1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES 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
incorporation or organization) Identification No.)
217 North Fourth Ave., Sturgeon Bay, WI 54235
(Address of principal executive offices) (Zip Code)
(414)-743-5551
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of August 8, 1995.
$5.00 Par Value Common
2,452,937 shares
2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheets 3
as of June 30, 1995 and December 31, 1994
Consolidated Condensed Statement of Income 4
Three months and six months ended June 30,
1995 and 1994
Consolidated Statement of Cash Flows 5 - 6
Six months ended June 30, 1995 and 1994
Note to Consolidated Condensed Financial Statements 7 - 8
Item 2.
Managements Discussion and Analysis of Financial 9 - 17
Condition and Results of Operations
PART II. OTHER INFORMATION 18
Signatures 19
3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
JUNE 30 DECEMBER 31
ASSETS 1995 1994
------ -------- -----------
Cash and due from Banks $ 9,922 $ 10,516
Investment securities available for
sale (at market) 60,387 59,033
Investment securities held to maturity (market value
$11,810 on 6/30/95; $14,237 on 12/31/94) 11,328 14,013
Loans 205,272 192,673
Less: Allowance for loan losses (2,683) (2,534)
-------- --------
Loans, net of allowance for loan losses 202,589 190,139
Bank premises and equipment 6,740 5,930
Accrued interest receivable 2,357 1,995
Prepaid income taxes 319 237
Deferred income taxes 872 2,125
Other assets 4,167 3,119
-------- --------
TOTAL ASSETS $298,681 $287,107
======== ========
LIABILITIES
-----------
Domestic Deposits
Non-interest bearing deposits $ 34,236 $ 33,506
Interest bearing deposits
Now 31,947 34,369
Savings 84,082 87,467
Time, $100,000 and over 14,089 4,900
Other time 93,209 86,875
-------- --------
Interest bearing deposits $223,327 $213,611
-------- --------
Total deposits $257,563 $247,117
Short term borrowings 2,467 4,149
Accrued expenses and other liabilities 3,433 3,062
Dividends payable 540
-------- --------
TOTAL LIABILITIES $263,463 $254,868
======== ========
STOCKHOLDERS EQUITY
-------------------
Common Stock $5.00 par value - authorized
10,000,000 shares; issued 2,454,881 shares on
6/30/95 and 2,454,081 on 12/31/94; outstanding
2,452,937 shares on 6/30/95 and 2,452,137 on
12/31/94 $ 12,274 $ 12,270
Additional paid-in capital 5,949 5,941
Reserve for market adjustment of
securities (115) (1,995)
Retained earnings 17,159 16,072
Treasury Stock (49) (49)
-------- --------
TOTAL STOCKHOLDERS EQUITY 35,218 32,239
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $298,681 $287,107
======== ========
See accompanying notes to unaudited consolidated financial statements
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT AMOUNTS PER SHARE)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
-------- --------- ------ --------
Interest Income
Interest and fees on loans $ 4,857 $ 4,017 $ 9,500 $ 7,826
Interest on investment securities
Taxable 792 782 1,619 1,558
Exempt from federal income tax 299 360 613 762
Other interest income 11 4 32 65
-------- -------- -------- --------
Total Interest Income 5,959 5,163 11,764 10,211
Interest Expense
Interest on deposits 2,481 1,698 4,712 3,429
Interest on short term borrowings 110 121 239 163
-------- -------- -------- --------
Total Interest Expense 2,591 1,819 4,951 3,592
-------- -------- -------- --------
Net Interest Income 3,368 3,344 6,813 6,619
Provision for loan losses 78 62 155 130
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,290 3,282 6,658 6,489
-------- -------- -------- --------
Other Income
Fees for fudiciary activities 82 88 163 164
Fees from loan servicing 130 163 228 258
Fees for other services to customers 319 327 581 640
Securities gains (losses) (6) 10 (6) 41
Other income 108 190 165 216
-------- -------- -------- --------
Total Other Income 633 778 1,131 1,319
-------- -------- -------- --------
Other Expenses
Salaries and employee benefits 1,249 1,216 2,568 2,425
Occupancy expense 151 137 283 269
Equipment expense 159 135 309 263
Data processing and courier 179 110 283 218
FDIC insurance expense 129 144 281 278
Operation of other real estate 20 4 30 10
Other operating expense 456 618 897 1,014
-------- -------- -------- --------
Total Other Expenses 2,343 2,364 4,651 4,477
-------- -------- -------- --------
Income before income taxes 1,580 1,696 3,138 3,331
-------- -------- -------- --------
Income tax expense (benefit) 495 530 974 1,001
-------- -------- -------- --------
Net Income $1,085 $ 1,166 $ 2,164 $ 2,330
======== ======== ======== ========
Net Income per share (1) $0.44 $0.47 $0.88 $0.95
Cash dividends per share $0.22 $0.20 $0.44 $0.35
(1) Based on 2,452,937 shares average outstanding in 1995 and 2,446,625 in
1994.
