<PAGE> 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 SEPTEMBER 30, 1996
---------------------------------------
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.
- ----------------------------------------------------------------------
(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
--- -----
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of November 11, 1996.
$5.00 Par Value Common
2,458,537 shares
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of September 30, 1996 and December 31, 1995
Consolidated Condensed Statement of Income 4
Three and Nine months ended September 30, 1996
and 1995
Consolidated Statement of Cash Flows 5 - 6
Nine months ended September 30, 1996 and 1995
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 - 19
Signatures 20
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
SEPT 30 DEC 31
ASSETS 1996 1995
------ -------- --------
<S> <C> <C>
Cash and due from Banks $ 12 270 $ 9 887
Investment securities available for
sale (at market) 98 465 63 966
Investment securities held to maturity (market value
$10,986 on 9/30/96; $12,197 on 12/31/95) 10 728 11 645
Federal funds sold 1 380
Loans 245 976 210 230
Less: Allowance for loan losses (2 868) (2 617)
--------- ---------
Loans, net of allowance for loan losses 243 108 207 613
Bank premises and equipment 11 665 8 652
Accrued interest receivable 3 287 2 227
Income tax receivable 284 262
Deferred income taxes 731 726
Other assets 7 610 3 070
-------- --------
TOTAL ASSETS $388 148 $309 428
======== ========
LIABILITIES
-----------
Domestic Deposits
Non-interest bearing deposits $ 43 570 $ 33 887
Interest bearing deposits
Now 39 169 36 945
Savings 93 494 84 448
Time, $100,000 and over 25 282 11 523
Other time 122 534 100 177
-------- --------
Interest bearing deposits $280 479 $233 093
-------- --------
Total deposits $324 049 $266 980
Short term borrowings 22 165 1 528
Long term debt 374 475
Accrued expenses and other liabilities 4 885 3 606
Dividends payable 564
-------- --------
TOTAL LIABILITIES $351 473 $273 153
-------- --------
STOCKHOLDERS EQUITY
-------------------
Common Stock $5.00 par value - authorized
10,000,000 shares; issued 2,460,481 shares
on 9/30/96 and 2,454,881 on 12/31/95; outstanding
2,458,537 shares on 9/30/96 and 2,452,937 on 12/31/95 $ 12 302 $ 12 274
Additional paid-in capital 6 004 5 954
Reserve for market adjustment of
securities (1 237) 176
Retained earnings 19 655 17 920
Treasury Stock (49) (49)
-------- --------
TOTAL STOCKHOLDERS EQUITY 36 675 36 275
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $388 148 $309 428
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE> 4
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT AMOUNTS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
-------- --------- ------ --------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 5,617 $ 4,991 $ 15,716 $ 14,491
Interest on investment securities
Taxable 1,234 840 2,698 2,459
Exempt from federal income tax 405 317 1,144 930
Other interest income 23 113 58 145
-------- -------- -------- --------
Total Interest Income 7,279 6,261 19,616 18,025
Interest Expense
Interest on deposits 3,180 2,565 8,292 7,277
Interest on short term borrowings 115 32 314 271
Interest on Long-term debt 10 0 31 0
-------- -------- -------- --------
Total Interest Expense 3,305 2,597 8,637 7,548
-------- -------- -------- --------
Net Interest Income 3,974 3,664 10,979 10,477
Provision for loan losses 88 78 269 233
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,886 3,586 10,710 10,244
-------- -------- -------- --------
Other Income
Fees for fiduciary activities 139 112 412 275
Fees from loan servicing 131 98 632 326
Fees for other services to customers 367 311 1,051 892
Securities gains (losses) 0 0 (6)
Other income 204 35 276 200
-------- -------- -------- --------
Total Other Income 841 556 2,371 1,687
-------- -------- -------- --------
Other Expenses
Salaries and employee benefits 1,824 1,466 4,833 4,034
Occupancy expense 219 153 558 436
Equipment expense 227 158 596 467
Data processing and courier 138 65 393 348
FDIC insurance expense 1 (15) 2 266
Operation of other real estate 7 (2) (163) 28
Other operating expense 780 614 1,937 1,511
-------- -------- -------- --------
Total Other Expenses 3,196 2,439 8,156 7,090
-------- -------- -------- --------
Income before income taxes 1,531 1,703 4,925 4,841
Income tax expense (benefit) 478 507 1,495 1,481
-------- -------- -------- --------
Net Income $ 1,053 $ 1,196 $ 3,430 $ 3,360
======== ======== ======== ========
Net Income per share (1) $ 0.43 $ 0.49 $ 1.40 $ 1.37
Cash dividends per share $ 0.23 $ 0.22 $ 0.69 $ 0.66
</TABLE>
(1) Based on 2,453,559 shares average outstanding in 1996 and 2,452,937 in
1995.
