<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 JUNE 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 (I.R.S. Employer
incorporation or organization) Identification No.)
217 North Fourth Ave., 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 August 9, 1999.
$5.00 Par Value Common
3,710,237 shares
PAGE 1 OF 27
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of June 30, 1999 and December 31, 1998
Consolidated Condensed Statement of Income 4
Three and Six months ended June 30, 1999
and 1998
Consolidated Statement of Comprehensive Income 5
Three and Six months ended June 30, 1999 and
1998
Consolidated Statement of Cash Flows 6 - 7
Six months ended June 30, 1999 and 1998
Notes to Consolidated Condensed Financial Statements 8 - 9
Item 2.
Managements Discussion and Analysis of Financial 10 - 25
Condition and Results of Operations
PART II. OTHER INFORMATION 25 - 26
Signatures 27
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
ASSETS 1999 1998
---------- -----------
<S> <C> <C>
Cash and due from Banks $ 14,879 $ 17,560
Investment securities available for
sale (at market) 127,972 112,536
Investment securities held to maturity
(market value $17,797 and $15,765) 17,818 15,510
Federal funds sold
26,106
Loans 419,364 408,921
Less: Allowance for loan losses 8,243 11,035
-------- --------
Loans, net of allowance for loan losses 411,121 397,886
Bank premises and equipment 16,922 15,627
Federal Home Loan Bank Stock (at cost) 2,650 2,650
Accrued interest receivable 4,313 3,913
Income taxes receivable 1,028 1,459
Deferred income taxes 1,431 520
Goodwill 7,119 8,326
Other assets 6,339 5,345
-------- --------
TOTAL ASSETS $611,592 $607,438
======== ========
LIABILITIES
Domestic Deposits
Non-interest bearing deposits $ 60,361 $ 58,311
Interest bearing deposits
Now 43,670 54,974
Savings 141,230 132,075
Time, $100,000 and over 53,077 47,717
Other time 191,468 202,207
-------- --------
Total interest bearing $429,445 $436,973
-------- --------
Total deposits $489,806 $495,284
Short term borrowings
Federal funds purchased, repurchase agreements
and Federal Home Bank Loans 70,096 56,758
Long term debt 264 392
Accrued expenses and other liabilities 5,862 5,911
Dividends payable --- 661
Minority interest payable 3,160
-------- --------
TOTAL LIABILITIES $566,028 $562,166
======== ========
STOCKHOLDERS EQUITY
Common stock $5.00 par value - authorized
10,000,000 shares; issued 3,731,146 shares
in 1999 and 3,690,021 in 1998; outstanding
3,707,987 in 1999; 3,656,145 in 1998
$ 18,656 $ 18,473
Additional paid-in capital 6,677 6,229
Retained earnings 21,235 19,394
Treasury Stock (625) (625)
Net unrealized gain (loss) on securities
(379) 1,801
-------- ---------
available for sale, net of tax of $144 in
1999 and $975 in 1998
TOTAL STOCKHOLDERS EQUITY 45,564 45,272
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $611,592 $ 607,438
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT AMOUNTS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 9,127 $ 7,044 $ 18,108 $ 13,760
Interest on investment securities
Taxable 1,528 1,286 2,894 2,517
Exempt from federal income tax 638 591 1,238 1,177
Other interest income 0 0 239 0
-------- -------- -------- --------
Total Interest Income 11,293 8,921 22,479 17,454
-------- -------- -------- --------
Interest Expense
Interest on deposits 4,747 3,477 9,676 6,975
Interest on short-term borrowings 848 1,016 1,666 1,805
Interest on Long-term debt 6 7 11 14
-------- -------- -------- --------
Total Interest Expense 5,601 4,500 11,353 8,794
-------- -------- -------- --------
Net Interest Income 5,692 4,421 11,126 8,660
Provision for loan losses 182 151 345 301
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,510 4,270 10,781 8,359
-------- -------- -------- --------
Other Income
Fees for fiduciary activities 153 134 283 234
Fees from loan servicing 221 148 446 329
Fees for other services to customers 588 435 1,078 832
Gains from sales of loans 115 179 204 399
Securities gains (losses) -- -- -- --
Other income 92 41 211 89
-------- -------- -------- --------
Total Other Income 1,169 937 2,222 1,883
-------- -------- -------- --------
Other Expenses
Salaries and employee benefits 2,335 1,864 4,750 3,796
Occupancy expense 311 264 619 521
Equipment expense 305 247 638 486
Data processing and courier 223 171 413 334
Operation of other real estate (51) -- (41) --
Other operating expense 1,085 700 2,065 1,342
-------- -------- -------- --------
Total Other Expenses 4,208 3,246 8,444 6,479
-------- -------- -------- --------
Income before income taxes 2,471 1,961 4,559 3,763
Income tax expense (benefit) 759 561 1,386 1,041
-------- -------- -------- --------
Net Income $ 1,712 $ 1,400 $ 3,173 $ 2,722
======== ======== ======== ========
Net Income per share (1) $ 0.46 $ 0.38 $ 0.86 $ 0.74
Cash dividends per share $ 0.18 $ 0.17 $ 0.36 $ 0.34
</TABLE>
(1) Based on 3,692,074 shares average outstanding in 1999 and 3,658,157 in 1998.
