<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 JUNE 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
- --------------------------------------------------------------------------------
(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 August 5, 1996.
$5.00 Par Value Common
2,452,937 shares
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of June 30, 1996 and December 31, 1995
Consolidated Condensed Statement of Income 4
Three and Six months ended June 30, 1996
and 1995
Consolidated Statement of Cash Flows 5 - 6
Six months ended June 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>
JUNE 30 DECEMBER 31
ASSETS 1996 1995
------ -------- -----------
<S> <C> <C>
Cash and due from Banks $ 13,860 $ 9,887
Investment securities available for
sale (at market) 61,389 63,966
Investment securities held to maturity (market value
$11,487 on 6/30/96; $12,197 on 12/31/95) 11,192 11,645
Federal funds sold 1,380
Loans 231,174 210,230
Less: Allowance for loan losses (2,775) (2,617)
-------- ---------
Loans, net of allowance for loan losses 228,399 207,613
Bank premises and equipment 10,056 8,652
Accrued interest receivable 2,779 2,227
Income tax receivable 249 262
Deferred income taxes 726
1,002
Other assets 3,136 3,070
-------- -------
TOTAL ASSETS $332,062 $309,428
======== ========
LIABILITIES
-----------
Domestic Deposits
Non-interest bearing deposits $ 37,511 $ 33,887
Interest bearing deposits
Now 32,543 36,945
Savings 84,550 84,448
Time, $100,000 and over 25,000 11,523
Other time 98,293 100,177
-------- --------
Interest bearing deposits $240,386 $233,093
-------- --------
Total deposits $277,897 $266,980
Short term borrowings 13,023 1,528
Long term debt 422 475
Accrued expenses and other liabilities 3,725 3,606
Dividends payable 564
-------- -------
TOTAL LIABILITIES $295,067 $273,153
-------- --------
STOCKHOLDERS EQUITY
-------------------
Common Stock $5.00 par value - authorized
10,000,000 shares; issued 2,454,881 shares
on 6/30/96 and 12/31/95; outstanding
2,452,937 shares on 6/30/96 and 12/31/95
$ 12,274 $ 12,274
Additional paid-in capital 5,954 5,954
Reserve for market adjustment of
securities (352) 176
Retained earnings 19,168 17,920
Treasury Stock (49) (49)
-------- -------
TOTAL STOCKHOLDERS EQUITY 36 995 36 275
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $332 062 $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 JUNE 30 SIX MONTHS ENDED
JUNE 30
1996 1995 1996 1995
---- ---- ---- ----
Interest Income
<S> <C> <C> <C> <C>
Interest and fees on loans $5,230 $4,857 $10,099 $ 9,500
Interest on investment securities
Taxable 723 792 1,464 1,619
Exempt from federal income tax 381 299 739 613
Other interest income 8 11 35 32
------ ------ ------- -------
Total Interest Income 6,342 5,959 12,337 11,764
Interest Expense
Interest on deposits 2,552 2,481 5,112 4,712
Interest on short term borrowings 149 110 199 239
Interest on Long-term debt 11 0 21 0
------ ------ ------- -------
Total Interest Expense 2,712 2,591 5,332 4,951
------ ------ ------- -------
Net Interest Income 3,630 3,368 7,005 6,813
Provision for loan losses 87 78 181 155
------ ------ ------- -------
Net interest income after
provision for loan losses 3,543 3,290 6,824 6,658
------ ------ ------- -------
Other Income
Fees for fiduciary activities 136 82 273 163
Fees from loan servicing 218 130 501 228
Fees for other services to customers 355 319 684 581
Securities gains (losses) 0 (6) 0 (6)
Other income 77 108 170 165
------ ------ ------- -------
Total Other Income 786 633 1,628 1,131
------ ------ ------- -------
Other Expenses
Salaries and employee benefits 1,492 1,249 3,069 2,568
Occupancy expense 170 151 360 283
Equipment expense 189 159 374 309
Data processing and courier 130 179 255 283
FDIC insurance expense 0 129 1 281
Operation of other real estate 0 20 (170) 30
Other operating expense 634 456 1,174 897
------ ------ ------- -------
Total Other Expenses 2,615 2,343 5,063 4,651
------ ------ ------- -------
Income before income taxes 1,714 1,580 3,389 3,138
------ ------ ------- -------
Income tax expense (benefit) 508 495 1,012 974
------ ------ ------- -------
Net Income $1,206 $1,085 $ 2,377 $ 2,164
====== ====== ======= =======
Net Income per share (1) $ 0.49 $ 0.44 $ 0.97 $ 0.88
Cash dividends per share $ 0.23 $ 0.22 $ 0.46 $ 0.44
</TABLE>
(1) Based on 2,452,937 shares average outstanding in 1996 and 1995.
