1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
---------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8679
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BAYLAKE CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
217 North Fourth Ave., Sturgeon Bay, WI 54235
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(Address of principal executive offices) (Zip Code)
(920)-743-5551
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of May 10, 2000.
$5.00 Par Value Common
7,444,274 shares
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BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of March 31, 2000 and December 31, 1999
Consolidated Condensed Statement of Income 4
Three months ended March 31, 2000 and
1999
Consolidated Statement of Comprehensive Income 5
Three months ended March 31, 2000 and 1999
Consolidated Statement of Cash Flows 6 - 7
Three months ended March 31, 2000 and 1999
Notes to Consolidated Condensed Financial Statements 8 - 9
Item 2.
Managements Discussion and Analysis of Financial 10 - 21
Condition and Results of Operations
PART II. OTHER INFORMATION 21 - 22
Signatures 23
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PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
MARCH 31 DECEMBER 31
ASSETS 2000 1999
------ -------- -----------
Cash and due from Banks $ 13 581 $ 19 475
Investment securities available for
sale (at market) 128 417 125 700
Investment securities held to maturity
(market value $18,122 and $19,259) 18 287 19 380
Federal funds sold - -
Loans held for sale - 748
Loans 472 177 447 019
Less: Allowance for loan losses 7 893 7 611
-------- --------
Loans, net of allowance for loan losses 464 284 439 408
Bank premises and equipment 19 085 18 463
Federal Home Loan Bank Stock (at cost) 4 000 4 000
Accrued interest receivable 4 779 4 146
Income taxes receivable 807 1 161
Deferred income taxes 2 941 2 912
Goodwill 5 819 5 941
Other assets 5 541 4 976
-------- --------
TOTAL ASSETS $667 541 $646 310
======== ========
LIABILITIES
-----------
Domestic Deposits
Non-interest bearing deposits $ 55 173 $ 59 153
Interest bearing deposits
Now 43 353 49 061
Savings 152 049 150 468
Time, $100,000 and over 72 114 55 535
Other time 187 326 189 857
-------- --------
Total interest bearing $454 842 $444 921
-------- --------
Total deposits $510 015 $504 074
Short term borrowings
Federal funds purchased, repurchase agreements
and Federal Home Bank Loans 101 911 89 231
Long term debt 2 211 264
Accrued expenses and other liabilities 6 442 5 788
Dividends payable --- 743
Minority interest payable --- 0
--------- --------
TOTAL LIABILITIES $ 620 579 $600 100
--------- --------
STOCKHOLDERS EQUITY
-------------------
Common stock $5.00 par value - authorized
10,000,000 shares; issued 7,467,433 shares
in 2000 and 7,460,333 in 1999; outstanding
7,444,274 in 2000; 7,437,174 in 1999
$37 337 $ 37 302
Additional paid-in capital 7 126 7 120
Retained earnings 5 868 5 012
Treasury Stock (625) (625)
Net unrealized gain on securities available
For sale, net of tax $544 in 2000 and $515 in 1999 (2 744) (2 599)
--------- --------
TOTAL STOCKHOLDERS EQUITY 46 962 46 210
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $667 541 $646 310
======== ========
4
See accompanying notes to unaudited consolidated financial statements
5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT AMOUNTS PER SHARE)
THREE MONTHS ENDED
MARCH 31
2000 1999
--------- ---------
Interest Income
Interest and fees on loans $10 278 $8 981
Interest on investment securities
Taxable 1 648 1 366
Exempt from federal income tax 641 600
Other interest income 239
--------- ---------
Total Interest Income 12 567 11 186
Interest Expense
Interest on deposits 5 399 4 929
Interest on short-term borrowings 1 374 818
Interest on long-term debt 6 5
--------- ---------
Total Interest Expense 6 779 5 752
--------- ---------
Net Interest Income 5 788 5 434
Provision for loan losses 60 163
--------- ---------
Net interest income after
provision for loan losses 5 728 5 271
--------- ---------
Other Income
Fees from fiduciary activities 137 130
Fees from loan servicing 161 225
Fees for other services to customers 547 490
Gains from sales of loans 24 89
Securities gains, net - -
Other income 115 119
--------- ---------
Total Other Income 984 1 053
--------- ---------
Other Expenses
Salaries and employee benefits 2 594 2 415
Occupancy expense 341 308
Equipment expense 348 333
Data processing and courier 223 190
Operation of other real estate 33 10
Other operating expense 899 980
--------- ---------
Total Other Expenses 4 438 4 236
--------- ---------
Income before income taxes 2 274 2 088
Income tax expense 673 627
--------- ---------
NET INCOME $1 601 $1 461
========= =======
Net Income per share (1) $0.22 $0.20
Cash dividends per share $0.10 $0.09
(1) Based on 7,440,545 average shares outstanding in 2000 and 7,363,262 in 1999.
