FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from .............. to .....................
Commission file number: 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 06-1169935
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
132 West State Street
Medford, Wisconsin 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 748-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
(Title of Class)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 3, 1999 the aggregate market value of the common shares held by
non-affiliates was approximately $43,846,426.
The number of common shares outstanding at March 3, 1999 was 1,821,589
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 26, 1999 (to the extent specified herein): Part
III
<PAGE>
FORM 10-K
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business.......................................................3
2. Properties.....................................................8
3. Legal Proceeding...............................................8
4. Submission of matters to a vote of security holders...........8
PART II
5. Market for registrant's common equity and related
stockholder matters............................................9
6. Selected Financial Data.......................................11
7. Management's discussion and analysis of financial
condition and results of operations...........................12
7A. Quantitative and Qualitative Disclosures About Market Risk....32
8. Financial statements and supplementary data...................33
9. Changes in and disagreements with accountants on accounting
and financial disclosure......................................62
PART III
10. Directors and executive officers of the registrant............63
11. Executive compensation........................................63
12. Security ownership of certain beneficial owners and
management....................................................63
13. Certain relationships and related transactions................63
PART IV
14. Exhibits, financial statements schedules, and reports on
Form 8-K......................................................64
<PAGE>
PART I
ITEM 1. BUSINESS
General
Mid-Wisconsin Financial Services, Inc. ("the Company") is a registered
bank holding company under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). The Company's subsidiary operates under the name "Mid-
Wisconsin Bank" (the "Bank") and has its principal office in Medford,
Wisconsin. Except as may otherwise be noted, this annual report on Form
10-K describes the business of the Company and the Bank as in effect on
December 31, 1998.
Acquisitions
The Company has a policy of actively pursuing opportunities to acquire
additional bank subsidiaries so that, at any given time, it may be engaged
in some tentative or preliminary discussions for such purpose with
officers, directors or principal shareholders of other holding companies or
banks. There are no plans, understandings, or arrangements, written or
oral, regarding other acquisitions as of the date hereof.
Business of the Bank
The day-to-day management of the Bank rests with its officers and
board of directors. The Bank is engaged in general commercial and retail
banking services, including trust services. The Bank serves individuals,
businesses and governmental units and offers most forms of commercial and
consumer lending, including lines of credit, term loans, real estate
financing and mortgage lending. In addition, the Bank provides a full
range of personal banking services, including checking accounts, savings
and time accounts, installment and other personal loans, as well as
mortgage loans. New services are frequently added to the Bank's retail
banking departments. The Bank and each of its branches, other than the
Ogema and Fairchild branches, have drive-in banking facilities.
Trust and investment services are offered to the Bank's customers
through its Trust and Investment Center located in Medford.
The Company furnishes management services to the Bank to supplement
its internal management and expand the banking services offered. Services
provided include advice and counsel concerning areas of banking policy,
employee benefit programs, and personnel development services.
<PAGE>
The Bank
The Bank was incorporated on September 1, 1890, as a state bank under
the laws of Wisconsin. The Bank's principal office is located at 132 West
State Street, Medford, Wisconsin, 54451. The Bank's principal office and
branches, provide various commercial and consumer banking services for
customers located principally in Taylor County and portions of Eau Claire,
Lincoln, Clark, Marathon, Price and Oneida Counties, Wisconsin, within a
range of 15 to 45 miles from its principal office.
The Bank's principal branch offices are located at 101 South First
Street, Colby, Wisconsin, 54421; 500 West Street, Neillsville, Wisconsin
54456; 2170 Lincoln Street, Rhinelander, Wisconsin 54501; and 864 North
Lake Avenue, Phillips, Wisconsin, 54555. These branches provide commercial
and consumer banking services for customers located in the surrounding
market areas.
In October 1998, an addition was built onto the Medford Plaza location that
combined the areas of Trust and Investment services into one location. The
Trust and Investment Center staff provides investment services, retirement
planning and estate planning for all the branches.
A call center became operational in February 1999 to provide financial
services to customers over the phone. The call center is currently
handling general customer service questions, account inquiries, fund
transferring, stop payments, and rate information. The Bank is the first
Bank of its size in central Wisconsin to implement this new technology in
customer service.
As of December 31, 1998, the Bank had total assets of $280,478,820;
deposits of $222,321,660; and shareholders' equity of $29,570,084. Loans
outstanding as of December 31, 1998 were $189,952,342. No material portion
of the Bank's loans are concentrated within a single industry or customer.
Bank Market Area and Competition
The Bank has active competition for its services in the area in which
it presently operates. It competes in its market area for commercial and
individual deposits and loans with more than thirty other commercial banks
and savings and loan associations, as well as with national non-bank
financial institutions. Such competition encompasses efforts to obtain new
deposits, efforts to attract assets for trust management, types of services
offered, loan rates, and interest rates paid on time deposits, as well as
other aspects of banking. The Bank maintains correspondent banking
relationships with larger financial institutions located in Madison, and
Milwaukee, Wisconsin; Minneapolis, Minnesota; and Chicago, Illinois. In
addition, the Bank encounters substantial competition from other financial
institutions engaged in the business of making loans or accepting savings
deposits, such as savings and loan associations, small loan companies,
credit unions, certain governmental agencies, and insurance companies. The
Bank is the second largest bank and financial institution within its
principal geographic market area.
<PAGE>
Employees
All officers of the Company except the Chairman, Vice Chairman,
and the Vice President are full-time employees of the Bank. As of December
31, 1998, the total employees of the Company and its subsidiaries was
approximately 121 on a full-time basis and 36 on a part-time basis.
Officers and certain supervisors are salaried, and all other full and part-
time employees are paid on an hourly basis. Employee relations are
considered to be good and none of the employees are covered by a collective
bargaining agreement.
Executive Officers
The executive officers of the the Company as of March 1, 1999,
their ages, offices and principal occupation during the last five years are
set forth below.
James R. Peterson, 62
Chairman of the Board of the Company (since 1993) and Vice President,
James Peterson Sons, Inc.
James F. Melvin, 49
Vice Chairman of the Board of the Company (since August 1996) and
President of the Melvin Companies.
Ronald D. Isaacson, 62
Vice President of the Company (since October 1996) previously Chairman
of the Board (1991 to 1993) and President and CEO (1993 to 1996) of the
Company; also Chairman of the Board of the Bank.
Gene C. Knoll, 45
President of the Company (since October 1996) and President,
Chief Executive Officer and a director of the Bank; previously, Vice
President of the Company (1994 to 1996), President and CEO of the Company's
Bank of Colby (1988 to 1994).
William A. Weiland, 44
Secretary and Treasurer of the Company (since May 1998) also
Executive Vice President of the Bank.
Lucille T. Brandner, 60
Controller of the Company until September 1998; and Senior Vice
President of the Bank.
Rhonda R. Kelley, 25
Controller of the Company (since September 1998).
All executive officers are elected annually by the board of directors
at its annual meeting and hold office until the next annual meeting of the
board of directors, or until their respective successors are elected and
qualified.
<PAGE>
Regulation and Supervision
The Company and the Bank are subject to regulation under both federal
and state law. The Company is a registered bank holding company and is
subject to regulation and examination by the Board of Governors of the
Federal Reserve System (the "Board") pursuant to the BHCA. The Bank is
subject to regulation and examination by the Federal Deposit Insurance
Corporation ("FDIC") and, as a Wisconsin chartered bank, by the Wisconsin
Department of Financial Institutions.
The Board expects a bank holding company to be a source of strength
for its subsidiary banks. As such, the Company may be required to take
certain actions or commit certain resources to the Bank when it might
otherwise choose not to do so. Under federal and state banking laws, the
Company and the Bank are also subject to regulations which govern the
Company's and the Bank's capital adequacy, loans and loan policies
(including the extension of credit to affiliates), deposits, payment of
dividends, establishment of branch offices, mergers and other acquisitions,
investments in or the conduct of other lines of business, management
personnel, interlocking directors and other aspects of the operation of the
Company and the Bank. Bank regulators having jurisdiction over the Company
and the Bank generally have the authority to impose civil fines or
penalties and to impose regulatory control for noncompliance with
applicable banking regulations and policies. In particular, the FDIC has
broad authority to take corrective action if the Bank fails to maintain
required capital. Information concerning the Company's compliance with
applicable capital requirements is set forth under the subheading "Capital
Adequacy" in this Item 7 and in Note 14 of the Notes to Consolidated
Financial Statements.
Banking laws and regulations have undergone periodic revisions that
often have a direct effect on the Bank's operations and its competitive
environment. From time to time various formal or informal proposals,
including new legislation, relating to, among other things, changes with
respect to deposit insurance, permitted bank activities and restructuring
of the federal regulatory scheme have been made and may be made in the
future. Depending on the scope and timing of future regulatory changes, it
is possible that such changes may have a significant impact on the
Company's competitive circumstances and that such changes may have a
material adverse effect on the Company's consolidated financial condition,
liquidity or results of operations. At this time, the Company is unable to
predict whether any such changes will be adopted or the effect of any such
changes, if so adopted.
Monetary Policy
The earnings and growth of the Bank, and therefore the Company, are
affected by the monetary and fiscal policies of the federal government and
governmental agencies. The Board has broad power to expand and contract
the supply of money and credit and to regulate the rates that its member
banks can pay on time and savings deposits. These broad powers are used to
influence inflation and the growth of the economy and directly affect the
growth of bank loans, investments and deposits, and may also affect the
interest rates charged by banks on loans paid by banks in respect of
deposits. Governmental and Board monetary policies have had a significant
effect on the operating results of commercial banks in the past and are
expected to do so in the future. Management of the Company is not able to
anticipate the future impact of such policies and practices on the growth
of profitability of the Company.
<PAGE>
Cautionary Statement Regarding Forward Looking Information
Certain statements contained in each of the Company's annual reports
to shareholders, Forms 10-K, 8-K and 10-Q, proxy statements, prospectuses,
and any other written or oral statement made by or on behalf of the Company
subsequent to filing of this Form 10-K may include one or more "forward-
looking statements" within the meaning of Sections 27A of the Securities
Act of 1933 and 21E of the Securities Exchange Act of 1934 as enacted in
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
In addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of the Company which are
not statements of historical fact will constitute forward-looking
statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to
: (i) projections of revenues, income or loss, earnings or loss per share,
the payment or non-payment of dividends, capital structure and other
financial items; (ii) statements of plans and objectives of the Company or
its management or Board of Directors, including those relating to products
or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as
"believes", "anticipates", "expects", "intends", "targeted", and similar
expressions are intended to identify forward-looking statements but are not
the exclusive means of identifying such statements. In making forward-
looking statements within the meaning of the Reform Act, the Company
undertakes no obligation to publicly update or revise any such statement.
Forward-looking statements of the Company are based on information
available to the Company as of the date of such statements, and reflect the
Company's expectations as of such date, but are subject to risks and
uncertainties that may cause actual results to vary materially. In
addition to specific factors which may be described in connection with any
of the Company's forward-looking statements, factors which could cause
actual results to differ materially from those discussed in the forward
looking statements include, but are not limited to the following: (i) the
condition of the U.S. economy in general and the condition of the local
economies in which operations are conducted; (ii) the effects of increased
competition in the banking and financial services industry; (iii) the
effects of and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System which reduce interest margins; (iv) the effects of
inflation, interest rate, market, and monetary fluctuations; (v) the timely
development of and acceptance of new products and services and perceived
overall value of these products and services by users; (vi) changes in
consumer spending, borrowing and saving habits; (vii) technological
changes, including increases in on-line banking or delivery of financial
services; (viii) the effect of acquisitions or the inability to consummate
acquisitions to expand the Company's service area; (ix) the ability to
increase market share and control expenses; (x) the effect of changes in
laws and regulations (including laws and regulations concerning taxes,
banking, securities and insurance) with which the Company and its
subsidiaries must comply; (xi) the effect of changes in accounting policies
and practices required by bank or securities regulatory agencies or to
comply with generally accepted accounting principles; (xii) the costs and
effects of litigation and of unexpected or adverse outcomes in such
litigation; and (xiii) the success of the Company at managing the risks
involved in the foregoing.
<PAGE>
ITEM 2. PROPERTIES
The Company's operations are carried out at the Bank's administrative
office facility at 132 West State Street, Medford, Wisconsin. The Company
does not maintain any separate offices.
The Bank's administrative office is located at the property owned by
it at 132 West State Street, Medford, Wisconsin, in the main business
district. The Bank's main retail facility is located at the property owned
at 134 South Eighth Street, Medford, Wisconsin. The Bank owns both
facilities.
In addition to its administrative office, the Bank also owns eleven
branch facilities. All of the branches are free-standing buildings that
provide adequate customer parking and, with two exceptions, all have drive-
in facilities. The Bank constructed the Phillips branch location in 1997
and the other branches acquired in 1997, at Rhinelander and Lake Tomahawk,
Wisconsin, were previously operated as branches of the seller.
The Company considers its properties to be adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings before any
court, administrative agency or other tribunal. Further, the Company is
not aware of any litigation, which is threatened against it in any court,
administrative agency or other tribunal.
The Bank is engaged in legal actions and proceedings, both as
plaintiffs and defendants, from time to time in the ordinary course of its
business. In some instances, such actions and proceedings involve
substantial claims for compensatory or punitive damages or involve claims
for an unspecified amount of damages. There are, however, presently no
proceedings pending or contemplated which, in the opinion of the Company's
management, would have a material adverse effect on the operations,
liquidity or consolidated financial condition of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
There is no active established public trading market in the Company
common stock, although two regional broker-dealers act as market makers for
the Company common stock. Bid and ask quotations are published
periodically in the Milwaukee Journal Sentinel and prices are quoted on the
NASD OTC Electronic Bulletin Board under the symbol "MWFS". Transactions
in the Company common stock are limited and sporadic.
