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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1996
[ ] 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 (IRS 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) 748-4364
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 15, 1997 the aggregate market value of the common shares held by
non-affiliates was approximately $39,344,088.
The number of common shares outstanding at March 15, 1997 was 1,867,218.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 28, 1997 (to the extent specified herein): Part III
FORM 10-K
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business........................................................... .3
2. Properties......................................................... .8
3. Legal Proceeding.....................................................9
4. Submission of matters to a vote of security holders..................9
PART II
5. Market for registrant's common equity and related
stockholder matters.................................................10
6. Selected Financial Data.............................................11
7. Management's discussion and analysis of financial
condition and results of operations.................................12
8. Financial statements and supplementary data.........................28
9. Changes in and disagreements with accountants on
accounting and financial disclosure.................................58
PART III
10. Directors and executive officers of the registrant..................59
11. Executive compensation..............................................59
12. Security ownership of certain beneficial owners and management......59
13. Certain relationships and related transactions......................59
PART IV
14. Exhibits, financial statements schedules, and reports on Form 8-K...60
PART I
ITEM 1. BUSINESS
GENERAL
Mid-Wisconsin Financial Services, Inc. ("Mid-Wisconsin") is a
registered bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). Mid-Wisconsin'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 Mid-Wisconsin and the Bank as in effect on
December 31, 1996.
ACQUISITIONS
Mid-Wisconsin has a policy of continuously exploring opportunities for
the acquisition of additional bank subsidiaries so that, at any given time,
it may be engaged in some tentative 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 all 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 Bank and each of its branches, other than the
Ogema and Fairchild branches, have drive-in banking facilities.
Investment and brokerage services are offered to the Bank's customers
through its Investment Sales Centers.
Mid-Wisconsin furnishes management services to the Bank to supplement
its internal management and expand the banking services offered. Services
provided include advice and counsel concerning areas of banking policy,
employee benefit programs, and personnel development services.
Trust services are marketed to customers of the Bank through its Trust
Department located in the Medford office.
THE BANK
The Bank was incorporated on September 1, 1890, as a state bank under
the laws of Wisconsin. The Bank's principal office is located at 132 West
State Street, Medford, Wisconsin, 54451. The Bank's principal office and
branches in Medford, Ogema and Rib Lake, Wisconsin, provide various
commercial and consumer banking services for customers located principally
in Taylor County and portions of Price, Lincoln, Clark and Marathon
Counties, Wisconsin, within a range of 15 to 45 miles from its principal
office.
The Bank's principal branch offices are located at 101 South First
Street, Colby, Wisconsin, 54421 and at 500 West Street, Neillsville,
Wisconsin 54456. These branches provide commercial and consumer banking
services for customers located principally in the communities of Colby,
Abbotsford and Unity, all of the townships of Hull and Brighton, portions
of the townships of Holton, Johnson, Frankfort, Green Grove, Beaver, Eau
Pleine, Mayville and Hoard and the Neillsville market area.
The Bank has received approval from its regulators to open a branch
office in Phillips, Wisconsin. Plans are underway to construct a full
service facility with a scheduled opening date of July 1, 1997. This
branch will provide commercial and consumer banking services for customers
located principally in Price County.
As of December 31, 1996, the Bank had total assets of $251,282,084;
deposits of $206,645,213; and shareholders' equity of $21,363,648. Loans
outstanding as of December 31, 1996 were $174,841,989. No material portion
of the Bank's loans are concentrated within a single industry or customer.
BANK MARKET AREA AND COMPETITION
The Bank has active competition for the services it offers in the
market area in which it presently operates. It competes in its market area
for commercial and individual deposits and loans with twenty-three other
commercial banks and five savings and loan associations, as well as with
national non-bank financial institutions. Such competition encompasses
efforts to obtain new deposits, efforts to attract assets for trust
management, types of services offered, loan rates, and interest rates paid
on time deposits, as well as other aspects of banking. The Bank maintains
correspondent banking relationships with larger financial institutions
located in Madison, Milwaukee, and Eau Claire, Wisconsin; Minneapolis,
Minnesota; and Chicago, Illinois. In addition, the Bank encounters
substantial competition from other financial institutions engaged in the
business of making loans or accepting savings deposits, such as savings and
loan associations, small loan companies, credit unions, certain
governmental agencies, and insurance companies.
The Bank is the second largest bank and financial institution within
its geographic market area.
EMPLOYEES
All officers of Mid-Wisconsin except the Chairman and the Vice-
President are full-time employees of the Bank. As of December 31, 1996,
the total employees of Mid-Wisconsin and its subsidiaries was approximately
105 on a full-time basis and 19 on a part-time basis. Officers and certain
supervisors are salaried, and all other full and part-time employees are
paid on an hourly basis. Employee relations are considered to be good and
none of the employees are covered by a collective bargaining agreement.
EXECUTIVE OFFICERS
The executive officers of the Mid-Wisconsin as of March 1, 1997, their
ages, offices and principal occupation during the last five years are set
forth below.
James R. Peterson, 60
Chairman of the Board of the Company (since 1993) and Vice President,
James Peterson Sons, Inc.
James F. Melvin, 47
Vice Chairman of the Board of the Company and President of the Melvin
Companies.
Ronald D. Isaacson, 60
Vice President of the Company (since October 1996) previously Chairman
of the Board (1991 to 1993) and President and CEO (1993 to 1996) of
the Company; also Chairman of the Board of the Bank.
Gene C. Knoll, 43
President of the Company (since October 1996) and President, Chief
Executive Officer and a director of the Bank; previously, Vice
President of the Company (1994 to 1996), President and CEO of Mid-
Wisconsin Bank of Colby(1988 to 1994).
Ruth M. Zuleger, 58
Secretary and Treasurer of the Company; also Senior Vice President and
Cashier of the Bank.
Lucille T. Brandner, 58
Controller of the Company; also Senior Vice President of the Bank.
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
Mid-Wisconsin and the Bank are subject to regulation under both
federal and state law. The information given below consists of summaries
of certain, but not all statutory provisions which regulate Mid-Wisconsin's
business. These summaries are qualified in their entirety by reference to
the statutory provisions.
Mid-Wisconsin is directly regulated by the Board of Governors of the
Federal Reserve System (the "Board") pursuant to the BHCA and must file
reports on a periodic basis. Among other limitations imposed by the BHCA,
Mid-Wisconsin must obtain prior approval from the Board before acquiring
direct or indirect ownership or control of more than 5% of any bank or bank
holding company. The BHCA also regulates the entry by Mid-Wisconsin into a
business other than banking.
The deposits of the Bank are insured under the provisions of the
Federal Deposit Insurance Act, and the Bank is, therefore, subject to
regulation and examination by the Federal Deposit Insurance Corporation
("FDIC"). As a Wisconsin chartered bank, the Bank and Mid-Wisconsin are
also subject to periodic examination and the regulations of the Wisconsin
Commissioner of Banking.
State and federal banking authorities regulate the Bank's capital
adequacy, loans and loan policies (including the extension of credit to
affiliates), payment of dividends, establishment of branch offices, mergers
and other acquisitions, management personnel, interlocking directors and
other aspects of the operation of the Bank. The Bank is subject to civil
fines, penalties or imposition of regulatory control for noncompliance with
applicable banking regulations and policies. Other financial institutions
with which the Bank competes, such as national banking associations,
savings and loan associations or credit unions, are subject to regulations
which are generally similar, but may be more or less restrictive in certain
areas or permit activities or practices unavailable to the Bank.
Banking laws and regulations have undergone periodic revisions which
often have a direct effect on the Bank's operations and its competitive
environment. Certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, for example, included a provision
setting the Bank's FDIC deposit insurance premiums at a level which
reflects certain risk factors, included immediate authority to acquire
healthy capital-impaired thrift institutions and eliminated cross-marketing
restrictions on bank holding companies which own thrift institutions. Some
of the provisions of the Federal Deposit Insurance Corporation Improvement
Act of 1991, for example, contained substantial changes to the regulatory
framework previously in effect and imposed new standards on many areas of
bank operations, including additional deposit insurance premiums to
recapitalize the bank insurance fund. These increased premiums had a
significant effect on the Bank's earnings until these premiums returned to
levels closer to historical levels in 1995.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") significantly expanded interstate banking
opportunities in Wisconsin. Under a Wisconsin law enacted in 1995 in
response to the Riegle-Neal Act, subject to certain exceptions for banks
which have not been in existence and in continuous operations for at least
five years, bank holding companies may acquire control of an existing or DE
NOVO bank in Wisconsin upon application and approval by the Division of
Banking Wisconsin Department of Financial Institutions. Under the Riegle-
Neal Act, banks will also be permitted to operate interstate branches
beginning June 1, 1997. The effect of the new Wisconsin banking provisions
will be to increase the level of banking competition for the Bank by
broadening the impact of interstate banking within Wisconsin.
