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 JUNE 30, 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (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
--------- ---------
Applicable Only to Corporate Issuers:
Number of outstanding shares of each of common stock, par value $5.00 per share,
as of August 6, 2001: 7,471,575 shares
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BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 3
and December 31, 2000
Consolidated Statements of Income for the three and 4
six months ended June 30, 2001 and 2000
Consolidated Statements of Comprehensive Income for the three 5
and six months ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows for the six months ended 6 - 7
June 30, 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 - 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 - 35
PART II - OTHER INFORMATION 35 - 36
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 38
EXHIBIT INDEX 36 - 37
Exhibit 11 Statement re: computation of per share earnings 39
Exhibit 15 Letter re: unaudited interim financial information 40
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PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
JUNE 30, DECEMBER 31,
ASSETS 2001 2000
------ ---- ----
Cash and due from banks $ 17,676 $ 21,695
Investment securities available for sale (at market) 137,897 135,089
Investment securities held to maturity (market 18,681 18,422
value $18,950 and $18,503, at June 30, 2001 and
December 31, 2000, respectively)
Federal funds sold 1,027
Loans held for sale 1,232 724
Loans 591,805 555,107
Less: Allowance for loan losses 7,136 7,006
--------- ---------
Loans, net of allowance for loan losses 584,669 548,101
Bank premises and equipment 20,945 21,313
Federal Home Loan Bank stock (at cost) 6,179 5,955
Accrued interest receivable 6,235 5,733
Income taxes receivable 1,177 1,135
Deferred income taxes 1,358 2,256
Goodwill 5,212 5,455
Other Assets 8,420 6,390
--------- ---------
Total Assets $ 810,708 $ 772,268
========= =========
LIABILITIES
-----------
Domestic deposits
Non-interest bearing $ 65,975 $ 69,149
Interest bearing
NOW 41,260 49,582
Savings 192,555 183,369
Time, $100,000 and over 126,266 61,334
Other time 202,312 189,820
--------- ---------
Total interest bearing 562,393 484,105
Total deposits 628,368 553,254
Short-term borrowings
Federal funds purchased, repurchase
agreements, borrowings from unaffiliated banks and
Federal Home Loan Bank advances 12,636 80,289
Accrued expenses and other liabilities 6,769 6,868
Dividends payable 0 819
Other borrowings 90,000 77,700
Long-term debt 158 211
Long-term debt-trust preferred securities 16,100 0
--------- ---------
Total liabilities 754,031 719,141
--------- ---------
SHAREHOLDERS' EQUITY
--------------------
Common stock, $5 par value: authorized 10,000,000
shares; issued 7,494,734 shares as of June 30, 2001
and 7,468,733 as of December 31, 2000; outstanding
7,471,575 as of June 30, 2001 and 7,445,574 as of
December 31, 2000 37,474 37,344
Additional paid-in capital 7,266 7,185
Retained earnings 10,388 8,670
Treasury stock (625) (625)
Net unrealized gain (loss) on securities available
for sale, net of tax of $1,175 as of June 30, 2001 2,174 553
and $277 as of December 31, 2000 --------- ---------
Total shareholders' equity 56,677 53,127
--------- ---------
Total liabilities and shareholders' equity $ 810,708 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Interest income
Interest and fees on loans $12,800 $ 11,409 $25,739 $ 21,687
Interest on investment securities
Taxable 1,703 1,693 3,416 3,341
Exempt from federal income taxes 653 627 1,302 1,268
Other interest income 9 -- 9 --
------- -------- ------- --------
Total interest income 15,165 13,729 30,466 26,296
------- -------- ------- --------
Interest expense
Interest on deposits 6,471 5,600 12,943 10,999
Interest on short-term borrowings 316 629 1,133 809
Interest on other borrowingins 1,263 1,450 2,789 2,644
Interest on long-term debt 4 47 8 53
Interest on trust preferred securities 398 -- 595 --
------- -------- ------- --------
Total interest expense 8,452 7,726 17,468 14,505
------- -------- ------- --------
Net interest income 6,713 6,003 12,998 11,791
Provision for loan losses 448 150 650 210
------- -------- ------- --------
Net interest income after provision for
loan losses 6,265 5,853 12,348 11,581
------- -------- ------- --------
Other income
Fees from fiduciary activities 145 130 295 267
Fees from loan servicing 304 217 500 378
Fees for other services to customers 738 664 1,336 1,211
Gains from sales of loans 251 55 364 79
Other income 146 84 221 199
------- -------- ------- --------
Total other income 1,584 1,150 2,716 2,134
------- -------- ------- --------
Other expenses
Salaries and employee benefits 3,007 2,596 5,934 5,190
Occupancy expense 438 394 868 735
Equipment expense 355 366 706 714
Data processing and courier 243 232 479 455
Operation of other real estate 140 (90) 164 (57)
Other operating expenses 1,195 1,053 2,121 1,952
------- -------- ------- --------
Total other expenses 5,378 4,551 10,272 8,989
------- -------- ------- --------
Income before income taxes 2,471 2,452 4,792 4,726
Income tax expense 722 755 1,431 1,428
------- -------- ------- --------
Net Income $ 1,749 $ 1,697 $ 3,361 $ 3,298
======= ======== ======= ========
Basic earnings per common share (1) $ 0.23 $ 0.22 $ 0.45 $ 0.44
Diluted earnings per common share (1) $ 0.23 $ 0.22 $ 0.44 $ 0.43
Cash dividends per share $ 0.11 $ 0.10 $ 0.22 $ 0.20
(1) Based on 7,464,337 average shares outstanding in 2001 and 7,442,410 in 2000.
