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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, 2001
[ ] 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. [X]
As of March 3, 2002, 1,696,497 shares of common stock were outstanding and the
total aggregate market value of the common stock held by nonaffiliates of the
Registrant was approximately $40,348,178.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 22, 2002 (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............................................ 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. 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. 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 2001.
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 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:
2001 Prices 2000 Prices
Quarter High Low Dividends (1) High Low Dividends (1)
1st $22.50 $21.00 .20 $27.50 $27.00 .20
2nd 23.25 20.12 .60 27.00 27.00 .60
3rd 25.10 23.25 .20 27.00 25.75 .20
4th 26.00 24.25 .22 25.75 21.50 .20
(1) The $.60 per share dividend declared in the second quarter of 2001 and 2000
includes a special dividend of $.40 per share.
Prices detailed in item 6 for the common stock for the year ended December 31,
1998 represent the bid quotations as published in the Milwaukee Journal
Sentinel and since 1998, the bid prices reported on the OTC Bulletin Board.
The prices do not reflect retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions. There is no active established
trading market.
SALES OF UNREGISTERED SECURITIES
During the three-fiscal year period ended December 31, 2001, the Company sold
common stock in connection with the various stock options plans as detailed in
the footnotes to the financial statements. 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
2001 1,258 $30,343
2000 1,906 $37,168
1999 3,539 $65,959
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
(dollars in thousands, except per share data)
Years Ended December 31,
2001 2000 1999 1998 1997
Net interest income $12,395 $11,305 $11,395 $11,038 $10,800
Provision for credit losses 370 400 180 420 140
Net interest income after
provision for loan losses 12,025 10,905 11,215 10,618 10,660
Noninterest income 2,425 2,303 2,107 2,085 2,258
Noninterest expense 9,118 8,658 8,542 7,900 7,556
Income before income taxes 5,332 4,550 4,780 4,803 5,362
Provision for income taxes 1,483 1,201 1,432 1,555 1,855
Net income $3,849 $3,349 $3,348 $3,248 $3,507
Per common share:
Basic and diluted earnings $2.25 $1.85 $1.83 $1.74 $1.88
Dividends declared 1.22 1.20 1.17 0.81 0.75
Book value at year end 17.42 16.75 15.62 15.89 14.95
Average common shares (000's) 1,707 1,814 1,826 1,862 1,868
Dividend payout ratio 54.2% 64.9% 63.9% 46.6% 39.9%
Shareholders of record at year end 818 803 816 830 790
SELECTED FINANCIAL DATA
Year-End Balances:
Loans net of unearned income $231,649 $226,942 $217,546 $189,952 $185,015
Assets 340,490 321,102 307,684 280,479 263,675
Deposits 258,401 244,691 230,170 222,322 211,149
Shareholders equity 29,553 30,345 28,499 29,570 27,867
Average Balances:
Loans net of unearned income 228,170 225,308 200,497 190,014 178,968
Assets 325,261 314,318 288,287 272,084 254,352
Deposits 250,131 235,656 222,755 214,246 198,935
Shareholders equity 28,806 28,520 28,396 28,558 26,633
Performance Ratios:
Return on average assets 1.18% 1.07% 1.16% 1.19% 1.38%
Return on average common equity 13.36% 11.74% 11.79% 11.37% 13.17%
Equity to assets 8.68% 9.45% 9.26% 10.54% 10.57%
Total risk-based capital 12.11% 13.17% 12.93% 15.11% 14.94%
Net loan charge-offs as a percentage
of average loans 0.16% 0.04% 0.03% 0.13% 0.10%
Nonperforming assets as a percentage
of loans and other real estate 1.07% 0.97% 0.63% 0.75% 0.70%
Net interest margin 4.24% 4.02% 4.47% 4.55% 4.56%
Efficiency ratio 59.44% 61.34% 61.12% 58.37% 56.40%
Fee revenue as a percentage of
average assets 0.47% 0.46% 0.46% 0.45% 0.44%
Stock Price Information:
High $26.00 $27.50 $27.50 $27.50 $27.25
Low 20.12 21.50 25.50 23.00 24.00
Market Price at year end (1) 26.00 22.00 27.50 26.00 27.25
(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 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
2001 2000 1999
Average Yield Average Yield Average Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(dollars in thousands)
ASSETS
Earnings Assets
Earning assets:
Loans (1) (2) $228,170 $19,317 8.47% $225,308 $20,133 8.94% $200,497 $17,539 8.75%
