<PAGE> 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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 0-8679
BAYLAKE CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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
- ----------------------------------------------------------- --------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock $5
- ----------------------------------------------------------- ---------------------
Par Value
---------
</TABLE>
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 26, 1997 2,458,537 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $25.50 reported bid
price on that date) held by non-affiliates (excludes a total of 253,639 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $56,224,892.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
-------- --------------------------------------
Proxy Statement for 1997 Annual
Meeting of Shareholders Part III
<PAGE> 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 July 1, 1996, the Registrant acquired Four Seasons of Wis, Inc. ("Four
Seasons") and its subsidiary The Bank (with branches in Manawa and King,
Wisconsin) in a cash transaction totaling $13.875 million. On July 1, 1996,
Four Seasons was dissolved and The Bank was merged into Baylake Bank. At the
time of acquisition, The Bank had total assets of $55.8 million, loans of $12.2
million, deposits of $46.9 million and shareholders' equity of $8.4 million.
This transaction has been accounted for using the purchase method of
accounting.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. At December
31, 1996, the Bank had total assets of $395.4 million. It 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 a five county area
composed of Door, Kewaunee, Manitowoc, Brown and Waupaca Counties. The 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. The 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.
The Bank has the following 100%-owned subsidiaries: Baylake Investments, Inc.,
Bank of Sturgeon Bay Building Corporation, Cornerstone Financial, Inc., Karsten
Resources, 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
<PAGE> 3
Corporation's conference center facilities. Karsten Resources, Inc. manages
hotel and restaurant facilities, acquired as a result of a loan default.
Baylake Insurance Agency, Inc. offers various types of insurance products to
the general public as an independent agent. The Bank also owns a 49.6%
interest in United Financial Services, Inc. ("UFS"), a data processing services
company. Unaffiliated third parties own a 50.4% interest in UFS. The revenues
generated by these subsidiaries and UFS amount in aggregate to less than 5% of
the Bank's total income.
The 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. The Bank focuses
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 market area consists of primarily Door
County, Wisconsin. Sturgeon Bay is the county seat and major industrial and
retail area of Door County. The Bank is the largest commercial bank in Door
County. The 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
permanent facilities opened in 1996 and a leased facility opened in Northwest
Brown County in the latter part of 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.
The Bank's market area consists also of Kewaunee County, Wisconsin and adjacent
portions of Manitowoc County. The Bank owns and operates three branch offices,
in addition to its main office in downtown Kewaunee. 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).
<PAGE> 4
Tourism also contributes to the local economy.
The Bank additionally has three locations in Brown County consisting of two
permanent locations located on the Northeast side of Green Bay and one leased
facility located on the Northwest side of Green Bay. The area offers a wide
and diversified manufacturing and service industry mix and is a leading area
for growth in Wisconsin.
The Bank's market area also consists of two locations in Waupaca county
(acquired thru the Four Seasons acquisition) and is located approximately 35
miles west of Green Bay. The major industries center around the production of
food and related products, lumber and wood furniture and fixtures. Tourism
also contributes to the local economy.
Lending and Investments
The 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. The Bank focus lending
activities on individuals and small businesses in its market area. Lending has
been exclusively within the State of Wisconsin. The Bank does not conduct any
substantial business with foreign obligors. The markets served by the Bank
include 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.
The Bank's total outstanding loans as of December 31, 1996 amounted to
approximately $261.4 million, consisting of 76.2% residential, commercial,
agricultural and construction real estate loans, 15.7% commercial and
industrial loans, 5.8% installment and 2.3% 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
The 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 Bank are
insured by the FDIC up to statutory limits. At December 31, 1996, the Bank's
<PAGE> 5
total deposits amounted to $327.2 million, including interest bearing deposits
of $284.9 million and non-interest bearing deposits of $42.3 million.
Other Customer Services and Products
Other services and products offered by the 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
The 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. The 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, the Bank has maintained their position within the market areas,
holding better than half of all commercial bank deposits in the combined market
area as of December 31, 1996. Although no assurance can be given that they
will continue to do so, the Bank has been able to maintain their 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.
The Bank is incorporated under the banking laws of Wisconsin, and its deposits
are insured by the FDIC. It is therefore subject to
<PAGE> 6
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 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. As a result
of extraordinary dividends declared to enable the purchase of Four Seasons, the
Bank is required to get written consent from the FRB prior to paying dividends.
The Bank is in compliance with all applicable capital requirements and may pay
dividends to Baylake, pending written approval.
Current federal law provides that adequately managed bank holding companies
from any state may acquire banks and bank holding companies located in any
other state, subject to certain conditions. Beginning on June 1, 1997, banks
may create interstate branching networks in states that do not "opt out" of
interstate branching. Prior to that date, banks could create interstate
branching networks in states that "opted in" to interstate branching early.
Wisconsin law generally permits establishment of full service bank branch
offices statewide.
Employees
At December 31, 1996, the Registrant and its subsidiary, had 185 full-time
equivalent employees.
<PAGE> 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)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Assets
<S> <C> <C> <C>
Cash and Due from Banks $ 9,168 $ 7,609 $ 7,948
Investment Securities:
U. S. Treasury 5,270 6,076 9,297
U. S. Government Agencies 50,384 46,865 42,026
State and Municipal Obligations 25,143 18,495 21,402
Other Securities 2,967 2,376 2,285
Market Adjustment on AFS Securities 52 (1,153) (1,052)
-------- -------- --------
Total Investments $ 83,816 $ 72,659 $ 73,958
-------- -------- --------
Federal Funds Sold $ 943 $ 4,849 $ 6,196
Loans, Net of Unearned Income $233,473 $201,839 $187,945
Reserve for Loan Losses (2,792) (2,669) (2,452)
-------- -------- --------
Net Loans $230,681 $199,170 $185,493
-------- -------- --------
Bank Premises and Equipment $ 9,925 $ 6,873 $ 5,710
Other Real Estate Owned $ 150 $ 128 $ 83
Other Assets $ 17,600 $ 7,326 $ 5,163
-------- -------- --------
Total Assets $352,283 $298,614 $284,551
======== ======== ========
Liabilities and Stockholders' Equity
Demand Deposits $ 37,229 $ 32,350 $ 30,815
NOW Account Deposits 36,593 33,060 33,618
Savings Deposits 88,046 83,470 84,623
Time Deposits 135,759 106,444 93,618
-------- -------- --------
Total Deposits $297,627 $255,324 $242,674
-------- -------- --------
Short Term Borrowings $ 9,949 $ 3,131 $ 2,448
Customer Repurchase Agreements $ 1,841 $ 1,279 $ 3,525
Long Term Debt $ 423 $ 475
Other Liabilities $ 4,500 $ 3,834 $ 2,665
-------- -------- --------
Total Liabilities $314,340 $264,043 $251,312
-------- -------- --------
Common Stock $ 12,286 $ 12,272 $ 12,239
Additional paid in capital 5,989 5,947 5,928
Retained Earnings 19,675 17,141 15,784
Net Unrealized Losses on AFS Securities 42 (740) (666)
Treasury Stock (49) (49) (46)
-------- -------- --------
Total Equity $ 37,943 $ 34,571 $ 33,239
-------- -------- --------
Total Liabilities and Stockholders' Equity $352,283 $298,614 $284,551
======== ======== ========
</TABLE>
<PAGE> 8
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).
<TABLE>
<CAPTION>
1996 1995
Amount Interest Yield Amount Interest Yield
------ -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, Net $233,473 9.15% $201,839 9.74%
Less: non-accruing Loans (2,402) (1,463)
-------- --------
Loans $231,071 $21,367 9.25% $200,376 $19,661 9.81%
U.S. Treasury Securities 5,270 304 5.77% 6,076 303 4.99%
U.S. Government Agencies 50,384 3,494 6.93% 46,865 2,895 6.18%
State and Municipal Obligations 25,143 2,350 9.35% 18,495 1,897 10.26%
Other Securities 569 34 5.98% 423 25 5.91%
Federal Funds Sold 943 58 6.15% 4,849 282 5.82%
Other Money Market Instruments 2,398 119 4.96% 1,953 69 3.53%
-------- -------- ------ -------- ------- ------
Total Interest Earning Assets (net of
non-accruing loans) $315,778 $ 27,726 8.78% $279,037 $25,132 9.01%
======== ======== ====== ======== ======= ======
Interest-bearing liabilities:
NOW Accounts $36,593 $ 868 2.37% $33,060 $ 910 2.75%
Savings Accounts 88,046 2,858 3.25% 83,470 2,978 3.57%
Time Deposits 135,759 7,644 5.63% 106,444 5,951 5.59%
Short Term Borrowings 9,949 571 5.74% 3,131 198 6.32%
Customer Repurchase Agreements 1,841 68 3.69% 1,279 52 4.07%
Long Term Debt 423 37 8.75% 475 42 8.84%
-------- ------- ------ -------- ------- ------
Total Interest-bearing Liabilities $272,611 $12,046 4.42% $227,859 $10,131 4.45%
======== ======= ====== ======== ======= ======
<CAPTION>
1994
Amount Interest Yield
------ -------- -----
<S> <C> <C> <C>
Interest-earning assets:
Loans, Net $ 187,945 8.83%
Less: non-accruing Loans (1,565)
--------
Loans $186,380 $ 16,594 8.90%
U.S. Treasury Securities 9,297 483 5.20%
U.S. Government Agencies 42,026 2,541 6.05%
State and Municipal Obligations 21,402 2,229 10.41%
Other Securities 418 25 5.98%
Federal Funds Sold 6,196 260 4.20%
Other Money Market Instruments 1,867 76 4.07%
-------- -------- ------
Total Interest Earning Assets (net of
non-accruing loans) $267,586 $ 22,208 8.30%
======== ======== ======
Interest-bearing liabilities:
NOW Accounts $ 33,618 $ 810 2.41%
Savings Accounts 84,623 2,549 3.01%
Time Deposits 93,618 3,981 4.25%
Short Term Borrowings 2,448 105 4.29%
Customer Repurchase Agreements 3,525 111 3.15%
Long Term Debt
-------- -------- ------
Total Interest-bearing Liabilities $217,832 $ 7,556 3.47%
======== ======== ======
</TABLE>
<PAGE> 9
The table below shows the net interest earnings and the net yield on
interest-earning assets for the periods indicated (in thousands of dollars).
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Total Interest Income $ 27,726 $ 25,132 $ 22,208
Total Interest Expense 12,046 10,131 7,556
-------- -------- ---------
Net Interest Earnings $ 15,680 $ 15,001 $ 14,652
======== ======== =========
Net Yield on Interest-earning Assets 4.97% 5.38% 5.48%
(excluding non-accruing loans)
</TABLE>
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%.
<PAGE> 10
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).