On December 14, 1998, the Company made a self-tender offer to purchase
up to 93,045 shares of its issued and outstanding common stock for $27.50
per share. The tender-offer expired on January 15, 1999. The Company
accepted 39,304 shares of its common stock for repurchase in connection
with its tender offer. The shares purchased represented approximately
2.11% of the shares outstanding immediately prior to the tender offer.
Following the purchase of accepted shares, 1,821,589 shares of the
Company's common stock were outstanding.
Holders
As of March 15, 1999, there were approximately 772 holders of record
of the Company's $.10 per share par value common stock.
Dividend Policy
The Company's Bylaws provide that, subject to the provisions of
applicable law, the Board of Directors may declare dividends from
unreserved and unrestricted earned surplus, at such times and in such
amounts as the board shall deem advisable.
The Company's ability to pay dividends depends upon the receipt of
dividends from the Bank, payment of which is subject to regulatory laws and
regulations. The declaration of dividends by the Company is discretionary
and will depend upon operating results and financial condition, regulatory
limitations, tax considerations and other factors. The Company has paid
regular dividends since its inception in 1986.
<PAGE>
Market Prices and Dividends
Price ranges of over-the-counter quotations and dividends declared per
share on the Company common stock for the periods indicated are:
<TABLE>
<CAPTION>
1998 1997
Prices:
Quarter High Low Dividends(1) High Low Dividends(2)
<S> <C> <C> <C> <C> <C> <C>
1st $27.50 $27.25 .15 $25.50 $24.00 .15
2nd 28.00 27.50 .15 25.50 25.00 .15
3rd 30.00 27.50 .17 27.00 25.50 .15
4th 27.50 23.00 .34 27.25 27.00 .30
<FN>
(1) The $.34 per share dividend declared in the fourth quarter of 1998
includes a special dividend of $.17 per share.
(2) The $.30 per share dividend declared in the fourth quarter of 1997
includes a special dividend of $.15 per share.
</TABLE>
Prices represent the average bid and ask prices from market makers in the
common stock published periodically in the Milwaukee Journal Sentinel.
Market makers in the company's common stock are Robert W. Baird & Co,
Incorporated and Everen Clearing Corp. The quotations reflect prices,
without retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions. There is no active established public
trading market.
Sales of Unregistered Securities
During the three-fiscal year period ended December 31, 1998, the
Company sold common stock in connection with the exercise by employees of
options granted under the 1991 Stock Option Plan. These shares were not
registered under the Securities Act of 1933, but were offered in reliance
on the exemptions afforded under sections 4(2) and 3 (a) (11) thereof as
all optionees were officers of the Bank and all are residents of the State
of Wisconsin. All proceeds from the sale of such shares were used for
general corporate purposes. Sales of shares during each fiscal year were
as follows:
<TABLE>
<CAPTION>
Aggregate
Aggregate Consolidation
Year Ended Shares Sold Received
<S> <C> <C>
1998 4,678 $ 72,067.50
1997 7,981 $101,060.25
1996 8,079 $ 75,057.50
</TABLE>
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Years Ended December 31
1998 1997 1996 1995 1994
FINANCIAL HIGHLIGHTS: (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Earnings and Dividends:
Net interest revenue $11,038 $10,800 $10,757 $10,182 $9,865
Provision for credit losses 420 140 400 100 303
Other non-interest income 2,085 2,258 2,033 1,397 1,739
Other non-interest expense 9,455 9,411 9,114 8,598 8,623
Net income 3,248 3,507 3,276 2,881 2,678
Per common share: (1)
Basic and diluted earnings 1.74 1.88 1.76 1.55 1.44
Dividends declared 0.81 0.75 0.67 0.47 0.41
Book value at year end 15.89 14.95 13.79 12.79 10.91
Average common shares (000's) 1,862 1,868 1,865 1,861 1,857
Dividend payout ratio 46.55% 39.89% 38.07% 30.32% 28.47%
Shareholders of record at year end 830 790 750 710 720
Balance Sheet Summary:
At year end:
Loans net of unearned income $189,952 $185,015 $174,842 $172,678 $165,422
Assets 280,479 263,675 251,501 244,606 237,739
Deposits 222,322 211,149 202,412 192,144 186,151
Shareholders equity 29,570 27,867 25,725 23,750 20,180
Average balances:
Loans net of unearned income 190,014 178,968 171,381 166,958 159,265
Assets 272,084 254,352 244,772 236,659 234,186
Deposits 214,246 198,935 192,220 188,586 190,697
Shareholders equity 28,558 26,633 24,544 21,920 20,086
Performance Ratios:
Return on average assets 1.19% 1.38% 1.34% 1.22% 1.14%
Return on average common equity 11.37% 13.17% 13.35% 13.14% 13.33%
Equity to assets 10.54% 10.57% 10.23% 9.71% 8.49%
Total risk-based capital 15.11% 14.94% 15.66% 13.92% 12.38%
Net loan charge-offs as a percentage
of average loans 0.13% 0.10% 0.12% 0.07% 0.13%
Nonperforming assets as a percentage
of loans and other real estate 0.75% 0.70% 0.58% 0.67% 0.96%
Net interest margin 4.49% 4.56% 4.78% 4.67% 4.61%
Efficiency ratio 63.42% 58.94% 59.22% 61.87% 64.56%
Fee revenue as a percentage of
average assets 0.45% 0.44% 0.43% 0.44% 0.53%
Stock Price Information:
High $27.50 $27.25 $24.00 $21.00 $17.50
Low 23.00 24.00 21.00 15.00 14.50
Market Price at year end (2) 26.00 27.25 24.00 19.50 16.00
<FN>
(1) All per share amounts (income and dividends) have been restated to
reflect the stock split in the form of a 100 percent stock dividend issued
May 8, 1995.
(2) Market value at year end represents the average of bid and asked
prices.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis reviews significant
factors with respect to the Company's financial condition and results of
operation at and for the three-year period ended December 31, 1998. This
discussion should be read in conjunction with the consolidated financial
statements, notes, tables, and the selected financial data presented
elsewhere in this report.
The Company is not aware of any current recommendations by any
regulatory authority which, if they were implemented, would have a material
effect on liquidity, capital resources, or operations.
Management's discussion and analysis contains forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, such performance involves risks and
uncertainties which may cause actual results to differ materially from
those in such statements. For a discussion of certain factors that may
cause such forward-looking statements to differ materially from actual
results see Item 1, Cautionary Statement Regarding Forward-Looking
Information, in this Annual Report on Form 10-K for the year ended December
31, 1998.
RESULTS OF OPERATIONS
The Company's consolidated net income for 1998 decreased 7.39% to
$3,248,084 from $3,507,454 in 1997. This compares with an increase of
7.05% for 1997 over 1996 income of $3,276,441. Factors contributing to the
decreased 1998 earnings include the gain from the sale of the Bank's
mortgage loan portfolio and the curtailment from the termination of the
defined benefit pension plan recognized in 1997. Also, 1998 was the first
full year expenses were recognized from the start-up and acquisition of
three branches in 1997.
Operations consolidation and standardization continued throughout
1998, eliminating duplication of procedures in all areas of the company.
In 1998, the Bank assigned several reengineering committees the task of
designing completely new methods and procedures in the areas of loan and
deposit origination, trust operations, and item processing to increase
efficiency and productivity throughout those areas.
Return on average common stockholders' equity amounted to 11.37% in
1998, 13.17% in 1997, and 13.35% in 1996.
Return on average assets for 1998 amounted to 1.19%, compared to 1.38%
for 1997 and 1.34% for 1996.
Net income per share amounted to $1.74 in 1998, compared to $1.88 in
1997 and $1.76 in 1996. Cash dividends declared in 1998 were $ .81,
compared to $ .75 per share in 1997 and $ .67 in 1996. The per share ratio
of dividends to shareholders to net income was 46.55% in 1998, compared to
39.89% in 1997 and 38.07% in 1996.
<PAGE>
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. 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>
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. Management actively
monitors and manages its interest-rate risk exposure. The measurement of
the market risk associated with financial instruments is meaningful only
when all related and offsetting on- and off-balance sheet transactions are
aggregated, and the resulting net positions are identified. Disclosures
about the fair value of financial instruments which reflect changes in
market prices and rates, can be found in footnotes 16 and 17 on the Notes
to the Financial Statements.
The Company's primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on the Company's
net interest income and capital, while adjusting the Company's asset-
liability structure to obtain the maximum yield-cost spread on that
structure. The Company relies primarily on its asset-liability structure
to control interest-rate risk. However, a sudden and substantial increase
in interest rates may adversely impact the Company's earnings, to the
extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent, or on the same basis. The
Company does not engage in trading activities.
NET INTEREST INCOME
The following table shows how net interest income is impacted by the
change in volume and interest rates.
<TABLE>
Interest Income & Expense Volume & Rate Change
(in thousands of dollars)
<CAPTION>
1998 compared to 1997 1997 compared to 1996
increase (decrease) increase (decrease)
due to (1) due to (1)
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans (2) $997 $(444) $553 $720 $(83) $637
Taxable investment securities (113) (37) (150) (171) (73) (244)
Non-taxable invest (2) 198 (25) 173 168 (10) 158
Other interest income 105 (3) 102 40 2 42
Total 1,188 (510) 678 757 (164) 593
Interest paid on:
Savings deposits $271 $(341) $(70) $40 $214 $254
Time deposits 344 (42) 302 268 81 349
Short Term Borrowing 2 (57) (55) (42) 18 (24)
Long Term Borrowing 28 (8) 20 103 28 131
Total 645 (448) 197 369 341 710
Net Interest earnings $542 $(61) $481 $388 $(505) $(117)
<FN>
(1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(2) The yield on tax-exempt loans and investment securities has been
adjusted to its fully taxable equivalent using a 34% tax rate.
</TABLE>
<PAGE>
The Company's reported increase in net interest income in 1998 was
primarily driven by larger volumes of earning assets. Net of related
funding costs, this growth increased net interest income by $481,000. This
increase was tempered by a negative impact from interest rates. The net
interest income reported in 1997 decreased by $117,000 from 1996. This
decrease was primarily driven by higher interest rates paid in 1997 than
1996.
The following table demonstrates how the changing interest rate
environment affected the net yield on earning assets (on a fully tax
equivalent basis) for the three-year period ending December 31, 1998.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
Yield Change Yield Change Yield Change
<S> <C> <C> <C> <C> <C> <C>
Yield on earning assets 8.52% -0.22% 8.74% -0.05% 8.79% 0.05%
Effective rate on all liabilities
as a % of earning assets 4.02% -0.16% 4.18% 0.17% 4.01% -0.06%
Net yield on earning assets 4.50% -0.06% 4.56% -0.22% 4.78% 0.11%
</TABLE>
The 1998 figures as a percent of average earning assets reflect a decrease
in interest income and interest expense. The changes are due to the
decrease of interest rates in the economy and continued pressure from
competitors.
Average earning assets increased 6.00% to $251,548 in 1998 from
$237,289 in 1997. Included in this increase was a 6.17% increase in
average loans and leases to $190,014 in 1998, up from $178,968 in 1997, a
3.71% decrease in average taxable investments to $46,218 in 1998, from
$48,000 in 1997, and a 36.61% increase in average tax exempt investments to
$11,130 in 1998, up from $8,147 in 1997.
<PAGE>
The following table sets forth average consolidated balance sheet data and
average rate data on a tax equivalent basis for the periods indicated.
<TABLE>
Average Consolidated Balance Sheet
<CAPTION>
Average 1998 Yield Average 1997 Yield Average 1996 Yield
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans $190,014 $17,549 9.24% $178,968 $16,996 9.50% $171,380 $16,359 9.55%
Taxable Investments 46,218 2,909 6.29% 48,000 3,059 6.37% 50,672 3,303 6.52%
Non-taxable investments 11,130 744 6.68% 8,147 571 7.01% 5,744 413 7.19%
Other Interest Income 4,186 219 5.23% 2,174 117 5.38% 1,422 75 5.27%
Total earning assets $251,548 21,421 8.52% $237,289 20,743 8.74% $229,218 20,150 8.79%
Non-interest earning assets:
Cash & cash equivalents 10,114 10,114 9,625
Premises & Equip-Net 5,494 4,501 3,994
Other assets 7,064 4,483 3,839
Allow.for credit losses (2,136) (2,035) (1,904)
Total assets $272,084 $254,352 $244,772
Liabilities & Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand $18,410 $341 1.85% $17,412 $341 1.96% $18,768 $410 2.18%
Savings deposits 56,967 1,919 3.37% 52,199 1,989 3.81% 49,550 1,666 3.36%
Time deposits 112,948 6,550 5.80% 107,003 6,248 5.84% 102,398 5,899 5.76%
Short-term borrowings 19,149 921 4.81% 19,109 976 5.11% 19,928 1,000 5.02%
Long-term borrowings 6,521 374 5.74% 6,030 354 5.87% 4,243 223 5.26%
Total interest bearing
Liabilities $213,995 $10,105 4.72% $201,753 $9,908 4.91% $194,887 $9,198 4.72%
Non-interest bearing liabilities & equity
Demand deposits 25,920 22,321 21,504
Other liabilities 3,611 3,645 3,837
Stockholders' equity 28,558 26,633 24,544
Total liabilities and
stockholders' equity $272,084 $254,352 $244,772
<FN>
(1) For the purposes of these computations, non-accruing loans are
included in the daily average loan amounts outstanding.
(2) The amount of interest income on non-taxable investment securities and
loans has been adjusted to its fully taxable equivalent using a 34% tax
rate.
(3) Loan fees are included in total interest income as follows: 1998-
$331,754; 1997-$409,928; 1996-$389,714.