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------
1996 1995
--------- --------
(thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 9,657 $ 9,201
Investments 2,193 2,286
Fees and service charges 1,608 1,024
Interest paid to depositors (4,879) (4,231)
Interest paid to others (235) (219)
Cash paid to suppliers and employees (5,043) (4,504)
Income taxes paid (998) (1,063)
-------- ---------
Net cash provided by operating activities 2,303 2,494
Cash flows from investing activities
Proceeds from sales of investing securities 993
Principal payments received on investments 6,985 8,737
Purchase of investments (3,437) (5,397)
Investment in service center (196)
Proceeds from sale of other real estate owned 220 53
Loans made to customers in excess of principal collected Capital (21,018) (13,365)
expenditures (1,748) (1,069)
--------- ---------
Net cash (used) provided in investing activities (18,998) (10,244)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts and (559) (5,077)
savings accounts
Net increase (decrease) in advances from borrowers 11,443 (1,682)
Net increase (decrease) in time deposits 11,477 15,523
Proceeds from issuance of common stock 0 11
Dividends paid (1,693) (1,619)
--------- ---------
Net cash used in financing activities 20,668 7,156
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,973 (594)
Cash and cash equivalents, beginning 9,887 10,516
--------- --------
Cash and cash equivalents, ending $ 13,860 $ 9,922
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
1996 1995
-------- --------
(thousands of dollars)
Reconciliation of net income to net cash provided by
operating activities:
<S> <C> <C>
Net Income $ 2,377 $ 2,164
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation 343 259
Provision for loan losses and real estate owned 181 155
Amortization of premium on investments 133 135
Accretion of discount on investments (74) (94)
Cash surrender value increase (37) (41)
(Gain) loss from disposal of other real estate (178) (1)
(Gain) loss on sale of investment securities 6
Equity in income of service center 18 (34)
Goodwill writedown 3 3
Deferred compensation 87 10
Changes in assets and liabilities:
Interest receivable (552) (362)
Prepaids and other assets (49) (100)
Unearned income 7 6
Interest payable 218 501
Taxes payable 12 (89)
Other liabilities (186) (24)
-------- --------
Total adjustments (74) 330
-------- --------
Net cash provided by operating activities $ 2,303 $ 2,494
======== ========
</TABLE>
<PAGE> 7
BAYLAKE CORP. AND SUBSIDIARIES NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30,
1996 and December 31, 1995. The results of operations for the six
months ended June 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>
JUNE 30 DECEMBER 31
1996 1995
-------- -----------
(thousands of dollars)
<S> <C> <C>
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 10,669 $ 11,237
Other 0 408
-------- --------
Investment securities held to maturity $ 11,192 $ 11,645
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 10,080 $ 11,321
Obligations of states and political 13,763 13,322
subdivisions
Mortgage-backed securities 36,345 38,430
Other 1,201 893
-------- --------
Investment securities available for sale $ 61,389 $ 63,966
======== ========
</TABLE>
3. At June 30, 1996 and December 31, 1995, loans were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(thousands of dollars)
<S> <C> <C>
Commercial, industrial and agricultural $ 143,853 $ 129,712
Real estate - construction 9,002 6,378
Real estate - mortgage 66,061 62,271
Installment 12,920 12,522
Less: Deferred loan origination fees,
net of costs (662) (653)
--------- ---------
231 174 210,230
Less allowance for loan losses (2 775) (2,617)
--------- ---------
Net loans $ 228,399 $ 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 June
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 March 31, 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.