The activities and operations of Mid-Wisconsin and the Bank are
subject to a number of other federal and state laws and regulations,
including, among others, state usury and consumer credit laws, the
Truth-In-Lending Act and Regulation Z, Truth in Savings Act and Regulation
DD, the Equal Credit Opportunity Act and Regulation B, the Fair Credit
Reporting Act, the Community Reinvestment Act, anti-redlining legislation
and the antitrust laws.
MONETARY POLICY
The earnings and growth of the Bank, and therefore Mid-Wisconsin, are
affected by the monetary and fiscal policies of the federal government and
governmental agencies. The Board has broad power to expand and contract
the supply of money and credit and to regulate the rates which its member
banks can pay on time and savings deposits. These broad powers are used to
influence inflation and the growth of the economy and directly affect the
growth of bank loans, investments and deposits, and may also affect the
interest rates charged by banks on loans paid by banks in respect of
deposits. Governmental and Board monetary policies have had a significant
effect on the operating results of commercial banks in the past and are
expected to do so in the future. Management of Mid-Wisconsin is not able
to anticipate the future impact of such policies and practices on the
growth or profitability of Mid-Wisconsin.
CHANGES IN FEDERAL REGULATORY SCHEME
From time to time various formal or informal proposals, including new
legislation, relating to, among other things, additional changes with
respect to deposit insurance, permitted bank activities and restructuring
of the federal regulatory scheme have been made and may be made in the
future. Recent proposals or regulations concern expanded securities
activities for banks and accelerated approval procedures for acquisitions
by bank holding companies. Depending on the scope and timing of future
regulatory changes, it is possible that there may be a significant impact
in the future on the competitive circumstances which will affect Mid-
Wisconsin. At this time, Mid-Wisconsin is unable to predict whether any
such changes will be adopted or the effect of any such changes on its
future business or operations.
ITEM 2. PROPERTIES
MID-WISCONSIN
Mid-Wisconsin's operations are carried out at the Bank's main office
facility at 132 West State Street, Medford, Wisconsin. Mid-Wisconsin does
not maintain any separate offices.
All of the offices and facilities of Mid-Wisconsin and the Bank are
adequate and suitable for their purposes.
MID-WISCONSIN BANK
The Bank's main office is located at the property owned by it at 132
West State Street, Medford, Wisconsin, 54451, in the main business district
of the city. The building is a two-story glass and brick structure which
was originally constructed in 1968. A major addition was completed in
1977, which increased the building to its current size of approximately
15,000 square feet of usable floor space. Additional lobby renovation was
completed in 1984.
In addition to the main offices, the Bank also owns the following real
estate and buildings occupied by its other branch facilities
The Plaza branch office consists of a 10,500 square foot building
located on a 56,750 square foot parcel of property off Hwy. 13 in Medford.
The facilities were renovated in 1992 and 1993. Approximately 950 square
feet of the building is being leased to another tenant.
The Ogema branch facility consists of approximately 1,232 square feet
of usable floor space.
The Rib Lake branch office was constructed in 1971 and remodeled in
1983. It currently consists of approximately 2,100 square feet of usable
floor space and has a single attached drive-in lane.
The Colby branch office is located at 101 South First Street in Colby,
Wisconsin. The building at this site was renovated in 1990 and has three
attached drive-in lanes.
The Abbotsford branch facility was opened in early 1987 and consists
of approximately 2,970 square feet of usable floor space and two attached
drive-in lanes.
The Unity branch building was originally constructed in 1982 and
consists of approximately 1,978 square feet of usable floor space and a
single lane drive-in.
The Neillsville branch office is located on property at 500 West
Street, Neillsville, Wisconsin. The bank building, a two-story brick and
glass structure of 7,560 square feet, was constructed in 1975 and was
renovated in 1990 and 1991. It has three attached drive-in lanes.
The Fairchild branch office, constructed in 1968, consists of
approximately 1,040 square feet and was renovated in 1990.
The Phillips branch office is expected to be completed by July 1,
1997. It will initially consist of approximately 3,000 square feet of
office space and an attached drive-through facility.
ITEM 3. LEGAL PROCEEDINGS
Mid-Wisconsin is not a party to any pending legal proceedings before
any court, administrative agency or other tribunal. Further, Mid-Wisconsin
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 Mid-
Wisconsin's management, would have a material adverse effect on the
operations, liquidity or consolidated financial condition of the Bank or
Mid-Wisconsin.
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 1996.
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 Mid-Wisconsin
common stock, although two regional broker-dealers act as a market makers
for Mid-Wisconsin common stock and bid and ask quotations are published
periodically in THE MILWAUKEE JOURNAL SENTINEL. Transactions in Mid-
Wisconsin common stock are limited and sporadic.
HOLDERS
As of March 15, 1997, there were approximately 750 holders of record
of Mid-Wisconsin's $.10 per share par value common stock.
DIVIDEND POLICY
Mid-Wisconsin'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.
Mid-Wisconsin's ability to pay dividends depends upon its receipt of
dividends from the Bank. The Bank's ability to pay dividends, in turn, is
regulated by banking laws and regulations. The declaration of dividends by
Mid-Wisconsin is discretionary and will depend upon operating results and
financial condition, regulatory limitations, tax considerations and other
factors. Mid-Wisconsin 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 Mid-Wisconsin common stock for the periods indicated are:
Market Prices and Dividends
1996 1995
Prices: Prices:
Quarter High Low Dividends(1) High Low Dividends(2)
1st $21.50 $21.00 .13 $16.00 $15.00 .11
2nd 22.63 21.50 .13 18.00 16.00 .12
3rd 23.00 22.63 .13 19.00 17.00 .24
4th 24.00 23.00 .28 21.00 18.00 .00
(1) The $.28 per share dividend declared in the fourth quarter of 1996
includes a special dividend of $.15 per share.
(2) No dividends were declared in the fourth quarter of 1995. The
Company has changed its policy and will hereafter declare the 1st
quarter dividend in the 1st quarter. The $.24 per share dividend
declared in the third quarter includes a special dividend of $.12 per
share.
Quotations represent bid and ask prices from market makers in the common
stock and are published periodically in THE MILWAUKEE JOURNAL SENTINEL. Market
makers in the company's common stock are Robert W. Baird & Co., Incorporated and
Everen Clearing Corp. The quotations reflect prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual
transactions. There is no active established public trading market.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
1996 1995 1994 1993 1992
FINANCIAL HIGHLIGHTS: (Dollars in thousands, except per share amounts)
Earnings and Dividends:
Net interest revenue $10,757 $10,182 $9,865 $9,557 $9,700
Provision for credit los 400 100 303 326 370
Other operating revenue 1,873 1,397 1,739 1,543 1,435
Other operating expense 8,954 8,598 8,623 8,483 8,477
Net income 3,276 2,881 2,678 2,291 2,288
Per common share: (1)
Net income 1.76 1.55 1.44 1.24 1.25
Dividends declared 0.67 0.47 0.41 0.46 0.33
Stockholders'equity 13.79 12.79 10.91 10.52 9.75
Average common shares (000's) 1,865 1,861 1,857 1,848 1,835
Dividend payout ratio 38.07% 30.32% 28.47% 37.10% 26.40%
Shareholders of record at year end 750 710 720 710 700
Balance Sheet Summary:
At year end:
Loans net of unearned income $174,842 $171,364 $165,422 $160,657 $138,596
Assets 251,501 244,606 237,739 229,548 222,176
Deposits 202,412 192,144 186,151 190,172 187,796
Shareholders equity 25,725 23,750 20,180 19,382 17,907
Average balances:
Loans net of unearned income 171,380 166,958 159,265 146,717 136,412
Assets 244,772 236,659 234,186 224,146 222,591
Deposits 192,220 188,586 190,697 190,579 191,121
Shareholders equity 24,544 21,920 20,086 18,566 16,984
Performance Ratios:
Return on average assets 1.34% 1.22% 1.14% 1.02% 1.03%
Return on average common equity 13.35% 13.14% 13.33% 12.34% 13.47%
Equity to assets 9.97% 9.41% 8.14% 8.05% 7.61%
Total risk-based capital 15.66% 13.92% 12.38% 11.88% 12.25%
Net loan charge-offs as a percentage
of average loans 0.12% 0.07% 0.13% 0.10% 0.24%
Nonperforming assets as a percentage
of loans and other real estate 0.58% 0.67% 0.96% 0.59% 0.86%
Net interest margin 4.78% 4.67% 4.61% 4.77% 4.85%
Efficiency ratio 56.12% 60.26% 61.21% 65.23% 64.02%
Fee revenue as a percentage of
average assets 0.43% 0.44% 0.53% 0.51% 0.43%
Stock Price Information:
High $24.00 $21.00 $17.50 $14.50 $11.00
Low 21.00 15.00 14.50 11.00 8.50
Market value at year end (2) 24.00 19.50 16.00 14.00 10.88
(1) All per share amounts (income and dividends) have been restated to
reflect the stock splits in the form of a 100 percent stock dividend issued
May 8, 1995 and December 15, 1992.
