bank. As of December 31, 2001, the Company and its subsidiaries had 129 full-time equivalent employees.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 1, 2002, their ages, offices and principal occupation during the last five years are set forth below.
Name Offices and Positions Held Date of Election James F. Melvin Chairman of the Board of the Company May 2000 Age: 52 From August 1996 to May 2000 Vice Chairman of the Board of the Company
From May 1998 to May 2000 Chairman of the Board of the Bank
President of the Melvin Companies
Name Offices and Positions Held Date of Election
Fred J. Schroeder Vice President of the Company May 1999 Age: 64 Former Mayor of the City of Medford
Gene C. Knoll President of the Company October 1996 Age: 48 President, Chief Executive Officer of the Bank
William A. Weiland Secretary and Treasurer of the May 1998 Age: 47 Company
Executive Vice President of the Bank
Rhonda R. Kelley Controller of the Company September 1998 Age: 28 Prior to September 1998, accountant at public accounting firm
All executive officers are elected annually by the board of directors at its annual meeting and hold office until the next annual meeting of the board of directors, or until their respective successors are elected and qualified.
REGULATION AND SUPERVISION
The Company and the Bank are subject to regulation under both federal and state law. The Company is a registered bank holding company and is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the "Board") pursuant to the BHCA. The Bank is subject to regulation and examination by the Federal Deposit Insurance Corporation ("FDIC") and, as a Wisconsin chartered bank, by the Wisconsin Department of Financial Institutions.
The Board expects a bank holding company to be a source of strength for its subsidiary banks. As such, the Company may be required to take certain actions or commit certain resources to the bank when it might otherwise choose not to do so. Under federal and state banking laws, the Company and the Bank are also subject to regulations which govern the Company's and the Bank's capital adequacy, loans and loan policies (including the extension of credit to affiliates), deposits, payment of dividends, establishment of branch offices, mergers and other acquisitions, investments in or the conduct of other lines of business, management personnel, interlocking directors and other aspects of the operation of the Company and the Bank.
Bank regulators having jurisdiction over the Company and the Bank generally have the authority to impose civil fines or penalties and to impose regulatory sanctions for noncompliance with applicable banking regulations and policies. In particular, the FDIC has broad authority to take corrective action if the Bank fails to maintain required capital level. Information concerning the Company's compliance with applicable capital requirements is set forth under the subheading "Capital Adequacy" in Item 7 and Item 8, and Note 14 of the Notes to Consolidated Financial Statements.
Banking laws and regulations have undergone periodic revisions that often have a direct effect on the Bank's operations and its competitive environment. From time to time various formal or informal proposals, including new legislation, relating to, among other things, changes with respect to deposit insurance, permitted bank activities and restructuring of the federal regulatory scheme have been made or may be made or adopted in the future. It is likely that such changes may have a significant impact on the Company's competitive circumstances and that such changes may have a material adverse effect on the Company's consolidated financial condition, liquidity or results of operations.
MONETARY POLICY
The earnings and growth of the Bank, and therefore the Company, are affected by the monetary and fiscal policies of the federal government and governmental agencies. The Board has a direct and indirect influence on the costs of funds used by the Bank for lending and its actions have a substantial effect on interest rates, the general availability of credit and the economy as a whole. These policies therefore affect the growth of Bank loans and deposits and the rates charged for loans and paid for deposits. Governmental and Board policies have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. Management of the Company is not able to anticipate the future impact of such policies and practices on the growth of the profitability of the Company.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, reports to shareholders, in press releases, and in other oral and written statements made by or with the approval of the Company which are not statements of historical fact will constitute forward- looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of the Company or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. In making forward-looking statements within the meaning of the Reform Act, the Company undertakes no obligation to publicly update or revise any such statement.
Forward-looking statements of the Company are based on information available to the Company as of the date of such statements, and reflect the Company's expectations as of such date, but are subject to risks and uncertainties that may cause actual results to vary materially. In addition to specific factors which may be described in connection with any of the Company's forward-looking statements, factors which could cause actual results to differ materially from those discussed in the forward looking statements include, but are not limited to the following: (i) the condition of the U.S. economy in general and the condition of the local economies in which operations are conducted; (ii) the effects of increased competition in the banking and financial services industry; (iii) the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System which reduce interest margins; (iv) the effects of inflation, interest rate, market, and monetary fluctuations; (v) the timely development of and acceptance of new products and services and perceived overall value of these products and services by users; (vi) changes in consumer spending, borrowing and saving habits; (vii) technological changes, including increases in on-line banking or delivery of financial services; (viii) the effect of acquisitions or the inability to consummate acquisitions to expand the Company's service area; (ix) the ability to increase market share and control expenses; (x) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply or which result in increased competition (xi) the effect of changes in accounting policies and practices required by bank or securities regulatory agencies or to comply with generally accepted accounting principles; (xii) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (xiii) the success of the Company at managing the risks involved in the foregoing.
ITEM 2.
ITEM 2. PROPERTIES
The Company's operations are carried out at the Bank's administrative office facility at 132 West State Street, Medford, Wisconsin. The Company does not maintain any separate offices.
The Bank's administrative office is located at 132 West State Street, Medford, Wisconsin, in the main business district. The Bank's main retail facility is located at 134 South Eighth Street, Medford, Wisconsin. The Bank owns both facilities.
In addition to its administrative office, the Bank also owns nine branch facilities. All of the branches are free-standing buildings that provide adequate customer parking and, with one exception, all have drive-in facilities. The Company considers its properties to be adequate for its needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings before any court, administrative agency or other tribunal. Further, the Company is not aware of any litigation which is threatened against it in any court, administrative agency or other tribunal.