Investment securities:
Taxable 52,818 3,406 6.45% 50,112 3,263 6.51% 48,039 3,018 6.28%
Tax exempt (2) 18,691 1,333 7.13% 17,177 1,236 7.20% 14,465 1,033 7.14%
Other Interest Income 5,307 176 3.32% 1,476 91 6.17% 2,562 123 4.80%
Total earning assets $304,986 $24,232 7.95% $294,073 $24,723 8.41% $265,563 $21,713 8.18%
Cash and cash equivalents 11,253 11,817 12,816
Other assets 11,801 10,868 12,152
Allowance for credit losses (2,779) (2,440) (2,244)
Total assets $325,261 $314,318 $288,287
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest earning demand $19,928 $240 1.20% $18,950 $343 1.81% $19,813 $294 1.48%
Savings deposits 66,928 1,703 2.54% 57,481 2,152 3.74% 58,826 1,766 3.00%
Time deposits 132,149 7,434 5.63% 129,281 7,647 5.92% 113,776 6,106 5.37%
Short-term borrowings 22,700 863 3.80% 28,300 1,684 5.95% 23,485 1,091 4.65%
Long-term borrowings 19,575 1,077 5.50% 18,086 1,085 6.00% 10,136 586 5.78%
Total interest bearing liabilities $261,280 $11,317 4.33% $252,098 $12,911 5.12% $226,036 $9,843 4.35%
Demand deposits 31,126 29,944 30,341
Other liabilities 4,049 3,756 3,514
Stockholders' equity 28,806 28,520 28,396
Total liabilities and
stockholders' equity $325,261 $314,318 $288,287
Net interest income and
rate spread (2) $12,915 3.62% $11,812 3.29% $11,870 3.83%
Net interest margin (2) 4.24% 4.02% 4.47%
Taxable equivalent adjustment $520 $507 $474
(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%.
Table 3: Interest Income and Expense Volume and Rate Analysis
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
Interest income:
Loans (2) $256 $(1,072) $(816) $2,168 $426 $2,594
Investment securities:
Taxable 176 (33) 143 130 115 245
Tax exempt (2) 109 (12) 97 195 8 203
Other interest income 236 (151) 85 (52) 20 (32)
Total earning assets (2) $777 $(1,268) $(491) $2,441 $569 $3,010
Interest expense:
Interest bearing demand $18 $(121) $(103) $(13) $63 $50
Savings deposits 353 (802) (449) (40) 425 385
Time deposits 170 (383) (213) 831 710 1,541
Short Term Borrowing (333) (488) (821) 224 368 592
Long Term Borrowing 89 (97) (8) 460 40 500
Total interest-bearing liabilities 297 (1,891) (1,594) 1,462 1,606 3,068
Net interest income(2) $480 $623 $1,103 $979 $(1,037) $(58)
(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.
Table 4: Yield on Earning Assets
Year Ended Year Ended Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
Yield Change Yield Change Yield Change
Yield on earning assets 7.95% -0.46% 8.41% 0.23% 8.18% -0.39%
Effective rate on all liabilities
as a percentage of earning assets 3.71% -0.68% 4.39% 0.68% 3.71% -0.31%
Net yield on earning assets 4.24% 0.22% 4.02% -0.45% 4.47% -0.08%
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
% Change
From Prior
Years Ended December 31, Year
2001 2000 1999 2001 2000
(dollars in thousands)
Service fees $883 $803 $706 10.0% 13.7%
Trust service fees 659 629 569 4.8% 10.5%
Net realized gain on sale of securities
available for sale 8 - -
Investment product commissions 182 266 242 -31.6% 9.9%
Other operating income 693 605 590 14.5% 2.5%
Total $2,425 $2,303 $2,107 5.3% 9.3%
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
% Change
From Prior
Years Ended December 31, Year
2001 2000 1999 2001 2000
(dollars in thousands)
Salaries and employee benefits $4,918 $4,637 $4,511 6.1% 2.8%
Occupancy 1,176 1,278 1,328 -8.0% -3.8%
Data processing and information systems 456 450 434 1.3% 3.7%
Goodwill & core deposit intangibles amortization 358 340 323 5.3% 5.3%
Other operating expense 2,210 1,952 1,946 13.2% 0.3%
Total $9,118 $8,657 $8,542 5.3% 1.3%
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
After After
One But Five but
Within Within Within After
One Year Five Years Ten Years Ten Years
Weighted Weighted Weighted Weighted
Amount Yields Amount Yields Amount Yields Amount Yields
(dollars in thousands)
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies $2,295 6.64% $212 6.60% $1,995 7.02%
Mortgage-backed securities 4,436 6.17% 39,428 6.13% 2,439 6.21% 4,907 6.41%
Obligations of states and political
subdivisions (1) 1,536 4.46% 9,421 4.40% 11,182 4.60% 384 4.21%
Corporate debt securities 25 7.50% 100 4.30%
Money market equity funds 5,003 1.95%
Equity securities 151 1.96%
$11,000 4.01% $51,144 5.84% $14,084 4.88% $7,286 6.46%
(1) Weighted average yields on tax-exempt securities have been calculated on a tax equivalent basis using a tax rate of 34%.