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 2,925 ($1,219) $1,706 $1,310 $ 1,757 $ 3,067
U.S. Treasury
Securities (43) 44 1 (164) (16) (180)
U.S. Government
Agencies 231 368 599 296 58 354
State and Municipal
Obligations 652 (199) 453 (300) (32) (332)
Other Securities 9 0 9 0 0 0
Federal Funds Sold (234) 10 (224) (67) 89 22
Other Money Market
Instruments 19 31 50 3 (10) (7)
------- ------- ------- ------ ------- -------
Total Interest
Earning Assets $ 3,559 ($ 965) $2,594 $1,078 $ 1,846 $ 2,924
======= ======== ======= ======= ======= =======
Interest paid on:
NOW Accounts $ 91 ($ 133) ($ 42) ($ 14) $ 114 $ 100
Savings Accounts 156 (276) (120) (38) 467 429
Time Deposits 1,645 48 1,693 631 1,339 1,970
Short Term
Borrowings 411 (38) 373 36 57 93
Customer Repurchase
Agreements 22 (6) 16 (81) 22 (59)
Long Term Debt (5) 0 (5) 21 21 42
------- ------- ------- ------- ------- -------
Total Interest-
Bearing
Liabilities $ 2,320 $ (405) $1,915 $ 555 $ 2,020 $ 2,575
======= ======== ======= ======= ======= =======
</TABLE>
(1) When a change in interest is due both to rate changes and volume this
analysis has been made on a fifty-fifty basis.
<PAGE> 11
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,
1996, 1995 and 1994 are summarized as follows (in thousand of dollars).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Available for Sale
<S> <C> <C> <C>
U.S. Treasury and Other U.S. government $ 38,924 $ 11,321 $ 8,187
agencies
Mortgage-backed securities 31,426 38,430 41,139
Obligations of states and political 16,971 13,322 6,742
subdivisions
Other 369 893 2,965
------- ------- --------
$ 87,690 $ 63,966 $ 59,033
Held to Maturity
Obligations of states and $ 10,511 $ 11,237 $ 13,605
political subdivisions
Other 937 408 408
-------- -------- --------
$ 11,448 $ 11,645 $ 14,013
Total $ 99,138 $ 75,611 $ 73,046
</TABLE>
The Registrant does not hold investment securities of any issuer (other than
securities of the U.S. Government or its agencies) whose book value exceeds ten
percent of its stockholders equity.
<PAGE> 12
II. B. The following table shows the maturities of investment securities as
of December 31, 1996 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.
<TABLE>
<CAPTION>
One Year Over 1 Year Over 5 Years
or less Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government $4,010 4.74% $25,169 6.70% $ 2,913 7.18%
agencies
Mortgage-backed securities 13,800 5.40% 17,626 6.58%
Obligations of states and political 5,007 10.10% 4,864 9.48% 12,264 7.71%
subdivisions
Other 369 4.94%
------- ---- ------- ---- ------- ----
Total $23,186 7.30% $47,659 8.02% $15,177 7.90%
<CAPTION>
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government $ 6,832 7.46% $38,924 6.67%
agencies
Mortgage-backed securities 31,426 6.06%
Obligations of states and political 5,347 9.01% 27,482 8.71%
subdivisions
Other 937 5.82% 1,306 5.57%
------- ---- ------- ----
Total $13,116 6.36% $99,138 7.03%
</TABLE>
Weighted average yield on state and political subdivisions has been computed on
a fully taxable equivalent basis using a tax rate of 34%.
<PAGE> 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).
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans secured primarily
by real estate:
Secured by 1 to 4 family $83,538 $62,271 $52,873 $48,190 $43,288
residential properties
Real estate-construction 11,365 6,378 5,881 4,511 3,275
Other real estate loans 104,391 83,461 69,702 64,585 45,818
Loans to farmers 5,883 5,771 6,103 5,586 5,306
Commercial and Industrial 40,777 40,287 42,157 41,558 47,707
loans
Loans to individuals for 15,233 12,522 16,603 16,844 16,978
household, family and other
personal expenditures
All other loans 240 193 152 378 513
-------- -------- -------- -------- --------
Total gross loans $261,427 $210,883 $193,471 $181,652 $162,885
Less:
Unearned Income (573) (653) (798) (748) (718)
-------- -------- -------- -------- --------
Net Loans $260,854 $210,230 $192,673 $180,904 $162,167
======== ======== ======== ======== ========
</TABLE>
<PAGE> 14
2. As of December 31, 1996, there existed potential problem loans totaling
$1,388,994 which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1996.
<TABLE>
<CAPTION>
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
<S> <C> <C> <C>
$ 679,810 10% $ 67,981
664,854 25% 166,214
38,516 50% 19,258
5,814 100% 5,814
---------- ---- ---------
Totals $1,388,994 $ 259,267
</TABLE>
Commercial loans comprised 93.2% or $1,294,424 of the total loans categorized
as problem loans. The other types of loans comprising this amount were
consumer loans totaling $94,570 or 6.8%.
3. The Bank's loan portfolio is diversified by types of borrowers and industry
groups within the Door, Kewaunee, Brown and Waupaca county 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, 1996, there existed the following industry group concentrations in
the Registrant's loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $38.5 million or 14.7%
----------------------
Total tourism loans $38.5 million or 14.7%
<PAGE> 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, 1996 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.
<TABLE>
<CAPTION>
Maturing
----------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Loans secured primarily by real estate:
Secured by 1 to 4 family
residential property $ 38,350 $ 39,669 $ 5,519 $ 83,538
Real estate - construction 2,801 4,871 3,693 11,365
Other real estate loans 25,733 44,740 33,918 104,391
Loans to farmers 1,450 2,521 1,912 5,883
Commercial and industrial loans 16,223 19,534 5,020 40,777
Loans to individuals for household family and
other personal expenditures
7,707 7,392 134 15,233
All other loans 240 0 0 240
-------- -------- -------- --------
Total $ 92,504 $118,727 $ 50,196 $261,427
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
----- --------
<S> <C> <C>
Due after one year $ 96,154 $ 72,769
</TABLE>
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.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 3,677 $ 846 $ 1,536 $ 1,508 $ 1,535
Troubled debt restructurings 1,000 648 815 255 309
Loans past due 90 days or more 0 0 90 56 129
------- ------- ------- ------- -------
Total $ 4,677 $ 1,494 $ 2,441 $ 1,819 $ 1,973
======= ======= ======= ======= =======
</TABLE>
<PAGE> 16
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $472,000; $74,000; $117,000; $175,000; and
$189,000 for 1996, 1995, 1994, 1993 and 1992 respectively. Interest income
which is recorded only as received, amounted to $154,000; $34,000; $58,000;
$101,000; and $77,000 for 1996, 1995, 1994, 1993 and 1992 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 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.
<PAGE> 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).
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Daily average amount of loans $233,473 $201,839 $187,945 $174,371 $155,955
======== ======== ======== ======== ========
Balance of allowance for possible $ 2,617 $ 2,534 $ 2,434 $ 2,253 $ 1,905
loan losses at beginning of period
Allowance related to assets 120
acquired
Loans Charged Off:
Real estate - mortgage 99 ---- ---- 12 ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 82 158 239 86 54
Consumer Loans 105 50 32 82 42
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 286 $ 208 $ 271 $ 180 $ 96
======== ======== ======== ======== ========
Recoveries of loans previously charged
off:
Real estate - mortgage ---- ---- ---- ---- ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 16 33 63 5 87
Consumer loans 26 8 48 46 47
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total recoveries $ 42 $ 41 $ 111 $ 57 $ 134
-------- -------- -------- -------- --------
Net loans charged off $ 244 $ 167 $ 160 $ 123 $ (38)
-------- -------- -------- -------- --------
Additions to allowance for $ 400 $ 250 $ 260 $ 304 $ 310
-------- -------- -------- -------- --------
loan losses charged to
operating expense
Allowance for loan losses at
end of period $ 2,893 $ 2,617 $ 2,534 $ 2,434 $ 2,253
======== ======== ======== ======== ========
Ratio of net charge offs during .10% .08% .09% .07% (.02%)
period to average
loans outstanding
</TABLE>
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
1.25% according to Baylake management.
2. The percentage of recoveries of loans previously charged off in relation
to the ratio in (1) above.
<PAGE> 18
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.
<PAGE> 19
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).
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
----- of Loans ------ of Loans ------ of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Loans Loans Loans
-------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage $1,143 71.9% $1,000 69.1% $ 974 63.4%
Real estate -
construction 50 4.3% 50 3.0% 50 3.0%
Loans to farmers 20 2.3% 20 2.7% 20 3.2%
Commercial/industrial 1,300 15.7% 1,190 19.2% 1,133 21.8%
Consumer 360 5.8% 337 6.0% 337 8.6%
Not allocated 20 20 20
------ ------ ------ ------ ------ ------
Total $2,893 100% $2,617 100% $2,534 100%
====== ====== ====== ====== ====== ======
<CAPTION>
December 31, 1993 December 31, 1992
----------------- -----------------
Amount Percent Amount Percent of
------ of Loans ------ Loans in
in Each Each
Category Category
to Total to Total
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Real estate - mortgage $ 924 62.1% $ 771 54.7%
Real estate -
construction 50 2.5% 50 2.0%
Loans to farmers 20 3.1% 20 3.3%
Commercial/industrial 1,083 23.0% 1,074 29.6%
Consumer 337 9.3% 317 10.4%
Not allocated 20 20
------ ------ ------ ------
Total $2,434 100% $2,252 100%
====== ====== ====== ======
</TABLE>
<PAGE> 20
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 37,229 0.00% $ 32,350 0.00% $ 30,815 0.00%
Interest bearing demand
deposits 36,593 2.75% 33,060 2.75% 33,618 2.41%
Savings deposits 88,046 3.57% 83,470 3.57% 84,623 3.01%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 116,375 5.57% 94,858 5.53% 86,207 4.28%
Time Certificates of Deposit
of $100,000 or more 19,384 5.99% 11,586 6.11% 7,411 3.95%
-------- -------- --------
Total Deposits $297,627 3.82% $255,324 3.85% $242,674 3.03%
======== ======== ========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
3 months or less $ 6,411 $ 2,783 $ 1,681
Over 3 months thru 6 months 5,376 5,066 1,270
6 months thru 12 months 5,737 2,336 1,108
Over 12 months 2,349 1,338 841
-------- -------- --------
Total $ 19,873 $ 11,523 $ 4,900
======== ======== ========
</TABLE>
<PAGE> 21
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.34% 1.56% 1.56%
Average Stockholders' Equity (return
on equity) 12.39% 13.43% 13.33%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 48.44% 60.32% 56.35%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 10.77% 11.58% 11.68%
</TABLE>
<PAGE> 22
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).
<TABLE>
<CAPTION>
1996 1995 1994
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Federal Funds purchased $21,975 6.11% $ 774 6.09% $1,634 6.00%
Securities Sold under
agreements to repurchase 1,865 3.55% 754 3.74% 2,515 4.00%
------- ----- ------ ----- ------ -----
$23,840 5.91% $1,528 4.93% $4,149 4.79%
------- ----- ------ ----- ------ -----
</TABLE>
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).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal funds purchased $30,016 $ 9,519 $12,611
Securities sold under
agreements to repurchase 2,272 1,076 4,522
</TABLE>
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).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term
borrowings:
Federal funds
purchased $ 9,950 $571 5.74% $3,131 $198 6.32% $2,448 $105 4.29%
Securities sold
under agreements to
repurchase 1,841 68 3.69% 1,279 52 4.07% 3,525 111 3.15%
------- ---- ----- ------ ---- ----- ------ ---- -----
Total short-term
borrowings $11,791 $639 5.42% $4,410 $250 5.67% $5,973 $216 3.62%
======= ==== ===== ====== ==== ===== ====== ==== =====
</TABLE>
<PAGE> 23
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%.
