1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
--------------------------------------------------
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -----------------------
Commission file number 0-8679
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BAYLAKE CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
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(State or other jurisdiction of incorporation (Identification No.)
or organization)
217 North Fourth Avenue, Sturgeon Bay, WI 54235
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(Address of principal executive offices) (Zip Code)
(920)-743-5551
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(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
------------ ---------------
Applicable Only to Corporate Issuers:
Number of outstanding shares of each of common stock, par value $5.00 per share,
as of May 7, 2001: 7,471,574 shares
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BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of March 31, 2001 3
and December 31, 2000
Consolidated Condensed Statement of Income for the three 4
months ended March 31, 2001 and 2000
Consolidated Statement of Comprehensive Income for the three 5
months ended March 31, 2001 and 2000
Consolidated Statement of Cash Flows for the three months ended 6 - 7
March 31, 2001 and 2000
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II - OTHER INFORMATION 32 - 33
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 34
EXHIBIT INDEX 33
Exhibit 11 Statement re: computation of per share earnings 35
Exhibit 15 Letter re: unaudited interim financial information 35
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PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(dollars in thousands)
MARCH 31, DECEMBER 31,
ASSETS 2001 2000
------ ---- ----
Cash and due from banks $ 16,586 $ 21,695
Investment securities available for sale (at market) 138,360 135,089
Investment securities held to maturity (market
value $17,984 and $18,503, at March 31, 2001
and December 31, 2000, respectively) 17,734 18,422
Loans held for sale 3,889 724
Loans 577,807 555,107
Less: Allowance for loan losses 7,239 7,006
----- -----
Loan, net of allowance for loan losses 570,568 548,101
Bank premises and equipment 21,040 21,313
Federal Home Loan Bank stock (at cost) 6,074 5,955
Accrued interest receivable 6,225 5,733
Income taxes receivable 559 1,135
Deferred income taxes 1,425 2,256
Goodwill 5,334 5,455
Other Assets 7,461 6,390
----- -----
Total Assets $795,255 $772,268
======== ========
LIABILITIES
-----------
Domestic deposits
Non-interest bearing $ 59,438 $ 69,149
Interest bearing
NOW 40,120 49,582
Savings 193,680 183,369
Time, $100,000 and over 82,325 61,334
Other time 198,319 189,820
------- -------
Total interest bearing 514,444 484,105
Total deposits 573,882 553,254
Short-term borrowings
Federal funds purchased, repurchase
Agreements, borrowings from unaffiliated banks
and Federal Home Loan Bank advances 37,042 80,289
Accrued expenses and other liabilities 7,435 6,868
Dividends payable 0 819
Other borrowings 105,000 77,700
Long-term debt 158 211
Long-term debt-trust preferred securities 16,100 0
------ -
Total liabilities 739,617 719,141
------- -------
SHAREHOLDERS' EQUITY
--------------------
Common stock,$5 par value: authorized 10,000,000
shares; issued 7,494,733 shares as of March 31,
2001 and 7,468,733 as of December 31, 2000;
outstanding 7,471,574 as of March 31, 2001 and
7,445,574 as of December 31, 2000 37,474 37,344
Additional paid-in capital 7,266 7,185
Retained earnings 9,461 8,670
Treasury Stock (625) (625)
Net unrealized gain (loss) on securities available
for sale, net of tax of $1,108 as of March 31,
2001 and $277 as of December 31, 2000. 2,062 553
-------- ------
Total shareholders' equity 55,638 53,127
------ ------
Total liabilities and shareholders' equity $ 795,255 $ 772,268
========= =========
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
2001 2000
---- ----
Interest income
Interest and fees on loans $ 12,939 $ 10,278
Interest on investment securities
Taxable 1,713 1,648
Exempt from federal income taxes 649 641
--- ---
Total interest income 15,301 12,567
Interest expense
Interest on deposits 6,472 5,399
Interest on short-term borrowings 817 180
Interest on other borrowingins 1,526 1,194
Interest on long-term debt 4 6
Interest on trust preferred securities 197 -
-------- --------
Total interest expense 9,016 6,779
-------- --------
Net interest income 6,285 5,788
Provision for loan losses 202 60
-------- --------
Net interest income after provision for
loan losses 6,083 5,728
-------- --------
Other income
Fees from fiduciary activities 150 137
Fees from loan servicing 196 161
Fees for other services to customers 598 547
Gains from sales of loans 113 24
Other income 75 115
-------- --------
Total other income 1,132 984
-------- --------
Other expenses
Salaries and employee benefits 2,927 2,594
Occupancy expense 430 341
Equipment expense 351 348
Data processing and courier 236 223
Operation of other real estate 24 33
Other operating expenses 926 899
-------- --------
Total other expenses 4,894 4,438
-------- --------
Income before income taxes 2,321 2,274
Income tax expense 709 673
-------- --------
Net Income $ 1,612 $ 1,601
======== ========
Basic earnings per common share (1) $ 0.22 $ 0.22
Diluted earnings per common share (1) $ 0.21 $ 0.20
Cash dividends per share $ 0.11 $ 0.10
(1) Based on 7,457,018 average shares outstanding in 2001 and 7,440,545 in 2000.
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
2001 2000
---- ----
Net Income $ 1,612 $ 1,601
------- -------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during
period 1,509 (145)
------- -------
Comprehensive income $ 3,121 $ 1,456
======= =======
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
2001 2000
---- ----
Cash flows from operating activities: Interest received from:
Loans $ 12,394 $ 9,639
Investments 2,382 2,208
Fees and service charges 1,065 899
Interest paid to depositors (5,978) (4,743)
Interest paid to others (2,462) (1,363)
Cash paid to suppliers and employees (4,992) (4,376)
Income taxes paid (133) (106)
--------- --------
Net cash provided by operating activities 2,276 2,158
Cash flows from investing activities:
Principal payments received on investments 5,484 2,626
Purchase of investments (5,850) (4,418)
Proceeds from sale of other real estate owned 249 102
Loans made to customers in excess of principal collected (26,449) (24,526)
Capital expenditures (118) (958)
--------- --------
Net cash used in investing activities (26,684) (27,174)
Cash flows from financing activities:
Net decrease in demand deposits, NOW accounts, and savings (8,861) (8,098)
Accounts
Net increase (decrease) in short term borrowing (43,248) 12,680
Net increase in time deposits 29,490 14,039
Proceeds from other borrowings and long-term debt 35,000 2,000
Payments on other borrowings and long term debt (7,753) (53)
Proceeds from issuance of common stock 211 41
Proceeds from issuance of trust preferred stock 16,100 0
Dividends paid (1,640) (1,487)
--------- --------
Net cash provided by financing activities 19,299 19,122
--------- --------
Net decrease in cash and cash equivalents (5,109) (5,894)
Cash and cash equivalents, beginning 21 695 19,475
--------- --------
Cash and cash equivalents, ending $ 16,586 $ 13,581
========= ========
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MARCH 31,
2001 2000
----- ----
Reconciliation of net income to net cash provided by operating activities:
Net income $ 1,613 $ 1,601
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 391 336
Provision for losses on loans and real estate owned 202 60
Amortization of premium on investments 43 35
Accretion of discount on investments (39) (42)
Cash surrender value increase (14) (13)
Gain from disposal of ORE (8) (15)
Gain on sale of loans (113) (24)
Proceeds from sale of loans held for sale 12,366 3,207
Originations of loans held for sale (12,253) (3,183)
Equity in income of service center (51) (53)
Amortization of goodwill 121 123
Amortization of mortgage servicing rights 46 22
Mortgage servicing rights booked (58) (34)
Deferred compensation 64 62
Changes in assets and liabilities:
Interest receivable (493) (633)
Prepaids and other assets (641) (172)
Unearned income 21 (64)
Interest payable 576 672
Taxes payable 575 567
Other liabilities (72) (294)
---------- --------
Total adjustments 663 557
---------- --------
Net cash provided by operating activities $ 2,276 $ 2,158
============ ==========
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BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Baylake Corp.'s 2000 annual report on Form
10-K. In the opinion of management, the unaudited financial information
included in this report reflects all adjustments, consisting only of
normal recurring accruals, which are necessary for a fair statement of
the financial position as of March 31, 2001 and December 31, 2000. The
results of operations for the three months ended March 31, 2001 and
2000 are not necessarily indicative of results to be expected for the
entire year.
