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, 2002
------------------
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
---------------------------------------------------------
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 12, 2002: 7,471,576 shares
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 3 - 4
Consolidated Statements of Income for the three and
six months ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows for the six months ended 7 - 8
June 30, 2002 and 2001
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
PART II - OTHER INFORMATION 40 - 41
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 42
EXHIBIT INDEX 40 - 41
Exhibit 11 Statement re: computation of per share earnings 43
Exhibit 15 Letter re: unaudited interim financial information 44
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350 45 - 46
2
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
------
Cash and due from banks $ 19,531 $ 24,033
Federal funds sold 0 4,452
--------- ---------
Cash and cash equivalents 19,531 28,485
Investment securities available for sale (at market) 142,297 144,895
Investment securities held to maturity (market
value $20,083 and $22,398, at June 30, 2002
and December 31, 2001, respectively) 19,713 22,205
Loans held for sale 534 2,428
Loans 631,220 605,287
Less: Allowance for loan losses 8,732 7,992
--------- ---------
Loans, net of allowance for loan losses 622,488 597,295
Bank premises and equipment 24,670 21,792
Federal Home Loan Bank stock (at cost) 6,548 6,376
Accrued interest receivable 5,131 5,112
Income taxes receivable 404 1,673
Deferred income taxes 1,353 2,048
Goodwill 4,969 4,969
Other Assets 21,326 8,513
--------- ---------
Total Assets $ 868,964 $ 845,791
========= =========
LIABILITIES
-----------
Domestic deposits
Non-interest bearing $ 82,498 $ 76,051
Interest bearing
NOW 52,881 49,709
Savings 197,740 218,736
Time, $100,000 and over 172,177 137,148
Other time 183,509 188,246
--------- ---------
Total interest bearing 606,307 593,839
Total deposits 688,805 669,890
Short-term borrowings
Federal funds purchased, repurchase
Agreements, and Federal Home Loan
Bank advances 20,023 2,837
Accrued expenses and other liabilities 6,247 6,779
Dividends payable 0 897
Other borrowings 75,000 90,000
Long-term debt 106 158
Guaranteed preferred beneficial interest in the
company's junior subordinated debt 16,100 16,100
--------- ---------
Total liabilities 806,281 786,661
--------- ---------
3
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
SHAREHOLDERS' EQUITY
--------------------
Common stock,$5 par value: authorized 10,000,000
Shares; issued 7,494,735 shares as of June 30, 2002
And 7,494,733 as of December 31, 2001; outstanding
7,471,576 as of June 30, 2002 and 7,471,575 as of
December 31, 2001 37,474 37,474
Additional paid-in capital 7,319 7,319
Retained earnings 15,113 12,843
Treasury stock (625) (625)
Net unrealized gain on securities available 3,402 2,119
--------- ---------
For sale, net of tax of $1,841 as of June 30, 2002
And $1,146 as of December 31, 2001
Total shareholders' equity 62,683 59,130
--------- ---------
Total liabilities and shareholders' equity $ 868,964 $ 845,791
========= =========
4
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,
----------------- ----------------
2002 2001 2002 2001
------- ------- ------- -------
Interest income
Interest and fees on loans $10,887 $12,800 $21,321 $25,739
Interest on investment securities
Taxable 1,609 1,703 3,191 3,416
Exempt from federal income taxes 666 653 1,354 1,302
Other interest income 4 9 16 9
------- ------- ------- -------
Total interest income 13,166 15,165 25,882 30,466
------- ------- ------- -------
Interest expense
Interest on deposits 4,212 6,471 8,595 12,943
Interest on short-term borrowings 180 316 306 1,133
Interest on other borrowings 726 1,263 1,542 2,789
Interest on long-term debt 2 4 3 8
Interest on guaranteed preferred
beneficial interest in the company's junior
subordinated debt 412 398 823 595
------- ------- ------- -------
Total interest expense 5,532 8,452 11,269 17,468
------- ------- ------- -------
Net interest income 7,634 6,713 14,613 12,998
Provision for loan losses 546 448 1,046 650
------- ------- ------- -------
Net interest income after provision for Loan losses 7,088 6,265 13,567 12,348
------- ------- ------- -------
Other income
Fees from fiduciary activities 143 145 324 295
Fees from loan servicing 219 384 492 580
Fees for other services to customers 907 738 1,983 1,336
Gains from sales of loans 179 251 444 364
Other income 685 146 776 221
------- ------- ------- -------
Total other income 2,133 1,664 4,019 2,796
------- ------- ------- -------
Other expenses
Salaries and employee benefits 3,563 3,007 6,805 5,934
Occupancy expense 572 438 1,015 868
Equipment expense 399 355 785 706
Data processing and courier 252 243 507 479
Operation of other real estate 66 140 210 164
Other operating expenses 1,221 1,275 2,455 2,201
------- ------- ------- -------
Total other expenses 6,073 5,458 11,777 10,352
------- ------- ------- -------
Income before income taxes 3,148 2,471 5,809 4,792
Income tax expense 958 722 1,746 1,431
------- ------- ------- -------
Net Income $ 2,190 $ 1,749 $ 4,063 $ 3,361
======= ======= ======= =======
Basic earnings per common share (1) $ 0.29 $ 0.23 $ 0.54 $ 0.45
Diluted earnings per common share (1) $ 0.28 $ 0.23 $ 0.53 $ 0.44
Cash dividends per share $ 0.12 $ 0.11 $ 0.24 $ 0.22
(1) Based on 7,471,576 average shares outstanding in 2002 and 7,464,337 in 2001.