The Bank is engaged in legal actions and proceedings, both as plaintiffs and defendants, from time to time in the ordinary course of its business. In some instances, such actions and proceedings involve substantial claims for compensatory or punitive damages or involve claims for an unspecified amount of damages. There are, however, presently no proceedings pending or contemplated which, in the opinion of the Company's management, would have a material adverse effect on the operations, liquidity or consolidated financial condition of the Bank or the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no active established public trading market in Company common stock, although two regional broker-dealers act as market makers for the stock. Bid and ask quotations are published periodically in the Milwaukee Journal Sentinel and prices are quoted on the OTC Bulletin Board under the symbol "MWFS.OB". Transactions in the Company common stock are limited and sporadic.
On December 15, 2000, the Company made a self-tender offer to purchase up to 90,557 shares and reserved the right to expand its offer and purchase up to 7% of its issued and outstanding common stock for $25.50 per share. The tender- offer expired on January 31, 2001. The Company accepted 116,117 shares of its common stock for repurchase in connection with its tender offer. The shares repurchased represented approximately 6.4% of the shares outstanding immediately prior to the tender offer. Following the purchase of accepted shares, 1,695,452 shares of the Company's common stock were outstanding.
HOLDERS
As of March 15, 2002, there were approximately 822 holders of record of the Company's $.10 per share par value common stock. Some of the Company's shares are held in "street" name and the number of beneficial owners of such shares is not known nor included in the foregoing number.
DIVIDEND POLICY
The Company's Bylaws provide that, subject to the provisions of applicable law, the Board of Directors may declare dividends from unreserved and unrestricted earned surplus, at such times and in such amounts as the board shall deem advisable.
The Company's ability to pay dividends depends upon the receipt of dividends from the Bank. Bank dividends are subject to limitation under banking laws and regulations. As of December 31, 2001, the Bank could have paid $10,364,637 of additional dividends to the Company without prior regulatory approval. The declaration of dividends by the Company is discretionary and will depend upon operating results and financial condition, regulatory limitations, tax considerations and other factors. The Company has paid regular dividends since its inception in 1986.
MARKET PRICES AND DIVIDENDS
Price ranges of over-the-counter quotations and dividends declared per share on the Company common stock for the periods indicated are:
Prices detailed in item 6
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data (dollars in thousands, except per share data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis reviews significant factors with respect to the Company's financial condition and results of operations at and for the three-year period ended December 31, 2001. This discussion should be read in conjunction with the consolidated financial statements, notes, tables, and the selected financial data presented elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially from those in such statements. For a discussion of certain factors that may cause such forward-looking statements to differ materially from actual results see Item 1, Cautionary Statement Regarding Forward-Looking Information, in this Annual Report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
The Company's consolidated net income for 2001 was $3.8 million, an increase of $500,000 or 14.9% higher than 2000. Basic and diluted earnings per share for 2001 were $2.25, a 21.6% increase over 2000 basic and diluted earnings per share of $1.85. Return on average common stockholders' equity and return on average assets were 13.36% and 1.18% for 2001 compared to 11.74% and 1.07% for 2000. Cash dividends paid in 2001 increased by 1.7% to $1.22 per share over the $1.20 per share paid in 2000. Key factors behind these results were:
Taxable equivalent net interest income was $12.9 million for 2001, $1.1 million or 9.3% higher than 2000. Taxable equivalent interest income decreased by $491,000, while interest expense decreased $1.6 million. The volume of average earning assets increased $10.9 million to $305 million, which exceeded the $9.2 million increase in interest bearing liabilities. Increases in volume and changes in product mix added $480,000 to taxable equivalent net interest income, whereas changes in the rate environment of 2001 resulted in a $623,000 increase.
Total loans and deposits were $232.1 million and $258.4 million, respectively, at December 31, 2001, compared to $227.1 million and $244.7 million, respectively, at December 31, 2000.
The allowance for credit losses remained constant at $2.6 million in 2001 and 2000. Net loan charge-offs increased $273,000, primarily due to two large commercial credits, and were .16% of average loans outstanding compared to .04% in 2000. The ratio of allowance for credit losses to loans was 1.12% and 1.14% at December 31, 2001 and 2000.
Noninterest income was $2.4 million for 2001, $122,000 or 5.3% higher than 2000. Noninterest expense increased $460,000 or 5.3% over 2000 to $9.1 million.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest-rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest-rate risk exposure. The measurement of the market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments that reflect changes in market prices and rates can be found in footnotes 16 and 17 on the Notes to the Financial Statements.
The Company's primary objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while adjusting the Company's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely impact the Company's earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company does not engage in trading activities.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income represents the difference between interest earned on loans, securities and other interest-earning assets, and the interest expense associated with the deposits and borrowings that fund them. Interest rate fluctuations together with changes in volume and types of earning assets and interest-bearing liabilities combine to affect total net interest income. Additionally, net interest income is impacted by the sensitivity of the balance sheet to change in interest rates, contractual maturities, and repricing frequencies.
Fully taxable equivalent net interest income was $12.9 million for 2001, an increase of $1.1 million or 9.3% from 2000. The increase in fully taxable equivalent net interest income was due to a combination of the lower cost of interest bearing liabilities in 2001 to fund the earning assets and the liability sensitive repricing gap.
