<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, 1997
--------------------------------------------
[ ] 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)
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: (920)-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
---------
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, 1998 2,437,537 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $31.50 reported bid
price on that date) held by non-affiliates (excludes a total of 257,678 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $68,665,559.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
-------- ---------------------------------------
Proxy Statement for 1998 Annual Meeting Part III
of Shareholders
<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.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. At December 31,
1997, the Bank had total assets of $450.1 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 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.
<PAGE> 3
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.
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).
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 through the Four Seasons acquisition which is further referenced in
Item 7. of Management's Discussion and Analysis of Financial Condition and
Results of Operations under General) and is located approximately 35 miles west
of Green Bay.
<PAGE> 4
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 focuses 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, 1997 amounted to
approximately $293.4 million, consisting of 79.3% residential, commercial,
agricultural and construction real estate loans, 13.9% commercial and industrial
loans, 4.6% installment and 2.2% 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, 1997, the Bank's
total deposits amounted to $346.0 million, including interest bearing deposits
of $301.8 million and non-interest bearing deposits of $44.2 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.
<PAGE> 5
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, 1997. 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 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
<PAGE> 6
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, 1997, the Registrant and its subsidiary, had 190 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>
1997 1996 1995
---- ---- ----
Assets
<S> <C> <C> <C>
Cash and Due from Banks $ 10,162 $ 9,168 $ 7,609
Investment Securities:
U. S. Treasury 2,691 5,270 6,076
U. S. Government Agencies 58,687 50,384 46,865
State and Municipal Obligations 32,858 25,143 18,495
Other Securities 4,475 2,967 2,376
Market Adjustment on AFS Securities 927 52 (1,153)
------- ------- -------
Total Investments $ 99,638 $ 83,816 $ 72,659
------- ------- -------
Federal Funds Sold $ 17 $ 943 $ 4,849
Loans, Net of Unearned Income $276,639 $233,473 $201,839
Reserve for Loan Losses (3,203) (2,792) (2,669)
------- ------- -------
Net Loans $273,436 $230,681 $199,170
------- ------- -------
Bank Premises and Equipment $ 12,521 $ 9,925 $ 6,873
Other Real Estate Owned $ 38 $ 150 $ 128
Other Assets $ 12,441 $ 17,600 $ 7,326
------- ------- -------
Total Assets $408,253 $352,283 $298,614
======= ======= =======
Liabilities and Stockholders' Equity
Demand Deposits $ 41,521 $ 37,229 $ 32,350
NOW Account Deposits 38,898 36,593 33,060
Savings Deposits 88,544 88,046 83,470
Time Deposits 163,755 135,759 106,444
------- ------- -------
Total Deposits $332,718 $297,627 $255,324
------- ------- -------
Short Term Borrowings $ 27,701 $ 9,949 $ 3,131
Customer Repurchase Agreements $ 1,800 $ 1,841 $ 1,279
Long Term Debt $ 377 $ 423 $ 475
Other Liabilities $ 5,562 $ 4,500 $ 3,834
------- ------- -------
Total Liabilities $368,158 $314,340 $264,043
------- ------- -------
Common Stock $ 12,302 $ 12,286 $ 12,272
Additional paid in capital 6,038 5,989 5,947
Retained Earnings 21,347 19,675 17,141
Net Unrealized Gains (Losses) on AFS Securities 609 42 (740)
Treasury Stock (201) (49) (49)
------- ------- -------
Total Equity $ 40,095 $ 37,943 $ 34,571
------- ------- -------
Total Liabilities and Stockholders' Equity $408,253 $352,283 $298,614
======= ======= =======
</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>
1997 1996
Amount Interest Yield Amount
------ -------- ----- ------
Interest-earning assets:
<S> <C> <C> <C> <C>
Loans, Net $276,639 9.22% $233,473
Less: non-accruing Loans (1,269) (2,402)
-------- --------
Loans $275,370 $25,496 9.26% $231,071
U.S. Treasury Securities 2,691 168 6.24% 5,270
U.S. Government Agencies 58,687 3,833 6.53% 50,384
State and Municipal 32,858 2,755 8.38% 25,143
Obligations
Other Securities 2,026 132 6.52% 569
Federal Funds Sold 17 1 5.88% 943
Other Money Market Instruments 2,449 129 5.27% 2,398
-------- -------- ------ --------
Total Interest Earning $374,098 $ 32,514 8.69% $315,778
Assets (net of non-accruing ======== ======== ====== ========
loans)
Interest-bearing
liabilities:
NOW Accounts $38,898 $ 892 2.29% $36,593
Savings Accounts 88,544 2,770 3.13% 88,046
Time Deposits 163,755 9,279 5.67% 135,759
Short Term Borrowings 27,701 1,619 5.84% 9,949
Customer Repurchase 1,800 70 3.89% 1,841
Agreements
Long Term Debt 377 32 8.49% 423
-------- ------- ------ --------
Total Interest-bearing Liabilities $321,075 $14,662 4.57% $272,611
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
Interest Yield Amount Interest Yield
-------- ----- ------ -------- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Loans, Net 9.15% $201,839 9.74%
Less: non-accruing Loans (1,463)
--------
Loans $21,367 9.25% $200,376 $19,661 9.81%
U.S. Treasury Securities 304 5.77% 6,076 303 4.99%
U.S. Government Agencies 3,494 6.93% 46,865 2,895 6.18%
State and Municipal 2,350 9.35% 18,495 1,897 10.26%
Obligations
Other Securities 34 5.98% 423 25 5.91%
Federal Funds Sold 58 6.15% 4,849 282 5.82%
Other Money Market 119 4.96% 1,953 69 3.53%
Instruments ------- ---- -------- ------- ----
Total Interest Earning $27,726 8.78% $279,037 $25,132 9.01%
Assets (net of non-accruing ======= ==== ======== ======= ====
loans)
Interest-bearing
liabilities:
NOW Accounts $ 868 2.37% $33,060 $ 910 2.75%
Savings Accounts 2,858 3.25% 83,470 2,978 3.57%
Time Deposits 7,644 5.63% 106,444 5,951 5.59%
Short Term Borrowings 571 5.74% 3,131 198 6.32%
Customer Repurchase 68 3.69% 1,279 52 4.07%
Agreements
Long Term Debt 37 8.75% 475 42 8.84%
------- ------ -------- ------- ------
Total Interest-bearing Liabilities $12,046 4.42% $227,859 $10,131 4.45%
======= ==== ======== ======= ====
</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>
1997 1996 1995
<S> <C> <C> <C>
Total Interest Income $ 32,514 $ 27,726 $ 25,132
Total Interest Expense 14,662 12,046 10,131
-------- -------- --------
Net Interest Earnings $ 17,852 $ 15,680 $ 15,001
======== ======== ========
Net Yield on Interest- 4.77% 4.97% 5.38%
earning Assets (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>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
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 $4,099 $ 30 $4,129 $2,925 ($1,219) $ 1,706
U.S. Treasury
Securities (155) 19 (136) (43) 44 1
U.S. Government
Agencies 559 (220) 339 231 368 599
State and Municipal
Obligations 684 (279) 405 652 (199) 453
Other Securities 91 7 98 9 0 9
Federal Funds Sold (56) (1) (57) (234) 10 (224)
Other Money Market
Instruments 3 7 10 19 31 50
----- ----- ----- ----- ----- -----
Total Interest
Earning Assets $5,225 ($ 437) $4,788 $3,559 ($ 965) $ 2,594
====== ====== ====== ====== ====== =======
Interest paid on:
NOW Accounts $ 54 ($ 30) $ 24 $ 91 ($ 133) ($ 42)
Savings Accounts 16 (104) (88) 156 (276) (120)
Time Deposits 1,581 54 1,635 1,645 48 1,693
Short Term
Borrowings 1,028 20 1,048 411 (38) 373
Customer Repurchase
Agreements (2) 4 2 22 (6) 16
Long Term Debt (4) (1) (5) (5) 0 (5)
----- ----- ----- ----- ----- -----
Total Interest-
Bearing
Liabilities $2,673 $ (57) $2,616 $2,320 ($ 405) $ 1,915
====== ======= ====== ====== ====== =======
</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,
1997, 1996 and 1995 are summarized as follows (in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Available for Sale
- ------------------
<S> <C> <C> <C>
U.S. Treasury and Other U.S. $ 31,453 $ 38,924 $ 11,321
government agencies
Mortgage-backed securities 34,337 31,426 38,430
Obligations of states and 33,214 16,971 13,322
political subdivisions
Other 3,958 369 893
-------- ------- --------
$102,962 $ 87,690 $ 63,966
Held to Maturity
- ----------------
Obligations of states and $ 11,937 $ 10,511 $ 11,237
political subdivisions
Other 0 937 408
-------- -------- --------
$ 11,937 $ 11,448 $ 11,645
Total $114,899 $ 99,138 $ 75,611
</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, 1997 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. $ 8,122 7.82% $16,428 6.66% $ 2,989 7.18%
Government agencies
Mortgage-backed securities 7,101 6.08% 12,000 6.56% 13,248 6.60%
Obligations of states and 3,158 8.93% 8,595 8.36% 11,751 7.68%
political subdivisions
Other 3,019 5.29%
------- ------ ------- ------ ------- ------
Total $21,400 7.05% $37,023 7.02% $27,988 7.12%
</TABLE>
<TABLE>
<CAPTION>
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. $ 3,914 7.46% $ 31,453 7.11%
Government agencies
Mortgage-backed securities 1,988 6.29% 34,337 6.46%
Obligations of states and 21,647 8.04% 45,151 8.07%
political subdivisions
Other 939 5.82% 3,958 5.42%
------- ----- ------- -----
Total $28,488 7.77% $114,899 7.24%
</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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Loans secured primarily by real estate:
<S> <C> <C> <C> <C> <C>
Secured by 1 to 4 family $100,555 $ 83,538 $ 62,271 $ 52,873 $ 48,190
residential properties
Real estate-construction 14,760 11,365 6,378 5,881 4,511
Other real estate loans 118,103 104,391 83,461 69,702 64,585
Loans to farmers 6,314 5,883 5,771 6,103 5,586
Commercial and Industrial 40,624 40,777 40,287 42,157 41,558
loans
Loans to individuals for 13,480 15,233 12,522 16,603 16,844
household, family and
other personal
expenditures
All other loans 140 240 193 152 378
-------- -------- -------- -------- --------
Total gross loans $293,976 $261,427 $210,883 $193,471 $181,652
Less:
Unearned Income (538) (573) (653) (798) (748)
-------- -------- -------- -------- --------
Net Loans $293,438 $260,854 $210,230 $192,673 $180,904
======== ======== ======== ======== ========
</TABLE>
<PAGE> 14
2. As of December 31, 1997, there existed potential problem loans totaling
$695,833 which are additionally disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1997.
<TABLE>
<CAPTION>
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
<S> <C> <C> <C>
$ 387,367 10% $ 38,737
171,791 25% 42,948
33,029 50% 16,515
97,286 75% 72,965
6,360 100% 6,360
---------- ---- ----------
Totals $ 695,833 $ 177,523
</TABLE>
Commercial loans comprised $449,715 or 64.6% of the total loans categorized as
problem loans. The other types of loans comprising this amount were consumer
loans totaling $171,431 or 24.7% and mortgage loans totaling $74,687 or 10.7%.
