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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
-------------------------------------------------
[ ] 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
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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: (414)-743-5551
---------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock $5
---------------
Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ]
As of March 21, 1996 2,452,937 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $26.75 reported bid
price on that date) held by non-affiliates (excludes a total of 525,887 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $51,548,588.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
-------- --------------------------------------
Proxy Statement for 1996 Annual Meeting Part III
of Shareholders
2
ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Registrant"), is a registered bank holding company under the Federal Bank
Holding Company Act of 1956. Registrant was organized primarily to acquire and
hold the stock of Baylake Bank ("Bank"), and to enter into such other closely
related business activities as may be approved from time to time. On August
31, 1994, the Registrant acquired Kewaunee County Banc-Shares, Inc. ("KCB"), a
registered bank holding company, and its wholly owned subsidiary, State Bank of
Kewaunee (subsequently named "Baylake Bank Kewaunee") ("BBK"). Effective
January 1, 1996, Bank and BBK were merged, and are referred to herein as
"Baylake Bank."
Baylake Bank
The Bank was a Wisconsin State Bank originally chartered in 1889. At December
31, 1995, the Bank had total assets of $244.6 million. BBK was a Wisconsin
State Bank originally chartered in 1876. At December 31, 1995, BBK had total
assets of $64.9 million. Baylake Bank is a member of the Federal Reserve
System and its deposits are insured, subject to regulatory limits, by the FDIC.
It provides general banking and trust department services to commercial,
industrial and individual accounts in the areas of Door, Kewaunee, Brown and
Manitowoc Counties, Wisconsin. Baylake Bank offers a full range of financial
services, including demand deposit accounts, various savings account plans,
certificates of deposit, individual retirement accounts, real estate mortgage
loans, consumer and business loans, agricultural loans, safe deposit boxes,
collection services, transfer agency services, a trust department, insurance
agency, discount brokerage, financial planning, conference facilities and
access to TYME Corporation's electronic funds transfer system. Baylake Bank
maintains a number of divisions each headed by a vice president, including a
Retail Division, Commercial/Loan Division and Non-Bank Division to facilitate
the provision of customer services, and three supportive divisions, the
Administrative Division, Accounting Division and Operations Division.
Baylake Bank has the following 100%-owned subsidiaries: Baylake Investments,
Inc., Bank of Sturgeon Bay Building Corporation, Cornerstone Financial, Inc. and
Baylake Insurance Agency, Inc., Baylake Investments, Inc. was formed to manage
certain bank assets available for investment. Bank of Sturgeon Bay Building
Corporation owns the main office building, conference center facilities and
underlying property of the Bank. Cornerstone Financial, Inc. manages Bank of
Sturgeon Bay Building Corporation's conference center facilities. Baylake
Insurance Agency, Inc. offers various types of insurance products to the general
public as an independent agent. Baylake Bank also owns a 49.6% interest in
United Financial Services, Inc. ("UFS"), a data processing services company.
Unaffiliated third parties own the remaining 50.4% interest in UFS.
3
The revenues generated by these subsidiaries and UFS amount in aggregate to
less than 5% of Baylake Bank's total income.
Baylake Bank offers short-term and long-term loans on a secured and
unsecured basis for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. Baylake Bank
focuses its lending activities on individuals and small businesses in its
market area. Lending has been exclusively within the industrial and consumer
community within their market areas. The Bank's largest market area consists of
Door County, Wisconsin. Sturgeon Bay is the county seat and major industrial
and retail area of Door County. Baylake Bank is the largest commercial bank
in Door County, having assets of $244.6 million as of December 31, 1995.
Baylake Bank operates seven branch offices (two of which are seasonal) in Door
County, in addition to its main office in downtown Sturgeon Bay. Baylake Bank
has also expanded into the Northeast Brown County region with two facilities
planned: a mobile unit facility and a permanent facility that opened in March
1996. These facilities will offer a full range of services similar to those of
Baylake Bank.
The resident population of Door County is approximately 27,250 (according to
the 1990 census) with 9,100 living in the City of Sturgeon Bay. The major
industries of Door County include shipbuilding, tourism, metal products
manufacturing, electrical components manufacturing, and industrial oven
fabrication. Most industry is centered in the Sturgeon Bay area. The rest of
Door County is primarily involved in agriculture (mostly dairy farming and the
production of cherries and apples), and tourism. The tourist business of Door
County is seasonal, with the season beginning in early spring and continuing
until late fall. The seasonal nature of the tourist business imposes increased
demands for loans shortly before and during the tourist season and causes
reduced deposits shortly before and during the early part of the tourist
season, although the financial needs of those involved in the delivery of
tourist related services is a year around concern.
BBK's former market area, which is now part of Baylake Bank's market, consists
primarily of Kewaunee County, Wisconsin
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and adjacent portions of Manitowoc County. Baylake Bank owns and operates four
branch offices in Kewaunee County. The resident population of Kewaunee County
is approximately 20,000 according to the 1990 census, with 2,750 people living
in Kewaunee and 3,353 in Algoma. The Kewaunee County industrial base is
diverse with over half of the business associated with food and related
products, fabricated metals, and lumber and wood furniture and fixtures. Most
industry is centered in the Kewaunee and Algoma area. The rest of Kewaunee
County is primarily involved in agriculture (mainly dairy production). Tourism
also contributes to the local economy.
Recent Developments
Manawa Acquisition
In March 1996, Baylake entered into a definitive agreement providing for the
acquisition of Four Seasons of Wis, Inc. ("Four Seasons"). Four Seasons is
the sole shareholder of The Bank, in Manawa, Wisconsin. In addition to its main
office in Manawa, which is approximately 35 miles west of Green Bay, The Bank
maintains a branch office in King, a nearby community.
The definitive agreement provides that Baylake will acquire Four Seasons in a
cash transaction, in the amount of $13.8 million, plus the amount of Four
Seasons net income from January 1, 1996 prior to closing. The acquisition
remains subject to regulatory approvals, an audit of Four Seasons financial
statements, and other customary conditions. Assuming the conditions are timely
met, the acquisition of Four Seasons is expected to be consummated in summer
1996. The acquisition would be accounted for using the purchase method of
accounting.
At December 31, 1995, according to information provided by Four Seasons, on an
unaudited consolidated basis, Four Seasons had approximate total assets of
$59.6 million, total deposits of $49.9 million and total shareholders' equity
of $9.3 million. For the fiscal year ended June 30, 1995, Four Seasons had net
income of $452,000; for the six months ended December 31, 1995, Four Seasons'
net income was $264,000.
Green Bay Branches
Baylake Bank completed construction of its permanent facility in the Green Bay
region and opened for business in March 1996. This facility will offer a full
range of products and services. Total costs for building and equipment to date
are $1.9 million. In addition, construction will occur on a second site in
Green Bay. This area is currently served by a temporary facility and offers
various retail services as well as consumer and commercial loan services.
Subsequent to December 31, 1995, Baylake Bank has entered into a contract to
construct a building for $1.1 million with completion anticipated in the late
third quarter to early fourth quarter of 1996.
Merger of Subsidiary Banks
Effective January 1, 1996, Baylake's subsidiary banks, Baylake Bank and Baylake
Bank (Kewaunee), were merged under the name "Baylake Bank". The merger is
intended by Baylake to generate operating efficiencies, improve customer
service, assist in the coordination of management and reduce regulatory burdens.
Lending and Investments
Baylake Bank offers short-term and long-term loans on a secured and unsecured
basis for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. Baylake Bank
focuses its lending activities on individuals and small businesses in its
market area. Lending has been exclusively within the State of Wisconsin.
Baylake Bank does not conduct any substantial business with foreign obligors.
The markets served by Baylake Bank includes a wide variety of types of
businesses; therefore, the Registrant does not believe it is unduly exposed to
the problems in any particular industry group. However, any general weakness
in the economy of Door and Kewaunee County areas (as a result, for example, of
a decline in its manufacturing and tourism industries or otherwise) could have
a material effect on the business and operations of the Registrant.
Baylake Bank's total outstanding loans as of December 31, 1995 amounted to
approximately $210.2 million, consisting of 72.0% residential, commercial,
agricultural and construction real estate loans, 19.2% commercial and
industrial loans, 6.0% installment and 2.8% agricultural loans.
