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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-8679
BAYLAKE CORP.
(Exact name of Registrant as specified in its charter)
Wisconsin 39-1268055
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
217 North Fourth Avenue., Sturgeon Bay, WI 54235
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (920)-743-5551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $5
Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
As of March 17, 2000, 7,444,274 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $22.00 reported bid
price on that date) held by non-affiliates (excludes a total of 627,287 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $149,973,725.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Proxy Statement for 1999 Annual Meeting Part III
of Shareholders
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ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Registrant") is a registered bank holding company under the Federal Bank
Holding Company Act of 1956. Registrant was organized primarily to acquire and
hold the stock of Baylake Bank ("Bank), and to enter into such other closely
related business activities as may be approved from time to time.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. At December 31,
1999, the Bank had total assets of $646.3 million. It is a member of the Federal
Reserve System and its deposits are insured, subject to regulatory limits, by
the FDIC. It provides general banking and trust department services to
commercial, industrial and individual accounts in a eight county area composed
of Door, Kewaunee, Manitowoc, Brown, Outagamie, Green Lake, Waushara and Waupaca
Counties. The Bank offers a full range of financial services, including demand
deposit accounts, various savings account plans, certificates of deposit,
individual retirement accounts, real estate mortgage loans, consumer and
business loans, agricultural loans, safe deposit boxes, collection services,
transfer agency services, a trust department, insurance agency, discount
brokerage, financial planning, conference facilities, electronic banking and
access to TYME Corporation's electronic funds transfer system. The Bank
maintains a number of divisions each headed by a vice president, including a
Retail Division, Commercial/Loan Division and Non-Bank Division to facilitate
the provision of customer services, and three supportive divisions, the
Administrative Division, Accounting Division and Operations Division.
The Bank has the following 100%-owned subsidiaries: Baylake Investments, Inc.,
Bank of Sturgeon Bay Building Corporation, Cornerstone Financial, Inc., and
Baylake Insurance Agency, Inc. Baylake Investments, Inc. was formed to manage
certain bank assets available for investment. Bank of Sturgeon Bay Building
Corporation owns the main office building, conference center facilities and
underlying property of the Bank. Cornerstone Financial, Inc. manages Bank of
Sturgeon Bay Building Corporation's conference center facilities. Baylake
Insurance Agency, Inc. offers various types of insurance products to the general
public as an independent agent. The Bank also owns a 49.6% interest in United
Financial Services, Inc. ("UFS"), a data processing services company.
Unaffiliated third parties own a 50.4% interest in UFS. The revenues generated
by these subsidiaries and UFS amount in aggregate to less than 5% of the Bank's
total income.
The Bank offers short-term and long-term loans on a secured and unsecured basis
for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. The Bank focuses lending
activities on individuals and small businesses in its market area. Lending has
been exclusively within the industrial and consumer community within their
market areas. The Bank's market area consists of primarily Door County,
Wisconsin. Sturgeon Bay is the county seat and major industrial and retail area
of Door County. The Bank is the largest commercial bank in Door County. The Bank
operates seven branch offices (one of which are seasonal) in Door County, in
addition to its main office in downtown Sturgeon Bay.
The resident population of Door County is approximately 27,250 (according to the
1990 census) with 9,450 living in the City of Sturgeon Bay. The major industries
of Door County include shipbuilding, tourism, metal products manufacturing,
electrical components manufacturing, and industrial oven fabrication. Most
industry is centered in the Sturgeon Bay area. The rest of Door County is
primarily involved in agriculture (mostly dairy farming and the production of
cherries and apples), and tourism. The tourist business of Door County is
seasonal, with the season beginning in early spring and continuing
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until late fall. The seasonal nature of the tourist business imposes increased
demands for loans shortly before and during the tourist season and causes
reduced deposits shortly before and during the early part of the tourist season,
although the financial needs of those involved in the delivery of tourist
related services is a year round concern.
The Bank's market area consists also of Kewaunee County, Wisconsin and adjacent
portions of Manitowoc County. The Bank owns and operates three branch offices,
in addition to its main office in downtown Kewaunee. The resident population of
Kewaunee County is approximately 20,000 according to the 1990 census, with 2,750
people living in Kewaunee and 3,353 in Algoma. The Kewaunee County industrial
base is diverse with over half of the business associated with food and related
products, fabricated metals, and lumber and wood furniture and fixtures. Most
industry is centered in the Kewaunee and Algoma area. The rest of Kewaunee
County is primarily involved in agriculture (mainly dairy production). Tourism
also contributes to the local economy.
The Bank additionally has four locations in Brown County consisting of two
permanent locations located on the Northeast side of Green Bay, one leased
facility located on the Northwest side of Green Bay and one facility located in
Ledgeview on the Southeast side of Green Bay. The area offers a wide and
diversified manufacturing and service industry mix and is a leading area for
growth in Wisconsin.
The Bank's market area also consists of five locations in Waupaca County (two of
which were acquired as result of the Evergreen Bank, N.A. "Evergreen"
acquisition in October 1998) and is located approximately 35 miles west of Green
Bay. The major industries center around the production of food and related
products, lumber and wood furniture and fixtures. Tourism also contributes to
the local economy.
In addition the Bank has one location in the counties of Outagamie and Green
Lake as a result of the Evergreen acquisition.
Acquisitions
On March 15, 1999, Baylake Bank merged with Baylake Bank, NA ("BLBNA") fka
Evergreen. Evergreen was acquired by the Registrant on October 1, 1998 and its
name was changed to BLBNA. No payments to the seller have been made at this
point but are contingently payable based on a formula set forth in the stock
purchase agreement, not to exceed $2 million dollars. The transaction was
accounted for using the purchase method of accounting.
Lending and Investments
The Bank offers short-term and long-term loans on a secured and unsecured basis
for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. The Bank focus lending
activities on individuals and small businesses in its market area. Lending has
been exclusively within the State of Wisconsin. The Bank does not conduct any
substantial business with foreign obligors. The markets served by the Bank
include a wide variety of types of businesses; therefore, the Registrant does
not believe it is unduly exposed to the problems in any particular industry
group. However, any general weakness in the economy of Door, Brown, Kewaunee,
Waupaca, and Waushara County areas (as a result, for example, of a decline in
its manufacturing and tourism industries or otherwise) could have a material
effect on the business and operations of the Registrant.
The Bank's total outstanding loans as of December 31, 1999 amounted to
approximately $447.0 million, consisting of 81.8% residential, commercial,
agricultural and construction real estate loans, 12.9% commercial and industrial
loans, 3.4% installment and 1.9% agricultural loans.
The Registrant maintains a portfolio of other investments, primarily consisting
of U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
4
securities, and obligations of states and their political subdivisions. The
Registrant attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
The Bank offers a broad range of depository products, including non-interest
bearing demand deposits, interest-bearing demand deposits, various savings and
money market accounts and certificates of deposit. Deposits at the Bank are
insured by the FDIC up to statutory limits. At December 31, 1999, the Bank's
total deposits amounted to $504.1 million, including interest bearing deposits
of $444.9 million and non-interest bearing deposits of $59.2 million.
Other Customer Services and Products
Other services and products offered by the Bank and subsidiaries include safe
deposit box services, personal and corporate trust services, conference center
facilities, an insurance agency and discount brokerage services offering stocks,
bonds, annuities, mutual funds and other investment products.
Competition
The Bank competes with other financial institutions and businesses in both
attracting and retaining deposits and making loans. The Bank encounters direct
competition in its Door County market area from two other commercial banks as
well as from two savings and loan associations and one credit union maintaining
offices in Door County. The Bank encounters direct competition in its Kewaunee
County market area from four other commercial banks as well as one savings and
loan association and one credit union. In spite of such competition, the Bank
has maintained its position within these market areas, holding more than half of
all commercial bank deposits in the combined market area as of December 31,
1999. In other market areas served by the Bank it competes with various
financial institutions. Although no assurance can be given that they will
continue to do so, the Bank has been able to maintain its prominence in these
market areas, even though certain competitors have considerably more financial
and other resources than do the Registrant.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, that is not within the control of Baylake. This
regulation substantially affects the business and financial results of all
financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Federal Reserve Board, which requires that Baylake's capital
to asset ratio meet certain minimum standards. For a discussion of the Federal
Reserve Board's guidelines and the Registrant's applicable ratios, see the
section entitled "Capital Resources" under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation.