<TABLE>
<CAPTION>
1996 1995 1994
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Land contract payable $ 422 8.75% $ 475 8.75%
------ ----- ------ ----- ------ -----
$ 422 8.75% $ 475 8.75% $ 0 0.00%
------ ----- ------ ----- ------ -----
</TABLE>
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).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Land contract payable $ 422 $ 475 $ 0
</TABLE>
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).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Long term debt:
Land contract payable $ 422 $ 37 8.75% $ 475 $ 41 8.75% $
------ ---- ------ ------ ---- ------ ------ ---- ------
Total long term debt $ 422 $ 37 8.75% $ 475 $ 41 8.75%
------ ---- ====== ------ ---- ------ ------ ---- ------
</TABLE>
<PAGE> 24
ITEM 2. PROPERTIES
Registrant directly owns no real properties of any kind. However, Bank owns
fifteen branches and leases the main office building from its subsidiary the
Bank of Sturgeon Bay Building Corporation. In addition, the Bank leases office
space from an unrelated third party for a facility in Green Bay.
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 sixteen branches owned or leased by Bank are
conveniently located throughout the market area served by Bank, including
counties of Door, Kewaunee, Brown, Manitowoc, and Waupaca. All properties are
in good condition and considered adequate for present and near term
requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending involving the Registrant or its
subsidiaries which management believes to be material.
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 1996.
Executive Officers of the Registrant
The following is a list of names of the executive officers of the Registrant
and position within the Registrant.
Thomas L. Herlache Chairman, President, CEO and Director of
Baylake Corp
Richard A. Braun Vice Chairman, Executive Vice President and
Director of Baylake Corp
Paul C. Wickmann Vice President
Daniel F. Maggle Secretary
Steven D. Jennerjohn Treasurer
<PAGE> 25
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. In addition, since May 1993, prices for Baylake Common Stock
have generally been reported daily in The Milwaukee Journal Sentinel based on
information provided by a local brokerage firm.
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, and, since May 1993 from
bid prices reported in The Milwaukee Journal Sentinel. 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.
<TABLE>
<CAPTION>
Cash
dividends
paid per
Calendar period High Low share
--------------- ---- --- ---------
<S> <C> <C> <C> <C>
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
1996 1st Quarter 28.00 26.25 0.230
2nd Quarter 28.00 26.25 0.230
3rd Quarter 27.50 26.25 0.230
4th Quarter 28.00 26.25 0.240
</TABLE>
Baylake had approximately 1,538 shareholders of record at March 21, 1997.
Baylake paid a special dividend of $.25 per share cash dividend in December
1995.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January, 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
<PAGE> 26
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 has maintained a dividend reinvestment plan which enabled 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 were purchased on behalf of participating
shareholders at their then fair market value.
In previous years, Baylake has maintained a dividend reinvestment plan which
allowed participating shareholders to elect that dividends be used to purchase
shares or partial shares of stock. Baylake has determined because of certain
short-term compliance costs to suspend purchase of shares through the dividend
reinvestment plan at this time. Effective April 1, 1997 shareholders will no
longer have the option of dividend reinvestment and all shareholders will
receive cash dividends. Baylake will continue to look at the idea of
reinstating the dividend reinvestment plan in the fourth quarter of 1997 but at
this time no final decisions have been made.
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except amounts per share)
<S> <C> <C> <C> <C> <C>
Interest Income $ 26,926 $ 24,487 $ 21,445 $ 20,468 $ 21,285
Interest Expense $ 12,046 $ 10,131 $ 7,556 $ 7,507 $ 9,285
Net Interest Income $ 14,880 $ 14,356 $ 13,889 $ 12,961 $ 12,000
Provision for Loan Losses $ 400 $ 250 $ 260 $ 304 $ 310
Other Income $ 3,451 $ 2,581 $ 2,320 $ 2,697 $ 2,657
Other Expense $ 11,289 $ 9,894 $ 9,689 $ 8,769 $ 8,485
Income before income taxes $ 6,642 $ 6,793 $ 6,260 $ 6,585 $ 5,862
Net income $ 4,703 $ 4,644 $ 4,430 $ 4,662 $ 4,181
Earnings per share:
Primary Net Income without
effect of goodwill
$ 1.98 $ 1.89 $ 1.81 $ 1.92 $ 1.73
Fully diluted $ 1.92 $ 1.89 $ 1.81 $ 1.92 $ 1.73
Dividends per share (1) .93 1.14 1.02 .58 1.51
Total assets $395,356 $309,428 $287,107 $284,075 $272,079
(year end)
</TABLE>
(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
<PAGE> 28
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 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.
On July 1, 1996, the Registrant consummated its acquisition of Four Seasons of
Wis., Inc. ("Four Seasons"), the holding company for The Bank in a cash
transaction totaling $13.875 million. The acquisition was accounted for using
the purchase method of accounting, therefore it would affect future operations.
Results of Operations
Net income in 1996 was $4.70 million, a 1.3% increase from the $4.64 million
earned in 1995. Net income for 1995 showed a 4.8% increase over 1994 earnings.
On a per share basis, net income was $1.92 in 1996 compared with $1.89 in 1995,
an increase of 1.6%. Earnings per share in 1995 showed a 4.4% increase over
1994 results.
Net income for 1996 includes amortization expense of goodwill related to the
purchase of Four Seasons. This expense reduced after-tax net income in 1996 by
$144,000 or earnings per share by $.06. Net income for 1994 reflected 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. Those charges in 1994 reduced after-tax earnings per share by
$.22.
Net interest income for 1996 improved $524,000 or 3.7% over 1995 levels.
Net interest income for 1995 improved $467,000 or 3.4% over 1994 levels. From a
slightly increasing rate environment in early 1996 to year end, interest income
increased 10.0% while interest expense increased 18.9%.
Other income showed an increase of $870,000 or 33.7%. The primary factors
increasing other income were increased trust revenues and loan servicing fee
income.
Non-interest expense increased $1.4 million or 14.1% over 1995 levels. Factors
contributing to the increase were increased personnel expenses and occupancy
and equipment expense.
For 1996, return on average assets declined to 1.34% compared with 1.56% in
1995 and 1.56% recorded in 1994. This ratio declined as a result of the
various factors discussed above combined with average asset growth of 18.0% in
1996, primarily a result of the Four Seasons acquisition.
<PAGE> 29
Return on average stockholders' equity in 1996 showed a decrease at 12.39%
compared to 13.43% in 1995 and a decrease compared to 13.33% in 1994. This
result occurred as a result of decreased net income and the factors discussed
above offset by an increased capital base.
Cash dividends declared in 1996 decreased 18.4% to $.93 per share compared to
$1.14 in 1995. This compares to an increase of 11.8% in 1995 dividends as
compared to 1994.
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
82.0% of 1996 total operating income, as compared to 85.3% in 1995 and 86.3% in
1994. 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 $15.7 million in 1996, an
increase of 4.5% from $15.0 million in 1995 (and $14.6 million in 1994). The
improvement in 1996 net interest income of $679,000 was due in part to a 13.9%
increase in the volume of average earning assets, offset by a 19.6% increase in
average interest-bearing liabilities. The benefit from the increase in earning
assets, the stable cost of interest bearing liabilities and the increase in
noninterest bearing deposits were offset, in part, by an increase in
interest-bearing liabilities and a decline in the yield on earning assets. As
a result, interest income increased 10.3%, while interest expense for 1996
increased 18.9%.
Average loans outstanding grew from $201.8 million in 1995 to $233.5 million in
1996, an increase of 15.7%. The increase in loan volumes also was a
significant contributing factor to the increase in interest income. Average
loans outstanding increased from $187.9 million in 1994 to $201.8 million in
1995, an increase of 7.4%. The mix of average loans to average total assets
grew from 66.0% in 1994 to 67.6% in 1995 and declined slightly to 66.3% in
1996. The relationship of greater loan composition in the asset mix has
provided a source of higher yielding assets, which has 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 20 basis points in 1996 to
4.36% from 4.56% in 1995, as the average yield on earning assets decreased 23
basis points while the average cost paid on interest-bearing liabilities
decreased 3 basis over the same period. The decrease in interest rate spread
followed a decline of 27 basis points in 1995 compared to a spread of 4.83%
<PAGE> 30
in 1994. The decrease in the Registrant's earning assets yield reflects lower
loan yields, resulting from increased competition, less frequent repricing of
variable rate loans due to a stable interest rate environment on average and a
slightly decreased percentage of the Registrant's assets represented by loans.
Increased investment interest income resulting from an increased investment
portfolio (primarily due to the Four Seasons acquisition) combined with higher
yields on the investment portfolio have partially offset the decline in
interest rate spread. Yields on interest-paying liabilities declined 3 basis
points due to a stable interest rate environment on average.
Net interest margin is tax-equivalent net interest income expressed as a
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 1996 was 4.97% compared to 5.38% in 1995. The
decline in net interest margin was primarily the result of the 20 basis point
decline in the interest rate spread and a reduction in the average earning
assets to average asset ratio. The impact from competition as it relates to
the commercial loan portfolio 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 to 21.3% from 22.4% in 1995, which
caused a reduction in net interest margin.
The net interest margin for 1995 was 5.38% as compared to 5.48% in 1994 as
interest rate spread improved during that period. The decrease in 1995
occurred primarily as 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 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 89.6% in 1996 compared with 93.4% in 1995 and 94.0% in
1994. The ratio declined in 1996 as a result of additional fixed assets
resulting from the Green Bay expansion and goodwill stemming from the Four
Seasons acquisition.
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.
<PAGE> 31
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 slightly increasing interest rates has prompted increased
interest income as a result of the repricing of the variable loan rate
portfolio combined with a lagging effect on the deposit side raising interest
rates more slowly. Management believes that a gradual increase 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 rising 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
Provision for loan losses in 1996 at $400,000 compares to a provision of
$250,000 for 1995 and $260,000 for 1994. Net charge-offs in 1996 were $244,000
compared with net charge-offs of $167,000 in 1995 and $160,000 in 1994. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .10% in 1996 compared with .08% in 1995
and .09% in 1994. 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 $836,000 more
than 1995, or a 32.4% increase. In 1995, total non-interest income was
$232,000 more than 1994, or a 9.9% increase. Trust service fees, loan
servicing fees and service charges continue to be the primary components of
non-interest income.
Trust fees increased $217,000 or 55.1% in 1996 compared to 1995, primarily as a
result of increased trust business and the timing of certain billable business.
This compared to an increase of $59,000 or 17.6% in 1995 compared to 1994, in
part due to increased trust business.
Loan servicing fees increased $355,000 or 66.9% to $886,000 in 1996. $134,000
of the increase stemmed from the adoption of STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 122 (SFAS 122) "Accounting for Mortgage Servicing Rights". The
remaining increase resulted from fees realized for additional commercial loan
business sold and serviced on the secondary market. This result followed a
decrease of $21,000 or 3.8% in 1995 as compared to 1994 due to decreased
activity in the loan refinancing market as a higher rate environment on average
tempered activity in that area.
<PAGE> 32
Service charges on deposit accounts showed an improvement of $116,000 or 18.5%
over 1995 results accounting for much of the improvement in fee income
generated for other services to customers. Fee income in this category also
showed improvement of approximately $78,000 from income generated from discount
brokerage business.
Included in 1996 other income are revenues of $277,000 stemming from the
operation of Karsten Resources, Inc. This compares to revenues of $269,000
reported in 1995.