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
-------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net Income
Other comprehensive income,
net of tax: $ 1,712 $ 1,400 $ 3,173 $ 2,722
------- ------- ------- -------
Unrealized gains on securities:
Unrealized holding gains
(losses) arising during period (1,635) 21 (2,180) (16)
------- ------- ------- -------
Comprehensive Income $ 77 $ 1,421 $ 993 $ 2,706
======= ======= ======= =======
</TABLE>
5
<PAGE> 6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------
1999 1998
-------- --------
(thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 17,604 $ 13,197
Investments 4,339 3,717
Fees and service charges 2,045 1,781
Interest paid to depositors (9,863) (6,882)
Interest paid to others (1,716) (1,835)
Cash paid to suppliers and employees (5,999) (5,260)
Income taxes paid (2,028) (1,134)
-------- --------
Net cash provided by operating activities 4,382 3,584
Cash flows from investing activities:
Principal payments received on investments 37,011 15,280
Purchase of investments (31,968) (19,545)
Proceeds from sale of other real estate owned 850 0
Loans made to customers in excess of principal collected (14,275) (18,842)
Capital expenditures (1,890) (1,305)
-------- --------
Net cash provided by (used in) investing activities (10,272) (24,412)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts (99) 7,074
and savings accounts
Net increase (decrease) in advances from borrowers 13,210 18,174
Net increase (decrease) in time deposits (5,379) 1,229
Proceeds from issuance of common stock 630 52
Redemption of preferred stock (3,160) 0
Treasury Stock acquired 0 (211)
Dividends paid (1,993) (1,843)
-------- --------
Net cash provided by (used in) financing activities 3,209 24,475
-------- --------
Net increase (decrease) in cash and cash equivalents (2,681) 3,647
Cash and cash equivalents, beginning 17,560 15,065
-------- --------
Cash and cash equivalents, ending $ 14,879 $ 18,712
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
1999 1998
------- --------
(thousands of dollars)
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 3,173 $ 2,722
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation 595 690
Provision for loan losses and real estate owned 345 301
Amortization of premium on investments 94 85
Accretion of discount on investments (74) (147)
Cash surrender value increase (27) (27)
(Gain) loss from disposal of other real estate (78) 0
(Gain) loss on sale of loans (204) (399)
Proceeds from sale of loans held for sale 9,201 7,618
Originations of loans held for sale (8,997) (7,220)
Equity in income of service center (41) (15)
Amortization of goodwill 310 162
Amortization of mortgage servicing rights 61 0
Mortgage servicing rights booked (172) 0
Deferred compensation 94 (3)
Changes in assets and liabilities:
Interest receivable (401) (423)
Prepaids and other assets (721) 210
Unearned income (92) (6)
Interest payable (226) 77
Taxes payable (643) (93)
Deferred taxes 0 0
Other liabilities 2,185 52
------- -------
Total adjustments 1,209 862
------- -------
Net cash provided by operating activities $ 4,382 $ 3,584
======= =======
</TABLE>
7
<PAGE> 8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1999 and December 31, 1998. The results of
operations for the three and six months ended June 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>
JUNE 30 DECEMBER 31
1999 1998
-------- -----------
(thousands of dollars)
<S> <C> <C>
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 17,818 $ 15,510
Other -------- --------
Investment securities held to maturity $ 17,818 $ 15,510
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 18,102 $ 20,192
Obligations of states and political 35,143 34,288
subdivisions
Mortgage-backed securities 72,762 54,981
Other 1,965 3,075
-------- --------
Investment securities available for sale $127,972 $112,536
======== ========
</TABLE>
3. At June 30, 1999 and December 31, 1998, loans were as follows:
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
--------- -----------
(thousands of dollars)
<S> <C> <C>
Commercial, industrial and agricultural $ 255,053 $ 246,396
Real estate - construction 13,594 9,553
Real estate - mortgage 136,382 137,837
Installment 15,022 15,914
Less: Deferred loan origination fees,
net of costs (687) (779)
--------- ---------
419,364 408,921
Less allowance for loan losses (8,243) (11,035)
--------- ---------
Net loans $ 411,121 $ 397,886
</TABLE>
8
<PAGE> 9
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 June 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 of 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 six months ended June 30, 1999 and
1998.