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, 1997, there existed the following industry group concentrations in the
Registrant's loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $50.3 million or 17.1%
----------------------
Total tourism loans $50.3 million or 17.1%
<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, 1997 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 $ 33,021 $ 42,111 $ 25,423 $100,555
Real estate - construction 2,811 4,625 7,324 14,760
Other real estate loans 22,490 37,008 58,605 118,103
Loans to farmers 1,202 1,979 3,133 6,314
Commercial and industrial loans 14,669 18,475 7,480 40,624
Loans to individuals for
household, family and other
personal expenditures 6,954 6,369 157 13,480
All other loans 140 0 0 140
------- ------- ------- -------
Total $ 81,287 $110,567 $102,122 $293,976
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
-------------------------
Fixed Variable
Rate Rate
----- --------
<S> <C> <C>
Due after one year $107 734 $104 955
</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>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,720 $ 3,677 $ 846 $ 1,536 $ 1,508
Troubled debt restructurings 2,930 1,000 648 815 255
Loans past due 90 days or more 0 0 0 90 56
----- ----- ----- ----- -----
Total $ 4,650 $ 4,677 $ 1,494 $ 2,441 $ 1,819
====== ====== ====== ====== ======
</TABLE>
<PAGE> 16
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $202,000; $472,000; $74,000; $117,000; and
$175,000 for 1997, 1996, 1995, 1994 and 1993 respectively. Interest income which
is recorded only as received, amounted to $180,000; $154,000; $34,000; $58,000;
and $101,000 for 1997, 1996, 1995, 1994 and 1993 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. When interest accruals are
discontinued, interest credited to income is reversed. If collectibility is in
doubt, cash receipts on nonaccrual loans are used to reduce principal rather
than recorded as interest income.
<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
-----------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Daily average amount of loans $276,639 $233,473 $201,839 $187,945 $174,371
======== ======== ======== ======== ========
Balance of allowance for $ 2,893 $ 2,617 $ 2,534 $ 2,434 $ 2,253
possible loan losses
at beginning of period
Loans Charged Off:
Real estate - mortgage 1 99 ---- ---- 12
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 197 82 158 238 86
Consumer Loans 121 105 50 32 82
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 319 $ 286 $ 208 $ 270 $ 180
======== ======== ======== ======== ========
Recoveries of loans previously charged off:
Real estate - mortgage 1 ---- ---- ---- 6
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 149 16 33 62 5
Consumer loans 42 26 8 48 46
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loan recoveries $ 192 $ 42 $ 41 $ 110 $ 57
-------- -------- -------- -------- --------
Net loans charged off $ 127 $ 244 $ 167 $ 160 $ 123
-------- -------- -------- -------- --------
Additions to allowance for $ 1,115 $ 400 $ 250 $ 260 $ 304
loan losses charged to -------- -------- -------- -------- --------
operating expense
Allowance for loan losses at end of period $ 3,881 $ 2,893 $ 2,617 $ 2,534 $ 2,434
======== ======== ======== ======== ========
Ratio of net charge offs .05% .10% .08% .09% .07%
during 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
<PAGE> 18
in (1) above.
3. The charged off loans to total loan loss experience.
4. The economic stability within the market area and its impact on the
loan portfolio.
<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, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ Category ------ Category ------ Category ------ Category ------ Category
to Total to Total to Total to Total to Total
Loans Loans Loans Loans Loans
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage $1,900 74.4% $1,143 71.9% $1,000 69.1% $ 974 63.4% $ 924 62.1%
Real estate -
construction 50 5.0% 50 4.3% 50 3.0% 50 3.0% 50 2.5%
Loans to farmers 20 2.1% 20 2.3% 20 2.7% 20 3.2% 20 3.1%
Commercial/industrial 1,520 13.9% 1,300 15.7% 1,190 19.2% 1,133 21.8% 1,083 23.0%
Consumer 371 4.6% 360 5.8% 337 6.0% 337 8.6% 337 9.3%
Not allocated 20 20 20 20 20
------ --- ------ --- ------ --- ------ --- ------ ---
Total $3,881 100% $2,893 100% $2,617 100% $2,534 100% $2,434 100%
====== === ====== ==== ====== === ====== === ====== ===
</TABLE>
<PAGE> 20
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 41,521 0.00% $ 37,229 0.00% $ 32,350 0.00%
Interest bearing demand
deposits 38,898 2.29% 36,593 2.37% 33,060 2.75%
Savings deposits 88,544 3.13% 88,046 3.25% 83,470 3.57%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 130,084 5.63% 116,375 5.57% 94,858 5.53%
Time Certificates of Deposit
of $100,000 or more 33,671 5.80% 19,384 5.99% 11,586 6.11%
-------- -------- --------
Total Deposits $332,718 3.89% $297,627 3.82% $255,324 3.85%
======== ======== ========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
3 months or less $ 15,801 $ 6,411 $ 2,783
Over 3 months thru 6 months 7,078 5,376 5,066
6 months thru 12 months 7,621 5,737 2,336
Over 12 months 1,833 2,349 1,338
-------- -------- --------
Total $ 32,333 $ 19,873 $ 11,523
======== ======== ========
</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
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.29% 1.34% 1.56%
Average Stockholders' Equity (return
on equity) 13.14% 12.39% 13.43%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 56.74% 48.44% 60.32%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 9.82% 10.77% 11.58%
</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 thousands of dollars).
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Federal Funds purchased $18,373 7.07% $21,975 6.11% $ 774 6.00%
Federal Home Loan Bank 36,000 5.88%
borrowings
Securities Sold under 2,276 5.07% 1,845 3.55% 754 4.00%
agreements to ------ ---- ------ ---- ----- ----
repurchase
$56,649 6.23% $23,840 5.91% $1,528 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 thousands of
dollars).
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal funds purchased $18,373 $30,016 $ 9,519
Federal Home Loan Bank 36,000
borrowings
Securities sold under 2,276 2,272 1,076
agreements to repurchase
</TABLE>
<PAGE> 23
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>
1997 1996 1995
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
Short-term
borrowings:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds $20,944 $1,233 5.89% $9,950 $571 5.74% $3,131 $198 6.32%
purchased
Federal Home Loan 6,756 386 5.71%
Bank borrowings
Securities sold 1,800 70 3.89% 1,841 68 3.69% 1,279 52 4.07%
under agreements ------ ----- ---- ------ --- ---- ----- --- ----
to repurchase
Total short-term
borrowings $29,500 $1,689 5.73% $11,791 $639 5.42% $4,410 $250 5.67%
====== ===== ==== ====== === ==== ===== === ====
</TABLE>
<PAGE> 24
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, of 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% and a supplier contract for $14,000 with a five
year term and payments monthly.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Land contract payable $ 369 8.50% $ 422 8.75% 475 8.75%
Other 14 4.50%
------ ---- ------ ---- ------ ----
$ 383 8.35% $ 422 8.75% $ 475 8.75%
====== ==== ====== ==== ====== ====
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Land contract payable $ 370 $ 422 $ 475
Other $ 15
</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>
1997 1996 1995
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ------- ------ ---- ------- ------ ---- -------
Long term debt:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Land contract payable $ 370 $ 31 8.50% $ 422 $ 37 8.75% $ 475 $ 41 8.75%
Other $ 7 $ 1 4.50%
----- --- ---- ----- --- --- ----- --- ----
Total long term debt $ 377 $ 32 8.49% $ 422 $ 37 8.75% $ 475 $ 41 8.75%
===== === ==== ===== === ==== ===== === ====
</TABLE>
<PAGE> 25
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 1997.
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> 26
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>
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
1997 1st Quarter 26.87 24.00 0.240
2nd Quarter 23.75 26.25 0.240
3rd Quarter 25.00 28.50 0.240
4th Quarter 26.50 30.00 0.500
</TABLE>
Baylake had approximately 1,552 shareholders of record at March 24, 1998.
Baylake paid a special dividend of $.25 per share cash dividend in December
1997.
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> 27
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.
Effective April 1, 1997, Baylake suspended its dividend reinvestment plan as a
result of certain short-term compliance costs. As a result, shareholders
received cash dividends for the remainder of 1997. Effective with the March 15,
1998 dividend payment Baylake reinstated the dividend reinvestment plan,
consequently, shareholders in the dividend reinvestment plan who so elected were
able to purchase shares or partial shares of stock in lieu of receiving cash
dividends.
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except amounts per share)
<S> <C> <C> <C> <C> <C>
Interest Income $31,577 $26,926 $24,487 $21,445 $20,468
Interest Expense $14,662 $12,046 $10,131 $ 7,556 $ 7,507
Net Interest $16,915 $14,880 $14,356 $13,889 $12,961
Income
Provision for Loan $ 1,115 $ 400 $ 250 $ 260 $ 304
Losses
Other Income $ 4,068 $ 3,451 $ 2,581 $ 2,320 $ 2,697
Other Expense $12,571 $11,289 $ 9,894 $ 9,689 $ 8,769
Income before $ 7,297 $ 6,642 $ 6,793 $ 6,260 $ 6,585
income taxes
Net income $ 5,270 $ 4,703 $ 4,644 $ 4,430 $ 4,662
Earnings per
share:
Basic earnings
per share $ 2.15 $ 1.92 $ 1.89 $ 1.81 $ 1.92
Fully diluted $ 2.14 $ 1.90 $ 1.88 $ 1.81 $ 1.92
Dividends per 1.22 .93 1.14 1.02 .58
share (1)
Total assets $450,062 $395,356 $309,428 $287,107 $284,075
(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> 29
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"), 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 1997 was $5.3 million, a 12.1% increase from the $4.70 million
earned in 1996. Net income for 1996 showed a 1.3% increase over 1995 earnings.
Basic operating earnings per share increased to $2.15 per share in 1997 compared
with $1.92 in 1996, an increase of 12.0%. Basic operating earnings per share in
1996 showed a 1.6% increase over 1995 results of $1.89 per share. On a diluted
operated earnings per share basis, the Registrant recorded $2.14 per share in
1997, compared to $1.90 and $1.88 per share in 1996 and 1995, respectively.
The presentation of basic and diluted earnings per share on the consolidated
statements of income is in accordance with the Registrant's adoption of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 (SFAS 128) "Earnings per
Share". Under the provisions of SFAS 128, primary and fully diluted earnings per
share reporting were replaced with basic and diluted earnings per share.
Net income for 1997 includes amortization expense of goodwill related to the
purchase of Four Seasons. This expense reduced after-tax net income in 1997 by
$326,000 or earnings per share by $.13. Net income for 1996 reflected
amortization expense of $144,000 related to the Four Seasons acquisition. Those
charges in 1996 reduced after-tax earnings per share by $.06.
Net interest income for 1997 improved $2.0 million or 13.7% over 1996 levels.
