Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
-----------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number 0-8679
------
BAYLAKE CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Wisconsin 39-1268055
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
217 North Fourth Avenue., Sturgeon Bay, WI 54235
- ------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (920)-743-5551
-------------------
Securities registered pursuant to Section 12(b) of the Act: None
- ----------------------------------------------------------- -------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock $5
- ----------------------------------------------------------- -------------------
Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
As of March 12, 2001, 7,471,574 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $14.50 reported bid
price on that date) held by non-affiliates (excludes a total of 606,559 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $99,542,718.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
-------- --------------------------------------
Definitive Proxy Statement for Part III
2001 Annual Meeting of
Shareholders to be Filed
within 120 days of the fiscal
Year ended December 31, 2000
1
2
2000 FORM 10-K
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
----------- -------
PART I
ITEM 1. Business 3
ITEM 2. Properties 23
ITEM 3. Legal Proceedings 23
ITEM 4. Submission of Matters to a Vote of Security Holders 23
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
ITEM 6. Selected Financial Data 25
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
ITEM 7A. Quantitative and Qualitative Disclosures about Market
Risk 59
ITEM 8. Financial Statements and Supplementary Data 60
ITEM 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure. 99
PART III
ITEM 10. Directors and Executive Officers of the Registrant 99
ITEM 11. Executive Compensation 99
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 99
ITEM 13. Certain Relationships and Related Transactions 100
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 100
Signatures 101
2
3
ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Company") is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended. Baylake's primary activities consist of holding
indirectly the stock of Baylake Bank ("Bank"), and providing a wide range of
banking and related business activities, through the Bank and its other
subsidiaries.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. The Bank
conducts its community banking business through 25 financial centers located
throughout Northeast Wisconsin, in Brown, Door, Green Lake, Kewaunee, Manitowoc,
Outagamie, Waupaca, and Waushara Counties. The Bank has eight financial centers
in Door County, which is known for its seasonal and tourism related services.
The balance of the Bank's financial centers are located in the previously
mentioned counties, with the highest concentration, after Door County, in Brown
County, which has six financial centers. Other principal industries in Bank's
market area include light industry and manufacturing, agriculture, food related
products, and to a lesser degree, lumber and furniture.
The Bank is an independent community bank offering a full range of financial
services primarily to small businesses and individuals located in its market
area. To complement the Bank's traditional banking products, such as demand
deposit accounts, various savings account plans, certificates of deposit and
real estate, consumer, commercial/industrial and agricultural loans, the Bank
offers its customers a variety of services. These services include transfer
agency, personal and corporate trust, insurance agency, brokerage, financial
planning, cash management and electronic banking services.
In addition to its banking operations, the Bank owns four non-bank subsidiaries:
Baylake Investments, Inc., located in Las Vegas, Nevada, which holds and manages
a portion of the bank's investment portfolio; Bank of Sturgeon Bay Building
Corporation, which owns the Bank's main office building in Sturgeon Bay,
Wisconsin and nearby conference center facilities and underlying real property;
Cornerstone Financial, Inc., which manages the conference center facilities; and
Baylake Insurance Agency, Inc., which offers various types of insurance products
to the general public as an independent agent. The Bank also owns a minority
(49.8% of the outstanding common stock) interest in United Financial Services,
Inc. ("UFS"), a data processing services company, located in Grafton, Wisconsin,
that provides data processing services to approximately 22 banks and ATM
processing services to 50 banks. The revenues generated by Bank's wholly-owned
subsidiaries and UFS amount, in aggregate, to less than 5% of the Bank's total
income.
At December 31, 2000, the Bank had total assets of $772.3 million. For
additional financial information, see the Consolidated Financial Statements and
Notes beginning at Item 8 of this Form 10-K.
Acquisitions
Baylake acquired Evergreen Bank, N.A., from M&I Marshall & Ilsley Bank,
Milwaukee, Wisconsin ("M&I") through a stock purchase agreement on October 1,
1998. Pursuant to the stock purchase agreement with M&I, Baylake is only
required to pay M&I for the Evergreen Bank, N.A. stock it purchased upon certain
events set forth in the stock purchase agreement. Although the payment period
set forth in the stock purchase agreement expired, Baylake has committed
3
4
to M&I that it will treat the payment terms of the stock purchase agreement as
though they had not expired. As of December 31, 2000, none of the events that
would require Baylake to pay any funds to M&I has occurred. In connection with
Baylake's acquisition of Evergreen Bank, N.A., Baylake changed the name of
Evergreen Bank, N.A., to Baylake Bank, N.A. ("BLBNA"). On March 15, 1999,
Baylake Bank merged with BLBNA.
Lending and Investments
The Company offers short-term and long-term loans on a secured and unsecured
basis for business and personal purposes. It makes real estate,
commercial/industrial, agricultural and consumer loans, in accordance with the
basic lending policies established by its board of directors. The Company
focuses lending activities on individuals and small businesses in its market
area. Lending has, historically, been exclusively within the State of Wisconsin.
The Company does not conduct any substantial business with foreign obligors. The
markets served by the Company include a wide variety of industries; therefore,
Baylake believes the broad business base of its market area limits its exposure
to the problems in any particular industry group. However, any general weakness
in the economy of Northeastern Wisconsin (as a result, for example, of a decline
in its manufacturing and tourism industries or otherwise) could have a material
adverse effect on the business and operations of Baylake.
The Company's total outstanding loans as of December 31, 2000 amounted to
approximately $555.1 million, consisting of 81.7% residential, commercial,
agricultural and construction real estate loans, 13.5% commercial and industrial
loans, 3.2% installment and 1.6% agricultural loans.
The Company maintains a portfolio of other investments, primarily consisting of
U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
securities, and obligations of states and their political subdivisions. The
Company attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
The Company offers a broad range of depository products, including non-interest
bearing demand deposits, interest-bearing demand deposits, various savings and
money market accounts and certificates of deposit. Deposits at the Company are
insured by the Bank Insurance Fund of the FDIC up to statutory limits. At
December 31, 2000, the Company's total deposits amounted to $553.3 million,
including interest bearing deposits of $484.1 million and non-interest bearing
deposits of $69.2 million.
Other Customer Services and Products
Other services and products offered by the Company include transfer agency, safe
deposit box services, personal and corporate trust services, conference center
facilities, insurance agency and brokerage services, cash management, financial
planning and electronic banking services, including eBanc, an Internet banking
product for its customers.
Competition
The financial services industry is highly competitive. The Company competes with
other financial institutions and businesses in both attracting and retaining
deposits and making loans in all of its principal markets. The primary factors
in competing for deposits are interest rates, personalized services, the quality
and range of financial services, convenience of office locations and office
hours. Competition for deposit products comes primarily
4
5
from other commercial banks, savings banks, credit unions and non-bank
competitors, including insurance companies, money market and mutual funds and
other investment alternatives. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized services. Competition for loans comes primarily from other
commercial banks, savings banks, mortgage banking firms, credit unions, finance
companies, leasing companies, and other financial intermediaries. Although no
assurance can be given that it will continue to do so, the Bank believes that it
has been able to maintain its prominence in these market areas, even though
certain competitors have considerably more financial and other resources than
does Baylake.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years and may be the subject of further significant
legislation in the future, that is not within the control of Baylake. This
regulation substantially affects the business and financial results of all
financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Board of Governors of the Federal Reserve System ("FRB"),
which requires that Baylake's capital to asset ratio meet certain minimum
standards. For a discussion of the Federal Reserve Board's guidelines and the
Company's applicable ratios, see the section entitled "Capital Resources" under
Item 7; "Management's Discussion and Analysis of Financial Condition and Results
of Operation."
As a Wisconsin bank, the Bank is subject to supervision and regulation by the
Wisconsin Department of Financial Institutions (the "WDFI"), the FRB and the
FDIC. As a registered bank holding company under the Bank Holding Company Act,
Baylake is subject to review and regulation by the FRB (its primary regulator).
Baylake is also subject to review and examination by the WDFI under Wisconsin
law.
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the WDFI be paid out of current earnings or, no more than
once within the immediate preceding two years, out of undivided profits in the
event that there have been insufficient net profits. Any other dividends require
the prior written consent of the WDFI. The Bank is in compliance with all
applicable capital requirements and may pay dividends to Baylake.
Current federal law provides that adequately managed bank holding companies from
any state may acquire banks and bank holding companies located in any other
state, subject to certain conditions. Beginning on June 1, 1997, banks may
create interstate branching networks in states that do not "opt out" of
interstate branching. Prior to that date, banks could create interstate
branching networks in states that "opted in" to interstate branching early.
Wisconsin law generally permits establishment of full service bank branch
offices statewide.
Employees
At December 31, 2000, Baylake and its subsidiaries, had 272 full-time equivalent
employees.
5
6
Statistical Information
The following statistical information is presented in accordance with the
Securities and Exchange Commission's Guide 3, "Statistical Disclosure by Bank
Holding Companies." Reference numbers relate to Guide 3.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Three-year comparison of Consolidated Average Balance Sheet
(dollars in thousands)
2000 1999 1998
---- ---- ----
Assets
Cash and Due from Banks $ 15,142 $ 15,978 $ 11,917
Investment Securities:
U. S. Treasury 1,164 1,156 2,102
U. S. Government Agencies 96,757 89,863 67,824
State and Municipal Obligations 50,263 50,954 44,614
Other Securities 7,440 5,019 5,629
Market Adjustment on AFS Securities (2,775) 386 2,298
-------- -------- --------
Total Investments $152,849 $147,378 $122,467
-------- -------- --------
Federal Funds Sold $ 14 $ 5,361 $ 6,657
Loans, Net of Unearned Income $505,892 $421,541 $333,484
Reserve for Loan Losses (7,999) (8,924) (5,833)
-------- -------- --------
Net Loans $497,893 $412,617 $327,651
-------- -------- --------
Bank Premises and Equipment $ 20,128 $ 16,795 $ 14,434
Other Real Estate Owned $ 562 $ 287 $ 93
Other Assets $ 19,858 $ 18,423 $ 14,139
-------- -------- --------
Total Assets $706,446 $616,839 $497,358
======== ======== ========
Liabilities and Stockholders' Equity
Demand Deposits $ 61,214 $ 56,755 $ 46,586
NOW Account Deposits 44,965 47,313 41,734
Savings Deposits 164,858 141,972 109,778
Time Deposits 252,086 246,782 188,412
-------- -------- --------
Total Deposits $523,123 $492,822 $386,510
-------- -------- --------
Short Term Borrowings $ 41,798 $ 10,812 $ 15,106
Customer Repurchase Agreements $ 2,213 $ 3,657 $ 3,637
Other Borrowings $ 83,629 $ 56,466 $ 42,099
Long Term Debt $ 211 $ 265 $ 387
Other Liabilities $ 6,718 $ 6,882 $ 6,247
-------- -------- --------
Total Liabilities $657,692 $570,904 $453,986
-------- -------- --------
Common Stock $ 37,333 $ 20,996 $ 18,475
Additional paid in capital 7,125 6,560 8,718
Retained Earnings 7,234 18,743 15,305
Net Unrealized Gains (Losses) on AFS Securities (2,313) 261 1,496
Treasury Stock (625) (625) (622)
-------- -------- --------
Total Equity $ 48,754 $ 45,935 $ 43,372
-------- -------- --------
Total Liabilities and Stockholders' Equity $706,446 $616,839 $497,358
======== ======== ========
6
7
I. B. INTEREST RATES AND INTEREST DIFFERENTIAL
The tables below show for the periods indicated the daily average amount
outstanding for major categories of the interest-earning assets and
interest-bearing liabilities, the interest earned or paid and the average yields
thereon (dollars in thousands).
2000 1999
Amount Interest Yield Amount Interest Yield
------ -------- ----- ------ -------- -----
Interest-earning assets:
Loans, Net $505,892 $421,541
Less: non-accruing Loans (8,396) (10,364)
-------- --------
Loans $497,496 $ 46,685 9.38% $411,177 $ 37,586 9.14%
U.S. Treasury Securities 1,164 79 6.79% 1,156 79 6.83%
U.S. Government Agencies 96,757 6,127 6.33% 89,863 5,579 6.21%
State and Municipal Obligations 50,263 3,912 7.78% 50,954 3,989 7.83%
Other Securities 6,457 467 7.23% 4,036 265 6.57%
Federal Funds Sold 14 1 7.14% 5,361 245 4.57%
Other Money Market Instruments 1,188 69 5.81% 1,251 58 4.64%
-------- -------- ----- -------- -------- -----
Total Interest Earning Assets (net of
non-accruing loans) $653,339 $ 57,340 8.78% $563,798 $ 47,801 8.48%
======== ======== ===== ======== ======== =====
Interest-bearing liabilities:
NOW Accounts $ 44,965 $ 837 1.86% $ 47,313 $ 837 1.77%
Savings Accounts 164,858 7,890 4.79% 141,972 5,325 3.75%
Time Deposits 252,086 14,855 5.89% 246,782 13,379 5.42%
Short Term Borrowings 41,798 2,847 6.81% 10,812 605 5.60%
Customer Repurchase 2,213 123 5.56% 3,657 163 4.46%
Agreements
Other Borrowings 83,629 5,529 6.61% 56,466 2,950 5.22%
Long Term Debt 211 18 8.53% 265 21 7.92%
-------- -------- ----- -------- -------- -----
Total Interest-bearing Liabilities $589,760 $ 32,099 5.44% $507,267 $ 23,280 4.59%
======== ======== ===== ======== ======== =====
1998
Amount Interest Yield
------ -------- -----
Interest-earning assets:
Loans, Net $333,484
Less: non-accruing Loans (4,505)
--------
Loans $328,979 $ 30,161 9.17%
U.S. Treasury Securities 2,102 135 6.42%
U.S. Government Agencies 67,824 4,707 6.94%
State and Municipal Obligations 44,614 3,576 8.02%
Other Securities 3,964 260 6.56%
Federal Funds Sold 6,657 356 5.35%
Other Money Market Instruments 1,665 81 4.86%
-------- -------- -----
Total Interest Earning Assets (net of
non-accruing loans) $455,805 $ 39,276 8.62%
======== ======== =====
Interest-bearing liabilities:
NOW Accounts $ 41,734 $ 852 2.04%
Savings Accounts 109,778 4,077 3.71%
Time Deposits 188,412 10,826 5.75%
Short Term Borrowings 15,106 898 5.94%
Customer Repurchase 3,637 173 4.76%
Agreements
Other Borrowings 42,099 2,290 5.44%
Long Term Debt 348 32 9.20%
-------- -------- -----
Total Interest-bearing Liabilities $401,114 $ 19,148 4.77%
======== ======== =====
7
8
The table below shows the net interest earnings and the net yield on
interest-earning assets for the periods indicated (dollars in thousands).
2000 1999 1998
Total Interest Income $ 57,340 $ 47,801 $ 39,276
Total Interest Expense 32,099 23,280 19,148
-------- -------- --------
Net Interest Earnings $ 25,241 $ 24,521 $ 20,128
======== ======== ========
Net Yield on Interest-earning Assets (excluding 3.86% 4.35% 4.42%
non-accruing loans)
Interest on tax exempt income, (i.e., interest earned on state and municipal
obligations) are figured on a federal tax-equivalent basis using a tax rate of
34%.
8
9
I. C. The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rate.
(dollars in thousands).
2000 COMPARED TO 1999 1999 COMPARED TO 1998
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
Interest earned on:
Loans $7,995 $1,104 $9,099 $7,525 ($ 100) $ 7,425
U.S. Treasury
Securities 1 (1) 0 (63) 7 (56)
U.S. Government
Agencies 432 116 548 1,449 (577) 872
State and Municipal
Obligations (2) (54) (23) (77) 502 (89) 413
Other Securities 167 35 202 5 0 5
Federal Funds Sold (313) 69 (244) (64) (47) (111)
Other Money Market
Instruments (3) 14 11 (20) (3) (23)
------ ------ ------ ----- ------ ------
Total Interest
Earning Assets
(net of non-accruing
loans) $8,225 $1,314 $9,539 $9,334 ($ 809) $ 8,525
====== ====== ====== ====== ======= =======
Interest paid on:
NOW Accounts $ (43) $ 43 $ 0 $ 106 ($ 121) ($ 15)
Savings Accounts 977 1,588 2,565 1,202 46 1,248
Time Deposits 300 1,176 1,476 3,259 (706) 2,553
Short Term
Borrowings 1,922 320 2,242 (233) (60) (293)
Customer Repurchase
Agreements (72) 32 (40) 1 (11) (10)
Other Borrowings 1,607 972 2,579 780 (120) 660
Long Term Debt (4) 1 (3) (7) (4) (11)
------ ------ ------ ----- ------ ------
Total Interest-
Bearing
Liabilities $4,687 $4,132 $8,819 $5,108 $ (976) $ 4,132
====== ====== ====== ====== ======= =======
(1) When a change in interest is due both to rate changes and volume this
analysis has been made on a fifty-fifty basis.
(2) Interest on tax exempt income is figured on a federal tax-equivalent
basis using a tax rate of 34%.
9
10
================================================================================
II. INVESTMENT PORTFOLIO
A. The carrying value of investment securities for those held to maturity (at
amortized cost) and available for sale (at fair market value) as of December 31,
2000, 1999 and 1998 are summarized as follows (dollars in thousands):
2000 1999 1998
---- ---- ----
Available for Sale
- ------------------
U.S. Treasury and Other U.S.
government agencies $ 32,997 $ 22,819 $ 20,192
Mortgage-backed securities 66,986 69,410 54,981
Obligations of states and
political subdivisions 33,795 31,797 34,288
Other 1,311 1,674 3,075
-------- -------- --------
$135,089 $125,700 $112,536
Held to Maturity
- ----------------
Obligations of states and
Political subdivisions $ 18,422 $ 19,380 $ 15,510
Other 0 0 0
-------- -------- --------
$ 18,422 $ 19,380 $ 15,510
Total $153,511 $145,080 $128,046
Baylake does not hold investment securities of any issuer (other than securities
of the U.S. Government or its agencies) whose book value exceeds ten percent of
its stockholders equity.
10
11
II. B. The following table shows the maturities of investment securities as of
December 31, 2000 and the weighted average yields of investment securities. The
weighted average yields by maturity range were computed by annualizing the
purchase yield income on the securities within such maturity range (dollars in
thousands):
One Year Over 1 Year Over 5 Years
or less Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
U.S. Treasury and other U.S.
government agencies $10,215 6.52% $ 8,634 6.76% $14,148 6.81%
Mortgage-backed securities 6,172 6.11% 56,086 6.14% 716 6.13%
Obligations of states and
political subdivisions 2,441 10.08% 14,783 7.18% 12,508 8.01%
Other 2 6.09% 0.00% 0.00%
------- ---- ------- ---- ------- ----
Total $18,830 6.85% $79,503 6.40% $27,372 7.34%
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other U.S.
government agencies $ 0.00% $32,997 6.71%
Mortgage-backed securities 4,012 7.24% 66,986 6.20%
Obligations of states and
political subdivisions 22,485 7.89% 52,217 7.82%
Other 1,309 5.83% 1,311 5.83%
------- ---- -------- ----
Total $27,806 7.70% $153 511 6.86%
Weighted average yield on tax-exempt state and political subdivisions has been
computed on a fully taxable equivalent basis using a tax rate of 34%.
11
12
III. LOAN PORTFOLIO
A. Types of Loans
The following table sets forth the comparison of the loan portfolio at December
31st of each of the past five years (dollars in thousands).
