UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2009
OR
o 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 001-16339
BAYLAKE CORP.
(Exact name of registrant as specified in its charter)
Wisconsin | 39-1268055 |
(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
or organization) |
|
217 North Fourth Avenue, Sturgeon Bay, WI | 54235 |
(Address of principal executive offices) | (Zip Code) |
(920) 743-5551
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x | No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
|
| (Do not check if a smaller |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o | No x |
Number of outstanding shares of common stock as of May 8, 2009: 7,911,539 shares
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I – FINANCIAL INFORMATION | PAGE NO. |
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| |
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Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008 | 3 |
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Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2009 and 2008 | 4 |
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5 | |
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Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2009 and 2008 | 6 – 7 |
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8 – 14 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 – 33 |
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Item 3. Quantitative and Qualitative Disclosure about Market Risk | 34 |
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35 | |
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PART II – OTHER INFORMATION |
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36 | |
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36 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
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36 | |
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Item 4. Submission of Matters to a Vote of Securities Holders | 36 |
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36 | |
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36 | |
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37 | |
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Exhibit 31.1 Certification pursuant to Section 302 |
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Exhibit 31.2 Certification pursuant to Section 302 |
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Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 |
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Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
BAYLAKE CORP.
March 31, 2009 (Unaudited) and December 31, 2008
(Dollar amounts in thousands except share data)
|
| March 31, |
| December 31, |
| ||
ASSETS |
|
|
|
|
|
|
|
Cash and due from financial institutions |
| $ | 58,666 |
| $ | 23,085 |
|
Federal funds sold |
|
| 557 |
|
| 397 |
|
Cash and cash equivalents |
|
| 59,223 |
|
| 23,482 |
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
| 182,611 |
|
| 225,417 |
|
Loans held for sale |
|
| 2,850 |
|
| 368 |
|
Loans, net of allowance of $14,680 and $13,561 at March 31, 2009 and December 31, 2008, respectively |
|
| 705,803 |
|
| 715,161 |
|
Cash value of life insurance |
|
| 23,397 |
|
| 23,435 |
|
Premises held for sale |
|
| 2,006 |
|
| 2,006 |
|
Premises and equipment, net |
|
| 24,178 |
|
| 24,451 |
|
Federal Home Loan Bank stock |
|
| 6,792 |
|
| 6,792 |
|
Foreclosed properties, net |
|
| 7,546 |
|
| 7,143 |
|
Goodwill |
|
| 6,108 |
|
| 6,108 |
|
Deferred income taxes |
|
| 14,764 |
|
| 13,501 |
|
Accrued interest receivable |
|
| 3,896 |
|
| 3,968 |
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Other assets |
|
| 9,716 |
|
| 11,081 |
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Total assets |
| $ | 1,048,890 |
| $ | 1,062,913 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Deposits |
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Non-interest-bearing |
| $ | 63,257 |
| $ | 73,537 |
|
Interest-bearing |
|
| 781,460 |
|
| 776,221 |
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Total deposits |
|
| 844,717 |
|
| 849,758 |
|
Federal Home Loan Bank advances |
|
| 85,095 |
|
| 85,095 |
|
Federal funds purchased and repurchase agreements |
|
| 22,303 |
|
| 30,174 |
|
Subordinated debentures |
|
| 16,100 |
|
| 16,100 |
|
Accrued expenses and other liabilities |
|
| 12,241 |
|
| 12,832 |
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Total liabilities |
|
| 980,456 |
|
| 993,959 |
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Common stock, $5 par value, authorized 50,000,000 shares; |
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Issued-8,132,552 shares at March 31, 2009 and December 31, 2008; |
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Outstanding-7,911,539 shares at March 31, 2009 and December 31, 2008 |
|
| 40,662 |
|
| 40,662 |
|
Additional paid-in capital |
|
| 11,978 |
|
| 11,977 |
|
Retained earnings |
|
| 23,781 |
|
| 21,499 |
|
Treasury stock (221,013 shares at March 31, 2009 and December 31, 2008) |
|
| (3,549 | ) |
| (3,549 | ) |
Accumulated other comprehensive loss |
|
| (4,438 | ) |
| (1,635 | ) |
Total stockholders’ equity |
|
| 68,434 |
|
| 68,954 |
|
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Total liabilities and stockholders’ equity |
| $ | 1,048,890 |
| $ | 1,062,913 |
|
See accompanying notes to Unaudited Consolidated Financial Statements.
BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended March 31, 2009 and 2008
(Dollar amounts in thousands, except per share data)
|
| Three months ended March 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Interest and dividend income |
|
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Loans, including fees |
| $ | 9,908 |
| $ | 12,908 |
|
Taxable securities |
|
| 2,065 |
|
| 2,050 |
|
Tax exempt securities |
|
| 527 |
|
| 567 |
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Federal funds sold and other |
|
| 13 |
|
| 82 |
|
Total interest and dividend income |
|
| 12,513 |
|
| 15,607 |
|
Interest expense |
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Deposits |
|
| 4,353 |
|
| 7,121 |
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Federal funds purchased and repurchase agreements |
|
| 71 |
|
| 168 |
|
Federal Home Loan Bank advances and other debt |
|
| 538 |
|
| 865 |
|
Subordinated debentures |
|
| 113 |
|
| 250 |
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Total interest expense |
|
| 5,075 |
|
| 8,404 |
|
Net interest income |
|
| 7,438 |
|
| 7,203 |
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Provision for loan losses |
|
| 1,200 |
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| 300 |
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Net interest income after provision for loan losses |
|
| 6,238 |
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| 6,903 |
|
Non-interest income |
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Fees from fiduciary services |
|
| 126 |
|
| 193 |
|
Fees from loan servicing |
|
| 175 |
|
| 217 |
|
Fees from other services to customers |
|
| 1,252 |
|
| 1,408 |
|
Gains from sales of loans |
|
| 227 |
|
| 133 |
|
Net change in valuation of mortgage servicing rights |
|
| (73 | ) |
| (116 | ) |
Net gains from sale of securities |
|
| 2,762 |
|
| 308 |
|
Net change in cash surrender value of life insurance |
|
| (38 | ) |
| (58 | ) |
Income in equity of UFS subsidiary |
|
| 82 |
|
| 185 |
|
Other income |
|
| 23 |
|
| 45 |
|
Total non-interest income |
|
| 4,536 |
|
| 2,315 |
|
Non-interest expenses |
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Salaries and employee benefits |
|
| 4,184 |
|
| 4,408 |
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Occupancy expense |
|
| 669 |
|
| 645 |
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Equipment expense |
|
| 325 |
|
| 322 |
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Data processing and courier |
|
| 242 |
|
| 318 |
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Operation of foreclosed properties |
|
| 92 |
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| 175 |
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Other operating expenses |
|
| 1,915 |
|
| 1,974 |
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Total non-interest expenses |
|
| 7,427 |
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| 7,842 |
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Income before provision for income taxes |
|
| 3,347 |
|
| 1,376 |
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Provision for income taxes |
|
| 1,065 |
|
| 211 |
|
Net income |
| $ | 2,282 |
| $ | 1,165 |
|
Basic earnings per share |
| $ | 0.29 |
| $ | 0.15 |
|
Diluted earnings per share |
| $ | 0.29 |
| $ | 0.15 |
|
See accompanying notes to Unaudited Consolidated Financial Statements.
BAYLAKE CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (Unaudited)
Three months ended March 31, 2009
(Dollar amounts in thousands except for share and per share data)
|
| Common Stock |
|
|
| Retained |
| Treasury |
| Accumulated |
| Total |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| (loss) |
| Equity |
| ||||||
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Balance, December 31, 2008 |
| 7,911,539 |
| $ | 40,662 |
| $ | 11,977 |
| $ | 21,499 |
| $ | (3,549 | ) | $ | (1,635 | ) | $ | 68,954 |
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Net income for the period |
| — |
|
| — |
|
| — |
|
| 2,282 |
|
| — |
|
| — |
|
| 2,282 |
|
Changes in unrealized loss on securities available for sale |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,842 | ) |
| (1,842 | ) |
Reclassification adjustment for net gains realized in income |
|
|
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|
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|
| (2,762 | ) |
| (2,762 | ) |
Tax effect |
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|
| 1,801 |
|
| 1,801 |
|
Total comprehensive loss |
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|
|
|
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| (2,803 | ) |
Stock options forfeited |
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
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| — |
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| 1 |
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Balance, March 31, 2009 |
| 7,911,539 |
| $ | 40,662 |
| $ | 11,978 |
| $ | 23,781 |
| $ | (3,549 | ) | $ | (4,438 | ) | $ | 68,434 |
|
See accompanying notes to Unaudited Consolidated Financial Statements.
BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2009 and 2008
(Dollar amounts in thousands)
|
| 2009 |
| 2008 |
| ||
Cash flows from operating activities: |
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Reconciliation of net income to net cash provided by operating activities: |
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Net income |
| $ | 2,282 |
| $ | 1,165 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
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Depreciation and amortization |
|
| 340 |
|
| 358 |
|
Amortization of core deposit intangible |
|
| 13 |
|
| 13 |
|
Provision for losses on loans |
|
| 1,200 |
|
| 300 |
|
Net amortization of premium/discount on securities |
|
| 29 |
|
| (11 | ) |
Decrease in cash surrender value of life insurance |
|
| 38 |
|
| 58 |
|
Net gain on sale of securities |
|
| (2,762 | ) |
| (308 | ) |
Net gain on sale of loans |
|
| (227 | ) |
| (133 | ) |
Proceeds from sale of loans held for sale |
|
| 17,852 |
|
| 10,067 |
|
Origination of loans held for sale |
|
| (20,130 | ) |
| (9,263 | ) |
Net change in valuation on mortgage servicing rights |
|
| 73 |
|
| 116 |
|
Provision for valuation allowance on foreclosed properties |
|
| 41 |
|
| 133 |
|
Net (gain) loss from disposal of other real estate |
|
| (36 | ) |
| 21 |
|
Net (gain) loss from disposal of bank premises and equipment |
|
| (6 | ) |
| 2 |
|
Stock option compensation expense recognized |
|
| 1 |
|
| — |
|
Provision for (benefit from) deferred tax expense |
|
| 538 |
|
| (349 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Accrued interest receivable and other assets |
|
| 1,373 |
|
| 688 |
|
Accrued expenses and other liabilities |
|
| (591 | ) |
| (744 | ) |
Net cash provided by operating activities |
|
| 28 |
|
| 2,113 |
|
|
|
|
|
|
|
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|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Principal payments on securities available-for-sale |
|
| 46,377 |
|
| 5,722 |
|
Proceeds from sale of securities available-for-sale |
|
| 152,666 |
|
| 12,476 |
|
Purchase of securities available-for-sale |
|
| (158,108 | ) |
| (19,353 | ) |
Proceeds from sale of foreclosed properties |
|
| 751 |
|
| 336 |
|
Proceeds from sale of premises and equipment |
|
| 6 |
|
| — |
|
Loan originations and payments, net |
|
| 7,000 |
|
| 11,905 |
|
Additions to premises and equipment |
|
| (67 | ) |
| (180 | ) |
Net cash provided by investing activities |
|
| 48,625 |
|
| 10,906 |
|
See accompanying notes to Unaudited Consolidated Financial Statements.
BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2009 and 2008
(Dollar amounts in thousands)
|
| 2009 |
| 2008 |
| ||
Cash flows from financing activities: |
|
|
|
|
|
|
|
Net change in deposits |
| $ | (5,041 | ) | $ | (21,728 | ) |
Net change in federal funds purchased and repurchase agreements |
|
| (7,871 | ) |
| (8,419 | ) |
Repayments on Federal Home Loan Bank advances |
|
| (20,000 | ) |
| (2 | ) |
Proceeds from Federal Home Loan Bank advances |
|
| 20,000 |
|
| — |
|
Issuance of stock pursuant to dividend reinvestment plan |
|
| — |
|
| 266 |
|
Cash dividends paid |
|
| — |
|
| (1,262 | ) |
Net cash used in financing activities |
|
| (12,912 | ) |
| (31,145 | ) |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| 35,741 |
|
| (18,126 | ) |
|
|
|
|
|
|
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|
Beginning cash and cash equivalents |
|
| 23,482 |
|
| 46,381 |
|
|
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|
Ending cash and cash equivalents |
| $ | 59,223 |
| $ | 28,255 |
|
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Supplemental cash flow information: |
|
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Interest paid |
| $ | 4,988 |
| $ | 8,360 |
|
Income taxes paid |
|
| — |
|
| — |
|
|
|
|
|
|
|
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|
Supplemental noncash disclosure: |
|
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|
Transfers from loans to foreclosed properties |
|
| 1,158 |
|
| 3,318 |
|
Mortgage servicing rights resulting from sale of loans |
|
| 24 |
|
| 14 |
|
See accompanying notes to Unaudited Consolidated Financial Statements.
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
1. | The accompanying consolidated financial statements should be read in conjunction with our 2008 Annual Report on Form 10-K. The accompanying consolidated financial statements are unaudited. These interim consolidated financial statements are prepared in accordance with the requirements of Form 10-Q, and accordingly do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited consolidated financial information included in this report reflects all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of the consolidated financial position as of March 31, 2009 and the results of operations for the three month periods ending March 31, 2009 and 2008. The consolidated results of operations for the three months ended March 31, 2009 are not necessarily indicative of results to be expected for the entire year. |
2. | Use of Estimates |
To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles, our management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, foreclosed properties, servicing rights, income tax expense and fair values of financial instruments are particularly subject to change.
3. | Earnings Per Share |
Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares and common stock equivalents. The following table shows the computation of the basic and diluted earnings per share:
EARNINGS PER SHARE
($ in thousands, excluding per share data)
Three months ended March 31,
|
| 2009 |
| 2008 |
| ||
(Numerator): |
|
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|
|
|
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|
|
|
|
|
|
Net income |
| $ | 2,282 |
| $ | 1,165 |
|
(Denominator): |
|
|
|
|
|
|
|
Weighted average number of common shares outstanding- basic |
|
| 7,911,539 |
|
| 7,911,539 |
|
Dilutive effect of stock options |
|
| —(1 | ) |
| —(1 | ) |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding- diluted |
|
| 7,911,539 |
|
| 7,911,539 |
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
| $ | 0.29 |
| $ | 0.15 |
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
| $ | 0.29 |
| $ | 0.15 |
|
(1) At March 31, 2009 and 2008, there were 73,628 and 156,114 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
4. | Cash Dividends |
Beginning in February 2008, the Board of Directors, in consultation with our federal and state regulators, elected to forego the payment of normal quarterly cash dividends on the common stock of Baylake Corp. (the “Company”). The Company will continue to monitor the feasibility of a dividend payment on a quarterly basis and intends to reinstate payment of dividends at the earliest appropriate time. The Company’s ability to pay dividends is subject to various factors including, among other things, sufficient earnings, available capital, board discretion and regulatory compliance. There can be no assurance when or if the Company will resume payment of quarterly dividends at historical levels or at all. In order to pay dividends, advance approval from the Wisconsin Department of Financial Institutions as well as the Federal Reserve Board will need to be obtained.
5. | Adoption of New Accounting Standards |
In November 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 160 Non-controlling Interest in Consolidated Financial Statements – an amendment to ARB No. 51. SFAS 160 changes the way consolidated net earnings are presented. The new standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest and will require disclosure on the face of the consolidated statement of operations amounts attributable to the parent and the non-controlling interest. The adoption of this statement will result in more transparent reporting of the net earnings attributable to the non-controlling interest. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. The adoption of SFAS 160 was effective for the Company on January 1, 2009. The adoption of this statement did not have a material impact on the Company’s consolidated financial condition, results of operation or liquidity.
In February 2008, the FASB issued FASB Staff Position (FSP) 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. FSP 140-3 requires the initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with or in contemplation of the initial transfer, to be treated as a linked transaction under SFAS 140, unless certain criteria are met, then the initial transfer and repurchase will not be evaluated as a linked transaction, but will be evaluated separately under SFAS 140. FSP 140-3 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FSP-140-3 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.
In March 2008, the FASB issued SFAS 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. SFAS 161 requires entities to provide enhanced qualitative disclosures about objectives and strategies with respect to an entity’s derivative and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial condition, results of operation or liquidity.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 clarifies the application of SFAS 157 in an inactive market and provides key considerations in determining the fair value of an asset where the market is not active. FSP 157-3 was effective immediately upon issuance. The adoption of FSP 157-3 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.
In December 2008, the FASB issued FSP 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interest in Variable Interest Entities. FSP 140-4 and FIN 46(R)-8 require enhanced disclosures about the transfers of financial assets and interests in variable interest entities. FSP 140-4 and FIN 46(R)-8 are effective for interim and annual reporting periods ending after December 15, 2008. The adoption of FSP 140-4 and FIN 46(R)-8 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary guidance to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. The FSP modifies the current indicator that, to avoid considering an impairment to be other-than-temporary, management must assert that it has both the intent and ability to hold an impaired security for a period of time sufficient to allow for any anticipated recovery in fair value. The new FSP would require management to assert that (a) it does have the intent to sell the security and (b) it is more likely than not that it will not have to sell the security before its recovery. The FSP changes the total amount recognized in earnings when there are factors other than credit losses associated with an impairment of a debt security. The impairment is separated into impairments related to credit losses and impairments related to all other factors. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.
In April 2009, FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. SFAS 157-4 provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under SFAS 157 Fair Value Measurements. FSP SFAS 157-4 is effective for the Company’s interim and annual periods ending after June 15, 2009 and is not anticipated to have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, require disclosures about fair value of financial instruments in interim periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending June 30, 2009. As FSP 107-1 and APB 28-1 amend only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company’s consolidated statements of operations and financial condition.
6. | Fair Value |
Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The statement describes three levels of inputs that may be used to measure fair value:
| Level 1: | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| Level 2: | Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| Level 3: | Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). None of our securities available for sale at March 31, 2009 were measured using Level 1 inputs.
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. We are able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).
The fair value of both Foreclosed Properties and Impaired Loans are based on review of comparable collateral in similar marketplaces and analysis of expected cash flows of the loan in relationship to the agreed terms of the loan. (Level 3 inputs).
Assets measured at fair value on a recurring basis are summarized below:
ASSETS MEASURED ON A RECURRING BASIS
($ in thousands)
|
| Fair Value Measurements |
| ||||||||||
|
|
|
| ||||||||||
|
| At March 31, |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
| $ | 182,611 |
| $ | 32,868 |
| $ | 149,743 |
| $ | — |
|
Servicing rights |
|
| 810 |
|
| — |
|
| 810 |
|
| — |
|
Total |
| $ | 183,421 |
| $ | 32,868 |
| $ | 150,553 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
| $ | 225,417 |
| $ | — |
| $ | 225,417 |
| $ | — |
|
Assets measured at fair value on a non-recurring basis are summarized below:
ASSETS MEASURED ON A NON-RECURRING BASIS
($ in thousands)
|
| Fair Value Measurements |
| ||||||||||
|
|
|
| ||||||||||
|
| At March 31, |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
| $ | 40,743 |
| $ | — |
| $ | — |
| $ | 40,743 |
|
Foreclosed Properties |
|
| 7,546 |
|
| — |
|
| — |
|
| 7,546 |
|
|
| $ | 48,289 |
| $ | — |
| $ | — |
| $ | 48,289 |
|
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
|
| At December 31, |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing rights |
| $ | 860 |
| $ | — |
| $ | 860 |
| $ | — |
|
Impaired loans |
|
| 26,299 |
|
| — |
|
| — |
|
| 26,299 |
|
Foreclosed properties |
|
| 7,143 |
|
| — |
|
| — |
|
| 7,143 |
|
|
| $ | 34,302 |
| $ | — |
| $ | 860 |
| $ | 33,442 |
|
Impaired loans with a carrying value of $40.7 million were measured for impairment using the fair value of collateral for collateral dependent loans, resulting in an allowance for loan losses (“ALL”) of $7.2 million related to these loans at March 31, 2009.