See accompanying notes to unaudited consolidated financial statements.
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30
-----------------------------
1995 1994
-------- --------
(thousands of dollars)
Cash flows from operating activities:
Interest received from:
Loans $ 9,201 $ 7,546
Investments 2,286 2,575
Fees and service charges 1,024 1,064
Interest paid to depositors (4,231) (3,177)
Interest paid to others (219) (160)
Cash paid to suppliers and employees (4,504) (4,210)
Income taxes paid (1,063) (1,174)
---------- ----------
Net cash provided by operating activities 2,494 2,464
Cash flows from investing activities:
Proceeds from sales of investment securities 993 6,878
Principal payments received on investments 8,737 22,947
Purchase of investments (5,397) (19,265)
Investment in service center (196)
Proceeds from disposition of subsidiary 148
Proceeds from sale of other real estate owned 53 130
Loans made to customers in excess of principal collected (13,365) (10,845)
Capital expenditures (1,069) (602)
---------- ----------
Net cash (used) provided in investing activities (10,244) (609)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (5,077) (6,632)
Net increase (decrease) in advances from borrowers (1,682) 8,973
Net increase (decrease) in time deposits 15,523 (3,160)
Proceeds from issuance of common stock 11 327
Dividends paid (1,619) (1,135)
---------- ----------
Net cash used by financing activities 7,156 (1,627)
---------- ----------
Net increase (decrease) in cash and cash equivalents (594) 228
Cash and cash equivalents, beginning 10,516 10,288
--------- ---------
Cash and cash equivalents, ending $ 9,922 $ 10,516
6
1995 1994
-------- --------
(thousands of dollars)
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 2,164 $ 2,330
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation 259 250
Provision for loan losses and real estate owned 155 130
Amortization of premium on investments 135 156
Accretion of discount on investments (94) (53)
Cash surrender value increase (41) (38)
(Gain) loss from disposal of other real estate owned (1) (13)
Gain on disposal of subsidiary (148)
(Gain) loss on sale of investment securities 6 (41)
Equity in income of service center (34) (5)
Amortization of book of business 3
Goodwill writedown 3 3
Deferred compensation 10 52
Changes in assets and liabilities:
Interest receivable (362) (270)
Prepaids and other assets (100) 77
Unearned income 6 66
Interest payable 501 254
Taxes payable (89) (173)
Other liabilities (24) (116)
--------- ---------
Total adjustments 330 (134)
--------- ---------
Net cash provided by operating activities $ 2,494 $ 2,464
======== ========
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BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
1. The accompanying unaudited consolidated financial statements
should be read in conjunction with Baylake Corp.'s ("Company")
1994 annual report on Form 10-K. The financial data presented
includes the combination of financial data from Baylake Bank and
Baylake Bank-Kewaunee, formerly known as State Bank of Kewaunee,
the principal subsidiary of Kewaunee County Banc-Shares, Inc.
