UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8679
BAYLAKE CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
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(State or other jurisdiction of incorporation (Identification No.)
or organization)
217 North Fourth Avenue, Sturgeon Bay, WI 54235
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(Address of principal executive offices) (Zip Code)
(920)-743-5551
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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Applicable Only to Corporate Issuers:
Number of outstanding shares of each of common stock, par value $5.00 per share,
as of October 27, 2004: 7,672,283 shares
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of September 30, 2004 3
and December 31, 2003
Consolidated Condensed Statement of Income and Comprehensive
Income for the three and nine months ended September 30, 2004 and 2003 4 - 5
Consolidated Statement of Stockholders' Equity for the three 6
and nine months ended September 30, 2004 and 2003
Consolidated Statement of Cash Flows for the nine months ended 7
September 30, 2004 and 2003
Notes to Consolidated Condensed Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10 - 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 - 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION 29 - 30
Item 1. Legal Proceedings
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures 30
EXHIBIT INDEX 30
Exhibit 31.1 Certification pursuant to Section 302 31
Exhibit 31.2 Certification pursuant to Section 302 32
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 33
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 34
2
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Cash and cash equivalents $ 21,837 $ 24,226
Investment securities available for sale 192,015 176,815
Loans held for sale 674 165
Loans 753,845 715,022
Less: Allowance for loan losses 12,957 12,159
----------- -----------
Loan, net of allowance for loan losses 740,888 702,863
Cash value of life insurance 21,372 20,789
Bank premises and equipment 24,098 21,958
Federal Home Loan Bank stock (at cost) 7,584 7,247
Other real estate owned 2,520 2,271
Current and deferred income tax assets 3,183 3,784
Goodwill 5,723 4,969
Accrued interest receivable and other assets 10,681 10,151
----------- -----------
Total Assets $ 1,030,575 $ 975,238
=========== ===========
LIABILITIES
Domestic deposits
Non-interest bearing $ 115,297 $ 106,642
Interest bearing 687,583 676,650
----------- -----------
Total deposits 802,880 783,292
Federal funds purchased, repurchase 28,367 23,359
agreements
Accrued expenses and other liabilities 7,879 6,208
Dividends payable 0 1,061
Advances from Federal Home Loan Bank 100,193 75,092
Junior subordinated debentures 16,598 16,598
----------- -----------
Total liabilities 955,917 905,610
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $5 par value: authorized 38,477 38,141
50,000,000 shares; issued
7,695,442 shares as of September 30, 2004 and
7,628,135 as of December 31, 2003; outstanding
7,672,283 as of September 30, 2004 and 7,604,976 as
of December 31, 2003
Additional paid-in capital 8,645 8,163
Retained earnings 26,220 21,864
Treasury Stock (625) (625)
Net unrealized gain (loss) on securities available
for sale, net of tax of $1,022 as of September
30, 2004 and $1,094 as of December 31, 2003 1,941 2,085
----------- -----------
Total stockholders' equity 74,658 69,628
----------- -----------
Total liabilities and stockholders' equity $ 1,030,575 $ 975,238
=========== ===========
3
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
------- ------- ------- -------
Interest income
Interest and fees on loans $10,560 $10,104 $30,362 $30,494
Interest on loans exempt from federal tax 162 170 473 560
Interest on investment securities
Taxable 1,664 1,258 4,878 3,362
Exempt from federal income taxes 362 417 1,128 1,280
Other interest income 4 2 11 17
------- ------- ------- -------
Total interest income 12,752 11,951 36,852 35,713
Interest expense
Interest on deposits 2,890 3,411 8,718 11,484
Interest on short-term borrowings 67 30 289 80
Interest on other borrowings 610 488 1,633 1,596
Interest on long-term debt 0 0 0 2
Interest on junior subordinated debentures
of unconsolidated subsidiary 424 412 1,271 1,234
------- ------- ------- -------
Total interest expense 3,991 4,341 11,911 14,396
------- ------- ------- -------
Net interest income 8,761 7,610 24,941 21,317
Provision for loan losses 70 1,212 1,569 3,137
------- ------- ------- -------
Net interest income after provision for
loan losses 8,691 6,398 23,372 18,180
------- ------- ------- -------
Other income
Fees from fiduciary activities 167 216 529 509
Fees from loan servicing 456 701 1,076 1,763
Fees for other services to customers 1,189 1,045 3,264 3,144
Gains from sales of loans 250 653 732 1,696
Gain from sale of fixed assets 0 0 482 0
Gains from sale of subsidiary 0 0 0 350
Other income 354 440 990 981
------- ------- ------- -------
Total other income 2,416 3,055 7,073 8,443
------- ------- ------- -------
Other expenses
Salaries and employee benefits 3,860 3,721 11,669 11,067
Occupancy expense 517 495 1,568 1,442
Equipment expense 332 467 1,000 1,283
Data processing and courier 280 269 835 807
Operation of other real estate 65 71 336 208
Other operating expenses 1,521 1,358 4,051 3,685
------- ------- ------- -------
Total other expenses 6,575 6,381 19,459 18,492
------- ------- ------- -------
Income before income taxes 4,532 3,072 10,986 8,131
Income tax expense 1,458 831 3,423 2,197
------- ------- ------- -------
Net Income $ 3,074 $ 2,241 $ 7,563 $ 5,934
======= ======= ======= =======
Comprehensive Income $ 5,245 $ 210 $ 7,419 $ 4,738
4
Basic earnings per common share $ 0.40 $ 0.30 $ 0.99 $ 0.79
Diluted earnings per common share $ 0.39 $ 0.29 $ 0.97 $ 0.77
Cash dividends per share $ 0.14 $ 0.13 $ 0.42 $ 0.39
5
BAYLAKE CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands, except per share data)
Accumulated
other Total
Common Retained comprehensive Treasury stockholders'
stock Surplus earnings income (loss) stock equity
-------- -------- -------- ------------- -------- -------------
Balance, January 1, 2003 $ 37,532 $ 7,373 $ 17,903 $ 3,217 $ (625) $ 65,400
Net income 5,934 5,934
Net change in unrealized gain
(loss) on securities available
for sale, net of $672 deferred
taxes (1,196) (1,196)
--------
Comprehensive income 4,738
--------
Stock options exercised 386 383 769
Tax benefit from exercise of
stock options 109 109
Cash dividends declared, $0.39
per share (2,936) (2,936)
Balance, September 30, 2003 $ 37,918 $ 7,865 $ 20,901 $ 2,021 $ (625) $ 68,080
Accumulated
other Total
Common Retained comprehensive Treasury stockholders'
stock Surplus earnings income (loss) stock equity
-------- -------- -------- ------------- -------- -------------
Balance, January 1, 2004 $ 38,141 $ 8,163 $ 21,864 $ 2,085 $ (625) $ 69,628
Net income 7,563 7,563
Net change in unrealized gain
(loss) on securities available
for sale, net of $72 deferred
taxes (144) (144)
--------
Comprehensive income 7,419
--------
Stock options exercised 336 375 711
Tax benefit from exercise of
stock options 107 107
Cash dividends declared, $0.42
per share (3,207) (3,207)
Balance, September 30, 2004 $ 38,477 $ 8,645 $ 26,220 $ 1,941 $ (625) $ 74,658
6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,563 $ 5,934
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation 1,033 1,336
Provision for loan losses 1,569 3,137
Amortization of other intangibles 234 393
Amortization of premiums and discounts on securities, net 398 505
Net gain on sale of loans held for sale (732) (1,697)
Federal Home Loan Bank stock dividend (337) (409)
Increase in cash surrender value of life insurance (583) (540)
Proceeds from sale of loans held for sale 48,757 130,396
Originations of loans held for sale (48,190) (128,699)
(Gain) loss from disposal of other real estate owned (178) (59)
(Gain) loss from disposal of fixed assets (482) 0
(Gain) loss from disposal of subsidiary 0 (350)
Equity in income of service center (259) (231)
Mortgage servicing rights booked (313) (467)
Deferred compensation 201 313
Change in income taxes and other assets (923) 1,939
Change in accrued expenses and other liabilities 1,922 345