As indicated in tables 2 and 3, increases in volume and changes in the mix of both earning assets and interest bearing liabilities added $480,000 to fully taxable equivalent net interest income, and the changes in the rates resulted in a $623,000 increase, for a net increase of $1.1 million.
The net interest margin and interest rate spread improved to 4.24% and 3.62% compared to 4.02% and 3.29% in 2000. For 2001, the yield on earning assets decreased 46 basis points, decreasing interest income by $491,000 while the cost of interest bearing liabilities decreased 79 basis points, decreasing interest expense by $1.6 million for a net increase of $1.1 million in fully taxable equivalent net interest income. The increase in net interest margin was impacted by the interest rate environment of 2001 causing the liability sensitive balance sheet of the Bank to reprice at the declining interest rates.
The growth and composition change of earning assets contributed an additional $777,000 to fully taxable equivalent net interest income, while the growth and composition of interest bearing liabilities cost an additional $297,000, netting a $480,000 increase in fully taxable equivalent net interest income.
Average earning assets were $305 million in 2001, an increase of $10.9 million, or 3.7%, from 2000. Average interest bearing liabilities increased $9.2 million, or 3.6% from 2000. The composition of interest bearing liabilities shifted from higher cost short-term borrowings to more core deposit lower interest rate products. Total borrowings were $42.3 million on average for 2001, down $4.1 million or 8.9%. Total interest bearing deposits cost 4.28% on average for 2001 (65 basis points less than last year), while wholesale borrowings cost 4.59% (138 basis points less than last year).
Table 2: Average Balances and Interest Rates
Table 3: Interest Income and Expense Volume and Rate Analysis
Table 4: Yield on Earning Assets
NONINTEREST INCOME
Noninterest income was $2.4 million for 2001, $122,000 or 5.3% higher than 2000. Noninterest income as a percentage of total revenues was 9.3% for 2001 compared to 8.7% last year.
Table 5: Noninterest Income
Service fees were $883,000, $80,000 or 10.0% higher than 2000 due to the second quarter increase in deposit service fees.
Trust service fees for 2001 were $659,000, up 4.8% from last year. This increase reflects the continued growth in trust business volume and growth in the assets managed by the Bank's Trust Department.
Investment product commissions consist of annuity sales, brokerage services, mutual fund sales, life insurance commissions, and self-directed IRA fees. Investment product commissions decreased $84,000 or 31.6% from last year. The change was predominantly due to a decrease in the fair market value of assets under management, primarily from the declines in the stock and bond markets during 2001.
NONINTEREST EXPENSE
Total noninterest expense for 2001 was $9.1 million, a $461,000 or 5.3% increase over 2000.
Table 6: Noninterest Expense
Salaries and employee benefits increased $281,000 or 6.1% over 2000 and represented 53.9% of total noninterest expense in 2001 compared to 53.6% in 2000. While the average number of full time equivalent employees remained the same between the years, salaries increased 1.5% in 2001, due to merit increases. Employee benefits increased $226,000 in 2001, primarily the result of an increase in profit sharing expense.
Occupancy expense was $1.2 million for 2001 decreasing 8.0% from last year. The majority of the decrease was due to the savings of occupancy costs realized from the discontinuation of one Bank branch.
Data processing costs increased 1.3% reflecting the increasing cost of maintenance contracts. Other operating expense increased $258,000 or 13.2% in 2001. The majority of the change is due to a loss on an error in a trade execution on a security held for investment. The Company is seeking reimbursement for the loss of approximately $180,000 from the broker that services the Bank's brokerage business. The Bank's claim is in the early stages of arbitration and the Company cannot predict the outcome of that proceeding at this time.
PROVISION FOR CREDIT LOSSES
The adequacy of the reserve for credit losses is assessed based upon credit quality, existing economic conditions and loss exposure by loan category. Management determines the allowance for credit losses based on past loan experience, current economic conditions, composition of the loan portfolio, and the potential for future loss. Accordingly, the amount charged to expense is based on management's evaluation of the loan portfolio. It is the Company's policy that when available information confirms that specific loans and leases, or portions thereof, including impaired loans, are uncollectible, these amounts are promptly charged off against the allowance. The provision for credit losses was $370,000 in 2001; compared to $400,000 in 2000 and $180,000 in 1999. See additional discussion under section, "Allowance for Credit Losses."
INCOME TAXES
The effective tax rate was 27.8% in 2001, 26.4% in 2000, and 30.0% in 1999. See footnote 11 to the financial statements for additional tax information.
BALANCE SHEET ANALYSIS
INVESTMENT PORTFOLIO
The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. All securities are classified as available for sale and reported at fair 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. The investment portfolio represented 23% of average earning assets for both 2001 and 2000.
Table 7: Investment Securities Portfolio Maturities
At December 31, 2001, the Company's securities portfolio did not contain securities of any single issuer where the aggregate carrying value of such securities exceeded 10% of stockholders' equity.
Securities with an approximate carrying value of $38.3 million and $42.2 million, at December 31, 2001 and 2000, respectively, were pledged primarily to secure public deposits, short-term borrowings, and for other purposes required by law.
Table 8: Investment Securities Distribution
The market value of the fixed income portion on the investment portfolio as a percentage of book value has increased due to the decrease in interest rates. At December 31, 2001 market value was 101.1% of book value. The net unrealized gain on securities available for sale, recorded as a separate component of stockholders' equity, was $604,374, net of deferred taxes of $333,810 compared to a gain of $245,915, net of deferred income taxes of $139,300 at December 31, 2000.
LOANS
Total loans were $232.1 million at December 31, 2001, an increase of $5 million or 2.2% over December 31, 2000.