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.
9
<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").
10
<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 June 30, 1999, net income increased $312,000, or
22.3%, to $1.71 million from $1.40 million for the second quarter of 1998. Basic
operating earnings per share increased to $.46 per share in the second quarter
of 1999 compared with $.38 in 1998, an increase of 21.1%. On diluted operating
earnings per share, the Company recorded $.45 in 1999, compared to $.35 per
share in 1998.
The annualized return on average assets and return on average equity for the
three months ended June 30, 1999 were 1.14% and 14.80%, respectively compared to
1.21% and 13.17%, respectively for the same period a year ago.
For the six months ended June 30, 1999, net income increased $451,000, or 16.6%,
to $3.17 million from $2.72 million for the first six months of 1998. Basic
operating earnings per share increased to $.86 per share in 1999 compared with
$.74 in 1998, an increase of 17.8%. On a diluted operated earnings per share
basis, the Company recorded $.83 per share in 1999, compared to $.73 per share
in 1998.
The annualized return on average assets and return on average equity for the six
months ended June 30, 1999 were 1.06% and 13.79%, respectively compared to 1.21%
and 12.92%, 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 $.36 per share compared with
$.34 in 1998.
Net Interest Income
Net interest income is the largest component of the Registrant's operating
income (net interest income plus other non-interest income) accounting for 84.1%
of 1999 total operating income, as compared to 83.1% 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.
11
<PAGE> 12
Net interest income for the three months ended June 30, 1999 increased $1.3
million, or 28.8%, to $5.7 million from $4.4 million for the same period a year
ago. Total interest income for the second quarter of 1999 increased $2.4
million, or 26.6%, to $11.3 million from $8.9 million for the second quarter of
1998, while interest expense increased $1.1 million, 24.5%, to $5.6 million from
$4.5 million in the second 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 June 30, 1999, average earning assets increased
$123.3 million, or 28.7%, when compared to the same period last year. The
Company recorded an increase in average loans of $108.2 million, or 35.4%, for
the second 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 15 basis points to 3.91% from
3.76% in 1998, as the average yield on earning assets decreased 17 basis points
while the average rate paid on interest-bearing liabilities decreased 32 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 June 30, 1999 decreased from 4.40% to 4.36% compared to a year ago. The
average yield on interest earning assets amounted to 8.42% for the second
quarter of 1999, representing a decrease of 17 basis points from the same period
last year. Total loan yields declined 40 basis points to 8.85%, while total
investment yields decreased 26 basis points to 6.69%, as compared to the same
period a year ago. The Company's average cost on interest-bearing deposit
liabilities decreased 17 basis points to 4.45% for the second quarter of 1998,
while short-term borrowing costs decreased 87 basis to 4.87% comparing the two
periods. The above factors contributed to a decrease in the Company's overall
interest margin for the three months ended June 30, 1999. Other factors
contributing to the decrease was the increased volume of non-accrual loans (as a
result of the BLBNA purchase) and 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.
12
<PAGE> 13
For the six months ended June 30, 1999, average earning assets increased by
$132.5 million, or 31.4%, when compared to the same period last year. Loans have
continued to grow as the Company recorded an increase in average loans of $110.8
million, or 36.9%, for the first six months of 1999 compared to the same period
in 1998.
Net interest margin (on a federal tax-equivalent basis) for the first six months
of 1999 declined to 4.28% from 4.43% for the same period last year. The average
yield on interest-earning assets amounted to 8.41% for the first six months of
1999, representing a decrease of 22 basis points over the same period last year.
