1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8679
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BAYLAKE CORP.
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(Exact name of Registrant as specified in its charter)
Wisconsin 39-1268055
- ----------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification
No.)
217 North Fourth Avenue., Sturgeon Bay, WI 54235
- ------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (414)-743-5551
---------------
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock $5
---------------
Par Value
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ]
As of March 21, 1996 2,452,937 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $26.75 reported bid
price on that date) held by non-affiliates (excludes a total of 525,887 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $51,548,588.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
-------- --------------------------------------
Proxy Statement for 1996 Annual Meeting Part III
of Shareholders
2
ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Registrant"), is a registered bank holding company under the Federal Bank
Holding Company Act of 1956. Registrant was organized primarily to acquire and
hold the stock of Baylake Bank ("Bank"), and to enter into such other closely
related business activities as may be approved from time to time. On August
31, 1994, the Registrant 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, Bank and BBK were merged, and are referred to herein as
"Baylake Bank."
Baylake Bank
The Bank was a Wisconsin State Bank originally chartered in 1889. At December
31, 1995, the Bank had total assets of $244.6 million. BBK was a Wisconsin
State Bank originally chartered in 1876. At December 31, 1995, BBK had total
assets of $64.9 million. Baylake Bank is a member of the Federal Reserve
System and its deposits are insured, subject to regulatory limits, by the FDIC.
It provides general banking and trust department services to commercial,
industrial and individual accounts in the areas of Door, Kewaunee, Brown and
Manitowoc Counties, Wisconsin. Baylake Bank offers a full range of financial
services, including demand deposit accounts, various savings account plans,
certificates of deposit, individual retirement accounts, real estate mortgage
loans, consumer and business loans, agricultural loans, safe deposit boxes,
collection services, transfer agency services, a trust department, insurance
agency, discount brokerage, financial planning, conference facilities and
access to TYME Corporation's electronic funds transfer system. Baylake Bank
maintains a number of divisions each headed by a vice president, including a
Retail Division, Commercial/Loan Division and Non-Bank Division to facilitate
the provision of customer services, and three supportive divisions, the
Administrative Division, Accounting Division and Operations Division.
Baylake Bank has the following 100%-owned subsidiaries: Baylake Investments,
Inc., Bank of Sturgeon Bay Building Corporation, Cornerstone Financial, Inc. and
Baylake Insurance Agency, Inc., Baylake Investments, Inc. was formed to manage
certain bank assets available for investment. Bank of Sturgeon Bay Building
Corporation owns the main office building, conference center facilities and
underlying property of the Bank. Cornerstone Financial, Inc. manages Bank of
Sturgeon Bay Building Corporation's conference center facilities. Baylake
Insurance Agency, Inc. offers various types of insurance products to the general
public as an independent agent. Baylake Bank also owns a 49.6% interest in
United Financial Services, Inc. ("UFS"), a data processing services company.
Unaffiliated third parties own the remaining 50.4% interest in UFS.
3
The revenues generated by these subsidiaries and UFS amount in aggregate to
less than 5% of Baylake Bank's total income.
Baylake Bank offers short-term and long-term loans on a secured and
unsecured basis for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. Baylake Bank
focuses its lending activities on individuals and small businesses in its
market area. Lending has been exclusively within the industrial and consumer
community within their market areas. The Bank's largest market area consists of
Door County, Wisconsin. Sturgeon Bay is the county seat and major industrial
and retail area of Door County. Baylake Bank is the largest commercial bank
in Door County, having assets of $244.6 million as of December 31, 1995.
Baylake Bank operates seven branch offices (two of which are seasonal) in Door
County, in addition to its main office in downtown Sturgeon Bay. Baylake Bank
has also expanded into the Northeast Brown County region with two facilities
planned: a mobile unit facility and a permanent facility that opened in March
1996. These facilities will offer a full range of services similar to those of
Baylake Bank.
The resident population of Door County is approximately 27,250 (according to
the 1990 census) with 9,100 living in the City of Sturgeon Bay. The major
industries of Door County include shipbuilding, tourism, metal products
manufacturing, electrical components manufacturing, and industrial oven
fabrication. Most industry is centered in the Sturgeon Bay area. The rest of
Door County is primarily involved in agriculture (mostly dairy farming and the
production of cherries and apples), and tourism. The tourist business of Door
County is seasonal, with the season beginning in early spring and continuing
until late fall. The seasonal nature of the tourist business imposes increased
demands for loans shortly before and during the tourist season and causes
reduced deposits shortly before and during the early part of the tourist
season, although the financial needs of those involved in the delivery of
tourist related services is a year around concern.
BBK's former market area, which is now part of Baylake Bank's market, consists
primarily of Kewaunee County, Wisconsin
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and adjacent portions of Manitowoc County. Baylake Bank owns and operates four
branch offices in Kewaunee County. The resident population of Kewaunee County
is approximately 20,000 according to the 1990 census, with 2,750 people living
in Kewaunee and 3,353 in Algoma. The Kewaunee County industrial base is
diverse with over half of the business associated with food and related
products, fabricated metals, and lumber and wood furniture and fixtures. Most
industry is centered in the Kewaunee and Algoma area. The rest of Kewaunee
County is primarily involved in agriculture (mainly dairy production). Tourism
also contributes to the local economy.
Recent Developments
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.
The definitive agreement provides that Baylake will acquire Four Seasons in a
cash transaction, in the amount of $13.8 million, plus the amount of Four
Seasons net income from January 1, 1996 prior to closing. The acquisition
remains subject to regulatory approvals, an audit of Four Seasons financial
statements, and other customary conditions. Assuming the conditions are timely
met, the acquisition of Four Seasons is expected to be consummated in summer
1996. The acquisition would be accounted for using the purchase method of
accounting.
At December 31, 1995, according to information provided by Four Seasons, on an
unaudited consolidated basis, Four Seasons had approximate total assets of
$59.6 million, total deposits of $49.9 million and total shareholders' equity
of $9.3 million. For the fiscal year ended June 30, 1995, Four Seasons had net
income of $452,000; for the six months ended December 31, 1995, Four Seasons'
net income was $264,000.
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 $1.9 million. In addition, construction will occur on a second site in
Green Bay. This area is currently served by a temporary facility and offers
various retail services as well as consumer and commercial loan services.
Subsequent to December 31, 1995, Baylake Bank has entered into a contract to
construct a building for $1.1 million with completion 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.
Lending and Investments
Baylake Bank offers short-term and long-term loans on a secured and unsecured
basis for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. Baylake Bank
focuses its lending activities on individuals and small businesses in its
market area. Lending has been exclusively within the State of Wisconsin.
Baylake Bank does not conduct any substantial business with foreign obligors.
The markets served by Baylake Bank includes a wide variety of types of
businesses; therefore, the Registrant does not believe it is unduly exposed to
the problems in any particular industry group. However, any general weakness
in the economy of Door and Kewaunee County areas (as a result, for example, of
a decline in its manufacturing and tourism industries or otherwise) could have
a material effect on the business and operations of the Registrant.
Baylake Bank's total outstanding loans as of December 31, 1995 amounted to
approximately $210.2 million, consisting of 72.0% residential, commercial,
agricultural and construction real estate loans, 19.2% commercial and
industrial loans, 6.0% installment and 2.8% agricultural loans.
The Registrant maintains a portfolio of other investments, primarily consisting
of U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
securities, and obligations of states and their political subdivisions. The
Registrant attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
Baylake Bank offers a broad range of depository products, including
non-interest bearing demand deposits, interest-bearing demand deposits, various
savings and money market accounts and certificates of deposit. Deposits at the
Baylake Banks are insured by the FDIC up to statutory limits. At December 31,
1995, Baylake Bank's total deposits amounted to $267.0 million, including
interest bearing deposits of $233.1 million and non-interest bearing deposits
of $33.9 million.
5
Other Customer Services and Products
Other services and products offered by Baylake Bank and subsidiaries
include safety deposit box services, personal and corporate trust services,
conference center facilities, an insurance agency and discount brokerage
services offering stocks, bonds, annuities, mutual funds and other investment
products.
Competition
Baylake Bank competes with other financial institutions and businesses in both
attracting and retaining deposits and making loans. The Bank encounters direct
competition in its Door County market area from one other commercial bank as
well as from two savings and loans associations and one credit union which
maintain offices in Door County. Baylake Bank encounters direct competition in
its Kewaunee County market area from four other commercial banks as well as one
savings and loan association and one credit union. In spite of such
competition, Baylake Bank has maintained its position within the market areas,
holding better than half of all commercial bank deposits in the combined market
area as of December 31, 1995. Although no assurance can be given that it will
continue to do so, Baylake Bank has been able to maintain its prominence in the
market areas, even though certain competitors have considerably more financial
and other resources than do the Registrant.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, and is not within the control of Baylake. This
regulation substantially affects the business and financial results of all
financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Federal Reserve Board, which require that Baylake's capital
to asset ratio meet certain minimum standards. For a discussion of the Federal
Reserve Board's guidelines and the Registrant's applicable ratios, see the
section entitled "Capital Resources" under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation.
Baylake Bank is incorporated under the banking laws of Wisconsin, and its
deposits are insured by the FDIC. It is therefore subject to supervision and
regulation by the Wisconsin Commissioner of Banking (the "Commissioner"), the
Federal Reserve Bank ("FRB") and the FDIC. As a registered bank holding
company
6
under the Bank Holding Company Act, Baylake is subject to review and regulation
by the FRB (their primary regulator). Baylake is also subject to review and
examination by the Commissioner under Wisconsin law.
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the Commissioner be paid out of current earnings or, no
more than once within the immediate preceding two years, out of undivided
profits in the event there have been insufficient net profits. Any other
dividends require the prior written consent of the Commissioner. The Bank and
BBK each is in compliance with all applicable capital requirements and may pay
dividends to Baylake.
Effective September 1995, federal law permitted bank holding companies in
Wisconsin to acquire banks and holding companies nationwide, and holding
companies in any state to acquire banks and holding companies in Wisconsin.
Prior to that date, Wisconsin law permitted Wisconsin-based financial holding
companies to acquire institutions, or be acquired by other institutions,
located in a nine state regional area (consisting of Wisconsin, Illinois,
Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri and Ohio) provided such
other states had been determined by the Commissioner to have reciprocal laws
permitting such acquisitions by and of Wisconsin institutions. All of these
states except Missouri had such reciprocal laws. Certain additional states had
permitted acquisition of banks in those states by Wisconsin-based holding
companies. Wisconsin law generally permits establishment of full service bank
branch offices statewide.
7
Statistical Information
The following statistical information is presented in accordance with the
Securities and Exchange Commission's Guide 3, "Statistical Disclosure by Bank
Holding Companies." Reference numbers relate to Guide 3.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Three-year comparison of Consolidated Average Balance Sheet (in
thousands)
1995 1994 1993
---- ---- ----
Assets
Cash and Due from Banks $ 7,609 $ 7,948 $ 8,667
Investment Securities:
U. S. Treasury 6,076 9,297 10,338
U. S. Government Agencies 46,865 42,026 41,766
State and Municipal Obligations 18,495 21,402 26,613
Other Securities 2,376 2,285 2,155
Market Adjustment on AFS Securities (1,153) (1,052) 0
-------- -------- --------
Total Investments $ 72,659 $ 73,958 $ 80,872
-------- -------- --------
Federal Funds Sold $ 4,849 $ 6,196 $ 5,876
Loans, Net of Unearned Income $201,839 $187,945 $174,371
Reserve for Loan Losses (2,669) (2,452) (2,366)
-------- -------- --------
Net Loans $199,170 $185,493 $172,005
-------- -------- --------
Bank Premises and Equipment $ 6,873 $ 5,710 $ 5,291
Other Real Estate Owned $ 128 $ 83 $ 94
Other Assets $ 7,326 $ 5,163 $ 4,562
-------- -------- --------
Total Assets $298,614 $284,551 $277,367
======== ======== ========
Liabilities and Stockholders' Equity
Demand Deposits $ 32,350 $ 30,815 $ 28,985
NOW Account Deposits 33,060 33,618 31,286
Savings Deposits 83,470 84,623 79,623
Time Deposits 106,444 93,618 95,744
-------- -------- --------
Total Deposits $255,324 $242,674 $235,638
-------- -------- --------
Short Term Borrowings $ 3,131 $ 2,448 $ 6,692
Customer Repurchase Agreements $ 1,279 $ 3,525 $ 2,539
Long Term Debt $ 475
Other Liabilities $ 3,834 $ 2,665 $ 2,696
======== ======== ========
Total Liabilities $264,043 $251,312 $247,565
-------- -------- --------
Common Stock $ 12,272 $ 12,239 $ 12,166
Additional paid in capital 5,947 5,928 5,452
Retained Earnings 17,141 15,784 12,228
Net Unrealized Losses on AFS Securities (740) (666) 0
Treasury Stock (49) (46) (44)
-------- -------- --------
Total Equity $ 34,571 $ 33,239 $ 29,802
-------- -------- --------
Total Liabilities and Stockholders' Equity $298,614 $284,551 $277,367
======== ======== ========
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I. B. INTEREST RATES AND INTEREST DIFFERENTIAL
The tables below show for the periods indicated the daily average amount
outstanding for major categories of the interest-earning assets and
interest-bearing liabilities, the interest earned or paid and the average
yields thereon (in thousands of dollars).
1995 1994
Amount Interest Yield Amount Interest Yield
------ -------- ----- ------ -------- -----
Interest-earning assets:
Loans, Net $201,839 9.74% $187,945 8.83%
Less: non-accruing Loans (1,463) (1,565)
-------- --------
Loans $200,376 $19,661 9.81% $186,380 $16,594 8.90%
U.S. Treasury Securities 6,076 303 4.99% 9,297 483 5.20%
U.S. Government Agencies 46,865 2,895 6.18% 42,026 2,541 6.05%
State and Municipal Obligations 18,495 1,897 10.26% 21,402 2,229 10.41%
Other Securities 423 25 5.91% 418 25 5.98%
Federal Funds Sold 4,849 282 5.82% 6,196 260 4.20%
Other Money Market Instruments 1,953 69 3.53% 1,867 76 4.07%
-------- ------- ------ -------- ------- ------
Total Interest Earning Assets
(net of non-accruing loans) $279,037 $25,132 9.01% $267,586 $22,208 8.30%
======== ======= ====== ======== ======= ======
Interest-bearing liabilities:
NOW Accounts $33,060 $ 910 2.75% $ 33,618 $ 810 2.41%
Savings Accounts 83,470 2,978 3.57% 84,623 2,549 3.01%
Time Deposits 106,444 5,951 5.59% 93,618 3,981 4.25%
Short Term Borrowings 3,131 198 6.32% 2,448 105 4.29%
Customer Repurchase Agreements 1,279 52 4.07% 3,525 111 3.15%
Long Term Debt 475 42 8.84%
-------- ------- ------ -------- ------- ------
Total Interest-bearing Liabilities $227,859 $10,131 4.45% $217,832 $ 7,556 3.47%
======== ======= ====== ======== ======= ======
1993
Amount Interest Yield
------ -------- -----
Interest-earning assets:
Loans, Net $174,371 8.59%
Less: non-accruing Loans (1,777)
--------
Loans $172,594 $14,978 8.68%
U.S. Treasury Securities 10,338 727 7.03%
U.S. Government Agencies 41,766 2,654 6.35%
State and Municipal Obligations 26,613 2,758 10.36%
Other Securities 363 21 5.79%
Federal Funds Sold 5,876 173 2.94%
Other Money Market Instruments 1,792 90 5.02%
-------- ------- ------
Total Interest Earning Assets
(net OF non-accruing loans) $259,342 $21,401 8.25%
======== ======= ======
Interest-bearing liabilities:
NOW Accounts $ 31,286 $ 734 2.35%
Savings Accounts 79,623 2,352 2.95%
Time Deposits 95,744 4,133 4.32%
Short Term Borrowings 6,692 215 3.21%
Customer Repurchase Agreements 2,539 73 2.88%
Long Term Debt
-------- ------- ------
Total Interest-bearing Liabilities $215,884 $ 7,507 3.48%
======== ======= ======
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The table below shows the net interest earnings and the net yield on
interest-earning assets for the periods indicated (inthousands of dollars).