Net interest income for 1996 improved $524,000 or 3.7% over 1995 levels. In a
relatively stable interest environment, interest income increased 17.3% while
interest expense increased 21.7%.
Other income showed an increase of $617,000 or 17.9%. The primary factors
increasing other income were securities gains and gains on sales of loans into
the secondary market.
Non-interest expense increased $1.3 million or 11.4% over 1996 levels. Factors
contributing to the increase were increased personnel expenses and
<PAGE> 30
occupancy expense.
For 1997, return on average assets declined to 1.29% compared with 1.34% in 1996
and 1.56% recorded in 1995. This ratio declined as a result of the various
factors discussed above combined with average asset growth of 15.9% in 1997.
Return on average stockholders' equity in 1997 showed an increase at 13.14%
compared to 12.39% in 1996 and a decrease compared to 13.43% in 1995. The
increase in 1997 compared to 1996 occurred as a result of increased net income
and the factors discussed above.
Cash dividends declared in 1997 increased 31.2% to $1.22 per share compared to
$.93 in 1996. This compares to a decrease of 18.4% in 1996 dividends as compared
to 1995.
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
81.4% of 1997 total operating income, as compared to 82.0% in 1996 and 85.3% in
1995. 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 $17.9 million in 1997, an
increase of 13.9% from $15.7 million in 1996 (and $15.0 million in 1995). The
improvement in 1997 net interest income of $2.2 million was due in part to a
18.3% increase in the volume of average earning assets, offset by a 17.8%
increase in average interest-bearing liabilities. The benefit from the increase
in earning assets and the increase in noninterest bearing deposits were offset,
in part, by an increase in interest-bearing liabilities, a decline in the yield
on earning assets and an increase in the cost of interest paying liabilities. As
a result, interest income increased 17.3%, while interest expense for 1997
increased 21.7%.
Average loans outstanding grew from $233.5 million in 1996 to $276.6 million in
1997, an increase of 18.5%. The increase in loan volumes also was a significant
contributing factor to the increase in interest income. Average loans
outstanding increased from $201.8 million in 1995 to $233.5 million in 1996, an
increase of 15.7%. The mix of average loans to average total assets declined
slightly from 67.6% in 1995 to 66.3% in 1996 and increased to 67.8% in 1997. 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
<PAGE> 31
on average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread decreased 24 basis points in 1997 to 4.12%
from 4.36% in 1996, as the average yield on earning assets decreased 9 basis
points while the average cost paid on interest-bearing liabilities increased 15
basis over the same period. The decrease in interest rate spread followed a
decline of 20 basis points in 1996 compared to a spread of 4.56% in 1995. The
decrease in the Registrant's earning assets yield reflects stable loan yields,
resulting from increased competition, less frequent repricing of variable rate
loans due to a stable interest rate environment on average and an increased
percentage of the Registrant's assets represented by loans. Increased investment
interest income resulting from an increased investment portfolio combined with
lower yields on the investment portfolio have contributed to the decline in
interest rate spread. Yields on interest-paying liabilities increased 15 basis
points as a result of two factors. First, increased competition for retail
deposits and new product offerings increased yields on interest bearing deposits
by 7 basis points from 4.37% to 4.44% in 1997 compared to 1996. Second, as a
result of an effort intended to increase interest-earning assets and thus reduce
the percentage of equity to total assets (known as leveraging) Bank was able to
acquire additional funding, primarily from the Federal Home Loan Bank (FHLB) of
Chicago. This effort increased the percentage of short-term borrowings as a
percentage of interest-bearing liabilities to 8.6% in 1997 compared to 3.7% in
1996. Yields on these borrowings increased 10 basis points in 1997 adding to the
rates paid on interest-bearing liabilities.
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 1997 was 4.77% compared to 4.97% in 1996. The
decline in net interest margin was primarily the result of the 24 basis point
decline in the interest rate spread offset by an increase 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 21.4% from 22.6% in 1996, which caused a
reduction in net interest margin.
The net interest margin for 1996 was 4.97% as compared to 5.38% in 1995 as
interest rate spread declined during that period. The decrease in 1996 occurred
primarily as the result of the 20 basis point decline in the interest rate
spread and a reduction in the average earning assets to average ratio. Increased
competition especially as it relates to the commercial loan portfolio negatively
affected 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 91.6% in 1997 compared with 89.6% in 1996 and 93.4% in
1995. The ratio improved in 1997 as a result of efforts to increase interest
earning assets using such sources of FHLB and increased loan demand.
<PAGE> 32
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Registrant
constantly seeks to attract lower cost core deposits, service the needs of the
customer, and provide attractively priced products. Competition for high quality
assets will also affect asset yields. Net interest income is vital to the
Registrant's earnings performance, since net interest income is the largest
component of operating income. Growth in net interest income primarily is the
result of growth in the level of earning asset volumes and changes in asset mix.
Interest rate spread management through asset and liability pricing and
increased levels of non-interest-bearing sources of funds also aid in improving
net interest income. Management will continue its focus on maintaining an
appropriate mix of quality earning assets as well as seeking to achieve
appropriate growth in volumes.
Changes in the levels of market interest rates also affect net interest income,
but are less directly under the control of the Registrant. Although a rather
stable rate environment has been experienced, 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 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 1997 at $1,115,000 compares to a provision of
$400,000 for 1996 and $250,000 for 1995. Net charge-offs in 1997 were $127,000
compared with net charge-offs of $244,000 in 1996 and $167,000 in 1995. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .05% in 1997 compared with .10% in 1996
and .08% in 1995. The provision was increased as a result of higher average loan
growth experienced compared to an allowance for loan loss levels to average loan
ratios that has declined in recent years. Additionally entry into new markets
has allowed management the opportunity to re-evaluate the methodology used in
providing adequate provision for potential loan losses. 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 for 1997, excluding securities transactions, was
$363,000 more than 1996, or a 10.6% increase. In 1996, total non-interest income
was $836,000 more than 1995, or a 32.4% increase. Trust service fees, loan
servicing fees, gains from sales of loans and service charges continue to be the
primary components of non-interest income.
<PAGE> 33
Trust fees decreased $120,000 or 19.6% in 1997 compared to 1996, primarily as a
result of a reduction in trust estate business. This compared to an increase of
$217,000 or 55.1% in 1996 compared to 1995, due to increased trust business and
the timing of certain billable business.
Loan servicing fees increased $57,000 or 8.5% to $731,000 in 1997. $58,000 of
the increase stemmed from income derived from mortgage servicing rights
activity. The adoption of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 122
(SFAS 122) "Accounting for Mortgage Servicing Rights" occurred in 1996. This
followed an increase of $169,000 or 33.5% in 1996 as compared to 1995 following
the implementation of SFAS 122 which accounted for $134,000 of the increase.
Additional income was realized as a result of a larger portfolio of commercial
loan business sold on the secondary market and serviced by Registrant.
Gains on sales on loans in the secondary market increased $466,000 to $678,000
in 1997 primarily as a result of increased commercial loan business and a
favorable rate environment in which to take gains. The business sold consisted
of the guarantee portion of loans partially guaranteed by the Small Business
Administration (SBA) and sold with servicing rights retained by Registrant.
Service charges on deposit accounts showed an improvement of $101,000 or 13.5%
over 1996 results accounting for much of the improvement in fee income generated
for other services to customers.
Included in 1997 other income are revenues of $116,000 stemming from the
operation of Karsten Resources, Inc. This compares to revenues of $277,000
reported in 1996. The operation of Karsten Resources, Inc. was sold in the
latter part of 1997 with a gain on sale of assets of $17,000 realized.
Non-Interest Expense
Non-interest expense in 1997 increased $1.3 million or 11.4% compared to 1996
results primarily as a result of increased personnel, occupancy and data
processing expense. This followed a $1.4 million or 14.1% rise in 1996 as
compared to 1995.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $7.0 million in 1997, an increase of $733,000 or 11.7% as
compared to 1996 results. The increase in 1997 primarily results from additional
staffing increases, increased benefit costs, and normal salary increases. Salary
and employee benefits expense in 1996 totaled $6.3 million, an increase of
$879,000 or 16.3% over 1995 results. This increase resulted from additional
staffing, a result of expansion into the Green Bay market and Waupaca County
market (stemming from the Four Seasons acquisition) and normal salary increases.
Bonuses arising from the Registrant's Pay-For-Performance Program amounted to
$390,000 in 1997 compared to $373,000 in 1996, an increase of 4.6%. 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.
<PAGE> 34
The Registrant's 401(k) profit sharing plan covering all employees who qualify
as to age and length of service showed an increase of $46,000 or 12.2% over 1996
levels. Expenses in the same category were up $36,000 or 10.6% in 1996 compared
to 1995 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 190 in 1997 compared
to 185 in 1996, an increase of 2.7%. Employee levels in 1996 increased to 185
from 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. 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 for 1997 showed an increase of $298,000 or 34.3% compared
to 1996. This increase followed an increase of $180,000 or 26.1% in 1996. This
expense has resulted from expansion costs in the development of the Green Bay
region and two new branches completed in 1997 for the Door County market area
(Egg Harbor and West Side locations) resulting in additional depreciation
expense, real estate tax expense, and other occupancy costs.
Equipment expense showed an increase of $5,000 or .6% compared to 1996. This
followed an increase of $230,000 or 36.4% in 1996. 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 1997 increased $88,000 or 17.0% due to moderate
volume increases and technology enhancements. This followed a decrease of
$11,000 or 1.6% in 1996 compared to 1995. 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 a
net loss of $30,000 in 1997 as a result of a loss on sale of approximately
$17,000, a result of a sale of a commercial property disposed of in 1997. 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.
Other operating expenses in 1997 were $66,000 less than in 1996 or a 2.3%
decrease. Included in 1997 expenses was amortization of goodwill related to the
Four Seasons acquisition of $328,000 in 1997. This compares to an increase of
$221,000 or 8.6% in 1996 compared to 1995. Primarily affecting
<PAGE> 35
this change was amortization expense goodwill amounting to $144,000 in 1996.
Supplies expense shows a decrease of $47,000, or 13.0% 1997 as compared to 1996
primarily as a result of branch startup costs that existed in 1996. This
compares to an increase of $99,000 in 1996 as related to 1995.
Payments to regulatory agencies increased $28,000 to $41,000 for 1997. These
charges related to debt service assessment related to Financing Corporation
(FICO). A risk classification rating of 1A (rating assigned to well capitalized
institutions) allowed Bank to experience no Federal Deposit Insurance
Corporation (FDIC) assessments in 1997.
Operating costs for Karsten Resources, Inc. of $180,000 are included as part
of other operating expenses for 1997. This compares to costs of $328,000
included as a part of other operating expenses for 1996.