The Registrant maintains a portfolio of other investments, primarily consisting
of U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
securities, and obligations of states and their political subdivisions. The
Registrant attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
Baylake Bank offers a broad range of depository products, including
non-interest bearing demand deposits, interest-bearing demand deposits, various
savings and money market accounts and certificates of deposit. Deposits at the
Baylake Banks are insured by the FDIC up to statutory limits. At December 31,
1995, Baylake Bank's total deposits amounted to $267.0 million, including
interest bearing deposits of $233.1 million and non-interest bearing deposits
of $33.9 million.
5
Other Customer Services and Products
Other services and products offered by Baylake Bank and subsidiaries
include safety deposit box services, personal and corporate trust services,
conference center facilities, an insurance agency and discount brokerage
services offering stocks, bonds, annuities, mutual funds and other investment
products.
Competition
Baylake Bank competes with other financial institutions and businesses in both
attracting and retaining deposits and making loans. The Bank encounters direct
competition in its Door County market area from one other commercial bank as
well as from two savings and loans associations and one credit union which
maintain offices in Door County. Baylake Bank encounters direct competition in
its Kewaunee County market area from four other commercial banks as well as one
savings and loan association and one credit union. In spite of such
competition, Baylake Bank has maintained its position within the market areas,
holding better than half of all commercial bank deposits in the combined market
area as of December 31, 1995. Although no assurance can be given that it will
continue to do so, Baylake Bank has been able to maintain its prominence in the
market areas, even though certain competitors have considerably more financial
and other resources than do the Registrant.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, and is not within the control of Baylake. This
regulation substantially affects the business and financial results of all
financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Federal Reserve Board, which require that Baylake's capital
to asset ratio meet certain minimum standards. For a discussion of the Federal
Reserve Board's guidelines and the Registrant's applicable ratios, see the
section entitled "Capital Resources" under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation.
Baylake Bank is incorporated under the banking laws of Wisconsin, and its
deposits are insured by the FDIC. It is therefore subject to supervision and
regulation by the Wisconsin Commissioner of Banking (the "Commissioner"), the
Federal Reserve Bank ("FRB") and the FDIC. As a registered bank holding
company
6
under the Bank Holding Company Act, Baylake is subject to review and regulation
by the FRB (their primary regulator). Baylake is also subject to review and
examination by the Commissioner under Wisconsin law.
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the Commissioner be paid out of current earnings or, no
more than once within the immediate preceding two years, out of undivided
profits in the event there have been insufficient net profits. Any other
dividends require the prior written consent of the Commissioner. The Bank and
BBK each is in compliance with all applicable capital requirements and may pay
dividends to Baylake.
Effective September 1995, federal law permitted bank holding companies in
Wisconsin to acquire banks and holding companies nationwide, and holding
companies in any state to acquire banks and holding companies in Wisconsin.
Prior to that date, Wisconsin law permitted Wisconsin-based financial holding
companies to acquire institutions, or be acquired by other institutions,
located in a nine state regional area (consisting of Wisconsin, Illinois,
Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri and Ohio) provided such
other states had been determined by the Commissioner to have reciprocal laws
permitting such acquisitions by and of Wisconsin institutions. All of these
states except Missouri had such reciprocal laws. Certain additional states had
permitted acquisition of banks in those states by Wisconsin-based holding
companies. Wisconsin law generally permits establishment of full service bank
branch offices statewide.
7
Statistical Information
The following statistical information is presented in accordance with the
Securities and Exchange Commission's Guide 3, "Statistical Disclosure by Bank
Holding Companies." Reference numbers relate to Guide 3.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Three-year comparison of Consolidated Average Balance Sheet (in
thousands)
1995 1994 1993
---- ---- ----
Assets
Cash and Due from Banks $ 7,609 $ 7,948 $ 8,667
Investment Securities:
U. S. Treasury 6,076 9,297 10,338
U. S. Government Agencies 46,865 42,026 41,766
State and Municipal Obligations 18,495 21,402 26,613
Other Securities 2,376 2,285 2,155
Market Adjustment on AFS Securities (1,153) (1,052) 0
-------- -------- --------
Total Investments $ 72,659 $ 73,958 $ 80,872
-------- -------- --------
Federal Funds Sold $ 4,849 $ 6,196 $ 5,876
Loans, Net of Unearned Income $201,839 $187,945 $174,371
Reserve for Loan Losses (2,669) (2,452) (2,366)
-------- -------- --------
Net Loans $199,170 $185,493 $172,005
-------- -------- --------
Bank Premises and Equipment $ 6,873 $ 5,710 $ 5,291
Other Real Estate Owned $ 128 $ 83 $ 94
Other Assets $ 7,326 $ 5,163 $ 4,562
-------- -------- --------
Total Assets $298,614 $284,551 $277,367
======== ======== ========
Liabilities and Stockholders' Equity
Demand Deposits $ 32,350 $ 30,815 $ 28,985
NOW Account Deposits 33,060 33,618 31,286
Savings Deposits 83,470 84,623 79,623
Time Deposits 106,444 93,618 95,744
-------- -------- --------
Total Deposits $255,324 $242,674 $235,638
-------- -------- --------
Short Term Borrowings $ 3,131 $ 2,448 $ 6,692
Customer Repurchase Agreements $ 1,279 $ 3,525 $ 2,539
Long Term Debt $ 475
Other Liabilities $ 3,834 $ 2,665 $ 2,696
======== ======== ========
Total Liabilities $264,043 $251,312 $247,565
-------- -------- --------
Common Stock $ 12,272 $ 12,239 $ 12,166
Additional paid in capital 5,947 5,928 5,452
Retained Earnings 17,141 15,784 12,228
Net Unrealized Losses on AFS Securities (740) (666) 0
Treasury Stock (49) (46) (44)
-------- -------- --------
Total Equity $ 34,571 $ 33,239 $ 29,802
-------- -------- --------
Total Liabilities and Stockholders' Equity $298,614 $284,551 $277,367
======== ======== ========
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).
1995 1994
Amount Interest Yield Amount Interest Yield
------ -------- ----- ------ -------- -----
Interest-earning assets:
Loans, Net $201,839 9.74% $187,945 8.83%
Less: non-accruing Loans (1,463) (1,565)
-------- --------
Loans $200,376 $19,661 9.81% $186,380 $16,594 8.90%
U.S. Treasury Securities 6,076 303 4.99% 9,297 483 5.20%
U.S. Government Agencies 46,865 2,895 6.18% 42,026 2,541 6.05%
State and Municipal Obligations 18,495 1,897 10.26% 21,402 2,229 10.41%
Other Securities 423 25 5.91% 418 25 5.98%
Federal Funds Sold 4,849 282 5.82% 6,196 260 4.20%
Other Money Market Instruments 1,953 69 3.53% 1,867 76 4.07%
-------- ------- ------ -------- ------- ------
Total Interest Earning Assets
(net of non-accruing loans) $279,037 $25,132 9.01% $267,586 $22,208 8.30%
======== ======= ====== ======== ======= ======
Interest-bearing liabilities:
NOW Accounts $33,060 $ 910 2.75% $ 33,618 $ 810 2.41%
Savings Accounts 83,470 2,978 3.57% 84,623 2,549 3.01%
Time Deposits 106,444 5,951 5.59% 93,618 3,981 4.25%
Short Term Borrowings 3,131 198 6.32% 2,448 105 4.29%
Customer Repurchase Agreements 1,279 52 4.07% 3,525 111 3.15%
Long Term Debt 475 42 8.84%
-------- ------- ------ -------- ------- ------
Total Interest-bearing Liabilities $227,859 $10,131 4.45% $217,832 $ 7,556 3.47%
======== ======= ====== ======== ======= ======
1993
Amount Interest Yield
------ -------- -----
Interest-earning assets:
Loans, Net $174,371 8.59%
Less: non-accruing Loans (1,777)
--------
Loans $172,594 $14,978 8.68%
U.S. Treasury Securities 10,338 727 7.03%
U.S. Government Agencies 41,766 2,654 6.35%
State and Municipal Obligations 26,613 2,758 10.36%
Other Securities 363 21 5.79%
Federal Funds Sold 5,876 173 2.94%
Other Money Market Instruments 1,792 90 5.02%
-------- ------- ------
Total Interest Earning Assets
(net OF non-accruing loans) $259,342 $21,401 8.25%
======== ======= ======
Interest-bearing liabilities:
NOW Accounts $ 31,286 $ 734 2.35%
Savings Accounts 79,623 2,352 2.95%
Time Deposits 95,744 4,133 4.32%
Short Term Borrowings 6,692 215 3.21%
Customer Repurchase Agreements 2,539 73 2.88%
Long Term Debt
-------- ------- ------
Total Interest-bearing Liabilities $215,884 $ 7,507 3.48%
======== ======= ======
9
The table below shows the net interest earnings and the net yield on
interest-earning assets for the periods indicated (inthousands of dollars).
