<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-8679
BAYLAKE CORP.
(Exact name of Registrant as specified in its charter)
Wisconsin 39-1268055
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
217 North Fourth Avenue., Sturgeon Bay, WI 54235
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (920)-743-5551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $5
Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
As of March 17, 2000, 7,444,274 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $22.00 reported bid
price on that date) held by non-affiliates (excludes a total of 627,287 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $149,973,725.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Proxy Statement for 1999 Annual Meeting Part III
of Shareholders
<PAGE> 2
ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Registrant") is a registered bank holding company under the Federal Bank
Holding Company Act of 1956. Registrant was organized primarily to acquire and
hold the stock of Baylake Bank ("Bank), and to enter into such other closely
related business activities as may be approved from time to time.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. At December 31,
1999, the Bank had total assets of $646.3 million. It is a member of the Federal
Reserve System and its deposits are insured, subject to regulatory limits, by
the FDIC. It provides general banking and trust department services to
commercial, industrial and individual accounts in a eight county area composed
of Door, Kewaunee, Manitowoc, Brown, Outagamie, Green Lake, Waushara and Waupaca
Counties. The Bank offers a full range of financial services, including demand
deposit accounts, various savings account plans, certificates of deposit,
individual retirement accounts, real estate mortgage loans, consumer and
business loans, agricultural loans, safe deposit boxes, collection services,
transfer agency services, a trust department, insurance agency, discount
brokerage, financial planning, conference facilities, electronic banking and
access to TYME Corporation's electronic funds transfer system. The Bank
maintains a number of divisions each headed by a vice president, including a
Retail Division, Commercial/Loan Division and Non-Bank Division to facilitate
the provision of customer services, and three supportive divisions, the
Administrative Division, Accounting Division and Operations Division.
The Bank has the following 100%-owned subsidiaries: Baylake Investments, Inc.,
Bank of Sturgeon Bay Building Corporation, Cornerstone Financial, Inc., and
Baylake Insurance Agency, Inc. Baylake Investments, Inc. was formed to manage
certain bank assets available for investment. Bank of Sturgeon Bay Building
Corporation owns the main office building, conference center facilities and
underlying property of the Bank. Cornerstone Financial, Inc. manages Bank of
Sturgeon Bay Building Corporation's conference center facilities. Baylake
Insurance Agency, Inc. offers various types of insurance products to the general
public as an independent agent. The Bank also owns a 49.6% interest in United
Financial Services, Inc. ("UFS"), a data processing services company.
Unaffiliated third parties own a 50.4% interest in UFS. The revenues generated
by these subsidiaries and UFS amount in aggregate to less than 5% of the Bank's
total income.
The Bank offers short-term and long-term loans on a secured and unsecured basis
for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. The Bank focuses lending
activities on individuals and small businesses in its market area. Lending has
been exclusively within the industrial and consumer community within their
market areas. The Bank's market area consists of primarily Door County,
Wisconsin. Sturgeon Bay is the county seat and major industrial and retail area
of Door County. The Bank is the largest commercial bank in Door County. The Bank
operates seven branch offices (one of which are seasonal) in Door County, in
addition to its main office in downtown Sturgeon Bay.
The resident population of Door County is approximately 27,250 (according to the
1990 census) with 9,450 living in the City of Sturgeon Bay. The major industries
of Door County include shipbuilding, tourism, metal products manufacturing,
electrical components manufacturing, and industrial oven fabrication. Most
industry is centered in the Sturgeon Bay area. The rest of Door County is
primarily involved in agriculture (mostly dairy farming and the production of
cherries and apples), and tourism. The tourist business of Door County is
seasonal, with the season beginning in early spring and continuing
<PAGE> 3
until late fall. The seasonal nature of the tourist business imposes increased
demands for loans shortly before and during the tourist season and causes
reduced deposits shortly before and during the early part of the tourist season,
although the financial needs of those involved in the delivery of tourist
related services is a year round concern.
The Bank's market area consists also of Kewaunee County, Wisconsin and adjacent
portions of Manitowoc County. The Bank owns and operates three branch offices,
in addition to its main office in downtown Kewaunee. The resident population of
Kewaunee County is approximately 20,000 according to the 1990 census, with 2,750
people living in Kewaunee and 3,353 in Algoma. The Kewaunee County industrial
base is diverse with over half of the business associated with food and related
products, fabricated metals, and lumber and wood furniture and fixtures. Most
industry is centered in the Kewaunee and Algoma area. The rest of Kewaunee
County is primarily involved in agriculture (mainly dairy production). Tourism
also contributes to the local economy.
The Bank additionally has four locations in Brown County consisting of two
permanent locations located on the Northeast side of Green Bay, one leased
facility located on the Northwest side of Green Bay and one facility located in
Ledgeview on the Southeast side of Green Bay. The area offers a wide and
diversified manufacturing and service industry mix and is a leading area for
growth in Wisconsin.
The Bank's market area also consists of five locations in Waupaca County (two of
which were acquired as result of the Evergreen Bank, N.A. "Evergreen"
acquisition in October 1998) and is located approximately 35 miles west of Green
Bay. The major industries center around the production of food and related
products, lumber and wood furniture and fixtures. Tourism also contributes to
the local economy.
In addition the Bank has one location in the counties of Outagamie and Green
Lake as a result of the Evergreen acquisition.
Acquisitions
On March 15, 1999, Baylake Bank merged with Baylake Bank, NA ("BLBNA") fka
Evergreen. Evergreen was acquired by the Registrant on October 1, 1998 and its
name was changed to BLBNA. No payments to the seller have been made at this
point but are contingently payable based on a formula set forth in the stock
purchase agreement, not to exceed $2 million dollars. The transaction was
accounted for using the purchase method of accounting.
Lending and Investments
The Bank offers short-term and long-term loans on a secured and unsecured basis
for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. The Bank focus lending
activities on individuals and small businesses in its market area. Lending has
been exclusively within the State of Wisconsin. The Bank does not conduct any
substantial business with foreign obligors. The markets served by the Bank
include a wide variety of types of businesses; therefore, the Registrant does
not believe it is unduly exposed to the problems in any particular industry
group. However, any general weakness in the economy of Door, Brown, Kewaunee,
Waupaca, and Waushara County areas (as a result, for example, of a decline in
its manufacturing and tourism industries or otherwise) could have a material
effect on the business and operations of the Registrant.
The Bank's total outstanding loans as of December 31, 1999 amounted to
approximately $447.0 million, consisting of 81.8% residential, commercial,
agricultural and construction real estate loans, 12.9% commercial and industrial
loans, 3.4% installment and 1.9% agricultural loans.
The Registrant maintains a portfolio of other investments, primarily consisting
of U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
<PAGE> 4
securities, and obligations of states and their political subdivisions. The
Registrant attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
The Bank offers a broad range of depository products, including non-interest
bearing demand deposits, interest-bearing demand deposits, various savings and
money market accounts and certificates of deposit. Deposits at the Bank are
insured by the FDIC up to statutory limits. At December 31, 1999, the Bank's
total deposits amounted to $504.1 million, including interest bearing deposits
of $444.9 million and non-interest bearing deposits of $59.2 million.
Other Customer Services and Products
Other services and products offered by the Bank and subsidiaries include safe
deposit box services, personal and corporate trust services, conference center
facilities, an insurance agency and discount brokerage services offering stocks,
bonds, annuities, mutual funds and other investment products.
Competition
The Bank competes with other financial institutions and businesses in both
attracting and retaining deposits and making loans. The Bank encounters direct
competition in its Door County market area from two other commercial banks as
well as from two savings and loan associations and one credit union maintaining
offices in Door County. The Bank encounters direct competition in its Kewaunee
County market area from four other commercial banks as well as one savings and
loan association and one credit union. In spite of such competition, the Bank
has maintained its position within these market areas, holding more than half of
all commercial bank deposits in the combined market area as of December 31,
1999. In other market areas served by the Bank it competes with various
financial institutions. Although no assurance can be given that they will
continue to do so, the Bank has been able to maintain its prominence in these
market areas, even though certain competitors have considerably more financial
and other resources than do the Registrant.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, that is not within the control of Baylake. This
regulation substantially affects the business and financial results of all
financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Federal Reserve Board, which requires that Baylake's capital
to asset ratio meet certain minimum standards. For a discussion of the Federal
Reserve Board's guidelines and the Registrant's applicable ratios, see the
section entitled "Capital Resources" under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation.
The Bank is incorporated under the banking laws of Wisconsin, and its deposits
are insured by the FDIC. It is therefore subject to supervision and regulation
by the Wisconsin Commissioner of Banking (the "Commissioner"), the Federal
Reserve Bank ("FRB") and the FDIC. As a registered bank holding company under
the Bank Holding Company Act, Baylake is subject to review and regulation by the
FRB (its primary regulator). Baylake is also subject to review and
<PAGE> 5
examination by the Commissioner under Wisconsin law.
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the Commissioner be paid out of current earnings or, no more
than once within the immediate preceding two years, out of undivided profits in
the event that there have been insufficient net profits. Any other dividends
require the prior written consent of the Commissioner. The Bank is in compliance
with all applicable capital requirements and may pay dividends to Baylake.
Current federal law provides that adequately managed bank holding companies from
any state may acquire banks and bank holding companies located in any other
state, subject to certain conditions. Beginning on June 1, 1997, banks may
create interstate branching networks in states that do not "opt out" of
interstate branching. Prior to that date, banks could create interstate
branching networks in states that "opted in" to interstate branching early.
Wisconsin law generally permits establishment of full service bank branch
offices statewide.
Employees
At December 31, 1999, the Registrant and its subsidiary, had 252 full-time
equivalent employees.
<PAGE> 6
Statistical Information
The following statistical information is presented in accordance with the
Securities and Exchange Commission's Guide 3, "Statistical Disclosure by Bank
Holding Companies." Reference numbers relate to Guide 3.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Three-year comparison of Consolidated
Average Balance Sheet (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 15 978 $ 11 917 $ 10 162
Investment Securities:
U. S. Treasury 1 156 2 102 2 691
U. S. Government Agencies 89 863 67 824 58 687
State and Municipal Obligations 50 954 44 614 32 858
Other Securities 5 019 5 629 4 475
Market Adjustment on AFS Securities 386 2 298 927
-------- -------- --------
Total Investments $147 378 $122 467 $ 99 638
-------- -------- --------
Federal Funds Sold $ 5 361 $ 6 657 $ 17
Loans, Net of Unearned Income $421 541 $333 484 $276 639
Reserve for Loan Losses (8 924) (5 833) (3 203)
-------- -------- --------
Net Loans $412 617 $327 651 $273 436
-------- -------- --------
Bank Premises and Equipment $ 16 795 $ 14 434 $ 12 521
Other Real Estate Owned $ 287 $ 93 $ 38
Other Assets $ 18 423 $ 14 139 $ 12 441
-------- -------- --------
Total Assets $616 839 $497 358 $408 253
-------- -------- --------
Liabilities and Stockholders' Equity
Demand Deposits $ 56 755 $ 46 586 $ 41 521
NOW Account Deposits 47 313 41 734 38 898
Savings Deposits 141 972 109 778 88 544
Time Deposits 246 782 188 412 163 755
-------- -------- --------
Total Deposits $492 822 $386 510 $332 718
-------- -------- --------
Short Term Borrowings $ 67 278 $ 57 205 $ 27 701
Customer Repurchase Agreements $ 3 657 $ 3 637 $ 1 800
$
Long Term Debt $ 265 $ 387 377
Other Liabilities $ 6 882 $ 6 247 $ 5 562
-------- -------- --------
Total Liabilities $570 904 $453 986 $368 158
-------- -------- --------
Common Stock $ 20 996 $ 18 475 $ 12 302
Additional paid in capital 6 560 8 718 6 038
Retained Earnings 18 743 15 305 21 347
Net Unrealized Gains (Losses) on AFS Securities 261 1 496 609
Treasury Stock (625) (622) (201)
-------- -------- --------
Total Equity $ 45 935 $ 43 372 $ 40 095
-------- -------- --------
Total Liabilities and Stockholders' Equity $616 839 $497 358 $408 253
======== ======== ========
</TABLE>
<PAGE> 7
I. B. INTEREST RATES AND INTEREST DIFFERENTIAL
The tables below show for the periods indicated the daily average amount
outstanding for major categories of the interest-earning assets and
interest-bearing liabilities, the interest earned or paid and the average yields
thereon (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998
Amount Interest Yield Amount Interest
------ -------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, Net $421 541 $333,484
Less: non-accruing Loans (10 364) (4 505)
-------- --------
Loans $411 177 $ 37 586 9.14% $328 979 $ 30 161
U.S. Treasury Securities 1 156 79 6.83% 2 102 135
U.S. Government Agencies 89 863 5 579 6.21% 67 824 4 707
State and Municipal Obligations 50 954 3 989 7.83% 44 614 3 576
Other Securities 4 036 265 6.57% 3 964 260
Federal Funds Sold 5 361 245 4.57% 6 657 356
Other Money Market Instruments 1 251 58 4.64% 1 665 81
-------- -------- ----- -------- --------
Total Interest Earning Assets (net of $563 798 $ 47 801 8.48% $455 805 $ 39 276
non-accruing loans) ======== ======== ===== ======== ========
Interest-bearing liabilities:
NOW Accounts $ 47 313 $ 837 1.77% $ 41 734 $ 852
Savings Accounts 141 972 5 325 3.75% 109 778 4 077
Time Deposits 246 782 13 379 5.42% 188 412 10 826
Short Term Borrowings 67 278 3 555 5.28% 57 205 3 188
Customer Repurchase Agreements 3 657 163 4.46% 3 637 173
Long Term Debt
265 21 7.92% 348 32
-------- -------- ----- -------- --------
Total Interest-bearing Liabilities $507 267 $ 23 280 4.59% $401 114 $ 19 148
======== ======== ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
Yield Amount Interest Yield
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans, Net $276 639
Less: non-accruing Loans (1 269)
Loans 9.17% $275 370 $ 25 496 9.26%
U.S. Treasury Securities 6.42% 2 691 168 6.24%
U.S. Government Agencies 6.94% 58 687 3 833 6.53%
State and Municipal Obligations 8.02% 32 858 2 755 8.38%
Other Securities 6.56% 2 026 132 6.52%
Federal Funds Sold 5.35% 17 1 5.88%
Other Money Market Instruments 4.86% 2 449 129 5.27%
----- -------- -------- -----
Total Interest Earning Assets (net of 8.62% $374 098 $ 32 514 8.69%
non-accruing loans) ===== ======== ======== =====
Interest-bearing liabilities:
NOW Accounts 2.04% $ 38 898 $ 892 2.29%
Savings Accounts 3.71% 88 544 2 770 3.13%
Time Deposits 5.75% 163 755 9 279 5.67%
Short Term Borrowings 5.57% 27 701 1 619 5.84%
Customer Repurchase Agreements 4.76% 1 800 70 3.89%
Long Term Debt
9.20% 377 32 8.49%
----- -------- -------- -----
Total Interest-bearing Liabilities 4.77% $321 075 $ 14 662 4.57%
</TABLE>
<PAGE> 8
The table below shows the net interest earnings and the net yield on
interest-earning assets for the periods indicated (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Total Interest Income $ 47 801 $ 39 276 $ 32 514
Total Interest Expense 23 280 19 148 14 662
-------- -------- --------
Net Interest Earnings $ 24 521 $ 20 128 $ 17 852
======== ======== ========
Net Yield on Interest-earning Assets 4.35% 4.42% 4.77%
(excluding non-accruing loans)
</TABLE>
Interest on tax exempt income, (i.e., interest earned on state and municipal
obligations) are figured on a federal tax-equivalent basis using a tax rate of
34%.
<PAGE> 9
I. C. The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates (in thousands).
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $7 525 ($ 100) $7 425 4 939 ($ 274) $ 4 665
U.S. Treasury
Securities (63) 7 (56) (37) 4 (33)
U.S. Government
Agencies 1 449 (577) 872 615 259 874
State and Municipal
Obligations 502 (89) 413 964 (143) 821
Other Securities 5 0 5 127 1 128
Federal Funds Sold (64) (47) (111) 373 (18) 355
Other Money Market
Instruments (20) (3) (23) (40) (8) (48)
------- ------ ------ ------ ------ -------
Total Interest
Earning Assets $9 334 ($ 809) $8 525 $6 941 ($ 179) $ 6 762
======= ====== ====== ====== ====== =======
Interest paid on:
NOW Accounts $ 106 ($ 121) ($ 15) $ 61 ($ 101) ($ 40)
Savings Accounts 1 202 46 1 248 726 581 1 307
Time Deposits 3 259 (706) 2 553 1 407 140 1 547
Short Term
Borrowings 547 (180) 367 1 684 (115) 1 569
Customer Repurchase
Agreements 1 (11) (10) 79 24 103
Long Term Debt (7) (4) (11) (3) 3 0
------- ------ ------ ------ ------ -------
Total Interest-
Bearing
Liabilities $5 108 ($ 976) $4 132 $3 956 $ 530 $ 4 486
======= ===== ====== ====== ======= =======
</TABLE>
(1) When a change in interest is due both to rate changes and volume this
analysis has been made on a fifty-fifty basis.
<PAGE> 10
II. INVESTMENT PORTFOLIO
A. The carrying value of investment securities for those held to maturity (at
amortized cost) and available for sale (fair market value) as of December 31,
1999, 1998 and 1997 are summarized as follows (in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Available for Sale
U.S. Treasury and Other U.S. government agencies $ 22 819 $ 20 192 $ 31 453
Mortgage-backed securities 69 410 54 981 34 337
Obligations of states and political subdivisions 31 797 34 288 33 214
Other 1 674 3 075 3 958
-------- -------- --------
$125 700 $112 536 $102 962
Held to Maturity
Obligations of states and political subdivisions $ 19 380 $ 15 510 $ 11 937
Other 0 0 0
-------- -------- --------
$ 19 380 $ 15 510 $ 11 937
Total $145 080 $128 046 $114 899
</TABLE>
The Registrant does not hold investment securities of any issuer (other than
securities of the U.S. Government or its agencies) whose book value exceeds ten
percent of its stockholders equity.
<PAGE> 11
II. B. The following table shows the maturities of investment securities as of
December 31, 1999 and weighted average yields of investment securities (in
thousands). The weighted average yields by maturity range was computed by
annualizing the purchase yield income on the securities within such maturity
range.
<TABLE>
<CAPTION>
One Year Over 1 Year Over 5 Years
or less Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. $ 994 7.13% $14 140 5.67% $ 7 685 6.93%
government agencies
Mortgage-backed securities 2 590 6.94% 46 739 6.10% 15 960 6.13%
Obligations of states and political subdivisions 2 139 7.19% 14 081 7.11% 11 323 7.85%
Other 515 4.86% 0.00% 0.00%
------- ---- ------- ---- ------- ----
Total $ 6 238 6.88% $74 960 6.21% $34 968 6.86%
</TABLE>
<TABLE>
<CAPTION>
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. $ 0.00 0.00% $ 22 819 6.16%
government agencies
Mortgage-backed securities 4 121 7.12% 69 410 6.20%
Obligations of states and political subdivisions 23 634 8.03% 51 177 7.70%
Other 1 159 5.80% 1 674 5.51%
------- ---- -------- ----
Total $28 914 7.81% $145 080 6.71%
</TABLE>
Weighted average yield on state and political subdivisions has been computed on
a fully taxable equivalent basis using a tax rate of 34%.
