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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1999
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
132 West State Street
Medford, Wisconsin 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 748-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
(Title of Class)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 3, 2000 the aggregate market value of the common shares held by
non-affiliates was approximately $45,912,735.
The number of common shares outstanding at March 3, 2000 was 1,824,718.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 25, 2000 (to the extent specified herein): Part III
FORM 10-K
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business 3
2. Properties 8
3. Legal Proceeding 8
4. Submission of matters to a vote of security holders 8
PART II
5. Market for registrant's common equity and related
stockholder matters 9
6. Selected Financial Data 11
7. Management's discussion and analysis of financial condition
and results of operations 12
7A. Quantitative and Qualitative Disclosures About Market Risk 30
8. Financial statements and supplementary data 31
9. Changes in and disagreements with accountants on
accounting and financial disclosure 63
PART III
10. Directors and executive officers of the registrant 64
11. Executive compensation 64
12. Security ownership of certain beneficial owners and
management 64
13. Certain relationships and related transactions 64
PART IV
14. Exhibits, financial statements schedules, and reports on
Form 8-K 65
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, 1999.
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 also administers
pension, profit sharing and other employee benefit plans, and personal trusts
and estates.
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 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 at 134 South Eighth Street,
Medford, Wisconsin 54451; 101 South First Street, Colby, Wisconsin 54421; 500
West Street, Neillsville, Wisconsin 54456; 2170 Lincoln Street, Rhinelander,
Wisconsin 54501; and 864 North Lake Avenue, Phillips, Wisconsin 54555. These
branches provide commercial and consumer banking services for customers located
in the surrounding market areas.
The Bank is constantly looking for new technology to serve the customers'
needs. Automated Teller Machines (ATMs), which provide 24-hour banking services
are installed in many locations in the service area. A call center was
established in February 1999 to provide financial services to customers over
the phone. The call center is currently handling general customer service
questions, account inquiries, fund transferring, stop payments, and opening
deposit accounts. In March 2000 the Bank rolled out online banking to its
customers. Customers will be able to check balances and activity in deposit and
loan accounts, transfer funds, view check images, and pay bills electronically
using the bill payer service. The Bank is the first bank of its size in central
Wisconsin to implement a call center and online banking.
BANK MARKET AREA AND COMPETITION
The Bank has active competition for its services in the area in which it
presently operates. It competes in its market area for commercial and
individual deposits and loans with more than thirty other commercial banks and
savings and loan associations, as well as with national non-bank financial
institutions. Such competition encompasses efforts to obtain new deposits,
efforts to attract assets for trust management, types of services offered, loan
rates, and interest rates paid on time deposits, as well as other aspects of
banking. The Bank maintains correspondent banking relationships with larger
financial institutions located in Madison, and Milwaukee, Wisconsin;
Minneapolis, Minnesota; and Chicago, Illinois. In addition, the Bank encounters
substantial competition from other financial institutions engaged in the
business of making loans or accepting savings deposits, such as savings and
loan associations, small loan companies, credit unions, certain governmental
agencies, and insurance companies.
The Bank also offers certain insurance and securities transaction services and
competes with numerous financial services and insurance agents. The passage of
the Gramm-Leach-Bliley Act of 1999 will likely result in increased competition
as financial services companies will now be permitted to conduct a broad range
of insurance and securities business.
EMPLOYEES
All officers of the Company except the Chairman, Vice Chairman, and the Vice
President are full-time employees of the Bank. As of December 31, 1999, the
total employees of the Company and its subsidiaries were approximately 122 on a
full-time basis and 37 on a part-time basis. Officers and certain supervisors
are salaried, and all other full and part-time employees are paid on an hourly
basis. Employee relations are considered to be good and none of the employees
are covered by a collective bargaining agreement.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 1, 2000, their ages,
offices and principal occupation during the last five years are set forth
below.
Ronald D. Isaacson, 63
Chairman of the Board of the Company (1991 to 1993 and 2000); Vice
President of the Company (October 1996-May 1999); previously President
and CEO (1993 to 1996) of the Company and Chairman of the Board of the
Bank (1994 to May 1998).
James F. Melvin, 50
Vice Chairman of the Board of the Company (since August 1996); also
Chairman of the Board of the Bank (since May 1998) and President of the
Melvin Companies.
Fred J. Schroeder, 62
Vice President of the Company (since May 1999) and Mayor of the City of
Medford.
Gene C. Knoll, 46
President of the Company (since October 1996) and President, Chief
Executive Officer and a director of the Bank; previously, Vice President
of the Company (1994 to 1996), President and CEO of the Company's Bank of
Colby (1988 to 1994).
William A. Weiland, 45
Secretary and Treasurer of the Company (since May 1998) also Executive
Vice President of the Bank.
Rhonda R. Kelley, 26
Controller of the Company (since September 1998).
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 control 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.
Information concerning the Company's compliance with applicable capital
requirements is set forth under the subheading "Capital Adequacy" in this Item
7 and in 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 and may be made in the future. The Gramm-Leach-Bliley Act of
1999 will eliminate many of the legal barriers to affiliations among banks and
securities firms, insurance companies and other financial service companies.
The provisions of the Act will become effective at various times over the next
year. The changes in the rules governing the affiliation of banks and
securities firms and insurance companies became effective March 11, 2000. The
overall effect of the new law is expected to give consumers greater choice to
do "one-stop" shopping for banking, and insurance services and securities
transactions. The effect of the new law will likely be an increase in
competition from larger financial institutions. It is possible 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 broad power to expand and contract the supply of money
and credit and to regulate the rates that its member banks can pay on time and
savings deposits. These broad powers are used to influence inflation and the
growth of the economy and directly affect the growth of bank loans, investments
and deposits, and may also affect the interest rates charged by banks on loans
paid by banks in respect of deposits. Governmental and Board monetary 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; (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. 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 eleven branch
facilities. All of the branches are free-standing buildings that provide
adequate customer parking and, with two exceptions, all have drive-in
facilities.
The Company considers its properties to be adequate for its needs.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter
of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no active established public trading market in the Company common
stock, although two regional broker-dealers act as market makers for the
Company common stock. Bid and ask quotations are published periodically in the
MILWAUKEE JOURNAL SENTINEL and prices are quoted on the OTC Electronic Bulletin
Board under the symbol "MWFS". Transactions in the Company common stock are
limited and sporadic.
On December 14, 1998, the Company made a self-tender offer to purchase up to
93,045 shares of its issued and outstanding common stock for $27.50 per share.
The tender-offer expired on January 15, 1999. The Company accepted 39,304
shares of its common stock for repurchase in connection with its tender offer.
The shares purchased represented approximately 2.11% of the shares outstanding
immediately prior to the tender offer. Following the purchase of accepted
shares, 1,821,589 shares of the Company's common stock were outstanding.
HOLDERS
As of March 15, 2000, there were approximately 816 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, payment that is subject to regulatory laws and regulations. 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.
As of December 31, 1999, the Bank could have paid approximately $9,428,000 of
additional dividends to the Company without prior regulatory approval. The
payment of dividends is subject to the statutes governing state-chartered
banks.
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:
1999 1998
Prices:
Quarter High Low Dividends(1) High Low Dividends(2)
1st $27.38 $25.50 .17 $27.50 $27.25 .15
2nd 27.38 27.38 .60 28.00 27.50 .15
3rd 27.38 27.38 .20 30.00 27.50 .17
4th 27.50 27.50 .20 27.50 23.00 .34
(1) The $.60 per share dividend declared in the second quarter of 1999 includes
a special dividend of $.40 per share.