1995 1994 1993
---- ---- ----
Total Interest Income $ 25,132 $ 22,208 $ 21,401
Total Interest Expense 10,131 7,556 7,507
-------- -------- --------
Net Interest Earnings $ 15,001 $ 14,652 $ 13,894
======== ======== ========
Net Yield on Interest-earning Assets 5.38% 5.48% 5.36%
(excluding non-accruing loans)
Interest on tax exempt income, (i.e., interest earned on state and municipal
obligations) are figured on a federal tax-equivalent basis using a tax rate of
34%.
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).
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
Interest earned on:
Loans $1,310 $1,757 $3,067 $1,212 $ 404 $ 1,616
U.S. Treasury
Securities (164) (16) (180) (64) (180) (244)
U.S. Government
Agencies 296 58 354 16 (129) (113)
State and Municipal
Obligations (300) (32) (332) (541) 12 (529)
Other Securities 0 0 0 3 1 4
Federal Funds Sold (67) 89 22 11 76 87
Other Money Market
Instruments 3 (10) (7) 3 (17) (14)
------ ------- ------- ------ -------- --------
Total Interest
Earning Assets $1,078 $1,846 $2,924 $ 640 $ 167 $ 807
======= ======= ======= ======= ======== ========
Interest paid on:
NOW Accounts $ (14) $ 114 $ 100 $ 55 $ 21 $ 76
Savings Accounts (38) 467 429 149 48 197
Time Deposits 631 1,339 1,970 (91) (61) (152)
Short Term
Borrowings 36 57 93 (159) 49 (110)
Customer Repurchase
Agreements (81) 22 (59) 30 8 38
Long Term Debt 21 21 42
------- ------- ------- -------- ------- --------
Total Interest-
Bearing
Liabilities $ 555 $2,020 $2,575 $ (16) $ 65 $ 49
======= ======= ======= ======== ======= ========
(1) When a change in interest is due both to rate changes and volume this
analysis has been made on a fifty-fifty basis.
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,
1995, 1994 and 1993 are summarized as follows (in thousand of dollars)
1995 1994 1993
-------- -------- --------
Available for Sale
------------------
U.S. Treasury and Other U.S. government $ 11,321 $ 8,187 $ 9,195
agencies
Mortgage-backed securities 38,430 41,139 38,148
Obligations of states and political 13,322 6,742 8,828
subdivisions
Other 893 2,965 1,924
------- -------- --------
$63,966 $59,033 $58,095
Held to Maturity
----------------
Obligations of states and $ 11,237 $ 13,605 $ 16,864
political subdivisions
Other 408 408 408
-------- -------- --------
$ 11,645 $ 14,013 $ 17,272
Total $ 75,611 $ 73,046 $ 75,367
The Registrant does not hold investment securities of any issuer (other than
securities on the U.S. Government or its agencies) whose book value exceeds ten
percent of its stockholders equity.
12
II. B. The following table shows the maturities of investment securities as
of December 31, 1995 and weighted average yields of investment securities (in
thousands). The weighted average yields by maturity range was computed by
annualizing the purchase yield income on the securities within such maturity
range.
One Year Over 1 Year Over 5 Years
or less Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
U.S. Treasury and other U.S. Government
agencies $1,000 6.12% $10,321 5.97% $
Mortgage-backed securities 72 6.58%
Obligations of states and political
subdivisions 2,407 8.45% 7,066 11.02% 8,842 7.90%
Other 765 5.28% 13 8.00%
------ ----- ------- ----- ------ ------
Total $4,244 7.30% $17,400 8.02% $8,842 7.90%
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other U.S.
Government agencies $ $11,321 5.98%
Mortgage-backed securities 38,358 6.02% 38,430 6.02%
Obligations of states and political
subdivisions 6,244 8.52% 24,559 9.01%
Other 523 5.89% 1,301 5.55%
------- ----- ------- -----
Total $45,125 6.36% $75,611 6.98%
Weighted average yield on state and political subdivisions has been computed on
a fully taxable equivalent basis using a tax rate of 34%.
13
III. LOAN PORTFOLIO
A. Types of Loans
The following table sets forth the comparison of the loan portfolio at December
31st of each of the past five years (in thousands of dollars).
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Loans secured primarily
by real estate:
Secured by 1 to 4 family $62,271 $52,873 $48,190 $43,288 $42,778
residential properties
Real estate-construction 6,378 5,881 4,511 3,275 3,330
Other real estate loans 83,461 69,702 64,585 45,818 41,274
Loans to farmers 5,771 6,103 5,586 5,306 4,469
Commercial and Industrial
loans 40,287 42,157 41,558 47,707 39,241
Loans to individuals for
household, family and other
personal expenditures 12,522 16,603 16,844 16,978 14,818
All other loans 193 152 378 513 1,294
-------- -------- -------- -------- --------
Total gross loans $210,883 $193,471 $181,652 $162,885 $147,204
Less:
Unearned Income (653) (798) (748) (718) (637)
-------- -------- -------- -------- --------
Net Loans $210,230 $192,673 $180,904 $162,167 $146,567
======== ======== ======== ======== ========
14
2. As of December 31, 1995, there existed potential problem loans totaling
$2,154,950 which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1995.
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
$2 044 084 10% $ 204 408
89 183 25% 22 296
18 511 50% 9 256
2 542 100% 2 542
---------- ---- ----------
Totals $2 154 320 $ 238 502
Commercial loans comprised 96.8% or $2,085,955 of the total loans categorized
as problem loans. The other types of loans comprising this amount were
mortgage loans totaling $42,467 or 2.0% and consumer loans totaling $25,898 or
1.2%.
3. The Bank's loan portfolio is diversified by types of borrowers and industry
groups within the Door and Kewaunee market area. Significant loan
concentrations are considered to exist for a financial entity when such amounts
are loaned to borrowers engaged in similar activities as would cause them to be
similarly impacted by economic or other conditions. At December 31, 1995,
there existed the following industry group concentrations in the Registrant's
loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $27.5 million or 13.0%
----------------------
Total tourism loans $27.5 million or 13.0%
15
III. LOAN PORTFOLIO
B. Maturity and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of loans outstanding (in thousands) as of
December 31, 1995 which, based on remaining schedule repayments of principal,
are due in the periods indicated. Also, the amounts due after one year are
classified according to the sensitivity to change in interest rates.
Maturing
----------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------- ---------- ---------- ---------
Loans secured primarily by real estate:
Secured by 1 to 4 family
residential property $ 31,959 $ 26,356 $ 3,956 $ 62,271
Real estate - construction 1,750 2,554 2,074 6,378
Other real estate loans 24,017 33,023 26,421 83,461
Loans to farmers 3,003 1,809 959 5,771
Commercial and industrial loans 21,295 16,458 2,534 40,287
Loans to individuals for household family and
other personal expenditures
6,830 5,450 242 12,522
All other loans 118 17 58 193
-------- -------- -------- --------
Total $ 88,972 $ 85,667 $ 36,244 $210,883
======== ======== ======== ========
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
----- --------
Due after one year $ 50,771 $ 71,140
C. Risk Elements
1. The following table shows at December 31, the aggregate amounts of loans
(in thousands) which are non-accrual, troubled with debt restructurings and
accruing loans past 90 days or more as to principal or interest payments.
1995 1994 1993 1992 1991
Non-accrual loans $ 846 $ 1,536 $ 1,508 $ 1,535 $ 1,616
Troubled debt restructurings 648 815 255 309 0
Loans past due 90 days or more 0 90 56 129 81
------- ------- ------- ------- -------
Total $ 1,494 $ 2,441 $ 1,819 $ 1,973 $ 1,697
======= ======= ======= ======= =======
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $74,000; $117,000; $175,000; $189,000; and
$146,000 for 1995, 1994, 1993, 1992 and 1991 respectively. Interest income
which is recorded only as received, amounted to $34,000; $58,000; $101,000;
$77,000; and $69,000 for 1995, 1994, 1993, 1992 and 1991 respectively for these
non-accrual loans.