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".
<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 June 30, 1996,
and the results of operations for the three and six months ended June 30, 1996
and June 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 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 an
aggregate of $13.875 million which is composed of the initial purchase price of
$13.8 million and one half (or $75,000) of the estimated income of Four Seasons
for 1996 up to the effective date of the transaction. The remaining one half
of the estimated net income has been placed in escrow with Baylake Bank pending
the 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 paid out accordingly.
RESULTS OF OPERATIONS
For the three months ended June 30, 1996, net income increased $121,000, or
11.2%, to $1.21 million from $1.09 million for the second quarter of 1995. The
annualized return on average assets and return on average equity for the three
months ended June 30, 1996, were 1.51% and 13.16%, respectively compared to
1.49% and 12.64%, respectively, for the same period a year ago.
For the six months ended June 30, 1996, net income was $2.38 million, an
increase of 9.8% from the $2.16 million earned during the first six months of
1995. The annualized return on average assets and return on average equity,
were 1.51% and 13.04%, respectively, compared to 1.51% and 12.95%, respectively
for the same period a year ago.
The increase in net income for both periods is primarily due to improved net
interest income and
<PAGE> 10
improved other income offset by increased other expenses.
NET INTEREST INCOME
Net interest income for the three months ended June 30, 1996 increased
$262,000, or 7.8%, to $3.63 million from $3.37 million for the same period a
year ago. Total interest income for the second quarter of 1996 increased
$383,000, or 6.4%, to $6.34 million from $5.96 million for the second quarter
of 1995, while interest expense increased $121,000, or 4.7%, to $2.71 million
from $2.59 million in the second quarter of 1995. These changes were primarily
the result of a favorable increase in the average volume of earning assets
offset by increased competition relating to loan pricing, particularly in the
commercial sector, and deposit pricing, particularly in the area of time
deposits resulting from entry into the Green Bay market.
For the three months ended June 30, 1996, average earning assets increased
$25.7 million, or 9.5%, when compared to the same period last year. The
Company registered an increase in average loans of $24.3 million, or 12.1%, for
the second quarter of 1996 compared to the same period a year ago.
For the six months ended June 30, 1996, average earning assets increased by
$22.2 million, or 8.2%, when compared to the same period last year. Loans have
continued to grow as the Company registered an increase in average loans of
$20.5 million, or 10.3%, for the first six 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 June 30, 1996 decreased from 5.19% to 5.13% compared to a year ago. The
average yield on interest earning assets amounted to 8.77% for the second
quarter of 1996, representing a decrease of 23 basis points from the same
period last year. Total loan yields declined 35 basis points to 9.32%, while
total investment yields increased 18 basis points to 7.13% as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities declined 26 basis points during the second quarter of 1996, while
short-term borrowing costs declined 382 basis points during the second quarter
of 1996. The above factors resulted in the decrease of the Company's overall
interest margin for the second quarter.
Net interest margin (on a federal tax-equivalent basis) for the first six
months of 1996 declined to 5.07% from 5.31% for the same period a year ago.
The average yield on interest-earning assets amounted to 8.73% for the first
six months of 1996, representing a decrease of 27 basis points from the same
period last year. Total loan yields declined 38 basis points while investment
securities declined 1 basis point. The Company's average cost on
interest-bearing deposit liabilities declined 7 basis points to 4.34% for the
first six months of 1996, while short- term borrowing costs decreased 216 basis
points 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, 1996.
