Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2015
OR
☐
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
(State
or other jurisdiction of
incorporation
or organization) |
39-1268055
(I.R.S.
Employer Identification No.) |
|
|
217
North Fourth Avenue, Sturgeon Bay, WI
(Address
of principal executive offices) |
54235
(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 ☒ No ☐
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 ☒ No
☐
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 ☐ |
Accelerated filer ☒ |
Non-accelerated filer ☐
(Do
not check if a smaller reporting company) |
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 ☐ No ☒
The number
of outstanding shares of common stock, $5.00 par value per share, as of October 30, 2015 was 9,320,255
shares.
BAYLAKE
CORP.
index
Table of Contents
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
|
|
|
|
|
|
BAYLAKE CORP. |
CONSOLIDATED BALANCE SHEETS |
September 30, 2015 (unaudited)
and December 31, 2014 |
(Dollar amounts in thousands) |
| |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
Cash and due from financial institutions | |
$ | 75,634 | | |
$ | 60,189 | |
Federal funds sold | |
| 663 | | |
| 1,176 | |
Securities held to maturity, at amortized cost | |
| 25,519 | | |
| 25,612 | |
Securities available for sale, at fair value | |
| 158,121 | | |
| 182,912 | |
Loans held for sale | |
| 175 | | |
| 1,290 | |
Loans, net of allowance of $6,510 at September 30, 2015 and $7,051 at December 31, 2014 | |
| 685,131 | | |
| 672,306 | |
Cash surrender value of life insurance | |
| 23,647 | | |
| 23,587 | |
Premises and equipment, net | |
| 20,948 | | |
| 20,206 | |
Premises and equipment held for sale | |
| 784 | | |
| 844 | |
Federal Home Loan Bank stock | |
| 4,238 | | |
| 4,238 | |
Other real estate owned, net | |
| 3,977 | | |
| 4,266 | |
Goodwill | |
| 7,222 | | |
| 7,222 | |
Deferred income taxes, net | |
| 3,630 | | |
| 4,707 | |
Accrued interest receivable | |
| 2,830 | | |
| 2,559 | |
Other assets | |
| 10,649 | | |
| 10,509 | |
Total Assets | |
$ | 1,023,168 | | |
$ | 1,021,623 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Deposits | |
| | | |
| | |
Noninterest-bearing | |
$ | 186,677 | | |
$ | 153,113 | |
Interest-bearing | |
| 613,171 | | |
| 612,429 | |
Total Deposits | |
| 799,848 | | |
| 765,542 | |
| |
| | | |
| | |
Federal Home Loan Bank advances | |
| 41,610 | | |
| 60,455 | |
Repurchase agreements | |
| 48,076 | | |
| 64,869 | |
Subordinated debentures | |
| 16,100 | | |
| 16,100 | |
Convertible promissory notes | |
| — | | |
| 1,650 | |
Accrued expenses and other liabilities | |
| 6,933 | | |
| 7,503 | |
Total Liabilities | |
| 912,567 | | |
| 916,119 | |
| |
| | | |
| | |
Commitments and Contingencies - Note 15 | |
| | | |
| | |
| |
| | | |
| | |
Common stock, $5 par value, authorized 50,000,000
shares; Issued-10,158,768 shares at September 30, 2015 and 9,777,834 shares at December 31,
2014; Outstanding-9,320,255 shares at September 30, 2015 and 9,054,821 shares at December 31, 2014 | |
| 50,794 | | |
| 48,889 | |
Additional paid-in capital | |
| 12,917 | | |
| 12,654 | |
Retained earnings | |
| 55,685 | | |
| 51,123 | |
Treasury stock 838,513 shares at September 30, 2015 and 723,013 shares at December 31, 2014 | |
| (10,943 | ) | |
| (9,497 | ) |
Accumulated other comprehensive income | |
| 2,148 | | |
| 2,335 | |
Total Stockholders’ Equity | |
| 110,601 | | |
| 105,504 | |
Total Liabilities and Stockholders’ Equity | |
$ | 1,023,168 | | |
$ | 1,021,623 | |
| |
| | | |
| | |
See accompanying Notes to Consolidated Financial Statements |
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
BAYLAKE CORP. |
CONSOLIDATED STATEMENTS
OF OPERATIONS (Unaudited) |
Three and Nine months ended
September 30, 2015 and 2014 |
(Dollar amounts in thousands,
except per share data) |
| |
| | |
| | |
| | |
| |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
INTEREST AND DIVIDEND INCOME | |
| | | |
| | | |
| | | |
| | |
Loans, including fees | |
$ | 7,317 | | |
$ | 6,862 | | |
$ | 21,779 | | |
$ | 20,898 | |
Taxable securities | |
| 930 | | |
| 1,269 | | |
| 3,225 | | |
| 3,768 | |
Tax exempt securities | |
| 339 | | |
| 377 | | |
| 1,038 | | |
| 1,120 | |
Federal funds sold | |
| 34 | | |
| 33 | | |
| 62 | | |
| 62 | |
Total Interest and Dividend Income | |
| 8,620 | | |
| 8,541 | | |
| 26,104 | | |
| 25,848 | |
INTEREST EXPENSE | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 328 | | |
| 400 | | |
| 1,003 | | |
| 1,226 | |
Repurchase agreements | |
| 13 | | |
| 24 | | |
| 50 | | |
| 74 | |
Federal Home Loan Bank advances and other debt | |
| 219 | | |
| 175 | | |
| 716 | | |
| 589 | |
Subordinated debentures | |
| 67 | | |
| 65 | | |
| 198 | | |
| 194 | |
Convertible promissory notes | |
| — | | |
| 119 | | |
| 27 | | |
| 571 | |
Total Interest Expense | |
| 627 | | |
| 783 | | |
| 1,994 | | |
| 2,654 | |
Net interest income before provision for loan losses | |
| 7,993 | | |
| 7,758 | | |
| 24,110 | | |
| 23,194 | |
Provision for loan losses | |
| — | | |
| — | | |
| 200 | | |
| — | |
Net interest income after provision for loan losses | |
| 7,993 | | |
| 7,758 | | |
| 23,910 | | |
| 23,194 | |
NONINTEREST INCOME | |
| | | |
| | | |
| | | |
| | |
Fees from fiduciary activities | |
| 295 | | |
| 287 | | |
| 892 | | |
| 791 | |
Fees from loan servicing | |
| 133 | | |
| 133 | | |
| 428 | | |
| 433 | |
Fees from financial services to customers | |
| 301 | | |
| 281 | | |
| 841 | | |
| 799 | |
Fees for other services to customers | |
| 980 | | |
| 1,003 | | |
| 2,826 | | |
| 2,667 | |
Net gain on sale of loans | |
| 247 | | |
| 199 | | |
| 731 | | |
| 452 | |
Net change in valuation of mortgage servicing rights, net of payments and payoffs | |
| (25 | ) | |
| 3 | | |
| (48 | ) | |
| (131 | ) |
Net realized gain on sale of securities | |
| 132 | | |
| 71 | | |
| 384 | | |
| 232 | |
Net gains (losses) on sale of premises and equipment | |
| 12 | | |
| (4 | ) | |
| 12 | | |
| 1 | |
Increase in cash surrender value of life insurance | |
| 78 | | |
| 85 | | |
| 263 | | |
| 287 | |
Income in equity of UFS subsidiary | |
| 213 | | |
| 299 | | |
| 900 | | |
| 881 | |
Other noninterest (expense) income | |
| (93 | ) | |
| (28 | ) | |
| 2 | | |
| 99 | |
Total Noninterest Income | |
| 2,273 | | |
| 2,329 | | |
| 7,231 | | |
| 6,511 | |
NONINTEREST EXPENSE | |
| | | |
| | | |
| | | |
| | |
Salaries and employee benefits | |
| 3,883 | | |
| 3,630 | | |
| 12,543 | | |
| 12,086 | |
Occupancy expense | |
| 550 | | |
| 544 | | |
| 1,667 | | |
| 1,618 | |
Equipment expense | |
| 339 | | |
| 328 | | |
| 1,020 | | |
| 982 | |
Data processing and courier expense | |
| 243 | | |
| 222 | | |
| 706 | | |
| 625 | |
FDIC insurance expense | |
| 147 | | |
| 156 | | |
| 444 | | |
| 456 | |
Operation of other real estate owned | |
| 178 | | |
| 339 | | |
| 417 | | |
| 646 | |
Loan and collection expense | |
| 16 | | |
| 6 | | |
| 50 | | |
| 43 | |
Other outside services | |
| 301 | | |
| 250 | | |
| 904 | | |
| 876 | |
Audit and legal expense | |
| 322 | | |
| 201 | | |
| 740 | | |
| 530 | |
Costs relating to UFS tax strategy implementation | |
| — | | |
| — | | |
| 163 | | |
| — | |
Other noninterest expenses | |
| 965 | | |
| 832 | | |
| 2,615 | | |
| 2,408 | |
Total Noninterest Expense | |
| 6,944 | | |
| 6,508 | | |
| 21,269 | | |
| 20,270 | |
Income before provision for income taxes | |
| 3,322 | | |
| 3,579 | | |
| 9,872 | | |
| 9,435 | |
Provision for income taxes | |
| 1,031 | | |
| 1,122 | | |
| 2,992 | | |
| 2,754 | |
Net Income | |
$ | 2,291 | | |
$ | 2,457 | | |
$ | 6,880 | | |
$ | 6,681 | |
Basic earnings per share | |
$ | 0.25 | | |
$ | 0.29 | | |
$ | 0.74 | | |
$ | 0.82 | |
Diluted earnings per share | |
$ | 0.24 | | |
$ | 0.26 | | |
$ | 0.73 | | |
$ | 0.73 | |
Cash dividends paid per share | |
$ | 0.09 | | |
$ | 0.08 | | |
$ | 0.25 | | |
$ | 0.22 | |
| |
| | | |
| | | |
| | | |
| | |
See accompanying Notes to Consolidated Financial Statements |
Table of Contents
BAYLAKE
CORP.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three and
Nine Months ended September 30, 2015 and 2014
(Dollar
amounts in thousands)
| |
| | |
| | |
| | |
| |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Net Income | |
$ | 2,291 | | |
$ | 2,457 | | |
$ | 6,880 | | |
$ | 6,681 | |
Other comprehensive income (loss), net of tax | |
| | | |
| | | |
| | | |
| | |
Unrealized gains on securities | |
| | | |
| | | |
| | | |
| | |
Net unrealized holding gains (losses) arising during the period | |
| 1,162 | | |
| 1,695 | | |
| 77 | | |
| 1,856 | |
Less: reclassification adjustment for gains realized in net income | |
| (132 | ) | |
| (71 | ) | |
| (384 | ) | |
| (232 | ) |
Tax effect | |
| (404 | ) | |
| 318 | | |
| 120 | | |
| (637 | ) |
Other comprehensive income (loss) | |
| 626 | | |
| 1,942 | | |
| (187 | ) | |
| 987 | |
Comprehensive income | |
$ | 2,917 | | |
$ | 4,399 | | |
$ | 6,693 | | |
$ | 7,668 | |
See
accompanying Notes to Consolidated Financial Statements
Table of Contents
BAYLAKE
CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
Nine Months
ended September 30, 2015
(Dollar
amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
Paid-In |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Stockholders’ |
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Stock |
|
Income |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015 |
|
|
9,054,821 |
|
$ |
48,889 |
|
$ |
12,654 |
|
$ |
51,123 |
|
$ |
(9,497 |
) |
$ |
2,335 |
|
$ |
105,504 |
|
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
6,880 |
|
|
— |
|
|
— |
|
|
6,880 |
|
Net changes
in unrealized gains on securities available for sale |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
77 |
|
|
77 |
|
Reclassification
adjustment for net gains realized in income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(384 |
) |
|
(384 |
) |
Tax effect |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
120 |
|
|
120 |
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,693 |
|
Purchase
of treasury stock |
|
|
(115,500 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(1,446 |
) |
|
— |
|
|
(1,446 |
) |
Stock-based
compensation expense recognized, net |
|
|
— |
|
|
— |
|
|
330 |
|
|
— |
|
|
— |
|
|
— |
|
|
330 |
|
Vesting
of RSUs |
|
|
35,556 |
|
|
178 |
|
|
(178 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Tax benefit
from vesting of RSUs |
|
|
— |
|
|
— |
|
|
81 |
|
|
— |
|
|
— |
|
|
— |
|
|
81 |
|
Exercise
of stock options |
|
|
15,378 |
|
|
77 |
|
|
34 |
|
|
— |
|
|
— |
|
|
— |
|
|
111 |
|
Tax benefit
from exercise of stock options/RSUs |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Forfeiture
of stock options/RSUs not exercised |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Tax expense
from forfeiture of unexercised stock options/RSUs |
|
|
— |
|
|
— |
|
|
(4 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(4 |
) |
Conversion
of debentures |
|
|
330,000 |
|
|
1,650 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,650 |
|
Cash dividends
- ($0.25 per share) |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,318 |
) |
|
— |
|
|
— |
|
|
(2,318 |
) |
Balance, September 30, 2015 |
|
|
9,320,255 |
|
$ |
50,794 |
|
$ |
12,917 |
|
$ |
55,685 |
|
$ |
(10,943 |
) |
$ |
2,148 |
|
$ |
110,601 |
|
See
accompanying Notes to Consolidated Financial Statements
Table of Contents
BAYLAKE
CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Nine months
ended September 30, 2015 and 2014
(Dollar
amounts in thousands)
| |
| |
|
| |
2015 |
| |
2014 |
|
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Reconciliation of net income to net
cash provided by operating activities: | |
| | | |
| | |
Net Income | |
$ | 6,880 | | |
$ | 6,681 | |
Adjustments to reconcile net income
to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 949 | | |
| 982 | |
Amortization of debt
issuance costs | |
| — | | |
| 26 | |
Amortization of core
deposit intangible | |
| 17 | | |
| 15 | |
Provision for loan
losses | |
| 200 | | |
| — | |
Net amortization of
premium/discount on securities | |
| 1,166 | | |
| 1,208 | |
Increase in cash surrender
value of life insurance | |
| (263 | ) | |
| (287 | ) |
Net realized gain
on sale of securities | |
| (384 | ) | |
| (232 | ) |
Net gain on sale of
loans | |
| (731 | ) | |
| (452 | ) |
Proceeds from sale
of loans held for sale | |
| 38,396 | | |
| 22,232 | |
Origination of loans
held for sale | |
| (36,632 | ) | |
| (20,955 | ) |
Change in valuation
of mortgage servicing rights, net of payments and payoffs | |
| 48 | | |
| 131 | |
Provision for valuation
allowance on other real estate owned | |
| 154 | | |
| 508 | |
Provision for valuation
allowance on land held for sale | |
| 60 | | |
| — | |
Net (gains) losses
on sale of premises and equipment | |
| (12 | ) | |
| (1 | ) |
Net gain on disposals
of other real estate owned | |
| (32 | ) | |
| (48 | ) |
Provision for deferred
income tax expense | |
| 1,197 | | |
| 848 | |
Stock-based compensation
expense | |
| 330 | | |
| 262 | |
Forfeiture of options
not exercised and RSUs not vested | |
| — | | |
| (7 | ) |
Tax (expense) benefit
from exercise/forfeiture of options | |
| (4 | ) | |
| 5 | |
Income in equity of
UFS subsidiary | |
| (900 | ) | |
| (881 | ) |
Changes in assets
and liabilities: | |
| | | |
| | |
Accrued
income taxes | |
| 71 | | |
| 11 | |
Accrued
interest receivable and other assets | |
| 93 | | |
| (1,088 | ) |
Income
tax refunds | |
| — | | |
| (173 | ) |
Accrued
expenses and other liabilities | |
| (570 | ) | |
| (741 | ) |
Net
cash provided by operating activities | |
| 10,033 | | |
| 8,044 | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Proceeds from sale of securities available
for sale | |
| 12,803 | | |
| 4,588 | |
Principal payments on securities available
for sale | |
| 27,155 | | |
| 22,349 | |
Purchase of securities held to maturity | |
| — | | |
| (15,456 | ) |
Purchase of securities available for
sale | |
| (16,163 | ) | |
| (4,328 | ) |
Purchase of FHLB stock | |
| — | | |
| (640 | ) |
Proceeds from sale of other real estate
owned | |
| 539 | | |
| 1,437 | |
Proceeds from sale of premises and equipment | |
| 39 | | |
| 82 | |
Proceeds from life insurance death benefit | |
| 203 | | |
| 196 | |
Loan originations and payments, net | |
| (13,397 | ) | |
| (14,746 | ) |
Additions to premises and equipment | |
| (1,718 | ) | |
| (776 | ) |
Net change in federal funds sold | |
| 513 | | |
| (1,580 | ) |
Dividend from UFS subsidiary | |
| 342 | | |
| 417 | |
Net cash provided
in purchase or sale of branches | |
| — | | |
| 12,086 | |
Net
cash provided by investing activities | |
| 10,316 | | |
| 3,629 | |
See
accompanying Notes to Unaudited Consolidated Financial Statements.
Table of Contents
BAYLAKE
CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Nine
months ended September 30, 2015 and 2014
(Dollar
amounts in thousands)
| |
| |
|
| |
2015 |
| |
2014 |
|
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Net change in deposits | |
$ | 34,306 | | |
$ | (4,890 | ) |
Net change in repurchase agreements | |
| (16,793 | ) | |
| (13,173 | ) |
Repayments on Federal Home Loan Bank
advances | |
| (28,845 | ) | |
| (62,530 | ) |
Proceeds from Federal Home Loan Bank
advances | |
| 10,000 | | |
| 50,300 | |
Tax benefit from vesting of restricted
stock units | |
| 81 | | |
| 92 | |
Proceeds from exercise of stock options | |
| 111 | | |
| 7 | |
Purchase of treasury stock | |
| (1,446 | ) | |
| (3,231 | ) |
Cash dividends
paid | |
| (2,318 | ) | |
| (1,789 | ) |
Net
cash used in financing activities | |
| (4,904 | ) | |
| (35,214 | ) |
Net change in cash | |
| 15,445 | | |
| (23,541 | ) |
| |
| | | |
| | |
Beginning cash | |
| 60,189 | | |
| 76,179 | |
Ending cash | |
$ | 75,634 | | |
$ | 52,638 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 1,984 | | |
$ | 2,762 | |
Income taxes paid
(refunded), net | |
| 1,620 | | |
| 1,977 | |
Supplemental noncash disclosure: | |
| | | |
| | |
Transfers from loans
to other real estate owned | |
$ | 372 | | |
$ | 586 | |
Mortgage servicing
rights resulting from sale of loans | |
| 82 | | |
| 51 | |
Conversion of debentures
to equity | |
| 1,650 | | |
| 5,025 | |
See
accompanying Notes to Unaudited Consolidated Financial Statements.
Table of Contents
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
| 1. | The
consolidated financial statements of Baylake Corp. (the “Company”) include
the accounts of the Company, its wholly owned subsidiaries Baylake Bank (the “Bank”)
and Admiral Asset Management, LLC (“Admiral”), and the Bank’s wholly
owned subsidiary, Bay Lake Investments, Inc. All significant intercompany items have
been eliminated. The accompanying interim consolidated financial statements should be
read in conjunction with the 2014 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 (“U.S. 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 nine month periods ending September 30, 2015
and 2014 necessary to make the consolidated financial information not misleading. The
consolidated results of operations for the three and nine months ended September 30,
2015 are not necessarily indicative of results to be expected for the entire year. Management
of the Company has evaluated all subsequent events to October 30, 2015, the date the
interim consolidated financial statements were issued, and determined that all subsequent
events have been recognized and disclosed in the accompanying consolidated financial
statements through the date of this report. |
To
prepare consolidated financial statements in conformity with U.S. 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, value of other real estate owned, other than temporary
impairment of securities, mortgage servicing rights, income tax assets and liabilities, and fair values of financial instruments
are particularly subject to change.
Basic
earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common
shares outstanding during the period. 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 the Company’s 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:
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
(Dollar
amounts in thousands, except per share data)
EARNINGS
PER SHARE
| |
Three
months ended September
30, | | |
Nine
months ended September
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
(Numerator): | |
| | | |
| | | |
| | | |
| | |
Net income available to common stockholders | |
$ | 2,291 | | |
$ | 2,457 | | |
$ | 6,880 | | |
$ | 6,681 | |
Plus: Income impact of assumed conversions | |
| | | |
| | | |
| | | |
| | |
Interest on 10% convertible debentures, net of income tax | |
| — | | |
| 72 | | |
| 16 | | |
| 347 | |
Income available to common stockholders plus assumed conversions | |
$ | 2,291 | | |
$ | 2,529 | | |
$ | 6,896 | | |
$ | 7,028 | |
| |
| | | |
| | | |
| | | |
| | |
(Denominator): | |
| | | |
| | | |
| | | |
| | |
Weighted average number of common
shares outstanding-basic | |
| 9,320,255 | | |
| 8,611,631 | | |
| 9,267,250 | | |
| 8,101,490 | |
Plus: Incremental shares of assumed conversions: | |
| | | |
| | | |
| | | |
| | |
Dilutive effect of stock options (1) | |
| 47,775 | | |
| 45,427 | | |
| 48,407 | | |
| 44,379 | |
Dilutive effect of restricted stock units (2) | |
| 24,427 | | |
| 32,238 | | |
| 26,720 | | |
| 35,977 | |
Dilutive effect of convertible promissory notes (3) | |
| — | | |
| 875,000 | | |
| 70,879 | | |
| 1,446,465 | |
Dilutive potential common shares | |
| 72,202 | | |
| 952,665 | | |
| 146,006 | | |
| 1,526,821 | |
Adjusted weighted-average shares | |
| 9,392,457 | | |
| 9,564,296 | | |
| 9,413,256 | | |
| 9,628,311 | |
| |
| | | |
| | | |
| | | |
| | |
Basic Earnings Per Share | |
$ | 0.25 | | |
$ | 0.29 | | |
$ | 0.74 | | |
$ | 0.82 | |
Diluted Earnings Per Share | |
$ | 0.24 | | |
$ | 0.26 | | |
$ | 0.73 | | |
$ | 0.73 | |
| (1) | For
the three and nine months ended September 30, 2015 and 2014, respectively, there were
114,197 and 61,469 outstanding stock options that were not included in the computation
of diluted earnings per share because they were considered anti-dilutive. |
| (2) | For
the three months ended September 30, 2015 and 2014, respectively, there were no outstanding
restricted stock units that were not included in the computation of diluted earnings
per share because they were considered anti-dilutive. For the nine months ended September
30, 2015 and 2014, there were 0 and 14,416 restricted stock units, respectively, which
were not included in the computation of diluted earnings per share because they are considered
anti-dilutive. |
| (3) | At
September 30, 2015, the Company had no outstanding convertible notes (the “Convertible
Notes”). At September 30, 2014, the Company had $4.4 million of the Convertible
Notes outstanding. The Convertible Notes were 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 (the “Conversion Ratio”). Prior to
the quarterly interest date preceding the fifth anniversary of issuance of the Convertible
Notes each holder of the Convertible Notes could 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 of the Convertible
Notes were mandatorily convertible at the Conversion Ratio if voluntary conversion had
not yet occurred. The principal amount of any Convertible Note that had not been converted
would be payable at maturity on June 30, 2017. At September 30, 2014, the entire 1,875,000
of common shares issuable upon conversion of remaining outstanding Convertible Notes
are included in the computation of diluted earnings per share since the average market
price per share for the three and nine months ended September 30, 2014 exceeded the conversion
price of $5.00 per share. On April 1, 2015, all of the remaining outstanding debentures
were converted to shares of common stock under the provisions for voluntary conversion. |
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
| 4. | Recent
Accounting Pronouncement |
In
September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
no. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments
in this update require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record,
in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income
effects, if any, as a result of the change to the estimated amounts, calculated as if the account had been completed at the acquisition
date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes
the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting
periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this guidance
is not expected to have a significant impact on the consolidated financial condition, results of operations or liquidity of the
Company.
In
August 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff
Announcement at June 8, 2015 EITF Meeting (SEC Update). The original ASU (2015-03) issued in April 2015 required that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts. Given the absence of authoritative guidance within ASU
2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an
entity deferring and presenting debt issuance costs as an asset and subsequently amortizing those deferred debt issuance costs
ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods with fiscal years
beginning after December 15, 2016. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods
presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of
the fiscal year of adoption. The adoption of this guidance is not expected to have a significant impact on the consolidated financial
condition, results of operations or liquidity of the Company.
In
May 2015, FASB issued ASU No. 2015-08 Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs
Pursuant to Staff Accounting Bulletin No. 115. Amendments in this update amend SEC paragraphs pursuant to Staff Accounting
Bulletin (“SAB”) No. 115, which supersedes several paragraphs in ASC 805-50 in response to the SEC’s November
2014 publication of SAB 115.The SEC issued SAB 115 in connection with the release of FASB ASU No. 2014-17, “Pushdown
Accounting.” This guidance is effective immediately. The adoption of this guidance did not have a significant impact
on the consolidated financial condition, results of operations or liquidity of the Company.
In
February 2015, the FASB issued ASU No. 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis. The
amendments in this update rescind the indefinite deferral of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R),
included in FASB Accounting Standards Update No. 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds.
However, the amendments in this update provide a scope exception from Topic 810 for reporting entities with interests in legal
entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment
Company Act of 1940 for registered money market funds. This guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. The adoption of this guidance is not expected to have a significant impact
on the consolidated financial condition, results of operations or liquidity of the Company.
In
January 2015, the FASB issued ASU No. 2015-01 Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The amendment eliminates from U.S. GAAP the
concept of extraordinary items. Subtopic 225-20, Income Statement – Extraordinary and Unusual Items, required that an entity
separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed
to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary
item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary
item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from
continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share
data applicable to the extraordinary item. This guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively or retrospectively to all
prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the
beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a significant impact on the consolidated
financial condition, results of operations or liquidity of the Company.
