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 March 31, 1999
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 (IRS Employer Identification No.)
of incorporation or organization)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-8300
(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 March 31, 1999 there were 1,821,589 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
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three Months Ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 11-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K 17
Signatures 18
Exhibit Index 19
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheet
(Unaudited)
<CAPTION>
March 31, 1999 December 31, 1998
ASSETS
<S> <C> <C>
Cash and due from banks $10,593,107 $14,025,302
Interest-bearing deposits in other financial institutions 23,985 43,453
Federal funds sold 6,734,000 9,223,000
Investment securities available for sale -At fair value 63,210,089 56,916,589
Loans held for sale 466,500 951,650
Loans receivable, net of allowance for credit losses of
$2,175,293 in 1999 and $2,159,145 in 1998 184,333,641 187,793,197
Accrued interest receivable 1,925,352 1,838,541
Premises and equipment 7,012,336 6,440,692
Goodwill and purchased intangibles 2,398,907 2,479,705
Other assets 947,603 766,691
TOTAL ASSETS $277,645,520 $280,478,820
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $27,995,984 $31,540,360
Interest-bearing deposits 189,780,660 190,781,300
Total Deposits 217,776,644 222,321,660
Short-term borrowings 21,732,443 19,688,031
Long term borrowings 5,800,000 5,800,000
Accrued expenses and other liabilities 3,509,280 3,099,045
Total Liabilities 248,818,367 250,908,736
Stockholders' equity:
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares in 1999 & 1998
Issued & outstanding - 1,821,589 shares in 1999 182,159
- 1,860,893 shares in 1998 186,089
Additional paid-In capital 11,704,568 12,648,174
Retained earnings 16,579,892 16,276,389
Accumulated other comprehensive income, net of tax 360,534 459,432
Total Stockholders' Equity 28,827,153 29,570,084
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $277,645,520 $280,478,820
<FN>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
Item 1. Financial Statements Continued:
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaduited)
<CAPTION>
Three months ended
March 31, 1999 March 31, 1998
<S> <C> <C>
Interest income
Interest and fees on loans $4,076,058 $4,224,997
Interest on investment securities:
Taxable 729,682 770,749
Tax-exempt 161,016 128,915
Other interest and dividend income 93,659 36,465
Total interest income 5,060,415 5,161,126
Interest expense
Deposits 2,057,142 2,174,863
Short-term borrowings 205,696 209,528
Long-term borrowings 80,820 89,454
Total interest expense 2,343,658 2,473,845
Net Interest income 2,716,757 2,687,281
Provision for credit losses 60,000 90,000
Net interest income after provision
for credit losses 2,656,757 2,597,281
Noninterest income:
Service fees 162,435 156,933
Trust Service fees 135,121 112,059
Net realized gain on sale of securities available for sale - -
Investment product commissions 59,978 83,735
Other operating income 211,387 151,969
Total noninterest income 568,921 504,696
Noninterest expenses:
Salaries and employee benefits 1,138,575 1,091,216
Occupancy 416,850 353,670
Data Processing & Information Systems 37,698 33,720
Goodwill & Core Deposit Intang Amortization 80,798 76,926
Net realized loss on sale of securities available for sale - -
Other operating 488,317 442,679
Total noninterest expenses 2,162,238 1,998,211
Income before income taxes 1,063,440 1,103,766
Provision for income taxes 315,760 359,772
Net income $747,680 $743,994
Basic and diluted earnings per share $0.40 $0.40
Cash dividends declared per share $0.17 $0.15
<FN>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
Item 1. Financial Statements Continued:
<TABLE>
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<CAPTION>
1999 1998
<S> <C> <C>
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $747,680 $743,994
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 319,162 239,238
Provision for credit losses 60,000 90,000
