FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 (IRS Employer Identification No.)
incorporation or organization)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-4364
(Registrant's telephone number, including area code)
(Former name, former address & former fiscal year, if changed since last report)
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 X No
As of June 30, 1998 there were 1,857,827 shares of $.10 par value common stock
outstanding.
<PAGE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three Months Ended June 30, 1998 and June 30, 1997
and Six Months Ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and June 30, 1997 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 11-13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15-17
Item 6. Exhibits and Reports of Form 8-K 18
Signatures 19
Exhibit Index 20
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS $12,019,698 $9,521,270
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS 19,888 21,260
FEDERAL FUNDS SOLD 1,703,000 4,616,000
INVESTMENT SECURITIES AVAILABLE FOR SALE -AT FAIR VALUE 58,126,749 54,256,192
LOANS HELD FOR SALE 498,800 1,169,350
LOANS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES OF 191,129,819 185,015,272
$2,154,163 IN 1998 AND $1,990,090 IN 1997 (2,154,163) (1,990,090)
NET LOANS 188,975,656 183,025,182
ACCRUED INTEREST RECEIVABLE 2,056,934 1,620,973
PREMISES AND EQUIPMENT 5,453,732 5,505,984
GOODWILL AND PURCHASED INTANGIBLES 2,633,557 2,787,410
OTHER ASSETS 1,260,692 1,151,940
TOTAL ASSETS $272,748,706 $263,675,561
LIABILITIES AND STOCKHOLDERS' EQUITY
NONINTEREST-BEARING DEPOSITS $26,760,001 $25,625,169
INTEREST-BEARING DEPOSITS 188,690,298 185,524,289
TOTAL DEPOSITS 215,450,299 211,149,458
SHORT-TERM BORROWINGS 17,019,631 16,078,523
LONG TERM BORROWINGS 8,400,000 5,400,000
ACCRUED EXPENSES AND OTHER LIABILITIES 3,197,811 3,180,423
TOTAL LIABILITIES 244,067,741 235,808,404
STOCKHOLDERS' EQUITY:
COMMON STOCK-PAR VALUE $.10 PER SHARE:
AUTHORIZED - 6,000,000 SHARES IN 1998 & 1997
ISSUED & OUTSTANDING - 1,857,827 SHARES IN 1998 185,783
- 1,864,122 SHARES IN 1997 186,412
ADDITIONAL PAID-IN CAPITAL 12,605,396 12,653,703
RETAINED EARNINGS 15,533,458 14,678,785
UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAX 356,328 348,257
TOTAL STOCKHOLDERS' EQUITY 28,680,965 27,867,157
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $272,748,706 $263,675,561
<FN>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
<S> <C> <C> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS $4,352,661 $4,138,359 $8,577,658 $8,109,572
INTEREST ON INVESTMENT SECURITIES:
TAXABLE 761,192 799,666 1,531,941 1,623,669
TAX-EXEMPT 135,883 102,299 264,798 195,542
OTHER INTEREST INCOME 38,951 20,851 75,416 56,143
TOTAL INTEREST INCOME 5,288,687 5,061,175 10,449,813 9,984,926
INTEREST EXPENSE
DEPOSITS 2,222,671 2,039,375 4,397,534 4,107,767
U.S. REPURCHASE AGREEMENTS 221,314 284,223 430,842 465,030
LONG-TERM BORROWINGS 96,205 93,821 185,659 173,543
TOTAL INTEREST EXPENSE 2,540,190 2,417,419 5,014,035 4,746,340
NET INTEREST INCOME 2,748,497 2,643,756 5,435,778 5,238,586
PROVISION FOR CREDIT LOSSES 120,000 30,000 210,000 60,000
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 2,628,497 2,613,756 5,225,778 5,178,586
OTHER INCOME:
SERVICE FEES 181,707 151,494 338,640 300,905
TRUST SERVICE FEES 125,001 118,500 237,060 227,954
NET REALIZED GAIN ON SALE OF SECURITIES AVAILABLE FOR SALE - 14,369 - 14,369
INVESTMENT PRODUCT COMMISSIONS 69,176 65,173 152,911 116,524
OTHER FEE INCOME 134,438 90,118 240,042 177,528
OTHER OPERATING INCOME 19,904 247,692 66,269 276,760