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans secured primarily
By real estate:
Secured by 1 to 4 family
residential properties $ 160,150 $ 138,030 $ 136,564 $ 100,555 $ 83,538
Real estate-construction 41,524 26,534 9,553 14,760 11,365
Other real estate loans 251,971 201,301 178,846 118,103 104,391
Loans to farmers 9,047 8,472 6,810 6,314 5,883
Commercial and Industrial
Loans 73,893 56,861 60,495 40,624 40,777
Loans to individuals for
Household, family and
other personal
expenditures 17,925 15,446 15,914 13,480 15,233
All other loans 957 826 245 140 240
--------- --------- --------- --------- ---------
Total gross loans $ 555,467 $ 447,470 $ 408,427 $ 293,976 $ 261,427
Less:
Unearned Income (360) (451) (779) (538) (573)
--------- --------- --------- --------- ---------
Net Loans $ 555,107 $ 447,019 $ 407,648 $ 293,438 $ 260,854
========= ========= ========= ========= =========
12
13
III. LOAN PORTFOLIO
B. Maturity and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of loans outstanding (dollars in thousands)
as of December 31, 2000 that, based on remaining scheduled repayments of
principal, are due in the periods indicated. Also, the amounts due after one
year are classified according to the sensitivity to change in interest rates.
Maturing
--------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
Loans secured primarily by real estate:
Secured by 1 to 4 family
Residential property $ 32,660 $ 73,116 $ 54,374 $160,150
Real estate - construction 23,609 17,005 910 41,524
Other real estate loans 65,828 138,550 47,593 251,971
Loans to farmers 3,273 4,887 887 9,047
Commercial and industrial loans 18,786 28,866 26,241 73,893
Loans to individuals for
household, family and other
personal expenditures 5,492 11,966 467 17,925
All other loans 847 100 10 957
-------- -------- -------- --------
Total gross loans $150,495 $274,490 $130,482 $555,467
======== ======== ======== ========
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
----- --------
Due after one year $228,480 $176,492
C. Risk Elements
1. The following table shows at December 31, the aggregate amounts of loans
(dollars in thousands) which are non-accrual, troubled with debt restructurings
and accruing loans past due 90 days or more as to principal or interest
payments.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Non-accrual loans $ 8,479 $ 8,086 $11,060 $ 1,720 $ 3,677
Troubled debt restructurings 4,510 4,458 3,028 2,930 1,000
Loans past due 90 days or more 0 0 0 0 0
------- ------- ------- ------- -------
Total $12,989 $12,544 $14,088 $ 4,650 $ 4,677
======= ======= ======= ======= =======
13
14
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $1,065,000: $929,000; $431,000; $202,000
and $472,000 for 2000, 1999, 1998, 1997 and 1996 respectively. Interest income,
which is recorded only as received, amounted to $460,000; $442,000; $216,000;
$180,000 and $154,000 for 2000, 1999, 1998, 1997 and 1996 respectively for these
non-accrual loans.
In accordance with the general policies established by the board of directors of
the Company, loans are placed on non-accrual status when they are contractually
past due 90 days or more as to interest or principal payments. Additionally,
whenever management becomes aware of facts or circumstances that may adversely
impact the collectibility of principal or interest on loans, it is the practice
of management to place such loans on a non-accrual status immediately rather
than waiting until the loans become 90 days past due. When interest accruals are
discontinued, interest credited to income is reversed. If collectibility is in
doubt, cash receipts on nonaccrual loans are used to reduce principal rather
than recorded as interest income.
14
15
2. As of December 31, 2000, there existed potential problem loans totaling
$8,679,251, which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 2000.
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
$4,404,163 5% $ 220,208
3,564,758 10% 356,476
291,738 25% 72,935
415,677 50% 207,839
$ 2,915 100% 2,915
---------- --- ----------
Totals $8,679,251 $ 860,372
Commercial loans comprised $8,114,113 or 93.5% of the total loans categorized as
problem loans. The other types of loans comprising this amount were consumer
loans totaling $565,138 or 6.5%.
3. The Company's loan portfolio is diversified by types of borrowers and
industry groups within all of the counties that comprise its market area.
Significant loan concentrations are considered to exist for a financial entity
when such amounts are loaned to borrowers engaged in similar activities as would
cause them to be similarly impacted by economic or other conditions. At December
31, 2000, there existed no industry group concentrations in the Company's loans
which exceed 10% of total loans; See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Balance Sheet
Analysis -- Loans" for additional discussion regarding industry groups.
15
16
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following table summarizes the daily average loan balances at the end of
each period; changes in allowance for loan losses arising from loans charged off
and recoveries on loans previously charged off, by loan category; and addition
to the allowance for loan losses that have been charged to operating expenses
(dollars in thousands).
December 31
-----------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Daily average amount of
loans $ 505,892 $ 421,541 $ 333,484 $ 276,639 $ 233,473
========= ========= ========= ========= =========
Balance of allowance for
possible loan losses
at beginning of period $ 7,611 $ 11,035 $ 3,881 $ 2,893 $ 2,617
Loans Charged Off:
Real estate - mortgage 1,584 991 355 1 99
Real estate - construction 40 -- -- --
Loans to farmers 24 35 -- -- --
Commercial/Industrial Loans 343 4,097 376 199 82
Consumer Loans 123 199 114 121 105
Lease financing/other loans -- -- -- -- --
--------- --------- --------- --------- ---------
Total loans charged off $ 2,074 $ 5,362 $ 845 $ 321 $ 286
========= ========= ========= ========= =========
Recoveries of loans previously
charged off
Real estate - mortgage 290 508 148 1 --
Real estate - construction 2 -- -- -- --
Loans to farmers 11 -- -- -- --
Commercial/Industrial Loans 557 1,433 186 151 16
Consumer loans 64 47 43 42 26
Lease financing/other loans -- -- -- -- --
--------- --------- --------- --------- ---------
Total loan recoveries $ 924 $ 1,988 $ 377 $ 194 $ 42
--------- --------- --------- --------- ---------
Net loans charged off $ 1,150 $ 3,374 $ 468 $ 127 $ 244
--------- --------- --------- --------- ---------
Additions to allowance for loan
losses charged to operating
expense $ 545 $ 850 $ 1,135 $ 1,115 $ 400
--------- --------- --------- --------- ---------
Allowance to related assets
acquired $ -- $ (900) $ 6,487 $ -- $ 120
--------- --------- --------- --------- ---------
Allowance for loan losses at
end of period $ 7,006 $ 7,611 $ 11,035 $ 3,881 $ 2,893
========= ========= ========= ========= =========
Ratio of net charge offs
during period to average
Loans outstanding .23% .80% .14% .05% .10%
The factors which influence management's judgment in determining the additions
to loan valuation reserve are discussed in the section titled "Risk Management
and the Allowance for Loan Losses" in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
16
17
V. DEPOSITS
The average amounts of and the average rate paid on each category of the
Company's deposits are summarized below for the periods indicated (dollars in
thousands).
YEAR ENDED DECEMBER 31
----------------------
2000 1999 1998
---- ---- ----
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
Non-interest bearing demand
deposits $ 61,214 0.00% $ 56,755 0.00% $ 46,586 0.00%
Interest bearing demand
deposits 44,965 1.86% 47,313 1.77% 41,734 2.04%
Savings deposits 164,858 4.79% 141,972 3.75% 109,778 3.71%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 186,696 5.77% 193,416 5.36% 144,772 5.86%
Time Certificates of Deposit
of $100,000 or more 65,390 6.24% 53,366 5.63% 43,640 5.38%
-------- ---- -------- ---- -------- ----
Total Deposits $523,123 4.51% $492,822 3.97% $386,510 4.08%
======== ==== ======== ==== ======== ====
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (dollars in thousands).
2000 1999 1998
---- ---- ----
3 months or less $ 8,034 $20,118 $ 9,778
Over 3 months thru 6 months 6,185 20,955 17,183
6 months thru 12 months 12,345 8,244 12,629
Over 12 months 34,770 6,218 8,127
------- ------- -------
Total $61,334 $55,535 $47,717
======= ======= =======
17
18
VI. RETURN ON EQUITY AND ASSETS
The ratio of consolidated net income to average stockholders' equity and to
average total assets and other ratios are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---- ---- ----
Percentage of consolidated net income
to:
Average total assets (return on assets) .95% 1.12% 1.21%
Average stockholders' equity (return
on equity) 13.76% 15.07% 13.87%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 45.56% 39.36% 57.32%
Percent of average stockholders'
equity to average total assets
(equity to assets ratio) 6.90% 7.45% 8.72%
18
19
VII. Short-Term Borrowings
A. The following table shows outstanding amounts of short-term borrowings,
together with the weighted average interest rates thereon, at December 31, of
each of the past three years (dollars in thousands).
2000 1999 1998
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Federal funds purchased $35,000 7.08% $ 6,330 6.16% $ -- 0.00%
Federal Home Loan Bank
borrowings 42,000 6.24% -- 0.00% -- 0.00%
Securities Sold under
agreements to repurchase 3,289 4.68% 2,901 3.88% 3,758 4.19%
------- ----- ------- ----- ------- -----
Totals $80,289 6.54% $ 9,231 5.44% $ 3,758 4.19%
======= ===== ======= ===== ======= =====
B. The following table shows the maximum amounts outstanding of short term
borrowings at any month-end during each reported period (dollars in thousands).
2000 1999 1998
---- ---- ----
Balance Balance Balance
------- ------- -------
Federal funds purchased $35,000 $28,350 $38,392
Federal Home Loan Bank
borrowings 42,000 -- --
Securities sold under
agreements to repurchase 3,289 2,032 2,925
19
20
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of short-term borrowings, the interest paid and
the weighted average rates thereon (dollars in thousands).
2000 1999 1998
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
Short-term
borrowings:
Federal funds
purchased $20,459 $ 1,388 6.78% $10,812 $ 605 5.60% $15,106 $ 898 5.94%
Federal Home Loan
Bank borrowings 21,339 1,459 6.84% 0.00% -- -- 0.00%
Securities sold
under agreements
to repurchase 2,213 123 5.56% 3,657 163 4.46% 3,637 173 4.76%
------- ------- ---- ------- ------- ---- ------- ------- ----
Total short-term
borrowings $44,011 $ 2,970 6.75% $14,469 $ 768 5.31% $18,743 $ 1,071 5.71%
======= ======= ==== ======= ======= ==== ======= ======= ====
20
21
VIII. Other Borrowings
A. The following table shows outstanding amounts of other borrowings, together
with the weighted average interest rates thereon, at December 31, of each of the
past three years (dollars in thousands).
2000 1999 1998
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Federal Home Loan Bank
loan $70,000 6.80% $80,000 6.39% $53,000 5.26%
Correspondent Bank
loans 7,700 8.50% --- 0.00% --- 0.00%
Totals $77,700 6.97% $80,000 6.39% $53,000 5.26%
======= ===== ======= ===== ======= =====
B. The following table shows the maximum amounts outstanding of other borrowings
at any month-end during each reported period (dollars in thousands).
2000 1999 1998
---- ---- ----
Balance Balance Balance
------- ------- -------
Federal Home Loan Bank
loan $95,000 $80,000 $53,000
Correspondent Bank loans $ 7,800
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of other borrowings, the interest paid and the
weighted average rates thereon (dollars in thousands).
2000 1999 1998
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
Federal Home Loan Bank
loan: $79,904 $ 5,208 6.52% $56,466 $ 2,950 5.22% $42,099 $ 2,290 5.44%
Correspondent Bank
loans $ 3,725 $ 321 8.62% -- -- 0.00% -- -- 0.00%
Total other
borrowings $83,629 $ 5,529 6.61% $56,466 $ 2,950 5.22% $42,099 $ 2,290 5.44%
======= ======= ==== ======= ======= ==== ======= ======= ====
21
22
IX. Long Term Debt
A. The following table shows outstanding amounts of long term debt,
together with the weighted average interest rates thereon, at December
31, of each of the past three years (dollars in thousands). Long term
debt consists of a land contract requiring annual principal payments
of $53,000 plus interest calculated at prime + 1/4%.
2000 1999 1998
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Land contract payable $ 211 8.75% $ 264 8.00% 317 8.75%
Other -- 0.00% -- 0.00% 75 5.85%
------ ---- ------ ---- ------ ----
$ 211 8.75% $ 264 8.00% $ 392 8.20%
====== ==== ====== ==== ====== ====
B. The following table shows the maximum amounts outstanding of long term debt
at any month-end during each reported period (dollars in thousands).
2000 1999 1998
---- ---- ----
Balance Balance Balance
------- ------- -------
Land contract payable $ 211 $ 264 $ 317
Other -- -- 89
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of long term debt, the interest paid and the
weighted average rates thereon (dollars in thousands).
2000 1999 1998
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
Long term debt:
Land contract payable $ 211 $ 18 8.75% $ 265 $ 21 7.92% $ 348 $ 31 9.20%
22
23
ITEM 2. PROPERTIES
Baylake directly owns no real properties of any kind. However, the Bank owns
twenty-three branches and leases the Company's main office building in Sturgeon
Bay, Wisconsin from its subsidiary, the Bank of Sturgeon Bay Building
Corporation.
The main office building located in Sturgeon Bay serves as headquarters for
Baylake as well as the main banking office of the Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
(Baylake Insurance Agency) and financial services. The twenty-five branches
owned or leased by Bank are conveniently located throughout the market area
served by Bank, including the counties of Door, Kewaunee, Brown, Manitowoc,
Green Lake, Outagamie, Waushara and Waupaca. All properties are in good
condition and considered adequate for present and near term requirements.
ITEM 3. LEGAL PROCEEDINGS
There are currently no legal proceedings of any kind constituting material
litigation involving Baylake or its subsidiaries. The previously pending
litigation, described in Baylake's annual report on Form 10-K for the year ended
December 31, 1999, was based on a lender liability claim for an alleged failure
to extend credit and was dismissed by the Circuit Court for Waupaca County,
Wisconsin on December 20, 2000 with prejudice and without payment or settlement
of any kind by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
Historically, trading in shares of the Company's Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol: BYLKBB), an electronic interdealer quotation system providing
real-time quotations on over 4,000 eligible securities. Trading in Baylake
Common Stock has been conducted principally by certain brokerage and investment
firms with offices in Door County, Wisconsin that have provided price
quotations, and have assisted individual holders of Baylake Common Stock who
wish to sell their shares. In addition, since May 1993, prices for Baylake
Common
23
24
Stock have generally been reported daily in The Milwaukee Journal Sentinel based
on information provided by a local brokerage firm.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are computed
from those obtained from two brokerage firms, and, since May 1993 from bid
prices reported in The Milwaukee Journal Sentinel. The reported high and low
prices represent interdealer bid prices, without retail mark-up, mark-downs or
commission, and may not necessarily represent actual transactions. Prices and
dividends per share quoted have been adjusted for a 2 for 1 stock dividend paid
on November 15, 1999.
Cash dividends per
Calendar period High Low share
--------------- ---- --- ------------------
1999 1st Quarter $17.25 $15.50 $0.090
2nd Quarter $17.63 $16.56 $0.090
3rd Quarter $20.00 $17.25 $0.090
4th Quarter $30.00 $19.75 $0.100
2000 1st Quarter $26.00 $21.50 $0.100
2nd Quarter $23.50 $19.88 $0.100
3rd Quarter $21.00 $18.00 $0.100
4th Quarter $18.25 $14.50 $0.110
Baylake had approximately 1,733 shareholders of record at March 12, 2001.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January, and Baylake expects to
continue this practice for the immediate future. The holders of Baylake Common
Stock are entitled to receive such dividends when and as declared by Baylake's
Board of Directors. The ability of Baylake to pay dividends is dependent upon
receipt by Baylake of dividends from the Bank, which is subject to regulatory
restrictions. Such restrictions, which govern state chartered banks, generally
limit the payment of dividends on bank stock to the bank's undivided profits
after all payments of all necessary expenses, provided that the bank's surplus
equals or exceeds its capital, as discussed further in Item 7. "Management
Discussion and Analysis of Financial Condition and Results of Operation-Capital
Resources". In determining the payment of cash dividends, the Board of Directors
of Baylake considers the earnings, capital and debt servicing requirements,
financial ratio guidelines issued by the FRB and other banking regulators,
financial conditions of Baylake and the Bank, and other relevant factors.
Baylake maintains a dividend reinvestment plan enabling participating
shareholders to elect to purchase shares of Baylake Common Stock in lieu of
receiving cash dividends. Such shares may be newly issued securities or acquired
in the market and will be purchased on behalf of participating shareholders at
their then fair market value.
24
25
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
Interest Income $ 56,036 $ 46,467 $ 38,061 $ 31,577 $ 26,926
Interest Expense 32,099 23,280 19,148 14,662 12,046
--------- --------- --------- --------- ---------
Net Interest Income 23,937 23,187 18,913 16,915 14,880
Provision for Loan Losses 545 850 1,135 1,115 400
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 23,392 22,337 17,778 15,800 14,480
Non-interest income:
Gain on sale of loans 240 295 893 678 212
Loan servicing fees 837 875 846 731 674
Trust fees 517 553 451 491 611
Service charges on deposit
accounts 1,489 1,369 1,074 844 743
Securities gains (losses), net 0 (2) 0 292 38
Other 1,603 1,466 1,113 1,032 1,173
--------- --------- --------- --------- ---------
Total non-interest income 4,686 4,556 4,377 4,068 3,451
Non-interest expense
Salaries and employee benefits 10,353 9,700 7,772 7,003 6,270
Occupancy expense, net 3,047 2,668 2,192 2,035 1,732
Data processing 932 872 699 642 548
Other non-interest expense 4,280 4,247 3,213 2,861 2,972
Operation of other real estate (22) (117) 15 30 (188)
--------- --------- --------- --------- ---------
Total non-interest expense 18,590 17,370 13,891 12,571 11,289
--------- --------- --------- --------- ---------
Income before income tax 9,488 9,523 8,264 7,297 6,642
Income tax provision 2,778 2,600 2,247 2,027 1,939
--------- --------- --------- --------- ---------
Net income $ 6,710 $ 6,923 $ 6,017 $ 5,270 $ 4,703
PER SHARE DATA: (1)
Net income per share (basic) $ 0.90 $ 0.94 $ 0.82 $ 0.72 $ 0.64
Net income per share (diluted) 0.87 0.90 0.80 0.71 0.63
Cash dividends per common share 0.41 0.37 0.47 0.40 0.31
25
26
Book value per share 7.14 6.21 6.17 5.71 5.32
SELECTED FINANCIAL CONDITION
DATA (AT END OF PERIOD):
Total assets $ 772,268 $ 646,310 $ 607,438 $ 450,062 $ 395,356
Investment securities (2) 153,511 145,080 128,046 114,899 99,138
Total loans 555,831 447,767 408,921 293,438 260,854
Total deposits 553,254 504,074 495,284 345,976 327,165
Short-term borrowings (3) 80,289 9,231 3,758 20,649 23,840
Other borrowings (4) 77,700 80,000 53,000 36,000 0
Notes payable and subordinated
debt 211 264 392 383 422
Total shareholders' equity 53,127 46,210 45,272 41,855 39,234
PERFORMANCE RATIOS:
Return on average assets 0.95% 1.12% 1.21% 1.29% 1.34%
Return on average total
shareholders' equity 13.76% 15.07% 13.87% 13.14% 12.39%
Net interest margin (5) 3.86% 4.35% 4.42% 4.77% 4.97%
Net interest spread (5) 3.34% 3.89% 3.85% 4.12% 4.36%
Non-interest income to average
assets 0.66% 0.74% 0.88% 1.00% 0.98%
Non-interest expense to average
assets 2.63% 2.82% 2.79% 3.08% 3.20%
Net overhead ratio (6) 1.97% 2.08% 1.91% 2.08% 2.22%
Average loan-to-average deposit
ratio 96.71% 85.54% 86.28% 83.14% 78.44%
Average interest-earning assets
to average interest-bearing
liabilities 110.78% 111.14% 113.63% 116.51% 115.83%
ASSET QUALITY RATIOS: (7)(8)
Non-performing loans to total loans 2.34% 2.80% 3.45% 1.58% 1.79%
Allowance for loan losses to:
Total loans 1.26% 1.70% 2.71% 1.32% 1.11%
Non-performing loans 53.94% 60.67% 78.33% 83.46% 61.86%
26
27
Net charge-offs to average loans 0.23% 0.80% 0.14% 0.05% 0.10%
Non-performing assets to total
assets 1.80% 1.95% 2.41% 1.03% 1.27%
CAPITAL RATIOS: (9)
Shareholders' equity to assets 6.88% 7.15% 7.45% 9.30% 9.92%
Tier 1 risk-based capital 7.77% 8.81% 7.97% 11.31% 12.14%
Total risk-based capital 8.92% 10.07% 9.22% 12.52% 13.18%
Leverage ratio 6.38% 6.79% 6.02% 8.86% 9.63%
RATIO OF EARNINGS TO FIXED
CHARGES: (10)
Including deposit interest 1.30x 1.41x 1.43x 1.50x 1.55x
Excluding deposit interest 2.11x 3.55x 3.44x 5.24x 10.83x
(1) Earnings and dividends per share are based on the weighted average number
of shares outstanding for the period. All per share data has been adjusted
to reflect (a) a 2 for 1 stock dividend paid on November 15, 1999 and (b) a
3 for 2 stock dividend paid on May 15, 1998.