2. The book value of investment securities, by type, held by Baylake Corp.
are as follows:
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(dollars in thousands)
Investment securities held to maturity:
Obligations of state and political subdivisions $ 17,984 $ 18,503
-------- ---------
Investment securities held to maturity $ 17,984 $ 18,503
======== =========
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 30,618 $ 32,997
Obligations of states and political subdivisions 34,313 33,795
Mortgage-backed securities 71,239 66,986
Other 2,190 1,311
--------- ---------
Investment securities available for sale $ 138,360 $ 135,089
========= =========
3. At March 31, 2001 and December 31, 2000, loans were as follows:
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(dollars in thousands)
Commercial, financial and agricultural $ 339,876 $ 335,868
Real estate - construction 66,796 41,524
Real estate - mortgage 153,696 160,150
Installment 17,819 17,925
Less: Deferred loan origination fees, net of costs (380) (360)
--------- ---------
$ 577,807 $ 555,107
Less allowance for loan losses (7,239) (7,006)
--------- ---------
Net loans $ 570,568 $ 548,101
========= =========
4. Baylake Corp. declared a cash dividend of $0.11 per share payable on
March 15, 2001 to shareholders of record as of March 1, 2001.
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PART 1 - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of Baylake Corp.
("Baylake" or the "Company") for the three months ended March 31, 2001 and 2000
which may not be otherwise apparent from the consolidated financial statements
included in this report. Unless otherwise stated, the "Company" or "Baylake"
refers to this entity and to its subsidiaries on a consolidated basis when the
context indicates. For a more complete understanding, this discussion and
analysis should be read in conjunction with the financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen") and
changed its name to Baylake Bank, N.A. ("BLBNA"). Prior to the acquisition,
Evergreen was under the active supervision of the Office of the Comptroller of
the Currency ("OCC") due to its designation of Evergreen as a "troubled
institution" and "critically under capitalized". As part of the acquisition, the
Company was required to contribute $7 million of capital to Evergreen. As of the
date of this report, no payments to the seller of Evergreen have been made by
the Company and no payments are presently due. However, the Company may become
obligated for certain contingent payments that may become payable in the future,
based on a formula set forth in the stock purchase agreement, not to exceed $2
million. Such contingent payments are not accrued at March 31, 2001, since that
amount, if any, is not estimable.
The acquisition was accounted for using the purchase method of accounting,
therefore it could affect future operations. At the time of acquisition, BLBNA
had total assets of $101.8 million, deposits of $93.2 million and loans of $83.7
million. On March 15, 1999, BLBNA merged with and into Baylake Bank ("Bank").
Forward-Looking Information
This discussion and analysis of 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 not historical in nature and are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "anticipates," "believes," "estimates," "expects," "forecasts,"
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"intends," "is likely," "plans," "projects," and other such words are intended
to identify in 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 the control of
the Company, 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 impact the business
and financial prospects of the relationships; demand for financial products and
financial services; the degree of competition by traditional and non-traditional
financial services competitors; changes in banking legislation or regulations;
changes in tax laws; changes in interest rates; changes in prices; the impact of
technological advances; governmental and regulatory policy changes; trends in
customer behavior as well as their ability to repay loans; and changes in the
general economic conditions, nationally or in the State of Wisconsin.
Results of Operations
For the three months ended March 31, 2001, earnings were relatively unchanged
for the quarter when compared to the same quarter last year. Net income of $1.61
million, or $0.22 basic operating earnings per share, was reported for the
quarter ended March 31, 2001 and net income of $1.60 million, or $0.22 basic
operating earnings per share, was reported for the quarter ended March 31, 2000.
On a fully diluted basis, the Company recorded $0.21 per share for the first
quarter in 2001 and $0.20 for the same period in 2000.
The annualized return on average assets and return on average equity for the
three months ended March 31, 2001 were 0.84% and 12.09%, respectively, compared
to 0.99% and 13.72%, respectively, for the same period a year ago.
The slight increase in net income for the period is primarily due to improved
net interest income after provision for loan losses and an increase in other
income offset to a slightly lesser extent by increased other expenses and income
tax expense.
Cash dividends declared in the first three months of 2001 increased 10.0% to
$0.11 per share compared with $0.10 for the same period in 2000.
Net Interest Income
Net interest income is the largest component of the Company's operating income
(net interest income plus other non-interest income) accounting for 85.4% of
total operating income for the first three months of 2001, as compared to 86.1%
for the first three months of 2000. Net interest income represents the
difference between interest earned on loans, investments and other interest
earning assets offset by the interest
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expense attributable to the deposits and the 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.
Net interest income on a tax equivalent basis for the three months ended March
31, 2001 increased $501,000, or 8.2%, to $6.6 million from $6.1 million for the
same period a year ago. Total interest income for the first quarter of 2001
increased $2.7 million, or 20.9%, to $15.6 million from $12.9 million for the
first quarter of 2000, while interest expense in the first quarter of 2001
increased $2.2 million, or 33.0%, to $9.0 million when compared to $6.8 million
in the first quarter of 2000. The increase in net interest income between these
two quarterly periods occurred primarily as a result of growth in the average
volume of interest earning assets and non-interest bearing deposits offset to a
lesser extent by an increase in interest paying liabilities and an increase in
the cost of average interest paying liabilities.
For the three months ended March 31, 2001, average earning assets increased
$118.8 million, or 19.7%, when compared to the same period last year. The
Company recorded an increase in average loans of $109.8 million, or 23.9%, for
the first quarter of 2001 compared to the same period a year ago. Loans have
typically resulted in higher rates of interest income to the Company than have
investment securities.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread remained compressed for the quarter ended
March 31, 2001 when compared to the same period a year ago. The interest rate
spread decreased 56 basis points to 3.08% at March 31, 2001 from 3.64% in the
same quarter in 2000. While the average yield on earning assets decreased 1
basis point during the period, the average rate paid on interest-bearing
liabilities increased 55 basis points over the same period as a result of a
higher cost of funding from deposits and other wholesale funding such as federal
funds purchased and loans from the Federal Home Loan Bank.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
component increasing net interest margin.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended March 31, 2001 decreased from 4.09% to 3.73% compared to the same period a
year ago. The average yield on interest earning
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assets amounted to 8.61% for the first quarter of 2001, representing a decrease
of 1 basis point from the same period last year. Total loan yields increased 1
basis point to 9.17%, while total investment yields decreased 35 basis points to
6.65%, as compared to the same period a year ago. The Company's average cost on
interest-bearing deposit liabilities increased 54 basis points to 5.31% for the
first quarter of 2001 when compared to the first quarter of 2000, while
short-term borrowing costs decreased 11 basis points to 5.99% comparing the two
periods. Other borrowing costs decreased 1 basis point to 5.99% during the same
time period. These factors contributed to a decrease in the Company's interest
margin for the three months ended March 31, 2001 compared to the same period a
year ago.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 92.5% for the first quarter of 2001 compared with 92.0%
for the same period in 2000. The ratio increased slightly in 2001, primarily as
a result of growth in earning assets offset to a lesser degree by an increase in
non-accrual loans.