TOTAL OTHER INCOME 530,226 687,346 1,034,922 1,114,040
OPERATING EXPENSES:
SALARIES 808,485 747,494 1,608,672 1,437,641
EMPLOYEE BENEFITS 277,499 266,641 568,528 538,649
OCCUPANCY 334,957 319,090 688,627 647,338
FDIC DEPOSIT INSURANCE PREMIUMS 6,550 6,578 12,937 12,307
NET REALIZED LOSS ON SALE OF SECURITIES AVAILABLE FOR SALE - - - -
OTHER OPERATING 538,078 509,344 1,085,016 935,745
TOTAL OPERATING EXPENSES 1,965,569 1,849,147 3,963,780 3,571,680
INCOME BEFORE INCOME TAXES 1,193,154 1,451,955 2,296,920 2,720,946
PROVISION FOR INCOME TAXES 387,282 508,583 747,054 948,906
INCOME $805,872 $943,372 $1,549,866 $1,772,040
BASIC AND DILUTED EARNINGS PER SHARE $0.43 $0.50 $0.83 $0.94
CASH DIVIDENDS DECLARED PER SHARE $0.15 $0.15 $0.15 $0.15
<FN>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<CAPTION>
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $1,549,866 $1,772,040
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR DEPRECIATION AND NET AMORTIZATION 480,451 374,793
PROVISION FOR CREDIT LOSSES 210,000 60,000
PROCEEDS FROM SALES OF LOANS HELD FOR SALE 3,613,370 2,088,525
ORIGINATIONS OF LOANS HELD FOR SALE (2,078,720) (2,308,525)
(GAIN) LOSS ON SALE OF INVESTMENT SECURITIES - (14,186)
(GAIN) LOSS ON EQUIPMENT DISPOSALS 2,716
(GAIN) LOSS ON SALE OF OTHER REAL ESTATE - 24,092
CHANGES IN OPERATING ASSETS AND LIABILITIES:
OTHER ASSETS (338,171) (181,076)
OTHER LIABILITIES 17,389 (136,188)
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,456,901 1,679,475
CASH FLOWS FROM INVESTING ACTIVITIES:
AVAILABLE FOR SALE SECURITIES:
PROCEEDS FROM SALES - 534,836
PROCEEDS FROM MATURITIES: 10,712,925 5,979,345
PAYMENT FOR PURCHASES (14,553,251) (6,687,229)
NET (INCREASE) DECREASE IN LOANS (7,203,791) (5,176,316)
NET (INCREASE) DECREASE IN INTEREST-BEARING DEPOSITS
IN OTHER INSTITUTIONS 1,372 (5,004)
NET (INCREASE) DECREASE IN FED FUNDS SOLD 2,913,000 (340,000)
CAPITAL EXPENDITURES (326,551) (613,370)
PROCEEDS FROM SALE OF OTHER REAL ESTATE - 250,384
NET CASH USED IN INVESTING ACTIVITIES (8,456,295) (6,057,354)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET INCREASE IN NONINTEREST-BEARING DEPOSITS 1,134,832 (590,136)
NET INCREASE IN INTEREST-BEARING DEPOSITS 3,166,009 (2,475,652)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 13,440 25,086
PAYMENT FOR REPURCHASE OF COMMON STOCK (199,275) (47,150)
NET INCREASE (DECREASE) IN SHORT-TERM BORROWING 941,108 5,181,095
PROCEEDS FROM ISSUANCE OF LONG-TERM BORROWINGS 3,000,000 1,000,000
DIVIDENDS PAID (558,292) (559,888)
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,497,822 2,533,355
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,498,428 (1,844,524)
CASH AND CASH EQUIVALENTS AT BEGINNING 9,521,270 13,734,886
CASH AND CASH EQUIVALENTS AT END $12,019,698 $11,890,362
SUPPLEMENTAL CASH FLOW INFORMATION: 1998 1997
CASH PAID DURING THE YEAR FOR:
INTEREST $5,110,191 $4,619,453
INCOME TAXES $715,025 $905,025
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
LOANS TRANSFERRED TO OTHER REAL ESTATE $179,576 $100,000
LOANS CHARGED OFF $69,638 $113,424
<FN>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
</TABLE>
<PAGE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
The consolidated balance sheet as of June 30, 1998, and the consolidated
statements of income for the three month periods ended June 30, 1998 and 1997,
and the six month periods ended June 30, 1998 and 1997, and the consolidated
statements of cash flows for the six month periods ended June 30, 1998 and 1997,
have been prepared by the company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in
financial position for the unaudited interim period have been made.
