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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________________________to_______________________
Commission file number 0-8679
BAYLAKE CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
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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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Applicable Only to Corporate Issuers:
Number of outstanding shares of each of common stock, par value $5.00 per share,
as of May 13, 2003: 7,517,976 shares
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of March 31, 2003
and December 31, 2002 3 - 4
Consolidated Condensed Statement of Income for the three
months ended March 31, 2003 and 2002 5 - 6
Consolidated Statement of Comprehensive Income for the three
months ended March 31, 2003 and 2002 7
Consolidated Statement of Cash Flows for the three months ended
March 31, 2003 and 2002 8 - 9
Notes to Consolidated Condensed Financial Statements 10 -11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12 - 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31 - 32
PART II - OTHER INFORMATION 32 - 33
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 33
Section 302 Certification 34 - 35
EXHIBIT INDEX 32
Exhibit 11 Statement re: computation of per share earnings 38
Exhibit 15 Letter re: unaudited interim financial information 39
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350 36
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350 37
2
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(dollars in thousands)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Cash and due from banks $ 20,817 $ 33,300
Federal funds sold 12 0
--------- ---------
Cash and cash equivalents 20,829 33,300
Investment securities available for sale (at market) 136,354 133,139
Investment securities held to maturity (market 16,257 18,227
value $16,646 and $18,524, at March 31, 2003 and
December 31, 2002, respectively)
Loans held for sale 956 1,602
Loans 680,728 664,285
Less: Allowance for loan losses 12,171 11,410
--------- ---------
Loan, net of allowance for loan losses 668,557 652,875
Bank premises and equipment 21,782 23,446
Federal Home Loan Bank stock (at cost) 6,899 6,713
Accrued interest receivable 4,819 4,580
Income taxes receivable 365 340
Deferred income taxes 2,915 2,878
Goodwill 4,969 4,969
Other Assets 22,362 22,587
--------- ---------
Total Assets $ 907,064 $ 904,656
========= =========
LIABILITIES
Domestic deposits
Non-interest bearing $ 77,285 $ 89,848
Interest bearing
NOW 62,058 64,281
Savings 195,702 195,232
Time, $100,000 and over 189,712 176,605
Other time 217,889 214,358
--------- ---------
Total interest bearing 665,361 650,476
--------- ---------
Total deposits 742,646 740,324
Short-term borrowings
Federal funds purchased, repurchase 9,061 10,056
agreements and Federal Home Loan Bank
advances
Accrued expenses and other liabilities 7,770 6,698
Dividends payable 0 972
Other borrowings 65,000 65,000
Long-term debt 53 106
Guaranteed preferred beneficial interest in the 16,100 16,100
--------- ---------
company's junior subordinated debt
Total liabilities 840,630 839,256
--------- ---------
3
SHAREHOLDERS' EQUITY
Common stock, $5 par value: authorized 37,706 37,532
10,000,000 shares issued 7,541,135 shares as of
March 31, 2003 and 7,506,435 as of December 31,
2002; outstanding 7,517,976 as of March 31, 2003 and
7,483,276 as of December 31, 2002
Additional paid-in capital 7,536 7,373
Retained earnings 18,753 17,903
Treasury Stock (625) (625)
Net unrealized gain on securities available
for sale, net of tax of $1,647 as of March 31,
2003 and $1,716 as of December 31, 2002 3,064 3,217
--------- ---------
Total shareholders' equity 66,434 65,400
--------- ---------
Total liabilities and shareholders' equity $ 907,064 $ 904,656
========= =========
4
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
THREE MONTHS
ENDED
MARCH 31,
2003 2002
---- ----
Interest income
Interest and fees on loans $10,196 $ 10,434
Interest on investment securities
Taxable 1,051 1,582
Exempt from federal income taxes 645 688
Other interest income 6 12
------- --------
Total interest income 11,898 12,716
Interest expense
Interest on deposits 4,096 4,383
Interest on short-term borrowings 24 126
Interest on other borrowings 555 816
Interest on long-term debt 1 1
Interest on guaranteed preferred beneficial
interest in the company's junior
subordinated debt 411 411
------- --------
Total interest expense 5,087 5,737
------- --------
Net interest income 6,811 6,979
Provision for loan losses 893 500
------- --------
Net interest income after provision for
loan losses 5,918 6,479
------- --------
Other income
Fees from fiduciary activities 134 181
Fees from loan servicing 462 355
Fees for other services to customers 1,074 1,076
Gains from sales of loans 425 265
Gains from sale of subsidiary 350 0
Other income 199 91
------- --------
Total other income 2,644 1,968
------- --------
Other expenses
Salaries and employee benefits 3,701 3,334
Occupancy expense 469 487
Equipment expense 393 388
Data processing and courier 272 255
Operation of other real estate 103 144
Other operating expenses 1,094 1,178
------- --------
Total other expenses 6,032 5,786
------- --------
Income before income taxes 2,530 2,661
Income tax expense 704 788
------- --------
Net Income $ 1,826 $ 1,873
======= ========
5
Basic earnings per common share (1) $ 0.24 $ 0.25
Diluted earnings per common share (1) $ 0.24 $ 0.25
Cash dividends per share $ 0.13 $ 0.12
(1) Based on 7,492,374 average shares outstanding in 2003 and 7,471,575 in 2002.
6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
THREE MONTHS
ENDED
MARCH 31,
2003 2002
---- ----
Net Income $ 1,826 $ 1,873
------- --------
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized losses arising during period (153) (137)
------- --------
Comprehensive income $ 1,673 $ 1,736
======= ========
7
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Cash flows from operating activities:
Interest received from:
Loans $ 9,848 $ 10,407
Investments 1,986 2,285
Fees and service charges 2,295 1,759
Interest paid to depositors (3,463) (4,443)
Interest paid to others (1,000) (1,441)
Cash paid to suppliers and employees (5,559) (5,830)
Income taxes paid 16 (157)
-------- --------
Net cash provided by operating activities 4,123 2,580
Cash flows from investing activities:
Principal payments received on investments 24,978 20,755
Purchase of investments (26,815) (25,982)
Proceeds from sale of other real estate owned 350 914
Proceeds from sale of subsidiary's assets 1,884 0
Loans made to customers in excess of principal collected (16,015) (13,493)
Capital expenditures (651) (2,820)
-------- --------
Net cash used in investing activities (16,269) (20,626)
Cash flows from financing activities:
Net decrease in demand deposits, NOW accounts, and savings (14,317) (25,176)
Accounts
Net increase (decrease) in short term borrowing (995) 41,231
Net increase in time deposits 16,650 6,134
Proceeds from other borrowings and long-term debt 0 (15,000)
Payments on other borrowings and long term debt (53) (53)
Proceeds from issuance of common stock 337 0
Dividends paid (1,947) (1,793)
-------- --------
Net cash provided by (used in) financing activities (325) 5,343
-------- --------
Net decrease in cash and cash equivalents (12,471) (12,703)
Cash and cash equivalents, beginning 33,300 28,485
-------- --------
Cash and cash equivalents, ending $ 20,829 $ 15,782
======== ========
8
MARCH 31,
2003 2002
---- ----
Reconciliation of net income to net cash provided by operating
activities:
Net income $ 1,826 $ 1,873
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 431 391
Provision for losses on loans and real estate owned 893 500
Amortization of premium on investments 231 51
Accretion of discount on investments (49) (34)
Cash surrender value increase (142) (13)
Gain from disposal of ORE 10 68
Gain on sale of loans (425) (265)
Proceeds from sale of loans held for sale 33,705 19,945
Originations of loans held for sale (33,280) (19,680)
Gain on sale of subsidiary (350) 0
Equity in income of service center (27) (52)
Amortization of mortgage servicing rights 90 83
Mortgage servicing rights booked (91) (61)
Deferred compensation 98 62
Changes in assets and liabilities:
Interest receivable (239) (65)
Prepaids and other assets 477 (493)
Unearned income (6) 22
Interest payable 624 (147)
Taxes payable 721 631
Other liabilities (374) (236)
-------- --------
Total adjustments 2,297 707
-------- --------
Net cash provided by operating activities $ 4,123 $ 2,580
======== ========
9
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Baylake Corp.'s 2002 annual report on Form
10-K. In the opinion of management, the unaudited financial information
included in this report reflects all adjustments, consisting only of
normal recurring accruals, which are necessary for a fair statement of
the financial position as of March 31, 2003 and December 31, 2002. The
results of operations for the three months ended March 31, 2003 and
2002 are not necessarily indicative of results to be expected for the
entire year.