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
Years Ended December 31,
2001 2000 1999
(dollars in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $4,502 $16,007 $12,488
Mortgage-backed securities 51,210 34,548 32,389
Obligations of states and political
subdivisions (1) 22,523 18,208 16,047
Corporate debt securities 125 75 574
Money market equity funds 5,003 579 826
Equity securities 151 141 41
Totals $83,514 $69,558 $62,365
(1) Weighted average yields on tax-exempt securities have been calculated on a
tax equivalent basis using a tax rate of 34%.
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
2001 2000 1999 1998 1997
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollars in thousands)
Commercial and financial $44,320 19.1% $42,772 18.8% $43,360 19.9% $32,585 17.2% $26,943 14.6%
Construction Loans 5,375 2.3% 4,200 1.9% 4,137 1.9% 3,455 1.8% 1,700 0.9%
Agricultural 36,815 15.9% 41,435 18.2% 40,280 18.5% 36,103 19.0% 34,952 18.9%
Real estate 135,421 58.4% 127,288 56.1% 118,641 54.5% 107,482 56.1% 109,529 58.6%
Installment 10,162 4.3% 11,177 4.9% 10,931 5.1% 10,962 5.8% 12,642 6.8%
Lease financing 8 0.0% 239 0.1% 247 0.1% 317 0.2% 418 0.2%
Total loans (including
loans held for sale) $232,101 100.0% $227,111 100.0% $217,596 100.0% $190,904 100.0% $186,184 100.0%
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
Loan Maturity
One Year Over one Year Over
or Less to Five Years Five Years
(dollars in thousands)
Commercial, financial and
commercial real estate $40,254 $71,768 $7,698
Agricultural 21,292 11,532 3,036
Real estate mortgage 7,332 40,503 12,539
Total $68,878 $123,803 $23,273
Fixed rate $48,966 $82,772 $4,866
Variable rate 19,912 41,031 18,407
Total $68,878 $123,803 $23,273
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
Years Ended December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Allowance for credit losses at
beginning of year $2,593 $2,286 $2,159 $1,990 $2,031
Loans charged off:
Commercial, financial and
agricultural 389 78 31 211 111
Real Estate 21 12 11 46 45
Installment loans to individuals 81 103 86 72 89
Total loans charged off 491 193 128 329 245
Recoveries on loans previously charged off:
Commercial, financial, and
agricultural 95 38 25 60 27
Real estate 10 34 30 0 0
Installment loans to individuals 20 28 20 18 37
Total recoveries 125 100 75 78 64
Net loans charged off 366 93 53 251 181
Provision for loan losses 370 400 180 420 140
Allowance for credit losses at end of
period $2,597 $2,593 $2,286 $2,159 $1,990
Ratio of allowance for credit losses
to total loans at end of period 1.12% 1.14% 1.05% 1.14% 1.08%
Ratio of net charge-offs during the
period to average loans outstanding 0.16% 0.04% 0.02% 0.13% 0.10%
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
As of December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Commercial, financial,
agricultural $1,247 $1,200 $858 $865 $763
Real Estate 900 850 1,091 967 842
Installment loans to individuals 195 202 181 193 191
Impaired Loans 255 341 156 134 194
Unallocated 0 0 0 0 0
Total $2,597 $2,593 $2,286 $2,159 $1,990
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
December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Nonaccrual loans $701 $517 $505 $1,416 $1,087
Impaired loans 1,204 1,691 866
Accruing loans past due 90 days or more 30 24 64 38 35
Restructured loans 453 295 419 710 116
Total non-performing loans $2,388 $2,527 $1,854 $2,164 $1,238
Other real estate owned $90 $98 $70 $56 $50
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
2001 2000 1999
% of % of % of
Amount Total Amount Total Amount Total
(dollars in thousands)
Non-interest bearing demand $31,126 12.4% $29,944 12.7% $30,341 13.6%
Interest-bearing demand 19,928 8.0% 18,950 8.0% 19,813 8.9%
Savings deposits 66,928 26.8% 57,481 24.4% 58,825 26.4%
Time deposits 132,149 52.8% 129,281 54.9% 113,776 51.1%
Total $250,131 100.0% $235,656 100.0% $222,755 100.0%
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
December 31, 2001
(dollars in thousands)
3 months or less $12,451
Over 3 months through 6 months 5,726
