<PAGE> 1
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
------------------
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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 (Identification No.)
incorporation 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
-------- --------
Indicate the number of shares outstanding of each issuer's classes of common
stock as of December 21, 2000.
$5.00 Par Value Common
7,445,574 shares
1
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 2. 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 Baylake Corp.
("Baylake" or the "Company") for the nine months ended September 30, 2000 and
1999 which may not be otherwise apparent from the consolidated financial
statements included in this report. Unless otherwise stated, the "Company" or
"Baylake" refers to this consolidated entity and to its subsidiaries when the
context indicates. For a more complete understanding, this discussion and
analysis should be read in conjunction with the financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report.
All per share information has been restated to reflect the 2-for-1 stock
dividend paid on November 15, 1999.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen") and
changed its name to Baylake Bank, N.A. ("BLBNA"). 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 Evergreen as a "troubled
institution" and "critically under capitalized". As part of the acquisition, the
Company was required to contribute $7 million of capital to Evergreen. As of the
date of this report, no payments to the seller of Evergreen have been made by
the Company and no payments are presently due. However, the Company may become
obligated for certain contingent payments that may become payable in the future,
based on a formula set forth in the stock purchase agreement, not to exceed $2
million. Such contingent payments are not accrued at September 30, 2000, since
that amount, if any, is not estimable.
The acquisition was accounted for using the purchase method of accounting,
therefore it could 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 and into Baylake Bank ("Bank").
Forward-Looking Information
This discussion and analysis of financial condition and results of operations,
and other sections of this report, may contain forward-looking statements that
are based on the current expectations of management. Such expressions of
expectations are not historical in
2
<PAGE> 3
nature and are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "projects," and other such words are intended to identify such
forward-looking statements. The statements contained herein and such
forward-looking statements involve or may involve certain assumptions, risks and
uncertainties, many of which are beyond the control of the Company, that may
cause actual future results to differ materially from what may be expressed or
forecasted in such forward-looking statements. Readers should not place undue
expectations on any "forward looking statements." In addition to the assumptions
and other factors referenced specifically in connection with such statements,
the following factors could impact the business and financial prospects of the
relationships; demand for financial products and financial services; the degree
of competition by traditional and non-traditional financial services
competitors; changes in banking legislation or regulations; changes in tax laws;
changes in interest rates; 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 general
economic conditions, nationally or in the State of Wisconsin.
Results of Operations
For the three months ended September 30, 2000, earnings were relatively
unchanged for the quarter when compared to the same quarter last year. Net
income of $1.76 million or $.24 basic operating earnings per share was reported
for the quarter ended September 30, 2000 and the quarter ended September 30,
1999. On a diluted operating earnings per share, there was no change as the
Company recorded $.23 per share in 2000 and 1999.
The annualized return on average assets and return on average equity for the
three months ended September 30, 2000 were .96% and 14.26%, respectively,
compared to 1.12% and 15.13%, respectively, for the same period a year ago.
The slight decrease in net income for the period is primarily due to improved
net interest income after provision for loan losses and an increase in other
income offset to a slightly greater extent by increased other and income tax
expenses.
For the nine months ended September 30, 2000, net income increased $124,000, or
2.5%, to $5.06 million from $4.93 million for the first nine months of 1999. The
change in net income for the period is primarily due to improved net interest
income after provision for loan losses and an increase in other income offset to
a slightly lesser extent by increased other and income tax expenses. For the
nine-month period, basic operating earnings per share increased to $.68 per
share in 2000 compared with $.67 in 1999, an increase of 1.5%. On a diluted
operating earnings per share basis, the Company recorded $.66 per share
3
<PAGE> 4
in the first nine months of 2000, compared to $.64 per share for the same period
in 1999.
The annualized return on average assets and return on average equity for the
first nine months ended September 30, 2000 were .97% and 14.10%, respectively,
compared to 1.08% and 14.24%, respectively, for the same period a year ago.
Cash dividends declared in the first nine months of 2000 increased 11.1% to $.30
per share compared with $.27 for the same period in 1999.
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 85.1% of
total operating income for the first nine months of 2000, as compared to 84.9%
for the first nine months of 1999. 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
such assets. 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 earned
interest income. Tax-exempt interest income is adjusted to a level that reflects
such income as if it were fully taxable.
Net interest income on a tax equivalent basis for the three months ended
September 30, 2000 decreased $75,000, or 1.1%, to $6.4 million from $6.5 million
for the same period a year ago. Total interest income for the third quarter of
2000 increased $2.8 million, or 22.6%, to $15.0 million from $12.2 million for
the third quarter of 1999, while interest expense in the third quarter of 2000
increased $2.8 million, or 49.6%, to $8.6 million when compared to $5.8 million
in the third quarter of 1999. The slight decline in net interest income between
these two quarterly periods occurred primarily as a result of growth in the
average volume of earning assets and non-interest bearing deposits and an
increase in the yield on earning assets offset to a greater extent by an
increase in interest paying liabilities and an increase in the cost of average
interest paying liabilities.
For the three months ended September 30, 2000, average earning assets increased
$104.5 million, or 18.4%, when compared to the same period last year. The
Company recorded an increase in average loans of $102.4 million, or 24.1%, for
the third quarter of 2000 compared to the same period a year ago. Loans have
typically resulted in higher rates of interest income 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 remained compressed for the quarter ended
September 30, 2000 when compared to the same period a
4
<PAGE> 5
year ago. The interest rate spread decreased 79 basis points to 3.27% at
September 30, 2000 from 4.06% in the same quarter in 1999. While the average
yield on earning assets increased 31 basis points during the period, the average
rate paid on interest-bearing liabilities increased 110 basis points over the
same period as a result of a higher cost of funding from deposits and other
wholesale funding such as federal funds purchased and loans from the Federal
Home Loan Bank.