Proceeds from sales of loans held for sale 2,980,638 1,716,904
Gain on sale of loans held for sale (41,238) (29,304)
Originations of loans held for sale (2,454,250) (365,300)
(Gain) loss on sale of investment securities - -
Loss on premises and equipment disposals 11,836 -
Gain on sale of other real estate (4,154) -
Changes in operating assets and liabilities:
Other assets (960) (70,896)
Other liabilities 410,235 306,017
Net cash provided by operating activities 2,028,948 2,630,653
Cash flows from investing activities:
Available for sale securities:
Proceeds from maturities 7,439,471 4,524,902
Payment for purchases (13,928,292) (6,211,584)
Net (increase) decrease in loans 3,176,321 (911,747)
Net decrease in interest-bearing deposits - -
in other institutions 19,468 2,255
Net (increase) decrease in federal funds sold 2,489,000 (1,231,000)
Capital expenditures (784,735) (72,780)
Proceeds from sale of other real estate 19,942 -
Net cash used in investing activities (1,568,826) (3,899,954)
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits (3,544,376) (2,302,076)
Net increase (decrease) in interest-bearing deposits (1,000,640) 3,243,377
Proceeds from exercise of stock options 10,477 13,440
Payment for repurchase of common stock (1,092,520) (199,276)
Net increase in short-term borrowing 2,044,412 828,766
Proceeds from issuance of long-term borrowings - 1,000,000
Dividends paid (309,670) (279,618)
Net cash provided by financing activities (3,892,317) 2,304,613
Net increase (decrease) in cash and cash equivalents (3,432,195) 1,035,312
Cash and cash equivalents at beginning 14,025,302 9,521,270
Cash and cash equivalents at end $10,593,107 $10,556,582
Supplemental cash flow information: 1999 1998
Cash paid during the year for:
Interest $2,388,373 $2,467,220
Income taxes $63,616 $30,025
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to other real estate $223,027 $-
Loans charged off $50,182 $40,811
Loans made in connection with the disposition of other real
Estate 0 0
<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 March 31, 1999, and the consolidated
statements of income for the three month periods ended March 31, 1999 and 1998,
and the consolidated statements of cash flows for the three month period ended
March 31, 1999 and 1998, 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.
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, 1998, 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 investments are available for sale. The amortized cost and fair value of
investment securities for the periods indicated are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
Amortized Cost Fair Value Amortized Cost Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of other U.S. Govt agencies & corp $11,946,945 $11,966,030 $11,117,705 $11,206,493
Mortgage Backed Securities 33,951,988 34,173,873 29,264,412 29,534,297
Oblig. to states & political subdivisions 14,515,220 14,820,484 13,664,274 14,006,742
Corporate Securities 575,001 579,550 575,000 584,350
Equity Securities 1,670,152 1,670,152 1,584,707 1,584,707
Totals $62,659,306 $63,210,089 $56,206,098 $56,916,589
</TABLE>
<PAGE>
NOTE 3 - LOANS
The composition of loans at March 31, 1999, and December 31, 1998, follows:
<TABLE>
<CAPTION>
March 31 % of Dec. 31 % of
(Dollars in Thousands) 1999 total 1998 total
<S> <C> <C> <C> <C>
Commercial and financial $32,554 17.45% $32,585 17.15%
Construction Loans 3,549 1.90% 3,455 1.82%
Agricultural 35,139 18.84% 36,103 19.01%
Real estate 104,553 56.06% 106,530 56.08%
Installment 10,592 5.68% 10,962 5.77%
Lease financing 122 0.07% 317 0.17%
Total loans $186,509 100.00% $189,952 100.00%
</TABLE>
Loans outstanding decreased 1.82% for the three months ended March 31, 1999;
decreasing from $189,952,342 at December 31, 1998, to $186,508,934 at March
31, 1999.
The Company's process for monitoring loan quality includes weekly 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. The decision of management to place loans in this category does
not necessarily mean that the Company expects losses to occur but that
management recognizes that a higher degree of risk is associated with these
loans.