Non-Interest Expense
Non-interest expense in 1996 increased $1.4 million or 14.1% compared to 1995
results primarily as a result of increased personnel, occupancy and equipment
expense. This followed a $205,000 or 2.1% rise in 1995 as compared to 1994.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $6.3 million in 1996, an increase of $879,000 or 16.3% as
compared to 1995 results. The increase in 1996 primarily results from
additional staffing as a result of expansion into the Green Bay market and
Waupaca County market (as a result of the Four Seasons acquisition) and normal
salary increases. Salary and employee benefits expense in 1995 totaled $5.4
million, an increase of $40,000 or .8% over 1994 results.
Bonuses arising from the Registrant's Pay-For-Performance Program amounted to
$373,000 in 1996 compared to $313,000 in 1995, an increase of 19.2%. This
program is designed to reward various divisions if certain goals are met in
achieving improvement in income; 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 $36,000 or 10.6% over
1995 levels. Expenses in the same category were up $118,000 or 52.9% in 1995
compared to 1994 as the Registrant increased contributions from combination
discretionary/matching plan of 5% to 10% in 1995 to meet industry standards.
The number of full-time equivalent employees increased to 185 in 1996 compared
to 157 in 1995, an increase of 17.8%. 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 1995 increased to 157 from 149 in 1994, an
increase of 5.4%. 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 an increase of $180,000 or 26.1% compared to 1995.
This increase followed an increase of $30,000 or 4.5% in 1994. This expense
has resulted from expansion costs in the development of the Green Bay region
with two new branches completed in 1996 resulting in additional depreciation
expense and other occupancy costs.
<PAGE> 33
Equipment expense showed an increase of $230,000 or 36.4%. This followed an
increase of $130,000 or 25.9%. These resulted primarily from depreciation
relating to past increased capital expenditures for equipment which were made
to enhance the Registrant's technological capabilities and additional equipment
added as a result of the Green Bay expansion efforts.
Data processing expense in 1996 decreased $11,000 or 1.6% due to moderate
volume increases along with decreased servicing cost. This followed an
increase of $109,000 or 18.2% in 1995 compared to 1994. 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 $188,000 in 1996 as a result of gains on sale of approximately
$96,000 resulting from three commercial properties disposed of in 1996.
Additionally a gain of $155,000 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 $84,000 in 1995
and $4,000 in 1994.
Other operating expenses in 1996 were $221,000 more than in 1995 or a 8.6%
increase. Primarily affecting this change was amortization expense of goodwill
amounting to $144,000 in 1996. This compares to a decrease of $24,000 or .9% in
1995 compared to 1994.
Supplies expense shows an increase of $99,000, or 34.4% primarily as a result
of the additional branch needs in 1996. This compares to an increase of $4,000
in 1995 as related to 1994.
The decline in payments to regulatory agencies of $279,000 in 1996 when
compared to 1995 is due to the reduction in FDIC insurance premiums. Although
FDIC insurance expense remained a sizable component of other operating expense
totaling $292,000 in 1995, it was $252,000 lower than 1994 results or a 46.3%
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.
Operating costs for Karsten Resources, Inc. of $328,000 are included as part of
other operating expenses for 1996. This compares to costs of $319,000 included
as a part of other operating expenses for 1995.
Other items comprising other operating expense shows an increase of $248,000 or
a 15.0% increase in 1996 compared to 1995. Additional marketing and
advertising expense of $133,000 in 1996 account for some of this increase.
These costs were primarily the result of the Bank's expansion efforts. In
addition $115,000 of the increase stems from increased loan and collection
costs, primarily the result of legal costs for one commercial loan which has
since been resolved. This followed a decrease in 1995 of $90,000 or 4.4%
compared to 1994. The increase in 1994 resulted primarily from one-time
charges related to the KCB acquisition. The overhead ratio, which is computed
by subtracting non- interest income from non-interest expense and dividing by
average total assets was 2.22% for 1996 compared to 2.45% for
<PAGE> 34
1995. Registrant continues its commitment to deliver quality service and
products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1996 was $1.9 million, a decrease of
$210,000 or 9.8% compared to 1995. This followed an increase of $319,000 or
17.4% in 1995 compared to 1994. The lower tax expense in 1996 reflected the
Registrant's decrease in before tax earnings and an increase in tax exempt
interest income. Conversely, 1995 income tax expense was higher due to an
increase in before tax earnings and a decrease in tax exempt interest income.
The Registrant's effective tax rate (income tax expense divided by income
before taxes) was 29.2% in 1996 compared with 31.6% in 1995 and 29.2% in 1994.
Of the 29.2% effective rate for 1996 the federal effective tax rate was 25.8%
while the Wisconsin state tax effective rate was 3.4%.
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.
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 $260.9 million at December 31, 1996, a 24.1%
increase from the end of 1995. This follows a 9.1% increase at December 31,
1995 over 1994 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
<PAGE> 35
loans) totaled $162.3 million at year end 1996 and comprised 62.2% of the loan
portfolio compared with 64.5% of the portfolio at the end of 1995. Loans in
these classifications grew $26.6 million or 19.6% during 1996.
The following table sets forth loan composition (net of unearned income) at
December 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
(In thousands of
Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate- $ 83,334 32% $ 62,059 29% $ 52,474 27% $ 47,816 27% $ 42,929 27%
residential
Real estate- $ 11,365 4% 6,378 3% 5,881 3% 4,511 2% 3,275 2%
construction
Real estate- $104,136 40% 83,177 40% 69,303 36% 64,211 36% 45,459 28%
commercial &
agricultural
Commercial, $ 46,786 18% 46,094 22% 48,412 25% 47,522 26% 53,526 33%
financial &
agricultural
Installment loans $ 15,233 6% 12,522 6% 16,603 9% 16,844 9% 16,978 10%
to individuals
Total Loans, $260,854 $210,230 $192,673 $180,904 $162,167
(net of
unearned income)
</TABLE>
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, 1996, there existed the following industry group concentrations in
the Registrant's loans which exceeded 10% of total loans:
Tourism related loans:
<PAGE> 36
Lodging business $38.5 million or 14.7%
---------------------
Total tourism loans $38.5 million or 14.7%
The Registrant has a significant loan concentration because of tourism based
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 $83.3 million at the end of 1996
and comprised 32.0% of the loan portfolio at the end of 1996. Loans in this
category grew $21.3 million or 34.3% during 1996. 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, 1996, these loans totaled $35.3
million.
Installment loans to individuals totaled $15.2 million or 5.9% of the total
loan portfolio at December 31, 1996 compared to $12.5 million or 6.0% at the
end of 1995. 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 provide
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
<PAGE> 37
At December 31, 1996 the allowance for possible loan losses of $2.9 million
represented 1.11% of total loans, down from 1.25% at December 31, 1995. Loans
grew at a rate of 24.1% from December 31, 1995 to year end 1996, while the
allowance grew at a lower rate. Also, net charge-offs increased in 1996 as
compared to 1995. As loans have grown, management did not believe there
existed any trends indicating any undue portfolio risk.
At December 31, 1995, the allowance for possible loan losses of $2.6 million
represented 1.25% of total loans compared with 1.31% at the end of 1994.
Commercial, agricultural and other loans net charge-offs represented 27.0% of
the total net charge-offs as compared with 74.9% of total net charge-offs in
1995. Real estate mortgage loan net charge-offs represented 40.6% of the total
net charge-offs in 1996. Installment loan net charge-offs in 1996 were 32.4%
of the total net charge-offs as compared with 25.1% of total net charge-offs in
1995. In the commercial sector, three particular charge-offs contributed to the
increase. The remaining commercial loan charge-offs during 1996 were offset
for the most part by their eventual recoveries in 1996. Real estate mortgage
loan charge-offs consisted of two commercial properties secured by real estate.
The majority of charge-offs in the installment loan sector occurred as a result
of automobile loans. Six charge-offs totaling $20,000 were made in 1996 with
minimal recoveries occurring. Credit card loans showed net charge-offs of
$30,000 in 1996 compared to net charge-offs of $4,400 in 1995. Although the
Bank has experienced higher interest returns on approximately $1.5 million 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, 1996 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
<PAGE> 38
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
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, 1996 were $4.7 million, an increase of
$3.2 million from the level at December 31, 1995. Approximately $1.9 million
of the increase consists of one non-accrual commercial real estate credit which
is experiencing cashflow problems. Management believes that collateral is
sufficient in the event of default. $770,000 of the increase consists of three
non-accrual commercial real estate loans. $369,000 of this amount consists of
a commercial rental property for which rental payments have been slow. Efforts
are being made to correct the problem. $237,000 consists of a credit for a
manufacturer that has incurred ongoing operating losses. Management continues
to monitor progress in this credit. $164,000 consists of a bar and restaurant
business that has experienced cashflow problems. Management believes that
collateral is sufficient in these three credits in the event of default.
Approximately $627,000 of the increase consists of one non-accrual commercial
loan which has personal guarantees supporting the loan. Management continues
to monitor progress in this credit and expects repayment to be made in full.
As a result the ratio of non-performing loans to total loans at the end of 1996
was 1.8% compared to .7% at 1995 year end. The Registrant's allowance for
possible loan losses balance was 61.9% of total non-performing loans at
December 31, 1996 compared to 175.2% at year end 1995. Troubled debt
restructurings increased $352,000 or 54.3% and is largely composed of
commercial real estate loans which are current as to payment status at year end
1996. 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,
1996, potential problem loans amounted to a total of $1.4 million compared to
$2.2 million at year end 1995. $375,000 of the 1996 problem loans stems from
vacant commercial property which has been listed for sale. $237,000 of the
problem loans stems from credits for a manufacturer that has incurred ongoing
operating losses. $630,000 of the problem loans stem from a commercial
customer who is currently experiencing cashflow concerns. Various commercial
loans totaling $55,000 and consumer loans totaling $95,000
<PAGE> 39
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
credits are expected in this category.
Other real estate owned which represents property to which the Registrant has
acquired through foreclosure or in satisfaction of debt, consisted of one
commercial real estate property totaling $110,000 at year end 1996. There
existed no other real estate owned at year end 1995. 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 1996, 1995, and 1994 consists of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(In Thousands of Dollars)
<S> <C> <C> <C>
Loss on disposition of
properties and other costs $ 102 $ 66 $ 45
Gains on disposition of
properties and expense
recoveries (290) (150) (49)
------ ----- ------
Net costs (gains) $(188) $ (84) $ (4)
</TABLE>
Other properties taken in as a result of foreclosure or surrender include a
restaurant and hotel facility that exists as a subsidiary of Bank 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 Bank. The intent is to manage the assets until such time as this
property can be sold to an independent third party. Currently management of
Bank is marketing the property with limited results at present. Results of
operation which are included in other income and other operating expense
consists of 1996 other income of $277,000; other operating expenses of $328,000
and a net loss after tax of $33,000. The carrying value of the investment at
year end 1996 equals $548,000 and consists of real property which is
consolidated in the Balance Sheet with Premises and Equipment.
Investment Portfolio
<PAGE> 40
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 1996 that all of its taxable issues,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 1996 were to be classified as available for sale. In addition,
Bank 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 1996, they were determined to be held to 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, 1996, securities held to
maturity had an aggregate market value of approximately $11.9 million compared
with amortized cost of $11.4 million. Investment securities classified as
available for sale are those securities which the Registrant has determined
might be sold to manage interest rates or in response to changes in interest
rates or other economic factors. While the Registrant has no current intention
of selling those securities, they may not be held to maturity. Investment
securities available for sale at December 31, 1996 and 1995 are carried at
market value. Adjustments up or down to market value at December 31, 1996 and
1995 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. At December 31, 1996, securities available for sale had
a market and carrying value of $87.7 million compared with amortized cost of
$86.8 million. The reserve for market adjustment of securities, net of tax,
and reflected in the stockholders' equity section stood at $604,000 at December
31, 1996.