</TABLE>
As the largest component of operating income, improvements in the
growth of net interest income are important to the Company's earnings
performance. Growth in the Company's net interest income during the past
three years has been a result of the growth in the level of interest-
earning assets volumes. The Company uses modeling and analysis techniques
to its asset-liability structure to manage net interest income and the
related interest rate risk position. The Company seeks to meet the needs
of its customers, yet provide for stability in net interest income in the
event of significant interest rate changes.
<PAGE>
The following table sets forth the mix of average interest-earning
assets and average interest-bearing liabilities.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Loans 75.54% 75.42% 74.77%
Taxable investments 18.37% 20.23% 22.11%
Non-taxable 4.42% 3.43% 2.51%
Other 1.67% 0.92% 0.61%
100.00% 100.00% 100.00%
Interest bearing demand 8.60% 8.63% 9.63%
Savings deposits 26.62% 25.87% 25.42%
Time deposits 52.78% 53.04% 52.54%
Short Term Borrowing 8.95% 9.47% 10.22%
Long Term Borrowing 3.05% 2.99% 2.19%
100.00% 100.00% 100.00%
</TABLE>
NON-INTEREST INCOME
The following table shows the major components of non-interest income.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
<S> <C> <C> <C>
Service Fees $697 $632 $594
Trust Service Fees 488 448 383
Net Realized Gain on sale of securities
available for sale 3 15
Gain on pension settlement/curtailment 258 368
Investment product commissions 272 247 213
Gain on sale of mortgage servicing rights 213
Other Operating Income 627 445 475
Total $2,087 $2,258 $2,033
</TABLE>
Total 1998 operating non-interest income, excluding gains from security
transactions, pension settlement curtailment and sale of mortgage servicing
rights, increased $313,000 or 17.66% over 1997, compared to an increase of
$104,000, or 6.23% in 1997 over 1996.
Fiduciary fees increased to $487,795 in 1998, compared to $448,174 in 1997
and $382,524 in 1996. This increase reflects the continued growth in trust
business volume and growth in assets managed by the Bank's Trust
Department. The market value of assets under management increased to
$123,583,201 at December 31, 1998, from $111,077,268 at December 31, 1997,
and $84,821,244 at December 31, 1996. The Company expects to see increased
growth in the Trust and Investment Center due to the combination of Trust
and Investment services in 1998 into one location and increased marketing
of services to its market area.
<PAGE>
Service fee income on deposit accounts increased $65,215 in 1998, to
$696,768. Service fee income on deposit accounts increased $37,222 in 1997
to $631,553 from $594,331 in 1996.
Other operating income, from a variety of sources, increased $181,436,
or 40.73% in 1998. This increase is primarily attributable to higher ATM
fees and loan origination fees. ATM fees increased by $44,086 and loan
origination fees increased by $60,951 in 1998.
NON-INTEREST EXPENSE
The following table shows the major components of non-interest
expense.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
<S> <C> <C> <C>
Salaries $3,235 $3,043 $3,001
Pensions and other employee
benefits 1,003 1,172 1,080
Occupancy 1,013 971 925
Data processing & Information systems 498 508 512
Goodwill & core deposit Intangibles amortization 308 179 86
Net realized loss on sales of securities available for sale 1 160
Other operating expense 1,844 1,682 1,569
Total $7,902 $7,555 $7,333
</TABLE>
Total operating non-interest expense increased $345,828 or 4.58% in 1998.
This follows a $222,307, or 3.03% increase in 1997 over 1996.
Salaries and employee benefits increased $22,783 or .54% during 1998 over
1997. This category continues to be the largest component of non-interest
expense, representing 53.6% of operating expenses in 1998 and 55.8% and
55.6% in 1997 and 1996, respectively. The increase in 1998 was tempered by
the retirement of two highly salaried employees, turnover of higher
salaried employees replaced with lower hourly-paid employees, and decrease
in pay-for-performance programs due to decreased 1998 earnings.
Increased depreciation, maintenance, utilities, and goodwill and core
deposit intangible amortization directly reflect the investment made in new
technology in 1998 and a full year of expense from the new branches in
1997.
Included in non-interest expense categories are charges related to the
Bank's activities to prepare its systems for the Year 2000. Such
activities and related charges incurred in connection with the Year 2000
project are expected to continue through the next year. During the current
year, these costs were not material and represent a reallocation of
internal resources. See the subheading, "Year 2000 Issues" in this Item 7.
<PAGE>
PROVISION FOR CREDIT LOSSES
The adequacy of the reserve for credit losses is assessed based upon
credit quality, existing and prospective economic conditions and loss
exposure by loan category. 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 $420,000 in 1998; compared to $140,000 in 1997 and $400,000 in
1996. The allowance for credit losses as a percentage of gross loans
outstanding was 1.14% at December 31, 1998; 1.09% at December 31, 1997; and
1.16% at December 31, 1996. Charge-offs as a percentage of average loans
outstanding were .13 % in 1998; .10% in 1997; and .12% in 1996. Charge-
offs have not been concentrated in any industry or business segment as
reflected in the schedule below.
In the opinion of management, the allowance for credit losses is
adequate as of December 31, 1998.
<PAGE>
The allowance for credit losses shown in the following table represents a
general allowance available to absorb future losses within the entire
portfolio.
<TABLE>
Years Ended December 31,
(Dollars in Thousands)
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at beginning
of period $1,990 $2,031 $1,836 $1,859 $1,770
Loans Charged off:
Commercial, financial and
agricultural 211 111 190 123 199
Real Estate 46 45 17 32 16
Installment and other consumer loans
to individuals 72 89 105 35 70
Total charge offs 329 245 312 190 285
Recoveries on loans previously charged
off:
Commercial, financial and
agricultural 60 27 80 36 41
Real estate 0 0 2 1 1
Installment and other consumer
loans to indivuduals 18 37 25 30 29
Total recoveries 78 64 107 67 71
Net loans charged-off 251 181 205 123 214
Additions charged to operations 420 140 400 100 303
Allowance for credit losses at end of
period $2,159 $1,990 $2,031 $1,836 $1,859
Ratio of allowance for credit losses
to total loans at end of period 1.14% 1.08% 1.16% 1.07% 1.12%
Ratio of net charge-offs during the
period to average loans outstanding 0.13% 0.10% 0.12% 0.07% 0.13%
</TABLE>
The reserve for credit losses continues to provide non-performing loan
coverage, at 97% at December 31, 1998. This compares to non-performing
loan coverage of 155% at December 31, 1997, and 168% at December 31, 1996.
<PAGE>
The following table presents an allocation of the year-end allowance for
credit losses for each of the past five years based on management's
estimates of loss exposure by category of loans. Management believes this
is appropriate in light of current and expected economic conditions, the
geographic and industry mix of the loan portfolio and other risk related
factors. Commercial loans secured by real estate are included in this
table under the category of real estate and the allowance for credit losses
is allocated to cover expectations of loss.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
as a % as a % as a % as a % as a %
of Total of Total of Total of Total of Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $865 35.88% $763 32.64% $814 32.03% $644 33.54% $619 30.91%
Real Estate 967 58.13% 842 60.19% 850 60.92% 958 59.53% 959 62.24%
Installment and other consumer
loans to individuals 193 5.74% 191 6.79% 162 6.57% 181 6.80% 178 6.85%
Impaired Loans 134 0.25% 194 0.38% 132 0.48% 51 0.13%
Unallocated 0 n/a 0 n/a 73 n/a 2 n/a 103 n/a
Total $2,159 100.00% $1,990 100.00% $2,031 100.00% $1,836 100.00% $1,859 100.00%
</TABLE>
INCOME TAXES
The effective tax rate was 32.40% in 1998, 34.59% in 1997, and 35.20% in
1996.
LIQUIDITY AND INTEREST SENSITIVITY
The Company's Asset Liability Management process provides a unified
approach to management of liquidity, capital and interest rate risk, and to
providing adequate funds to support the borrowing requirements and deposit
flow of its customers. Management views liquidity as the ability to raise
cash at a reasonable cost or with a minimum of loss and as a measure of
balance sheet flexibility to react to marketplace, regulatory, and
competitive changes. The primary sources of the Company's liquidity are
marketable assets maturing within one year. At December 31, 1998, the
carrying value of debt securities maturing within one year amounted to
$14,948,184; or 26.26% of the total investment securities portfolio. At
December 31, 1997, the carrying value of debt securities maturing within
one year amounted to $7,895,617 or 14.55% of the total investment
securities portfolio. The Company attempts, when possible, to match
relative maturities of assets and liabilities, while maintaining the
desired net interest margin. At the end of 1998 the Bank sold $9.2 million
in Fed Funds. Currently the Bank is experiencing stable loan growth. As
a result the Bank is planning to purchase short-term asset backed
securities to provide liquidity mid-summer 1999 when loan demand is
anticipated to increase. Management believes liquidity is adequate.
<PAGE>
The following tables show the approximate consolidated rate sensitivity gap
position as of December 31, 1998 and December 31, 1997.
<TABLE>
INTEREST RATE RISK EXPOSURE
December 31, 1998
<CAPTION>
90 day 91-180 days 181-365 days 1-5 Years Beyond 5 Years Total
<S> <C> <C> <C> <C> <C> <C>
Loans $40,503 $27,829 $47,392 $63,893 $10,335 $189,952
Securities 4,464 1,855 9,078 31,467 10,053 $56,917
Fed Funds & Other 9,266 9,266
$54,233 $29,684 $56,470 $95,360 $20,388 $256,135
Cumulative Rate Sensitive Assets $54,233 $83,97 $140,387 $235,747 $256,135
<100 CDs & Other Time Dep 23,893 18,795 21,047 23,489 87,224
Money Market Plus Accounts 8,794 5,863 5,863 8,794 29,314
Money Market Savings Accounts 3,125 2,083 2,083 3,125 10,416
Regular Savings 2,066 3,099 3,099 12,396 20,659
Now & Super Now Accounts 5,885 3,923 3,923 5,885 19,617
100 & Over 7,037 3,532 7,182 5,800 23,551
FF Purch, Repo, & Other Borrowed Funds 19,688 1,000 1,800 3,000 25,488
$70,488 $22,327 $44,197 $46,057 $33,200 $216,269
Cumulative Rate Sensitive Liabilities $70,488 $92,815 $137,012 $183,069 $216,269
Rate Sensitivity Gap $(16,255) $7,357 $12,273 $49,303 $(12,812)
Cumulative Rate Sensitivity $(16,255) $(8,898) $3,375 $52,678 $39,866
Gap
Cumulative gap ratio 76.94% 90.41% 102.46% 128.77% 118.43%
</TABLE>
<TABLE>
INTEREST RATE RISK EXPOSURE
December 31, 1997
<CAPTION>
90 day 91-180 days 181-365 days 1-5 Years Beyond 5 Years Total
<S> <C> <C> <C> <C> <C> <C>
Loans $43,116 $24,496 $46,346 $60,433 $10,624 $185,015
Securities 3,693 549 3,491 32,327 14,196 54,256
Fed Funds & Other 4,637 4,637
$51,446 $25,045 $49,837 $92,760 $24,820 $243,908
Cumulative Rate Sensitive Assets $51,446 $76,491 $126,328 $219,088 $243,908
<100 CDs & Other Time Dep 17,648 18,347 23,200 30,368 89,563
Money Market Plus Accounts 6,527 4,351 4,351 6,526 21,755
Money Market Savings Accounts 3,887 2,591 2,591 3,887 12,955
Regular Savings 2,052 3,078 3,078 12,313 20,521
Now & Super Now Accounts 5,310 3,540 3,540 5,310 17,701
100 & Over 4,466 2,711 6,715 9,137 23,029
FF Purch, Repo, & Other Borrowed Funds 16,079 3,600 1,800 21,479
$55,969 $21,058 $47,076 $54,866 $28,035 $207,003
Cumulative Rate Sensitive Liabilities $55,969 $77,027 $124,102 $178,968 $207,003
Rate Sensitivity Gap $(4,523) $3,987 $2,761 $37,894 $(3,215)
Cumulative Rate Sensitivity $(4,523) $(536) $2,226 $40,120 $36,905
Gap
Cumulative gap ratio 91.92% 99.30% 101.79% 122.42% 117.83%
</TABLE>
<PAGE>
Management's overall strategy is to coordinate the volume of rate sensitive
assets and liabilities to minimize the impact of interest rate movement on
the net interest margin. From time to time, the Bank develops special
term deposit products that will attract present and potential customers.
The figures reflect a slightly negative position in the 90 day and 180 day
categories; the cumulative one-year position is positive at 102.46%. A
significant portion of consumer deposits do not re-price or mature on a
contractual basis. These deposit balances and rates are considered to be
core deposits since these balances are generally not susceptible to
significant interest rate changes. The Company's Asset/Liability Committee
distributes these deposits over a number of periods to reflect those
portions of such accounts that are expected to re-price fully with market
rates over the simulation period. The assumptions are based on historical
experience with the bank's individual markets and customers and include
projections for how management expects to continue to price in response to
marketplace and market changes. However, markets and consumer behavior do
change, and adjustments are necessary as customer preferences, competitive
market conditions, liquidity, loan growth rates, and mix change.
Management considers that an acceptable range for the rate sensitivity
ratio is 70-130%.
INVESTMENT PORTFOLIO
The following table shows the relative maturities of the investment
portfolio as of December 31, 1998. Weighted average yields on tax-exempt
securities have been calculated on a tax equivalent basis using a tax rate
of 34%.
<TABLE>
<CAPTION>
After After
One But Five but
December 31, 1998 Within Weighted Within Weighted Within Weighted
(dollars in thousands) One Year Yields Five Years Yields Ten Years Yields
<S> <C> <C> <C> <C> <C> <C>
U.S. Treas & other U.S.
