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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 SEPTEMBER 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)
(920)-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
----- -----
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of November 11, 1997.
$5.00 Par Value Common
2,444,537 shares
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BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of September 30, 1997 and December 31, 1996
Consolidated Condensed Statement of Income 4
Three and Nine months ended September 30, 1997
and 1996
Consolidated Statement of Cash Flows 5 - 6
Nine months ended September 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)
SEPT 30 DEC 31
ASSETS 1997 1996
------ -------- --------
Cash and due from Banks $ 10 460 $ 13 853
Investment securities available for
sale (at market) 94 662 87 690
Investment securities held to maturity (market value
$14,012 on 9/30/97; $11,869 on 12/31/96) 13 607 11 448
Loans 284 369 260 854
Less: Allowance for loan losses (3 431) (2 893)
--------- ---------
Loans, net of allowance for loan losses 280 938 257 961
Bank premises and equipment 12 780 12 354
Accrued interest receivable 3 293 2 883
Income tax receivable 198 220
Deferred income taxes 513 705
Other assets 8 047 8 242
-------- --------
TOTAL ASSETS $424 498 $395 356
======== ========
LIABILITIES
-----------
Domestic Deposits
Non-interest bearing deposits $ 45 097 $ 42 285
Interest bearing deposits
Now 39 371 43 356
Savings 89 773 93 465
Time, $100,000 and over 55 523 19 873
Other time 128 433 128 186
-------- --------
Interest bearing deposits $313 100 $284 880
-------- --------
Total deposits $358 197 $327 165
Short-term borrowings 19 596 23 840
Long-term debt 385 422
Accrued expenses and other liabilities 5 108 4 105
Dividends payable 590
-------- --------
TOTAL LIABILITIES $383 286 $356 122
======== ========
STOCKHOLDERS EQUITY
-------------------
Common Stock $5.00 par value - authorized
10,000,000 shares; issued 2,460,681 shares
on 9/30/97 and 12/31/96; outstanding
2,444,537 shares on 9/30/97 and 2,458,537
on 12/31/96 $ 12 302 $ 12 302
Additional paid-in capital 6 038 6 038
Reserve for market adjustment of
securities 966 604
Retained earnings 22 320 20 339
Treasury Stock (414) (49)
-------- --------
TOTAL STOCKHOLDERS EQUITY 41 212 39 234
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $424 498 $395 356
======== ========
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
-------- -------- -------- --------
Interest Income
Interest and fees on loans $ 6 503 $ 5 617 $ 18 920 $ 15 716
Interest on investment securities
Taxable 994 1 234 3 091 2 698
Exempt from federal income tax 469 405 1 249 1 144
Other interest income 1 23 1 58
--------- --------- --------- ---------
Total Interest Income 7 967 7 279 23 261 19 616
Interest Expense
Interest on deposits 3 418 3 180 9 513 8 292
Interest on short-term borrowings 205 115 1 033 314
Interest on long-term debt 8 10 24 31
--------- --------- --------- ---------
Total Interest Expense 3 631 3 305 10 570 8 637
--------- --------- --------- ---------
Net Interest Income 4 336 3 974 12 691 10 979
Provision for loan losses 154 88 457 269
--------- --------- --------- ---------
Net interest income after
provision for loan losses 4 182 3 886 12 234 10 710
--------- --------- --------- ---------
Other Income
Fees for fiduciary activities 139 139 337 412
Fees from loan servicing 289 131 917 632
Fees for other services to customers 372 367 1 117 1 051
Securities gains (losses) 0 0 47 0
Other income 78 204 223 276
--------- --------- --------- ---------
Total Other Income 878 841 2 641 2 371
--------- --------- --------- ---------
Other Expenses
Salaries and employee benefits 1 790 1 824 5 430 4 833
Occupancy expense 261 219 784 558
Equipment expense 243 227 754 596
Data processing and courier 155 138 471 393
FDIC insurance expense 10 1 30 2
Operation of other real estate 4 7 29 (163)
Other operating expense 705 780 2 084 1 937
--------- --------- --------- ---------
Total Other Expenses 3 168 3 196 9 582 8 156
--------- --------- --------- ---------
Income before income taxes 1 892 1 531 5 293 4 925
Income tax expense (benefit) 543 478 1 542 1 495
--------- --------- --------- ---------
Net Income $ 1 349 $ 1 053 $ 3 751 $ 3 430
========= ========= ========= =========
Net Income per share (1) $0.55 $0.43 $1.53 $1.40
Cash dividends per share $0.24 $0.23 $0.72 $0.69
Based on 2,455,358 shares average outstanding in 1997 and 2,453,559 in 1996.
