<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
-------------------------------------------------
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 0-8679
---------------------------------------------------------
BAYLAKE CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer No.)
Identification or organization)
217 North Fourth Avenue, Sturgeon Bay, WI 54235
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(920)-743-5551
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -------
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of November 8, 1999.
$5.00 Par Value Common
3,712,337 shares
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1.
Consolidated Condensed Balance Sheet as of September 30, 1999 3
and December 31, 1998
Consolidated Condensed Statement of Income Three and Nine 4
months ended September 30, 1999 and 1998
Consolidated Statement of Comprehensive Income Three and Nine 5
Months ended September 30, 1999 and 1998
Consolidated Statement of Cash Flows Nine months ended 6 - 7
September 30, 1999 and 1998
Notes to Consolidated Condensed Financial Statements 8 - 9
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations 10 - 25
Part II. Other Information 25 - 26
Signatures 27
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
SEPT. 30 DEC. 30
ASSETS 1999 1998
------ -------- --------
<S> <C> <C>
Cash and due from banks $ 19,984 $ 17,560
Investment securities available for sale (at market) 129,437 112,536
Investment securities held to maturity (market 18,541 15,510
value $18,449 and $15,765)
Federal funds sold 0 26,106
Loans 433,821 408,921
Less: Allowance for loan losses 8,216 11,035
-------- --------
Loan, net of allowance for loan losses 425,605 397,886
Bank premises and equipment 17,735 15,627
Federal Home Loan Bank stock (at cost) 2,650 2,650
Accrued interest receivable 4,222 3,913
Income taxes receivable 807 1,459
Deferred income taxes 2,044 520
Goodwill 7,025 8,326
Other Assets 4,864 5,345
-------- --------
Total Assets $632,914 $607,438
======== ========
LIABILITIES
-----------
Domestic deposits
Non-interest bearing $ 62,757 $ 58,311
Interest bearing
NOW 46,608 54,974
Savings 150,908 132,075
Time, $100,000 and over 53,614 47,717
Other time 188,403 202,207
-------- --------
Total interest bearing $439,533 $436,973
-------- --------
Total deposits 502,290 495,284
Short-term borrowings
Federal funds purchased, repurchase 77,602 56,758
agreements and Federal Home Bank Loans
Long-term debt 264 392
Accrued expenses and other liabilities 6,616 5,911
Dividends payable 0 661
Minority interest payable 0 3,160
-------- --------
Total liabilities $586,772 $562,166
-------- --------
STOCKHOLDERS EQUITY
-------------------
Common stock $5 par value-authorized 10,000,000
shares; issued 3,735,496 shares in 1999 and
3,690,021 in 1998; outstanding 3,712,337 in
1999; 3,656,145 in 1998 18,677 18,473
Additional paid-in capital 6,716 6,229
Retained earnings 22,326 19,394
Treasury Stock (625) (625)
Net unrealized gain (loss) on securities available
for sale, net of tax of $549 in 1999 and $975
in 1998.
(952) 1,801
-------- --------
Total stockholder equity 46,142 45,272
-------- --------
Total liabilities and stockholder equity $632,914 $607,438
======== ========
</TABLE>
<PAGE> 4
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of dollars except amounts per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 9,677 $ 7,230 $27,785 $20,990
Interest on investment securities
Taxable 1,559 1,264 4,453 3,781
Exempt from federal income taxes 675 579 1,913 1,756
Other interest income 0 26 239 26
------- ------- ------- -------
Total interest income 11,911 9,099 34,390 26,553
Interest expense
Interest on deposits 4,880 3,739 14,556 10,714
Interest on short-term borrowings 851 764 2,517 2,569
Interest on long-term debt 5 7 16 21
------- ------- ------- -------
Total interest expense 5,736 4,510 17,089 13,304
------- ------- ------- -------
Net interest income 6,175 4,589 17,301 13,249
Provision for loan losses 193 150 538 451
------- ------- ------- -------
Net interest income after provision for
loan losses 5,982 4,439 16,763 12,798
------- ------- ------- -------
Other income
Fees from fiduciary activities 147 102 430 336
Fees from loan servicing 172 240 618 569
Fees for other services to customers 569 475 1,647 1,307
Gains from sales of loans 52 287 256 686
Securities gains, net - - - -
Other income 85 34 296 123
------- ------- ------- -------
Total other income 1,025 1,138 3,247 3,021
------- ------- ------- -------
Other expenses
Salaries and employee benefits 2,461 2,034 7,211 5,830
Occupancy expense 307 247 926 768
Equipment expense 308 246 946 732
Data processing and courier 227 185 640 519
Operation of other real estate 50 - 9 -
Other operating expenses 1,179 710 3,244 2,052
------- ------- ------- -------
Total other expenses 4,532 3,422 12,976 9,901
------- ------- ------- -------
Income before income taxes 2,475 2,155 7,034 5,918
Income tax expense 716 624 2,102 1,665
------- ------- ------- -------
Net Income $ 1,759 $ 1,531 $ 4,932 $ 4,253
======= ======= ======= =======
Net income per share (1) $ .48 $ .42 $ 1.33 $ 1.16
Cash dividends per share $ 0.18 $ 0.17 $ 0.54 $ 0.51
</TABLE>
(1) Based on 3,698,031 average shares outstanding in 1999 and 3,659,313 in 1998.