Gov't agencies & corp $12,355 6.28% $21,188 6.54% $3,596 6.59%
State & political sub-
divisions (domestic) 1,685 4.47% 6,722 4.94% 5,600 4.56%
Other bonds, notes, and
debentures 907 6.15% 3,279 6.28% 0
Debt Securities $14,947 6.07% $31,189 6.17% $9,196 5.35%
Equity Securities 1,585 5.43%
Total Securities $16,532 6.00% $31,189 6.17% $9,196 5.35%
</TABLE>
There are no securities in the investment portfolio that are in excess
of ten percent of stockholders' equity.
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115), which specifies the accounting for
investments in securities that have readily determinable fair values.
During 1995, the Bank reclassified all securities as available-for-sale.
At December 31, 1998, the net unrealized gain on securities available
for sale, recorded as a separate component of stockholders' equity, was
$459,432, net of deferred income taxes of $253,978.
<PAGE>
Securities with an approximate carrying value of $25,438,126 and
$32,889,744, at December 31, 1998 and 1997 respectively, were pledged
primarily to secure public deposits and for other purposes required by law.
The following table sets forth the distribution of investment
securities and their percentage to total investment securities as of the
dates indicated.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
(dollars in thousands) Amount % of total Amount % of total Amount % of total
<S> <C> <C> <C> <C> <C> <C>
U.S. Treas & other U.S. Gov't
Agencies & Corp. $40,741 71.58% $41,023 75.61% $46,934 82.10%
State & Political subdivisions
(domestic) (1) 14,007 24.61% 10,356 19.09% 6,893 12.06%
Other securities and
Investments 2,169 3.81% 2,877 5.30% 3,338 5.84%
Total $56,917 100.00% $54,256 100.00% $57,165 100.00%
<FN>
(1) Weighted average yields on tax-exempt securities have been calculated
on a tax equivalent basis using a tax rate of 34%.
</TABLE>
The market value of the fixed income portion on the investment
portfolio as a percentage of book value increased due to the decline in
rates. The Bank's investment subsidiary, Mid-Wisconsin Investment Corp.,
was formed in June 1994, and currently holds approximately $43,074,926 in
investments and loans at book value. Income tax expense for 1998 was
approximately $138,000 lower as a result of holding these securities at the
subsidiary.
The book value and market value of investment securities are equal and are
summarized as follows:
<TABLE>
BOOK VALUE and MARKET VALUE
<CAPTION>
(dollars in thousands) Dec. 31, 1998 Dec. 31, 1997
<S> <C> <C>
U.S. Treasury securities and obligations
of other U.S. Govt agencies & corp $40,740,790 $41,023,840
Obligations to states & political
subdivisions 14,006,742 10,355,358
Other securities 2,169,057 2,876,994
Totals $56,916,589 $54,256,192
</TABLE>
<PAGE>
LOAN PORTFOLIO
The following table sets forth the approximate maturities of the loan
portfolio, excluding consumer, other loans, and non-accrual loans; and the
sensitivity of loans to interest changes as of December 31, 1998.
<TABLE>
Maturity
(dollars in thousands) One Year Over one Year Over
or Less to Five Years Five Years
<S> <C> <C> <C>
Commercial, financial and
commercial real estate $31,395 $39,185 $5,037
Agricultural 23,702 8,925 1,675
Real estate mortgage 12,884 16,376 25,727
Total $67,981 $64,486 $32,439
</TABLE>
<TABLE>
Interest Sensitivity
<CAPTION>
Amount of Loans Due After One Year With:
Fixed Variable
(dollars in thousands) Rate Rate
<S> <C> <C>
Commercial and financial $33,445 $10,777
Agricultural 7,935 2,665
Real Estate 8,802 33,301
Total $50,182 $46,743
</TABLE>
Loan growth for the year ended December 31, 1998 was 2.67%; increasing
from $185,015,272 at December 31, 1997 to $189,952,342 at December 31,
1998. The composition of loans outstanding and their percentage to total
loans as of the dates indicated are as follows:
<TABLE>
<CAPTION>
Dec. 31 % of Dec. 31 % of Dec. 31 % of Dec. 31 % of Dec. 31 % of
(dollars in Thousands) 1998 total 1997 total 1996 total 1995 total 1994 total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial 32,585 17.15% 26,943 14.56% 26,923 15.40% 28,075 16.38% 24,361 14.73%
Construction Loans 3,455 1.82% 1,700 0.92% 891 0.51% 1,272 0.74% 519 0.31%
Agricultural 36,103 19.01% 34,952 18.89% 30,869 17.66% 27,963 16.32% 25,500 15.42%
Real estate 106,530 56.08% 108,360 58.57% 104,002 59.48% 101,473 59.21% 102,958 62.24%
Installment 10,962 5.77% 12,642 6.83% 11,499 6.58% 11,819 6.90% 11,336 6.85%
Lease financing 317 0.17% 418 0.23% 658 0.37% 762 0.45% 748 0.45%
Total loans $189,952 100.00% $185,015 100.00% $174,842 100.00% $171,364 100.00% $165,422 100.00%
</TABLE>
In 1998 increases were experienced in commercial and financial,
construction and agricultural loans, each up $5.6 million, $1.8 million and
$1.1 million, respectively. In 1998, the bank concentrated on selling
fixed-rate real estate loans in the secondary market to remain competitive
on pricing and earn additional income. Loan origination fees in 1998 were
$159,774 compared to $98,823 in 1997.
<PAGE>
The Company's process for monitoring loan quality includes weekly
analysis of delinquencies, non-performing assets and potential problem
loans. The Company's policy is to place loans on a non-accrual status when
they become contractually past due 90 days or more as to interest or
principal payments. All interest accrued (including applicable impaired
loans) but not collected for loans that are placed on non-accrual or
charged off is reversed to interest income. The interest on these loans is
accounted for on the cash basis until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest
amounts contractually due have been collected and there is reasonable
assurance that repayment will continue within a reasonable time frame.
A loan is impaired when, based on current information, it is probable
that the Company will not be able to 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 loans effective
interest rate or the fair value of the collateral if the loan is collateral
dependent.
The Company maintained generally high loan quality during 1998. The
following table sets forth the amount of risk-element loans and other real
estate owned as of the dates indicated.
<TABLE>
<CAPTION>
Risk-element loans Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total Dec. 31 % of total
(dollars in thousands) 1998 loans 1997 loans 1996 loans 1995 loans 1994 loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual, past due,
and restructured loans $2,164 1.14% $1,238 0.67% $1,072 0.61% $1,152 0.67% $1,558 0.94%
Potential problem loans 0 0.00% 161 0.09% 448 0.26% 72 0.04% 0 0.00%
Foreign outstandings 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Total risk-element
loans $2,164 1.14% $1,399 0.76% $1,520 0.87% $1,224 0.71% $1,558 0.94%
</TABLE>
Included above are $385,750 of impaired loans (.20%) in non-accrual
status at December 31, 1998. In addition, there are impaired loans of
$89,836 (.05%) which management has considered in the allowance for credit
losses. The average balance of impaired loans during 1998 was $608,798.
Total risk-element assets (loans and other real estate) increased
during 1998. As a percentage of total outstanding loans, the non-
performing assets increased .38% to 1.14% in 1998. The percentage of risk-
element assets had decreased .11% in 1997 and increased .16% in 1996.
There are no foreign loans outstanding and no concentrations of credit
requiring disclosure.
On January 1, 1996, the Company adopted Statements of Financial
Accounting Standards Nos. 114 and 118 (SFAS114), "Accounting by Creditors
for Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." The adoption of SFAS 114 did not
result in additional provision for losses since the Company evaluates the
overall adequacy of the allowance for credit losses on an ongoing basis.
SFAS 114 does not apply to groups of smaller balance homogeneous loans that
are collectively evaluated for impairment. Loans collectively evaluated
for impairment include certain smaller balance commercial and agricultural
loans, consumer loans, residential real estate loans, and credit card
loans.
<PAGE>
Interest payments on impaired loans are typically applied to principal
unless collectability of the principal amount is fully assured, in which
case interest is recognized on the cash basis. The interest that would
have been reported in 1998 if all loans had been current throughout the
year in accordance with their original terms was $248,280 in comparison to
$141,511 actually collected.
DEPOSITS
The following table sets forth average daily deposits and the
percentage of total deposits for the periods indicated.
<TABLE>
<CAPTION>
Dec. 31, % of Dec. 31, % of Dec. 31, % of
(dollars in thousands) 1998 Total 1997 Total 1996 Total
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $25,920 12.10% $22,321 11.22% $21,504 11.19%
Interest-bearing demand 18,410 8.59% 17,412 8.75% 18,768 9.76%
Savings deposits 56,968 26.59% 52,199 26.24% 49,550 25.78%
Time deposits 112,948 52.72% 107,003 53.79% 102,398 53.27%
Total $214,246 100.00% $198,935 100.00% $192,220 100.00%
</TABLE>
During 1998, deposits increased 5.29%, or $11,172,202 to $222,321,660
at December 31, 1998 from $211,149,458 at December 31, 1997. Year-end 1998
non-interest bearing deposits were $31 million compared to $26 million at
the end of 1997. Demand deposits normally show a sizable increase as
businesses, and public entities adjust their cash positions at year-end.
The maturity distribution of time certificates of deposit of $100,000
or more at December 31, 1998 and December 31, 1997 is (in thousands):
<TABLE>
<CAPTION>
(dollars in thousands) Dec. 31, 1998 Dec. 31, 1997
<S> <C> <C>
3 months or less $7,036 $4,466
Over 3 months through 6 months 3,533 2,711
Over 6 months through 12 months 7,182 6,715
Over 12 months 5,800 9,137
Total $23,551 $23,029
</TABLE>
The Company continues to experience strong competition for deposits in
its markets. As a result, deposit products are being designed to retain
core deposit accounts, attract new customers, and create opportunities for
providing other bank services not offered by competitors.
<PAGE>
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under repurchase
agreements. The repurchase agreements are payable on demand. Average total
short-term borrowings were $19.2 million in 1998 compared with $19.1
million in 1997.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Securities sold under agreements to
repurchase $19,688 $16,078 $14,671
Average amounts outstanding during year $19,194 $19,122 $19,977
Average interest rates on amounts
outstanding during year 4.80% 5.11% 5.01%
Maximum month-end amounts outstanding $23,193 $28,166 $25,280
Average interest rates on amounts
outstanding at end of year 4.26% 4.95% 4.89%
</TABLE>
<PAGE>
CAPITAL ADEQUACY
During 1998, the Company's stockholders' equity increased by
$1,702,927 to $29,570,084; after adjusting for a change of $111,175 in net
unrealized gains. This increase was substantially from retention of
current year earnings. Note that subsequent to December 31, 1998 the
Company redeemed 39,304 shares of its common stock.
The Company is subject to risk-based capital guidelines of the Board
and the Bank is subject to equivalent capital guidelines of the FDIC.
A summary of Capital Ratios follows:
<TABLE>
CAPITAL RATIOS
(000's except percents)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Total Assets $280,479 $263,714 $251,521
Capital 29,570 27,867 25,725
Capital Ratio 10.54% 10.57% 10.23%
Total Assets $280,479 $263,714 $251,521
Less Goodwill (2,480) (2,767) (727)
Tangible Assets $277,999 $260,947 $250,794
Stockholders Equity $29,570 $27,867 $25,725
Less Goodwill (2,480) (2,767) (727)
Tangible Capital $27,090 $25,100 $24,998
Tangible Capital Ratio 9.74% 9.62% 9.97%
Risk-based Assets $190,547 $178,985 $171,526
Tangible Equity 27,090 25,100 24,998
Plus Security Valuation (459) (348) (176)
Less Equity Valuation
Tier 1 Capital $26,631 $24,752 $24,822
Plus Allowance for Credit Losses 2,159 1,990 2,031
Total Risk-based Capital $28,790 $26,742 $26,853
Tier 1 Capital Ratio 13.98% 13.83% 14.47%
Total Risk-based Capital Ratio 15.11% 14.94% 15.66%
</TABLE>
As of December 31, 1998, the Bank could have paid approximately
$9,082,000 of additional dividends to the Company without prior regulatory
approval. The payment of dividends is subject to the statutes governing
state-chartered banks. Management feels the capital structure of the
Company is adequate.
<PAGE>
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.
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
<PAGE>
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. 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.
The insurance industry as a whole, and the Company's insurer in particular,
has indicated that they will not provide, in many instances, coverage 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.
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information required by this Item 7A is set forth in Item 6,
"Selected Financial Data" and under subcaptions "Results of Operations",
"Market Risk", "Net Interest Income", "Provision for Credit Losses",
"Liquidity and Interest Sensitivity", "Investment Portfolio", and
"Deposits" under Item 7, Management's Discussion and Analysis of Financial
Conditions.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
Medford, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We have audited the accompanying consolidated balance sheets of Mid-
Wisconsin Financial Services, Inc. and Subsidiary as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mid-
Wisconsin Financial Services, Inc. and Subsidiary at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998 in conformity
with generally accepted accounting principles.
