UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND 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 (I.R.S. Employer
incorporated or organization) Identification No.)
217 North Fourth Avenue., Sturgeon Bay, WI 54235
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (920)-743-5551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $5 Par Value
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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
As of March 17, 2003, 7,517,276 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $13.50 reported bid
price on that date) held by non-affiliates (excludes a total of 413,572 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $95,900,004.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Definitive Proxy Statement for 2003 Part III
Annual Meeting of Shareholders to be
Filed within 120 days of the fiscal
Year ended December 31, 2002
2002 FORM 10-K
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
----------- --------
PART I
ITEM 1. Business 3
ITEM 2. Properties 8
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a Vote of Security Holders 8
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
ITEM 6. Selected Financial Data 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of
Operations 12
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 41
ITEM 8. Financial Statements and Supplementary Data 41
ITEM 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure 81
PART III
ITEM 10. Directors and Executive Officers of the Registrant 82
ITEM 11. Executive Compensation 82
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 82
ITEM 13. Certain Relationships and Related Transactions 82
PART IV
ITEM 14. Controls and Procedures 83
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 83
Signatures 84
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this report, including the discussion and analysis
of financial condition and results of operations, that are not historical facts
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are intended to be covered by the safe-harbor
provisions for forward-looking statements contained in that Act. For example,
all statements regarding our expected financial position, business and
strategies are forward-looking statements. The words "anticipates," "believes,"
"estimates," "seeks," "expects," "plans," "intends," and similar expressions, as
they relate to Baylake or its management, are intended to identify
forward-looking statements. Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments and
their potential effects upon Baylake or the Bank. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, and
have based these expectations on our beliefs as well as assumptions we have
made, these expectations may prove to be incorrect. Actual results may differ
materially from those included in the forward-looking statements. Important
factors that could cause actual results to differ materially from our
expectations include, without limitation, the failure of a significant number of
borrowers to repay their loans, general changes in economic conditions and
interest rates, as well as restrictions imposed on us by regulations or
regulators of the banking industry. Many of these factors are not within the
control of Baylake or management. Baylake undertakes no obligation to update or
revise any forward-looking information, whether as a result of new information,
future developments or otherwise.
ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Company") is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended. Baylake's primary activities consist of holding
indirectly the stock of Baylake Bank ("Bank"), and providing a wide range of
banking and related business activities, through the Bank and its other
subsidiaries.
Kewaunee County Banc-Shares, Inc.
Kewaunee County Banc-Shares, Inc., ("KCB"), a Wisconsin corporation organized in
1983 and located in Sturgeon Bay, WI, is a registered bank holding company under
the Federal Bank Holding Company Act of 1956, as amended. It is an intermediate
tier holding company owned 100% by Baylake. KCB's only activity is to acquire
and hold all of the outstanding stock of Bank.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. The Bank
conducts its community banking business through 26 full-service financial
centers located throughout Northeast Wisconsin, in Brown, Door, Green Lake,
Kewaunee, Manitowoc, Outagamie, Waupaca, and Waushara Counties. The Bank has
eight financial centers in Door County, which is known for its seasonal and
tourism related services. The balance of the Bank's financial centers are
located in the previously mentioned counties, with the highest concentration,
after Door County, in Brown County, which has six financial centers. Other
principal industries in Bank's market area include light industry and
manufacturing, agriculture, food related products, and to a lesser degree,
lumber and furniture.
The Bank is an independent community bank offering a full range of financial
services primarily to small businesses and individuals located in its market
area. To complement the Bank's traditional banking products, such as demand
deposit accounts, various savings account plans, certificates of deposit and
real estate, consumer, commercial/industrial and agricultural loans, the Bank
offers its customers a variety of services. These services include transfer
agency, personal and corporate trust, insurance agency, brokerage, financial
planning, cash management and electronic banking services.
Bank Subsidiaries
3
In addition to its banking operations, the Bank owns four non-bank subsidiaries:
Baylake Investments, Inc., located in Las Vegas, Nevada, which holds and manages
a portion of the Bank's investment and loan portfolio; Bank of Sturgeon Bay
Building Corporation, which owns the Bank's main office building in Sturgeon
Bay, Wisconsin and nearby conference center facilities and underlying real
property; Cornerstone Financial, Inc., which manages the conference center
facilities; and Baylake Insurance Agency, Inc., which offers various types of
insurance products to the general public as an independent agent. The Bank also
owns a minority interest (49.8% of the outstanding common stock) in United
Financial Services, Inc. ("UFS"), a data processing services company, located in
Grafton, Wisconsin, that provides data processing services to approximately 23
banks (including Bank) and ATM processing services to 50 banks. On January 24,
2002, the Bank formed an additional subsidiary, Arborview LLC ("Arborview") for
purposes of the operation of a community based residential facility, acquired as
a result of loan problems. On February 19, 2002, the Bank formed a second
additional subsidiary, Fish Creek English Inn, LLC ("English Inn") for purposes
of the operation of a restaurant acquired in the course of liquidation of
problem loans. The English Inn was dissolved by the Bank, effective July 1, 2002
after sale of the business. The results of operations of English Inn are not
considered material to the financial statements.
At December 31, 2002, the Company had total assets of $904.7 million. For
additional financial information, see the Consolidated Financial Statements and
Notes beginning at Item 8 of this Form 10-K.
Corporate Governance Matters
Baylake maintains a website at www.baylake.com. The Company began on March 20,
2003 to make available through that website, free of charge, copies of our
Annual Reports, on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to those reports, as soon as reasonably practical after
Baylake electronically files those materials with, or furnishes them to, the
Securities and Exchange Commission ("SEC"). The Company's SEC reports can be
accessed through the Baylake Corp link of our website. The SEC also maintains a
website at www.sec.gov that contains reports, proxy statements and other
information regarding SEC registrants.
Acquisitions
Effective October 1, 1998, Baylake acquired Evergreen Bank, N.A., ("Evergreen")
from M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin ("M&I"). Pursuant to the
stock purchase agreement with M&I, Baylake is only required to pay M&I for the
Evergreen stock it purchased upon certain events set forth in the stock purchase
agreement. Although the payment period set forth in the stock purchase agreement
expired, Baylake has committed to M&I that it will treat the payment terms of
the stock purchase agreement as though they had not expired. As of December 31,
2002, none of the events that would require Baylake to pay any funds to M&I has
occurred. In connection with Baylake's acquisition of Evergreen, Baylake changed
the name of Evergreen, to Baylake Bank, N.A. ("BLBNA"). On March 15, 1999, BLBNA
merged with and into Baylake Bank.
Lending
The Company offers short-term and long-term loans on a secured and unsecured
basis for business and personal purposes. It makes real estate,
commercial/industrial, agricultural and consumer loans, in accordance with the
basic lending policies established by its board of directors. The Company
focuses lending activities on individuals and small businesses in its market
area. Lending has, historically, been exclusively within the State of Wisconsin.
The Company does not conduct any substantial business with foreign obligors. The
markets served by the Company include a wide variety of industries; therefore,
Baylake believes the broad business base of its market area limits its exposure
to the problems in any particular industry group. However, any general weakness
in the economy of Northeastern Wisconsin (as a result, for example, of a decline
in its manufacturing and tourism industries or otherwise) could have a material
adverse effect on the business and operations of Baylake.
The Company's total outstanding loans as of December 31, 2002 amounted to
approximately $664.3 million, consisting of 84.4% residential, commercial,
agricultural and construction real estate loans, 12.0% commercial and industrial
loans, 2.3% installment and 1.3% agricultural loans.
4
Investments
The Company maintains a portfolio of other investments, primarily consisting of
U.S. Treasury securities, U.S. Government Agency securities, mortgage-backed
securities, and obligations of states and their political subdivisions. The
Company attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
The Company offers a broad range of depository products, including non-interest
bearing demand deposits, interest-bearing demand deposits, various savings and
money market accounts and certificates of deposit. Deposits at the Company are
insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") up to statutory limits. At December 31, 2002, the Company's total
deposits amounted to $740.3 million, including interest bearing deposits of
$650.4 million and non-interest bearing deposits of $89.9 million.
Other Customer Services and Products
Other services and products offered by the Company include transfer agency, safe
deposit box services, personal and corporate trust services, conference center
facilities, insurance agency and brokerage services, cash management, financial
planning and electronic banking services, including eBanc, an Internet banking
product for its customers.
Competition
The financial services industry is highly competitive. The Company competes with
other financial institutions and businesses in both attracting and retaining
deposits and making loans in all of its principal markets. The primary factors
in competing for deposits are interest rates, personalized services, the quality
and range of financial services, convenience of office locations and office
hours. Competition for deposit products comes primarily from other commercial
banks, savings banks, credit unions and non-bank competitors, including
insurance companies, money market and mutual funds, and other investment
alternatives. The primary factors in competing for loans are interest rates,
loan origination fees, the quality and range of lending services and
personalized services. Competition for loans comes primarily from other
commercial banks, savings banks, mortgage banking firms, credit unions, finance
companies, leasing companies, and other financial intermediaries. The Company
also faces direct competition from members of bank holding company systems that
have greater assets and resources than those of the Company.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. The system of supervision and regulation applicable to Baylake and the
Bank establishes a comprehensive framework for our respective operations and is
intended primarily for the protection of the FDIC's deposit funds, the
depositors of the Bank and the public, rather than shareholders of the Bank or
Baylake. Any change in government regulation may have a material adverse effect
on the business of Baylake and the Bank.
Baylake Corp. As a bank holding company, Baylake is subject to regulation by the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended, or
BHCA. Under the BHCA, Baylake is subject to examination by the Federal Reserve
Board and is required to file reports of its operations and such additional
information as the Federal Reserve Board may require. Baylake is also subject to
supervision and examination by the Wisconsin Department of Financial
Institutions under Wisconsin law. Under Federal Reserve Board policy, Baylake is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where Baylake might not do so
absent such policy.
Any loans by a bank holding company to a subsidiary bank are subordinate in
right of payment to deposits and to certain
5
other indebtedness of such subsidiary bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
With certain limited exceptions, the BHCA prohibits bank holding companies from
acquiring direct or indirect ownership or control of voting shares or assets of
any company other than a bank, unless the company involved is engaged solely in
one or more activities which the Federal Reserve Board has determined to be so
closely related to banking or managing or controlling banks as to be incidental
to these operations. Under current Federal Reserve Board regulations, these
permissible non-bank activities include such things as mortgage banking,
equipment leasing, securities brokerage, and consumer and commercial finance
company operations. As a result of recent amendments to the BHCA, many of these
acquisitions may be effected by bank holding companies that satisfy certain
statutory criteria concerning management, capitalization, and regulatory
compliance, if written notice is given to the Federal Reserve within 10 business
days after the transaction. In other cases, prior written notice to the Federal
Reserve Board will be required.
The Federal Reserve Board uses capital adequacy guidelines in its examination
and regulation of bank holding companies. If capital falls below minimum
guidelines, a bank holding company may, among other things, be denied approval
to acquire or establish banks or non-bank businesses.
Baylake Bank. As a Wisconsin bank, the Bank is subject to supervision and
regulation by the Wisconsin Department of Financial Institutions (the "WDFI"),
the Board of Governors of the Federal Reserve System and the FDIC. Federal law
and regulations, including provisions added by the Federal Deposit Insurance
Corporation Improvement Act of 1991, or FDICIA, and regulations promulgated
thereunder, establish supervisory standards applicable to the lending activities
of the Bank, including internal controls, credit underwriting, loan
documentation and loan-to-value ratios for loans secured by real property.
The Bank is subject to certain federal and state statutory and regulatory
restrictions on any extension of credit to Baylake or its subsidiaries, on
investments in the stock or other securities of Baylake or its subsidiaries, on
the payment of dividends to Baylake, and on the acceptance of the stock or other
securities of Baylake or its subsidiaries as collateral for loans to any person.
Certain limitations and reporting requirements are also placed on extension of
credit by the Bank to its directors and officers, to directors and officers of
us and our subsidiaries, to principal shareholders of us, and to "related
interests" of such directors, officers and principal shareholders. In addition,
such legislation and regulations may affect the terms upon which any person
becoming a director or officer of us or one of our subsidiaries or a principal
shareholder of us may obtain credit from banks with which we maintain a
correspondent relationship.
The FDIC, the Office of Thrift Supervision, the Federal Reserve Board and the
Office of the Comptroller of the Currency have published guidelines implementing
the FDICIA requirement that the federal banking agencies establish operational
and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines establish standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines prescribe the goals to be achieved
in each area, and each institution will be responsible for establishing its own
procedures to achieve those goals. If an institution fails to comply with any of
the standards set forth in the guidelines, the institution's primary federal
bank regulator may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the guidelines states that the agencies
expect to require a compliance plan from an institution whose failure to meet
one or more of the standards is of such severity that it could threaten the safe
and sound operation of the institution. Failure to submit an acceptable
compliance plan, or failure to adhere to a compliance plan that has been
accepted by the appropriate regulator, would constitute grounds for further
enforcement action.
The Bank's business includes making a variety of types of loans to individuals.
In making these loans, the Bank is subject to state usury and regulatory laws
and to various federal statutes, such as the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement
Procedures Act and the Home Mortgage Disclosure Act, and the regulations
promulgated thereunder, which prohibit discrimination, specify disclosures to be
made to borrowers regarding credit and settlement costs and regulate the
mortgage loan servicing activities of the Bank, including the maintenance and
operation of escrow accounts and the transfer of mortgage loan servicing. The
Riegle Act imposed
6
new escrow requirements on depository and non-depository mortgage lenders and
services under the National Flood Insurance Program. In receiving deposits, the
Bank is subject to extensive regulation under state and federal law and
regulations, including the Truth in Savings Act, the Expedited Funds
Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and
the Federal Deposit Insurance Act. Violation of these laws could result in the
imposition of significant damages and fines upon the Bank, its directors and
officers.
Under the Community Reinvestment Act, or CRA, and the implementing regulations,
the Bank has a continuing and affirmative obligation to help meet the credit
needs of its local community including low and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. The CRA
requires the board of directors of financial institutions, such as the Bank, to
adopt a CRA statement for each assessment area that, among other things,
describes its efforts to help meet community credit needs and the specific types
of credit that the institution is willing to extend. The Bank's service area is
designated and comprised of the eight counties within the geographic area of
Central and Northeast, Wisconsin. The Bank's board of directors is required to
review the appropriateness of this delineation at least annually.
Financial institution regulation has been the subject of significant legislation
in recent years and may be the subject of further significant legislation in the
future. This regulation substantially affects the business and financial results
of all financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Board of Governors of the Federal Reserve System ("FRB"),
which requires that Baylake's capital to asset ratio meet certain minimum
standards. For a discussion of the Federal Reserve Board's guidelines and the
Company's applicable ratios, see the section entitled "Capital Resources" under
Item 7: "Management's Discussion and Analysis of Financial Condition and Results
of Operation."
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the WDFI be paid out of current earnings or, no more than
once within the immediate preceding two years, out of undivided profits in the
event that there have been insufficient net profits. Any other dividends require
the prior written consent of the WDFI. The Bank is in compliance with all
applicable capital requirements and may pay dividends to Baylake.
Current federal law provides that adequately managed bank holding companies from
any state may acquire banks and bank holding companies located in any other
state, subject to certain conditions. Wisconsin law generally permits
establishment of full service bank branch offices statewide.
Recent Legislation. The Gramm-Leach-Bliley Act, or Gramm-Leach, was signed into
law on November 12, 1999 and authorizes bank holding companies that meet
specified conditions to elect to become "financial holding companies" and
thereby engage in a broader array of financial activities than previously
permitted. Such activities include selling and underwriting insurance (including
annuities), underwriting and dealing in securities, and merchant banking.
Gramm-Leach also authorizes banks to engage through "financial subsidiaries" in
certain of the activities permitted for financial holding companies. In February
2001, the Federal Reserve Bank of Chicago approved our election to become a
financial holding company; however, we have no current plans to pursue expanded
activities under Gramm-Leach.
The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 and directs
publicly traded companies to comply with a variety of expanded disclosure and
internal control requirements, affecting corporate governance and accounting
practices reforms under the direction of the Securities and Exchange Commission.
The Bank was additionally made subject to Sarbanes-Oxley by direction of the
Board of Governors of the Federal Reserve under an interim rule adopted in
September of 2002, providing that the Board will administer and enforce the
sections of the Sarbanes-Oxley Act with respect to registered banks, consistent
with Regulation H of the Board of Governors of the Federal Reserve.
Employees
At December 31, 2002, Baylake and its subsidiaries had 293 full-time equivalent
employees. Baylake considers the relationship with its employees to be good.
7
ITEM 2. PROPERTIES
Baylake does not directly own any real property of any kind. However, the Bank
owns twenty-three branches and leases the Company's main office building in
Sturgeon Bay, Wisconsin from its subsidiary, the Bank of Sturgeon Bay Building
Corporation.
The main office building located in Sturgeon Bay serves as headquarters for
Baylake as well as the main banking office of the Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
(Baylake Insurance Agency) and financial services. The twenty-six branches owned
or leased by the Bank are in good condition and considered adequate for present
and near term requirements. The Bank also owned real property under its
liquidation subsidiary, Arborview, LLC, which was valued for holding purposes at
$1.8 million and which was divested at its full value on February 3, 2003. In
addition, the Bank owns other real property that, when considered in the
aggregate, is not material to its financial position.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
Historically, trading in shares of the Company's Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol: bylk.ob), an electronic interdealer quotation system providing
real-time quotations on eligible securities. Trading in Baylake Common Stock has
been conducted principally by certain brokerage and investment firms with
offices in Door County, Wisconsin that have provided price quotations, and have
assisted individual holders of Baylake Common Stock who wish to purchase or sell
shares. In addition, since May 1993, prices for Baylake Common Stock have
generally been reported regularly in The Milwaukee Journal Sentinel based on
information provided by a local brokerage firm.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are computed
from those obtained from two brokerage firms, and, since May 1993, from bid
prices reported in The Milwaukee Journal Sentinel. The reported high and low
prices represent interdealer bid prices, without retail mark-up, mark-downs or
commission, and may not necessarily represent actual transactions.
