1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
--------------------------------------------------
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------------
Commission file number 0-8679
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BAYLAKE CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (Identification No.)
or organization)
217 North Fourth Avenue, Sturgeon Bay, WI 54235
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(920)-743-5551
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of July 17, 2000
$5.00 Par Value Common
7,444,274 shares
2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of June 30, 2000 and 3
December 31, 1999
Consolidated Condensed Statement of Income for the three and six 4
months ended June 30, 2000 and 1999
Consolidated Statement of Comprehensive Income for the three and six 5
months ended June 30, 2000 and 1999
Consolidated Statement of Cash Flows for the six months ended 6 - 7
June 30, 2000 and 1999
Notes to Consolidated Condensed Financial Statements 8
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations 9 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION 25 - 29
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 30
3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
JUNE 30, DEC. 31,
ASSETS 2000 1999
------ ---- ----
Cash and due from banks $ 20,951 $ 19,475
Investment securities available for sale (at market) 129,256 125,700
Investment securities held to maturity (market 16,563 19,380
value $16,474 and $19,259)
Federal funds sold 0 0
Loans held for sale 95 748
Loans 514,680 447,019
Less: Allowance for loan losses 7,958 7,611
-------- --------
Loan, net of allowance for loan losses 506,722 439,408
Bank premises and equipment 20,099 18,463
Federal Home Loan Bank stock (at cost) 5,750 4,000
Accrued interest receivable 5,462 4,146
Income taxes receivable 954 1,161
Deferred income taxes 2,890 2,912
Goodwill 5,698 5,941
Other Assets 5,468 4,976
-------- --------
Total Assets $719,908 $646,310
======== ========
LIABILITIES
-----------
Domestic deposits
Non-interest bearing $ 69,213 $ 59,153
Interest bearing
NOW 41,845 49,061
Savings 165,459 150,468
Time, $100,000 and over 58,280 55,535
Other time 183,608 189,857
-------- --------
Total interest bearing 449,192 444,921
Total deposits 518,405 504,074
Short-term borrowings
Federal funds purchased, repurchase 142,531 89,231
agreements and Federal Home Bank Loans
Long-term debt 5,111 264
Accrued expenses and other liabilities 5,830 5,788
Dividends payable 0 743
-------- --------
Total liabilities 671,877 600,100
-------- --------
STOCKHOLDERS EQUITY
-------------------
Common stock $5 par value-authorized 10,000,000
shares; issued 7,467,433 shares in 2000 and
7,460,333 in 1999; outstanding 7,444,274 in
2000; 7,437,174 in 1999 37,337 37,302
Additional paid-in capital 7,126 7,120
Retained earnings 6,821 5,012
Treasury Stock (625) (625)
Net unrealized gain (loss) on securities available
for sale, net of tax of $493 in 2000 and $515
in 1999. (2,628) (2,599)
-------- --------
Total stockholder equity 48,031 46,210
-------- --------
Total liabilities and stockholder equity $ 719,908 $ 646,310
========= =========
4
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of dollars, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
Interest income
Interest and fees on loans $11,409 $ 9,127 $21,687 $18,108
Interest on investment securities
Taxable 1,693 1,528 3,341 2,894
Exempt from federal income taxes 627 638 1,268 1,238
Other interest income 0 0 0 239
------- ------- ------- -------
Total interest income 13,729 11,293 26,296 22,479
Interest expense
Interest on deposits 5,600 4,747 10,999 9,676
Interest on short-term borrowings 2,079 848 3,453 1,666
Interest on long-term debt 47 6 53 11
------- ------- ------- -------
Total interest expense 7,726 5,601 14,505 11,353
------- ------- ------- -------
Net interest income 6,003 5,692 11,791 11,126
Provision for loan losses 150 182 210 345
------- ------- ------- -------
Net interest income after provision for
loan losses 5,853 5,510 11,581 10,781
------- ------- ------- -------
Other income
Fees from fiduciary activities 130 153 267 283
Fees from loan servicing 217 221 378 446
Fees for other services to customers 664 588 1,211 1,078
Gains from sales of loans 55 115 79 204
Securities gains, net - - - -
Other income 84 92 199 211
------- ------- ------- -------
Total other income 1,150 1,169 2,134 2,222
------- ------- ------- -------
Other expenses
Salaries and employee benefits 2,596 2,335 5,190 4,750
Occupancy expense 394 311 735 619
Equipment expense 366 305 714 638
Data processing and courier 232 223 455 413
Operation of other real estate (90) (51) (57) (41)
Other operating expenses 1,053 1,085 1,952 2,065
------- ------- ------- -------
Total other expenses 4,551 4,208 8,989 8,444
------- ------- ------- -------
Income before income taxes 2,452 2,471 4,726 4,559
Income tax expense 755 759 1,428 1,386
------- ------- ------- -------
Net Income $ 1,697 $ 1,712 $ 3,298 $ 3,173
======= ======= ======= =======
Net income per share (1) $ 0.22 $ 0.23 $ 0.44 $ 0.43
Cash dividends per share $ 0.10 $ 0.09 $ 0.20 $ 0.18
(1) Based on 7,442,410 average shares outstanding in 2000 and 7,384,148 in 1999.