<PAGE> 5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,759 $ 1,531 $ 4,932 $ 4,253
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during
Period (573) 1,856 (2,753) 1,840
------- ------- ------- -------
Comprehensive income $ 1,186 $ 3,387 $ 2,179 $ 6,093
======= ======= ======= =======
</TABLE>
<PAGE> 6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
---- ----
(thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 27,440 $ 13,197
Investments 6,345 3,717
Fees and service charges 3,008 1,781
Interest paid to depositors (14,349) (6,882)
Interest paid to others (2,539) (1,835)
Cash paid to suppliers and employees (8,565) (5,260)
Income taxes paid (2,918) (1,134)
--------- ---------
Net cash provided by operating activities 8,422 3,584
Cash flows from investing activities:
Principal payments received on investments 38,283 15,280
Purchase of investments (36,411) (19,545)
Proceeds from sale of other real estate owned 1,399 -
Loans made to customers in excess of principal collected (28,861) (18,842)
Capital expenditures (3,001) (1,305)
--------- ---------
Net cash used in investing activities (28,591) (24,412)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts, and savings 14,914 7,074
Accounts
Net increase (decrease) in advances from borrowers 20,716 18,174
Net increase (decrease) in time deposits (7,908) 1,229
Proceeds from issuance of common stock 692 52
Redemption of preferred stock (3,160) -
Treasury stock acquired - (211)
Dividends paid (2,661) (1,843)
--------- ---------
Net cash provided by financing activities 22 593 24,475
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,424 3,647
Cash and cash equivalents, beginning 17,560 15,065
--------- ---------
Cash and cash equivalents, ending $ 19,984 $ 18,712
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
---- ----
Reconciliation of net income to net cash provided by operating activities:
<S> <C> <C>
Net income $ 4,932 $ 4,253
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 893 1,037
Provision for losses on loans and real estate owned 538 451
Amortization of premium on investments 137 128
Accretion of discount on investments (111) (212)
Cash surrender value increase (41) (41)
(Gain) loss from disposal of ORE (137) -
(Gain) loss on sale of loans (256) (686)
Proceeds from sale of loans held for sale 23,511 10,601
Originations of loans held for sale (23,255) (9,914)
Equity in income of service center (78) (27)
Amortization of goodwill 404 243
Amortization of mortgage servicing rights 82 42
Mortgage servicing rights booked (208) (170)
Deferred compensation 156 36
Changes in assets and liabilities:
Interest receivable (309) (323)
Prepaids and other assets 390 121
Unearned income (233) (18)
Interest payable 201 316
Taxes payable (816) (179)
Deferred taxes - -
Other liabilities 2,622 271
-------- --------
Total adjustments 3,490 1,676
-------- --------
Net cash provided by operating activities $ 8,422 $ 5,929
======== ========
</TABLE>
<PAGE> 8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. The accompanying unaudited consolidated financial statements should be read
in conjunction with Baylake Corp.'s ("Company") 1998 annual report on Form
10-K. The unaudited financial information included in this report reflects
all adjustments (consisting only of normal recurring accruals) which are
necessary for a fair statement of the financial position as of September
30, 1999 and December 31, 1998. The results of operations for the three and
nine months ended September 30, 1999 and 1998 are not necessarily
indicative of results to be expected for the entire year.
2. The book value of investment securities, by type, held by the Company are
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
---- ----
(thousands of dollars)
<S> <C> <C>
Investment securities held to maturity:
Obligations of state and political subdivisions $ 18,541 $ 15,510
Other 0 0
--------- ---------
Investment securities held to maturity $ 18,541 $ 15,510
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 21,040 $ 20,192
Obligations of states and political subdivisions $ 34,697 $ 34,288
Mortgage-backed securities $ 71,603 $ 54,981
Other $ 2,097 $ 3,075
--------- ---------
Investment securities available for sale $ 129,437 $ 112,536
========= =========
</TABLE>
3. At September 30, 1999 and December 31, 1998, loans were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
---- ----
(thousands of dollars)
<S> <C> <C>
Commercial, industrial and agricultural $ 257,797 $ 246,396
Real estate - construction $ 21,919 $ 9,553
Real estate - mortgage $ 139,423 $ 137,837
Installment $ 15,228 $ 15,914
Less: Deferred loan origination fees, net of costs $ (546) $ (779)
--------- ---------
$ 433,821 $ 408,921
Less allowance for loan losses $ (8,216) $ (11,035)
--------- ---------
Net loans $ 425,605 $ 397,886
</TABLE>
4. As of December 31, 1993, the Company adopted STATEMENTS OF FINANCIAL
ACCOUNTING STANDARDS NO. 115 (SFAS 115) "ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES." Accordingly, investment securities
available for sale at September 30, 1999 and December 31, 1998 are carried
at market value. Adjustments up or down to market value are recorded as a
separate component of equity, net or tax. Premium amortization and discount
accretion are recognized as adjustments to interest income. Realized gains
or losses on disposition are based on the net proceeds and the adjusted
carrying amount of the securities sold, using the specific identification
method.
5. As of January 1, 1996, the Company adopted SFAS No. 122, "ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS" which amends SFAS No. 65, "ACCOUNTING FOR
CERTAIN MORTGAGE BANKING ACTIVITIES." This statement required that the
rights to service mortgage loans for others be recognized as separate
assets regardless of how those rights were acquired. The impact on the
company's financial position and the results of operation were not material
for the three and nine months ended September 30, 1999 and 1998.
<PAGE> 9
6. As of January 1, 1998, the Company adopted SFAS No. 130, "REPORTING
COMPREHENSIVE INCOME." This statement established standards for reporting
and the display of comprehensive income in a full set of general-purpose
financial statements.
Effective December 31, 1997, the Company adopted SFAS No. 128, "EARNINGS
PER SHARE". The statement specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly
held stock. All reported prior earnings per share information has been
restated with SFAS No. 128.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION." This statement requires certain related disclosures about
products and services, geographic areas, and major customers. The segment
and other information disclosures were required for the year end December
31, 1998.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Company"), which may not be otherwise apparent from the
consolidated financial statements included in this report. This discussion and
analysis should be read in conjunction with those financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report for a more complete understanding of the following
discussion and analysis.
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on the current expectations of management. 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 such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the control of the Company, that could materially
differ from what may be expressed or forecasted in such forward-looking
statements. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the relationships; demand for
products and services; the degree of competition by traditional and
non-traditional competitors; changes in banking regulations; changes in tax
laws; changes in prices; the impact of technological advances; governmental and
regulatory policy changes; trends in customer behavior as well as their ability
to repay loans; and changes in the national economy.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen") and
changed its name to Baylake Bank, N.A. ("BLBNA"). No payments to the former
shareholder have been made, but are contingently payable in May 1999 based on a
formula set forth in the stock purchase agreement. Prior to the acquisition,
Evergreen was under the active supervision of the Office of the Comptroller of
the Currency ("OCC") due to its designation of the bank as a "troubled
institution" and "critically under capitalized" based on severe asset quality
problems and significant fraudulent activities by former bank employees and
directors.