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Net Income $1,749 $1,697 $3,361 $ 3,298
------ ------ ------ -------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period 112 116 1,621 (29)
------ ------ ------ -------
Comprehensive income $1,861 $1,813 $4,982 $ 3,269
====== ====== ====== =======
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
2001 2000
---- ----
Cash flows from operating activities:
Interest received from:
Loans $ 24,987 $ 20,338
Investments 4,869 4,552
Fees and service charges 2,534 1,917
Interest paid to depositors (12,972) (10,907)
Interest paid to others (4,774) (3,281)
Cash paid to suppliers and employees (9,930) (8,389)
Income taxes paid (1,474) (1,221)
-------- --------
Net cash provided by operating activities 3,240 3,009
Cash flows from investing activities:
Principal payments received on investments 11,273 7,113
Purchase of investments (13,086) (9,595)
Proceeds from sale of other real estate owned 1,056 687
Loans made to customers in excess of principal collected (39,645) (67,661)
Capital expenditures (415) (2,365)
-------- --------
Net cash used in investing activities (40,817) (71,821)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts, and savings (2,309) 17,844
accounts
Net increase (decrease) in short term borrowing (67,654) 63,301
Net increase (decrease) in time deposits 77,425 (3,513)
Proceeds from other borrowings and long-term debt 35,000 20,000
Payments on other borrowings and long term debt (22,753) (25,153)
Proceeds from issuance of common stock 211 41
Proceeds from issuance of trust preferred securities 16,100 0
Dividends paid (2,462) (2,232)
-------- --------
Net cash provided by financing activities 33,558 70,288
-------- --------
Net increase (decrease) in cash and cash equivalents (4,019) 1,476
Cash and cash equivalents, beginning 21,695 19,475
-------- --------
Cash and cash equivalents, ending $ 17,676 $ 20,951
======== ========
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JUNE 30,
2001 2000
---- ----
Reconciliation of net income to net cash provided by operating activities:
Net income $ 3,361 $ 3,298
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 783 728
Provision for losses on loans and real estate owned 650 210
Amortization of premium on investments 89 72
Accretion of discount on investments (75) (86)
Cash surrender value increase (27) (27)
Gain from disposal of ORE (25) (186)
Gain on sale of loans (364) (79)
Proceeds from sale of loans held for sale 39,442 8,822
Originations of loans held for sale (39,078) (8,743)
Equity in income of service center (118) (94)
Amortization of goodwill 243 245
Amortization of mortgage servicing rights 80 38
Mortgage servicing rights booked (168) (126)
Deferred compensation 114 123
Changes in assets and liabilities:
Interest receivable (503) (1,316)
Prepaids and other assets (917) 50
Unearned income 9 (46)
Interest payable (278) 318
Taxes payable (42) 208
Other liabilities 64 (400)
-------- -------
Total adjustments (121) (289)
-------- -------
Net cash provided by operating activities $ 3,240 $ 3,009
======== =======
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BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2001 and December 31, 2000. The results of
operations for the three and six months ended June 30, 2001 and 2000 are
not necessarily indicative of results to be expected for the entire year.
2. The market value of investment securities, by type, held by Baylake Corp.
are as follows:
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(dollars in thousands)
Investment securities held to maturity:
Obligations of state and political subdivisions $ 18,950 $ 18,503
-------- --------
Investment securities held to maturity $ 18,950 $ 18,503
======== ========
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 29,475 $ 32,997
Obligations of states and political subdivisions 34,181 33,795
Mortgage-backed securities 71,375 66,986
Other 2,866 1,311
-------- --------
Investment securities available for sale $137,897 $135,089
======== ========
3. At June 30, 2001 and December 31, 2000, loans were as follows:
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(dollars in thousands)
Commercial, financial and agricultural $ 353,827 $ 335,868
Real estate - construction 68,935 41,524
Real estate - mortgage 151,471 160,150
Installment 17,941 17,925
Less: Deferred loan origination fees, net of costs (369) (360)
--------- ---------
$ 591,805 $ 555,107
Less allowance for loan losses (7,136) (7,006)
--------- ---------
Net loans $ 584,669 $ 548,101
========= =========
4. Baylake Corp. declared a cash dividend of $0.11 per share payable on June
15, 2001 to shareholders of record as of June 1, 2001.
5. Baylake Capital Trust I, a Delaware business trust and subsidiary of
Baylake Corp., paid its first interest payment on the outstanding
shares of the Trust's 10.00% Cumulative Preferred Securities on July 2,
2001. This distribution covers the period from February 16, 2001 through
June 30, 2001 and payment was made to shareholders of record on the close
of business on June 29, 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 and six months ended June 30, 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 June 30, 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 June 30, 2001, earnings increased $52,000, or 3.1%,
to $1.75 million from $1.70 million for the second quarter of 2000. Basic
operating and fully diluted earnings per share increased to $0.23 per share in
the second quarter of 2001 compared with $0.22 in 2000, an increase of 4.5%.
The annualized return on average assets and return on average equity for the
three months ended June 30, 2001 were 0.88% and 12.63%, respectively, compared
to 0.99% and 14.29%, respectively, for the same period a year ago.