Table of Contents
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40).
In connection with preparing financial statements for each annual and interim reporting periods, an entity’s management
should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or within one
year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should
be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are
issued (or at the date that the financial statements are available to be issued when applicable). The amendments in this update
are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The
adoption of this guidance is not expected to have a significant impact on the consolidated financial condition, results of operations
or liquidity of the Company.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under the amended guidance,
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective
prospectively for annual and interim periods beginning after December 15, 2016. Management is currently evaluating this guidance
and does not expect this guidance to have a significant impact on the consolidated financial condition, results of operations
or liquidity of the Company.
In
January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging
Issues Task Force). The amendments in ASU 2014-04 clarify when an in-substance repossession or foreclosure occurs —
that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing
a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU
requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to
the real estate collateral, or upon the borrower voluntarily conveying all interest in the real estate property to the lender
to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. This ASU was effective for the Company beginning
January 1, 2015. The provisions of this guidance did not have a significant impact on the consolidated financial condition, results
of operations or liquidity of the Company.
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
Accounting
guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure
fair value:
| Level 1: | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as
of the measurement date. |
| Level 2: | Significant
other observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| Level 3: | Significant
unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would
use in pricing an asset or liability. |
A
financial instrument’s 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). One of the Company’s securities available for sale at September
30, 2015 and December 31, 2014 was measured using Level 3 inputs.
Non-impaired
loans and deposits - the fair value of fixed rate non-impaired loans and deposits and non-impaired variable rate loans and deposits
with infrequent repricing or repricing limits is based on discounted cash flows using current market rates applied to the estimated
life and credit risk (Level 3 inputs).
Impaired
Loans - the fair value of impaired loans is based on a 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. Impaired loans are not carried at
fair value if there is sufficient collateral or if expected repayments exceed the recorded investments of such loans.
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).
Other
real estate owned - the fair value of other real estate owned is determined using a variety of market information including, but
not limited to, appraisals, professional market assessments, and real estate tax assessment information. Properties obtained by
the Bank in foreclosure are adjusted to fair value less estimated costs to sell upon their transfer to other real estate owned,
establishing a new cost basis. Subsequently, other real estate owned is carried at the lower of cost or fair value less estimated
costs to sell (Level 3 inputs).
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
(Dollar
amounts in thousands)
ASSETS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
Assets
measured at fair value on a recurring basis are summarized below:
| |
September
30, 2015 | | |
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 | |
$ | 2,269 | | |
$ | — | | |
$ | 2,269 | | |
$ | — | |
Mortgage-backed securities | |
| 90,710 | | |
| — | | |
| 90,606 | | |
| 104 | |
Obligations of states and political subdivisions | |
| 59,728 | | |
| — | | |
| 59,728 | | |
| — | |
Private placement and corporate bonds | |
| 3,509 | | |
| — | | |
| 3,509 | | |
| — | |
Other securities | |
| 1,905 | | |
| — | | |
| 1,905 | | |
| — | |
Total securities available for sale | |
| 158,121 | | |
| — | | |
| 158,017 | | |
| 104 | |
Mortgage servicing rights | |
| 875 | | |
| — | | |
| 875 | | |
| — | |
Total | |
$ | 158,996 | | |
$ | — | | |
$ | 158,892 | | |
$ | 104 | |
| |
December
31,
2014 | | |
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 | |
$ | 2,747 | | |
$ | — | | |
$ | 2,747 | | |
$ | — | |
Mortgage-backed securities | |
| 115,714 | | |
| — | | |
| 115,460 | | |
| 254 | |
Obligations of states and political subdivisions | |
| 59,002 | | |
| — | | |
| 59,002 | | |
| — | |
Private placement and corporate bonds | |
| 3,544 | | |
| — | | |
| 3,544 | | |
| — | |
Other securities | |
| 1,905 | | |
| — | | |
| 1,905 | | |
| — | |
Total securities available for sale | |
| 182,912 | | |
| — | | |
| 182,658 | | |
| 254 | |
Mortgage servicing rights | |
| 841 | | |
| — | | |
| 841 | | |
| — | |
Total | |
$ | 183,753 | | |
$ | — | | |
$ | 183,499 | | |
$ | 254 | |
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
(Dollar
amounts in thousands)
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 months ended
September 30, 2015 | | |
For
the nine months ended
September 30, 2015 | |
Balance, beginning of period | |
$ | 151 | | |
$ | 254 | |
Other comprehensive gain | |
| — | | |
| 5 | |
Principal payments | |
| (47 | ) | |
| (155 | ) |
Balance, end of period | |
$ | 104 | | |
$ | 104 | |
ASSETS
MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS
Assets
measured at fair value on a non-recurring basis are summarized below:
| |
September
30, 2015 | | |
Quoted
Prices in
Active Markets
For Identical
Assets (Level
1) | | |
Significant
Other
Observable
Inputs (Level
2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Impaired loans with allocated allowances | |
$ | 1,139 | | |
$ | — | | |
$ | — | | |
$ | 1,139 | |
Other real estate owned, net | |
| 3,977 | | |
| — | | |
| — | | |
| 3,977 | |
Total | |
$ | 5,116 | | |
$ | — | | |
$ | — | | |
$ | 5,116 | |
| |
December
31,
2014 | | |
Quoted
Prices in
Active Markets
For Identical
Assets (Level
1) | | |
Significant
Other
Observable
Inputs (Level
2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Impaired loans with allocated allowances | |
$ | 1,451 | | |
$ | — | | |
$ | — | | |
$ | 1,451 | |
Other real estate owned, net | |
| 4,266 | | |
| — | | |
| — | | |
| 4,266 | |
Total | |
$ | 5,717 | | |
$ | — | | |
$ | — | | |
$ | 5,717 | |
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
(Dollar
amounts in thousands)
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:
| |
| |
| |
September
30, 2015 | | |
December
31, 2014 | |
| |
Carrying
Amount | | |
Fair
Value | | |
Carrying
Amount | | |
Fair
Value | |
FINANCIAL ASSETS | |
| | | |
| | | |
| | | |
| | |
Cash and due from financial institutions | |
$ | 75,634 | | |
$ | 75,634 | | |
$ | 60,189 | | |
$ | 60,189 | |
Federal funds sold | |
| 663 | | |
| 663 | | |
| 1,176 | | |
| 1,176 | |
Securities held to maturity | |
| 25,519 | | |
| 26,603 | | |
| 25,612 | | |
| 26,181 | |
Securities available for sale | |
| 158,121 | | |
| 158,121 | | |
| 182,912 | | |
| 182,912 | |
Loans held for sale | |
| 175 | | |
| 179 | | |
| 1,290 | | |
| 1,314 | |
Loans, net | |
| 685,131 | | |
| 686,637 | | |
| 672,306 | | |
| 675,481 | |
Federal Home Loan Bank stock | |
| 4,238 | | |
| 4,238 | | |
| 4,238 | | |
| 4,238 | |
Mortgage servicing rights | |
| 875 | | |
| 875 | | |
| 841 | | |
| 841 | |
Other real estate owned, net | |
| 3,977 | | |
| 3,977 | | |
| 4,266 | | |
| 4,266 | |
Accrued interest receivable | |
| 2,830 | | |
| 2,830 | | |
| 2,559 | | |
| 2,559 | |
FINANCIAL LIABILITIES | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 799,848 | | |
$ | 799,824 | | |
$ | 765,542 | | |
$ | 765,370 | |
Federal Home Loan Bank advances | |
| 41,610 | | |
| 42,255 | | |
| 60,455 | | |
| 60,475 | |
Repurchase agreements | |
| 48,076 | | |
| 48,076 | | |
| 64,869 | | |
| 64,869 | |
Subordinated debentures | |
| 16,100 | | |
| 16,100 | | |
| 16,100 | | |
| 16,100 | |
Convertible promissory notes | |
| — | | |
| — | | |
| 1,650 | | |
| 1,642 | |
Accrued interest payable | |
| 292 | | |
| 292 | | |
| 283 | | |
| 283 | |
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
and Due from Financial Institutions |
The
carrying amount of cash and due from financial institutions approximates fair value.
The
carrying amount of federal funds sold approximates fair value.
| (c) | Securities
Held to Maturity and Available for Sale |
The
fair value of securities held to maturity and securities available for sale is based on quoted prices in active markets, or if
quoted prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics or discounted cash flows.
Table of Contents
BAYLAKE
CORP.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2015
(d) Loans
Held for Sale
Loans
held for sale, which generally consists of the current production of first-lien residential mortgage loans, are carried at the
lower of cost or estimated fair value. Fair value is estimated based on actual market quotes from investors in the secondary market.
(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 representative of 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) 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.
(i) Repurchase
Agreements
The
carrying amount of repurchase agreements approximates fair value.
(j) Subordinated
Debentures
The
carrying amount of variable rate subordinated debentures approximates fair value.
(k) Convertible
Promissory Notes
The
carrying amount of convertible promissory notes is based on current rates for similar financing.
(l) Accrued
Interest Payable
The
carrying amount of accrued interest payable approximates fair value.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
6. Investments
The
fair value of securities available for sale (“AFS”), the fair value of securities held to maturity (“HTM”)
and the related unrealized gains and losses as of September 30, 2015 and December 31, 2014 are as follows:
| |
| | |
| | |
| |
| |
September 30, 2015 | |
| |
Fair Value | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | |
Securities Available for Sale: | |
| | | |
| | | |
| | |
U.S. government-sponsored agency securities | |
$ | 2,269 | | |
$ | 44 | | |
$ | — | |
Mortgage-backed securities | |
| 90,710 | | |
| 2,172 | | |
| (343 | ) |
Obligations of states and political subdivisions | |
| 59,728 | | |
| 1,707 | | |
| (35 | ) |
Private placement and corporate bonds | |
| 3,509 | | |
| — | | |
| (10 | ) |
Other securities | |
| 1,905 | | |
| — | | |
| — | |
Total Securities Available for Sale | |
$ | 158,121 | | |
$ | 3,923 | | |
$ | (388 | ) |
Securities Held to Maturity: | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 21,428 | | |
$ | 909 | | |
$ | — | |
Private placement and corporate bonds | |
| 5,175 | | |
| 175 | | |
| — | |
Total Securities Held to Maturity | |
$ | 26,603 | | |
$ | 1,084 | | |
$ | — | |
Total Investment Securities | |
$ | 184,724 | | |
$ | 5,007 | | |
$ | (388 | ) |
| |
| | | |
| | | |
| | |
| |
December
31, 2014 | |
| |
Fair
Value | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | |
Securities Available
for Sale: | |
| | | |
| | | |
| | |
U.S.
government-sponsored agency securities | |
$ | 2,747 | | |
$ | — | | |
$ | (4 | ) |
Mortgage-backed securities | |
| 115,714 | | |
| 2,492 | | |
| (640 | ) |
Obligations of states
and political subdivisions | |
| 59,002 | | |
| 2,027 | | |
| (57 | ) |
Private placement
and corporate bonds | |
| 3,544 | | |
| 24 | | |
| — | |
Other
securities | |
| 1,905 | | |
| — | | |
| — | |
Total
Securities Available for Sale | |
$ | 182,912 | | |
$ | 4,543 | | |
$ | (701 | ) |
Securities Held to
Maturity: | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 21,131 | | |
$ | 519 | | |
$ | — | |
Private
placement and corporate bonds | |
| 5,050 | | |
| 50 | | |
| — | |
Total
Securities Held to Maturity | |
$ | 26,181 | | |
$ | 569 | | |
$ | — | |
Total
Investment Securities | |
$ | 209,093 | | |
$ | 5,112 | | |
$ | (701 | ) |
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
At
September 30, 2015 and December 31, 2014, the mortgage-backed securities portfolios at market value were $112.1 million (60.7%)
and $136.8 million (65.4%), respectively, of the investment portfolios. Approximately 4.8%, or $5.4 million, of the mortgage-backed
securities outstanding at September 30, 2015 were issued by the Government National Mortgage Association (“GNMA”);
an agency of the United States government. An additional 91.3%, or $102.3 million, of the mortgage-backed securities outstanding
at September 30, 2015 were issued by either the Federal National Mortgage Association (“FNMA”), the FHLB 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
and comprised approximately 3.9%, or $4.4 million of the outstanding mortgage-backed securities at September 30, 2015. Management
evaluates these non-agency mortgage-backed securities at least quarterly and more frequently when economic or market concerns
warrant such evaluation.
Securities
with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, are as follows:
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
September 30, 2015 | |
| |
Less than 12 Months | | |
12 Months or More | | |
Total | |
Description of Securities | |
Fair
Value | | |
Unrealized
Loss | | |
Fair
Value | | |
Unrealized
Loss | | |
Fair
Value | | |
Unrealized
Loss | |
Securities Available for Sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 4,661 | | |
$ | (10 | ) | |
$ | 14,875 | | |
$ | (333 | ) | |
$ | 19,536 | | |
$ | (343 | ) |
Obligations of states and political subdivisions | |
| 5,066 | | |
$ | (24 | ) | |
| 1,063 | | |
$ | (11 | ) | |
| 6,129 | | |
| (35 | ) |
Private placement and corporate bonds | |
| 3,509 | | |
| (10 | ) | |
| — | | |
| — | | |
| 3,509 | | |
| (10 | ) |
Total temporarily impaired | |
$ | 13,236 | | |
$ | (44 | ) | |
$ | 15,938 | | |
$ | (344 | ) | |
$ | 29,174 | | |
$ | (388 | ) |
| |
December 31, 2014 | |
| |
Less than 12 Months | | |
12 Months or More | | |
Total | |
Description of Securities | |
Fair
Value | | |
Unrealized
Loss | | |
Fair
Value | | |
Unrealized
Loss | | |
Fair
Value | | |
Unrealized
Loss | |
Securities Available for Sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. government-sponsored agency securities | |
$ | — | | |
$ | — | | |
$ | 2,747 | | |
$ | (4 | ) | |
$ | 2,747 | | |
$ | (4 | ) |
Mortgage-backed securities | |
| 2,689 | | |
| (6 | ) | |
| 30,216 | | |
| (634 | ) | |
| 32,905 | | |
| (640 | ) |
Obligations of states and political subdivisions | |
| 857 | | |
| (4 | ) | |
| 2,935 | | |
| (53 | ) | |
| 3,792 | | |
| (57 | ) |
Total temporarily impaired | |
$ | 3,546 | | |
$ | (10 | ) | |
$ | 35,898 | | |
$ | (691 | ) | |
$ | 39,444 | | |
$ | (701 | ) |
At
September 30, 2015, the AFS mortgage-backed securities category with continuous unrealized losses for twelve months or more comprised
eight securities. The obligations of states and political subdivisions securities category with continuous unrealized losses for
twelve months or more comprised three securities. No private placement and corporate bonds had continuous losses for twelve months
or more at September 30, 2015.
At
December 31, 2014 the AFS mortgage-backed securities category with continuous unrealized losses for twelve months or more comprised
thirteen securities. The obligations of states and political subdivisions category with continuous unrealized losses for twelve
months or more comprised ten securities. The U.S. government sponsored agency securities category with continuous unrealized losses
for twelve months or more comprised one security.
At
both September 30, 2015 and December 31, 2014, the HTM portfolio had no unrealized losses.
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 securities before
their anticipated recovery, and therefore, there is no other-than-temporary impairment.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
7. Loans
Loans
held for investment, including purchased loan participations from other financial institutions and in the syndicated loan market,
are summarized as follows:
| |
| | |
| |
| |
September 30, 2015 | | |
December 31, 2014 | |
| |
| | | |
| | |
Construction | |
$ | 34,885 | | |
$ | 40,808 | |
Real estate-Residential | |
| 153,895 | | |
| 152,091 | |
Real estate-Commercial | |
| 316,679 | | |
| 304,446 | |
Commercial-Syndicated | |
| 66,225 | | |
| 65,429 | |
Commercial-Other | |
| 93,666 | | |
| 88,045 | |
Consumer | |
| 5,672 | | |
| 6,075 | |
Tax exempt | |
| 21,131 | | |
| 22,964 | |
Gross loans | |
| 692,153 | | |
| 679,858 | |
Less: Deferred origination fees, net of costs | |
| (512 | ) | |
| (501 | ) |
Less: Allowance for loan losses | |
| (6,510 | ) | |
| (7,051 | ) |
Loans, net | |
$ | 685,131 | | |
$ | 672,306 | |
Loans
having a carrying value of $144.9 million and $142.0 million are pledged as collateral for borrowings from the FHLB at September
30, 2015 and December 31, 2014, respectively.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
A breakdown
of the allowance for loan losses and recorded investment in loans as of and for the nine months ended September 30, 2015 is as
follows:
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
|
|
| |
Construction |
| |
Real
Estate-
Residential |
| |
Real
Estate-
Commercial |
| |
Commercial-
Syndicated |
| |
Commercial-
Other |
| |
Consumer |
| |
Tax
Exempt |
| |
Not
Specifically
Allocated |
| |
Total |
|
Allowance for Loan Losses: | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 252 | | |
$ | 779 | | |
$ | 3,282 | | |
$ | 1,047 | | |
$ | 1,082 | | |
$ | 54 | | |
$ | — | | |
$ | 555 | | |
$ | 7,051 | |
Charge-offs | |
| — | | |
| (90 | ) | |
| (391 | ) | |
| — | | |
| (645 | ) | |
| (36 | ) | |
| — | | |
| — | | |
| (1,162 | ) |
Recoveries | |
| 15 | | |
| 14 | | |
| 245 | | |
| — | | |
| 138 | | |
| 9 | | |
| — | | |
| — | | |
| 421 | |
Provision | |
| (124 | ) | |
| (291 | ) | |
| (732 | ) | |
| 79 | | |
| 60 | | |
| 24 | | |
| — | | |
| 1,184 | | |
| 200 | |
Ending balance | |
$ | 143 | | |
$ | 412 | | |
$ | 2,404 | | |
$ | 1,126 | | |
$ | 635 | | |
$ | 51 | | |
$ | — | | |
$ | 1,739 | | |
$ | 6,510 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 34,885 | | |
$ | 153,895 | | |
$ | 316,167 | | |
$ | 66,225 | | |
$ | 93,666 | | |
$ | 5,672 | | |
$ | 21,131 | | |
$ | — | | |
$ | 691,641 | |
ALL | |
| (143 | ) | |
| (412 | ) | |
| (2,404 | ) | |
| (1,126 | ) | |
| (635 | ) | |
| (51 | ) | |
| — | | |
| (1,739 | ) | |
| (6,510 | ) |
Recorded Investment | |
$ | 34,742 | | |
$ | 153,483 | | |
$ | 313,763 | | |
$ | 65,099 | | |
$ | 93,031 | | |
$ | 5,621 | | |
$ | 21,131 | | |
$ | (1,739 | ) | |
$ | 685,131 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated | |
$ | — | | |
$ | 622 | | |
$ | 9,343 | | |
$ | — | | |
$ | 181 | | |
$ | 55 | | |
$ | — | | |
$ | — | | |
$ | 10,201 | |
Collectively evaluated | |
| 34,885 | | |
| 153,273 | | |
| 306,824 | | |
| 66,225 | | |
| 93,485 | | |
| 5,617 | | |
| 21,131 | | |
| — | | |
| 681,440 | |
Total | |
$ | 34,885 | | |
$ | 153,895 | | |
$ | 316,167 | | |
$ | 66,225 | | |
$ | 93,666 | | |
$ | 5,672 | | |
$ | 21,131 | | |
$ | — | | |
$ | 691,641 | |
A breakdown
of the allowance for loan losses and recorded investment in loans as of and for the year ended December 31, 2014 is as follows:
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
Construction | | |
Real
Estate- Residential | | |
Real
Estate-
Commercial | | |
Commercial-
Syndicated | | |
Commercial-
Other | | |
Consumer | | |
Tax
Exempt | | |
Not
Specifically
Allocated | | |
Total | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for Loan Losses: | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 372 | | |
$ | 1,373 | | |
$ | 4,431 | | |
$ | 218 | | |
$ | 445 | | |
$ | 64 | | |
$ | — | | |
$ | 755 | | |
$ | 7,658 | |
Charge-offs | |
| (162 | ) | |
| (88 | ) | |
| (656 | ) | |
| (178 | ) | |
| (116 | ) | |
| (83 | ) | |
| — | | |
| — | | |
| (1,283 | ) |
Recoveries | |
| 56 | | |
| 126 | | |
| 439 | | |
| — | | |
| 37 | | |
| 18 | | |
| — | | |
| — | | |
| 676 | |
Provision | |
| (14 | ) | |
| (632 | ) | |
| (932 | ) | |
| 1,007 | | |
| 716 | | |
| 55 | | |
| — | | |
| (200 | ) | |
| — | |
Ending balance | |
$ | 252 | | |
$ | 779 | | |
$ | 3,282 | | |
$ | 1,047 | | |
$ | 1,082 | | |
$ | 54 | | |
$ | — | | |
$ | 555 | | |
$ | 7,051 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 40,808 | | |
$ | 152,091 | | |
$ | 303,945 | | |
$ | 65,429 | | |
$ | 88,045 | | |
$ | 6,075 | | |
$ | 22,964 | | |
$ | — | | |
$ | 679,357 | |
ALL | |
| (252 | ) | |
| (779 | ) | |
| (3,282 | ) | |
| (1,047 | ) | |
| (1,082 | ) | |
| (54 | ) | |
| — | | |
| (555 | ) | |
| (7,051 | ) |
Recorded Investment | |
$ | 40,556 | | |
$ | 151,312 | | |
$ | 300,663 | | |
$ | 64,382 | | |
$ | 86,963 | | |
$ | 6,021 | | |
$ | 22,964 | | |
$ | (555 | ) | |
$ | 672,306 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending Balance: | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated | |
$ | — | | |
$ | 849 | | |
$ | 12,101 | | |
$ | — | | |
$ | 848 | | |
$ | 13 | | |
$ | — | | |
$ | — | | |
$ | 13,811 | |
Collectively evaluated | |
| 40,808 | | |
| 151,242 | | |
| 291,844 | | |
| 65,429 | | |
| 87,197 | | |
| 6,062 | | |
| 22,964 | | |
| — | | |
| 665,546 | |
Total | |
$ | 40,808 | | |
$ | 152,091 | | |
$ | 303,945 | | |
$ | 65,429 | | |
$ | 88,045 | | |
$ | 6,075 | | |
$ | 22,964 | | |
$ | — | | |
$ | 679,357 | |
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
A summary
of past due loans at September 30, 2015 and December 31, 2014 is as follows:
| |
| |
| |
|
| |
September 30, 2015 |
| |
| 30-89
Days
Past Due
(accruing) | | |
| 90
Days
or More
Past Due
or on
Non-accrual | | |
| Total | |
| |
| | | |
| | | |
| | |
Construction | |
$ | 87 | | |
$ | — | | |
$ | 87 | |
Real estate – Residential | |
| 639 | | |
| 521 | | |
| 1,160 | |
Real estate – Commercial | |
| 846 | | |
| 2,866 | | |
| 3,712 | |
Commercial-Syndicated | |
| — | | |
| — | | |
| — | |
Commercial-Other | |
| 1 | | |
| 181 | | |
| 182 | |
Consumer | |
| 28 | | |
| 55 | | |
| 83 | |
Tax exempt | |
| — | | |
| — | | |
| — | |
Total | |
$ | 1,601 | | |
$ | 3,623 | | |
$ | 5,224 | |
| |
| December
31, 2014 |
| |
| 30-89
Days
Past Due
(accruing) | | |
| 90
Days
or More
Past Due
or on
Non-accrual | | |
| Total | |
| |
| | | |
| | | |
| | |
Construction | |
$ | — | | |
$ | — | | |
$ | — | |
Real estate – Residential | |
| 313 | | |
| 849 | | |
| 1,162 | |
Real estate – Commercial | |
| 996 | | |
| 3,461 | | |
| 4,457 | |
Commercial-Syndicated | |
| — | | |
| — | | |
| — | |
Commercial-Other | |
| 11 | | |
| 832 | | |
| 843 | |
Consumer | |
| 35 | | |
| 13 | | |
| 48 | |
Tax exempt | |
| — | | |
| — | | |
| — | |
Total | |
$ | 1,355 | | |
$ | 5,155 | | |
$ | 6,510 | |
Credit
Quality: Management utilizes a risk grading matrix on each of the Company’s commercial loans. Loans are graded on a
scale of 0001 to 0007. 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.
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 is normally profitable
year-to-year but may experience an occasional loss.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
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, but that are 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
with this rating do not expose the Bank to sufficient risk to warrant adverse classification. Includes loans deemed to have weaknesses,
but are less than 90 days past due.
0007
– Have well defined weaknesses and trends that jeopardize the repayment of the loan. Range from workout to legal. Includes
loans that are on nonaccrual and/or are 90 days or more past due.
In
addition to the risk grading on commercial loans, management utilizes a risk grading process on its real estate mortgage, consumer,
and municipal loans when the loan becomes past due 90 days or more and/or is moved to nonaccrual status.