2. The book value of investment securities, by type, held by Baylake Corp.
are as follows:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(dollars in thousands)
Investment securities held to maturity:
Obligations of state and political subdivisions $ 16,257 $ 18,227
-------- --------
Investment securities held to maturity $ 16,257 $ 18,227
======== ========
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 38,475 $ 40,593
Obligations of states and political subdivisions 37,659 37,654
Mortgage-backed securities 55,143 50,851
Other 5,077 4,041
-------- --------
Investment securities available for sale $136,354 $133,139
======== ========
3. At March 31, 2003 and December 31, 2002, loans were as follows:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(dollars in thousands)
Commercial, financial and agricultural $ 92,077 $ 89,207
Real estate-commercial 377,814 351,425
Real estate - construction 64,065 75,688
Real estate - mortgage 132,150 133,365
Installment 14,932 14,916
Less: Deferred loan origination fees, net of costs (310) (316)
--------- ---------
$ 680,728 $ 664,285
Less allowance for loan losses (12,171) (11,410)
--------- ---------
Net loans $ 668,557 $ 652,875
========= =========
10
4. Baylake Corp. declared a cash dividend of $0.13 per share payable on
March 17, 2003 to shareholders of record as of March 3, 2003.
5. The Company has a non-qualified stock option plan, which is described
more fully in the Company's December 31, 2002 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 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 March 31,
- ------------------------------------------------------------------------------------------------------------
2003 2002
---- ----
- ------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------
Net income, as reported $ 1,826 $ 1,873
- ------------------------------------------------------------------------------------------------------------
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes (44) (55)
-- --
- ------------------------------------------------------------------------------------------------------------
Pro forma net income 1,782 1,818
- ------------------------------------------------------------------------------------------------------------
Earnings per share:
- ------------------------------------------------------------------------------------------------------------
Basic - as reported $ 0.24 $ 0.25
- ------------------------------------------------------------------------------------------------------------
Basic - pro forma $ 0.24 $ 0.24
- ------------------------------------------------------------------------------------------------------------
Diluted - as reported $ 0.24 $ 0.25
- ------------------------------------------------------------------------------------------------------------
Diluted - pro forma $ 0.23 $ 0.24
- ------------------------------------------------------------------------------------------------------------
11
PART 1 - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of Baylake Corp.
("Baylake" or the "Company") for the three months ended March 31, 2003 and 2002
which may not be otherwise apparent from the consolidated financial statements
included in this report. Unless otherwise stated, the "Company" or "Baylake"
refers to this entity and to its subsidiaries on a consolidated basis when the
context indicates. For a more complete understanding, this discussion and
analysis should be read in conjunction with the financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen") and
changed its name to Baylake Bank, N.A. ("BLBNA"). Prior to the acquisition,
Evergreen was under the active supervision of the Office of the Comptroller of
the Currency ("OCC") due to its designation of Evergreen as a "troubled
institution" and "critically under capitalized". As part of the acquisition, the
Company was required to contribute $7 million of capital to Evergreen. As of the
date of this report, no payments to the seller of Evergreen have been made by
the Company and no payments are presently due. However, the Company may become
obligated for certain contingent payments that may become payable in the future,
based on a formula set forth in the stock purchase agreement, not to exceed $2
million. Such contingent payments are not accrued at March 31, 2003, since that
amount, if any, is not estimable.
Forward-Looking Information
This discussion and analysis of financial condition and results of operations,
and other sections of this report, may contain forward-looking statements that
are based on the current expectations of management. Such expressions of
expectations are not historical in nature and are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "anticipates," "believes," "estimates," "expects," "forecasts,"
"intends," "is likely," "plans," "projects," and other such words are intended
to identify in such forward-looking statements. The statements contained herein
and in such forward-looking statements involve or may involve certain
assumptions, risks and uncertainties, many of which are beyond the control of
the Company, that may cause actual future results to differ materially from what
may be expressed or forecasted in such forward-looking statements. Readers
should not place undue expectations on any forward-looking statements. In
addition to the assumptions and other factors referenced specifically in
connection with such statements, the following factors could impact the business
and financial prospects of the relationships; demand for financial products and
financial services; the degree of competition by traditional and non-traditional
financial services competitors; changes in banking legislation or regulations;
changes in tax laws; changes in interest rates; changes in prices; the impact of
technological advances; governmental and regulatory policy changes; trends in
customer behavior as well as their ability to repay loans; and changes in the
general economic conditions, nationally or in the State of Wisconsin.
Results of Operations
For the three months ended March 31, 2003, earnings decreased $47,000, or 2.5%,
to $1.8 million from $1.9 million for the first quarter last year. Basic
operating earnings per share of $0.24 was reported for the quarter ended March
31, 2003 compared to $0.25 for the same period last year, a decrease of 4.0%. On
a fully diluted basis, the Company recorded $0.24 per share for the first
quarter in 2003 and $0.25 for the same period in 2002.
12
TABLE 1
SUMMARY RESULTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------
Three months ended March 31, Three months ended March 31,
2003 2002
- ------------------------------------------------------------------------------------------------------
Net income, as reported 1,826 1,873
- ------------------------------------------------------------------------------------------------------
EPS-basic, as reported 0.24 0.25
- ------------------------------------------------------------------------------------------------------
EPS-diluted, as reported 0.24 0.25
- ------------------------------------------------------------------------------------------------------
Return on average assets, as reported 0.82% 0.90%
- ------------------------------------------------------------------------------------------------------
Return on average equity, as reported 11.23% 12.64%
- ------------------------------------------------------------------------------------------------------
Efficiency ratio, as reported (1) 61.63% 61.87%
- ------------------------------------------------------------------------------------------------------
(1) Noninterest expense divided by sum of taxable equivalent net
interest income plus noninterest income, excluding investment
securities gains, net
The annualized return on average assets and return on average equity for the
three months ended March 31, 2003 were 0.82% and 11.23%, respectively, compared
to 0.90% and 12.64%, respectively, for the same period a year ago.
The decrease in net income for the period is primarily due to decreased net
interest income after provision for loan losses and an increase in other
expenses offset to a lesser extent by increased other income and a reduction in
income tax expense.
Cash dividends declared in the first three months of 2003 increased 8.3% to
$0.13 per share compared with $0.12 for the same period in 2002.
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 73.0% of
total operating income for the first three months of 2003, as compared to 78.8%
for the first three months of 2002. Net interest income represents the
difference between interest earned on loans, investments and other interest
earning assets offset by the interest expense attributable to the deposits and
the borrowings that fund such assets. Interest fluctuations together with
changes in the volume and types of earning assets and interest-bearing
liabilities combine to affect total net interest income. This analysis discusses
net interest income on a tax-equivalent basis in order to provide comparability
among the various types of earned interest income. Tax-exempt interest income is
adjusted to a level that reflects such income as if it were fully taxable.
Net interest income on a tax equivalent basis for the three months ended March
31, 2003 decreased $182,000, or 2.5%, to $7.1 million from $7.3 million for the
same period a year ago. As a result of a lower interest rate environment, total
interest income for the first quarter of 2003 decreased $832,000, or 6.4%, to
$12.2 million from $13.1 million for the first quarter of 2002, while interest
expense in the first quarter of 2003 decreased $650,000, or 11.3%, to $5.1
million when compared to $5.7 million in the first quarter of 2002. The major
contributing factor to the decline in net interest income was net interest
margin compression due to the asset sensitive position of Baylake's balance
sheet in addition to an increase in the average balance of non-accrual loans for
the quarter further reducing net interest income. This margin compression was
due to continued downward repricing of earning assets without a point-for-point
decrease in interest bearing liability rates. The effect of the 50 basis point
decrease in the prime lending rate in the latter part of the fourth quarter of
2002 impacted interest income for the first quarter. The decrease in net
interest income between these two quarterly periods occurred in spite of growth
in the average volume of interest earning assets and non-interest bearing
deposits offset to a lesser extent by an increase in interest
13
paying liabilities. The decline in total interest expense in the first quarter
of 2003 versus the first quarter of 2002 did not offset the decline in interest
income.
For the three months ended March 31, 2003, average-earning assets increased
$40.5 million, or 5.2%, when compared to the same period last year. The Company
recorded an increase in average loans of $60.5 million, or 9.9%, for the first
quarter of 2003 compared to the same period a year ago. Loans have typically
resulted in higher rates of interest income to the Company than have investment
securities.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread decreased for the quarter ended March 31,
2003 when compared to the same period a year ago. The interest rate spread
decreased 22 basis points to 3.29% at March 31, 2003 from 3.51% in the same
quarter in 2002. While the average yield on earning assets decreased 74 basis
points during the period, the average rate paid on interest-bearing liabilities
decreased 52 basis points over the same period as a result of a lower cost of
funding from deposits and other wholesale funding such as federal funds
purchased and loans from the Federal Home Loan Bank.