The Bank is incorporated under the banking laws of Wisconsin, and its deposits
are insured by the FDIC. It is therefore subject to supervision and regulation
by the Wisconsin Commissioner of Banking (the "Commissioner"), the Federal
Reserve Bank ("FRB") and the FDIC. As a registered bank holding company under
the Bank Holding Company Act, Baylake is subject to review and regulation by the
FRB (its primary regulator). Baylake is also subject to review and
5
examination by the Commissioner under Wisconsin law.
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the Commissioner be paid out of current earnings or, no more
than once within the immediate preceding two years, out of undivided profits in
the event that there have been insufficient net profits. Any other dividends
require the prior written consent of the Commissioner. The Bank is in compliance
with all applicable capital requirements and may pay dividends to Baylake.
Current federal law provides that adequately managed bank holding companies from
any state may acquire banks and bank holding companies located in any other
state, subject to certain conditions. Beginning on June 1, 1997, banks may
create interstate branching networks in states that do not "opt out" of
interstate branching. Prior to that date, banks could create interstate
branching networks in states that "opted in" to interstate branching early.
Wisconsin law generally permits establishment of full service bank branch
offices statewide.
Employees
At December 31, 1999, the Registrant and its subsidiary, had 252 full-time
equivalent employees.
6
Statistical Information
The following statistical information is presented in accordance with the
Securities and Exchange Commission's Guide 3, "Statistical Disclosure by Bank
Holding Companies." Reference numbers relate to Guide 3.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Three-year comparison of Consolidated
Average Balance Sheet (in thousands)
1999 1998 1997
---- ---- ----
Assets
Cash and Due from Banks $ 15 978 $ 11 917 $ 10 162
Investment Securities:
U. S. Treasury 1 156 2 102 2 691
U. S. Government Agencies 89 863 67 824 58 687
State and Municipal Obligations 50 954 44 614 32 858
Other Securities 5 019 5 629 4 475
Market Adjustment on AFS Securities 386 2 298 927
-------- -------- --------
Total Investments $147 378 $122 467 $ 99 638
-------- -------- --------
Federal Funds Sold $ 5 361 $ 6 657 $ 17
Loans, Net of Unearned Income $421 541 $333 484 $276 639
Reserve for Loan Losses (8 924) (5 833) (3 203)
-------- -------- --------
Net Loans $412 617 $327 651 $273 436
-------- -------- --------
Bank Premises and Equipment $ 16 795 $ 14 434 $ 12 521
Other Real Estate Owned $ 287 $ 93 $ 38
Other Assets $ 18 423 $ 14 139 $ 12 441
-------- -------- --------
Total Assets $616 839 $497 358 $408 253
-------- -------- --------
Liabilities and Stockholders' Equity
Demand Deposits $ 56 755 $ 46 586 $ 41 521
NOW Account Deposits 47 313 41 734 38 898
Savings Deposits 141 972 109 778 88 544
Time Deposits 246 782 188 412 163 755
-------- -------- --------
Total Deposits $492 822 $386 510 $332 718
-------- -------- --------
Short Term Borrowings $ 67 278 $ 57 205 $ 27 701
Customer Repurchase Agreements $ 3 657 $ 3 637 $ 1 800
$
Long Term Debt $ 265 $ 387 377
Other Liabilities $ 6 882 $ 6 247 $ 5 562
-------- -------- --------
Total Liabilities $570 904 $453 986 $368 158
-------- -------- --------
Common Stock $ 20 996 $ 18 475 $ 12 302
Additional paid in capital 6 560 8 718 6 038
Retained Earnings 18 743 15 305 21 347
Net Unrealized Gains (Losses) on AFS Securities 261 1 496 609
Treasury Stock (625) (622) (201)
-------- -------- --------
Total Equity $ 45 935 $ 43 372 $ 40 095
-------- -------- --------
Total Liabilities and Stockholders' Equity $616 839 $497 358 $408 253
======== ======== ========
7
I. B. INTEREST RATES AND INTEREST DIFFERENTIAL
The tables below show for the periods indicated the daily average amount
outstanding for major categories of the interest-earning assets and
interest-bearing liabilities, the interest earned or paid and the average yields
thereon (in thousands of dollars).
1999 1998
Amount Interest Yield Amount Interest
------ -------- ----- ------ --------
Interest-earning assets:
Loans, Net $421 541 $333,484
Less: non-accruing Loans (10 364) (4 505)
-------- --------
Loans $411 177 $ 37 586 9.14% $328 979 $ 30 161
U.S. Treasury Securities 1 156 79 6.83% 2 102 135
U.S. Government Agencies 89 863 5 579 6.21% 67 824 4 707
State and Municipal Obligations 50 954 3 989 7.83% 44 614 3 576
Other Securities 4 036 265 6.57% 3 964 260
Federal Funds Sold 5 361 245 4.57% 6 657 356
Other Money Market Instruments 1 251 58 4.64% 1 665 81
-------- -------- ----- -------- --------
Total Interest Earning Assets (net of $563 798 $ 47 801 8.48% $455 805 $ 39 276
non-accruing loans) ======== ======== ===== ======== ========
Interest-bearing liabilities:
NOW Accounts $ 47 313 $ 837 1.77% $ 41 734 $ 852
Savings Accounts 141 972 5 325 3.75% 109 778 4 077
Time Deposits 246 782 13 379 5.42% 188 412 10 826
Short Term Borrowings 67 278 3 555 5.28% 57 205 3 188
Customer Repurchase Agreements 3 657 163 4.46% 3 637 173
Long Term Debt
265 21 7.92% 348 32
-------- -------- ----- -------- --------
Total Interest-bearing Liabilities $507 267 $ 23 280 4.59% $401 114 $ 19 148
======== ======== ===== ======== ========
1998 1997
Yield Amount Interest Yield
Interest-earning assets:
Loans, Net $276 639
Less: non-accruing Loans (1 269)
Loans 9.17% $275 370 $ 25 496 9.26%
U.S. Treasury Securities 6.42% 2 691 168 6.24%
U.S. Government Agencies 6.94% 58 687 3 833 6.53%
State and Municipal Obligations 8.02% 32 858 2 755 8.38%
Other Securities 6.56% 2 026 132 6.52%
Federal Funds Sold 5.35% 17 1 5.88%
Other Money Market Instruments 4.86% 2 449 129 5.27%
----- -------- -------- -----
Total Interest Earning Assets (net of 8.62% $374 098 $ 32 514 8.69%
non-accruing loans) ===== ======== ======== =====
Interest-bearing liabilities:
NOW Accounts 2.04% $ 38 898 $ 892 2.29%
Savings Accounts 3.71% 88 544 2 770 3.13%
Time Deposits 5.75% 163 755 9 279 5.67%
Short Term Borrowings 5.57% 27 701 1 619 5.84%
Customer Repurchase Agreements 4.76% 1 800 70 3.89%
Long Term Debt
9.20% 377 32 8.49%
----- -------- -------- -----
Total Interest-bearing Liabilities 4.77% $321 075 $ 14 662 4.57%
8
The table below shows the net interest earnings and the net yield on
interest-earning assets for the periods indicated (in thousands of dollars).
1999 1998 1997
Total Interest Income $ 47 801 $ 39 276 $ 32 514
Total Interest Expense 23 280 19 148 14 662
-------- -------- --------
Net Interest Earnings $ 24 521 $ 20 128 $ 17 852
======== ======== ========
Net Yield on Interest-earning Assets 4.35% 4.42% 4.77%
(excluding non-accruing loans)
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%.