Over 6 months through 12 months 11,865
Over 12 months 5,189
Total $35,231
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
December 31,
2001 2000 1999
(dollars in thousands)
Securities sold under repurchase agreements $18,465 $25,278 $22,709
Federal funds purchased 924 681 3,211
Totals $19,389 $25,959 $25,920
Average amounts outstanding during year $22,739 $28,294 $23,487
Average interest rates on amounts
outstanding during year 3.8% 6.0% 4.6%
Maximum month-end amounts outstanding $29,492 $42,095 $27,018
Average interest rates on amounts
outstanding at end of year 2.0% 6.0% 4.9%
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
December 31, 2001
0-90 Days 91-180 Days 181-365 Days 1-5 Years Beyond 5 Years Total
(dollars in thousands)
Earning Assets
Loans $25,905 $16,495 $30,138 $135,858 $23,253 $231,649
Securities 6,552 1,619 4,329 51,144 21,370 $85,014
Other earning assets 25 25
Total $32,482 $18,114 $34,467 $187,002 $44,623 $316,688
Cumulative rate sensitive assets $32,482 $50,596 $85,063 $272,065 $316,688
Interest-bearing liabilities
Interest-bearing deposits $55,985 $21,950 $54,441 $45,047 $45,851 $223,274
Other interest-bearing liabilities 19,389 27,000 3,000 49,389
Total $75,374 $21,950 $54,441 $72,047 $48,851 $272,663
Cumulative interest sensitive liabilities $75,374 $97,324 $151,765 $223,812 $272,663
Interest sensitivity gap $(42,892) $(3,836) $(19,974) $114,955 $(4,228)
Cumulative interest sensitivity gap $(42,892) $(46,728) $(66,702) $48,253 $44,025
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 43.1% 52.0% 56.0% 121.6% 116.1%
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
(dollars in thousands)
2001 2000 1999
Total Assets $340,490 $321,102 $307,684
Capital 29,553 30,345 28,499
Capital Ratio 8.7% 9.5% 9.3%
Total Assets $340,490 $321,102 $307,684
Less Goodwill (1,459) (1,817) (2,156)
Tangible Assets $339,031 $319,285 $305,528
Stockholders Equity $29,553 $30,345 $28,499
Less Goodwill (1,459) (1,817) (2,156)
Tangible Capital $28,094 $28,528 $26,343
Tangible Capital Ratio 8.3% 8.9% 8.6%
Risk-based Assets $248,458 $234,424 $227,553
Tangible Equity 28,094 28,528 26,343
Less Security Valuation (604) (246) 800
Tier 1 Capital $27,490 $28,282 $27,143
Plus Allowance for Credit Losses 2,597 2,593 2,286
Total Risk-based Capital $30,087 $30,875 $29,429
Tier 1 Capital Ratio 11.1% 12.1% 11.9%
Total Risk-based Capital Ratio 12.1% 13.2% 12.9%
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
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
Assets
Cash and due from banks $15,052,383 $14,126,994
Interest-bearing deposits in other financial institutions 25,102 18,574
Federal funds sold 712,845
Securities available for sale - At fair value 83,514,352 69,557,693
Federal Home Loan Bank stock (at cost) 1,500,000 1,294,600
Loans held for sale 451,650 169,600
Loans receivable, net of allowance for credit losses of $2,597,416
in 2001 and $2,593,099 in 2000 229,051,540 224,348,597
Accrued interest receivable 1,843,509 2,156,122
Premises and equipment 5,707,450 6,287,659
Purchased core deposit intangible 1,163,929 1,434,996
Goodwill 295,316 381,749
Other assets 1,171,500 1,325,160
TOTAL ASSETS $340,489,576 $321,101,744
Liabilities and Stockholders' Equity
Non-interest-bearing deposits $35,127,283 $32,155,566
Interest-bearing deposits 223,274,164 212,534,981
Total deposits 258,401,447 244,690,547
Short-term borrowings 19,389,436 25,958,753
Long-term borrowings 30,000,000 16,200,000
Accrued expenses and other liabilities 3,145,572 3,907,350
Total liabilities 310,936,455 290,756,650
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding - 1,696,497 shares in 2001 and
1,811,356 shares in 2000 169,650 181,136
Additional paid-in capital 10,972,612 11,698,317
Retained earnings 17,806,485 18,219,726
Unrealized gain on securities available for sale, net of tax 604,374 245,915
Total stockholders' equity 29,553,121 30,345,094
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $340,489,576 $321,101,744
See accompanying notes to consolidated financial statements.