5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
Net Income $2,190 $1,749 $4,063 $3,361
------ ------ ------ ------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period 1,420 112 1,283 1,621
------ ------ ------ ------
Comprehensive income $3,610 $1,861 $5,346 $4,982
====== ====== ====== ======
6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Interest received from:
Loans $ 21,131 $ 24,987
Investments 4,555 4,869
Fees and service charges 3,686 2,534
Interest paid to depositors (9,180) (12,972)
Interest paid to others (2,776) (4,774)
Cash paid to suppliers and employees (11,011) (9,930)
Income taxes paid (477) (1,474)
-------- --------
Net cash provided by operating activities 5,928 3,240
Cash flows from investing activities:
Principal payments received on investments 42,112 11,273
Purchase of investments (30,798) (13,086)
Purchase of insurance contracts (13,000) 0
Proceeds from sale of other real estate owned 1,305 1,056
Loans made to customers in excess of principal collected (24,828) (39,645)
Capital expenditures (3,582) (415)
-------- --------
Net cash used in investing activities (28,791) (40,817)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts,
and savings Accounts (11,376) (2,309)
Net increase (decrease) in short term borrowing 17,187 (67,654)
Net increase (decrease) in time deposits 30,293 77,425
Proceeds from other borrowings and long-term debt (15,000) 35,000
Payments on other borrowings and long term debt (53) (22,753)
Proceeds from issuance of common stock 0 211
Proceeds from issuance of trust preferred securities 16,100 0
Dividends paid (2,690) (2,462)
-------- --------
Net cash provided by financing activities 18,361 33,558
-------- --------
Net increase (decrease) in cash and cash equivalents (4,502) (4,019)
Cash and cash equivalents, beginning 24,033 21,695
-------- --------
Cash and cash equivalents, ending $ 19,531 $ 17,676
======== ========
7
JUNE 30,
-----------------------
2002 2001
-------- --------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 4,063 $ 3,361
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 811 783
Provision for losses on loans and real estate owned 1,046 650
Amortization of premium on investments 103 89
Accretion of discount on investments (69) (75)
Cash surrender value increase (42) (27)
Gain from disposal of ORE 67 (25)
Gain on sale of loans (444) (364)
Proceeds from sale of loans held for sale 33,821 39,442
Originations of loans held for sale (33,377) (39,078)
Equity in income of service center (138) (118)
Gain from disposal of fixed assets (107) 0
Amortization of goodwill 0 243
Amortization of mortgage servicing rights 176 80
Mortgage servicing rights booked (91) (168)
Deferred compensation 128 114
Changes in assets and liabilities:
Interest receivable (19) (503)
Prepaids and other assets (620) (917)
Unearned income 11 9
Interest payable (688) (278)
Taxes payable 1,268 (42)
Other liabilities 29 64
-------- --------
Total adjustments 1,865 (121)
-------- --------
Net cash provided by operating activities $ 5,928 $ 3,240
======== ========
8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Baylake Corp.'s 2001 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, 2002 and December 31, 2001. The
results of operations for the three and six months ended June 30, 2002
and 2001 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,
2002 2001
-------- -----------
(dollars in thousands)
Investment securities held to maturity:
Obligations of state and political subdivisions $ 19,713 $ 22,205
-------- --------
Investment securities held to maturity $ 19,713 $ 22,205
-------- --------
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 25,230 $ 22,740
Obligations of states and political subdivisions 36,664 33,504
Mortgage-backed securities 75,023 74,348
Other 5,380 14,303
-------- --------
Investment securities available for sale $142,297 $144,895
======== ========
3. At June 30, 2002 and December 31, 2001, loans were as follows:
JUNE 30, DECEMBER 31,
2002 2001
--------- -----------
(dollars in thousands)
Commercial, financial and agricultural $ 391,792 $ 377,034
Real estate - construction 81,632 67,939
Real estate - mortgage 141,974 143,748
Installment 16,158 16,890
Less: Deferred loan origination fees, net of costs (336) (324)
--------- ---------
$ 631,220 $ 605,287
Less allowance for loan losses (8,732) (7,992)
--------- ---------
Net loans $ 622,488 $ 597,295
========= =========
4. Baylake Corp. declared a cash dividend of $0.12 per share payable on
June 14, 2002 to shareholders of record as of June 3, 2002.
9
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, 2002
and 2001 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, 2002, since that
amount, if any, is not estimable.
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,"
"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
10
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, 2002, earnings increased $441,000, or 25.2%,
to $2.2 million from $1.75 million for the second quarter last year. Basic
operating earnings per share of $0.29 was reported for the quarter ended June
30, 2002 compared to $0.23 for the same period last year, an improvement of
26.1%. On a fully diluted basis, the Company recorded $0.28 per share for the
second quarter in 2002 and $0.23 for the same period in 2001.
TABLE 1
Summary results of operations
($ in Thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ----------------------------------- ------------- ------------- ------------- -------------
Net income, as reported 2,190 1,749 4,063 3,361
- ----------------------------------------------------------------------------------------------------------
Net income, as adjusted (1) 2,190 1,870 4,063 3,604
- ----------------------------------------------------------------------------------------------------------
EPS-basic, as reported 0.29 0.23 0.54 0.45
- ----------------------------------------------------------------------------------------------------------
EPS-basic, as adjusted (1) 0.29 0.25 0.54 0.48
- ----------------------------------------------------------------------------------------------------------
EPS-diluted, as reported 0.28 0.23 0.53 0.44
- ----------------------------------------------------------------------------------------------------------
EPS-diluted, as adjusted (1) 0.28 0.25 0.53 0.47
- ----------------------------------------------------------------------------------------------------------
Return on average
assets, as reported 1.02% 0.87% 0.96% 0.86%
- ----------------------------------------------------------------------------------------------------------
Return on average
assets, as adjusted (1) 1.02% 0.94% 0.96% 0.92%
- ----------------------------------------------------------------------------------------------------------
Return on average
equity, as reported 14.38% 12.61% 13.52% 12.35%
- ----------------------------------------------------------------------------------------------------------
Return on average
equity, as adjusted (1) 14.38% 13.48% 13.52% 13.25%
- ----------------------------------------------------------------------------------------------------------
Efficiency ratio, as reported 60.07% 62.64% 60.93% 62.87%
- ----------------------------------------------------------------------------------------------------------
Efficiency ratio, as
adjusted (1), (2) 60.07% 61.25% 60.93% 61.40%
- ----------------------------------------------------------------------------------------------------------
11
(1) Selected 2001 financial data has been adjusted to exclude the
amortization of goodwill affected by SFAS 142.
(2) Noninterest expense divided by sum of taxable equivalent net interest
income plus noninterest income, excluding investment securities gains,
net.
The annualized return on average assets and return on average equity for the
three months ended June 30, 2002 were 1.02% and 14.38%, respectively, compared
to 0.87% and 12.61%, 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 and income tax expense.
For the six months ended June 30, 2002, net income increased $702,000, or 20.9%,
to $4.1 million from $3.4 million for the first six months of 2001. The change
in net income is due for the same reasons as listed above. Basic operating
earnings per share increased to $0.54 for the first six months of 2002 compared
to $0.45 for the six months ended June 30, 2001, an increase of 20.0%. On a
fully diluted basis, the Company recorded $0.53 per share for the first six
months of 2002 and $0.44 for the same period in 2001.
Cash dividends declared in the first six months of 2002 increased 9.1% to $0.24
per share compared with $0.22 for the same period in 2001.
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 79.9% of
total operating income for the first six months of 2002, as compared to 83.4%
for the first six months of 2001. 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.
12
Net interest income on a tax equivalent basis for the three months ended June
30, 2002 increased $927,000, or 13.2%, to $8.0 million from $7.1 million for the
same period a year ago. As a result of a lower interest rate environment, total
interest income for the second quarter of 2002 decreased $2.0 million, or 12.9%,
to $13.5 million from $15.5 million for the second quarter of 2001, while
interest expense in the second quarter of 2002 decreased $2.9 million, or 34.6%,
to $5.5 million when compared to $8.5 million in the second quarter of 2001. The
increase in net interest income between these two quarterly periods occurred
partially 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. In addition, lower funding costs from deposits and
other wholesale funding sources relative to rates earned on earning assets such
as loans and investments also contributed to an improvement in net interest
income.
For the three months ended June 30, 2002, average earning assets increased $48.4
million, or 6.5%, when compared to the same period last year. The Company
recorded an increase in average loans of $37.7 million, or 6.4%, for the second
quarter of 2002 compared to the same period a year ago. Loans have typically
resulted in higher rates of interest income to the Company than have investment
securities.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread increased for the quarter ended June 30,
2002 when compared to the same period a year ago. The interest rate spread
increased 40 basis points to 3.77% at June 30, 2002 from 3.37% in the same
quarter in 2001. While the average yield on earning assets decreased 153 basis
points during the period, the average rate paid on interest-bearing liabilities
decreased 193 basis points over the same period as a result of a lower cost of
funding from deposits and other wholesale funding such as federal funds
purchased and loans from the Federal Home Loan Bank.