1995 1994 1993
---- ---- ----
Total Interest Income $ 25,132 $ 22,208 $ 21,401
Total Interest Expense 10,131 7,556 7,507
-------- -------- --------
Net Interest Earnings $ 15,001 $ 14,652 $ 13,894
======== ======== ========
Net Yield on Interest-earning Assets 5.38% 5.48% 5.36%
(excluding non-accruing loans)
Interest on tax exempt income, (i.e., interest earned on state and municipal
obligations) are figured on a federal tax-equivalent basis using a tax rate of
34%.
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I. C. The following table sets forth for the periods indicated a summary of
the changes in interest earned and interest paid resulting from changes in
volume and changes in rates (in thousands).
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
Interest earned on:
Loans $1,310 $1,757 $3,067 $1,212 $ 404 $ 1,616
U.S. Treasury
Securities (164) (16) (180) (64) (180) (244)
U.S. Government
Agencies 296 58 354 16 (129) (113)
State and Municipal
Obligations (300) (32) (332) (541) 12 (529)
Other Securities 0 0 0 3 1 4
Federal Funds Sold (67) 89 22 11 76 87
Other Money Market
Instruments 3 (10) (7) 3 (17) (14)
------ ------- ------- ------ -------- --------
Total Interest
Earning Assets $1,078 $1,846 $2,924 $ 640 $ 167 $ 807
======= ======= ======= ======= ======== ========
Interest paid on:
NOW Accounts $ (14) $ 114 $ 100 $ 55 $ 21 $ 76
Savings Accounts (38) 467 429 149 48 197
Time Deposits 631 1,339 1,970 (91) (61) (152)
Short Term
Borrowings 36 57 93 (159) 49 (110)
Customer Repurchase
Agreements (81) 22 (59) 30 8 38
Long Term Debt 21 21 42
------- ------- ------- -------- ------- --------
Total Interest-
Bearing
Liabilities $ 555 $2,020 $2,575 $ (16) $ 65 $ 49
======= ======= ======= ======== ======= ========
(1) When a change in interest is due both to rate changes and volume this
analysis has been made on a fifty-fifty basis.
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II. INVESTMENT PORTFOLIO
A. The carrying value of investment securities for those held to maturity (at
amortized cost) and available for sale (fair market value) as of December 31,
1995, 1994 and 1993 are summarized as follows (in thousand of dollars)
1995 1994 1993
-------- -------- --------
Available for Sale
------------------
U.S. Treasury and Other U.S. government $ 11,321 $ 8,187 $ 9,195
agencies
Mortgage-backed securities 38,430 41,139 38,148
Obligations of states and political 13,322 6,742 8,828
subdivisions
Other 893 2,965 1,924
------- -------- --------
$63,966 $59,033 $58,095
Held to Maturity
----------------
Obligations of states and $ 11,237 $ 13,605 $ 16,864
political subdivisions
Other 408 408 408
-------- -------- --------
$ 11,645 $ 14,013 $ 17,272
Total $ 75,611 $ 73,046 $ 75,367
The Registrant does not hold investment securities of any issuer (other than
securities on the U.S. Government or its agencies) whose book value exceeds ten
percent of its stockholders equity.
12
II. B. The following table shows the maturities of investment securities as
of December 31, 1995 and weighted average yields of investment securities (in
thousands). The weighted average yields by maturity range was computed by
annualizing the purchase yield income on the securities within such maturity
range.
One Year Over 1 Year Over 5 Years
or less Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
U.S. Treasury and other U.S. Government
agencies $1,000 6.12% $10,321 5.97% $
Mortgage-backed securities 72 6.58%
Obligations of states and political
subdivisions 2,407 8.45% 7,066 11.02% 8,842 7.90%
Other 765 5.28% 13 8.00%
------ ----- ------- ----- ------ ------
Total $4,244 7.30% $17,400 8.02% $8,842 7.90%
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other U.S.
Government agencies $ $11,321 5.98%
Mortgage-backed securities 38,358 6.02% 38,430 6.02%
Obligations of states and political
subdivisions 6,244 8.52% 24,559 9.01%
Other 523 5.89% 1,301 5.55%
------- ----- ------- -----
Total $45,125 6.36% $75,611 6.98%
Weighted average yield on state and political subdivisions has been computed on
a fully taxable equivalent basis using a tax rate of 34%.
13
III. LOAN PORTFOLIO
A. Types of Loans
The following table sets forth the comparison of the loan portfolio at December
31st of each of the past five years (in thousands of dollars).
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Loans secured primarily
by real estate:
Secured by 1 to 4 family $62,271 $52,873 $48,190 $43,288 $42,778
residential properties
Real estate-construction 6,378 5,881 4,511 3,275 3,330
Other real estate loans 83,461 69,702 64,585 45,818 41,274
Loans to farmers 5,771 6,103 5,586 5,306 4,469
Commercial and Industrial
loans 40,287 42,157 41,558 47,707 39,241
Loans to individuals for
household, family and other
personal expenditures 12,522 16,603 16,844 16,978 14,818
All other loans 193 152 378 513 1,294
-------- -------- -------- -------- --------
Total gross loans $210,883 $193,471 $181,652 $162,885 $147,204
Less:
Unearned Income (653) (798) (748) (718) (637)
-------- -------- -------- -------- --------
Net Loans $210,230 $192,673 $180,904 $162,167 $146,567
======== ======== ======== ======== ========
14
2. As of December 31, 1995, there existed potential problem loans totaling
$2,154,950 which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1995.
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
$2 044 084 10% $ 204 408
89 183 25% 22 296
18 511 50% 9 256
2 542 100% 2 542
---------- ---- ----------
Totals $2 154 320 $ 238 502
Commercial loans comprised 96.8% or $2,085,955 of the total loans categorized
as problem loans. The other types of loans comprising this amount were
mortgage loans totaling $42,467 or 2.0% and consumer loans totaling $25,898 or
1.2%.
3. The Bank's loan portfolio is diversified by types of borrowers and industry
groups within the Door and Kewaunee market area. Significant loan
concentrations are considered to exist for a financial entity when such amounts
are loaned to borrowers engaged in similar activities as would cause them to be
similarly impacted by economic or other conditions. At December 31, 1995,
there existed the following industry group concentrations in the Registrant's
loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $27.5 million or 13.0%
----------------------
Total tourism loans $27.5 million or 13.0%
15
III. LOAN PORTFOLIO
B. Maturity and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of loans outstanding (in thousands) as of
December 31, 1995 which, based on remaining schedule repayments of principal,
are due in the periods indicated. Also, the amounts due after one year are
classified according to the sensitivity to change in interest rates.
Maturing
----------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------- ---------- ---------- ---------
Loans secured primarily by real estate:
Secured by 1 to 4 family
residential property $ 31,959 $ 26,356 $ 3,956 $ 62,271
Real estate - construction 1,750 2,554 2,074 6,378
Other real estate loans 24,017 33,023 26,421 83,461
Loans to farmers 3,003 1,809 959 5,771
Commercial and industrial loans 21,295 16,458 2,534 40,287
Loans to individuals for household family and
other personal expenditures
6,830 5,450 242 12,522
All other loans 118 17 58 193
-------- -------- -------- --------
Total $ 88,972 $ 85,667 $ 36,244 $210,883
======== ======== ======== ========
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
----- --------
Due after one year $ 50,771 $ 71,140
C. Risk Elements
1. The following table shows at December 31, the aggregate amounts of loans
(in thousands) which are non-accrual, troubled with debt restructurings and
accruing loans past 90 days or more as to principal or interest payments.
1995 1994 1993 1992 1991
Non-accrual loans $ 846 $ 1,536 $ 1,508 $ 1,535 $ 1,616
Troubled debt restructurings 648 815 255 309 0
Loans past due 90 days or more 0 90 56 129 81
------- ------- ------- ------- -------
Total $ 1,494 $ 2,441 $ 1,819 $ 1,973 $ 1,697
======= ======= ======= ======= =======
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $74,000; $117,000; $175,000; $189,000; and
$146,000 for 1995, 1994, 1993, 1992 and 1991 respectively. Interest income
which is recorded only as received, amounted to $34,000; $58,000; $101,000;
$77,000; and $69,000 for 1995, 1994, 1993, 1992 and 1991 respectively for these
non-accrual loans.
Loans are placed in non-accrual status when they are contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact
the collectibility of principal or interest on loans, it is the practice of
management to place such loans on a non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued
16
and uncollected interest on such loans are reversed and income is recorded only
to the extent that interest payments are subsequently received on a cash basis
and a determination has been made that the loan's principal is collectible. If
the loan collectibility of principal is doubtful, payments received are applied
to loan principal.
17
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following table summarizes the daily average loan balances at the end
of each period; changes in allowance for possible loan losses arising from
loans charged off and recoveries on loans previously charged off, by loan
category; and addition to the allowance which have been charged to operating
expenses (in thousands).
December 31
-----------
1995 1994 1993 1992 1991
Daily average amount of loans $201,839 $187,945 $174,371 $155,955 $144,877
======== ======== ======== ======== ========
Balance of allowance for possible
loan losses
at beginning of period $ 2,534 $ 2,434 $ 2,253 $ 1,905 $ 1,632
Loans Charged Off:
Real estate - mortgage ---- ---- 12 ---- 104
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 158 238 86 54 177
Consumer Loans 50 32 82 42 29
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 208 $ 270 $ 180 $ 96 $ 310
======== ======== ======== ======== ========
Recoveries of loans previously charged
off:
Real estate - mortgage ---- ---- 6 ---- ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 33 62 5 87 82
Consumer loans 8 48 46 47 38
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total recoveries $ 41 $ 110 $ 57 $ 134 $ 120
Net loans charged off $ 167 $ 160 $ 123 $ (38) $ 190
-------- -------- -------- -------- --------
Additions to allowance for
loan losses charged to
operating expense $ 250 $ 260 $ 304 $ 310 $ 463
-------- -------- -------- -------- --------
Allowance for loan losses at
end of period $ 2,617 $ 2,534 $ 2,434 $ 2,253 $ 1,905
======== ======== ======== ======== ========
Ratio of net charge off during period to
average loans outstanding .08% .09% .07% (.02%) .13%
The factors which influence management's judgment in determining the additions
to the loan valuation reserve are as follows:
1. The ratio of loan valuation reserves to the total loans should approximate
1.30% according to Baylake management.
2. The percentage of recoveries of loans previously charged off in relation
to the ratio in (1) above.
3. The charged off loans to total loan loss experience.
4. The economic stability within the market area and its impact on the loan
portfolio.
18
B. Allocation of Allowance for Loan Losses
For each period ended December 31, the loan valuation reserve has been
allocated to the following categories in amounts deemed reasonably necessary to
provide for the possibility of losses being incurred within each category. The
table also sets forth the percentage of loans in each category to total loans
(in thousands).
December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991
------------------- -------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent of Amount Percent of Amount Percent of Amount Percent of
------ ------ ------ ------ ------
of Loans Loans in Loans in Loans in Loans in
in Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Loans Loans Loans Loans Loans
-------- -------- -------- -------- --------
Real estate - mortgage $1,000 69.1% $ 974 63.4% $ 924 62.1% $ 771 54.7% $ 664 57.1%
Real estate -
construction 50 3.0% 50 3.0% 50 2.5% 50 2.0% 50 2.3%
Loans to farmers 20 2.7% 20 3.2% 20 3.1% 20 3.3% 10 3.0%
Commercial/industrial 1,190 19.2% 1,133 21.8% 1,083 23.0% 1,074 29.6% 948 27.5%
Consumer 337 6.0% 337 8.6% 337 9.3% 317 10.4% 184 10.1%
Not allocated 20 20 20 20 49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,617 100% $2,534 100% $2,434 100% $2,252 100% $1,905 100%
====== ====== ====== ==== ====== ====== ====== ====== ====== ======
19
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
YEAR ENDED DECEMBER 31
----------------------
1995 1994 1993
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
Non-interest bearing demand
deposits $ 32,350 0.00% $ 30,815 0.00% $ 28,985 0.00%
Interest bearing demand
deposits 33,060 2.75% 33,618 2.41% 31,286 2.35%
Savings deposits 83,470 3.57% 84,623 3.01% 79,623 2.95%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 94,858 5.53% 86,207 4.28% 90,278 4.34%
Time Certificates of Deposit
of $100,000 or more 11,586 6.11% 7,411 3.95% 5,466 3.99%
-------- -------- --------
Total Deposits $255,324 3.85% $242,674 3.03% $235,638 3.07%
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
1995 1994 1993
---- ---- ----
3 months or less $ 2,783 $ 1,681 $ 1,165
Over 3 months thru 6 months 5,066 1,270 1,021
6 months thru 12 months 2,336 1,108 2,947
Over 12 months 1,338 841 600
-------- -------- --------
Total $ 11,523 $ 4,900 $ 5,733
======== ======== ========
20
VI. RETURN ON EQUITY AND ASSETS
The ratio of consolidated net income to average stockholders' equity and to
average total assets and other ratios are as follows:
YEAR ENDED DECEMBER 31
----------------------
1995 1994 1993
---- ---- ----
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.56% 1.56% 1.68%
Average Stockholders' Equity (return
on equity) 13.43% 13.33% 15.64%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 60.32% 56.35% 30.21%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 11.58% 11.68% 10.75%
21
VII. Short-Term Borrowings
A. The following table shows outstanding amounts of short-term borrowings,
together with the weighted average interest rates thereon, at December 31, of
each of the past three years (in thousand of dollars).
1995 1994 1993
Amount Rate Amount Rate Amount Rate
Federal Funds purchased $ 774 6.09% $1,634 6.00% $
Securities Sold under agreements to
repurchase 754 3.74% 2,515 4.00% 3,162 2.75%
------ ----- ------ ----- ------ -----
$1,528 4.93% $4,149 4.79% $3,162 2.75%
------ ----- ------ ----- ------ -----
B. The following table shows the maximum amounts outstanding of short term
borrowings at any month-end during each reported period (in thousand of
dollars).
1995 1994 1993
---- ---- ----
Federal funds purchased $ 9,519 $12,611 $18,900
Securities sold under agreements to
repurchase 1,076 4,522 3,153
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of short-term borrowings, the interest paid and
the weighted average rates thereon (in thousands of dollars).
1995 1994 1993
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
Short-term
borrowings:
Federal funds
purchased $3,131 $198 6.32% $2,448 $105 4.29% $6,692 $215 3.21%
Securities sold
under agreements
to repurchase 1,279 52 4.07% 3,525 111 3.15% 2,539 73 2.88%
------ ---- ----- ------ ---- ----- ------ ---- -----
Total short-term
borrowings $4,410 $250 5.67% $5,973 $216 3.62% $9,231 $288 3.13%
22
VIII. Long Term Debt
A. The following table shows outstanding amounts of long term debt, together
with the weighted average interest rates thereon, at December 31, or each of
the past three years (in thousands of dollars). Long term debt consists of a
land contract requiring annual principal payments of $53,000 plus interest
calculated at prime + 1/4%.
1995 1994 1993
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Land contract payable $ 475 8.75%
------ ----- ------ ----- ------ -----
$ 475 8.75% $ 0 $ 0
====== ===== ====== ===== ====== =====
B. The following table shows the maximum amounts outstanding of long term debt
at any month-end during each reported period (in thousands of dollars).
1995 1994 1993
---- ---- ----
Land contract payable $ 475 $ 0 $ 0
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of long term debt, the interest paid and the
weighted average rates thereon (in thousands of dollars).