At December 31, 1996 and 1995, 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 $83.8 million in 1996 compared with $72.7
million in 1995. The average balance of securities increased primarily as a
result of the acquisition of Four Seasons. In 1996, taxable securities
comprised approximately 70.0% of the total average investments compared to
74.9% in 1995. Tax-exempt securities on average for 1996 accounted for 30.0%
of the total average investments compared to 25.1% in 1995.
Deposits
<PAGE> 41
Average total deposits in 1996 were $297.6 million, an increase of 16.6% over
1995. The average balance of deposits increased partially as a result of the
acquisition of Four Seasons. This follows a 5.2% increase in 1995 over 1994.
Non-interest bearing demand deposits in 1996 averaged $37.2 million, up 15.1%
from $32.3 million in 1995. This $4.9 million increase is partially
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 and partially the result of the
Four Seasons acquisition. December 31, 1996 non-interest bearing demand
deposits were $42.3 million compared with $33.9 million at year end 1995.
Interest bearing deposits generally consist of interest-bearing checking,
savings deposits, money market accounts, individual retirement accounts (IRAs)
and certificates of deposit (CDs). In 1996 interest bearing deposits averaged
$260.4 million compared with $223.0 million, an increase of 16.8%. Within the
category of interest bearing deposits, savings deposits (including money market
accounts) increased an average of $4.6 million or 5.5%. During the same
period, time deposits (including CDs and IRAs) grew an average of $29.3 million
or 27.5%. Time deposits increased largely as a result of the acquisition of
Four Seasons, whose customer deposit base consisted largely of time deposits.
Increased competition for consumer loan deposits and customer awareness of
interest rates continues to limit the Registrant's core deposit growth in these
types of deposit.
Additional emphasis will be placed on generating additional core deposits in
1997 through competitive pricing of deposit products and through the branch
delivery systems that have already been established. 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 1996 short-term borrowings were $11.8 million compared with $4.4
million during 1995. This increase of $7.4 million or 167.4% occurred as a
result of higher than expected loan demand and additional funding needs as a
result of the acquisition of Four Seasons.
Average short-term borrowings decreased $1.6 million or 26.2% in 1995 from 1994
as a result of allowing maturing investments to serve as liquidity sources for
1995.
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
federal funds purchased show the most fluctuation as we saw an increase in
average short-term borrowings of $6.8 million, as a result of additional lines
established during 1996.
<PAGE> 42
Long-Term Debt
Long-term debt of $422,000 consists 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
Liquidity refers to the ability of the Registrant or its subsidiary bank to
generate adequate amounts of cash to meet its needs for cash. The Registrant
and the Bank have different liquidity considerations.
The Bank meets 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 Bank is 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 Bank. For
1996 net investment activity provided $8.2 million of net cashflow during 1996.
At December 31, 1996, the carrying or book value of investment securities
maturing within one year amounted to $23.2 million or 23.4% of the total
investment securities portfolio. This compares to the 5.6% level for
investment securities with one year or less maturities as of December 31, 1995.
Within the investing activities of the cashflow statement, sales and maturities
of investment securities during 1996 totaled $23.4 million. At the end of
1996, the investment portfolio contained $70.4 million of U.S. Treasury and
federal agency backed securities, representing 71.0% of the total investment
portfolio. These securities tend to be highly marketable and had a market
value above amortized cost at year end 1996 amounting to $730,000.
Deposit growth is another source of liquidity for the Bank. As a financing
activity reflected in 1996 Consolidated Statements of Cash Flows, deposits
provided $13.3 million in net cash inflow during 1996. The Registrant's
overall average deposit base grew $42.3 million or 16.6% during 1996. Deposit
growth, especially in the area of core deposits, is the most stable source of
liquidity for the Bank.
Federal funds sold averaged $943,000 in 1996 compared to $4.8 million in 1995.
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 Bank has 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, 1996, the Bank had no federal
funds sold.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $92.5 million of loans maturing within one year, or 35.4% of
<PAGE> 43
total loans.
Within the classification of short-term borrowings at year end 1996, federal
funds and securities sold under agreements to repurchase totaled $23.8 million
compared with $1.5 million at the end of 1995. 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 Bank's liquidity resources were sufficient in 1996 to fund the growth in
loans, maintain a stable investment portfolio and meet other cash needs when
necessary.
Management expects that deposit growth will continue to be the primary funding
source of the Bank's liquidity on a long-term basis, along with a stable
earnings base, the resulting cash generated by operating activities, and a
strong capital position. Although federal funds purchased provided a sizable
portion of funds provided in 1996, management expects deposit growth to be a
more reliable funding source in the future as a result of branch expansion
efforts and marketing efforts to attract and retain core deposits.
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 Bank's) 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 Bank totaled $14.3 million in
1996 and will continue to be the Registrant's main source of long-term
liquidity. The dividends from the Bank were sufficient to pay cash dividends
to the Registrant's shareholders of $2.3 million in 1996 and provide cashflow
to complete the acquisition of Four Seasons totaling $13.875 million.
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 bank uses 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.
<PAGE> 44
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 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. Although the analysis
indicates a result above the 15% one year maturity gap for repricing,
management considers these core deposits such as savings and NOW accounts to be
more long-term in repricing characteristics.
<PAGE> 45
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
As of December 31, 1996
----------------------------------------------------------------------------
Within Four to Seven to One Year to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ 6,491 $ 8,043 $ 8,652 $ 47,659 $28,293 $ 99,138
Federal Funds Sold 0 0
Loans and Leases:
Variable Rate 96,255 0 0 96,255
Fixed Rate 20,055 25,041 33,265 81,292 1,842 161,495
-------- -------- -------- -------- ------- --------
Total Loans and Leases $116,310 $ 25,041 $ 33,265 $ 81,292 $ 1,842 $257,750
-------- -------- -------- -------- ------- --------
Total Earning Assets $122,801 $ 33,084 $ 41,917 $128,951 $30,135 $356,888
======== ======== ======== ======== ======= ========
Interest Bearing Liabilities:
NOW Accounts $ 43,356 $ $ $ $ $ 43,356
Saving Deposits 93,465 93,465
Time Deposits 38,641 22,935 53,047 33,371 64 148,058
Borrowed Funds 23,893 0 0 211 159 24,263
-------- -------- -------- -------- ------- --------
Total Interest Bearing Liabilities $199,355 $ 22,935 $ 53,047 $ 33,582 $ 223 $309,142
======== ======== ======== ======== ======= ========
Interest Sensitivity GAP $(76,554) $ 10,149 $(11,130) $ 95,369 $29,912 $ 47,746
(within periods)
Cumulative Interest $(76,554) $(66,405) $(77,535) $ 17,834 $47,746
Sensitivity GAP
Ratio of Cumulative Interest -21.45% -18.61% -21.73% 5.00% 13.38%
Sensitivity GAP to Rate
Sensitive Assets
Ratio of Rate Sensitive 61.60% 144.25% 79.02% 383.99% ----
Asset to Rate Sensitive
Liabilities
Cumulative Ratio of Rate 61.60% 70.13% 71.84% 105.77% 115.44%
Sensitive Assets to Rate
Sensitive Liabilities
</TABLE>
<PAGE> 46
Capital Resources
Stockholders' equity at December 31, 1996 increased $2.9 million or 8.2% to
$39.2 million, compared with $36.3 million at 1995 year end. This increase
includes a positive change of $428,000 to capital in 1996 due to the use of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of
this net change stockholders' equity would have increased $2.5 million or 7.0%
for 1996 over 1995, which compares to an increase of $1.9 million or 5.4% for
1995 over 1994. With the SFAS 115 adjustment included in 1995 capital, capital
increased $4.0 million or 12.5% compared to 1994 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
assisted in capital improvement, as the holders of approximately 36% of
Registrant's Common Stock participate in the plan.
Cash dividends paid in 1996 were $.93 per share compared with $1.14 in 1995,
including a special dividend of $.25 paid in December 1995. The Registrant
provided a 4.5% increase in regular dividends per share in 1996 over 1995 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 has established capital adequacy rules which take
into account risk attributable to balance sheet assets and off- balance sheet
activities. All banks and bank holding companies must meet a minimum total
risk-based capital ratio of 8%. Of the 8% required, at least half must be
comprised of core capital elements defined as Tier 1 capital. The federal
banking agenices also have adopted leverage capital guidelines which banking
organizations must meet. Under these guidelines, the most highly rated banking
organizations must meet a leverage ratio of at least 3% Tier 1 capital to total
assets, while lower rated banking organizations must maintain a ratio of at
least 4% to 5%. Failure to meet minimum capital requirements can initiate
certain mandatory -and possible additional discretionary- actions by regulators
that, if undertaken, could have a direct material effect on the consolidated
financial statements.
At December 31, 1996, the most recent notification from the Federal Reserve
Board categorized the corporation as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
To be well capitalized under the regulatory framework, the Tier 1 capital ratio
must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the
leverage ratio must meet or exceed 5%.
<PAGE> 47
The following table presents the Registrant's capital ratios as of December 31,
for each of the following two years.
Registrant's Ratios:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Average stockholders' equity to average assets 10.77% 11.58%
Stockholders' equity to total assets 9.92% 11.72%
Total Stockholders' Equity $ 39,234 $ 36,275
Total Tier 1 Capital 33,878 36,099
Total Tier 2 Capital 36,770 38,716
Risk-Adjusted Assets (including off-balance 278,990 216,061
sheet items)
Tier 1 Capital to risk-weighted assets 12.14% 16.71%
Total Tier 1 and Tier 2 capital to risk-weighted 13.18% 17.92%
assets
Tier 1 leverage ratio 9.63% 12.09%
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 4.00% 4.00%
</TABLE>
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.
Accounting Developments
The Registrant adopted the Financial Accounting Standards Board ("FASB") 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
<PAGE> 48
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. 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 adopted SFAS 121 effective January 1, 1996.
The impact on the Registrant's financial position and results of operations was
not 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 adopted
SFAS 122 effective January 1, 1996. The cost of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net servicing
revenues. Impairment of mortgage servicing rights is assessed based on the
fair value of those rights. Fair values are estimated using discounted cash
flows based on a current market rate. For purposes of measuring impairment,
the rights are stratified based on risk characteristics of the underlying loans
including loan type and note rate. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed
their fair value.
Mortgage servicing rights of $143,000 were capitalized and $9,000 were
amortized during 1996. The amount of impairment was not 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 has elected to continue to measure
compensation cost related to employee stock purchase options using APB 25.
<PAGE> 49
Had compensation cost for the Registrant's options granted after January 1,
1995, been determined according to SFAS 123, the Registrant's net income and
earnings per share would have been reduced to the following proforma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
Net income
As reported $4,703 $ 4,644
Proforma 4,631 4,604
Earnings per common share
As reported 1.92 1.89
Proforma 1.88 1.88
</TABLE>
PART II - OTHER INFORMATION
ITEM 8. Other Information
The Bank opened a third location in the Green Bay region leasing office space
in the northwest portion of Green Bay. That site opened for business in the
fourth quarter of 1996. The office is offering a full range of retail loan and
deposit services.