Provision for Loan Losses
The provision for loan losses is the periodic cost (not less than quarterly) of
providing an allowance for future loan losses. In any accounting period, the
amount of provision is based on management's evaluation of the loan portfolio,
especially nonperforming and other potential problem loans, taking into
consideration many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
loan quality, general economic factors and collateral values.
The provision for loan losses for the three months ended March 31, 2001
increased $142,000 to $202,000 compared with $60,000 for the first quarter of
2000. Management believes that the current allowance (giving effect to the
increased provision) conforms with the Company's loan loss reserve policy and is
adequate in view of the present condition of the Company's loan portfolio. See
"Risk Management and the Allowance for Possible Loan Losses" below.
Non-Interest Income
Total non-interest income increased $148,000, or 15.0%, to $1.1 million for the
first quarter of 2001 when compared to the first quarter of 2000. This increase
occurred as a result of increased fees on other customer services, increased
gains from sales of loans, increased fees from loan servicing, and increased
trust income offset to a lesser degree by decreased other income.
Trust fees increased $13,000, or 9.5%, in the first quarter of 2001 compared to
the same quarter in 2000, primarily as a result of timing differences related to
billing and collection of fees.
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Loan servicing fees increased $35,000, or 21.7%, to $196,000 in the first
quarter of 2001, when compared to the same quarter in 2000. The increase in 2001
resulted from an increase in commercial loan servicing income.
Gains on sales of loans in the secondary market increased $89,000 to $113,000 in
the first quarter of 2001, when compared to the same quarter in 2000, primarily
as a result of increased gains from sales of mortgage and commercial loans.
Recent declines in interest rates have stimulated mortgage production, including
an increase in refinancing activity.
Service charges on deposit accounts for the first quarter of 2001 showed an
increase of $62,000, or 18.2%, over 2000 results, accounting for much of the
improvement in fee income generated for other services to customers. Financial
service income decreased $7,000, or 10.3%.
Non-Interest Expense
Non-interest expense increased $456,000, or 10.3%, for the three months ended
March 31, 2001 compared to the same period in 2000. Salaries and employee
benefits showed an increase of $333,000, or 12.8%, for the period as a result of
additional staffing to operate new facilities and regular salary and related
benefit increases. Full time equivalent staff increased to 272 persons from 258
a year earlier. Increases in occupancy (amounting to $89,000 or 26.1%) and
equipment expenses (amounting to $3,000 or 0.9%) occurred as a result of
expansion in the Green Bay and Waupaca markets and costs related to
modernization of various facilities.
Other operating expenses increased $27,000, or 3.0%. Included in 2001 expenses
were amortization of goodwill related to the Four Seasons acquisition (a
purchase of a one bank holding company in July 1996) of $82,000 (the same as in
2000) and amortization of $39,000 (the same as in 2000) related to the BLBNA
acquisition.
Legal expense and loan collection expense increased $39,000 for the three months
ended March 31, 2001 primarily as a result of legal issues relating to loan
collection efforts of two commercial real estate loans which are in the process
of foreclosure action.
Other items (such as supplies, marketing. telephone, postage and director fees)
comprising other operating expense show a decrease of $11,000 or 1.5% in the
first quarter of 2001 when compared to the same quarter in 2000. Expenses
related to the amortization of trust preferred expenses (such as legal and
underwriting expenses) amounted to $5,000 for the quarter ended March 31, 2001.
The overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total assets, was 1.96% for the
three months ended March 31, 2001 compared to 2.12% for the same period in 2000.
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Income Taxes
Income tax expense for the Company for the three months ended March 31, 2001 was
$709,000, an increase of $36,000, or 5.3%, compared to the same period in 2000.
The increase in income tax provision for the period was due to increased taxable
income.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 30.5% for the three months ended March 31, 2001 compared with 29.6%
for the same period in 2000. The effective tax rate of 30.5% consisted of a
federal effective tax rate of 26.1% and Wisconsin State effective tax rate of
4.4%.
Balance Sheet Analysis
Loans
At March 31, 2001, total loans increased $22.7 million, or 4.1%, to $577.8
million from $555.1 million at December 31, 2000. Growth in the Company's loan
portfolio resulted primarily from an increase in real estate construction loans
to $66.8 million at March 31, 2001 compared to $41.5 million at December 31,
2000. In addition, commercial loans increased to $339.9 million at March 31,
2001, compared to $335.9 million at December 31, 2000. Real estate mortgage
loans decreased to $153.7 million at March 31, 2001, compared with $160.2
million at December 31, 2000. Consumer loans decreased to $17.8 million at March
31, 2001, compared with $17.9 million at December 31, 2000.
Growth in commercial real estate mortgages and commercial loans occurred
principally as a result of the Company's expansion efforts (primarily in the
Green Bay market) and the strong economic growth existing in that market.
The following table reflects the composition (mix) of the loan portfolio
(dollars in thousands):
- -----------------------------------------------------------------------------------------------------------
March 31 December 31,
2001 2000
- -----------------------------------------------------------------------------------------------------------
Amount of loans by type (dollars in thousands)
- -----------------------------------------------------------------------------------------------------------
Real estate-mortgage
- -----------------------------------------------------------------------------------------------------------
Commercial $252,735 $251,971
- -----------------------------------------------------------------------------------------------------------
1-4 family residential
- -----------------------------------------------------------------------------------------------------------
First liens 102,294 109,173
- -----------------------------------------------------------------------------------------------------------
Junior liens 26,435 26,513
- -----------------------------------------------------------------------------------------------------------
Home equity 24,967 24,464
- -----------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural 87,141 83,897
- -----------------------------------------------------------------------------------------------------------
Real estate-construction 66,796 41,524
- -----------------------------------------------------------------------------------------------------------
Installment
- -----------------------------------------------------------------------------------------------------------
Credit cards and related plans 2,272 2,140
- -----------------------------------------------------------------------------------------------------------
Other 15,547 15,785
- -----------------------------------------------------------------------------------------------------------
Less: deferred origination fees, net of costs 380 360
- -----------------------------------------------------------------------------------------------------------
Total 577,807 555,107
- -----------------------------------------------------------------------------------------------------------
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Risk Management and the Allowance for Loan Losses
The loan portfolio is the Company's primary asset subject to credit risk. To
reflect this credit risk, the Company sets aside an allowance or reserve for
credit losses through periodic charges to earnings. These charges are shown in
the Company's consolidated income statement as provision for loan losses. See
"Provision for Loan Losses" above. Credit risk is managed and monitored through
the use of lending standards, a thorough review of potential borrowers, and an
on-going review of payment performance. Asset quality administration, including
early identification of problem loans and timely resolution of problems, further
enhances management of credit risk and minimization of loan losses. All
specifically identifiable and quantifiable losses are immediately charged off
against the allowance. Charged-off loans are subject to periodic review, and
specific efforts are taken to achieve maximum recovery of principal and
interest.
Management reviews the adequacy of the Allowance for Loan Losses ("ALL") on a
quarterly basis to determine whether the allowance is adequate to provide for
probable losses inherent in the loan portfolio as of the balance sheet date.
