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Table of Contents


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________to ________________

Commission file number 001-16339

 

 

 

 

 

 


 

BAYLAKE CORP.

(Exact name of registrant as specified in its charter)


 

 

 

Wisconsin

 

39-1268055

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

217 North Fourth Avenue, Sturgeon Bay, WI

 

54235

(Address of principal executive offices)

 

(Zip Code)

 

 

 


 

(920) 743-5551

(Registrant’s telephone number, including area code)

 

None

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

 

 

     (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Number of outstanding shares of common stock, $5.00 par value per share, as of May 7, 2012 was 7,926,458 shares

BAYLAKE CORP. AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

 

PAGE NO.

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 -

FINANCIAL STATEMENTS

 

3

 

 

 

 

ITEM 2 -

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

31

 

 

 

 

ITEM 3 -

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

50

 

 

 

 

ITEM 4 -

CONTROLS AND PROCEDURES

 

51

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1 -

LEGAL PROCEEDINGS

 

51

 

 

 

 

ITEM 1A -

RISK FACTORS

 

51

 

 

 

 

ITEM 2 -

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

51

 

 

 

 

ITEM 3 -

DEFAULTS UPON SENIOR SECURITIES

 

51

 

 

 

 

ITEM 4 - MINE SAFETY DISCLOSURES   52
       

ITEM 5 -

OTHER INFORMATION

 

52

 

 

 

 

ITEM 6 -

EXHIBITS

 

52

2


Table of Contents


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BAYLAKE CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2012 (Unaudited) and December 31, 2011
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

March 31,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

67,595

 

$

86,980

 

Federal funds sold

 

 

 

 

513

 

Securities available for sale

 

 

279,074

 

 

284,331

 

Loans held for sale

 

 

1,849

 

 

1,869

 

Loans, net of allowance of $11,250 and $10,638 at March 31, 2012 and December 31, 2011, respectively

 

 

625,685

 

 

620,377

 

Cash surrender value of life insurance

 

 

23,157

 

 

23,064

 

Premises and equipment, net

 

 

22,899

 

 

22,953

 

Federal Home Loan Bank stock

 

 

4,710

 

 

6,792

 

Foreclosed properties, net

 

 

14,766

 

 

12,119

 

Goodwill

 

 

6,641

 

 

6,641

 

Deferred income taxes

 

 

6,745

 

 

7,145

 

Accrued interest receivable

 

 

3,681

 

 

3,381

 

Other assets

 

 

10,903

 

 

10,764

 

Total Assets

 

$

1,067,705

 

$

1,086,929

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing

 

$

106,745

 

$

104,446

 

Interest-bearing

 

 

751,579

 

 

760,741

 

Total Deposits

 

 

858,324

 

 

865,187

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

55,000

 

 

55,000

 

Repurchase agreements

 

 

33,277

 

 

47,566

 

Subordinated debentures

 

 

16,100

 

 

16,100

 

Convertible promissory notes

 

 

9,450

 

 

9,450

 

Accrued expenses and other liabilities

 

 

9,196

 

 

9,225

 

Total Liabilities

 

 

981,347

 

 

1,002,528

 

 

 

 

 

 

 

 

 

Common stock, $5 par value, authorized 50,000,000 shares;

 

 

 

 

 

 

 

Issued-8,147,471 shares at March 31, 2012 and 8,132,552 at December 31, 2011;

 

 

 

 

 

 

 

Outstanding-7,926,458 shares at March 31, 2012 and 7,911,539 at December 31, 2011

 

 

40,737

 

 

40,662

 

Additional paid-in capital

 

 

12,028

 

 

12,066

 

Retained earnings

 

 

32,694

 

 

31,441

 

Treasury stock (221,013 shares at March 31, 2012 and December 31, 2011)

 

 

(3,549

)

 

(3,549

)

Accumulated other comprehensive income

 

 

4,448

 

 

3,781

 

Total Stockholders’ Equity

 

 

86,358

 

 

84,401

 

Total Liabilities and Stockholders’ Equity

 

$

1,067,705

 

$

1,086,929

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

3


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended March 31, 2012 and 2011
(Dollar amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

 

 

2012

 

 

2011

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

Loans, including fees

 

$

8,010

 

$

8,482

 

Taxable securities

 

 

1,906

 

 

1,751

 

Tax exempt securities

 

 

372

 

 

380

 

Federal funds sold

 

 

30

 

 

21

 

Total Interest and Dividend Income

 

 

10,318

 

 

10,634

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Deposits

 

 

1,394

 

 

1,956

 

Repurchase agreements

 

 

23

 

 

22

 

Federal Home Loan Bank advances and other debt

 

 

258

 

 

314

 

Subordinated debentures

 

 

78

 

 

67

 

Convertible promissory notes

 

 

245

 

 

245

 

Total Interest Expense

 

 

1,998

 

 

2,604

 

Net interest income

 

 

8,320

 

 

8,030

 

Provision for loan losses

 

 

1,750

 

 

1,300

 

Net interest income after provision for loan losses

 

 

6,570

 

 

6,730

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

Fees from fiduciary activities

 

 

240

 

 

283

 

Fees from loan servicing

 

 

159

 

 

190

 

Fees for other services to customers

 

 

1,168

 

 

1,251

 

Net gain on sale of loans

 

 

361

 

 

386

 

Net gain (loss) in mortgage servicing rights

 

 

18

 

 

(30

)

Net gain on sale of securities

 

 

678

 

 

125

 

Net gain on sale of premises and equipment

 

 

2

 

 

8

 

Increase in cash surrender value of life insurance

 

 

93

 

 

130

 

Income in equity of UFS subsidiary

 

 

177

 

 

231

 

Other income

 

 

149

 

 

40

 

Total Noninterest Income

 

 

3,045

 

 

2,614

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,427

 

 

4,556

 

Occupancy expense

 

 

624

 

 

605

 

Equipment expense

 

 

270

 

 

280

 

Data processing and courier

 

 

229

 

 

208

 

FDIC insurance expense

 

 

362

 

 

731

 

Operation of other real estate

 

 

596

 

 

1,038

 

Provision for impairment of standby letters of credit

 

 

 

 

7

 

Loan and collection expense

 

 

210

 

 

168

 

Other outside services

 

 

183

 

 

165

 

Other operating expenses

 

 

932

 

 

956

 

Total Noninterest Expense

 

 

7,833

 

 

8,714

 

Income before provision for (benefit from) income taxes

 

 

1,782

 

 

630

 

Provision for (benefit from) income taxes

 

 

450

 

 

(21

)

Net Income

 

$

1,332

 

$

651

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.17

 

$

0.08

 

Diluted earnings per share

 

$

0.15

 

$

0.08

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

4


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
Three months ended March 31, 2012
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2012

 

Net Income

 

 

 

 

$

1,332

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

Unrealized holding gains arising during period

 

$

1,077

 

 

 

 

Less: reclassification adjustment for gains included in net income

 

 

(410

)

 

 

 

Other comprehensive income

 

 

 

 

 

667

 

Comprehensive income

 

 

 

 

$

1,999

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

5


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)
Three months ended March 31, 2012
(Dollar amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income

 

 

 

 

 

 

 

 

Additional
Paid-in
Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Retained
Earnings

 

Treasury
Stock

 

 

Stockholders’
Equity

 

 

 

Shares

 

Amount

 

 

 

 

 

 

Balance, January 1 , 2012

 

 

7,911,539

 

$

40,662

 

$

12,066

 

$

31,441

 

$

(3,549

)

$

3,781

 

$

84,401

 

Net income for the period

 

 

 

 

 

 

 

 

1,332

 

 

 

 

 

 

1,332

 

Net changes in unrealized gain on securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

1,779

 

 

1,779

 

Reclassification adjustment for net gains realized in income

 

 

 

 

 

 

 

 

 

 

 

 

(678

)

 

(678

)

Tax effect

 

 

 

 

 

 

 

 

 

 

 

 

(434

)

 

(434

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,999

 

Stock-based compensation expense

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

27

 

Vesting of Restricted Stock Units (RSUs)

 

 

14,919

 

 

75

 

 

(75

)

 

 

 

 

 

 

 

 

Tax benefit from vesting of RSUs

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

12

 

Expiration of unexercised stock options

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

(2

)

Cash dividends ($0.01 per share)

 

 

 

 

 

 

 

 

(79

)

 

 

 

 

 

(79

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2012

 

 

7,926,458

 

$

40,737

 

$

12,028

 

$

32,694

 

$

(3,549

)

$

4,448

 

$

86,358

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

6


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2012 and 2011
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Net Income

 

$

1,332

 

$

651

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

314

 

 

325

 

Amortization of debt issuance costs

 

 

9

 

 

9

 

Provision for losses on loans

 

 

1,750

 

 

1,300

 

Provision for impairment of letters of credit

 

 

 

 

7

 

Net amortization of premium/discount on securities

 

 

757

 

 

745

 

Increase in cash surrender value of life insurance

 

 

(93

)

 

(130

)

Net realized gain on sale of securities

 

 

(678

)

 

(125

)

Net gain on sale of loans

 

 

(361

)

 

(386

)

Proceeds from sale of loans held for sale

 

 

19,558

 

 

31,918

 

Origination of loans held for sale

 

 

(19,222

)

 

(25,189

)

Net change in valuation of mortgage servicing rights

 

 

(18

)

 

33

 

Provision for valuation allowance on foreclosed properties

 

 

458

 

 

682

 

Net gain on sale of premises and equipment

 

 

(2

)

 

(8

)

Net gain on disposals of foreclosed properties

 

 

(39

)

 

(83

)

Benefit for deferred income tax expense

 

 

(34

)

 

(297

)

Stock-based compensation expense

 

 

27

 

 

8

 

Income in equity of UFS subsidiary

 

 

(177

)

 

(231

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(811

)

 

3,493

 

Accrued expenses and other liabilities

 

 

(29

)

 

590

 

Net cash flows provided by operating activities

 

 

2,741

 

 

13,312

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from sale of securities available for sale

 

 

17,121

 

 

16,226

 

Principal payments on securities available for sale

 

 

16,096

 

 

12,924

 

Purchase of securities available for sale

 

 

(26,937

)

 

(24,823

)

Proceeds from sale of FHLB stock

 

 

2,082

 

 

Proceeds from sale of foreclosed properties

 

 

792

 

 

2,872

 

Proceeds from sale of premises and equipment

 

 

2

 

 

11

 

Loan originations and payments, net

 

 

(10,916

)

 

7,215

 

Additions to premises and equipment

 

 

(260

)

 

(153

)

See accompanying Notes to Unaudited Consolidated Financial Statements.

7


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2012 and 2011
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

CASH FLOWS FROM INVESTING ACTIVITIES (continued)

 

 

 

 

 

 

 

Proceeds from life insurance surrender

 

$

 

$

1,698

 

Rabbi Trust initial funding

 

 

 

 

(1,626

)

Net change in federal funds sold

 

 

513

 

 

(5

)

Dividend from UFS Subsidiary

 

 

600

 

 

115

 

Net cash provided by (used in) investing activities

 

 

(907

)

 

14,454

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net change in deposits

 

 

(6,863

)

 

(28,665

)

Net change in federal funds purchased and repurchase agreements

 

 

(14,289

)

 

7,785

 

Repayments on Federal Home Loan Bank advances

 

 

 

 

(15,000

)

Tax benefit from vesting of RSUs

 

 

12

 

 

 

Cash dividends paid

 

 

(79

)

 

 

Net cash used in financing activities

 

 

(21,219

)

 

(35,880

)

Net change in cash

 

 

(19,385

)

 

(8,114

)

 

 

 

 

 

 

 

 

Beginning cash

 

 

86,980

 

 

54,555

 

Ending cash

 

$

67,595

 

$

46,441

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

1,728

 

$

2,312

 

Income taxes (paid) refunded, net

 

 

(920

)

 

3,046

 

Supplemental noncash disclosure:

 

 

 

 

 

 

 

Transfers from loans to foreclosed properties

 

$

3,858

 

$

1,244

 

Mortgage servicing rights resulting from sale of loans

 

 

45

 

 

57

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

8


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

1.

The consolidated financial statements of Baylake Corp. (the “Company”) include the accounts of the Company, its wholly owned subsidiary Baylake Bank (the “Bank”), and the Bank’s wholly owned subsidiaries: Baylake Investments, Inc., and Baylake Insurance Agency, Inc. The accompanying interim consolidated financial statements should be read in conjunction with the 2011 Annual Report on Form 10-K of the Company. The accompanying consolidated financial statements are unaudited. These interim consolidated financial statements are prepared in accordance with the requirements of Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, the unaudited consolidated financial information included in this report reflects all adjustments, consisting of normal recurring accruals of operations for the three month periods ending March 31, 2012 and 2011. The consolidated results of operations for the three months ended March 31, 2012 are not necessarily indicative of results to be expected for the entire year. Management of the Company has evaluated all subsequent events through May 10, 2012, the date the interim consolidated financial statements were issued.

 

 

2.

Use of Estimates

 

 

 

To prepare consolidated financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, provision for letter of credit impairment loss, value of foreclosed properties, other than temporary impairment of securities, mortgage servicing rights, income tax expense, and fair values of financial instruments are particularly subject to change.

 

 

3.

