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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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 0-8679
BAYLAKE CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
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 26, 1997 2,458,537 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock (based upon the $25.50 reported bid
price on that date) held by non-affiliates (excludes a total of 253,639 shares
reported as beneficially owned by directors and executive officers -- does not
constitute an admission as to affiliate status) was approximately $56,224,892.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
-------- --------------------------------------
Proxy Statement for 1997 Annual
Meeting of Shareholders Part III
2
ITEM 1. BUSINESS
General
Baylake Corp., a Wisconsin corporation organized in 1976, ("Baylake" or the
"Registrant"), is a registered bank holding company under the Federal Bank
Holding Company Act of 1956. Registrant was organized primarily to acquire and
hold the stock of Baylake Bank ("Bank"), and to enter into such other closely
related business activities as may be approved from time to time.
On July 1, 1996, the Registrant acquired Four Seasons of Wis, Inc. ("Four
Seasons") and its subsidiary The Bank (with branches in Manawa and King,
Wisconsin) in a cash transaction totaling $13.875 million. On July 1, 1996,
Four Seasons was dissolved and The Bank was merged into Baylake Bank. At the
time of acquisition, The Bank had total assets of $55.8 million, loans of $12.2
million, deposits of $46.9 million and shareholders' equity of $8.4 million.
This transaction has been accounted for using the purchase method of
accounting.
Baylake Bank
The Bank is a Wisconsin State Bank originally chartered in 1876. At December
31, 1996, the Bank had total assets of $395.4 million. It is a member of the
Federal Reserve System and its deposits are insured, subject to regulatory
limits, by the FDIC. It provides general banking and trust department services
to commercial, industrial and individual accounts in a five county area
composed of Door, Kewaunee, Manitowoc, Brown and Waupaca Counties. The Bank
offers a full range of financial services, including demand deposit accounts,
various savings account plans, certificates of deposit, individual retirement
accounts, real estate mortgage loans, consumer and business loans, agricultural
loans, safe deposit boxes, collection services, transfer agency services, a
trust department, insurance agency, discount brokerage, financial planning,
conference facilities and access to TYME Corporation's electronic funds
transfer system. The Bank maintains a number of divisions each headed by a
vice president, including a Retail Division, Commercial/Loan Division and
Non-Bank Division to facilitate the provision of customer services, and three
supportive divisions, the Administrative Division, Accounting Division and
Operations Division.
The Bank has the following 100%-owned subsidiaries: Baylake Investments, Inc.,
Bank of Sturgeon Bay Building Corporation, Cornerstone Financial, Inc., Karsten
Resources, Inc. and Baylake Insurance Agency, Inc.. Baylake Investments, Inc.
was formed to manage certain bank assets available for investment. Bank of
Sturgeon Bay Building Corporation owns the main office building, conference
center facilities and underlying property of the Bank. Cornerstone Financial,
Inc. manages Bank of Sturgeon Bay Building
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Corporation's conference center facilities. Karsten Resources, Inc. manages
hotel and restaurant facilities, acquired as a result of a loan default.
Baylake Insurance Agency, Inc. offers various types of insurance products to
the general public as an independent agent. The Bank also owns a 49.6%
interest in United Financial Services, Inc. ("UFS"), a data processing services
company. Unaffiliated third parties own a 50.4% interest in UFS. The revenues
generated by these subsidiaries and UFS amount in aggregate to less than 5% of
the Bank's total income.
The Bank offers short-term and long-term loans on a secured and unsecured basis
for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. The Bank focuses
lending activities on individuals and small businesses in its market area.
Lending has been exclusively within the industrial and consumer community
within their market areas. The Bank's market area consists of primarily Door
County, Wisconsin. Sturgeon Bay is the county seat and major industrial and
retail area of Door County. The Bank is the largest commercial bank in Door
County. The Bank operates seven branch offices (two of which are seasonal) in
Door County, in addition to its main office in downtown Sturgeon Bay. Baylake
Bank has also expanded into the Northeast Brown County region with two
permanent facilities opened in 1996 and a leased facility opened in Northwest
Brown County in the latter part of 1996. These facilities will offer a full
range of services similar to those of Baylake Bank.
The resident population of Door County is approximately 27,250 (according to
the 1990 census) with 9,100 living in the City of Sturgeon Bay. The major
industries of Door County include shipbuilding, tourism, metal products
manufacturing, electrical components manufacturing, and industrial oven
fabrication. Most industry is centered in the Sturgeon Bay area. The rest of
Door County is primarily involved in agriculture (mostly dairy farming and the
production of cherries and apples), and tourism. The tourist business of Door
County is seasonal, with the season beginning in early spring and continuing
until late fall. The seasonal nature of the tourist business imposes increased
demands for loans shortly before and during the tourist season and causes
reduced deposits shortly before and during the early part of the tourist
season, although the financial needs of those involved in the delivery of
tourist related services is a year around concern.
The Bank's market area consists also of Kewaunee County, Wisconsin and adjacent
portions of Manitowoc County. The Bank owns and operates three branch offices,
in addition to its main office in downtown Kewaunee. The resident population
of Kewaunee County is approximately 20,000 according to the 1990 census, with
2,750 people living in Kewaunee and 3,353 in Algoma. The Kewaunee County
industrial base is diverse with over half of the business associated with food
and related products, fabricated metals, and lumber and wood furniture and
fixtures. Most industry is centered in the Kewaunee and Algoma area. The rest
of Kewaunee County is primarily involved in agriculture (mainly dairy
production).
4
Tourism also contributes to the local economy.
The Bank additionally has three locations in Brown County consisting of two
permanent locations located on the Northeast side of Green Bay and one leased
facility located on the Northwest side of Green Bay. The area offers a wide
and diversified manufacturing and service industry mix and is a leading area
for growth in Wisconsin.
The Bank's market area also consists of two locations in Waupaca county
(acquired thru the Four Seasons acquisition) and is located approximately 35
miles west of Green Bay. The major industries center around the production of
food and related products, lumber and wood furniture and fixtures. Tourism
also contributes to the local economy.
Lending and Investments
The Bank offers short-term and long-term loans on a secured and unsecured basis
for business and personal purposes. They make real estate,
commercial/industrial, agricultural and consumer loans. The Bank focus lending
activities on individuals and small businesses in its market area. Lending has
been exclusively within the State of Wisconsin. The Bank does not conduct any
substantial business with foreign obligors. The markets served by the Bank
include a wide variety of types of businesses; therefore, the Registrant does
not believe it is unduly exposed to the problems in any particular industry
group. However, any general weakness in the economy of Door and Kewaunee
County areas ( as a result, for example, of a decline in its manufacturing and
tourism industries or otherwise) could have a material effect on the business
and operations of the Registrant.
The Bank's total outstanding loans as of December 31, 1996 amounted to
approximately $261.4 million, consisting of 76.2% residential, commercial,
agricultural and construction real estate loans, 15.7% commercial and
industrial loans, 5.8% installment and 2.3% agricultural loans.
The Registrant maintains a portfolio of other investments, primarily consisting
of U.S. Treasury securities, U.S. Government agency securities, mortgage-backed
securities, and obligations of states and their political subdivisions. The
Registrant attempts to balance its portfolio to manage interest rate risks,
maximize tax advantages and meet its liquidity needs while endeavoring to
maximize investment income.