9
I. C. The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates (in thousands).
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
Interest earned on:
Loans $7 525 ($ 100) $7 425 4 939 ($ 274) $ 4 665
U.S. Treasury
Securities (63) 7 (56) (37) 4 (33)
U.S. Government
Agencies 1 449 (577) 872 615 259 874
State and Municipal
Obligations 502 (89) 413 964 (143) 821
Other Securities 5 0 5 127 1 128
Federal Funds Sold (64) (47) (111) 373 (18) 355
Other Money Market
Instruments (20) (3) (23) (40) (8) (48)
------- ------ ------ ------ ------ -------
Total Interest
Earning Assets $9 334 ($ 809) $8 525 $6 941 ($ 179) $ 6 762
======= ====== ====== ====== ====== =======
Interest paid on:
NOW Accounts $ 106 ($ 121) ($ 15) $ 61 ($ 101) ($ 40)
Savings Accounts 1 202 46 1 248 726 581 1 307
Time Deposits 3 259 (706) 2 553 1 407 140 1 547
Short Term
Borrowings 547 (180) 367 1 684 (115) 1 569
Customer Repurchase
Agreements 1 (11) (10) 79 24 103
Long Term Debt (7) (4) (11) (3) 3 0
------- ------ ------ ------ ------ -------
Total Interest-
Bearing
Liabilities $5 108 ($ 976) $4 132 $3 956 $ 530 $ 4 486
======= ===== ====== ====== ======= =======
(1) When a change in interest is due both to rate changes and volume this
analysis has been made on a fifty-fifty basis.
10
II. INVESTMENT PORTFOLIO
A. The carrying value of investment securities for those held to maturity (at
amortized cost) and available for sale (fair market value) as of December 31,
1999, 1998 and 1997 are summarized as follows (in thousands of dollars)
1999 1998 1997
---- ---- ----
Available for Sale
U.S. Treasury and Other U.S. government agencies $ 22 819 $ 20 192 $ 31 453
Mortgage-backed securities 69 410 54 981 34 337
Obligations of states and political subdivisions 31 797 34 288 33 214
Other 1 674 3 075 3 958
-------- -------- --------
$125 700 $112 536 $102 962
Held to Maturity
Obligations of states and political subdivisions $ 19 380 $ 15 510 $ 11 937
Other 0 0 0
-------- -------- --------
$ 19 380 $ 15 510 $ 11 937
Total $145 080 $128 046 $114 899
The Registrant does not hold investment securities of any issuer (other than
securities of the U.S. Government or its agencies) whose book value exceeds ten
percent of its stockholders equity.
11
II. B. The following table shows the maturities of investment securities as of
December 31, 1999 and weighted average yields of investment securities (in
thousands). The weighted average yields by maturity range was computed by
annualizing the purchase yield income on the securities within such maturity
range.
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. $ 994 7.13% $14 140 5.67% $ 7 685 6.93%
government agencies
Mortgage-backed securities 2 590 6.94% 46 739 6.10% 15 960 6.13%
Obligations of states and political subdivisions 2 139 7.19% 14 081 7.11% 11 323 7.85%
Other 515 4.86% 0.00% 0.00%
------- ---- ------- ---- ------- ----
Total $ 6 238 6.88% $74 960 6.21% $34 968 6.86%
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other U.S. $ 0.00 0.00% $ 22 819 6.16%
government agencies
Mortgage-backed securities 4 121 7.12% 69 410 6.20%
Obligations of states and political subdivisions 23 634 8.03% 51 177 7.70%
Other 1 159 5.80% 1 674 5.51%
------- ---- -------- ----
Total $28 914 7.81% $145 080 6.71%
Weighted average yield on state and political subdivisions has been computed on
a fully taxable equivalent basis using a tax rate of 34%.
12
III. LOAN PORTFOLIO
A. Types of Loans
The following table sets forth the comparison of the loan portfolio at December
31st of each of the past five years (in thousands of dollars).
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans secured primarily
By real estate:
Secured by 1 to 4 family
residential properties $138 030 $136 564 $100 555 $83 538 $62 271
Real estate-construction 26 534 9 553 14 760 11 365 6 378
Other real estate loans 201 301 178 846 118 103 104 391 83 461
Loans to farmers 8 472 6 810 6 314 5 883 5 771
Commercial and Industrial
Loans 56 861 60 495 40 624 40 777 40 287
Loans to individuals for
Household, family and
other personal
expenditures 15 446 15 914 13 480 15 233 12 522
All other loans 826 245 140 240 193
-------- -------- -------- -------- --------
Total gross loans $447 470 $408 427 $293 976 $261 427 $210 883
Less:
Unearned Income (451) (779) (538) (573) (653)
-------- -------- -------- -------- --------
Net Loans $447 019 $407 648 $293 438 $260 854 $210 230
======== ======== ======== ======== ========
13
III. LOAN PORTFOLIO
B. Maturity and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of loans outstanding (in thousands) as of
December 31, 1999 which, based on remaining scheduled repayments of principal,
are due in the periods indicated. Also, the amounts due after one year are
classified according to the sensitivity to change in interest rates.
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 $ 24 883 $ 64 732 $ 48 415 $138 030
Real estate - construction 21 639 4 136 759 26 534
Other real estate loans 44 357 116 846 40 098 201 301
Loans to farmers 1 993 5 638 841 8 472
Commercial and industrial loans 12 195 23 294 21 372 56 861
Loans to individuals for household,
family and other personal expenditures
4 089 10 996 361 15 446
All other loans 714 112 0 826
-------- -------- -------- --------
Total gross loans $109 870 $225 754 $111 847 $447 470
======== ======== ======== ========
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
---- ----
Due after one year $184 651 $152 949
C. Risk Elements
1. The following table shows at December 31, the aggregate amounts of loans (in
thousands) which are non-accrual, troubled with debt restructurings and accruing
loans past due 90 days or more as to principal or interest payments.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Non-accrual loans $ 8 086 $11 060 $ 1 720 $ 3 677 $ 846
Troubled debt restructurings 4 458 3 028 2 930 1 000 648
Loans past due 90 days or more 0 0 0 0 0
------- ------- ------- ------- -------
Total $12 544 $14 088 $ 4 650 $ 4 677 $ 1 494
======= ======= ======= ======= =======
14
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $929,000; $431,000; $202,000; $472,000; and
$74,000; for 1999, 1998, 1997, 1996 and 1995 respectively. Interest income which
is recorded only as received, amounted to $442,000; $216,000; $180,000;
$154,000; and $34,000; for 1999, 1998, 1997, 1996 and 1995 respectively for
these non-accrual loans.
Loans are placed on non-accrual status when they are contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is the practice of
management to place such loans on a non-accrual status immediately rather than
waiting until the loans become 90 days past due. When interest accruals are
discontinued, interest credited to income is reversed. If collectibility is in
doubt, cash receipts on nonaccrual loans are used to reduce principal rather
than recorded as interest income.
15
2. As of December 31, 1999, there existed potential problem loans totaling
$1,381,356 which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1999.
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
$ 770 919 10% $ 77 092
591 221 25% 147 805
11 216 50% 5 608
$ 8 000 100% 8 000
---------- --- --------
Totals $1 381 356 $238 505
Commercial loans comprised $1,337,918 or 96.9% of the total loans categorized as
problem loans. The other types of loans comprising this amount were consumer
loans totaling $43,438 or 3.1%.
3. The Bank's loan portfolio is diversified by types of borrowers and industry
groups within the Door, Brown, Kewaunee, Waushara, Outagamie, Green Lake and
Waupaca county market area. Significant loan concentrations are considered to
exist for a financial entity when such amounts are loaned to borrowers engaged
in similar activities as would cause them to be similarly impacted by economic
or other conditions. At December 31, 1999, there existed the following industry
group concentrations in the Registrant's loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $51.4 million or 11.5%
Total tourism loans $51.4 million or 11.5%
16
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following table summarizes the daily average loan balances at the end of
each period; changes in allowance for possible loan losses arising from loans
charged off and recoveries on loans previously charged off, by loan category;
and addition to the allowance which have been charged to operating expenses (in
thousands).