(2) Includes securities classified as held-to-maturity and available for sale.
(3) Consists of Federal Home Loan Bank advances, federal funds purchased and
collateralized borrowings.
(4) Consists of Federal Home Loan Bank term notes and Company borrowings
from unaffiliated correspondent bank.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets, and net interest rate spread represents
the difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(6) Net overhead ratio represents the difference between noninterest expense
and noninterest income, divided by average assets.
(7) Non-performing loans consist of non-accrual loans, guaranteed loans 90 days
or more past due but still accruing interest and restructured loans.
(8) The increases in non-performing loans culminating with the period ended
December 31, 1998 were due, in part, to various troubled loans acquired as
a result of the Evergreen Bank acquisition. For additional information, see
in Item 7. "Management's Discussion and Analysis of Financial Condition and
Result of Operations-Non-performing Loans, Potential Problem Loans and
Other Real Estate."
(9) The capital ratios are presented on a consolidated basis. For information
on Baylake and the Bank's regulatory capital requirements, see Item 7.
"Management's Discussion and Analysis
27
28
of Financial Condition and Results of Operations-Capital Resources" and
Item 1. "Business-Regulation and Supervision".
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
28
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Company"), which may not be otherwise apparent from the
consolidated financial statements included in this report at Item 8. This
discussion and analysis should be read in conjunction with those financial
statements, related notes, the selected financial data and the statistical
information presented elsewhere in this report for a more complete understanding
of the following discussion and analysis.
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on the current expectations of management. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "projects," and similar expressions are intended to identify such
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the control of the 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 Company: 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. and changed its
name to Baylake Bank, N.A. ("BLBNA"). The acquisition was accounted for using
the purchase method of accounting. Therefore, any consideration paid to M&I will
affect future income. See the discussion of this transaction under Item 1.
"Business" and Note 13 of Notes to Consolidated Financial Statements for
additional details on this transaction.
All per share information has been restated to reflect the 3-for-2 stock
dividend paid on May 15, 1998 and the 2-for-1 dividend paid on November 1999.
Results of Operations
Earnings Summary
Net income in 2000 was $6.7 million, a 3.1% decrease from the $6.9 million
earned in 1999. Net income for 1999 showed a 15.1% increase
29
30
over the 1998 earnings. Basic operating earnings per share decreased $.04 to
$.90 per share in 2000 compared with $.94 in 1999, a decrease of 4.3%. Basic
operating earnings per share in 1999 showed a 14.6% increase over 1998 results
of $.82 per share. On a diluted earnings per share basis, the Company recorded
$.87 per share in 2000, compared to $.90 and $.80 per share in 1999 and 1998,
respectively.
Net income for 2000 includes amortization expense of $327,000 of goodwill
related to the purchase of Four Seasons (holding company of financial
institution named "The Bank", acquired by the Company on July 1, 1996) and
$159,000 related to the acquisition of BLBNA. This expense reduced after-tax net
income in 2000 by $486,000 or earnings per share by $.06. Net income for 1999
reflected amortization expense of $453,000 related to goodwill, thereby reducing
after-tax earnings per share by $.06.
Although affected by a rising interest rate environment and increased
competition in 2000, net interest income improved. Net interest income for 2000
improved $750,000 or 3.2% over 1999 levels. Net interest income for 1999
improved $4.3 million or 22.6% over 1998 levels. Interest income increased by
20.1% while interest expense increased 37.9%.
Other income increased $130,000 or 2.9%. The primary factors increasing other
income were an increase in fees for other services to customers and other income
offset by a decrease in gains on sales of loans, a decrease in loan servicing
fees and reduced fiduciary income.
Non-interest expense increased $1.2 million or 7.0% over 1999 levels. Factors
contributing to the increase were increased personnel expenses, occupancy and
equipment expense, data processing and other operating expenses offset by a
reduction in operation of other real estate.
For 2000, return on average assets declined to .95% compared with 1.12% in 1999
and 1.21% in 1998. This ratio declined as a result of the various factors
discussed above combined with an average asset growth rate of 14.5% in 2000.
Return on average stockholders' equity in 2000 showed a decrease to 13.8%
compared to 15.1% in 1999 and 13.9% in 1998. The decrease in 2000 compared to
1999 occurred as a result of decreased net income, higher average capital and
the factors described above.
Cash dividends declared in 2000 increased 10.8% to $.41 per share compared with
$.37 in 1999. This compares to a decrease of 21.3% in 1999 dividends as compared
to 1998.
The major components of net income and changes in these components are
summarized in the following table for years ended December 31, 2000, 1999 and
1998 and are discussed in more detail on the following pages.
30
31
Years ended December 31,
2000 1999 1999 to 1998 1998 to
2000 1999
increase increase
(dollars in thousands)
Net interest income 23,937 23,187 3.23% 18,913 22.60%
Provision for loan losses 545 850 (35.88%) 1,135 (25.11%)
Noninterest income 4,686 4,556 2.85% 4,377 4.09%
Noninterest expense 18,590 17,370 7.02% 13,891 25.04%
Income before income taxes 9,488 9,523 (0.37%) 8,264 15.23%
Income tax expense 2,778 2,600 6.85% 2,247 15.71%
----- ----- -----
Net income 6,710 6,923 (3.08%) 6,017 15.06%
Net Interest Income
Net interest income (on a tax equivalent basis) is the Company's principal
source of revenue accounting for 84.3% of total income in 2000, as compared to
84.3% in 1999 and 82.1% in 1998. Net interest income represents the difference
between interest earned on loans, investments and other interest earning assets
offset by the interest expense attributable to funding sources, principally
deposits and borrowings. Interest rate 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 income earned. Tax-exempt interest income is adjusted to a level
that reflects such income as if it were fully taxable.
Net interest income on a tax-equivalent basis reached $25.2 million in 2000, an
increase of 2.9% from $24.5 million in 1999 and $20.1 million in 1998. The
improvement in 2000 net interest income of $700,000 was due in part to an
increase in the volume of net average earning assets of $7.0 million. In spite
of this, average-earning assets increased 15.9% offset by an increase of 16.3%
in average interest-bearing liabilities. The benefit from an increase in earning
assets, non-interest bearing deposits and an increase in the yield on earning
assets were offset, in part, by an increase in interest-bearing liabilities and
an increase in the cost of interest paying liabilities. As a result, interest
income increased 20.1% while interest expense for 2000 increased 37.9%.
Average loans outstanding grew from $421.5 million in 1999 to $505.9 million in
2000, an increase of 20.0%. The increase in loan volume was a significant
contributing factor to the increase in interest income. Average loans
outstanding increased from $333.5 million in 1998 to $421.5 million in 1999, an
increase of 26.4%. The mix of average loans to average total assets increased
from 67.1% in 1998 to 68.3% in 1999 and to 71.6% in 2000. The relationship of a
higher volume of loans as
31
32
a percentage of the asset mix has provided a source of higher yielding assets,
which has contributed to an increase in net interest income.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The year 2000 saw the compression of the interest rate spread for
the Company as a higher rate environment and additional reliance on wholesale
funding resulted in higher interest expense relative to interest income. The
interest rate spread decreased 55 basis points in 2000 to 3.34% from 3.89% in
1999, as the average yield on earning assets increased 30 basis points while the
average rate paid on interest-bearing liabilities increased 85 basis points over
the same period. In contrast, interest rate spread increased 4 basis points in
1999 compared to 1998 results. The increase in the Company's earning assets
yield reflects an increasing rate environment impacting rates on the variable
priced loans for the year 2000. Increased investment interest income, which
resulted from an increased investment portfolio, combined with higher yields on
the investment portfolio have contributed to some of the increase in the yields
on interest earning assets. Yields on interest-paying liabilities increased 85
basis points. An increased rate environment also affected the funding side of
the balance sheet. Increased interest costs resulted from increased competition
for retail deposits; increased balances in indexed accounts and additional
reliance on wholesale funding. Yields on interest bearing deposits increased 63
basis points from 4.48% in 1999 to 5.11% in 2000.
Short-term borrowings increased $71.0 million as loan demand continued to exceed
deposit growth, increasing reliance on wholesale funding sources. Short-term
borrowings consist of federal funds purchased and overnight borrowings from the
Federal Home Loan Bank ("FHLB") of Chicago. These funding sources increased the
percentage of average short-term borrowings as a percentage of average
interest-bearing liabilities to 7.1% in 2000 compared to 2.1% in 1999. Yields on
these borrowings increased 121 basis points in 2000 compared to 1999
contributing to an overall increase in the yields paid on interest-bearing
liabilities.
Additional sources of funds consisted of other borrowings. Other borrowings
consist of term loans with the FHLB and other term loans taken out by the
Company during the year 2000. Other borrowings decreased $2.3 million to $77.7
million. As a percentage of interest-bearing liabilities, other borrowings
increased to 14.2% from 11.1% in 1999. Yields on these borrowings increased 139
basis points to 6.61% from 5.22% in 1999.
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.
32
33
The net interest margin for 2000 was 3.86% compared to 4.35% in 1999. The
decline in net interest margin was in part related to a decline in the free
funds ratio and a decrease in the interest rate spread offset by a decrease in
non-accrual loans. The impact from competition as it relates to the commercial
loan portfolio and costs related to new product offerings had a negative affect
on the change in net interest margin. A rising interest rate environment further
compressed margin for the year 2000. The free funds ratio, or the level of
non-interest bearing funds that support earning assets, declined to 16.8% from
18.2% in 1999.
The net interest margin for 1999 was 4.35% compared to 4.42% in 1998 as interest
rate spread declined during that period. The decrease in 1999 occurred primarily
as the result of an increase in non-accrual loans and a decline in the free
funds ratio offset by a 4 basis point increase in the interest rate spread.
Increased competition especially as it relates to the commercial loan portfolio,
negatively affected net interest margin.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 92.5% in 2000 compared with 91.4% in 1999 and 91.7% in
1998. The ratio increased in 2000 as a result of a decrease in non-accrual
loans.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Company
constantly seeks to attract lower cost core deposits, service the needs of
customers, and provide attractively priced products. Competition for high
quality assets will also affect asset yields.
Growth in net interest income primarily is the result of growth in the level of
earning asset volumes and changes in asset mix. Interest rate spread management
through asset and liability pricing and increased levels of non-interest-bearing
sources of funds also aid in improving net interest income. Management will
continue its focus on maintaining an appropriate mix of quality earning assets
as well as seeking to achieve appropriate growth in volumes.
Changes in the levels of market interest rates also affect net income, but are
less directly under the control of the Company. Although a stable rate
environment has been experienced, management believes that a gradual increase in
interest rates will not adversely affect the earning capacity of the Company.
Past experience has shown that, although the Company remains in a short-term
negative interest rate sensitivity gap, deposits tend not to be repriced as
quickly as loans in a rising rate scenario and are repriced more frequently in a
falling interest rate environment. More discussion on this subject is referenced
in the section titled "Interest Rate Risk" below.
33
34
Provision for Loan Losses
The provision for loan losses is the periodic cost, not less than quarterly, of
providing an allowance for anticipated future loan losses. In any accounting
period, the amount of provision is based on management's evaluation of the loan
portfolio, especially nonperforming and other potential problem loans, taking
into consideration many factors, including loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies, management's evaluation
of loan quality, general economic factors and collateral values.
Provision for loan losses in 2000 at $545,000 compares to a provision of
$850,000 for 1999 and $1,135,000 for 1998. Net charge-offs in 2000 were $1.2
million compared with net charge-offs of $3.4 million in 1999 and $468,000 in
1998. Net charge-offs as a percentage of average loans is a key measure of asset
quality. Net charge-offs to average loans were .23% in 2000 compared with .80%
in 1999 and .14% in 1998. Entry into new markets has allowed management the
opportunity to re-evaluate and refine the methodology used in estimating
adequate provision for loan losses. As a result, the provision for loan losses
was reduced despite increased loan growth. Management believes that the current
provision conforms with the Company's loan loss reserve policy and is adequate
in view of the present condition of the Company's loan portfolio. See "Risk
Management and the Allowance for Loan Losses" below.
Non-Interest Income
Total non-interest income for 2000, excluding securities transactions, was, $4.7
million, a $130,000 increase from 1999, or 2.9%. In 1999, total non-interest
income was $179,000 more than 1998, a 4.1% increase. Trust service fees, loan
servicing fees, gains from sales of loans and service charges continue to be the
primary components of non-interest income.
Trust fees decreased $36,000 or 6.5% to $517,000 in 2000 compared to 1999,
primarily as a result of a decrease in trust estate business offset slightly by
an increase in additional assets under management. This compared to an increase
of $102,000 or 22.6% in 1999 compared to 1998, primarily the result of increased
trust estate business.
Loan servicing fees decreased $38,000, or 4.3%, to $837,000 in 2000. This
followed an increase of $29,000, or 3.4%, increase to $875,000 in 1999. The
decrease in 2000 occurred as a result of decreased servicing income due to a
smaller portfolio of commercial loan business sold on the secondary market and
serviced by Company.
Gains on sales on loans in the secondary market decreased $55,000 to $240,000 in
2000 primarily as a result of decreased gains from sales of commercial loans.
Premiums declined in the secondary market for commercial loans contributing to a
decline of $46,000 in gains from the sale of commercial loans. In addition,
gains from mortgage loans
34
35
decreased $9,000 in 2000. A decrease in mortgage loan business sold during 2000
amounted to $17.2 million of loans sold compared to $19.9 million of mortgage
loans sold in 1999. Total loans sold during 2000 were $23.6 million compared to
$26.2 million in 1999.
Service charges on deposit accounts showed an increase of $120,000, or 8.7%,
over 1999 results accounting for the improvement in fee income generated for
other services provided to customers.
Other income increased $94,000, or 9.9%, to $1.0 million in 2000. The growth
resulted primarily from increases in undistributed income from UFS, the data
processing subsidiary. Undistributed income from UFS increased as a result of
increased earnings of $105,000, to $232,000, from the data processing
subsidiary.
Non-Interest Expense
Non-interest expense in 2000 increased to $18.6 million, a $1.2 million, or 7.0%
increase compared to 1999 results, primarily as a result of increased personnel,
equipment, data processing, and other operating expense. This followed a $3.5
million or 25.0% increase in 1999 as compared to 1998.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $10.4 million in 2000, an increase of $653,000, or 6.7%, as
compared to 1999 results. The increase in 2000 primarily resulted from staffing
increases, increased benefit costs, and normal salary increases. Salary and
employee benefits expense in 1999 totaled $9.7 million, an increase of $1.9
million, or 24.8%, as compared to 1998 results. The 1999 increase resulted
primarily from staffing increases, including the addition of BLBNA, bonus
expense, increased benefit costs, and normal salary increases.
Bonus expense in 2000 was $134,000 compared to $636,000 in 1999. The decrease
occurred as a result of no bonus expense arising from the Company's
Pay-for-Performance Program in 2000. In 1999, Baylake paid $536,000 pursuant to
its Pay-for-Performance Program. This program is designed to reward various
divisions upon achievement of certain goals related to improvement in income and
on return on equity. The Company did not achieve its return on equity goals and,
accordingly, no bonus payment was made.
The Company's 401(k) profit sharing plan, including a money purchase plan
initiated in 1999, covering all employees who qualify as to age and length of
service increased to $626,000, an increase of $53,000, or 9.3%, over 1999
levels. Expenses in the same category were up $94,000, or 19.7%, over 1998
levels.
The number of full-time equivalent employees increased to 272 in 2000 from 252
in 1999, an increase of 7.9%. Employee levels in 1999 increased to 252 from 229
in 1998, an increase of 10.0%. In addition to increases from the BLBNA
acquisition, the increases occurred
35
36
primarily at the Company's Green Bay locations with emphasis on additional
personnel for sales and calling programs. Management will continue its efforts
to control salaries and employee benefits expense, although increases in these
expenses are likely to continue to occur in future years.
Net occupancy expense for 2000 showed an increase of $213,000, or 14.9%, as
compared to 1999 for a total of $1.6 million. Additions of two facilities in the
Green Bay region plus two additional branches built on existing sites accounted
for the balance of the increase in occupancy expense for 2000. Additional
depreciation expense, real estate tax expense, and other occupancy costs
resulted in 2000. This increase followed an increase of $261,000, or 22.3%, in
1999. The cost of a new branch in Waupaca along with additional expense stemming
from the BLBNA acquisition and expansion opportunities in the Green Bay region
were reasons for the additional expense in 1999.
Equipment expense increased $166,000, or 13.4%, compared to 1999. This followed
an increase of $215,000, or 21.0%, in 1999. The increase resulted from
depreciation expense from past capital expenditures for equipment that were made
to enhance the Company's technological capabilities. The addition of branches in
2000 also accounted for an increase in equipment expense in 2000.
Data processing expense in 2000 increased $60,000, or 6.9%, due to an increase
in the volume of transaction activity processed, conversion expense, and
technology enhancements. This followed an increase of $173,000, or 24.7%, in
1999 compared to 1998. Management estimates that data processing expense should
show relatively flat increases with only adjustments related to any volume
increases incurred by the Company.
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result, the
Company has shown varied results. Other real estate owned showed net income of
$22,000 in 2000 as a result of various gains taken on property sales. Gains of
$73,000 were taken from lot sales of Idlewild Valley, Inc., a former subsidiary
of the Bank whose value was written off in 1988. In addition, gains of $110,000
from three commercial property sales and $72,000 from seven residential property
sales were realized in 2000. These were offset by losses of $2,000 from the sale
of one commercial property and two residential properties. Various operating
expenses, net of income, of other real estate totaling $231,000 occurred in
2000. Other real estate owned expenses resulted in net income of $117,000 in
1999. Gains of $232,000 were realized from lot sales of Idlewild Valley, Inc. in
1999. In addition, gains of $69,000 from three commercial property sales and
$33,000 from three residential property sales were realized in 1999. These were
offset by losses of $56,000 from the sale of one commercial property and three
residential properties. Various operating expenses, net of income, of other real
estate totaling $161,000 occurred in 1999. Other real estate owned expenses
showed a net loss of $15,000 in 1998,
36
37
stemming from various operating expenses incurred on property held during the
year.