1995 1994 1993
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
Long term debt:
Land contract payable $ 475 $ 41 8.75% $ $
------ ---- ------- ------ ---- ------ ------ ---- ------
Total long term debt $ 475 $ 41 8.75%
====== ==== ======= ====== ==== ====== ====== ==== ======
23
ITEM 2. PROPERTIES
Registrant directly owns no real properties of any kind. However, Baylake Bank
owns twelve branches and leases the main office building from its subsidiary,
the Bank of Sturgeon Bay Building Corporation. In addition, the Bank leases a
modular facility from an unrelated third party for its second facility in Green
Bay; this is being replaced by a branch owned by Baylake Bank.
The main office building located in Sturgeon Bay serves as headquarters for
Registrant as well as the main banking office of Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
and financial services. The thirteen branches owned or leased by Bank are
conveniently located throughout the market area served by Bank. All properties
are in good condition and considered adequate for present and near term
requirements.
ITEM 3. LEGAL PROCEEDINGS
One of the subsidiaries of the Registrant is a defendant in a legal action.
Management believes that the action is without merit and that the ultimate
liability, if any, resulting from it will not materially affect the
Registrant's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 1995.
24
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
Historically, trading in shares of Baylake Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol:BYLKBB), an electronic interdealer quotation system providing
real-time quotations on over 4,000 eligible securities. Previously, Baylake
Common Stock was listed on the NASDAQ Pink Sheets. Trading in Baylake Common
Stock has been conducted principally by certain brokerage and investment firms
with offices in Door County, Wisconsin which have provided price quotations,
and have assisted individual holders of Baylake Common Stock who wish to sell
their shares.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are
computed from those obtained from two brokerage firms. The reported high and
low prices represent interdealer bid prices, without retail mark-ups,
mark-downs or commission, and may not necessarily represent actual
transactions.
Cash
dividends
paid per
Calendar period High Low share
--------------- ---- --- ---------
1994 1st Quarter $32.00 $25.50 $0.150
2nd Quarter 33.50 29.00 0.200
3rd Quarter 35.00 32.00 0.200
4th Quarter 34.50 32.00 0.470
1995 1st Quarter 34.50 30.50 0.220
2nd Quarter 32.00 27.00 0.220
3rd Quarter 29.25 26.50 0.220
4th Quarter 29.00 26.25 0.480
Baylake had approximately 1,513 shareholders of record at March 21, 1996.
Baylake paid a 100% stock dividend in September 1993. In addition, Baylake
paid a special dividend of $.25 per share cash dividend in December 1994 and
1995.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January,
25
and Baylake expects to continue this practice for the foreseeable future. The
holders of Baylake Common Stock are entitled to receive such dividends when and
as declared by Baylake's Board of Directors. The ability of Baylake to pay
dividends is dependent upon receipt by Baylake of dividends from the Bank,
which is subject to regulatory restrictions. Such restrictions, which govern
state chartered banks, generally limit the payment of dividends on bank stock
to the bank's undivided profits after all payments of all necessary expenses,
provided that the bank's surplus equals or exceeds its capital. In determining
the payment of cash dividends, the Board of Directors of Baylake considers the
earnings, capital and debt servicing requirements, financial ratio guidelines
issued by the FRB and other banking regulators, financial conditions of Baylake
and the Bank, and other relevant factors.
Baylake maintains a dividend reinvestment plan which enables participating
shareholders to elect to purchase shares of Baylake Common Stock in lieu of
receiving cash dividends. Such shares may be newly issued securities or
acquired in the market, and will be purchased on behalf of participating
shareholders at their then fair market value.
26
ITEM 6. SELECTED FINANCIAL DATA
Year ended December 31
----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except amounts per share)
Interest Income $ 24,487 $ 21,445 $ 20,468 $ 21,285 $ 22,822
Interest Expense $ 10,131 $ 7,556 $ 7,507 $ 9,285 $ 11,891
Net Interest Income $ 14,356 $ 13,889 $ 12,961 $ 12,000 $ 10,931
Provision for Loan Losses $ 250 $ 260 $ 304 $ 310 $ 463
Other Income $ 2,581 $ 2,320 $ 2,697 $ 2,657 $ 1,960
Other Expense $ 9,894 $ 9,689 $ 8,769 $ 8,485 $ 7,333
Income before income taxes $ 6,793 $ 6,260 $ 6,585 $ 5,862 $ 5,095
Net income $ 4,644 $ 4,430 $ 4,662 $ 4,181 $ 3,259
Earnings per share:
Fully diluted $ 1.89 $ 1.81 $ 1.92 $ 1.73 $ 1.36
Dividends per share (1) 1.14 1.02 .58 1.51 .35
Total assets (year end) $309,428 $287,107 $284,075 $272,079 $264,148
(1) All data, except dividends per share, have been restated to give effect to
the Registrant's acquisition of Kewaunee County Banc-Shares, Inc. on August 31,
1994, in a transaction accounted for using the pooling of interest methods of
accounting.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Registrant"), which may not be otherwise apparent from the
consolidated financial statements included in this report. This discussion and
analysis should be read in conjunction with those financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report for a more complete
27
understanding of the following discussion and analysis.
On August 31, 1994, the Registrant completed the acquisition of Kewaunee County
Banc-Shares, Inc. ("KCB"), the holding company for Baylake Bank-Kewaunee
("BBK"). The Registrant acquired all of the outstanding shares of KCB in
exchange for 574,756 shares of the Registrant's common stock. The acquisition
was structured as a merger of KCB with a newly-formed subsidiary of the
Registrant and accounted for using the pooling-of-interests method of
accounting; therefore, results of prior periods have been restated.
In addition, in March 1996, the Registrant signed an agreement to acquire Four
Seasons of Wis, Inc. 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. The acquisition
remains subject to regulatory approvals and other contingencies.
Results of Operations
The Registrant achieved solid earnings in 1995. Net income was $4.64 million,
a 4.8% increase from the $4.43 million earned in 1994. Net income for 1994
showed a 5.0% decrease over 1993 earnings, primarily from one-time charges
associated with the acquisition of KCB and the name changes of Baylake's
subsidiary banks. Those changes reduced after-tax net income in 1994 by
$529,000. On a per share basis, net income was $1.89 in 1995 compared with
$1.81 in 1994, an increase of 4.4%. Earnings per share in 1994 showed a 5.7%
decline over 1993 results. Those charges in 1994 reduced after-tax earnings
per share by $.22.
Net interest income improved $467,000 or 3.4% over 1994 levels. From a slightly
increasing rate environment in early 1995 to a slightly declining rate
environment in late 1995, interest income increased 14.2% while interest
expense increased 34.1%.
Other income showed an increase of $261,000 or 11.3%. The primary factor
increasing other income were revenues generated from the Karsten Resources,
Inc. operation.
Non-interest expense increased $205,000 or 2.1% over 1994 levels. Factors
contributing to the increase were increased equipment expenses and data
processing costs.
For 1995, return on average assets remained unchanged at 1.56% compared with
1.56% in 1994 and a decrease from the 1.68% recorded in 1993. This ratio
remained stable as a result of the various factors discussed above combined
with average asset growth of 4.9% in 1995.
Return on average stockholders' equity in 1995 showed a slight increase at
13.43% compared to 13.33% in 1994 and a decline compared to 15.64% in 1993.
This result occurred as a result of increased net income and the factors
discussed above offset by an increased capital base.
Cash dividends declared in 1995 increased 11.8% to $1.14 per share compared to
$1.02 in 1994. This compares to an increase of 75.9% in 1994 dividends as
compared to 1993.
Net Interest Income
Net interest income is the largest component of the Registrant's operating
income (net interest income plus other non-interest income), accounting for
28
85.3% of 1995 total operating income, as compared to 86.3% in 1994 and 83.7%
in 1993. Net interest income represents the difference between interest
earned on loans, investments and other earning assets, and the interest expense
associated with the deposits and borrowings that fund them. Interest
fluctuations together with changes in the volume and types of earnings and
interest-bearing liabilities combine to affect total net interest income. This
analysis discusses net interest income on a tax-equivalent basis in order to
provide comparability among the various types of interest earned. Tax-exempt
interest income is adjusted to a level that reflects such income as if it were
fully taxable.
Net interest income on a tax-equivalent basis reached $15.0 million in 1995, an
increase of 2.4% from $14.6 million in 1994 (and $13.9 million in 1993). The
improvement in 1995 net interest income of $355,000 was due in part to a 4.2%
increase in the volume of average earning assets, offset by a 4.6% increase in
average interest-bearing liabilities. The declining rate environment in the
latter half of 1995 had a negative impact on net interest income as assets were
repriced more frequently than its deposits. In addition a special deposit
product offering was made as a promotional vehicle for the Bank's entry into
the Green Bay market. Although the offer was short-term in nature and
duration, it had a negative impact on net interest income as short-term time
deposit rates rose significantly. As a result, interest income increased
13.2%, while interest expense for 1995 increased 34.1%.
Average loans outstanding grew from $187.9 million in 1994 to $201.8 million in
1995, an increase of 7.4%. The increase in loan volumes also was a significant
contributing factor to the increase in interest income. Average loans
outstanding increased from $174.4 million in 1993 to $187.9 million in 1994, an
increase of 7.8%. The mix of average loans to average total assets grew from
62.9% in 1993 and 66.0% in 1994 to 67.6% in 1995. The switch in asset mix to
greater loan composition has provided a source of higher yielding assets, which
contributed to an increase in net interest income.
Interest rate spread is the difference between the tax-equivalent rate earned
on average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread decreased 27 basis points in 1995 to
4.56% from 4.83% in 1994, as the average yield on earning assets increased 71
basis points while the average cost paid on interest-bearing liabilities
increased 98 basis over the same period. This interest rate spread decline
followed an improvement of 6 basis points in 1994 compared to a spread of 4.77%
in 1993. The increase in the Registrant's earning assets yield reflects higher
loan yields, resulting from the higher interest rate environment on average,
more frequent repricing of variable rate loans and a higher percentage of the
Registrant's assets represented by loans and stable investment yields related
to reduced activity in the investment portfolio. Yields on interest-paying
liabilities rose 98 basis points due to a higher interest rate environment on
average coupled with a special time deposit offering made in conjunction with
the opening of a branch in the Green Bay region. As a result of this offering,
new deposits were generated and a portion of the existing time deposit base
shifted to the higher yielding time deposit resulting in effective higher rates
for time deposits.
Net interest margin is tax-equivalent net interest income expressed as a
29
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of
funds to fund a portion of earning assets. As a result, the level of funds
available without interest cost (demand deposits and equity capital) is an
important factor affecting an increasing net interest margin.
The net interest margin for 1995 was 5.38% compared to 5.48% in 1994. The
decline in net interest margin was primarily the result of the 27 basis point
decline in the interest rate spread. The impact in the levels of average
interest rates from 1994 to 1995 had a negative affect on the change in net
interest margin. The free funds ratio, or the level of non-interest-bearing
funds that support earning assets, declined slightly to 22.4% from 22.5% in
1994, which caused a slight reduction in net interest margin.
The net interest margin for 1994 was 5.48% as compared to 5.36% in 1993 as
interest rate spread improved during that period. The increase in 1994
occurred in a rising rate environment as yields on earning assets improved 5
basis points while rates on interest-bearing liabilities remained stable.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 93.4% in 1995 compared with 94.0% in 1994 and 93.5% in
1993, indicating a consistent ability by the Registrant to use assets in a
direct earning capacity.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Registrant
constantly seeks to attract lower cost core deposits, service the needs of the
customer, and provide attractively priced products. Competition for high
quality assets will also affect asset yields. Net interest income is vital to
the Registrant's earnings performance, since net interest income is the largest
component of operating income. Growth in net interest income primarily is the
result of growth in the level of earning asset volumes and changes in asset
mix. Interest rate spread management through asset and liability pricing and
increased levels of non-interest-bearing sources of funds also aid in improving
net interest income. Management will continue its focus on maintaining an
appropriate mix of quality earning assets as well as seeking to achieve
appropriate growth in volumes.
Changes in the levels of market interest rates also affect net interest income,
but are less directly under the control of the Registrant. The recent
environment of declining interest rates has prompted reduced interest income as
a result of the repricing of the variable loan portfolio combined with a
lagging effect on the deposit side lowering interest rates more slowly.
Management believes that a gradual decrease in interest rates will not
adversely affect the earning capacity of the Registrant. Past experience has
shown that, although the Registrant remains in a short-term negative interest
rate sensitivity gap, deposits tend not to be repriced as quickly as loans in a
declining rate scenario, as the current environment has shown, and are repriced
more frequently in a falling interest rate environment. More discussion on
this subject is referenced in the section titled "Interest Rate Sensitivity".
Provision for Loan Losses
30
Provision for loan losses in 1995 at $250,000 compares to a provision of
$260,000 for 1994 and $304,000 for 1993. Net charge-offs in 1995 were $167,000
compared with net charge-offs of $160,000 in 1994 and $123,000 in 1993. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .08% in 1995 compared with .09% in 1994
and .07% in 1993. The provision is lower in spite of increased problem loans
due to strong collateral positions that exist. Management's determination of
the provision for loan losses is based on several factors. Factors considered
include evaluation of the loan portfolio, current domestic conditions, loan
volume, loan growth, loan portfolio composition, levels of non-performing
loans, trends in past due loans, and the evaluation of various problem loans
for loss potential. Net charge-offs to average loans remain comparatively low
in spite of above average loan growth due to higher underwriting standards and
improved collection efforts.
Non-Interest Income
Total non-interest income, excluding securities transactions, was $232,000 more
than 1994, or a 9.9% increase. Included in non-interest income in 1995 were
revenues of $269,000 from the operation of Karsten Resources, Inc., a hotel and
restaurant business. Without the impact from the Karsten revenues,
non-interest income would have been flat with a 1.6% decrease. In 1994, total
non-interest income was $196,000 less than 1993, or a 7.7% reduction. Trust
service fees, loan servicing fees and service charges continue to be the
primary components of non-interest income.
Trust fees increased $59,000 or 17.6% in 1995 compared to 1994, primarily as a
result of increased trust business. This compared to a decrease of $16,000 or
4.5% in 1994 compared to 1993, in part due to decreased estate business.
Loan servicing fees remained flat with a decrease of $21,000 or 3.8% to
$531,000 in 1995, a decline that resulted primarily due to decreased activity
in the loan refinancing market as a higher rate environment on average tempered
activity in that area. This result followed a decrease of $115,000 or 17.2% in
1994 as compared to 1993 for primarily the same reasons as listed above.
Service charges on deposit accounts showed a modest improvement of $11,000 or
1.8% over 1994 results. The reduction in fees for other service charges to
customers was a primarily a result of the sale of BBK's insurance subsidiary
during mid 1994 with revenues recognized in 1994 with no offsetting revenues in
1995.
As mentioned earlier, revenues of $269,000 stemming from the operation of
Karsten Resources, Inc. are included in 1995 other income results. Also
included in other income for 1995 were gains on sale of the student loan
portfolio totaling $97,000. For 1994 results, included in other income is
recognition of gain on sale of BBK's insurance subsidiary amounting to
$138,000.
Non-Interest Expense
Non-interest expense in 1995 increased $205,000 or 2.1% compared to 1994
31
results. This followed a $920,000 or 10.5% rise in 1994 as compared to 1993.
The 1994 increase resulted from one-time charges from Baylake's acquisition of
KCB and the related name changes at the Registrant's subsidiary banks.
Management estimated that those one-time expenses approximated $781,000 on a
pre-tax basis.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $5.4 million in 1995, an increase of $40,000 or .8% as
compared to 1994 results. The increase in 1995 primarily results from
additional staffing as a result of expansion into the Green Bay market and
normal salary increases. Salary and employee benefits expense in 1994 totaled
$5.4 million, an increase of $577,000 or 12.1% over 1993. The increase in 1994
primarily results from acceleration of a deferred compensation agreement as a
result of the merger with KCB recognizing a one-time expense amount of
$519,000. The salary portion of salary and benefit expense increased $414,000
or 12.1% compared to 1994. This compares to an increase of $237,000 or 7.1% in
1994 as compared to 1993 salary levels. Bonuses arising from the Registrant's
Pay-For-Performance Program amounted to $313,000 in 1995 compared to $224,000
in 1994, an increase of 39.7%. This program is designed to reward various
divisions if certain goals are met in achieving improvement in income and
return on equity to shareholders; bonuses increased due to an increased salary
base structure and certain goals on return on equity being achieved.