MID-WISCONSIN FINANCIAL SERVICES, INC
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
Interest income:
Interest and fees on loans $19,250,624 $20,046,389 $17,415,808
Interest and dividends on securities:
Taxable 3,409,726 3,262,893 3,018,331
Tax-exempt 879,670 816,100 682,334
Other interest and dividend income 171,954 91,084 122,435
Total interest income 23,711,974 24,216,466 21,238,908
Interest expense:
Deposits 9,376,858 10,141,916 8,166,015
Short-term borrowings 862,744 1,683,779 1,090,912
Long-term borrowings 1,077,425 1,085,697 586,505
Total interest expense 11,317,027 12,911,392 9,843,432
Net interest income 12,394,947 11,305,074 11,395,476
Provision for credit losses 370,000 400,000 180,000
Net interest income after provision for credit losses 12,024,947 10,905,074 11,215,476
Noninterest income:
Service fees 883,289 803,155 706,026
Trust service fees 658,555 629,372 569,312
Net realized gain on sale of securities available for sale 7,892
Investment product commissions 181,862 265,675 241,466
Other operating income 693,113 604,351 589,919
Total noninterest income 2,424,711 2,302,553 2,106,723
Noninterest expenses:
Salaries and employee benefits 4,918,212 4,636,860 4,510,574
Occupancy 1,175,876 1,277,739 1,328,126
Data processing and information systems 455,664 450,178 433,885
Goodwill and purchased core deposit amortization 357,500 339,767 323,193
Other operating 2,211,081 1,952,734 1,946,089
Total noninterest expenses 9,118,333 8,657,278 8,541,867
Income before income taxes 5,331,325 4,550,349 4,780,332
Provision for income taxes 1,482,575 1,201,289 1,432,215
Net income $3,848,750 $3,349,060 $3,348,117
Basic and diluted earnings per share $2.25 $1.85 $1.83
Cash dividends declared per share $1.22 $1.20 $1.17
See accompanying notes to consolidated financial statements.
MID-WISCONSIN FINANCIAL SERVICES, INC
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000, and 1999
Unrealized Gain
(Loss) on
Additional Securities
Common Stock Paid-In Retained Available
Shares Amount Capital Earnings for Sale Totals
Balance, January 1, 1999 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 of $743,424 (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 paid $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
Comprehensive income:
Net income 3,349,060 3,349,060
Unrealized gain on securities available
for sale, net of tax of $628,746 1,046,440 1,046,440
Total comprehensive income 4,395,500
Proceeds from stock options 1,906 191 36,977 37,168
Repurchase of common stock
returned to unissued (15,268) (1,527) (98,397) (311,037) (410,961)
Cash dividends paid $1.20 per share (2,175,250) (2,175,250)
Balance, December 31, 2000 1,811,356 181,136 11,698,317 18,219,726 245,915 30,345,094
Comprehensive income:
Net income 3,848,750 3,848,750
Unrealized gain on securities available
for sale, net of tax of $194,510 358,459 358,459
Total comprehensive income 4,207,209
Proceeds from stock options 1,258 126 30,217 30,343
Repurchase of common stock
returned to unissued (116,117) (11,612) (755,922) (2,193,450) (2,960,984)
Cash dividends paid $1.22 per share (2,068,541) (2,068,541)
Balance, December 31, 2001 1,696,497 $169,650 $10,972,612 $17,806,485 $604,374 $29,553,121
See accompanying notes to consolidated financial statements.
MID-WISCONSIN FINANCIAL SERVICES, INC
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,848,750 $3,349,060 $3,348,117
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation and net amortization 1,092,114 1,165,490 1,228,235
Provision for credit losses 370,000 400,000 180,000
Benefit for deferred income taxes (37,461) (206,910) (146,591)
Proceeds from sales of loans held for sale 10,956,441 2,755,311 6,725,002
Gain on sale of loans held for sale (134,541) (40,791) (86,662)
Originations of loans held for sale (10,372,250) (2,834,120) (5,736,690)
Gain on sale of investment securities (7,892)
Loss on premises and equipment disposals 21,277 17,748 12,956
(Gain) loss on foreclosed real estate (22,012) 11,522
FHLB stock dividends (91,400) (62,000)
Changes in operating assets and liabilities:
Other assets 294,984 (179,742) (191,105)
Other liabilities (761,778) 812,147 (3,842)
Net cash provided by operating activities 5,178,244 5,154,181 5,340,942
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in
other institutions (6,528) (1,946) 26,825
Net (increase) decrease in federal funds sold (712,845) 9,223,000
Securities available for sale:
Proceeds from sales 1,622,892
Proceeds from maturities 36,561,064 15,001,991 23,665,982
Payment for purchases (51,578,956) (20,507,728) (31,981,312)
Payment for purchase of FHLB stock (114,000) (232,600) (182,500)