December 31
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Daily average amount of $421 541 $333 484 $276 639 $233 473 $201 839
loans ======== ======== ======== ======== ========
Balance of allowance for $ 11 035 $ 3 881 $ 2 893 $ 2 617 $ 2 534
possible loan losses
at beginning of period
Loans Charged Off:
Real estate - mortgage 991 355 1 99 ----
Real estate - construction 40 ---- ---- ---- ----
Loans to farmers 35 ---- ---- ---- ----
Commercial/Industrial Loans 4 097 376 199 82 158
Consumer Loans 199 114 121 105 50
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 5 362 $ 845 $ 321 $ 286 $ 208
======== ======== ======== ======== ========
Recoveries of loans previously
charged off:
Real estate - mortgage 508 148 1 ---- ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 1 433 186 151 16 33
Consumer loans 47 43 42 26 8
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loan recoveries $ 1 988 $ 377 $ 194 $ 42 $ 41
-------- -------- -------- -------- --------
Net loans charged off $ 3 374 $ 468 $ 127 $ 244 $ 167
-------- -------- -------- -------- --------
Additions to allowance for
Loan losses charged to $ 850 $ 1 135 $ 1 115 $ 400 $ 250
Operating expense -------- -------- -------- -------- --------
Allowance to related assets $ (900) $ 6 487 $ -- $ 120 $ -
acquired -------- -------- -------- -------- --------
Allowance for loan losses at $ 7 611 $ 11 035 $ 3 881 $ 2 893 $ 2 617
end of period ======== ======== ======== ======== ========
Ratio of net charge offs 0.80% .14% .05% .10% .08%
during period to average
Loans outstanding
The factors which influence management's judgment in determining the additions
to the loan valuation reserve are as follows:
1. An evaluation of potential losses in the current loan
portfolio, including the
17
evaluation of impaired loans under SFAS 114.
2. The ratio of loan valuation reserves to the total loans should
approximate 1.40% according to Baylake management.
3. The reserve margin as evaluated with various loss weightings to
the loan portfolio should provide a margin of .50% as related to
total loans.
4. The percentage of recoveries of loans previously charged off in
relation to (1) above.
5. The relationship of charged off loans to total loans experience.
6. The economic stability within the market area and its impact on the loan
portfolio.
18
B. Allocation of Allowance for Loan Losses
For each period ended December 31, the loan valuation reserve has been allocated
to the following categories in amounts deemed reasonably necessary to provide
for the possibility of losses being incurred within each category. The table
also sets forth the percentage of loans in each category to total loans (in
thousands).
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount
------ of Loans ------ of Loans ------
in Each in Each
Category Category
to Total to Total
Loans Loans
----- -----
Real estate - mortgage $3 200 75.8% $6 635 77.3% $1 900
Real estate -
construction 200 5.9% 100 2.3% 50
Loans to farmers 100 1.9% 75 1.7% 20
Commercial/industrial 3 661 12.9% 3 750 14.8% 1 520
Consumer 400 3.5% 425 3.9% 371
Not allocated 50 50 20
------- ------- ------- ------- -------
Total $ 7 611 100% $11 035 100% $3 881
======= ======= ======= ======= =======
1996 1995
---- ----
Percent Amount Percent Amount Percent
of Loans ------ of Loans ------ of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Loans Loans Loans
----- ----- -----
Real estate - mortgage 74.4% $1 143 71.9% $1 000 69.1%
Real estate -
construction 5.0% 50 4.3% 50 3.0%
Loans to farmers 2.1% 20 2.3% 20 2.7%
Commercial/industrial 13.9% 1 300 15.7% 1 190 19.2%
Consumer 4.6% 360 5.8% 337 6.0%
Not allocated 20 20
------- ------- ------- ------- --------
Total 100% $2 893 100% $2 617 100%
======= ======= ======= ======= ========
19
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- ----- ------- ----- ------- -----
Non-interest bearing demand
deposits $ 56 755 0.00% $ 46 586 0.00% $ 41 521 0.00%
Interest bearing demand
deposits 47 313 1.77% 41 734 2.04% 38 898 2.29%
Savings deposits 141 972 3.75% 109 778 3.71% 88 544 3.13%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 193 416 5.36% 144 772 5.86% 130 084 5.63%
Time Certificates of Deposit
of $100,000 or more 53 366 5.63% 43 640 5.38% 33 671 5.80%
-------- ----- -------- ----- -------- -----
Total Deposits $492 822 3.97% $386 510 4.08% $332 718 3.89%
======== ===== ======== ===== ======== =====
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
1999 1998 1997
---- ---- ----
3 months or less $ 20 118 $9 778 $ 15 801
Over 3 months thru 6 months 20 955 17 183 7 078
6 months thru 12 months 8 244 12 629 7 621
Over 12 months 6 218 8 127 1 833
-------- -------- --------
Total $ 55 535 $ 47 717 $ 32 333
======== ======== ========
20
VI. RETURN ON EQUITY AND ASSETS
The ratio of consolidated net income to average stockholders' equity and to
average total assets and other ratios are as follows:
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
---- ---- ----
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.12% 1.21% 1.29%
Average Stockholders' Equity (return
on equity) 15.07% 13.87% 13.14%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 39.36% 57.32% 55.56%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 7.45% 8.72% 9.82%
21
VII. Short-Term Borrowings
A. The following table shows outstanding amounts of short-term borrowings,
together with the weighted average interest rates thereon, at December 31, of
each of the past three years (in thousands of dollars).
1999 1998 1997
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Federal Funds purchased $ 6 330 6.16% $ - 0.00% $18 373 7.07%
Federal Home Loan Bank 80 000 6.39% 53 000 5.26% 36 000 5.88%
borrowings
Securities Sold under
agreements to 2 901 3.88% 3 758 4.19% 2 276 5.07%
repurchase ------- ------- ------- ------- ------- -------
$89 231 6.29% $56 758 5.19% $56 649 6.23%
======= ======= ======= ======= ======= =======
B. The following table shows the maximum amounts outstanding of short term
borrowings at any month-end during each reported period (in thousands of
dollars).
1999 1998 1997
---- ---- ----
Balance Balance Balance
------- ------- -------
Federal funds purchased $28 350 $38 392 $18 373
Federal Home Loan Bank
borrowings 61 000 36 000 36 000
Securities sold under
agreements to repurchase
2 031 2 925 2 276
22
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of short-term borrowings, the interest paid and
the weighted average rates thereon (in thousands of dollars).
1999 1998 1997
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- --------
Short-term
borrowings:
Federal funds $10 812 $ 605 5.60% $15 107 $ 898 5.94% $20 944 $1 233 5.89%
purchased
Federal Home Loan 56 466 2 895 5.13% 42 098 2 290 5.44% 6 756 386 5.71%
Bank borrowings
Securities sold
under agreements
to repurchase 3 657 163 4.46% 3 637 173 4.76% 1 800 70 3.89%
------- ------- ----- ------- ------- ----- ------- ------- -----
Total short-term
borrowings $70 935 $3 663 5.16% $60 842 $3 361 5.52% $29 500 $1 689 5.73%
======= ======= ===== ======= ======= ===== ======= ======= =====
23
VIII. Long Term Debt
A. The following table shows outstanding amounts of long term debt,
together with the weighted average interest rates thereon, at December
31, of each of the past three years (in thousands of dollars). Long
term debt consists of a land contract requiring annual principal
payments of $53,000 plus interest calculated at prime + 1/4% and a
supplier contract for $14,000 with a five year term and payments
monthly. The supplier contract was paid off in 1998.
1999 1998 1997
---- ---- ----
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Land contract payable $ 264 8.00% $ 317 8.75% 369 8.50%
Other - 0.00% 75 5.85% 14 4.50%
------ ------ ------ ------ ------ ------
$ 264 8.00% $ 392 8.20% $ 383 8.35%
====== ====== ====== ====== ====== ======
B. The following table shows the maximum amounts outstanding of long term debt
at any month-end during each reported period (in thousands of dollars).