See accompanying notes to unaudited consolidated financial statements.
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31
2000 1999
--------- ---------
Net Income
Other comprehensive income, $1 601 $1 461
net of tax:
Unrealized gains on securities:
unrealized holding gains (losses)
arising during period (145) (545)
-------- --------
Comprehensive Income $1 456 $ 9 16
======== ========
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31
----------------------------------
2000 1999
-------- ---------
(thousands of dollars)
Cash flows from operating activities:
Interest received from:
Loans $9 639 $8 673
Investments 2 208 2 058
Fees and service charges 899 1 001
Interest paid to depositors (4 743) (4 715)
Interest paid to others (1 363) (807)
Cash paid to suppliers and employees (4 376) (760)
Income taxes paid (106) (1 174)
-------- -------
Net cash provided by operating activities 2 158 4 276
Cash flows from investing activities:
Principal payments received on investments 2 626 32 763
Purchase of investments (4 418) (23 618)
Proceeds from sale of other real estate owned 102 622
Loans made to customers in excess of principal collected (24 526) (2 745)
Capital expenditures (958) (915)
-------- -------
Net cash provided by (used in) investing activities (27 174) 6 107
Cash flows from financing activities:
Net in demand deposits, NOW accounts (8 098) (20 135)
and savings accounts
Net increase in advances from borrowers 14 627 3 603
Net increase in time deposits 14 039 2 877
Proceeds from issuance of common stock 41 514
Dividends paid (1 487) (1 326)
-------- -------
Net cash provided by (used in) financing activities 19 122 (14 467)
-------- -------
Net decrease in cash and cash equivalents (5 894) (4 084)
Cash and cash equivalents, beginning 19 475 17 560
======== =======
Cash and cash equivalents, ending $ 13 581 $13 476
8
2000 1999
------ ------
(thousands of dollars)
Reconciliation of net income to net cash provided by
operating activities:
Net Income $1 601 $1 461
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation 336 298
Provision for loan losses and real estate owned 60 163
Amortization of premium on investments 35 50
Accretion of discount on investments (42) (40)
Cash surrender value increase (13) (13)
Gain from disposal of other real estate (15) (26)
Gain on sale of loans (24) (89)
Proceeds from sale of loans held for sale 3 207 5 980
Originations of loans held for sale (3 183) (5 980)
Equity in income of service center (53) (10)
Amortization of goodwill 123 154
Amortization of mortgage servicing rights 22 15
Mortgage servicing rights booked (34) (70)
Deferred compensation 62 42
Changes in assets and liabilities:
Interest receivable (633) (387)
Prepaids and other assets (172) 728
Unearned income (64) (36)
Interest payable 672 229
Taxes payable 567 (755)
Deferred taxes 0 209
Other liabilities (294) 2 263
-------- --------
Total adjustments 557 2 815
-------- --------
Net cash provided by operating activities $2 158 $ 4 276
======== ========
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BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. The accompanying unaudited consolidated financial statements
should be read in conjunction with Baylake Corp.'s ("Company")
1999 annual report on Form 10-K. The unaudited financial
information included in this report reflects all adjustments
(consisting only of normal recurring accruals) which are necessary
for a fair statement of the financial position as of March 31,
2000 and December 31, 1999. The results of operations for the
three months ended March 31, 2000 and 1999 are not necessarily
indicative of results to be expected for the entire year.