("KCB"). KCB was acquired by the Company in a merger, which has been
accounted for as a pooling of interests. The unaudited financial
information included in this report reflects all adjustments
(consisting only of normal recurring accruals) which are necessary
for a fair statement of the financial position as of June 30,
1995 and December 31, 1994. The results of operations for the
three and six months ended June 30, 1995 and 1994 are not
necessarily indicative of results to be expected for the entire year.
2. The book value of investment securities, by type, held by the
Company are as follows:
JUNE 30 DECEMBER
1995 1994
------- --------
(thousands of dollars)
<
Investment securities held to maturity:
U.S. Treasury and other U.S.
government agencies $ $
Mortgage-backed securities
Obligations of states and political
subdivisions 11,328 13,605
Other (408)
--------- ---------
Investment securities held to maturity $ 11,328 $ 14,013
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 8,513 $ 8,187
Mortgage-backed securities 43,031 41,139
Obligations of states and political
subdivisions 7,104 6,742
Other 1,739 2,965
-------- --------
Investment securities available for sale $ 60,387 $ 59,033
======== ========
3. At June 30, 1995 and December 31, 1994, loans were as follows:
June 30 December 31
1995 1994
--------- ---------------
(thousands of dollars)
Commercial, industrial and agricultural $ 128,370 $ 109,133
Real estate - construction 5,631 5,881
Real estate - mortgage 58,897 61,818
Installment 13,181 16,639
Less: Deferred loan origination fees,
net of costs (806) (798)
-------- --------
205,273 192,673
Less allowance for loan losses (2,684) (2,534)
-------- --------
Net loans $ 202,589 $ 190,139
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4. As of December 31, 1993, the Company adopted STATEMENTS OF
FINANCIAL ACCOUNTING STANDARDS No. 115 (SFAS 115) "ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES."
Accordingly, investment securities available for sale at June
30, 1995 and December 31, 1994 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.
5. In February 1994, the Company entered into a definitive agreement
to merge with KCB which was completed on August 31, 1994. In
conjunction with the merger, the Company issued 15.69 shares of
its common stock for each share of KCB common stock. The
acquisition is accounted for as a pooling of interests.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The following sets forth management's discussion and analysis of the
consolidated financial condition of Baylake Corp. (the "Company") at June 30,
1995, and the results of operations for the three and six months ended June 30,
1995 and June 30, 1994. This discussion and analysis should be read in
conjunction with the Company's unaudited consolidated financial statements and
the notes thereto included herein.
The company completed its acquisition of Kewaunee County Banc-Shares, Inc.
("KCB"), the holding company for Baylake Bank - Kewaunee ("BBK") on August 31,
1994. The company acquired all of the outstanding shares of KCB in exchange
for 574,756 shares of the Company's common stock. The acquisition was
structured as a merger of KCB with a newly-formed subsidiary of the Company and
accounted for using the pooling-of-interests method of accounting; therefore
the financial data presented reflects the combined data of the Company and KCB.
RESULTS OF OPERATIONS
For the three months ended June 30, 1995, net income decreased $81,000, or
6.9%, to $1,085,000 from $1,166,000 for the second quarter of 1994. The
annualized return on average assets and return on average equity for the three
months ended June 30, 1995, were 1.49% and 12.64% respectively, compared to
1.67% and 14.36%, respectively, for the same period a year ago.
For the six months ended June 30, 1995, net income was $2.16 million, a
decrease of 7.12% from the $2.33 million earned during the first six months of
1994. The annualized return on average assets and return on average equity for
the period ended June 30, 1995 were 1.51% and 12.95%, respectively, compared to
1.67% and 14.48%, respectively for the same period a year ago.
The decrease in net income for both periods is primarily due to increased
personnel costs and a reduction in other income offset by increased net
interest income.
NET INTEREST INCOME
Net interest income for the three months ended June 30, 1995 increased $24,000,
or .72%, to $3.37 million from $3.34 million for the same period a year ago.