--------- ---------
Net cash provided by operating activities 9,680 11,846
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on securities available for sale 15,019 59,429
Purchase of securities available for sale (30,832) (81,749)
Proceeds from sale of other real estate owned 2,242 1,623
Proceeds from sale of subsidiary assets 0 1,884
Proceeds from sale of bank assets 767 0
Cash paid in completion of acquisition (754) 0
Loans made to customers in excess of principal collected (41,907) (12,076)
Investment in bank owned life insurance 0 (4,000)
Capital expenditures (2,691) (1,310)
--------- ---------
Net cash used in investing activities (58,156) (36,199)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,588 13,231
Net increase (decrease) in short term borrowing 5,008
(1,773)
Proceeds from other borrowings and long-term debt 25,101 93
Payments on other borrowings and long term debt
(53) (53)
Proceeds from exercised stock options 711 769
Dividends paid (4,268) (3,907)
--------- ---------
Net cash provided by financing activities 46,087 8,360
--------- ---------
Net decrease in cash and cash equivalents (2,389)
(15,993)
Cash and cash equivalents, beginning 24,226 33,300
--------- ---------
Cash and cash equivalents, ending $ 21,837 $ 17,307
========= =========
7
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. The accompanying consolidated financial statements should be read in
conjunction with Baylake Corp.'s 2003 annual report on Form 10-K. The
accompanying consolidated financial statements are unaudited. These interim
financial statements are prepared in accordance with the requirements of
Form 10-Q, and accordingly do not include all of the information and
footnotes required by United States of America generally accepted
accounting principles for complete financial statements. In the opinion of
management, the unaudited financial information included in this report
reflects all adjustments, consisting only of normal recurring accruals,
which are necessary for a fair statement of the financial position as of
September 30, 2004 and December 31, 2003. The results of operations for the
three and nine months ended September 30, 2004 and 2003 are not necessarily
indicative of results to be expected for the entire year.
2. Diluted earnings per share, which reflects the potential dilution that
could occur if outstanding stock options were exercised and stock awards
were fully vested and resulted in the issuance of common stock that then
shared in the earnings of the Company, is computed by dividing net income
by weighted average number of common shares and common stock equivalents.
The following table shows the computation of the basic and diluted earnings
per share for the three and nine months ended September 30 (dollars in
thousands, except per share amounts):
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(NUMERATOR):
Net income $ 3,074 $ 2,241 $ 7,563 $ 5,934
(DENOMINATOR):
Weighted average number of common
shares outstanding-basic 7,654,549 7,546,443 7,642,506 7,520,021
Dilutive effect of stock options 155,416 170,153 155,416 170,153
---------- ---------- ---------- ----------
Weighted average of common shares
outstanding and assumed
conversion-diluted 7,809,965 7,716,596 7,797,922 7,690,174
BASIC EPS $ 0.40 $ 0.30 $ 0.99 $ 0.79
DILUTED EPS $ 0.39 $ 0.29 $ 0.97 $ 0.77
3. Baylake Corp. declared a cash dividend of $0.14 per share payable on
September 15, 2004 to shareholders of record as of September 1, 2004.
4. The Company has a non-qualified stock option plan, which is described more
fully in the Company's December 31, 2003 Annual Report on Form 10-K. The
Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee
compensation cost is reflected in
8
net income, as all options granted under these plans had an exercise price
at least equal to the fair market value of the underlying common stock on
the grant date. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value provisions
of SFAS 123 "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(In thousands, except per share amounts)
---------------------------------------------------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income, as reported $ 3,074 $ 2,241 $ 7,563 $ 5,934
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (47) (80) (140) (238)
--------- --------- --------- ---------
Pro forma net income 3,027 2,161 7,423 5,696
Earnings per share:
Basic - as reported $ 0.40 $ 0.30 $ 0.99 $ 0.79
Basic - pro forma $ 0.40 $ 0.29 $ 0.97 $ 0.76
Diluted - as reported $ 0.39 $ 0.29 $ 0.97 $ 0.77
Diluted - pro forma $ 0.39 $ 0.28 $ 0.95 $ 0.74
5. Certain amounts reported in the December 31, 2003 consolidated financial
statements and the September 30, 2003 Form 10-Q have been reclassified to
conform to the September 30, 2004 presentation.
9
PART 1 - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of Baylake Corp.
("Baylake" or the "Company") for the three and nine months ended September 30,
2004 and 2003 which may not be otherwise apparent from the consolidated
financial statements included in this report. Unless otherwise stated, the
"Company" or "Baylake" refers to this entity and to its subsidiaries on a
consolidated basis when the context indicates. For a more complete
understanding, this discussion and analysis should be read in conjunction with
the financial statements, related notes, the selected financial data and the
statistical information presented elsewhere in this report.
In 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen"), which was
later merged into Baylake Bank. In the acquisition, as a result of Evergreen's
capital regulatory condition, the Company was required to contribute capital to
Evergreen, but no payment to the seller of Evergreen ("Marshall & Ilsley Bank")
was made by the Company in 1998. Payment to the seller was contingent on the
recovery of a portion of non-performing loans of Evergreen and certain other
assets related to Evergreen. As of result of recoveries made, in September 2004,
Company and Marshall & Ilsley Bank ("M&I") were able to formalize the final
details of, and purchase price in, this transaction and the Company paid
$753,700 to M&I to finalize this transaction. This cost was recorded as goodwill
on the Company's books.
FORWARD-LOOKING INFORMATION
This discussion and analysis of financial condition and results of operations,
and other sections of this report, may contain forward-looking statements that
are based on the current expectations of management. Such expressions of
expectations are not historical in nature and are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "anticipates," "believes," "estimates," "expects," "forecasts,"
"intends," "is likely," "plans," "projects," and other such words are intended
to identify in such forward-looking statements. The statements contained herein
and in such forward-looking statements involve or may involve certain
assumptions, risks and uncertainties, many of which are beyond the control of
the Company, that may cause actual future results to differ materially from what
may be expressed or forecasted in such forward-looking statements. Readers
should not place undue expectations on any forward-looking statements. In
addition to the assumptions and other factors referenced specifically in
connection with such statements, the following factors could impact the business
and financial prospects of the relationships; demand for financial products and
financial services; the degree of competition by traditional and non-traditional
financial services competitors; changes in banking legislation or regulations;
changes in tax laws and the results of recent Wisconsin state tax developments;
changes in interest rates; changes in prices; the impact of technological
advances; governmental and regulatory policy changes; trends in customer
behavior as well as their ability to repay loans; and changes in the general
economic conditions, nationally or in the State of Wisconsin.
CRITICAL ACCOUNTING POLICIES
In the course of the Company's normal business activity, management must select
and apply many accounting policies and methodologies that lead to the financial
results presented in the consolidated financial statements of the Company. Some
of these policies are more critical than others.
