<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 MARCH 31, 1998
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 0-8679
--------------------------
BAYLAKE CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1268055
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
217 North Fourth Ave., Sturgeon Bay, WI 54235
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(920)-743-5551
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of May 12, 1998.
$5.00 Par Value Common
2,437,430 shares
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1.
Consolidated Condensed Balance Sheet 3
as of March 31, 1998 and December 31, 1997
Consolidated Condensed Statement of Income 4
Three months ended March 31, 1998
and 1997
Consolidated Statement of Comprehensive Income
Three months ended March 31, 1998
and 1997. 5
Consolidated Statement of Cash Flows 6 - 7
Three months ended March 31, 1998 and 1997
Note to Consolidated Condensed Financial Statements 8 - 9
Item 2.
Managements Discussion and Analysis of Financial 10 - 17
Condition and Results of Operations
PART II. OTHER INFORMATION 17 - 18
Signatures 19
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
ASSETS 1998 1997
------ -------- -----------
<S> <C> <C>
Cash and due from Banks $ 9 676 $ 15 065
Investment securities available for
sale (at market) 107 962 102 962
Investment securities held to maturity (market value
$11,969 on 3/31/98; $12,382 on 12/31/97) 11 529 11 937
Federal funds sold
Loans 298 571 293 438
Less: Allowance for loan losses (4 005) (3 881)
--------- ---------
Loans, net of allowance for loan losses 294 566 289 557
Bank premises and equipment 13 742 13 493
Federal Home Loan Bank stock (at cost) 4 633 4 633
Accrued interest receivable 3 566 3 267
Income taxes receivable 191
Deferred income taxes 594 567
Other assets 7 950 8 390
-------- --------
TOTAL ASSETS $454 218 $450 062
======== ========
LIABILITIES
-----------
Domestic Deposits
Non-interest bearing deposits $ 39 854 $ 44 216
Interest bearing deposits
Now 36 267 40 721
Savings 98 949 96 382
Time, $100,000 and over 44 374 32 333
Other time 124 504 132 324
-------- --------
Interest bearing deposits $304 094 $301 760
-------- --------
Total deposits $343 948 $345 976
Short term borrowings 63 147 56 649
Long term debt 331 383
Accrued income taxes 250
Accrued expenses and other liabilities 4 219 4 588
Dividends payable 611
--------- --------
TOTAL LIABILITIES $411 895 $408 207
-------- --------
STOCKHOLDERS EQUITY
-------------------
Common Stock $5.00 par value - authorized
10,000,000 shares; issued 2,460,681 shares
on 3/31/98 and 12/31/97; outstanding
2,437,430 shares on 3/31/98 and 2,444,537
12/31/97 $ 12 302 $ 12 302
Additional paid-in capital 6 038 6 038
Reserve for market adjustment of
securities 1 274 1 311
Retained earnings 23 331 22 618
Treasury Stock (622) (414)
--------- --------
TOTAL STOCKHOLDERS EQUITY 42 323 41 855
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $454 218 $450 062
======== ========
</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
MARCH 31
1998 1997
---------- ---------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 6 716 $ 6 130
Interest on investment securities
Taxable 1 231 1 093
Exempt from federal income tax 586 380
Other interest income 0 0
-------- --------
Total Interest Income 8 533 7 603
Interest Expense
Interest on deposits 3 498 2 992
Interest on short-term borrowings 789 400
Interest on long-term debt 7 8
-------- --------
Total Interest Expense 4 294 3 400
-------- --------
Net Interest Income 4 239 4 203
Provision for loan losses 150 150
-------- --------
Net interest income after
provision for loan losses 4 089 4 053
-------- --------
Other Income
Fees for fiduciary activities 100 100
Fees from loan servicing 181 135
Fees for other services to customers 397 362
Gains from sales of loans 220 93
Securities gains (losses) 0 20
Other income 48 65
-------- --------
Total Other Income 946 775
-------- --------
Other Expenses
Salaries and employee benefits 1 932 1 843
Occupancy expense 257 249
Equipment expense 239 237
Data processing and courier 163 156
Operation of other real estate 1
Other operating expense 642 657
-------- --------
Total Other Expenses 3 233 3 143
-------- --------
Income before income taxes 1 802 1 685
Income tax expense (benefit) 480 488
-------- --------
Net Income $ 1 322 $ 1 197
======== ========
Basic net Income per share (1) $0.54 $0.49
Diluted net income per share $0.54 $0.49
Cash dividends per share $0.25 $0.24
</TABLE>
(1) Based on 2,437,596 shares average outstanding in 1998 and 2,458,537 in 1997.
