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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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8679
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BAYLAKE CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
217 North Fourth Ave., Sturgeon Bay, WI 54235
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(Address of principal executive offices) (Zip Code)
(414)-743-5551
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of
common stock as of August 12, 1997.
$5.00 Par Value Common
2,451,537 shares
Page 1 of 19 Pages
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BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of June 30, 1997 and December 31, 1996
Consolidated Condensed Statement of Income 4
Three and six months ended June 30, 1997
and 1996
Consolidated Statement of Cash Flows 5 - 6
Six months ended June 30, 1997 and 1996
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
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PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
JUNE, 30 DECEMBER, 31
ASSETS 1997 1996
------ ----------- -----------
Cash and due from Banks $ 13,722 $ 13,853
Investment securities available for
sale (at market) 79,886 87,690
Investment securities held to maturity (market value
$11,602 on 6/30/97; $11,869 on 12/31/96) 11,219 11,448
Federal funds sold
Loans 278,482 260,854
Less: Allowance for loan losses (3,153) (2,893)
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Loans, net of allowance for loan losses 275,329 257,961
Bank premises and equipment 13,206 12,354
Accrued interest receivable 3,119 2,883
Income tax receivable 215 220
Deferred income taxes 989 705
Other assets 8,025 8,242
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TOTAL ASSETS $ 405,710 $ 395,356
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LIABILITIES
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Domestic Deposits
Non-interest bearing deposits $ 40,260 $ 42,285
Interest bearing deposits
Now 38,285 43,356
Savings 85,326 93,465
Time, $100,000 and over 37,486 19,873
Other time 129,659 128,186
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Interest bearing deposits $ 290,756 $ 284,880
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Total deposits $ 331,016 $ 327,165
Short term borrowings 28,988 23,840
Long term debt 370 422
Accrued income taxes
Accrued expenses and other liabilities 4,728 4,105
Dividends payable 590
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TOTAL LIABILITIES $ 365,102 $ 356,122
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STOCKHOLDERS EQUITY
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Common Stock $5.00 par value - authorized
10,000,000 shares; issued 2,460,681 shares
on 6/30/97 and 12/31/96; outstanding
2,451,537 on 6/30/97 and 2,458,537 shares on
12/31/96 $ 12 302 $ 12 302
Additional paid-in capital 6 038 6 038
Reserve for market adjustment of
securities 933 604
Retained earnings 21 560 20 339
Treasury Stock (225) (49)
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TOTAL STOCKHOLDERS EQUITY 40 608 39 234
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 405 710 $ 395 356
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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
1997 1996 1997 1996
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Interest Income
Interest and fees on loans $ 6,287 $ 5,230 $ 12,417 $ 10,099
Interest on investment securities
Taxable 1,004 723 2,097 1,464
Exempt from federal income tax 400 381 780 739
Other interest income 0 8 0 35
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Total Interest Income 7,691 6,342 15,294 12,337
Interest Expense
Interest on deposits 3,103 2,552 6,095 5,112
Interest on short-term borrowings 428 149 828 199
Interest on Long-term debt 8 11 16 21
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Total Interest Expense 3,539 2,712 6,939 5,332
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Net Interest Income 4,152 3,630 8,355 7,005
Provision for loan losses 153 87 303 181
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Net interest income after
provision for loan losses 3,999 3,543 8,052 6,824
---------- ---------- -------- ---------
Other Income
Fees for fudiciary activities 98 136 198 273
Fees from loan servicing 400 218 628 501
Fees for other services to customers 383 355 745 684
Securities gains (losses) 27 0 47 0
Other income 80 77 145 170
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Total Other Income 988 786 1,763 1,628
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Other Expenses
Salaries and employee benefits 1,797 1,492 3,640 3,069
Occupancy expense 274 170 523 360
Equipment expense 274 189 511 374
Data processing and courier 160 130 316 255
FDIC insurance expense 10 0 20 1
Operation of other real estate 24 0 25 (170)
Other operating expense 732 634 1,379 1,174
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Total Other Expenses 3,271 2,615 6 414 5,063
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Income before income taxes 1,716 1,714 3,401 3,389
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Income tax expense (benefit) 511 508 999 1,012
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Net Income $ 1,205 $ 1,206 $ 2,402 $ 2,377
========== ========== ======== =========
Net Income per share (1) $ 0.49 $ 0.49 $ 0.98 $ 0.97
Cash dividends per share $ 0.24 $ 0.23 $ 0.48 $ 0.46
(1) Based on 2,451,537 shares average outstanding in 1997 and 2,542,937 in
1996.
