<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{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 incorporation (Identification No.)
or organization)
217 North Fourth Avenue, Sturgeon Bay, WI 54235
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(920)-743-5551
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------ ---------------
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of October 24, 2000
$5.00 Par Value Common
7,444,274 shares
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of September 30, 2000 3
and December 31, 1999
Consolidated Condensed Statement of Income for the three and nine 4
months ended September 30, 2000 and 1999
Consolidated Statement of Comprehensive Income for the three and nine 5
months ended September 30, 2000 and 1999
Consolidated Statement of Cash Flows for the nine months ended 6 - 7
September 30, 2000 and 1999
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION 28 - 29
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 30
EXHIBIT INDEX 31
Exhibit 11 Statement re: computation of per share earnings 32
Exhibit 15 Letter re: unaudited interim financial information 33
Exhibit 27 Financial Data Schedule 34
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 24,015 $ 19,475
Investment securities available for sale (at market) 131,495 125,700
Investment securities held to maturity (market 16,459 19,380
value $16,465 and $19,259)
Federal funds sold 0 0
Loans held for sale 457 748
Loans 531,862 447,019
Less: Allowance for loan losses 8,126 7,611
-------- --------
Loan, net of allowance for loan losses 523,736 439,408
Bank premises and equipment 21,147 18,463
Federal Home Loan Bank stock (at cost) 5,843 4,000
Accrued interest receivable 5,511 4,146
Income taxes receivable 1,209 1,161
Deferred income taxes 2,758 2,912
Goodwill 5,576 5,941
Other Assets 5,773 4,976
-------- --------
Total Assets $743,979 $646,310
======== ========
LIABILITIES
-----------
Domestic deposits
Non-interest bearing $ 75,979 $ 59,153
Interest bearing
NOW 43,521 49,061
Savings 178,451 150,468
Time, $100,000 and over 65,100 55,535
Other time 184,666 189,857
-------- --------
Total interest bearing 471,738 444,921
Total deposits 547,717 504,074
Short-term borrowings
Federal funds purchased, repurchase
agreements, borrowings from unaffiliated banks
and Federal Home Loan Bank loans 136,966 89,231
Long-term debt 2,011 264
Accrued expenses and other liabilities 7,018 5,788
Dividends payable 0 743
-------- --------
Total liabilities 693,712 600,100
-------- --------
SHAREHOLDERS' EQUITY
--------------------
Common stock $5 par value-authorized 10,000,000
shares; issued 7,467,433 shares in 2000 and
7,460,333 in 1999; outstanding 7,444,274 in
2000; 7,437,174 in 1999 37,337 37,302
Additional paid-in capital 7,126 7,120
Retained earnings 7,835 5,012
Treasury Stock (625) (625)
Net unrealized gain (loss) on securities available
for sale, net of tax of $361 in 2000 and $515
in 1999 (1,406) (2,599)
--------- ---------
Total shareholders' equity 50,267 46,210
--------- ---------
Total liabilities and shareholders' equity $ 743,979 $ 646,310
========= =========
</TABLE>
3
<PAGE> 4
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $12,375 $ 9,677 $34,062 $27,785
Interest on investment securities
Taxable 1,729 1,559 5,070 4,453
Exempt from federal income taxes 617 675 1,885 1,913
Other interest income 0 0 0 239
------- ------- ------- -------
Total interest income 14,721 11,911 41,017 34,390
Interest expense
Interest on deposits 6,103 4,880 17,102 14,556
Interest on short-term borrowings 2,365 851 5,818 2,517
Interest on long-term debt 113 5 166 16
------- ------- ------- -------
Total interest expense 8,581 5,736 23,086 17,089
------- ------- ------- -------
Net interest income 6,140 6,175 17,931 17,301
Provision for loan losses 120 193 330 538
------- ------- ------- -------
Net interest income after provision for
loan losses 6,020 5,982 17,601 16,763
------- ------- ------- -------
Other income
Fees from fiduciary activities 122 147 389 430
Fees from loan servicing 204 172 582 618
Fees for other services to customers 665 569 1,876 1,647
Gains from sales of loans 60 52 139 256
Securities gains, net - - - -
Other income 122 85 321 296
------- ------- ------- -------
Total other income 1,173 1,025 3,307 3,247
------- ------- ------- -------
Other expenses
Salaries and employee benefits 2,662 2,461 7,852 7,211
Occupancy expense 389 307 1,124 926
Equipment expense 360 308 1,074 946
Data processing and courier 231 227 686 640
Operation of other real estate (13) 50 (70) 9
Other operating expenses 1,030 1,179 2,982 3,244
------- ------- ------- -------
Total other expenses 4,659 4,532 13,648 12,976
------- ------- ------- -------
Income before income taxes 2,534 2,475 7,260 7,034
Income tax expense 776 716 2,204 2,102
------- ------- ------- -------
Net Income $ 1,758 $ 1,759 $ 5,056 $ 4,932
======= ======= ======= =======
Net income per share (1) $ 0.24 $ 0.24 $ 0.68 $ 0.67
Cash dividends per share $ 0.10 $ 0.09 $ 0.30 $ 0.27
</TABLE>
(1) Based on 7,443,036 average shares outstanding in 2000 and 7,396,062 in 1999.