TABLE 2
Net Interest Income Analysis on a Tax-equivalent basis
($ in Thousands)
- -------------------------- ----------------------------------------- ----------------------------------------
Six months ended June 30, 2002 Six months ended June 30, 2001
- -------------------------- ----------------------------------------- ----------------------------------------
Average Interest Average Average Interest Average
Balance Income/ Yield/ Balance Income/ Yield/
Expense Rate Expense Rate
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
ASSETS
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Earning Assets:
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Loans, net (1)(2)(3) $619,508 $578,624
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Less: non-accrual loans (13,749) (9,762)
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Loans, net 605,759 $21,320 7.10% 568,862 $25,739 9.12%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Investments 178,016 5,241 5.94% 161,800 5,389 6.72%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Other earning assets 1,972 18 1.84% 712 9 2.55%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total earning assets $785,747 $26,579 6.82% $731,374 $31,137 8.59%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
13
- -------------------------- ----------------------------------------- ----------------------------------------
Six months ended June 30, 2002 Six months ended June 30, 2001
- -------------------------- ----------------------------------------- ----------------------------------------
Average Interest Average Average Interest Average
Balance Income/ Yield/ Balance Income/ Yield/
Expense Rate Expense Rate
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Allowance for loan losses (8,412) (7,999)
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Non-accrual loans 13,749 9,762
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Cash and due from banks 16,762 15,186
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Other assets 45,102 42,321
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total assets $852,948 $790,644
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
LIABILITIES AND
STOCKHOLDERS EQUITY
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Interest bearing
liabilities
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Interest bearing
deposits, excluding time
more than $100M $438,103 $5,502 2.53% $431,146 $10,416 4.87%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Time deposits more than
$100M 152,928 3,093 4.08% 85,065 2,527 5.99%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total interest bearing
deposits $591,031 $8,595 2.93% $516,211 $12,943 5.06%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Short-term borrowings 30,808 306 2.00% 43,097 1,216 5.69%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Other borrowings 77,923 1,545 4.00% 97,286 2,714 5.63%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Trust preferred
securities 16,100 823 10.31% 12,008 595 9.99%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total interest bearing
liabilities $715,862 $11,269 3.17% $668,602 $17,468 5.27%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Demand deposits 69,257 60,188
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Accrued expenses and
other liabilities 7,233 6,986
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Stockholders' equity 60,596 54,868
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total liabilities and
stockholders' equity $852,948 $790,644
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Interest rate spread $15,310 3.65% $13,669 3.32%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Contribution of free
funds 0.28% 0.45%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Net interest margin 3.93% 3.77%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
TABLE 2 (continued)
14
Net Interest Income Analysis on a Tax-equivalent basis
($ in Thousands)
- -------------------------- ----------------------------------------- ----------------------------------------
Three months ended June 30, 2002 Three months ended June 30, 2001
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Average Interest Average Average Interest Average
Balance Income/ Yield/ Balance Income/ Yield/
Expense Rate Expense Rate
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
ASSETS
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Earning Assets:
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Loans, net (1)(2)(3) $625,799 $588,132
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Less:non-accrual loans (15,535) (10,103)
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Loans, net 610,264 $10,887 7.16% 578,029 $12,800 8.88%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Investments 179,769 2,618 5.84% 162,779 2,694 6.64%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Other earning assets 425 4 3.78% 1,269 8 2.53%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total earning assets $790,458 $13,509 6.85% $742,077 $15,502 8.38%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Allowance for loan losses (8,597) (7,367)
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Non-accrual loans 15,535 10,103
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Cash and due from banks 16,900 15,478
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Other assets 44,428 41,580
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total assets $858,724 $801,871
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
LIABILITIES AND
STOCKHOLDERS EQUITY
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Interest bearing
liabilities
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Interest bearing
deposits, excluding time
more than $100M $430,549 $2,622 2.44% $432,154 $4,960 4.60%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Time deposits more than
$100M 162,259 1,590 3.93% 106,066 1,511 5.71%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total interest bearing
deposits 592,808 4,212 2.85% $538,220 $6,471 4.82%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Short-term borrowings 35,649 180 2.03% 26,740 315 4.72%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Other borrowings 75,105 728 3.89% 95,388 1,267 5.33%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Trust preferred
securities 16,100 412 10.26% 16,100 399 9.94%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total interest bearing
liabilities $719,662 $5,532 3.08% $676,448 $8,452 5.01%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
15
- -------------------------- ----------------------------------------- ----------------------------------------
Three months ended June 30, 2002 Three months ended June 30, 2001
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Average Interest Average Average Interest Average
Balance Income/ Yield/ Balance Income/ Yield/
Expense Rate Expense Rate
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Demand deposits 70,623 62,372
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Accrued expenses and
other liabilities 7,370 7,412
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Stockholders' equity 61,069 55,639
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Total liabilities and
stockholders' equity $858,724 $801,871
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Interest rate spread $7,977 3.77% $7,050 3.37%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Contribution of free
funds 0.28% 0.44%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
Net interest margin 4.05% 3.81%
- -------------------------- ------------- -------------- ------------ ------------- ------------- ------------
(1) The yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 34% for all periods presented
(2) Interest income includes net loan fees
(3) Nonaccrual loans and loans held for sale have been included in the
average balances
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
component increasing net interest margin.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended June 30, 2002 increased from 3.81% to 4.05% compared to the same period a
year ago. The average yield on interest earning assets amounted to 6.85% for the
second quarter of 2002, representing a decrease of 153 basis points from the
same period last year. Total loan yields decreased 172 basis points to 7.16%,
while total investment yields decreased 80 basis points to 5.84%, as compared to
the same period a year ago. The Company's average cost on interest-bearing
deposit liabilities decreased 197 basis points to 2.85% for the second quarter
of 2002 when compared to the second quarter of 2001, while short-term borrowing
costs decreased 269 basis points to 2.03% comparing the two periods. Other
borrowing costs decreased 144 basis points to 3.89% during the same time period.
These factors contributed to an increase in the Company's interest margin for
the three months ended June 30, 2002 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 92.1% for the second quarter of 2002 compared with 92.5%
for the same period in 2001. The ratio decreased slightly in 2002, primarily as
a result of growth in earning assets offset to a slightly greater degree by an
increase in non-accrual loans.
16
Net interest income on a tax equivalent basis for the six months ended June 30,
2002 increased $1.6 million, or 12.0%, to $15.3 million from $13.7 million for
the same period a year ago. Total interest income for the six months ended June
30, 2002 decreased $4.6 million, or 14.6%, to $26.6 million from $31.1 million
for the six months ended June 30, 2001, while interest expense decreased $6.2
million, or 35.5%, to $11.3 million when compared to $17.5 million for the six
months ended June 30, 2001. 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
degree by an increase in interest paying liabilities and a decrease in the yield
of earning assets.
For the six months ended, average-earning assets increased $54.4 million, or
7.4%, when compared to the same period last year. The Company recorded an
increase in average loans of $40.9 million, or 7.1%, for the first six months of
2002 when 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.
The interest rate spread increased for the six months ended June 30, 2002 when
compared to the same period a year ago. The interest rate spread increased 40
basis points to 3.77% at June 30, 2002 from 3.37% in the same period in 2001.
While the average yield on earning assets decreased 153 basis points during the
period, the average rate paid on interest-bearing liabilities decreased 193
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 (on a federal tax-equivalent basis) for the six months ended
June 30, 2002 increased from 3.77% to 3.93% compared to the same period a year
ago. The average on interest earning assets amounted to 6.82% for the six months
ended June 30, 2002, representing a decrease of 177 basis points from the same
period last year. Total loan yields decreased 202 basis points to 7.10%, while
total investment yields decreased 78 basis points to 5.94%, as compared to the
same period a year ago. The Company's average cost on interest bearing deposit
liabilities decreased 213 basis points to 2.93% for the first six months of 2002
when compared to the same period in 2001, while short-term borrowing costs
decreased 369 basis points to 2.00%, comparing the two periods. Other borrowing
costs decreased 163 basis points to 4.0% during the same time period. These
factors contributed to an increase in the Company's interest margin for the six
months ended June 30, 2002 compared to the same period a year ago.