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, 2000 decreased from 4.56% to 3.80% compared to the same
period a year ago. The average yield on interest earning assets amounted to
8.87% for the third quarter of 2000, representing an increase of 31 basis points
from the same period last year. Total loan yields increased 28 basis points to
9.30%, while total investment yields increased 11 basis points to 6.88%, as
compared to the same period a year ago. The Company's average cost on
interest-bearing deposit liabilities increased 80 basis points to 5.21% for the
third quarter of 2000 when compared to the third quarter of 1999, while
short-term borrowing costs increased 175 basis points to 6.85% comparing the two
periods. Long-term borrowing costs increased 15 basis points to 8.65% during the
same time period, the result of funds borrowed during the period by the Company
at variable rates of interest tied to prime. These factors contributed to a
decrease in the Company's overall interest margin for the three months ended
September 30, 2000 compared to the same period a year ago.
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 92.0% for the third quarter of 2000 compared with 91.7%
for the same period in 1999. The ratio increased slightly in 2000, primarily as
a result of a reduction in non-accrual loans.
Net interest income (on a tax-equivalent basis) for the nine months ended
September 30, 2000 increased $616,000, or 3.4%, to $18.9 million from $18.3
million for the same period a year ago. Total interest income for the nine
months ended September 30, 2000 increased $6.6 million, or 18.7%, to $42.0
million from $35.4 million for the same period in 1999, while interest expense
during the period increased $6.0 million, or 35.1%, to $23.1 million when
compared to $17.1 million for the nine months ended 1999. The improvement in net
interest income when compared to the prior period occurred primarily as a result
of growth in the average volume of earning assets and non-interest bearing
deposits and an increase in the yield on earning assets offset to a
5
<PAGE> 6
lesser extent by an increase in interest paying liabilities and an increase in
the cost of average interest paying liabilities.
For the nine months ended September 30, 2000, average earning assets increased
$78.5 million, or 14.0%, when compared to the same period last year. The Company
recorded an increase in average loans of $78.0 million, or 18.7%, for the first
nine months of 2000 compared to the same period a year ago.
For the nine months ended September 30, 2000, interest rate spread decreased 44
basis points to 3.47% when compared to 3.91% for the nine months ended September
30, 1999. The average yield on earning assets increased 34 basis points and the
average rate paid on interest-bearing liabilities increased 78 basis points over
the same period, a result of higher cost of funding from deposit and wholesale
funding sources.
Net interest margin (on a federal tax-equivalent basis) for the nine months
ended September 30, 2000 decreased from 4.37% to 3.96% compared to the same
period a year ago. The average yield on interest earning assets amounted to
8.80% for the first nine months of 2000, representing an increase of 34 basis
points from the same period last year. Total loan yields increased 29 basis
points to 9.21%, while total investment yields increased 25 basis points to
6.73%, as compared to the same period a year ago. The Company's average cost on
interest-bearing deposit liabilities increased 52 basis points to 5.00% for the
first nine months of 2000, while short-term borrowing costs increased 148 basis
points to 6.53% comparing the two periods, a result of increased funding costs
from federal funds purchased and Federal Home Loan Bank borrowings. Long-term
borrowing costs increased 12 basis points to 8.62% over the same period,
primarily a result of higher interest costs from variable rate loans borrowed by
the Company in the first nine months of 2000. The above factors contributed to a
decrease in the Company's overall interest margin for the nine months ended
September 30, 2000 as compared to the same period in 1999. Other factors
contributing to the decrease 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, resulting in higher costs from wholesale
funding offset by decreased volume of non-accrual loans.
The ratio of average earning assets to average total assets was 92.0% for the
first nine months of 2000 compared with 91.6% for the same period in 1999. The
ratio increased slightly in 2000, primarily as a result of a reduction in
non-accrual loans.
Provision for Loan Losses
The provision for loan losses is the periodic cost (not less than quarterly) of
providing an allowance for anticipated loan losses. In any accounting period,
the amount of provision is based on management's evaluation of the loan
portfolio, especially nonperforming
6
<PAGE> 7
and other potential problem loans, taking into consideration many factors,
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of loan quality, general
economic factors and collateral values.
The provision for loan losses for the three months ended September 30, 2000
decreased $73,000, or 37.8%, to $120,000 compared with $193,000 for the third
quarter of 1999. For the nine months ended September 30, 2000, the provision for
loan losses decreased $208,000, or 38.7%, to $330,000 from $538,000 for the same
period last year. Management believes that the current allowance conforms with
the Company's loan loss reserve policy and is adequate in view of the present
condition of the Company's loan portfolio. See "Risk Management and the
Allowance for Loan Losses" below.
Non-Interest Income
Total non-interest income increased $148,000, or 14.4%, to $1.2 million for the
third quarter of 2000 when compared to the third quarter of 1999. This increase
occurred as a result of increased fees on other customer services, increased
gains from sales of loans, increased fees from loan servicing, and increased
other income offset to a lesser degree by decreased trust income.
Trust fees decreased $25,000 or 17.0% in the third quarter of 2000 compared to
the same quarter in 1999, primarily as a result of a decrease in trust estate
business.
Loan servicing fees increased $32,000 or 18.6% to $204,000 in the third quarter
of 2000, when compared to the same quarter in 1999. The increase in 2000
resulted from an increase in mortgage servicing rights income and commercial
loan servicing income.
Gains on sales on loans in the secondary market increased $8,000 to $60,000 in
the third quarter of 2000, when compared to the same quarter in 1999, primarily
as a result of increased gains from sales of mortgage and commercial loans.
