Attached files
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2010
[ ] 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 Identification No.)
of incorporation or organization)
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:
$0.10 Par Value Common Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [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]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of "large accelerated filer," "large accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 30, 2010 (the last business day of the registrant's most recently
completed second fiscal quarter) the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $14,098,000 based
upon a price per share of $9.50. For purposes of this calculation, the
registrant has assumed its directors and executive officers are affiliates.
As of March 1, 2011, 1,652,122 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K Into Which
Proxy Statement for Annual Meeting of Portions of Documents Are Incorporated
Shareholders on April 26, 2011 Part III
MID-WISCONSIN FINANCIAL SERVICES, INC.
2010 FORM 10-K TABLE OF CONTENTS
Page
PART I
ITEM 1. Business 4
ITEM 1A. Risk Factors 19
ITEM 1B. Unresolved Staff Comments 30
ITEM 2. Properties 30
ITEM 3. Legal Proceedings 31
ITEM 4. Removed and Reserved 31
PART II
ITEM 5. Market for the Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities 31
ITEM 6. Selected Financial Data 34
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 35
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk 67
ITEM 8. Financial Statements and Supplementary Data 68
ITEM 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 113
ITEM 9A. Controls and Procedures 113
ITEM 9B. Other Information 114
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance 114
ITEM 11. Executive Compensation 114
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholders Matters 114
ITEM 13. Certain Relationships and Related Transactions,
and Director Independence 115
ITEM 14. Principal Accounting Fees and Services 115
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 115
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7, contains forward-
looking statements as defined by The Private Securities Litigation Reform Act of
1995, that involve risks, uncertainties, and assumptions. Forward-looking
statements are based on current management expectations and are not guarantees
of future performance, nor should they be relied upon as representing
management's view as of any subsequent date. If the risks or uncertainties ever
materialize or the assumptions prove incorrect, our results may differ
materially from those presented, either expressed or implied, in this filing.
All statements other than statements of historical fact are statements that
could be deemed forward-looking statements. Forward-looking statements may be
identified by, among other things, expressions of beliefs or expectations that
certain events may occur or are anticipated, and projections or statements of
expectations. Such forward-looking statements include, without limitation,
statements regarding expected financial and operating activities and results
that are preceded by, followed by, or that include words such as "may,"
"expects," "anticipates," "estimates," "plans," "believes," or similar
expressions. Such statements are subject to important factors that could cause
our actual results to differ materially from those anticipated by the forward-
looking statements. These factors, many of which are beyond our control, include
the following:
o operating, legal and regulatory risks, including the effects of the
recently enacted Dodd-Frank Wall Street Reform and Consumer Protection
Act and Regulations promulgated thereunder;
o economic, political and competitive forces affecting our banking and
wealth management businesses;
o impact on net interest income from changes in monetary policy and general
economic conditions;
o the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful;
o other factors discussed under Item 1A, "Risk Factors" and elsewhere
herein, and from time to time in our other filings with the Securities
and Exchange Commission after the date of this report.
These factors should be considered in evaluating the forward-looking statements,
and you should not place undue reliance on such statements. We specifically
disclaim any obligation to update factors or to publicly announce the results of
revisions to any of the forward-looking statements or comments included herein
to reflect future events or developments.
PART I
ITEM 1. BUSINESS
GENERAL
Our subsidiary operates under the name Mid-Wisconsin Bank (the "Bank") and has
its principal office in Medford, Wisconsin. We are a Wisconsin corporation
organized in 1986 and as the sole shareholder of the Bank, are a bank holding
company registered with, and subject to regulation by the Board of Governors of
the Federal Reserve System under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). This Annual Report on Form 10-K describes our business
and that of the Bank in effect on December 31, 2010, and any reference to the
"Company" refers to Mid-Wisconsin Financial Services, Inc. or the consolidated
operations of Mid-Wisconsin Financial Services, Inc. and its subsidiary Mid-
Wisconsin Bank, as the context requires.
THE BANK
The Bank was incorporated on September 1, 1890, as a state bank under the laws
of Wisconsin. The Bank operates fourteen retail banking locations throughout
North Central Wisconsin serving markets in Clark, Eau Claire, Lincoln, Marathon,
Oneida, Price, Taylor and Vilas counties.
The day-to-day management of the Bank rests with its officers with oversight
provided by the board of directors. The Bank is engaged in general commercial
and retail banking services, including wealth management 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, mortgage lending and agricultural lending. In addition, the
Bank provides a full range of personal banking services, including checking
accounts, savings and time products, installment and other personal loans, as
well as mortgage loans. To expand services to its customers on a 24-hour basis,
the Bank offers ATM services, merchant capture, cash management, express phone
and online banking. New services are frequently added.
The Wealth Management area consists of two delivery methods of providing
financial products and services to assist customers in building, investing, or
protecting their wealth. Through its state granted trust powers, Wealth
Management provides fiduciary, administrative, and investment management
services to personal trusts, estates, individuals, businesses, non-profits, and
foundations for an asset based fee. Through a third party broker/dealer, UVEST
Financial Services, a subsidiary of Linsco Private Ledger, a registered
broker/dealer, Wealth Management makes available a variety of retail investment
and insurance products including equities, bonds, fixed and variable annuities,
mutual funds, life insurance, long-term care insurance and brokered certificates
of deposits, which are commission based transactions.
All of our products and services are directly or indirectly related to the
business of community banking and all activity is reported as one segment of
operations. All revenue, profit and loss, and total assets are reported in one
segment and represent our entire operations.
We have a policy of pursuing opportunities to acquire additional bank
subsidiaries or branch offices so that, at any given time, we 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 the
potential acquisition or sale of any business unit as of the date hereof.
EMPLOYEES
As of December 31, 2010, we employed 151 full-time equivalent employees. None
of our employees are represented by unions. We consider the relationship with
our employees to be good.
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. 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.
EXECUTIVE OFFICERS
The management team of the Bank as of March 1, 2011, and their offices are set
forth below.
Name Offices and Positions Held
James F. Warsaw President, Chief Executive Officer
Rhonda R. Kelley Principal Accounting Officer and Controller
Robert E. Taubenheim Chief Credit Officer
Scot G. Thompson Regional President - Eastern Region
William A. Weiland Regional President - Central Region
SUPERVISION AND REGULATION
GENERAL
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by requirements of federal
and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Wisconsin Department of Financial
Institutions (the "DFI"), the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and the Federal Deposit Insurance Corporation (the
"FDIC"). Furthermore, taxation laws administered by the Internal Revenue
Service and state taxing authorities, accounting rules developed by the
Financial Accounting Standards Board (the "FASB") and securities laws
administered by the Securities and Exchange Commission (the "SEC") and state
securities authorities have an impact on the business of the Company. The effect
of these statutes, regulations, regulatory policies and accounting rules may be
significant, and cannot be predicted with a high degree of certainty.
Federal and state banking laws impose a comprehensive system of supervision,
regulation and enforcement on the operations of financial institutions, their
holding companies and affiliates that is intended primarily for the protection
of the FDIC-insured deposits and depositors of banks, rather than shareholders.
These federal and state laws, and the regulations of the bank regulatory
authorities issued under them, affect, among other things, the scope of
business, the kinds and amounts of investments banks may make, reserve
requirements, capital levels relative to operations, the nature and
amount of collateral for loans, the establishment of branches, the ability to
merge, consolidate and acquire, dealings with insiders and affiliates and the
payment of dividends. In addition, turmoil in the credit markets in recent
years prompted the enactment of unprecedented legislation that has allowed the
U.S. Department of the Treasury ("Treasury") to make equity capital available to
qualifying financial institutions to help restore confidence and stability in
the U.S. financial markets, which imposes additional requirements on
institutions in which Treasury invests.
The following is a summary of the material elements of the supervisory and
regulatory framework applicable to the Company and the Bank. It does not
describe all of the statutes, regulations and regulatory policies that apply,
nor does it restate all of the requirements of those that are described.
Moreover, Congress recently enacted fundamental reforms to our bank regulatory
framework, the majority of which will be implemented over time by various
regulatory agencies, making their impact difficult to predict. See "-Financial
Regulatory Reform" below.
FINANCIAL REGULATORY REFORM
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Dodd-Frank Act") into law. The Dodd-Frank Act
represents a sweeping reform of the supervisory and regulatory framework
applicable to financial institutions and capital markets in the United States,
certain aspects of which are described below in more detail. The Dodd-Frank Act
creates new federal governmental entities responsible for overseeing different
aspects of the U.S. financial services industry, including identifying emerging
systemic risks. It also shifts certain authorities and responsibilities among
federal financial institution regulators, including the supervision of holding
company affiliates and the regulation of consumer financial services and
products. In particular, and among other things, the Dodd-Frank Act: creates a
Bureau of Consumer Financial Protection authorized to regulate providers of
consumer credit, savings, payment and other consumer financial products and
services; narrows the scope of federal preemption of state consumer laws enjoyed
by national banks and federal savings associations and expands the authority of
state attorneys general to bring actions to enforce federal consumer protection
legislation; imposes more stringent capital requirements on bank holding
companies and subjects certain activities, including interstate mergers and
acquisitions, to heightened capital conditions; significantly expands
underwriting requirements applicable to loans secured by 1-4 family residential
real property; restricts the interchange fees payable on debit card transactions
for issuers with $10 billion in assets or greater; requires the originator of a
securitized loan, or the sponsor of a securitization, to retain at least 5% of
the credit risk of securitized exposures unless the underlying exposures are
qualified residential mortgages or meet certain underwriting standards to be
determined by regulation; creates a Financial Stability Oversight Council as
part of a regulatory structure for identifying emerging systemic risks and
improving interagency cooperation; provides for enhanced regulation of advisers
to private funds and of the derivatives markets; enhances oversight of credit
rating agencies; and prohibits banking agency requirements tied to credit
ratings.
Numerous provisions of the Dodd-Frank Act are required to be implemented through
rulemaking by the appropriate federal regulatory agencies over the next few
years. It is not clear what form such regulations will ultimately take or if
certain provisions of the Dodd-Frank Act will be amended prior to their
implementation. Furthermore, while the reforms primarily target systemically
important financial service providers, their influence is expected to filter
down in varying degrees to smaller institutions over time. As a result, in many
respects, the ultimate impact of the Dodd-Frank Act will not be fully known for
years, and no current assurance may be given that the Dodd-Frank Act, or any
other new legislative changes, will not have a negative impact on the results
of operations and financial condition of the Company and the Bank.
THE INCREASING IMPORTANCE OF CAPITAL
While capital has historically been one of the key measures of the financial
health of both holding companies and depository institutions, its role is
becoming fundamentally more important in the wake of the financial crisis. Not
only will capital requirements increase, but the type of instruments that
constitute capital will also change, and, as a result of the Dodd-Frank Act,
after a phase-in period, bank holding companies will have to hold capital under
rules as stringent as those for insured depository institutions. Moreover, the
actions of the international Basel Committee on Banking Supervision, a committee
of central banks and bank supervisors, to reassess the nature and uses of
capital in connection with an initiative called "Basel III," discussed below,
will likely have a significant impact on the capital requirements applicable to
U.S. bank holding companies and depository institutions.
REQUIRED CAPITAL LEVELS. As indicated above, the Dodd-Frank Act mandates the
Federal Reserve to establish minimum capital levels for bank holding companies
on a consolidated basis that are as stringent as those required for insured
depository institutions. The components of Tier 1 capital will be restricted to
capital instruments that are currently considered to be Tier 1 capital for
insured depository institutions. As a result, the proceeds of trust preferred
securities will be excluded from Tier 1 capital unless such securities were
issued prior to May 19, 2010 by bank holding companies with less than $15
billion of assets. As the Company has assets of less than $15 billion, it will
be able to maintain its trust preferred proceeds as capital but it will have to
comply with new capital mandates in other respects, and it will not be able to
raise Tier 1 capital in the future through the issuance of trust preferred
securities.
Under current federal regulations, the Bank is subject to, and, after a phase-in
period, the Company will be subject to, the following minimum capital standards:
(i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to
total assets of 3% for the most highly-rated banks with a minimum requirement of
at least 4% for all others; and (ii) a risk-based capital requirement consisting
of a minimum ratio of total capital to total risk-weighted assets of 8% and a
minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. For this
purpose, Tier 1 capital consists primarily of common stock, noncumulative
perpetual preferred stock and related surplus less intangible assets (other than
certain loan servicing rights and purchased credit card relationships). Total
capital consists primarily of Tier 1 capital plus Tier 2 capital, which includes
other non-permanent capital items such as certain other debt and equity
instruments that do not qualify as Tier 1 capital and a portion of the Bank's
allowance for loan and lease losses.
The capital requirements described above are minimum requirements. Federal law
and regulations provide various incentives for banking organizations to maintain
regulatory capital at levels in excess of minimum regulatory requirements. For
example, a banking organization that is "well-capitalized" may qualify for
exemptions from prior notice or application requirements otherwise applicable to
certain types of activities may qualify for expedited processing of other
required notices or applications and may accept brokered deposits.
Additionally, one of the criteria that determines a bank holding company's
eligibility to operate as a financial holding company (see "-Acquisitions,
Activities and Changes in Control" below) is a requirement that all of its
depository institution subsidiaries be "well-capitalized." Under the Dodd-Frank
Act, that requirement is extended such that, as of July 21, 2011, bank holding
companies, as well as their depository institution subsidiaries, will have to be
well-capitalized in order to operate as financial holding companies. Under the
capital regulations of the Federal Reserve, in order to be "well-capitalized" a
banking organization must maintain a ratio of total capital to total
risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total
risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total
assets of 5% or greater.
Higher capital levels may also be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing
or anticipating significant growth or declines in asset quality would be
expected to maintain capital ratios, including tangible capital positions (i.e.,
Tier 1 capital less all intangible assets), well above the minimum levels. See
"- The Bank - Regulatory Proceedings Against the Bank" for a discussion
regarding the heightened capital requirements which the Bank has agreed to
maintain.
It is important to note that certain provisions of the Dodd-Frank Act and Basel
III, discussed below, will ultimately establish strengthened capital standards
for banks and bank holding companies, will require more capital to be held in
the form of common stock and will disallow certain funds from being included in
a Tier 1 capital determination. Once fully implemented, these provisions may
represent regulatory capital requirements which are meaningfully more stringent
than those outlined above.
PROMPT CORRECTIVE ACTION. A banking organization's capital plays an important
role in connection with regulatory enforcement as well. Federal law provides
the federal banking regulators with broad power to take prompt corrective action
to resolve the problems of undercapitalized institutions. The extent of the
regulators' powers depends on whether the institution in question is "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized," in each case as defined by regulation. Depending
upon the capital category to which an institution is assigned, the regulators'
corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution's asset growth and restricting
its activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired; (iv) restricting
transactions between the institution and its affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new election
of directors of the institution; (vii) requiring that senior executive officers
or directors be dismissed; (viii) prohibiting the institution from accepting
deposits from correspondent banks; (ix) requiring the institution to divest
certain subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the
institution.
As of December 31, 2010, the Bank exceeded its minimum regulatory capital
requirements under Federal Reserve capital adequacy guidelines, as well as the
heightened capital requirements that it has agreed to maintain with the FDIC and
DFI (as described under "- The Bank - Regulatory Proceedings Against the Bank").
As of December 31, 2010, the Company had regulatory capital in excess of the
Federal Reserve's minimum requirements.
BASEL III. The current risk-based capital guidelines that apply to the Bank
and will apply to the Company are based upon the 1988 capital accord of the
international Basel Committee on Banking Supervision, a committee of central
banks and bank supervisors, as implemented by the U.S. federal banking agencies
on an interagency basis. In 2008, the banking agencies collaboratively began to
phase-in capital standards based on a second capital accord, referred to as
"Basel II," for large or "core" international banks (generally defined for U.S.
purposes as having total assets of $250 billion or more or consolidated foreign
exposures of $10 billion or more). Basel II emphasized internal assessment of
credit, market and operational risk, as well as supervisory assessment and
market discipline in determining minimum capital requirements.
On September 12, 2010, the Group of Governors and Heads of Supervision, the
oversight body of the Basel Committee on Banking Supervision, announced
agreement to a strengthened set of capital requirements for banking
organizations in the United States and around the world, known as Basel III.
The agreement is currently supported by the U.S. federal banking agencies. As
agreed to, Basel III is intended to be fully-phased in on a global basis on
January 1, 2019. However, the ultimate timing and scope of any U.S.
implementation of Basel III remains uncertain. As agreed to, Basel III would
require, among other things: (i) an increase in minimum required common equity
to 7% of total assets; (ii) an increase in the minimum required amount of Tier 1
capital from the current level of 4% of total assets to 8.5% of total assets;
(iii) an increase in the minimum required amount of Total Capital, from the
current level of 8% to 10.5%. Each of these increased requirements includes
2.5% attributable to a capital conservation buffer to be phased in from January
2016 until January 1, 2019. The purpose of the conservation buffer is to ensure
that banks maintain a buffer of capital that can be used to absorb losses during
periods of financial and economic stress. There will also be a required
countercyclical buffer to achieve the broader goal of protecting the banking
sector from periods of excess aggregate credit growth.
Pursuant to Basel III, certain deductions and prudential filters, including
minority interests in financial institutions, mortgage servicing rights and
deferred tax assets from timing differences, would be deducted in increasing
percentages beginning January 1, 2014, and would be fully deducted from common
equity by January 1, 2018. Certain instruments that no longer qualify as Tier 1
capital, such as trust preferred securities, also would be subject to phase-out
over a 10-year period beginning January 1, 2013.
The Basel III agreement calls for national jurisdictions to implement the new
requirements beginning January 1, 2013. At that time, the U.S. federal banking
agencies, including the Federal Reserve, will be expected to have implemented
appropriate changes to incorporate the Basel III concepts into U.S. capital
adequacy standards. Although the Basel III changes, as implemented in the
United States, will likely result in generally higher regulatory capital
standards, it is difficult at this time to predict how any new standards will
ultimately be applied to the Company and the Bank.
THE COMPANY
GENERAL. The Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the BHCA. In accordance with Federal Reserve policy,
and as now codified by the Dodd-Frank Act, the Company is legally obligated to
act as a source of financial strength to the Bank and to commit resources to
support the Bank in circumstances where the Company might not otherwise do so.
Under the BHCA, the Company is subject to periodic examination by the Federal
Reserve. The Company is required to file with the Federal Reserve periodic
reports of the Company's operations and such additional information regarding
the Company and its subsidiaries as the Federal Reserve may require.
ACQUISITIONS, ACTIVITIES AND CHANGE IN CONTROL. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may
allow a bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is required to
give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its insured
depository institution affiliates in the state in which the target bank is
located (provided that those limits do not discriminate against out-of-state
depository institutions or their holding companies) and state laws that require
that the target bank have been in existence for a minimum period of time (not to
exceed five years) before being acquired by an out-of-state bank holding
company. Furthermore, in accordance with the Dodd-Frank Act, as of July 21,
2011, bank holding companies must be well-capitalized in order to effect
interstate mergers or acquisitions. For a discussion of the capital
requirements, see "-The Increasing Importance of Capital" above.
The BHCA generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions.
The principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
prior to November 11, 1999 to be "so closely related to banking ... as to be a
proper incident thereto." This authority would permit the Company to engage in
a variety of banking-related businesses, including the ownership and operation
of a savings association, or any entity engaged in consumer finance, equipment
leasing, the operation of a computer service bureau (including software
development), and mortgage banking and brokerage. The BHCA generally does not
place territorial restrictions on the domestic activities of non-bank
subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature or incidental to any such financial activity or that the Federal Reserve
determines by order to be complementary to any such financial activity and does
not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. As of the date of this filing,
the Company has not applied for approval to operate as a financial holding
company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed
to exist upon the acquisition of 25% or more of the outstanding voting
securities of a bank or bank holding company, but may arise under certain
circumstances between 10% and 24.99% ownership.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines, as affected by the Dodd-Frank Act and Basel III. For a discussion
of capital requirements, see "-The Increasing Importance of Capital" above.
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008. Events in the U.S. and global
financial markets over the past several years, including deterioration of the
worldwide credit markets, have created significant challenges for financial
institutions throughout the country. In response to this crisis affecting the
U.S. banking system and financial markets, on October 3, 2008, the U.S. Congress
passed, and the President signed into law, the Emergency Economic
Stabilization Act of 2008 (the "EESA"). The EESA authorized the Secretary of
the Treasury to implement various temporary emergency programs designed to
strengthen the capital positions of financial institutions and stimulate the
availability of credit within the U.S. financial system. Financial institutions
participating in certain of the programs established under the EESA are required
to adopt Treasury's standards for executive compensation and corporate
governance.
THE TARP CAPITAL PURCHASE PROGRAM. On October 14, 2008, Treasury announced that
it would provide Tier 1 capital (in the form of perpetual preferred stock) to
eligible financial institutions. This program, known as the TARP Capital
Purchase Program (the "CPP"), allocated $250 billion from the $700 billion
authorized by the EESA to Treasury for the purchase of senior preferred shares
from qualifying financial institutions (the "CPP Preferred Stock"). Under the
program, eligible institutions were able to sell equity interests to the
Treasury in amounts equal to between 1% and 3% of the institution's risk-
weighted assets. The CPP Preferred Stock is non-voting and pays dividends at
the rate of 5% per annum for the first five years and thereafter at a rate of 9%
per annum. In conjunction with the purchase of the CPP Preferred Stock, the
Treasury received warrants to purchase common stock with an aggregate market
price equal to 15% of the investment from participating institutions with an
established trading market, and warrants to purchase shares of an additional
series of CPP Preferred Stock with a liquidation preference equal to 5% of the
aggregate investment from participating institutions without an established
trading market. Participating financial institutions are required to adopt
Treasury's standards for executive compensation and corporate governance for the
period during which Treasury holds equity issued under the CPP. These
requirements are discussed in more detail in the Compensation Discussion and
Analysis section in the Company's proxy statement, which is incorporated by
reference in this Form 10-K.
Pursuant to the CPP, on February 20, 2009, the Company entered into a Letter
Agreement with Treasury, pursuant to which the Company issued (i) 10,000 shares
of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and
(ii) a warrant to purchase 500 shares of the Company's Fixed Rate Cumulative
Perpetual Preferred Stock, Series B, which were immediately exercised, for an
aggregate purchase price of $10,000,000 in cash. Although the Company is a
public company, an established trading market for its stock does not exist, and
therefore it was required to issue Treasury a warrant for additional CPP Stock
rather than common stock. The Company's federal regulators, the Treasury and the
Treasury's Office of the Inspector General maintain significant oversight over
the Company as a participating institution, to evaluate how it is using the
capital provided and to ensure that it strengthens its efforts to help its
borrowers avoid foreclosure, which is one of the core aspects of the EESA.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As a Wisconsin
corporation, the Company is subject to the limitations of the Wisconsin Business
Corporation Law, which prohibit the Company from paying dividends if such
payment would (i) render the Company unable to pay its debts as they become due
in the usual course of business, or (ii) result in the Company's assets being
less than the sum of its total liabilities plus the amount needed to satisfy the
preferential rights upon dissolution of any shareholders with preferential
rights superior to those shareholders receiving the dividend. Additionally,
policies of the Federal Reserve caution that a bank holding company should not
pay cash dividends unless its net income available to common shareholders over
the past year has been sufficient to fully fund the dividends and the
prospective rate of earnings retention appears consistent with its capital
needs, asset quality, and overall financial condition.
The Federal Reserve also possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. Further, with respect to the
Company's participation in the CPP, the terms of the CPP Preferred Stock provide
that no dividends on any common or preferred stock that ranks equal to or junior
to the CPP Preferred Stock may be paid unless and until all accrued and unpaid
dividends for all past dividend periods on the CPP Preferred Stock have been
fully paid. Finally, as a policy matter, the Federal Reserve has indicated bank
holding companies should not pay dividends on common stock (or make
distributions on trust preferred securities) using funds from the CPP.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered with
the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading and
other restrictions and requirements of the SEC under the Exchange Act.
CORPORATE GOVERNANCE. The Dodd-Frank Act addresses many investor protection,
corporate governance and executive compensation matters that will affect most
U.S. publicly traded companies. The Dodd-Frank Act will increase shareholder
influence over boards of directors by requiring companies to give shareholders a
non-binding vote on executive compensation and so-called "golden parachute"
payments, and authorizing the SEC to promulgate rules that would allow
shareholders to nominate and solicit voters for their own candidates using a
company's proxy materials. The legislation also directs the Federal Reserve to
promulgate rules prohibiting excessive compensation paid to bank holding company
executives, regardless of whether the company is publicly traded.
THE BANK
GENERAL. The Bank is a Wisconsin-chartered bank, the deposit accounts of which
are insured by the FDIC's Deposit Insurance Fund ("DIF") to the maximum extent
provided under federal law and FDIC regulations. As a Wisconsin-chartered,
FDIC-insured, non-member bank, the Bank is presently subject to the examination,
supervision, reporting and enforcement requirements of the DFI, the chartering
authority for Wisconsin banks, and the FDIC, designated by federal law as the
primary federal regulator of insured state banks that, like the Bank, are not
members of the Federal Reserve System.
REGULATORY PROCEEDINGS AGAINST THE BANK. On November 9, 2010, the Bank entered
into a formal written agreement (the "Agreement") with the FDIC and DFI.
Pursuant to the Agreement, the Bank has agreed to take certain actions and
operate in compliance with the Agreement's provisions during its term. The
Agreement is based on the results of an annual examination of the Bank by the
FDIC and DFI and addresses certain matters that, in the view of the FDIC and
DFI, may impact the Bank's overall safety and soundness.
Specifically, under the terms of the Agreement, the Bank is required to, among
other things: (i) maintain ratios of Tier 1 capital to each of total assets and
total risk-weighted assets of at least 8.5% and 12%, respectively; (ii) refrain
from declaring or paying any dividend without the written consent of the FDIC
and DFI; (iii) refrain from increasing its total assets by more than 5% during
any three-month period without first submitting a growth plan to the FDIC and
DFI; (iv) develop and maintain a number of plans, policies and procedures,
including, but not limited to, a management plan, a liquidity plan, and a
strategic plan; and (v) take certain actions related to its loan portfolio and
budgeting process, such as reducing the level of certain classified assets,
reviewing (and, if necessary, adjusting) its allowance for loan and lease
losses, refraining from extending additional loans to certain classified
borrowers, and revising its 2011 and 2012 budgets.
The Bank's board of directors and management team has assigned great importance
to complying with the terms of the Agreement, and believe the Bank has already
satisfied a number of the conditions of the Agreement and commenced the steps
necessary to resolve any and all remaining matters presented therein.
Specifically, the Bank, among other actions, has (i) put in place procedures and
periodic reporting requirements to ensure additional loans are not extended to
certain classified borrowers; (ii) engaged a consultant to perform a management
study for use in the preparation of the required management report; (iii)
developed reporting procedures to monitor and ultimately reduce its level of
certain classified assets; (iv) revised and approved a new liquidity plan; (v)
implemented procedures to review the adequacy of its allowance for loan and
lease losses on a monthly basis; (vi) completed revised budgets for 2011 and
2012, and formalized and enhanced procedures by which the board periodically
reviews performance compared to the budget; (vii) developed and approved a
strategic plan; and (viii) engaged a consultant to review its interest rate risk
model and assumptions.
Further, as of December 31, 2010, the Bank's ratio of Tier 1 capital to each of
total assets and total risk-weighted assets was 8.95% and 13.94%, respectively,
exceeding the ratios required under the Agreement. Additionally, in accordance
with the Agreement, the Bank has refrained from declaring dividends, taken
measures to monitor and limit its growth, and provided various periodic progress
reports to the FDIC and DFI.
While management and the board of directors believes they have taken or
commenced the necessary measures to resolve any and all remaining matters
presented in the Agreement, the FDIC and DFI could take further enforcement
actions, including requiring the sale or liquidation of the Bank, if they are
not satisfied with the corrective actions that are taken by the Bank. In such
case, there can be no assurance that the proceeds of any such sale or
liquidation would result in a full return of capital to investors. A copy of
the Agreement was filed as a part of the Company's Quarterly Report on Form 10-Q
filed on November 12, 2010 with the SEC.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-
based assessment system whereby FDIC-insured depository institutions pay
insurance premiums at rates based on their risk classification. An
institution's risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators.
On November 12, 2009, the FDIC adopted a final rule that required insured
depository institutions to prepay on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011, and 2012. On December 31, 2009, the Bank paid the FDIC $3,226,000
in prepaid assessments. An institution's prepaid assessments were calculated
based on the institution's actual September 30, 2009 assessment base, adjusted
quarterly by an estimated 5 percent annual growth rate through the end of 2012.