On March 14, 1997 property was purchased on the north side of the city of
Appleton in Outagamie County. Although that property will be developed for a
future site, no plans have been presently made.
<PAGE> 50
ITEM 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Consolidated Financial Statements and notes related thereto
are set forth on the following pages
ITEM 10. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE> 51
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 1996, 1995, and 1994
<PAGE> 52
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholder Equity 5 - 6
Consolidated Statements of Cash Flows 7 - 8
Notes to Consolidated Financial Statements 9 - 36
<PAGE> 53
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Madison, Wisconsin
January 24, 1997 SMITH & GESTELAND, LLP
<PAGE> 54
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1996 1995
----- ----
(Thousands of dollars)
ASSETS
<S> <C> <C>
Cash and due from banks $ 13,853 $ 9,887
Investment securities available for sale
(at market) 87,690 63,966
Investment securities held to maturity (market
value $11,869 and $12,197) 11,448 11,645
Loans 260,854 210,230
Less: Allowance for loan losses 2,893 2,617
-------- --------
Loans, net of allowance for loan losses 257,961 207,613
Federal funds sold 1,380
Bank premises and equipment 12,354 8,652
Accrued interest receivable 2,883 2,227
Income taxes receivable 220 262
Deferred income taxes 705 726
Other assets 8,242 3,070
-------- --------
Total assets $395,356 $309,428
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 55
<TABLE>
<CAPTION>
1996 1995
---- ----
(Thousands of dollars)
LIABILITIES
<S> <C> <C>
Domestic deposits
Noninterest bearing $ 42,285 $ 33,887
Interest bearing
NOW 43,356 36,945
Savings 93,465 84,448
Time, $100,000 and over 19,873 11,523
Other time 128,186 100,177
-------- --------
Total interest bearing 284,880 233,093
-------- --------
Total deposits 327,165 266,980
Short-term borrowings
Federal funds purchased and securities
sold under agreements to repurchase 23,840 1,528
Long-term debt 422 475
Accrued expenses and other liabilities 4,105 3,606
Dividends payable 590 564
-------- --------
Total liabilities 356,122 273,153
-------- --------
STOCKHOLDER EQUITY
Common stock $5 par value - authorized
10,000,000 shares; issued 2,460,481 shares in
1996; 2,454,881 shares in 1995; outstanding -
2,458,537 shares in 1996; 2,452,937 shares in
1995 12,302 12,274
Additional paid-in capital 6,038 5,954
Retained earnings 20,339 17,920
Treasury stock (49) (49)
Net unrealized gain (loss) on securities available
for sale, net of tax of $309 in 1996 and $77
in 1995 604 176
-------- --------
Total stockholder equity 39,234 36,275
-------- --------
Total liabilities and stockholder equity $395,356 $309,428
======== ========
</TABLE>
3
<PAGE> 56
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Amounts in thousands
except per share data)
<S> <C> <C> <C>
Interest income
Interest and fees on loans $21,367 $19,661 $16,585
Interest on investment securities
Taxable 3,950 3,298 3,135
Exempt from federal income taxes 1,550 1,247 1,464
Other interest income 59 281 261
------- ------- -------
Total interest income 26,926 24,487 21,445
------- ------- -------
Interest expense
Interest on deposits 11,370 9,840 7,339
Interest on short-term borrowings 639 250 217
Interest on long-term debt 37 41
------- ------- -------
Total interest expense 12,046 10,131 7,556
------- ------- -------
Net interest income 14,880 14,356 13,889
Provision for loan losses 400 250 260
------- ------- -------
Net interest income after provision
for loan losses 14,480 14,106 13,629
------- ------- -------
Other income
Fees from fiduciary activities 611 394 335
Fees from loan servicing 886 531 552
Fees for other services to customers 1,237 1,041 1,043
Securities gains (losses) 38 4 (25)
Other income 679 611 415
------- ------- -------
Total other income 3,451 2,581 2,320
------- ------- -------
Other expenses
Salaries and employee benefits 6,270 5,391 5,351
Occupancy expense 870 690 660
Equipment expense 862 632 502
Data processing and courier 696 707 598
Operation of other real estate (188) (84) (4)
Other operating expenses 2,779 2,558 2,582
------- ------- -------
Total other expenses 11,289 9,894 9,689
------- ------- -------
Income before income taxes 6,642 6,793 6,260
Income tax expense 1,939 2,149 1,830
------- ------- -------
NET INCOME $ 4,703 $ 4,644 $ 4,430
======= ======= =======
Earnings per common share $ 1.92 $ 1.89 $ 1.81
Earnings per common share without
effect of goodwill 1.98 1.89 1.81
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 57
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
For the Years Ended December 31
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common Stock Additional on Securities
------------ Paid-in Available Retained Treasury
Shares Amount Capital for Sale Earnings Stock
------ ------ -------- ------------ -------- --------
1994 (Amounts in thousands except for shares)
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1994 2,437,856 $12,189 $5,532 $ 563 $ 14,029 $(44)
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 -
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
--------- ------- ------ ------- -------- ----
Balance forward -
December 31,
1995 2,454,881 $12,274 $5,954 $ 176 $ 17,920 $(49)
--------- ------- ------ ------- ------- ----
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 58
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
(Continued)
For the Years Ended December 31
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common Stock Additional on Securities
------------ Paid-in Available Retained Treasury
Shares Amount Capital for Sale Earnings Stock
------ ------ -------- ------------ -------- --------
(Amounts in thousands except for shares)
<S> <C> <C> <C> <C> <C> <C>
Balance forwarded -
December 31,
1995 2,454,881 $12,274 $5,954 $ 176 $17,920 $(49)
1996
----
Net income for the
year 4,703
Sale of stock 5,600 28 50
Tax benefit from
exercise of
stock options 34
Cash dividends
declared (2,284)
Net changes in
unrealized on
securities
available for
sale, net of
$232 deferred
taxes 428
--------- ------- ------- ------- ------- ----
2,460,481 $12,302 $ 6,038 $ 604 $20,339 $(49)
======= ======= ======= ======= ====
Less treasury
stock 1,944
---------
2,458,537
=========
</TABLE>
6
<PAGE> 59
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received from:
Loans $21,253 $ 19,239 $ 16,298
Investments 5,456 4,961 5,192
Fees and service charges 3,323 2,505 2,075
Interest paid to depositors (11,473) (9,468) (7,312)
Interest paid to others (676) (250) (216)
Cash paid to suppliers and employees (10,278) (9,118) (8,807)
Income taxes paid (2,013) (2,091) (2,425)
------- ------- -------
Net cash provided by operating activities 5,592 5,778 4,805
------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 4,214 5,876 9,706
Proceeds from sale of other assets 85 324
Principal payments received on investments 19,155 12,426 28,498
Purchase of investments (15,158) (18,846) (30,160)
Proceeds from sale of other real estate owned 954 415 287
Loans made to customers in excess of
principal collected (39,237) (18,248) (12,248)
Capital expenditures (3,953) (2,401) (1,042)
Purchase of annuity (114) (634)
Investment in service center (196) (66)
Cash paid for acquisition net of cash and
federal funds sold acquired (890)
-------- -------- -------
Net cash used in investing activities (35,029) (20,889) (5,335)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts 9,647 (63) 5,131
Net increase (decrease) in short-term
borrowings 22,313 (2,622) 987
Net increase (decrease) in time deposits 3,676 19,926 (3,588)
Payments on long-term debt (53)
Proceeds from issuance of stock 78 11 34
Stock reacquired (61)
Dividends paid (2,258) (2,770) (1,745)
------- -------- --------
Net cash provided by financing activities 33,403 14,482 758
------- -------- --------
Net increase (decrease) in cash and
due from banks 3,966 (629) 228
Cash and due from banks, beginning 9,887 10,516 10,288
------- -------- --------
Cash and due from banks, ending $13,853 $ 9,887 $ 10,516
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 60
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 4,703 $ 4,644 $ 4,430
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 957 560 497
Provision for losses on loans and
real estate owned 400 250 260
Amortization of premium on investments 283 268 290
Accretion of discount on investments (242) (178) (142)
Cash surrender value increase (63) (8) (86)
Net gain from disposal of other
real estate (278) (149) (47)
(Gain) loss on sale of investment
securities (38) (4) 25
(Gain) loss on sale of other assets 30 41 (145)
Equity in income of service center (28) (62) (30)
Deferred compensation 77 115 650
Deferred income taxes (95) 82 (307)
Changes in assets and liabilities:
Interest receivable (175) (232) (163)
Prepaids and other assets 133 (69) 31
Unearned income (82) (145) 49
Interest payable (103) 412 27
Taxes receivable 21 (25) (287)
Other liabilities 92 278 (247)
------- ------- -------
Net cash provided by operating activities $ 5,592 $ 5,778 $ 4,805
======= ======= =======
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of property in lieu of
foreclosure $ 786 $ 671 $ 270
Dividends reinvested in common stock 815 701 491
Land acquired on land contract 475
</TABLE>
8
<PAGE> 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
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., Karsten Resources, Inc., and Lufter Insurance
Agency, Inc. All significant intercompany items and transactions have
been eliminated.
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 $531,000, $464,000, and $439,000 in 1996, 1995, and 1994,
respectively. At December 31, 1996, Baylake Bank had loans of
$424,000 to United Financial Services, Inc.
The bank grants commercial, mortgage, and installment loans to
customers substantially all of whom are located in Door, Brown,
Kewaunee, and Waupaca Counties of Wisconsin. Although the bank has a
diversified portfolio, 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.
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.
9
<PAGE> 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)
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 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.
10
<PAGE> 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)
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 operation was not material.
11
<PAGE> 64
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
adopted SFAS 122 effective January 1, 1996. The cost of mortgage
servicing rights is amortized in proportion to, and over the period
of, estimated net servicing revenues. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current
market rate. For purposes of measuring impairment, the rights are
stratified based on risk characteristics of the underlying loans
including loan type and note rate. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
Mortgage servicing rights of $143,000 were capitalized and $9,000 were
amortized during 1996. The amount of impairment was not 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 has elected to continue to measure
compensation cost related to employee stock purchase options using
APB 25.
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, 1996, was approximately
$2,865,000.
12
<PAGE> 65
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:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Available For Sale
- ------------------
U.S. Treasury and
other U.S.
government agencies $38,151 $ 800 $ 27 $38,924
Obligations of states
and political
subdivisions 16,788 279 96 16,971
Mortgage-backed
securities 31,469 189 232 31,426
Other 369 369
------- ------- ------- -------
$86,777 $ 1,268 $ 355 $87,690
======= ======= ======= =======
Held to Maturity
- ----------------
Obligations of
states and
political
subdivisions $10,511 $ 421 $ $10,932
Other 937 937
------- ------- ------- -------
$11,448 $ 421 $ $11,869
======= ======= ======= =======
</TABLE>
13
<PAGE> 66
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
Results of sales of securities were as follows:
<TABLE>
<CAPTION>
Held for
Investment Available for Sale
---------- ------------------------------
1995 1996 1995 1994
------- ------- -------- -------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Proceeds $504 $4,214 $5,878 $9,706
Realized gains 4 40 34 103
Realized losses 2 34 128
</TABLE>
A security that had been designated as held to maturity, having an amortized
cost basis of $500,000, was called by the issuer in 1995 with a call premium
being received.