_______________________________________
Wipfli Ullrich Bertelson LLP
January 20, 1999
Wausau, Wisconsin
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Cash and due from banks $ 14,025,302 $ 9,521,270
Interest-bearing deposits in other financial institutions 43,453 21,260
Federal funds sold 9,223,000 4,616,000
Investment securities available for sale - At fair value 56,916,589 54,256,192
Loans held for sale 951,650 1,169,350
Loans receivable, net of allowance for credit losses of
$2,159,145 in 1998 and $1,990,090 in 1997 187,793,197 183,025,182
Accrued interest receivable 1,838,541 1,620,973
Premises and equipment 6,440,692 5,654,921
Goodwill and purchased intangibles 2,479,705 2,787,410
Other assets 766,691 1,003,003
TOTAL ASSETS $280,478,820 $263,675,561
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing deposits $ 31,540,360 $ 25,625,169
Interest-bearing deposits 190,781,300 185,524,289
Total deposits 222,321,660 211,149,458
Short-term borrowings 19,688,031 16,078,523
Long-term borrowings 5,800,000 5,400,000
Accrued expenses and other liabilities 3,099,045 3,180,423
Total liabilities 250,908,736 235,808,404
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares in 1998 and 1997
Issued and outstanding - 1,860,893 shares in 1998 186,089
- 1,864,122 shares in 1997 186,412
Additional paid-in capital 12,648,174 12,653,703
Retained earnings 16,276,389 14,678,785
Accumulated other comprehensive income, net of tax 459,432 348,257
Total stockholders' equity 29,570,084 27,867,157
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $280,478,820 $263,675,561
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 17,377,398 $ 16,821,018 $ 16,270,597
Interest and dividends on investment securities:
Taxable 2,994,394 3,152,401 3,303,183
Tax-exempt 551,107 422,524 306,252
Other interest and dividend income 219,142 117,257 74,593
Total interest income 21,142,041 20,513,200 19,954,625
Interest expense:
Deposits 8,809,600 8,382,923 7,974,336
Short-term borrowings 921,090 976,247 999,989
Long-term borrowings 373,753 353,725 223,290
Total interest expense 10,104,443 9,712,895 9,197,615
Net interest income 11,037,598 10,800,305 10,757,010
Provision for credit losses 420,000 140,000 400,000
Net interest income after provision for credit losses 10,617,598 10,660,305 10,357,010
Non-interest income:
Service fees 696,768 631,553 594,330
Trust service fees 487,795 448,174 382,524
Net realized gain on sale of securities available for sale 1,900 14,632
Gain on pension settlement/curtailment 258,294 367,815
Investment product commissions 271,903 247,183 212,871
Gain on sale of mortgage servicing rights 212,881
Other operating income 626,850 445,414 475,519
Total non-interest income 2,085,216 2,258,131 2,033,059
Non-interest expenses:
Salaries and employee benefits 4,237,853 4,215,070 4,080,862
Occupancy 1,013,016 971,420 924,571
Data processing and information systems 497,766 508,036 512,539
Goodwill and purchased intangibles amortization 307,704 178,868 86,433
Net realized loss on sale of securities available for sale 159,812
Other operating 1,844,060 1,682,427 1,569,297
Total non-interest expenses 7,900,399 7,555,821 7,333,514
Income before income taxes 4,802,415 5,362,615 5,056,555
Provision for income taxes 1,554,331 1,855,161 1,780,114
Net income $3,248,084 $3,507,454 $3,276,441
Basic and diluted earnings per share $ 1.74 $ 1.88 $ 1.76
Cash dividends declared per share $ .81 $ .75 $ .67
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Stock Paid-In Retained Income
Shares Amount Capital Earnings (Loss) Totals
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,857,290 $185,729 $12,573,366 $10,685,070 $305,793 $23,749,958
Comprehensive income:
Net income 3,276,441 3,276,441
Unrealized loss on securities
available for sale, net of tax (129,788) (129,788)
Total comprehensive income 3,146,653
Proceeds from stock options 8,079 808 74,249 75,057
Cash dividends declared $.67
per share (1,247,037) (1,247,037)
Balance, December 31, 1996 1,865,369 186,537 12,647,615 12,714,474 176,005 25,724,631
Comprehensive income:
Net income 3,507,454 3,507,454
Unrealized gain on securities
available for sale, net of tax 172,252 172,252
Total comprehensive income 3,679,706
Proceeds from stock options 7,981 798 100,262 101,060
Repurchase of common stock returned
to unissued (9,228) (923) (94,174) (143,907) (239,004)
Cash dividends declared $.75
per share (1,399,236) (1,399,236)
Balance, December 31, 1997 1,864,122 186,412 12,653,703 14,678,785 348,257 27,867,157
Comprehensive income:
Net income 3,248,084 3,248,084
Unrealized gain on securities
available for sale, net of tax 111,175 111,175
Total comprehensive income 3,359,259
Proceeds from stock options 4,678 468 71,600 72,068
Repurchase of common stock
returned to unissued (7,907) (791) (77,129) (143,575) (221,495)
Cash dividends declared $.81
per share (1,506,905) (1,506,905)
Balance, December 31, 1998 1,860,893 $186,089 $12,648,174 $16,276,389 $459,432 $29,570,084
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,248,084 $3,507,454 $3,276,441
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and net amortization 946,992 841,970 777,953
Provision for credit losses 420,000 140,000 400,000
Provision (benefit) for deferred income taxes (114,504) 80,614 31,913
Proceeds from sales of loans held for sale 9,559,744 3,855,675 6,118,766
Gain on sale of loans held for sale (159,774) (36,631) (38,541)
Originations of loans held for sale (9,182,270) (4,868,394) (4,886,425)
(Gain) loss on sale of investment securities (1,900) (14,632) 159,812
Gain on curtailment of pension plan (367,815)
Gain on settlement of pension plan (258,294)
Gain on sale of mortgage servicing rights (212,881)
Loss on premises and equipment disposals 12,489 1,717 441
Loss on sale of other real estate 28 29,432
Changes in operating assets and liabilities:
Other assets 74,064 (59,352) (2,864)
Other liabilities (81,378) 152,367 342,578
Net cash provided by operating activities 4,721,575 3,159,045 5,812,259
Cash flows from investing activities:
Available for sale securities:
Proceeds from sales 1,499,869 1,549,804 6,555,302
Proceeds from maturities 21,777,200 14,664,102 19,775,437
Payment for purchases (25,695,462) (13,004,472) (28,636,385)
Net increase in loans (5,509,352) (10,394,025) (3,817,517)
Net (increase) decrease in interest-bearing
deposits in other institutions (22,193) (11,027) 10,013
Net increase in federal funds sold (4,607,000) (4,616,000)
Capital expenditures (1,501,908) (2,259,265) (436,079)
Proceeds from sale of equipment 50 2,950
Proceeds from sale of other real estate 315,925 309,179 5,000
Premium paid to purchase deposits (2,218,437)
Net cash used in investing activities (13,742,921) (15,980,091) (6,541,279)
</TABLE>
<PAGE>
<TABLE>
MID-WISCONSIN FINANCIAL SERVICES, INC.
And Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Continued)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in non-interest-bearing deposits $5,915,191 $2,541,584 $438,316
Net increase in interest-bearing deposits 5,257,011 6,195,767 9,829,385
Proceeds from exercise of stock options 72,068 101,060 75,057
Payment for repurchase of common stock (221,495) (239,004)
Net increase (decrease) in short-term borrowings 3,609,508 1,407,259 (6,715,359)
Proceeds from issuance of long-term borrowings 4,000,000 1,000,000 3,000,000
Principal payments on long-term borrowings (3,600,000) (1,000,000) (1,600,000)
Dividends paid (1,506,905) (1,399,236) (1,247,037)
Net cash provided by financing activities 13,525,378 8,607,430 3,780,362
Net increase (decrease) in cash and due from banks 4,504,032 (4,213,616) 3,051,342
Cash and due from banks at beginning 9,521,270 13,734,886 10,683,544
Cash and due from banks at end $14,025,302 $9,521,270 $13,734,886
Supplemental cash flow information:
Cash paid during the year for:
Interest $10,285,845 $9,722,432 $9,234,573
Income taxes 1,541,025 1,805,025 1,712,851
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to other real estate 322,004 253,198 135,000
Loans charged off 328,569 244,874 311,538
Loans made in connection with the disposition
of other real estate 241,752
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Mid-Wisconsin
Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank. All
significant intercompany balances and transactions have been eliminated.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practice within the banking
industry.
The Company operates as a full-service financial institution with a primary
market area including, but not limited to, Clark, Taylor, Price, and Oneida
Counties, Wisconsin. It provides a variety of core banking products in
addition to trust services and investment product sales.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Due From Banks
For purposes of reporting cash flows, cash and due from banks include cash
on hand and non-interest-bearing deposits in correspondent banks.
Investment Securities
Investment securities are assigned an appropriate classification at the
time of purchase in accordance with management's intent. Securities held
to maturity represent those securities for which the Company has the
positive intent and ability to hold to maturity. Accordingly, these
securities are carried at cost adjusted for amortization of premium and
accretion of discount calculated using the effective yield method.
Unrealized gains and losses on securities held to maturity are not
recognized in the financial statements. The Company has no held to
maturity securities.
Trading securities include those securities bought and held principally for
the purpose of selling them in the near future. The Company has no trading
securities.
Securities not classified as either securities held to maturity or trading
securities are considered available for sale and reported at fair value
determined from estimates of brokers or other sources. Unrealized gains
and losses are excluded from earnings but are reported as other
comprehensive income in a separate component of stockholders' equity, net
of income tax effects.
Any gains and losses on sales of securities are recognized at the time of
sale using the specific identification method.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest and Fees on Loans
Interest on loans is credited to income as earned. Interest income is not
accrued on loans where management has determined collection of such
interest is doubtful. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest deemed uncollectible is reversed and
charged against current income.
Loan origination fees and certain direct loan origination costs are
deferred and amortized to income over the contractual lives of the
underlying loans.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based upon
reviews of individual credits, recent loss experience, current economic
conditions, composition of the loan portfolio, and other relevant factors.
Provisions for credit losses and recoveries on loans previously charged off
are added to the allowance.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges
to income. Mortgage servicing rights are not retained.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation.
Maintenance and repair costs are charged to expense as incurred. Gains or
losses on disposition of premises and equipment are reflected in income.
Depreciation is computed on both accelerated and straight-line methods and
is based on the estimated useful lives of the assets varying from 10 to 50
years on buildings and 3 to 20 years on equipment.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at
the lower of carrying amount or fair value less estimated cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in loss on foreclosed real estate.
Intangibles
The excess of cost over the net assets acquired (goodwill) is being
amortized using the straight-line method over a 15-year period from the
date of acquisition.
Purchased deposit base intangible is amortized using the systematic method
over an eight-year period.
The Company periodically evaluates the carrying value and remaining
amortization period of all long-lived assets including intangible assets
for impairment. Adjustments are recorded when the benefit of the asset
decreases due to disposition of deposits associated with the entity
acquired in the purchase business combination.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Plans
The Company had a noncontributory defined benefit pension plan which
covered substantially all full-time employees. This plan was terminated
effective January 1, 1997 and replaced with a money purchase defined
contribution pension plan covering substantially the same employees. The
Company also maintains a defined contribution 401(k) profit-sharing plan
which covers substantially all employees.
Income Taxes
Deferred income taxes have been provided under the liability method.
Deferred tax assets and liabilities are determined based upon the
differences between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates which will be in effect
when these differences are expected to reverse. Deferred tax expense is
the result of changes in the deferred tax asset and liability.
Earnings Per Share
Earnings per common share are based upon the weighted average number of
common shares outstanding which includes the common stock equivalents
applicable to shares issuable under the stock options granted. The
weighted average number of shares outstanding were 1,861,787 in 1998,
1,867,610 in 1997, and 1,864,840 in 1996.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Under this SFAS, the Company reports those items defined as comprehensive
income in the statement of changes in stockholders' equity. The adoption
of SFAS No. 130 did not have an impact on the Company's financial condition
or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" which was issued
in June 1997. This statement establishes new standards for reporting
information about operating segments in annual and interim financial
statements. The standard also required descriptive information about the
way 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. The
disclosure requirements had no impact on the Company's financial position
or results of operations.
Effective January 1, 1998, The Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which was
issued in February 1998. This statement revises employers' disclosures
about pension and other postretirement benefit plans. It did not change
the measurement or recognition of those plans. It standardized the
disclosure requirements and required additional information on changes in
benefit obligations and fair value of plan assets, and eliminated certain
disclosures no longer useful. The disclosure requirements had no impact on
the Company's financial position or results of operations.
<PAGE>
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLE (CONTINUED)
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statements of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP 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.
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." In part, this SFAS changed the method of accounting for
serviced loans and superseded SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which was adopted by the Company during 1996. The
adoption had an insignificant effect on the financial statements during the
year of adoption.
Effective January 1, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." There was no impact on net income as a result of the adoption of
SFAS No. 128. This statement requires the reporting of both basic and
diluted earnings per share.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed of." There was no
impact on net income as a result of the adoption of SFAS No. 121. The
Company had no long-lived assets considered to be impaired at the time of
adopting the standard.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." Under this SFAS, the Company is required to
disclose in the notes to the financial statements the difference between
the "fair value method" and the "intrinsic value method" as prescribed by
the Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company continues to account for stock-based
compensation in accordance with APB Opinion No. 25, with differences from
the "fair value method" disclosed. The adoption had no effect on the
financial statements.
NOTE 3 - PURCHASE OF BRANCHES
During 1997, the Company completed the purchase of two branches of a
commercial bank located in Lake Tomahawk and Rhinelander. The acquisition
of these branches, now operating as branches of the Company's subsidiary,
was accounted for as a purchase. Consequently, the related accounts and
results of operations are included in the Company's consolidated financial
statements from the date of acquisition. At the date of acquisition, the
assets purchased and liabilities assumed consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Loans and accrued interest $ 872,223
Real estate and equipment 891,000
Cash on hand 144,140
Deposits and accrued interest (20,083,476)
Deposit base intangible 2,218,437
</TABLE>
The deposit base intangible is being amortized on a systematic basis over
an eight-year period. Deposit base intangible amortization expense totaled
$221,271 and $72,075 during 1998 and 1997, respectively.
<PAGE>
NOTE 4 - CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $1,040,000 is restricted at
December 31, 1998 to meet the reserve requirements of the Federal Reserve
System.
In the normal course of business, the Company and its subsidiary maintain
cash and due from bank balances with correspondent banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company and its subsidiary also maintain cash balances in
money market funds. Such balances are not insured.