Total interest income for the second quarter of 1995 increased $796,000, or
15.4%, to $5.96 million from $5.16 million for the second quarter of 1994,
while interest expense increased $772,000, or 42.5%, to $2.59 million from
$1.82 million in the second quarter of 1994. These changes were primarily the
result of a favorable increase in the average volume of earning assets. Net
interest income for the six months ended
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June 30, 1995 increased $194,000, or 2.94%, to $6.81 million from $6.62 million
in the first six months of 1994. Total interest income for the first six
months increased $1.55 million, or 15.21%, to $11.76 million from $10.21
million in the first six months of 1994, while interest expense increased $1.36
million, or 34.39%, to $4.95 million from $3.59 million for the same period in
1994. These changes were primarily the result of a favorable increase in the
average volume of earning assets, offset primarily by a decline in the net
interest margin.
For the three months ended June 30, 1995, average earning assets increased
$11.07 million, or 4.24%, when compared to the same period last year. The
Company registered and increase in average loans of $10.97 million, or 5.77%,
for the second quarter of 1995 compared to the same period last year.
For six months ended June 30, 1995, average earning assets increased by $6.62
million, or 2.50%, when compared to the same period last year. Loans have
continued to grow as the Company registered and increase in average loans of
$11.96 million, or 6.40%, for the first six months of 1995 compared to the same
period in 1994. Loans have typically resulted in higher rates of interest
payable to the Company than have investment securities.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended June 30, 1995 decreased from 5.42% to 5.19% compared to a year ago. The
average yield on interest earning assets amounted to 9.00% for the second
quarter of 1995, representing an increase of 80 basis points from the same
period last year. Total loan yields increased 111 basis points, while total
investment yields declined 43 basis points as higher yielding securities
matured and were replaced with securities having lower market rates of return.
The Company's average cost on interest-bearing liabilities increased 107 basis
points during the second quarter of 1995, while short-term borrowing costs
increased 301 basis points from a year ago. The above factors resulted in the
decrease of the Company's overall interest margin for the second quarter.
Net interest margin (on a federal tax-equivalent basis) for the first six
months of 1995 declined to 5.30% from 5.35% for the same period a year ago.
The average yield on interest-earning assets amounted to 8.98% for the first
six months of 1995, representing a increase of 90 basis points from the same
period las year. Total loan yields increased 119 basis points while investment
securities declined 2 basis points. The Company's average cost on
interest-bearing liabilities increased 110 basis points to 4.26% for the first
six months of 1995, while short-term borrowing costs increased 310 basis points
comparing the two periods. The above factors contributed to a decline in the
Company's overall interest margin decline for the first six months ended June
30, 1995.
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PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 1995
increased $16,000, or 25.81%, to $78,000 from $62,000 for the second quarter a
year ago. For the six months ended June 30, 1995, the provision for loan
losses increased $25,000, or 19.23%, to $155,000 from $130,000 for the same
period last year. These increases have resulted primarily as a result of above
average loan growth. Management believes that the current allowance is
adequate in view of the healthy condition of the Company's loan portfolio.
Based on current conditions, management intends to maintain the loan loss
reserve at a level above 1.25% of average total loans, subject to continuing
review.
NON-INTEREST INCOME
Total non-interest income declined $145,000, or 18.64%, to $633,000 from
$778,000 for the second quarter a year ago. For the first six months of 1995,
other income has declined $188,000, or 14.25%, to $1.13 million from $1.32
million for the same period last year. These decreases have occurred as a
result of reduced service fee income, reduced security activity and a reduction
in other income.
Service fee income decreased primarily as a result of reduced insurance
commissions of $53,000 due to the discontinued operations of BBK's insurance
subsidiary which was sold in mid 1994. In addition, a gain of approximately
$185,000 was recognized in the second quarter of 1994 on the sale of Baylake
Bank - Kewaunee's insurance subsidiary and reflected in other income. A small
loss in securities activity has resulted in 1995 compared to a gain of $41,000
in 1994 which additionally has affected comparisons between the two periods.