2. The book value of investment securities, by type, held by the
Company are as follows:
March 31 December 31
2000 1999
---------- -----------
(thousands of dollars)
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 18 287 $ 19 380
--------- --------
Investment securities held to maturity $ 18 287 $ 19 380
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies
Obligations of states and political $ 25 699 $ 22 819
subdivisions 31 951 31 797
Mortgage-backed securities
Other 68 386 69 410
2 381 1 674
--------- --------
Investment securities available for sale $128 417 $125 700
========= ========
3. At March 31, 2000 and December 31, 1999, loans were as follows:
March 31 December 31
2000 1999
----------- -----------
(thousands of dollars)
Commercial, industrial and agricultural $ 284 797 $ 267 460
Real estate - construction 27 001 26 535
Real estate - mortgage 144 351 138 029
Installment 16 416 15 446
Less: Deferred loan origination fees, net of
costs ( 388) (451)
--------- ---------
472 177 447 019
Less allowance for loan losses (7 893) ( 7 611)
--------- ---------
Net loans $ 464 284 $ 439 408
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4. As of December 31, 1997, the Company adopted STATEMENTS OF
FINANCIAL ACCOUNTING STANDARDS No. 128 (SFAS 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.
5. As of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement established
standards for reporting and the display of comprehensive income in
a full set of general-purpose financial statements.
6. In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." This statement requires certain related
disclosures about products and services, geographic areas, and
major customers. The segment and other information disclosures
were required for the year ended December 31, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Company"), which may not be otherwise apparent from the
consolidated financial statements included in this report. This discussion and
analysis should be read in conjunction with those financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report for a more complete understanding of the following
discussion and analysis.
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on the current expectations of management. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "projects," and other such words are intended to identify such
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the control of the Company, that could materially
differ from what may be expressed or forecasted in such forward-looking
statements. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the relationships; demand for
products and services; the degree of competition by traditional and
non-traditional competitors; changes in banking regulations; changes in tax
laws; changes in prices; the impact of technological advances; governmental and
regulatory policy changes; trends in customer behavior as well as their ability
to repay loans; and changes in the national economy.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen") and
changed its name to Baylake Bank, N.A. ("BLBNA"). Prior to the acquisition,
Evergreen was under the active supervision of the Office of the Comptroller of
the Currency ("OCC") due to its designation of the bank as a "troubled
institution" and "critically under capitalized" based on severe asset quality
problems and significant fraudulent activities by former bank employees and
directors.
As part of the acquisition, the Company 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
March 31, 2000, since that amount, if any, is not estimable.
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The acquisition was accounted for using the purchase method of accounting,
therefore it would affect future operations. At the time of acquisition, BLBNA
had total assets of $101.8 million, deposits of $93.2 million and loans of $83.7
million. On March 15, 1999, BLBNA merged with Baylake Bank ("Bank").
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 stock dividend paid on November
15, 1999.
Results of Operations
For the three months ended March 31, 2000, net income increased $140,000, or
9.6%, to $1.60 million from $1.46 million for the first quarter of 1999. Basic
operating earnings per share increased to $.22 per share in the first quarter of
2000 compared with $.20 in 1999, an increase of 10.0%. On diluted operating
earnings per share, the Company recorded $.20 in 2000, compared to $.19 per
share in 1999.
The annualized return on average assets and return on average equity for the
three months ended March 31, 2000 were .98% and 13.80%, respectively compared to
.97% and 12.62%, respectively for the same period a year ago.
The change in net income for the period is primarily due to improved net
interest income offset by a decrease in other income and increased other
expenses.