1999 1998 1997
---- ---- ----
Balance Balance Balance
------- ------- -------
Land contract payable $ 264 $ 317 $ 369
Other - 89 14
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of long term debt, the interest paid and the
weighted average rates thereon (in thousands of dollars).
1999 1998 1997
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
Long term debt:
Land contract payable $ 264 $ 21 8.00% $ 317 $ 27 8.54% $ 369 $ 31 8.50%
24
ITEM 2. PROPERTIES
Registrant directly owns no real properties of any kind. However, Bank owns
twenty branches and leases the main office building from its subsidiary the Bank
of Sturgeon Bay Building Corporation.
The main office building located in Sturgeon Bay serves as headquarters for
Registrant as well as the main banking office of Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
and financial services. The twenty two branches owned or leased by Bank are
conveniently located throughout the market area served by Bank, including the
counties of Door, Kewaunee, Brown, Manitowoc, Green Lake, Outagamie, Waushara
and Waupaca. All properties are in good condition and considered adequate for
present and near term requirements.
ITEM 3. LEGAL PROCEEDINGS
Registrant is presently involved in one legal action which may have a
significant impact. The action is based on a lender liability claim for damages
arising from the denial of a loan application. The amount of potential loss may
exceed $500,000 if the liability claim is successful. Management intends to
defend this claim vigorously.
Registrant remains subject to various other claims. However, these matters are
subject to uncertainties, and accordingly, the outcomes are not predictable with
assurance. Although the Registrant believes that amounts provided in its
financial statements are adequate, there can be no assurances that the amounts
required to discharge alleged liabilities from these matters will not have a
material adverse affect on its financial condition, results of operations or
cash flows. Any amounts of costs that may be incurred in excess of those amounts
provided as of December 31, 1999 cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of names of executive officers of the Registrant and
position within the Registrant.
- ----------------------------------------- -----------------------------------
Thomas L. Herlache Chairman, President, CEO and
Director of Baylake Corp.
- ----------------------------------------- -----------------------------------
Richard A. Braun Vice Chairman, Executive Vice
President and Director of Baylake
Corp.
- ----------------------------------------- -----------------------------------
Paul C. Wickmann Vice President
- ----------------------------------------- -----------------------------------
Daniel F. Maggle Secretary
- ----------------------------------------- -----------------------------------
Steven D. Jennerjohn Treasurer
- ----------------------------------------- -----------------------------------
25
- -------------------------------------- -----------------------------------
Robert M. Zubella Vice President
- -------------------------------------- -----------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
Historically, trading in shares of Baylake Corp. Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol: BYLKBB), an electronic interdealer quotation system providing
real-time quotations on over 4,000 eligible securities. Previously, Baylake
Common Stock was listed on the NASDAQ Pink Sheets. Trading in Baylake Common
Stock has been conducted principally by certain brokerage and investment firms
with offices in Door County, Wisconsin which have provided price quotations, and
have assisted individual holders of Baylake Common Stock who wish to sell their
shares. In addition, since May 1993, prices for Baylake Common Stock have
generally been reported daily in The Milwaukee Journal Sentinel based on
information provided by a local brokerage firm.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are computed
from those obtained from two brokerage firms, and, since May 1993 from bid
prices reported in The Milwaukee Journal Sentinel. The reported high and low
prices represent interdealer bid prices, without retail mark-up, mark-downs or
commission, and may not necessarily represent actual transactions. Prices and
dividends per share quoted have been adjusted for a 2 for 1 stock dividend paid
on November 15, 1999.
- ----------------------- --------------------- -------------------- --------------------- --------------------
Calendar High Low Cash
-------- ---- --- ----
period dividends
------ ---------
per share
---------
- ----------------------- --------------------- -------------------- ------------------------------------------
1998 1st Quarter $11.67 $ 9.42 $0.085
- ----------------------- --------------------- -------------------- -------------- ---------------------------
2nd Quarter $13.00 $10.50 $0.085
- ----------------------- --------------------- -------------------- -------------- ---------------------------
3rd Quarter $14.75 $12.50 $0.085
- ----------------------- --------------------- -------------------- -------------- ---------------------------
4th Quarter $17.00 $13.50 $0.175
- ----------------------- --------------------- -------------------- -------------- ---------------------------
1999 1st Quarter $17.25 $15.50 $0.090
- ----------------------- --------------------- -------------------- -------------- ---------------------------
2nd Quarter $17.63 $16.56 $0.090
- ----------------------- --------------------- -------------------- -------------- ---------------------------
3rd Quarter $20.00 $17.25 $0.090
- ----------------------- --------------------- -------------------- -------------- ---------------------------
4th Quarter $30.00 $19.75 $0.100
- ----------------------- --------------------- -------------------- -------------- ---------------------------
Baylake had approximately 1,687 shareholders of record at March 17, 2000.
Baylake paid a special dividend of $.09 per share cash dividend in December
1998.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January, and Baylake expects to
continue this practice for the immediate future. The holders of Baylake Common
Stock are entitled to receive such dividends when and as declared by Baylake's
Board of Directors. The ability of Baylake to pay dividends is dependent upon
receipt by Baylake of dividends from the Bank, which is subject to regulatory
restrictions.
26
Such restrictions, which govern state chartered banks, generally limit the
payment of dividends on bank stock to the bank's undivided profits after all
payments of all necessary expenses, provided that the bank's surplus equals or
exceeds its capital. In determining the payment of cash dividends, the Board of
Directors of Baylake considers the earnings, capital and debt servicing
requirements, financial ratio guidelines issued by the FRB and other banking
regulators, financial conditions of Baylake and the Bank, and other relevant
factors. Baylake maintains a dividend reinvestment plan enabling participating
shareholders to elect to purchase shares of Baylake Common Stock in lieu of
receiving cash dividends. Such shares may be newly issued securities or acquired
in the market, and will be purchased on behalf of participating shareholders at
their then fair market value.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Interest $46,467 $38,061 $31,577 $26,926 $24,487
Income
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Interest $23,280 $19,148 $14,662 $12,046 $10,131
Expense
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Net $23,187 $18,913 $16,915 $14,880 $14,356
Interest
Income
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Provision $ 850 $ 1,135 $ 1,115 $ 400 $ 250
for Loan
Losses
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Other $ 4,556 $ 4,377 $ 4,068 $ 3,451 $ 2,581
Income
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Other $17,370 $13,891 $12,571 $11,289 $ 9,894
Expense
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Income $ 9,523 $ 8,264 $ 7,297 $ 6,642 $ 6,793
before
Income
taxes
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Net Income $ 6,923 $ 6,017 $ 5,270 $ 4,703 $ 4,644
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Earnings
per
share:
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Basic $ .94 $ .82 $ .72 $ .64 $ .63
earnings
per share
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Diluted $ .90 $ .80 $ .71 $ .63 $ .62
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Dividends $ .37 $ .47 $ .40 $ .31 $ .38
per share
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total $646,310 $607,438 $450,062 $395,356 $309,428
assets
(ooo's)
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Registrant"), which may not be otherwise apparent from the
consolidated financial statements included in this report. This discussion and
analysis should be read in conjunction with those financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report for a more complete understanding of the following
discussion and analysis.
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on the current expectations of management. Words such as "anticipates,"
believes," estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "projects," and similar expressions are intended to identify such
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the control of the Registrant, that could materially
differ from what may be expressed or forecasted in such forward-looking
statements. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the relationships; demand for
products and services; the degree of competition by traditional and
non-traditional competitors; changes in banking regulations; changes in tax
laws; changes in prices; the impact of technological advances; governmental and
regulatory policy changes; trends in customer behavior as well as their ability
to repay loans; and changes in the national economy.
On October 1, 1998, the Registrant acquired Evergreen Bank, N.A. and changed its
name to Baylake Bank, N.A. ("BLBNA"). No payments to the former shareholder have
been made, but are contingently payable based on a formula set forth in the
stock purchase agreement. The acquisition was accounted for using the purchase
method of accounting, therefore, it would affect future operations. See Note 13
of Notes to Consolidated Financial Statements for additional details on this
transaction.