4
<PAGE> 5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,758 $ 1,759 $ 5,056 $ 4,932
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during Period 1,222 (573) 1,193 (2,753)
------- ------- ------- -------
Comprehensive income $ 2,980 $ 1,186 $ 6,249 $ 2,179
======= ======= ======= =======
</TABLE>
5
<PAGE> 6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 32,838 $ 27,440
Investments 6,715 6,345
Fees and service charges 2,942 3,008
Interest paid to depositors (16,279) (14,349)
Interest paid to others (5,735) (2,539)
Cash paid to suppliers and employees (12,160) (8,565)
Income taxes paid (2,251) (2,918)
-------- --------
Net cash provided by operating activities 6,070 8,422
Cash flows from investing activities:
Principal payments received on investments 9,202 38,283
Purchase of investments (12,550) (36,411)
Proceeds from sale of other real estate owned
990 1,399
Loans made to customers in excess of principal collected (85,583) (28,861)
Capital expenditures (3,780) (3,001)
-------- --------
Net cash used in investing activities (91,721) (28,591)
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts, and savings
accounts 39,262 14,914
Net increase in advances from borrowers 49,483 20,716
Net increase(decrease) in time deposits 4,381 (7,908)
Proceeds from issuance of common stock 41 692
Redemption of preferred stock -- (3,160)
Dividends paid (2,976) (2,661)
-------- --------
Net cash provided by financing activities 90,191 22,593
-------- --------
Net increase in cash and cash equivalents 4,540 2,424
Cash and cash equivalents, beginning 19,475 17,560
-------- --------
Cash and cash equivalents, ending $ 24,015 $ 19,984
======== ========
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999
----- ----
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 5,056 $ 4,932
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 1,096 893
Provision for losses on loans and real estate owned 330 538
Amortization of premium on investments 109 137
Accretion of discount on investments (131) (111)
Cash surrender value increase (66) (41)
Gain from disposal of ORE (231) (137)
Gain on sale of loans (138) (256)
Proceeds from sale of loans held for sale 15,778 23,511
Originations of loans held for sale (15,639) (23,255)
Equity in income of service center (160) (78)
Amortization of goodwill 368 404
Amortization of mortgage servicing rights 73 82
Mortgage servicing rights booked (182) (208)
Deferred compensation 186 156
Changes in assets and liabilities:
Interest receivable (1,365) (309)
Prepaids and other assets 26 390
Unearned income (35) (233)
Interest payable 1,072 201
Taxes payable (47) (816)
Deferred taxes -- --
Other liabilities (30) 2,622
-------- --------
Total adjustments 1,014 3,490
-------- --------
Net cash provided by operating activities $ 6,070 $ 8,422
======== ========
</TABLE>
7
<PAGE> 8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. The accompanying unaudited consolidated financial statements should be read
in conjunction with Baylake Corp.'s ("Company") 1999 annual report on Form
10-K. In the opinion of management, the unaudited financial information
included in this report reflects all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair statement of the
financial position as of September 30, 2000 and December 31, 1999. The
results of operations for the three and nine months ended September 30,
2000 and 1999 are not necessarily indicative of results to be expected for
the entire year.