The aggregate amount of non-performing assets was approximately $1,577,000 and
$2,164,000 at March 31, 1999, and December 31, 1998, 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, $32,853 of interest income would have been recorded for the three
months ended March 31, 1999. Interest income actually collected and recorded
was $25,072.
<PAGE>
The following table shows the amount of non-performing assets and other real
estate owned as of the dates indicated.
<TABLE>
Nonperforming Loans and Other Real Estate
(In Thousands)
<CAPTION>
March 31 % of total Dec. 31 % of total
1999 loans 1998 loans
<S> <C> <C> <C> <C>
Nonaccrual loans $1,095 0.58% $1,416 0.77%
Accruing loans past due
90 days or more 5 0.003% $38 0.02%
Restructured loans 477 0.25% $710 0.38%
Total non-performing
loans $1,577 0.83% $2,164 1.17%
Other real estate owned $263 $56
</TABLE>
Total non-performing loans at March 31, 1999 were $1.5 million, a decrease of
$321,000 from December 31, 1998. The ratio of nonperforming loans to total
loans at March 31, 1999 was .83% compared to 1.17% at December 31, 1998. Other
real estate owned increased $207,000 from December 31, 1998 to March 31, 1999.
Management is not aware of any additional loans that represent material credits
or of any information that causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
An analysis of the allowance for credit losses for the period ended March 31,
1999, and December 31, 1998 follows:
<TABLE>
(Dollars in Thousands)
<CAPTION>
March 31, 1999 Dec. 31, 1998
<S> <C> <C>
Allowance for credit losses at
beginning of period $2,159 $1,990
Provision Charged to Operating Expense 60 420
Recoveries on Loans 6 78
Loans Charged off (50) (329)
Allowance for losses at end of period $2,175 $2,159
</TABLE>
<PAGE>
NOTE 4 - EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding which includes the common stock equivalents applicable to shares
issuable under the stock options granted.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In Thousands, Except Per Share Data)
<S> <C> <C>
Net income available to common
stockholders $747,680 $743,994
Weighted average shares outstanding 1,859,729 1,862,611
Basic earnings per share $0.40 $0.40
</TABLE>
NOTE 5 - COMPREHENSIVE INCOME
The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS No. 130 on January 1, 1998, and
all annual required disclosures have been included beginning with the Company's
1998 Form 10-K Annual Report.
The Company's comprehensive income for the three months ended March 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In Thousands, Except Per Share Data)
<S> <C> <C>
Net Income $747,680 $743,994
Unrealized gain(loss) on securities available
for sale, net of tax (98,898) 33,818
$648,782 $777,812
</TABLE>
<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>
<CAPTION>
(Dollars in thousands, 1999 1998
except per share amounts) First Fourth Third Second First
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS:
Earnings and Dividends:
Net interest revenue $2,717 $2,813 $2,789 $2,748 $2,687
Provision for credit losses 60 60 150 120 90
Other noninterest income 569 532 520 530 505
Other noninterest expense 2,162 1,978 1,960 1,966 1,998
Net income 748 887 812 806 744
Per common share
Basic and diluted earnings 0.40 0.48 0.44 0.43 0.40
Dividends declared 0.17 0.34 0.17 0.15 0.15
Book Value 15.83 15.89 15.79 15.44 15.17
Average common shares (000's) 1,860 1,861 1,863 1,863 1,863
Dividend payout ratio 41.42% 71.36% 38.92% 34.58% 37.58%
Balance Sheet Summary:
At quarter end:
Loans net of unearned income 184,334 187,793 190,424 191,130 183,330
Assets 277,645 280,479 272,786 272,749 267,064
Deposits 217,777 222,322 211,135 215,450 212,091
Shareholders equity 28,827 29,570 29,335 28,681 28,180
Average balances:
Loans net of unearned income 188,401 193,201 193,313 188,710 184,701
Assets 279,234 278,588 275,470 269,261 264,376
Deposits 221,844 217,738 216,107 213,037 186,277
Shareholders equity 28,814 29,323 28,690 28,274 27,927
Performance Ratios:
Return on average assets 1.07% 1.27% 1.18% 1.20% 1.13%
Return on average common equity 10.38% 12.10% 11.32% 11.40% 10.66%