10
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and the estimated collateral values, economic conditions,
and other factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
Income tax accounting: The assessment of tax assets and liabilities involves the
use of estimates, assumptions, interpretations, and judgments concerning certain
accounting pronouncements and federal and state tax codes. There can be no
assurance that future events, such as court decisions or positions of federal
and state taxing authorities, will not differ from management's current
assessment, the impact of which could be significant to the consolidated results
of the Company's operations and reported earnings. The Company believes that the
tax assets and liabilities are adequate and properly recorded in the
consolidated financial statements. The reserve does not include any specific
reserves relative to any position recently taken by state taxing authorities.
Income tax expense may be affected by developments in the state of Wisconsin.
Like many financial institutions that are located in Wisconsin, a subsidiary of
the Bank located in the state of Nevada holds and manages various investment
securities. Due to that fact that these subsidiaries are out of state, income
from their operations has not been subject to Wisconsin state taxation. Although
the Wisconsin Department of Revenue issued favorable tax rulings regarding
Nevada subsidiaries of Wisconsin financial institutions, the Department
representatives have recently stated that the Department intends to revoke those
rulings and tax some or all these subsidiaries' income, even though there has
been no intervening change in the law. The Department also implemented a program
in 2003 for the audit of Wisconsin financial institutions who have formed and
contributed assets to subsidiaries located in Nevada; to date, the Company and
its subsidiaries have not been audited on these matters.
The Department sent letters in late July 2004 to financial institutions in
Wisconsin, whether or not they are undergoing an audit, reporting on settlements
involving 17 banks and their out-of-state investment subsidiaries. The letter
provided a summary of currently available settlement parameters. For periods
before 2004, they include: restrictions on the types of subsidiary income
excluded from Wisconsin taxation; assessment of certain back taxes for a limited
period of time; and interest (but not penalties) on any past-due taxes. For 2004
and going forward, there are similar provisions plus limits on the amount of
subsidiaries' assets as to which their income will be excluded from Wisconsin
tax. Settlement on the terms outlined would result in the Department's
rescission of related prior letter rulings, and would purport to be binding
going forward except for future legislation or change by mutual agreement. By
implication, the Department appears to accept the general proposition that some
out-of-state investment subsidiary income is not subject to Wisconsin taxes.
The Company continues to believe that it has reported income and paid Wisconsin
taxes correctly in accordance with applicable tax laws and the Department's
prior longstanding interpretations thereof, including interpretations issued
specifically to it. However, in view of the Department's subsequent change
11
in position (even if that change does not have a basis in law), the aggressive
stance now being taken by the Department, the settlements by some other banks,
and the potential effect that decisions by other similarly situated institutions
may have on the Company's alternatives going forward, the Company has determined
that it would be prudent to obtain and consider a settlement proposal from the
Department; however, the Company has not yet received a specific proposal nor
has any assessment been made against the Company or its subsidiaries. The
Company will need to review any settlement proposal in more specific detail to
quantify in any definitive way the Department's view of its exposure and to
evaluate alternatives.
RESULTS OF OPERATIONS
The following table sets forth the Company's net income and related information
for the three-months and nine-month periods ended September 30, 2004 and 2003,
as well as comparisons between the respective periods.
TABLE 1
SUMMARY RESULTS OF OPERATIONS
($ in Thousands, except per share data)
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Net income $3,074 $2,241 $7,563 $5,934
EPS-basic $ 0.40 $ 0.30 $ 0.99 $ 0.79
EPS-diluted $ 0.39 $ 0.29 $ 0.97 $ 0.77
Cash dividends declared $ 0.14 $ 0.13 $ 0.42 $ 0.39
Return on average assets 1.21% 0.97% 1.01% 0.88%
Return on average equity 17.04% 13.09% 14.14% 11.83%
Efficiency ratio (1) 58.83% 58.19% 60.78% 60.22%
(1) Noninterest expense divided by sum of taxable equivalent net interest
income plus noninterest income, excluding investment securities gains, net
The increase in net income for the three-month and nine-month periods is
primarily due to increased net interest income and a reduction in the provision
for loan losses. The increase in net income for the nine-month periods included
a gain on sale of bank land totaling $482,000, which was recognized in the
second quarter of 2004. This was offset partially by a decrease in other income
and an increase in other expenses and income tax expense.
Net Interest Income
Net interest income is the largest component of the Company's operating income
(net interest income plus other non-interest income), accounting for 78.4% of
total operating income for the three months ended September 30, 2004, as
compared to 72.2% for the same period in 2003. Net interest income represents
the difference between interest earned on loans, investments and other interest
earning assets offset by the interest expense attributable to the deposits and
the borrowings that fund such assets. Interest fluctuations together with
changes in the volume and types of earning assets and interest-bearing
liabilities combine to affect total net interest income. This analysis discusses
net interest income on a tax-equivalent basis in
12
order to provide comparability among the various types of earned interest
income. Tax-exempt interest income is adjusted to a level that reflects such
income as if it were fully taxable.
Net interest income on a tax equivalent basis for the three months ended
September 30, 2004 increased $1.1 million, or 14.2%, to $9.0 million from $7.9
million over the comparable period a year ago. During the nine months ended
September 30, 2004, net interest income increased $3.5 million, or 15.7%, to
$25.8 million from $22.3 million for the comparable period in 2003.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
component increasing net interest margin.
The net interest margin for the third quarter of 2004 was 3.85%, up 13 basis
points ("bps") from 3.72% for the comparable period in 2003. This comparable
period increase was attributable to a 16 bps increase in interest rate spread
(the net result of a 36 bps reduction in the cost of interest-bearing
liabilities offset partially by a 20 bps reduction in the yield on earning
assets). During the nine months ended September 30, 2004, the net interest
margin was 3.70% compared to 3.52% for the comparable period in 2003. The
increase resulted from the same factors as the increase in the third quarter.
Although average interest rates were lower in 2004 than in 2003, interest rates
steadily rose during the quarter, with two rate increases totaling 50 bps
between the comparable third quarter periods. The Company had positioned the
balance sheet to be slightly asset sensitive (which means that assets will
re-price faster than liabilities); thus, the rate increases impacted net
interest income positively. The Company expects that in a gradually increasing
interest rate environment, we would continue to anticipate that our income
statement would benefit from asset sensitivity over the long term.
For the three months ended September 30, 2004, average-earning assets increased
$87.9 million, or 10.3%, when compared to the same period last year. The Company
recorded an increase in average loans of $51.8 million, or 7.5%, for the third
quarter of 2004 compared to the same period a year ago. For the nine months
ended September 30, 2004, average-earning assets increased $84.7 million, or
10.1%, when compared to the same period last year. The Company recorded an
increase in average loans of $42.1 million, or 6.1%, for the nine months ended
September 30, 2004 compared to the same period a year earlier. Loans have
typically resulted in higher rates of interest income to the Company than have
investment securities.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread increased for the quarter ended September
30, 2004 when compared to the same period a year ago. The interest rate spread
increased 16 bps to 3.60% at September 30, 2004 from 3.44% in the same quarter
in 2003. While the average yield on earning assets decreased 20 bps during the
period, the average rate paid on interest-bearing liabilities decreased 36 bps
over the same period. For the nine months ended September 30, 2004, the interest
rate spread increased 24 bps to 3.48% from 3.24% for the same period a year
earlier. The average yield on earning assets decreased 39 bps during the
nine-month period, while the average rate paid on interest-bearing liabilities
decreased 63 bps. The reduction in the rates paid on interest-bearing
liabilities occurred as a result of a lower cost of funding from deposits and
other wholesale funding such as federal funds purchased and loans from the
Federal Home Loan Bank. We would not expect that trend to continue in light of
the recent Federal Reserve Board interest rate increases.