Below is
a breakdown of loans by risk grading as of September 30, 2015:
| |
| |
| |
| |
| |
|
| |
| 0001-0005 | | |
| 0006A | | |
| 0006B | | |
| 0007(1) | | |
| Total | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial-Syndicated | |
$ | 59,389 | | |
$ | — | | |
$ | 4,016 | | |
$ | 2,820 | | |
$ | 66,225 | |
Commercial-Other | |
| 89,110 | | |
| 2,889 | | |
| 1,232 | | |
| 435 | | |
| 93,666 | |
Real estate – Commercial | |
| 274,452 | | |
| 26,414 | | |
| 3,494 | | |
| 12,319 | | |
| 316,679 | |
Construction | |
| 33,529 | | |
| 1,169 | | |
| — | | |
| 187 | | |
| 34,885 | |
| |
| 456,480 | | |
| 30,472 | | |
| 8,742 | | |
| 15,761 | | |
| 511,455 | |
Real estate - Residential | |
| 151,180 | | |
| 1,379 | | |
| 200 | | |
| 1,136 | | |
| 153,895 | |
Consumer | |
| 5,617 | | |
| — | | |
| — | | |
| 55 | | |
| 5,672 | |
Tax exempt | |
| 21,131 | | |
| — | | |
| — | | |
| — | | |
| 21,131 | |
Total | |
$ | 634,408 | | |
$ | 31,851 | | |
$ | 8,942 | | |
$ | 16,952 | | |
| 692,153 | |
Deferred origination fees, net of costs | |
| | | |
| | | |
| | | |
| | | |
| (512 | ) |
Total loans | |
| | | |
| | | |
| | | |
| | | |
$ | 691,641 | |
Percent of Total
Loans | |
| 91.6 | % | |
| 4.6 | % | |
| 1.3 | % | |
| 2.5 | % | |
| 100.0 | % |
(1) | Included
in the 0007 risk grading are $6.8 million of loans that are evaluated but not considered impaired because, in the event of default,
no loss is expected, therefore they are included in loans that are collectively evaluated for the general allowance for loan losses
(“ALL”) allocation. |
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
Below is
a breakdown of loss by risk grading as of December 31, 2014:
| |
| |
| |
| |
| |
|
| |
| 0001-0005 | | |
| 0006A | | |
| 0006B | | |
| 0007(1) | | |
| Total | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial-Syndicated | |
$ | 60,694 | | |
$ | 4,735 | | |
$ | — | | |
$ | — | | |
$ | 65,429 | |
Commercial-Other | |
| 81,530 | | |
| 4,224 | | |
| 1,240 | | |
| 1,051 | | |
| 88,045 | |
Real estate – Commercial | |
| 255,711 | | |
| 26,124 | | |
| 5,632 | | |
| 16,979 | | |
| 304,446 | |
Construction | |
| 38,679 | | |
| 1,153 | | |
| 783 | | |
| 193 | | |
| 40,808 | |
| |
| 436,614 | | |
| 36,236 | | |
| 7,655 | | |
| 18,223 | | |
| 498,728 | |
Real estate - Residential | |
| 148,835 | | |
| 1,299 | | |
| 414 | | |
| 1,543 | | |
| 152,091 | |
Consumer | |
| 6,062 | | |
| — | | |
| — | | |
| 13 | | |
| 6,075 | |
Tax exempt | |
| 21,994 | | |
| 970 | | |
| — | | |
| — | | |
| 22,964 | |
Total | |
$ | 613,505 | | |
$ | 38,505 | | |
$ | 8,069 | | |
$ | 19,779 | | |
| 679,858 | |
Deferred origination fees, net of costs | |
| | | |
| | | |
| | | |
| | | |
| (501 | ) |
Total loans | |
| | | |
| | | |
| | | |
| | | |
$ | 679,357 | |
Percent
of Total Loans | |
| 90.2 | % | |
| 5.7 | % | |
| 1.2 | % | |
| 2.9 | % | |
| 100.0 | % |
(1)
Included in the 0007 risk grading are $6.0 million of loans that are evaluated but not considered impaired because, in the
event of default, no loss is expected, therefore they are included in loans that are collectively evaluated for the general ALL
allocation.
Loan
balances with a risk grading of 0005 or better were $634.4 million as of September 30, 2015, representing 91.6% of the total loan
portfolio, versus $613.5 million as of December 31, 2014, representing 90.2% of the total loan portfolio.
Loan
balances with a risk grading of 0006A decreased by $6.7 million since December 31, 2014. The decrease resulted primarily from
a $3.5 million loan for which the underlying collateral was sold and $3.4 million was applied to the loan. The remaining $0.1
million loan balance was charged off. Additionally, $6.6 million of loan balances were downgraded to risk category 0006B, of which
$4.4 million related to one syndicated loan relationship, $1.0 million of loans were upgraded to risk categories 0001-0005 and
$5.3 million of loan payments and payoffs were received. This decrease was offset in part by $3.8 million of loans being upgraded
from 0006B and 0007 as well as $5.9 million of credits that were downgraded from categories 0001-0005.
Loan
balances with a risk grading of 0006B have increased by $0.9 million since December 31, 2014. The increase resulted primarily
from $6.6 million of loans downgraded from risk grading 0006A and $0.2 million upgraded from category 0007 offset in part by $1.7
million of payments and payoffs received and $4.2 million of loan balances upgraded to risk category 0006A and categories 0001-0005.
Loan
balances with risk grading of 0007 decreased $2.8 million from December 31, 2014. This decrease resulted from $3.6 million of
payments and payoffs were received, $1.3 million of loan balances charged off, collateral supporting $0.3 million of loan balances
being moved to other real estate and $0.8 million loan balances were upgraded to categories 0001-0005. Offsetting these reductions
are $3.2 million of loan balances downgraded from categories 0001-0005 and 0006A.
| 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 Company’s 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.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar amounts in thousands)
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 that 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 Company’s 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 regulators 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.
Information
regarding impaired loans as of September 30, 2015 is as follows:
IMPAIRED
LOANS AND ALLOCATED ALLOWANCE
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
September 30, 2015 | |
Construction | | |
Real Estate-
Residential | | |
Real
Estate-
Commercial | | |
Commercial- Syndicated | | |
Commercial- Other | | |
Consumer | | |
Tax Exempt | | |
Not
Specifically
Allocated | | |
Totals | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | 36 | | |
$ | 1,055 | | |
$ | — | | |
$ | — | | |
$ | 48 | | |
$ | — | | |
$ | — | | |
$ | 1,139 | |
Unpaid principal balance | |
| — | | |
| 43 | | |
| 1,264 | | |
| — | | |
| — | | |
| 52 | | |
| — | | |
| — | | |
| 1,359 | |
Related Allowance | |
| — | | |
| 7 | | |
| 209 | | |
| — | | |
| — | | |
| 4 | | |
| — | | |
| — | | |
| 220 | |
With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | 579 | | |
$ | 8,079 | | |
$ | — | | |
$ | 181 | | |
$ | 3 | | |
$ | — | | |
$ | — | | |
$ | 8,842 | |
Unpaid principal balance | |
| — | | |
| 579 | | |
| 8,079 | | |
| — | | |
| 181 | | |
| 3 | | |
| — | | |
| — | | |
| 8,842 | |
Related Allowance | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | 615 | | |
$ | 9,134 | | |
$ | — | | |
$ | 181 | | |
$ | 51 | | |
$ | — | | |
$ | — | | |
$ | 9,981 | |
Unpaid principal balance | |
| — | | |
| 622 | | |
| 9,343 | | |
| — | | |
| 181 | | |
| 55 | | |
| — | | |
| — | | |
| 10,201 | |
Related allowance | |
| — | | |
| 7 | | |
| 209 | | |
| — | | |
| — | | |
| 4 | | |
| — | | |
| — | | |
| 220 | |
Average recorded investment during quarter | |
$ | — | | |
$ | 803 | | |
$ | 9,498 | | |
$ | — | | |
$ | 256 | | |
$ | 64 | | |
$ | — | | |
$ | — | | |
$ | 10,621 | |
Interest income recognized while impaired during the period | |
$ | — | | |
$ | 2 | | |
$ | 71 | | |
$ | — | | |
$ | 4 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 77 | |
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar
amounts in thousands)
Information
regarding impaired loans as of December 31, 2014 is as follows:
IMPAIRED
LOANS AND ALLOCATED ALLOWANCE
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
December 31, 2014 | |
Construction | | |
Real Estate-
Residential | | |
Real
Estate-
Commercial | | |
Commercial- Syndicated | | |
Commercial- Other | | |
Consumer | | |
Tax Exempt | | |
Not
Specifically
Allocated | | |
Totals | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | 83 | | |
$ | 1,367 | | |
$ | — | | |
$ | — | | |
$ | 1 | | |
$ | — | | |
$ | — | | |
$ | 1,451 | |
Unpaid principal balance | |
| — | | |
| 168 | | |
| 2,008 | | |
| — | | |
| 634 | | |
| 2 | | |
| — | | |
| — | | |
| 2,812 | |
Related allowance | |
| — | | |
| 85 | | |
| 641 | | |
| — | | |
| 634 | | |
| 1 | | |
| — | | |
| — | | |
| 1,361 | |
With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | 681 | | |
$ | 10,093 | | |
$ | — | | |
$ | 214 | | |
$ | 11 | | |
$ | — | | |
$ | — | | |
$ | 10,999 | |
Unpaid principal balance | |
| — | | |
| 681 | | |
| 10,093 | | |
| — | | |
| 214 | | |
| 11 | | |
| — | | |
| — | | |
| 10,999 | |
Related allowance | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recorded investment | |
$ | — | | |
$ | 764 | | |
$ | 11,460 | | |
$ | — | | |
$ | 214 | | |
$ | 12 | | |
$ | — | | |
$ | — | | |
$ | 12,450 | |
Unpaid principal balance | |
| — | | |
| 849 | | |
| 12,101 | | |
| — | | |
| 848 | | |
| 13 | | |
| — | | |
| — | | |
| 13,811 | |
Related allowance | |
| — | | |
| 85 | | |
| 641 | | |
| — | | |
| 634 | | |
| 1 | | |
| — | | |
| — | | |
| 1,361 | |
Average recorded investment during quarter | |
$ | 408 | | |
$ | 532 | | |
$ | 13,031 | | |
$ | — | | |
$ | 228 | | |
$ | 3 | | |
$ | — | | |
$ | — | | |
$ | 14,202 | |
Interest income recognized while impaired during the period | |
$ | — | | |
$ | 5 | | |
$ | 351 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 356 | |
Management
regularly monitors impaired loan relationships. In the event facts and circumstances change, an additional PFLL may be necessary.
Nonperforming
loans are as follows:
NONPERFORMING
LOANS
| |
September 30, 2015 | | |
June 30, 2015 | | |
March 31, 2015 | | |
December 31, 2014 | | |
September 30, 2014 | |
Nonaccrual loans | |
$ | 3,352 | | |
$ | 4,708 | | |
$ | 5,731 | | |
$ | 5,155 | | |
$ | 5,647 | |
Loans restructured in a troubled debt restructuring, nonaccrual | |
| 271 | | |
| 62 | | |
| — | | |
| — | | |
| 256 | |
Total nonperforming loans (“NPLs”) | |
$ | 3,623 | | |
$ | 4,770 | | |
$ | 5,731 | | |
$ | 5,155 | | |
$ | 5,903 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Restructured loans, accruing | |
$ | 6,578 | | |
$ | 6,816 | | |
$ | 6,907 | | |
$ | 8,656 | | |
$ | 8,656 | |
During
the quarter ended September 30, 2015, $0.3 million of additional loan balances became nonaccrual, of which $0.2 million related
to a previously restructured, accruing loan. This increase was offset by $0.3 million of payments received during the third quarter
of 2015, $0.2 million in loans brought current, and $0.6 million of nonaccrual loan balances charged off. One nonaccrual loan
was transferred to other real estate owned during the third quarter of 2015, totaling $0.3 million.
One
loan of $0.1 million was restructured during the third quarter of 2015 but continues to accrue interest as it is in compliance
with its restructured terms.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar
amounts in thousands)
| 9. | Other
Real Estate Owned, Net |
Other
real estate owned is summarized as follows:
| |
| |
| |
For
the nine months ended September
30, | |
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Beginning balance | |
$ | 5,093 | | |
$ | 8,566 | |
Transfer of net realizable value to other real estate owned | |
| 372 | | |
| 586 | |
Sale proceeds | |
| (539 | ) | |
| (1,437 | ) |
Net gain from disposal of other real estate owned | |
| 32 | | |
| 48 | |
Valuation allowance related to properties disposed | |
| (177 | ) | |
| (1,179 | ) |
Total other real estate owned | |
| 4,781 | | |
| 6,584 | |
Valuation allowance for losses | |
| (804 | ) | |
| (1,597 | ) |
Total other real estate owned, net | |
$ | 3,977 | | |
$ | 4,987 | |
Changes
in the valuation allowance for losses on total other real estate owned were as follows:
| |
| |
| |
For
the nine months ended September
30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Beginning balance | |
$ | 827 | | |
$ | 2,268 | |
Provision charged to operations | |
| 154 | | |
| 508 | |
Amounts related to properties disposed | |
| (177 | ) | |
| (1,179 | ) |
Balance at end of period | |
$ | 804 | | |
$ | 1,597 | |
The
foreclosure process commences on consumer real estate loans when a borrower becomes 120 or greater days delinquent in accordance
with Consumer Finance Protection Bureau guidelines. Foreclosure procedures and timelines may vary depending on a variety of factors,
including where the property is located. At both September 30, 2015 and December 31, 2014, the recorded investment in consumer
mortgage loans that were in the process of foreclosure was $0.3 million. Additionally, $0.2 million at September 30, 2015 and
$0.3 million at December 31, 2014 of loans serviced for and guaranteed by FHLMC were in the process of foreclosure. Although these
loans continue to be serviced by the Bank, these loans are sold to FHLMC once originated and therefore, no balances are included
in the Company’s balance sheet. At September 30, 2015, $1.4 million of consumer mortgage properties were held as other real
estate owned.
Consumer
mortgage properties are derecognized as mortgage loans and classified as Other Real Estate Owned when the Bank has physical possession
of and legal title to the property, regardless of whether foreclosure process has been completed. At both September 30, 2015 and
December 31, 2014, titles relating to all of the consumer mortgage loan properties classified as Other Real Estate Owned had been
transferred to the Company.
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.
Table of Contents
BAYLAKE CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar
amounts in thousands, except per share data)
Management
regularly reviews the carrying amount of the Company’s 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 the
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 carryforward periods, experience
with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary
differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences.
The evaluation is based on current tax laws as well as management’s expectations of future performance. At September 30,
2015 and December 31, 2014, the Company determined that no valuation allowance was required to be taken against the deferred income
tax asset.
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 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 U.S. GAAP.
The
Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2012 and for Wisconsin state income
taxes for years before 2011. The Internal Revenue Service (“IRS”) conducted audits of the Company’s 2011 federal
income tax return in 2013 and of the Company’s 2012 federal tax return in 2014. There were no significant adjustments related
to the audits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease
in the next twelve months.
The
Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The
Bank owns a 99.2% interest (500 shares) in United Financial Services, Incorporated (“UFS, Inc.”), a data processing
company. During the third quarter of 2014, a reorganization of UFS, Inc. was launched with the intent of providing a more favorable
structure to UFS, Inc. and its shareholders, including the Bank. This transaction was completed in the fourth quarter of 2014.
As part of this reorganization, UFS, LLC was formed. Collectively, UFS, Inc. and UFS, LLC are referred to as “UFS.”
UFS, Inc. owns a 50.2% profits interest in UFS, LLC. Under the new structure, the Bank owns a 49.8% indirect profits interest
in UFS, LLC through its 99.2% ownership of UFS, Inc. As part of the transaction, the Bank paid $0.7 million to UFS, LLC’s
other 49.8% shareholder during the fourth quarter of 2014 as reimbursement of costs borne by that shareholder resulting from the
overall restructuring transaction. Approximately $0.1 million of that reimbursement was returned to the Bank in the first quarter
of 2015 due to a revision of the amount calculated. The transaction was settled during the second quarter of 2015 with the Bank
making a $0.2 million additional reimbursement to the other shareholder.
In
addition to the ownership interest, the Bank and UFS, Inc. have a common member on each of their respective Boards of Directors.
The investment in this entity is carried on the Bank’s balance sheet under the equity method of accounting and the pro rata
share of its net income is included in noninterest income in the consolidated statement of operations and increases the Bank’s
investment in UFS. As dividends are received from UFS, Inc. the Bank’s investment is reduced. The carrying value of the
Bank’s investment in UFS, Inc. was $4.9 million at September 30, 2015 and $4.6 million at December 31, 2014. The book value
of UFS, Inc. was approximately $9,903 per share and $9,279 per share at September 30, 2015 and December 31, 2014, respectively.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar
amounts in thousands)
12. Mortgage
Servicing Rights
The
Company has rights 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 such loans are sold. On
a quarterly basis, MSRs are valued based on a model that calculates their fair value using assumptions comparable to those used
by market participants in estimating the present value of future net servicing income.
Changes
in the carrying value of MSRs are as follows:
MORTGAGE
SERVICING RIGHTS
| |
| |
|
| |
For
the three months ended
September 30, 2015 | | |
For
the nine months ended
September 30, 2014 | |
| |
2015 |
| |
2014 |
| |
2015 |
| |
2014 |
|
Balance at beginning of period | |
$ | 872 | | |
$ | 864 | | |
$ | 841 | | |
$ | 967 | |
Additions from loans sold with servicing retained | |
| 28 | | |
| 20 | | |
| 82 | | |
| 51 | |
Loan payments and payoffs | |
| (22 | ) | |
| (19 | ) | |
| (65 | ) | |
| (64 | ) |
Changes in valuation | |
| (3 | ) | |
| 22 | | |
| 17 | | |
| (67 | ) |
Fair value of MSRs at the end of period | |
$ | 875 | | |
$ | 887 | | |
$ | 875 | | |
$ | 887 | |
Unpaid
principal balance of loans serviced for others was $123.6 million and $123.2 million at September 30, 2015 and September 30, 2014,
respectively.
During
2009 and 2010, the Company issued 10% Convertible Notes due June 30, 2017 totaling $9.5 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
thereunder.
The
Convertible Notes accrued interest at a fixed rate of 10% per annum upon issuance and until maturity or earlier conversion or
redemption. Interest was payable quarterly, in arrears, on January 1, April 1, July 1, and October 1 of each year. The Convertible
Notes were convertible into shares of common stock at the 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 the fifth anniversary of issuance, each holder of the Convertible Notes could convert up to 100% (at the discretion of
the holder) of the original principal amount into shares of common stock at the Conversion Ratio. Beginning on July 1, 2014, the
Company was entitled to redeem the notes in whole or in part. A notice of redemption superseded and took priority over any notice
of conversion. On October 1, 2014, one-half of the original principal amounts were mandatorily convertible into common stock at
the Conversion Ratio if voluntary conversion had not occurred. The principal amount of any Convertible Notes that were not converted
was payable at maturity on June 30, 2017.
Beginning
January 1, 2014, the Company began redeeming Convertible Notes at the investors’ option under the terms described in the
preceding paragraph. In 2014, $6.1 million of Convertible Notes converted into 1,220,000 shares of the Company’s common
stock under this option. On October 1, 2014, an additional $1.7 million of Convertible Notes was converted into 330,000 shares
of the Company’s common stock under the mandatory conversion provision of the Convertible Notes. During the first quarter
of 2015, $0.6 million of Convertible Notes were converted into 115,000 shares of the Company’s common stock at the option
of the holder. On April 1, 2015, the remaining $1.1 million of Convertible Notes were converted in full under the voluntary conversion
provisions into 215,000 shares of the Company’s Common Stock, resulting in no remaining outstanding Convertible Notes at
September 30, 2015.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar
amounts in thousands)
| 14. | Troubled
Debt Restructuring |
A
troubled debt restructuring (“TDR”) is a loan modification resulting from a borrower experiencing financial difficulty
and the Bank granting a concession to that borrower that would not otherwise be considered except for the borrower’s financial
difficulties. A TDR may be on either accrual or nonaccrual status based upon the performance of the borrower and management’s
assessment of collectability. A TDR remains classified as such until a sufficient period of performance under the restructured
terms has occurred, generally six months, at which time it is no longer deemed to be a TDR.
Changes
in TDRs for the nine months ended September 30, 2015 are as follows:
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Construction | | |
Real Estate- Residential | | |
Real Estate-
Commercial | | |
Commercial-
Syndicated | | |
Commercial-
Other | | |
Consumer | | |
Tax
Exempt | | |
Total | |
Accruing | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
January 1, 2015 | |
$ | — | | |
$ | — | | |
$ | 8,640 | | |
$ | — | | |
$ | 16 | | |
$ | — | | |
$ | — | | |
$ | 8,656 | |
Principal payments | |
| — | | |
| — | | |
| (152 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (152 | ) |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Advances | |
| — | | |
| 2 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2 | |
New restructured | |
| — | | |
| 99 | | |
| — | | |
| — | | |
| — | | |
| 62 | | |
| — | | |
| 161 | |
Transfers out of TDRs | |
| — | | |
| — | | |
| (1,792 | ) | |
| — | | |
| (16 | ) | |
| — | | |
| — | | |
| (1,808 | ) |
Transfers to nonaccrual | |
| — | | |
| — | | |
| (219 | ) | |
| — | | |
| — | | |
| (62 | ) | |
| — | | |
| (281 | ) |
September 30, 2015 | |
$ | — | | |
$ | 101 | | |
$ | 6,477 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 6,578 | |
Nonaccrual | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
January 1, 2015 | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Principal payments | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (10 | ) | |
| — | | |
| (10 | ) |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Advances | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
New restructured | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Transfers to other real estate owned | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Transfers from accruing | |
| — | | |
| — | | |
| 219 | | |
| — | | |
| — | | |
| 62 | | |
| — | | |
| 281 | |
September 30, 2015 | |
$ | — | | |
$ | — | | |
$ | 219 | | |
$ | — | | |
$ | — | | |
$ | 52 | | |
$ | — | | |
$ | 271 | |
Totals | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
January 1, 2015 | |
$ | — | | |
$ | — | | |
$ | 8,640 | | |
$ | — | | |
$ | 16 | | |
$ | — | | |
$ | — | | |
$ | 8,656 | |
Principal payments | |
| — | | |
| — | | |
| (152 | ) | |
| — | | |
| — | | |
| (10 | ) | |
| — | | |
| (162 | ) |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Advances | |
| — | | |
| 2 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2 | |
New restructured | |
| — | | |
| 99 | | |
| — | | |
| — | | |
| — | | |
| 62 | | |
| — | | |
| 161 | |
Transfers out of TDRs | |
| — | | |
| — | | |
| (1,792 | ) | |
| — | | |
| (16 | ) | |
| — | | |
| — | | |
| (1,808 | ) |
Transfers to other real estate owned | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
September 30, 2015 | |
$ | — | | |
$ | 101 | | |
$ | 6,696 | | |
$ | — | | |
$ | — | | |
$ | 52 | | |
$ | — | | |
$ | 6,849 | |
During
the first quarter of 2015, one loan totaling $0.1 million was restructured and was subsequently transferred to nonaccrual status
during the quarter ended June 30, 2015. During the third quarter of 2015, one loan was restructured and one loan previously restructured
for $0.2 million was changed from accruing status to nonaccrual. Also during the nine months ended September 30, 2015, $1.8 million
of accruing restructured loans were removed from restructured status due to compliance with their restructured terms for at least
six months.
Table of Contents
BAYLAKE
CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Dollar
amounts in thousands)
A
summary of troubled debt restructurings as of September 30, 2015 and December 31, 2014 is as follows:
| |
| | |
| | |
| | |
| |
| |
September 30, 2015 | | |
December 31, 2014 | |
| |
Number of
Modifications | | |
Recorded
Investment | | |
Number of
Modifications | | |
Recorded
Investment | |
| |
| | |
| | |
| | |
| |
Construction | |
| — | | |
$ | — | | |
| — | | |
$ | — | |
Real estate – Residential | |
| 1 | | |
| 101 | | |
| — | | |
| — | |
Real estate – Commercial | |
| 7 | | |
| 6,696 | | |
| 9 | | |
| 8,640 | |
Commercial-Syndicated | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial-Other | |
| — | | |
| — | | |
| 1 | | |
| 16 | |
Consumer | |
| 1 | | |
| 52 | | |
| — | | |
| — | |
Tax exempt | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
| 9 | | |
$ | 6,849 | | |
| 10 | | |
$ | 8,656 | |
A summary
of troubled debt restructurings as of September 30, 2015 by restructure type is as follows:
| |
| |
| |
|
| |
Accruing | | |
Nonaccruing | | |
Total | |
| |
| | | |
| | | |
| | |
Payment schedule changes | |
$ | 6,428 | | |
$ | 271 | | |
$ | 6,699 | |
Interest rate reduction | |
| 150 | | |
| — | | |
| 150 | |
Total | |
$ | 6,578 | | |
$ | 271 | | |
$ | 6,849 | |
| 15. | Commitments
and Contingencies |
The
following is a summary of the Company’s off-balance sheet commitments, all of which were lending-related commitments:
LENDING
RELATED COMMITMENTS
| |
| |
|
| |
September
30,
2015 | | |
December
31,
2014 | |
| |
| | | |
| | |
Commitments to fund unused home equity line loans | |
$ | 58,979 | | |
$ | 59,163 | |
Commitments to fund 1-4 family loans | |
| 720 | | |
| 2,606 | |
Commitments to fund residential real estate construction loans | |
| 4,275 | | |
| 3,014 | |
Commitments unused on commercial lines of credit loans | |
| 187,297 | | |
| 154,405 | |
Commitments unused on consumer lines of credit loans | |
| 9,716 | | |
| 9,333 | |
Total commitments to extend credit | |
$ | 260,987 | | |
$ | 228,521 | |
Financial standby letters of credit | |
$ | 29,881 | | |
$ | 9,757 | |
The
increase in financial standby letters of credit during the first nine months of 2015 resulted from origination of a standby letter
of credit with the FHLB on behalf of a municipal customer as collateral for their interest bearing deposit balances. This fluctuating
balance financial standby letter of credit (“LOC”) through the FHLB Public Link Deposit program is supported by loan
and/or investment security collateral as an alternative to directly pledging of investment securities to specific customers. Under
the agreement with this customer, the amount of the LOC may increase or decrease quarterly with a maximum limit between $20.0
million to $40.0 million, depending on the time of year. At September 30, 2015, this LOC was $20 million.