Deposits
The Bank offers a broad range of depository products, including non-interest
bearing demand deposits, interest-bearing demand deposits, various savings and
money market accounts and certificates of deposit. Deposits at the Bank are
insured by the FDIC up to statutory limits. At December 31, 1996, the Bank's
5
total deposits amounted to $327.2 million, including interest bearing deposits
of $284.9 million and non-interest bearing deposits of $42.3 million.
Other Customer Services and Products
Other services and products offered by the Bank and subsidiaries include safety
deposit box services, personal and corporate trust services, conference center
facilities, an insurance agency and discount brokerage services offering
stocks, bonds, annuities, mutual funds and other investment products.
Competition
The Bank competes with other financial institutions and businesses in both
attracting and retaining deposits and making loans. The Bank encounters direct
competition in its Door County market area from one other commercial bank as
well as from two savings and loans associations and one credit union which
maintain offices in Door County. The Bank encounters direct competition in its
Kewaunee County market area from four other commercial banks as well as one
savings and loan association and one credit union. In spite of such
competition, the Bank has maintained their position within the market areas,
holding better than half of all commercial bank deposits in the combined market
area as of December 31, 1996. Although no assurance can be given that they
will continue to do so, the Bank has been able to maintain their prominence in
the market areas, even though certain competitors have considerably more
financial and other resources than do the Registrant.
Regulation and Supervision
The banking industry is highly regulated by both federal and state regulatory
authorities. Regulation includes, among other things, capital and reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, and is not within the control of Baylake. This
regulation substantially affects the business and financial results of all
financial institutions and holding companies, including Baylake and its
subsidiaries. As an example, Baylake is subject to the capital and leverage
guidelines of the Federal Reserve Board, which require that Baylake's capital
to asset ratio meet certain minimum standards. For a discussion of the Federal
Reserve Board's guidelines and the Registrant's applicable ratios, see the
section entitled "Capital Resources" under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation.
The Bank is incorporated under the banking laws of Wisconsin, and its deposits
are insured by the FDIC. It is therefore subject to
6
supervision and regulation by the Wisconsin Commissioner of Banking (the
"Commissioner"), the Federal Reserve Bank ("FRB") and the FDIC. As a
registered bank holding company under the Bank Holding Company Act, Baylake is
subject to review and regulation by the FRB (their primary regulator). Baylake
is also subject to review and examination by the Commissioner under Wisconsin
law.
In addition to general requirements that banks retain specified levels of
capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without approval of the Commissioner be paid out of current earnings or, no
more than once within the immediate preceding two years, out of undivided
profits in the event there have been insufficient net profits. Any other
dividends require the prior written consent of the Commissioner. As a result
of extraordinary dividends declared to enable the purchase of Four Seasons, the
Bank is required to get written consent from the FRB prior to paying dividends.
The Bank is in compliance with all applicable capital requirements and may pay
dividends to Baylake, pending written approval.
Current federal law provides that adequately managed bank holding companies
from any state may acquire banks and bank holding companies located in any
other state, subject to certain conditions. Beginning on June 1, 1997, banks
may create interstate branching networks in states that do not "opt out" of
interstate branching. Prior to that date, banks could create interstate
branching networks in states that "opted in" to interstate branching early.
Wisconsin law generally permits establishment of full service bank branch
offices statewide.
Employees
At December 31, 1996, the Registrant and its subsidiary, had 185 full-time
equivalent employees.
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)
1996 1995 1994
---- ---- ----
Assets
Cash and Due from Banks $ 9,168 $ 7,609 $ 7,948
Investment Securities:
U. S. Treasury 5,270 6,076 9,297
U. S. Government Agencies 50,384 46,865 42,026
State and Municipal Obligations 25,143 18,495 21,402
Other Securities 2,967 2,376 2,285
Market Adjustment on AFS Securities 52 (1,153) (1,052)
-------- -------- --------
Total Investments $ 83,816 $ 72,659 $ 73,958
-------- -------- --------
Federal Funds Sold $ 943 $ 4,849 $ 6,196
Loans, Net of Unearned Income $233,473 $201,839 $187,945
Reserve for Loan Losses (2,792) (2,669) (2,452)
-------- -------- --------
Net Loans $230,681 $199,170 $185,493
-------- -------- --------
Bank Premises and Equipment $ 9,925 $ 6,873 $ 5,710
Other Real Estate Owned $ 150 $ 128 $ 83
Other Assets $ 17,600 $ 7,326 $ 5,163
-------- -------- --------
Total Assets $352,283 $298,614 $284,551
======== ======== ========
Liabilities and Stockholders' Equity
Demand Deposits $ 37,229 $ 32,350 $ 30,815
NOW Account Deposits 36,593 33,060 33,618
Savings Deposits 88,046 83,470 84,623
Time Deposits 135,759 106,444 93,618
-------- -------- --------
Total Deposits $297,627 $255,324 $242,674
-------- -------- --------
Short Term Borrowings $ 9,949 $ 3,131 $ 2,448
Customer Repurchase Agreements $ 1,841 $ 1,279 $ 3,525
Long Term Debt $ 423 $ 475
Other Liabilities $ 4,500 $ 3,834 $ 2,665
-------- -------- --------
Total Liabilities $314,340 $264,043 $251,312
-------- -------- --------
Common Stock $ 12,286 $ 12,272 $ 12,239
Additional paid in capital 5,989 5,947 5,928
Retained Earnings 19,675 17,141 15,784
Net Unrealized Losses on AFS Securities 42 (740) (666)
Treasury Stock (49) (49) (46)
-------- -------- --------
Total Equity $ 37,943 $ 34,571 $ 33,239
-------- -------- --------
Total Liabilities and Stockholders' Equity $352,283 $298,614 $284,551
======== ======== ========
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).
1996 1995
Amount Interest Yield Amount Interest Yield
------ -------- ----- ------ -------- -----
Interest-earning assets:
Loans, Net $233,473 9.15% $201,839 9.74%
Less: non-accruing Loans (2,402) (1,463)
-------- --------
Loans $231,071 $21,367 9.25% $200,376 $19,661 9.81%
U.S. Treasury Securities 5,270 304 5.77% 6,076 303 4.99%
U.S. Government Agencies 50,384 3,494 6.93% 46,865 2,895 6.18%
State and Municipal Obligations 25,143 2,350 9.35% 18,495 1,897 10.26%
Other Securities 569 34 5.98% 423 25 5.91%
Federal Funds Sold 943 58 6.15% 4,849 282 5.82%
Other Money Market Instruments 2,398 119 4.96% 1,953 69 3.53%
-------- -------- ------ -------- ------- ------
Total Interest Earning Assets (net of
non-accruing loans) $315,778 $ 27,726 8.78% $279,037 $25,132 9.01%
======== ======== ====== ======== ======= ======
Interest-bearing liabilities:
NOW Accounts $36,593 $ 868 2.37% $33,060 $ 910 2.75%
Savings Accounts 88,046 2,858 3.25% 83,470 2,978 3.57%
Time Deposits 135,759 7,644 5.63% 106,444 5,951 5.59%
Short Term Borrowings 9,949 571 5.74% 3,131 198 6.32%
Customer Repurchase Agreements 1,841 68 3.69% 1,279 52 4.07%
Long Term Debt 423 37 8.75% 475 42 8.84%
-------- ------- ------ -------- ------- ------
Total Interest-bearing Liabilities $272,611 $12,046 4.42% $227,859 $10,131 4.45%
======== ======= ====== ======== ======= ======
1994
Amount Interest Yield
------ -------- -----
Interest-earning assets:
Loans, Net $ 187,945 8.83%
Less: non-accruing Loans (1,565)
--------
Loans $186,380 $ 16,594 8.90%
U.S. Treasury Securities 9,297 483 5.20%
U.S. Government Agencies 42,026 2,541 6.05%
State and Municipal Obligations 21,402 2,229 10.41%
Other Securities 418 25 5.98%
Federal Funds Sold 6,196 260 4.20%
Other Money Market Instruments 1,867 76 4.07%
-------- -------- ------
Total Interest Earning Assets (net of
non-accruing loans) $267,586 $ 22,208 8.30%
======== ======== ======
Interest-bearing liabilities:
NOW Accounts $ 33,618 $ 810 2.41%
Savings Accounts 84,623 2,549 3.01%
Time Deposits 93,618 3,981 4.25%
Short Term Borrowings 2,448 105 4.29%
Customer Repurchase Agreements 3,525 111 3.15%
Long Term Debt
-------- -------- ------
Total Interest-bearing Liabilities $217,832 $ 7,556 3.47%
======== ======== ======
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).