The ratio of average earning assets to average total assets was 92.1% in the
first six months of 2002 compared with 92.5% for the same period in 2001. The
ratio decreased slightly in 2002, 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
17
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, 2002 increased
$98,000 to $546,000 compared with $448,000 for the second quarter of 2001. For
the six months ended June 30, 2002, the provision for loan losses increased
$396,000 to $1.0 million compared with $650,000 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.
Non-Interest Income
Total non-interest income increased $469,000, or 28.2%, to $2.1 million for the
second quarter of 2002 when compared to the second quarter of 2001. This
increase occurred as a result of increased fees on other customer services, and
increased other income offset to a lesser degree by a decrease in gains from
sales of loans and decreased fees from loan servicing.
TABLE 3
NONINTEREST INCOME
($ in Thousands)
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Second Second Percent YTD YTD Percent
Quarter Quarter change 2002 2001 change
2002 2001
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Trust 143 145 (1.4)% 324 295 9.8%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Service charges on
deposit accts 698 474 47.3% 1,352 877 54.2%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Loan servicing fees 219 384 (43.0)% 492 580 (15.2)%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Brokerage commissions 165 98 68.4% 274 163 68.1%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Bank owned life
insurance income 28 13 115.4% 42 27 55.6%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Non-bank subsidiary
income 373 67 456.7% 425 118 260.2%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
18
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Second Second Percent YTD YTD Percent
Quarter Quarter change 2002 2001 change
2002 2001
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Gain on sales of 179 251 (28.7)% 444 364 22.0%
loans
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Asset sales gains, 107 0 Na 107 0 Na
net
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Other 221 232 (4.7)% 559 372 50.3%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Total 2,133 1,664 28.2% 4,019 2,796 43.7%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Service charges on deposit accounts for the second quarter of 2002 showed an
increase of $224,000, or 47.3%, over 2001 results, accounting for much of the
improvement in fee income generated for other services to customers.
Other income increases consisted of a gain of $107,000 related to the sale of
bank land not deemed necessary for development at this time. Another item
contributing to other income increases was interest paid of $133,000 on
previously amended tax returns which was received during the quarter. During the
quarter, a purchase of $13 million in business owed life insurance ("BOLI") was
made. Income from BOLI improved by $15,000 for the second quarter. In addition,
revenues generated by the operation of Arborview LLC ("Arborview") (a recently
formed subsidiary created to manage a community based residential facility)
amounted to $202,000 for the second quarter.
Trust fees decreased $2,000, or 1.4%, in the second quarter of 2002 compared to
the same quarter in 2001, primarily as a result of lowered market values on
various trust accounts for which fees are assessed.
Loan servicing fees decreased $165,000 to $219,000 in the second quarter of
2002, when compared to the same quarter in 2001. The decrease in 2002 resulted
from a decrease in commercial loan servicing income.
Gains on sales of loans in the secondary market decreased $72,000 to $179,000 in
the second quarter of 2002, when compared to the same quarter in 2001, primarily
as a result of decreased gains from sales of mortgage and commercial loans.
Recent declines in interest rates have continue to stimulate mortgage
production, including an increase in refinancing activity. Sales of loans for
the three months ended June 30, 2002 decreased to $13.7 million, compared to
$26.8 million for the same period a year earlier.
For the first six months of 2002, non-interest income increased $1.2 million, or
43.7%, to $4.0 million from $2.8 million for the same period a year ago. This
includes revenues received from Arborview totaling $328,000 for the period.
Trust fee income increased $29,000, or 9.8%, to $324,000 for the first six
months of 2002 compared to $295,000 for the same period in 2001 as a result of
increased trust business.
19
For the first six months, service charges on deposit accounts increased
$475,000, or 54.2%, to $1.4 million from $877,000 for the same period in 2001 as
a result of better collection efforts and a recent price adjustment.
Loan servicing fees decreased $88,000, or 15.2%, to $492,000 for the first six
months of 2002 compared to $580,000 for the same period in 2001.
Gains on sales of loans in the secondary market increased $80,000 to $444,000
for the first six months of 2002, when compared to the same period in 2001,
primarily as a result of increased gains from sales of mortgage loans. Sales of
loans for the six months ended June 30, 2002 decreased to $33.8 million,
compared to $39.4 million for the same period a year earlier.
Non-Interest Expense
Non-interest expense increased $615,000, or 11.3%, for the three months ended
June 30, 2002 compared to the same period in 2001. Salaries and employee
benefits showed an increase of $556,000, or 18.5%, for the period as a result of
additional staffing to operate newer facilities and regular salary and related
benefit increases. Full time equivalent staff increased to 289 persons from 279
a year earlier. Increases in occupancy (amounting to $134,000 or 30.1%) and
equipment expenses (amounting to $44,000 or 12.4%) occurred as a result of
expansion in the Green Bay and Waupaca markets and costs related to
modernization of various facilities.
TABLE 4
NONINTEREST EXPENSE
($ in Thousands)
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Second Second Percent YTD YTD Percent
Quarter Quarter change 2002 2001 change
2002 2001
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Personnel 3,563 3,007 18.5% 6,805 5,934 14.7%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Occupancy 572 438 30.6% 1,015 868 16.9%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Equipment 399 355 12.4% 785 706 11.2%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Data processing 252 243 3.7% 507 479 5.8%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Supplies and printing 162 133 21.8% 291 219 32.9%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Business development/
Advertising 209 189 10.6% 295 284 3.9%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
FDIC 28 27 3.7% 57 53 7.5%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Goodwill amortization 0 121 Na 0 243 Na
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Amortization of MSR's 93 34 173.5% 176 80 120.0%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Legal and professional 83 98 (15.3)% 157 147 6.8%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Operation of other
real estate owned 66 140 (52.9)% 210 164 28.0%
20
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Second Second Percent YTD YTD Percent
Quarter Quarter change 2002 2001 change
2002 2001
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Other 646 673 (4.0)% 1,479 1,175 25.9%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Total 6,073 5,458 11.3% 11,777 10,352 13.8%
- ---------------------- -------------- -------------- ------------- -------------- ------------- -------------
Expenses related to the operation of other real estate owned decreased $74,000
to $66,000 for the quarter ended June 30, 2002 compared to the same period in
2001. Included in the increase of these expenses were losses taken on the sale
of other real estate owned amounting to $24,000 for the second quarter of 2002
compared to net gains taken on sale of $18,000 for the same period in 2001. In
addition, costs related to the holding of other real estate owned properties
decreased $68,000 to $90,000 for the second quarter of 2002.
Other operating expenses decreased $54,000, or 4.2%. Legal expense and loan
collection expense decreased $15,000 for the three months ended June 30, 2002
primarily as a result of reduced legal issues related to loan collection
efforts. Expenses related to the operation of Arborview amounted to $248,000 for
the second quarter of 2002 and are consolidated in various expense categories.
Included in 2001 expenses for other operating expenses were amortization of
goodwill related to the Four Seasons acquisition (a purchase of a one bank
holding company in July 1996) of $163,000 and amortization of $78,000 related to
the BLBNA acquisition. In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and
intangible assets with indefinite lives no longer be amortized, but instead
tested for impairment as least annually. SFAS No. 142 requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and be reviewed for impairment
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The adoption of SFAS No. 142 and SFAS No. 144 does not have
a material impact on the Company's financial statements.