8
Cash dividends per
Calendar period High Low share
--------------- ---- --- ------------------
2001 1st Quarter $16.25 $11.00 $0.110
2nd Quarter $15.00 $12.80 $0.110
3rd Quarter $16.25 $13.00 $0.110
4th Quarter $13.75 $12.75 $0.120
2002 1st Quarter $14.00 $12.95 $0.120
2nd Quarter $13.40 $12.75 $0.120
3rd Quarter $13.90 $13.05 $0.120
4th Quarter $13.60 $13.30 $0.130
Baylake had approximately 1,705 shareholders of record at March 17, 2003.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January, and Baylake expects to
continue this practice for the immediate future. The holders of Baylake Common
Stock are entitled to receive such dividends when and as declared by Baylake's
Board of Directors. The ability of Baylake to pay dividends is dependent upon
receipt by Baylake of dividends from the Bank, which is subject to regulatory
restrictions. Such restrictions, which govern state chartered banks, generally
limit the payment of dividends on bank stock to the bank's undivided profits
after all payments of all necessary expenses, provided that the bank's surplus
equals or exceeds its capital, as discussed further in Item 7. "Management
Discussion and Analysis of Financial Condition and Results of Operation-Capital
Resources". In determining the payment of cash dividends, the Board of Directors
of Baylake considers the earnings, capital and debt servicing requirements,
financial ratio guidelines issued by the FRB and other banking regulators,
financial conditions of Baylake and the Bank, and other relevant factors. In
addition, under the terms of Baylake's 10.00% Junior Subordinated Debentures due
2031, Baylake would be precluded from paying dividends on the Common Stock if it
was in default under the Debentures, if it exercised its right to defer payments
of interest on the Debentures, or if certain related defaults occurred. Baylake
maintains a dividend reinvestment plan enabling participating shareholders to
elect to purchase shares of Baylake Common Stock in lieu of receiving cash
dividends. Such shares may be newly issued securities or acquired in the market
and will be purchased on behalf of participating shareholders at their then fair
market value.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
2002 2001 2000 1999 1998
-------- -------- --------- --------- --------
(dollars in thousands, except per share data)
RESULTS OF OPERATIONS:
Interest Income $ 51,564 $ 59,023 $ 56,036 $ 46,467 $ 38,061
Interest Expense 22,188 32,053 32,099 23,280 19,148
-------- -------- --------- --------- --------
Net Interest Income 29,376 26,970 23,937 23,187 18,913
Provision for Loan Losses 5,700 2,880 545 850 1,135
-------- -------- --------- --------- --------
Net interest income after provision for
loan losses 23,676 24,090 23,392 22,337 17,778
Non-interest income:
Gain on sale of loans 1,425 873 240 295 893
Loan servicing fees 1,327 1,461 837 875 846
Trust fees 637 664 517 553 451
Service charges on deposit accounts 2,853 1,836 1,489 1,369 1,074
Securities gains (losses), net 509 0 0 (2) 0
Other 4,002 1,473 1,603 1,466 1,113
-------- -------- --------- --------- --------
Total non-interest income 10,753 6,307 4,686 4,556 4,377
Non-interest expense
Salaries and employee benefits 13,743 11,923 10,353 9,700 7,772
9
Occupancy expense, net 3,585 3,235 3,047 2,668 2,192
Data processing 1,040 986 932 872 699
Other non-interest expense 4,560 4,379 4,280 4,247 3,213
Operation of other real estate 203 248 (22) (117) 15
-------- -------- --------- --------- --------
Total non-interest expense 23,131 20,771 18,590 17,370 13,891
-------- -------- --------- --------- --------
Income before income tax 11,298 9,626 9,488 9,523 8,264
Income tax provision 2,575 2,091 2,778 2,600 2.247
-------- -------- --------- --------- --------
Net income $ 8,723 $ 7,535 $ 6,710 $ 6,923 $ 6,017
PER SHARE DATA: (1)
Net income per share (basic) $ 1.17 $ 1.01 $ 0.90 $ 0.94 $ 0.82
Net income per share (diluted) 1.15 0.99 0.87 0.90 0.80
Cash dividends per common share 0.49 0.45 0.41 0.37 0.47
Book value per share 8.74 7.91 7.14 6.21 6.17
SELECTED FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total assets $904,656 $845,713 $ 772,268 $ 646,310 $607,438
Investment securities (2) 151,366 167,100 153,511 145,080 128,046
Total loans 665,887 607,715 555,831 447,767 408,921
Total deposits 740,324 669,812 554,005 504,074 495,284
Short-term borrowings (3) 10,056 2,837 79,538 9,231 3,758
Other borrowings (4) 65,000 90,000 77,700 80,000 53,000
Notes payable and subordinated debt 106 158 211 264 392
Trust preferred securities 16,100 16,100 0 0 0
Total shareholders' equity 65,400 59,130 53,127 46,210 45,272
PERFORMANCE RATIOS:
Return on average assets 1.00% 0.93% 0.95% 1.12% 1.21%
Return on average total shareholders'
equity 13.82% 13.37% 13.76% 15.07% 13.87%
Net interest margin (5) 3.87% 3.79% 3.88% 4.35% 4.42%
Net interest spread (5) 3.61% 3.34% 3.37% 3.89% 3.85%
Non-interest income to average assets 1.23% 0.78% 0.66% 0.74% 0.88%
Non-interest expense to average assets 2.65% 2.57% 2.63% 2.82% 2.79%
Net overhead ratio (6) 1.42% 1.79% 1.97% 2.08% 1.91%
Average loan-to-average deposit ratio 91.80% 95.76% 96.71% 85.54% 86.28%
Average interest-earning assets to
average interest-bearing liabilities 109.55% 110.36% 110.78% 111.14% 113.63%
ASSET QUALITY RATIOS: (7)(8)
Non-performing loans to total loans 3.32% 2.42% 2.34% 2.80% 3.45%
Allowance for loan losses to:
Total loans 1.71% 1.32% 1.26% 1.70% 2.71%
Non-performing loans 51.66% 54.47% 53.94% 60.67% 78.33%
Net charge-offs to average loans 0.36% 0.32% 0.23% 0.80% 0.14%
Non-performing assets to total assets 2.76% 1.93% 1.80% 1.95% 2.41%
CAPITAL RATIOS: (9)
Shareholders' equity to assets 7.23% 6.99% 6.88% 7.15% 7.45%
Tier 1 risk-based capital 9.74% 10.15% 7.77% 8.81% 7.97%
Total risk-based capital 10.99% 11.34% 8.92% 10.07% 9.22%
Leverage ratio 8.24% 8.24% 6.38% 6.79% 6.02%
RATIO OF EARNINGS TO FIXED CHARGES: (10)
Including deposit interest 1.51x 1.30x 1.30x 1.41x 1.43x
Excluding deposit interest 3.33x 2.27x 2.11x 3.55x 3.44x
10
(1) Earnings and dividends per share are based on the weighted average number
of shares outstanding for the period. All per share data has been adjusted
to reflect (a) a 2 for 1 stock dividend paid on November 15, 1999 and (b)
a 3 for 2 stock dividend paid on May 15, 1998.
(2) Includes securities classified as held-to-maturity and available for sale.
(3) Consists of Federal Home Loan Bank advances, federal funds purchased and
collateralized borrowings.
(4) Consists of Federal Home Loan Bank term notes and Company borrowings from
unaffiliated correspondent bank.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets, and net interest rate spread represents
the difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(6) Net overhead ratio represents the difference between noninterest expense
and noninterest income, divided by average assets.
(7) Non-performing loans consist of non-accrual loans, guaranteed loans 90
days or more past due but still accruing interest and restructured loans.
(8) The increases in non-performing loans culminating with the period ended
December 31, 1998 were due, in part, to various troubled loans acquired as
a result of the acquisition of Evergreen. For additional information, see
in Item 7. "Management's Discussion and Analysis of Financial Condition
and Result of Operations-Non-performing Loans, Potential Problem Loans and
Other Real Estate."
(9) The capital ratios are presented on a consolidated basis. For information
on Baylake and the Bank's regulatory capital requirements, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations-Capital Resources" and Item 1. "Business-Regulation and
Supervision".
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
11
ITEM 7. 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 the Baylake Corp.
("Baylake" or the "Company"), which may not be otherwise apparent from the
consolidated financial statements included in this report at Item 8. This
discussion and analysis should be read in conjunction with those financial
statements, related notes, the selected financial data and the statistical
information presented elsewhere in this report for a more complete understanding
of the following discussion and analysis.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. and changed its
name to Baylake Bank, N.A. ("BLBNA"). The acquisition was accounted for using
the purchase method of accounting. See the discussion of this transaction under
Item 1. "Business" and Note 20 of Notes to Consolidated Financial Statements for
additional details on this transaction.
Results of Operations
Earnings Summary
Net income in 2002 was $8.7 million, a 15.8% increase from the $7.5 million
earned in 2001. Net income for 2001 showed a 12.3% increase over the 2000
earnings. Basic operating earnings per share increased $0.16 to $1.17 per share
in 2002 compared with $1.01 in 2001, an increase of 15.8%. Basic operating
earnings per share in 2001 showed a 12.2% increase from 2000 results of $0.90
per share. On a diluted earnings per share basis, the Company recorded $1.15 per
share in 2002, compared to $0.99 and $0.87 per share in 2001 and 2000,
respectively.
Net income for 2001 and 2000 includes amortization expense of $327,000 of
goodwill related to the purchase of Four Seasons (holding company of financial
institution named "The Bank", acquired by the Company on July 1, 1996) and
$159,000 related to the acquisition of BLBNA. This expense reduced after-tax net
income in 2001 and 2000 by $486,000 or earnings per share by $0.07.
Although affected by a declining interest rate environment and increased
competition in 2002, net interest income improved. Net interest income for 2002
improved $2.4 million or 8.9% over 2001 levels. Net interest income for 2001
improved $3.0 million or 12.7% over 2000 levels.
Non-interest income during 2002 increased $4.4 million or 70.5% when compared to
2001. The primary factors increasing non-interest income were an increase in
gains on sales of loans, net securities gains, an increase in fees for other
services to customers and increased other income offset by to a lesser degree by
a decrease in fiduciary fees and a decrease in loan servicing fee income.
Non-interest expense increased $2.4 million during 2002, or 11.4% over 2001
levels. Factors contributing to the increase were increased personnel expenses,
occupancy expense, data processing expense, and other operating expense.
For 2002, return on average assets increased to 1.00% compared with 0.93% in
2001 and 0.95% in 2000. This ratio increased as a result of the various factors
discussed above combined with an average asset growth rate of 8.0% in 2002.
Return on average stockholders' equity in 2002 showed an increase to 13.8%
compared to 13.4% in 2001 and 13.8% in 2000. The increase in 2002 compared to
2001 occurred as a result of a higher level of net income and the factors
described above offset to a lesser degree by a higher level of average capital.
Cash dividends declared in 2002 increased 8.9% to $0.49 per share compared with
$0.45 in 2001. This compares to an increase of 9.8% in dividends declared in
2001 as compared to 2000.
12
The major components of net income and changes in these components are
summarized in Table 1 for years ended December 31, 2002, 2001 and 2000 and are
discussed in more detail on the following pages.
TABLE 1: NET INCOME COMPONENTS
Years ended December 31,
2001 to 2002 2000 to 2001
2002 2001 increase 2000 increase
(dollars in thousands)
Net interest Income $29,376 $26,970 8.9% $23,937 12.7%
Provision for Loan losses $ 5,700 $ 2,880 97.9% $ 545 428.4%
Noninterest Income $10,753 $ 6,307 70.5% $ 4,686 34.6%
Noninterest Expense $23,131 $20,771 11.4% $18,590 11.7%
Income before Income taxes $11,298 $ 9,626 17.4% $ 9,488 1.5%
Income tax Expense $ 2,575 $ 2,091 23.1% $ 2,778 (24.7%)
Net income $ 8,723 $ 7,535 15.8% $ 6,710 12.3%
Net Interest Income
Net interest income (on a tax equivalent basis) is the Company's principal
source of revenue accounting for 74.1% of total income in 2002, as compared to
81.8% in 2001 and 84.3% in 2000. Net interest income represents the difference
between interest earned on loans, investments and other interest earning assets
offset by the interest expense attributable to funding sources, principally
deposits and borrowings. Interest rate 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 interest income earned. Tax-exempt interest income is adjusted to a level
that reflects such income as if it were fully taxable.
Net interest income in the consolidated statements of income (which excludes the
taxable equivalent adjustment on tax exempt assets) was $29.4 million, compared
to $27.0 million in 2001 and $23.9 million in 2000. The taxable equivalent
adjustments (the adjustments to bring tax-exempt interest to a level that would
yield the same after-tax income had that income been subject to taxation, using
a 34% tax rate) of $1.4 million for 2002 and $1.3 million for 2001 and 2000,
resulted in fully taxable equivalent ("FTE") net interest income of $30.8
million, $28.3 million and $25.2 million, respectively. Net interest income on a
tax-equivalent basis reached $30.8 million in 2002, an increase of 8.7% from
$28.3 million in 2001. Net interest income on a tax-equivalent basis was $25.2
million in 2000. The improvement in 2002 net interest income of $2.5 million was
due in spite of a decrease in the volume of net average earning assets of
$849,000. Average-earning assets increased 6.3% offset by an increase of 7.1% in
average interest-bearing liabilities. The benefit from an increase in earning
assets, non-interest bearing deposits and a decrease in the cost on interest
paying liabilities were offset, in part, by an increase in interest-bearing
liabilities and a decrease in the yield on interest earning assets. As a result,
interest income decreased 12.2% while interest expense for 2002 decreased 30.8%.
Interest rate spread and net interest margin are terms utilized to measure and
explain changes in net interest income. Interest rate spread is the difference
between the yield on earning assets ("EAs") and the rate paid on
interest-bearing liabilities (IBLs") that fund those assets. The net interest
margin is expressed as the percentage of tax-equivalent net interest income as a
percentage of average EAs. The net interest margin exceeds the interest rate
13
spread because of the use of non-interest bearing sources of funds (net free
funds), principally composed of demand deposits and stockholders' equity, to
fund a portion of EAs. To compare tax-exempt asset yields to taxable yields, the
yield on tax-exempt loans and securities is computed on an FTE basis. As a
result, the level of funds available without interest cost is an important
factor affecting the ability to increase net interest margin.
Table 2 provides average balances of EAs and IBLs, the associated income and
expense, and the corresponding interest rates earned and paid, as well as net
interest income, interest rate spread, and net interest margin on an FTE basis
for the three years ended December 31, 2002. Tables 3 through 4 present
additional information for the discussion of FTE net interest income, interest
rate spread, and net interest margin.
As indicated in Tables 2 and 3, increases in volume and changes in the mix of
both EAs and IBLs added $1.4 million to FTE net interest income, while changes
in the rates resulted in a $1.0 million increase, for a net increase of $2.4
million.
Average loans outstanding grew from $588.0 million in 2001 to $635.4 million in
2002, an increase of 8.1%. The increase in loan volume was a significant
contributing factor to the increase in net interest income. Average loans
outstanding increased from $505.9 million in 2000 to $588.0 million in 2001, an
increase of 16.2%. The mix of average loans to average total assets increased
from 71.6% in 2000 to 72.7% in 2001 and to 72.8% in 2002. The relationship of a
higher volume of loans as a percentage of the asset mix has provided a source of
higher yielding assets, which has contributed to an increase in net interest
income.
The year 2002 saw an increase of the interest rate spread for the Company in
spite of a lower interest rate environment. The interest rate spread increased
27 basis points in 2002 to 3.61% from 3.34% in 2001, as the average yield on
earning assets decreased 142 basis points while the average rate paid on
interest-bearing liabilities decreased 167 basis points over the same period. In
contrast, interest rate spread decreased 3 basis points in 2001 compared to 2000
results. The decrease in the Company's earning assets yield reflects a
decreasing rate environment impacting rates on the variable priced loans and
repricing fixed rate loans (for competitive reasons) for the year 2002.
Increased investment interest income, which resulted from an increased
investment portfolio, offset by lower yields on the investment portfolio, have
contributed to some of the decrease in the yields on interest earning assets. A
decreased rate environment also affected the funding side of the balance sheet.
Yields on interest-paying liabilities decreased 167 basis points. Decreased
interest costs resulted from a lower rate environment offset to a lesser extent
by increased competition for retail deposits; increased balances in indexed
accounts and additional reliance on wholesale funding. Yields on interest
bearing deposits decreased 166 basis points from 4.47% in 2001 to 2.81% in 2002.
Average short-term borrowings decreased $643,000 as deposit growth from core and
non-core funding exceeded loan demand, decreasing reliance on other short-term
wholesale funding sources. Short-term borrowings consist of federal funds
purchased and overnight borrowings from the Federal Home Loan Bank ("FHLB") of
Chicago. These funding sources decreased the percentage of average short-term
borrowings as a percentage of average interest-bearing liabilities to 2.6% in
2002 compared to 2.9% in 2001. Yields on these borrowings decreased 340 basis
points in 2002 compared to 2001 contributing to an overall decrease in the
yields paid on interest-bearing liabilities.
Additional sources of funds consisted of other borrowings. Other borrowings
consist of term loans with the FHLB and other term loans taken out by the
Company during the year 2002. Other borrowings on average decreased $22.1
million to $72.5 million. As a percentage of interest-bearing liabilities, other
borrowings decreased to 10.0% from 14.0% in 2001. Yields on these borrowings
decreased 141 basis points to 3.85% from 5.26% in 2001.
An additional source of funds generated in 2001 were proceeds from the trust
preferred securities offering. These resulted in an average of $16.1 million in
funds for 2002 (compared to an average of $14.0 million in 2001, based on the
fact that the $16.1 million in trust preferred securities were issued in
February 2001) at a cost of 10.2%.
The net interest margin for 2002 was 3.87% compared to 3.79% in 2001. The
increase in net interest margin was in part related to a decline in the free
funds ratio, an increase in the interest rate spread offset by an increase in
non-accrual loans. The impact from competition as it relates to the commercial
loan portfolio and costs related to new product offerings had a negative effect
on the change in net interest margin. A declining interest rate environment
14
further impacted the net interest margin for the year 2002. The free funds
ratio, or the level of non-interest bearing funds that support earning assets,
improved to 18.5% from 17.5% in 2001.
The net interest margin for 2001 was 3.79% compared to 3.88% in 2000 as interest
rate spread declined during that period. The decrease in 2001 during a declining
interest rate environment occurred primarily as the result of an increase in
non-accrual loans, a decline in the free funds ratio and a 3 basis point
decrease in the interest rate spread. Increased competition, especially as it
relates to the commercial loan portfolio, negatively affected net interest
margin.
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 91.1% in 2002 compared with 92.5% in 2001 and 92.1% in
2000. The ratio decreased in 2002 as a result of an increase in non-accrual
loans.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Company
constantly seeks to attract lower cost core deposits, service the needs of
customers, and provide attractively priced products. Competition for high
quality assets will also affect asset yields.
Growth in net interest income primarily is the result of growth in the level of
earning asset volumes and changes in asset mix. Interest rate spread management
through asset and liability pricing and increased levels of non-interest-bearing
sources of funds also aid in improving net interest income. Management will
continue its focus on maintaining an appropriate mix of quality earning assets
as well as seeking to achieve appropriate growth in volumes.
Changes in the levels of market interest rates also affect net income, but are
less directly under the control of the Company. Although a stable rate
environment has been experienced, management believes that a gradual increase in
interest rates will not adversely affect the earning capacity of the Company.
Past experience has shown that, although the Company remains in a short-term
negative interest rate sensitivity gap, deposits tend not to be repriced as
quickly as loans in a rising rate scenario and are repriced more frequently in a
falling interest rate environment. More discussion on this subject is referenced
in the section titled "Interest Rate Risk"below.
