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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 June 30, 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 August 9, 2012 was 7,927,347 shares.


BAYLAKE CORP. AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

 

PAGE NO.

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 -

FINANCIAL STATEMENTS

 

4

 

 

 

 

ITEM 2 -

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

 

32

 

 

 

 

ITEM 3 -

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

51

 

 

 

 

ITEM 4 -

CONTROLS AND PROCEDURES

 

52

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1 -

LEGAL PROCEEDINGS

 

52

 

 

 

 

ITEM 1A -

RISK FACTORS

 

52

 

 

 

 

ITEM 2 -

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

52

 

 

 

 

ITEM 3 -

DEFAULTS UPON SENIOR SECURITIES

 

53

 

 

 

 

ITEM 4 - MINE SAFETY DISCLOSURES   53
       

ITEM 5 -

OTHER INFORMATION

 

53

 

 

 

 

ITEM 6 -

EXHIBITS

 

54

2


Table of Contents


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BAYLAKE CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2012 (Unaudited) and December 31, 2011
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

June 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

69,753

 

$

86,980

 

Federal funds sold

 

 

1,369

 

 

513

 

Securities available for sale

 

 

255,512

 

 

284,331

 

Loans held for sale

 

 

1,703

 

 

1,869

 

Loans, net of allowance of $12,733 and $10,638 at June 30, 2012 and December 31, 2011, respectively

 

 

620,903

 

 

620,377

 

Cash surrender value of life insurance

 

 

22,895

 

 

23,064

 

Premises and equipment, net

 

 

21,184

 

 

22,953

 

Premises and equipment held for sale

 

 

3,122

 

 

1,224

 

Federal Home Loan Bank stock

 

 

4,133

 

 

6,792

 

Foreclosed properties, net

 

 

10,357

 

 

12,119

 

Goodwill

 

 

6,641

 

 

6,641

 

Deferred income taxes

 

 

6,806

 

 

7,145

 

Accrued interest receivable

 

 

3,272

 

 

3,381

 

Other assets

 

 

11,139

 

 

9,540

 

Total Assets

 

$

1,038,789

 

$

1,086,929

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing

 

$

114,209

 

$

104,446

 

Interest-bearing

 

 

731,067

 

 

760,741

 

Total Deposits

 

 

845,276

 

 

865,187

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

55,000

 

 

55,000

 

Repurchase agreements

 

 

17,697

 

 

47,566

 

Subordinated debentures

 

 

16,100

 

 

16,100

 

Convertible promissory notes

 

 

9,450

 

 

9,450

 

Accrued expenses and other liabilities

 

 

7,079

 

 

9,225

 

Total Liabilities

 

 

950,602

 

 

1,002,528

 

 

 

 

 

 

 

 

 

Commitments and Contingencies – Note 16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Issued-8,148,360 shares at June 30, 2012 and 8,132,552 at December 31, 2011;

 

 

 

 

 

 

 

Outstanding-7,927,347 shares at June 30, 2012 and 7,911,539 at December 31, 2011

 

 

40,741

 

 

40,662

 

Additional paid-in capital

 

 

12,080

 

 

12,066

 

Retained earnings

 

 

33,909

 

 

31,441

 

Treasury stock (221,013 shares at June 30, 2012 and December 31, 2011)

 

 

(3,549

)

 

(3,549

)

Accumulated other comprehensive income

 

 

5,006

 

 

3,781

 

Total Stockholders’ Equity

 

 

88,187

 

 

84,401

 

Total Liabilities and Stockholders’ Equity

 

$

1,038,789

 

$

1,086,929

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

3


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and six months ended June 30, 2012 and 2011
(Dollar amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,875

 

 

8,238

 

$

15,885

 

 

16,720

 

Taxable securities

 

 

1,712

 

 

1,878

 

 

3,618

 

 

3,629

 

Tax exempt securities

 

 

372

 

 

374

 

 

744

 

 

754

 

Federal funds sold

 

 

23

 

 

18

 

 

53

 

 

39

 

Total Interest and Dividend Income

 

 

9,982

 

 

10,508

 

 

20,300

 

 

21,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,194

 

 

1,872

 

 

2,588

 

 

3,828

 

Repurchase agreements

 

 

13

 

 

20

 

 

36

 

 

42

 

Federal Home Loan Bank advances and other debt

 

 

258

 

 

258

 

 

516

 

 

572

 

Subordinated debentures

 

 

74

 

 

67

 

 

152

 

 

134

 

Convertible promissory notes

 

 

245

 

 

245

 

 

490

 

 

490

 

Total Interest Expense

 

 

1,784

 

 

2,462

 

 

3,782

 

 

5,066

 

Net interest income

 

 

8,198

 

 

8,046

 

 

16,518

 

 

16,076

 

Provision for loan losses

 

 

2,275

 

 

1,950

 

 

4,025

 

 

3,250

 

Net interest income after provision for loan losses

 

 

5,923

 

 

6,096

 

 

12,493

 

 

12,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees from fiduciary activities

 

 

283

 

 

220

 

 

523

 

 

503

 

Fees from loan servicing

 

 

141

 

 

223

 

 

300

 

 

413

 

Fees for other services to customers

 

 

1,220

 

 

1,215

 

 

2,388

 

 

2,466

 

Net gain on sale of loans

 

 

512

 

 

211

 

 

873

 

 

597

 

Net loss in mortgage servicing rights

 

 

(87

)

 

(84

)

 

(69

)

 

(114

)

Net gain on sale of securities

 

 

907

 

 

 

 

1,585

 

 

125

 

Net gain/(loss) on sale of premises and equipment

 

 

174

 

 

(11

)

 

176

 

 

(3

)

Net gain on sale of premises and equipment held for sale

 

 

445

 

 

 

 

445

 

 

 

Increase in cash surrender value of life insurance

 

 

107

 

 

122

 

 

200

 

 

252

 

Income in equity of UFS subsidiary

 

 

159

 

 

202

 

 

336

 

 

433

 

Other income

 

 

481

 

 

323

 

 

630

 

 

363

 

Total Noninterest Income

 

 

4,342

 

 

2,421

 

 

7,387

 

 

5,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,228

 

 

4,058

 

 

8,655

 

 

8,614

 

Occupancy expense

 

 

553

 

 

575

 

 

1,177

 

 

1,180

 

Equipment expense

 

 

287

 

 

308

 

 

557

 

 

588

 

Data processing and courier

 

 

221

 

 

203

 

 

450

 

 

411

 

FDIC insurance expense

 

 

369

 

 

559

 

 

731

 

 

1,290

 

Operation of other real estate

 

 

1,817

 

 

729

 

 

2,413

 

 

1,767

 

Loan and collection expense

 

 

147

 

 

163

 

 

357

 

 

331

 

Other outside services

 

 

198

 

 

158

 

 

381

 

 

323

 

Other operating expenses

 

 

1,057

 

 

1,102

 

 

1,989

 

 

2,065

 

Total Noninterest Expense

 

 

8,877

 

 

7,855

 

 

16,710

 

 

16,569

 

Income before provision for/(benefit from) income taxes

 