Tangible Equity to assets 9.54% 9.72% 9.58% 9.60% 9.62%
Total risk-based capital 14.37% 15.11% 15.05% 15.08% 15.15%
Net loan charge-offs as a percentage
of average loans 0.02% 0.02% 0.09% 0.01% 0.02%
Nonperforming assets as a percentage
of loans and other real estate 0.59% 0.75% 0.99% 1.00% 0.96%
Net interest margin 4.51% 4.49% 4.48% 4.53% 4.50%
Efficiency ratio 67.62% 60.93% 63.77% 63.64% 65.41%
Fee revenue as a percentage of
average assets 0.20% 0.18% 0.17% 0.19% 0.17%
Stock Price Information:
High $27.38 $27.50 $30.00 $28.00 $27.50
Low 25.50 23.00 27.50 27.50 27.25
Market value at quarter end (1) 27.38 26.00 30.00 28.00 27.50
<FN>
(1) Market value at quarter end represents the average of bid and asked prices.
The quotations reflect prices, without retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions.
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
This discussion will focus on information about the Company's financial
condition and results of operations that are not otherwise apparent from the
consolidated financial statements included in this report. Reference should be
made to those statements presented elsewhere in this report for an
understanding of the following discussion and analysis.
This report contains certain of management's expectations and other forward-
looking information regarding the Company. While the Company believes that
these forward-looking statements are based on reasonable assumptions, all such
statements involve risk and uncertainties that could cause actual results to
differ materially from these contemplated in this report. The assumptions,
risks and uncertainties relating to the forward-looking statements in this
report include those described under the caption "Cautionary Statements
Regarding Forward Looking Information" in the Company's Form 10-K for the year
ended December 31, 1998 and, from time to time, in the company's other filings
with the Securities and Exchange Commission.
BALANCE SHEET
During the first three months of 1999, total assets decreased by $2.8 million.
Investments increased $6.3 million. The increase in investments was due in
part to the $3.9 decrease in loans and $4.5 million decrease in deposits. The
majority of the decrease in the loan portfolio was from real estate loans.
Real estate loans decreased $2.0 million. Non-interest bearing deposits
decreased $3.5 million.
LIQUIDITY
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet the Company's need for cash. The Company manages its liquidity to
provide adequate funds to support borrowing needs 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 the Company's liquidity are marketable assets maturing
within one year. At March 31, 1999, the carrying value of debt securities
maturing within one year amounted to $3,145,619 or 5.12% of the total debt
securities portfolio. The Company also holds $1,670,152 in marketable equity
securities. The Company attempts, when possible, to match relative maturities
of assets and liabilities, while maintaining the desired net interest margin.
Marketable assets maturing within one year will continue to be the primary
source of liquidity along with stable earnings, and strong capital position.
CAPITAL RESOURCES
Stockholders' equity at March 31, 1999 decreased $742,931, or 2.5% since
December 31, 1998. This net decrease was composed of $436,827 of retained
earnings reduced by $98, 898 in net SFAS 115 investment market value adjustment
and $1,080,860 from the stock tender-offer. Equity to assets at March 31, 1999
was 9.54%, with the Tier 1 leverage ratio at 13.26%.
<PAGE>
Cash dividends of $0.17 per share were paid in the first quarter of 1999,
representing a payout ratio of 41.42% for the quarter.
The adequacy of the Company's capital is regularly reviewed to ensure
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of March 31, 1999, the Company's
tier 1 risk-based capital ratio, total risk-based capital, and tier 1 leverage
ratio were well in excess of regulatory minimums.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1999, totaled $747,680, an
increase of $3,686 over the $743,994 earned during the same period of 1998.