Cash dividends declared in 2000 increased 11.1% to $.10 per share compared with
$.09 in 1999.
Net Interest Income
Net interest income is the largest component of the Company's operating income
(net interest income plus other non-interest income) accounting for 86.1% of
2000 total operating income, as compared to 84.5% in 1999. Net interest income
represents the difference between interest earned on loans, investments and
other earning assets offset by the interest expense attributable to the deposits
and the borrowings that fund 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 for the three months ended March 31, 2000 increased
$375,000, or 6.5%, to $6.1 million from $5.7 million for the same period a year
ago. Total interest income for the first quarter of 2000 increased $1.4 million,
or 12.2%, to $12.9 million from $11.5 million for the first quarter of 1999,
while interest expense increased $1.0 million, or 17.9%, to $6.8 million from
$5.8 million in the first
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quarter of 1999. The improvement in net interest income occurred as a result of
growth in the average volume of earning assets and non-interest bearing deposits
and an increase in the yield on earning assets offset by an increase in interest
paying liabilities and an increase in the cost of average interest paying
liabilities.
For the three months ended March 31, 2000, average earning assets increased
$46.1 million, or 8.3%, when compared to the same period last year. The Company
recorded an increase in average loans of $49.5 million, or 12.1%, for the first
quarter of 2000 compared to the same period a year ago. Loans have typically
resulted in higher rates of interest payable to the Company than have investment
securities.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread decreased 13 basis points to 3.64% from
3.77% in 1999, as the average yield on earning assets increased 23 basis points
while the average rate paid on interest-bearing liabilities increased 36 basis
points over the same period.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
factor affecting an increasing net interest margin.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended March 31, 2000 decreased from 4.19% to 4.09% compared to a year ago. The
average yield on interest earning assets amounted to 8.62% for the first quarter
of 2000, representing an increase of 23 basis points from the same period last
year. Total loan yields decreased 3 basis points to 9.16%, while total
investment yields increased 59 basis points to 7.00%, as compared to the same
period a year ago. The Company's average cost on interest-bearing deposit
liabilities increased 20 basis points to 4.77% for the first quarter of 2000,
while short-term borrowing costs increased 113 basis points to 6.04% comparing
the two periods. The above factors contributed to a decrease in the Company's
overall interest margin for the three months ended March 31, 2000. Other factors
contributing to the decrease was the Company's efforts intended to increase
interest-earning assets and thus reduce the percentage of equity to total assets
(known as leveraging) by acquiring additional funding, primarily from the
Federal Home Loan Bank of Chicago resulting in higher costs from wholesale
funding offset by decreased volume of non-accrual loans.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 92.0% for the first three months of 2000 compared with
91.7% for the same period in 1999. The ratio
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increased slightly in 2000, primarily as a result of a reduction in non-accrual
loans.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2000
decreased $103,000, or 63.2%, to $60,000 compared with $163,000 for the first
quarter of 1999. Management believes that the current allowance is adequate in
view of the present condition of the Company's loan portfolio.
Non-Interest Income
Total non-interest income decreased $69,000, or 6.6%, to $984,000 for the first
quarter of 2000, from $1.1 million for the first quarter a year ago. This
increase has occurred as a result of increased trust income and fees on other
customer services offset by decreased gains from sales of loans and decreased
fees from loan servicing.
Trust fees increased $7,000 or 5.4% in 2000 compared to 1999, primarily as a
result of an increase in trust and estate business.
Loan servicing fees decreased $64,000 or 28.4% to $161,000 in 2000. The decrease
in 2000 occurred as a result of decreased mortgage servicing rights income.
Gains on sales on loans in the secondary market decreased $65,000 to $24,000 in
2000 primarily as a result of decreased gains from sales of mortgage and
commercial loans due to a reduction of sales in the secondary market. Sales of
total loans for the three months decreased to $3.2 million, compared to $6.0
million a year ago.