<PAGE> 12
III. LOAN PORTFOLIO
A. Types of Loans
The following table sets forth the comparison of the loan portfolio at December
31st of each of the past five years (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans secured primarily
By real estate:
<S> <C> <C> <C> <C> <C>
Secured by 1 to 4 family
residential properties $138 030 $136 564 $100 555 $83 538 $62 271
Real estate-construction 26 534 9 553 14 760 11 365 6 378
Other real estate loans 201 301 178 846 118 103 104 391 83 461
Loans to farmers 8 472 6 810 6 314 5 883 5 771
Commercial and Industrial
Loans 56 861 60 495 40 624 40 777 40 287
Loans to individuals for
Household, family and
other personal
expenditures 15 446 15 914 13 480 15 233 12 522
All other loans 826 245 140 240 193
-------- -------- -------- -------- --------
Total gross loans $447 470 $408 427 $293 976 $261 427 $210 883
Less:
Unearned Income (451) (779) (538) (573) (653)
-------- -------- -------- -------- --------
Net Loans $447 019 $407 648 $293 438 $260 854 $210 230
======== ======== ======== ======== ========
</TABLE>
<PAGE> 13
III. LOAN PORTFOLIO
B. Maturity and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of loans outstanding (in thousands) as of
December 31, 1999 which, based on remaining scheduled repayments of principal,
are due in the periods indicated. Also, the amounts due after one year are
classified according to the sensitivity to change in interest rates.
<TABLE>
<CAPTION>
Maturing
--------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Loans secured primarily by real estate:
Secured by 1 to 4 family
Residential property $ 24 883 $ 64 732 $ 48 415 $138 030
Real estate - construction 21 639 4 136 759 26 534
Other real estate loans 44 357 116 846 40 098 201 301
Loans to farmers 1 993 5 638 841 8 472
Commercial and industrial loans 12 195 23 294 21 372 56 861
Loans to individuals for household,
family and other personal expenditures
4 089 10 996 361 15 446
All other loans 714 112 0 826
-------- -------- -------- --------
Total gross loans $109 870 $225 754 $111 847 $447 470
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
---- ----
<S> <C> <C>
Due after one year $184 651 $152 949
</TABLE>
C. Risk Elements
1. The following table shows at December 31, the aggregate amounts of loans (in
thousands) which are non-accrual, troubled with debt restructurings and accruing
loans past due 90 days or more as to principal or interest payments.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 8 086 $11 060 $ 1 720 $ 3 677 $ 846
Troubled debt restructurings 4 458 3 028 2 930 1 000 648
Loans past due 90 days or more 0 0 0 0 0
------- ------- ------- ------- -------
Total $12 544 $14 088 $ 4 650 $ 4 677 $ 1 494
======= ======= ======= ======= =======
</TABLE>
<PAGE> 14
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $929,000; $431,000; $202,000; $472,000; and
$74,000; for 1999, 1998, 1997, 1996 and 1995 respectively. Interest income which
is recorded only as received, amounted to $442,000; $216,000; $180,000;
$154,000; and $34,000; for 1999, 1998, 1997, 1996 and 1995 respectively for
these non-accrual loans.
Loans are placed on non-accrual status when they are contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is the practice of
management to place such loans on a non-accrual status immediately rather than
waiting until the loans become 90 days past due. When interest accruals are
discontinued, interest credited to income is reversed. If collectibility is in
doubt, cash receipts on nonaccrual loans are used to reduce principal rather
than recorded as interest income.
<PAGE> 15
2. As of December 31, 1999, there existed potential problem loans totaling
$1,381,356 which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1999.
<TABLE>
<CAPTION>
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
<S> <C> <C> <C>
$ 770 919 10% $ 77 092
591 221 25% 147 805
11 216 50% 5 608
$ 8 000 100% 8 000
---------- --- --------
Totals $1 381 356 $238 505
</TABLE>
Commercial loans comprised $1,337,918 or 96.9% of the total loans categorized as
problem loans. The other types of loans comprising this amount were consumer
loans totaling $43,438 or 3.1%.
3. The Bank's loan portfolio is diversified by types of borrowers and industry
groups within the Door, Brown, Kewaunee, Waushara, Outagamie, Green Lake and
Waupaca county market area. Significant loan concentrations are considered to
exist for a financial entity when such amounts are loaned to borrowers engaged
in similar activities as would cause them to be similarly impacted by economic
or other conditions. At December 31, 1999, there existed the following industry
group concentrations in the Registrant's loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $51.4 million or 11.5%
Total tourism loans $51.4 million or 11.5%
<PAGE> 16
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following table summarizes the daily average loan balances at the end of
each period; changes in allowance for possible loan losses arising from loans
charged off and recoveries on loans previously charged off, by loan category;
and addition to the allowance which have been charged to operating expenses (in
thousands).
<TABLE>
<CAPTION>
December 31
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Daily average amount of $421 541 $333 484 $276 639 $233 473 $201 839
loans ======== ======== ======== ======== ========
Balance of allowance for $ 11 035 $ 3 881 $ 2 893 $ 2 617 $ 2 534
possible loan losses
at beginning of period
Loans Charged Off:
Real estate - mortgage 991 355 1 99 ----
Real estate - construction 40 ---- ---- ---- ----
Loans to farmers 35 ---- ---- ---- ----
Commercial/Industrial Loans 4 097 376 199 82 158
Consumer Loans 199 114 121 105 50
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 5 362 $ 845 $ 321 $ 286 $ 208
======== ======== ======== ======== ========
Recoveries of loans previously
charged off:
Real estate - mortgage 508 148 1 ---- ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 1 433 186 151 16 33
Consumer loans 47 43 42 26 8
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loan recoveries $ 1 988 $ 377 $ 194 $ 42 $ 41
-------- -------- -------- -------- --------
Net loans charged off $ 3 374 $ 468 $ 127 $ 244 $ 167
-------- -------- -------- -------- --------
Additions to allowance for
Loan losses charged to $ 850 $ 1 135 $ 1 115 $ 400 $ 250
Operating expense -------- -------- -------- -------- --------
Allowance to related assets $ (900) $ 6 487 $ -- $ 120 $ -
acquired -------- -------- -------- -------- --------
Allowance for loan losses at $ 7 611 $ 11 035 $ 3 881 $ 2 893 $ 2 617
end of period ======== ======== ======== ======== ========
Ratio of net charge offs 0.80% .14% .05% .10% .08%
during period to average
Loans outstanding
</TABLE>
The factors which influence management's judgment in determining the additions
to the loan valuation reserve are as follows:
1. An evaluation of potential losses in the current loan
portfolio, including the
<PAGE> 17
evaluation of impaired loans under SFAS 114.
2. The ratio of loan valuation reserves to the total loans should
approximate 1.40% according to Baylake management.
3. The reserve margin as evaluated with various loss weightings to
the loan portfolio should provide a margin of .50% as related to
total loans.
4. The percentage of recoveries of loans previously charged off in
relation to (1) above.
5. The relationship of charged off loans to total loans experience.
6. The economic stability within the market area and its impact on the loan
portfolio.
<PAGE> 18
B. Allocation of Allowance for Loan Losses
For each period ended December 31, the loan valuation reserve has been allocated
to the following categories in amounts deemed reasonably necessary to provide
for the possibility of losses being incurred within each category. The table
also sets forth the percentage of loans in each category to total loans (in
thousands).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount
------ of Loans ------ of Loans ------
in Each in Each
Category Category
to Total to Total
Loans Loans
----- -----
<S> <C> <C> <C> <C> <C>
Real estate - mortgage $3 200 75.8% $6 635 77.3% $1 900
Real estate -
construction 200 5.9% 100 2.3% 50
Loans to farmers 100 1.9% 75 1.7% 20
Commercial/industrial 3 661 12.9% 3 750 14.8% 1 520
Consumer 400 3.5% 425 3.9% 371
Not allocated 50 50 20
------- ------- ------- ------- -------
Total $ 7 611 100% $11 035 100% $3 881
======= ======= ======= ======= =======
1996 1995
---- ----
Percent Amount Percent Amount Percent
of Loans ------ of Loans ------ of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Loans Loans Loans
----- ----- -----
<S> <C> <C> <C> <C> <C>
Real estate - mortgage 74.4% $1 143 71.9% $1 000 69.1%
Real estate -
construction 5.0% 50 4.3% 50 3.0%
Loans to farmers 2.1% 20 2.3% 20 2.7%
Commercial/industrial 13.9% 1 300 15.7% 1 190 19.2%
Consumer 4.6% 360 5.8% 337 6.0%
Not allocated 20 20
------- ------- ------- ------- --------
Total 100% $2 893 100% $2 617 100%
======= ======= ======= ======= ========
</TABLE>
<PAGE> 19
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 56 755 0.00% $ 46 586 0.00% $ 41 521 0.00%
Interest bearing demand
deposits 47 313 1.77% 41 734 2.04% 38 898 2.29%
Savings deposits 141 972 3.75% 109 778 3.71% 88 544 3.13%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 193 416 5.36% 144 772 5.86% 130 084 5.63%
Time Certificates of Deposit
of $100,000 or more 53 366 5.63% 43 640 5.38% 33 671 5.80%
-------- ----- -------- ----- -------- -----
Total Deposits $492 822 3.97% $386 510 4.08% $332 718 3.89%
======== ===== ======== ===== ======== =====
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
3 months or less $ 20 118 $9 778 $ 15 801
Over 3 months thru 6 months 20 955 17 183 7 078
6 months thru 12 months 8 244 12 629 7 621
Over 12 months 6 218 8 127 1 833
-------- -------- --------
Total $ 55 535 $ 47 717 $ 32 333
======== ======== ========
</TABLE>
<PAGE> 20
VI. RETURN ON EQUITY AND ASSETS
The ratio of consolidated net income to average stockholders' equity and to
average total assets and other ratios are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.12% 1.21% 1.29%
Average Stockholders' Equity (return
on equity) 15.07% 13.87% 13.14%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 39.36% 57.32% 55.56%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 7.45% 8.72% 9.82%
</TABLE>
<PAGE> 21
VII. Short-Term Borrowings
A. The following table shows outstanding amounts of short-term borrowings,
together with the weighted average interest rates thereon, at December 31, of
each of the past three years (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal Funds purchased $ 6 330 6.16% $ - 0.00% $18 373 7.07%
Federal Home Loan Bank 80 000 6.39% 53 000 5.26% 36 000 5.88%
borrowings
Securities Sold under
agreements to 2 901 3.88% 3 758 4.19% 2 276 5.07%
repurchase ------- ------- ------- ------- ------- -------
$89 231 6.29% $56 758 5.19% $56 649 6.23%
======= ======= ======= ======= ======= =======
</TABLE>
B. The following table shows the maximum amounts outstanding of short term
borrowings at any month-end during each reported period (in thousands of
dollars).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Balance Balance Balance
------- ------- -------
<S> <C> <C> <C>
Federal funds purchased $28 350 $38 392 $18 373
Federal Home Loan Bank
borrowings 61 000 36 000 36 000
Securities sold under
agreements to repurchase
2 031 2 925 2 276
</TABLE>
<PAGE> 22
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of short-term borrowings, the interest paid and
the weighted average rates thereon (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term
borrowings:
Federal funds $10 812 $ 605 5.60% $15 107 $ 898 5.94% $20 944 $1 233 5.89%
purchased
Federal Home Loan 56 466 2 895 5.13% 42 098 2 290 5.44% 6 756 386 5.71%
Bank borrowings
Securities sold
under agreements
to repurchase 3 657 163 4.46% 3 637 173 4.76% 1 800 70 3.89%
------- ------- ----- ------- ------- ----- ------- ------- -----
Total short-term
borrowings $70 935 $3 663 5.16% $60 842 $3 361 5.52% $29 500 $1 689 5.73%
======= ======= ===== ======= ======= ===== ======= ======= =====
</TABLE>
<PAGE> 23
VIII. Long Term Debt
A. The following table shows outstanding amounts of long term debt,
together with the weighted average interest rates thereon, at December
31, of each of the past three years (in thousands of dollars). Long
term debt consists of a land contract requiring annual principal
payments of $53,000 plus interest calculated at prime + 1/4% and a
supplier contract for $14,000 with a five year term and payments
monthly. The supplier contract was paid off in 1998.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Land contract payable $ 264 8.00% $ 317 8.75% 369 8.50%
Other - 0.00% 75 5.85% 14 4.50%
------ ------ ------ ------ ------ ------
$ 264 8.00% $ 392 8.20% $ 383 8.35%
====== ====== ====== ====== ====== ======
</TABLE>
B. The following table shows the maximum amounts outstanding of long term debt
at any month-end during each reported period (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Balance Balance Balance
------- ------- -------
<S> <C> <C> <C>
Land contract payable $ 264 $ 317 $ 369
Other - 89 14
</TABLE>
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of long term debt, the interest paid and the
weighted average rates thereon (in thousands of dollars).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt:
Land contract payable $ 264 $ 21 8.00% $ 317 $ 27 8.54% $ 369 $ 31 8.50%
</TABLE>
<PAGE> 24
ITEM 2. PROPERTIES
Registrant directly owns no real properties of any kind. However, Bank owns
twenty branches and leases the main office building from its subsidiary the Bank
of Sturgeon Bay Building Corporation.
The main office building located in Sturgeon Bay serves as headquarters for
Registrant as well as the main banking office of Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
and financial services. The twenty two branches owned or leased by Bank are
conveniently located throughout the market area served by Bank, including the
counties of Door, Kewaunee, Brown, Manitowoc, Green Lake, Outagamie, Waushara
and Waupaca. All properties are in good condition and considered adequate for
present and near term requirements.
ITEM 3. LEGAL PROCEEDINGS
Registrant is presently involved in one legal action which may have a
significant impact. The action is based on a lender liability claim for damages
arising from the denial of a loan application. The amount of potential loss may
exceed $500,000 if the liability claim is successful. Management intends to
defend this claim vigorously.
Registrant remains subject to various other claims. However, these matters are
subject to uncertainties, and accordingly, the outcomes are not predictable with
assurance. Although the Registrant believes that amounts provided in its
financial statements are adequate, there can be no assurances that the amounts
required to discharge alleged liabilities from these matters will not have a
material adverse affect on its financial condition, results of operations or
cash flows. Any amounts of costs that may be incurred in excess of those amounts
provided as of December 31, 1999 cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of names of executive officers of the Registrant and
position within the Registrant.
- ----------------------------------------- -----------------------------------
Thomas L. Herlache Chairman, President, CEO and
Director of Baylake Corp.
- ----------------------------------------- -----------------------------------
Richard A. Braun Vice Chairman, Executive Vice
President and Director of Baylake
Corp.
- ----------------------------------------- -----------------------------------
Paul C. Wickmann Vice President
- ----------------------------------------- -----------------------------------
Daniel F. Maggle Secretary
- ----------------------------------------- -----------------------------------
Steven D. Jennerjohn Treasurer
- ----------------------------------------- -----------------------------------
<PAGE> 25
- -------------------------------------- -----------------------------------
Robert M. Zubella Vice President
- -------------------------------------- -----------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
Historically, trading in shares of Baylake Corp. Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol: BYLKBB), an electronic interdealer quotation system providing
real-time quotations on over 4,000 eligible securities. Previously, Baylake
Common Stock was listed on the NASDAQ Pink Sheets. Trading in Baylake Common
Stock has been conducted principally by certain brokerage and investment firms
with offices in Door County, Wisconsin which have provided price quotations, and
have assisted individual holders of Baylake Common Stock who wish to sell their
shares. In addition, since May 1993, prices for Baylake Common Stock have
generally been reported daily in The Milwaukee Journal Sentinel based on
information provided by a local brokerage firm.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are computed
from those obtained from two brokerage firms, and, since May 1993 from bid
prices reported in The Milwaukee Journal Sentinel. The reported high and low
prices represent interdealer bid prices, without retail mark-up, mark-downs or
commission, and may not necessarily represent actual transactions. Prices and
dividends per share quoted have been adjusted for a 2 for 1 stock dividend paid
on November 15, 1999.
<TABLE>
<CAPTION>
- ----------------------- --------------------- -------------------- --------------------- --------------------
Calendar High Low Cash
-------- ---- --- ----
period dividends
------ ---------
per share
---------
- ----------------------- --------------------- -------------------- ------------------------------------------
<S> <C> <C> <C> <C>
1998 1st Quarter $11.67 $ 9.42 $0.085
- ----------------------- --------------------- -------------------- -------------- ---------------------------
2nd Quarter $13.00 $10.50 $0.085
- ----------------------- --------------------- -------------------- -------------- ---------------------------
3rd Quarter $14.75 $12.50 $0.085
- ----------------------- --------------------- -------------------- -------------- ---------------------------
4th Quarter $17.00 $13.50 $0.175
- ----------------------- --------------------- -------------------- -------------- ---------------------------
1999 1st Quarter $17.25 $15.50 $0.090
- ----------------------- --------------------- -------------------- -------------- ---------------------------
2nd Quarter $17.63 $16.56 $0.090
- ----------------------- --------------------- -------------------- -------------- ---------------------------
3rd Quarter $20.00 $17.25 $0.090
- ----------------------- --------------------- -------------------- -------------- ---------------------------
4th Quarter $30.00 $19.75 $0.100
- ----------------------- --------------------- -------------------- -------------- ---------------------------
</TABLE>
Baylake had approximately 1,687 shareholders of record at March 17, 2000.
Baylake paid a special dividend of $.09 per share cash dividend in December
1998.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January, and Baylake expects to
continue this practice for the immediate future. The holders of Baylake Common
Stock are entitled to receive such dividends when and as declared by Baylake's
Board of Directors. The ability of Baylake to pay dividends is dependent upon
receipt by Baylake of dividends from the Bank, which is subject to regulatory
restrictions.