TABLE 2
NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS
($ IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------------
2003 2002
---- ----
- -------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance income/exp yield/rate Balance income/exp yield/rate
- -------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------
Earning assets:
- -------------------------------------------------------------------------------------------------------------
Loans, net (1)(2)(3) $ 673,660 $ 613,147
- -------------------------------------------------------------------------------------------------------------
Less: non-accrual loans (12,361) (11,943)
--------- ----------
- -------------------------------------------------------------------------------------------------------------
Loans, net 661,299 $ 10,196 6.25% 601,204 $ 10,434 7.04%
- -------------------------------------------------------------------------------------------------------------
Investments 158,909 2,030 5.18% 176,757 2,616 6.00%
- -------------------------------------------------------------------------------------------------------------
Other earning assets 1,185 4 1.37% 2,957 12 1.65%
--------- ---------- ----- ---------- ---------- ----
- -------------------------------------------------------------------------------------------------------------
Total earning assets $ 821,393 $ 12,230 6.04% $ 780,918 $ 13,062 6.78%
- -------------------------------------------------------------------------------------------------------------
Allowance for loan losses (11,838) (8,059)
- -------------------------------------------------------------------------------------------------------------
Non-accrual loans 12,361 11,943
- -------------------------------------------------------------------------------------------------------------
Cash and due from banks 19,246 16,625
- -------------------------------------------------------------------------------------------------------------
Other assets 59,423 45,099
--------- ----------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total assets $ 900,585 $ 846,526
--------- ----------
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
- -------------------------------------------------------------------------------------------------------------
NOW accounts $ 64,133 $ 164 1.04% $ 46,939 $ 95 0.82%
- -------------------------------------------------------------------------------------------------------------
Savings accounts 196,513 521 1.08% 214,295 850 1.61%
- -------------------------------------------------------------------------------------------------------------
14
- -------------------------------------------------------------------------------------------------------------
Time deposits > $100M 183,990 1,556 3.43% 143,493 1,503 4.25%
- -------------------------------------------------------------------------------------------------------------
Time deposits < $100M 216,547 1,855 3.47% 184,508 1,935 4.25%
--------- ---------- ----- ---------- ---------- ----
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing 661,183 4,096 2.51% 589,235 4,383 3.02%
deposits
- -------------------------------------------------------------------------------------------------------------
Short-term borrowings 5,345 19 1.44% 23,168 114 2.00%
- -------------------------------------------------------------------------------------------------------------
Customer repurchase 1,680 5 1.21% 2,403 12 2.03%
agreements
- -------------------------------------------------------------------------------------------------------------
Other borrowings 65,000 555 3.46% 80,666 816 4.10%
- -------------------------------------------------------------------------------------------------------------
Long term debt 53 1 7.65% 107 1 3.79%
- -------------------------------------------------------------------------------------------------------------
Trust preferred 16,100 411 10.35% 16,100 411 10.35%
securities
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing $ 749,361 $ 5,087 2.75% $ 711,679 $ 5,737 3.27%
--------- ---------- ----- ---------- ---------- ----
liabilities
- -------------------------------------------------------------------------------------------------------------
Demand deposits 77,083 67,878
- -------------------------------------------------------------------------------------------------------------
Accrued expenses and 8,208 6,851
other liabilities
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity 65,933 60,118
--------- ----------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 900,585 $ 846,526
--------- ----------
- -------------------------------------------------------------------------------------------------------------
Interest rate spread $ 7,143 3.29% $ 7,325 3.51%
- -------------------------------------------------------------------------------------------------------------
Contribution of free
funds 0.24% 0.29%
----- ----
- -------------------------------------------------------------------------------------------------------------
Net interest margin 3.53% 3.80%
----- ----
- -------------------------------------------------------------------------------------------------------------
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
component increasing net interest margin.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended March 31, 2003 decreased from 3.80% to 3.53% compared to the same period a
year ago. The average yield on interest earning assets amounted to 6.04% for the
first quarter of 2003, representing a decrease of 74 basis points from the same
period last year. Total loan yields decreased 79 basis points to 6.25%, while
total investment yields decreased 82 basis points to 5.18%, as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities decreased 51 basis points to 2.51% for the first quarter of 2003
when compared to the first quarter of 2002, while short-term borrowing costs
decreased 56 basis points to 1.44% comparing the two periods. Other borrowing
costs decreased 64 basis points to 3.46% during the same time period. These
factors contributed to a decrease in the Company's interest margin for the three
months ended March 31, 2003 compared to the same period a year ago.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 91.2% for the first quarter of 2003 compared with 92.2%
for the same period in 2002. The ratio decreased slightly in 2003, primarily as
a result of growth in earning assets offset to a slightly greater degree by an
increase in non-accrual loans.
15
Provision for Loan Losses
The provision for loan losses is the periodic cost (not less than quarterly) of
providing an allowance for future loan losses. In any accounting period, the
amount of provision is based on management's evaluation of the loan portfolio,
especially nonperforming and other potential problem loans, taking into
consideration many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
loan quality, general economic factors and collateral values.
The provision for loan losses for the three months ended March 31, 2003
increased $393,000 to $893,000 compared with $500,000 for the first quarter of
2002. Management believes that the current allowance (giving effect to the
increased provision) conforms with the Company's loan loss reserve policy and is
adequate in view of the present condition of the Company's loan portfolio. See
"Risk Management and the Allowance for Possible Loan Losses" below.
Non-Interest Income
Total non-interest income increased $676,000, or 34.3%, to $2.6 million for the
first quarter of 2003 when compared to the first quarter of 2002. This increase
occurred as a result of increased gains from sales of loans, increased fees from
loan servicing, increased other income and gain on sale of subsidiary offset to
a lesser degree by a decrease in trust income.
TABLE 3
NONINTEREST INCOME
($ in Thousands)
- ---------------------------------------------------------------------------------------------
First quarter 2003 First quarter 2002 Percent change
- ---------------------------------------------------------------------------------------------
Trust revenue 134 181 (26.0%)
- ---------------------------------------------------------------------------------------------
Loan servicing income 462 355 30.1%
- ---------------------------------------------------------------------------------------------
Service charges on deposit
accounts 706 654 8.0%
- ---------------------------------------------------------------------------------------------
Other fee income 163 189 (13.8%)
- ---------------------------------------------------------------------------------------------
Financial services income 80 109 (26.6%)
- ---------------------------------------------------------------------------------------------
Business owned life insurance 142 14 NM
- ---------------------------------------------------------------------------------------------
Non-bank subsidiary income 125 124 0.8%
- ---------------------------------------------------------------------------------------------
Gains from sales of loans 425 265 60.4%
- ---------------------------------------------------------------------------------------------
Gain from sale of non-bank
subsidiary 350 0 NM
- ---------------------------------------------------------------------------------------------
Other 57 77 (26.0%)
----- ----- -----
- ---------------------------------------------------------------------------------------------
Total 2,644 1,968 34.3%
- ---------------------------------------------------------------------------------------------
Trust fees decreased $47,000, or 26.0%, in the first quarter of 2003 compared to
the same quarter in 2002, primarily as a result of lower market values on
various trust accounts for which fees are assessed.
Loan servicing fees increased $107,000, or 30.1%, to $462,000 in the first
quarter of 2003, when compared to the same quarter in 2002. The increase in 2003
resulted from an increase in commercial loan servicing income.
Gains on sales of loans in the secondary market increased $160,000 to $425,000
in the first quarter of 2003, when compared to the same quarter in 2002,
primarily as a result of increased gains from sales of mortgage and commercial
loans. Declines in interest rates continue to stimulate mortgage production,
including an increase in refinancing activity, although that trend is expected
to decline in the near future.
16
Service charges on deposit accounts for the first quarter of 2003 showed an
increase of $52,000, or 8.0%, over 2002 results, accounting for much of the
improvement in fee income generated for other services to customers. Financial
service income decreased $29,000, or 26.6%. Income from business owned life
insurance ("BOLI") amounted to $142,000 for the first three months of 2003
compared to $14,000 a year earlier. A $13 million purchase of BOLI had been made
in the second quarter of 2002. Revenues generated from the operation of
Arborview LLC ("Arborview") (a subsidiary formed in 2002 to manage a community
based residential facility) amounted to $125,000 for the first quarter compared
to $124.000 a year earlier.