Total loan yields declined 36 basis points to 8.87% while yields on investment
securities declined 39 basis points to 6.69%. The Company's average cost on
interest-bearing deposit liabilities decreased 12 basis points to 4.51% for the
first six months of 1999, while short-term borrowing costs declined 70 basis
points to 5.04% 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 six months ended June 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 91.7% for the first six months of 1999 compared with
93.0% 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 June 30, 1999 increased
$31,000, or 20.5%, to $182,000 compared with $151,000 for the second quarter of
1998. For the six months ended June 30, 1999, the provision for loan losses
increased $44,000, or 14.6%, to $345,000 from $301,000 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 increased $232,000, or 24.8%, to $1.2 million for the
second quarter of 1999, from $937,000 for the second quarter a year ago. This
increase has occurred as a result of increased trust income, fees from loan
servicing, fees on other customer services and other income offset by decreased
gains from sales of loans.
For the first six months of 1999, non-interest income has improved $339,000, or
18.0%, to $2.2 million from $1.9 million for the same period a year ago.
Trust fees increased $49,000 or 20.1% in 1999 compared to 1998, primarily as a
result of an increase in trust an estate business.
13
<PAGE> 14
Loan servicing fees increased $117,000 or 35.6% to $446,000 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 $195,000 to $204,000
in 1999 primarily as a result of decreased gains from sales of commercial loans.
Sales of total loans for the six months increased to $9.0 million, compared to
$7.2 million a year ago.
Service charges on deposit accounts showed an increase of $44,000 or 24.9% over
1998 results accounting for the improvement in fee income generated for other
services to customers.
Included in 1999 other income are recoveries of $89,000 related to the BLBNA
operation, providing the increase to other income as related to 1998 results.
Non-Interest Expense
Non-interest expense increased $962,000, or 29.6%, for the three months ended
June 30, 1999 compared to the same period in 1998. Salaries and employee
benefits showed an increase of $471,000, or 25.3%, 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 248 from 200
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 $385,000 or 55.0%. 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 $72,000 related to the BLBNA
acquisition.
Legal expense and loan collection expense increased $178,000 for the three
months ended March 31, 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 $85,000 or a
15.0% 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 2.02% for the three months ended June 30, 1999 compared
to 2.04% for the same period in 1998.
Non-interest expense increased $2.0 million, or 30.3%, for the first six months
ended June 30, 1999, compared to the same period in 1998. Salaries and employee
benefits increased $954,000, or 25.1%, primarily for the same reasons as listed
above. Occupancy and equipment expenses
14
<PAGE> 15
increased $250,000, or 24.8%, a result of the BLBNA acquisition and additional
depreciation expense from branch expansion efforts. Other real estate operations
shows income of $41,000, the result of gains of $89,000 taken on sales of other
real estate. $55,000 of the gains result from sales of lots in Idlewild Valley,
Inc., a former subsidiary of Bank. Additional gains on sales totaling $34,000
stemmed from property sales of assets formerly held as loans in the BLBNA loan
portfolio.
Other operating expenses increased $723,000, or 53.9%, for the six months ended
June 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
$164,000 (same as previous year) and $144,000 related to the BLBNA acquisiton.
Legal expense and loan collection expense increased $250,000 for the six months
ended June 30, 1999 for the same reasons as listed above. Payments to regulatory
agencies increased $83,000 to $104,000 for the six months ended June 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 $68,000 during this timeframe, a result of
additional transaction volume. Other operating expense increased $177,000, or
23.4%, the result of additional expense for supplies, postage, and telephone
related to growth in branch expansion efforts. The overhead ratio was 2.08% for
the six months ended June 30, 1999 compared to 2.04% 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 June 30, 1999 was
$759,000, an increase of $198,000 or 35.3% compared to the same period in 1998.
Income tax expense for the six months ended June 30, 1999 was $1.4 million, an
increase of $345,000 or 33.1%. The increase in income tax provision for both
periods was due to increased taxable income.
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
15
<PAGE> 16
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 June 30, 1999, total loans increased $10.4 million, or 2.6% to $419.4 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 $255.1
million at June 30, 1999 compared to $246.4 million at December 31, 1998. In
addition, real estate construction loans increased to $13.6 million at June 30,
1999 compared to $9.6 million at December 31, 1998. Real estate mortgage loans
decreased to $136.4 million at June 30, 1999 compared with $137.8 million at
December 31, 1998.