Loans are placed in non-accrual status when they are contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact
the collectibility of principal or interest on loans, it is the practice of
management to place such loans on a non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued
16
and uncollected interest on such loans are reversed and income is recorded only
to the extent that interest payments are subsequently received on a cash basis
and a determination has been made that the loan's principal is collectible. If
the loan collectibility of principal is doubtful, payments received are applied
to loan principal.
17
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following table summarizes the daily average loan balances at the end
of each period; changes in allowance for possible loan losses arising from
loans charged off and recoveries on loans previously charged off, by loan
category; and addition to the allowance which have been charged to operating
expenses (in thousands).
December 31
-----------
1995 1994 1993 1992 1991
Daily average amount of loans $201,839 $187,945 $174,371 $155,955 $144,877
======== ======== ======== ======== ========
Balance of allowance for possible
loan losses
at beginning of period $ 2,534 $ 2,434 $ 2,253 $ 1,905 $ 1,632
Loans Charged Off:
Real estate - mortgage ---- ---- 12 ---- 104
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 158 238 86 54 177
Consumer Loans 50 32 82 42 29
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 208 $ 270 $ 180 $ 96 $ 310
======== ======== ======== ======== ========
Recoveries of loans previously charged
off:
Real estate - mortgage ---- ---- 6 ---- ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 33 62 5 87 82
Consumer loans 8 48 46 47 38
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total recoveries $ 41 $ 110 $ 57 $ 134 $ 120
Net loans charged off $ 167 $ 160 $ 123 $ (38) $ 190
-------- -------- -------- -------- --------
Additions to allowance for
loan losses charged to
operating expense $ 250 $ 260 $ 304 $ 310 $ 463
-------- -------- -------- -------- --------
Allowance for loan losses at
end of period $ 2,617 $ 2,534 $ 2,434 $ 2,253 $ 1,905
======== ======== ======== ======== ========
Ratio of net charge off during period to
average loans outstanding .08% .09% .07% (.02%) .13%
The factors which influence management's judgment in determining the additions
to the loan valuation reserve are as follows:
1. The ratio of loan valuation reserves to the total loans should approximate
1.30% according to Baylake management.
2. The percentage of recoveries of loans previously charged off in relation
to the ratio in (1) above.
3. The charged off loans to total loan loss experience.
4. The economic stability within the market area and its impact on the loan
portfolio.
18
B. Allocation of Allowance for Loan Losses
For each period ended December 31, the loan valuation reserve has been
allocated to the following categories in amounts deemed reasonably necessary to
provide for the possibility of losses being incurred within each category. The
table also sets forth the percentage of loans in each category to total loans
(in thousands).
December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991
------------------- -------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent of Amount Percent of Amount Percent of Amount Percent of
------ ------ ------ ------ ------
of Loans Loans in Loans in Loans in Loans in
in Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Loans Loans Loans Loans Loans
-------- -------- -------- -------- --------
Real estate - mortgage $1,000 69.1% $ 974 63.4% $ 924 62.1% $ 771 54.7% $ 664 57.1%
Real estate -
construction 50 3.0% 50 3.0% 50 2.5% 50 2.0% 50 2.3%
Loans to farmers 20 2.7% 20 3.2% 20 3.1% 20 3.3% 10 3.0%
Commercial/industrial 1,190 19.2% 1,133 21.8% 1,083 23.0% 1,074 29.6% 948 27.5%
Consumer 337 6.0% 337 8.6% 337 9.3% 317 10.4% 184 10.1%
Not allocated 20 20 20 20 49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,617 100% $2,534 100% $2,434 100% $2,252 100% $1,905 100%
====== ====== ====== ==== ====== ====== ====== ====== ====== ======
19
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
YEAR ENDED DECEMBER 31
----------------------
1995 1994 1993
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
Non-interest bearing demand
deposits $ 32,350 0.00% $ 30,815 0.00% $ 28,985 0.00%
Interest bearing demand
deposits 33,060 2.75% 33,618 2.41% 31,286 2.35%
Savings deposits 83,470 3.57% 84,623 3.01% 79,623 2.95%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 94,858 5.53% 86,207 4.28% 90,278 4.34%
Time Certificates of Deposit
of $100,000 or more 11,586 6.11% 7,411 3.95% 5,466 3.99%
-------- -------- --------
Total Deposits $255,324 3.85% $242,674 3.03% $235,638 3.07%
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
1995 1994 1993
---- ---- ----
3 months or less $ 2,783 $ 1,681 $ 1,165
Over 3 months thru 6 months 5,066 1,270 1,021
6 months thru 12 months 2,336 1,108 2,947
Over 12 months 1,338 841 600
-------- -------- --------
Total $ 11,523 $ 4,900 $ 5,733
======== ======== ========
20
VI. RETURN ON EQUITY AND ASSETS
The ratio of consolidated net income to average stockholders' equity and to
average total assets and other ratios are as follows:
YEAR ENDED DECEMBER 31
----------------------
1995 1994 1993
---- ---- ----
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.56% 1.56% 1.68%
Average Stockholders' Equity (return
on equity) 13.43% 13.33% 15.64%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 60.32% 56.35% 30.21%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 11.58% 11.68% 10.75%
21
VII. Short-Term Borrowings
A. The following table shows outstanding amounts of short-term borrowings,
together with the weighted average interest rates thereon, at December 31, of
each of the past three years (in thousand of dollars).
1995 1994 1993
Amount Rate Amount Rate Amount Rate
Federal Funds purchased $ 774 6.09% $1,634 6.00% $
Securities Sold under agreements to
repurchase 754 3.74% 2,515 4.00% 3,162 2.75%
------ ----- ------ ----- ------ -----
$1,528 4.93% $4,149 4.79% $3,162 2.75%
------ ----- ------ ----- ------ -----
B. The following table shows the maximum amounts outstanding of short term
borrowings at any month-end during each reported period (in thousand of
dollars).
1995 1994 1993
---- ---- ----
Federal funds purchased $ 9,519 $12,611 $18,900
Securities sold under agreements to
repurchase 1,076 4,522 3,153
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of short-term borrowings, the interest paid and
the weighted average rates thereon (in thousands of dollars).
1995 1994 1993
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
Short-term
borrowings:
Federal funds
purchased $3,131 $198 6.32% $2,448 $105 4.29% $6,692 $215 3.21%
Securities sold
under agreements
to repurchase 1,279 52 4.07% 3,525 111 3.15% 2,539 73 2.88%
------ ---- ----- ------ ---- ----- ------ ---- -----
Total short-term
borrowings $4,410 $250 5.67% $5,973 $216 3.62% $9,231 $288 3.13%
22
VIII. Long Term Debt
A. The following table shows outstanding amounts of long term debt, together
with the weighted average interest rates thereon, at December 31, or each of
the past three years (in thousands of dollars). Long term debt consists of a
land contract requiring annual principal payments of $53,000 plus interest
calculated at prime + 1/4%.
1995 1994 1993
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Land contract payable $ 475 8.75%
------ ----- ------ ----- ------ -----
$ 475 8.75% $ 0 $ 0
====== ===== ====== ===== ====== =====
B. The following table shows the maximum amounts outstanding of long term debt
at any month-end during each reported period (in thousands of dollars).
1995 1994 1993
---- ---- ----
Land contract payable $ 475 $ 0 $ 0
C. The following table shows for the periods indicated the daily average amount
outstanding for the categories of long term debt, the interest paid and the
weighted average rates thereon (in thousands of dollars).
1995 1994 1993
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
Long term debt:
Land contract payable $ 475 $ 41 8.75% $ $
------ ---- ------- ------ ---- ------ ------ ---- ------
Total long term debt $ 475 $ 41 8.75%
====== ==== ======= ====== ==== ====== ====== ==== ======
23
ITEM 2. PROPERTIES
Registrant directly owns no real properties of any kind. However, Baylake Bank
owns twelve branches and leases the main office building from its subsidiary,
the Bank of Sturgeon Bay Building Corporation. In addition, the Bank leases a
modular facility from an unrelated third party for its second facility in Green
Bay; this is being replaced by a branch owned by Baylake Bank.
The main office building located in Sturgeon Bay serves as headquarters for
Registrant as well as the main banking office of Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
and financial services. The thirteen branches owned or leased by Bank are
conveniently located throughout the market area served by Bank. All properties
are in good condition and considered adequate for present and near term
requirements.
ITEM 3. LEGAL PROCEEDINGS
One of the subsidiaries of the Registrant is a defendant in a legal action.