7. | Equity Investment |
As of March 31, 2009 and December 31, 2008 Baylake Bank owned a 49.8% interest in United Financial Services, Inc. (“UFS”), a data processing service company. Our ownership interest had a value of $4.5 million at March 31, 2009 and $4.4 million at December 31, 2008 and is reflected in Other Assets in our consolidated balance sheets. In addition to the ownership interest, we have a right to appoint one member to the three member Board of Directors of UFS. The investment in this entity is carried under the equity method of accounting, and the pro rata share of its income is included in other income. On June 27, 2006, UFS entered into an amendment to an earlier agreement for employment with a key employee of UFS allowing that individual the option to purchase up to 20%, or 240 shares, of the authorized shares of UFS. The individual exercised the option with respect to 120 shares on January 15, 2007 at $1,000 per share and subsequently sold these shares back to UFS for book value. The net result was recognition of $0.4 million of goodwill upon redemption of the shares. Current book value of UFS is approximately $8,909 per share. Any future exercise of the options and issuance of the underlying shares will have the effect of reducing our investment in UFS and result in a dilution of UFS earnings per share. There will not be a material impact to the carrying value of the asset on our consolidated balance sheet.
8. | Allowance For Loan Losses |
The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (“PFLL”) is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
The ALL consists of a specific component on specific loans and a general component for loans without specific reserves. The components of the ALL represent estimations pursuant to either SFAS No. 5, Accounting for Contingencies, or SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The specific component of the ALL reflects estimated losses from analyses developed through review of individual loans deemed impaired. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general component is based on the Company’s historical loss experience which is updated quarterly. The general component of the allowance for loan losses also includes consideration of concentrations, changes in portfolio mix and volume and other qualitative factors.
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
There are many factors affecting the ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
Changes in the ALL were as follows ($ in thousands):
ALLOWANCE FOR LOAN LOSSES
|
| For the three months ended |
| ||||
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
Balance at beginning of period |
| $ | 13,561 |
| $ | 11,840 |
|
Provision for loan losses |
|
| 1,200 |
|
| 300 |
|
Charge-offs |
|
| (131 | ) |
| (208 | ) |
Recoveries |
|
| 50 |
|
| 82 |
|
Balance at end of period |
| $ | 14,680 |
| $ | 12,014 |
|
Information regarding impaired loans is as follows ($ in thousands):
IMPAIRED LOANS AND ALLOCATED ALLOWANCE
|
| March 31, |
| December 31, |
| September 30, |
| June 30, |
| March 31, |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no allocated ALL |
| $ | 8,165 |
| $ | 17,755 |
| $ | — |
| $ | — |
| $ | 1,250 |
|
Impaired loans with allocated ALL |
| $ | 40,743 |
| $ | 26,299 |
| $ | 38,234 |
| $ | 36,312 |
| $ | 35,993 |
|
ALL allocated to non performing loans |
| $ | 7,192 |
| $ | 6,019 |
| $ | 6,854 |
| $ | 6,826 |
| $ | 6,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average impaired loans during the period |
| $ | 46,822 |
| $ | 42,970 |
| $ | 38,752 |
| $ | 36,993 |
| $ | 37,635 |
|
Management is continually monitoring impaired loan relationships and, in the event facts and circumstances change, additional provisions may be necessary.
As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management, based on information available to the regulators at the time of their examinations.
Non performing loans are as follows:
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars amounts in thousands, except per share data)
NON PERFORMING LOANS
|
| Quarters Ended |
| |||||||||||||
|
| 3/31/09 |
| 12/31/08 |
| 9/30/08 |
| 6/30/08 |
| 3/31/08 |
| |||||
|
| ($ in thousands) |
| |||||||||||||
Nonaccrual Loans |
| $ | 48,480 |
| $ | 43,687 |
| $ | 38,234 |
| $ | 36,312 |
| $ | 37,243 |
|
Loans restructured in a troubled debt restructuring |
|
| 428 |
|
| 367 |
|
| — |
|
| — |
|
| — |
|
Total Nonperforming Loans |
| $ | 48,908 |
| $ | 44,054 |
| $ | 38,234 |
| $ | 36,312 |
| $ | 37,243 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Baylake Corp. is a Wisconsin corporation that is registered with the Federal Reserve as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our wholly-owned banking subsidiary, Baylake Bank, is a Wisconsin state-chartered bank that provides a wide variety of loan, deposit and other banking products and services to our business, retail, and municipal customers, as well as a full range of trust, investment and cash management services. Baylake Bank is a member of the Federal Reserve and Federal Home Loan Bank.
The following sets forth management’s discussion and analysis of our consolidated financial condition at March 31, 2009 and December 31, 2008 and our consolidated results of operations for the three months ended March 31, 2009 and 2008. This discussion and analysis should be read together with the consolidated financial statements and accompanying notes contained in Part I of this Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2008.
Forward-Looking Information
This discussion and analysis of consolidated financial condition and results of operations, and other sections of this report, may contain forward-looking statements that are based on the current expectations of management. Such expressions of expectations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” and other such words are intended to identify such forward-looking statements. The statements contained herein and in such forward-looking statements involve or may involve certain assumptions, risks and uncertainties, many of which are beyond our control that may cause actual future results to differ materially from what may be expressed or forecasted in such forward-looking statements. Readers should not place undue expectations on any forward-looking statements. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could cause actual results to differ materially from the forward-looking statements: the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, which are incorporated herein by reference, and other risks that may be identified or discussed in this Report.
Critical Accounting Policies
In the course of our normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in our consolidated financial statements. The following is a summary of what management believes are our critical accounting policies.
Allowance for Loan Losses:
The allowance for loan losses (“ALL”) on our consolidated balance sheet represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on homogeneous pools of loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant changes. The loan portfolio also represents the largest asset on the consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (“PFLL”) is charged to earnings based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
The ALL consists of specific reserves on individual loans, general reserves on homogeneous pools of loans and an unallocated component reflecting the imprecision of the calculation. The components of the allowance represent an estimate pursuant to either SFAS No. 5, Accounting for Contingencies, or SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The reserve component of the ALL on specific loans reflects expected losses based on analyses of impaired loans over a fixed dollar amount. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans including estimating the amount and timing of future cash flows and collateral values. The reserve component on homogeneous pools of loans is based on our historical loss experience, which is updated quarterly. This component of the ALL also includes consideration of concentration changes in portfolio mix and volume and other qualitative factors. The unallocated component represents the portion of the allowance not specifically identified with specific loans or pools of loans.
There are many factors affecting the ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual results differ from management estimates, an additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALL may be made for specific loans, but the entire ALL is available for any loan that, in management’s judgment, should be charged-off for which a loss is realized.
The following table presents the components of the ALL:
COMPONENTS OF ALL
($ in thousands)
|
| As of |
| |||||||||||||
|
| 3/31/09 |
| 12/31/08 |
| 9/30/08 |
| 6/30/08 |
| 3/31/08 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component 1 – Specific credit allocation |
| $ | 7,192 |
| $ | 6,019 |
| $ | 6,854 |
| $ | 6,826 |
| $ | 6,341 |
|
Component 2 – General reserves: historical |
|
| 6,221 |
|
| 6,408 |
|
| 4,591 |
|
| 4,366 |
|
| 4,506 |
|
General reserves: other |
|
| 1,001 |
|
| 1,064 |
|
| 1,157 |
|
| 1,134 |
|
| 1,167 |
|
Unallocated |
|
| 266 |
|
| 70 |
|
| 2 |
|
| 1 |
|
| — |
|
Allowance for Loan Losses |
| $ | 14,680 |
| $ | 13,561 |
| $ | 12,604 |
| $ | 12,327 |
| $ | 12,014 |
|
Changes in the ALL were as follows for the quarters presented:
ALLOWANCE FOR LOAN LOSSES
($ in thousands)
|
| As of |
| |||||||||||||
|
| 3/31/09 |
| 12/31/08 |
| 9/30/08 |
| 6/30/08 |
| 3/31/08 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| $ | 13,561 |
| $ | 12,604 |
| $ | 12,327 |
| $ | 12,014 |
| $ | 11,840 |
|
Provision for loan losses |
|
| 1,200 |
|
| 13,600 |
|
| 3,200 |
|
| 861 |
|
| 300 |
|
Charge-offs |
|
| (131 | ) |
| (12,858 | ) |
| (2,990 | ) |
| (611 | ) |
| (208 | ) |
Recoveries |
|
| 50 |
|
| 215 |
|
| 67 |
|
| 63 |
|
| 82 |
|
Balance at end of period |
| $ | 14,680 |
| $ | 13,561 |
| $ | 12,604 |
| $ | 12,327 |
| $ | 12,014 |
|
During the fourth quarter of 2008, two related credit relationships totaling $19.3 million experienced significant cash flow concerns. Prior to the fourth quarter of 2008, these relationships had been paying as agreed and in management’s opinion, did not represent increased credit risk. As a result of our evaluation of these relationships, a provision of $10.2 million was charged to earnings of which $5.9 million relating to one of the relationships was charged off against ALL during the quarter ended December 31, 2008. During the first quarter of 2009, the ALL relating to these relationships was reduced to $4.1 million, reflecting a payment of $0.2 million. Subsequent to March 31, 2009, we received an additional partial payment in the amount of $5.6 million and charged off an additional $2.7 million against the ALL relating to one of the relationships. We continue to monitor both credits and believe that the remaining ALL of $1.4 million relating to these credits is appropriate and adequate based on all information available to us as of the date of this Report.
Foreclosed Properties:
Foreclosed properties acquired through or in lieu of loan foreclosure are initially recorded at lower of cost or fair value when acquired, less estimated costs to sell, thereby establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Any costs incurred with respect to such assets after acquisition are expensed as incurred.
Provision for Impairment of Standby Letters of Credit:
The provision for impairment of standby letters of credit represents management’s estimate of probable incurred losses on off-balance sheet standby letters of credit which are used to support our customers’ business arrangements with an unrelated third party. In the event of further impairment, a provision for impairment of standby letter of credit is charged to operations based on management’s periodic evaluation of the factors affecting the standby letters of credit. At March 31, 2009, the allowance for impairment of standby letters of credit was $3.0 million.