NOTE 5 - INVESTMENT SECURITIES
The fair value, amortized cost, and gross unrealized gains and losses for
the Company's securities available for sale follow:
<TABLE>
<CAPTION>
Gross Gross
Fair Unrealized Unrealized Amortized
Value Gains Losses Cost
December 31, 1998
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $11,206,494 $88,788 $ $11,117,706
Obligations of states and
political subdivisions 14,007,008 355,340 12,873 13,664,541
Corporate securities 584,350 9,350 575,000
Mortgage-backed securities 29,534,028 300,209 30,324 29,264,143
Equity securities 1,584,709 1,584,709
Totals $56,916,589 $753,687 $43,197 $56,206,099
December 31, 1997
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $15,756,976 $113,622 $16,924 $15,660,278
Obligations of states and
political subdivisions 10,355,359 251,408 2,247 10,106,198
Corporate securities 1,689,391 10,934 1,678,457
Mortgage-backed securities 25,266,862 224,097 52,072 25,094,837
Equity securities 1,187,604 1,187,604
Totals $54,256,192 $600,061 $71,243 $53,727,374
</TABLE>
<PAGE>
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
As a member of the Federal Home Loan Bank (FHLB) system, the banking
subsidiary is required to hold stock in the FHLB based on asset size. This
stock is recorded at cost which is equal to par value. Equity securities
include $817,500 and $984,000 of FHLB stock at December 31, 1998 and 1997,
respectively. Transfer of the stock is substantially restricted.
The book values and fair values of debt securities at December 31, 1998, 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.
<TABLE>
<CAPTION>
Fair Book
Values Values
Debt Securities Available for Sale
<S> <C> <C>
Due in one year or less $5,091,300 $5,069,834
Due after one year through five years 14,154,038 13,877,375
Due after five years through ten years 6,552,514 6,410,038
Mortgage-backed securities 29,534,028 29,264,143
Total debt securities available for sale $55,331,880 $54,621,390
</TABLE>
Following is a summary of the proceeds from sales of investment securities
as well as gross realized gains and losses for the years ended December 31:
<TABLE>
Securities Available for Sale
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Proceeds from sales of investments $1,499,869 $1,549,804 $6,555,302
Debt securities - Gross realized gains $ 3,150 $ 14,632 $ 1,553
Debt securities - Gross realized losses (1,250)
Equity securities - Net realized losses (161,365)
Total investment securities gains (losses) $ 1,900 $ 14,632 $ (159,812)
</TABLE>
Securities with an approximate carrying value of $25,438,000 and
$32,890,000 at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits, short-term borrowings, and for other purposes
required by law.
<PAGE>
NOTE 6 - LOANS
The composition of loans at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial $ 32,625,773 $ 27,004,397
Agricultural 36,108,289 34,962,725
Real estate:
Construction 3,454,784 1,700,017
Commercial 45,278,804 47,080,271
Residential 61,280,463 61,310,410
Installment 10,963,260 12,642,454
Lease financing 316,743 417,926
Subtotals 190,028,116 185,118,200
Net deferred loan fees (75,774) (102,928)
Allowance for credit losses (2,159,145) (1,990,090)
Net loans $187,793,197 $183,025,182
</TABLE>
The Company, in the ordinary course of business, grants loans to the
Company's executive officers and directors, including their families and
firms in which they are principal owners. The Bank has a policy of making
loans (limited to $50,000 per individual) available to employees and
executive officers at interest rates slightly below those prevailing for
comparable transactions with other customers. In the opinion of
management, such loans do not involve more than the normal risk of
collectibility or present other unfavorable features.
Activity in related party loans for the years ended December 31, is
summarized below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Loans outstanding, January 1 $2,696,520 $1,891,208
New loans 2,242,161 1,327,931
Repayments (1,635,714) (522,619)
Loans outstanding, December 31 $3,302,967 $2,696,520
</TABLE>
The allowance for credit losses includes specific allowances related to
loans which have been judged to be impaired and which fall within the scope
of SFAS No. 114. A loan is impaired when, based on current information, it
is probable that the Company will not collect all amounts due in accordance
with the contractual terms of the loan agreement. These specific
allowances are based on discounted cash flows of expected future payments
using the loan's initial effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
<PAGE>
NOTE 6 - LOANS (CONTINUED)
An analysis of impaired loans follows:
<TABLE>
<CAPTION>
At December 31, 1998 1997
<S> <C> <C>
Nonaccrual $385,750 $539,513
Accruing income 89,836 161,406
Total impaired loans 475,586 700,919
Less - Allowance for credit losses 133,762 194,464
Net investment in impaired loans $341,824 $506,455
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Average recorded investment, net of
allowance for credit losses $608,798 $743,114 $779,924
Interest income recognized $ 48,157 $ 69,362 $ 86,776
</TABLE>
The Company continues to maintain a general allowance for credit losses for
loans outside of the scope of SFAS No. 114. The allowance for credit
losses is maintained at a level which management believes is adequate for
possible credit losses. Management periodically evaluates the adequacy of
the allowance using the Company's past credit loss experience, known and
inherent risks in the portfolio, composition of the portfolio, current
economic conditions, and other relevant factors. This evaluation is
inherently subjective since it requires material estimates that may be
susceptible to significant change.
An analysis of the allowance for credit losses for the three years ended
December 31, follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $1,990,090 $2,030,878 $1,835,951
Provision charged to operating expense 420,000 140,000 400,000
Recoveries on loans 77,624 64,086 106,465
Loans charged off (328,569) (244,874) (311,538)
Balance, December 31 $2,159,145 $1,990,090 $2,030,878
</TABLE>
<PAGE>
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land and improvements $ 898,994 $ 875,994
Buildings 5,661,091 5,051,379
Furniture and equipment 4,919,131 4,627,070
Total cost 11,479,216 10,554,443
Accumulated depreciation 5,038,524 4,899,522
Net book value $ 6,440,692 $ 5,654,921
</TABLE>
Depreciation and amortization charged to operating expense totaled $682,465
in 1998, $675,358 in 1997, and $680,295 in 1996.
NOTE 8 - INTEREST-BEARING DEPOSITS
Aggregate annual maturities of certificate and IRA accounts at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 80,354,456
2000 20,650,231
2001 5,107,075
2002 4,603,952
2003 5,120
Total $ 110,720,834
</TABLE>
Deposits from Company directors, executive officers, and related firms in
which they are principal owners totaled $3,239,545 and $3,809,192 at
December 31, 1998 and 1997, respectively.
Interest-bearing deposits include $23,551,739 and $23,028,560 of
certificates of deposit in denominations of $100,000 or more at December
31, 1998 and 1997, respectively.
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 and 1997 totaled $19,688,031 and
$16,078,523, respectively, and consisted of securities sold under
repurchase agreements.
As a member of the Federal Home Loan Bank (FHLB) System, the Company has
available a line of credit totaling $16,350,000 at December 31, 1998. At
December 31, 1998, the Company's available and unused portion of this line
of credit totaled $10,550,000.
<PAGE>
NOTE 9 - SHORT-TERM BORROWINGS (CONTINUED)
The following information relates to federal funds purchased, securities
sold under repurchase agreements, and FHLB open line of credit, for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Weighted average rate at December 31 4.26% 4.95% 4.89%
For the year:
Highest month-end balance $23,192,687 $28,166,356 $25,280,224
Daily average balance 19,193,892 19,121,688 19,976,901
Weighted average rate 4.80% 5.11% 5.01%
</TABLE>
At December 31, 1998, the Company maintained repurchase agreements
aggregating $11,050,000 with two entities. The repurchase agreements are
payable on demand.
NOTE 10 - LONG-TERM BORROWINGS
Long-term borrowings at December 31, consist of the following:
<TABLE>
<CAPTION
1998 1997
<S> <C> <C>
6.23% FHLB advance, interest payable monthly with principal
due during 1999 $1,000,000 $1,000,000
5.46% FHLB advance, interest payable monthly with principal
due during 2000 800,000 800,000
5.41% FHLB advance, interest payable monthly with principal
due during 2001 1,000,000
5.30% FHLB advance, interest payable monthly with principal
due during 2008, callable during 2000 1,000,000
5.51% FHLB advance, interest payable monthly with principal
due during 2008, callable during 2003 2,000,000
4.98%-6.55% FHLB advances, interest payable monthly with
principal due during 1998 3,600,000
Totals $5,800,000 $5,400,000
</TABLE>
The FHLB advances are secured by a blanket lien consisting principally of
one-to-four family real estate loans totaling $9,667,000 and $9,000,000 at
December 31, 1998 and 1997, respectively.
<PAGE>
NOTE 11 - INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
1998 1997 1995
<S> <C> <C> <C>
Current income tax provision:
Federal $1,471,839 $1,507,354 $1,471,075
State 196,996 267,193 277,126
Total current 1,668,835 1,774,547 1,748,201
Deferred income tax expense (benefit):
Federal (91,237) 63,632 25,190
State (23,267) 16,982 6,723
Total deferred (114,504) 80,614 31,913
Total provision for income taxes $1,554,331 $1,855,161 $1,780,114
</TABLE>
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax expense at
statutory rate $1,632,821 34.0 $1,823,289 34.0 $1,719,229 34.0
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (232,289) (4.8) (190,215) (3.5) (160,572) (3.2)
State income tax 114,661 2.4 187,556 3.4 187,340 3.7
Other 39,138 .8 34,531 .7 34,117 .7
Provision for income taxes $1,554,331 32.4 $1,855,161 34.6 $1,780,114 35.2
</TABLE>
<PAGE>
NOTE 11 - INCOME TAXES (CONTINUED)
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. The major components of the net deferred taxes are as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 489,358 $ 423,089
Deferred compensation 256,773 268,374
State net operating loss 44,986 78,678
Purchased deposit intangible 37,680 16,898
Other deferred expenses 2,620 6,901
831,417 793,940
Less - Valuation allowance (44,986) (78,678)
Total deferred tax assets 786,431 715,262
Deferred tax liabilities:
Premises and equipment 146,263 182,973
Direct lease financing 72,462 78,331
Unrealized gain on securities
available for sale 253,978 182,818
Other deferred income 1,890 2,646
Total deferred tax liabilities 474,593 446,768
Net deferred tax assets $ 311,838 $ 268,494
</TABLE>
The Company, and its subsidiary, pay state income taxes on individual,
unconsolidated net earnings. At December 31, 1998, tax net operating
losses at the parent company level of approximately $863,000 existed to
offset future state taxable income. These net operating losses will begin
to expire in 2007. The valuation allowance has been recognized to adjust
deferred tax assets to the amount of tax net operating losses expected to
be realized. If realized, the tax benefit for this item will reduce
current tax expense for that period.
NOTE 12 - RETIREMENT PLANS
The Company has established a noncontributory defined contribution money
purchase pension plan. Company contributions to this plan, as determined
by the Board of Directors, totaled $137,071 and $141,919 during 1998 and
1997, respectively. Under the terms of the plan, the Company will
contribute annually to the plan based on a percentage of annual salaries
and wages.
<PAGE>
NOTE 12 - RETIREMENT PLANS (CONTINUED)
Contributions to the Company's 401(k) profit-sharing plan are based on
achieving desired Company profitability and the Board of Directors'
authorization. The Company matches 100 percent of employee contributions
to the plan up to 5 percent of pay deferred in addition to the
discretionary profit-sharing contribution. For the years ended December
31, 1998, 1997, and 1996, the amount of the plan expense was $171,312,
$274,858, and $394,036, respectively.
Effective January 1, 1997, the Company terminated its defined benefit
pension plan and replaced it with the noncontributory defined contribution
money purchase pension plan covering substantially the same employees. The
Company received regulatory approval to distribute participants' vested
defined benefit pension plan balances into the new money purchase pension
plan. During 1997, the Company settled the defined benefit pension plan
obligation by transferring existing plan assets of $1,840,121 to the money
purchase pension plan in settlement of all benefit obligations. Plan
assets of $35,477 in excess of benefit obligations were allocated to plan
participants.
The following tables provide a reconciliation of changes in the plan's
benefit obligation and fair value of assets for the year ended December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Reconciliation of benefit obligation:
Obligation at January 1 $ 2,376,810
Interest cost 59,549
Benefit payments (373,421)
Gain on settlement of plan due to applicable benefit
payout interest rates at time of settlement (258,294)
Rollover of amounts due participants to the money
purchase pension plan (1,804,644)
Obligation at December 31 $ -0-
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 $ 2,135,771
Actual return on plan assets, net of
administrative expenses 77,771
Benefit payments (373,421)
Rollover of investment fair value to the money purchase
pension plan (1,840,121)
Fair value of plan assets at December 31 $ -0-
</TABLE>
<PAGE>
NOTE 12 - RETIREMENT PLANS (CONTINUED)
The following table provides the components of net periodic benefit cost
(income) of the plan for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Service cost $ $ 96,743
Interest cost 59,549 164,023
Expected return on plan assets (72,070) (218,324)
Amortization of transition obligation (5,701) 83,638
Net periodic pension cost (income) (18,222) 126,080
Curtailment gain (367,815)
Settlement gain (258,294)
Net periodic benefit income after settlement
and curtailment $(276,516) $(241,735)
</TABLE>
NOTE 13 - STOCK OPTIONS
Under the terms of existing stock option plans, shares of unissued common
stock are reserved for options to officers and key employees of the Company
at prices not less than the fair market value of the shares at the date of
the grant. Options expire no later than approximately five years from the
date of the grant.
At December 31, 1998, options outstanding are as follows:
<TABLE>
<CAPTION>
Number of Shares Option Price
Outstanding Exercisable* Per Share
<S> <C> <C> <C>
2,378 2,378 $ 16.00
2,405 2,405 19.50
2,261 2,261 24.00
2,316 2,316 27.25
9,360 9,360
</TABLE>
*Options can be exercised only between the fourth and fifth anniversaries
of the date of grant.