 

1,388

 

 

662

 

 

3,170

 

 

1,292

 

Provision for (benefit from) income taxes

 

 

94

 

 

(113

)

 

544

 

 

(134

)

Net Income

 

$

1,294

 

 

775

 

$

2,626

 

$

1,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.16

 

 

0.10

 

$

0.33

 

$

0.18

 

Diluted earnings per share

 

$

0.15

 

 

0.10

 

$

0.30

 

$

0.18

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

4


Table of Contents

BAYLAKE CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
Three and six months ended June 30, 2012
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30, 2012

 

Six months ended
June 30, 2012

 

Net Income

 

 

 

 

$

1,294

 

 

 

 

$

2,626

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains arising during period

 

$

1,830

 

 

 

 

$

3,610

 

 

 

 

Less: reclassification adjustment for gains included in net income

 

 

(907

)

 

 

 

 

(1,585

)

 

 

 

Tax effect

 

 

(365

)

 

 

 

 

(800

)

 

 

 

Other comprehensive income

 

 

 

 

 

558

 

 

 

 

 

1,225

 

Comprehensive income

 

 

 

 

$

1,852

 

 

 

 

$

3,851

 

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)

Six months ended June 30, 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

 

 

 

 

 

 

 

 

2,626

 

 

 

 

 

 

2,626

 

Net changes in unrealized gain on securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

3,610

 

 

3,610

 

Reclassification adjustment for net gains realized in income

 

 

 

 

 

 

 

 

 

 

 

 

(1,585

)

 

(1,585

)

Tax effect

 

 

 

 

 

 

 

 

 

 

 

 

(800

)

 

(800

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,851

 

Stock-based compensation expense

 

 

 

 

 

 

85

 

 

 

 

 

 

 

 

85

 

Vesting of Restricted Stock Units (“RSUs”)

 

 

14,919

 

 

75

 

 

(75

)

 

 

 

 

 

 

 

 

Tax benefit from vesting of RSUs

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

12

 

Exercise of stock options

 

 

889

 

 

4

 

 

(1

)

 

 

 

 

 

 

 

3

 

Expiration/forfeiture of unexercised stock options/RSUs

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

(7

)

Cash dividends ($0.02 per share)

 

 

 

 

 

 

 

 

(158

)

 

 

 

 

 

(158

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2012

 

 

7,927,347

 

$

40,741

 

$

12,080

 

$

33,909

 

$

(3,549

)

$

5,006

 

$

88,187

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

6


Table of Contents


 

BAYLAKE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six months ended June 30, 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

 

$

2,626

 

$

1,426

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

640

 

 

652

 

Amortization of debt issuance costs

 

 

18

 

 

17

 

Provision for losses on loans

 

 

4,025

 

 

3,250

 

Provision for impairment of letters of credit

 

 

 

 

14

 

Net amortization of premium/discount on securities

 

 

1,435

 

 

1,269

 

Increase in cash surrender value of life insurance

 

 

(200

)

 

(252

)

Net gain on life insurance death benefit

 

 

(501

)

 

(161

)

Net realized gain on sale of securities

 

 

(1,585

)

 

(125

)

Net gain on sale of loans

 

 

(873

)

 

(597

)

Proceeds from sale of loans held for sale

 

 

46,447

 

 

42,937

 

Origination of loans held for sale

 

 

(45,535

)

 

(36,354

)

Net change in valuation of mortgage servicing rights

 

 

69

 

 

114

 

Provision for valuation allowance on foreclosed properties

 

 

2,202

 

 

1,087

 

Net gain on sale of premises and equipment

 

 

(176

)

 

3

 

Net (gain) loss on sale of land held for sale

 

 

(445

)

 

10

 

Net gain on disposals of foreclosed properties

 

 

(110

)

 

(103

)

Benefit for deferred income tax expense

 

 

(461

)

 

(580

)

Stock-based compensation expense

 

 

85

 

 

32

 

Tax benefit from exercise/forfeiture of options

 

 

(4

)

 

 

Income in equity of UFS subsidiary

 

 

(336

)

 

(433

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(1,794

)

 

3,576

 

Accrued expenses and other liabilities

 

 

(2,147

)

 

1,047

 

Net cash flows provided by operating activities

 

 

3,380

 

 

16,829

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from sale of securities available for sale

 

 

45,823

 

 

21,534

 

Principal payments on securities available for sale

 

 

27,856

 

 

21,916

 

Purchase of securities available for sale

 

 

(42,685

)

 

(27,218

)

FHLB stock redemption

 

 

2,659

 

 

 

Proceeds from sale of foreclosed properties

 

 

5,489

 

 

4,383

 

7


Table of Contents


 

BAYLAKE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six months ended June 30, 2012 and 2011

(Dollar amounts in thousands)


 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

CASH FLOWS FROM INVESTING ACTIVITIES (continued)

 

 

 

 

 

 

 

Proceeds from sale of premises and equipment

 

247

 

$

11

 

Proceeds from sale of land held for sale

 

 

601

 

 

308

 

Loan originations and payments, net

 

 

(10,370

)

 

5,615

 

Additions to premises and equipment

 

 

(996

)

 

(254

)

Proceeds from life insurance surrender

 

 

 

 

1,698

 

Proceeds from life insurance death benefit

 

 

870

 

 

457

 

Rabbi Trust initial funding

 

 

 

 

(1,626

)

Net change in federal funds sold

 

 

(856

)

 

1

 

Dividend from UFS Subsidiary

 

 

680

 

 

219

 

Net cash provided by investing activities

 

 

29,318

 

 

27,044

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net change in deposits

 

 

(19,910

)

 

(27,606

)

Net change in federal funds purchased and repurchase agreements

 

 

(29,869

)

 

1,324

 

Repayments on Federal Home Loan Bank advances

 

 

 

 

(15,000

)

Tax benefit from vesting of restricted stock units

 

 

12

 

 

 

Cash dividends paid

 

 

(158

)

 

 

Net cash used in financing activities

 

 

(49,925

)

 

(41,282

)

Net change in cash

 

 

(17,227

)

 

2,591

 

 

 

 

 

 

 

 

 

Beginning cash

 

 

86,980

 

 

54,555

 

Ending cash

 

$

69,753

 

$

57,146

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

3,696

 

$

4,861

 

Income taxes paid (refunded), net

 

 

1,200

 

 

(2,526

)

Supplemental noncash disclosure:

 

 

 

 

 

 

 

Transfers from loans to foreclosed properties

 

$

5,819

 

$

1,361

 

Mortgage servicing rights resulting from sale of loans

 

 

127

 

 

89

 

8


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six month periods ending June 30, 2012 and 2011. The consolidated results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of results to be expected for the entire year. Management of the Company has evaluated all subsequent events through August 9, 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
June 30,

 

Six months ended
June 30,

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2012

 

2011

 

(Numerator):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

1,294

 

$

775

 

$

2,626

 

$

1,426

 

Plus: Income impact of assumed conversions

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on 10% convertible debentures, net of income tax

 

 

149

 

 

 

 

297

 

 

 