<PAGE> 26
Such restrictions, which govern state chartered banks, generally limit the
payment of dividends on bank stock to the bank's undivided profits after all
payments of all necessary expenses, provided that the bank's surplus equals or
exceeds its capital. In determining the payment of cash dividends, the Board of
Directors of Baylake considers the earnings, capital and debt servicing
requirements, financial ratio guidelines issued by the FRB and other banking
regulators, financial conditions of Baylake and the Bank, and other relevant
factors. Baylake maintains a dividend reinvestment plan enabling participating
shareholders to elect to purchase shares of Baylake Common Stock in lieu of
receiving cash dividends. Such shares may be newly issued securities or acquired
in the market, and will be purchased on behalf of participating shareholders at
their then fair market value.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Interest $46,467 $38,061 $31,577 $26,926 $24,487
Income
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Interest $23,280 $19,148 $14,662 $12,046 $10,131
Expense
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Net $23,187 $18,913 $16,915 $14,880 $14,356
Interest
Income
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Provision $ 850 $ 1,135 $ 1,115 $ 400 $ 250
for Loan
Losses
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Other $ 4,556 $ 4,377 $ 4,068 $ 3,451 $ 2,581
Income
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Other $17,370 $13,891 $12,571 $11,289 $ 9,894
Expense
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Income $ 9,523 $ 8,264 $ 7,297 $ 6,642 $ 6,793
before
Income
taxes
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Net Income $ 6,923 $ 6,017 $ 5,270 $ 4,703 $ 4,644
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Earnings
per
share:
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Basic $ .94 $ .82 $ .72 $ .64 $ .63
earnings
per share
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Diluted $ .90 $ .80 $ .71 $ .63 $ .62
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Dividends $ .37 $ .47 $ .40 $ .31 $ .38
per share
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total $646,310 $607,438 $450,062 $395,356 $309,428
assets
(ooo's)
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Registrant"), which may not be otherwise apparent from the
consolidated financial statements included in this report. This discussion and
analysis should be read in conjunction with those financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report for a more complete understanding of the following
discussion and analysis.
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on the current expectations of management. Words such as "anticipates,"
believes," estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "projects," and similar expressions are intended to identify such
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the control of the Registrant, that could materially
differ from what may be expressed or forecasted in such forward-looking
statements. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the relationships; demand for
products and services; the degree of competition by traditional and
non-traditional competitors; changes in banking regulations; changes in tax
laws; changes in prices; the impact of technological advances; governmental and
regulatory policy changes; trends in customer behavior as well as their ability
to repay loans; and changes in the national economy.
On October 1, 1998, the Registrant acquired Evergreen Bank, N.A. and changed its
name to Baylake Bank, N.A. ("BLBNA"). No payments to the former shareholder have
been made, but are contingently payable based on a formula set forth in the
stock purchase agreement. The acquisition was accounted for using the purchase
method of accounting, therefore, it would affect future operations. See Note 13
of Notes to Consolidated Financial Statements for additional details on this
transaction.
All per share information has been restated to reflect the 3-for-2 stock
dividend paid on May 15, 1998 and the 2-for-1 dividend paid on November 1999.
Results of Operations
Net income in 1999 was $6.9 million, a 15.1% increase from the $6.0 million in
1998. Net income for 1998 showed a 14.2% increase over the 1997 earnings. Basic
operating earnings per share increased to $.94
<PAGE> 28
per share in 1999 compared with $.82 in 1998, an increase of 14.6%. Basic
operating earnings per share in 1998 showed a 13.9% increase over 1997 results
of $.72 per share. On a diluted earnings per share basis, the Registrant
recorded $.90 per share in 1999, compared to $.80 and $.71 per share in 1998 and
1997, respectively.
Net income for 1999 includes amortization expense of $327,000 of goodwill
related to the purchase of Four Seasons and $126,000 related to the acquisition
of BLBNA. This expense reduced after-tax net income in 1999 by $453,000 or
earnings per share by $.06. Net income for 1998 reflected amortization expense
of $399,000 related to goodwill, thereby reducing after-tax earnings per share
by $.05.
In spite of an interest rate environment affected by rising rates in the latter
half of 1999 and increased competition, net interest income improved. Net
interest income for 1999 improved $4.3 million or 22.6% over 1998 levels. Net
interest income for 1998 improved $2.0 million or 11.8% over 1997 levels.
Interest income increased by 22.1% while interest expense increased 21.6%.
Other income increased $179,000 or 4.1%. The primary factors increasing other
income were an increase in loan servicing fees, fiduciary income, and fees for
other services to customers offset by a decrease in gains on sales of loans.
Non-interest expense increased $3.5 million or 25.0% over 1998 levels. Factors
contributing to the increase were increased personnel expenses, occupancy and
equipment expense, data processing and other operating expenses offset by a
reduction in operation of other real estate.
For 1999, return on average assets declined to 1.12% compared with 1.21% in 1998
and 1.29% in 1997. This ratio declined as a result of the various factors
discussed above combined with an average asset growth rate of 24.0% in 1999.
Return on average stockholders' equity in 1999 showed an increase of 15.1%
compared to 13.9% in 1998 and 13.1% in 1997. The increase in 1999 compared to
1998 occurred as a result of increased net income, a lower average capital to
average asset ratio and the factors described above.
Cash dividends declared in 1999 decreased 21.3% to $.37 per share compared with
$.47 in 1998. This compares to an increase of 17.5% in 1998 dividends as
compared to 1997.
Net Interest Income
Net interest income is the largest component of the Registrant's operating
income (net interest income plus other non-interest income) accounting for 84.3%
of 1999 total operating income, as compared to 82.1% in 1998 and 81.4% in 1997.
Net interest income represents the difference between interest earned on loans,
investments and other earning assets offset by the interest expense attributable
to the
<PAGE> 29
deposits and the borrowings that fund them. Interest fluctuations together with
changes in the volume and types of earning assets and interest-bearing
liabilities combine to affect total net interest income. This analysis discusses
net interest income on a tax-equivalent basis in order to provide comparability
among the various types of interest earned. Tax-exempt interest income is
adjusted to a level that reflects such income as if it were fully taxable.
Net interest income on a tax-equivalent basis reached $24.5 million in 1999, an
increase of 21.9% from $20.1 million in 1998 (and $17.9 million in 1997). The
improvement in 1999 net interest income of $4.4 million was due in part to an
increase in the volume of net average earning assets of $1.8 million. In spite
of this, average earning assets increased 23.7% offset by an increase of 26.5%
in average interest-bearing liabilities. The benefit from an increase in earning
assets, non-interest bearing deposits and a decrease in the cost of interest
paying liabilities were offset, in part, by an increase in interest-bearing
liabilities and a decline in the yield on earning assets. As a result, interest
income increased 21.7% while interest expense for 1999 increased 21.6%.
Average loans outstanding grew from $333.5 million in 1998 to $421.5 million in
1999, an increase of 26.4%. The increase in loan volume also was a significant
contributing factor to the increase in interest income. Average loans
outstanding increased from $276.6 million in 1997 to $333.5 million in 1998, an
increase of 20.6%. The mix of average loans to average total assets decreased
slightly from 67.8% in 1997 to 67.1% in 1998 and increased to 68.3% in 1999. The
relationship of greater loan composition in the asset mix has provided a source
of higher yielding assets, which has contributed to an increase in net interest
income.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread increased 4 basis points in 1999 to 3.89%
from 3.85% in 1998, as the average yield on earning assets decreased 14 basis
points while the average rate paid on interest-bearing liabilities decreased 18
basis points over the same period. The increase in interest rate spread followed
a decline of 27 basis points in 1998 compared to a spread of 4.12% in 1997. The
increase in the Registrant's earning assets yield reflects an increasing rate
environment impacting rates on the variable priced loans in the last half of
1999 and increased competition. Increased investment interest income which have
resulted from an increased investment portfolio combined with lower yields on
the investment portfolio have contributed to some of the increase in interest
rate spread. Yields on interest-paying liabilities decreased 18 basis points.
Less reliance on high cost deposit funds offset by increased competition for
retail deposits and new product offerings decreased yields on interest bearing
deposits by 15 basis points from 4.63% in 1998 to 4.48% in 1999. Additionally,
as a result of an effort intended to increase interest-earning assets and thus
reduce the percentage of equity to total assets (known as leveraging), Baylake
was able to
<PAGE> 30
acquire additional funding, primarily from the Federal Home Loan Bank ("FHLB")
of Chicago. Although this effort provided additional funding in 1999, the
percentage of short-term borrowings as a percentage of interest-bearing
liabilities decreased to 13.3% in 1999 compared to 14.3% in 1998. Yields on
these borrowings decreased 29 basis points in 1999 compared to 1998 contributing
to an overall decrease in the yields paid on interest-bearing liabilities.
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.
The net interest margin for 1999 was 4.35% compared to 4.42% in 1998. The
decline in net interest margin was in part related to a decline in the free
funds ratio and an increase in non-accrual loans offset by an increase in the
interest rate spread. The impact from competition as it relates to the
commercial loan portfolio and costs related to new product offerings had a
negative affect on the change in net interest margin. The free funds ratio, or
the level of non-interest bearing funds that support earning assets, declined to
18.2% from 19.7% in 1998.
The net interest margin for 1998 was 4.42% compared to 4.77% in 1997 as interest
rate spread declined during that period. The decrease in 1998 occurred primarily
as the result of the 27 basis point decline in the interest rate spread and a
decrease in the average earning assets to average asset ratio. Increased
competition especially as it relates to the commercial loan portfolio,
negatively affected net interest margin.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 91.4% in 1999 compared with 91.7% in 1998 and 91.6% in
1997. The ratio remained stable in 1999 as a result of efforts to increase
interest-earning assets using such sources as FHLB for funding increased loan
demand. This was offset by an increase in non-accrual loans.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Registrant
constantly seeks to attract lower cost core deposits, service the needs of the
customer, and provide attractively priced products. Competition for high quality
assets will also affect asset yields. Net interest income is vital to the
Registrant's earnings performance, since net interest income is the largest
component of operating income. Growth in net interest income primarily is the
result of growth in the level of earning asset volumes and changes in asset mix.
Interest rate spread management through asset and liability pricing and
increased levels of non-interest-bearing sources of funds also aid in improving
net interest income. Management will continue
<PAGE> 31
its focus on maintaining an appropriate mix of quality earning assets as well as
seeking to achieve appropriate growth in volumes.
Changes in the levels of market interest rates also affect net income, but are
less directly under the control of the Registrant. Although a stable rate
environment has been experienced, management believes that a gradual increase in
interest rates will not adversely affect the earning capacity of the Registrant.
Past experience has shown that, although the Registrant remains in a short-term
negative interest rate sensitivity gap, deposits tend not to be repriced as
quickly as loans in a rising rate scenario and are repriced more frequently in a
falling interest rate environment. More discussion on this subject is referenced
in the section titled "Interest Rate Sensitivity".
Provision for Loan Losses
Provision for loan losses in 1999 at $850,000 compares to a provision of
$1,135,000 for 1998 and $1,115,000 for 1997. Net charge-offs in 1999 were $3.4
million compared with net charge-offs of $468,000 in 1998 and $127,000 in 1997.
Net charge-offs of $3.4 million occurred as a result of BLBNA results. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .80% in 1999 compared with .14% in 1998
and .05% in 1997. Entry into new markets has allowed management the opportunity
to re-evaluate the methodology used in providing adequate provision for
potential loan losses, as a result the provision for loan losses was reduced in
spite of increased loan growth. Management's determination of the provision for
loan losses is based on several factors. Factors considered include evaluation
of the loan portfolio, current domestic conditions, loan volume, loan growth,
loan portfolio composition, levels of non-performing loans, trends in past due
loans, and the evaluation of various problem loans for loss potential. Net
charge-offs to average loans remain comparatively low in spite of above average
loan growth due to higher underwriting standards and improved collection
efforts.
The Registrant's charge-off level for 2000 will continue to be affected as a
result of the purchase of BLBNA. The Registrant anticipates charge-off levels in
2000 to be less than 1999 but slightly higher than recent historical charge-off
levels, although the Registrant believes adequate coverage exists as a result of
the Allowance for Possible Loan Losses acquired as a result of the BLBNA
acquisition.
Non-Interest Income
Total non-interest income for 1999, excluding securities transactions, was
$181,000 more than 1998, a 4.1% increase. In 1998, total non-interest income was
$601,000 more than 1997, a 15.9% increase. Trust service fees, loan servicing
fees, gains from sales of loans and service charges continue to be the primary
components of non-interest income.
<PAGE> 32
Trust fees increased $102,000 or 22.6% in 1999 compared to 1998, primarily as a
result of an increase in trust estate business and additional assets under
management. This compared to a decrease of $40,000 or 8.2% in 1998 compared to
1997, primarily the result of decreased trust estate business.
Loan servicing fees increased $29,000 or 3.4% to $875,000 in 1999. This followed
an increase of $115,000 or 15.7% increase to $846,000 in 1998. The increase in
1999 occurred as a result of increased servicing income due to a larger
portfolio of commercial loan business sold on the secondary market and serviced
by Registrant.
Gains on sales on loans in the secondary market decreased $598,000 to $295,000
in 1999 primarily as a result of decreased gains from sales of commercial loans.
Premiums were non-existent in the secondary market for commercial loans
contributing to a decline of $472,000 in gains from the sale of commercial
loans. In addition, gains from mortgage loans decreased $87,000 in 1999.
Increased mortgage loan business amounted to $19.9 million of loans sold in
1999. Total loans sold during 1999 were $26.2 million compared to $24.8 million
in 1998.
Service charges on deposit accounts showed an increase of $279,000 or 26.8% over
1998 results accounting for the improvement in fee income generated for other
services to customers.
Included in 1999 other income are recoveries of $131,000 related to the BLBNA
operation, providing the increase to other income as related to 1998 results.
Non-Interest Expense
Non-interest expense in 1999 increased $3.5 million or 25.0% compared to 1998
results primarily as a result of increased personnel, equipment, data
processing, and other operating expense. This followed a $1.3 million or 10.5%
increase in 1998 as compared to 1997.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $9.7 million in 1999, an increase of $1.9 million or 24.8%
as compared to 1998 results. The increase in 1999 primarily resulted from
additional staffing increases (including the addition of BLBNA), bonus expense,
increased benefit costs, and normal salary increases. Salary and employee
benefits expense in 1998 totaled $7.8 million, an increase of $769,000 or 11.0%
as compared to 1997 results. The 1998 increase resulted primarily from
additional staffing increases, increased benefit costs, and normal salary
increases.
Bonuses arising from the Registrant's Pay-for-Performance Program amounted to
$536,000 in 1999 compared to $205,000 in 1998, an increase of 161.5%. This
program is designed to reward various divisions if certain goals are met in
achieving improvement in income and reaching certain levels of performance on
return on equity. As a result of
<PAGE> 33
certain goals on return on equity being achieved, the bonus payout was more,
therefore bonus expense increased.
The Registrant's 401(k) profit sharing plan (including a money purchase plan
initiated in 1999) covering all employees who qualify as to age and length of
service increased $94,000 or 19.7% over 1998 levels. Expenses in the same
category were up $55,000 or 13.0% over 1997 levels.
The number of full-time equivalent employees increased to 252 in 1999 from 229
in 1998, an increase of 10.0%. Employee levels in 1998 increased to 229 from 199
in 1997, an increase of 20.5%. Other than resulting from the BLBNA acquisition,
these increases occurred primarily in the Green Bay market with emphasis on
additional personnel for sales and calling programs in that particular market.
As the Registrant expands to take advantage of business opportunities and the
related revenues, management will continue its efforts to control salaries and
employee benefits expense, although increases in these expenses are likely to
occur in future years.
Net occupancy expense for 1999 showed an increase of $261,000, or 22.3%, as
compared to 1998. An addition in Waupaca along with additional expense stemming
from the BLBNA acquisition and expansion opportunities in the Green Bay region
were reasons for the additional expense in 1999. Additional depreciation
expense, real estate tax expense and other occupancy costs resulted in 1999.
This increase followed an increase of $1,000 in 1998. The only addition in 1998
occurred as a result of opening a branch in Ledgeview offset by a reduction in
expenses related to maintenance and repairs.
Equipment expense increased $215,000 or 21.0% compared to 1998. This followed an
increase of $156,000 or 18.0% in 1998. The increase resulted from depreciation
expense from past capital expenditures for equipment which were made to enhance
the Registrant's technological capabilities. In addition, four branches acquired
as a result of the BLBNA acquisition provided expenses for all of 1999 as
compared to one quarter in 1998.
Data processing expense in 1999 increased $173,000 or 24.7% due to volume
increases, conversion expense, and technology enhancements. This followed an
increase of $57,000 or 8.9% in 1998 compared to 1997. Management estimates that
data processing expense should show relatively flat increases with only
adjustments related to any volume increase incurred by Registrant.
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result, the
Registrant has shown varied results. Other real estate owned expenses showed net
income of $117,000 in 1999 as a result of various gains taken on property sales.
Gains of $232,000 were taken from lot sales of Idlewild Valley, Inc., a former
subsidiary of the Bank whose value was written off in 1988. In addition gains of
$69,000 from three commercial property sales and $33,000 from three residential
<PAGE> 34
property sales occurred in 1999. These were offset by losses of $56,000 from the
sale of one commercial property and three residential properties. Various
operating expenses, net of income, of other real estate totaling $161,000
occurred in 1999. Other real estate owned expenses resulted in a net loss of
$15,000 in 1998, stemming from various operating expenses occurring on property
held during the year. Other real estate owned expenses showed a net loss of
$30,000 in 1997 as a result of a loss on sale of approximately $17,000 on a
commercial property transaction closed during the year along with various
operating costs expensed during 1997.
Other operating expenses in 1999 increased $1 million or 32.2%. Included in 1999
expenses were amortization of goodwill related to the Four Seasons acquisition
of $327,000 (the same as in 1998) and amortization of $126,000 (as compared to
$72,000 in 1998) related to the BLBNA acquisition. This compares to an increase
of $352,000 or 12.3% in 1998 compared to 1997.
Supplies expense shows an increase of $60,000, or 15.7% in 1999 as compared to
1998. $12,000 of the increase occurred as a result of BLBNA operations.
Payments to regulatory agencies increased $80,000 to $181,000 for 1999. $35,000
of the increase occurred as a result of BLBNA. For the Bank, these charges
related to a debt service assessment related to Financing Corporation (FICO). A
risk classification rating of 1A (rating assigned to well-capitalized
institutions) allowed Bank to experience no Federal Deposit Insurance
Corporation (FDIC) assessments for the first nine months of 1999. As a result of
a change in rating assigned of 2A (rating for adequately capitalized
institutions), the Bank experienced higher assessment costs for the last quarter
of 1999. The lower assessment occurred as a result of the "Total Risk-Based
Capital Ratio"decreasing to a level below 10%. Prior to the merger of the Bank
and BLBNA, BLBNA had been assigned a risk classification rating of 3B (rating
assigned to troubled and critically under capitalized institutions) therefore in
addition to a FICO assessment, BLBNA also received a FDIC assessment.
Other items comprising other operating expense shows an increase of $780,000 or
a 32.6% increase in 1999 compared to 1998. Additional marketing and advertising
expense of $92,000 account for some of this increase, as entry into newer
markets contributed to more extensive and costlier media advertising expense.
Director fees and other related costs show an increase of $32,000 in 1999 due to
additional regional boards established in the year for purposes of keeping
involvement in the communities served by Bank, thereby allowing various levels
of decision-making to be made in the regions formed. Loan and collection expense
increased $346,000, the result of more extensive collection efforts being made
on the troubled loan portfolio acquired as result of the BLBNA purchase. Legal
expenses increased $176,000 during 1999, primarily the result of the completion
of various legal actions stemming from the operations of the former BLBNA. The
overhead ratio, which is computed by subtracting non-interest
<PAGE> 35
income from non-interest expense and dividing by average total assets was 2.08%
for 1999 compared to 1.91% for 1998 and 2.08% for 1997. Registrant continues its
commitment to deliver quality service and products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1999 was $2.6 million, an increase of
$353,000 or 15.7% compared to 1998. This followed an increase of $220,000 or
10.9% in 1998 compared to 1997. The higher tax expense in 1999 and 1998
reflected the Registrant's increase in before tax earnings offset by an increase
in tax-exempt interest income.