TABLE 2
NET INTEREST INCOME ANALYSIS ON A TAX -EQUIVALENT BASIS
($ In Thousands)
13
Three months ended September 30,
2004 2003
--------------------------------------- -----------------------------------
Average Interest Average Average Interest Average
Balance income/exp yield/rate Balance income/exp yield/rate
---------- ---------- ---------- ------- ---------- ----------
ASSETS
Earning assets:
Loans, net $ 744,714 $ 10,804 5.80% $ 692,887 $10,361 5.99%
Taxable securities 161,101 1,664 4.13% 120,914 1,258 4.17%
Tax exempt securities 30,802 550 7.14% 33,980 631 7.43%
Federal funds sold and
interest bearing due
from banks 1,608 4 1.00% 2,551 2 0.31%
---------- ---------- ----- ---------- ------- -----
Total earning assets 938,225 13,022 5.56% 850,332 12,252 5.76%
========== ========== ===== ========== ======= =====
Non-interest earning
assets 75,392 65,369
---------- ----------
Total assets $1,013,617 $ 915,701
========== ==========
LIABILITIES AND
STOCKHOLDERS'EQUITY
Interest-bearing
liabilities:
Total interest-bearing
deposits 686,698 2,890 1.68% 657,198 3,411 2.08%
Short-term borrowings 14,658 64 1.75% 8,497 27 1.27%
Customer repurchase
agreements 1,196 3 1.00% 1,067 3 1.12%
Other borrowings 100,194 610 2.44% 61,335 487 3.18%
Long term debt 0 0 0.00% 53 1 7.55%
Trust preferred
securities 16,598 424 10.22% 16,100 412 10.24%
---------- ---------- ----- ---------- ------- -----
Total interest-bearing
liabilities $ 819,344 $ 3,991 1.96% $ 744,250 $ 4,341 2.32%
---------- ---------- ----- ---------- ------- -----
Demand deposits 114,181 96,676
Accrued expenses and
other liabilities 7,932 6,846
Stockholders' equity 72,160 67,929
========== ==========
Total liabilities and
stockholders' equity $1,013,617 $ 915,701
---------- ---------
Interest rate spread $ 9,031 3.60% $ 7,911 3.44%
Net interest margin 3.85% 3.72%
===== =====
TABLE 3
NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS
($ In Thousands)
14
Nine months ended September 30,
2004 2003
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance income/exp yield/rate Balance income/exp yield/rate
---------- ---------- ---------- -------- ----------- ----------
ASSETS
Earning assets:
Loans, net $ 736,943 $ 31,077 5.62% $694,795 $ 31,342 6.01%
Taxable securities 156,729 4,878 4.15% 110,003 3,326 4.03%
Tax exempt securities 32,123 1,711 7.10% 36,186 1,974 7.27%
Federal funds sold and
interest bearing due
from banks 1,821 11 0.81% 1,947 17 1.16%
---------- ---------- ----- -------- ---------- -----
Total earning assets 927,616 37,677 5.41% 842,931 36,659 5.80%
========== ========== ===== ======== ========== =====
Non-interest earning
assets 73,050 64,830
---------- --------
Total assets $1,000,666 $907,761
========== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Interest-bearing
liabilities:
Total interest-bearing
deposits 681,217 8,718 1.71% 660,013 11,484 2.32%
Short-term borrowings 26,405 281 1.42% 6,728 70 1.39%
Customer repurchase
agreements 1,107 8 0.96% 1,211 10 1.10%
Other borrowings 93,646 1,633 2.33% 63,765 1,596 3.34%
Long term debt 0 0 0.00% 53 2 5.03%
Trust preferred
securities 16,598 1,271 10.21% 16,100 1,234 10.22%
---------- ---------- ----- -------- ---------- -----
Total interest-bearing
liabilities $ 818,973 $ 11,911 1.93% $747,870 $ 14,396 2.56%
---------- ---------- ----- -------- ---------- -----
Demand deposits 102,901 85,039
Accrued expenses and
other liabilities 7,478 7,812
Stockholders' equity 71,314 67,040
========== ========
Total liabilities and
stockholders' equity $1,000,666 $907,761
---------- --------
Interest rate spread $ 25,766 3.48% $ 22,263 3.24%
Net interest margin 3.70% 3.52%
===== =====
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 92.7% and 92.9%, respectively, for the first nine months
of 2004 and 2003, respectively.
15
Provision for Loan Losses
The provision for loan losses ("PFLL") is the periodic cost of providing an
allowance for probable incurred losses. Prior to the third quarter of 2004, the
Company determined the allowance by risk rating loans that were classified as
substandard or doubtful thru a grading process that was predicated on various
risk rating matrices and the assignment of potential loss based on those
ratings. In addition, the remaining loans in the portfolio were assigned risk
weightings based on their various classifications. During the course of their
examinations, those grading processes had been accepted by various regulatory
authorities. In the third quarter of 2004, the Company made appropriate changes,
as recommended by the regulatory authorities, to further enhance their
methodologies to individually review substandard and doubtful loans for
impairment and bring other factors into the process to evaluate the balance of
the portfolio. As previously discussed, the allowance consists of specific and
general components. The specific component relates to loans that are
individually classified as impaired or loans otherwise classified as substandard
or doubtful. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors. These current factors,
include 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.
As a result of this process, the PFLL for the first nine months of 2004 at $1.6
million compares to a PFLL of $3.1 million for the first nine months in 2003.
For the three months ended September 30, 2004, the Company's PFLL was $70,000 as
compared to $1.2 million. Net loan charge-offs in the first nine months of 2004
were $771,000 compared with net charge-offs of $1.9 million for the same period
in 2003. Net charge-offs as a percentage of average loans is a key measure of
asset quality. Net charge-offs to average loans were 0.14% for the first nine
months of 2004 compared to 0.37% for the same period in 2003. For the nine
months ended September 30, 2004, non-accrual loans increased $2.9 million, in
part as the result of a transfer of a $1.8 million credit from restructured
loans as a result of non-payment. This credit (commented upon in previous
filings) was the remaining amount of a previously restructured loan that had
been in default due to cash flow problems. In October of 2004, the Company
charged off $1.8 million of this loan. Although this charge-off will affect
various balance sheet items and will be considered (along with other
developments relating to the loan portfolio) in determining the allowance and
provision for loan losses going forward, the charge-off itself will not result
in further expense because the Company previously fully reserved for the loan.
Restructured loans decreased significantly, primarily as a result of a $2.7
million credit that has improved in asset quality and transferred to a
performing loan status in addition to the above $1.8 million credit that was
transferred from restructured to non-accrual during the third quarter.
TABLE 4
ALLOWANCE FOR LOAN LOSSES
($ in thousands)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Allowance for Loan
Losses ("ALL)
Balance at beginning
of period $13,080 $12,885 $12,159 $11,410
Provision for loan
losses 70 1,212 1,569 3,137
Charge-offs 560 1,914 1,689 2,770
Recoveries 367 451 918 857
16
Balance at end of
period $12,957 $12,634 $12,957 $12,634
Net charge-offs
("NCOs:) $ 193 $ 1,463 $ 771 $ 1,913
As described more fully in Table 6, non-accrual loans increased during the
period, however, the total amount of non-performing loans and non-performing
assets actually decreased. Furthermore, despite the increase in non-accrual
loans during the quarter ended September 30, 2004, the required allocation of
the allowance for such loans increased only minimally resulting in a provision
of $70,000 for the third quarter of 2004.