Other items comprising other operating expense shows an increase of $114,000 or
a 5.1% increase in 1997 compared to 1996. Additional marketing and advertising
expense of $20,000 in 1997 account for some of this increase. These costs were
primarily the result of the Bank's expansion efforts. Director fees and other
related costs show an increase of $38,000 in 1997 due to additional regional
boards being established in the year for purposes of keeping involvement in the
communities served by Bank and allow various levels of decision-making to be
made in the regions formed. The overhead ratio, which is computed by subtracting
non-interest income from non-interest expense and dividing by average total
assets was 2.08% for 1997 compared to 2.22% for 1996. Registrant continues its
commitment to deliver quality service and products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1997 was $2.0 million, an increase of
$88,000 or 4.5% compared to 1996. This followed a decrease of $210,000 or 9.8%
in 1996 compared to 1995. The higher tax expense in 1997 reflected the
Registrant's increase in before tax earnings offset by an increase in tax exempt
interest income. Conversely, 1996 income tax expense was lower due to an
decrease 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 27.8% in 1997 compared with 29.2% in 1996 and 31.6% in 1995. Of the
27.8% effective rate for 1997 the federal effective tax rate was 25.9% while the
Wisconsin state tax effective rate was 1.9%.
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
<PAGE> 36
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 $293.4 million at December 31, 1997, a 12.5%
increase from the end of 1996. This follows a 24.1% increase at December 31,
1996 over 1995 year end.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small business. Loans of this type are in a
broad range of industries and include service, retail, wholesale and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door and Kewaunee Counties, Wisconsin. The credit risk related
to commercial loans made by the Registrant's subsidiaries is largely influenced
by general economic conditions (especially those applicable to the Door County
market area) and the resulting impact on a borrower's operations.
Commercial loans and commercial real estate loans (including construction loans)
totaled $179.9 million at year end 1997 and comprised 61.2% of the loan
portfolio compared with 62.2% of the portfolio at the end of 1996. Loans in
these classifications grew $17.7 million or 10.9% during 1997.
The following table sets forth loan composition (net of unearned income) at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
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- $100,352 34% $ 83,334 32% $ 62,059 29% $ 52,474 27% $ 47,816 27%
residential
Real estate- $ 14,760 5% 11,365 4% 6,378 3% 5,881 3% 4,511 2%
construction
Real estate- $117,768 40% 104,136 40% 83,177 40% 69,303 36% 64,211 36%
commercial &
agricultural
Commercial, $ 47,078 16% 46,786 18% 46,094 22% 48,412 25% 47,522 26%
financial &
agricultural
Installment loans $ 13,480 5% 15,233 6% 12,522 6% 16,603 9% 16,844 9%
to individuals
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total Loans, $293,438 $260,854 $210,230 $192,673 $180,904
(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,
1997, there existed the following industry group concentrations in the
Registrant's loans which exceeded 10% of total loans:
Tourism related loans:
Lodging business $50.3 million or 17.1%
---------------------
Total tourism loans $50.3 million or 17.1%
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 $100.6 million at the end of 1997
and comprised 34.3% of the loan portfolio at the end of 1997. Loans in this
category grew $17.2 million or 20.7% during 1997. Residential real estate loans
consist of conventional home mortgages, adjustable indexed interest rate
mortgage loans, 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 and three year
<PAGE> 38
balloon feature.
In 1997, Registrant offered adjustable indexed interest mortgage loans based
upon market demands. At year end 1997, those loans totaled $30.1 million
dollars. Adjustable indexed interest rate mortgage loans contain an interest
rate adjustment provision tied to the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, plus an additional
mark-up of 2.75% (the "index") which varies with the mortgage loan product.
Interest rates on indexed mortgage loans are adjusted, up or down, on
predetermined dates fixed by contract, in relation to and based on the index or
market interest rates as of a predetermined time prior to the adjustment date.
Adjustable indexed interest rate mortgage loans have an initial period, ranging
from one or three years, during which the interest rate is fixed, with
adjustments permitted thereafter, subject to annual and lifetime interest rate
caps which vary with the product. Annual limits on interest rate increases are
2% while aggregate lifetime interest rate increases over the term of the loan
are currently at 6% above the original mortgage loan interest rate.
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, 1997, these loans totaled $36.3 million.
Additionally in the last quarter of 1997, Registrant offered fixed rate mortgage
through participation in secondary fixed rate mortgage programs under private
investors. These loans are sold on the secondary market with servicing rights
sold retained by buyer.
Installment loans to individuals totaled $13.5 million or 4.6% of the total loan
portfolio at December 31, 1997 compared to $15.2 million or 5.9% at the end of
1996. 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.
<PAGE> 39
Allowance for Possible Loan Losses
At December 31, 1997 the allowance for possible loan losses of $3.9 million
represented 1.32% of total loans, up from 1.11% at December 31, 1996. Loans grew
at a rate of 12.5% from December 31, 1996 to year end 1997, while the allowance
grew at a higher rate. Also, net charge-offs decreased in 1997 as compared to
1996. As loans have grown, management did not believe there existed any trends
indicating any undue portfolio risk.
At December 31, 1996, the allowance for possible loan losses of $2.9 million
represented 1.11% of total loans compared with 1.25% at the end of 1995.
Commercial, agricultural and other loans net charge-offs represented 37.8% of
the total net charge-offs as compared with 27.0% of total net charge-offs in
1996. There existed no real estate mortgage loan net charge-offs in 1997 as
compared to 40.6% of the total net charge-offs in 1996. Installment loan net
charge-offs in 1996 were 62.2% of the total net charge-offs as compared with
32.4% of total net charge-offs in 1996. In the commercial sector, one charge-off
contributed to the increase. The remaining commercial loan charge-offs during
1997 were offset for the most part by their eventual recoveries in 1997. The
majority of charge-offs in the installment loan sector occurred as a result of
automobile loans. Nine charge-offs totaling $59,000 were made in 1997 with
minimal recoveries occurring. Credit card loans showed net charge-offs of
$19,000 in 1997 compared to net charge-offs of $30,000 in 1996. Although the
Bank has experienced higher interest returns on approximately $1.3 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, 1997 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> 40
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, 1997 were $4.7 million, the same that
existed at December 31, 1996. Non-accrual loans represent $1.7 million of this
total. Approximately $1.2 million of this total consists of three non-accrual
commercial real estate credits which are experiencing cashflow problems.
Management believes that collateral is sufficient in the event of default.
Troubled debt restructured loans represent $2.9 million of non-performing loans.
Approximately $1.9 million of this total consists of one commercial real estate
credit which has been granted various concessions and has been experiencing
cashflow problems. This credit was current at December 31, 1997. Other
commercial credits totaling $646,000 represented by five customers make up the
balance remaining. These credits also have experienced cashflow difficulties but
are current at year end 1997. Management believes that collateral is sufficient
in those loans classified as troubled debt in event of default. As a result the
ratio of non-performing loans to total loans at the end of 1997 was 1.6%
compared to 1.8% at 1996 year end. The Registrant's allowance for possible loan
losses balance was 83.3% of total non-performing loans at December 31, 1997
compared to 61.9% at year end 1996.
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, 1997,
potential problem loans amounted to a total of $696,000 compared to $1.4 million
at year end 1996. $180,000 of the 1997 problem loans stems from vacant
commercial property which has been listed for sale. $208,000 of the problem
loans stem from three commercial credits who are currently experiencing cashflow
concerns. Various commercial loans totaling $62,000, mortgage loans totaling
$75,000 and consumer loans totaling $171,000 make up the remaining totals. With
the exceptions noted above, potential problem loans are not concentrated in a
particular industry but rather cover a diverse range of businesses.
The placement of performing loans in the potential problem loan category
indicated management's willingness to more closely monitor the financial
condition of the borrower and collateral positions of the Registrant or will
<PAGE> 41
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 no real
estate property at year end 1997. This compared to one commercial real estate
property totaling $110,000 at year end 1996. 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 1997, 1996, and 1995 consists of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands of Dollars)
<S> <C> <C> <C>
Loss on disposition of
properties and other costs $ 30 $ 102 $ 66
Gains on disposition of
properties and expense
recoveries (290) (150)
----- ---- -----
Net costs (gains) $ 30 $(188) $ (84)
</TABLE>
Other properties taken in as a result of foreclosure or surrender include a
restaurant and hotel facility that existed as a subsidiary of Bank named Karsten
Resources, Inc. This subsidiary was sold in the last quarter of 1997. Results of
operation which are included in other income and other operating expense
consists of 1997 other income of $99,000 and gain on sale of fixed assets of
$17,000; other operating expenses of $180,000 and a net loss after tax of
$42,000.
Investment Portfolio
The investment portfolio is intended to provide the Registrant with adequate
liquidity, flexibility in asset/liability management and, lastly, its earning
potential.
Investment securities are classified as held to maturity or available for sale.
The Registrant has determined at year end 1997 that all of its taxable issues,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 1997 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
<PAGE> 42
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, 1997, securities
held to maturity had an aggregate market value of approximately $12.4 million
compared with amortized cost of $11.9 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, 1997
and 1996 are carried at market value. Adjustments up or down to market value at
December 31, 1997 and 1996 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, 1997, securities
available for sale had a market and carrying value of $103.0 million compared
with amortized cost of $101.0 million. The reserve for market adjustment of
securities, net of tax, and reflected in the stockholders' equity section stood
at $1.3 million at December 31, 1997.
At December 31, 1997 and 1996, 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 $99.6 million in 1997 compared with $83.8 million
in 1996. The average balance of securities increased primarily as a result of
the additional funding created from the leveraging strategy employed by the
Registrant in the latter part of 1997. In 1997, taxable securities comprised
approximately 67.0% of the total average investments compared to 70.0% in 1996.
Tax-exempt securities on average for 1997 accounted for 33.0% of the total
average investments compared to 30.0% in 1996.
Deposits
Average total deposits in 1997 were $332.7 million, an increase of 11.8% over
1996. This follows a 16.6% increase in 1996 over 1995, partially the result of
the acquisition of Four Seasons.
Non-interest bearing demand deposits in 1997 averaged $41.5 million, up 11.5%
from $37.2 million in 1996. This $4.3 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. December 31,
<PAGE> 43
1997 non-interest bearing demand deposits were $44.2 million compared with $43.1
million at year end 1996.
Interest bearing deposits generally consist of interest-bearing checking,
savings deposits, money market accounts, individual retirement accounts (IRAs)
and certificates of deposit (CDs). In 1997 interest bearing deposits averaged
$291.2 million compared with $260.4 million, an increase of 11.8%. Within the
category of interest bearing deposits, savings deposits (including money market
accounts) increased an average of $498,000 or .6%. During the same period, time
deposits (including CDs and IRAs) grew an average of $28.0 million or 20.6%.
Time deposits over $100,000 increased by $14.3 million on average primarily in
public fund time deposits. These were priced within the framework of
Registrant's rate structure and did not materially increase the average rates on
deposit liabilities. 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
1998 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 Home Loan Bank.
Average 1997 short-term borrowings were $29.5 million compared with $11.8
million during 1996. This increase of $17.7 million or 150.2% occurred as a
result of higher than expected loan demand, increased investment balances and
the Registrant's effort to more effectively leverage capital.
Average short-term borrowings increased $7.4 million or 167.4% in 1996 from 1995
as a result of increased loan demand and additional funding required as a result
of the acquisition of Four Seasons.