The Company is not aware of any known trends, events, or uncertainties
that will have or that are reasonably likely to have a material effect on the
Company's liquidity, capital resources, or operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes included in the Company's December 31, 1997, annual report to the
Shareholders. The results of operations for the interim period are not
necessarily indicative of the results to be expected for the entire year.
NOTE 2 - INVESTMENT SECURITIES
All investment securities are held as available for sale. The book value
and market value of investment securities are summarized as follows:
<TABLE>
BOOK VALUE and MARKET VALUE
<CAPTION>
June 30, 1998 December 31, 1997
<S> <C> <C>
U.S. Treasury securities and obligations
of other U.S. Govt agencies & corp $16,703,319 $15,756,976
Mortgage Backed Securities 28,040,741 25,266,862
Oblig. to states & political subdivisions 11,529,318 10,355,359
Corporate Securities 779,640 1,689,391
Equity Securities 1,073,731 1,187,604
Totals $58,126,749 $54,256,192
</TABLE>
Included in the totals of Investment Securities at June 30, 1998, are
unrealized gains of $546,329 on debt securities classified as available for
sale. The net of tax unrealized holding gain of $356,328 on securities
classified as available-for-sale is reflected in stockholders' equity.
Securities with an approximate carrying value of $28,928,149 and
$32,889,744 at June 30, 1998 and December 31, 1997, respectively, were pledged
primarily to secure public deposits and for other purposes required by law.
There are no securities of any one issuer that exceed ten percent of
stockholder's equity.
<PAGE>
Note 3 - LOANS
Loans outstanding increased 3.30% for the six months ended June 30, 1998;
increasing from $185,015,272 at December 31, 1997, to $191,129,819 at June 30,
1998.
The composition of loans at June 30, 1998, and December 31, 1997, follows:
<TABLE>
<CAPTION>
June 30 % of Dec. 31 % of
(Dollars in Thousands) 1998 total 1997 total
<S> <C> <C> <C> <C>
Commercial and financial $32,283 16.89% $26,943 14.56%
Construction Loans 2,821 1.48% 1,700 0.92%
Agricultural 34,330 17.96% 34,952 18.89%
Real estate 109,206 57.14% 108,360 58.57%
Installment 12,121 6.34% 12,642 6.83%
Lease financing 369 0.19% 418 0.23%
Total loans $191,130 100.00% $185,015 100.00%
</TABLE>
The composition of loans in the loan portfolio shows an increase in
commercial and financial and real estate loans at June 30, 1998. The bank
continues to sell loans in the secondary market, which will provide funds for
liquidity needs and continue to provide service to customers in its market
area.
Mid-Wisconsin's process for monitoring loan quality includes monthly
analysis of delinquencies, non-performing assets, and potential problem loans.
Loans are placed on a nonaccrual status when they become contractually past due
90 days or more as to interest or principal payments. All interest accrued but
not collected for loans (including applicable impaired loans) that are placed on
nonaccrual or charged off is reversed to interest income. The interest on these
loans is accounted for on the cash basis until qualifying for return to accrual
status. Loans are returned to accrual status when all the principal and
interest amounts contractually due have been collected and there is reasonable
assurance that repayment will continue within a reasonable time
frame.
A loan is considered impaired when, based on current information, it is
probable that the bank will not collect all amounts due in accordance with the
contractual terms of the loan agreement. Impairment is based on discounted cash
flows of expected future payments using the loan's initial effective interest
rate or the fair value of the collateral if the loan is collateral dependent.
Smaller balance homogeneous loans that are collectively evaluated for impairment
include certain smaller balance commercial and agricultural loans, residential
real estate loans, and credit card loans.
<PAGE>
The company maintains generally high quality loans. The following table
shows the amount of non-performing assets and other real estate owned as of the
dates indicated.
<TABLE>
<CAPTION>
Risk-element loans June 30 % of total Dec. 31 % of total
(dollars in thousands) 1998 loans 1997 loans
<S> <C> <C> <C> <C>
Non-accrual, past due,
and restructured loans $1,820 0.95% $1,238 0.67%
Potential problem loans 101 0.05% 161 0.09%
Foreign outstandings
0.00% 0.00%
Total risk-element loans $1,921 1.00% $1,399 0.76%
</TABLE>
Included above are $672,638 of impaired loans (.352%) in non-accrual
status at June 30, 1998. In addition, there are impaired loans of $100,506
(.053%) which management has considered in the allowance for credit losses. The
average balance of impaired loans during the first six months of 1998 was
$673,708. The impaired loans with an aggregate outstanding balance of $773,144
are based on fair value of the collateral of the loans, as these loans are
collateral dependent.