The acquisition was accounted for using the purchase method of accounting,
therefore it would affect future operations. At the time of acquisition, BLBNA
had total assets of $101.8 million, deposits of $93.2 million and loans of $83.7
million. On March 15, 1999, BLBNA merged with Baylake Bank ("Bank").
<PAGE> 11
All per share information has been restated to reflect the 3-for-2 stock
dividend paid on May 15, 1998, to shareholders of record May 1, 1998.
Results of Operations
For the three months ended September 30, 1999, net income increased $228,000, or
14.9%, to $1.76 million from $1.53 million for the third quarter of 1998. Basic
operating earnings per share increased to $.48 per share in the third quarter of
1999 compared with $.42 in 1998, an increase of 14.3%. On diluted operating
earnings per share, the Company recorded $.46 in 1999, compared to $.41 per
share in 1998.
The annualized return on average assets and return on average equity for the
three months ended September 30, 1999 were 1.12% and 15.13%, respectively
compared to 1.28% and 13.63%, respectively for the same period a year ago.
For the nine months ended September 30, 1999, net income increased $679,000, or
16.0%, to $4.93 million from $4.25 million for the first nine months of 1998.
Basic operating earnings per share increased to $1.33 per share in 1999 compared
with $1.16 in 1998, an increase of 14.7%. On a diluted operated earnings per
share basis, the Company recorded $1.28 per share in 1999, compared to $1.13 per
share in 1998.
The annualized return on average assets and return on average equity for the
nine months ended September 30, 1999 were 1.08% and 14.24%, respectively
compared to 1.23% and 12.95%, respectively for the same period a year ago.
The change in net income for the period is primarily due to improved net
interest income and an increase in other income offset by increased other
expenses.
Cash dividends declared in 1999 increased 5.9% to $.54 per share compared with
$.51 in 1998.
Net Interest Income
Net interest income is the largest component of the Company's operating income
(net interest income plus other non-interest income) accounting for 84.9% of
1999 total operating income, as compared to 82.4% in 1998. Net interest income
represents the difference between interest earned on loans, investments and
other earning assets offset by the interest expense attributable to the deposits
and the borrowings that fund them. Interest fluctuations together with changes
in the volume and types of earning assets and interest-bearing liabilities
combine to affect total net interest income. This analysis discusses net
interest income on a tax-equivalent basis in order to provide comparability
among the various types of interest earned. Tax-exempt interest income is
adjusted to a level that reflects such income as if it were fully taxable.
<PAGE> 12
Net interest income for the three months ended September 30, 1999 increased $1.6
million, or 34.6%, to $6.2 million from $4.6 million for the same period a year
ago. Total interest income for the third quarter of 1999 increased $2.8 million,
or 30.9%, to $11.9 million from $9.1 million for the third quarter of 1998,
while interest expense increased $1.2 million, or 27.2%, to $5.7 million from
$4.5 million in the third quarter of 1998. The improvement in net interest
income occurred as a result of growth in the average volume of earning assets
and non-interest bearing deposits and a decline in the cost of average interest
paying liabilities offset by an increase in interest paying liabilities and a
decline in the yield on earning assets.
For the three months ended September 30, 1999, average earning assets increased
$133.3 million, or 30.7%, when compared to the same period last year. The
Company recorded an increase in average loans of $109.8 million, or 34.8%, for
the third quarter of 1999 compared to the same period a year ago. Loans have
typically resulted in higher rates of interest payable to the Company than have
investment securities.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread increased 22 basis points to 4.06% from
3.84% in 1998, as the average yield on earning assets decreased 2 basis points
while the average rate paid on interest-bearing liabilities decreased 24 basis
points over the same period.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
factor affecting an increasing net interest margin.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended September 30, 1999 increased from 4.46% to 4.56% compared to a year ago.
The average yield on interest earning assets amounted to 8.56% for the third
quarter of 1999, representing a decrease of 2 basis points from the same period
last year. Total loan yields declined 6 basis points to 9.02%, while total
investment yields decreased 38 basis points to 6.77%, as compared to the same
period a year ago. The Company's average cost on interest-bearing deposit
liabilities decreased 19 basis points to 4.41% for the third quarter of 1998,
while short-term borrowing costs decreased 44 basis to 5.10% comparing the two
periods. The above factors contributed to an increase in the Company's overall
interest margin for the three months ended September 30, 1999. Other factors
contributing to the increase was the Company's efforts intended to increase
interest-earning assets and thus reduce the percentage of equity to total assets
(known as leveraging) by acquiring additional funding, primarily from the
Federal Home Loan Bank of Chicago offset by increased volume of non-accrual
loans (as a result of the BLBNA acquisition).
<PAGE> 13
For the nine months ended September 30, 1999, average earning assets increased
by $132.8 million, or 31.1%, when compared to the same period last year. Loans
have continued to grow as the Company recorded an increase in average loans of
$110.5 million, or 36.1%, for the first nine months of 1999 compared to the same
period in 1998.
Net interest margin (on a federal tax-equivalent basis) for the first nine
months of 1999 declined to 4.37% from 4.44% for the same period last year. The
average yield on interest-earning assets amounted to 8.46% for the first nine
months of 1999, representing a decrease of 15 basis points over the same period
last year. Total loan yields declined 26 basis points to 8.92% while yields on
investment securities declined 38 basis points to 6.73%. The Company's average
cost on interest-bearing deposit liabilities decreased 14 basis points to 4.48%
for the first nine months of 1999, while short-term borrowing costs declined 62
basis points to 5.06% comparing the two periods. The above factors as well as
the previously listed factors contributed to a decrease in the Company's overall
interest margin for the first nine months ended September 30, 1999.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 91.6% for the first nine months of 1999 compared with
92.6% for the same period in 1998. The ratio declined in 1999, primarily as a
result of additional non-accrual loans acquired in the BLBNA purchase.