Income available to common stockholders plus assumed conversions

 

$

1,443

 

$

775

 

$

2,923

 

$

1,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Denominator):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding-basic

 

7,926,546

 

7,911,539

 

7,920,436

 

7,911,539

 

Plus: Incremental shares of assumed conversions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

1,844

(1)

 

(1)

 

(2)

 

(2)

Dilutive effect of restricted stock units

 

 

16,470

 

 

4,870

 

 

16,605

(3)

 

2,287

 

Dilutive effect of convertible promissory notes (4)

 

 

1,890,000

 

 

 

 

1,890,000

 

 

 

Dilutive potential common shares

 

 

1,908,314

 

 

4,870

 

 

1,906,605

 

 

2,287

 

Adjusted weighted-average shares

 

 

9,834,860

 

 

7,916,409

 

 

9,827,041

 

 

7,913,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.16

 

$

0.10

 

$

0.33

 

$

0.18

 

Diluted Earnings Per Share

 

$

0.15

 

$

0.10

 

$

0.30

 

$

0.18

 

9


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

 

 

 

 

(1)

At June 30, 2012 and 2011, there were 68,572 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

 

 

 

 

(2)

At June 30, 2012 and 2011, there were 138,701 and 112,400 outstanding stock options, respectively, which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

 

 

 

 

(3)

At June 30, 2012, there were 68,572 outstanding restricted stock units which are not included in the computation of diluted earnings per share because they are considered anti-dilutive.

 

 

 

 

(4)

At June 30, 2012, the Company had $9.45 million of outstanding Convertible Promissory Notes (the “Convertible Notes”). The Convertible Notes are convertible into shares of common stock of the Company 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 voluntary conversion has not occurred. At June 30, 2012, the entire 1,890,000 common shares are included since the average market price per share for the three months and six months ended June 30, 2012 exceeded the conversion price of $5.00 per share. For the three months and six months ended June 30, 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 was 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 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.

10


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

 

 

 

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 June 30, 2012 or December 31, 2011 were measured using Level 1 inputs.

 

 

 

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 are adjusted to fair value less costs to sell upon transfer to foreclosed properties, establishing a new cost basis when fair value is lower than the carrying cost on date of transfer. 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 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
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

 

$

12,033

 

$

 

$

12,033

 

$

 

Mortgage-backed securities

 

 

166,073

 

 

 

 

161,530

 

 

4,543

 

Asset-backed securities

 

 

4,768

 

 

 

 

4,768

 

 

 

Obligations of states and political subdivisions

 

 

58,580

 

 

 

 

58,580

 

 

 

Private placement and corporate bonds

 

 

12,404

 

 

 

 

12,404

 

 

 

Other securities

 

 

1,654

 

 

 

 

1,654

 

 

 

Total securities available for sale

 

 

255,512

 

 

 

 

250,969

 

 

4,543

 

Mortgage servicing rights

 

 

693

 

 

 

 

693

 

 

 

Total

 

$

256,205

 

$

 

$

251,662

 

$

4,543

 

11


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30,
2012

 

For the six
month period
ended June 30,
2012

 

Balance, beginning of period

 

$

4,923

 

$

16,262

 

Transfer into Level 3

 

 

 

 

 

Net unrealized gains

 

 

47

 

 

546

 

Transfer out of Level 3

 

 

 

 

(10,593

)

Principal payments

 

 

(427

)

 

(1,672

)

Balance, end of period

 

$

4,543

 

$

4,543

 

The transfers out of Level 3 during the first 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
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

 

$

8,669

 

$

 

$

 

$

8,669

 

Foreclosed properties, net

 

 

10,357

 

 

 

 

 

 

10,357

 

Total

 

$

19,026

 

$

 

$

 

$

19,026

 

12


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 the Company’s fair value.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar amounts in thousands)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

69,753

 

$

69,753

 

$

86,980

 

$

86,980

 

Federal funds sold

 

 

1,369

 

 

1,369

 

 

513

 

 

513

 

Securities available for sale

 

 

255,512

 

 

255,512

 

 

284,331

 

 

284,331

 

Loans held for sale

 

 

1,703

 

 

1,731

 

 

1,869

 

 

1,898

 

Loans, net

 

 

620,903

 

 

623,061

 

 

620,377

 

 

622,967

 

Federal Home Loan Bank stock

 

 

4,133

 

 

4,133

 

 

6,792

 

 

6,792

 

Mortgage servicing rights

 

 

693

 

 

693

 

 

634

 

 

634

 

Foreclosed properties, net

 

 

10,357

 

 

10,357

 

 

12,119

 

 

12,119

 

Accrued interest receivable

 

 

3,272

 

 

3,272

 

 

3,381

 

 

3,381

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

845,276

 

$

846,179

 

$

865,187

 

$

851,054

 

Repurchase agreements

 

 

17,697

 

 

17,697

 

 

47,566

 

 

47,566

 

Federal Home Loan Bank advances

 

 

55,000

 

 

56,679

 

 

55,000

 

 

56,968

 

Subordinated debentures

 

 

16,100

 

 

16,100

 

 

16,100

 

 

16,100

 

Convertible promissory notes

 

 

9,450

 

 

9,393

 

 

9,450

 

 

9,387

 

Accrued interest payable

 

 

985

 

 

985

 

 

898

 

 

898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet credit related items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Letters of credit

 

$

 

$

 

$

1,995

 

$

1,995

 

13


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 noninterest-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.

14


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

(j) Subordinated Debentures

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

(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 June 30, 2012 and December 31, 2011 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

 

 

Fair Value

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agency securities

 

$

12,033

 

$

9

 

$

(12

)

Obligations of states and political subdivisions

 

 

58,580

 

 

4,433

 

 

(7

)

Mortgage-backed securities

 

 

166,073

 

 

4,279

 

 

(661

)

Asset-backed securities

 

 

4,768

 

 

127

 

 

(221

)

Private placement and corporate bonds

 

 

12,404

 

 

335

 

 

(8

)

Other securities

 

 

1,654

 

 

 

 

 

Totals

 

$

255,512

 

$

9,183

 

$

(909

)


 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

15


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

At June 30, 2012 and December 31, 2011, the mortgage-backed securities portfolio was $166.1 million, (65.0%) and $193.6 million, (68.1%), respectively, of the investment portfolios. Approximately 9.4%, or $15.6 million, of the mortgage-backed securities outstanding at June 30, 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 65.2%, or $108.3 million, of the mortgage-backed securities outstanding at June 30, 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 25.4%, or $42.3 million, of the outstanding mortgage-backed securities at June 30, 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 June 30, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

$

2,013

 

$

(12

)

$

 

$

 

$

2,013

 

$

(12

)

Obligations of states and political subdivisions

 

 

474

 

 

(7

)

 

 

 

 

 

474

 

 

(7

)

Mortgage-backed securities

 

 

31,525

 

 

(141

)

 

7,163

 

 

(520

)

 

38,688

 

 

(661

)

Asset-backed securities

 

 

 

 

 

 

3,592

 

 

(221

)

 

3,592

 

 

(221

)

Private placement and corporate bonds

 

 

3,513

 

 

(8

)

 

 

 

 

 

3,513

 

 

(8

)

Total securities temporarily impaired

 

$

37,525

 

$

(168

)

$

10,755

 

$

(741

)

$

48,280

 

$

(909

)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 securities temporarily impaired

 

$

50,459

 

$

(981

)

$

13,008

 

$

(1,471

)

$

63,467

 

$

(2,452

)

At June 30, 2012, the mortgage-backed securities category with continuous unrealized losses for twelve months or more comprises two securities. 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.