Table 9: Loan Composition
Real estate mortgage loans totaled $135.4 million at the end of 2001 and $127.3 million at the end of 2000. Loans in this classification include $65.8 million of loans secured by 1-to-4 family residential properties. Residential real estate loans consist of home mortgages, home equity lines, and second mortgages. Commercial loans were $44.3 million at the end of 2001, up $1.5 million since year-end 2000, and comprising 19.1% of the total loans outstanding, up from 18.8% at the end of 2000. The commercial and financial loan classification primarily consists of commercial loans to small businesses. Loans of this type are in a broad range of industries. Loans to finance agricultural production total $36.8 million or 15.9% of total loans.
Commercial real estate construction loans grew 28.6% to $5.4 million at the end of 2001 compared to $4.2 million at the end of 2000. Loans in this classification are primarily short-term loans that provide financing for the acquisition or development of commercial real estate, such as multi-family or other commercial development projects.
Installment loans to individuals totaled $10.2 million, down from $11.2 million at year-end 2000. Installment loans include short-term installment loans, automobile loans, recreational vehicle loans, credit card loans, and other personal loans. The Bank experiences extensive competition from local credit unions offering low rates on installment loans.
Table 10: Loan Maturity Distribution and Interest Rate Sensitivity
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic conditions. At December 31, 2001, no concentrations existed in the Company's portfolio in excess of 10% of total loans.
ALLOWANCE FOR CREDIT LOSSES
The loan portfolio is the primary asset subject to credit risk. Credit risk is controlled through the use of credit standards, review of potential borrowers, and loan payment performance. As of December 31, 2001, the allowance for credit losses remained constant at $2.6 million for 2001 and 2000. As of December 31, 2001 the allowance for credit losses as a percentage of total loans outstanding was 1.1% and covered 108.8% of nonperforming loans, compared to 1.1% and 102.6%, respectively, at December 31, 2000.
Table 11: Loan Loss Experience
The allowance for credit losses represents management's estimate of an amount adequate to provide for potential losses in the loan portfolio. Adequacy of the allowance for credit losses is based on management's ongoing review and grading of the loan portfolio, past loan loss experience, trends in past due and nonperforming loans, and current economic conditions. The Company has an internal risk analysis and review staff that continuously reviews loan quality.
The allocation of the year-end allowance for credit losses for each of the past five years based on management's estimates of loss exposure by category of loans is shown in Table 12. The allocation methodology applied by the Company focuses on changes in the size and character of the loan portfolio, current and expected economic conditions, the geographic and industry mix of the loan portfolio and historical losses by category. The total allowance is available to absorb losses from any segment of the portfolio. Management allocates the allowance for credit losses by pools of risk. The Company combines estimates of the allowance needed for loans analyzed individually and loans analyzed on a pool basis. The determination of allocated reserves for larger commercial loans involves a review of individual higher-risk transactions, focusing on loan grading, and assessment of specific loss content and possible resolutions of problem credits.
In the opinion of management, the allowance for credit losses is adequate as of December 31, 2001. While management uses available information to recognize losses on loans, future adjustments may be necessary based on changes in economic conditions.
Table 12: Allocation of the Allowance for Credit Losses
Net loans charged off were $366,000 or .16% of average loans for 2001, compared to $93,000 or .04% of average loans for 2000, and were $53,000 or .02% of average loans for 1999. The $273,000 increase in net loans charged off was primarily due to partial charge-offs of two large commercial credits. Loans charged off are subject to continuous review and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.
Nonperforming loans are defined as nonaccrual loans, 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. Previously accrued and uncollected interest on such loans is reversed, and income is recorded only to the extent that interest payments are subsequently received and principal is collectible.
Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Also included in nonperforming loans are restructured loans. Restructured loans involve the granting of concessions to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate.
Table 13: Nonperforming Loans and Other Real Estate Owned
Nonperforming loans at December 31, 2001, were $2.4 million, a decrease of $139,000 from December 31, 2000.
Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is fully assured, in which case interest is recognized on the cash basis. The interest that would have been reported in 2001 if all loans had been current throughout the year in accordance with their original terms was $124,371 in comparison to $122,893 actually collected.
DEPOSITS
Deposits are the Company's largest source of funds. At December 31, 2001, deposits were $258.4 million, up $13.7 million or 5.6% over last year, primarily in money market deposits (up $10 million).
The Company's retail deposit growth is continuously influenced by competitive pressure from other financial institutions, as well as other investment opportunities available to customers. During 2001, the Company experienced a shift of deposit mix to more short-term liquid accounts from time deposits due to the interest rate environment.
Table 14: Average Deposits Distribution
On average, deposits were $250.1 million for 2001, up $14.5 million or 6.1% over the average for 2000. Average savings deposits, including money markets, increased $9.4 million or 16.4% over 2000.
Table 15: Maturity Distribution of Certificates of Deposit of $100,000 or More
OTHER FUNDING SOURCES
Other funding sources, including short-term borrowings and long-term debt, were $49.4 million at December 31, 2001, up $7.2 million from $42.2 million at December 31, 2000. Short-term borrowings consist of securities sold under repurchase agreements and federal funds purchased. The repurchase agreements are payable on demand. Long-term debt at December 31, 2001, was $30 million, up from $16.2 million at the end of last year.
The mix of other funding sources shifted toward longer-term investments, with average long-term debt representing 60.7% of other funding sources from 38.4% last year, in response to asset/liability objectives. Within the short-term borrowing category, federal funds purchased and securities sold under repurchase agreements were down $6.6 million.