5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands of dollars)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
Net Income $ 1,697 $ 1,712 $ 3,298 $ 3,173
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during
Period 116 (1,635) (29) (2,180)
------- ------- ------- -------
Comprehensive income $ 1,813 $ 77 $ 3,269 $ 993
======= ======= ======= =======
6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2000 1999
---- ----
(thousands of dollars)
Cash flows from operating activities:
Interest received from:
Loans $ 20,338 $ 17,604
Investments 4,552 4,339
Fees and service charges 1,917 2,045
Interest paid to depositors (10,907) (9,863)
Interest paid to others (3,281) (1,716)
Cash paid to suppliers and employees (8,389) (5,999)
Income taxes paid (1,221) (2,028)
--------- --------
Net cash provided by operating activities 3,009 4,382
Cash flows from investing activities:
Principal payments received on investments 7,113 37,011
Purchase of investments (9,595) (31,968)
Proceeds from sale of other real estate owned 687 850
Loans made to customers in excess of principal collected (67,661) (14,275)
Capital expenditures (2,365) (1,890)
--------- --------
Net cash used in investing activities (71,821) (10,272)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts, and savings 17,844 (99)
Accounts
Net increase in advances from borrowers 58,148 13,210
Net decrease in time deposits (3,513) (5,379)
Proceeds from issuance of common stock 41 630
Redemption of preferred stock - -
Dividends paid (2,232) (1,993)
--------- --------
Net cash provided by financing activities 70,288 3,209
--------- --------
Net increase (decrease) in cash and cash equivalents 1,476 (2,681)
Cash and cash equivalents, beginning 19,475 17,560
--------- --------
Cash and cash equivalents, ending $ 20,951 $ 14,879
========= ========
7
JUNE 30,
2000 1999
---- ----
Reconciliation of net income to net cash provided by operating activities:
Net income $ 3,297 $ 3,173
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 729 595
Provision for losses on loans and real estate owned 210 345
Amortization of premium on investments 72 94
Accretion of discount on investments (86) (74)
Cash surrender value increase (27) (27)
Gain from disposal of ORE (186) (78)
(Gain) loss on sale of loans (79) (204)
Proceeds from sale of loans held for sale 8,822 9,201
Originations of loans held for sale (8,743) (8,997)
Equity in income of service center (94) (41)
Amortization of goodwill 245 310
Amortization of mortgage servicing rights 38 61
Mortgage servicing rights booked (126) (172)
Deferred compensation 123 94
Changes in assets and liabilities:
Interest receivable (1,316) (401)
Prepaids and other assets 50 (721)
Unearned income (46) (92)
Interest payable 318 (226)
Taxes payable 208 (643)
Deferred taxes - -
Other liabilities (400) 2,185
--------- ---------
Total adjustments (288) 1,209
--------- ---------
Net cash provided by operating activities $ 3,009 $ 4,382
========= =========
8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. The accompanying unaudited consolidated financial statements should be read
in conjunction with Baylake Corp.'s ("Company") 1999 annual report on Form
10-K. The unaudited financial information included in this report reflects
all adjustments (consisting only of normal recurring accruals) which are
necessary for a fair statement of the financial position as of June 30,
2000 and December 31, 1999. The results, in the opinion of management, of
operations for the three and six months ended June 30, 2000 and 1999 are
not necessarily indicative of results to be expected for the entire year.
2. The book value of investment securities, by type, held by the Company are
as follows:
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(thousands of dollars)
Investment securities held to maturity:
Obligations of state and political subdivisions $ 16,563 $ 19,380
-------- ---------
Investment securities held to maturity $ 16,563 $ 19,380
======== =========
Investment securities available for sale:
U.S. Treasury and other U.S. government agencies $ 28,097 $ 22,819
Obligations of states and political subdivisions 32,228 31,797
Mortgage-backed securities 67,412 69,410
Other 1,519 1,674
-------- ---------
Investment securities available for sale $129,256 $ 125,700
======== =========
3. At June 30, 2000 and December 31, 1999, loans were as follows:
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(thousands of dollars)
Commercial, industrial and agricultural $ 311,432 $ 267,460
Real estate - construction 31,437 26,535
Real estate - mortgage 155,317 138,029
Installment 16,899 15,446
Less: Deferred loan origination fees, net of costs (405) (451)
-------- ---------
$ 514,680 $ 447,019
Less allowance for loan losses (7,958) (7,611)
-------- ---------
Net loans $ 506,722 $ 439,408
========= =========
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Company") for the six months ended June 30, 2000 and 1999
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.
All per share information has been restated to reflect the 2-for-1 stock
dividend paid on November 15, 1999.
On October 1, 1998, the Company acquired Evergreen Bank, N.A. ("Evergreen") and
changed its name to Baylake Bank, N.A. ("BLBNA"). Prior to the acquisition,
Evergreen was under the active supervision of the Office of the Comptroller of
the Currency ("OCC") due to its designation of Evergreen as a "troubled
instituition" and "critically under capitalized". As part of the acquisition,
the Company was required to contribute $7 million of capital to Evergreen. As of
the date of this report, no payments to the seller of Evergreen have been made
by the Company and no payments are presently due. However, the Company may
become obligated for certain contingent payments that may become payable in the
future, based on a formula set forth in the stock purchase agreement, not to
exceed $2 million. Such contingent payments are not accrued at June 30, 2000,
since that amount, if any, is not estimable.
The acquisition was accounted for using the purchase method of accounting,
therefore it could affect future operations. At the time of acquisition, BLBNA
had total assets of $101.8 million, deposits of $93.2 million and loans of $83.7
million. On March 15, 1999, BLBNA merged with and into Baylake Bank ("Bank").
Forward-Looking Information
This discussion and analysis of financial condition and results of operations,
and other sections of this report, may contain forward-looking statements that
are based on the current expectations of management. 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. Readers should not place undue expectations on any "forward looking
statements." In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the relationships; demand for
financial products and financial services; the degree
10
of competition by traditional and non-traditional financial services
competitors; changes in banking legislation or 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 general economic conditions, nationally or in
the State of Wisconsin.
Results of Operations
For the three months ended June 30, 2000, net income declined $15,000, or 0.9%,
to $1.70 million from $1.71 million for the second quarter of 1999. Basic
operating earnings per share decreased to $.22 per share in the second quarter
of 2000 compared with $.23 in 1999, a decrease of 4.3%. On a diluted operating
earnings per share, there was no change as the Company recorded $.22 per share
in 2000 and 1999.
The annualized return on average assets and return on average equity for the
three months ended June 30, 2000 were .98% and 14.49%, respectively compared to
1.14% and 14.80%, respectively for the same period a year ago.
The slight decrease in net income for the period is primarily due to improved
net interest income offset by a decrease in other income and increased other
expenses.