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. We have two wholly- owned subsidiaries: Admiral Asset Management, LLC (“Admiral”) and Baylake
Bank (the “Bank”). Admiral was formed in the fourth quarter of 2013 as a registered investment advisory subsidiary
to provide investment advisory services in addition to those offered by the Bank. The Bank is a Wisconsin state-chartered bank
that provides a wide variety of loan, deposit and other banking products and services, as well as a full range of trust, investment
and treasury management services to its business, retail and municipal customers. 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 September 30, 2015
and December 31, 2014 and our consolidated results of operations for the three and nine months ended September 30, 2015 and 2014.
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, 2014.
Important
Information for Investors
This
report contains a discussion of a proposed merger transaction involving us and Nicolet Bankshares, Inc. (“Nicolet”).
In connection with the proposed merger, Nicolet and we will file a joint proxy statement/prospectus on Form S-4 and other relevant
documents concerning the merger with the Securities and Exchange Commission (the “SEC”). BEFORE MAKING ANY VOTING
OR INVESTMENT DECISION, INVESTORS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS TO BE FILED WITH
THE SEC IN CONNECTION WITH THE PROPOSED MERGER OR INCORPORATED BY REFERENCE IN THE JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY
WILL CONTAIN IMPORTANT INFORMATION ABOUT NICOLET, BAYLAKE AND THE PROPOSED MERGER. When available, the joint proxy statement/prospectus
will be delivered to our shareholders and shareholders of Nicolet. Investors may obtain copies of the joint proxy statement/prospectus
and other relevant documents (as they become available) free of charge on Nicolet’s website at www.nicoletbank.com Copies
of the documents filed with the SEC by us will be available free of charge on our website at www.baylake.com
We,
Nicolet and certain of our respective directors, executive officers and other members of management and employees may be deemed
to be participants in the solicitation of proxies from our shareholders and the shareholders of Nicolet in connection with the
proposed merger. Information about our directors and officers, and the directors and executive officers of Nicolet will be included
in the joint proxy statement/prospectus for the proposed transaction filed with the SEC. Information about the directors and executive
officers of Nicolet is also included in its annual report on Form 10-K for the year ended December 31, 2014, which was filed with
the SEC on March 9, 2015. Information about our directors and executive officers of Baylake is also included in the proxy statement
for our 2015 annual meeting of shareholders, which was filed with the SEC on April 24, 2015. Additional information regarding
the interests of such participants and other persons who may be deemed participants in the transaction will be included in the
joint proxy statement/prospectus and the other relevant documents filed with the SEC when they become available.
Forward-Looking
Information
This
discussion and analysis of consolidated financial condition and results of operations, and other sections of this report, including
the discussion set forth below regarding our pending merger with and into Nicolet, 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 or Nicolet’s control that may cause our, Nicolet’s or the combined company’s 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 our, Nicolet’s or the combined company’s actual results to
differ materially from the forward-looking statements: (1) our and Nicolet’s businesses may not integrate successfully or
the integration may be more difficult, time-consuming or costly than expected; (2) the expected growth opportunities and cost
savings from the transaction may not be fully realized or may take longer to realize than expected; (3) revenues following the
transaction may be lower than expected as a result of losses of customers or other reasons, including issues arising in connection
with integration of the two banks; (4) deposit attrition, operating costs, customer loss and business disruption following the
transaction, including difficulties in maintaining relationships with employees, may be greater than expected; (5) governmental
approvals of the transaction may not be obtained on the proposed terms or expected timeframe; (6) the terms of the proposed truncation
may need to be modified to satisfy such approvals or conditions; (7) our or Nicolet’s shareholders may fail to approve the
transaction; (8) reputational risks and the reaction of the companies’ customers to the transaction; (9) diversion of management
time on merger related issues: (10) changes in asset quality and credit risk; (11) the cost and availability of capital: (12)
customer acceptance of the combined company’s products and services; (13) customer borrowing, repayment, investment and
deposit practices; (14) the introduction, withdrawal, success and timing of business initiatives; (15) the impact, extent and
timing of technological changes; (16) severe catastrophic events in our or Nicolet’s geographic area; (17) a weakening of
the economies in which the combined company will conduct operations may adversely affect its operating results; (18) the U.S.
legal and regulatory framework, including those associated with the Dodd Frank Wall Street Reform and Consumer Protection Act,
could adversely affect the operation results of the combined company: (19) the interest rate environment may compress margins
and adversely affect net interest income: and (20) competition from other financial services companies in the companies’
markets could adversely affect operations. Additional factors that could cause our results to differ materially from those described
in the forward-looking statements can be found under “Risk Factors” in Item 1A of Part II of this Quarterly Report
on Form 10-Q and Part I of our Annual Report on Form 10-K for the year ended December 31, 2014, which are incorporated herein
by reference, and other risks that may be identified or discussed in this Form 10-Q. All subsequent written and oral forward-looking
statements concerning us, Nicolet or the proposed merger or other matters and attributable to us, Nicolet or any person actin
on either of our behalf are expressly qualified in their entirety by the cautionary statement above. Neither we nor Nicolet undertake
any obligation to update any forward-looking statement, whether written or oral, to reflect the circumstances or events that occur
after the date the forward-looking statements are made.
Table of Contents
Acquisition
Agreement
On
May 8, 2015, we announced the signing of a definitive agreement to acquire NEW Bancshares, Inc. (“NEW”) in a cash
and stock transaction. NEW, headquartered in Kewaunee, Wisconsin, is the parent company of Union State Bank (“Union”),
which operates four locations in northeast Wisconsin. At September 30, 2015, Union had approximately $81.9 million in total assets,
$48.4 million in loans, and $72.5 million in deposits.
Under
the terms of the agreement, we will pay approximately $9.7 million in total consideration in the merger, subject to adjustment
as described in the merger agreement, approximately 60% of which will be paid in cash and 40% in our common stock. In order to
complete the acquisition transaction as structured, we may borrow up to $6.0 million with an anticipated final maturity of ten
years. The transaction is subject to regulatory and NEW shareholder approval as well as certain closing conditions. The transaction
is expected to be completed in the fourth quarter of 2015.
Plan
of Merger
On
September 8, 2015, we announced jointly with Nicolet the signing of an Agreement and Plan of Merger (the “Nicolet Merger
Agreement”), pursuant to which we will merge with and into Nicolet (the “Nicolet Merger”). Following the Nicolet
Merger, Baylake Bank, our wholly-owned bank subsidiary, will merge with and into Nicolet National Bank, Nicolet’s wholly-owned
bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all bank branches operating under the Nicolet
National Bank brand.
We
and Nicolet have agreed to prepare and file with the Securities and Exchange Commission (the “SEC”) a registration
statement on Form S-4, which will include a joint proxy statement/prospectus. As soon as practical following effectiveness of
the registration statement on Form S-4, we and Nicolet will each call a special shareholders meeting to approve the Nicolet Merger
Agreement. Subject to the provision relating to change in recommendation in connection with a superior proposal, our and Nicolet’s
respective boards of directors have agreed to recommend that our respective shareholders approve the Nicolet Merger Agreement.
Merger
Consideration. Pursuant to the terms and subject to the conditions set forth in the Nicolet Merger Agreement, at
the effective time of the Nicolet Merger, each issued and outstanding share of our common stock (other than our common stock we
hold in treasury or held directly or indirectly by Nicolet, which shares will be canceled prior to any exchange therefor), will
be exchanged for the right to receive 0.4517 of a share of Nicolet common stock and cash in lieu of any fractional shares.
Treatment
of Restricted Stock and Stock Options. At the effective time of the Nicolet Merger, and subject to the exchange
ratio outlined in the Nicolet Merger Agreement, each restricted stock unit and option granted by us, whether vested or unvested,
shall be substituted with an equity award issued under a Nicolet stock plan or adjusted under a Baylake stock plan to be exercisable
for Nicolet common stock.
Board
of Directors and Executive Officers. Upon consummation of the Nicolet Merger, the board of directors of Nicolet
will consist of sixteen members, eight selected by the Nicolet board of directors and eight selected by our board of directors.
The Nominating Committee of the Nicolet board of directors shall consist of two directors each from Nicolet and us for a period
of two years after closing. Nicolet will establish a Co-Chairman and Co-Chief Executive Officer structure for Robert B. Atwell
and Robert J. Cera, and deliver an employment agreement to Robert J. Cera as of the closing date.
Closing
Conditions. Consummation of the Nicolet Merger is subject to certain mutual closing conditions, including, without
limitation, (i) the approval of the Nicolet Merger Agreement by our shareholders and the shareholders of Nicolet; (ii) Nicolet
listing its common stock on NASDAQ; (iii) the registration statement on Form S-4 shall become effective; (iv) the absence of certain
legal proceedings challenging the Nicolet Merger; and (v) the receipt of all required regulatory approvals.
Table of Contents
In
addition to these mutual conditions, each party’s obligation to consummate the Nicolet Merger is subject to certain other
conditions, including, without limitation, (i) the accuracy of each party’s representations and warranties; and (ii) each
party’s compliance with its covenants and agreements contained in the Nicolet Merger Agreement.
Representations,
Warranties and Covenants. The Nicolet Merger Agreement includes detailed representations, warranties and covenant
provisions that are customary for transactions of this type.
No
Solicitation. The Nicolet Merger Agreement restricts the ability of either us or Nicolet to solicit proposals or
enter into agreements relating to alternative business combination transactions. However, should either Nicolet or we receive
an unsolicited bona fide Acquisition Proposal (as defined in the Nicolet Merger Agreement), and the receiving entity’s board
of directors concludes in good faith that such proposal is or would reasonably be likely to result in an Acquisition Proposal
which is superior to that described in the Nicolet Merger Agreement, such entity may negotiate with the third party. The receiving
party may not terminate the Nicolet Merger Agreement in order to enter into an agreement with respect to such an Acquisition Proposal
without providing the other party to the Nicolet Merger Agreement five business days to respond to such unsolicited Acquisition
Proposal, during which time the parties to the Nicolet Merger Agreement shall cooperate with each other with the intent of engaging
in good faith negotiations.
Termination. The
Nicolet Merger Agreement contains certain termination rights for both us and Nicolet, including, among others, the right to terminate,
by either party, (i) if the required regulatory approvals are not obtained; (ii) if the Nicolet Merger is not consummated on or
before September 8, 2016; (iii) if Nicolet’s shareholders or our shareholders fail to approve the Nicolet Merger Agreement;
(iv) upon a breach by either Nicolet or us of our respective representations, warranties, covenants or other agreements contained
in the Nicolet Merger Agreement; or (v) if Nicolet or we become subject to a law or order that prevents the Nicolet Merger from
being consummated. In addition, Nicolet or we may terminate the Nicolet Merger Agreement to enter into an alternative business
combination transaction pursuant to a superior proposal as described above. If the Nicolet Merger Agreement is terminated under
certain circumstances by Nicolet or us, the terminating party has agreed to pay the other party a termination fee of $7.0 million.
Branch
Closure
In
January 2015, we announced our intention to close one of our branches in Brown County. This closure was consummated in April 2015,
however, we retained the property for use in future bank operations. In October 2015, we entered into a lease with Nicolet whereas
Nicolet will lease this branch facility from us for a nominal rent. The term of the lease expires on the date the Nicolet Merger
is completed.
Land
Held for Sale
In
April 2015, we accepted an offer to sell a vacant real estate property we own located in Neenah, Wisconsin. At December 31, 2014,
the property was reflected in our Consolidated Balance Sheet as Premises and Equipment held for sale in the amount of $0.8 million.
During the third quarter of 2015, the carrying value of the property was reduced by $0.1 million to expedite the sale of the property.
This transaction is expected to be completed no later than December 31, 2015.
Branch
Facilities
In
June 2015, we entered into an agreement to purchase, subject to conditions of the agreement, a building and the accompanying real
estate in Sister Bay, Wisconsin in the amount of $1.1 million. The transaction was completed in September 2015. Renovations of
$1.2 million are planned and, post renovation, we intend to relocate our current Sister Bay branch to the new facility.
In
October 2015, we entered into an agreement to renovate our branch facility in Appleton, Wisconsin. The renovations are expected
to be completed in the second quarter of 2016 at an estimated cost of $1.1 million. The branch facility is anticipated to remain
accessible during usual business hours throughout the renovation.
Table of Contents
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 (“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 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 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 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.
Other
Real Estate Owned: Other real estate owned acquired through or in lieu of loan foreclosure, or bank facilities no longer intended
for use in bank operations are initially recorded at 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 the 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.
Table of Contents
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. For
Goodwill valuation purposes, the Goodwill of our organization is collectively evaluated as one segment. The operations are managed
and financial performance is evaluated on a company wide basis. All of the financial service operations are considered by management
to be aggregated in the reportable operating segment. 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 2014, 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 accounting principles generally accepted in the United States of America 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, 2014, our most recent annual valuation exceeded
our carrying value by a range of 51% to 61%.
As
of September 30, 2015 the total balance of goodwill held on our balance sheet was $7.2 million. As of September 30, 2015, there
are no conditions that would require goodwill impairment to be reevaluated.
Table of Contents
Results
of Operations
The
following table sets forth our results of operations and related summary information for the three and nine month periods ended
September 30, 2015 and 2014.
SUMMARY
RESULTS OF OPERATIONS
(Dollar
amounts in thousands, except per share data)
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Net income, as reported | |
$ | 2,291 | | |
$ | 2,457 | | |
$ | 6,880 | | |
$ | 6,681 | |
Earnings per share-basic, as reported | |
$ | 0.25 | | |
$ | 0.29 | | |
$ | 0.74 | | |
$ | 0.82 | |
Earnings per share-diluted, as reported | |
$ | 0.24 | | |
$ | 0.26 | | |
$ | 0.73 | | |
$ | 0.73 | |
Cash dividends declared per share | |
$ | 0.09 | | |
$ | 0.08 | | |
$ | 0.25 | | |
$ | 0.22 | |
| |
| | | |
| | | |
| | | |
| | |
Return on average assets | |
| 0.90 | % | |
| 0.98 | % | |
| 0.93 | % | |
| 0.91 | % |
Return on average equity | |
| 8.32 | % | |
| 9.64 | % | |
| 8.49 | % | |
| 9.18 | % |
Efficiency ratio (1) | |
| 67.64 | % | |
| 64.52 | % | |
| 67.86 | % | |
| 68.24 | % |
Efficiency ratio (non-GAAP)-tax equivalent (1) | |
| 66.97 | % | |
| 63.30 | % | |
| 66.58 | % | |
| 66.98 | % |
| |
| | | |
| | | |
| | | |
| | |
Efficiency Ratio: GAAP to Non-GAAP reconciliation (1) | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Non-interest Expense | |
$ | 6,944 | | |
$ | 6,508 | | |
$ | 21,269 | | |
$ | 20,270 | |
Less: significant, nonrecurring expenses | |
| — | | |
| — | | |
| 163 | (2) | |
| — | |
Non-interest Expense (non-GAAP) | |
$ | 6,944 | | |
$ | 6,508 | | |
$ | 21,106 | | |
$ | 20,270 | |
| |
| | | |
| | | |
| | | |
| | |
Net-interest Income | |
$ | 7,993 | | |
$ | 7,758 | | |
$ | 24,110 | | |
$ | 23,194 | |
Plus: Tax equivalent adjustment relating to tax exempt loans and investments | |
| 247 | | |
| 262 | | |
| 755 | | |
| 791 | |
Net-interest income (non-GAAP) – tax equivalent | |
$ | 8,240 | | |
$ | 8,020 | | |
$ | 24,865 | | |
$ | 23,985 | |
| |
| | | |
| | | |
| | | |
| | |
Non-interest Income | |
$ | 2,273 | | |
$ | 2,329 | | |
$ | 7,231 | | |
$ | 6,511 | |
Less: net securities gains | |
| 132 | | |
| 71 | | |
| 384 | | |
| 232 | |
Less: net gains relating to disposal of fixed assets | |
| 12 | | |
| (4 | ) | |
| 12 | | |
| 1 | |
Non-interest income (non-GAAP) | |
$ | 2,129 | | |
$ | 2,262 | | |
$ | 6,835 | | |
$ | 6,278 | |
| |
| | | |
| | | |
| | | |
| | |
(1)
Efficiency ratio is calculated as follows: non-interest expense less significant, non-recurring expenses divided by the
sum of taxable equivalent net interest income plus non-interest income, excluding net investment security gains, net gains on
sale of fixed assets and land held for sale and significant, non-recurring income. This efficiency ratio is presented on a tax
equivalent basis, which adjusts net interest income for the tax-favored status of certain loans and investment securities. Management
believes this measure to be the preferred industry measurement of net interest income as it enhances the comparability of such
income arising from both taxable and non-taxable sources. However, as calculated, this ratio is not considered to be in accordance
with accounting principles generally accepted in the United State of America (“U.S. GAAP”) and as such, the ratio
is presented in accordance with U.S. GAAP as well.
(2)
The non-deductible payment of $0.2 million to the other member of UFS, LLC pursuant to an agreement between the Bank and
the other member relating to the Bank’s pro rata share of the tax liability resulting from a reorganization transaction
involving UFS that occurred in the fourth quarter of 2014, but was not settled until the second quarter of 2015 and is not considered
to be usual or recurring due to its nature.
Table of Contents
Net
income of $2.3 million for the three months ended September 30, 2015 decreased from net income of $2.5 million for the comparable
period in 2014. Net interest income before provision for loan losses was $8.0 million for the three months ended September 30,
2015 and $7.8 million for the comparable period last year. The increase resulted from a $0.2 million reduction in interest expense,
as well as a modest increase in interest income. No PFLL was charged to operations
for either the three months ended September 30, 2015 or of the same period of 2014. Noninterest income of $2.3 million for the
three months ended September 30, 2015 was relatively unchanged compared to the same period of 2014. Noninterest expense increased
$0.4 million (6.7%) to $6.9 million for the third quarter of 2015 compared to $6.5 million for the third quarter of 2014. During
the third quarter of 2015, salaries and benefits costs increased $0.3 million compared to the same quarter of 2014 due to more
highly compensated employees hired earlier in 2015. Legal and professional costs increased $0.1 million for the third quarter
of 2015 compared to the third quarter of 2014 related to the pending acquisition of NEW announced in May of 2015 and the pending
merger with Nicolet, announced in September 2015. Additionally, losses related to unauthorized wires of $0.2 million was incurred
in the third quarter of 2015. These increases in costs were offset in part by a $0.2 million decrease in costs relating to the
operation of other real estate owned during the quarter ended September 30, 2015 compared to the same quarter in 2014.
Net
income of $6.9 million for the nine months ended September 30, 2015 increased from net income of $6.7 million for the comparable
period in 2014. Net interest income before provision for loan losses was $24.1 million for the nine months ended September 30,
2015 and $23.2 million for the comparable period last year. The increase resulted from a $0.2 million increase in interest income
as well as a $0.7 million reduction in interest expense. A PFLL of $0.2 million was charged to operations for the nine months
ended September 30, 2015 compared to no PFLL recorded during the comparable period of 2014. Noninterest income increased $0.7
million (11.1%) to $7.2 million for the nine months of 2015 versus $6.5 million for the comparable period of 2014. The increase
resulted primarily from a $0.3 million increase in gain on sale of loans, a $0.2 million increase in fees for other services to
customers, a $0.2 million increase in gains from sale of securities, and a $0.1 million increase in net change in valuation of
mortgage servicing rights offset by a $0.1 million decrease in other income. Noninterest expense increased $1.0 million (4.9%)
to $21.3 million for the nine months ended September 30, 2015 compared to $20.3 million for the comparable period 2014. This increase
resulted primarily due to costs recorded during the first quarter of 2015 related to the departure of one of our senior executive
officers, the addition of key personnel in the commercial banking and wealth management areas, the non-deductible payment of $0.2
million under the agreement with the other member of UFS in settlement of the UFS reorganization, increased legal and professional
costs of $0.2 million relating to the pending NEW acquisition and Nicolet merger and costs associated with the branding initiative
that began in the fourth quarter of 2014 offset in part by a $0.2 million decline in costs relating to the operation of other
real estate owned properties.
Net
Interest Income:
Net
interest income is the largest component of our operating income and represents the difference between interest earned on loans,
investments and other interest-earning assets, offset by the interest expense attributable to the deposits and borrowings that
fund such assets. Interest rate fluctuations, together with changes in the volume and types of interest-earning assets and interest-bearing
liabilities, combine to affect total net interest income. This analysis discusses net interest income on a tax-equivalent basis
in order to provide comparability among the various types of earned interest income. Tax-exempt interest income is adjusted to
a level that reflects such income as if it were fully taxable.
Net
interest income on a tax-equivalent basis was $8.2 million for the three months ended September 30, 2015, compared to $8.0 million
for the same period in 2014. Average earning assets increased $17.8 million (1.9%) to $930.2 million for the third quarter of
2015 compared to $912.4 million for the quarter ended September 30, 2014. Increases of $57.5 million (9.1%) in average loans,
$0.2 million (0.5%) in tax exempt securities and $0.6 million (1.1%) in federal funds sold and interest bearing due from financial
institution balances were offset by decreases of $40.6 million (22.1%) in average taxable securities. The yield on average earning
assets for the quarter ended September 30, 2015 decreased 4 bps to 3.79% compared to 3.83% for the same period in 2014 due to
the average yield on taxable securities decreasing 16 bps to 2.60% for the third quarter of 2015 from 2.76% for the same period
in 2014, a decrease in the yield on tax exempt securities of 52 bps to 4.45% for the third quarter of 2015 from 4.97% for the
same period in 2014, and a decrease in yield on loans of 10 bps to 4.26% during the third quarter of 2015 compared 4.36% for the
same period in 2014. We have continued to focus on prudent loan growth during the third quarter of 2015 in an effort to utilize
low cost funding available through liquid cash balances, primarily from increased customer demand deposits and repurchase agreements.
Average
interest-bearing liabilities for the three months ended September 30, 2015 decreased to $716.3 million from $736.3 million for
the same period in 2014, but were offset by an increase of noninterest-bearing demand deposits from $150.5 million for the three
months ended September 30, 2014 to $180.4 million for the three months ended September 30, 2015. The decrease in interest-bearing
liabilities is primarily due to use of available deposit balances and due from financial institutions balance to facilitate a
reduction of average FHLB advances of $29.6 million (41.2%). Additionally, average interest-bearing liabilities decreased due
to the conversion of the remaining Convertible Notes during the second quarter of 2015.
The
cost of average interest-bearing liabilities for the three months ended September 30, 2015 declined 7 bps from 0.42% for the
third quarter of 2014 to 0.35% for the third quarter of 2015. The reductions in the cost of interest-bearing liabilities
resulted primarily from a reduction of interest costs associated with repurchase agreements and certificates of deposits as
higher cost term deposits matured into the lower cost products, offset in part by an increase in the cost of FHLB
borrowings as lower cost variable rate advances without associated prepayment penalties were paid off prior to maturity due
to available liquidity.
Table of Contents
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 increased from 3.41% for the third quarter of 2014 to 3.45% for the third quarter
of 2015, resulting from the 7 bp decrease in the cost of interest-bearing liabilities, offset in part by the 4 bp decrease in
the yield on interest-bearing assets.
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 third quarter of 2015 was 3.52% compared to 3.49% for
the same period in 2014.
Net
interest income on a tax-equivalent basis was $24.9 million for the nine months ended September 30, 2015, compared to $24.0 million
for the same period in 2014. The increase for the nine months of 2015 resulted primarily from a $0.2 million increase in interest
income on interest-earning assets and a $0.7 million decrease in interest expense on interest-bearing liabilities compared to
the same period in 2014. Average earning assets increased $18.0 million (2.0%) to $911.3 million for the nine months ended September
30, 2015 compared to $893.3 million for the comparable nine month period of 2014. An increase of $51.6 million (8.2%) in average
loans, and $0.2 million (0.5%) in federal funds sold and interest-bearing due from financial institutions balances was partially
offset by a decrease of $33.7 million (18.1%) in average taxable securities and a decrease of $0.1 million (0.2%) in tax exempt
securities. The yield on average earning assets decrease 5 bps from 3.99% for the nine months ended September 30, 2014 to 3.94%
for the nine months ended September 30, due to the average yield on loans declining 17 bps from 4.49% to 4.32% for the same period,
and a decrease in the yield on tax exempt securities of 36 bps to 4.63% for the first nine months of 2015 from 4.99% for the same
period in 2014. This was offset in part by an increase in yield on taxable securities from 2.70% for the first nine months of
2014 to 2.82% for the first nine months of 2015. We have continued to focus on prudent loan growth during the third quarter of
2015 in an effort to utilize low cost funding available through liquid cash balances, primarily increased customer demand deposits
and repurchase agreements.
Average
interest-bearing liabilities decreased from $739.7 million for first nine months of 2014 to $720.6 million for the same period
in 2015, offset by an increase of noninterest-bearing demand deposits from $132.0 million for the first nine months in 2014 to
$157.3 million for the nine months ended September 30, 2015.
The
cost of average interest-bearing liabilities declined 11 bps from 0.48% for the nine months ended September 30, 2014 to 0.37%
or the same period of 2015. The reductions in the cost of interest-bearing liabilities resulted primarily from a reduction of
interest costs associated with repurchase agreements and non-core money market deposits.
Interest
rate spread increased from 3.51% for the first nine months of 2014 to 3.57% for the first nine months of 2015 resulting from the
5 bp decrease in the yield on interest-earning assets, offset by the 11 bp decrease in the cost of interest-bearing liabilities.
Net
interest margin for the nine months ended September 30, 2015 was 3.65% compared to 3.59% for the same period in 2014.
The
Company continues to focus on increasing lending into broader markets as well as on retaining and expanding customer relationships
in an effort to increase yields on interest-earning assets as well as decrease the reduce the reliance on wholesale funding sources,
in turn, maintaining the improving the net interest margin.