The 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 lesser extent by increased other expenses.
For the six months ended June 30, 2001, net income increased $63,000, or 1.9%,
to $3.36 million from $3.30 million for the first six months of 2000. The change
in net income is due for the same reasons as listed above. Basic operating
earnings per share increased to $0.45 for the first six months of 2001 compared
to $0.44 for the six months ended June 30, 2000, an increase of 2.3%. On a fully
diluted basis, the Company recorded $0.44 per share for the first six months of
2001 and $0.43 for the same period in 2000.
The annualized return on average assets and return on average equity for the
first six months ended June 30, 2001 were 0.86% and 12.37%, respectively
compared to 0.98% and 14.01%, respectively for the same period a year ago.
Cash dividends declared in the first six months of 2001 increased 10.0% to $0.22
per share compared with $0.20 for the same period in 2000.
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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 83.4% of
total operating income for the first six months of 2001, as compared to 85.4%
for the first six months of 2000. Net interest income represents the difference
between interest earned on loans, investments and other interest earning assets
offset by the interest 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 June
30, 2001 increased $723,000, or 14.3%, to $7.0 million from $6.3 million for the
same period a year ago. Total interest income for the second quarter of 2001
increased $1.4 million, or 10.3%, to $15.5 million from $14.1 million for the
second quarter of 2000, while interest expense in the second quarter of 2001
increased $726,000, or 9.4%, to $8.5 million when compared to $7.7 million in
the second 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 and a
decrease in the cost of average interest paying liabilities offset to a lesser
extent by an increase in interest paying liabilities and a decrease in the yield
of average earning assets.
For the three months ended June 30, 2001, average earning assets increased
$103.9 million, or 16.3%, when compared to the same period last year. The
Company recorded an increase in average loans of $92.9 million, or 18.8%, for
the second 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
June 30, 2001 when compared to the same period a year ago. The interest rate
spread decreased 7 basis points to 3.44% at June 30, 2001 from 3.51% in the same
quarter in 2000. While the average yield on earning assets decreased 47 basis
point during the period, the average rate paid on interest-bearing liabilities
decreased 40 basis points over the same period as a result of a lower 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
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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 June 30, 2001 decreased from 3.99% to 3.81% compared to the same period a
year ago. The average yield on interest earning assets amounted to 8.38% for the
second quarter of 2001, representing a decrease of 47 basis points from the same
period last year. Total loan yields decreased 54 basis points to 8.88%, while
total investment yields decreased 39 basis points to 6.64%, as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities decreased 26 basis points to 4.73% for the second quarter of 2001
when compared to the second quarter of 2000, while short-term borrowing costs
decreased 196 basis points to 4.72% comparing the two periods. Other borrowing
costs decreased 116 basis points to 5.32% during the same time period. These
factors contributed to a decrease in the Company's interest margin for the three
months ended June 30, 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 92.6% for the second quarter of 2001 compared with 92.1%
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.
Net interest income on a tax equivalent basis for the six months ended June 30,
2001 increased $1.2 million, or 9.8%, to $13.7 million from $12.4 million for
the same period a year ago. Total interest income for the six months ended June
30, 2001 increased $4.2 million, or 15.5%, to $31.1 million from $26.9 million
for the six months ended June 30, 2000, while interest expense increased $3.0
million, or 20.4%, to $17.5 million when compared to $14.5 million for the six
months ended June 30, 2000. The increase in net interest income between these
two 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 a decrease in the yield
of average earning assets.
For the six months ended June 30, 2001, average earning assets increased $111.4
million, or 18.0%, when compared to the same period last year. The Company
recorded an increase in average loans of $101.4 million, or 21.3%, for the first
six months 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 six months
ended June 30, 2001 when compared to the same period a
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year ago. The interest rate spread decreased 24 basis points to 3.33% at June
30, 2001 from 3.57% over the same period in 2000. While the average yield on
earning assets decreased 18 basis points during the period, the average rate
paid on interest-bearing liabilities increased 6 basis points over the same
period as a result of a higher cost of funding from deposits offset to a lesser
extent by a lower cost of funding from other wholesale funding such as federal
funds purchased and loans from the Federal Home Loan Bank.
Net interest margin (on a federal tax-equivalent basis) for the six months ended
June 30, 2001 decreased from 4.04% to 3.77% compared to the same period a year
ago. The average yield on interest earning assets amounted to 8.56% for the six
months ended June 30, 2001, representing a decrease of 18 basis points from the
same period last year. Total loan yields decreased 20 basis points to 9.10%,
while total investment yields decreased 31 basis points to 6.70%, as compared to
the same period a year ago. The Company's average cost on interest-bearing
deposit liabilities increased 13 basis points to 5.01% for the first six months
of 2001 when compared to the same period in 2000, while short-term borrowing
costs decreased 96 basis points to 5.58% comparing the two periods. Other
borrowing costs decreased 63 basis points to 5.62% during the same time period.
These factors contributed to a decrease in the Company's interest margin for the
six months ended June 30, 2001 compared to the same period a year ago.
The ratio of average earning assets to average total assets was 92.6% for the
first six months of 2001 compared with 92.1% 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 June 30, 2001 increased
$298,000 to $448,000 compared with $150,000 for the second quarter of 2000. For
the six months ended June 30, 2001, the provision for loan losses increased
$440,000 to $650,000 compared with $210,000 for the same period last year.
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.