Other operating expenses in 2000 increased $33,000 or .8%. This compares to an
increase of $1 million, or 32.2%, in 1999 compared to 1998. Included in 2000
expenses were amortization of goodwill related to the Four Seasons acquisition
of $327,000, the same as in 1999, and amortization of $159,000, as compared to
$126,000 in 1999, related to the BLBNA acquisition.
Supplies expense shows an increase of $94,000, or 21.3%, in 2000 as compared to
1999. This increase occurred as a result of additional branches coming online
during the year 2000.
Payments to regulatory agencies decreased $41,000 to $140,000 for 2000. For the
Bank, these charges related to a debt service assessment related to Financing
Corporation ("FICO") for 2000 and a Federal Deposit Insurance Corporation
("FDIC") assessment for the first quarter of 2000. As a result of a change in
rating assigned of 2A, rating for adequately capitalized institutions, the Bank
experienced higher assessment costs for the last quarter of 1999 and first
quarter of 2000. The higher assessment occurred as a result of the "Total
Risk-Based Capital Ratio" decreasing to a level below 10%. Prior to the merger
of the Bank and BLBNA, BLBNA had been assigned a risk classification rating of
3B, rating assigned to troubled and critically under capitalized institutions,
therefore in addition to a FICO assessment, BLBNA also received a FDIC
assessment for its Bank Insurance Fund. The Bank's risk classification changed
to 1A, rating assigned to well-capitalized institutions, on May 31, 2000,
thereby enabling Bank to reduce FDIC premiums accordingly for the remainder of
2000. For additional information regarding the Company's capital adequacy, see
"Capital Resources" below.
Other items comprising other operating expense shows a decrease of $56,000 or a
1.8% decrease in 2000 compared to 1999. Additional marketing and advertising
expense of $135,000 account for some of this increase, as entry into newer
markets contributed to more extensive and costlier media advertising expense.
Loan and collection expense decreased $161,000, the result of less costly legal
and collection actions occurring during the year, especially as it involved the
BLBNA loans. Legal expenses decreased $173,000 during 2000, primarily the result
of the completion of various legal actions stemming from the operations of the
former BLBNA. The overhead ratio, which is computed by subtracting non-interest
income from non-interest expense and dividing by average total assets was 1.97%
for 2000 compared to 2.08% for 1999 and 1.91% for 1998. The Company continues
its commitment to deliver quality service and products to its customer base.
Income Taxes
Income tax expense for the Company in 2000 was $2.8 million, an increase of
$178,000 or 6.8% compared to 1999. This followed an increase of $353,000 or
15.7% in 1999 compared to 1998. The higher tax
37
38
expense in 2000 and 1999 reflected the Company's increase in before tax earnings
offset by an increase in tax-exempt interest income.
The Company's effective tax rate, income tax expense divided by income before
taxes, was 29.3% in 2000 compared with 27.3% in 1999 and 27.2% in 1998. Of the
29.3% effective tax rate for 2000, the federal effective tax rate was 26.0%
while the Wisconsin State effective tax rate was 3.3%.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been recognized to offset the related deferred tax assets due to the uncertainty
of realizing tax benefits of a portion of loan loss and mortgage servicing
differences.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Balance Sheet Analysis
Loans
Total loans outstanding grew to $555.1 million at December 31, 2000, a 24.2%
increase from the end of 1999. This follows a 9.7% increase at December 31, 1999
over 1998 year end.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small businesses. Loans of this type are in a
broad range of industries and include service, retail, wholesale, and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door, Brown, Outagamie, Waupaca, Waushara and Kewaunee counties,
Wisconsin. The credit risk related to commercial loans made is largely
influenced by general economic conditions, especially those applicable to the
Northeast Wisconsin market area, and the resulting impact on a borrower's
operations.
Commercial loans and commercial real estate loans (including construction loans)
totaled $377.4 million at year end 2000 and comprised 68.0% of the loan
portfolio compared with 65.7% of the portfolio at the end of 1999. Loans in
these classifications grew $83.4 million or 28.4% during 2000.
38
39
The following table reflects composition (mix) of the loan portfolio at December
31 (in thousands of dollars):
2000 1999 1998
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
Amount of loans by type
Real estate-mortgage
- -----------------------
Commercial $251,971 45.4% $201,301 45.0% $178,846 43.9%
1-4 Family residential
- ----------------------
First liens $109,173 19.7% $ 95,255 21.3% $101,391 24.9%
Junior liens $ 26,513 4.8% $ 23,811 5.3% $ 17,122 4.2%
Home equity $ 24,464 4.4% $ 18,963 4.3% $ 18,051 4.4%
Commercial,financial
and agricultural $ 83,897 15.1% $ 66,159 14.8% $ 67,550 16.6%
Real estate-construction $ 41,524 7.5% $ 26,535 5.9% $ 9,553 2.3%
Installment
- -----------
Credit cards and related
plans $ 2,140 0.4% $ 1,810 0.4% $ 1,809 0.4%
Other $ 15,785 2.8% $ 13,636 3.1% $ 14,105 3.5%
Less: deferred fees, net
of costs $ 360 0.1% $ 451 0.1% $ 779 0.2%
Total loans (net of
unearned income) $555,107 $447,019 $407,648
1997 1996
---- ----
% of % of
Amount Total Amount Total
Amount of loans by type
Real
estate-mortgage
- ---------------
Commercial $118,103 40.2% $104,391 40.0%
1-4 Family residential
- ----------------------
First liens $ 67,270 22.9% $ 57,319 22.0%
Junior liens $ 16,571 5.7% $ 15,416 5.9%
Home equity $ 16,714 5.7% $ 10,803 4.1%
Commercial,financial and
agricultural $ 47,078 16.1% $ 46,900 18.0%
Real estate-
construction $ 14,760 5.0% $ 11,365 4.4%
39
40
Installment
- -----------
Credit cards and related
plans $ 1,790 0.6% $ 2,069 0.8%
Other $ 11,690 4.0% $ 13,164 5.0%
Less: deferred fees, net
of costs $ 538 0.2% $ 573 0.2%
Total loans (net of
unearned income) $293,438 $260,854
Real estate loans (including construction loans) secured by non-residential real
estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, they are combined with
commercial loans for purposes of analysis and discussion.
Management uses an active credit risk management process for commercial loans to
ensure that sound and consistent credit decisions are made. Management attempts
to control credit risk by adhering to detailed underwriting procedures,
performing comprehensive loan administration, and undertaking periodic review of
borrowers' outstanding loans and commitments. Borrower relationships are
formally reviewed periodically during the life of the loan. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Company's loan portfolio is diversified by types of borrowers and industry
groups within the market areas that it serves. Significant loan concentrations
are considered to exist for a financial entity when such amounts are loans to a
multiple of borrowers engaged in similar activities that cause them to be
similarly impacted by economic or other conditions. The Company has identified
certain industry groups within its market area, including lodging, restaurants,
retail shops, small manufacturing, real estate rental properties and real estate
development. At December 31, 2000, there existed no industry group
concentrations in the Company's loans that exceeded 10% of total loans.
Although management does not believe significant industry group loan
concentrations exist in the Company's loan portfolio, it is aware that its
market area is heavily reliant on seasonal tourism. As a result, a decrease in
tourism could adversely affect one or more industry groups in the Company's loan
portfolio, which could have a corresponding adverse effect on the Company's
earnings.
At the end of 2000, residential real estate mortgage loans totaled $160.1
million and comprised 28.9% of the loan portfolio. These loans grew $22.1
million or 16.0% during 2000. Residential real estate loans consist of
conventional home mortgages, adjustable indexed interest rate mortgage loans,
home equity loans, and secondary home mortgages. Loans are primarily for
properties within the market areas served by the Company. Residential real
estate loans generally contain a limit
40
41
for the maximum loan to collateral value of 75% to 80%. Private mortgage
insurance may be required when the loan to value exceeds these limits.
Residential real estate loans are written normally with a one or three year
adjustment rate feature.
In 1997, the Company offered adjustable indexed interest mortgage loans based
upon market demands. At year end 2000, those loans totaled $49.5 million
dollars. Adjustable indexed interest rate mortgage loans contain an interest
rate adjustment provision tied to the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, plus an additional
mark-up of 2.75% (the "index") which varies with the mortgage loan product.
Interest rates on indexed mortgage loans are adjusted, up or down, on
predetermined dates fixed by contract, in relation to and based on the index or
market interest rates as of a predetermined time prior to the adjustment date.
Adjustable indexed interest rate mortgage loans have an initial period, ranging
from one or three years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps which vary with the product. Annual limits on interest rate increases are
2% while aggregate lifetime interest rate increases over the term of the loan
are currently at 6% above the original mortgage loan interest rate. The Company
also participates in a secondary fixed rate mortgage program under the Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines. These loans are sold on the
secondary market and the Company retains servicing rights. At December 31,
2000, these loans totaled $32.3 million.
Additionally in the last quarter of 1997, the Company began to offer fixed rate
mortgages through participation in secondary fixed rate mortgage programs under
private investors. These loans are sold on the secondary market with servicing
rights sold retained by buyer. In 2000, the Company sold $17.3 million mortgage
loans through the secondary programs.
Installment loans to individuals totaled $17.9 million, or 3.2%, of the total
loan portfolio at December 31, 2000 compared to $15.4 million, or 3.5%, at end
of 1999. Installment loans include short-term installment loans, direct and
indirect automobile loans, recreational vehicle loans, credit card loans, and
other personal loans. Individual borrowers may be required to provide collateral
or a satisfactory endorsement or guaranty from another party, depending upon the
specific type of loan and the creditworthiness of the borrower. Loans are made
to individual borrowers located in the market areas served by the Company.
Credit risks for loans of this type are generally influenced by general economic
conditions (especially in the market areas served), the characteristics of
individual borrowers and the nature of the loan collateral. Credit risk is
primarily controlled by reviewing the creditworthiness of the borrowers as well
as taking the appropriate collateral and guaranty positions on such loans.
Critical factors in the overall management of credit quality are sound loan
underwriting and administration, systematic monitoring of existing
41
42
loans and commitments, effective loan review on an ongoing basis, adequate
allowance for loan losses, and conservative non-accrual and charge-off policies.
Risk Management and the Allowance for Loan Losses
The loan portfolio is the Company's primary asset subject to credit risk. To
reflect this credit risk, the Company sets aside an allowance or reserve for
probable credit losses through periodic charges to earnings. These charges are
shown in the Company's consolidated income statement as provision for loan
losses. See "Provision for Loan Losses" above. Credit risk is controlled and
monitored through the use of lending standards, a thorough review of potential
borrowers, and an ongoing review of payment performance. Asset quality
administration, including early identification of problem loans and timely
resolution of problems, further enhances management of credit risk and
minimization of loan losses. All specifically identifiable and quantifiable
losses are immediately charged off against the allowance.
Management reviews the adequacy of the Allowance for Loan Losses ("allowance" or
"ALL") on a quarterly basis to determine whether, in management's estimate, the
allowance is adequate to provide for probable losses inherent in the loan
portfolio as of the balance sheet date. Management's evaluation of the adequacy
of the ALL is based primarily on management's periodic assessment and grading of
the loan portfolio as described below. Additional factors considered by
management include the consideration of past loan loss experience, trends in
past due and nonperforming loans, risk characteristics of the various
classifications of loans, current economic conditions, the fair value of
underlying collateral, and other regulatory or legal issues that could affect
credit losses.
Loans are initially graded when originated. They are re-graded as they are
renewed, when there is a loan to the same borrower, when identified facts
demonstrate heightened risk of nonpayment, or if they become delinquent. The
loan review, or, grading process attempts to identify and measure problem and
watch list loans. Problem loans are those loans that management determines has a
higher than average risk for default, with workout and/or legal action probable
within one year. These loans are reported at least quarterly to the directors'
loan committee and reviewed at the officers' loan committee for action to be
taken. Watch list loans are those loans considered as having weakness detected
in either character, capacity to repay or balance sheet concerns and prompt
management to take corrective action at the earliest opportunity. Problem and
watch list loans generally exhibit one or more of the following characteristics:
1. Adverse financial trends and condition
2. Decline in the entire industry
3. Managerial problems
4. Customer's failure to provide financial information or other
collateral documentation
42
43
5. Repeated delinquency, overdrafts or renewals
Every significant problem credit is reviewed by the loan review process and
assessments are performed quarterly to confirm the risk rating, proper
accounting and the adequacy of loan loss reserve assigned.
After reviewing the gradings in the loan portfolio, management will allocate or
assign a portion of the ALL to categories of loans and individual loans to cover
management's estimate of probable loss. Allocation is related to the grade of
the loan and includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS 118"). Allocations also are made for unrated loans, such as
credit card loans, based on historical loss experience adjusted for portfolio
activity. The indirect risk in the form of off-balance sheet unfunded
commitments are also taken into consideration. These allocated reserves are
further supplemented by unallocated reserves based on management's estimate
regarding risk of error, local economic conditions and any other relevant
factors. Management then compares the amounts allocated for probable losses to
the current allowance. To the extent that the current allowance is insufficient
to cover management's best estimate of probable losses, management records
additional provision for credit loss. If the allowance is greater than required
at that point in time, provision expense is adjusted accordingly.
As the following table indicates, the ALL at December 31, 2000 was $7.0 million
compared with $7.6 million at the end of 1999. Loans increased 24.2% from
December 31, 1999 to December 31, 2000, while the allowance as a percent of
total loans declined due to reduced loan loss provision for the year 2000 in
addition to net charge-offs for the year. The December 31, 2000 ratio of ALL to
outstanding loans was 1.26% compared with 1.70% at December 31, 1999 and the ALL
as a percentage of nonperforming loans was 53.9% at December 31, 2000 compared
to 60.7% at end of year 1999. Based on management's analysis of the loan
portfolio risk at December 31, 2000, a provision expense of $545,000 was
recorded for the year ended December 31, 2000, a decrease of $305,000 or 35.9%
compared to the same period in 1999. Net loan charge-offs of $1.1 million
occurred in 2000, and the ratio of net charge-offs to average loans for period
ended December 31, 2000 was .23% compared to .80% at December 31, 1999. Real
estate-mortgage charge-offs represented 112.5% of the total net charge-offs for
the year 2000. Commercial mortgage loan charge-offs accounted for $754,000 for
the mortgage total and residential mortgage loan charge-offs totaled $540,000.
Loans charged-off are subject to periodic review and specific efforts are taken
to achieve maximum recovery of principal and accrued interest.
Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
For period ended December 31,
43
44
2000 1999 1998 1997 1996
Allowance for Loan Losses ("ALL")
Balance at beginning of period 7,611 11,035 3,881 2,893 2,617
Balance related to acquisitions (900) 6,487 120
Provision for loan losses 545 850 1,135 1,115 400
Charge-offs 2,074 5,362 845 321 286
Recoveries 924 1,988 377 194 42
------- ------- ------- ------ ------
Balance at end of period 7,006 7,611 11,035 3,881 2,893
Net charge-offs ("NCO's") 1,150 3,374 468 127 244
Non-performing assets:
Nonaccrual loans 8,479 8,086 11,060 1,720 3,677
Accruing loans past due 90 days or more 0 0 0 0 0
Restructured loans 4,510 4,458 3,028 2,930 1,000
Total nonperforming loans ("NPL's") 12,989 12,544 14,088 4,650 4,677
Other real estate owned 877 71 566 229 339
------- ------- ------- ------ ------
Total nonperforming assets ("NPA's") 13,866 12,615 14,654 4,879 5,016
Ratios:
ALL to NCO's 6.09 2.26 23.58 30.56 11.86
NCO's to average loans 0.23% 0.80% 0.14% 0.05% 0.10%
ALL to total loans 1.26% 1.70% 2.71% 1.32% 1.11%
NPL's to total loans 2.34% 2.81% 3.46% 1.58% 1.79%
NPA's to total assets 1.80% 1.95% 2.41% 1.08% 1.27%
ALL to NPL's 53.94% 60.67% 78.33% 83.46% 61.86%
Consistent with generally accepted accounting principles ("GAAP") and with the
methodologies used in estimating the unidentified losses in the loan portfolio,
the ALL consists of several components.
First, the allowance includes a component resulting from the application of the
measurement criteria of SFAS 114 and SFAS 118. The amount of this component is
included in the various categories presented in the following table.
The second component is statistically based and is intended to provide for
losses that have occurred in large groups of smaller balance loans, the credit
quality of which is impracticable to re-grade at end of each period. These loans
would include residential real estate, consumer loans and loans to small
businesses generally of $100,000 and less. The loss factors are based primarily
on the Company's historical loss experience tracked over a three-year period and
accordingly will change over time. Due to the fact that historical loss
experience varies for the different categories of loans, the loss factors
applied to each category also differ.
Finally, the "unallocated" component of the ALL is intended to absorb losses
that may not be provided for by the other components. There are
44
45
several reasons that the other components discussed above might not be
sufficient to absorb the losses present in portfolios, and the unallocated
portion of the ALL is used to provide for the losses that have occurred because
of these reasons.
The first reason stems from the fact that there are limitations inherent to any
credit risk grading process. Even for experienced loan reviewers, grading loans
and estimating probable losses involves a significant degree of judgement
regarding the present situation with respect to individual loans and the
portfolio as a whole. The overall number of loans in the portfolio also makes it
impracticable to re-grade every loan each quarter. Therefore, the possibility
exists that some currently performing loans will not be as strong as their last
grading estimate and an insufficient portion of the allowance will have been
allocated to them. In addition, it's possible that grading and loan review may
be done without all relevant facts. Troubled borrowers may inadvertently or
deliberately omit important information from correspondence with lending
officers regarding their financial condition and the diminished strength of
repayment sources.
The second is that loss estimation factors are based on historical loss totals.
As such, the factors may not give sufficient weight to such considerations as
the current general economic and business conditions that affect the Company's
borrowers and specific industry conditions that affect borrowers in that
industry. For example, with respect to loans to borrowers who are influenced by
trends in the local tourist industry, management considers the effects of
weather conditions, market saturation, and the competition for borrowers from
other tourist destinations and attractions.
Third, the loss estimation factors do not give consideration to the seasoning of
the loan portfolio. Seasoning is relevant because losses are less likely to
occur in loans that have been performing satisfactorily for several years than
in loans that are more recent.
Finally, the loss estimation factors do not give consideration to the interest
rate environment. For example, borrowers with variable rate loans may be less
able to manage their debt service if interest rates rise.
For these reasons, management regards it as both a more practical and a more
prudent practice to maintain the total allowance at an amount larger than the
sum of the amounts allocated as described above.
The following table shows the amount of the ALL allocated for the time periods
indicated to each loan type as described. It also shows the percentage of
balances for each loan type to total loans. In general, it would be expected
that those types of loans which have historically more loss associated with them
will have a proportionally larger amount of the allowance allocated to them than
do loans that have less risk.
Consideration for making such allocations is consistent with the factors
discussed above, and all of the factors are subject to change;
45
46
thus, the allocation is not necessarily indicative of the loan categories in
which future loan losses will occur. It would also be expected that the amount
allocated for any particular type of loan will increase or decrease
proportionately to both the changes in the loan balances and to increases or
decreases in the estimated loss in loans of that type. In other words, changes
in the risk profile of the various parts of the loan portfolio should be
reflected in the allowance allocated.