Table of Contents
NET
INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS
(Dollar
amounts in thousands)
| |
Three
months ended September
30, 2015 | | |
Three
months ended September
30, 2014 | |
| |
Average Balance | | |
Interest Income/ Expense | | |
Average Yield/ Rate | | |
Average Balance | | |
Interest Income/ Expense | | |
Average Yield/ Rate | |
ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Average Interest-Earning Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans (1,2) | |
$ | 687,401 | | |
$ | 7,389 | | |
| 4.26 | % | |
$ | 629,857 | | |
$ | 6,927 | | |
| 4.36 | % |
Taxable securities | |
| 143,311 | | |
| 930 | | |
| 2.60 | % | |
| 183,934 | | |
| 1,270 | | |
| 2.76 | % |
Tax exempt securities (1) | |
| 46,183 | | |
| 514 | | |
| 4.45 | % | |
| 45,939 | | |
| 570 | | |
| 4.97 | % |
Federal funds sold and interest-bearing due from financial institutions | |
| 53,275 | | |
| 34 | | |
| 0.25 | % | |
| 52,671 | | |
| 34 | | |
| 0.25 | % |
Total interest-earning assets | |
| 930,170 | | |
| 8,867 | | |
| 3.79 | % | |
| 912,401 | | |
| 8,801 | | |
| 3.83 | % |
Noninterest earning assets | |
| 83,186 | | |
| | | |
| | | |
| 83,305 | | |
| | | |
| | |
Total assets | |
$ | 1,013,356 | | |
| | | |
| | | |
$ | 995,706 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ EQUITY | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Average Interest-Bearing Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-bearing deposits | |
$ | 611,767 | | |
| 328 | | |
| 0.21 | % | |
$ | 604,208 | | |
| 399 | | |
| 0.26 | % |
Federal funds purchased | |
| — | | |
| — | | |
| — | % | |
| — | | |
| — | | |
| — | % |
Customer repurchase agreements | |
| 46,179 | | |
| 13 | | |
| 0.11 | % | |
| 39,762 | | |
| 25 | | |
| 0.24 | % |
Federal Home Loan Bank advances | |
| 42,268 | | |
| 219 | | |
| 2.06 | % | |
| 71,867 | | |
| 175 | | |
| 0.96 | % |
Convertible promissory notes | |
| — | | |
| — | | |
| — | % | |
| 4,375 | | |
| 118 | | |
| 10.83 | % |
Subordinated debentures | |
| 16,100 | | |
| 67 | | |
| 1.63 | % | |
| 16,100 | | |
| 65 | | |
| 1.58 | % |
Total interest-bearing liabilities | |
| 716,314 | | |
| 627 | | |
| 0.34 | % | |
| 736,312 | | |
| 782 | | |
| 0.42 | % |
Demand deposits | |
| 180,444 | | |
| | | |
| | | |
| 150,467 | | |
| | | |
| | |
Accrued expenses and other liabilities | |
| 7,325 | | |
| | | |
| | | |
| 7,781 | | |
| | | |
| | |
Stockholders’ equity | |
| 109,273 | | |
| | | |
| | | |
| 101,146 | | |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 1,013,356 | | |
| | | |
| | | |
$ | 995,706 | | |
| | | |
| | |
Net interest income | |
| | | |
$ | 8,240 | | |
| | | |
| | | |
$ | 8,019 | | |
| | |
Interest rate spread (3) | |
| | | |
| | | |
| 3.45 | % | |
| | | |
| | | |
| 3.41 | % |
Net interest margin (4) | |
| | | |
| | | |
| 3.52 | % | |
| | | |
| | | |
| 3.49 | % |
| (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. |
Table of Contents
NET
INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS
(Dollar amounts in thousands)
| |
Nine
months ended September
30, 2015 | | |
Nine
months ended September
30, 2014 | |
| |
Average Balance | | |
Interest Income/ Expense | | |
Average Yield/ Rate | | |
Average Balance | | |
Interest Income/ Expense | | |
Average Yield/ Rate | |
ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Average Interest-Earning Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans (1,2) | |
$ | 680,600 | | |
$ | 22,000 | | |
| 4.32 | % | |
$ | 628,975 | | |
$ | 21,113 | | |
| 4.49 | % |
Taxable securities | |
| 152,434 | | |
| 3,225 | | |
| 2.82 | % | |
| 186,153 | | |
| 3,768 | | |
| 2.70 | % |
Tax exempt securities (1) | |
| 45,259 | | |
| 1,573 | | |
| 4.63 | % | |
| 45,339 | | |
| 1,697 | | |
| 4.99 | % |
Federal funds sold and interest-bearing due from financial institutions | |
| 32,973 | | |
| 62 | | |
| 0.25 | % | |
| 32,795 | | |
| 62 | | |
| 0.25 | % |
Total interest-earning assets | |
| 911,266 | | |
| 26,860 | | |
| 3.94 | % | |
| 893,262 | | |
| 26,640 | | |
| 3.99 | % |
Noninterest earning assets | |
| 82,163 | | |
| | | |
| | | |
| 83,294 | | |
| | | |
| | |
Total assets | |
$ | 993,429 | | |
| | | |
| | | |
$ | 976,556 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ EQUITY | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Average Interest-Bearing Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total interest-bearing deposits | |
$ | 607,936 | | |
| 1,003 | | |
| 0.22 | % | |
$ | 600,493 | | |
| 1,226 | | |
| 0.27 | % |
Federal funds purchased | |
| 29 | | |
| — | | |
| 1.14 | % | |
| 105 | | |
| 1 | | |
| 0.67 | % |
Customer repurchase agreements | |
| 47,116 | | |
| 50 | | |
| 0.14 | % | |
| 41,009 | | |
| 74 | | |
| 0.24 | % |
Federal Home Loan Bank advances | |
| 49,019 | | |
| 716 | | |
| 1.95 | % | |
| 74,755 | | |
| 589 | | |
| 1.05 | % |
Convertible promissory notes | |
| 357 | | |
| 27 | | |
| 10.00 | % | |
| 7,232 | | |
| 571 | | |
| 10.52 | % |
Subordinated debentures | |
| 16,100 | | |
| 198 | | |
| 1.62 | % | |
| 16,100 | | |
| 194 | | |
| 1.59 | % |
Total interest-bearing liabilities | |
| 720,557 | | |
| 1,994 | | |
| 0.37 | % | |
| 739,694 | | |
| 2,655 | | |
| 0.48 | % |
Demand deposits | |
| 157,280 | | |
| | | |
| | | |
| 132,022 | | |
| | | |
| | |
Accrued expenses and other liabilities | |
| 7,309 | | |
| | | |
| | | |
| 7,554 | | |
| | | |
| | |
Stockholders’ equity | |
| 108,283 | | |
| | | |
| | | |
| 97,286 | | |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 993,429 | | |
| | | |
| | | |
$ | 976,556 | | |
| | | |
| | |
Net interest income | |
| | | |
$ | 24,866 | | |
| | | |
| | | |
$ | 23,985 | | |
| | |
Interest rate spread (3) | |
| | | |
| | | |
| 3.57 | % | |
| | | |
| | | |
| 3.51 | % |
Net interest margin (4) | |
| | | |
| | | |
| 3.65 | % | |
| | | |
| | | |
| 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. |
Table of Contents
RATE/VOLUME ANALYSIS (1)
(Dollar
amounts in thousands)
The
following table presents an analysis of changes in net interest income resulting from changes in average volumes in interest-earning
assets and interest-bearing liabilities, and average rates earned and paid for the three months ended September 30, 2015 compared
to the three months ended September 30, 2014:
| |
| Increase
(Decrease) due to (1) |
| |
| Volume | | |
| Rate
| | |
| Net | |
Average Interest-Earning Assets: | |
| | | |
| | | |
| | |
Loans | |
$ | 619 | | |
$ | (157 | ) | |
$ | 462 | |
Taxable securities | |
| (228 | ) | |
| (112 | ) | |
| (340 | ) |
Tax exempt securities | |
| 3 | | |
| (59 | ) | |
| (56 | ) |
Federal funds sold and interest-bearing due from financial institutions | |
| — | | |
| — | | |
| — | |
Total interest-earning assets | |
$ | 394 | | |
$ | (328 | ) | |
$ | 66 | |
| |
| | | |
| | | |
| | |
Average Interest-Bearing Liabilities: | |
| | | |
| | | |
| | |
Total interest-bearing deposits | |
$ | (25 | ) | |
$ | (46 | ) | |
$ | (71 | ) |
Customer repurchase agreements and federal funds purchased | |
| 3 | | |
| (15 | ) | |
| (12 | ) |
FHLB advances | |
| (94 | ) | |
| 138 | | |
| 44 | |
Convertible promissory notes | |
| (59 | ) | |
| (59 | ) | |
| (118 | ) |
Subordinated debentures | |
| — | | |
| 2 | | |
| 2 | |
Total interest-bearing liabilities | |
$ | (175 | ) | |
$ | 20 | | |
$ | (155 | ) |
Net interest income | |
$ | 569 | | |
$ | (348 | ) | |
$ | 221 | |
(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 91.8% for the three months ended September 30, 2015 increased from 91.6% for the
three months ended September 30, 2014.
RATE/VOLUME
ANALYSIS (1)
(Dollar
amounts in thousands)
The
following table presents an analysis of changes in net interest income resulting from changes in average volumes in interest-earning
assets and interest-bearing liabilities, and average rates earned and paid for the nine months ended September 30, 2015 compared
to the nine months ended September 30, 2014:
| |
| Increase
(Decrease) due to (1) |
| |
| Volume | | |
| Rate
| | |
| Net | |
Average Interest-Earning Assets: | |
| | | |
| | | |
| | |
Loans | |
$ | 1,688 | | |
$ | (801 | ) | |
$ | 887 | |
Taxable securities | |
| (613 | ) | |
| 70 | | |
| (543 | ) |
Tax exempt securities | |
| (4 | ) | |
| (120 | ) | |
| (124 | ) |
Federal funds sold and interest-bearing due from financial institutions | |
| 1 | | |
| (1 | ) | |
| — | |
Total interest-earning assets | |
$ | 1,072 | | |
$ | (852 | ) | |
$ | 220 | |
| |
| | | |
| | | |
| | |
Average Interest-Bearing Liabilities: | |
| | | |
| | | |
| | |
Total interest-bearing deposits | |
$ | (70 | ) | |
$ | (153 | ) | |
$ | (223 | ) |
Customer repurchase agreements and federal funds purchased | |
| 10 | | |
| (35 | ) | |
| (25 | ) |
FHLB advances | |
| (253 | ) | |
| 380 | | |
| 127 | |
Convertible promissory notes | |
| (520 | ) | |
| (24 | ) | |
| (544 | ) |
Subordinated debentures | |
| — | | |
| 4 | | |
| 4 | |
Total interest-bearing liabilities | |
$ | (833 | ) | |
$ | 172 | | |
$ | (661 | ) |
Net interest income | |
$ | 1,905 | | |
$ | (1,024 | ) | |
$ | 881 | |
(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.
The
ratio of average interest-earning assets to average total assets for the nine months ended September 30, 2015 was 91.7%, increased
from 91.5% for the same period in 2014.
Table of Contents
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 the nature
and volume of past-due, nonaccrual and/or classified loans, 5) changes in the 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.
No
PFLL was recorded for the three months ended September 30, 2015 and 2014. No new loans were identified as being impaired during
the third quarter of 2015. There were $0.4 million of net loan charge-offs for the three months ended September 30, 2015, consistent
with $0.4 million for the same period 2014.
A
PFLL of $0.2 million was recorded for the nine months ended September 30, 2015 compared to no PFLL recorded in the same period
of 2014. Net loan charge-offs for the nine months ended September 30, 2015 and 2014 were $0.7 million and $0.6 million, respectively.
Net annualized charge-offs to average loans was 0.15% for the nine months ended September 30, 2015 compared to 0.13% for the same
period in 2014. For the nine months ended September 30, 2015, nonperforming loans decreased by $1.5 million (29.7%) to $3.6 million
from $5.2 million at December 31, 2014. Refer to the “Financial Condition - Risk Management and the Allowance for Loan
Losses” and “Financial Condition - Nonperforming Loans, Potential Problem Loans and Other Real Estate Owned”
sections following for more information related to nonperforming loans. On an ongoing basis, we continue to monitor the level
of risk inherent in our loan portfolio in relationship to the return we receive on these loans to achieve an appropriate balance
between the two and modify our underwriting expectations as appropriate.
Our
management believes that the ALL at September 30, 2015 is 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.
Table of Contents
Noninterest
Income:
The
following table reflects the various components of noninterest income for the three and nine month periods ended September 30,
2015 and 2014, respectively.
NONINTEREST
INCOME
(Dollar
amounts in thousands)
| |
| |
| |
| |
| |
| |
|
| |
Three months ended | | |
Nine months ended | |
| |
September
30,
2015 | | |
September
30,
2014 | | |
%
Change | | |
September
30,
2015 | | |
September
30,
2014 | | |
%
Change | | |
Fees from fiduciary services | |
$ | 295 | | |
$ | 287 | | |
| 2.8 | % | |
$ | 892 | | |
$ | 791 | | |
| 12.8 | % |
Fees from loan servicing | |
| 133 | | |
| 133 | | |
| — | % | |
| 428 | | |
| 433 | | |
| (1.2 | )% |
Charges for other services to customers | |
| 816 | | |
| 830 | | |
| (1.7 | )% | |
| 2,352 | | |
| 2,179 | | |
| 7.9 | % |
Other fee income | |
| 164 | | |
| 173 | | |
| (5.2 | )% | |
| 474 | | |
| 488 | | |
| (2.9 | )% |
Financial services income | |
| 301 | | |
| 281 | | |
| 7.1 | % | |
| 841 | | |
| 799 | | |
| 5.3 | % |
Net gains on sales of loans | |
| 247 | | |
| 199 | | |
| 24.1 | % | |
| 731 | | |
| 452 | | |
| 61.7 | % |
Net change in valuation of mortgage servicing rights, net of payments and payoffs | |
| (25 | ) | |
| 3 | | |
| (933.3 | )% | |
| (48 | ) | |
| (131 | ) | |
| 63.4 | % |
Net gains from sale of securities | |
| 132 | | |
| 71 | | |
| 85.9 | % | |
| 384 | | |
| 232 | | |
| 65.5 | % |
Gains (losses) from sale of fixed assets | |
| 12 | | |
| (4 | ) | |
| 400.0 | % | |
| 12 | | |
| 1 | | |
| 1100.0 | % |
Increase in cash surrender value of life insurance | |
| 78 | | |
| 85 | | |
| (8.2 | )% | |
| 263 | | |
| 287 | | |
| (8.4 | )% |
Equity in income of UFS subsidiary | |
| 213 | | |
| 299 | | |
| (28.8 | )% | |
| 900 | | |
| 881 | | |
| 2.2 | % |
Other income (expense) | |
| (93 | ) | |
| (28 | ) | |
| (232.1 | )% | |
| 2 | | |
| 99 | | |
| (98.0 | )% |
Total Noninterest Income | |
$ | 2,273 | | |
$ | 2,329 | | |
| (2.4 | )% | |
$ | 7,231 | | |
$ | 6,511 | | |
| 11.1 | % |
Included
in the fees for other services to customers in noninterest income on our consolidated statements of operations are service charges
on deposit accounts and other fee income.
Noninterest
income decreased $0.1 million for the three months ended September 30, 2015 versus the comparable period in 2014 primarily resulting
from nominal net gains on sales of securities and gains from sales of loans, offset by a nominal decrease in equity in income
from UFS.
Noninterest
income increased $0.7 million for the nine months ended September 30, 2015 versus the comparable period in 2014. Net gains from
the sale of loans increased $0.3 million (61.7%), gains on sale of securities increased $0.2 million (65.5%), net changes in the
valuation of mortgage servicing rights improved by $0.1 million, and changes for other services to customers increased $0.2 million
(7.9%), all of which were offset by a decrease in other income of $0.1 million (98.0%).
Table of Contents
Noninterest
Expense:
The
following table reflects the various components of noninterest expense for the three and nine months ended September 30, 2015
and 2014.
NONINTEREST
EXPENSE
(Dollar
amounts in thousands)
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Three
months ended | | |
Nine months ended | |
| |
September 30,
2015 | | |
September 30,
2014 | | |
%
Change | | |
September 30,
2015 | | |
September 30,
2014 | | |
%
Change | |
Salaries and employee benefits | |
$ | 3,883 | | |
$ | 3,630 | | |
| 7.0 | % | |
$ | 12,543 | | |
$ | 12,086 | | |
| 3.8 | % |
Occupancy | |
| 550 | | |
| 544 | | |
| 1.1 | % | |
| 1,667 | | |
| 1,618 | | |
| 3.0 | % |
Equipment | |
| 339 | | |
| 328 | | |
| 3.4 | % | |
| 1,020 | | |
| 982 | | |
| 3.9 | % |
Data processing and courier | |
| 243 | | |
| 222 | | |
| 9.5 | % | |
| 706 | | |
| 625 | | |
| 13.0 | % |
Operation of other real estate owned | |
| 178 | | |
| 339 | | |
| (47.5 | )% | |
| 417 | | |
| 646 | | |
| (35.4 | )% |
Business development and advertising | |
| 147 | | |
| 151 | | |
| (2.6 | )% | |
| 562 | | |
| 460 | | |
| 22.2 | % |
Charitable contributions | |
| 7 | | |
| 14 | | |
| (50.0 | )% | |
| 70 | | |
| 43 | | |
| 62.8 | % |
Stationery and supplies | |
| 99 | | |
| 121 | | |
| (18.2 | )% | |
| 282 | | |
| 374 | | |
| 24.6 | % |
Director fees | |
| 104 | | |
| 94 | | |
| 10.6 | % | |
| 296 | | |
| 290 | | |
| 2.1 | % |
FDIC insurance | |
| 147 | | |
| 156 | | |
| (5.8 | )% | |
| 444 | | |
| 456 | | |
| (2.6 | )% |
Audit and legal | |
| 322 | | |
| 201 | | |
| 60.2 | % | |
| 740 | | |
| 530 | | |
| 39.6 | % |
Loan and collection | |
| 16 | | |
| 6 | | |
| 166.7 | % | |
| 50 | | |
| 43 | | |
| 16.3 | % |
Other outside services | |
| 301 | | |
| 250 | | |
| 20.4 | % | |
| 904 | | |
| 876 | | |
| 3.2 | % |
Other operating expenses | |
| 608 | | |
| 452 | | |
| 34.5 | % | |
| 1,568 | | |
| 1,241 | | |
| 26.3 | % |
Total Noninterest Expense | |
$ | 6,944 | | |
$ | 6,508 | | |
| 6.7 | % | |
$ | 21,269 | | |
$ | 20,270 | | |
| 4.9 | % |
Total
noninterest expense increased by $0.4 million to $6.9 million for the three months ended September 30, 2015 compared to $6.5 million
for the same period ended September 30, 2014. During the third quarter of 2015, salaries and benefit costs increased $0.3 million
compared to the same quarter of 2014 due to the addition of more highly compensated employees earlier in 2015. Legal and professional
costs increased $0.1 million for the quarter ended September 30, 2015 compared to the same quarter of 2014 related to the pending
NEW acquisition and the pending merger with Nicolet. Additionally, losses related to unauthorized wires of $0.2 million were incurred
during the third quarter of 2015. These increases were offset in part by a decrease in costs relating to the operation of other
real estate owned of $0.2 million during the third quarter of September 2015 compared to the same quarter of 2014. The noninterest
expense to average assets ratio was 2.7% for the three months ended September 30, 2015, increased slightly from 2.6% for the same
period in 2014.
Total
noninterest expense increased by $1.0 million to $21.3 million for the nine months ended September 30, 2015 compared to $20.3
million for the same period ended September 30, 2014.
Salaries
and employee benefits were $12.5 million for the nine months ended September 30, 2015, compared to $12.1 million for the nine
months ended September 30, 2014. Although the number of full-time equivalent employees decreased from 252 at September 30, 2014
to 247 at September 30, 2015, investment in additional, more highly compensated personnel in key areas of the Bank occurred during
the first quarter of 2015. Additionally, $0.2 million of salary and benefits costs were recorded in the first quarter of 2015
related to the departure of one of our senior executive officers. Commission expense for commissioned salespersons, including
financial advisors and mortgage originators, may impact future salary expense based on the levels of production attained. Included
in 2015 salary expense is $0.3 million of expense related to our long-term equity incentive plan and $0.1 million related to our
performance-based incentive program.
Audit
and legal expenses increased $0.2 million and business development expenses increased $0.1 million for the nine months ended September
30, 2015 compared to the same period of 2014. The increase in audit and legal resulted primarily from costs incurred relating
to the pending acquisition of NEW and the pending merger with Nicolet. During the fourth quarter of 2014, a branding initiative
was begun, resulting in increased business development and advertising cost in the first nine months of 2015 compared to the same
period in 2014. Other operating expenses in the nine months ended September 30, 2015 included $0.2 million relating to the non-deductible
reimbursement paid to the other member of UFS LLC that was not incurred in the same period of 2014.
Table of Contents
The
noninterest expense to average assets ratio was 2.9% for the nine months ended September 30, 2015, increased slightly from 2.8%
for the same period in 2014.
Net
overhead expense is total noninterest expense less total noninterest income. The net overhead expense to average assets ratio
was 1.8% for the three months ended September 30, 2015 increased slightly from 1.7% for three months ended September 30, 2014.
The efficiency ratio represents total noninterest expense as a percentage of the sum of net interest income on a fully taxable
equivalent basis and total noninterest income (excluding net gains on the sale of securities, premises and equipment, branch sales,
land held for sale, and the payment made in conjunction with the UFS reorganization transaction). The efficiency ratio increased
from 64.5% (63.3% non-GAAP, tax equivalent) for the quarter ended September 30, 2014 to 67.4% (67.6% non-GAAP, tax equivalent)
for the quarter ended September 30, 2015, and from 68.2% (67.0% non-GAAP, tax equivalent) for the nine months ended September
30, 2014 to 67.9% (66.6% non-GAAP, tax equivalent) for the nine months ended September 30, 2015. The increased efficiency ratio
is due primarily to the additional costs associated with the acquisition and merger activity. A lower efficiency ratio represents
a more efficient operation
Income
Taxes:
We
recorded an income tax expense of $1.0 million for the three months ended September 30, 2015 versus an expense of $1.1 million
for the same period in 2014. The decrease in tax expense is primarily attributable to a year-over-year decrease in pre-tax income
for the third quarter of 2015 versus the comparable period of 2014. The effective tax rate for the three months ended September
30, 2015 decreased slightly to 31.0% from 31.3% for the same period in 2014.
Income
tax expense recorded for the nine months ended September 30, 2015 was $3.0 million compared to $2.8 million for the same period
in 2014. The increase in tax expense is primarily attributable to an increase in pre-tax income for the first nine months of 2015
versus the same period in 2014. The effective tax rate for the nine months ended September 30, 2015 and 2014 was 30.3% and 29.2%
respectively.
We
maintain net deferred income tax assets for deductible temporary tax differences, such as allowance for loan losses, nonaccrual
loan interest, and other real estate owned valuations as well as net operating loss carry forwards. Our determination of the amount
of our deferred income tax assets to be realized is highly subjective and is based on several factors, including projected future
income, income tax planning strategies, and federal and state income tax rules and regulations. At September 30, 2015, we determined
that no valuation allowance was required to be taken against our net deferred income tax assets. We assess the amount of tax benefits
we may realize in future periods in determining the necessity for any valuation allowance.
Table of Contents
Financial
Condition
Loans:
The
following table reflects the composition (mix) of the loan portfolio:
| |
| | |
| | |
| |
| |
September
30,
2015 | | |
December
31,
2014 | | |
Percent
Change | |
Real estate-mortgage: | |
| | | |
| | | |
| | |
Commercial | |
$ | 316,679 | | |
$ | 304,446 | | |
| 4.0 | % |
1-4 family residential | |
| | | |
| | | |
| | |
First liens | |
| 108,049 | | |
| 106,292 | | |
| 1.7 | % |
Junior liens | |
| 5,895 | | |
| 5,623 | | |
| 4.8 | % |
Home equity | |
| 39,951 | | |
| 40,176 | | |
| (0.6 | )% |
Commercial and agricultural: | |
| | | |
| | | |
| | |
Syndicated | |
| 66,225 | | |
| 65,429 | | |
| 1.2 | % |
Other | |
| 93,666 | | |
| 88,045 | | |
| 6.4 | % |
Real estate-construction | |
| 34,885 | | |
| 40,808 | | |
| (14.5 | )% |
Installment | |
| | | |
| | | |
| | |
Credit cards and related plans | |
| 1,341 | | |
| 1,353 | | |
| (0.9 | )% |
Other | |
| 4,331 | | |
| 4,722 | | |
| (8.3 | )% |
Obligations of states and political subdivisions | |
| 21,131 | | |
| 22,964 | | |
| (8.0 | )% |
Less: Deferred origination fees, net of costs | |
| (512 | ) | |
| (501 | ) | |
| (2.2 | )% |
Less: Allowance for loan losses | |
| (6,510 | ) | |
| (7,051 | ) | |
| 7.7 | % |
Total | |
$ | 685,131 | | |
$ | 672,306 | | |
| 1.9 | % |
Net
loans increased $12.8 million (1.9%) from $672.3 million at December 31, 2014 to $685.1 million at September 30, 2015. In
addition to originating loans, we buy and sell loan participations with other financial institutions, primarily located in markets
we serve. These loans are underwritten to the same lending standards as the loans we originate. Additionally, we purchase syndicated
loans in the national market that represent small portions of large national credits. These credits are also subject to our normal
underwriting guidelines and represent $66.2 million and $65.4 million in loan balances outstanding at September 30, 2015 and December
31, 2014, respectively.