Service charges on deposit accounts for the third quarter of 2000 showed an
increase of $22,000 or 6.1% over 1999 results. Financial service income
increased $70,000, or 95.0%, accounting for the remainder of the improvement in
fee income generated for other services to customers.
For the first nine months of 2000, non-interest income increased $60,000, or
1.8%, to $3.3 million from $3.2 million for the same period a year ago.
7
<PAGE> 8
Trust fee income decreased $41,000, or 9.5%, to $389,000 for the first nine
months of 2000 compared to the same period in 1999 as a result of decreased
trust estate business.
Loan servicing fees decreased $36,000 or 5.8% for the first nine months in 2000,
when compared to the same period in 1999. The decrease in 2000 resulted from a
decline in mortgage servicing rights income and mortgage servicing income.
Gains on sales on loans in the secondary market decreased $117,000 or 45.7% for
the first nine months of 2000, when compared to the same period in 1999,
primarily as a result of decreased gains from sales of mortgage and commercial
loans taken in the secondary market. Sales of total loans for the first nine
months of 2000 decreased to $15.8 million, compared to $23.5 million a year ago.
Service charges on deposit accounts increased $99,000 or 9.8% and financial
service income increased $107,000, or 43.4% accounting for the improvement in
fee income generated for other services to customers for the first nine months
of 2000, when compared to the same period in 1999.
Non-Interest Expense
Non-interest expense increased $127,000, or 2.8%, for the three months ended
September 30, 2000 compared to the same period in 1999. Salaries and employee
benefits showed an increase of $201,000, or 8.2%, for the period as a result of
additional staffing to operate new facilities and salary and related benefit
increases. Full time equivalent staff increased to 272 persons from 254 a year
earlier. Increases in occupancy (amounting to $82,000 or 26.7%) and equipment
expenses (amounting to $52,000 or 16.9%) occurred as a result of expansion in
the Green Bay and Waupaca markets and costs related to modernization of various
facilities.
Other operating expenses decreased $149,000 or 12.6%. Included in 2000 expenses
were amortization of goodwill related to the Four Seasons (a purchase of a one
bank holding company in July 1996) acquisition of $82,000 (the same as in 1999)
and amortization of $39,000 (compared to $12,000 in 1999) related to the BLBNA
acquisition.
Legal expense and loan collection expense decreased $209,000 for the three
months ended September 30, 2000 primarily as a result of reduced legal issues
relating to loan collection efforts of the BLBNA loan portfolio.
Other items comprising other operating expense show an increase of $33,000 or
4.2% in the third quarter of 2000 when compared to the same quarter in 1999. The
overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total assets, was 1.90% for the
three months ended September 30, 2000 compared to 2.24% for the same period in
1999.
8
<PAGE> 9
Non-interest expense increased $672,000, or 5.2%, for the nine months ended
September 30, 2000 compared to the same period in 1999. Salaries and employee
benefits increased $641,000, or 8.9%, primarily for the same reasons as listed
above. Occupancy and equipment expenses increased $326,000, or 17.4%, a result
of additional depreciation expense from branch expansion in the Green Bay and
Waupaca market areas.
Data processing expense increased $46,000, or 7.2%, for the nine months ended
September 30, 2000 as compared to the same period a year ago. The increase
occurred as a result of additional transaction volume and growth in number of
accounts.
Other real estate operations show income of $70,000, the result of net gains of
$231,000 taken on sales of other real estate owned offset by $161,000 of costs
expensed in the operation and maintenance of other real estate owned properties.
$64,000 of the gains resulted from sales of lots in Idlewild Valley, Inc. a
former subsidiary of the Bank. Additional gains totaling $167,000 resulted from
property sales of seven commercial and five residential mortgage properties
formerly held as loans in the BLBNA loan portfolio.
Other operating expenses decreased $262,000, or 8.1%, for the nine months ended
September 30, 2000 compared to the same period in 1999. Included in 2000
expenses was amortization of goodwill related to the Four Seasons acquisition of
$246,000 (same as previous year) and $118,000 (compared to $155,000 in the
previous year) related to the BLBNA acquisition. Legal expense and loan
collection expense decreased $221,000, or 53.8%, for the nine months ended
September 30, 2000 for primarily the same reasons as listed earlier. Other
operating expense decreased $74,000, or .2%, in spite of additional expense for
supplies, postage, marketing, and travel expense related to growth in branch
expansion efforts. The overhead ratio was 1.99% for the nine months ended
September 30, 2000 compared to 2.13% for the same period in 1999.
Income Taxes
Income tax expense for the Company for the three months ended September 30, 2000
was $776,000, an increase of $60,000 or 8.4% compared to the same period in
1999. The increase in income tax provision for the period was due to increased
taxable income.
Income tax expense for the Company for the nine months ended September 30, 2000
was $2.2 million, an increase of $102,000, or 4.9% compared to the same period
in 1999. The increase in income tax provision for the period was due to
increased taxable income.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 30.4% for the nine months ended September 30, 2000 compared with
29.9% for the same period in 1999. The effective tax rate of 30.4% consisted of
a federal effective tax rate of 26.4% and Wisconsin State effective tax rate of
4.0%.
9
<PAGE> 10
Balance Sheet Analysis
Loans
At September 30, 2000, total loans increased $84.8 million, or 19.0% to $531.9
million from $447.0 million at December 31, 1999. Growth in the Company's loan
portfolio resulted primarily from an increase in commercial loans to $327.1
million at September 30, 2000 compared to $267.5 million at December 31, 1999.