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1996 1995
-------- --------
(thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 15,482 $ 14,313
Investments 3,131 3,499
Fees and service charges 2,317 1,600
Interest paid to depositors (7,398) (6,512)
Interest paid to others (342) (240)
Cash paid to suppliers and employees (11,477) (6,514)
Income taxes paid (1,498) (1,564)
-------- --------
Net cash provided by operating activities 215 4,582
Cash flows from investing activities
Proceeds from sales of investment securities 0 993
Principal payments received on investments 10,213 9,971
Purchase of investments (43,096) (17,353)
Investment in service center (0) (196)
Proceeds from sale of other real estate owned 540 264
Loans made to customers in excess of principal collected (36,502) (13,128)
Capital expenditures (3,522) (1,665)
Net cash acquired in acquisition 12,984 0
Payment for purchase of stock of acquired company (13,875) 0
--------- --------
Net cash (used) provided in investing activities (73,258) (21,114)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 20,954 1,406
Net increase (decrease) in advances from borrowers 20,537 (2,486)
Net increase (decrease) in time deposits 36,115 18,650
Proceeds from issuance of common stock 78 11
Dividends paid (2,258) (2,158)
-------- --------
Net cash provided by financing activities 75,426 15,423
-------- --------
Net increase (decrease) in cash and cash equivalents 2,383 (1,109)
Cash and cash equivalents, beginning 9,887 10,516
-------- --------
Cash and cash equivalents, ending $ 12,270 $ 9,407
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
1996 1995
-------- --------
(thousands of dollars)
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 3,430 $ 3,360
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation 509 381
Provision for loan losses and real estate owned 269 233
Amortization of premium on investments 209 196
Accretion of discount on investments (163) (139)
Cash surrender value increase (59) (21)
(Gain) loss from disposal of other real estate (209) (1)
(Gain) loss on sale of investment securities (0) 6
Equity in income of service center 4 (53)
Amortization of book of business 1 0
Goodwill writedown 79 4
Deferred compensation 134 59
Changes in assets and liabilities:
Interest receivable (1,061) (312)
Prepaids and other assets (4,083) 147
Unearned income 12 26
Interest payable 898 795
Taxes payable (3) (83)
Other liabilities 248 (16)
-------- --------
Total adjustments (3,215) 1,222
-------- --------
Net cash provided by operating activities $ 215 $ 4,582
======== ========
</TABLE>
<PAGE> 7
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. The accompanying unaudited consolidated financial statements should
be read in conjunction with Baylake Corp.'s ("Company") 1995 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, 1996 and December 31, 1995.