<PAGE> 11
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 1996
increased $9,000, or 11.5%, to $87,000 from $78,000 for the second quarter a
year ago. For the first six months ended June 30, 1996, the provision for loan
losses increased $26,000, or 16.8%, to $181,000 from $155,000 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 $153,000, or 24.2%, to $786,000 for the
second quarter of 1996, from $633,000 for the second quarter a year ago. For
the first six months of 1996, non-interest income has increased $497,000, or
43.9%, to $1.63 million from $1.13 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
$155,000 were realized as a result of loan sales in the secondary market and
estimated fees of $115,000 were recognized due to the implementation of SFAS
No. 122, "Accounting for Mortgage Servicing Rights" in the first half 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 $83,000 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 $272,000, or 11.6%, for the three months ended
June 30, 1996 compared to the same period in 1995. Salaries and employee
benefits showed the largest increase of $243,000, or 19.5%, due in part to
additional employee expense of $39,000 stemming from the Karsten operation and
additional employee expense resulting from operations in the Green Bay region.
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 operations in the Green Bay region. FDIC insurance expense shows
a reduction of $129,000 as a result of action taken by the FDIC to lower the
fees assessed to a minimum fee, rather than the 23 cents per $100 of deposits
assessed in the early half of 1995.
$43,000 of the increase in other operating expense occurred as a result of the
Karsten operation. 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, 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 2.29% for the three months ended June 30, 1996 compared to 2.36%
for the same period in 1995.
<PAGE> 12
Non-interest expense increased $412,000, or 8.9%, for the six months ended June
30, 1996, compared to the same period in 1995. Salaries and employee benefits
showed an increase of $501,000, or 19.5%, due in part to $61,000 recognized
from the Karsten operation along with the additional salary expenses stemming
from the Green Bay operation 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 of the
same reason listed previously. Other real estate owned expenses shows income
of $170,000, due to gains taken upon disposition of property totaling $177,000.
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.
$69,000 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 additional promotional expenses, supplies expense, and data services
expense stemming from startup in the Green Bay region, reasons listed
previously.
The overhead ratio, which is computed by subtracting non-interest income from
non-interest expense and dividing by average total assets, was 2.19% for the
three months ended June 30, 1996 compared with 2.45% for the same period in
1995.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended June 30,
1996 increased $13,000, or 2.6%, to $508,000 from $493,000 for the same period
one year ago. The Company's provision for income taxes for the six months ended
June 30, 1996 increased $38,000, or 3.9%, to $1.01 million from $974,000 for
the same period a year ago. The increase in income tax provision for both
periods was due to increased taxable income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At June 30, 1996, total loans increased $20.9 million, or 10.0%, to $231.2
million from $210.2 million at December 31, 1995. The change in loan mix in
the Company's portfolio resulted from an increase in commercial loans to $143.8
million at June 30, 1996 compared to $129.7 million at December 31, 1995. In
addition, real estate construction loans increased to $9.0 million at June 30,
1996 compared to $6.4 million at December 31, 1995 and real estate-mortgage
loans increased to $66.0 million at June 30, 1996 compared to $62.3 million at
December 31, 1995.
NON-PERFORMING ASSETS
At June 30, 1996, non-performing assets amounted to $2.99 million compared to
$1.49 million at December 31, 1995. Non-performing loans at June 30, 1996 were
.99% of total
<PAGE> 13
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. Management is closely monitoring this situation. $686,000
of the increase centers around three restaurant businesses which are
experiencing cashflow problems. In the event of liquidation, management
expects minimal losses due to strong collateral positions that exist in each
loan. The ratio of non-performing assets to total loans at June 30, 1996 was
1.29% compared to .71% at December 31, 1995.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At June 30, 1996, the allowance for loan losses increased $158,000 from year
end 1995 to $2.78 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 June 30, 1996 and December 31, 1995, the
allowance for loan losses as a percentage of total loans were at 1.20% and
1.24% respectively.