16


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 losses were 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):


 

 

 

 

 

 

 

 

 

 

June 30,
2012

 

December 31,
2011

 

 

Construction

 

$

55,699

 

$

53,606

 

Real estate-mortgage

 

 

149,401

 

 

143,456

 

Real estate-commercial

 

 

307,360

 

 

317,198

 

Commercial

 

 

94,077

 

 

91,750

 

Consumer

 

 

9,182

 

 

8,809

 

Municipal

 

 

18,326

 

 

16,577

 

Gross loans

 

 

634,045

 

 

631,396

 

Less: Deferred origination fees, net of costs

 

 

(409

)

 

(381

)

Less: Allowance for loan losses

 

 

(12,733

)

 

(10,638

)

Loans, net

 

$

620,903

 

$

620,377

 

Loans having a carrying value of $112.6 million and $105.1 million are pledged as collateral for borrowings from the FHLB at June 30, 2012 and December 31, 2011, respectively.

17


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the six months ended June 30, 2012 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

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

 

 

(380

)

 

(254

)

 

(1,575

)

 

(165

)

 

(62

)

 

 

 

 

 

(2,436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

18

 

 

8

 

 

401

 

 

61

 

 

18

 

 

 

 

 

 

506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision

 

 

695

 

 

556

 

 

3,824

 

 

(86

)

 

33

 

 

 

 

(997

)

 

4,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

1,564

 

$

2,305

 

$

8,117

 

$

580

 

$

150

 

$

 

$

17

 

$

12,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

55,699

 

$

149,401

 

$

306,951

 

$

94,077

 

$

9,182

 

$

18,326

 

$

 

$

633,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL

 

 

(1,564

)

 

(2,305

)

 

(8,117

)

 

(580

)

 

(150

)

 

 

 

(17

)

 

(12,733

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

54,135

 

$

147,096

 

$

298,834

 

$

93,497

 

$

9,032

 

$

18,326

 

$

(17

)

$

620,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

1,721

 

$

4,144

 

$

18,400

 

$

100

 

$

22

 

$

 

$

 

$

24,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated

 

 

53,978

 

 

145,257

 

 

288,551

 

 

93,977

 

 

9,160

 

 

18,326

 

 

 

 

609,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

55,699

 

$

149,401

 

$

306,951

 

$

94,077

 

$

9,182

 

$

18,326

 

$

 

$

633,636

 

18


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

A breakdown of the allowance for loan losses and recorded investment in loans as of and for the six months ended June 30, 2011 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

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

 

 

(64

)

 

(1,090

)

 

(706

)

 

(233

)

 

(192

)

 

 

 

 

 

(2,285

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

54

 

 

5

 

 

74

 

 

26

 

 

34

 

 

 

 

 

 

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision

 

 

161

 

 

1,525

 

 

1,422

 

 

18

 

 

156

 

 

 

 

(32

)

 

3,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

1,575

 

$

2,543

 

$

7,145

 

$

1,000

 

$

389

 

$

 

$

8

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

52,159

 

$

133,716

 

$

331,646

 

$

77,544

 

$

9,378

 

$

16,380

 

$

 

$

620,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL

 

 

(1,575

)

 

(2,543

)

 

(7,145

)

 

(1,000

)

 

(389

)

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

50,584

 

$

131,173

 

$

324,501

 

$

76,544

 

$

8,989

 

$

16,380

 

$

(8

)

$

608,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

5,511

 

$

5,032

 

$

28,778

 

$

1,114

 

$

171

 

$

 

$

 

$

40,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated

 

 

46,648

 

 

128,684

 

 

302,868

 

 

76,430

 

 

9,207

 

 

16,380

 

 

 

580,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

52,159

 

$

133,716

 

$

331,646

 

$

77,544

 

$

9,378

 

$

16,380

 

$

$

620,823

 

A summary of past due loans at June 30, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

 

 

30-89 Days Past
Due (accruing)

 

90 Days & Over or
on Non-accrual

 

Total

 

Construction

 

$

44

 

$

1,720

 

$

1,764

 

Real estate – mortgage

 

 

2,123

 

 

2,674

 

 

4,797

 

Real estate – commercial

 

 

664

 

 

15,156

 

 

15,820

 

Commercial

 

 

182

 

 

100

 

 

282

 

Consumer

 

 

51

 

 

22

 

 

73

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,064

 

$

19,672

 

$

22,736

 

19


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.

20


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

Below is a breakdown of loans by risk grading as of June 30, 2012 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0001-0005

 

0006A

 

0006B

 

0007

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

88,658

 

$

3,609

 

$

999

 

$

811

 

$

94,077

 

Real estate - commercial

 

 

227,483

 

 

39,171

 

 

13,623

 

 

27,083

 

 

307,360

 

Construction

 

 

43,892

 

 

5,628

 

 

2,802

 

 

3,377

 

 

55,699

 

 

 

 

360,033

 

 

48,408

 

 

17,424

 

 

31,271

 

 

457,136

 

Real estate - mortgage

 

 

142,481

 

 

1,137

 

 

746

 

 

5,037

 

 

149,401

 

Consumer

 

 

9,179

 

 

 

 

 

 

3

 

 

9,182

 

Municipal

 

 

18,326

 

 

 

 

 

 

 

 

18,326

 

Total

 

 

530,019

 

 

49,545

 

 

18,170

 

 

36,311

 

 

634,045

 

Deferred origination fees, net of costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(409

)

Total loans

 

 

 

 

 

 

 

 

 

 

 

 

 

$

633,636

 

Included in the 0007 rated loans are $11.9 million of loans that are not impaired.

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

 

$

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

 

Real estate - mortgage

 

 

137,379

 

 

391

 

 

885

 

 

4,801

 

 

143,456

 

Consumer

 

 

8,791

 

 

 

 

 

 

18

 

 

8,809

 

Municipal

 

 

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

 

Included in the 0007 rated loans are $5.2 million of loans that are not impaired.

21


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.