During the second quarter of 1995, a sale of the student loan portfolio
provided approximately $95,000 in gains on sale of that portfolio. For the six
months ended June 30, 1995, Baylake Bank's data service subsidiary, United
Financial Services, Inc. showed income of $34,000.
NON-INTEREST EXPENSE
Non-interest expense declined $21,000, or .89%, for the three months ended June
30, 1995 compared to the same period in 1994. Salaries and employee benefits
showed an increase of $33,000, or 2.71%, due in part to additional employee
expense resulting from the February startup of the Company's Green Bay
operation. Increased benefit costs stemming from increased 401-K contributions
and normal salary increases accounted for the remaining increase. Data
processing costs have shown an increase of $69,000, or 62.7%, due to various
conversion costs and on line teller system enhancements. Other operating
expenses show a reduction of $162,000, or 26.21%, as compared to a similar
period a year ago as in 1994 as various non-recurring costs arising from the
name change to Baylake Bank and various merger expenses were realized in 1994.
The overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total
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assets, was 2.35% for the three months ended June 30, 1995 compared to 2.28%
for the same period in 1994.
Non-interest expense increased $174,000, or 3.89%, for the six months ended
June 30, 1995, compared to the same period in 1994. Salaries and employee
benefits showed an increase of $143,000, or 5.90%, due to increased benefit
costs and additional personnel expense as a result of the Green Bay operations.
Computer costs for the six month period were up $65,000, or 29.82%, for the
same reason listed previously. Other operating expense shows a decline of
$117,000, or 11.54%, primarily due to non-recurring costs that were expensed in
1994 regarding the name change and merger related expenses. The overhead ratio
for the six months ended June 30, 1995 was 2.45% compared to 2.26% for the same
period in 1994.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended June 30,
1995 decreased $35,000, or 6.60%, to $495,000 from $530,000 for the same period
a year ago. The Company's provision for income taxes for the six months ended
June 30, 1995 decreased $27,000, or 2.70%, to $974,000 from $1.0 million for
the same period a year ago. The decrease in income tax provision was due to
decreased taxable income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At June 30, 1995, total loans increased $12.60 million, or 6.5%, to $205.3
million from $192.7 million at December 31, 1994. The change in loan mix in
the Company's portfolio resulted primarily as a result of commercial loans
increasing to $128.4 million at June 30, 1995 compared to $109.1 million at
December 31, 1994, offset by a decline in real estate mortgage loans from $58.9
million at June 30, 1995 compared to $61.8 million at December 31, 1994 and
consumer loans from $13.2 million at June 30, 1995 compared to $16.6 million at
December 31, 1994. The decrease in consumer loans is primarily due to a sale
of the Company's student loan portfolio resulting in a reduction of $3.6
million in loans in the second quarter of 1995.
NON-PERFORMING ASSETS
At June 30, 1995, non-performing assets were at $1.44 million compared to $1.66
million at December 31, 1994. Non-performing loans at June 30, 1995 were .70%
of total loans compared with .80% at December 31, 1994. There existed other
real estate owned of $214,000 at June 30, 1995 as compared with $123,000 at
December 31, 1994. In addition, during the second quarter of 1995 Karsten
Resources, Inc., a subsidiary of Baylake Bank - Kewaunee was formed for the
expressed purpose of holding the assets of a former commercial customer. The
intent is to actively market the property (hotel/restaurant in nature) for sale
and operate the business in
13
the short term. The carrying amount of the investment at June 30, 1995 was
$608,000. The ratio of non-performing assets to total loans at June 30, 1995
was 1.10% compared to .86% at December 31, 1994, primarily as a result of the
investment in Karsten Resources, Inc.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At June 30, 1995, the allowance for loan losses increased $149,000 from year
end 1994 to $2.68 million. At June 30, 1995 and December 31, 1994, the
allowance for loan losses as a percentage of total loans were at 1.31% and
1.32% respectively. Although loans have continued to grow at an above average
rate, the allowance for loan losses as a percent of total loans remains
comparable. The allowance is at a level currently believed acceptable by
management.