The Registrant's effective tax rate (income tax expense divided by income before
taxes) was 27.3% in 1999 compared with 27.2% in 1998 and 27.8% in 1997. Of the
27.3% effective tax rate for 1999, the federal effective tax rate was 25.9%
while the Wisconsin State effective tax rate was 1.4%.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been recognized to offset the related deferred tax assets due to the uncertainty
of realizing tax benefits of a portion of loan loss and mortgage servicing
differences.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Balance Sheet Analysis
Loans
Total loans outstanding grew to $447.0 million at December 31, 1999, a 9.7%
increase from the end of 1998. This follows a 39.1% increase at December 31,
1998 over 1997 year end. The acquisition of BLBNA accounted for $76.6 million or
26.2% of the increase at December 31, 1998.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small business. Loans of this type are in a
broad range of industries and include service, retail, wholesale, and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door, Brown,
<PAGE> 36
Outagamie, Waupaca, Waushara and Kewaunee counties, Wisconsin. The credit risk
related to commercial loans made by the Registrant's subsidiaries is largely
influenced by general economic conditions (especially those applicable to the
Door County market area) and the resulting impact on a borrower's operations.
Commercial loans and commercial real estate loans (including construction loans)
totaled $293.7 million at year end 1999 and comprised 65.7% of the loan
portfolio compared with 62.4% of the portfolio at the end of 1998. Loans in
these classifications grew $38.0 million or 14.9% during 1999.
The following tables set forth loan composition (net of unearned income) at
December 31 (in thousands of dollars):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Amount % of Total Amount % of Total Amount % of Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real $137 900 31% $136 225 34% $100 352 34%
estate-
resident
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Real estate- $ 26 534 6% $ 9 553 2% $ 14 760 5%
construction
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Real $200 980 45% $178 406 43% $117 768 40%
estate-commercial/agric
ultural
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Commercial/agric $ 66 159 15% $ 67 550 17% $ 47 078 16%
ultural
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Consumer/Install $ 15 446 3% $ 15 914 4% $ 13 480 5%
ment
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Total loans (net $447 019 $407 648 $293 438
of unearned
income)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------- --------------------- -------------------- --------------------- --------------
Amount % of Total Amount % of Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real $ 83 334 32% $ 62 059 29%
estate-
residential
- ----------------------- --------------------- -------------------- --------------------- --------------
Real $ 11 365 4% $ 6 378 3%
estate-
construction
- ----------------------- --------------------- -------------------- --------------------- --------------
Real $104 136 40% $ 83 177 40%
estate-commercial/
agricultural
- ----------------------- --------------------- -------------------- --------------------- --------------
Commercial/ $ 46 786 18% $ 46 094 22%
agricultural
- ----------------------- --------------------- -------------------- --------------------- --------------
Consumer/Ins $ 15 233 6% $ 12 522 6%
tallment
- ----------------------- --------------------- -------------------- --------------------- --------------
Total Loans, $260 854 $210 230
(net of
unearned
income)
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 37
Real estate loans (including construction loans) secured by non-residential real
estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, they are combined with
commercial loans for purposes of analysis and discussion.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
in part by detailed underwriting procedures, comprehensive loan administration,
and periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Registrant's loan portfolio is diversified by types of borrowers and
industry groups within the market areas served. Significant loan concentrations
are considered to exist for a financial entity when such amounts are loans to a
multiple of borrowers engaged in similar activities which cause them to be
similarly impacted by economic or other conditions. At December 31, 1999, there
existed the following industry group concentrations in the Registrant's loans
which exceeded 10% of total loans:
<TABLE>
Tourism related loans:
<S> <C>
- -------------------------------------------------------------------------------------------------------
Lodging business $51.4 million or 11.5%
- ------------------------------------------------------- -----------------------------------------------
Total tourism loans $51.4 million or 11.5%
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Registrant has a significant loan concentration because of tourism based
loans. The Registrant must serve the credit needs of its market, with one of the
key industries being tourism. Being a community bank, however, the Registrant
must also meet the other needs of its market area. For that reason the
Registrant realizes that the economic conditions of its market area directly
impact the Registrant's performance levels. Any general weakness in the Door,
Brown, Kewaunee, Outagamie, Waupaca, or Waushara County areas could have a
material effect on the business and operations of the Registrant, although
management believes that it is not unduly exposed to problems in any particular
industry group.
Real estate residential mortgage loans totaled $137.9 million at the end of 1999
and comprised 30.9% of the loan portfolio at the end of 1999. Loans grew $1.7
million or 1.2% during 1999. Residential real estate loans consist of
conventional home mortgages, adjustable indexed interest rate mortgage loans,
home equity loans, and secondary home mortgages. Loans are primarily for
properties with the market areas served by the Registrant. Residential real
estate loans generally contain a limit for the maximum loans to collateral value
of 75% to 80%. Private mortgage insurance may be required when the loan to value
exceeds these limits. Residential real estate loans are written normally with a
one, two, or three year balloon feature.
<PAGE> 38
In 1997, the Registrant offered adjustable indexed interest mortgage loans based
upon market demands. At year end 1999, those loans totaled $44.5 million
dollars. Adjustable indexed interest rate mortgage loans contain an interest
rate adjustment provision tied to the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, plus an additional
mark-up of 2.75% (the "index") which varies with the mortgage loan product.
Interest rates on indexed mortgage loans are adjusted, up or down, on
predetermined dates fixed by contract, in relation to and based on the index or
market interest rates as of a predetermined time prior to the adjustment date.
Adjustable indexed interest rate mortgage loans have an initial period, ranging
from one or three years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps which vary with the product. Annual limits on interest rate increases are
2% while aggregate lifetime interest rate increases over the term of the loan
are currently at 6% above the original mortgage loan interest rate.
The Registrant also participates in a secondary fixed rate mortgage program
under the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. These
loans are sold on the secondary market and the Registrant retains servicing
rights. At December 31, 1999, these loans totaled $35.4 million.
Additionally in the last quarter of 1997, Registrant offered fixed rate
mortgages through participation in secondary fixed rate mortgage programs under
private investors. These loans are sold on the secondary market with servicing
rights sold retained by buyer.
Installment loans to individuals totaled $15.4 million or 3.5% of the total loan
portfolio at December 31, 1999 compared to $15.9 million or 3.9% at end of 1998.
Installment loans include short-term installment loans, direct and indirect
automobile loans, recreational vehicle loans, credit card loans, and other
personal loans. Individual borrowers may be required to provide related
collateral or a satisfactory endorsement or guaranty from another party,
depending upon the specific type of loan and the creditworthiness of the
borrower. Loans are made to individual borrowers located in the market areas
served by the Registrant. Credit risks for loans of this type are generally
influenced by general economic conditions (especially in the market areas
served), the characteristics of individual borrowers and the nature of the loan
collateral. Credit risk is primarily controlled by reviewing the
creditworthiness of the borrowers as well as taking the appropriate collateral
and guaranty positions on such loans.
Critical factors in the overall management of credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, adequate allowance for
possible loan losses, and conservative non-accrual and charge-off policies.
<PAGE> 39
Allowance for Possible Loan Losses
At December 31, 1999, the allowance for possible loan losses ("APLL) of $7.6
million represented 1.70% of total loans, down from 2.71% at December 31, 1998.
APLL of $5.6 million was acquired as a result of the BLBNA acquisition. Loans
grew at a rate of 9.7% from December 31, 1998 to year end 1999, while the
allowance grew at a higher rate. Net charge-offs increased in 1999 as compared
to 1998, as result of the BLBNA acquisition. As loans have grown in the Bank's
portfolio, management did not believe there existed any trends indicating any
undue portfolio risk. There exists potential asset quality problems in the loan
portfolio acquired in the BLBNA purchase although management believes sufficient
reserves have been provided in the APLL acquired in the BLBNA purchase to absorb
potential losses in the loan portfolio. In the fifteen months since the purchase
of BLBNA, management has undergone extensive efforts to identify and evaluate
potential problem loans stemming from the BLBNA acquisition. As an integral part
of their examination process on BLBNA since the acquisition, various regulatory
agencies have also done a review on these loans. Although no assurance can be
given, management feels that the majority of these loans have been identified.
Ongoing efforts are being made to collect these loans and involve the legal
process where necessary to minimize risk of further deterioration of these loans
for repayment in full.
At December 31, 1998, the allowance for possible loan losses of $11.0 million
represented 2.71% of total loans compared with 1.32% at the end of 1997.
Commercial, agricultural and other loan net charge-offs represented 81.2% of the
total net charge-offs as compared with 40.6% of total net charge-offs in 1998.
Real estate mortgage loan net charge-offs represented 14.3% of total net
charge-offs in 1999 as compared to 44.2% in 1998. Installment loan net
charge-offs represented 4.5% of total net-charge-offs as compared with 15.2% in
1998. In the commercial loan sector, three loans totaling $2.5 million accounted
for the majority of the net charge-offs. Twelve real estate residential loans
totaling $593,000 accounted for the real estate loan net charge-offs. The
majority of charge-offs from installment credits occurred as a result of
automobile loans. $123,000 of net-chargeoffs occurred. Credit card loans showed
net charge-offs of $20,000 in 1999 compared with net charge-offs of $28,000 in
1998. Although the Bank has experienced higher interest returns on approximately
$1.2 million in credit card balances, credit card loans are inherently risky in
nature. The Bank continues to work with the credit card issuer to solicit
quality loan accounts based on designated criteria and actively pursue
collection efforts in a more timely fashion. Loans charged-off are subject to
continuous review and specific efforts are taken to achieve maximum recovery of
principal and accrued interest.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb
<PAGE> 40
potential losses arising from the credit granting process. Factors considered
include the levels of non-performing loans, other real estate, trends in past
due loans, loan portfolio growth, changes in loan portfolio composition,
historical net charge-offs, present and prospective financial condition of
borrowers, general and local economic conditions, specific industry conditions,
other factors which could affect potential credit losses such as Year 2000
issues related to borrowers, and other regulatory or legal issues that could
affect the Registrant's loss potential.
Management believes that the balance of the allowance for possible loan losses
as of December 31, 1999 is sufficient to absorb potential loan losses.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
Non-performing loans remain a leading indicator of future loan loss potential.
Non-performing loans are defined as non-accrual loans, guaranteed loans 90 days
or more past due but still accruing, and restructured loans. Additionally,
whenever management becomes aware of facts or circumstances that may adversely
impact on the collection of principal or interest on loans, it is the practice
of management to place such loans on non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued interest and
uncollected interest on such loans is reversed and income is recorded only to
the extent that interest payments are subsequently received on a cash basis and
a determination has been made that the loan's principal is collectible. If the
collection of principal is doubtful, payments received are applied to loan
principal.
Restructuring loans involve the granting of some concession to the borrower
involving a loan modification, such as payment schedule or interest rate
changes.
Non-performing loans at December 31, 1999 were $12.5 million compared to $14.1
million at December 31, 1998. Non-accrual loans represent $8.1 million of the
total of non-performing loans, of which $6.0 million was acquired with the BLBNA
acquisition. Real estate non-accrual loans account for $6.8 million of the total
(of which $2.7 million was residential real estate), while commercial and
industrial non-accruals account for $788,000. Management believes collateral is
sufficient in the event of default. Troubled debt restructured loans represent
$4.5 million of non-performing loans at December 31, 1999 compared to $3.0
million at December 31, 1998. Approximately $3.1 million of this total consists
of three commercial real estate credits granted various concessions and have
experienced past cash flow
<PAGE> 41
problems. These credits were current at December 31, 1999. In addition, the
total consisted of one loan totaling $341,000 experiencing cash flow problems
that was not current at end of year. 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 the end of 1999 was
2.8% compared to 3.5% at end of year 1998. The Registrant's APLL was 60.7% of
total non-performing loans at December 31, 1999 compared to 78.3% at year end
1998.
Potential problem loans are performing loans in which there is doubt that the
borrower will be able to comply with loan repayment terms. Management's decision
to place loans in this category does not necessarily mean that the Registrant
expects to take losses on such loans, but that management needs to be more
vigilant in its efforts to oversee the loan and recognize that a higher degree
of risk is associated with these nonperforming loans. At December 31, 1999,
potential problem loans amounted to a total of $1.4 million compared to a total
of $1.0 million at end of 1998. $1.2 million of the problem loans stem from two
commercial credits experiencing cash flow concerns. Various commercial loans
totaling $161,000 and consumer loans totaling $43,000 make up the balance of the
total potential problem loans. With the exceptions noted above, potential
problem loans are not concentrated in a particular industry but rather cover a
diverse range of businesses.
The placement of performing loans in the potential problem loan category
indicated management's willingness to more closely monitor the financial
condition of the borrower and collateral positions of the Registrant or will
strengthen the loans with additional collateral if significant losses from
credits are expected in this category.
Other real estate owned which represents property to which the Registrant has
acquired through foreclosure or in satisfaction of debt, consisted of two
properties totaling $71,000 at end of year 1999. This compared to two properties
totaling $566,000 at end of year 1998. Management actively seeks to ensure that
properties held are administered to minimize any risk of loss.
Net cost of operation of other real estate for 1999, 1998, and 1997 consists of
the following (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
- ----------------------------------- ------------------------ ------------------------- -------------------------
<S> <C> <C> <C>
Loss on disposition of
properties and other $ 219 $ 15 $ 30
costs
- ----------------------------------- ------------------------ ------------------------- -------------------------
Gains on disposition of $ 336
properties and expense
recoveries
- ----------------------------------- ------------------------ ------------------------- -------------------------
Net (gains) losses $(117) $ 15 $ 30
- ----------------------------------- ------------------------ ------------------------- -------------------------
</TABLE>
<PAGE> 42
Investment Portfolio
The investment portfolio is intended to provide the Registrant with adequate
liquidity, flexibility in asset/liability management and, lastly, its earning
potential.
Investment securities are classified as held to maturity or available for sale.
The Registrant has determined at year end 1999 that all of its taxable issues,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 1999 were to be classified as available for sale. In addition, Bank
had determined that its non-taxable local municipals were classified as
available for sale. In the case of the Baylake Bank's non-taxable issues and
municipal bond investments purchased prior to 1996, they were determined to be
held to maturity. This determination was made because the Bank wanted to retain
the municipal bond issues due to their higher after-tax yields, and local
non-taxable issues due to their lessened marketability. Held to maturity
securities are those securities the Registrant has both the intent and ability
to hold until maturity. Under this classification, securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts which are
recognized as adjustments to interest income. Gains or losses on disposition are
based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method. At December 31, 1999, securities
held to maturity had an aggregate market value of approximately $19.3 million
compared with amortized cost of $19.4 million.
Investment securities classified as available for sale are those securities
which the Registrant has determined might be sold to manage interest rates or in
response to changes in interest rates or other economic factors. While the
Registrant has no current intention of selling those securities, they may not be
held to maturity. Investment securities available for sale at December 31, 1999
and 1998 are carried at market value. Adjustments up or down to market value at
December 31, 1999 and 1998 are recorded as a separate component of equity, net
of tax with one exception. In the event of a market value loss with regards to
investments held in the investment subsidiary, the market value loss is recorded
without a tax benefit since the loss would be treated as a capital loss. Premium
amortization and discount accretion are recognized as adjustments to interest
income. Realized gains or losses on disposition are based on the net proceeds
and the adjusted carrying amount of the securities sold using the specific
identification method. At December 31, 1999, securities available for sale had a
market and carrying value of $125.7 million. The reserve for market adjustment
of securities, net of tax, and reflected in the stockholders' equity section
stood at a negative $2.6 million at December 31, 1999.
At December 31, 1999 and 1998, the Registrant's investment portfolio did not
contain, other than U.S. treasury and federal agencies, securities of any single
issuer that were payable from and secured by the same source of revenue of
taxing authority where the aggregate book value of such securities exceed 10% of
stockholders' equity.
<PAGE> 43
Investment securities averaged $147.4 million in 1999 compared with $122.5
million in 1998. The average balance of securities increased primarily as a
result of the additional funding created from the leveraging strategy employed
by the Registrant in 1999. In 1999, taxable securities comprised approximately
66.4% of the total average investments compared to 63.6% in 1998. Tax-exempt
securities on average for 1999 accounted for 33.6% of the total average
investments compared to 36.4% in 1998.
Deposits
Average total deposits for 1999 were $492.8 million, an increase of 27.5% over
1998. BLBNA average deposits accounted for 16.2% of the increase in 1999. This
follows a 16.2% increase in 1998 over 1997, BLBNA accounting for 6.9% of the
increase.
Non-interest bearing demand deposits in 1999 averaged $56.8 million, up 21.8%
from $46.6 million recorded in 1998. This $10.2 million increase is partially
attributable to BLBNA and to improvement in the seasonal increases in these
funds throughout the year along with an emphasis of attracting new customer
relationships and selling more services to existing customers. December 31, 1999
non-interest bearing demand deposits were $59.2 million compared with $58.3
million at year end 1998.
Interest bearing deposits generally consist of interest-bearing checking,
savings deposits, money market accounts, individual retirement accounts ("IRAs")
and certificates of deposit ("CDs"). In 1999 interest bearing deposits averaged
$436.0 million, an increase of 28.3%. Within the category of interest bearing
deposits, savings deposits (including money market accounts) increased $32.2
million or 29.3%. During the same period, time deposits (including CDs and IRAs)
grew an average of $58.4 million or 31.0%. Average time deposits over $100,000
increased by $9.8 million or 22.3%. Time deposits greater than $100,000 were
priced within the framework of Registrant's rate structure and did not
materially increase the average rates on deposit liabilities. Increased
competition for consumer deposits and customer awareness of interest rates
continues to limit the Registrant's core deposit growth in these types of
deposit.
Emphasis will 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 Registrant will also attempt to attract
and retain core deposit accounts through new product offerings and customer
service.
Short Term Borrowings
Short-term borrowings consist of federal funds purchased, securities under
agreements to repurchase, and borrowings from the Federal Home Loan Bank.
Average 1999 short-term borrowings were $70.9 million compared to $60.8 million
during 1998. The increase of $10.1 million
<PAGE> 44
or 16.6% occurred as a result of higher than expected loan demand, increased
investment balances, and the Registrant's effort to more effectively leverage
capital.
Average short-term borrowings increased $31.3 million or 106.6% in 1998 from
1997 as a result of capital leveraging opportunities and higher loan demand.
Federal funds are purchased from money center banks and correspondent banks at
prevailing overnight interest rates. Securities are sold to bank customers under
repurchase agreements at prevailing market rates. Borrowings with the Federal
Home Loan Bank are secured by one to four family residential mortgages and
eligible investment securities allowing the Registrant to use it for additional
funding purposes. The balances in Federal Home Loan Bank loans showed the most
fluctuation as an additional $14.4 million in average balances were borrowed
during the course of 1999.