Non-Interest Expense
Non-interest expense increased $246,000, or 4.3%, for the three months ended
March 31, 2003 compared to the same period in 2002. Salaries and employee
benefits showed an increase of $367,000, or 11.0%, for the period as a result of
additional staffing to operate new facilities and regular salary and related
benefit increases. Full time equivalent staff increased to 296 persons from 290
a year earlier. A decrease in occupancy (amounting to $18,000 or 3.7%) and an
increase in equipment expenses (amounting to $5,000 or 1.3%) occurred as a
result of costs related to modernization of various facilities.
TABLE 4
NONINTEREST EXPENSE
($ in Thousands)
- ---------------------------------------------------------------------------------------------
First quarter 2003 First quarter 2002 Percent change
- ---------------------------------------------------------------------------------------------
Personnel 3,701 3,334 11.0%
- ---------------------------------------------------------------------------------------------
Occupancy 469 487 (3.7%)
- ---------------------------------------------------------------------------------------------
Equipment 393 388 1.3%
- ---------------------------------------------------------------------------------------------
Data processing/courier 272 255 6.7%
- ---------------------------------------------------------------------------------------------
Supplies and printing 103 143 (28.0%)
- ---------------------------------------------------------------------------------------------
Business 117 87 34.5%
development/advertising
- ---------------------------------------------------------------------------------------------
FDIC 29 29 0.0%
- ---------------------------------------------------------------------------------------------
Director fees 94 97 (3.1%)
- ---------------------------------------------------------------------------------------------
Amortization of mortgage 90 83 8.4%
servicing rights
- ---------------------------------------------------------------------------------------------
Legal and professional 101 74 36.5%
- ---------------------------------------------------------------------------------------------
Operation of other real estate 103 144 (28.5%)
owned
- ---------------------------------------------------------------------------------------------
Other 560 665 (15.8%)
----- ----- -----
- ---------------------------------------------------------------------------------------------
Total 6,032 5,786 4.3%
- ---------------------------------------------------------------------------------------------
Expenses related to the operation of other real estate owned decreased $41,000
to $103,000 for the quarter ended March 31, 2003 compared to the same period in
2002. Included in these expenses were net losses taken on the sale of other real
estate owned amounting to $8,000 for the first quarter of 2003 compared to net
losses taken on sale of $69,000 for the same period in 2002. In addition, costs
related to the holding of other real estate owned properties increased $20,000
to $95,000 for the first quarter of 2003.
Other operating expenses decreased $84,000, or 7.1%. Legal expense and loan
collection expense increased $27,000 for the three months ended March 31, 2003
primarily as a result of legal issues related to loan collection efforts of one
commercial real estate loan in the process of foreclosure. Expenses related to
the operation of Arborview amounted to $169,000 for the first quarter of 2003
compared to $172,000 a year earlier and are included in various expenses.
17
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets
with indefinite lives no longer be amortized, but instead tested for impairment
as least annually. SFAS No. 142 requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and be reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The adoption of SFAS No. 142 and SFAS No. 144 does not have a material impact on
the Company's financial statements. There was no impairment for 2002 and
impairment testing for 2003 will occur in the second quarter of 2003.
Other items (such as supplies, marketing, telephone, postage and director fees)
comprising other operating expense show a decrease of $111,000 or 10.1% in the
first quarter of 2003 when compared to the same quarter in 2002. Expenses
related to the amortization of trust preferred expenses (such as legal and
underwriting expenses) amounted to $9,000 for the quarter ended March 31, 2002
and 2003. The overhead ratio, which is computed by subtracting non-interest
income from non-interest expense and dividing by average total assets, was 1.53%
for the three months ended March 31, 2003 compared to 1.83% for the same period
in 2002.
Income Taxes
Income tax expense for the Company for the three months ended March 31, 2003 was
$704,000, a decrease of $84,000, or 10.7%, compared to the same period in 2002.
The increase in income tax provision for the period was due to increased taxable
income.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 27.8% for the three months ended March 31, 2003 compared with 29.6%
for the same period in 2002. The effective tax rate of 27.8% consisted of a
federal effective tax rate of 24.5% and Wisconsin State effective tax rate of
3.3%.
Balance Sheet Analysis
Loans
At March 31, 2003, total loans increased $16.4 million, or 2.5%, to $680.7
million from $664.3 million at December 31, 2002. Growth in the Company's loan
portfolio resulted primarily from an increase in real estate commercial loans to
$377.8 million at March 31, 2003 compared to $351.4 million at December 31,
2002. In addition, commercial loans increased to $92.1 million at March 31,
2003, compared to $89.2 million at December 31, 2002. Real estate construction
loans decreased to $64.1 million at March 31, 2003, compared to $75.7 million at
December 31, 2002. Real estate mortgage loans decreased to $132.1 million at
March 31, 2003, compared with $133.4 million at December 31, 2002. Consumer
loans remained the same at $14.9 million at March 31, 2003 and December 31,
2002.
Growth in commercial real estate mortgages and commercial loans occurred
principally as a result of the Company's expansion efforts (primarily in the
Green Bay market) and the strong economic growth existing in that market.
The following table reflects the composition (mix) of the loan portfolio
(dollars in thousands):
18
TABLE 5
LOAN PORTFOLIO ANALYSIS
($ in Thousands)
- ----------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- ----------------------------------------------------------------------------------
Amount of loans by type (dollars in thousands)
- ----------------------------------------------------------------------------------
Real estate-mortgage
- ----------------------------------------------------------------------------------
Commercial $ 377,814 $ 351,425
- ----------------------------------------------------------------------------------
1-4 family residential
- ----------------------------------------------------------------------------------
First liens 84,015 86,161
- ----------------------------------------------------------------------------------
Junior liens 21,262 21,789
- ----------------------------------------------------------------------------------
Home equity 26,873 25,415
- ----------------------------------------------------------------------------------
Commercial, financial and agricultural 92,077 89,207
- ----------------------------------------------------------------------------------
Real estate-construction 64,065 75,688
- ----------------------------------------------------------------------------------
Installment
- ----------------------------------------------------------------------------------
Credit cards and related plans 2,104 2,057
- ----------------------------------------------------------------------------------
Other 12,828 12,859
- ----------------------------------------------------------------------------------
Less: deferred origination fees, net of costs 310 316
- ----------------------------------------------------------------------------------
Total $ 680,728 $ 664,285
- ----------------------------------------------------------------------------------
Risk Management and the Allowance for Loan Losses
The loan portfolio is the Company's primary asset subject to credit risk. To
reflect this credit risk, the Company sets aside an allowance or reserve for
credit losses through periodic charges to earnings. These charges are shown in
the Company's consolidated income statement as provision for loan losses. See
"Provision for Loan Losses" above. Credit risk is managed and monitored through
the use of lending standards, a thorough review of potential borrowers, and an
on-going review of payment performance. Asset quality administration, including
early identification of problem loans and timely resolution of problems, further
enhances management of credit risk and minimization of loan losses. All
specifically identifiable and quantifiable losses are immediately charged off
against the allowance. Charged-off loans are subject to periodic review, and
specific efforts are taken to achieve maximum recovery of principal and
interest.
Management reviews the adequacy of the Allowance for Loan Losses ("ALL") on a
quarterly basis to determine whether the allowance is adequate to provide for
probable losses inherent in the loan portfolio as of the balance sheet date.
Valuation of the adequacy of the ALL is based primarily on management's periodic
assessment and grading of the loan portfolio as described below. Additional
factors considered by management include the consideration of past loan loss
experience, trends in past due and non-performing loans, risk characteristics of
the various classifications of loans, current economic conditions, the fair
value of underlying collateral, and other regulatory or legal issues that could
affect credit losses.
Loans are initially graded when originated. They are re-graded as they are
renewed, when there is a loan to the same borrower, when identified facts
demonstrate heightened risk of nonpayment, or if they become delinquent. The
loan review, or grading process attempts to identify and measure problem and
watch list loans. Problem loans are those loans with higher than average risk
with workout and/or legal action probable within one year. These loans are
reported at least quarterly to the directors' loan committee and reviewed at
least monthly at the officers' loan committee for action to be taken. Watch list
loans are those loans considered as having weakness detected in either
character, capacity to repay or balance sheet concerns and prompt management to
take corrective action at the earliest opportunity. Problem and watch list loans
generally exhibit one or more of the following characteristics:
1. Adverse financial trends and condition
2. Decline in the entire industry
3. Managerial problems
4. Customer's failure to provide financial information or other collateral
documentation
5. Repeated delinquency, overdrafts or renewals
Every significant problem credit is reviewed by the loan review process and
assessments are performed quarterly to confirm the risk rating to that credit,
proper accounting and the adequacy of loan loss reserve assigned.