Total non-performing assets (loans and other real estate) increased during
the three months ended June 30, 1998. As a percentage of total outstanding
loans, the non-performing assets increased .24% to 1.00% at June 30, 1998, from
.76% at December 31, 1997.
The aggregate amount of non-performing assets was approximately $1,921,000
and $1,399,000 at June 30, 1998, and December 31, 1997, respectively.
Non-performing assets are those which are either contractually past due 90 days
or more as to interest or principal payments, on a nonaccrual status, or the
terms of which have been renegotiated to provide a reduction or deferral of
interest or principal. If nonaccrual and renegotiated loans had been current or
not troubled, $61,924 of interest income would have been recorded for the three
months ended June 30, 1998. Interest income actually collected and recorded was
$34,323.
Management is not aware of any additional loans that represent material
credits or of any information which causes management to have serious doubts as
to the ability of such borrowers to comply with the loan repayment terms.
On January 1, 1997, Mid-Wisconsin adopted Statement of Financial
Accounting Standards No. 122 (SFAS122), "Accounting for Mortgage Servicing
Rights". The adoption of SFAS No. 122 did not have a significant impact on the
Company's financial condition or results of operations.
<PAGE>
An analysis of the allowance for credit losses for the period ended
June 30, 1998, and December 31, 1997 follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, 1998 Dec. 31, 1997
<S> <C> <C>
Allowance for credit losses at
beginning of period $1,990 $2,031
Provision Charged to Operating Expense 210 140
Recoveries on Loans 24 64
Loans Charged off (70) (245)
Allowance for losses at end of period $2,154 $1,990
</TABLE>
NOTE 4 - EARNINGS PER SHARE
Earnings per common share are based upon the weighted average number of
common shares outstanding which includes the common stock equivalents applicable
to shares issuable under the stock options granted. The weighted number of
shares outstanding were 1,862,642 for the three months ended June 30, 1998, and
1,872,694 for the three months ended June 30, 1997.
<PAGE>
SELECTED FINANCIAL DATA
The following table presents consolidated financial data of Mid-Wisconsin
Financial Services, Inc. and subsidiary. This information and the following
discussion and analysis should be read in conjunction with other financial
information presented elsewhere in this report.
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
(Dollars in thousands, 1998 1997
except per share amounts) Second First Fourth Third Second
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS:
Earnings and Dividends:
Net interest revenue $2,748 $2,687 $2,793 $2,767 $2,644
Provision for credit losses 120 90 50 30 30
Other operating revenue 530 505 695 449 687
Other operating expense 1,966 1,998 2,199 1,785 1,849
Net income 806 744 819 916 943
Per common share
Net income 0.43 0.40 0.44 0.49 0.50
Dividends declared 0.15 0.15 0.30 0.15 0.15
Stockholders' equity 15.44 15.17 14.95 14.79 14.42
Average common shares (000's) 1,863 1,863 1,868 1,871 1,873
Dividend payout ratio 34.58% 37.58% 68.28% 30.57% 29.69%
Balance Sheet Summary:
At quarter end:
Loans net of unearned income 191,130 183,330 $183,025 $183,159 $180,108
Assets 272,749 267,064 263,676 259,224 255,649
Deposits 215,450 212,091 185,524 203,753 199,346
Shareholders equity 28,681 28,180 27,867 27,508 26,895
Average balances:
Loans net of unearned income 188,710 184,701 185,095 181,390 176,480
Assets 269,261 264,376 263,747 254,216 250,278
Deposits 213,037 186,277 183,229 195,609 192,570
Shareholders equity 28,274 27,927 27,521 26,993 26,133
Performance Ratios:
Return on average assets 1.20% 1.13% 1.24% 1.44% 1.51%
Return on average common equity 11.40% 10.66% 11.90% 13.57% 14.43%
Equity to assets 9.60% 9.62% 9.47% 10.30% 10.28%
Total risk-based capital 15.08% 15.15% 14.94% 14.72% 16.14%
Net loan charge-offs as a percentage
of average loans 0.01% 0.02% 0.05% 0.02% 0.01%
Nonperforming assets as a percentage
of loans and other real estate 1.00% 0.96% 0.76% 0.70% 0.77%
Net interest margin 4.53% 4.50% 4.56% 4.76% 4.61%
Efficiency ratio 61.29% 63.00% 62.44% 55.04% 55.75%
Fee revenue as a percentage of
average assets 0.19% 0.17% 0.18% 0.11% 0.11%
Stock Price Information:
High $28.00 $27.50 $27.25 $27.00 $25.50
Low 27.50 27.25 27.00 25.50 25.00
Market value at quarter end (1) 28.00 27.50 27.25 27.00 25.00
<FN>
(1) Market value at quarter end represents the average of bid and asked
prices.