Long Term Debt
Long-term debt of $264,000 consists of a land contract requiring annual payments
of $53,000 plus calculated at prime +1/4%. The land contract was for the
purchase of one of the properties in the Green Bay region for a branch location.
Liquidity
Liquidity refers to the ability of the Registrant, and its subsidiary the Bank
to generate adequate amounts of cash to meet its needs for cash. The Registrant
and the Bank have different liquidity considerations.
The Bank meets their cash flow needs by having funding sources available to them
to satisfy the credit needs of customers as well as having available funds to
satisfy deposit withdrawal requests. Liquidity at the Bank is derived from
deposit growth, maturing loans, the maturity of the investment portfolio, access
to other funding sources, marketability of certain of their assets and strong
capital positions.
Maturing investments have been a primary source of liquidity at the Bank. In
addition, the Registrant continued its capital leveraging strategy in 1999. As
part of this strategy, $47.3 million in investments were purchased in 1999. This
resulted in net cash of $1.8 million used in investing activities for 1999. At
December 31, 1999, the carrying or book value of investment securities maturing
within one year amounted to $6.2 million or 4.3% of the total investment
securities portfolio. This compares to a 7.2% level for investment securities
with one year or less maturities as of December 31, 1998. Within the investing
activities of the statement of cash flows, sales and maturities of investment
securities during 1999 totaled $49.1
<PAGE> 45
million. At the end of 1999, the investment portfolio contained $92.2 million of
U.S.Treasury and federal agency backed securities representing 63.6% of the
total investment portfolio. These securities tend to be highly marketable and
had a market value below amortized cost at end of year 1999 amounting to $2.5
million.
Deposit growth is another source of liquidity for the Bank. As a financing
activity reflected in 1999 Consolidated Statements of Cash Flows, deposits
provided $8.8 million in cash inflow during 1999. The Registrant's overall
average deposit base grew $106.3 million or 27.5% during 1999. Deposit growth,
especially core deposits, is the most stable source of liquidity for the Bank.
Federal funds sold averaged $5.4 million in 1999 compared to $6.7 million in
1998. Funds provided from the maturity of these assets typically are used as
funding sources for seasonal loan growth, which typically have higher yields.
Short-term and liquid by nature, federal funds sold generally provide a yield
lower than other earning assets. The Bank has a strategy of maintaining a
sufficient level of liquidity to accommodate fluctuations in funding sources and
will at times take advantage of specific opportunities to temporarily invest
excess funds at narrower than normal rate spreads while still generating
additional interest revenue. At December 31, 1999, the Bank had no federal funds
sold.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $109.9 million of loans maturing within one year, or 24.6% of total
loans.
Within the classification of short-term borrowings at year-end 1999, federal
funds purchased and securities sold under agreements to repurchase totaled $9.2
million compared with $3.8 million at the end of 1998. Federal funds are
purchased from various upstream correspondent banks while securities sold under
agreements to repurchase are obtained from a base of business customers.
Borrowings from Federal Home Loan Bank are another source of funds. They totaled
$80.0 million at year end 1999.
The Bank's liquidity resources were sufficient in 1999 to fund the growth in
loans and investments, increase the volume of interest earning assets and meet
other cash needs when necessary.
Management expects that deposit growth will continue to be the primary funding
source of the Bank's liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Although federal funds purchased and borrowings from
the Federal Home Loan Bank provided funds in 1999, management expects deposit
growth to be a reliable funding source in the future as a result of branch
expansion efforts and marketing efforts to attract and retain core deposits.
Shorter-term liquidity needs will mainly be derived from growth in short-term
borrowings, maturing federal funds sold and portfolio investments, loan
maturities and access to other funding sources.
<PAGE> 46
The Registrant's (rather than of Bank's) primary sources of funds are dividends
and interest, and proceeds from the issuance of equity. The Registrant manages
its liquidity position in order to provide funds necessary to pay dividends to
its shareholders. Dividends received from Bank totaled $2.0 million in 1999 and
will continue to be the Registrant's main source of long-term liquidity. The
dividends from the Bank were sufficient to pay cash dividends to the
Registrant's shareholders of $2.7 million in 1999.
Management believes that, in the current economic environment, the Registrant's
and the Bank's liquidity position is 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 Registrant's liquidity.
Interest Rate Sensitivity
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. All banks assume interest rate risk as an
integral part of normal banking operations. Management of interest rate risk
includes four components: policy statements, risk limits, risk measurement and
reporting procedures. A primary objective of asset/liability management is the
control and monitoring of interest rate risk. The Registrant's bank uses an
Asset/Liability Committee ("ALCO") to manage risks associated with changing
interest rates, changing asset and liability mixes, and their impact on
earnings. The sensitivity of net interest income to market rate changes is
evaluated monthly by the ALCO committee.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. The mismatch between asset and liability repricing characteristics in
specific time intervals is referred to as "interest rate sensitivity gap." If
more liabilities than assets reprice in a given time interval a liability gap
position exists. In general, liability sensitive gap positions in a declining
interest rate environment increase net interest income. Alternatively asset
sensitive positions, where assets reprice more quickly than liabilities,
negatively impact the net interest income in a declining rate environment. In
the event of an increasing rate environment, opposite results would occur in
that a liability sensitivity gap position would decrease net interest income and
an asset sensitivity gap position would increase net interest income. The
sensitivity of net interest income to changing interest rates can be reduced by
matching the repricing characteristics of assets and liabilities.
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Registrant is liability sensitive, although management
believes that a range of plus or minus 15% within a one year pricing schedule is
acceptable. The analysis considers money market index accounts and 25% of NOW
accounts to be rate sensitive
<PAGE> 47
within three months. Regular savings, money market deposit accounts and 75% of
NOW accounts are considered to be rate sensitive within one to five years. While
these accounts are contractually short-term in nature, it is the Registrant's
experience that repricing occurs over a longer period of time. The Registrant
views its savings and NOW accounts to be core deposits and relatively non-price
sensitive, as it believes it could make repricing adjustments for these types of
accounts in small increments without a material decrease in balances. All other
earning categories include loans and investments as well as other paying
liability categories such as time deposits are scheduled according to their
contractual maturities.
For the time frame within three months as of December 31, 1999, rate sensitive
liabilities exceeded rate sensitive assets by $77.6 million, or a ratio of rate
sensitive assets to rate sensitive liabilities of 66.8%. For the next time frame
of four to six months, rate sensitive liabilities exceeded rate sensitive assets
by $37.5 million, or a ratio of rate sensitive assets to rate sensitive
liabilities of 57.3%. For all assets and liabilities priced within a one year
time frame, the cumulative ratio of rate sensitive assets to rate sensitive
liabilities was 61.3%, which is outside the range of plus or minus 15% deemed
acceptable by management. When the Registrant requires funds beyond its ability
to generate them internally, it can borrow from a number of sources, including
the Federal Home Loan Bank of Chicago and other correspondent banks.
Management continually reviews its interest risk position through the committee
processes. Managements' philosophy is to maintain relatively matched rate
sensitive asset and liability position within the range described above, in
order to provide earnings stability in the event of significant interest rate
changes.
<PAGE> 48
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Within Four to Seven to One year to Over five Total
three six months twelve five years years
months months
<S> <C> <C> <C> <C> <C> <C>
Earning
assets
Investment 1,837 134 4,344 80,041 62,724 149,080
securities
Federal Funds
Sold
Loans and leases:
Variable rate 121,577 15,484 27,316 77 164,454
Fixed rate 32,773 34,604 33,669 174,131 50 275,227
-------- -------- -------- -------- ------ -------
Total loans 154,350 50,088 33,669 201,447 127 439,681
and leases -------- -------- -------- -------- ------ -------
Total earning 156,187 50,222 38,013 281,488 62,851 588,761
assets -------- -------- -------- -------- ------ -------
Interest bearing
liabilities
NOW accounts 12,265 36,796 49,061
Savings 100,654 49,814 150,468
deposits
Time deposits 56,632 62,725 77,106 48,929 245,392
Borrowed funds 64,283 25,000 0 212 89,495
-------- -------- -------- -------- -------
Total 233,834 87,725 77,106 135,751 0 534,416
interest bearing -------- -------- -------- -------- ------ -------
liabilities
Interest (77,647) (37,503) (39,093) 145,737 62,851 54,345
sensitivity
(within
periods)
Cumulative (77,647) (115,150) (154,243) ( 8,506) 54,345
interest
sensitivity
GAP
Ratio of (13.19%) (19.56%) (26.20%) ( 1.44%) 9.23%
cumulative
interest rate
sensitivity
GAP to
rate
sensitive
assets
Ratio of rate 66.79% 57.25% 49.30% 207.36%
sensitive
asset to rate
sensitive
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 49
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
liabilities
Cumulative 66.79% 64.19% 61.31% 98.41% 110.17%
ratio of rate
sensitive
assets to
rate
sensitive
liabilities
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Capital Resources
Stockholders' equity at December 31, 1999 increased $938,000 or 2.1% to $46.2
million, compared with $45.3 million at 1998 year end. This increase includes a
negative change of $4.4 million to capital in 1999 due to the impact of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of this
net change, stockholders' equity would have increased $5.3 million or 12.3% for
1999 over 1998, which compares to an increase of $2.9 million or 7.2% for 1998
over 1997. With the SFAS 115 adjustment included in 1998 capital, capital
increased $3.4 million or 8.2% compared to 1997 year end.
The Registrant's capital base (before SFAS 115 change) increased primarily due
to the retention of earnings. Although not used for a portion of 1998, the
Registrant's dividend reinvestment plan typically provides capital improvement,
as the holders of approximately 28% of Registrant's Common Stock participate in
the plan. The dividend reinvestment plan although suspended during early 1998
was reinstated for the March 1998 dividend for those shareholders who elected to
participate.
Cash dividends paid in 1999 were $.37 per share compared with $.43 in 1998,
including a special dividend of $.085 paid in December 1998. The Registrant
provided a 7.3% increase in normal dividends per share in 1999 over 1998 as a
result of above average earnings and strong capital position.
In 1997, the Registrant's Board of Directors authorized management to repurchase
up to 7,000 shares of the Registrant's common stock each calendar quarter in the
market. The shares repurchased would be used to fill its needs for the dividend
reinvestment program, any future benefit plans, and the Registrant's stock
purchase plan. Shares repurchased are held as treasury stock and, accordingly,
are accounted for as a reduction of stockholders' equity. The Registrant
repurchased none of its common shares in 1999.
<PAGE> 50
The adequacy of the Registrant's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. Management is confident that because
of current capital levels and projected earnings levels, capital levels are more
than adequate to meet the ongoing and future concerns of the Registrant.
The Federal Reserve Board has established capital adequacy rules which take into
account risk attributable to balance sheet assets and off-balance sheet
activities. All banks and bank holding companies must meet a minimum total
risk-based capital ratio of 8%. Of the 8% required, at least half must be
comprised of core capital elements defined as Tier 1 capital. The federal
banking agencies also have adopted leverage capital guidelines which banking
organizations must meet. Under these guidelines, the most highly rated banking
organizations must meet a leverage ratio of at least 3% Tier 1 capital to
assets, while lower rated banking organizations must maintain a ratio of at
least 4% to 5%. Failure to meet minimum capital requirements can initiate
certain mandatory -and possible additional discretionary- actions by regulators
that, if undertaken, could have a direct material effect on the consolidated
financial statements.
At December 31, 1999 and 1998, the Registrant was categorized as well and
adequately capitalized, respectively, under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Registrant's category.
To be well capitalized under the regulatory framework, the Tier 1 capital ratio
must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the
leverage ratio must meet or exceed 5%.
The following table presents the Registrant's capital ratios as of December 31
for each of the previous two years.
Registrant's Ratios:
Risk-Based Capital Ratios
<TABLE>
<CAPTION>
December 31, Ratio December 31, Ratio
1999 (000's) 1998 (000's)
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Average stockholders equity $ 45,935 7.45% $ 43,372 8.72%
to average assets
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Stockholders equity to total $ 46,210 7.15% $ 45,272 7.45%
assets
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Total Tier 1 Capital $ 42,811 8.81% $ 35,100 7.97%
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Total Tier 2 Capital $ 48,903 10.07% $ 40,603 9.22%
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Risk-adjusted Assets $485,840 $440,241
(including off-balance sheet
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
</TABLE>
<PAGE> 51
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
items)
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Tier 1 Leverage Ratio $ 42,811 6.79% $ 35,100 6.02%
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Regulatory Requirements:
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Tier 1 capital to risk- 4.00% 4.00%
weighted assets
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Total Tier 1 and Tier 2 8.00% 8.00%
capital to risk-weighted assets
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
Tier 1 leverage ratio 4.00% 4.00%
- --------------------------------------------- --------------------- --------------------- -------------------- ---------------------
</TABLE>
Management believes that a strong capital position is necessary to take
advantages of opportunities for profitable expansion of product and market
share, and to provide depositor and investor confidence. The Registrant's
capital level is strong, but also must be maintained at an appropriate level to
provide the opportunity for a superior return on the capital employed.
Management actively reviews capital strategies for the Registrant to ensure that
capital levels are appropriate based on the perceived business risks, further
growth opportunities, industry standards, and regulatory requirements.
Year 2000
The Registrant did not encounter computer or system problems from the transition
into the new year 2000 ("Y2K"). The year 2000 issue relates to systems designed
to use two digits rather than four to define the particular year. The banks
computer equipment, software and devices with imbedded technology that are time
sensitive may recognize date using "00" as the year 1900 rather than the Year
2000. The Registrant is not aware of any Y2K problems encountered by major
customers, suppliers or hardware and software providers. No liquidity problems
or material withdrawals by depositors of the Bank were experienced during the
transition into the Year 2000.
Total Y2K project costs were approximately $75,000 for the year ended December
31, 1999 and were not material to the Registrant's results of operations,
liquidity, or capital resources.
Although highly unlikely, certain Y2K problems could surface later during 2000.
The Registrant continues to monitor systems for possible future disruptions and
has a business resumption plan in place to deal with such problems.
Accounting Developments
Effective December 31, 1997, the Registrant adopted SFAS No. 128, "Earnings per
Share". The statement specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common
stock. All reported prior period earnings per share information has been
restated with SFAS No. 128.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income
<PAGE> 52
in a full set of general purpose financial statements. The Registrant adopted
this statement as of January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related information." This statement requires certain related
disclosures about products and services, geographic areas, and major customers.
The segment and other information disclosures have been provided for the years
ended after December 31, 1998.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." SFAS No. 127 deferred the
effective date of SFAS No. 125 related to transfers of financial assets
occurring after December 31, 1997, specifically, such transfers involving
repurchase agreements, securities lending, and similar transactions. The
Registrant adopted SFAS 127 as required. The adoption of SFAS No. 127 did not
have a material impact on the Registrant's consolidated statement of position or
results of operations.
Item 7 A. Quantitative and Qualitative Disclosure about Market Risk.
The Registrant's financial performance is impacted by interest rate risk and
credit risk, among other factors. Registrant does not use derivatives to
mitigate its interest rate risk, or credit risk. Registrant instead puts
reliance on loan review and the provision of an adequate loan loss reserve as
explained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. This risk is evaluated quarterly by the
Registrant's Asset/Liability Committee ("ALCO"). Their responsibility involves
the management of risks associated with changing interest rates, changing mix
involving assets and liabilities, and the subsequent impact on earnings. The
ALCO committee operates under the advisory policy guidelines on interest rate
sensitivity approved by the Board of Directors. The sensitivity of net interest
income to market rate changes is evaluated regularly by the Registrant to
determine the effectiveness of interest rate risk management.
In order to limit exposure to interest rate risk, the Registrant has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. Registrant has focused on the establishment of
adjustable rate mortgages ("ARM's") in its residential lending product line; the
concerted efforts made to attract and sell core deposit products through the use
of Registrant's branching and delivery systems and marketing efforts; and the
use of other available sources of funding to provide longer term funding
possibilities.
Interest rate sensitivity analysis is used to measure the Registrant's interest
rate risk by computing changes in the Registrant's pretax
<PAGE> 53
income calculated using flat rates over a 12 month period. The resulting income
is then compared to a future earnings simulation based on a +/- 100 basis point
parallel rate shock. The difference in income calculated represents the
Registrant's earnings sensitivity to a +/- 100 basis point parallel rate shock.
The table below illustrates these amounts at December 31, 1999, which are within
the limits established by the Registrant:
<TABLE>
<CAPTION>
HYPOTHETICAL CHANGE IN IMPACT TO 2000
INTEREST RATES PRETAX NET INCOME
- -------------------------------------------------------------------------------------------------------------
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
100 basis point shock up (4.8%)
- ------------------------------------------------------- -----------------------------------------------------
100 basis point shock down 1.8%
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
These results are based solely on immediate and sustained parallel changes in
market rates and do not reflect the earnings sensitivity that may arise from
such factors as the change in spread between key market rates and the shape of
the yield curve. The above results also are considered to be conservative
estimates due to the fact that no management action is factored into the
analysis to deal with potential income variances.
Another component of interest rate risk, fair value at risk, is determined by
the Registrant through the technique of simulating the fair value of equity in
changing rate environments. This involves determining the present value of all
contractual asset and liability cash flows based on market rates of interest
provided by independent broker quotations and other public sources. The net
result of all balance sheet items determines the fair value of equity. The fair
value of equity resulting from the current flat rate scenario is compared to the
fair value of equity using discount rates +/- 100 basis points from flat rates
to determine the fair value of equity at risk. Currently, fair value of equity
at risk is less than 11.0% of the market value of the Registrant as of December
31, 1999.
Part II - Other Information
Item 8. Other Information
Bank has begun construction of a full-service branch facility in the village of
Ashwaubenon, located in Brown County, with costs of construction estimated to be
$893,000. Completion of this project is expected in the early third quarter of
2000.
Bank has begun remodeling efforts on a leased downtown site in Green Bay. Costs
of construction are estimated to be $382,000 with completion expected in the
early third quarter of 2000.
Bank began construction of a new facility in King, located in Waupaca County, to
replace an existing facility. Completion is expected in the early second quarter
of 2000. Costs of construction are estimated to be $590,000.
<PAGE> 54
Bank began construction of a new facility in Kewaunee to replace an existing
leased facility. Completion is expected in the late second quarter of 2000.
Costs of construction are estimated to be $581,000.
Bank purchased land and a building in the late third quarter of 1999 in Seymour
for $475,000. The Bank's intentions are to remodel that building in the middle
of 2000 to replace a facility currently in use.
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.
Registrant repurchased all of the preferred stock of BLBNA at par value of
$3,160,000 on March 31, 1999 with a dividend rate of 7%. The dividend payment
amounted to $55,300.
On March 15, 1999, BLBNA was dissolved and merged into Bank.