The FDIC also used the institution's total base assessment rate in effect on
September 30, 2009, increasing it by an annualized 3 basis points beginning in
2011. The FDIC began to offset prepaid assessments on March 30, 2010,
representing payment of the regular quarterly risk-based deposit insurance
assessment for the fourth quarter of 2009. Any prepaid assessment not exhausted
after collection of the amount due on June 30, 2013, will be returned to the
institution.
Amendments to the Federal Deposit Insurance Act also revise the assessment base
against which an insured depository institution's deposit insurance premiums
paid to the DIF will be calculated. Under the amendments, the assessment base
will no longer be the institution's deposit base, but rather its average
consolidated total assets less its average tangible equity. This may shift the
burden of deposit insurance premiums toward those large depository institutions
that rely on funding sources other than U.S. deposits. Additionally, the Dodd-
Frank Act makes changes to the minimum designated reserve ratio of the DIF,
increasing the minimum from 1.15% to 1.35% of the estimated amount of total
insured deposits, and eliminating the requirement that the FDIC pay dividends
to depository institutions when the reserve ratio exceeds certain thresholds.
The FDIC is given until September 3, 2020 to meet the 1.35% reserve ratio
target. Several of these provisions could increase the Bank's FDIC deposit
insurance premiums.
The Dodd-Frank Act permanently increases the maximum amount of deposit insurance
for banks, savings institutions and credit unions to $250,000 per insured
depositor, retroactive to January 1, 2009. Furthermore, the legislation
provides that non-interest bearing transaction accounts have unlimited deposit
insurance coverage through December 31, 2013. This temporary unlimited deposit
insurance coverage replaces the Transaction Account Guarantee Program ("TAGP")
that expired on December 31, 2010. It covers all depository institution non-
interest-bearing transaction accounts, but not low interest-bearing accounts.
Unlike TAGP, there is no special assessment associated with the temporary
unlimited insurance coverage, nor may institutions opt-out of the unlimited
coverage.
FICO ASSESSMENTS. The Financing Corporation ("FICO") is a mixed-ownership
governmental corporation chartered by the former Federal Home Loan Bank Board
pursuant to the Competitive Equality Banking Act of 1987 to function as a
financing vehicle for the recapitalization of the former Federal Savings and
Loan Insurance Corporation. FICO issued 30-year noncallable bonds of
approximately $8.1 billion that mature in 2017 through 2019. FICO's authority
to issue bonds ended on December 12, 1991. Since 1996, federal legislation has
required that all FDIC-insured depository institutions pay assessments to cover
interest payments on FICO's outstanding obligations. These FICO assessments are
in addition to amounts assessed by the FDIC for deposit insurance. During the
year ended December 31, 2010, the FICO assessment rate was approximately 0.01%
of deposits.
SUPERVISORY ASSESSMENTS. All Wisconsin banks are required to pay supervisory
assessments to the DFI to fund the operations of the DFI. The amount of the
assessment is calculated on the basis of total assets. During the year ended
December 31, 2010, the Bank paid supervisory assessments to the DFI totaling
$18,700.
CAPITAL REQUIREMENTS. Banks are generally required to maintain capital levels
in excess of other businesses. For a discussion of the Bank's capital
requirements, see "-The Increasing Importance of Capital," as well as "-
Regulatory Proceedings Against the Bank."
DIVIDEND PAYMENTS. The primary source of funds for the Company is dividends
from the Bank. Under Wisconsin state law, the board of directors of a bank may
declare and pay a dividend from its undivided profits in an amount they consider
expedient. The board of directors shall provide for the payment of all
expenses, losses, required reserves, taxes, and interest accrued or due from the
bank before the declaration of dividends from undivided profits. If dividends
declared and paid in either of the two immediately preceding years exceeded net
income for either of those two years respectively, the bank may not declare or
pay any dividend in the current year that exceeds year-to-date net income except
with the written consent of the DFI.
The payment of dividends by any financial institution is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally is prohibited
from paying any dividends if, following payment thereof, the institution would
be undercapitalized. As described above, the Bank exceeded its minimum capital
requirements under applicable guidelines as of December 31, 2010. However, as
described in "- Regulatory Proceedings Against the Bank," the Bank has agreed
to refrain from declaring or paying any dividend without the consent of the
FDIC and DFI. Furthermore the Federal Reserve may prohibit the payment of
any dividends by the Bank if the Federal Reserve determines such payment would
constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by
federal law on "covered transactions" between the Bank and its "affiliates." The
Company is an affiliate of the Bank for purposes of these restrictions, and
covered transactions subject to the restrictions include extensions of credit to
the Company, investments in the stock or other securities of the Company and the
acceptance of the stock or other securities of the Company as collateral for
loans made by the Bank. The Dodd-Frank Act enhances the requirements for
certain transactions with affiliates as of July 21, 2011, including an expansion
of the definition of "covered transactions" and an increase in the amount of
time for which collateral requirements regarding covered transactions must be
maintained.
Certain limitations and reporting requirements are also placed on extensions of
credit by the Bank to its directors and officers, to directors and officers of
the Company, to principal shareholders of the Company and to "related interests"
of such directors, officers and principal shareholders. In addition, federal
law and regulations may affect the terms upon which any person who is a director
or officer of the Company or the Bank or a principal shareholder of the Company
may obtain credit from banks with which the Bank maintains a correspondent
relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
As described in further detail above, the Bank is currently subject to the
Agreement with the FDIC and DFI, pursuant to which it has agreed to maintain
certain heightened capital ratios, refrain from declaring or paying dividends
without prior regulatory approval, observe certain limitations on its asset
growth, develop and maintain certain policies and procedures, and take certain
actions related to its loan portfolio and budgeting process. The Bank's board of
directors and management team has assigned great importance to complying with
the terms of the Agreement, and believe the Bank has already satisfied a number
of the conditions of the Agreement and commenced the steps necessary to resolve
any and all remaining matters presented therein. See "- Regulatory Proceedings
Against the Bank" for further detail on the Agreement.
BRANCHING AUTHORITY. Wisconsin banks, such as the Bank, have the authority
under Wisconsin law to establish branches anywhere in the State of Wisconsin,
subject to receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) has historically been
permitted only in those states the laws of which expressly authorize such
expansion. However, the Dodd-Frank Act permits well-capitalized banks to
establish branches across state lines without these impediments effective as of
the day after its enactment, July 22, 2010.
STATE BANK INVESTMENTS AND ACTIVITIES. The Bank generally is permitted to make
investments and engage in activities directly or through subsidiaries as
authorized by Wisconsin law. However, under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC-insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank unless the bank meets, and continues to meet, its minimum regulatory
capital requirements and the FDIC determines the activity would not pose a
significant risk to the deposit insurance fund of which the bank is a member.
These restrictions have not had, and are not currently expected to have, a
material impact on the operations of the Bank.
TRANSACTION ACCOUNT RESERVES. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain reserves against their
transaction accounts (primarily NOW and regular checking accounts), as follows:
for transaction accounts aggregating more than $10.7 million to $58.8 million,
the reserve requirement is 3% of total transaction accounts; and for transaction
accounts aggregating in excess of $58.8 million, the reserve requirement is
$1.443 million plus 10% of the aggregate amount of total transaction accounts in
excess of $58.8 million. The first $10.7 million of otherwise reservable
balances are exempted from the reserve requirements. These reserve requirements
are subject to annual adjustment by the Federal Reserve. The Bank is in
compliance with the foregoing requirements.
CONSUMER FINANCIAL SERVICES. There are numerous developments in federal and
state laws regarding consumer financial products and services that impact the
Bank's business. Importantly, the current structure of federal consumer
protection regulation applicable to all providers of consumer financial products
and services will change on July 21, 2011. In this regard, the Dodd-Frank Act
creates a new Consumer Financial Protection Bureau (the "Bureau") with extensive
powers to supervise and enforce consumer protection laws. The Bureau has broad
rule-making authority for a wide range of consumer protection laws that apply to
all providers of consumer products and services, including the Bank, as well as
the authority to prohibit "unfair, deceptive or abusive" acts and practices. The
Bureau has examination and enforcement authority over providers with more than
$10 billion in assets. Banks and savings institutions with $10 billion or less
in assets, like the Bank, will continue to be examined by their applicable bank
regulators. The Dodd-Frank Act also generally weakens the federal preemption
available for national banks and federal savings associations, and gives state
attorneys general the ability to enforce applicable federal consumer protection
laws. It is unclear what changes will be promulgated by the Bureau and what
effect, if any, such changes would have on the Bank.
The Dodd-Frank Act contains additional provisions that affect consumer mortgage
lending. First, the new law significantly expands underwriting requirements
applicable to loans secured by 1-4 residential real property and augments
federal law combating predatory lending practices. In addition to numerous new
disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage
loan originations on all lenders, including banks and savings associations, in
an effort to strongly encourage lenders to verify a borrower's ability to
repay. Most significantly, the new standards limit the total points and fees
that the Bank and/or a broker may charge on conforming and jumbo loans to 3% of
the total loan amount. Also, the Dodd-Frank Act, in conjunction with the Federal
Reserve's final rule on loan originator compensation effective April 1, 2011,
prohibits certain compensation payments to loan originators and prohibits
steering consumers to loans not in their interest because it will result in
greater compensation for a loan originator. These standards may result in a
myriad of new system, pricing and compensation controls in order to ensure
compliance and to decrease repurchase requests and foreclosure defenses. In
addition, the Dodd-Frank Act generally requires lenders or securitizers to
retain an economic interest in the credit risk relating to loans the lender
sells and other asset-backed securities that the securitizer issues if the loans
have not complied with the ability to repay standards. The risk retention
requirement generally will be 5%, but could be increased or decreased by
regulation.
Federal and state laws further impact foreclosures and loan modifications, many
of which laws have the effect of delaying or impeding the foreclosure process.
Legislation has been introduced in the U.S. Senate that would amend the
Bankruptcy Code to permit bankruptcy courts to compel servicers and homeowners
to enter mediation before initiating foreclosure. While legislation compelling
loan modifications in Chapter 13 bankruptcies was approved by the House in 2010,
the legislation was not approved by the Senate, and the requirement was not
included in the Dodd-Frank Act or any other legislative or regulatory reforms.
The scope, duration and terms of potential future legislation with similar
effect continue to be discussed. The Bank cannot predict whether any such
legislation will be passed or the impact, if any, it would have on the Bank's
business.
ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent to our business.
The material risks and uncertainties that management believes affect us are
described below. Before making an investment decision, you should carefully
consider the risks described below because they could materially and adversely
affect our business, liquidity, financial condition, results of operation, and
prospects. This report is qualified in its entirety by these risk factors. See
also, the cautionary statement in Item 1 regarding the use of forward-looking
statements in this Annual Report on Form 10-K.
OUR STOCK DOES NOT HAVE A SIGNIFICANT AMOUNT OF TRADING ACTIVITY.
There is no active public trading market for our stock. Therefore, low activity
may increase the volatility of the price of our stock and result in a greater
spread between the bid and ask prices as compared to more actively-traded
stocks. Investors may not be able to resell shares at the price or time they
desire. The lack of an active public trading market may also limit our ability
to raise additional capital through the issuance of new stock.
OUR AGREEMENTS WITH THE U.S. DEPARTMENT OF THE TREASURY UNDER THE CAPITAL
PURCHASE PROGRAM IMPOSE RESTRICTIONS AND OBLIGATIONS ON US THAT LIMIT OUR
ABILITY TO INCREASE DIVIDENDS, REPURCHASE OUR COMMON OR PREFERRED STOCK.
In February 2009, we issued preferred stock to the Treasury under the CPP. Prior
to February 20, 2012, unless we have redeemed all of the preferred stock, the
consent of the Treasury will be required for us to increase our annual common
stock dividend above $0.44 per common share or to repurchase our common stock.
OUR PROFITABILITY DEPENDS SIGNIFICANTLY ON THE ECONOMIC CONDITIONS OF THE
MARKETS IN WHICH WE OPERATE.
Our success depends on the general economic conditions of North Central
Wisconsin where substantially all of our loans are originated. Local economic
conditions have a significant impact on the demand for our products and
services, the ability of our customers to repay loans, the value of the
collateral securing loans, and the stability of our deposit funding sources. A
significant decline in general local economic conditions, caused by inflation,
recession, unemployment, changes in securities markets, changes in housing
market prices, or other factors could impact local economic conditions and, in
turn, have a material adverse effect on our consolidated financial condition and
results of operations. Because of our geographic concentrations, we are less
able the other regional or national financial institutions to diversify credit
risks across multiple markets.
INCREASES IN COMPETITION COULD ADVERSELY AFFECT OUR GROWTH AND PROFITABILITY.
We operate exclusively in North Central Wisconsin. Increased competition within
our markets may result in reduced demand for loans and deposits, increased
expenses, and difficulty in recruiting and retaining talented employees. Many
competitors offer similar banking services in our market areas. Such
competitors include national, internet, regional, and other community banks, as
well as other types of financial institutions, including savings and loan
associations, trust companies, finance companies, brokerage firms, insurance
companies, credit unions, mortgage banks, and other financial intermediaries.
Some of these competitors may be better able to offer more desirable or cost-
effective products to customers thereby increasing the potential for loss of our
market share. Additionally, many of our larger competitors may be able to
achieve better economies of scale, offer a broader range of products and
services, and better pricing for these products and services than we can.
Furthermore, many nonbank competitors are not subject to the same regulatory
restrictions as we are and may therefore provide customers with potentially
attractive alternatives to traditional banking services.
Our ability to compete successfully depends on a number of factors, including,
among other things:
o Our ability to develop, maintain, and build upon long-term customer
relationships based on top quality service, and high ethical standards.
o Our ability to expand our market position.
o The scope, relevance, and pricing of products and services offered to
meet customer needs and demands.
o The rate at which we introduce new products and services relative to our
competitors.
o Customer satisfaction with our level of service.
Failure to perform in any of these areas could significantly weaken our
competitive position and adversely affect our growth and profitability.
STRATEGIC RISKS
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED
IF WE FAIL TO GROW OR FAIL TO MANAGE OUR GROWTH EFFECTIVELY.
Our ability to grow successfully will depend on a variety of factors including
the continued availability of desirable business opportunities, the competitive
responses from other financial institutions in our market areas, the
availability of capital, and our ability to manage our growth. While we believe
we have the management resources and internal systems in place to successfully
manage our future growth, there can be no assurance growth opportunities will be
available or growth will be successfully managed.
WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE.
The financial services industry is continually undergoing rapid technological
change with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our future
success depends on being able to effectively implement new technology and in
being successful in marketing these products and services to our customers. Many
of our larger competitors have substantially greater resources to invest in
technological improvements. As a result, they may be able to offer additional
or superior products to those we will be able to offer, which would put us at a
competitive disadvantage. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on our business and, in turn, our financial condition and results of
operations.
NEW LINES OF BUSINESS OR NEW PRODUCTS AND SERVICES MAY SUBJECT US TO ADDITIONAL
RISK. From time to time, we may implement new lines of business or offer new
products and services within existing lines of business. There are substantial
risks and uncertainties associated with these efforts, particularly in instances
where the markets are not fully developed. In developing and marketing new lines
of business and/or new products and services, we may invest significant time and
resources. Initial timetables for the introduction and development of new lines
of business and/or new products or services may not be achieved and price and
profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line of
business and/or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to successfully manage
these risks in the development and implementation of new lines of business
and/or new products or services could substantially increase our operating
costs, direct capital from other more profitable lines of business, or lead to a
variety of unforeseen risks, each of which could have a material adverse effect
on our business, results of operations and financial condition.
REPUTATION RISKS
NEGATIVE PUBLICITY COULD DAMAGE OUR REPUTATION.
Reputation risk, or the risk to our earnings and capital from negative public
opinion, is inherent in our business. Negative public opinion could adversely
affect our ability to keep and attract customers, expose us to adverse legal and
regulatory consequences or cause service providers to be reluctant to commit to
long-term projects with us. Negative public opinion could result from our actual
or alleged conduct in any number of activities, including lending practices,
corporate governance, regulatory compliance, sharing or inadequate protection of
customer information, and from actions taken by government regulators and
community organizations in response to that conduct.
ETHICS OR CONFLICT OF INTEREST ISSUES COULD DAMAGE OUR REPUTATION.
We have established a Code of Conduct and related policies and procedures to
address the ethical conduct of business and to avoid potential conflicts of
interest. Any system of controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable
assurances that the objectives of the system are met. Any failure or
circumvention of our related controls and procedures or failure to comply with
the established Code of Conduct and Related Party Transaction Policies and
Procedures could have a material adverse effect on our reputation, business,
results of operations, and/or financial condition.
CREDIT RISKS
COMMERCIAL LOANS MAKE UP A SIGNIFICANT PORTION OF OUR LOAN PORTFOLIO.
Commercial loans, defined as commercial business, commercial real estate, and
real estate construction loans, comprised $201,378,000 and $209,981,000, or 60%
and 59%, of our loan portfolio at December 31, 2010 and 2009, respectively. Our
commercial loans are primarily made based on the identified cash flow of the
borrower and secondarily on the underlying collateral provided by the borrower.
Most often, this collateral is accounts receivable, inventory, or machinery.
Credit support provided by the borrower for most of these loans and the
probability of repayment is based on the liquidation of the pledged collateral
and enforcement of a personal guarantee, if any exists. As a result, in the
case of loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers. The collateral securing
other loans may depreciate over time, may be difficult to appraise and may
fluctuate in value based on the success of the business. Due to the larger
average size of each commercial loan as compared with other loans such as
residential loans, as well as collateral that is generally less readily-
marketable, losses incurred on a small number of commercial loans could have a
material adverse impact on our financial condition and results of operations.
OUR AGRICULTURAL LOANS INVOLVE A GREATER DEGREE OF RISK THAN OTHER LOANS, AND
THE ABILITY OF THE BORROWER TO REPAY MAY BE AFFECTED BY MANY FACTORS OUTSIDE OF
THE BORROWER'S CONTROL.
At December 31, 2010 and 2009, agricultural real estate loans totaled
$39,671,000 and $42,280,000, or 12% our total loan portfolio, respectively.
Agricultural real estate lending involves a greater degree of risk and typically
involves larger loans to single borrowers than lending on single-family
residences. Payments on agricultural real estate loans are dependent on the
profitable operation or management of the farm property securing the loan. The
success of the farm may be affected by many factors outside the control of the
farm borrower, including adverse weather conditions that prevent the planting of
a crop or limit crop yields (such as hail, drought and floods), loss of
livestock due to disease or other factors, declines in market prices for
agricultural products (both domestically and internationally) and the impact of
government regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a limited
number of key individuals whose injury or death may significantly affect the
successful operation of the farm. If the cash flow from a farming operation is
diminished, the borrower's ability to repay the loan may be impaired.
OUR LOAN PORTFOLIO HAS A LARGE CONCENTRATION OF REAL ESTATE LOANS, WHICH INVOLVE
RISKS SPECIFIC TO REAL ESTATE VALUES.
Real estate lending (including commercial, construction, land and residential)
is a large portion of our loan portfolio. These categories were $91,974,000 or
approximately 26% of our total loan portfolio as of December 31, 2010, as
compared to $99,116,000, or approximately 27%, as of December 31, 2009. The
market value of real estate can fluctuate significantly in a short period of
time as a result of market conditions in the geographic area in which the real
estate is located. Although a significant portion of such loans are secured by
a secondary form of collateral, adverse developments affecting real estate
values in one or more of our markets could increase the credit risk associated
with our loan portfolio. Additionally, real estate lending typically involves
higher loan principal amounts and the repayment of the loans generally is
dependent, in large part, on sufficient income from the properties securing the
loans to cover operating expenses and debt service. Economic events or
governmental regulations outside of the control of the borrower or lender could
negatively impact the future cash flow and market
values of the affected properties.
If the loans that are collateralized by real estate become troubled during a
time when market conditions are declining or have declined, then we may not be
able to realize the amount of security that we anticipated at the time of
originating the loan, which could cause us to increase our provision for loan
and lease losses and adversely affect our operating results and financial
condition. In particular, if the declines in values that have occurred in the
residential and commercial real estate markets worsen, particularly within our
market area, the value of collateral securing our real estate loans could
decline further. In light of the uncertainty that exists in the economy and
credit markets nationally, there can be no guarantee that we will not experience
additional deterioration resulting from the downturn in credit performance by
our real estate loan customers.
INTEREST RATES AND OTHER CONDITIONS IMPACT OUR RESULTS OF OPERATIONS.
Our profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. Like most banking institutions, our net
interest spread and margin will be affected by general economic conditions and
other factors, including fiscal and monetary policies of the federal government,
that influence market interest rates and our ability to respond to changes in
such rates. At any given time, our assets and liabilities will be such that
they are affected differently by a given change in interest rates. As a result,
an increase or decrease in rates, the length of loan terms or the mix of
adjustable and fixed rate loans in our portfolio could have a positive or
negative effect on our net income, capital and liquidity. We measure interest
rate risk under various rate scenarios and using specific criteria and
assumptions. A summary of this process, along with the results of our net
interest income simulations is presented in the section entitled "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
Although we believe our current level of interest rate sensitivity is reasonable
and effectively managed, significant fluctuations in interest rates may have an
adverse effect on our business, financial condition and results of operations.
OUR ALLOWANCE FOR LOAN AND LEASE LOSSES ("ALLL") MAY BE INSUFFICIENT TO ABSORB
LOSSES IN OUR LOAN PORTFOLIO.
All financial institutions maintain an ALLL to provide for loans that may not be
repaid in their entirety. All borrowers carry the potential to default and our
remedies to recover may not fully satisfy money previously lent. We maintain an
ALLL, which is a reserve established through a provision for loan and lease
losses charged to expense, which represents management's best estimate of
potential credit losses that could be incurred within the existing portfolio of
loans. The allowance, in the judgment of management, is necessary to reserve for
estimated loan losses and risks inherent in the loan portfolio. The level of the
ALLL reflects management's continuing evaluation of industry concentrations;
specific credit risks; loan loss experience; current loan portfolio quality;
present economic, environmental, and regulatory conditions; and unidentified
losses inherent in the current loan portfolio. The determination of the
appropriate level of the ALLL involves a high degree of subjectivity and
requires us to make significant estimates of current credit risks using existing
qualitative and quantitative information, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans, and other
factors, both within and outside of our control, may require an increase in the
ALLL. In addition, bank regulatory agencies periodically review our ALLL and
may require an increase in the provision for loan and lease losses or the
recognition of additional loan charge-offs, based on judgments different than
those of management. An increase in the provision for loan and lease losses
to bolster the ALLL results in a decrease in net income, and possibly
risk-based capital, and may have a material adverse effect on our consolidated
financial condition and results of operations.
WE DEPEND ON THE ACCURACY AND COMPLETENESS OF INFORMATION ABOUT CUSTOMERS AND
COUNTERPARTIES.
In deciding whether to extend credit or enter into other transactions, we may
rely on information furnished by or on behalf of customers and counterparties,
including financial statements, credit reports, appraisals, and other financial
information. Reliance on inaccurate or misleading financial statements, credit
reports, appraisals, or other financial information could cause us to enter into
unfavorable transactions, which could have a material adverse effect on our
consolidated financial condition and results of operations.
LIQUIDITY RISKS
LIQUIDITY IS ESSENTIAL TO OUR BUSINESS.
Our liquidity could be impaired by an inability to access the capital markets or
unforeseen outflows of cash. This situation may arise due to circumstances that
we may be unable to control, such as a general market disruption or an
operational problem that affects third parties or us. Our credit ratings are
important to our liquidity. A reduction in our credit ratings could adversely
affect our liquidity and competitive position, increase our borrowing costs,
limit our access to the capital markets or trigger unfavorable contractual
obligations.
WE RELY ON DIVIDENDS FROM OUR SUBSIDIARIES FOR MOST OF OUR REVENUE.
The Company is a separate and distinct legal entity from the Bank. A substantial
portion of its revenue comes from dividends of the Bank. These dividends are the
principal source of funds to pay dividends on our common and preferred stock,
and to pay interest and principal on our subordinated debentures. Various
federal and/or state laws and regulations limit the amount of dividends that the
Bank may pay to the Company. Moreover, the Bank has agreed to refrain from
paying dividends to the Company without the prior approval of the FDIC and DFI,
which in light of the current financial condition of the Bank, may not be
granted in the near future. In the event the Bank is unable to continue to pay
dividends to the Company, the Company may not be able to service debt, pay
obligations, or pay dividends on our common and preferred stock. The inability
to receive dividends from the Bank could have a material adverse effect on our
business, consolidated financial condition, and results of operations.
INTEREST RATE RISKS
WE ARE SUBJECT TO INTEREST RATE RISK.
Our earnings are dependent upon our net interest income. Interest rates are
highly sensitive to many factors that are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies
and, in particular, the Federal Reserve. Changes in monetary policy, including
changes in interest rates, could influence not only the interest we receive on
loans and investments and the amount of interest we pay on deposits and
borrowings, but such changes could also affect: (i) our ability to originate
loans and obtain deposits; (ii) the fair value of our financial assets and
liabilities, and (iii) the average duration of our mortgage-backed securities
portfolio and other interest-earning assets. If the interest rates paid on
deposits and other liabilities increase at a faster rate than the interest rates
received on loans and other investments, our net interest income, and therefore
earnings, could be adversely affected. Earnings could also be adversely affected
if the interest rates received on loans and other investments fall more quickly
than the interest rates paid on deposits and other borrowings.
THE IMPACT OF INTEREST RATES ON OUR MORTGAGE BANKING ACTIVITIES CAN HAVE A
SIGNIFICANT IMPACT ON REVENUES.
Changes in interest rates can impact mortgage banking revenue. A decline in
mortgage rates generally increases the demand for mortgage loans as borrowers
refinance, but also generally leads to accelerated payoffs. Conversely, in a
constant or increasing rate environment, we would expect fewer loans to be
refinanced and a decline in payoffs.
LEGAL/COMPLIANCE RISKS
LEGISLATIVE AND REGULATORY REFORMS APPLICABLE TO THE FINANCIAL SERVICES INDUSTRY
MAY, IF ENACTED OR ADOPTED, HAVE A SIGNIFICANT IMPACT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
On July 21, 2010, the Dodd-Frank Act was signed into law, which significantly
changes the regulation of financial institutions and the financial services
industry. The Dodd-Frank Act, together with the regulations to be developed
thereunder, includes provisions affecting large and small financial institutions
alike, including several provisions that will affect how community banks,
thrifts and small bank and thrift holding companies will be regulated in the
future.
The Dodd-Frank Act, among other things, imposes new capital requirements on bank
holding companies; changes the base for FDIC insurance assessments to a bank's
average consolidated total assets minus average tangible equity, rather than
upon its deposit base, and permanently raises the current standard deposit
insurance limit to $250,000; and expands the FDIC's authority to raise insurance
premiums. The legislation also calls for the FDIC to raise the ratio of
reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by
September 30, 2020 and to "offset the effect" of increased assessments on
insured depository institutions with assets of less than $10 billion. The Dodd-
Frank Act also authorizes the Federal Reserve to limit interchange fees payable
on debit card transactions, establishes the Bureau of Consumer Financial
Protection as an independent entity within the Federal Reserve, which will have
broad rulemaking, supervisory and enforcement authority over consumer financial
products and services, including deposit products, residential mortgages, home-
equity loans and credit cards, and contains provisions on mortgage-related
matters, such as steering incentives, determinations as to a borrower's ability
to repay and prepayment penalties. The Dodd-Frank Act also includes provisions
that affect corporate governance and executive compensation at all publicly-
traded companies.
The Collins Amendment to the Dodd-Frank Act, among other things, eliminates
certain trust preferred securities from Tier 1 capital, but certain trust
preferred securities issued prior to May 19, 2010 by bank holding companies with
total consolidated assets of $15 billion or less will continue to be includible
in Tier 1 capital. This provision also requires the federal banking agencies to
establish minimum leverage and risk-based capital requirements that will apply
to both insured banks and their holding companies. Regulations implementing the
Collins Amendment must be issued within 18 months of July 21, 2010.
These provisions, or any other aspects of current or proposed regulatory or
legislative changes to laws applicable to the financial industry, if enacted or
adopted, may impact the profitability of our business activities or change
certain of our business practices, including the ability to offer new products,
obtain financing, attract deposits, make loans, and achieve satisfactory
interest spreads, and could expose us to additional costs, including increased
compliance costs. These changes also may require us to invest significant
management attention and resources to make any necessary changes to operations
in order to comply, and could therefore also materially and adversely affect
our business, financial condition and results of operations. Our management
is actively reviewing the provisions of the Dodd-Frank Act, many of which are
to be phased-in over the next several months and years, and assessing its
probable impact on our operations. However, the ultimate effect of the
Dodd-Frank Act on the financial services industry in general, and us in
particular, is uncertain at this time.