Earnings Per Share

 

 

 

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised, stock awards were fully vested, and promissory notes were converted, resulting in the issuance of common stock that then shared in our earnings, is computed by dividing net income as adjusted for the income impact of assumed conversions by the weighted average number of common shares outstanding and common stock equivalents. The following table shows the computation of the basic and diluted earnings per share:

EARNINGS PER SHARE
(Dollar amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three months ended
March 31,

 

 

 

2012

 

2011

 

(Numerator):

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

1,332

 

$

651

 

Plus: Income impact of assumed conversions

 

 

 

 

 

 

 

Interest on 10% convertible debentures, net of income tax

 

 

149

 

 

 

Income available to common stockholders plus assumed conversions

 

$

1,481

 

$

651

 

 

 

 

 

 

 

 

 

(Denominator):

 

 

 

 

 

 

 

Weighted average number of common shares outstanding-basic

 

 

7,914,326

 

 

7,911,539

 

Plus: Incremental shares of assumed conversions:

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

(1)

 

(1)

Dilutive effect of restricted stock units

 

 

19,124

 

 

5,845

 

Dilutive effect of convertible promissory notes (2)

 

 

1,890,000

 

 

 

Dilutive potential common shares

 

 

1,909,124

 

 

5,845

 

Adjusted weighted-average shares

 

 

9,823,450

 

 

7,917,384

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.17

 

$

0.08

 

Diluted Earnings Per Share

 

$

0.15

 

$

0.08

 

9


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

 

(1)

At March 31, 2012 and 2011, there were 103,400 and 112,600 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

 

 

 

 

(2)

At March 31, 2012 and 2011, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”). The Convertible Notes are convertible into shares of our common stock at a conversion ratio of one share of common stock for each $5.00 in aggregate principal amount held on the record date of the conversion subject to certain adjustments as described in the Convertible Notes. On October 1, 2014, one-half of the original principal amounts of the Convertible Notes are mandatorily convertible at the conversion ratio if conversion has not occurred. At March 31, 2012, the entire 1,890,000 common shares are included since the average market price per share for the quarter ended March 31, 2012 exceeded the conversion price of $5.00 per share. At March 31, 2011 the common shares are not included due to their anti-dilutive effect.

 

 

4.

Recent Accounting Pronouncements

 

 

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to the codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The provisions of this guidance had no impact on the consolidated financial condition, results of operation or liquidity of the Company.

 

 

 

In June 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (“IASB”) (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The provisions of this guidance had no impact on the consolidated financial condition, results of operations or liquidity of the Company.

 

 

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total number for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In October 2011, the FASB deferred the effective date of the amendment. The provisions of this guidance are not expected to have a significant impact on the consolidated financial condition, results of operations or liquidity of the Company.

10


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

In December 2011, the FASB has issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentations of Comprehensive Income, so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011.

 

 

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The provisions of this guidance did not have a significant impact on the consolidated financial condition, results of operations or liquidity of the Company.

 

 

5.

Fair Value

 

 

 

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:


 

 

 

 

Level 1:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2:

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3:

Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.


 

 

 

A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

 

 

 

The methods and assumptions used to estimate fair value are described below.

 

 

 

Securities available for sale - the fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For other securities not able to be priced on matrix pricing, outside third parties are relied upon (Level 3 inputs). None of the Company’s securities available for sale at March 31, 2012 were measured using Level 1 inputs.

11


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

Mortgage servicing rights - the fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. These assumptions include servicing costs, expected loan lives, discount rates, and the determination of whether the loan is likely to be refinanced. The Company compares the valuation model inputs and results to published industry data for reasonableness (Level 2 inputs).

 

 

 

Foreclosed properties - the fair value of foreclosed properties is determined using a variety of market information including but not limited to appraisals, professional market assessments and real estate tax assessment information. Foreclosed properties adjusted to fair value less costs to sell upon transfer to foreclosed properties, establishing a new cost basis. Subsequently, foreclosed properties are carried at the lower of cost or fair value less estimated costs to sell (Level 3 inputs).

 

 

 

Impaired loans - the fair value of impaired loans is based on review of comparable collateral in the similar marketplaces (Level 3 inputs) or an analysis of expected cash flows of the loan in relationship to the contractual terms of the loan (Level 3 inputs). Impaired loans are carried at the lower of amortized cost or fair value less estimated costs to sell. Not all impaired loans are carried at fair value if there is sufficient collateral or expected repayments exceed the recorded investments of such loans.

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
(Dollar amounts in thousands)

Assets measured at fair value on a recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,
2012

 

Quoted Prices in
Active Markets
For Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agency securities

 

$

13,605

 

$

 

$

13,605

 

$

 

Mortgage-backed securities

 

 

188,698

 

 

 

 

183,775

 

 

4,923

 

Asset-backed securities

 

 

4,766

 

 

 

 

4,766

 

 

 

Obligations of states and political subdivisions

 

 

57,637

 

 

 

 

57,637

 

 

 

Private placement and corporate bonds

 

 

12,713

 

 

 

 

12,713

 

 

 

Other securities

 

 

1,655

 

 

 

 

1,655

 

 

 

Total securities available for sale

 

 

279,074

 

 

 

 

274,151

 

 

4,923

 

Mortgage servicing rights

 

 

697

 

 

 

 

697

 

 

 

Total

 

$

279,771

 

$

 

$

274,848

 

$

4,923

 

12


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2011

 

Quoted Prices in
Active Markets
For Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agency securities

 

$

14,138

 

$

 

$

14,138

 

$

 

Mortgage-backed securities

 

 

193,592

 

 

 

 

177,330

 

 

16,262

 

Asset-backed securities

 

 

4,969

 

 

 

 

4,969

 

 

 

Obligations of states and political subdivisions

 

 

57,766

 

 

 

 

57,766

 

 

 

Private placement and corporate bonds

 

 

12,212

 

 

 

 

12,212

 

 

 

Other securities

 

 

1,654

 

 

 

 

1,654

 

 

 

Total securities available for sale

 

 

284,331

 

 

 

 

268,069

 

 

16,262

 

Mortgage servicing rights

 

 

634

 

 

 

 

634

 

 

 

Total

 

$

284,965

 

$

 

$

268,703

 

$

16,262

 

The following table presents additional information about assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

 

 

 

 

For the three month period ended
March 31, 2012

 

Balance, beginning of period

 

$

16,262

 

Transfer into Level 3

 

 

 

Net unrealized gains

 

 

499

 

Transfer out of Level 3

 

 

(10,593

)

Principal payments

 

 

(1,245

)

Balance, end of period

 

$

4,923

 

The transfers out of Level 3 during the quarter were the result of the availability of quoted prices on a portion of the securities that were Level 3 at December 31, 2011.

ASSETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS
(Dollar amounts in thousands)

Assets measured at fair value on a non-recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,
2012

 

Quoted Prices in
Active Markets
For Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

10,104

 

$

 

$

 

$

10,104

 

Foreclosed properties, net

 

 

14,766

 

 

 

 

 

 

14,766

 

Total

 

$

24,870

 

$

 

$

 

$

24,870

 

13


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2011

 

Quoted Prices in
Active Markets
For Identical
Assets

(Level 1)

 

Significant
Other
Observable
Inputs

(Level 2)

 

Significant
Unobservable

Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

4,685

 

$

 

$

 

$

4,685

 

Foreclosed properties, net

 

 

12,119

 

 

 

 

 

 

12,119

 

Total

 

$

16,804

 

$

 

$

 

$

16,804

 

Required Financial Disclosures about Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all nonfinancial instruments are excluded from the scope of this guidance. Accordingly, the fair value disclosures required by this guidance are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of our fair value.

The following table presents the carrying amount and estimated fair value of certain financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar amounts in thousands)

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

67,595

 

$

67,595

 

$

86,980

 

$

86,980

 

Federal funds sold

 

 

 

 

 

 

513

 

 

513

 

Securities available for sale

 

 

279,074

 

 

279,074

 

 

284,331

 

 

284,331

 

Loans held for sale

 

 

1,849

 

 

1,883

 

 

1,869

 

 

1,898

 

Loans, net

 

 

625,685

 

 

627,819

 

 

620,377

 

 

622,967

 

Federal Home Loan Bank stock

 

 

4,710

 

 

4,710

 

 

6,792

 

 

6,792

 

Mortgage servicing rights

 

 

697

 

 

697

 

 

634

 

 

634

 

Foreclosed properties, net

 

 

14,766

 

 

14,766

 

 

12,119

 

 

12,119

 

Accrued interest receivable

 

 

3,681

 

 

3,681

 

 

3,381

 

 

3,381

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

858,324

 

$

851,739

 

$

865,187

 

$

851,054

 

Repurchase agreements

 

 

33,277

 

 

33,277

 

 

47,566

 

 

47,566

 

Federal Home Loan Bank advances

 

 

55,000

 

 

56,637

 

 

55,000

 

 

56,968

 

Subordinated debentures

 

 

16,100

 

 

16,100

 

 

16,100

 

 

16,100

 

Convertible promissory notes

 

 

9,450

 

 

9,645

 

 

9,450

 

 

9,387

 

Accrued interest payable

 

 

1,168

 

 

1,168

 

 

898

 

 

898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet credit related items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Letters of credit

 

$

1,995

 

$

1,995

 

$

1,995

 

$

1,995

 

14


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring and non-recurring basis have been previously disclosed. The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

(a) Cash

The carrying amount of cash approximates fair value.

(b) Federal Funds Sold

The carrying amount of federal funds sold approximates fair value.

(c) Loans Held for Sale

The fair value of loans held for sale is based on actual market quotes from third party investors.

(d) Cash Value of Life Insurance

The fair value of life insurance approximates the carrying amount, because upon liquidation of these investments, the Company would receive the cash surrender value, which equals the carrying amount.

(e) Federal Home Loan Bank Stock

It is not practical to determine the fair value of Federal Home Loan Bank (“FHLB”) stock due to restrictions placed on its transferability. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is fair value.

(f) Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates fair value.

(g) Deposits

The carrying amount of demand deposits (interest-bearing and non-interest-bearing), savings deposits, and money market deposits approximates fair value. The carrying amount of variable rate time deposits, including certificates of deposit, approximates fair value. For fixed rate time deposits, fair value is based on discounted cash flows using current market interest rates.

(h) Repurchase Agreements

The carrying amount of repurchase agreements approximates fair value.

(i) Federal Home Loan Bank Advances

The carrying amount of variable rate FHLB advances approximates fair value. For fixed rate advances, fair value is based on discounted cash flows using current market interest rates.

(j) Subordinated Debentures

The carrying amount of variable rate subordinated debentures approximates fair value.

15


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

(k) Convertible Promissory Notes

The fair value of fixed rate convertible promissory notes is based on discounted cash flows using current market interest rates.

(l) Accrued Interest Payable

The carrying amount of accrued interest payable approximates fair value.

(m) Off Balance Sheet Credit Related Items-Letters of Credit

The carrying amount of the off balance sheet letters of credit approximates fair value based on management’s evaluation of the factors affecting the letters of credit.

 

 

6.

Investments

INVESTMENT SECURITY ANALYSIS
(Dollar amounts in thousands)

The fair value of securities available for sale and the related unrealized gains and losses as of March 31, 2012 and December 31, 2011 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

Fair Value

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

U.S. government-sponsored agency securities

 

$

13,605

 

$

23

 

$

(46

)

Obligations of states and political subdivisions

 

 

57,637

 

 

3,860

 

 

(12

)

Mortgage-backed securities

 

 

188,698

 

 

4,079

 

 

(875

)

Asset-backed securities

 

 

4,766

 

 

119

 

 

(436

)

Private placement and corporate bonds

 

 

12,713

 

 

639

 

 

 

Other securities

 

 

1,655

 

 

 

 

 

Totals

 

$

279,074

 

$

8,720

 

$

(1,369

)


 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

Fair Value

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

U.S. government-sponsored agency securities

 

$

14,138

 

$

49

 

$

 

Obligations of states and political subdivisions

 

 

57,766

 

 

4,128

 

 

 

Mortgage-backed securities

 

 

193,592

 

 

4,233

 

 

(1,984

)

Asset-backed securities

 

 

4,969

 

 

132

 

 

(451

)

Private placement and corporate bonds

 

 

12,212

 

 

159

 

 

(17

)

Other securities

 

 

1,654

 

 

 

 

 

Totals

 

$

284,331

 

$

8,701

 

$

(2,452

)

16


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

At March 31, 2012 and December 31, 2011, the mortgage-backed securities portfolio was $188.7 million, (67.6%) and $193.6 million, (68.1%), respectively, of the investment portfolios. Approximately 9.6%, or $18.2 million, of the mortgage-backed securities outstanding at March 31, 2012 were issued and guaranteed by the Government National Mortgage Association (“GNMA”), the Small Business Administration (“SBA”) or the United States Department of Veterans Affairs (“VA”): agencies of the United States government. An additional 67.4%, or $127.1 million, of the mortgage-backed securities outstanding at March 31, 2012 were issued by either the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”); United States government-sponsored-agencies. Non-agency mortgage-backed securities present a level of credit risk that does not exist currently with United States government agency-backed securities, but only comprised approximately 22.9%, or $43.3 million, of the outstanding mortgage-backed securities at March 31, 2012. Management evaluates these non-agency mortgage-backed securities at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

Description of Securities

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

U.S. government-sponsored
agency securities

 

$

3,532

 

$

(46

)

$

 

$

 

$

3,532

 

$

(46

)

Obligations of states and
political subdivisions

 

 

983

 

 

(12

)

 

 

 

 

 

983

 

 

(12

)

Mortgage-backed securities

 

 

46,959

 

 

(450

)

 

4,034

 

 

(425

)

 

50,993

 

 

(875

)

Asset-backed securities

 

 

 

 

 

 

3,553

 

 

(436

)

 

3,553

 

 

(436

)

Total temporarily impaired

 

$

51,474

 

$

(508

)

$

7,587

 

$

(861

)

$

59,061

 

$

(1,369

)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

Description of Securities

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

Mortgage-backed securities

 

$

46,955

 

$

(964

)

$

9,363

 

$

(1,020

)

$

56,318

 

$

(1,984

)

Asset-backed securities

 

 

 

 

 

 

3,645

 

 

(451

)

 

3,645

 

 

(451

)

Private placement and
corporate bonds

 

 

3,504

 

 

(17

)

 

 

 

 

 

3,504

 

 

(17

)

Total temporarily impaired

 

$

50,459

 

$

(981

)

$

13,008

 

$

(1,471

)

$

63,467

 

$

(2,452

)

At March 31, 2012, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises one security. The asset-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.