Valuation of the adequacy of the ALL is based primarily on management's periodic
assessment and grading of the loan portfolio as described below. Additional
factors considered by management include the consideration of past loan loss
experience, trends in past due and nonperforming loans, risk characteristics of
the various classifications of loans, current economic conditions, the fair
value of underlying collateral, and other regulatory or legal issues that could
affect credit losses.
Loans are initially graded when originated. They are re-graded as they are
renewed, when there is a loan to the same borrower, when identified facts
demonstrate heightened risk of nonpayment, or if they become delinquent. The
loan review, or grading, process attempts to identify and measure problem and
watch list loans. Problem loans are those loans with higher than average risk
with workout and/or legal action probable within one year. These loans are
reported at least quarterly to the directors' loan committee and reviewed at
least monthly at the officers' loan committee for action to be taken. Watch list
loans are those loans considered as having weakness detected in either
character, capacity to repay or balance sheet concerns and prompt management to
take corrective action at the earliest opportunity. Problem and watch list loans
generally exhibit one or more of the following characteristics:
1. Adverse financial trends and condition
2. Decline in the entire industry
3. Managerial problems
4. Customer's failure to provide financial information or other collateral
documentation
5. Repeated delinquency, overdrafts or renewals
Every significant problem credit is reviewed by the loan review process and
assessments are performed quarterly to confirm the risk rating to
15
16
that credit, proper accounting and the adequacy of loan loss reserve assigned.
After reviewing the gradings in the loan portfolio, management will allocate or
assign a portion of the ALL to groups of loans and individual loans to cover
management's estimate of probable loss. Allocation is related to the grade of
the loan and includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS 118"). Allocations also are made for unrated loans, such as
credit card loans, based on historical loss experience adjusted for portfolio
activity. These allocated reserves are further supplemented by unallocated
reserves based on management's judgment regarding risk of error, local economic
conditions and any other relevant factors. Management then compares the amounts
allocated for probable losses to the current allowance. To the extent that the
current allowance is insufficient to cover management's best estimate of
probable losses, management records additional provision for credit loss. If the
allowance is greater than required at that point in time, provision expense is
adjusted accordingly.
As the following table indicates, the ALL at March 31, 2001 was $7.2 million
compared with $7.0 million at the end of 2000. Loans increased 4.1% from
December 31, 2000 to March 31, 2001, while the allowance as a percent of total
loans declined due to the loan loss provision being lower in comparison to
higher loan growth for the first quarter of 2001. The March 31, 2001 ratio of
ALL to outstanding loans was 1.25% compared with 1.26% at December 31, 2000 and
the ALL as a percentage of nonperforming loans was 49.8% at March 31, 2001
compared to 53.9% at end of year 2000. Based on management's analysis of the
loan portfolio risk at March 31, 2001, a provision expense of $202,000 was
recorded for the three months ended March 31, 2001, an increase of $142,000 or
236.7% compared to the same period in 2000. Net loan recoveries of $31,000
occurred in the first quarter of 2001, and the ratio of net charge-offs to
average loans for the period ended March 31, 2001 was (0.02%) compared to
(0.19%) at March 31, 2000. Commercial, agricultural and other loan net
charge-offs represented 74.2% of the total net recoveries for the first three
months of 2001. Loans charged-off are subject to periodic review and specific
efforts are taken to achieve maximum recovery of principal and accrued interest.
16
17
Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
For the period ended For the period ended For the period ended
March 31 ,2001 March 31, 2000 December 31, 2000
- -------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
("ALL")
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of
period $7,006 $ 7,611 $ 7,611
- -------------------------------------------------------------------------------------------------------------
Provision for loan losses 202 60 545
- -------------------------------------------------------------------------------------------------------------
Charge-offs 111 60 2,074
- -------------------------------------------------------------------------------------------------------------
Recoveries 142 282 924
--- --- ---
- -------------------------------------------------------------------------------------------------------------
Balance at end of period 7,239 7,893 7,006
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Net charge-offs ("NCOs") (31) (222) 1,150
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Nonperforming Assets:
- -------------------------------------------------------------------------------------------------------------
Nonaccrual loans $9,883 7,988 8,479
- -------------------------------------------------------------------------------------------------------------
Accruing loans past due 90
days or more 0 0 0
- -------------------------------------------------------------------------------------------------------------
Restructured loans 4,657 4,349 4,510
----- ----- -----
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total nonperforming loans
("NPLs") 14,540 12,337 12,989
- -------------------------------------------------------------------------------------------------------------
Other real estate owned 1,230 385 877
----- --- ---
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets
("NPAs") $15,770 12,722 13,866
- -------------------------------------------------------------------------------------------------------------
Ratios:
- -------------------------------------------------------------------------------------------------------------
ALL to NCO's (annualized) (58.38) (8.89) 6.09
- -------------------------------------------------------------------------------------------------------------
NCO's to average loans
(annualized) (0.02%) (0.19%) 0.23%
- -------------------------------------------------------------------------------------------------------------
ALL to total loans 1.25% 1.67% 1.26%
- -------------------------------------------------------------------------------------------------------------
NPL's to total loans 2.50% 2.61% 2.34%
- -------------------------------------------------------------------------------------------------------------
NPA's to total assets 1.98% 1.90% 1.80%
- -------------------------------------------------------------------------------------------------------------
ALL to NPL's 49.79% 63.98% 53.94%
- -------------------------------------------------------------------------------------------------------------
While management uses available information to recognize losses on loans, future
adjustments to the ALL may be necessary based on changes in economic conditions
and the impact of such change on the Company's borrowers.
Consistent with generally accepted accounting principles ("GAAP") and with the
methodologies used in estimating the unidentified losses in the loss portfolio,
the ALL consists of several components.
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18
First, the allowance includes a component resulting from the application of the
measurement criteria of SFAS 114 and SFAS 118. The amount of this component is
included in the various categories presented in the following table.
The second component is statistically based and is intended to provide for
losses that have occurred in large groups of smaller balance loans, the credit
quality of which is impracticable to re-grade at end of period. These loans
would include residential real estate, consumer loans and loans to small
businesses generally in principal amounts of $100,000 and less. The loss factors
are based primarily on the Company's historical loss experience tracked over a
three-year period and accordingly will change over time. Due to the fact that
historical loss experience varies for the different categories of loans, the
loss factors applied to each category also differ.
The final or "unallocated" component of the ALL is a component that is intended
to absorb losses that may not be provided for by the other components. There are
several primary reasons that the other components discussed above might not be
sufficient to absorb the losses present in portfolios, and the unallocated
portion of the ALL is used to provide for the losses that have occurred because
of these reasons.
The first is that there are limitations to any credit risk grading process. Even
for experienced loan reviewers, grading loans and estimating losses involves a
significant degree of judgment regarding the present situation with respect to
individual loans and the portfolio as a whole. The overall number of loans in
the portfolio also makes it impracticable to re-grade every loan each quarter.
Therefore, it is possible that some currently performing loans not recently
graded will not be as strong as their last grading and an insufficient portion
of the allowance will have been allocated to them. In addition, it is possible
that grading and loan review may be done without knowing whether all relevant
facts are at hand. For example, troubled borrowers may inadvertently or
deliberately omit important information from correspondence with lending
officers regarding their financial condition and the diminished strength of
repayment sources.
The second is that loss estimation factors are based on historical loss totals.