Allowance for Possible Loan Losses
At June 30, 1999, the allowance for possible loan losses ("APLL") of $8.2
million represented 1.97% 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 2.6% from December 31, 1998 to June 30, 1999, while the allowance
declined as a result of higher than normal net charge-offs for the quarter.
Provision expense was $182,000 for the three months ended June 30, 1999. Net
recoveries over chargeoffs of $32,000 occurred in the second quarter of 1999.
For the six months ended June 30, 1999, provision expense was $345,000, an
increase of $44,000 or 14.6% compared to the same period in 1998. Net
charge-offs of $3.2 million occurred in the first six months in 1999 as compared
to $276,000 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 nine months
since the purchase 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
16
<PAGE> 17
necessary to minimize risk of further deterioration of these loans for full
collectibility.
Commercial, agricultural and other loan net charge-offs represented 97.4% of the
total net charge-offs for the six months of 1999. In the commercial loan sector,
three loans totaling $3.3 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 June 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 June 30, 1999 were $13.4 million compared to $14.1
million at December 31, 1998. Other real estate owned totals $582,000 and
consisted of six residential and two commercial properties. Non-accrual loans
represent $9.0 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 $7.4 million of the total (of which $3.0 million was residential
real estate and $4.3 million was commercial real estate), while commercial and
industrial non-accruals account for $1.8 million. Management believes collateral
is sufficient in the event of default. $3.8 million of troubled debt
restructured loans existed at June 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.
17
<PAGE> 18
This credit was current at June 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 June 30, 1999 was
3.1% compared to 3.4% at 1998 year end. The Company's APLL was 64.4% of total
non-performing loans at June 30, 1999 compared to 78.3% at year end 1998.
Investment Portfolio
At June 30, 1999, the investment portfolio increased $17.7 million, or 13.9% to
$145.8 million from $128.0 million at December 31, 1998. At June 30, 1999, the
investment portfolio represented 23.8% 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 June 30, 1999 decreased $5.5 million, or 1.1%, to $489.8
million from $495.3 million at December 31, 1998. Non-interest bearing deposits
at June 30, 1999 increased $2.1 million, or 3.5%, to $60.4 million from $58.3
million at December 31, 1998. Interest-bearing deposits at June 30, 1999
decreased $7.5 million, or 1.7%, to $429.4 million from $437.0 million at
December 31, 1998. Interest-bearing transaction accounts (NOW deposits)
decreased $11.3 million, primarily public fund deposits. 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 Loan Bank. Total
short-term borrowings at June 30, 1999 increased $13.3 million to $70.1 million
from 56.8 million at December 31, 1998. The increase in short-term borrowings
resulted from decreased deposits as compared to increases in the investment
portfolio.
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
18
<PAGE> 19
+ 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 six
months ended June 30, 1999, cash and cash equivalents decreased $2.7 million
during the period to $14.9 million at June 30, 1999. The decrease primarily
reflected $4.4 million in net cash provided by operating activities and $3.2
million by financing activities offset by $10.3 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 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 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
19
<PAGE> 20
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
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.
20
<PAGE> 21
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
Within Four to Seven to One Year Over
Three Six Twelve to Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ 1,119 $ 969 $ 3,124 $ 76,142 $ 67,086 $ 148,440
Federal funds sold 0 0
Loans and Leases:
Variable Rate 113,733 10,560 0 29,053 0 153,346
Fixed Rate 31,438 32,309 32,082 159,604 1,589 257,022
--------- --------- --------- --------- --------- ---------
Total Loans and Leases $ 145,171 $ 42,869 $ 32,082 $ 188,657 $ 1,589 $ 410,368
--------- --------- --------- --------- --------- ---------
Total Earning Assets $ 146,290 $ 43,838 $ 35,206 $ 264,799 $ 68,675 $ 558,808
========= ========= ========= ========= ========= =========
Interest Bearing Liabilities:
NOW Accounts $ 10,917 $ $ 0 $ 32,753 $ 0 $ 43,670
Saving Deposits 87,522 0 53,708 0 141,230
Time Deposits 61,652 46,910 79,162 56,821 0 244,545
Borrowed Funds 47,096 10,000 13,000 264 0 70,360
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities $ 207,187 $ 56,910 $ 92,162 $ 143,546 $ 0 $ 499,805
========= ========= ========= ========= ========= =========
Interest Sensitivity GAP $ (60,897) $ (13,072) $ (56,956) $ 121,253 $ 68,675 $ 59,003
(within periods)
Cumulative Interest Sensitivity $ (60,897) $ (73,969) $(130,925) $ (9,672) $ 59,003
GAP
Ratio of Cumulative Interest -10.95% -13.30% -23.54% -1.74% 10.61%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to 70.61% 77.03% 38.20% 184.47% ---
Rate Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 70.61% 71.99% 63.25% 99.27% 100.95%
Assets to Rate Sensitive
Liabilities
</TABLE>
21
<PAGE> 22
For the time frame within three months as of June 30, 1999, rate sensitive
liabilities exceeded rate sensitive assets by $60.9 million, or a ratio of rate
sensitive assets to rate sensitive liabilities of 70.6%. For the next time frame
of four to six months, rate sensitive liabilities exceeded rate sensitive assets
by $13.1 million, or a ratio of rate sensitive assets to rate sensitive
liabilities of 77.0%. For all assets and liabilities priced within a one year
time frame, the cumulative ratio of rate sensitive assets to rate sensitive
liabilities was 63.3%, 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.