(2) Market value at year end represents the average of bid and asked
prices.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis reviews significant
factors with respect to Mid-Wisconsin's financial condition and results of
operation at and for the three-year period ended December 31, 1996. This
discussion should be read in conjunction with the consolidated financial
statements, notes, tables, and the selected financial data presented
elsewhere in this report. All earnings and dividends per share have been
restated to reflect the stock splits in May 1995 and December 1992.
Mid-Wisconsin is not aware of any current recommendations by any
regulatory authority which, if they were implemented, would have a material
effect on liquidity, capital resources, or operations.
RESULTS OF OPERATIONS
Mid-Wisconsin's consolidated net income for 1996 increased 13.73% to
$3,276,441 from $2,880,861 in 1995. This compares with an increase of
7.57% for 1995 over 1994 income of $2,678,121. Factors contributing to the
1996 earnings increase include improved net interest income, increases in
fiduciary and other fee income, and income recognized as a result of the
curtailment of the company's defined benefit pension plan. Mid-Wisconsin
continued to provide funds for loans in its market area. Mid-Wisconsin
promotes a sales culture, along with quality service, in order to attract
new customers and build stronger relationships with existing customers.
Operations consolidation and standardization continued throughout
1996, eliminating duplication of procedures in all areas of the company.
Mid-Wisconsin installed local and wide area networks in 1994, to enable
all offices to communicate and share information. This has enhanced
customer service by providing accurate and timely information as well as
increase productivity. Optical storage and image technology, which will be
installed in the future, will enable Mid-Wisconsin to provide information
throughout the networks, eliminating the need of printed information. The
bank's Voice Response Unit provides the customer with twenty-four hour,
seven days a week access to their account information. An 800 telephone
number has been provided for customers living outside the local phone area.
Corporate Cash Management on-line services were installed in February
1996.
Return on average common stockholders' equity amounted to 13.35% in
1996, 13.14% in 1995, and 13.33% in 1994.
Return on average assets for 1996 amounted to 1.34%, compared to 1.22%
for 1995 and 1.14% for 1994.
Net income per share amounted to $1.76 in 1996, compared to $1.55 in
1995 and $1.44 in 1994. Cash dividends declared in 1996 were $ .67,
compared to $ .47 per share in 1995 and $ .41 in 1994. The per share ratio
of dividends to shareholders to net income was 38.07% in 1996, compared to
30.32% in 1995 and 28.47% in 1994.
NET INTEREST INCOME
The following table shows how net interest income is impacted by the
change in volume and interest rates. 1996 and 1995 data shows a favorable
spread due to both increased volume and rate changes. Growth in net
interest income will continue to be moderate and interest margins will need
to be managed carefully during 1997.
Interest Income & Expense Volume & Rate Change
(in thousands of dollars)
1996 compared to 1995 1995 compared to 1994
increase (decrease) increase (decrease)
due to (1) due to (1)
Volume Rate Net Volume Rate Net
Interest earned on:
Loans (2) $420 $206 $626 $680 $1,417 $2,097
Taxable investment securities 124 (14) 110 0 0 0
Non-taxable invest(2) 33 (41) (8) (81) (22) (103)
Other interest income 33 (3) 30 (241) 151 (90)
Total 611 147 758 358 1,546 1,904
Interest paid on:
Savings deposits $169 $61 $230 $(129) $333 $204
Time deposits (206 150 (56) 243 864 1,107
Short Term Borrowing 267 (281) (14) 99 202 301
Long Term Borrowing 2 9 11 (15) 1 (14)
Total 233 (62) 171 198 1,400 1,598
Net Interest earnings $378 $209 $587 $160 $146 $306
(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 amount of interest income on non-taxable loans and investment
securities has been adjusted to its fully taxable equivalent using a 34%
tax rate.
The following table demonstrates how the changing interest rate
environment affected the net yield on earning assets (on a fully tax
equivalent basis) for the three-year period ending December 31, 1996.
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
Yield Change Yield Change Yield Change
Yield on earning assets 8.79% 0.05% 8.74% 0.73% 8.01% -0.32%
Effective rate on all liabilities as a
% of earning assets 4.01% -0.06% 4.07% 0.67% 3.40% -0.16%
Net yield on earning assets 4.78% 0.11% 4.67% 0.06% 4.61% -0.16%
The 1996 figures as a percent of average earning assets reflect an
increase in interest income and a decrease in interest expense. The
increases are due to the continued high short term interest rates on loans
and strategic pricing of deposits during 1996. Mid-Wisconsin will focus
on increasing net interest income in 1997 through continued control of
interest expense, maintaining the level of interest rates on loans, and
managing the rates on the investment portfolio.
Average earning assets increased 3.28% to $229,218 in 1996 from
$221,933 in 1995. Included in this increase was a 2.65% increase in
average loans and leases to $171,380 in 1996, up from $166,958 in 1995, a
3.90% increase in average taxable investments to $50,672 in 1996, up from
$48,772 in 1995, and a 6.02% increase in average tax exempt investments to
$5,744 in 1996, up from $5,418 in 1995.
The following table sets forth average consolidated balance sheet data
and average rate data on a tax equivalent basis for the periods indicated.
MID-WISCONSIN FINANCIAL SERVICES
Average Consolidated Balance Sheet
Average 1996 Yield Average 1995 Yield Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance
Assets
Interest earning assets:
Loans $171,380 $16,359 9.55% $166,958 $15,733 9.42% $159,265 $13,636 8.56%
Taxable Investment 50,672 3,303 6.52% 48,772 3,193 6.55% 49,242 3,193 6.48%
Non-taxable investments 5,744 413 7.19% 5,418 421 7.77% 6,448 524 8.13%
Other Interest Income 1,422 75 5.27% 785 45 5.73% 3,501 135 3.86%
Total $229,218 20,150 8.79% $221,933 19,392 8.74% $218,456 17,488 8.01%
Non-interest earning assets:
Cash & cash equivalents 9,625 8,880 9,908
Premises & Equip-Net 3,994 4,208 4,443
Other assets 3,839 3,556 3,221
Allow.for credit losses (1,904) (1,918) (1,842)
Total $244,772 $236,659 $234,186
Liabilities & Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand $18,768 $410 2.18% $20,642 $523 2.53% $23,635 $549 2.32%
Savings deposits 49,550 1,666 3.36% 42,069 1,323 3.14% 45,412 1,093 2.41%
Time deposits 102,398 5,899 5.76% 105,768 5,955 5.63% 100,900 4,848 4.80%
Short-term borrowings 19,928 1,000 5.02% 18,244 1,014 5.56% 16,173 713 4.41%
Long-term borrowings 4,243 223 5.26% 4,194 212 5.05% 4,497 226 5.03%
Total $194,887 $9,198 4.72% $190,917 $9,027 4.73% $190,617 $7,429 3.90%
Non-interest bearing liabilities
Demand deposits 21,504 20,107 20,750
Other liabiliti 3,837 3,715 3,733
Stockholders' equity 24,544 21,920 20,086
Total $244,772 $236,659 $234,186
Net interest income $10,952 $10,365 $10,059
Rate Spread 4.07% 4.01% 4.11%
Net yield on interest
earning assets 4.78% 4.67% 4.61%
Equity to Asset Rati 10.03% 9.26% 8.58%
(1) For the purposes of these computations, non-accruing loans are include
in the daily average loan amounts outstanding.
(2) The amount of interest income on non-taxable investment securities and
loans has been adjusted to its fully taxable equivalent using a 34% tax rate.
(3) Loan fees are included in total interest income as follows: 1996-
$389,714; 1995-$396,999; 1994-$356,507.
The preceding table shows a 1996 increase of .11% on net yield on
interest earning assets. The average rate on loans and leases increased
.13% in 1996 to 9.55%, up from 9.42% in 1995. Time deposits decreased
with funds shifting into the more liquid Money Market deposit accounts
which Mid-Wisconsin offered throughout 1996 in an effort to retain deposits
to support loan demand. Total deposits at December 31, 1996 showed an
increase of $10,267,701, increasing to $202,412,107 from $192,144,406 at
December 31, 1995. Average deposits for 1996 increased $3,633,036 to
$192,219,892 from $188,586,856 in 1995. Average short term borrowing
increased $1,684,013, increasing from $18,244,296 in 1995 to $19,928,309
in 1996. The average rate on all interest bearing liabilities decreased
.01% to 4.72 in 1996 from 4.73% in 1995.
Loan growth is expected to moderate during 1997 due to the anticipated
sale of additional real estate loans in the secondary market. This will
provide increased loan servicing income and offset any potential decline in
net interest margin resulting from increased pressure from customers for
lower rates on loans. It will also provide liquidity and decrease the need
to borrow Fed Funds or pay premium rates in order to attract new deposits.