Service charges on deposit accounts showed an increase of $41,000 or 13.6% over
1999 results accounting for the improvement in fee income generated for other
services to customers.
Non-Interest Expense
Non-interest expense increased $202,000, or 4.8%, for the three months ended
March 31, 2000 compared to the same period in 1999. Salaries and employee
benefits showed an increase of $179,000, or 7.4%, for the period as a result of
additional staffing acquired as a result of additional facilities and salary and
related benefit increases. Full time equivalent staff increased to 258 from 234
a year earlier. Slight increases in occupancy and equipment expenses occurred as
a result of expansion efforts in the Green Bay and Waupaca markets and costs
related to modernization of various facilities.
Other operating expenses increased $81,000 or 8.3%. Included in 2000 expenses
were amortization of goodwill related to the Four Seasons
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acquisition of $82,000 (the same as in 1999) and amortization of $40,000
(compared to $72,000 in 1999) related to the BLBNA acquisition.
Legal expense and loan collection expense decreased $53,000 for the three months
ended March 31, 2000, primarily the result of reduced legal issues revolving
around loan collection efforts of the BLBNA loan portfolio.
Other items comprising other operating expense shows an increase of $4,000 or
.6% in 2000 compared to 1999. The overhead ratio, which is computed by
subtracting non-interest income from non-interest expense and dividing by
average total assets was 2.12% for the three months ended March 31, 2000
compared to 2.16% for the same period in 1999.
The Company continues its commitment to deliver quality service and products for
its customer base.
Income Taxes
Income tax expense for the Company for the three months ended March 31, 2000 was
$673,000, an increase of $46,000 or 7.3% compared to the same period in 1999.
The increase in income tax provision for the period was due to increased taxable
income.
Balance Sheet Analysis
Loans
At March 31, 2000, total loans increased $25.2 million, or 5.6% to $472.2
million from $447.0 million at December 31, 1999. The change in loan mix in the
Company's loan portfolio resulted from an increase in commercial loans to $284.8
million at March 31, 2000 compared to $267.5 million at December 31, 1999. In
addition, real estate construction loans increased to $27.0 million at March 31,
2000 compared to $26.5 million at December 31, 1999. Real estate mortgage loans
increased to $144.4 million at March 31, 2000 compared with $138.0 million at
December 31, 1999.
Allowance for Possible Loan Losses
At March 31,2000, the allowance for possible loan losses ("APLL") of $7.9
million represented 1.67% of total loans, down from 1.7% at December 31, 1999.
APLL of $6.5 million was acquired as a result of the BLBNA acquisition. Loans
increased 5.6% from December 31, 1999 to March 31, 2000, while the allowance
declined as a result of reduced loan loss provision for the quarter based on an
analysis of the loan portfolio risk at March 31. Provision expense was $60,000
for the three months ended March 31, 2000. Net recoveries over chargeoffs of
$222,000 occurred in the first quarter of 2000, the result of $231,000 recovery
from BLBNA loans. As loans have grown in the Bank's portfolio, management did
not believe there existed any trends indicating any undue portfolio risk. There
does exist potential asset quality problems in the loan portfolio acquired in
the BLBNA purchase although
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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
eighteen 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 full collectibility.
Commercial, agricultural and other loan net charge-offs represented 110.8% of
the total net recoveries for the three months of 2000. In the commercial loan
sector, one loan totaling $225,000 accounted for the net recoveries. Loans
charged-off are subject to continuous review and specific efforts are taken to
achieve maximum recovery of principal and accrued interest.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb potential losses
arising from the credit granting process. Factors considered include the levels
of non-performing loans, other real estate, trends in past due loans, loan
portfolio growth, changes in loan portfolio composition, historical net
charge-offs, present and prospective financial condition of borrowers, general
and local economic conditions, specific industry conditions, 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 March 31, 2000 is sufficient to absorb potential loan losses.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
Non-performing assets at March 31, 2000 were $12.7 million compared to $12.6
million at December 31, 1999. Other real estate owned totals $385,000 and
consisted of four residential and one commercial property. Non-accrual loans
represent $8.0 million of the total of non-performing assets, of which $5.7
million was acquired with the BLBNA acquisition. Real estate non-accrual loans
account for $6.8 million of the total (of
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which $2.6 million was residential real estate and $4.2 million was commercial
real estate), while commercial and industrial non-accruals account for $1.0
million. Management believes collateral is sufficient in the event of default.