1996 1995 1994
Total Interest Income $ 27,726 $ 25,132 $ 22,208
Total Interest Expense 12,046 10,131 7,556
-------- -------- ---------
Net Interest Earnings $ 15,680 $ 15,001 $ 14,652
======== ======== =========
Net Yield on Interest-earning Assets 4.97% 5.38% 5.48%
(excluding non-accruing loans)
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).
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1) DUE TO (1)
RATE/ RATE/
VOLUME RATE VOLUME VOLUME RATE VOLUME
------ ---- ------ ------ ---- ------
Interest earned on:
Loans $ 2,925 ($1,219) $1,706 $1,310 $ 1,757 $ 3,067
U.S. Treasury
Securities (43) 44 1 (164) (16) (180)
U.S. Government
Agencies 231 368 599 296 58 354
State and Municipal
Obligations 652 (199) 453 (300) (32) (332)
Other Securities 9 0 9 0 0 0
Federal Funds Sold (234) 10 (224) (67) 89 22
Other Money Market
Instruments 19 31 50 3 (10) (7)
------- ------- ------- ------ ------- -------
Total Interest
Earning Assets $ 3,559 ($ 965) $2,594 $1,078 $ 1,846 $ 2,924
======= ======== ======= ======= ======= =======
Interest paid on:
NOW Accounts $ 91 ($ 133) ($ 42) ($ 14) $ 114 $ 100
Savings Accounts 156 (276) (120) (38) 467 429
Time Deposits 1,645 48 1,693 631 1,339 1,970
Short Term
Borrowings 411 (38) 373 36 57 93
Customer Repurchase
Agreements 22 (6) 16 (81) 22 (59)
Long Term Debt (5) 0 (5) 21 21 42
------- ------- ------- ------- ------- -------
Total Interest-
Bearing
Liabilities $ 2,320 $ (405) $1,915 $ 555 $ 2,020 $ 2,575
======= ======== ======= ======= ======= =======
(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,
1996, 1995 and 1994 are summarized as follows (in thousand of dollars).
1996 1995 1994
---- ---- ----
Available for Sale
U.S. Treasury and Other U.S. government $ 38,924 $ 11,321 $ 8,187
agencies
Mortgage-backed securities 31,426 38,430 41,139
Obligations of states and political 16,971 13,322 6,742
subdivisions
Other 369 893 2,965
------- ------- --------
$ 87,690 $ 63,966 $ 59,033
Held to Maturity
Obligations of states and $ 10,511 $ 11,237 $ 13,605
political subdivisions
Other 937 408 408
-------- -------- --------
$ 11,448 $ 11,645 $ 14,013
Total $ 99,138 $ 75,611 $ 73,046
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.
12
II. B. The following table shows the maturities of investment securities as
of December 31, 1996 and weighted average yields of investment securities (in
thousands). The weighted average yields by maturity range was computed by
annualizing the purchase yield income on the securities within such maturity
range.
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 $4,010 4.74% $25,169 6.70% $ 2,913 7.18%
agencies
Mortgage-backed securities 13,800 5.40% 17,626 6.58%
Obligations of states and political 5,007 10.10% 4,864 9.48% 12,264 7.71%
subdivisions
Other 369 4.94%
------- ---- ------- ---- ------- ----
Total $23,186 7.30% $47,659 8.02% $15,177 7.90%
Over 10 Years Total
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other U.S. Government $ 6,832 7.46% $38,924 6.67%
agencies
Mortgage-backed securities 31,426 6.06%
Obligations of states and political 5,347 9.01% 27,482 8.71%
subdivisions
Other 937 5.82% 1,306 5.57%
------- ---- ------- ----
Total $13,116 6.36% $99,138 7.03%
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).
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Loans secured primarily
by real estate:
Secured by 1 to 4 family $83,538 $62,271 $52,873 $48,190 $43,288
residential properties
Real estate-construction 11,365 6,378 5,881 4,511 3,275
Other real estate loans 104,391 83,461 69,702 64,585 45,818
Loans to farmers 5,883 5,771 6,103 5,586 5,306
Commercial and Industrial 40,777 40,287 42,157 41,558 47,707
loans
Loans to individuals for 15,233 12,522 16,603 16,844 16,978
household, family and other
personal expenditures
All other loans 240 193 152 378 513
-------- -------- -------- -------- --------
Total gross loans $261,427 $210,883 $193,471 $181,652 $162,885
Less:
Unearned Income (573) (653) (798) (748) (718)
-------- -------- -------- -------- --------
Net Loans $260,854 $210,230 $192,673 $180,904 $162,167
======== ======== ======== ======== ========
14
2. As of December 31, 1996, there existed potential problem loans totaling
$1,388,994 which are not now disclosed within the category "Risk Element".
The following table indicates management's assessment of potential loss at year
end 1996.
Loans in category Loss factor Loan loss potential
----------------- ----------- -------------------
$ 679,810 10% $ 67,981
664,854 25% 166,214
38,516 50% 19,258
5,814 100% 5,814
---------- ---- ---------
Totals $1,388,994 $ 259,267
Commercial loans comprised 93.2% or $1,294,424 of the total loans categorized
as problem loans. The other types of loans comprising this amount were
consumer loans totaling $94,570 or 6.8%.
3. The Bank's loan portfolio is diversified by types of borrowers and industry
groups within the Door, Kewaunee, Brown and Waupaca county market area.
Significant loan concentrations are considered to exist for a financial entity
when such amounts are loaned to borrowers engaged in similar activities as
would cause them to be similarly impacted by economic or other conditions. At
December 31, 1996, there existed the following industry group concentrations in
the Registrant's loans which exceed 10% of total loans:
Tourism related loans:
Lodging Business $38.5 million or 14.7%
----------------------
Total tourism loans $38.5 million or 14.7%
15
III. LOAN PORTFOLIO
B. Maturity and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of loans outstanding (in thousands) as of
December 31, 1996 which, based on remaining schedule repayments of principal,
are due in the periods indicated. Also, the amounts due after one year are
classified according to the sensitivity to change in interest rates.
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 $ 38,350 $ 39,669 $ 5,519 $ 83,538
Real estate - construction 2,801 4,871 3,693 11,365
Other real estate loans 25,733 44,740 33,918 104,391
Loans to farmers 1,450 2,521 1,912 5,883
Commercial and industrial loans 16,223 19,534 5,020 40,777
Loans to individuals for household family and
other personal expenditures
7,707 7,392 134 15,233
All other loans 240 0 0 240
-------- -------- -------- --------
Total $ 92,504 $118,727 $ 50,196 $261,427
======== ======== ======== ========
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate
----- --------
Due after one year $ 96,154 $ 72,769
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.