Income Tax Accounting:
The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of our operations and reported earnings. We believe that the tax assets and liabilities are adequate and properly recorded in the consolidated financial statements.
Income tax expense may be affected by developments in the state of Wisconsin. Like many financial institutions that are located in Wisconsin, a subsidiary of our bank located in the state of Nevada holds and manages various investment securities. Because these subsidiaries are located outside Wisconsin, income from their operations has not historically been subject to Wisconsin state taxation. Although the WDOR issued favorable tax rulings regarding Nevada subsidiaries of Wisconsin financial institutions at the time such subsidiaries were formed, the WDOR subsequently changed its positions and, following a formal audit by the WDOR, we negotiated a settlement to resolve all Wisconsin tax matters for all tax years through and including 2006 and 2007 for all issues arising in connection with our Nevada Subsidiary. This settlement will be paid over three years in equal installments (the “Settlement Payments”). We previously accrued more than a sufficient amount to cover the Settlement Payments; accordingly, the Settlement Payments will not have a material impact on our operations going forward. The first installment was paid to WDOR during the fourth quarter of 2008.
In February 2009, the State of Wisconsin passed legislation that requires tax reporting on a consolidated basis (known as “combined reporting”) effective January 1, 2009. Under such legislation, the income of our Nevada subsidiary which was previously not subject to state income tax, will be required to report earnings to the state of Wisconsin and pay applicable income taxes. We are still evaluating this legislation and have not yet fully determined its effect on the recorded value of our deferred tax assets or its overall financial impact.
Results of Operations
The following table sets forth our results of operations and related summary information for the three month periods ended March 31, 2009 and 2008.
SUMMARY RESULTS OF OPERATIONS
($ in thousands, except per share data)
|
| Three months ended |
| ||||
|
| 2009 |
| 2008 |
| ||
Net income |
| $ | 2,282 |
| $ | 1,165 |
|
EPS-basic |
| $ | 0.29 |
| $ | 0.15 |
|
EPS-diluted |
| $ | 0.29 |
| $ | 0.15 |
|
Cash dividends declared |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
Return on average assets |
|
| 0.87 | % |
| 0.43 | % |
Return on average equity |
|
| 12.98 | % |
| 5.71 | % |
Efficiency ratio(1) |
|
| 77.61 | % |
| 81.70 | % |
(1) | Non-interest expense divided by the sum of taxable equivalent net interest income plus non-interest income, excluding net investment securities gains and net gains on the sale of premises and equipment. |
Net income of $2.3 million for the three months ended March 31, 2009 increased from net income of $1.2 million for the comparable period in 2008. Net interest income increased $ 0.2 million for the quarter ended March 31, 2009 versus the comparable quarter last year resulting from a $3.3 million decline in interest expense partially offset by a $3.1 million reduction in interest income. Additionally, a PFLL of $1.2 million was charged to earnings for the first quarter of 2009, versus a PFLL of $0.3 million taken during the comparable quarter of 2008. Finally, $2.8 million of gain on the sale of securities was realized during the quarter ended March 31, 2009, versus $0.3 million taken in 2008. Refer to the “Net Interest Income”, “Provision for Loan Losses”, “Non-Interest Expense” and “Non-Interest Income” sections below for additional details.
Net Interest Income
Net interest income is the largest component of our operating income and represents the difference between interest earned on loans, investments and other interest earning assets offset by the interest expense attributable to the deposits and borrowings that fund such assets. Interest fluctuations, together with changes in the volume and types of earning assets and interest-bearing liabilities, combine to affect total net interest income. This analysis discusses net interest income on a tax-equivalent basis in order to provide comparability among the various types of earned interest income. Tax-exempt interest income is adjusted to a level that reflects such income as if it were fully taxable.
Average interest rates on both loans and deposits were lower during the first three months of 2009 compared to 2008, due in part to changing economic conditions and the continued reduction in the Fed Funds target rate. In mid December 2008, the intended Fed Funds target rate was set by the Federal Reserve Board at 0-0.25% and has remained at this level throughout the first quarter of 2009.
Interest rate spread is the difference between the interest rate earned on average earning assets and the rate paid on average interest-bearing liabilities. Interest rate spread increased 27 basis points (“bps”) to 3.10% for the first quarter of 2009 compared to the same period in 2008, resulting primarily from a 142 bps decrease in the cost of interest bearing liabilities from 3.66% to 2.24% partially offset by a 115 bp decrease in the yield on earning assets from 6.49% to 5.34%. At December 31, 2008, the balance sheet was slightly liability sensitive (meaning liabilities will reprice more quickly than assets). Therefore as the economic climate continued to reduce interest rates in our competitive environment, our deposits have repriced downward at a faster pace than our loans. Additionally, many of the terms of the loans comprising our balance sheet contain interest rate floors which were achieved during the fourth quarter of 2008 and first quarter of 2009, allowing a widening of our interest rate spread.
Net interest income on a tax-equivalent basis was $7.8 million for the three months ended March 31, 2009 and $7.6 million for the same period in 2008. The increase for the current quarter resulted primarily from a decrease in interest expense on funding costs partially offset by a decrease in interest received on loans, each reflecting the continued decline in prevailing interest rates.
Net interest margin represents net interest income expressed as an annualized percentage of average interest-earning assets. Net interest margin exceeds the interest rate spread because of the use of non-interest bearing sources of funds (demand deposits and equity capital) to fund a portion of earning assets. Net interest margin for the first quarter of 2009 was 3.23%, up 15 bps from 3.08% for the comparable period in 2008.
For the three months ended March 31, 2009, average interest-earning assets decreased $15.6 million (1.6%) from the same period in 2008. Decreases in average loans of $24.4 million (3.2%) and in average tax-exempt securities of $3.5 million (6.2%) were offset in part by a $1.6 million (0.9%) increase in average taxable securities and a $10.8 million increase in Federal Funds Sold and interest-bearing due from banks.
NET INTEREST INCOME ANALYSIS ON A TAX–EQUIVALENT BASIS
($ in thousands)
|
| Three months ended March 31, 2009 |
| Three months ended March 31, 2008 |
| ||||||||||||
|
| Average Balance |
| Interest Income/ |
| Average Yield/ |
| Average Balance |
| Interest Income/ |
| Average Yield/ |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
| $ | 726,967 |
| $ | 10,000 |
| 5.58 | % | $ | 751,360 |
| $ | 13,003 |
| 6.96 | % |
Taxable securities |
|
| 174,310 |
|
| 2,065 |
| 4.74 | % |
| 172,733 |
|
| 2,050 |
| 4.75 | % |
Tax exempt securities |
|
| 53,456 |
|
| 799 |
| 5.98 | % |
| 56,987 |
|
| 859 |
| 6.06 | % |
Federal funds sold and interest bearing due from banks |
|
| 19,667 |
|
| 13 |
| .026 | % |
| 8,924 |
|
| 82 |
| 3.69 | % |
Total earning assets |
|
| 974,400 |
|
| 12,877 |
| 5.34 | % |
| 990,004 |
|
| 15,994 |
| 6.49 | % |
Non-interest earning assets |
|
| 92,350 |
|
|
|
|
|
|
| 93,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 1,066,750 |
|
|
|
|
|
| $ | 1,083,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
| $ | 787,135 |
|
| 4,354 |
| 2.24 | % | $ | 803,831 |
|
| 7,122 |
| 3.56 | % |
Short-term borrowings |
|
| 1,233 |
|
| 2 |
| 0.69 | % |
| 4,121 |
|
| 34 |
| 3.41 | % |
Customer repurchase agreements |
|
| 27,896 |
|
| 69 |
| 1.01 | % |
| 13,830 |
|
| 133 |
| 3.86 | % |
Federal Home Loan Bank advances |
|
| 85,117 |
|
| 538 |
| 2.56 | % |
| 85,171 |
|
| 865 |
| 4.08 | % |
Subordinated debentures |
|
| 16,100 |
|
| 113 |
| 2.85 | % |
| 16,100 |
|
| 250 |
| 6.24 | % |
Total interest-bearing liabilities |
|
| 917,481 |
|
| 5,076 |
| 2.24 | % |
| 923,053 |
|
| 8,404 |
| 3.66 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
| 65,619 |
|
|
|
|
|
|
| 66,889 |
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
| 12,311 |
|
|
|
|
|
|
| 12,051 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 71,339 |
|
|
|
|
|
|
| 81,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 1,066,750 |
|
|
|
|
|
| $ | 1,083,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
| $ | 7,801 |
|
|
|
|
|
| $ | 7,590 |
|
|
|
Interest rate spread |
|
|
|
|
|
|
| 3.10 | % |
|
|
|
|
|
| 2.83 | % |
Net interest margin |
|
|
|
|
|
|
| 3.23 | % |
|
|
|
|
|
| 3.08 | % |
RATE/VOLUME ANALYSIS (1)
Three Months ended March 31, 2009 compared to the Three Months ended March 31, 2008
|
| Increase (Decrease) due to |
| |||||||
|
| Volume |
| Rate |
| Net |
| |||
Interest income: |
|
|
|
|
|
|
|
|
|
|
Loans (2) |
| $ | (1,623 | ) | $ | (1,380 | ) | $ | (3,003 | ) |
Taxable securities |
|
| (167 | ) |
| 182 |
|
| 15 |
|
Tax exempt securities |
|
| (212 | ) |
| 152 |
|
| (60 | ) |
Federal funds sold and interest bearing due from banks |
|
| 157 |
|
| (226 | ) |
| (69 | ) |
Total earning assets |
|
| (1,845 | ) |
| (1,272 | ) |
| (3,117 | ) |
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
| (948 | ) |
| (1,820 | ) |
| (2,768 | ) |
Short term borrowings |
|
| (62 | ) |
| 30 |
|
| (32 | ) |
Customer repurchase agreements |
|
| 310 |
|
| (374 | ) |
| (64 | ) |
FHLB advances |
|
| (2 | ) |
| (325 | ) |
| (327 | ) |
Subordinated debentures |
|
| — |
|
| (137 | ) |
| (137 | ) |
Long term debt |
|
| — |
|
| — |
|
| — |
|
Total interest-bearing liabilities |
|
| (702 | ) |
| (2,626 | ) |
| (3,328 | ) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
| $ | (1,143 | ) | $ | 1,354 |
| $ | 211 |
|
| (1) | The change in interest due to both rate and volume has been allocated proportional to the relationship to the dollar amounts of the change in each. |
| (2) | The yield on tax-exempt loans and securities is computed on a tax equivalent basis using a tax rate of 34% for all periods presented. |
Our management’s ability to employ overall assets for the production of interest income can be measured by the ratio of average earning assets to average total assets. This ratio was 91.3% and 91.4% for the first three months of 2009 and 2008, respectively.