See accompanying notes to unaudited consolidated financial statements.
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BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1997 1996
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(thousands of dollars)
Cash flows from operating activities:
Interest received from:
Loans $ 18 699 $ 15 482
Investments 4 055 3 131
Fees and service charges 2 574 2 317
Interest paid to depositors (9 055) (7 398)
Interest paid to others (1 061) (342)
Cash paid to suppliers and employees (8 074) (11 477)
Income taxes paid (1 514) (1 498)
----------- ----------
Net cash provided by operating activities 5 624 215
Cash flows from investing activities:
Proceeds from sales of investment securities 3 817
Principal payments received on investments 19 409 10 213
Purchase of investments (31 687) (43 096)
Proceeds from sale of other real estate owned 93 540
Loans made to customers in excess of principal collected (23 449) (36 502)
Capital expenditures (1 226) (3 522)
Cash paid for acquisition net of cash and federal
funds sold acquired (891)
---------- ---------
Net cash used in investing activities (33 043) (73 258)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (4 866) 20 954
Net increase (decrease) in advances from borrowers (4 281) 20 537
Net increase (decrease) in time deposits 35 897 36 115
Proceeds from issuance of common stock 78
Treasury stock acquired (365)
Dividends paid (2 359) (2 258)
---------- ----------
Net cash provided by financing activities 24 026 75 426
---------- ----------
Net increase (decrease) in cash and due from banks (3 393) 2 383
Cash and due from banks, beginning 13 853 9 887
---------- ----------
Cash and due from banks, ending $ 10 460 $ 12 270
6
1997 1996
-------- --------
(thousands of dollars)
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 3 751 $ 3 430
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1 029 589
Provision for loan losses and real estate owned 457 269
Amortization of premium on investments 152 209
Accretion of discount on investments (216) (163)
Cash surrender value increase (41) (59)
(Gain) loss from disposal of other real estate 17 (209)
(Gain) loss on sale of investment securities (47)
(Gain) loss from disposal of fixed assets 21
Equity in income of service center (48) 4
Deferred compensation 132 134
Changes in assets and liabilities:
Interest receivable (410) (1 061)
Prepaids and other assets (88) (4 083)
Unearned income 17 12
Interest payable 453 898
Taxes payable 22 (3)
Deferred taxes 6
Other liabilities 417 248
--------- ---------
Total adjustments 1 873 (3 215)
--------- ---------
Net cash provided by operating activities $ 5 624 $ 215
========= =========
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BAYLAKE CORP. AND SUBSIDIARIES NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1997 and December 31, 1996.
The results of operations for the nine and three months ended
September 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:
SEPT 30 DECEMBER 31
1997 1996
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(thousands of dollars)
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 11 484 $ 10 511
Other 2 123 937
-------- --------
Investment securities held to maturity $ 13 607 $ 11 448
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 36 339 $ 38 924
Obligations of states and political 27 918 16 971
subdivisions
Mortgage-backed securities 24 017 31 426
Other 6 388 369
-------- --------
Investment securities available for sale $ 94 662 $ 87 690
======== ========
3. At September 30, 1997 and December 31, 1996, loans were as follows:
SEPT 30 DECEMBER 31
1997 1996
--------- -----------
(thousands of dollars)
Commercial, industrial and agricultural $ 159 999 $ 151 291
Real estate - construction 12 389 11 365
Real estate - mortgage 99 112 83 538
Installment 13 458 15 233
Less: Deferred loan origination fees,
net of costs (589) (573)
-------- --------
284 369 260 854
Less allowance for loan losses (3 431) (2 893)
-------- --------
Net loans $ 280 938 $ 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 September 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 three and nine months ended
September 30, 1997.