1996 1995 1994 1993 1992
Non-accrual loans $ 3,677 $ 846 $ 1,536 $ 1,508 $ 1,535
Troubled debt restructurings 1,000 648 815 255 309
Loans past due 90 days or more 0 0 90 56 129
------- ------- ------- ------- -------
Total $ 4,677 $ 1,494 $ 2,441 $ 1,819 $ 1,973
======= ======= ======= ======= =======
16
If the non-accrual loans had been current throughout their terms, interest
income would have been approximately $472,000; $74,000; $117,000; $175,000; and
$189,000 for 1996, 1995, 1994, 1993 and 1992 respectively. Interest income
which is recorded only as received, amounted to $154,000; $34,000; $58,000;
$101,000; and $77,000 for 1996, 1995, 1994, 1993 and 1992 respectively for
these non-accrual loans.
Loans are placed in non-accrual status when they are contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact
the collectibility of principal or interest on loans, it is the practice of
management to place such loans on a non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans are reversed and income is recorded only to
the extent that interest payments are subsequently received on a cash basis and
a determination has been made that the loan's principal is collectible. If the
loan collectibility of principal is doubtful, payments received are applied to
loan principal.
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
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
Daily average amount of loans $233,473 $201,839 $187,945 $174,371 $155,955
======== ======== ======== ======== ========
Balance of allowance for possible $ 2,617 $ 2,534 $ 2,434 $ 2,253 $ 1,905
loan losses at beginning of period
Allowance related to assets 120
acquired
Loans Charged Off:
Real estate - mortgage 99 ---- ---- 12 ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 82 158 239 86 54
Consumer Loans 105 50 32 82 42
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total loans charged off $ 286 $ 208 $ 271 $ 180 $ 96
======== ======== ======== ======== ========
Recoveries of loans previously charged
off:
Real estate - mortgage ---- ---- ---- ---- ----
Real estate - construction ---- ---- ---- ---- ----
Loans to farmers ---- ---- ---- ---- ----
Commercial/Industrial Loans 16 33 63 5 87
Consumer loans 26 8 48 46 47
Lease financing/other loans ---- ---- ---- ---- ----
-------- -------- -------- -------- --------
Total recoveries $ 42 $ 41 $ 111 $ 57 $ 134
-------- -------- -------- -------- --------
Net loans charged off $ 244 $ 167 $ 160 $ 123 $ (38)
-------- -------- -------- -------- --------
Additions to allowance for $ 400 $ 250 $ 260 $ 304 $ 310
-------- -------- -------- -------- --------
loan losses charged to
operating expense
Allowance for loan losses at
end of period $ 2,893 $ 2,617 $ 2,534 $ 2,434 $ 2,253
======== ======== ======== ======== ========
Ratio of net charge offs during .10% .08% .09% .07% (.02%)
period to average
loans outstanding
The factors which influence management's judgment in determining the additions
to the loan valuation reserve are as follows:
1. The ratio of loan valuation reserves to the total loans should approximate
1.25% according to Baylake management.
2. The percentage of recoveries of loans previously charged off in relation
to the ratio in (1) above.
18
3. The charged off loans to total loan loss experience.
4. The economic stability within the market area and its impact on the loan
portfolio.
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).
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
----- of Loans ------ of Loans ------ of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Loans Loans Loans
-------- -------- --------
Real estate - mortgage $1,143 71.9% $1,000 69.1% $ 974 63.4%
Real estate -
construction 50 4.3% 50 3.0% 50 3.0%
Loans to farmers 20 2.3% 20 2.7% 20 3.2%
Commercial/industrial 1,300 15.7% 1,190 19.2% 1,133 21.8%
Consumer 360 5.8% 337 6.0% 337 8.6%
Not allocated 20 20 20
------ ------ ------ ------ ------ ------
Total $2,893 100% $2,617 100% $2,534 100%
====== ====== ====== ====== ====== ======
December 31, 1993 December 31, 1992
----------------- -----------------
Amount Percent Amount Percent of
------ of Loans ------ Loans in
in Each Each
Category Category
to Total to Total
Loans Loans
--------- ---------
Real estate - mortgage $ 924 62.1% $ 771 54.7%
Real estate -
construction 50 2.5% 50 2.0%
Loans to farmers 20 3.1% 20 3.3%
Commercial/industrial 1,083 23.0% 1,074 29.6%
Consumer 337 9.3% 317 10.4%
Not allocated 20 20
------ ------ ------ ------
Total $2,434 100% $2,252 100%
====== ====== ====== ======
20
V. DEPOSITS
The average deposits are summarized below for the periods indicated (in
thousands).
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
BALANCE YIELD BALANCE YIELD BALANCE YIELD
Non-interest bearing demand
deposits $ 37,229 0.00% $ 32,350 0.00% $ 30,815 0.00%
Interest bearing demand
deposits 36,593 2.75% 33,060 2.75% 33,618 2.41%
Savings deposits 88,046 3.57% 83,470 3.57% 84,623 3.01%
Time deposits (Excluding time
certificates of deposit of
$100,000 or more) 116,375 5.57% 94,858 5.53% 86,207 4.28%
Time Certificates of Deposit
of $100,000 or more 19,384 5.99% 11,586 6.11% 7,411 3.95%
-------- -------- --------
Total Deposits $297,627 3.82% $255,324 3.85% $242,674 3.03%
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31 are summarized as follows (in thousands).
1996 1995 1994
---- ---- ----
3 months or less $ 6,411 $ 2,783 $ 1,681
Over 3 months thru 6 months 5,376 5,066 1,270
6 months thru 12 months 5,737 2,336 1,108
Over 12 months 2,349 1,338 841
-------- -------- --------
Total $ 19,873 $ 11,523 $ 4,900
======== ======== ========
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:
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
Percentage of Consolidated net income
to:
Average total assets (return on assets) 1.34% 1.56% 1.56%
Average Stockholders' Equity (return
on equity) 12.39% 13.43% 13.33%
Percent of dividends declared per
common share to net income per common
share (dividend pay-out ratio) 48.44% 60.32% 56.35%
Percent of average stockholders' equity
to average total assets (equity to
assets ratio) 10.77% 11.58% 11.68%
22
VII. Short-Term Borrowings
A. The following table shows outstanding amounts of short-term borrowings,
together with the weighted average interest rates thereon, at December 31, of
each of the past three years (in thousand of dollars).
1996 1995 1994
Amount Rate Amount Rate Amount Rate
Federal Funds purchased $21,975 6.11% $ 774 6.09% $1,634 6.00%
Securities Sold under
agreements to repurchase 1,865 3.55% 754 3.74% 2,515 4.00%
------- ----- ------ ----- ------ -----
$23,840 5.91% $1,528 4.93% $4,149 4.79%
------- ----- ------ ----- ------ -----
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).
1996 1995 1994
---- ---- ----
Federal funds purchased $30,016 $ 9,519 $12,611
Securities sold under
agreements to repurchase 2,272 1,076 4,522
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).