For the six months ended June 30, 2000, net income increased $126,000, or 3.9%,
to $3.30 million from $3.17 million for the first six months of 1999. The change
in net income for the period is primarily due to the same reasons listed above,
although the offset was proportionately smaller for the six month period than
the three month period, which resulted in the increase for six months. Basic
operating earnings per share increased to $.44 per share in 2000 compared with
$.43 in 1999, an increase of 2.3%. On a diluted operating earnings per share
basis, the Company recorded $.43 per share in 2000, compared to $.42 per share
in 1999.
The annualized return on average assets and return on average equity for the
first six months ended June 30, 2000 were .98% and 14.12%, respectively compared
to 1.06% and 13.79%, respectively for the same period a year ago.
Cash dividends declared in the first six months of 2000 increased 11.1% to $.20
per share compared with $.18 in 1999.
Net Interest Income
Net interest income is the largest component of the Company's operating income
(net interest income plus other non-interest income) accounting for 85.4% of
total operating income for the first six months of 2000, as compared to 84.1%
for the first six months of 1999. Net interest income represents the difference
between interest earned on loans, investments and other earning assets offset by
the interest expense attributable to the deposits and the borrowings that fund
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
11
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 for the three months ended June
30, 2000 increased $305,000, or 5.1%, to $6.3 million from $6.0 million for the
same period a year ago. Total interest income for the second quarter of 2000
increased $2.4 million, or 20.9%, to $14.0 million from $11.6 million for the
second quarter of 2000, while interest expense increased $2.1 million, or 37.9%,
to $7.7 million from $5.6 million in the second quarter of 2000. The improvement
in net interest income occurred primarily, as a result of growth in the average
volume of earning assets and non-interest bearing deposits and an increase in
the yield on earning assets offset to a lesser extent by an increase in interest
paying liabilities and an increase in the cost of average interest paying
liabilities.
For the three months ended June 30, 2000, average earning assets increased $84.9
million, or 15.3%, when compared to the same period last year. The Company
recorded an increase in average loans of $81.9 million, or 19.8%, for the second
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 remained compressed for the quarter ended
June 30, 2000. The interest rate spread decreased 41 basis points to 3.50% from
3.91% in the same quarter in 1999, as the average yield on earning assets
increased 40 basis points while the average rate paid on interest-bearing
liabilities increased 81 basis points over the same period as a result of a
higher cost of funding from deposits and other wholesale funding such as federal
funds purchased and loans from the Federal Home Loan Bank.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
factor affecting an increasing net interest margin.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended June 30, 2000 decreased from 4.37% to 3.99% compared to the same period a
year ago. The average yield on interest earning assets amounted to 8.83% for the
second quarter of 2000, representing an increase of 40 basis points from the
same period last year. Total loan yields increased 33 basis points to 9.40%,
while total investment yields increased 33 basis points to 7.03%, as compared to
the same period a year ago. The Company's average cost on interest-bearing
deposit liabilities increased 54 basis points to 5.00% for the second quarter of
2000 when compared to the second quarter of 1999, while short-term borrowing
costs increased 168 basis points to 6.54% comparing the two periods. Long-term
borrowing costs increased 80 basis points to 8.41% during the same time period,
the result of funds borrowed during the period by the Company at variable rates
of interest tied to prime. The above factors contributed to a decrease in the
Company's overall interest margin for the three months ended June 30, 2000.
12
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 92.1% for the second quarter of 2000 compared with 91.7%
for the same period in 1999. The ratio increased slightly in 2000, primarily as
a result of a reduction in non-accrual loans.
Net interest income on a tax-equivalent basis for the six months ended June 30,
2000 increased $680,000, or 5.8%, to $12.4 million from $11.7 million for the
same period a year ago. Total interest income for the six months ended June 30,
2000 increased $3.8 million, or 16.6%, to $26.9 million from $23.1 million for
the same period in 1999, while interest expense increased $3.1 million, or
27.8%, to $14.5 million from $11.4 million for the six months ended 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 to a lesser extent by an increase in interest
paying liabilities and an increase in the cost of average interest paying
liabilities.
For the six months ended June 30, 2000, average earning assets increased $65.5
million, or 11.8%, when compared to the same period last year. The Company
recorded an increase in average loans of $65.7 million, or 16.0%, for the first
six months of 2000 compared to the same period a year ago.
For the six months ended June 30, 2000, interest rate spread decreased 27 basis
points to 3.57% from 3.84% in 1999. The average yield on earning assets
increased 33 basis points and the average rate paid on interest-bearing
liabilities increased 60 basis points over the same period, a result of higher
cost of funding from deposit and wholesale funding sources.
Net interest margin (on a federal tax-equivalent basis) for the six months ended
June 30, 2000 decreased from 4.28% to 4.04% compared to a year ago. The average
yield on interest earning assets amounted to 8.74% for the first six months of
2000, representing an increase of 33 basis points from the same period last
year. Total loan yields increased 17 basis points to 9.30%, while total
investment yields increased 47 basis points to 7.02%, as compared to the same
period a year ago. The Company's average cost on interest-bearing deposit
liabilities increased 37 basis points to 4.88% for the first six months of 2000,
while short-term borrowing costs increased 146 basis points to 6.32% comparing
the two periods, a result of increased funding costs from federal funds
purchased and Federal Home Loan Bank borrowings. Long-term borrowing costs
increased 128 basis points to 8.53% over the same period, primarily a result of
higher interest costs from variable rate loans borrowed by the Company in the
first six months of 2000. The above factors contributed to a decrease in the
Company's overall interest margin for the six months ended June 30, 2000 as
compared to the same period in 1999. Other factors contributing to the decrease
was the Company's efforts intended to increase interest-earning assets and thus
reduce the percentage of equity to total assets (known as leveraging) by
acquiring additional funding, primarily from the Federal Home Loan Bank of
Chicago resulting in higher costs from wholesale funding offset by decreased
volume of non-accrual loans.
13
The ratio of average earning assets to average total assets was 92.0% for the
first six months of 2000 compared with 91.7% for the same period in 1999. The
ratio increased slightly in 2000, primarily as a result of a reduction in
non-accrual loans.