Provision for Loan Losses
The provision for loan losses for the three months ended September 30, 1999
increased $43,000, or 28.7%, to $193,000 compared with $150,000 for the third
quarter of 1998. For the nine months ended September 30, 1999, the provision for
loan losses increased $87,000, or 19.3%, to $538,000 from $451,000 for the same
period last year. Management believes that the current allowance is adequate in
view of the present condition of the Company's loan portfolio.
Non-Interest Income
Total non-interest income decreased $113,000, or 9.9%, to $1.0 million for the
third quarter of 1999, from $1.1 million for the third quarter a year ago. This
increase has occurred as a result of increased trust income, fees on other
customer services and other income offset by decreased gains from sales of loans
and decreased fees from loan servicing.
For the first nine months of 1999, non-interest income has improved $236,000, or
7.5%, to $3.2 million from $3.0 million for the same period a year ago.
<PAGE> 14
Trust fees increased $94,000 or 28.0% in 1999 compared to 1998, primarily as a
result of an increase in trust an estate business and timing of billings.
Loan servicing fees increased $49,000 or 8.6% to $618,000 in 1999. The increase
in 1999 occurred as a result of increased servicing income due to a larger
portfolio of commercial loan business sold on the secondary market and serviced
by Company.
Gains on sales on loans in the secondary market decreased $430,000 to $256,000
in 1999 primarily as a result of decreased gains from sales of commercial loans
due to a lack of premiums in the secondary market. Sales of total loans for the
nine months increased to $23.5 million, compared to $10.6 million a year ago.
Service charges on deposit accounts showed an increase of $238,000 or 32.3% over
1998 results accounting for the improvement in fee income generated for other
services to customers.
Included in 1999 other income are recoveries of $127,000 related to the BLBNA
operation, providing the increase to other income as related to 1998 results.
Non-Interest Expense
Non-interest expense increased $1.1 million, or 32.4%, for the three months
ended September 30, 1999 compared to the same period in 1998. Salaries and
employee benefits showed an increase of $427,000, or 21.0%, for the period as a
result of additional staffing acquired as a result of the BLBNA purchase, salary
and related benefit increases. Full time equivalent staff increased to 254 from
203 a year earlier. Slight increases in occupancy and equipment expenses
occurred as a result of expansion efforts in the Green Bay and Waupaca markets
and costs related to modernization of various facilities.
Other operating expenses increased $469,000 or 66.0%. Included in 1999 expenses
were amortization of goodwill related to the Four Seasons acquisition of $82,000
(the same as in 1998) and amortization of $57,000 related to the BLBNA
acquisition.
Legal expense and loan collection expense increased $349,000 for the three
months ended September 30, 1999, primarily the result of various legal issues
revolving around loan collection efforts of the BLBNA loan portfolio.
Other items comprising other operating expense shows an increase of $121,000 or
a 18.2% increase in 1999 compared to 1998. The overhead ratio, which is computed
by subtracting non-interest income from non-interest expense and dividing by
average total assets was 2.24% for the three months ended September 30, 1999
compared to 1.91% for the same period in 1998.
<PAGE> 15
Non-interest expense increased $3.1 million, or 31.1%, for the first nine months
ended September 30, 1999, compared to the same period in 1998. Salaries and
employee benefits increased $1.4 million, or 23.7%, primarily for the same
reasons as listed above. Occupancy and equipment expenses increased $158,000, or
20.6%, a result of the BLBNA acquisition and additional depreciation expense
from branch expansion efforts. Operations from other real estate show expense of
$9,000. Included were gains of $194,000 taken on sales of other real estate,
$131,000 of the gains, a result from sales of lots in Idlewild Valley, Inc., a
former subsidiary of Bank. Additional gains on sales totaling $63,000 stemmed
from property sales of assets formerly held as loans in the BLBNA loan
portfolio. In addition, losses on sales of property totaling $56,000 have
resulted for the first nine months of 1999. Included in those losses are losses
on three residential properties totaling $50,000 from the BLBNA portfolio.
Other operating expenses increased $1.2 million, or 58.1%, for the nine months
ended September 30, 1999 as compared to a similar period in 1998. Included in
1999 expenses was amortization of goodwill related to the Four Seasons
acquisitions of $246,000 (same as previous year) and $155,000 related to the
BLBNA acquisiton. Legal expense and loan collection expense increased $599,000
for the nine months ended September 30, 1999 for the same reasons as listed
above. Payments to regulatory agencies increased $87,000 to $118,000 for the
nine months ended September 30, 1999. $77,000 of the increase occurred as a
result of the BLBNA acquisition. For the Bank, these charges related to a debt
service assessment related to Financing Corporation (FICO). A risk
classification of 1A (rating assigned to well-capitalized institutions) allowed
Bank to experience no Federal Deposit Insurance Corporation (FDIC) assessments
for the first six months of 1999. BLBNA had been assigned a risk classification
rating of 3B (rating assigned to troubled and critically undercapitalized
institutions) therefore in addition to a FICO assessment BLBNA also received a
FDIC assessment. The merger of BLBNA with Bank eliminated that additional
expense as of March 31, 1999. Data processing expense increased $99,000 during
this timeframe, a result of additional transaction volume. Other operating
expense increased $252,000, or 21.9%, the result of additional expense for
supplies, postage, and telephone related to growth in branch expansion efforts.
The overhead ratio was 2.13% for the nine months ended September 30, 1999
compared to 1.99% for the same period in 1998.
The Company continues its commitment to deliver quality service and products for
its customer base.
Income Taxes
Income tax expense for the Company for the three months ended September 30, 1999
was $716,000, an increase of $92,000 or 14.7% compared to the same period in
1998. Income tax expense for the nine months ended September 30, 1999 was $2.1
million, an increase of $437,000 or 26.3%. The increase in income tax provision
for both periods was due to increased taxable income.