22


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

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

IMPAIRED LOANS AND ALLOCATED ALLOWANCE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

Construction

 

Real
Estate-
Mortgage

 

Real Estate-
Commercial

 

Commercial

 

Consumer

 

Municipal

 

Not
Specifically
Allocated

 

Totals

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

136

 

$

2,009

 

$

6,524

 

$

 

$

 

$

 

$

 

$

8,669

 

Unpaid principal balance

 

 

480

 

 

2,441

 

 

9,648

 

 

14

 

 

 

 

 

 

 

 

12,583

 

Related allowance

 

 

344

 

 

432

 

 

3,124

 

 

14

 

 

 

 

 

 

 

 

3,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

1,241

 

$

1,703

 

$

8,752

 

$

86

 

$

22

 

$

 

$

 

$

11,804

 

Unpaid principal balance

 

 

1,241

 

 

1,703

 

 

8,752

 

 

86

 

 

22

 

 

 

 

 

 

11,804

 

Related allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

$

1,377

 

$

3,712

 

$

15,276

 

$

86

 

$

22

 

$

 

$

 

$

20,473

 

Unpaid principal balance

 

 

1,721

 

 

4,144

 

 

18,400

 

 

100

 

 

22

 

 

 

 

 

 

24,387

 

Related allowance

 

 

344

 

 

432

 

 

3,124

 

 

14

 

 

 

 

 

 

 

 

3,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment during quarter

 

$

2,544

 

$

3,813

 

$

16,808

 

$

305

 

$

27

 

$

 

$

 

$

23,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income recognized while impaired

 

$

2

 

$

41

 

$

145

 

$

6

 

$

 

$

 

$

 

$

194

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

Construction

 

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

 

23


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

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

NONPERFORMING LOANS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2012

 

March 31,
2012

 

December 31,
2011

 

September 30,
2011

 

June 30,
2011

 

Nonaccrual loans

 

$

11,513

 

$

14,301

 

$

15,242

 

$

19,026

 

$

16,759

 

Loans restructured in a troubled debt restructuring, nonaccrual

 

 

8,159

 

 

8,158

 

 

4,341

 

 

5,287

 

 

5,288

 

Total nonperforming loans (“NPLs”)

 

$

19,672

 

$

22,459

 

$

19,583

 

$

24,313

 

$

22,047

 

 

Restructured loans, accruing

 

$

4,715

 

$

6,469

 

$

22,009

 

$

20,461

 

$

18,559

 

During the quarter ended June 30, 2012, $1.3 million of accruing restructured loans were transferred to nonaccrual. The collateral securing the loans were sold within the quarter and principal payments of $0.9 million were received. The remaining balance of $0.4 million was charged off.

 

 

9.

Foreclosed Properties, Net

 

 

 

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


 

 

 

 

 

 

 

 

 

 

For the six months ended
June 30,

 

 

 

2012

 

2011

 

 

Beginning balance

 

$

14,913

 

$

19,934

 

Transfer of net realizable value to foreclosed properties

 

 

5,819

 

 

1,361

 

Sale proceeds

 

 

(5,489

)

 

(4,383

)

Net gain from disposal of foreclosed properties

 

 

110

 

 

103

 

Valuation allowance related to properties disposed

 

 

(1,579

)

 

(1,062

)

Total foreclosed properties

 

 

13,774

 

 

15,953

 

Valuation allowance for losses

 

 

(3,417

)

 

(4,007

)

Total foreclosed properties, net

 

$

10,357

 

$

11,946

 


 

 

 

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


 

 

 

 

 

 

 

 

 

 

For the six months ended
June 30,

 

 

 

 

2012

 

2011

 

 

Beginning balance

 

$

2,794

 

$

3,982

 

Provision charged to operations

 

 

2,202

 

 

1,087

 

Amounts related to properties disposed

 

 

(1,579

)

 

(1,062

)

Balance at end of period

 

$

3,417

 

$

4,007

 

24


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 June 30, 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.


25


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

 

 

 

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


 

 

 

 

 

 

 

 

 

 

For the three
months ended
June 30, 2012

 

For the six
months ended
June 30, 2012

 

Balance at beginning of period

 

$

140

 

$

174

 

Additions for tax positions of prior years

 

 

 

 

 

Settlements

 

 

 

 

(34

)

Balance, June 30, 2012

 

$

140

 

$

140

 


 

 

 

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

 

 

 

Deferred income taxes – Available for sale securities


 

 

 

 

 

 

 

 

 

 

For the six months ended
June 30,

 

 

 

2012

 

2011

 

 

Balances at beginning of period

 

$

(2,468

)

$

(659

)

Net change during period

 

 

(800

)

 

(1,866

)

Balances at end of period

 

$

(3,268

)

$

(2,525

)


 

 

 

Deferred income taxes – Other than available for sale securities


 

 

 

 

 

 

 

 

 

 

For the six months ended
June 30,

 

 

 

2012

 

2011

 

 

Balances at beginning of period

 

$

9,613

 

$

9,861

 

Net change during period

 

 

461

 

 

580

 

Balances at end of period

 

$

10,074

 

$

10,441

 


 

 

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 $4.0 million at June 30, 2012 and December 31, 2011. The current book value of UFS is approximately $7,969 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.

26


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

 

 

 

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

MORTGAGE SERVICING RIGHTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months
ended June 30,

 

For the six months
ended June 30,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

Balance at beginning of period

 

$

697

 

$

770

 

$

634

 

$

746

 

Additions from loans sold with servicing retained

 

 

83

 

 

32

 

 

128

 

 

89

 

Changes in valuation

 

 

(28

)

 

(17

)

 

26

 

 

 

Loan payments and payoffs

 

 

(59

)

 

(63

)

 

(95

)

 

(113

)

Fair value of MSRs at the end of period

 

$

693

 

$

722

 

$

693

 

$

722

 


 

 

 

Unpaid principal balance of loans serviced for others was $91.5 million and $83.1 million at June 30, 2012 and June 30, 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.

 

 

 

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.

27


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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

 

Real Estate-Mortgage

 

Real Estate-Commercial

 

Commercial

 

Consumer

 

Municipal

 

Total

 

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

$

 

$

1,432

 

$

20,203

 

$

374

 

$

 

$

 

$

22,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

 

 

 

(2

)

 

(323

)

 

(374

)

 

 

 

 

 

(699

)

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

43

 

New restructured

 

 

 

 

79

 

 

217

 

 

 

 

 

 

 

 

296

 

Transferred out of TDRs

 

 

 

 

(39

)

 

(7,592

)

 

 

 

 

 

 

 

(7,631

)

Transfers to nonaccrual

 

 

 

 

 

 

(9,303

)

 

 

 

 

 

 

 

(9,303

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

$

 

$

1,470

 

$

3,245

 

$

 

$

 

$

 

$

4,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

$

 

$

 

$

4,325

 

$

16

 

$

 

$

 

$

4,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

 

 

 

 

 

(936

)

 

(1

)

 

 

 

 

 

(937

)

Charge-offs

 

 

 

 

 

 

(977

)

 

 

 

 

 

 

 

(977

)

Advances

 

 

 

 

 

 

189

 

 

 

 

 

 

 

 

189

 

New restructured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers to foreclosed properties

 

 

 

 

 

 

(3,760

)

 

 

 

 

 

 

 

(3,760

)

Transfers from accruing

 

 

 

 

 

 

9,303

 

 

 

 

 

 

 

 

9,303

 

June 30, 2012

 

$

 

$

 

$

8,144

 

$

15

 

$

 

$

 

$

8,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

$

 

$

1,432

 

$

24,528

 

$

390

 

$

 

$

 

$

26,350

 

 

Principal payments

 