Provision for Loan Losses
The provision for loan losses for the three months ended June 30, 2000 decreased
$32,000, or 17.6%, to $150,000 compared with $182,000 for the second quarter of
1999. For the six months ended June 30, 2000, the provision for loan losses
decreased $135,000, or 39.1%, to $210,000 from $345,000 for the same period last
year. Management believes that the current allowance conforms with the Company's
loan loss reserve policy and is adequate in view of the present condition of the
Company's loan portfolio.
Non-Interest Income
Total non-interest income decreased $19,000, or 1.6%, to $1.2 million for the
second quarter of 2000. This decrease has occurred as a result of increased fees
on other customer services offset by decreased trust income, decreased gains
from sales of loans and decreased fees from loan servicing.
Trust fees decreased $23,000 or 15.0% in the second quarter of 2000 compared to
the same quarter in 1999, primarily as a result of a decrease in trust estate
business.
Loan servicing fees decreased $4,000 or 1.8% to $217,000 in the second quarter
of 2000, when compared to the same quarter in 1999. The decrease in 2000
resulted from decreased mortgage servicing rights income.
Gains on sales on loans in the secondary market decreased $60,000 to $55,000 in
the second quarter of 2000, when compared to the same quarter in 1999, primarily
as a result of decreased gains from sales of mortgage and commercial loans.
Sales of total loans for the three months increased to $5.5 million, compared to
$3.0 million for the same period a year ago.
Service charges on deposit accounts for the second quarter of 2000 showed an
increase of $36,000 or 10.3% over 1999 results. Financial service income
increased $32,000, or 30.5%, accounting for the remainder of the improvement in
fee income generated for other services to customers.
For the first six months of 2000, non-interest income decreased $88,000, or
4.0%, to $2.1 million from $2.2 million for the same period a year ago.
Trust fee income decreased $16,000, or 5.7%, to $267,000 for the first six
months of 2000 compared to the same period in 1999 as a result of decreased
trust estate business.
Loan servicing fees decreased $68,000 or 15.2% for the first six months in 2000,
when compared to the same period in 1999. The decrease in 2000 resulted from a
decline in mortgage servicing rights income and mortgage servicing income.
14
Gains on sales on loans in the secondary market decreased $125,000 or 61.3% for
the first six months of 2000, when compared to the same period in 1999,
primarily as a result of decreased gains from sales of mortgage and commercial
loans taken in the secondary market. Sales of total loans for the first six
months of 2000 decreased to $8.8 million, compared to $9.2 million a year ago.
Service charges on deposit accounts increased $77,000 or 11.9% and financial
service income increased $37,000, or 21.4% accounting for the improvement in fee
income generated for other services to customers for the first six months of
2000, when compared to the same period in 1999.
Non-Interest Expense
Non-interest expense increased $343,000, or 8.2%, for the three months ended
June 30, 2000 compared to the same period in 1999. Salaries and employee
benefits showed an increase of $261,000, or 11.2%, 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 260 from 248
a year earlier. Increases in occupancy (amounting to $83,000 or 26.7%) and
equipment expenses (amounting to $61,000 or 20.0%) 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 decreased $32,000 or 2.9%. Included in 2000 expenses
were amortization of goodwill related to the Four Seasons (a purchase of a one
bank holding company in July 1996) acquisition of $82,000 (the same as in 1999)
and amortization of $40,000 (compared to $72,000 in 1999) related to the BLBNA
acquisition.
Legal expense and loan collection expense decreased $31,000 for the three months
ended June 30, 2000 primarily as a result of reduced legal issues relating to
loan collection efforts of the BLBNA loan portfolio.
Other items comprising other operating expense show an increase of $31,000 or
3.7% in the second quarter of 2000 when compared to the same quarter in 1999.
The overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total assets was 1.97% for the
three months ended June 30, 2000 compared to 2.02% for the same period in 1999.
Non-interest expense increased $545,000, or 6.5%, for the six months ended June
30, 2000 compared to the same period in 1999. Salaries and employee benefits
increased $440,000, or 9.3%, primarily for the same reasons as listed above.
Occupancy and equipment expenses increased $192,000, or 15.3%, a result of
additional depreciation expense from branch expansion in the Green Bay and
Waupaca market areas.
Data processing expense increased $42,000, or 10.2%, for the six months ended
June 30, 2000 as compared to the same period a year ago. The increase occurred
as a result of additional transaction volume and growth in number of accounts.
15
Other real estate operations show income of $57,000, the result of net gains of
$186,000 taken on sales of other real estate owned offset by $129,000 of costs
expensed in the operation and maintenance of other real estate owned properties.
$64,000 of the gains resulted from sales of lots in Idlewild Valley, Inc. a
former subsidiary of Bank. Additional gains on sales totaling $122,000 resulted
from property sales of two commercial and three residential mortgage properties
formerly held as loans in the BLBNA loan portfolio.
Other operating expenses decreased $113,000, or 5.5%, for the six months ended
June 30, 2000 compared to the same period in 1999. Included in 2000 expenses was
amortization of goodwill related to the Four Seasons acquisition of $164,000
(same as previous year) and $79,000 (compared to $144,000 in the previous year)
related to the BLBNA acquisition. Legal expense and loan collection expense
decreased $127,000, or 37.6%, for the six months ended June 30, 2000 for
primarily the same reasons as listed earlier. Other operating expense increased
$79,000, or 5.6%, the result of additional expense for supplies, postage, and
travel expense related to growth in branch expansion efforts. The overhead ratio
was 2.05% for the six months ended June 30, 2000 compared to 2.08% for the same
period in 1999.
Income Taxes
Income tax expense for the Company for the three months ended June 30, 2000 was
$755,000, a decrease of $4,000 or .5% compared to the same period in 1999. The
decrease in income tax provision for the period was due to decreased taxable
income.
Income tax expense for the Company for the six months ended June 30, 2000 was
$1.4 million, an increase of $42,000, or 3.0% compared to the same period in
1999. The increase in income tax provision for the period was due to increased
taxable income.