As such, the factors may not give sufficient weight to such considerations as
the current general economic and business conditions that affect the Company's
borrowers and specific industry conditions that affect borrowers in that
industry. For example, with respect to loans to borrowers who are influenced by
trends in the local tourist industry, management considers the effects of
weather conditions, market saturation, and the competition for borrowers from
other tourist destinations and attractions.
Third, the loss estimation factors do not give consideration to the seasoning of
the loan portfolio. Seasoning is relevant because losses are less likely to
occur in loans that have been performing satisfactorily for several years than
in loans that are more recent.
18
19
Finally, the loss estimation factors do not give consideration to the interest
rate environment. Most obviously, borrowers with variable rate loans may be less
able to manage their debt service if interest rates rise.
For these reasons, management regards it as both a more practical and prudent
practice to maintain the total allowance at an amount larger than the sum of the
amounts allocated as described above.
The following table shows the amount of the ALL allocated for the time periods
indicated to each loan type as described. It also shows the percentage of
balances for each loan type to total loans. In general, it would be expected
that those types of loans which have historically more loss associated with them
will have a proportionally larger amount of the allowance allocated to them than
do loans which have less risk.
Consideration for making such allocations is consistent with the factors
discussed above, and all of the factors are subject to change; thus, the
allocation is not necessarily indicative of the loan categories in which future
loan losses will occur. It would also be expected that the amount allocated for
any particular type of loan will increase or decrease proportionately to both
the changes in the loan balances and to increases or decreases in the estimated
loss in loans of that type. In other words, changes in the risk profile of the
various parts of the loan portfolio should be reflected in the allowance
allocated.
Allocation of the Allowance for Loan Losses
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
March 31,
2001 March 31, 2000 Dec 31, 2000
- ----------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ of ------ of ------ of
loans to loans to loans to
total loans total loans total loans
----------- ----------- -----------
- ----------------------------------------------------------------------------------------------------------------
Commercial, financial $1 200 15.08% 675 16.12% 1,073 15.09%
& agricultural
- ----------------------------------------------------------------------------------------------------------------
Commercial real estate 3,250 43.68% 2,750 45.28% 2,993 45.27%
- ----------------------------------------------------------------------------------------------------------------
Real Estate:
- ----------------------------------------------------------------------------------------------------------------
Construction 360 11.56% 45 5.72% 302 7.47%
- ----------------------------------------------------------------------------------------------------------------
Residential 1,420 22.28% 1,340 25.08% 1,395 24.54%
- ----------------------------------------------------------------------------------------------------------------
Home equity lines 142 4.32% 132 4.32% 148 4.40%
- ----------------------------------------------------------------------------------------------------------------
Consumer 140 2.69% 130 3.09% 140 2.84%
- ----------------------------------------------------------------------------------------------------------------
Credit card 52 0.39% 41 0.39% 68 0.39%
- ----------------------------------------------------------------------------------------------------------------
Loan commitments 147 136 135
- ----------------------------------------------------------------------------------------------------------------
Not specifically 528 2,644 752
allocated --- ----- ---
- ----------------------------------------------------------------------------------------------------------------
Total allowance $7,239 100.00% $7,893 100.00% $7,006 100.00%
- ----------------------------------------------------------------------------------------------------------------
Allowance for credit 1.25% 1.67% 1.26%
loss as a percentage
of total loans
- ----------------------------------------------------------------------------------------------------------------
Period end loans $577,807 $472,177 $555,107
- ----------------------------------------------------------------------------------------------------------------
19
20
While there exists probable asset quality problems in the loan portfolio,
including loans acquired in the BLBNA purchase, management believes sufficient
reserves have been provided in the ALL to absorb probable losses in the loan
portfolio at March 31, 2001. In the time period since the purchase of BLBNA,
management has undertaken extensive efforts to identify and evaluate problem
loans stemming from the BLBNA acquisition. Although no assurance can be given,
management feels that the majority of these problem loans associated with BLBNA
have been identified. Ongoing efforts are being made to collect these loans, and
the Company involves the legal process when necessary to minimize the risk of
further deterioration of these loans for full collectibility.
As an integral part of their examination process, various regulatory agencies
also review the Company's ALL. Such agencies may require that changes in the ALL
be recognized when their credit evaluations differ from those of management,
based on their judgments about information available to them at the time of
their examination.
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. This is accomplished by monitoring and
reviewing credit policies and procedures on a regular basis.
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 collectibility is in doubt, cash
receipts on non-accrual loans are used to reduce principal rather than recorded
as interest income.
Non-performing assets at March 31, 2001 were $15.8 million compared to $13.9
million at December 31, 2000. Other real estate owned totaled $1.2 million and
consisted of four residential and six commercial properties. Non-accrual loans
represented $9.9 million of the total of non-performing assets, of which $4.6
million was acquired by the Company with the BLBNA acquisition. Real estate
non-accrual loans
20
21
accounted for $8.1 million of the total, of which $3.2 million was residential
real estate and $4.9 million was commercial real estate, while commercial and
industrial non-accruals accounted for $1.3 million.
Management believes collateral is sufficient to offset losses in the event
additional legal action would be warranted to collect these loans, except for
two commercial credits totaling $1.0 million. These credits are in the process
of liquidation and it is not anticipated that the specific reserve applied to
these loans (approximately $368,000) will be sufficient to cover the entire
amount of potential loss. $4.7 million of troubled debt restructured loans
existed at March 31, 2001, compared with $4.5 million at December 31, 2000.
Approximately $3.1 million of troubled debt restructured loans at March 31
consists of two commercial real estate credits which were granted various
payment concessions and had experienced past cashflow problems. These credits
were current at March 31, 2001. Management believes that collateral is
sufficient in those loans classified as troubled debt in event of default. As a
result, the ratio of non performing loans to total loans at March 31, 2001 was
2.5% compared to 2.3% at 2000 year end. The Company's ALL was 49.8% of total
non-performing loans at March 31, 2001 compared to 53.9% at end of year 2000.
Potential problem loans at March 31, 2001 are restricted to two commercial
borrowers with credits aggregating approximately $7.6 million. Potential problem
loans totaled $8.7 million at December 31, 2000. The first commercial loan
customer, with a credit totaling $2.9 million, is undergoing management changes
and, as a result, has experienced liquidity problems. The second commercial loan
customer, with credits totaling $4.7 million underwent management changes and is
in the process of modernizing their facilities. These credits were current at
March 31, 2001, but will be monitored for future performance as management
change is now in place. Management's evaluation of the borrower's existing
collateral supports an expectation of full recovery even in the event of
liquidation, regardless of future performance, consummation of a business
combination transaction or potential default.
Investment Portfolio
At March 31, 2001, the investment portfolio (which includes investment
securities available for sale and held to maturity) increased $2.6 million, or
1.7%, to $156.1 million from $153.5 million at December 31, 2000. At March 31,
2001, the investment portfolio represented 19.6% of total assets compared with
19.9% at December 31, 2000.
