<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, 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 August 12, 1998.
$5.00 Par Value Common
3,661,587 shares
<PAGE> 2
BAYLAKE CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1.
Consolidated Condensed Balance Sheet 3
as of June 30, 1998 and December 31, 1997
Consolidated Condensed Statement of Income 4
Three and six months ended June 30, 1998
and 1997
Consolidated Statement of Comprehensive Income 5
Three and six months ended June 30, 1998
and 1997
Consolidated Statement of Cash Flows 6 - 7
Six months ended June 30, 1998 and 1997
Note to Consolidated Condensed Financial Statements 8 - 9
Item 2.
Managements Discussion and Analysis of Financial 10 - 18
Condition and Results of Operations
PART II. OTHER INFORMATION 18 - 19
Signatures 20
</TABLE>
<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 1998 1997
------------ ------------
<S> <C> <C>
Cash and due from Banks $ 18,712 $ 15,065
Investment securities available for
sale (at market) 109,919 102,962
Investment securities held to maturity (market value
$12,615 on 6/30/98; $12,382 on 12/31/97) 12,118 11,937
Federal funds sold
Loans 312,261 293,438
Less: Allowance for loan losses (4,157) (3,881)
------------ ------------
Loans, net of allowance for loan losses 308,104 289,557
Bank premises and equipment 14,301 13,493
Federal Home Loan Bank 1,800 4,633
Accrued interest receivable 3,691 3,267
Income tax receivable 285 191
Deferred income taxes 574 567
Other assets 7,867 8,390
------------ ------------
TOTAL ASSETS $ 477,371 $ 450,062
============ ============
LIABILITIES
Domestic Deposits
Non-interest bearing deposits $ 46,186 $ 44,216
Interest bearing deposits
Now 37,630 40,721
Savings 104,693 96,382
Time, $100,000 and over 40,119 32,333
Other time 125,652 132,324
------------ ------------
Interest bearing deposits $ 308,094 $ 301,760
------------ ------------
Total deposits $ 354,280 $ 345,976
Short term borrowings 74,877 56,649
Long term debt 330 383
Accrued income taxes
Accrued expenses and other liabilities 4,713 4,588
Dividends payable 611
------------ ------------
TOTAL LIABILITIES $ 434,200 $ 408,207
------------ ------------
STOCKHOLDERS EQUITY
Common Stock $5.00 par value - authorized 10,000,000 shares; issued 3,684,746
shares on 6/30/98 and 2,460,481 on 12/31/97; outstanding 3,661,587 shares on
6/30/98
and 2,444,537 shares on 12/31/97 $ 18,424 $ 12,302
Additional paid-in capital 6,071 6,038
Reserve for market adjustment of
securities 1,295 1,311
Retained earnings 18,006 22,618
Treasury Stock (625) (414)
------------ ------------
TOTAL STOCKHOLDERS EQUITY 43,171 41,855
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 477,371 $ 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 7,044 $ 6,287 $ 13,760 $ 12,417
Interest on investment securities
Taxable 1,286 1,004 2,517 2,097
Exempt from federal income tax 591 400 1 177 780
Other interest income 0 0 0 0
--------- --------- --------- ---------
Total Interest Income 8,921 7,691 17,454 15,294
Interest Expense
Interest on deposits 3,477 3,103 6,975 6,095
Interest on short-term borrowings 1,016 428 1,805 828
Interest on Long-term debt 7 8 14 16
--------- --------- --------- ---------
Total Interest Expense 4,500 3,539 8,794 6,939
--------- --------- --------- ---------
Net Interest Income 4,421 4,152 8,660 8,355
Provision for loan losses 151 153 301 303
--------- --------- --------- ---------
Net interest income after
provision for loan losses 4,270 3,999 8,359 8,052
--------- --------- --------- ---------
Other Income
Fees for fiduciary activities 134 98 234 198
Fees from loan servicing 148 177 329 312
Fees for other services to customers 435 383 832 745
Gains from sales of loans 179 223 399 316
Securities gains (losses) 27 47
Other income 41 80 89 145
--------- --------- --------- ---------
Total Other Income 937 988 1,883 1,763
--------- --------- --------- ---------
Other Expenses
Salaries and employee benefits 1,864 1,797 3,796 3,640
Occupancy expense 264 274 521 523
Equipment expense 247 274 486 511
Data processing and courier 171 160 334 316
Operation of other real estate 24 25
Other operating expense 700 742 1,342 1,399
--------- --------- --------- ---------