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INTEREST AND RATES ON A
TAX-EQUIVALENT BASIS)
Year ended December 31,
-----------------------
2002 2001 2000
--------- --------- --------- --------- ------- --------- --------- --------- ---------
Average Interest Average Average Interest Average Average Interest Average
Balance Rate Balance Rate Balance Rate
--------- --------- --------- --------- -------- --------- --------- --------- ---------
(dollars in thousands)
ASSETS:
Earning Assets
Loans (1)(2)(3) $ 635,368 $ 587,995 $ 505,892
Less: non-accruals (15,665) (10,613) (8,396)
========= ========= =========
U.S. Treasuries 1,235 77 6.23% 1,229 78 6.35% 1,164 79 6.79%
Agencies 97,684 5,239 5.36% 99,972 6,202 6.20% 94,882 6,127 6.46%
State and Municipal
obligations (1) 57,701 4,163 7.21% 53,158 4,051 7.62% 49,363 3,912 7.92%
Other Securities 7,671 510 6.65% 7,671 483 6.30% 6,457 467 7.23%
Federal funds sold 1,132 19 1.68% 5,347 174 3.25% 14 1 7.14%
Other money market
instruments 10,043 149 1.48% 2,963 78 2.63% 1,188 69 5.81%
--------- --------- --------- --------- ------- --------- --------- --------- ---------
Total earning assets $ 795,169 $ 52,983 6.66% $ 747,722 $60,379 8.08% $ 650,564 $ 57,340 8.81%
========= ========= ========= ======= ========= =========
15
Allowance for loan
losses (8,383) (7,349) (7,999)
Non-accrual loans 15,665 10,613 8,396
Cash and due from
banks 18,447 16,288 14,937
Other assets 52,176 41,162 40,548
========= ========= =========
Total assets $ 873,074 $ 808,436 $ 706,446
========= ========= =========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest bearing
liabilities
NOW accounts $ 53,170 $ 526 0.99% $ 44,015 $ 514 1.17% $ 44,965 $ 837 1.86%
Savings accounts 201,344 3,038 1.51% 197,993 6,940 3.51% 164,858 7,890 4.79%
Time deposits 361,555 13,771 3.81% 305,012 17,001 5.57% 252,086 14,855 5.89%
========= ========= ==== ========= ======= ==== ========= ========= ====
Total interest-bearing
deposits 616,069 17,335 2.81% 547,020 24,455 4.47% 461,909 23,582 5.11%
Short-term borrowings 18,708 375 2.00% 19,351 1,084 5.60% 41,798 2,847 6.81%
Securities sold under
agreement to
repurchase 2,332 38 1.63% 2,403 94 3.91% 2,213 123 5.56%
Other borrowings 72,534 2,790 3.85% 94,589 4,975 5.26% 83,629 5,529 6.61%
Trust preferred 16,100 1,645 10.22% 14,031 1,430 10.19%
Long term debt 106 5 4.72% 159 15 9.43% 211 18 8.53%
========= ========= ==== ========= ======= ==== ========= ========= ====
Total interest-bearing
liabilities $ 725,849 $ 22,188 3.06% $ 677,553 $32,053 4.73% $ 589,760 $ 32,099 5.44%
Demand deposits 76,030 67,012 61,214
Accrued expenses and
other liabilities 8,069 7,519 6,718
Stockholders' equity 63,126 56,352 48,754
========= ========= =========
Total liabilities and
stockholders' equity $ 873,074 $ 808,436 $ 706,446
========= ========= =========
Net interest income
and rate spread $ 30,795 3.61% $28,326 3.34% $ 25,241 3.37%
Net interest margin 3.87% 3.79% 3.88%
(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) Nonaccrual loans and loans held for sale have been included in the average
balances.
(3) Interest income includes net loan fees.
TABLE 3: RATE/VOLUME ANALYSIS (1)
2002 compared to 2001 2001 compared to 2000
Increase (Decrease) due to Increase (Decrease) due to
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(dollars in thousands)
Interest income:
Loans (2) $ 3,270 $ (9,757) $(6,487) $ 7,160 $(4,532) $ 2,628
U.S. treasuries 1 (2) (1) 1 (2) (1)
Agencies (251) (712) (963) 81 (6) 75
State and
municipal obligations (2) 264 (152) 112 142 (3) 139
16
Other securities 86 (59) 27 82 (66) 16
Federal funds sold (104) (51) (155) 277 (104) 173
Other money market
instruments 146 (75) 71 75 (66) 9
------- -------- ------- ------- ------- -------
Total earning assets $ 3,411 $(10,807) $(7,396) $ 7,817 $(4,778) $ 3,039
======= ======== ======= ======= ======= =======
Interest expense:
NOW accounts $ 99 $ (87) $ 12 $ (14) $ (309) $ (323)
Savings accounts 84 (3,986) (3,902) 1,374 (2,324) (950)
Time deposits 2,653 (5,883) (3,230) 3,034 (888) 2,146
Short term borrowings (24) (685) (709) (1,393) (370) (1,763)
Securities sold under
agreement to repurchase (2) (54) (56) 9 (38) (29)
Other borrowings (1,004) (1,181) (2,185) 651 (1,205) (554)
Trust preferred 211 4 215 715 715 1,430
Long term debt (4) (6) (10) (5) 2 (3)
======= ======== ======= ======= ======= =======
Total interest-bearing
liabilities $ 2,012 $(11,877) $(9,865) $ 4,370 $(4,416) $ (46)
Net interest income $ 1,399 $ 1,070 $ 2,469 $ 3,447 $ (362) $ 3,085
======= ======== ======= ======= ======= =======
(1) The change in interest due to both rate and volume has been allocated
proportional to the relationship to the dollar amounts of the change in
each.
(2) The yield on tax-exempt loans and securities is computed on an FTE basis
using a tax rate of 34% for all periods presented.
17
TABLE 4: SELECTED AVERAGE BALANCES
Percent 2002 as % of 2001 as % of
2002 2001 Change Total Assets Total Assets
---- ---- ------ ------------ ------------
(dollars in thousands)
ASSETS
Loans, net of
non-accrual loans $619,703 $577,382 7.3% 71.0% 71.4%
Investment securities
Taxable 107,290 108,872 (1.5%) 12.3 13.5
Tax-exempt 57,001 53,158 7.2% 6.5 6.6
Short-term investments 11,175 8,310 34.5% 1.3 1.0
-------- -------- --- ----- -----
Total earning assets 795,169 747,722 6.3% 91.1 92.5
Other assets 77,905 60,714 28.3% 8.9 7.5
-------- -------- --- ----- -----
Total assets $873,074 $808,436 8.0% 100.0% 100.0%
======== ======== === ===== =====
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits $616,069 $547,020 12.6% 70.6% 67.7%
Short-term borrowings 93,574 116,343 (19.6%) 10.7 14.4
Trust preferred 16,100 14,031 14.7% 1.9 1.7
Long-term debt 106 159 (33.3%) 0.0 0.0
-------- -------- --- ----- -----
Total interest-bearing
Liabilities 725,849 677,553 7.1% 83.2 83.8
Demand deposits 76,030 67,012 13.5% 8.7 8.3
Accrued expenses 8,069 7,519 7.3% 0.9 0.9
Stockholders' equity 63,126 56,352 12.0% 7.2 7.0
-------- -------- --- ----- -----
Total liabilities and
Stockholders'equity $873,074 $808,436 8.0% 100.0% 100.0%
======== ======== === ===== =====
TABLE 5: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
For the years
-------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
ASSETS
Cash and due from banks $ 18,990 $ 16,896 $ 15,142 $ 15,978 $ 11,917
Investment securities
U.S. Treasuries 1,183 1,173 1,164 1,156 2,102
Agencies 93,831 98,040 96,757 89,863 67,824
State and municipal obligations 55,544 52,082 50,263 50,954 44,614
Other securities 18,612 10,026 7,440 5,019 5,629
Market adjustment on AFS securities 4,621 3,064 (2,775) 386 2,298
--------- --------- --------- --------- ---------
Total investments $ 173,791 $ 164,385 $ 152,849 $ 147,378 $ 122,467
========= ========= ========= ========= =========
Federal funds sold 1,132 5,347 14 5,361 6,657
Loans, net of unearned income 635,368 587,995 505,892 421,541 333,484
18
Reserve for loan losses (8,383) (7,349) (7,999) (8,924) (5,833)
--------- --------- --------- --------- ---------
Net loans 626,985 580,646 497,893 412,617 327,651
Bank premises and equipment 21,769 21,033 20,128 16,795 14,434
Other real estate owned 990 1,501 562 287 93
Other assets 29,417 18,628 19,858 18,423 14,139
--------- --------- --------- --------- ---------
Total assets $ 873,074 $ 808,436 $ 706,446 $ 616,839 $ 497,358
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Demand deposits $ 76,030 $ 67,012 $ 61,214 $ 56,755 $ 46,586
NOW accounts 53,170 44,015 44,965 47,313 41,734
Savings deposits 201,344 197,993 164,858 141,972 109,778
Time deposits 361,555 305,012 252,086 246,782 188,412
--------- --------- --------- --------- ---------
Total deposits $ 692,099 $ 614,032 $ 523,123 $ 492,822 $ 386,510
Short term borrowings $ 18,708 $ 19,351 $ 41,798 $ 10,812 $ 15,106
Securities sold under agreement to repurchase 2,332 2,403 2,213 3,657 3,637
Other borrowings 72,534 94,589 83,629 56,466 42,099
Long term debt 106 159 211 265 387
Trust preferred securities 16,100 14,031 -- -- --
Other liabilities 8,069 7,519 6,718 6,882 6,247
--------- --------- --------- --------- ---------
Total liabilities $ 809,948 $ 752,084 $ 657,692 $ 570,904 $ 453,986
Common stock $ 37,486 $ 37,456 $ 37,333 $ 20,996 $ 18,475
Additional paid in capital 7,328 7,625 7,125 6,560 8,718
Retained earnings 15,950 9,902 7,234 18,743 15,305
Net unrealized gains (losses) on AFS securities 2,987 1,994 (2,313) 261 1,496
Treasury stock (625) (625) (625) (625) (622)
========= ========= ========= ========= =========
Total equity $ 63,126 $ 56,352 $ 48,754 $ 45,935 $ 43,372
========= ========= ========= ========= =========
Total liabilities and stockholders' equity $ 873,074 $ 808,436 $ 706,446 $ 616,839 $ 497,358
========= ========= ========= ========= =========
Provision for Loan Losses
The provision for loan losses ("PFLL") is the periodic cost, not less than
quarterly, of providing an allowance for anticipated future loan losses. In any
accounting period, the PFLL is based on a function of the methodology used and
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 evaluation of loan quality, general economic factors
and collateral values.
The PFLL in 2002 at $5.7 million compares to a PFLL of $2.9 million for 2001 and
$545,000 for 2000. Net charge-offs in 2002 were $2.3 million compared with net
charge-offs of $1.9 million in 2001 and $1.2 million in 2000. Net charge-offs as
a percentage of average loans is a key measure of asset quality. Net charge-offs
to average loans
19
were 0.36% in 2002 compared with 0.32% in 2001 and 0.23% in 2000. Management
believes that the current 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 Loan Losses" below.
Non-Interest Income
Total non-interest income for 2002, excluding securities transactions, was $10.8
million, a $4.4 million increase from 2001, or 70.5%. In 2001, total
non-interest income was $1.6 million more than 2000, a 34.6% increase. Trust
service fees, loan servicing fees, gains from sales of loans and service charges
continue to be the primary components of non-interest income as evidenced in
Table 6.
TABLE 6: NONINTEREST INCOME
Years ended December 31, % Change from prior year
------------------------ ------------------------
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
(dollars in thousands)
Trust service fees $ 637 $ 664 $ 517 (4.1%) 28.4%
Loan servicing income $ 1,327 $1,461 $ 837 (9.2%) 74.6%
Service charges on
Deposit accounts $ 2,853 $1,836 $1,489 55.4% 23.3%
Other fee income $ 720 $ 608 $ 564 18.4% 7.8%
Financial service income $ 575 $ 300 $ 459 91.7% (34.6%)
Bank owned life ins $ 332 $ 0 $ 0 NM NM
Death benefit in excess
Of cash surrender value $ 754 $ 0 $ 0 NM NM
Gains from sale of loans $ 1,425 $ 873 $ 240 63.2% 263.8%
Securities gains $ 509 $ 0 $ 0 NM NM
Other $ 1,621 $ 565 $ 580 186.9% (2.6%)
------- ------ ------ ---- ----
Total noninterest income $10,753 $6,307 $4,686 70.5% 34.6%
======= ====== ====== ==== ====
Trust fees decreased $27,000 or 4.1% to $637,000 in 2002 compared to 2001,
primarily as a result of lower market values on various trust accounts for which
fees are assessed. This compared to an increase of $147,000 or 28.4% in 2001
compared to 2000, primarily as a result of an increase in trust estate business
and by an increase in additional assets under management.
Loan servicing fees decreased $134,000, or 9.2%, to $1.3 million in 2002. This
followed an increase of $624,000, or 74.6%, to $1.5 million in 2001. The
decrease in 2002 resulted from a decrease in commercial loan servicing income.
The increase in 2001 occurred as a result of increased servicing income due to
an increase in the portfolio of mortgage loan business sold in the secondary
market and an increase in the commercial loan business sold in the secondary
market and serviced by the Company, primarily the result of a falling interest
rate environment in 2001 compared to 2000.
Service charges on deposit accounts showed an increase of $1.0 million, or
55.4%, over 2001 results accounting for the improvement in fee income generated
for other services provided to customers. A lower rate environment reduced
earnings credits on transaction accounts providing for additional fee income. In
addition, changes were made earlier in the year addressing changes in several
pricing policies and procedures which along with better collection processes
provided additional fee income to the bottom line.
Financial services income increased $275,000, or 91.7%, to $575,000 in 2002 as
compared to 2001 as a result of additional annuity sales and improved staff
expertise.
20
As a result of a purchase of $13 million in business owned life insurance
("BOLI") made during the year, income made during 2002 amounted to $332,000.
Death benefits were recognized in excess of cash surrender value in the amount
of $754,000. Life insurance is held on various directors as a funding vehicle
for several deferred compensation agreements the Company has with them.
Gains on sales on loans in the secondary market increased $552,000, or 63.2%, to
$1.4 million in 2002 primarily as a result of increased gains from sales of
mortgage loans. Premiums increased in the secondary market for mortgage loans
contributing to an increase in $527,000 in gains from the sale of mortgage
loans. In addition, gains from commercial loans increased $25,000 in 2002. An
increase in mortgage loan business sold during 2002 amounted to $104.8 million
of loans sold compared to $78.7 million of mortgage loans sold in 2001. Total
loans sold during 2002 were $108.6 million compared to $86.5 million in 2001.
Securities gains for the year ended December 31, 2002 totaled $509,000.
Other income increased $1.1 million to $1.6 million in 2002. Included in the
2002 results was $707,000 of revenues generated by the Arborview LLC
("Arborview") (a recently formed subsidiary created to manage a community based
residential facility) operations. Gains of $107,000 related to the sale of bank
land not deemed necessary for development was recorded in 2002. Included in
other income was income of $133,000 on previously amended tax returns received
during the year. Undistributed income from United Financial Services, Inc., the
Bank's data servicing subsidiary increased $88,000 as a result of increased
earnings to $383,000, from the data processing subsidiary.
Non-Interest Expense
Non-interest expense in 2002 increased to $23.1 million, a $2.4 million, or
11.4% increase compared to 2001 results, primarily as a result of increased
personnel, equipment, data processing, and other operating expense. This
followed a $2.2 million or 11.7% increase in 2001 as compared to 2000. Primary
categories impacting the change between 2002 and 2001 are noted in Table 7
below.
TABLE 7: NONINTEREST EXPENSE
Years ended December 31, % Change from prior year
------------------------ ------------------------
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
(dollars in thousands)
Personnel $13,743 $11,923 $ 10,353 15.3% 15.2%
Occupancy $ 2,163 $ 1,834 $ 1,643 17.9% 11.6%
Equipment $ 1,422 $ 1,401 $ 1,404 1.5% (0.2%)
Data processing $ 942 $ 893 $ 844 5.5% 5.8%
Business development
and advertising $ 628 $ 594 $ 628 5.7% (5.4%)
Stationery and supplies $ 611 $ 482 $ 536 26.8% (10.1%)
Director fees $ 266 $ 285 $ 262 (6.7%) 8.8%
FDIC insurance $ 116 $ 110 $ 140 5.5% (21.4%)
Goodwill amortization $ 0 $ 486 $ 486 NM 0.0%
Legal and professional $ 230 $ 256 $ 199 (10.2%) 28.6%
Operation of other real
Estate $ 203 $ 248 $ (22) (18.1%) NM
Other $ 2,807 $ 2,259 $ 2,117 24.3% 6.7%
------- ------- -------- ---- ----
Total noninterest expense $23,131 $20,771 $ 18,590 11.4% 11.7%
======= ======= ======== ==== ====
21
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $13.7 million in 2002, an increase of $1.8 million, or
15.3%, as compared to 2001 results. The increase in 2002 primarily resulted from
staffing increases, bonus expense, increased benefit costs, and normal salary
increases. Salary and employee benefits expense in 2001 totaled $11.9 million,
an increase of $1.6 million, or 15.2%, as compared to 2000 results. The 2001
increase resulted primarily from staffing increases, increased benefit costs,
and normal salary increases.
Bonus expense in 2002 was $588,000 compared to $405,000 in 2001. The increase
occurred as a result of bonus expense arising from the Company's
Pay-for-Performance Program in 2002. This program is designed to reward various
divisions upon achievement of certain goals related to improvement in income and
on return on equity. The Company did achieve its return on equity goals and,
accordingly, a bonus payment was made.
The Company's 401(k) profit sharing plan, including a money purchase plan
initiated in 1999, covering all employees who qualify as to age and length of
service increased to $810,000, an increase of $97,000, or 13.6%, over 2001
levels. Expenses in the same category in 2001 were up $87,000, or 13.9%, over
2000 levels.
Salary expense was $10.0 million in 2002, an increase of $1.3 million, or 15.7%,
as compared to 2001 results. This includes salary expense of $487,000 related to
the Arborview operation. This followed an increase of $916,000, or 11.9% for
2001 results compared to 2000. The number of full-time equivalent employees
increased to 293 in 2002 from 286 in 2001, an increase of 2.4%. Employee levels
in 2001 increased to 286 from 272 in 2000, an increase of 5.1%. The increases
occurred primarily at the Company's Green Bay locations with emphasis on
additional personnel for sales and calling programs. Management will continue
its efforts to control salaries and employee benefits expense, although
increases in these expenses are likely to continue to occur in future years.
Net occupancy expense for 2002 showed an increase of $329,000, or 17.9%, as
compared to 2001 for a total of $2.2 million. Additional depreciation expense,
real estate tax expense, and other occupancy costs resulted in 2002. This
increase followed an increase of $191,000, or 11.6%, in 2001. Included in 2002
results were occupancy expenses of $188,000 related to the Arborview operation.
Addition of a facility in the Green Bay market and costs related to the
modernization of various facilities accounted for the balance of the increase in
occupancy expense for 2002.
Equipment expense for 2002 increased slightly, $21,000, or 1.5%, compared to
2001. This followed a decrease of $3,000, or 0.2%, in 2001. The increase in 2002
resulted from depreciation expense from past capital expenditures for equipment
that were made to enhance the Company's technological capabilities. The addition
of branches in 2002 also accounted for an increase in equipment expense in 2002.
Data processing expense in 2002 increased $49,000, or 5.5%, due to an increase
in the volume of transaction activity processed and technology enhancements.
This followed an increase of $49,000, or 5.8%, in 2001 compared to 2000.
Management estimates that data processing expense should show minimal increases
in the next several years with adjustments related only to any volume increases
incurred by the Company.