Real
estate loans secured by 1-4 family first lien mortgages totaled $108.0 million at September 30, 2015, an increase of $1.8 million
(1.7%) from December 31, 2014. Other commercial and agricultural loans totaled $93.7 million at September 30, 2015, an increase
of $5.6 million (6.4%) from December 31, 2014. Commercial real estate loans, which totaled $316.7 million at September 30, 2015,
comprised 46.2% of our loan portfolio, up $12.3 million (4.0%) from $304.4 million, at December 31, 2014, comprising 45.3% of
our loan portfolio at that date. We attempt to attain overall loan growth while maintaining a prudent portfolio mix.
Risk
Management and the Allowance for Loan Losses:
The
loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent
credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as
PFLL. See the “Provision for Loan Losses” section discussed earlier. We attempt to control, monitor, and minimize
credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing
and timely review of payment performance. Asset quality administration, including early identification of loans performing in
a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization
of loan losses. Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts
focused on achieving maximum recovery of both principal and interest.
The
ALL at September 30, 2015 was $6.5 million, compared to $7.1 million at December 31, 2014. On a quarterly basis, management reviews
the adequacy of the ALL. The analysis of the ALL consists of three components: (i) specific reserves established for expected
losses relating to impaired loans for which the recorded investment in the loans exceeds its fair value; (ii) general reserves
based on historical loan loss experience for significant loan classes; and (iii) general reserves based on qualitative factors
such as concentrations and changes in portfolio mix and volume. Allocations of the ALL may be made for specific loans but the
entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is
realized.
Table of Contents
On
a regular basis, loan officers review all commercial credit relationships. The loan officers grade commercial credits and the
loan review function validates the grades assigned. In the event that the loan review function downgrades a loan, it is included
in the ALL analysis process at the lower grade. This grading system is in compliance with regulatory classifications. At least
quarterly, all commercial loans that have been deemed impaired are evaluated. In compliance with accounting guidance for impaired
loans, the fair value of the loan is determined based on either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the market price of the loan or, if the loan is collateral dependent, the fair value
of the underlying collateral less the estimated costs to sell. This evaluation may include obtaining supplemental market data
and/or routine site visits to offer support to the evaluation process. If the carrying value of the loan exceeds the fair value
less estimated cost to sell, a specific reserve is established. Such reserves are reviewed by the Delinquent Account Review Team.
We
have two other major components of the ALL that do not pertain to specific loans; “General Reserves – Historical”
and “General Reserves – Other.” We determine General Reserves – Historical based on our historical recorded
charge-offs of loans in particular classes, analyzed as a group. We determine General Reserves – Other by taking into account
such qualitative factors 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 the nature and volume of past-due, nonaccrual and/or classified loans,
5) changes in the 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.
Nonperforming
Loans, Potential Problem Loans and Other Real Estate Owned:
Management
encourages early identification of nonaccrual and problem loans in order to minimize the risk of loss. Nonperforming loans are
defined as nonaccrual loans, loans 90 days or more past due, but still accruing, and nonaccrual loans restructured in a troubled
debt restructuring that have not shown a sufficient period of performance with the restructured terms. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the collection of principal or interest on loans,
it is the practice of management to place such loans on nonaccrual status immediately rather than waiting until the loans become
90 days past due. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest
or earlier as deemed appropriate. When interest accruals are discontinued, interest credited to income is reversed. If collection
is in doubt, cash received on nonaccrual loans is used to reduce principal rather than recorded as interest income. Restructuring
a loan typically involves the granting of some concession to the borrower involving a loan modification such as payment schedule
or interest rate changes. Restructured loans may involve loans that have had a charge-off taken against the loan to reduce the
carrying amount of the loan to fair market value as determined pursuant to accounting guidance for troubled debt restructurings.
NONPERFORMING
ASSETS
(Dollars
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
June 30,
2015 |
|
March 31,
2015 |
|
December 31,
2014 |
|
September 30,
2014 |
|
Nonperforming Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
3,352 |
|
$ |
4,708 |
|
$ |
5,731 |
|
$ |
5,155 |
|
$ |
5,647 |
|
Nonaccrual loans, restructured |
|
|
271 |
|
|
62 |
|
|
— |
|
|
— |
|
|
256 |
|
Total nonperforming loans (“NPLs”) |
|
$ |
3,623 |
|
$ |
4,770 |
|
$ |
5,731 |
|
$ |
5,155 |
|
$ |
5,903 |
|
Other real estate owned, net |
|
|
3,977 |
|
|
4,022 |
|
|
4,195 |
|
|
4,266 |
|
|
4,987 |
|
Total nonperforming assets (“NPAs”) |
|
$ |
7,600 |
|
$ |
8,792 |
|
$ |
9,926 |
|
$ |
9,421 |
|
$ |
10,890 |
|
Restructured loans, accruing(1) |
|
$ |
6,578 |
|
$ |
6,816 |
|
$ |
6,907 |
|
$ |
8,656 |
|
$ |
8,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL to Net Charge-offs (“NCOs”) (annualized) |
|
|
6.57 |
x |
|
11.69 |
x |
|
6.97 |
x |
|
11.62 |
x |
|
8.80 |
x |
NCOs to average loans (annualized) |
|
|
0.15 |
% |
|
0.09 |
% |
|
0.15 |
% |
|
0.10 |
% |
|
0.13 |
% |
ALL to total loans |
|
|
0.94 |
% |
|
1.01 |
% |
|
1.04 |
% |
|
1.18 |
% |
|
1.12 |
% |
NPLs to total loans |
|
|
0.52 |
% |
|
0.70 |
% |
|
0.85 |
% |
|
0.76 |
% |
|
0.93 |
% |
NPAs to total assets |
|
|
0.74 |
% |
|
0.90 |
% |
|
1.00 |
% |
|
0.92 |
% |
|
1.11 |
% |
ALL to NPLs |
|
|
179.69 |
% |
|
145.83 |
% |
|
122.20 |
% |
|
136.78 |
% |
|
119.58 |
% |
(1)
Restructured loans on nonaccrual status are returned to accruing when a sufficient period of performance in accordance with
the restructured terms, generally six months, has passed.
Table of Contents
The
ALL to NPL ratio increased from 136.78% at December 31, 2014 to 179.69% at September 30, 2015 due primarily to a decrease in nonperforming
loans in the first nine months of 2015. During the quarter ended September 30, 2015, other real estate owned declined slightly
due to the sale of two such real estate properties totaling $0.3 million. Offsetting the sale, three properties totaling $0.3
million were transferred into other real estate owned during the quarter ended September 30, 2015.
Restructured
loans accruing at September 30, 2015 decreased $0.2 million from the prior quarter end due to a restructured, accruing loan of
$0.2 million being changed to nonaccrual status. One loan of $0.1 million was added to the restructured loans accruing category
and payments of $0.1 million were received on restructured accruing loans during the quarter ended September 30, 2015. Restructured
loans accruing at September 30, 2015 were $6.6 million, a decrease of $2.1 million during the first nine months of 2015 primarily
due to one restructured accruing loan with modified terms totaling $1.8 million being transferred out of the restructured loan
category upon performance with its restructured terms for a sufficient period of time.
The
following table presents an analysis of our past due loans, excluding nonaccrual loans:
PAST
DUE LOANS (EXCLUDING NONACCRUALS)
30-89
DAYS PAST DUE
(Dollars
amounts in thousands)
| |
September
30,
2015 | | |
June
30,
2015 | | |
March
31,
2015 | | |
December
31,
2014 | | |
September
30,
2014 | |
Secured by real estate | |
$ | 1,572 | | |
$ | 2,454 | | |
$ | 2,303 | | |
$ | 1,309 | | |
$ | 2,603 | |
Commercial, syndicated | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial, other | |
| 1 | | |
| 1 | | |
| 6 | | |
| 11 | | |
| 35 | |
Loans to individuals | |
| 28 | | |
| 5 | | |
| 12 | | |
| 35 | | |
| 18 | |
All other loans | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 1,601 | | |
$ | 2,460 | | |
$ | 2,321 | | |
$ | 1,355 | | |
$ | 2,656 | |
Percentage of total loans | |
| 0.23 | % | |
| 0.36 | % | |
| 0.35 | % | |
| 0.19 | % | |
| 0.42 | % |
As
reflected above, loan balances 30-89 days past due at September 30, 2015 have increased $0.2 million compared to December 31,
2014 but decreased $1.1 million from September 30, 2014. The increase in 30-89 days past due loans during the first nine months
of 2015 occurred primarily in real estate-mortgage balances ($0.3 million) and construction loans ($0.1 million) offset in part
by a decrease in real estate-commercial loans ($0.2 million). Subsequently, $0.4 million of the loans 30-89 days past due at September
30, 2015 were brought current.
Information
regarding other real estate owned is as follows:
OTHER
REAL ESTATE OWNED, NET
(Dollars
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended
September 30,
2015 |
|
Twelve months
ended
December 31,
2014 |
|
Nine
months
ended September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
5,093 |
|
$ |
8,566 |
|
$ |
8,566 |
|
Transfer of loans to other real estate owned |
|
|
372 |
|
|
1,204 |
|
|
586 |
|
Sales proceeds, net |
|
|
(539 |
) |
|
(2,525 |
) |
|
(1,437 |
) |
Net gain from sale of other real estate owned |
|
|
32 |
|
|
19 |
|
|
48 |
|
Valuation allowance recovered upon disposition of other real estate owned |
|
|
(177 |
) |
|
(2,171 |
) |
|
(1,179 |
) |
Total other real estate owned |
|
|
4,781 |
|
|
5,093 |
|
|
6,584 |
|
Valuation allowance for losses |
|
|
(804 |
) |
|
(827 |
) |
|
(1,597 |
) |
Total other real estate owned, net |
|
$ |
3,977 |
|
$ |
4,266 |
|
$ |
4,987 |
|
Table of Contents
VALUATION ALLOWANCE ON
OTHER REAL ESTATE OWNED
(Dollars amounts
in thousands)
| |
Nine
months ended
September
30,
2015 | | |
Twelve
months ended
December 31,
2014 | | |
Nine
months
ended
September 30,
2014 | |
| |
| | | |
| | | |
| | |
Beginning balance | |
$ | 827 | | |
$ | 2,268 | | |
$ | 2,268 | |
Provision charged to operations | |
| 154 | | |
| 730 | | |
| 508 | |
Valuation allowance recovered upon disposition of other real estate owned | |
| (177 | ) | |
| (2,171 | ) | |
| (1,179 | ) |
Ending balance | |
$ | 804 | | |
$ | 827 | | |
$ | 1,597 | |
The
foreclosure process commences on consumer real estate loans when a borrower becomes 120 or greater days delinquent in accordance
with Consumer Finance Protection Bureau guidelines. Foreclosure procedures and timelines may vary depending on a variety of factors,
including where the property in located. At both September 30, 2015 and December 31, 2014, the recorded investment in consumer
mortgage loans that were in the process of foreclosure was $0.3 million. Additionally, $0.2 million at September 30, 2015 and
$0.3 million at December 31, 2014 of loans serviced for and guaranteed by FHLMC were in the process of foreclosure. Although these
loans continue to be serviced by the Bank, these loans are sold to FHLMC once originated and therefore, no balances are included
in the our balance sheet.
Consumer
mortgage properties are derecognized as mortgage loans and classified as other real estate owned when the Bank has control of
the property, regardless of whether legal title has been transferred in the completed foreclosure process. At both September 30,
2015 and December 31, 2014, titles relating to all of the consumer mortgage loan properties classified as other real estate owned
had been transferred to us. At September 30, 2015, $1.4 million of consumer mortgage properties were held as other real estate
owned.
Investment
Portfolio:
The
investment portfolio is intended to provide us with adequate liquidity, flexibility in asset/liability management and an increase
in our earning potential.
At
September 30, 2015, our securities available for sale (“AFS”) decreased $24.8 million (13.6%) to $158.1 million compared
to $182.9 million at December 31, 2014. At September 30, 2015, the AFS investment portfolio represented 15.5% of total assets
compared to 17.9% at December 31, 2014. For the nine months ended September 30, 2015, principal payments of $27.2 million were
received on AFS securities, which included $9.9 million from the maturity or call of such securities. For the nine months ended
September 30, 2015, we purchased $16.2 million of AFS securities and sold $12.8 million of AFS securities at a $0.4 million gain.
Additionally, AFS securities decreased during the nine months ended September 30, 2015 by $1.1 million due to net amortization
of premiums and discounts originated at the time the securities were purchased and were reduced by a decrease in unrealized gains
of $0.3 million.
At
September 30, 2015 and December 31, 2014, the held to maturity (“HTM”) investment portfolio comprised three securities
totaling $25.5 million and $25.6 million, respectively. During the nine months ended September 30, 2015, we did not purchase any
HTM securities.
We
closely monitor securities we hold in both our investment portfolios that remain in an unrealized loss position for twelve months
or greater. There were no unrealized losses at September 30, 2015 in the HTM securities portfolio. Total gross unrealized losses
on AFS securities in such a loss position for twelve months or greater were $0.3 million at September 30, 2015, representing 88.7%
of total gross unrealized securities losses. AFS securities in such a loss position for twelve months or greater represented 10.3%
of the total AFS investment portfolio. Based on an in-depth analysis of the specific instruments, which may include ratings from
external rating agencies and/or brokers, as well as the creditworthiness of the related issuers, including their ability to continue
payments under the terms of the security agreements, no unrealized losses were deemed to be other-than-temporary. Additionally,
we do not have the intent to sell the securities and it is not more likely than not that we will be required to sell these securities
before their anticipated recovery. If at any point in time any losses are considered other-than-temporary, we would be required
to recognize other-than-temporary impairment. This would require us to assess the cash flows expected to be collected from the
security. The difference between cash flows expected to be collected and the amortized cost basis would result in a credit loss
for the amount of the impairment. This amount would reduce our earnings. The remaining portion of the impairment related to factors
other than credit loss would be recognized through other comprehensive income (loss). At September 30, 2015 and December 31, 2014,
we did not hold securities of any one issuer, other than FNMA, GNMA, FHLMC, or VA, each an agency or corporation of the United
States government, in an amount greater than 10% of our stockholders’ equity. As of September 30, 2015, the highest concentration
of loans underlying mortgage-backed securities issued in any state was issued in California, representing approximately 15.5%
of the total amount invested in residential mortgage-backed securities.
Table of Contents
Deposits:
Total
deposits at September 30, 2015 increased $34.3 million (4.5%) to $799.8 million from $765.5 million at December 31, 2014.
The increase for the nine months was a result of an increase in non-interest-bearing demand deposit balances of $33.6 million
(21.9%) and an increase in savings deposits of $20.9 million (6.3%), offset in part by a decrease in NOW balances of $5.3 million
(3.8%) and a decrease in our time deposits of $14.9 million (10.7%). The total increase in interest-bearing deposits was $0.1
million (0.1%) from December 31, 2014 to September 30, 2015. At September 30, 2015, we did not hold any traditional brokered certificates
of deposits, but we held $0.3 million of NOW balances that were considered brokered deposits, a decrease of $8.2 million since
December 31, 2014. Deposits where our customers direct their funds with us to be exchanged with deposits of another participating
institution through a depository network (“Reciprocal Deposits”) are considered brokered deposits. At September 30,
2015 we held $1.6 million of such Reciprocal Deposits, decreased from $1.7 million at December 31, 2014.
We
continue to focus on expanding and retaining customer relationships and attracting core deposit accounts by emphasizing customer
service while maintaining competitive pricing. If liquidity concerns arise, we have alternative sources of funds such as lines
of credit with correspondent banks and borrowing arrangements with the FHLB and through the discount window at the Federal Reserve
Bank.
Other
Funding Sources:
Securities
repurchase agreements decreased $16.8 million (25.9%) from $64.9 million at December 31, 2014 to $48.1 million at September
30, 2015. We did not have any federal funds purchased at either September 30, 2015 or December 31, 2014. The decline in repurchase
agreements during the first nine months of 2015 is related to the planned reduction in a significant commercial customer’s
balances.
During
the third quarter of 2015, no new FHLB advance were taken. FHLB advances were $41.6 million at September 30, 2015, down from $60.5
million at December 31, 2014, a decline of $18.9 million (31.2%), primarily due to the payoff or maturity of $16.8 million of
prior period advances. The availability of deposits also determines the amount of funds we need to borrow in order to fund loan
demand and operations. FHLB continues to be available as a source of borrowing for future funding needs as we manage our liquidity
needs.
During
the third quarter of 2015, we utilized FHLB advances of varying terms and maturities to maximize and enhance our net interest
margin. At September 30, 2015, all of the $41.6 million FHLB advances outstanding were fixed rate.
Long
Term Debt:
In
March 2006, we issued $16.1 million of variable rate, trust preferred securities (“TruPS”) and $0.5 million of trust
common securities through Baylake Capital Trust II (the “Trust”) that adjust quarterly at a rate equal to 1.35% over
the three month LIBOR and mature on June 30, 2036. At September 30, 2015, the interest rate on these securities was 1.68%. These
securities were issued to replace trust preferred securities issued in 2001 through Baylake Capital Trust I. For bank regulatory
purposes, these securities are considered Tier 1 capital.
The
Trust’s ability to pay amounts due on the TruPS is solely dependent upon us making payment on the related subordinated debentures
(“Debentures”) to the Trust. Under the terms of the Debentures, we would be precluded from paying dividends on our
common stock if we were in default under the Debentures, if we exercised our right to defer payment of interest on the Debentures
or if certain related defaults occurred. At September 30, 2015, we were not in default of any provision under the Debentures and
were current on all interest payments on the TruPS.
During
2009 and 2010, we completed several separate closings of a private placement of Convertible Notes. The Convertible Notes were
offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933 and Rule
506 promulgated there under. The total amount of the Convertible Notes outstanding were $1.7 million as of December 31, 2014.
No Convertible Notes were outstanding as of September 30, 2015.
Table of Contents
The
Convertible Notes were convertible into shares of our common stock at a 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
(the “Conversion Ratio”). Prior to the quarterly interest date preceding the fifth anniversary of issuance of the
Convertible Notes, each holder of the Convertible Notes could convert up to 100% (at the discretion of the holder) of the original
principal amount into shares of our common stock at the Conversion Ratio. Beginning on the quarterly interest date prior to the
fifth anniversary of the Convertible Notes, we could redeem the notes in whole or in part. A notice of redemption superseded and
took priority over any notice of conversion. On October 1, 2014, one-half of the original principal amounts of the Convertible
Notes mandatorily converted at the Conversion Ratio. The principal amount of any Convertible Note that had not been converted
would be payable at maturity on June 30, 2017.
On
January 1, 2015, $0.6 million of Convertible Notes were converted to 115,000 shares of our common stock under the voluntary conversion
terms of the Convertible Notes. In April 2015, all of the remaining $1.1 million of Convertible Notes were converted to 215,000
shares of our common stock under the voluntary conversion terms of the Convertible Notes.
In
order to complete the acquisition of NEW as structured, we may borrow up to $6.0 million with an anticipated maturity of ten years.
Contractual
Obligations:
We
use a variety of financial instruments in the normal course of business to meet the financial needs of our customers. These financial
instruments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial
letters of credit, standby letters of credit, and forward commitments to sell residential mortgage loans. Please refer to our
Annual Report on Form 10-K for the year ended December 31, 2014 for quantitative and qualitative disclosures about our fixed and
determinable contractual obligations. Contractual obligations disclosed in the 2014 Annual Report on Form 10-K have not materially
changed since that report was filed.
The
following table summarizes our significant contractual obligations and commitments at September 30, 2015:
CONTRACTUAL
OBLIGATIONS
| |
| | |
| | |
| | |
| | |
| |
| |
Within
1 Year | | |
1-3
Years | | |
3-5
Years | | |
After
5 Years | | |
Total | |
Certificates of deposit and other time deposit obligations | |
$ | 79,733 | | |
$ | 33,300 | | |
$ | 10,771 | | |
$ | — | | |
$ | 123,804 | |
Repurchase agreements | |
| 48,076 | | |
| — | | |
| — | | |
| — | | |
| 48,076 | |
Federal Home Loan Bank advances | |
| 4,750 | | |
| 3,550 | | |
| 33,310 | | |
| — | | |
| 41,610 | |
Subordinated debentures | |
| — | | |
| — | | |
| — | | |
| 16,100 | | |
| 16,100 | |
Operating leases | |
| 32,715 | | |
| 43,620 | | |
| — | | |
| — | | |
| 76,335 | |
Total | |
$ | 165,274 | | |
$ | 80,470 | | |
$ | 44,081 | | |
$ | 16,100 | | |
$ | 305,925 | |
Off-
Balance Sheet Arrangements:
We
do not use interest rate contracts (i.e. swaps), forward loans sales or other derivatives to manage interest rate risk and do
not have any of these instruments outstanding. The Bank does have, through its normal operations, loan commitments and standby
letters of credit outstanding as of September 30, 2015, and December 31, 2014 in the amount of $290.9 million and $238.3 million,
respectively. These are further explained in Note 15 of the Notes to Consolidated Financial Statements.
Liquidity:
Liquidity
management refers to our ability to ensure that cash is available on a timely basis to meet loan demand and depositors’
needs and to service other liabilities as they become due without undue cost or risk and without causing a disruption to normal
operating activities. We and the Bank have different liquidity considerations.
Our
primary sources of funds are dividends from the Bank and net proceeds from borrowings, including offerings of subordinated debentures
and convertible promissory notes. We may also undertake offerings of debt and issue our common stock if and when we deem it prudent
to do so, subject to regulatory approval. We generally manage our liquidity position in order to provide funds necessary to meet
interest obligations of our TruPS and Convertible Notes, pay dividends to our shareholders, subject to regulatory restrictions,
and repurchase shares. Restrictions, which govern all state chartered banks, preclude the payment of dividends by the Bank without
the prior written consent of the Wisconsin Department of Financial Institutions (“WDFI”) if dividends declared and
paid by the Bank in either of the two immediately preceding years exceeded the Bank’s net income for those years, which
was not the case.
The
Bank meets its cash flow needs by having funding sources available to satisfy the credit needs of customers as well as having
available funds to satisfy deposit withdrawal requests. Liquidity is derived from deposit growth, payments on and maturities of
loans, payments on and maturities of the investment portfolio, access to other funding sources, marketability of certain assets,
the ability to use loan and investment portfolios as collateral for secured borrowings and a strong capital position.
Table of Contents
Maturing
investments have historically been a primary source of liquidity. For the nine months ended September 30, 2015, principal payments
totaling $17.3 million were received on investments in addition to proceeds of $9.9 million from maturities. We purchased $16.2
million in investments in the same period. Approximately 4.8%, or $5.4 million, of the mortgage-backed securities outstanding
at September 30, 2015 were issued and guaranteed by GNMA; an agency of the United States government. An additional 91.3%, or $102.3
million, of the mortgage-backed securities outstanding at September 30, 2015 were issued by either FNMA or FHLMC, United States
government-sponsored agencies. Non-agency mortgage-backed securities present a level of credit risk that does not exist currently
with United States government agency-backed securities, and comprised approximately 3.9%, or $4.4 million, of the outstanding
mortgage-backed securities at September 30, 2015. Management evaluates these non-agency mortgage-backed securities at least on
a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. These securities tend to be highly
marketable.
Deposit
increases, reflected as financing activity in the September 30, 2015 unaudited consolidated statements of cash flows, resulted
in $34.3 million of cash outflow during the first nine months of 2015. In February of 2015, we entered into a customer relationship
with a public entity that requires us to provide collateral for their money market deposits through the FHLB’s Public Unit
Deposit program. Under this program, FHLB issues a financial standby letter of credit on our behalf secured by various loans and/or
investment securities collateral provided by the Bank. Our agreement with the public entity customer limits these deposits to
maximums of between $20.0 million and $40.0 million and can fluctuate quarterly. At September 30, 2015 the amount of these money
market deposits was $20.1 million.
Customer
deposit growth is normally the most stable source of liquidity, although brokered deposits, which are inherently less stable than
locally-generated core deposits, are sometimes used. Our reliance on brokered certificates of deposit was eliminated in 2013.
We have $0.3 million in brokered NOW accounts at September 30, 2015 compared to $8.5 million of such deposits at December 31,
2014. Additionally, at September 30, 2015, we have $1.6 million of Reciprocal Deposits, decreased $0.1 million from December 31,
2014. If at any point in the future we fall below the “well capitalized” regulatory capital threshold, it will become
more difficult for us to obtain brokered deposits. Also affecting liquidity are core deposit growth levels, certificate of deposit
maturity structure and retention, and characteristics and diversification of wholesale funding sources affecting the channels
by which brokered deposits are acquired. Conversely, deposit outflow will cause a need to develop alternative sources of funds,
which may not be as liquid and potentially a more costly alternative.
The
scheduled payments and maturities of loans can provide a source of additional liquidity. There are $190.8 million, or 27.6% of
total gross loans, maturing within one year of September 30, 2015. Factors affecting liquidity relative to loans are loan origination
volumes, loan prepayment rates and the maturity structure of existing loans. The liquidity position is influenced by changes in
interest rates, economic conditions and competition. Conversely, loan demand creates a need for liquidity that may cause us to
acquire other sources of funding, some of which could be more difficult to find and more costly to secure.
Within
the classification of short-term borrowings at September 30, 2015, securities repurchase agreements totaled $48.1 million compared
to $64.9 million at the end of 2014. Securities repurchase agreements are obtained from a base of business and municipal customers.
The decline in such repurchase agreements from December 31, 2014 to September 30, 2015 is primarily due to the planned reduction
of a significant commercial customer’s deposit and repurchase balances. Short-term and long-term borrowings from the FHLB
are another source of funds and totaled $41.6 million and $60.5 million at September 30, 2015 and December 31, 2014, respectively.
We utilize FHLB advances of varying terms and maturities, to maximize our net interest margin and manage our interest rate risk.