1996 1995 1994
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
Short-term
borrowings:
Federal funds
purchased $ 9,950 $571 5.74% $3,131 $198 6.32% $2,448 $105 4.29%
Securities sold
under agreements to
repurchase 1,841 68 3.69% 1,279 52 4.07% 3,525 111 3.15%
------- ---- ----- ------ ---- ----- ------ ---- -----
Total short-term
borrowings $11,791 $639 5.42% $4,410 $250 5.67% $5,973 $216 3.62%
======= ==== ===== ====== ==== ===== ====== ==== =====
23
VIII. Long Term Debt
A. The following table shows outstanding amounts of long term debt, together
with the weighted average interest rates thereon, at December 31, or each of
the past three years (in thousands of dollars). Long term debt consists of a
land contract requiring annual principal payments of $53,000 plus interest
calculated at prime + 1/4%.
1996 1995 1994
Amount Rate Amount Rate Amount Rate
Land contract payable $ 422 8.75% $ 475 8.75%
------ ----- ------ ----- ------ -----
$ 422 8.75% $ 475 8.75% $ 0 0.00%
------ ----- ------ ----- ------ -----
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).
1996 1995 1994
---- ---- ----
Land contract payable $ 422 $ 475 $ 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).
1996 1995 1994
---- ---- ----
Average Average Average
Amount Int. Rate Amount Int. Rate Amount Int. Rate
------ ---- ----- ------ ---- ----- ------ ---- -------
Long term debt:
Land contract payable $ 422 $ 37 8.75% $ 475 $ 41 8.75% $
------ ---- ------ ------ ---- ------ ------ ---- ------
Total long term debt $ 422 $ 37 8.75% $ 475 $ 41 8.75%
------ ---- ====== ------ ---- ------ ------ ---- ------
24
ITEM 2. PROPERTIES
Registrant directly owns no real properties of any kind. However, Bank owns
fifteen branches and leases the main office building from its subsidiary the
Bank of Sturgeon Bay Building Corporation. In addition, the Bank leases office
space from an unrelated third party for a facility in Green Bay.
The main office building located in Sturgeon Bay serves as headquarters for
Registrant as well as the main banking office of Bank. The main office also
accommodates the expanded business of the Bank, primarily an insurance agency
and financial services. The sixteen branches owned or leased by Bank are
conveniently located throughout the market area served by Bank, including
counties of Door, Kewaunee, Brown, Manitowoc, and Waupaca. All properties are
in good condition and considered adequate for present and near term
requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending involving the Registrant or its
subsidiaries which management believes to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
Executive Officers of the Registrant
The following is a list of names of the executive officers of the Registrant
and position within the Registrant.
Thomas L. Herlache Chairman, President, CEO and Director of
Baylake Corp
Richard A. Braun Vice Chairman, Executive Vice President and
Director of Baylake Corp
Paul C. Wickmann Vice President
Daniel F. Maggle Secretary
Steven D. Jennerjohn Treasurer
25
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
Historically, trading in shares of Baylake Common Stock has been limited.
Since mid-1993, Baylake Common Stock has been listed on the OTC Bulletin Board
(Trading symbol:BYLKBB), an electronic interdealer quotation system providing
real-time quotations on over 4,000 eligible securities. Previously, Baylake
Common Stock was listed on the NASDAQ Pink Sheets. Trading in Baylake Common
Stock has been conducted principally by certain brokerage and investment firms
with offices in Door County, Wisconsin which have provided price quotations,
and have assisted individual holders of Baylake Common Stock who wish to sell
their shares. In addition, since May 1993, prices for Baylake Common Stock
have generally been reported daily in The Milwaukee Journal Sentinel based on
information provided by a local brokerage firm.
The following table summarizes high and low bid prices and cash dividends paid
for the Baylake Common Stock for the periods indicated. Bid prices are
computed from those obtained from two brokerage firms, and, since May 1993 from
bid prices reported in The Milwaukee Journal Sentinel. The reported high and
low prices represent interdealer bid prices, without retail mark-ups,
mark-downs or commission, and may not necessarily represent actual
transactions.
Cash
dividends
paid per
Calendar period High Low share
--------------- ---- --- ---------
1995 1st Quarter $34.50 $30.50 $0.220
2nd Quarter 32.00 27.00 0.220
3rd Quarter 29.25 26.50 0.220
4th Quarter 29.00 26.25 0.480
1996 1st Quarter 28.00 26.25 0.230
2nd Quarter 28.00 26.25 0.230
3rd Quarter 27.50 26.25 0.230
4th Quarter 28.00 26.25 0.240
Baylake had approximately 1,538 shareholders of record at March 21, 1997.
Baylake paid a special dividend of $.25 per share cash dividend in December
1995.
Dividends on Baylake Common Stock have historically been paid in cash on a
quarterly basis in March, June, September and January, and Baylake expects to
continue this practice for the foreseeable future. The holders of Baylake
Common Stock are entitled to receive such dividends when and as declared by
Baylake's Board of
26
Directors. The ability of Baylake to pay dividends is dependent upon receipt
by Baylake of dividends from the Bank, which is subject to regulatory
restrictions. Such restrictions, which govern state chartered banks, generally
limit the payment of dividends on bank stock to the bank's undivided profits
after all payments of all necessary expenses, provided that the bank's surplus
equals or exceeds its capital. In determining the payment of cash dividends,
the Board of Directors of Baylake considers the earnings, capital and debt
servicing requirements, financial ratio guidelines issued by the FRB and other
banking regulators, financial conditions of Baylake and the Bank, and other
relevant factors.
Baylake has maintained a dividend reinvestment plan which enabled participating
shareholders to elect to purchase shares of Baylake Common Stock in lieu of
receiving cash dividends. Such shares may be newly issued securities or
acquired in the market, and were purchased on behalf of participating
shareholders at their then fair market value.
In previous years, Baylake has maintained a dividend reinvestment plan which
allowed participating shareholders to elect that dividends be used to purchase
shares or partial shares of stock. Baylake has determined because of certain
short-term compliance costs to suspend purchase of shares through the dividend
reinvestment plan at this time. Effective April 1, 1997 shareholders will no
longer have the option of dividend reinvestment and all shareholders will
receive cash dividends. Baylake will continue to look at the idea of
reinstating the dividend reinvestment plan in the fourth quarter of 1997 but at
this time no final decisions have been made.
27
ITEM 6. SELECTED FINANCIAL DATA
Year ended December 31
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except amounts per share)
Interest Income $ 26,926 $ 24,487 $ 21,445 $ 20,468 $ 21,285
Interest Expense $ 12,046 $ 10,131 $ 7,556 $ 7,507 $ 9,285
Net Interest Income $ 14,880 $ 14,356 $ 13,889 $ 12,961 $ 12,000
Provision for Loan Losses $ 400 $ 250 $ 260 $ 304 $ 310
Other Income $ 3,451 $ 2,581 $ 2,320 $ 2,697 $ 2,657
Other Expense $ 11,289 $ 9,894 $ 9,689 $ 8,769 $ 8,485
Income before income taxes $ 6,642 $ 6,793 $ 6,260 $ 6,585 $ 5,862
Net income $ 4,703 $ 4,644 $ 4,430 $ 4,662 $ 4,181
Earnings per share:
Primary Net Income without
effect of goodwill
$ 1.98 $ 1.89 $ 1.81 $ 1.92 $ 1.73
Fully diluted $ 1.92 $ 1.89 $ 1.81 $ 1.92 $ 1.73
Dividends per share (1) .93 1.14 1.02 .58 1.51
Total assets $395,356 $309,428 $287,107 $284,075 $272,079
(year end)
(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
28
Corp. ("Baylake" or the "Registrant"), which may not be otherwise apparent from
the consolidated financial statements included in this report. This discussion
and analysis should be read in conjunction with those financial statements,
related notes, the selected financial data and the statistical information
presented elsewhere in this report for a more complete understanding of the
following discussion and analysis.