Management believes that the current provision conforms to the Company's loan
loss reserve policy and is adequate in view of the present condition of the
Company's loan portfolio. However, a decline in the quality of our loan
portfolio, as a result of general economic conditions, factors affecting
particular borrowers or our market area, or otherwise, could affect the adequacy
of the allowance. If there are significant charge-offs against the allowance, or
we otherwise determine that the allowance is inadequate, we will need to make
higher provisions in the future. See "Risk Management and the Allowance for Loan
Losses" below for more information related to non-performing loans.
Non-Interest Income
Total non-interest income decreased $639,000, or 20.9% to $2.4 million for the
third quarter of 2004 when compared to the third quarter of 2003. For the nine
months ended September 30, 2004, total non-interest income was $7.1 million, a
decrease of $1.4 million, or 16.2%, compared to $8.4 million for the comparable
period in 2003. The non-interest income to average assets ratio was 0.95% for
the three months ended September 30, 2004 compared to 1.32% for the same period
in 2003. For the nine months ended September 30, 2004, the non-interest income
to average assets ratio was 0.94% compared to 1.24% for the same period in 2003.
The decrease in non-interest income for the three and nine month periods is
mainly due to decreases in loan servicing fee income and gains from sales of
loans. In addition, a gain of $482,000 recognized on the sale of bank land
improved the results of the nine-month period.
In the third quarter and the first nine months of 2004, gains from sales of
loans were affected by a slowdown in refinancing activity throughout the
industry due to higher mortgage rates. In comparison, those periods in 2003 saw
high levels of loan refinancing as a result of the historically low interest
rate environment. Loan servicing fees decreased $245,000 and gains from sales of
loans decreased $403,000 between the comparable quarters of 2004 and 2003. For
the nine months ended September 30, 2004, loan servicing fees decreased $687,000
and gains from sales of loans decreased $964,000 compared to the first nine
months of 2003. The decrease was driven primarily by secondary mortgage and
commercial loan production (loan production to be sold to the secondary market)
and resulting sales. As interest rates have increased over the quarter, the
Company has seen a decrease in the number of loan applications. Secondary loan
production declined 62.7% between the comparable first nine-month periods ($48.0
million in the first nine months of 2004 versus $128.7 million in the first nine
months of 2003).
For the nine-month period, non-interest income included a gain recognized on the
sale of bank land located at one of the Bank's branch locations in the Green Bay
market area totaling $482,000. The sale of property occurred as a result of a
purchase of 19.2 acres by the Department of Transportation to facilitate its
highway expansion efforts in the Green Bay market. We do not expect the sale to
substantially affect the operations at that location.
Financial service income increased $214,000, or 59.3%, as a result of additional
business generated and aided by favorable market conditions. Income from bank
owned life insurance ("BOLI") amounted to $582,000 for the first nine months of
2004 compared to $540,000 a year earlier.
Revenues generated from the operation of Arborview LLC ("Arborview") (a
subsidiary formed in 2002 to manage a community based residential facility and
sold in the first quarter of 2003) as a result of the sale
17
were $0 and $125,000 for the first six months of 2004 and 2003, respectively.
The subsidiary was sold in February 2003 with a gain on sale amounting to
$350,000.
Non-Interest Expense
Non-interest expense increased $194,000 or 3.0%, to $6.6 million for the three
months ended September 30, 2004 compared to the same period in 2003. For the
nine months ended September 30, 2004, total non-interest expense increased
$967,000, or 5.2%, to $19.5 million compared to the same period in 2003. The
non-interest expense to average assets ratio was 2.58% for the three months
ended September 30, 2004 compared to 2.79% for the same period in 2003. For the
nine months ended September 30, 2004, non-interest expense ratio to average
assets was 2.60% compared to 2.72% for the same period in 2003.
Net overhead expense is total non-interest expense less total non-interest
income excluding securities gains. The net overhead expenses to average assets
ratio was 1.63% for the three months ended September 30, 2004 compared to 1.44%
for the same period in 2003. For the nine months ended September 30, 2004, the
net overhead expenses to average assets ratio was 1.65% compared to 1.48% for
the similar period in 2003. The efficiency ratio is total non-interest expense
as a percentage of the sum of net-interest income on a fully taxable equivalent
basis and total non-interest income. The efficiency ratio for the three months
ended September 30, 2004 was 58.83% compared to 58.19% for the same period in
2003. For the nine months ended September 30, 2004, the efficiency ratio was
59.26% compared to 60.22% for the same period in 2003.
Salaries and employee benefits showed an increase of $139,000, or 3.7%, to $3.9
million for the third quarter of 2004 compared to the same period in 2003. For
the nine months ended September 30, 2004, salary and employee benefits expenses
increased $602,000, or 5.4%, to $11.7 million from $11.1 million for the
comparable period in 2003. The number of full-time equivalent employees was 308
as of September 30, 2004 compared to 300 as of September 30, 2003. For the nine
months ended September 30, 2004, salary-related expenses increased $234,000, or
3.0%, due principally to merit increases between the years. Accrued bonus
expense and benefit costs, principally for health insurance and pension costs,
represent the remaining increase in personnel-related costs. The increase in
health insurance costs is expected to continue for the balance of 2004 and for
2005. Management will continue its efforts to control salaries and employee
benefits expense, although increases in these expenses are likely to continue in
future years.
Expenses related to the operation of other real estate owned increased $128,000
to $336,000 for the 2004 nine-month period compared to the same period in 2003.
Included in these expenses were net gains taken on the sale of other real estate
owned amounting to $178,000 for the first nine months of 2004 compared to net
gains taken on sale of $59,000 for the same period in 2003. In addition, costs
related to the holding of other real estate owned properties increased $339,000
to $634,000 for the first nine months of 2004.
Costs of $305,000 related to non-employee benefit insurance expense primarily
accounted for the increase in other operating expense for the three and
nine-month period ended September 30, 2004.
Income Taxes
Income tax expense for the Company for the nine months ended September 30, 2004
was $3.4 million, an increase of $1.2 million, or 55.8%, compared to the same
period in 2003. The higher tax expense in 2004 reflected the Company's increase
in before tax earnings.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 31.2% for the nine months ended September 30, 2004 compared with
27.0% for the same period in 2003. The effective tax rate of 31.2% consisted of
a federal effective tax rate of 26.2% and Wisconsin State effective tax rate of
5.0%.
18
BALANCE SHEET ANALYSIS
Loans
At September 30, 2004, total loans increased $38.8 million, or 5.4%, to $753.8
million from $715.0 million at December 31, 2003. Growth in the Company's loan
portfolio resulted primarily from an increase in real estate commercial loans to
$412.9 million at September 30, 2004 compared to $387.8 million at December 31,
2003. Growth in commercial real estate mortgages and commercial loans occurred
principally as a result of the Company's expansion efforts (primarily in the
Green Bay market) and the strong economic growth existing in that market.
The following table reflects the composition (mix) of the loan portfolio
(dollars in thousands):
TABLE 5
LOAN PORTFOLIO ANALYSIS
($ in Thousands)
September December Percent
30, 2004 31, 2003 change
--------- -------- -------
Amount of loans by type (dollars in thousands)
Real estate-mortgage
Commercial $412,905 $387,820 6.5%
1-4 family residential
First liens 78,106 72,494 7.7%
Junior liens 20,245 21,443 (5.6%)
Home equity 34,182 31,763 7.6%
Commercial, financial and agricultural 95,314 91,009 4.7%
Real estate-construction 82,814 77,350 7.1%
Installment
Credit cards and related plans 1,972 2,145 (8.0%)
Other 11,646 12,315 (5.4%)
Obligations of states and political subdivisions 17,171 19,032 (9.8%)
Less: deferred origination fees, net of costs 510 349 46.1%
-------- -------- ----
Total $753,845 $715,022 5.4%
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
probable incurred losses through periodic charges to earnings. These charges are
shown in the Company's consolidated income statement as provision for loan
losses. See "Provision for Loan Losses" above. Credit risk is managed and
monitored through the use of lending standards, a thorough review of potential
borrowers, and an on-going review of payment performance. Asset quality
administration, including early identification of problem loans and timely
resolution of problems, further enhances management of credit risk and
minimization of loan losses. All specifically identifiable and quantifiable
losses are immediately charged off against the allowance. Charged-off loans are
subject to periodic review, and specific efforts are taken to achieve maximum
recovery of principal and interest.