At December 31, 2011, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises three securities. The asset-backed securities category with continuous unrealized losses for twelve months or more comprises two securities.

17


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers is assessed. Adjustments to market value that are considered temporary are recorded as a separate component of other comprehensive income, net of tax. If an impairment of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if a credit loss exists. If there is a credit loss, it will be recorded in the consolidated statement of operations. Unrealized losses other than credit losses will continue to be recognized in other comprehensive income; net of tax. Unrealized losses reflected in the preceding tables have not been included in the results of operations because the unrealized loss was not deemed other-than-temporary. Management does not have the intent to sell the securities and has determined that it is not more likely than not that the Company will be required to sell the debt securities before their anticipated recovery and therefore, there is no other-than-temporary impairment. The losses on these securities are expected to dissipate as they approach their maturity dates and/or if interest rates decline.

 

 

7.

Loans

          Loans held for investment are summarized as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

March 31,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Construction

 

$

53,049

 

$

53,606

 

Real Estate-Mortgage

 

 

148,920

 

 

143,456

 

Real Estate-Commercial

 

 

318,043

 

 

317,198

 

 

 

 

 

 

 

 

 

Commercial Loans

 

 

92,625

 

 

91,750

 

Consumer Loans

 

 

8,416

 

 

8,809

 

Municipal Loans

 

 

16,287

 

 

16,577

 

Gross Loans

 

 

637,340

 

 

631,396

 

Less: Deferred Origination Fees, net of costs

 

 

(405

)

 

(381

)

Less: Allowance for Loan Losses

 

 

(11,250

)

 

(10,638

)

Loans, net

 

$

625,685

 

$

620,377

 

Loans having a carrying value of $110,949 and $105,114 are pledged as collateral for borrowings from the FHLB at March 31, 2012 and December 31, 2011, respectively.

18


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2012 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction
Loans

 

Real Estate-
Mortgage

 

Real Estate-
Commercial

 

Commercial

 

Consumer

 

Municipal

 

Not Specifically
Allocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,231

 

$

1,995

 

$

5,467

 

$

770

 

$

161

 

$

 

$

1,014

 

$

10,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs

 

 

(3

)

 

(47

)

 

(1,074

)

 

(59

)

 

(22

)

 

 

 

 

 

(1,205

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

6

 

 

3

 

 

24

 

 

23

 

 

11

 

 

 

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision

 

 

99

 

 

50

 

 

2,591

 

 

(43

)

 

(8

)

 

 

 

(939

)

 

1,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

1,333

 

$

2,001

 

$

7,008

 

$

691

 

$

142

 

$

 

$

75

 

$

11,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

53,049

 

$

148,920

 

$

317,638

 

$

92,625

 

$

8,416

 

$

16,287

 

$

 

$

636,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL

 

 

(1,333

)

 

(2,001

)

 

(7,008

)

 

(691

)

 

(142

)

 

 

 

(75

)

 

(11,250

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

51,716

 

$

146,919

 

$

310,630

 

$

91,934

 

$

8,274

 

$

16,287

 

$

(75

)

$

625,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

4,022

 

$

4,108

 

$

20,128

 

$

642

 

$

29

 

$

 

$

 

$

28,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated

 

 

49,027

 

 

144,812

 

 

297,510

 

 

91,983

 

 

8,387

 

 

16,287

 

 

 

 

608,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

53,049

 

$

148,920

 

$

317,638

 

$

92,625

 

$

8,416

 

$

16,287

 

$

 

$

636,935

 

19


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2011 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction
Loans

 

Real Estate-
Mortgage

 

Real Estate-
Commercial

 

Commercial

 

Consumer

 

Municipal

 

Not Specifically
Allocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,424

 

$

2,103

 

$

6,355

 

$

1,189

 

$

391

 

$

 

$

40

 

$

11,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs

 

 

(62

)

 

(393

)

 

(222

)

 

(21

)

 

(157

)

 

 

 

 

 

(855

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

50

 

 

2

 

 

71

 

 

15

 

 

13

 

 

 

 

 

 

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision

 

 

(36

)

 

678

 

 

(23

)

 

(161

)

 

142

 

 

 

 

700

 

 

1,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

1,376

 

$

2,390

 

$

6,181

 

$

1,022

 

$

389

 

$

 

$

740

 

$

12,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

53,298

 

$

130,322

 

$

329,908

 

$

81,664

 

$

9,576

 

$

15,960

 

$

 

$

620,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL

 

 

(1,376

)

 

(2,390

)

 

(6,181

)

 

(1,022

)

 

(389

)

 

 

 

(740

)

 

(12,098

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

51,922

 

$

127,932

 

$

323,727

 

$

80,642

 

$

9,187

 

$

15,960

 

$

(740

)

$

608,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

118

 

$

2,196

 

$

4,472

 

$

474

 

$

15

 

$

 

$

 

$

7,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated

 

 

53,180

 

 

128,126

 

 

325,436

 

 

81,190

 

 

9,561

 

 

15,960

 

 

 

 

613,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

53,298

 

$

130,322

 

$

329,908

 

$

81,664

 

$

9,576

 

$

15,960

 

$

 

$

620,728

 

A summary of past due loans at March 31, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

30-89 Days Past
Due (accruing)

 

90 Days & Over or
on non-accrual

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

364

 

$

4,022

 

$

4,386

 

Real estate – mortgage

 

 

753

 

 

2,717

 

 

3,470

 

Real estate – commercial

 

 

3,413

 

 

15,422

 

 

18,835

 

Commercial

 

 

1,173

 

 

269

 

 

1,442

 

Consumer

 

 

51

 

 

29

 

 

80

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,754

 

$

22,459

 

$

28,213

 

20


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

30-89 Days Past
Due (accruing)

 

90 Days & Over or
on non-accrual

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

435

 

$

4,945

 

$

5,380

 

Real estate – mortgage

 

 

845

 

 

2,676

 

 

3,521

 

Real estate – commercial

 

 

2,072

 

 

11,660

 

 

13,732

 

Commercial

 

 

41

 

 

259

 

 

300

 

Consumer

 

 

59

 

 

43

 

 

102

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,452

 

$

19,583

 

$

23,035

 

Credit Quality: Management utilizes a risk grading matrix on each of the Company’s commercial loans. Loans are graded on a scale of 1 to 7. A description of the loan grades is as follows:

0001 - Excellent Risk. Borrowers of highest quality and character. Almost no risk possibility. Balance sheets are very strong with superior liquidity, excellent debt capacity and low leverage. Cash flow trends are positive and stable. Excellent ratios.

0002 - Very Good Risk. Good ratios in all areas. High quality borrower. Normally quite liquid. Differs slightly from a 0001 customer.

0003 - Strong in most categories. Possible higher levels of debt or shorter track record. Minimal attention required. Good management.

0004 - Better than Average Risk. Adequate ratios, fair liquidity, desirable customer. Proactive management. Performance trends are positive. Any deviations are limited and temporary as a historical trend.

0005 - Satisfactory Risk. Some ratios slightly weak. Overall ability to repay is adequate. Capable and generally proactive management in all critical positions. Margins and cash flow may lack stability but trends are stable to positive. Company normally profitable year to year but may experience an occasional loss.

0006 A - Weakness detected in either management, capacity to repay or balance sheet. Erratic profitability and financial performance. Loan demands more attention. Includes loans deemed to have weaknesses and less than 90 days past due.

0006 B - Have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s collateral position at some future date. Loans rated 0006B are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Includes loans deemed to have weaknesses and less than 90 days past due.

0007 - Well defined weaknesses and trends that jeopardize the repayment of loans. Ranging from workout to legal. Includes loans that are nonaccrual and/or 90 days and over past due.

21


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

Below is a breakdown of loans by risk grading as of March 31, 2012 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0001-0005

 

0006A

 

0006B

 

0007

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loans

 

$

86,403

 

$

3,925

 

$

771

 

$

1,526

 

$

92,625

 

Real Estate - Commercial

 

 

233,300

 

 

43,437

 

 

11,856

 

 

29,450

 

 

318,043

 

Construction

 

 

38,536

 

 

5,785

 

 

2,919

 

 

5,809

 

 

53,049

 

 

 

 

358,239

 

 

53,147

 

 

15,546

 

 

36,785

 

 

463,717

 

Mortgage

 

 

142,008

 

 

851

 

 

885

 

 

5,176

 

 

148,920

 

Consumer Loans

 

 

8,412

 

 

 

 

 

 

4

 

 

8,416

 

Municipal Loans

 

 

16,287

 

 

 

 

 

 

 

 

16,287

 

Total

 

$

524,946

 

$

53,998

 

$

16,431

 

$

41,965

 

 

637,340

 

Deferred Origination Fees, net of costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(405

)

Total loans

 

 

 

 

 

 

 

 

 

 

 

 

 

$

636,935

 

Below is a breakdown of loss by risk grading as of December 31, 2011 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0001-0005

 

0006A

 

0006B

 

0007

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loans

 

$

84,652

 

$

4,618

 

$

1,051

 

$

1,429

 

$

91,750

 

Real Estate – Commercial

 

 

227,815

 

 

43,690

 

 

11,592

 

 

34,101

 

 

317,198

 

Construction

 

 

37,636

 

 

6,218

 

 

3,323

 

 

6,429

 

 

53,606

 

 

 

 

350,103

 

 

54,526

 

 

15,966

 

 

41,959

 

 

462,554

 

Mortgage

 

 

137,379

 

 

391

 

 

885

 

 

4,801

 

 

143,456

 

Consumer Loans

 

 

8,791

 

 

 

 

 

 

18

 

 

8,809

 

Municipal Loans

 

 

16,577

 

 

 

 

 

 

 

 

16,577

 

Total

 

$

512,850

 

$

54,917

 

$

16,851

 

$

46,778

 

 

631,396

 

Deferred Origination Fees, net of costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(381

)

Total loans

 

 

 

 

 

 

 

 

 

 

 

 

 

$

631,015

 

22


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

8.

Allowance For Loan Losses (“ALL”)

 

 

 

The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (“PFLL”) is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

 

 

 

The ALL consists of specific reserves on certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses based on regular analyses of all impaired non-homogenous loans. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based on the Bank’s historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, nonaccrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) changes in underlying collateral values.

 

 

 

There are many factors affecting the ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional PFLL could be required that could adversely affect the earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

23


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

Information regarding impaired loans is as follows (dollar amounts in thousands):

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

Construction
Loans

 

Real
Estate-
Mortgage

 

Real Estate-
Commercial

 

Commercial

 

Consumer

 

Municipal

 

Not
Specifically
Allocated

 

Totals

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

2,440

 

$

1,602

 

$

6,005

 

$

56

 

$

1

 

$

 

$

 

$

10,104

 

Unpaid principal balance

 

 

2,750

 

 

1,796

 

 

7,794

 

 

174

 

 

2

 

 

 

 

 

 

12,516

 

Related allowance

 

 

310

 

 

194

 

 

1,789

 

 

118

 

 

1

 

 

 

 

 

 

2,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

1,272

 

$

2,312

 

$

12,334

 

$

468

 

$

27

 

$

 

$

 

$

16,413

 

Unpaid principal balance

 

 

1,272

 

 

2,312

 

 

12,334

 

 

468

 

 

27

 

 

 

 

 

 

16,413

 

Related allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

3,712

 

$

3,914

 

$

18,339

 

$

524

 

$

28

 

$

 

$

 

$

26,517

 

Unpaid principal balance

 

 

4,022

 

 

4,108

 

 

20,128

 

 

642

 

 

29

 

 

 

 

 

 

28,929

 

Related allowance

 

 

310

 

 

194

 

 

1,789

 

 

118

 

 

1

 

 

 

 

 

 

2,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment during quarter

 

$

3,780

 

$

4,068

 

$

18,075

 

$

664

 

$

48

 

$

 

$

 

$

26,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income recognized while impaired

 

$

 

$

20

 

$

110

 

$

6

 

$

 

$

 

$

 

$

136

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

Construction
Loans

 

Real
Estate-
Mortgage

 

Real Estate-
Commercial

 

Commercial

 

Consumer

 

Municipal

 

Not
Specifically
Allocated

 

Totals

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

2,667

 

$

904

 

$

1,103

 

$

 

$

11

 

$

 

$

 

$

4,685

 

Unpaid principal balance

 

 

2,852

 

 

1,096

 

 

1,702

 

 

54

 

 

16

 

 

 

 

 

 

5,720

 

Related allowance

 

 

185

 

 

192

 

 

599

 

 

54

 

 

5

 

 

 

 

 

 

1,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

2,093

 

$

3,011

 

$

30,156

 

$

612

 

$

 

$

 

$

 

$

35,872

 

Unpaid principal balance

 

 

2,093

 

 

3,011

 

 

30,156

 

 

612

 

 

 

 

 

 

 

 

35,872

 

Related allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

4,760

 

$

3,915

 

$

31,259

 

$

612

 

$

11

 

$

 

$

 

$

40,557

 

Unpaid principal balance

 

 

4,945

 

 

4,107

 

 

31,858

 

 

666

 

 

16

 

 

 

 

 

 

41,592

 

Related allowance

 

 

185

 

 

192

 

 

599

 

 

54

 

 

5

 

 

 

 

 

 

1,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment during quarter

 

$

4,942

 

$

4,327

 

$

30,080

 

$

529

 

$

15

 

$

 

$

 

$

39,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income recognized while impaired

 

$

277

 

$

311

 

$

1,512

 

$

66

 

$

21

 

$

 

$

 

$

2,187

 

24


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

Management regularly monitors impaired loan relationships. In the event facts and circumstances change, an additional PFLL may be necessary.