Provision for Loan Losses
The PFLL is the cost of providing an allowance for probable and inherent losses. The allowance consists of specific and general components. Our internal risk system is used to identify loans that meet the criteria for being “impaired” under the definition of SFAS 114. The specific component relates to loans that are individually classified as impaired. These loans identified for impairment are assigned a specific reserve based upon that analysis. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include repayment risk, employment and inflation statistics concentration risk based on industry type, new product growth and portfolio growth.
The PFLL for the three months ended March 31, 2009 was $1.2 million representing new impairments not previously identified with associated loan balances totaling $8.8 million. This compared to a $0.3 million provision taken in the comparable quarter of 2008.
Net loan charge-offs for the first three months of 2009 were $0.1 million unchanged from the same period in 2008. Net annualized charge-offs to average loans were 0.04% for the first three months of 2009 compared to 0.07% for the same period in 2008. For the three months ended March 31, 2009, non-performing loans increased by $4.8 million (10.9%) to $48.9 million from $44.1 million at December 31, 2008 and increased $11.7 million (31.5%) from $37.2 million at March 31, 2008. Refer to the “Financial Condition - Risk Management and the Allowance for Loan Losses” and “Financial Condition - Non-Performing Loans, Potential Problem Loans and Other Real Estate” sections below for more information related to non-performing loans.
Our management believes that the ALL at March 31, 2009 and the related PFLL taken for the three months ended March 31, 2009 is appropriate in view of the present condition of the loan portfolio and the amount and quality of the collateral supporting non-performing loans. We are continually monitoring non-performing loan relationships and will make additional provisions, as necessary, if the facts and circumstances change. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market area, or otherwise, could affect the adequacy of the ALL. If there are significant charge-offs against the ALL or we otherwise determine that the ALL is inadequate, we will need to make additional PFLLs in the future. See “Financial Condition - Risk Management and the Allowance for Loan Losses” below for more information related to non-performing loans.
Non-Interest Income
The following Table reflects the various components of non-interest income for the three months ended March 31, 2009 and 2008, respectively.
NON-INTEREST INCOME
($ in thousands)
|
| Three months ended |
|
|
| ||||
|
| 2009 |
| 2008 |
| % Change |
| ||
Fees from fiduciary services |
| $ | 126 |
| $ | 193 |
| (34.7% | ) |
Fees from loan servicing |
|
| 175 |
|
| 217 |
| (19.4% | ) |
Service charges on deposit accounts |
|
| 920 |
|
| 924 |
| (0.4% | ) |
Other fee income |
|
| 187 |
|
| 163 |
| 14.7% |
|
Financial services income |
|
| 145 |
|
| 321 |
| (54.8% | ) |
Gains from sales of loans |
|
| 227 |
|
| 133 |
| 70.7% |
|
Net change in valuation of mortgage servicing rights |
|
| (73 | ) |
| (116 | ) | 37.1% |
|
Net gains from sale of securities |
|
| 2,762 |
|
| 308 |
| 796.8% |
|
Change in cash surrender value of life insurance |
|
| (38 | ) |
| (58 | ) | 34.5% |
|
Income in equity of UFS subsidiary |
|
| 82 |
|
| 185 |
| (55.7% | ) |
Other income |
|
| 23 |
|
| 45 |
| (48.9% | ) |
Total Non-Interest Income |
| $ | 4,536 |
| $ | 2,315 |
| 95.9% |
|
Non-interest income increased $2.2 million (95.9%) for the three months ended March 31, 2009 versus the comparable period in 2008. This was primarily due to $2.8 million of securities gains realized for the three months ended March 31, 2009 versus $0.3 million for the same period in 2008, partially offset by a $0.2 million decrease in financial services income due to decline in trading activity on behalf of customers, a $0.1 million decrease in income in equity of UFS subsidiary reflecting a reduction of equity income from implementation of a volume discount and $0.1 million decrease in fees from fiduciary services calculated on market values of related estates.
Non-Interest Expense
The following Table reflects the various components of non-interest expense for the three months ended March 31, 2009 and 2008, respectively.
NON-INTEREST EXPENSE
($ in thousands)
|
| Three months ended |
| % |
| ||||
|
| 2009 |
| 2008 |
| Change |
| ||
Salaries and employee benefits |
| $ | 4,184 |
| $ | 4,408 |
| (5.1% | ) |
Occupancy |
|
| 669 |
|
| 645 |
| 3.7% |
|
Equipment |
|
| 325 |
|
| 322 |
| 0.9% |
|
Data processing and courier |
|
| 242 |
|
| 318 |
| (23.9% | ) |
Operation of foreclosed properties |
|
| 188 |
|
| 175 |
| 7.4% |
|
Business development & advertising |
|
| 177 |
|
| 172 |
| 2.9% |
|
Charitable contributions |
|
| 31 |
|
| 26 |
| 19.2% |
|
Stationary and supplies |
|
| 125 |
|
| 132 |
| (5.3% | ) |
Director fees |
|
| 143 |
|
| 148 |
| (3.4% | ) |
FDIC premiums |
|
| 393 |
|
| 124 |
| 216.9% |
|
Legal and professional |
|
| 310 |
|
| 323 |
| (4.0% | ) |
Loan and collection |
|
| 221 |
|
| 341 |
| (35.2% | ) |
Other operating |
|
| 419 |
|
| 708 |
| (40.8% | ) |
Total Non-Interest Expense |
| $ | 7,427 |
| $ | 7,842 |
| (5.3% | ) |
Non-interest expense decreased $0.4 million (5.3%) to $7.4 million for the three months ended March 31, 2009 compared to $7.8 million for the same period in 2008. The non-interest expense to average assets ratio was 2.8% for the three months ended March 31, 2009 compared to 2.9% for the same period in 2008.
Net overhead expense is total non-interest expense less total non-interest income excluding securities gains. The net overhead expense to average assets ratio decreased to 1.1% for the three months ended March 31, 2009 compared to 2.0% for the same period in 2008. The efficiency ratio represents total non-interest expense as a percentage of the sum of net-interest income on a fully taxable equivalent basis and total non-interest income (excluding net gains on the sale of securities and premises and equipment). The efficiency ratio decreased to 77.6% for the three months ended March 31, 2009 from 81.7% for the comparable period last year.
The decrease in salaries and employee benefits of $0.2 million (5.1%) to $4.2 million for the three-month period ended March 31, 2009 compared to the same period in 2008 reflects the fact that the number of full-time equivalent employees decreased from 320 as of March 31, 2008 to 311 as of March 31, 2009. Additionally, our discretionary year end contribution to the employees’ 401K by was eliminated effective January 1, 2009.
Data processing and courier expense decreased $0.1 million (23.9%) from the same period in 2008 due to a discount applied to our fees on behalf of our data processing provider effective January 1, 2009. This discount is determined on a volume basis and is anticipated to be applicable for the remainder of 2009.
Expenses related to the operation of foreclosed properties held for sale by the Bank remained unchanged at $0.2 million for the three-month period ended March 31, 2009 compared to the same period in 2008. We intend to continue to evaluate all foreclosed property values and attempt to reduce the holding periods of these properties and as a result, the related holding costs to the extent possible. Such expenses include but are not limited to insurance, maintenance, real estate taxes, management fees, utilities and legal fees.
Included in non-interest expenses are FDIC insurance premiums of $0.4 million for the three months ended March 31, 2009 compared to $0.1 million for the same period a year ago. FDIC insurance premiums consist of two components, deposit insurance premiums and payments for servicing obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan associations. With the enactment in early 2006 of the Federal Deposit Insurance Reform Act of 2005, major changes were introduced in the calculation of FDIC deposit insurance premiums. Such changes were effective January 1, 2007 and included establishment by the FDIC of a target reserve ratio range for the Deposit Insurance Fund (DIF) between 1.15% and 1.50%, as opposed to the prior fixed reserve ratio of 1.25%. The FDIC approved 1.25% as the target ratio. At the same time, the FDIC adopted a new risk-based system for assessment of deposit insurance premiums under which all such institutions are required to pay minimum annual premiums. The system categorizes institutions in one of four risk categories, depending on capitalization and supervisory rating criteria. Our bank’s assessment rate, like that of other financial institutions, is confidential and may not be directly disclosed, except to the extent required by law. To ease the transition to the new system, insured institutions that had paid deposit insurance prior to 1997 were eligible for a one-time assessment credit based on their respective share of the aggregate assessment base. Our FDIC assessment for the first quarter of 2008 and for all of 2007 received and recorded after first quarter 2007, was offset by a portion of our one-time assessment credit. The final portion of the credit was applied to our FDIC assessment in the second quarter of 2008 and is therefore no longer available to offset future assessments which will result in future expense increases. Payments for the FICO portion will continue as long as FICO obligations remain outstanding.
In the fourth quarter of 2008, the FDIC Board issued for comment a proposal doubling bank premium rates as part of a five-year plan to recapitalize the Deposit Insurance Fund. The proposal increased by between 7 and 10 bps the entire premium schedule for the first quarter of 2009, raising the premium for well-capitalized institutions to between 12 and 20 bp, up from 5 to 10 bp. After the first quarter of 2009, the FDIC proposed adjusting the risk-based premium calculation to include new risk factors and the rate for well-capitalized banks would then be between the base rate of 10bp to a ceiling of 14 bp. The proposal, if enacted, would significantly increase our 2009 premiums from what we paid in 2008. We continue to monitor the proposed legislation and its impact on our organization.