(2) The $.34 per share dividend declared in the fourth quarter of 1998 includes
a special dividend of $.17 per share.
Prices represent the bid price from market makers in the common stock published
periodically in the MILWAUKEE JOURNAL SENTINEL. Market makers in the company's
common stock are Robert W. Baird & Co, Incorporated and Everen Clearing Corp.
The quotations reflect prices, without retail mark-up, markdown or commissions,
and may not necessarily represent actual transactions. There is no active
established public trading market.
SALES OF UNREGISTERED SECURITIES
During the three-fiscal year period ended December 31, 1999, the Company sold
common stock in connection with the exercise by employees of options granted
under the 1991 Stock Option Plan. These shares were not registered under the
Securities Act of 1933, but were offered in reliance on the exemptions afforded
under sections 4(2) and 3(a)(11) thereof as all optionees were officers of the
Bank and all are residents of the State of Wisconsin. All proceeds from the
sale of such shares were used for general corporate purposes. Sales of shares
during each fiscal year were as follows:
Aggregate
Aggregate Consideration
Year Ended Shares Sold Received
1999 3,539 $ 65,959
1998 4,678 $ 72,068
1997 7,981 $101,060
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
Years Ended December 31
1999 1998 1997 1996 1995
FINANCIAL HIGHLIGHTS: (Dollars in Thousands, Except Per Share Amounts)
Earnings and Dividends:
Net interest income $11,395 $11,038 $10,800 $10,757 $10,182
Provision for credit losses 180 420 140 400 100
Other non-interest income 2,107 2,085 2,258 2,033 1,397
Other non-interest expense 9,974 9,455 9,411 9,114 8,598
Net income 3,348 3,248 3,507 3,276 2,881
Per common share:
Basic and diluted earnings 1.83 1.74 1.88 1.76 1.55
Dividends declared 1.17 0.81 0.75 0.67 0.47
Book value at year end 15.62 15.89 14.95 13.79 12.79
Average common shares (000's) 1,826 1,862 1,868 1,865 1,861
Dividend payout ratio 63.93% 46.55% 39.89% 38.07% 30.32%
Shareholders of record at year end 816 830 790 750 710
Balance Sheet Summary:
At year end:
Loans net of unearned income 217,546 189,952 $185,015 $174,842 $172,678
Assets 307,684 280,479 263,675 251,501 244,606
Deposits 230,170 222,322 211,149 202,412 192,144
Shareholders equity 28,499 29,570 27,867 25,725 23,750
Average balances:
Loans net of unearned income 200,497 190,014 178,968 171,381 166,958
Assets 288,287 272,084 254,352 244,772 236,659
Deposits 222,755 214,246 198,935 192,220 188,586
Shareholders equity 28,396 28,558 26,633 24,544 21,920
Performance Ratios:
Return on average assets 1.16% 1.19% 1.38% 1.34% 1.22%
Return on average common equity 11.79% 11.37% 13.17% 13.35% 13.14%
Equity to assets 9.26% 10.54% 10.57% 10.23% 9.71%
Total risk-based capital 12.93% 15.11% 14.94% 15.66% 13.92%
Net loan charge-offs as a percentage
of average loans 0.03% 0.13% 0.10% 0.12% 0.07%
Nonperforming assets as a percentage
of loans and other real estate 0.63% 0.75% 0.70% 0.58% 0.67%
Net interest margin 4.47% 4.55% 4.56% 4.78% 4.67%
Efficiency ratio 61.12% 58.37% 56.40% 56.08% 59.92%
Fee revenue as a percentage of
average assets 0.46% 0.45% 0.44% 0.43% 0.44%
Stock Price Information:
High $27.50 $27.50 $27.25 $24.00 $21.00
Low 25.50 23.00 24.00 21.00 15.00
Market Price at year end (1) 27.50 26.00 27.25 24.00 19.50
(1) Market value at year-end represents the bid price. The quotations reflect
prices, without retail mark-up, markdown, or commissions, and may not
necessarily represent actual transactions.
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 operation at
and for the three-year period ended December 31, 1999. This discussion should
be read in conjunction with the consolidated financial statements, notes,
tables, and the selected financial data presented elsewhere in this report.
The Company is not aware of any current recommendations by any regulatory
authority, which, if they were implemented, would have a material effect on
liquidity, capital resources, or operations.
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, 1999.
RESULTS OF OPERATIONS
The Company's consolidated net income for 1999 increased 3.1% to $3,348,117
over $3,248,084 earned in 1998. Return on average common stockholders' equity
and return on average assets were 11.79% and 1.16% for 1999 compared to 11.37%
and 1.19% for 1998. Net income per share was $1.83, a 5.2% increase over 1998
net income per share of $1.74. Cash dividends declared in 1999 were $1.17,
compared to $.81 per share in 1998. The dividend payout ratio was 63.93%
compared to 46.55% in 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). FASB 133 establishes new accounting and
reporting requirements for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The standard
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities in the statement of condition. Under certain conditions,
a derivative may be specifically designated as a hedge. Accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and resulting designation. Adoption of the standard is required for
the Company's December 31, 2000 financial statements with early adoption
allowed as of the beginning of any quarter after June 30, 1998. Adoption is not
expected to result in a material financial impact.
For other changes in accounting principals see footnote 2 on the Notes to the
Financial Statements.
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.
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.
Table 2: Interest Income and Expense Volume and Rate Change
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
(In Thousands of Dollars) Due to (1) Due to (1)
Volume Rate Net Volume Rate Net
Interest income:
Loans (2) $444 $(403) $41 $997 $(444) $553
Taxable investment securities 94 (77) 17 (113) (37) (150)
Tax-exempt invest (2) 236 (38) 198 198 (25) 173
Other interest income (79) (17) (96) 105 (3) 102
Total earning assets (2) 695 (535) 160 1,188 (510) 678
Interest expense:
Savings deposits $104 $(304) $(200) $271 $(341) $(70)
Time deposits 48 (492) (444) 344 (42) 302
Short Term Borrowing 200 (30) 170 2 (57) (55)
Long Term Borrowing 209 3 212 28 (8) 20
Total interest-bearing liabilities 562 (824) (262) 645 (448) 197
Net interest income $133 $289 $422 $542 $(61) $481
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) The yield on tax-exempt loans and investment securities has been adjusted
to its fully taxable equivalent using a 34% tax rate.
Volumes and changes in the mix offset most of the impact from the interest rate
environment and competitive pricing changes. Earning asset volume increased $14
million, and interest-bearing liabilities increased $12 million from 1998.
During 1999 the mix of assets and liabilities shifted towards lower yielding
loans and lower rate deposits.
Table 3: Yield on Earning Assets
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
Yield Change Yield Change Yield Change
Yield on earning assets 8.18% -0.39% 8.57% -0.17% 8.74% -0.05%
Effective rate on all liabilities
as a % of earning assets 3.71% -0.31% 4.02% -0.16% 4.18% 0.17%
Net yield on earning assets 4.47% -0.08% 4.55% -0.01% 4.56% -0.22%
Loans are the largest component of earning assets. On average, loans grew $10
million to $200 million for 1999, and represented 75.5% of earning assets. A
change in the total yield on the loan portfolio generally has the largest
impact on net interest income. The yield on total loans decreased 47 basis
points to 8.79% in 1999. The yield was strongly impacted by the loans tied to
the prime lending rate repricing immediately with a change in the rate, and
competitive pricing on loans.