Income of $250,086 on municipal loans is included in interest and fees
on loans in 1996; $246,574 in 1995; and $316,955 in 1994.
Income on taxable securities in 1996 includes no interest on taxable
municipal securities, compared to $29,575 in 1995 and $37,865 in 1994.
The following table sets forth the mix of average interest-earning
assets and average interest-bearing liabilities.
1996 1995 1994
Loans 74.77% 75.23% 72.91%
Taxable investments 22.11% 21.98% 22.54%
Non-taxable 2.50% 2.44% 2.95%
Other 0.62% 0.35% 1.60%
100.00% 100.00% 100.00%
Interest bearing demand 9.63% 10.81% 12.40%
Savings deposits 25.42% 22.04% 23.82%
Time deposits 52.54% 55.40% 52.93%
Short Term Borrowing 10.23% 9.55% 8.49%
Long Term Borrowing 2.18% 2.20% 2.36%
100.00% 100.00% 100.00%
Interest bearing assets show an increase in loans for the years 1996
through 1994. This reflects management's philosophy of investing funds for
local growth. Included in loans and leases are municipal loans of
$4,483,090 at December 31, 1996; $4,300,549 at December 31, 1995; and
$5,225,521 at December 31, 1994.
NON-INTEREST INCOME
The following table shows the major components of non-interest income.
(Dollars in Thousands) 1996 1995 1994
Service Fees $594 $616 $650
Insurance Commissions 69 67 268
Trust Service Fees 383 348 324
Net Securities Transactions (160) (82) (27)
Income from Curtailment of Defined
Benefit Pension Plan 368
Other Operating Income 619 448 524
Total $1,873 $1,397 $1,739
Fiduciary fees increased to $382,524 in 1996, compared to $347,815 in
1995 and $324,639 in 1994. This increase reflects the continual growth of
assets managed by Mid-Wisconsin's Trust Department. The market value of
assets under management increased to $84,821,244 at December 31, 1996, from
$75,220,716 at December 31, 1995, and $61,751,021 at December 31, 1994.
Service fee income on deposit accounts decreased $21,771 in 1996, to
$594,331 reflecting the competitive attitude of Mid-Wisconsin's market
area. Service fee income on deposit accounts decreased $34,024 in 1995 to
$616,102 from $650,126 in 1994.
Insurance commissions increased 3.07% in 1996 from 1995 and decreased
75% in 1995 from 1994. The decrease in 1995 from 1994 was primarily due
to the sale of Mid-Wisconsin's property and casualty business which
occurred in 1995 and 1994.
NON-INTEREST EXPENSE
The following table shows the major components of non-interest
expense.
(Dollars in Thousands) 1996 1995 1994
Salaries $3,001 $2,890 $2,837
Pensions and other employee
benefits 1,080 1,095 1,063
Occupancy expenses (net) 1,297 1,327 1,311
FDIC Expense 2 219 429
Other operating expense 1,794 1,533 1,549
Total $7,174 $7,064 $7,189
Salaries increased $111,028 or 3.84% during 1996 over 1995. Included
in 1996 salary expense is $150,000 in funds provided for payout of
employment contracts to executives. Also included is $52,122 in severance
pay related to operations consolidation. Pensions and other benefits
decreased reflecting the decrease in the number of employees with the
consolidations that have been made in both operations and lending
functions.
Occupancy expense decreased in 1996 after increasing slightly in 1995.
FDIC expense decreased 99.09% in 1996 from 1995, reflecting the reduction
in expense for well capitalized banks from the Federal Deposit Insurance
Corp. FDIC expense will increase in 1997. Other operating expense
increased in 1996 due to an increase in educational, marketing, and
charitable contribution expense.
Effective January 1, 1994, the Company adopted SFAS No. 112
"Employers' Accounting for Post Employment Benefits." The adoption had no
effect on the financial statements.
PROVISION FOR CREDIT LOSSES
Management determines the adequacy of 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 $400,000 in
1996; compared to $100,000 in 1995 and $303,000 in 1994. The allowance for
credit losses as a percentage of gross loans outstanding was 1.16% at
December 31, 1996; 1.06% at December 31, 1995; and 1.12% at December 31,
1994. The increased provision in 1996 is intended to provide adequate
reserves for potential losses due to the depressed agricultural economy.
Charge-offs as a percentage of average loans outstanding were .12% in 1996;
.07% in 1995; and .13% in 1994. Charge-offs have not been concentrated in
any industry or business segment as reflected in the schedule below.
Management feels the allowance for credit losses is adequate as of
December 31, 1996.
The allowance for credit losses shown in the following table
represents a general allowance available to absorb future losses within the
entire portfolio.
(Dollars in Thousands) Years Ended December 31
1996 1995 1994 1993 1992
Allowance for credit losses at beginning
of period $1,836 $1,859 $1,770 $1,590 $1,541
Loans Charged off:
Commercial, financial and 190 123 199 120 186
agricultural
Real Estate 17 32 16 84 53
Installment and other consumer loans
to individuals 105 35 70 65 154
Total charge offs 312 190 285 269 393
Recoveries on loans previously charged
off:
Commercial, financial and
agricultural 80 36 41 66 27
Real estate 2 1 1 21 7
Installment and other consumer
loans to individuals 25 30 29 36 38
Total recoveries 107 67 71 123 72
Net loans charged-off 205 123 214 146 321
Additions charged to operations 400 100 303 326 370
Allowance for credit losses at end of
period $2,031 $1,836 $1,859 $1,770 $1,590
Ratio of allowance for credit losses
to total loans at end of period 1.16% 1.07% 1.12% 1.10% 1.15%
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.07% 0.13% 0.10% 0.24%
The adequacy of the reserve for credit losses is assessed based upon
credit quality and other pertinent loan portfolio information. The reserve
for credit losses provided strong non-performing loan coverage, increasing
to 168% at December 31, 1996. This compares to non-performing loan
coverage of 159% at December 31, 1995, and 117% at December 31, 1994.
The following table presents an 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. Commercial loans secured
by real estate are included in this table under the category of real estate
and the allowance for credit losses is allocated sufficiently to cover any
expectations of loss.
1996 1995 1994 1993 1992
as a % as a % as a % as a % as a %
of Total of Total of Total of Total of Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial, financial, and
agricultural $814 32.03% $644 33.54% $619 30.91% $588 32.24% $525 32.43%
Real Estate 850 60.92% 958 59.53% 959 62.24% 852 58.53% 652 55.89%
Installment and other consumer
loans to individuals 162 6.57% 181 6.80% 178 6.85% 218 9.23% 201 11.68%
Impaired Loans 132 0.48% 51 0.13%
Unallocated 73 n/a 2 n/a 103 n/a 112 n/a 212 n/a
Total $2,031 100.00% $1,836 100.00% $1,859 100.00% $1,770 100.00% $1,590 100.00%
Although real estate loans represent 60.92% of total loans, the
allocated allowance for real estate loans totals 41.85% of the total
allowance since there is a lesser degree of credit risk in real estate
mortgages.
INCOME TAXES
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," became effective January 1, 1994. SFAS No.
109 requires deferred income taxes be provided at enacted tax rates
expected to apply to taxable income in the periods in which the deferred
tax liability or asset is expected to be settled or realized. Mid-
Wisconsin changed its method of accounting for income taxes from the
deferred method to the liability method as permitted by SFAS No. 109. As
permitted under SFAS 109, prior years' financial statements were not
restated. The effect of the change was immaterial. The effective tax rate
increased from 34.7% in 1995 to 35.2% in 1996.
LIQUIDITY AND INTEREST SENSITIVITY
Mid-Wisconsin's Asset Liability Management process provides a unified
approach to management of liquidity, capital and interest rate risk, and to
providing adequate funds to support the borrowing requirements and deposit
flow of its customers. Management views liquidity as the ability to raise
cash at a reasonable cost or with a minimum of loss and as a measure of
balance sheet flexibility to react to marketplace, regulatory, and
competitive changes. The primary sources of Mid-Wisconsin's liquidity are
marketable assets maturing within one year. At December 31, 1996, the
carrying value of debt securities maturing within one year amounted to
$8,167,273; or 14.29% of the total investment securities portfolio. At
December 31, 1995, the carrying value of debt securities maturing within
one year amounted to $14,262,449 or 25.80% of the total investment
securities portfolio. Mid-Wisconsin attempts, when possible, to match
relative maturities of assets and liabilities, while maintaining the
desired net interest margin. Management believes liquidity is adequate.
The following tables show the approximate consolidated rate
sensitivity gap position as of December 31, 1996 and December 31, 1995.