Loan and collection expenses decreased $0.1 million (35.2%) to $0.2 million for the three months ended March 31, 2009 compared to $0.3 million for the three months ended March 31, 2008. We anticipate that as non-performing loans begin to stabilize and moderate, such expenses should follow a similar trend. Fees for outsourced legal fees relating to these loans accounted for $0.1 million of the expenses incurred during the first three months of 2009.
Income Taxes
Our income tax expense for the three months ended March 31, 2009 was $1.1 million, versus an expense of $0.2 million for the same period in 2008.
Income tax expense recorded in the consolidated statements of operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy. We undergo examinations by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See “Critical Accounting Policies-Income Tax Accounting” above regarding Wisconsin tax matters that may affect our income tax expense in future periods.
Balance Sheet Analysis
Loans
The following table reflects the composition (mix) of the loan portfolio:
LOAN PORTFOLIO ANALYSIS
($ in thousands)
|
| March 31, |
| December 31, |
| Percent |
| ||
Amount of loans by type |
|
|
|
|
|
|
|
|
|
Real estate-mortgage |
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 379,275 |
| $ | 381,765 |
| (0.7% | ) |
1-4 family residential |
|
|
|
|
|
|
|
|
|
First liens |
|
| 83,026 |
|
| 81,329 |
| 2.1% |
|
Junior liens |
|
| 17,144 |
|
| 18,609 |
| (7.9% | ) |
Home equity |
|
| 36,205 |
|
| 34,498 |
| 4.9% |
|
Commercial, financial and agricultural |
|
| 109,412 |
|
| 110,432 |
| (0.9% | ) |
Real estate-construction |
|
| 66,360 |
|
| 69,838 |
| (5.0% | ) |
Installment |
|
|
|
|
|
|
|
|
|
Credit cards and related plans |
|
| 1,697 |
|
| 1,627 |
| 4.3% |
|
Other |
|
| 11,019 |
|
| 11,249 |
| (2.0% | ) |
Obligations of states and political subdivisions |
|
| 16,823 |
|
| 19,858 |
| (15.3% | ) |
Less: deferred origination fees, net of costs |
|
| (477 | ) |
| (483 | ) | (1.2% | ) |
Total |
| $ | 720,484 |
| $ | 728,722 |
| (1.1% | ) |
Total gross loans at March 31, 2009 decreased $8.2 million (1.1%) from $728.7 million at December 31, 2008 to $720.5 million at March 31, 2009. This was primarily due to a decrease of $2.5 million (0.7%) in commercial real estate mortgage loans, a decrease of $1.5 million (7.9%) in junior lien residential real estate mortgage loans, a decrease in real estate construction loans of $3.5 million (5.0%) and a decrease in obligations of states and political subdivisions of $3.0 million (15.3%) from December 31, 2008 to March 31, 2009, partially offset by increases of $1.7 million (2.1%) and $1.7 million (4.9%) in first lien and home equity real estate mortgage loans, respectively, for the same period.
Risk Management and the Allowance for Loan Losses
The loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as PFLL. See “Provision for Loan Losses” earlier in this Report. We attempt to control, monitor and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.
At least quarterly, management reviews the adequacy of the ALL. Based on an estimate computed pursuant to the requirements of SFAS No. 5, Accounting for Contingencies and SFAS Nos. 114 and 118, Accounting by Creditors for Impairment of a Loan, the analysis of the ALL consists of three components: (i) specific credit allocation established for expected losses relating to specific individual loans for which the recorded investment in the loans exceeds its fair value; (ii) general portfolio allocation based on historical loan loss experience for significant loan categories; and (iii) general portfolio allocation based on economic conditions as well as specific factors in the markets in which we operate.
The specific credit allocation for the ALL is based on a regular analysis by the loan officers of all commercial credits. The loan officers grade commercial credits and the loan review function validates the grades assigned. In the event that the loan review function downgrades the loan, it is included in the ALL analysis process at the lower grade. This grading system is in compliance with regulatory classifications. At least quarterly, all commercial loans over a fixed dollar amount with internal credit gradings at or below a predetermined classification are evaluated. In compliance with SFAS No. 114, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the cost of sale. This evaluation may include obtaining supplemental market data and/or routine site visits to offer support to the evaluation process. Additionally, during the third quarter of 2008, we established a third-party relationship with professionals in the property management field to assist us in valuing both commercial and non-commercial collateral as a part of our analysis. A specific allowance is then allocated to the loans based on this assessment. Such allocations or impairments are reviewed by the CCO and management familiar with the credits.
The ALL at March 31, 2009 was $14.7 million, compared to $13.6 million at year-end 2008. This increase was based on management’s analysis of the loan portfolio risk at March 31, 2009 as discussed above. As such, a PFLL of $1.2 million was charged to earnings for the three months ended March 31, 2009 compared to a $0.3 million PFLL recorded for the same period ended March 31 2008.
All of the factors we take into account in determining loan loss provisions in general categories are subject to change; thus, the allocations are management’s best estimate of the loan loss categories in which future loan losses will occur. As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allowance allocated.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management encourages early identification of non-accrual and problem loans in order to minimize the risk of loss. Non-performing loans are defined as non-accrual loans, loans 90 days or more past due but still accruing, and restructured loans. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collection of principal or interest on loans, it is the practice of management to place such loans on non-accrual status immediately rather than waiting until the loans become 90 days past due. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than recorded as interest income. Restructuring loans typically involves the granting of some concession to the borrower involving a loan modification, such as payment schedule or interest rate changes. Restructured loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to SFAS No. 114.
NON-PERFORMING ASSETS
($ in thousands)
|
| March 31, |
| December 31, |
| March 31, |
| |||
Nonperforming Assets: |
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
| $ | 48,480 |
| $ | 43,687 |
| $ | 37,206 |
|
Loans restructured in a trouble debt restructuring |
|
| 428 |
|
| 367 |
|
| — |
|
Accruing loans past due 90 days or more |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans (“NPLs”) |
|
| 48,908 |
|
| 44,054 |
|
| 37,206 |
|
Foreclosed properties |
|
| 7,546 |
|
| 7,143 |
|
| 8,127 |
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets (“NPAs”) |
| $ | 56,454 |
| $ | 51,197 |
| $ | 45,333 |
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
ALL to Net Charge-offs (“NCO’s”) (annualized) |
|
| 4556.06 | % |
| 83.50 | % |
| 2384.73 | % |
NCO’s to average loans (annualized) |
|
| 0.04 | % |
| 2.18 | % |
| 0.07 | % |
ALL to total loans |
|
| 2.03 | % |
| 1.86 | % |
| 1.61 | % |
NPL’s to total loans |
|
| 6.76 | % |
| 6.04 | % |
| 4.99 | % |
NPA’s to total assets |
|
| 5.38 | % |
| 4.82 | % |
| 4.21 | % |
ALL to NPL’s |
|
| 32.97 | % |
| 30.78 | % |
| 32.29 | % |
Non-performing loans increased $4.9 million (11.0%) during the three months ended March 31, 2009 and increased $11.7 million (31.5%) from March 31, 2008. The non-performing loan relationships are secured primarily by commercial or residential real estate and, secondarily, by personal guarantees from principals of the respective borrowers.
Information regarding foreclosed properties is as follows:
FORECLOSED PROPERTIES
($ in thousands)
|
| Three months ended |
| Twelve months ended |
| Three months ended |
| |||
Beginning Balance |
| $ | 7,143 |
| $ | 5,167 |
| $ | 5,167 |
|
Transfer of net realizable value to foreclosed properties |
|
| 1,158 |
|
| 8,328 |
|
| 3,317 |
|
Sales Proceeds, net |
|
| (813 | ) |
| (2,623 | ) |
| (336 | ) |
Net gain (loss) from sale of foreclosed properties |
|
| 98 |
|
| (119 | ) |
| (21 | ) |
Provision for foreclosed properties |
|
| (40 | ) |
| (3,610 | ) |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreclosed Properties |
| $ | 7,546 |
| $ | 7,143 |
| $ | 8,127 |
|
Changes in the valuation allowance for losses on foreclosed properties were as follows:
|
| Three months ended March 31, 2009 |
| Twelve months ended December 31, 2008 |
| ||
Beginning Balance |
| $ | 3,391 |
| $ | 207 |
|
Provision charged to operations |
|
| 40 |
|
| 3,610 |
|
Allowance recovered on properties disposed |
|
| (53 | ) |
| (426 | ) |
Balance at end of period |
| $ | 3,378 |
| $ | 3,391 |
|
Investment Portfolio
The investment portfolio is intended to provide us with adequate liquidity, flexibility in asset/liability management and an increase in our earning potential.
At March 31, 2009, the investment portfolio (which comprised investment securities available for sale) decreased $42.8 million (19.0%) to $182.6 million as compared to $225.4 million at December 31, 2008. At March 31, 2009, the investment portfolio represented 17.4% of total assets compared to 21.2% at December 31, 2008.
Securities available for sale consist of the following:
INVESTMENT SECURITY ANALYSIS
At March 31, 2009
($ in thousands)
|
| Gross Unrealized |
| Gross Unrealized |
| Fair Value |
| |||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & other U.S. government approved agency securities |
| $ | 3 |
| $ | (332 | ) | $ | 36,371 |
|
Mortgage-backed securities of U.S. government sponsored agencies |
|
| 1,663 |
|
| (20 | ) |
| 93,675 |
|
Obligations of states & political subdivisions |
|
| 507 |
|
| (447 | ) |
| 42,390 |
|
Private placement and corporate bonds |
|
| — |
|
| (8,831 | ) |
| 7,824 |
|
Other securities |
|
| — |
|
| — |
|
| 2,351 |
|
Total securities available for sale |
| $ | 2,173 |
| $ | (9,630 | ) | $ | 182,611 |
|
At December 31, 2008
($ in thousands)
|
| Gross Unrealized |
| Gross Unrealized |
| Fair Value |
| |||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & other U.S. government approved agency securities |
| $ | 116 |
| $ | — |
| $ | 4,605 |
|
Mortgage-backed securities of U.S. government sponsored agencies |
|
| 3,051 |
|
| (36 | ) |
| 155,133 |
|
Obligations of states & political subdivisions |
|
| 724 |
|
| (931 | ) |
| 53,647 |
|
Private placement and corporate bonds |
|
| — |
|
| (5,777 | ) |
| 9,353 |
|
Other securities |
|
| — |
|
| — |
|
| 2,679 |
|
Total securities available for sale |
| $ | 3,891 |
| $ | (6,744 | ) | $ | 225,417 |
|
The increase in unrealized losses during the first three months of 2009 is primarily due to a decline of $2.8 million (30.5%) in the fair market value of corporate trust preferred securities held in our investment portfolio. Total unrealized losses on these securities are $8.6 million at March 31, 2009, representing 89.6% of the total gross unrealized losses. Based on in-depth analysis of the specific instruments and the creditworthiness of the related issuers, including their ability to continue payments under the terms of the security agreements, no declines were deemed to be other than temporary. Additionally, we have the intent and ability to hold these securities until any recovery in the credit markets may occur, which may not be before maturity in some instances. If at any point in time any losses are considered other than temporary we would be required to expense the portion of the losses deemed to be permanent. The valuation of these securities is currently monitored by the Board of Directors and management on a monthly basis.