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Non-Interest Income
Total non-interest income increased $434,000, or 37.7%, to $1.6 million for the
second quarter of 2001 when compared to the second quarter of 2000. This
increase occurred as a result of increased trust income, increased fees from
loan servicing, increased fees on other customer services, increased fees from
loan servicing, and increased other income.
Trust fees increased $15,000, or 11.5%, in the second quarter of 2001 compared
to the same quarter in 2000, primarily as a result of timing differences related
to billing and collection of fees.
Loan servicing fees increased $87,000, or 40.1%, to $304,000 in the second
quarter of 2001, when compared to the same quarter in 2000. The increase in 2001
resulted from an increase in commercial loan servicing income and mortgage
servicing rights income.
Gains on sales of loans in the secondary market increased $196,000 to $251,000
in the second 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. Sales of loans for the three
months ended June 30, 2001 increased to $26.8 million, compared to $5.6 million
for the same period a year earlier.
Service charges on deposit accounts for the second quarter of 2001 showed an
increase of $91,000, or 25.0%, over 2000 results, accounting for much of the
improvement in fee income generated for other services to customers. Financial
services income decreased $38,000, or 27.6%.
For the first six months of 2001, non-interest income increased $582,000, or
27.3%, to $2.7 million from $2.1 million for the same period a year ago.
Trust fee income increased $28,000, or 10.5%, to $295,000 for the first six
months of 2001 compared to $267,000 for the same period in 2000 as a result of
increased trust business.
Loan servicing fees increased $122,000, or 32.3%, to $500,000 for the first six
months in 2001, when compared to the same period 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 $285,000 for the first
six months of 2001, when compared to the same period in 2000, primarily as a
result of increased gains from sales of mortgage loans taken in the secondary
market. Sales of total loans for the first six months of 2001 increased to $39.4
million, compared to $8.8 million a year ago.
14
15
Other fees for services to customers increased for the six months ended June 30,
2001 as a result of an increase of $158,000, or 22.9%, in service charges on
deposit accounts. This increase was offset to a lesser extent by a decrease in
financial services income amounting to $45,000 when compared to the same period
in 2000.
Non-Interest Expense
Non-interest expense increased $827,000, or 18.2%, for the three months ended
June 30, 2001 compared to the same period in 2000. Salaries and employee
benefits showed an increase of $411,000, or 15.8%, 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 279 persons from 260
a year earlier. Increases in occupancy (amounting to $44,000 or 11.2%) offset by
a decrease in equipment expenses (amounting to $11,000 or 3.0%) 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 $142,000, or 13.5%, for the three months
ended June 30, 2001 when compared to the same period a year ago. 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 $11,000 for the three months
ended June 30, 2001 primarily as a result of legal issues relating to loan
collection efforts of one commercial real estate loan which is in the process of
foreclosure action.
Marketing expenses increased $22,000, or 9.7%, for the three months ended June
30, 2001 as a result of additional advertising and public relation expense
related to various expansion efforts.
Expenses related to the amortization of trust preferred expenses (such as legal
and underwriting expenses) and other legal expenses related to various
regulatory filings increased $51,000 for the three months ended June 30, 2001.
Other items (such as supplies, telephone, postage and director fees) comprising
other operating expense show an increase of $58,000 or 9.0% in the second
quarter of 2001 when compared to the same quarter in 2000. The overhead ratio,
which is computed by subtracting non-interest income from non-interest expense
and dividing by average total assets, was 1.90% for the three months ended June
30, 2001 compared to 1.97% for the same period in 2000.
Non-interest expense increased $1.3 million, or 14.3%, for the six months ended
June 30, 2001 compared to the same period in 2000.
15
16
Salaries and employee benefits showed an increase of $744,000, or 14.3%, for the
period as a result of additional staffing to operate new facilities and regular
salary and related benefit increases. Increases in occupancy (amounting to
$133,000 or 18.1%) offset by a decrease in equipment expenses (amounting to
$8,000 or 1.1%) occurred as a result of expansion in the Green Bay and Waupaca
markets and costs related to modernization of various facilities.
Operation of other real estate shows an increase of $221,000. This is related
primarily to net losses on other real estate taken in 2001 of $1,000 compared to
net gains of $186,000 taken in the first six months of 2000. Other expenses
related to the operation of other real estate owned amounted to $163,000 for the
first six months of 2001.
Other operating expenses increased $169,000, or 8.7%, for the six months ended
June 30, 2001 when compared to the same period a year ago. 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 $165,000 (the same as
in 2000) and amortization of $78,000 (the same as in 2000) related to the BLBNA
acquisition.
Legal expense and loan collection expense increased $50,000 for the six months
ended June 30, 2001 primarily as a result of legal issues relating to loan
collection efforts of three commercial real estate loans which are in the
process of foreclosure action.
Marketing expenses increased $31,000, or 9.0%, for the six months ended June 30,
2001 as a result of additional advertising and public relation expense related
to various expansion efforts.
Expenses related to the amortization of trust preferred expenses (such as legal
and underwriting expenses) and other legal expenses related to various
regulatory filings increased $56,000 for the six months ended June 30, 2001.
Other items (such as supplies, telephone, postage and director fees) comprising
other operating expense show an increase of $33,000 or 2.6% for the first six
months of 2001 when compared to the same period in 2000. The overhead ratio,
which is computed by subtracting non-interest income from non-interest expense
and dividing by average total assets, was 1.93% for the six months ended June
30, 2001 compared to 2.05% for the same period in 2000.