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 $11.0 million, as a result of increased lines established during
1997. During 1997 the Registrant acquired an additional funding source with the
establishment of a relationship with the Federal Home Loan Bank. Borrowings with
the Federal Home Loan Bank are secured by one to four family residential
mortgages allowing the Registrant to use it for additional funding purposes. On
average, $6.8 million was borrowed with the Federal Home Loan Bank in 1997.
Long-Term Debt
The largest component of long-term debt of $383,000 consists of a land contract
requiring annual principal payments of $53,000 plus interest
<PAGE> 44
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. This
changed in 1997, as the Registrant implemented a capital leveraging strategy. As
part of this strategy employed by the Registrant, $50.3 million in investments
were purchased in 1997. This resulted in a net cash of $18.9 million used in
investing activities for 1997. At December 31, 1997, the carrying or book value
of investment securities maturing within one year amounted to $21.4 million or
18.6% of the total investment securities portfolio. This compares to the 23.4%
level for investment securities with one year or less maturities as of December
31, 1996. Within the investing activities of the cashflow statement, sales and
maturities of investment securities during 1997 totaled $31.4 million. At the
end of 1997, the investment portfolio contained $65.8 million of U.S. Treasury
and federal agency backed securities, representing 57.3% of the total investment
portfolio. These securities tend to be highly marketable and had a market value
above amortized cost at year end 1997 amounting to $1.0 million.
Deposit growth is another source of liquidity for the Bank. As a financing
activity reflected in 1997 Consolidated Statements of Cash Flows, deposits
provided $18.8 million in net cash inflow during 1997. The Registrant's overall
average deposit base grew $35.1 million or 11.8% during 1997. Deposit growth,
especially in the area of core deposits, is the most stable source of liquidity
for the Bank.
Federal funds sold averaged $17,000 in 1997 compared to $943,000 in 1996. 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, 1997, the Bank had no federal funds sold.
The scheduled maturity of loans can provide a source of additional liquidity.
The Bank has $81.3 million of loans maturing within one year, or 27.7% of total
loans.
<PAGE> 45
Within the classification of short-term borrowings at year end 1997, federal
funds and securities sold under agreements to repurchase totaled $20.6 million
compared with $23.8 million at the end of 1996. Federal funds are purchased from
various upstream correspondent banks while securities sold under agreements to
repurchase are obtained from a base of business customers. Federal Home Loan
Bank was also established during 1997 as another source of funds. Borrowings
from Federal Home Loan Bank stood at $36.0 million at year end 1997.
The Bank's liquidity resources were sufficient in 1997 to fund the growth in
loans, maintain a stable investment portfolio, increase the volume of interest
earning assets 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 and borrowings from
the Federal Home Loan Bank provided a sizable portion of funds provided in 1997,
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 Bank totaled $3.0 million in 1997 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 $3.0 million in 1996.
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> 46
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> 47
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
As of December 31, 1997
Within Four to Seven to One Year Over
Three Six Twelve to Five Five
Months Months Months Years Years Total
------ ------- -------- -------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ 4,283 $ 5,468 $ 11,649 $ 37,023 $ 61,109 $119,532
Federal Funds Sold 0 0
Loans and Leases:
Variable Rate 99,938 483 966 28,289 10 129,686
Fixed Rate 21,990 18,583 32,859 85,558 3,570 162,560
-------- --------- --------- --------- -------- ---------
Total Loans and Leases $121,928 $ 19,066 $ $33,825 $113,847 $ 3,580 $292,246
-------- --------- --------- --------- -------- ---------
Total Earning Assets $126,211 $ 24,534 $ 45,474 $150,870 $ 64,689 $411,778
======== ========= ========= ======== ======== ========
Interest Bearing
Liabilities:
NOW Accounts $ 40,721 $ $ $ $ $ 40,721
Saving Deposits 96,382 96,382
Time Deposits 45,007 40,155 45,282 34,199 14 164,657
Borrowed Funds 56,716 0 0 211 105 57,032
-------- --------- --------- -------- -------- --------
Total Interest Bearing $238,826 $ 40,155 $ 45,282 $ 34,410 $ 119 $358,792
======== ========= ========= ======== ======== ========
Liabilities
Interest Sensitivity GAP $(112,615) $ (15,621) $ 192 $116,460 $ 64,570 $ 52,986
(within periods)
Cumulative Interest $(112,615) $(128,236) $(128,044) $(11,584) $ 52,986
Sensitivity GAP
Ratio of Cumulative -27.35% -31.14% -31.10% -2.81% 12.87%
Interest Sensitivity GAP
to Rate Sensitive Assets
Ratio of Rate Sensitive 52.85% 61.10% 100.42% 438.45% ----
Asset to Rate
Sensitive Liabilities
Cumulative Ratio of Rate 52.85% 54.03% 60.51% 96.77% 114 .77%
Sensitive Assets to Rate
Sensitive Liabilities
</TABLE>
<PAGE> 48
Capital Resources
Stockholders' equity at December 31, 1997 increased $2.6 million or 6.7% to
$41.9 million, compared with $39.2 million at 1996 year end. This increase
includes a positive change of $707,000 to capital in 1997 due to the use of
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. Without the effect of this
net change stockholders' equity would have increased $1.9 million or 5.0% for
1997 over 1996, which compares to an increase of $2.5 million or 7.0% for 1996
over 1995. With the SFAS 115 adjustment included in 1996 capital, capital
increased $2.9 million or 8.2% compared to 1995 year end.
The Registrant's capital base (before SFAS 115 change) increased primarily due
to the retention of earnings. Although not used for a portion of 1997, the
Registrant's dividend reinvestment plan typically provides capital improvement,
as the holders of approximately 28% of Registrant's Common Stock participate in
the plan. The dividend reinvestment plan although suspended during a part of
1997 and early 1998 was reinstated for the March 1998 dividend for those
shareholders who elected to participate.
Cash dividends paid in 1997 were $1.22 per share compared with $.93 in 1996,
including a special dividend of $.25 paid in December 1997. The Registrant
provided a 4.3% increase in normal dividends per share in 1997 over 1996 as a
result of above average earnings and strong capital position.
In 1997, the Registrant's Board of Directors authorized management to repurchase
up to 7,000 shares of the Registrant's common stock each calendar quarter in the
market. The shares repurchased would be used to fill its needs for the dividend
reinvestment program, any future benefit plans, and the employee stock purchase
program currently being developed. Shares repurchased are held as treasury stock
and, accordingly, are accounted for as a reduction of stockholders' equity. The
Registrant purchased 14,000 of its common shares in 1997.
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 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 possible additional
<PAGE> 49
discretionary- actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements.
At December 31, 1997, 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%.
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>
1997 1996
---- ----
<S> <C> <C>
Average stockholders' equity to average assets 9.82% 10.77%
Stockholders' equity to total assets 9.30% 9.92%
Total Stockholders' Equity $41,855 $39,234
Total Tier 1 Capital 36,102 33,878
Total Tier 2 Capital 39,983 36,770
Risk-Adjusted Assets (including off-balance 319,260 278,990
sheet items)
Tier 1 Capital to risk-weighted assets 11.31% 12.14%
Total Tier 1 and Tier 2 capital to risk-weighted 12.52% 13.18%
assets
Tier 1 leverage ratio 8.86% 9.63%
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.
<PAGE> 50
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.
Year 2000
The Registrant has begun an initial assessment of the Year 2000 issue. This
issue relates to systems designed to use two digits rather than four to define
the particular year. The assessment completed thus far includes an awareness,
inventory of systems affected by the issue and a preliminary analysis of
corrective actions to be taken.
Accounting Developments
Effective December 31, 1997, the Registrant adopted SFAS No. 128, "Earnings per
Share." The statement specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common
stock. All reported prior period earnings per share information has been
restated with SFAS No. 128.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income in a full set of general- purpose
financial statements. The Registrant will be required to adopt this statement as
of January 1, 1998. If the Registrant had adopted this statement as of January
1, 1996, comprehensive income for the years ended December 31, 1997 and 1996,
would have been $6.0 million and $5.2 million, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires certain disclosures
about an entity's operating segments in annual and interim financial reports. It
also requires certain related disclosures about products and services,
geographic areas, and major customers. The segment and other information
disclosures are required for the year ended December 31, 1998. The segments that
will be disclosed have not yet been determined.
Item 7 A. Quantitative and Qualitative Disclosures About Market Risk.
The Registrant's financial performance is impacted by interest rate risk and
credit risk, among other factors. Registrant does not use derivatives to
mitigate its interest rate risk, or credit risk. Registrant instead puts
reliance on loan review and the provision of an adequate loan loss reserve as
explained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<PAGE> 51
Interest rate risk is the exposure to a bank's earnings and capital arising from
changes in future interest rates. This risk is evaluated quarterly by the
Registrant's Asset/Liability Committee (ALCO). Their responsibility involves the
management of risks associated with changing interest rates, changing mix
involving assets and liabilities, and the subsequent impact on earnings. The
ALCO committee operates under the advisory policy guidelines on interest rate
sensitivity approved the Board of Directors. The sensitivity of net interest
income to market rate changes is evaluated regularly by the Registrant to
determine the effectiveness of interest rate risk management.
In order to limit exposure to interest rate risk, the Registrant has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. Registrant has focused on the establishment of
Adjustable rate mortgages (ARM's) in its residential lending productline; the
concerted efforts made to attract and sell core deposit products through use of
Registrant's branching and delivery systems and marketing efforts; and the use
of other available sources of funding to provide longer term funding
possibilities.
Interest rate sensitivity analysis is used to measure the Registrant's interest
rate risk by computing changes in the Registrant's pretax income calculated
using flat rates over a 12 month period. The resulting income is then compared
to a future earnings simulation based on a +/- 100 basis point parallel rate
shock. The difference in income calculated represents the Registrant's earnings
sensitivity to a +/- 100 basis point parallel rate shock. The table below
illustrates these amounts at December 31, 1997, which are within the limits
established by the Registrant:
HYPOTHETICAL CHANGE IMPACT TO 1998
IN INTEREST RATES PRETAX NET INCOME
100 basis point shock up (5.2%)
100 basis point shock down 2.5%
These results are based solely on immediate and sustained parallel changes in
market rates and do not reflect the earnings sensitivity that may arise from
such factors as the change in spread between key market rates and the shape of
the yield curve. The above results also are considered to be conservative
estimates due to the fact that no management action is factored into the
analysis to deal with potential income variances.
Another component of interest rate risk, fair value at risk, is determined by
the Registrant through the technique of simulating the fair value of equity in
changing rate environments. This involves determining the present value of all
contractual asset and liability cash flows based on market rates of interest
provided by independent broker quotations and other public sources. The net
result of all these balance sheet items determine the fair value of equity. The
fair value of equity resulting from the current flat rate scenario is compared
to the fair value of equity using discount rates +/- 100 basis points from flat
rates to determine the fair value of equity at risk. Currently, fair value of
equity at risk is less than 3.0% of the market value of the Registrant as of
December 31, 1997.