Mortgage servicing rights expense includes the amortization of the mortgage
servicing rights asset. Amortization of mortgage servicing rights increased by
$59,000, reflecting the decline in interest rates in 2002.
Other items (such as marketing, telephone, postage and director fees) comprising
other operating expense show a decrease of $27,000 or 11.4% in the second
quarter of 2002 when compared to the same quarter in 2001. The overhead ratio,
which is computed by subtracting non-interest income from non-interest expense
and dividing by average total assets, was 1.86% for the three months ended June
30, 2002 compared to 1.93% for the same period in 2001.
Non-interest expense increased $1.4 million, or 13.8%, for the six months ended
June 30, 2002 compared to the same period in 2001. Salaries and employee
benefits showed an increase of $871,000, or 14.7%, for the period as a result of
additional staffing to operate new facilities and regular salary and related
benefit increases. Increases
21
in occupancy (amounting to $147,000 or 16.9%) and equipment expense (amounting
to $79,000 or 11.2%) 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 $46,000. The increase is
related primarily to net losses on other real estate taken in 2002 of $47,000
compared to net losses of $1,000 taken for the same period in 2001. Other
expenses related to the operation of other real estate owned amounted to
$163,000 for the first six months of 2002.
Other operating expenses increased $254,000, or 11.5%, for the six months ended
June 30, 2002 when compared to the same period a year ago. Included in 2001
expenses were amortization of goodwill amounting to $243,000 related to the Four
Seasons and BLBNA acquisition. Expenses related to the operation of Arborview
total $420,000 for the six month period ended June 30, 2002 and are included in
various expense categories of non-interest expense.
Amortization of mortgage servicing rights increased by $96,000, or 120.0%, for
the six months ended June 30, 2002 when compared to the same period in 2001.
Other items (such as marketing, telephone, postage and director fees) comprising
other operating expense shows an increase of $482,000 or 20.5% for the period
ended June 30, 2002 when compared to the same period in 2001. The overhead
ratio, which is computed by subtracting non-interest income from non-interest
expense and dividing by average total assets, was 1.84% for the six months ended
June 30, 2002 compared to 1.93% for the same period in 2001.
Income Taxes
Income tax expense for the Company for the three months ended June 30, 2002 was
$958,000, an increase of $236,000, or 32.7%, compared to the same period in
2001. The increase in income tax provision for the period was due to increased
taxable income.
Income tax expense for the Company for the six months ended June 30, 2002 was
$1.7 million, an increase of $315,000, or 22.0%, compared to the same period in
2001. The increase in income tax provision for the period was due to increased
taxable income.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 30.0% for the three months ended June 30, 2002 compared with 29.9%
for the same period in 2001. The effective tax rate of 30.0% consisted of a
federal effective tax rate of 26.5% and Wisconsin State effective tax rate of
3.5%.
Balance Sheet Analysis
Loans
22
At June 30, 2002, total loans increased $25.9 million, or 4.3%, to $631.2
million from $605.3 million at December 31, 2001. Growth in the Company's loan
portfolio resulted primarily from an increase in real estate commercial loans to
$306.6 million at June 30, 2002 compared to $288.4 million at December 31, 2001.
In addition, real estate construction loans increased to $81.6 million at June
30, 2002, compared to $67.9 million at December 31, 2001. Real estate mortgage
loans decreased to $142.0 million at June 30, 2002, compared with $143.7 million
at December 31, 2001. Consumer loans decreased to $16.2 million at June 30,
2002, compared with $16.9 million at December 31, 2001.
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 31,
2002 2001
- ------------------------------------------------------------------------ ---------------- -----------------
Amount of loans by type (dollars in thousands)
- ------------------------------------------------------------------------ ---------------- -----------------
Real estate-mortgage
- ------------------------------------------------------------------------ ---------------- -----------------
Commercial $306,616 $288,385
- ------------------------------------------------------------------------ ---------------- -----------------
1-4 family residential
- ------------------------------------------------------------------------ ---------------- -----------------
First liens 93,671 96,626
- ------------------------------------------------------------------------ ---------------- -----------------
Junior liens 23,785 24,748
- ------------------------------------------------------------------------ ---------------- -----------------
Home equity 24,518 22,374
- ------------------------------------------------------------------------ ---------------- -----------------
Commercial, financial and agricultural 85,176 88,649
- ------------------------------------------------------------------------ ---------------- -----------------
Real estate-construction 81,632 67,939
- ------------------------------------------------------------------------ ---------------- -----------------
Installment
- ------------------------------------------------------------------------ ---------------- -----------------
Credit cards and related plans 2,112 2,145
- ------------------------------------------------------------------------ ---------------- -----------------
Other 14,046 14,745
- ------------------------------------------------------------------------ ---------------- -----------------
Less: deferred origination fees, net of costs 336 324
- ------------------------------------------------------------------------ ---------------- -----------------
Total $631,220 $605,287
- ------------------------------------------------------------------------ ---------------- -----------------
Risk Management and the Allowance for Loan Losses
The loan portfolio is the Company's primary asset subject to credit risk. To
reflect this credit risk, the Company sets aside an allowance or reserve for
credit losses through periodic charges to earnings. These charges are shown in
the Company's consolidated income statement as provision for loan losses. See
"Provision for Loan Losses" above. Credit risk is managed and monitored through
the use of lending standards, a thorough review of potential borrowers, and an
on-going review of payment performance. Asset quality administration, including
early identification of problem loans and timely resolution of problems, further
enhances management of credit risk and minimization of loan losses. All
specifically identifiable and quantifiable losses are immediately charged off
against the allowance. Charged-off loans are subject to periodic review, and
specific efforts are taken to achieve maximum recovery of principal and
interest.
23
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.
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
24
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, 2002 was $8.7 million
compared with $8.0 million at the end of 2001. Loans increased 4.3% from
December 31, 2001 to June 30, 2002, while the allowance as a percent of total
loans increased due to the loan loss provision being higher in comparison to
loan growth for the first six months of 2002. The June 30, 2002 ratio of ALL to
outstanding loans was 1.38% compared with 1.32% at December 31, 2001 and the ALL
as a percentage of nonperforming loans was 39.8% at June 30, 2002 compared to
54.5% at end of year 2001. Based on management's analysis of the loan portfolio
risk at June 30, 2002, a provision expense of $1.0 million was recorded for the
six months ended June 30, 2002, an increase of $396,000 or 60.9% compared to the
same period in 2001. Net loan charge-offs of $306,000 occurred in the first six
months of 2002, and the ratio of net charge-offs to average loans for the period
ended June 30, 2002 was 0.10% compared to 0.18% at June 30, 2001. Commercial,
agricultural and other loan and commercial real estate net charge-offs
represented 43.1% and 47.4% respectively of the total net loan charge-offs for
the first six months of 2002. 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 31,
2002 2001 2001
- --------------------------------------- -------------------- -------------------- --------------------
Allowance for Loan Losses ("ALL")
- --------------------------------------- -------------------- -------------------- --------------------
Balance at beginning of period $7,992 $7,006 $7,006
- --------------------------------------- -------------------- -------------------- --------------------
Provision for loan losses 1,046 650 2,880
- --------------------------------------- -------------------- -------------------- --------------------
Charge-offs 500 839 2,729
- --------------------------------------- -------------------- -------------------- --------------------
Recoveries 194 319 835
- --------------------------------------- -------------------- -------------------- --------------------
Balance at end of period 8,732 7,136 7,992
- --------------------------------------- -------------------- -------------------- --------------------
Net charge-offs ("NCOs") 306 520 1,894
- --------------------------------------- -------------------- -------------------- --------------------
Nonperforming Assets:
- --------------------------------------- -------------------- -------------------- --------------------
Nonaccrual loans 17,448 8,665 9,929
- --------------------------------------- -------------------- -------------------- --------------------
Accruing loans past due 90 days or more 0 0 0
- --------------------------------------- -------------------- -------------------- --------------------
Restructured loans 4,506 4,866 4,744
- --------------------------------------- -------------------- -------------------- --------------------
25
<Table>
<Caption>
- --------------------------------------- -------------------- -------------------- --------------------
For the period For the period For the period
ended June 30, ended June 30, ended December 31,
2002 2001 2001
- --------------------------------------- -------------------- -------------------- --------------------
Total nonperforming loans ("NPLs") 21,954 13,531 14,673
- --------------------------------------- -------------------- -------------------- --------------------
Other real estate owned 3,228 1,756 1,673
- --------------------------------------- -------------------- -------------------- --------------------
Total nonperforming assets ("NPAs") $25,812 15,287 16,346
- --------------------------------------- -------------------- -------------------- --------------------
Ratios:
- --------------------------------------- -------------------- -------------------- --------------------
ALL to NCO's (annualized) 28.54 6.86 4.22
- --------------------------------------- -------------------- -------------------- --------------------
NCO's to average loans (annualized) 0.10% 0.18% 0.32%
- --------------------------------------- -------------------- -------------------- --------------------
ALL to total loans 1.38% 1.21% 1.32%
- --------------------------------------- -------------------- -------------------- --------------------
NPL's to total loans 3.48% 2.29% 2.42%
- --------------------------------------- -------------------- -------------------- --------------------
NPA's to total assets 2.90% 1.89% 1.93%
- --------------------------------------- -------------------- -------------------- --------------------
ALL to NPL's 39.77% 52.74% 54.47%
- --------------------------------------- -------------------- -------------------- --------------------
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.