The results of operations for the nine months ended September 30,
1996 and 1995 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:
<TABLE>
<CAPTION>
SEPT 30 DECEMBER 31
1996 1995
-------- -----------
(thousands of dollars)
<S> <C> <C>
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 10,728 $ 11,237
Other 0 408
------- --------
Investment securities held to maturity $ 10,728 $ 11,645
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 44,619 $ 11,321
Obligations of states and political 17,234 13,322
subdivisions
Mortgage-backed securities 35,005 38,430
Other 1,607 893
-------- --------
Investment securities available for sale $ 98,465 $ 63,966
======== ========
</TABLE>
3. At September 30, 1996 and December 31, 1995, loans were as follows:
<TABLE>
<CAPTION>
SEPT 30 DECEMBER 31
1996 1995
--------- -----------
(thousands of dollars)
<S> <C> <C>
Commercial, industrial and agricultural $ 145,052 $ 129,712
Real estate - construction 9,853 6,378
Real estate - mortgage 76,901 62,271
Installment 14,836 12,522
Less: Deferred loan origination fees, net of
costs (666) (653)
-------- --------
245,976 210,230
Less allowance for loan losses (2,868) (2,617)
-------- --------
Net loans $ 243,108 $ 207,613
</TABLE>
<PAGE> 8
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, 1996 and
December 31, 1995 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, 1996.
6. On August 31, 1994, the Company acquired Kewaunee County
Banc-Shares, Inc. ("KCB"), a registered bank holding company, and its
wholly owned subsidiary, State Bank of Kewaunee (subsequently named
"Baylake Bank Kewaunee") ("BBK"). Effective January 1, 1996, Baylake
Bank and BBK were merged, and referred to herein as "Baylake Bank".
7. 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.
<PAGE> 9
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,
1996, and the results of operations for the three and nine months ended
September 30, 1996 and September 30, 1995. This discussion and analysis should
be read in conjunction with the Company's unaudited consolidated financial
statements and the notes thereto included herein.
In March 1996, the Company signed an agreement to acquire Four Seasons of Wis.,
Inc. ("Four Seasons") and its subsidiary The Bank ("Bank") in a cash
transaction valued at $13.8 million. Because the transaction would be
accounted for using the purchase method of accounting, it would affect future
operations.
Subsequently on July 1, 1996, the Company consummated its acquisition of Four
Seasons. To consummate the acquisition, the Company has paid to date $13.875
million which is composed of the initial purchase price of $13.8 million and
estimated income of Four Seasons for 1996 up to the effective date of the
transaction. This is subject to final review of a certified audit confirming
financial data for Four Seasons for the six months ended June 30, 1996. Any
adjustment to final net income due shall be made at that time and transacted
accordingly.
RESULTS OF OPERATIONS
For the three months ended September 30, 1996, net income decreased $143,000,
or 12.0%, to $1.05 million from $1.20 million for the third quarter of 1995.
The annualized return on average assets and return on average equity for the
three months ended September 30, 1996, were 1.08% and 11.29%, respectively
compared to 1.55% and 13.40%, respectively, for the same period a year ago.
For the nine months ended September 30, 1996, net income was $3.43 million, an
increase of 2.1% from the $3.36 million earned during the first nine months of
1995. The annualized return on average assets and return on average equity,
were 1.35% and 12.45%, respectively compared to 1.52% and 13.10%, respectively
for the same period a year ago.
The change in net income for both periods is primarily due to improved net
interest income and an increase in other income offset by increased other
expenses.
<PAGE> 10
NET INTEREST INCOME
Net interest income for the three months ended September 30, 1996 increased
$310,000, or 8.5%, to $3.97 million from $3.66 million for the same period a
year ago. Total interest income for the third quarter of 1996 increased $1.02
million, or 16.3%, to $7.28 million from $6.26 million for the third quarter of
1995, while interest expense increased $708,000, or 27.3%, to $3.31 million
from $2.60 million in the third quarter of 1995. 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, 1996, average earning assets increased
$42.2 million, or 14.7%, when compared to the same period last year. The
Company registered an increase in average loans of $38.1 million, or 18.5% for
the third quarter of 1996 compared to the same period a year ago.
For the nine months ended September 30, 1996, average earning assets increased
by $28.9 million, or 10.5%, when compared to the same period last year. Loans
have continued to grow as the Company registered an increase in average loans
of $26.9 million, or 13.4%, for the first nine months of 1996 compared to the
same period in 1995. 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, 1996 decreased from 5.25% to 5.02% compared to a year ago.