$4.3 million of troubled debt restructured loans existed at March 31, 2000
compared with $4.5 million at December 31, 1999. Approximately $3.0 million of
this total consists of three commercial real estate credits granted various
concessions and had experienced past cashflow problems. These credits were
current at March 31, 2000. Management believes that collateral is sufficient in
those loans classified as troubled debt in event of default. As a result the
ratio of non performing loans to total loans at March 31, 2000 was 2.6% compared
to 2.8% at 1999 year end. The Company's APLL was 64.2% of total non-performing
loans at March 31, 2000 compared to 60.7% at end of year 1999.
Investment Portfolio
At March 31, 2000, the investment portfolio increased $1.6 million, or 1.1% to
$146.7 million from $145.1 million at December 31, 1999. At March 31, 2000, the
investment portfolio represented 22.0% of total assets compared with 22.4% at
December 31, 1999. The increase in total investments occurred as a result of an
increase in federal funds purchased accompanied by an increase in the loan
portfolio.
Deposits
Total deposits at March 31, 2000 increased $5.9 million, or 1.2%, to $510.0
million from $504.1 million at December 31, 1999. Non-interest bearing deposits
at March 31, 2000 decreased $4.0 million, or 6.7%, to $55.2 million from $59.2
million at December 31, 1999. Interest-bearing deposits at March 31, 2000
increased $9.9 million, or 2.2%, to $454.8 million from $444.9 million at
December 31, 1999. Interest-bearing transaction accounts (NOW deposits)
decreased $5.7 million, primarily public fund deposits. Savings deposits
increased $1.6 million, or 1.1%, to $152.0 million at March 31, 2000. Time
deposits increased $14.0 million (includes increase of $16.6 million in time
deposits over $100,000), or 5.7%, to $259.4 million at March 31, 2000. Overall
deposits for the first six months tend to slightly decline as a result of the
seasonality of the customer base as they drawdown deposits during the early
first half of the year in anticipation of the summer tourist season.
Emphasis will be placed on generating additional core deposits in 2000 through
competitive pricing of deposit products and through the branch delivery systems
that have already been established. The Company will also attempt to attract and
retain core deposit accounts through new product offerings and customer service.
18
Short Term Borrowings
Short-term borrowings consist of federal funds purchased, securities under
agreements to repurchase, and borrowings from the Federal Home Loan Bank. Total
short-term borrowings at March 31, 2000 increased $12.7 million to $101.9
million from $89.2 million at December 31, 1999. The increase in short-term
borrowings resulted from increased loan demand.
Long Term Debt
Long-term debt consists of two separate borrowings. Long-term debt of $2 million
borrowed to the parent company consists of a note requiring quarterly payments
of $100,000 and calculated at prime less 1%. In addition, long-term debt of
$211,000 consists of a land contract requiring annual payments of $53,000 plus
interest calculated at prime + 1/4%. The land contract is for debt used for the
purchase of one of the properties in the Green Bay region for branch location.
Liquidity
Liquidity refers to the ability of the Company, and its subsidiary Bank to
generate adequate amounts of cash to meet its needs for cash. The Company and
the Bank have different liquidity considerations.
The Bank meets their cash flow needs by having funding sources available to them
to satisfy the credit needs of customers as well as having available funds to
satisfy deposit withdrawal requests. Liquidity at the Bank is derived from
deposit growth, maturing loans, the maturity of the investment portfolio, access
to other funding sources, marketability of certain of their assets and strong
capital positions.