 

 

 

(2

)

 

(1,259

)

 

(375

)

 

 

 

 

 

(1,636

)

Charge-offs

 

 

 

 

 

 

(977

)

 

 

 

 

 

 

 

(977

)

Advances

 

 

 

 

 

 

232

 

 

 

 

 

 

 

 

232

 

New restructured

 

 

 

 

79

 

 

217

 

 

 

 

 

 

 

 

296

 

Transfers out of TDRs

 

 

 

 

(39

)

 

(7,592

)

 

 

 

 

 

 

 

(7,631

)

Transfers to foreclosed properties

 

 

 

 

 

 

(3,760

)

 

 

 

 

 

 

 

(3,760

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

$

 

$

1,470

 

$

11,389

 

$

15

 

$

 

$

 

$

12,874

 

28


Table of Contents

BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012

During the quarter ended June 30, 2012, a $1.3 million restructured loan was transferred to nonaccrual status. The collateral securing the loan was sold within the quarter and principal payments of $0.9 million were received. The remaining balance of $0.4 million was charged off. 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 June 30, 2012 and December 31, 2011 is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Number of Modifications

 

Recorded Investment

 

Number of Modifications

 

Recorded Investment

 

Construction

 

 

 

$

 

 

 

$

 

Real estate – mortgage

 

 

3

 

 

1,470

 

 

3

 

 

1,432

 

Real estate – commercial

 

 

13

 

 

11,389

 

 

24

 

 

24,528

 

Commercial

 

 

1

 

 

15

 

 

2

 

 

390

 

Consumer

 

 

 

 

 

 

 

 

 

Municipal

 

 

 

 

 

 

 

 

 

Total

 

 

17

 

$

12,874

 

 

29

 

$

26,350

 

A summary of troubled debt restructurings as of June 30, 2012 by restructure type is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

Nonaccruing

 

Total

 

A/B split

 

 

1,470

 

 

8,145

 

 

9,615

 

Payment schedule changes

 

 

1,105

 

 

14

 

 

1,119

 

Interest rate reduction

 

 

2,140

 

 

 

 

2,140

 

 

 

 

4,715

 

 

8,159

 

 

12,874

 

29


Table of Contents


 

BAYLAKE CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012


 

 

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”). On June 12, 2012, the Company and Bank announced the termination of the Written Agreement. In place of the Written Agreement, on June 19, 2012, the Company and the Bank entered into an informal Memorandum of Understanding with the Federal Reserve and WDFI, which requires the Company and the Bank to (i) refrain from declaring or paying dividends absent prior regulatory approval, (ii) submit capital plans as evidence of sufficient capital, and (iii) submit annual business plan and budget at least 30 days prior to the beginning of the year.

 

 

16.

Commitments and Contingencies

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)

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Commitments to fund unused home equity line loans

 

$

58,425

 

$

56,952

 

Commitments to fund 1-4 family loans

 

 

7,057

 

 

3,034

 

Commitments to fund residential real estate construction loans

 

 

1,260

 

 

1,114

 

Commitments unused on various other lines of credit loans

 

 

154,197

 

 

163,698

 

Total commitments to extend credit

 

$

220,939

 

$

224,798

 

Financial standby letters of credit

 

$

10,368

 

$

12,468

 

30


Table of Contents

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

General

Baylake Corp. (“we,” “us” or “our”) 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 (the “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 June 30, 2012 and December 31, 2011 and our consolidated results of operations for the three and six months ended June 30, 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.

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.

Branch Sale

On June 13, 2012, the Bank entered into a branch purchase and sale agreement with Premier Community Bank (“Premier”) whereby Premier will purchase the Bank’s branch operations in Waupaca, King, Manawa and Fremont, Wisconsin. On a combined basis, the transaction is expected to involve total deposits of approximately $69.2 million and total loans of approximately $35.5 million. The transaction, which is subject to regulatory approval and other customary conditions to closing, is expected to close in early fall 2012.

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.

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Table of Contents

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.

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.

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 June 30, 2012, there are no conditions that would require goodwill impairment to be reevaluated.

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Table of Contents

Results of Operations

The following table sets forth our results of operations and related summary information for the three and six month periods ended June 30, 2012 and 2011.

SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income, as reported

 

$

1,294

 

$

775

 

$

2,626

 

$

1,426

 

Earnings per share-basic, as reported

 

$

0.16

 

$

0.10

 

$

0.33

 

$

0.18

 

Earnings per share-diluted, as reported

 

$

0.15

 

$

0.10

 

$

0.30

 

$

0.18

 

Cash dividends declared per share

 

$

0.01

 

$

 

$

0.02

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.50

%

 

0.31

%

 

0.50

%

 

0.28

%

Return on average equity

 

 

5.93

%

 

3.89

%

 

6.07

%

 

3.65

%

Efficiency ratio (1)

 

 

78.71

%

 

73.13

%

 

75.19

%

 

77.00

%


 

 

(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.

Net income of $1.3 million for the three months ended June 30, 2012 increased from net income of $0.8 million for the comparable period in 2011. Net interest income increased $0.2 million for the quarter ended June 30, 2012 versus the comparable quarter last year, resulting from a $0.7 million reduction in interest expense partially offset by a $0.5 million reduction in interest income. A PFLL of $2.3 million was charged to operations for the second quarter of 2012, which is $0.3 million higher than the $2.0 million PFLL taken during the comparable quarter of 2011. Noninterest income increased by $1.9 million in the second quarter of 2012 versus the comparable quarter of 2011, primarily due to an increase of $0.9 million in net gains on the sale of securities, a $0.6 million gain on sale of fixed assets, including land held for sale, and a $0.5 million death benefit from a life insurance policy and is included in Other Income in which the Bank was the beneficiary. Second quarter 2011 Other Income included a $0.3 million death benefit from a life insurance policy. Noninterest expense increased $1.0 million between the periods primarily due to valuation adjustments and expenses related to the operation of foreclosed properties.

Net income of $2.6 million for the six months ended June 30, 2012 increased from net income of $1.4 million for the comparable period in 2011. Net interest income increased $0.4 million for the six months ended June 30, 2012 versus the comparable period last year, resulting from a $1.3 million reduction in interest expense partially offset by a $0.9 million reduction in interest income. A PFLL of $4.0 million was charged to operations for the first six months of 2012, which is $0.7 million higher than the $3.3 million PFLL taken during the comparable period of 2011. Noninterest income increased by $2.4 million in the first six months of 2012 versus the comparable period of 2011, primarily due to an increase of $1.5 million in net gains on the sale of securities, a $0.6 million increase in gain on sale of fixed assets including land held for sale, and a $0.5 million gain on a death benefit from a life insurance policy. Noninterest expense increased $0.1 million between the periods primarily due to an increase of $0.5 million in expenses related to the operation of other real estate, partially offset by a $0.5 million decrease in FDIC insurance expense.

Net Interest Income:

Net interest income is the largest component of the Company’s 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.