INVESTMENT PORTFOLIO
At June 30, 1996, the investment portfolio declined $3.03 million, or 4.01%, to
$72.6 million from $75.6 million at December 31, 1995. At June 30, 1996, the
investment portfolio represented 21.9% of total assets compared with 24.4% at
December 31, 1995. The decline in total investments occurred as proceeds from
matured investment securities were used to fund loan demand.
DEPOSITS
Total deposits at June 30, 1996 increased $10.9 million, or 4.1%, to $277.9
million from 267.0 million at December 31, 1995. Non-interest bearing deposits
at June 30, 1996 increased $3.6 million, or 11.5%, to $37.5 million from $33.9
million at December 31, 1995. Interest-bearing deposits at June 30, 1996
increased $7.3 million, or 3.1%, to $240.4 million from $233.1 million at
December 31, 1995. Time deposits show a larger than normal increase with $11.6
million in growth since year end 1995 as municipal deposits have shifted into
higher interest paying time deposit accounts. 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 where there has been a pattern of decreased deposits and
increased loan demands in the late spring and early summer seasons by its
customer base in anticipation of the summer tourist season.
SHORT-TERM BORROWINGS
Total short-term borrowings at June 30, 1996 increased $11.5 million to $13.0
million from $1.5 million at December 31, 1995. This increase corresponds to
past historical trends. The seasonality of the customer base in its Door
County market 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. In addition,
loan demand has remained quite strong in the markets that the Company serves.
<PAGE> 14
LIQUIDITY
As shown in the Company's Consolidated Statements of Cashflows for the six
months ended June 30, 1996, cash and cash equivalents increased $4.0 million
during the period to $13.9 million at June 30, 1996. The increase primarily
reflected $2.3 million in net cash provided by operating activities and $20.7
million provided by financing activities offset by $19.0 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
decrease in investments offset by a net increase in loans plus necessary
capital expenditures. Net cash provided by financing activities resulted
primarily from a net increase in deposits and borrowed funds offset by
dividends paid. As is typical of the seasonality that exists in the tourism
market serviced, customers tend to prepare for summer business through
increasing loans and drawing down on deposits during the early part of the
year, although the seasonality that exists in the Door County market has been
reduced significantly because of the additional markets the Company serves.
Strong loan demand in the first half of 1996 has also caused the Company to
acquire short term funding sources through overnight correspondent fed fund
purchases to fund loan growth. Internal deposit growth in the mid to late
summer as is typical of its Door County market should allow the Company to
balance its funding requirements for the remainder of the year.
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management view its
liquidity as the ability to raise cash at reasonable costs or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable assets maturing within one year. The Company
attempts, when possible, to match relative maturities of assets and
liabilities, while maintaining the desired net interest margin. Although the
percentage of earning assets represented by loans is increasing, management
believes that liquidity is adequate to support anticipated borrowing
requirements and deposit flows.
INTEREST RATE SENSITIVITY
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Company is slightly liability gap sensitive, although
management believes that a range of plus or minus 15% (from 100% matching)
within 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 smaller increments without a material decrease in
balances.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. This mismatch between asset and liability repricing characteristics
in specific time intervals is referred to as "interest rate
<PAGE> 15
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 sensitivity gap position would
decrease net interest income and an asset sensitivity gap position would
increase net interest income. The sensitivity of net interest income to
changing interest rates can be reduced by matching the repricing
characteristics of assets and liabilities. For the time frame within three
months as of June 30, 1996, rate sensitive liabilities exceeded rate sensitive
assets by $53.6 million, or a ratio of rate sensitive assets to rate sensitive
liabilities of 69.1%. For the next time frame of four to six months, rate
sensitive assets exceeded rate sensitive liabilities by $739,000, or a ratio of
rate sensitive assets to rate sensitive liabilities of 104.3%. For all assets
and liabilities priced within a one year time frame, the cumulative ratio of
rate sensitive assets to rate sensitive liabilities was 80.7%, which is
somewhat outside the range of plus or minus 15% deemed acceptable by
management.