All per share information has been restated to reflect the 3-for-2 stock
dividend paid on May 15, 1998 and the 2-for-1 dividend paid on November 1999.
Results of Operations
Net income in 1999 was $6.9 million, a 15.1% increase from the $6.0 million in
1998. Net income for 1998 showed a 14.2% increase over the 1997 earnings. Basic
operating earnings per share increased to $.94
28
per share in 1999 compared with $.82 in 1998, an increase of 14.6%. Basic
operating earnings per share in 1998 showed a 13.9% increase over 1997 results
of $.72 per share. On a diluted earnings per share basis, the Registrant
recorded $.90 per share in 1999, compared to $.80 and $.71 per share in 1998 and
1997, respectively.
Net income for 1999 includes amortization expense of $327,000 of goodwill
related to the purchase of Four Seasons and $126,000 related to the acquisition
of BLBNA. This expense reduced after-tax net income in 1999 by $453,000 or
earnings per share by $.06. Net income for 1998 reflected amortization expense
of $399,000 related to goodwill, thereby reducing after-tax earnings per share
by $.05.
In spite of an interest rate environment affected by rising rates in the latter
half of 1999 and increased competition, net interest income improved. Net
interest income for 1999 improved $4.3 million or 22.6% over 1998 levels. Net
interest income for 1998 improved $2.0 million or 11.8% over 1997 levels.
Interest income increased by 22.1% while interest expense increased 21.6%.
Other income increased $179,000 or 4.1%. The primary factors increasing other
income were an increase in loan servicing fees, fiduciary income, and fees for
other services to customers offset by a decrease in gains on sales of loans.
Non-interest expense increased $3.5 million or 25.0% over 1998 levels. Factors
contributing to the increase were increased personnel expenses, occupancy and
equipment expense, data processing and other operating expenses offset by a
reduction in operation of other real estate.
For 1999, return on average assets declined to 1.12% compared with 1.21% in 1998
and 1.29% in 1997. This ratio declined as a result of the various factors
discussed above combined with an average asset growth rate of 24.0% in 1999.
Return on average stockholders' equity in 1999 showed an increase of 15.1%
compared to 13.9% in 1998 and 13.1% in 1997. The increase in 1999 compared to
1998 occurred as a result of increased net income, a lower average capital to
average asset ratio and the factors described above.
Cash dividends declared in 1999 decreased 21.3% to $.37 per share compared with
$.47 in 1998. This compares to an increase of 17.5% in 1998 dividends as
compared to 1997.
Net Interest Income
Net interest income is the largest component of the Registrant's operating
income (net interest income plus other non-interest income) accounting for 84.3%
of 1999 total operating income, as compared to 82.1% in 1998 and 81.4% in 1997.
Net interest income represents the difference between interest earned on loans,
investments and other earning assets offset by the interest expense attributable
to the
29
deposits and the borrowings that fund them. Interest fluctuations together with
changes in the volume and types of earning assets and interest-bearing
liabilities combine to affect total net interest income. This analysis discusses
net interest income on a tax-equivalent basis in order to provide comparability
among the various types of interest earned. Tax-exempt interest income is
adjusted to a level that reflects such income as if it were fully taxable.
Net interest income on a tax-equivalent basis reached $24.5 million in 1999, an
increase of 21.9% from $20.1 million in 1998 (and $17.9 million in 1997). The
improvement in 1999 net interest income of $4.4 million was due in part to an
increase in the volume of net average earning assets of $1.8 million. In spite
of this, average earning assets increased 23.7% offset by an increase of 26.5%
in average interest-bearing liabilities. The benefit from an increase in earning
assets, non-interest bearing deposits and a decrease in the cost of interest
paying liabilities were offset, in part, by an increase in interest-bearing
liabilities and a decline in the yield on earning assets. As a result, interest
income increased 21.7% while interest expense for 1999 increased 21.6%.
Average loans outstanding grew from $333.5 million in 1998 to $421.5 million in
1999, an increase of 26.4%. The increase in loan volume also was a significant
contributing factor to the increase in interest income. Average loans
outstanding increased from $276.6 million in 1997 to $333.5 million in 1998, an
increase of 20.6%. The mix of average loans to average total assets decreased
slightly from 67.8% in 1997 to 67.1% in 1998 and increased to 68.3% in 1999. The
relationship of greater loan composition in the asset mix has provided a source
of higher yielding assets, which has contributed to an increase in net interest
income.
Interest rate spread is the difference between the tax-equivalent rate earned on
average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread increased 4 basis points in 1999 to 3.89%
from 3.85% in 1998, as the average yield on earning assets decreased 14 basis
points while the average rate paid on interest-bearing liabilities decreased 18
basis points over the same period. The increase in interest rate spread followed
a decline of 27 basis points in 1998 compared to a spread of 4.12% in 1997. The
increase in the Registrant's earning assets yield reflects an increasing rate
environment impacting rates on the variable priced loans in the last half of
1999 and increased competition. Increased investment interest income which have
resulted from an increased investment portfolio combined with lower yields on
the investment portfolio have contributed to some of the increase in interest
rate spread. Yields on interest-paying liabilities decreased 18 basis points.
Less reliance on high cost deposit funds offset by increased competition for
retail deposits and new product offerings decreased yields on interest bearing
deposits by 15 basis points from 4.63% in 1998 to 4.48% in 1999. Additionally,
as a result of an effort intended to increase interest-earning assets and thus
reduce the percentage of equity to total assets (known as leveraging), Baylake
was able to
30
acquire additional funding, primarily from the Federal Home Loan Bank ("FHLB")
of Chicago. Although this effort provided additional funding in 1999, the
percentage of short-term borrowings as a percentage of interest-bearing
liabilities decreased to 13.3% in 1999 compared to 14.3% in 1998. Yields on
these borrowings decreased 29 basis points in 1999 compared to 1998 contributing
to an overall decrease in the yields paid on interest-bearing liabilities.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of funds
to fund a portion of earning assets. As a result, the level of funds available
without interest cost (demand deposits and equity capital) is an important
factor affecting an increasing net interest margin.
The net interest margin for 1999 was 4.35% compared to 4.42% in 1998. The
decline in net interest margin was in part related to a decline in the free
funds ratio and an increase in non-accrual loans offset by an increase in the
interest rate spread. The impact from competition as it relates to the
commercial loan portfolio and costs related to new product offerings had a
negative affect on the change in net interest margin. The free funds ratio, or
the level of non-interest bearing funds that support earning assets, declined to
18.2% from 19.7% in 1998.
The net interest margin for 1998 was 4.42% compared to 4.77% in 1997 as interest
rate spread declined during that period. The decrease in 1998 occurred primarily
as the result of the 27 basis point decline in the interest rate spread and a
decrease in the average earning assets to average asset ratio. Increased
competition especially as it relates to the commercial loan portfolio,
negatively affected net interest margin.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 91.4% in 1999 compared with 91.7% in 1998 and 91.6% in
1997. The ratio remained stable in 1999 as a result of efforts to increase
interest-earning assets using such sources as FHLB for funding increased loan
demand. This was offset by an increase in non-accrual loans.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Registrant
constantly seeks to attract lower cost core deposits, service the needs of the
customer, and provide attractively priced products. Competition for high quality
assets will also affect asset yields. Net interest income is vital to the
Registrant's earnings performance, since net interest income is the largest
component of operating income. Growth in net interest income primarily is the
result of growth in the level of earning asset volumes and changes in asset mix.
Interest rate spread management through asset and liability pricing and
increased levels of non-interest-bearing sources of funds also aid in improving
net interest income. Management will continue
31
its focus on maintaining an appropriate mix of quality earning assets as well as
seeking to achieve appropriate growth in volumes.
Changes in the levels of market interest rates also affect net income, but are
less directly under the control of the Registrant. Although a stable rate
environment has been experienced, management believes that a gradual increase in
interest rates will not adversely affect the earning capacity of the Registrant.