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Management is not aware of any known trends, events, or uncertainties that
will have or that are reasonably likely to have a material effect on the
Company's liquidity, capital resources, or operations.
Deposits increased $4,300,841 during the six-month period endedJune 30,
1998. Non-interest bearing deposits increased $1,134,842 and interest bearing
deposits increased $3,166,009. The company's market area continues to be highly
rate competitive.
Loans increased $6,114,547 during the six month period ended June 30,
1998.
Investments increased $3,870,557 during the six month period ended June
30, 1998. The increase in investments was used primarily to satisfy pledging
requirements for municipal deposits.
LIQUIDITY
Mid-Wisconsin manages its liquidity to provide adequate funds to support
borrowing requirements and deposit flow of its customers. Management views
liquidity as the ability to raise cash at a reasonable cost or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of Mid-Wisconsin's
liquidity are marketable assets maturing within one year. At June 30, 1998, the
carrying value of debt securities maturing within one year amounted to
$7,308,799 or 12.81% of the total debt securities portfolio. Mid-Wisconsin
also holds $1,073,731 in marketable equity securities. Mid-Wisconsin attempts,
when possible, to match relative maturities of assets and liabilities, while
maintaining the desired net interest margin.
CAPITAL RESOURCES
As of June 30, 1998, shareholders' equity increased $813,808 to
$28,680,965 from $27,867,157 at December 31, 1997. This net increase is due to
retention of current year earnings and adjustments for unrealized gains or
losses. Net unrealized gains were $356,328 at June 30, 1998, and $348,257 at
December 31, 1997.
The primary capital to asset ratio was 9.64% as of June 30, 1998, compared
to 9.62% at December 31, 1997. The company's risk-based capital ratio for Tier
1 (core) amounted to 13.90% and total risk-based capital amounted to 15.06%.
This compares to Tier 1 (core) capital of 13.83% and total risk-based capital of
14.94% at December 31, 1997.
RESULTS OF OPERATIONS
The company's consolidated net income for the three months ended June 30,
1998, decreased $137,500 or 14.58% to $805,872 from $943,372 for the three
months ended June 30, 1997. Net interest income increased $104,741 during the
three months ended June 30, 1998, over the three months ended June 30, 1997.
<PAGE>
Return on average common stockholders' equity amounted to 11.40% for the
three months ended June 30, 1998; compared to 14.43% for the three months ended
June 30, 1997.
Return on average assets for the three months ended June 30, 1998,
amounted to 1.20%; compared to 1.51% for the three months ended June 30, 1997.
Net earnings per share amounted to $ .43 per share for the three months
ended June 30, 1998, compared to $ .50 for the three months ended
June 30, 1997. Cash dividends paid were $ .15 per share in June 1998 and 1997.
A third quarter cash dividend of $ .17 per share was declared in July, payable
to shareholders of record as of September 3, 1998.
PROVISION FOR CREDIT LOSSES
Management determines the adequacy of the allowance for credit losses
based on past loan experience, current economic conditions, composition of the
loan portfolio, and the potential for future loss. Accordingly, the amount
charged to expense is based on management's evaluation of the loan portfolio. It
is the Company's policy that when available information confirms that specific
loans and leases, or portions thereof, including impaired loans, are
uncollectible, these amounts are promptly charged off against the allowance. The
provision for credit losses was $120,000 for the three months ended June 30,
1998, and $30,000 for the three months ended June 30, 1997. The allowance for
credit losses as a percentage of gross loans outstanding was $2,154,163 or 1.13%
of total loans on June 30, 1998, compared to $2,045,352 or 1.13% of total loans
on June 30, 1997. Net charge-offs as a percentage of average loans outstanding
were .01% during the three months ended June 30, 1998 and 1997.
Non-performing loans are reviewed to determine exposure for potential loss
within each loan category. The adequacy of the allowance for credit losses is
assessed based on credit quality and other pertinent loan portfolio information.