On August 31, 1994, the Registrant completed the acquisition of Kewaunee County
Banc-Shares, Inc. ("KCB"), the holding company for Baylake Bank-Kewaunee
("BBK"). The Registrant acquired all of the outstanding shares of KCB in
exchange for 574,756 shares of the Registrant's common stock. The acquisition
was structured as a merger of KCB with a newly-formed subsidiary of the
Registrant and accounted for using the pooling- of-interests method of
accounting; therefore, results of prior periods have been restated.
On July 1, 1996, the Registrant consummated its acquisition of Four Seasons of
Wis., Inc. ("Four Seasons"), the holding company for The Bank in a cash
transaction totaling $13.875 million. The acquisition was accounted for using
the purchase method of accounting, therefore it would affect future operations.
Results of Operations
Net income in 1996 was $4.70 million, a 1.3% increase from the $4.64 million
earned in 1995. Net income for 1995 showed a 4.8% increase over 1994 earnings.
On a per share basis, net income was $1.92 in 1996 compared with $1.89 in 1995,
an increase of 1.6%. Earnings per share in 1995 showed a 4.4% increase over
1994 results.
Net income for 1996 includes amortization expense of goodwill related to the
purchase of Four Seasons. This expense reduced after-tax net income in 1996 by
$144,000 or earnings per share by $.06. Net income for 1994 reflected one-time
charges associated with the acquisition of KCB and the name changes of
Baylake's subsidiary banks. Those changes reduced after-tax net income in 1994
by $529,000. Those charges in 1994 reduced after-tax earnings per share by
$.22.
Net interest income for 1996 improved $524,000 or 3.7% over 1995 levels.
Net interest income for 1995 improved $467,000 or 3.4% over 1994 levels. From a
slightly increasing rate environment in early 1996 to year end, interest income
increased 10.0% while interest expense increased 18.9%.
Other income showed an increase of $870,000 or 33.7%. The primary factors
increasing other income were increased trust revenues and loan servicing fee
income.
Non-interest expense increased $1.4 million or 14.1% over 1995 levels. Factors
contributing to the increase were increased personnel expenses and occupancy
and equipment expense.
For 1996, return on average assets declined to 1.34% compared with 1.56% in
1995 and 1.56% recorded in 1994. This ratio declined as a result of the
various factors discussed above combined with average asset growth of 18.0% in
1996, primarily a result of the Four Seasons acquisition.
29
Return on average stockholders' equity in 1996 showed a decrease at 12.39%
compared to 13.43% in 1995 and a decrease compared to 13.33% in 1994. This
result occurred as a result of decreased net income and the factors discussed
above offset by an increased capital base.
Cash dividends declared in 1996 decreased 18.4% to $.93 per share compared to
$1.14 in 1995. This compares to an increase of 11.8% in 1995 dividends as
compared to 1994.
Net Interest Income
Net interest income is the largest component of the Registrant's operating
income (net interest income plus other non-interest income), accounting for
82.0% of 1996 total operating income, as compared to 85.3% in 1995 and 86.3% in
1994. Net interest income represents the difference between interest earned on
loans, investments and other earning assets, and the interest expense
associated with the deposits and borrowings that fund them. Interest
fluctuations together with changes in the volume and types of earnings and
interest-bearing liabilities combine to affect total net interest income. This
analysis discusses net interest income on a tax-equivalent basis in order to
provide comparability among the various types of interest earned. Tax-exempt
interest income is adjusted to a level that reflects such income as if it were
fully taxable.
Net interest income on a tax-equivalent basis reached $15.7 million in 1996, an
increase of 4.5% from $15.0 million in 1995 (and $14.6 million in 1994). The
improvement in 1996 net interest income of $679,000 was due in part to a 13.9%
increase in the volume of average earning assets, offset by a 19.6% increase in
average interest-bearing liabilities. The benefit from the increase in earning
assets, the stable cost of interest bearing liabilities and the increase in
noninterest bearing deposits were offset, in part, by an increase in
interest-bearing liabilities and a decline in the yield on earning assets. As
a result, interest income increased 10.3%, while interest expense for 1996
increased 18.9%.
Average loans outstanding grew from $201.8 million in 1995 to $233.5 million in
1996, an increase of 15.7%. The increase in loan volumes also was a
significant contributing factor to the increase in interest income. Average
loans outstanding increased from $187.9 million in 1994 to $201.8 million in
1995, an increase of 7.4%. The mix of average loans to average total assets
grew from 66.0% in 1994 to 67.6% in 1995 and declined slightly to 66.3% in
1996. The relationship of greater loan composition in the asset mix has
provided a source of higher yielding assets, which has contributed to an
increase in net interest income.
Interest rate spread is the difference between the tax-equivalent rate earned
on average earning assets and the rate paid on average interest- bearing
liabilities. The interest rate spread decreased 20 basis points in 1996 to
4.36% from 4.56% in 1995, as the average yield on earning assets decreased 23
basis points while the average cost paid on interest-bearing liabilities
decreased 3 basis over the same period. The decrease in interest rate spread
followed a decline of 27 basis points in 1995 compared to a spread of 4.83%
30
in 1994. The decrease in the Registrant's earning assets yield reflects lower
loan yields, resulting from increased competition, less frequent repricing of
variable rate loans due to a stable interest rate environment on average and a
slightly decreased percentage of the Registrant's assets represented by loans.
Increased investment interest income resulting from an increased investment
portfolio (primarily due to the Four Seasons acquisition) combined with higher
yields on the investment portfolio have partially offset the decline in
interest rate spread. Yields on interest-paying liabilities declined 3 basis
points due to a stable interest rate environment on average.
Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. The net interest margin exceeds the
interest rate spread because of the use of non-interest bearing sources of
funds to fund a portion of earning assets. As a result, the level of funds
available without interest cost (demand deposits and equity capital) is an
important factor affecting an increasing net interest margin.
The net interest margin for 1996 was 4.97% compared to 5.38% in 1995. The
decline in net interest margin was primarily the result of the 20 basis point
decline in the interest rate spread and a reduction in the average earning
assets to average asset ratio. The impact from competition as it relates to
the commercial loan portfolio had a negative affect on the change in net
interest margin. The free funds ratio, or the level of non-interest-bearing
funds that support earning assets, declined to 21.3% from 22.4% in 1995, which
caused a reduction in net interest margin.
The net interest margin for 1995 was 5.38% as compared to 5.48% in 1994 as
interest rate spread improved during that period. The decrease in 1995
occurred primarily as the result of the 27 basis point decline in the interest
rate spread. The impact in the levels of average interest rates from 1994 to
1995 had a negative affect on the change in net interest margin.
The ratio of average earning assets to average total assets measures
management's ability to employ overall assets for the production of interest
income. This ratio was 89.6% in 1996 compared with 93.4% in 1995 and 94.0% in
1994. The ratio declined in 1996 as a result of additional fixed assets
resulting from the Green Bay expansion and goodwill stemming from the Four
Seasons acquisition.
Competition in the financial services industry will also affect net interest
margin. Spreads will be a focus of management's attention, as the Registrant
constantly seeks to attract lower cost core deposits, service the needs of the
customer, and provide attractively priced products. Competition for high
quality assets will also affect asset yields. Net interest income is vital to
the Registrant's earnings performance, since net interest income is the largest
component of operating income. Growth in net interest income primarily is the
result of growth in the level of earning asset volumes and changes in asset
mix. Interest rate spread management through asset and liability pricing and
increased levels of non-interest-bearing sources of funds also aid in improving
net interest income. Management will continue its focus on maintaining an
appropriate mix of quality earning assets as well as seeking to achieve
appropriate growth in volumes.