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
26
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.
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
27
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, 2002 June 30, 2001 Dec 31, 2001
- ----------------------- -------------------------- ------------------------------- --------------------------
Amount Percent of Amount Percent of Amount Percent of
loans to loans to loans to
total loans total loans total loans
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Commercial, financial
& agricultural $1,472 13.49% 1,360 15.60% 972 14.65%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Commercial real estate 4,250 48.52% 3,300 44.13% 4,158 47.59%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Real Estate:
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Construction 380 12.93% 370 11.64% 503 11.22%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Residential 1,400 18.61% 1,400 21.43% 1,078 20.05%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Home Equity 145 3.88% 142 4.17% 178 3.70%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Consumer 150 2.23% 140 2.64% 162 2.44%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Credit card 67 0.33% 52 0.39% 93 0.35%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Loan commitments 164 147 144
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Not specifically
allocated 704 225 704
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Total allowance $8,732 100.00% $7,136 100.00% $7,992 100.00%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Allowance for credit
loss as a percentage
of total loans 1.38% 1.21% 1.32%
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
Period end loans $631,220 $591,805 $605,287
- ----------------------- -------------- ------------ ------------------ ------------- -------------- ------------
While there exists probable asset quality problems in the loan portfolio,
management believes sufficient reserves have been provided in the ALL to absorb
probable losses in the loan portfolio at June 30 2002. 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
28
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, 2002 were $25.8 million compared to $16.3
million at December 31, 2001. Other real estate owned totaled $772,000 and
consisted of two residential and four commercial properties. In addition,
investment in Arborview, an operating subsidiary of the Company, totals $2.3
million at June 30, 2002. Another entity, Fish Creek English Inn LLC ("English
Inn") was formed in early April as a subsidiary of the bank for purposes of
managing a restaurant business. That investment totals $633,000 at June 30,
2002. Non-accrual loans represented $17.4 million of the total of non-performing
assets, of which $3.0 million was acquired by the Company with the BLBNA
acquisition. Real estate non-accrual loans accounted for $16.0 million of the
total, of which $3.0 million was residential real estate and $13.0 million was
commercial real estate, while commercial and industrial non-accruals accounted
for $1.2 million.
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 $5.4 million. These credits are in the process of
a workout and it is anticipated that the specific reserve applied to this loan
(approximately $1.2 million) will be sufficient to cover the entire amount of
potential loss. $4.5 million of troubled debt restructured loans existed at June
30, 2002 and $4.7 million at December 31, 2001. Approximately $3.4 million of
troubled debt restructured loans at June 30, 2002 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, 2002.
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, 2002 was 3.5% compared to 2.4% at 2001 year
end. The Company's ALL was 39.8% of total non-performing loans at June 30, 2002
compared to 54.4% at end of year 2001.
Potential problem loans at June 30, 2002 are restricted to one commercial
borrower with credits aggregating approximately $465,000. Potential problem
loans totaled $10.5 million at December 31, 2001. The commercial loan customer
is undergoing management changes and, as a result, has experienced liquidity
problems. This credit was not current
29
\
at June 30, 2002, and continues to 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, 2002, the investment portfolio (which includes investment securities
available for sale and held to maturity) decreased $5.1 million, or 3.0%, to
$162.0 million from $167.1 million at December 31, 2001. At June 30, 2002, the
investment portfolio represented 18.6% of total assets compared with 19.8% at
December 31, 2001.
Securities held to maturity and securities available for sale consist of the
following:
At June 30, 2002
(dollars in thousands)
- --------------------------------- ----------- ------------ ----------- ----------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------- ----------- ------------ ----------- ----------
Securities held to maturity
- --------------------------------- ----------- ------------ ----------- ----------
Obligations of states &
political subdivisions $ 19,713 $ 370 $ 0 $ 20,083
- --------------------------------- ----------- ------------ ----------- ----------
Securities available for sale
- --------------------------------- ----------- ------------ ----------- ----------
Obligations of U.S. Treasury &
other U.S. Agencies 23,607 1,623 0 25,230
- --------------------------------- ----------- ------------ ----------- ----------
Mortgage-backed securities 72,962 2,134 73 75,023
- --------------------------------- ----------- ------------ ----------- ----------
Obligations of states &
political subdivisions 35,105 1,560 1 36,664
- --------------------------------- ----------- ------------ ----------- ----------
Equity securities 5,380 5,380
- --------------------------------- ----------- ------------ ----------- ----------
Total securities available for
sale $137,054 $5,317 $ 74 $142,297
- --------------------------------- ----------- ------------ ----------- ----------
30
At December 31, 2001
(dollars in thousands)
- --------------------------------- ----------- ------------ ----------- ----------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------- ----------- ------------ ----------- ----------
Obligations of states &
political subdivisions $ 22,205 $216 $23 $ 22,398
- --------------------------------- ----------- ------------ ----------- ----------
Securities available for sale
- --------------------------------- ----------- ------------ ----------- ----------
Obligations of U.S. Treasury &
other U.S. Agencies $ 21,505 $ 1,235 $ 0 $ 22,740
- --------------------------------- ----------- ------------ ----------- ----------
Mortgage-backed securities 73,183 1,359 194 74,348
- --------------------------------- ----------- ------------ ----------- ----------
Obligations of states &
political subdivisions 32,639 889 24 33,504
- --------------------------------- ----------- ------------ ----------- ----------
Equity securities 14,303 14,303
- --------------------------------- ----------- ------------ ----------- ----------
Total securities available for
sale $141,630 $ 3,483 $ 218 $144,895
- --------------------------------- ----------- ------------ ----------- ----------
At June 30, 2002, the contractual maturities of securities held to maturity and
securities available for sale are as follows: (dollars in thousands):
- ---------------------------- ----------------------------------------------- -----------------------------------------------
Securities held to Maturity Securities Available for Sale
- ---------------------------- ----------------------------------------------- -----------------------------------------------
Amortized Cost Market Value Amortized Cost Market Value
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Within 1 year $2,422 $ 2,440 $ 10,303 $ 10,405
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
After 1 but within 5 years 8,702 8,948 86,482 90,368
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
After 5 but within 10 years 3,090 3,196 24,411 25,346
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
After 10 years 5,499 5,499 14,422 14,742
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Equity securities 0 0 1,436 1,436
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Total $ 19,713 $ 20,083 $137,054 $142,297
- ---------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Deposits
Total deposits at June 30, 2002 increased $18.9 million, or 2.8%, to $688.8
million from $669.9 million at December 31, 2001. Non-interest bearing deposits
at June 30, 2002 increased $6.4 million, or 8.5%, to $82.5 million from $76.1
million at December 31, 2001. Interest-bearing deposits at June 30, 2002
increased $12.5 million, or 2.1%, to $606.3 million from $593.8 million at
December 31, 2001. Interest-bearing transaction accounts (NOW deposits)
increased $3.1 million, primarily in public fund deposits. Savings deposits
decreased $21.0 million, or
31
9.6%, to $197.7 million at June 30, 2002, when compared to $218.7 million at
December 31, 2001. Time deposits (including time, $100,000 and over and other
time) increased $30.3 million (includes increase of $35.0 million in time
deposits over $100,000), or 9.3%, to $355.7 million at June 30, 2002, when
compared to $325.4 million at December 31, 2001. Brokered CD's totaled $96.9
million at June 30, 2002 compared to $47.6 million at December 31, 2001. Time
deposits greater than $100,000 and brokered time deposits were priced within the
framework of the Company's rate structure and did not materially increase the
average rates on deposit liabilities. Increased competition for consumer
deposits and customer awareness of interest rates continues to limit the
Company's core deposit growth in these types of deposits. Typically, overall
deposits for the first six months tend to decline slightly as a result of the
seasonality of the Company's customer base as customers draw down deposits
during the early first half of the year in anticipation of the summer tourist
season. As a result of the Company's expansion into new markets in recent years,
this effect has been reduced as additional branch facilities in less seasonal
locations have provided deposit growth and seasonal stability.