The Company's effective tax rate (income tax expense divided by income before
taxes) was 30.2% for the six months ended June 30, 2000 compared with 30.4% for
the same period in 1999. The effective tax rate of 30.2% consisted of a federal
effective tax rate of 26.4% and Wisconsin State effective tax rate of 3.8%.
Balance Sheet Analysis
Loans
At June 30, 2000, total loans increased $67.7 million, or 15.1% to $514.7
million from $447.0 million at December 31, 1999. The increase in loan mix in
the Company's loan portfolio resulted primarily from an increase in commercial
loans to $311.4 million at June 30, 2000 compared to $267.5 million at December
31, 1999. In addition, real estate construction loans increased to $31.4 million
at June 30, 2000 compared to $26.5 million at December 31, 1999. Real estate
mortgage loans increased to $155.3 million at June 30, 2000 compared with $138.0
million at December 31, 1999. Consumer loans increased to $16.9 million at June
30, 2000 compared with $15.4 million at December 31, 1999.
16
The following table reflects the composition of the loan portfolio
- -----------------------------------------------------------------------------------------------------------
June 30, December
2000 31, 1999
- -----------------------------------------------------------------------------------------------------------
Amount of loans by type (dollars in thousands)
- -----------------------------------------------------------------------------------------------------------
Real estate-mortgage
- -----------------------------------------------------------------------------------------------------------
Commercial $241,236 $201,301
- -----------------------------------------------------------------------------------------------------------
1-4 family residential
- -----------------------------------------------------------------------------------------------------------
First liens 100,227 95,255
- -----------------------------------------------------------------------------------------------------------
Junior liens 25,099 23,811
- -----------------------------------------------------------------------------------------------------------
Home equity 22,444 18,963
- -----------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural 77,743 66,159
- -----------------------------------------------------------------------------------------------------------
Real estate-construction 31,437 26,535
- -----------------------------------------------------------------------------------------------------------
Installment
- -----------------------------------------------------------------------------------------------------------
Credit cards and related plans 1,980 1,810
- -----------------------------------------------------------------------------------------------------------
Other 14,919 13,636
- -----------------------------------------------------------------------------------------------------------
Less: deferred origination fees, net of costs 405 451
- -----------------------------------------------------------------------------------------------------------
Total 514,680 447,019
- -----------------------------------------------------------------------------------------------------------
Allowance for Possible Loan Losses
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. Management's evaluation of the
adequacy of the APLL is based on management's ongoing review and grading of the
loan portfolio. Additional factors considered include the levels of
non-performing loans, other real estate owned, trends in past due and
nonperforming loans, loan portfolio growth, changes in loan portfolio
composition, historical net charge-offs, present and prospective financial
condition of borrowers, general and local economic conditions, specific industry
conditions, and other regulatory or legal issues that could affect the Company's
loss potential.
At June 30, 2000, the allowance for possible loan losses ("APLL") of $8.0
million represented 1.55% of total loans, down from 1.7% at December 31, 1999.
APLL of $6.5 million was acquired as a result of the BLBNA acquisition during
the fourth quarter of 1998. Loans increased 15.1% from December 31, 1999 to June
30, 2000, while the allowance declined as a result of reduced loan loss
provision for the first two quarters of 2000, based on management's analysis of
the loan portfolio risk at June 30. Provision expense was $150,000 for the three
months ended June 30, 2000. Net charge-offs of $85,000 occurred in the second
quarter of 2000. For the six months ended June 30, 2000, provision expense was
$210,000, a decrease of $135,000 or 39.1% compared to the same period in 1999.
Net loan recoveries of $137,000 occurred in the first six months of 2000 as
compared to net loan charge-offs of $3.2 million for the same period in 1999. As
loans have grown in the Company's portfolio, management did not believe there
existed any trends indicating any material portfolio risk. There does exist
potential asset quality problems in the loan portfolio, including loans acquired
in the BLBNA purchase, although management believes sufficient reserves have
been provided in the APLL acquired in the BLBNA purchase to absorb potential
losses in the loan portfolio. In the time period since the purchase of BLBNA,
management has undergone extensive efforts to identify and evaluate potential
problem loans stemming from the BLBNA acquisition. As an integral part of their
examination process on BLBNA since the acquisition, various regulatory agencies
have also
17
performed 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 130.9% 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 believes that the balance of the allowance for possible loan losses
as of June 30, 2000 is sufficient to absorb potential loan losses. While
management uses available information to recognize losses on loans, future
adjustments to the APLL may be necessary based on changes in economic conditions
and the impact of such change on the Company's borrowers. Various regulatory
agencies also review the adequacy of the APLL, in conjunction with their
examination process. Such regulatory agencies may require that changes in the
APLL be recognized when their credit evaluations differ from those of
management, based on such regulatory agencies' judgments about information
available to them at the time of examination process.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
Non-performing assets at June 30, 2000 were $13.8 million compared to $12.6
million at December 31, 1999. Other real estate owned totaled $406,000 and
consisted of five residential and two commercial properties. Non-accrual loans
represent $9.0 million of the total of non-performing assets, of which $4.8
million was acquired by the Company with the BLBNA acquisition. Real estate
non-accrual loans account for $8.0 million of the total (of which $2.9 million
was residential real estate and $4.9 million was commercial real estate), while
commercial and industrial non-accruals account for $588,000. Management believes
collateral is sufficient to offset losses in the event of default. $4.4 million
of troubled debt restructured loans existed at June 30, 2000 compared with $4.5
million at December 31, 1999. Approximately $3.1 million of troubled debt
restructured loans at June 30 consists of three commercial real estate credits
which were granted various payment concessions and had experienced past cashflow
problems. These credits were current at June 30, 2000. Management believes that
collateral is sufficient in those loans classified as troubled debt in event of
default. As a result the ratio of non performing loans to total loans at June
30, 2000 was 2.6% compared to 2.8% at 1999 year end. The Company's APLL was
59.5% of total non-performing loans at June 30, 2000 compared to 60.7% at end of
year 1999.