The reserve for credit losses provided strong non-performing loan coverage,
decreasing to 112% at June 30, 1998 from 142% at December 31, 1997. The adequacy
of the reserve and the provision for credit losses is consistent with the
composition of the loan portfolio and recent credit quality history.
NET INTEREST INCOME
Net interest income is the most significant component in earnings. For
analysis purposes, interest earned on tax exempt assets is adjusted to a fully
taxable equivalent basis.
The net yield on interest earning assets shows the yield for the three
months ended June 30, 1998, to be 4.53%; compared to 4.61% for the three months
ended June 30, 1997. The average rate on earning assets increased slightly and
the average rate on interest bearing liabilities decreased. The company
continues efforts to increase net interest margin through the strategic pricing
of loans and deposits.
<PAGE>
NON-INTEREST INCOME
Non-interest income decreased 22.86% to $530,226 during the three months
ended June 30, 1998, from $687,346 during the three months ended June 30, 1997.
There were no security gains or losses during the three months ended
June 30,1998. Gains on securities available for sale during the three months
ended June 30, 1997 were $14,369. Fee income on deposit accounts increased
$30,213 to $181,707 during the three months ended June 30, 1998, from $151,494
during the three months ended June 30, 1997. Other fee income increased
$44,320 to $134,438 during the three months ended June 30, 1998 from $90,118
during the three months ended June 30, 1997. This increase is primarily from
origination fees on loans sold in the secondary market. Other operating income
decreased $227,778 during the three months ended June 30, 1998 over the three
months ended June 30, 1997. Other operating income of $247,692 for the three
months ended June 30, 1997 included income of $241,039 from the curtailment of
the Company's defined benefit pension plan.
NON-INTEREST EXPENSE
Non-interest expenses increased 6.30% to $1,965,569 for the three months
ended June 30, 1998, from $1,849,147 for the three months ended June 30, 1997.
There are no expenses included in other expenses that exceed 1% of total
interest and other income for either 1998 or 1997. The Company is expanding the
use of technology throughout its banks in order to provide increased customer
service and allow for more efficient consolidation of its operational areas.
Mid-Wisconsin has placed emphasis on increased productivity and standardization
of programs and procedures throughout all of its locations.
<PAGE>
PART II. OTHER INFORMATIION
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on April 28,
1998.
The matters voted upon, including the number of votes cast for, against,
or withhold, as well as the number of abstentions and broker non-votes, as to
each such matter were as follows:
<TABLE>
<CAPTION>
Matter Shares
<S> <C> <C> <C> <C> <C>
1. Election of Directors
Broker
For Against Withheld Abstain Non-Vote
(a) Norman A. Hatlestad 1,274,191 N/A 7,082 N/A 0
Broker
For Against Withheld Abstain Non-Vote
(b) Ronald D. Isaacson 1,274,191 N/A 6,482 N/A 0
Broker
For Against Withheld Abstain Non-Vote
(c) James F. Melvin 1,273,145 N/A 8,128 N/A 0
2. Approval of appointment
of independent auditors For Against Withheld Abstain Broker
for year ending Non-Vote
December 31, 1998 1,273,489 3,140 N/A 4,644 0
</TABLE>
<PAGE>
ITEM 5. Other Information
YEAR 2000 ISSUES
READINESS
The Company's assessment of the possible consequences of Year 2000 issues
on the Company's business, results of operations, or financial condition is not
complete, but is continuing in accordance with the Company's Year 2000 Project
Plan (the "Year 2000 Plan"). The Year 2000 Plan is based on FFIEC Interagency
Statement on "Year 2000 Project Management Awareness" (FIL-50-97) dated May 9,
1997, and the FFIEC Interagency Guidance report on "Year 2000 Risk" (FIL-29-98)
dated March 18, 1998. The Company's implementation of its Year 2000 Plan has
also relied upon additional FFIEC guidance in the form of "Year 2000 Testing
Guidance" (FIL-38-98) dated April 10, 1998, and "Year 2000 Contingency Planning
Guidance" (FIL-51-98) dated May 13, 1998. For this purpose, "Year 2000 issues"
or "Year 2000 problems", or words of similar import, refer to the potential for
failure of computer applications as a result of the failure of a program to
properly recognize the year 2000.
The Company's Year 2000 Plan has been split into five phases: awareness,
assessment, renovation, validation, and implementation. Under the direction of
the Company's Director of Information Technology, the Company's Technology
Committee is monitoring Year 2000 issues and implementing the Year 2000 Plan.