The average yield on interest earning assets amounted to 8.99% for the third
quarter of 1996, representing an increase of 14 basis points from the same
period last year. Total loan yields declined 46 basis points to 9.18%, while
total investment yields increased 166 basis points to 8.50% as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities increased 10 basis points during the third quarter of 1996, while
short-term borrowing costs declined 146 basis points during the third quarter
of 1996. The above factors resulted in the decrease of the Company's overall
interest margin for the third quarter.
Net interest margin (on a federal tax-equivalent basis) for the first nine
months of 1996 declined to 5.03% from 5.28% for the same period a year ago.
The average yield on interest-earning assets amounted to 8.79% for the first
nine months of 1996, representing a decrease of 12 basis points from the same
period last year. Total loan yields declined 43 basis points while investment
securities increased 56 basis points. The Company's average cost on
interest-bearing deposit liabilities declined 7 basis points to 4.34% for the
first nine months of 1996, while short-term borrowing costs declined 237 basis
points 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, 1996.
<PAGE> 11
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended September 30, 1996
increased $10,000, or 12.8%, to $88,000 from $78,000 for the third quarter a
year ago. For the first nine months ended September 30, 1996, the provision
for loan losses increased $36,000, or 15.5%, to $269,000 from $233,000 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.
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 increased $285,000, or 51.3%, to $841,000 for the
third quarter of 1996, from $556,000 for the third quarter a year ago. For the
first nine months of 1996, non-interest income has increased $684,000, or
40.6%, to $2.37 million from $1.69 million for the same period last year.
These increases have occurred as a result of increased trust revenues,
increased loan servicing fees, and increased fees for other customer services.
Trust revenues increased primarily as a result of increased trust business.
Loan servicing fees increased for two reasons. Premiums of approximately
$210,000 were realized as a result of loan sales in the secondary market and
estimated fees of $134,000 were recognized as a result of the implementation of
SFAS No. 122 "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS" at the beginning of
1996. The increase in fees for other services to customers primarily resulted
from increased revenues from the Company's insurance subsidiary. Revenues of
approximately $125,000 stemming from the operation of Karsten Resources, Inc.
("Karsten"), a hotel and restaurant business, account for the increase in other
income.
NON-INTEREST EXPENSE
Non-interest expense increased $757,000, or 31.0%, for the three months ended
September 30, 1996 compared to the same period in 1995. Salaries and employee
benefits showed the largest increase of $358,000, or 24.4%, due in part to
additional employee expense of $28,000 stemming from the Karsten operation and
additional expense resulting from operations in Green Bay region.
Approximately $95,000 of the increase occurred as a result of additional
employees due to the Four Seasons purchase and merger. 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. Other operating expense shows an increase
of $166,000, or 27.0%, for the third quarter of 1996 primarily as a result of
approximately $49,000 from operations of the Bank and an additional $75,000 of
goodwill amortized during the quarter as a result of the acquisition of Four
Seasons. The balance of the increase has occurred as a result of additional
promotional expenses, supplies,
<PAGE> 12
expense, and data services expense stemming from startup in the Green Bay
region, as well as normal expense increases in other areas. The overhead
ratio, which is computed by subtracting non-interest income from non-interest
expense and dividing by average total assets, was 2.42% for the three months
ended September 30, 1996 compared to 2.43% for the same period in 1996.
Non-interest expense increased $1.07 million, or 15.0%, for the nine months
ended September 30, 1996, compared to the same period in 1996. Salaries and
employee benefits showed an increase of $799,000, or 19.8%, due in part to
$89,000 recognized from the Karsten operation along with the additional salary
expenses stemming from the Green Bay and Bank operations as previously
explained. Normal salary increases accounted for the balance of the increase
in salaries and benefits. The increase in occupancy and equipment expense were
primarily the result for the same reasons listed previously. Other real estate
owned expenses shows income of $163,000, due to gains taken upon disposition of
property totaling $209,000. Much of the gains resulted from additional sales
of lots of Idlewild Valley, a former subsidiary of the Company whose value was
written off in 1988. FDIC insurance expense shows a reduction of $264,000 as a
result of action taken by the FDIC to lower fees assessed to a minimum fee,
rather than the 23 cents per $100 of deposits assessed in the early half of
1995. Items affecting the increase in other operating expense include $65,000
stemming from the operation of Karsten, $49,000 from the operations of the Bank
and $75,000 of goodwill amortized as a result of the Four Seasons acquisition.