18
Potential problem loans at June 30, 2000 are restricted to a single commercial
customer with a number of credits aggregating approximately $9.0 million. This
customer has maintained these loans to date on a current basis, but is
experiencing significant liquidity problems which may affect future performance.
Customer has informed management that customer anticipates entering into a
business combination transaction with a third party during the third quarter of
2000. Management reasonably believes that consummation of such a transaction
would include repayment of all outstanding loans. Management's evaluation of
customer's existing collateral supports expectations of full recovery even in
the event of liquidation, regardless of future performance, consummation of a
business combination transaction or potential default.
Investment Portfolio
At June 30, 2000, the investment portfolio increased $739,000, or .5% to $145.8
million from $145.1 million at December 31, 1999. At June 30, 2000, the
investment portfolio represented 20.3% of total assets compared with 22.4% at
December 31, 1999.
Securities held to maturity and securities available for sale consist of the
following: (dollars in thousands)
At June 30, 2000
- ---------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
--------- Unrealized Unrealized Market Value
Cost Gains Losses ------------
---- ----- ------
- ---------------------------------------------------------------------------------------------------------------------
Securities held to
maturity
- ---------------------------------------------------------------------------------------------------------------------
Obligations of $ 16,563 $ 18 $ 107 $ 16,474
states & political
subdivisions
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Securities
available for sale
- ---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. $ 28,326 $ 12 $ 241 $ 28,097
Treasury & other
U.S. Agencies
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed 70,054 14 2,656 67,412
securities
- ---------------------------------------------------------------------------------------------------------------------
Obligations of 32,479 59 310 32,228
states & political
subdivisions
- ---------------------------------------------------------------------------------------------------------------------
Equity securities 1,519 1,519
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total securities $132,378 $ 85 $3,207 $129,256
available for sale
- ---------------------------------------------------------------------------------------------------------------------
19
At December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
--------- Unrealized Unrealized Market Value
Cost Gains Losses ------------
---- ----- ------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Securities held to
maturity
- ---------------------------------------------------------------------------------------------------------------------
Obligations of $ 19,380 $ 10 $ 131 $ 19,259
states & political
subdivisions
- ---------------------------------------------------------------------------------------------------------------------
Securities
available for sale
- ---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. $ 22,851 $ 54 $ 86 $ 22,819
Treasury & other
U.S. Agencies
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed 71,876 23 2,489 69,410
securities
- ---------------------------------------------------------------------------------------------------------------------
Obligations of 32,413 122 738 31,797
states & political
subdivisions
- ---------------------------------------------------------------------------------------------------------------------
Equity securities 1,674 1,674
- ---------------------------------------------------------------------------------------------------------------------
Total securities $128,814 $ 199 $3,313 $125,700
available for sale
- ---------------------------------------------------------------------------------------------------------------------
At June 30, 2000, the contractual maturities of securities held to maturity and
securities available for sale are as follows: (dollars in thousands)
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
- ---------------------------------------------------------------------------------------------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
- ---------------------------------------------------------------------------------------------------------------------
Within 1 year $ 856 $ 855 $ 11,496 $ 11,449
- ---------------------------------------------------------------------------------------------------------------------
After 1 but 7,760 7,654 69,929 67,632
within 5 years
- ---------------------------------------------------------------------------------------------------------------------
After 5 but 4,834 4,852 27,124 26,700
within 10 years
- ---------------------------------------------------------------------------------------------------------------------
After 10 years 3,113 3,113 22,310 21,956
- ---------------------------------------------------------------------------------------------------------------------
Equity 0 0 1,519 1,519
securities -------- ------- -------- --------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total $ 16,563 $16,474 $132,378 $129,257
- ---------------------------------------------------------------------------------------------------------------------
Deposits
Total deposits at June 30, 2000 increased $14.3 million, or 2.8%, to $518.4
million from $504.1 million at December 31, 1999. Non-interest bearing deposits
at June 30, 2000 increased $10.1 million, or 17.0%, to $69.2 million from $59.2
20
million at December 31, 1999. Interest-bearing deposits at June 30, 2000
increased $4.3 million, or 1.0%, to $449.2 million from $444.9 million at
December 31, 1999. Interest-bearing transaction accounts (NOW deposits)
decreased $7.2 million, primarily in public fund deposits. Savings deposits
increased $15.0 million, or 10.0%, to $165.5 million at June 30, 2000. Time
deposits decreased $3.5 million (includes increase of $2.7 million in time
deposits over $100,000), or 1.4%, to $241.9 million at June 30, 2000. Typically,
overall deposits for the first six months tend to decline slightly as a result
of the seasonality of the customer base as customers drawdown deposits during
the early first half of the year in anticipation of the summer tourist season.
As a result of the Company's geographical expansion in recent years, this effect
has been minimized as additional branch locations have continued to provide
deposit growth.
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.
Short Term Borrowings
Short-term borrowings at June 30, 2000 consist of federal funds purchased,
securities under agreements to repurchase, and borrowings from the Federal Home
Loan Bank ("FHLB"). Total short-term borrowings at June 30, 2000 increased $53.3
million to $142.5 million from $89.2 million at December 31, 1999. FHLB
borrowings increased from $80 million at December 31, 1999 to $103 million at
June 30, 2000. The balance of the increase was in federal funds purchased.
Short-term borrowings increased as a result of the growth in the loan portfolio.
The Company will borrow monies if borrowing is a less costly form of funding for
loans compared to the cost of acquiring deposits. Additionally, the availability
of deposits also determines the amount of funds the Company needs to acquire in
order to fund loan demand. The Company anticipates it will continue to use
wholesale funding sources of this nature, if these borrowings add incrementally
to overall profitability.