The U.S. Congress has also recently adopted additional consumer protection laws
such as the Credit Card Accountability Responsibility and Disclosure Act of
2009, and the Federal Reserve has adopted numerous new regulations addressing
banks' credit card, overdraft and mortgage lending practices. Additional
consumer protection legislation and regulatory activity is anticipated in the
near future.
Such proposals and legislation, if finally adopted, would change banking laws
and our operating environment and that of our subsidiaries in substantial and
unpredictable ways. We cannot determine whether such proposals and legislation
will be adopted, or the ultimate effect that such proposals and legislation, if
enacted, or regulations issued to implement the same, would have upon our
business, financial condition or results of operations.
WE MAY BE A DEFENDANT IN A VARIETY OF LITIGATION AND OTHER ACTIONS, WHICH MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATION.
We may be involved from time to time in a variety of litigation arising out of
our business. Our insurance may not cover all claims that may be asserted
against us, regardless of merit or eventual outcome. Such litigation may divert
the focus of our management and is also possible that such litigation may harm
our reputation. Should judgments or settlements in any litigation exceed our
insurance coverage, they could have a material adverse effect on our financial
condition and results of operation. In addition, we may not be able to obtain
appropriate types or levels of insurance in the future, nor may we be able to
obtain adequate replacement policies with acceptable terms, if at all.
OPERATIONAL RISKS
CHANGES IN OUR ACCOUNTING POLICIES OR IN ACCOUNTING STANDARDS COULD MATERIALLY
AFFECT HOW WE REPORT OUR FINANCIAL RESULTS AND CONDITION.
Our accounting policies are fundamental to understanding our financial condition
and results of operation. Some of these policies require use of estimates and
assumptions that may affect the value of our assets or liabilities and results
of operations. Some of our accounting policies are critical because they require
management to make difficult, subjective and complex judgments about matters
that are inherently uncertain and because it is likely that materially different
amounts would be reported under different conditions or using different
assumptions.
IMPAIRMENT OF INVESTMENT SECURITIES OR DEFERRED TAX ASSETS COULD REQUIRE CHARGES
TO EARNINGS, WHICH COULD RESULT IN A NEGATIVE IMPACT ON OUR RESULTS OF
OPERATIONS.
In assessing the impairment of investment securities, management considers the
length of time and extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuers, and the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The impact of each of these
impairment matters could have a material adverse effect on our business, results
of operations, and financial condition.
OUR ABILITY TO ATTRACT AND RETAIN MANAGEMENT AND KEY PERSONNEL MAY AFFECT FUTURE
GROWTH AND EARNINGS, AND LEGISLATION IMPOSING COMPENSATION RESTRICTIONS COULD
ADVERSELY AFFECT OUR ABILITY TO DO SO.
Much of our success and growth has been influenced strongly by our ability to
attract and retain management experienced in banking and financial services and
familiar with the communities in our market areas. Our ability to retain
executive officers, the current management teams, branch managers and loan
officers of our bank subsidiary will continue to be important to the successful
implementation of our strategy. It is also critical, as we grow, to be able to
attract and retain qualified additional management and loan officers with the
appropriate level of experience and knowledge about our market areas to
implement our community-based operating strategy. The unexpected loss of
services of any key management personnel, or the inability to recruit and retain
qualified personnel in the future, could have an adverse effect on our business,
results of operations and financial condition.
Further, we are subject to extensive restrictions on our ability to pay
retention awards, bonuses and other incentive compensation during the period in
which we have any outstanding securities held by the U.S. Treasury that were
issued under the TARP Capital Purchase Program. Many of the restrictions are
not limited to our senior executives and could cover other employees whose
contributions to revenue and performance can be significant. The limitations
may adversely affect our ability to recruit and retain these key employees in
addition to our senior executive officers, especially if we are competing for
talent against institutions that are not subject to the same restrictions. The
Dodd-Frank Act also directs the Federal Reserve to promulgate rules prohibiting
excessive compensation paid to bank holding company executives. These rules, if
adopted, may make it more difficult to attract and retain the people we need to
operate our businesses and limit our ability to promote our objectives through
our compensation and incentive programs.
BECAUSE THE NATURE OF THE FINANCIAL SERVICES BUSINESS INVOLVES A HIGH VOLUME OF
TRANSACTIONS, WE FACE SIGNIFICANT OPERATIONAL RISKS.
Operational risk is the risk of loss resulting from our operations, including
but not limited to, the risk of fraud by employees or persons outside our
company, the execution of unauthorized transactions by employees, errors
relating to transaction processing and technology, breaches of the internal
control system and compliance requirements, and business continuation and
disaster recovery. This risk of loss also includes potential legal actions that
could arise as a result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards, adverse business decisions
or their implementation, and customer attrition due to potential negative
publicity. In the event of a breakdown in the internal control system, improper
operation of systems or improper employee actions, we could suffer financial
loss, face regulatory action and suffer damage to our reputation.
WE RELY ON OTHER COMPANIES TO PROVIDE KEY COMPONENTS OF OUR BUSINESS
INFRASTRUCTURE.
Third party vendors provide key components of our business infrastructure such
as internet connections, online banking and core applications. While we have
selected these third party vendors carefully, we do not control their actions.
Any problems caused by these third parties, including a failure to provide us
with their services for any reason or poor performance, could adversely affect
our ability to deliver products and services to our customers and otherwise to
conduct our business. Replacing these third party vendors could also entail
significant delay and expense.
OUR INFORMATION SYSTEMS MAY EXPERIENCE AN INTERRUPTION OR BREACH IN SECURITY.
We rely heavily on communications and information systems to conduct our
business. Any failure, interruption, or breach in security or operational
integrity of these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan, and other
systems. While we have policies and procedures designed to prevent or limit the
effect of the failure, interruption, or security breach of our information
systems, we cannot assure you that any such failures, interruptions, or security
breaches will not occur or, if they do occur, that they will be adequately
addressed. The occurrence of any failures, interruptions, or security breaches
of our information systems could damage our reputation, result in a loss of
customer business, subject us to additional regulatory scrutiny, or expose us to
civil litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of operations.
CHANGES IN FUTURE RULES APPLICABLE TO TARP RECIPIENTS COULD ADVERSELY AFFECT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On February 20, 2009, we issued $10,000,000 of our Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, to the U.S. Treasury pursuant to the TARP
Capital Purchase Program, along with warrants to purchase 500 shares of our
Fixed Rate Cumulative Perpetual Preferred Stock, Series B, which the Treasury
immediately exercised. The rules and policies applicable to recipients of
capital under the TARP Capital Purchase Program have evolved since we first
elected to participate in the program and their scope, timing and effect may
continue to evolve in the future. Any redemption of the securities sold to the
U.S. Treasury to avoid these restrictions would require prior Federal Reserve
and U.S. Treasury approval. Based on guidelines issued by the Federal Reserve,
institutions seeking to redeem TARP Capital Purchase Program preferred stock
must demonstrate an ability to access the long-term debt markets, successfully
demonstrate access to public equity markets and meet a number of additional
requirements and considerations before such institutions can redeem any
securities sold to the U.S. Treasury.
OUR ANTICIPATED PACE OF GROWTH MAY REQUIRE US TO RAISE ADDITIONAL CAPITAL IN THE
FUTURE, BUT THAT CAPITAL MAY NOT BE AVAILABLE WHEN IT IS NEEDED.
We are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations. We anticipate that our existing
capital resources will satisfy our capital requirements for the foreseeable
future. However, we may at some point need to raise additional capital to
support continuing growth. Our ability to raise additional capital, if needed,
will depend on conditions in the capital markets at that time, which are outside
our control, and on our financial performance. Accordingly, we cannot assure
you of our ability to raise additional capital if needed on terms acceptable to
us. If we cannot raise additional capital when needed, our ability to further
expand our operations through internal growth and acquisitions could be
materially impaired.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located at the Bank's administrative office facility at 132
West State Street, Medford, Wisconsin.
We own one building in Rib Mountain and lease the premises back to the Bank. The
Bank owns ten buildings and leases three. All buildings owned or leased
by the Bank are in good condition and considered adequate for present and near-
term requirements.
Branch Address Square Feet
Medford-Plaza 134 South 8th Street, Medford, WI 54451 20,000
Medford-Corporate 132 W. State Street, Medford, WI 54451 15,900
Rib Mountain 3845 Rib Mountain Drive, Wausau, WI 54401 13,000
Colby 101 South First Street, Colby, WI 54421 8,767
Neillsville 500 West Street, Neillsville, WI 54456 7,560
Minocqua* 8744 Highway 51 N, Suite 4, Minocqua, WI 54548 4,500
Rhinelander 2170 Lincoln Street, Rhinelander, WI 54501 4,285
Phillips 864 N Lake Avenue, Phillips, WI 54555 4,285
Eagle River* 325 West Pine Street, Eagle River, WI 54521 4,000
Abbotsford 119 North First Street, Abbotsford, WI 54405 2,986
Weston * 7403 Stone Ridge Drive, Weston, WI 54476 2,500
Rib Lake 717 McComb Avenue, Rib Lake, WI 54470 2,112
Lake Tomahawk # 7241 Bradley St, Lake Tomahawk, WI 54539 1,887
Fairchild 111 N Front Street, Fairchild, WI 54741 1,040
*Branch leased from third party.
#The Lake Tomahawk Branch was closed February 1, 2011. The building is
available for sale.
ITEM 3. LEGAL PROCEEDINGS
We engage in legal actions and proceedings, both as plaintiff and defendant,
from time to time in the ordinary course of 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 our opinion,
would have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
As previously reported, in 2007 we commenced a legal action against the
guarantor of a loan to a former car dealership ("Impaired Borrower") and others
seeking relief for damages. On September 30, 2010 a Marathon County jury found
the Impaired Borrower liable for intentionally misrepresenting the financial
condition of the dealership and for acts of conspiracy in enticing the Bank to
extend credit to them. The jury awarded the Bank a $4,000,000 judgment for the
losses it suffered as a result of this transaction. This judgment is subject to
appeal and the ability to collect is unclear at this time. As a result of our
continuing collection efforts to recover losses related to this transaction, the
Bank recently received an insurance settlement in the amount of $500,000 that
will be recorded as income in the first quarter of 2011. We continue to pursue
all avenues of recovery.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
There is no active established public trading market in our common stock,
although two regional broker-dealers act as market makers for the stock. Bid
and ask prices are quoted on the OTC Bulletin Board under the symbol "MWFS.OB".
Transactions in our common stock are limited and sporadic.
MARKET PRICES AND DIVIDENDS
The following table summarizes price ranges of over-the-counter quotations and
cash dividends paid on our common stock for the periods indicated. Bid prices
represent 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.
2010 Prices and Dividends 2009 Prices and Dividends
Quarter High Low Dividends Quarter High Low Dividends
1st $9.10 $6.00 - 1st $12.80 $7.55 $0.11
2nd 11.00 9.00 - 2nd 16.25 8.50 -
3rd 9.50 7.85 - 3rd 13.15 8.30 -
4th 7.85 7.80 - 4th 8.30 7.00 -
In August 2009, the Company announced that the 2009 semi-annual dividend,
payable in August 2009, to shareholders would be foregone. This decision was
made after evaluating the Company's year-to-date earnings, overall capital
position and uncertain economic climate. After similar assessments conducted in
2010, the Company suspended both semi-annual dividends in 2010 as well. The
board of directors continues to remain committed to increasing capital levels at
the Bank and the Company and consequently expects to continue foregoing dividend
payments for the foreseeable future.
HOLDERS
As of March 1, 2011, there were approximately 841 holders of record of our
common stock. Some of our common stock is held in "street" or "nominee" name and
the number of beneficial owners of such shares is not known nor included in the
foregoing number.
DIVIDEND POLICY
Prior to 2009 dividends on our common stock were historically paid in cash on a
quarterly basis in March, June, September, and December. In 2009, we declared a
first quarter dividend payable to shareholders in March. Subsequent to the
payment of the 2009 first quarter dividend we changed the dividend payment dates
on our common stock to semi-annual payable in August and February; however, as
noted above, we elected to defer dividends beginning in August 2009 and do not
anticipate paying dividends on our common stock for the foreseeable future. Our
ability to pay dividends depends in part upon the receipt of dividends from the
Bank and these dividends are subject to limitation under banking laws and
regulations. Our declaration of dividends to our shareholders is discretionary
and will depend upon earnings, capital requirements, and the operating and
financial condition of the Company. We are prohibited from paying dividends on
our common stock if we fail to make distributions or scheduled payments on our
preferred stock or subordinate debentures.
On February 20, 2009, we sold 10,000 shares of our Series A Preferred Stock and
a warrant to purchase 500 shares of Series B Preferred Stock (which was
immediately exercised) to the Treasury pursuant to the CPP. Dividends on the
Preferred Stock issued to the Treasury are payable on a quarterly basis in
February, May, August, and November. Cumulative dividends on the Series A
Preferred Stock will accrue and be payable quarterly at a rate of 5% per annum
for five years. The rate will increase to 9% per annum thereafter if the shares
are not redeemed by the Company. The Series B Preferred Stock dividends will
accrue and be payable quarterly at 9%. So long as Treasury holds any shares of
Series A or B Preferred Stock, we may not pay dividends on our common stock,
unless all accrued and unpaid dividends for all past dividend periods on the
Series A or B Preferred Stock are fully paid. As of December 31, 2010, all
required dividend payments have been paid to the Treasury. Prior to the third
anniversary of the Treasury's purchase of the Series A and B Preferred Stock,
unless such stock has been redeemed, the consent of the Treasury will be
required for us to increase our annual common stock dividend above $0.44 per
common share.
We maintain a dividend reinvestment plan that enables common shareholders the
opportunity to automatically reinvest their cash dividends in shares of our
common stock. Common stock shares issued under the plan will be either issued
common shares or common shares acquired in the market on behalf of the
shareholders at their then fair market value.
STOCK BUY-BACK
Under the CPP, prior to the third anniversary of the Treasury's purchase of our
Series A and B Preferred Stock, February 20, 2012, unless such stock has been
redeemed, the consent of the Treasury will be required for us to redeem,
purchase or acquire any shares of our capital stock, other than (i) redemptions,
purchases or other acquisitions of the Series A or B Preferred Stock,
(ii) redemptions, purchases or other acquisitions of shares of our common stock
in connection with the administration of any employee benefit plan in the
ordinary course of business and consistent with past practice and (iii) certain
other redemptions, repurchases or other acquisitions as permitted under the CPP.
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
Years Ended December 31, 2010 2009 2008 2007 2006
(In thousands, except per share data)
RESULTS OF OPERATIONS:
Interest income $25,062 $26,932 $29,732 $32,144 $29,619
Interest expense 8,762 10,500 13,297 16,564 14,052
Net interest income 16,300 16,432 16,435 15,580 15,567
Provision for loan losses 4,755 8,506 3,200 1,140 5,133
Net interest income after provision for loan losses 11,545 7,926 13,235 14,440 10,434
Noninterest income 5,550 4,421 4,026 4,057 3,448
Other-than-temporary impairment losses, net 412 301 0 0 0
Noninterest expense 15,805 16,450 16,010 17,334 12,746
Income (loss) before income taxes 878 (4,404) 1,251 1,163 1,136
Income tax expense (benefit) 135 (1,916) 9 45 41
Net income (loss) 743 (2,488) 1,242 1,118 1,095
Preferred stock dividends, discount and premium (641) (545) 0 0 0
Net income (loss) available to common equity $102 ($3,033) $1,242 $1,118 $1,095
Earnings (loss) per common share:
Basic $0.06 ($1.84) $0.76 $0.68 $0.67
Diluted $0.06 ($1.84) $0.76 $0.68 $0.66
Cash dividends per common share $0.00 $0.11 $0.55 $0.66 $1.28
Weighted average common shares outstanding:
Basic 1,650 1,645 1,643 1,640 1,644
Diluted 1,650 1,646 1,643 1,641 1,648
SELECTED FINANCIAL DATA
YEAR-END BALANCES:
Loans $339,170 $358,616 $364,381 $357,988 $351,447
Allowance for loan losses 9,471 7,957 4,542 4,174 8,184
Investment securities 101,310 103,477 81,038 82,551 82,472
Total assets 509,082 505,460 496,459 480,359 460,651
Deposits 400,610 397,800 385,675 369,479 342,253
Long-term borrowings 42,561 42,561 49,429 46,429 38,428
Subordinated debentures 10,310 10,310 10,310 10,310 10,310
Stockholders' equity 42,970 43,184 35,805 34,571 34,133
Book value per common share $19.85 $20.10 $21.78 $21.06 $20.82
AVERAGE BALANCES:
Loans $355,575 $363,966 $361,883 $355,307 $330,490
Investment securities 123,103 110,515 90,776 86,972 86,528
Total assets 505,597 497,994 477,274 470,209 440,865
Deposits 394,872 380,633 364,710 360,101 332,955
Short-term borrowings 10,410 11,907 11,634 17,939 21,890
Long-term borrowings 42,561 47,296 51,874 42,462 35,993
Stockholders' equity 43,976 44,122 35,317 34,348 35,642
FINANCIAL RATIOS:
Return on average assets 0.02% -0.61% 0.26% 0.24% 0.25%
Return on average equity 0.23% -6.87% 3.52% 3.25% 3.07%
Equity to assets 8.70% 8.86% 7.21% 7.20% 7.41%
Net interest margin 3.46% 3.53% 3.71% 3.60% 3.83%
Total risk-based capital 15.46% 14.49% 13.33% 13.32% 13.65%
Net charge-offs to average loans 0.91% 1.40% 0.78% 1.45% -0.01%
Nonperforming loans to total loans 4.07% 3.93% 2.62% 1.96% 2.03%
Efficiency ratio (1) 73.40% 79.20% 76.86% 86.71% 65.68%
Noninterest income to average assets 1.10% 0.89% 0.84% 0.86% 0.78%
Noninterest expenses to average assets 3.13% 3.30% 3.35% 3.69% 2.89%
Dividend payout ratio 0.00% 7.27% 72.68% 96.78% 191.04%
STOCK PRICE INFORMATION: (2)
High $11.00 $16.25 $24.00 $38.00 $38.25
Low 6.00 7.00 12.25 19.75 35.40
Market Price at year end 7.80 7.00 12.25 19.75 37.90
(1) Fully taxable equivalent basis, assuming a federal tax rate of 34% and adjusted for the disallowance of interest expense
(2) Bid Price
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 our consolidated financial condition at December 31, 2010 and
2009, and results of operations for the three-year period ended December 31,
2010. This discussion should be read in conjunction with the consolidated
financial statements, notes, tables, and the selected financial data presented
elsewhere in this report.
Our 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 forward-looking
statements. A cautionary statement regarding forward-looking statements is set
forth under the caption "Forward-Looking Statements" in Item 1 of this Annual
Report on Form 10-K. This discussion and analysis should be considered in light
of such cautionary statements and the risk factors disclosed elsewhere in this
report.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and follow general practices
within the industry in which we operate. This preparation requires management
to make estimates, assumptions and judgments that affect the amounts reported in
the consolidated financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, actual
results could differ from the estimates, assumptions and judgments reflected in
the financial statements. Certain policies inherently have a greater reliance
on the use of estimates, assumptions and judgments and, as such, have a greater
possibility of producing results that could be materially different than
originally reported. We believe the following policies are important to the
portrayal of our financial condition and require subjective or complex judgments
and, therefore, are critical accounting policies.
Investment Securities: The fair value of our investment securities is important
to the presentation of the consolidated financial statements since the
investment securities are carried on the consolidated balance sheet at fair
value. We utilize a third party vendor to assist in the determination of the
fair value of our investment portfolio. Adjustments to the fair value of the
investment portfolio impact our consolidated financial condition by increasing
or decreasing assets and shareholders' equity, and possibly earnings. Declines
in the fair value of investment securities below their cost that are deemed to
be other-than temporarily impaired ("OTTI") are reflected in earnings as
realized losses and assigned a new cost basis. In estimating OTTI, we consider
many factors which include: (1) the length of time and the extent to which fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of our financial
position to retain the investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. To determine OTTI, we may
utilize a discounted cash flow model to estimate the fair value of the security.
The use of a discounted cash flow model involves judgment, particularly of
interest rates, estimated default rates and prepayment speeds.
Allowance for Loan and Lease Losses ("ALLL"): Management's evaluation process
used to determine the adequacy of the ALLL is subject to the use of estimates,
assumptions, and judgments. The evaluation process combines several factors:
management's ongoing review and grading of the loan portfolio, consideration of
historical loan loss and delinquency experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, concentrations of loans to specific borrowers or industries, existing
economic conditions, the fair value of underlying collateral, and other
qualitative and quantitative factors which could affect potential credit losses.
Because current economic conditions can change and future events are inherently
difficult to predict, the anticipated amount of estimated loan losses, and
therefore the adequacy of the ALLL, could change significantly. As an integral
part of their examination process, various regulatory agencies also review the
ALLL. Such agencies may require that certain loan balances be classified
differently or charged-off when their credit evaluations differ from those of
management, based on their judgments about information available to them at the
time of their examination. The Company believes the ALLL as recorded in the
consolidated financial statements is adequate.
Other real estate owned ("OREO"): Real estate acquired through, or in lieu of,
loan foreclosure is held for sale and is initially recorded at fair value at the
date of foreclosure, establishing a new cost basis. The fair value is based on
appraised or estimated values obtained less estimated costs to sell, and
adjusted based on highest and best use of the properties, or other changes.
There are uncertainties as to the price we ultimately receive on the sale of the
properties, potential property valuation allowances due to declines in the fair
values, and the carrying costs of properties for expenses such as utilities,
real estate taxes, and other ongoing expenses that may affect future earnings.
Income taxes: The assessment of tax assets and liabilities involves the use of
estimates, assumptions, interpretations, and judgment concerning certain
accounting pronouncements and federal and state tax codes. There can be no
assurance that future events, such as court decisions or positions of federal
and state taxing authorities, will not differ from management's current
assessment, the impact of which could be significant to the consolidated results
of operations and reported earnings. The Company believes the tax assets and
liabilities are adequate and properly recorded in the consolidated financial
statements.
All remaining information included in Management's Discussion and Analysis of
Financial Condition and Results of Operations are shown in thousands of dollars,
except per share data.
OVERVIEW
The Economy in General, Our Markets, and Profitability
Target interest rates have remained unchanged since December 2008. Recent
government debt issues in Europe and the weakness in the U.S. housing markets
has continued to add stress to the economy. The rise in energy costs
complicated by prolonged soft labor markets weighed heavily on consumers
throughout most of 2010. The Fed has and intends to inject billions of dollars
into the economy to help stimulate growth. The injection is helping to hold
interest rates low, benefiting consumers strapped with debt. Equity markets
performed well during the second half of 2010, with the Dow Jones
Industrial Average, S&P 500, and NASDAQ indices each closing the year with
double digit returns.
Although our earnings were not at historical levels, we were pleased with the
marked improvement shown in our financial performance through December 31, 2010
and remain optimistic that a general economic recovery may be imminent from
positive trends that began to take shape at the end of 2010. Our local markets
appear to be slowly and unevenly recovering from the depressed economic
conditions experienced over the past three years. Unemployment rates still
remain painfully higher than state and national averages. While we have done our
best to work with our consumer and business loan customers, loan delinquencies
and defaults have remained stubbornly higher than normal levels.
Credit Management Process Enhancements
Since 2007 and continuing through today, Executive Management has been focused
on implementing enhancements to the Company's credit management process. The
Company established a credit administration function and hired an experienced
Chief Credit Officer in November 2009 to oversee this initiative and in January
2010 expanded its special assets and collection staff.
These changes were necessary to address the effects of the deteriorating
economic conditions and to support our move into new markets. While the Bank's
board of directors has always provided oversight of the credit process it has
increased its involvement over the past several years. Three outside directors
and the President/CEO comprise the Board Loan Committee ("BLC"), meeting two
times per month and more often if necessary to discuss problem loans and
consider any secured loan over $1,200 or unsecured loan over $500. Additionally,
any secured loan over $7,000 or unsecured loan over $5,000 and all loan
participations must be approved by the full board of director. In addition, all
lending limits are approved by the board of directors.
Furthermore, oversight by the Chief Credit Officer and Regional Presidents
ensure that virtually all loans are reviewed by a second reviewer during the
approval process. All loans are reviewed for compliance with policy; all
exceptions must have appropriate approval by both a Regional President and the
Chief Credit Officer.
Policies and procedures have also been substantially modified and new training
programs have been implemented to further strengthen the Bank's credit
underwriting activities. These changes have prompted a number of personnel
changes among our lending staff and in some instances the reassignment of duties
and responsibilities among remaining staff members. During the fourth quarter of
2009 the Audit Committee engaged the services of an independent third party to
perform periodic reviews of the Bank's loan portfolio and lending operations.
Their findings are reviewed by the Audit Committee and shared with the full
board. Reviews conducted in July and November 2010 confirmed that substantial
improvements had been made in the Bank's credit administration and loan approval
process throughout the year.
CPP
As previously reported, in February 2009 the Company participated in the CPP and
received $10,000 through the issuance and sale of 10,000 shares of Series A
Preferred Stock and a warrant to purchase 500 share of Series B Preferred Stock
(which was immediately exercised), which is accounted for as capital under
regulatory guidelines. This money has proven to be beneficial in addressing
the credit needs of our customers and the communities we serve.
RESULTS OF OPERATIONS
PERFORMANCE SUMMARY
We reported net income to common shareholders of $102 for the year-ended
December 31, 2010, compared to a net loss of $3,033 for the year-ended December
31, 2009. Basic and diluted income per common share for 2010 was $0.06,
compared to 2009 basic and diluted loss per common share of $1.84. Our financial
results for 2010 were characterized by stable core earnings, a decline in the
level of provision for loan and lease losses from the prior year, and other
expenses associated with credit collections and carrying expenses associated
with properties obtained from foreclosures and repossessions. Noninterest income
was positively impacted by the sale of residential mortgages to the secondary
market and proceeds from sales of investment securities. No cash dividends were
paid in 2010, compared to cash dividends of $0.11 per common share paid in 2009.
Key factors behind these results are discussed below.
o An indication of the Company's strength is its core earnings, which are
reflected in the general stability of its net interest income and net
interest margin, despite fluctuations in the interest rate environment.
Net interest income of $16,300 for 2010 decreased only 0.80% from 2009. On
a fully tax-equivalent basis, the net interest margin for 2010 decreased
to 3.46%, compared to 3.53% for 2009. The drop in net interest margin was
primarily due to an elevated liquidity position that was generated from
core deposit growth and weak loan demand during the latter half of the
year. As of December 31, 2010, federal funds sold and overnight
repurchase agreements totaled $32,473 versus $9,064 as of December 31,
2009. The average balance of federal funds and overnight repurchase
agreements during 2010 was $23,013 versus $12,164 in 2009.
o In general, overall credit quality during 2010 showed signs of
stabilization despite the weak economic conditions that have persisted
over the past three years. Over the past five quarters non-accrual loans
(loans not accruing interest) peaked at $14,327 on September 30, 2009 and
have since trended down to $11,540 at December 31, 2010 versus the $13,924
reported on December 31, 2009.
o Net charge-offs for 2010 were $3,241, compared to $5,091 in 2009. Total
loan loss provisions for 2010 were to $4,755 compared to $8,506 in 2009.
During the year the level of our allowance for loan and lease losses
increased by $1,514 to $9,471 at December 31, 2010, compared to the $7,957
reported at December 31, 2009 as the level of loan charge-offs decreased
more than the loan loss provisions. The Bank's coverage ratio of reserves
to total loans at year-end 2010 improved to 2.79% (covering 69% of
nonperforming loans), compared to 2.22% (covering 56% of nonperforming
loans) at year-end 2009. The current levels are substantially higher than
the allowance for loan and lease losses of $3,028 and coverage ratio of
0.98% reported at December 31, 2005.
o At December 31, 2010, total loans were $339,170, down 5.42% from year-end
2009, primarily in loans related to real estate. Total deposits at
December 31, 2010, were $400,610, up 0.71% from year-end 2009.
o Noninterest income increased $1,129, or 25.5%, from 2009 to 2010 primarily
due to proceeds from fee income generated from the sales of residential
mortgages into the secondary market and sales of investment securities.