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 5
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
-------- --------
<S> <C> <C>
Net Income $ 1 322 $ 1 197
-------- --------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during period (37) (458)
-------- --------
Comprehensive Income $ 1 285 $ 739
-------- --------
</TABLE>
<PAGE> 6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-----------------------------
1998 1997
-------- --------
(thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 6 553 $ 5 829
Investments 1 611 1 370
Fees and service charges 895 741
Interest paid to depositors (3 577) (2 804)
Interest paid to others (815) (419)
Cash paid to suppliers and employees (2 741) (2 909)
Income taxes paid (39) (15)
-------- ---------
Net cash provided by operating activities 1 887 1 793
Cash flows from investing activities
Proceeds from sales of investment securities 0 1 272
Principal payments received on investments 6 657 8 961
Purchase of investments (11 284) (2 558)
Proceeds from sale of other real estate owned 0 0
Loans made to customers in excess of principal collected (5 139) (6 414)
Capital expenditures (497) (400)
-------- ---------
Net cash provided by (used in) investing activities (10 263) 861
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts (6 249) (18 517)
and savings accounts
Net increase (decrease) in advances from borrowers 6 445 6 614
Net increase (decrease) in time deposits 4 220 7 437
Stock Reacquired (208) 0
Dividends paid (1 221) (1 180)
-------- ---------
Net cash provided by (used in) financing activities 2 987 (5 646)
-------- --------
Net decrease in cash and cash equivalents (5 389) (2 992)
Cash and cash equivalents, beginning 15 065 13 853
--------- --------
Cash and cash equivalents, ending $ 9 676 $ 10 861
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
(thousands of dollars)
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 1 322 $ 1 197
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 248 322
Provision for loan losses and real estate owned 150 150
Amortization of premium on investments 41 62
Accretion of discount on investments (70) (72)
Cash surrender value increase (13) (13)
(Gain) loss from disposal of other real estate 0 0
(Gain) loss on sale of investment securities 0 (20)
(Gain) loss on sale of loans and other assets (220) (93)
Proceeds from sale of loans held for sale 6 067 2 634
Originations of loans held for sale (5 882) (2 541)
Equity in income of service center (4) (12)
Deferred compensation (6) 46
Deferred taxes
Changes in assets and liabilities:
Interest receivable (299) (379)
Prepaids and other assets 494 70
Unearned income (20) (3)
Interest payable (99) 177
Taxes payable 442 472
Other liabilities (264) (204)
--------- ---------
Total adjustments 565 596
--------- ---------
Net cash provided by operating activities $ 1 887 $ 1 793
========= =========
</TABLE>
<PAGE> 8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. The accompanying unaudited consolidated financial statements should
be read in conjunction with Baylake Corp.'s ("Company") 1997
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 March 31, 1998 and
December 31, 1997. The results of operations for the three
months ended March 31, 1998 and 1997 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>
MARCH 31 DECEMBER 31
1998 1997
-------- -----------
(thousands of dollars)
<S> <C> <C>
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 11 529 $ 11 937
------- --------
Other
Investment securities held to maturity $ 11 529 $ 11 937
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 30 570 $ 31 453
Obligations of states and political 32 802 33 214
subdivisions
Mortgage-backed securities 43 308 34 337
Other 1 282 3958
-------- -------
Investment securities available for sale $107 962 $102 962
======== ========
</TABLE>
3. At March 31, 1998 and December 31, 1997, loans were as follows:
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
--------- -----------
(thousands of dollars)
<S> <C> <C>
Commercial, industrial and agricultural $ 169 599 $ 165 181
Real estate - construction 13 852 14 760
Real estate - mortgage 102 733 100 555
Installment 12 905 13 480
Less: Deferred loan origination fees,
net of costs (518) (538)
-------- --------
298 571 293 438
Less allowance for loan losses (4 005) (3 881)
-------- --------
Net loans $ 294 566 $ 289 557
</TABLE>
<PAGE> 9
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 March
31, 1998 and December 31, 1997 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 months ended March 31, 1998 and 1997.
6. As of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement established
standards for reporting and the display of comprehensive income
in a full set of general-purpose financial statements.
<PAGE> 10
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 March 31,
1998, and the results of operations for the three months ended March 31, 1998
and March 31, 1997. This discussion and analysis should be read in conjunction
with the Company's unaudited consolidated financial statements and the notes
thereto included herein.