INVESTMENT PORTFOLIO
At June 30, 1995, the investment portfolio declined $1.33 million, or 1.82%, to
$71.7 million from $73.0 million at December 31, 1994. At June 30, 1995, the
investment portfolio represented 24.0% of total assets compared with 25.4% at
December 31, 1994. The slight decline in total investments occurred as
proceeds from matured investment securities were used to fund loan demand.
DEPOSITS
Total deposits at June 30, 1995 increased $10.4 million, or 4.2%, to $257.6
million from $247.1 million at December 31, 1994. Non-interest bearing
deposits at June 30, 1995 increased $730,000, or 2.2%, to $34.2 million from
$33.5 million at December 31, 1994. Interest bearing deposits at June 30, 1995
increased $9.7 million, or 4.5%, to $223.3 million from $213.6 million at
December 31, 1994. Time deposits show a larger than normal increase with $15.5
million in growth since year end 1994 as municipal deposits have shifted into
higher interest paying time deposit accounts. In addition, entry into the
Green Bay market has provided an additional source of deposit base as compared
to year end 1994.
SHORT-TERM BORROWINGS
Total short-term borrowings at June 30, 1995 decreased $1.7 million, or 40.5%,
to $2.5 million from $4.1 million at December 31, 1994. An increase in the
deposit base has allowed the Company to reduce their short-term borrowings and
still meet the loan demands of its customers. Typically, the seasonality of
the customer base influences the Company's balance sheet as decreased deposits
and increased loan demands are historically recurring for the Company in the
late spring and early summer seasons.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cash Flows for
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the three months ended June 30, 1995, cash and cash equivalents decreased
$594,000 during the period to $9.92 million at June 30, 1995. The decrease
primarily reflected $2.49 million in net cash provided by operating activities
offset by $10.24 million in net cash used in investing activities, and $7.16
million provided by financing activities. Net cash provided by operating
activities consisted of the Company's net income for the periods increased by
adjustments for non-cash expenditures. Net cash used in investing activities
consisted of a net decrease in investments offset by a net increase in loans
plus necessary capital expenditures. Net cash provided by financing activities
resulted primarily from a net increase in deposits and decrease in borrowed
funds offset by dividends paid. As is typical of the seasonality that exists
in the tourism market serviced, customers tend to prepare for summer business
through increasing loans and drawing down deposits during the early part of the
year, increasing deposits at the end of summer.
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management view its
liquidity as the ability to raise cash at reasonable costs or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable assets maturing within one year. The Company
attempts, when possible, to match relative maturities of assets and
liabilities, while maintaining the desired net interest margin. Although the
percentage of earning assets represented by loans is increasing, management
believes that liquidity is adequate to support anticipated borrowing
requirements and deposit flows.
INTEREST RATE SENSITIVITY
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Company is slightly liability gap sensitive, although
management believes that a range of plus or minus 15% (from 100% matching)
within one year pricing schedule is acceptable. The analysis considers regular
savings, money market deposits and NOW accounts to be rate sensitive within
three months. All other earning categories including loans and investments as
well as other paying liability categories such as time deposits are scheduled
according to their contractual maturities. Also, Baylake Bank considers it
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 smaller increments without a material decrease in balances.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. This 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
15
liability gap position exists. In general, liability sensitive gap positions
in a declining interest rate environment increases 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. For the time frame within three months as of June 30, 1995, rate
sensitive liabilities exceeded rate sensitive assets by $28.62 million, or a
ratio of rate sensitive assets to rate sensitive liabilities of 79.95%. For
the next time frame of four to six months, rate sensitive liabilities exceeded
rate sensitive assets by $859,000 or a ratio of rate sensitive assets to rate
sensitive liabilities of 94.99%. For all assets and liabilities priced within
a one year time frame, the cumulative ratio of rate sensitive assets to rate
sensitive liabilities was 84.10%, which was slightly less than the range of
plus or minus 15% deemed acceptable by management.