Fee income from the sale of residential mortgages was $955 compared to
$564 in 2009. Securities gains were $1,054 in 2010 compared to $449 in
2009. Fee based revenues from deposit services, trust fees and investment
product commissions remained flat at $2,498 compared to $2,500 for the
prior year.
o The company recognized net OTTI write-downs of $412 compared to $301 in
2009. These adjustments represented the complete write-off of $211 on one
private placement trust preferred security and a partial write down of
$201 on a publicly traded trust preferred security. Both securities
were issued by banks. The recognized losses on these securities are due
in part to credit losses that will not be recovered by the Company.
o Noninterest expense for 2010 was $15,805, down $645 or 3.9% from 2009.
Foreclosure/OREO expense declined $1,035 principally from the reduction of
$799 in OREO valuation write-downs from those recognized in 2009 and a
general decrease of $243 in foreclosure expenses and OREO carrying costs.
NET INTEREST INCOME
Our earnings are substantially dependent on net interest income which is the
difference between interest earned on loans, securities and other interest-
earning assets, and the interest paid on deposits and borrowings. Net interest
income is directly impacted by the sensitivity of the balance sheet to changes
in interest rates and by the amount and composition of earning assets and
interest-bearing liabilities, including characteristics such as the fixed or
variable nature of the financial instruments, contractual maturities, and
repricing frequencies.
Taxable equivalent net interest income for 2010 was $16,544, a decrease of $184
or 1.1%, from $16,728 in 2009. The decrease in taxable equivalent net interest
income was a function of unfavorable volume variances (as balance sheet changes
in both volume and mix decreased taxable equivalent net interest income by $257)
and favorable interest rate changes (as the impact of changes in the interest
rate environment and product pricing increased taxable equivalent interest
income by $73). The change in mix and volume of earning assets decreased
taxable equivalent interest income by $271, while the change in volume and
composition of interest-bearing liabilities decreased interest expense $14.
Rate changes on earning assets reduced interest income by $1,651, while changes
in rates on interest-bearing liabilities lowered interest expense by $1,724, for
a net favorable impact of $73. The net interest margin for 2010 was 3.46%,
compared to 3.53% in 2009. For 2010, the yield on earning assets of 5.29% was
45 basis points ("bp") lower than 2009. Loan yields decreased 25 bp, to 6.02%,
impacted by the levels of nonaccrual loans, repricing of adjustable rate loans
and competitive pricing pressures in a low interest rate environment. The yield
on investment securities and other interest-earning assets decreased 164 bp,
impacted by the Company's excess liquidity position during most of 2010 and the
sale of investment securities.
The cost of average interest-bearing liabilities of 2.16% in 2010 was 46 bp
lower than 2009. The average cost of interest-bearing deposits in 2010 was
1.87%, 49 bp lower than 2009, reflecting the low interest rate environment. The
cost of wholesale funding (comprised of short-term borrowings and long-term
borrowings) decreased 19 bp to 3.33% for 2010. The subordinated debentures had
a fixed rate of 5.98% through December 15, 2010, after which they have a
floating rate of the three-month Libor plus 1.43%, adjusted quarterly. The
interest rate at December 31, 2010 was 1.73%.
Average earning assets of $478,678 in 2010 were $4,197 lower than 2009. Average
federal funds sold and overnight repurchase agreements and investment securities
grew $10,849 and $5,103, respectively, reflecting the Company's increased
liquidity position. Average loans decreased $8,391. Taxable equivalent
interest income in 2010 decreased $1,922 due to earning asset volume changes,
including a decrease of $526 attributable to loans, partially offset by a $255
increase attributable to investment securities and federal funds sold and
overnight repurchase agreements.
Average interest-bearing liabilities of $405,945 in 2010 were up $5,751 versus
2009, attributable to a higher level of interest-bearing deposits. Average
interest-bearing deposits grew $11,983 and average noninterest-bearing deposits
increased $2,256. Given the soft loan demand and growth in deposits, average
wholesale funding decreased by $6,232. In 2010, interest expense decreased
$1,724 due to rate changes, with a $1,598 decrease from interest-bearing
deposits and a $126 decrease due to short-term and long-term borrowings and
subordinated debentures.
Table 2: Average Balances and Interest Rates
Years Ended December 31,
2010 2009 2008
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
($ in thousands)
ASSETS
Earnings assets
Loans (1), (2), (3) $355,575 $21,391 6.02% $363,966 $22,814 6.27% $361,883 $25,779 7.12%
Investment securities:
Taxable 85,925 3,216 3.74% 79,030 3,540 4.48% 65,908 3,174 4.82%
Tax-exempt (2) 10,003 544 5.43% 11,795 725 6.15% 14,154 888 6.28%
Other interest-earning assets 27,175 155 0.57% 19,690 149 0.75% 10,714 244 2.28%
Total earning assets $478,678 $25,306 5.29% $474,481 $27,228 5.74% $452,659 $30,085 6.65%
Cash and due from banks 7,789 7,618 8,113
Allowance for loan losses (8,667) (6,733) (4,854)
Other assets 27,797 22,628 21,356
Total assets $505,597 $497,994 $477,274
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing demand $35,100 $205 0.59% $29,639 $187 0.63% $27,561 $232 0.84%
Savings deposits 107,622 1,074 1.00% 105,330 1,393 1.32% 99,264 1,908 1.92%
Time deposits 199,942 5,123 2.56% 195,712 6,221 3.18% 189,882 7,998 4.21%
Short-term borrowings 10,410 95 0.91% 11,907 124 1.04% 11,634 180 1.55%
Long-term borrowings 42,561 1,670 3.92% 47,296 1,961 4.15% 51,874 2,365 4.56%
Subordinated debentures 10,310 595 5.77% 10,310 614 5.98% 10,310 614 5.98%
Total interest-bearing liabilities $405,945 $8,762 2.16% $400,194 $10,500 2.62% $390,525 $13,297 3.40%
Demand deposits 52,208 49,952 48,003
Other liabilities 3,468 3,726 3,429
Stockholders' equity 43,976 44,122 35,317
Total liabilities and $505,597 $497,994 $477,274
stockholders' equity
Net interest income and rate
spread$ 16,544 3.13% $16,728 3.12% $16,788 3.25%
Net interest margin 3.46% 3.53% 3.71%
(1)Nonaccrual loans are included in the daily average loan balances outstanding.
(2)The yield on tax-exempt loans and investment securities is computed on a tax-equivalent basis using a federal tax rate of 34%
and adjusted for the disallowance of interest expense.
(3)Interest income includes loan fees as follows: 2010- $387; 2009-$489; and 2008-$535
Table 3: Interest Income and Expense Volume and Rate Analysis
2010 vs. 2009 2009 vs. 2008
Due to Due to
Volume Rate (1) Net Volume Rate (1) Net
($ in Thousands)
Loans (2) ($526) ($897) ($1,423) $148 ($3,113) ($2,965)
Taxable investments 309 (633) (324) 632 (266) 366
Tax-exempt investments (2) (110) (71) (181) (148) (15) (163)
Other interest income 56 (50) 6 205 (300) (95)
Total earning assets ($271) ($1,651) ($1,922) $837 ($3,694) ($2,857)
Interest-bearing demand $34 ($16) $18 $17 ($62) ($45)
Savings deposits 30 (349) (319) 116 (631) (515)
Time deposits 135 (1,233) (1,098) 245 (2,022) (1,777)
Short-term borrowings (16) (13) (29) 4 (60) (56)
Long-term borrowings (197) (94) (291) (209) (195) (404)
Subordinated debenture 0 (19) (19) 0 0 0
Total interest-bearing liabilities ($14) ($1,724) ($1,738) $173 ($2,970) ($2,797)
Net Interest Income ($257) $73 ($184) $664 ($724) ($60)
(1)The change in interest due to both rate and volume has been allocated to rate.
(2)The yield on tax-exempt loans and investment securities is computed on a tax-equivalent basis using a federal tax rate
of 34% adjusted for the disallowance of interest expense.
Table 4: Yield on Earning Assets
December 31, 2010 December 31, 2009 December 31, 2008
Yield Change Yield Change Yield Change
Yield on earning assets (1) 5.29% -0.45% 5.74% -0.91% 6.65% -0.70%
Effective rate on all liabilities
as a percentage of earning assets 1.83% -0.38% 2.21% -0.73% 2.94% -0.81%
Net yield on earning assets 3.46% -0.07% 3.53% -0.18% 3.71% 0.11%
(1)The yield on tax-exempt loans and investment securities is computed on a tax-equivalent basis using a federal tax rate
of 34% adjusted for the disallowance of interest expense.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is predominantly a function of the
Company's methodology and judgment as to qualitative and quantitative factors
used to determine the adequacy of the ALLL. The adequacy of the ALLL is
affected by changes in the size and character of the loan portfolio, changes in
levels of impaired and other nonperforming loans, historical losses and
delinquencies on each portfolio category, the risk inherent in specific loans,
concentrations of loans to specific borrowers or industries, existing and future
economic conditions, the fair value of underlying collateral, and other factors
which could affect potential credit losses.
The provision for loan and lease losses in 2010 was $4,755, compared to $8,506
and $3,200 for 2009 and 2008, respectively. Net charge-offs were $3,241 for
2010, compared to $5,091 for 2009 and $2,832 for 2008. Net charge-offs as a
percentage of average loans were 0.91%, 1.40%, and 0.78% for 2010, 2009, and
2008, respectively. At December 31, 2010, the ALLL was $9,471 an increase of
$1,514 over December 31, 2009 and an increase of $4,929 over December 31, 2008.
The ratio of the ALLL to total loans was 2.79%, 2.22%, and 1.25% for the years
ended 2010, 2009, and 2008, respectively. The level of nonperforming loans
declined in 2010; however, the ratio of nonperforming loans to total loans rose
due to the decrease in the total loan portfolio in each of the past three
years. Nonperforming loans at December 31, 2010, were $13,808, compared to
$14,093 at December 31, 2009, and $9,554 at December 31, 2008, representing
4.07%, 3.93%, and 2.62% of total loans, respectively.
NONINTEREST INCOME
Noninterest income was $5,550 for 2010, an increase of $1,129, or 25.5%, from
2009.
Mortgage banking income represents income received from the sale of residential
real estate loans into the secondary market. For 2010, mortgage banking income
was $955, up $391 from 2009. In 2010, 407 mortgage loans were sold totaling
$68,886 into the secondary market compared to 301 loans totaling $47,436 for
2009. Residential loan activity reached an all time high in 2010 due to the
historically low interest rate environment.
Gain on sale of investments was $1,054 for 2010 compared to $449 in 2009.
Proceeds from 2010 sales totaled $38,146 while proceeds from 2009 were $12,717.
The sales of investments are considered a normal function of prudently managing
the portfolio and taking advantage of gain positions when appropriate. Sales
also occurred to remove those mortgage securities that were considered too small
to hold, to remove those securities that will have a tendency to react most
negatively as rates rise and lastly to reposition the portfolio for rising
rates.
Table 5: Noninterest Income
Years Ended December 31, % Change
2010 2009 2008 2010 2009
($ in thousands)
Service fees $1,174 $1,239 $1,412 -5.2% -12.3%
Trust service fees 1,103 1,024 1,114 7.7% -8.1%
Investment product commissions 221 237 249 -6.8% -4.8%
Mortgage banking 955 564 289 69.3% 95.2%
Gain on sale of investments 1,054 449 0 134.7% 100.0%
Other operating income 1,043 908 962 14.9% -5.6%
Total noninterest income $5,550 $4,421 $4,026 25.5% 9.8%
NONINTEREST EXPENSE
Noninterest expense declined $645 or 3.90% from 2009, primarily from a reduction
of $1,035 in expenses related to foreclosures and holding OREO as we were
actively working out more loans in 2009 than in 2010.
Generally we have continued to control noninterest expenses through staff
reductions (full-time-equivalents at December 31, 2010 were 151 compared to 158
at December 31, 2009), renegotiated vendor contracts and reduced level of
discretionary spending.
Our primary noninterest expense is salaries and benefits. Overall, salaries
were generally frozen for all employees in 2010 and related expenses declined
$19; however, this was offset by increases of $145 in the Company's insurance
and medical plans, provided as an employee benefit, for a net increase of $126
in 2010.
Foreclosure and OREO expense for 2010 was $243, a reduction of $1,035 from 2009.
Savings of $698 were realized due to lower valuation adjustments required for
OREO properties and the carrying expenses thereof, as well as, a general
reduction in foreclosure expenses.
Other expenses of $2,831 increased $550 in 2010 primarily due to $118 increase
in advertising, marketing and public relations expenses; $289 in higher loan
servicing expenses and $100 due to the recalculation of directors deferred
compensation fees.
Table 6: Noninterest Expense
Years Ended December 31, % Change
2010 2009 2008 2010 2009
($ in thousands)
Salaries and employee benefits $8,537 $8,411 $9,068 1.5% -7.2%
Occupancy 1,830 1,893 1,996 -3.3% -5.2%
Data processing 651 648 748 0.5% -13.4%
Foreclosure/OREO expense 243 1,278 541 -81.0% NM
Legal and professional fees 677 882 762 -23.2% 15.7%
Goodwill impairment 0 0 295 NM NM
FDIC expense 1,036 1,057 220 -2.0% NM
Other 2,831 2,281 2,380 24.1% -4.2%
Total noninterest expense $15,805 $16,450 $16,010 -3.9% 2.7%
INCOME TAXES
Income tax expense for 2010 was $135 compared to income tax benefit of $1,916
for 2009. The Company's effective tax rate was 15.4% in 2010 and -43.5% in
2009. The increase in the effective tax rate for 2010 over 2009 was the
result of profit in 2010 aided significantly by the $3,751 reduction in
provisions for loan and lease losses in 2010.
BALANCE SHEET ANALYSIS
LOANS
The Bank services a diverse customer base throughout North Central Wisconsin
including the following industries: agriculture (primarily dairy), retail,
manufacturing, service, resort properties, timber and businesses supporting the
general building industry. Commercial loans were the only loan category to see
growth in 2010. The most significant declines were in the real estate
portfolio, i.e. commercial real estate, real estate construction, and
residential real estate. We continue to concentrate our efforts in originating
loans in our local markets and assisting our current loan customers. We are
actively utilizing government loan programs such as SBA, USDA, and FSA to help
these customers survive the current economic downturn and position their
businesses to return to profitability in the future.
Total loans were $339,170 at December 31, 2010, a decrease of $19,446 or 5% from
December 31, 2009. Loan volume growth was negatively impacted by the current
credit environment and economic conditions which we believe has reduced loan
demand in our market areas.
Table 7: Loan Composition
2010 2009 2008 2007 2006
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
($ in thousands)
Commercial business $39,093 12% $35,673 10% $39,047 11% $39,892 11% $61,778 18%
Commercial real estate 132,079 39% 138,891 39% 127,209 34% 114,028 32% 113,738 32%
Real estate construction 30,206 9% 35,417 10% 45,665 13% 45,959 13% 26,105 7%
Agricultural 39,671 12% 42,280 12% 43,345 12% 40,804 11% 42,936 12%
Real estate residential 91,974 26% 99,116 27% 100,311 28% 107,239 30% 97,711 28%
Installment 6,147 2% 7,239 2% 8,804 2% 10,066 3% 9,179 3%
Total loans $339,170 100% $358,616 100% $364,381 100% $357,988 100% $351,447 100%
Owner occupied $83,115 63% $88,002 63% $54,749 43% $57,027 50% $65,312 57%
Non-owner occupied 48,964 37% 50,889 37% 72,460 57% 57,001 50% 48,426 43%
Commercial real estate $132,079 100% $138,891 100% $127,209 100% $114,028 100% $113,738 100%
1-4 family construction $967 3% $3,523 10% $4,757 10% $8,034 17% $9,447 36%
All other construction 29,239 97% 31,894 90% 40,908 90% 37,925 83% 16,658 64%
Real estate construction $30,206 100% $35,417 100% $45,665 100% $45,959 100% $26,105 100%
Commercial business loans, commercial real estate, real estate construction
loans and agricultural loans comprise 72% of our loan portfolio. Such loans are
considered to have more inherent risk of default than residential mortgage or
consumer loans. The commercial balance per borrower is typically larger than
that for residential and mortgage loans, inferring higher potential losses on an
individual customer basis. Commercial loan growth throughout 2010 was
negatively impacted by soft loan demand across all markets, the Company's
aggressive approach to recognizing risks associated with and reducing expenses
to specific borrowers and in recognizing charge-offs on nonperforming loans in a
timely manner.
Commercial business loans were $39,093 at the end of 2010, up $3,420 (10%) since
year-end 2009, and comprised 12% of total loans outstanding, up from 10% at the
end of 2009. The commercial business loan classification primarily consists of
commercial loans to small businesses, multi-family residential income-producing
businesses, and loans to municipalities. Loans of this type include a diverse
range of industries. The credit risk related to commercial business loans is
largely influenced by general economic conditions and the resulting impact on a
borrower's operations, or on the value of underlying collateral, if any.
Commercial real estate primarily includes commercial-based mortgage loans that
are secured by nonfarm/nonresidential real estate properties. Commercial real
estate totaled $132,079 at December 31, 2010, down $6,812 (5%) from December 31,
2009, and comprised 39% of total loans outstanding for each of 2010 and 2009.
Loans of this type are mainly secured by commercial income properties. Credit
risk is managed by employing sound underwriting guidelines, lending primarily to
borrowers in local markets, periodically evaluating the underlying collateral,
and formally reviewing the borrower's financial soundness and relationship on an
ongoing basis.
Real estate construction loans declined $5,211 (15%) to $30,206, representing 9%
of the total loan portfolio at the end of 2010, compared to an aggregate
$35,417, representing 10% of the total loan portfolio at the end of 2009. Loans
in this classification provide financing for the acquisition or development of
commercial income properties, multi-family residential development, and single-
family consumer construction. The Company controls the credit risk on these
types of loans by making loans in familiar markets, underwriting the loans to
meet the requirements of institutional investors in the secondary market,
reviewing the merits of individual projects, controlling loan structure, and
monitoring the progress of projects through the analysis of construction
advances.
Agricultural loans totaled $39,671 at December 31, 2010, down $2,609 (6%)
compared to 2009, and represented 12% of the 2010 year-end loan portfolio,
unchanged from year-end 2009. Loans in this classification include loans
secured by farmland and financing for agricultural production. Credit risk is
managed by employing sound underwriting guidelines, periodically evaluating the
underlying collateral, and formally reviewing the borrower's financial soundness
and relationship on an ongoing basis.
Real estate residential loans totaled $91,974 at the end of 2010, down $7,142
(7%) from the prior year-end and comprised 26% of total loans outstanding at the
end of 2010, compared to 27% at the end of 2009. Residential mortgage loans
include conventional first lien home mortgages and home equity loans. Home
equity loans consist of home equity lines, and term loans, some of which
are first lien positions. As part of its management of originating residential
mortgage loans, nearly all of the Company's long-term, fixed-rate residential
real estate mortgage loans are sold in the secondary market without retaining
the servicing rights. At December 31, 2010, $7,444 in residential mortgages were
being held for resale in to the secondary market, compared to $5,452 at December
31, 2009.
Installment loans totaled $6,147 at December 31, 2010, down $1,092 (16%)
compared to 2009, and represented 2% of the 2010 and 2009 year-end loan
portfolio. Loans in this classification include short-term and other personal
installment loans not secured by real estate. Credit risk is primarily
controlled by reviewing the creditworthiness of the borrowers, monitoring
payment histories, and taking appropriate collateral and guaranty positions.
Factors that are important to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, early identification of
potential problems, an adequate ALLL, and sound nonaccrual and charge-off
policies. An active credit risk management process is used for commercial loans
to further ensure that sound and consistent credit decisions are made. As
described above, this process is regularly reviewed and the process has been
modified over the past several years to further strengthen the direct
participation of the Bank's board of directors in the credit process. Credit
risk is controlled by detailed underwriting procedures, comprehensive loan
administration, and periodic review of borrowers' outstanding loans and
commitments. Borrower relationships are formally reviewed and graded on an
ongoing basis for early identification of potential problems. Further analyses
by customer, industry, and geographic location are performed to monitor trends,
financial performance, and concentrations. Cash flows and collateral values are
analyzed in a range of projected operating environments.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas. Significant loan concentrations are considered to exist for a
financial institution when there are amounts loaned to multiple numbers of
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic or other conditions. At December 31, 2010, no significant
industry concentrations existed in the Company's portfolio in excess of 30% of
total loans. The Bank has also developed guidelines to manage its exposure to
various types of concentration risks.
Table 8: Loan Maturity Distribution
Loan Maturity
One Year Over One Year Over
or Less to Five Years Five Years
($ in thousands)
Commercial business $14,739 $19,218 $5,136
Commercial real estate 48,300 72,919 10,860
Real estate construction 13,568 9,802 6,836
Agricultural 16,471 16,796 6,404
Real estate residential 16,932 32,210 42,832
Installment 1,618 4,284 245
Total $111,628 $155,229 $72,313
Fixed rate $94,789 $138,958 $9,871
Variable rate 16,839 16,271 62,442
Total $111,628 $155,229 $72,313
ALLOWANCE FOR LOAN AND LEASE LOSSES ("ALLL")
The economic environment during 2010 continued to present unique credit related
issues that required management's attention. As a result, the Company focused
on managing credit risk through enhanced asset quality administration, including
early problem loan identification and timely resolution of problems. Credit
risks within the loan portfolio are inherently different for each loan type.
Credit risk is controlled and monitored through the use of lending standards, a
thorough review of potential borrowers, and on-going attention to loan payment
performance.
The level of the ALLL represents management's estimate of an amount of reserves
which provides for potential credit losses in the loan portfolio at the balance
sheet date. To assess the ALLL, an allocation methodology is applied by the
Company which focuses on evaluation of several factors, including but not
limited to: (1) evaluation of facts and issues related to specific loans; (2)
management's ongoing review and grading of the loan portfolio; (3) consideration
of historical loan loss and delinquency experience on each portfolio category;
(4) trends in past due and nonperforming loans; (5) the risk characteristics of
the various classifications of loans; (6) changes in the size and character of
the loan portfolio; (7) concentrations of loans to specific borrowers or
industries; (8) existing and forecasted economic conditions; (9) the fair value
of underlying collateral; (10) and other qualitative and quantitative factors
which could affect potential credit losses. Our methodology reflects guidance by
regulatory agencies to all financial institutions, and is specifically reviewed
by the Company's independent auditors.
At December 31, 2010, the ALLL was $9,471, compared to $7,957 at December 31,
2009 and $4,542 at December 31, 2008. The ALLL as a percentage of total loans
was 2.79%, 2.22%, and 1.25% at December 31, 2010, 2009 and 2008, respectively.
The ALLL was 69%, 56% and 48% of nonperforming loans at December 31, 2010, 2009
and 2008, respectively. Management's allowance methodology includes an
impairment analysis on specifically identified commercial loans defined as
impaired by the Company in determining the overall appropriate level of the
ALLL.
While management believes the worst of the credit quality deterioration was
addressed in 2010 and 2009, it also believes the recovery will be long term in
nature. Provisions for loan and lease losses, total nonperforming loans and net
charge-offs decreased in 2010 from 2009; however, OREO holdings increased
signaling that problem loans are moving to resolution. Provisions for loan and
lease losses of $4,755 for 2010 were $3,751 lower than the 2009 provision of
$8,056 and $1,555 higher than the 2008 provision of $3,200. At each respective
period, management believed those actions recognized and appropriately addressed
any significant credit quality issues in the loan portfolio.
The asset quality stress which began in 2007 with the $4,600 charge-off (88% of
total charge-offs in 2007) of the Impaired Borrower accelerated considerably
through 2009. During this three year period the Company experienced elevated
levels of net charge-offs and higher nonperforming loans relative to the
Company's historical trends. Levels of charge-offs and non-performing loans
declined in 2010, but still remain historically high. Issues impacting asset
quality during this period included historically depressed economic factors,
such as heightened unemployment, depressed commercial and residential real
estate markets, volatile energy prices, and depressed consumer confidence.
Declining collateral values have significantly contributed to our elevated
levels of nonperforming loans, net charge-offs, and ALLL. During this time
period, the Company continued to review its underwriting and risk-based
pricing guidelines for commercial real estate and real estate construction
lending, as well as on new home equity and residential mortgage loans, to
reduce potential exposure within these portfolio categories. In the fourth
quarter 2009 a new Chief Credit Officer was hired to focus on credit related
issues and to further strengthen the credit management process.
Gross charge-offs were $4,034 for 2010, $5,283 for 2009, and $3,040 for 2008,
while recoveries for the corresponding periods were $793, $192 and $208,
respectively. As a result, net charge-offs for 2010 were $3,241 or 0.91% of
average loans, compared to $5,091 or 1.40% of average loans for 2009, and $2,832
or 0.78% of average loans for 2008. In 2010, 61% of net charge-offs came from
commercial loans, compared to 79% for 2009 and 65% for 2008. Residential
mortgages and home equity accounted for 35% of 2010 net charge-offs compared to
19% and 30% for 2009 and 30% for 2008, respectively. Commercial business and
commercial real estate loan losses declined in 2010, while losses in consumer
residential real estate increased compared to prior years. This reflects the
continuing stress on personal household income even though the general economic
conditions for businesses have began to improve. Gross charge-offs have risen
over the past four years, as a result of the increasing economic stress and
declining values of underlying collateral that have occurred during this time
period. Loans charged-off are subject to continuous review, and specific
efforts are taken to achieve maximum recovery of principal, accrued interest,
and related expenses.
Table 9: Loan Loss Experience
Years Ended December 31,
2010 2009 2008 2007 2006
($ in thousands)
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $7,957 $4,542 $4,174 $8,184 $3,028
Charge-offs (4,034) (5,283) (3,040) (5,198) (113)
Recoveries 793 192 208 48 136
Net (charge-offs) recoveries (3,241) (5,091) (2,832) (5,150) 23
Provision for loan losses 4,755 8,506 3,200 1,140 5,133
Balance at end of year $9,471 $7,957 $4,542 $4,174 $8,184
NET LOAN CHARGE-OFFS (RECOVERIES):
Commercial business $268 $603 $177 $1,442 ($59)
Agricultural 120 34 18 1 (1)
Commercial real estate (CRE) 1,215 1,839 1,453 3,298 10
Real estate construction 388 1,556 186 6 11
Total commercial 1,991 4,032 1,834 4,747 (39)
Residential mortgage 1,124 950 842 331 0
Installment 126 109 156 72 16
Total net charge-offs (recoveries) $3,241 $5,091 $2,832 $5,150 ($23)
CRE AND CONSTRUCTION NET CHARGE-OFF DETAIL:
Owner occupied $502 $757 $1,078 ($11) $10
Non-owner occupied 713 1,082 375 3,309 0
Commercial real estate $1,215 $1,839 $1,453 $3,298 $10
1-4 family construction ($18) $33 $186 $0 $11
All other construction 406 1,523 0 6 0
Real estate construction $388 $1,556 $186 $6 $11
The allocation of the year-end ALLL for each of the past five years based on our
estimate of loss exposure by category of loans is shown in Table 10.
Table 10: Allocation of the Allowance for Loan and Lease Losses
% of Loan % of Loan % of Loan % of Loan % of Loan
Type to Type to Type to Type to Type to
2010 Total Loans 2009 Total Loans 2008 Total Loans 2007 Total Loans 2006 Total Loans
($ in thousands)
ALLOWANCE ALLOCATION:
Commercial business $536 12% $497 10% $295 11% $301 11% $2,452 18%
Agricultural 1,146 12% 981 12% 450 12% 374 11% 854 12%
Commercial real estate (CRE) 4,320 39% 3,954 39% 1,836 34% 1,899 32% 3,048 32%
Real estate construction 1,278 9% 685 10% 836 13% 351 13% 219 7%
Total commercial 7,280 72% 6,117 71% 3,417 70% 2,925 67% 6,573 69%
Residential mortgage 2,060 26% 1,753 27% 1,010 28% 1,056 30% 1,232 28%
Installment 131 2% 87 2% 115 2% 193 3% 379 3%
Total allowance for
loan losses $9,471 100% $7,957 100% $4,542 100% $4,174 100% $8,184 100%
ALLOWANCE CATEGORY AS A PERCENT
OF TOTAL ALLOWANCE:
Commercial business 5.6% 6.2% 6.5% 7.2% 30.0%
Agricultural 12.1% 12.3% 9.9% 9.0% 10.4%
Commercial real estate (CRE) 45.6% 49.8% 40.4% 45.5% 37.2%
Real estate construction 13.5% 8.6% 18.4% 8.4% 2.7%
Total commercial 76.8% 76.9% 75.2% 70.1% 80.3%
Residential mortgage 21.8% 22.0% 22.2% 25.3% 15.1%
Installment 1.4% 1.1% 2.6% 4.6% 4.6%
Total allowance for
loan losses 100.0% 100.0% 100.0% 100.0% 100.0%
The allocation methodology used at December 31, 2010, 2009, 2008 was comparable.