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 September 30,
1997, and the results of operations for the three and nine months ended
September 30, 1997 and September 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 September 30, 1997, net income increased $296,000,
or 28.1%, to $1.35 million from $1.05 million for the third quarter of 1996.
The annualized return on average assets and return on average equity for the
three months ended September 30, 1997, were 1.31% and 13.33%, respectively
compared to 1.08% and 11.29%, respectively, for the same period a year ago.
For the nine months ended September 30, 1997, net income was $3.75 million, an
increase of 9.4% from the $3.43 million earned during the first nine months of
1996. The annualized return on average assets and return on average equity,
were 1.26% and 12.71%, respectively, compared to 1.35% and 12.45%, 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 September 30, 1997 increased
$362,000, or 9.1%, to $4.34 million from $3.97 million for the same period a
year ago. Total interest income for the third quarter of 1997 increased
$688,000, or 9.5%, to $7.97 million from $7.28 million for the third quarter of
1996, while interest
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expense increased $326,000, or 9.9%, to $3.63 million from $3.31 million in the
third 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 September 30, 1997, average earning assets increased
$43.9 million, or 13.3%, when compared to the same period last year. The
Company registered an increase in average loans of $38.3 million, or 15.7% for
the third quarter of 1997 compared to the same period a year ago.
For the nine months ended September 30, 1997, average earning assets increased
by $59.5 million or 19.5%, when compared to the same period last year. Loans
have continued to grow as the Company registered an increase in average loans
of $45.4 million, or 19.9%, for the first nine 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 September 30, 1997 decreased from 5.02% to 4.83% compared to a year ago.
The average yield on interest earning assets amounted to 8.66% for the third
quarter of 1997, representing a decrease of 33 basis points from the same
period last year. Total loan yields declined 2 basis points to 9.16%, while
total investment yields declined 137 basis points to 7.13% as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities increased 14 basis points to 4.46% for the third quarter of 1997,
while short-term borrowing costs increased 62 basis points to 5.74% comparing
the two periods. The above factors contributed to a decrease in the Company's
overall interest margin for the three months ended September 30, 1997.
Net interest margin (on a federal tax-equivalent basis) for the first nine
months of 1997 declined to 4.86% from 5.03% for the same period last year. The
average yield on interest-earning assets amounted to 8.45% for the first nine
months of 1997, representing a decrease of 34 basis points over the same period
last year. Total loan yields increased 5 basis points to 9.26% while
investment securities decreased 44 basis points to 7.13%. The Company's average
cost on interest-bearing deposit liabilities increased 2 basis points to 4.36%
for the first nine months of 1997, while short-term borrowing costs increased 44
basis points to 5.70% comparing the two periods. The above factors contributed
to a decline in the Company's overall interest margin for the first nine months
ended September 30, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended September 30, 1997
increased $66,000, or 75.0%, to $154,000 from $88,000 for
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the third quarter a year ago. For the nine months ended September 30, 1997, the
provision for loan losses increased $188,000, or 69.9%, to $457,000 from
$269,000 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 $37,000, or 4.4%, to $878,000 for the third
quarter of 1997, from $841,000 for the second quarter a year ago. This
increase has occurred as a result of increased loan servicing fees and fees on
other customer services offset by decreased other income.
For the first nine months of 1997, non-interest income has improved $270,000,
or 11.4%, to $2.64 million from $2.37 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 showed improvement as
an increase in premiums of approximately $221,450 were realized as a result of
loan sales in the secondary market. The increase in fees for other services to
customers primarily resulted from increased service charges on deposit
products. A decline in revenues of approximately $40,000 stemming from the
operation of Karsten Resources, Inc. ("Karsten"), a hotel and restaurant
business, account primarily for the decrease in other income.
NON-INTEREST EXPENSE
Non-interest expense increased $88,000, or .9%, for the three months ended
September 30, 1997 compared to the same period in 1996. Salaries and employee
benefits showed a slight decline of $34,000 or 1.9% for the period due to
expenses resulting from the Four Seasons merger in the third quarter of 1996..