As the following table indicates, the ALL at September 30, 2004 was $13.0
million compared with $12.2 million at the end of 2003. This was based on
management's analysis of the loan portfolio risk at September 30, 2004. As such
a provision expense of $70,000 was recorded for the quarter and a provision
expense of $1.6 million was recorded for the nine months ended September 30,
2004. The year to date provision has decreased by $1.6 million compared to the
same period in 2003.
19
TABLE 6
NONPERFORMING ASSETS
($ in thousands)
At or for the period At or for the period At or for the period
ended September ended September ended December
30, 2004 30, 2003 31, 2003
--------------------- --------------------- ----------------------
Nonperforming Assets:
Nonaccrual loans $ 13,239 $ 11,783 $ 11,078
Accruing loans past due 90 days or more 0 0 0
Restructured loans 744 7,674 5,144
---------- ---------- ----------
Total nonperforming loans ("NPLs") $ 13,983 $ 19,457 $ 16,222
Other real estate owned 2,520 1,359 2,271
---------- ---------- ----------
Total nonperforming assets ("NPAs") $ 16,503 $ 20,816 $ 18,493
Ratios:
ALL to NCO's (annualized) 12.58 4.94 2.48
NCO's to average loans (annualized) 0.14% 0.37% 0.72%
ALL to total loans 1.72% 1.85% 1.70%
NPL's to total loans 1.85% 2.85% 2.33%
NPA's to total assets 1.60% 2.27% 1.90%
ALL to NPL's 92.66% 64.93% 74.95%
On a monthly basis, management of the Company meets to review the adequacy of
the ALL. Loan officers grade their individual commercial credits. The Company's
loan review personnel along with management review the officers' grades. During
this process, if a loan is downgraded, the loan is included in the allowance
analysis at the lower grade.
While there exists probable asset quality problems in the loan portfolio,
management believes sufficient reserves have been provided in the ALL to absorb
probable incurred losses in the loan portfolio at September 30, 2004. Ongoing
efforts are being made to collect these loans, and the Company involves the
legal process when necessary to minimize the risk of further deterioration of
these loans for full 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 Company's
ALL. Such agencies may require that changes in the ALL be recognized when their
credit evaluations differ from those of management, based on their judgments
about information available to them at the time of their examination.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management encourages early identification of non-accrual and problem loans in
order to minimize the risk of loss. This is accomplished by monitoring and
reviewing credit policies and procedures on a regular basis.
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
20
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.
As indicated in Table 6, non-performing loans at September 30, 2004 were $14.0
million compared to $16.2 million at December 31, 2003. Impacting the decrease
in non-performing loans was a shift, as a result of foreclosure, of
approximately $2.3 million in loans to other real estate owned during 2004.
Non-accrual loans represented $13.2 million of the total non-performing loans.
Real estate non-accrual loans accounted for $10.4 million of the total, of which
$1.2 million was residential real estate and $9.2 million was commercial real
estate, while commercial and industrial non-accrual loans total $2.7 million. Of
the restructured loans at September 30, 2004, approximately $1.6 million
consisted of one commercial credit and conditional loan as to which the Bank has
granted various concessions as a result of the borrowers' past cash flow
problems. See "Results of Operations-Provision for Loan Losses" above for
discussion of a $1.8 million loan which was transferred from restructured loans
to non-performing loans in the third quarter, and subsequently written off in
October 2004. Restructured loans were $744,000 at September 30, 2004 compared
with $5.1 million at year-end 2003. As a result the ratio of non-performing
loans to total loans at September 30, 2004 was 1.85% compared to 2.27% at end of
year 2003. The Company's ALL was 92.7% of total non-performing loans at
September 30, 2004 compared to 75.0% at end of year 2003.
Non-performing assets (non-performing loans plus other real estate owned assets)
at September 30, 2004 were $16.5 million compared to $18.5 million at December
31, 2003. Other real estate owned, which represents property that the Company
acquired through foreclosure or in satisfaction of debt, consisted of seven
residential and eleven commercial properties totaling $2.5 million. Other real
estate owned at December 31, 2003 totaled $2.3 million and consisted of nineteen
properties.
Potential problem loans are currently 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 September
30, 2004, potential problem loans amounted to $1.2 million compared to a total
of $5.7 million at December 31, 2003. The potential problem loans stem from one
commercial credit going through a restructure of management.
Investment Portfolio
The investment portfolio is intended to provide the Company with adequate
liquidity, flexibility in asset/liability management and, lastly, an increase in
its earning potential.
At September 30, 2004, the investment portfolio (which includes investment
securities available for sale) increased $15.2 million, or 8.6%, to $192.0
million from $176.8 million at December 31, 2003. At September 30, 2004, the
investment portfolio represented 18.6% of total assets compared with 18.1% at
December 31, 2003. Obligations of states and political subdivisions under
"Securities held to Maturity" have been re-classified under "Loans".
Securities available for sale consist of the following:
TABLE 7
INVESTMENT SECURITY ANALYSIS
At September 30, 2004
($ in Thousands)
21
Gross Unrealized Gross Unrealized Estimated Market
Gains Losses Value
---------------- ---------------- ----------------
Securities available for sale
Obligations of U.S. Treasury &
other U.S. agencies 1,439 21 53,763
Mortgage-backed securities 246 650 99,168
Obligations of states &
political subdivisions 1,872 0 32,056
Other securities 77 0 7,028
-------- -------- --------
Total securities available for sale $ 3,634 $ 671 $192,015
At December 31, 2003
($ in Thousands)
Gross Unrealized Gross Unrealized Estimated Market
Gains Losses Value
---------------- ---------------- ----------------
Securities available for sale
Obligations of U.S. Treasury &
other U.S. Agencies $ 1,760 $ 6 $ 39,696
Mortgage-backed securities 204 1,026 99,148
Obligations of states &
political subdivisions 2,167 0 35,015
Other securities 79 0 2,956
-------- -------- --------
Total securities available for sale $ 4,210 $ 1,032 $176,815
Goodwill
Goodwill increased $754,000 in the quarter and nine months ended September 30,
2004 as a result of the payment made in September 2004 in respect of the 1998
purchase of Evergreen. Goodwill is subject to periodic tests for impairment; see
"Critical Accounting Policies."
Deposits
Total deposits at September 30, 2004 increased $19.6 million, or 2.5%, to $802.9
million from $783.3 million at December 31, 2003. Non-interest bearing deposits
at September 30, 2004 increased $8.7 million, or 8.1%, to $115.3 million from
$106.6 million at December 31, 2003. Interest-bearing deposits at September 30,
2004 increased $10.9 million, or 1.6%, to $687.6 million from $676.7 million at
December 31, 2003. Brokered CD's totaled $133.8 million at September 30, 2004
compared to $97.8 million at December 31, 2003. 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. If liquidity concerns arose, the Company has alternative
sources of funds such as lines with correspondent banks and borrowing
arrangements with FHLB should the need present itself. Increased competition for
consumer deposits and customer awareness of interest rates continues to limit
the Company's core deposit growth in these types of deposits. Typically, overall
deposits for the first six months tend to decline slightly as a result of the
seasonality of the Company's customer base as customers draw down deposits
during the early first half of the year in anticipation of the summer tourist
season.