Loss factors are analyzed based on historical loss rates and on other
qualitative factors that may affect loan collectability. Management allocates
the ALLL by pools of risk. The loss factors applied in the methodology are
periodically re-evaluated. The loss factors assigned to loan types were very
similar from 2008 through 2010. Refinements were made in 2010 to better align
current and historical loss experience, for example, effective December 31, 2010
the Bank changed its loss history period to the trailing three year period from
the trailing five year period utilized in 2009 and 2008.
During 2010, management continued to focus on the erosion of the credit
environment and the corresponding deterioration in its credit quality metrics.
Process improvements were implemented around credit evaluations, documentation,
appraisal processes and portfolio monitoring. The improved credit processes,
combined with enhanced credit information, have been incorporated into the
methodology management uses in determining the adequacy of the ALLL. This
process is reviewed by the Company's internal and external auditors and the
regulatory agencies.
IMPAIRED LOANS AND NONPERFORMING ASSETS
As part of its overall credit risk management process, management has been
committed to an aggressive problem loan identification philosophy. This
philosophy has been implemented through the ongoing monitoring and review of all
pools of risk in the loan portfolio to ensure that problem loans are identified
early and the risk of loss is minimized.
Nonperforming loans are considered one indicator of potential future loan
losses. Nonperforming loans are defined as nonaccrual loans, including those
defined as impaired under current accounting standards, loans 90 days or more
past due but still accruing interest, and restructured loans. Loans are
generally placed on nonaccrual status when contractually past due 90 days or
more as to interest or principal payments. Additionally, whenever management
becomes aware of facts or circumstances that may adversely impact the
collectability of principal or interest on loans, management may place such
loans on nonaccrual status immediately. Previously accrued and uncollected
interest on such loans is reversed, amortization of related loan fees is
suspended, and income is recorded only to the extent that interest payments are
subsequently received in cash after a determination has been made that the
principal balance of the loan is collectible. If collectability of the principal
is in doubt, payments received are applied to loan principal. Loans modified in
a troubled debt restructuring (or "restructured" loans) involve the granting of
some concession to the borrower involving the modification of terms of the loan,
such as changes in payment schedule or interest rate, which generally would not
be otherwise be considered. Generally, such loans are included in nonaccrual
loans until the customer has attained a sustained period of repayment
performance. Nonperforming loans were $13,808, $14,093, and $9,554 at December
31, 2010, 2009, and 2008 respectively, reflecting the impact of the economy on
our customers.
Table 11: Nonperforming Assets
2010 2009 2008 2007 2006
Nonaccrual loans not considered impaired: ($ in thousands)
Commercial business $808 $751 $36 $32 $599
Agricultural 369 371 521 0 24
Residential mortgage 1,605 958 1,273 485 594
Installment 2 19 47 42 7
Total nonaccrual loans not considered impaired 2,784 2,099 1,877 559 1,224
Nonaccrual loans considered impaired:
Commercial business 7,561 8,894 5,632 3,786 4,722
Agricultural 71 568 216 277 0
Residential mortgage 1,124 2,363 808 1,140 197
Installment 0 0 416 499 504
Total nonaccrual loans considered impaired 8,756 11,825 7,072 5,702 5,423
Impaired loans still accruing interest 993 0 0 0 0
Accruing loans past due 90 days or more (credit cards) 10 18 36 64 4
Restructured loans 1,265 151 569 700 473
Total nonperforming loans 13,808 14,093 9,554 7,025 7,124
Other real estate owned (OREO) 4,230 1,808 2,556 2,352 130
Other repossessed assets 0 450 5 0 0
Investment security (Trust Preferred) 136 211 0 0 0
Total nonperforming assets $18,174 $16,562 $12,115 $9,377 $7,254
RATIOS
Nonperforming loans to total loans 4.07% 3.93% 2.62% 1.96% 2.03%
Nonperforming assets to total loans plus OREO 5.29% 4.60% 3.30% 2.60% 2.06%
Nonperforming assets to total assets 3.57% 3.28% 2.44% 1.95% 1.57%
Allowance for loan losses to nonperforming loans 69% 56% 48% 59% 115%
Allowance for loan losses to total loans at end of year 2.79% 2.22% 1.25% 1.17% 2.33%
NONPERFORMING ASSETS BY TYPE:
Commercial business $54 $40 $411 $547 $2,225
Agricultural 440 939 737 393 24
Commercial real estate (CRE) 6,931 9,009 3,501 3,855 3,077
Real estate construction 2,644 747 2,325 0 62
Total commercial 10,069 10,735 6,974 4,795 5,388
Residential mortgage 3,727 3,321 2,081 1,625 791
Installment 12 37 499 605 515
Total nonperforming loans 13,808 14,093 9,554 7,025 6,694
Commercial real estate owned 3,683 1,523 1,827 1,660 0
Residential real estate owned 547 285 729 692 130
Total other real estate owned 4,230 1,808 2,556 2,352 130
Other repossessed assets 0 450 5 0 0
Investment security (Trust Preferred) 136 211 0 0 0
Total nonperforming assets $18,174 $16,562 $12,115 $9,377 $6,824
CRE and Construction nonperforming loan detail:
Owner occupied $5,488 $5,949 $2,255 $3,179 $195
Non-owner occupied 1,443 3,060 1,246 676 2,882
Commercial real estate $6,931 $9,009 $3,501 $3,855 $3,077
1-4 family construction $0 $0 $296 $0 $0
All other construction 2,644 747 2,029 0 62
Real estate construction $2,644 $747 $2,325 $0 $62
Nonperforming loans began increasing in 2006 when the loans to the Impaired
Borrower were identified as problem credits, charged-off in 2007 and the
commercial and residential real estate properties securing those loans were
surrendered and taken into OREO. Since 2008 the increased levels of
nonperforming loans have been primarily due to the impact of declining property
values, decreased sales and longer holding periods for OREO properties, rising
costs brought on by deteriorating real estate conditions and the weakening
economy.
Total nonperforming loans of $13,808 were down $285 or 2% since year-end 2009,
with commercial nonperforming loans down $1,333 and residential mortgage
nonperforming loans were down $1,239.
The following tables shows the approximate gross interest that would have been
recorded if the loans accounted for on nonaccrual basis and restructured loans
for the years ended as indicated had performed in accordance with their original
terms, in contrast to the amount of interest income that was included in
interest income for the period.
Table 12: Forgone Loan Interest
Years Ended December 31,
2010 2009 2008
($ in thousands)
Interest income in accordance with original terms $819 $819 $704
Interest income recognized (197) (622) (423)
Reduction in interest income $622 $197 $281
The level of potential problem loans is another predominant factor in
determining the relative level of risk in the loan portfolio and in determining
the adequacy of the ALLL. Potential problem loans are generally defined by
management to include loans rated as substandard by management but that are in
performing status; however, there are circumstances present which might
adversely affect the ability of the borrower to comply with present repayment
terms. The decision of management to include performing loans in potential
problem loans does not necessarily mean that the Company expects losses to
occur, but that management recognizes a higher degree of risk associated with
these loans. The loans that have been reported as potential problem loans are
predominantly commercial loans covering a diverse range of businesses and real
estate property types. At December 31, 2010, potential problem loans totaled
$11,967 up from $10,873 at December 31, 2009, due to more aggressive early
detection, work-out and collection procedures undertaken during 2010. There is
no comparable figure to year-end 2008. Potential problem loans at December 31,
2010, consist of $8,631 of commercial loans and $3,336 of residential mortgage
loans. This compares to $9,231 for commercial and $1,642 residential mortgage
loans. The current level of potential problem loans requires a heightened
management review of the pace at which a credit may deteriorate, the duration of
asset quality stress, and uncertainty around the magnitude and scope of economic
stress that may be felt by the Company's customers and on underlying real estate
values.
OREO was $4,230 at December 31, 2010, compared to $1,808 at December 31, 2009
and $2,556 at December 31, 2008. Excluding the properties of the Impaired
Borrower, the other properties held as OREO in 2010 consist of $2,716 of
commercial real estate (the largest being $1,744 related to a hotel/water park
project), $82 real estate construction loans, $150 agricultural loans and $547
residential real estate. OREO as of year-end 2009 consisted of $580 of
commercial real estate, $208 real estate construction and $35 residential real
estate. Management generally seeks to ensure properties held are monitored to
minimize the Company's risk of loss. Evaluations of the fair market value of the
OREO properties are done quarterly and valuation adjustments, if necessary, are
recorded in our consolidated financial statements.
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio is intended to provide the Bank with
adequate liquidity, flexible asset/liability management and a source of stable
income. The portfolio is structured with minimum credit exposure to the Bank.
All securities are classified as available for sale and are carried at market
value. Unrealized gains and losses are excluded from earnings, but are reported
as other comprehensive income in a separate component of shareholders' equity,
net of income tax. Premium amortization and discount accretion are recognized
as adjustments to interest income using the interest method. Realized gains or
losses on sales are based on the net proceeds and the adjusted carrying value
amount of the securities sold using the specific identification method.
Table 13: Investment Securities Portfolio at Estimated Fair Value
Years Ended December 31,
2010 2009 2008
($ in thousands)
U.S. treasury securities and obligations of U.S. government
corporations and agencies $22,567 $3,179 $201
Mortgage-backed securities 56,916 81,766 65,073
Obligations of states and political subdivisions 20,715 17,184 14,006
Corporate debt securities 961 1,198 1,607
Total debt securities 101,159 103,327 80,887
Equity securities 151 150 151
Totals $101,310 $103,477 $81,038
At December 31, 2010, the total carrying value of investment securities was
$101,310, down $2,167 or 2% compared to December 31, 2009, and represented 20%
of total assets, the same as December 31, 2009. While investment securities
remained relatively flat year-over-year, there was some re-adjustment within the
categories to spread the risk out among all categories.
At December 31, 2010, with the exception of securities of the U.S. Government,
the securities portfolio did not contain securities of any single issuer that
were payable from and secured by the same source of revenue or taxing authority
where the aggregate carrying value of such securities exceeded 10% of
shareholders' equity.
The Company recognized OTTI write-downs of $412 during 2010. The write-downs
were to two unrelated private placement trust preferred securities. One of the
issues was completely written off with an OTTI write-down of $211. The other
issue was partially written-off with an OTTI write-down of $201, related in part
to credit losses that are not expected to be recovered by the Company. Since
the Company does not intend to sell the securities and it is not more likely
than not that the Company will be required to sell the securities, the portion
of OTTI related to all other factors was recognized in other comprehensive
income.
A summary of the investment portfolio is shown below:
Table 14: Investments
Investment Category December 31, 2010 December 31, 2009
Rating Amount % Amount %
($ in thousands)
US Treasury & Agencies Debt
AAA $22,567 100% $3,179 100%
Total $22,567 100% $3,179 100%
US Treasury & Agencies Debt as % of Portfolio 22% 3%
Mortgage-backed securities
AAA $56,205 99% $80,898 99%
A+ 13 0% 0 0%
A2 0 0% 11 0%
Baa2 60 0% 0 0%
BA1 308 0% 514 1%
BA3 330 1% 0 0%
B3 0 0% 343 0%
Total $56,916 100% $81,766 100%
Mortgage-Backed Securities as % of Portfolio 57% 79%
Obligations of State and Political Subdivisions
Aa1 $3,496 17% $0 0%
Aa2 $4,492 22% $2,299 13%
AA3 2,665 13% 3,449 20%
A1 905 4% 336 2%
A2 0 0% 875 5%
A3 0 0% 536 3%
Baa1 339 2% 342 2%
NR 8,818 42% 9,347 55%
Total $20,715 100% $17,184 100%
Obligations of State and Political Subdivisions as % of Portfolio 20% 17%
Corporate Debt Securities
NR $1,112 100% $1,348 100%
Total $1,112 100% $1,348 100%
Corporate Debt Securities as % of Portfolio 1% 1%
Total Market Value of Securities $101,310 100% $103,477 100%
Obligations of State and Political Subdivisions (municipal securities): At
December 31, 2010 and 2009, municipal securities were $20,715 and $17,184,
respectively, and represented 20% of total investment securities for 2010 and
17% for 2009 based on fair value.
Mortgage-Backed Securities: At December 31, 2010 and 2009, mortgage-related
securities (which include predominantly mortgage-backed securities and
collateralized mortgage obligations) were $56,916 and $81,766, respectively, and
represented 56% and 79%, respectively, of total investment securities based on
fair value. The fair value of mortgage-related securities is subject to
inherent risks based upon the future performance of the underlying collateral
(mortgage loans) for these securities. Future performance is impacted by
prepayment risk and interest rate changes.
Corporate Debt Securities: At December 31, 2010 and 2009, corporate debt
securities were $1,112 and $1,348, respectively, and represented 1% of total
investment securities based on fair value. Corporate debt securities at
December 31, 2010, consisted of trust preferred securities of $937, and other
securities of $175. Corporate debt securities at December 31, 2009, consisted
of trust preferred securities of $1,173, and other equity securities of $175.
One of the remaining trust preferred securities held in the investment portfolio
deferred its quarterly interest payments effective during the third quarter of
2010.
The Federal Home Loan Bank ("FHLB") of Chicago announced in October 2007 that it
was under a consensual cease and desist order with its regulator, which among
other things, restricts various future activities of the FHLB of Chicago. Such
restrictions may limit or stop the FHLB from paying dividends or redeeming stock
without prior approval. The FHLB of Chicago last paid a dividend in the third
quarter of 2007. Recently, we have been notified by the FHLB that it is making a
fourth quarter dividend payment on February 14, 2011. The Bank is a member of
the FHLB Chicago. Accounting guidance indicates that an investor in FHLB Chicago
capital stock should recognize impairment if it concludes that it is not
probable that it will ultimately recover the par value of its shares. The
decision of whether impairment exists is a matter of judgment that should
reflect the investor's view of FHLB Chicago's long-term performance, which
includes factors such as: (1) its operating performance, (2) the severity and
duration of declines in the market value of its net assets related to its
capital stock amount, (3) its commitment to make payments required by law or
regulation and the level of such payments in relation to its operating
performance, (4) the impact of legislation and regulatory changes on FHLB
Chicago, and on the members of FHLB Chicago and (5) its liquidity and funding
position. After evaluating all of these considerations, the Company believes the
cost of the investment will be recovered. Future evaluations of these factors
could result in a different conclusion.
Table 15: Investment Securities Portfolio Maturity Distribution
After After
One But Five but
Within Within Within After
One Five Ten Ten
Year Years Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
($ in thousands)
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $0 0.00% $18,433 2.13% $3,134 1.52% $1,000 2.00% $22,567 2.04%
Mortgage-backed securities 300 5.00% 1,239 3.85% 18,505 3.69% 36,872 2.91% 56,916 3.19%
Obligations of states and political
subdivisions (1) 1,432 5.52% 8,177 4.96% 10,009 4.24% 1,097 4.54% 20,715 4.63%
Corporate debt securities 25 0.00% 0 0.00% 0 0.00% 1,087 3.15% 1,112 3.08%
Total carrying value $1,757 5.35% $27,849 3.04% $31,648 3.65% $40,056 2.93% $101,310 3.23%
(1) The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34%
adjusted for the disallowance of interest expense.
DEPOSITS
Deposits represent the Company's largest source of funds. At December 31, 2010
total deposits were $400,610, up $2,810 or 1% from 2009. While deposit growth
was minimal, there were significant changes within the deposit classifications.
Time deposits and Brokered Certificates of Deposit of $186,187 declined $18,198
or 9% from year end 2009. This decrease was made intentionally to reduce the
Bank's dependency on non-core funding sources as the Bank is focusing on
increasing core deposits. The decrease was offset by an increase of $6,087 in
interest bearing demand accounts and a $5,228 increase in non-interest bearing
demand accounts, all of which represent sources of lower cost of funds. The
change in deposit mix is believed to be the result of depositors' flight to
safety into FDIC insured bank accounts, our competitive pricing position for
municipal deposits and customers' reluctance to tie their deposits up for
lengthy periods of time in a prevailing low rate environment. The result of
these changes resulted in a shift in our deposit mix at year end which is
displayed in Table 16 below.
Table 16: Deposits
2010 2009 2008
% of % of % of
Amount Total Amount Total Amount Total
($ in thousands)
Noninterest-bearing demand deposits $60,446 15% $55,218 14% $55,694 14%
Interest-bearing demand deposits 39,462 10% 33,375 8% 37,855 10%
Savings deposits 114,515 29% 104,822 26% 103,162 27%
Time deposits 159,201 39% 165,204 42% 139,681 36%
Brokered certificates of deposit 26,986 7% 39,181 10% 49,283 13%
Total $400,610 100% $397,800 100% $385,675 100%
In 2010 average deposits increased $14,329, or 3.74% to $394,872 compared to
$380,633 in 2009. The shift in deposit mix is not as evident when comparing
average balances, in that the shift did not begin to occur until after mid-year.
Table 17: Average Deposits
2010 2009 2008
% of % of % of
Amount Total Amount Total Amount Total
($ in thousands)
Noninterest-bearing demand deposits $52,208 13% $49,952 13% $48,003 13%
Interest-bearing demand deposits 35,100 9% 29,639 8% 27,561 8%
Savings deposits 107,622 27% 105,330 28% 99,264 27%
Time deposits 166,475 42% 151,827 40% 143,059 39%
Brokered certificates of deposit 33,467 9% 43,885 11% 46,823 13%
Total $394,872 100% $380,633 100% $364,710 100%
The retail markets we compete in are continuously influenced by economic
conditions, competitive pressures from other financial institutions and other
investment alternatives available to our customers. A stipulation of the written
agreement with our regulators, limits the rates of interest we may set on our
deposit products. As a result, we continue to focus on expanding existing
customer relationships.
Table 18: Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31, 2010 December 31, 2009
($ in thousands)
3 months or less $19,900 $22,734
Over 3 months through 6 months 6,196 12,646
Over 6 months through 12 months 11,736 21,471
Over 12 months 23,277 37,652
Total $61,109 $94,503
OTHER FUNDING SOURCES
The Bank's other funding sources, which includes short and long term borrowings
and subordinated debentures, increased $1,529 at December 31, 2010 from December
31, 2009. Short term borrowings consist of corporate repurchase agreements which
totaled $9,512 at December 31, 2010 and $7,983 at December 31, 2009.
Table 19: Short Term Borrowings
December 31,
2010 2009 2008
($ in thousands)
Balance end of year $9,512 $7,983 $11,311
Average amounts outstanding during year $10,411 $12,031 $11,753
Maximum month-end amounts outstanding $18,329 $20,074 $13,654
Average interest rates on amounts outstanding during year 0.69% 1.06% 1.53%
Average interest rates on amounts outstanding at end of year 0.49% 0.48% 0.70%
At December 31, 2010 the Bank and Company had additional sources of liquidity
available through pre-approved overnight federal funds lines of credit with
corresponding banks, the federal reserve discount window and other long term
borrowing agreements totaling $28,820.
In 2005, Mid-Wisconsin Statutory Trust I (the "Trust"), a Delaware Business
Trust subsidiary of the Company, issued $10,000 in trust preferred securities.
The Trust used the proceeds from the offering along with Mid-Wisconsin's common
ownership investment to purchase $10,310 of the Company's subordinated
debentures (the "debentures"). The trust preferred securities and the
debentures mature on December 15, 2035, and had a fixed rate of 5.98% until
December 15, 2010. They now have a floating rate of the three-month
LIBOR plus 1.43%, adjusted quarterly. The interest rate at December 31, 2010
was 1.73%.
OFF-BALANCE SHEET OBLIGATIONS
As of December 31, 2010 and 2009, we had the following commitments, which do not
appear on our balance sheet.
Table 20: Commitments
2010 2009
Commitments to extend credit: ($ in thousands)
Fixed rate $25,073 $25,405
Adjustable rate 33,406 23,462
Standby and irrevocable letters of credit-fixed rate 3,921 3,792
Credit card commitments 3,776 4,250
Further discussion of these commitments is included in Note 20, "-Commitments
and Contingencies" of the Notes to Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
We are party to various contractual obligations requiring the use of funds as
part of our normal operations. The table below outlines principal amounts and
timing of these obligations, excluding amounts due for interest, if applicable.
Most of these obligations are routinely refinanced into similar replacement
obligation. However, renewal of these obligations is dependent on our ability
to offer competitive interest rates or availability of collateral for pledging
purposes supporting the long-term advances.
Table 21: Contractual Obligations
Payments due by period
Total < 1 year 1-3 years 3-5 years > 5 years
($ in thousands)
Subordinated debentures $10,310 $0 $0 $0 $10,310
Other long-term borrowings 10,000 0 0 10,000 0
FHLB borrowings 32,561 2,500 6,000 24,061 0
Total long-term borrowing obligations $52,871 $2,500 $6,000 $34,061 $10,310
Also, we have liabilities due to directors for services rendered with various
payment terms depending on their anticipated retirement date or their election
of payout terms following retirement. The total liability at December 31, 2010
for current and retired directors is $697, and is estimated to have a maturity
in excess of five years.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management refers to the ability to ensure that cash is available in a
timely manner to meet cash and loan demands to service liabilities as they
become due without undue cost or risk.
Funds are available from a number of basic banking activity sources, primarily
from the core deposit base and from the repayment and maturity of loans and
investment securities. Additionally, liquidity is available from the sale of
investment securities, and brokered deposits. Volatility or disruptions in the
capital markets may impact the Company's ability to access certain liquidity
sources.
While dividends and service fees from the Bank and proceeds from the issuance of
capital are primary funding sources for the Company, these sources could be
limited or costly (such as by regulation increasing the capital needs of the
Bank, or by limited appetite for new sales of company stock). No dividends were
received in cash from the Bank in 2010 or 2009. Also, as discussed in Part 1,
Item 1 the Bank's written agreement with the FDIC and DFI places restrictions on
the payment of dividends from the Bank to the Company without prior approval
with our regulators.
Investment securities are an important tool to the Company's liquidity
objective. All investment securities are classified as available for sale and
are reported at fair value on the consolidated balance sheet. Approximately
$65,847 of the $101,310 investment securities portfolio on hand at December 31,
2010, were pledged to secure public deposits, short-term borrowings, and for
other purposes as required by law. The majority of the remaining securities
could be sold to enhance liquidity, if necessary.
The scheduled maturity of loans could also provide a source of additional
liquidity. The Bank has $111,628, or 33%, of its total loans maturing within
one year. Factors affecting liquidity relative to loans are loan renewals,
origination volumes, prepayment rates, and maturity of the existing loan
portfolio. The Bank's liquidity position is influenced by changes in interest
rates, economic conditions, and competition. Conversely, loan demand as a need
for liquidity may cause us to acquire other sources of funding which could be
more costly than deposits.
Deposits are another source of liquidity for the Bank. Deposit liquidity is
affected by core deposit growth levels, certificates of deposit maturity
structure, and retention and diversification of wholesale funding sources.
Deposit outflows would require the Bank to access alternative funding sources
which may not be as liquid and may be more costly.
Other funding sources for the Bank are in the form of short-term borrowings
(corporate repurchase agreements, and federal funds purchased), and long-term
borrowings. Short-term borrowings can be reissued and do not represent an
immediate need for cash. Long-term borrowings are used for asset/liability
matching purposes and to access more favorable interest rates than deposits.
The Bank's liquidity resources were sufficient in 2010 to fund the growth in
loans and investments, and to meet other cash needs when necessary.
INTEREST RATE SENSITIVITY GAP ANALYSIS
Table 22 represents a schedule of the Bank's assets and liabilities maturing
over various time intervals. The primary market risk faced by the Company is
interest rate risk. The table reflects a cumulative positive interest
sensitivity gap position, i.e. more rate sensitive assets maturing than rate
sensitive liabilities. We extensively evaluate the cumulative gap position at
the one and two-year time frames. At those time intervals the cumulative
maturity gap was within our established guidelines of 60% to 120%.
Table 22: Interest Rate Sensitivity Gap Analysis
December 31, 2010
0-90 91-180 181-365 1-5 Beyond
Days Days Days Years 5 Years Total
($ in thousands)
Earning Assets:
Loans $36,452 $35,446 $59,461 $167,296 $40,515 $339,170
Securities 3,842 7,528 7,739 41,759 40,442 101,310
Other earning assets 32,473 0 0 0 0 32,473
Total $72,767 $42,974 $67,200 $209,055 $80,957 $472,953
Cumulative rate sensitive assets $72,767 $115,741 $182,941 $391,996 $472,953
Interest-bearing liabilities:
Interest-bearing deposits (1) $54,063 $32,843 $73,584 $128,002 $51,672 $340,164
Borrowings 9,512 2,500 0 40,061 0 52,073
Subordinated debentures 0 0 0 0 10,310 10,310
Total $63,575 $35,343 $73,584 $168,063 $61,982 $402,547
Cumulative interest sensitive liabilities $63,575 $98,918 $172,502 $340,565 $402,547
Interest sensitivity gap $9,192 $7,631 ($6,384) $40,992 $18,975
Cumulative interest sensitivity gap $9,192 $16,823 $10,439 $51,431 $70,406
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 114.5% 117.0% 106.1% 115.1% 117.5%
(1) The interest rate sensitivity assumptions for savings accounts, money market
accounts, and interest-bearing demand deposits accounts are based on the Office
of Thrift Supervision tables regarding portfolio retention and interest rate
repricing behavior. Based on this data, a portion of these balances are
considered to be long-term and fairly stable and are included in the 1-5 year
category and beyond 5 years category.
In order to limit exposure to interest rate risk, we monitor the liquidity and
gap analysis on a monthly basis and adjust pricing, term and product offerings
when necessary to stay within our guidelines and maximize effectiveness of
asset/liability management.
We also estimate the effect a sudden change in interest rates could have on
expected net interest income through income simulation. The simulation is run
using the prime rate as the base with the assumption of rates increasing 100,
200, 300 and 400 basis points or decreasing 100 or 200 basis points. All rates
are increased or decreased parallel to the change in prime rate. The simulation
assumes a static mix of assets and liabilities. As a result of the simulation,
over a 12-month time period ending December 31, 2010, net interest income is
estimated to increase 5.1% if rates increase 200 basis points. In a down 200
basis point rate environment assumption, net interest income is estimated to
decrease 9.6% during the same period. These results are based solely on the
modeled changes in the market rates and do not reflect the earnings sensitivity
that may arise from other factors such as changes in the shape of the yield
curve, changes in spreads between key market rates, or changes in consumer or
business behavior. These results also do not include any management action to
mitigate potential income variances within the modeled process. We realize
actual net interest income is largely impacted by the allocation of assets,
liabilities and product mix. The simulation results are one indicator of
interest rate risk.
Management continually reviews its interest rate risk position through our
Asset/Liability Committee process. This is also reported to the board of
directors through the Board Investment Committee on a bi-monthly basis.
CAPITAL
The Company regularly reviews the adequacy of its capital to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. Management actively reviews capital
strategies for the Company and the Bank in light of perceived business risks
associated with current and prospective earning levels, liquidity, asset
quality, economic conditions in the markets served, and level of dividends
available to shareholders. It is management's intent to maintain an optimal
capital and leverage mix for growth and for shareholder return.
Management believes that the Company and Bank had a strong capital base at the
end of 2010. As of December 31, 2010 and 2009, the tier 1 risk-based capital
ratio, total risk-based capital (tier 1 and tier 2) ratio, and tier 1 leverage
ratio for the Company and Bank were in excess of regulatory minimum
requirements, as well as the heightened requirements as set forth in the Bank's
written agreement with the FDIC and DFI.
On October 14, 2008, the Treasury announced details of the CPP whereby the
Treasury made direct equity investments into qualifying financial institutions
in the form of preferred stock, providing an immediate influx of Tier 1 capital
into the banking system. Participants also adopted the Treasury's standards for
executive compensation and corporate governance for the period during which the
Treasury holds equity issued under this program.
The Company's Articles of Incorporation, as approved and amended at a
shareholder meeting on January 22, 2009, authorized the issuance of 10,000
shares of Series A, Preferred Stock and 500 shares of Series B Preferred Stock.
On February 20, 2009, under the CPP, the Company issued 10,000 shares of Series
A Preferred Stock and a warrant to purchase 500 shares of Series B Preferred
Stock (which were immediately exercised) to the Treasury. Total proceeds
received were $10,000. The proceeds received were allocated between the Series
A Preferred Stock and the Series B Preferred Stock based upon their relative
fair values, which resulted in the recording of a discount on the Series A
Preferred Stock and a premium on the Series B Preferred Stock. The discount and
premium will be amortized over five years. The allocated carrying value of the
Series A Preferred Stock and Series B Preferred Stock on the date of issuance
(based on their relative fair values) was $9,442 and $558, respectively.