Emphasis has been, and will continue to be, placed on generating additional core
deposits in 2002 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. The Company also may increase brokered
time deposits during the remainder of the year 2002 as an additional source of
funds to provide for loan growth.
Short Term Borrowings and Other Borrowings
Short-term borrowings at June 30, 2002 consist of federal funds purchased,
securities under agreements to repurchase, and advances from the Federal Home
Loan Bank ("FHLB"). Total short-term borrowings at June 30, 2002 increased $17.2
million to $20.0 million from $2.8 million at December 31, 2001. Customer
repurchase agreements were approximately the same at June 30, 2002 and December
31, 2001 totaling $2.7 million and $2.8 million, respectively. FHLB advances
increased from $0 at December 31, 2001 to $3.8 million at June 30, 2002. Federal
funds purchased increased from $0 at December 31, 2001 to $13.5 million at June
30, 2002 accounting for the balance of the increase in the balance of short-term
borrowings. These have increased as a result of loan growth and a decline in
deposits for the first half of the year.
Other borrowings consist of term loans with FHLB. These borrowings totaled $75
million at June 30, 2002 compared to $90 million at December 31, 2001.
Typically, short-term borrowings and other borrowings increase in order to fund
growth in the loan portfolio. Although total borrowings increased 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
32
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 $106,000 at June 30, 2002 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.
In connection with the issuance of Trust Preferred Securities in 2001 (see
"Capital Resources"), the Company issued long-term subordinated debentures to
Baylake Capital Trust I, a Delaware Business Trust subsidiary of the Company.
The aggregate principal amount of the debentures due 2031, to the trust
subsidiary is $16,597,940. For additional details, please make reference to the
Consolidated Financial Statements and the accompanying footnotes on the
Company's Form 10-K for the year 2001.
Liquidity
Liquidity management refers to the ability of the Company 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.
Dividends received from Bank totaled $1.8 million for the first half of 2002 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 $2.7 million in the first half of
2002.
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, 2002, principal payments totaling $42.1 million
were received on investments. These proceeds in addition in other Company cash
were used to purchase $30.8 million in investments for the period. At June 30,
2002, the carrying or book value of investment securities maturing within one
year amounted to $12.8 million or 7.9% of the total investment securities
portfolio. This compares to a 12.3% level for investment securities with one
year or less maturities as of December 31, 2001. Within the investing
33
activities of the statement of cash flows, sales and maturities of investment
securities during the first half of 2002 totaled $42.1 million. At June 30,
2002, the investment portfolio contained $100.3 million of U.S. Treasury and
federal agency backed securities representing 61.9% of the total investment
portfolio. These securities tend to be highly marketable and had a market value
above amortized at June 30, 2002 amounting to $3.7 million.
Deposit growth is typically another source of liquidity for the Bank. As a
financing activity reflected in the June 30, 2002 Consolidated Statements of
Cash Flows, deposits increased and resulted in $18.9 million of cash inflow
during the first half of 2002. The Company's overall deposit base increased 2.8%
for the six months ended June 30, 2002. Deposit growth, especially core
deposits, is the most stable source of liquidity for the Bank.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $185.2 million, or 29.3%, of loans maturing within one year.
Within the classification of short-term borrowings and other borrowings at June
30, 2002, federal funds purchased and securities sold under agreements to
repurchase totaled $16.2 million compared to $2.8 million at the end of 2001.
Federal funds are purchased from various upstream correspondent banks while
securities sold under agreements to repurchase are obtained from a base of
business customers. Borrowings from FHLB, short-term or term, are another source
of funds. They total $78.8 million at June 30, 2002, compared to $90.0 million
at the end of 2001.
The Bank's liquidity resources were sufficient in the first six months of 2002
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 2002, 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 Risk
34
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 ALCO.
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 asset 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
35
analysis" may not necessarily be indicative of the sensitivity of net interest
income in a changing rate environment.
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF June 30, 2002
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 $ 12,179 $ 4,542 $ 2,953 $ 98,172 $ 50,712 $168,558
Loans and leases
Variable rate 297,281 6,354 17,040 27,699 0 348,374
Fixed rate 49,638 22,055 43,512 144,358 6,369 265,932
-------- -------- -------- -------- -------- --------
Total loans and leases $346,919 $ 28,409 $ 60,552 $172,057 $6,369 $614,306
-------- -------- -------- -------- -------- --------
Total earning assets $359,098 $ 32,951 $ 63,505 $270,229 $ 57,081 $782,864
======== ======== ======== ======== ======== ========
Interest bearing liabilities:
NOW Accounts $ 13,220 $ 0 $ 0 $ 39,661 $ 0 $ 52,881
Savings Deposits 156,423 0 0 41,317 0 197,740
Time Deposits 60,452 56,392 69,282 169,560 0 355,686
Borrowed Funds 60,023 0 52 35,054 0 95,129
Trust Preferred Stock 0 0 0 0 16,100 16,100
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities $290,118 $ 56,392 $ 69,334 $285,592 $ 16,100 $717,536
======== ======== ======== ======== ======== ========
Interest sensitivity gap (within periods) $ 68,980 $(23,441) $ (5,829) $(15,363) $ 40,981 $ 65,328
Cumulative interest sensitivity gap $ 68,980 $ 45,539 $ 39,710 $ 24,347 $ 65,328
Ratio of cumulative interest 8.81% 5.82% 5.07% 3.11% 8.34%
Sensitivity gap to rate
Sensitive assets
Ratio of rate sensitive assets 123.78% 58.43% 91.59% 94.62% 354.54%
To rate sensitive
Liabilities
Cumulative ratio of rate 123.78% 113.14% 109.55% 103.47% 109.10%
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 100 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 100 basis point parallel
rate shock. The resulting simulations indicated that net interest income would
increase by approximately 2.4% if rates rose by a 100 basis point shock, and
projected that net interest income would decrease by approximately 8.5% if rates
fell by a 100 basis point shock under these scenarios for the period ended June
30, 2003. This result was within the policy limits established by the Company.