Securities held to maturity and securities available for sale consist of the
following:
21
22
At March 31, 2001
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated Market
---------
Cost Gains Losses Value
---- ----- ------ -----
- ---------------------------------------------------------------------------------------------------------------------
Securities held to maturity
-----------
- ---------------------------------------------------------------------------------------------------------------------
Obligations of states & $ 17,734 $ 250 $ 0 $ 17,984
political subdivisions
------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Securities available for sale
------------------
- ---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Treasury &
other U.S. Agencies 29,263 1,355 0 30,618
-------------
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 70,671 714 146 71,239
----------
- ---------------------------------------------------------------------------------------------------------------------
Obligations of states &
political subdivisions 33,066 1,247 0 34,313
------------
- ---------------------------------------------------------------------------------------------------------------------
Equity securities 2,190 2,190
- -----------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total securities available for $135,190 $3,316 $ 146 $138,360
--------------
sale
- ----
- ---------------------------------------------------------------------------------------------------------------------
At December 31, 2000
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated Market
---------
Cost Gains Losses Value
---- ----- ------ -----
- ---------------------------------------------------------------------------------------------------------------------
Securities held to maturity
-----------
- ---------------------------------------------------------------------------------------------------------------------
Obligations of states & $ 18,422 $119 $ 38 $ 18,503
political subdivisions
------------
- ---------------------------------------------------------------------------------------------------------------------
Securities available for sale
- ---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Treasury & $ 32,252 $748 $ 3 $ 32,997
other U.S. Agencies
-------------
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 67,629 107 750 66,986
----------
- ---------------------------------------------------------------------------------------------------------------------
Obligations of states &
political subdivisions 33,067 757 29 33,795
------------
- ---------------------------------------------------------------------------------------------------------------------
Equity securities 1,311 1,311
- -----------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total securities available for
--------------
sale $134,259 $1,612 $782 $135,089
- ----
- ---------------------------------------------------------------------------------------------------------------------
22
23
At March 31, 2001, the contractual maturities of securities held to maturity and
securities available for sale are as follows: (dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
Securities held to Maturity Securities Available for Sale
--------------------------- -----------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Within 1 year $ 2,980 $ 2,991 $ 16,417 $ 16,480
- ----------------------------------------------------------------------------------------------------------------------------
After 1 but within 5 years 7,092 7,227 74,715 76,005
- ----------------------------------------------------------------------------------------------------------------------------
After 5 but within 10 years 2,286 2,341 23,746 25,126
- ----------------------------------------------------------------------------------------------------------------------------
After 10 years 5,376 5,425 19,003 19,440
- ----------------------------------------------------------------------------------------------------------------------------
Equity securities 0 0 1,309 1,309
- - ----- -----
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 17,734 $ 17,984 $135,190 $138,360
- ----------------------------------------------------------------------------------------------------------------------------
Deposits
Total deposits at March 31, 2001 increased $20.6 million, or 3.7%, to $573.9
million from $553.3 million at December 31, 2000. Non-interest bearing deposits
at March 31, 2001 decreased $9.7 million, or 14.0%, to $59.4 million from $69.1
million at December 31, 2000. Interest-bearing deposits at March 31, 2001
increased $30.3 million, or 6.3%, to $514.4 million from $484.1 million at
December 31, 2000. Interest-bearing transaction accounts (NOW deposits)
decreased $9.5 million, primarily in public fund deposits. Savings deposits
increased $10.3 million, or 5.6%, to $193.7 million at March 31, 2001, when
compared to $183.4 million at December 31, 2000. Time deposits (including time,
$100,000 and over and other time) increased $29.5 million (includes increase of
$21.0 million in time deposits over $100,000), or 11.7%, to $280.6 million at
March 31, 2001, when compared to $251.2 million at December 31, 2000. Brokered
CD's totaled $23.4 million at March 31, 2001 compared to $11.5 million at
December 31, 2000. Typically, overall deposits for the first six months tend to
decline slightly as a result of the seasonality of the Company's customer base
as customers draw down deposits during the early first half of the year in
anticipation of the summer tourist season. As a result of the Company's
expansion into new markets in recent years, this effect has been reduced as
additional branch facilities in less seasonal locations have provided deposit
growth and seasonal stability.
Emphasis has been, and will continue to be, placed on generating additional core
deposits in 2001 through competitive pricing of deposit products and through the
branch delivery systems that have already been
23
24
established. The Company will also attempt to attract and retain core deposit
accounts through new product offerings and quality customer service.
Short Term Borrowings and Other Borrowings
Short-term borrowings at March 31, 2001 consist of federal funds purchased,
securities under agreements to repurchase, and advances from the Federal Home
Loan Bank ("FHLB"). Total short-term borrowings at March 31, 2001 decreased
$43.3 million to $37.0 million from $80.3 million at December 31, 2000. Customer
repurchase agreements decreased $1.2 million from $3.3 million at December 31,
2000 to $2.0 million at March 31, 2001. FHLB advances decreased from $42 million
at December 31, 2000 to $13 million at March 31, 2001. Federal funds purchased
decreased from $35 million at December 31, 2000 to $22 million at March 31, 2001
accounting for the balance of the decrease in the balance of short-term
borrowings. These have decreased as a result of deposit growth for the first
quarter, include brokered CD's, and additional borrowings from FHLB in the form
of term loans.
Other borrowings consist of term loans with FHLB. These borrowings totaled $105
million at March 31, 2001 compared to $70 million at December 31, 2000. Three
separate borrowings outstanding at December 31, 2000 totaling $7.7 million lent
to Baylake by an unaffiliated bank were paid off during the quarter ended March
31, 2001.
Typically, short-term borrowings and other borrowings increase in order to fund
growth in the loan portfolio. Although total borrowings decreased during the
quarter, the Company will borrow monies if borrowing is a less costly form of
funding loans compared to the cost of acquiring deposits. Additionally, the
availability of deposits also determines the amount of funds the Company needs
to borrow in order to fund loan demand. The Company anticipates it will continue
to use wholesale funding sources of this nature, if these borrowings add
incrementally to overall profitability.
Long Term Debt
Long-term debt of $158,000 at March 31, 2001 consists of a land contract
requiring annual payments of $53,000 plus interest calculated at prime + 1/4%.
The land contract is for debt used to purchase one of the properties in the
Green Bay region for a branch location.
Liquidity
Liquidity management refers to the ability of the management to ensure that cash
is available 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. The Company and the Bank have
different liquidity considerations.
24
25
The Company's primary sources of funds are dividends and interest, and proceeds
from the issuance of its securities. The Company manages its liquidity position
in order to provide funds necessary to pay dividends to its shareholders and
distributions to holders of the Company's trust preferred securities. Dividends
received from Bank totaled $800,000 for the first quarter of 2001 and will
continue to be the Company's main source of long-term liquidity. The dividends
from the Bank along with existing cash were sufficient to pay cash dividends to
the Company's shareholders of $1.6 million in the first quarter of 2001. In
February 2001, the Company issued trust preferred securities, which will receive
quarterly distributions beginning in the second quarter of 2001.
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 at the Bank is derived from
deposit growth, maturing loans, the maturity of the investment portfolio, access
to other funding sources, marketability of certain of its assets and strong
capital positions.
Maturing investments have been a primary source of liquidity at the Bank. For
the quarter ended March 31, 2001, principal payments totaling $5.5 million were
received on investments. These proceeds in addition to other Company cash were
used to purchase $5.9 million in investments for the quarter. At March 31, 2001,
the carrying or book value of investment securities maturing within one year
amounted to $19.5 million or 12.5% of the total investment securities portfolio.
This compares to a 8.3% level for investment securities with one year or less
maturities as of December 31, 2000. Within the investing activities of the
statement of cash flows, sales and maturities of investment securities during
the first quarter of 2001 totaled $5.5 million. At March 31, 2001, the
investment portfolio contained $101.9 million of U.S. Treasury and federal
agency backed securities representing 65.3% of the total investment portfolio.
These securities tend to be highly marketable and had a market value above
amortized at March 31, 2001 amounting to $1.9 million.