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on the current expectations of management. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "projects," and other such words are intended to identify such
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the control of the Company, that could materially
differ from what may be expressed or forecasted in such forward-looking
statements. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Company: changes in
interest rates and interest rate relationships; demand for products and
services; the degree of competition by traditional and non-traditional
competitors; changes in banking regulations; changes in tax laws; changes in
prices; the impact of technological advances; governmental and regulatory
policy changes; trends in customer behavior as well as their ability to repay
loans; and changes in the national economy.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, net income increased $125,000, or
10.4%, to $1.32 million from $1.20 million for the first quarter of 1997. The
annualized return on average assets and return on average equity for the three
months ended March 31, 1998, were 1.20% and 12.74%, respectively compared to
1.24% and 12.35%, 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
<PAGE> 11
Net interest income for the three months ended March 31, 1998 increased
$36,000, or .9%, to $4.24 million from $4.20 million for the same period a year
ago. Total interest income for the first quarter of 1998 increased $930,000,
or 12.2%, to $8.53 million from $7.60 million for the first quarter of 1997,
while interest expense increased $894,000, or 26.3%, to $4.29 million from
$3.40 million in the first quarter of 1997. 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 March 31, 1998, average earning assets increased
$55.4 million, or 15.5%, when compared to the same period last year. The
Company registered an increase in average loans of $31.7 million, or 12.0% for
the first quarter of 1998 compared to the same period a year ago. Loans have
typically resulted in higher rates of interest payable to the Company than have
investment securities.
Net interest margin (on a federal tax-equivalent basis) for the three months
ended March 31, 1998 decreased from 5.04% to 4.53% compared to a year ago. The
average yield on interest earning assets amounted to 8.75% for the first
quarter of 1998, representing a decrease of 14 basis points from the same
period last year. Total loan yields declined 20 basis points to 9.21%, while
total investment yields increased 18 basis points to 7.49% as compared to the
same period a year ago. The Company's average cost on interest-bearing deposit
liabilities increased 32 basis points to 4.63% for the first quarter of 1998,
while short-term borrowing costs increased 12 basis points to 5.73% comparing
the two periods. The above factors contributed to a decrease in the Company's
overall interest margin for the three months ended March 31, 1998. Another
factor affecting interest margin has been the Company's effort intended to
increase interest-earning assets and thus reduce the percentage of equity to
total assets (known as leveraging) by acquiring additional funding, primarily
from the Federal Home Loan Bank (FHLB) of Chicago.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1998
remained stable at $150,000, the same as the first quarter a year ago. This
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 $171,000, or 22.1%, to $946,000 for the
first quarter of 1998, from $775,000 for the first quarter a year ago. This
increase has occurred as a result of increased
<PAGE> 12
loan servicing fees, gains from sales of loans and fees on other customer
services offset by decreased other income and a decline in securities gains
taken.
Loan servicing fees showed improvement as an increase in portfolio size has
provided approximately $46,000 in increased servicing fee income. Gain on the
sale of loans increased substantially in the first quarter of 1998 as compared
to the first quarter of 1997 as a result of increased loan sales. Company sold
the Small Business Administration ("SBA") guaranteed portion of commercial
loans totaling $1.9 million and $3.9 million of mortgage loans in the three
months ended March 31, 1998, as compared to $1.6 million of commercial loans
and $1.0 million in mortgage loans for the same period in 1997. The increase in
fees for other services to customers primarily resulted from increased service
charges on deposit products.