For the years ended December 31, 1996, 1997 and 1998, options exercised
were as follows:
<TABLE>
<CAPTION>
Year Price at Which
Exercised Shares Exercised
<S> <C> <C>
1996 8,079 $ 9.29
1997 7,981 12.66
1998 4,678 15.41
</TABLE>
<PAGE>
NOTE 13 - STOCK OPTIONS (CONTINUED)
As of December 31, 1998, 62,242 shares of common stock remain reserved for
future grants under option plans approved by the shareholders.
Had compensation cost for the Company's stock-based plans been determined
in accordance with SFAS No. 123, net income would have been $3,242,665,
$3,498,424, and $3,271,628 in 1998, 1997, and 1996, respectively. Earnings
per share, assuming dilution, would have been $1.74 in 1998, $1.87 in 1997,
and $1.75 in 1996.
NOTE 14 - CAPITAL REQUIREMENTS
The Company and subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the bank must meet specific capital guidelines that
involve quantitative measures of the bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998,
that the bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998 and 1997, the most recent notification from the
Federal Deposit Insurance Corporation categorized the bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
<PAGE>
NOTE 14 - CAPITAL REQUIREMENTS (CONTINUED)
The Company and subsidiary bank's actual capital amounts and ratios are
also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk
weighted assets):
Consolidated $ 28,790,000 15.1% $ 15,244,000 8.0% N/A
Subsidiary bank $ 24,375,000 12.9% $ 15,074,000 8.0% $ 18,842,000 10.0%
Tier I capital (to risk
weighted assets):
Consolidated $ 26,631,000 14.0% $ 7,622,000 4.0% N/A
Subsidiary bank $ 22,216,000 11.8% $ 7,537,000 4.0% $ 11,305,000 6.0%
Tier I capital (to average
assets):
Consolidated $ 26,631,000 9.5% $ 11,219,000 4.0% N/A
Subsidiary bank $ 22,216,000 8.0% $ 11,112,000 4.0% $ 13,890,000 5.0%
As of December 31, 1997:
Total capital (to risk
weighted assets):
Consolidated $ 26,742,000 14.9% $ 14,324,000 8.0% N/A
Subsidiary bank $ 22,757,000 12.7% $ 14,324,000 8.0% $ 17,904,000 10.0%
Tier I capital (to risk
weighted assets):
Consolidated $ 24,752,000 13.8% $ 7,162,000 4.0% N/A
Subsidiary bank $ 20,767,000 11.6% $ 7,162,000 4.0% $ 10,743,000 6.0%
Tier I capital (to average
assets):
Consolidated $ 24,752,000 9.5% $ 10,438,000 4.0% N/A
Subsidiary bank $ 20,767,000 8.0% $ 10,438,000 4.0% $ 13,047,000 5.0%
</TABLE>
NOTE 15 - RESTRICTIONS ON RETAINED EARNINGS
The banking subsidiary is restricted by banking regulations from making
dividend distributions above prescribed amounts and limited in making loans
and advances to the Company. At December 31, 1998, the retained earnings
of the subsidiary available for distribution as dividends without
regulatory approval was approximately $9,082,000.
<PAGE>
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized
in the balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. These commitments at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit:
Fixed rate $ 9,968,186 $ 11,134,093
Adjustable rate 10,827,641 7,884,178
Standby and irrevocable letters of
credit - Fixed rate 1,692,937 1,484,147
Credit card commitments 4,774,637 4,144,150
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
party. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The commitments are structured to allow for collateralization
on all standby letters of credit in the same manner and terms as exist on
loans of similar risk.
Credit card commitments are commitments on credit cards issued by the
Company and serviced by Elan Financial Services. These commitments are
unsecured.
<PAGE>
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
Contingencies
Under the most recent provisions approved by the Company's Board of
Directors, up to 93,045 shares may be repurchased from shareholders at a
price of $27.50 per share. Subsequent to December 31, 1998, various
shareholders holding 39,304 shares elected to have the Company repurchase
their shares in a transaction to be completed in 1999.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the
consolidated financial statements.
Concentration of Credit Risk
The Company grants residential, commercial, agricultural and consumer loans
predominantly in central and northern Wisconsin. There were no significant
concentrations of credit to any one debtor or industry group. It is felt
that the diversity of the local economy will prevent significant losses in
the event of an economic downturn.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments:
Cash and Short-Term Investments: The carrying amounts reported in the
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.
Investment Securities: Fair values are based on quoted market prices,
where available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, residential mortgage, and other consumer. The fair value of
loans is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Company's repayment schedules for each loan
classification. In addition, for impaired loans, marketability and
appraisal values for collateral were considered in the fair value
determination. The carrying amount of accrued interest approximates its
fair value.
Deposit Liabilities: The fair value of deposits with no stated
maturity, such as non-interest-bearing demand deposits, savings, NOW
accounts and money market accounts, is equal to the amount payable on
demand at the reporting date. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate
reflects the credit quality and operating expense factors of the Company.
Short-Term Borrowings: The carrying amount reported in the
consolidated balance sheets for short-term borrowings approximates the
liability's fair value.
<PAGE>
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Long-Term Borrowings: The fair values of the Company's long-term
borrowings (other than deposits) are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
Off-Balance-Sheet Instruments: The fair value of commitments would be
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 credit worthiness of the counter
parties. Since this amount is immaterial, no amounts for fair value are
presented.
The following table presents information for financial instruments:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $23,291,755 $23,291,755 $14,158,530 $14,158,530
Investment securities 56,916,589 56,916,589 54,256,192 54,256,192
Net loans 188,744,847 189,896,191 184,194,532 184,526,082
Financial liabilities:
Deposits 222,321,660 223,008,129 211,149,458 211,273,707
Short-term borrowings 19,688,031 19,688,031 16,078,523 16,078,523
Long-term borrowings 5,800,000 5,690,402 5,400,000 5,367,963
</TABLE>
Limitations: Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the Company's 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 judgement 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, other assets and other liabilities. In addition, the tax
ramifications related to the realization of the unrealized gains or losses
can have a significant effect on fair value estimates and have not been
considered in the estimates.
<PAGE>
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
<TABLE>
BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Cash and due from banks $ 4,324,063 $ 4,038,731
Investment in subsidiary 25,154,629 23,882,439
Premises and equipment 132,038 32,652
Other assets 66,417 70,687
Total assets $ 29,677,147 $ 28,024,509
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 107,063 $ 157,352
Total stockholders' equity 29,570,084 27,867,157
Total liabilities and stockholders' equity $ 29,677,147 $ 28,024,509
</TABLE>
<PAGE>
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
<TABLE>
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 2,000,000 $ 1,100,000 $ 2,800,000
Interest 181,951 194,589 145,271
Rental income 180,000 180,000 182,250
Other 2 1,269 5,116
Total income 2,361,953 1,475,858 3,132,637
Expenses:
Salaries and benefits 52,717 48,115 55,142
Other 177,274 235,410 286,251
Total expenses 229,991 283,525 341,393
Income before income taxes and equity in
undistributed net income of subsidiary 2,131,962 1,192,333 2,791,244
Provision for income tax expense (benefit) 44,892 31,418 (2,952)
Net income before equity in undistributed
net income of subsidiary 2,087,070 1,160,915 2,794,196
Equity in undistributed net income of subsidiary 1,161,014 2,346,539 482,245
Net income $ 3,248,084 $ 3,507,454 $ 3,276,441
</TABLE>
<PAGE>
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
<TABLE>
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $ 3,248,084 $ 3,507,454 $ 3,276,441
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and net amortization 85,096 132,194 169,077
Equity in undistributed net income of subsidiary (1,161,014) (2,346,539) (482,245)
Changes in operating assets and liabilities:
Other assets 9,988 (2,117) 55,042
Liabilities (50,289) 66,029 1,034
Net cash provided by operating activities 2,131,865 1,357,021 3,019,349
Net cash used in investing activities - Capital expenditures (190,201) (14,216) (32,550)
Cash flows from financing activities:
Proceeds from exercise of stock options 72,068 101,060 75,057
Payments for repurchase of common stock (221,495) (239,004)
Dividends paid (1,506,905) (1,399,236) (1,247,037)
Net cash used in financing activities (1,656,332) (1,537,180) (1,171,980)
Net increase (decrease) in cash and due from banks 285,332 (194,375) 1,814,819
Cash and due from banks at beginning 4,038,731 4,233,106 2,418,287
Cash and due from banks at end $ 4,324,063 $ 4,038,731 $ 4,233,106
Supplemental cash flow information:
Cash paid during the year for income taxes $ 1,367,000 $ 1,540,025 $ 1,475,025
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by
this reference to the table on pages 3 and 4 of registrant's 1999 Proxy
Statement dated March 26, 1999 (the "1999 Proxy Statement") under the
caption "Election of Directors". Information relating to executive
officers is found in Part I, page 5 of this Form 10-K. Information
required under Rule 405 of Regulation S-K is incorporated in this Form 10-
K by reference to page 7 of the Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive and director compensation is
incorporated in this Form 10-K by this reference to the registrant's 1999
Proxy Statement under (1) the caption "Executive Officer Compensation,"
pages 7 through the material immediately preceding the subcaption
"Committees' Report on Executive Compensation Policies" on page 9, (2) the
material under the subcaption
"Committee Interlocks and Insider Participation", page 12, and (3) the
material under the subcaption "Director Compensation", pages 5 and 6.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial
owners is incorporated in this Form 10-K by this reference to the
registrant's 1999 Proxy Statement under the caption "Beneficial Ownership
of Common Stock," pages 6 and 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions
is incorporated in this Form 10-K by this reference to the registrant's
1999 Proxy Statement under the caption "Certain Relationships and Related
Transactions," page 14.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Description Page
The Company Financial Services, Inc.
Consolidated Financial Statements
Accountants' Report 34
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Changes in Stockholders' Equity 37
Consolidated Statements of Cash Flows 38
Notes to Consolidated Financial Statements 40
(b) Reports on Form 8-K
None
(c) Exhibits Required by Item 601 of Regulation S-K:
Incorporated
Exhibit No. and Description Exhibit <dagger>
(3) Articles of Incorporation and Bylaws
(a) Articles of Incorporation, as amended 3 (a) (1)
(b) Bylaws, as amended September 20, 1995 3 (b) (1)
(4) Instruments defining the rights of security
holders, including indentures
(a) Articles of Incorporation and
Bylaws (See (3)(a) and (b))
<PAGE>
Incorporated
Exhibit No. and Description Exhibit
(10) Material contracts:
**(a) 1997 Mid-Wisconsin Bank
Senior Officer Incentive Bonus Plan 10 (a) (2)
**(b) Mid-Wisconsin Financial Services, Inc.
1991 Employee Stock Option Plan 10 (b) (1)
**(c) Mid-Wisconsin Financial Services, Inc.
Directors' Deferred Compensation Plan
**(d) Executive Officer Employment and Severance
Agreements 10 (d) (2)
**(e) Executive Officer Bonus Plan 10 (e) (2)
**(f) Mid-Wisconsin Bank
Senior Officer Incentive Bonus Plan 10 (f) (2)
(21) Subsidiaries of the registrant 21 (1)
(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, 1995, as filed with the
Commission on March 26, 1996, Commission File No. 0-18542.
(2) Form 10-K for the year ended December 31, 1997, as filed with the
Commission on March 23, 1998, Commission File No. 0-18542.
The exhibits listed above are available upon request in writing to
William A. Weiland, Secretary, Mid-Wisconsin Financial Services, Inc., 132
West State Street, Medford, Wisconsin 54451.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1994, the registrant had duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 17, 1999.
MID-WISCONSIN FINANCIAL SERVICES, INC.
James R. Peterson
James R. Peterson,
Chairman of the Board
William A. Weiland
William A. Weiland,
Secretary and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
on March 17, 1999, and in the capacities indicated.
James F. Melvin Gene C. Knoll
James F. Melvin, Vice Chairman Gene C. Knoll, President
of the Board and a Director and Chief Executive Officer
(Principal Executive Officer
and a Director)
Ronald D. Isaacson Norman A. Hatlestad
Ronald D. Isaacson, Vice President Norman A. Hatlestad,
and a Director Director
James N. Dougherty Roger B. Olson
James N. Dougherty, Roger B. Olson,
Director Director
Jack E. Wild Fred J. Schroeder
Jack E. Wild, Fred J. Schroeder,
Director Director
Kurt D. Mertens John P. Selz
Kurt D. Mertens, John P. Selz,
Director Director
Rhonda R. Kelley
Rhonda R. Kelley,
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX<dagger>
to
FORM 10-K
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the period ended December 31, 1998
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. <section>232.102(d))
Exhibit 10 - Material Contracts*
(b) Mid-Wisconsin Financial Services, Inc. Directors' Deferred Compensation
Plan
*Exhibit represents executive compensation plan or arrangement.
Exhibit 27 - Financial Data Schedule
<dagger>Exhibits required by Item 601 of Regulation S-K which have been
previously filed and are incorporated by reference are set forth in Part
IV, Item 14 of the Form 10-K to which this Exhibit Index relates.
<PAGE>
Exhibit 10(b)
MID-WISCONSIN FINANCIAL SERVICES, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Mid-Wisconsin Financial Services, Inc. Directors' Deferred
Compensation Plan (the "Plan") is hereby adopted effective as of July 1,
1992 for the purpose and under the terms and conditions hereinafter set
forth for the benefit of the directors of Mid-Wisconsin Financial Services,
Inc. ("Mid-Wisconsin") and each of the subsidiary banks of Mid-Wisconsin
(the "Banks") which adopt the Plan.
1. Purpose. The purpose of the Plan is to establish an alternative
method of compensating the directors of each Plan Sponsor (the
"Directors"), whether or not they otherwise receive compensation as
employees of the Plan Sponsor, in order to aid the Plan Sponsor in
attracting and retaining as Directors persons whose abilities, experience
and judgment can contribute to the continued growth of the Plan Sponsor.