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 a decrease
of $75,000, or 9.6%, for the third quarter of 1997 primarily as a result of
reduced costs stemming from the Karsten operation. $82,000 of goodwill was
amortized during the quarter as a result of the acquisition of Four Seasons.
The balance of the increase has occurred as a result of normal increases in
promotional expenses, supplies expense, and data services expense. The
overhead ratio, which is computed by subtracting non-interest
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income from non-interest expense and dividing by average total assets, was
2.22% for the three months ended September 30, 1997 compared to 2.42% for the
same period in 1996.
Non-interest expense increased $1.43 million, or 17.5%, for the nine months
ended September 30, 1997, compared to the same period in 1996. Salaries and
employee benefits showed an increase of $597,000, or 12.4%, as a result of
additional employee expense resulting from operations in the Green Bay and
Manawa regions, 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
$147,000, or 7.6%, for the nine months ended September 30, 1997 as compared to
September 30, 1996. Approximately $170,000 of the increase is related to
goodwill amortization related to the Four Seasons acquisition. The overhead
ratio was 2.33% for the nine months ended September 30, 1997 compared with
2.28% for the same period in 1996.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended September
30, 1997 increased $65,000, or 13.6%, to $543,000 from $478,000 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 nine months ended September 30, 1997
increased $47,000, or 3.1%, to $1.54 from $1.50 million for the same period one
year ago. The increase in income tax provision was due to increased taxable
income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At September 30, 1997, total loans increased $23.5 million, or 9.0%, to $284.4
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 September 30, 1997 compared to $151.3 million at December 31, 1996.
In addition, real estate construction loans increased to $12.4 million at
September 30, 1997 compared to $11.4 million at December 31, 1996 and real
estate- mortgage loans increased to $99.1 million at September 30, 1997
compared to $83.5 million at December 31, 1996.
NON-PERFORMING ASSETS
At September 30, 1997, non-performing assets amounted to $3.86 million compared
to $4.70 million at December 31, 1996. Non-performing assets at September 30,
1997 were .91% 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. The ratio of non-performing assets to total
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loans at September 30, 1997 was 1.36% compared to 1.80% at December 31, 1996.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At September 30, 1997, the allowance for loan losses increased $538,000 from
year end 1996 to $3.43 million due to increased provision expense and net
recoveries over chargeoffs of $81,000 year to date. 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 September 30, 1997 and
December 31, 1996, the allowance for loan losses as a percentage of total loans
were at 1.21% and 1.11%, respectively.
INVESTMENT PORTFOLIO
At September 30, 1997, the investment portfolio increased $9.1 million, or
9.2%, to $108.2 million from $99.1 million at December 31, 1996. At September
30, 1997, the investment portfolio represented 25.5% of total assets compared
with 25.1% at December 31, 1996. The increase in total investments occurred as
a result of net growth in deposits as compared to growth in the loan portfolio.
DEPOSITS
Total deposits at September 30, 1997 increased $31.0 million, or 9.5%, to
$358.2 million from $327.2 million at December 31, 1996. Non-interest bearing
deposits at September 30, 1997 increased $2.8 million, or 6.7%, to $45.1
million from $42.3 million at December 31, 1996. Interest-bearing deposits at
September 30, 1997 increased $28.2 million, or 9.9%, to $313.1 million from
$284.9 million at December 31, 1996. Time deposits over $100,000 show an
increase of $35.7 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. During the third quarter, deposits typically
increase as a result of increased tourism activity in the various markets
served by the Company generating increased deposits.