31
Changes in the levels of market interest rates also affect net interest income,
but are less directly under the control of the Registrant. The recent
environment of slightly increasing interest rates has prompted increased
interest income as a result of the repricing of the variable loan rate
portfolio combined with a lagging effect on the deposit side raising interest
rates more slowly. Management believes that a gradual increase in interest
rates will not adversely affect the earning capacity of the Registrant. Past
experience has shown that, although the Registrant remains in a short-term
negative interest rate sensitivity gap, deposits tend not to be repriced as
quickly as loans in a rising rate scenario, as the current environment has
shown, and are repriced more frequently in a falling interest rate environment.
More discussion on this subject is referenced in the section titled "Interest
Rate Sensitivity".
Provision for Loan Losses
Provision for loan losses in 1996 at $400,000 compares to a provision of
$250,000 for 1995 and $260,000 for 1994. Net charge-offs in 1996 were $244,000
compared with net charge-offs of $167,000 in 1995 and $160,000 in 1994. Net
charge-offs as a percentage of average loans is a key measure of asset quality.
Net charge-offs to average loans were .10% in 1996 compared with .08% in 1995
and .09% in 1994. The provision is lower in spite of increased problem loans
due to strong collateral positions that exist. Management's determination of
the provision for loan losses is based on several factors. Factors considered
include evaluation of the loan portfolio, current domestic conditions, loan
volume, loan growth, loan portfolio composition, levels of non-performing
loans, trends in past due loans, and the evaluation of various problem loans
for loss potential. Net charge-offs to average loans remain comparatively low
in spite of above average loan growth due to higher underwriting standards and
improved collection efforts.
Non-Interest Income
Total non-interest income, excluding securities transactions, was $836,000 more
than 1995, or a 32.4% increase. In 1995, total non-interest income was
$232,000 more than 1994, or a 9.9% increase. Trust service fees, loan
servicing fees and service charges continue to be the primary components of
non-interest income.
Trust fees increased $217,000 or 55.1% in 1996 compared to 1995, primarily as a
result of increased trust business and the timing of certain billable business.
This compared to an increase of $59,000 or 17.6% in 1995 compared to 1994, in
part due to increased trust business.
Loan servicing fees increased $355,000 or 66.9% to $886,000 in 1996. $134,000
of the increase stemmed from the adoption of STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 122 (SFAS 122) "Accounting for Mortgage Servicing Rights". The
remaining increase resulted from fees realized for additional commercial loan
business sold and serviced on the secondary market. This result followed a
decrease of $21,000 or 3.8% in 1995 as compared to 1994 due to decreased
activity in the loan refinancing market as a higher rate environment on average
tempered activity in that area.
32
Service charges on deposit accounts showed an improvement of $116,000 or 18.5%
over 1995 results accounting for much of the improvement in fee income
generated for other services to customers. Fee income in this category also
showed improvement of approximately $78,000 from income generated from discount
brokerage business.
Included in 1996 other income are revenues of $277,000 stemming from the
operation of Karsten Resources, Inc. This compares to revenues of $269,000
reported in 1995.
Non-Interest Expense
Non-interest expense in 1996 increased $1.4 million or 14.1% compared to 1995
results primarily as a result of increased personnel, occupancy and equipment
expense. This followed a $205,000 or 2.1% rise in 1995 as compared to 1994.
Salaries and employee benefits expense is the largest component of non-interest
expense and totaled $6.3 million in 1996, an increase of $879,000 or 16.3% as
compared to 1995 results. The increase in 1996 primarily results from
additional staffing as a result of expansion into the Green Bay market and
Waupaca County market (as a result of the Four Seasons acquisition) and normal
salary increases. Salary and employee benefits expense in 1995 totaled $5.4
million, an increase of $40,000 or .8% over 1994 results.
Bonuses arising from the Registrant's Pay-For-Performance Program amounted to
$373,000 in 1996 compared to $313,000 in 1995, an increase of 19.2%. This
program is designed to reward various divisions if certain goals are met in
achieving improvement in income; bonuses increased due to an increased salary
base structure and certain goals on return on equity being achieved.
The Registrant's 401(k) profit sharing plan covering all employees who qualify
as to age and length of service showed an increase of $36,000 or 10.6% over
1995 levels. Expenses in the same category were up $118,000 or 52.9% in 1995
compared to 1994 as the Registrant increased contributions from combination
discretionary/matching plan of 5% to 10% in 1995 to meet industry standards.
The number of full-time equivalent employees increased to 185 in 1996 compared
to 157 in 1995, an increase of 17.8%. This increase primarily resulted from
the Registrant gearing up for entry into the Green Bay market with emphasis on
personnel time spent on acclimation to the Bank and its products and calling
programs. Employee levels in 1995 increased to 157 from 149 in 1994, an
increase of 5.4%. As the Registrant expands to take advantage of business
opportunities and the related revenues, management will continue its efforts to
control salaries and employee benefits expense, although increases in these
expenses are likely to occur in future years.
Net occupancy expense showed an increase of $180,000 or 26.1% compared to 1995.
This increase followed an increase of $30,000 or 4.5% in 1994. This expense
has resulted from expansion costs in the development of the Green Bay region
with two new branches completed in 1996 resulting in additional depreciation
expense and other occupancy costs.
33
Equipment expense showed an increase of $230,000 or 36.4%. This followed an
increase of $130,000 or 25.9%. These resulted primarily from depreciation
relating to past increased capital expenditures for equipment which were made
to enhance the Registrant's technological capabilities and additional equipment
added as a result of the Green Bay expansion efforts.
Data processing expense in 1996 decreased $11,000 or 1.6% due to moderate
volume increases along with decreased servicing cost. This followed an
increase of $109,000 or 18.2% in 1995 compared to 1994. Management estimates
that data processing expense should show relatively flat increases with only
adjustments related to any volume increase incurred by Registrant.
Other real estate expenses are netted against income received in the
determination of net other real estate owned expense (income). As a result the
Registrant has shown varied results. Other real estate owned expenses showed
net income of $188,000 in 1996 as a result of gains on sale of approximately
$96,000 resulting from three commercial properties disposed of in 1996.
Additionally a gain of $155,000 was recognized as a result of disposal of
additional lot sales of Idlewild Valley, a former subsidiary of the Bank whose
value was written off in 1988. This compares to net income of $84,000 in 1995
and $4,000 in 1994.
Other operating expenses in 1996 were $221,000 more than in 1995 or a 8.6%
increase. Primarily affecting this change was amortization expense of goodwill
amounting to $144,000 in 1996. This compares to a decrease of $24,000 or .9% in
1995 compared to 1994.
Supplies expense shows an increase of $99,000, or 34.4% primarily as a result
of the additional branch needs in 1996. This compares to an increase of $4,000
in 1995 as related to 1994.
The decline in payments to regulatory agencies of $279,000 in 1996 when
compared to 1995 is due to the reduction in FDIC insurance premiums. Although
FDIC insurance expense remained a sizable component of other operating expense
totaling $292,000 in 1995, it was $252,000 lower than 1994 results or a 46.3%
reduction. This occurred as a result of FDIC action to lower the assessment
ratio in June 1995 from 23 cents per $100 of deposits to 4 cents per $100 of
deposits for the remainder of 1995.