The Technology Committee meets at least bi-monthly to review the status of Year
2000 issues as they relate to the Company and the Technology Committee reports
to the Board of Directors at each of its meetings with respect to each phase of
the Year 2000 Plan and the Company's progress against established goals.
The initial assessment and inventory of all software, hardware,
interfaces, and other date sensitive systems was completed in June 1997. Year
2000 compliance audits were conducted by the FDIC in December 1997 and by an
independent third party in July 1998.
The Company does not build or customize any software programs and must
rely on its vendors to test programs and ensure Year 2000 compliance. All
vendors deemed "mission critical" by the Company have been contacted regarding
the Year 2000 compliance and have been informed that any programs not in
compliance by December 1998 will be replaced. Such vendors have submitted
letters stating that their software is or will be compliant within the specified
time frames. The Company will continue to monitor vendor certifications and take
other steps, as deemed appropriate to address Year 2000 issues, including
requesting vendor contract addenda regarding Year 2000 readiness, obtaining test
scripts to test systems or test results from an identical user, obtaining third
party audit of vendor systems, and obtaining analysis of vendor contingency
plans.
Inquiries have been made of the Company's key correspondent banks
requesting information on the status of their Year 2000 compliance.
Correspondent banks have submitted letters and information on an ongoing basis
regarding the steps being taken regarding Year 2000 readiness.
Surveys and letters were mailed to commercial customers in May 1998 to
inform them of the Company's status in regard to Year 2000 issues and to
determine the Year 2000 status of these customers. Commercial customers with
loans exceeding a threshold level and any other customers deemed likely to have
Year 2000 related problems are in the process of being contacted individually to
determine what effect, if any, Year 2000 problems may have on their indebtedness
to the Company. The Company has implemented an ongoing customer education
program regarding Year 2000 issues and posts Year 2000 information on its web
site at http://www.midwisc.com/year2000. The Company is continuing to monitor
the possible effect of Year 2000 issues on its customers.
<PAGE>
The Company has also reviewed its non-information technology systems, and
believes them to be Year 2000 compliant.
COSTS
Replacement of hardware and software which was identified as non-Year 2000
compliant began in early 1998. New hardware and software is certified by the
manufacturer or vendor as Year 2000 compliant and the cost of such equipment is
capitalized over its useful life. All other costs associated with Year 2000
issues are being expensed as incurred and have come from the information
technology budget or other related department budgets and have not caused a
reduction in net income. The estimated total cost of evaluation and compliance
with Year 2000 issues is not expected to be material.
RISKS
The Company does not believe that Year 2000 issues will have a material
adverse effect on the Company's results of operations, liquidity, or financial
condition. However, the risks to the Company associated with Year 2000 issues
are many. The banking system in the United States is highly regulated and
interdependent. The Company depends upon the Federal Reserve System and other
financial institutions to process a wide variety of financial transactions for
itself and its customers and as a source of credit. To a large extent, the
Company is dependent upon the activities of the various federal bank regulatory
agencies and their efforts to make certain that the U.S. banking and payments
system, as a whole, is Year 2000 compliant. While the Company believes that
such efforts will result in compliance by the banking system as a whole, it can
offer no assurance of that fact. If the banking system as a whole or
correspondent banks with which the company has material relationships are not
Year 2000 compliant, the Company could suffer a material adverse affect.
The Company also faces the risk that Year 2000 problems encountered by its
customers may result in significant losses to the Company as a result of the
inability to repay loans or as a result of reducing the nonloan portion of its
customers' banking business. Approximately 57% of the Company's loan portfolio
is concentrated in real estate loans, but these loans represent a diverse
customer base. Similarly, the Company's commercial and agricultural loans
represent approximately 17% and 18% respectively, of the loans outstanding, but
also represent a diverse customer base.
The insurance industry as a whole, and the Company's insurer in
particular, have indicated that they will not provide coverages for losses
related to Year 2000 issues. Therefore, if such limitation is successfully
imposed by insurance companies, insurance coverage for any claims of business
interruption on the part of the Company or its customers or vendors, or claims
by or against the Company for failure to perform various contracts or business
agreements as a result of Year 2000 related problems may not be available.
However, while disruptions to the nationwide banking system are possible and one
or more individual customers or groups of customers may encounter significant
Year 2000 related problems, the Company does not believe these will materially
affect the Company.