2. Definitions. As used in this Plan the following terms shall
have the meaning set forth in this paragraph 2:
(a) "Account" shall mean the account maintained by the Plan Sponsor
to record the amount of Director's Fees deferred by a Participant and
interest credited on such deferred amounts pursuant to paragraph 5.
(b) "Beneficiary" of a Participant shall mean such person or persons,
or organization or organizations, as the Participant from time to time may
designate by a written designation filed with the Plan Sponsor during the
Participant's life. Any amounts payable hereunder to a Participant's
Beneficiary shall be paid in such proportions and subject to such trusts,
powers and conditions as the Participant may provide in such designation.
Each such designation, unless otherwise expressly provided therein, may be
revoked by the Participant by a written revocation filed with the Plan
Sponsor during the Participant's life. If more than one such designation
shall be filed by a Participant with the Plan Sponsor, the last designation
so filed shall control over any revocable designation filed prior to such
filing. To the extent that any amounts payable under this Plan to a
Participant's Beneficiary are not effectively disposed of pursuant to the
above provisions of this paragraph 2(b), either because no designation was
in effect at the Participant's death or because a designation in effect at
the Participant's death failed to dispose of such amounts in their
entirety, then for purposes of this Plan, the Participant's "Beneficiary"
as to such undisposed of amounts shall be the Participant's estate.
(c) "Directors' Fees" shall mean all of the compensation to which a
Director would otherwise become entitled for services to be rendered as a
Director, but excluding any compensation to which such person is entitled
to receive in his capacity, if any, as an employee.
<PAGE>
(d) "Participant" shall mean a Director who has made an election to
defer Directors' Fees in accordance with paragraph 3.
(e) "Plan Sponsor" shall mean Mid-Wisconsin and each Bank which
adopts the Plan and reference to "Plan Sponsor" shall be construed as a
reference to each Plan Sponsor individually.
(f) "Rate of Return" for a fiscal year of Mid-Wisconsin shall be
determined in accordance with generally accepted accounting principles and
shall mean a percentage equal to (i) Mid-Wisconsin's return on equity as
determined by dividing (A) Mid-Wisconsin's net income for the applicable
year by (B) Mid-Wisconsin's average daily equity for such year minus (ii)
300 basis points.
(g) "Termination of Service" shall mean the bona fide termination of
a Participant's services as a director of Mid-Wisconsin and each of its
subsidiaries.
3. Right to Defer Directors' Fees.
(a) Any Director, including any person who becomes a Director after
the effective date of this Plan, may become a Participant in this Plan by
filing an election (i) before the first date on which services as a
Director are to be performed after the adoption of the Plan and (ii) before
the first day of any subsequent fiscal year to defer the payment of
Directors' Fees subsequent to any such election and may specify the manner
in which such Participant's Account shall be distributed as provided in
paragraph 6; provided, however, that no election as to the manner of
payment of a Participant's Account which is made on or before a date which
is less than six months before the Participant's Termination of Service
shall be effective. An election by a Participant to defer Directors' Fees
shall be effective with respect to Directors' Fees earned after the date
such election is made and each subsequent fiscal year of the Plan Sponsor
until revoked or amended; provided, however, that any such revocation or
amendment shall only be effective with respect to fiscal years beginning
after the date written notice of such revocation or amendment is first
received by the Plan Sponsor. Amounts deferred by a Participant shall be
distributable in accordance with paragraph 6 hereof and only after such
Participant's Termination of Service.
(b) Any Directors' Fees not covered by an election made in accordance
with this paragraph 3 shall be paid to the Director in cash.
4. Forms for Elections. Each election provided for in this Plan
shall be made on a form or forms provided by Mid-Wisconsin for such
purpose. Such form or forms shall provide for the specification of:
(a) the amount (expressed as a percentage or a specified dollar
amount) of the Participant's Director's Fees or the specified fees (e.g.
meeting fees) which constitute a portion of the Participant's Directors'
Fees to be held and deferred under the terms of the Plan;
<PAGE>
(b) whether the Participant's Account is to be distributed in a lump
sum or in 120 monthly installments, as provided in paragraph 6; and
(c) the Beneficiary to whom any undistributed balance of the
Participant's Account shall be distributed in the event of the death of the
Participant before all amounts payable to the Participant under the Plan
have been distributed.
5. Accounting.
(a) The Plan Sponsor shall establish an Account in the name of each
Participant. As of the last day of each fiscal year (the "Current Fiscal
Year"), there shall be credited to the Account of each Participant who has
not incurred a Termination of Service (i) the Directors' Fees for the year
which he has elected to have deferred for such year and (ii) interest on
the average daily balance in his Account (assuming that the Directors' Fees
to be deferred during the year were credited to his Account as of the date
on which they would have otherwise been paid to the Participant in cash) at
a rate per annum equal to the Rate of Return for the fiscal year ending
immediately prior to the Current Fiscal Year.
(b) As of the last day of the month in which a Participant's
Termination of Service occurs, the ending balance of his Account shall be
determined by adding to the value of his Account as of the last day of the
immediately preceding fiscal year (i) interest on such value computed at an
annual rate equal to (A) the Rate of Return for such preceding fiscal year
multiplied by (B) a fraction, the numerator of which is equal to the number
of days of the fiscal year elapsed as of the last day of such month in
which the Termination of Service occurred and the denominator of which is
the number of days in such fiscal year and (ii) all Director's Fees
deferred by such Participant during the fiscal year in which the
Termination of Service occurs and (iii) interest, as determined in clause
(i) of this sentence, on the average daily balance of the Director's Fees
described in clause (ii) (assuming that the Directors' Fees to be deferred
during the year were credited to his Account as of the date on which they
would have otherwise been paid to the Participant in cash). The amount so
determined pursuant to the preceding sentence, when added to the most
recent year end balance credited pursuant to subparagraph (a) to the
Participant's Account as of the last day of the fiscal year immediately
preceding the year in which the Participant's Termination of Service
occurs, shall constitute the Ending Balance of the Participant's Account.
(c) In addition to any amounts deferred and credited to a
Participant's Account pursuant to paragraph (a) with respect to Director's
Fees which are deferred after the effective date of this Plan, the Account
of each Participant who had accrued a benefit under the Directors' Deferred
Compensation Plan of State Bank of Medford as effective as of November 12,
1985 (the "Prior Plan"), shall be credited, as of the effective date of
this Plan, with an amount equal to such accrued, but undistributed, benefit
under the Prior Plan.
<PAGE>
6. Distribution of Deferred Amounts.
(a) Distribution of amounts represented by each Account of a
Participant shall be made in a lump sum or in installments as specified in
the most recent election pursuant to which such Participant's Directors'
Fees were deferred and credited to such Account.
(b) If installment payments were elected, distributions shall be made
in equal monthly installments, beginning on the first day of the first
month following the date on which such Participant's Termination of Service
occurs, in an amount equal to the amount necessary to amortize the
repayment of a loan in the amount of the Participant's Ending Balance by
120 equal monthly payments at an interest rate which is equal to the
average Rate of Return for the five fiscal years ended immediately prior to
the date on which the Director's Termination of Service occurs.
(c) In the case of an Account with respect to which payment is to be
made in a lump sum, the amount and timing of such payment shall be
determined as if installment payments had been elected and the lump sum was
the last (but only) such payment.
(d) After a Participant's Termination of Service occurs, neither such
Participant nor, in the event of his death prior to complete distribution
of his account, his Beneficiary, shall have any right to modify in any way
the schedule for the distribution of amounts credited to such Participant
under this Plan as specified in the last election pursuant to which such
Participant's Directors' Fees were deferred. However, upon a written
request submitted to the Plan Sponsor by the person then entitled to
receive payments under this Plan (who may be the Participant or a
Beneficiary), the Board of Directors of the Plan Sponsor may, in its sole
discretion, accelerate the time for payment of any one or more installments
remaining unpaid.
(e) Upon the written request of a Participant who has not yet
incurred a Termination of Service, the Board of Directors of the Plan
Sponsor may, in its sole discretion, permit the Participant's account to be
distributed as of a date prior to such Participant's Termination of Service
in a manner provided for in subparagraph (a) after consideration of the
Participant's reason for such request and after determining that such
acceleration would not be contrary to the purpose of the Plan or the
interests of the Plan Sponsor. The right to request a distribution under
the terms of this subparagraph (e) shall not confer upon the Participant
any right to obtain a distribution of all or any portion of his account
prior to his Termination of Service and the Board of Directors to whom such
request may be made shall be under no obligation to grant such a request,
regardless of any circumstances then prevailing, and no decision to grant a
request shall act as a precedent with respect to any other application of
any Participant.
<PAGE>
7. Payments Upon Death or Disability.
(a) In the event that a Participant dies before receiving payment of
the entire amount to which such Participant is entitled under this Plan,
the unpaid balance shall be paid in a lump sum or in installments as
specified in the Participant's most recent election under the Plan to the
Beneficiary of such Participant. If a Beneficiary dies after the
Participant's death but before receiving the entire payment of his portion
of the amount to which the Participant was entitled under this Plan, the
portion of the unpaid balance which such Beneficiary would have received if
he had not died shall be paid in a lump sum to such Beneficiary's estate
unless the Participant designated otherwise.
(b) If, in the opinion of the officer designated by the Board of
Directors pursuant to paragraph 8, or if no officer is designated, in the
opinion of the Board of Directors of the Plan Sponsor, a Participant or
Beneficiary shall at any time be mentally incompetent, any payment to which
such Participant or Beneficiary would be entitled under this Plan may, with
the approval of the Board of Directors, be paid to the Participant's or
Beneficiary's legal representative, or to any other person for the benefit
of such Participant or Beneficiary. The Board of Directors of the Plan
Sponsor may, in its sole discretion, accelerate the time for payment of any
one or more installments remaining unpaid.
8. Miscellaneous.
(a) This Plan shall be effective as to Mid-Wisconsin as of July 1,
1992 upon adoption by its Board of Directors and as to each Bank as of the
date specified in the resolution of such Bank's Board of Directors
providing for the adoption of the Plan.
(b) Amounts payable hereunder may not be voluntarily or involuntarily
sold or assigned, and shall not be subject to any attachment, levy or
garnishment.
(c) Participation in this Plan by any person shall not confer upon
such person any right to be nominated for re-election to the Board of
Directors of Mid-Wisconsin or any Bank, or to be re-elected to such Board
of Directors.
(d) No Plan Sponsor shall be obligated to reserve or otherwise set
aside funds for the payment of its obligations hereunder, and the rights of
any Participant or Beneficiary to an Account under the Plan shall be an
unsecured claim against the general assets of the Plan Sponsor for which
such person (or the predecessor in interest of a Beneficiary) served as a
Director.
(e) The Board of Directors of Mid-Wisconsin may designate an officer
of Mid-Wisconsin who is not a Participant in this Plan to have plenary
jurisdiction over the administration and interpretation of this Plan. Any
designation of an officer may be revoked by the Board of Directors of Mid-
Wisconsin at any time. Any such designation or revocation thereof shall be
made by written notice to the designated officer. While a designation is
in effect, all decisions of such designated officer shall be final as to
any Participant under this Plan.
<PAGE>
(f) The Board of Directors of Mid-Wisconsin may amend this Plan in
any and all respects (including, specifically, but not limited to, the rate
at which interest will be credited to any Account from and after the date
of such amendment) at any time, or from time to time, or may terminate this
Plan at any time, but any such amendment or termination shall be without
prejudice to any Participant's right to receive amounts previously credited
to such Participant under this Plan. A Bank may terminate its
participation in the Plan at any time by action of its Board of Directors,
but such termination shall be without prejudice to any Participant's right
to receive amounts previously credited to such Participant under this Plan.
(g) Within 90 days of the end of each fiscal year of the Plan Sponsor
in which this Plan is in effect, the Plan Sponsor shall furnish each
Participant a statement of the year-end balance in such Participant's
account.
IN WITNESS WHEREOF, Mid-Wisconsin has caused this Plan to be executed
by its duly authorized officer as of the 29th day of June, 1992.
MID-WISCONSIN FINANCIAL SERVICES, INC.
By:__________________________
Ronald D. Isaacson
As its Chairman of the Board
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] Dec-31-1998
[PERIOD-END] Dec-31-1998
[CASH] 14,025
[INT-BEARING-DEPOSITS] 190,781
[FED-FUNDS-SOLD] 9,223
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 56,917
[INVESTMENTS-CARRYING] 56,917
[INVESTMENTS-MARKET] 56,917
[LOANS] 189,952
[ALLOWANCE] (2,159)
[TOTAL-ASSETS] 280,479
[DEPOSITS] 222,322
[SHORT-TERM] 19,688
[LIABILITIES-OTHER] 3,099
[LONG-TERM] 5,800
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 186
[OTHER-SE] 29,384
[TOTAL-LIABILITIES-AND-EQUITY] 280,479
[INTEREST-LOAN] 17,377
[INTEREST-INVEST] 3,546
[INTEREST-OTHER] 219
[INTEREST-TOTAL] 21,142
[INTEREST-DEPOSIT] 8,810
[INTEREST-EXPENSE] 10,104
[INTEREST-INCOME-NET] 11,038
[LOAN-LOSSES] 420
[SECURITIES-GAINS] 3
[EXPENSE-OTHER] 7,902
[INCOME-PRETAX] 4,802
[INCOME-PRE-EXTRAORDINARY] 4,802
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,248
[EPS-PRIMARY] 1.74
[EPS-DILUTED] 1.74
[YIELD-ACTUAL] 8.52
[LOANS-NON] 1,416
[LOANS-PAST] 38
[LOANS-TROUBLED] 627
[LOANS-PROBLEM] 476
[ALLOWANCE-OPEN] 1,990
[CHARGE-OFFS] 329
[RECOVERIES] 78
[ALLOWANCE-CLOSE] 2,159
[ALLOWANCE-DOMESTIC] 420
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