19
After reviewing the gradings in the loan portfolio, management will allocate or
assign a portion of the ALL to groups of loans and individual loans to cover
management's estimate of probable loss. Allocation is related to the grade of
the loan and includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS 118"). Allocations also are made for unrated loans, such as
credit card loans, based on historical loss experience adjusted for portfolio
activity. These allocated reserves are further supplemented by unallocated
reserves based on management's judgment regarding risk of error, local economic
conditions and any other relevant factors. Management then compares the amounts
allocated for probable losses to the current allowance. To the extent that the
current allowance is insufficient to cover management's best estimate of
probable losses, management records additional provision for credit loss. If the
allowance is greater than required at that point in time, provision expense is
adjusted accordingly.
As the following table indicates, the ALL at March 31, 2003 was $12.2 million
compared with $11.4 million at the end of 2002. Loans increased 2.5% from
December 31, 2002 to March 31, 2003, while the allowance as a percent of total
loans increased due to the loan loss provision being higher in comparison to
loan growth for the first quarter of 2003. The March 31, 2003 ratio of ALL to
outstanding loans was 1.79% compared with 1.72% at December 31, 2002 and the ALL
as a percentage of nonperforming loans was 56.4% at March 31, 2003 compared to
51.7% at end of year 2002. Based on management's analysis of the loan portfolio
risk at March 31, 2003, a provision expense of $893,000 was recorded for the
three months ended March 31, 2003, an increase of $393,000 or 78.6% compared to
the same period in 2002. Net loan charge-offs of $132,000 occurred in the first
quarter of 2003, and the ratio of net charge-offs to average loans for the
period ended March 31, 2003 was 0.08% compared to 0.11% at March 31, 2002. Real
estate mortgage loan net charge-offs represented 63.6% of the total net
charge-offs and consumer loans represented 31.8% of the net charge-offs for the
first three months of 2003. Loans charged-off are subject to periodic review and
specific efforts are taken to achieve maximum recovery of principal and accrued
interest.
TABLE 6
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
($ in thousands)
- ---------------------------------------------------------------------------------------------------------
For the period ended For the period ended For the period ended
March 31, 2003 March 31, 2002 December 31, 2002
- ---------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
("ALL")
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of $ 11,410 $ 7,992 $ 7,992
period
- ---------------------------------------------------------------------------------------------------------
Provision for loan losses 893 500 5,700
- ---------------------------------------------------------------------------------------------------------
Charge-offs 209 246 3,055
- ---------------------------------------------------------------------------------------------------------
Recoveries 77 79 773
-------- -------- -------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Balance at end of period 12,171 8,325 11,410
- ---------------------------------------------------------------------------------------------------------
Net charge-offs ("NCOs") 132 167 2,282
- ---------------------------------------------------------------------------------------------------------
Nonperforming Assets:
- ---------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 12,629 $ 16,008 $12,244
- ---------------------------------------------------------------------------------------------------------
Accruing loans past due 90 0 599 0
days or more
- ---------------------------------------------------------------------------------------------------------
Restructured loans 8,971 4,710 9,844
-------- -------- -------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 21,600 $ 21,317 $22,088
("NPLs")
- ---------------------------------------------------------------------------------------------------------
20
- ---------------------------------------------------------------------------------------------------------
Other real estate owned 626 3,385 2,890
-------- -------- -------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 22,226 $ 24,702 $24,978
("NPAs")
- ---------------------------------------------------------------------------------------------------------
Ratios:
- ---------------------------------------------------------------------------------------------------------
ALL to NCO's (annualized) 23.05 12.46 5.00
- ---------------------------------------------------------------------------------------------------------
NCO's to average loans 0.08% 0.11% 0.36%
(annualized)
- ---------------------------------------------------------------------------------------------------------
ALL to total loans 1.79% 1.34% 1.72%
- ---------------------------------------------------------------------------------------------------------
NPL's to total loans 3.17% 3.44% 3.33%
- ---------------------------------------------------------------------------------------------------------
NPA's to total assets 2.45% 2.90% 2.76%
- ---------------------------------------------------------------------------------------------------------
ALL to NPL's 56.35% 39.05% 51.66%
- ---------------------------------------------------------------------------------------------------------
While management uses available information to recognize losses on loans, future
adjustments to the ALL may be necessary based on changes in economic conditions
and the impact of such change on the Company's borrowers.
Consistent with generally accepted accounting principles ("GAAP") and with the
methodologies used in estimating the unidentified losses in the loss portfolio,
the ALL consists of several components.
First, the allowance includes a component resulting from the application of the
measurement criteria of SFAS 114 and SFAS 118. The amount of this component is
included in the various categories presented in the following table.
The second component is statistically based and is intended to provide for
losses that have occurred in large groups of smaller balance loans, the credit
quality of which is impracticable to re-grade at end of period. These loans
would include residential real estate, consumer loans and loans to small
businesses generally in principal amounts of $100,000 and less. The loss factors
are based primarily on the Company's historical loss experience tracked over a
three-year period and accordingly will change over time. Due to the fact that
historical loss experience varies for the different categories of loans, the
loss factors applied to each category also differ.
The final or "unallocated" component of the ALL is a component that is intended
to absorb losses that may not be provided for by the other components. There are
several primary reasons that the other components discussed above might not be
sufficient to absorb the losses present in portfolios, and the unallocated
portion of the ALL is used to provide for the losses that have occurred because
of these reasons.
The first is that there are limitations to any credit risk grading process. Even
for experienced loan reviewers, grading loans and estimating losses involves a
significant degree of judgment regarding the present situation with respect to
individual loans and the portfolio as a whole. The overall number of loans in
the portfolio also makes it impracticable to re-grade every loan each quarter.
Therefore, it is possible that some currently performing loans not recently
graded will not be as strong as their last grading and an insufficient portion
of the allowance will have been allocated to them. In addition, it is possible
that grading and loan review may be done without knowing whether all relevant
facts are at hand. For example, troubled borrowers may inadvertently or
deliberately omit important information from correspondence with lending
officers regarding their financial condition and the diminished strength of
repayment sources.
The second is that loss estimation factors are based on historical loss totals.
As such, the factors may not give sufficient weight to such considerations as
the current general economic and business conditions that affect the Company's
borrowers and specific industry conditions that affect borrowers in that
industry. For example, with respect to loans to borrowers who are influenced by
trends in the local tourist industry, management considers the effects of
weather conditions, market saturation, and the competition for borrowers from
other tourist destinations and attractions.
21
Third, the loss estimation factors do not give consideration to the seasoning of
the loan portfolio. Seasoning is relevant because losses are less likely to
occur in loans that have been performing satisfactorily for several years than
in loans that are more recent.
Finally, the loss estimation factors do not give consideration to the interest
rate environment. Most obviously, borrowers with variable rate loans may be less
able to manage their debt service if interest rates rise.
For these reasons, management regards it as both a more practical and prudent
practice to maintain the total allowance at an amount larger than the sum of the
amounts allocated as described above.
The following table shows the amount of the ALL allocated for the time periods
indicated to each loan type as described. It also shows the percentage of
balances for each loan type to total loans. In general, it would be expected
that those types of loans which have historically more loss associated with
them, will have a proportionally larger amount of the allowance allocated to
them than do loans which have less risk.