Management believes that the action is without merit and that the ultimate
liability, if any, resulting from it will not materially affect the
Registrant's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 1995.
24
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
Historically, trading in shares of Baylake Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol:BYLKBB), an electronic interdealer quotation system providing
real-time quotations on over 4,000 eligible securities. Previously, Baylake
Common Stock was listed on the NASDAQ Pink Sheets. Trading in Baylake Common
Stock has been conducted principally by certain brokerage and investment firms
with offices in Door County, Wisconsin which have provided price quotations,
and have assisted individual holders of Baylake Common Stock who wish to sell
their shares.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are
computed from those obtained from two brokerage firms. The reported high and
low prices represent interdealer bid prices, without retail mark-ups,
mark-downs or commission, and may not necessarily represent actual
transactions.
Cash
dividends
paid per
Calendar period High Low share
--------------- ---- --- ---------
1994 1st Quarter $32.00 $25.50 $0.150
2nd Quarter 33.50 29.00 0.200
3rd Quarter 35.00 32.00 0.200
4th Quarter 34.50 32.00 0.470
1995 1st Quarter 34.50 30.50 0.220
2nd Quarter 32.00 27.00 0.220
3rd Quarter 29.25 26.50 0.220
4th Quarter 29.00 26.25 0.480
Baylake had approximately 1,513 shareholders of record at March 21, 1996.
Baylake paid a 100% stock dividend in September 1993. In addition, Baylake
paid a special dividend of $.25 per share cash dividend in December 1994 and
1995.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January,
25
and Baylake expects to continue this practice for the foreseeable future. The
holders of Baylake Common Stock are entitled to receive such dividends when and
as declared by Baylake's Board of Directors. The ability of Baylake to pay
dividends is dependent upon receipt by Baylake of dividends from the Bank,
which is subject to regulatory restrictions. Such restrictions, which govern
state chartered banks, generally limit the payment of dividends on bank stock
to the bank's undivided profits after all payments of all necessary expenses,
provided that the bank's surplus equals or exceeds its capital. In determining
the payment of cash dividends, the Board of Directors of Baylake considers the
earnings, capital and debt servicing requirements, financial ratio guidelines
issued by the FRB and other banking regulators, financial conditions of Baylake
and the Bank, and other relevant factors.
Baylake maintains a dividend reinvestment plan which enables participating
shareholders to elect to purchase shares of Baylake Common Stock in lieu of
receiving cash dividends. Such shares may be newly issued securities or
acquired in the market, and will be purchased on behalf of participating
shareholders at their then fair market value.
26
ITEM 6. SELECTED FINANCIAL DATA
Year ended December 31
----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except amounts per share)
Interest Income $ 24,487 $ 21,445 $ 20,468 $ 21,285 $ 22,822
Interest Expense $ 10,131 $ 7,556 $ 7,507 $ 9,285 $ 11,891
Net Interest Income $ 14,356 $ 13,889 $ 12,961 $ 12,000 $ 10,931
Provision for Loan Losses $ 250 $ 260 $ 304 $ 310 $ 463
Other Income $ 2,581 $ 2,320 $ 2,697 $ 2,657 $ 1,960
Other Expense $ 9,894 $ 9,689 $ 8,769 $ 8,485 $ 7,333
Income before income taxes $ 6,793 $ 6,260 $ 6,585 $ 5,862 $ 5,095
Net income $ 4,644 $ 4,430 $ 4,662 $ 4,181 $ 3,259
Earnings per share:
Fully diluted $ 1.89 $ 1.81 $ 1.92 $ 1.73 $ 1.36
Dividends per share (1) 1.14 1.02 .58 1.51 .35
Total assets (year end) $309,428 $287,107 $284,075 $272,079 $264,148
(1) All data, except dividends per share, have been restated to give effect to
the Registrant's acquisition of Kewaunee County Banc-Shares, Inc. on August 31,
1994, in a transaction accounted for using the pooling of interest methods of
accounting.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
The following sets forth management's discussion and analysis of the
consolidated financial condition and results of operations of the Baylake Corp.
("Baylake" or the "Registrant"), which may not be otherwise apparent from the
consolidated financial statements included in this report. This discussion and
analysis should be read in conjunction with those financial statements, related
notes, the selected financial data and the statistical information presented
elsewhere in this report for a more complete
27
understanding of the following discussion and analysis.
On August 31, 1994, the Registrant completed the acquisition of Kewaunee County
Banc-Shares, Inc. ("KCB"), the holding company for Baylake Bank-Kewaunee
("BBK"). The Registrant acquired all of the outstanding shares of KCB in
exchange for 574,756 shares of the Registrant's common stock. The acquisition
was structured as a merger of KCB with a newly-formed subsidiary of the
Registrant and accounted for using the pooling-of-interests method of
accounting; therefore, results of prior periods have been restated.
In addition, in March 1996, the Registrant signed an agreement to acquire Four
Seasons of Wis, Inc. and its subsidiary in a cash transaction valued at
$13.8 million. Because the transaction would be accounted for using the purchase
method of accounting, it would affect future operations. The acquisition
remains subject to regulatory approvals and other contingencies.
Results of Operations
The Registrant achieved solid earnings in 1995. Net income was $4.64 million,
a 4.8% increase from the $4.43 million earned in 1994. Net income for 1994
showed a 5.0% decrease over 1993 earnings, primarily from one-time charges
associated with the acquisition of KCB and the name changes of Baylake's
subsidiary banks. Those changes reduced after-tax net income in 1994 by
$529,000. On a per share basis, net income was $1.89 in 1995 compared with
$1.81 in 1994, an increase of 4.4%. Earnings per share in 1994 showed a 5.7%
decline over 1993 results. Those charges in 1994 reduced after-tax earnings
per share by $.22.
Net interest income improved $467,000 or 3.4% over 1994 levels. From a slightly
increasing rate environment in early 1995 to a slightly declining rate
environment in late 1995, interest income increased 14.2% while interest
expense increased 34.1%.
Other income showed an increase of $261,000 or 11.3%. The primary factor
increasing other income were revenues generated from the Karsten Resources,
Inc. operation.
Non-interest expense increased $205,000 or 2.1% over 1994 levels. Factors
contributing to the increase were increased equipment expenses and data
processing costs.
For 1995, return on average assets remained unchanged at 1.56% compared with
1.56% in 1994 and a decrease from the 1.68% recorded in 1993. This ratio
remained stable as a result of the various factors discussed above combined
with average asset growth of 4.9% in 1995.
Return on average stockholders' equity in 1995 showed a slight increase at
13.43% compared to 13.33% in 1994 and a decline compared to 15.64% in 1993.
This result occurred as a result of increased net income and the factors
discussed above offset by an increased capital base.
Cash dividends declared in 1995 increased 11.8% to $1.14 per share compared to
$1.02 in 1994. This compares to an increase of 75.9% in 1994 dividends as
compared to 1993.
Net Interest Income
Net interest income is the largest component of the Registrant's operating
income (net interest income plus other non-interest income), accounting for
28
85.3% of 1995 total operating income, as compared to 86.3% in 1994 and 83.7%
in 1993. Net interest income represents the difference between interest
earned on loans, investments and other earning assets, and the interest expense
associated with the deposits and borrowings that fund them. Interest
fluctuations together with changes in the volume and types of earnings and
interest-bearing liabilities combine to affect total net interest income. This
analysis discusses net interest income on a tax-equivalent basis in order to
provide comparability among the various types of interest earned. Tax-exempt
interest income is adjusted to a level that reflects such income as if it were
fully taxable.
Net interest income on a tax-equivalent basis reached $15.0 million in 1995, an
increase of 2.4% from $14.6 million in 1994 (and $13.9 million in 1993). The
improvement in 1995 net interest income of $355,000 was due in part to a 4.2%
increase in the volume of average earning assets, offset by a 4.6% increase in
average interest-bearing liabilities. The declining rate environment in the
latter half of 1995 had a negative impact on net interest income as assets were
repriced more frequently than its deposits. In addition a special deposit
product offering was made as a promotional vehicle for the Bank's entry into
the Green Bay market. Although the offer was short-term in nature and
duration, it had a negative impact on net interest income as short-term time
deposit rates rose significantly. As a result, interest income increased
13.2%, while interest expense for 1995 increased 34.1%.
