Attached files
file | filename |
---|---|
EX-31.1 - EX 31.1 - CERTIFICATION - MID WISCONSIN FINANCIAL SERVICES INC | e311jun11b.htm |
EX-32.1 - EX 32.1 - CERTIFICATION - MID WISCONSIN FINANCIAL SERVICES INC | e321jun11b.htm |
EX-31.2 - EX 31.2 - CERTIFICATION - MID WISCONSIN FINANCIAL SERVICES INC | e312jun11b.htm |
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
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 of incorporation or organization)
(IRS Employer Identification No.)
132 West State Street
Medford, WI 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 715-748-8300
Indicate by check mark 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 T
No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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 T No £
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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer £
Accelerated filer £
Non-accelerated filer £ (Do not check if a smaller reporting company) Smaller reporting company S
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £
No S
As of August 3, 2011 there were 1,653,832 shares of $0.10 par value common stock outstanding.
1
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I | FINANCIAL INFORMATION |
| PAGE | ||
| Item 1. | Financial Statements: |
| ||
|
| Consolidated Balance Sheets June 30, 2011 (unaudited) and December 31, 2010 (derived from audited financial statements) | 3 | ||
|
| Consolidated Statements of Income Three Months and Six Months Ended June 30, 2011 and 2010 (unaudited) |
4 | ||
|
| Consolidated Statements of Changes in Stockholders Equity Six Months Ended June 30, 2011 (unaudited) | 5 | ||
|
| Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010 (unaudited) | 6-7 | ||
|
| Notes to Consolidated Financial Statements | 8-21 | ||
| Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 22-46 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 46 | |||
| Item 4. | Controls and Procedures | 46 | ||
PART II | OTHER INFORMATION |
|
| ||
| Item 1. | Legal Proceedings | 46 | ||
| Item 1A. | Risk Factors | 47 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47 | ||
| Item 3. | Defaults Upon Senior Securities | 47 | ||
| Item 4. | [Removed and Reserved] | 47 | ||
| Item 5. | Other Information | 47 | ||
| Item 6. | Exhibits | 47 | ||
|
| Signatures | 48 | ||
|
| Exhibit Index | 48 |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Mid-Wisconsin Financial Services, Inc. and Subsidiary | ||
Consolidated Balance Sheets | ||
(In thousands, except per share data) | ||
| June 30, 2011 | December 31, 2010 |
| (Unaudited) | (Audited) |
Assets |
|
|
Cash and due from banks | $ 7,746 | $ 9,502 |
Interest-bearing deposits in other financial institutions | 9 | 8 |
Federal funds sold and securities purchased under agreements to sell | 8,371 | 32,473 |
Investment securities available-for-sale, at fair value | 108,919 | 101,310 |
Loans held for sale | 684 | 7,444 |
Loans | 343,842 | 339,170 |
Less: Allowance for loan and lease losses | (9,224) | (9,471) |
Loans, net | 334,618 | 329,699 |
Accrued interest receivable | 1,746 | 1,853 |
Premises and equipment, net | 8,081 | 8,162 |
Other investments, at cost | 2,616 | 2,616 |
Other assets | 15,169 | 16,015 |
Total assets | $ 487,959 | $ 509,082 |
Liabilities and Stockholders' Equity |
|
|
Noninterest-bearing deposits | $ 60,182 | $ 60,446 |
Interest-bearing deposits | 319,603 | 340,164 |
Total deposits | 379,785 | 400,610 |
Short-term borrowings | 12,130 | 9,512 |
Long-term borrowings | 40,061 | 42,561 |
Subordinated debentures | 10,310 | 10,310 |
Accrued interest payable | 906 | 992 |
Accrued expenses and other liabilities | 1,697 | 2,127 |
Total liabilities | 444,889 | 466,112 |
Stockholders' equity: |
|
|
Series A preferred stock | 9,688 | 9,634 |
Series B preferred stock | 533 | 538 |
Common Stock | 165 | 165 |
Additional paid-in capital | 11,940 | 11,916 |
Retained earnings | 19,246 | 20,127 |
Accumulated other comprehensive income | 1,498 | 590 |
Total stockholders' equity | 43,070 | 42,970 |
Total liabilities and stockholders' equity | $ 487,959 | $ 509,082 |
|
|
|
Series A preferred stock authorized (no par value) | 10,000 | 10,000 |
Series A preferred stock issued and outstanding | 10,000 | 10,000 |
Series B preferred stock authorized (no par value) | 500 | 500 |
Series B preferred stock issued and outstanding | 500 | 500 |
Common stock authorized (par value $0.10 per share) | 6,000,000 | 6,000,000 |
Common stock issued and outstanding | 1,653,832 | 1,652,122 |
The accompanying notes to the consolidated financial statements are an integral part of these statements. |
3
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc. and Subsidiary | ||||
Consolidated Statements of Income (Loss) | ||||
(In thousands, except per share data) | ||||
(Unaudited) | ||||
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended |
| June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 |
Interest Income |
|
|
|
|
Loans, including fees | $ 4,676 | $ 5,381 | $ 9,502 | $ 10,779 |
Securities: |
|
|
|
|
Taxable | 691 | 896 | 1,329 | 1,833 |
Tax-exempt | 100 | 91 | 201 | 189 |
Other | 52 | 23 | 132 | 47 |
Total interest income | 5,519 | 6,391 | 11,164 | 12,848 |
Interest Expense |
|
|
|
|
Deposits | 1,183 | 1,673 | 2,469 | 3,393 |
Short-term borrowings | 27 | 19 | 52 | 39 |
Long-term borrowings | 408 | 410 | 813 | 845 |
Subordinated debentures | 45 | 153 | 90 | 307 |
Total interest expense | 1,663 | 2,255 | 3,424 | 4,584 |
Net interest income | 3,856 | 4,136 | 7,740 | 8,264 |
Provision for loan losses | 1,900 | 955 | 2,950 | 2,355 |
Net interest income after provision for loan losses | 1,956 | 3,181 | 4,790 | 5,909 |
Noninterest Income |
|
|
|
|
Service fees | 252 | 317 | 505 | 604 |
Trust service fees | 267 | 287 | 533 | 564 |
Investment product commissions | 69 | 57 | 113 | 107 |
Mortgage banking | 84 | 148 | 233 | 298 |
Gain on sale of investments |
| 168 |
| 168 |
Other | 260 | 243 | 1,025 | 466 |
Total noninterest income | 932 | 1,220 | 2,409 | 2,207 |
Noninterest Expense |
|
|
|
|
Salaries and employee benefits | 2,096 | 2,105 | 4,227 | 4,210 |
Occupancy | 426 | 469 | 910 | 930 |
Data processing | 161 | 162 | 334 | 328 |
Foreclosure/OREO expense | 129 | 130 | 171 | 124 |
Legal and professional fees | 224 | 184 | 391 | 381 |
FDIC expense | 285 | 230 | 599 | 465 |
Loss on sale of investments |
|
| 55 |
|
Other | 816 | 665 | 1,624 | 1,289 |
Total noninterest expense | 4,137 | 3,945 | 8,311 | 7,727 |
Income (loss) before income taxes | (1,249) | 456 | (1,112) | 389 |
Income tax (benefit) expense | (549) | 128 | (552) | 48 |
Net income (loss) | ($700) | $ 328 | ($560) | $ 341 |
Preferred stock dividends, discount and premium | (162) | (160) | (322) | (321) |
Net income (loss) available to common equity | ($862) | $ 168 | ($882) | $ 20 |
Earnings (Loss) Per Common Share: |
|
|
|
|
Basic and diluted | ($0.52) | $ 0.10 | ($0.53) | $ 0.01 |
Cash dividends declared per common share | $ 0.00 | $ 0.00 | $ 0.00 | $ 0.00 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
4
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc. and Subsidiary | ||||||||
Consolidated Statement of Changes in Stockholders' Equity | ||||||||
June 30, 2011 | ||||||||
(In thousands, except per share data) | ||||||||
(Unaudited) | ||||||||
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| Additional |
| Other |
|
|
|
|
|
| Paid-In | Retained | Comprehensive |
|
| Shares | Amount | Shares | Amount | Capital | Earnings | Income | Totals |
Balance, December 31, 2010 | 10,500 | $ 10,172 | 1,652 | $ 165 | $ 11,916 | $ 20,127 | $ 590 | $ 42,970 |
Comprehensive Income: |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
| (560) |
| (560) |
Other comprehensive income |
|
|
|
|
|
| 875 | 875 |
Reclassification adjustment for net realized losses on securities available-for-sale included in earnings, net of tax |
|
|
|
|
|
| 33 | 33 |
Total comprehensive income |
|
|
|
|
|
|
| 348 |
Accretion of preferred stock discount |
| 54 |
|
|
| (54) |
| 0 |
Amortization of preferred stock premium |
| (5) |
|
|
| 5 |
| 0 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
Proceeds from stock purchase plans |
|
| 1 | 0 | 13 |
|
| 13 |
Cash dividends: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
| (68) |
| (68) |
Dividends declared: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
| (204) |
| (204) |
Stock-based compensation |
|
|
|
| 11 |
|
| 11 |
Balance, June 30, 2011 | 10,500 | $ 10,221 | 1,653 | $ 165 | $ 11,940 | $ 19,246 | $ 1,498 | $ 43,070 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
5
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc. and Subsidiary | ||
Consolidated Statements of Cash Flows | ||
(In thousands, except per share data) | ||
| Six months ended | Six months ended |
| June 30, 2011 | June 30, 2010 |
Cash flows from operating activities: |
|
|
Net income (loss) | ($560) | $ 341 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
Depreciation and amortization | 536 | 470 |
Provision for loan losses | 2,950 | 2,355 |
Provision for valuation allowance other real estate owned | 108 | 75 |
Loss on sale of investment securities | 55 |
|
Gain on sale of investment securities |
| (168) |
(Gain) loss on premises and equipment disposals | (32) | 0 |
(Gain) loss on sale of foreclosed real estate owned | (89) | 8 |
Stock-based compensation | 11 | 13 |
Changes in operating assets and liabilities: |
|
|
Loans held for sale | 6,760 | 3,198 |
Other assets | 280 | (736) |
Other liabilities | (515) | (403) |
Net cash provided by operating activities | 9,504 | 5,153 |
Cash flows from investing activities: |
|
|
Net increase in interest-bearing deposits in other financial institutions | (1) | 0 |
Net (increase) decrease in federal funds sold | 24,102 | (17,420) |
Securities available for sale: |
|
|
Proceeds from sales | 641 | 9,927 |
Proceeds from maturities | 15,764 | 15,327 |
Payment for purchases | (22,665) | (15,359) |
Net (increase) decrease in loans | (8,679) | 4,353 |
Capital expenditures | (426) | (229) |
Proceeds from sale of premises and equipment | 173 | 0 |
Proceeds from sale of other real estate owned | 797 | 505 |
Net cash provided by (used in) investing activities | 9,706 | (2,896) |
6
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc. and Subsidiary | ||
Consolidated Statements of Cash Flows | ||
(In thousands, except per share data) | ||
| Six months ended | Six months ended |
| June 30, 2011 | June 30, 2010 |
Cash flows from financing activities: |
|
|
Net decrease in deposits | (20,825) | (7,217) |
Net increase in short-term borrowings | 2,618 | 2,539 |
Proceeds from issuance of long-term borrowings | 0 | 22,061 |
Principal payments on long-term borrowings | (2,500) | (22,061) |
Proceeds from stock benefit plans | 13 | 15 |
Cash dividends paid preferred stock | (272) | (273) |
Net cash used in financing activities | (20,966) | (4,936) |
Net decrease in cash and due from banks | (1,756) | (2,679) |
Cash and due from banks at beginning of period | 9,502 | 9,824 |
Cash and due from banks at end of period | $ 7,746 | $ 7,145 |
Supplemental disclosures of cash flow information: | 2011 | 2010 |
Cash paid during the period for: |
|
|
Interest | $ 3,510 | $ 4,764 |
Income taxes | 0 | 0 |
Noncash investing and financing activities: |
|
|
Loans transferred to other real estate owned | $ 886 | $ 1,108 |
Loans charged-off | 3,440 | 2,226 |
Dividends declared but not yet paid on preferred stock | 204 | 69 |
Loans made in connection with the sale of other real estate owned | 75 | 151 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
7
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
Note 1 Basis of Presentation
General
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Mid-Wisconsin Financial Services, Inc.s (the Company) and Mid-Wisconsin Banks (the Bank), its wholly owned banking subsidiary, consolidated financial position, results of its operations, changes in stockholders equity and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial position includes the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year. We have reviewed and evaluated subsequent events through the date this Form 10-Q was filed.