Deposits are the largest component of interest bearing liabilities. Deposit
growth has not kept pace with asset growth, in part because of a low rate of
personal savings by households and competition for depositor funds from higher-
yielding investments. On average, total deposits grew $4 million for 1999, and
represented 85.1% of interest bearing liabilities, compared to 88% for 1998. As
a result, the Bank had greater dependence on wholesale funds to fund the asset
growth. On average, borrowed funds increased 31% to $34 million in 1999.
Table 4: Average Balances and Interest Rates (2)
Average 1999 Yield Average 1998 Yield
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
Assets
Earnings Assets
Interest earning assets:
Loans (1) (3) $200,497 $17,631 8.79% $190,014 $17,590 9.26%
Taxable Investments 48,039 2,926 6.09% 46,218 2,909 6.29%
Non-taxable investments 14,465 1,033 7.14% 11,130 835 7.50%
Other Interest Income 2,562 123 4.80% 4,186 219 5.23%
Total earning assets $265,563 21,713 8.18% $251,548 21,553 8.57%
Non-interest earning assets:
Cash & cash equivalents 12,816 10,114
Other assets 12,152 12,558
Allow. for credit losses (2,244) (2,136)
Total assets $288,287 $272,084
Liabilities & Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand $19,813 $294 1.48% $18,410 $341 1.85%
Savings deposits 58,826 1,766 3.00% 56,967 1,919 3.37%
Time deposits 113,776 6,106 5.37% 112,948 6,550 5.80%
Short-term borrowings 23,485 1,091 4.65% 19,149 921 4.81%
Long-term borrowings 10,136 586 5.78% 6,521 374 5.74%
Total interest bearing
liabilities $226,036 $9,843 4.35% $213,995 $10,105 4.72%
Demand deposits 30,341 25,920
Other liabilities 3,514 3,611
Stockholders' equity 28,396 28,558
Total liabilities and
stockholders' equity $288,287 $272,084
Net interest income and
Rate Spread $11,870 3.83% $11,448 3.85%
Net yield on earning
Assets 4.47% 4.55%
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using
a tax rate of 34%.
(3) Interest income includes loan fees: 1999 - $338,050; 1998 - $331,754; 1997 - $409,928.
The net interest margin was 4.47% for 1999, an 8 basis point decline from 4.55%
in 1998. The interest spread decreased 2 basis points to 3.83% for 1999. The
yield on earning assets decreased 39 basis points to 8.18%, while the rate on
interest bearing liabilities decreased 37 basis points to 4.35% for 1999. The
sensitivity of the asset mix to the yield curve was larger than the benefit
from re-pricing the liabilities.
As the largest component of operating income, improvements in the growth of net
interest income are important to the Company's earnings performance. The
Company uses modeling and analysis techniques to its asset-liability structure
to manage net interest income and the related interest rate risk position. The
Company seeks to meet the needs of its customers, yet provide for stability in
net interest income in the event of significant interest rate changes.
Table 5: Mix of Average Interest-Earning Assets and Average Interest-Bearing
Liabilities
1999 1998 1997
Loans 75.50% 75.54% 75.42%
Taxable investments 18.09% 18.37% 20.23%
Non-taxable 5.45% 4.42% 3.43%
Other 0.96% 1.67% 0.92%
100.00% 100.00% 100.00%
Interest bearing demand 8.77% 8.60% 8.63%
Savings deposits 26.03% 26.62% 25.87%
Time deposits 50.34% 52.78% 53.04%
Short Term Borrowing 10.39% 8.95% 9.47%
Long Term Borrowing 4.47% 3.05% 2.99%
100.00% 100.00% 100.00%
NON-INTEREST INCOME
Total 1999 operating non-interest income, excluding gains from security
transactions, pension settlement curtailment and sale of mortgage servicing
rights, increased slightly, $23,407 or 1.1%, over 1998, compared to an increase
of $310,992, or 17.6% in 1998 over 1997.
Table 6: Non-interest income
Years Ended December 31,
1999 1998 1997
Service Fees $706,026 $696,768 $631,553
Trust Service Fees 569,312 487,795 448,174
Net Realized Gain on sale of securities
available for sale - 1,900 14,632
Gain on pension settlement/curtailment - - 258,294
Investment product commissions 241,466 271,903 247,183
Gain on sale of mortgage servicing rights - - 212,881
Other Operating Income 589,919 626,850 445,414
Total $2,106,723 $2,085,216 $2,258,131
Fiduciary fees increased to $569,312 in 1999, compared to $487,795 in 1998 and
$448,174 in 1997. This increase reflects the continued growth in trust business
volume and growth in the assets managed by the Bank's Trust Department. The
market value of assets under management totaled $134,956,486 at December 31,
1999, from $123,583,201 at December 31, 1998, and $111,077,268 at December 31,
1997.
NON-INTEREST EXPENSE
Total non-interest expense increased $641,468 or 8.1% in 1999. Personnel
expense accounts for 42.5% of this increase, up $272,721 over 1998. Occupancy
expenses increased $166,172 over 1998.
Table 7: Non-interest Expense
1999 1998 1997
Salaries and employee Benefits $4,510,574 $4,237,853 $4,215,070
Occupancy 1,328,126 1,161,954 1,123,692
Data processing & information systems 433,885 348,828 355,764
Goodwill & core deposit Intangibles amortization 323,193 307,704 178,868
Other operating expense 1,946,089 1,844,060 1,682,427
Total $8,541,867 $7,900,399 $7,555,821
Salaries and employee benefits increased $272,721 or 6.4% compared to 1998.
This category continues to be the largest component of non-interest expense,
representing 52.8% of operating expenses in 1999 and 53.6% and 55.8% in 1998
and 1997, respectively. The increase in 1999 was attributable to base merit pay
increases, commission or incentive pay, document imaging staff salary, new
positions added, and vacant positions filled.
Increased depreciation, maintenance, utilities, and goodwill and core deposit
intangible amortization directly reflect the investment made in new technology
in 1999. Included in non-interest expense categories are charges related to the
Bank's activities to prepare its systems for the Year 2000. During the current
year, these costs were not material and represent a reallocation of internal
resources.
PROVISION FOR CREDIT LOSSES
The adequacy of the reserve for credit losses is assessed based upon credit
quality, existing and prospective 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 $180,000 in 1999; compared to $420,000 in 1998 and $140,000
in 1997.
The allowance for credit losses as a percentage of gross loans outstanding was
1.05% at December 31, 1999; 1.14% at December 31, 1998; and 1.08% at December
31, 1997. Charge-offs as a percentage of average loans outstanding were .03 %
in 1999; .13% in 1998; and .10% in 1997. Charge-offs have not been concentrated
in any industry or business segment as reflected in Table 8.
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, 1999, the allowance for credit
losses grew by 5.9% to $2,285,675, compared to $2,159,145 last year.
Table 8: Loan Loss Experience
Years Ended December 31,
(Dollars in Thousands)
1999 1998 1997 1996 1995
Allowance for credit losses at beginning
of period $2,159 $1,990 $2,031 $1,836 $1,859
Loans Charged off:
Commercial, financial and
agricultural 31 211 111 190 123
Real Estate 11 46 45 17 32
Installment and other consumer loans
to individuals 86 72 89 105 35
Total charge offs 128 329 245 312 190
Recoveries on loans previously charged
off:
Commercial, financial and
agricultural 25 60 27 80 36
Real estate 30 0 0 2 1
Installment and other consumer
loans to individuals 20 18 37 25 30
Total recoveries 75 78 64 107 67
Net loans charged-off 53 251 181 205 123
Additions charged to operations 180 420 140 400 100
Allowance for credit losses at end of
Period $2,286 $2,159 $1,990 $2,031 $1,836
Ratio of allowance for credit losses
to total loans at end of period 1.05% 1.14% 1.08% 1.16% 1.07%
Ratio of net charge-offs during the
period to average loans outstanding 0.03% 0.13% 0.10% 0.12% 0.07%
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, current economic conditions, and collateral.