<PAGE> 52
PART II - OTHER INFORMATION
ITEM 8. Other Information
Bank has received approval to open two additional branches in 1998. The first
branch will be opened up in the town of Ledgeview, located in the southeast
portion of the Green Bay region. This facility will offer a full range of retail
and deposit services and is anticipated to be completed in the early third
quarter of 1998. Costs to complete facility are estimated at $950,000. The
second branch will be opened up in the city of Waupaca. This facility will offer
a full range of retail and deposit services and is anticipated to be completed
in the late third quarter to early fourth quarter of 1998. Costs to complete
facility are estimated to be $1.1 million.
Baylake Corp has reinstated the Dividend Reinvestment Plan with the quarterly
dividend payment made March 16, 1998. Participating shareholders who so elected,
purchased shares of Baylake Common Stock in lieu of receiving cash dividends.
ITEM 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Consolidated Financial Statements and notes to related thereto
are set forth on the following pages.
ITEM 10. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE> 53
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 1997, 1996, and 1995
<PAGE> 54
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> 55
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Madison, Wisconsin
January 22, 1998 SMITH & GESTELAND, LLP
<PAGE> 56
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1997 1996
---- ----
(Thousands of dollars)
ASSETS
<S> <C> <C>
Cash and due from banks $ 15,065 $ 13,853
Investment securities available for sale
(at market) 102,962 87,690
Investment securities held to maturity (market
value $12,382 and $11,869) 11,937 11,448
Loans 293,438 260,854
Less: Allowance for loan losses 3,881 2,893
-------- -------
Loans, net of allowance for loan losses 289,557 257,961
Bank premises and equipment 13,493 12,354
Federal Home Loan Bank stock (at cost) 4,633
Accrued interest receivable 3,267 2,883
Income taxes receivable 191 220
Deferred income taxes 567 705
Other assets 8,390 8,242
------- -------
Total assets $450,062 $395,356
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 57
<TABLE>
<CAPTION>
1997 1996
---- ----
(Thousands of dollars)
LIABILITIES
<S> <C> <C>
Domestic deposits
Noninterest bearing $ 44,216 $ 43,131
Interest bearing
NOW 40,721 43,356
Savings 96,382 93,465
Time, $100,000 and over 32,333 19,873
Other time 132,324 127,340
-------- --------
Total interest bearing 301,760 284,034
-------- --------
Total deposits 345,976 327,165
Short-term borrowings
Federal funds purchased, repurchase agreements,
and Federal Home Loan Bank loans 56,649 23,840
Long-term debt 383 422
Accrued expenses and other liabilities 4,588 4,105
Dividends payable 611 590
-------- --------
Total liabilities 408,207 356,122
-------- --------
STOCKHOLDER EQUITY
Common stock $5 par value - authorized
10,000,000 shares; issued 2,460,481
shares in 1997; 2,460,481 shares in
1996; outstanding - 2,444,537 shares in
1997; 2,458,537 shares in 1996 12,302 12,302
Additional paid-in capital 6,038 6,038
Retained earnings 22,618 20,339
Treasury stock (414) (49)
Net unrealized gain (loss) on securities available
for sale, net of tax of $702 in 1997 and $309
in 1996 1,311 604
-------- --------
Total stockholder equity 41,855 39,234
-------- --------
Total liabilities and stockholder equity $450,062 $395,356
======== ========
</TABLE>
3
<PAGE> 58
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Amounts in thousands
except per share data)
<S> <C> <C> <C>
Interest income
Interest and fees on loans $25,496 $21,367 $19,661
Interest on investment securities
Taxable 4,258 3,950 3,298
Exempt from federal income taxes 1,818 1,550 1,247
Other interest income 5 59 281
------- ------- -------
Total interest income 31,577 26,926 24,487
------- ------- -------
Interest expense
Interest on deposits 12,941 11,370 9,840
Interest on short-term borrowings 1,689 639 250
Interest on long-term debt 32 37 41
------- ------- -------
Total interest expense 14,662 12,046 10,131
------- ------- -------
Net interest income 16,915 14,880 14,356
Provision for loan losses 1,115 400 250
------- ------- -------
Net interest income after provision
for loan losses 15,800 14,480 14,106
------- ------- -------
Other income
Fees from fiduciary activities 491 611 394
Fees from loan servicing 731 674 505
Fees for other services to customers 1,343 1,237 1,041
Gains from sales of loans 678 212 26
Securities gains, net 292 38 4
Other income 533 679 611
------- ------- -------
Total other income 4,068 3,451 2,581
------- ------- -------
Other expenses
Salaries and employee benefits 7,003 6,270 5,391
Occupancy expense 1,168 870 690
Equipment expense 867 862 632
Data processing and courier 642 548 514
Operation of other real estate 30 (188) (84)
Other operating expenses 2,861 2,927 2,751
------- ------- -------
Total other expenses 12,571 11,289 9,894
------- ------- -------
Income before income taxes 7,297 6,642 6,793
Income tax expense 2,027 1,939 2,149
------- ------- -------
NET INCOME $ 5,270 $ 4,703 $ 4,644
======= ======= =======
Basic earnings per common share $2.15 $1.92 $1.89
Diluted earnings per common share $2.14 $1.90 $1.88
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 59
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
------ ------ ---------- ------------- -------- --------
1995 (Amounts in thousands except for shares)
----
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1995 2,454,081 $ 12,270 $5,941 $ (1,995) $ 16,072 $ (49)
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 -
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
gain on
securities
available for
sale, net of
$232 deferred
taxes 428
--------- -------- ------ ------- ------- -----
Balance forward -
December 31,
1996 2,460,481 $ 12,302 $6,038 $ 604 $20,339 $ (49)
--------- -------- ------ ------- ------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 60
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,
1996 2,460,481 $12,302 $ 6,038 $ 604 $20,339 $ (49)
1997
----
Net income for the
year 5,270
Treasury stock
acquired (365)
Cash dividends
declared (2,991)
Net changes in
unrealized gain
on securities
available for
sale, net of
$393 deferred
taxes 707
--------- ------- ------- -------- ------- ------
2,460,481 $12,302 $ 6,038 $ 1,311 $22,618 $ (414)
======= ======= ======== ======= ======
Less treasury
stock 15,944
---------
2,444,537
=========
</TABLE>
6
<PAGE> 61
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received from:
Loans $25,200 $ 21,253 $ 19,239
Investments 5,866 5,456 4,961
Fees and service charges 3,424 3,323 2,505
Interest paid to depositors (12,616) (11,473) (9,468)
Interest paid to others (1,558) (676) (250)
Cash paid to suppliers and employees (11,461) (10,278) (9,118)
Income taxes paid (2,254) (2,013) (2,091)
------- ------- --------
Net cash provided by operating activities 6,601 5,592 5,778
------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 8,928 4,214 5,876
Proceeds from sale of other assets 85
Principal payments received on investments 22,460 19,155 12,426
Purchase of investments (50,299) (15,158) (18,846)
Proceeds from sale of other real estate owned 93 954 415
Loans made to customers in excess of
principal collected (32,146) (39,237) (18,248)
Capital expenditures (2,673) (3,953) (2,401)
Purchase of annuity (114)
Cash paid for acquisition net of cash and
federal funds sold acquired (890)
Investment in service center (196)
-------- -------- --------
Net cash used in investing activities (53,637) (35,029) (20,889)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts 2,213 9,647 (63)
Net increase (decrease) in short-term
borrowings 32,810 22,313 (2,622)
Net increase in time deposits 16,599 3,676 19,926
Payments on long-term debt (39) (53)
Proceeds from issuance of stock 78 11
Stock reacquired (365)
Dividends paid (2,970) (2,258) (2,770)
------- -------- --------
Net cash provided by financing activities 48,248 33,403 14,482
------- -------- --------
Net increase (decrease) in cash and
due from banks 1,212 3,966 (629)
Cash and due from banks, beginning 13,853 9,887 10,516
------- -------- --------
Cash and due from banks, ending $15,065 $ 13,853 $ 9,887
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 62
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 5,270 $ 4,703 $ 4,644
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,293 957 560
Provision for losses on loans and
real estate owned 1,115 400 250
Amortization of premium on investments 190 283 268
Accretion of discount on investments (281) (242) (178)
Cash surrender value increase (87) (63) (8)
Gain on sale of investment
securities (292) (38) (4)
Gain on sale of loans and other assets (618) (460) (134)
Proceeds from sale of loans held
for sale 15,808 8,023 4,801
Originations of loans held for sale (15,130) (7,811) (4,775)
Equity in income of service center (54) (28) (62)
Deferred compensation 24 77 115
Deferred income taxes (255) (95) 82
Changes in assets and liabilities:
Interest receivable (384) (175) (232)
Prepaids and other assets (450) 133 (69)
Unearned income (35) (82) (145)
Interest payable 487 (103) 412
Taxes receivable 28 21 (25)
Other liabilities (28) 92 278
-------- -------- -------
Net cash provided by operating activities $ 6,601 $ 5,592 $ 5,778
======== ======== =======
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Loans issued to facilitate the sale of
assets $ 530 $ $
Acquisition of property in lieu of
foreclosure 786 671
Dividends reinvested in common stock 815 701
Land acquired on land contract 475
</TABLE>
8
<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
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
$599,000, $531,000, and $464,000 in 1997, 1996, and 1954, respectively.
At December 31, 1997 and 1996, Baylake Bank had loans of $696,000 and
$424,000, respectively, 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.
For comparability, certain 1996 and 1995 amounts have been reclassified
to confirm with classification adopted in 1997.
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> 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)
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 or an amortized method.
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 is reversed. If
collectibility is in doubt, cash receipts on nonaccrual loans are used
to reduce principal rather than recorded as interest income.
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.
10
<PAGE> 65
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)
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.
The company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25) and related interpretations
in accounting for its stock-based compensation plans. In 1995,
the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation"
which is effective for fiscal years beginning after December 15,
1995. Under SFAS No. 123, companies may elect to recognize
stock-based compensation expense based on the fair value of the
awards or continue to account for stock-based compensation under
APB No. 25. The company has elected to continue to apply the
provisions of APB No. 25 with the disclosure requirements of
SFAS No. 123 in Note 17.
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.
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.
11
<PAGE> 66
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)
Effective January 1, 1997, the company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 requires that after a
transfer of financial assets, an entity must recognize the financial
and servicing assets controlled and liabilities incurred and
derecognize financial assets and liabilities in which control is
surrendered or when debt is extinguished. The impact on the company's
consolidated financial position and results of operations was not
material.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No.
125." SFAS No. 127 deferred the effective date of SFAS No. 125
related to transfers of financial assets occurring after
December 31, 1997, specifically, such transfers involving
repurchase agreements, securities lending, and similar
transactions. The company will adopt SFAS No. 127 as required.
The adoption of SFAS No. 127 is not expected to have a material
impact on the company's consolidated statement of position or
results of operations.
Effective December 31, 1997, the company adopted SFAS No. 128,
"Earnings Per Share." The statement specifies the computation,
presentation, and disclosure requirements for earnings per share for
entities with publicly held common stock. All reported prior period
earnings per share information has been restated in accordance with
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display
of comprehensive income in a full set of general-purpose financial
statements. The company will be required to adopt this statement as of
January 1, 1998. If the company had adopted this statement as of
January 1, 1996, comprehensive income for the years ended December 31,
1997 and 1996, would have been $5,977,000 and $5,165,000, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement requires
certain disclosures about an entity's operating segments in annual and
interim financial reports. It also requires certain related disclosures
about products and services, geographic areas, and major customers. The
segment and other information disclosures are required for the year
ended December 31, 1998. The segments that will be disclosed have not
yet been determined.