Business development and advertising expense increased $34,000, or 5.7%,
compared to 2001. More emphasis was placed on business referral and development
calls for 2002 accounting for the balance of the increase. This compared to a
decrease of $34,000, or 5.4% in 2001 compared to 2000.
Supplies expense shows an increase of $129,000, or 26.8%, in 2002 as compared to
2001. This increase occurred as a result of additional branches coming online
during the year 2002. This compared to a decrease of $54,000, or 10.1%, in 2001
as compared to 2000.
Payments to regulatory agencies increased $6,000 to $116,000 for 2002. This
followed a decrease of $30,000 in 2001 compared to 2000 reflecting the net rate
reduction in deposit insurance effective for 2001 on a higher deposit base for
the year. The Bank's risk classification has remained at 1A, rating assigned to
well-capitalized institutions. For additional information regarding the
Company's capital adequacy, see "Capital Resources" below.
Legal and professional expense for 2002 decreased $26,000 or 10.2%. Legal
expenses increased $57,000 during 2001, primarily the result of the completion
of various legal actions stemming from the operations of the former BLBNA.
22
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result, the
Company has shown varied results. Other real estate owned showed net expense of
$203,000 in 2002. Gains of $24,000 were taken from lot sales of Idlewild Valley,
Inc., a former subsidiary of the Bank whose value was written off in 1988. In
addition, gains of $77,000 from two commercial property sales and $12,000 from
three residential property sales were realized in 2002. These were offset by
losses of $71,000 from the sale of five commercial properties and two
residential properties. Various operating expenses, net of income, of other real
estate totaling $245,000 occurred in 2002. Other real estate owned expenses
resulted in net expense of $248,000 in 2001. Gains of $23,000 were realized from
lot sales of Idlewild Valley, Inc., in 2001. In addition, gains of $177,000 from
eight commercial property sales and $9,000 from five residential property sales
were realized in 2001. These were offset by losses of $22,000 from the sale of
two commercial properties and two residential properties. Various operating
expenses, net of income, of other real estate totaling $435,000 occurred in
2001.
During 2002, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangibles," which requires that goodwill
no longer be amortized but, instead, tested annually for impairment. There was
no impairment of goodwill in 2002. Prior to 2002, goodwill was being amortized
on a straight-line basis over 15 years. Amortization expense was $486,000 for
2001, unchanged from 2000 results.
Other operating expenses in 2002 increased $548,000 or 24.3%, including $129,000
in expenses related to the Arborview operation. Loan and collection expenses
increased $176,000 for 2002 compared to 2001. Additionally other losses
increased $178,000 for 2002. Included in other losses were losses taken on the
disposal of fixed assets amounting to $107,000. Other operating expenses in 2001
increased $142,000 or 6.7% compared to 2000, primarily the result of an increase
of $108,000 related to other outside service expense, such as consulting fees
and payroll service expenses.
The overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total assets was 1.42% for 2002
compared to 1.79% for 2001 and 1.97% for 2000.
Income Taxes
Income tax expense for the Company in 2002 was $2.6 million, an increase of
$484,000 or 23.1% compared to 2001. The higher tax expense in 2002 reflected the
Company's increase in before tax earnings offset by an increase in tax-exempt
interest income. This followed a decrease of $687,000 or 24.7% in 2001 compared
to 2000. The major part of the decrease was attributable to $516,000 of net
federal tax refunds booked based on an IRS audit of BLBNA completed in December
2001. This amount was net of $151,000 of tax assessed and $340,000 of refund
claims not booked pending IRS approval.
The Company's effective tax rate, income tax expense divided by income before
taxes, was 22.8% in 2002 compared with 21.7% in 2001 and 29.3% in 2000. Of the
22.8% effective tax rate for 2002, the federal effective tax rate was 20.0%
while the Wisconsin State effective tax rate was 2.8%.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been recognized to offset the related deferred tax assets due to the uncertainty
of realizing tax benefits of a portion of loan loss and mortgage servicing
differences.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Balance Sheet Analysis
Loans
23
Total loans outstanding grew to $664.3 million at December 31, 2002, a 9.7%
increase from the end of 2001. This follows a 9.0% increase at December 31, 2001
over 2000 year end.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small businesses. Loans of this type are in a
broad range of industries and include service, retail, wholesale, and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door, Brown, Outagamie, Waupaca, Waushara and Kewaunee counties,
Wisconsin. The credit risk related to commercial loans made is largely
influenced by general economic conditions, especially those applicable to the
Northeast Wisconsin market area, and the resulting impact on a borrower's
operations.
Commercial loans and commercial real estate loans (including construction loans)
totaled $516.3 million at year end 2002 and comprised 77.7% of the loan
portfolio compared with 73.5% of the portfolio at the end of 2001. Loans in
these classifications grew $71.3 million or 16.0% during 2002. Loans of this
type are in a broad range of industries. The credit risk related to these types
of loans is greatly influenced by general economic conditions and the resulting
impact on the borrower's operations.
Table 8 reflects composition (mix) of the loan portfolio at December 31:
TABLE 8: LOAN COMPOSITION
(dollars in thousands)
2002 2001 2000
Amount % of Total Amount % of Total Amount % of Total
Amount of loans by type
Real estate-
mortgage
Commercial $351,425 52.9% $288,385 47.6% $251,971 45.4%
1-4 Family residential
First liens 86,161 13.0 96,626 16.0 109,173 19.7
Junior liens 21,789 3.3 24,748 4.1 26,513 4.8
Home equity 25,415 3.8 22,374 3.7 24,464 4.4
Commercial,financial
and agricultural 89,207 13.4 88,649 14.6 83,897 15.1
Real estate-construction 75,688 11.4 67,939 11.2 41,524 7.5
Installment
Credit cards and related
plans 2,057 0.3 2,145 0.4 2,140 0.4
Other 12,859 1.9 14,745 2.4 15,785 2.8
Less: deferred fees, net
of costs 316 0.0 324 0.1 360 0.1
Total loans (net of
unearned income) $664,285 100.0% $605,287 100.0% $555,107 100.0%
======== ======== ========
1999 1998
Amount % of Total Amount % of Total
Amount of loans by type
Real estate-
mortgage
Commercial $201,301 45.0% $178,846 43.9%
1-4 Family residential
First liens 95,255 21.3 101,391 24.9
Junior liens 23,811 5.3 17,122 4.2
24
Home equity 18,963 4.3 18,051 4.4
Commercial,financial
and agricultural 66,159 14.8 67,550 16.6
Real estate-construction 26,535 5.9 9,553 2.3
Installment
Credit cards and related
plans 1,810 0.4 1,809 0.4
Other 13,636 3.1 14,105 3.5
Less: deferred fees, net
Of costs 451 0.1 779 0.2
Total loans (net of
unearned income) $447,019 100.0% $407,648 100.0%
======== ========
Real estate loans (including construction loans) secured by non-residential real
estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, they are combined with
commercial loans for purposes of analysis and discussion.
Management uses an active credit risk management process for commercial loans to
ensure that sound and consistent credit decisions are made. Management attempts
to control credit risk by adhering to detailed underwriting procedures,
performing comprehensive loan administration, and undertaking periodic review of
borrowers' outstanding loans and commitments. Borrower relationships are
formally reviewed periodically during the life of the loan. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Company's loan portfolio is diversified by types of borrowers and industry
groups within the market areas that it serves. Significant loan concentrations
are considered to exist for a financial entity when such amounts are loans to a
multiple of borrowers engaged in similar activities that cause them to be
similarly impacted by economic or other conditions. The Company has identified
certain industry groups within its market area, including lodging, restaurants,
retail shops, small manufacturing, real estate rental properties and real estate
development. At December 31, 2002, there existed no industry group concentration
in the Company's loans that exceeded 10% of total loans.
Although management does not believe significant industry group loan
concentrations exist in the Company's loan portfolio, it is aware that its
market area is heavily reliant on seasonal tourism. As a result, a decrease in
tourism could adversely affect one or more industry groups in the Company's loan
portfolio, which could have a corresponding adverse effect on the Company's
earnings.
At the end of 2002, residential real estate mortgage loans totaled $133.4
million and comprised 20.1% of the loan portfolio. These loans decreased $10.4
million or 7.2% during 2002. A lower interest rate environment provided
opportunities for the Company to refinance existing mortgage loans into fixed
rates and sell them into the secondary market. Residential real estate loans
consist of conventional home mortgages, adjustable indexed interest rate
mortgage loans, home equity loans, and secondary home mortgages. Loans are
primarily for properties within the market areas served by the Company.
Residential real estate loans generally contain a limit for the maximum loan to
collateral value of 75% to 80%. Private mortgage insurance may be required when
the loan to value exceeds these limits. Residential real estate loans are
written normally with a one or three year adjustment rate feature.
In 1997, the Company offered adjustable indexed interest rate mortgage loans
based upon market demands. At year end 2002, those loans totaled $31.2 million
dollars. Adjustable indexed interest rate mortgage loans contain an interest
rate adjustment provision tied to the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, plus an additional
mark-up of 2.75% (the "index") which varies with the mortgage loan product.
Interest rates on indexed mortgage loans are adjusted, up or down, on
predetermined dates fixed by contract, in relation to and based on the index or
market interest rates as of a predetermined time prior to the adjustment date.
Adjustable indexed interest rate mortgage loans have an initial period, ranging
from one or three years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps
25
which vary with the product. Annual limits on interest rate changes are 2% while
aggregate lifetime interest rate increases over the term of the loan are
currently at 6% above the original mortgage loan interest rate. The Company also
participates in a secondary fixed rate mortgage program under the Federal Home
Loan Mortgage Corporation ("FHLMC") guidelines. These loans are sold in the
secondary market and the Company retains servicing rights. At December 31, 2002,
these loans totaled $72.7 million.
Additionally in the last quarter of 1997, the Company began to offer fixed rate
mortgages through participation in secondary fixed rate mortgage programs under
private investors. These loans are sold in the secondary market with servicing
rights sold retained by buyer. In 2002, the Company sold $104.8 million in
mortgage loans through the secondary programs.
TABLE 9: LOAN MATURITY AND INTEREST RATE SENSITIVITY
Maturity
------------------------------------------------------------------
December 31, 2002 Within 1 Year 1-5 Years After 5 Years Total
------------- --------- ------------- -----
(dollars in thousands)
Loans secured
primarily by real
estate:
Secured by 1 to 4
family residential
properties $ 37,046 $ 55,470 $ 40,849 $133,365
Construction 55,525 19,540 623 75,688
Other real estate 107,261 159,398 84,766 351,425
Loans to farmers 3,106 4,183 1,034 8,323
Commercial and
industrial 21,396 19,965 38,582 79,943
Loans to consumers 3,294 10,338 1,284 14,916
All other loans 895 21 25 941
-------- -------- -------- --------
Total $228,523 $268,915 $167,163 $664,601
======== ======== ======== ========
Interest sensitivity
Fixed rate Variable rate
---------- --------------------
Due after one year $179,552 $256,526
Installment loans to individuals totaled $14.9 million, or 2.2%, of the total
loan portfolio at December 31, 2002 compared to $16.9 million, or 2.8%, at end
of 2001. Installment loans include short-term installment loans, direct and
indirect automobile loans, recreational vehicle loans, credit card loans, and
other personal loans. Individual borrowers may be required to provide collateral
or a satisfactory endorsement or guaranty from another party, depending upon the
specific type of loan and the creditworthiness of the borrower. Loans are made
to individual borrowers located in the market areas served by the Company.
Credit risks for loans of this type are generally influenced by general economic
conditions (especially in the market areas served), the characteristics of
individual borrowers and the nature of the loan collateral. Credit risk is
primarily controlled by reviewing the creditworthiness of the borrowers as well
as taking the appropriate collateral and guaranty positions on such loans.
Critical factors in the overall management of credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, adequate allowance for
loan losses, and conservative non-accrual and charge-off policies.
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
possible 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 controlled and
monitored through the use of lending standards, a thorough review of
26
potential borrowers, and an ongoing 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.
Management reviews the adequacy of the Allowance for Loan Losses ("allowance" or
"ALL") on a quarterly basis to determine whether, in management's estimate, the
allowance is adequate to provide for possible losses inherent in the loan
portfolio as of the balance sheet date. Management's evaluation 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 that management determines have
a higher than average risk for default, 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 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, proper
accounting and the adequacy of loan loss reserve assigned. In addition to this
quarterly management review, all problem review, all problem loans are monitored
and evaluated on a monthly basis by a designated review committee. Depending on
the change in condition, loans may be reassessed concerning allocation of risk,
probable disposition, and potential loss, including changes to the Allowance for
Loan Losses.
After reviewing the gradings in the loan portfolio, management will allocate or
assign a portion of the ALL to categories 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. The indirect risk in the form of off-balance sheet unfunded
commitments are also taken into consideration. These allocated reserves are
further supplemented by unallocated reserves based on management's estimate
regarding risk of error, local economic conditions and any other relevant
factors. Management then compares the amounts allocated for probable losses to
the current allowance. To the extent that the current allowance is insufficient
to cover management's best estimate of probable losses, management records
additional provision for credit loss. If the allowance is greater than required
at that point in time, provision expense is adjusted accordingly.
As Table 10 indicates, the ALL at December 31, 2002 was $11.4 million compared
with $8.0 million at the end of 2001. Loans increased 9.7% from December 31,
2001 to December 31, 2002, while the allowance as a percent of total loans
increased due to increased loan loss provision for the year 2002 offset by net
charge-offs for the year. The December 31, 2002 ratio of ALL to outstanding
loans was 1.72% compared with 1.32% at December 31, 2001. Based on management's
analysis of the loan portfolio risk at December 31, 2002, a provision expense of
$5.7 million was recorded for the year ended December 31, 2002, an increase of
$2.8 million compared to the same period in 2001. Net loan charge-offs of $2.3
million occurred in 2002, and the ratio of net charge-offs to average
27
loans for the period ended December 31, 2002 was 0.36% compared to 0.32% at
December 31, 2001. Real estate-mortgage charge-offs represented 73.8% of the
total net charge-offs for the year 2002. Commercial mortgage loan charge-offs
accounted for $1.6 million of the mortgage total and residential mortgage loan
charge-offs totaled $52,000. Commercial loans accounted for $265,000 or 11.6% of
the total net charge-offs for the year 2002. Loans charged-off are subject to
periodic review and specific efforts are taken to achieve maximum recovery of
principal and accrued interest.
TABLE 10. LOAN LOSS EXPERIENCE
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Daily average amount of loans $635,368 $587,995 $505,892 $ 421,541 $333,484
-------- -------- -------- --------- --------
Loans, end of period $664,285 $605,287 $555,107 $ 447,019 $407,648
-------- -------- -------- --------- --------
ALL, at beginning of year $ 7,992 $ 7,006 $ 7,611 $ 11,035 $ 3,881
Loans charged off:
Real estate-mortgage 1,859 1,573 1,584 991 355
Real estate-construction -- -- -- 40 --
Loans to farmers -- -- 24 35 --
Commercial/industrial loans 789 983 343 4,097 376
Consumer loans 407 173 123 199 114
Lease financing/other loans -- -- -- -- --
-------- -------- -------- --------- --------
Total loans charged off $ 3,055 $ 2,729 $ 2,074 $ 5,362 $ 845
Recoveries of loans previously charged off:
Real estate-mortgage 175 332 290 508 148
Real estate-construction -- -- 2 -- --
Loans to farmers -- -- 11 -- --
Commercial/industrial loans 524 428 557 1,433 186
Consumer loans 74 75 64 47 43
Lease financing/other loans -- -- -- -- --
Total loans recovered 773 835 924 1,988 377
-------- -------- -------- --------- --------
Net loans charged off ("NCOs") 2,282 1,894 1,150 3,374 468
-------- -------- -------- --------- --------
Additions to allowance for loan losses charged
to operating expense $ 5,700 $ 2,880 $ 545 $ 850 $ 1,135
Allowance to related assets acquired -- -- -- (900) 6,487
-------- -------- -------- --------- --------
ALL, at end of year $ 11,410 $ 7,992 $ 7,006 $ 7,611 $ 11,035
Ratio of NCOs during period to average loans
outstanding 0.36% 0.32% 0.23% 0.80% 0.14%
Ratio of ALL to NCOs 5.0 4.2 6.1 2.3 23.6
Ratio of ALL to total loans end of period 1.72% 1.32% 1.26% 1.70% 2.71%
Consistent with generally accepted accounting principles ("GAAP") and with the
methodologies used in estimating the unidentified losses in the loan portfolio,
the ALL consists of several components.
First, the allowance includes a component resulting from the applicaton 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 each period. These loans
would include residential real estate, consumer loans and loans to small
businesses generally of $100,000 and less. The loss factors are based primarily
on the Company's historical loss experience tracked over a three-year period
28
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.
Finally, the "unallocated" component of the ALL is intended to absorb losses
that may not be provided for by the other components. There are several reasons
that the other components discussed above might not be sufficient to absorb the
losses present in portfolios, and the unallocated portion of the ALL is used to
provide for the losses that have occurred because of these reasons.
The first reason stems from the fact that there are limitations inherent to any
credit risk grading process. Even for experienced loan reviewers, grading loans
and estimating probable losses involves a significant degree of judgement
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, the possibility
exists that some currently performing loans will not be as strong as their last
grading estimate and an insufficient portion of the allowance will have been
allocated to them. In addition, it's possible that grading and loan review may
be done without all relevant facts. 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. For example, 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 a more
prudent practice to maintain the total allowance at an amount larger than the
sum of the amounts allocated as described above.
Table 11 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. Management continues to target and maintain the ALL
equal to the allocation methodology plus an unallocated portion, as determined
by economic conditions on the Company's borrowers. 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 that have less risk.
Consideration for making such allocations is consistent with the factors
discussed above, and all of the factors are subject to change; thus, the
allocation is not necessarily indicative of the loan categories in which future
loan losses will occur. It would also be expected that the amount allocated for
any particular type of loan will increase or decrease proportionately to both
the changes in the loan balances and to increases or decreases in the estimated
loss in loans of that type. In other words, changes in the risk profile of the
various parts of the loan portfolio should be reflected in the allowance
allocated.
TABLE 11: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
29
As of December 31,
------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Commercial, financial
& agricultural $ 3,679 $ 972 $1,073 $ 814 $ 1,025
Commercial real estate 4,639 4,158 2,993 2,605 4,925
Real estate
Construction 814 503 302 29 50
Residential 1,467 1,078 1,395 2,484 3,350
Home equity lines 228 178 148 84 150
Consumer 139 162 140 145 325
Credit card 83 93 68 42 75
Loan commitments 154 144 135 130 --
Not specifically
Allocated 207 704 752 1,278 1,135
------- ------ ------ ------ -------
Total allowance $11,410 $7,992 $7,006 $7,611 $11,035
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 December 31, 2002. Ongoing efforts are
being made to collect these loans, and the Company involves the legal process
when it believes it necessary to minimize the risk of further deterioration of
these loans for full collection.
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. As an integral part of
their examination process, various regulatory agencies also review the ALL. Such
agencies may require that changes in the ALL be recognized when their credit
evaluations differ from those of management, based on their judgements 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.
Non-performing loans remain a leading indicator of future loan loss potential.