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Table of Contents

Net interest income on a tax-equivalent basis was $8.5 million for the three months ended June 30, 2012 compared to $8.3 million for the same period in 2011. The increase for the second 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. Average noninterest-bearing demand deposits increased from $87.3 million during the second quarter of 2011 to $105.7 million for the comparable period in 2012.

Net interest income on a tax-equivalent basis was $17.0 million for the six months ended June 30, 2012 compared to $16.6 million for the same period in 2011. The increase for the second 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. Average noninterest-bearing demand deposits increased from $87.6 million during the first six months of 2011 to $102.1 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 6 bps to 3.45% for the second quarter of 2012 compared to the same period in 2011, resulting primarily from a 40 bps decrease in the yield on earning assets from 4.69% to 4.29%, partially offset by a 34 bps decrease in the cost of interest-bearing liabilities from 1.18% to 0.84%. 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.

Interest rate spread decreased 5 bps to 3.44% for the first six months of 2012 compared to the same period in 2011, resulting primarily from a 37 bps decrease in the yield on earning assets from 4.69% to 4.32%, partially offset by a 32 bps decrease in the cost of interest-bearing liabilities from 1.20% to 0.88%.

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 second quarter of 2012 was 3.55%, down 7 bps from 3.62% for the comparable period in 2011. For the six months ended June 30, 2012, the net interest margin was 3.53%, down 6 bps from 3.59% for the comparable period in 2011.

For the three months ended June 30, 2012, average interest-earning assets increased $37.1 million from the same period in 2011. Increases in average loans of $16.5 million (2.7%), federal funds sold and interest-bearing due from financial institutions balances of $11.3 million (35.4%) and in taxable securities of $5.8 million (2.6%) accounted for a majority of the increase.

For the six months ended June 30, 2012, average interest-earning assets increased $38.4 million from the same period in 2011. Increases in average loans of $11.9 million (1.6%), federal funds sold and interest-bearing due from financial institutions balances of $10.7 million (30.6%) and in taxable securities of $14.8 million (6.5%) accounted for a majority of the increase.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30, 2012

 

Three months ended
June 30, 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

 

$

638,684

 

$

7,950

 

 

5.01

%

$

622,179

 

$

8,308

 

 

5.36

%

Taxable securities

 

 

231,116

 

 

1,712

 

 

2.96

%

 

225,293

 

 

1,878

 

 

3.33

%

Tax exempt securities 1

 

 

44,534

 

 

563

 

 

5.06

%

 

41,125

 

 

568

 

 

5.52

%

Federal funds sold and interest-bearing due from financial institutions

 

 

43,406

 

 

23

 

 

0.21

%

 

32,064

 

 

18

 

 

0.24

%

Total earning assets

 

 

957,740

 

 

10,248

 

 

4.29

%

 

920,661

 

 

10,772

 

 

4.69

%

Noninterest earning assets

 

 

93,051

 

 

 

 

 

 

 

 

95,105

 

 

 

 

 

 

 

Total assets

 

$

1,050,791

 

 

 

 

 

 

 

$

1,015,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

$

742,178

 

 

1,195

 

 

0.65

%

$

734,314

 

 

1,872

 

 

1.02

%

Short-term borrowings

 

 

96

 

 

 

 

0.67

%

 

 

 

 

 

%

Customer repurchase agreements

 

 

26,829

 

 

13

 

 

0.20

%

 

24,654

 

 

20

 

 

0.32

%

Federal Home Loan Bank advances

 

 

55,000

 

 

258

 

 

1.88

%

 

55,000

 

 

258

 

 

1.88

%

Convertible promissory notes

 

 

9,450

 

 

245

 

 

10.37

%

 

9,450

 

 

245

 

 

10.26

%

Subordinated debentures

 

 

16,100

 

 

74

 

 

1.82

%

 

16,100

 

 

67

 

 

1.66

%

Total interest-bearing liabilities

 

 

849,653

 

 

1,785

 

 

0.84

%

 

839,518

 

 

2,462

 

 

1.18

%

Demand deposits

 

 

105,695

 

 

 

 

 

 

 

 

87,342

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

7,665

 

 

 

 

 

 

 

 

8,952

 

 

 

 

 

 

 

Stockholders’ equity

 

 

87,778

 

 

 

 

 

 

 

 

79,954

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,050,791

 

 

 

 

 

 

 

$

1,015,766

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

8,463

 

 

 

 

 

 

 

$

8,310

 

 

 

 

Interest rate spread (3)

 

 

 

 

 

 

 

 

3.45

%

 

 

 

 

 

 

 

3.51

%

Net interest margin (4)

 

 

 

 

 

 

 

 

3.55

%

 

 

 

 

 

 

 

3.62

%


 

 

(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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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30, 2012

 

Six months ended
June 30, 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

 

$

636,408

 

$

16,029

 

 

5.06

%

$

627,269

 

$

16,862

 

 

5.42

%

Taxable securities

 

 

242,960

 

 

3,618

 

 

2.98

%

 

228,185

 

 

3,629

 

 

3.18

%

Tax exempt securities 1

 

 

44,371

 

 

1,127

 

 

5.08

%

 

40,553

 

 

1,143

 

 

5.64

%

Federal funds sold and interest-bearing due from financial institutions

 

 

45,525

 

 

53

 

 

0.23

%

 

34,861

 

 

39

 

 

0.23

%

Total earning assets

 

 

969,264

 

 

20,827

 

 

4.32

%

 

930,868

 

 

21,673

 

 

4.69

%

Noninterest earning assets

 

 

92,139

 

 

 

 

 

 

 

 

98,336

 

 

 

 

 

 

 

Total assets

 

$

1,061,403

 

 

 

 

 

 

 

$

1,029,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

$

752,237

 

 

2,589

 

 

0.69

%

$

740,321

 

 

3,828

 

 

1.04

%

Short-term borrowings

 

 

48

 

 

 

 

0.67

%

 

 

 

 

 

%

Customer repurchase agreements

 

 

30,953

 

 

36

 

 

0.24

%

 

26,536

 

 

42

 

 

0.32

%

Federal Home Loan Bank advances

 

 

55,000

 

 

516

 

 

1.88

%

 

61,768

 

 

572

 

 

1.87

%

Convertible promissory notes

 

 

9,450

 

 

490

 

 

10.37

%

 

9,450

 

 

490

 

 

10.37

%

Subordinated debentures

 

 

16,100

 

 

152

 

 

1.87

%

 

16,100

 

 

134

 

 

1.66

%

Total interest-bearing liabilities

 

 

863,788

 

 

3,783

 

 

0.88

%

 

854,175

 

 

5,066

 

 

1.20

%

Demand deposits

 

 

102,081

 

 

 

 

 

 

 

 

87,584

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

8,500

 

 

 

 

 

 

 

 

8,710

 

 

 

 

 

 

 

Stockholders’ equity

 

 

87,034

 

 

 

 

 

 

 

 

78,735

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,061,403

 

 

 

 

 

 

 

$

1,029,204

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

17,044

 

 

 

 

 

 

 

$

16,607

 

 

 

 

Interest rate spread (3)

 

 

 

 

 

 

 

 

3.44

%

 

 

 

 

 

 

 

3.49

%

Net interest margin (4)