In the opinion of management, the allowance for credit losses is adequate as of
December 31, 1999. While management uses available information to recognize
losses on loans, future adjustments may be necessary based on changes in
economic conditions.
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 9. Management believes this allocation is appropriate
in light of current and expected economic conditions, the geographic and
industry mix of the loan portfolio and other risk related factors. Commercial
loans secured by real estate are included in this table under the category of
real estate and the allowance for credit losses is allocated to cover
expectations of loss.
Table 9: Allocation of the Allowance for Credit Losses
1999 1998 1997 1996 1995
as a % as a % as a % as a % as a %
(Dollars in Thousands) of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial, financial,
agricultural $858 35.44% $865 35.88% $763 32.64% $814 32.03% $644 33.54%
Real Estate 1,091 58.61% 967 58.13% 842 60.19% 850 60.92% 958 59.53%
Installment and other
loans to individuals 181 5.02% 193 5.74% 191 6.79% 162 6.57% 181 6.80%
Impaired Loans 156 0.93% 134 0.25% 194 0.38% 132 0.48% 51 0.13%
Unallocated 0 n/a 0 n/a 0 n/a 73 n/a 2 n/a
Total $2,286 100.00% $2,159 100.00% $1,990 100.00% $2,031 100.00% $1,836 100.00%
Factors that are critical to managing overall credit quality are sound loan
underwriting and administration, and monitoring existing loans. The Company's
process for monitoring loan quality includes weekly analysis of delinquencies,
non-performing assets and potential problem loans. The Company's policy is to
place loans on a non-accrual status when they become contractually past due 90
days or more as to interest or principal payments. All interest accrued
(including applicable impaired loans) but not collected for loans that are
placed on non-accrual or charged off is reversed to interest income. The
interest on these loans is accounted for on the cash basis until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due have been collected and there is
reasonable assurance that repayment will continue within a reasonable time
frame.
A loan is impaired when, based on current information, it is probable that the
Company will not be able to collect all amounts due in accordance with the
contractual terms of the loan agreement. Impairment is based on discounted cash
flows of expected future payments using the loans effective interest rate or
the fair value of the collateral if the loan is collateral dependent.
Table 10: Risk-Element Loans
Risk-element loans Dec. 31 of total Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total
(Dollars in Thousands) 1999 loans 1998 loans 1997 loans 1996 loans 1995 loans
Non-accrual, past due,
and restructured loans $1,854 0.85% $2,164 1.14% $1,238 0.67% $1,072 0.61% $1,152 0.67%
Potential problem loans 2,018 0.93% 476 0.25% 161 0.09% 448 0.26% 72 0.04%
Foreign outstandings 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Total risk-element
loans $3,872 1.78% $2,640 1.39% $1,399 0.76% $1,520 0.87% $1,224 0.71%
Included above in potential problem loans is $865,947 of impaired loans (.40%)
in non-accrual status at December 31, 1999. In addition, there are $1,151,755
(.05%) of impaired loans which management has considered in the allowance for
credit losses. The average balance of impaired loans during 1999 was
$1,842,855.
Total risk-element assets (loans and other real estate) increased during 1999.
As a percentage of total outstanding loans, the non-performing assets increased
.39% to 1.78% in 1999. The percentage of risk-element assets had increased .63%
in 1998 and decreased .11% in 1997. There are no foreign loans outstanding and
no concentrations of credit requiring disclosure.
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. Loans past due 90 days or more but still accruing interest
are classified as such where the underlying loans are both well secured and in
the process of collection. Also included in nonperforming loans are
restructured loans. Restructured loans involve granting a concession to the
borrower modifying the terms of the loan.
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
1999 if all loans had been current throughout the year in accordance with their
original terms was $162,954 in comparison to $143,502 actually collected.
Table 11: Nonperforming Loans and Other Real Estate Owned
(Dollars in Thousands) 1999 1998 1997 1996 1995
Non-accrual loans $1,371 $1,416 $1,087 $847 $1,132
Loans past due 90 days 64 38 35 36 3
or more
Restructured loans 419 710 116 189 17
Total Non-performing
Loans $1,854 $2,164 $1,238 $1,072 $1,152
Other real estate owned $70 $56 $50 $135 $5
Total non-performing
assets $1,924 $2,220 $1,288 $1,207 $1,157
The reserve for credit losses continues to provide non-performing loan
coverage, at 119% at December 31, 1999. This compares to non-performing loan
coverage of 97% at December 31, 1998, and 155% at December 31, 1997.
INCOME TAXES
The effective tax rate was 30.0% in 1999, 32.4% in 1998, and 34.6% in 1997.
LIQUIDITY AND INTEREST SENSITIVITY
The Bank's Asset Liability Management process provides a unified approach to
management of liquidity, capital and interest rate risk, and to providing
adequate funds to support the borrowing requirements and deposit flow of its
customers. Management views liquidity as the ability to raise cash at a
reasonable cost or with a minimum of loss and as a measure of balance sheet
flexibility to react to marketplace, regulatory, and competitive changes.
Deposit growth is the primary source of liquidity. Total year-end deposits
increased $7,848,423 from 1998 to 1999. Another substantial source of the
Company's liquidity is the marketable assets maturing within one year. At
December 31, 1999, the carrying value of debt securities maturing within one
year amounted to $8,273,194; or 13.1% of the total investment securities
portfolio. At December 31, 1998, the carrying value of debt securities maturing
within one year amounted to $14,948,184 or 26.3% of the total investment
securities portfolio.
The Company attempts, when possible, to match relative maturities of assets and
liabilities, while maintaining the desired net interest margin. During the
third and fourth quarters of 1999 the Bank experienced a surge in loan growth
of $19,374,397 or 70.5% of the total 1999 loan growth. As a result the Banks
long-term debt-to-equity ratio increased to 70.2% from 19.6% at December 31,
1998.
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 12 represents the Company's earning sensitivity to
changes in interest rates at December 31, 1999.
Table 12 reflects a negative gap position in all categories one year or less;
the cumulative one-year gap ratio is negative at 52.30%. The Bank is attempting
to change this trend in the gap ratio by offering more time deposit products
maturing over one year and 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 distributes 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 limit exposure of earnings at risk. Management
considers that an acceptable range for the rate sensitivity ratio is 70-130%.