Consideration for making such allocations is consistent with the factors
discussed above, and all of the factors are subject to change; thus, the
allocation is not necessarily indicative of the loan categories in which future
loan losses will occur. It would also be expected that the amount allocated for
any particular type of loan will increase or decrease proportionately to both
the changes in the loan balances and to 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 7
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
($ in thousands)
- ----------------------------------------------------------------------------------------------------------
March 31, March 31, 200 2 Dec 31,
2003 2002
- ----------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
loans to loans to loans to
Amount total loans Amount total loans Amount total loans
------ ------ ------
- ----------------------------------------------------------------------------------------------------------
Commercial, financial
& agricultural $ 3,800 13.53% $ 1,150 13.71% $ 3,679 13.43%
- ----------------------------------------------------------------------------------------------------------
Commercial real estate 5,150 55.45% 4,600 48.63% 4,639 52.85%
- ----------------------------------------------------------------------------------------------------------
Real Estate:
- ----------------------------------------------------------------------------------------------------------
Construction 780 9.41% 546 12.15% 814 11.39%
- ----------------------------------------------------------------------------------------------------------
Residential 1,420 15.47% 1,090 19.25% 1,467 16.25%
- ----------------------------------------------------------------------------------------------------------
Home equity lines 225 3.95% 165 3.66% 228 3.83%
- ----------------------------------------------------------------------------------------------------------
Consumer 150 1.88% 190 2.26% 139 1.94%
- ----------------------------------------------------------------------------------------------------------
Credit card 68 0.31% 83 0.34% 83 0.31%
- ----------------------------------------------------------------------------------------------------------
Loan commitments 278 141 154
- ----------------------------------------------------------------------------------------------------------
Not specifically
allocated 300 360 207
--------- --------- ---------
- ----------------------------------------------------------------------------------------------------------
Total allowance $ 12,171 100.00% $ 8,325 100.00% $ 11,410 100.00%
- ----------------------------------------------------------------------------------------------------------
Allowance for credit
loss as a percentage
of total loans 1.79% 1.34% 1.72%
- ----------------------------------------------------------------------------------------------------------
Period end loans $ 680,728 $ 620,157 $ 664,285
- ----------------------------------------------------------------------------------------------------------
22
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 March 31, 2003. Ongoing efforts are
being made to collect these loans, and the Company involves the legal process
when necessary to minimize the risk of further deterioration of these loans for
full collectibility.
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.
The accrual of interest income is discontinued when a loan becomes 90 days past
due as to principal or interest. When interest accruals are discontinued,
interest credited to income is reversed. If collectibility is in doubt, cash
receipts on non-accrual loans are used to reduce principal rather than recorded
as interest income.
Non-performing assets at March 31, 2003 were $22.2 million compared to $25.0
million at December 31, 2002. Other real estate owned totaled $626,000 and
consisted of four residential and four commercial properties. Other real estate
owned at December 31, 2002 totaled $2.9 million, including an investment in
Arborview, an operating subsidiary of the Company, totaling $2.0 million. This
subsidiary was sold in February 2003, resulting in a gain on sale of
approximately $350,000. Non-accrual loans represented $12.6 million of the total
of non-performing assets at March 31, 2003. Real estate non-accrual loans
accounted for $10.9 million of the total, of which $2.6 million was residential
real estate and $8.1 million was commercial real estate, while commercial and
industrial non-accruals accounted for $1.6 million. Management believes
collateral is sufficient to offset losses in the event additional legal action
would be warranted to collect these loans. Troubled debt restructured loans
represent $8.9 million of non-performing loans at March 31, 2003 and $9.8
million at December 31, 2002. Approximately $6.8 million of troubled debt
restructured loans at March 31 consists of two commercial real estate credits
which were granted various payment concessions and had experienced past cash
flow problems. These credits were current at March 31, 2003. Management believes
that collateral is sufficient in those loans classified as troubled debt in
event of default, with the exception that $2.0 million in loan loss provision
has been allocated to a commercial credit totaling $4.0 million (included in
credits totaling $6.8 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 March
31, 2003 was 3.2% compared to 3.4% at end of year 2002. The Company's ALL was
56.4% of total non-performing loans at March 31, 2003 compared to 51.7% at end
of year 2002.
Potential problem loans at March 31, 2003 amounted to $3.7 million compared to a
total of $5.2 million at December 31, 2002. $2.2 million of the problem loans
stem from one commercial credit experiencing cash flow concerns. Various
commercial loans totaling $1.5 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.
23
Investment Portfolio
At March 31, 2003, the investment portfolio (which includes investment
securities available for sale and held to maturity) increased $1.2 million, or
0.8%, to $152.6 million from $151.4 million at December 31, 2002. At March 31,
2003, the investment portfolio represented 16.8% of total assets compared with
16.7% at December 31, 2002.
Securities held to maturity and securities available for sale consist of the
following:
TABLE 8
INVESTMENT SECURITY ANALYSIS
At March 31, 2003
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized Estimated Market
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
- ---------------------------------------------------------------------------------------------------------------
Securities held to maturity
- ---------------------------------------------------------------------------------------------------------------
Obligations of states &
political subdivisions $ 16,257 $ 389 $ 0 $ 16,646
--------- ---------- ------ ---------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Securities available for sale
- ---------------------------------------------------------------------------------------------------------------
Obligations of U.S. Treasury & 36,336 2,139 0 38,475
other U.S. Agencies
- ---------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 54,816 496 169 55,143
- ---------------------------------------------------------------------------------------------------------------
Obligations of states & 35,435 2,224 0 37,659
political subdivisions
- ---------------------------------------------------------------------------------------------------------------
Other securities 5,056 21 5,077
--------- ---------- ---------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Total securities available for
sale $ 131,643 $ 4,880 $ 169 $ 136,354
- ---------------------------------------------------------------------------------------------------------------
At December 31, 2002
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized Estimated Market
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
- ---------------------------------------------------------------------------------------------------------------
Securities held to maturity
- ---------------------------------------------------------------------------------------------------------------
Obligations of states & $ 18,227 $ 297 $ 0 $ 18,524
political subdivisions
--------- ---------- ------ ---------
- ---------------------------------------------------------------------------------------------------------------
Securities available for sale
- ---------------------------------------------------------------------------------------------------------------
Obligations of U.S. Treasury & $ 38,379 $ 2,214 $ 0 $ 40,593
other U.S. Agencies
- ---------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 49,968 941 58 50,851
- ---------------------------------------------------------------------------------------------------------------
Obligations of states & 35,840 1,817 3 37,654
political subdivisions
- ---------------------------------------------------------------------------------------------------------------
Other securities 4,019 22 4,041
--------- ---------- ---------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Total securities available for
sale $ 128,206 $ 4,994 $ 61 $ 133,139
- ---------------------------------------------------------------------------------------------------------------
24
At March 31, 2003, the contractual maturities of securities held to maturity and
securities available for sale are as follows:
TABLE 9
INVESTMENT PORTFOLIO MATURITY
($ in Thousands)
- ---------------------------------------------------------------------------------------------
Securities held to Maturity Securities Available for Sale
--------------------------- -----------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Within 1 year $ 2,278 $ 2,299 $ 28,479 $ 28,740
- ---------------------------------------------------------------------------------------------
After 1 but within 5 years 6,488 6,794 68,117 70,380
- ---------------------------------------------------------------------------------------------
After 5 but within 10 years 2,295 2,357 20,643 22,232
- ---------------------------------------------------------------------------------------------
After 10 years 5,196 5,196 12,968 13,566
- ---------------------------------------------------------------------------------------------
Equity securities 0 0 1,436 1,436
-------- -------- -------- --------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total $ 16,257 $ 16,646 $131,643 $136,354
- ---------------------------------------------------------------------------------------------
Deposits
Total deposits at March 31, 2003 increased $2.3 million, or 0.3%, to $742.6
million from $740.3 million at December 31, 2002. Non-interest bearing deposits
at March 31, 2003 decreased $12.6 million, or 14.0%, to $77.3 million from $89.8
million at December 31, 2002. Interest-bearing deposits at March 31, 2003
increased $14.9 million, or 2.3%, to $665.4 million from $650.5 million at
December 31, 2002. Interest-bearing transaction accounts (NOW deposits)
decreased $2.2 million, primarily in public fund deposits. Savings deposits
increased $470,000, or 0.2%, to $195.7 million at March 31, 2003, when compared
to $195.2 million at December 31, 2002. Time deposits (including time, $100,000
and over and other time) increased $16.6 million (includes increase of $13.1
million in time deposits over $100,000), or 4.3%, to $407.6 million at March 31,
2003, when compared to $391.0 million at December 31, 2002. Brokered CD's
totaled $98.9 million at March 31, 2003 compared to $87.1 million at December
31, 2002. Time deposits greater than $100,000 and brokered time deposits were
priced within the framework of the Company's rate structure and did not
materially increase the average rates on deposit liabilities. Increased
competition for consumer deposits and customer awareness of interest rates
continues to limit the Company's core deposit growth in these types of deposits.
Typically, overall deposits for the first six months tend to decline slightly as
a result of the seasonality of the Company's customer base as customers draw
down deposits during the early first half of the year in anticipation of the
summer tourist season. As a result of the Company's expansion into new markets
in recent years, this effect has been reduced as additional branch facilities in
less seasonal locations have provided deposit growth and seasonal stability.
Emphasis has been, and will continue to be, placed on generating additional core
deposits in 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 quality customer service. The Company also may increase brokered
time deposits during the remainder of the year 2003 as an additional source of
funds to provide for loan growth.