Allocation of the Reserve for Loan Losses
(dollars in thousands)
For years ended December 31,
2000 1999 1998
Amount Amount Amount
------ Percent of ------ Percent of ------ Percent of
loans to loans to loans to
total total total
loans loans loans
----- ----- -----
Commercial, financial &
agricultural $ 1,073 15.09% $ 814 14.80% $ 1,025 19.34%
Commercial real estate 2,993 45.27% 2,605 44.93% 4,925 42.26%
Real estate
- -----------
Construction 302 7.47% 29 5.94% 50 2.26%
Residential 1,395 24.54% 2,484 26.64% 3,350 28.11%
Home equity lines 148 4.40% 84 4.24% 150 4.27%
Consumer 140 2.84% 145 3.05% 325 3.33%
Credit card 68 0.39% 42 0.40% 75 0.43%
Loan commitments 135 130
Not specifically allocated 752 1,278 1,135
------- ------ -------
Total $ 7,006 100.00% $7,611 100.00% $11,035 100.00%
1997 1996
Amount Amount
------ Percent of ------ Percent of
loans to loans to
total total
loans loans
----- -----
Commercial, financial &
agricultural $ 800 18.77% $ 800 19.76%
Commercial real estate 1,125 38.77% 800 38.94%
46
47
Real estate
- -----------
Construction 50 4.87% 50 4.26%
Residential 745 27.64% 700 27.28%
Home equity lines 25 5.51% 50 4.05%
Consumer 270 3.85% 275 4.93%
Credit card 75 0.59% 85 0.78%
Loan commitments
Not specifically allocated 791 133
--- ---
Total $3,881 100.00% $2,893 100.00%
While there exists probable asset quality problems in the loan portfolio,
including loans acquired in the BLBNA purchase, management believes sufficient
reserves have been provided in the ALL to absorb probable losses in the loan
portfolio at December 31, 2000. In the time period subsequent to the purchase of
BLBNA, management has undergone extensive efforts to identify and evaluate
problem loans stemming from the BLBNA acquisition. As part of their examination
of the Company since the BLBNA acquisition, various regulatory agencies have
also performed a review of these loans. Although no assurance can be given,
management feels that the majority of problem loans associated with BLBNA
have been identified. Ongoing efforts are being made to collect these loans, and
the Company involves the legal process when it believes it necessary to minimize
the risk of further deterioration of these loans for full collectibility.
While management uses available information to recognize losses on loans, future
adjustments to the ALL may be necessary based on changes in economic conditions
and the impact of such change on the Company's borrowers. As an integral part
of their examination process, various regulatory agencies also review the ALL.
Such agencies may require that changes in the ALL be recognized when their
credit evaluations differ from those of management, based on their judgements
about information available to them at the time of their examination.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management encourages early identification of non-accrual and problem loans in
order to minimize the risk of loss. This is accomplished by monitoring and
reviewing credit policies and procedures on a regular basis.
Non-performing loans remain a leading indicator of future loan loss potential.
Non-performing loans are defined as non-accrual loans, guaranteed loans 90 days
or more past due but still accruing, and restructured loans. Additionally,
whenever management becomes aware of
47
48
facts or circumstances that may adversely impact on the collection of principal
or interest on loans, it is the practice of management to place such loans on
non-accrual status immediately rather than waiting until the loans become 90
days past due. The accrual of interest income is discontinued when a loan
becomes 90 days past due as to principal or interest. When interest accruals are
discontinued, interest credited to income is reversed. If collectibility is in
doubt, cash receipts on non-accrual loans are used to reduce principal rather
than recorded as interest income.
Restructuring loans involve the granting of some concession to the borrower
involving a loan modification, such as payment schedule or interest rate
changes.
Non-performing loans at December 31, 2000 were $13.0 million compared to $12.5
million at December 31, 1999. Non-accrual loans represented $8.5 million of the
total of non-performing loans, of which $4.6 million was acquired with the BLBNA
acquisition. Real estate non-accrual loans account for $7.4 million of the
total, of which $3.3 million was residential real estate and $3.9 million was
commercial real estate, while commercial and industrial non-accruals account for
$828,000. Management believes collateral is sufficient to offset losses in the
event additional legal action would be warranted to collect these loans.
Troubled debt restructured loans represent $4.5 million of non-performing loans
at December 31, 2000 and December 31, 1999. Approximately $2.9 million of this
total consists of three commercial real estate credits granted various
concessions and have experienced past cash flow problems. These credits were
current at December 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 the end of 2000 was 2.3%
compared to 2.8% at end of year 1999. The Company's ALL was 53.9% of total
non-performing loans at December 31, 2000 compared to 60.7% at end of year 1999.
Potential problem loans are performing loans that management believes may incur
difficulties in complying with loan repayment terms. Management's decision to
place loans in this category does not necessarily mean that the Company expects
to take losses on such loans, but that management needs to be more vigilant in
its efforts to oversee the loans and recognize that a higher degree of risk is
associated with these nonperforming loans. At December 31, 2000, potential
problem loans amounted to a total of $8.7 million compared to a total of $1.4
million at end of 1999. $4.4 million of the problem loans stem from two
commercial credits experiencing cash flow concerns. $382,000 of the problem
loans consist of one commercial credit which is going through liquidation. The
credit has been written down to estimated fair market value. Various commercial
loans totaling $3.3 million, mortgage loans totaling $548,000 and consumer loans
totaling $17,000 make up the balance of the total potential problem loans. With
the exceptions noted above, potential problem loans are not concentrated in a
particular industry but rather cover a diverse range of businesses.
48
49
Except as noted above, management does not presently expect significant losses
from credits in the potential problem loan category.
Other real estate owned which represents property that the Company acquired
through foreclosure or in satisfaction of debt, consisted of eight properties
totaling $877,000 at end of year 2000. This compared to two properties totaling
$71,000 at end of year 1999. Management actively seeks to ensure that properties
held are administered to minimize any risk of loss.
Net cost of operation of other real estate for 2000, 1999, and 1998 consists of
the following:
2000 1999 1998
---- ---- ----
(dollars in thousands)
Loss on disposition of properties
and other costs $ 254 $ 219 $ 15
Gains on disposition of properties
and expense recoveries $ 276 $ 336
Net (gains) losses $ (22) $(117) $ 15
Investment Portfolio
The investment portfolio is intended to provide the Company with adequate
liquidity, flexibility in asset/liability management and, lastly, its earning
potential.
Investment securities are classified as held to maturity or available for sale.
The Company has determined at year end 2000 that all of its taxable issues,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 2000 were to be classified as available for sale. In addition, the
Company had determined that its non-taxable local municipals were classified as
available for sale. In the case of the Company's non-taxable issues and
municipal bond investments purchased prior to 1996, they were determined to be
held to maturity. This determination was made because the Company wanted to
retain the municipal bond issues due to their higher after-tax yields, and local
non-taxable issues due to their lessened marketability. Held to maturity
securities are those securities the Company has both the intent and ability to
hold until maturity. Under this classification, securities are stated at cost,
adjusted for amortization of premiums and accretion of discounts which are
recognized as adjustments to interest income. Gains or losses on disposition are
based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method. At December 31, 2000, securities
held to maturity had an aggregate market value of approximately $18.5 million
compared with amortized cost of $18.4 million.
49
50
Investment securities classified as available for sale are those securities
which the Company has determined might be sold to manage interest rates or in
response to changes in interest rates or other economic factors. While the
Company has no current intention of selling those securities, they may not be
held to maturity. Investment securities available for sale at December 31, 2000
and 1999 are carried at market value. Adjustments up or down to market value at
December 31, 2000 and 1999 are recorded as a separate component of equity, net
of tax with one exception. In the event of a market value loss with regards to
investments held in the investment subsidiary, the market value loss is recorded
without a tax benefit since the loss would be treated as a capital loss. Premium
amortization and discount accretion are recognized as adjustments to interest
income. Realized gains or losses on disposition are based on the net proceeds
and the adjusted carrying amount of the securities sold using the specific
identification method. At December 31, 2000, securities available for sale had a
market and carrying value of $135.1 million. The reserve for market adjustment
of securities, net of tax, and reflected in the stockholders' equity section
stood at $553,000 at December 31, 2000.
At December 31, 2000 and 1999, the Company's investment portfolio did not
contain, other than U.S. treasury and federal agencies, securities of any single
issuer that were payable from and secured by the same source of revenue of
taxing authority where the aggregate book value of such securities exceed 10% of
stockholders' equity.
Investment securities averaged $152.8 million in 2000 compared with $147.4
million in 1999. The average balance of securities increased partly as a result
of investment earnings reinvested at the investment subsidiary during 2000. In
2000, taxable securities comprised approximately 68.0% of the total average
investments compared to 66.4% in 1999. Tax-exempt securities on average for 2000
accounted for 32.0% of the total average investments compared to 33.6% in 1999.
Deposits
Average total deposits for 2000 were $523.1 million, an increase of 6.1% over
1999. This follows a 27.5% increase in 1999 over 1998. BLBNA average deposits
accounted for 16.2% of the increase in 1999.
Non-interest bearing demand deposits in 2000 averaged $61.2 million, up 7.9%
from $56.8 million recorded in 1999. This $4.4 million increase is attributable
to improvement in the seasonal increases in these funds throughout the year
along with an emphasis of attracting new customer relationships and selling more
services to existing customers. December 31, 2000 non-interest-bearing demand
deposits were $69.1 million compared with $59.2 million at year end 1999.
Interest bearing deposits generally consist of interest-bearing checking,
savings deposits, money market accounts, individual retirement accounts ("IRAs")
and certificates of deposit ("CDs"). In 2000, interest-bearing deposits averaged
$461.9 million, an increase of 5.9%. Within the category of interest bearing
deposits, savings
50
51
deposits, including money market accounts, increased $22.9 million or 16.1%.
During the same period, time deposits, including CDs and IRAs decreased in
average deposits $6.7 million or 3.5%, primarily the result of a shift in
customer preferences. Average time deposits over $100,000 increased by $12.0
million or 22.5%. Time deposits greater than $100,000 were priced within the
framework of the Company's rate structure and did not materially increase the
average rates on deposit liabilities. Increased competition for consumer
deposits and customer awareness of interest rates continues to limit the
Company's core deposit growth in these types of deposits. Brokered CD's averaged
$13.4 million for 2000. At December 31, 2000, brokered CD's totaled $11.5
million.
Emphasis will be placed on generating additional core deposits in 2001 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.
The Company also may increase brokered CD's during the year 2001 as an
additional source of funds to provide for loan growth.
Short Term Borrowings and Other Borrowings
Short-term borrowings consist of federal funds purchased, securities under
agreements to repurchase, and advances from FHLB. Average 2000 short-term
borrowings were $41.8 million compared to $10.8 million during 1999. The
increase of $31.0 million occurred as a result of higher than expected loan
demand and increased investment balances.
Average short-term borrowings decreased $4.3 million or 28.4% in 1999 from 1998
due to other forms of funding used during the year.
Other borrowings consist of term loans with FHLB and three separate borrowings
lent to Baylake by an unaffiliated bank. Average other borrowings in 2000 were
$83.6 million compared to $56.4 million. The increase of $27.2 million or 48.1%
occurred as a result of higher than expected loan demand.
Federal funds are purchased from money center banks and correspondent banks at
prevailing overnight interest rates. Securities are sold to bank customers under
repurchase agreements at prevailing market rates. Borrowings with the FHLB are
secured by one to four family residential mortgages and eligible investment
securities allowing the Company to use it for additional funding purposes. These
borrowings with original maturities less than one year are included as short
term borrowings. Borrowings with original maturities greater than one year or
callable notes with call features greater than one year are included in the
other borrowings category. The loan balances with the FHLB showed the most
fluctuation as an additional $44.8 million in average balances were borrowed
during the course of 2000.
51
52
Long Term Debt
Long-term debt of $211,000 consists of a land contract requiring annual payments
of $53,000 plus interest calculated at prime plus one quarter of one percent.
The land contract was for the purchase of one of the properties in the Green Bay
region for a branch location.
Liquidity
Liquidity management refers to the ability of the Company to ensure that cash is
available in a timely manner to meet loan demand and depositors' needs, and to
service other liabilities as they become due, without undue cost or risk, and
without causing a disruption to normal operating activities. The Company and the
Bank have different liquidity considerations.
The Company's primary sources of funds are dividends and interest, and proceeds
from the issuance of its securities. The Company manages its liquidity position
in order to provide funds necessary to pay dividends to its shareholders.
Dividends received from Bank totaled $2.8 million in 2000 and will continue to
be the Company's main source of long-term liquidity. The dividends from the Bank
were sufficient to pay cash dividends to the Company's shareholders of $3.0
million in 2000.
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 their assets and strong
capital positions.
Maturing investments have been a primary source of liquidity at the Bank. $22.0
million in investments were purchased in 2000. This resulted in net cash of $6.4
million used in investing activities for 2000. At December 31, 2000, the
carrying or book value of investment securities maturing within one year
amounted to $12.6 million or 8.3% of the total investment securities portfolio.
This compares to a 4.3% level for investment securities with one year or less
maturities as of December 31, 1999. Within the investing activities of the
statement of cash flows, sales and maturities of investment securities during
2000 totaled $15.6 million. At the end of 2000, the investment portfolio
contained $100.0 million of U.S. Treasury and federal agency backed securities
representing 65.1% of the total investment portfolio. These securities tend to
be highly marketable and had a market value above amortized cost at end of year
2000 amounting to $105,000.
Deposit growth is another source of liquidity for the Bank. As a financing
activity reflected in 2000 Consolidated Statements of Cash Flows, deposits
provided $49.2 million in cash inflow during 2000. The Company's overall average
deposit base grew $30.3 million or 6.2% during 2000. Deposit growth, especially
core deposits, is the most stable source of liquidity for the Bank.
52
53
Federal funds sold averaged $14,000 in 2000 compared to $5.4 million in 1999.
The reduction was the result of above average loan growth offset by a slower
growth in deposits. Funds provided from the maturity of these assets typically
are used as funding sources for seasonal loan growth, which typically have
higher yields. Short-term and liquid by nature, federal funds sold generally
provide a yield lower than other earning assets. The Bank has a strategy of
maintaining a sufficient level of liquidity to accommodate fluctuations in
funding sources and will at times take advantage of specific opportunities to
temporarily invest excess funds at narrower than normal rate spreads while still
generating additional interest revenue. At December 31, 2000, the Bank had no
federal funds sold.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $150.5 million of loans maturing within one year, or 27.1% of total
loans.
Within the classification of short-term borrowings and other borrowings at
year-end 2000, federal funds purchased and securities sold under agreements to
repurchase totaled $38.3 million compared with $9.2 million at the end of 1999.
Federal funds are purchased from various upstream correspondent banks while
securities sold under agreements to repurchase are obtained from a base of
business customers. Borrowings from FHLB, short-term or term, are another source
of funds. They totaled $112.0 million at year end 2000.
The Bank's liquidity resources were sufficient in 2000 to fund the growth in
loans and investments, increase the volume of interest earning assets and meet
other cash needs when necessary.
Management expects that deposit growth will continue to be the primary funding
source of the Bank's liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Although federal funds purchased and borrowings from
the FHLB provided funds in 2000, management expects deposit growth, including
brokered CD's, to be a reliable funding source in the future as a result of
branch expansion efforts and marketing efforts to attract and retain core
deposits. Shorter-term liquidity needs will mainly be derived from growth in
short-term borrowings, maturing federal funds sold and portfolio investments,
loan maturities and access to other funding sources.
Management believes that, in the current economic environment, the Company's and
the Bank's liquidity position is adequate. To management's knowledge, there are
no known trends nor any known demands, commitments, events or uncertainties that
will result or are reasonably likely to result in a material increase or
decrease in the Bank's or the Company's liquidity.
Interest Rate Risk
53
54
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. All banks assume interest rate risk as an
integral part of normal banking operations. Control and monitoring of interest
rate risk is a primary objective of asset/liability management. Baylake's
Asset/Liability Committee ("ALCO") manages risks associated with changing
interest rates, changing asset and liability mixes, and the impact on such
changes on earnings. The sensitivity of net interest income to market rate
changes is evaluated monthly by ALCO.
In order to limit exposure to interest rate risk, the Company has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. The Company has focused on the establishment of
adjustable rate mortgages ("ARM's") in its residential lending product line; the
concerted efforts made to attract and sell core deposit products through the use
of Company's branching and delivery systems and marketing efforts; and the use
of other available sources of funding to provide longer term funding
possibilities.
Interest rate sensitivity analysis 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
54
55
sensitivity to changes in interest rates. It is a static indicator and does not
reflect various repricing characteristics. Accordingly, a "static gap analysis"
may not be indicative of the sensitivity of net interest income in a changing
rate environment.
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
As of December 31, 2000
- -------------------------------------------------------------------------------------------------------------------
Within Four to Seven to One Over Total
three six months twelve year to five
months months five years
years
Earning assets
Investment securities 9,980 3,060 11,746 79,509 55,171 159,466
Loans and leases:
Variable rate 149,349 20,737 27,175 76 207,337
Fixed rate 39,801 50,960 37,101 207,563 4,590 340,015
------- ------- ------- ------- ------- -------
Total loans and leases 199,150 71,697 37,101 234,738 4,666 547,352
------- ------- ------- ------- ------- -------
Total earning assets 209,130 74,757 48,847 314,247 59,837 706,818
------- ------ ------- ------- ------- -------
Interest bearing
liabilities
NOW accounts 12,395 37,187 49,582
Savings deposits 139,110 44,259 183,369
Time deposits 60,613 61,547 107,092 21,902 251,154
Borrowed funds 125,541 7,500 0 25,159 158,200
------- ------- ------- ------- -------
Total interest bearing
liabilities 337,659 69,047 107,092 128,507 0 642,305
Interest sensitivity ------- ------- ------- ------- ------- -------
(within periods) (128,529) 5,710 (58,245) 185,740 59,837 64,513
Cumulative interest
sensitivity GAP (128,529) (122,819) (181,064) 4,676 64,513
Ratio of cumulative
interest rate
sensitivity GAP to
rate sensitive assets (18.18%) (17.38%) (25.62%) 0.66% 9.13%
55
56
Ratio of rate
sensitive assets to
rate sensitive
liabilities 61.94% 108.27% 45.61% 244.54%
Cumulative ratio of
rate sensitive assets
to rate sensitive
liabilities 61.94% 69.80% 64.76% 100.73% 110.04%
In addition to the "static gap analysis", determining the sensitivity of future
earnings to a hypothetical plus or minus 200 basis point parallel rate shock can
be accomplished through the use of simulation modeling. Simulation of earnings
includes the modeling of the balance sheet as an ongoing entity. Balance sheet
items are modeled to project income based on a hypothetical change in interest
rates. The resulting net income for the next twelve-month period is compared to
the net income calculated using flat rates. This difference represents the
Company's earnings sensitivity to a plus or minus 200 basis point parallel
rate shock. The resulting simulations indicated a plus or minus 2.6% adjustment
in net income under these scenarios for the period ended December 31, 2000. This
result was within the policy limits established by the Company.
The results of the simulations are based solely on immediate and sustained
parallel changes in market rates and do not reflect the earnings sensitivity
that may arise from such factors as the change in spread between key market
rates and the shape of the yield curve. The above results also are considered to
be conservative estimates due to the fact that no management action is factored
into the analysis to deal with potential income variances.