The Registrant's 401(k) profit sharing plan covering all employees who qualify
as to age and length of service showed an increase of $118,000 or 52.9% over
1994 levels as the Registrant increased contributions from a combination
discretionary/matching plan of 5% to 10% in 1995 to meet industry standards.
Expenses in the same category were up $7,000 or 3.2% in 1994 compared to 1993.
The number of full-time equivalent employees increased to 157 in 1995 compared
to 149 in 1994, an increase of 5.4%. This increase primarily resulted from the
Registrant gearing up for entry into the Green Bay market with emphasis on
personnel time spent on acclimation to the Bank and its products and calling
programs. Employee levels in 1994 increased to 149 from 146 in 1993, an
increase of 2.1%. As the Registrant expands to take advantage of business
opportunities and the related revenues, management will continue its efforts to
control salaries and employee benefits expense, although increases in these
expenses are likely to occur in future years.
Net occupancy expense showed a modest increase of $30,000 or 4.5% compared to
1994. This increase followed an increase of 3.4% in 1994. This expense should
increase in subsequent years as building projects in the Green Bay region
should add to depreciation expense and other occupancy costs. More detail on
the projected expansion costs are detailed in the section titled "Recent
Developments".
Equipment expense showed an increase of $130,000 or 25.9%. This followed an
increase of $43,000 or 9.4%. These resulted primarily from depreciation
expenses relating to past increased capital expenditures for equipment which
were made to enhance the Registrant's technological capabilities.
Data processing expense in 1995 increased $109,000 or 18.2% due to volume
32
increases and additional services purchased from outside vendors.
Approximately 6.6% of this increase stemmed as a result of doing business with
its partially owned data service center, United Financial Services, Inc. This
followed an increase of $22,000 or 3.8% in 1994 compared to 1993. Management
estimates that data processing expense should show relatively flat increases
with only adjustments related to any volume increase incurred by Registrant.
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result the
Registrant has shown varied results. Other real estate owned expenses showed
net income of $84,000 in 1995 as a result of gains on sale of approximately
$130,000 resulting from two residential properties (taken as collateral on two
commercial loans) disposed of in 1995. Additionally a gain of $18,000 was
recognized as a result of disposal of additional lot sales of Idlewild Valley,
a former subsidiary of the Bank whose value was written off in 1988. This
compares to net income of $4,000 in 1994 and net expenses of $15,000 in 1993.
Other operating expenses in 1995 were $24,000 less than in 1994 or a .9%
reduction. Two factors primarily affecting this change were reduced FDIC
insurance expense and expenses from the operation of Karsten Resources, Inc.
This compares to an increase of $275,000 or 11.9% in 1994 compared to 1993.
Although FDIC insurance expense remained a sizable component of other operating
expense totaling $291,000 in 1995, it was $253,000 lower than 1994 results or a
46.5% reduction. This occurred as a result of FDIC action to lower the
assessment ratio in June 1995 from 23 cents per $100 of deposits to 4 cents per
$100 of deposits for the remainder of 1995. That decrease compares to an
increase of $20,000 or 3.8% in 1994 compared to 1993. Operating costs for
Karsten Resources, Inc. of $319,000 are included as part of other operating
expenses for 1995.
Other items comprising other operating expense shows a decrease of $90,000 or a
4.4% reduction in 1995 compared to 1994. This followed an increase in 1994 of
$255,000 or 14.3% compared to 1993. The increase in 1994 resulted primarily
from one-time charges related to the KCB acquisition. The Registrant
(including KCB) incurred expenses related to the KCB acquisition of
approximately $197,000, including investment banking, legal and accounting
fees, regulatory filing fees, printing and mailing expenses, and the like.
Also, approximately $65,000 of the 1994 increase stems from costs associated
with the name change of the Registrant's subsidiary banks to Baylake Bank and
Baylake Bank Kewaunee. The overhead ratio, which is computed by subtracting
non-interest income from non-interest expense and dividing by average total
assets was 2.45% for 1995 compared to 2.59% for 1994. Registrant continues its
commitment to deliver quality service and products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1995 was $2.1 million, an increase of
$319,000 or 17.4% compared to 1994. This followed a decrease of $93,000 or
4.8% in 1994 compared to 1993. The higher tax expense in 1995 reflected the
Registrant's increase in before tax earnings and a reduction in tax exempt
interest income. Conversely, 1994 income tax expense was lower due to
33
a reduction in before tax earnings.
The Registrant's effective tax rate (income tax expense divided by income
before taxes) was 31.6% in 1995 compared with 29.2% in 1994 and 1993. Of the
31.6% effective rate for 1995 the federal effective tax rate was 28.5% while
the Wisconsin state tax effective rate was 3.1%.
In January 1993 the Registrant adopted STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 109 (SFAS 109) "Accounting for Income Taxes". The adoption of
SFAS 109 changed the method of accounting for income taxes from the deferred
method to an asset and liability approach. Previously the Registrant deferred
the past tax effects of timing differences between financial reporting and
taxable income. The asset and liability approach requires the recognition of
deferred tax liabilities between the carrying amounts and the tax bases of
other assets and liabilities. As permitted under the new rule, prior years'
financial statements have not been restated. The cumulative effect of adopting
this statement as of January 1, 1993 was immaterial to net income.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
Balance Sheet Analysis
Loans
Total loans outstanding grew to $210.2 million at December 31, 1995, a 9.1%
increase from the end of 1994. This follows a 6.5% increase at December 31,
1994 over 1993 year end.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small business. Loans of this type are in a
broad range of industries and include service, retail, wholesale and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door and Kewaunee Counties, Wisconsin. The credit risk related
to commercial loans made by the Registrant's subsidiaries is largely influenced
by general economic conditions (especially those applicable to the Door County
market area) and the resulting impact on a borrower's operations.
Commercial loans and commercial real estate loans (including construction
loans) totaled $135.6 million at year end 1995 and comprised 64.5% of the loan
portfolio compared with 64.3% of the portfolio at the end of 1994. Loans in
these classifications grew $12.0 million or 9.7% during 1995.
34
The following table sets forth loan composition at December 31:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
(In thousands of
Dollars)
Real estate- $ 62,059 29% $ 52,474 27% $ 47,816 27% $ 42,929 27% $ 42,459 30%
residential
Real estate- $ 6,378 3% 5,881 3% 4,511 2% 3,275 2% 3,330 2%
construction
Real estate- $ 83,177 40% 69,303 36% 64,211 36% 45,459 28% 40,956 28%
commercial &
agricultural
Commercial, $ 46,094 22% 48,412 25% 47,522 26% 53,526 33% 45,004 31%
financial &
agricultural
Installment loans $ 12,522 6% 16,603 9% 16,844 9% 16,978 10% 14,818 10%
to individuals
Total Loans, $201,230 $192,673 $180,904 $162,167 $146,567
(net of
unearned income)
Real estate loans (including construction loans) secured by non-residential
real estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, we have combined them with
commercial loans for purposes of analysis and discussion.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
in part by detailed underwriting procedures, comprehensive loan administration,
and periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Registrant's loan portfolio is diversified by types of borrowers and
industry groups with the Door and Kewaunee County market areas. Significant
loan concentrations are considered to exist for a financial entity when such
amounts are loans to a multiple of borrowers engaged in similar activities
which cause them to be similarly impacted by economic or other conditions. At
December 31, 1995, there existed the following industry group concentrations in
the Registrant's loans which exceeded 10% of total loans:
Tourism related loans:
Lodging business $27.5 million or 13.0%
----------------------
Total tourism loans $27.5 million or 13.0%
The Registrant has a significant loan concentration because of tourism based
35
loans. The Registrant must serve the credit needs of its market, with one of
the key industries being tourism. Being a community bank, however, the
Registrant must also meet the other needs of its market area. For that reason
the Registrant realizes that the economic conditions of its market area
directly impact the Registrant's performance levels. Any general weakness in
the Door or Kewaunee County areas could have a material effect on the business
and operations of the Registrant, although management believes that it is not
unduly exposed to problems in any particular industry group.
Real estate residential mortgage loans totaled $62.0 million at the end of 1995
and comprised 29.5% of the loan portfolio at the end of 1995. Loans in this
category grew $9.5 million or 18.1% during 1995. Residential real estate loans
consist of conventional home mortgages, home equity lines, and secondary home
mortgages. Loans are primarily for properties within the Door and Kewaunee
County markets. Residential real estate loans generally contain a limit for
the maximum loan to collateral value of 75% to 80%. Private mortgage insurance
may be required when the loan to value exceeds these limits. Residential real
estate loans are written normally with a one, two or three year balloon
feature. The Registrant also participates in a secondary fixed rate mortgage
program under the Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
These loans are sold on the secondary market and the Registrant retains
servicing rights. At December 31, 1995, these loans totaled $37.3 million.
Installment loans to individuals totaled $12.5 million or 6.0% of the total
loan portfolio at December 31, 1995 compared to $16.8 million or 8.6% at the
end of 1994. The reduction in 1995 occurred primarily as a result of a large
percentage of the student loan portfolio of approximately $4.0 million being
sold in mid 1995. These were sold primarily as a result of the regulatory
burdens placed upon servicing portfolios of these types and secondarily for
liquidity. Installment loans include short-term installment loans, direct and
indirect automobile loans, recreational vehicle loans, credit card loans, and
other personal loans. Individual borrowers may be required to provided related
collateral or a satisfactory endorsement or guaranty from another party,
depending upon the specific type of loan and the creditworthiness of the
borrower. Loans are made to individual borrowers located in Door and Kewaunee
Counties. Credit risks for these types of loans is generally influenced by
general economic conditions (especially in the Door and Kewaunee County market
areas), the characteristics of individual borrowers and the nature of the loan
collateral. Credit risk is primarily controlled by reviewing the
creditworthiness of the borrowers as well as taking the appropriate collateral
and guaranty positions on such loans.
Critical factors in the overall management of credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, adequate allowance for
possible loan losses, and conservative non-accrual and charge-off policies.
Allowance for Possible Loan Losses
At December 31, 1995 the allowance for possible loan losses of $2.6 million
represented 1.25% of total loans, down from 1.31% at December 31, 1994. Loans
grew at a rate of 9.1% from December 31, 1994 to year end 1995, while
36
the allowance grew at a lower rate. Also, net charge-offs increased in 1995 as
compared to 1994. As loans have grown, management did not believe there
existed any trends indicating any undue portfolio risk.
At December 31, 1994, the allowance for possible loan losses of $2.5 million
represented 1.31% of total loans compared with 1.35% at the end of 1993.
Commercial, agricultural and other loans net charge-offs represented 74.9% of
the total net charge-offs as compared with 110.0% of total net charge-offs in
1994. Installment loan net charge-offs in 1995 were 25.1% of the total net
charge-offs as compared with 10.0% of net recoveries in 1994. In the commercial
sector, two particular charge-offs contributed to the increase. One of the
charge-offs for $68,000 was related to the Karsten Resources, Inc. loan prior
to BBK converting it to a subsidiary. The other charge-off for $39,000 was in
the retail business in addition to $119,500 taken as a charge-off in 1994. The
remaining commercial loan charge-offs during 1995 were offset for the most part
by their eventual recoveries in 1995. The majority of charge-offs in the
installment loan sector occurred as a result of automobile loans. Four
charge-offs totaling $40,000 were made in 1995 with minimal recoveries
occurring. Credit card loans showed net charge-offs of $4,400 in 1995 compared
to small net recoveries in 1994. Although the Bank has experienced higher
interest returns on approximately $960,000 in credit card balances, credit card
loans are inherently risky in nature. The Bank continues to work with the
credit card issuer to solicit quality loan accounts based on designated
criteria and actively pursue collection efforts in a more timely fashion.
Loans charged-off are subject to continuous review and specific efforts are
taken to achieve maximum recovery of principal and accrued interest.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb potential losses
arising from the credit granting process. Factors considered include the
levels of non-performing loans, other real estate, trends in past due loans,
loan portfolio growth, changes in loan portfolio composition, historical net
charge-offs, present and prospective financial condition of borrowers, general
and local economic conditions, specific industry conditions and other
regulatory or legal issues that could affect the Registrant's loss potential.
Management believes that the balance of the allowance for possible loan losses
as of December 31, 1995 is sufficient to absorb potential loan losses.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to
ensure that all problem loans are identified quickly and the risk of loss is
minimized.
Non-performing loans remain a leading indicator of future loan loss potential.
Non-performing loans are defined as non-accrual loans, guaranteed loans 90 days
or more past due but still accruing, and restructured loans. Loans are placed
in non-accrual status when contractually past due 90 days or more as to
interest or principal payments. Additionally, whenever management
37
becomes aware of facts or circumstances that may adversely impact on the
collectibility of principal or interest on loans, it is the practice of
management to place such loans on non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed and income is recorded only to
the extent that interest payments are subsequently received on a cash basis and
a determination has been made that the loan's principal is collectible. If the
collectibility of principal is doubtful, payments received are applied to loan
principal.
Restructuring loans involve the granting of some concession to the borrower
involving a loan modification, such as payment schedule or interest rate
changes.
Non-performing loans at December 31, 1995 were $1.5 million, a decrease of
$947,000 from the level at December 31, 1994. Approximately $600,000 of the
decline occurred as a result of the Karsten Resources loans being moved to a
separate corporation as a result of loan default so that BBK in the short term
could manage operations and pursue sale of the company to interested third
parties as expediently and efficiently as possible. As a result the ratio of
non-performing loans to total loans at the end of 1995 was .7% compared to
1.27% at 1994 year end. The Registrant's allowance for possible loan losses
balance was 175.2% of total non-performing loans at December 31, 1995 compared
to 103.8% at year end 1994. Troubled debt restructurings decreased $167,000 or
20.5% as a result of principal paydowns during the course of 1995. Management
believes that collateral is sufficient in those loans classified as troubled
debt in event of default.
Potential problem loans are performing loans in which there is doubt that the
borrower will be able to comply with loan repayment terms. Management's
decision to place loans in this category does not necessarily mean that the
Registrant expects to take losses on such loans, but that management needs to
be more vigilant in its efforts to oversee the loan and recognize that a higher
degree risk is associated with these nonperforming loans. At December 31,
1995, potential problem loans amounted to a total of $2.2 million compared to
$444,847 at year end 1994. $601,000 of the 1995 problem loans stems from three
loan customers in the food business for which cashflow problems have arisen.
$237,000 of the problem loans stems from credits for a manufacturer that has
incurred ongoing operating losses. $210,000 of the problem loans stems from
credits for oil services provider who has undergone cashflow concerns.
$252,000 of the credits stem from loans for a prefabrication housing provider
which has undergone competitive pressures in the particular market they serve
reducing cashflow. $139,000 of the credits stem from a furniture manufacturing
concern which has undergone several years of operating losses, for which
management continues to monitor progress. Various commercial loans totaling
$615,000, mortgage loans totaling $42,000 and consumer loans totaling $58,000
make up the remaining totals. With the exceptions noted above, potential
problem loans are not concentrated in a particular industry but rather cover a
diverse range of businesses.
The placement of performing loans in the potential problem loan category
indicated management's willingness to more closely monitor the financial
condition of the borrower and collateral positions of the Registrant or will
strengthen the loans with additional collateral if significant losses from
38
credits are expected in this category.
There existed no other real estate owned at year end 1995. Other real estate
owned which represents property to which the Registrant has acquired title
through foreclosure or in satisfaction of debt, stood at $123,000 at year end
1994. Management actively seeks to ensure that properties held are
administered to minimize any risk of loss.