The balance of the increase has occurred as a result of additional promotional
expenses, supplies expense, and data services expense stemming from startup in
the Green Bay region, reasons listed previously. The overhead ratio was 2.28%
for the nine months ended September 30, 1996 compared with 2.44% for the same
period in 1995.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended September
30, 1996 decreased $29,000, or 5.7%, to $478,000 from $507,000 for the same
period one year ago. The decrease in income tax provision was due to decreased
taxable income. The Company's provision for income taxes for the nine months
ended September 30, 1996 increased $14,000, or 1.0%, to $1.49 million from
$1.48 million for the same period a year ago. The increase in income tax
provision was due to increased taxable income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At September 30, 1996, total loans increased $35.7 million, or 17.0%, to $246.0
million from $210.2 million at December 31, 1995. Approximately $12.3 million
of loans were acquired as a result of the Four Seasons acquisition. The change
in loan mix in the Company's portfolio resulted from an increase in commercial
loans
<PAGE> 13
to $145.1 million at September 30, 1996 compared to $129.7 million at December
31, 1995. In addition, real estate construction loans increased to $9.9
million at September 30, 1996 compared to $6.4 million at December 31, 1995 and
real estate-mortgage loans increased to $76.9 million at September 30, 1996
compared to $62.3 million at December 31, 1995.
NON-PERFORMING ASSETS
At September 30, 1996, non-performing assets amounted to $3.11 million compared
to $1.49 million at December 31, 1995. Non-performing loans at September 30,
1996 were .73% of total assets compared with .48% at December 31, 1995.
$627,000 of this increase stems from a commercial credit which is attempting a
reorganization of an existing business. $397,000 of the increase centers
around one restaurant business which is experiencing cashflow problems. In the
event of liquidation, management expects minimal losses due to the strong
collateral position that exist in that particular loan. Other real estate
totaling $274,000 consists of two restaurant properties amounting to $168,000
and two residential properties equaling $106,000. No loss is anticipated as
strong collateral positions exist in these properties. The ratio of non-
performing assets to total loans at September 30, 1996 was 1.26% compared to
.71% at December 31, 1995.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At September 30, 1996, the allowance for loan losses increased $251,000 from
year end 1995 to $2.87 million. Although loans have continued to grow at an
above average rate, the allowance for loan losses as a percent of total loans
has declined slightly. The allowance is at a level currently believed to be
acceptable by management. At September 30, 1996 and December 31, 1995, the
allowance for loan losses as a percentage of total loans were at 1.17% and
1.24% respectively.
INVESTMENT PORTFOLIO
At September 30, 1996, the investment portfolio increased $33.6 million, or
44.4%, to $109.2 million from $75.6 million at December 31, 1995.
Approximately $29.7 million of investments were added as a result of the Four
Seasons acquisition. At September 30, 1996, the investment portfolio
represented 28.1% of total assets compared with 24.4% at December 31, 1995.
The increase in total investments occurred primarily as a result of the
acquisition of Four Seasons.
DEPOSITS
Total deposits at September 30, 1996 increased $57.1 million, or 21.4%, to
$324.0 million from $267.0 million at December 31, 1995. Approximately $46.9
million of the growth came as a result of the Four Seasons acquisition,
consisting largely of time deposits totaling $32.7 million . Non-interest
bearing deposits at September 30, 1996 increased $9.7 million, or 28.6%, to
$43.6
<PAGE> 14
million from $33.9 million at December 31, 1995. Interest-bearing deposits at
September 30, 1996 increased $47.4 million, or 20.3%, to $280.5 million from
$233.1 million at December 31, 1995. Time deposits show a larger than normal
increase with $36.1 million in growth since year end 1995, primarily due to the
Four Seasons acquisition. In addition, entry into the Green Bay market has
provided additional sources of deposit growth helping to reduce the typical
seasonal patterns experienced by the Company in its Door County market.