Nonperforming loans are as follows (dollar amounts in thousands):

NONPERFORMING LOANS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,
2012

 

December 31,
2011

 

September 30,
2011

 

June 30,
2011

 

March 31,
2011

 

Nonaccrual loans

 

$

14,301

 

$

15,242

 

$

19,026

 

$

16,759

 

$

17,027

 

Loans restructured in a troubled debt restructuring, nonaccrual

 

 

8,158

 

 

4,341

 

 

5,287

 

 

5,288

 

 

165

 

Total nonperforming loans (“NPLs”)

 

$

22,459

 

$

19,583

 

$

24,313

 

$

22,047

 

$

17,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured loans, accruing

 

$

6,469

 

$

22,009

 

$

20,461

 

$

18,559

 

$

22,777

 

During the quarter ended March 31, 2012, $8.0 million of accruing restructured loans were transferred to nonaccrual and $7.6 million of restructured loans were in compliance with their modified terms and were transferred out of the restructured loan category.

 

 

9.

Foreclosed Properties, Net

 

 

 

Foreclosed properties are summarized as follows (dollar amounts in thousands):


 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

14,913

 

$

19,934

 

Transfer of net realizable value to foreclosed properties

 

 

3,858

 

 

1,244

 

Sale proceeds

 

 

(792

)

 

(2,872

)

Net gain from disposal of foreclosed properties

 

 

39

 

 

83

 

Valuation allowance related to properties disposed

 

 

(740

)

 

(572

)

Total foreclosed properties

 

 

17,278

 

 

17,817

 

Valuation allowance for losses

 

 

(2,512

)

 

(4,092

)

Total foreclosed properties, net

 

$

14,766

 

$

13,725

 


 

 

 

Changes in the valuation allowance for losses on foreclosed properties were as follows (dollar amounts in thousands):


 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,794

 

$

3,982

 

Provision charged to operations

 

 

458

 

 

682

 

Amounts related to properties disposed

 

 

(740

)

 

(572

)

Balance at end of period

 

$

2,512

 

$

4,092

 

25


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

10.

Income Taxes

 

 

 

In accordance with the accounting guidance for income taxes, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

 

 

 

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that has a greater than 50% chance of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

 

 

The Company regularly reviews the carrying amount of our deferred income tax assets to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence, it is more likely than not that all or a portion of our deferred income tax assets will not be realized in future periods, a deferred income tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred income tax assets. In evaluating available evidence, management considers, among other things, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences. Our evaluation is based on current tax laws as well as management’s expectations of future performance. At March 31, 2012 and December 31, 2011, the Company determined that no valuation allowance was required to be taken against our deferred income tax asset other than a valuation allowance to reduce our state net operating loss carry forwards to an amount which the Company believes the benefit will more likely than not be realized. The Company continues to assess the amount of tax benefits it may realize.

 

 

 

The Company is subject to the income tax laws of the U.S., its states and municipalities. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant Governmental taxing authorities. Accounting guidance related to uncertainty in income taxes prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under the guidance, tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon the examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% chance of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. The guidance also revises disclosure requirements to include an annual tabular roll forward of unrecognized tax benefits. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws within the framework existing under GAAP. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

 

 

 

As of March 31, 2012, the gross unrecognized tax benefits represent estimated tax and interest costs related to a pending IRS audit for the 2009 tax year. In January 2012, the Company and the IRS reached a tentative settlement agreement to finalize the audit. The Company paid interest related to the timing of deductions taken for income tax purposes. The liability amount recorded by the Company is considered adequate to cover the proposed settlement amount.

 

 

 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (dollar amounts in thousands):


 

 

 

 

 

Balance, January 1, 2012

 

$

174

 

Additions for tax positions of prior years

 

 

 

Settlements

 

 

(34

)

Balance, March 31, 2012

 

$

140

 

26


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

Changes in the deferred income tax balances were as follows (dollar amounts in thousands):

 

 

 

Deferred income taxes – Available for sale securities


 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

(2,468

)

$

(659

)

Net change during period

 

 

(434

)

 

(810

)

Balances at end of period

 

$

(2,902

)

$

(1,469

)


 

 

 

Deferred income taxes – Other than available for sale securities


 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

9,613

 

$

9,861

 

Net change during period

 

 

34

 

 

297

 

Balances at end of period

 

$

9,647

 

$

10,158

 


 

 

11.

Equity Investment

 

 

 

Baylake Bank owns a 49.8% interest (500 shares) in United Financial Services, Inc. (“UFS”), a data processing service. In addition to the ownership interest, the Bank and UFS have a common member on each of their respective Boards of Directors. The investment in this entity is carried under the equity method of accounting and the pro rata share of its net income is included in other income. The carrying value of the investment in UFS was $3.9 million at March 31, 2012 and December 31, 2011. The current book value of UFS is approximately $7,813 per share.

 

 

12.

Mortgage Servicing Rights

 

 

 

The Company has obligations to service residential first mortgage loans and commercial loans that have been sold in the secondary market with servicing retained. Mortgage servicing rights (“MSRs”) are recorded at fair value when loans are sold in the secondary market with servicing retained. On a quarterly basis MSRs are valued based on available market information.

27


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

Changes in the carrying value of MSRs are as follows (dollar amounts in thousands):

MORTGAGE SERVICING RIGHTS

 

 

 

 

 

 

 

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

634

 

$

746

 

Additions from loans sold with servicing retained

 

 

45

 

 

57

 

Changes in valuation

 

 

(36

)

 

18

 

Loan payments and payoffs

 

 

54

 

 

(51

)

Fair value of MSRs at the end of period

 

$

697

 

$

770

 


 

 

 

Unpaid principal balance of loans serviced for others was $85.8 million and $83.6 million at March 31, 2012 and March 31, 2011, respectively.

 

 

13.

Promissory Notes

 

 

 

During 2009 and 2010, the Company issued 10% Convertible Notes due June 30, 2017 (the “Convertible Notes”) totaling $9.45 million. The Convertible Notes were offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated there under.

 

 

 

The Convertible Notes accrue interest at a fixed rate of 10% per annum upon issuance and until maturity or earlier conversion or redemption. Interest is payable quarterly, in arrears, on January 1, April 1, July 1, and October 1 of each year. The Convertible Notes are convertible into shares of common stock at a conversion ratio of one share of common stock for each $5.00 in aggregate principal amount held on the record date of the conversion, subject to certain adjustments as described in the Convertible Notes. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of common stock at the conversion ratio. On October 1, 2014, one-half of the original principal amounts are mandatorily convertible into common stock at the conversion ratio if voluntary conversion has not occurred. The principal amount, along with accrued but unpaid interest, of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. The Company is not obligated to register the common stock issued on the conversion of the Convertible Notes.

 

 

 

During 2009 and 2010 the Company incurred debt issuance costs of $0.2 million. These costs were capitalized and are being amortized to interest expense using the effective interest method over the initial conversion term, which ends October 1, 2014.

28


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

14.

Troubled Debt Restructuring

 

 

 

A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that would not otherwise be considered except for the borrower’s financial difficulties. A TDR may be either accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status, generally six months.

 

 

 

(Dollar amounts in thousands)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction
Loans

 

Real Estate-
Mortgage

 

Real Estate-
Commercial

 

Commercial

 

Consumer

 

Municipal

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2012

 

$

 

$

1,432

 

$

20,203

 

$

374

 

$

 

$

 

$

22,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

 

 

 

(2

)

 

(109

)

 

(1

)

 

 

 

 

 

(112

)

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

43

 

New restructured

 

 

 

 

 

 

175

 

 

 

 

 

 

 

 

175

 

Transferred out of TDRs

 

 

 

 

(39

)

 

(7,592

)

 

 

 

 

 

 

 

(7,631

)

Transfers to nonaccrual

 

 

 

 

 

 

(8,015

)

 

 

 

 

 

 

 

(8,015

)

March 31, 2012

 

$

 

$

1,391

 

$

4,705

 

$

373

 

$

 

$

 

$

6,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2012

 

$

 

$

 

$

4,325

 

$

16

 

$

 

$

 

$

4,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Charge-offs

 

 

 

 

 

 

(625

)

 

 

 

 

 

 

 

(625

)

Advances

 

 

 

 

 

 

188

 

 

 

 

 

 

 

 

188

 

New Restructured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers to foreclosed properties

 

 

 

 

 

 

(3,760

)

 

 

 

 

 

 

 

(3,760

)

Transfers from accruing

 

 

 

 

 

 

8,015

 

 

 

 

 

 

 

 

8,015

 

March 31, 2012

 

$

 

$

 

$

8,143

 

$

15

 

$

 

$

 

$

8,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2012

 

$

 

$

1,432

 

$

24,528

 

$

390

 

$

 

$

 

$

26,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

 

 

 

(2

)

 

(109

)

 

(2

)

 

 

 

 

 

(113

)

Charge-offs

 

 

 

 

 

 

(625

)

 

 

 

 

 

 

 

(625

)

Advances

 

 

 

 

 

 

231

 

 

 

 

 

 

 

 

231

 

New restructured

 

 

 

 

 

 

175

 

 

 

 

 

 

 

 

175

 

Transfers out of TDRs

 

 

 

 

(39

)

 

(7,592

)

 

 

 

 

 

 

 

(7,631

)

Transfers to foreclosed properties

 

 

 

 

 

 

(3,760

)

 

 

 

 

 

 

 

(3,760

)

March 31, 2012

 

$

 

$

1,391

 

$

12,848

 

$

388

 

$

 

$

 

$

14,627

 

29


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

During the quarter ended March 31, 2012, the entire $8.0 million of restructured loans transferred to nonaccrual status were loans that had been restructured with principal charge-offs (A/B Note Structure). Of the $7.6 million of loans transferred out of the restructured category, $5.0 million were loans that had been modified with payment schedule changes and not due to interest rate concessions. A majority of the remaining amount ($2.5 million) were loans that had been restructured with principal charge-offs (A/B Note Structure).

A summary of troubled debt restructurings as of March 31, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Number of
Modifications

 

Recorded
Investment

 

Number of
Modifications

 

Recorded
Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

$

 

 

 

$

 

Real estate – mortgage

 

 

2

 

 

1,391

 

 

3

 

 

1,432

 

Real estate – commercial

 

 

14

 

 

12,848

 

 

24

 

 

24,528

 

Commercial

 

 

2

 

 

388

 

 

2

 

 

390

 

Consumer

 

 

 

 

 

 

 

 

 

Municipal

 

 

 

 

 

 

 

 

 

Total

 

 

18

 

$

14,627

 

 

29

 

$

26,350

 


 

 

15.

Supervisory Agreement

 

 

 

Effective December 29, 2010, the Company and the Bank entered into a Written Agreement (the “Written Agreement”) with the Federal Reserve Bank and the Wisconsin Department of Financial Institutions (“WDFI”). Under the terms of the Written Agreement, the Bank has agreed to develop and submit for approval within the time periods specified therein written plans to: (i) further reduce the Bank’s concentration of commercial real estate loans; (ii) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $0.5 million which are now or in the future become past due more than 90 days, are on the Bank’s problem loan list, or are adversely classified in any report of examination of the Bank; (iii) review and revise, as appropriate, the Bank’s current policy for determining, documenting and recording an adequate allowance for loan losses and maintain sound processes for compliance with the same; and (iv) improve the Bank’s earnings and overall condition.

30


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012

 

 

 

In addition, the Bank has agreed that it will: (i) not extend, renew or restructure any credit that has been criticized by the Federal Reserve Bank or the WDFI absent prior board of directors’ approval in accordance with the restrictions in the Written Agreement; and (ii) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the Federal Reserve Bank. In addition, the Bank has agreed that it will: (a) not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval; (b) refrain from incurring or guaranteeing any debt without the prior written approval of the Federal Reserve Bank; and (c) refrain from purchasing or redeeming any shares of our stock without the prior written consent of the Federal Reserve Bank.

 

 

 

Under the terms of the Written Agreement, both the Company and the Bank have agreed to: (i) submit for approval plans to maintain sufficient capital on a consolidated basis, and the Bank, on a stand-alone basis; (ii) comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers and legal and regulatory limitations on indemnification payments and severance payments; and (iii) refrain from declaring or paying dividends absent prior regulatory approval. Failure to comply with the provisions of the Written Agreement could result in the imposition of additional restrictions and/or sanctions by the Federal Reserve Bank and WDFI and could have a material adverse effect on the consolidated financial condition and results of operations of the Company.