Net cost of operation of other real estate for 1995, 1994, and 1993 consists of
the following:
1995 1994 1993
------ ------ ------
(In Thousands of Dollars)
Loss on disposition of
properties and other costs $ 66 $ 45 $ 41
Gains on disposition of
properties and expense
recoveries (150) (49) (26)
------ ----- ------
Net costs (gains) $(84) $ (4) $ 15
Other properties taken in as a result of foreclosure or surrender include a
restaurant and hotel facility that exists as a subsidiary of BBK named Karsten
Resources, Inc. The intent on forming the corporation was to allow the
business to operate as a going concern while at the same time limiting the
liability of BBK. The intent is to manage the assets until such time as this
property can be sold to an independent third party. Currently management of
BBK is marketing the property with limited results at present. Results of
operation which are included in other income and other operating expense
consists of 1995 other income of $269,000; other operating expenses of $319,000
and a net loss after tax of $33,000. The carrying value of the investment at
year end 1995 equals $537,000 and consists of real property which is
consolidated in the Balance Sheet with Premises and Equipment.
Investment Portfolio
The investment portfolio is intended to provide the Registrant with adequate
liquidity, flexibility in asset/liability management and, lastly, its earning
potential.
Investment securities are classified as held to maturity or available for sale.
The Registrant has determined at year end 1995 that all of its taxable issues,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 1995 were to be classified as available for sale. In addition,
BBK had determined that its non-taxable issues such as municipal issues and
non-taxable local municipals were classified as available for sale. In the
case of the Baylake Bank's non-taxable issues and municipal bond investments
purchased prior to 1995, they were determined to be held to
39
maturity. This determination was made because the Bank wanted to retain the
municipal bond issues due to their higher after-tax yields, and local
non-taxable issues due to their lessened marketability. Held to maturity
securities are those securities which the Registrant has both the intent and
ability to hold until maturity. Under this classification, securities are
stated at cost, adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income. 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. At
December 31, 1995, securities held to maturity had an aggregate market value of
approximately $12.2 million compared with amortized cost of $11.6 million.
Investment securities classified as available for sale are those securities
which the Registrant has determined might be sold to manage interest rates or
other economic factors. While the Registrant has no current intention of
selling those securities, they may not be held to maturity. As of December 31,
1993, the Registrant adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
115 (SFAS 115) "Accounting for Certain Investments on Debt and Equity
Securities." Accordingly investment securities available for sale at December
31, 1995 and 1994 are carried at market value. Adjustments up or down to
market value at December 31, 1995 and 1994 are recorded as a separate component
of equity, net of tax. Premium amortization and discount accretion are
recognized as adjustments of 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. At December 31,
1995, securities available for sale had a market and carrying value of $64.0
million compared with a amortized cost of $63.7 million. The reserve for
market adjustment of securities, net of tax, and reflected in the stockholders'
equity section stood at $176,000 at December 31, 1995.
At December 31, 1995 and 1994, the Registrant's investment portfolio did not
contain, other than U.S. treasury and federal agencies, securities of any
single issuer that were payable from and secured by the same source of revenue
of taxing authority where the aggregate book value of such securities exceed
10% of stockholders' equity.
Investment securities averaged $72.7 million in 1995 compared with $74.0
million in 1993. The average balance of securities decreased as management
directed a higher proportion of assets to loans. In 1995, taxable securities
comprised approximately 74.9% of the total average investments compared to
71.5% in 1994. Tax-exempt securities on average for 1995 accounted for 25.1%
of the total average investments compared to 28.5% in 1994.
Deposits
Average total deposits in 1995 were $255.3 million, an increase of 5.2% over
1994. This followed a 3.0% increase in 1994 over 1993.
Non-interest bearing demand deposits in 1995 averaged $32.3 million, up 5.0%
from $30.8 million in 1994. This $1.5 million increase is primarily
attributable to improvement in the seasonal increases in these funds throughout
the year along with an emphasis of attracting new customer relationships and
selling more services to existing customers. December 31, 1995 non-interest
bearing demand deposits were $33.9 million compared with
40
$33.5 million at year end 1994.
Interest bearing deposits generally consist of interest-bearing checking,
savings deposits, money market accounts, individual retirement accounts (IRAs)
and certificates of deposit (CDs). In 1995 interest bearing deposits averaged
$223.0 million compared with $211.9 million, an increase of 5.2%. Within the
category of interest bearing deposits, savings deposits (including money market
accounts) decreased an average of $1.2 million or 1.4%. During the same
period, time deposits (including CDs and IRAs) grew an average of $12.6 million
or 13.7%. During 1995 the average higher rate environment with lowering rates
toward the end of 1995 caused customers to shift deposit balances to longer
term deposit products such as CDs. In addition a higher market rate time
deposit was offered in early 1995 as a promotional vehicle for entry into the
Green Bay region adding to time balances and causing other deposit products to
shift to this account, thus limiting their growth. Increased competition for
consumer loan deposits and customer awareness of interest rates have limited
the Registrant's core deposit growth in these types of products.
Additional emphasis will be placed on generating additional core deposits in
1996 through competitive pricing of deposit products and an additional full
service branch in the Green Bay market. The Registrant will also attempt to
attract and retain core deposit accounts through new product offerings and
customer service.
Short-Term Borrowings
Short-term borrowings consist of federal funds purchased, securities sold under
agreements to repurchase, and borrowings from the Federal Reserve Bank.
Average 1995 short-term borrowings were $4.4 million compared with $6.0 million
during 1994. This decrease of $1.6 million or 26.2% occurred as a result of
allowing maturing investments to serve as liquidity sources for 1995.
Average short-term borrowings decreased $3.2 million or 35.3% in 1994 from
1993, primarily for the same reason listed above.
Federal funds are purchased from money center banks and correspondent banks at
prevailing overnight interest rates. Securities are sold to bank customers
under repurchase agreements at prevailing market rates. The balances in
securities sold under agreements to repurchase show the most fluctuation as we
saw a decrease of $2.2 million or 63.7%, primarily as a result of a large
customer scaling down their own business line, thereby reducing their
investment balances.
Long-Term Debt
Long-term debt of $475,000 consist of a land contract requiring annual
principal payments of $53,000 plus interest calculated at prime + 1/4%. The
land contract is debt used for the purchase of one of the properties in the
Green Bay region for branch location.
Liquidity
41
Liquidity refers to the ability of the Registrant or its subsidiary banks to
generate adequate amounts of cash to meet its needs for cash. The Registrant
and the Banks have different liquidity considerations.
The Banks meet their cash flow needs by having funding sources available to
them to satisfy the credit needs of customers as well as having available funds
to satisfy deposit withdrawal requests. Liquidity at the Banks are derived
from deposit growth, maturing loans, the maturity of the investment portfolio,
access to other funding sources, marketability of certain of their assets and
strong capital positions.
Maturing investments has been a primary source of liquidity at the Banks. For
1995 net investment activity used $544,000 of net cash outflow during 1995. At
December 31, 1995, the carrying or book value of investment securities maturing
within one year amounted to $4.2 million or 5.6% of the total investment
securities portfolio. This compares to the 17.8% level for investment
securities with one year or less maturities as of December 31, 1994. Within
the investing activities of the cashflow statement, sales and maturities of
investment securities during 1995 totaled $18.3 million. At the end of 1995,
the investment portfolio contained $49.8 million of U.S. Treasury and federal
agency backed securities, representing 65.8% of the total investment portfolio.
These securities tend to be highly marketable and had a market value above
amortized cost at year end 1995 amounting to $37,000.
Deposit growth is another source of liquidity for the Banks. As a financing
activity reflected in 1995 Consolidated Statements of Cash Flows, deposits
provided $19.9 million in net cash inflow during 1995. The Registrant's
overall average deposit base grew $12.7 million or 5.2% during 1995. Deposit
growth, especially in the area of core deposits, is the most stable source of
liquidity for the Banks.
Federal funds sold averaged $4.8 million in 1995 compared to $6.2 million in
1994. Funds provided from the maturity of these assets typically are used as
funding sources for seasonal loan growth, which generally have higher yields.
Being short-term and liquid by nature, federal funds sold generally provide a
yield lower than other earning assets. The Banks have a strategy of
maintaining a sufficient level of liquidity to accommodate fluctuations in
funding sources and will at times take advantage of specific opportunities to
temporarily invest excess funds at narrower than normal rate spreads while
still generating additional interest revenue. At December 31, 1995, the Banks
had federal funds sold amounting to $1.4 million.
The scheduled maturity of loans can provide a source of additional liquidity.
The Banks have $89.0 million of loans maturing within one year, or 42.2% of
total loans.
Within the classification of short-term borrowings at year end 1995, federal
funds and securities sold under agreements to repurchase totaled $1.5 million
compared with $4.1 million at the end of 1994. Federal funds are purchased
from various upstream correspondent banks while securities sold under
agreements to repurchase are obtained from a base of business customers.
The Banks liquidity resources were sufficient in 1995 to fund the growth in
42
loans, maintain a stable investment portfolio and meet other cash needs when
necessary. As of December 31, 1995 estimated funds needed for branch
completion at one of its sites in the Green Bay market amounted to $500,000 for
building and equipment. Subsequent to December 31, 1995, the Bank entered into
a contract to construct a building at its other Green Bay site for $1.1
million.
Management expects that deposit growth will continue to be the primary funding
source of the Banks liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Shorter-term liquidity needs will mainly be derived
from growth in short-term borrowings, maturing federal funds sold and portfolio
investments, loan maturities and access to other funding sources.
The Registrant's (rather than of Banks) primary sources of funds are dividends
and interest, and proceeds from the issuance of equity. The Registrant manages
its liquidity position in order to provide funds necessary to pay dividends to
its shareholders. Dividends received from the Banks totaled $2.9 million in
1995 and will continue to be the Registrant's main source of long-term
liquidity. The dividends from the Banks were sufficient to pay cash dividends
to the Registrant's shareholders of $2.8 million in 1995.
Management believes that, in the current economic environment, the Registrant's
and the Bank's liquidity position are adequate. To management's knowledge,
there are no known trends nor any known demands, commitments, events or
uncertainties that will result or are reasonably likely to result in a material
increase or decrease in the Banks or the Registrant's liquidity.
Interest Rate Sensitivity
Interest rate risk is the exposure to a bank's earnings and capital arising
from changes in future interest rates. All banks assume interest rate risk as
an integral part of normal banking operations. Management of interest rate
risks includes four components: policy statements, risk limits, risk
measurement and reporting procedures. A primary objective of asset/liability
management is the control and monitoring of interest rate risk. The
Registrant's banks each use an Asset/Liability Committee (ALCO) to manage risks
associated with changing interest rates, changing asset and liability mixes,
and their impact on earnings. The sensitivity of net interest income to market
rate changes is evaluated monthly by the ALCO committee.
Interest rate sensitivity analysis can be performed in several different ways.
The traditional method of measuring interest sensitivity is called "gap"
analysis. The 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 sensitivity gap position
43
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.
The following table entitled "Asset and Liability Maturity Repricing Schedule"
indicates that the Registrant is liability sensitive, although management
believes that a range of plus or minus 15% 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. Additionally, the Registrant 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.
44
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
As of December 31, 1995
Within Four to Seven to One Year to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In Thousands)
Earning Assets:
Investment Securities $ 916 $ 1,271 $ 2,056 $17,399 $53,969 $ 75,611
Federal Funds Sold 1,380 1,380
Loans and Leases:
Variable Rate 94,548 0 0 94,548
Fixed Rate 16,540 17,257 31,648 47,206 2,185 114,836
-------- ------- ------- ------- ------- --------
Total Loans and Leases $111,088 $17,257 $31,648 $47,206 $ 2,185 $209,384
-------- ------- ------- ------- ------- --------
Total Earning Assets $113,384 $18,528 $33,704 $64,605 $56,154 $286,375
======== ======= ======= ======= ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 36,945 $ $ $ $ $ 36,945
Saving Deposits 84,448 84,448
Time Deposits 26,935 29,388 26,315 28,978 84 111,700
Borrowed Funds 1,580 0 0 211 212 2,003
-------- -------- -------- ------- ------- --------
Total Interest Bearing Liabilities $149,908 $ 29,388 $ 26,315 $29,189 $ 296 $235,096
======== ======== ======== ======= ======= ========
Interest Sensitivity GAP $(36,524) $(10,860) $ 7,389 $ 35,416 $ 55,858 $ 51,279
(within periods)
Cumulative Interest $(36,524) $(47,384) $(39,995) $ (4,579) $ 51,279
Sensitivity GAP
Ratio of Cumulative Interest -12.75% -16.55% -13.97% -1.60% 17.91%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive 75.64% 63.05% 128.08% 221.33% ----
Asset to Rate Sensitive
Liabilities
Cumulative Ratio of Rate 75.64% 73.57% 80.55% 98.05% 121.81%
Sensitive Assets to Rate
Liabilities
45
Capital Resources
Stockholders' equity at December 31, 1995 increased $4.0 million or 12.5% to
$36.3 million, compared with $32.2 million at 1994 year end. This increase
includes a positive change of $2.2 million to capital in 1995 due to the use of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of
this net change stockholders' equity would have increased $1.9 million or 5.4%
for 1995 over 1994, which compares to an increase of $2.5 million or 8.0% for
1994. With the SFAS 115 adjustment included in 1994 capital, capital decreased
$30,000 or .09% compared to 1993 year end.
The Registrant's capital base (before SFAS 115 change) increased primarily due
to the retention of earnings. The Registrant's dividend reinvestment plan also
assists in capital improvement, as the holders of approximately 36% of
Registrant's Common Stock participate in the plan.
Cash dividends paid in 1995 were $1.14 per share compared with $1.02 in 1994,
including a dividend of $.25 paid in December 1995 and 1994. The Registrant
provided a 11.8% increase in dividends per share in 1995 over 1994 as a result
of above average earnings and strong capital position.
The adequacy of the Registrant's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends upon a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. Management is confident that
because of current capital levels and projected earnings levels, capital levels
are more than adequate to meet the ongoing and future concerns of the
Registrant.
The Federal Reserve Board had established risk-based capital guidelines, which
require banking organizations to maintain certain ratios of "qualifying
capital" to "risk-weighted assets". In general, the guidelines require banks
and bank holding companies to maintain capital based on "risk adjusted" assets
so that categories of assets with potentially higher credit risk will require
more capital backing than assets with lower risk. In addition, bank and bank
holding companies are required to maintain capital to support, in a
risk-adjusted basis certain off-balance sheet activities such as loan
commitments and interest rate swaps. "Qualifying capital" is classified into
two tiers, referred to as Tier 1 and Tier 2 capital. Tier 1 capital consists
of common equity, qualifying perpetual preferred equity and minority interests
in the equity accounts of unconsolidated subsidiaries, less goodwill. Tier 2
capital consists of perpetual preferred equity not qualifying for Tier 1,
allowance for loan losses, mandatory convertible debt, and subordinated and
other qualifying securities. In calculating "risk-weighted assets", certain
risk percentages, as specified by the Federal Reserve Board, applies to
particular categories of both on-and off-balance sheet assets. The Federal
Reserve Board has also adopted a Tier 1 leverage ratio which is defined as Tier
1 capital (as defined under the final risk-based capital guidelines) divided by
average total assets (net of allowance for losses and goodwill). The
guidelines require that banking organizations maintain a minimum ratio of Tier
1 capital to risk-weighted assets of 4%, a minimum ratio of Tier 1 and Tier 2
capital to risk-weighted assets of 8%, and
46
a Tier 1 leverage ratio of 3% (for banks that do not anticipate significant
growth and have well-diversified risk, excellent asset quality, high liquidity,
and good earnings). However, the Federal Reserve Board has not advised the
Registrant of any specific minimum Tier 1 leverage ratio applicable to it.
The following table presents the Registrant's capital ratios as of December 31,
for each of the following two years.