Earnings per share were $0.40 for the three months ended March 31, 1999 and
1998. Cash dividends paid were $0.17 per share in March 1999 and $0.15 per
share in March 1998.
Return on average common stockholders' equity amounted to 10.38% for the three
months ended March 31, 1999; compared to 10.66% for the three months ended
March 31, 1998.
Return on average assets for the three months ended March 31, 1999 amounted to
1.07%; compared to 1.13% for the three months ended March 31, 1998.
NET INTEREST INCOME
Net interest income is the most significant component of earnings. For analysis
purposes, interest earned on tax exempt assets is adjusted to a fully taxable
equivalent basis.
Average earning assets grew $12 million from the first quarter 1998. The net
interest margin for the first quarter was 4.12%, or 38 basis points less than
the 4.50% margin in the first quarter 1998. The interest rate spread also
increased, to 3.87% from 3.82% reported a year ago.
The Company's net interest income was impacted by the interest rate environment
encountered in the first quarter 1999 as compared to the first quarter 1998.
The lower rate environment caused the re-financing of higher yield residential
real estate loans and mortgage-related securities. The re-investment
opportunities available were at lower yields.
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 $60,000 for the three months ended March
31, 1999, and $90,000 for the three months ended March 31, 1998. The allowance
for credit losses as a percentage of gross loans outstanding was $2,175,293 or
1.18% of total loans on March 31, 1999, compared to $2,159,145 or 1.14% of
total loans on December 31, 1998. Net charge-offs as a percentage of average
loans outstanding were .02% during the three months ended March 31, 1999 and
1998.
<PAGE>
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, increasing to 137.9% at March 31, 1999 from 99.8% at December 31,
1998. 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.
NON-INTEREST INCOME
Non-interest income increased 12.73% to $568,921 during the three months ended
March 31, 1999, from $504,696 during the three months ended March 31, 1998.
There were no gains or losses on securities during the three months ended March
31, 1999. Fee income on deposit accounts increased $5,502 to $162,435 during
the three months ended March 31, 1999, from $156,933 during the three months
ended March 31, 1998. Other fee income and fiduciary fees remained constant
at $195,099 for the three months ended March 31, 1999 and $195,794 for the
three months ended March 31, 1998. Other operating income increased $59,418
during the three months ended March 31, 1999 over the three months ended March
31, 1998.
NON-INTEREST EXPENSE
Non-interest expenses increased 8.21% to $2,162,238 for the three months ended
March 31, 1999, from $1,998,211 for the three months ended March 31, 1998.
There are no expenses included in other expenses that exceed 1% of total
interest and other income for either 1999 or 1998. 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.
YEAR 2000 ISSUES
READINESS
The Company's assessment of the possible consequences of Year 2000 issues on
the Company's consolidated financial condition, liquidity, and results of
operations is continuing in accordance with the Company's Year 2000 Project
Plan (the "Year 2000 Plan"). 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 term "Year 2000 readiness", or terms of similar
import, mean that the particular software or equipment referred to has been
modified or replaced and the Company believes that such modified or replaced
equipment or processes will operate as designed after 1999 without Year 2000
problems.
The Company's Technology Committee is monitoring Year 2000 issues and
implementing the Year 2000 Plan. The initial assessment and inventory of all
software, hardware, interfaces, and other date sensitive systems was completed
in September 1997. Compliance audits conducted by the FDIC in December 1997
and by an independent third party in July 1998 indicated Year 2000 readiness.
A phase II Year 2000 audit was performed in February 1999 by the FDIC also
indicated Year 2000 readiness.
<PAGE>
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. The Company has been informed by all such vendors that the
software used by the Company is Year 2000 ready. The Company will continue to
monitor vendor certifications and take other steps as deemed appropriate to
address Year 2000 issues.
The Company has also reviewed its non-information technology systems, and
believes them to be Year 2000 ready.