2. The book value of investment securities, by type, held by the Company are
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(dollars in thousands)
<S> <C> <C>
Investment securities held to maturity:
Obligations of state and political subdivisions $ 16,459 $ 19,380
-------- --------
Investment securities held to maturity $ 16,459 $ 19,380
======== ========
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 30,361 $ 22,819
Obligations of states and political subdivisions 32,620 31,797
Mortgage-backed securities 66,773 69,410
Other 1,741 1,674
-------- --------
Investment securities available for sale $131,495 $125,700
======== ========
</TABLE>
3. At September 30, 2000 and December 31, 1999, loans were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 327,119 $ 267,460
Real estate - construction 34,303 26,535
Real estate - mortgage 153,169 138,029
Installment 17,687 15,446
Less: Deferred loan origination fees, net of costs (416) (451)
--------- ---------
$ 531,862 $ 447,019
Less allowance for loan losses (8,126) (7,611)
--------- ---------
Net loans $ 523,736 $ 439,408
========= =========
</TABLE>
8
<PAGE> 9
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 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
9
<PAGE> 10
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 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
10
<PAGE> 11
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 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
11
<PAGE> 12
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 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
12
<PAGE> 13
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 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.
13
<PAGE> 14
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.
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
14
<PAGE> 15
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.
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
15
<PAGE> 16
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%.
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.
16
<PAGE> 17
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>
Allowance for Possible Loan Losses
Management reviews on a quarterly basis the adequacy of the Allowance for
Possible Loan Losses ("APLL") to determine whether the allowance is sufficient
to absorb potential losses arising from the credit granting process.
Management's evaluation of the adequacy of the APLL is based primarily on
management's periodic review and grading of the loan portfolio. Additional
factors considered by management include the levels of non-performing loans,
other real estate owned, trends in past due and nonperforming loans, loan
portfolio growth, changes in loan portfolio composition (mix), historical net
charge-offs, present and prospective financial condition of borrowers, general
and local economic conditions, specific industry conditions, and other
regulatory or legal issues that could affect the Company's loss potential.
At September 30, 2000, the APLL of $8.1 million represented 1.53% of total
loans, down from 1.7% at December 31, 1999. APLL of $6.5 million was acquired as
a result of the BLBNA acquisition during the fourth quarter of 1998. Loans
increased 19.0% from December 31, 1999 to September 30, 2000, while the
allowance as a percent of total loans declined as a result of reduced loan loss
provision for the first three quarters of 2000. Based on management's analysis
of the loan portfolio risk at September 30, 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. Net loan recoveries of $48,000
occurred in the third quarter of 2000. For the nine months ended September 30,
2000, provision expense was $330,000, a decrease of $208,000 or 38.7% compared
to the same period in 1999. Net loan
17
<PAGE> 18
recoveries of $185,000 occurred in the first nine months of 2000 as compared to
net loan charge-offs of $2.5 million for the same period in 1999.
There does exist potential asset quality problems in the loan portfolio,
including loans 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 time period
since the purchase of BLBNA, management has undergone extensive efforts to
identify and evaluate potential problem loans stemming from the BLBNA
acquisition. As part of their examination of the Company since the BLBNA
acquisition, various regulatory agencies have also performed a review on these
loans. 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 risk of further deterioration of these loans
for full collectibility.
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. Loans charged-off are subject to periodic review and specific
efforts are taken to achieve maximum recovery of principal and accrued interest.
Management believes that the balance of the allowance for possible loan losses
as of September 30, 2000 is sufficient to absorb potential loan losses. While
loan volume has increased as a percentage of the Company's portfolio, management
did not believe there existed any trends indicating any material portfolio risk.
While management uses available information to recognize losses on loans, future
adjustments to the APLL may be necessary based on changes in economic conditions
and the impact of such change on the Company's borrowers. Various regulatory
agencies also review the adequacy of the APLL, in conjunction with their
examination process. Such regulatory agencies may require that changes in the
APLL be recognized when their credit evaluations differ from those of
management, based on such regulatory agencies' judgments about information
available to them at the time of examination process.
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
18
<PAGE> 19
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 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 cash flow
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
APLL 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.