36
The results of the simulations are based solely on immediate and sustained
parallel changes in market rates and do not reflect the earnings sensitivity
that may arise from such factors as the change in spread between key market
rates and the shape of the yield curve. The above results also are considered to
be conservative estimates due to the fact that no management action is factored
into the analysis to deal with potential income variances. Management
continually reviews its interest risk position through the ALCO process.
Management's philosophy is to maintain relatively matched rate sensitive asset
and liability positions within the range described above in order to provide
earnings stability in the event of significant interest rate changes.
Capital Resources
Shareholders' equity at June 30, 2002 increased $3.6 million or 6.0% to $62.7
million, compared with $59.1 million at end of year 2001. This increase includes
a change of $1.3 million to capital in 2002 due to the impact of STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 115. Disregarding the effect of this change,
shareholders' equity would have increased $2.3 million or 3.8% for the period
between June 30, 2002 and December 31, 2001.
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 24% of Company's
Common Stock participate in the plan.
In 2001, the Company completed a Trust Preferred Security offering in the amount
of $16.1 million to enhance regulatory capital and to add liquidity. Under
applicable regulatory guidelines, the Trust Preferred Securities qualify as Tier
1 capital up to a maximum of 25% of Tier 1 capital. As of June 30, 2002, $16.1
million of the Trust Preferred Securities qualify as Tier 1 Capital.
Cash dividends paid for the first half of 2002 were $0.24 per share compared
with $0.22 in the first half of 2001. The Company provided a 9.1% increase in
normal dividends per share in 2002 over 2001 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
2002.
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.
37
Management is confident that because of current capital levels and projected
earnings levels, capital levels are more than adequate to meet the ongoing and
future concerns of the Company.
The Federal Reserve Board has established capital adequacy rules which take into
account risk attributable to balance sheet assets and off-balance sheet
activities. All banks and bank holding companies must meet a minimum total
risk-based capital ratio of 8%. Of the 8% required, at least half must be
comprised of core capital elements defined as Tier 1 capital. The federal
banking agencies also have adopted leverage capital guidelines which banking
organizations must meet. Under these guidelines, the most highly rated banking
organizations must meet a leverage ratio of at least 3% Tier 1 capital to
assets, while lower rated banking organizations must maintain a ratio of at
least 4% to 5%. Failure to meet minimum capital requirements can initiate
certain mandatory -- and possible additional discretionary -- actions by
regulators that, if undertaken, could have a direct material effect on the
consolidated financial statements.
At June 30, 2002 and December 31, 2001, the Company was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the Company's category.
To be "well capitalized" under the regulatory framework, the Tier 1 capital
ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10%
and the leverage ratio must meet or exceed 5%.
The following table presents the Company's and the Bank's capital ratios as of
June 30, 2002 and December 31, 2001:
(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, 2002
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Total Capital (to
Risk Weighted Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 79,063 11.16% 54,182 8.00% 67,727 10.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 75,590 10.66% 54,200 8.00% 67,750 10.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Tier 1 Capital (to
Risk Weighted Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 70,331 9.92% 27,091 4.00% 40,636 6.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 66,858 9.43% 27,100 4.00% 40,650 6.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Tier 1 Capital (to
Average Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 70,331 8.26% 34,067 4.00% N/A N/A
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 66,858 7.85% 34,067 4.00% 42,584 5.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
38
As of December 31, 2001
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Total Capital (to
Risk Weighted Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 76,044 11.34% 53,663 8.00% 67,144 10.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 72,022 10.73% 53,715 8.00% 67,144 10.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Tier 1 Capital (to
Risk Weighted Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 68,052 10.15% 26,831 4.00% 40,286 6.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 64,030 9.54% 26,858 4.00% 40,286 6.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Tier 1 Capital (to
Average Assets)
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Company 68,052 8.24% 33,032 4.00% N/A N/A
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Bank 64,030 7.75% 33,032 4.00% 41,290 5.00%
- -------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Management believes that a strong capital position is necessary to take
advantage of opportunities for profitable expansion of product and market share,
and to provide depositor and investor confidence. The Company's capital level is
strong, but also must be maintained at an appropriate level to provide the
opportunity for an adequate return on the capital employed. Management actively
reviews capital strategies for the Company to ensure that capital levels are
appropriate based on the perceived business risks, further growth opportunities,
industry standards, and regulatory requirements.
Item 3 Quantitative and Qualitative Disclosure about Market Risk.
The Company's financial performance is affected by, among other factors, credit
risk and interest rate risk. The Company does not use derivatives to mitigate
its interest rate risk or credit risk, relying instead on loan review and its
loan loss reserve.
The Company's earnings are derived from the operations of its direct and
indirect subsidiaries with particular reliance on net interest income,
calculated as the difference between interest earned on loans and investments
and the interest expense paid on deposits and other interest bearing
liabilities, including advances from FHLB and other borrowings. Like other
financial institutions, the Company's interest income and interest expense are
affected by general economic conditions and by the policies of regulatory
authorities, including the monetary policies of the Board of Governors of the
Federal Reserve System. Changes in the economic environment may influence, among
other matters, the growth rate of loans and deposits, the quality of the loan
portfolio and loan and deposit pricing. Fluctuations in interest rates are not
predictable or controllable.
As of June 30, 2002, 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, 2001, as described in the
Company's 2001 Form 10-K Annual Report.
Part II - Other Information
39
Item 1. Legal Proceedings
Baylake and its subsidiaries may be involved from time to time in various
routine legal proceedings incidental to its business. Neither Baylake nor any of
its subsidiaries is currently engaged in any legal proceedings that are expected
to have a material adverse effect on the results of operations or financial
position of Baylake.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a). The Company's Annual Meeting of Shareholders was held on June 3, 2002. A
total of 7,471,576 shares of the Company's common stock were outstanding and
entitled to vote as of record date for the Annual Meeting. One matter was
submitted to a vote of the shareholders of the Company at the Annual Meeting.
That matter was the election of three (3) directors of Class II, whose term will
expire in 2005.
(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
- ---------------------------- -------------------------- -------------------------- --------------------------
Robert W. Agnew 6,065,003 189,353 1,217,220
- ---------------------------- -------------------------- -------------------------- --------------------------
George Delveaux 6,064,600 189,756 1,217,220
- ---------------------------- -------------------------- -------------------------- --------------------------
Joseph J. Morgan 6,066,114 188,242 1,217,220
- ---------------------------- -------------------------- -------------------------- --------------------------
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). The following exhibits are furnished herewith:
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
11 Statement re: computation of per share earnings
15 Letter re: unaudited interim financial information
99.1 Certification pursuant to 18 U.S.C. Section 1350
40
(b). Report on Form 8-K:
None
41
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 12, 2002 /s/ Thomas L. Herlache
------------------------------------
Thomas L. Herlache
President (CEO)
Date: August 12, 2002 /s/ Steven D. Jennerjohn
------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
42