Premises Held for Sale
Premises held for sale represents vacant properties owned by the Bank that were purchased in 2006 to be held for future branch expansion opportunities, primarily in the Fox Valley area of Wisconsin. At this time, our intentions are not to expand in these markets and therefore, attempts are being made to sell these properties. No losses on the sale of these properties are anticipated at the date of this filing. In the event our future expansion plans were to change and these properties have not yet been sold they would be transferred back to Premises and Equipment.
Deposits
Total deposits at March 31, 2009 decreased $5.1 million (0.6%) to $844.7 million from $849.8 million at December 31, 2008. Such decrease was primarily a result of seasonal trends of business customers in our Door County market. Non-interest bearing deposits at March 31, 2009 decreased $10.2 million (14.0%) to $63.3 million from $73.5 million at December 31, 2007, as public fund customers shifted balances to interest bearing accounts during the first quarter of 2009. Interest-bearing deposits at March 31, 2009 increased $5.3 million (0.7%) to $781.5 million from $776.2 million at December 31, 2008.
Brokered CDs decreased $1.4 million (1.2%) to $112.5 million at March 31, 2009 compared to $113.9 million at December 31, 2008. Increased competition for consumer deposits and customer awareness of interest rates continues to limit our core deposit growth and may require increased reliance on the brokered CD market.
Emphasis has been, and will continue to be, placed on generating additional core deposits in 2009 through competitive pricing of deposit products and through our pre-established branch delivery systems. We will also attempt to attract and retain core deposit accounts through new product offerings and quality customer service. We also may increase brokered CDs during the remainder of 2009 as an additional source of funds to support loan growth or other asset and liability needs in the event that core deposit growth goals are not achieved. Under that scenario, we will continue to look at other wholesale sources of funds if the brokered CD market were to become illiquid or more costly. If liquidity concerns arise, we have alternative sources of funds such as lines of credit with correspondent banks and borrowing arrangements with the Federal Home Loan Bank (“FHLB”) and through the discount window at the Federal Reserve.
Other Funding Sources
Securities under agreements to repurchase and federal funds purchased at March 31, 2009 decreased $7.9 million (26.2%) to $22.3 million from $30.2 million at December 31, 2008. We did not have any Federal funds purchased at either March 31, 2009 or December 31, 2008.
FHLB advances were $85.1 million at March 31, 2009, unchanged from December 31, 2008. We will borrow funds if borrowing is a less costly form of funding loans than acquiring deposits, or if deposit growth is not sufficient. The availability of deposits also determines the amount of funds we need to borrow in order to fund loan demand. We anticipate we will continue to use wholesale funding sources of this nature if these borrowings add incrementally to overall profitability.
Long-term Debt
In March 2006, we issued $16.1 million of variable rate, trust preferred securities and $0.5 million of trust common securities through Baylake Capital Trust II (the “Trust”) that will adjust quarterly at a rate equal to 1.35% over the three month LIBOR. At March 31, 2009, the interest rate on these securities was 2.58%. These securities were issued to replace the trust-preferred securities issued in 2001 through Baylake Capital Trust I. For banking regulatory purposes, these securities are considered Tier 1 capital.
The Trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon us making payment on the related subordinated debentures (“Debentures”) to the Trust. Under the terms of the Debentures, we would be precluded from paying dividends on our common stock if we were in default under the Debentures, if we exercised our right to defer payment of interest on the Debentures or if certain related defaults occurred.
Contractual Obligations
We utilize a variety of financial instruments in the normal course of business to meet the financial needs of our customers. These financial instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, standby letters of credit, and forward commitments to sell residential mortgage loans. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008 for quantitative and qualitative disclosures about our fixed and determinable contractual obligations. Items disclosed in the Annual Report on Form 10-K have not materially changed since that report was filed.
The following table summarizes our significant contractual obligations and commitments at March 31, 2009:
CONTRACTUAL OBLIGATIONS
($ in thousands)
|
| Within 1 |
| 1-3 years |
| 3-5 years |
| After 5 |
| Total |
| |||||
Certificates of deposit and other time deposit obligations |
| $ | 312,791 |
| $ | 87,988 |
| $ | 14,137 |
| $ | — |
| $ | 414,916 |
|
Federal funds purchased and repurchase agreements |
|
| 22,303 |
|
| — |
|
| — |
|
| — |
|
| 22,303 |
|
Federal Home Loan Bank advances |
|
| 10,095 |
|
| 75,000 |
|
| — |
|
| — |
|
| 85,095 |
|
Subordinated debentures |
|
| — |
|
| — |
|
| — |
|
| 16,100 |
|
| 16,100 |
|
Operating leases |
|
| 35 |
|
| 16 |
|
| — |
|
| — |
|
| 51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 345,224 |
| $ | 163,004 |
| $ | 14,137 |
| $ | 16,100 |
| $ | 538,465 |
|
Off-Balance Sheet Arrangements
The following is a summary of our off-balance sheet commitments, all of which were lending-related commitments:
LENDING RELATED COMMITMENTS
($ in thousands)
|
| March 31, 2009 |
| December 31, 2008 |
| ||
Commitments to fund home equity line loans |
| $ | 42,465 |
| $ | 42,085 |
|
Commitments to fund residential real estate construction loans |
|
| 725 |
|
| 1,309 |
|
Commitments unused on various other lines of credit loans |
|
| 124,886 |
|
| 134,093 |
|
Total commitments to extend credit |
| $ | 168,076 |
| $ | 177,487 |
|
|
|
|
|
|
|
|
|
Financial and performance standby letters of credit |
| $ | 16,533 |
| $ | 16,325 |
|
Liquidity
Liquidity management refers to our ability to ensure that cash is available in a timely manner to meet loan demand and depositors’ needs, and to service other liabilities as they become due, without undue cost or risk, and without causing a disruption to normal operating activities. Baylake Corp. and Baylake Bank have different liquidity considerations.
Our primary sources of funds are dividends from our subsidiary, investment income, and net proceeds from borrowings. We may also undertake offerings of junior subordinated obligations and issue our common stock if and when we deem it prudent to do so. We generally manage our liquidity position in order to provide funds necessary to meet interest obligations of our trust preferred securities, pay dividends to our shareholders, subject to regulatory restrictions, and repurchase shares. Such restrictions, which govern all state chartered banks, preclude the payment of dividends without the prior written consent of the Wisconsin Department of Financial Institutions - Division of Banking (“WDFI”) if dividends declared and paid by such bank in either of the two immediately preceding years exceeded that bank’s net income for those years. In consultation with our federal and state regulators, our Board of Directors elected to forego the dividend to our shareholders beginning in the first quarter of 2008. In addition, in order to pay dividends in the future, we will need to seek prior approval from WDFI as well as the Federal Reserve Board. There is no assurance, however, that we would receive such approval if sought.
The Bank meets its cash flow needs by having funding sources available to satisfy the credit needs of customers as well as having available funds to satisfy deposit withdrawal requests. Liquidity is derived from deposit growth, payments on and maturities of loans, the payments on and maturities of the investment portfolio, access to other funding sources, marketability of certain assets, the ability to use loan and investment portfolios as collateral for secured borrowings and a strong capital position.
Maturing investments have historically been a primary source of liquidity. For the three months ended March 31, 2009, principal payments totaling $46.4 million were received on investments. However, we purchased $158.1 million in investments in the same period. At March 31, 2009 the investment portfolio contained $36.4 million of U.S. Treasury and agency backed securities and $93.7 million of mortgage-backed securities issued by U.S. government agencies, representing 19.9% and 51.3%, respectively, of the total investment portfolio. These securities tend to be highly marketable.
Deposit decreases, reflected as a financing activity in the March 31, 2009 Consolidated Statements of Cash Flows, resulted in $5.0 million of cash outflow during the first three months of 2009. Deposit growth is generally the most stable source of liquidity, although brokered deposits, which are inherently less stable than locally generated core deposits, are sometimes used. Our reliance on brokered deposits decreased $1.2 million to $112.7 million during the three-month period ended March 31, 2009 versus $113.9 million at December 31, 2008. Affecting liquidity are core deposit growth levels, certificate of deposit maturity structure and retention, and characteristics and diversification of wholesale funding sources affecting the channels by which brokered deposits are acquired. Conversely, deposit outflow will cause a need to develop alternative sources of funds, which may not be as liquid and potentially a more costly alternative.
The scheduled payments and maturities of loans can provide a source of additional liquidity. There are $235.9 million, or 32.7%, of total loans, maturing within one year of March 31, 2009. Factors affecting liquidity relative to loans are loan origination volumes, loan prepayment rates and the maturity structure of existing loans. The liquidity position is influenced by changes in interest rates, economic conditions and competition. Conversely, loan demand creates a need for liquidity that may cause us to acquire other sources of funding, some of which could be more difficult to find and more costly to secure.
Within the classification of short-term borrowings at March 31, 2009, federal funds purchased and securities sold under agreements to repurchase totaled $22.3 million compared to $30.2 million at the end of 2008. Federal funds are purchased from various upstream correspondent banks while securities sold under agreements to repurchase are obtained from a base of business customers. Short-term and long-term borrowings from the FHLB are another source of funds, totaling $85.1 million at March 31, 2009 and December 31, 2008.