19
<PAGE> 20
Securities held to maturity and securities available for sale consist of the
following:
At September 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market Value
Gains Losses
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to
maturity
---------------------------------------------------------------------------------------------------------------------
Obligations of $ 16,459 $ 69 $ 63 $ 16,465
states & political
subdivisions
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Securities
available for sale
---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. 30,284 137 60 30,361
Treasury & other
U.S. Agencies
---------------------------------------------------------------------------------------------------------------------
Mortgage-backed 68,827 16 2,070 66,773
securities
---------------------------------------------------------------------------------------------------------------------
Obligations of 32,411 345 136 32,620
states & political
subdivisions
---------------------------------------------------------------------------------------------------------------------
Equity securities 1,741 1,741
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Total securities $133,263 $498 $2,266 $131,495
available for sale
---------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market Value
Gains Losses
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to
maturity
---------------------------------------------------------------------------------------------------------------------
Obligations of $ 19,380 $10 $ 131 $ 19,259
states & political
subdivisions
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Securities
available for sale
---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. $ 22,851 $54 $ 86 $ 22,819
Treasury & other
U.S. Agencies
---------------------------------------------------------------------------------------------------------------------
Mortgage-backed 71,876 23 2,489 69,410
securities
---------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Obligations of states & 32,413 122 738 31,797
political
subdivisions
---------------------------------------------------------------------------------------------------------------------
Equity securities 1,674 1,674
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Total securities $128,814 $199 $3,313 $125,700
available for sale
---------------------------------------------------------------------------------------------------------------------
</TABLE>
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 0 0 1,741 1,741
securities
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
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
21
<PAGE> 22
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.
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
22
<PAGE> 23
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 funding sources to meet
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 $60.0 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
23
<PAGE> 24
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 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
24
<PAGE> 25
of the sensitivity of net interest income in a changing rate environment.
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
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
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
25
<PAGE> 26
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. 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%
----------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------
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>
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.
Item 3 Quantitative and Qualitative Disclosure about Market Risk.
The Company's financial performance is affected by, among other factors, credit
risk and interest rate risk. The Company does not use derivatives to mitigate
its interest rate risk or credit risk, relying instead on loan review and its
loan loss reserve.
The Company's earnings are derived from the operations of its direct and
indirect subsidiaries with particular reliance on net interest income,
calculated as the difference between interest earned on loans and investments
and the interest expense paid on deposits and other interest bearing
liabilities, including advances from FHLB and other borrowings. Like other
financial institutions, the Company's interest income and interest expense are
affected by general economic conditions and by the policies of regulatory
authorities, including the monetary policies of the Board of Governors of the
Federal Reserve System. Changes in the economic environment may influence, among
other matters, the growth rate of loans and deposits, the quality of the loan
27
<PAGE> 28
portfolio and loan and deposit pricing. Fluctuations in interest rates are not
predictable or controllable.
As of September 30, 2000, the Company was in compliance with its management
policies with respect to exposure to interest rate risk. The Company has not
experienced any material changes to its market risk position since December 31,
1999, as described in the Company's 1999 Form 10-K Annual Report.
Part II - Other Information
Item 1. Legal Proceedings
The Company is a party to routine litigation involving various aspects of its
businesses, none of which, in the opinion of management and its legal counsel is
expected to have a material adverse impact on the consolidated financial
condition, results of operations or liquidity of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Bank constructed a full-service branch facility in the village of
Ashwaubenon, located in Brown County, Wisconsin. Completion of this project
occurred early in the third quarter of 2000. The cost of construction was $1.1
million.
The Bank remodeled a leased site in downtown Green Bay, Wisconsin. Completion of
this project occurred in the third quarter of 2000. The cost of construction was
approximately $390,000.
The Bank constructed a new facility in Kewaunee, Wisconsin to replace an
existing leased facility. Completion occurred early in the third quarter of
2000. The cost of construction was approximately $625,000.
The Bank purchased land and a building in the late third quarter of 1999 in
Seymour, Wisconsin for $475,000. The Bank's intentions are to remodel that
building in the year 2001 to replace a facility currently in use.
28
<PAGE> 29
The 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.
Item 6. Exhibits and Reports on Form 8-K
(a). The following exhibits are furnished herewith:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
11 Statement re: computation of per share earnings
15 Letter re: unaudited interim financial information
27 Financial Data Schedule
</TABLE>
(b). Reports on Form 8-K
There were no Current Reports on Form 8-K filed for the quarter ended September
30, 2000.
29
<PAGE> 30
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: October 26, 2000 /s/ Thomas L. Herlache
------------------- --------------------------------------------
Thomas L. Herlache
President (CEO)
Date: October 26, 2000 /s/ Steven D. Jennerjohn
------------------- --------------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
30
<PAGE> 31
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- ------------
<S> <C>
11 Statement re: computation of per share earnings
15 Letter re: unaudited interim financial information
27 Financial Data Schedule
</TABLE>
31