Non-performing loans are defined as non-accrual loans, guaranteed loans 90 days
or more past due but still accruing, and restructured loans. Additionally,
whenever management becomes aware of facts or circumstances that may adversely
impact on the collection of principal or interest on loans, it is the practice
of management to place such loans on non-accrual status immediately rather than
waiting until the loans become 90 days past due. The accrual of interest income
is discontinued when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, interest credited to income
is reversed. If collection is in doubt, cash receipts on non-accrual loans are
used to reduce principal rather than recorded as interest income.
Restructuring loans involve the granting of some concession to the borrower
involving a loan modification, such as payment schedule or interest rate
changes.
TABLE 12: NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Nonaccrual loans $12,244 $ 9,929 $ 8,479 $ 8,086 $11,060
Accruing loans past due 90 days or more -- -- -- -- --
Restructured loans 9,844 4,744 4,510 4,458 3,028
------- ------- ------- ------- -------
Total non-performing loans (NPLs) $22,088 $14,673 $12,989 $12,544 $14,088
======= ======= ======= ======= =======
Other real estate owned/operating subsidiaries 2,890 1,673 877 71 566
------- ------- ------- ------- -------
Total non-performing assets (NPAs) $24,978 $16,346 $13,866 $12,615 $14,654
======= ======= ======= ======= =======
30
Ratios:
NPL's to total loans 3.33% 2.42% 2.34% 2.81% 3.46%
NPA's to total assets 2.76% 1.93% 1.80% 1.95% 2.41%
ALL to NPL's 51.66% 54.47% 53.94% 60.67% 78.33%
Non-performing loans at December 31, 2002 were $22.1 million compared to $14.7
million at December 31, 2001. Non-accrual loans represented $12.2 million of the
total of non-performing loans. Real estate non-accrual loans account for $11.0
million of the total, of which $2.7 million was residential real estate and $7.7
million was commercial real estate, while commercial and industrial non-accruals
account for $1.1 million. Management believes collateral is sufficient to offset
losses in the event additional legal action would be warranted to collect these
non-accrual loans. Troubled debt restructured loans represent $9.8 million of
non-performing loans at December 31, 2002 and $4.7 million at December 31, 2001.
Approximately $7.4 million of this total consists of two commercial real estate
credits granted various concessions and have experienced past cash flow
problems. These credits were current at December 31, 2002. Management believes
that collateral is sufficient in those loans classified as troubled debt in
event of default, with the exception that $2.4 million in loan loss provision
has been allocated to a commercial credit totaling $4.7 million (included in
credits totaling $7.4 million). Management is monitoring this loan credit on a
monthly basis and working with the borrower to minimize any additional loss
exposure. As a result the ratio of non-performing loans to total loans at the
end of 2002 was 3.3% compared to 2.4% at end of year 2001. The Company's ALL was
51.7% of total non-performing loans at December 31, 2002 compared to 54.5% at
end of year 2001.
The following table shows, for those loans accounted for on a non-accrual basis
for the years ended as indicated, the gross interest that would have been
recorded if the loans had been current in accordance with their original terms
and the amount of interest income that was included in interest income for the
period.
TABLE 13: FOREGONE LOAN INTEREST
Years ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(dollars in thousands)
Interest income in accordance with original terms $ 1,639 $ 1,212 $ 1,065
Interest income recognized (357) (346) (460)
Reduction in interest income $ 1,282 $ 866 $ 605
Potential problem loans are performing loans that management believes may incur
difficulties in complying with loan repayment terms. Management's decision to
place loans in this category does not necessarily mean that the Company expects
to take losses on such loans, but that management needs to be more vigilant in
its efforts to oversee the loans and recognize that a higher degree of risk is
associated with these potential problem loans. At December 31, 2002, potential
problem loans amounted to a total of $5.2 million compared to a total of $10.5
million at end of 2001. $3.2 million of the problem loans stem from two
commercial credits experiencing cash flow concerns. Various commercial loans
totaling $2.0 million make up the balance of the total potential problem loans.
With the exceptions noted above, potential problem loans are not concentrated in
a particular industry but rather cover a diverse range of businesses. Except as
noted above, management does not presently expect significant losses from
credits in the potential problem loan category.
Other real estate owned, which represents property that the Company acquired
through foreclosure or in satisfaction of debt, consisted of nine properties
totaling $896,000 at end of year 2002. This compared to twelve properties
totaling $1.7 million at end of year 2001. Management actively seeks to ensure
that properties held are administered to minimize any risk of loss.
Net cost of operation of other real estate for 2002, 2001, and 2000 consists of
the following and are shown in Table 14:
31
TABLE 14: OTHER REAL ESTATE OPERATION SUMMARY
2002 2001 2000
---- ---- ----
(dollars in thousands)
Loss on disposition of properties and
other costs $341 $475 $ 254
Gains on disposition of properties
and expense recoveries $138 $227 $ 276
---- ---- ----
Net (gains) losses $203 $248 $ (22)
==== ==== =====
In the first quarter of 2002, a commercial real estate loan totaling $2.2
million was deeded over to the Bank, and a subsidiary in the name of Arborview
LLC ("Arborview") was formed for purposes of operating a community based
residential facility ("CBRF"). The balance of that operating subsidiary at year
end 2002 was $2.0 million and is included in non-performing assets totals.
Investment Portfolio
The investment portfolio is intended to provide the Company with adequate
liquidity, flexibility in asset/liability management and, lastly, its earning
potential.
TABLE 15: INVESTMENT SECURITIES PORTFOLIO
2002 2001 2000
---- ---- ----
(dollars in thousands)
Investment Securities Held to Maturity
(HTM):
Obligations of states and political
subdivisions $ 18,227 $ 22,205 $ 18,422
-------- -------- --------
Total amortized cost and carrying value $ 18,227 $ 22,205 $ 18,422
-------- -------- --------
Total fair value $ 18,524 $ 22,398 $ 18,503
======== ======== ========
Investment Securities Available for Sale
AFS):
U.S. Treasury and other agency
Securities $ 38,379 $ 21,505 $ 32,252
Obligations of states and political
Subdivisions 35,840 32,639 33,067
Mortgage-backed securities 49,968 73,183 67,629
Other 4,019 14,303 1,311
-------- -------- --------
Total amortized cost $128,206 $141,630 $134,259
-------- -------- --------
Total fair value and carrying value $133,139 $144,895 $135,089
======== ======== ========
Total Investment Securities:
Total amortized cost $146,433 $163,835 $152,681
Total fair value $151,663 $167,293 $153,592
Total carrying value $151,366 $167,100 $153,511
32
Investment securities are classified as held to maturity or available for sale.
The Company determined at year end 2002 that all of its taxable securities,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 2002 were to be classified as available for sale. In addition, the
Company determined that its non-taxable local municipals were classified as
available for sale. In the case of the Company's non-taxable securities and
municipal bond investments purchased prior to 1996, they were determined to be
held to maturity. This determination was made because the Company wanted to
retain the municipal bond issues due to their higher after-tax yields, and local
non-taxable issues due to their lessened marketability. Held to maturity
securities are those securities the Company has both the intent and ability to
hold until maturity. Under this classification, securities are stated at cost,
adjusted for amortization of premiums and accretion of discounts which are
recognized as adjustments to interest income. Gains or losses on disposition are
based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method. At December 31, 2002, securities
held to maturity had an aggregate market value of approximately $18.5 million
compared with amortized cost of $18.2 million.
Investment securities classified as available for sale are those securities
which the Company has determined might be sold to manage interest rates or in
response to changes in interest rates or other economic factors. While the
Company has no current intention of selling those securities, they may not be
held to maturity. Investment securities available for sale at December 31, 2002
and 2001 are carried at market value. Adjustments up or down to market value at
December 31, 2002 and 2001 are recorded as a separate component of equity, net
of tax with one exception. In the event of a market value loss with regards to
investments held in the investment subsidiary, the market value loss is recorded
without a tax benefit since the loss would be treated as a capital loss. Premium
amortization and discount accretion are recognized as adjustments to interest
income. Realized gains or losses on disposition are based on the net proceeds
and the adjusted carrying amount of the securities sold using the specific
identification method. At December 31, 2002, securities available for sale had a
market and carrying value of $133.1 million. The reserve for market adjustment
of securities, net of tax, and reflected in the stockholders' equity section
stood at $3.2 million at December 31, 2002.
TABLE 16: INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION
(dollars in thousands)
Investment securities HTM - maturity distribution and weighted average yield
----------------------------------------------------------------------------------------------------------------
Within one After one year After five years After ten years Total
year But within five But within ten
Years Years
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Obligations of
states and
political
subdivisions $ 3,980 5.11% $ 6,153 6.63% $ 2,618 8.18% $ 5,476 9.30% $ 18,227 7.32%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total carrying
Value $ 3,980 5.11% $ 6,153 6.63% $ 2,618 8.18% $ 5,476 9.30% $ 18,227 7.32%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Investment securities AFS - maturity distribution and weighted average yield
----------------------------------------------------------------------------------------------------------------
Within one After one year After five years After ten years Total
year But within five But within ten
years years
------------------ ------------------- ------------------- ------------------ -------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Treasury $ 1,030 6.91% $ 209 4.59% $ -- -- $ -- -- $ 1,239 6.52%
Agencies 3,039 3.28% 29,674 4.81% 6,641 5.35% -- -- 39,354 4.78%
Mortgage-backed
securities 38,402 5.55% 12,449 5.69% -- -- -- -- 50,851 5.58%
33
Obligations of
states and
political
subdivisions 2,238 7.11% 8,835 7.25% 14,265 7.79% 12,316 7.16% 37,654 7.42%
Other 1,495 1.06% -- -- -- -- 2,546 7.00% 4,041 4.80%
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
Total carrying
value $ 46,204 5.36% $ 51,167 5.44% $ 20,906 7.01% $ 14,862 7.13% 133,139 5.85%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
At December 31, 2002 and 2001, the Company's investment portfolio did not
contain, other than U.S. treasury and federal agencies, securities of any single
issuer that were payable from and secured by the same source of revenue of
taxing authority where the aggregate book value of such securities exceed 10% of
stockholders' equity.
Investment securities averaged $173.8 million in 2002 compared with $164.4
million in 2001. The average balance of securities increased partly as a result
of investment earnings reinvested at the investment subsidiary during 2002. In
2002, taxable securities comprised approximately 66.8% of the total average
investments compared to 67.7% in 2001. Tax-exempt securities on average for 2002
accounted for 33.2% of the total average investments compared to 32.3% in 2001.
Deposits
Deposits are the Company's largest source of funds. At December 31, 2002,
deposits were $740.3 million, an increase of $70.4 million or 10.5% from $669.9
million recorded at December 31, 2001. Brokered deposits increased from $47.6
million at year end 2001 to $98.6 million at year end 2002. Average total
deposits for 2002 were $692.1 million, an increase of 12.7% over 2001. Included
in these results was an increase in average brokered deposits from $35.7 million
in 2001 to $87.1 million in 2002. Average deposits increased 17.4% in 2001
compared to 2000 results.
TABLE 17: AVERAGE DEPOSITS DISTRIBUTION
2002 2001 2000
Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ----------
(dollars in thousands)
Noninterest-bearing
Demand deposits $ 76,030 11% $ 67,012 11% $ 61,214 12%
Interest-bearing demand
Deposits 53,170 8% 44,015 7% 44,965 9%
Savings deposits 201,344 29% 197,993 32% 164,858 31%
Other time deposits 192,160 28% 194,106 32% 184,904 35%
Time deposits $100,000
and over (excluding
brokered deposits) 82,287 12% 75,192 12% 52,771 10%
Brokered certificates of
Deposit 87,108 12% 35,714 6% 14,411 3%
-------- --- -------- --- -------- ---
Total deposits $692,099 100% $614,032 100% $523,123 100%
======== === ======== === ======== ===
As shown in Table 17, non-interest bearing demand deposits in 2002 averaged
$76.0 million, up 13.5% from $67.0 million recorded in 2001. This $9.0 million
increase is attributable to improvement in the seasonal increases in these funds
throughout the year along with an emphasis of attracting new customer
relationships and selling more services to existing customers. At December 31,
2002, non-interest-bearing demand deposits were $89.8 million compared with
$76.1 million at year end 2001.
34
Interest bearing deposits generally consist of interest-bearing checking,
savings deposits, money market accounts, individual retirement accounts ("IRAs")
and certificates of deposit ("CDs"). In 2002, interest-bearing deposits averaged
$616.1 million, an increase of 12.6%. Within the category of interest bearing
deposits, savings deposits, including money market accounts, increased $3.4
million or 1.7%. During 2002, the Company focused on marketing its money market
accounts, which offered increased customer flexibility and competitive rates.
During the same period, time deposits, including CDs and IRAs (other than
brokered time and time over $100,000) decreased in average deposits $1.9 million
or 1.0%, primarily the result of a shift in customer preferences. Average time
deposits over $100,000 increased by $7.1 million or 9.4%. 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.
Emphasis will be placed on generating additional core deposits in 2003 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 customer service.
The Company also may increase brokered CD's during the year 2003 as an
additional source of funds to provide for loan growth.
Short-Term Borrowings and Other Borrowings
Short-term borrowings consist of federal funds purchased, securities under
agreements to repurchase, and advances from FHLB. As indicated in Table 18,
average 2002 short-term borrowings were $21.0 million compared to $21.8 million
during 2001. The decrease of $714,000 occurred as a result of growth in core
deposits and an increase in noncore funding sources such as brokered time
deposits, time deposits greater than $100,000 and increased term loans with FHLB
offset to a lesser extent by increased loan demand and increased investment
balances.
Average short-term borrowings decreased $22.3 million to $21.8 million in 2001
from $44.0 million in 2000 due to other forms of funding sources used during the
year.
TABLE 18: SHORT-TERM BORROWINGS
December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
(dollars in thousands)
Federal funds purchased and securities
sold under agreements to repurchase:
Balance end of year $10,056 $ 2,837 $37,538
Average amounts outstanding during year $15,631 $13,237 $22,672
Maximum month-end amounts outstanding $38,197 $47,009 $38,289
Average interest rates on amounts
Outstanding at end of year 1.37% 3.91% 6.87%
Average interest rates on amounts
Outstanding during year 1.94% 5.49% 6.66%
Federal Home Loan Bank advances:
Balance end of year -- -- $42,000
Average amounts outstanding during year $ 5,409 $ 8,517 $21,339
Maximum month-end amounts outstanding $10,000 $23,000 $42,000
Average interest rates on amounts
outstanding at end of year -- -- 6.24%
Average interest rates on amounts
outstanding during year 2.03% 5.30% 6.84%
35
Other borrowings consist of term loans with FHLB. Average other borrowings in
2002 were $72.5 million compared to $94.6 million. The decrease of $22.1 million
or 23.3% occurred as a result of the availability of other funding sources used
during 2002 .
Federal funds are purchased from money center banks and correspondent banks at
prevailing overnight interest rates. Securities are sold to bank customers under
repurchase agreements at prevailing market rates. Borrowings with the FHLB are
secured by one to four family residential mortgages and eligible investment
securities allowing the Company to use it for additional funding purposes. These
borrowings with original maturities less than one year are included as short
term borrowings. Borrowings with original maturities greater than one year or
callable notes with call features greater than one year are included in the
other borrowings category.
Long-Term Debt
Long-term debt of $106,000 consists of a land contract requiring annual payments
of $53,000 plus interest calculated at prime plus one quarter of one percent.
The land contract was for the purchase of 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.
Liquidity
Liquidity management refers to the ability of the Company to ensure that cash is
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they become due, without undue cost or risk, and
without causing a disruption to normal operating activities. 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 $3.8 million in 2002 and will continue to
be the Company's main source of long-term liquidity. The dividends from the Bank
were sufficient to pay cash dividends to the Company's shareholders of $3.6
million in 2002.
The Bank meets its cash flow needs by having funding sources available to it 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 their assets and strong
capital positions.
Maturing investments have been a primary source of liquidity at the Bank. Sales
of investments totaling $88.3 million were made in 2002. $70.8 million in
investments were purchased in 2002. This resulted in net cash of $17.4 million
provided by investing activities for 2002. At December 31, 2002, the carrying or
book value of investment securities maturing within one year amounted to $50.2
million or 33.2% 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 activities of the statement of cash
flows, sales and maturities of investment securities during 2002 totaled $88.3
million. At the end of 2002, the investment portfolio contained $91.4 million of
U.S. Treasury and federal agency backed securities representing 60.4% of the
total investment portfolio. These securities tend to be highly marketable and
had a market value above amortized cost at end of year 2002 amounting to $3.1
million.
Deposit growth is another source of liquidity for the Bank. As a financing
activity reflected in 2002 Consolidated Statements of Cash Flows, deposits
provided $70.5 million in cash inflow during 2002. The Company's overall
36
average deposit base grew $78.1 million or 12.7% during 2002. Deposit growth,
especially core deposits, is the most stable source of liquidity for the Bank.
Federal funds sold averaged $1.1 million in 2002 compared to $5.3 million in
2001. The reduction was the result of above average deposit growth, including
non-core funding sources offset by to a greater degree with above average growth
in loans and a reduction in other borrowings. Funds provided from the maturity
of these assets typically are used as funding sources for seasonal loan growth,
which typically have higher yields. Short-term and liquid by nature, federal
funds sold generally provide a yield lower than other earning assets. The Bank
has a strategy of maintaining a sufficient level of liquidity to accommodate
fluctuations in funding sources and will at times take advantage of specific
opportunities to temporarily invest excess funds at narrower than normal rate
spreads while still generating additional interest revenue. At December 31,
2002, the Bank had no federal funds sold.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $228.5 million of loans maturing within one year, or 34.4% of total
loans.
Within the classification of short-term borrowings and other borrowings at
year-end 2002, federal funds purchased and securities sold under agreements to
repurchase totaled $10.1 million compared with $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 totaled $65.0 million at end of year 2002.
The Bank's liquidity resources were sufficient in 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
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. Baylake's
Asset/Liability Committee ("ALCO") manages risks associated with changing
interest rates, changing asset and liability mixes, and the impact on 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 gap
position exists. In general, liability sensitive gap positions in a declining
interest rate
37
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 in that a liability
sensitive gap position would decrease net interest income and an asset sensitive
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 include loans and investments as well as other paying liability
categories such as time deposits are scheduled according to their contractual
maturities. The "static gap analysis" provides a representation of the Company's
earnings sensitivity to changes in interest rates. It is a static indicator and
does not reflect various repricing characteristics. Accordingly, a "static gap
analysis" may not be indicative of the sensitivity of net interest income in a
changing rate environment.