Deposit growth is another source of liquidity for the Bank. As a financing
activity reflected in the 2001 Consolidated Statements of Cash Flows, deposits
provided $20.6 million of cash flow during the first quarter of 2001. The
Company's overall deposit base grew 3.7% for the quarter ended March 31, 2001.
Deposit growth, especially core deposits, is the most stable source of liquidity
for the Bank.
The scheduled maturity of loans can provide a source of additional liqudity. The
Bank has $160.3 million, or 27.7%, of loans maturing within one year.
Within the classification of short-term borrowings and other borrowings at March
31, 2001, federal funds purchased and securities sold under agreements to
repurchase totaled $24.0 million compared to $38.3 million at the end of 2000.
Federal funds are purchased from various upstream correspondent banks while
securities sold under agreements to repurchase are obtained from a base of
business customers. Borrowings from FHLB, short-term or term, are another source
of funds. They total
25
26
$118.0 million at March 31, 2001, compared to $112.0 million at the end of 2000.
The Bank's liquidity resources were sufficient in the first quarter of 2001 to
fund the growth in loans and investments, increase the volume of interest
earning assets and meet other cash needs when necessary.
Management expects that deposit growth will continue to be the primary funding
source of the Bank's liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Although federal funds purchased and borrowings from
the FHLB provided funds in 2001, management expects deposit growth, including
brokered CD's, to be a reliable funding source in the future as a result of
branch expansion efforts and marketing efforts to attract and retain core
deposits. Shorter-term liquidity needs will mainly be derived from growth in
short-term borrowings, maturing federal funds sold and portfolio investments,
loan maturities and access to other funding sources.
Management believes that, in the current economic environment, the Company's and
the Bank's liquidity position is adequate. To management's knowledge, there are
no known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Bank's or the Company's liqudity.
Interest Rate Sensitivity
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. All banks assume interest rate risk as an
integral part of normal banking operations. Control and monitoring of interest
rate risk is a primary objective of asset/liability management. The Bank uses an
Asset/Liability Committee ("ALCO") to manage risks associated with changing
interest rates, changing asset and liability mixes, and measuring the impact of
such changes on earnings. The sensitivity of net interest income to market rate
changes is evaluated monthly by the ALCO using "static gap analysis" and
simulation of earnings modeling.
In order to limit exposure to interest rate risk, the Company has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. The Company has focused on the establishment of
adjustable rate mortgages ("ARM's") in its residential lending product line; the
concerted efforts made to attract and sell core deposit products through the use
of Company's branching and delivery systems and marketing efforts; and the use
of other available sources of funding to provide longer term funding
possibilities.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest
26
27
sensitivity is called "gap" analysis. The mismatch between asset and liability
repricing characteristics in specific time intervals is referred to as "interest
rate sensitivity gap." If more liabilities than assets reprice in a given time
interval a liability sensitive gap position exists. In general, liability
sensitive gap positions in a declining interest rate environment increase net
interest income. Alternatively asset sensitive positions, where assets reprice
more quickly than liabilities, negatively impact the net interest income in a
declining rate environment. In the event of an increasing rate environment,
opposite results would occur such that a liability sensitivity gap position
would decrease net interest income and an asset sensitivity gap position would
increase net interest income. The sensitivity of net interest income to changing
interest rates can be reduced by matching the repricing characteristics of
assets and liabilities.
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Company is liability sensitive. The analysis considers money
market index accounts and 25% of NOW accounts to be rate sensitive within three
months. Regular savings, money market deposit accounts and 75% of NOW accounts
are considered to be rate sensitive within one to five years. While these
accounts are contractually short-term in nature, it is the Company's experience
that repricing occurs over a longer period of time. The Company views its
savings and NOW accounts to be core deposits and relatively non-price sensitive,
as it believes it could make repricing adjustments for these types of accounts
in small increments without a material decrease in balances. All other earning
categories, including loans and investments as well as other paying liability
categories such as time deposits, are scheduled according to their contractual
maturities. The "static gap analysis" provides a representation of the Company's
earnings sensitivity to changes in interest rates. It is a static indicator and
does not reflect various repricing characteristics. Accordingly, a "static gap
analysis" may not necessarily be indicative of the sensitivity of net interest
income in a changing rate environment.
27
28
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF March 31, 2001
Within Four to Seven to One Year Over
Three Six Twelve To Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In thousands)
Earning assets:
Investment securities $ 10 568 $ 6 877 $ 8 075 $ 82 910 $ 53 738 $162 168
Loans and leases
Variable rate 175 699 20 404 0 29 177 0 225 280
Fixed rate 55 061 29 636 49 376 201 635 10 825 346 533
------ ------ ------ ------- ------ -------
Total loans and leases $230 760 $ 50 040 $ 49 376 $230 812 $ 10 825 $571 813
-------- -------- -------- -------- -------- --------
Total earning assets $241 328 $ 56 917 $ 57 451 $313 722 $ 64 563 $733 981
======== ======== ======== ======== ======== ========
Interest bearing liabilities:
NOW Accounts $ 10 030 $ 0 $ 0 $ 30 090 $ 0 $ 40 120
Savings Deposits 151 436 0 0 42 244 0 193 680
Time Deposits 79 161 93 581 86 847 21 055 0 280 644
Borrowed Funds 82 042 0 15 052 45 106 0 142 200
Trust Preferred Stock 0 0 0 0 16 100 16 100
= = = = ====== ======
Total interest bearing
Liabilities $322 669 $ 93 581 $101 899 $138 495 $ 16 100 $672 744
======== ======== ======== ======== ======== ========
Interest sensitivity gap (within
periods) $(81 341) $(36 664) $(44 448) $175 227 $ 48 463 $ 61 237
Cumulative interest sensitivity gap $(81 341) $(118 005) $(162 453) $ 12 774 $ 61 237
Ratio of cumulative interest
Sensitivity gap to rate
Sensitive assets - 11.08% - 16.08% - 22.13% 1.74% 8.34%
Ratio of rate sensitive assets
To rate sensitive
Liabilities 74.79% 60.82% 56.38% 226.52% ---
Cumulative ratio of rate
Sensitive assets to rate
Sensitive liabilities 74.79% 71.65% 68.65% 101.95% 109.10%
In addition to the "static gap analysis", determining the sensitivity of future
earnings to a hypothetical plus or minus 200 basis point parallel rate shock can
be accomplished through the use of simulation modeling. Simulation of earnings
includes the modeling of the balance sheet as an ongoing entity. Balance sheet
items are modeled to project income based on a hypothetical change in interest
rates. The resulting net income for the next twelve-month period is compared to
the net income amount calculated using flat rates. This difference represents
the Company's earnings sensitivity to a plus or minus 200 basis point parallel
rate shock. The resulting simulations indicated a plus or minus 8.1% adjustment
in net income under these scenarios for the period ended March 31, 2001. This
result was within the policy limits established by the Company.
Management continually reviews its interest risk position through the ALCO
process. Management's philosophy is to maintain relatively matched rate
sensitive asset and liability positions within the range described above in
order to provide earnings stability in the event of significant interest rate
changes.
Capital Resources
Shareholders' equity at March 31, 2001 increased $2.5 million or 4.7% to $55.6
million, compared with $53.1 million at end of year 2000. This increase includes
a change of $1.5 million to capital in 2001 due to the impact of STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 115. Disregarding the effect of this change,
shareholders' equity would have increased $1.0 million or 1.9% for the period
between March 31, 2001 and December 31, 2000.
The Company's capital base (before SFAS 115 change) increased primarily due to
the retention of earnings. The Company's dividend reinvestment
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plan typically provides capital improvement, as the holders of approximately 26%
of Company's Common Stock participate in the plan.