Cumulative dividends on the Series A Preferred Stock accrue and are payable
quarterly at a rate of 5% per annum for five years. The rate will increase to
9% per annum thereafter if the shares are not redeemed by the Company. The
Series B Preferred Stock dividends accrue and are payable quarterly at 9%. All
$10,000 of the CPP Preferred Stock qualify as Tier 1 Capital for regulatory
purposes at the Company.
Table 23: Capital
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes (1) Action Provisions (2)
Amount Ratio Amount Ratio Amount Ratio
($ in thousands)
DECEMBER 31, 2010
MID-WISCONSIN FINANCIAL SERVICES, INC.
Tier 1 to average assets $50,575 10.0% $20,143 4.0%
Tier 1 risk-based capital ratio 50,575 14.2% 14,252 4.0%
Total risk-based capital ratios 55,091 15.5% 28,504 8.0%
MID-WISCONSIN BANK
Tier 1 to average assets $44,787 9.0% $20,024 4.0% $42,552 8.5%
Tier 1 risk-based capital ratio 44,787 12.7% 14,140 4.0% 21,210 6.0%
Total risk-based capital ratios 49,268 13.9% 28,280 8.0% 42,420 12.0%
DECEMBER 31, 2009
MID-WISCONSIN FINANCIAL SERVICES, INC.
Tier 1 to average assets $48,493 9.8% $19,744 4.0%
Tier 1 risk-based capital ratio 48,493 13.2% 14,667 4.0%
Total risk-based capital ratios 53,118 14.5% 29,335 8.0%
MID-WISCONSIN BANK
Tier 1 to average assets $40,313 8.2% $19,643 4.0% $24,554 5.0%
Tier 1 risk-based capital ratio 40,313 11.1% 14,575 4.0% 21,863 6.0%
Total risk-based capital ratios 44,910 12.3% 29,150 8.0% 36,438 10.0%
(1) The Bank has agreed with the FDIC and DFI that until the Consent Order is no longer in effect, to maintain minimum
capital ratios at specified levels higher that those otherwise required by applicable regulations as follows:
Tier 1 capital to total average assets - 8.5% and total capital to risk-weighted assets (total
capital) - 12%.
(2) Prompt corrective action provisions are not applicable at the bank holding company level.
Shareholders' equity at December 31, 2010 was $42,970, a decrease of $214 from
the year-end 2009 amount of $43,184. The decrease in 2010 shareholders' equity
was due to a decrease in accumulated other comprehensive income due mainly to
the sale of securities with embedded gains of $466, net income of $743,
preferred stock dividends of $545, proceeds from stock purchase plans of $32 and
stock-based compensation of $22.
SELECTED QUARTERLY FINANCIAL DATA
The following is selected financial data summarizing the results of operations
for each quarter in the years ended December 31, 2010, 2009 and 2008:
Table 24: Selected Quarterly Financial Data
2010 Quarter Ended
December 31, September 30, June 30, March 31,
(In thousands, except per share data)
Interest income $6,018 $6,196 $6,391 $6,457
Interest expense 2,004 2,175 2,255 2,328
Net interest income 4,014 4,021 4,136 4,129
Provision for loan losses 1,500 900 955 1,400
Income (loss) before income taxes 305 183 456 (66)
Net income (loss) available to common equity 80 2 168 (148)
Basic and diluted earnings (loss) per common $0.05 $0.00 $0.10 ($0.09)
Share
2009 Quarter Ended
December 31, September 30, June 30, March 31,
(In thousands, except per share data)
Interest income $6,623 $6,665 $6,822 $6,822
Interest expense 2,456 2,554 2,701 2,789
Net interest income 4,167 4,111 4,121 4,033
Provision for loan losses 2,856 2,150 2,750 750
Income before income taxes (1,475) (1,289) (2,017) 377
Net income available to common equity (1,155) (833) (1,252) 207
Basic and diluted earnings per common share ($0.70) ($0.51) ($0.76) $0.13
2008 Quarter Ended
December 31, September 30, June 30, March 31,
(In thousands, except per share data)
Interest income $7,159 $7,356 $7,479 $7,738
Interest expense 3,112 3,218 3,304 3,663
Net interest income 4,047 4,138 4,175 4,075
Provision for loan losses 935 630 705 930
Income (loss) before income taxes 107 349 690 105
Net income (loss) available to common equity 291 48 500 403
Basic and diluted earnings (loss) per common share $0.03 $0.18 $0.30 $0.25
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 sub-captions "Results of Operations", "Market Risk",
"Net Interest Income", "ALLL", "Investment Securities Portfolio", "Deposits",
and "Liquidity and Interest Rate Sensitivity" under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and notes to related statements thereto
are set forth:
WIPFLI
Report of Independent Registered
Public Accounting Firm
Board of Directors and Stockholders
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, 2010 and 2009, 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,
2010. 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 standards of the Public Company
Accounting Oversight Board (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 misstatements. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included considerations of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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, 2010 and 2009, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States.
WIPFLI
Wipfli LLP
February 23, 2011
Green Bay, Wisconsin
Mid-Wisconsin Financial Services, Inc. And Subsidiary
Consolidated Balance Sheets
December 31, 2010 and 2009
(In thousands, except per share data)
2010 2009
ASSETS
Cash and due from banks $9,502 $9,824
Interest-bearing deposits in other financial institutions 8 13
Federal funds sold and securities purchased under agreements to sell 32,473 9,064
Investment securities available for sale, at fair value 101,310 103,477
Loans held for sale 7,444 5,452
Loans 339,170 358,616
Less: Allowance for loan losses (9,471) (7,957)
Loans, net 329,699 350,659
Accrued interest receivable 1,853 1,940
Premises and equipment, net 8,162 8,294
Other investments, at cost 2,616 2,616
Other assets 16,015 14,121
TOTAL ASSETS $509,082 $505,460
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $60,446 $55,218
Interest-bearing deposits 340,164 342,582
Total deposits 400,610 397,800
Short-term borrowings 9,512 7,983
Long-term borrowings 42,561 42,561
Subordinated debentures 10,310 10,310
Accrued interest payable 992 1,287
Accrued expenses and other liabilities 2,127 2,335
Total liabilities 466,112 462,276
Stockholders' equity:
Series A preferred stock - no par value
Authorized - 10,000 shares in 2010 and 2009
Issued and outstanding Series A - 10,000 shares in 2010 and 2009 9,634 9,527
Series B preferred stock - no par value
Authorized - 500 shares in 2010 and 2009
Issued and outstanding Series B - 500 shares in 2010 and 2009 538 549
Common stock - par value $0.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding - 1,652,122 shares in 2010 and
1,648,102 shares in 2009 165 165
Additional paid-in capital 11,916 11,862
Retained earnings 20,127 20,025
Accumulated other comprehensive income 590 1,056
Total stockholders' equity 42,970 43,184
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $509,082 $505,460
The accompanying notes are an integral part of the consolidated financial statements.
Mid-Wisconsin Financial Services, Inc And Subsidiary
Consolidated Statements of Income (Loss)
Years Ended December 31, 2010, 2009, and 2008
(In thousands, except per share data)
2010 2009 2008
Interest Income
Loans, including fees $21,325 $22,756 $25,718
Securities:
Taxable 3,216 3,540 3,174
Tax-exempt 366 487 596
Other 155 149 244
Total interest income 25,062 26,932 29,732
Interest Expense
Deposits 6,402 7,801 10,138
Short-term borrowings 95 124 180
Long-term borrowings 1,670 1,961 2,365
Subordinated debentures 595 614 614
Total interest expense 8,762 10,500 13,297
Net interest income 16,300 16,432 16,435
Provision for loan losses 4,755 8,506 3,200
Net interest income after provision for loan losses 11,545 7,926 13,235
Noninterest Income
Service fees 1,174 1,239 1,412
Trust service fees 1,103 1,024 1,114
Investment product commissions 221 237 249
Mortgage banking 955 564 289
Gain on sale of investments 1,054 449 0
Other 1,043 908 962
Total noninterest income 5,550 4,421 4,026
Other-than-temporary impairment losses, net
Total other-than-temporary impairment losses (426) (374) 0
Less: Non-credit portion recognized in other comprehensive income, before taxes 14 73 0
Total impairment (412) (301) 0
Noninterest Expense
Salaries and employee benefits 8,537 8,411 9,068
Occupancy 1,830 1,893 1,996
Data processing 651 648 748
Foreclosure/OREO expense 243 1,278 541
Legal and professional fees 677 882 762
Goodwill impairment 0 0 295
FDIC expense 1,036 1,057 220
Other 2,831 2,281 2,380
Total noninterest expense 15,805 16,450 16,010
Income (loss) before income taxes 878 (4,404) 1,251
Income tax expense (benefit) 135 (1,916) 9
Net income (loss) 743 (2,488) 1,242
Preferred stock dividends, discount and premium (641) (545) 0
Net income (loss) available to common equity $102 ($3,033) $1,242
Earnings (Loss) Per Common Share:
Basic and diluted $0.06 ($1.84) $0.76
The accompanying notes are an integral part of the consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2010, 2009, and 2008
(In thousands, except per share data)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income (Loss) Totals
Balance, January 1, 2008 0 $0 1,642 $164 $11,721 $22,901 ($215) $34,571
Comprehensive income:
Net income 1,242 1,242
Other comprehensive income 813 813
Total comprehensive income 2,055
Proceeds from stock purchase plans 2 39 39
Stock-based compensation 44 44
Cash dividends paid, $0.55 per share (904) (904)
Balance, December 31, 2008 0 0 1,644 164 11,804 23,239 598 35,805
Comprehensive loss:
Net loss (2,488) (2,488)
Other comprehensive income 370 370
Reclassification adjustment for net
realized gains on securities available
for sale included in earnings, net of
tax 88 88
Total comprehensive loss (2,030)
Issuance of preferred stock Series A 10,000 9,442 9,442
Issuance of preferred stock Series B 500 558 558
Accretion of preferred stock discount 85 (85) 0
Amortization of preferred stock
premium (9) 9 0
Issuance of common stock: 0
Proceeds from stock purchase plans 4 1 34 35
Cash dividends:
Preferred stock (401) (401)
Common stock, $0.11 per share (181) (181)
Dividends declared:
Preferred stock (68) (68)
Stock-based compensation 24 24
Balance, December 31, 2009 10,500 $10,076 1,648 $165 $11,862 $20,025 $1,056 $43,184
Comprehensive income:
Net income 743 743
Other comprehensive loss (854) (854)
Reclassification adjustment for net
realized gains on securities available
for sale included in earnings, net of
tax 388 388
Total comprehensive income 277
Accretion of preferred stock discount 107 (107) 0
Amortization of preferred stock (11) 11 0
premium
Issuance of common stock:
Proceeds from stock purchase plans 4 0 32 32
Cash dividends:
Preferred stock (477) (477)
Dividends declared:
Preferred stock (68) (68)
Stock-based compensation 22 22
Balance, December 31, 2010 10,500 $10,172 1,652 $165 $11,916 $20,127 $590 $42,970
The accompanying notes are an integral part of the consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
(In thousands, except per share data)
2010 2009 2008
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income (loss) $743 ($2,488) $1,242
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 911 961 1,017
Provision for loan losses 4,755 8,506 3,200
Provision for valuation allowance other real estate 159 958 273
Provision (benefit) for deferred income taxes (90) (1,578) (8)
Gain on sale of investment securities (1,054) (449) 0
Other-than-temporary impairment losses, net 412 301 0
(Gain) loss on premises and equipment disposals 0 12 3
(Gain) Loss on sale of foreclosed real estate owned (187) 91 11
Stock-based compensation 22 24 44
Goodwill impairment 0 0 295
Changes in operating assets and liabilities:
Loans held for sale (1,992) (4,968) 684
Other assets 939 (3,906) 432
Other liabilities (503) (376) (773)
Net cash provided by (used in) operating activities 4,115 (2,912) 6,420
Cash flows from investing activities:
Net decrease in interest-bearing deposits in other financial institutions 5 8 13
Net (increase) decrease in federal funds sold (23,409) 13,236 (19,120)
Securities available for sale:
Proceeds from sales 38,146 12,717 0
Proceeds from maturities 32,614 25,238 18,668
Payment for purchases (68,747) (59,552) (15,892)
Net increase (decrease) in loans 12,220 (639) (10,120)
Capital expenditures (682) (280) (438)
Proceeds from sale of premises and equipment 0 9 0
Proceeds from sale of other real estate 1,590 1,012 407
Net cash used in investing activities (8,263) (8,251) (26,482)
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
(In thousands, except per share data)
2010 2009 2008
Cash flows from financing activities:
Net increase in deposits $2,810 $12,125 $16,196
Net increase (decrease) in short-term borrowings 1,529 (3,328) (4,035)
Proceeds from issuance of long-term borrowings 22,061 6,500 15,500
Principal payments on long-term borrowings (22,061) (13,368) (12,500)
Proceeds from issuance of preferred stock and common stock warrants 0 10,000 0
Proceeds from stock benefit plans 32 35 39
Cash dividends paid preferred stock (545) (401) 0
Cash dividends paid common stock 0 (181) (904)
Net cash provided by financing activities 3,826 11,382 14,296
Net increase (decrease) in cash and due from banks (322) 219 (5,766)
Cash and due from banks at beginning of year 9,824 9,605 15,371
Cash and due from banks at end of year $9,502 $9,824 $9,605
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest $9,057 $10,931 $14,270
Income taxes 0 (19) 710
Noncash investing and financing activities:
Loans transferred to other real estate owned $4,965 $1,652 $895
Loans charged-off 4,034 5,283 3,040
Dividends declared by not yet paid on preferred stock 68 68 0
Loans made in connection with the sale of other real estate 981 339 0
Goodwill impairment 0 0 295
The accompanying notes are an integral part of the consolidated financial statements
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Mid-Wisconsin Financial Services, Inc. (the "Company") operates as a full-
service financial institution with a primary market area including, but not
limited to, Clark, Eau Claire, Lincoln, Marathon, Oneida, Price, Taylor and
Vilas Counties, Wisconsin. It provides a variety of traditional banking product
sales, insurance services, and wealth management services. The Company is
regulated by federal and state agencies and is subject to periodic examinations
by those agencies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary, Mid-Wisconsin Bank (the "Bank"), and the Bank's wholly-owned
subsidiary, Mid-Wisconsin Investment Corporation. All significant intercompany
balances and transactions have been eliminated in consolidation. The accounting
and reporting policies of the Company conform to generally accepted accounting
principles and to general practices within the banking industry.
The Company also owns Mid-Wisconsin Statutory Trust 1 ("Trust"), a wholly owned
subsidiary that is a variable interest entity because the Company is not the
primary beneficiary and, as a result, is not consolidated. The Trust is a
qualifying special-purpose entity established for the sole purpose of issuing
trust preferred securities. The proceeds from the issuance were used by the
Trust to purchase subordinated debentures of the Company, which is the sole
asset of the Trust. Liabilities on the consolidated balance sheets include the
subordinated debentures related to the Trust, as more fully described in Note
12.
ESTIMATES
The preparation of the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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
significantly 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 include cash on hand
and non-interest-bearing deposits at correspondent banks.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
INVESTMENT SECURITIES AVAILABLE FOR SALE
Securities are classified as available for sale and are carried at fair value,
with unrealized gains and losses, net of related deferred income taxes, included
in stockholders' equity as a separate component of other comprehensive income.
Amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the terms of the securities. Declines in
fair value of securities that are deemed to be other-than-temporary are
reflected in earnings as a realized loss, and a new cost basis is established.
In estimating other-than-temporary impairment losses, management considers the
length of time and the extent to which fair value has been less than cost, the
financial condition and near-term prospects of the issuer, and the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. Gains and
losses on the sale of securities are determined using the specific-
identification method.
LOANS HELD FOR SALE
Loans held for sale consist of the current origination of certain fixed rate
mortgage loans and are recorded at the lower of aggregate cost or fair value. A
gain or loss is recognized at the time of the sale reflecting the present value
of the difference between the contractual interest rate of the loans sold and
the yield to the investor. All loans held for sale at December 31, 2010 and 2009
have a forward sale commitment from an investor. Mortgage servicing rights are
not retained.
LOANS
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoffs generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on loans is
accrued and credited to income based on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest method.
Management considers a loan to be impaired when it is probable that the Company
will be unable to collect all amounts due according to the original contractual
terms of the note agreement, including both principal and interest. Management
has determined that specific commercial and consumer loan relationships that
have nonaccrual status or have had their terms restructured in a trouble debt
restructuring meet this definition.
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectability of principal or interest on loans, it is management's practice to
place such loans on a nonaccrual status immediately, rather than delaying such
action until the loans become 90 days past due. When loans are placed on
nonaccrual or charged-off, all current year unpaid accrued interest is reversed
against interest income. The interest on these loans is subsequently accounted
for on the cash basis until qualifying for return to accrual status. If
collectability of the principal is in doubt, payments received are applied to
loan principal. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
A loan is accounted for as a troubled debt restructuring in the Company, for
economic or legal reasons related to the borrower's financial condition, grants
a significant concession to the borrower that it would not otherwise consider.
A troubled debt restructuring may involve the receipt of assets from the debtor
in partial or full satisfaction of the loan, or a modification of terms such as
a reduction of the stated interest rate or face amount of the loan, a reduction
of accrued interest, an extension of the maturity date at a stated interest rate
lower than the current market rate for a new loan with similar risk, or some
combination of these concessions. Troubled debt restructurings generally remain
on nonaccrual status until a six-month payment history is sustained.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve for estimated credit losses on
individually evaluated loans determined to be impaired as well as estimated
credit losses inherent in the loan portfolio, and is based on quarterly
evaluations of the collectability and historical loss experience of loans.
Actual credit losses, net of recoveries, are deducted from the allowance for
loan losses. A provision for loan losses, which is a charge against
earnings, is recorded to bring the allowance for loan losses to a level that, in
management's judgment, is adequate to absorb probable losses in the loan
portfolio.
The allocation methodology applied by the Company to assess the appropriateness
of the allowance for loan losses focuses on evaluation of several factors,
including but not limited to: the establishment of specific reserve allocations
on impaired credits where a high risk of loss is anticipated but not yet
realized, allocation for each loan category based on historical loan loss
experience, and general reserve allocation made based on subjective economic
and bank specific factors such as unemployment, delinquency levels, industry
concentrations, lending staff experience, disposable income and changes in
regulatory or internal loan policies. The total allowance is available to
absorb losses from any segment of the portfolio.
The allowance for loan losses includes specific allowances related to loans
which have been judged to be impaired under current accounting standards. A loan
is impaired when, based on current information, it is probable the Company will
not collect all amounts due in accordance with the contractual terms of the loan
agreement. Management has determined that commercial, financial, agricultural
loans and commercial real estate loans that have a nonaccrual status meet this
definition. Losses on large groups of homogeneous loans, such as mortgage and
consumer loans, are primarily evaluated using historical loss rates. Specific
allowances for impaired loans are based on an evaluation of the customers' cash
flow ability to repay or the fair value of the collateral if the loan is
collateral dependent.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Management believes that the level of the allowance for loan loss is
appropriate. While management uses available information to recognize losses on
loans, future additions to the allowance for loan losses may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require certain loan balances be
charged off or downgraded into criticized loan categories when their credit
evaluations differ from those of management based on their judgments about
information available to them at the time of their examination.
PREMISES, EQUIPMENT, AND DEPRECIATION
Premises and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line method and is based on the estimated
useful lives of the assets. Maintenance and repair costs are charged to expense
as incurred. Gains or losses on disposition of premises and equipment are
reflected in income.
OTHER REAL ESTATE OWNED (OREO)
Other real estate owned consists of real estate properties acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. OREO is
recorded at the lower of the recorded investment in the loan at the time of
acquisition or the fair value of the underlying property value, less estimated
selling costs. Any write-down in the carrying value of a property at the time
of acquisition is charged to the allowance for loan losses. Any subsequent
write-downs to reflect current fair market value, as well as gains and losses on
sale and revenues and expenses incurred in maintaining such properties, are
treated as period costs. OREO is included in the balance sheet caption "Other
assets."
GOODWILL
The excess of cost over the net assets acquired (goodwill) from a bank
acquisition is tested for impairment annually in the fourth quarter. The
results of goodwill impairment testing in 2008 indicated that there was
impairment of goodwill as the carrying value of the reporting unit's goodwill
exceeded its implied fair value. During the fourth quarter 2008 the Company
recorded a $295 non-cash impairment charge to income for goodwill. The Company
no longer has goodwill on its balance sheet as of December 31, 2008.
FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the Federal Home Loan Bank system, the Company is required to
hold stock in the FHLB based on the outstanding amount of FHLB borrowings. This
stock is substantially restricted. The FHLB of Chicago is under regulatory
requirements which require approval of dividend restrictions and stock
redemptions. The stock is evaluated for impairment on an annual basis. However,
the stock is viewed as a long-term investment therefore, its value is determined
based on the ultimate recovery of the par value rather than recognizing
temporary declines in value. FHLB stock is included in the balance sheet caption
"Other investments, at cost" and totals $2,306 at December 31, 2010 and 2009.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income taxes, which arise from temporary
differences between the amounts reported in the financial statements and the tax
bases of assets and liabilities are determined based on the difference between
the financial statement and tax basis of assets and liabilities as measured by
the current enacted tax rates which will be in effect when these differences
are expected to reverse. Provision (credit) for deferred taxes is the result of
changes in the deferred tax assets and liabilities. The Company may also
recognize a liability for unrecognized tax benefits from uncertain tax positions
Unrecognized tax benefits represent the differences between a tax position taken
or expected to be taken in a tax return and the benefit recognized and measured
in the financial statements. Interest and penalties related to unrecognized tax
benefits are classified as income taxes.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commitments under commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded in the financial statements when they
become payable.
RATE LOCK COMMITMENTS
The Company enters into commitments to originate mortgage loans whereby the
interest rate on the loan is determined prior to funding (rate lock
commitments). Rate lock commitments on mortgage loans that are intended to be
sold are considered to be derivatives. The mortgage loans are sold to the
secondary market shortly after the loan is closed. The fair value of the
mortgage loan rate lock commitments is immaterial to the financial statements.
The Company's rate lock commitments were $8,542 and $7,914 at December 31, 2010
and 2009, respectively.
SEGMENT INFORMATION
The Company, through a branch network of its banking subsidiary, provides a full
range of consumer and commercial banking services to individuals,
businesses, and farms in north central Wisconsin. These services include demand,
time, and savings deposits; safe deposit services; credit cards; notary
services; night depository; money orders, traveler's checks; cashier's checks;
savings bonds; secured and unsecured consumer, commercial, and real estate
loans; ATM processing; cash management; merchant capture; online banking; and
trust and financial planning.
While the Company's management monitors the revenue streams of various Company
products and services, operations are managed and financial performance is
evaluated on a companywide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available for sale, net of tax, which
are recognized as a separate component of equity, and accumulated other
comprehensive income (loss).
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated by dividing net income (loss)
available to common equity by the weighted average number of common shares
outstanding.
Diluted earnings (loss) per common share include the potential common stock
shares issuable under the stock options plans.
STOCK-BASED COMPENSATION
The Company accounts for employee stock compensation plans using the fair value
based method of accounting. Under this method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is also the vesting period.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2009 financial statements to
conform to the 2010 classifications.
SUBSEQUENT EVENTS
Management has reviewed the Company's operations for potential disclosure of
information or financial statement impacts related to events occurring after
December 31, 2010, but prior to the release of these financial statements.
Based on the results of this review, no subsequent event disclosures are
required as of the release date.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the Financial Accounting Standards Board ("FASB") issued an
accounting standard intended to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This accounting
standard requires companies to disclose the date through which they have
evaluated subsequent events and the basis of that date, as to whether it
represents the date the financial statements were issued or were available to be
issued. It also provides guidance regarding circumstances under which companies
should and should not recognize events or transactions that occurred after the
balance sheet date, which were not recognized in the financial statements. This
accounting standard is effective for interim and annual periods ending after
June 15, 2009. The Company adopted this accounting standard for the year ended
December 31, 2009. In February 2010, the FASB amended this standard by
requiring companies who file financial statements with the Securities and
Exchange Commission ("SEC") to evaluate subsequent events through the date the
financial statements are issued, and exempts SEC filers from disclosing the
date through which subsequent events have been evaluated. The adoption of this
accounting standard had no material impact on the Company's consolidated
financial statements.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
In June 2009, the FASB issued an accounting standard which requires a
qualitative rather than a quantitative analysis to determine the primary
beneficiary of a variable interest entity for consolidation purposes. The
primary beneficiary of a variable interest entity is the enterprise that has (1)
the power to direct the activities of the variable interest entity that most
significantly impact the variable interest entity's economic performance, and
(2) the obligation to absorb losses of the variable interest entity that could
potentially be significant to the variable interest entity or the right to
receive benefits of the variable interest entity that could potentially be
significant to the variable interest entity. This accounting standard was
effective as of the beginning of the first annual reporting period beginning
after November 15, 2009. The Company adopted this accounting standard on
January 1, 2010, and the standard did not have a significant effect on the
consolidated financial statements of the Company.
In June 2009, the FASB issued an accounting standard which amends current
generally accepted accounting principles related to the accounting for transfers
and servicing of financial assets and extinguishments of liabilities, including
the removal of the concept of a qualifying special-purpose entity. This new
accounting standard also clarifies that a transferor must evaluate whether it
has maintained effective control of a financial asset by considering its
continuing direct or indirect involvement with the transferred financial asset.
This accounting standard was effective as of the beginning of the first annual
reporting period beginning after November 15, 2009. The Company adopted this
accounting standard on January 1, 2010, with no material impact on the
consolidated financial statements of the Company.
In January 2010, the FASB issued an accounting standard providing additional
guidance relating to fair value measurement disclosures. Specifically,
companies will be required to separately disclose significant transfers into and
out of Level 1 and Level 2 measurements in the fair value hierarchy and the
reason for those transfers. Significance should generally be based on earnings
and total assets or liabilities, or when changes are recognized in other
comprehensive income, based on total equity. Companies may take different
approaches in determining when to recognize such transfers, including using the
actual date of the event or change in circumstances causing the transfer, or
using the beginning or ending of a reporting period. For Level 3 fair value
measurements, the new guidance required presentation of separate information
about purchases, sales, issuances and settlements. Additionally, the FASB also
clarified existing fair value measurement disclosure requirements relating to
the level of disaggregation, inputs, and valuation techniques. This accounting
standard became effective at the beginning of 2010, except for the detailed
Level 3 disclosures, which will be effective at the beginning of 2011. The
Company adopted the accounting standard, except for the detailed Level 3
disclosures, at January 1, 2010, with no material impact on the consolidated
financial statements of the Company.
In April 2010, the FASB issued updated guidance relating to how a loan that is
part of a pool should be accounted for if the loan is modified that it would
constitute a troubled debt restructuring. Modified loans that are accounted for
within a pool do not result in the removal of these loans from the pool even if
the loan modification would be considered trouble debt restructuring. This
accounting standard is effective for interim and annual periods ending on or
after July 15, 2010. Adoption of this amendment did not have a material impact
on the consolidated financial statements of the Company.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
In July 2010, the FASB issued an accounting standard update relating to improved
disclosures about the credit quality of financing receivables and the allowance
for credit losses. Companies are required to disaggregate, by portfolio segment
or class of financing receivable, certain existing disclosures and provide
certain new disclosures about its financing receivables and related allowance
for credit losses. The Company adopted this new accounting standard for the
year ended December 31, 2010. See Note 6 for the impact the adoption of this
accounting standard had on the Company's financial statements.
NOTE 2- EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are calculated by dividing net income (loss)
available to common equity by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share are calculated by dividing net
income (loss) available to common equity by the weighted average number of
shares adjusted for the dilutive effect of common stock awards. Presented below
are the calculations for basic and diluted earnings (loss) per common share.
For the Years Ended December 31,
2010 2009 2008
(In thousands, except per share data)
Net income (loss) $743 ($2,488) $1,242
Preferred stock dividends, discount and premium (641) (545) 0
Net income (loss) available to common equity $102 ($3,033) $1,242
Weighted average common shares outstanding 1,650 1,645 1,643
Effect of dilutive stock options 0 1 0
Diluted weighted average common shares outstanding 1,650 1,646 1,643
Basic and diluted earnings (loss) per common share $0.06 ($1.84) $0.76
NOTE 3- CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $298 and $234 was restricted at
December 31, 2010 and 2009, respectively, to meet the reserve requirements of
the Federal Reserve System.