SHORT-TERM BORROWINGS
Total short-term borrowings at September 30, 1996 increased $20.6 million to
$22.2 million from $1.5 million at December 31, 1995. 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.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cashflows for the nine
months ended September 30, 1996, cash and cash equivalents increased $2.4
million during the period to $12.3 million at September 30, 1996. The increase
primarily reflected $215,000 in net cash provided by operating activities and
$75.4 million provided by financing activities offset by $73.3 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 investments and loans (primarily as a result of the Four Seasons
acquisition) plus necessary capital expenditures in addition to a payment of
$13.8 million used in the acquisition of Four Seasons. This was offset by
approximately $13.0 million of cash acquired as a result of the Four Seasons
purchase. Net cash provided by financing activities resulted primarily from a
net increase in deposits (largely as a result of the Four Seasons acquisition)
and borrowed funds offset by dividends paid. Strong loan demand for the first
nine months of 1996 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 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
<PAGE> 15
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 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, 1996,
rate sensitive liabilities exceeded rate sensitive assets by $77.6 million, or
a ratio of rate sensitive assets to rate sensitive liabilities of 61.0%. For
the next time frame of four to six months, rate sensitive assets exceeded rate
sensitive liabilities by $4.3 million, or a ratio of rate sensitive assets to
rate sensitive liabilities of 85.2%. For all assets and liabilities priced
within a one year time frame, the cumulative ratio of rate sensitive assets to
rate sensitive liabilities was 75%, which is outside the range of plus or minus
15% deemed acceptable by management.
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.
<PAGE> 16
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Within Four to Seven to One Year Over
Three Six Twelve to Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ 7,675 $ 6,720 $ 15,138 $48,523 $31,137 $109,193
Loans and Leases:
Variable Rate 94,418 0 0 94,418
Fixed Rate 19,070 18,202 38,153 72,391 1,474 149,290
-------- -------- ------- ------- ------- --------
Total Loans and Leases $113,488 $ 18,202 $38,153 $72,391 $ 1,474 $243,708
-------- -------- ------- ------- ------- --------
Total Earning Assets $121,163 $ 24,922 $53,291 $120,914 $32,611 $352,901
======== ======== ======= ======== ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 39,169 $ $ $ $ $ 39,169
Saving Deposits 93,494 93,494
Time Deposits 43,912 29,198 37,917 36,724 65 147,816
Borrowed Funds 22,165 53 0 211 110 22,539
-------- ------- ------- ------- ------- --------
Total Interest Bearing Liabilities $198,740 $29,251 $37,917 $36,935 $ 175 $303,018
======== ======= ======= ======= ======= ========
Interest Sensitivity GAP (77,577) $(4,329) $15,374 $83,979 $32,436 $ 49,883
(within periods)
Cumulative Interest Sensitivity GAP (77,577) (81,906) (66,532) 17,447 $49,883
Ratio of Cumulative Interest -21.98% -23.21% -18.85% -4.94 14.14%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to Rate 60.97% 85.20% 140.55% 327.37% ---
Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 60.97% 64.07% 74.98% 105.76% 116.46%
Assets to Rate Sensitive
Liabilities
</TABLE>
<PAGE> 17
CAPITAL RESOURCES
At September 30, 1996, stockholders' equity increased $400,000, or 1.1%, to
$36.7 million from $36.3 million at December 31, 1995. The increase resulted
from net income less dividends paid offset by a reduction in capital of $1.4
million resulting from the implementation of FAS 115. At September 30, 1996,
the Company's risk-based Tier 1 Capital Ratio was 14.28%, the total risk based
capital ratio was 15.36% and the leverage ratio was 9.9%. The Company and
Baylake Bank continue to exceed all applicable regulatory capital requirements.