 

 

 

As of the date of this filing, the Company and the Bank have complied with all terms of the Written Agreement.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

Baylake Corp. is a Wisconsin corporation that is registered with the Board of Governors of the Federal Reserve (the “Federal Reserve”) as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our wholly-owned banking subsidiary, Baylake Bank, is a Wisconsin state-chartered bank that provides a wide variety of loan, deposit and other banking products and services to its business, retail, and municipal customers, as well as a full range of trust, investment and cash management services. The Bank is a member of the Federal Reserve and the Federal Home Loan Bank of Chicago.

 

The following sets forth management’s discussion and analysis of our consolidated financial condition at March 31, 2012 and December 31, 2011 and our consolidated results of operations for the three months ended March 31, 2012 and 2011. This discussion and analysis should be read together with the consolidated financial statements and accompanying notes contained in Part I of this Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Forward-Looking Information

 

This discussion and analysis of consolidated 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 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 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 our control 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 cause actual results to differ materially from the forward-looking statements: the factors described under “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and of our Annual Report on Form 10-K for the year ended December 31, 2011, which are incorporated herein by reference, and other risks that may be identified or discussed in this Form 10-Q.

 

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The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at strengthening safety and soundness for the financial services sector. We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

 

Critical Accounting Policies

 

In the course of our normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in our consolidated financial statements. The following is a summary of what management believes are our critical accounting policies.

 

Allowance for Loan Losses: The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on our consolidated balance sheet. Loan losses are charged off against the ALL while recoveries of amounts previously charged off are credited to the ALL. A PFLL is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

 

The ALL consists of specific reserves on certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses on impaired loans from analyses developed through specific credit allocations for individual loans. The specific credit allocations are based on regular analyses of all impaired non-homogenous loans. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based on our historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as (i) changes in the nature, volume and terms of loans, (ii) changes in lending personnel, (iii) changes in the quality of the loan review function, (iv) changes in nature and volume of past-due, nonaccrual and/or classified loans, (v) changes in concentration of credit risk, (vi) changes in economic and industry conditions, (vii) changes in legal and regulatory requirements, (viii) unemployment and inflation statistics, and (ix) changes in underlying collateral values.

 

There are many factors affecting the ALL, some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional PFLL could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

 

As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulatory credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

 

Provision for Impairment of Standby Letters of Credit: The provision for losses on standby letters of credit represents management’s estimate of probable incurred losses with respect to off-balance sheet standby letters of credit which are used to support our customers’ business arrangements with an unrelated third party. In the event of further impairment, a provision for impairment of standby letters of credit is charged to operations based on management’s periodic evaluation of the factors affecting the standby letters of credit.

 

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Foreclosed Properties: Foreclosed properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of carrying cost or fair value less estimated costs to sell, establishing a new cost basis. Fair value is determined using a variety of market information including but not limited to appraisals, professional market assessments and real estate tax assessment information. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs incurred after acquisition are expensed.

 

Income Tax Accounting: The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of our operations and reported earnings. We believe that the net deferred income tax asset on our March 31, 2012 balance sheet is recoverable, and the income tax liabilities are adequate and fairly stated in the consolidated financial statements.

 

Goodwill: Goodwill represents the excess of the cost of businesses acquired over fair value of net identifiable assets at the date of acquisition. Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if deemed appropriate. Goodwill is subject to a periodic assessment by applying a fair value test based upon a two-step method. The first step of the process compares the fair value of the reporting unit with its carrying value, including any goodwill. During 2011, we, with the assistance of a third party valuation firm determined an estimated cash fair value of our common stock. Consideration was given to our nature and history, the competitive and economic outlook for our trade area and for the banking industry in general, our book value and financial condition, our future earnings and dividend paying capacity, the size of the block valued, and the prevailing market prices of bank stocks. The following valuation methodologies were considered: (i) net asset value – defined as our net worth, (ii) market value – defined as the price at which knowledgeable buyers and sellers would agree to buy and sell our common stock, and (iii) investment value – defined as an estimate of the present value of the future benefits, usually earnings, cash flow, or dividends, that will accrue to our common stock. When consideration was given to the three valuation methodologies, as well as all other relevant valuation variables and factors, the fully-diluted cash fair value range of our common shares was considered to be in excess of the book value. Since the valuation range obtained from that firm exceeded our carrying value including goodwill, we did not fail step one of the impairment test established under generally accepted accounting principles and, therefore, no goodwill impairment was recognized. If the carrying amount would have exceeded fair value, we would have performed the second step to measure the amount of impairment loss. Based on the valuation obtained as of September 30, 2011, our valuation exceeded our carrying value by a range of 23% to 33%. As of March 31, 2012, there are no conditions that would require goodwill impairment to be reevaluated.

 

Results of Operations

 

The following table sets forth our results of operations and related summary information for the three month periods ended March 31, 2012 and 2011.

 

SUMMARY RESULTS OF OPERATIONS

(Dollar amounts in thousands, except per share data)

 

    Three months ended March 31,  
    2012     2011  
             
Net income, as reported   $ 1,332     $ 651  
Earnings per share-basic, as reported   $ 0.17     $ 0.08  
Earnings per share-diluted, as reported   $ 0.15     $ 0.08  
Cash dividends declared per share   $ 0.01     $  
                 
                 
Return on average assets     0.50 %     0.28 %
Return on average equity     6.23 %     3.40 %
Efficiency ratio (1)     71.55 %     80.85 %

 

(1)Noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income, excluding net investment securities gains and net gains on the sale of fixed assets. A lower ratio indicates greater efficiency.

 

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Net income of $1.3 million for the three months ended March 31, 2012 increased from a net income of $0.7 million for the comparable period in 2011. Net interest income increased $0.3 million for the quarter ended March 31, 2012 versus the comparable quarter last year, resulting from a $0.6 million reduction in interest expense partially offset by a $0.3 million reduction in interest income. A PFLL of $1.8 million was charged to operations for the first quarter of 2012, which is $0.5 million higher than the $1.3 million PFLL taken during the comparable quarter of 2011. Noninterest income increased by $0.4 million in the first quarter of 2012 versus the comparable quarter of 2011, primarily due to an increase of $0.6 million in net gains on the sale of securities. Noninterest expense decreased $0.9 million between the periods primarily due to reductions in FDIC insurance expense and expenses related to the operation of other real estate.

 

Net Interest Income:

 

Net interest income is the largest component of our operating income and represents the difference between interest earned on loans, investments and other interest-earning assets offset by the interest expense attributable to the deposits and borrowings that fund such assets. Interest rate fluctuations, together with changes in the volume and types of interest-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 was $8.6 million for the three months ended March 31, 2012 compared to $8.3 million for the same period in 2011. The increase for the first quarter of 2012 resulted primarily from a decrease in interest expense in funding costs on interest-bearing liabilities, partially offset by a decrease in interest income on interest-earning assets. Positively impacting net interest income was a $10.7 million increase in average noninterest-bearing demand deposits, from $87.8 million during the first quarter of 2011 to $98.5 million for the comparable period in 2012.

 

Interest rate spread is the difference between the interest rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities. Interest rate spread decreased 4 bps to 3.42% for the first quarter of 2012 compared to the same period in 2011, resulting primarily from a 35 bps decrease in the yield on earning assets from 4.68% to 4.33%, partially offset by a 30 bps decrease in the cost of interest-bearing liabilities from 1.22% to 0.92%. We continue to be positively impacted by the interest rate floors on a large number of loans on our balance sheet, which has resulted in the recognition of a greater amount of interest income than would have been recognized had the floors not existed.

 

Net interest margin represents net interest income expressed as an annualized percentage of average interest-earning assets. Net interest margin exceeds the interest rate spread because of the use of noninterest-bearing sources of funds (demand deposits and equity capital) to fund a portion of earning assets. Net interest margin for the first quarter of 2012 was 3.51%, down 5 bps from 3.56% for the comparable period in 2011.

 

For the three months ended March 31, 2012, average interest-earning assets increased $39.6 million from the same period in 2011. Increases in average federal funds sold and interest-bearing due from financial institutions balances of $10.0 million (26.5%) and in taxable securities of $23.7 million (10.3%) accounted for a majority of the increase.

 

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NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS (Dollar amounts in thousands)

 

    Three months ended
March 31, 2012
    Three months ended
March 31, 2011
 
    Average
Balance
    Interest
Income/
Expense
    Average
Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Average
Yield/
Rate
 
ASSETS                                                
Average Earning Assets:                                                
Loans, net 1,2   $ 634,131     $ 8,080       5.12 %   $ 632,415     $ 8,553       5.49 %
Taxable securities     254,805       1,906       2.99 %     231,109       1,751       3.03 %
Tax exempt securities 1     44,207       564       5.10 %     39,974       575       5.76 %
Federal funds sold and interest-bearing due from financial institutions     47,645       30       0.25 %     37,689       21       0.22 %
Total earning assets     980,788       10,580       4.34 %     941,187       10,900       4.68 %
Noninterest earning assets     91,210                       101,603                  
Total assets   $ 1,071,998                     $ 1,042,790                  
                                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                                                
Average Interest-bearing liabilities:                                                
Total interest-bearing deposits   $ 762,525     $ 1,394       0.74 %   $ 746,393     $ 1,956       1.06 %
Short-term borrowings                       1             0.65 %
Customer repurchase agreements     35,078       23       0.26 %     28,440       22       0.32 %
Federal Home Loan Bank advances     55,000       258       1.88 %     68,611       314       1.86 %
Convertible promissory notes     9,450       245       10.37 %     9,450       245       10.37 %
Subordinated debentures     16,100       78       1.93 %     16,100       67       1.65 %
Total interest-bearing liabilities     878,153       1,998       0.92 %     868,995       2,604       1.22 %
Demand deposits     98,509                       87,828                  
Accrued expenses and other liabilities     9,336                       8,464                  
Stockholders’ equity     86,000                       77,503                  
Total liabilities and stockholders’ equity   $ 1,071,998                     $ 1,042,790                  
Net interest income           $ 8,582                     $ 8,296          
Interest rate spread (3)                     3.42 %                     3.46 %
Net interest margin (4)                     3.51 %                     3.56 %

 

(1)The interest income on tax exempt securities and loans is computed on a tax-equivalent basis using a tax rate of 34% for all periods presented.
(2)The average loan balances and rates include nonaccrual loans.
(3)Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest accrued on average interest-bearing liabilities for the period.
(4)Net interest margin is the annualized effect of net interest income for a period divided by average interest-earning assets for the period.

 

 

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RATE/VOLUME ANALYSIS (1)

(Dollar amounts in thousands)

 

Three months ended March 31, 2012 compared to the three months ended March 31, 2011:

 

    Increase (Decrease) due to (1)  
    Volume     Rate     Net  
Interest income:                        
Loans   $ (60 )   $ (413 )   $ (473 )
Taxable securities     622       (467 )     155  
Tax exempt securities     230       (241 )     (11 )
Federal funds sold and interest-bearing due from financial institutions     23       (14 )     9  
Total interest-earning assets   $ 815     $ (1,135 )   $ (320 )
                         
Interest expense:                        
Total interest-bearing deposits   $ (331 )   $ (231 )   $ (562 )
Repurchase agreements     19       (18 )     1  
FHLB advances     (255 )     199       (56 )
Subordinated debentures           11       11  
Convertible promissory notes                  
Total interest-bearing liabilities   $ (567 )   $ (39 )   $ (606 )
                         
Net interest income   $ 1,382     $ (1,096 )   $ 286  

 

(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

 

Our management’s ability to employ overall assets for the production of interest income can be measured by the ratio of average interest-earning assets to average total assets. This ratio was 91.5% and 90.2% for the first quarter of 2012 and 2011, respectively.

 

Provision for Loan Losses:

The PFLL is the periodic cost of providing an allowance for probable and inherent losses in our loan portfolio. The ALL consists of specific and general components. Our internal risk system is used to identify loans that meet the criteria for being “impaired” as defined in the accounting guidance. The specific component relates to loans that are individually classified as impaired and where expected cash flows are less than carrying value. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include: 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, nonaccrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) changes in underlying collateral values.

 

The PFLL for the quarter ended March 31, 2012 was $1.8 million compared to $1.3 million for the first quarter of 2011. New impairments of $1.5 million on loans not previously identified, with associated loan balances of $7.8 million, were recorded during the first quarter of 2012. Included in those amounts is an impairment of $1.3 million on loan balances of $4.8 million on a credit relationship in the hospitality industry. Collateral for the related loans consists of three hotel properties in the Green Bay region.

 

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Net loan charge-offs for the first three months of 2012 and 2011 were $1.1 million and $0.7 million, respectively. A charge-off of $0.6 million was recorded on a loan transferred to foreclosed properties during the first quarter of 2012. The loan was a nonperforming loan at December 31, 2011 with no allocation for loan losses. An additional charge-off of $0.2 million was recorded on a $3.2 million credit relationship for advances made for the payment of real estate taxes to protect our security interest in the collateral securing the loan. This credit was transferred to nonperforming loans during the first quarter of 2012. Net annualized charge-offs to average loans were 0.72% for the first three months of 2012 compared to 0.45% for the same period in 2011. For the three months ended March 31, 2012, nonperforming loans increased by $2.9 million (14.8%) to $22.5 million from $19.6 million at December 31, 2011. Refer to the “Financial Condition - Risk Management and the Allowance for Loan Losses” and “Financial Condition - Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to nonperforming loans. Our management believes that the ALL at March 31, 2012 and the related PFLL charged to earnings for the quarter and three months ended March 31, 2012 are appropriate in light of the present condition of the loan portfolio and the amount and quality of the collateral supporting nonperforming loans. We continue to monitor nonperforming loan relationships and will make additional PFLLs, as necessary, if the facts and circumstances change. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market area, or otherwise, could affect the adequacy of the ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate or our estimates are different than our regulators’ estimates, we will need to make additional PFLLs in the future.