Management continually reviews its interest risk position through the ALCO
process. Management's philosophy is to maintain relatively matched rate
sensitive asset and liability positions within the range described above in
order to provide earnings stability in the event of significant interest rate
changes.
Capital Resources
Stockholders' equity at December 31, 2000 increased $6.9 million or 15.0% to
$53.1 million, compared with $46.2 million at 1999 year end. This increase
includes an increase of $3.2 million to capital in 2000 due to the impact of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of this
increase, stockholders' equity would have increased $3.7 million or 7.7% for
2000 over 1999, which compares to an increase of $5.3 million or 12.3% for 1999
over 1998. With the SFAS 115 adjustment included in 1999 capital, capital
increased $938,000 or 2.1% compared to 1998 year end.
56
57
The Company's capital base (before SFAS 115 change) increased primarily due to
the retention of earnings. The Company's dividend reinvestment plan typically
provides capital improvement, as the holders of approximately 26% of
Company's Common Stock participate in the plan.
Cash dividends paid in 2000 were $.41 per share compared with $.37 in 1999. The
Company provided a 10.8% increase in normal dividends per share in 2000 over
1999 as a result of above average earnings.
In 1997, the Company's Board of Directors authorized management to repurchase up
to 7,000 shares of the Company's common stock each calendar quarter in the
market. The shares repurchased would be used to fill its needs for the dividend
reinvestment program, any future benefit plans, and the Company's stock purchase
plan. Shares repurchased are held as treasury stock and, accordingly, are
accounted for as a reduction of stockholders' equity. The Company repurchased
none of its common shares in 2000.
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.
The Federal Reserve Board has established capital adequacy rules which take into
account risk attributable to balance sheet assets and off-balance sheet
activities. All banks and bank holding companies must meet a minimum total
risk-based capital ratio of 8%. Of the 8% required, at least half must be
comprised of core capital elements defined as Tier 1 capital. The federal
banking agencies also have adopted leverage capital guidelines which banking
organizations must meet. Under these guidelines, the most highly rated banking
organizations must meet a leverage ratio of at least 3% Tier 1 capital to
assets, while lower rated banking organizations must maintain a ratio of at
least 4% to 5%. Failure to meet minimum capital requirements can initiate
certain mandatory -and possible additional discretionary- actions by regulators
that, if undertaken, could have a direct material effect on the consolidated
financial statements.
At December 31, 2000 and 1999, the Company was categorized as adequately and
well capitalized, respectively, under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Company's category.
To be well capitalized under the regulatory framework, the Tier 1 capital ratio
must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the
leverage ratio must meet or exceed 5%.
57
58
The following table presents the Company's and the Bank's capital ratios as of
December 31 for each of the previous two years.
Risk-Based Capital Ratios
To Be Well
Capitalized
Under Prompt
Corrective
For Capital Action
Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000:
Total Capital (to Risk Weighted
Assets):
The Company $54,055 8.92% $48,464 8.00% N/A N/A
The Bank 61,237 10.10% 48,512 8.00% 60,640 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
The Company 47,049 7.77% 24,232 4.00% N/A N/A
The Bank 54,232 8.94% 24,255 4.00% 36,384 6.00%
Tier 1 Capital (to Average Assets)
The Company 47,049 6.38% 29,518 4.00% N/A N/A
The Bank 54,232 7.35% 29,518 4.00% 36,897 5.00%
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets):
The Company $48,903 10.07% $38,867 8.00% N/A N/A
The Bank 48,230 9.86% 39,123 8.00% 48,905 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
The Company 42,811 8.81% 19,434 4.00% N/A N/A
The Bank 42,098 8.61% 19,562 4.00% 29,343 6.00%
Tier 1 Capital (to Average Assets)
The Company 42,811 6.79% 25,220 4.00% N/A N/A
The Bank 42,098 6.68% 25,220 4.00% 31,524 5.00%
Management believes that a strong capital position is necessary to take
advantage of opportunities for profitable expansion of product and
58
59
market share, and to provide depositor and investor confidence. The Company's
capital level is strong, but also must be maintained at an appropriate level to
provide the opportunity for a superior return on the capital employed.
Management actively reviews capital strategies for the Company to ensure that
capital levels are appropriate based on the perceived business risks, further
growth opportunities, industry standards, and regulatory requirements.
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 material Y2K problems in the future. However,
management has decided to maintain a Y2K specific contingency plan in an effort
to mitigate any such risks.
Item 7 A. Quantitative and Qualitative Disclosure about Market Risk.
Information required by this item is set forth in Item 7 under the captions
"Interest Rate Risk."
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes to related statements
thereto are set forth on the following pages.
59
60
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 2000, 1999 , and 1998
60
61
[intentionally left blank]
61
62
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 63
FINANCIAL STATEMENTS
Consolidated Balance Sheets 64 - 65
Consolidated Statements of Income 66
Consolidated Statements of Changes in Stockholder Equity 67
Consolidated Statements of Cash Flows 68 - 69
Notes to Consolidated Financial Statements 70 - 98
62
63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Baylake Corp.
Sturgeon Bay, Wisconsin
We have audited the accompanying consolidated balance sheets of Baylake
Corp. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholder equity, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly the consolidated financial position of Baylake Corp. and subsidiaries at
December 31, 2000 and 1999, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
Madison, Wisconsin /s/ SMITH & GESTELAND, LLP
January 25, 2001, except for Note 20
as to which the date is February 23, 2001 SMITH & GESTELAND, LLP
63
64
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED BALANCE SHEETS
December 31
2000 1999
-------------- -------------
(Thousands of dollars)
ASSETS
Cash and due from banks $ 21,695 $ 19,475
Investment securities available for sale (at market) 135,089 125,700
Investment securities held to maturity (market value
$18,503 and $19,259) 18,422 19,380
Loans held for sale 724 748
Loans 555,107 447,019
Less: Allowance for loan losses 7,006 7,611
------------- ------------
Loans, net of allowance for loan losses 548,101 439,408
Bank premises and equipment 21,313 18,463
Federal Home Loan Bank stock (at cost) 5,955 4,000
Accrued interest receivable 5,733 4,146
Income taxes receivable 1,135 1,161
Deferred income taxes 2,256 2,912
Goodwill 5,455 5,941
Other assets 6,390 4,976
------------- ------------
Total assets $ 772,268 $ 646,310
============= ============
The accompanying notes are an integral part of the financial statements.
64
65
2000 1999
-------------- -------------
(Thousands of dollars)
LIABILITIES
Domestic deposits
Noninterest bearing $ 69,149 $ 59,153
Interest bearing
NOW 49,582 49,061
Savings 183,369 150,468
Time, $100,000 and over 61,334 55,535
Other time 189,820 189,857
------------- ------------
Total interest bearing 484,105 444,921
------------- ------------
Total deposits 553,254 504,074
Short-term borrowings
Federal funds purchased, repurchase agreements,
and Federal Home Loan Bank advances 80,289 9,231
Accrued expenses and other liabilities 6,868 5,788
Dividends payable 819 743
Other borrowings 77,700 80,000
Long-term debt 211 264
------------- ------------
Total liabilities 719,141 600,100
------------- ------------
STOCKHOLDER EQUITY
Common stock $5 par value - authorized 10,000,000 shares; issued - 7,468,733
shares in 2000; 7,460,333 shares in 1999; outstanding -
7,445,574 shares in 2000; 7,437,174 shares in 1999 37,344 37,302
Additional paid-in capital 7,185 7,120
Retained earnings 8,670 5,012
Treasury stock (625) (625)
Accumulated other comprehensive income
Net unrealized gain (loss) on securities available for sale, net of
tax of $277 in 2000 and $515 in 1999 553 (2,599)
------------- ------------
Total stockholder equity 53,127 46,210
------------- ------------
Total liabilities and stockholder equity $ 772,268 $ 646,310
============= ============
65
66
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
2000 1999 1998
----------- ----------- -----------
(Amounts in thousands
except per share data)
Interest income
Interest and fees on loans $ 46,685 $ 37,586 $ 30,161
Interest on investment securities
Taxable 6,806 6,041 5,204
Exempt from federal income taxes 2,532 2,582 2,340
Other interest income 13 258 356
---------- ---------- ----------
Total interest income 56,036 46,467 38,061
---------- ---------- ----------
Interest expense
Interest on deposits 23,582 19,541 15,755
Interest on short-term borrowings 2,970 768 1,071
Interest on other borrowings 5,529 2,895 2,290
Interest on long-term debt 18 76 32
---------- ---------- ----------
Total interest expense 32,099 23,280 19,148
---------- ---------- ----------
Net interest income 23,937 23,187 18,913
Provision for loan losses 545 850 1,135
---------- ---------- ----------
Net interest income after provision for loan losses 23,392 22,337 17,778
---------- ---------- ----------
Other income
Fees from fiduciary activities 517 553 451
Fees from loan servicing 837 875 846
Fees for other services to customers 2,053 1,890 1,562
Gains from sales of loans 240 295 893
Securities losses, net (2)
Other income 1,039 945 625
---------- ---------- ----------
Total other income 4,686 4,556 4,377
---------- ---------- ----------
Other expenses
Salaries and employee benefits 10,353 9,700 7,772
Occupancy expense 1,643 1,430 1,169
Equipment expense 1,404 1,238 1,023
Data processing and courier 932 872 699
Operation of other real estate (22) (117) 15
Other operating expenses 4,280 4,247 3,213
---------- ---------- ----------
Total other expenses 18,590 17,370 13,891
---------- ---------- ----------
Income before income taxes 9,488 9,523 8,264
Income tax expense 2,778 2,600 2,247
---------- ---------- ----------
NET INCOME $ 6,710 $ 6,923 $ 6,017
========== ========== ==========
Basic earnings per common share $.90 $.94 $.82
Diluted earnings per common share $.87 $.90 $.80
The accompanying notes are an integral part of the financial statements.
66
67
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
For the Years Ended December 31
Accumulated
Common Stock Additional Other
------------------------- Paid-in Comprehensive Retained Treasury Total
Shares Amount Capital Income Earnings Stock Equity
----------- ---------- ----------- ---------------- ---------- --------- ----------
(Amounts in thousands except for shares)
1998
Balance - January 1, 1998 2,460,481 $ 12,302 $ 6,038 $ 1,311 $ 22,618 $ (414) $ 41,855
---------
Net income for the year 6,017 6,017
Net changes in unrealized gain on
securities available for sale, net
of $273 deferred taxes 490 490
---------
Comprehensive income 6,507
---------
Stock options exercised 13,500 68 76 144
Treasury stock acquired (211) (211)
Stock dividend - 50% 1,220,565 6,103 (6,103)
Tax benefit from exercise of stock
options 115 115
Cash dividends declared (3,138) (3,138)
--------- -------- ------- ------- -------- ----- ---------
Balance - December 31, 1998 3,694,546 18,473 6,229 1,801 19,394 (625) 45,272
1999
Net income for the year 6,923 6,923
Net changes in unrealized gain
(loss) on securities available for
sale, net of $1,490 deferred taxes (4,400) (4,400)
---------
Comprehensive income 2,523
---------
Stock options exercised 53,450 267 518 785
Tax benefit from exercise of stock
options 373 373
Stock dividend - 100% 3,712,337 18,562 (18,562)
Cash dividends declared (2,743) (2,743)
---------- --------- -------- -------- -------- ------ ---------
Balance - December 31, 1999 7,460,333 37,302 7,120 (2,599) 5,012 (625) 46,210
2000
Net income for the year 6,710 6,710
Net changes in unrealized gain
(loss) on securities available for
sale, net of $792 deferred
taxes 3,152 3,152
---------
Comprehensive income 9,862
---------
Stock options exercised 8,400 42 5 47
Tax benefit from exercise of stock
options 60 60
Cash dividends declared (3,052) (3,052)
---------- --------- -------- -------- --------- ------ ---------
Balance - December 31, 2000 7,468,733 $ 37,344 $ 7,185 $ 553 $ 8,670 $ (625) $ 53,127
========= ======== ======== ========= ====== =========
Less treasury stock 23,159
----------
7,445,574
==========
The accompanying notes are an integral part of the financial statements.
67
68
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
2000 1999 1998
------------ ----------- -----------
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received from:
Loans $ 45,200 $ 37,218 $ 29,901
Investments 9,127 8,716 7,777
Fees and service charges 4,197 4,030 4,004
Interest paid to depositors (22,797) (19,982) (16,173)
Interest paid to others (8,227) (3,599) (3,336)
Cash paid to suppliers and employees (16,894) (13,558) (12,077)
Income taxes paid (2,887) (3,204) (2,595)
----------- ---------- ----------
Net cash provided by operating activities 7,719 9,621 7,501
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 3,947
Principal payments received on investments 15,634 45,166 31,636
Purchase of investments (22,045) (47,306) (66,749)
Proceeds from sale of other real estate owned 1,119 1,590 165
Loans made to customers in excess of principal collected (110,743) (43,608) (33,120)
Capital expenditures (4,281) (4,008) (1,941)
Proceeds on insurance contracts 41
Purchase of annuity (630)
Cash and federal funds received in acquisition 12,459
----------- ---------- ----------
Net cash used in investing activities (120,316) (44,178) (58,180)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 43,418 13,322 44,495
Net increase (decrease) in short-term borrowings 71,159 5,473 (16,816)
Net increase (decrease) in time deposits 5,761 (4,532) 11,604
Proceeds from other borrowings and long-term debt 98,000 50,000 17,000
Payments on other borrowings and long-term debt (100,453) (23,128) (67)
Proceeds from issuance of stock 107 1,158 259
Debt issuance costs (199)
Redemption of preferred stock (3,160)
Stock reacquired (211)
Dividends paid (2,976) (2,661) (3,090)
----------- ---------- ----------
Net cash provided by financing activities 114,817 36,472 53,174
----------- ---------- ----------
Net increase in cash and due from banks 2,220 1,915 2,495
Cash and due from banks, beginning 19,475 17,560 15,065
----------- ---------- ----------
Cash and due from banks, ending $ 21,695 $ 19,475 $ 17,560
=========== ========== ==========
The accompanying notes are an integral part of the financial statements.
68
69
2000 1999 1998
------------ ----------- -----------
(Thousands of dollars)
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 6,710 $ 6,923 $ 6,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,871 1,639 1,417
Provision for losses on loans and real
estate owned 545 850 1,135
Amortization of premium on investments 146 176 176
Accretion of discount on investments (177) (152) (414)
Cash surrender value increase (124) (140) (82)
Loss on sale of investment securities 2
Gain on sale of loans and other assets (494) (582) (897)
Proceeds from sale of loans held for sale 23,802 26,505 25,684
Origination of loans held for sale (23,562) (26,210) (24,791)
Equity in income of service center (250) (142) (66)
Deferred compensation 108 (50) (6)
Deferred income taxes (136) (901) (68)
Changes in assets and liabilities:
Interest receivable (1,586) (234) (106)
Prepaids and other assets (40) 2,040 26
Unearned income (92) (328) (38)
Interest payable 1,075 (300) (361)
Taxes receivable 27 297 (280)
Other liabilities (104) 228 155
----------- ---------- ----------
Net cash provided by operating activities $ 7,719 $ 9,621 $ 7,501
=========== ========== ==========
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of property in lieu of foreclosure $ 1,619 $ 816 $ 126
Dividends reinvested in common stock 771 736 518
Net liabilities and preferred stock assumed in acquisition,
excluding cash and federal funds received 16,771
69
70
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements of Baylake Corp. (the company)
include the accounts of the company, its wholly-owned subsidiary;
Kewaunee County Banc-Shares, Inc., its wholly-owned subsidiaries;
Baylake Bank and Baylake Bank, N.A., and their wholly-owned
subsidiaries; Bank of Sturgeon Bay Building Corporation, Cornerstone
Financial, Inc., Baylake Investments, Inc., and Baylake Insurance
Agency, Inc. In 1999, Baylake Bank, N.A. was merged into Baylake Bank.
All significant intercompany items and transactions have been
eliminated.
Baylake Bank owns a 49% interest in United Financial Services, Inc.,
(UFS) a data processing service. The investment in this entity is
carried under the equity method of accounting and the pro rata share of
its income is included in other revenue. Amounts paid to UFS for data
processing services for Baylake's banks were $815,000, $755,000, and
$627,000, in 2000, 1999, and 1998, respectively. At December 31, 2000
and 1999, Baylake Bank had loans of $235,000 and $888,000,
respectively, to UFS.
The company's subsidiary banks make commercial, mortgage, and
installment loans to customers substantially all of whom are located in
Door, Brown, Kewaunee, Manitowoc, Waushara, Outagamie, Green Lake and
Waupaca Counties of Wisconsin. Although the banks have a diversified
portfolio, a substantial portion of their debtors' ability to honor
their contracts is dependent upon the economic condition of the local
industrial businesses, and commercial, agricultural and tourism
industries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
For comparability, certain 1999 and 1998 amounts have been reclassified
to conform with classification adopted in 2000.
The company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and due from banks. The
company places these assets with high credit quality institutions. At
times such assets may be in excess of FDIC insurance limit.
Investment securities classified as held to maturity are those
securities which the bank has both the intent and the ability to hold
until maturity. Under this classification, securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts
which are recognized as adjustments to interest income. Gains or losses
on disposition are based on the net proceeds and the adjusted carrying
amount of the securities sold, using the specific identification
method.
70
71
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Investment securities classified as available for sale are those
securities which Baylake Bank has determined might be sold to manage
interest rate risk or in response to changes in interest rates or other
economic factors. While the company has no current intention of selling
these securities, they may not be held to maturity.
Investment securities available for sale are carried at market value.
Adjustments up or down to market value are recorded as a separate
component of equity, net of tax. Premium amortization and discount
accretion are recognized as adjustments to interest income. Realized
gains or losses on disposition are based on the net proceeds and the
adjusted carrying amount of the securities sold, using the specific
identification method.
Loans, including loans held for sale, are stated at face value, net of
deferred loan origination fees (net of costs) and the allowance for
loan losses. Interest on loans is calculated using the simple interest
method on daily balances of the principal amount outstanding or an
amortized method.
Loan origination fees and related costs are deferred and the net
deferred revenue is amortized over the term of the loans using the
effective interest rate method.
The allowance for loan losses is maintained at a level that is
management's best estimate of probable loan losses incurred as of the
balance sheet date. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current domestic and international economic conditions,
volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan
losses charged against income.
The accrual of interest income is discontinued when a loan becomes 90
days past due as to principal or interest. When interest accruals are
discontinued, interest credited to income is reversed. If
collectibility is in doubt, cash receipts on nonaccrual loans are used
to reduce principal rather than recorded as interest income.
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to operating expense over the estimated useful
lives of the assets, using the straight-line and accelerated methods.
Mortgage servicing rights of $215,000, $236,000, and $221,000 were
capitalized and $101,000, $106,000, and $77,000 were amortized during
2000, 1999, and 1998, respectively. The amount of impairment was not
material.
71
72
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Other real estate, which is included in other assets, comprises
properties acquired through a foreclosure proceeding or acceptance of a
deed in lieu of foreclosure. These properties are carried at the lower
of cost or fair value, minus estimated costs to sell, based on
appraised value at the date acquired. Loan losses arising from the
acquisition of such property are charged against the allowance for loan
losses. An allowance for losses on other real estate is maintained for
subsequent valuation adjustments on a specific property basis.
Goodwill is being amortized on a straight-line basis over 15 years.