These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K) should be referred to in connection with the reading of these unaudited interim financial statements.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. Estimates that are susceptible to significant change include, but are not limited to, the determination of the allowance for loan and lease losses, the valuation of other real estate and repossessed assets, the valuations of investments and income taxes.
Recent Accounting Pronouncements
In July 2010, the FASB issued guidance for improving disclosures about an entitys allowance for loan losses and the credit quality of its loans. The guidance requires additional disclosure to facilitate financial statement users evaluation of the following: (1) the nature of credit risk inherent in the entitys loan portfolio, (2) how that risk is analyzed and assessed in arriving at the allowance for loan losses, and (3) the changes and reasons for those changes in the allowance for loan losses. The increased disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. Increased disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 31, 2010. The Company adopted the accounting standard as of December 31, 2010, with no material impact on its results of operations, financial position, and liquidity.
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 reasons 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 requires 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 was effective at the beginning of 2010, except for the detailed Level 3 disclosures which were effective at the beginning of 2011. The Company adopted the accounting standard at the beginning of 2010 with no material impact on its results of operations, financial position, and liquidity.
8
In April 2011, the FASB issued an accounting standard that modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions remove from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. The accounting standard does not change the other existing criteria used in the assessment of effective control and effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this accounting standard is not expected to have a material impact on the Companys statements of income and condition.
In May 2011, the FASB issued an accounting standard that provides a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRS). The changes to U.S. GAAP as a result of the accounting standard are as follows: (1) the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets, while the new accounting standard extends that prohibition to all fair value measurements; (3) an exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entitys net exposure to either of those risks, which such exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) the fair value measurement of instruments classified within an entitys shareholders equity have been aligned with the guidance for liabilities; and (5)
disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of the accounting standard are effective for the Companys interim reporting period beginning on or after December 15, 2011. The adoption of this accounting standard is not expected to have a material impact on the Companys statements of income and condition.
In June 2011, the FASB issued an accounting standard that allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. The accounting pronouncement eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of this accounting standard are effective for the Companys interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of this accounting standard will have no impact on the Companys statements of condition.
9
Note 2 Earnings (Loss) per Common Share
Earnings (loss) per common share is calculated by dividing net income (loss) available to common equity by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is 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.
| Three Months Ended June 30, | Six Months Ended June 30, | ||
| 2011 | 2010 | 2011 | 2010 |
| (In thousands, except per share data) | |||
Net income (loss) | ($700) | $ 328 | ($560) | $ 341 |
Preferred dividends, discount and premium | (162) | (160) | (322) | (321) |
Net income (loss) available to common equity | (862) | 168 | (882) | 20 |
Weighted average shares outstanding | 1,653 | 1,649 | 1,653 | 1,649 |
Effect of dilutive stock options | 0 | 1 | 0 | 0 |
Diluted weighted average common shares outstanding | 1,653 | 1,650 | 1,653 | 1,649 |
Basic and diluted earnings (loss) per common share | ($0.52) | $ 0.10 | ($0.53) | $ 0.01 |
Note 3- Securities
The amortized cost and fair values of investment securities available-for-sale at June 30, 2011 and December 31, 2010 were as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| ($ in thousands) | |||
June 30, 2011 |
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ 21,690 | $ 280 | $ 37 | $ 21,933 |
Mortgage-backed securities | 63,260 | 1,387 | 21 | 64,626 |
Obligations of states and political subdivisions | 20,492 | 900 | 15 | 21,377 |
Corporate debt securities | 831 | 1 | 0 | 832 |
Total debt securities | 106,273 | 2,568 | 73 | 108,768 |
Equity securities | 151 | 0 | 0 | 151 |
Total securities available-for-sale | $ 106,424 | $ 2,568 | $ 73 | $ 108,919 |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| ($ in thousands) | |||
December 31, 2010 |
|
|
|
|
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 subdivisions | 20,239 | 661 | 185 | 20,715 |
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 |
10
The amortized cost and fair values of investment debt securities available-for-sale at June 30, 2011, 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.
| Amortized Cost | Fair Value |
| ($ in thousands) | |
Due in one year or less | $ 1,671 | $ 1,700 |
Due after one year but within five years | 22,815 | 23,682 |
Due after five years but within ten years | 14,971 | 15,480 |
Due after ten years or more | 3,556 | 3,280 |
Mortgage-backed securities | 63,260 | 64,626 |
Total debt securities available-for-sale | $ 106,273 | $ 108,768 |
The following table represents gross unrealized losses and the related fair value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010.
| Less Than 12 Months | 12 Months or More | Total | |||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||
| ($ in thousands) | |||||||
June 30, 2011 |
|
|
|
|
|
| ||
US Treasury obligations and direct obligations of U.S. government agencies | $ 2,017 | $ 37 | $ 0 | $ 0 | $ 2,017 | $ 37 | ||
Mortgage-backed securities | 2,779 | 15 | 13 | 6 | 2,792 | 21 | ||
Corporate securities | 0 | 0 | 0 | 0 | 0 | 0 | ||
Obligations of states and political subdivisions | 1,618 | 15 | 0 | 0 | 1,618 | 15 | ||
Total | $ 6,414 | $ 67 | $ 13 | $ 6 | $ 6,427 | $ 73 | ||
December 31, 2010 |
|
|
|
|
|
| ||
US Treasury obligations and direct obligations of U.S. government 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 subdivisions | 5,719 | 185 | 0 | 0 | 5,719 | 185 | ||
Total | $ 46,218 | $ 696 | $ 208 | $ 20 | $ 46,426 | $ 716 |
The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment (OTTI) that may result due to the current adverse economic conditions. A determination as to whether a securitys decline in market value is OTTI takes into consideration numerous factors. Some factors the Company may consider in the OTTI analysis 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) our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Companys evaluation, a third party vendor reviews specific investment securities identified by management for OTTI. To determine OTTI, 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.
11
During 2010, the Company determined that OTTI existed in 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. In the first quarter 2011, the Company sold the three OTTI securities, which resulted in net investment losses of $55. As of June 30, 2011 the Company has determined that there are no remaining OTTI securities in the investment portfolio.
The following is a summary of the credit loss of OTTI recognized in earnings on investment securities during 2010. 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 $201, related in part to credit losses that were not expected to be recovered by the Company.
| Non-Agency Mortgage-Backed Securities | Corporate Securities | Total |
| ($ 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 previously recognized | 0 | 211 | 211 |
Balance of credit-related other-than-temporary impairment at December 31, 2010 | $ 12 | $ 701 | $ 713 |
There were no credit losses of OTTI recognized in earnings during 2011.
Based on the Companys evaluation, management believes that any remaining unrealized loss at June 30, 2011 are primarily attributable to changes in interest rates and the current market conditions, and not credit deterioration.
Note 4 Loans
The period end loan composition as of June 30, 2011 and December 31, 2010 is as follows:
| June 30, 2011 | December 31, 2010 |
| Amount | Amount |
| ($ in thousands) | |
Commercial business | $ 43,987 | $ 39,093 |
Commercial real estate | 132,780 | 132,079 |
Real estate construction | 28,824 | 30,206 |
Agricultural | 46,990 | 39,671 |
Real estate residential | 85,965 | 91,974 |
Installment | 5,296 | 6,147 |
Total loans | $ 343,842 | $ 339,170 |
12
A summary of the changes in the allowance for loan and lease losses by portfolio segment for the periods indicated is as follows:
| Beginning Balance at 1/1/2011 | Charge-offs | Recoveries | Provision | Ending Balance at 6/30/2011 | Ending balance: individually evaluated for impairment | Ending balance: collectively evaluated for impairment |
June 30, 2011 | ($ in thousands) | ||||||
Commercial business | $ 536 | ($38) | $ 15 | $ 269 | $ 782 | $ 205 | $ 577 |
Commercial real estate | 4,320 | (1,377) | 79 | 779 | 3,801 | 1,311 | 2,490 |
Real estate construction | 1,278 | (1,121) | 9 | 1,018 | 1,184 | 348 | 836 |
Agricultural | 1,146 | (261) | 73 | 276 | 1,234 | 64 | 1,170 |
Residential Mortgage | 2,060 | (611) | 35 | 612 | 2,096 | 461 | 1,635 |
Installment | 131 | (32) | 32 | (4) | 127 | 0 | 127 |
Total | $ 9,471 | ($3,440) | $ 243 | $ 2,950 | $ 9,224 | $ 2,389 | $ 6,835 |
| Beginning Balance at 1/1/2010 | Charge-offs | Recoveries | Provision | Ending Balance at 12/31/2010 | Ending balance: individually evaluated for impairment | Ending balance: collectively evaluated for impairment |
December 31, 2010 | ($ in thousands) | ||||||
Commercial business | $ 497 | ($435) | $ 167 | $ 307 | $ 536 | $ 0 | $ 536 |
Commercial real estate | 3,954 | (1,490) | 275 | 1,581 | 4,320 | 1,236 | 3,084 |
Real estate construction | 685 | (537) | 149 | 981 | 1,278 | 484 | 794 |
Agricultural | 981 | (206) | 86 | 285 | 1,146 | 8 | 1,138 |
Residential Mortgage | 1,753 | (1,207) | 83 | 1,431 | 2,060 | 213 | 1,847 |
Installment | 87 | (159) | 33 | 170 | 131 | 0 | 131 |
Total | $ 7,957 | ($4,034) | $ 793 | $ 4,755 | $ 9,471 | $ 1,941 | $ 7,530 |
The allocation methodology used by the Company includes allocation for specifically identified impaired loans and loss factor allocations, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. Management allocates the allowance for loan and lease losses by pools of risk within each loan portfolio. While the methodology used at June 30, 2011 and December 31, 2010 was generally comparable, several refinements were incorporated into the historical loss factor allocation process during the first quarter 2011. The refinements, which impacted individual portfolio allocation amounts, did not materially impact the overall level of the allowance for loan and lease losses.
At June 30, 2011, the allowance for loan loss allocations for the commercial business, agricultural, and residential mortgage portfolios increased, with all other loan portfolio allocations declining from December 31, 2010. The increase in commercial business was primarily due to a decline in credit quality and higher loss rates. The increase in agricultural allocation was due to a slight decline in credit quality and increased loan volume. Residential mortgage increased primarily due to a decline in credit quality metrics. The allocation of the allowance for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan portfolio.