Total Other Expenses 3,246 3,271 6,479 6,414
--------- --------- --------- ---------
Income before income taxes 1,961 1,716 3,763 3,401
Income tax expense (benefit) 561 511 1 041 999
--------- --------- --------- ---------
Net Income $ 1,400 $ 1,205 $ 2,722 $ 2,402
========= ========= ========= =========
Net Income per share (1) $ 0.38 $ 0.33 $ 0.74 $ 0.65
Cash dividends per share $ 0.17 $ 0.16 $ 0.34 $ 0.32
</TABLE>
(1) Based on 3,658,157 shares average outstanding in 1998 and 3,677,306 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 SIX MONTHS ENDED
MARCH 31 JUNE 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income
Other comprehensive income,
net of tax: $ 1,400 $ 1,205 $ 2,722 $ 2,402
--------- --------- --------- ---------
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 21 787 (16) 329
--------- --------- --------- ---------
Comprehensive Income $ 1,421 $ 1,992 $ 2,706 $ 2,731
========= ========= ========= =========
</TABLE>
<PAGE> 6
BAYLAKE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
1998 1997
--------- ---------
(thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Interest received from:
Loans $ 13,197 $ 11,974
Investments 3,717 3,014
Fees and service charges 1,781 1,687
Interest paid to depositors (6,882) (5,800)
Interest paid to others (1,835) (846)
Cash paid to suppliers and employees (5,260) (5,359)
Income taxes paid (1,134) (994)
--------- ---------
Net cash provided by operating activities 3,584 3,676
Cash flows from investing activities
Proceeds from sales of investment securities 0 3,817
Principal payments received on investments 15,280 13,615
Purchase of investments (19,545) (9,271)
Proceeds from sale of other real estate owned 0 93
Loans made to customers in excess of principal collected (18,842) (17,671)
Capital expenditures (1,305) (1,390)
--------- ---------
Net cash used in investing activities (24,412) (10,807)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts 7,074 (15,235)
and savings accounts
Net increase (decrease) in advances from borrowers 18,174 5,096
Net increase (decrease) in time deposits 1,229 19,086
Proceeds from issuance of common stock 52 0
Treasury Stock Acquired (211) (176)
Dividends paid (1,843) (1,771)
--------- ---------
Net cash provided by financing activities 24,475 7,000
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,647 (131)
Cash and cash equivalents, beginning 15,065 13,853
--------- ---------
Cash and cash equivalents, ending $ 18,712 $ 13,722
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(thousands of dollars)
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net Income $ 2,722 $ 2,402
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 690 684
Provision for loan losses and real estate owned 301 303
Amortization of premium on investments 85 109
Accretion of discount on investments (147) (145)
Cash surrender value increase (27) (27)
(Gain) loss from disposal of other real estate 0 17
(Gain) loss on sale of investment securities 0 (47)
(Gain) loss on sale of loans and other assets (399) (310)
Proceeds from sale of loans held for sale 7,618 4,578
Originations of loans held for sale (7,220) (4,268)
(Gain) loss from disposal of fixed assets 21
Equity in income of service center (15) (34)
Deferred compensation (3) 86
Deferred Taxes
Changes in assets and liabilities:
Interest receivable (423) (236)
Prepaids and other assets 372 2
Unearned income (6) (1)
Interest payable 77 292
Taxes payable (93) 5
Other liabilities 52 245
---------- ----------
Total adjustments 862 1,274
---------- ----------
Net cash provided by operating activities $ 3,584 $ 3,676
========== ==========
</TABLE>
<PAGE> 8
BAYLAKE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30,
1998 and December 31, 1997. The results of operations for the three and six
months ended June 30, 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>
JUNE 30 DECEMBER 31
1998 1997
---------- ----------
(thousands of dollars)
<S> <C> <C>
Investment securities held to maturity:
Obligations of states and political
subdivisions $ 12,118 $ 11,937
Other
---------- ----------
Investment securities held to maturity $ 12,118 $ 11,937
Investment securities available for sale:
U.S. Treasury and other U.S. government
agencies $ 30,463 $ 31,453
Obligations of states and political 32,560 33,214
subdivisions
Mortgage-backed securities 45,718 34,337
Other 1,178 3,958
---------- ----------
Investment securities available for sale $ 109,919 $ 102,962
========== ==========
</TABLE>
3. At June 30, 1998 and December 31, 1997, loans were as follows:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ ------------
(thousands of dollars)
<S> <C> <C>
Commercial, industrial and agricultural $ 181,595 $ 165,181
Real estate - construction 15,113 14,760
Real estate - mortgage 103,475 100,555
Installment 12,610 13,480
Less: Deferred loan origination fees,
net of costs (532) (538)
------------ ------------
312,261 293,438
Less allowance for loan losses (4,157) (3,881)
------------ ------------
Net loans $ 308,104 $ 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 June 30, 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 and six months ended June 30, 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 June 30, 1998,
and the results of operations for the three and six months ended June 30, 1998
and June 30, 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 June 30, 1998, net income increased $195,000, or
16.2%, to $1.4 million from $1.21 million for the second quarter of 1997. The
annualized return on average assets and return on average equity for the three
months ended June 30, 1998, were 1.21% and 13.17%, respectively compared to
1.22% and 12.09%, respectively, for the same period a year ago.
For the six months ended June 30, 1998, net income was $2.72 million, an
increase of 13.3% from the $2.4 million earned during the first six months of
1997. The annualized return on average assets and return on average equity, were
1.21% and 12.92%, respectively, compared to 1.23% and 12.22%, respectively for
the same period a year ago.
<PAGE> 11
The change in net income for the period is primarily due to improved net
interest income and an increase in other income offset by increased other
expenses.
NET INTEREST INCOME
Net interest income for the three months ended June 30, 1998 increased $269,000,
or 6.5%, to $4.42 million from $4.15 million for the same period a year ago.
Total interest income for the second quarter of 1998 increased $1.23 million, or
16.0%, to $8.92 million from $7.69 million for the second quarter of 1997, while
interest expense increased $961,000, or 27.2%, to $4.5 million from $3.54
million in the second 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 June 30, 1998, average earning assets increased $68.6
million, or 19.0%, when compared to the same period last year. The Company
registered an increase in average loans of $32.8 million, or 12.0% for the
second 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 June 30, 1998 decreased from 4.83% to 4.40% compared to a year ago. The
average yield on interest earning assets amounted to 8.59% for the second
quarter of 1998, representing a decrease of 16 basis points from the same period
last year. Total loan yields remained the same at 9.25%, while total investment
yields decreased 20 basis points to 6.95% as compared to the same period a year
ago. The Company's average cost on interest-bearing deposit liabilities
increased 20 basis points to 4.62% for the second quarter of 1998, while
short-term borrowing costs decreased 11 basis points to 5.74% comparing the two
periods. The above factors contributed to a decrease in the Company's overall
interest margin for the three months ended June 30, 1998.
For the six months ended June 30, 1998, average earning assets increased by
$62.0 million, or 17.2%, when compared to the same period last year. Loans have
continued to grow as the Company registered an increase in average loans of
$32.2 million, or 12.0%, for the first six months of 1998 compared to the same
period in 1997.
Net interest margin (on a federal tax-equivalent basis) for the first six months
of 1998 declined to 4.43% from 4.91% for the same period last year. The average
yield on interest-earning assets amounted to 8.63% for the first six months of
1998, representing a decrease of 16 basis points over the same period last year.