Amortization expense was $486,000, $453,000, and $399,000 in 2000,
1999, and 1998, respectively.
The company expenses all advertising costs as they are incurred. Total
advertising costs for the years ended December 31, 2000, 1999, and 1998
were $339,000, $233,000, and $192,000, respectively.
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25) and related interpretations in accounting for
its stock-based compensation plans. Under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", companies may elect to recognize stock-based
compensation expense based on the fair value of the awards or continue
to account for stock-based compensation under APB No. 25. The company
has elected to continue to apply the provisions of APB No. 25 with the
disclosure requirements of SFAS No. 123 in Note 17.
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
the allowance for loan losses, deferred loan origination fees, deferred
compensation, mortgage loan servicing, market value adjustments of
securities, and depreciation for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return
basis, and remit to the company amounts determined to be currently
payable, if any.
Earnings per share are based on the weighted average number of shares
outstanding during each year.
For purposes of the statement of cash flows, the company considers cash
and due from banks as cash and cash equivalents.
72
73
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 127 deferred the effective date of SFAS No. 125 related to
transfers of financial assets occurring after December 31, 1997,
specifically, such transfers involving repurchase agreements,
securities lending, and similar transactions. The company adopted SFAS
No. 127 as required. The adoption of SFAS No. 127 did not have a
material impact on the company's consolidated statement of position or
results of operations.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The company's subsidiary Baylake Bank is required to maintain average
reserve balances by the Federal Reserve Bank. The average amount of
those reserve balances for the year ended December 31, 2000, was
approximately $6,475,000.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as
follows:
December 31, 2000
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------- -------------- ------------
(Thousands of dollars)
Available For Sale
------------------
U.S. Treasury and other U.S.
government agencies $ 32,252 $ 748 $ 3 $ 32,997
Obligations of states and
political subdivisions 33,067 757 29 33,795
Mortgage-backed securities 67,629 107 750 66,986
Other 1,311 1,311
----------- --------- --------- -----------
$ 134,259 $ 1,612 $ 782 $ 135,089
=========== ========= ========= ===========
Held to Maturity
----------------
Obligations of states and
political subdivisions $ 18,422 $ 119 $ 38 $ 18,503
=========== ========= ========= ===========
73
74
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
December 31, 1999
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ --------------- ------------
(Thousands of dollars)
Available For Sale
------------------
U.S. Treasury and other U.S.
government agencies $ 22,851 $ 54 $ 86 $ 22,819
Obligations of states and
political subdivisions 32,413 122 738 31,797
Mortgage-backed securities 71,876 23 2,489 69,410
Other 1,674 1,674
------------- ---------- ---------- -------------
$ 128,814 $ 199 $ 3,313 $ 125,700
============= ========== ========== =============
Held to Maturity
----------------
Obligations of states and
political subdivisions $ 19,380 $ 10 $ 131 $ 19,259
============= ========== ========== =============
Results of sales of securities were as follows:
Available for Sale
------------------------------------------
2000 1999 1998
----------- ----------- -----------
(Thousands of dollars)
Proceeds $ None $ 3,947 $ None
Realized gains 21
Realized losses 23
74
75
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investments at
December 31, 2000, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Available for Sale Held to Maturity
----------------------------- ----------------------------
Estimated
Amortized Market Amortized Estimated
Cost Value Cost Value
------------ ------------ ------------ ------------
(Thousands of dollars)
Due in one year or less $ 10,627 $ 10,645 $ 2,012 $ 2,013
Due after one year through
five years 14,839 15,140 8,278 8,285
Due after five years through
ten years 23,079 23,295 3,361 3,434
Due after ten years 18,085 19,023 4,771 4,771
------------ ------------ ----------- -----------
66,630 68,103 18,422 18,503
Mortgage-backed securities 67,629 66,986
------------ ------------ ----------- -----------
$ 134,259 $ 135,089 $ 18,422 $ 18,503
============ ============ =========== ===========
Securities pledged to secure public and trust deposits and borrowed
funds had a carrying value of $103,902,000 and $61,560,000 at
December 31, 2000 and 1999, respectively.
NOTE 4 - LOANS
Major classifications of loans are as follows:
December 31, December 31,
2000 1999
----------------- -----------------
(Thousands of dollars)
Commercial, financial, and agricultural $ 335,868 $ 267,460
Real estate - construction 41,524 26,535
Real estate - mortgage 160,150 138,029
Installment 17,925 15,446
------------- ------------
555,467 447,470
Less: Deferred loan origination
fees, net of costs (360) (451)
------------- ------------
Net loans $ 555,107 $ 447,019
============= ============
75
76
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
Loans having a carrying value of $51,372,000 are pledged as collateral
for borrowings from the Federal Home Loan Bank at December 31, 2000.
Certain directors and officers of the company and the subsidiary banks,
including their immediate families, companies in which they are
principal owners, and trusts in which they are involved, were loan
customers of the subsidiary during 2000 and 1999. Such loans were made
in the ordinary course of business at normal credit terms, including
interest rate and collateralization, and do not represent more than a
normal risk of collection.
A summary of the changes in those loans is as follows:
2000 1999
----------- ------------
(Thousands of dollars)
Balance at beginning of year $ 5,594 $ 10,983
New loans made 3,836 2,622
Repayments received (3,844) (2,889)
Loans related to former officers and directors (159) (5,122)
---------- -----------
Balance at end of year $ 5,427 $ 5,594
========== ===========
Loans on which the accrual of interest has been discontinued or reduced
amounted to $8,479,000 and $8,086,000 at December 31, 2000 and 1999,
respectively. If these loans had been current throughout their terms,
interest income for the nonaccrual period would have approximated
$1,065,000 and $929,000 for 2000 and 1999, respectively. Interest
income which has been recorded amounted to $460,000 and $442,000 for
2000 and 1999, respectively, for these nonaccrual loans.
Changes in the allowance for loan losses were as follows:
2000 1999 1998
----------- ------------ ------------
(Thousands of dollars)
Balance at beginning of year $ 7,611 $ 11,035 $ 3,881
Allowance related to assets acquired (900) 6,487
Provision charged to operations 545 850 1,135
Recoveries 924 1,988 377
Loans charged off (2,074) (5,362) (845)
---------- ----------- -----------
Balance at end of year $ 7,006 $ 7,611 $ 11,035
========== =========== ===========
76
77
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
In 1999, it was determined that the allowance that had been established
for assets acquired in 1998 was in excess of the amount needed to
absorb potential losses on those assets based on a review of
information received subsequent to year-end. Accordingly, the allowance
was reduced $900,000 with a corresponding reduction in goodwill related
to the acquisition.
The provision for credit losses charged to expense is based upon
management's best estimate of probable loan losses incurred at the
balance sheet date, including consideration of the banks' credit loss
experience and an evaluation of impaired loans under SFAS 114. The
level of the allowance at the bank acquired by the company in 1998 was
also influenced by unusual factors affecting that bank prior to the
acquisition. See Note 13. A loan is considered to be impaired when,
based upon current information and events, it is probable that the bank
will be unable to collect all amounts due according to the contractual
terms of the loan.
The following is a summary of activity in investment in loans that have
declined in value and related interest income and allowance for credit
losses accounts:
2000 1999
------------ ------------
(Thousands of dollars)
Impaired loans at December 31 $ 19,638 $ 18,745
Impaired loans at December 31 allowed for $ 19,638 $ 13,167
Average impaired loans during the period $ 18,800 $ 17,294
Interest income recognized while loans impaired $ 2,198 $ 1,283
Interest income using a cash-basis method $ 2,090 $ 1,281
Allowance as of January 1 $ 1,536 $ 4,852
Additions during the year 1,602 1,333
Recoveries of amounts previously allowed for (1,273) (4,649)
----------- -----------
Allowance as of December 31 $ 1,865 $ 1,536
=========== ===========
77
78
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
2000 1999 1998
------------ ------------ ------------
(Thousands of dollars)
Land $ 4,074 $ 3,892 $ 3,232
Buildings and improvements 16,930 14,298 12,143
Equipment 9,613 8,275 7,330
----------- ----------- -----------
30,617 26,465 22,705
Less accumulated depreciation 9,304 8,002 7,078
----------- ----------- -----------
$ 21,313 18,463 $ 15,627
=========== =========== ===========
Depreciation expense $ 1,380 $ 1,001 $ 1,013
=========== =========== ===========
NOTE 6 - OTHER REAL ESTATE
Other real estate ($931,000 in 2000, $164,000 in 1999, and $795,000 in
1998, net of an allowance for other real estate losses of $54,000 in
2000, $93,000 in 1999, and $229,000 in 1998) is included in other
assets.
Net cost of operation of other real estate is summarized below:
2000 1999 1998
---------- ---------- --------
(Thousands of dollars)
Loss on disposition of properties
and other costs $ 254 $ 219 $ 15
Gain on disposition of properties
and expense recoveries (276) (336)
------- -------- ------
Net (gains) losses $ (22) $ (117) $ 15
======= ======== ======
Changes in the allowance for losses on other real estate were as
follows:
2000 1999 1998
------- --------- --------
(Thousands of dollars)
Balance at beginning of year $ 93 $ 229 $ 229
Amounts related to properties disposed (39) (136)
------ -------- -------
Balance at end of year $ 54 $ 93 $ 229
====== ======== =======
78
79
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits were
as follows:
(Thousands of dollars)
2001 $ 229,530
2002 16,273
2003 4,560
2004 791
------------
$ 251,154
============
Deposits from related parties held by the company's subsidiary bank at
December 31, 2000 and 1999, amounted to $6,400,000 and $5,700,000,
respectively.
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
2000 1999 1998
------------ ---------- -----------
(Thousands of dollars)
Federal funds purchased $ 35,000 $ 6,330 $
Federal Home Loan Bank Loan 42,000
Securities sold under agreements
to repurchase 3,289 2,901 3,758
----------- --------- ----------
$ 80,289 $ 9,231 $ 3,758
=========== ========= ==========
The average outstanding balance of total short-term borrowings amounted
to $44,011,000 in 2000 and $14,469,000 in 1999. The weighted-average
interest rate on these borrowings was 6.75% for 2000 and 5.3% for 1999.
The average outstanding balance is determined on a daily average basis
and the weighted-average interest rate is calculated by dividing the
actual interest paid on all short-term borrowings by the average
balance for the year.
The maximum amount outstanding at any month end was $80,289,000 during
2000 and $30,382,000 during 1999.
79
80
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of a land contract requiring annual principal
payments of $53,000 plus interest calculated at prime +1/4%. The
balance at December 31, 2000 and 1999 was $211,000 and $264,000,
respectively.
NOTE 10 - OTHER BORROWINGS
Other borrowings consists of the following at December 31:
2000 1999
------------- ------------
(Thousands of dollars)
Federal Home Loan Bank loans secured by real estate mortgages and
mortgage backed agency securities. Interest rates range from 6.28%
to 6.93%. The loans are due at various dates from May 1, 2000
through August 28, 2003. $ 70,000 $ 30,000
Federal Home Loan Bank loans secured by real estate mortgages and
mortgage backed securities. Repaid in 2000. 50,000
Line of credit with a correspondent bank dated March 29, 2000.
Interest rate of 1% less than prime (8.50% at December 31, 2000).
$100,000 principal payments due quarterly. The line is due
March 29, 2002, and is secured by 3,800 shares of stock in Baylake
Bank (a subsidiary of the company). 1,700
Term notes with a correspondent bank dated June 30, 2000. Interest
rate of 1% less than prime (8.5% at December 31, 2000). The loans
are due on various dates through September 29, 2001, and are
secured by 2,000 shares of stock in Baylake Bank (a subsidiary of
the company). 6,000
------------ -----------
$ 77,700 $ 80,000
============ ===========
Other borrowings are due as follows for the years ending December 31:
2001 $ 21,400
2002 46,300
2003 10,000
------------
$ 77,700
============
80
81
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - DIVIDENDS AND CAPITAL RESTRICTIONS
Cash dividends per share to shareholders were $.41, $.37, and $.47 in
2000, 1999, and 1998, respectively, after adjustment for stock
dividends.
As of December 31, 2000, undistributed earnings of the subsidiaries,
included in consolidated retained earnings, available for distribution
to the company as dividends without prior approval of regulatory
authorities was $15,036,000.
Federal banking regulatory agencies have established capital adequacy
rules which take into account risk attributable to balance sheet
assets and off-balance sheet activities. All banks and bank holding
companies must meet a minimum total risk-based capital ratio of 8%. Of
the 8% required, at least half must be comprised of core capital
elements defined as Tier 1 capital. The federal banking agencies also
have adopted leverage capital guidelines which banking organizations
must meet. Under these guidelines, the most highly rated banking
organizations must meet a leverage ratio of at least 3% Tier 1 capital
to total assets, while lower rated banking organizations must maintain
a ratio of at least 4% to 5%. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the consolidated financial statements.
At December 31, 2000 and 1999, the company was categorized as
adequately capitalized and well capitalized, respectively, under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed the company's category.
To be well capitalized under the regulatory framework, the Tier 1
capital ratio must meet or exceed 6%, the total capital ratio must
meet or exceed 10% and the leverage ratio must meet or exceed 5%.
The company's risk-based capital and leverage ratios are as follows
(thousands of dollars):
Risk-Based Capital Ratios
----------------------------------------------
December 31, 2000 December 31, 1999
---------------------- ---------------------
Amount Ratio Amount Ratio
--------- --------- --------- --------
Tier 1 capital
Baylake Corp. $47,049 7.8% $42,811 8.8%
Minimum requirement 24,232 4.0% 19,434 4.0%
Total capital
Baylake Corp. 54,055 8.9% 48,903 10.1%
Minimum requirement 48,464 8.0% 38,867 8.0%
81
82
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
Leverage Ratios
-------------------------------------------------------
December 31, 2000 December 31, 1999
-------------------------- --------------------------
Amount Ratio Amount Ratio
------------ --------- ------------ ---------
Tier 1 capital to average total assets
Baylake Corp. $ 47,049 6.4% $ 42,811 6.8%
Minimum requirement 29,518 4.0% 25,220 4.0%
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Baylake Bank is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit, standby letters of credit, and financial guarantees.
Baylake Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees
written is represented by the contract or notional amount of those
instruments. The bank uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
Contract or
Notional Amount
-------------------------------
2000 1999
------------- -------------
(Thousands of dollars)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 131,898 $ 128,781
Standby letters of credit and
financial guarantees written 2,581 1,387
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the bank upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
82
83
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
Standby letters of credit and financial guarantees written are
conditional commitments issued by the bank to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. The
guarantees expire in decreasing amounts through 2008, with the
majority expiring within two years. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The bank does not require
collateral as support for the commitments. Collateral is obtained
based on loan policies upon use of a commitment by a customer.
NOTE 13 - ACQUISITIONS
On October 1, 1998, the company acquired Evergreen Bank, N.A.
("Evergreen") and changed its name to Baylake Bank, N.A. Prior to the
acquisition, Evergreen was under the active supervision of the Office
of the Comptroller of the Currency due to its designation of the bank
as a "troubled institution" and "critically under capitalized" based
on severe asset quality problems and significant fraudulent activities
by former bank employees and directors. Prior to its acquisition by
the company, Evergreen was the victim of substantial fraud by former
Evergreen insiders. Evergreen's regulators had discovered extensive
financial irregularities at Evergreen which resulted from unauthorized
and/or improper transactions effected by former members of Evergreen
management.
As part of the acquisition, 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 December 31, 2000, since the
amount, if any, is not estimable.
The acquisition was accounted for using the purchase method of
accounting. Under the purchase method, net assets purchased are
recorded at their fair market values on the date of acquisition. Any
excess of the purchase price over the value of the net assets is
recorded as goodwill. The goodwill recorded on the bank is the result
of assumption of liabilities having a market value in excess of market
value of assets received. Any payments made in the future to the
former shareholder of the bank may affect the goodwill recorded.
Goodwill is being amortized on a straight-line basis over 15 years.
83
84
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - ACQUISITIONS (continued)
The following unaudited proforma financial information presents the
combined results of operations of the company and Evergreen as if the
acquisition had occurred as of the beginning of the period presented.
1998
------------
(Thousands of dollars except
earnings per common share)
Total revenue $ 52,265
Net interest income 21,398
Net income 5,525
Earnings per common share 1.51
Net income above includes write-offs and write-downs of approximately
$2,500,000 in 1998, and bond recoveries of $2,050,000 in 1998 due to
the fraudulent activities of Evergreen's previous management.
Information is substantially affected by the fraudulent activity which
occurred at Evergreen prior to its acquisition by the company. Because
the company would have replaced that previous management had it
acquired Evergreen at an earlier date, the company believes that
actual results would have been substantially different than shown.
NOTE 14 - PENSION PLAN
The subsidiaries have 401(k) Profit Sharing Plans covering all
employees who qualify as to age and length of service. The employer
contributions paid and expensed under all plans for 2000, 1999, and
1998, totaled $626,000, $572,000, and $478,000, respectively.
Certain officers and directors of the company and its subsidiaries are
covered by nonqualified deferred compensation plans. Payments to be
made under these plans are accrued over the anticipated years of
service of the individuals covered. Amounts charged to expense were
$157,000 in 2000, $146,000 in 1999, and $141,000 in 1998.
84
85
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAX EXPENSE
The taxes applicable to income before income taxes were as follows:
2000 1999 1998
----------- ----------- -----------
(Thousands of dollars)
Taxes currently payable
Federal $ 2,442 $ 2,025 $ 2,306
State 311 191 17
---------- ---------- ----------
2,753 2,216 2,323
---------- ---------- ----------
Deferred income taxes
Federal 21 330 (72)
State 4 54 (4)
---------- ---------- ----------
25 384 (76)
---------- ---------- ----------
$ 2,778 $ 2,600 $ 2,247
========== ========== ==========
The provision for income taxes differs from the amount of income
tax determined by applying the statutory federal income tax rate to
pretax income as a result of the following differences:
2000 1999 1998
----------- ----------- -----------
(Thousands of dollars)
Income tax based on statutory rate $ 3,226 $ 3,242 $ 2,809
State income taxes net of federal tax benefit 205 113 3
---------- ---------- ----------
3,431 3,355 2,812
Effect of tax-exempt interest income (702) (761) (686)
Other 49 6 121
---------- ---------- ----------
Provision based on effective tax rates $ 2,778 $ 2,600 $ 2,247
========== ========== ==========
85
86
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAX EXPENSE (continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance has been recognized to offset the
related deferred tax assets due to the uncertainty of realizing tax
benefits of a portion of loan loss and mortgage servicing differences.
The following is a summary of the significant components of the
company's deferred tax assets and liabilities as of December 31, 2000
and 1999:
2000 1999
----------- -----------
(Thousands of dollars)
Deferred tax assets
Allowance for loan losses $ 2,072 $ 2,174
Deferred loan origination fees 142 178
Deferred compensation 700 639
Mortgage loan servicing 391 357
Nonaccrual loans 430 221
Accrued vacation pay 95 86
Other 47 4
Investments acquired in merger 46 85
Market value adjustment on securities
available for sale 515
---------- ----------
Gross deferred tax assets 3,923 4,259
Valuation allowance for deferred tax assets (550) (550)
---------- ----------
Net deferred tax assets 3,373 3,709
---------- ----------
Deferred tax liabilities
Bank premises and equipment 776 736
Market value adjustment on securities
available for sale 277
Other 64 61
---------- ----------
Total deferred tax liabilities 1,117 797
---------- ----------
Net deferred asset $ 2,256 $ 2,912
========== ==========
86
87
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EARNINGS AND DIVIDENDS PER SHARE
Earnings and dividends per share are based on the weighted average
number of shares outstanding for the year, restated for the 100% stock
dividend paid in November 1999 and the 50% stock dividend paid in May
1998. A reconciliation of the basic and diluted earnings per share
amounts is as follows:
2000 1999 1998
------------ ------------- ------------
Basic weighted average number of
common shares outstanding 7,443,999 7,403,429 7,323,216
Additional common dilutive stock
option shares 298,563 289,149 172,094
----------- ------------ -----------
Diluted weighted average number
of common shares outstanding 7,742,562 7,692,578 7,495,310
=========== ============ ===========
Additional common stock option
shares that have not been
included due to their
antidilutive effect 60,000
There is no difference between basic and diluted income available to
common stockholders.