Income Taxes
Income tax expense for the Company for the three months ended June 30, 2001 was
$722,000, a decrease of $33,000, or 4.4%, compared to the same period in 2000.
The decrease in income tax provision for the period was due to decreased taxable
income.
Income tax expense for the Company for the six months ended June 30, 2001 and
2000 was approximately the same at $1.4 million. The slight
16
17
increase in income tax provision of $3,000 for the period was due to increased
taxable income.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 29.9% for the six months ended June 30, 2001 compared with 30.2% for
the same period in 2000. The effective tax rate of 29.9% consisted of a federal
effective tax rate of 27.0% and Wisconsin State effective tax rate of 2.9%.
Balance Sheet Analysis
Loans
At June 30, 2001, total loans increased $36.7 million, or 6.6%, to $591.8
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 $68.9 million at June 30, 2001 compared to $41.5 million at December 31,
2000. In addition, commercial loans increased to $353.8 million at June 30,
2001, compared to $335.9 million at December 31, 2000. Real estate mortgage
loans decreased to $151.5 million at June 30, 2001, compared with $160.2 million
at December 31, 2000. Consumer loans totaled $17.9 million at June 30, 2001 and
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):
- ------------------------------------------------------------------------ ---------------- -----------------
June 30, December
2001 31, 2000
- ------------------------------------------------------------------------ ---------------- -----------------
Amount of loans by type (dollars in thousands)
- ------------------------------------------------------------------------ ---------------- -----------------
Real estate-mortgage
- ------------------------------------------------------------------------ ---------------- -----------------
Commercial $261,509 $251,971
- ------------------------------------------------------------------------ ---------------- -----------------
1-4 family residential
- ------------------------------------------------------------------------ ---------------- -----------------
First liens 100,821 109,173
- ------------------------------------------------------------------------ ---------------- -----------------
Junior liens 25,989 26,513
- ------------------------------------------------------------------------ ---------------- -----------------
Home equity 24,661 24,464
- ------------------------------------------------------------------------ ---------------- -----------------
Commercial, financial and agricultural 92,318 83,897
- ------------------------------------------------------------------------ ---------------- -----------------
Real estate-construction 68,935 41,524
- ------------------------------------------------------------------------ ---------------- -----------------
Installment
- ------------------------------------------------------------------------ ---------------- -----------------
Credit cards and related plans 2,294 2,140
- ------------------------------------------------------------------------ ---------------- -----------------
Other 15,647 15,785
- ------------------------------------------------------------------------ ---------------- -----------------
Less: deferred origination fees, net of costs 369 360
- ------------------------------------------------------------------------ ---------------- -----------------
Total 591,805 555,107
- ------------------------------------------------------------------------ ---------------- -----------------
Risk Management and the Allowance for Loan Losses
17
18
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 that credit,
proper accounting and the adequacy of loan loss reserve assigned.
18
19
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 June 30, 2001 was $7.1 million
compared with $7.0 million at the end of 2000. Loans increased 6.6% from
December 31, 2000 to June 30, 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 six months of 2001. The June 30, 2001 ratio of
ALL to outstanding loans was 1.21% compared with 1.26% at December 31, 2000 and
the ALL as a percentage of nonperforming loans was 52.7% at June 30, 2001
compared to 53.9% at end of year 2000. Based on management's analysis of the
loan portfolio risk at June 30, 2001, a provision expense of $650,000 was
recorded for the six months ended June 30, 2001, an increase of $440,000
compared to the same period in 2000. Net loan charge-offs of $520,000 occurred
in the first six months of 2001, and the ratio of net charge-offs to average
loans for the period ended June 30, 2001 was 0.18% compared to (0.06%) at June
30, 2000. Commercial, agricultural and other loan net charge-offs represented
103.5% of the total net charge-offs for the first six months of 2001. Two
commercial loans totaling $495,000 accounted for the majority of the net
charge-offs. Loans charged-off are subject to periodic review and specific
efforts are taken to achieve maximum recovery of principal and accrued interest.
Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
- ---------------------------- -------------------------- -------------------------- --------------------------
For the period For the period For the period
ended June 30, ended June 30, ended December
2001 2000 31, 2000
- ---------------------------- -------------------------- -------------------------- --------------------------
Allowance for
Loan Losses
("ALL")
- ---------------------------- -------------------------- -------------------------- --------------------------
Balance at $7,006 $ 7,611 $ 7,611
beginning of
- ---------------------------- -------------------------- -------------------------- --------------------------
19
20
- ---------------------------- -------------------------- -------------------------- --------------------------
period
- ---------------------------- -------------------------- -------------------------- --------------------------
Provision for 650 210 545
loan losses
- ---------------------------- -------------------------- -------------------------- --------------------------
Charge-offs 839 280 2,074
- ---------------------------- -------------------------- -------------------------- --------------------------
Recoveries 319 417 924
- ---------------------------- -------------------------- -------------------------- --------------------------
Balance at 7,136 7,958 7,006
end of period
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Net charge-offs 520 (137) 1,150
("NCOs")
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Nonperforming
Assets:
- ---------------------------- -------------------------- -------------------------- --------------------------
Nonaccrual loans $8,665 9,030 8,479
- ---------------------------- -------------------------- -------------------------- --------------------------
Accruing loans 0 0 0
past due 90 days
or more
- ---------------------------- -------------------------- -------------------------- --------------------------
Restructured 4,866 4,354 4,510
loans
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Total 13,531 13,384 12,989
nonperforming
loans ("NPLs")
- ---------------------------- -------------------------- -------------------------- --------------------------
Other real 1,756 406 877
estate owned
- ---------------------------- -------------------------- -------------------------- --------------------------
- ---------------------------- -------------------------- -------------------------- --------------------------
Total $15,287 13,790 13,866
nonperforming
assets ("NPAs")
- ---------------------------- -------------------------- -------------------------- --------------------------
Ratios:
- ---------------------------- -------------------------- -------------------------- --------------------------
ALL to NCO's 6.81 (28.94) 6.09
(annualized)
- ---------------------------- -------------------------- -------------------------- --------------------------
NCO's to average 0.18% (0.06%) 0.23%
loans
(annualized)
- ---------------------------- -------------------------- -------------------------- --------------------------
ALL to total 1.21% 1.54% 1.26%
loans
- ---------------------------- -------------------------- -------------------------- --------------------------
NPL's to total 2.28% 2.60% 2.34%
loans
- ---------------------------- -------------------------- -------------------------- --------------------------
NPA's to total 1.89% 1.92% 1.80%
assets
- ---------------------------- -------------------------- -------------------------- --------------------------
ALL to NPL's 52.74% 59.46% 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.
20
21
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.
21
22
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)
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
June 30, June 30, Dec 31,
2001 2000 2000
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Amount Percent Amount Percent Amount Percent
------ of ------ of ------ of
loans loans loans
to to to
total total total
loans loans loans
----- ----- -----
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Commercial, $1 360 15.60% 1,190 15.11% 1,073 15.09%
financial
& agricultural
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Commercial 3,300 44.13% 2,825 46.77% 2,993 45.27%
real estate
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Real Estate:
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Construction 370 11.64% 55 6.11% 302 7.47%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Residential 1,400 21.43% 1,440 24.37% 1,395 24.54%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Home equity
lines 142 4.17% 134 4.36% 148 4.40%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Consumer 140 2.64% 130 2.90% 140 2.84%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Credit card 52 0.39% 41 0.38% 68 0.39%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Loan
commitments 147 136 135
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
22
23
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Not 225 2,007 752
specifically -------------- ------------------ --------------
allocated
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Total $7,136 100.00% $7,958 100.00% $7,006 100.00%
allowance
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Allowance 1.21% 1.55% 1.26%
for credit
loss as a
percentage
of total
loans
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Period end $591,805 $514,680 $555,107
loans
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
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 June 30, 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 June 30, 2001 were $15.3 million compared to $13.9
million at December 31, 2000. Other real estate owned totaled $1.8 million and
consisted of five residential and seven commercial properties. Non-accrual loans
represented $8.7 million of the total of non-performing assets, of which $3.5
million was acquired by the Company with the BLBNA acquisition. Real estate
non-accrual loans accounted for $7.2 million of the total, of which $2.7 million
was
23
24
residential real estate and $4.5 million was commercial real estate, while
commercial and industrial non-accruals accounted for $1.3 million and consumer
loans accounted for $200,000.
Management believes collateral is sufficient to offset losses in the event
additional legal action would be warranted to collect these loans, except for
one commercial credit totaling $614,000. These credits are in the process of
liquidation and it is not anticipated that the specific reserve applied to these
loans (approximately $225,000) will be sufficient to cover the entire amount of
potential loss. $4.8 million of troubled debt restructured loans existed at June
30, 2001, compared with $4.5 million at December 31, 2000. Approximately $3.5
million of troubled debt restructured loans at June 30 consists of two
commercial real estate credits which were granted various payment concessions
and had experienced past cashflow problems. These credits were current at June
30, 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 June 30, 2001 and December 31, 2000 was 2.3%.
The Company's ALL was 52.7% of total non-performing loans at June 30, 2001
compared to 53.9% at end of year 2000.
Potential problem loans at June 30, 2001 are restricted to two commercial
borrowers with credits aggregating approximately $8.0 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. This credit was delinquent
at June 30, 2001 and subsequently became non-accrual prior to July 31, 2001. The
second commercial loan customer, with credits totaling $5.1 million underwent
management changes and is in the process of modernizing their facilities. This
credit was current at June 30, 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 June 30, 2001, the investment portfolio (which includes investment securities
available for sale and held to maturity) increased $3.1 million, or 2.0%, to
$156.6 million from $153.5 million at December 31, 2000. At June 30, 2001, the
investment portfolio represented 19.3% of total assets compared with 19.9% at
December 31, 2000.