As shown in the Company's Consolidated Statements of Cashflows for the three
months ended March 31, 2000, cash and cash equivalents increased $5.9 million
during the period to $13.6 million at March 31, 2000. The increase primarily
reflected $2.2 million in net cash provided by operating activities and $19.1
million by financing activities offset by $27.2 million used in financing
activities. Net cash provided by operating activities consisted of the Company's
net income for the periods increased by adjustments for non-cash expenditures.
Net cash used in investing activities consisted of a net increase in investment
activities and loans plus necessary capital expenditures. Net cash provided by
financing activities resulted primarily from an increase in time deposits and
borrowed funds offset by payment of dividends and a decrease in short term
deposits. A component of the Company's strategy to enter additional markets will
continue to concentrate on core deposit growth and utilize other funding sources
such as the Federal Home Loan Bank so as to reduce reliance on short-term
funding needs.
19
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management views its
liquidity as the ability to raise cash at reasonable costs or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable assets maturing within one year. The Company attempts,
when possible, to match relative maturities of assets and liabilities, while
maintaining the desired net interest margin. Although the percentage of earning
assets represented by loans is increasing, management believes that liquidity is
adequate to support anticipated borrowing requirements and deposit flows.
Management believes that, in the current economic environment, the Company's and
the Bank's liquidity position are adequate. To management's knowledge, there are
no known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Bank or the Company's liquidity.
Interest Rate Sensitivity
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. All banks assume interest rate risk as an
integral part of normal banking operations. Management of interest rate risk
includes four components: policy statements, risk limits, risk measurement and
reporting procedures. A primary objective of asset/liability management is the
control and monitoring of interest rate risk. The Registrant's banks use an
Asset/Liability Committee ("ALCO") to manage risks associated with changing
interest rates, changing asset and liability mixes, and their impact on
earnings. The sensitivity of net interest income to market rate changes is
evaluated monthly by the ALCO committee.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. The mismatch between asset and liability repricing characteristics in
specific time intervals is referred to as "interest rate sensitivity gap." If
more liabilities than assets reprice in a given time interval a liability gap
position exists. In general, liability sensitive gap positions in a declining
interest rate environment increase net interest income. Alternatively asset
sensitive positions, where assets reprice more quickly than liabilities,
negatively impact the net interest income in a declining rate environment. In
the event of an increasing rate environment, opposite results would occur in
that a liability sensitivity gap position would decrease net interest income and
an asset sensitivity gap position would increase net interest income. The
sensitivity of net interest income to changing interest rates can be reduced by
matching the repricing characteristics of assets and liabilities.
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Registrant is liability sensitive,
20
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF MARCH 31, 2000
Within Four to Seven to One Year to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In Thousands)
Earning Assets:
Investment Securities $5 587 $ 318 $ 8 093 $ 79 797 $56 909 $150 704
Federal funds sold 0 0 0 0 0 0
Loans and Leases:
Variable Rate 130 499 15 994 0 27 021 77 173 591
Fixed Rate 40 089 32 323 32 500 185 158 528 290 598
-------- -------- ------- -------- ------- --------
Total Loans and Leases $170 588 $ 48 317 $32 500 $212 179 $ 605 $464 189
-------- -------- ------- -------- ------- --------
Total Earning Assets $176 175 $ 48 635 $40 593 $291 976 $57 514 $614 893
======== ======== ======= ======== ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 10 838 $ 0 $ 0 $32 515 $ 0 $ 43 353
Saving Deposits 105 022 0 0 47 027 0 152 049
Time Deposits 96 913 47 192 72 376 42 959 0 259 440
Borrowed Funds 103 911 0 52 159 0 104 122
-------- -------- ------- -------- ------- --------
Total Interest Bearing Liabilities $316 684 $ 47 192 $72 428 $122 660 $ 0 $558 964
======== ======== ======= ======== ======= ========
Interest Sensitivity GAP $(140 509) $ 1 443 $ (31 835) $169 316 $57 514 $ 55 929
(within periods)
Cumulative Interest Sensitivity $(140 509) $(139 066) $(170 901) $(1 585) $55 929
GAP
Ratio of Cumulative Interest -22.85% -22.62% -27.79% -.26% 9.10%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to 55.63% 103.06% 56.05% 238.04% ---
Rate Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 55.63% 61.78% 60.83% 99.72% 110.01%
Assets to Rate Sensitive
Liabilities
21
although management believes that a range of plus or minus 15% within a one year
pricing schedule is acceptable. The analysis considers money market index
accounts and 25% of NOW accounts to be rate sensitive within three months.