Long Term Debt
Long-term debt at June 30, 2000 consists of two separate borrowings. Long-term
debt of $4.9 million borrowed by the Company consists of a note for $2 million
requiring quarterly payments of $100,000 (current balance $1.9 million) and a
second borrowing of $3 million with a term of one year. The interest rate on
these borrowings is calculated at prime less 1%. These borrowings are secured by
a pledge of the common stock of the Company's banking subsidiary. In addition,
long-term debt of $211,000 consists of a land contract requiring annual payments
of $53,000 plus interest calculated at prime + 1/4%. The land contract is for
debt used to purchase one of the properties in the Green Bay region for branch
location.
21
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 Company's primary funding sources to meets its liquidity requirements are
dividends from its subsidiary Bank, borrowings from nonaffiliated banks, and
proceeds from the issuance of equity. The Company manages its liquidity position
to provide the funds necessary to pay dividends to shareholders, service debt,
and to invest in the subsidiary Bank.
The Bank meets its cash flow needs by having funding sources available to it 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 its assets and strong
capital positions. At June 30, 2000, the Bank had $60.4 million of established
lines of credit with nonaffiliated banks, of which $36.4 million was outstanding
at June 30, 2000.
As shown in the Company's Consolidated Statements of Cashflows for the six
months ended June 30, 2000, cash and cash equivalents increased $1.5 million
during the period to $21.0 million at June 30, 2000. The increase primarily
reflected $3.0 million in net cash provided by operating activities and $70.3
million by financing activities offset by $71.8 million used in financing
activities. Net cash provided by operating activities consisted of the Company's
net income for the periods increased by adjustments for non-cash expenditures.
Net cash used in investing activities consisted of a net increase in investment
activities and loans plus necessary capital expenditures. Net cash provided by
financing activities resulted primarily from an increase in short term deposits
and borrowed funds offset by payment of dividends and a decrease in time
deposits. A component of the Company's strategy to enter additional markets will
continue to concentrate on core deposit growth and utilize other funding sources
such as the FHLB so as to reduce reliance on short-term funding needs.
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 loan growth and deposit flows.
Management believes that, in the current economic environment, the Company's and
the Bank's liquidity positions are adequate. To management's knowledge, there
are no known trends nor any known demands, commitments, events or uncertainties
that will result or are reasonably likely to result in a material increase or
decrease in the Bank's or the Company's liquidity.
22
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 Company'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 by using "static gap analysis" and
simulation of earnings.
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 Company is liability sensitive. The analysis considers money
market index accounts and 25% of NOW accounts to be rate sensitive within three
months. Regular savings, money market deposit accounts and 75% of NOW accounts
are considered to be rate sensitive within one to five years. While these
accounts are contractually short-term in nature, it is the Company's experience
that repricing occurs over a longer period of time. The Company views its
savings and NOW accounts to be core deposits and relatively non-price sensitive,
as it believes it could make repricing adjustments for these types of accounts
in small increments without a material decrease in balances. All other earning
categories include loans and investments as well as other paying liability
categories such as time deposits are scheduled according to their contractual
maturities. The static gap analysis provides a representation of the Company's
earnings sensitivity to changes in interest rates. It is a static indicator and
does not reflect various repricing characteristics and may not necessarily be
indicative of the sensitivity of net interest income in a changing rate
environment.
23
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF JUNE 30, 2000
Within Four to Seven to One Year Over
Three Six Twelve To Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In thousands)
Earning assets:
Investment securities $ 6,549 $ 1,486 $ 10,283 $ 76,631 $ 56,620 $151,569
Federal funds sold 0 0 0 0 0 0
Loans and leases
Variable rate 149,007 17,950 0 27,132 1,528 195,617
Fixed rate 35,302 36,303 36,049 194,012 8,462 310,128
--------- --------- --------- --------- -------- --------
Total loans and leases $ 184,309 $ 54,253 $ 36,049 $ 221,144 $ 9,990 $505,745
--------- --------- --------- --------- -------- --------
Total earning assets $ 190,858 $ 55,739 $ 46,332 $ 297,775 $ 66,610 $657,314
========= ========= ========= ========= ======== ========
Interest bearing liabilities:
NOW Accounts $ 10,461 $ 0 $ 0 $ 31,384 $ 0 $ 41,845
Savings Deposits 117,457 0 0 48,002 0 165,459
Time Deposits 66,040 54,760 72,342 48,746 0 241,888
Borrowed Funds 139,931 0 7,552 159 0 147,642
--------- --------- --------- --------- -------- --------
Total interest bearing $ 333,889 $ 54,760 $ 79,894 $ 128,291 $ 0 $596,834
========= ========= ========= ========= ======== ========
Liabilities
Interest sensitivity gap $(143,031) $ 979 $ (33,562) $ 169,484 $ 66,610 $60,480
(within periods)
Cumulative interest $(143,031) $(142,052) $(175,614) $ (6,130) $ 60,480
Sensitivity gap
Ratio of cumulative interest -21.76% -21.61% -26.72% -0.93% 9.20%
Sensitivity gap to rate
Sensitive assets
Ratio of rate sensitive assets 57.16% 101.79% 57.99% 232.11% ---
To rate sensitive
Liabilities
Cumulative ratio of rate
Sensitive assets to rate 57.16% 63.45% 62.52% 98.97% 110.13%
Sensitive liabilities
24
In addition to the static gap analysis, determining the sensitivity of future
earnings to a hypothetical plus or minus 200 basis point parallel rate shock can
be accomplished through the use of simulation modeling. Simulation of earnings
includes the modeling of the balance sheet as an ongoing entity. These items are
modeled to project income based on a hypothetical change in interest rates. The
resulting net income for the next twelve-month period is compared to the net
income amount calculated using flat rates. This difference represents the
Company's earnings sensitivity to a plus or minus 200 basis point parallel rate
shock. The resulting simulations indicated a plus or minus 3.4% adjustment in
net income under these scenarios for the period ended June 30, 2000. This result
was within the policy limits set by the Company.
Management continually reviews its interest risk position through the committee
processes. Managements' philosophy is to maintain relatively matched rate
sensitive asset and liability position within the range described above, in
order to provide earnings stability in the event of significant interest rate
changes.