<PAGE> 16
Under current law, the state of Wisconsin imposes a corporate franchise tax of
7.9% on the separate taxable incomes of the affiliated members of the Company's
consolidated income tax group except for Baylake Investments, which is located
in Nevada. Presently, the income of Baylake Investments is only subject to
taxation in Nevada which currently does not impose a corporate income or
franchise tax. The Wisconsin 1999-2001 State Budget Bill contained a proposal
for the adoption of combined corporate income tax reporting in Wisconsin
beginning in the year 2000. If the state legislative branch had approved the
proposal, then substantially all of the income of all of the members of the
Company's consolidated federal income tax return group, including that of
Baylake Investments, would have been subject to Wisconsin corporate franchise
tax. That section of the bill did not gain the necessary approval from the
legislature, therefore, it will not impact the Company during that time period.
Balance Sheet Analysis
Loans
At September 30, 1999, total loans increased $24.9 million, or 6.1% to $433.8
million from $408.9 million at December 31, 1998. The change in loan mix in the
Company's loan portfolio resulted from an increase in commercial loans to $257.8
million at September 30, 1999 compared to $246.4 million at December 31, 1998.
In addition, real estate construction loans increased to $21.9 million at
September 30, 1999 compared to $9.6 million at December 31, 1998. Real estate
mortgage loans increased to $139.4 million at September 30, 1999 compared with
$137.8 million at December 31, 1998.
Allowance for Possible Loan Losses
At September 30, 1999, the allowance for possible loan losses ("APLL") of $8.2
million represented 1.89% of total loans, down from 2.7% at December 31, 1998.
APLL of $6.5 million was acquired as a result of the BLBNA acquisition. Loans
increased 6.1% from December 31, 1998 to September 30, 1999, while the allowance
declined as a result of higher than normal net charge-offs for the quarter.
Provision expense was $193,000 for the three months ended September 30, 1999.
Net recoveries over chargeoffs of $679,000 occurred in the third quarter of
1999, the result of a $900,000 recovery from BLBNA loans. For the nine months
ended September 30, 1999, provision expense was $538,000, an increase of $86,000
or 19.2% compared to the same period in 1998. Net charge-offs of $2.5 million
occurred in the first nine months in 1999 as compared to $46,000 for the same
period in 1998. As loans have grown in the Bank's portfolio, management did not
believe there existed any trends indicating any undue portfolio risk. There does
exist potential asset quality problems in the loan portfolio acquired in the
BLBNA purchase although management believes sufficient reserves have been
provided in the APLL acquired in the BLBNA purchase to absorb potential losses
in the loan portfolio. In the twelve months since the purchase
<PAGE> 17
of BLBNA, management has undergone extensive efforts to identify and evaluate
potential problem loans stemming from the BLBNA acquisition. As an integral part
of their examination process on BLBNA since the acquisition, various regulatory
agencies have also done a review on these loans. Although no assurance can be
given, management feels that the majority of these loans have been identified.
Ongoing efforts are being made to collect these loans and involve the legal
process where necessary to minimize risk of further deterioration of these loans
for full collectibility.
Commercial, agricultural and other loan net charge-offs represented 95.3% of the
total net charge-offs for the nine months of 1999. In the commercial loan
sector, three loans totaling $2.4 million accounted for the net charge-offs.
Loans charged-off are subject to continuous review and specific efforts are
taken to achieve maximum recovery of principal and accrued interest.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb potential losses
arising from the credit granting process. Factors considered include the levels
of non-performing loans, other real estate, trends in past due loans, loan
portfolio growth, changes in loan portfolio composition, historical net
charge-offs, present and prospective financial condition of borrowers, general
and local economic conditions, specific industry conditions, other factors which
could affect potential credit losses such as Year 2000 issues related to
borrowers, and other regulatory or legal issues that could affect the
Registrant's loss potential.
Management believes that the balance of the allowance for possible loan losses
as of September 30, 1999 is sufficient to absorb potential loan losses.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
Non-performing assets at September 30, 1999 were $13.2 million compared to $14.1
million at December 31, 1998. Other real estate owned totals $142,000 and
consisted of two residential and one commercial properties. Non-accrual loans
represent $9.2 million of the total of non-performing assets, of which $6.1
million was acquired with the BLBNA acquisition. Real estate non-accrual loans
account for $7.8 million of the total (of which $2.8 million was residential
real estate
<PAGE> 18
and $4.7 million was commercial real estate), while commercial and industrial
non-accruals account for $1.1 million. Management believes collateral is
sufficient in the event of default. $3.8 million of troubled debt restructured
loans existed at September 30, 1999 compared with $3.0 million at December 31,
1998. Approximately $1.9 million of this total consists of one commercial real
estate credit which has been granted various concessions and had experienced
past cashflow problems. This credit was current at September 30, 1999.
Management believes that collateral is sufficient in those loans classified as
troubled debt in event of default. As a result the ratio of non performing loans
to total loans at September 30, 1999 was 3.0% compared to 3.4% at 1998 year end.
The Company's APLL was 62.9% of total non-performing loans at September 30, 1999
compared to 78.3% at year end 1998.
Investment Portfolio
At September 30, 1999, the investment portfolio increased $19.9 million, or
15.6% to $148.0 million from $128.0 million at December 31, 1998. At September
30, 1999, the investment portfolio represented 23.4% of total assets compared
with 21.1% at December 31, 1998. The increase in total investments occurred as a
result of a reduction in federal funds sold and an increase in federal funds
purchased accompanied by an increase in the loan portfolio.