22
Emphasis has been, and will continue to be, placed on generating additional core
deposits in 2004 through competitive pricing of deposit products and through the
branch delivery systems that have already been established. The Company will
also attempt to attract and retain core deposit accounts through new product
offerings and quality customer service. The Company also may increase brokered
time deposits during the remainder of the year 2004 and in 2005 as an additional
source of funds to provide for loan growth in the event that core deposit growth
goals would not be accomplished. Under that scenario, the Company will continue
to look at other wholesale sources of funds, if the brokered CD market became
illiquid or more costly in terms of interest rate.
Borrowings
Federal funds purchased and securities under agreements to repurchase at
September 30, 2004 increased $5.0 million to $28.4 million from $23.4 million at
December 31, 2003. Federal funds purchased increased from $23.3 million at
December 31, 2003 to $26.8 million at September 30, 2004 accounting for the
majority of the increase. These have increased as a result of growth in the loan
portfolio coupled with a decrease in core deposits during the quarter ended
September 30, 2004.
Federal Home Loan Bank Advances totaled $100.2 million at September 30, 2004
compared to $75.1 million at December 31, 2003.
Typically, these borrowings increase in order to fund growth in the loan
portfolio. The Company will borrow monies if borrowing is a less costly form of
funding loans compared to the cost of acquiring deposits or if deposit growth is
not sufficient. Additionally, the availability of deposits also determines the
amount of funds the Company needs to borrow in order to fund loan demand. The
Company anticipates it will continue to use wholesale funding sources of this
nature, if these borrowings add incrementally to overall profitability.
In connection with the issuance of Trust Preferred Securities in 2001 (see
"Capital Resources"), the Company issued long-term subordinated debentures to
Baylake Capital Trust I, a Delaware Business Trust subsidiary of the Company.
The aggregate principal amount of the debentures due 2031, to the trust
subsidiary is $16,597,940. For additional details, please make reference to the
Consolidated Financial Statements and the accompanying footnotes on the
Company's Form 10-K for the year 2003.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT
LIABILITIES
The Company utilizes a variety of financial instruments in the normal course of
business to meet the financial needs of its customers. These financial
instruments include commitments to extend credit, commitments to originate
residential mortgage loans held for sale, commercial letters of credit, standby
letters of credit, and forward commitments to sell residential mortgage loans.
Please refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 for discussion with respect to the Company's quantitative and
qualitative disclosures about its fixed and determinable contractual
obligations. Items disclosed in Form 10-K have not materially changed since that
report was filed.
The following is a summary of our off-balance sheet commitments, all of which
were lending-related commitments:
TABLE 8
LENDING RELATED COMMITMENTS
($ in Thousands)
23
September 30, 2004 December 31, 2003
------------------ -----------------
Commitments to fund home equity
line loans $ 51,581 $ 31,277
Commitments to fund commercial real
estate loans 3,581 5,081
Commitments unused on various other
lines of credit loans 141,069 140,179
-------- --------
Total commitments to extend credit $196,231 $176,537
Financial standby letters of credit $ 23,140 $ 22,229
The following table summarizes the Company's significant contractual obligations
and commitments at September 30, 2004:
(IN THOUSANDS) WITHIN 1 YEAR 1-3 YEARS 3-5 YEARS AFTER 5 YEARS TOTAL
- ------------------- ------------- --------- --------- ------------- --------
Federal Home Loan
Bank advances $ 75,000 $ 0 $ 193 $ 25,000 $100,193
Junior subordinated
debt 0 0 0 16,598 16,598
Operating leases 126 259 192 0 577
-------- -------- -------- -------- --------
Total $ 75,126 $ 259 $ 385 $ 41,598 $117,368
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 from the Bank, investment
income, and net proceeds from borrowings and the offerings of junior
subordinated obligations, in addition to the issuance of its common stock
securities. The Company manages its liquidity position in order to provide funds
necessary to pay dividends to its shareholders. Dividends received from Bank
totaled $3.4 million for the first nine months of 2004 and will continue to be
the Company's main source of long-term liquidity. The dividends from the Bank
along with existing cash were sufficient to pay cash dividends to the Company's
shareholders of $4.3 million in the first nine months of 2004.
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 its assets; the ability to
use its loan and investment portfolios as collateral for secured borrowings and
strong capital positions. The Bank used its existing capital resources to fund
the $753,700 paid to finalize the Evergreen transaction in September 2004.
Maturing investments have been a primary source of liquidity at the Bank. For
the nine months ended September 30, 2004, principal payments totaling $15.0
million were received on investments. $30.8 million in investments were
purchased in the first nine months of 2004. This resulted in net cash of $15.8
million used in investing activities for the first nine months of 2004. At
September 30, 2004 the investment portfolio contained $152.9 million of U.S.
Treasury and federal agency backed securities representing 84.0% of the total
investment portfolio. These securities tend to be highly marketable.
24
Deposit growth is typically another source of liquidity for the Bank. As a
financing activity reflected in the September 30, 2004 Consolidated Statements
of Cash Flows, deposits increased and resulted in $19.6 million of cash inflow
during the first nine months of 2004. The Company's overall deposit base
increased 2.5% for the nine months ended September 30, 2004. Deposit growth is
generally the most stable source of liquidity for the Bank, although brokered
deposits are inherently less stable than locally generated core deposits.
Affecting liquidity are core deposit growth levels, certificate of deposit
maturity structure and retention, and characteristics and diversification of
wholesale funding sources affecting the channels by which brokered deposits are
acquired. Conversely, deposit outflow will cause the Bank to develop alternative
sources of funds which may not be as liquid and potentially a more costly
alternative.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $232.5 million, or 30.9%, of loans maturing within one year.
Factors affecting liquidity relative to loans are loan origination volumes, loan
prepayment rates and the maturity structure of existing loans. The Bank's
liquidity position is influenced by changes in interest rates, economic
conditions and competition. Conversely, loan demand as a need for liquidity will
cause the Company to acquire other sources of funding which could be harder to
find; therefore more costly to acquire.
Within the classification of short borrowings at September 30, 2004, federal
funds purchased and securities sold under agreements to repurchase totaled $28.4
million compared to $23.4 million at the end of 2003. Federal funds are
purchased from various upstream correspondent banks while securities sold under
agreements to repurchase are obtained from a base of business customers.
Borrowings from FHLB, short-term or term, are another source of funds. They
total $100.2 million at September 30, 2004 and $75.1 million at December 31,
2003.
The Bank's liquidity resources were sufficient in the first nine months of 2004
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 the first nine months of 2004, management expects
deposit growth 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. In addition, Bank may acquire additional brokered deposits as funding
for short-term liquidity needs. 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.
In assessing liquidity, historical information such as seasonality (loan
demand's affect on liquidity which starts before and during the tourist season
and deposit draw down which affects liquidity shortly before and during the
early part of the tourist season), local economic cycles and the economy in
general are considered along with the current ratios, management goals and the
unique characteristics of the Company. 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.
Capital Resources
Stockholders' equity at September 30, 2004 increased $5.0 million or 7.2% to
$74.7 million, compared with $69.6 million at end of year 2003. The increase in
stockholders' equity in 2004 was primarily composed of the retention of earnings
and the exercise of stock options with offsetting decreases to stockholders'
equity from the payment of dividends and the change in unrealized losses on
available for sale securities. Stockholders' equity to assets at September 30,
2004 was 7.24% compared to 7.14% at the end of 2003.