Table 16: Short-term Borrowings
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Bank's Asset Liability Management process provides a unified approach to management of liquidity, capital and interest rate risk, and to provide adequate funds to support the borrowing requirements and deposit flow of its customers. Management views liquidity as the ability to raise cash at a reasonable cost or with a minimum of loss and as a measure of balance sheet flexibility to react to marketplace, regulatory, and competitive changes.
The Bank's primary funding source is deposits. Deposits as a percentage of other funding sources were 84.0% at December 31, 2001 and 85.3% at December 31, 2000. Other funding sources represent the balance of the Bank's total funding needs. The primary funding sources utilized are Federal Home Loan Bank advances, federal funds purchased, repurchase agreements from a base of individuals, businesses, and public entities, and brokered CDs.
Management's overall strategy is to coordinate the volume of rate sensitive assets and liabilities to minimize the impact of interest rate movement on the net interest margin. Table 17 represents the Company's earning sensitivity to changes in interest rates at December 31, 2001. It is a static indicator which does not reflect various repricing characteristics and may not indicate the sensitivity of net interest income in a changing interest rate environment.
Table 17 reflects a negative gap position in all categories one year or less; the cumulative one-year gap ratio is negative at 56.0%. The Bank is attempting to change this trend in the gap ratio by shortening final loan maturities and offering more variable rate loan products. A significant portion of consumer deposits do not re-price or mature on a contractual basis. These deposit balances and rates are considered to be core deposits since these balances are generally not susceptible to significant interest rate changes. The Bank's Asset/Liability Committee attempts to distribute these deposits over a number of periods to reflect those portions of such accounts that are expected to re- price fully with market rates over the simulation period. The assumptions are based on historical experience with the Bank's individual markets and customers and include projections for how management expects to continue to price in response to marketplace and market changes.
The Asset/Liability Committee uses financial modeling techniques that measure the interest rate risk. Policies established by the Bank's Asset/Liability Committee are intended to limit exposure of earnings at risk. Management considers that an acceptable range for the rate sensitivity ratio is 70-130%.
Table 17: Interest rate sensitivity gap analysis
CAPITAL ADEQUACY
Stockholders' equity at December 31, 2001, decreased to $29.6 million or $17.42 per share compared with $30.3 million or $16.75 per share at the end of 2000. The primary decrease in stockholders' equity in 2001 was a function of the repurchase of common stock and cash dividends. Included in capital at year-end 2001 is a $604,000 equity component compared to $246,000 at December 31, 2000, related to unrealized gains on securities AFS, net of their tax effect. Cash dividends paid in 2001 were $1.22 per share compared to $1.20 per share in 2000. As a result of the completion of the Company's self-tender offer of common stock during 2001 stockholders' equity decreased $3 million.
The adequacy of the Company's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. As of December 31, 2001, 2000, and 1999, the Company's Tier 1 risk-based capital ratios, total risk-based capital ratios and Tier 1 leverage ratios were well in excess of regulatory requirements. Management feels the capital structure of the Company is adequate.
Table 18: Capital Ratios
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is set forth in Item 6, "Selected Financial Data" and under subcaptions "Results of Operations", "Market Risk", "Net Interest Income", "Provision for Credit Losses", "Investment Portfolio", "Deposits", and "Liquidity and Interest Sensitivity" under Item 7, Management's Discussion and Analysis of Financial Conditions.
INDEPENDENT AUDITOR'S REPORT
Board of Directors Mid-Wisconsin Financial Services, Inc. Medford, Wisconsin
We have audited the accompanying consolidated balance sheets of Mid-Wisconsin Financial Services, Inc. and Subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mid-Wisconsin Financial Services, Inc. and Subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
Wipfli Ullrich Bertelson LLP
January 18, 2002 Wausau, Wisconsin
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
The Company operates as a full-service financial institution with a primary market area including, but not limited to, Clark, Taylor, Price, and Oneida Counties, Wisconsin. It provides a variety of traditional banking products in addition to trust services and uninsured investment product sales.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mid-Wisconsin Financial Services, Inc. (the "Company") and its subsidiary, Mid-Wisconsin Bank (the "Bank"). All significant intercompany balances and transactions have been eliminated. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practice within the banking industry.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks." Cash and due from banks includes cash on hand and non-interest-bearing deposits at correspondent banks.
SECURITIES
Securities are assigned an appropriate classification at the time of purchase in accordance with management's intent. Securities held to maturity represent those securities for which the Company has the positive intent and ability to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premium and accretion of discount calculated using the effective yield method. Unrealized gains and losses on securities held to maturity are not recognized in the financial statements. The Company has no held to maturity securities.
Trading securities include those securities bought and held principally for the purpose of selling them in the near future. The Company has no trading securities.
Securities not classified as either securities held to maturity or trading securities are considered available for sale and reported at fair value determined from estimates of brokers or other sources. 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 effects.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SECURITIES (CONTINUED)
Any gains and losses on sales of securities are recognized at the time of sale using the specific identification method.
INTEREST AND FEES ON LOANS
Interest on loans is credited to income as earned. Interest income is not accrued on loans where management has determined collection of such interest is doubtful. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received or the collection of principal becomes reasonably assured. Interest income recognition on impaired loans is consistent with the recognition on all other loans.
Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual lives of the underlying loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level management believes is adequate to absorb probable credit losses relating to specifically identified loans and probable credit losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based on a regular, quarterly assessment of the loan portfolio, past events, current economic conditions, and other relevant factors. The allowance is adjusted through provisions for credit losses charged to expense. Loans are charged against the allowance when management believes the collectibility of the principal is unlikely.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Mortgage servicing rights are not retained.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is computed on both accelerated and straight-line methods and is based on the estimated useful lives of the assets varying generally from 40 to 50 years on buildings and three to nine years on equipment. Computer equipment and related software are depreciated or amortized over a useful life of three years.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at cost or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate.
GOODWILL AND PURCHASED INTANGIBLES
The excess of cost over the net assets acquired (goodwill) was amortized using the straight-line method over a 15-year period from the date of acquisition. Amortization of goodwill ceased on January 1, 2002 in accordance with the change in accounting discussed in Note 2.
The purchased core deposit intangible is amortized using a systematic method over an eight-year period.
The Company periodically evaluates the carrying value and remaining amortization period of all long-lived assets including intangible assets for impairment. Adjustments are recorded when the value of the asset decreases or is determined to be impaired.
RETIREMENT PLANS
The Company maintains a money purchase defined contribution pension plan and a defined contribution 401(k) profit-sharing plan which cover substantially all employees.
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined based upon the differences between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense is the result of changes in the deferred tax asset and liability.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of common shares outstanding. Diluted earnings per share includes the potential common stock shares issuable under the stock options granted. The weighted average number of shares outstanding were 1,706,958 in 2001, 1,813,653 in 2000, and 1,826,440 in 1999.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year presentation.
NOTE 2 CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2001, the Company adopted Statements of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Under these SFAS, the Company must recognize all significant derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in fair value are generally recognized in earnings in the period of the change. The adoption of SFAS No. 133 and No. 138 did not have an impact on the Company's financial condition or results of operations.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 142 addresses how intangible assets acquired outside of a business combination should be accounted for upon acquisition and how goodwill and other intangible assets should be accounted for after they have been initially recognized. SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Other intangible assets with a finite life will be amortized over their useful life. Goodwill and other intangible assets with indefinite useful lives shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. There will be no cumulative effect of a change in accounting when the Company adopts SFAS No. 142 on January 1, 2002. However, amortization of goodwill ceased as of January 1, 2002. Amortization of goodwill anticipated during 2002 prior to adoption of SFAS No. 142 would have been $86,433.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $1,832,000 was restricted at December 31, 2001 to meet the reserve requirements of the Federal Reserve System.
In the normal course of business, the Company and its subsidiary maintain cash and due from bank balances with correspondent banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. Total uninsured balances at December 31, 2001 were approximately $2,150,169.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 SECURITIES
The fair value, amortized cost, and gross unrealized gains and losses for the Company's securities available for sale follow:
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 SECURITIES (Continued)
The amortized cost and fair values of debt securities at December 31, 2001, 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.
During 2001, proceeds from sales of investments were $1,622,892. There were $7,892 of gross realized gains. There were no sales of securities during 2000 and 1999.
Securities with a carrying value of $38,322,796 and $42,244,400 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits, short-term borrowings, and for other purposes required by law.
NOTE 5 FEDERAL HOME LOAN BANK STOCK
As a member of the Federal Home Loan Bank (FHLB) system, the banking subsidiary is required to hold stock in the FHLB based on the anticipated amount of FHLB borrowings to be advanced. This stock is recorded at cost, which is equal to fair value. Equity securities included $1,500,000 and $1,294,600 of FHLB stock at December 31, 2001 and 2000, respectively. Transfer of the stock is substantially restricted.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 LOANS
The composition of loans at December 31 follows:
The Company, in the ordinary course of business, grants loans to the Company's executive officers and directors, including firms in which they are principal owners. The Bank has a policy of making loans (limited to $50,000 per individual) available to employees and executive officers at interest rates slightly below those prevailing for comparable transactions with other customers. In the opinion of management, such loans do not involve more than the normal risk of collectibility or present other unfavorable features.
Activity in related party loans for the years ended December 31, is summarized below:
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 LOANS (Continued)
The Company has an established process to determine the adequacy of the allowance for credit losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans) and loans analyzed on a pool basis.
The determination of allocated reserves for larger commercial and commercial real estate loans involves a review of individual higher-risk transactions, focusing on the accuracy of loan grading, assessments of specific loss content, and, in some cases, strategies for resolving problem credits.
The Company's determination of the amount of the allowance and, correspondingly, the provision for credit losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, and the Company's ongoing examination process and that of its regulators. The Company has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its examinations to executive management and the Board of Directors. Such reviews also assist management in establishing the level of the allowance.
The allowance arrived at through this methodology is adjusted by management's judgment concerning the effect of recent economic events on portfolio performance.
The allowance for credit losses includes specific allowances related to loans which have been judged to be impaired under current accounting standards (primarily commercial loans). A loan is impaired when, based on current information, it is probable that the Company will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan's initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 LOANS (Continued)
An analysis of impaired loans follows:
An analysis of the allowance for credit losses for the three years ended December 31, follows:
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
Depreciation and amortization charged to operating expense totaled $726,078 in 2001, $820,398 in 2000, and $834,282 in 1999.
NOTE 8 Interest-Bearing Deposits
Aggregate annual maturities of certificate and IRA accounts at December 31, 2001 are as follows:
Deposits from Company directors, executive officers, and related firms in which they are principal owners totaled $3,655,862 and $1,892,592 at December 31, 2001 and 2000, respectively.