12
<PAGE> 67
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, was approximately
$3,797,000.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
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 $ 30,604 $ 850 $ 1 $ 31,453
Obligations of states
and political
subdivisions 32,250 965 1 33,214
Mortgage-backed
securities 34,137 289 89 34,337
Other 3,958 3,958
-------- ------ --- --------
$100,949 $2,104 $91 $102,962
======== ====== === ========
Held to Maturity
----------------
Obligations of
states and
political
subdivisions $ 11,937 $ 445 $ $ 12,382
-------- ------ --- --------
$ 11,937 $ 445 $ $ 12,382
======== ====== === ========
</TABLE>
13
<PAGE> 68
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (continued)
<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
======= ====== ====== ========
Results of sales of securities were as follows:
<CAPTION>
Held for
Investment Available for Sale
---------- -------------------------------
1995 1997 1996 1995
---------- ---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C> <C>
Proceeds $ 504 $8,928 $4,214 $5,878
Realized gains 4 307 40 34
Realized losses 15 2 34
</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> 69
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, 1997, 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 $ 11,581 $ 11,641 $ 2,658 $ 2,708
Due after one year
through five years 18,028 18,426 6,597 6,836
Due after five years
through ten years 13,150 13,605 1,135 1,222
Due after ten years 24,053 24,953 1,547 1,616
-------- -------- ------- -------
66,812 68,625 11,937 12,382
Mortgage-backed
securities 34,137 34,337
-------- -------- ------- -------
$100,949 $102,962 $11,937 $12,382
======== ======== ======= =======
</TABLE>
Securities pledged to secure public and trust deposits and borrowed
funds had a carrying value of $8,181,000 at December 31, 1997, and a
carrying value of $7,447,000 at December 31, 1996.
NOTE 4 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------- ------------
(Thousands of dollars)
<S> <C> <C>
Commercial, financial, and agricultural $165,181 $151,291
Real estate - construction 14,760 11,365
Real estate - mortgage 100,555 83,538
Installment 13,480 15,233
-------- --------
293,976 261,427
Less: Deferred loan origination fees,
net of costs (538) (573)
-------- --------
Net loans $293,438 $260,854
======== ========
</TABLE>
15
<PAGE> 70
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS (continued)
Loans having a carrying value of $65,958,000 are pledged as collateral
for borrowings from the Federal Home Loan Bank at December 31, 1997.
Certain directors and 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 1997 and 1996. Such loans were
made in the ordinary course of business at normal credit terms,
including interest rate and collateralization, and do not represent
more than a normal risk of collection. The aggregate dollar amount of
these loans was $8,471,000 and $7,612,000 at December 31, 1997 and
1996, respectively. During 1997, $9,044,000 of new loans were made and
repayments totalled $8,088,000.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,720,000 and $3,677,000 at December 31, 1997 and 1996,
respectively. If these loans had been current throughout their terms,
interest income for the nonaccrual period would have approximated
$202,000 and $472,000 for 1997 and 1996, respectively. Interest income
which has been recorded amounted to $180,000 and $154,000 for 1997 and
1996, respectively, for these nonaccrual loans.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $2,893 $2,617 $2,534
Allowance related to assets acquired 120
Provision charged to operations 1,115 400 250
Recoveries 194 42 41
Loans charged off (321) (286) (208)
------- ------- ------
Balance at end of year $3,881 $2,893 $2,617
====== ====== ======
</TABLE>
The provision for credit losses charged to expense is based upon the
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> 71
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>
1997 1996
---- ----
(Thousands of Dollars)
<S> <C> <C>
Impaired loans at December 31 $8,582 $5,136
Impaired loans at December 31 allowed for $2,760 $1,389
Average impaired loans during the period $3,119 $2,589
Interest income recognized while loans
impaired $ 350 $ 118
Interest income using a cash-basis method $ 358 $ 141
Allowance as of January 1 $ 259 $ 239
Additions during the year 255 194
Recoveries of amounts previously allowed
for (256) (174)
------ ------
Balance at December 31 $ 258 $ 259
====== ======
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Land $ 2,339 $ 2,004 $ 2,163
Buildings and improvements 11,484 10,158 6,968
Equipment 5,825 6,302 4,925
------- ------- -------
19,648 18,464 14,056
Less accumulated depreciation 6,155 6,110 5,404
------- ------- -------
$13,493 $12,354 $ 8,652
======= ======= =======
Depreciation expense $ 961 $ 807 $ 553
======= ======= =======
</TABLE>
17
<PAGE> 72
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - OTHER REAL ESTATE
Other real estate ($229,000 in 1997, $339,000 in 1996, and $378,000 in
1995, net of an allowance for other real estate losses of $229,000 in
1997, $229,000 in 1996, and $378,000 in 1995) is included in other
assets.
Net cost of operation of other real estate is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Loss on disposition of properties
and other costs $ 30 $ 102 $ 66
Gain on disposition of properties
and expense recoveries (290) (150)
---- ----- -----
Net (gains) losses $ 30 $(188) $ (84)
==== ===== =====
Changes in the allowance for losses on other real estate were as
follows:
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $229 $ 378 $ 392
Amounts related to properties disposed (149) (14)
---- ----- -----
Balance at end of year $229 $ 229 $ 378
==== ===== =====
</TABLE>
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
Federal funds purchased $18,373 $21,975 $774
Federal Home Loan Bank loan 36,000
Securities sold under agreements
to repurchase 2,276 1,865 754
------- ------ ------
$56,649 $23,840 $1,528
======= ======= ======
</TABLE>
18
<PAGE> 73
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 $29,500,000 in 1997 and $11,791,000 in 1996. The weighted-average
interest rate on these borrowings was 5.7% for 1997 and 5.4% for 1996.
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 $56,649,000 during
1997 and $32,288,000 during 1996.
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following at December 31,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land contract requiring annual
principal payments of $53,000
plus interest calculated at
prime + 1/4% $369 $422
Other 14
---- ----
$383 $422
==== ====
</TABLE>
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS
Cash dividends per share to outside shareholders were $1.22, $.93, and
$1.14 in 1997, 1996, and 1995, respectively.
As of December 31, 1997, 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 $9,921,000.
19
<PAGE> 74
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, 1997, 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):
<TABLE>
<CAPTION>
Risk-Based Capital Ratios
-------------------------------------
December 31, 1997 December 31, 1996
----------------- -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 capital
Baylake Corp. $36,102 11.3% $33,878 12.1%
Minimum requirement 12,770 4.0% 11,160 4.0%
Total capital
Baylake Corp. 39,983 12.5% 36,770 13.2%
Minimum requirement 25,541 8.0% 22,319 8.0%
</TABLE>
20
<PAGE> 75
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DIVIDENDS AND CAPITAL RESTRICTIONS (continued)
<TABLE>
<CAPTION>
Leverage Ratios
-------------------------------------
December 31, 1997 December 31, 1996
----------------- -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 capital
to average
total assets
Baylake Corp. $36,102 8.9% $33,878 9.6%
Minimum requirement 16,301 4.0% 14,066 4.0%
</TABLE>
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.
<TABLE>
<CAPTION>
Contract or
Notional Amount
-------------------
1997 1996
-------- --------
(Thousands of dollars)
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $82,121 $52,516
Standby letters of credit and
financial guarantees written 1,610 744
</TABLE>
21
<PAGE> 76
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> 77
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>
NOTE 12 - PENSION PLAN
The subsidiaries have 401(k) Profit Sharing Plans covering all
employees who qualify as to age and length of service. The employer
contributions paid and expensed under all plans for 1997, 1996, and
1995, totaled $423,000, $377,000, and $341,000, 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. Amounts charged to expense were
$142,000 in 1997, $136,000 in 1996, and $193,000 in 1995.
23
<PAGE> 78
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(Thousands of dollars)
<S> <C> <C> <C>
Taxes currently payable
Federal $2,076 $1,798 $1,753
State 169 238 313
------ ------ ------
2,245 2,036 2,066
------ ------ ------
Deferred income taxes
Federal (188) (84) 71
State (30) (13) 12
------ ------ ------
(218) (97) 83
------ ------ ------
Total expense $2,027 $1,939 $2,149
====== ====== ======
</TABLE>
Income tax expense associated with realized securities gains was
$115,000, $15,000, $2,000 for 1997, 1996, and 1995, respectively.
Provisions for deferred income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Nonaccrual loans $ 83 $(174) $ (7)
Deferred loan origination
fees 11 38 57
Depreciation 11 36 48
Provision for loan and other
real estate losses (391) (45) (33)
Mortgage loan servicing (38) 3 (10)
Provision for deferred
compensation (12) (19) 64
Assets acquired in merger 92 35
Other 26 29 (36)
----- ----- ----
$(218) $ (97) $ 83
===== ===== ====
</TABLE>
24
<PAGE> 79
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAX EXPENSE (continued)
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
(Thousands of dollars)
<S> <C> <C> <C>
Income tax based on
statutory rate $2,481 $2,258 $2,310
Environmental tax 5
State income taxes net of
federal tax benefit 92 144 214
------ ------ ------
2,573 2,402 2,529
Effect of tax-exempt interest
income (536) (466) (345)
Other (10) 3 (35)
------ ------ ------
Provision based on
effective tax rates $2,027 $1,939 $2,149
====== ====== ======
</TABLE>
25
<PAGE> 80
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, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Thousands of dollars)
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $1,076 $ 685
Deferred loan origination fees 209 220
Deferred compensation 606 594
Mortgage loan servicing 461 422
Nonaccrual loans 137 220
Accrued vacation pay 57 58
Stock option accrued compensation 18 13
Investments acquired in merger 180 272
------ ------
Gross deferred tax assets 2,744 2,484
Valuation allowance for deferred
tax assets (550) (550)
------ ------
Net deferred tax assets 2,194 1,934
------ ------
Deferred tax liabilities
Depreciation 864 853
Market value adjustment on securities
available for sale 702 309
Other 61 67
------ ------
Total deferred tax liabilities 1,627 1,229
------ ------
Net deferred asset $ 567 $ 705
====== ======
</TABLE>
26
<PAGE> 81
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. A reconciliation of the
basic and diluted earnings per share amounts is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average
number of common shares
outstanding 2,452,688 2,457,925 2,452,687
Additional common
dilutive stock
option shares 25,200 63,200 66,800
--------- --------- ---------
Diluted weighted average
number of common
shares outstanding 2,477,888 2,521,125 2,519,487
========= ========= =========
Additional common stock
option shares that have
not been included due
to their antidilutive
effect 150,000 72,000 36,000
</TABLE>
There is no difference between basic and diluted income available to
common stockholders.