Past experience has shown that, although the Registrant remains in a short-term
negative interest rate sensitivity gap, deposits tend not to be repriced as
quickly as loans in a rising rate scenario and are repriced more frequently in a
falling interest rate environment. More discussion on this subject is referenced
in the section titled "Interest Rate Sensitivity".
Provision for Loan Losses
Provision for loan losses in 1999 at $850,000 compares to a provision of
$1,135,000 for 1998 and $1,115,000 for 1997. Net charge-offs in 1999 were $3.4
million compared with net charge-offs of $468,000 in 1998 and $127,000 in 1997.
Net charge-offs of $3.4 million occurred as a result of BLBNA results. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .80% in 1999 compared with .14% in 1998
and .05% in 1997. Entry into new markets has allowed management the opportunity
to re-evaluate the methodology used in providing adequate provision for
potential loan losses, as a result the provision for loan losses was reduced in
spite of increased loan growth. Management's determination of the provision for
loan losses is based on several factors. Factors considered include evaluation
of the loan portfolio, current domestic conditions, loan volume, loan growth,
loan portfolio composition, levels of non-performing loans, trends in past due
loans, and the evaluation of various problem loans for loss potential. Net
charge-offs to average loans remain comparatively low in spite of above average
loan growth due to higher underwriting standards and improved collection
efforts.
The Registrant's charge-off level for 2000 will continue to be affected as a
result of the purchase of BLBNA. The Registrant anticipates charge-off levels in
2000 to be less than 1999 but slightly higher than recent historical charge-off
levels, although the Registrant believes adequate coverage exists as a result of
the Allowance for Possible Loan Losses acquired as a result of the BLBNA
acquisition.
Non-Interest Income
Total non-interest income for 1999, excluding securities transactions, was
$181,000 more than 1998, a 4.1% increase. In 1998, total non-interest income was
$601,000 more than 1997, a 15.9% increase. Trust service fees, loan servicing
fees, gains from sales of loans and service charges continue to be the primary
components of non-interest income.
32
Trust fees increased $102,000 or 22.6% in 1999 compared to 1998, primarily as a
result of an increase in trust estate business and additional assets under
management. This compared to a decrease of $40,000 or 8.2% in 1998 compared to
1997, primarily the result of decreased trust estate business.
Loan servicing fees increased $29,000 or 3.4% to $875,000 in 1999. This followed
an increase of $115,000 or 15.7% increase to $846,000 in 1998. The increase in
1999 occurred as a result of increased servicing income due to a larger
portfolio of commercial loan business sold on the secondary market and serviced
by Registrant.
Gains on sales on loans in the secondary market decreased $598,000 to $295,000
in 1999 primarily as a result of decreased gains from sales of commercial loans.
Premiums were non-existent in the secondary market for commercial loans
contributing to a decline of $472,000 in gains from the sale of commercial
loans. In addition, gains from mortgage loans decreased $87,000 in 1999.
Increased mortgage loan business amounted to $19.9 million of loans sold in
1999. Total loans sold during 1999 were $26.2 million compared to $24.8 million
in 1998.
Service charges on deposit accounts showed an increase of $279,000 or 26.8% over
1998 results accounting for the improvement in fee income generated for other
services to customers.
Included in 1999 other income are recoveries of $131,000 related to the BLBNA
operation, providing the increase to other income as related to 1998 results.
Non-Interest Expense
Non-interest expense in 1999 increased $3.5 million or 25.0% compared to 1998
results primarily as a result of increased personnel, equipment, data
processing, and other operating expense. This followed a $1.3 million or 10.5%
increase in 1998 as compared to 1997.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $9.7 million in 1999, an increase of $1.9 million or 24.8%
as compared to 1998 results. The increase in 1999 primarily resulted from
additional staffing increases (including the addition of BLBNA), bonus expense,
increased benefit costs, and normal salary increases. Salary and employee
benefits expense in 1998 totaled $7.8 million, an increase of $769,000 or 11.0%
as compared to 1997 results. The 1998 increase resulted primarily from
additional staffing increases, increased benefit costs, and normal salary
increases.
Bonuses arising from the Registrant's Pay-for-Performance Program amounted to
$536,000 in 1999 compared to $205,000 in 1998, an increase of 161.5%. This
program is designed to reward various divisions if certain goals are met in
achieving improvement in income and reaching certain levels of performance on
return on equity. As a result of
33
certain goals on return on equity being achieved, the bonus payout was more,
therefore bonus expense increased.
The Registrant's 401(k) profit sharing plan (including a money purchase plan
initiated in 1999) covering all employees who qualify as to age and length of
service increased $94,000 or 19.7% over 1998 levels. Expenses in the same
category were up $55,000 or 13.0% over 1997 levels.
The number of full-time equivalent employees increased to 252 in 1999 from 229
in 1998, an increase of 10.0%. Employee levels in 1998 increased to 229 from 199
in 1997, an increase of 20.5%. Other than resulting from the BLBNA acquisition,
these increases occurred primarily in the Green Bay market with emphasis on
additional personnel for sales and calling programs in that particular market.
As the Registrant expands to take advantage of business opportunities and the
related revenues, management will continue its efforts to control salaries and
employee benefits expense, although increases in these expenses are likely to
occur in future years.
Net occupancy expense for 1999 showed an increase of $261,000, or 22.3%, as
compared to 1998. An addition in Waupaca along with additional expense stemming
from the BLBNA acquisition and expansion opportunities in the Green Bay region
were reasons for the additional expense in 1999. Additional depreciation
expense, real estate tax expense and other occupancy costs resulted in 1999.
This increase followed an increase of $1,000 in 1998. The only addition in 1998
occurred as a result of opening a branch in Ledgeview offset by a reduction in
expenses related to maintenance and repairs.
Equipment expense increased $215,000 or 21.0% compared to 1998. This followed an
increase of $156,000 or 18.0% in 1998. The increase resulted from depreciation
expense from past capital expenditures for equipment which were made to enhance
the Registrant's technological capabilities. In addition, four branches acquired
as a result of the BLBNA acquisition provided expenses for all of 1999 as
compared to one quarter in 1998.
Data processing expense in 1999 increased $173,000 or 24.7% due to volume
increases, conversion expense, and technology enhancements. This followed an
increase of $57,000 or 8.9% in 1998 compared to 1997. Management estimates that
data processing expense should show relatively flat increases with only
adjustments related to any volume increase incurred by Registrant.
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result, the
Registrant has shown varied results. Other real estate owned expenses showed net
income of $117,000 in 1999 as a result of various gains taken on property sales.
Gains of $232,000 were taken from lot sales of Idlewild Valley, Inc., a former
subsidiary of the Bank whose value was written off in 1988. In addition gains of
$69,000 from three commercial property sales and $33,000 from three residential
34
property sales occurred in 1999. These were offset by losses of $56,000 from the
sale of one commercial property and three residential properties. Various
operating expenses, net of income, of other real estate totaling $161,000
occurred in 1999. Other real estate owned expenses resulted in a net loss of
$15,000 in 1998, stemming from various operating expenses occurring on property
held during the year. Other real estate owned expenses showed a net loss of
$30,000 in 1997 as a result of a loss on sale of approximately $17,000 on a
commercial property transaction closed during the year along with various
operating costs expensed during 1997.
Other operating expenses in 1999 increased $1 million or 32.2%. Included in 1999
expenses were amortization of goodwill related to the Four Seasons acquisition
of $327,000 (the same as in 1998) and amortization of $126,000 (as compared to
$72,000 in 1998) related to the BLBNA acquisition. This compares to an increase
of $352,000 or 12.3% in 1998 compared to 1997.
Supplies expense shows an increase of $60,000, or 15.7% in 1999 as compared to
1998. $12,000 of the increase occurred as a result of BLBNA operations.