In the normal course of business, the Bank maintains cash and due from bank
balances with correspondent banks. Accounts at each institution are insured in
full by the Federal Deposit Insurance Corporation ("FDIC") Transaction Guarantee
Program until December 31, 2012 or are under the FDIC insurance limit of $250.
Federal funds sold invested in other institutions are not insured.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 4- SECURITIES
The amortized cost and fair values of securities available for sale at December
31, 2010 and 2009, were as follows:
2010
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
($ in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $22,732 $69 $234 $22,567
Mortgage-backed securities 56,292 908 284 56,916
Obligations of states and political 20,239 661 185 20,715
subdivisions
Corporate debt securities 974 0 13 961
Total debt securities 100,237 1,638 716 101,159
Equity securities 151 0 0 151
Total securities available for sale $100,388 $1,638 $716 $101,310
2009
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
($ in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $3,200 $0 $21 $3,179
Mortgage-backed securities 80,380 1,599 213 81,766
Obligations of states and political 16,739 481 36 17,184
subdivisions
Corporate debt securities 1,386 0 188 1,198
Total debt securities 101,705 2,080 458 103,327
Equity securities 150 0 0 150
Total securities available for sale $101,855 $2,080 $458 $103,477
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The following tables represents gross unrealized losses and the related fair
value of investment securities available for sale, aggregated by investment
category and length of time individual securities have been in a continuous
unrealized loss position, at December 31:
Less Than 12 Months 12 Months or More Total
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
($ In Thousands)
December 31, 2010
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $13,784 $234 $0 $0 $13,784 $234
Mortgage-backed securities 26,715 277 72 7 26,787 284
Corporate securities 0 0 136 13 136 13
Obligations of states and political 5,719 185 0 0 5,719 185
Subdivisions
Total $46,218 $696 $208 $20 $46,426 $716
December 31, 2009
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $3,179 $21 $0 $0 $3,179 $21
Mortgage-backed securities 13,865 114 1,305 99 15,170 213
Corporate securities 184 27 189 161 373 188
Obligations of states and political 3,072 36 0 0 3,072 36
subdivisions
Total $20,300 $198 $1,494 $260 $21,794 $458
The Company reviews the investment securities portfolio on a quarterly basis to
monitor its exposure to other-than-temporary impairment that may result due to
the current adverse economic conditions. A determination as to whether a
security's decline in market value is other-than-temporary takes into
consideration numerous factors. Some factors the Company may consider in the
other-than-temporary analysis include, the length of time the security has been
in an unrealized loss position, changes in security ratings, financial condition
of the issuer, whether there has been defaulted payments, and the value of
underlying collateral. Based on the Company's evaluation, a third party vendor
reviews specific investment securities identified by management for other-than
temporary impairment. To determine other-than-temporary impairment, a
discounted cash flow model is utilized to estimate the fair value of the
security. The use of a discounted cash flow model involves judgment,
particularly of interest rates, estimated default rates and prepayment speeds.
During 2010, the Company determined that other-than-temporary impairment existed
in its one non-agency mortgage-backed security and two corporate securities
since the unrealized losses on these securities appear to be related in part to
expected credit losses that will not be recovered by the Company. Since the
Company does not intend to sell the securities and it is not more likely than
not that the Company will be required to sell the securities, the portion of the
other-than-temporary impairment related to credit losses was recognized in
earnings, and the portion of the other-than-temporary impairment related to all
other factors was recognized in other comprehensive income.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The following is a summary of the credit loss of other-than-temporary impairment
recognized in earnings on investment securities.
Non-Agency Mortgage- Corporate Total
Backed Securities Securities
($ in thousands)
Balance of credit-related other-than-temporary impairment at December 31, 2009 $12 $289 $301
Credit losses on securities for which other-than-temporary impairment was not
previously recorded 0 201 201
Additional credit losses on securities for which other-than-temporary impairment was 0 211 211
previously recognized
Balance of credit-related other-than-temporary impairment at December 31, 2010 $12 $701 $713
Based on the Company's evaluation, management does not believe any remaining
unrealized loss at December 31, 2010 represents an other-than-temporary
impairment as these unrealized losses are primarily attributable to changes in
interest rates and the current volatile market conditions, and not credit
deterioration. At December 31, 2010, 50 debt and equity securities had
unrealized losses with aggregate depreciation of 1.52%. The Company currently
has both the intent and ability to hold the securities contained in the previous
table for the time necessary to recover the amortized cost.
The amortized cost and fair value of investment securities at December 31, 2010,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Fair values of securities are estimated based on financial models or prices paid
for similar securities. It is possible interest rates could change considerably
resulting in a material change in estimated fair value.
2010
Amortized Fair
Cost Value
($ in thousands)
Due in one year or less $1,440 $1,457
Due after one year through five years 26,384 26,610
Due after five years through ten years 13,027 13,143
Due after ten years 3,094 3,033
Mortgage-backed securities 56,292 56,916
Total debt securities available for sale $100,237 $101,159
During 2010, proceeds from sales of investments securities available for sale
were $37,165 which resulted in gross investment security gains of $1,054.
Investment securities gains of $449 during 2009 were attributable to the sales
of investment securities available for sale of $12,717. There were no sales of
investment securities during 2008.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Securities with a carrying value of $65,847 and $61,448 at December 31, 2010 and
2009, respectively, were pledged to secure public deposits, short-term
borrowings, and for other purposes as required by law.
The FHLB of Chicago announced in October 2007 that it was under a consensual
cease and desist order with its regulator, which among other things, restricts
various future activities of the FHLB of Chicago. Such restrictions may limit
or stop the FHLB of Chicago from paying dividends or redeeming stock without
prior approval, however, a cash dividend was paid on February 14, 2011. This
will be the first dividend paid by the FHLB of Chicago since the third quarter
of 2007. Based on an evaluation of this investment the Company believes the
cost of the investment will be recovered and no impairment has been recorded on
these securities during 2010, 2009, or 2008.
NOTE 5- LOANS
Loans at December 31 are summarized as follows:
2010 2009
($ in thousands)
Commercial $39,093 $35,673
Commercial real estate 132,079 138,891
Real estate construction 30,206 35,417
Agricultural 39,671 42,280
Residential mortgage 91,974 99,116
Installment 6,147 7,239
Total loans $339,170 $358,616
The Company serves the credit needs of its customers predominantly in central
and northern Wisconsin. Significant loan concentrations are considered to exist
for a financial institution when there are amounts loaned to multiple numbers of
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic or other conditions. At December 31, 2010 no significant
concentrations existed in the Company's loan portfolio in excess of 10% of total
loans.
The Bank, in the ordinary course of business, grants loans to its executive
officers and directors, including affiliated companies in which they are
principal owners. These loans were made on substantially the same terms,
including rates and collateral, as those prevailing at the time for comparable
transactions with other unrelated customers. In the opinion of management, such
loans do not involve more than the normal risk of collectability or present
other unfavorable features. These loans to related parties are summarized as
follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
2010 2009
($ in thousands)
Balance at beginning of year $3,917 $3,432
New loans 2,921 1,427
Repayments (2,497) (921)
Changes due to status of executive officers and directors (8) (21)
Balance at end of year $4,333 $3,917
NOTE 6- ALLOWANCE FOR LOAN LOSSES
A summary of the changes in the allowance for loan losses for the years
indicated is as follows:
Commercial Real Estate Residential
December 31, 2010 Commercial Real Estate Construction Agricultural Mortgage Installment Total
($ in thousands)
Allowance for Loan Losses
Balance at beginning of year $497 $3,954 $685 $981 $1,753 $87 $7,957
Charge-offs (435) (1,490) (537) (206) (1,207) (159) (4,034)
Recoveries 167 275 149 86 83 33 793
Provision 307 1,581 981 285 1,431 170 4,755
Balance at end of year $536 $4,320 $1,278 $1,146 $2,060 $131 $9,471
Ending balance:
individually
evaluated for
impairment $0 $1,236 $484 $8 $213 $0 $1,941
Ending balance:
collectively
evaluated for
impairment $536 $3,084 $794 $1,138 $1,847 $131 $7,530
Commercial Real Estate Residential
December 31, 2009 Commercial Real Estate Construction Agricultural Mortgage Installment Total
($ in thousands)
Allowance for loan losses
Balance at beginning of year $295 $1,836 $836 $450 $1,010 $115 $4,542
Charge-offs (608) (1,990) (1,556) (38) (964) (127) (5,283)
Recoveries 4 151 0 4 13 20 192
Provision 806 3,957 1,405 565 1,694 79 8,506
Balance at end of year $497 $3,954 $685 $981 $1,753 $87 $7,957
Ending balance:
individually
evaluated for
impairment $0 $1,726 $57 $47 $460 $0 $2,290
Ending balance:
collectively
evaluated for
impairment $497 $2,228 $628 $934 $1,293 $87 $5,667
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The commercial credit exposure based on internally assigned credit grade
follows:
Credit Quality Indicators as of December 31, 2010 and 2009
($ in thousands)
Commercial Real Estate
Commercial Real Estate Construction Agricultural
2010 2009 2010 2009 2010 2009 2010 2009
Low to no risk $1,118 $922 $0 $0 $172 $355 $0 $17
Little risk 2,760 3,065 1,306 1,383 1,673 2,401 868 1,326
Minimal risk 6,217 4,832 16,790 14,519 6,685 7,931 3,341 4,925
Moderate risk 10,437 8,093 32,019 39,512 7,062 10,707 7,607 9,230
Acceptable 13,166 16,065 39,448 42,919 7,171 5,083 18,748 17,888
Minimally
Acceptable 3,928 663 19,146 22,774 1,883 6,649 4,338 4,194
Substandard 559 1,957 14,735 8,991 2,723 1,481 4,176 3,801
Doubtful 908 76 8,635 8,793 2,837 810 593 899
Loss 0 0 0 0 0 0 0
Total $39,093 $35,673 $132,079 $138,891 $30,206 $35,417 $39,671 $42,280
The consumer credit exposure based on internally assigned credit grade follows:
Residential Mortgage Installment
2010 2009 2010 2009
Low to no risk $652 $1,022 $15 $70
Little risk 7,208 10,261 555 788
Minimal risk 24,395 30,576 1,850 1,790
Moderate risk 24,574 22,135 2,707 3,477
Acceptable 18,295 19,988 841 931
Minimally acceptable 7,990 7,785 165 152
Substandard 5,022 2,796 11 23
Doubtful 3,838 4,553 3 8
Loss 0 0 0 0
Total $91,974 $99,116 $6,147 $7,239
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The following table presents loans by past due status at December 31, 2010 and
2009:
Recorded
30 - 59 60 - 89 Greater Investment
Days Past Days Past Than 90 Total Past Total > 90 Days
Due Due Days Due Current Loans and Accruing
($ in thousands)
December 31, 2010
Commercial $389 $28 $0 $417 $38,676 $39,093 $0
Commercial real estate 422 2,580 3,677 6,679 125,400 132,079 0
Real estate construction 0 1,143 2,644 3,787 26,419 30,206 0
Agricultural 177 357 250 784 38,887 39,671 0
Residential Mortgage 1,710 472 2,255 4,437 87,537 91,974 0
Installment 35 16 10 61 6,086 6,147 10
Total $2,733 $4,596 $8,836 $16,165 $323,005 $339,170 $10
December 31, 2009
Commercial $99 $8 $17 $124 $35,549 $35,673 $0
Commercial real estate 2,473 334 2,177 4,984 133,907 138,891 0
Real estate construction 115 0 18 133 35,284 35,417 0
Agricultural 228 382 332 942 41,338 42,280 0
Residential Mortgage 1,300 458 1,334 3,092 96,024 99,116 0
Installment 67 13 18 98 7,141 7,239 18
Total $4,282 $1,195 $3,896 $9,373 $349,243 $358,616 $18
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The following table presents impaired loans at December 31, 2010 and 2009.
Recorded Unpaid Principal Related Average Recorded Interest Income
Investment Balance Allowance Investment Recognized
($ in thousands)
December 31, 2010
With no related allowance
recorded:
Commercial real estate $243 $243 $0 $413 $0
Real estate construction 182 182 0 36 3
Agricultural 0 0 0 109 0
Residential mortgage 335 335 0 268 3
With an allowance recorded:
Commercial real estate $4,715 $5,951 $1,236 $6,805 $120
Real estate construction 1,684 2,168 484 984 18
Agricultural 63 71 8 310 0
Residential mortgage 586 799 213 1,319 21
Total:
Commercial real estate $4,958 $6,194 $1,236 $7,218 $120
Real estate construction 1,866 2,350 484 1,020 21
Agricultural 63 71 8 419 0
Residential mortgage 921 1,134 213 1,587 24
December 31, 2009
With no related allowance
recorded:
Commercial $0 $0 $0 $73 $0
Commercial real estate 793 793 0 728 25
Real estate construction 0 0 0 62 0
Agricultural 108 108 0 422 5
Residential mortgage 193 193 0 563 6
Installment 0 0 0 102 0
With an allowance recorded:
Commercial $0 $0 $0 $117 $0
Commercial real estate 6,030 7,756 1,726 5,204 152
Real estate construction 288 345 57 1,519 8
Agricultural 413 460 47 71 13
Residential mortgage 1,710 2,170 460 1,385 33
Installment 0 0 0 0 0
Total:
Commercial $0 $0 $0 $190 $0
Commercial real estate 6,823 8,549 1,726 5,932 177
Real estate construction 288 345 57 1,581 8
Agricultural 521 568 47 493 18
Residential mortgage 1,903 2,363 460 1,948 39
Installment 0 0 0 102 0
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Nonaccrual loans at December 31, 2010 and 2009, are summarized as follows:
2010 2009
$ in thousands)
Commercial $54 $40
Commercial real estate 5,670 8,858
Real estate construction 2,644 747
Agricultural 440 939
Residential mortgage 2,730 3,322
Installment 2 19
Total $11,540 $13,925
NOTE 7 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 was as follows:
2010 2009
($ in thousands)
Land and improvements $2,052 $2,082
Buildings 9,246 9,063
Furniture and equipment 7,489 7,139
Total cost 18,787 18,284
Less: accumulated depreciation 10,625 9,990
Premises and equipment, net $8,162 $8,294
Depreciation and amortization of premises and equipment totaled $814 in 2010,
$930 in 2009, and $1,048 in 2008.
The Bank leases certain of its facilities and equipment, certain of which
provide for increased rentals based upon increases in cost of living adjustments
and other operating costs. The approximate minimum annual rentals and
commitments under these leases with remaining terms in excess of one year are as
follows:
($ in thousands)
2011 $85
2012 49
2013 46
2014 46
2015 46
Thereafter 54
Total $326
Total rental expense under operating leases was $186, $184, and $174 in 2010,
2009, and 2008, respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 8- OTHER REAL ESTATE OWNED
A summary of other real estate at December 31 was as follows:
2010 2009
($ in thousands)
Balance at beginning of year $1,808 $2,556
Transfer of loans at net realizable value to OREO 4,965 1,652
Sale proceeds (1,590) (1,012)
Loans made in sale of OREO (981) (339)
Net gain (loss) from sale of OREO 187 (91)
Provision charged to operations (159) (958)
Balance at end of year $4,230 $1,808
An analysis of the valuation allowance on other real estate at December 31 was
follows:
2010 2009
($ in thousands)
Balance at beginning of year $2,994 $2,616
Provision charged to operations 159 958
Amounts related to OREO disposed of (365) (580)
Balance at end of year $2,788 $2,994
NOTE 9- DEPOSITS
The distribution of deposits at December 31 was as follows:
2010 2009
($ in thousands)
Noninterest-bearing demand deposits $60,446 $55,218
Interest-bearing demand deposits 39,462 33,375
Money market deposits 89,546 81,436
Savings deposits 24,969 23,386
IRA retirement accounts 33,519 34,414
Brokered certificates of deposit 26,986 39,181
Certificates of deposit 125,682 130,790
Total deposits $400,610 $397,800
Time deposits of $100,000 or more were $61,109 and $94,503 at December 31, 2010
and 2009 respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Aggregate annual maturities of all time deposits at December 31, 2010, are as
follows:
Maturities During Year Ending December 31, ($ in thousands)
2011 $129,031
2012 36,818
2013 16,549
2014 3,521
2015 264
Thereafter 4
Total $186,187
Deposits from the Company's directors, executive officers, and affiliated
companies in which they are principal owners totaled $3,112 and $2,492 at
December 31, 2010 and 2009, respectively.
NOTE 10- SHORT-TERM BORROWINGS
Short-term borrowings consisted of $9,512 and $7,983 of securities sold under
repurchase agreements at December 31, 2010 and 2009, respectively.
The Company pledges U.S. agency securities available-for-sale as collateral for
repurchase agreements. The fair value of securities pledged for short-term
borrowings totaled $14,032 and $15,486 at December 31, 2010 and 2009,
respectively.
The following information relates to federal funds purchased and securities sold
under repurchase agreements at December 31:
2010 2009 2008
($ in thousands)
Weighted average rate at December 31, 0.49% 0.48% 0.70%
For the year:
Highest month-end balance $18,329 $20,074 $13,654
Daily average balance $10,411 $12,031 $11,753
Weighted average rate 0.69% 1.06% 1.53%
NOTE 11- LONG-TERM BORROWINGS
Long-term borrowings at December 31 were as follows:
2010 2009
($ in thousands)
Federal Home Loan Bank ("FHLB") advances $32,561 $32,561
Other borrowed funds 10,000 10,000
Total long-term borrowings $42,561 $42,561
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
FHLB advances at December 31 were as follows:
2010 2009
($ in thousands)
4.74% to 5.37% fixed rate, interest payable monthly
with principal due during 2010 $0 $5,061
1.84% to 4.22% fixed rate, interest payable monthly
with principal due during 2011 2,500 9,000
2.17% to 5.12% fixed rate, interest payable monthly
with principal due during 2012 4,000 14,500
3.90% fixed rate, interest payable monthly
with principal due during 2013 2,000 2,000
1.79% to 3.03% fixed rate, interest payable monthly
with principal due during 2014 16,061 2,000
3.16% to 3.48% fixed rate, interest payable monthly
with principal due during 2015 8,000 0
Total $32,561 $32,561
FHLB advances are secured by FHLB stock, qualifying mortgages of the subsidiary
bank (such as residential mortgage, home equity, and commercial real estate) and
by municipal bonds and mortgage-backed securities totaling approximately $67,519
and $63,669 at December 31, 2010 and 2009, respectively. At December 31, 2010,
the bank had $4,248 in available, but unused, FHLB advances.
In April 2010, FHLB advances of $22,061 were restructured. The present value of
the cash flows before and after the restructuring were reviewed and it was
determined the restructuring was closely related to the original contract within
accounting guidance that allows the prepayment penalty to be incorporated into
the new borrowing agreements.
Other borrowed funds include $10,000 of structured repurchase agreements at
December 31, 2010 and 2009. The fixed rate structured repurchase agreements
mature in 2014 and 2015, callable in 2013, and had weighted-average interest
rates of 4.24% and 3.47% at December 31, 2010 and 2009, respectively. Other
borrowings are secured by investment securities totaling $13,390 and $12,173 at
December 31, 2010 and 2009, respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 12- SUBORDINATED DEBENTURES
In 2005, Mid-Wisconsin Statutory Trust 1 (the "Trust") issued $10,000 in trust
preferred securities. The trust preferred securities were sold in a private
placement to institutional investors. The Trust used the proceeds from the
offering along with the Company's common ownership investment to purchase
$10,310 of the Company's subordinated debentures (the "debentures"). The
debentures are the sole asset of the Trust.
The trust preferred securities and the debentures mature on December 15, 2035,
and had a fixed rate of 5.98% until December 15, 2010, after which they have a
floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The
interest rate at December 31, 2010 was 1.73%. The debentures may be called at
par in part or in full on or after December 15, 2010, or within 120 days of
certain events. The trust preferred securities are mandatorily redeemable upon
the maturity or early redemption of the debentures.
The Company has fully and unconditionally guaranteed all of the obligations of
the Trust. The guarantee covers the quarterly distributions and payments on
liquidation or redemption of the trust preferred securities, but only to the
extent of funds held by the Trust. The trust preferred securities qualify under
the risk-based capital guidelines as Tier 1 capital for regulatory purposes.
NOTE 13- INCOME TAXES
The current and deferred amounts of income tax expense (benefit) were as
follows:
2010 2009 2008
($ in thousands)
Current income tax expense (benefit):
Federal $225 ($338) $17
State 0 0 0
Total current 225 (338) 17
Deferred income tax expense (benefit):
Federal (134) (1,223) (4)
State 44 (355) (4)
Total deferred (90) (1,578) (8)
Total income tax expense (benefit) $135 ($1,916) $9
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The effective income tax rate differs from the statutory federal tax rate. The
major reasons for this difference were as follows:
2010 2009 2008
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
($ in thousands)
Tax (benefit) expense at statutory rate $299 34.0% ($1,497) -35.0% $425 34.0%
Increase (decrease) in taxes resulting from:
Tax-exempt interest (169) (19.2) (190) (4.3) (246) (19.7)
Federal tax refund 0 0.0 0 0.0 (221) (17.7)
State income taxes 40 4.5 (239) (5.4) (26) (2.1)
Bank-owned life insurance (53) (6.0) (36) (0.8) (39) (3.2)
Goodwill 0 0.0 0 0.0 100 8.0
Other 18 2.1 46 1.0 16 1.3
Provision (benefit) for income taxes $135 15.4% ($1,916) -43.5% $9 0.7%
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities resulted in deferred taxes.
Deferred tax assets and liabilities at December 31 were as follows:
2010 2009
($ in thousands)
Deferred tax assets:
Allowance for loan losses $2,835 $2,140
Valuation allowance for other real estate owned 1,098 1,179
Deferred compensation 361 388
State net operating losses 362 476
Federal net operating losses 62 488
Purchased deposit intangible 97 155
AMT credit carryover 204 0
Other 20 87
Total 5,039 4,913
Less - Valuation allowance for deferred tax assets 175 185
Total deferred tax assets 4,864 4,728
Deferred tax liabilities:
Premises and equipment 253 195
FHLB stock 215 215
Prepaid expense and other 105 117
Unrealized gain on securities available for sale 332 566
Total deferred tax liabilities 905 1,093
Net deferred tax asset $3,959 $3,635
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (in thousands, except per share data)
Both the Company and the Bank pay federal and state income taxes on their
consolidated net earnings. At December 31, 2010, tax net operating losses at the
Company of approximately $182 federal and $3,480 state existed to offset future
taxable income. The valuation allowance has been recognized to adjust deferred
tax assets to the amount of tax net operating losses that are expected to be
realized. If realized, the tax benefit for this item will reduce current tax
expense for that period.
NOTE 14- SELF-FUNDED INSURANCE
The Company participated in a self-funded health care plan which provided
medical benefits to employees, retirees, and their dependents through December
31, 2008. Expenses under this plan were expensed as incurred and based upon
actual claims paid, reinsurance premiums, administration fees, and unpaid claims
at year-end. The Company purchased reinsurance to cover catastrophic individual
claims over $30. Health care expense for 2009 and 2008 was $738, and $1,025,
respectively. During 2009, the Company recovered $140, which represented the
remaining balance of the self-funded health insurance fund after all outstanding
claims and expenses were paid.
Effective January 1, 2009, the Company moved to a fully insured HMO health
insurance plan.
NOTE 15- RETIREMENT PLANS
The Company sponsors a defined contribution plan referred to as the Profit
Sharing and 401(k) Plan covering substantially all full-time employees. The plan
consists of a fixed contribution and a discretionary matching contribution by
the Company. In 2010 and 2009, the Company made the fixed contribution of 1% of
eligible employees' annual pay and matched 100% of the first 2% of employees'
deferrals and 50% on the next 4% of employees' deferrals to the plan up to a 4%
matching contribution. In 2008, the Company made the fixed contribution of 5%
of eligible employees' annual pay. However, the Company did not make a
discretionary matching contribution in 2008. Total expense associated with the
plan was $274, $289, and $274 for the years ended December 31, 2010, 2009, and
2008, respectively.
The Company has a nonqualified deferred directors' fee compensation plan which
permits directors to defer all or a portion of their compensation into a stock
equivalent account or a cash account. The benefits are payable after a
director's resignation from the Board of the Company in a lump-sum or in
installments over a period not in excess of five years. Included in other
liabilities is the estimated present value of future payments of $697 and
$839 at December 31, 2010 and 2009, respectively. The expense associated with
the deferred stock account is impacted by the market price of the Company's
stock. Expense, including directors' fees, associated with this plan was $171,
$25, and $2 in 2010, 2009, and 2008, respectively.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 16- EMPLOYEE STOCK PURCHASE, STOCK OPTION, AND OTHER STOCK PURCHASE PLANS
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, 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. Stock is purchased quarterly by employees
under the plan. The purchase price of the stock is 95% of the lower of its
market value on the first payroll date of the quarterly offering period or the
market price on the close of business on the day before the last quarterly
payroll date. There were 4,020 shares purchased in 2010. Approximately 34% of
eligible employees participated in the plan during 2010. As of December 31,
2010, 34,351 shares of common stock remain reserved for future grants to
employees under the Employee Stock Purchase Plan approved by the shareholders.
STOCK OPTION PLAN
Under the terms of an incentive stock option plan, 260,154 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. All options granted after January 1, 2006 are nonqualified options
and become exercisable over a four-year period following a one-year waiting
period from the grant date. These options expire ten years after the grant date.
The fair value of stock options granted in 2009, and 2008, was estimated on the
date of grant using the Black-Scholes option pricing model. There were no stock
options granted in 2010. The following assumptions were made in estimating the
fair value for options granted at December 31:
2009 2008
Dividend yield 1.89% 2.16%
Risk-free interest rate 3.00% 3.20%
Expected volatility 29.87% 16.11%
Weighted average expected life (years) 7 7
Weighted average per share fair value of options $2.71 $2.41
Total compensation expense of $22, $24 and $44 was recognized during 2010, 2009
and 2008, respectively. As of December 31, 2010, there was $33 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements, which is expected to be recognized over the next three years.
Changes in estimated forfeitures will be recognized in the period of change and
will also impact the amount of stock compensation expense to be recognized in
future periods.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The following table summarizes information regarding the Company's stock options
outstanding at December 31, 2010:
Outstanding Options Exercisable Options
Options Weighted Average Remaining Options Weighted Average
Outstanding Exercise Price Life (Years) Exercisable Exercise Price
Range of Exercise Prices:
$9.25 to $36.00 57,905 $26.52 6.5 41,155 $29.67
The intrinsic value of all outstanding options and exercisable options as of
December 31, 2010, was $0.
A summary of the Company's stock option activity for 2010, 2009, and 2008, is
presented below.
Weighted
Shares Average Price
December 31, 2007 49,788 $33.82
Options granted 34,250 21.50
Options forfeited (16,864) 31.50
December 31, 2008 67,174 $28.12
Options granted 6,000 9.25
Options forfeited (10,571) 26.81
December 31, 2009 62,603 $26.54
Options granted 0 0.00
Options forfeited (4,698) 26.71
December 31, 2010 57,905 $26.52
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
A summary of nonvested shares as of December 31, 2010, and changes during the
year is presented below.
Weighted Average
Number Fair Value
December 31, 2009 31,484 $695
Options granted 0 0
Options vested (11,602) (80)
Options forfeited (3,132) (319)
December 31, 2010 16,750 $296
As of December 31, 2010, 202,249 shares of common stock remain reserved for
future grants to officers and key employees under the incentive stock option
plan approved by the shareholders.
NOTE 17- STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation, as amended, authorized the issuance of
10,000 shares of Series A, Preferred Stock and 500 shares of Series B, Preferred
Stock. In February 2009, under the CPP, the Company issued 10,000 shares of
Series A Preferred Stock and a warrant to purchase 500 shares of Series B
Preferred Stock, which was immediately exercised, to the Treasury. Total
proceeds received were $10,000. The proceeds received were allocated between
the Series A Preferred Stock and the Series B Preferred Stock based upon their
relative fair values, which resulted in recording of a discount on the Series A
Preferred Stock and premium on the Series B Preferred Stock. The discount and
premium will be amortized over five years. The allocated carrying value of the
Series A Preferred Stock and Series B Preferred Stock on the date of issuance
(based on their relative fair values) was $9,442 and $558, respectively.
Cumulative dividends on the Series A Preferred Stock will accrue and be payable
quarterly at a rate of 5% per annum for five years. The rate will increase to
9% per annum thereafter if the shares are not redeemed by the Company. The
Series B Preferred Stock dividends will accrue and be payable quarterly at 9%.