Capital Resources
Stockholders' equity at June 30, 1999 increased $292,000 or .6% to $45.6
million, compared with $45.3 million at 1998 year end. This increase includes a
negative change of $2.2 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 $2.5 million or 5.5% for
1999 over 1998.
At June 30, 1999, the Company's risk-based Tier 1 Capital Ratio was 8.43%, the
total risk based capital ratio was 9.68% and the leverage ratio was 6.51% The
Company and Bank continue to exceed 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, 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
22
<PAGE> 23
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 second quarter of 1999, the Company has completed substantially all
of the following Year 2000 preparedness activities. The Company presently meets
all industry and regulatory requirements concerning the identification of Y2K
sensitive 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 June 30, 1999, it has completed 98%
of all required regulatory initiatives with respect to Year 2000 readiness. The
completed and
23
<PAGE> 24
remaining efforts determined by regulatory guidelines affecting Y2K readiness
can be identified as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Year 2000 Initiative Complete Performance Date % completed
- ----------------------------- ---------------- -----------
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
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 6/30/99 95%
- ---------------------------------------------------------- ----------------------------------- -----------------------------------
</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. As to customer concerns, the Company has also received and responded
to customer 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.
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. 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
24
<PAGE> 25
$200,000. Such amount represents approximately 10% of the Company's total actual
and anticipated IT expenditures for 1998 through 1999. As of July 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 7A. 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. Although final costs were not available, costs of construction were
estimated to be $716,000. 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.
25
<PAGE> 26
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.
26
<PAGE> 27
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: August 10, 1999 Thomas L. Herlache
------------------------- --------------------------------------------
Thomas L. Herlache
President (CEO)
Date: August 10, 1999 Steven D. Jennerjohn
------------------------- --------------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
27
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000275119
<NAME> FINANCIAL DATA SCHEDULE
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,879
<INT-BEARING-DEPOSITS> 153
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,972
<INVESTMENTS-CARRYING> 17,818
<INVESTMENTS-MARKET> 17,797
<LOANS> 419,364
<ALLOWANCE> 8,243
<TOTAL-ASSETS> 611,592
<DEPOSITS> 489,806
<SHORT-TERM> 70,096
<LIABILITIES-OTHER> 5,862
<LONG-TERM> 264
0
0
<COMMON> 18,656
<OTHER-SE> 26,908
<TOTAL-LIABILITIES-AND-EQUITY> 611,592
<INTEREST-LOAN> 18,108
<INTEREST-INVEST> 4,132
<INTEREST-OTHER> 239
<INTEREST-TOTAL> 22,479
<INTEREST-DEPOSIT> 9,676
<INTEREST-EXPENSE> 11,353
<INTEREST-INCOME-NET> 11,126
<LOAN-LOSSES> 345
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,444
<INCOME-PRETAX> 4,559
<INCOME-PRE-EXTRAORDINARY> 4,559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,173
<EPS-BASIC> .86
<EPS-DILUTED> .83
<YIELD-ACTUAL> 8.41
<LOANS-NON> 8,996
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,840
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,035
<CHARGE-OFFS> 3,947
<RECOVERIES> 810
<ALLOWANCE-CLOSE> 8,243
<ALLOWANCE-DOMESTIC> 8,243
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