Inquiries have been made of the Company's key correspondent banks requesting
information on the status of their Year 2000 compliance. Surveys and letters
have been mailed to commercial customers 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 have
been or 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.
COSTS
Replacement of hardware and software that was identified as non-Year 2000
compliant began in early 1998. The cost of such equipment is capitalized over
its useful life. All other costs associated with Year 2000 issues are being
expensed as incurred. Internal costs for Year 2000 readiness are not being
tracked, but principally relate to payroll costs of Company personnel. 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 consolidated financial condition, liquidity, or results
of operations. 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 ready. While the
Company believes that such efforts will result in Year 2000 readiness 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 ready, the Company could suffer a
material adverse affect. Similarly, while the Company faces potential
disruptions in its operations from Year 2000 problems as a result of the
failure of the power grid, telecommunications, or other utilities, it is not
aware that any material disruption in these infrastructures is reasonably
likely to occur.
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 or reducing the nonloan portion of its
customers' banking business.
<PAGE>
Approximately 56% 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
19% respectively, of the loans outstanding, but also represent a diverse
customer base. The Bank has increased its credit loss reserve for potential
Year 2000 risk.
To the extent the Company incurs losses arising from the interruption of its
business or claims by its customers or vendors as a result of Year 2000
problems, it may have insurance coverage. The scope and amount of such
insurance reimbursement for such losses will depend upon the nature of any
claims which may arise.
CONTIGENCY PLANS
The Company has prepared a business impact analysis to identify critical issues
and is developing a business resumption contingency plan for continued
operations in the event of failure of one of its major systems. This business
resumption contingency plan is expected to be similar, and in some cases,
identical, to those in place for the Company's overall business recovery plan
that would be used in the event of any type of disaster. Work on the business
resumption contingency plan is expected to be completed during the second
quarter of 1999.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," in June
1997. FASB 130 requires comprehensive income and its components, as recognized
under the accounting standards, to be displayed in a financial statement with
the same prominence as other financial statements. The disclosure requirements
of FASB 130 have been included in the Company's consolidated statements of
shareholders' equity.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in June 1997. FASB No. 131 establishes new standards for
reporting information about operating segments in annual and interim financial
statements. The standard also requires descriptive information about the way
the operating segments are determined, the products and services provided by
the segments and the nature of differences between reportable segment
measurements and those used for the consolidated enterprise. This standard is
effective for years beginning after December 15, 1997. Adoption in interim
financial statements is not required until the year after initial adoption,
however comparative prior period information is required. FASB 131 has been
adopted, as required beginning with year-end 1998. This disclosure
requirements will have no impact on the Company's financial position or results
of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1), which provides guidance as to when it is or is not
appropriate to capitalize the cost of software developed or obtained for
internal use. The Company elected early adoption of SOP 98-1. The effect of
the adoption was not material.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, " Accounting for Derivative Instruments
and Hedging Activities" (FASB133). FASB 133 establishes new accounting and
reporting requirements for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The standard
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities in the statement of condition.
<PAGE>
Under certain conditions, a derivative may be specifically designated as a
hedge. Accounting for the changes in the fair value of a derivative depends on
the intended use of the derivative and resulting designation. Adoption of the
standard is required for the Company's December 31, 2000 financial statements
with early adoption allowed as of the beginning of any quarter after June 30,
1998. Management is in the process of assessing the impact and period of
adoption of the standard. Adoption is not expected to result in a material
financial impact.
<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 (b) (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, 1998, as filed with the
Commission on March 29, 1999.
(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 May 12, 1999 GENE C. KNOLL
Gene C. Knoll, President
(Principal Executive Officer)
Date May 12, 1999 RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
For the period ended March 31, 1999
Pursuant to Section 102(d), Regulation S-T
(17 C.F.R. <section>232.102(d))
Exhibit 27. Financial Data Schedule
<PAGE>
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
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