SHORT-TERM BORROWINGS
Total short-term borrowings at September 30, 1997 decreased $4.2 million to
$19.6 million from $23.8 million at December 31, 1996. The decrease in
short-term borrowings resulted from increased deposits as compared to increases
in the loan and investment portfolio.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cashflows for
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the nine months ended September 30, 1997, cash and cash equivalents decreased
$3.4 million during the period to $10.5 million at September 30, 1997. The
decrease primarily reflected $5.6 million in net cash provided by operating
activities and $24.0 million provided by financing activities offset by $33.0
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 and investment securities plus necessary capital
expenditures. Net cash provided by financing activities resulted primarily from
a net decrease in short term deposits, borrowed funds and dividends paid offset
by a net increase in time deposits. Strong loan demand for the first nine
months of 1997 continues to remain solid. An increase in deposits though
permitted the Company to decrease 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. While these accounts are contractually short-term in
nature, it is the Company's experience that repricing occurs over a longer
period of time. The Company views its savings and NOW accounts to be core
deposits and relatively non-price sensitive, as it believes it could make
repricing adjustments for these types of accounts in small increments without a
material decrease in balances. All other earning categories including loans
and investments as well as other paying liability categories such as time
deposits are scheduled according to their contractual maturities.
Interest rate sensitivity analysis can be performed in several
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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 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 September 30, 1997, rate sensitive liabilities exceeded rate
sensitive assets by $53.1 million, or a ratio of rate sensitive assets to rate
sensitive liabilities of 74.7%. For the next time frame of four to six months,
rate sensitive liabilities exceeded rate sensitive assets by $15.2 million, or
a ratio of rate sensitive assets to rate sensitive liabilities of 56.3%. For
all assets and liabilities priced within a one year time frame, the cumulative
ratio of rate sensitive assets to rate sensitive liabilities was 73.7%, 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.
16
ASSET AND LIABILITY MATURITY REPRICING
SCHEDULE AS OF SEPTEMBER 30, 1997
Within Four to Seven to One Year Over
Three Six Twelve to Five Five
Months Months Months Years Years Total
-------- -------- ------- ------- ------- --------
(In Thousands)
Earning Assets:
Investment Securities $ 9 641 $ 392 $ 8 852 $41 659 $47 725 $108 269
Loans and Leases:
Variable Rate 124 473 0 0 124 473
Fixed Rate 22 277 19 246 32 501 80 515 4 921 159 460
-------- -------- ------- ------- ------- --------
Total Loans and Leases $146 750 $ 19 246 $32 501 $80 515 $ 4 921 $283 933
-------- -------- ------- ------- ------- --------
Total Earning Assets $156 391 $ 19 638 $41 353 $122 174 $52 646 $392 202
======== ======== ======= ======== ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 39 371 $ $ $ $ $ 39 371
Saving Deposits 89 773 89 773
Time Deposits 60 701 34 832 50 787 37 593 43 183 956
Borrowed Funds 19 596 53 0 211 121 19 981
-------- ------- ------- ------- ------- --------
Total Interest Bearing Liabilities $209 441 $34 885 $50 787 $37 804 $ 164 $333 081
======== ======= ======= ======= ======= ========
Interest Sensitivity GAP $(53 050) $(15 247) $(9 434) $ 84 370 $52 482 $ 59 121
(within periods)
Cumulative Interest Sensitivity
GAP (53 050) (68 297) (77 731) 6 639 $59 121
Ratio of Cumulative Interest -13.53% -17.41% -19.82% 1.69% 15.07%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to
Rate Sensitive Liabilities 74.67% 56.29% 81.42% 323.18% ---
Cumulative Ratio of Rate Sensitive 74.67% 72.05% 73.66% 101.99% 116.46%
Assets to Rate Sensitive
Liabilities
17
CAPITAL RESOURCES
At September 30, 1997, stockholders' equity increased $2.0 million, or 5.0%, to
$41.2 million from $39.2 million at December 31, 1996. The increase resulted
from net income less dividends paid plus an increase in capital of $362,000
resulting from increases in the market value of available for sale securities
related to FAS 115. At September 30, 1997, the Company's risk-based Tier 1
Capital Ratio was 11.49%, the total risk based capital ratio was 12.60% and the
leverage ratio was 8.84%. The Company and Baylake Bank continue to exceed all
applicable regulatory capital requirements.
18
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 occupancy for the West
Side facility was October of 1997. 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 September 30, 1997
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: November 11, 1997 Thomas L. Herlache
-------------------------------- ---------------------------------
Thomas L. Herlache
President (CEO)
Date: November 11, 1997 Steven D. Jennerjohn
-------------------------------- ---------------------------------
Steven D. Jennerjohn
Treasurer (CFO)