We expect that deposit growth will continue to be the primary funding source of liquidity on a long-term basis, along with a stable earnings base, the resulting cash generated by operating activities and a strong capital position. We expect deposit growth to be a reliable funding source in the future as a result of marketing efforts to attract and retain core deposits. In addition, we may acquire additional brokered deposits as funding for short-term liquidity needs. Short-term liquidity needs will also be addressed by growth in short-term borrowings, maturing federal funds sold and portfolio investments and loan maturities and prepayments.
In assessing liquidity, historical information such as seasonality, local economic cycles and the economy in general are considered along with our current financial position and projections. We believe that in the current economic environment our liquidity position is adequate. To our knowledge, there are no known trends nor any known demands, commitments, events or uncertainties that will result or are reasonably likely to result in material increases or decreases in our liquidity.
Capital Resources
Stockholders’ equity at March 31, 2009 and December 31, 2008 was $68.4 million and $69.0 million, respectively. In total, stockholders’ equity decreased $0.6 million (0.1%). The decrease in stockholders’ equity in 2009 was primarily related to an increase in comprehensive loss of $2.8 million (as a result of an increase in unrealized losses on available-for-sale securities); partially offset by our net income of $2.3 million. The ratio of stockholders’ equity to assets remained at 6.5% as of March 31, 2009 and December 31, 2008.
No cash dividends were declared during the three months of 2009 or during all of 2008. Beginning in February 2008, our Board of Directors, in consultation with our federal and state bank regulators, elected to forego the payment of cash dividends on the Company’s common stock. The payment of dividends in relationship to our financial position continues to be monitored on a quarterly basis and our intentions are to reinstate payment of dividends at the earliest appropriate opportunity, however there is no assurance if or when we will be able to do so or if we do, in what amounts.
We regularly review the adequacy of our capital to ensure that sufficient capital is available for our current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends upon a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management.
The Federal Reserve Board has established capital adequacy rules which take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8% of which at least half must comprise core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banks and bank holding companies must meet. Under these guidelines, the most highly rated banking organizations must meet a leverage ratio of at least 3% Tier 1 capital to assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can initiate certain mandatory, as well as possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements.
At March 31, 2009, we were categorized as “well capitalized” under the regulatory framework for the prompt corrective action categorization. There are no conditions or events since such categorization that we believe have changed our category. To be “well capitalized” under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%.
On October 14, 2008, the United States Treasury Department (“the Treasury”) announced the creation of its voluntary Troubled Asset Relief Program (“TARP”) in furtherance of the recently enacted Emergency Economic Stabilization Act of 2008 (“EESA”). Under this program, the Treasury proposed to purchase up to $250 billion of non-voting senior preferred stock from “Qualifying Financial Institutions” in an amount between 1% and 3% of the institution’s risk-weighted assets with a maximum of $25 billion per institution. TARP is intended to encourage United States financial institutions to build capital to support increased financing to United States businesses and consumers in support of the United States economy. Under the definitions of TARP, we would be considered a “Qualifying Financial Institution” and as such, would be able to participate in the program in an amount of between $8.6 million and $25.9 million. The resulting perpetual preferred stock purchased by the Treasury would qualify as Tier 1 capital. Such preferred stock would have an annual, cumulative dividend of 5% for the first five years, increasing to 9% thereafter. As with any issuance of preferred stock, shares issued under TARP would have a dividend and liquidation preference over our common stock but would rank behind our other indebtedness. The Treasury’s purchase is conditional upon us complying with Section 111 of EESA regarding executive compensation. Additionally, we would be required to issue warrants to the Treasury to purchase shares of a second series of preferred stock with a 9% coupon rate at an exercise price of $0.01 per share, which warrants the Treasury would exercise upon closing. If we elect to participate, we will need to call a special meeting of our shareholders in order to amend our articles of incorporation to authorize the preferred stock to be issued to the Treasury prior to closing of the purchase by the Treasury.
We have no material commitments for capital expenditures.
The following table presents our and our subsidiary’s capital ratios as of March 31, 2009 and December 31, 2008:
CAPITAL RATIOS
($ in thousands)
|
| Actual |
| Required For |
| Required To Be |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
As of March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
| $ | 82,894 |
| 10.30 | % | $ | 64,373 |
| 8.00 | % |
| N/A |
| N/A |
|
Bank |
| $ | 81,750 |
| 10.15 | % | $ | 64,424 |
| 8.00 | % | $ | 80,530 |
| 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
| $ | 72,778 |
| 9.04 | % | $ | 32,186 |
| 4.00 | % |
| N/A |
| N/A |
|
Bank |
| $ | 71,627 |
| 8.89 | % | $ | 32,212 |
| 4.00 | % | $ | 48,318 |
| 6.00 | % |
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
| $ | 72,778 |
| 6.93 | % | $ | 42,022 |
| 4.00 | % |
| N/A |
| N/A |
|
Bank |
| $ | 71,627 |
| 6.82 | % | $ | 42,041 |
| 4.00 | % | $ | 52,551 |
| 5.00 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Actual |
| Required For |
| Required To Be |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
| $ | 80,787 |
| 9.72 | % | $ | 66,471 |
| 8.00 | % |
| N/A |
| N/A |
|
Bank |
| $ | 79,566 |
| 9.56 | % | $ | 66,524 |
| 8.00 | % | $ | 83,155 |
| 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
| $ | 70,362 |
| 8.47 | % | $ | 33,235 |
| 4.00 | % |
| N/A |
| N/A |
|
Bank |
| $ | 69,132 |
| 8.31 | % | $ | 33,262 |
| 4.00 | % | $ | 49,893 |
| 6.00 | % |
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
| $ | 70,362 |
| 6.68 | % | $ | 42,110 |
| 4.00 | % |
| N/A |
| N/A |
|
Bank |
| $ | 69,132 |
| 6.56 | % | $ | 42,161 |
| 4.00 | % | $ | 52,701 |
| 5.00 | % |
A strong capital position is necessary to take advantage of opportunities for profitable expansion of product and market share, and to provide depositor and investor confidence. We believe our capital level is strong, but also must be maintained at an appropriate level to provide the opportunity for an adequate return on the capital employed. We actively review our capital strategies to ensure that capital levels are appropriate based on the perceived business risks, further growth opportunities, industry standards, and regulatory requirements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Our primary market risk exposure is interest rate risk. Interest rate risk is the risk that our earnings and capital will be adversely affected by changes in interest rates. Historically, we have not used derivatives to mitigate our interest rate risk.
Our earnings are derived from the operations of our direct and indirect subsidiaries with particular reliance on net interest income, calculated as the difference between interest earned on loans and investments and the interest expense paid on deposits and other interest bearing liabilities, including advances from FHLB and other subordinated debentures. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities, including the monetary policies of the Board of Governors of the Federal Reserve System. Changes in the economic environment may influence, among other matters, the growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing. Fluctuations in interest rates are not predictable or controllable.
As of March 31, 2009, we were in compliance with our management policies with respect to interest rate risk. We have not experienced any material changes to our market risk position since December 31, 2008, as described in our 2008 Annual Report on Form 10-K.
Our overall interest rate sensitivity is demonstrated by net interest income shock analysis which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in net interest income in the event of sudden and sustained 100 bp to 200 bp increases and decreases in market interest rates. The table below presents our projected changes in net interest income for the various rate shock levels at March 31, 2009.
INTEREST SENSITIVITY
($ in thousands)
|
| Change in Net Interest Income over One Year Horizon |
| ||||||
|
| At March 31, 2009 |
| At December 31, 2008 |
| ||||
Change in levels |
| Dollar change |
| Percentage |
| Dollar change |
| Percentage |
|
+200 bp |
| ($1,230 | ) | (4.9% | ) | ($2,464 | ) | (8.4% | ) |
+100 bp |
| (750 | ) | (3.0% | ) | (1,333 | ) | (4.5% | ) |
Base |
| — |
| — |
| — |
| — |
|
-100 bp |
| 983 |
| 3.9% |
| 1,984 |
| 6.8% |
|
-200 bp |
| 285 |
| 1.1% |
| 1,163 |
| 4.0% |
|
As shown above, at March 31, 2009, the effect of an immediate 200 bp increase in interest rates would decrease our net interest income by $1.2 million or 4.9%. The effect of an immediate 200 bp reduction in rates would increase our net interest income by $0.3 million or 1.1%.
During the first three months of 2009, the Bank lengthened slightly the duration of its liabilities by replacing variable rate wholesale borrowings with fixed rate, putable borrowings. This effort has contributed to moderation of the liability sensitivity present at December 31, 2008.
Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the relative levels of market interest rates and loan prepayments, and should not be relied upon as indicative of actual results. Actual values may differ from those projections set forth above, should market conditions vary from the assumptions used in preparing the analyses. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.
Item 4. Controls and Procedures
Disclosures Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2009. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries is currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.
Item 1A.Risk Factors
See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2008. There have been no material changes since then to the risk factors affecting us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2009 we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, or repurchase any of our equity securities.
Item 3.Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5.Other Information
Not Applicable.
Item 6. Exhibits
The following exhibits are furnished herewith:
Exhibit |
| Description |
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31.1 |
| Certification under Section 302 of Sarbanes-Oxley Chief Executive Officer, is attached hereto. |
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31.2 |
| Certification under Section 302 of Sarbanes-Oxley Chief Financial Officer, is attached hereto. |
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32.1 |
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto. |
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32.2 |
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| BAYLAKE CORP. |
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Date: | May 8, 2009 |
| /s/Robert J. Cera |
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| Robert J. Cera |
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| President and Chief Executive Officer |
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Date: | May 8, 2009 |
| /s/ Kevin L. LaLuzerne |
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| Kevin L. LaLuzerne |
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| Treasurer and Chief Financial Officer |
31.1 | Certification under Section 302 of Sarbanes-Oxley Chief Executive Officer. |
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31.2 | Certification under Section 302 of Sarbanes-Oxley Chief Financial Officer. |
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32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley. |
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32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley. |