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
1997 1996
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(thousands of dollars)
Cash flows from operating activities:
Interest received from:
Loans $ 11,974 $ 9,657
Investments 3,014 2,193
Fees and service charges 1,687 1,608
Interest paid to depositors (5,800) (4,879)
Interest paid to others (846) (235)
Cash paid to suppliers and employees (5,359) (5,043)
Income taxes paid (994) (998)
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Net cash provided by operating activities 3,676 2,303
Cash flows from investing activities
3,817 0
Proceeds from sales of investment securities 13,615 6,985
Principal payments received on investments (9,271) (3,437)
Purchase of investments 93 220
Proceeds from sale of other real estate owned (17,671) (21,018)
Loans made to customers in excess of principal collected
Capital expenditures (1,390) (1,748)
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Net cash provided by (used in) investing activities (10,807) (18,998)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts (15,235) (559)
and savings accounts
Net increase (decrease) in advances from borrowers 5,096 11,443
Net increase (decrease) in time deposits 19,086 11,477
Treasury Stock Acquired (176)
Dividends paid (1,771) (1,693)
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Net cash provided by (used in) financing activities 7,000 20,668
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Net decrease in cash and cash equivalents (131) 3,973
Cash and cash equivalents, beginning 13,853 9,887
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Cash and cash equivalents, ending $ 13,722 $ 13,860
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1997 1996
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(thousands of dollars)
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 2402 $ 2377
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Provision for loan losses and real estate owned 684 346
Amortization of premium on investments 303 181
Accretion of discount on investments 109 133
Cash surrender value increase (145) (74)
(Gain) loss from disposal of other real estate (27) (37)
(Gain) loss on sale of investment securities 17 (178)
(Gain) loss from disposal of fixed assets (47) 0
Equity in income of service center 21 0
Deferred compensation (34) 18
Changes in assets and liabilities: 86 87
Interest receivable (236) (552)
Prepaids and other assets 2 (49)
Unearned income (1) 7
Interest payable 292 218
Taxes payable 5 12
Deferred Taxes 0 0
Other liabilities 245 (186)
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Total adjustments 1,274 (74)
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Net cash provided by operating activities $ 3,676 $ 2,303
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BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Baylake Corp.'s ("Company") 1996 annual report on
Form 10-K. The unaudited financial information included in this report
reflects all adjustments (consisting only of normal recurring accruals)
which are necessary for a fair statement of the financial position as of
June 30, 1997 and December 31, 1996. The results of operations for the six
and three months ended June 30, 1997 and 1996 are not necessarily
indicative of results to be expected for the entire year.
2. The book value of investment securities, by type, held by the Company are
as follows:
JUNE 30 DECEMBER 31
1997 1996
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(thousands of dollars)
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 10,282 $ 10,511
Other 937 937
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Investment securities held to maturity $ 11,219 $ 11,448
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 37,101 $ 38,924
Obligations of states and political
subdivisions 20,337 16,971
Mortgage-backed securities 21,710 31,426
Other 738 369
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Investment securities available for sale $ 79,886 $ 87,690
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3. At June 30, 1997 and December 31, 1996, loans were as follows:
JUNE 30 DECEMBER 31
1997 1996
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(thousands of dollars)
Commercial, industrial and agricultural $ 160,032 $ 151,291
Real estate - construction 11,558 11,365
Real estate - mortgage 93,167 83,538
Installment 14,297 15,233
Less: Deferred loan origination fees,
net of costs (572) (573)
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278,482 260,854
Less allowance for loan losses (3,153) (2,893)
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Net loans $ 275,329 $ 257,961
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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, 1997 and December 31, 1996 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. As of January 1, 1996, the Company adopted SFAS No. 122. "Accounting for
Mortgage Servicing Rights" which amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." This statement required that the
rights to service mortgage loans for others be recognized as separate
assets regardless of how those rights were acquired. The impact on the
company's financial position and the results of operation were not material
for the six and three months ended June 30, 1997 and 1996.