In addition, real estate construction loans increased to $34.3 million at
September 30, 2000 compared to $26.5 million at December 31, 1999. Real estate
mortgage loans increased to $153.2 million at September 30, 2000 compared with
$138.0 million at December 31, 1999. Consumer loans increased to $17.7 million
at September 30, 2000 compared with $15.4 million at December 31, 1999.
Growth in commercial real estate mortgages and commercial loans occurred as a
result of the Company's expansion efforts (primarily in the Green Bay market)
and the strong economic growth existing in that market.
The following table reflects the composition (mix) of the loan portfolio
(dollars in thousands):
<TABLE>
<CAPTION>
September December
30, 2000 31, 1999
--------- --------
<S> <C> <C>
Amount of loans by type (dollars in thousands)
Real estate-mortgage
Commercial $242,963 $201,301
1-4 family residential
First liens 103,538 95,255
Junior liens 25,955 23,811
Home equity 23,676 18,963
Commercial, financial and agricultural 84,156 66,159
Real estate-construction 34,303 26,535
Installment
Credit cards and related plans 2,030 1,810
Other 15,657 13,636
Less: deferred origination fees, net of costs 416 451
-------- --------
Total 531,862 447,019
======== ========
</TABLE>
Risk Management and the Allowance for Loan Losses
The loan portfolio is the Company's primary asset subject to credit risk. To
reflect the currently perceived credit risk in the loan portfolio, the Company
sets aside an allowance or reserve for credit losses through periodic charges to
earnings. These charges are shown in the Company's consolidated income statement
as provision for loan losses. See "Provision for Loan Losses" above. Credit risk
is controlled and monitored through the use of lending standards, a thorough
review of potential borrowers, and an on-going review of payment performance.
Asset quality administration,
10
<PAGE> 11
including early identification of problem loans and timely resolution of
problems, further enhances management of credit risk and minimization of loan
losses. All specifically identifiable and quantifiable losses are immediately
charged off against the allowance. Charged-off loans are subject to periodic
review, and specific efforts are taken to achieve maximum recovery of principal
and accrued interest.
Management reviews the adequacy of the allowance for loan losses ("allowance" or
"ALL") on a quarterly basis to determine whether the allowance is adequate to
provide for probable losses inherent in the loan portfolio as of the balance
sheet date. Management's evaluation of the adequacy of the allowance is based
primarily on management's periodic assessment and grading of the loan portfolio
as described below. Additional factors considered by management include past
loan loss experience, trends in past due and nonperforming loans, risk
characteristics of the various classifications of loans, current economic
conditions, the fair value of underlying collateral, and other regulatory or
legal issues that could affect credit losses.
Loans are initially graded when originated. They are re-graded as they are
renewed, when there is a loan to the same borrower, when identified facts
demonstrate heightened risk of nonpayment, or if they become delinquent. The
loan review, or grading, process attempts to identify and measure problem and
watch list loans. Problem loans are those loans with higher than average risk
with workout and/or legal action probable within one year. These loans are
reported at least quarterly to the directors' loan committee and reviewed at the
officers' loan committee for action to be taken. Watch list loans are those
loans considered to have weakness in either character, capacity to
repay or balance sheet concerns and prompt management to take corrective action
at the earliest opportunity. Problem and watch list loans generally exhibit one
or more of the following characteristics:
1. Adverse financial trends and condition
2. Decline in the entire industry
3. Managerial problems
4. Customer's failure to provide financial information or other collateral
documentation
5. Repeated delinquency, overdrafts or renewals.
Every significant problem credit is reviewed by the loan review process and
assessments are performed quarterly to confirm the risk rating, proper
accounting and the adequacy of loan loss reserve assigned.
After reviewing the gradings in the loan portfolio, management will allocate or
assign a portion of the allowance to groups of loans and individual loans to
cover management's estimate of probable loss. Allocation is related to the grade
of the loan and includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS 118"). Allocations also are made for unrated
11
<PAGE> 12
loans, such as credit card loans, based on historical loss experience adjusted
for portfolio activity. These allocated reserves are further supplemented by
unallocated reserves based on management's judgment regarding risk of error,
local economic conditions and any other relevant factors. Management then
compares the amounts allocated for probable losses to the current allowance. To
the extent that the current allowance is insufficient to cover management's best
estimate of probable losses, management records additional provision for credit
loss. If the allowance is greater than required at that point in time, provision
expense is adjusted accordingly.
As the following table indicates, the ALL at September 30, 2000 was $8.1 million
compared with $7.6 million at December 31, 1999. Loans increased 19.0% from
December 31, 1999 to September 30, 2000, while the allowance as a percent of
total loans declined due to reduced loan loss provision for the first three
quarters of 2000. The September 30, 2000 ratio of ALL to outstanding loans was
1.53% compared with 1.70% at December 31, 1999, and the ALL as a percentage of
nonperforming loans was 65.5% at September 30, 2000 compared to 60.7% at end of
year 1999. Based on management's analysis of the loan portfolio risk at
September 30, 2000, a provision expense of $120,000 was recorded for the three
months ended September 30, 2000, a decrease of $73,000 or 37.8% compared to the
same period in 1999. The provision for the nine months ended September 30, 2000
was $330,000 compared to $538,000 a year earlier. Net loan recoveries of $48,000
occurred in the third quarter of 2000, and the ratio of net charge-offs to
average loans for the period ended September 30, 2000 was (0.05%) compared to
0.79% at September 30, 1999. Net loan recoveries of $185,000 occurred in the
first nine months of 2000 as compared to net charge-offs of $2.5 million for the
same period in 1999. Commercial, agricultural and other loan net charge-offs
represented 156.8% of the total net recoveries for the first nine months of
2000. In the commercial loan sector, recoveries totaling $350,000 on one loan
accounted for the net recoveries.
Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
<TABLE>
<CAPTION>
For the period ended For the period ended For the period ended
September 30 ,2000 September 30, 1999 December 31, 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Allowance for
Loan Losses ("ALL")
Balance at beginning of $7,611 $11,035 $11,035
period
Balance related to (900) (900)
acquisitions
Provision for loan losses 330 538 850
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
For the period ended For the period ended For the period ended
September 30 ,2000 September 30, 1999 December 31, 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Charge-offs 423 4,270 5,362
Recoveries 608 1,813 1,988
--- ----- -----
Balance at end of period 8,126 8,216 7,611
Net charge-offs ("NCOs") (185) 2,457 3,374
Nonperforming Assets:
Nonaccrual loans $8,336 9,234 8,086
Accruing loans past due 90 0 0 0
days or more
Restructured loans 4,074 4,041 4,458
----- ----- -----
Total nonperforming loans 12,410 13,275 12,544
("NPLs")
Other real estate owned 563 142 71
--- --- --
Total nonperforming assets $12,973 13,417 12,615
("NPAs")
Ratios:
ALL to NCO's (annualized) (43.92) 3.34 2.26
NCO's to average loans (0.05%) 0.79% 0.80%
(annualized)
ALL to total loans 1.53% 1.89% 1.70%
NPL's to total loans 2.33% 3.06% 2.81%
NPA's to total assets 1.74% 2.12% 2.82%
ALL to NPL's 65.48% 61.89% 60.67%
</TABLE>
While management uses available information to recognize losses on loans, future
adjustments to the ALL may be necessary based on changes in economic conditions
and the impact of such change on the Company's borrowers.
Consistent with generally accepted accounting principles ("GAAP") and with the
methodologies used in estimating the unidentified losses in the loss portfolio,
the ALL consists of several components.
First, the allowance includes a component resulting from the application of the
measurement criteria of SFAS 114 and SFAS 118. The amount of this component is
included in the various categories presented in the following table.
The second component is statistically based and is intended to provide for
losses that have occurred in large groups of smaller balance loans, the credit
quality of which are impracticable to re-grade at end of
13
<PAGE> 14
period. These loans would include residential real estate, consumer loans and
loans to small businesses generally in principal amounts of $100,000 and less.
The loss factors are based primarily on the Company's historical loss experience
tracked over a three-year period and accordingly will change over time. Due to
the fact that historical loss experience varies for the different categories of
loans, the loss factors applied to each category also differ.
The final or "unallocated" component of the allowance is intended to absorb
losses that may not be provided for by the other components. There are several
primary reasons that the other components discussed above might not be
sufficient to absorb the losses present in portfolios, and the unallocated
portion of the ALL is used to provide for the losses that have occurred because
of these reasons.
The first reason is that there are limitations to any credit risk grading
process. Even for experienced loan reviewers, grading loans and estimating
probable losses involves a significant degree of judgment regarding the present
situation with respect to individual loans and the portfolio as a whole. The
overall number of loans in the portfolio also makes it impracticable to re-grade
every loan each quarter. Therefore, it is possible that some currently
performing loans not recently graded will not be as strong as their last grading
and an insufficient portion of the allowance will have been allocated to them.
In addition, it is possible that grading and loan review may be done without
knowing whether all relevant facts are at hand. Troubled borrowers may
inadvertently or deliberately omit important information from correspondence
with lending officers regarding their financial condition and the diminished
strength of repayment sources.
The second reason is that loss estimation factors are based on historical loss
totals. As such, the factors may not give sufficient weight to such
considerations as the current general economic and business conditions that
affect the Company's borrowers and specific industry conditions that affect
borrowers in that industry. For example, with respect to loans to borrowers who
are influenced by trends in the local tourist industry, management considers the
effects of weather conditions, market saturation, and the competition for
borrowers from other tourist destinations and attractions.
Third, the loss estimation factors do not give consideration to the seasoning,
or maturity, of the loan portfolio. Seasoning is relevant because losses are
less likely to occur in loans that have been performing satisfactorily for
several years than in loans that are more recent.
Finally, the loss estimation factors do not give consideration to changes in the
interest rate environment. For example, borrowers with variable rate loans may
be less able to manage their debt service if interest rates rise.
14
<PAGE> 15
For these reasons, management regards it as both a more practical and a more
prudent practice to maintain the total allowance at an amount larger than the
sum of the amounts allocated as described above.
The following table shows the amount of the ALL allocated for the time periods
indicated to each loan type as described. It also shows the percentage of
balances for each loan type to total loans. In general, it would be expected
that those types of loans which have historically more loss associated with them
will have a proportionally larger amount of the allowance allocated to them than
do loans which have less risk.
Consideration for making such allocations is consistent with the factors
discussed above, and all of the factors are subject to change; thus, the
allocation is not necessarily indicative of the loan categories in which future
loan losses will occur. It would also be expected that the amount allocated for
any particular type of loan will increase or decrease proportionately to both
the changes in the loan balances and to increases or decreases in the estimated
loss in loans of that type. In other words, changes in the risk profile of the
various parts of the loan portfolio should be reflected in the allowance
allocated.