Total loan yields declined 10 basis points to 9.23% while yields on
<PAGE> 12
investment securities declined 4 basis points to 7.08%. The Company's average
cost on interest-bearing deposit liabilities increased 27 basis points to 4.63%
for the first six months of 1998, while short-term borrowing costs increased 1
basis point to 5.74% comparing the two periods. The above factors contributed to
a decrease in the Company's overall interest margin for the six months ended
June 30, 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 June 30, 1998 decreased
$2,000, or 1.3%, to $151,000 from $153,000 for the second quarter a year ago.
For the six months ended June 30, 1998, the provision for loan losses decreased
$2,000, or .7%, to $301,000 from $303,000 for the same period last year.
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 decreased $51,000, or 5.2%, to $937,000 for the second
quarter of 1998, from $988,000 for the second quarter a year ago. This decrease
has occurred as a result of increased trust income, fees on other customer
services offset by decreased loan servicing fee income, decreased gains from
sales of loans, decreased other income and a decline in securities gains taken.
For the first six months of 1998, non-interest income has improved $120,000, or
6.8%, to $1.88 million from $1.76 million for the same period a year ago.
Trust revenues increased primarily as a result of increased trust and estate
business. Loan servicing fees showed improvement as an increase in portfolio
size has provided approximately $17,000 in increased servicing fee income for
the first six months of 1998 as compared to the same period in 1997. Gain on the
sale of loans decreased slightly in the second quarter of 1998 as compared to
the second quarter of 1997 as a result of decreased loan sales. For the first
six months gain on sales of loans has increased $83,000, or 26.3%. Company sold
the Small Business Administration ("SBA") guaranteed portion of commercial loans
totaling $3.4 million and $3.9 million of mortgage loans in the six months ended
June 30, 1998, as compared to $2.8 million of commercial loans and $1.5 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.
<PAGE> 13
NON-INTEREST EXPENSE
Non-interest expense decreased $25,000, or .8%, for the three months ended June
30, 1998 compared to the same period in 1997. Salaries and employee benefits
showed an increase of $67,000 or 3.7% for the period as a result of salary
increases and related benefit expense increases. Slight decreases in occupancy
and equipment expenses resulted in spite of expansion efforts in the Green Bay
market, resulting in additional depreciation expense. Data processing expense
increased $11,000 in the second quarter of 1998 primarily as a result of
additional transaction volume. Other operating expense shows a decrease of
$42,000, primarily a result of Karsten Resources Inc. expenses of $17,000 in the
second quarter of 1997. That operation was sold in the latter part of 1997, thus
no expenses occurred in the second 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 1.99% for the three months ended June 30,
1998 compared to 2.32% for the same period in 1997.
Non-interest expense increased $65,000, or 1.0%, for the first six months ended
June 30, 1998, compared to the same period in 1997. Salaries and employee
benefits showed an increase of $156,000, or 4.3%, primarily for the same reasons
as listed previous. Occupancy and equipment expenses shows a decrease of
$27,000, or .6%, as a result of reduced depreciation expense. Data processing
expense increased $18,000, or 5.7%, for the six months ended June 30 as compared
to the same period a year ago, primarily the result of additional transaction
volume. Other operating expense shows a decrease of $57,000, or 4.1%, primarily
a result of a reduction of $37,000 in expenses related to the Karsten Resources,
Inc. operation. The overhead ratio was 2.04% for the six months ended June 30,
1998 compared to 2.39% for the same period in 1997.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the three months ended June 30,
1998 increased $50,000, or 9.8%, to $561,000 from $511,000 for the same period
one year ago. The increase in income tax provision was due to increased taxable
income.
The provision for income taxes for the first six months ended June 30, 1998
increased $42,000, or 4.2%, to $1.04 million from $999,000 for the same period
one year ago. The increase in income tax provision was due to increased taxable
income.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
At June 30, 1998, total loans increased $18.8 million, or 6.4%, to $312.3
million from $293.4 million at December 31, 1997. The change in loan mix in the
Company's portfolio resulted from an
<PAGE> 14
increase in commercial loans to $181.6 million at June 30, 1998 compared to
$165.2 million at December 31, 1997. In addition, real estate construction loans
increased to $15.1 million at June 30, 1998 compared to $14.8 million at
December 31, 1997 and real estate-mortgage loans increased to $103.5 million at
June 30, 1998 compared to $100.6 million at December 31, 1997.