6. On July 1, 1996, the Company acquired Four Seasons of Wis, Inc. ("Four
Seasons"), a registered bank holding company, and its wholly owned
subsidiary, The Bank. Effective July 1, 1996, Baylake Bank and The Bank
were merged, and referred to herein as "Baylake Bank". The transaction is
accounted for using the purchase method.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The following sets forth management's discussion and analysis of the
consolidated financial condition of Baylake Corp. ("Company") at June 30, 1997,
and the results of operations for the three and six months ended June 30, 1997
and June 30, 1996. This discussion and analysis should be read in conjunction
with the Company's unaudited consolidated financial statements and the notes
thereto included herein.
On July 1, 1996, the Company acquired Four Seasons of Wis., Inc. ("Four
Seasons") and its subsidiary The Bank (with branches in Manawa and King,
Wisconsin) in a cash transaction totaling $13.875 million. On July 1, 1996,
Four Seasons was dissolved and The Bank was merged into Baylake Bank. At the
time of acquisition, The Bank had total assets of $55.8 million, loans of $12.2
million, deposits of $46.9 million and shareholders' equity of $8.4 million.
This transaction has been accounted for using the purchase method of
accounting.
RESULTS OF OPERATIONS
For the three months ended June 30, 1997, net income declined $1,000, to $1.20
million, the same amount as the second quarter of 1996. The annualized return
on average assets and return on average equity for the three months ended June
30, 1997, were 1.22% and 12.09%, respectively compared to 1.51% and 13.16%,
respectively, for the same period a year ago.
For the six months ended June 30, 1997, net income was $2.40 million, an
increase of 1.1% from the $2.38 million earned during the first six months of
1996. The annualized return on average assets and return on average equity,
were 1.23% and 12.22%, respectively, compared to 1.51% and 13.04%, respectively
for the same period a year ago.
The change in net income for the period is primarily due to improved net
interest income and an increase in other income offset by increased other
expenses.
NET INTEREST INCOME
Net interest income for the three months ended June 30, 1997 increased
$522,000, or 14.4%, to $4.15 million from $3.63 million for the same period a
year ago. Total interest income for the second quarter of 1997 increased $1.35
million, or 21.3%, to $7.69 million from $6.34 million for the second quarter
of 1996, while
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interest expense increased $827,000, or 30.5%, to $3.54 million from $2.71
million in the second quarter of 1996. These changes were primarily the result
of a favorable increase in the average volume of earning assets offset by
increased competition related to loan pricing, particularly in the commercial
sector, and deposit pricing, primarily in time deposits.
For the three months ended June 30, 1997, average earning assets increased
$65.2 million, or 21.9%, when compared to the same period last year. The
Company registered an increase in average loans of $47.5 million, or 21.0% for
the second quarter of 1997 compared to the same period a year ago.
For the six months ended June 30, 1997, average earning assets increased by
$67.4 million or 23.0%, when compared to the same period last year. Loans have
continued to grow as the Company registered an increase in average loans of
$49.5 million, or 22.5%, for the first six months of 1997 compared to the same
period in 1996. Loans have typically resulted in higher rates of interest
payable to the Company then have investment securities.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended June 30, 1997 decreased from 5.19% to 4.81% compared to a year ago. The
average yield on interest earning assets amounted to 8.49% for the second
quarter of 1997, representing a decrease of 28 basis points from the same
period last year. Total loan yields decreased 9 basis points to 9.23%, while
total investment yields increased 3 basis points to 7.16% as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities increased 8 basis points to 4.41% for the second quarter of 1997,
while short-term borrowing costs increased 41 basis points to 5.81% comparing
the two periods. The above factors contributed to a decrease in the Company's
overall interest margin for the three months ended June 30, 1997.
Net interest margin (on a federal tax-equivalent basis) for the first six
months of 1997 declined to 4.88% from 5.07% for the same period last year. The
average yield on interest-earning assets amounted to 8.75% for the first six
months of 1997, representing a increase of 2 basis points over the same period
last year. Total loan yields increased 6 basis points to 9.31% while
investment securities increased 14 basis points to 7.14%. The Company's
average cost on interest-bearing deposit liabilities increased 2 basis points
to 4.36% for the first six months of 1997, while short-term borrowing costs
increased 34 basis points to 5.69% comparing the two periods. The above
factors contributed to a decline in the Company's overall interest margin for
the first six months ended June 30, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 1997
increased $66,000, or 75.9%, to $153,000 from $87,000 for the second quarter a
year ago. For the six months ended June 30, 1997,
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the provision for loan losses increased $122,000, or 67.4%, to $303,000 from
$181,000 for the same period last year. This increase has occurred primarily as
a result of above average loan growth. Management believes that the current
allowance is adequate in view of the present condition of the Company's loan
portfolio.