Allocation of the Allowance for Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>
Percent of Percent of Percent of
Sept 30, loans to Sept 30, loans to Dec 31, loans to
2000 total 1999 total 1999 total
Amount loans Amount loans Amount loans
------ ---------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial $515 15.83% 616 15.26% 814 14.80%
& agricultural
Commercial real estate 3,324 45.60% 2,717 44.04% 2,605 44.93%
Real Estate:
Construction 40 6.45% 21 5.05% 29 5.94%
Residential 1,823 24.35% 1,358 27.92% 2,484 26.64%
Home equity lines 103 4.45% 106 4.22% 84 4.24%
Consumer 105 2.94% 108 3.11% 145 3.05%
Credit card 54 0.38% 41 0.40% 42 0.40%
Loan commitments 132 120 130
Not specifically 2,029 3,129 1,278
----- ----- ------
allocated
Total allowance $8,126 100.00% $8,216 100.00% $7,611 100.00%
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Percent of Percent of Percent of
Sept 30, loans to Sept 30, loans to Dec 31, loans to
2000 total 1999 total 1999 total
Amount loans Amount loans Amount loans
------ ---------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan 1.53% 1.89% 1.70%
loss as a percentage
of total loans
Period end loans $531,862 $433,821 $447,019
</TABLE>
While there exists probable asset quality problems in the loan portfolio,
including loans acquired in the BLBNA purchase, management believes sufficient
reserves have been provided in the allowance to absorb probable losses in the
loan portfolio at September 30, 2000. In the time period since the purchase of
BLBNA, management has undergone extensive efforts to identify and evaluate
problem loans stemming from the BLBNA acquisition. Although no assurance can be
given, management feels that the majority of these problem loans associated with
BLBNA have been identified. Ongoing efforts are being made to collect these
loans, and the Company involves the legal process where necessary to minimize
the risk of further deterioration of these loans for full collectibility.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management encourages early identification of non-accrual and problem loans in
order to minimize the risk of loss. This is accomplished by monitoring and
reviewing credit policies and procedures on a regular basis.
The accrual of interest income is discontinued when a loan becomes 90 days past
due as to principal or interest. When interest accruals are discontinued,
interest credited to income is reversed. If collectibility is in doubt, cash
receipts on non-accrual loans are used to reduce principal rather than recorded
as interest income.
Non-performing assets at September 30, 2000 were $12.4 million compared to $12.6
million at December 31, 1999. Other real estate owned totaled $563,000 and
consisted of three residential and four commercial properties. Non-accrual loans
represented $8.3 million of the total of non-performing assets, of which $4.7
million was acquired by the Company with the BLBNA acquisition. Real estate
non-accrual loans
16
<PAGE> 17
accounted for $7.3 million of the total (of which $2.7 million was residential
real estate and $4.6 million was commercial real estate), while commercial and
industrial non-accruals accounted for $523,000. Management believes collateral
is sufficient to offset losses in the event additional legal action would be
warranted to collect these loans. $4.1 million of troubled debt restructured
loans existed at September 30, 2000 compared with $4.5 million at December 31,
1999. Approximately $3.1 million of troubled debt restructured loans at
September 30 consists of three commercial real estate credits which were granted
various payment concessions and had experienced past cashflow problems. These
credits were current at September 30, 2000. 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, 2000
was 2.3% compared to 2.8% at 1999 year end. The Company's ALL was 65.5% of
total non-performing loans at September 30, 2000 compared to 60.7% at end of
year 1999.
Potential problem loans at September 30, 2000 are restricted to two commercial
borrowers with credits aggregating approximately $3.6 million. One commercial
credit secured by real estate totaling $1.2 million is currently past due and
experiencing significant liquidity problems. The borrower has informed
management that a sale of the real estate to a third party is expected in the
fourth quarter. Management reasonably believes that consummation of such a
transaction would result in repayment of this outstanding loan. The second
commercial loan customer, with a credit totaling $2.4 million, is undergoing
management changes and, as a result, has experienced liquidity problems. This
credit was not current at September 30, 2000, but will be monitored for future
performance as management change is now in place. Management's evaluation of the
borrower's existing collateral supports an expectation of full recovery even in
the event of liquidation, regardless of future performance, consummation of a
business combination transaction or potential default.
Investment Portfolio
At September 30, 2000, the investment portfolio (which includes investment
securities available for sale and held to maturity) increased $2.9 million, or
2.0% to $148.0 million from $145.1 million at December 31, 1999. At September
30, 2000, the investment portfolio represented 19.9% of total assets compared
with 22.4% at December 31, 1999.
Securities held to maturity and securities available for sale consist of the
following: (dollars in thousands)
17
<PAGE> 18
At September 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Securities held to maturity
Obligations of states & $ 16,459 $ 69 $ 63 $ 16,465
political subdivisions
Securities available for sale
Obligations of U.S. Treasury & 30,284 137 60 30,361
other U.S. Agencies
Mortgage-backed securities 68,827 16 2,070 66,773
Obligations of states & 32,411 345 136 32,620
political subdivisions
Equity securities 1,741 1,741
-------- ---- ------ --------
Total securities available for $133,263 $498 $2,266 $131,495
======== ==== ====== ========
sale
</TABLE>
At December 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Securities held to maturity
Obligations of states & $ 19,380 $10 $131 $ 19,259
political subdivisions
Securities available for sale
Obligations of U.S. Treasury & $ 22,851 $54 $ 86 $ 22,819
other U.S. Agencies
Mortgage-backed securities 71,876 23 2,489 69,410
Obligations of states & 32,413 122 738 31,797
political subdivisions
Equity securities 1,674 1,674
-------- ---- ------ --------
Total securities available for $128,814 $199 $3,313 $125,700
======== ==== ====== ========
sale
</TABLE>
18
<PAGE> 19
At September 30, 2000, the contractual maturities of securities held to maturity
and securities available for sale are as follows: (dollars in thousands)
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
------------------------------- ------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Within 1 year $ 576 $ 576 $ 15,061 $ 15,033
After 1 but within 5 years 7,968 7,927 67,674 66,095
After 5 but within 10 years 3,182 3,228 26,625 26,629
After 10 years 4,733 4,734 22,162 21,997
Equity securities 0 0 1,741 1,741
-------- ------- -------- --------
Total $ 16,459 $16,465 $133,263 $131,495
</TABLE>
Deposits
Total deposits at September 30, 2000 increased $43.6 million, or 8.7%, to $547.7
million from $504.1 million at December 31, 1999. Non-interest bearing deposits
at September 30, 2000 increased $16.8 million, or 28.4%, to $76.0 million from
$59.2 million at December 31, 1999. Interest-bearing deposits at September 30,
2000 increased $26.8 million, or 6.0%, to $471.7 million from $444.9 million at
December 31, 1999. Interest-bearing transaction accounts (NOW deposits)
decreased $5.5 million, primarily in public fund deposits. Savings deposits
increased $28.0 million, or 18.6%, to $178.5 million at September 30, 2000 when
compared to $150.5 million at December 31, 1999. Time deposits (including time,
$100,000 and over and other time) increased $4.4 million (includes increase of
$9.6 million in time deposits over $100,000), or 1.8%, to $249.8 million at
September 30, 2000 when compared to $245.4 million at December 31, 1999.