Deposits
Total deposits at September 30, 1999 increased $7.0 million, or 1.4%, to $502.3
million from $495.3 million at December 31, 1998. Non-interest bearing deposits
at September 30, 1999 increased $4.4 million, or 7.6%, to $62.8 million from
$58.3 million at December 31, 1998. Interest-bearing deposits at September 30,
1999 increased $2.6 million, or .6%, to $439.5 million from $437.0 million at
December 31, 1998. Interest-bearing transaction accounts (NOW deposits)
decreased $8.4 million, primarily public fund deposits. Savings deposits
increased $18.8 million, or 14.3%, to $150.9 million at September 30, 1999. Time
deposits decreased $7.9 million, or 3.2%, to $242.0 million at September 30,
1999. Overall deposits for the first six months tend to slightly decline as a
result of the seasonality of the customer base as they drawdown deposits during
the early first half of the year in anticipation of the summer tourist season.
Emphasis will be placed on generating additional core deposits in 1999 through
competitive pricing of deposit products and through the branch delivery systems
that have already been established. The Company will also attempt to attract and
retain core deposit accounts through new product offerings and customer service.
Short Term Borrowings
Short-term borrowings consist of federal funds purchased, securities under
agreements to repurchase, and borrowings from the Federal Home
<PAGE> 19
Loan Bank. Total short-term borrowings at September 30, 1999 increased $20.8
million to $77.6 million from 56.8 million at December 31, 1998. The increase in
short-term borrowings resulted from increased loan demand.
Long Term Debt
The only component of long-term debt of $264,000 consists of a land contract
requiring annual payments of $53,000 plus calculated at prime + 1/4%. The land
contract is for debt used for the purchase of one of the properties in the Green
Bay region for branch location.
Liquidity
Liquidity refers to the ability of the Company, and its subsidiary Bank to
generate adequate amounts of cash to meet its needs for cash. The Company and
the Bank have different liquidity considerations.
The Bank meets their cash flow needs by having funding sources available to them
to satisfy the credit needs of customers as well as having available funds to
satisfy deposit withdrawal requests. Liquidity at the Bank is derived from
deposit growth, maturing loans, the maturity of the investment portfolio, access
to other funding sources, marketability of certain of their assets and strong
capital positions.
As shown in the Company's Consolidated Statements of Cashflows for the nine
months ended September 30, 1999, cash and cash equivalents increased $2.4
million during the period to $17.6 million at September 30, 1999. The increase
primarily reflected $8.4 million in net cash provided by operating activities
and $22.6 million by financing activities offset by $28.6 million used in
financing activities. Net cash provided by operating activities consisted of the
Company's net income for the periods increased by adjustments for non-cash
expenditures. Net cash used in investing activities consisted of a net flow of
funds provided by investment activities offset by a net increase in loans plus
necessary capital expenditures. Net cash provided by financing activities
resulted primarily from an increase in short term deposits and borrowed funds
and issuance of common stock offset by payment of dividends, a decrease in time
deposits and redemption of preferred stock. A component of the Company's
strategy to enter additional markets will continue to concentrate on core
deposit growth and utilize other funding sources such as the Federal Home Loan
Bank so as to reduce reliance on short-term funding needs.
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management views its
liquidity as the ability to raise cash at reasonable costs or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable
<PAGE> 20
assets maturing within one year. The Company attempts, when possible, to match
relative maturities of assets and liabilities, while maintaining the desired net
interest margin. Although the percentage of earning assets represented by loans
is increasing, management believes that liquidity is adequate to support
anticipated borrowing requirements and deposit flows.
Management believes that, in the current economic environment, the Company's and
the Bank's liquidity position are adequate. To management's knowledge, there are
no known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Bank or the Company's liquidity.
Interest Rate Sensitivity
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. All banks assume interest rate risk as an
integral part of normal banking operations. Management of interest rate risk
includes four components: policy statements, risk limits, risk measurement and
reporting procedures. a primary objective of asset/liability management is the
control and monitoring of interest rate risk. The Registrant's banks use an
Asset/Liability Committee ("ALCO") to manage risks associated with changing
interest rates, changing asset and liability mixes, and their impact on
earnings. The sensitivity of net interest income to market rate changes is
evaluated monthly by the ALCO committee.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. The mismatch between asset and liability repricing characteristics in
specific time intervals is referred to as "interest rate sensitivity gap." If
more liabilities than assets reprice in a given time interval a liability gap
position exists. In general, liability sensitive gap positions in a declining
interest rate environment increase net interest income. Alternatively asset
sensitive positions, where assets reprice more quickly than liabilities,
negatively impact the net interest income in a declining rate environment. In
the event of an increasing rate environment, opposite results would occur in
that a liability sensitivity gap position would decrease net interest income and
an asset sensitivity gap position would increase net interest income. The
sensitivity of net interest income to changing interest rates can be reduced by
matching the repricing characteristics of assets and liabilities.
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Registrant is liability sensitive, although management
believes that a range of plus or minus 15% within a one year pricing schedule is
acceptable. The analysis considers money market index accounts and 25% of NOW
accounts to be rate sensitive within three months. Regular savings, money market
deposit accounts and 75% of NOW accounts are considered to be rate sensitive
within one to five years. While these accounts are contractually short-term in
<PAGE> 21
nature, it is the Registrant's experience that repricing occurs over a longer
period of time. The Registrant views its savings and NOW accounts to be core
deposits and relatively non-price sensitive, as it believes it could make
repricing adjustments for these types of accounts in small increments without a
material decrease in balances. All other earning categories include loans and
investments as well as other paying liability categories such as time deposits
are scheduled according to their contractual maturities.
For the time frame within three months as of September 30, 1999, rate sensitive
liabilities exceeded rate sensitive assets by $71.4 million, or a ratio of rate
sensitive assets to rate sensitive liabilities of 71.4%. For the next time frame
of four to six months, rate sensitive liabilities exceeded rate sensitive assets
by $1.5 million, or a ratio of rate sensitive assets to rate sensitive
liabilities of 96.7%. For all assets and liabilities priced within a one year
time frame, the cumulative ratio of rate sensitive assets to rate sensitive
liabilities was 61.4%, which is outside the range of plus or minus 15% deemed
acceptable by management. When the Company requires funds beyond its ability to
generate them internally, it can borrow from a number of sources, including the
Federal Home Loan Bank of Chicago and other correspondent banks.