13
Loans by credit quality indicator based on internally assigned credit grade follows:
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
June 30, 2011 | Highest Quality | High Quality | Quality | Moderate risk | Acceptable | Special Mention | Substandard | Doubtful | Loss | Total |
Commercial business | $ 886 | $ 2,649 | $ 6,081 | $ 8,808 | $ 18,127 | $ 4,456 | $ 2,293 | $ 687 | $ 0 | $ 43,987 |
Commercial real estate | 0 | 1,881 | 13,918 | 38,675 | 36,041 | 13,407 | 18,593 | 10,265 | 0 | 132,780 |
Real estate construction | 170 | 1,241 | 5,601 | 7,599 | 8,034 | 567 | 2,971 | 2,641 | 0 | 28,824 |
Agricultural | 124 | 493 | 2,666 | 7,376 | 24,544 | 7,517 | 3,273 | 997 | 0 | 46,990 |
Residential Mortgage | 486 | 6,825 | 19,930 | 22,591 | 19,576 | 6,306 | 6,185 | 4,066 | 0 | 85,965 |
Installment | 8 | 453 | 1,488 | 2,403 | 772 | 163 | 4 | 5 | 0 | 5,296 |
Total | $ 1,674 | $ 13,542 | $ 49,684 | $ 87,452 | $ 107,094 | $ 32,416 | $ 33,319 | $ 18,661 | $ 0 | $ 343,842 |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
December 31, 2010 | Highest Quality | High Quality | Quality | Moderate risk | Acceptable | Special Mention | Substandard | Doubtful | Loss | Total |
Commercial business | $ 1,118 | $ 2,760 | $ 6,217 | $ 10,437 | $ 13,166 | $ 3,928 | $ 559 | $ 908 | $ 0 | $ 39,093 |
Commercial real estate | 0 | 1,306 | 16,790 | 32,019 | 39,448 | 19,146 | 14,735 | 8,635 | 0 | 132,079 |
Real estate construction | 172 | 1,673 | 6,685 | 7,062 | 7,171 | 1,883 | 2,723 | 2,837 | 0 | 30,206 |
Agricultural | 0 | 868 | 3,341 | 7,607 | 18,748 | 4,338 | 4,176 | 593 | 0 | 39,671 |
Residential Mortgage | 652 | 7,208 | 24,395 | 24,574 | 18,295 | 7,990 | 5,022 | 3,838 | 0 | 91,974 |
Installment | 15 | 555 | 1,850 | 2,707 | 841 | 165 | 11 | 3 | 0 | 6,147 |
Total | $ 1,957 | $ 14,370 | $ 59,278 | $ 84,406 | $ 97,669 | $ 37,450 | $ 27,226 | $ 16,814 | $ 0 | $ 339,170 |
The following table represents loans by past due status for the periods indicated is as follows:
| 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days and Over | Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing |
June 30, 2011 | ($ in thousands) | ||||||
Commercial business | $ 182 | $ 214 | $ 10 | $ 406 | $ 43,581 | $ 43,987 | $ 0 |
Commercial real estate | 2,129 | 3,393 | 4,815 | $ 10,337 | 122,443 | 132,780 | 0 |
Real estate construction | 160 | 1,115 | 1,083 | $ 2,358 | 26,466 | 28,824 | 0 |
Agricultural | 79 | 40 | 382 | $ 501 | 46,489 | 46,990 | 8 |
Residential Mortgage | 663 | 491 | 2,606 | $ 3,760 | 82,205 | 85,965 | 0 |
Installment | 24 | 18 | 59 | $ 101 | 5,195 | 5,296 | 59 |
Total | $ 3,237 | $ 5,271 | $ 8,955 | $ 17,463 | $ 326,379 | $ 343,842 | $ 67 |
| 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 Days and Over | Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing |
December 31, 2010 | ($ in thousands) | ||||||
Commercial business | $ 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 |
14
The following table presents impaired loans for the periods indicated as follows:
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized |
| ($ in thousands) | ||||
June 30, 2011 |
|
|
|
|
|
With no related allowance: |
|
|
|
|
|
Commercial business | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Commercial real estate | 0 | 0 | 0 | 368 | 0 |
Real estate construction | 0 | 0 | 0 | 161 | 0 |
Agricultural | 0 | 0 | 0 | 0 | 0 |
Residential mortgage | 0 | 0 | 0 | 219 | 0 |
With a related allowance: |
|
|
|
|
|
Commercial business | $ 427 | $ 632 | $ 205 | $ 244 | $ 0 |
Commercial real estate | 6,287 | 7,599 | 1,312 | 7,064 | 56 |
Real estate construction | 1,294 | 1,642 | 348 | 2,189 | 21 |
Agricultural | 188 | 252 | 64 | 195 | 0 |
Residential mortgage | 2,420 | 2,880 | 460 | 1,794 | 28 |
Total: |
|
|
|
|
|
Commercial business | $ 427 | $ 632 | $ 205 | $ 244 | $ 0 |
Commercial real estate | 6,287 | 7,599 | 1,312 | 7,432 | 56 |
Real estate construction | 1,294 | 1,642 | 348 | 2,350 | 21 |
Agricultural | 188 | 252 | 64 | 195 | 0 |
Residential mortgage | 2,420 | 2,880 | 460 | 2,013 | 28 |
Total | $ 10,616 | $ 13,005 | $ 2,389 | $ 12,234 | $ 105 |
December 31, 2010 |
|
|
|
|
|
With no related allowance: |
|
|
|
|
|
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 a related allowance: |
|
|
|
|
|
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 |
Total | $ 7,808 | $ 9,749 | $ 1,941 | $ 10,244 | $ 165 |
15
Note 5 Other Real Estate Owned (OREO)
A summary of OREO, which is included in other assets, is as follows:
| Six months ended June 30, 2011 | Year ended December 31, 2010 |
| ($ in thousands) | |
Balance at beginning of year | $ 4,230 | $ 1,808 |
Transfer of loans at net realizable value to OREO | 886 | 4,965 |
Sale proceeds | (797) | (1,590) |
Loans made in sale of OREO | (75) | (981) |
Net gain (loss) from sale of OREO | 89 | 187 |
Provision charged to operations | (108) | (159) |
Balance at end of period | $ 4,225 | $ 4,230 |
Changes in the valuation reserve for losses on OREO were as follows:
| Six months ended June 30, 2011 | Year ended December 31, 2010 |
| ($ in thousands) | |
Balance at beginning of year | $ 2,788 | $ 2,994 |
Provision charged to operations | 108 | 159 |
Amounts related to OREO disposed of | (45) | (365) |
Balance at end of period | $ 2,851 | $ 2,788 |
OREO was $4,225 at June 30, 2011, compared to $4,230 at December 31, 2010. The properties held as OREO in 2011 consist of $3,202 of commercial real estate (the largest being $1,744 related to a hotel/water park project), $652 real estate construction loans, $50 agricultural loans and $321 residential real estate. OREO as of year-end 2010 consisted of $2,716 of commercial real estate, $82 real estate construction, $150 agricultural loans and $547 residential real estate. Management generally seeks to ensure properties held are monitored to minimize the Companys 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.
In the six months ended June 30, 2011, OREO continued to turn over rapidly, as we have had success in aggressively marking down the assets to a value that enables us to sell the property quickly. During 2010 we sold 35 OREO properties resulting in a net gain from the sale of OREO of $187. In 2011, we sold 13 OREO properties resulting in a net gain from the sale of OREO of $89.
Note 6- Short-term Borrowings
Short-term borrowings were as follows.
| Six months ended June 30, 2011 | Year ended December 31, 2010 |
| ($ in Thousands) | |
Securities sold under repurchase agreements | $ 9,630 | $ 9,512 |
Federal Home Loan Bank open line of credit | 2,500 | 0 |
Total short-term borrowings | $ 12,130 | $ 9,512 |
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 $13,860 at June 30, 2011 and $14,032 at December 31, 2010.
16
The following information relates to federal funds purchased, securities sold under repurchase agreements, and Federal Home Loan Bank open line of credit for the following periods.
| Six months ended June 30, 2011 | Year ended December 31, 2010 |
Weighted average rate | 0.46% | 0.49% |
For the year: |
|
|
Highest month-end balance | $ 12,130 | $ 18,329 |
Daily average balance | $ 10,254 | $ 10,411 |
Weighted average rate | 0.50% | 0.69% |
Note 7- Long-term Borrowings
Long-term borrowings were as follows.
| Six months ended June 30, 2011 | Year ended December 31, 2010 |
| ($ in Thousands) | |
Federal Home Loan Bank advances | $ 30,061 | $ 32,561 |
Other borrowed funds | 10,000 | 10,000 |
Total long-term borrowings | $ 40,061 | $ 42,561 |
Federal Home Loan Bank Advances Long-term advances from the Federal Home Loan Bank (FHLB) have maturities through 2015 and had a weighted-average interest rate of 4.24% at both June 30, 2011 and December 31, 2010. FHLB advances decreased $2,500 from year-end 2010 due to the maturity of an advance that was not renewed due to the liquidity position of the Company.
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.
Structured repurchase agreements Fixed rate structured repurchase agreements, which mature in 2014 and 2015, callable in 2013, and had weighted-average interest rates of 4.24% at June 30, 2011 and December 31, 2010.
Note 8 - Fair Value Measurements
The FASB issued accounting guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance 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 entitys own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of 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.
17
Level 3 Fair value measurement is based on valuation models and methodologies that incorporate unobservable inputs, which are typically based on an entitys own assumptions, as there is little related market activity.
Some assets and liabilities, such as securities available-for-sale, 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 and impaired loans, 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 Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considerations specific to the asset or liability.
Following is a description of the valuation methodologies used for the Companys more significant instruments measured on a recurring and nonrecurring 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 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 nonrecurring fair value measurement.
The fair value of loans held for sale is based on observable current prices in the secondary market in which loans trade. All loans held for sale are categorized based on commitments received from secondary sources that the loans qualify for placement at the time of underwriting and at an agreed upon price. A gain or loss is recognized at the time of sale reflecting the present value of the difference between the contractual interest rate of the loan and the yield to investors.
Loans Loans are not measured at fair value on a recurring basis.
Impaired Loans The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. 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.
18
OREO Real estate acquired through or in lieu of loan foreclosure is not measured at fair value on a recurring basis. However, OREO 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.
Information regarding the fair value of assets measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, is as follows:
|
| Recurring Fair Value Measurements Using | ||
| Assets Measured at Fair Value | Quoted Price in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 |
| ($ in thousands) | |||
June 30, 2011 |
|
|
|
|
Investment securities available for sale: |
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ 21,933 | $ 0 | $ 21,933 | $ 0 |
Mortgage-backed securities | 64,626 | 0 | 64,614 | 12 |
Obligations of states and political subdivisions | 21,377 | 0 | 20,850 | 527 |
Corporate debt securities | 832 | 0 | 7 | 825 |
Total debt securities | $ 108,768 | $ 0 | $ 107,404 | $ 1,364 |
Equity securities | 151 | 0 | 51 | 100 |
Total investment securities available for sale | $ 108,919 | $ 0 | $ 107,455 | $ 1,464 |
December 31, 2010 |
|
|
|
|
Investment securities available for sale: |
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ 22,567 | $ 0 | $ 22,567 | $ 0 |
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 | $2,299 |
The table below presents a roll forward of the balance sheet amounts for the six months ended June 30, 2011 and for the year ended December 31, 2010, for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
19
Assets Measured at Fair Value Using Significant Unobservable Inputs (Level 3) | ||
| June 30, 2011 | December 31, 2010 |
| ($ in thousands) | |
Balance at beginning of year | $ 2,299 | $ 3,119 |
Total gains or losses (realized/unrealized) |
|
|
Included in earnings | (55) | (412) |
Included in other comprehensive income | 7 | 273 |
Principal payments | (150) | (693) |
Sales | (637) | 0 |
Transfers in and/or out of Level 3 | 0 | 12 |
Balance at end of period | $ 1,464 | $ 2,299 |
Information regarding the fair values of assets measured at fair value on a nonrecurring basis as of June 30, 2011 and December 31, 2010, is as follows:
|
| Nonrecurring Fair Value Measurements Using | ||
| Assets Measured at Fair Value | Quoted Price in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 |
| ($ in thousands) | |||
June 30, 2011 |
|
|
|
|
Loans held for sale | $ 684 | $ 0 | $ 684 | $ 0 |
Impaired loans | $ 10,616 | $ 0 | $ 10,580 | $ 36 |
OREO | $ 4,225 | $ 0 | $ 4,225 | $ 0 |
December 31, 2010 |
|
|
|
|
Loans held for sale | $ 7,444 | $ 0 | $ 7,444 | $ 0 |
Impaired loans | $ 7,808 | $ 0 | $ 7,361 | $ 447 |
OREO | $ 4,230 | $ 0 | $ 4,230 | $ 0 |
At June 30, 2011 loans with a carrying amount of $13,005 were considered impaired and were written down to their estimated fair value of $10,616. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $2,389. At year end 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 $1,941.
The Company is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Companys financial instruments.
20
The estimated fair values of the Companys financial instruments on the balance sheet at June 30, 2011 and December 31, 2010 were as follows:
| June 30, 2011 | December 31, 2010 | ||
| Carrying |
| Carrying |
|
| Amount | Fair Value | Amount | Fair Value |
| ($ in thousands) | |||
Financial assets: |
|
|
|
|
Cash and short-term investments | $ 16,126 | $ 16,126 | $ 41,983 | $ 41,983 |
Securities and other investments | 111,535 | 111,535 | 103,926 | 103,926 |
Net loans | 335,302 | 333,045 | 337,143 | 333,665 |
Accrued interest receivable | 1,746 | 1,746 | 1,853 | 1,853 |
Financial liabilities: |
|
|
|
|
Deposits | $ 379,785 | $ 383,752 | $ 400,610 | $ 401,190 |
Short-term borrowings | 12,130 | 12,130 | 9,512 | 9,512 |
Long-term borrowings | 40,061 | 42,419 | 42,561 | 45,026 |
Subordinated debentures | 10,310 | 6,785 | 10,310 | 6,785 |
Accrued interest payable | 906 | 906 | 992 | 992 |
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, or if quoted prices are not available for a specific security, the fair values are estimated by using pricing models, quoted price 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 Companys 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 noninterest-bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate reflects the credit quality and operating expense factors of the Company.