Interest-bearing deposits include $35,231,411 and $37,465,501 of certificates of deposit in denominations greater than $100,000 at December 31, 2001 and 2000, respectively.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 SHORT-TERM BORROWINGS
Short-term borrowings at December 31, consist of the following:
The Company pledges U.S. Treasury and agency securities available for sale as collateral for repurchase agreements. The fair value of pledged securities, including accrued interest receivable, totaled $25,612,921 and $31,264,418 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the Company maintained repurchase agreements aggregating $10,700,002 with two entities. The repurchase agreements are payable on demand.
The following information relates to federal funds purchased, securities sold under repurchase agreements, and FHLB open line of credit, for the years ended December 31:
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10
LONG-TERM BORROWINGS
Long-term borrowings at December 31, consist of the following:
The FHLB advances are secured by a blanket lien consisting principally of one- to four-family real estate loans totaling approximately $50,000,000 and $27,000,000 at December 31, 2001 and 2000, respectively.
As a member of the FHLB System, the Company has available a line of credit totaling $32,924,000 at December 31, 2001. At December 31, 2001, the Company's available and unused portion of this line of credit totaled approximately $2,924,000.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 INCOME TAXES
The components of the income tax provision are as follows:
A summary of the source of differences between income taxes at the federal statutory rate and the provision for income taxes for the years ended December 31, follows:
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 INCOME TAXES (Continued)
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The major components of the net deferred taxes are as follows:
Both the Company and subsidiary Bank pay state income taxes on their individual net earnings. At December 31, 2001, tax net operating losses at the parent company of approximately $650,000 existed to offset future state taxable income. These net operating losses will begin to expire in 2007. The valuation allowance has been recognized to adjust deferred tax assets to the amount of tax net operating losses expected to be realized. If realized, the tax benefit for this item will reduce current tax expense for that period.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 RETIREMENT PLANS
The Company has established a noncontributory defined contribution money purchase pension plan. Company contributions to this plan, as determined by the Board of Directors, totaled $165,818, $143,426, and $137,158 during 2001, 2000, and 1999, respectively. Under the terms of the plan, the Company will contribute annually to the plan based on a percentage of annual salaries and wages.
Contributions to the Company's 401(k) profit-sharing plan are based on achieving desired Company profitability and the Board of Directors' authorization. The Company matches 100% of participant contributions to the plan up to 5% of pay deferred in addition to the discretionary profit-sharing contribution. For the years ended December 31, 2001, 2000, and 1999, the amount of the plan expense was $232,644, $137,850, and $125,048, respectively.
NOTE 13 STOCK OPTION PLANS
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan adopted during 2000, the Company is authorized to issue up to 50,000 shares of common stock to its full- time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose each year to have up to 5% of their annual gross earnings withheld to purchase the Company's common stock. Options purchased by employees under the plan are exercised annually. The purchase price of the stock is 95% of the lower of its beginning-of-year or end-of-year market price. Approximately 20% of eligible employees participated in the plan during 2001. Options issued and exercised under this plan totaled 441 and 213 during 2001 and 2000, respectively. As of December 31, 2001, 49,346 shares of common stock remain reserved for future grants to employees under the Employee Stock Purchase Plan approved by the shareholders.
INCENTIVE STOCK OPTION PLAN
Under the terms of an incentive stock option plan adopted during 2000, shares of unissued common stock are reserved for options to officers and key employees of the Company at prices not less than the fair market value of the shares at the date of the grant. Options may be exercised no earlier than six months after the start date. These options expire ten years after the grant date.
Under the terms of a previous stock option plan terminated during 1999, some granted options may be exercised only between the fourth and fifth anniversaries of the date of the grant. These options expire five years after the grant date.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 STOCK OPTION PLANS (Continued)
At December 31, 2001, 5,351 options outstanding were eligible to be exercised. The following table summarizes information regarding stock options exercisable at December 31, 2001:
For the years ended December 31, 1999, 2000, and 2001, activity in stock options outstanding was as follows:
As of December 31, 2001, 256,214 shares of common stock remain reserved for future grants to officers and key employees under the incentive stock option plan approved by the shareholders.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 STOCK OPTION PLANS (Continued)
The Company follows the provisions of APB No. 25, "Accounting for Stock Issued to Employees," and uses the "intrinsic value method" of recording stock-based compensation cost. Because stock options are granted with an exercise price equal to fair value at the date or grant, no compensation expense is recorded. The Employee Stock Purchase Plan is considered a noncompensatory stock purchase plan. Therefore, no compensation expense is recorded upon issuance of the discounted shares. However, had compensation cost for the Company's stock- based plans been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," based on the fair value of the stock options, net income would have decreased $6,024, $4,455, and $6,954 in 2001, 2000, and 1999, respectively. Earnings per share, assuming dilution, would have been $2.25 in 2001, $1.84 in 2000, and $1.83 in 1999.
NOTE 14 CAPITAL REQUIREMENTS
The Company and subsidiary Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well- capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 CAPITAL REQUIREMENTS (Continued)
The Company and subsidiary Bank's actual capital amounts and ratios are also presented in the table.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 RESTRICTIONS ON RETAINED EARNINGS
The Bank is restricted by banking regulations from making dividend distributions above prescribed amounts and limited in making loans and advances to the Company. At December 31, 2001, the retained earnings of the Bank available for distribution as dividends without regulatory approval was approximately $10,364,637.
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments at December 31, 2001 and 2000 are as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
CREDIT RISK (CONTINUED)
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The commitments are structured to allow for collateralization on all standby letters of credit in the same manner and terms as exist on loans of similar risk.