See Note 17 for information on additional stock options issued
subsequent to year end. These shares would not have changed materially
the calculation of the number of common shares or potential common
shares outstanding at the end of the period if the transaction had
occurred before December 31, 2000.
87
88
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN
The company has a non-qualified stock option plan under which certain
officers and key salaried employees may purchase shares of the
company's stock at an established exercise price. Unless earlier
terminated, these options will expire ten years from the date of
grant. The options become exercisable 20% per year, commencing one
year from date of grant.
Activity in the plan is summarized as follows:
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
----------- ---------------- -----------
Shares under option at December 31, 1997 525,600 $ 4.67 - 11.50 $ 8.96
Options granted 120,000 9.75 9.75
Options exercised (30,700) 4.67 4.67
-------- --------------- ---------
Shares under option at December 31, 1998 614,900 4.67 - 11.50 9.33
Options granted 126,000 15.25 15.25
Options exercised (94,400) 4.67 - 9.75 8.31
-------- --------------- -------
Shares under option at December 31, 1999 646,500 4.67 - 15.25 10.64
Options granted 60,000 25.00 25.00
Options exercised (8,400) 4.67 - 8.95 5.64
-------- --------------- ---------
Shares under option at December 31, 2000 698,100 $ 4.67 - 25.00 $ 11.93
======== =============== =========
In January 2001, options to purchase up to an additional 30,450
shares were granted. The exercise price was established at 100% of
the fair market value of the stock on the date of grant, or $14.75
per share.
The options outstanding at December 31, 2000, were:
Weighted
Weighted-Average Average
Number of Shares Exercise Price Remaining
Price ------------------------------- ------------------------------ Life
Range Outstanding Exercisable Outstanding Exercisable (In Years)
--------- -------------- -------------- -------------- ------------- -------------
$ 4.67 13,700 13,700 $ 4.67 $ 4.67 2.3
8.92 98,200 75,400 8.92 8.92 5.0
8.96 108,700 60,700 8.96 8.96 6.0
9.50 76,500 76,500 9.50 9.50 3.0
9.75 117,600 45,600 9.75 9.75 7.0
11.50 97,400 97,400 11.50 11.50 4.0
15.25 126,000 25,200 15.25 15.25 8.0
25.00 60,000 25.00 25.00 9.0
-------- --------- --------- --------- ----
698,100 394,500 $ 11.93 $ 10.03 6.0
======== ========= ========= ========= ====
88
89
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Options exercisable at December 31, 1999 and 1998, were 285,300 and
265,700, respectively. The weighted average exercise price for options
exercisable at December 31, 1999 and 1998, was $9.53 and $9.02,
respectively.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation" establishes financial
accounting and reporting standards for stock-based employee
compensation plans.
SFAS 123 defines a fair value based method of accounting for employee
stock option or similar equity instruments. Under the fair value based
method, compensation cost is measured at the grant date based on the
fair value of the award using an option-pricing model that takes into
account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock,
expected dividends and the risk-free interest rate over the expected
life of the option. The resulting compensation cost is recognized over
the service period, which is usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued
to Employees." Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount paid to acquire
the stock.
The largest difference between SFAS 123 and APB 25 as it relates to
the company is the amount of compensation cost attributable to the
company's stock option plan. Under APB 25 no compensation cost is
recognized for the stock option plan because the exercise price is
equal to the quoted market price at the date of grant and therefore
there is no intrinsic value. SFAS 123 compensation cost would equal
the calculated fair value of the options granted.
As permitted by SFAS 123, the company continues to measure
compensation cost for the stock option plan using the accounting
method prescribed by APB 25.
89
90
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Had compensation cost for the company's options granted after January
1, 1995, been determined according to SFAS 123, the company's net
income and earnings per share would have been reduced to the following
proforma amounts:
2000 1999 1998
----------- ----------- -----------
(Thousands of dollars)
Net income
As reported $ 6,710 $ 6,923 $ 6,017
Proforma 6,320 6,578 5,802
Basic earnings per common share
As reported .90 .94 .82
Proforma .85 .89 .79
Diluted earnings per common share
As reported .88 .90 .80
Proforma .83 .82 .73
The fair value of each option grant was estimated as of the date of
grant using the Black-Scholes option pricing model. The resulting
compensation cost was amortized over the vesting period.
The grant date fair values and assumptions used to determine such
values are as follows:
2000 1999 1998
--------- --------- ---------
Weighted average grant date fair value $ 7.13 $ 5.14 $ 3.45
Assumptions:
Risk-free interest rates 5.12% 6.50% 4.70%
Expected volatility 27.40% 19.08% 33.56%
Expected term (in years) 8.00 8.00 8.00
Expected dividend yield 2.93% 1.60% 2.32%
90
91
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS
Provided below is the information required by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" (SFAS 107). These amounts represent estimates
of fair values at a point in time. Significant estimates regarding
economic conditions, loss experience, risk characteristics associated
with particular financial instruments and other factors were used for
the purposes of this disclosure. These estimates are subjective in
nature and involve matters of judgment. Therefore, they cannot be
determined with precision. Changes in the assumptions could have a
material impact on the amounts estimated.
Many of the company's financial instruments lack an available trading
market. Furthermore, most of the financial instruments are intended to
be held to maturity. Therefore, it is not probable that the fair
values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets
and liabilities that are not considered financial instruments. In
addition, the significant value of long-term relationships with
depositors and other customers are not reflected.
A. CASH AND DUE FROM BANKS
These instruments are, by definition, short-term and do not
present any unanticipated credit issues. Therefore, the
carrying amount is a reasonable estimate of fair value.
B. INVESTMENT SECURITIES
The estimated fair values of securities are provided in Note 3
to the financial statements. These are based on quoted market
prices, when available. If a quoted market price is not
available, fair value is estimated using quoted market prices
for similar securities.
91
92
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
C. LOANS
The carrying amount (total outstandings excluding unearned
income and reserve for loan losses) and estimated fair value
of loans outstanding at December 31, 2000, are $555,107,000
and $541,738,000, and for December 31, 1999, are $447,019,000
and $437,262,000. In order to determine the fair values for
loans, the loan portfolio was segmented based on loan type,
credit quality and repricing characteristics. For certain
variable rate loans with no significant credit concerns and
frequent repricings, estimated fair values are based on the
carrying values. The fair values of other loans are estimated
using discounted cash flow analyses. The discount rates used
in these analyses are generally based on origination rates for
similar loans of comparable credit quality. However, where
appropriate, adjustments have been made to more accurately
reflect market rates. Maturity estimates are based on
historical experience with prepayments and current economic
and lending conditions.
D. DEPOSITS
The carrying amount and estimated fair value of deposits
outstanding at December 31, 2000, are $553,254,000 and
$553,486,000 and for December 31, 1999, are $504,074,000 and
$503,902,000. Under SFAS 107, the fair value of deposits with
no stated maturity is equal to the amount payable on demand.
Therefore, the fair value estimates for these products do not
reflect the benefits that the company receives from the
low-cost, long-term funding they provide. These benefits are
significant. The estimated fair values of fixed rate time
deposits are based on discounted cash flow analyses. The
discount rates used in these analyses are based on market
rates currently offered for deposits of similar remaining
maturities. Because of the repricing characteristics and the
competitive nature of the company's rates offered on variable
rate time deposits, carrying amount is a reasonable estimate
of the fair value.
E. SHORT-TERM BORROWINGS
Short-term borrowings reprice frequently and therefore the
carrying amount is a reasonable estimate of fair value.
F. OTHER BORROWINGS
The carrying amount and estimated fair value of other
borrowings outstanding at December 31, 2000, are $77,700,000
and $77,869,000 and for December 31, 1999, are $80,000,000 and
$79,689,000. The estimated fair values of fixed rate time
borrowings are based on discounted cash flow analyses. The
discount rates used in these analyses are based on market
rates currently offered for borrowings of similar remaining
maturities.
92
93
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
G. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND
LETTERS OF CREDIT
Pricing of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of
funding, and compensating balance and other covenants or
requirements. Loan commitments generally have fixed expiration
dates, are variable rate and contain termination and other
clauses which provide for relief from funding in the event
that there is a significant deterioration in the credit
quality of the customer. Many loan commitments are expected
to, and typically do, expire without being drawn upon. The
carrying amounts are reasonable estimates of the fair value of
these financial instruments. Carrying amounts are comprised of
the unamortized fee income and, where necessary, reserves for
any expected credit losses from these financial instruments.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
During 1999, the company entered into a ten year lease to rent space
in a building in Green Bay. The annual base rent is $76,000 and shall
increase as of the beginning of each December based on the Consumer
Price Index.
During 1999, the company entered into a seven year lease to rent space
for a branch bank location in Howard, Wisconsin. The annual base rent
is $33,000 and increases by 15% after five years. The company must
also pay its proportional share of costs for common areas at the mall.
93
94
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - COMMITMENTS AND CONTINGENCIES (continued)
Rent expense for 2000 and 1999 was $95,000 and $87,000, respectively.
Future minimum lease payments under these agreements are as follows:
2001 $ 109,000
2002 109,000
2003 109,000
2004 109,000
2005 109,000
2006 and thereafter 336,000
------------
$ 881,000
============
NOTE 20 - SUBSEQUENT EVENT
In February 2001, the company issued 1,610,000 shares of Cumulative
Trust Preferred Securities at $10 per share for a total of
$16,100,000. The shares were issued at a rate of 10% and expire on
March 31, 2031. The company may call the securities after five years
at par.
94
95
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT
COMPANY ONLY
BAYLAKE CORP.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31
2000 1999
------------ ------------
(Thousands of dollars)
ASSETS
Cash in bank $ 462 $ 329
Dividend receivable 600 743
Receivable from subsidiary 129 382
Prepaid expenses 199
Investment in subsidiaries 60,310 45,499
----------- -----------
Total assets $ 61,700 $ 46,953
=========== ===========
LIABILITIES AND STOCKHOLDER
EQUITY
Liabilities
Dividends payable $ 819 $ 743
Accrued expense 54
Other borrowings 7,700
----------- -----------
Total liabilities 8,573 743
Stockholder equity 53,127 46,210
----------- -----------
Total liabilities and stockholder equity $ 61,700 $ 46,953
=========== ===========
95
96
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT
COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
2000 1999 1998
----------- ----------- ------------
(Thousands of dollars)
Income
Dividends from subsidiaries $ 2,645 $ 2,076 $ 10,139
Interest income 11 11 6
---------- ---------- -----------
Total income 2,656 2,087 10,145
---------- ---------- -----------
Expenses
Interest 322
Other 67 54 64
Income taxes (benefit) (128) (10) (15)
---------- ---------- -----------
Total expenses 261 44 49
---------- ---------- -----------
Income before equity in 2,395 2,043 10,096
undistributed net income
of subsidiaries
Equity in undistributed net income
of subsidiaries 4,315 4,880 (4,079)
---------- ---------- -----------
NET INCOME $ 6,710 $ 6,923 $ 6,017
========== ========== ===========
96
97
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT
COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31
2000 1999 1998
---------- ---------- -----------
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (534) $ (59) $ (59)
Interest received 11 11 6
Dividends received 2,788 1,994 10,289
Income taxes (paid) received 381 (241) 10
--------- --------- ----------
Net cash provided by operating activities 2,646 1,705 10,246
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributed to subsidiary (7,345)
Purchase of subsidiary (7,000)
--------- --------- ----------
Net cash used in investing activities (7,345) (7,000)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,976) (2,660) (3,089)
Issuance of debt 7,700
Issuance of stock 108 1,157 143
Repurchase of stock (211)
--------- --------- ----------
Net cash provided by (used in) financing
activities 4,832 (1,503) (3,157)
--------- --------- ----------
Net increase in cash 133 202 89
Cash and due from banks, beginning 329 127 38
--------- --------- ----------
Cash and due from banks, ending $ 462 $ 329 $ 127
========= ========= ==========
Reconciliation of net income to net cash provided by operating
activities:
Net income $ 6,710 $ 6,923 $ 6,017
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiary (4,315) (4,880) 4,081
Change in receivable from subsidiary 253 (251) (7)
Change in prepaid expenses (199)
Change in dividends receivable 143 (82) 150
Change in accrued expenses 54 (5) 5
--------- --------- ----------
Net cash provided by operating activities $ 2,646 $ 1,705 $ 10,246
========= ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Dividends reinvested in common stock $ 771 $ 736 $ 518
97
98
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - BUSINESS SEGMENTS
The company has two business segments for which discrete financial
information is available: banking and non-banking.
Banking provides commercial, mortgage, and consumer lending, deposit
services, trust services, and other traditional bank services. These
services are provided primarily through branch banks, and ATMs.
Non-banking includes insurance agency services and conference
facilities through two of the company's wholly-owned subsidiaries.
2000
--------------------------------------------------------------------
Intercompany
Banking Non-Banking Amounts Totals
------------ --------------- ------------------ -------------
(Amounts in thousands)
Interest revenue $ 56,036 $ 21 $ (21) $ 56,036
Interest expense 32,120 (21) 32,099
Provision for loan losses 545 545
Noninterest revenue 4,557 129 4,686
Noninterest expenses 18,482 108 18,590
Income taxes 2,760 18 2,778
Net income 6,686 24 6,710
Total assets 772,774 536 (1,042) 772,268
1999
--------------------------------------------------------------------
Intercompany
Banking Non-Banking Amounts Total
------------ --------------- ------------------ -------------
(Amounts in thousands)
Interest revenue $ 46,467 $ 19 $ (19) $ 46,467
Interest expense 23,299 (19) 23,280
Provision for loan losses 850 850
Noninterest revenue 4,431 125 4,556
Noninterest expense 17,248 122 17,370
Income taxes 2,590 10 2,600
Net income 6,911 12 6,923
Total assets 646,301 506 (497) 646,310
98
99
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the sections titled "Proposal No. 1, Election of
Directors," "Information on Executive Officers" and "Compliance with Section
16(a) of the Exchange Act" contained in the definitive proxy statement for the
Company's 2001 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the sections titled "Director Fees and
Benefits", "Executive Compensation", "Board of Directors Compensation Committee
Report on Management Compensation", "Compensation Committee Interlocks and
Insider Participation" and "Performance Graph" under "Matters to be Considered
at the Baylake Annual Meeting" contained in the Company's 2001 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the section titled "Ownership of Baylake Common"
contained in the definitive proxy statement for the Company's 2001 Annual
Meeting of Stockholders is incorporated herein by reference.
99
100
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the section titled "Certain Transactions with
Management" in the definitive proxy statement for the Company's 2001 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2.
The consolidated financial statements and supplementary data contained in Item 8
of this report are filed as part of this report. All schedules are omitted
because of the absence of the conditions under which they are required or
because the required information is included in the consolidated financial
statements or related notes.
(a) 3.
See Item 14(c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits Required by Item 601 of Regulation S-K
Reference is made to the Exhibit Index on page 103 for exhibits filed as part of
this report.
(d) Additional Financial Statements
Not applicable.
100
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BAYLAKE CORP.
By: /s/Steven D. Jennerjohn
------------------------------
Steven D. Jennerjohn
Treasurer
Date: March 20, 2001
--------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below hereby designates and appoints Thomas L. Herlache and Steven D.
Jennerjohn, and each of them, any one of whom may act without the joinder of the
other, as such person's true and lawful attorney-in-fact and agents (the
"Attorneys-in-Fact") with full power of substitution and resubstitution, for
such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, the Securities and Exchange Commission and
any state securities commission, granting unto said Attorneys-in-Fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming all that said Attorneys-in-Fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
these dates indicated.
/s/ Thomas L. Herlache /s/ L. George Evenson
------------------ -----------------
Thomas L. Herlache L. George Evenson, Director
President, Chief Executive
Officer and Director (Principal
Executive Officer)
101
102
/s/ Steven D. Jennerjohn
- --------------------------- -----------------------
Steven D. Jennerjohn Glenn Miller, Director
Treasurer
(Principal Financial and
Accounting Officer)
/s/ Ruth Nelson
- -------------------- ---------------
Ron Berg, Director Ruth Nelson, Director
/s/ John D. Collins /s/ Paul J. Sturm
- ------------------- ---- -------------
John D. Collins, Director Paul J. Sturm, Director
/s/ George Delveaux, Jr. /s/ Richard A. Braun
- ------------------------ ---- ----------------
George Delveaux, Jr., Director Richard A. Braun, Director
/s/ John W. Bunda /s/ Joseph Morgan
- ----------------- -----------------
John W. Bunda, Director Joseph Morgan, Director
/s/ William C. Parsons
- ----------------------
William C. Parsons, Director
*Each of the above signatures is affixed as of March 20, 2001.
102
103
Sequentially Exhibit Description
Numbered Page No. -----------
- ------------- ---
- -- 2.1 Agreement and Plan of Acquisition dated March 13, 1996 between Baylake
Corp. and Four Seasons of Wis Corp. (1)
- -- 2.4 Stock Purchase Agreement, dated as of October 1, 1998, among the Company,
M&I and Evergreen (2)
- -- 3.1 Articles of Incorporation, as amended (3)
- -- 3.2 Bylaws, as amended (4)
- -- 10.1 Baylake Corp. 1993 Stock Option Plan (5)
- -- 10.2 Baylake Bank's Pay-for-Performance (bonus) program (6)
- -- 10.3 Baylake Bank's Deferred Compensation Program with Thomas L. Herlache (7)
- -- 10.4 Baylake Bank's Agreement for Early Retirement with Ronald D. Berg (8)
- -- 10.5 Baylake Bank's Deferred Compensation and Salary Continuation Agreement
with Richard A. Braun (9)
- -- 10.6 Baylake Corp. Stock Purchase Plan (10)
Page 105 12.1 Statement Re Computation of Ratios
Page 107 21.1 List of Subsidiaries
Page 108 23.1 Consent of Smith & Gesteland
Page 101 24.1 Power of Attorney (contained on the Signature Page)
(1) Incorporated by reference to Exhibit 2.1 from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(2) Incorporated by reference to Exhibit 2.1 from the Company's Current
Report on Form 8-K filed October 15, 1998.
(3) Incorporated by reference to Exhibit 3.1 from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(4) Incorporated by reference to Exhibit 3.2 from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference to Exhibit A from the Company's Proxy
Statement for the 1993 Annual Meeting of Shareholders.
(6) Incorporated by reference to Description thereof under "Board
Directors/Compensation Committee Report on Management's Compensation"
in the Company's Proxy Statement for the 1994 Annual Meeting of
Shareholders.
(7) Incorporated by reference to Exhibit 10.3 from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(8) Incorporated by reference to Exhibit 10.4 from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
103
104
(9) Incorporated by reference to Exhibit 10.5 from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(10) Incorporated by reference to Exhibit 4 from the Company's Form S-3
filed on February 10, 1998.
104