Securities held to maturity and securities available for sale consist of the
following:
At June 30, 2001
(dollars in thousands)
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Amortized Gross Gross Estimated
--------- Unrealized Unrealized Market Value
Cost ------------
----
- --------------------------------- -------------------- -------------------- -------------------- --------------------
24
25
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Gains Losses
----- ------
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Securities held to
maturity
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Obligations of $ 18,681 $ 269 $ 0 $ 18,950
states & political
subdivisions
- --------------------------------- -------------------- -------------------- -------------------- --------------------
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Securities
available for sale
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Obligations of U.S. 28,269 1,206 0 29,475
Treasury & other
U.S. Agencies
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Mortgage-backed 70,347 1,051 23 71,375
securities
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Obligations of 33,065 1,125 9 34,181
states & political
subdivisions
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Other securities 100 100
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Equity securities 2,766 2,766
- --------------------------------- -------------------- -------------------- -------------------- --------------------
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Total securities $134,547 $3,382 $ 32 $137,897
available for sale
- --------------------------------- -------------------- -------------------- -------------------- --------------------
At December 31, 2000
(dollars in thousands)
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Amortized Gross Gross Estimated
--------- Unrealized Unrealized Market Value
Cost Gains Losses -------------
---- ----- ------
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Securities held to
maturity
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Obligations of $ 18,422 $119 $38 $ 18,503
states & political
subdivisions
- --------------------------------- -------------------- -------------------- -------------------- --------------------
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Securities
available for sale
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Obligations of U.S. $ 32,252 $748 $ 3 $ 32,997
Treasury & other
U.S. Agencies
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Mortgage-backed 67,629 107 750 66,986
securities
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Obligations of 33,067 757 29 33,795
states & political
subdivisions
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Equity securities 1,311 1,311
- --------------------------------- -------------------- -------------------- -------------------- --------------------
- --------------------------------- -------------------- -------------------- -------------------- --------------------
Total securities $134,259 $1,612 $782 $135,089
available for sale
- --------------------------------- -------------------- -------------------- -------------------- --------------------
25
26
At June 30, 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 $1,443 $ 1,455 $ 14,039 $ 14,153
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
After 1 but within 5 years 7,865 8,027 76,920 78,741
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
After 5 but within 10 years 5,228 5,324 23,902 25,007
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
After 10 years 4,145 4,144 16,920 17,230
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Equity securities 0 0 2,766 2,766
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Total $ 18,681 $ 18,950 $134,547 $137,897
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Deposits
Total deposits at June 30, 2001 increased $75.1 million, or 13.6%, to $628.4
million from $553.3 million at December 31, 2000. Non-interest bearing deposits
at June 30, 2001 decreased $3.1 million, or 4.6%, to $66.0 million from $69.1
million at December 31, 2000. Interest-bearing deposits at June 30, 2001
increased $78.3 million, or 16.2%, to $562.4 million from $484.1 million at
December 31, 2000. Interest-bearing transaction accounts (NOW deposits)
decreased $8.3 million, primarily in public fund deposits. Savings deposits
increased $9.2 million, or 5.0%, to $192.6 million at June 30, 2001, when
compared to $183.4 million at December 31, 2000. Time deposits (including time,
$100,000 and over and other time) increased $77.4 million (includes increase of
$64.9 million in time deposits over $100,000), or 30.8%, to $328.6 million at
June 30, 2001, when compared to $251.2 million at December 31, 2000. Brokered
CD's totaled $48.3 million at June 30, 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. In addition, acquisition of brokered deposits has
enabled the Company to meet short term funding requirements.
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27
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 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 June 30, 2001 consist of securities under agreements to
repurchase and advances from the Federal Home Loan Bank ("FHLB"). Total
short-term borrowings at June 30, 2001 decreased $67.7 million to $12.6 million
from $80.3 million at December 31, 2000. Customer repurchase agreements
increased $1.1 million from $3.3 million at December 31, 2000 to $4.4 million at
June 30, 2001. FHLB advances decreased from $42 million at December 31, 2000 to
$8.2 million at June 30, 2001. Federal funds purchased decreased from $35
million at December 31, 2000 to no funds purchased at June 30, 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 six months of 2001,
including brokered CD's, and additional borrowings from FHLB in the form of term
loans.
Other borrowings consist primarily of term loans with FHLB. These borrowings
totaled $90 million at June 30, 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 June 30, 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
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28
Liquidity management refers to the ability of 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.
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 six months 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 $2.5 million in the first six months of 2001. In
February 2001, the Company issued trust preferred securities, which received
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 six months ended June 30, 2001, principal payments totaling $11.3 million
were received on investments. These proceeds in addition to other Company cash
were used to purchase $13.1 million in investments for the period. At June 30,
2001, the carrying or book value of investment securities maturing within one
year amounted to $15.6 million or 10.0% of the total investment securities
portfolio. This compares to an 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 six months of 2001 totaled $11.3 million. At June 30, 2001, the
investment portfolio contained $100.9 million of U.S. Treasury and federal
agency backed securities representing 64.4% of the total investment portfolio.
These securities tend to be highly marketable and had a market value above
amortized cost at June 30, 2001 amounting to $2.2 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 $75.1 million of cash flow during the first six months of 2001. The
Company's overall deposit base grew 13.6% for the six months ended June 30,
2001. Deposit growth, especially core deposits, is the most stable source of
liquidity for the Bank.
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29
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $183.1 million, or 30.9%, of loans maturing within one year.
Within the classification of short-term borrowings and other borrowings at June
30, 2001, federal funds purchased and securities sold under agreements to
repurchase totaled $4.4 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 long-term, are another
source of funds. They total $98.2 million at June 30, 2001, compared to $112.3
million at the end of 2000.
The Bank's liquidity resources were sufficient in the first six months 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 liquidity.
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.
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30
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 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.