<PAGE> 18
PART II - OTHER INFORMATION
Item 5. Other Information
Manawa Acquisition
In March 1996, Baylake entered into a definitive agreement providing
for the acquisition of Four Seasons of Wis, Inc. ("Four Seasons").
Four Seasons is the sole shareholder of The Bank, in Manawa,
Wisconsin. In addition to its main office in Manawa, which is
approximately 35 miles west of Green Bay, The Bank maintains a branch
office in King, a nearby community.
Baylake acquired Four Seasons pursuant to a Agreement and Plan of
Acquisition dated as of March 13, 1996. To consummate the
acquisition, Baylake has paid thus far an aggregate of $13,875,000,
including the initial purchase price of $13,800,000 plus $75,000 of
the estimated income of Four Seasons for 1996 up to the effective date
of the transaction. The remaining 50% of estimated net income is
placed in escrow with Baylake Bank until completion and review of a
certified audit confirming financial data for Four Seasons for the six
months ended June 30, 1996. Any adjustment to final net income due
shall be made at that time and the remaining income shall be paid out.
To the extent that there is any increase in actual income which
exceeds the amount held in escrow, Baylake has agreed to pay such
increase at that time.
The acquisition was negotiated at arm's length between Baylake and the
representatives of Four Seasons (who are not affiliated with Baylake).
The transaction is being accounted for by Baylake using the purchase
method of accounting.
Green Bay Branches
Baylake Bank completed construction of its permanent facility in the
Green Bay region and opened for business in March 1996. This facility
will offer a full range of products and services. Total costs for
building and equipment to date are $2.0 million. In addition,
construction has occurred on a second site in Green Bay. This area is
currently served by a temporary facility and offers various retail
services as well as consumer and commercial loan services. Subsequent
to December 31, 1995, Baylake Bank has entered into a contract to
construct a building for $1.1 million with completion occurring in the
late third quarter of 1996.
Merger of Subsidiary Banks
Effective January 1, 1996, Baylake's subsidiary banks, Baylake Bank
and Baylake Bank (Kewaunee), were merged under the name "Baylake
Bank". The merger is intended by Baylake to generate operating
efficiencies, improve customer service, assist in the coordination of
management and reduce regulatory burdens.
Item 6. 8-K
<PAGE> 19
(a) Exhibits
None
(b) Reports on Form 8-K filed for three months ended June 30, 1996
The initial filing of Form 8-K dated July 12, 1996 was followed by a
subsequent filing with audited financial statements of Four Seasons
and proforma financial information for June 30, 1996 and filed on
September 30, 1996.
<PAGE> 20
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 12, 1996 Thomas L. Herlache
------------------------ ---------------------------------
Thomas L. Herlache
President (CEO)
Date: November 12, 1996 Steven D. Jennerjohn
------------------------ ---------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000275119
<NAME> BAYLAKE CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,270
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,465
<INVESTMENTS-CARRYING> 10,728
<INVESTMENTS-MARKET> 10,986
<LOANS> 245,976
<ALLOWANCE> 2,868
<TOTAL-ASSETS> 388,148
<DEPOSITS> 324,049
<SHORT-TERM> 22,165
<LIABILITIES-OTHER> 4,885
<LONG-TERM> 374
0
0
<COMMON> 12,302
<OTHER-SE> 36,675
<TOTAL-LIABILITIES-AND-EQUITY> 388,148
<INTEREST-LOAN> 15,716
<INTEREST-INVEST> 3,842
<INTEREST-OTHER> 58
<INTEREST-TOTAL> 19,616
<INTEREST-DEPOSIT> 8,292
<INTEREST-EXPENSE> 8,637
<INTEREST-INCOME-NET> 10,979
<LOAN-LOSSES> 269
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,156
<INCOME-PRETAX> 4,925
<INCOME-PRE-EXTRAORDINARY> 3,430
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,430
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 5.03
<LOANS-NON> 2,268
<LOANS-PAST> 0
<LOANS-TROUBLED> 563
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,617
<CHARGE-OFFS> 166
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 2,868
<ALLOWANCE-DOMESTIC> 2,868
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