 

Noninterest Income:

The following table reflects the various components of noninterest income for the three month periods ended March 31, 2012 and 2011, respectively.

 

NONINTEREST INCOME

(Dollar amounts in thousands)

 

    Three months ended  
    March 31,
2012
    March 31,
2011
    %
Change
 
                   
Fees from fiduciary services   $ 240     $ 283       (15.3 )%
Fees from loan servicing     159       190       (16.2 )%
Service charges on deposit accounts     772       795       (2.8 )%
Other fee income     188       164       14.7 %
Financial services income     208       292       (28.8 )%
Net gains from sales of loans     361       386       (6.4 )%
Net gain (loss) in valuation of mortgage servicing rights     18       (30 )     159.4 %
Net gains from sale of securities     678       125       443.1 %
Gains from sale of fixed assets     2       8       (79.1 )%
Increase in cash surrender value of life insurance     93       130       (28.3 )%
Equity in income of UFS subsidiary     177       231       (23.3 )%
Other income     149       40       267.4 %
Total Noninterest Income   $ 3,045     $ 2,614       16.5 %

 

Noninterest income increased $0.4 million (16.5%) for the three months ended March 31, 2012 versus the comparable period in 2011. The gain resulted when securities were sold primarily to provide additional cash for potential business opportunities being considered and secondarily, to take advantage of opportunities to restructure a portion of the investment portfolio. These gains were realized to enhance our cash position as we explore potential strategic business opportunities. Partially offsetting the increase is a reduction of $0.1 million in financial services income due to reduced brokerage activity when compared to the similar period one year ago.

 

 

 

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Noninterest Expense:

The following table reflects the various components of noninterest expense for the three months ended March 31, 2012 and 2011, respectively.

 

NONINTEREST EXPENSE

(Dollar amounts in thousands)

 

    Three months ended  
    March 31,
2012
    March 31,
2011
    %
Change
 
                   
Salaries and employee benefits   $ 4,427     $ 4,556       (2.8 )%
Occupancy     624       605       3.3 %
Equipment     270       280       (3.6 )%
Data processing and courier     229       208       10.3 %
Operation of foreclosed properties     596       1,038       (42.6 )%
Business development & advertising     171       128       33.7 %
Charitable contributions     15       18       (13.8 )%
Stationery and supplies     132       112       17.7 %
Director fees     101       93       8.9 %
FDIC insurance expense     362       731       (50.5 )%
Legal and professional     100       193       (48.1 )%
Loan and collection     210       168       25.3 %
Other outside services     183       165       10.7 %
Provision for impairment of letter of credit           7       NM %
Other operating     413       412       0.1 %
Total Noninterest Expense   $ 7,833     $ 8,714       (10.1 )%

 

Total noninterest expense decreased $0.9 million (10.1%) for the three months ended March 31, 2012 compared to the same period in 2011. The noninterest expense to average assets ratio was 2.9% for the three months ended March 31, 2012 compared to 3.4% for the same period in 2011.

 

Net overhead expense is total noninterest expense less total noninterest income. The net overhead expense to average assets ratio was at 1.8% for the three months ended March 31, 2012 compared to 1.9% for the three months ended March 31, 2011. The efficiency ratio represents total noninterest expense as a percentage of the sum of net interest income on a fully taxable equivalent basis and total noninterest income (excluding net gains on the sale of securities and premises and equipment). A lower efficiency ratio indicates a more efficient operation. The efficiency ratio improved to 71.6% for the three months ended March 31, 2012 from 80.9% for the comparable period last year. This is primarily due to a decrease of $0.9 million in noninterest expense, of which $0.4 million was related to the operation of foreclosed properties and $0.4 million was related to a decrease in FDIC insurance premiums.

 

Expenses related to the operation of foreclosed properties held for sale by the Bank decreased $0.4 million to $0.6 million for the three-month period ended March 31, 2012 compared to $1.0 million for the same period in 2011. The decrease consists of a $0.2 million decrease in write-downs due to the revaluation of properties held and a $0.3 million decrease in net operating expenses, partially offset by a $0.1 million decrease in the net gain on sale of foreclosed properties. We continue to evaluate all foreclosed property values and attempt to reduce the holding periods of these properties and, as a result, the related holding costs, to the extent possible. Such expenses include but are not limited to insurance, maintenance, real estate taxes, management fees, utilities and legal fees. A majority of the properties have updated valuations within the last twelve months.

 

Salaries and employee benefits decreased $0.1 million (2.8%) to $4.4 million for the three months ended March 31, 2012 compared to $4.5 million for the three months ended March 31, 2011. The number of full-time equivalent employees (FTEs) decreased from 304 at March 31, 2011 to 296 at March 31, 2012. Commission expense for commissioned salespersons, including financial advisors and mortgage originators, may impact future salary expense based on the levels of production attained.

 

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Included in noninterest expense are FDIC insurance premiums of $0.4 million for the three months ended March 31, 2012 compared to $0.7 million for the same period a year ago. On February 7, 2011, the FDIC finalized a rule to change the assessment base upon which it calculates its premiums from total domestic deposits to average total assets minus average tangible equity, as required in the Dodd-Frank Act. The new base began in the second quarter of 2011, with the premium payable in September 2011. The result of the change has been a reduction in FDIC assessments.

 

Income Taxes:

 

We recorded an income tax expense of $0.5 million for the three months ended March 31, 2012 versus a nominal tax benefit for the same period in 2011. The increase in tax expense is primarily attributable to a $1.2 million year-over-year increase in pre-tax income.

 

We maintain significant net deferred income tax assets for deductible temporary tax differences, such as allowance for loan losses, nonaccrual loan interest, and foreclosed property valuations as well as net operating loss carry forwards. Our determination of the amount of our deferred income tax assets to be realized is highly subjective and is based on several factors, including projected future income, income tax planning strategies, and federal and state income tax rules and regulations. At March 31, 2012, we determined that no valuation allowance was required to be taken against our deferred income tax assets other than a valuation allowance to reduce our state net operating loss carry forwards to an amount which we believe the benefit will more likely than not be realized. We continue to assess the amount of tax benefits we may realize.

 

During the second quarter of 2011, the IRS began an audit of our 2009 federal income tax return primarily in response to our net operating loss carry back claim. In January 2012, we reached a tentative settlement agreement with the IRS to finalize the audit. We expect the audit to be finalized sometime during 2012.

 

 

 

 

 

 

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Financial Condition

 

Loans:

 

The following table reflects the composition (mix) of the loan portfolio:

 

LOAN PORTFOLIO ANALYSIS

(Dollar amounts in thousands)

 

    March 31,
2012
    December 31,
2011
    Percent
Change
 
Amount of Loans by Type:                        
Real estate-mortgage:                        
Commercial   $ 318,043     $ 317,198       0.3 %
1-4 Family residential                        
First liens     96,770       90,369       7.1 %
Junior liens     8,211       8,878       (7.5 )%
Home equity     43,939       44,209       (0.6 )%
Commercial, financial and agricultural     92,625       91,750       1.0 %
Real estate-construction     53,049       53,606       (1.0 )%
Installment                        
Credit cards and related plans     1,642       1,675       (2.0 )%
Other     6,774       7,134       (5.0 )%
Obligations of states and political subdivisions     16,287       16,577       (1.7 )%
Less:  Deferred origination fees, net of costs     (405 )     (381 )     0.9 %
Less:  Allowance for loan losses     (11,250 )     (10,638 )     5.8 %
Total   $ 625,685     $ 620,377       0.9 %

 

Net loans at March 31, 2012 increased $5.3 million (0.9%) from $620.4 million at December 31, 2011 to $625.7 million at March 31, 2012. The increase is primarily due to an increase of $6.4 million (7.1%) in first lien 1-4 family residential loans.

 

Risk Management and the Allowance for Loan Losses:

 

The loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as PFLL. See “Provision for Loan Losses” earlier in this Report. We attempt to control, monitor and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.

 

The ALL at March 31, 2012 was $11.3 million, compared to $10.6 million at December 31, 2011. On a quarterly basis, management reviews the adequacy of the ALL. The analysis of the ALL consists of three components: (i) specific reserves established for expected losses relating to impaired loans for which the recorded investment in the loans exceeds its fair value; (ii) general reserves based on historical loan loss experience for significant loan classes; and (iii) general reserves based on qualitative factors such as concentrations and changes in portfolio mix and volume. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized.

 

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On a regular basis, loan officers review all commercial credit relationships. The loan officers grade commercial credits and the loan review function validates the grades assigned. In the event that the loan review function downgrades a loan, it is included in the ALL analysis process at the lower grade. This grading system is in compliance with regulatory classifications. At least quarterly, all commercial loans that have been deemed impaired are evaluated. In compliance with accounting guidance for impaired loans, the fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan or, if the loan is collateral dependent, the fair value of the underlying collateral less the estimated costs to sell. This evaluation may include obtaining supplemental market data and/or routine site visits to offer support to the evaluation process. A specific reserve is then allocated to the loans based on this assessment. Specific reserves are reviewed by the Chief Credit Officer (“CCO”) and management familiar with the credits.

 

We have two other major components of the ALL that do not pertain to specific loans: “General Reserves – Historical” and “General Reserves – Other.” We determine General Reserves – Historical based on our historical recorded charge-offs of loans in particular classes, analyzed as a group. We determine General Reserves – Other by taking into account such factors as the concentration of loans in a particular industry or geographic area and adjustments for economic indicators. By nature, our general reserve changes with our fluid lending environment and the overall economic environment in which we lend. As such, we are continually attempting to enhance this portion of the allocation process to reflect anticipated losses in our portfolio driven by these changing factors. Economic statistics, specifically unemployment and inflation rates for national, state and local markets are monitored and factored into the allocation to address repayment risk. Further identification and management of portfolio concentration risks, both by loan class and by specific markets is reflected in the general allocation component.

 

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties:

 

Management encourages early identification of nonaccrual and problem loans in order to minimize the risk of loss. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, and nonaccrual loans restructured in a troubled debt restructuring that haven’t shown a sufficient period of performance with the restructured terms. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collection of principal or interest on loans, it is the practice of management to place such loans on nonaccrual status immediately rather than waiting until the loans become 90 days past due. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest or earlier as deemed appropriate. When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on nonaccrual loans are used to reduce principal rather than recorded as interest income. Restructuring a loan typically involves the granting of some concession to the borrower involving a loan modification, such as payment schedule or interest rate changes. Restructured loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to accounting guidance for troubled debt restructurings.

 

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NONPERFORMING ASSETS

(Dollar amounts in thousands)

 

    March 31,
2012
    December 31,
2011
    September 30,
2011
    June 30,
2011
 
Nonperforming Assets:                                
Nonaccrual loans   $ 14,301     $ 15,242     $ 19,027     $ 16,759  
Nonaccrual loans, restructured     8,158       4,341       5,287       5,288  
Accruing loans past due 90 days or more                        
Total nonperforming loans (“NPLs”)   $ 22,459     $ 19,583     $ 24,314     $ 22,047  
Foreclosed assets, net     14,766       12,119       10,662       11,946  
Total nonperforming assets (“NPAs”)   $ 37,225     $ 31,702     $ 34,976     $ 33,993  
Restructured loans, accruing(1)   $ 6,469     $ 22,009     $ 20,461     $ 18,559  
                                 
Ratios:                                
ALL to Net Charge-offs (“NCOs”) (annualized)     2.46 x     1.80 x     3.11 x     3.00 x
NCOs to average loans (annualized)     0.72 %     0.94 %     0.66 %     0.67 %
ALL to total loans     1.76 %     1.68 %     2.01 %     2.04 %
NPLs to total loans     3.52 %     3.10 %     3.81 %     3.55 %
NPAs to total assets     3.49 %     2.92 %     3.33 %     3.34 %
ALL to NPLs     50.09 %     54.32 %     52.88 %     57.42 %

 

(1)Restructured loans on nonaccrual status are returned to accruing when a sufficient period of performance in accordance with the restructured terms, generally six months, has passed.

 

Restructured nonaccrual loans at December 31, 2011 were $4.3 million. During the first quarter of 2012, $8.0 million of restructured loans were transferred from the accruing category to the nonaccruing category. These loans were in the hospitality industry and satisfactory repayment plans could not be reached with the borrowers for future payments. At December 31, 2011, these loans were current and in compliance with the restructured loan terms. In addition, a loan in the amount of $3.8 million was transferred to foreclosed properties and a portion of the loan, $0.6 million, was charged off.

 

Restructured loans accruing at December 31, 2011 were $22.0 million. As previously mentioned, $8.0 million of accruing restructured loans were transferred to nonaccrual during the first quarter of 2012. In addition, $7.6 million of restructured loans were in compliance with their modified terms for a period deemed sufficient and were therefore transferred out of the restructured loan category. This reduced the accruing restructured loans to $6.5 million at March 31, 2012.