Table 12: Rate Sensitivity Gap Position
December 31, 1999
90 day 91-180 days 181-365 days 1-5 Years Beyond 5 Years Total
Loans $22,416 $17,457 $29,265 $113,621 $34,787 $217,546
Securities 2,374 2,034 5,692 33,870 19,395 $63,365
Fed Funds & Other 17 17
$24,807 $19,491 $34,957 $147,491 $54,182 $280,928
Cumulative Rate Sensitive Assets $24,807 $44,298 $79,255 $226,746 $280,928
<100 CDs & Other Time Dep 17,355 18,233 26,544 28,010 3 90,145
Money Market Plus Accounts 8,887 4,443 4,443 11,849 29,622
Money Market Savings Accounts 3,152 1,576 1,576 4,203 10,507
Regular Savings 2,064 2,064 2,064 14,446 20,637
Now Accounts 5,938 3,959 3,959 5,938 19,794
100 & Over 6,166 8,385 10,041 4,257 28,849
FF Purch, Repo, & Other Borrowed Funds 25,920 6,000 800 12,200 1,000 45,920
$69,482 $32,618 $49,427 $56,509 $37,439 $245,474
Cumulative Rate Sensitive Liabilities $69,482 $102,100 $151,526 $208,035 $245,474
Rate Sensitivity Gap $(44,675) $(13,127) $(14,470) $90,982 $16,743
Cumulative Rate Sensitivity $(44,675) $(57,802) $(72,271) $18,711 $35,454
Gap
Cumulative gap ratio 35.70% 43.39% 52.30% 108.99% 114.44%
INVESTMENT PORTFOLIO
The investment securities portfolio is intended to provide liquidity, flexible
asset/liability management and a source of stable income.
Table 13: Investment Securities Portfolio Maturities (1)
After After
(Dollars in Thousands) One But Five but
Within Weighted Within Weighted Within Weighted
December 31, 1999 One Year Yields Five Years Yields Ten Years Yields
U.S. Treas & other U.S.
Gov't agencies & corp $5,480 6.67% $23,788 6.48% $9,257 6.78%
State & political sub-
divisions (domestic) 878 5.47% 6,950 4.90% 8,219 4.72%
Other bonds, notes, and
debentures 1,916 6.27% 3,132 6.71% 1,878 7.19%
Debt Securities $8,274 6.45% $33,870 6.18% $19,354 5.95%
Equity Securities 1,826 6.36% 41 3.69%
Total Securities $10,100 6.43% $33,870 6.18% $19,395 5.94%
(1) Weighted average yields on tax-exempt securities have been calculated on a
tax equivalent basis using a tax rate of 34%.
All securities are classified as available-for-sale. There are no securities in
the investment portfolio that are in excess of ten percent of stockholders'
equity.
Securities with an approximate carrying value of $41,142,109 and $25,438,126,
at December 31, 1999 and 1998 respectively, were pledged primarily to secure
public deposits and for other purposes required by law.
Table 14: Investment Securities Distribution (1)
December 31, 1999 December 31, 1998 December 31, 1997
(Dollars in Thousands) Amount % of total Amount % of total Amount % of total
U.S. Treas & other U.S. Gov't
Agencies & Corp. $44,877 70.82% $40,741 71.58% $41,023 75.61%
State & Political subdivisions
(domestic) (1) 16,047 25.32% 14,007 24.61% 10,356 19.09%
Other securities and
Investments 2,441 3.85% 2,169 3.81% 2,877 5.30%
Total $63,365 100.00% $56,917 100.00% $54,256 100.00%
(1) Weighted average yields on tax-exempt securities have been calculated on a
tax equivalent basis using a tax rate of 34%.
During 1999, the interest rates beyond one year increased, ending the year .01%
to .59% higher than 1998 year-end. The market value of the fixed income portion
on the investment portfolio as a percentage of book value has declined due to
the increase in interest rates. At December 31, 1999 market value was 97.9% of
book value. The net unrealized loss on securities available for sale, recorded
as a separate component of stockholders' equity, was $800,525, net of deferred
income taxes of $489,690 compared to a gain of $459,432, net of deferred taxes
of $253,978 at December 31, 1998.
The Bank's investment subsidiary, Mid-Wisconsin Investment Corp., was formed in
June 1994, and currently holds approximately $67,911,255 in investments and
loans at book value. Income tax expense for 1999 was approximately $178,000
lower as a result of holding these investments and loans at the subsidiary.
Table 15: Book Value and Market Value of Investment Securities
December 31, 1999 December 31, 1998
U.S. Treasury securities and obligations
of other U.S. Govt agencies & corp $44,876,832 $40,740,790
Obligations to states & political
subdivisions 16,046,592 14,006,742
Other securities 2,441,241 2,169,057
Totals $63,364,665 $56,916,589
LOAN PORTFOLIO
Table 16 sets forth the approximate maturities of the loan portfolio, excluding
consumer, other loans, and non-accrual loans; and the sensitivity of loans to
interest changes as of December 31, 1999.
Table 16: Loan Maturity Distribution and Interest Rate Sensitivity
Maturity
(Dollars in Thousands) One Year Over one Year Over
or Less to Five Years Five Years
Commercial, financial and
commercial real estate $30,772 $60,494 $10,931
Agricultural 25,505 10,551 3,277
Real estate mortgage 8,871 30,004 19,932
Total $65,148 $101,049 $34,140
Interest Sensitivity
Amount of Loans Due After One Year With: Fixed Variable
(dollars in thousands) Rate Rate
Commercial and financial $60,682 $10,743
Agricultural 10,504 3,324
Real Estate 20,689 29,247
Total $91,875 $43,314
Total loans increased by $27,593,518, or 14.5%, to $217,545,860 at the end of
1999. Increases were experienced primarily in commercial lending, with a
$7,074,463 increase in commercial loans, $5,406,960 increase in commercial real
estate, $12,061,015 increase in residential mortgages, and $4,176,803 increase
in agricultural loans.
Table 17: Loan Composition
Dec. 31 % of Dec. 31 % of Dec. 31 % of Dec. 31 % of Dec. 31 % of
(Dollars in Thousands) 1999 total 1998 total 1997 total 1996 total 1995 total
Commercial and financial 43,360 19.93% 32,585 17.15% 26,943 14.56% 26,923 15.40% 28,075 16.38%
Construction Loans 4,137 1.90% 3,455 1.82% 1,700 0.92% 891 0.51% 1,272 0.74%
Agricultural 40,280 18.52% 36,103 19.01% 34,952 18.89% 30,869 17.66% 27,963 16.32%
Real estate 118,591 54.51% 106,530 56.08% 108,360 58.57% 104,002 59.48% 101,473 59.21%
Installment 10,931 5.02% 10,962 5.77% 12,642 6.83% 11,499 6.58% 11,819 6.90%
Lease financing 247 0.11% 317 0.17% 418 0.23% 658 0.37% 762 0.45%
Total loans $217,546 100.00% $189,952 100.00% $185,015 100.00% $174,842 100.00% $171,364 100.00%
Real estate mortgage loans totaled $118,590,913 at the end of 1999 and
$106,530,099 at the end of 1998. Loans in this classification in 1999 include
$63,399,908 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 $43,360,501 at the end of 1999, up
$10,775,314 since year-end 1998, and comprising 19.9% of the total loans
outstanding, up from 17.2% at the end of 1998. 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 $40,279,168 or 18.52% of total loans.
Real estate construction loans grew $681,956 or 19.7% to $4,136,740 at the end
of 1999 compared to $3,454,784 at the end of 1998. 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 $10,932,981, down slightly from
$10,963,260 at year-end 1998. Installment loans include short-term installment
loans, automobile loans, recreational vehicle loans, credit card loans, and
other personal loans.
DEPOSITS
Table 18 sets forth the average daily deposits and the percentage of total
deposits for the periods indicated.