INTEREST RATE RISK EXPOSURE
December 31, 1996
Liquidity
90 day 180 day 1 Yr 2-5 Yrs Over 5 Total
Loans $39,113 $19,543 $36,633 $70,729 $8,944 $174,962
Securities 5,822 4,783 6,748 31,217 8,595 57,165
Fed Funds & Other 10 10
$44,945 $24,326 $43,381 $101,946 $17,539 $232,137
Cumulative Rate Sensitive Assets $44,945 $69,271 $112,652 $214,598 $232,137
<100 CDs & Other Time Dep 17,659 15,066 22,623 31,638 86,986
Money Market Plus Accounts 17,418 17,418
Money Market Savings Accounts 5,262 15,785 21,047
Regular Savings 4,670 14,011 18,681
Now & Super Now Accounts 4,513 13,538 18,051
100 & Over 3,690 2,412 5,745 5,299 17,146
FF Purch, Repo, & Other Borrowed Funds 12,871 1,800 1,000 4,400 20,071
$66,083 $19,278 $29,368 $84,671 $ - $199,400
Cumulative Rate Sensitive Liabilities $66,083 $85,361 $114,729 $199,400 $199,400
Rate Sensitivity Gap $(21,138) $5,048 $14,013 $17,275 $17,539
Cumulative Rate Sensitivity $(21,138) $(16,090) $(2,077) $15,198 $32,737
Gap
Cumulative gap ratio 68.01% 81.15% 98.19% 107.62% 116.42%
INTEREST RATE RISK EXPOSURE
December 31, 1995
Liquidity
90 day 180 day 1 Yr 2-5 Yrs Over 5 Total
Loans $44,636 $21,927 $48,816 $48,773 $8,526 $172,678
Securities 17,505 2,446 7,588 19,436 8,305 55,280
Fed Funds 20 20
$62,161 $24,373 $56,404 $68,209 $16,831 $227,978
Cumulative Rate Sensitive Assets $62,161 $86,534 $142,938 $211,147 $227,978
<100 CDs & Other Time Dep 26,693 16,473 17,740 28,813 150 89,869
Money Market Plus Accounts 7,103 7,103
Money Market Savings Accounts 4,170 12,510 16,680
Regular Savings 5,038 15,114 20,152
Now & Super Now Accounts 4,831 14,494 19,325
100 & Over 7,170 1,941 3,150 4,109 16,370
FF Purch, Repo, & Other Borrowed Funds 21,387 1,600 1,600 800 25,387
$76,392 $18,414 $22,490 $76,640 $950 $194,886
Cumulative Rate Sensitive Liabilities $76,392 $94,806 $117,296 $193,936 $194,886
Rate Sensitivity Gap $(14,231) $5,959 $33,914 $(8,431) $15,881
Cumulative Rate Sensitivity $(14,231) $(8,272) $25,642 $17,211 $33,092
Gap
Cumulative gap ratio 81.37% 91.27% 121.86% 108.87% 116.98%
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. From time to time, the bank develops
special term deposit products that will attract present and potential
customers. The figures reflect a negative position within the first year;
however, the cumulative one-year position is 98.19%. A significant portion
of consumer deposits do not reprice 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. Mid-Wisconsin's Asset/Liability Committee distributes these
deposits over a number of periods to reflect those portions of such
accounts that are expected to reprice 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. However, markets and consumer behavior do change, and
adjustments are necessary as customer preferences, competitive market
conditions, liquidity, loan growth rates, and mix change. Management
considers that an acceptable range for the rate sensitivity ratio is 75-
125%.
At December 31, 1996, Mid-Wisconsin had $19,927,010 in variable rate
loans that reprice on a quarterly basis. These loans have floors and
ceilings which prevent significant short-term interest fluctuations.
INVESTMENT PORTFOLIO
The following table shows the relative maturities of the investment
portfolio as of December 31, 1996. Weighted average yields on tax-exempt
securities have been calculated on a tax equivalent basis using a tax rate
of 34%.
After After
One But Five but
December 31, 1996 Within Weighted Within Weighted Within Weighted After Weighted
(dollars in thousands) One Year Yields Five Years Yields Ten Years Yields Ten Years Yields
U.S. Treas & other U.S.
Gov't agencies & corp $7,539 6.60% $32,439 6.42% $4,869 7.05% $2,087 6.27%
State & political sub-
divisions (domestic) 225 6.95% 4,140 5.03% 2,195 5.22% 333 7.27%
Other bonds, notes, and
debentures 403 8.07% 1,217 8.08% 0 0.00% 0 0.00%
Debt Securities $8,167 6.68% $37,796 6.32% $7,064 6.48% $2,420 6.40%
Equity Securities 1,718 5.88%
Total Securities $9,885 6.54% $37,796 6.32 $7,064 6.48% $2,420 6.40%
There are no securities in the Investment Portfolio that are in excess
of ten percent of Shareholders' Equity.
On January 1, 1994, Mid-Wisconsin Financial Services, Inc. adopted
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115), which
specifies the accounting for investments in securities that have readily
determinable fair values. During 1995, the bank reclassified all
securities as available-for-sale.
At December 31, 1996, the net unrealized gain on securities available
for sale, recorded as a separate component of stockholders' equity, was
$176,005, net of deferred income taxes of $77,725.
Securities with an approximate carrying value of $37,993,443 and
$30,389,165, at December 31, 1996 and 1995 respectively, were pledged
primarily to secure public deposits and for other purposes required by law.
The following table sets forth the distribution of investment
securities and their percentage to total investment securities as of the
dates indicated.
December 31, 1996 December 31, 1995 December 31, 1994
(dollars in thousands) Amount % of total Amount % of total Amount % of total
U.S. Treas & other U.S. Gov't
Agencies & Corp. $46,934 82.10% $37,859 68.48% $31,982 56.76%
State & Political subdivisions
(domestic) (1) 6,893 12.06% 4,900 8.87% 6,693 11.88%
Other securities and
investments 3,338 5.84% 12,522 22.65% 17,671 31.36%
Total $57,165 100.00% $55,281 100.00% $56,346 100.00%
(1) Weighted average yields on tax-exempt securities have been calculated
on a tax equivalent basis using a tax rate of 34%.
Interest rates fluctuated throughout 1996, closing the year .3% to
.75% higher. The market value of the fixed income portion of the
investment portfolio as a percentage of book value decreased slightly due
to this increase in rates. An investment subsidiary, Mid-Wisconsin
Investment Corp., was formed in June 1994, and currently holds
approximately $29,240,439 in securities at book value. Income tax expense
for 1996 was approximately $114,884 lower as a result of holding these
securities at the subsidiary.
The book value and market value of investment securities are equal and
are summarized as follows:
BOOK VALUE and MARKET VALUE
Dec. 31, 1996 Dec. 31, 1995
U.S. Treasury securities and obligations
of other U.S. Govt agencies & corp $46,933,671 $37,858,878
Obligations to states & political
subdivisions 6,893,312 4,900,426
Other securities 3,337,740 12,521,202
Totals $57,164,723 $55,280,506
LOAN PORTFOLIO
The following table sets forth the approximate maturities of the loan
portfolio, excluding consumer, other loans, and non-accrual loans; and the
sensitivity of loans to interest changes as of December 31, 1996.
Maturity
(dollars in thousands) One Year Over one Year Over
or Less to Five Years Five Years
Commercial, financial and
commercial real estate $30,241 $35,209 $11,559
Agricultural 20,947 8,280 1,537
Real estate mortgage 25,056 26,725 3,049
Total $76,244 $70,214 $16,145
Interest Sensitivity
Amount of Loans Due After One Year With: Fixed Variable
(dollars in thousands) Rate Rate
Commercial and financial $35,357 $11,411
Agricultural 7,452 2,365
Real Estate 27,797 1,977
Total $70,606 $15,753
Loan growth for the year ended December 31, 1996 was 1.32%; increasing
from $171,364,245 at December 31, 1995 to $174,841,989 at December 31,
1996. The composition of loans outstanding and their percentage to total
loans as of the dates indicated are as follows:
Dec. 31 % of Dec. 31 % of Dec. 31 % of Dec. 31 % of Dec. 31 % of
(dollars in Thousands) 1996 total 1995 total 1994 total 1993 total 1992 total
Commercial and financial 26,923 15.40% 28,075 16.38% 24,361 14.73% $24,829 15.45% $20,067 14.48%
Construction Loans 891 0.51% 1,272 0.74% 519 0.31% 2,444 1.52% 1,234 0.89%
Agricultural 30,869 17.66% 27,963 16.32% 25,500 15.42% 26,052 16.22% 23,866 17.22%
Real estate 104,002 59.48% 101,473 59.21% 102,958 62.24% 91,581 57.01% 76,233 55.00%
Installment 11,499 6.58% 11,819 6.90% 11,336 6.85% 14,834 9.23% 16,190 11.68%
Lease financing 658 0.37% 762 0.45% 748 0.45% 917 0.57% 1,006 0.73%
Total loans $174,842 100.00% $171,364 100.00% $165,422 100.00% 160,657 100.00% $138,596 100.00%
The composition of loans in the loan portfolio shows a decrease in
commercial and financial loans and increases in real estate and
agricultural loans. Mid-Wisconsin expects growth will be modest to
declining in the real estate category during 1996 as increased efforts are
made to sell these loans in the secondary market.