Average loans outstanding grew from $187.9 million in 1994 to $201.8 million in
1995, an increase of 7.4%. The increase in loan volumes also was a significant
contributing factor to the increase in interest income. Average loans
outstanding increased from $174.4 million in 1993 to $187.9 million in 1994, an
increase of 7.8%. The mix of average loans to average total assets grew from
62.9% in 1993 and 66.0% in 1994 to 67.6% in 1995. The switch in asset mix to
greater loan composition has provided a source of higher yielding assets, which
contributed to an increase in net interest income.
Interest rate spread is the difference between the tax-equivalent rate earned
on average earning assets and the rate paid on average interest-bearing
liabilities. The interest rate spread decreased 27 basis points in 1995 to
4.56% from 4.83% in 1994, as the average yield on earning assets increased 71
basis points while the average cost paid on interest-bearing liabilities
increased 98 basis over the same period. This interest rate spread decline
followed an improvement of 6 basis points in 1994 compared to a spread of 4.77%
in 1993. The increase in the Registrant's earning assets yield reflects higher
loan yields, resulting from the higher interest rate environment on average,
more frequent repricing of variable rate loans and a higher percentage of the
Registrant's assets represented by loans and stable investment yields related
to reduced activity in the investment portfolio. Yields on interest-paying
liabilities rose 98 basis points due to a higher interest rate environment on
average coupled with a special time deposit offering made in conjunction with
the opening of a branch in the Green Bay region. As a result of this offering,
new deposits were generated and a portion of the existing time deposit base
shifted to the higher yielding time deposit resulting in effective higher rates
for time deposits.
Net interest margin is tax-equivalent net interest income expressed as a
29
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of
funds to fund a portion of earning assets. As a result, the level of funds
available without interest cost (demand deposits and equity capital) is an
important factor affecting an increasing net interest margin.
The net interest margin for 1995 was 5.38% compared to 5.48% in 1994. The
decline in net interest margin was primarily the result of the 27 basis point
decline in the interest rate spread. The impact in the levels of average
interest rates from 1994 to 1995 had a negative affect on the change in net
interest margin. The free funds ratio, or the level of non-interest-bearing
funds that support earning assets, declined slightly to 22.4% from 22.5% in
1994, which caused a slight reduction in net interest margin.
The net interest margin for 1994 was 5.48% as compared to 5.36% in 1993 as
interest rate spread improved during that period. The increase in 1994
occurred in a rising rate environment as yields on earning assets improved 5
basis points while rates on interest-bearing liabilities remained stable.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 93.4% in 1995 compared with 94.0% in 1994 and 93.5% in
1993, indicating a consistent ability by the Registrant to use assets in a
direct earning capacity.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Registrant
constantly seeks to attract lower cost core deposits, service the needs of the
customer, and provide attractively priced products. Competition for high
quality assets will also affect asset yields. Net interest income is vital to
the Registrant's earnings performance, since net interest income is the largest
component of operating income. Growth in net interest income primarily is the
result of growth in the level of earning asset volumes and changes in asset
mix. Interest rate spread management through asset and liability pricing and
increased levels of non-interest-bearing sources of funds also aid in improving
net interest income. Management will continue its focus on maintaining an
appropriate mix of quality earning assets as well as seeking to achieve
appropriate growth in volumes.
Changes in the levels of market interest rates also affect net interest income,
but are less directly under the control of the Registrant. The recent
environment of declining interest rates has prompted reduced interest income as
a result of the repricing of the variable loan portfolio combined with a
lagging effect on the deposit side lowering interest rates more slowly.
Management believes that a gradual decrease in interest rates will not
adversely affect the earning capacity of the Registrant. Past experience has
shown that, although the Registrant remains in a short-term negative interest
rate sensitivity gap, deposits tend not to be repriced as quickly as loans in a
declining rate scenario, as the current environment has shown, and are repriced
more frequently in a falling interest rate environment. More discussion on
this subject is referenced in the section titled "Interest Rate Sensitivity".
Provision for Loan Losses
30
Provision for loan losses in 1995 at $250,000 compares to a provision of
$260,000 for 1994 and $304,000 for 1993. Net charge-offs in 1995 were $167,000
compared with net charge-offs of $160,000 in 1994 and $123,000 in 1993. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .08% in 1995 compared with .09% in 1994
and .07% in 1993. The provision is lower in spite of increased problem loans
due to strong collateral positions that exist. Management's determination of
the provision for loan losses is based on several factors. Factors considered
include evaluation of the loan portfolio, current domestic conditions, loan
volume, loan growth, loan portfolio composition, levels of non-performing
loans, trends in past due loans, and the evaluation of various problem loans
for loss potential. Net charge-offs to average loans remain comparatively low
in spite of above average loan growth due to higher underwriting standards and
improved collection efforts.
Non-Interest Income
Total non-interest income, excluding securities transactions, was $232,000 more
than 1994, or a 9.9% increase. Included in non-interest income in 1995 were
revenues of $269,000 from the operation of Karsten Resources, Inc., a hotel and
restaurant business. Without the impact from the Karsten revenues,
non-interest income would have been flat with a 1.6% decrease. In 1994, total
non-interest income was $196,000 less than 1993, or a 7.7% reduction. Trust
service fees, loan servicing fees and service charges continue to be the
primary components of non-interest income.
Trust fees increased $59,000 or 17.6% in 1995 compared to 1994, primarily as a
result of increased trust business. This compared to a decrease of $16,000 or
4.5% in 1994 compared to 1993, in part due to decreased estate business.
Loan servicing fees remained flat with a decrease of $21,000 or 3.8% to
$531,000 in 1995, a decline that resulted primarily due to decreased activity
in the loan refinancing market as a higher rate environment on average tempered
activity in that area. This result followed a decrease of $115,000 or 17.2% in
1994 as compared to 1993 for primarily the same reasons as listed above.
Service charges on deposit accounts showed a modest improvement of $11,000 or
1.8% over 1994 results. The reduction in fees for other service charges to
customers was a primarily a result of the sale of BBK's insurance subsidiary
during mid 1994 with revenues recognized in 1994 with no offsetting revenues in
1995.
As mentioned earlier, revenues of $269,000 stemming from the operation of
Karsten Resources, Inc. are included in 1995 other income results. Also
included in other income for 1995 were gains on sale of the student loan
portfolio totaling $97,000. For 1994 results, included in other income is
recognition of gain on sale of BBK's insurance subsidiary amounting to
$138,000.
Non-Interest Expense
Non-interest expense in 1995 increased $205,000 or 2.1% compared to 1994
31
results. This followed a $920,000 or 10.5% rise in 1994 as compared to 1993.
The 1994 increase resulted from one-time charges from Baylake's acquisition of
KCB and the related name changes at the Registrant's subsidiary banks.
Management estimated that those one-time expenses approximated $781,000 on a
pre-tax basis.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $5.4 million in 1995, an increase of $40,000 or .8% as
compared to 1994 results. The increase in 1995 primarily results from
additional staffing as a result of expansion into the Green Bay market and
normal salary increases. Salary and employee benefits expense in 1994 totaled
$5.4 million, an increase of $577,000 or 12.1% over 1993. The increase in 1994
primarily results from acceleration of a deferred compensation agreement as a
result of the merger with KCB recognizing a one-time expense amount of
$519,000. The salary portion of salary and benefit expense increased $414,000
or 12.1% compared to 1994. This compares to an increase of $237,000 or 7.1% in
1994 as compared to 1993 salary levels. Bonuses arising from the Registrant's
Pay-For-Performance Program amounted to $313,000 in 1995 compared to $224,000
in 1994, an increase of 39.7%. This program is designed to reward various
divisions if certain goals are met in achieving improvement in income and
return on equity to shareholders; bonuses increased due to an increased salary
base structure and certain goals on return on equity being achieved.
The Registrant's 401(k) profit sharing plan covering all employees who qualify
as to age and length of service showed an increase of $118,000 or 52.9% over
1994 levels as the Registrant increased contributions from a combination
discretionary/matching plan of 5% to 10% in 1995 to meet industry standards.
Expenses in the same category were up $7,000 or 3.2% in 1994 compared to 1993.
The number of full-time equivalent employees increased to 157 in 1995 compared
to 149 in 1994, an increase of 5.4%. This increase primarily resulted from the
Registrant gearing up for entry into the Green Bay market with emphasis on
personnel time spent on acclimation to the Bank and its products and calling
programs. Employee levels in 1994 increased to 149 from 146 in 1993, an
increase of 2.1%. As the Registrant expands to take advantage of business
opportunities and the related revenues, management will continue its efforts to
control salaries and employee benefits expense, although increases in these
expenses are likely to occur in future years.