Registrant's Ratios:
1995 1994
---- ----
Average stockholders' equity to average assets 11.58% 11.68%
Stockholders' equity to total assets 11.72% 11.23%
Total Stockholders' Equity $36,275 $32,239
Total Tier 1 Capital 36,099 34,234
Total Tier 2 Capital 38,716 36,768
Risk-Adjusted Assets (including off-balance 216,061 195,564
sheet items)
Tier 1 Capital to risk-weighted assets 16.71% 17.50%
Total Tier 1 and Tier 2 capital to risk-weighted 17.92% 18.75%
assets
Tier 1 leverage ratio 12.09% 12.02%
Regulatory requirements:
Tier 1 capital to risk-weighted assets 4.00% 4.00%
Total Tier 1 and Tier 2 capital to risk-weighted 8.00% 8.00%
assets
Tier 1 leverage ratio 3.00% 3.00%
Management believes that a strong capital position is necessary to take
advantages of opportunities for profitable expansion of product and market
share, and to provide depositor and investor confidence. The Registrant's
capital level is strong, but also must be maintained at an appropriate level to
provide the opportunity for a superior return on the capital employed.
Management actively review capital strategies for the Registrant to ensure that
capital levels are appropriate based on the perceived business risks, further
growth opportunities, industry standards, and regulatory requirements.
The Registrant intends to finance the Four Seasons acquisition through a
combination of internal funds and corporate borrowings. Although The
Registrant had initial discussions with potential lenders, it has not yet
arranged that financing.
Accounting Developments
47
As of December 31, 1993, the Registrant adopted STATEMENTS OF FINANCIAL
ACCOUNTING STANDARDS NO 115 (SFAS 115) "Accounting for Certain Investments of
Debt and Equity Securities". Accordingly, investment securities available for
sale at December 31, 1995 and 1994, are carried at market value. Adjustments
up or down to market value at December 31, 1995 and 1994, 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.
Investment securities classified as available for sale are those securities
which the bank has determined might be sold to manage interest rate risk or in
response to changes in interest rates or other economic factors. While the
Registrant has no current intention of selling these securities, they may not
be held to maturity.
Investment securities classified as held to maturity are those securities which
the bank has both the intent and the ability to hold until maturity. Under
this classification, securities are stated at cost, adjusted for amortization
of premiums and accretion of discounts which are recognized as adjustments to
interest income. 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.
In January 1993 the Registrant adopted STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 109 "Accounting for Income Taxes". The adoption of SFAS 109
changes the method of accounting for income taxes from the deferred method to
an asset and liability approach. Previously the Registrant deferred the past
tax effects of timing differences between financial reporting and taxable
income. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of other
assets and liabilities.
The cumulative effect of the change in accounting for income taxes as of
January 1, 1993 was immaterial to net income.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income reporting in accordance with SFAS 109. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
The Registrant adopted SFAS NO.s 114 and 118, "Accounting by Creditors for
Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" as of January 1, 1995. This statement
provides measurement criteria for impaired loans that fall within its scope. A
loan is considered to be impaired when, based upon current information and
events, it is probable that the bank will be unable to collect all amounts
48
due according to the contractual terms of the loan. The adoption of SFAS NO.'s
114 and 118 did not result in additional provisions for credit losses.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets
to be Disposed Of." The Registrant will adopt SFAS 121 effective January 1,
1996. The impact on the Registrant's financial position and results of
operations is not expected to be material.
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights" which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." This statement requires
that the rights to service mortgage loans for others be recognized as separate
assets regardless of how those rights were acquired. The Registrant will adopt
SFAS 122 effective January 1, 1996. The impact on the Registrant's financial
position and the results of operation is not expected to be material.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for employee stock options or similar equity instruments
granted after December 1994. However, it allows an entity to continue to
account for these plans according to Accounting Principles Board Opinion No. 25
(APB 25), provided pro forma disclosures of net income and earnings per share
are made as if the fair value based method of accounting defined by SFAS No.
123 had been applied. The Registrant anticipates electing to continue to
measure compensation cost related to employee stock purchase options using APB
25, and will provide pro forma disclosures as required in 1996.
PART II - OTHER INFORMATION
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Consolidated Financial Statements and notes related thereto
are set forth on the following pages
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
50
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 53
FINANCIAL STATEMENTS
Consolidated Balance Sheets 54 - 55
Consolidated Statements of Income 56
Consolidated Statements of Changes in Stockholder Equity 57 - 58
Consolidated Statements of Cash Flows 59 - 60
Notes to Consolidated Financial Statements 61 - 84
51
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 1995, 1994, and 1993
52
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Baylake Corp.
Sturgeon Bay, Wisconsin
We have audited the accompanying consolidated balance sheets of Baylake
Corp. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholder equity, and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly
the consolidated financial position of Baylake Corp. and subsidiaries at
December 31, 1995 and 1994, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Madison, Wisconsin
January 30, 1996 SMITH & GESTELAND, LLP
(Except for the last paragraph
of note 19, as to which the date
is March 13, 1996)
53
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED BALANCE SHEETS
December 31
1995 1994
----- ----
(Thousands of dollars)
ASSETS
Cash and due from banks (Note 2) $ 9,887 $ 10,516
Investment securities available for sale
(at market) (Note 3) 63,966 59,033
Investment securities held to maturity (market
value $12,197 and $14,237) (Note 3) 11,645 14,013
Loans (Note 4) 210,230 192,673
Less: Allowance for loan losses 2,617 2,534
-------- --------
Loans, net of allowance for loan losses 207,613 190,139
Federal funds sold 1,380
Bank premises and equipment (Note 5) 8,652 5,930
Accrued interest receivable 2,227 1,995
Income taxes receivable 262 237
Deferred income taxes (Note 13) 726 2,125
Other assets (Note 6) 3,070 3,119
-------- --------
Total assets $309,428 $287,107
======== ========
The accompanying notes are an integral part of the financial statements.
54
1995 1994
---- ----
(Thousands of dollars)
LIABILITIES
Domestic deposits
Noninterest bearing $ 33,887 $ 33,506
Interest bearing
NOW 36,945 34,369
Savings 84,448 87,467
Time, $100,000 and over 11,523 4,900
Other time 100,177 86,875
-------- --------
Total interest bearing 233,093 213,611
-------- --------
Total deposits 266,980 247,117
Short-term borrowings (Note 7)
Federal funds purchased and securities
sold under agreements to repurchase 1,528 4,149
Long-term debt (Note 8) 475
Accrued expenses and other liabilities 3,606 3,062
Dividends payable 564 540
-------- --------
Total liabilities 273, 153 254,868
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
(Notes 10 and 19)
STOCKHOLDER EQUITY
Common stock $5 par value - authorized
10,000,000 shares; issued 2,454,881 shares in
1995; 2,454,081 shares in 1994; outstanding -
2,452,937 shares in 1995; 2,452,137 shares in
1994 12,274 12,270
Additional paid-in capital 5,954 5,941
Retained earnings (Note 9) 17,920 16,072
Treasury stock (49) (49)
Net unrealized gain (loss) on securities available
for sale, net of tax of $77 in 1995 and $1,240
in 1994 176 (1,995)
-------- --------
Total stockholder equity 36,275 32,239
-------- --------
Total liabilities and stockholder equity $309,428 $287,107
======== ========
55
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
1995 1994 1993
---- ---- ----
(Amounts in thousands
except per share data)
Interest income
Interest and fees on loans $19,661 $16,585 $14,979
Interest on investment securities
Taxable 3,298 3,135 3,502
Exempt from federal income taxes 1,247 1,464 1,814
Other interest income 281 261 173
------- ------- -------
Total interest income 24,487 21,445 20,468
------- ------- -------
Interest expense
Interest on deposits 9,840 7,339 7,219
Interest on short-term borrowings 250 217 288
Interest on long-term debt 41
------- ------- -------
Total interest expense 10,131 7,556 7,507
------- ------- -------
Net interest income 14,356 13,889 12,961
Provision for loan losses (Note 4) 250 260 304
------- ------- -------
Net interest income after provision
for loan losses 14,106 13,629 12,657
------- ------- -------
Other income
Fees from fiduciary activities 394 335 351
Fees from loan servicing 531 552 667
Fees for other services to customers 1,041 1,043 1,147
Trading account 36
Securities gains (losses) 4 (25) 156
Other income (Note 15) 611 415 340
------- ------- -------
Total other income 2,581 2,320 2,697
------- ------- -------
Other expenses
Salaries and employee benefits 5,391 5,351 4,774
Occupancy expense 690 660 638
Equipment expense 632 502 459
Data processing and courier 707 598 576
Operation of other real estate (Note 6) (84) (4) 15
Other operating expenses (Note 16) 2,558 2,582 2,307
------- ------- -------
Total other expenses 9,894 9,689 8,769
------- ------- -------
Income before income taxes 6,793 6,260 6,585
Income tax expense (Note 13) 2,149 1,830 1,923
------- ------- -------
NET INCOME $ 4,644 $ 4,430 $ 4,662
======= ======= =======
Earnings per common share (Note 14) $ 1.89 $ 1.81 $ 1.92
The accompanying notes are an integral part of the financial statements.
56
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
For the Years Ended December 31
Net
Unrealized
Gain (Loss)
Additional on Securities
Common Stock Paid-in Available Retained Treasury
---------------
Shares Amount Capital for Sale Earnings Stock
------ ------ ------- ------------- -------- --------
1993 (Amounts in thousands except for shares)
----
Balance -
January 1, 1993
1,498,751 $ 7,493 $5,307 $ $ 15,254 $(44)
Net income for the
year 4,662
Sale of stock 8,432 42 231
Stock dividend -
100% 930,673 4,654 (4,654)
Stock reacquired (6)
Cash dividends
declared (1,233)
Adjustment of market
value of securities
available for sale
at December 31,
1993, net of $316
of deferred income
tax 563
--------- ------- ------ ------- -------- ----
Balance -
December 31, 1993 2,437,856 12,189 5,532 563 14,029 (44)
1994
----
Net income for the
year 4,430
Sale of stock 16,225 81 388
Tax benefit from
exercise of
stock options 21
Cash dividends
declared (2,387)
Treasury stock
acquired (5)
Net changes in
unrealized
gain (loss) on
securities
available for
sale, net of
$1,556 deferred
taxes (2,558)
--------- ------- ------ ------ ------- ----
Balance forward -
December 31,
1994 2,454,081 $12,270 $5,941 $(1,995) $16,072 $(49)
--------- ------- ------ ------- ------- ----
The accompanying notes are an integral part of the financial statements.
57
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
(Continued)
For the Years Ended December 31
Net
Unrealized
Gain (Loss)
Additional on Securities
Common Stock Paid-in Available Retained Treasury
--------------
Shares Amount Capital for Sale Earnings Stock
------ ------ ------- ------------- -------- --------
(Amounts in thousands except for shares)
Balance forwarded -
December 31,
1994 2,454,081 $12,270 $ 5,941 $ (1,995) $16,072 $(49)
1995
- ----
Net income for the
year 4,644
Sale of stock 800 4 7
Tax benefit from
exercise of
stock options 6
Cash dividends
declared (2,796)
Net changes in
unrealized gain
(loss) on
securities
available for
sale, net of
$1,318 deferred
taxes 2,171
--------- ------- ------- ------ ------- ----
2,454,881 $12,274 $ 5,954 $ 176 $17,920 $(49)
======= ====== ====== ======= ====
Less treasury
stock 1,944
---------
2,452,937
=========
The accompanying notes are an integral part of the financial statements.
58
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
1995 1994 1993
---- ---- ----
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received from:
Loans $ 19,239 $ 16,298 $ 14,928
Investments 4,961 5,192 6,166
Fees and service charges 2,505 2,075 2,513
Proceeds from sale of trading securities 1,070
Interest paid to depositors (9,468) (7,312) (7,239)
Interest paid to others (250) (216) (288)
Cash paid to suppliers and employees (9,118) (8,807) (7,943)
Income taxes paid (2,091) (2,425) (3,111)
-------- -------- --------
Net cash provided by operating activities 5,778 4,805 6,096
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 5,876 9,706 22,474
Proceeds from sale of other assets 85 324
Principal payments received on investments 12,426 28,498 38,742
Purchase of investments (18,846) (30,160) (57,066)
Proceeds from sale of other real estate owned 415 287 96
Loans made to customers in excess of
principal collected (18,248) (12,248) (18,927)
Capital expenditures (2,401) (1,042) (719)
Purchase of annuity (634)
Investment in service center (196) (66)
-------- -------- --------
Net cash used in investing activities (20,889) (5,335) (15,400)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts (63) 5,131 9,925
Net increase (decrease) in short-term
borrowings (2,622) 987 (3,166)
Net increase (decrease) in time deposits 19,926 (3,588) 1,391
Proceeds from issuance of stock 11 34
Stock reacquired (61) (6)
Dividends paid (2,770) (1,745) (876)
-------- -------- --------
Net cash provided by financing activities 14,482 758 7,268
-------- -------- --------
Net increase (decrease) in cash and
due from banks (629) 228 (2,036)
Cash and due from banks, beginning 10,516 10,288 12,324
-------- -------- --------
Cash and due from banks, ending $ 9,887 $ 10,516 $ 10,288
======== ======== ========
The accompanying notes are an integral part of the financial statements.
59
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 4,644 $ 4,430 $ 4,662
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 560 497 463
Provision for losses on loans and
real estate owned 250 260 304
Amortization of premium on investments 268 290 444
Accretion of discount on investments (178) (142) (136)
Cash surrender value increase (8) (86) (91)
Net gain from disposal of other
real estate (149) (47) (18)
(Gain) loss on sale of investment
securities (4) 25 (156)
(Gain) loss on sale of other assets 41 (145)
Equity in income of service center (62) (30) (2)
Deferred compensation 115 650 79
Gain on trading account (36)
Market value adjustment - security (18)
Deferred taxes 82 (307) (395)
Changes in assets and liabilities:
Trading securities 1,070
Interest receivable (232) (163) 405
Prepaids and other assets (69) 31 (16)
Unearned income (145) 49 29
Interest payable 412 27 (21)
Taxes receivable/payable (25) (287) (792)
Other liabilities 278 (247) 321
-------- -------- -------
Net cash provided by operating activities $ 5,778 $ 4,805 $ 6,096
======= ======== =======
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of property in lieu of
foreclosure $ 671 $ 270 $
Dividends reinvested in common stock 701 491 273
Land acquired on land contract 475
Two-for-one stock split in the form of a
100% stock dividend 4,654
60
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements of Baylake Corp. (the company)
include the accounts of the company, its wholly-owned subsidiaries,
Baylake Bank and Kewaunee County Banc-Shares, Inc., and their wholly-
owned subsidiaries; Bank of Sturgeon Bay Building Corporation,
Cornerstone Financial, Inc., Baylake Investments, Inc., Baylake
Insurance Agency, Inc., Baylake Bank-Kewaunee, BBK Investments, Inc.,
Karsten Resources, Inc., and Lufter Insurance Agency, Inc. All
significant intercompany items and transactions have been eliminated.
The accompanying prior period financial statements have been restated
for the acquisition described in Note 11, which has been accounted for
as a pooling of interests. For purposes of comparability, certain
prior year amounts have been reclassified to conform with current year
presentation.
Baylake Bank owns a 49% interest in United Financial Services, Inc.,
a data processing service. The investment in this entity is carried
under the equity method of accounting and the pro rata share of its
income (loss) is included in other revenue. Amounts paid to United
Financial Services, Inc. for data processing services for the banks
were $464,000, $439,000, and $353,000 in 1995, 1994, and 1993,
respectively.
The banks (Baylake Bank and Baylake Bank-Kewaunee) grant commercial,
mortgage, and installment loans to customers substantially all of whom
are located in the Door, Brown, and Kewaunee Counties of Wisconsin.
Although the banks have diversified portfolios, a substantial portion
of their debtors' ability to honor their contracts is dependent upon
the economic condition of the local industrial businesses, and
commercial, agricultural and tourism industries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Trading securities are carried at market value. Gains and losses on
sales and changes in market values are included in other income.