For as long as the CPP Preferred Stock owned by the United States Treasury is
outstanding, no dividends may be declared or paid on junior preferred shares,
preferred shares ranking equal to the Series A or B Preferred Stock, or common
shares, nor may the Company repurchase or redeem any such shares, unless all
accrued and unpaid dividends for all past dividend periods on the Series A and
Series B Preferred Stock are fully paid. The consent of the United States
Treasury is required for any increase in the quarterly dividends of the
Company's common stock or for any share repurchases of junior preferred or
common shares, until the shorter of the third anniversary date of the Series A
Preferred Stock issuance or the date the Series A or B Preferred Stock is
redeemed in whole. Participation in this program also subjects the Company to
certain restrictions with respect to the compensation of certain executives.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
The American Recovery and Reinvestment Act of 2009 ("ARRA") requires the United
States Treasury, subject to consultation with appropriate banking regulators, to
permit participants in the Capital Purchase Program to repay any amounts
previously received without regard to whether the recipient has replaced such
funds from any other source or to any waiting period. All redemptions of the
Preferred Stock shall be at 100% of the issue price, plus any accrued and unpaid
dividends. The Series A and Series B Preferred Stock is nonvoting, other than
for class voting rights on any authorization or issuance of senior ranking
shares, any amendment to its rights, or any merger, exchange or similar
transaction which would adversely affect its rights.
NOTE 18- REGULATORY MATTERS
REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. These requirements take into
account risk attributable to balance sheet assets and off-balance sheet
activities. Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The 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 Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of tier 1 capital to
average assets (as defined). Further, on November 9, 2010, the Bank entered
into an agreement with the FDIC and DFI to, among other things, maintain certain
heightened regulatory capital ratios. Management believes, as of December 31,
2010 and 2009, that the Company and the Bank meet all capital adequacy
requirements to which it is subject, and exceeded the minimum regulatory capital
ratios that financial institutions must meet to be categorized as well
capitalized under the regulatory framework for prompt corrective action.
Under the terms of the Agreement, the Bank is required to: (i) maintain ratios
of Tier 1 capital to each of total assets and total risk-weighted assets of at
least 8.5% and 12%, respectively; (ii) refrain from declaring or paying any
dividend without the written consent of the FDIC and DFI; and (iii) refrain from
increasing its total assets by more than 5% during any three-month period
without first submitting a growth plan to the FDIC and DFI. Additionally, the
Bank is required to develop and maintain a number of policies and procedures and
to take certain actions related to its loan portfolio and budgeting process, all
as described in more detail in the Agreement.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Management believes that is has satisfied most of the conditions of the
Agreement and has taken actions to resolve the other requirements referenced in
the Agreement.
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes (1) Action Provisions (2)
Amount Ratio Amount Ratio Amount Ratio
($ In Thousands)
December 31, 2010
Mid-Wisconsin Financial Services, Inc.
Tier 1 to average assets $50,575 10.0% $20,143 4.0%
Tier 1 risk-based capital ratio 50,575 14.2% 14,252 4.0%
Total risk-based capital ratios 55,091 15.5% 28,504 8.0%
Mid-Wisconsin Bank
Tier 1 to average assets $44,787 9.0% $20,024 4.0% $42,552 8.5%
Tier 1 risk-based capital ratio 44,787 12.7% 14,140 4.0% 21,210 6.0%
Total risk-based capital ratios 49,268 13.9% 28,280 8.0% 42,420 12.0%
December 31, 2009
Mid-Wisconsin Financial Services, Inc.
Tier 1 to average assets $48,493 9.8% $19,744 4.0%
Tier 1 risk-based capital ratio 48,493 13.2% 14,667 4.0%
Total risk-based capital ratios 53,118 14.5% 29,335 8.0%
Mid-Wisconsin Bank
Tier 1 to average assets $40,313 8.2% $19,643 4.0% $24,554 5.0%
Tier 1 risk-based capital ratio 40,313 11.1% 14,575 4.0% 21,863 6.0%
Total risk-based capital ratios 44,910 12.3% 29,150 8.0% 36,438 10.0%
(1) The Bank has agreed with the FDIC and DFI that until the Consent Order is no longer in effect, to maintain minimum
capital ratios at specified levels higher that those otherwise required by applicable regulations as follows:
Tier 1 capital to total average assets - 8.5% and total capital to risk-weighted assets (total capital) - 12%.
(2) Prompt corrective action provisions are not applicable at the bank holding company level.
The Company has a Dividend Reinvestment Plan which provides shareholders the
opportunity to automatically reinvest their cash dividends in shares of the
Company's common stock. Common stock shares issued under the plan will be
either newly issued shares or shares purchased for plan participants in the open
market. In accordance with the plan, 150,000 shares of common stock are reserved
at December 31, 2010.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 19 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is shown in the consolidated statements of changes
in stockholders' equity. The Company's accumulated other comprehensive income
(loss) is comprised of the unrealized gain or loss on securities available for
sale, net of the tax effect and a reclassification adjustment for losses
realized in income. A summary of activity in accumulated other comprehensive
income (loss) follows.
2010 2009 2008
($ in thousands)
Accumulated other comprehensive income (loss) at beginning $1,056 $598 ($215)
Activity:
Reclassification for gains on sale of investments included in income (1,054) (449) 0
Unrealized gain (loss) on securities available for sale (58) 872 1,231
Reclassification for impairment losses included in income 412 301 0
Tax effect 234 (266) (418)
Other comprehensive income (loss) (466) 458 813
Accumulated other comprehensive income (loss) at end $590 $1,056 $598
NOTE 20 - COMMITMENTS AND CONTINGENCIES
CREDIT RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Company uses the same credit policies and approval process in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The following is a summary of lending-related
commitments at December 31.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
2010 2009
($ in thousands)
Commitments to extend credit:
Fixed rate $25,073 $25,405
Adjustable rate 33,406 23,462
Standby and irrevocable letters of credit - Fixed rate 3,921 3,792
Credit card commitments 3,776 4,250
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.
Standby and irrevocable letters of credit are conditional lending commitments
used by the Company to guarantee the performance of a customer to a third party.
Generally, all standby letters of credit issued have expiration dates within one
year. The credit risk involved in issuing standby and irrevocable letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company generally holds collateral supporting these commitments.
Standby letters of credit are not reflected in the consolidated financial
statements since recording the fair value of these guarantees would not have a
significant impact on the consolidated financial statements.
Credit card commitments are commitments of credit issued by the Company and
serviced by Elan Financial Services. These commitments are unsecured.
CONTINGENT LIABILITIES
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.
On September 30, 2010, a Marathon County Jury found the former owners of Smith
Ford in Mosinee, Wisconsin liable for intentionally misrepresenting the
financial condition of their dealership and acts of conspiracy in enticing the
Bank to extend credit to them. The Jury awarded the Bank a $4 million judgment
for losses suffered as a result of this transaction. This judgment is subject to
appeal and the ability to collect is unclear at this time. However, as a result
of our continuing efforts to recover losses related to this transaction, the
Bank recently received an insurance settlement in the amount of $500,000 that
will be recorded as income in the first quarter 2011.
Effective February 1, 2011, the Bank's branch located in Lake Tomahawk,
Wisconsin was closed.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 21- FAIR VALUE MEASUREMENTS
The FASB issued accounting guidance that applies to reported balances that are
required or permitted to be measured at fair value under existing accounting
pronouncements. It emphasized that fair value (i.e., the price that would be
received in an orderly transaction that is not a forced liquidation or
distressed sale at the measurement date), among other things, is based on exit
price versus entry price, and is a market-based measurement, not an entity-
specific measurement. When considering the assumption that market participants
would use in pricing the asset or liability, the guidance establishes a fair
value hierarchy that distinguishes between market participant assumptions based
on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity's own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy). The fair
value hierarchy prioritizes inputs used to measure fair value into three broad
levels.
Level 1 - Fair value measurement is based on quoted prices for identical
assets or liabilities in active markets.
Level 2 - Fair value measurement is based on 1) quoted prices for similar
assets or liabilities in active markets; 2) quoted prices for similar
assets or liabilities in markets that are not active; or 3) valuation
models and methodologies for which all significant assumptions are or can
be corroborated by observable market data.
Level 3 - Fair value measurement is based on valuation models and
methodologies that incorporate unobservable inputs, which are typically
based on an entity's own assumptions, as there is little, related market
activity.
Some assets and liabilities, such as securities available for sale and impaired
loans, are measured at fair values on a recurring basis under accounting
principles generally accepted in the United States. Other assets and
liabilities, such as loans held for sale, are measured at fair values on a
nonrecurring basis.
In instances where the determination of the fair value measurements is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company's assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
specific to the asset or liability.
Following is a description of the valuation methodology used for the Company's
more significant instruments measured on a recurring basis at fair value, as
well as the classification of the asset or liability within the fair value
hierarchy.
INVESTMENT SECURITIES AVAILABLE FOR SALE - Securities available for sale may be
classified as Level 1, Level 2, or Level 3 measurements within the fair value
hierarchy. Level 1 investment securities include equity securities traded on a
national exchange. The fair value
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
measurement of a Level 1 security is based on the quoted price of the security.
The fair value measurement of a Level 2 security is obtained from an independent
pricing service and is based on recent sales of similar securities and other
observable market data. Examples of these investment securities include U.S.
government and agency securities, obligations of states and political
subdivisions, corporate debt securities, and mortgage related securities. In
certain cases where there is limited activity or less transparency around inputs
to the estimated fair value, securities are classified within Level 3 of the
fair value hierarchy. The fair value measurement of a Level 3 security is based
on a discounted cash flow model that incorporates assumptions market
participants would use to measure the fair value of the security.
LOANS HELD FOR SALE - Loans held for sale, which consist generally of current
production of certain fixed-rate, first-lien residential mortgage loans, are
carried at the lower of cost or estimated fair value. The estimated fair value
is based on current secondary market prices for similar loans, which is
considered a Level 2 measurement.
LOANS - Loans are not measured at fair value on a recurring basis. However,
loans considered to be impaired are measured at fair value on a nonrecurring
basis. The fair value measurement of an impaired loan is based on the fair
value of the underlying collateral. Fair value measurements of underlying
collateral that utilize observable market data such as independent appraisals
reflecting recent comparable sales are considered Level 2 measurements. Other
fair value measurements that incorporate estimated assumptions market
participants would use to measure fair value, are considered Level 3
measurements.
OTHER REAL ESTATE - Real estate acquired through or in lieu of loan foreclosure
is not measured at fair value on a recurring basis. However, other real estate
is initially measured at fair value, less estimated costs to sell when it is
acquired and is also measured at fair value, less estimated costs to sell if it
becomes subsequently impaired.
The fair value measurement for each property may be obtained from an independent
appraiser or prepared internally. Fair value measurements obtained from
independent appraisers are generally based on sales of comparable assets and
other observable market data and are considered Level 2 measurements. Fair
value measurements prepared internally are based on observable market data but
include significant unobservable data and are therefore considered Level 3
measurements.
The table below presents the Company's investment securities available for sale
measured at fair value on a recurring basis as of December 31, 2010, and
December 31, 2009, were as follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Recurring Fair Value Measurements Using
Quoted Price in Active Significant Other Significant
Assets Measured Markets for Identical Observable Unobservable
at Fair Value Assets Level 1 Inputs Level 2 Inputs Level 3
($ in thousands)
December 31, 2010
Investment securities available for sale:
U.S. Treasury securities and obligations of U.S. $22,567 $0 $22,567 $0
government corporations and agencies
Mortgage-backed securities 56,916 0 56,205 711
Obligations of states and political subdivisions 20,715 0 20,188 527
Corporate debt securities 961 0 0 961
Total debt securities $101,159 $0 $98,960 $2,199
Equity securities 151 0 51 100
Total investment securities available for sale $101,310 $0 $99,011 $2,299
December 31, 2009
Investment securities available for sale:
U.S. Treasury securities and obligations of U.S. $3,179 $0 $3,179 $0
government corporations and agencies
Mortgage-backed securities 81,766 0 80,472 1,294
Obligations of states and political subdivisions 17,184 0 16,657 527
Corporate debt securities 1,198 0 0 1,198
Total debt securities $103,327 $0 $100,308 $3,019
Equity securities 150 0 50 100
Total investment securities available for sale $103,477 $0 $100,358 $3,119
The table below presents a roll forward of the balance sheet amounts for the
years ended December 31, 2010 and 2009, for financial instruments measured on a
recurring basis and classified within Level 3 of the fair value hierarchy.
Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
2010 2009
($ in thousands)
Balance at beginning of year $3,119 $1,952
Total gains or losses (realized/unrealized)
Included in earnings (412) (301)
Included in other comprehensive income 273 (58)
Principal payments (693) 0
Transfers in and/or out of Level 3 12 1,526
Balance at end of year $2,299 $3,119
The table below presents the Company's loans held for sale, impaired loans, and
other real estate measure at fair value on a nonrecurring basis as of December
31, 2010 and 2009, aggregated by the level in the fair value hierarchy within
which those measurements fell.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
Nonrecurring Fair Value Measurements Using
Quoted Price in
Assets Active Markets for Significant Other Significant
Measured at Identical Assets Observable Inputs Unobservable Inputs
Fair Value Level 1 Level 2 Level 3
($ in thousands)
December 31, 2010
Loans held for sale $7,444 $0 $5,452 $0
Impaired loans $7,808 $0 $7,361 $447
Other real estate owned $4,230 $0 $4,230 $0
December 31, 2009
Loans held for sale $5,452 $0 $5,452 $0
Impaired loans $9,535 $0 $9,207 $328
Other real estate owned $1,808 $0 $1,808 $0
During the year ended December 31, 2010 loans with a carrying amount of $9,749
were considered impaired and were written down to their estimated fair value of
$7,808. As a result, the Company recognized a specific valuation allowance
against these impaired loans totaling $1,941. During the year ended December
31, 2009 loans with a carrying amount of $11,825 were considered impaired and
were written down to their estimated fair value of $9,535. As a result, the
Company recognized a specific valuation allowance against these impaired loans
totaling $2,290.
In 2010, the Bank acquired other real estate owned of $4,965 measured at fair
value less selling costs. In addition, an impairment write down of $159 was
made against these as well as some of the other real estate properties acquired
in prior years and charged to earnings for the year ended December 31, 2010.
In 2009, the Bank acquired other real estate owned of $1,652 measured at fair
value less selling costs. In addition, an impairment write down of $958 was
made against these as well as some of the other real estate properties acquired
in prior years and charged to earnings for the year ended December 31, 2009.
The Company is required to disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below
for the Company's financial instruments.
The estimated fair value of the Company's financial instruments on the balance
sheet at December 31, were as follows:
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
2010 2009
Carrying Carrying
Amount Fair Value Amount Fair Value
($ in thousands)
Financial assets:
Cash and short-term investments $41,983 $41,983 $18,901 $18,901
Securities and other investments 103,926 103,926 106,093 106,649
Net loans 337,143 333,665 356,111 353,142
Accrued interest receivable 1,853 1,853 1,940 1,940
Financial liabilities:
Deposits 400,610 401,190 397,800 396,069
Short-term borrowings 9,512 9,512 7,983 7,983
Long-term borrowings 42,561 45,026 42,561 43,446
Subordinated debentures 10,310 6,785 10,310 10,310
Accrued interest payable 992 992 1,287 1,287
The Company estimates fair value of all financial instruments regardless of
whether such instruments are measured at fair value. The following methods and
assumptions were used by the Company to estimate fair value of financial
instruments not previously discussed.
CASH AND SHORT-TERM INVESTMENTS - The carrying amounts reported in the
consolidated balance sheets for cash and due from banks, interest-bearing
deposits in other financial institutions, and federal funds sold approximate the
fair value of these assets.
SECURITIES AND OTHER INVESTMENTS - The fair value of investment securities
available for sale is based on quoted prices in active markets, of if quoted
prices are not available for a specific security, the fair values are estimated
by using pricing models, quoted prices with similar characteristics, or
discounted cash flows.
NET 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.
DEPOSITS - 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.
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
SHORT-TERM BORROWINGS - The carrying amount reported in the consolidated balance
sheets for short-term borrowings approximates the liability's fair value.
LONG-TERM BORROWINGS - The fair values are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
SUBORDINATED DEBENTURES - The fair value is estimated by discounting future cash
flows using the current interest rates at which similar borrowings would be
made.
ACCRUED INTEREST - The carrying amount of accrued interest approximates its fair
value.
OFF-BALANCE SHEET INSTRUMENTS - The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements, the current interest rates, and the
present creditworthiness of the counter parties. Since this amount is
immaterial, no amounts for fair value are presented.
LIMITATIONS - Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
particular financial instruments. Fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. Fair value estimates
are based on existing on- and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include premises and equipment, goodwill and intangibles, and other
assets and other liabilities. In addition, the 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.
Notes To Consolidated Financial Statements (Continued)
December 31, 2010, 2009, And 2008 (In thousands, except per share data)
NOTE 22- CONDENSED FINANCIAL INFORMATION- PARENT COMPANY ONLY
Balance Sheets
December 31, 2010 and 2009
2010 2009
($ in thousands)
ASSETS
Cash and due from banks $3,488 $6,244
Investment in bank subsidiary 46,670 43,825
Investment in nonbank subsidiary 310 310
Securities available for sale - at fair value 100 100
Premises and equipment 3,027 3,022
Other assets 20 340
Total assets $53,615 $53,841
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures $10,310 $10,310
Accrued interest payable 8 27
Accrued expense and other liabilities 327 320
Total liabilities 10,645 10,657
Stockholders' equity 42,970 43,184
Total liabilities and stockholders' equity $53,615 $53,841
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 22- CONDENSED FINANCIAL INFORMATION- PARENT COMPANY ONLY (CONTINUED)
Statements of Income (Loss)
For the Years Ended December 31,
2010 2009 2008
($ in thousands)
INCOME
Interest $19 $51 $65
Management and service fees from subsidiaries 165 180 300
Rental income 196 164 145
Other 18 21 3
Total income 398 416 513
EXPENSE
Interest on subordinated debentures 595 614 614
Salaries and benefits 412 252 329
Other 291 348 259
Total expense 1,298 1,214 1,202
Income (loss) before income tax expense (benefit) and equity in
undistributed income (loss) (900) (798) (689)
Income tax expense (benefit) (354) (316) (234)
Loss before equity in undistributed net income of subsidiary (546) (482) (455)
Equity in undistributed net income (loss) of subsidiary 1,289 (2,006) 1,697
Net income (loss) 743 (2,488) 1,242
Preferred stock dividends, discount and premium (641) (545) 0
Net income (loss) available to common equity $102 ($3,033) $1,242
Notes to Consolidated Financial Statements (Continued)
December 31, 2010, 2009, and 2008 (In thousands, except per share data)
NOTE 22- CONDENSED FINANCIAL INFORMATION- PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
2010 2009 2008
($ in thousands)
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income (loss) $743 ($2,488) $1,242
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 99 108 100
Stock-based compensation 22 24 44
(Equity) loss in undistributed net income of subsidiary (1,289) 1,806 (1,697)
Changes in operating assets and liabilities:
Other assets 279 307 (198)
Other liabilities (33) 4 (71)
Net cash provided by (used in) operating activities (179) (239) (580)
Cash flows from financing activities:
Investment in bank subsidiary (2,000) (5,500) 0
Capital expenditures (64) (40) (76)
Net cash used in investing activities (2,064) (5,540) (76)
Cash flows from financing activities:
Proceeds from issuance of preferred stock and warrants 0 10,000 0
Proceeds from stock benefit plans 32 35 39
Cash dividends paid preferred stock (545) (401) 0
Cash dividends paid common stock 0 (181) (904)
Net cash provided by (used in) financing activities (513) 9,453 (865)
Net increase (decrease) in cash and due from banks (2,756) 3,674 (1,521)
Cash and due from banks at beginning 6,244 2,570 4,091
Cash and due from banks at end $3,488 $6,244 $2,570
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: As of the end of the period covered by this
report, management, under the supervision, and with the participation, of our
President and Chief Executive Officer and the Principal Accounting Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rules 13a-15f and 15d-15f
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
pursuant to Exchange Act Rule 13a-15. The President and Chief Executive Officer
and the Principal Accounting Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2010.
REPORT BY MID-WISCONSIN FINANCIAL SERVICES, INC. MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining an effective
system of internal control over financial reporting, as such term is defined in
section 13a-15f of the Securities and Exchange Act of 1934. The Company's system
of internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. There are inherent limitations in the
effectiveness of any system of internal control over financial reporting,
including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective system of internal control over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the Company's system of internal controls over financial
reporting as of December 31, 2010. This assessment was based on criteria for
effective internal control over financial reporting described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, management believes that
as of December 31, 2010, the Company maintained effective internal control over
financial reporting based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the
Company's registered accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to the Securities and Exchange
Commission that permit the Company to provide only management's report in this
Annual Report.
Changes in Internal Control Over Financial Reporting: There were no changes in
the internal control over financial reporting during the quarter ended December
31, 2010, that have materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Company's Proxy Statement, prepared for the 2011 Annual
Meeting of Shareholders, which contains information concerning directors and
executive officers of the Company under the caption "Election of Directors";
information concerning the Company's code of ethics under the caption
"Governance of the Company - Code of Ethics"; and information concerning the
audit committee of Company under the caption "Governance of the Company -
Committees and Meetings - Audit Committee" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Company's Proxy Statement, prepared for the 2011 Annual
Meeting of Shareholders, which contains information concerning director
compensation under the caption "Director Compensation," is incorporated herein
by reference
The information in the Company's Proxy Statement, prepared for the 2011 Annual
Meeting of Shareholders, which contains information concerning executive officer
compensation under the caption "Executive Officer Compensation," is incorporated
herein by reference
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDERS MATTERS
Information relating to security ownership of certain beneficial owners is
incorporated in this Form 10-K by this reference to the disclosure in the 2011
Proxy Statement under the caption "Beneficial Ownership of Common Stock."
The following table sets forth, as of December 31, 2010, information with
respect to compensation plans under which our common stock is authorized for
issuance:
Number of securities remaining
Number of securities to be Weighted- average available for future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security
holders 57,905 (1) $26.52 (1) 236,600 (2)
Equity Compensation plans
not approved by security
holders - - -
(1)Shares issuable upon exercise of options granted pursuant to the 1999
Stock Option Plan.
(2)Includes 202,249 shares issuable under the 1999 Stock Option Plan and
34,351 shares available under the Employee Stock Purchase Plan. The
purchase period for shares under the Employee Stock Purchase Plan is
quarterly; accordingly, there were no shares subject to option as of
December 31, 2010, under the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information relating to certain relationships and related transactions with
directors and officers, and the independence of directors, is incorporated in
the Form 10-K by this reference to the disclosure in the 2011 Proxy Statement
under the sub-caption "Governance of the Company."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information relating to the fees and services of our principal accountant is
incorporated into this Form 10-K by this reference to the disclosure in the 2011
Proxy Statement under the sub-captions "Independent Accountant Fees," and "Audit
Committee Pre-Approval Policy."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
Description Page
MID-WISCONSIN FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 68
Consolidated Balance Sheets as of December 31, 2010 and 2009 69
Consolidated Statements of Income for the years ended
December 31, 2010, 2009, and 2008 70
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2010, 2009, and 2008 71
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009, and 2008 72
Notes to Consolidated Financial Statements 74
(2) NO FINANCIAL STATEMENT SCHEDULES ARE REQUIRED BY ITEM 8
OR ITEM 15(C)
(3) 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 Form 10-K:
3.1 Restated Articles of Incorporation, (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated February
20, 2009)
3.2 Bylaws, as amended February 20, 2009 (incorporated by reference
to Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated May
27, 2009)
4.1 Indenture dated October 14, 2005 between Mid-Wisconsin Financial
Services, Inc., as issuer, and Wilmington Trust Company, as trustee,
including the form of Junior Subordinated Debenture as Exhibit A thereto
(incorporated by reference to Exhibit 1.1 to the Registrant's Current
Report on Form 8-K dated October 14, 2005)
4.2 Guarantee Agreement dated October 14, 2005, between Mid-Wisconsin
Financial Services, Inc., as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee (incorporated by reference to Exhibit 1.2 to the
Registrant's Current Report on Form 8-K dated October 14, 2005)
4.3 Amended and Restated Declaration of Trust dated October 14, 2005,
among Mid-Wisconsin Financial Services, Inc., as Sponsor, Wilmington Trust
Company, Institutional and Delaware Trustees, and Administrators named
thereto, including the form of Trust Preferred Securities (incorporated by
reference to Exhibit 1.3 to the Registrant's Current Report on Form 8-K
dated October 14, 2005)
4.4 Warrant to Purchase Preferred Stock (incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February
20, 2009)
4.5 Form of Certificate for Senior Preferred Stock (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K
dated February 20, 2009)
4.6 Form of Certificate for Warrant Preferred Stock (incorporated by
reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K
dated February 20, 2009)
10.1* Mid-Wisconsin Financial Services, Inc. Directors' Deferred
Compensation Plan as last amended April 22, 2008 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-
Q for the quarterly period ended March 31, 2008)
10.2* Mid-Wisconsin Financial Services, Inc. 2011 Directors' Deferred
Compensation Plan, as amended and restated effective December 16, 2010
(incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated December 20, 2010)
10.3* Director Retirement Bonus Policy as amended April 22, 2008
(incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2008)
10.4* Mid-Wisconsin Financial Services, Inc. Employee Stock Purchase
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)
10.5 Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan, as
last amended December 16, 2010 (incorporated by reference to Exhibit 10.5
to the Registrant's Quarterly Report on Form 10-K for the annual period
ended December 31, 2010)
10.6* Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2004)
10.7* Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2006)
10.8* Employment Agreement - James F. Warsaw (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
January 15, 2009)
10.9* Form of Letter Agreement with Senior Executive Officers
(incorporated by reference to Exhibit 10.4 to the Registrant's Current
Report on Form 8-K dated February 20, 2009)
10.10* 2007 Incentive Plan (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2007)
10.11 Letter Agreement dated February 20, 2009, between Mid-Wisconsin
Financial Services, Inc. and the United States Treasury, which includes
the Securities Purchase Agreement attached thereto, with respect to the
issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock,
Series A and Warrant Preferred Stock under the TARP Capital Purchase
Program (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated February 20, 2009)
10.12 Consent Order with the Federal Deposit Insurance Corporation
and the Wisconsin Department of Financial Institutions, dated November 9,
2010 (incorporated by reference to Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2010)
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, 2009)
23.1 Consent of Wipfli LLP
31.1 Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of CEO and CFO pursuant to 18 USC Section 1350, as
adopted pursuant to, Section 906 of Sarbanes-Oxley Act of 2002
99.1 Certification of CEO pursuant to Section 111(b)(4) of the
Emergency Economic Stabilization Act of 2008
99.2 Certification of CFO pursuant to Section 111(b)(4) of the
Emergency Economic Stabilization Act of 2008
*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.
(B) EXHIBITS
See Item 15(a) (3)
(C) FINANCIAL SCHEDULES
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 16, 2011.
MID-WISCONSIN FINANCIAL SERVICES, INC.
JAMES F. WARSAW
James F. Warsaw, President
and Chief Executive Officer
WILLIAM A. WEILAND
William A. Weiland, Secretary
and Treasurer
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
16, 2011, and in the capacities indicated.
KIM A. GOWEY JAMES F. WARSAW
Kim A. Gowey, Chairman of the Board, James F. Warsaw, President and
and a Director Chief Executive Officer and a
Director
(Principal Executive Officer)
JAMES F. MELVIN RHONDA R. KELLEY
James F. Melvin, Vice Chairman of the Rhonda R. Kelley
Board, and a Director Principal Accounting Officer
and Controller
JAMES P. HAGER BRIAN B. HALLGREN
James P. Hager, Director Brian B. Hallgren, Director
CHRISTOPHER J. GHIDORZI KURT D. MERTENS
Christopher J. Ghidorzi, Director Kurt D. Mertens, Director
EXHIBIT INDEX{dagger}
TO
FORM 10-K
OF
MID-WISCONSIN FINANCIAL SERVICES, INC.
FOR THE PERIOD ENDED DECEMBER 31, 2010
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. {section}232.102(d))
23.1 Consent of Wipfli LLP
31.1 Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of CEO and CFO pursuant to 18 USC Section 1350, as
adopted pursuant to, Section 906 of Sarbanes-Oxley Act of 2002
99.1 Certification of CEO pursuant to Section 111(b)(4) of the Emergency
Economic Stabilization Act of 2008
99.2 Certification of CFO pursuant to Section 111(b)(4) of the Emergency
Economic Stabilization Act of 2008
{dagger}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 15 OF THE FORM 10-K TO WHICH THIS EXHIBIT INDEX RELATES