NON-PERFORMING ASSETS
At June 30, 1998, non-performing assets amounted to $4.34 million compared to
$4.70 million at December 31, 1997. Non-performing assets at June 30, 1998 were
.91% of total assets compared to 1.04% that existed on December 31, 1997. The
ratio of non-performing assets to total loans at June 30, 1998 was 1.39%
compared to 1.60% at December 31, 1997.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
At June 30, 1998, the allowance for loan losses increased $276,000 from year end
1997 to $4.2 million due to a provision expense of $301,000 offset by net charge
offs over recoveries of $25,000 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 June 30, 1998 and December 31, 1997,
the allowance for loan losses as a percentage of total loans were at 1.33% and
1.32%, respectively.
INVESTMENT PORTFOLIO
At June 30, 1998, the investment portfolio increased $7.1 million, or 6.2%, to
$122.0 million from $114.9 million at December 31, 1997. At June 30, 1998, the
investment portfolio represented 25.6% 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 June 30, 1998 increased $8.3 million, or 2.4%, to $354.3
million from $346.0 million at December 31, 1997. Noninterest bearing deposits
at June 30, 1998 increased $2.0 million, or 4.5%, to $46.2 million from $44.2
million at December 31, 1997. Interest-bearing deposits at June 30, 1998
increased $6.3 million, or 2.1%, to $308.1 million from $301.8 million at
December 31, 1997. Time deposits over $100,000 show an increase of $7.8 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.
<PAGE> 15
SHORT-TERM BORROWINGS
Total short-term borrowings at June 30, 1998 increased $18.2 million to $74.9
million from $56.6 million at December 31, 1997. The increase in short-term
borrowings resulted from more growth in the loan and investment portfolio
compared to overall deposit growth.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cashflows for the six
months ended June 30, 1998, cash and cash equivalents increased $3.6 million
during the period to $18.7 million at June 30, 1998. The increase primarily
reflected $3.6 million in net cash provided by operating activities and $24.4
million provided by financing activities offset by $24.4 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 as a
result of treasury stock purchased and dividends paid offset by a net increase
in short term deposits, time deposits and borrowed funds. Strong loan demand for
the first six months of 1998 continues to remain solid thereby effecting an
increase in short term funding requirements through overnight correspondent fed
funds purchases and Federal Home Loan Bank borrowings. 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
<PAGE> 16
a longer period of time. The Company views its savings and NOW accounts to be
core deposits and relatively non-price sensitive, as it believes it could make
repricing adjustments for these types of accounts in small increments without a
material decrease in balances. All other earning categories including loans and
investments as well as other paying liability categories such as time deposits
are scheduled according to their contractual maturities.
Interest rate sensitivity analysis can be performed in several 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 June 30, 1998, rate sensitive liabilities
exceeded rate sensitive assets by $82.1 million, or a ratio of rate sensitive
assets to rate sensitive liabilities of 68.2%. For the next time frame of four
to six months, rate sensitive liabilities exceeded rate sensitive assets by $9.6
million, or a ratio of rate sensitive assets to rate sensitive liabilities of
73.9%. For all assets and liabilities priced within a one year time frame, the
cumulative ratio of rate sensitive assets to rate sensitive liabilities was
67.6%, 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> 17
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
AS OF JUNE 30, 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 $ 5,766 $ 6,195 $ 1,940 $ 46,556 $ 63,380 $ 123,837
Federal funds sold 0 0
Loans and Leases:
Variable Rate 145,155 0 0 145,155
Fixed Rate 25,360 21,061 26,281 87,458 5,921 166,081
--------- --------- --------- --------- --------- ---------
Total Loans and Leases $ 170,515 $ 21,061 $ 26,281 $ 87,458 $ 5,921 $ 311,236
--------- --------- --------- --------- --------- ---------