Table 18: Average daily deposits
Dec. 31, % of Dec. 31, % of Dec. 31, % of
(Dollars in Thousands) 1999 Total 1998 Total 1997 Total
Non-interest bearing demand $30,341 13.62% $25,920 12.10% $22,321 11.22%
Interest-bearing demand 19,813 8.89% 18,410 8.59% 17,412 8.75%
Savings deposits 58,825 26.41% 56,968 26.59% 52,199 26.24%
Time deposits 113,776 51.08% 112,948 52.72% 107,003 53.79%
Total $222,755 100.00% $214,246 100.00% $198,935 100.00%
Average total deposits in 1999 were $223 million, an increase of 3.9% or $9
million over 1998. Average non-interest-bearing demand deposits as a percentage
of total average deposits increased to 13.6% compared to 12.1% in 1998 and
11.2% in 1997. The total average interest-bearing demand, savings, and money
market deposits increased to $79 million for 1999 from $75 million in 1998.
These deposits as a percentage of total average assets have remained stable
over the past
three years at 35.3% in 1999, 35.2% in 1998, and 35.0% in 1997.
Table 19: Maturity Distribution of Time Certificates of deposit of $100,000 or
More
(Dollars in Thousands) Dec. 31, 1999 Dec. 31, 1998
3 months or less $6,166 $7,036
Over 3 months through 6 months 8,385 3,533
Over 6 months through 12 months 10,041 7,182
Over 12 months 4,257 5,800
Total $28,849 $23,551
The Company continues to experience strong competition for deposits in its
markets. As a result, deposit products are being designed to retain core
deposit accounts, attract new customers, and create opportunities for providing
other bank services or relationships.
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under repurchase agreements
and federal funds purchased. The repurchase agreements are payable on demand.
Average total short-term borrowings were $23.5 million in 1999 compared with
$19.2 million in 1998.
Table 20: Short-term Borrowings
December 31,
1999 1998 1997
Securities sold under repurchase agreements $22,708,665 $19,688,031 $16,078,523
Federal funds purchased 3,211,000
Totals $25,919,665 $19,688,031 $16,078,523
Average amounts outstanding during year $23,486,859 $19,193,892 $19,121,688
Average interest rates on amounts
outstanding during year 4.64% 4.80% 5.11%
Maximum month-end amounts outstanding $27,017,836 $23,192,687 $28,166,356
Average interest rates on amounts
outstanding at end of year 4.92% 4.26% 4.95%
The change in short-term borrowings outstanding is principally attributable to
federal funds purchased at year-end. The Company continues to supplement the
funding of asset growth with other sources of borrowed funds.
CAPITAL ADEQUACY
Stockholders' equity at December 31, 1999, decreased to $28,498,637 or $15.62
per share compared with $29,570,84 or $15.89 per share at the end of 1998. The
primary decrease in stockholders' equity in 1999 was a function of the
repurchase of common stock and cash dividends. Included in capital at year-end
1999 is a $(800,525) equity component compared to $459,432 at December 31,
1998, related to unrealized gains(losses) on securities AFS, net of their tax
effect. Cash dividends paid in 1999 were $1.17 per share compared to $.81 per
share in 1998.
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, 1999, 1998, and 1997,
the Company's Tier 1 risk-based capital ratios, total risk-based capital ratios
and Tier 1 leverage ratios were well in excess or regulatory requirements.
Management feels the capital structure of the Company is adequate.
Table 21: Capital Ratios
(Dollars in Thousands)
1999 1998 1997
Total Assets $307,684 $280,479 $263,714
Capital 28,499 29,570 27,867
Capital Ratio 9.3% 10.5% 10.6%
Total Assets $307,684 $280,479 $263,714
Less Goodwill (2,156) (2,480) (2,767)
Tangible Assets $305,528 $277,999 $260,947
Stockholders Equity $28,499 $29,570 $27,867
Less Goodwill (2,156) (2,480) (2,767)
Tangible Capital $26,343 $27,090 $25,100
Tangible Capital Ratio 8.6% 9.7% 9.6%
Risk-based Assets $227,553 $190,547 $178,985
Tangible Equity 26,343 27,090 25,100
Plus Security Valuation 800 (459) (348)
Less Equity Valuation
Tier 1 Capital $27,143 $26,631 $24,752
Plus Allowance for Credit Losses 2,286 2,159 1,990
Total Risk-based Capital $29,429 $28,790 $26,742
Tier 1 Capital Ratio 11.9% 14.0% 13.8%
Total Risk-based Capital Ratio 12.9% 15.1% 14.9%
YEAR 2000
The Company's Year 2000 Project Plan was intended to address year 2000 problems
and prevent major interruptions in its business due to problems related to the
Company's computerized financial and information systems. As part of its
program, the Company's Technology Committee conducted an assessment of its
financial and information systems, third party vendors, and customers.
The Company did not experience any significant disruption as a result of Year
2000 problems. As of March 6, 2000, neither the Company nor any of its key
vendors or customers have experienced any material adverse effects related to
Year 2000 problems. Based on its experience in the Year 2000 transition and its
business operations through such date, the Company does not expect to encounter
any year 2000 problems that would have a material adverse effect on the results
of operations, liquidity and financial condition of the Company.
The costs of achieving year 2000 readiness were not material. Internal costs
for Year 2000 readiness were not tracked, but principally related to payroll
costs of Bank personnel.
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", "Liquidity and Interest
Sensitivity", "Investment Portfolio", and "Deposits" under Item 7, Management's
Discussion and Analysis of Financial Conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
Medford, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
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, 1999 and 1998, 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, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
Wipfli Ullrich Bertelson LLP
January 14, 2000
Wausau, Wisconsin
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
Cash and due from banks $16,400,484 $14,025,302
Interest-bearing deposits in other financial institutions 16,628 43,453
Federal funds sold 9,223,000
Securities available for sale - At fair value 63,364,665 56,916,589
Loans held for sale 50,000 951,650
Loans receivable, net of allowance for credit losses of
$2,285,675 in 1999 and $2,159,145 in 1998 215,260,185 187,793,197
Accrued interest receivable 2,048,587 1,838,541
Premises and equipment 6,740,834 6,440,692
Goodwill and purchased intangibles 2,156,512 2,479,705
Other assets 1,645,693 766,691
TOTAL ASSETS $307,683,588 $280,478,820
Liabilities and Stockholders' Equity
Non-interest-bearing deposits $30,615,700 $31,540,360
Interest-bearing deposits 199,554,383 190,781,300
Total deposits 230,170,083 222,321,660
Short-term borrowings 25,919,665 19,688,031
Long-term borrowings 20,000,000 5,800,000
Accrued expenses and other liabilities 3,095,203 3,099,045
Total liabilities 279,184,951 250,908,736
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares in 1999 and 1998
Issued and outstanding - 1,824,718 shares in 1999
and 1,860,893 Shares in 1998 182,472 186,089
Additional paid-in capital 11,759,737 12,648,174
Retained earnings 17,356,953 16,276,389
Accumulated other comprehensive income (loss), net of tax (800,525) 459,432
Total stockholders' equity 28,498,637 29,570,084
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $307,683,588 $280,478,820
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Interest income:
Interest and fees on loans $17,415,808 $17,377,398 $16,821,018
Interest and dividends on investment securities:
Taxable 3,018,331 2,994,394 3,152,401
Tax-exempt 682,334 551,107 422,524
Other interest and dividend income 122,435 219,142 117,257
Total interest income 21,238,908 21,142,041 20,513,200
Interest expense:
Deposits 8,166,015 8,809,600 8,382,923
Short-term borrowings 1,090,912 921,090 976,247
Long-term borrowings 586,505 373,753 353,725
Total interest expense 9,843,432 10,104,443 9,712,895