Net increase in loans (5,901,643) (9,512,647) (27,900,132)
Capital expenditures (249,179) (407,869) (1,162,680)
Proceeds from sale of premises and equipment 78,840 10,908
Proceeds from sale of other real estate 105,099 11,711 224,607
Net cash used in investing activities (20,195,256) (15,638,180) (28,086,210)
MID-WISCONSIN FINANCIAL SERVICES, INC
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits $2,971,717 $1,539,866 $(924,660)
Net increase in interest-bearing deposits 10,739,183 12,980,598 8,773,083
Net increase (decrease) in short-term borrowings (6,569,317) 39,088 6,231,634
Proceeds from issuance of long-term borrowings 23,000,000 4,000,000 15,200,000
Principal payments on long-term borrowings (9,200,000) (7,800,000) (1,000,000)
Proceeds from exercise of stock options 30,343 37,168 65,959
Payment for repurchase of common stock (2,960,984) (410,961) (1,092,520)
Dividends paid (2,068,541) (2,175,250) (2,133,046)
Net cash provided by financing activities 15,942,401 8,210,509 25,120,450
Net increase (decrease) in cash and due from banks 925,389 (2,273,490) 2,375,182
Cash and due from banks at beginning 14,126,994 16,400,484 14,025,302
Cash and due from banks at end $15,052,383 $14,126,994 $16,400,484
Supplemental cash flow information:
Cash paid during the year for:
Interest $12,356,111 $12,361,909 $9,931,587
Income taxes 1,505,941 1,486,000 1,611,591
Supplemental schedule of noncash investing and
financing activities:
Loans charged off 490,791 192,430 128,654
Loans transferred to other real estate 207,667 106,024 250,830
Loans made in connection with the sale of other real estate 90,582 88,772 99,187
See accompanying notes to consolidated financial statements.
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:
Gross Gross
Fair Unrealized Unrealized Amortized
Value Gains Losses Cost
December 31, 2001
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $4,501,631 $56,962 $5,000 $4,449,669
Mortgage-backed securities 51,210,475 985,268 401,515 50,626,722
Obligations of states and political
subdivisions 22,523,071 432,795 130,326 22,220,602
Corporate debt securities 125,000 125,000
Money market equity funds 5,003,550 5,003,550
Equity securities 150,625 150,625
Totals $83,514,352 $1,475,025 $536,841 $82,576,168
December 31, 2000
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $16,006,707 $35,552 $53,891 $16,025,046
Mortgage-backed securities 34,548,135 360,941 127,473 34,314,667
Obligations of states and political
subdivisions 18,207,578 251,582 81,496 18,037,492
Corporate debt securities 75,000 75,000
Money market equity funds 579,648 579,648
Equity securities 140,625 140,625
Totals $69,557,693 $648,075 $262,860 $69,172,478
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.
Fair Amortized
Debt Securities Available for Sale Values Cost
Due in one year or less $1,561,719 $1,540,820
Due after one year through five years 11,715,912 11,466,142
Due after five years through ten years 11,492,664 11,403,309
Due after ten years through fifteen years 2,379,407 2,385,000
Mortgage-backed securities 51,210,475 50,626,722
Total debt securities available for sale $78,360,177 $77,421,993
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:
2001 2000
Commercial $44,352,464 $42,805,527
Agricultural 36,819,104 41,438,724
Real estate:
Construction 6,630,659 5,232,822
Commercial 70,622,818 60,932,645
Residential 64,375,070 66,201,230
Installment 10,169,623 11,177,677
Lease financing 238,573
Subtotals 232,969,738 228,027,198
Net deferred loan fees (64,955) (52,672)
Loans in process of disbursement (1,255,827) (1,032,830)
Allowance for credit losses (2,597,416) (2,593,099)
Net loans $229,051,540 $224,348,597
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:
2001 2000
Loans outstanding, January 1 $703,295 $4,379,724
New loans 709,886 1,394,006
Repayments (282,731) (5,070,435)
Loans outstanding, December 31 $1,130,450 $703,295
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:
2001 2000
At December 31,
Nonaccrual $1,204,030 $1,691,325
Accruing income 925,339 1,025,820
Total impaired loans 2,129,369 2,717,145
Less - Allowance for credit losses 255,000 341,400
Net investment in impaired loans $1,874,369 $2,375,745
2001 2000 1999
Years Ended December 31,
Average recorded investment, net of allowance
for credit losses $2,169,376 $2,489,941 $1,842,855
Interest income recognized $124,371 $223,998 $143,502
Interest income recognized using the cash basis $122,893 $126,719 $60,255
An analysis of the allowance for credit losses for the three years ended
December 31, follows:
2001 2000 1999
Balance, January 1 $2,593,099 $2,285,675 $2,159,145
Provision charged to operating expense 370,000 400,000 180,000