Short-term borrowings The carrying amount reported in the consolidated balance sheets for short-term borrowings approximates the liabilitys fair value.
Long-term borrowings The fair values are estimated using discounted cash flow analyses based on the Companys 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.
21
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 Companys 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 income 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.
Because of the wide range of valuation techniques and the numerous assumptions which must be made, it may be difficult to compare our Companys fair value to that of other financial institutions. It is important that the many assumptions discussed above be considered when using the estimated fair value disclosures and to realize that because of the uncertainties, the aggregate fair value should in no way be construed as representative of the underlying value of the Company.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
We operate as a one-bank holding company and own all of the outstanding capital stock of Mid-Wisconsin Bank (the Bank), chartered as a state bank in Wisconsin. The Bank is engaged in general commercial and retail banking services, including wealth management services.
The following managements discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition as of June 30, 2011 and December 31, 2010 and results of operations for the three-month and six-month periods ended June 30, 2011 and 2010. It is intended to supplement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. Quarterly comparisons reflect continued consistency of operations and do not reflect any significant trends or events other than those noted in the comments.
Special Note Regarding Forward-Looking Statements
Statements made in this document and in documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of managements plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements may be identified by the use of words such as believe, expect, anticipate, plan, estimate, should, will, intend, or similar expressions. Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of the Company and could cause those results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. These factors, many of which are beyond the Companys control, include the following:
22
·
operating, legal and regulatory risks including the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations promulgated thereunder;
·
economic, political and competitive forces affecting our banking and wealth management businesses;
·
changes in monetary policy and general economic conditions may impact our net interest income;
·
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;
·
other factors discussed under Item 1A, Risk Factors in our 2010 Form 10-K 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.
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 stockholders equity, and possibly earnings. Declines in the fair value of investment securities below their cost that are deemed to be OTTI are reflected in earnings as realized losses and such securities are 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) our intent and ability 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 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): Managements evaluation process used to determine the adequacy of the allowance for loan and lease losses is subject to the use of estimates, assumptions, and judgments. The evaluation process combines several factors: (1) evaluation of facts and issues related to specific loans; (2) managements 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. 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 allowance for loan and lease losses, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan and lease losses. 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 allowance for loan and lease losses as recorded in the consolidated financial statements is adequate.
23
OREO: Real estate acquired through, or in lieu of, loan foreclosure is held for sale and 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 the highest and best use of the properties, or other changes. There are uncertainties as to the price we may 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 may affect future earnings.
Income taxes: The assessment of income 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 managements 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 properly recorded in the consolidated financial statements.
All remaining information included in this Managements Discussion and Analysis of Financial Condition and Results of Operations is shown in thousands of dollars, except per share data.
RESULTS OF OPERATIONS
Performance Summary
The Company reported net loss to common shareholders $882, or $0.53 per common share, for the six months ended June 30, 2011, compared to net income to common shareholders of $20, or $0.01 per common share, for the six months ended June 30, 2010. Financial results continue to be impacted by the increased provision for loan and lease losses, expenses associated with credit collections, declining net interest margin, declining service fees and mortgage banking income, and FDIC insurance costs. Key factors behind these results are discussed below:
·
Net interest income of $7,740 for the six months ended June 30, 2011, decreased by 6.3% from the same period in 2010. On a fully tax-equivalent basis, the net interest margin at June 30, 2011 decreased to 3.37% from 3.54% for the same period in 2010. The decrease in net interest margin was primarily due to an elevated level of liquidity that was invested in low-yielding assets, weak loan demand and the sale of investment securities during the latter half of 2010. Average loans outstanding decreased by $21,445 and average balance of federal funds sold and securities purchased under agreements to resell
increased $13,284 at June 30, 2011, compared to a year earlier. The average yield on earning assets was 4.83% at June 30, 2011 compared to 5.47% at June 30, 2010.
·
Loans of $343,842 at June 30, 2011, increased $4,672 from December 31, 2010. Loan growth has been impacted by the current credit environment, economic conditions, loan payoffs, and charge-offs; however, in the second quarter we experienced growth in commercial and agricultural loans. Although competition among local and regional banks for creditworthy borrowers and core deposit customers remains high, we remain committed to supporting our markets through lending to creditworthy borrowers as opportunities arise.
24
·
Total deposits were $379,785 at June 30, 2011, down $20,825 from year-ended December 31, 2010 primarily due to normal customer inflows and outflows and the maturity of brokered certificates of deposit.
·
Net charge-offs were $3,197 in the first six months of 2011, and $1,960 for the comparable period in 2010. The provision for loan and lease losses was $2,950 for the first six months of 2011, compared with $2,355 for the first six months of 2010. The 2011 provision has increased over the 2010 provision due to economic factors that include: the high unemployment rate in our market areas, increased delinquencies in existing commercial real estate and construction credits resulting from weakness in the local economies, depressed collateral values, and internal assessments of currently performing loans with increased risk for future delinquencies. The Banks coverage ratio of the allowance for loan and lease losses to total loans at June 30, 2011 was 2.68% compared to 2.79% at December 31, 2010 and 2.38% at June 30, 2010.
·
Noninterest income for the six months ended June 30, 2011 increased $202, or 9.2%, to $2,409 from the comparable period in 2010 due to a legal settlement, the details of which are subject to a confidentiality agreement. Noninterest expense for the six months ended June 30, 2011 was $8,311, an increase of $584 over the first six months of 2010, due primarily to increased marketing and product expenses associated with a new deposit product, FDIC costs, foreclosure/OREO expenses, loan servicing costs, and loss on sale of investment securities.
·
As of June 30, 2011, the Companys tier 1 risk-based capital ratio and total risk-based capital ratios were 10.0 % and 15.4%, respectively. Both ratios are in excess of regulatory minimum requirements.
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 the six months ended June 30, 2011, was $7,873, down from $8,385 in the related 2010 period. The decrease in taxable equivalent net interest income was attributable to unfavorable volume variances (as changes in the balances and mix of earning assets and interest-bearing liabilities lowered taxable equivalent net interest income by $285) and unfavorable rates variances (as the impact of changes in the interest rate environment and product pricing reduced taxable equivalent net interest income by $227).
The tax-equivalent net interest margin for the first six months of 2011 was 3.37%, down from 3.54% in the related 2010 period. For 2011, the yield on earning assets of 4.83% was 64 bps lower than the comparable period last year. Loan yields decreased 37 bps, to 5.69%, impacted by levels of nonaccrual loans, lower loan yields given the repricing of adjustable rate loans, soft loan demand, and competitive pricing pressures to retain and/or obtain creditworthy borrowers. The yield on investment securities and other short-term investments decreased 101 bps to 2.66%, impacted by the Companys excess liquidity position invested in lower-yielding assets resulting from soft loan demand during 2011 and the sale of investment securities during the latter half of 2010.
The cost of interest-bearing liabilities of 1.76% for the first six months of 2011 was 51 bps lower than the related 2010 period. The average cost of interest-bearing deposits was 1.51%, down 47 basis points, while the cost of wholesale funding (comprised of short-term borrowings and long-term borrowings) decreased 16 bps to 3.31% for the six months ended June 30, 2011. The $10,310 of subordinated debentures had a fixed rate of 5.98% through December 15, 2010, after which they have a floating rate equal to the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rate at June 30, 2011 was 1.68%.
25
Average earning assets of $471,369 for the first six months of 2011 were $6,800 lower than the comparable period last year. Average federal funds sold and securities purchased under agreements to resell grew $13,284 to $25,116, reflecting the Companys increased liquidity position. Average loans decreased $21,445 to $338,024 as a result of soft loan demand, pay-offs and charge-offs. Taxable equivalent interest income in 2011 decreased $1,671 to $11,297 due to $598 unfavorable earning asset volume changes and $1,073 unfavorable rate variances.
Average interest-bearing liabilities of $392,906 for the first six months of 2011 were down $13,594 compared to the related 2010 period. Average interest-bearing deposits decreased $15,028 and, average noninterest-bearing deposits increased $7,020. For the first six months of 2011, interest expense decreased $1,159 of which $846 was due to favorable rate changes and $313 was due to favorable volume changes.
26
Table 1: Year-To-Date Net Interest Income Analysis Taxable Equivalent Basis
| Six months ended June 30, 2011 | Six months ended June 30, 2010 | ||||
| Average | Interest | Average | Average | Interest | Average |
| Balance | Income/Expense | Yield/Rate | Balance | Income/Expense | Yield/Rate |
ASSETS |
|
|
|
|
|
|
Earning Assets |
|
|
|
|
|
|
Loans (1) (2) (3) | $ 338,024 | $ 9,538 | 5.69% | $ 359,469 | $ 10,807 | 6.06% |
Investment securities: |
|
|
|
|
|
|
Taxable | 92,487 | 1,329 | 2.90% | 92,645 | 1,833 | 3.99% |
Tax-exempt (2) | 12,194 | 297 | 4.91% | 10,184 | 281 | 5.57% |
Interest-bearing deposits in other financial institutions | 8 | 0 | 0.00% | 11 | 0 | 0.00% |
Federal funds sold | 9,289 | 6 | 0.13% | 11,832 | 8 | 0.14% |
Securities purchased under agreements to sell | 15,827 | 107 | 1.36% | 0 | 0 | 0.00% |
Other interest-earning assets | 3,540 | 20 | 1.14% | 4,028 | 39 | 1.95% |
Total earning assets | $ 471,369 | $ 11,297 | 4.83% | $ 478,169 | $ 12,968 | 5.47% |
Cash and due from banks | $ 7,529 |
|
| $ 7,573 |
|
|
Other assets | 26,550 |
|
| 27,042 |
|
|
Allowance for loan losses | (9,163) |
|
| (8,520) |
|
|
Total assets | $ 496,285 |
|
| $ 504,264 |
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
Interest-bearing demand | $ 37,565 | $ 89 | 0.48% | $ 34,879 | $ 107 | 0.62% |
Savings deposits | 114,647 | 440 | 0.77% | 103,542 | 532 | 1.04% |
Time deposits | 177,624 | 1,940 | 2.20% | 206,443 | 2,753 | 2.69% |
Short-term borrowings | 10,254 | 52 | 1.02% | 8,765 | 39 | 0.89% |
Long-term borrowings | 42,506 | 813 | 3.86% | 42,561 | 845 | 4.00% |