TABLE 19: INTEREST RATE SENSITIVITY ANALYSIS
As of December 31, 2002
Over one
With three Four to six Seven to twelve Year to five Over five
Months Months Months Years Years Total
(dollars in thousands)
---------- ----------- --------------- ------------ --------- ---------
Earning assets
Investment securities $ 18,748 $ 11,746 $ 26,402 $ 56,737 $ 44,446 $158,079
Federal funds sold 0 0
Loans and leases:
Variable rate 337,932 7,644 27,291 13,112 385,979
Fixed rate 38,607 31,020 61,565 132,763 3,709 267,664
-------- --------- --------- --------- -------- --------
Total loans and leases 376,539 38,664 88,856 145,875 3,709 653,643
-------- --------- --------- --------- -------- --------
Total earning assets $395,287 $ 50,410 $ 115,258 $ 202,612 $ 48,155 $811,722
-------- --------- --------- --------- -------- --------
Interest bearing liabilities
NOW accounts 16,070 48,211 64,281
Savings deposits 151,870 43,362 195,232
Time deposits 46,569 60,488 141,412 142,472 22 390,963
Borrowed funds 10,108 30,000 10,000 25,054 75,162
Trust preferred 0 0 0 0 16,100 16,100
-------- --------- --------- --------- -------- --------
Total interest bearing liabilities $224,617 $ 90,488 $ 151,412 $ 259,099 $ 16,122 $741,738
-------- --------- --------- --------- -------- --------
Interest sensitivity (within periods) $170,670 $ (40,078) $ (36,154) $ (56,487) $ 32,033 $ 69,984
Cumulative interest sensitivity GAP 170,670 130,592 94,438 37,951 69,984
Ratio of cumulative interest rate
sensitivity
GAP to rate sensitive assets 21.03% 16.09% 11.63% 4.68% 8.62%
38
Ratio of rate
sensitive assets
to rate sensitive
liabilities 175.98% 55.71% 76.12% 78.20% 298.69%
Cumulative ratio 175.98% 141.44% 120.24% 105.23% 109.44%
of rate 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 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 4.3% if rates rose by a 100 basis point shock, and
projected that net interest income would decrease by approximately 10.4% if
rates fell by a 100 basis point shock under these scenarios for the period ended
December 31, 2003. The results of a 100 basis point shock if rates rose were
within the policy limits established by the Company. The results of a 100 basis
point shock if rates fell were slightly outside the policy limits of 10%
established by the Company and were not determined to be an issue at this time,
but will be monitored for future results.
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
Stockholders' equity at December 31, 2002 increased $6.3 million or 10.6% to
$65.4 million, compared with $59.1 million at end of year 2002. This increase
includes an increase of $1.1 million to capital in 2002 due to the impact of
Statement of Financial Accounting Standards No. 115. Without the effect of this
increase, stockholders' equity would have increased $5.2 million or 8.7% for
2002 over 2001, which compares to an increase of $4.4 million or 8.4% for 2001
over 2000. With the SFAS 115 adjustment included in 2001 capital, capital
increased $6.0 million or 11.3% compared to 2000 year end.
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. Any additional portion of
Trust Preferred Securities would qualify as Tier 2 capital. As of December 31,
2002, $16.1 million of the Trust Preferred Securities qualify as Tier 1 Capital.
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.
Cash dividends paid in 2002 were $0.49 per share compared with $0.45 in 2001.
The Company provided an 8.9% 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 to repurchase up
to 7,000 shares of the Company's common stock each calendar quarter in the
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.
39
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 2002 for treasury stock purchases.
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. Management 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 December 31, 2002 and 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
December 31 for each of the previous two years.
TABLE 20: CAPITAL
Actual For Capital Adequacy To Be Well Capitalized
Under Prompt
Corrective Action
Purposes Provisions
(dollars in thousands)
At December 31, 2002:
Total capital (to risk
weighted assets):
The Company $ 82,643 10.99% $ 60,146 8.00% N/A N/A
The Bank $ 79,436 10.59% $ 60,031 8.00% $ 75,039 10.00%
Tier 1 capital (to risk
Weighted assets):
The Company $ 73,220 9.74% $ 30,073 4.00% N/A N/A
The Bank $ 70,031 9.33% $ 30,016 4.00% $ 45,023 6.00%
Tier 1 capital (to average
assets):
The Company $ 73,220 8.24% $ 35,564 4.00% N/A N/A
The Bank $ 70,031 7.96% $ 35,564 4.00% $ 44,455 5.00%
At December 31, 2001:
Total capital (to risk
weighted assets):
40
The Company $ 76,044 11.34% $ 53,663 8.00% N/A N/A
The Bank $ 72,022 10.73% $ 53,715 8.00% $ 67,144 10.00%
Tier 1 capital (to risk
Weighted assets):
The Company $ 68,052 10.15% $ 26,831 4.00% N/A N/A
The Bank $ 64,030 9.54% $ 26,858 4.00% $ 40,286 6.00%
Tier 1 capital (to average
assets):
The Company $ 68,052 8.24% $ 33,032 4.00% N/A N/A
The 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 7 A. Quantitative and Qualitative Disclosure about Market Risk.
Information required by this item is set forth in Item 7 under the captions
"Interest Rate Risk."
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes to related statements
thereto are set forth on the following pages.
41
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 2002, 2001, and 2000
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 45
FINANCIAL STATEMENTS
Consolidated Balance Sheets 46-47
Consolidated Statements of Income 48
Consolidated Statements of Changes in Stockholder Equity 49
Consolidated Statements of Cash Flows 50-51
Notes to Consolidated Financial Statements 52-81
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Baylake Corp.
Sturgeon Bay, Wisconsin
We have audited the accompanying consolidated balance sheets of Baylake
Corp. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholder equity, and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
the consolidated financial position of Baylake Corp. and subsidiaries at
December 31, 2002 and 2001, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Smith & Gesteland, LLP
Madison, Wisconsin
January 23, 2003 SMITH & GESTELAND, LLP
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED BALANCE SHEETS
December 31
2002 2001
-------- --------
ASSETS (Thousands of dollars)
Cash and due from banks $ 33,300 $ 24,033
Federal funds sold 4,452
-------- --------
Cash and cash equivalents 33,300 28,485
Investment securities available for sale (at market) 133,139 144,895
Investment securities held to maturity (market value
$18,524 and $22,398) 18,227 22,205
Loans held for sale 1,602 2,428
Loans 664,285 605,287
Less: Allowance for loan losses 11,410 7,992
-------- --------
Loans, net of allowance for loan losses 652,875 597,295
Bank premises and equipment 23,446 21,792
Federal Home Loan Bank stock (at cost) 6,713 6,376
Accrued interest receivable 4,580 5,112
Income taxes receivable 340 1,673
Deferred income taxes 2,878 2,048
Goodwill 4,969 4,969
Other assets 22,587 8,435
-------- --------
Total assets $904,656 $845,713
======== ========
The accompanying notes are an integral part of the financial statements.
46
2002 2001
--------- ---------
LIABILITIES (Thousands of dollars)
Domestic deposits
Noninterest bearing $ 89,848 $ 76,051
Interest bearing
NOW 64,281 49,709
Savings 195,232 218,736
Time, $100,000 and over 176,605 137,070
Other time 214,358 188,246
--------- ---------
Total interest bearing 650,476 593,761
--------- ---------
Total deposits 740,324 669,812
Short-term borrowings
Federal funds purchased, repurchase agreements,
and Federal Home Loan Bank advances 10,056 2,837
Accrued expenses and other liabilities 6,698 6,779
Dividends payable 972 897
Other borrowings 65,000 90,000
Long-term debt 106 158
Guaranteed preferred beneficial interest in the
company's junior subordinated debt 16,100 16,100
--------- ---------
Total liabilities 839,256 786,583
--------- ---------
STOCKHOLDER EQUITY
Common stock $5 par value - authorized 50,000,000
shares in 2002 and 2001; issued 7,506,435 shares
in 2002; 7,494,734 shares in 2001; outstanding
7,483,276 shares in 2002; 7,471,575 shares in 2001 37,532 37,474
Additional paid-in capital 7,373 7,319
Retained earnings 17,903 12,843
Treasury stock (625) (625)
Accumulated other comprehensive income
Net unrealized gain on securities available for sale, net of
tax of $1,716 in 2002 and $1,146 in 2001 3,217 2,119
--------- ---------
Total stockholder equity 65,400 59,130
--------- ---------
Total liabilities and stockholder equity $ 904,656 $ 845,713
========= =========
47
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
2002 2001 2000
------- ------- --------
(Amounts in thousands except per share data)
Interest income
Interest and fees on loans $42,826 $49,313 $ 46,685
Interest on investment securities
Taxable 5,958 6,887 6,806
Exempt from federal income taxes 2,753 2,631 2,532
Other interest income 27 192 13
------- ------- --------
Total interest income 51,564 59,023 56,036
------- ------- --------
Interest expense
Interest on deposits 17,335 24,455 23,582
Interest on short-term borrowings 413 1,178 2,970
Interest on other borrowings 2,790 4,975 5,529
Interest on guaranteed preferred beneficial interest in the
company's junior subordinated debt 1,645 1,430
Interest on long-term debt 5 15 18
------- ------- --------
Total interest expense 22,188 32,053 32,099
------- ------- --------
Net interest income 29,376 26,970 23,937
Provision for loan losses 5,700 2,880 545
------- ------- --------
Net interest income after provision for loan losses 23,676 24,090 23,392
------- ------- --------
Other income
Fees from fiduciary activities 637 664 517
Fees from loan servicing 1,327 1,461 837
Fees for other services to customers 3,573 2,444 2,053
Gains from sales of loans 1,425 873 240
Securities gains 509
Other income 3,282 865 1,039
------- ------- --------
Total other income 10,753 6,307 4,686
------- ------- --------
Other expenses
Salaries and employee benefits 13,743 11,923 10,353
Occupancy expense 2,163 1,834 1,643
Equipment expense 1,422 1,401 1,404
Data processing and courier 1,040 986 932
Operation of other real estate 203 248 (22)
Other operating expenses 4,560 4,379 4,280
------- ------- --------
Total other expenses 23,131 20,771 18,590
------- ------- --------
Income before income taxes 11,298 9,626 9,488
Income tax expense 2,575 2,091 2,778
------- ------- --------
NET INCOME $ 8,723 $ 7,535 $ 6,710
======= ======= ========
Basic earnings per common share $ 1.17 $ 1.01 $ 0.90
Diluted earnings per common share $ 1.15 $ 0.99 $ 0.87
The accompanying notes are an integral part of the financial statements.
48
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
For the Years Ended December 31
Accumulated
Common Stock Additional Other
-------------------- Paid-in Comprehensive Retained Treasury Total
Shares Amount Capital Income Earnings Stock Equity
--------- ------- ---------- ------------- -------- -------- --------
2000 (Amounts in thousands except for shares)
Balance - January 1, 2000 7,460,333 $37,302 $7,120 $(2,599) $5,012 $(625) $46,210
Net income for the year 6,710 6,710
Net changes in unrealized gain
(loss) on securities available for
sale, net of $792 deferred taxes 3,152 3,152
-------
Comprehensive income 9,862
-------
Stock options exercised 8,400 42 5 47
Tax benefit from exercise of stock
options 60 60
Cash dividends declared (3,052) (3,052)
--------- ------- ------ ------ ------- ----- -------
Balance - December 31, 2000 7,468,733 37,344 7,185 553 8,670 (625) 53,127
2001
Net income for the year 7,535 7,535
Net changes in unrealized gain
(loss) on securities available for
sale, net of $869 deferred taxes 1,566 1,566
-------
Comprehensive income 9,101
-------
Stock options exercised 26,001 130 82 212
Tax benefit from exercise of stock
options 52 52
Cash dividends declared (3,362) (3,362)
--------- ------- ------ ------ ------- ----- -------
Balance - December 31, 2001 7,494,734 37,474 7,319 2,119 12,843 (625) 59,130
2002
Net income for the year 8,723 8,723
Net changes in unrealized gain
(loss) on securities available for
sale, net of $570 deferred taxes 1,098 1,098
-------
Comprehensive income 9,821
-------
Stock options exercised 11,701 58 23 81
Tax benefit from exercise of stock
options 31 31
Cash dividends declared (3,663) (3,663)
--------- ------- ------ ------ ------- ----- -------
Balance - December 31, 2002 7,506,435 $37,532 $7,373 $3,217 $17,903 $(625) $65,400
======= ====== ====== ======= ===== =======
Less treasury stock 23,159
---------
7,483,276
=========
The accompanying notes are an integral part of the financial statements.
49
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
2002 2001 2000
-------- -------- ---------
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received from:
Loans $ 43,416 $ 49,721 $ 45,200
Investments 8,877 9,730 9,127
Fees and service charges 8,279 5,676 4,197
Interest paid to depositors (17,608) (24,715) (22,797)
Interest paid to others (5,010) (7,935) (8,227)
Cash paid to suppliers and employees (21,417) (18,322) (16,894)
Income taxes paid (2,626) (3,290) (2,887)
-------- -------- ---------
Net cash provided by operating activities 13,911 10,865 7,719
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 8,506
Principal payments received on investments 79,777 36,141 15,634
Purchase of investments (70,843) (47,559) (22,045)
Proceeds from sale of other real estate owned 5,608 2,839 1,119
Loans made to customers in excess of principal collected (67,143) (57,190) (110,743)
Capital expenditures (1,206) (1,925) (4,281)
Payments on insurance contracts (13,000)
-------- -------- ---------
Net cash used in investing activities (58,301) (67,694) (120,316)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 4,865 41,646 43,521
Net increase (decrease) in short-term borrowings 7,220 (76,702) 71,056
Net increase in time deposits 65,648 74,239 5,761
Proceeds from trust preferred securities 16,100
Proceeds (payments) from other borrowings (25,000) 35,000 98,000
Payments on other borrowings and long-term debt (53) (22,753) (100,453)
Proceeds from issuance of stock 113 264 107
Debt issuance costs (891) (199)
Dividends paid (3,588) (3,284) (2,976)
-------- -------- ---------
Net cash provided by financing activities 49,205 63,619 114,817
-------- -------- ---------
Net increase in cash and due from banks 4,815 6,790 2,220
Cash and cash equivalents, beginning 28,485 21,695 19,475
-------- -------- ---------
Cash and cash equivalents, ending $ 33,300 $ 28,485 $ 21,695
======== ======== =========
50
2002 2001 2000
--------- -------- --------
(Thousands of dollars)
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 8,723 $ 7,535 $ 6,710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,460 1,934 1,871
Provision for losses on loans and real
estate owned 5,700 2,880 545
Amortization of premium on investments 317 206 146
Accretion of discount on investments (182) (364) (177)
Cash surrender value increase (450) (140) (124)
Gain on sale of investment securities (509)
Gain on sale of loans and other assets (1,467) (1,062) (494)
Proceeds from sale of loans held for sale 110,056 87,379 23,802
Origination of loans held for sale (108,631) (86,506) (23,562)
Equity in income of service center (383) (295) (250)
Deferred compensation 96 90 108
Deferred income taxes (1,401) (661) (136)
Changes in assets and liabilities:
Interest receivable 532 621 (1,586)
Prepaids and other assets (1,098) 1 (40)
Unearned income (8) (35) (92)
Interest payable (429) (596) 1,075
Taxes receivable 1,349 (538) 27
Other liabilities 236 416 (104)
--------- -------- --------
Net cash provided by operating activities $ 13,911 $ 10,865 $ 7,719
========= ======== ========
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of property in lieu of foreclosure $ 6,697 $ 3,448 $ 1,619
Dividends reinvested in common stock 771 857 771
51
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements of Baylake Corp. (the company)
include the accounts of the company, its wholly-owned subsidiaries;
Kewaunee County Banc-Shares, Inc., (KCB) and Baylake Capital Trust I, and
KCB's wholly-owned subsidiary Baylake Bank, and its wholly-owned
subsidiaries; Bank of Sturgeon Bay Building Corporation, Cornerstone
Financial, Inc., Baylake Investments, Inc., Baylake Insurance Agency, Inc.
and Arborview, LLC. All significant intercompany items and transactions
have been eliminated.
Baylake Bank owns a 49% interest in United Financial Services, Inc., (UFS)
a data processing service. The investment in this entity is carried under
the equity method of accounting and the pro rata share of its income is
included in other revenue. Amounts paid to UFS for data processing
services for Baylake's banks were $909,000, $850,000, and $815,000 in
2002, 2001, and 2000, respectively. At December 31, 2002 and 2001, Baylake
Bank had loans of $200,000 and $180,000, respectively, to UFS.
Baylake Bank makes commercial, mortgage, and installment loans to
customers substantially all of whom are located in Door, Brown, Kewaunee,
Manitowoc, Waushara, Outagamie, Green Lake and Waupaca Counties of
Wisconsin. Although Baylake Bank has a diversified portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economic condition of the local industrial businesses,
and commercial, agricultural and tourism industries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
For comparability, certain 2001 and 2000 amounts have been reclassified to
conform with classification adopted in 2002.
The company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and due from banks. The company
places these assets with high credit quality institutions. At times such
assets may be in excess of FDIC insurance limit.
Investment securities classified as held to maturity are those securities
which the bank has both the intent and the ability to hold until maturity.
Under this classification, securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts which are recognized
as adjustments to interest income. Gains or losses on disposition are
based on the net proceeds and the adjusted carrying amount of the
securities sold, using the specific identification method.
52
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Investment securities classified as available for sale are those
securities which Baylake Bank has determined might be sold to manage
interest rate risk or in response to changes in interest rates or other
economic factors. While the company has no current intention of selling
these securities, they may not be held to maturity.
Investment securities available for sale are carried at market value.
Adjustments up or down to market value are recorded as a separate
component of equity, net of tax. Premium amortization and discount
accretion are recognized as adjustments to interest income. Realized gains
or losses on disposition are based on the net proceeds and the adjusted
carrying amount of the securities sold, using the specific identification
method.
Loans, including loans held for sale, are stated at face value, net of
deferred loan origination fees (net of costs) and the allowance for loan
losses. Interest on loans is calculated using the simple interest method
on daily balances of the principal amount outstanding or an amortized
method.
Loan origination fees and related costs are deferred and the net deferred
revenue is amortized over the term of the loans using the effective
interest rate method.
The allowance for loan losses is maintained at a level that is
management's best estimate of probable loan losses incurred as of the
balance sheet date. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current domestic and international economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses charged
against income.
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 nonaccrual loans are used to reduce
principal rather than recorded as interest income.
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to operating expense over the estimated useful
lives of the assets, using the straight-line and accelerated methods.
Mortgage servicing rights of $308,000, $400,000, and $215,000 were
capitalized and $260,000, $204,000, and $101,000 were amortized during
2002, 2001, and 2000, respectively. The amount of impairment was not
material. The amount of loans serviced for the benefit of others as of
December 31, 2002, 2001, and 2000 was $105,180,000, $87,165,000, and
$67,030,000, respectively.
53
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Other real estate, which is included in other assets, comprises properties
acquired through a foreclosure proceeding or acceptance of a deed in lieu
of foreclosure. These properties are carried at the lower of cost or fair
value, minus estimated costs to sell, based on appraised value at the date
acquired. Loan losses arising from the acquisition of such property are
charged against the allowance for loan losses. An allowance for losses on
other real estate is maintained for subsequent valuation adjustments on a
specific property basis.
During 2002, the company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangibles," which
requires that goodwill no longer be amortized but, instead, tested
annually for impairment. There was no impairment of goodwill in 2002.
Prior to 2002, goodwill was being amortized on a straight-line basis over
15 years. Amortization expense was $486,000 and $486,000 in 2001 and 2000,
respectively.
The company expenses all advertising costs as they are incurred. Total
advertising costs for the years ended December 31, 2002, 2001, and 2000
were $274,000, $293,000, and $339,000, respectively.