14
<PAGE> 67
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, 1996, 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.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- -------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 5,500 $ 5,501 $ 3,885 $ 3,956
Due after one year
through five years 26,346 26,681 3,352 3,526
Due after five years
through ten years 12,934 13,042 2,135 2,228
Due after ten years 10,528 11,040 2,076 2,159
------- ------- ------- -------
55,308 56,264 11,448 11,869
Mortgage-backed
securities 31,469 31,426
------- ------- ------- -------
$86,777 $87,690 $11,448 $11,869
======= ======= ======= =======
</TABLE>
Securities pledged to secure public and trust deposits and borrowed
funds had a carrying value of $7,447,000 at December 31, 1996, and
a carrying value of $6,780,000 at December 31, 1995.
NOTE 4 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
(Thousands of dollars)
<S> <C> <C>
Commercial, financial, and agricultural $151,291 $129,712
Real estate - construction 11,365 6,378
Real estate - mortgage 83,538 62,271
Installment 15,233 12,522
-------- --------
261,427 210,883
Less: Deferred loan origination fees,
net of costs (573) (653)
-------- --------
Net loans $260,854 $210,230
======== ========
</TABLE>
15
<PAGE> 68
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
Loans available for sale were $-0- and $639,000 at December 31, 1996
and 1995, respectively.
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 1996 and 1995.
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 $7,612,000 and $8,387,000 at December 31,
1996 and 1995, respectively. During 1996, $6,915,000 of new loans were
made and repayments totalled $5,961,000.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $3,677,000 and $846,000 at December 31, 1996 and 1995,
respectively. If these loans had been current throughout their
terms, interest income for the nonaccrual period would have
approximated $472,000 and $74,000 for 1996 and 1995, respectively.
Interest income which has been recorded amounted to $154,000 and
$34,000 for 1996 and 1995, respectively, for these nonaccrual loans.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(Thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $2,617 $2,534 $2,434
Allowance related to assets acquired 120
Provision charged to operations 400 250 260
Recoveries 42 41 111
Loans charged off (286) (208) (271)
------ ------ ------
Balance at end of year $2,893 $2,617 $2,534
====== ====== ======
</TABLE>
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.
16
<PAGE> 69
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
Impaired loans at December 31 $5,136 $3,904
Impaired loans at December 31 allowed for $1,389 $2,154
Average impaired loans during the period $2,589 $2,709
Interest income recognized while loans
impaired $ 118 $ 100
Interest income using a cash-basis method $ 141 $ 120
Allowance as of January 1 (date of
adoption) $ 239 $ 239
Additions during the year 194 131
Recoveries of amounts previously allowed
for (174) (131)
------ ------
Balance at December 31 $ 259 $ 239
====== ======
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Land $ 2,004 $ 2,163 $ 1,069
Buildings and improvements 10,158 6,968 5,686
Equipment 6,302 4,925 4,132
------- ------- -------
18,464 14,056 10,887
Less accumulated depreciation 6,110 5,404 4,957
------- ------- -------
$12,354 $ 8,652 $ 5,930
======= ======= =======
Depreciation expense $ 807 $ 553 $ 461
======= ======= =======
</TABLE>
17
<PAGE> 70
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - OTHER REAL ESTATE
Other real estate ($339,000 in 1996, $378,000 in 1995, and $512,000 in
1994, net of an allowance for other real estate losses of $229,000 in
1996, $378,000 in 1995, and $392,000 in 1994) is included in other
assets.
Net cost of operation of other real estate is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Loss on disposition of properties
and other costs $ 102 $ 66 $ 45
Gain on disposition of properties
and expense recoveries (290) (150) (49)
----- ----- -----
Net costs $(188) $ (84) $ (4)
===== ===== =====
</TABLE>
Changes in the allowance for losses on other real estate were
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 378 $ 392 $ 406
Amounts related to properties disposed (149) (14) (14)
----- ----- -----
Balance at end of year $ 229 $ 378 $ 392
===== ===== =====
</TABLE>
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Federal funds purchased $21,975 $ 774 $1,634
Securities sold under agreements
to repurchase 1,865 754 2,515
------- ------ ------
$23,840 $1,528 $4,149
======= ====== ======
</TABLE>
18
<PAGE> 71
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 $11,791,000 in 1996 and $4,410,000 in 1995. The weighted-average
interest rate on these borrowings was 5.4% for 1996 and 5.7% for
1995. 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 $32,288,000 during
1996 and $10,595,000 during 1995.
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following at December 31,
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land contract requiring annual
principal payments of $53,000
plus interest calculated at
prime + 1/4% $422,400 $475,000
</TABLE>
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS
Cash dividends per share of the company and its acquired
subsidiary to outside shareholders were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Baylake Corp. $.93 $1.14 $1.02
Kewaunee County Banc-Shares,
Inc. 2.50
Equivalent shares after pooling .93 1.14 .98
</TABLE>
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, 1996, 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 $7,817,287.
19
<PAGE> 72
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
Federal banking regulatory agencies have established capital adequacy
rules which take into account risk attributable to balance sheet assets
and off-balance sheet activities. All banks and bank holding companies
must meet a minimum total risk-based capital ratio of 8%. Of the 8%
required, at least half must be comprised of core capital elements
defined as Tier 1 capital. The federal banking agencies also have
adopted leverage capital guidelines which banking organizations must
meet. Under these guidelines, the most highly rated banking
organizations must meet a leverage ratio of at least 3% Tier 1 capital
to total assets, while lower rated banking organizations must maintain
a ratio of at least 4% to 5%. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the consolidated financial statements.
At December 31, 1996, the most recent notification from the Federal
Reserve Board categorized the corporation as well capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed the corporation's category.
To be well capitalized under the regulatory framework, the Tier 1
capital ratio must meet or exceed 6%, the total capital ratio must meet
or exceed 10% and the leverage ratio must meet or exceed 5%.
The corporation's risk-based capital and leverage ratios are as follows
(amounts in thousands):
Risk-Based Capital Ratios
---------------------------------------
December 31, 1996 December 31, 1995
----------------- -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 capital
Baylake Corp. $33,878 12.1% $36,099 16.7%
Minimum requirement 11,160 4.0% 8,630 4.0%
Total capital
Baylake Corp. 36,770 13.2% 38,716 17.9%
Minimum requirement 22,319 8.0% 17,260 8.0%
20
<PAGE> 73
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
Leverage Ratios
-------------------------------------
December 31, 1996 December 31, 1995
----------------- -----------------
Amount Ratio Amount Ratio
------ ----- ------ ----
Tier 1 capital
total assets
Baylake Corp. $33,878 9.6% $36,099 12.1%
Minimum requirement 14,066 4.0% 11,942 4.0%
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The bank is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit, standby letters of credit, and financial guarantees.
The bank's 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 bank uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
Contract or
Notional Amount
-------------------
1996 1995
-------- --------
(Thousands of dollars)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $52,516 $48,950
Standby letters of credit and
financial guarantees written 744 912
21
<PAGE> 74
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 bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the bank 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 bank 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 bank does 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 - ACQUISITIONS
On July 1, 1996, the company acquired all of the common stock of Four
Seasons of Wis., Inc. (Four Seasons) for a cash price of $13,875,000.
Subsequent to the purchase, Four Seasons was liquidated and the net
assets were contributed to Baylake Bank. Four Seasons was a one-bank
holding company with two locations in Waupaca County, Wisconsin. The
acquisition was accounted for under the purchase method of accounting.
The excess of the purchase price over the fair value of the net
identifiable assets acquired of $4,900,000 has been recorded as
goodwill and is being amortized on a straight-line basis over 15
years.
22
<PAGE> 75
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - ACQUISITIONS (continued)
The following unaudited proforma financial information presents the
combined results of operations of the company and Four Seasons as if
the acquisition had occurred as of the beginning of each of the
periods presented.
<TABLE>
<CAPTION>
1996 1995
----------- ----------
(Thousands of dollars except
earnings per common share)
<S> <C> <C>
Total revenue $32,400 $30,444
Net interest income 15,550 15,774
Net income 4,449 4,690
Earnings per common share $1.81 $1.91
Earnings per common share
without effect of goodwill 1.93 2.04
</TABLE>
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:
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
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.
23
<PAGE> 76
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1996,
1995, and 1994, totalled $377,000, $341,000, and $223,000,
respectively.
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 11, certain individuals became fully vested during 1994.
Amounts charged to expense were $136,000 in 1996, $193,000 in 1995,
and $677,000 in 1994.
NOTE 13 - INCOME TAX EXPENSE
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:
1996 1995 1994
------- ------ ------
(Thousands of dollars)
Taxes currently payable
Federal $1,798 $1,753 $1,755
State 238 313 403
------ ------ ------
2,036 2,066 2,158
------ ------ ------
Deferred income taxes
Federal (84) 71 (283)
State (13) 12 (45)
------ ------ ------
(97) 83 (328)
------ ------ ------
Total expense $1,939 $2,149 $1,830
====== ====== ======
24
<PAGE> 77
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAX EXPENSE (continued)
Income tax expense (benefit) associated with realized
securities gains (losses) was $15,000, $2,000, $(10,000), for
1996, 1995 and 1994, respectively.
Provisions for deferred income taxes:
1996 1995 1994
-------- --------- --------
(Thousands of dollars)
Nonaccrual loans $(174) $ (7) $
Deferred loan origination
fees 38 57 (20)
Depreciation 36 48 39
Provision for loan and other
real estate losses (45) (33) (66)
Mortgage loan servicing 3 (10) (55)
Provision for deferred
compensation (19) 64 (255)
Other 64 (36) 29
----- ----- -----
$ (97) $ 83 $(328)
===== ===== =====
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:
1996 1995 1994
------ ------- ------
(Thousands of dollars)
Income tax based on
statutory rate $2,258 $2,310 $2,128
Environmental tax 5 5
State income taxes net of
federal tax benefit 144 214 228
------ ------ ------
2,402 2,529 2,361
Effect of tax-exempt interest
income (466) (345) (458)
Other 3 (35) (73)
------ ------ ------
Provision based on
effective tax rates $1,939 $2,149 $1,830
====== ====== ======
25
<PAGE> 78
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, 1996
and 1995:
1996 1995
---- ----
(Thousands of dollars)
Deferred tax assets
Allowance for loan losses $ 685 $ 640
Deferred loan origination fees 220 258
Deferred compensation 594 575
Mortgage loan servicing 422 425
Nonaccrual loans 220 46
Accrued vacation pay 58 40
Stock option accrued compensation 13 12
Investments acquired in merger 272
----- -----
Gross deferred tax assets 2,484 1,996
Valuation allowance for deferred
tax assets (550) (550)
----- -----
Net deferred tax assets 1,934 1,446
----- -----
Deferred tax liabilities
Depreciation 853 632
Market value adjustment on securities
available for sale 309 77
Other 67 11
----- -----
Total deferred tax liabilities 1,229 720
----- -----
Net deferred asset $ 705 $ 726
===== =====
26
<PAGE> 79
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: 2,457,925 for
1996, 2,452,687 for 1995, and 2,445,350 for 1994. 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.
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
1996 1995 1994
---- ---- ----
(Thousands of dollars)
FDIC assessment $ 13 $ 292 $ 544
Supplies and printing 387 288 284
Other (individually, less than 1%
of total income and total other
income) 2,379 1,978 1,754
------ ------ ------
$2,779 $2,558 $2,582
====== ====== ======
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.