Registrant filed a registration statement for purposes of creating the "Baylake
Corp. Stock Purchase Plan". This registration became effective on December 17,
1998 and will be used by eligible employees and directors to purchase shares of
the Registrant, thereby creating additional liquidity in the Common Stock of the
Registrant.
Item 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Consolidated Financial Statements and notes to related
statements thereto are set forth on the following pages.
Item 10. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 55
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 1999, 1998, and 1997
<PAGE> 56
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholder Equity 5
Consolidated Statements of Cash Flows 6 - 7
Notes to Consolidated Financial Statements 8 - 34
</TABLE>
<PAGE> 57
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Baylake Corp.
Sturgeon Bay, Wisconsin
We have audited the accompanying consolidated balance sheets of Baylake
Corp. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholder equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly the consolidated financial position of Baylake Corp. and subsidiaries at
December 31, 1999 and 1998, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
Madison, Wisconsin Smith & Gesteland, LLP
January 21, 2000 SMITH & GESTELAND, LLP
<PAGE> 58
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,475 $ 17,560
Federal funds sold 26,106
Investment securities available for sale (at market) 125,700 112,536
Investment securities held to maturity (market value
$19,259 and $15,765 ) 19,380 15,510
Loans held for sale 748 1,273
Loans 447,019 407,648
Less: Allowance for loan losses 7,611 11,035
-------------- -------------
Loans, net of allowance for loan losses 439,408 396,613
Bank premises and equipment 18,463 15,627
Federal Home Loan Bank stock (at cost) 4,000 2,650
Accrued interest receivable 4,146 3,913
Income taxes receivable 1,161 1,459
Deferred income taxes 2,912 520
Goodwill 5,941 8,326
Other assets 4,976 5,345
============== =============
Total assets $ 646,310 $ 607,438
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 59
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
(Thousands of dollars)
<S> <C> <C>
LIABILITIES
Domestic deposits
Noninterest bearing $ 59,153 $ 58,311
Interest bearing
NOW 49,061 54,974
Savings 150,468 132,075
Time, $100,000 and over 55,535 47,717
Other time 189,857 202,207
-------------- -------------
Total interest bearing 444,921 436,973
-------------- -------------
Total deposits 504,074 495,284
Short-term borrowings
Federal funds purchased, repurchase agreements,
and Federal Home Loan Bank loans 89,231 56,758
Accrued expenses and other liabilities 5,788 5,911
Dividends payable 743 661
Long-term debt 264 392
-------------- -------------
Total liabilities 600,100 559,006
-------------- -------------
Preferred stockholder equity in a subsidiary company 3,160
-------------- -------------
STOCKHOLDER EQUITY
Common stock $5 par value - authorized 10,000,000 shares;
issued - 7,460,333 shares in 1999; 3,694,546 shares in 1998;
outstanding - 7,437,174 shares in 1999; 3,671,387 shares in
1998 37,302 18,473
Additional paid-in capital 7,120 6,229
Retained earnings 5,012 19,394
Treasury stock (625) (625)
Accumulated other comprehensive income
Net unrealized gain (loss) on securities available for sale, net of
tax of $515 in 1999 and $975 in 1998 (2,599) 1,801
-------------- -------------
Total stockholder equity 46,210 45,272
-------------- -------------
Total liabilities and stockholder equity $ 646,310 $ 607,438
============== =============
</TABLE>
3
<PAGE> 60
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Amounts in thousands
except per share data)
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 37,586 $ 30,161 $ 25,496
Interest on investment securities
Taxable 6,041 5,204 4,258
Exempt from federal income taxes 2,582 2,340 1,818
Other interest income 258 356 5
----------- ----------- -----------
Total interest income 46,467 38,061 31,577
----------- ----------- -----------
Interest expense
Interest on deposits 19,541 15,755 12,941
Interest on short-term borrowings 3,663 3,361 1,689
Interest on long-term debt 76 32 32
----------- ----------- -----------
Total interest expense 23,280 19,148 14,662
----------- ----------- -----------
Net interest income 23,187 18,913 16,915
Provision for loan losses 850 1,135 1,115
----------- ----------- -----------
Net interest income after provision for loan losses 22,337 17,778 15,800
----------- ----------- -----------
Other income
Fees from fiduciary activities 553 451 491
Fees from loan servicing 875 846 731
Fees for other services to customers 1,890 1,562 1,343
Gains from sales of loans 295 893 678
Securities gains (losses), net (2) 292
Other income 945 625 533
----------- ----------- -----------
Total other income 4,556 4,377 4,068
----------- ----------- -----------
Other expenses
Salaries and employee benefits 9,700 7,772 7,003
Occupancy expense 1,430 1,169 1,168
Equipment expense 1,238 1,023 867
Data processing and courier 872 699 642
Operation of other real estate (117) 15 30
Other operating expenses 4,247 3,213 2,861
----------- ----------- -----------
Total other expenses 17,370 13,891 12,571
----------- ----------- -----------
Income before income taxes 9,523 8,264 7,297
Income tax expense 2,600 2,247 2,027
=========== =========== ===========
NET INCOME $ 6,923 $ 6,017 $ 5,270
=========== =========== ===========
Basic earnings per common share $.94 $.82 $.72
Diluted earnings per common share $.90 $.80 $.71
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 61
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
For the Years Ended December 31
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------ Paid-in Comprehensive Retained Treasury Total
Shares Amount Capital Income Earnings Stock Equity
----------- ---------- ----------- ---------------- ---------- --------- ----------
(Amounts in thousands except for shares)
1997
----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 2,460,481 $ 12,302 $ 6,038 $ 604 $ 20,339 $ (49) $ 39,234
----------
Net income for the year 5,270 5,270
Net changes in unrealized gain
on securities available for
sale, net of $393
deferred taxes 707 707
----------
Comprehensive income 5,977
----------
Stock options exercised (365) (365)
Cash dividends declared (2,991) (2,991)
----------- ---------- --------- --------- ---------- ------- ----------
Balance - December 31, 1997 2,460,481 12,302 6,038 1,311 22,618 (414) 41,855
1998
----
Net income for the year 6,017 6,017
Net changes in unrealized gain
on securities available for
sale, net of $273 deferred taxes 490 490
----------
Comprehensive income 6,507
----------
Stock options exercised 13,500 68 76 144
Treasury stock acquired (211) (211)
Stock dividend - 50% 1,220,565 6,103 (6,103)
Tax benefit from exercise of
stock options 115 115
Cash dividends declared (3,138) (3,138)
----------- ---------- --------- --------- ---------- ------- ----------
Balance - December 31, 1998 3,694,546 18,473 6,229 1,801 19,394 (625) 45,272
1999
----
Net income for the year 6,923 6,923
Net changes in unrealized gain
(loss) on securities
available for sale, net of
$1,490 deferred taxes (4,400) (4,400)
----------
Comprehensive income 2,523
----------
Stock options exercised 53,450 267 518 785
Tax benefit from exercise of
stock options 373 373
Stock dividend - 100% 3,712,337 18,562 (18,562)
Cash dividends declared (2,743) (2,743)
----------- ---------- --------- --------- ---------- ------- ----------
7,460,333 $ 37,302 $ 7,120 $ (2,599) $ 5,012 $ (625) $ 46,210
========== ========= ========= ========== ======= ==========
Less treasury stock 23,159
===========
7,437,174
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 62
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received from:
Loans $ 37,218 $ 29,901 $ 25,200
Investments 8,716 7,777 5,866
Fees and service charges 4,030 4,004 3,424
Interest paid to depositors (19,982) (16,173) (12,616)
Interest paid to others (3,599) (3,336) (1,558)
Cash paid to suppliers and employees (13,558) (12,077) (11,461)
Income taxes paid (3,204) (2,595) (2,254)
----------- ----------- -----------
Net cash provided by operating activities 9,621 7,501 6,601
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 3,947 8,928
Principal payments received on investments 45,166 31,636 22,460
Purchase of investments (47,306) (66,749) (50,299)
Proceeds from sale of other real estate owned 1,590 165 93
Loans made to customers in excess of principal collected (43,608) (33,120) (32,146)
Capital expenditures (4,008) (1,941) (2,673)
Purchase of annuity (630)
Proceeds on insurance contracts 41
Cash and federal funds received in acquisition 12,459
----------- ----------- -----------
Net cash used in investing activities (44,178) (58,180) (53,637)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 13,322 44,495 2,213
Net increase in short-term borrowings 32,473 184 32,810
Net increase (decrease) in time deposits (4,532) 11,604 16,599
Payments on long-term debt (128) (67) (39)
Proceeds from issuance of stock 1,158 259
Redemption of preferred stock (3,160)
Stock reacquired (211) (365)
Dividends paid (2,661) (3,090) (2,970)
----------- ----------- -----------
Net cash provided by financing activities 36,472 53,174 48,248
----------- ----------- -----------
Net increase in cash and due from banks 1,915 2,495 1,212
Cash and due from banks, beginning 17,560 15,065 13,853
=========== =========== ===========
Cash and due from banks, ending $ 19,475 $ 17,560 $ 15,065
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 63
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 6,923 $ 6,017 $ 5,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,639 1,417 1,293
Provision for losses on loans and real
estate owned 850 1,135 1,115
Amortization of premium on investments 176 176 190
Accretion of discount on investments (152) (414) (281)
Cash surrender value increase (140) (82) (87)
(Gain) loss on sale of investment securities 2 (292)
Gain on sale of loans and other assets (582) (897) (618)
Proceeds from sale of loans held for sale 26,505 25,684 15,808
Origination of loans held for sale (26,210) (24,791) (15,130)
Equity in income of service center (142) (66) (54)
Deferred compensation (50) (6) 24
Deferred income taxes (901) (68) (255)
Changes in assets and liabilities:
Interest receivable (234) (106) (384)
Prepaids and other assets 2,040 26 (450)
Unearned income (328) (38) (35)
Interest payable (300) (361) 487
Taxes receivable 297 (280) 28
Other liabilities 228 155 (28)
----------- ----------- -----------
Net cash provided by operating activities $ 9,621 $ 7,501 $ 6,601
=========== =========== ===========
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Loans issued to facilitate the sale of assets $ $ $ 530
Acquisition of property in lieu of foreclosure 816 126
Dividends reinvested in common stock 736 518
Net liabilities and preferred stock assumed in
acquisition, excluding cash and federal funds received 16,771
</TABLE>
7
<PAGE> 64
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements of Baylake Corp. (the
company) include the accounts of the company, its wholly-owned
subsidiaries, Baylake Bank, Baylake Bank, N.A., and Kewaunee County
Banc-Shares, Inc., and their wholly-owned subsidiaries; Bank of
Sturgeon Bay Building Corporation, Cornerstone Financial, Inc.,
Baylake Investments, Inc., Baylake Insurance Agency, Inc., and
Lufter Insurance Agency, Inc. In 1999, Baylake Bank, N.A. was
merged into Baylake Bank. All significant intercompany items and
transactions have been eliminated.
Baylake Bank owns a 49% interest in United Financial Services,
Inc., (UFS) a data processing service. The investment in this
entity is carried under the equity method of accounting and the pro
rata share of its income is included in other revenue. Amounts paid
to UFS for data processing services for the banks were $755,000,
$627,000, and $599,000, in 1999, 1998, and 1997, respectively. At
December 31, 1999 and 1998, Baylake Bank had loans of $888,000 and
$642,000, respectively, to UFS.
The company's subsidiary banks make commercial, mortgage, and
installment loans to customers substantially all of whom are
located in Door, Brown, Kewaunee, Manitowoc, Waushara, Outagamie,
Green Lake and Waupaca Counties of Wisconsin. Although the banks
have a diversified portfolio, a substantial portion of their
debtors' ability to honor their contracts is dependent upon the
economic condition of the local industrial businesses, and
commercial, agricultural and tourism industries.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
For comparability, certain 1998 and 1997 amounts have been
reclassified to conform with classification adopted in 1999.
The company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and due
from banks. The company places these assets with high credit
quality institutions. At times such assets may be in excess of FDIC
insurance limit.
Investment securities classified as held to maturity are those
securities which the bank has both the intent and the ability to
hold until maturity. Under this classification, securities are
stated at cost, adjusted for amortization of premiums and accretion
of discounts which are recognized as adjustments to interest
income. Gains or losses on disposition are based on the net
proceeds and the adjusted carrying amount of the securities sold,
using the specific identification method.
8
<PAGE> 65
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Investment securities classified as available for sale are those
securities which the bank has determined might be sold to manage
interest rate risk or in response to changes in interest rates or
other economic factors. While the company has no current intention
of selling these securities, they may not be held to maturity.
Investment securities available for sale are carried at market
value. Adjustments up or down to market value are recorded as a
separate component of equity, net of tax. Premium amortization and
discount accretion are recognized as adjustments to interest
income. Realized gains or losses on disposition are based on the
net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method.
Loans, including loans held for sale, are stated at face value, net
of deferred loan origination fees (net of costs) and the allowance
for loan losses. Interest on loans is calculated using the simple
interest method on daily balances of the principal amount
outstanding or an amortized method.
Loan origination fees and related costs are deferred and the net
deferred revenue is amortized over the term of the loans using the
effective interest rate method.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan
loss experience, current domestic and international economic
conditions, volume, growth and composition of the loan portfolio,
and other relevant factors. The allowance is increased by
provisions for loan losses charged against income.
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 nonaccrual loans
are used to reduce principal rather than recorded as interest
income.
Depreciable assets are stated at cost less accumulated
depreciation. Depreciation is charged to operating expense over the
estimated useful lives of the assets, using the straight-line and
accelerated methods.
Mortgage servicing rights of $236,000, $221,000, and $191,000 were
capitalized and $106,000, $77,000, and $19,000 were amortized
during 1999, 1998, and 1997, respectively. The amount of impairment
was not material.
9
<PAGE> 66
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Other real estate, which is included in other assets, comprises
properties acquired through a foreclosure proceeding or acceptance
of a deed in lieu of foreclosure. These properties are carried at
the lower of cost or fair value, minus estimated costs to sell,
based on appraised value at the date acquired. Loan losses arising
from the acquisition of such property are charged against the
allowance for loan losses. An allowance for losses on other real
estate is maintained for subsequent valuation adjustments on a
specific property basis.
Goodwill is being amortized on a straight-line basis over 15 years.
Amortization expense was $453,000, $399,000, and $327,000 in 1999,
1998, and 1997, respectively.
The company expenses all advertising costs as they are incurred.
Total advertising costs for the years ended December 31, 1999,
1998, and 1997 were $233,000, $192,000, and $157,000, respectively.
The company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25) and related interpretations in
accounting for its stock-based compensation plans. Under Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", companies may elect to recognize
stock-based compensation expense based on the fair value of the
awards or continue to account for stock-based compensation under
APB No. 25. The company has elected to continue to apply the
provisions of APB No. 25 with the disclosure requirements of SFAS
No. 123 in Note 17.
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between
the basis of the allowance for loan losses, deferred loan
origination fees, deferred compensation, mortgage loan servicing,
market value adjustments of securities, and depreciation for
financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
The company and its subsidiaries file a consolidated federal income
tax return. The subsidiaries provide for income taxes on a
separate-return basis, and remit to the company amounts determined
to be currently payable, if any.
Earnings per share are based on the weighted average number of
shares outstanding during each year.
For purposes of the statement of cash flows, the company considers
cash and due from banks as cash and cash equivalents.
10
<PAGE> 67
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125."
SFAS No. 127 deferred the effective date of SFAS No. 125 related to
transfers of financial assets occurring after December 31, 1997,
specifically, such transfers involving repurchase agreements,
securities lending, and similar transactions. The company adopted
SFAS No. 127 as required. The adoption of SFAS No. 127 did not have
a material impact on the company's consolidated statement of
position or results of operations.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The company's subsidiary bank is required to maintain average
reserve balances by the Federal Reserve Bank. The average amount of
those reserve balances for the year ended December 31, 1999, was
approximately $5,939,000.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are
as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------- -------------- ------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Available For Sale
------------------
U.S. Treasury and other U.S.
government agencies $ 22,851 $ 54 $ 86 $ 22,819
Obligations of states and
political subdivisions 32,413 122 738 31,797
Mortgage-backed securities 71,876 23 2,489 69,410
Other 1,674 1,674
------------ ---------- ---------- ------------
$ 128,814 $ 199 $ 3,313 $ 125,700
============ ========== ========== ============
Held to Maturity
----------------
Obligations of states and
political subdivisions $ 19,380 $ 10 $ 131 $ 19,259
============ ========== ========== ============
</TABLE>
11
<PAGE> 68
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ --------------- ------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Available For Sale
------------------
U.S. Treasury and other U.S.
government agencies $ 19,280 $ 912 $ $ 20,192
Obligations of states and
political subdivisions 32,802 1,486 34,288
Mortgage-backed securities 54,603 510 132 54,981
Other 3,075 3,075
----------------------------------------------------------------
$ 109,760 $ 2,908 $ 132 $ 112,536
============= ========== ========== =============
Held to Maturity
----------------
Obligations of states and
political subdivisions $ 15,510 $ 255 $ $ 15,765
============= ========== ========== =============
</TABLE>
Results of sales of securities were as follows:
<TABLE>
<CAPTION>
Available for Sale
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Proceeds $ 3,947 $ None $ 8,928
Realized gains 21 307
Realized losses 23 15
</TABLE>
12
<PAGE> 69
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investments at
December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------- ----------------------------
Estimated
Amortized Market Amortized Estimated
Cost Value Cost Value
------------ ------------ ------------ ------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 1,762 $ 1,767 $ 1,866 $ 1,868
Due after one year through
five years 19,221 19,255 8,965 8,873
Due after five years through
ten years 15,859 15,795 3,126 3,095
Due after ten years 20,096 19,473 5,423 5,423
------------ ------------ ----------- -----------
56,938 56,290 19,380 19,259
Mortgage-backed securities 71,876 69,410
------------ ------------ ----------- -----------
$ 128,814 $ 125,700 $ 19,380 $ 19,259
============ ============ =========== ===========
</TABLE>
Securities pledged to secure public and trust deposits and borrowed
funds had a carrying value of $61,560,000 and $52,494,000 at
December 31, 1999 and 1998, respectively.
NOTE 4 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------------- -----------------
(Thousands of dollars)
<S> <C> <C>
Commercial, financial, and agricultural $ 267,460 $ 246,396
Real estate - construction 26,535 9,553
Real estate - mortgage 138,029 136,564
Installment 15,446 15,914
-------------- -------------
447,470 408,247
Less: Deferred loan origination
fees, net of costs (451) (779)
-------------- -------------
Net loans $ 447,019 $ 407,648
============== =============
</TABLE>
13
<PAGE> 70
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
Loans having a carrying value of $44,718,000 are pledged as
collateral for borrowings from the Federal Home Loan Bank at
December 31, 1999.
Certain directors and officers of the company and the subsidiary
banks, including their immediate families, companies in which they
are principal owners, and trusts in which they are involved, were
loan customers of the subsidiaries during 1999 and 1998. Such loans
were made in the ordinary course of business at normal credit
terms, including interest rate and collateralization, and do not
represent more than a normal risk of collection.