Payments to regulatory agencies increased $80,000 to $181,000 for 1999. $35,000
of the increase occurred as a result of BLBNA. For the Bank, these charges
related to a debt service assessment related to Financing Corporation (FICO). A
risk classification rating of 1A (rating assigned to well-capitalized
institutions) allowed Bank to experience no Federal Deposit Insurance
Corporation (FDIC) assessments for the first nine months of 1999. As a result of
a change in rating assigned of 2A (rating for adequately capitalized
institutions), the Bank experienced higher assessment costs for the last quarter
of 1999. The lower assessment occurred as a result of the "Total Risk-Based
Capital Ratio"decreasing to a level below 10%. Prior to the merger of the Bank
and BLBNA, BLBNA had been assigned a risk classification rating of 3B (rating
assigned to troubled and critically under capitalized institutions) therefore in
addition to a FICO assessment, BLBNA also received a FDIC assessment.
Other items comprising other operating expense shows an increase of $780,000 or
a 32.6% increase in 1999 compared to 1998. Additional marketing and advertising
expense of $92,000 account for some of this increase, as entry into newer
markets contributed to more extensive and costlier media advertising expense.
Director fees and other related costs show an increase of $32,000 in 1999 due to
additional regional boards established in the year for purposes of keeping
involvement in the communities served by Bank, thereby allowing various levels
of decision-making to be made in the regions formed. Loan and collection expense
increased $346,000, the result of more extensive collection efforts being made
on the troubled loan portfolio acquired as result of the BLBNA purchase. Legal
expenses increased $176,000 during 1999, primarily the result of the completion
of various legal actions stemming from the operations of the former BLBNA. The
overhead ratio, which is computed by subtracting non-interest
35
income from non-interest expense and dividing by average total assets was 2.08%
for 1999 compared to 1.91% for 1998 and 2.08% for 1997. Registrant continues its
commitment to deliver quality service and products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1999 was $2.6 million, an increase of
$353,000 or 15.7% compared to 1998. This followed an increase of $220,000 or
10.9% in 1998 compared to 1997. The higher tax expense in 1999 and 1998
reflected the Registrant's increase in before tax earnings offset by an increase
in tax-exempt interest income.
The Registrant's effective tax rate (income tax expense divided by income before
taxes) was 27.3% in 1999 compared with 27.2% in 1998 and 27.8% in 1997. Of the
27.3% effective tax rate for 1999, the federal effective tax rate was 25.9%
while the Wisconsin State effective tax rate was 1.4%.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been recognized to offset the related deferred tax assets due to the uncertainty
of realizing tax benefits of a portion of loan loss and mortgage servicing
differences.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Balance Sheet Analysis
Loans
Total loans outstanding grew to $447.0 million at December 31, 1999, a 9.7%
increase from the end of 1998. This follows a 39.1% increase at December 31,
1998 over 1997 year end. The acquisition of BLBNA accounted for $76.6 million or
26.2% of the increase at December 31, 1998.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small business. Loans of this type are in a
broad range of industries and include service, retail, wholesale, and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door, Brown,
36
Outagamie, Waupaca, Waushara and Kewaunee counties, Wisconsin. The credit risk
related to commercial loans made by the Registrant's subsidiaries is largely
influenced by general economic conditions (especially those applicable to the
Door County market area) and the resulting impact on a borrower's operations.
Commercial loans and commercial real estate loans (including construction loans)
totaled $293.7 million at year end 1999 and comprised 65.7% of the loan
portfolio compared with 62.4% of the portfolio at the end of 1998. Loans in
these classifications grew $38.0 million or 14.9% during 1999.
The following tables set forth loan composition (net of unearned income) at
December 31 (in thousands of dollars):
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Amount % of Total Amount % of Total Amount % of Total
- ---------------------------------------------------------------------------------------------------------------------
Real $137 900 31% $136 225 34% $100 352 34%
estate-
resident
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Real estate- $ 26 534 6% $ 9 553 2% $ 14 760 5%
construction
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Real $200 980 45% $178 406 43% $117 768 40%
estate-commercial/agric
ultural
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Commercial/agric $ 66 159 15% $ 67 550 17% $ 47 078 16%
ultural
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Consumer/Install $ 15 446 3% $ 15 914 4% $ 13 480 5%
ment
- ---------------------------- -------------- --------------- -------------- --------------- -------------- -----------
Total loans (net $447 019 $407 648 $293 438
of unearned
income)
- ---------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------- --------------------- -------------------- --------------------- --------------
Amount % of Total Amount % of Total
- -------------------------------------------------------------------------------------------------------
Real $ 83 334 32% $ 62 059 29%
estate-
residential
- ----------------------- --------------------- -------------------- --------------------- --------------
Real $ 11 365 4% $ 6 378 3%
estate-
construction
- ----------------------- --------------------- -------------------- --------------------- --------------
Real $104 136 40% $ 83 177 40%
estate-commercial/
agricultural
- ----------------------- --------------------- -------------------- --------------------- --------------
Commercial/ $ 46 786 18% $ 46 094 22%
agricultural
- ----------------------- --------------------- -------------------- --------------------- --------------
Consumer/Ins $ 15 233 6% $ 12 522 6%
tallment
- ----------------------- --------------------- -------------------- --------------------- --------------
Total Loans, $260 854 $210 230
(net of
unearned
income)
- -------------------------------------------------------------------------------------------------------
37
Real estate loans (including construction loans) secured by non-residential real
estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, they are combined with
commercial loans for purposes of analysis and discussion.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
in part by detailed underwriting procedures, comprehensive loan administration,
and periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Registrant's loan portfolio is diversified by types of borrowers and
industry groups within the market areas served. Significant loan concentrations
are considered to exist for a financial entity when such amounts are loans to a
multiple of borrowers engaged in similar activities which cause them to be
similarly impacted by economic or other conditions. At December 31, 1999, there
existed the following industry group concentrations in the Registrant's loans
which exceeded 10% of total loans:
Tourism related loans:
- -------------------------------------------------------------------------------------------------------
Lodging business $51.4 million or 11.5%
- ------------------------------------------------------- -----------------------------------------------
Total tourism loans $51.4 million or 11.5%
- -------------------------------------------------------------------------------------------------------
The Registrant has a significant loan concentration because of tourism based
loans. The Registrant must serve the credit needs of its market, with one of the
key industries being tourism. Being a community bank, however, the Registrant
must also meet the other needs of its market area. For that reason the
Registrant realizes that the economic conditions of its market area directly
impact the Registrant's performance levels. Any general weakness in the Door,
Brown, Kewaunee, Outagamie, Waupaca, or Waushara County areas could have a
material effect on the business and operations of the Registrant, although
management believes that it is not unduly exposed to problems in any particular
industry group.
Real estate residential mortgage loans totaled $137.9 million at the end of 1999
and comprised 30.9% of the loan portfolio at the end of 1999. Loans grew $1.7
million or 1.2% during 1999. Residential real estate loans consist of
conventional home mortgages, adjustable indexed interest rate mortgage loans,
home equity loans, and secondary home mortgages. Loans are primarily for
properties with the market areas served by the Registrant. Residential real
estate loans generally contain a limit for the maximum loans to collateral value
of 75% to 80%. Private mortgage insurance may be required when the loan to value
exceeds these limits. Residential real estate loans are written normally with a
one, two, or three year balloon feature.
38
In 1997, the Registrant offered adjustable indexed interest mortgage loans based
upon market demands. At year end 1999, those loans totaled $44.5 million
dollars. Adjustable indexed interest rate mortgage loans contain an interest
rate adjustment provision tied to the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, plus an additional
mark-up of 2.75% (the "index") which varies with the mortgage loan product.
Interest rates on indexed mortgage loans are adjusted, up or down, on
predetermined dates fixed by contract, in relation to and based on the index or
market interest rates as of a predetermined time prior to the adjustment date.
Adjustable indexed interest rate mortgage loans have an initial period, ranging
from one or three years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps which vary with the product. Annual limits on interest rate increases are
2% while aggregate lifetime interest rate increases over the term of the loan
are currently at 6% above the original mortgage loan interest rate.
The Registrant also participates in a secondary fixed rate mortgage program
under the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. These
loans are sold on the secondary market and the Registrant retains servicing
rights. At December 31, 1999, these loans totaled $35.4 million.
Additionally in the l