Credit card commitments are commitments on credit cards issued by the Company and serviced by Elan Financial Services. These commitments are unsecured.
COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.
CONCENTRATION OF CREDIT RISK
The Company grants residential, commercial, agricultural, and consumer loans predominantly in central and northern Wisconsin. There were no significant concentrations of credit to any one debtor or industry group. It is felt that the diversity of the local economy will prevent significant losses in the event of an economic downturn.
NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS
Current accounting standards require that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the balance sheets for cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold approximate the fair value of these assets.
SECURITIES: Fair values are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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. The carrying amount of accrued interest approximates its fair value.
DEPOSIT LIABILITIES: The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate reflects the credit quality and operating expense factors of the Company.
SHORT-TERM BORROWINGS: The carrying amount reported in the consolidated balance sheets for short-term borrowings approximates the liability's fair value.
LONG-TERM BORROWINGS: The fair values of the Company's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: The fair value of commitments would be 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.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table presents information for financial instruments:
LIMITATIONS: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, goodwill and intangibles, and other assets and other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains or losses can have a significant effect on fair value estimates and have not been considered in the estimates.
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
MID-WISCONSIN FINANCIAL SERVICES, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by this reference to the disclosure beginning with the sentence immediately preceding the table on page 4 of registrant's 2002 Proxy Statement dated March 22, 2002 (the "2002 Proxy Statement") under the caption Proposal No. 1 "Election of Directors" and continuing through the disclosure ending at the subcaption "Committees and Meetings, page 5. Information relating to executive officers is found in Part I, page 5 of this form 10-K. Information required under Rule 405 of Regulation S-K is incorporated in this Form 10-K by reference to page 7 of the 2002 Proxy Statement under the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive and director compensation is incorporated in this Form 10-K by this reference to the disclosure in the registrant's 2002 Proxy Statement under (1) the subcaption "Executive Officer Compensation," page 8, through the disclosure ending at the caption "Committees' Report on Executive Compensation Policies", page 9, (2) the disclosure under the subcaption "Committee Interlocks and Insider Participation", page 11, and (3) the disclosure under the subcaption "Director Compensation", page 6.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners is incorporated in this Form 10-K by this reference to the disclosure in the registrant's 2002 Proxy Statement under the caption "Beneficial Ownership of Common Stock," page 7, through the table ending at the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is incorporated in this Form 10-K by this reference to the registrant's 2002 Proxy Statement under the caption "Certain Relationships and Related Transactions," page 12.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Description Page
Mid-Wisconsin Financial Services, Inc. Consolidated Financial Statements
Accountants' Report 25
Consolidated Balance Sheets 26
Consolidated Statements of Income 27
Consolidated Statements of Changes in Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 31
(b) Reports on Form 8-K
None
(c) Exhibits Required by Item 601 of Regulation S-K:
The following exhibits required by Item 601 of Regulation S-K are filed as part of this annual report on Form 10-K:
4.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000)
4.2 Bylaws, as amended September 20, 1995 (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000)
10.1* Mid-Wisconsin Financial Services, Inc. 1991 Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000)
10.2* Mid-Wisconsin Financial Services, Inc. Directors' Deferred Compensation Plan as last amended July 19, 2000 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000)
10.3* Director Retirement Benefit Policy (incorporated by reference to Exhibit 10(e) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999)
10.4* 1999 TeamBank Bonus Plan (incorporated by reference to Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999)
10.5 Mid-Wisconsin Financial Services, Inc. Employee Stock Purchase Plan (incorporated by reference to exhibit 10.7 to the Registrant's Quarterly Report on form 10-Q for the quarterly period ended June 30, 2000)
10.6* Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan (incorporated by reference to exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
23.1 Consent of Wipfli Ullrich Bertelson LLP
*Denotes executive compensation plans and arrangements
The exhibits listed above are available upon request in writing to William A. Weiland, Secretary, Mid-Wisconsin Financial Services, Inc., 132 West State Street, Medford, Wisconsin 54451.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1994, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 22, 2002.
MID-WISCONSIN FINANCIAL SERVICES, INC.
James F. Melvin James F. Melvin, Chairman of the Board
William A. Weiland William A. Weiland, Secretary and Treasurer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant on March 20, 2002, and in the capacities indicated.
Fred J. Schroeder Gene C. Knoll Fred J. Schroeder, Vice President Gene C. Knoll, President and Chief of the Board, and a Director Executive Officer (Principal Executive Officer and a Director)
James N. Dougherty Norman A. Hatlestad James N. Dougherty, DVM, Director Norman A. Hatlestad, Director
Kim A. Gowey James P. Hager Kim A. Gowey, DDS, Chairman of James P. Hager, Director the Board of Mid-Wisconsin Bank and a Director
Kurt D. Mertens Kathryn M. Hemer Kurt D. Mertens, Director Kathryn M. Hemer, Director
Robert J. Schoofs Brian B. Hallgren Robert J. Schoofs, Director Brian B. Hallgren, Director
Rhonda R. Kelley Rhonda R. Kelley, Controller (Principal Accounting Officer)
EXHIBIT INDEX to FORM 10-K of MID-WISCONSIN FINANCIAL SERVICES, INC. for the period ended December 31, 2001 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. 232.102(d))
23.1 Consent of Wipfli Ullrich Bertelson LLP
Exhibits required by Item 601 of Regulation S-K which have been previously filed and are incorporated by reference are set forth in Part IV, Item 14 of the Form 10-K to which this Exhibit Index relates.