Regular savings, money market deposit accounts and 75% of NOW accounts are
considered to be rate sensitive within one to five years. While these accounts
are contractually short-term in nature, it is the Registrant's experience that
repricing occurs over a longer period of time. The Registrant views its savings
and NOW accounts to be core deposits and relatively non-price sensitive, as it
believes it could make repricing adjustments for these types of accounts in
small increments without a material decrease in balances. All other earning
categories include loans and investments as well as other paying liability
categories such as time deposits are scheduled according to their contractual
maturities.
For the time frame within three months as of March 31, 2000, rate sensitive
liabilities exceeded rate sensitive assets by $140.5 million, or a ratio of rate
sensitive assets to rate sensitive liabilities of 55.6%. For the next time frame
of four to six months, rate sensitive assets exceeded rate sensitive liabilities
by $1.4 million, or a ratio of rate sensitive assets to rate sensitive
liabilities of 103.1%. For all assets and liabilities priced within a one year
time frame, the cumulative ratio of rate sensitive assets to rate sensitive
liabilities was 60.8%, which is outside the range of plus or minus 15% deemed
acceptable by management. When the Company requires funds beyond its ability to
generate them internally, it can borrow from a number of sources, including the
Federal Home Loan Bank of Chicago and other correspondent banks.
Management continually reviews its interest risk position through the committee
processes. Managements' philosophy is to maintain relatively matched rate
sensitive asset and liability position within the range described above, in
order to provide earnings stability in the event of significant interest rate
changes.
Capital Resources
Stockholders' equity at March 31, 2000 increased $752,000 or 1.6% to $47.0
million, compared with $46.2 million at end of year 1999. This increase includes
a negative change of $145,000 to capital in 2000 due to the impact of STATEMENT
OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of this net
change, stockholders' equity would have increased $897,000 or 1.9% for 2000 over
1999.
At March 31, 2000, the Company's risk-based Tier 1 Capital Ratio was 8.53%, the
total risk based capital ratio was 9.79% and the leverage ratio was 6.76%. The
Company and Bank are adequately capitalized under all applicable regulatory
capital requirements.
22
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. Management is confident that because
of current capital levels and projected earnings levels, capital levels are more
than adequate to meet the ongoing and future concerns of the Company.
Year 2000
The Company did not encounter computer or system problems from the transition
into the new year 2000 ("Y2K") or subsequent problems after December 31, 1999.
Although highly unlikely, certain Y2K problems could surface later during 2000.
The Company continues to monitor systems for possible future disruptions and has
a business resumption plan in place to deal with such problems.
Item 7 A. Quantitative and Qualitative Disclosure about Market Risk.
See Item 7A. Quantitative and Qualitative Disclosures About Market Risk
in 1999 Form 10-K.
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 continues its 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, to
replace an existing facility. Completion is expected in the early second quarter
of 2000. Costs of construction are estimated to be $590,000.
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 2000 in Seymour
for $475,000. The Bank's intentions are to remodel that
23
building in the middle of the year 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.
The Company 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.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
------------------------------
(Registrant)
Date: May 11, 2000 Thomas L. Herlache
------------------------------ ------------------------------
Thomas L. Herlache
President (CEO)
Date: May 11, 2000 Steven D. Jennerjohn
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Steven D. Jennerjohn
Treasurer (CFO)