Management continually reviews it interest risk position through its committee
processes. Managements' philosophy is to maintain a relatively matched rate
sensitive asset and liability position, within the range described above, in
order the provided earnings stability in the event of significant interest rate
changes.
16
ASSET AND LIABILITY REPRICING SCHEDULE
AS OF JUNE 30, 1995
Within Four to Seven to One Year Over
Three Six Twelve to Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In Thousands)
Earning Assets:
Investments Securities $ 2,220 $ 1,719 $ 2,201 $ 13,488 $ 52,087 $ 71,715
Loans and Leases:
Variable Rate 96,829 1,260 73 98,162
Fixed Rate 15,071 13,315 29,534 47,169 582 105,671
-------- -------- -------- -------- -------- --------
Total Loans and Leases $111,900 $ 14,575 $ 29,534 $ 47,242 $ 582 $203,833
-------- -------- -------- -------- -------- --------
Total Earning Assets $114,120 $ 16,294 $ 31,735 $ 60,730 $ 52,669 $275,548
======== ======== ======== ======== ======== ========
Interest Bearing Liabilities:
NOW Accounts $ 31,947 $ $ $ $ $ 31,947
Saving Deposits 84,082 84,082
Time Deposits 24,715 17,153 32,872 32,504 54 107,298
Borrowed Funds 1,992 53 211 211 2,467
-------- ------- ------- ------- -------- --------
Total Interest Bearing Liabilities $142,736 $17,153 $ 32,925 $35,715 $ 265 $225,794
======== ======= ======== ======= ======== ========
Interest Sensitivity GAP $(28,616) $ (859) $(1,190) $28,015 $ 52,404 $ 49,754
(within periods)
Cumulative Interest Sensitivity GAP (28,616) (29,475) (30,665) (2,650) $ 49,754
Ratio of Cumulative Interest -10.39% -10.70% -11.13% -0.96% 18.06
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to Rate 79.95% 94.99% 96.39% 185.63% ---
Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 79.95% 81.57% 84.10% 98.82% 122.04%
Assets to Rate Sensitive
Liabilities
17
CAPITAL RESOURCES
At June 30, 1995, stockholders equity increased $2.98 million, or 9.24%, to
35.2 million from $32.2 million at December 31, 1994. An increase of $2.11
million in capital resulting from the implementation of FAS 115 accounted for
part of this increase, while the remaining increase resulted from net income
less dividends paid. At June 30, 1995, the Company's risk-based Tier 1 Capital
Ratio was 16.78%, the total risk based capital ratio was 18.03% and the
leverage ratio was 12.21%. Both the Company, Baylake Bank and Baylake
Bank-Kewaunee continue to exceed all applicable regulatory capital
requirements.
18
PART II - OTHER INFORMATION
Item 5. Other Information
Baylake Bank has expanded into the Northern Brown County region with a
mobile unit facility located in Green Bay commencing operations on
February 20, 1995. Various retail services in addition to consumer
and commercial loan services are being offered at this temporary
facility. A permanent facility is planned for fall of 1995 and is
expected to offer a full range of products and services. The
construction phase of this project began in the second quarter of this
year. Construction costs for the facility are estimated to be $1.2
million with total costs for building and equipment estimated to be
$2.0 million.
Item 6. 8-K
(a) Exhibits
None
(b) Reports on Form 8-K filed for three months
ended June 30, 1995
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYLAKE CORP.
---------------------------
(Registrant)
Date: August 10, 1995 Thomas L. Herlache
------------------- ---------------------------
Thomas L. Herlache
President (CEO)
Date: August 10, 1995 Steven D. Jennerjohn
------------------- ---------------------------
Steven D. Jennerjohn
Treasurer (CFO)