We
continue to focus on expanding customer deposit relationships and attracting core deposit accounts by emphasizing customer service
while maintaining competitive pricing. In the event that core deposit growth goals are not accomplished, we will continue to look
at other wholesale sources of funds. In addition, we may acquire additional brokered deposits as funding for short-term liquidity
needs. Short-term liquidity needs will also be addressed by growth in short-term borrowings, maturing federal funds sold and portfolio
investments, and loan maturities and prepayments.
In
assessing liquidity, historical information such as seasonality, local economic cycles and the economy in general are considered
along with our current financial position and projections. We believe that in the current economic environment our liquidity position
is adequate. To our knowledge, there are no known trends nor any known demands, commitments, events, or uncertainties that will
result or are reasonably likely to result in material increases or decreases in our liquidity.
Capital
Resources:
In
June 2015, we entered into an agreement to purchase, subject to conditions of the agreement, a building and the accompanying real
estate in Sister Bay, Wisconsin in the amount of $1.1 million. The transaction was completed in September 2015. We intend, post
renovation, to relocate our current Sister Bay branch into the new building. The expected cost of the renovations is approximately
$1.2 million. Additionally, in October 2015, we entered into an agreement to renovate our Appleton, Wisconsin branch. The expected
cost of this renovation is $1.1 million and is anticipated to be completed in the second quarter of 2016. Both the purchase and
the renovation of the Sister Bay facility and the renovation of the Appleton facility are expected to be financed using cash from
operations.
Table of Contents
Stockholders’
equity at September 30, 2015 and December 31, 2014 was $110.6 million and $105.5 million, respectively, reflecting an increase
of $5.1 million (4.8%) during the first nine months of 2015. The increase in stockholders’ equity primarily resulted from
net income of $6.9 million, the conversion of $1.6 million of debentures, the exercise of stock options of $0.1 million, stock
based compensation of $0.3 million, and the vesting of restricted stock units of $0.1 million, partially offset by cash dividends
of $2.3 million, the repurchase of 115,500 common shares for $1.4 million under the repurchase program approved by our Board of
Directors on May 23, 2013 (the “Repurchase Program”) and a decrease in comprehensive income of $0.2 million during
the first nine months of 2015. Dividends of $0.25 per share were declared and paid during the nine months ended September 30,
2015. The ratio of stockholders’ equity to assets was 10.8% and 10.3% at September 30, 2015 and December 31, 2014, respectively.
In
October of 2015, we declared a $0.09 per share dividend. Our ability to pay dividends is subject to various factors including,
among other things, sufficient earnings, available capital, board discretion, and regulatory compliance.
On
May 23, 2013, our board of directors approved the Repurchase Program, which was designed to allow us to proactively manage our
capital position and return excess capital to shareholders. Pursuant to the Repurchase Program, we may buy up to 400,000 shares
of our common stock, representing approximately 5.0% of our outstanding common shares. During the first six months of 2015, we
repurchased 115,500 shares pursuant to the Repurchase Program. See Part II, Item 2 – Unregistered Sales of Equity Securities
and Use of Proceeds, included elsewhere in this report for details of the stock repurchases during the quarter. On April 15, 2014,
our board of directors approved an amendment to and extension of the Repurchase Program to authorize the repurchase of up to an
additional 400,000 shares and extended the time period for the Repurchase Program through May 30, 2015. Again on May 16, 2015,
our board of directors approved an amendment to, and extension of, the Repurchase Program authorizing a maximum of an additional
400,000 shares to be authorized to be purchased and extending the time period to May 30, 2016.
We
regularly review the adequacy of our capital to ensure that sufficient capital is available for our current and future needs and
it is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends upon a variety of factors,
including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served
and strength of management.
The
final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III”)
became effective for us on January 1, 2015 with full compliance with all of the final rule requirements to be fully phased in
incrementally through January 1, 2019. As of September 30, 2015, our capital levels characterize us as “well-capitalized”
under these new rules. See the “Regulatory Initiatives Affecting the Banking Industry” section for further discussion
of Basel III.
We
continue to evaluate the potential impact that regulatory rules may have on our liquidity and capital management strategies, including
Basel III and those required under the Dodd-Frank Act. See the “Regulatory Initiatives Affecting the Banking Industry”
section below for further discussion on the potential impact that these regulatory rules may have on our liquidity and capital
requirements.
Among
other things, the new rules revise capital adequacy guidelines and the regulatory framework for prompt corrective action. Additionally,
they modified specified quantitative measures of assets, liabilities, and capital. These new rules require us to maintain capital
in excess of previous “well-capitalized” regulatory standards, and in excess of historical levels.
The
total capital ratios for the previous four quarters are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015(1) |
|
June 30,
2015(1) |
|
March 31,
2015(1) |
|
December 31,
2014 |
|
Company |
|
|
15.90% |
|
15.76% |
|
15.87% |
|
16.14% |
|
Bank |
|
|
15.35% |
|
15.34% |
|
15.54% |
|
15.92% |
|
(1)
March 31, 2015, June 30, 2015, and September 30, 2015 are calculated under Basel III rules, which became effective January
1, 2015.
A
strong capital position is necessary to take advantage of opportunities for profitable expansion of product and market share and
to provide depositor and investor confidence. We believe our capital level is strong, but also must be maintained at an appropriate
level to provide the opportunity for an adequate return on the capital employed. We actively review our capital strategies to
ensure that capital levels are appropriate based on the perceived business risks, further growth opportunities, industry standards,
and regulatory requirements.
Table of Contents
The
following tables present our and the Bank’s capital ratios as of September 30, 2015 and December 31, 2014:
CAPITAL
RATIOS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Actual |
|
Required For Capital
Adequacy Purposes |
|
Required To Be
Well
Capitalized Under Prompt
Corrective Action Provisions |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
As of September 30, 2015 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
121,645 |
|
|
15.90 |
% |
$ |
61,224 |
|
|
8.00 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
117,397 |
|
|
15.35 |
% |
|
61,173 |
|
|
8.00 |
% |
|
76,466 |
|
|
10.00 |
% |
Tier 1 Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
115,135 |
|
|
15.04 |
% |
$ |
45,918 |
|
|
6.00 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
110,887 |
|
|
14.50 |
% |
|
45,880 |
|
|
6.00 |
% |
|
61,173 |
|
|
8.00 |
% |
Tier 1 Common Equity (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
100,334 |
|
|
13.11 |
% |
$ |
34,439 |
|
|
4.50 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
110,887 |
|
|
14.50 |
% |
|
34,410 |
|
|
4.50 |
% |
|
49,703 |
|
|
6.50 |
% |
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
115,135 |
|
|
11.45 |
% |
$ |
40,229 |
|
|
4.00 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
110,887 |
|
|
11.05 |
% |
|
40,141 |
|
|
4.00 |
% |
|
50,176 |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Required For Capital
Adequacy Purposes |
|
Required To Be
Well
Capitalized Under Prompt
Corrective Action Provisions |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
As of December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
118,605 |
|
|
16.14 |
% |
$ |
58,791 |
|
|
8.00 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
116,935 |
|
|
15.92 |
% |
|
58,753 |
|
|
8.00 |
% |
|
73,441 |
|
|
10.00 |
% |
Tier 1 Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
109,904 |
|
|
14.96 |
% |
$ |
29,395 |
|
|
4.00 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
109,884 |
|
|
14.96 |
% |
|
29,376 |
|
|
4.00 |
% |
|
44,064 |
|
|
6.00 |
% |
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
109,904 |
|
|
11.26 |
% |
$ |
39,032 |
|
|
4.00 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
109,884 |
|
|
11.27 |
% |
|
39,016 |
|
|
4.00 |
% |
|
48,770 |
|
|
5.00 |
% |
(1)
September 30, 2015 ratios are calculated under Basel III rules, which became effective January 1, 2015.
Regulatory
Initiatives Affecting the Banking Industry
Basel
III
The
Federal Reserve and the FDIC approved the final rules implementing Basel III. Under the final rules, minimum requirements will
increase for both the quantity and quality of capital we hold. The rules include a new common equity Tier 1 capital to risk-weighted
assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a
minimum ratio of total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital
conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements.
This capital conservation buffer will be phased-in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each
subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility for regulatory
capital instruments was also implemented under the final rules. The final rules also revise the definition and calculation of
Tier 1 capital, total capital and risk-weighted assets.
The
phase-in period for the final rules became effective for us on January 1, 2015, with full compliance with all of the final rules’
requirements phased in incrementally, to be fully phased-in by January 1, 2019. Although as of September 30, 2015, we were categorized
as “well-capitalized” under the new rules, our ratios have declined on a comparative basis to our regulatory capital
ratios at December 31, 2014 due to compliance with the new rules under Basel III.
Table of Contents
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Our
primary market risk exposure is interest rate risk. Interest rate risk is the risk that our earnings and capital will be adversely
affected by changes in interest rates. Historically, we have not used derivatives to mitigate our interest rate risk.
Our
earnings are derived from the operations of our direct and indirect subsidiaries with particular reliance on net interest income,
calculated as the difference between interest earned on loans and investments and the interest expense paid on deposits and other
interest-bearing liabilities, including advances from FHLB, convertible promissory notes and subordinated debentures. Like other
financial institutions, our interest income and interest expense are affected by general economic conditions and by the policies
of regulatory authorities, including the monetary policies of the Federal Reserve.
Changes
in the economic environment may influence, among other matters, the growth rate of loans and deposits, the quality of the loan
portfolio and loan and deposit pricing. Fluctuations in interest rates are not predictable or controllable.
As
of September 30, 2015, we were in compliance with our management policies with respect to interest rate risk. We have not experienced
any material changes to our market risk position since December 31, 2014, as described in our 2014 Annual Report on Form 10-K.
Our
overall interest rate sensitivity is demonstrated by net interest income shock analysis which measures the change in net interest
income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in net interest income
in the event of sudden and sustained 100 bps and 200 bps increases and decreases in market interest rates. The table below presents
our projected changes in net interest income for the various rate shock levels at September 30, 2015.
INTEREST
SENSITIVITY
| |
| | |
| | |
| | |
| |
| |
Change
in Net Interest Income Over One Year Horizon | |
| |
| |
| |
At
September 30, 2015 | | |
At
December 31, 2014 | |
| |
Dollar
change (in
thousands) | | |
Percentage
change | | |
Dollar
change (in
thousands) | | |
Percentage
change | |
Change in levels of interest rates | |
| | |
| | |
| | |
| |
+200 bps | |
$ | 1,090 | | |
| 3.4 | % | |
$ | 137 | | |
| 0.4 | % |
+100 bps | |
| 502 | | |
| 1.6 | % | |
| 67 | | |
| 0.2 | % |
Base | |
| — | | |
| — | | |
| — | | |
| — | |
-100 bps | |
| (1,453 | ) | |
| (4.6 | )% | |
| (1,281 | ) | |
| (3.9 | )% |
-200 bps | |
| (2,389 | ) | |
| (7.5 | )% | |
| (2,141 | ) | |
| (6.6 | )% |
As
in the preceding table, at September 30, 2015, the effect of an immediate 200 bp increase in interest rates would increase our
net interest income by $1.1 million or 3.4% versus a $0.1 million or 0.4% increase in net interest income from a similar change
in interest rates at December 31, 2014. The change in the impact of an immediate 200 bp increase in interest rates resulted from
reduction of interest sensitive liability balances, and a reduction of cash balances during the first nine months of 2015. The
effect of an immediate 200 bp reduction in rates would have decreased our net interest income by $2.4 million or 7.5%, relatively
unchanged from a decrease of $2.1 million or 6.6% at December 31, 2014 based upon such a reduction in interest rates. It is projected
that rates paid on interest-bearing liabilities in the current low interest rate environment have less ability to continue to
decline compared to yields on interest-earning assets. Accordingly, a 200 bp reduction in rates is not considered realistic given
the low interest rate environment that currently exists. An interest rate floor of no less than zero is used rather than assuming
a negative interest rate.
Table of Contents
Computations
of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the relative levels
of market interest rates and loan prepayments, and should not be relied upon as indicative of actual results. Actual values may
differ from those projections set forth above, should market conditions vary from the assumptions used in preparing the analyses.
Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.
Item
4. Controls and Procedures
Disclosures
Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2015. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2015, our disclosure
controls and procedures are effective.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Internal
Control Over Financial Reporting
There
have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
Table of Contents
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
We
and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses.
Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse
effect on our results of operations or financial position.
Item
1A. Risk Factors
See
“Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2014. There have been
no material changes to the risk factors since then.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the quarter ended September 30, 2015, we did not sell any equity securities which were not registered under the Securities Act
of 1933, as amended and did not repurchase any shares of our common stock. A total of 617,500 shares have been purchased since
May 23, 2013 at an average price of $11.98 per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Number
of Shares
Purchased |
|
Average
Price Paid
per Share |
|
Total
Number of
Shares
Purchased as
Part of Publically
Announced Plans
or Programs(1) |
|
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs(1) |
|
July 1 – July 31, 2015 |
|
|
— |
|
$ |
— |
|
|
— |
|
|
582,500 |
|
August 1 – August 31, 2015 |
|
|
— |
|
|
— |
|
|
— |
|
|
582,500 |
|
September 1 – September 30, 2015 |
|
|
— |
|
|
— |
|
|
— |
|
|
582,500 |
|
Three Months Ended September 30, 2015 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Nine Months Ended September 30, 2015 |
|
|
115,000 |
|
|
12.52 |
|
|
115,000 |
|
|
|
|
Since May 23, 2013 |
|
|
617,500 |
|
$ |
11.98 |
|
|
617,500 |
|
|
582,500 |
|
(1)
On May 23, 2013, our Board of Directors approved the Repurchase Program, which authorized us to repurchase up to 400,000
shares of our stock through May 30, 2014. We repurchased an aggregate of 163,000 shares on the open market during the second,
third and fourth quarters of 2013 at an average price of $10.48 per share. On April 15, 2014 our Board of Directors amended the
Repurchase Program to increase the applicable shares that we could repurchase from 400,000 shares to 800,000 shares and extend
the date through which those shares could be repurchased to May 30, 2015. During 2014, we repurchased 339,000 shares on the open
market at an average price of $12.51 per share
On
May 16, 2015, our Board of Directors amended the Repurchase Program to increase the applicable shares that could be repurchased
from 800,000 shares to 1,200,000 shares and extended the date through which those shares could be repurchased to May 30, 2016.
We repurchased 66,000 shares on the open market during the first quarter of 2015 at an average price of $12.50 per share.
We
have several limitations on our ability to pay dividends. The Federal Reserve has adopted regulations that deal with the measure
of capitalization for bank holding companies. The Federal Reserve has also issued a policy statement on the payment of cash dividends
by bank holding companies, wherein the Federal Reserve has stated that a bank holding company experiencing earnings weaknesses
should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company’s
financial health, such as by borrowing.
Our
ability to pay dividends on our common stock is largely dependent upon the Bank’s ability to pay dividends on its stock
held by us. The Bank’s ability to pay dividends is restricted by both state and federal laws and regulations. The Bank is
subject to policies and regulations issued by the Federal Reserve, as the Bank’s primary federal regulator, and the Division
of Banking of the WDFI, which, in part, establish minimum acceptable capital requirements for banks, thereby limiting the ability
of such banks to pay dividends. In addition, Wisconsin law provides that state chartered banks may declare and pay dividends out
of undivided profits but only after provision has been made for all expenses, losses, required reserves, taxes and interest accrued
or due from the bank.
Item
3. Defaults Upon Senior Securities
Not
applicable.
Item
4. Mine Safety Disclosures
Not
applicable.
Table of Contents
Item
5. Other Information
Not applicable.
Item
6. Exhibits
The following
exhibits are furnished herewith:
|
|
|
Exhibit
Number |
|
Description |
|
|
|
2.1 |
|
Agreement and Plan
of Merger by and between Baylake Corp. and NEW Bancshares, Inc., dated as of May 5, 2015, incorporated by reference to Exhibit
2.1 from the Company’s Current Report on Form 8-K filed on May 8, 2015. |
|
|
|
2.2 |
|
Voting Agreement
and Release by and between Baylake Corp. and the person listed on Schedule I attached thereto, dated as of May 5, 2015, incorporated
by reference to Exhibit 2.2 from the Company’s Current Report on Form 8-K filed on May 8, 2015 |
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2.3 |
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First
Amendment to Agreement and Plan of Merger by and between Baylake Corp. and NEW Bancshares, Inc. dated as of October 14, 2015,
incorporated by reference to Exhibit 2.1 from the Company’s Current Report on For 8-K filed on October 16, 2015. |
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2.4 |
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Agreement and Plan of Merger between Nicolet Bankshares, Inc. and Baylake Corp., dated September 8, 2015,
incorporated by reference to Exhibit 2.1 from the Company’s Current Report on For 8-K filed on September 11, 2015.
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3.1 |
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Bylaws of Baylake Corp., as amended through October 20, 2015. |
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31.1 |
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Certification
under Section 302 of Sarbanes-Oxley by Robert J. Cera, Chief Executive Officer, is attached hereto. |
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31.2 |
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Certification
under Section 302 of Sarbanes-Oxley by Kevin L. LaLuzerne, Chief Financial Officer, is attached hereto. |
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32.1 |
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Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached
hereto. |
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32.2 |
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley is attached
hereto. |
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101 |
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Interactive
data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations,
(iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity,
(v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text. |
Table of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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BAYLAKE
CORP. |
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Date: |
October
30, 2015 |
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/s/
Robert J. Cera |
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Robert J. Cera |
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President and Chief Executive Officer |
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Date: |
October
30, 2015 |
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/s/
Kevin L. LaLuzerne |
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Kevin L. LaLuzerne |
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Treasurer and Chief Financial Officer |
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EXHIBIT 3.1
BYLAWS, AS AMENDED THROUGH OCTOBER 20, 2015
Effective 10-20-15
BY-LAWS
OF
BAYLAKE CORP.
(a Wisconsin corporation)
INTRODUCTION-
VARIABLE REFERENCES
0.01. Date
of annual shareholders’ meeting (See Section 2.01):
7:00 P.M. on the first Monday of June.
0.02. Notice of Shareholder
Meetings. The notice period for meetings of the shareholders shall be not less than 21 days.
0.03. Authorized Number
of Directors. The Board of Directors shall consist of not less than 5 nor more than 17 members as shall be determined from
year to year by the stockholders at the Annual Meeting of the Corporation, except that no director shall be removed from office
prior to the expiration of the term for which he is elected unless under the provisions of Section 3.09 of these By-Laws.
0.04. Required notice of directors’
meetings (See Section 3.05):
(A) not less than
48 hours if by mail, and
(B) not less than
24 hours if by telegram or personal delivery.
0.05. Authorized number of
Vice-Presidents (See Section 4.01): Up to five.
ARTICLE I. OFFICES
1.01. Principal and Business
Offices. The corporation may have such principal and other business offices, either within or without the State of Wisconsin,
as the Board of Directors may designate or as the business of the corporation may require from time to time.
1.02. Registered Office.
The registered office of the corporation required by the Wisconsin Business Corporation Law to be maintained in the State of Wisconsin
may be, but need not be, identical with the principal office in the State of Wisconsin, and the address of the registered office
may be changed from time to time by the Board of Directors or by the registered agent. The business office of the registered agent
of the corporation shall be identified to such registered office.
ARTICLE II. SHAREHOLDERS
2.01. Annual Meeting.
The annual meeting of the shareholders shall be held at the date and hour in each year set forth in Section 0.01, or at such other
time and date within thirty days before or 90 days after said date as may be fixed by or under the authority of the Board of Directors,
for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day
fixed for the annual meeting shall be a legal holiday in the State of Wisconsin, such meeting shall be held on the next succeeding
business day. If the election of directors shall not be held on the day designated for any annual meeting of the shareholders,
or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders.
2.02. Special Meeting.
Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the
President or the Board of Directors or by the person designated in the written request of the holders of not less than one-tenth
of all shares of the corporation entitled to vote at the meeting.
2.03. Place of Meeting.
The Board of Directors may designate any place, either within or without the State of Wisconsin, as the place of meeting for any
annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled
to vote at a meeting may designate any place, either within or without the State of Wisconsin, as the place for the holding of
such meeting. The place of meeting shall be the principal business office of the corporation, but any meeting may be adjourned
to reconvene at any place designated by vote of a majority of the shares represented thereat.
2.04. Notice of Meeting
and Nomination of Directors. Written notice of the time, place and purpose of any meeting shall be delivered not less than
the period set forth in Section 0.02, nor more than 70 days before the date of the meeting, either by mail or otherwise, at the
direction of the persons calling the meeting, to each person entitled to vote at such meeting. If the business at a meeting includes
the nomination and election of any directors, such nominations shall be made by notice in writing, delivered or mailed by first
class United States mail, postage prepaid, to the secretary of the Corporation not less than 14 days nor more than 70 days preceding
the meeting, provided, however, that if less than 21 days notice of the meeting is given to stockholders, such notice shall be
delivered or mailed not less than 7 business days following the mailing of such notice of meeting. Each notice of nomination of
directors shall contain the name and address, the principal occupation or employment, and number of shares of the Corporation beneficially
owned by each nominee and the class for which nominated. The Chairman of the meeting shall determine whether any nomination was
not made in accordance herewith and if it is so determined, he shall so declare to the meeting and the defective nomination shall
be disregarded.
2.05. Closing of Transfer
Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting
of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholder for any other proper purpose, the Board of Directors may provide that the stock transfer books shall
be closed for a stated period but not to exceed, in any case, fifty days and at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination
of shareholders, such date in any case to be not more than 70 days and, in case of a meeting of shareholders, not less than ten
days prior to such date. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders
entitled to notice or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the close
of business on the date on which notice of the meeting is mailed on or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders.
2.06. Voting Records.
The office or agent having charge of the stock transfer books for shares of the corporation shall, before each meeting of shareholders,
make a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, with the address of and
the number of shares held by each. Such record shall be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the meeting for the purposes of the meeting. The original
stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such record or transfer books
or to vote at any meeting of shareholders. Failure to comply with the requirements of this section shall not affect the validity
of any action taken at such meeting.
2.07. Quorum. Except
as otherwise provided in the articles of incorporation, a majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of shareholders. If a quorum is present, the affirmative vote of the majority of
the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders unless the
vote of a greater number or voting by classes is required by law or the articles of incorporation. Though less than a quorum of
the outstanding shares are represented may adjourn the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting
as originally notified.
2.08. Conduct of Meetings.
The President, and in his absence, a Vice-President in the order provided under Section 4.06, and in their absence, any person
chosen by the shareholders present shall call the meeting of the shareholders to order and shall act as chairman of the meeting,
and the Secretary of the corporation shall act as secretary of all meetings of the shareholders, but, in the absence of the Secretary,
the presiding officer may appoint any other person to act as secretary of the meeting.
2.09. Proxies. At all
meetings of shareholders, a shareholder entitled to vote may vote in person or by proxy appointed in writing by the shareholder
or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the corporation before or at the time
of the meeting. Unless otherwise provided in the proxy, a proxy may be revoked at any time before it is voted, either by written
notice filed with the Secretary or the acting secretary of the meeting or by oral notice given by the shareholder to the presiding
officer during the meeting. The presence of a shareholder who has filed his proxy shall not of itself constitute a revocation.
No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. The Board of
Directors shall have the power and authority to make rules establishing presumptions as to the validity and sufficiency of proxies.
2.10. Voting of Shares.
Each outstanding share shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders, except
to the extent that the voting rights of the shares of any class or classes are enlarged, limited or denied by the articles of incorporation.
2.11. Voting of Shares by
Certain Holders.
(A) Other Corporations.
Shares standing in the name of another corporation may be voted either in person or by proxy, by the president of such corporation
or any other officer appointed by such president.
(B) Legal Representatives
and Fiduciaries. Shares held by an administrator, executor, guardian, conservator, trustee in bankruptcy, receiver, or assignee
for creditors may be voted by him, either in person or by proxy, without a transfer of such shares into his name, provided that
there is field with the Secretary before or at the time of meeting proper evidence of his incumbency and the number of shares held.
Shares standing in the name of a fiduciary may be voted by him, either in person or by proxy.
(C) Pledges.
A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name
of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.
(D) Treasury Stock
and Subsidiaries. Neither treasury shares, nor shares held by another corporation if a majority of the shares entitled to vote
for the election of directors of such other corporation is held by this corporation, shall be voted at any meeting of counted in
determining the total number of outstanding shares entitled to vote, but shares of its own issue held by this corporation in a
fiduciary capacity, or held by such other corporation in a fiduciary capacity, may be voted and shall be counted in determining
the total number of outstanding shares entitled to vote.
(E) Minors.
Shares held by a minor may be voted by such minor in person or by proxy and no such vote shall be subject to disaffirmance or avoidance,
unless prior to such vote the Secretary of the corporation has received written or has actual knowledge that such shareholder is
a minor.
(F) Incompetents
and Spendthrifts. Shares held by an incompetent or spendthrift may be voted by such incompetent or spendthrift in person or
by proxy and no such vote shall be subject to disaffirmance or avoidance, unless prior to such vote the Secretary of the corporation
has actual knowledge that such shareholder has been adjudicated an incompetent or spendthrift or actual knowledge of filing of
judicial proceedings for appointment of a guardian.
(G) Joint Tenants.
Shares registered in the names of two or more individuals who are named in the registration as joint tenants may be voted in person
or by proxy signed by any one or more of such individuals if either (i) no other such individual or his legal representative is
present and claims the right to participate in the voting of such shares or prior to the vote files with the Secretary of the corporation
a contrary written voting authorization or direction or written denial of authority of the individual present or signing the proxy
proposed to be voted or (ii) all such other individuals are deceased and the Secretary of the corporation has no actual knowledge
that the survivor has been adjudicated not to be the successor to the interests of those deceased.