Mid-Wisconsin's process for monitoring loan quality includes monthly
analysis of delinquencies, non-performing assets and potential problem
loans. Mid-Wisconsin's policy is to place loans on a non-accrual status
when they become contractually past due 90 days or more as to interest or
principal payments. All interest accrued (including applicable impaired
loans) but not collected for loans that are placed on nonaccrual or charged
off is reversed to interest income. The interest on these loans is
accounted for on the cash basis until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest
amounts contractually due have been collected and there is reasonable
assurance that repayment will continue within a reasonable time frame.
A loan is impaired when, based on current information, it is probable
that the Company will be not collect all amounts due in accordance with
the contractual terms of the loan agreement. Impairment is based on
discounted cash flows of expected future payments using the loan's initial
effective interest rate or the fair value of the collateral if the loan is
collateral dependent.
Mid-Wisconsin maintained generally high loan quality during 1996. The
following table sets forth the amount of non-performing loans and other
real estate owned as of the dates indicated.
Non-performing loans Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total
(dollars in thousands) 1996 loans 1995 loans 1994 loans 1993 loans 1992 loans
Non-accrual loans $847 0.49% $1,132 0.66% $1,510 0.91% $650 0.41% $574 0.42%
Loans past due 90 days 36 0.02% 3 0.00% 0 0.00% 19 0.01% 46 0.03%
or more
Restructured loans 189 0.11% 17 0.01% 48 0.03% 279 0.17% 94 0.07%
Total Non-performing
loans $1,072 0.62% $1,152 0.67% $1,558 0.94% $948 0.59% $714 0.52%
Other real estate owned 135 0.08% 5 0.00% 25 0.02% 0 0% 475 0.34%
Total non-performing
assets $1,207 0.70% $1,157 0.67% $1,583 0.96% $948 0.59% $1,189 0.86%
Included above are $394,552 of impaired loans (.023%) in non-accrual
status at December 31, 1996. In addition, there are impaired loans of
$448,179 (.026%) which management has considered in the allowance for
credit losses. The average balance of impaired loans during 1996 was
$779,924.
Total non-performing assets (loans and other real estate) increased
during 1996. As a percentage of total outstanding loans, the non-
performing assets increased .03% to .70% in 1996. The percentage of non-
performing assets decreased .29% in 1995 and increased .37% in 1994 over
1993.
On January 1, 1996, Mid-Wisconsin adopted Statements of Financial
Accounting Standards Nos. 114 and 118 (SFAS114), "Accounting by Creditors
for Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." The adoption of SFAS 114 did
not result in additional provision for losses since the Company evaluates
the overall adequacy of the allowance for credit losses on an ongoing
basis. SFAS 114 does not apply to groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. Loans collectively
evaluated for impairment include certain smaller balance commercial and
agricultural loans, consumer loans, residential real estate loans, and
credit card loans.
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.
DEPOSITS
The following table sets forth average daily deposits and the
percentage of total deposits for the periods indicated.
Dec. 31, % of Dec. 31, % of Dec. 31, % of
(dollars in thousands) 1996 Total 1995 Total 1994 Total
Non-interest bearing demand $21,504 11.19% $20,107 10.66% $20,750 10.88%
Interest-bearing demand 18,768 9.76% 20,642 10.95% 23,635 12.39%
Savings deposits 49,550 25.78% 42,069 22.31% 45,412 23.81%
Time deposits 102,398 53.27% 105,768 56.08% 100,900 52.92%
Total $192,220 100.00% $188,586 100.00% $190,697 100.00%
During 1996, deposits increased 5.34%, or $10,267,701 to $212,412,107
at December 31, 1996 from $192,144,406 at December 31, 1995. Management is
projecting modest deposit growth during 1996 because of Mid-Wisconsin's
strategy to grow only if it can do so profitably along, with increased
competition for deposits in its market area.
The maturity distribution of time certificates of deposit of $100,000
or more at December 31, 1996 and December 31, 1995 is (in thousands):
(dollars in thousands) Dec. 31, 1996 Dec. 31, 1995
3 months or less $3,689 $7,170
Over 3 months through 6 months 2,413 1,941
Over 6 months through 12 months 5,744 3,150
Over 12 months 5,300 4,109
Total $17,146 $16,370
CAPITAL ADEQUACY
During 1996, Mid-Wisconsin's stockholders' equity increased by
$1,974,673 to $25,724,631; after adjusting for a change of $129,788 in net
unrealized losses. This increase was substantially from retention of
current year earnings.
Mid-Wisconsin is subject to risk-based capital guidelines of the Board
and the Bank is subject to equivalent capital guidelines of the FDIC.
A summary of Capital Ratios follows:
CAPITAL RATIOS
(000's except percents)
1996 1995 1994
Total Assets $251,521 $244,606 $237,739
Capital 25,725 23,750 20,180
Capital Ratio 10.23% 9.71% 8.49%
Total Assets $251,521 $244,606 $237,739
Less Goodwill (727) (814) (900)
Tangible Assets $250,794 $243,792 $236,839
Stockholders Equity $25,725 $23,750 $20,180
Less Goodwill (727) (814) (900)
Tangible Capital $24,998 $22,936 $19,280
Tangible Capital Ratio 9.97% 9.41% 8.14%
Risk-based Assets $171,526 $174,979 $174,515
Tangible Equity 24,998 22,936 19,280
Plus Security Valuation (176) (306) 1,191
Less Equity Valuation (106) (718)
Tier 1 Capital $24,822 $22,524 $19,753
Plus Allowance for Credit Losses 2,03 1,836 1,859
Total Risk-based Capital $26,85 $24,360 $21,612
Tier 1 Capital Ratio 14.47% 12.87% 11.32%
Total Risk-based Capital Ratio 15.66% 13.92% 12.38%
As of December 31, 1996, the bank could have paid approximately
$5,575,000 of additional dividends to the company without prior regulatory
approval. The payment of dividends is subject to the statutes governing
state-chartered banks. Management feels the capital structure of Mid-
Wisconsin is adequate.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
Medford, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
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, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of MID-
WISCONSIN FINANCIAL SERVICES, INC. And Subsidiary at December 31, 1996 and
1995, and the consolidated results of operations and cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As described in Note 2 to the consolidated financial statements, in
1996, the Company changed its method of accounting for mortgage servicing
rights, impairment of long-lived assets, and stock-based compensation. In
1995, the Company changed its method of accounting for impaired loans. In
1994, the Company changed its method of accounting for marketable investments
and post employment benefits.