NON-INTEREST INCOME
Total non-interest income increased $202,000, or 25.7%, to $988,000 for the
second quarter of 1997, from $786,000 for the second quarter a year ago. This
increase has occurred as a result of increased loan servicing fees, fees on
other customer services and securities gains offset by decreased trust
revenues.
For the first six months of 1997, non-interest income has improved $135,000, or
8.3%, to 1.76 million from 1.63 million for the same period a year ago.
Trust revenues decreased primarily as a result of increased trust business
offset by the change in billing fee cycles from annual to quarterly which
started in the first half of 1996. Loan servicing fees increased for two
reasons. An increase in premiums of approximately $152,000 were realized as a
result of loan sales in the secondary market. In addition there resulted a
increase of approximately $18,700 recognized as a result of the implementation
of SFAS No. 122 "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS" comparing the first
six months of 1997 with 1996. The increase in fees for other services to
customers primarily resulted from increased service charges on deposit
products. A decline in revenues of approximately $32,000 stemming from the
operation of Karsten Resources, Inc. ("Karsten"), a hotel and restaurant
business, account partially for the decrease in other income.
NON-INTEREST EXPENSE
Non-interest expense increased $656,000, or 25.1%, for the three months ended
June 30, 1997 compared to the same period in 1996. Salaries and employee
benefits showed the largest increase of $305,000 or 20.4%, due in part to
additional employee expense resulting from operations in the Green Bay and
Manawa regions. Normal salary increases account for the remaining increase in
salaries and benefits. Increased occupancy and equipment expenses have also
resulted due to the start up of operations in the Green Bay region and
additional expense from the Manawa region. These expansion efforts have
resulted in additional depreciation expense resulting from new building
construction and past increased capital expenditures for equipment which were
made to enhance the Company's technological capabilities. Other operating
expense shows an increase of $98,000, or 15.5%, for the second quarter of 1997
primarily as a result of approximately $82,000 of goodwill amortized during the
quarter as a result of the acquisition of Four Seasons. $17,000 of the
increase resulting in other operating expense occurred as a result of the
Karsten operation. The balance of the increase has occurred as a result of
normal increases in
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promotional expenses, supplies expense, and data services expense. The
overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total assets, was 2.32% for the
three months ended June 30, 1997 compared to 2.29% for the same period in 1996.
Non-interest expense increased $1.35 million, or 26.7%, for the six months
ended June 30, 1997, compared to the same period in 1996. Salaries and
employee benefits showed an increase of $571,000, or 18.6%, primarily for the
same reasons as listed previous, along with normal salary increases. The
increase in occupancy and equipment expense occurred primarily as a result of
expansion efforts into the Green Bay and Manawa regions. Other operating
expense shows an increase of $205,000, or 17.5%, for the six months ended June
30, 1997 as compared to June 30, 1996. Approximately $163,000 of the increase
is related to goodwill amortization related to the Four Seasons acquisition.
The overhead ratio was 2.39% for the six months ended June 30, 1997 compared
with 2.19% for the same period in 1996.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended June 30,
1997 increased $3,000, or .6%, to $511,000 from $508,000 for the same period
one year ago. The increase in income tax provision was due to increased
taxable income.
The provision for income taxes for the six months ended June 30, 1997 decreased
$13,000, or 1.3%, to $999,000 from $1.01 million for the same period one year
ago. The decrease in income tax provision was due to decreased taxable income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At June 30, 1997, total loans increased $17.6 million, or 6.8%, to $278.5
million from $260.9 million at December 31, 1996. The change in loan mix in
the Company's portfolio resulted from an increase in commercial loans to $160.0
million at June 30, 1997 compared to $151.3 million at December 31, 1996. In
addition, real estate construction loans increased to $11.6 million at June 30,
1997 compared to $11.4 million at December 31, 1996 and real estate-mortgage
loans increased to $93.2 million at June 30, 1997 compared to $83.5 million at
December 31, 1996.
NON-PERFORMING ASSETS
At June 30, 1997, non-performing assets amounted to $4.33 million compared to
$4.70 million at December 31, 1996. Non-performing assets at June 30, 1997
were 1.07% of total assets compared with 1.19% at December 31, 1996. $531,000
of this decrease stems from a paydown resulting from sale of collateral on a
commercial credit.