Investment securities classified as held to maturity are those
securities which the bank has both the intent and the ability to hold
until maturity. Under this classification, securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts
which are recognized as adjustments to interest income. 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.
61
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Investment securities classified as available for sale are those
securities which the bank has determined might be sold to manage
interest rate risk or in response to changes in interest rates or
other economic factors. While the company has no current intention
of selling these securities, they may not be held to maturity.
Investment securities available for sale 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.
Loans are stated at face value, net of deferred loan origination fees
(net of costs) and the allowance for loan losses. Interest on loans
is calculated using the simple interest method on daily balances of
the principal amount outstanding.
Loan origination fees and related costs are deferred and the net
deferred revenue is amortized over the term of the loans using the
effective interest rate method.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current domestic and international economic conditions,
volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan
losses charged against income.
The company adopted SFAS No.'s 114 and 118, "Accounting by Creditors
for Impairment of a Loan" and "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" as of January 1, 1995.
The adoption of SFAS 114 did not result in additional provisions for
credit losses.
The accrual of interest income is discontinued when a loan becomes 90
days past due as to principal or interest. When interest accruals
are discontinued, interest credited to income in the current year is
reversed, and interest accrued in the prior year is charged to the
allowance for loan losses. If collectibility is in doubt, cash
receipts on nonaccrual loans are used to reduce principal rather than
recorded as interest income.
62
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to operating expense over the estimated useful
lives of the assets, using the straight-line and accelerated methods.
Other real estate, which is included in other assets, comprises
properties acquired through a foreclosure proceeding or acceptance
of a deed in lieu of foreclosure. These properties are carried at the
lower of cost or fair value, minus estimated costs to sell, based on
appraised value at the date acquired. Loan losses arising from the
acquisition of such property are charged against the allowance for
loan losses. An allowance for losses on other real estate is
maintained for subsequent valuation adjustments on a specific
property basis.
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
the allowance for loan losses, deferred loan origination fees,
deferred compensation, mortgage loan servicing, market value
adjustments of securities, and depreciation for financial and income
tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled.
The company and its subsidiaries file a consolidated federal income
tax return. The subsidiaries provide for income taxes on a
separate-return basis, and remit to the company amounts determined to
be currently payable, if any.
Primary earnings per share are based on the weighted average number
of shares outstanding during each year.
For purposes of the statement of cash flows, the company considers
cash and due from banks as cash and cash equivalents.
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The company will adopt
SFAS 121 effective January 1, 1996. The impact on the company's
financial position and results of operations is not expected to be
material.
63
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights" which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." This statement requires that the rights
to service mortgage loans for others be recognized as separate assets
regardless of how those rights were acquired. The company will adopt
SFAS 122 effective January 1, 1996. The impact on the company's
financial position and results of operations is not expected to be
material.
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation", which defines a fair value based method
of accounting for employee stock options or similar equity
instruments granted after December 31, 1994. However, it also allows
an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25 (APB 25), provided pro
forma disclosures of net income and earnings per share are made as if
the fair value based method of accounting defined by SFAS No. 123
had been applied. The company anticipates electing to continue to
measure compensation cost related to employee stock purchase options
using APB 25, and will provide pro forma disclosures as required in
1996.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The subsidiary banks are required to maintain average reserve balances
by the Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1995, was approximately
$1,654,000.
64
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as
follows:
December 31, 1995
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ----------- ---------
(Thousands of dollars)
Available For Sale
U.S. Treasury and
other U.S.
government agencies $11,177 $ 168 $ 24 $11,321
Obligations of states
and political
subdivisions 13,105 247 30 13,322
Mortgage-backed
securities 38,537 282 389 38,430
Other 893 893
------- -------- -------- -------
$63,712 $ 697 $ 443 $63,966
======= ======== ======== =======
Held to Maturity
----------------
Obligations of
states and
political
subdivisions $11,237 $ 565 $ 13 $11,789
Other 408 408
------- ------- -------- -------
$11,645 $ 565 $ 13 $12,197
======= ======= ======== =======
65
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
December 31, 1994
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- --------- ---------- ---------
(Thousands of dollars)
Available For Sale
------------------
U.S. Treasury and
other U.S.
government agencies
$ 8,474 $ $ 287 $ 8,187
Obligations of states
and political
subdivisions 7,097 18 373 6,742
Mortgage-backed
securities 43,638 73 2,572 41,139
Other 3,059 94 2,965
------- ------- ------- -------
$62,268 $ 91 $ 3,326 $59,033
======= ======= ======= =======
Held to Maturity
----------------
Obligations of states
and political
subdivisions $13,605 $ 483 $ 259 $13,829
Other 408 408
------- ------- ------- -------
$14,013 $ 483 $ 259 $14,237
======= ======= ======= =======
Results of sales of securities were as follows:
Held for
Investment Available for Sale
---------- --------------------------------
1995 1995 1994 1993
---------- ---- ---- ----
Proceeds $504 $5,878 $9,706 $22,474
Realized gains 4 34 103 337
Realized losses 34 128 181
A security that had been designated as held to maturity, having an amortized
cost basis of $500,000, was called by the issuer with a call premium being
received.
66
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
The amortized cost and estimated market value of investments at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Available for Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
(Thousands of dollars)
Due in one year or less $ 1,763 $ 1,765 $ 2,407 $ 2,441
Due after one year
through five years 10,933 11,086 6,314 6,711
Due after five years
through ten years 7,050 7,128 1,714 1,753
Due after ten years 5,429 5,557 1,210 1,292
------- ------- ------- -------
25,175 25,536 11,645 12,197
Mortgage-backed
securities 38,537 38,430
------- ------- ------- -------
$63,712 $63,966 $11,645 $12,197
======= ======= ======= =======
Securities pledged to secure public and trust deposits and borrowed
funds had a carrying value of $6,780,000 and a market value of
$6,706,000 at December 31, 1995, and a carrying value of $9,829,000
and a market value of $9,229,000 at December 31, 1994.
NOTE 4 - LOANS
Major classifications of loans are as follows:
December 31, December 31,
1995 1994
------------ ------------
(Thousands of dollars)
Commercial, financial, and agricultural $129,712 $117,510
Real estate - construction 6,378 5,881
Real estate - mortgage 62,271 53,464
Installment 12,522 16,616
-------- --------
210,883 193,471
Less: Deferred loan origination fees,
net of costs (653) (798)
-------- --------
Net loans $210,230 $192,673
======== ========
67
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
Loans available for sale were $639,000 at December 31, 1995. There
were none at December 31, 1994.
Certain directors and executive officers of the company and the
subsidiary banks, including their immediate families, companies in
which they are principal owners, and trusts in which they are
involved, were loan customers of the subsidiaries during 1995 and
1994. Such loans were made in the ordinary course of business at
normal credit terms, including interest rate and collateralization,
and do not represent more than a normal risk of collection. The
aggregate dollar amount of these loans was $8,387,000 and $7,639,000
at December 31, 1995 and 1994, respectively. During 1995, $2,995,000
of new loans were made and repayments totalled $2,247,000.
Loans on which the accrual of interest has been discontinued or
reduced amounted to $846,000 and $1,536,000 at December 31, 1995 and
1994, respectively. If these loans had been current throughout their
terms, interest income for the nonaccrual period would have
approximated $74,000 and $117,000 for 1995 and 1994, respectively.
Interest income which has been recorded amounted to $34,000 and
$58,000 for 1995 and 1994, respectively, for these nonaccrual loans.
Changes in the allowance for loan losses were as follows:
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Balance at beginning of year $2,534 $2,434 $2,253
Provision charged to operations 250 260 304
Recoveries 41 111 57
Loans charged off (208) (271) (180)
------ ----- ------
Balance at end of year $2,617 $2,534 $2,434
====== ====== ======
The provision for credit losses charged to expense is based upon each
bank's credit loss experience and an evaluation of potential losses
in the current loan portfolio, including the evaluation of impaired
loans under SFAS 114. A loan is considered to be impaired when,
based upon current information and events, it is probable that the
bank will be unable to collect all amounts due according to the
contractual terms of the loan.
68
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
The following is a summary of activity in investment in loans that
have declined in value and related interest income and allowance for
credit losses accounts:
1995
----
(Thousands of Dollars)
Impaired loans at December 31 $3,904
Impaired loans at December 31 allowed for $2,154
Average impaired loans during the period $2,709
Interest income recognized while loans
impaired $ 100
Interest income using a cash-basis method $ 120
Allowance as of January 1 (date of adoption) $ 239
Additions during the year 131
Recoveries of amounts previously allowed for (131)
------
Balance at December 31 $ 239
======
NOTE 5 - BANK PREMISES AND EQUIPMENT
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Land $ 2,163 $ 1,069 $ 845
Buildings and improvements 6,968 5,686 5,431
Equipment 4,925 4,132 3,710
-------- ------- -------
14,056 10,887 9,986
Less accumulated depreciation 5,404 4,957 4,604
-------- ------- ------
$ 8,652 $ 5,930 $5,382
-------- ------- ------
Depreciation expense $ 553 $ 461 $ 421
======== ======= ======
69
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - OTHER REAL ESTATE
Other real estate ($378,000 in 1995, $512,000 in 1994, and $496,000
in 1993, net of an allowance for other real estate losses of
$378,000 in 1995, $392,000 in 1994, and $406,000 in 1993) is included
in other assets.
Net cost of operation of other real estate is summarized below:
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Loss on disposition of properties
and other costs $ 66 $ 45 $ 41
Gain on disposition of properties
and expense recoveries (150) (49) (26)
----- ----- -----
Net costs (gains) $ (84) $ (4) $ 15
===== ===== =====
Changes in the allowance for losses on other real estate were as
follows:
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Balance at beginning of year $ 392 $ 406 $ 436
Provisions charged to cost of
operation of other real estate
Amounts related to properties disposed (14) (14) (30)
----- ----- -----
Balance at end of year $ 378 $ 392 $ 406
===== ===== =====
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Federal funds purchased $ 774 $1,634 $
Securities sold under agreements
to repurchase 754 2,515 3,162
------ ------ ------
$1,528 $4,149 $3,162
====== ====== ======
70
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SHORT-TERM BORROWINGS (continued)
The average outstanding balance of total short-term borrowings
amounted to $4,410,000 in 1995 and $5,974,000 in 1994. The
weighted- average interest rate on these borrowings was 5.7% for 1995
and 3.6% for 1994. The average outstanding balance is determined on
a daily average basis and the weighted-average interest rate is
calculated by dividing the actual interest paid on all short-term
borrowings by the average balance for the year.
The maximum amount outstanding at any month end was $10,595,000 during
1995 and $17,133,000 during 1994.
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
Land contract requiring annual principal payments
of $53,000 plus interest calculated at prime + 1/4%. $475,000
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS
Cash dividends per share of the company and its acquired subsidiary
to outside shareholders were as follows:
1995 1994 1993
---- ---- ----
Baylake Corp. $1.14 $1.02 $ .58
Kewaunee County Banc-Shares,
Inc. 2.50 4.00
Equivalent shares after pooling 1.14 .98 .51
Dividends per equivalent shares after pooling is calculated as if the
pooling was in effect for the entire year of each year reported.
Conversion to equivalent shares was made at the agreed upon exchange
ratio of 15.69 shares of Baylake Corp. stock per share of Kewaunee
County Banc-Shares, Inc., stock.
As of December 31, 1995, undistributed earnings of the subsidiaries,
included in consolidated retained earnings, available for distribution
to the company as dividends without prior approval of regulatory
authorities was $17,403,000.
71
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
Federal Reserve Board standards require banks and bank holding
companies to maintain capital based on "risk-adjusted" assets. At
December 31, 1995, all banks were required to meet a minimum ratio of
8% of qualifying total capital to risk-adjusted total assets and a
ratio of at least 4% of Tier 1 capital to risk- adjusted assets. The
minimum leverage ratio requirement is to maintain Tier 1 capital of
at least 3% of average quarterly assets.
The Tier 1 capital, total (Tier 1 and Tier 2) capital and leverage
ratios for the company at December 31, 1995, were 16.7%, 17.9%, and
12.1%, respectively.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The banks are parties to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
their customers. These financial instruments include commitments to
extend credit, standby letters of credit, and financial guarantees.
The banks' exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit and financial guarantees written
is represented by the contract or notional amount of those
instruments. The banks use the same credit policies in making
commitments and conditional obligations as they do for on-
balance-sheet instruments.
Contract or
Notional Amount
-------------------
1995 1994
-------- --------
(Thousands of dollars)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $48,950 $45,265
Standby letters of credit and
financial guarantees written 912 1,155
72
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The banks evaluate each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained if deemed
necessary by the banks upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the banks to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. The
guarantees expire in decreasing amounts through 1999, with the
majority expiring within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The banks do not require
collateral as support for the commitments. Collateral is obtained
based on loan policies upon use of a commitment by a customer.
NOTE 11 - ACQUISITION
On August 31, 1994, Baylake Corp. acquired all of the outstanding
common shares of Kewaunee County Banc-Shares, Inc. (KCB), of
Kewaunee, Wisconsin, in exchange for 574,756 shares of Baylake Corp.
common stock. At December 31, 1993, KCB had total assets of
approximately $61 million.
The acquisition has been accounted for as a pooling of interests.
The following table shows the effect of their results of operations
for the periods prior to combination:
73
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - ACQUISITION (continued)
Kewaunee
County
Baylake Corp. Banc-Shares Combined
------------- ----------- --------
(Thousands of dollars)
1994 Total revenue $20,466 $3,299 $23,765
Net interest income 12,237 1,661 13,898
Net income 3,623 807 4,430
1993 Total revenue 17,929 5,236 23,165
Net interest income 10,443 2,518 12,961
Net income 3,703 959 4,662
Kewaunee County Banc-Shares 1994 amounts are through the August 31,
1994, date of combination. Baylake Corp. 1994 amounts include the
consolidated amounts from Kewaunee County Banc-Shares for the period
of September 1, 1994, to December 31, 1994.
Merger expenses of $262,000 related to the acquisition were charged
to expense during 1994. The after-tax impact of these expenses on
earnings per share was $.09.
NOTE 12 - PENSION PLAN
The subsidiaries have 401(k) Profit Sharing Plans covering all
employees who qualify as to age and length of service. A defined
contribution pension plan covering all employees who qualified as to
age and length of service also existed through December 31, 1994, for
employees of Kewaunee County Banc-Shares, Inc. The plan was
terminated at December 31, 1994, and all participants became fully
vested. The employer contributions paid and expensed under all plans
for 1995, 1994, and 1993, totalled $341,000, $223,000, and $216,000,
respectively.
74
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PENSION PLAN (continued)
Certain officers and directors of the company and its subsidiaries are
covered by nonqualified deferred compensation plans. Payments to be
made under these plans are accrued over the anticipated years of
service of the individuals covered. Due to the acquisition discussed
in Note 12, certain individuals became fully vested during 1994.
Amounts charged to expense were $193,000 in 1995, $677,000 in 1994,
and $137,000 in 1993.
NOTE 13 - INCOME TAX EXPENSE
Effective January 1, 1993, the company changed its method of
accounting for income taxes from the deferred method to the
liability method required by STATEMENT OF FINANCIAL ACCOUNTING
Standards No. 109 (SFAS 109), "Accounting for Income Taxes." As
permitted under the new rule, prior years' financial statements have
not been restated. The cumulative effect of adopting this statement
as of January 1, 1993, was immaterial to net income.
The following is a summary of the components of the provisions for
income taxes and deferred income taxes, and a reconciliation of the
U.S. statutory income tax rate to the effective income tax rate.