_______________________________________
Wipfli Ullrich Bertelson LLP
January 17, 1997
Wausau, Wisconsin
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
Cash and due from banks $ 13,734,886 $ 10,683,544
Interest-bearing deposits in other financial institutions 10,233 20,246
Investment securities available for sale - At fair value 57,164,723 55,280,506
Loans held for sale 120,000 1,313,800
Total loans receivable 174,841,989 171,364,245
Allowance for credit losses (2,030,878) (1,835,951)
Net loans 172,811,111 169,528,294
Premises and equipment 3,906,661 4,135,949
Other assets 3,753,670 3,643,833
TOTAL ASSETS $251,501,284 $244,606,172
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 23,083,585 $ 22,645,269
Interest-bearing deposits 179,328,522 169,499,137
Total deposits 202,412,107 192,144,406
Short-term borrowings 14,671,264 21,386,623
Long-term borrowings 5,400,000 4,000,000
Accrued expenses and other liabilities 3,293,282 3,325,185
Total liabilities 225,776,653 220,856,214
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares in 1996 and 1995
Issued and outstanding - 1,865,369 shares in 1996 186,537
- 1,857,290 shares in 1995 185,729
Additional paid-in capital 12,647,615 12,573,366
Retained earnings 12,714,474 10,685,070
Unrealized gain on securities available for sale, net 176,005 305,793
Total stockholders' equity 25,724,631 23,749,958
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $251,501,284 $244,606,172
See accompanying notes to consolidated financial statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Interest revenue:
Interest and fees on loans $ 16,270,597 $ 15,637,886 $ 13,577,912
Interest and dividends on investment securities:
Taxable 3,303,183 3,213,173 3,192,896
Tax-exempt 306,252 312,372 388,444
Other interest revenue 74,593 44,884 135,302
Total interest revenue 19,954,625 19,208,315 17,294,554
Interest expense:
Deposits 7,974,336 7,800,759 6,490,806
Short-term borrowings 999,989 1,014,048 712,925
Long-term borrowings 223,290 211,902 225,683
Total interest expense 9,197,615 9,026,709 7,429,414
Net interest revenue 10,757,010 10,181,606 9,865,140
Provision for credit losses 400,000 100,000 303,000
Net interest revenue after provision for credit losses 10,357,010 10,081,606 9,562,140
Noninterest revenue:
Service fees 594,330 616,102 650,126
Insurance commissions 68,525 66,482 267,596
Trust service fees 382,524 347,815 324,639
Net security losses (159,812) (82,199) (27,093)
Gain on curtailment of pension plan 367,815
Other operating income 619,865 448,404 524,053
Total noninterest revenue 1,873,247 1,396,604 1,739,321
Noninterest expenses:
Salaries and related benefits 4,080,862 3,984,877 3,900,407
Net occupancy expense 1,297,160 1,326,876 1,310,613
FDIC expense 2,000 218,763 428,859
Other operating expenses 1,793,680 1,533,174 1,548,694
Total noninterest expenses 7,173,702 7,063,690 7,188,573
Income before income taxes 5,056,555 4,414,520 4,112,888
Provision for income taxes 1,780,114 1,533,659 1,434,767
Net income $ 3,276,441 $ 2,880,861 $ 2,678,121
Earnings per share $ 1.76 $ 1.55 $ 1.44
Cash dividends declared per share $ .67 $ .47 $ .41
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, 1996, 1995 and 1994
Unrealized
Gain (Loss)
on
Additional Securities
Common Stock Paid-In Retained Available
Shares Amount CapitalL Earnings For Sale
Balance, January 1, 1994 921,732 $ 92,173 $ 12,553,178 $ 6,754,568 $ (18,094)
Change in accounting - Adoption
of SFAS No. 115 483,636
Proceeds from stock options 3,198 320 50,369
Net income 2,678,121
Cash dividends declared $.41 (757,164)
Unrealized loss on securities
available for sale - Net of tax (1,656,909)
Balance, December 31, 1994 924,930 92,493 12,603,547 8,675,525 (1,191,367)
Par value of stock transferred
in connection with two-
for-one stock split 924,930 92,493 (92,493)
Proceeds from stock options 7,430 743 62,312
Net income 2,880,861
Cash dividends declared $.47 (871,316)
Unrealized gain on securities
available for sale - Net of tax 1,497,160
Balance, December 31, 1995 1,857,290 185,729 12,573,366 10,685,070 305,793
Proceeds from stock options 8,079 808 74,249
Net income 3,276,441
Cash dividends declared $.67 (1,247,037)
Unrealized loss on securities
available for sale - Net of tax (129,788)
Balance, December 31, 1996 1,865,369 $ 186,537 $ 12,647,615 $ 12,714,474 $ 176,005
See accompanying notes to consolidated financial statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $ 3,276,441 $ 2,880,861 $ 2,678,121
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and net amortization 777,953 749,717 760,413
Provision for credit losses 400,000 100,000 303,000
Provision (benefit) for deferred income taxes 31,913 (52,609) (205,443)
Loss on sale of investment securities 159,812 82,199 27,093
Gain on (curtailment of) pension plan (367,815)
Loss on equipment disposals 441 30,320 23,440
Loss on sale of other real estate 1,777 13,058
Gain on sale of insurance business (210,900)
Changes in operating assets and liabilities:
Other assets (2,864) (420,579) (461,355)
Other liabilities 342,578 130,178 284,920
Net cash provided by operating activities 4,618,459 3,501,864 3,212,347
Cash flows from investing activities:
Proceeds from sale - Available for sale 6,555,302 7,837,562 2,972,907
Proceeds from maturities:
Held to maturity 6,389,900
Available for sale 19,775,437 8,728,667 8,079,145
Payment for purchases:
Held to maturity (1,093,387)
Available for sale (28,636,385) (13,274,834) (24,426,262)
Proceeds from sale of loans 6,080,225 2,855,444 1,480,250
Net increase in loans (8,703,942) (10,038,876) (6,711,363)
Net (increase) decrease in interest-bearing
deposits in other institutions 10,013 72,708 16,732
Net decrease in federal funds sold 2,287,000
Capital expenditures (436,079) (436,847) (493,390)
Proceeds from sale of equipment 2,950 8,250 25,857
Proceeds from sale of other real estate 5,000 23,222 212,051
Proceeds from sale of insurance business 210,900
Net cash used in investing activities (5,347,479) (4,224,704) (11,049,660)
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(CONTINUED)
1996 1995 1994
Cash flows from financing activities:
Net increase (decrease) in deposits $ 10,267,701 $ 5,993,029 $ (4,021,068)
Proceeds from exercise of stock options 75,057 63,055 50,689
Net increase (decrease) in short-term borrowings (6,715,359) (2,485,809) 12,009,956
Proceeds from issuance of long-term borrowings 3,000,000
Principal payments on long-term borrowings (1,600,000) (335,000) (900,000)
Dividends paid (1,247,037) (1,074,801) (738,052)
Net cash provided by financing activities 3,780,362 2,160,474 6,401,525
Net increase (decrease) in cash and due from banks 3,051,342 1,437,634 (1,435,788)
Cash and due from banks at beginning 10,683,544 9,245,910 10,681,698
Cash and due from banks at end $ 13,734,886 $ 10,683,544 $ 9,245,910
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 9,234,573 $ 8,767,822 $ 7,280,832
Income taxes 1,712,851 1,695,025 1,723,912
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to other real estate $ 135,000 $ 5,000 $ 250,108
Loans charged off 311,538 189,884 285,459
Loans made in connection with the disposition
of other real estate 178,600
See accompanying notes to consolidated financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mid-Wisconsin
Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank. All
significant intercompany balances and transactions have been eliminated. The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and to general practice within the banking industry.
The Company operates as a full service financial institution with a primary
marketing area including, but not limited to, Clark and Taylor Counties. It
provides a variety of core banking products in addition to trust services and
investment product sales.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND DUE FROM BANKS
For purposes of reporting cash flows, cash and due from banks include cash on
hand and noninterest-bearing deposits in correspondent banks.
INVESTMENT SECURITIES
Investment 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 a separate component of
stockholders' equity, net of income tax effects.
Any gains and losses on sales of securities are recognized at the time of sale
using the specific identification method.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST AND FEES ON LOANS
Interest on loans is credited to income as earned. Interest income is not
accrued on loans where management has determined collection of such interest is
doubtful. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest deemed uncollectible is reversed and charged against current
income.
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 believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based upon reviews of
individual credits, recent loss experience, current economic conditions,
composition of the loan portfolio, and other relevant factors. Provisions for
credit losses and recoveries on loans previously charged off are added to the
allowance.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation.
Maintenance and repair costs are charged to expense as incurred. Gains or
losses on disposition of premises and equipment are reflected in income.
Depreciation is computed on both accelerated and straight-line methods and is
based on the estimated useful lives of the assets varying from 10 to 50 years
on buildings and 3 to 20 years on equipment.
OTHER REAL ESTATE
Other real estate is carried at the lower of cost or realizable fair market
value at the date of transfer.
INTANGIBLES
The excess of cost over the net assets acquired (goodwill) is being amortized
using the straight-line method over a 15-year period from the date of
acquisition.
RETIREMENT PLANS
The Company had a noncontributory defined benefit pension plan which covered
substantially all full-time employees. This plan was terminated effective
January 1, 1997 to be replaced with a money purchase defined contribution
pension plan covering substantially the same employees. The Company also
maintains a defined contribution profit-sharing plan which covers substantially
all full-time employees.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
EARNINGS PER SHARE
Earnings per common share are based upon the weighted average number of common
shares outstanding which includes the common stock equivalents applicable to
shares issuable under the stock options granted. The weighted average number
of shares outstanding were 1,864,840 in 1996, 1,861,328 in 1995, and 1,856,940
in 1994. The weighted average number of shares has been adjusted to reflect
the stock split in the form of a 100 percent stock dividend issued May 8, 1995.
All per share amounts have been restated to reflect the stock dividend.
FUTURE ACCOUNTING CHANGES
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS No.
125 requires use of a financial-components approach to recognize financial
assets and liabilities. Under this approach, after a transfer of financial
assets, the Company will recognize the financial and servicing assets and
liabilities based on whether control over the asset and liability was
maintained or surrendered. This statement is required to be adopted by the
Company for transfers and servicing of financial assets and extinguishments of
liabilities effective January 1, 1997. The adoption of SFAS No. 125 is not
anticipated to have a significant impact on the Company's financial condition
or results of operations once implemented.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets to be Disposed of." There was no impact on net income as a result
of the adoption of SFAS No. 121. The Company had no long-lived assets
considered to be impaired at the time of adopting the standard.
Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." Under this SFAS, the Company had to record an
asset for the value of retained servicing rights on mortgages sold. This asset
is amortized to expense as serviced loan principal is paid. The adoption had
an insignificant effect on the financial statements during the year of
adoption.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." Under this SFAS, the Company is required to
disclose in the notes to the financial statements the difference between the
"fair value method" and the "intrinsic value method" as prescribed by the
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company continues to account for stock-based compensation
in accordance with APB Opinion No. 25, with differences from the "fair value
method" disclosed. The adoption had no effect on the financial statements.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures." There was no impact on net
income as a result of the adoption of SFAS No. 114.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Under this SFAS, the
Company had to classify its investment securities into one of three different
classifications. Investments classified as available for sale must reflect
market value changes in the equity section. The impact of adoption of SFAS No.
115 was an increase in the value of securities reflected on the balance sheet
of $795,636, an increase in deferred tax liabilities of $312,000 and an
increase in equity of $483,636. The adoption of SFAS No. 115 had no effect on
1994 net income.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Post Employment Benefits." The adoption had no effect on the
financial statements.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $898,000 are restricted at December
31, 1996 to meet the reserve requirements of the Federal Reserve System.
NOTE 4 - INVESTMENT 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, 1996
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 23,095,170 $ 116,542 $ 102,043 $ 23,080,671
Obligations of states and
political subdivisions 6,893,312 168,603 22,117 6,746,826
Corporate securities 1,620,370 30,043 1,590,327
Mortgage-backed securities 23,838,501 213,548 152,502 23,777,455
Equity securities 1,717,370 1,717,370
Totals $ 57,164,723 $ 528,736 $ 276,662 $ 56,912,649
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
Gross Gross
Fair Unrealized Unrealized Amortized
Value Gains Losses Cost
DECEMBER 31, 1995
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 22,475,820 $ 179,629 $ 71,666 $ 22,367,857
Obligations of states and
political subdivisions 4,900,426 182,668 16,910 4,734,668
Corporate securities 5,813,709 99,249 5,714,460
Mortgage-backed securities 15,511,636 250,983 3,963 15,264,616
Equity securities 6,578,915 131,275 6,710,190
Totals $ 55,280,506 $ 712,529 $ 223,814 $ 54,791,791
As a member of the Federal Home Loan Bank (FHLB) system, the banking subsidiary
is required to hold stock in the FHLB based on asset size. This stock is
recorded at cost which is equal to par value. Equity securities include
$984,000 and $712,000 of FHLB stock at December 31, 1996 and 1995,
respectively.
The book values and fair values of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Fair Book
Values Values
DEBT SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 4,790,648 $ 4,779,125
Due after one year through five years 22,267,886 22,189,340
Due after five years through ten years 4,216,397 4,149,359
Due after ten years 333,921 300,000
Mortgage-backed securities 23,838,501 23,777,455
Total debt securities available for sale $ 55,447,353 $ 55,195,279
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
Following is a summary of the proceeds from sales of investment securities as
well as gross gains and losses for the years ended December 31:
SECURITIES AVAILABLE FOR SALE
1996 1995 1994
Proceeds from sales of investments $ 6,555,302 $ 7,837,562 $ 2,972,907
Debt securities - Gross realized gains $ 1,553 $ 130,591 $
Debt securities - Gross realized losses (4,827)
Equity securities - Net realized losses (161,365) (207,963) (27,093)
Total investment securities losses $ (159,812) $ (82,199) $ (27,093)
Securities with an approximate carrying value of $37,993,000 and $30,389,000 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, short-term borrowings and for other purposes required by law.
A significant portion of the states and political subdivisions securities are
rated by Moody's, with ratings ranging from A to AAA. For those securities not
rated, fair values are obtained from brokerage services utilized by the
Company. At December 31, 1996, the total carrying value of nonrated
obligations of states and political subdivisions was approximately $3,027,000.
NOTE 5 - LOANS
The composition of loans at December 31 follows:
1996 1995
Commercial $ 26,922,254 $ 28,146,447
Agricultural 30,868,959 27,962,475
Real estate:
Construction 890,588 1,271,741
Mortgage 104,002,036 101,474,348
Installment 11,499,559 11,747,142
Lease financing 658,593 762,092
Total loans $ 174,841,989 $ 171,364,245
The weighted average interest rate for all loans was 9.02 percent and 9.11
percent at December 31, 1996 and 1995, respectively. Approximately 88.6
percent of the loans have fixed rates with the remaining 11.4 percent having
variable rates.
NOTE 5 - LOANS (CONTINUED)
Residential mortgage loans held for sale are carried at the lower of cost or
market. Cost was equal to market at December 31, 1996. Mortgage loans
serviced for others are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of these loans are $12,821,873,
$8,055,796, and $5,574,066 at December 31, 1996, 1995 and 1994, respectively.
Loans are recorded net of deferred loan fees which totaled $83,882 and $90,287
at December 31, 1996 and 1995, respectively.
The Company in the ordinary course of business grants loans to the Company's
executive officers and directors, including their families and firms in which
they are principal owners.
All loans to executive officers and directors are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others and do not involve more than the
normal risk of collectibility or present other unfavorable features. The bank
has a policy of making loans available to nonexecutive officers and employees
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 such loans during 1996 is summarized below:
Loans outstanding, January 1, 1996 $ 2,313,429
New loans 780,113
Repayments (1,202,334)
Loans outstanding, December 31, 1996 $ 1,891,208
The aggregate amount of nonperforming loans was approximately $1,072,000 and
$1,152,000 at December 31, 1996 and 1995, respectively. Nonperforming loans
are those which are either contractually past due 90 days or more as to
interest or principal payments, on a nonaccrual status, or the terms of which
have been renegotiated to provide a reduction or deferral of interest or
principal. If nonaccrual and renegotiated loans had been current or not
troubled, $108,788, $161,476, and $212,442 of interest income would have been
recorded for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest income on impaired or nonaccrued loans is recorded on the cash basis
as income when received. Interest income actually recorded was $182,442,
$71,740, and $31,391 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The allowance for credit losses should include specific allowances related to
loans which have been judged to be impaired and which fall within the scope of
SFAS No. 114. A loan is impaired when, based on current information, it is
probable that the Company will not collect all amounts due in accordance with
the contractual terms of the loan agreement. These specific allowances are
based on discounted cash flows of expected future payments using the loan's
initial effective interest rate or the fair value of the collateral if the loan
is collateral dependent.
NOTE 5 - LOANS (CONTINUED)
An analysis of impaired loans follows:
1996 1995
AT DECEMBER 31,
Nonaccrual $ 394,552 $ 155,000
Accruing income 448,179 72,000
Total impaired loans 842,731 227,000
Less - Allowance for credit losses 132,124 51,000
Net investment in impaired loans $ 710,607 $ 176,000
YEARS ENDED DECEMBER 31,
Average recorded investment, net of
allowance for credit losses $ 779,924 $ 183,000
Interest income recognized $ 86,776 $ 657
Since the Company evaluates the overall adequacy of the allowance for credit
losses on an ongoing basis, the adoption of SFAS No. 114 during 1995 did not
affect the amount of the allowance for credit losses or the existing income
recognition and charge-off policies for nonperforming loans.
The Company continues to maintain a general allowance for credit losses for
loans outside of the scope of SFAS No. 114. The allowance for credit losses is
maintained at a level which management believes is adequate for possible credit
losses. Management periodically evaluates the adequacy of the allowance using
the Company's past credit loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective since it requires
material estimates that may be susceptible to significant change.
An analysis of the allowance for credit losses for the three years ended
December 31, follows:
1996 1995 1994
Balance, January 1 $ 1,835,951 $ 1,858,783 $ 1,770,289
Provision charged to operating expense 400,000 100,000 303,000
Recoveries on loans 106,465 67,051 70,791
Loans charged off (311,538) (189,883) (285,297)
Balance, December 31 $ 2,030,878 $ 1,835,951 $ 1,858,783
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
1996 1995
Land and improvements $ 441,406 $ 441,406
Buildings 3,800,283 3,789,489
Furniture and equipment 3,671,854 3,419,269
Total cost 7,913,543 7,650,164
Accumulated depreciation (4,006,882) (3,514,215)
Net book value $ 3,906,661 $ 4,135,949
Depreciation and amortization charged to operating expense totaled $680,295 in
1996, $672,338 in 1995, and $658,392 in 1994.
NOTE 7 - OTHER REAL ESTATE
Included in other assets at December 31, 1996 and 1995 is other real estate
totaling $135,000 and $5,000, respectively. The carrying values of the
properties approximates realizable fair market value.
NOTE 8 - INTEREST-BEARING DEPOSITS
Aggregate annual maturities of certificate and IRA accounts at December 31,
1996 are as follows:
1997 $ 65,833,897
1998 16,344,667
1999 16,130,481
2000 5,754,561
2001 21,430
Total $ 104,085,036
Deposits from Company directors, executive officers, and related firms in which
they are principal owners totaled $3,701,280 at December 31, 1996.
NOTE 9 - SHORT-TERM BORROWINGS
The composition of short-term borrowings at December 31, follows:
1996 1995
Federal funds purchased $ $ 7,123,000
Securities sold u