A summary of the changes in those loans is as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Balance at beginning of year $ 10,983 $ 8,471
Beginning balance of loans to officers and
directors of Baylake Bank, N.A. 160
New loans made 2,622 19,960
Repayments received (2,889) (17,523)
Loans related to former officers and directors (5,122) (85)
------------- -------------
Balance at end of year $ 5,594 $ 10,983
============= =============
</TABLE>
Loans on which the accrual of interest has been discontinued or
reduced amounted to $8,086,000 and $11,060,000 at December 31, 1999
and 1998, respectively. If these loans had been current throughout
their terms, interest income for the nonaccrual period would have
approximated $929,000 and $431,000 for 1999 and 1998, respectively.
Interest income which has been recorded amounted to $442,000 and
$216,000 for 1999 and 1998, respectively, for these nonaccrual
loans.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 11,035 $ 3,881 $ 2,893
Allowance related to assets acquired (900) 6,487
Provision charged to operations 850 1,135 1,115
Recoveries 1,988 377 194
Loans charged off (5,362) (845) (321)
------------- ------------- -----------
Balance at end of year $ 7,611 $ 11,035 $ 3,881
============= ============= ===========
</TABLE>
14
<PAGE> 71
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
In 1999, it was determined that the allowance that had been
established for assets acquired in 1998 was in excess of the amount
needed to absorb potential losses on those assets based on a review
of information received subsequent to year-end. Accordingly, the
allowance was reduced $900,000 with a corresponding reduction in
goodwill related to the acquisition.
The provision for credit losses charged to expense is based upon
the banks' credit loss experience and an evaluation of potential
losses in the current loan portfolio, including the evaluation of
impaired loans under SFAS 114. The level of the allowance at the
bank acquired by the company in 1998 was also influenced by unusual
factors affecting that bank prior to the acquisition. See Note 13.
A loan is considered to be impaired when, based upon current
information and events, it is probable that the bank will be unable
to collect all amounts due according to the contractual terms of
the loan.
The following is a summary of activity in investment in loans that
have declined in value and related interest income and allowance
for credit losses accounts:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(Thousands of dollars)
<S> <C> <C>
Impaired loans at December 31 $ 18,745 $ 16,287
Impaired loans at December 31 allowed for $ 13,167 $ 11,148
Average impaired loans during the period $ 17,294 $ 13,779
Interest income recognized while loans impaired $ 1,283 $ 485
Interest income using a cash-basis method $ 1,281 $ 332
Allowance as of January 1 $ 4,852 $ 258
Allowance related to assets acquired 5,369
Additions during the year 1,333 282
Recoveries of amounts previously allowed for (4,649) (1,057)
------------ ------------
Allowance as of December 31 $ 1,536 $ 4,852
============ ============
</TABLE>
15
<PAGE> 72
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(Thousands of dollars)
<S> <C> <C> <C>
Land $ 3,892 $ 3,232 $ 2,339
Buildings and improvements 14,298 12,143 11,484
Equipment 8,275 7,330 5,825
------------ ------------ ------------
26,465 22,705 19,648
Less accumulated depreciation 8,002 7,078 6,155
------------ ------------ ------------
$ 18,463 $ 15,627 $ 13,493
============ ============ ============
Depreciation expense $ 1,001 $ 1,013 $ 961
============ ============ ============
</TABLE>
NOTE 6 - OTHER REAL ESTATE
Other real estate ($164,000 in 1999, $795,000 in 1998, and $229,000
in 1997, net of an allowance for other real estate losses of
$93,000 in 1999, $229,000 in 1998, and $229,000 in 1997) is
included in other assets.
Net cost of operation of other real estate is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Loss on disposition of properties
and other costs $ 219 $ 15 $ 30
Gain on disposition of properties
and expense recoveries (336)
--------- ------- -------
Net (gains) losses $ (117) $ 15 $ 30
========= ======= =======
</TABLE>
Changes in the allowance for losses on other real estate were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 229 $ 229 $ 229
Amounts related to properties disposed (136)
--------- --------- ---------
Balance at end of year $ 93 $ 229 $ 229
========= ========= =========
</TABLE>
16
<PAGE> 73
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - TIME DEPOSITS
At December 31,1999, the scheduled maturities of certificates of
deposit were as follows:
<TABLE>
<CAPTION>
(Thousands of dollars)
<S> <C>
2000 $ 195,441
2001 40,286
2002 8,001
2003 1,628
2004 36
------------
$ 245,392
============
</TABLE>
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(Thousands of dollars)
<S> <C> <C> <C>
Federal funds purchased $ 6,330 $ $ 18,373
Federal Home Loan Bank Loan 80,000 53,000 36,000
Securities sold under agreements
to repurchase 2,901 3,758 2,276
----------- ----------- -----------
$ 89,231 $ 56,758 $ 56,649
=========== =========== ===========
</TABLE>
The average outstanding balance of total short-term borrowings amounted
to $70,926,000 in 1999 and $60,843,000 in 1998. The weighted-average
interest rate on these borrowings was 5.2% for 1999 and 5.5% for 1998.
The average outstanding balance is determined on a daily average basis
and the weighted-average interest rate is calculated by dividing the
actual interest paid on all short-term borrowings by the average
balance for the year.
The maximum amount outstanding at any month end was $91,381,000 during
1999 and $77,317,000 during 1998.
17
<PAGE> 74
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Thousands of dollars)
<S> <C> <C>
Land contract requiring annual
principal payments of $53,000
plus interest calculated at
prime +1/4% $ 264 $ 317
Other 75
-------- -------
$ 264 $ 392
======== =======
</TABLE>
NOTE 10 - PREFERRED STOCKHOLDER EQUITY IN A SUBSIDIARY COMPANY
Preferred stockholder equity in a subsidiary company in 1998
represented 316 shares of 8%, non-cumulative, non-voting preferred
stock in Baylake Bank N.A., a subsidiary of the company which was
acquired during 1998. In 1999, these shares were redeemed.
NOTE 11 - DIVIDENDS AND CAPITAL RESTRICTIONS
Cash dividends per share to shareholders were $.37, $.47, and $.40
in 1999, 1998, and 1997, respectively, after adjustment for stock
dividends.
As of December 31, 1999, undistributed earnings of the
subsidiaries, included in consolidated retained earnings, available
for distribution to the company as dividends without prior approval
of regulatory authorities was $10,722,000.
Federal banking regulatory agencies have established capital
adequacy rules which take into account risk attributable to balance
sheet assets and off-balance sheet activities. All banks and bank
holding companies must meet a minimum total risk-based capital
ratio of 8%. Of the 8% required, at least half must be comprised of
core capital elements defined as Tier 1 capital. The federal
banking agencies also have adopted leverage capital guidelines
which banking organizations must meet. Under these guidelines, the
most highly rated banking organizations must meet a leverage ratio
of at least 3% Tier 1 capital to total assets, while lower rated
banking organizations must maintain a ratio of at least 4% to 5%.
Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect
on the consolidated financial statements.
18
<PAGE> 75
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
At December 31, 1999 and 1998, the corporation was categorized as
well capitalized and adequately capitalized, respectively, under
the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management
believes have changed the corporation's category.
To be well capitalized under the regulatory framework, the Tier 1
capital ratio must meet or exceed 6%, the total capital ratio must
meet or exceed 10% and the leverage ratio must meet or exceed 5%.
The corporation's risk-based capital and leverage ratios are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Risk-Based Capital Ratios
-------------------------------------------------------
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Amount Ratio Amount Ratio
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Tier 1 capital
Baylake Corp. $ 42,811 8.8% $ 35,100 8.0%
Minimum requirement 19,434 4.0% 17,610 4.0%
Total capital
Baylake Corp. 48,903 10.1% 40,603 9.2%
Minimum requirement 38,867 8.0% 35,220 8.0%
</TABLE>
<TABLE>
<CAPTION>
Leverage Ratios
-------------------------------------------------------
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Amount Ratio Amount Ratio
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Tier 1 capital to average total assets
Baylake Corp. $ 42,811 6.8% $ 35,100 6.0%
Minimum requirement 25,220 4.0% 23,321 4.0%
</TABLE>
19
<PAGE> 76
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The bank is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit, standby letters of credit, and financial
guarantees.
The bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial
guarantees written is represented by the contract or notional
amount of those instruments. The bank uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
<TABLE>
<CAPTION>
Contract or
Notional Amount
-------------------------------
1999 1998
------------- -------------
(Thousands of dollars)
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 128,781 $ 120,835
Standby letters of credit and
financial guarantees written 1,387 2,012
</TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the bank upon extension of credit,
is based on management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing
commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the bank to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. The
guarantees expire in decreasing amounts through 2008, with the
majority expiring within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The bank does not
require collateral as support for the commitments. Collateral is
obtained based on loan policies upon use of a commitment by a
customer.
20
<PAGE> 77
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - ACQUISITIONS
On October 1, 1998, Baylake Corp. acquired Evergreen Bank, N.A.
("Evergreen") and changed its name to Baylake Bank, N.A. Prior to
the acquisition, Evergreen was under the active supervision of the
Office of the Comptroller of the Currency due to its designation of
the bank as a "troubled institution" and "critically under
capitalized" based on severe asset quality problems and significant
fraudulent activities by former bank employees and directors. Prior
to its acquisition by the company, Evergreen was the victim of
substantial fraud by former Evergreen insiders. Evergreen's
regulators had discovered extensive financial irregularities at
Evergreen which resulted from unauthorized and/or improper
transactions effected by former members of Evergreen management.
As part of the acquisition, Baylake Corp. was required to
contribute $7 million of capital to the bank. No payments to the
seller of Evergreen have been made, but are contingently payable
based on a formula set forth in the stock purchase agreement, not
to exceed $2 million. The contingent payments are not accrued at
December 31, 1999, since the amount, if any, is not estimable.
The acquisition was accounted for using the purchase method of
accounting. Under the purchase method, net assets purchased are
recorded at their fair market values on the date of acquisition.
Any excess of the purchase price over the value of the net assets
is recorded as goodwill. The goodwill recorded on the bank is the
result of assumption of liabilities having a market value in excess
of market value of assets received. Any payments made in the future
to the former shareholder of the bank may affect the goodwill
recorded. Goodwill is being amortized on a straight-line basis over
15 years.
The following unaudited proforma financial information presents the
combined results of operations of the company and Evergreen as if
the acquisition had occurred as of the beginning of each of the
periods presented.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Thousands of dollars except
earnings per common share)
<S> <C> <C>
Total revenue $ 52,265 $ 44,087
Net interest income 21,398 20,719
Net income 5,525 (2,629)
Earnings per common share 1.51 (1.07)
</TABLE>
21
<PAGE> 78
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - ACQUISITIONS (continued)
Net income above includes write-offs and write-downs of
approximately $2,500,000 in 1998 and $8,600,000 in 1997, and bond
recoveries of $2,050,000 in 1998 due to the fraudulent activities
of Evergreen's previous management. Information is substantially
affected by the fraudulent activity which occurred at Evergreen
prior to its acquisition by the company. Because the company would
have replaced that previous management had it acquired Evergreen at
an earlier date, the company believes that actual results would
have been substantially different than shown.
NOTE 14 - PENSION PLAN
The subsidiaries have 401(k) Profit Sharing Plans covering all
employees who qualify as to age and length of service. The employer
contributions paid and expensed under all plans for 1999, 1998, and
1997, totaled $572,000, $478,000, and $423,000, respectively.
Certain officers and directors of the company and its subsidiaries
are covered by nonqualified deferred compensation plans. Payments
to be made under these plans are accrued over the anticipated years
of service of the individuals covered. Amounts charged to expense
were $146,000 in 1999, $141,000 in 1998, and $142,000 in 1997.
NOTE 15 - INCOME TAX EXPENSE
The taxes applicable to income before income taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Taxes currently payable
Federal $ 2,025 $ 2,306 $ 2,076
State 191 17 169
---------- ---------- ----------
2,216 2,323 2,245
---------- ---------- ----------
Deferred income taxes
Federal 330 (72) (188)
State 54 (4) (30)
---------- ---------- ----------
384 (76) (218)
---------- ---------- ----------
$ 2,600 $ 2,247 $ 2,027
========== ========== ==========
</TABLE>
Income tax expense associated with net realized securities gains was
$0, for 1999 and 1998, and $115,000 for 1997.
22
<PAGE> 79
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAX EXPENSE (continued)
The provision for income taxes differs from the amount of income
tax determined by applying the statutory federal income tax rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Income tax based on statutory rate $ 3,242 $ 2,809 $ 2,481
State income taxes net of federal tax benefit 113 3 92
---------- ---------- ----------
3,355 2,812 2,573
Effect of tax-exempt interest income (761) (686) (536)
Other 6 121 (10)
---------- ---------- ----------
Provision based on effective tax rates $ 2,600 $ 2,247 $ 2,027
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. A valuation allowance has been recognized to offset
the related deferred tax assets due to the uncertainty of realizing
tax benefits of a portion of loan loss and mortgage servicing
differences. The following is a summary of the significant
components of the company's deferred tax assets and liabilities as
of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 2,174 $ 1,332
Deferred loan origination fees 178 193
Deferred compensation 639 629
Mortgage loan servicing 357 390
Nonaccrual loans 221 92
Accrued vacation pay 86 62
Other 4 13
Investments acquired in merger 85 113
Market value adjustment on securities
available for sale 515
---------- ----------
Gross deferred tax assets 4,259 2,824
Valuation allowance for deferred tax assets (550) (550)
---------- ----------
Net deferred tax assets 3,709 2,274
---------- ----------
Deferred tax liabilities
Bank premises and equipment 736 718
Market value adjustment on securities
available for sale 975
Other 61 61
---------- ----------
Total deferred tax liabilities 797 1,754
---------- ----------
Net deferred asset $ 2,912 $ 520
========== ==========
</TABLE>
23
<PAGE> 80
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EARNINGS AND DIVIDENDS PER SHARE
Earnings and dividends per share are based on the weighted average
number of shares outstanding for the year, restated for the 100%
stock dividend paid in November 1999 and the 50% stock dividend
paid in May 1998. A reconciliation of the basic and diluted
earnings per share amounts is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Basic weighted average number of
common shares outstanding 7,403,429 7,323,216 7,358,064
Additional common dilutive stock
option shares 646,500 614,900 75,600
------------ ------------ ------------
Diluted weighted average number
of common shares outstanding 8,049,929 7,938,116 7,433,664
============ ============ ============
Additional common stock option
shares that have not been
included due to their
antidilutive effect 450,000
</TABLE>
There is no difference between basic and diluted income available
to common stockholders.
See Note 17 for information on additional stock options issued
subsequent to year end. These shares would not have changed
materially the calculation of the number of common shares or
potential common shares outstanding at the end of the period if the
transaction had occurred before December 31, 1999.
24
<PAGE> 81
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN
The company has a non-qualified stock option plan under which
certain officers and key salaried employees may purchase shares of
the company's stock at an established exercise price. Unless
earlier terminated, these options will expire ten years from the
date of grant. The options become exercisable 20% per year,
commencing one year from date of grant.
Activity in the plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
--------- ---------------- -----------
<S> <C> <C> <C>
Shares under option at December 31, 1996 405,600 $ 4.67 - 11.50 $ 8.97
Options granted 120,000 8.96 8.96
-------- --------------- ---------
Shares under option at December 31, 1997 525,600 4.67 - 11.50 8.96
Options granted 120,000 9.75 9.75
Options exercised (30,700) 4.67 4.67
-------- --------------- ---------
Shares under option at December 31, 1998 614,900 4.67 - 11.50 9.33
Options granted 126,000 15.25 15.25
Options exercised (94,400) 4.67 - 9.75 8.31
-------- --------------- ---------
Shares under option at December 31, 1999 646,500 $ 4.67 - 15.25 $ 10.64
======== =============== =========
</TABLE>
In January 2000, options to purchase an additional 60,000 shares were
granted. The exercise price was established at 100% of the fair market
value of the stock on the date of grant, or $25.00 per share.
The options outstanding at December 31, 1999, were:
<TABLE>
<CAPTION>
Weighted
Weighted-Average Average
Number of Shares Exercise Price Remaining
Price ------------------------------- ------------------------------ Life
Range Outstanding Exercisable Outstanding Exercisable (In Years)
--------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 4.67 20,200 20,200 $ 4.67 $ 4.67 3.3
8.92 98,200 52,600 8.92 8.92 6.0
8.96 110,600 38,600 8.96 8.96 7.0
9.50 76,500 76,500 9.50 9.50 4.0
9.75 117,600 21,600 9.75 9.75 8.0
11.50 97,400 75,800 11.50 11.50 5.0
15.25 126,000 15.25 15.25 9.0
-------- --------- --------- --------- -----
646,500 285,300 $ 10.64 $ 9.53 6.7
======== ========= ========= ========= =====
</TABLE>
25
<PAGE> 82
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Options exercisable at December 31, 1998 and 1997, were 265,700 and
186,000, respectively. The weighted average exercise price for
options exercisable at December 31, 1998 and 1997, was $9.33 and
$8.97, respectively.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation" establishes financial
accounting and reporting standards for stock-based employee
compensation plans.
SFAS 123 defines a fair value based method of accounting for
employee stock option or similar equity instruments. Under the fair
value based method, compensation cost is measured at the grant date
based on the fair value of the award using an option-pricing model
that takes into account the stock price at the grant date, the
exercise price, the expected life of the option, the volatility of
the underlying stock, expected dividends and the risk-free interest
rate over the expected life of the option. The resulting
compensation cost is recognized over the service period, which is
usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price
of the stock at grant date or other measurement date over the
amount paid to acquire the stock.
The largest difference between SFAS 123 and APB 25 as it relates to
the company is the amount of compensation cost attributable to the
company's stock option plan. Under APB 25 no compensation cost is
recognized for the stock option plan because the exercise price is
equal to the quoted market price at the date of grant and therefore
there is no intrinsic value. SFAS 123 compensation cost would equal
the calculated fair value of the options granted.
As permitted by SFAS 123, the company continues to measure
compensation cost for the stock option plan using the accounting
method prescribed by APB 25.
26
<PAGE> 83
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Had compensation cost for the company's options granted after
January 1, 1995, been determined according to SFAS 123, the
company's net income and earnings per share would have been reduced
to the following proforma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Net income
As reported $ 6,923 $ 6,017 $ 5,270
Proforma 6,340 5,708 5,140
Basic earnings per common share
As reported .94 .82 .72
Proforma .86 .78 .70
Diluted earnings per common share
As reported .90 .80 .71
Proforma .82 .76 .70
</TABLE>
The fair value of each option grant was estimated as of the date of
grant using the Black-Scholes option pricing model. The resulting
compensation cost was amortized over the vesting period.
The grant date fair values and assumptions used to determine such
values are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ---------
<S> <C> <C> <C>
Weighted average grant date fair value value $ 10.87 $ 14.77 $ 7.34
Assumptions:
Risk-free interest rates 6.50% 4.70% 5.60%
Expected volatility 19.08% 33.56% 19.84%
Expected term (in years) 8.00 8.00 8.00
Expected dividend yield 1.60% 2.32% 3.42%
</TABLE>
27
<PAGE> 84
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS
Provided below is the information required by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107). These amounts represent
estimates of fair values at a point in time. Significant estimates
regarding economic conditions, loss experience, risk
characteristics associated with particular financial instruments
and other factors were used for the purposes of this disclosure.