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25) and related interpretations in accounting for its
stock-based compensation plans. Under Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
companies may elect to recognize stock-based compensation expense based on
the fair value of the awards or continue to account for stock-based
compensation under APB No. 25. The company has elected to continue to
apply the provisions of APB No. 25 with the disclosure requirements of
SFAS No. 123 in Note 18.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of the allowance
for loan losses, deferred loan origination fees, deferred compensation,
mortgage loan servicing, market value adjustments of securities, and
depreciation for financial and income tax reporting. The deferred tax
assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
The company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return
basis, and remit to the company amounts determined to be currently
payable, if any.
Earnings per share are based on the weighted average number of shares
outstanding during each year.
For purposes of the statement of cash flows, the company considers cash,
due from banks, and federal funds sold as cash and cash equivalents.
54
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The company's subsidiary, Baylake Bank, is required to maintain average
reserve balances by the Federal Reserve Bank. The average amount of those
reserve balances for the year ended December 31, 2002, was approximately
$8,698,000.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as
follows:
December 31, 2002
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Thousands of dollars)
Available For Sale
U.S. Treasury and other
U.S. government agencies $ 38,379 $2,214 $ $ 40,593
Obligations of states and
political subdivisions 35,840 1,817 3 37,654
Mortgage-backed securities 49,968 941 58 50,851
Other 4,019 22 4,041
-------- ------ -------- --------
$128,206 $4,994 $ 61 $133,139
======== ====== ======== ========
Held to Maturity
Obligations of states and
political subdivisions $ 18,227 $ 297 $ $ 18,524
======== ====== ======== ========
55
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
December 31, 2001
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Thousands of dollars)
Available For Sale
U.S. Treasury and other U.S.
government agencies $ 21,505 $ 1,235 $ $ 22,740
Obligations of states and
political subdivisions 32,639 889 24 33,504
Mortgage-backed securities 73,183 1,359 194 74,348
Other 14,303 14,303
-------- ------- -------- --------
$141,630 $ 3,483 $ 218 $144,895
======== ======= ======== ========
Held to Maturity
Obligations of states and
political subdivisions $ 22,205 $ 216 $ 23 $ 22,398
======== ======= ======== ========
Results of sales of securities were as follows:
Available for Sale
----------------------------------
2002 2001 2000
------ ------ ------
(Thousands of dollars)
Proceeds $8,506 $ None $ None
Realized gains 509
56
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investments at December
31, 2002, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale Held to Maturity
--------------------- ---------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------- --------- --------- ---------
(Thousands of dollars) (Thousands of dollars)
Due in one year or less $ 7,675 $ 7,802 $ 3,980 $ 4,011
Due after one year through
five years 36,034 38,718 6,153 6,371
Due after five years through
ten years 19,525 20,906 2,618 2,666
Due after ten years 15,004 14,862 5,476 5,476
-------- -------- ------- -------
78,238 82,288 18,227 18,524
Mortgage-backed securities 49,968 50,851
-------- -------- ------- -------
$128,206 $133,139 $18,227 $18,524
======== ======== ======= =======
Securities pledged to secure public and trust deposits and borrowed funds
had a carrying value of $50,065,000 and $78,791,000 at December 31, 2002
and 2001, respectively.
NOTE 4 - LOANS
Major classifications of loans are as follows:
December 31, December 31,
2002 2001
------------ ------------
(Thousands of dollars)
Commercial, financial, and agricultural $ 440,632 $ 377,034
Real estate - construction 75,688 67,939
Real estate - mortgage 133,365 143,748
Installment 14,916 16,890
--------- ---------
664,601 605,611
Less: Deferred loan origination
fees, net of costs (316) (324)
--------- ---------
Net loans $ 664,285 $ 605,287
========= =========
57
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
Loans having a carrying value of $31,487,000 are pledged as collateral for
borrowings from the Federal Home Loan Bank at December 31, 2002.
Certain directors and officers of the company and the subsidiary banks,
including their immediate families, companies in which they are principal
owners, and trusts in which they are involved, were loan customers of the
subsidiary during 2002 and 2001. Such loans were made in the ordinary
course of business at normal credit terms, including interest rate and
collateralization, and do not represent more than a normal risk of
collection.
A summary of the changes in those loans is as follows:
2002 2001
------- -------
(Thousands of dollars)
Balance at beginning of year $ 4,889 $ 5,427
New loans made 3,252 4,547
Repayments received (3,156) (4,819)
Loans related to former officers and directors (7) (266)
------- -------
Balance at end of year $ 4,978 $ 4,889
======= =======
Loans on which the accrual of interest has been discontinued or reduced
amounted to $12,244,000 and $9,929,000 at December 31, 2002 and 2001,
respectively. If these loans had been current throughout their terms,
interest income for the nonaccrual period would have approximated
$1,639,000 and $1,212,000 for 2002 and 2001, respectively. Interest income
which has been recorded amounted to $357,000 and $346,000 for 2002 and
2001, respectively, for these nonaccrual loans.
Changes in the allowance for loan losses were as follows:
2002 2001 2000
-------- ------- -------
(Thousands of dollars)
Balance at beginning of year $ 7,992 $ 7,006 $ 7,611
Provision charged to operations 5,700 2,880 545
Recoveries 773 835 924
Loans charged off (3,055) (2,729) (2,074)
-------- ------- -------
Balance at end of year $ 11,410 $ 7,992 $ 7,006
======== ======= =======
58
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
The provision for credit losses charged to expense is based upon
management's best estimate of probable loan losses incurred at the balance
sheet date, including consideration of the banks' credit loss experience
and an evaluation of impaired loans under SFAS 114. A loan is considered
to be impaired when, based upon current information and events, it is
probable that the bank will be unable to collect all amounts due according
to the contractual terms of the loan.
The following is a summary of activity in investment in loans that have
declined in value and related interest income and allowance for credit
losses accounts:
2002 2001
-------- --------
(Thousands of dollars)
Impaired loans at December 31 $ 30,197 $ 23,740
Impaired loans at December 31 allowed for $ 30,197 $ 23,740
Average impaired loans during the period $ 30,443 $ 23,805
Interest income recognized while loans impaired $ 1,864 $ 1,012
Interest income using a cash-basis method $ 1,889 $ 1,004
Allowance as of January 1 $ 2,104 $ 1,865
Additions during the year 3,678 1,447
Recoveries of amounts previously allowed for (892) (1,208)
-------- --------
Allowance as of December 31 $ 4,890 $ 2,104
======== ========
59
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
2002 2001 2000
-------- -------- --------
(Thousands of dollars)
Land $ 3,673 $ 4,155 $ 4,074
Buildings and improvements 21,130 18,054 16,930
Equipment 9,373 10,313 9,613
-------- -------- --------
34,176 32,522 30,617
Less accumulated depreciation 10,730 10,730 9,304
-------- -------- --------
Bank premises and equipment $ 23,446 $ 21,792 $ 21,313
======== ======== ========
Depreciation expense $ 1,515 $ 1,449 $ 1,380
======== ======== ========
NOTE 6 - OTHER REAL ESTATE
Other real estate ($929,000 in 2002, $1,716,000 in 2001, and $931,000 in
2000, net of an allowance for other real estate losses of $33,000 in 2002,
$43,000 in 2001, and $54,000 in 2000) is included in other assets.
Net cost of operation of other real estate is summarized below:
2002 2001 2000
-------- -------- --------
(Thousands of dollars)
Loss on disposition of properties
and other costs $ 341 $ 475 $ 254
Gain on disposition of properties
and expense recoveries (138) (227) (276)
-------- -------- --------
Net (gains) losses $ 203 $ 248 $ (22)
======== ======== ========
Changes in the allowance for losses on other real estate were as follows:
2002 2001 2000
-------- -------- --------
(Thousands of dollars)
Balance at beginning of year $ 43 $ 54 $ 93
Amounts related to properties disposed (10) (11) (39)
-------- -------- --------
Balance at end of year $ 33 $ 43 $ 54
======== ======== ========
60
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits were as
follows:
(Thousands of dollars)
2003 $247,648
2004 113,416
2005 24,365
2006 5,378
2007 134
Thereafter 22
--------
$390,963
========
Deposits from the company's directors and officers held by Baylake Bank at
December 31, 2002 and 2001, amounted to $3,130,000 and $8,040,000,
respectively.
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
2002 2001 2000
------- ------- -------
(Thousands of dollars)
Federal funds purchased $ 8,250 $ $35,000
Federal Home Loan Bank Loan 42,000
Securities sold under agreements
to repurchase 1,806 2,837 2,538
------- ------- -------
$10,056 $ 2,837 $79,538
======= ======= =======
The average outstanding balance of total short-term borrowings amounted to
$21,039,000 in 2002 and $21,754,000 in 2001. The weighted-average interest
rate on these borrowings was 1.97% for 2002 and 5.42% for 2001. The
average outstanding balance is determined on a daily average basis and the
weighted-average interest rate is calculated by dividing the actual
interest paid on all short-term borrowings by the average balance for the
year.
The maximum amount outstanding at any month end was $48,197,000 during
2002 and $70,009,000 during 2001.
61
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of a land contract requiring annual principal
payments of $53,000 plus interest calculated at prime +1/4%. The balance
at December 31, 2002 and 2001, was $106,000 and $158,000, respectively.
NOTE 10 - OTHER BORROWINGS
Other borrowings consists of Federal Home Loan Bank loans secured by real
estate mortgages and mortgage backed agency securities. Interest rates
range from 1.42% to 4.73%. The total outstanding at December 31, 2002 is
$65,000,000, of which $40,000,000 mature in 2003 and the remaining
$25,000,000 mature in 2011.
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANY'S JUNIOR
SUBORDINATED DEBT
Baylake Corp. has sponsored a trust with a total outstanding balance of
$16.1 million in trust preferred securities at December 31, 2002, as
follows:
Junior Subordinated Debt
Trust Preferred Owned by Trust
------------------------------------------- ----------------------------------------
Initial Initial
Liquidation Principal
Value Distribution Amount Redeemable
Issuance Date (In Millions) Rate (In Millions) Maturity Beginning
------------- ------------- ------------ ------------- -------- ----------
Baylake Capital February 16, March 31, March 31,
Trust I 2001 $16.1 10.0% $16.6 2031 2006
Baylake Capital Trust I is a statutory business trust or ganized for the
sole purpose of issuing trust preferred securities and investing the
proceeds thereof in junior subordinated debentures of the company, the
sole asset of the trust. The common securities of the trust are
wholly-owned by the company. The trust preferred securities and common
securities of the trust represent preferred undivided beneficial interests
in the assets of Baylake Capital Trust I, and the holder of the preferred
securities will be entitled to a preference over the common securities of
the trust upon an event of default with respect to distributions and
amounts payable on redemption or liquidation. These trust preferred
securities are tax-advantaged issues that qualify for Tier 1 capital
treatment to the company. Distributions on these securities are included
in interest expense on guaranteed preferred beneficial interest. The
preferred securities are traded on the American Stock Exchange under the
symbol BYL_p.
62
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANY'S
JUNIOR SUBORDINATED DEBT (continued)
The trust's ability to pay amounts due on the trust preferred securities
is solely dependent upon the company making payment on the related junior
subordinated debentures to the trust. The company's obligations under the
junior subordinated debentures constitute a full and unconditional
guarantee by the company of the trust's obligations under the trust
securities issued by the trust.
NOTE 12 - DIVIDENDS AND CAPITAL RESTRICTIONS
Cash dividends per share to shareholders were $.49, $.45, and $.41 in
2002, 2001, and 2000, respectively, after adjustment for stock dividends.
As of December 31, 2002, undistributed earnings of the subsidiaries,
included in consolidated retained earnings, available for distribution to
the company as dividends without prior approval of regulatory authorities
was $29,375,000.
Federal banking regulatory agencies have 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 total 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 possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the
consolidated financial statements.
At December 31, 2002 and 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.
63
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
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 company's risk-based capital and leverage ratios are as follows
(thousands of dollars):
Risk-Based Capital Ratios
----------------------------------------------
December 31, 2002 December 31, 2001
-------------------- --------------------
Amount Ratio Amount Ratio
------- ----- ------- -----
Tier 1 capital
Baylake Corp. $73,220 9.7% $68,052 10.1%
Minimum requirement 30,073 4.0% 26,831 4.0%
Total capital
Baylake Corp. $82,643 11.0% $76,044 11.3%
Minimum requirement 60,146 8.0% 53,663 8.0%
Tier 1 capital to average total assets
Baylake Corp. $73,220 8.2% $68,052 8.2%
Minimum requirement 35,564 4.0% 33,032 4.0%
64
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Baylake Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit, and financial guarantees.
Baylake Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit and financial guarantees written is
represented by the contract or notional amount of those instruments. The
bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Contract or
Notional Amount
---------------------
2002 2001
-------- --------
(Thousands of dollars)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $145,951 $138,996
Standby letters of credit and
financial guarantees written 7,671 5,273
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Baylake
Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by Baylake Bank
upon extension of credit, is based on management's credit evaluation of
the counter-party. Collateral held varies but may include accounts
receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
65
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
Standby letters of credit and financial guarantees written are conditional
commitments issued by Baylake Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The guarantees expire in
decreasing amounts through 2008, with the majority expiring within five
years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Baylake Bank does not require collateral as support for the
commitments. Collateral is obtained based on loan policies upon use of a
commitment by a customer.
NOTE 14 - PENSION PLAN
The subsidiaries have 401(k) Profit Sharing Plans covering all employees
who qualify as to age and length of service. The employer contributions
paid and expensed under all plans for 2002, 2001, and 2000, totaled
$810,000, $713,000, and $626,000, respectively.
Certain officers and directors of the company and its subsidiaries are
covered by nonqualified deferred compensation plans. Payments to be made
under these plans are accrued over the anticipated years of service of the
individuals covered. Amounts charged to expense were $227,000 in 2002,
$224,000 in 2001, and $157,000 in 2000.
NOTE 15 - INCOME TAX EXPENSE
The taxes applicable to income before income taxes were as follows:
2002 2001 2000
------- ------- ------
(Thousands of dollars)
Taxes currently payable
Federal $ 3,259 $ 2,542 $2,442
State 379 212 311
------- ------- ------
3,638 2,754 2,753
------- ------- ------
Deferred income taxes
Federal (915) (571) 21
State (148) (92) 4
------- ------- ------
(1,063) (663) 25
------- ------- ------
Income tax expense $ 2,575 $ 2,091 $2,778
======= ======= ======
66
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAX EXPENSE (continued)
The provision for income taxes differs from the amount of income tax
determined by applying the statutory federal income tax rate to pretax
income as a result of the following differences:
2002 2001 2000
------- ------- -------
(Thousands of dollars)
Income tax based on statutory rate $ 3,841 $ 3,273 $ 3,226
State income taxes net of federal tax benefit 87 58 205
------- ------- -------
3,928 3,331 3,431
Effect of tax-exempt interest income (842) (749) (702)
Life insurance death benefit and earnings (410) (48) (42)
Equity in income of service center (130) (100) (85)
Amortization of goodwill 165 165
Federal tax refund claims based on IRS audit
of acquired company (516)
Other 29 8 11
------- ------- -------
Provision based on effective tax rates $ 2,575 $ 2,091 $ 2,778
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A
valuation allowance has been recognized to offset the related deferred tax
assets due to the uncertainty of realizing tax benefits of a portion of
loan loss and mortgage servicing differences.
67
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAX EXPENSE (continued)
The following is a summary of the significant components of the company's
deferred tax assets and liabilities as of December 31, 2002 and 2001:
2002 2001
------- -------
(Thousands of dollars)
Deferred tax assets
Allowance for loan losses $ 4,395 $ 2,590
Deferred loan origination fees 125 128
Deferred compensation 848 783
Mortgage loan servicing 149 318
Nonaccrual loans 581 648
Accrued vacation pay 157 104
Other 33 48
------- -------
Gross deferred tax assets 6,288 4,619
Valuation allowance for deferred tax assets (550) (550)
------- -------
Net deferred tax assets 5,738 4,069
------- -------
Deferred tax liabilities
Bank premises and equipment 889 805
FHLB stock dividends 137
Market value adjustment on securities
available for sale 1,716 1,146
Other 118 70
------- -------
Total deferred tax liabilities 2,860 2,021
------- -------
Net deferred asset $ 2,878 $ 2,048
======= =======
68
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EARNINGS AND DIVIDENDS PER SHARE
Earnings and dividends per share are based on the weighted average number
of shares outstanding for the year. A reconciliation of the basic and
diluted earnings per share amounts is as follows:
2002 2001 2000
--------- --------- ---------
Basic weighted average number of
common shares outstanding 7,474,819 7,467,986 7,443,999
Additional common dilutive stock
option shares 127,164 143,135 298,563
--------- --------- ---------
Diluted weighted average number
of common shares outstanding 7,601,983 7,611,121 7,742,562
========= ========= =========
Additional common stock option
shares that have not been
included due to their
antidilutive effect 216,450 216,450 60,000
There is no difference between basic and diluted income available to
common stockholders.
See Note 18 for information on additional stock options issued subsequent
to year end. These shares would not have changed materially the
calculation of the number of common shares or potential common shares
outstanding at the end of the period if the transaction had occurred
before December 31, 2002.
69
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 142
Prior to the adoption of SFAS No. 142, goodwill had a stated cost of
$7,192,000 and accumulated amortization of $2,222,000 and $1,736,000 as of
December 31, 2001 and 2000, respectively.
A summary of the effects of the adoption of SFAS No. 142 on net income is
as follows:
For the year ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
(Thousands of dollars except earnings
per share amounts)
Reported net income $ 8,723 $ 7,535 $ 6,710
Add back: goodwill amortization 486 486
--------- --------- ---------
Adjusted net income $ 8,723 $ 8,021 $ 7,196
========= ========= =========
Basic earnings per share:
Reported net income $ 1.17 $ 1.01 $ 0.90
Add back: goodwill amortization 0.07 0.07
--------- --------- ---------
Adjusted net income $ 1.17 $ 1.08 $ 0.97
========= ========= =========
Diluted earnings per share:
Reported net income $ 1.15 $ 0.99 $ 0.87
Add back: goodwill amortization 0.06 0.06
--------- --------- ---------
Adjusted net income $ 1.15 $ 1.05 $ 0.93
========= ========= =========
70
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - STOCK OPTION PLAN
The company has a non-qualified stock option plan under which certain
officers and key salaried employees may purchase shares of the company's
stock at an established exercise price. Unless earlier terminated, these
options will expire ten years from the date of grant. The options become
exercisable 20% per year, commencing one year from date of grant.
Activity in the plan is summarized as follows:
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
------------- --------------- -------------
Shares under option at December 31, 1999 646,500 $ 4.67 - 15.25 $ 10.64
Options granted 60,000 25.00 25.00
Options exercised (8,400) 4.67 - 8.95 5.64
------------- --------------- -------------
Shares under option at December 31, 2000 698,100 4.67 - 25.00 11.93
Options granted 30,975 13.00 - 14.75 14.72
Options exercised (26,000) 4.67 - 11.50 8.12
------------- --------------- -------------
Shares under option at December 31, 2001 703,075 4.67 - 25.00 12.19
Options granted 32,384 13.00 13.00
Options exercised (11,700) 4.67 - 9.50 7.00
------------- --------------- -------------
Shares under option at December 31, 2002 723,759 $ 8.92 - 25.00 $ 12.31
============= =============== =============
Subsequent to year-end, options to purchase up to an additional 23,000
shares were granted. The exercise price was established at 100% of the
fair market value of the stock on the date of grant, or $13.30 per share.