<PAGE>
CONTINGENCY PLANS
The Company has prepared a business impact analysis to identify critical
issues and contingency plans for continued operations in the event of failure of
one the its major systems. These contingency plans and recovery are similar,
and in some cases, identical, to those in place for the Company's overall
business recovery plans that are or would be used in the event of any type of
disaster.
SHAREHOLDER PROPOSALS AND DISCRETIONARY VOTING
If any shareholder desires to submit a proposal for inclusion in the proxy
statement to be used in connection with the annual meeting of shareholders to be
held in 1999 (the "1999 Annual Meeting"), the proposal must be in proper form
and received by the Company no later than November 27, 1998.
The proxy solicited by the Board of Directors of the Company will provide
that the proxy will confer discretionary voting authority as to any matter
proposed by a shareholder at the 1999 Annual Meeting if the Company does not
receive notice of such proposal on or before February 10, 1999.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The following exhibits are filed as part of this quarterly report on
Form 10-Q.
Incorporated
EXHIBIT NO. AND DESCRIPTION EXHIBIT <dagger>
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation, as amended 3 (a) (2)
(b) Bylaws, as amended September 20, 1995 3 (b) (2)
(4) Instruments defining the rights of security
holders, including indentures
(a) Articles of Incorporation and
Bylaws (See (3)(a) and (b))
(10) Material contracts:
**(a) 1997 Mid-Wisconsin Bank
Senior Officer Incentive Bonus Plan 10 (a) (1)
**(b) Mid-Wisconsin Financial Services, Inc.
1991 Employee Stock Option Plan 10 (b) (2)
**(c) Mid-Wisconsin Financial Services, Inc.
Directors' Deferred Compensation Plan 10 (e) (3)
**(d) Executive Officer Employment and Severance
Agreement 10 (d) (1)
**(e) Executive Officer Bonus Plan 10 (e) (1)
**(f) Mid-Wisconsin Bank
Senior Officer Incentive Bonus Plan 10 (f) (1)
(22) Subsidiaries of the registrant 21 (2)
(27) Financial Data Schedule
**Denotes Executive Compensation Plans and Arrangements
<dagger> Where exhibit has been previously filed and is incorporated
herein by reference, exhibit numbers set forth herein correspond to the exhibit
numbers where such exhibit can be found in the following reports of the
registrant (Commission File No. 0-18542) filed with the Securities and Exchange
Commission:
(1) Form 10-K for the year ended December 31, 1997, as filed with the
Commission on March 23, 1998.
(2) Form 10-K for the year ended December 31, 1995, as filed with the
Commission on March 26, 1996.
(3) Form 10-K for the year ended December 31, 1992, as filed with the
Commission on March 30, 1993.
(b) No reports on Form 8-K have been filed during the quarter for which this
Form 10-Q is filed.
<PAGE>
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 7, 1998 GENE C. KNOLL
Gene C. Knoll, President
(Principal Executive Officer)
Date August 7, 1998 LUCILLE BRANDNER
Lucille Brandner, Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the period ended June 30, 1998
Pursuant to Section 102(d), Regulation S-T
(17 C.F.R. <section>232.102(d))
Exhibit 27. Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 12,019
<INT-BEARING-DEPOSITS> 188,690
<FED-FUNDS-SOLD> 1,703
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,127
<INVESTMENTS-CARRYING> 58,127
<INVESTMENTS-MARKET> 58,127
<LOANS> 191,130
<ALLOWANCE> (2,154)
<TOTAL-ASSETS> 272,749
<DEPOSITS> 215,450
<SHORT-TERM> 17,020
<LIABILITIES-OTHER> 3,198
<LONG-TERM> 8,400
0
0
<COMMON> 186
<OTHER-SE> 28,494
<TOTAL-LIABILITIES-AND-EQUITY> 272,749
<INTEREST-LOAN> 4,353
<INTEREST-INVEST> 897
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 5,289
<INTEREST-DEPOSIT> 2,223
<INTEREST-EXPENSE> 2,540
<INTEREST-INCOME-NET> 2,749
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,966
<INCOME-PRETAX> 1,193
<INCOME-PRE-EXTRAORDINARY> 1,193
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 8.48
<LOANS-NON> 1,576
<LOANS-PAST> 29
<LOANS-TROUBLED> 215
<LOANS-PROBLEM> 773
<ALLOWANCE-OPEN> 1,990
<CHARGE-OFFS> 70
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 2,154
<ALLOWANCE-DOMESTIC> 210
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 131
</TABLE>