Management continually reviews its interest risk position through the committee
processes. Managements' philosophy is to maintain relatively matched rate
sensitive asset and liability position within the range described above, in
order to provide earnings stability in the event of significant interest rate
changes.
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Within Four to Seven to One Year Over
Three Six Twelve To Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Earning assets:
Investment securities $ 3,099 $ 1,444 $ 1,657 $ 75,553 $ 68,875 $ 150,628
Federal funds sold 0 0 0 0 0 0
Loans and leases:
Variable rate $ 113,261 $ 12,961 0 $ 28,960 0 $ 155,182
Fixed rate $ 37,887 $ 29,856 $ 28,921 $ 169,671 $ 3,070 $ 269,405
--------- --------- --------- --------- --------- ---------
Total loans and leases $ 151,148 $ 42,817 $ 28,921 $ 198,631 $ 3,070 $ 424,587
--------- --------- --------- --------- --------- ---------
Total earning assets $ 154,247 $ 44,261 $ 30,578 $ 274,184 $ 71,945 $ 575,215
========= ========= ========= ========= ========= =========
Interest bearing liabilities:
NOW accounts $ 11,652 0 0 $ 34,956 $ 0 $ 46,608
Savings deposits $ 96,431 0 0 $ 54,477 $ 0 $ 150,908
Time deposits $ 62,971 $ 35,769 $ 88,463 $ 54,814 $ 0 $ 242,017
Borrowed funds $ 54,602 $ 10,000 $ 13,000 $ 264 $ 0 $ 77,866
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities $ 225,656 $ 45,769 $ 101,463 $ 144,511 $ 0 $ 517,399
========= ========= ========= ========= ========= =========
Interest sensitivity gap $ (71,409) $ (1,508) $ (70,885) $ 129,673 $ 71,945 $ 57,816
(within periods)
Cumulative interest sensitivity $ (71,409) $ (72,917) $(143,802) $ (14,129) $ 57,816
Gap
Ratio of cumulative interest -12.84% -13.11% -25.86% -2.54% 10.40%
Sensitivity gap to rate
Sensitive assets
Ratio of rate sensitive assets 68.35% 96.71% 30.14% 189.73% --
To rate sensitive liabilities
Cumulative ratio of rate sensitive 68.35% 73.14% 61.44% 98.99% 100.20%
Assets to rate
</TABLE>
Capital Resources
Stockholders' equity at September 30, 1999 increased $870,000 or 1.9% to $46.1
million, compared with $45.3 million at 1998 year end. This increase includes a
negative change of $2.7 million to capital in 1999 due to the impact of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of this
net change, stockholders' equity would have increased $3.6 million or 8.3% for
1999 over 1998.
At September 30, 1999, the Company's risk-based Tier 1 Capital Ratio was 8.43%,
the total risk based capital ratio was 9.69% and the leverage ratio was 6.52%
The Company and Bank are adequately capitalized under all applicable regulatory
capital requirements.
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces,
<PAGE> 22
economic conditions in markets served and strength of management. Management is
confident that because of current capital levels and projected earnings levels,
capital levels are more than adequate to meet the ongoing and future concerns of
the Company.
Year 2000
The year 2000 issue relates to systems designed to use two digits rather than
four to define the particular year. The banks computer equipment, software and
devices with imbedded technology that are time sensitive may recognize date
using "00" as the year 1900 rather than the Year 2000 ("Y2K"). This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions
such as the accrual of interest, erroneous billings, or other normal business
activities.
Year 2000 issues have been addressed relating to banks' "mission critical" and
other related systems, both internal and external, affected by the Y2K problem
of identifying the two digit definition for the year 2000.
The Company commenced significant initiatives in the fall of 1997 to correct
actual and potential Y2K problems to ensure that its computer based equipment
and interactive systems will function properly with respect to recognition and
processing of dates commencing as of January 1, 2000 and subsequent dates
thereafter. For disclosure purposes, the phrase "computer equipment and
software" primarily includes: systems that are commonly thought of as
information technology ("IT") systems, including primary data processing,
information storage and retrieval, general accounting, calculating, as well as
financial debit and credit transaction activity. It also includes secondary
systems and equipment affected by computer based activity within the control of
the banks such as direct communications networks (telephone and telefax), remote
communications (security and sensor devices), and physical support equipment
(HVAC, electrical, and general utilities).
Pursuant to its planning, assessment, and remediation initiatives, the Company
has established a pro-active plan for Y2K preparation and is presently compliant
with respect to established governmental and commercial standards for Year 2000
readiness. The Company has completed Y2K identification and assessment goals,
and implemented substantial evaluation, testing, and remediation activities as
of December 31, 1998 which were expressly directed toward accomplishment of Y2K
readiness within established government and commercial standards.
During the third quarter of 1999, the Company has almost completed its Year 2000
preparedness activities. The Company has been examined by the regulatory
authorities and presently meets all industry and regulatory requirements
concerning the identification of Y2K sensitive
<PAGE> 23
systems and equipment, as well as associated hardware, software, and related
physical, mechanical, and interactive devices sensitive to Y2K performance
criteria. The Company has utilized both internal and external resources in
confirming Y2K standards or, in the alternative, in verifying remediation
requirements to avoid controllable deterioration of performance as a result of
external Y2K impact. The Company has completed all necessary remediation efforts
and believes that, as of September 30, 1999, it has now fulfilled 99% of all
required regulatory initiatives with respect to Year 2000 readiness. The
completed and remaining efforts determined by regulatory guidelines affecting
Y2K readiness can be identified as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Year 2000 Initiative Complete Performance Date % completed
- ----------------------------- ---------------- -----------
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Initial IT system identification and assessment 6/30/98 100%
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Remediation and testing regarding Central Processing 12/21/98 100%
System issues
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Remediation and testing regarding Division System issues 12/31/98 100%
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Remediation and testing regarding Branch Delivery systems 6/30/99 100%
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Upgrades to Y2K ready telephone/communications systems 6/30/99 100%
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Identification, assessment, remediation and testing 6/30/98 100%
regarding desktop and individual system issues
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Identification and assessment regarding Non-IT System 1/31/99 100%
issues
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
Remediation and testing regarding Non-IT System issues 9/30/99 98%
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
In addition to internal assessment, testing and remediation efforts, the Company
has completed a pro-active customer information program addressing two
disparate, but significant Year 2000 concerns: potentially adverse bank impact
resulting from Y2K customer impact and customer concerns about Y2K effects. As
to customer impact, the Company has completed detailed analysis of potential
adverse Y2K effects and reviewed both customer awareness and potential
detrimental effects with respect to Company's performance. The Company has
determined that less 1% of outstanding loans are likely to adversely affect
Bank's financial performance. As of January 1, 1999, all loans which potentially
may be adversely affected have been identified and factored into existing loan
loss reserves to account for potential addition risks associated with Y2K
failures. The current total of those loans will not materially impact the
Company's activities, regardless of any Y2K impact that may be incurred. As to
customer concerns, the Company continues to respond to inquiries and requests
for information about Year 2000 preparations and has responded with detailed
information regarding its preparations and Y2K compliance. The Company has also
sponsored public forums and meetings to explain and discuss Year 2000 issues in
general and Company preparations in particular. The Company will continue these
activities throughout 1999 to avoid any negative customer response concerning
adverse Y2K impact.