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
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31
AS OF June 30, 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 $ 14,203 $ 1,457 $ 9,471 $ 86,604 $51,022 $162,757
Federal funds sold 1,027 1,027
Loans and leases
Variable rate 196,033 19,787 0 24,589 0 240,409
Fixed rate 38,155 36,200 69,596 188,757 11,255 343,963
--------- -------- --------- -------- ------- --------
Total loans and leases $ 234,188 $ 55,987 $ 69,596 $213,346 $11,255 $584,372
--------- -------- --------- -------- ------- --------
Total earning assets $ 249,418 $ 57,444 $ 79,067 $299,950 $62,277 $748,156
========= ======== ========= ======== ======= ========
Interest bearing
liabilities:
NOW Accounts $ 10,315 $ 0 $ 0 $ 30,945 $ 0 $ 41,260
Savings Deposits 146,647 0 0 45,908 0 192,555
Time Deposits 108,930 66,874 98,895 53,879 0 328,578
Borrowed Funds 42,636 0 15,052 45,106 0 102,794
Trust Preferred Securities 0 0 0 0 16,100 16,100
========= ======== ========= ======== ======= ========
Total interest bearing $ 308,528 $ 66,874 $ 113,947 $175,838 $16,100 $681,287
========= ======== ========= ======== ======= ========
Liabilities
Interest sensitivity gap $ (59,110) $ (9,430) $ (34,880) $124,112 $46,177 $ 66,869
(within periods)
Cumulative interest $ (59,110) $(68,540) $(103,420) $ 20,692 $66,869
sensitivity gap
Ratio of cumulative interest - 7.90% - 9.16% - 13.82% 2.77% 8.94%
Sensitivity gap to rate
Sensitive assets
Ratio of rate sensitive
assets 80.84% 85.90% 69.39% 170.58% --
To rate sensitive
Liabilities
Cumulative ratio of rate 80.84% 81.74% 78.87% 103.11% 109.82%
Sensitive assets to rate
Sensitive liabilities
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 2.5% adjustment
in net income under these scenarios for the period ended June 30, 2001. This
result was within the policy limits established by the Company.
Management continually reviews its interest rate 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.
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Capital Resources
Shareholders' equity at June 30, 2001 increased $3.6 million or 6.7% to $56.7
million, compared with $53.1 million at end of year 2000. This increase includes
a change of $1.6 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 $1.9 million or 3.6% for the period
between June 30, 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 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 six months of 2001 were $0.22 per share
compared with $0.20 in the first six months 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 six months 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
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33
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 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 June 30, 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 June 30, 2001, the
minimum leverage ratio requirement to be considered adequately capitalized was
4%.
The capital levels of the Company and the Bank at June 30, 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.
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34
The Company's and the Bank's capital amounts and ratios are as follows: (dollars
in thousands)
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action
Purposes Provisions
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
As of June 30, 2001
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Total Capital (to
Risk Weighted Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 72,449 11.23% 51,629 8.00% 64,536 10.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 66,236 10.25% 51,686 8.00% 64,608 10.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Tier 1 Capital(to
Risk Weighted Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 65,313 10.12% 25,815 4.00% 38,722 6.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 59,096 9.15% 25,843 4.00% 38,765 6.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Tier 1 Capital (to
Average Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 65,313 8.21% 31,828 4.00% N/A N/A
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 59,096 7.42% 31,828 4.00% 39,786 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
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35
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 June 30, 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 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. The initial dividend payment for trust preferred
securities was paid on July 2, 2001 for the period February 16, 2001 through
June 30, 2001 to shareholders of record on the close of business on June 29,
2001. Subsequent interest payments will be made on a quarterly basis at the rate
of $0.25 per security.
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
(a). The Company's Annual Meeting of Shareholders was held on June 4, 2001. A
total of 7,471,574 shares of the Company's common stock were outstanding and
entitled to vote as of record date for the Annual Meeting. Two matters were
submitted to a vote of the shareholders of the Company at the Annual Meeting.
These matters were the election of four (4) directors of Class I, whose term
will expire in 2004 and a vote on an amendment to the articles to increase the
authorized shares of Baylake from 10,000,000 to 50,000,000 shares.
(b). Each of the persons named in the Proxy Statement as a nominee for director
was elected. The following are the voting results with respect to the election
of directors:
- --------------------------------- ------------------------ ----------------------- ------------------------
Election of Directors For Against or Withheld Abstentions
- --------------------------------- ------------------------ ----------------------- ------------------------
John W. Bunda 5,707,374 566,327 1,197,873
- --------------------------------- ------------------------ ----------------------- ------------------------
Roger G. Ferris 6,130,671 143,030 1,197,873
- --------------------------------- ------------------------ ----------------------- ------------------------
Thomas L. Herlache 6,240,363 33,338 1,197,873
- --------------------------------- ------------------------ ----------------------- ------------------------
Paul J. Sturm 6,251,206 22,495 1,197,873
- --------------------------------- ------------------------ ----------------------- ------------------------
(c). Amendment to the articles to increase authorized shares of Baylake from
10,000,000 to 50,000,000 shares was approved.
- --------------------------------- ------------------------ ----------------------- ------------------------
Amendment to increase For Against or Withheld Abstentions
authorized shares
- --------------------------------- ------------------------ ----------------------- ------------------------
5,916,493 357,208 1,197,873
- --------------------------------- ------------------------ ----------------------- ------------------------
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.
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
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15 Letter re: unaudited interim financial information
(b). Report on Form 8-K:
None
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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: August 10, 2001 /s/ Thomas L. Herlache
---------------------- --------------------------------------
Thomas L. Herlache
President (CEO)
Date: August 10, 2001 /s/ Steven D. Jennerjohn
---------------------- --------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
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