Capital Resources
Stockholders' equity at June 30, 2000 increased $1.8 million or 3.9% to $48.0
million, compared with $46.2 million at end of year 1999. This increase includes
a negative change of $29,000 to capital in 2000 due to the impact of STATEMENT
OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Disregarding the effect of this
change, stockholders' equity would have increased $1.9 million or 4.0% for 2000
over 1999.
At June 30, 2000, the Company's risk-based Tier 1 Capital Ratio was 8.04%, the
total risk based capital ratio was 9.29% and the leverage ratio was 6.47%. The
Company is adequately capitalized under all applicable regulatory capital
requirements and Bank is well capitalized.
25
The Company's and the Bank's capital amounts and ratios are as follows: (dollars
in thousands)
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action
------ Purposes Provisions
-------- ----------
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- ----------------------------------------------------------------------------------------------------------------
As of June 30, 2000
- ----------------------------------------------------------------------------------------------------------------
Total Capital (to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 51,875 9.29% 44,599 8.00% N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Bank 56,698 10.17% 44,536 8.00% 55,670 10.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital(to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 44,894 8.04% 22,300 4.00% N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Bank 49,727 8.92% 22,268 4.00% 33,402 6.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital (to
Average Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 44,894 6.47% 27,716 4.00% N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Bank 49,727 7.18% 27,716 4.00% 34,645 5.00%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 1999
- ----------------------------------------------------------------------------------------------------------------
Total Capital (to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 48,903 10.07% 38,867 8.00% N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Bank 48,181 9.93% 38,807 8.00% 48,509 10.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital(to
Risk Weighted Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 42,811 8.81% 19,433 4.00% N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Bank 42,098 8.68% 19,403 4.00% 29,105 6.00%
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital (to
Average Assets)
- ----------------------------------------------------------------------------------------------------------------
Company 42,811 6.79% 25,220 4.00% N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Bank 42,098 6.68% 25,220 4.00% 31,524 5.00%
- ----------------------------------------------------------------------------------------------------------------
26
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. Management believes that 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,
nor does management expect any problems in the future. However, management has
decided to maintain a Y2K specific contingency plan in an effort to mitigate
such risks.
Item 3 Quantitative and Qualitative Disclosure about Market Risk.
The Company's financial performance is affected by, among other factors, credit
risk and interest rate risk. The Company does not use derivatives to mitigate
its interest rate risk or credit risk, relying instead on loan review and an
adequate loan loss reserve.
The Company's earnings are derived from the operations of its direct and
indirect subsidiaries with particular reliance on net interest income,
calculated as the difference between interest earned on loans and investments
and the interest expense paid on deposits and other interest bearing
liabilities, including advances from FHLB and other borrowings. Like other
financial institutions, the Company's interest income and interest expense are
affected by general economic conditions and by the policies of regulatory
authorities, including the monetary policies of the Federal Reserve. Changes in
the economic environment may influence the growth rate of loans and deposits,
the quality of the loan portfolio and loan and deposit pricing. Fluctuations in
interest rates are not predictable or controllable.
As of June 30, 2000, the Company was in compliance with its management policies
with respect to exposure to interest rate risk. The Company has not experienced
any material changes to its market risk position since December 31, 1999, from
that disclosed in the Company's 1999 Form 10-K Annual Report.
Part II - Other Information
Item 1. Legal Proceedings
The Company is a party to routine litigation involving various aspects of its
businesses, none of which, in the opinion of management and its legal counsel is
expected to have a material adverse impact on the
27
consolidated financial condition, results of operations or liquidity of the
Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a). The Company's Annual Meeting of Shareholders was held on June 5, 2000. A
total of 7,444,274 shares of the Company's common stock were outstanding and
entitled to vote as of record date for the Annual Meeting. The only matter
submitted to a vote of the shareholders of the Company at the Annual Meeting was
the election of three (3) directors of Class III, whose term will expire in
2003.
(b). Each of the persons named in the Proxy Statement as a nominee for director
was elected. The following are the voting results with respect to the election
of directors:
- -------------------------------------------------------------------------------------------------------------
Election of For Against or Abstentions
Directors --- ---------- -----------
Withheld
--------
- -------------------------------------------------------------------------------------------------------------
Ronald D. Berg 5,791,414 480,099 1,172,761
- -------------------------------------------------------------------------------------------------------------
Richard A. Braun 6,247,423 24,090 1,172,761
- -------------------------------------------------------------------------------------------------------------
Ruth Nelson 6,250,078 21,435 1,172,761
- -------------------------------------------------------------------------------------------------------------
Item 5. Other Information
The Bank constructed a full-service branch facility in the village of
Ashwaubenon, located in Brown County, Wisconsin. The costs of construction are
$1.1 million. Completion of this project occurred early in the third quarter of
2000.
The Bank continues its remodeling efforts on a leased downtown site in Green
Bay, Wisconsin. Costs of construction are estimated to be $382,000 with
completion expected early in the third quarter of 2000.
The Bank constructed a new facility in King, located in Waupaca County,
Wisconsin, to replace an existing facility. Completion occurred early in the
second quarter of 2000. Costs of construction are $600,000.
The Bank began construction of a new facility in Kewaunee, Wisconsin to replace
an existing leased facility. Completion is expected to occur early in the third
quarter of 2000. Costs of construction were estimated to be $581,000.
28
The Bank purchased land and a building in the late third quarter of 1999 in
Seymour, Wisconsin for $475,000. The Bank's intentions are to remodel that
building in the middle of the year 2000 to replace a facility currently in use.
The Bank purchased land in the city of Luxemburg located in Kewaunee County,
Wisconsin in January 1999. No plans have been made at present on this purchase.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished herewith:
29
27. Financial Data Schedule
(b). Reports on Form 8-K
There were no Current Reports on Form 8-K filed for the quarter ended June 30,
2000.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
----------------------------------------
(Registrant)
Date: Thomas L. Herlache
-------------------------- ----------------------------------------
Thomas L. Herlache
President (CEO)
Date: Steven D. Jennerjohn
-------------------------- ----------------------------------------
Steven D. Jennerjohn
Treasurer (CFO)