Subordinated debentures | 10,310 | 90 | 1.76% | 10,310 | 307 | 5.98% |
Total interest-bearing liabilities | $ 392,906 | $ 3,424 | 1.76% | $ 406,500 | $ 4,583 | 2.27% |
Noninterest-bearing demand deposits | 57,555 |
|
| 50,535 |
|
|
Other liabilities | 2,744 |
|
| 3,524 |
|
|
Stockholders' equity | 43,080 |
|
| 43,705 |
|
|
Total liabilities and stockholders' equity | $ 496,285 |
|
| $ 504,264 |
|
|
|
|
|
|
|
|
|
Net interest income and rate spread |
| $ 7,873 | 3.07% |
| $ 8,385 | 3.20% |
Net interest margin |
|
| 3.37% |
|
| 3.54% |
(1) Non-accrual 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 of $163 in 2011 and $184 in 2010. |
27
Table 2: Volume/Rate Variance - Taxable Equivalent Basis
Comparison of six months ended June 30, 2011 versus 2010 |
|
| |
|
| Due to |
|
| Volume | Rate | Net |
| ($ in thousands) | ||
Loans (1)(2) | ($644) | ($625) | ($1,269) |
Taxable investments | (3) | (501) | (504) |
Tax-exempt investments (2) | 56 | (40) | 16 |
Interest-bearing deposits in other financial institutions | 0 | 0 | 0 |
Federal funds sold | (2) | 0 | (2) |
Securities purchased under agreements to sell | 0 | 107 | 107 |
Other interest-earning assets | (5) | (14) | (19) |
Total earning assets | (598) | (1,073) | (1,671) |
Interest-bearing demand | 8 | (26) | (18) |
Savings deposits | 57 | (149) | (92) |
Time deposits | (384) | (429) | (813) |
Short-term borrowings | 7 | 6 | 13 |
Long-term borrowings | (1) | (31) | (32) |
Subordinated debenture | 0 | (217) | (217) |
Total interest-bearing liabilities | (313) | (846) | (1,159) |
Net interest income | ($285) | ($227) | ($512) |
(1) Non-accrual 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. |
28
Table 3: Quarterly Net Interest Income Analysis Taxable Equivalent Basis
| Three months ended June 30, 2011 | Three months ended June 30, 2010 | ||||
| Average | Interest | Average | Average | Interest | Average |
| Balance | Income/Expense | Yield/Rate | Balance | Income/Expense | Yield/Rate |
ASSETS |
|
|
|
|
|
|
Earning Assets |
|
|
|
|
|
|
Loans (1) (2) (3) | $ 336,330 | $ 4,695 | 5.60% | $ 358,221 | $ 5,396 | 6.04% |
Investment securities: |
|
|
|
|
|
|
Taxable | 95,392 | 691 | 2.91% | 95,094 | 896 | 3.78% |
Tax-exempt (2) | 12,282 | 149 | 4.87% | 9,960 | 135 | 5.43% |
Interest-bearing deposits in other financial institutions | 8 | 0 | 0.00% | 10 | 0 | 0.00% |
Federal funds sold | 7,036 | 2 | 0.11% | 10,192 | 3 | 0.12% |
Securities purchased under agreements to sell | 11,802 | 40 | 1.36% | 0 | 0 | 0.00% |
Other interest-earning assets | 3,467 | 9 | 1.04% | 4,028 | 20 | 1.99% |
Total earning assets | $ 466,317 | $ 5,586 | 4.81% | $ 477,505 | $ 6,450 | 5.42% |
Cash and due from banks | $ 7,412 |
|
| $ 7,506 |
|
|
Other assets | 26,499 |
|
| 27,594 |
|
|
Allowance for loan losses | (8,867) |
|
| (8,837) |
|
|
Total assets | $ 491,361 |
|
| $ 503,767 |
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
Interest-bearing demand | $ 34,682 | $ 38 | 0.44% | $ 33,720 | $ 51 | 0.60% |
Savings deposits | 113,628 | 221 | 0.78% | 103,630 | 271 | 1.05% |
Time deposits | 174,992 | 926 | 2.12% | 207,200 | 1,352 | 2.62% |
Short-term borrowings | 10,298 | 26 | 1.02% | 8,454 | 19 | 0.89% |
Long-term borrowings | 42,451 | 408 | 3.86% | 42,561 | 410 | 3.86% |
Subordinated debentures | 10,310 | 45 | 1.73% | 10,310 | 153 | 5.98% |
Total interest-bearing liabilities | $ 386,361 | $ 1,663 | 1.73% | $ 405,875 | $ 2,256 | 2.23% |
Noninterest-bearing demand deposits | 59,557 |
|
| 50,507 |
|
|
Other liabilities | 2,304 |
|
| 3,538 |
|
|
Stockholders' equity | 43,140 |
|
| 43,848 |
|
|
Total liabilities and stockholders' equity | $ 491,361 |
|
| $ 503,767 |
|
|
Net interest income and rate spread |
| $ 3,923 | 3.08% |
| $ 4,194 | 3.19% |
Net interest margin |
|
| 3.37% |
|
| 3.52% |
(1) Non-accrual 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 of $85 in 2011 and $94 in 2010. |
29
Table 4: Volume/Rate Variance - Taxable Equivalent Basis
Comparison of three months ended June 30, 2011 versus 2010 |
|
| |
|
| Due to |
|
| Volume | Rate | Net |
| ($ in thousands) | ||
Loans (1)(2) | ($330) | ($371) | ($701) |
Taxable investments | 3 | (208) | (205) |
Tax-exempt investments (2) | 31 | (17) | 14 |
Interest-bearing deposits in other financial institutions | 0 | 0 | 0 |
Federal funds sold | (1) | 0 | (1) |
Securities purchased under agreements to sell | 0 | 40 | 40 |
Other interest-earning assets | (3) | (8) | (11) |
Total earning assets | (300) | (564) | (864) |
Interest-bearing demand | 1 | (14) | (13) |
Savings deposits | 26 | (77) | (51) |
Time deposits | (210) | (216) | (426) |
Short-term borrowings | 4 | 3 | 7 |
Long-term borrowings | (1) | (1) | (2) |
Subordinated debenture | 0 | (108) | (108) |
Total interest-bearing liabilities | (180) | (413) | (593) |
Net interest income | ($120) | ($151) | ($271) |
(1) Non-accrual 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. |
Provision for Loan Losses
The provision for loan losses for the first six months of 2011 was $2,950, compared to $2,355 for the same period in 2010 and $4,755 for the full year 2010. The increase in provision was due primarily to economic factors that include: the high unemployment rate in our market areas, increased delinquencies in existing commercial real estate and construction credits resulting from weakness in the local economies, depressed collateral values, and internal assessments of currently performing loans with increased risk for future delinquencies. Net charge-offs were $3,197 for the first six months of 2011, compared to $1,960 for the same period of 2010. The increase in net charge-offs was primarily due to managements decision, made in consultation with the banking regulators, to charge-off certain impaired loans that were covered by specific reserve allocations identified in the ALLL. At June 30, 2011, the ALLL was $9,224, a decrease of $247 from December 31, 2010. The ratio of the ALLL to total loans was 2.68% and 2.79% at June 30, 2011 and December 31, 2010, respectively. Nonperforming loans at June 30, 2011, were $18,763, compared to $13,808 at December 31, 2010, representing 5.46% and 4.07% of total loans, respectively.
The provision for loan losses is predominantly a function of the Companys 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. We believe the level of provisioning and level of our allowance for loan and lease losses followed the direction of our policies and was adequate to cover anticipated and unexpected loan losses inherent in our loan portfolio as of June 30, 2011. However, we may need to increase our provisions in the future should the quality of the loan portfolio decline or other factors used to determine the allowance worsen. Please refer to the discussion on Allowance for Loan and Lease Losses for further information.
30
Noninterest Income
Table 5: Noninterest Income
| June 30, | June 30, | Percent | June 30, | June 30, | Percent |
| 2011 | 2010 | Change | 2011 | 2010 | Change |
Service fees | $ 252 | $ 317 | -20.5% | $ 505 | $ 604 | -16.4% |
Trust service fees | 267 | 287 | -7.0% | 533 | 564 | -5.5% |
Investment product commissions | 69 | 57 | 21.1% | 113 | 107 | 5.6% |
Mortgage banking | 84 | 148 | -43.2% | 233 | 298 | -21.8% |
Gain on sale of investments | 0 | 168 | -100.0% | 0 | 168 | -100.0% |
Other | 260 | 243 | 7.0% | 1,025 | 466 | 120.0% |
Total noninterest income | $ 932 | $ 1,220 | -23.6% | $ 2,409 | $ 2,207 | 9.2% |
Noninterest income for the first six months of 2011 was $2,409, up $202 from the same six-month period of 2010. Other noninterest income was $1,025, up $559 from the comparable period of 2010, primarily due to a $500 legal settlement received in the first quarter 2011.
Service fees on deposit accounts for the first six months of 2011 of $505 were down $99 from the same period in 2010. The decline in service fees was due to a general decrease in the amount of NSF/overdraft fees collected due to changes in customer behavior and regulatory changes. For the remainder of 2011, core-fee based revenues are expected to face challenges related to these same changes in consumer behavior and the impact of recent consumer banking regulatory changes that have affected year-to-date results thus far.
The Wealth Management Services Group generates trust service fees and investment product commissions. Wealth Management income was $533 for the first six months of 2011, down $31 from the same period in 2010, primarily due to a decrease in the valuation of assets under management, on which fees are based.
Mortgage banking income represents income received from the sale of residential real estate loans into the secondary market. Mortgage banking income for the first six months of 2011 was $233, compared to $298 for same period in 2010. Residential loan activity reached an all time refinancing high in 2010 due to a historically low interest rate environment. Interest rates have since increased, reducing volume thus far in 2011, and the Company anticipates the volume of loans sold to the secondary market for the remainder of 2011 will be considerably lower than 2010, resulting in lower income. Residential real estate loans originated for sale to the secondary market totaled $10,016 for the first six months of 2011, compared to $19,869 for the first six months of 2010.
Gains on the sale of investments of $168 for first six months of 2010 were attributable to the sale of mortgage-related securities. No gains on sale of investments were realized during the first six months of 2011.
31
Noninterest Expense
Total noninterest expense was $8,311 for the first six months of 2011, an increase of $584 over the first six months of 2010.
Table 6: Noninterest Expense
| Three months ended | Six months ended | ||||
| June 30, | June 30, | Percent | June 30, | June 30, | Percent |
| 2011 | 2010 | Change | 2011 | 2010 | Change |
Salaries and employee benefits | $ 2,096 | $ 2,105 | -0.4% | $ 4,227 | $ 4,210 | 0.4% |
Occupancy | 426 | 469 | -9.2% | 910 | 930 | -2.2% |
Data processing | 161 | 162 | -0.6% | 334 | 328 | 1.8% |
Foreclosure/OREO expense | 129 | 130 | -0.8% | 171 | 124 | 37.9% |
Legal and professional fees | 224 | 184 | 21.7% | 391 | 381 | 2.6% |
FDIC expense | 285 | 230 | 23.9% | 599 | 465 | 28.8% |
Loss on sale of investments | 0 | 0 | 0.0% | 55 | 0 | 100.0% |
Other | 816 | 665 | 22.7% | 1,624 | 1,289 | 26.0% |
Total noninterest expense | $ 4,137 | $ 3,945 | 4.9% | $ 8,311 | $ 7,727 | 7.6% |
Salaries and employee benefits of $4,227 for the first six months of 2011 increased 0.4% from the same period in 2010. The increase is primarily attributable to an increase in performance-based incentives and related payroll taxes of $63 in the first six months of 2011. These increased expenses were partially offset by a decline in health and life insurance expenses of $45 resulting from the reduced number of employees covered under the plans.
Occupancy expense decreased $20 or 2.2% in the first six months of 2011, due to the gain recognized on the sale of the Banks branch located in Lake Tomahawk, Wisconsin that offset the increased costs of building maintenance and utility costs. The Company closed the Banks branch located in Lake Tomahawk, Wisconsin on February 1, 2011. Foreclosure/OREO expense increased $47 between comparable six month periods primarily attributable to an increase in OREO write-downs and higher carrying costs of OREO, partially offset by $89 of gain on sales of OREO. Legal and professional fees of $391 increased $10, primarily due to higher legal costs associated with loan collection in 2011. An increase in FDIC expense of $134 was primarily due to increased deposit insurance rates. Other operating expenses increased $335 compared to the first six months of 2010, primarily due to increased marketing costs and deposit product expenses associated with the introduction of a new deposit program and loan servicing costs. The Company recognized a $55 loss on the sale of investments in the first six months of 2011. The security sales were executed in an effort to increase the credit quality of the Companys investment portfolio. No such losses were recognized in the comparable 2010 period.
Income Taxes
For the first six months of 2011, the income tax benefit was $552 compared to a $48 income tax expense for the comparable period in 2010. Management determined that a valuation allowance on deferred tax assets was not necessary, as management believes that tax benefits associated with current and past years pre-tax losses will be realized through the Companys ability to generate sufficient income in the future.
32
FINANCIAL CONDITION
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 stockholders 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.
At June 30, 2011, the total carrying value of investment securities was $108,919, an increase of $7,609, or 7.5%, since December 31, 2010, primarily attributable to the soft loan demand and excess liquidity position of the Bank.