Management continually reviews 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 JUNE 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 $ 627 $ 1,740 $ 5,282 $11,612 $53,320 $ 72,581
Loans and Leases:
Variable Rate 99,055 0 0 99,055
Fixed Rate 20,090 16,295 34,421 58,644 382 129,832
-------- -------- ------- ------- ------- --------
Total Loans and Leases $119,145 $ 16,295 $34,421 $58,644 $ 382 $228,887
-------- -------- ------- ------- ------- --------
Total Earning Assets $119,772 $ 18,035 $39,703 $70,256 $53,702 $301,468
======== ======== ======= ======= ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 32,543 $ $ $ $ $ 32,543
Saving Deposits 82,346 82,346
Time Deposits 45,444 17,296 29,246 31,222 84 123,292
Borrowed Funds 13,023 0 53 211 159 13,446
-------- ------- ------- ------- ------- --------
Total Interest Bearing Liabilities $173,356 $17,296 $29,299 $31,433 $ 243 $251,627
======== ======= ======= ======= ======= ========
Interest Sensitivity GAP $(53,584) $ 739 $10,404 $38,823 $53,459 $ 49,841
(within periods)
Cumulative Interest Sensitivity (53,584) (52,845) (42,441) (3,618) $49,841
GAP
Ratio of Cumulative Interest -17.77% -17.53% -14.08% -1.20% 16.53%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to Rate 69.09% 104.27% 135.51% 223.51% ---
Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 69.09% 72.28% 80.70% 98.56% 98.56%
Assets to Rate Sensitive
Liabilities
</TABLE>
<PAGE> 17
CAPITAL RESOURCES
At June 30, 1996, stockholders' equity increased $720,000, or 2.0%, to $37.0
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 $528,000
resulting from the implementation of FAS 115. At June 30, 1996, the Company's
risk-based Tier 1 Capital Ratio was 15.38%, the total risk based capital ratio
was 16.52% and the leverage ratio was 11.84%. 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 $13,800,000 plus 50% (or $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 will occur on a second site in Green Bay.
The 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 anticipated in the late third quarter to early fourth
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
Initial filing of Form 8-K dated July 12, 1996 to be followed
by subsequent filing when audited financial statements of Four
Seasons are completed and proforma financial information for
June 30, 1996 is available.
<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: August 9, 1996 Thomas L. Herlache
---------------- ---------------------
Thomas L. Herlache
President (CEO)
Date: August 9, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 13,860
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,389
<INVESTMENTS-CARRYING> 11,192
<INVESTMENTS-MARKET> 11,487
<LOANS> 231,174
<ALLOWANCE> 2,775
<TOTAL-ASSETS> 332,062
<DEPOSITS> 277,897
<SHORT-TERM> 13,023
<LIABILITIES-OTHER> 3725
<LONG-TERM> 422
0
0
<COMMON> 12,274
<OTHER-SE> 24,721
<TOTAL-LIABILITIES-AND-EQUITY> 332,062
<INTEREST-LOAN> 10,099
<INTEREST-INVEST> 2,203
<INTEREST-OTHER> 35
<INTEREST-TOTAL> 12,337
<INTEREST-DEPOSIT> 5,112
<INTEREST-EXPENSE> 5,332
<INTEREST-INCOME-NET> 7,005
<LOAN-LOSSES> 181
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<EXPENSE-OTHER> 5,063
<INCOME-PRETAX> 3,389
<INCOME-PRE-EXTRAORDINARY> 2,377
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,377
<EPS-PRIMARY> .97
<EPS-DILUTED> .97
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
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<RECOVERIES> 0
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</TABLE>