Recoveries on loans 125,108 99,854 75,184
Loans charged off (490,791) (192,430) (128,654)
Balance, December 31 $2,597,416 $2,593,099 $2,285,675
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:
2001 2000
Land and improvements $901,959 $896,903
Buildings 5,771,281 5,880,859
Furniture and equipment 5,503,323 5,766,476
Total cost 12,176,563 12,544,238
Less - accumulated depreciation 6,469,113 6,256,579
Total $5,707,450 $6,287,659
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:
2002 $96,312,545
2003 18,706,672
2004 5,306,536
2005 6,819,982
2006 112,846
Total $127,258,581
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:
2001 2000
Securities sold under repurchase agreements $18,465,436 $25,277,753
Federal funds purchased 924,000 681,000
Totals $19,389,436 $25,958,753
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:
2001 2000 1999
Weighted average rate at December 31 2.05% 6.00% 4.92%
For the year:
Highest month-end balance $29,492,473 $42,095,209 $27,017,836
Daily average balance 22,739,366 28,293,620 23,486,859
Weighted average rate 3.79% 5.95% 4.64%
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:
2001 2000
6.28% FHLB advance, interest payable monthly with principal due during 2003,
callable during 2002 $4,000,000 $4,000,000
4.65% to 4.67% FHLB advances, interest payable monthly with principal due
during 2003 5,000,000
4.61% to 5.07% FHLB advances, interest payable monthly with principal due
during 2004 10,000,000
4.14% FHLB advance, interest payable monthly with principal due during 2005 5,000,000
4.44% FHLB advance, interest payable monthly with principal due during 2006 3,000,000
5.30% to 5.51% FHLB advances, interest payable monthly with principal due
during 2008, callable during 2003 3,000,000 3,000,000
FHLB advance, interest payable monthly with principal due during 2001.
Interest rate equal to .5% above the LIBOR or 6.72% at December 31, 2000.
Repaid during 2001 3,000,000
5.41% to 6.21% FHLB advances, interest payable monthly with principal repaid
during 2001 6,200,000
Totals $30,000,000 $16,200,000
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:
2001 2000 1999
Current income tax provision:
Federal $1,512,939 $1,408,174 $1,440,244
State 7,097 25 138,562
Total current 1,520,036 1,408,199 1,578,806
Deferred income tax expense (benefit):
Federal (44,702) (142,156) (117,665)
State 7,241 (64,754) (28,926)
Total deferred (37,461) (206,910) (146,591)
Total provision for income taxes $1,482,575 $1,201,289 $1,432,215
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:
2001 2000 1999
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax expense at
statutory rate $1,812,651 34.0 $1,547,119 34.0 $1,625,313 34.0
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (328,452) (6.2) (316,982) (7.0) (295,772) (6.2)
State income tax 9,463 0.2 (42,721) (0.9) 72,360 1.5
Other (11,087) (0.2) 13,873 0.3 30,314 0.7
Provision for income
taxes $1,482,575 27.8 $1,201,289 26.4 $1,432,215 30.0
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:
2001 2000
Deferred tax assets:
Allowance for credit losses $664,881 $662,335
Deferred compensation 330,175 313,390
State net operating losses 34,912 49,623
Purchased deposit intangible 162,956 114,341
Other deferred expenses 2,560
Totals 1,192,924 1,142,249
Less - Valuation allowance (34,912) (33,565)
Total deferred tax assets 1,158,012 1,108,684
Deferred tax liabilities:
Premises and equipment 140,794 151,209
FHLB stock 60,440 24,428
Unrealized gain on securities available for sale 333,810 139,300
Other deferred income 13,730
Total deferred tax liabilities 535,044 328,667
Net deferred tax assets $622,968 $780,017
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:
Options Exercisable
Weighted
Range of Average
Exercise Exercise
Prices Shares Price
$25 to $29 5,351 $26.82
For the years ended December 31, 1999, 2000, and 2001, activity in stock
options outstanding was as follows:
Weighted
Average
Shares Price
December 31, 1998 9,360 $21.62
Options Granted 2,318 26.00
Options Exercised (3,539) (18.64)
December 31, 1999 8,139 24.16
Options Granted 2,575 28.25
Options Exercised (1,906) (19.50)
Options Forfeited (209) (19.50)
December 31, 2000 8,599 26.53
Options Granted 2,776 25.50
Options Exercised (604) (24.00)
Options Forfeited (1,202) (24.00)
December 31, 2001 9,569 $26.71
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.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As Of December 31, 2001:
Total capital (to risk
weighted assets):
Consolidated $30,087,000 12.1% $19,877,000 8.0% n/a
Subsidiary bank $29,492,000 11.9% $19,865,000 8.0% $24,831,000 10.0%
Tier I capital (to risk