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The ratio of non-performing assets to total loans at June 30, 1997 was 1.55%
compared to 1.80% at December 31, 1996.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At June 30, 1997, the allowance for loan losses increased $260,000 from year
end 1996 to $3.15 million. Although loans have continued to grow at an above
average rate, the allowance for loan losses as a percent of total loans has
improved slightly. The allowance is at a level currently believed to be
acceptable by management. At June 30, 1997 and December 31, 1996, the
allowance for loan losses as a percentage of total loans were at 1.13% and
1.11%, respectively.
INVESTMENT PORTFOLIO
At June 30, 1997, the investment portfolio decreased $8.0 million, or 8.1%, to
$91.1 million from $99.1 million at December 31, 1996. At June 30, 1997, the
investment portfolio represented 22.5% of total assets compared with 25.1% at
December 31, 1996. The decline in total investments occurred as proceeds from
matured investment securities were used to fund loan demand.
DEPOSITS
Total deposits at June 30, 1997 decreased $3.9 million, or 1.2%, to $331.0
million from $327.2 million at December 31, 1996. Non-interest bearing
deposits at June 30, 1997 decreased $2.0 million, or 4.8%, to $40.3 million
from $42.3 million at December 31, 1996. Interest-bearing deposits at June 30,
1997 increased $5.9 million, or 2.1%, to $290.8 million from $284.9 million at
December 31, 1996. Time deposits over $100,000 show an increase of $17.6
million resulting primarily from attracting various municipal deposits.
Overall deposits for the first six months tend to slightly decline/increase as
a result of the seasonality of the customer base as they drawdown deposits
during the early first half of the year in anticipation of the summer tourist
season.
SHORT-TERM BORROWINGS
Total short-term borrowings at June 30, 1997 increased $5.1 million to $29.0
million from $23.8 million at December 31, 1996. The increase has primarily
occurred as a result of the acquisition of Four Seasons totaling $13.8 million
and additional demands caused by increases in the loan portfolio where customer
demand remains quite strong in the markets that the Company serves. In
addition, the seasonality of the customer base influences the Company's balance
sheet as deposits normally decrease and loan demand increases during the early
part of the year requiring the Company to meet these needs with other short
term funding.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cashflows for
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the six months ended June 30, 1997, cash and cash equivalents decreased
$131,000 during the period to $13.7 million at June 30, 1997. The decrease
primarily reflected $3.7 million in net cash provided by operating
activities and $7.0 million provided by financing activities offset by $10.8
million used in investing activities. Net cash provided by operating
activities consisted of the Company's net income for the periods increased by
adjustments for non-cash expenditures. Net cash used in investing activities
consisted of a net increase in loans plus necessary capital expenditures offset
by a net decrease in investment securities. Net cash provided by financing
activities resulted primarily from a net decrease in short term deposits and
dividends paid offset by a net increase in time deposits and borrowed funds.
Strong loan demand for the first six months of 1997 continues to remain solid,
thereby effecting an increase in short term funding requirements through
overnight correspondent fed funds purchases. A component of the Company's
strategy to enter additional markets will continue to concentrate on core
deposit growth and utilize other funding sources such as the Federal Home Loan
Bank so as to reduce reliance on short-term funding needs.
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management views its
liquidity as the ability to raise cash at reasonable costs or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable assets maturing within one year. The Company
attempts, when possible, to match relative maturities of assets and
liabilities, while maintaining the desired net interest margin. Although the
percentage of earning assets represented by loans is increasing, management
believes that liquidity is adequate to support anticipated borrowing
requirements and deposit flows.
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 a 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 its savings and NOW accounts to be core deposits and relatively
non-price sensitive, as it believes it could make repricing adjustments for
these types of accounts in small increments without a material decrease in
balances.
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
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and liability repricing characteristics in specific time intervals is referred
to as "interest rate sensitivity gap." If more liabilities than assets reprice
in a given time interval a liability gap position exists. In general,
liability sensitive gap positions in a declining interest rate environment
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 sensitive
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, 1997, rate sensitive liabilities exceeded rate sensitive
assets by $73.5 million, or a ratio of rate sensitive assets to rate sensitive
liabilities of 66.3%. For the next time frame of four to six months, rate
sensitive liabilities exceeded rate sensitive assets by $2.2 million, or a
ratio of rate sensitive assets to rate sensitive liabilities of 92.3%. For all
assets and liabilities priced within a one year time frame, the cumulative
ratio of rate sensitive assets to rate sensitive liabilities was 70.3%, which
is outside the range of plus or minus 15% deemed acceptable by management.