Table 7: Investments
|
| As of | As of | ||
Investment Category | Rating | June 30, 2011 | December 31, 2010 | ||
|
| Amount | % | Amount | % |
| ($ in thousands) | ||||
US Treasury & Agencies Debt |
|
|
|
|
|
| AAA | $ 21,933 | 100% | $ 22,567 | 100% |
Total |
| $ 21,933 | 100% | $ 22,567 | 100% |
US Treasury & Agencies Debt as % of Portfolio |
|
| 20% |
| 22% |
Mortgage-backed securities |
|
|
|
|
|
| AAA | $ 64,546 | 100% | $ 56,205 | 99% |
| AA3 | 67 | 0% | 0 | 0% |
| A+ | 13 | 0% | 13 | 0% |
| Baa2 | 0 | 0% | 60 | 0% |
| BA1 | 0 | 0% | 308 | 0% |
| BA3 | 0 | 0% | 330 | 1% |
Total |
| $ 64,626 | 100% | $ 56,916 | 100% |
Mortgage-Backed Securities as % of Portfolio |
|
| 59% |
| 57% |
Obligations of State and Political Subdivisions |
|
|
|
|
|
| Aa1 | $ 3,345 | 16% | $ 3,496 | 17% |
| Aa2 | 4,624 | 22% | 4,492 | 22% |
| AA3 | 3,417 | 16% | 2,665 | 13% |
| A1 | 983 | 5% | 905 | 4% |
| A2 | 0 | 0% | 0 | 0% |
| A3 | 0 | 0% | 0 | 0% |
| Baa1 | 339 | 2% | 339 | 2% |
| NR | 8,669 | 39% | 8,818 | 42% |
Total |
| $ 21,377 | 100% | $ 20,715 | 100% |
Obligations of State and Political Subdivisions as % of Portfolio |
|
| 20% |
| 20% |
Corporate Debt and Equity Securities |
|
|
|
|
|
| NR | $ 983 | 100% | $ 1,112 | 100% |
Total |
| $ 983 | 100% | $ 1,112 | 100% |
Corporate Debt Securities as % of Portfolio |
|
| 1% |
| 1% |
Total Market Value of Securities |
| $ 108,919 | 100% | $ 101,310 | 100% |
33
Loans
The Bank serves 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. We continue to concentrate our efforts on originating loans in our local markets and assisting our current loan customers. We are actively utilizing government loan programs such as U.S. Small Business Administration, U.S. Department of Agriculture, and USDA Farm Service Agency to help these customers survive the current economic downturn of the last few years and position their businesses to return to profitability in the future.
Total loans were $343,842 at June 30, 2011, an increase of $4,672, or 1.4%, from December 31, 2010. While the overall loan portfolio increased slightly in 2011 including second quarter growth in commercial and agricultural loans, the overall rate of growth has been negatively impacted by the current credit environment, economic conditions, loan payoffs, and charge-offs.
Table 8: Loan Composition
|
|
|
| As of, |
|
|
|
|
|
|
| June 30, 2011 |
| March 31, 2011 |
| December 31, 2010 |
| September 30, 2010 |
| June 30, 2010 |
|
|
| % of |
| % of |
| % of |
| % of |
| % of |
| Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total |
| ($ in thousands) | |||||||||
Commercial business | $ 43,987 | 13% | $ 41,263 | 12% | $ 39,093 | 12% | $ 39,650 | 12% | $ 37,928 | 11% |
Commercial real estate | 132,780 | 38% | 130,733 | 39% | 132,079 | 39% | 132,104 | 38% | 137,862 | 39% |
Real estate construction | 28,824 | 8% | 29,181 | 9% | 30,206 | 9% | 32,197 | 9% | 32,314 | 9% |
Agricultural | 46,990 | 14% | 38,610 | 12% | 39,671 | 12% | 38,966 | 11% | 40,038 | 12% |
Real estate residential | 85,965 | 25% | 89,399 | 26% | 91,974 | 26% | 95,160 | 28% | 96,322 | 27% |
Installment | 5,296 | 2% | 5,650 | 2% | 6,147 | 2% | 6,120 | 2% | 6,882 | 2% |
Total loans | $ 343,842 | 100% | $ 334,836 | 100% | $ 339,170 | 100% | $ 344,197 | 100% | $ 351,346 | 100% |
Owner occupied | $ 75,904 | 57% | $ 77,885 | 60% | $ 83,115 | 63% | $ 82,562 | 62% | $ 83,885 | 61% |
Non-owner occupied | 56,876 | 43% | 52,848 | 40% | 48,964 | 37% | 49,542 | 38% | 53,977 | 39% |
Commercial real estate | $ 132,780 | 100% | $ 130,733 | 100% | $ 132,079 | 100% | $ 132,104 | 100% | $ 137,862 | 100% |
1-4 family construction | $ 863 | 3% | $ 559 | 2% | $ 967 | 3% | $ 1,351 | 4% | $ 2,234 | 7% |
All other construction | 27,961 | 97% | 28,622 | 98% | 29,239 | 97% | 30,846 | 96% | 30,080 | 93% |
Real estate construction | $ 28,824 | 100% | $ 29,181 | 100% | $ 30,206 | 100% | $ 32,197 | 100% | $ 32,314 | 100% |
Commercial business loans, commercial real estate, real estate construction loans and agricultural loans comprise 73% of our loan portfolio at June 30, 2011. 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 and 2011 has been negatively impacted by soft loan demand across all markets, the Companys aggressive approach to recognizing risks associated with specific borrowers and the recognition of charge-offs on nonperforming loans in a timely manner.
Commercial business loans were $43,987 at June 30, 2011, up $4,894, or 12.5%, since year-end 2010, and comprised 13% of total loans. 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 borrowers operations, or on the value of underlying collateral, if any.
34
Commercial real estate primarily includes commercial-based mortgage loans that are secured by nonfarm/nonresidential real estate properties. Commercial real estate totaled $132,780 at June 30, 2011, up $701, or 0.5%, from December 31, 2010, and comprised 38% of total loans outstanding. 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 borrowers financial soundness and overall relationship on an ongoing basis.
Real estate construction loans declined $1,382, or 4.6%, to $28,824, representing 8% of the total loan portfolio at June 30, 2011. 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 $46,990 at June 30, 2011, up $7,319, or 18.4%, compared to December 31, 2010, and represented 14% of the loan portfolio. 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 borrowers financial soundness and relationship on an ongoing basis.
Real estate residential loans totaled $85,965 at June 30, 2011, down $6,009, or 6.5%, from year-end 2010 and comprised 25% of total loans outstanding. 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 Companys long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. At June 30, 2011, $684 in residential mortgages were being held for resale to the secondary market, compared to $7,444 at December 31, 2010. At December 31, 2010, the Bank held a significant amount of loans held for sale to the secondary market that were not sold until the first quarter 2011.
Installment loans totaled $5,296 at June 30, 2011, down $851, or 13.8%, compared to December 31, 2010, and represented 2% of the 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. This process is regularly reviewed and the process has been modified over the past several years to further strengthen the direct participation of the Banks 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 June 30, 2011, no significant industry concentrations existed in the Companys portfolio in excess of 30% of total loans. The Bank has also developed guidelines to manage its exposure to various types of concentration risks.
35
Allowance for Loan and Lease Losses
The economic environment in 2011 continued to present unique credit-related issues that required managements attention. Industry issues impacting asset quality during this period included a general deterioration in economic factors; declining commercial and residential real estate markets; and waning second quarter consumer confidence. 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 ALLL is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collection of principal is unlikely. The level of the ALLL represents managements estimate of an amount of reserves which provides for estimated probable 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) managements 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.
The allocation methodology used by the Company includes allocations for specifically identified impaired loans and loss factor allocations, with a component primarily based on historical loss rates and a component based on other qualitative factors. Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation methodology consists of the following components. First a valuation allowance estimate is established for specifically identified commercial and consumer loans determined to be impaired by the Company. Second, management allocates ALLL with loss factors by loan type, primarily based on historical loss and delinquency experience, environmental factors and industry statistics. During the second quarter of 2011, management refined its process for determining historical loss rates by incorporating default and loss severity rates at a more granular level within each loan portfolio. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks. Lastly, management allocates ALLL to absorb unrecognized losses that may not be provided for by the other components due to other factors evaluated by management.
At June 30, 2011, the ALLL was $9,224, compared to $9,471 at December 31, 2010. The ALLL as a percentage of total loans was 2.68% and 2.79% at June 30, 2011 and December 31, 2010, respectively. The provision for loan and lease losses for the first six months of 2011 was $2,950, compared to $2,355 for the first six months of 2010. Net charge-offs were $3,197 for the six months ended June 30, 2011, compared to $1,960 for the comparable period ended June 30, 2010. The increase in net charge-offs between the comparable periods was mainly attributable to managements decision, made in consultation with the banking regulators, to charge-off certain impaired loans that we covered by specific reserve allocations identified in the ALLL. Loans charged-off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.
Since 2007 the Company has experienced elevated levels of net charge-offs and higher nonperforming loans relative to the Companys historical trends. Levels of charge-offs and non-performing loans declined in 2010 but have since increased in 2011, and 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 waning second quarter consumer confidence. Depressed 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.
36
Table 9: Loan Loss Experience
| June 30, 2011 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 |
Allowance for loan losses: |
|
|
|
|
|
Balance at beginning of period | $ 9,707 | $ 9,471 | $ 8,773 | $ 8,352 | $ 8,870 |
Charge-offs | (2,474) | (966) | (1,032) | (776) | (1,630) |
Recoveries | 91 | 152 | 230 | 297 | 157 |
Net charge-offs | (2,383) | (814) | (802) | (479) | (1,473) |
Provision for loan losses | 1,900 | 1,050 | 1,500 | 900 | 955 |
Balance at end of period | $ 9,224 | $ 9,707 | $ 9,471 | $ 8,773 | $ 8,352 |
Net loan charge-offs (recoveries): |
|
|
|
|
|
Commercial business | $ 29 | ($6) | $ 38 | ($47) | $ 292 |
Agricultural | 89 | 99 | 20 | 46 | (18) |
Commercial real estate (CRE) | 936 | 362 | 152 | 179 | 780 |
Real estate construction | 901 | 211 | 290 | 18 | 92 |
Total commercial | 1,955 | 666 | 500 | 196 | 1,146 |
Residential mortgage | 425 | 151 | 273 | 250 | 300 |
Installment | 3 | (3) | 29 | 33 | 27 |
Total net charge-offs | $ 2,383 | $ 814 | $ 802 | $ 479 | $ 1,473 |
|
|
|
|
|
|
CRE and construction net charge-off detail: |
|
|
|
|
|
Owner occupied | $ 657 | $ 217 | $ 82 | ($68) | $ 433 |
Non-owner occupied | 279 | 145 | 70 | 247 | 347 |
CRE | $ 936 | $ 362 | $ 152 | $ 179 | $ 780 |
1-4 family construction | $ 0 | $ 0 | ($18) | $ 0 | $ 0 |
All other construction | 901 | 211 | 308 | 18 | 92 |
Real estate construction | $ 901 | $ 211 | $ 290 | $ 18 | $ 92 |
Consolidated net income and stockholders equity could be affected if managements estimate of the ALLL proves subsequently different than actual losses, requiring additional or less provision for loan losses to be recorded. While management uses currently available information to recognize loan losses, future adjustments to the ALLL may be necessary based on changes in economic conditions that affect our customers. As an integral part of their examination process, various federal and state regulatory agencies also review the ALLL. These agencies may require additions to the ALLL or may require that certain loan balances be fully or partially charged-off or downgraded when their credit evaluations differ from those of management, based on their judgment of information available to them at the time of their examination.
The allocation of the allowance for loan and lease losses is based on our estimate of loss exposure by category of loans shown in Table 10.
37
Table 10: Allocation of the Allowance for Loan and Lease Losses
| June 30, 2011 | % of Total Loans by Category | March 31, 2011 | % of Total Loans by Category | December 31, 2010 | % of Total Loans by Category | September 30, 2010 | % of Total Loans by Category | June 30, 2010 | % of Total Loans by Category |
Allowance allocation: |
|
|
|
|
|
|
|
|
|
|
Commercial business | $ 782 | 13% | $ 514 | 12% | $ 536 | 12% | $ 509 | 12% | $ 532 | 11% |
Agricultural | 1,234 | 14% | 1,183 | 12% | 1,146 | 11% | 1,088 | 11% | 1,065 | 12% |
Commercial real estate | 3,801 | 38% | 4,586 | 39% | 4,320 | 38% | 3,931 | 38% | 3,913 | 39% |
Real estate construction | 1,184 | 8% | 1,298 | 9% | 1,278 | 9% | 1,077 | 9% | 907 | 9% |
Total commercial | 7,001 | 73% | 7,581 | 72% | 7,280 | 70% | 6,605 | 70% | 6,417 | 71% |
Residential mortgage | 2,096 | 25% | 2,011 | 26% | 2,060 | 28% | 2,057 | 28% | 1,829 | 27% |
Installment | 127 | 2% | 115 | 2% | 131 | 2% | 111 | 2% | 106 | 2% |
Total allowance for loan losses | $ 9,224 | 100% | $ 9,707 | 100% | $ 9,471 | 100% | $ 8,773 | 100% | $ 8,352 | 100% |
Allowance category as a percent of total allowance for loan losses: |
|
|
|
|
|
|
| |||
Commercial business | 8.5% |
| 5.3% |
| 5.6% |
| 5.8% |
| 6.4% |
|
Agricultural | 13.4% |
| 12.2% |
| 12.1% |
| 12.4% |
| 12.6% |
|
Commercial real estate | 41.2% |
| 47.2% |
| 45.6% |
| 44.8% |
| 46.9% |
|
Real estate construction | 12.8% |
| 13.4% |
| 13.5% |
| 12.3% |
| 10.9% |
|
Total commercial | 75.9% |
| 78.1% |
| 76.8% |
| 75.3% |
| 76.8% |
|
Residential mortgage | 22.7% |
| 20.7% |
| 21.8% |
| 23.4% |
| 21.9% |
|
Installment | 1.4% |
| 1.2% |
| 1.4% |
| 1.3% |
| 1.3% |
|
Total allowance for loan losses | 100.0% |
| 100.0% |
| 100.0% |
| 100.0% |
| 100.0% |
|
During 2010 and 2011, 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 Companys 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 otherwise be considered.