27
<PAGE> 80
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Activity in the plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
--------- ------------ --------
<S> <C> <C> <C>
Shares under option at
December 31, 1993 $ 34,000 $ 14.00 $14.00
Options granted 36,000 28.50 28.50
Options exercised (2,400) 14.00 14.00
-------- -------------- ------
Shares under option at
December 31, 1994 67,600 14.00 - 28.50 21.72
Options granted 36,000 34.50 34.50
Options exercised (800) 14.00 14.00
-------- -------------- ------
Shares option at
December 31, 1995 102,800 14.00 - 34.50 26.26
Options granted 38,000 26.75 26.75
Options exercised (5,600) 14.00 14.00
-------- -------------- ------
Shares under option at
December 31, 1996 $135,200 $14.00 - 34.50 $26.90
======== ============== ======
</TABLE>
In January 1997, options to purchase an additional 40,000 shares were
granted. The exercise price was established at 100% of the fair market
value of the stock on the date of grant, or $26.87 per share.
The options outstanding at December 31, 1996 were:
<TABLE>
<CAPTION>
Weighted
Weighted-Average Average
Number of Shares Exercise Price Remaining
Price ------------------------ ----------------------- Life
Range Outstanding Exercisable Outstanding Exercisable (In Years)
- ------ ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$14.00 25,200 11,600 $14.00 $14.00 6.3
26.75 38,000 26.75 9.0
28.50 36,000 14,400 28.50 28.50 7.0
34.50 36,000 7,200 34.50 34.50 8.0
------ ------ ------ ------ ---
135,200 33,200 $26.90 $24.73 7.7
======= ====== ====== ====== ===
</TABLE>
Options exercisable at December 31, 1995 and 1994 were 17,600 and
4,400, respectively. The weighted average exercise price for options
exercisable at December 31, 1995 and 1994 was $19.93 and $14.00,
respectively.
28
<PAGE> 81
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." This standard establishes
financial accounting and reporting standards for stock-based employee
compensation plans.
SFAS 123 defines a fair value based method of accounting for employee
stock option or similar equity instruments. Under the fair value based
method, compensation cost is measured at the grant date based on the
fair value of the award using an option-pricing model that takes into
account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock,
expected dividends and the risk-free interest rate over the expected
life of the option. The resulting compensation cost is recognized over
the service period, which is usually the vesting period.
Compensation cost can also be measured and accounted for using the
intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued
to Employees." Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount paid to acquire
the stock.
The largest difference between SFAS 123 and APB 25 as it relates to
the company is the amount of compensation cost attributable to the
company's stock option plan. Under APB 25 no compensation cost is
recognized for the stock option plan because the exercise price is
equal to the quoted market price at the date of grant and therefore
there is no intrinsic value. SFAS 123 compensation cost would equal
the calculated fair value of the options granted.
As permitted by SFAS 123, the company continues to measure
compensation cost for the stock option plan using the accounting
method prescribed by APB 25.
29
<PAGE> 82
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
Had compensation cost for the company's options granted after January
1, 1995, been determined according to SFAS 123, the company's net
income and earnings per share would have been reduced to the
following proforma amounts:
1996 1995
------ ------
(Thousands of Dollars)
Net income
As reported $4,703 $4,644
Proforma 4,631 4,604
Earnings per common share
As reported 1.92 1.89
Proforma 1.88 1.88
The fair value of each option grant was estimated as of the
date of grant using the Black-Scholes option pricing method.
The resulting compensation cost was amortized over the vesting
period.
The grant date fair values and assumptions used to determine such
values are as follows:
1996 1995
------ ------
Weighted average grant date fair
value $4.35 $5.61
Assumptions:
Risk-free interest rates 6.2% 6.04%
Expected volatility 9.16% 7.31%
Expected term (in years) 8.0 8.0
Expected dividend yield 3.59% 3.59%
30
<PAGE> 83
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
31
<PAGE> 84
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
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, 1996, are $260,854,000 and
$260,013,000 and for December 31, 1995, are $210,230,000 and
$211,531,000. 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, 1996, are $327,165,000 and
$325,628,000, and for December 31, 1995, are $266,980,000 and
$267,433,000. 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 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.
32
<PAGE> 85
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
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.
33
<PAGE> 86
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
BAYLAKE CORP.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1996 1995
---- ----
(Thousands of dollars)
<S> <C> <C>
ASSETS
Cash in bank $ 406 $ 2,771
Dividend receivable 590
Receivable from subsidiary 34 6
Investment in subsidiaries 38,797 34,080
------- -------
Total assets $39,827 $36,857
======= =======
LIABILITIES AND STOCKHOLDER EQUITY
Liabilities
Dividends payable $ 590 $ 564
Accrued expenses 3 18
------- -------
Total liabilities 593 582
Stockholder equity 39,234 36,275
------- -------
Total liabilities and
stockholder equity $39,827 $36,857
======= =======
</TABLE>
34
<PAGE> 87
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Income
Dividends from subsidiaries $14,284 $2,923 $2,554
Interest income 47 85 51
------- ------ ------
Total income 14,331 3,008 2,605
------- ------ ------
Expenses
Other 40 34 171
Income taxes 2 18 (2)
------- ------ ------
Total expenses 42 52 169
------- ------ ------
Income before equity in
undistributed net
income of subsidiaries 14,289 2,956 2,436
Equity in undistributed net
income of subsidiaries (9,586) 1,688 1,994
------- ------ ------
NET INCOME $ 4,703 $4,644 $4,430
======= ====== ======
</TABLE>
35
<PAGE> 88
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (40) $ (34) $ (172)
Interest received 47 85 51
Dividends received 13,694 3,462 2,294
Income taxes paid (17) 2 (3)
------- ------ ------
Net cash provided by operating
activities 13,684 3,515 2,170
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary (13,875)
------- ------ ------
Net cash used in investing
activities (13,875)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,258) (2,770) (1,544)
Issuance of stock 84 32 34
Repurchase of stock (61)
------- ------ ------
Net cash used by financing
activities (2,174) (2,738) (1,571)
------- ------ ------
Net increase (decrease) in cash (2,365) 777 599
Cash at beginning of year 2,771 1,994 1,395
------- ------ ------
Cash at end of year $ 406 $ 2,771 $ 1,994
======= ======= =======
Reconciliation of net income to net
cash provided by operating
activities:
Net income $ 4,703 $ 4,644 $ 4,430
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed earnings
of subsidiary 9,586 (1,688) (1,994)
Change in receivable
from subsidiary 2 (3)
Change in dividends receivable (590) 539 (260)
Change in accrued expenses (15) 18 (3)
------- ------ ------
Net cash provided by operating
activities $13,684 $3,515 $2,170
======= ======= =======
SUPPLEMENTAL SCHEDULE OF
NONCASH FINANCING ACTIVITIES:
Dividends reinvested in common
stock $ 815 $ 701 $ 491
</TABLE>
36
<PAGE> 89
PART III
The following items are incorporated by reference to the Registrant's Proxy
Statement to be filed pursuant to Regulation 14A for its 1997 Annual Meeting of
Shareholders (the "1997" Proxy Statement").
Item 11. 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 1997 Proxy Statement.
Item 12. 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
1997 Proxy Statement.
Item 13. 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 1997 Proxy Statement.
Item 14. 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."
<PAGE> 90
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 26, 1997
----------------------------
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.*
<TABLE>
<S> <C>
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)
Ronald D. Berg Ruth Nelson
-------------------------------------------- --------------------------
Ronald D. Berg, Director Ruth Nelson, Director
Marie Bertschinger William Parsons
-------------------------------------------- ---------------------------
Marie Bertschinger, Director William C. Parsons, Director
George Delveaux Richard Braun
-------------------------------------------- ----------------------------
George Delveaux, Jr., Director Richard A. Braun, Director
John W. Bunda Joseph Morgan
-------------------------------------------- ----------------------------
John W. Bunda, Director Joseph Morgan, Director
John D. Collins
--------------------------------------------
John D. Collins, Director
</TABLE>
*Each of the above signatures is affixed as of March 26, 1997.
<PAGE> 91
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
1996 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
------- ----------- ------------------- --------
<S> <C> <C> <C>
2.1 Agreement and Plan of Acquisition dated March 13,
1996 between the Registrant and Four Seasons of
Wis Corp.
2.2 Agreement and Plan of Reorganization dated as of Exhibit 2.1 to Registrant's Annual Report
February 18, 1994 among the Registrant, Kewaunee on Form 10-K for the year ended December
Acquisition Corp. ("KAC") and Kewaunee County 31, 1993 ("1993 10-K")
Banc-Shares, Inc. ("KCB")
2.3 Merger Agreement dated as of March 30, 1994 among Exhibit 2.2 to 1993 10-K
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 (bonus) Program Description thereof under "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 Agreement with Exhibit 10.3 to 1993 10-K
Thomas L. Herlache
10.4** Registrant's Agreement for Early Retirement with Exhibit 10.4 to 1993 10-K
Ronald D. Berg
10.5** Deferred Compensation and Salary Continuation Exhibit 10.4 to the Registrant's
Agreement with Richard A. Braun Registration Statement on Form S-4, No.
33-81184
21 List of Subsidiaries X
23 Consent of Smith & Gesteland X
24 Power of Attorney (contained on the Signature X
Page)
27 Financial Data Schedule X
</TABLE>
* 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.
** Designated management contracts or compensatory plans or arrangements
filed as exhibits.
<PAGE> 1
EXHIBIT 21
BAYLAKE CORP.
LIST OF SUBSIDIARIES:
Baylake Bank Kewaunee County BancShares
Bank of Sturgeon Bay Building Corp. Lufter Insurance Agency
Baylake Insurance
Baylake Investments, Inc.
Cornerstone Financial, Inc.
Karsten Resources, Inc.
<PAGE> 1
CONSENT OF SMITH & GESTELAND
We consent to incorporation by reference in the registration statement on
Form S-8 of Baylake Corp. of our report dated January 24, 1997 relating to the
consolidated balance sheets of Baylake and its subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholder equity and cash flows for each of the years ended December 31,
1996, 1995, and 1994, which report appears in Baylake's Annual Report on Form
10-K for the year ended December 31, 1996.
Madison, Wisconsin SMITH & GESTELAND, LLP
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,853
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,690
<INVESTMENTS-CARRYING> 11,448
<INVESTMENTS-MARKET> 11,869
<LOANS> 260,854
<ALLOWANCE> 2,893
<TOTAL-ASSETS> 395,356
<DEPOSITS> 327,165
<SHORT-TERM> 23,840
<LIABILITIES-OTHER> 4,695
<LONG-TERM> 422
0
0
<COMMON> 12,302
<OTHER-SE> 39,234
<TOTAL-LIABILITIES-AND-EQUITY> 395,356
<INTEREST-LOAN> 21,367
<INTEREST-INVEST> 5,500
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 26,926
<INTEREST-DEPOSIT> 11,370
<INTEREST-EXPENSE> 12,046
<INTEREST-INCOME-NET> 14,880
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 11,289
<INCOME-PRETAX> 6,642
<INCOME-PRE-EXTRAORDINARY> 4,703
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,703
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 4.97
<LOANS-NON> 3,677
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,000
<LOANS-PROBLEM> 1,389
<ALLOWANCE-OPEN> 2,617
<CHARGE-OFFS> 286
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2,893
<ALLOWANCE-DOMESTIC> 2,893
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