The options outstanding at December 31, 2002, were:
Weighted
Weighted-Average Average
Number of Shares Exercise Price Remaining
Price --------------------------- --------------------------- Life
Range Outstanding Exercisable Outstanding Exercisable (In Years)
-------------- ----------- ----------- ----------- ----------- ----------
$ 8.92 - 11.50 474,400 450,400 $ 9.72 $ 9.73 3.3
13.00 - 15.25 189,359 81,795 14.78 15.21 6.8
25.00 60,000 24,000 25.00 25.00 7.0
------- ------- ---------- ---------- ---
723,759 556,195 12.31 11.19 4.5
======= ======= ========== ========== ===
71
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - STOCK OPTION PLAN (continued)
Options exercisable at December 31, 2001 and 2000, were 476,500 and
394,500, respectively. The weighted average exercise price for options
exercisable at December 31, 2001 and 2000, was $10.66 and $10.03,
respectively.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation" establishes financial accounting
and reporting standards for stock-based employee compensation plans.
SFAS 123 defines a fair value based method of accounting for employee
stock option or similar equity instruments. Under the fair value based
method, compensation cost is measured at the grant date based on the fair
value of the award using an option-pricing model that takes into account
the stock price at the grant date, the exercise price, the expected life
of the option, the volatility of the underlying stock, expected dividends
and the risk-free interest rate over the expected life of the option. The
resulting compensation cost is recognized over the service period, which
is usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date
or other measurement date over the amount paid to acquire the stock.
The largest difference between SFAS 123 and APB 25 as it relates to the
company is the amount of compensation cost attributable to the company's
stock option plan. Under APB 25 no compensation cost is recognized for the
stock option plan because the exercise price is equal to the quoted market
price at the date of grant and therefore there is no intrinsic value. SFAS
123 compensation cost would equal the calculated fair value of the options
granted.
As permitted by SFAS 123, the company continues to measure compensation
cost for the stock option plan using the accounting method prescribed by
APB 25.
72
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - STOCK OPTION PLAN (continued)
Had compensation cost for the company's options granted after January 1,
1995, been determined according to SFAS 123, the company's net income and
earnings per share would have been reduced to the following proforma
amounts:
2002 2001 2000
--------- --------- ---------
(Thousands of dollars)
Net income
As reported $ 8,723 $ 7,535 $ 6,710
Stock-based compensation cost if the fair value
based method had been used 361 398 390
--------- --------- ---------
Proforma $ 8,362 $ 7,137 $ 6,320
========= ========= =========
Basic earnings per common share
As reported 1.17 1.01 0.90
Proforma 1.12 0.96 0.85
Diluted earnings per common share
As reported 1.15 0.99 0.87
Proforma 1.10 0.94 0.83
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option pricing model. The resulting compensation
cost was amortized over the vesting period.
The grant date fair values and assumptions used to determine such values
are as follows:
2002 2001 2000
--------- -------- --------
Weighted average grant date fair value $ 3.15 $ 6.32 $ 7.13
Assumptions:
Risk-free interest rates 3.78% 4.58% 5.12%
Expected volatility 30.10% 52.40% 27.40%
Expected term (in years) 8.00 8.00 8.00
Expected dividend yield 3.78% 3.36% 2.93%
73
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Provided below is the information required by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS 107). These amounts represent estimates of fair values
at a point in time. Significant estimates regarding economic conditions,
loss experience, risk characteristics associated with particular financial
instruments and other factors were used for the purposes of this
disclosure. These estimates are subjective in nature and involve matters
of judgment. Therefore, they cannot be determined with precision. Changes
in the assumptions could have a material impact on the amounts estimated.
Many of the company's financial instruments lack an available trading
market. Furthermore, most of the financial instruments are intended to be
held to maturity. Therefore, it is not probable that the fair values shown
will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition,
the significant value of long-term relationships with depositors and other
customers are not reflected.
A. CASH AND DUE FROM BANKS
These instruments are, by definition, short-term and do not present
any unanticipated credit issues. Therefore, the carrying amount is a
reasonable estimate of fair value.
B. INVESTMENT SECURITIES
The estimated fair values of securities are provided in Note 3 to
the financial statements. These are based on quoted market prices,
when available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
C. LOANS
The carrying amount (total outstandings excluding unearned income
and reserve for loan losses) and estimated fair value of loans
outstanding at December 31, 2002, are $664,286,000 and $667,832,000,
and for December 31, 2001, are $605,287,000 and $616,479,000. In
order to determine the fair values for loans, the loan portfolio was
segmented based on loan type, credit quality and repricing
characteristics. For certain variable rate loans with no significant
credit concerns and frequent repricings, estimated fair values are
based on the carrying values. The fair values of other loans are
estimated using discounted cash flow analyses. The discount rates
used in these analyses are generally based on origination rates for
similar loans of comparable credit quality. However, where
appropriate, adjustments have been made to more accurately reflect
market rates. Maturity estimates are based on historical experience
with prepayments and current economic and lending conditions.
74
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
D. DEPOSITS
The carrying amount and estimated fair value of deposits outstanding
at December 31, 2002, are $740,324,000 and $746,024,000 and for
December 31, 2001, are $669,812,000 and $672,646,000. Under SFAS
107, the fair value of deposits with no stated maturity is equal to
the amount payable on demand. Therefore, the fair value estimates
for these products do not reflect the benefits that the company
receives from the low-cost, long-term funding they provide. These
benefits are significant. The estimated fair values of fixed rate
time deposits are based on discounted cash flow analyses. The
discount rates used in these analyses are based on market rates
currently offered for deposits of similar remaining maturities.
Because of the repricing characteristics and the competitive nature
of the company's rates offered on variable rate time deposits,
carrying amount is a reasonable estimate of the fair value.
E. SHORT-TERM BORROWINGS
Short-term borrowings reprice frequently and therefore the carrying
amount is a reasonable estimate of fair value.
F. GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANY'S JUNIOR
SUBORDINATED DEBT AND OTHER BORROWINGS
The carrying amount and estimated fair value of guaranteed preferred
beneficial interest in the company's junior subordinated debt and
other borrowings outstanding at December 31, 2002, are $81,100,000
and $83,973,000 and for December 31, 2001, are $106,100,000 and
$109,178,000. The estimated fair values of fixed rate time
borrowings are based on discounted cash flow analyses. The discount
rates used in these analyses are based on market rates currently
offered for borrowings of similar remaining maturities.
G. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND LETTERS
OF CREDIT
Pricing of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of
funding, and compensating balance and other covenants or
requirements. Loan commitments generally have fixed expiration
dates, are variable rate and contain termination and other clauses
which provide for relief from funding in the event that there is a
significant deterioration in the credit quality of the customer.
Many loan commitments are expected to, and typically do, expire
without being drawn upon. The carrying amounts are reasonable
estimates of the fair value of these financial instruments. Carrying
amounts are comprised of the unamortized fee income and, where
necessary, reserves for any expected credit losses from these
financial instruments.
75
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - COMMITMENTS AND CONTINGENCIES
The company has a ten year lease to rent space in a building in Green Bay
that began in 2000. The annual base rent is $79,000 and increases as of
the beginning of each December based on the Consumer Price Index.
The company has a seven year lease to rent space for a branch bank
location in Howard, Wisconsin that began in 2000. The annual base rent is
$37,000 and increases by 15% after five years. The company must also pay
its proportional share of costs for common areas at the mall.
Rent expense for 2002 and 2001 was $117,000 and $110,000, respectively.
Future minimum lease payments under these agreements are as follows:
2003 $ 119,447
2004 121,746
2005 124,110
2006 126,540
2007 129,038
2008 and thereafter 191,185
---------
$ 812,066
=========
As part of the Evergreen Bank, N.A. ("Evergreen") acquisition, the company
was required to contribute $7 million of capital to Evergreen. No payments
to the seller of Evergreen have been made, but are contingently payable
based on a formula set forth in the stock purchase agreement, not to
exceed $2 million. The contingent payments are not accrued at December 31,
2002, since the amount, if any, is not estimable.
The acquisition was accounted for using the purchase method of accounting.
Under the purchase method, net assets purchased are recorded at their fair
market values on the date of acquisition. Any excess of the purchase price
over the value of the net assets is recorded as goodwill. The goodwill
recorded on the Evergreen acquisition is the result of assumption of
liabilities having a market value in excess of market value of assets
received. Any payments made in the future to the former shareholder of
Evergreen may affect the goodwill recorded.
76
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
BAYLAKE CORP.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31
2002 2001
------- -------
(Thousands of dollars)
ASSETS
Cash in bank $ 1,922 $ 3,636
Interest receivable 4
Receivable from subsidiary 134 188
Prepaid expenses 1,024 1,059
Investment securities available for sale 1,010
Investment in subsidiaries 78,884 71,745
------- -------
Total assets $82,978 $76,628
======= =======
LIABILITIES AND STOCKHOLDER
EQUITY
Liabilities
Dividends payable $ 972 $ 897
Accrued expense 1 3
Debentures to subsidiary 16,598 16,598
Deferred income taxes 7
------- -------
Total liabilities 17,578 17,498
Stockholder equity 65,400 59,130
------- -------
Total liabilities and stockholder equity $82,978 $76,628
======= =======
77
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
2002 2001 2000
-------- -------- --------
(Thousands of dollars)
Income
Dividends from subsidiaries $ 3,800 $ 200 $ 2,645
Interest income 151 216 11
------- ------- -------
Total income 3,951 416 2,656
------- ------- -------
Expenses
Interest 1,695 1,551 322
Other 98 171 67
Income tax benefit (559) (509) (128)
------- ------- -------
Total expenses 1,234 1,213 261
------- ------- -------
Income (loss) before
equity in undistributed net
income of subsidiaries 2,717 (797) 2,395
Equity in undistributed net income
of subsidiaries 6,006 8,332 4,315
------- ------- -------
NET INCOME $ 8,723 $ 7,535 $ 6,710
======= ======= =======
78
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31
2002 2001 2000
--------- -------- --------
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (101) $ (189) $ (218)
Interest received 95 216 11
Interest paid (1,659) (1,557) (316)
Dividends received 3,800 800 2,788
Income taxes received 613 454 381
-------- ------- -------
Net cash provided by (used in)operating
activities 2,748 (276) 2,646
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment (986)
Capital contributed to subsidiary (1,039) (7,345)
-------- ------- -------
Net cash used in investing activities (986) (1,039) (7,345)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (3,588) (3,284) (2,976)
Issuance of debt 16,100 7,700
Payments on debt (7,700)
Issuance of stock 112 264 108
Debt issue costs (891)
-------- ------- -------
Net cash provided by (used in) financing
activities (3,476) 4,489 4,832
-------- ------- -------
Net increase (decrease) in cash (1,714) 3,174 133
Cash and due from banks, beginning 3,636 462 329
-------- ------- -------
Cash and due from banks, ending $ 1,922 $ 3,636 $ 462
======== ======= =======
79
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31
2002 2001 2000
-------- -------- --------
(Thousands of dollars)
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 8,723 $ 7,535 $ 6,710
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiary (6,006) (8,332) (4,315)
Accretion of discount on investments (2)
Amortization 35 30
Reinvested interest income (50)
Change in interest receivable (4)
Change in receivable from subsidiary 54 (58) 253
Change in prepaid expenses (199)
Change in dividends receivable 600 143
Change in accrued expenses (2) (51) 54
------- ------- -------
Net cash provided by (used in)operating
activities $ 2,748 $ (276) $ 2,646
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Dividends reinvested in common stock $ 771 $ 857 $ 771
80
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - BUSINESS SEGMENTS
The company has two business segments for which discrete financial
information is available: banking and non-banking.
Banking provides commercial, mortgage, and consumer lending, deposit
services, trust services, and other traditional bank services. These
services are provided primarily through branch banks, and ATMs.
Non-banking includes insurance agency services and conference facilities
through two of the company's wholly-owned subsidiaries in 2001. In 2002,
this category also includes an assisted living facility which became a
wholly-owned subsidiary during the year.
2002
-----------------------------------------------------------------
Intercompany
Banking Non-Banking Amounts Totals
----------- ----------- ------------ ----------
(Amounts in thousands)
Interest revenue $ 51,564 $ 7 $ (7) $ 51,564
Interest expense 22,195 (7) 22,188
Provision for loan losses 5,700 5,700
Noninterest revenue 9,883 870 10,753
Noninterest expenses 22,031 1,100 23,131
Income taxes 2,646 (71) 2,575
Net income 8,837 (114) 8,723
Total assets 905,334 2,632 (3,310) 904,656
2001
-----------------------------------------------------------------
Intercompany
Banking Non-Banking Amounts Totals
----------- ----------- ------------ ----------
(Amounts in thousands)
Interest revenue $ 59,023 $ 19 $ (19) $ 59,023
Interest expense 32,072 (19) 32,053
Provision for loan losses 2,880 2,880
Noninterest revenue 6,167 140 6,307
Noninterest expense 20,657 114 20,771
Income taxes 2,074 17 2,091
Net income 7,507 28 7,535
Total assets 846,294 580 (1,083) 845,791
81
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No. 1, Election of
Directors," "Information on Executive Officers" and "Compliance with Section
16(a) of the Exchange Act" contained in the definitive proxy statement for the
Company's 2003 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Director Fees and
Benefits", "Executive Compensation", "Board of Directors Compensation Committee
Report on Management Compensation", "Compensation Committee Interlocks and
Insider Participation" and "Performance Graph" contained in the definitive proxy
statement for the Company's 2003 Annual Meeting of Stockholders is incorporated
herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the section titled "Ownership of Baylake Common"
contained in the definitive proxy statement for the Company's 2003 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the section titled "Certain Transactions with
Management" in the definitive proxy statement for the Company's 2003 Annual
Meeting of Stockholders is incorporated herein by reference.
82
PART IV
Item 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this
report on Form 10-K, the Company's principal executive officer and
principal financial officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13(a)-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act") are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regards to
significant deficiencies and material weaknesses.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The consolidated financial statements and supplementary data contained in Item 8
of this report are filed as part of this report. All schedules are omitted
because of the absence of the conditions under which they are required or
because the required information is included in the consolidated financial
statements or related notes.
(a) 3.
See Item 14(c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits Required by Item 601 of Regulation S-K
Reference is made to the Exhibit Index on page 88 for exhibits filed as part of
this report.
(d) Additional Financial Statements
Not applicable.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /s/ Steven D. Jennerjohn
Steven D. Jennerjohn
Treasurer
Date: March 18,2003
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below hereby designates and appoints Thomas L. Herlache and Steven D.
Jennerjohn, and each of them, any one of whom may act without the joinder of the
other, as such person's true and lawful attorney-in-fact and agents (the
"Attorneys-in-Fact") with full power of substitution and resubstitution, for
such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, the
Securities and Exchange Commission and any state securities commission, granting
unto said Attorneys-in-Fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all that said
Attorneys-in-Fact and agents or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
these dates indicated.
/s/ Thomas L. Herlache /s/ Richard A. Braun
- ------------------------------ ----------------------------------------
Thomas L. Herlache Richard A. Braun, Director
President, Chief Executive Vice-Chairman of the Board and
Officer and Director Executive Vice-President
(Principal Executive Officer)
84
/s/ Steven D. Jennerjohn
- ------------------------------ ________________________________________
Steven D. Jennerjohn John W. Bunda, Director
Treasurer
(Principal Financial and
Accounting Officer)
/s/ Robert W. Agnew
- ------------------------------ ________________________________________
Robert W. Agnew, Director Ronald D. Berg, Director
/s/ George Delveaux, Jr. /s/ Roger G. Ferris
- ------------------------------ ----------------------------------------
George Delveaux, Jr., Director Roger G. Ferris, Director
/s/ Joseph J. Morgan /s/ William Parsons
- ------------------------------ ----------------------------------------
Joseph J. Morgan, Director William Parsons, Director
/s/ Paul Jay Sturm
- ------------------------------
Paul Jay Sturm, Director
* Each of the above signatures is affixed as of March 18, 2003.
85
CERTIFICATIONS
I, Thomas L. Herlache, certify that:
1. I have reviewed this annual report on Form 10-K of Baylake Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other facts that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 20, 2003
/s/ Thomas L. Herlache
----------------------------------------
Thomas L. Herlache
President and CEO
86
I, Steven D. Jennerjohn, certify that:
1. I have reviewed this annual report on Form 10-K of Baylake Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 an 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 20, 2003
/s/ Steven D. Jennerjohn
----------------------------------------
Steven D. Jennerjohn
Senior Vice President and Chief Financial Officer
87
Sequentially Exhibit
Numbered Page No. Description
- ------------- --- -----------
- -- 2.1 Agreement and Plan of Acquisition dated March 13, 1996 between Baylake
Corp. and Four Seasons of Wis Corp. (1)
- -- 2.4 Stock Purchase Agreement, dated as of October 1, 1998, among the
Company, M&I and Evergreen (2)
- -- 3.1 Articles of Incorporation, as amended (3)
- -- 3.2 Bylaws, as amended (4)
- -- 3.3 Amendment to increase authorized shares of common stock of Baylake
Corp. from 10,000,000 to 50,000,000 shares (5)
- -- 4.1 Junior subordinated debenture dated February 16, 2002, by and between
Company and Wilmington Trust Company, as Indenture Trustee (6)
- -- 10.1 Baylake Corp. 1993 Stock Option Plan (7)
- -- 10.2 Baylake Bank's Pay-for-Performance (bonus) program (8)
- -- 10.3 Baylake Bank's Deferred Compensation Program with Thomas L. Herlache
(9)
- -- 10.4 Baylake Bank's Agreement for Early Retirement with Ronald D. Berg (10)
- -- 10.5 Baylake Bank's Deferred Compensation and Salary Continuation Agreement
with Richard A. Braun (11)
- -- 10.6 Baylake Corp. Stock Purchase Plan (12)
Page 91 12.1 Statement Re Computation of Ratios
Page 93 21.1 List of Subsidiaries
Page 96 23.1 Consent of Smith & Gesteland
Page 84 24.1 Power of Attorney (contained on the Signature Page)
Page 94 99.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 95 99.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to Exhibit 2.1 from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.
(2) Incorporated by reference to Exhibit 2.1 from the Company's Current Report
on Form 8-K filed October 15, 1998.
(3) Incorporated by reference to Exhibit 3.1 from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.
(4) Incorporated by reference to Exhibit 3.2 from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference to Exhibit 3.3 from the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders.
(6) Incorporated by reference to Exhibit 4.1 from the Company's Form S-3 filed
February 12, 2001 for Trust Preferred Securities issued under Baylake
Capital Trust I on February 16, 2001.
(7) Incorporated by reference to Exhibit A from the Company's Proxy Statement
for the 1993 Annual Meeting of Shareholders.
88
(8) Incorporated by reference to Description thereof under "Board
Directors/Compensation Committee Report on Management's Compensation" in
the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders.
(9) Incorporated by reference to Exhibit 10.3 from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.
(10) Incorporated by reference to Exhibit 10.4 from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.
(11) Incorporated by reference to Exhibit 10.5 from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.
(12) Incorporated by reference to Exhibit 4 from the Company's Form S-3 filed
on February 10, 1998.
89