See Note 17 for information on additional stock options issued
subsequent to year end. These shares would not have changed materially
the calculation of the number of common shares or potential common
shares outstanding at the end of the period if the transaction had
occurred before December 31, 1997.
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.
27
<PAGE> 82
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
FDIC assessment $ 41 $ 13 $ 292
Supplies and printing 324 387 288
Other (individually, less than 1%
of total income and total other
income) 2,496 2,527 2,171
------- ------ ------
$ 2,861 $2,927 $2,751
======= ====== ======
</TABLE>
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.
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, 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 under 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 option at
December 31, 1996 135,200 14.00 - 34.50 26.90
Options granted 40,000 26.87 26.87
-------- -------------- ------
Shares under option at
December 31, 1997 $175,200 $14.00 - 34.50 $26.90
======== ============== ======
</TABLE>
In January 1998, options to purchase an additional 42,000 shares were
granted. The exercise price was established at 100% of the fair market
value of the stock on the date of grant, or $28.75 per share.
28
<PAGE> 83
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
The options outstanding at December 31, 1997 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 18,400 $14.00 $14.00 5.3
26.75 38,000 7,600 26.75 26.75 8.0
26.87 40,000 26.87 9.0
28.50 36,000 21,600 28.50 28.50 6.0
34.50 36,000 14,400 34.50 34.50 7.0
------- ------ ------ ------ ---
175,200 62,000 $26.90 $25.38 7.2
======= ====== ====== ====== ===
</TABLE>
Options exercisable at December 31, 1996 and 1995 were 33,200 17,600,
respectively. The weighted average exercise price for options
exercisable at December 31, 1996 and 1995 was $24.73 and $19.93,
respectively.
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.
29
<PAGE> 84
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLAN (continued)
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.
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Thousands of Dollars)
<S> <C> <C> <C>
Net income
As reported $5,270 $4,703 $4,644
Proforma 5,140 4,631 4,604
Basic earnings per common share
As reported 2.15 1.92 1.89
Proforma 2.10 1.88 1.88
Diluted earnings per common share
As reported 2.14 1.90 1.88
Proforma 2.09 1.88 1.86
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average grant date fair
value $7.34 $4.35 $5.61
Assumptions:
Risk-free interest rates 5.60% 6.20% 6.04%
Expected volatility 19.84% 9.16% 7.31%
Expected term (in years) 8.00 8.00 8.00
Expected dividend yield 3.42% 3.59% 3.59%
</TABLE>
30
<PAGE> 85
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> 86
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, 1997, are $293,438,000 and $293,120,000
and for December 31, 1996, are $260,854,000 and $260,013,000. 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, 1997, are $345,976,000 and
$345,989,000, and for December 31, 1996, are $327,165,000 and
$325,628,000. 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> 87
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.
NOTE 19 - COMMITMENTS
In December 1997, the board of directors authorized the repurchase of
7,000 shares of stock in early 1998 to be used for the dividend
reinvestment plan. The authorized purchase price is $29.25 per share.
33
<PAGE> 88
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
BAYLAKE CORP.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1997 1996
---- ----
(Thousands of dollars)
<S> <C> <C>
ASSETS
Cash in bank $ 38 $ 406
Dividend receivable 811 590
Receivable from subsidiary 10 34
Investment in subsidiaries 41,607 38,797
------- -------
Total assets $42,466 $39,827
======= =======
LIABILITIES AND STOCKHOLDER
EQUITY
Liabilities
Dividends payable $ 611 $ 590
Accrued expenses 3
------- -------
Total liabilities 611 593
Stockholder equity 41,855 39,234
------- -------
Total liabilities and
stockholder equity $42,466 $39,827
======= =======
</TABLE>
34
<PAGE> 89
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1995 1994
------ ------- ------
(Thousands of dollars)
<S> <C> <C> <C>
Income
Dividends from subsidiaries $3,191 $14,284 $2,923
Interest income 9 47 85
------ ------- ------
Total income 3,200 14,331 3,008
------ ------- ------
Expenses
Other 45 40 34
Income taxes (benefit) (12) 2 18
------ ------- ------
Total expenses 33 42 52
------ ------- ------
Income before equity in
undistributed net
income of subsidiaries 3,167 14,289 2,956
Equity in undistributed net
income of subsidiaries 2,103 (9,586) 1,688
------ ------- ------
NET INCOME $5,270 $ 4,703 $4,644
====== ======= ======
</TABLE>
35
<PAGE> 90
BAYLAKE CORP. AND SUBSIDIARIES
Sturgeon Bay, Wisconsin
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
(continued)
BAYLAKE CORP.
(Parent Company Only)
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (48) $ (40) $ (34)
Interest received 9 47 85
Dividends received 2,970 13,694 3,462
Income taxes paid 36 (17) 2
------- -------- -------
Net cash provided by operating
activities 2,967 13,684 3,515
------- -------- -------
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 (2,970) (2,258) (2,770)
Issuance of stock 84 32
Repurchase of stock (365)
------- -------- -------
Net cash used by financing
activities (3,335) (2,174) (2,738)
------- -------- -------
Net increase (decrease) in cash (368) (2,365) 777
Cash at beginning of year 406 2,771 1,994
------- -------- -------
Cash at end of year $ 38 $ 406 $ 2,771
======= ======== =======
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 5,270 $ 4,703 $ 4,644
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed earnings
of subsidiary (2,103) 9,586 (1,688)
Change in receivable
from subsidiary 24 2
Change in dividends receivable (221) (590) 539
Change in accrued expenses (3) (15) 18
------- -------- -------
Net cash provided by operating
activities $ 2,967 $ 13,684 $ 3,515
======= ======== =======
SUPPLEMENTAL SCHEDULE OF
NONCASH FINANCING ACTIVITIES:
Dividends reinvested in common
stock $ $ 815 $ 701
</TABLE>
36
<PAGE> 91
PART III
The following items are incorporated by reference to the Registrant's Proxy
Statement to be filed pursuant to Regulation 14A for its 1998 Annual Meeting of
Shareholders (the "1998" 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 1998 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
1998 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 1998 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> 92
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
1997 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 Exhibit 2.1 to Registrant's
dated as of February 18, 1994 among the Annual Report on Form 10-K for
Registrant, Kewaunee Acquisition Corp. the year ended December 31, 1993
("KAC") and Kewaunee County Banc- ("1993 10-K")
Shares, Inc. ("KCB")
2.3 Merger Agreement dated as of March 30, Exhibit 2.2 to 1993 10-K
1994 among the Registrant, KAC and KCB
3.1 Articles of Incorporation, as amended Exhibit 3.1 to 1993 10-K
3.2 Bylaws, as amended Exhibit 3.2 to 1993 10-K
10.1** Registrant's 1993 Stock Option Plan Exhibit A to Registrant's Proxy
Statement for 1993 Annual Meeting
of Shareholders
10.2** Registrant's Pay-for-Performance Description thereof under "Board
(bonus) Program of Directors/Compensation
Committee Report on Management
Compensation" in Registrant's
Proxy Statement for the 1994
Annual Meeting of Shareholders
10.3** Registrant's Deferred Compensation Exhibit 10.3 to 1993 10-K
Agreement with Thomas L. Herlache
10.4** Registrant's Agreement for Early Exhibit 10.4 to 1993 10-K
Retirement with Ronald D. Berg
10.5** Deferred Compensation and Salary Exhibit 10.4 to the Registrant's
Continuation Agreement with Richard A. Registration Statement on Form S-
Braun 4, No. 33-81184
21 List of Subsidiaries X
23 Consent of Smith & Gesteland X
24 Power of Attorney (contained on the X
Signature Page)
27 Financial Data Schedule X
</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> 93
CONSENT OF SMITH & GESTELAND
We consent to incorporation by reference in the Registration Statement
No. 333-45995 on Form S-3, and in Registration Statement No. 33-43880 on Form
S-3, and the Registration Statement No. 33-77498 on Form S-8 of Baylake Corp. of
our report dated January 22, 1998 relating to the consolidated balance sheets of
Baylake and its subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholder equity and cash flows
for each of the years ended December 31, 1997, 1996, and 1995, which report
appears in Baylake=s Annual Report on Form 10-K for the year ended December 31,
1997, and the reference to our firm under the heading AExperts@ in the
Prospectus forming part of the Registration Statements.
SMITH & GESTELAND, LLP
Madison, Wisconsin SMITH & GESTELAND, LLP
March 27, 1998
<PAGE> 94
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 17, 1998
-------------------------
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 any and all amendments (including
post-effective amendments) to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, the Securities
and Exchange Commission and any state securities commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
reports has been signed by the following persons in the capacities and on these
dates indicated.*
Thomas L. Herlache L. George Evenson
------------------------- ---------------------------
Thomas L. Herlache L. George Evenson, Director
President, Chief Executive Officer and
Director (Principal Executive Officer)
Steven D. Jennerjohn Glenn Miller
------------------------- ---------------------------
Steven D. Jennerjohn Glenn Miller, Director
Treasurer
(Principal Financial and Accounting Officer)
Ruth Nelson
----------------------------- ---------------------------
Ronald D. Berg, Director Ruth Nelson, Director
Marie Bertschinger William Parsons
---------------------------- ----------------------------
Marie Bertschinger, Director William C. Parsons, Director
George Delveaux, Jr. Richard A. 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
*Each of the above signatures is affixed as of March 17, 1998.
<PAGE> 1
EXHIBIT 21
BAYLAKE CORP.
LIST OF SUBSIDIARIES:
Baylake Bank Kewaunee County Banc-Shares
Bank of Sturgeon Bay Building Corp. Baylake Insurance Agency
Baylake Investments, Inc. Cornerstone Financial, Inc.
Karsten Resources, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000275119
<NAME> BAYLAKE CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,065
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,962
<INVESTMENTS-CARRYING> 11,937
<INVESTMENTS-MARKET> 12,382
<LOANS> 293,438
<ALLOWANCE> 3,881
<TOTAL-ASSETS> 450,062
<DEPOSITS> 345,976
<SHORT-TERM> 56,649
<LIABILITIES-OTHER> 5,199
<LONG-TERM> 383
0
0
<COMMON> 12,302
<OTHER-SE> 29,553
<TOTAL-LIABILITIES-AND-EQUITY> 450,062
<INTEREST-LOAN> 25,496
<INTEREST-INVEST> 6,076
<INTEREST-OTHER> 5
<INTEREST-TOTAL> 31,577
<INTEREST-DEPOSIT> 12,941
<INTEREST-EXPENSE> 14,662
<INTEREST-INCOME-NET> 16,915
<LOAN-LOSSES> 1,115
<SECURITIES-GAINS> 292
<EXPENSE-OTHER> 12,571
<INCOME-PRETAX> 7,297
<INCOME-PRE-EXTRAORDINARY> 7,297
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,270
<EPS-PRIMARY> 2.15
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 8.69
<LOANS-NON> 1,720
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,930
<LOANS-PROBLEM> 696
<ALLOWANCE-OPEN> 2,893
<CHARGE-OFFS> 319
<RECOVERIES> 192
<ALLOWANCE-CLOSE> 3,881
<ALLOWANCE-DOMESTIC> 3,881
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