Total Earning Assets $ 176,281 $ 27,256 $ 28,221 $ 134,014 $ 69,301 $ 435,073
========= ========= ========= ========= ========= =========
Interest Bearing Liabilities:
NOW Accounts $ 37,630 $ $ $ $ $ 37,630
Saving Deposits 104,693 104,693
Time Deposits 47,217 30,884 47,674 39,987 9 165,771
Borrowed Funds 68,877 6,000 53 211 66 75,207
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities $ 258,417 $ 36,884 $ 47,727 $ 40,198 $ 75 $ 383,301
========= ========= ========= ========= ========= =========
Interest Sensitivity GAP $ (82,136) $ (9,628) $ (19,506) $ 93,816 $ 69,226 $ 51,772
(within periods)
Cumulative Interest Sensitivity (82,136) (91,764) (111,270) (17,454) $ 51,772
GAP
Ratio of Cumulative Interest -18.88% -21.09% -25.58% -4.01% 11.90%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive Assets to 68.22% 73.90% 59.13% 333.38% --
Rate Sensitive Liabilities
Cumulative Ratio of Rate Sensitive 68.22% 68.93% 67.56% 95.45% 113.51%
Assets to Rate Sensitive
Liabilities
</TABLE>
<PAGE> 18
CAPITAL RESOURCES
At June 30, 1998, stockholders' equity increased $1.3 million, or 3.1%, to
$43.2 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 $16,000
resulting from decreases in the market value of available for sale securities
related to FAS 115. In addition treasury stock purchases of $211,000 were made
in the six months ended June 30, 1998, also reducing capital. At June 30, 1998,
the Company's risk-based Tier 1 Capital Ratio was 10.84%, the total risk based
capital ratio was 12.02% and the leverage ratio was 8.16%. 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. This
issue relates to systems designed to use two digits rather than four to define
the particular year. As a part of the initial steps, the Company was
required to identify, assess and prioritize mission critical systems,
software and support equipment for remediation. In addition, by June 30, 1998,
the Company was required to continue the remediation process, implement a
customer due diligence awareness program and complete development of written
Year 2000 testing strategies and plans. These processes have been completed.
The next phase will encompass testing of internal mission-critical systems,
including those programmed in-house and those purchased from outside vendors.
This phase has started in the early part of July 1998. 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 operations or cash flow of
the Company. Anticipated costs are expected to be in the range of $100,000.
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 Ray region. The facility offers a full range of
retail and deposit services and opened on July 20, 1998. Costs to complete the
facility were $925,000.
The Company 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> 19
Item 6. 8-K
(a) Exhibits
None
(b) Reports on Form 8-K filed for three months ended June 30, 1998.
None
<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 13, 1998 Thomas L. Herlache
------------------------- ---------------------------------
Thomas L. Herlache
President (CEO)
Date: August 13, 1998 Steven D. Jennerjohn
------------------------- ---------------------------------
Steven D. Jennerjohn
Treasurer (CFO)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,501
<INT-BEARING-DEPOSITS> 211
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,919
<INVESTMENTS-CARRYING> 12,118
<INVESTMENTS-MARKET> 12,615
<LOANS> 312,261
<ALLOWANCE> 4,157
<TOTAL-ASSETS> 477,371
<DEPOSITS> 354,280
<SHORT-TERM> 74,877
<LIABILITIES-OTHER> 4,713
<LONG-TERM> 330
0
0
<COMMON> 18,424
<OTHER-SE> 24,747
<TOTAL-LIABILITIES-AND-EQUITY> 477,371
<INTEREST-LOAN> 13,760
<INTEREST-INVEST> 3,694
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,454
<INTEREST-DEPOSIT> 6,975
<INTEREST-EXPENSE> 8,794
<INTEREST-INCOME-NET> 8,660
<LOAN-LOSSES> 301
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,479
<INCOME-PRETAX> 3,763
<INCOME-PRE-EXTRAORDINARY> 3,763
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,722
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
<YIELD-ACTUAL> 8.59
<LOANS-NON> 1,025
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,338
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,881
<CHARGE-OFFS> 56
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 4,157
<ALLOWANCE-DOMESTIC> 4,157
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