 

Nonperforming loans increased $2.9 million (14.7%) from December 31, 2011 to March 31, 2012 primarily due to the transfer of $8.0 million of restructured loans from the accruing category to the nonaccruing category during the first quarter of 2012. The collateral for the loans consists of four commercial properties in the hospitality industry. The nonperforming loan relationships are secured primarily by commercial or residential real estate and, secondarily, by personal guarantees from principals of the respective borrowers. Partially offsetting the increase was a decrease of $4.4 million related to a property transferred to foreclosed properties, with a portion of the loan being charged-off in the amount of $0.6 million.

 

Loan balances with a risk grading of 0006B or 0007 have decreased by $5.2 million since December 31, 2011. Loans in these categories are existing or potential problem loans that require management’s close attention. The decline in these troubled assets continues to be an indication of improvement in the quality of the loan portfolio. As additional evidence of the continued improvement in the overall quality of the loan portfolio, loan balances with a risk grading of 0005 or better have risen to $524.9 million as of March 31, 2012, representing 82.4% of the total loan portfolio. Loan balances with a risk grading of 0005 or better totaled $512.9 million as of December 31, 2011, representing 81.3% of the total loan portfolio.

 

 

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The following table presents an analysis of our past due loans excluding nonaccrual loans:

 

PAST DUE LOANS (EXCLUDING NONACCRUALS)

30-89 DAYS PAST DUE

(Dollar amounts in thousands)

 

    March 31,
2012
    December 31,
2011
    September 30,
2011
    June 30,
2011
    March 31,
2011
 
Secured by Real Estate   $ 4,530     $ 3,352     $ 2,555     $ 3,355     $ 7,615  
Commercial and industrial loans     1,173       39       91       249       1,877  
Loans to individuals     51       59       141       44       54  
All other loans                             60  
Total   $ 5,754     $ 3,450     $ 2,787     $ 3,648     $ 9,606  
Percentage of total loans     0.90 %     0.55 %     0.44 %     0.59 %     1.55 %

 

 

 

As indicated above, loan balances 30 to 89 days past due have increased by $2.3 million since December 31, 2011. Compared to March 31, 2011, loan balances 30 to 89 days past due have decreased $3.9 million.

 

Information regarding foreclosed properties is as follows:

 

FORECLOSED PROPERTIES

(Dollar amounts in thousands)

 

    Three months
ended
March 31,
    Twelve months
ended
December 31,
    Three months
ended
March 31,
 
    2012     2011     2011  
                   
Beginning Balance   $ 12,119     $ 15,952     $ 15,952  
Transfer of loans to foreclosed properties     3,858       5,127       1,244  
Sales proceeds, net     (792 )     (7,419 )     (2,872 )
Net gain from sale of foreclosed properties     39       205       83  
Provision for foreclosed properties     (458 )     (1,746 )     (682 )
Total Foreclosed Properties, net   $ 14,766     $ 12,119     $ 13,725  

 

Changes in the valuation allowance for losses on foreclosed properties were as follows:

 

    Three months
ended
March 31,
2012
    Twelve months
Ended
December 31,
2011
    Three months
ended
March 31,
2011
 
                   
Beginning Balance   $ 2,794     $ 3,982     $ 3,982  
Provision charged to operations     458       1,746       682  
Allowance recovered on properties disposed     (740 )     (2,934 )     (572 )
Ending Balance   $ 2,512     $ 2,794     $ 4,092  

 

 

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Investment Portfolio:

 

The investment portfolio is intended to provide us with adequate liquidity, flexibility in asset/liability management and an increase in our earning potential.

 

At March 31, 2012, the investment portfolio (comprising investment securities available for sale) decreased $5.2 million (1.9%) to $279.1 million compared to $284.3 million at December 31, 2011. At March 31, 2012, the investment portfolio represented 26.1% of total assets compared to 26.2% at December 31, 2011. For the three months ended March 31, 2012, principal payments of $16.1 million and $17.1 million were received on maturing investments and the sale of investments, respectively, and a gain of $0.7 million was recognized. The gain resulted when securities were sold primarily to provide additional cash for potential business opportunities being considered and secondarily, to take advantage of opportunities to restructure a portion of the investment portfolio. We purchased $26.9 million of securities for a net cash increase of $6.3 million.

 

We closely monitor securities we hold in our investment portfolio that remain in an unrealized loss position for greater than twelve months. Total gross unrealized losses on these securities are $0.9 million at March 31, 2012, representing 62.9% of total gross unrealized securities losses and 0.3% of the total investment portfolio. Based on an in-depth analysis of the specific instruments, which may include ratings from external rating agencies and/or brokers, as well as the creditworthiness of the related issuers, including their ability to continue payments under the terms of the security agreements, no unrealized losses were deemed to be other-than-temporary. Additionally, we do not have the intent to sell the securities and it is not more likely than not that we will be required to sell these securities before their anticipated recovery. If at any point in time any losses are considered other-than-temporary, we would be required to recognize other-than-temporary impairment. This would require us to assess the cash flows expected to be collected from the security. The difference between the present value of the cash flows expected to be collected and the amortized cost basis would result in a credit loss for the amount of the impairment. This amount would reduce our earnings. The remaining portion of the impairment related to factors other than credit loss would be recognized through other comprehensive income (loss). At March 31, 2012 and December 31, 2011, we did not hold securities of any one issuer, other than one of the following agencies or corporations of the United States government: the Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), or United States Department of Veterans Affairs (“VA”), in an amount greater than 10% of stockholders’ equity. As of March 31, 2012, the highest concentration of loans underlying mortgage-backed securities issued in any state was issued in California, representing approximately 23.4% of the total amount invested in mortgage-backed securities.

 

Deposits:

 

Total deposits at March 31, 2012 decreased $6.9 million (0.8%) to $858.3 million from $865.2 million at December 31, 2011. This decrease was a result of an $11.2 million (3.7%) decrease in time deposits from $303.5 million at December 31, 2011 to $292.3 million at March 31, 2012 and a $6.9 million (2.8%) decrease in our non-interest bearing and interest bearing demand deposits from $251.2 million at December 31, 2011 to $244.3 million at March 31, 2012, partially offset by an increase of $11.3 million (3.6%) in our savings deposits from $310.5 million at December 31, 2011 to $321.7 million at March 31, 2012. Total interest-bearing deposits decreased $9.2 million (1.2%) while non-interest-bearing deposits increased $2.3 million (2.2%) from December 31, 2011 to March 31, 2012.

 

Emphasis has been, and will continue to be, placed on generating additional core deposits in 2012 through competitive pricing of deposit products and through our existing branch delivery systems. We will also attempt to attract and retain core deposit accounts through new product offerings and quality customer service. If liquidity concerns arise, we have alternative sources of funds such as lines of credit with correspondent banks and borrowing arrangements with the Federal Home Loan Bank and through the discount window at the Federal Reserve.

 

Other Funding Sources:

 

Securities sold under agreements to repurchase decreased $14.3 million (30.0%) from $47.6 million at December 31, 2011 to $33.3 million at March 31, 2012. We did not have any federal funds purchased at either March 31, 2012 or December 31, 2011.

 

FHLB advances were $55.0 million at March 31, 2012, consistent with the balance at December 31, 2011. The availability of deposits also determines the amount of funds we need to borrow in order to fund loan demand.

 

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Long Term Debt:

 

In March 2006, we issued $16.1 million of variable rate, trust preferred securities (“TruPS”) and $0.5 million of trust common securities through Baylake Capital Trust II (the “Trust”) that adjust quarterly at a rate equal to 1.35% over the three month LIBOR. At March 31, 2012, the interest rate on these securities was 1.82%. These securities were issued to replace trust preferred securities issued in 2001 through Baylake Capital Trust I. For bank regulatory purposes, these securities are considered Tier 1 capital.

 

The Trust’s ability to pay amounts due on the TruPS is solely dependent upon us making payment on the related subordinated debentures (“Debentures”) to the Trust. Under the terms of the Debentures, we would be precluded from paying dividends on our common stock if we were in default under the Debentures, if we exercised our right to defer payment of interest on the Debentures or if certain related defaults occurred. After discussion with our regulators during the first quarter of 2011, we exercised our right to defer payment of interest on the Debentures beginning with the March 30, 2011 interest payment, even though we had sufficient cash to make the interest payment. Our payments due June 29, 2011 and September 29, 2011 were also deferred. The expense related to the interest payment was recorded with a corresponding liability for the interest payment amount. In December of 2011, we made all payments due under the agreement, including the deferred payments. At March 31, 2012, we are current on all interest payments.

 

During 2009 and 2010, we completed several separate closings of a private placement of Convertible Notes. The Convertible Notes were offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated there under. The total amount of the Convertible Notes outstanding as of the date of this report is $9.45 million.

 

The Convertible Notes accrue interest at a fixed rate of 10% per annum upon issuance and until maturity or earlier conversion or redemption. Interest is payable quarterly, in arrears, on January 1, April 1, July 1, and October 1, of each year. The Convertible Notes are convertible into shares of our common stock at a conversion ratio of one share of common stock for each $5.00 in aggregate principal amount held on the record date of the conversion subject to certain adjustments as described in the Convertible Notes. Prior to October 1, 2014, each holder of the Convertible Notes may convert up to 100% (at the discretion of the holder) of the original principal amount into shares of our common stock at the conversion ratio. On October 1, 2014, one-half of the original principal amounts are mandatorily convertible into common stock at the conversion ratio if voluntary conversion has not occurred. The principal amount of any Convertible Note that has not been converted will be payable at maturity on June 30, 2017. To date, none of the notes have been converted.

 

Contractual Obligations:

 

We use a variety of financial instruments in the normal course of business to meet the financial needs of our customers. These financial instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, standby letters of credit, and forward commitments to sell residential mortgage loans. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2011 for quantitative and qualitative disclosures about our fixed and determinable contractual obligations. Contractual obligations disclosed in the 2011 Annual Report on Form 10-K have not materially changed since that Report was filed.

 

The following table summarizes our significant contractual obligations and commitments at March 31, 2012:

 

CONTRACTUAL OBLIGATIONS

(Dollar amounts in thousands)

 

    Within 1 Year     1-3 Years     3-5 Years     After 5 Years     Total  
Certificates of deposit and other time deposit obligations   $ 159,017     $ 122,724     $ 10,567     $     $ 292,308  
Repurchase agreements     33,277                         33,277  
Federal Home Loan Bank advances     15,000       28,000       12,000             55,000  
Subordinated debentures                       16,100       16,100  
Convertible promissory notes (1)           9,450                   9,450  
Total   $ 207,294     $ 160,174     $ 22,567     $ 16,100     $ 406,135  

 

(1)One-half of the Convertible Notes are mandatorily converted to shares of our common stock by October 1, 2014. The principal amount of any Convertible Note that has not been converted or redeemed will be payable at maturity on June 30, 2017.

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Off- Balance Sheet Arrangements:

 

The following is a summary of our off-balance sheet commitments, all of which were lending-related commitments:

 

LENDING RELATED COMMITMENTS

(Dollar amounts in thousands)

 

    March 31,  2012     December 31, 2011  
             
Commitments to fund home equity line loans   $ 57,239     $ 56,952  
Commitments to fund 1-4 family loans     1,549       3,034  
Commitments to fund residential real estate construction loans     646       1,114  
Commitments unused on various other lines of credit loans     159,901       163,698  
Total commitments to extend credit   $ 219,335     $ 224,798  
Financial standby letters of credit   $ 11,690     $ 12,468  

 

Subsequent to March 31, 2012, one of the properties securing a standby letter of credit for which a valuation reserve had been established was sold. The purchaser of the property assumed the existing obligations and the valuation reserve was eliminated. No additional provision for impairment was necessary.

 

Liquidity:

 

Liquidity management refers to our ability to ensure that cash is available on a timely basis 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. We and the Bank have different liquidity considerations.

 

Our primary sources of funds are dividends from the Bank and net proceeds from borrowings and the offerings of subordinated debentures and convertible promissory notes. We may also undertake offerings of debt and issue our common stock if and when we deem it prudent to do so, subject to regulatory approval. We generally manage our liquidity position in order to provide funds necessary to meet interest obligations of our trust preferred securities and convertible notes, pay dividends to our shareholders, subject to regulatory restrictions, and repurchase shares. Such restrictions, which govern all state chartered banks, preclude the payment of dividends without the prior written consent of the WDFI if dividends declared and paid by such bank in either of the two immediately preceding years exceeded that bank’s net income for those years. In consultation with our federal and state regulators, our Board of Directors elected to forego the dividend to our shareholders beginning in the first quarter of 2008. In January 2012, we requested advance approval to declare a $0.01 per share dividend. We received the approval and the dividend was paid on February 10, 2012.

 

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 is derived from deposit growth, payments on and maturities of loans, payments on and maturities of the investment portfolio, access to other funding sources, marketability of certain assets, the ability to use loan and investment portfolios as collateral for secured borrowings and a strong capital position.

 

Maturing investments have historically been a primary source of liquidity. For the three months ended March 31, 2012, principal payments totaling $16.1 million were received on maturing investments. In addition, we received proceeds of $17.1 million from the sale of investments and we purchased $26.9 million in investments in the same period. Approximately 9.6%, or $18.2 million, of the mortgage-backed securities outstanding at March 31, 2012 were issued and guaranteed by GNMA, the SBA or the VA, agencies of the United States government. An additional 67.4%, or $127.1 million, of the mortgage-backed securities outstanding at March 31, 2012 were issued by either FNMA or FHLMC, United States government-sponsored-agencies. Non-agency mortgage-backed securities present a level of credit risk that does not exist currently with United States government agency-backed securities, but only comprised approximately 22.9%, or $43.3 million, of the outstanding mortgage-backed securities at March 31, 2012. Management evaluates these non-agency mortgage-backed securities at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. These securities tend to be highly marketable.