These estimates are subjective in nature and involve matters of
judgment. Therefore, they cannot be determined with precision.
Changes in the assumptions could have a material impact on the
amounts estimated.
Many of the company's financial instruments lack an available
trading market. Furthermore, most of the financial instruments are
intended to be held to maturity. Therefore, it is not probable that
the fair values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of
assets and liabilities that are not considered financial
instruments. In addition, the significant value of long-term
relationships with depositors and other customers are not
reflected.
A. CASH AND DUE FROM BANKS
These instruments are, by definition, short-term and do not
present any unanticipated credit issues. Therefore, the
carrying amount is a reasonable estimate of fair value.
B. INVESTMENT SECURITIES
The estimated fair values of securities are provided in Note 3
to the financial statements. These are based on quoted market
prices, when available. If a quoted market price is not
available, fair value is estimated using quoted market prices
for similar securities.
28
<PAGE> 85
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
C. LOANS
The carrying amount (total outstandings excluding unearned
income and reserve for loan losses) and estimated fair value
of loans outstanding at December 31, 1999, are $447,019,000
and $437,262,000, and for December 31, 1998, are $407,648,000
and $407,116,000. In order to determine the fair values for
loans, the loan portfolio was segmented based on loan type,
credit quality and repricing characteristics. For certain
variable rate loans with no significant credit concerns and
frequent repricings, estimated fair values are based on the
carrying values. The fair values of other loans are estimated
using discounted cash flow analyses. The discount rates used
in these analyses are generally based on origination rates for
similar loans of comparable credit quality. However, where
appropriate, adjustments have been made to more accurately
reflect market rates. Maturity estimates are based on
historical experience with prepayments and current economic
and lending conditions.
D. DEPOSITS
The carrying amount and estimated fair value of deposits
outstanding at December 31, 1999, are $504,074,000 and
$503,902,000 and for December 31, 1998, are $495,284,000, and
$497,087,000. Under SFAS 107, the fair value of deposits with
no stated maturity is equal to the amount payable on demand.
Therefore, the fair value estimates for these products do not
reflect the benefits that the company receives from the
low-cost, long-term funding they provide. These benefits are
significant. The estimated fair values of fixed rate time
deposits are based on discounted cash flow analyses. The
discount rates used in these analyses are based on market
rates currently offered for deposits of similar remaining
maturities. Because of the repricing characteristics and the
competitive nature of the company's rates offered on variable
rate time deposits, carrying amount is a reasonable estimate
of the fair value.
E. SHORT-TERM BORROWINGS
Short-term borrowings reprice frequently and therefore the
carrying amount is a reasonable estimate of fair value.
29
<PAGE> 86
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
F. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND
LETTERS OF CREDIT
Pricing of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of
funding, and compensating balance and other covenants or
requirements. Loan commitments generally have fixed expiration
dates, are variable rate and contain termination and other
clauses which provide for relief from funding in the event
that there is a significant deterioration in the credit
quality of the customer. Many loan commitments are expected
to, and typically do, expire without being drawn upon. The
carrying amounts are reasonable estimates of the fair value of
these financial instruments. Carrying amounts are comprised of
the unamortized fee income and, where necessary, reserves for
any expected credit losses from these financial instruments.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
The company has made commitments for the construction of branch
facilities totaling $868,000.
In conjunction with the acquisition of Evergreen, the company is
subject to various other lawsuits, claims, and counterclaims. Such
matters are subject to the resolution of many uncertainties, and
accordingly, outcomes are not predictable with assurance. Although
the company believes that amounts provided in its financial
statements are adequate in light of the probable and estimable
liabilities, there can be no assurances that the amounts required
to discharge alleged liabilities from these matters will not have a
material adverse effect on its financial condition, results of
operations or cash flows. Any amounts of costs that may be incurred
in excess of those amounts provided as of December 31, 1999, cannot
be determined.
During 1999, the company entered into a ten year lease to rent
space in a building in Green Bay. The annual base rent is $68,000
and shall increase as of the beginning of each December based on
the Consumer Price Index. The company must also pay $3,000 annually
for parking spaces at this facility.
During 1999, the company entered into a seven year lease to rent
space for a branch bank location in Howard, Wisconsin. The annual
base rent is $24,000 and increases by 15% after five years. In
addition, the company must pay an additional rental amount related
to leasehold improvements equal to the cost of the improvements
amortized over 120 months. The company must also pay its
proportional share of costs for common areas at the mall.
30
<PAGE> 87
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - COMMITMENTS AND CONTINGENCIES (continued)
Rent expense for 1999 was $87,000.
Future minimum lease payments under these agreements are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 95,000
2001 95,000
2002 95,000
2003 95,000
2004 95,000
2005 and thereafter 410,000
------------
$ 885,000
============
</TABLE>
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT
COMPANY ONLY
BAYLAKE CORP.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Cash in bank $ 329 $ 127
Dividend receivable 743 661
Receivable from subsidiary 382 131
Investment in subsidiaries 45,499 45,019
----------- -----------
Total assets $ 46,953 $ 45,938
=========== ===========
LIABILITIES AND STOCKHOLDER
EQUITY
Liabilities
Dividends payable $ 743 $ 661
Accrued expense 5
------------ ------------
Total liabilities 743 666
Stockholder equity 46,210 45,272
------------ ------------
Total liabilities and stockholder equity $ 46,953 $ 45,938
============ ============
</TABLE>
31
<PAGE> 88
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT
COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Income
Dividends from subsidiaries $ 2,076 $ 10,139 $ 3,191
Interest income 11 6 9
---------- ------------ ----------
Total income 2,087 10,145 3,200
---------- ------------ ----------
Expenses
Other 54 64 45
Income taxes (benefit) (10) (15) (12)
---------- ------------ ----------
Total expenses 44 49 33
---------- ------------ ----------
Income before equity in
undistributed net income
of subsidiaries 2,043 10,096 3,167
Equity in undistributed net income
of subsidiaries 4,880 (4,079) 2,103
---------- ------------ ----------
NET INCOME $ 6,923 $ 6,017 $ 5,270
========== ============ ==========
</TABLE>
32
<PAGE> 89
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT
COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (59) $ (59) $ (48)
Interest received 11 6 9
Dividends received 1,994 10,289 2,970
Income taxes (paid) received (241) 10 36
--------- ---------- ---------
Net cash provided by operating activities 1,705 10,246 2,967
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary (7,000)
--------- ---------- ---------
Net cash used in investing activities (7,000)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,660) (3,089) (2,970)
Issuance of stock 143
Repurchase of stock 1,157 (211) (365)
--------- ---------- ---------
Net cash provided by financing activities (1,503) (3,157) (3,335)
--------- ---------- ---------
Net increase (decrease) in cash 202 89 (368)
Cash and due from banks, beginning 127 38 406
--------- ---------- ---------
Cash and due from banks, ending $ 329 $ 127 $ 38
========= ========== =========
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 6,923 $ 6,017 $ 5,270
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiary (4,880) 4,081 (2,103)
Change in receivable from subsidiary (251) (7) 24
Change in dividends receivable (82) 150 (221)
Change in accrued expenses (5) 5 (3)
--------- ---------- ---------
Net cash provided by operating activities $ 1,705 $ 10,246 $ 2,967
========= ========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Dividends reinvested in common stock $ 736 $ 518 $ 391
</TABLE>
33
<PAGE> 90
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - BUSINESS SEGMENTS
The company has two business segments for which discrete financial
information is available: banking and non-banking.
Banking provides commercial, mortgage, and consumer lending,
deposit services, trust services, and other traditional bank
services. These services are provided primarily through branch
banks, and ATMs.
Non-banking includes insurance agency services and conference
facilities through two of the company's wholly-owned subsidiaries.
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
Intercompany
Banking Non-Banking Amounts Totals
------------ --------------- ---------------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Interest revenue $ 46,467 $ 19 $ (19) $ 46,467
Interest expense 23,299 (19) 23,280
Provision for loan losses 850 850
Noninterest revenue 4,431 125 4,556
Noninterest expenses 17,248 122 17,370
Income taxes 2,590 10 2,600
Net income 6,911 12 6,923
Total assets 646,301 506 (497) 646,310
<CAPTION>
1998
------------------------------------------------------------------
Intercompany
Banking Non-Banking Amounts Total
------------ --------------- --------------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Interest revenue $ 38,061 $ 20 $ (20) $ 38,061
Interest expense 19,168 (20) 19,148
Provision for loans losses 1,135 1,135
Noninterest revenue 4,249 128 4,377
Noninterest expense 13,780 111 13,891
Income taxes 2,231 16 2,247
Net income 5,996 21 6,017
Total assets 607,410 502 (474) 607,438
</TABLE>
34
<PAGE> 91
PART III
The following items are incorporated by reference to the Registrant's Proxy
Statement to be filed pursuant to Regulation 14A for its 2000 Annual Meeting of
Shareholders (the "2000" Proxy Statement").
Item 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated herein by reference to
"Baylake Corp. - Management" and "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act" under "Matters to be Considered at the
Baylake Annual Meeting" in the 2000 Proxy Statement.
Item 12. EXECUTIVE COMPENSATION
Information in response to this item is incorporated herein by reference to
"Director Fees and Benefits", "Executive Compensation", "Board of
Directors/Compensation Committee Report on Management Compensation",
"Compensation Committee Interlocks and Insider Participation" and "Performance
Graph" under "Matters to be Considered at the Baylake Annual Meeting" in the
2000 Proxy Statement.
Item 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated herein by reference to
"Matters to be Considered at the Baylake Annual Meeting - Ownership of Baylake
Common" in the 2000 Proxy Statement.
Item 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is incorporated herein by reference to
"Matters to be Considered at Baylake Annual Meeting - Election of certain
directors whose terms will expire."
<PAGE> 92
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) See "Table of Contents" immediately following Item 9.
(b) See the following "Exhibit Index".
Reports on Form 8-K filed for three months ended December 31, 1999.
Form 8-K filed October 15, 1998 and Form 8-K/A filed December 14, 1998
regarding the acquisition of Baylake Bank N.A. f/k/a Evergreen Bank, N.A.
BAYLAKE CORP.
(the "Registrant")
EXHIBIT INDEX
TO
1999 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
------ ----------- ------------ --------
<S> <C> <C> <C>
2.1 Agreement and Plan of Acquisition dated March 13,
1996 between the Registrant and Four Seasons of Wis
Corp.
2.2 Agreement and Plan of Reorganization dated as of Exhibit 2.1 to Registrant's Annual Report on
February 18, 1994 among the Registrant, Kewaunee Form 10-K for the year ended December 31,
Acquisition Corp. ("KAC") and Kewaunee County 1993 ("1993 10-K")
Banc-Shares, Inc. ("KCB")
2.3 Merger Agreement dated as of March 30, 1994 among Exhibit 2.2 to 1993 10-K
the Registrant, KAC and KCB
2.4 Merger Agreement dated as of October 1, 1998 among
the Registrant, M&I and Evergreen
3.1 Articles of Incorporation, as amended Exhibit 3.1 to 1993 10-K
3.2 Bylaws, as amended Exhibit 3.2 to 1993 10-K
10.1** Registrant's 1993 Stock Option Plan Exhibit A to Registrant's Proxy Statement
for 1993 Annual Meeting of Shareholders
10.2** Registrant's Pay-for-Performance (bonus) Program Description thereof under "Board of
Directors/Compensation Committee Report on
Management Compensation" in Registrant's
Proxy Statement for the 1994 Annual Meeting
of Shareholders
10.3** Registrant's Deferred Compensation Agreement with Exhibit 10.3 to 1993 10-K
Thomas L. Herlache
10.4** Registrant's Agreement for Early Retirement with Exhibit 10.4 to 1993 10-K
Ronald D. Berg
10.5** Deferred Compensation and Salary Continuation Exhibit 10.4 to the Registrant's
Agreement with Richard A. Braun Registration Statement on Form S-4, No.
33-81184
10.6 Registrant's Stock Purchase Plan filed on December
17, 1998
21 List of Subsidiaries X
23 Consent of Smith & Gesteland X
24 Power of Attorney (contained on the Signature Page) X
27 Financial Data Schedule X
</TABLE>
<PAGE> 93
* Excluding schedules and exhibits, which are identified in such document.
The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Commission upon request.
** Designated management contracts or compensatory plans or arrangements filed
as exhibits.
<PAGE> 1
BAYLAKE CORP. EXHIBIT 21
LIST OF SUBSIDIARIES
Baylake Bank
Bank of Sturgeon Bay Building Corp.
Baylake Insurance
Baylake Investments, Inc.
Cornerstone Financial, Inc.
Kewaunee County Banc-Shares, Inc.
<PAGE> 1
EXHIBIT 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Baylake Corp.
Sturgeon Bay, Wisconsin
We have examined Baylake Bank's management's assertion included in the
accompanying Management Report Regarding Internal Control and Compliance with
Designated Laws and Regulations that Baylake Bank has maintained effective
internal control over financial reporting presented in conformity with both
generally accepted accounting principles and call report instructions.
Management is responsible for maintaining effective internal control over
financial reporting. Our responsibility is to express an opinion on the
effectiveness of internal control based on our examination.
Our examination was conducted in accordance with attestation standards
established by the American Institute of Certified Public Accountants and,
accordingly, included obtaining an understanding of the internal control over
financial reporting, testing, and evaluating the design and operating
effectiveness of the internal control, and performing such other procedures as
we considered necessary in the circumstances. We believe that our examination
provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements
due to error or fraud may occur and not be detected. Also, projections of any
evaluation of the internal control over financial reporting to future periods
are subject to the risk that the internal control may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assertion that Baylake Bank has maintained
effective internal control over financial reporting presented in conformity with
both generally accepted accounting principles and call report instructions is
fairly stated, in all material respects, based on criteria established in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Madison, Wisconsin /s/ SMITH & GESTELAND, LLP
March 17, 2000 SMITH & GESTELAND, LLP
<PAGE> 2
MANAGEMENT REPORT REGARDING INTERNAL CONTROL
AND COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS
Management of Baylake Bank is responsible for preparing the Bank's annual
financial statements. Management is also responsible for establishing and
maintaining internal control over financial reporting presented in conformity
with both generally accepted accounting principles and regulatory reporting in
conformity with the Federal Financial Institutions Examination Council
Instructions for Consolidated Reports of Condition and Income. The Bank's
internal control contains monitoring mechanisms and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary
over time.
It is also management's responsibility to ensure satisfactory compliance with
all designated laws and regulations. In particular, management ensures
compliance with all applicable state and federal laws and regulations as they
relate to loans to insiders and dividend restrictions.
Management assessed the Bank's internal control over financial reporting
presented in conformity with both generally accepted accounting principles and
call report instructions as of December 31, 1999. This assessment was based on
criteria for effective internal control over financial reporting described in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations (COSO). Based on this assessment, management believes that, as of
December 31, 1999, Baylake Bank maintained effective internal control over
financial reporting presented in conformity with both generally accepted
accounting principles and call report instructions.
Management also believes that there was satisfactory compliance during 1999 with
the designated laws and regulations.
/s/ T. L. Herlache /s/ Steven D. Jennerjohn
- -------------------------- -------------------------------------
T. L. Herlache - President Steven D. Jennerjohn - SVP Accounting
<PAGE> 3
CONSENT OF SMITH & GESTELAND
We consent to incorporation by reference in the registration statement
on Form S-8 of Baylake Corp. of our report dated January 21, 2000 relating to
the consolidated balance sheets of Baylake and its subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income, changes in
stockholder equity and cash flows for each of the years ended December 31, 1999,
1998, and 1997, which report appears in Baylake's Annual Report on Form 10-K for
the year ended December 31, 1999.
Madison, Wisconsin Smith & Gesteland, LLP
March 22, 2000 SMITH & GESTELAND, LLP
<PAGE> 1
EXHIBIT 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: Steven D. Jennerjohn
-------------------------
Steven D. Jennerjohn
Treasurer
Date: March 21, 2000
-------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Thomas L. Herlache, Steven D. Jennerjohn and Daniel F.
Maggle, and each of them, his true lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him and his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, the Securities
and Exchange Commission and any state securities commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
--------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on these
dates indicated.*
<TABLE>
<S> <C>
Thomas L. Herlache L. George Evenson
----------------------------------- ---------------------------
Thomas L. Herlache L. George Evenson, Director
President, Chief Executive Officer and Director (Principal
Executive Officer)
Steven D. Jennerjohn
----------------------------------- ---------------------------
Steven D. Jennerjohn Glenn Miller, Director
Treasurer
(Principal Financial and Accounting Officer)
Ruth Nelson
----------------------------------- ---------------------------
Ronald D. Berg, Director Ruth Nelson, Director
Marie Bertschinger Paul J. Sturm
----------------------------------- ---------------------------
Marie Bertschinger, Director Paul J. Sturm, Director
George Delveaux, Jr. Richard A. Braun
----------------------------------- ---------------------------
George Delveaux, Jr., Director Richard A. Braun, Director
John W. Bunda Joseph Morgan
----------------------------------- ---------------------------
John W. Bunda, Director Joseph Morgan, Director
John D. Collins
-----------------------------------
John D. Collins, Director
</TABLE>
*Each of the above signatures is affixed as of March 21, 2000.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000275119
<NAME> BAYLAKE CORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,333
<INT-BEARING-DEPOSITS> 142
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,700
<INVESTMENTS-CARRYING> 19,380
<INVESTMENTS-MARKET> 19,259
<LOANS> 447,019
<ALLOWANCE> 7,611
<TOTAL-ASSETS> 646,310
<DEPOSITS> 504,074
<SHORT-TERM> 89,231
<LIABILITIES-OTHER> 6,531
<LONG-TERM> 264
0
0
<COMMON> 37,302
<OTHER-SE> 8,908
<TOTAL-LIABILITIES-AND-EQUITY> 646,310
<INTEREST-LOAN> 37,586
<INTEREST-INVEST> 8,623
<INTEREST-OTHER> 258
<INTEREST-TOTAL> 46,467
<INTEREST-DEPOSIT> 19,541
<INTEREST-EXPENSE> 23,280
<INTEREST-INCOME-NET> 23,187
<LOAN-LOSSES> 850
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 17,370
<INCOME-PRETAX> 9,523
<INCOME-PRE-EXTRAORDINARY> 9,523
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,923
<EPS-BASIC> .94
<EPS-DILUTED> .90
<YIELD-ACTUAL> 8.48
<LOANS-NON> 8,086
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,458
<LOANS-PROBLEM> 1,381
<ALLOWANCE-OPEN> 11,035
<CHARGE-OFFS> 5,362
<RECOVERIES> 1,988
<ALLOWANCE-CLOSE> 7,611
<ALLOWANCE-DOMESTIC> 7,611
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