Typically, overall deposits for the first six months tend to decline slightly as
a result of the seasonality of the customer base as customers draw down deposits
during the early first half of the year in anticipation of the summer tourist
season. As a result of the Company's geographical expansion in recent years,
this effect has been minimized as additional branch facilities in less seasonal
locations have continued to provide deposit growth.
Emphasis has been, and will continue to be, placed on generating additional core
deposits in 2000 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 quality customer service.
19
<PAGE> 20
Short Term Borrowings
Short-term borrowings at September 30, 2000 consist of federal funds purchased,
securities under agreements to repurchase, borrowings from an unaffiliated bank
and borrowings from the Federal Home Loan Bank ("FHLB"). Total short-term
borrowings at September 30, 2000 increased $47.8 million to $137.0 million from
$89.2 million at December 31, 1999. FHLB borrowings increased from $80 million
at December 31, 1999 to $112 million at September 30, 2000. Borrowings from an
unaffiliated bank total $6 million and consist of two borrowings of $3 million,
each with a term of one year. The interest rate on these borrowings is
calculated at prime less 1%. These borrowings are secured by a pledge of common
stock of the Bank. The balance of the increase was in federal funds purchased.
Short-term borrowings increased in order to fund growth in the loan portfolio.
The Company will borrow monies if borrowing is a less costly form of funding
loans compared to the cost of acquiring deposits. Additionally, the availability
of deposits also determines the amount of funds the Company needs to borrow in
order to fund loan demand. The Company anticipates it will continue to use
wholesale funding sources of this nature, if these borrowings add incrementally
to overall profitability.
Long Term Debt
Long-term debt at September 30, 2000 consists of two separate borrowings.
Long-term debt of $1.8 million consists of a note by the Company in the face
amount of $2 million (current balance $1.8 million) requiring quarterly payments
of $100,000 with a term of two years. The interest rate on this borrowing is
calculated at prime less 1%. This borrowing is secured by a pledge of the common
stock of the Bank. In addition, long-term debt of $211,000 consists of a land
contract requiring annual payments of $53,000 plus interest calculated at prime
+ 1/4%. The land contract is for debt used to purchase one of the properties in
the Green Bay region for a branch location.
Liquidity
Liquidity refers to the ability of the Company, and the Bank, to generate
adequate amounts of cash on a timely basis to meet its needs for cash.
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 Company and the Bank
have different liquidity considerations.
The Company's objective is to manage its liquidity position in order to provide
the funds necessary to pay dividends to shareholders, service debt, and to
invest in the subsidiary Bank. The Company's primary
20
<PAGE> 21
funding sources to meets its liquidity requirements are dividends from the Bank,
borrowings from nonaffiliated banks, and proceeds from the issuance of equity.
Adequate liquidity at the Bank is necessary to handle fluctuations in deposit
levels, to provide for the credit needs of customers, and to take advantage of
investment opportunities as they are presented in the marketplace. 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 its assets and strong capital positions. The Bank 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 loan growth and deposit flows. At September 30, 2000, the
Bank had $60.4 million of established lines of credit with nonaffiliated banks,
of which $15.8 million was outstanding at September 30, 2000.
As shown in the Company's Consolidated Statements of Cashflows for the nine
months ended September 30, 2000, cash and cash equivalents increased $4.5
million during the period to $24.0 million at September 30, 2000. The increase
primarily reflected $6.1 million in net cash provided by operating activities
and $90.2 million by financing activities offset by $91.7 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 increase
in investment activities and loans plus necessary capital expenditures. Net cash
provided by financing activities resulted primarily from an increase in short
term deposits and borrowed funds offset by payment of dividends and a decrease
in time deposits. 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 FHLB so as to reduce reliance on short-term funding
needs.
Management believes that, in the current economic environment, the Company's and
the Bank's liquidity positions 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's 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. Control and monitoring of interest
rate risk is a primary objective of asset/liability management. The Bank uses an
Asset/Liability Committee ("ALCO") to manage risks associated with changing
interest rates, changing asset and liability mixes, and the impact of such
changes on
21
<PAGE> 22
earnings. The sensitivity of net interest income to market rate changes is
evaluated monthly by the ALCO using "static gap analysis" and simulation of
earnings modeling.
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
sensitive 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 such 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 Company is liability sensitive. 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 Company's experience
that repricing occurs over a longer period of time. The Company 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, including loans and investments as well as other paying liability
categories such as time deposits, are scheduled according to their contractual
maturities. The "static gap analysis" provides a representation of the Company's
earnings sensitivity to changes in interest rates. It is a static indicator and
does not reflect various repricing characteristics. Accordingly, a "static gap
analysis" may not necessarily be indicative of the sensitivity of net interest
income in a changing rate environment.