 

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During February 2012, proceeds of $2.1 million were received from the FHLB under their excess FHLB stock repurchase program that was implemented in 2011.

 

Deposit decreases, reflected as a financing activity in the March 31, 2012 Unaudited Consolidated Statements of Cash Flows, resulted in $6.9 million of cash outflow during the first three months of 2012. Deposit growth is normally the most stable source of liquidity, although brokered deposits, which are inherently less stable than locally-generated core deposits, are sometimes used. Our reliance on brokered deposits decreased $0.6 million from $46.7 million at December 31, 2011 to $46.1 million at March 31, 2012. If at any point in the future we fall below the “well capitalized” regulatory capital threshold, it will become more difficult for us to obtain brokered deposits. Also affecting liquidity are core deposit growth levels, certificate of deposit maturity structure and retention, and characteristics and diversification of wholesale funding sources affecting the channels by which brokered deposits are acquired. Conversely, deposit outflow will cause a need to develop alternative sources of funds, which may not be as liquid and potentially a more costly alternative.

 

The scheduled payments and maturities of loans can provide a source of additional liquidity. There are $214.5 million, or 33.6% of total loans, maturing within one year of March 31, 2012. Factors affecting liquidity relative to loans are loan origination volumes, loan prepayment rates and the maturity structure of existing loans. The liquidity position is influenced by changes in interest rates, economic conditions and competition. Conversely, loan demand creates a need for liquidity that may cause us to acquire other sources of funding, some of which could be more difficult to find and more costly to secure.

 

Within the classification of short-term borrowings at March 31, 2012, securities sold under agreements to repurchase totaled $33.3 million compared to $47.6 million at the end of 2011. Securities sold under agreements to repurchase are obtained from a base of business customers. Short-term and long-term borrowings from the FHLB are another source of funds, totaling $55.0 million at March 31, 2012 and December 31, 2011.

 

In 2012, we will continue to focus on attracting and retaining core deposit accounts and expanding customer deposit relationships by emphasizing customer service and convenience and new product offerings, and competitive pricing. In the event that core deposit growth goals are not accomplished, we will continue to look at other wholesale sources of funds. In addition, we may acquire additional brokered deposits as funding for short-term liquidity needs. Short-term liquidity needs will also be addressed by growth in short-term borrowings, maturing federal funds sold and portfolio investments, and loan maturities and prepayments.

 

In assessing liquidity, historical information such as seasonality, local economic cycles and the economy in general are considered along with our current financial position and projections. We believe that in the current economic environment our liquidity position is adequate. To our knowledge, there are no known trends nor any known demands, commitments, events or uncertainties that will result or are reasonably likely to result in material increases or decreases in our liquidity.

 

Capital Resources:

 

Stockholders’ equity at March 31, 2012 and December 31, 2011 was $86.4 million and $84.4 million, respectively, reflecting an increase of $2.0 million (2.3%) during the first three months of 2012. The increase in stockholders’ equity was primarily related to our net income of $1.3 million and an increase in comprehensive income of $0.7 million (as a result of an increase in unrealized gains on available for sale securities). The ratio of stockholders’ equity to assets was 8.1% and 7.8% at March 31, 2012 and December 31, 2011, respectively.

 

No cash dividends were declared during 2011. In January 2012, we declared a $0.01 per share dividend. Subsequent to March 31, 2012, we declared a $0.01 per share dividend payable June 1, 2012. Our ability to pay dividends is subject to various factors including, among other things, sufficient earnings, available capital, board discretion and regulatory compliance. In order to pay dividends, pursuant to the Written Agreement, advance approval from the WDFI as well as the Federal Reserve Board is required. There is no assurance that we will continue to receive such approval if sought.

 

We regularly review the adequacy of our capital to ensure that sufficient capital is available for our current and future needs and it 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.

 

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The Federal Reserve 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 which at least half must comprise core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines which banks and bank holding companies 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 minimum ratio of 4% or 5%, depending on their rating. Failure to meet minimum capital requirements can initiate certain mandatory, as well as possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. At March 31, 2012, we maintained capital in excess of the minimum ratios required to be categorized as “well capitalized” under the regulatory framework for the prompt corrective action categorization. There are no conditions or events since that date that we believe have changed our 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%.

 

Total capital to Risk-weighted Asset ratios for the previous four quarters are as follows:

 

      March 31,
2012
    December 31,
2011
    September 30,
2011
    June 30,
2011
 
Company       13.77 %     13.54 %     13.35 %     13.43 %
Bank       13.63 %     13.38 %     13.16 %     13.20 %

 

Effective December 29, 2010, we and the Bank entered into the Written Agreement with the Federal Reserve Bank and WDFI, the terms of which are detailed in Note 15 to our consolidated financial statements included in Part 1, Item 1 of this Report.

 

As of the date of this filing, we and the Bank have complied with all terms of the Written Agreement. Specific steps taken include, but are not limited to:

1.Continuing to reduce the Bank’s concentration in Commercial Real Estate loans and placing a greater emphasis on Commercial and Industrial loans.
2.Delegating primary responsibility to the Bank’s Directors’ Loan Committee for the following:
a.Monitoring loan relationships and other assets, including Other Real Estate Owned, in excess of $0.5 million with an emphasis on improving the Bank’s position.
b.Overseeing the Bank’s current policy for determining, documenting and recording an adequate allowance for loan losses and monitoring the Bank’s compliance with such policy.
c.Charging-off all assets classified as “loss” in a federal or state report of examination.
d.Pre-approving any extension, renewal, or restructure of any asset criticized by the Federal Reserve Bank or WDFI.
3.Delegating primary responsibility to the full Board of Directors for the following:
a.Pre-approving any extension, renewal, or restructure of any asset criticized by the Federal Reserve Bank or WDFI.
b.Obtaining prior regulatory approval on any form of payment resulting in a reduction in Baylake Corp’s or the Bank’s capital, including interest payments on our debentures and trust preferred securities.
c.Obtaining Federal Reserve Bank approval prior to purchasing or redeeming any shares of our stock.
d.Submitting required capital plans to the Federal Reserve Bank and WDFI.
e.Complying with notice provisions with respect to new directors and senior executive officers.
f.Complying with legal and regulatory limitations on indemnification payments and severance payments.
g.Obtaining prior regulatory approval for the declaration and payment of dividends.

 

Our senior management, primarily through our Chief Executive Officer, has established a regular dialogue with our lead examiner. These open communication lines provide timely feedback to us and the Bank on proposed action plans and keep our regulators updated on progress we have made.

 

 

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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. We believe our 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. We actively review our capital strategies to ensure that capital levels are appropriate based on the perceived business risks, further growth opportunities, industry standards, and regulatory requirements.

 

The following tables present our and the Bank’s capital ratios as of March 31, 2012 and December 31, 2011:

 

CAPITAL RATIOS
(Dollar amounts in thousands)

 

    Actual     Required For Capital
Adequacy Purposes
    Required To Be Well
Capitalized Under Prompt
Corrective Action Provisions
 
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of March 31, 2012                                                
Total Capital (to Risk-Weighted Assets)                                                
Company   $ 102,946       13.77 %   $ 59,827       8.00 %   $ N/A       N/A  
Bank     102,032       13.63 %     59,868       8.00 %     74,835       10.00 %
Tier 1 Capital (to Risk-Weighted Assets)                                                
Company   $ 84,125       11.25 %   $ 29,913       4.00 %   $ N/A       N/A  
Bank     92,654       12.38 %     29,934       4.00 %     44,901       6.00 %
Tier 1 Capital (to Average Assets)                                                
Company   $ 84,125       7.95 %   $ 42,325       4.00 %   $ N/A       N/A  
Bank     92,654       8.74 %     42,388       4.00 %     52,985       5.00 %

 

 

    Actual     Required For Capital
Adequacy Purposes
    Required To Be Well
Capitalized Under Prompt
Corrective Action Provisions
 
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of December 31, 2011                                                
Total Capital (to Risk-Weighted Assets)                                                
Company   $ 101,446       13.54 %   $ 59,928       8.00 %   $ N/A       N/A  
Bank     100,268       13.38 %     59,961       8.00 %     74,952       10.00 %
Tier 1 Capital (to Risk-Weighted Assets)                                                
Company   $ 82,617       11.03 %   $ 29,964       4.00 %   $ N/A       N/A  
Bank     90,883       12.13 %     29,981       4.00 %     44,971       6.00 %
Tier 1 Capital (to Average Assets)                                                
Company   $ 82,617       7.93 %   $ 41,648       4.00 %   $ N/A       N/A  
Bank     90,883       8.72 %     41,711       4.00 %     52,139       5.00 %

 

 

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Our primary market risk exposure is interest rate risk. Interest rate risk is the risk that our earnings and capital will be adversely affected by changes in interest rates. Historically, we have not used derivatives to mitigate our interest rate risk.

 

Our earnings are derived from the operations of our 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 subordinated debentures. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities, including the monetary policies of the Federal Reserve. 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, 2012, we were in compliance with our management policies with respect to interest rate risk. We have not experienced any material changes to our market risk position since December 31, 2011, as described in our 2011 Annual Report on Form 10-K.

 

Our overall interest rate sensitivity is demonstrated by net interest income shock analysis which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in net interest income in the event of sudden and sustained 100 bp to 200 bp increases and decreases in market interest rates. The table below presents our projected changes in net interest income for the various rate shock levels at March 31, 2012.

 

INTEREST SENSITIVITY

(Dollar amounts in thousands)

 

    Change in Net Interest Income Over One Year Horizon  
    At March 31, 2012     At December 31, 2011  
    Dollar change     Percentage change     Dollar change     Percentage change  
Change in levels of interest rates                                
+200 bp   $ (983 )     (3.0 )%   $ 105       0.3 %
+100 bp     (1,035 )     (3.2 )%     (122 )     (0.4 )%
Base                        
-100 bp     (1,063 )     (3.3 )%     (1,436 )     (4.5 )%
-200 bp     (1,824 )     (5.6 )%     (2,125 )     (6.6 )%

 

As shown above, at March 31, 2012, the effect of an immediate 200 bp increase in interest rates would have decreased our net interest income by $1.0 million or 3.0%. The effect of an immediate 200 bp reduction in rates would have decreased our net interest income by $1.8 million or 5.6%. However, a 200 bp reduction in rates is not realistic given the low interest rate environment that currently exists. An interest rate floor of zero is used rather than assuming a negative interest rate.

 

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the relative levels of market interest rates and loan prepayments, and should not be relied upon as indicative of actual results. Actual values may differ from those projections set forth above, should market conditions vary from the assumptions used in preparing the analyses. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.

 

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Table of Contents

Item 4. Controls and Procedures

 

Disclosures Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2012. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Internal Control Over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.

 

Item 1A. Risk Factors

 

See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2011. There have been no material changes to the risk factors since then.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended March 31, 2012, we did not sell any equity securities which were not registered under the Securities Act of 1933, as amended, or repurchase any of our equity securities.

 

We have several limitations on our ability to pay dividends. The Federal Reserve has adopted regulations that deal with the measure of capitalization for bank holding companies. The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding companies, wherein the Federal Reserve has stated that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing.

 

Our ability to pay dividends on our common stock is largely dependent upon the Bank’s ability to pay dividends on its stock held by us. The Bank’s ability to pay dividends is restricted by both state and federal laws and regulations. The Bank is subject to policies and regulations issued by the Federal Reserve, as the Bank’s primary federal regulator, and the Division of Banking of the WDFI, which, in part, establish minimum acceptable capital requirements for banks, thereby limiting the ability of such banks to pay dividends. In addition, Wisconsin law provides that state chartered banks may declare and pay dividends out of undivided profits but only after provision has been made for all expenses, losses, required reserves, taxes and interest accrued or due from the bank.

 

Our and the Bank’s payment of dividends in some circumstances may require the written consent of the Federal Reserve or the WDFI. Currently, the terms of the Written Agreement prohibit us and the Bank from declaring or paying any dividends without the prior written approval of the Federal Reserve Bank and, as to the Bank, the WDFI. We anticipate that this prior approval requirement will remain in place until the Written Agreement is lifted by the Federal Reserve Bank and the WDFI.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

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Table of Contents

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

The following exhibits are furnished herewith:

 

Exhibit
Number
Description
31.1 Certification under Section 302 of Sarbanes-Oxley by Robert J. Cera, Chief Executive Officer, is attached hereto.
31.2 Certification under Section 302 of Sarbanes-Oxley by Kevin L. LaLuzerne, Chief Financial Officer, is attached hereto.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached hereto.
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text.

 

 

 

 

 

 

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Table of Contents

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 10, 2012   /s/ Robert J. Cera  
      Robert J. Cera
President and Chief Executive Officer
 
         
         
Date: May 10, 2012   /s/ Kevin L. LaLuzerne  
      Kevin L. LaLuzerne
Treasurer and Chief Financial Officer
 

 

 

 

 

 

 

 

 

 

 

 

 

53


XOTC:BYLK Quarterly Report 10-Q Filling

XOTC:BYLK Stock - Get Quarterly Report SEC Filing of XOTC:BYLK stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XOTC:BYLK Quarterly Report 10-Q Filing - 3/31/2012
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