Short Term Borrowings and Other Borrowings
Short-term borrowings at March 31, 2003 consist of federal funds purchased and
securities under agreements to repurchase. Total short-term borrowings at March
31, 2003 decreased $1.0 million to $9.1 million from $10.1 million at December
31, 2002. Customer repurchase agreements totaled $1.1 million at
25
March 31, 2003 compared to $1.8 million at December 31, 2002. Federal funds
purchased decreased from $8.3 million at December 31, 2002 to $8.0 million at
March 31, 2003 accounting for the balance of the decrease in the balance of
short-term borrowings. These have decreased as a result of obtaining other
funding sources during the quarter including brokered time deposits.
Other borrowings consist of term loans with FHLB. These borrowings totaled $65
million at March 31, 2003 and December 31, 2002.
Typically, short-term borrowings and other borrowings increase in order to fund
growth in the loan portfolio. Although total borrowings decreased during the
quarter, the Company will borrow monies if borrowing is a less costly form of
funding loans compared to the cost of acquiring deposits. Additionally, the
availability of deposits also determines the amount of funds the Company needs
to borrow in order to fund loan demand. The Company anticipates it will continue
to use wholesale funding sources of this nature, if these borrowings add
incrementally to overall profitability.
Long Term Debt
Long-term debt of $53,000 at March 31, 2003 consists of a land contract
requiring annual payments of $53,000 plus interest calculated at prime + 1/4%.
The land contract is for debt used to purchase one of the properties in the
Green Bay region for a branch location.
In connection with the issuance of Trust Preferred Securities in 2001 (see
"Capital Resources"), the Company issued long-term subordinated debentures to
Baylake Capital Trust I, a Delaware Business Trust subsidiary of the Company.
The aggregate principal amount of the debentures due 2031, to the trust
subsidiary is $16,597,940. For additional details, please make reference to the
Consolidated Financial Statements and the accompanying footnotes on the
Company's Form 10-K for the year 2002.
Liquidity
Liquidity management refers to the ability of the Company to ensure that cash is
available to meet loan demand and depositors' needs, and to service other
liabilities as they become due, without undue cost or risk, and without causing
a disruption to normal operating activities. The Company and the Bank have
different liquidity considerations.
The Company's primary sources of funds are dividends and interest, and proceeds
from the issuance of its securities. The Company manages its liquidity position
in order to provide funds necessary to pay dividends to its shareholders.
Dividends received from Bank totaled $1.0 million for the first quarter of 2003
and will continue to be the Company's main source of long-term liquidity. The
dividends from the Bank along with existing cash were sufficient to pay cash
dividends to the Company's shareholders of $1.9 million in the first quarter of
2003.
The Bank meets its cash flow needs by having funding sources available to
satisfy the credit needs of customers as well as having available funds to
satisfy deposit withdrawal requests. Liquidity at the Bank is derived from
deposit growth, maturing loans, the maturity of the investment portfolio, access
to other funding sources, marketability of certain of its assets and strong
capital positions.
Maturing investments have been a primary source of liquidity at the Bank. For
the quarter ended March 31, 2003, principal payments totaling $25.0 million were
received on investments. These proceeds in addition to other Company cash were
used to purchase $26.8 million in investments for the quarter. At March 31,
2003, the carrying or book value of investment securities maturing within one
year amounted to $28.7 million or 18.8% of the total investment securities
portfolio. This compares to a 33.2% level for investment securities with one
year or less maturities as of December 31, 2002. Within the investing activities
of the statement of cash flows, sales and maturities of investment securities
during the first quarter of 2003 totaled $25.0 million. At March 31, 2003, the
investment portfolio contained $93.6 million
26
of U.S. Treasury and federal agency backed securities representing 61.3% of the
total investment portfolio. These securities tend to be highly marketable and
had a market value above amortized cost at March 31, 2003 amounting to $2.5
million.
Deposit growth is typically another source of liquidity for the Bank. As a
financing activity reflected in the March 31, 2003 Consolidated Statements of
Cash Flows, deposits increased and resulted in $2.3 million of cash inflow
during the first quarter of 2003. The Company's overall deposit base increased
0.3% for the quarter ended March 31, 2003. Deposit growth, especially core
deposits, is the most stable source of liquidity for the Bank.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $229.1 million, or 33.7%, of loans maturing within one year.
Within the classification of short-term borrowings and other borrowings at March
31, 2003, federal funds purchased and securities sold under agreements to
repurchase totaled $9.1 million compared to $10.1 million at the end of 2002.
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 $65.0 million at March 31, 2003 and December 31, 2002.
The Bank's liquidity resources were sufficient in the first quarter of 2003 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 2003, 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. The Bank uses an
Asset/Liability Committee ("ALCO") to manage risks associated with changing
interest rates, changing asset and liability mixes, and measuring the impact of
such changes on earnings. The sensitivity of net interest income to market rate
changes is evaluated monthly by ALCO.
In order to limit exposure to interest rate risk, the Company has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. The Company has focused on the establishment of
adjustable rate mortgages ("ARM's") in its residential lending product line; the
concerted efforts made to attract and sell core deposit products through the use
of Company's branching and delivery systems and marketing efforts; and the use
of other available sources of funding to provide longer term funding
possibilities.
27
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. The mismatch between asset and liability repricing characteristics in
specific time intervals is referred to as "interest rate sensitivity gap." If
more liabilities than assets reprice in a given time interval a liability
sensitive gap position exists. In general, liability sensitive gap positions in
a declining interest rate environment increase net interest income.
Alternatively asset sensitive positions, where assets reprice more quickly than
liabilities, negatively impact the net interest income in a declining rate
environment. In the event of an increasing rate environment, opposite results
would occur such that a liability sensitivity gap position would decrease net
interest income and an asset sensitivity gap position would increase net
interest income. The sensitivity of net interest income to changing interest
rates can be reduced by matching the repricing characteristics of assets and
liabilities.
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Company is liability sensitive. The analysis considers money
market index accounts and 25% of NOW accounts to be rate sensitive within three
months. Regular savings, money market deposit accounts and 75% of NOW accounts
are considered to be rate sensitive within one to five years. While these
accounts are contractually short-term in nature, it is the Company's experience
that repricing occurs over a longer period of time. The Company views its
savings and NOW accounts to be core deposits and relatively non-price sensitive,
as it believes it could make repricing adjustments for these types of accounts
in small increments without a material decrease in balances. All other earning
categories, including loans and investments as well as other paying liability
categories such as time deposits, are scheduled according to their contractual
maturities. The "static gap analysis" provides a representation of the Company's
earnings sensitivity to changes in interest rates. It is a static indicator and
does not reflect various repricing characteristics. Accordingly, a "static gap
analysis" may not necessarily be indicative of the sensitivity of net interest
income in a changing rate environment.
TABLE 10
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF March 31, 2003
Within Four to Seven to One Year Over
Three Six Twelve To Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In thousands)
Earning assets:
Investment securities $ 19 442 $ 12 582 $ 5 894 $ 76 867 $ 44 725 $159 510
Federal funds sold 12 12
Loans and leases
Variable rate 359 466 9 674 9 891 13 761 0 392 792
Fixed rate 35 437 32 185 64 805 141 883 1 953 276 263
--------- --------- ------------- --------- -------- -------
Total loans and leases $ 394 903 $ 41 859 $ 74 696 $ 155 644 $ 1 953 $276 263
--------- --------- ------------- --------- -------- --------
Total earning assets $ 414 357 $ 54 441 $ 80 590 $ 232 511 $ 46 678 $828 577
========= ========= ============= ========= ======== ========
Interest bearing liabilities:
NOW Accounts $ 15515 $ 0 $ 0 $ 46 543 $ 0 $ 62 058
Savings Deposits 152 104 0 0 43 598 0 195 702
Time Deposits 80 341 111 146 104 998 111 101 15 407 601
Borrowed Funds 39 061 10 000 53 25 000 0 74 114
Trust Preferred Stock 0 0 0 0 16 100 16 100
========= ========= ============= ========= ======== ========
Total interest bearing $ 287 021 $ 121 146 $ 105 051 $ 226 242 $ 16 115 $755 575
========= ========= ============= ========= ======== ========
Liabilities
Interest sensitivity gap (within $ 127 336 $ (66 705) $ (24 461) $ 6 269 $ 30 563 $ 73 002
periods)
Cumulative interest sensitivity gap $ 127 336 $ 60 631 $ 36 170 $ 42 439 $ 73 002
28
Ratio of cumulative interest
Sensitivity gap to rate
Sensitive assets 15.37% 7.32% 4.37% 5.12% 8.81%
Ratio of rate sensitive assets
To rate sensitive
Liabilities 144.36% 44.94% 76.72% 102.77% 289.66%
Cumulative ratio of rate
Sensitive assets to rate
Sensitive liabilities 144.36% 114.85% 107.05% 105.74% 109.66%
In addition to the "static gap analysis", determining the sensitivity of future
earnings to a hypothetical plus or minus 100 basis point parallel rate shock can
be accomplished through the use of simulation modeling. Simulation of earnings
includes the modeling of the balance sheet as an ongoing entity. Balance sheet
items are modeled to project income based on a hypothetical change in interest
rates. The resulting net income for the next twelve-month period is compared to
the net income amount calculated using flat rates. This difference represents
the Company's earnings sensitivity to a plus or minus 100 basis point parallel
rate shock. The resulting simulations indicated that net interest income would
increase by approximately 4.6% if rates rose by a 100 basis point shock, and
projected that net interest income would decrease by approximately 5.8% if rates
fell by a 100 basis point shock under these scenarios for the period ended March
31, 2004. This result was within the policy limits established by the Company.