NON-INTEREST EXPENSE
Non-interest expense increased $90,000, or 2.9%, for the three months ended
March 31, 1998 compared to the same period in 1997. Salaries and employee
benefits showed an increase of $89,000 or 4.8% for the period as a result of
salary increases and related benefit expense increases. Slight increases in
occupancy and equipment expenses resulted due to expansion efforts in the Green
Bay market and modernization of two branches in the Door County market area
(Egg Harbor and West Side locations), resulting in additional depreciation
expense. Data processing expense increased $7,000 in the first quarter of 1998
primarily as a result of additional transaction volume. Other operating
expense shows a decrease of $15,000, primarily a result of Karsten Resources
Inc. expenses of $20,000 in the first quarter of 1997. That operation was sold
in the latter part of 1997, thus no expenses occurred in the first quarter of
1998. The overhead ratio, which is computed by subtracting non- interest
income from non-interest expense and dividing by average total assets, was
2.08% for the three months ended March 31, 1998 compared to 2.46% for the same
period in 1997.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended March 31,
1998 decreased $8,000, or 1.6%, to $480,000 from $488,000 for the same period
one year ago. The decrease in income tax provision was due to decreased
taxable income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At March 31, 1998, total loans increased $5.1 million, or 1.8%, to $298.6
million from $293.4 million at December 31, 1997. The change in loan mix in
the Company's portfolio resulted from an
<PAGE> 13
increase in commercial loans to $169.6 million at March 31, 1998 compared to
$165.2 million at December 31, 1997. In addition, real estate construction
loans decreased to $13.9 million at March 31, 1998 compared to $14.8 million at
December 31, 1997 and real estate-mortgage loans increased to $102.7 million at
March 31, 1998 compared to $100.6 million at December 31, 1997.
NON-PERFORMING ASSETS
At March 31, 1998, non-performing assets amounted to $4.73 million compared to
$4.70 million at December 31, 1997. Non-performing assets at March 31, 1998
were 1.04% of total assets, at the same level that existed on December 31,
1997. The ratio of non-performing assets to total loans at March 31, 1998 was
1.58% compared to 1.60% at December 31, 1997.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At March 31, 1998, the allowance for loan losses increased $124,000 from year
end 1997 to $4.0 million due to a provision expense of $150,000 offset by net
chargeoffs over recoveries of $26,000 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 March 31, 1998 and
December 31, 1997, the allowance for loan losses as a percentage of total loans
were at 1.34% and 1.32%, respectively.
INVESTMENT PORTFOLIO
At March 31, 1998, the investment portfolio increased $4.6 million, or 4.0%, to
$119.5 million from $114.9 million at December 31, 1997. At March 31, 1998, the
investment portfolio represented 26.3% of total assets compared with 25.5% at
December 31, 1997. The increase in total investments occurred as a result of
net growth in other funding sources such as federal funds purchased as compared
to growth in the loan portfolio.
DEPOSITS
Total deposits at March 31, 1998 decreased $2.0 million, or .6%, to $343.9
million from $346.0 million at December 31, 1997. Non-interest bearing
deposits at March 31, 1998 decreased $4.4 million, or 9.9%, to $39.9 million
from $44.2 million at December 31, 1997. Interest-bearing deposits at March
31, 1998 increased $2.3 million, or .8%, to $304.1 million from $301.8 million
at December 31, 1997. Time deposits over $100,000 show an increase of $12.0
million resulting primarily from attracting various municipal deposits.
Overall deposits for the first six months tend to slightly decline as a result
of the seasonality of the customer base as they drawdown deposits during the
early first half of the year in anticipation of the summer tourist season.
SHORT-TERM BORROWINGS
<PAGE> 14
Total short-term borrowings at March 31, 1998 increased $6.5 million to $63.1
million from $56.6 million at December 31, 1997. The increase in short-term
borrowings resulted from decreased deposits as compared to increases in the
loan and investment portfolio.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cashflows for the three
months ended March 31, 1998, cash and cash equivalents decreased $5.4 million
during the period to $9.7 million at March 31, 1998. The decrease primarily
reflected $1.9 million in net cash provided by operating activities and $3.0
million provided by financing activities offset by $10.3 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 loans and investment securities plus necessary capital
expenditures. Net cash provided by financing activities resulted primarily
from a net decrease in short term deposits and dividends paid offset by a net
increase in time deposits and borrowed funds. Strong loan demand for the first
three months of 1998 continues to remain solid thereby effecting an increase in
short term funding requirements through overnight correspondent fed funds
purchases. A component of the Company's strategy to enter additional markets
will continue to concentrate on core deposit growth and utilize other funding
sources such as the Federal Home Loan Bank so as to reduce reliance on
short-term funding needs.
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management views its
liquidity as the ability to raise cash at reasonable costs or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are marketable assets maturing within one year. The Company
attempts, when possible, to match relative maturities of assets and
liabilities, while maintaining the desired net interest margin. Although the
percentage of earning assets represented by loans is increasing, management
believes that liquidity is adequate to support anticipated borrowing
requirements and deposit flows.