Net occupancy expense showed a modest increase of $30,000 or 4.5% compared to
1994. This increase followed an increase of 3.4% in 1994. This expense should
increase in subsequent years as building projects in the Green Bay region
should add to depreciation expense and other occupancy costs. More detail on
the projected expansion costs are detailed in the section titled "Recent
Developments".
Equipment expense showed an increase of $130,000 or 25.9%. This followed an
increase of $43,000 or 9.4%. These resulted primarily from depreciation
expenses relating to past increased capital expenditures for equipment which
were made to enhance the Registrant's technological capabilities.
Data processing expense in 1995 increased $109,000 or 18.2% due to volume
32
increases and additional services purchased from outside vendors.
Approximately 6.6% of this increase stemmed as a result of doing business with
its partially owned data service center, United Financial Services, Inc. This
followed an increase of $22,000 or 3.8% in 1994 compared to 1993. Management
estimates that data processing expense should show relatively flat increases
with only adjustments related to any volume increase incurred by Registrant.
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result the
Registrant has shown varied results. Other real estate owned expenses showed
net income of $84,000 in 1995 as a result of gains on sale of approximately
$130,000 resulting from two residential properties (taken as collateral on two
commercial loans) disposed of in 1995. Additionally a gain of $18,000 was
recognized as a result of disposal of additional lot sales of Idlewild Valley,
a former subsidiary of the Bank whose value was written off in 1988. This
compares to net income of $4,000 in 1994 and net expenses of $15,000 in 1993.
Other operating expenses in 1995 were $24,000 less than in 1994 or a .9%
reduction. Two factors primarily affecting this change were reduced FDIC
insurance expense and expenses from the operation of Karsten Resources, Inc.
This compares to an increase of $275,000 or 11.9% in 1994 compared to 1993.
Although FDIC insurance expense remained a sizable component of other operating
expense totaling $291,000 in 1995, it was $253,000 lower than 1994 results or a
46.5% reduction. This occurred as a result of FDIC action to lower the
assessment ratio in June 1995 from 23 cents per $100 of deposits to 4 cents per
$100 of deposits for the remainder of 1995. That decrease compares to an
increase of $20,000 or 3.8% in 1994 compared to 1993. Operating costs for
Karsten Resources, Inc. of $319,000 are included as part of other operating
expenses for 1995.
Other items comprising other operating expense shows a decrease of $90,000 or a
4.4% reduction in 1995 compared to 1994. This followed an increase in 1994 of
$255,000 or 14.3% compared to 1993. The increase in 1994 resulted primarily
from one-time charges related to the KCB acquisition. The Registrant
(including KCB) incurred expenses related to the KCB acquisition of
approximately $197,000, including investment banking, legal and accounting
fees, regulatory filing fees, printing and mailing expenses, and the like.
Also, approximately $65,000 of the 1994 increase stems from costs associated
with the name change of the Registrant's subsidiary banks to Baylake Bank and
Baylake Bank Kewaunee. The overhead ratio, which is computed by subtracting
non-interest income from non-interest expense and dividing by average total
assets was 2.45% for 1995 compared to 2.59% for 1994. Registrant continues its
commitment to deliver quality service and products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1995 was $2.1 million, an increase of
$319,000 or 17.4% compared to 1994. This followed a decrease of $93,000 or
4.8% in 1994 compared to 1993. The higher tax expense in 1995 reflected the
Registrant's increase in before tax earnings and a reduction in tax exempt
interest income. Conversely, 1994 income tax expense was lower due to
33
a reduction in before tax earnings.
The Registrant's effective tax rate (income tax expense divided by income
before taxes) was 31.6% in 1995 compared with 29.2% in 1994 and 1993. Of the
31.6% effective rate for 1995 the federal effective tax rate was 28.5% while
the Wisconsin state tax effective rate was 3.1%.
In January 1993 the Registrant adopted STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 109 (SFAS 109) "Accounting for Income Taxes". The adoption of
SFAS 109 changed the method of accounting for income taxes from the deferred
method to an asset and liability approach. Previously the Registrant deferred
the past tax effects of timing differences between financial reporting and
taxable income. The asset and liability approach requires the recognition of
deferred tax liabilities between the carrying amounts and the tax bases of
other assets and liabilities. As permitted under the new rule, prior years'
financial statements have not been restated. The cumulative effect of adopting
this statement as of January 1, 1993 was immaterial to net income.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
Balance Sheet Analysis
Loans
Total loans outstanding grew to $210.2 million at December 31, 1995, a 9.1%
increase from the end of 1994. This follows a 6.5% increase at December 31,
1994 over 1993 year end.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small business. Loans of this type are in a
broad range of industries and include service, retail, wholesale and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door and Kewaunee Counties, Wisconsin. The credit risk related
to commercial loans made by the Registrant's subsidiaries is largely influenced
by general economic conditions (especially those applicable to the Door County
market area) and the resulting impact on a borrower's operations.
Commercial loans and commercial real estate loans (including construction
loans) totaled $135.6 million at year end 1995 and comprised 64.5% of the loan
portfolio compared with 64.3% of the portfolio at the end of 1994. Loans in
these classifications grew $12.0 million or 9.7% during 1995.
34
The following table sets forth loan composition at December 31:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
(In thousands of
Dollars)
Real estate- $ 62,059 29% $ 52,474 27% $ 47,816 27% $ 42,929 27% $ 42,459 30%
residential
Real estate- $ 6,378 3% 5,881 3% 4,511 2% 3,275 2% 3,330 2%
construction
Real estate- $ 83,177 40% 69,303 36% 64,211 36% 45,459 28% 40,956 28%
commercial &
agricultural
Commercial, $ 46,094 22% 48,412 25% 47,522 26% 53,526 33% 45,004 31%
financial &
agricultural
Installment loans $ 12,522 6% 16,603 9% 16,844 9% 16,978 10% 14,818 10%
to individuals
Total Loans, $201,230 $192,673 $180,904 $162,167 $146,567
(net of
unearned income)
Real estate loans (including construction loans) secured by non-residential
real estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, we have combined them with
commercial loans for purposes of analysis and discussion.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
in part by detailed underwriting procedures, comprehensive loan administration,
and periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Registrant's loan portfolio is diversified by types of borrowers and
industry groups with the Door and Kewaunee County market areas. Significant
loan concentrations are considered to exist for a financial entity when such
amounts are loans to a multiple of borrowers engaged in similar activities
which cause them to be similarly impacted by economic or other conditions. At
December 31, 1995, there existed the following industry group concentrations in
the Registrant's loans which exceeded 10% of total loans:
Tourism related loans:
Lodging business $27.5 million or 13.0%
----------------------
Total tourism loans $27.5 million or 13.0%
The Registrant has a significant loan concentration because of tourism based
35
loans. The Registrant must serve the credit needs of its market, with one of
the key industries being tourism. Being a community bank, however, the
Registrant must also meet the other needs of its market area. For that reason
the Registrant realizes that the economic conditions of its market area
directly impact the Registrant's performance levels. Any general weakness in
the Door or Kewaunee County areas could have a material effect on the business
and operations of the Registrant, although management believes that it is not
unduly exposed to problems in any particular industry group.
Real estate residential mortgage loans totaled $62.0 million at the end of 1995
and comprised 29.5% of the loan portfolio at the end of 1995. Loans in this
category grew $9.5 million or 18.1% during 1995. Residential real estate loans
consist of conventional home mortgages, home equity lines, and secondary home
mortgages. Loans are primarily for properties within the Door and Kewaunee
County markets. Residential real estate loans generally contain a limit for
the maximum loan to collateral value of 75% to 80%. Private mortgage insurance
may be required when the loan to value exceeds these limits. Residential real
estate loans are written normally with a one, two or three year balloon
feature. The Registrant also participates in a secondary fixed rate mortgage
program under the Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
These loans are sold on the secondary market and the Registrant retains
servicing rights. At December 31, 1995, these loans totaled $37.3 million.