Provision for income taxes:
Liability Liability Deferred
Method Method Method
1995 1994 1993
--------- --------- --------
(Thousands of dollars)
Taxes currently payable
Federal $1,753 $1,755 $1,762
State 313 403 412
------ ------ ------
2,066 2,158 2,174
------ ------ ------
Deferred income taxes
Federal 71 (283) (215)
State 12 (45) (36)
------ ------ ------
83 (328) (251)
------ ------ ------
Total expense $2,149 $1,830 $1,923
------ ------ ------
Income tax expense (benefit) associated with realized securities gains
(losses) was $2,000, $(10,000), and $76,000 for 1995, 1994 and 1993,
respectively.
75
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAX EXPENSE (continued)
Provisions for deferred income taxes:
Liability Liability Deferred
Method Method Method
1995 1994 1993
--------- -------- --------
(Thousands of dollars)
Deferred loan origination
fees $ 57 $ (20) $ (12)
Depreciation 48 39 35
Provision for loan and other
real estate losses (33) (66) (72)
Mortgage loan servicing (10) (55) (156)
Provision for deferred
compensation 64 (255) (43)
Other (43) 29 (3)
------ ------ ------
$ 83 $ (328) $ (251)
====== ====== ======
The provision for income taxes differs from the amount of income tax
determined by applying the statutory federal income tax rate to
pretax income as a result of the following differences:
Liability Liability Deferred
Method Method Method
1995 1994 1993
--------- --------- --------
(Thousands of dollars)
Income tax based on
statutory rate $2,310 $2,128 $2,239
Environmental tax 5 5 4
State income taxes net of
federal tax benefit 214 228 248
------ ------ ------
2,529 2,361 2,491
Effect of tax-exempt interest
income (345) (458) (565)
Other (35) (73) (3)
------ ------ ------
Provision based on
effective tax rates $2,149 $1,830 $1,923
====== ====== ======
76
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAX EXPENSE (continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance has been recognized to offset the
related deferred tax assets due to the uncertainty of realizing tax
benefits of a portion of loan loss and mortgage servicing
differences. The following is a summary of the significant
components of the company's deferred tax assets and liabilities as
of December 31, 1995 and 1994:
1995 1994
---- ----
(Thousands of dollars)
Deferred tax assets
Allowance for loan losses $ 640 $ 608
Deferred loan origination fees 258 315
Deferred compensation 575 639
Mortgage loan servicing 425 417
Nonaccrual loans 46 39
Accrued vacation pay 40 34
Stock option accrued compensation 12 7
Other
Market value adjustment on securities
available for sale 1,240
------ ------
Gross deferred tax assets 1,996 3,299
Valuation allowance for deferred
tax assets (550) (550)
------ ------
Net deferred tax assets 1,446 2,749
------ ------
Deferred tax liabilities
Depreciation 632 584
Market value adjustment on securities
available for sale 77
Other 11 40
------ ------
Total deferred tax liabilities 720 624
------ ------
Net deferred asset $ 726 $2,125
====== ======
77
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - EARNINGS AND DIVIDENDS PER SHARE
Earnings and dividends per share are based on the weighted average
number of shares outstanding for the year as follows: 2,452,687 for
1995, 2,445,350 for 1994, and 2,432,809 for 1993. The dilutive effect
of stock options is not included since it would reduce earnings per
share by less than 3% and is therefore, not material.
All per share amounts have been retroactively adjusted to give effect
to the pooling of interests in 1994 and the 100% stock dividend
declared in August 1993.
NOTE 15 - OTHER INCOME
Other income is comprised of no amounts which are individually
greater than 1% of total interest income and total other income.
NOTE 16 - OTHER OPERATING EXPENSES
1995 1994 1993
---- ---- ----
(Thousands of dollars)
FDIC assessment $ 292 $ 544 $ 524
Other (individually, less than 1%
of total income and total other
income) 2,266 2,038 1,783
------ ------ ------
$2,558 $2,582 $2,307
====== ====== ======
NOTE 17 - STOCK OPTION PLAN
The company has a non-qualified stock option plan under which certain
officers and key salaried employees may purchase shares of the
company's stock at an established exercise price. Unless earlier
terminated, these options will expire ten years from the date of
grant. The options become exercisable 20% per year, commencing one
year from date of grant.
78
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Activity in the plan for 1995, 1994, and 1993 is summarized as
follows:
1995 1994 1993
-------------------------- ------------------------- ---------------------
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
----------- ------------- ---------- ------------- ---------- --------
Outstanding at
beginning of
year 67,600 $14.00 - 28.50 34,000 $ 14.00 $
Granted 36,000 34.50 36,000 28.50 34,000 14.00
Exercised (800) 14.00 (2,400) 14.00
------- ------ ------
Outstanding at
end of year 102,800 14.00 - 34.50 67,600 14.00 - 28.50 34,000 14.00
======= ====== ======
Exercisable at
end of year 17,600 14.00 - 28.50 4,400 14.00 34,000 14.00
======= ====== ======
In January 1996, options to purchase an additional 36,000 shares
were granted. The exercise price was established at 100% of the
fair market value of the stock on the date of grant, or $26.75 per
share.
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Provided below is the information required by STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 107, "Disclosures about Fair Value
of Financial Instruments" (SFAS 107). These amounts represent
estimates of fair values at a point in time. Significant estimates
regarding economic conditions, loss experience, risk characteristics
associated with particular financial instruments and other factors
were used for the purposes of this disclosure. These estimates are
subjective in nature and involve matters of judgment. Therefore, they
cannot be determined with precision. Changes in the assumptions
could have a material impact on the amounts estimated.
Many of the company's financial instruments lack an available
trading market. Furthermore, most of the financial instruments are
intended to be held to maturity. Therefore, it is not probable that
the fair values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of
assets and liabilities that are not considered financial instruments.
In addition, the significant value of long-term relationships with
depositors and other customers are not reflected.
79
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
A. CASH AND DUE FROM BANKS
These instruments are, by definition, short-term and do not present
any unanticipated credit issues. Therefore, the carrying amount is a
reasonable estimate of fair value.
B. INVESTMENT SECURITIES
The estimated fair values of securities are provided in Note 3 to the
financial statements. These are based on quoted market prices, when
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
C. LOANS
The carrying amount (total outstandings excluding unearned income and
reserve for loan losses) and estimated fair value of loans outstanding
at December 31, 1995, are $210,230,000 and $211,531,000, respectively.
In order to determine the fair values for loans, the loan portfolio was
segmented based on loan type, credit quality and repricing
characteristics. For certain variable rate loans with no significant
credit concerns and frequent repricings, estimated fair values are
based on the carrying values. The fair values of other loans are
estimated using discounted cash flow analyses. The discount rates used
in these analyses are generally based on origination rates for similar
loans of comparable credit quality. However, where appropriate,
adjustments have been made so as to more accurately reflect market
rates. Maturity estimates are based on historical experience with
prepayments and current economic and lending conditions.
D. DEPOSITS
The carrying amount and estimated fair value of deposits outstanding at
December 31, 1995, are $266,980,000 and $267,433,000, respectively.
Under SFAS 107, the fair value of deposits with no stated maturity is
equal to the amount payable on demand. Therefore, the fair value
estimates for these products do not reflect the benefits that the
company receives from the low-cost, long-term funding they provide.
These benefits are significant. The estimated fair values of fixed rate
time deposits are based on discounted cash flow analyses. The discount
rates used in these analyses are based on market rates currently offered
for deposits of
80
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
similar remaining maturities. Because of the repricing
characteristics and the competitive nature of the company's rates
offered on variable rate time deposits, carrying amount is a
reasonable estimate of the fair value.
E. SHORT-TERM BORROWINGS
Short-term borrowings reprice frequently and therefore the carrying
amount is a reasonable estimate of fair value.
F. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND
LETTERS OF CREDIT
Pricing of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of
funding, and compensating balance and other covenants or
requirements. Loan commitments generally have fixed expiration
dates, are variable rate and contain termination and other clauses
which provide for relief from funding in the event that there is a
significant deterioration in the credit quality of the customer.
Many loan commitments are expected to, and typically do, expire
without being drawn upon. The carrying amounts are reasonable
estimates of the fair value of these financial instruments.
Carrying amounts are comprised of the unamortized fee income and,
where necessary, reserves for any expected credit losses from
these financial instruments.
NOTE 19 - COMMITMENTS AND CONTINGENT LIABILITY
One of the subsidiaries of the company is a defendant in a legal
action. Management believes that the action is without merit and
that the ultimate liability, if any, resulting from it will not
materially affect the company's financial statements.
Subsequent to December 31, 1995, the company entered into a contract
to construct a building for $1,055,000.
On March 13, 1996, the company entered into an agreement and plan of
acquisition to purchase all of the stock of a one bank holding
company in Wisconsin. The plan is subject to approval of regulatory
agencies and the boards of directors of each company. The purchase
price is $13,800,000 plus net ordinary income of the bank for 1996 up
to the effective date of the transaction.
81
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
BAYLAKE CORP.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31
1995 1994
---- ----
(Thousands of dollars)
ASSETS
Cash in bank $ 2,771 $ 1,994
Dividend receivable 539
Receivable from subsidiary 6 23
Investment in subsidiaries 34,080 30,222
------- -------
Total assets $36,857 $32,778
======= =======
LIABILITIES AND STOCKHOLDER
EQUITY
Liabilities
Dividends payable $ 564 $ 539
Accrued expenses 18
------- -------
Total liabilities 582 539
Stockholder equity 36,275 32,239
------- -------
Total liabilities and
stockholder equity $36,857 $32,778
======= =======
82
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF INCOME
December 31
1995 1994 1993
----- ---- ----
(Thousands of dollars)
Income
Dividends from subsidiaries $2,923 $2,554 $1,087
Interest income 85 51 38
------ ------ ------
Total income 3,008 2,605 1,125
------ ------ ------
Expenses
Other 34 171 30
Income taxes 18 (2) 3
------ ------ ------
Total expenses 52 169 33
------ ------ ------
Income before equity in
undistributed net
income of subsidiaries 2,956 2,436 1,092
Equity in undistributed net
income of subsidiaries 1,688 1,994 3,570
------ ------ ------
NET INCOME $4,644 $4,430 $4,662
====== ====== ======
83
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
December 31
1995 1994 1993
----- ---- ----
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (34) $ (172) $ (30)
Interest received 85 51 38
Dividends received 3,462 2,294 1,057
Income taxes paid 23 (3) (8)
------- ------ ------
Net cash provided by operating
activities 3,536 2,170 1,057
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,770) (1,544) (784)
Issuance of stock 11 34
Repurchase of stock (61)
------- ------ --------
Net cash used by financing
activities (2,759) (1,571) (784)
------- ------- -------
Net increase in cash 777 599 273
Cash at beginning of year 1,994 1,395 1,122
------- ------- -------
Cash at end of year $ 2,771 $1,994 $ 1,395
======= ======= =======
Reconciliation of net income to net
cash provided by operating
activities:
Net income $ 4,644 $ 4,430 $ 4,662
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Undistributed earnings
of subsidiary (1,688) (1,994) (3,570)
Change in receivable
from subsidiary 23 (3)
Change in dividends
receivable 539 (260) (30)
Change in accrued expenses 18 (3) (5)
------ ------ ------
Net cash provided by operating
activities $3,536 $2,170 $1,057
====== ====== ======
SUPPLEMENTAL SCHEDULE OF
NONCASH FINANCING ACTIVITIES:
Dividends reinvested in common
stock $ 701 $ 491 $ 273
84
PART III
The following items are incorporated by reference to the Registrant's Proxy
Statement to be filed pursuant to Regulation 14A for its 1996 Annual Meeting of
Shareholders (the "1996" Proxy Statement").
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated herein by reference to
"Baylake Corp. - Management" and "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act" under "Matters to be Considered at the
Baylake Annual Meeting" in the 1996 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated herein by reference to
"Director Fees and Benefits", "Executive Compensation", "Board of
Directors/Compensation Committee Report on Management Compensation",
"Compensation Committee Interlocks and Insider Participation" and "Performance
Graph" under "Matters to be Considered at the Baylake Annual Meeting" in the
1996 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated herein by reference to
"Matters to be Considered at the Baylake Annual Meeting - Ownership of Baylake
Common" in the 1996 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is incorporated herein by reference to
"Matters to be Considered at Baylake Annual Meeting - Election of certain
directors whose terms will expire."
85
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) See "Table of Contents" immediately following Item 9
(b) See the following "Exhibit Index"
(c) No reports on Form 8-K.
BAYLAKE CORP.
(the "Registrant")
EXHIBIT INDEX
TO
1995 ANNUAL REPORT ON FORM 10-K
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
------- ----------- ------------------- --------
2.1 Agreement and Plan of Acquisition X
dated March 13, 1996 between the
Registrant and Four Seasons of
Wisconsin Corp.
2.2 Agreement and Plan of Reorganization Exhibit 2.1 to Registrant's
dated as of February 18, 1994 Annual Report on Form 10-K
among the Registrant, Kewaunee for the year ended
Acquisition Corp. ("KAC") and December 31, 1993
Kewaunee County Banc-Shares, Inc. ("1993 10-K")
("KCB")
2.3 Merger Agreement dated as of March 30, Exhibit 2.2 to 1993 10-K
1994 among the Registrant, KAC and KCB
3.1 Articles of Incorporation, as amended Exhibit 3.1 to 1993 10-K
3.2 Bylaws, as amended Exhibit 3.2 to 1993 10-K
10.1** Registrant's 1993 Stock Option Plan Exhibit A to Registrant's Proxy
Statement for 1993 Annual
Meeting of Shareholders
10.2** Registrant's Pay-for-Performance Description thereof under
(bonus) Program "Board of Directors/Compensation
Committee Report on Management
Compensation" in Registrant's
Proxy Statement for the 1994
Annual Meeting of Shareholders
10.3** Registrant's Deferred Compensation Exhibit 10.3 to 1993 10-K
Agreement with Thomas L. Herlache
10.4** Registrant's Agreement for Early Exhibit 10.4 to 1993 10-K
Retirement with Ronald D. Berg
10.5** Deferred Compensation and Salary Exhibit 10.4 to the Registrant's
Continuation Agreement with Richard Registration Statement on Form
A. Braun S-4, No. 33-81184
21 List of Subsidiaries X
23 Consent of Smith & Gesteland X
24 Power of Attorney (contained on the X
Signature Page)
27 Financial Data Schedule X
* Excluding schedules and exhibits, which are identified in such document. The
Registrant agrees to furnish supplementally a copy of any omitted schedule
or exhibit to the Commission upon request.
** Designates management contracts or compensatory plans or arrangements filed
as exhibits.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: Steven D. Jennerjohn
-----------------------------
Steven D. Jennerjohn
Treasurer
Date: March 25, 1996
-----------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Thomas L. Herlache, Steven D. Jennerjohn and Daniel F.
Maggle, and each of them, his true lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him and his name, place and
stead, in any and all capacities, to sign and all amendments (including
post-effective amendments) to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, the Securities
and Exchange Commission and any state securities commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
reports has been signed by the following persons in the capacities and on these
dates indicated.*
Thomas L. Herlache L. George Evenson
----------------------------- ----------------------------
Thomas L. Herlache L. George Evenson, Director
President, Chief Executive Officer and
Director (Principal Executive Officer)
Steven D. Jennerjohn Glenn Miller
----------------------------- ----------------------------
Steven D. Jennerjohn Glenn Miller, Director
Treasurer
(Principal Financial and Accounting Officer)
Ruth Nelson
---------------------------- ----------------------------
Ronald D. Berg, Director Ruth Nelson, Director
Marie Bertschinger William C. Parsons
---------------------------- ----------------------------
Marie Bertschinger, Director William C. Parsons, Director
Richard A. Braun
---------------------------- ----------------------------
Ivan Bissen, Director Richard A. Braun, Director
John W. Bunda
---------------------------- ----------------------------
John W. Bunda, Director Ellsworth Peterson, Director
John D. Collins
---------------------------- ----------------------------
John D. Collins, Director Joseph Morgan, Director
George Delveaux, Jr.
----------------------------
George Delveaux, Jr., Director
*Each of the above signatures is affixed as of March 25, 1996.