 

 

 

 

 

 

 

 

3.53

%

 

 

 

 

 

 

 

3.59

%


 

 

(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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Table of Contents

RATE/VOLUME ANALYSIS (1)
(Dollar amounts in thousands)

Three months ended June 30, 2012 compared to the three months ended June 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) due to (1)

 

 

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

Loans

 

$

703

 

$

(1,061

)

$

(358

)

Taxable securities

 

 

115

 

 

(281

)

 

(166

)

Tax exempt securities

 

 

180

 

 

(185

)

 

(5

)

Federal funds sold and interest-bearing due from financial institutions

 

 

24

 

 

(19

)

 

5

 

Total interest-earning assets

 

$

1,022

 

$

(1,546

)

$

(524

)

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

$

(434

)

$

(243

)

$

(677

)

Repurchase agreements/short-term borrowings

 

 

7

 

 

(14

)

 

(7

)

FHLB advances

 

 

 

 

 

 

 

Subordinated debentures

 

 

7

 

 

 

 

7

 

Convertible promissory notes

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

(420

)

$

(257

)

$

(677

)

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

1,442

 

$

(1,289

)

$

153

 


 

 

(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.

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 91.1% and 90.6% for the three months ended June 30, 2012 and 2011, respectively.

RATE/VOLUME ANALYSIS (1)
(Dollar amounts in thousands)

Six months ended June 30, 2012 compared to the six months ended June 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) due to (1)

 

 

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

Loans

 

$

204

 

$

(1,037

)

$

(833

)

Taxable securities

 

 

162

 

 

(173

)

 

(11

)

Tax exempt securities

 

 

102

 

 

(118

)

 

(16

)

Federal funds sold and interest-bearing due from financial institutions

 

 

12

 

 

2

 

 

14

 

Total interest-earning assets

 

$

480

 

$

(1,326

)

$

(846

)

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

$

(200

)

$

(1,039

)

$

(1,239

)

Repurchase agreements/short-term borrowings

 

 

6

 

 

(12

)

 

(6

)

FHLB advances

 

 

(63

)

 

7

 

 

(56

)

Subordinated debentures

 

 

 

 

18

 

 

18

 

Convertible promissory notes

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

(257

)

$

(1,026

)

$

(1,283

)

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

737

 

$

(300

)

$

437

 


 

 

(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.

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Table of Contents

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 91.3% and 90.5% for the six months ended June 30, 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 June 30, 2012 was $2.3 million compared to $2.0 million for the second quarter of 2011. New impairments of $0.9 million on loans not previously identified with associated loan balances of $4.1 million, were recorded during the second quarter of 2012. Included in those amounts is an impairment of $0.3 million on loan balances of $2.7 million on a credit relationship in the recreation industry. Collateral for the related loans consists of a golf course and land development property. Additionally, an impairment of $0.5 million on loan balances of $1.0 million was also recorded during the second quarter of 2012. Collateral consists of commercial real estate in the Green Bay region.

Net loan charge-offs for the six months ended June 30, 2012 and 2011 were $1.9 million and $2.1 million, respectively. Net annualized charge-offs to average loans were 0.61% for the six months ended June 30, 2012 compared to 0.67% for the same period in 2011. For the six months ended June 30, 2012, nonperforming loans increased by $0.1 million (5.1%) to $19.7 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 June 30, 2012 and the related PFLL charged to earnings for the quarter and six months ended June 30, 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.

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Table of Contents

Noninterest Income:

The following table reflects the various components of noninterest income for the three and six month periods ended June 30, 2012 and 2011, respectively.

NONINTEREST INCOME
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,
2012

 

June 30,
2011

 

%
Change

 

June 30,
2012

 

June 30,
2011

 

%
Change

 

 

Fees from fiduciary services

 

$

283

 

$

220

 

 

28.8

%

$

523

 

$

503

 

 

3.9

%

Fees from loan servicing

 

 

141

 

 

223

 

 

(36.9

)%

 

300

 

 

413

 

 

(27.4

) %

Service charges on deposit accounts

 

 

810

 

 

849

 

 

(4.6

)%

 

1,582

 

 

1,644

 

 

(3.7

) %

Other fee income

 

 

178

 

 

169

 

 

5.3

%

 

366

 

 

333

 

 

9.9

%

Financial services income

 

 

232

 

 

197

 

 

17.7

%

 

440

 

 

489

 

 

(10.0

) %

Net gains from sales of loans

 

 

512

 

 

211

 

 

143.1

%

 

873

 

 

597

 

 

46.1

%

Net gain (loss) in valuation of mortgage servicing rights

 

 

(87

)

 

(84

)

 

3.7

%

 

(69

)

 

(114

)

 

(39.7

) %

Net gains from sale of securities

 

 

907

 

 

 

 

NM

%

 

1,585

 

 

125

 

 

1,169.2

%

Gains (losses) from sale of fixed assets

 

 

619

 

 

(11

)

 

NM

%

 

621

 

 

(3

)

 

NM

%

Increase in cash surrender value of life insurance

 

 

107

 

 

122

 

 

(12.1

) %

 

200

 

 

252

 

 

(20.5

) %

Equity in income of UFS subsidiary

 

 

159

 

 

202

 

 

(21.2

) %

 

336

 

 

433

 

 

(22.4

) %

Other income

 

 

481

 

 

323

 

 

48.8

%

 

630

 

 

363

 

 

73.8

%

Total Noninterest Income

 

$

4,342

 

$

2,421

 

 

79.3

%

$

7,387

 

$

5,035

 

 

46.7

%

Noninterest income increased $1.9 million (79.3%) for the three months ended June 30, 2012 versus the comparable period in 2011. A gain from sales of securities of $0.9 million was recognized during the quarter. The gain resulted when securities with high prepayment risks were sold to take advantage of gain opportunities while they were available. In addition to the security gains, a $0.6 million gain was recognized on the sale of vacant land located adjacent to one of our branches in the Green Bay region. Other items of income during the quarter included a $0.5 million death benefit from a life insurance policy included in Other Income and a $0.3 million increase in gain on sale of mortgage loans due to increased mortgage activity.

Noninterest income increased $2.4 million (46.7%) for the six months ended June 30, 2012 versus the comparable period in 2011. Gains from securities sold in the amount of $1.6 million were recorded compared to $0.1 million in the similar period in 2011. These gains were taken to provide additional cash for potential business opportunities, restructure the security portfolio, and to liquidate securities with high prepayment risks. Also impacting 2012 results were the $0.6 million gain on the sale of land and a $0.5 million life insurance death benefit included in Other Income.

39


Table of Contents

Noninterest Expense:

The following table reflects the various components of noninterest expense for the three and six months ended June 30, 2012 and 2011, respectively.

NONINTEREST EXPENSE
(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,
2012

 

June 30,
2011

 

%
Change

 

June 30,
2012

 

June 30,
2011

 

%
Change

 

 

Salaries and employee benefits

 

$

4,228

 

$

4,058

 

 

4.2

%

$

8,655

 

$

8,614

 

 

0.5

%

Occupancy

 

 

553

 

 

575