Nonperforming loans were $18,763 and $13,808 at June 30, 2011 and December 31, 2010 respectively, reflecting a $3,225 increase in nonaccrual loans and $2,674 increase in restructured loans from year-end 2010. The high levels of nonperforming loans in recent quarters have been primarily attributable to the impact of depressed property values, decreased sales, longer holding periods, rising costs brought on by depressed real estate conditions and the historically weak economy.
38
Table 11: Nonperforming Loans and Other Real Estate Owned
|
|
| As of, |
|
|
| June 30, 2011 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 |
| ($ in thousands) | ||||
Nonaccrual loans not considered impaired: |
|
|
|
|
|
Commercial business | $ 3,637 | $ 1,590 | $ 808 | $ 2,644 | $ 1,880 |
Agricultural | 355 | 680 | 369 | 136 | 0 |
Residential mortgage | 1,688 | 1,127 | 1,605 | 1,894 | 956 |
Installment | 1 | 1 | 2 | 15 | 27 |
Total nonaccrual loans not considered impaired | 5,681 | 3,398 | 2,784 | 4,689 | 2,863 |
Nonaccrual loans considered impaired: |
|
|
|
|
|
Commercial business | 7,153 | 8,040 | 7,561 | 7,096 | 8,524 |
Agricultural | 252 | 260 | 71 | 294 | 516 |
Residential mortgage | 1,679 | 2,026 | 1,124 | 1,181 | 1,700 |
Installment | 0 | 0 | 0 | 0 | 0 |
Total nonaccrual loans considered impaired | 9,084 | 10,326 | 8,756 | 8,571 | 10,740 |
Impaired loans still accruing interest | 0 | 1,031 | 993 | 118 | 704 |
Accruing loans past due 90 days or more | 59 | 25 | 10 | 3 | 1 |
Restructured loans | 3,939 | 3,714 | 1,265 | 145 | 148 |
Total nonperforming loans | 18,763 | 18,494 | 13,808 | 13,526 | 14,456 |
Other real estate owned (OREO) | 4,225 | 3,873 | 4,230 | 3,699 | 2,177 |
Other repossessed assets | 6 | 0 | 0 | 0 | 442 |
Investment security (Trust Preferred) | 0 | 0 | 136 | 140 | 211 |
Total nonperforming assets | $ 22,994 | $ 22,367 | $ 18,174 | $ 17,365 | $ 17,286 |
RATIOS |
|
|
|
|
|
Nonperforming loans to total loans | 5.46% | 5.52% | 4.07% | 3.93% | 4.11% |
Nonperforming assets to total loans plus OREO | 6.61% | 6.60% | 5.29% | 4.99% | 4.89% |
Nonperforming assets to total assets | 4.71% | 4.46% | 3.57% | 3.45% | 3.45% |
ALLL to nonperforming loans | 49% | 52% | 69% | 65% | 58% |
ALLL to total loans at end of period | 2.68% | 2.90% | 2.79% | 2.55% | 2.38% |
Nonperforming loans by type: |
|
|
|
|
|
Commercial | $ 771 | $ 120 | $ 54 | $ 621 | $ 47 |
Agricultural | 628 | 948 | 440 | 536 | 516 |
Commercial real estate (CRE) | 9,960 | 8,943 | 6,931 | 7,742 | 9,961 |
Real estate construction | 2,777 | 4,325 | 2,644 | 1,523 | 1,235 |
Total commercial business | 14,136 | 14,336 | 10,069 | 10,422 | 11,759 |
Residential mortgage | 4,567 | 4,140 | 3,727 | 3,086 | 2,669 |
Installment | 60 | 18 | 12 | 18 | 28 |
Total nonperforming loans | 18,763 | 18,494 | 13,808 | 13,526 | 14,456 |
Commercial real estate owned | 3,904 | 3,627 | 3,683 | 3,198 | 1,463 |
Residential real estate owned | 321 | 246 | 547 | 501 | 714 |
Total OREO | 4,225 | 3,873 | 4,230 | 3,699 | 2,177 |
Other repossessed assets | 6 | 0 | 0 | 0 | 442 |
Investment security (Trust Preferred) | 0 | 0 | 136 | 140 | 211 |
Total nonperforming assets | $ 22,994 | $ 22,367 | $ 18,174 | $ 17,365 | $ 17,286 |
CRE and Construction nonperforming loan detail: |
|
|
|
|
|
Owner occupied | $ 5,618 | $ 5,337 | $ 5,488 | $ 6,259 | $ 6,745 |
Non-owner occupied | 4,342 | 3,606 | 1,443 | 1,483 | 3,216 |
Commercial real estate | $ 9,960 | $ 8,943 | $ 6,931 | $ 7,742 | $ 9,961 |
1-4 family construction | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
All other construction | 2,777 | 4,325 | 2,644 | 1,523 | 1,235 |
Real estate construction | $ 2,777 | $ 4,325 | $ 2,644 | $ 1,523 | $ 1,235 |
39
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 June 30, 2011, potential problem loans totaled $5,206, down from $11,967 at December 31, 2010. The decrease in potential problem loans since year-end 2010 is due to a $2,305 decrease in residential mortgage, a $1,890 decrease in commercial real estate, a $1,767 decrease in real estate construction, and a $600 decrease in commercial business 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 Companys customers and on underlying real estate values.
Deposits
Deposits represent the Companys largest source of funds. At June 30, 2011 total deposits were $379,785, down $20,825 from year-end 2010. Core deposits comprised 95.4% of the deposit portfolio at June 30, 2011 compared to 93.3% at December 31, 2010. Brokered certificates of deposit were 4.6% of the deposit portfolio at June 30, 2011 down from 6.7% at December 31, 2010. The change in the mix within deposits and brokered certificates of deposit represents the Companys strategy to grow core deposits and rely less on noncore funding sources.
Table 12: Deposit Distribution
| June 30, | % of | December 31, | % of |
| 2011 | total | 2010 | total |
| ($ in thousands) | |||
Noninterest-bearing demand deposits | $ 60,182 | 16% | $ 60,446 | 15% |
Interest-bearing demand deposits | 33,417 | 9% | 39,462 | 10% |
Savings deposits | 115,115 | 30% | 114,515 | 29% |
Time deposits | 153,639 | 40% | 159,201 | 39% |
Brokered certificates of deposit | 17,432 | 5% | 26,986 | 7% |
Total | $ 379,785 | 100% | $ 400,610 | 100% |
The retail markets we compete in are continuously influenced by economic conditions, competitive pressure from other financial institutions, and other investment alternatives available to our customers. A stipulation of the written agreement between the Bank and 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.
Contractual Obligations
We are party to various contractual obligations requiring use of funds as part of our normal operations. The table below outlines the principal amounts and timing of these obligations, excluding amounts due for interest, if applicable. Most of these obligations are routinely refinanced into a similar replacement obligation. However, renewal of these obligations is dependent on our ability to offer competitive interest rates, or the availability of collateral for pledging purposes.
40
Table 13: Contractual Obligations
| Payments due by period | ||||
| Total | < 1year | 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 | 30,061 | 0 | 15,000 | 15,061 | 0 |
Total long-term borrowing obligations | $ 50,371 | $ 0 | $ 15,000 | $ 25,061 | $ 10,310 |
Liquidity
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 Companys 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 2011 or 2010. Also, as discussed in the Capital section the Companys written agreement with the Federal Reserve Bank of Minneapolis (Federal Reserve Bank), and the Banks written agreement with the Federal Deposit Insurance Corporation (FDIC) and Wisconsin Department of Financial Institutions (DFI) places restrictions on the payment of dividends from the Bank to the Company without prior approval from our regulators.
Investment securities are an important tool to the Companys liquidity objective. All investment securities are classified as available-for-sale and are reported at fair value on the consolidated balance sheet. Approximately $62,378 of the $108,919 investment securities portfolio on hand at June 30, 2011, 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. Factors affecting liquidity relative to loans are loan renewals, origination volumes, prepayment rates, and maturity of the existing loan portfolio. The Banks liquidity position is influenced by changes in interest rates, economic conditions, and competition. Conversely, loan demand 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.
41
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 the level of dividends available to shareholders. It is managements intent to maintain an optimal capital and leverage mix for growth and for shareholder return. Management believes that both the Company and Bank had a strong capital base at June 30, 2011.
On November 9, 2010, the Bank entered into a formal written agreement with the FDIC and the DFI. 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. As of June 30, 2011, the tier 1 risk-based capital ratio, total risk-based capital (tier 1 and tier 2) ratio, and tier 1 leverage ratio for both the Company and the Bank were in excess of regulatory minimum requirements, as well as the heightened requirements as set forth in the Banks written agreement with the FDIC and DFI.
On October 14, 2008, the U.S. Department of the Treasury (Treasury) announced details of the Capital Purchase Plan (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. 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 (together with the Series A Preferred stock, the TARP 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 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 $10,000 of the TARP Preferred Stock qualify as Tier 1 Capital for regulatory purposes at the Company.
42
Table14: Capital Ratios
|
|
| To Be Well Capitalized | |||
|
| For Capital Adequacy | Under Prompt Corrective | |||
| Actual | Purposes (1) | Action Provisions (2) | |||
| Amount | Ratio | Amount | Ratio | Amount | Ratio |
| ($ in thousands) | |||||
June 30, 2011 |
|
|
|
|
|
|
Mid-Wisconsin Financial Services, Inc. |
|
|
|
|
|
|
Tier 1 to average assets | $ 47,890 | 10.0% | $ 19,510 | 4.0% |
|
|
Tier 1 risk-based capital ratio | 48,790 | 14.1% | 13,853 | 4.0% |
|
|
Total risk-based capital ratios | 53,179 | 15.4% | 27,705 | 8.0% |
|
|
Mid-Wisconsin Bank |
|
|
|
|
|
|
Tier 1 to average assets | $ 42,984 | 8.9% | $ 19,378 | 4.0% | $ 41,179 | 8.5% |
Tier 1 risk-based capital ratio | 42,984 | 12.5% | 13,730 | 4.0% | 20,595 | 6.0% |
Total risk-based capital ratios | 47,335 | 13.8% | 27,460 | 8.0% | 41,189 | 12.0% |
|
|
|
|
|
|
|
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% |
(1) The Bank has agreed with the FDIC and DFI that, until its formal written agreement with such parties is no longer in effect, | ||||||
it will 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 Companys 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. Pursuant to the agreement with the FDIC and DFI, the Bank needs the written consent of the regulators to pay dividends to the Company. The Bank has not paid dividends to the Company since 2006. Additionally, on May 10, 2011, the Company entered into a formal written agreement with the Federal Reserve Bank of Minneapolis. Pursuant to the written agreement at the holding company level, the Company needs the written consent of the Federal Reserve Bank of Minneapolis to pay dividends to our stockholders. We are also prohibited from paying dividends on our common stock if we fail to make distributions or required payments on our junior subordinated debentures (the Debentures) or on our TARP Preferred Stock. In consultation with the Federal Reserve Bank of Minneapolis, on May 12, 2011, the Company exercised its rights to suspend dividends on the outstanding TARP Preferred Stock and has also elected to defer interest on the debentures. Under the terms of the Debentures, the Company is allowed to defer payments of interest for 20 quarterly periods without default or penalty, but such amounts will continue to accrue. Also during the deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the TARP Preferred Stock. Dividend payments on the TARP Preferred Stock may be deferred without default, but the dividend is cumulative and therefore will continue to accrue and, if the Company fails to pay dividends for an aggregate of six quarters, whether or not consecutive, the holder will have the right to appoint representatives to the Companys board of directors. The terms of the TARP Preferred Stock also prevent the Company from paying cash dividends on or repurchasing its common stock while dividends are in arrears. Therefore, the Company will not be able to pay dividends on its common stock until it has fully paid all accrued and unpaid dividends on the Debentures and the TARP Preferred Stock. On June 30, 2011, the Company had $204 accrued and unpaid dividends on the TARP Preferred Stock and $54 accrued and unpaid interest due on the Debentures.