On February 16, 2001, the Company, through Baylake Capital Trust I, issued $16.1
million in trust preferred stock with a coupon rate of 10.0% and maturing on
March 31, 2031. These securities qualify as Tier 1 Capital for purposes of
calculating regulatory capital requirements. Baylake Capital Trust I, a finance
subsidiary of the Company, is a Delaware statutory business trust created
exclusively for the purposes of issuing and selling its capital securities and
using the proceeds to purchase 10.00% subordinated debentures, due 2031, issued
by the Company. Accordingly, the subordinated debentures are the sole assets of
Baylake Capital Trust I, and payments under the subordinated debentures will be
the sole revenue of Baylake Capital Trust I. All of the common securities of
Baylake Capital Trust I are owned by the Company.
Cash dividends paid for the first quarter of 2001 were $0.11 per share compared
with $0.10 in the first quarter of 2000. The Company provided a 10.0% increase
in normal dividends per share in 2001 over 2000 as a result of above average
earnings.
In 1997, the Company's Board of Directors authorized management, in its
discretion, to repurchase up to 7,000 shares of the Company's common stock each
calendar quarter in the open market. The shares repurchased would be used to
fill its needs for the dividend reinvestment program, any future benefit plans,
and the Company's stock purchase plan. Shares repurchased are held as treasury
stock and accordingly, are accounted for as a reduction of stockholders' equity.
The Company repurchased none of its common shares in the first quarter of 2001.
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for 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. Management believes that, because of
current capital levels and projected earnings levels, capital levels are
adequate to meet the ongoing and future concerns of the Company.
The Company and the Bank are subject to capital adequacy requirements
established by the federal banking agencies. The federal banking agencies have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. Failure to meet minimum capital requirements can result
in certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements.
These standards define capital and establish minimum capital requirements in
relation to assets and off-balance sheet exposure, adjusted for credit risk. The
risk-based capital standards currently
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in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
A banking organization's total qualifying capital includes two components: core
capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities (subject to certain limitations) and minority interests, less
goodwill. Supplementary capital includes the allowance for loan losses (subject
to certain limitations), other perpetual preferred stock, trust preferred
securities, certain other capital instruments and term subordinated debt. Total
capital is the sum of core and supplementary capital.
At March 31, 2001, the minimum risk-based capital requirements to be considered
adequately capitalized were 4% for Tier 1 capital and 8% for total capital.
Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At March 31, 2001, the
minimum leverage ratio requirement to be considered adequately capitalized was
4%.
The capital levels of the Company and the Bank at March 31, 2001 and the two
highest capital adequacy levels recognized under the guidelines established by
the federal banking agencies are included in the following table. The Company's
and the Bank's ratios all exceeded the well-capitalized guidelines shown in the
table.
The Company's and the Bank's capital amounts and ratios are as follows: (dollars
in thousands)
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To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action
------ Purposes Provisions
-------- ----------
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- ----------------------------------------------------------------------------------------------------------------
As of March 31, 2001
- ----------------------------------------------------------------------------------------------------------------
Total Capital (to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 71,511 11.32% 50,537 8.00% 63,172 10.00%
- ----------------------------------------------------------------------------------------------------------------
Bank 64,188 10.17% 50,504 8.00% 63,130 10.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital(to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 64,272 10.18% 25,269 4.00% 37,903 6.00%
- ----------------------------------------------------------------------------------------------------------------
Bank 56,949 9.02% 25,252 4.00% 37,878 6.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital (to
Average Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 64,272 8.31% 30,931 4.00% n/a n/a
- ----------------------------------------------------------------------------------------------------------------
Bank 56,949 7.36% 30,931 4.00% 38,664 5.00%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 2000
- ----------------------------------------------------------------------------------------------------------------
Total Capital (to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 54,055 8.92% 48,464 8.00% 60,580 10.00%
- ----------------------------------------------------------------------------------------------------------------
Bank 61,237 10.10% 48,512 8.00% 60,640 10.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital(to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 47,049 7.77% 24,232 4.00% 36,348 6.00%
Bank 54,232 8.94% 24,255 4.00% 36,384 6.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital (to
Average Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 47,049 6.38% 29,518 4.00% n/a n/a
- ----------------------------------------------------------------------------------------------------------------
Bank 54,232 7.35% 29,518 4.00% 36,897 5.00%
- ----------------------------------------------------------------------------------------------------------------
Item 3 Quantitative and Qualitative Disclosure about Market Risk.
The Company's financial performance is affected by, among other factors, credit
risk and interest rate risk. The Company does not use derivatives to mitigate
its interest rate risk or credit risk, relying instead on loan review and its
loan loss reserve.
The Company's earnings are derived from the operations of its 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 borrowings. Like other
financial institutions, the Company's 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, 2001, the Company was in compliance with its management policies
with respect to interest rate risk. The Company has not experienced any material
changes to its market risk position since
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December 31, 2000, as described in the Company's 2000 Form 10-K Annual Report.
Part II - Other Information
Item 1. Legal Proceedings
The Company is a party to routine litigation involving various aspects of its
businesses, none of which, in the opinion of management and its legal counsel is
expected to have a material adverse impact on the consolidated financial
condition, results of operations or liquidity of the Company.
Item 2. Changes in Securities and Use of Proceeds
On February 23, 2001, Baylake Capital Trust I (the "Trust"), a Delaware business
trust formed by the Company, completed the sale of $16.1 million of 10.00%
Preferred Securities (the "Preferred Securities") in a registered offering made
through an underwriting group led by Howe Barnes Investments, Inc. The Trust
also issued common securities to the Company and used the net proceeds from the
offering to purchase a like amount of 10.00% subordinated debentures, due 2031
(the "Debentures"), of the Company. In connection with the offering, the Company
and the Trust registered a total of $16.1 million of Preferred Securities on a
Form S-3 Registration Statement (Registration Nos. 333-48962 and 333-48962-01).
Total expenses associated with the offering were approximately $881,000,
including $644,000 in underwriting commissions. As of March 31, 2001, the
Company had used the net proceeds from the sale of the Debentures to repay
approximately $7.7 million of corporate indebtedness and invested the remaining
$7.5 million in marketable securities to be used for future acquisitions and
general corporate purposes.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Bank purchased land in the city of Luxemburg located in Kewaunee County,
Wisconsin in January 1999. The Bank's intentions are to construct a full-service
branch facility on this property in the third quarter of 2001.
In the third quarter of 1999, the Bank purchased land and a building in Seymour,
Wisconsin for $475,000. The Bank is in the process of soliciting bids for
purposes of remodeling that building in the third quarter of 2001 to replace a
facility currently in use.
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Item 6. Exhibits and Reports on Form 8-K
(a). The following exhibits are furnished herewith:
EXHIBIT NUMBER DESCRIPTION
- ----------------- -----------
11 Statement re: computation of per share earnings
15 Letter re: unaudited interim financial information
(b). Report on Form 8-K:
During the quarter ended March 31, 2001, the Company filed the following Current
Report on Form 8-K: Form 8-K filed February 1, 2001, as amended on February 5,
2001 and February 13, 2001, announcing financial results for the quarter and
year ended December 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
------------------------------------
Date: May 14, 2001 /s/ Thomas L. Herlache
---------------------- ------------------------------------
Thomas L. Herlache
President (CEO)
Date: May 14, 2001 /s/ Steven D. Jennerjohn
---------------------- ------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
34