The results of the simulations are based solely on immediate and sustained
parallel changes in market rates and do not reflect the earnings sensitivity
that may arise from such factors as the change in spread between key market
rates and the shape of the yield curve. The above results also are considered to
be conservative estimates due to the fact that no management action is factored
into the analysis to deal with potential income variances. Management
continually reviews its interest risk position through the ALCO process.
Management's philosophy is to maintain relatively matched rate sensitive asset
and liability positions within the range described above in order to provide
earnings stability in the event of significant interest rate changes.
Capital Resources
Shareholders' equity at March 31, 2003 increased $1.0 million or 1.6% to $66.4
million, compared with $65.4 million at end of year 2002. This increase includes
a change of $153,000 to capital in 2003 due to the impact of STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 115. Disregarding the effect of this change,
shareholders' equity would have increased $1.2 million or 1.8% for the period
between March 31, 2003 and December 31, 2002.
The Company's capital base (before SFAS 115 change) increased primarily due to
the retention of earnings. The Company's dividend reinvestment plan typically
provides capital improvement, as the holders of approximately 24% of Company's
Common Stock participate in the plan.
In 2001, the Company completed a Trust Preferred Security offering in the amount
of $16.1 million to enhance regulatory capital and to add liquidity. Under
applicable regulatory guidelines, the Trust Preferred Securities qualify as Tier
1 capital up to a maximum of 25% of Tier 1 capital. Any additional portion of
the Trust Preferred Securities qualify as Tier 2 Capital. As of March 31, 2003,
$16.1 million of the Trust Preferred Securities qualify as Tier 1 Capital.
Cash dividends paid for the first quarter of 2003 were $0.13 per share compared
with $0.12 in the first quarter of 2002. The Company provided an 8.3% increase
in normal dividends per share in 2003 over 2002 as a result of above average
earnings.
29
In 1997, the Company's Board of Directors authorized management, in its
discretion, to repurchase up to 7,000 shares of the Company's common stock each
calendar quarter in the open market. The shares repurchased would be used to
fill its needs for the dividend reinvestment program, any future benefit plans,
and the Company's stock purchase plan. Shares repurchased are held as treasury
stock and accordingly, are accounted for as a reduction of stockholders' equity.
The Company repurchased none of its common shares in the first quarter of 2003.
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 March 31, 2003 and December 31, 2002, 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
March 31, 2003 and December 31, 2002:
TABLE 11
CAPITAL RATIOS
($ in Thousands)
- -------------------------------------------------------------------------------------
To Be Well
Capitalized under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
- -------------------------------------------------------------------------------------
($ in Thousands)
- -------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------
As of March 31, 2003
- -----------------------------------------------------------------------------------
Total Capital (to
Risk Weighted Assets)
- -----------------------------------------------------------------------------------
Company 84,090 10.89% 61,770 8.00% 77,212 10.00%
- -----------------------------------------------------------------------------------
Bank 80,817 10.46% 61,782 8.00% 77,227 10.00%
- -----------------------------------------------------------------------------------
Tier 1 Capital (to
Risk Weighted Assets)
- -----------------------------------------------------------------------------------
Company 74,407 9.64% 30,885 4.00% 46,327 6.00%
- -----------------------------------------------------------------------------------
Bank 71,132 9.21% 30,891 4.00% 46,336 6.00%
- -----------------------------------------------------------------------------------
Tier 1 Capital (to
- -----------------------------------------------------------------------------------
30
- ------------------------------------------------------------------------------------
Average Assets)
- ------------------------------------------------------------------------------------
Company 74,407 8.33% 35,746 4.00% N/A N/A
- ------------------------------------------------------------------------------------
Bank 71,132 7.96% 35,746 4.00% 44,682 5.00%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
As of December 31, 2002
- -----------------------------------------------------------------------------------
Total Capital (to
Risk Weighted Assets)
- -----------------------------------------------------------------------------------
Company 82,643 10.99% 60,146 8.00% 75,183 10.00%
- -----------------------------------------------------------------------------------
Bank 79,436 10.59% 60,031 8.00% 75,039 10.00%
- -----------------------------------------------------------------------------------
Tier 1 Capital(to
Risk Weighted Assets)
- -----------------------------------------------------------------------------------
Company 73,220 9.74% 30,073 4.00% 45,110 6.00%
- -----------------------------------------------------------------------------------
Bank 70,031 9.33% 30,016 4.00% 45,023 6.00%
- -----------------------------------------------------------------------------------
Tier 1 Capital (to
Average Assets)
- -----------------------------------------------------------------------------------
Company 73,220 8.24% 35,564 4.00% N/A N/A
- -----------------------------------------------------------------------------------
Bank 70,031 7.96% 35,564 4.00% 44,455 5.00%
- -----------------------------------------------------------------------------------
Management believes that a strong capital position is necessary to take
advantage of opportunities for profitable expansion of product and market share,
and to provide depositor and investor confidence. The Company's capital level is
strong, but also must be maintained at an appropriate level to provide the
opportunity for an adequate return on the capital employed. Management actively
reviews capital strategies for the Company to ensure that capital levels are
appropriate based on the perceived business risks, further growth opportunities,
industry standards, and regulatory requirements.
Item 3 Quantitative and Qualitative Disclosure about Market Risk.
The Company's financial performance is affected by, among other factors, credit
risk and interest rate risk. The Company does not use derivatives to mitigate
its interest rate risk or credit risk, relying instead on loan review and its
loan loss reserve.
The Company's earnings are derived from the operations of its direct and
indirect subsidiaries with particular reliance on net interest income,
calculated as the difference between interest earned on loans and investments
and the interest expense paid on deposits and other interest bearing
liabilities, including advances from FHLB and other borrowings. Like other
financial institutions, the Company's interest income and interest expense are
affected by general economic conditions and by the policies of regulatory
authorities, including the monetary policies of the Board of Governors of the
Federal Reserve System. Changes in the economic environment may influence, among
other matters, the growth rate of loans and deposits, the quality of the loan
portfolio and loan and deposit pricing. Fluctuations in interest rates are not
predictable or controllable.
As of March 31, 2003, 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, 2002, as described in the
Company's 2002 Form 10-K Annual Report.
Item 4. 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 Quarterly Report on Form
10-Q, 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
31
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.
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. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a). The following exhibits are furnished herewith:
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
11 Statement re: computation of per share earnings
15 Letter re: unaudited interim financial information
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32
(b). Report on Form 8-K:
Reports on Form 8-K during the quarter ended March 31, 2003. First quarter
earnings release-Regulation FD Disclosures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
Date: May 13, 2003 /s/ Thomas L. Herlache
--------------------------------------
Thomas L. Herlache
President (CEO)
Date: May 13, 2003 /s/ Steven D. Jennerjohn
---------------------------------------
Steven D.Jennerjohn
Treasurer (CFO)
33
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven D. Jennerjohn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baylake
Corp (the "Registrant").;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: May 13, 2003
/s/ Steven D. Jennerjohn
------------------------
Steven D. Jennerjohn
Senior Vice President and Chief Financial Officer
34
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas L. Herlache, certify that:
1. I have reviewed this quarterly report on Form 10-K of Baylake
Corp (the "Registrant").;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: May 13, 2003
/s/ Thomas L. Herlache
----------------------
Thomas L. Herlache
President and CEO
35
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 Statement re: computation of per share earnings
15 Letter re: unaudited interim financial information
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
36