Net interest income 11,395,476 11,037,598 10,800,305
Provision for credit losses 180,000 420,000 140,000
Net interest income after provision for credit losses 11,215,476 10,617,598 10,660,305
Noninterest income:
Service fees 706,026 696,768 631,553
Trust service fees 569,312 487,795 448,174
Net realized gain on sale of securities available for sale 1,900 14,632
Gain on settlement of pension plan 258,294
Investment product commissions 241,466 271,903 247,183
Gain on sale of mortgage servicing rights 212,881
Other operating income 589,919 626,850 445,414
Total noninterest income 2,106,723 2,085,216 2,258,131
Noninterest expenses:
Salaries and employee benefits 4,510,574 4,237,853 4,215,070
Occupancy 1,328,126 1,161,954 1,123,692
Data processing and information systems 433,885 348,828 355,764
Goodwill and purchased intangibles amortization 323,193 307,704 178,868
Other operating 1,946,089 1,844,060 1,682,427
Total noninterest expenses 8,541,867 7,900,399 7,555,821
Income before income taxes 4,780,332 4,802,415 5,362,615
Provision for income taxes 1,432,215 1,554,331 1,855,161
Net income $3,348,117 $3,248,084 $3,507,454
Basic and diluted earnings per share $1.83 $1.74 $1.88
Cash dividends declared per share $1.17 $0.81 $0.75
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998, and 1997
Accumulated
Other
Additional Comprehensive
Common Stock Paid-In Retained Income
Shares Amount Capital Earnings (Loss) Totals
Balance, January 1, 1997 1,865,369 $186,537 $12,647,615 $12,714,474 $176,005 $25,724,631
Comprehensive income:
Net income 3,507,454 3,507,454
Unrealized gain on securities
available for sale, net of tax 172,252 172,252
Total comprehensive income 3,679,706
Proceeds from stock options 7,981 798 100,262 101,060
Repurchase of common stock returned
to unissued (9,228) (923) (94,174) (143,907) (239,004)
Cash dividends declared $.75 per share (1,399,236) (1,399,236)
Balance, December 31, 1997 1,864,122 186,412 12,653,703 14,678,785 348,257 27,867,157
Comprehensive income:
Net income 3,248,084 3,248,084
Unrealized gain on securities
available for sale, net of tax 111,175 111,175
Total comprehensive income 3,359,259
Proceeds from stock options 4,678 468 71,600 72,068
Repurchase of common stock returned
to unissued (7,907) (791) (77,129) (143,575) (221,495)
Cash dividends declared $.81 per share (1,506,905) (1,506,905)
Balance, December 31, 1998 1,860,893 186,089 12,648,174 16,276,389 459,432 29,570,084
Comprehensive income:
Net income 3,348,117 3,348,117
Unrealized loss on securities
available for sale, net of tax (1,259,957) (1,259,957)
Total comprehensive income 2,088,160
Proceeds from stock options 3,539 354 65,605 65,959
Repurchase of common stock returned
to unissued (39,714) (3,971) (954,042) (134,507) (1,092,520)
Cash dividends declared $1.17 per share (2,133,046) (2,133,046)
Balance, December 31, 1999 1,824,718 $182,472 $11,759,737 $17,356,953 ($800,525) $28,498,637
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,348,117 $3,248,084 $3,507,454
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 1,228,235 946,992 841,970
Provision for credit losses 180,000 420,000 140,000
Provision (benefit) for deferred income taxes (146,591) (114,504) 80,614
Proceeds from sales of loans held for sale 6,725,002 9,559,744 3,855,675
Gain on sale of loans held for sale (86,662) (159,774) (36,631)
Originations of loans held for sale (5,736,690) (9,182,270) (4,868,394)
Gain on sale of investment securities (1,900) (14,632)
Gain on settlement of pension plan (258,294)
Gain on sale of mortgage servicing rights (212,881)
Loss on premises and equipment disposals 12,956 12,489 1,717
Loss on sale of other real estate 11,522 28 29,432
Changes in operating assets and liabilities:
Other assets (191,105) 74,064 (59,352)
Other liabilities (3,842) (81,378) 152,367
Net cash provided by operating activities 5,340,942 4,721,575 3,159,045
Cash flows from investing activities:
Available for sale securities:
Proceeds from sales 1,499,869 1,549,804
Proceeds from maturities 23,665,982 21,777,200 14,664,102
Payment for purchases (32,163,812) (25,695,462) (13,004,472)
Net increase in loans (27,900,132) (5,509,352) (10,394,025)
Net (increase) decrease in interest-bearing
deposits in other institutions 26,825 (22,193) (11,027)
Net (increase) decrease in federal funds sold 9,223,000 (4,607,000) (4,616,000)
Capital expenditures (1,162,680) (1,501,908) (2,259,265)
Proceeds from sale of equipment 50
Proceeds from sale of other real estate 224,607 315,925 309,179
Premium paid to purchase deposits (2,218,437)
Net cash used in investing activities (28,086,210) (13,742,921) (15,980,091)
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits ($924,660) $5,915,191 $2,541,584
Net increase in interest-bearing deposits 8,773,083 5,257,011 6,195,767
Proceeds from exercise of stock options 65,959 72,068 101,060
Payment for repurchase of common stock (1,092,520) (221,495) (239,004)
Net increase in short-term borrowings 6,231,634 3,609,508 1,407,259
Proceeds from issuance of long-term borrowings 15,200,000 4,000,000 1,000,000
Principal payments on long-term borrowings (1,000,000) (3,600,000) (1,000,000)
Dividends paid (2,133,046) (1,506,905) (1,399,236)
Net cash provided by financing activities 25,120,450 13,525,378 8,607,430
Net increase (decrease) in cash and due from banks 2,375,182 4,504,032 (4,213,616)
Cash and due from banks at beginning 14,025,302 9,521,270 13,734,886
Cash and due from banks at end $16,400,484 $14,025,302 $9,521,270
Supplemental cash flow information:
Cash paid during the year for:
Interest $9,931,587 $10,285,845 $9,722,432
Income taxes 1,611,591 1,541,025 1,805,025
Supplemental schedule of noncash investing and financing
activities:
Loans transferred to other real estate 250,830 322,004 253,198
Loans charged off 128,654 328,569 244,874
Loans made in connection with the disposition of other real
estate 99,187 241,752
See accompanying notes to consolidated financial statements.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 core banking products in addition
to trust services and investment product sales.
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.
Any gains and losses on sales of securities are recognized at the time of sale
using the specific identification method.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 nonaccrued 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 (as detailed above).
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 established through a provision for credit
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that the collectibility of the principal is
unlikely. Management believes the allowance for credit losses is adequate to
cover probable credit losses relating to specifically identified loans, as well
as probable credit losses inherent in the balance of the loan portfolio. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
"Accounting for Contingencies" and SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," the allowance is provided for losses that have been
incurred as of the balance sheet date. The allowance is based on past events
and current economic conditions, and does not include the effects of expected
losses on specific loans or groups of loans that are related to future events
or expected changes in economic conditions. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. A loan is impaired when it
is probable the creditor will be unable to collect all contractual principal
and interest payments due in accordance with the terms of the loan agreement.
In addition, various regulatory agencies periodically review the allowance for
credit losses. These agencies may require the subsidiary Bank to make additions
to the allowance for credit losses based on their judgments of collectibility
based on information available to them at the time of their examination.
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.