weighted assets):
Consolidated $27,490,000 11.1% $9,938,000 4.0% N/A
Subsidiary Bank $26,895,000 10.8% $9,932,000 4.0% $14,898,000 6.0%
Tier I capital (to
average assets):
Consolidated $27,490,000 8.3% $13,561,000 4.0% N/A
Subsidiary Bank $26,895,000 8.1% $13,555,000 4.0% $16,944,000 5.0%
As of December 31, 2000:
Total capital (to risk
weighted assets):
Consolidated $30,875,000 13.2% $18,754,000 8.0% N/A
Subsidiary Bank $28,196,000 12.1% $18,626,000 8.0% $23,282,000 10.0%
Tier I capital (to risk
weighted assets):
Consolidated $28,282,000 12.1% $9,377,000 4.0% N/A
Subsidiary Bank $25,603,000 11.0% $9,313,000 4.0% $13,969,000 6.0%
Tier I capital (to
average assets):
Consolidated $28,282,000 8.9% $12,771,000 4.0% N/A
Subsidiary Bank $25,603,000 8.0% $12,765,000 4.0% $15,956,000 5.0%
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:
2001 2000
Commitments to extend credit:
Fixed rate $10,358,501 $11,249,823
Adjustable rate 13,963,867 12,697,560
Standby and irrevocable letters of credit - fixed rate 2,083,313 1,931,742
Credit card commitments 5,665,467 5,870,239
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:
At December 31, 2001 At December 31, 2000
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term
investments $15,790,330 $15,790,330 $14,145,568 $14,145,568
Investment securities 85,014,352 85,014,352 70,852,293 70,852,293
Net loans 229,503,190 231,858,129 224,518,197 221,491,138
Financial liabilities:
Deposits 258,401,447 260,764,540 244,690,547 247,184,844
Short-term borrowings 19,389,436 19,389,436 25,958,753 25,958,753
Long-term borrowings 30,000,000 30,670,276 16,200,000 15,802,394
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
BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
ASSETS
Cash and due from banks $565,918 $2,707,045
Investment in subsidiary 28,957,882 27,666,361
Securities available for sale - at fair value 100,000 100,000
Premises and equipment 498 29,430
Other assets 50,331 35,069
Total assets $29,674,629 $30,537,905
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $121,508 $192,811
Total stockholders' equity 29,553,121 30,345,094
Total liabilities and stockholders' equity $29,674,629 $30,537,905
MID-WISCONSIN FINANCIAL SERVICES, INC
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
2001 2000 1999
Income:
Dividends from subsidiary $2,950,000 $1,600,000 $2,250,000
Interest 23,917 162,130 138,329
Rental income 180,000 180,000 180,000
Other 255
Total income 3,154,172 1,942,130 2,568,329
Expenses:
Salaries and benefits 55,010 30,096 40,741
Other 201,149 218,711 186,135
Total expenses 256,159 248,807 226,876
Income before income taxes and equity in
undistributed net income of subsidiary 2,898,013 1,693,323 2,341,453
Provision for income tax (benefit) expense (17,676) 31,730 31,119
Net income before equity in undistributed net
income of subsidiary 2,915,689 1,661,593 2,310,334
Equity in undistributed net income of subsidiary 933,061 1,687,467 1,037,783
Net income $3,848,750 $3,349,060 $3,348,117
MID-WISCONSIN FINANCIAL SERVICES, INC
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,848,750 $3,349,060 $3,348,117
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net
amortization 28,932 78,383 87,207
Equity in undistributed net income of
subsidiary (933,061) (1,687,467) (1,037,783)
Changes in operating assets and liabilities:
Other assets (15,263) (10,679) (3,010)
Liabilities (71,303) 6,538 79,210
Net cash provided by operating activities 2,858,055 1,735,835 2,473,741
Cash flows from investing activities:
Capital expenditures (17,944)
Payment for purchase of securities available
for sale (100,000)
Net cash used in investing activities (100,000) (17,944)
Cash flows from financing activities:
Proceeds from exercise of stock options 30,343 37,168 65,959
Payments for repurchase of common stock (2,960,984) (410,961) (1,092,520)
Dividends paid (2,068,541) (2,175,250) (2,133,046)
Net cash used in financing activities (4,999,182) (2,549,043) (3,159,607)
Net decrease in cash and due from banks (2,141,127) (913,208) (703,810)
Cash and due from banks at beginning 2,707,045 3,620,253 4,324,063
Cash and due from banks at end $565,918 $2,707,045 $3,620,253
Supplemental cash flow information:
Cash paid during the year for income taxes $1,504,441 $1,460,000 $1,463,591
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by this
reference to the disclosure 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. 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. 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. 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. 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.