22
<PAGE> 23
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF SEPTEMBER 30, 2000
<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 $ 7 908 $ 4 273 $ 9 703 $ 74 066 $ 57 847 $153 797
Federal funds sold 0 0 0 0 0 0
Loans and leases
Variable rate 151 881 18 056 0 27 593 75 197 605
Fixed rate 40 207 26 580 44 258 212 610 2 723 326 378
-------- -------- -------- -------- -------- --------
Total loans and leases $192 088 $ 44 636 $ 44 258 $240 203 $2 798 $523 983
-------- -------- -------- -------- -------- --------
Total earning assets $199 996 $ 48 909 $ 53 961 $314 269 $ 60 645 $677 780
======== ======== ======== ======== ======== ========
Interest bearing liabilities:
NOW Accounts $ 10 880 $ 0 $ 0 $ 32 641 $ 0 $ 43 521
Savings Deposits 130 033 0 0 48 418 0 178 451
Time Deposits 76 481 39 950 110 749 22 586 0 249 766
Borrowed Funds 106 266 52 7 500 25 159 0 138 977
-------- -------- -------- -------- -------- --------
Total interest bearing $323 660 $40 002 $118 249 $128 804 $ 0 $610 715
======== ======= ======== ======== ==== ========
Liabilities
Interest sensitivity gap $(123 664) $ 8 907 $(64 288) $185 465 $ 60 645 $67 065
(within periods)
Cumulative interest $(123 664) $(114 757) $(179 045) $ 6 420 $67 065
Sensitivity gap
Ratio of cumulative interest -18.25% -16.93% -26.42% -0.95% 9.89%
Sensitivity gap to rate
Sensitive assets
Ratio of rate sensitive assets 61.79% 122.27% 45.63% 243.99% --
To rate sensitive
Liabilities
Cumulative ratio of rate
Sensitive assets to rate 61.79% 68.44% 62.85% 101.05% 110.98%
Sensitive liabilities
</TABLE>
In addition to the "static gap analysis", determining the sensitivity of future
earnings to a hypothetical plus or minus 200 basis point parallel rate shock can
be accomplished through the use of simulation modeling. Simulation of earnings
includes the modeling of the balance sheet as an ongoing entity. Balance sheet
items are modeled to project income based on a hypothetical change in interest
rates. The resulting net income for the next twelve-month period is compared to
the net income amount calculated using flat rates. This difference represents
the Company's earnings sensitivity to a plus or minus 200 basis point parallel
rate shock. The resulting simulations indicated a plus or minus 2.2% adjustment
in net income under these scenarios for the period ended September 30, 2000.
This result was within the policy limits established by the Company.
Management continually reviews its interest risk position through the ALCO
process. Management's philosophy is to maintain relatively matched rate
sensitive asset and liability positions within the range described above in
order to provide earnings stability in the event of significant interest rate
changes.
Capital Resources
Shareholders' equity at September 30, 2000 increased $4.1 million or 8.8% to
$50.3 million, compared with $46.2 million at end of year 1999.
23
<PAGE> 24
This increase includes a change of $1.2 million to capital in 2000 due to the
impact of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Disregarding the
effect of this change, shareholders' equity would have increased $2.9 million or
6.3% for the period between September 30, 2000 and December 31, 1999.
At September 30, 2000, the Company's risk-based Tier 1 Capital Ratio was 8.01%,
the total risk based capital ratio was 9.26% and the leverage ratio was 6.35%.
The Company is "adequately capitalized" under all applicable regulatory capital
requirements and Bank is "well capitalized".
The Company's and the Bank's capital amounts and ratios are as follows: (dollars
in thousands)
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action
Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000
Total Capital (to
Risk Weighted Assets)
Company 53,226 9.26% 45,993 8.00% N/A N/A
Bank 60,162 10.41% 46,237 8.00% 57,796 10.00%
Tier 1 Capital(to
Risk Weighted Assets)
Company 46,027 8.01% 22,996 4.00% N/A N/A
Bank 52,927 9.16% 23,118 4.00% 34,677 6.00%
Tier 1 Capital (to
Average Assets)
Company 46,027 6.35% 29,006 4.00% N/A N/A
Bank 52,927 7.30% 29,006 4.00% 36,258 5.00%
As of December 31, 1999
Total Capital (to
Risk Weighted Assets)
Company 48,903 10.07% 38,867 8.00% N/A N/A
Bank 48,181 9.93% 38,807 8.00% 48,509 10.00%
Tier 1 Capital(to
Risk Weighted Assets)
Company 42,811 8.81% 19,433 4.00% N/A N/A
Bank 42,098 8.68% 19,403 4.00% 29,105 6.00%
Tier 1 Capital (to
Average Assets)
Company 42,811 6.79% 25,220 4.00% N/A N/A
Bank 42,098 6.68% 25,220 4.00% 31,524 5.00%
</TABLE>
24
<PAGE> 25
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 believes that, in light of
current capital levels and projected earnings levels, capital levels are
adequate to meet the ongoing and future concerns of the Company.
Year 2000
The Company did not encounter computer or system problems from the transition
into the year 2000 ("Y2K") or subsequent problems after December 31, 1999, nor
does management expect any material Y2K problems in the future. However,
management has decided to maintain a Y2K specific contingency plan in an effort
to mitigate any such risks.
25
<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.
----------------------------------
Date: December 22, 2000 /s/ Thomas L. Herlache
------------------------------- ----------------------------------
Thomas L. Herlache
President (CEO)
Date: December 22, 2000 /s/ Steven D. Jennerjohn
------------------------------- ----------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
26