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 from 10 to 50 years
on buildings and 3 to 20 years on equipment.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold 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 the lower of carrying
amount or fair value less estimated cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in loss on
foreclosed real estate.
INTANGIBLES
The excess of cost over the net assets acquired (goodwill) is being amortized
using the straight-line method over a 15-year period from the date of
acquisition.
Purchased deposit base intangible is amortized using the 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 benefit of the asset decreases
due to disposition of deposits associated with the entity acquired in the
purchase business combination.
RETIREMENT PLANS
The Company maintains a money purchase defined contribution pension plan
covering substantially all full-time employees. The Company also maintains a
defined contribution 401(k) profit-sharing plan which covers 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.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per common share are based upon the weighted average number of common
shares outstanding which includes the potential common stock shares issuable
under the stock options granted. The weighted average number of shares
outstanding were 1,826,440 in 1999, 1,861,787 in 1998, and 1,867,610 in 1997.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
NOTE 2 CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Under
this SFAS, the Company reports those items defined as comprehensive income in
the statement of changes in stockholders' equity. The adoption of SFAS No. 130
did not have an impact on the Company's financial condition or results of
operations.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which was issued in June
1997. This statement establishes new standards for reporting information about
operating segments in annual and interim financial statements. The standard
also required descriptive information about the way operating segments are
determined, the products and services provided by the segments, and the nature
of differences between reportable segment measurements and those used for the
consolidated enterprise. The disclosure requirements had no impact on the
Company's financial position or results of operations.
NOTE 3 PURCHASE OF BRANCHES
During 1997, the Company completed the purchase of two branches of a commercial
bank located in Lake Tomahawk and Rhinelander. The acquisition of these
branches, now operating as branches of the Company's subsidiary, was accounted
for as a purchase. Consequently, the related accounts and results of operations
are included in the Company's consolidated financial statements from the date
of acquisition. The deposit base intangible is being amortized on a systematic
basis over an eight-year period. Deposit base intangible amortization expense
totaled $236,760, $221,271, and $72,075 during 1999, 1998, and 1997,
respectively.
NOTE 4 CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $1,143,000 was restricted at
December 31, 1999 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. The Company and its subsidiary also maintain cash balances in money
market funds. Such balances are not insured. Total uninsured balances a
December 31, 1999 were approximately $12,131,000.
NOTE 5 SECURITIES
The fair value, amortized cost, and gross unrealized gains and losses for the
Company's securities available for sale follow:
Gross Gross
Fair Unrealized Unrealized Amortized
Value Gains Losses Cost
December 31, 1999
U.S. Treasury Securities And
Obligations Of U.S. Government
Corporations And Agencies $12,487,600 $8,383 $468,322 $12,947,539
Obligations Of States And Political
Subdivisions 16,046,592 81,150 310,752 16,276,194
Corporate Debt Securities 574,400 600 575,000
Mortgage-Backed Securities 32,389,232 56,369 656,199 32,989,062
Equity Securities 1,866,841 1,866,841
Totals $63,364,665 $145,902 $1,435,873 $64,654,636
December 31, 1998
U.S. Treasury Securities And
Obligations Of U.S. Government
Corporations And Agencies $11,206,494 $88,788 $ $11,117,706
Obligations Of States And Political
Subdivisions 14,007,008 355,340 12,873 13,664,541
Corporate Debt Securities 584,350 9,350 575,000
Mortgage-Backed Securities 29,534,028 300,209 30,324 29,264,143
Equity Securities 1,584,709 1,584,709
Totals $56,916,589 $753,687 $43,197 $56,206,099
NOTE 5 SECURITIES (CONTINUED)
As a member of the Federal Home Loan Bank (FHLB) system, the banking subsidiary
is required to hold stock in the FHLB based on asset size and level of FHLB
borrowings. This stock is recorded at cost which is equal to par value. Equity
securities included $1,000,000 and $817,500 of FHLB stock at December 31, 1999
and 1998, respectively. Transfer of the stock is substantially restricted.
The book values and fair values of debt securities at December 31, 1999, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Fair Book
Debt Securities Available For Sale Values Values
Due In One Year Or Less $2,434,782 $2,420,500
Due After One Year Through Five Years 13,525,553 13,720,862
Due After Five Years Through Ten Years 13,148,257 13,657,371
Mortgage-Backed Securities 32,389,232 32,989,062
Total Debt Securities Available For Sale $61,497,824 $62,787,795
Following is a summary of the proceeds from sales of investment securities as
well as gross realized gains and losses for the years ended December 31:
Securities Available For Sale 1998 1997
Proceeds From Sales Of Investments $1,499,869 $1,549,804
Debt Securities - Gross Realized Gains $3,150 $14,632
Debt Securities - Gross Realized Losses (1,250)
Total Investment Securities Gains $1,900 $14,632
There were no sales of securities during 1999. Securities with an approximate
carrying value of $41,142,000 and $25,438,000 at December 31, 1999 and 1998,
respectively, were pledged to secure public deposits, short-term borrowings,
and for other purposes required by law.
NOTE 6 LOANS
The composition of loans at December 31 follows:
1999 1998
Commercial $43,406,191 $32,625,773
Agricultural 40,282,795 36,108,289
Real estate:
Construction 4,871,219 4,100,729
Commercial 55,240,005 45,278,804
Residential 63,370,909 61,280,463
Installment 10,932,981 10,963,260
Lease financing 247,149 316,743
Subtotals 218,351,249 190,674,061
Net deferred loan fees (70,910) (75,774)
Loans in process of disbursement (734,479) (645,945)
Allowance for credit losses (2,285,675) (2,159,145)
Net loans $215,260,185 $187,793,197
The Company, in the ordinary course of business, grants loans to the Company's
executive officers and directors, including their families and 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:
1999 1998
Loans outstanding, January 1 $3,129,518 $2,667,010
New loans 3,241,525 2,097,385
Repayments (1,991,319) (1,634,877)
Loans outstanding, December 31 $4,379,724 $3,129,518
NOTE 6 LOANS (CONTINUED)
The allowance for credit losses includes specific allowances related to loans
which have been judged to be impaired and which fall within the scope of SFAS
No. 114. 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.
An analysis of impaired loans follows:
At December 31, 1999 1998
Nonaccrual $865,947 $385,750
Accruing income 1,151,755 89,836
Total impaired loans 2,017,702 475,586
Less - Allowance for credit losses 155,800 133,762
Net investment in impaired loans $1,861,902 $341,824
Years Ended December 31, 1999 1998 1997
Average recorded investment, net of
allowance for credit losses $1,842,855 $608,798 $743,114
Interest income recognized $143,502 $48,157 $69,362
The Company continues to maintain a general allowance for credit losses for
loans outside of the scope of SFAS No. 114. The allowance for credit losses is
maintained at a level which management believes is adequate for possible credit
losses. Management periodically evaluates the adequacy of the allowance using
the Company's past credit loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective since it requires
material estimates that may be susceptible to significant change.
NOTE 6 LOANS (CONTINUED)
An analysis of the allowance for credit losses for the three years ended
December 31, follows:
1999 1998 1997
Balance, January 1 2,159,145 $1,990,090 $2,030,878
Provision charged to operating expense 180,000 420,000 140,000
Recoveries on loans 75,184 77,624 64,086
Loans charged off (128,654) (328,569) (244,874)
Balance, December 31 $2,285,675 $2,159,145 $1,990,090
NOTE 7 PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
1999 1998
Land And Improvements $916,153 $898,994
Buildings 5,859,867 5,661,091
Furniture And Equipment