In 2001, the Company formed Baylake Capital Trust I ("the Trust") as a statutory
business trust organized for the sole purpose of issuing trust preferred
securities and investing the proceeds thereof in junior
25
subordinated debentures of the Company, the sole asset of the Trust. The trust
preferred securities enhanced regulatory capital and added liquidity. 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 for the Company that qualify for Tier 1
capital treatment to the Company. Distributions on these securities are included
in interest expense on guaranteed preferred beneficial interest.
As of December 31, 2003, the Company deconsolidated the Trust, which had issued
the trust preferred securities (discussed above), and replaced the presentation
of such instruments with the Company's junior subordinated debentures issued to
the Trust. Such presentation reflects adoption of FASB Interpretation No. 46
(FIN 46 R) issued in December 2003.
The Company had $16.6 million of junior subordinated debentures outstanding to
the Trust and the Trust had $16.1 million of trust preferred securities
outstanding at September 30, 2004 and December 31, 2003, respectively. 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 September 30,
2004, all $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 23% of Company's
Common Stock participate in the plan.
Cash dividends paid in the first nine months of 2004 were $0.42 per share
compared with $0.39 in 2003. The Company provided a 7.7% increase in normal
dividends per share in 2004 over 2003 as a result of earnings for 2004. Total
funds utilized in the payment of dividends was $4.3 million in the first nine
months of 2004, as compared to $3.9 million in the corresponding period of 2003.
In 1997, the Company's Board of Directors authorized management, in its
discretion, to repurchase up to 7,000 shares of the Company's common stock each
calendar quarter in the market. The shares repurchased would be used to fill its
needs for the dividend reinvestment program, any future benefit plans, and the
Company's stock purchase plan. Shares repurchased are held as treasury stock and
accordingly, are accounted for as a reduction of stockholders' equity. The
Company repurchased none of its common shares in the first nine months of 2004.
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.
26
At September 30, 2004 and December 31, 2003, 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
September 30, 2004 and December 31, 2003:
TABLE 9
CAPITAL RATIOS
($ in Thousands)
To Be Well
Capitalized under
Actual For Capital Adequacy Prompt Corrective
($ in Thousands) Purposes Action Provisions
----------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2004
Total Capital (to
Risk Weighted Assets)
Company 94,050 10.83% 69,505 8.00% 86,882 10.00%
Bank 89,633 10.33% 69,425 8.00% 86,781 10.00%
Tier 1 Capital (to
Risk Weighted Assets)
Company 83,164 9.57% 34,753 4.00% 52,129 6.00%
Bank 78,759 9.08% 34,712 4.00% 52,068 6.00%
Tier 1 Capital (to
Average Assets)
Company 83,164 8.26% 40,256 4.00% N/A N/A
Bank 78,759 7.83% 40,256 4.00% 50,320 5.00%
As of December 31, 2003
Total Capital (to
Risk Weighted Assets)
Company 88,493 10.78% 65,650 8.00% 82,090 10.00%
Bank 84,771 10.33% 65,647 8.00% 82,059 10.00%
Tier 1 Capital (to
Risk Weighted Assets)
Company 78,212 9.52% 32,845 4.00% 49,293 6.00%
Bank 74,493 9.08% 32,823 4.00% 49,235 6.00%
Tier 1 Capital (to
Average Assets)
Company 78,212 8.38% 37,331 4.00% N/A N/A
Bank 74,493 7.98% 37,331 4.00% 46,664 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.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company's financial performance is affected by, among other factors, credit
risk and interest rate risk. The Company does not use derivatives to mitigate
its interest rate risk or credit risk, relying instead on loan review and its
loan loss reserve.
The Company's earnings are derived from the operations of its direct and
indirect subsidiaries with particular reliance on net interest income,
calculated as the difference between interest earned on loans and investments
and the interest expense paid on deposits and other interest bearing
liabilities, including advances from FHLB and other borrowings. Like other
financial institutions, the Company's interest income and interest expense are
affected by general economic conditions and by the policies of regulatory
authorities, including the monetary policies of the Board of Governors of the
Federal Reserve System. Changes in the economic environment may influence, among
other matters, the growth rate of loans and deposits, the quality of the loan
portfolio and loan and deposit pricing. Fluctuations in interest rates are not
predictable or controllable.
As of September 30, 2004, the Company was in compliance with its management
policies with respect to interest rate risk. The Company has not experienced any
material changes to its market risk position since December 31, 2003, as
described in the Company's 2003 Form 10-K Annual Report.
The Company's overall interest rate sensitivity is demonstrated by net interest
income analysis. Net interest income analysis measures the change in net
interest income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of change in net interest income in the event of
sudden and sustained 1.0% to 2.0% increases and decreases in market interest
rates. The table below presents the Company's projected changes in net interest
income for the various rate shock levels at September 30, 2004.
TABLE 10
INTEREST SENSITIVITY
Change in Net Interest Income over One Year Horizon
- ----------------------------------------------------------------------------------------------------
At September 30, 2004 At December 31, 2003
Change in levels of -------------------------------- ---------------------------------
interest rates Dollar change Percentage change Dollar change Percentage change
- ---------------------- ------------- ----------------- ------------- -----------------
+200 bp 3,299 8.9% 1,773 4.9%
+100 bp 1,660 4.5% 1,049 2.9%
Base 0 0% 0 0%
- -100 bp (2,071) (5.6%) (1,266) (3.5%)
As shown above, at September 30, 2004, the effect of an immediate 200 basis
point increase in interest rates would increase the Company`s net interest
income by $3.3 million or 8.9%. The effect of an immediate 100 basis point
reduction in rates would decrease the Company's net interest income by $2.1
million or 5.6%.
Changes in the mix of earning assets and interest-bearing liabilities increased
the Company's asset sensitivity during the past twelve months.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including the relative levels of market
interest rates and loan prepayments, and should not be relied upon as indicative
of actual results. Actual values may differ from those projections set forth
above, should market conditions vary from the assumptions used in preparing the
analyses. Further, the
28
computations do not contemplate any actions the Company may undertake in
response to changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURES CONTROLS AND PROCEDURES: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of
September 30, 2004. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company's disclosure
controls and procedures to the Company required to be included in this quarterly
report on Form 10-Q.
INTERNAL CONTROL OVER FINANCIAL REPORTING: There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls
subsequent to the date of such evaluation with the exception of enhancements
made during the quarter to the calculation of the allowance for loan loss
reserve. Such enhancement is explained in the section entitled "Provision for
Loan Losses."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Baylake and its subsidiaries may be involved from time to time in various
routine legal proceedings incidental to its business. Neither Baylake nor any of
its subsidiaries is currently engaged in any legal proceedings that are expected
to have a material adverse effect on the results of operations or financial
position of Baylake.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a). The following exhibits are furnished herewith:
29
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
31.1 Certification under Section 302 of Sarbanes-Oxley by Thomas L. Herlache,
Chief Executive Officer, is attached hereto.
31.2 Certification under Section 302 of Sarbanes-Oxley by Steven D.
Jennerjohn, Chief Financial Officer, is attached hereto.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached
hereto.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached
hereto.
(b). Report on Form 8-K:
Baylake Corp. filed a Report on Form 8-K dated November 3, 2004 reporting
Baylake Corp. released its earnings for the three and nine months ended
September 30, 2004. That report is not incorporated by reference into other
filings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
Date: November 8, 2004 /s/ Thomas L. Herlache
------------------------------------
Thomas L. Herlache
President (CEO)
Date: November 8, 2004 /s/ Steven D. Jennerjohn
------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
30