43
Quarter ended June 30, 2011 compared to June 30, 2010
The Company reported net loss available to common shareholders of $862, or $0.52 per common share, for the three months ended June 30, 2011, compared to net income available to common shareholders of $168, or $0.10 per common share, for the corresponding period in 2010. Current quarterly earnings decreased $280 due to decreased net interest income, decreased $945 from increased provision for loan losses, and decreased $288 from decreased noninterest income and $192 from increased noninterest expense. Second quarter 2010 earnings included a $168 gain on sale of investments.
Taxable equivalent net interest income for the second quarter of 2011 was $3,923, $271 lower than second quarter 2010. Changes in the rate environment and product pricing decreased net interest income by $151, while changes in balance sheet volume and mix decreased taxable equivalent net interest income by $120. The net interest margin was 3.37% at June 30, 2011, compared to 3.52% at June 30, 2010.
Average earning assets of $466,317 for the second quarter 2011 were $11,188 lower than the comparable quarter last year. Average federal funds sold and securities purchased with agreements to resell grew $8,646 to $18,838, reflecting the Companys increased liquidity position and soft loan demand. Average loans decreased $21,891 to $336,330. On the funding side, average interest-bearing deposits were down $21,248, while average noninterest-bearing deposits increased $9,050. Total average borrowings increased $1,734 to $52,749.
The provision for loan losses for the second quarter 2011 was $1,900, compared to $955 in the comparable period in 2010. Net charge-offs were $2,383 in the second quarter 2011 and $1,473 in the second quarter 2010. The increase in net charge-offs between the comparable June periods was mainly attributable to managements decision, made in consultation with the banking regulators, to charge-off certain impaired loans that were covered by specific reserve allocations identified in the ALLL. Total nonperforming loans of $18,763, or 5.46% of total loans, at June 30, 2011 increased from $14,456, or 4.11% of total loans at June 30, 2010. The ratio of allowance for loan and lease losses to total loans at June 30, 2011 was 2.68%, compared to 2.38% at June 30, 2010.
Total noninterest income for the quarter ended June 20, 2011was $932 compared to $1,220 during the June 2010 quarter, a decrease of $288 or 23.6%. The decrease was due to a $65 decrease in customer overdraft fees due to regulatory changes, a $20 decrease in trust service fees, and a $64 decrease in mortgage banking income. Residential refinancing activity was higher in the second quarter 2010 due to low interest rates. The June 2010 quarterly earnings also included a $168 gain on sale of mortgage-related investment securities, while no such gains were recognized in the 2011 period.
Noninterest expenses totaled $4,137 during the June 2011 quarter compared to $3,945 during the prior June 2010 quarter, an increase of $192, or 4.9%. Legal and professional fees of $224 increased $40, primarily due to higher legal costs associated with loan collection in 2011. An increase in FDIC expense of $55 was primarily due to increased deposit insurance rates. Other operating expenses increased $151 compared to the June 2010 quarter, primarily due to increased marketing costs and deposit product expenses associated with the introduction of a new deposit program implemented in the first quarter of 2011 and loan servicing costs. Offsetting these increases were a $9 decrease in salaries and employee benefits and a $43 decrease in occupancy expense. The decrease in salaries and employee benefits is primarily attributable to a decline in health and life insurance expenses of $26 resulting from the reduced number of employees covered under the plans, offset by increases in performance-based incentives and related payroll taxes of $18. Occupancy expense decreased $43, or 9.2%, due to the gain recognized on the sale of the Banks branch located in Lake Tomahawk, Wisconsin in the second quarter 2011, that offset the increased costs of building maintenance and utility costs. The Company closed the Banks branch located in Lake Tomahawk, Wisconsin on February 1, 2011.
44
Table 12: Summary Results of Operations
($ in thousands, except per share data)
|
| Three Months Ended, |
|
| |||||
| June 30, | March 31, | December 31, | September 30, | June 30, | ||||
| 2011 | 2011 | 2010 | 2010 | 2010 | ||||
Results of operations: |
|
|
|
|
| ||||
Interest income | $ 5,519 | $ 5,645 | $ 6,018 | $ 6,196 | $ 6,391 | ||||
Interest expense | 1,663 | 1,761 | 2,004 | 2,175 | 2,255 | ||||
Net interest income | 3,856 | 3,884 | 4,014 | 4,021 | 4,136 | ||||
Provision for loan losses | 1,900 | 1,050 | 1,500 | 900 | 955 | ||||
Net interest income after provision for loan losses | 1,956 | 2,834 | 2,514 | 3,121 | 3,181 | ||||
Noninterest income | 932 | 1,477 | 1,876 | 1,467 | 1,220 | ||||
Other-than-temporary impairment losses, net | 0 | 0 | 0 | 412 | 0 | ||||
Noninterest expenses | 4,137 | 4,174 | 4,085 | 3,993 | 3,945 | ||||
Income (loss) before income taxes | (1,249) | 137 | 305 | 183 | 456 | ||||
Income tax expense (benefit) | (549) | (3) | 65 | 21 | 128 | ||||
Net income (loss) | (700) | 140 | 240 | 162 | 328 | ||||
Preferred stock dividends, discount, and premium | (162) | (160) | (160) | (160) | (160) | ||||
Net income (loss) available to common equity | ($862) | ($20) | $ 80 | $ 2 | $ 168 | ||||
Earnings (loss) per common share: |
|
|
|
|
| ||||
Basic and diluted | ($0.52) | ($0.01) | $ 0.05 | $ 0.00 | $ 0.10 | ||||
Cash dividends per common share | $ 0.00 | $ 0.00 | $ 0.00 | $ 0.00 | $ 0.00 | ||||
Weighted average common shares outstanding: |
|
|
|
|
| ||||
Basic and diluted | 1,653 | 1,652 | 1,651 | 1,650 | 1,649 | ||||
SELECTED FINANCIAL DATA |
|
|
|
|
| ||||
Period-End Balances: |
|
|
|
|
| ||||
Loans | $ 343,842 | $ 334,836 | $ 339,170 | $ 344,197 | $ 351,346 | ||||
Total assets | 487,959 | 502,045 | 509,082 | 503,724 | 501,496 | ||||
Deposits | 379,785 | 394,214 | 400,610 | 393,230 | 390,583 | ||||
Stockholders' equity | 43,070 | 42,937 | 42,970 | 44,245 | 44,301 | ||||
Book value per common share | $ 19.86 | $ 19.81 | $ 19.85 | $ 20.65 | $ 20.71 | ||||
Average Balance Sheet |
|
|
|
|
| ||||
Loans | $ 336,330 | $ 339,737 | $ 350,559 | $ 352,928 | $ 358,221 | ||||
Total assets | 491,361 | 501,359 | 507,098 | 506,711 | 503,767 | ||||
Deposits | 382,859 | 391,976 | 395,411 | 393,291 | 395,057 | ||||
Short-term borrowings | 10,298 | 10,209 | 11,088 | 12,972 | 8,454 | ||||
Long-term borrowings | 42,451 | 42,561 | 42,561 | 42,561 | 42,561 | ||||
Stockholders' equity | 43,140 | 43,019 | 44,037 | 44,340 | 43,848 | ||||
Financial Ratios: |
|
|
|
|
| ||||
Return on average equity | -8.01% | -0.19% | 0.72% | 0.02% | 1.54% | ||||
Return on average common equity | -10.53% | -0.25% | 0.94% | 0.02% | 2.00% | ||||
Average equity to average assets | 8.78% | 8.58% | 8.68% | 8.75% | 8.70% | ||||
Common equity to average assets | 6.69% | 6.53% | 6.47% | 6.73% | 6.70% | ||||
Net interest margin (1) | 3.37% | 3.36% | 3.38% | 3.38% | 3.52% | ||||
Total risk-based capital | 15.36% | 15.69% | 15.46% | 15.10% | 14.93% | ||||
Net charge-offs to average loans | 0.71% | 0.24% | 0.23% | 0.14% | 0.41% | ||||
Nonperforming loans to total loans | 5.46% | 5.52% | 4.07% | 3.93% | 4.11% | ||||
Efficiency ratio (1) | 85.21% | 76.94% | 68.63% | 79.37% | 72.86% | ||||
Net interest income to average assets (1) | 0.78% | 0.77% | 0.79% | 0.79% | 0.82% | ||||
Noninterest income to average assets | 0.19% | 0.29% | 0.37% | 0.29% | 0.24% | ||||
Noninterest expenses to average assets | 0.84% | 0.83% | 0.81% | 0.79% | 0.78% | ||||
Stock Price Information (2) |
|
|
|
|
| ||||
High | $ 10.00 | $ 8.05 | $ 7.85 | $ 9.50 | $ 11.00 | ||||
Low | 7.77 | 7.80 | 7.80 | 7.85 | 9.00 | ||||
Market price at quarter end | 7.77 | 8.00 | 7.80 | 7.85 | 9.50 | ||||
|
|
|
|
|
| ||||
(1) Fully taxable-equivalent basis, assuming a Federal tax rate of 34% and adjusted for the disallowance of interest expense. |
| ||||||||
(2) Bid price |
|
|
|
|
|
45
Legislation Impacting the Financial Services Industry
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which is perhaps the most significant financial reform since the Great Depression. While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also contains many provisions which will affect smaller institutions such as the Company in substantial and unpredictable ways. Consequently, compliance with the Acts provisions may curtail the Companys revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Companys business or financial results in the future. The Companys management is actively reviewing the provisions of the Act and assessing its probable impact on the Companys business, financial condition, and result of operations. However, because many aspects of the Act remain subject to future rulemaking, much of which has been delayed, it is difficult to precisely anticipate its ultimate overall financial impact on the Company and the Bank.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
ITEM 4. 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 Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of, such evaluation, the President and Chief Executive Officer and the Principal Accounting Officer concluded that our disclosure controls and procedures were effective with respect to timely communication to them and other members of management responsible for preparing periodic reports and material information required to be disclosed in this report as it relates to us and our subsidiaries.
In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that management necessarily was required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that the disclosure controls and procedures currently in place provide reasonable assurance of achieving our control objectives.
There were no changes in the internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may be involved from time to time in various routine legal proceedings incidental to our business. We do not believe there are any threatened or pending legal proceedings against us or our subsidiaries that, if determined adversely, would have a material adverse effect on our results of operation or financial condition.
46
ITEM 1A. RISK FACTORS
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. [REMOVED AND RESERVED]
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number
Description
10.1
Written Agreement by and between the Company and the Federal Reserve Bank of Minneapolis dated May 10, 2011 (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011)
31.1
Certification of CEO (Principal Executive Officer) pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2
Certification of Principal Accounting Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32.1
Certification of CEO (Principal Executive Officer) and Principal Accounting Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101*
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at June 30, 2011 and December 31, 2010; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2011 and June 30, 2010; (iii) Consolidated Statements of Changes in Stockholders Equity for the six months ended June 30, 2011; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
* As provided in Rule 406T of Regulation S-T, this information shall not be deemed filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under those sections.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: August 15, 2011
/s/ JAMES F. WARSAW
James F. Warsaw
President and Chief Executive Officer
Date: August 15, 2011
/s/ RHONDA R. KELLEY
Rhonda R. Kelley
Principal Accounting Officer
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the quarterly period ended June 30, 2011
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. §232.102(d))
The following exhibits are filed as part this report:
10.1
Written Agreement by and between the Company and the Federal Reserve Bank of Minneapolis dated May 10, 2011 (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011)
31.1
Certification of CEO (Principal Executive Officer) pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2
Certification of Principal Accounting Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32.1
Certification of CEO (Principal Executive Officer) and Principal Accounting Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101*
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at June 30, 2011 and December 31, 2010; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2011 and June 30, 2010; (iii) Consolidated Statements of Changes in Stockholders Equity for the six months ended June 30, 2011; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
* As provided in Rule 406T of Regulation S-T, this information shall not be deemed filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under those sections.
48