INTEREST RATE SENSITIVITY
The following table entitled "Asset and Liability Maturity Repricing
Schedule" indicates that the Company is slightly liability gap sensitive,
although management believes that a range of plus or minus 15% (from 100%
matching) within a one year pricing schedule is acceptable. The analysis
considers regular savings, money market deposits and NOW accounts to be rate
sensitive within three months. 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
<PAGE> 15
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 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 March 31, 1998, rate
sensitive liabilities exceeded rate sensitive assets by $91.6 million, or a
ratio of rate sensitive assets to rate sensitive liabilities of 64.3%. For the
next time frame of four to six months, rate sensitive liabilities exceeded rate
sensitive assets by $9.5 million, or a ratio of rate sensitive assets to rate
sensitive liabilities of 74.2%. For all assets and liabilities priced within a
one year time frame, the cumulative ratio of rate sensitive assets to rate
sensitive liabilities was 67.3%, which is outside the range of plus or minus
15% deemed acceptable by management. When the Company requires funds beyond
its ability to generate them internally, it can borrow from a number of
sources, including the Federal Home Loan Bank of Chicago and other
correspondent banks.
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 MARCH 31, 1998
<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 $ 8 314 $ 5 142 $ 6 083 $41 139 $63 446 $124 124
Federal funds sold 0 0
Loans and Leases:
Variable Rate 136 449 0 0 136 449
Fixed Rate 19 911 22 310 29 012 84 157 5 594 160 984
-------- -------- ------- ------- ------- --------
Total Loans and Leases $156 360 $ 22 310 $29 012 $84 157 $ 5 594 $297 433
-------- -------- ------- ------- ------- --------
Total Earning Assets $164 674 $ 27 452 $35 095 $125 296 $69 040 $421 557
======== ======== ======= ======== ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 36 267 $ $ $ $ $ 36 267
Saving Deposits 98 949 98 949
Time Deposits 57 929 36 996 44 319 29 626 8 168 878
Borrowed Funds 63 147 0 53 211 67 63 478
-------- ------- ------- ------- ------- --------
Total Interest Bearing Liabilities $256 292 $36 996 $44 372 $29 837 $ 75 $367 572
======== ======= ======= ======= ======= ========
Interest Sensitivity GAP $(91 618) $(9 544) $(9 277) $95 459 $68 965 $ 53 985
(within periods)
Cumulative Interest Sensitivity GAP $(91 618) $(101 162) $(110 439) $(14 980) $53 985
Ratio of Cumulative Interest -21.73% -24.00% -26.20% -3.55% 12.81%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to 64.25% 74.20% 79.09% 419.93% ---
Rate Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 64.25% 65.51% 67.29% 95.92% 114.69%
Assets to Rate Sensitive
Liabilities
</TABLE>
<PAGE> 17
CAPITAL RESOURCES
At March 31, 1998, stockholders, equity increased $468,000, or 1.1%, to $42.3
million from $41.9 million at December 31, 1997. The increase resulted from net
income less dividends paid and less a decrease in capital of $37,000 resulting
from decreases in capital of $37,000 resulting from decreases in the market
value of available for sale securities related to FAS 115. In addition treasury
stock purchases of $208,000 were made in the quarter ended March 31, 1998, also
reducing capital. At March 31, 1998, the Company's risk-based Tier 1 Capital
Ratio was 11.07%, the total risk based capital ratio was 12.28% and the
leverage ratio was 8.38%. The Company and Baylake Bank continue to exceed all
applicable regulatory capital requirements.
Year 2000
The Company has completed an initial assessment of the Year 2000 issue. The
issue relates to systems designed to use two digits rather than four to define
the particular year. The financial impact to the Company to ensure year 2000
compliance is not anticipated by management to be material to the financial
position, results of operation or cash flow of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable
PART II - OTHER INFORMATION
Item 5. Other Information
Ground was broken for a branch in the town of Ledgeview, located in the
southeast portion of the Green Bay region. The facility will offer a full
range of retail and deposit services and is anticipated to be completed in the
early third quarter of 1998. Costs to complete the facility are estimated at
$950,000.
The Company has declared a stock split in the form of a three for two stock
dividend payable on May 15, 1998 to shareholders of record date May 1, 1998.
<PAGE> 18
Item 6. 8-K
---
(a) Exhibits
None
(b) Reports on Form 8-k filed for three months ended March 31, 1998
None.
<PAGE> 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: May 14, 1998 Thomas L. Herlache
---------------------- --------------------------------
Thomas L. Herlache
President (CEO)
Date: May 14, 1998 Steven D. Jennerjohn
---------------------- --------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
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<PERIOD-START> JAN-01-1998
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