2.12. Waiver of Notice By
Shareholders. Whenever any notice whatever is required to be given to any shareholder of the corporation under the articles
of incorporation or by-laws or any provision of law, a waiver thereof in writing, signed at any time, whether before or after the
time of meeting, by the shareholder entitled to such notice, shall be deemed equivalent to the giving of such notice; provided
that such waiver in respect to any matter of which notice is required under the provision of the Wisconsin Business Corporation
Law, shall contain the same information as would have been required to be included in such notice, except the time and place of
meeting.
2.13. Unanimous Consent
without Meeting. Any action required or permitted by the articles of incorporation or by-laws or any provision of law to be
taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof.
ARTICLE III. BOARD OF DIRECTORS
3.01. General Powers and
Number. The business and affairs of the corporation shall be managed by its Board of Directors. The number of directors of
the corporation shall be as provided in Section 0.03.
3.02. Tenure and Qualification
of Directors. The Board of Directors shall be divided into three classes, as nearly equal as the number constituting the whole
board shall permit, the term of one class expiring each year. At the Annual Meeting in 1985, Directors of the first class shall
be elected to hold office until the next Annual Meeting, Directors of the second class shall be elected to hold office until the
second Annual Meeting thereafter, and Directors of the third class shall be elected to hold office until the third Annual Meeting
thereafter. The successors of each class whose term shall expire shall be elected to hold office for a term expiring at the third
succeeding Annual Meeting of the Corporation. No Director shall have any significant relationship with the ownership or management
of any other financial institution, comprising either a 10% or more beneficial ownership or executive position as an officer or
director in such institution or an affiliate thereof. Notwithstanding any other provision of the By-Laws or as otherwise provided
for by law, this section may not be amended, altered, repealed, or otherwise changed except upon the affirmative vote of the holders
of more than 75% or more of the outstanding shares of the Corporation entitled to vote, cast a meeting of the stockholders for
that purpose.
3.03. Annual Meeting.
A regular meeting of the Board of Directors shall be held without other notice than this by-law immediately after the annual meeting
of shareholders, and each adjourned session thereof. The place of such regular meeting shall be the same as the place of the meeting
of shareholders which precedes it, or such other suitable place as may be announced at such meeting of shareholders.
3.04. Regular Meetings.
The regular meetings of the Board of Directors shall be held at the banking house on the third Tuesday of each month at such hour
as the board may fix. When any regular meeting of the board falls upon a holiday, the meeting shall be held upon such other day
as the board shall previously designate or, absent such designation, on the day following the holiday. Should there be no quorum
at any meeting, the directors present shall adjourn to another date until a quorum is in attendance.
3.05. Special Meetings.
Special meetings of the Board of Directors may be called by or at the request of the President, Secretary or any two directors.
The President or Secretary calling any special meeting of the Board of Directors may fix any place, either within or without the
State of Wisconsin, as the place for holding any special meeting of the Board of Directors called by them, and if no other place
is fixed the place of meeting shall be the principal business office of the corporation in the State of Wisconsin.
3.06. Records. The organization
papers of the Bank, Articles of Incorporation, By-Laws, and Amendments thereto, reports of standing and special committees, and
minutes of all meetings of the stockholders and directors shall be recorded in minute books. The minutes of all such meetings shall
be signed by the presiding officer and attested by the secretary of said meeting.
3.07. Notice; Waiver.
Notice of each meeting of the Board of Directors (unless otherwise provided in or pursuant to Section 3.03) shall be given by written
notice delivered personally or mailed or given by written notice delivered personally or mailed or given by telegram to each director
at his business address or at such other address as such director shall have designated in writing filed with the Secretary, in
each case not less than that number of hours prior thereto as set forth in Section 0.04. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram,
such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Whenever any notice whatever
is required to be given to any director of the corporation under the articles of incorporation or by-laws or any provision of law,
a waiver thereof in writing, signed at any time, whether before or after the time of meeting, by the director entitled to such
notice, shall be deemed equivalent to the giving of such notice.
3.08. Quorum. Except
as otherwise provided by law or by the articles of incorporation or these by-laws, a majority of the number of directors as provided
in Section 0.03 shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but a majority
of the directors present (though less than such quorum) any adjourn the meeting from time to time without further notice.
3.09. Manner of Acting.
The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors,
unless the act of a greater number is required by law or by the articles of incorporation or these by-laws.
3.10. Conduct of Meetings.
The Chairman, and in his absence, a Vice Chairman in the order provided under Section 4.06, and in their absence, any director
chosen by the directors present, shall call meetings of the Board of Directors to order and shall act as chairman of the meeting.
The Recording Secretary of the Board of Directors shall act as secretary of all meetings of the Board of Directors, but in the
absence of the Secretary, the presiding officer may appoint any Assistant Secretary or any director or other person present to
act as secretary of the meeting.
3.11 Removal and Replacement
of Directors. Notwithstanding any other provision of the By-Laws of the Corporation, a Director may be removed at any time,
but only for cause and only by the affirmative vote of 67% or more of the outstanding shares of the Corporation entitled to vote,
cast at a meeting of the stockholders called for that purpose. A Director may resign at any time by delivering written notice to
the Secretary of the Corporation. Any vacancy on the Board, including a vacancy resulting from removal of a Director for cause,
from resignation, or from an increase in the number of Directors, shall be filled by a majority of the Board of Directors, acting
by a majority of the Directors then in office, although less than a quorum, and any Directors so chosen shall hold office until
election of their duly qualified successors. No decrease in the number of directorships shall shorten the term of any existing
Director. Notwithstanding any other provision of the By-Laws or as otherwise provided for by law, this Section may not be amended,
altered, repealed, or otherwise changed except upon the affirmative vote of the holders of more than 75% or more of the outstanding
shares of the Corporation entitled to vote, cast at a meeting of the stockholders for that purpose.
3.12. Compensation.
The Board of Directors, by affirmative vote of a majority of the directors then in office, and irrespective of any personal interest
of any of its members may establish reasonable compensation of all directors for services to the corporation as directors, officers
or otherwise or may delegate such authority to an appropriate committee. The Board of Directors also shall have authority to provide
for or to delegate authority to an appropriate committee to provide for reasonable pensions, disability or death benefits, and
other benefits or payments, to directors, officers and employees and to their estates, families, dependents or beneficiaries on
account of prior services rendered by such directors, officers and employees to the corporation.
3.13. Presumption of Assent.
A director of the corporation who is present at a meeting of the Board of Directors or a committee thereof of which he is a member
at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall
be entered in the minutes of the meeting of unless he shall file his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the
corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
3.14. Committees. The
Board of Directors by resolution adopted by the affirmative vote of a majority of the number of directors as provided in Section
0.03 may designate one or more committees, each committee to consist of three or more directors elected by the Board of Directors,
which to the extent provided in said resolution as initially adopted, and as thereafter supplemented or amended by further resolution
adopted by a like vote, shall have and may exercise, when the Board of Directors is not in session, the powers of the Board of
Directors in the management of the business and affairs of the corporation, except action in respect to dividends to shareholders,
election of the principal officers or the filling of vacancies in the Board of Directors or committees created pursuant to this
section. Each such committee shall fix its own rules governing the conduct of its activities and shall make such reports to the
Board of Directors of its activities as the Board of Directors may request.
3.15. Unanimous Consent
without Meeting. Any action required or permitted by the articles of incorporation or by-laws or any provision of law to be
taken by the Board of Directors at a meeting or by resolution may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the directors then in office.
ARTICLE IV. OFFICERS
4.01. Number. The principal
officers of the corporation shall be a President, the number of Vice-Presidents as provided in Section 0.05, a Secretary, and a
Treasurer, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers as may be deemed
necessary may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person, except
the offices of President and Secretary and the offices of President and Vice-President.
4.02. Election and Term
of Office. The officers of the corporation to be elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. Each officer shall
hold office until his successor shall have been duly elected or until his prior death, resignation or removal.
4.03. Removal. Any officer
or agent may be removed by the Board of Directors whenever in its judgment the best interests of the corporation will be served
thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment
shall not of itself create contract rights.
4.04. Vacancies. A vacancy
in any principal office because of death, resignation, removal, disqualification or otherwise, shall be filled by the Board of
Directors for the unexpired portion of the term.
4.05. President. The
President shall be the principal executive officer of the corporation and, subject to the control of the Board of Directors, shall
in general supervise and control all of the business and affairs of the corporation. He shall, when present, preside at all meetings
of the shareholders and of the Board of Directors. He shall have authority, subject to such rules as may be prescribed by the Board
of Directors, to appoint such agents and employees of the corporation as he shall deem necessary to prescribe their powers, duties
and compensation, and to delegate authority to them. Such agents and employees shall hold office at the discretion of the President.
In general he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board
of Directors from time to time.
4.06. The Vice Presidents.
In the absence of the President or in the event of his death, inability or refusal to act, or in the event for any reason it shall
be impracticable for the President to act personally, the Vice-President (or in the event there be more than one Vice-President,
the Vice-Presidents in the order designated by the Board of Directors, or in the absence of any designation, then in the order
of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Any Vice-President may sign, with the Secretary or Assistant Secretary, certificates for
shares of the corporation; and shall perform such other duties and have such authority as from time to time may be delegated or
assigned to him by the President or by the Board of Directors.
4.07. The Secretary.
The Secretary shall: (a) keep the minutes of the meetings of the shareholders and of the Board of Directors in one or more books
provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required
by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is
affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized; (d) keep or arrange
for the keeping of a register of the post office address of each shareholder which shall be furnished to the Secretary by such
shareholder; (e) sign with the President, or a Vice-President, certificates for shares of the corporation, the issuance of which
shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the
corporation; and (g) in general perform all duties incident to the office of Secretary and have such other duties and exercise
such authority as from time to time may be delegated or assigned to him by the President or by the Board of Directors.
4.08. The Treasurer.
The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; (b) receive
and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the
name of the corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions
of Section 5.04; and (c) in general perform all of the duties incident to the office of Treasurer and have such other duties and
exercise such other authority as from time to time may be delegated or assigned to him by the President or by the Board of Directors.
If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and
with such surety or sureties as the Board of Directors shall determine.
4.09. Other Assistants and
Acting Officers. The Board of Directors shall have the power to appoint any person to act as assistant to any officer, or as
agent for the corporation in his stead, or to perform the duties of such officer whenever for any reason it is impracticable for
such officer to act personally, and such assistant or acting officer or other agent so appointed by the Board of Directors shall
have the power to perform all the duties of the officer to which he is so appointed to be assistant, or as to which he is so appointed
to act, except as such power may be otherwise defined or restricted by the Board of Directors.
4.10. Salaries. The
salaries of the principal officers shall be fixed from time to time by the Board of Directors or by a duly authorized committee
thereof, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation.
ARTICLE V. CONTRACTS, LOANS, CHECKS
AND DEPOSITS: SPECIAL CORPORATE ACTS
5.01. Contracts. The
Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute or deliver any
instrument in the name or and on behalf of the corporation, and such authorization may be general or confined to specific instances.
In the absence of other designation, all deeds, mortgages and instruments of assignment or pledge made by the corporation shall
be executed in the name of the corporation by the President or one of the Vice-Presidents and by the Secretary, an Assistant Secretary,
the Treasurer or an Assistant Treasurer; the Secretary or an Assistant Secretary, when necessary or required, shall affix the corporate
seal thereof; and when so executed no other party to such instrument or any third party shall be required to make any inquiry into
the authority of the signing officer or officers.
5.02. Loans. No indebtedness
for borrowed money shall be contracted on behalf of the Corporation and no evidences of such indebtedness shall be issued in its
name unless authorized by or under the authority of a resolution of the Board of Directors. Such authorization may be general or
confined to specific instances.
5.03. Checks, Drafts, Etc.
All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the
corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time
to time be determined by or under the authority of a resolution of the Board of Directors.
5.04. Deposits. All
funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositaries as may be selected by or under the authority of a resolution of the Board of Directors.
5.05. Voting of Securities
Owned by this Corporation. Subject always to the specific directions of the Board of Directors, (a) any shares or other securities
issued by any other corporation and owned or controlled by this corporation may be voted at any meeting of security holders of
such other corporation by the President of this corporation if he be present, or in his absence by any Vice-President of this corporation
who may be present, and (b) whenever, in the judgment of the President, or in his absence, of any Vice-President, it is desirable
for this corporation to execute a proxy or written consent in respect to any shares or other securities issued by any other corporation
and owned by this corporation, such proxy or consent shall be executed in the name of this corporation by the President or one
of the Vice-Presidents of this corporation, without necessity of any authorization by the Board of Directors, affixation of corporate
seal or countersignature or attestation by another officer.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.01. Certificates for Shares.
Certificates representing shares of the corporation shall be in such form, consistent with law, as shall be determined by the Board
of Directors. Such certificates shall be signed by the President or a Vice-President and by the Secretary or an Assistant Secretary.
All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom
the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer
books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate
shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except as provided
in Section 6.06.
6.02. Transfer of Shares.
Prior to due presentment of a certificate for shares for registration of transfer the corporation may treat the registered owner
of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to have and exercise all the
rights and power of an owner. Where a certificate for shares is presented to the corporation with a request to register for transfer,
the corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer
if (a) there were on or with the certificate the necessary endorsements, and (b) the corporation had no duty to inquire into adverse
claims or has discharged any such duty. The corporation may require reasonable assurance that said endorsements are genuine and
effective and compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors.
6.03. Restrictions on Transfer.
The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by
the corporation upon the transfer of such shares.
6.04. Lost, Destroyed or
Stolen Certificates. Where the owner claims that his certificate for shares has been lost, destroyed or wrongfully taken, a
new certificate shall be issued in place thereof if the owner (a) so requests before the corporation has notice that such shares
have been acquired by a bona fide purchaser, and (b) files with the corporation a sufficient indemnity bond, and (c) satisfies
such other reasonable requirements as may be prescribed by or under the authority of the Board of Directors.
6.05. Consideration for
Shares. The shares of the corporation may be issued for such consideration as shall be fixed from time to time by the Board
of Directors, provided that any shares having a par value shall not be issued for a consideration less than the par value thereof.
The consideration to be paid for shares may be paid in whole or in part, in money, in other property, tangible or intangible, or
in labor or services actually performed for the corporation. When payment of the consideration for which shares are to be issued
shall have been received by the corporation, such shares shall be deemed to be fully paid and nonassessable by the corporation.
No certificate shall be issued for any share until such share is fully paid.
6.06. Stock Regulations.
The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with
the statutes of the State of Wisconsin as it may deem expedient concerning the issue, transfer and registration of certificates
representing shares of the corporation.
ARTICLE VII. SEAL
7.01. The Board of Directors
shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation and
the state of incorporation and the words, “Corporate Seal.”
ARTICLE VIII. AMENDMENTS
8.01. Amendment by Shareholders.
Except as otherwise set forth in these By-Laws or otherwise provided for by Law, no amendment, alteration, change, or repeal of
or to the By-Laws of the Corporation shall be adopted by the Shareholders except by the affirmative vote of the holders of 67%
or more or the outstanding shares of the Corporation entitled to vote, cast at a meeting of the stockholders called for that purpose.
8.02. By Directors.
These by-laws may also be altered, amended or repealed and new by-laws may be adopted by the Board of Directors by affirmative
vote of a majority of the number of directors present at any meeting at which a quorum is in attendance; but no by-law adopted
by the shareholders shall be amended or repealed by the Board of Directors if the by-law so adopted so provides.
8.03. Implied Amendments.
Any action taken or authorized by the shareholders or by the Board of Directors, which would be inconsistent with the by-laws then
in effect but is taken or authorized by affirmative vote of not less than the number of shares or the number of directors required
to amend the by-laws so that the by-laws would be consistent with such action, shall be given the same effect as though the by-laws
had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized.
ARTICLE IX. TENDER OFFERS AND MERGERS
9.01. Consideration of Offers.
A. In addition to
any affirmative vote required by law or under any other section of these By-Laws and except as otherwise provided for in Sub-paragraph
B:
(1) Any merger or consolidation
of the Corporation or its subsidiary into any 30% stockholder or any other corporation which, after such merger or consolidation,
would be an affiliate of a 30% stockholder, or
(2) Any sale, exchange,
pledge or other disposition to or with any 30% stockholder or any assets of the Corporation or its subsidiary, or
(3) The issue or transfer
by the Corporation or its subsidiary of any securities of the Corporation or its subsidiary to any 30% stockholder in exchange
for cash, securities, or other property, or
(4) Any reclassification
of securities, recapitalization, reorganization, merger or consolidation of the Corporation or its subsidiary which has the effect
of increasing the proportionate share of outstanding shares which is directly or indirectly owned by any 30% stockholder, shall
require the affirmative vote of the holders of at least 90% or more of the outstanding shares of the Corporation entitled to vote,
cast at a meeting of the stockholders called for that purpose. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required or that some lesser percentage may be otherwise specified.
B. The provisions
of Sub-paragraph A shall be applicable to any transaction which might otherwise be described thereby, and the approval of such
transaction shall require only such affirmative vote as is required by law or set forth in the By-Laws or the Corporation if all
of the following have been met:
(1) Approval of
Board of Directors. When any of the above transactions are recommended by the Board of Directors, upon the affirmative vote
of two-thirds or more of the Directors then existing, cast at a meeting of the Board called for that purpose,
(2) Fair Price Provision.
When the aggregate amount of cash and fair market value of any other consideration to be received per share by holders of outstanding
shares of the Corporation is at least equal to one of the following:
(a) The highest price
per share paid by such 30% stockholder in acquiring any of its holdings in the Corporation within 18 months previous to the date
of such offer,
(b) The earnings
per share received for the 4 consecutive quarters preceding the record date for solicitation of votes on the transaction multiplied
by the then price/earnings multiple (if any) of such 30% stockholder as customarily computed and reported in the financial community,
(c) The then existing
book value of outstanding shares of the Corporation.
(3) Mandatory Redemption.
The minority stockholders existing after the transaction has been consummated shall have the right for a period of 6 months following
consummation of the transaction to cause the 30% stockholder to redeem such stockholder’s shares at a redemption price at
least equal to the price determined under Sub-paragraph (2) above.
9.02. Social Effect of Tender
or Merger. Upon the receipt of any tender offer for consideration by the Board of Directors for recommendation to the stockholders
of the Corporation, in addition to factors which are required under the business judgment rule and fiduciary obligations of the
Board of Directors, such consideration shall include a review of the social and economic effects of any proposed transaction and
such factors shall be given such weight in its consideration as the Board of Directors shall, in its discretion, declare to be
valid and appropriate under the circumstances.
9.03. Definitions. For
purposes of these By-Laws:
A. A “person”
shall mean any individual, firm, corporation, or other entity.
B. A “30% stockholder”
shall mean any person who or which as of the record date for the determination of stockholders entitled to notice of and to vote
on such tender or merger or any business combination presented for consideration, or immediately prior to such transaction,
(1) Is the beneficial
owner, directly or indirectly, or not less than 30% of the voting shares of the Corporation, or
(2) Is an affiliate
of such person and within 2 years prior thereto was the beneficial owner of not less than 30% of such voting shares of the Corporation,
or
(3) Is an assignee
or has otherwise succeeded to any shares of stock which were at any time within 2 years prior thereto beneficially owned by any
30% stockholder and such assignment of succession shall have occurred in the course of a transaction or series of transactions
not involving a public offering within the meaning of the Securities Act of 1933.
C. A “beneficial
owner” shall be any person:
(1) Who owns,
directly or indirectly, in the name of such person or any affiliate or associate thereof,
(2) Who has the
right to acquire, pursuant to any agreement therefor, or to vote shares of the Corporation, or
(3) Who, together
with any other person or affiliate or associate thereof, has any agreement, arrangement, or understanding for the purpose of acquiring,
holding, voting, or disposing of any shares of the Corporation.
D. An “affiliate”
or “associate” shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
9.04. Amendment. Notwithstanding
any other provision of the By-Laws or as otherwise provided for by law, this Article may not be amended, altered, repealed, or
otherwise changed except upon the affirmative vote of the holders of more than 75% or more of the outstanding shares of the Corporation
entitled to vote, cast at a meeting of the stockholders for that purpose.
ARTICLE X
10.01 Right to Indemnification.
Each officer and director shall be indemnified by the Corporation to the fullest extent permitted by law, or as may hereafter be
increased by amendment thereto, for all reasonable expenses, including attorney's fees, disbursements, charges and other costs,
and against all liability, including judgments, penalties, assessments, fines or forfeitures, and other obligations incurred by,
imposed upon, or asserted against such officer or director in connection with any civil, criminal, investigative, or administrative
action or proceeding brought or threatened against him or her by reason of his or her being or having been an officer or director
of the Corporation; provided, however, that in situations other than a successful defense, such officer or director shall not be
indemnified where the expense or liability arises from a breach or failure to perform a duty and such breach or failure to perform
constitutes (a) a willful failure to deal fairly with the Corporation in connection with a matter in which there is a material
conflict of interest, (b) a violation of criminal law, unless the officer or director had reasonable cause to believe the conduct
was lawful and did not have reasonable cause to believe that the conduct was unlawful, (c) a transaction from which the officer
or director derived an improper personal benefit, or (d) willful misconduct. Subject to Section 180.0853, Wisconsin Statutes, an
officer or director shall be entitled to reimbursement for reasonable expenses incurred in defense against actions or proceedings
upon (a) written affirmation of good faith belief that he or she has not breached or failed to perform any duty to the Corporation,
and (b) a written undertaking to repay any amounts for which the Corporation determines that indemnification is not permitted under
this Article or Chapter 180 of the Wisconsin Statutes.
10.02 Right to Legal Proceedings.
If any claim made under this Article is not paid by the Corporation within thirty days following written notice, an officer or
director may institute legal proceedings against the Corporation upon such claim and, if successful, the claimant shall be entitled
to be paid thereon. However, it shall be a defense to any such action that the claimant has not met the standard of conduct set
forth under this Article or Chapter 180 of the Wisconsin Statutes which permit the Corporation to indemnify the officer or director
for the amount claimed, but the burden of proving such defense shall be upon the Corporation.
10.03 Employees and Agents.
The Corporation, by resolution of the Board of Directors, may, upon such terms as the Board deems appropriate, indemnify and permit
reasonable expenses of any employee or agent of the Corporation with respect to actions taken or failed to be taken in his or her
capacity as an employee or agent of the Corporation.
10.04 Contract Rights.
All rights established under this Article shall be deemed a contract between the Corporation and the officer, director, employee,
or agent pursuant to which the parties intend to be legally bound. Any repeal, amendment, or modification of this Article shall
be prospective, applying only to conduct occurring thereafter, and shall not affect any rights or obligations then existing.
10.05 Scope. The rights
granted under this Article shall not be deemed exclusive of any other rights to which an officer or director may be entitled under
any statute, agreement, or otherwise. Indemnification of any payment of expenses provided hereunder shall continue to a person
who has ceased to be an officer or director in respect to the matters arising prior to such time and, further, shall inure to the
benefit of the heirs, administrators, and personal representatives of such person.
10.06 Insurance. The
Corporation may purchase and maintain insurance, at its expense, to protect itself and any person provided for hereunder against
any liability asserted against that person or incurred by that person in any such capacity, or arising out of that person's status,
whether or not the Corporation would have the power to indemnify such person against that expense, liability, or other loss under
this Article.”
EXHIBIT
31.1
CERTIFICATION
PURSUANT TO 18 U.S.C.
SECTION
1350, AS ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
| I, Robert
J. Cera, President and Chief Executive Officer of Baylake Corp., certify that: |
1. | I
have reviewed this quarterly report on Form 10-Q of Baylake Corp.; |
2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
3. | Based
on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
4. | The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed
such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation;
and |
| d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and |
5. | The
registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions): |
| a) | All
significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information;
and |
| b) | Any
fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
Date: |
October
30, 2015 |
|
|
|
|
/s/ Robert J.
Cera |
|
Robert J. Cera |
|
President and Chief Executive Officer |
|
EXHIBIT
31.2
CERTIFICATION
PURSUANT TO 18 U.S.C.
SECTION
1350, AS ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
| I, Kevin
L. LaLuzerne, Chief Financial Officer of Baylake Corp., certify that: |
1. | I
have reviewed this quarterly report on Form 10-Q of Baylake Corp.; |
2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
3. | Based
on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
4. | The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed
such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation;
and |
| d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and |
5. | The
registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions): |
| a) | All
significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information;
and |
| b) | Any
fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
Date: |
October
30, 2015 |
|
|
|
|
/s/ Kevin L.
LaLuzerne |
|
Kevin L. LaLuzerne |
|
Treasurer and Chief Financial Officer |
|
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with this Quarterly Report of Baylake Corp. (the “Company”) on Form 10-Q as filed with the Securities and
Exchange Commission on or about the date hereof (the “Report”), I, Robert J. Cera, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
(1) | The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
(2) | The
information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
Date: |
October
30, 2015 |
|
|
|
|
/s/ Robert J.
Cera |
|
Robert J. Cera |
|
President and Chief Executive Officer |
|
A
signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by Section
906, has been provided to Baylake Corp. and will be retained by Baylake Corp. and furnished to the Securities and Exchange Commission
or its staff upon request.
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with this Quarterly Report of Baylake Corp. (the “Company”) on Form 10-Q as filed with the Securities and
Exchange Commission on or about the date hereof (the “Report”), I, Kevin L. LaLuzerne, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that
to the best of my knowledge:
(1) | The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
(2) | The
information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
Date: |
October
30, 2015 |
|
|
|
|
/s/ Kevin L.
LaLuzerne |
|
Kevin L. LaLuzerne |
|
Treasurer and Chief Financial Officer |
|
A
signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by Section
906, has been provided to Baylake Corp. and will be retained by Baylake Corp. and furnished to the Securities and Exchange Commission
or its staff upon request.
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