<PAGE> 24
However, at this time, the Company is not aware of any identified concerns of
any bank customer with respect to their ability to meet Y2K compliance
requirements.
Part of the Company's Year 2000 preparations also includes contacts with its
principal vendors and service providers, including the federal banking
regulatory system and the Federal Reserve System. The Company has identified
external preparedness standards for all of its primary venders, suppliers, and
other providers of goods and services that are subject to Year 2000 preparedness
activity. To date, the Company is not aware of any identified concerns of any
bank customer with respect to their ability to meet Y2K compliance requirements.
The Company estimates that the cost of Year 2000 identification, assessment,
remediation and testing efforts, as well as currently anticipated costs to be
incurred by the Company will not exceed $200,000. Such amount represents
approximately 10% of the Company's total actual and anticipated IT expenditures
for 1998 through 1999. As of October 1, 1999, the Registrant had incurred costs
of approximately $140,000 related to Year 2000 issues. These amounts relate to
analysis, repair, or replacement of existing hardware or software, upgrades of
existing software, or evaluation of information received from significant
customers, vendors, or other service providers.
The Company has completed internal and external contingency plans that should
anticipate and manage adverse impacts that may arise. These plans set forth
specific responsibility and accountability affecting identification of Y2K
related failures and processes for responding. With respect to mission critical
systems, including core information and data processing activities, these plans
establish information backup and retrieval procedures and identify alternative
delivery sources, including existing disaster recovery preparations, to continue
limited business activities. With respect to mission non-critical systems,
including non-critical technical systems, communications, and support equipment,
these plans allow for minor business interruption regarding inconvenience or
time delays in continuing Company's activities. Finally, these plans address in
detail plans for resumption of business activity upon the occurrence of any
interruption.
Item 7 A. Quantitative and Qualitative Disclosure about Market Risk.
See Item 7A. Quantitative and Qualitative Disclosures About Market Risk in 1998
Form 10-K.
Part II - Other Information
Item 8. Other Information
Bank has completed construction of a full-service branch facility in the city of
Waupaca. Costs of construction were estimated to be
<PAGE> 25
$861,000. Completion of this project occurred in August 1999. Bank purchased
land in the city of Luxemburg located in Kewaunee County, Wisconsin in January
1999. No plans have been made at present on this purchase. Bank purchased land
in the village of Ashwaubenon located in Brown County. Tentative plans would be
to start construction in late fall 1999 with completion targeted to be late
spring 2000. Bank has purchased a facility in Fremont for $115,000 in May 1999.
This facility was previously occupied and leased by BLBNA.
The Company repurchased all of the preferred stock of BLBNA at par value of
$3,160,000 on March 31, 1999 with an interest rate of 7% paid in addition on the
shares held during the first quarter 1999. Interest expense amounted to $55,300.
On March 15, 1999, BLBNA was dissolved and merged into Bank.
The Company filed a registration statement for purposes of creating the "Baylake
Corp. Stock Purchase Plan". This registration became effective on December 17,
1998 and will be used by eligible employees and directors to purchase shares of
the Company, thereby creating additional liquidity in the Common Stock of the
Company.
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
-------------------------------------
(Registrant)
Date: November 12, 1999 Thomas L. Herlache
----------------------------- -------------------------------------
Thomas L. Herlache
President (CEO)
Date: November 12, 1999 Steven D. Jennerjohn
----------------------------- -------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000275119
<NAME> BAYLAKE CORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,984
<INT-BEARING-DEPOSITS> 342
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,437
<INVESTMENTS-CARRYING> 18,541
<INVESTMENTS-MARKET> 18,449
<LOANS> 433,821
<ALLOWANCE> 8,216
<TOTAL-ASSETS> 632,914
<DEPOSITS> 502,290
<SHORT-TERM> 77,602
<LIABILITIES-OTHER> 6,616
<LONG-TERM> 264
0
0
<COMMON> 18,677
<OTHER-SE> 27,465
<TOTAL-LIABILITIES-AND-EQUITY> 632,914
<INTEREST-LOAN> 27,785
<INTEREST-INVEST> 6,366
<INTEREST-OTHER> 239
<INTEREST-TOTAL> 34,390
<INTEREST-DEPOSIT> 14,556
<INTEREST-EXPENSE> 17,089
<INTEREST-INCOME-NET> 17,301
<LOAN-LOSSES> 538
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,976
<INCOME-PRETAX> 7,034
<INCOME-PRE-EXTRAORDINARY> 7,034
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,932
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 8.46
<LOANS-NON> 9,234
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,836
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,035
<CHARGE-OFFS> 4,270
<RECOVERIES> 1,812
<ALLOWANCE-CLOSE> 8,216
<ALLOWANCE-DOMESTIC> 8,216
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