Installment loans to individuals totaled $12.5 million or 6.0% of the total
loan portfolio at December 31, 1995 compared to $16.8 million or 8.6% at the
end of 1994. The reduction in 1995 occurred primarily as a result of a large
percentage of the student loan portfolio of approximately $4.0 million being
sold in mid 1995. These were sold primarily as a result of the regulatory
burdens placed upon servicing portfolios of these types and secondarily for
liquidity. Installment loans include short-term installment loans, direct and
indirect automobile loans, recreational vehicle loans, credit card loans, and
other personal loans. Individual borrowers may be required to provided related
collateral or a satisfactory endorsement or guaranty from another party,
depending upon the specific type of loan and the creditworthiness of the
borrower. Loans are made to individual borrowers located in Door and Kewaunee
Counties. Credit risks for these types of loans is generally influenced by
general economic conditions (especially in the Door and Kewaunee County market
areas), the characteristics of individual borrowers and the nature of the loan
collateral. Credit risk is primarily controlled by reviewing the
creditworthiness of the borrowers as well as taking the appropriate collateral
and guaranty positions on such loans.
Critical factors in the overall management of credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, adequate allowance for
possible loan losses, and conservative non-accrual and charge-off policies.
Allowance for Possible Loan Losses
At December 31, 1995 the allowance for possible loan losses of $2.6 million
represented 1.25% of total loans, down from 1.31% at December 31, 1994. Loans
grew at a rate of 9.1% from December 31, 1994 to year end 1995, while
36
the allowance grew at a lower rate. Also, net charge-offs increased in 1995 as
compared to 1994. As loans have grown, management did not believe there
existed any trends indicating any undue portfolio risk.
At December 31, 1994, the allowance for possible loan losses of $2.5 million
represented 1.31% of total loans compared with 1.35% at the end of 1993.
Commercial, agricultural and other loans net charge-offs represented 74.9% of
the total net charge-offs as compared with 110.0% of total net charge-offs in
1994. Installment loan net charge-offs in 1995 were 25.1% of the total net
charge-offs as compared with 10.0% of net recoveries in 1994. In the commercial
sector, two particular charge-offs contributed to the increase. One of the
charge-offs for $68,000 was related to the Karsten Resources, Inc. loan prior
to BBK converting it to a subsidiary. The other charge-off for $39,000 was in
the retail business in addition to $119,500 taken as a charge-off in 1994. The
remaining commercial loan charge-offs during 1995 were offset for the most part
by their eventual recoveries in 1995. The majority of charge-offs in the
installment loan sector occurred as a result of automobile loans. Four
charge-offs totaling $40,000 were made in 1995 with minimal recoveries
occurring. Credit card loans showed net charge-offs of $4,400 in 1995 compared
to small net recoveries in 1994. Although the Bank has experienced higher
interest returns on approximately $960,000 in credit card balances, credit card
loans are inherently risky in nature. The Bank continues to work with the
credit card issuer to solicit quality loan accounts based on designated
criteria and actively pursue collection efforts in a more timely fashion.
Loans charged-off are subject to continuous review and specific efforts are
taken to achieve maximum recovery of principal and accrued interest.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb potential losses
arising from the credit granting process. Factors considered include the
levels of non-performing loans, other real estate, trends in past due loans,
loan portfolio growth, changes in loan portfolio composition, historical net
charge-offs, present and prospective financial condition of borrowers, general
and local economic conditions, specific industry conditions and other
regulatory or legal issues that could affect the Registrant's loss potential.
Management believes that the balance of the allowance for possible loan losses
as of December 31, 1995 is sufficient to absorb potential loan losses.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to
ensure that all problem loans are identified quickly and the risk of loss is
minimized.
Non-performing loans remain a leading indicator of future loan loss potential.
Non-performing loans are defined as non-accrual loans, guaranteed loans 90 days
or more past due but still accruing, and restructured loans. Loans are placed
in non-accrual status when contractually past due 90 days or more as to
interest or principal payments. Additionally, whenever management
37
becomes aware of facts or circumstances that may adversely impact on the
collectibility of principal or interest on loans, it is the practice of
management to place such loans on non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed and income is recorded only to
the extent that interest payments are subsequently received on a cash basis and
a determination has been made that the loan's principal is collectible. If the
collectibility of principal is doubtful, payments received are applied to loan
principal.
Restructuring loans involve the granting of some concession to the borrower
involving a loan modification, such as payment schedule or interest rate
changes.
Non-performing loans at December 31, 1995 were $1.5 million, a decrease of
$947,000 from the level at December 31, 1994. Approximately $600,000 of the
decline occurred as a result of the Karsten Resources loans being moved to a
separate corporation as a result of loan default so that BBK in the short term
could manage operations and pursue sale of the company to interested third
parties as expediently and efficiently as possible. As a result the ratio of
non-performing loans to total loans at the end of 1995 was .7% compared to
1.27% at 1994 year end. The Registrant's allowance for possible loan losses
balance was 175.2% of total non-performing loans at December 31, 1995 compared
to 103.8% at year end 1994. Troubled debt restructurings decreased $167,000 or
20.5% as a result of principal paydowns during the course of 1995. Management
believes that collateral is sufficient in those loans classified as troubled
debt in event of default.
Potential problem loans are performing loans in which there is doubt that the
borrower will be able to comply with loan repayment terms. Management's
decision to place loans in this category does not necessarily mean that the
Registrant expects to take losses on such loans, but that management needs to
be more vigilant in its efforts to oversee the loan and recognize that a higher
degree risk is associated with these nonperforming loans. At December 31,
1995, potential problem loans amounted to a total of $2.2 million compared to
$444,847 at year end 1994. $601,000 of the 1995 problem loans stems from three
loan customers in the food business for which cashflow problems have arisen.
$237,000 of the problem loans stems from credits for a manufacturer that has
incurred ongoing operating losses. $210,000 of the problem loans stems from
credits for oil services provider who has undergone cashflow concerns.
$252,000 of the credits stem from loans for a prefabrication housing provider
which has undergone competitive pressures in the particular market they serve
reducing cashflow. $139,000 of the credits stem from a furniture manufacturing
concern which has undergone several years of operating losses, for which
management continues to monitor progress. Various commercial loans totaling
$615,000, mortgage loans totaling $42,000 and consumer loans totaling $58,000
make up the remaining totals. With the exceptions noted above, potential
problem loans are not concentrated in a particular industry but rather cover a
diverse range of businesses.
The placement of performing loans in the potential problem loan category
indicated management's willingness to more closely monitor the financial
condition of the borrower and collateral positions of the Registrant or will
strengthen the loans with additional collateral if significant losses from
38
credits are expected in this category.
There existed no other real estate owned at year end 1995. Other real estate
owned which represents property to which the Registrant has acquired title
through foreclosure or in satisfaction of debt, stood at $123,000 at year end
1994. Management actively seeks to ensure that properties held are
administered to minimize any risk of loss.
Net cost of operation of other real estate for 1995, 1994, and 1993 consists of
the following:
1995 1994 1993
------ ------ ------
(In Thousands of Dollars)
Loss on disposition of
properties and other costs $ 66 $ 45 $ 41
Gains on disposition of
properties and expense
recoveries (150) (49) (26)
------ ----- ------
Net costs (gains) $(84) $ (4) $ 15
Other properties taken in as a result of foreclosure or surrender include a
restaurant and hotel facility that exists as a subsidiary of BBK named Karsten
Resources, Inc. The intent on forming the corporation was to allow the
business to operate as a going concern while at the same time limiting the
liability of BBK. The intent is to manage the assets until such time as this
property can be sold to an independent third party. Currently management of
BBK is marketing the property with limited results at present. Results of
operation which are included in other income and other operating expense
consists of 1995 other income of $269,000; other operating expenses of $319,000
and a net loss after tax of $33,000. The carrying value of the investment at
year end 1995 equals $537,000 and consists of real property which is
consolidated in the Balance Sheet with Premises and Equipment.
Investment Portfolio
The investment portfolio is intended to provide the Registrant with adequate
liquidity, flexibility in asset/liability management and, lastly, its earning
potential.
Investment securities are classified as held to maturity or available for sale.
The Registrant has determined at year end 1995 that all of its taxable issues,
including U.S. Treasury, U.S. Agency securities and municipal bond securities
purchased in 1995 were to be classified as available for sale. In addition,
BBK had determined that its non-taxable issues such as municipal issues and
non-taxable local municipals were classified as available for sale. In the
case of the Baylake Bank's non-taxable issues and municipal bond investments
purchased prior to 1995, they were determined to be held to
39
maturity. This determination was made because the Bank wanted to retain the
municipal bond issues due to their higher after-tax yields, and local
non-taxable issues due to their lessened marketability. Held to maturity
securities are those securities which the Registrant has both the intent and
ability to hold until maturity. Under this classification, securities are
stated at cost