Management is presently reviewing other funding sources so as to decrease the
reliance on short term funding needs. An application to the Federal Home Loan
Bank has been approved and we are presently evaluating various funding
strategies that the Federal Home Loan Bank can provide.
Management continually review its 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 to provide earnings stability in the event of significant interest rate
changes.
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ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF JUNE 30, 1997
Within Four to Seven to One Year Over
Three Six Twelve to Five Five
(In Thousands) Months Months Months Years Years Total
--------- --------- --------- ---------------- ------- --------
Earning Assets:
Investment Securities $ 5,232 $ 2,837 $ 4,932 $ 46,610 $31,494 $ 91,105
Federal funds sold 0 0
Loans and Leases:
Variable Rate 115,715 0 0 115,715
Fixed Rate 23,624 23,494 27,624 80,817 6,854 162,413
--------- --------- --------- ---------- ------- --------
Total Loans and Leases $ 139,339 $ 23,494 $ 27,624 $ 80,817 $ 6,854 $278,128
--------- --------- --------- ---------- ------- --------
Total Earning Assets $ 144,571 $ 26,331 $ 32,556 $ 127,427 $38,348 $369,233
========= ========= ========= ========== ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 38,285 $ $ $ $ $ 38,285
Saving Deposits 85,326 85,326
Time Deposits 65,494 28,490 42,692 30,407 62 167,145
Borrowed Funds 28,988 53 0 211 106 29,358
--------- --------- --------- ---------- ------- --------
Total Interest Bearing Liabilities $ 218,093 $ 28,543 $ 42,692 $ 30,618 $ 168 $320,114
========= ========= ========= ========== ======= ========
Interest Sensitivity GAP
(within periods) $ (73,522) $ (2,212) $ (10,136) $ 96,809 $38,180 $ 49,119
Cumulative Interest Sensitivity
GAP (73,522) (75,734) (85,870) 10,939 $49,119
Ratio of Cumulative Interest
Sensitivity GAP to Rate
Sensitive Assets -19.91% -20.51% -23.26% 2.96% 13.30%
Ratio of Rate Sensitive Assets to
Rate Sensitive Liabilities 66.29% 92.25% 76.26% 416.18% ---
Cumulative Ratio of Rate Sensitive
Assets to Rate Sensitive
Liabilities 66.29% 69.29% 70.32% 103.42% 115.34%
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CAPITAL RESOURCES
At June 30, 1997, stockholders' equity increased $1.4 million, or 3.5%, to
$40.6 million from $39.2 million at December 31, 1996. The increase resulted
from net income less dividends paid plus an increase in capital of $329,000
resulting from increases in the market value of available for sale securities
related to FAS 115. At June 30, 1997, the Company's risk-based Tier 1 Capital
Ratio was 11.79%, the total risk based capital ratio was 12.85% and the
leverage ratio was 9.0%. The Company and Baylake Bank continue to exceed all
applicable regulatory capital requirements.
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PART II - OTHER INFORMATION
Item 5. Other Information
On March 14, 1997 property was purchased on the north side of the
city of Appleton in Outagamie County. Although that property will be
developed for a future site, no plans have been presently made.
On April 30, 1997 property was purchased in the town of Ledgeview,
located on the east side of De Pere in Brown County. Although that
property will be developed for a future site, no plans have been
presently made.
Baylake Bank continues to modernize its facilities in the Door County
market replacing two existing buildings in the Egg Harbor and
Sturgeon Bay West Side markets. These offices will feature drive-up
convenience, automated teller machines and drive-up night depository
services. In addition, they will provide an expanded customer
service area, customer education area and conference rooms.
Occupancy for the Egg Harbor facility was late May of 1997 while the
fall of 1997 is the anticipated completion date for the West Side
site. Costs for these projects are estimated at $900,000 each site.
Item 6. 8-K
(a) Exhibits
None
(b) Reports on Form 8-K filed for three months
ended June 30, 1997
Filed June 5, 1997 regarding stock repurchase program.
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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 12, 1997 Thomas L. Herlache
- --------------------------- ---------------------------
Thomas L. Herlache
President (CEO)
Date: August 12, 1997 Steven D. Jennerjohn
- --------------------------- ---------------------------
Steven D. Jennerjohn
Treasurer (CFO)
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