Operating costs for Karsten Resources, Inc. of $328,000 are included as part of
other operating expenses for 1996. This compares to costs of $319,000 included
as a part of other operating expenses for 1995.
Other items comprising other operating expense shows an increase of $248,000 or
a 15.0% increase in 1996 compared to 1995. Additional marketing and
advertising expense of $133,000 in 1996 account for some of this increase.
These costs were primarily the result of the Bank's expansion efforts. In
addition $115,000 of the increase stems from increased loan and collection
costs, primarily the result of legal costs for one commercial loan which has
since been resolved. This followed a decrease in 1995 of $90,000 or 4.4%
compared to 1994. The increase in 1994 resulted primarily from one-time
charges related to the KCB acquisition. The overhead ratio, which is computed
by subtracting non- interest income from non-interest expense and dividing by
average total assets was 2.22% for 1996 compared to 2.45% for
34
1995. Registrant continues its commitment to deliver quality service and
products for its customer base.
Income Taxes
Income tax expense for the Registrant in 1996 was $1.9 million, a decrease of
$210,000 or 9.8% compared to 1995. This followed an increase of $319,000 or
17.4% in 1995 compared to 1994. The lower tax expense in 1996 reflected the
Registrant's decrease in before tax earnings and an increase in tax exempt
interest income. Conversely, 1995 income tax expense was higher due to an
increase in before tax earnings and a decrease in tax exempt interest income.
The Registrant's effective tax rate (income tax expense divided by income
before taxes) was 29.2% in 1996 compared with 31.6% in 1995 and 29.2% in 1994.
Of the 29.2% effective rate for 1996 the federal effective tax rate was 25.8%
while the Wisconsin state tax effective rate was 3.4%.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance
has been recognized to offset the related deferred tax assets due to the
uncertainty of realizing tax benefits of a portion of loan loss and mortgage
servicing differences.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, deferred loan origination fees, deferred compensation, mortgage loan
servicing, market value adjustments of securities, and depreciation for
financial and income tax reporting in accordance with SFAS 109. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
Balance Sheet Analysis
Loans
Total loans outstanding grew to $260.9 million at December 31, 1996, a 24.1%
increase from the end of 1995. This follows a 9.1% increase at December 31,
1995 over 1994 year end.
The commercial, financial, and agricultural loan classification primarily
consists of commercial loans to small business. Loans of this type are in a
broad range of industries and include service, retail, wholesale and
manufacturing concerns. Agricultural loans are made principally to farmers
engaged in dairy, cherry and apple production. Borrowers are primarily
concentrated in Door and Kewaunee Counties, Wisconsin. The credit risk related
to commercial loans made by the Registrant's subsidiaries is largely influenced
by general economic conditions (especially those applicable to the Door County
market area) and the resulting impact on a borrower's operations.
Commercial loans and commercial real estate loans (including construction
35
loans) totaled $162.3 million at year end 1996 and comprised 62.2% of the loan
portfolio compared with 64.5% of the portfolio at the end of 1995. Loans in
these classifications grew $26.6 million or 19.6% during 1996.
The following table sets forth loan composition (net of unearned income) at
December 31:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
(In thousands of
Dollars)
Real estate- $ 83,334 32% $ 62,059 29% $ 52,474 27% $ 47,816 27% $ 42,929 27%
residential
Real estate- $ 11,365 4% 6,378 3% 5,881 3% 4,511 2% 3,275 2%
construction
Real estate- $104,136 40% 83,177 40% 69,303 36% 64,211 36% 45,459 28%
commercial &
agricultural
Commercial, $ 46,786 18% 46,094 22% 48,412 25% 47,522 26% 53,526 33%
financial &
agricultural
Installment loans $ 15,233 6% 12,522 6% 16,603 9% 16,844 9% 16,978 10%
to individuals
Total Loans, $260,854 $210,230 $192,673 $180,904 $162,167
(net of
unearned income)
Real estate loans (including construction loans) secured by non-residential
real estate properties involve borrower characteristics similar to those for
commercial loans. Because of their similarities, we have combined them with
commercial loans for purposes of analysis and discussion.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
in part by detailed underwriting procedures, comprehensive loan administration,
and periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis. Further analyses by
customer, industry, and location are performed to monitor trends, financial
performance and concentrations.
The Registrant's loan portfolio is diversified by types of borrowers and
industry groups with the Door and Kewaunee County market areas. Significant
loan concentrations are considered to exist for a financial entity when such
amounts are loans to a multiple of borrowers engaged in similar activities
which cause them to be similarly impacted by economic or other conditions. At
December 31, 1996, there existed the following industry group concentrations in
the Registrant's loans which exceeded 10% of total loans:
Tourism related loans:
36
Lodging business $38.5 million or 14.7%
---------------------
Total tourism loans $38.5 million or 14.7%
The Registrant has a significant loan concentration because of tourism based
loans. The Registrant must serve the credit needs of its market, with one of
the key industries being tourism. Being a community bank, however, the
Registrant must also meet the other needs of its market area. For that reason
the Registrant realizes that the economic conditions of its market area
directly impact the Registrant's performance levels. Any general weakness in
the Door or Kewaunee County areas could have a material effect on the business
and operations of the Registrant, although management believes that it is not
unduly exposed to problems in any particular industry group.
Real estate residential mortgage loans totaled $83.3 million at the end of 1996
and comprised 32.0% of the loan portfolio at the end of 1996. Loans in this
category grew $21.3 million or 34.3% during 1996. Residential real estate
loans consist of conventional home mortgages, home equity lines, and secondary
home mortgages. Loans are primarily for properties within the Door and
Kewaunee County markets. Residential real estate loans generally contain a
limit for the maximum loan to collateral value of 75% to 80%. Private mortgage
insurance may be required when the loan to value exceeds these limits.
Residential real estate loans are written normally with a one, two or three
year balloon feature. The Registrant also participates in a secondary fixed
rate mortgage program under the Federal Home Loan Mortgage Corporation (FHLMC)
guidelines. These loans are sold on the secondary market and the Registrant
retains servicing rights. At December 31, 1996, these loans totaled $35.3
million.
Installment loans to individuals totaled $15.2 million or 5.9% of the total
loan portfolio at December 31, 1996 compared to $12.5 million or 6.0% at the
end of 1995. Installment loans include short-term installment loans, direct
and indirect automobile loans, recreational vehicle loans, credit card loans,
and other personal loans. Individual borrowers may be required to provide
related collateral or a satisfactory endorsement or guaranty from another
party, depending upon the specific type of loan and the creditworthiness of the
borrower. Loans are made to individual borrowers located in Door and Kewaunee
Counties. Credit risks for these types of loans is generally influenced by
general economic conditions (especially in the Door and Kewaunee County market
areas), the characteristics of individual borrowers and the nature of the loan
collateral. Credit risk is primarily controlled by reviewing the
creditworthiness of the borrowers as well as taking the appropriate collateral
and guaranty positions on such loans.
Critical factors in the overall management of credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, adequate allowance for
possible loan losses, and conservative non-accrual and charge-off policies.
Allowance for Possible Loan Losses
37
At December 31, 1996 the allowance for possible loan losses of $2.9 million
represented 1.11% of total loans, down from 1.25% at December 31, 1995. Loans
grew at a rate of 24.1% from December 31, 1995 to year end 1996, while the
allowance grew at a lower rate. Also, net charge-offs increased in 1996 as
compared to 1995. As loans have grown, management did not believe there
existed any trends indicating any undue portfolio risk.
At December 31, 1995, the allowance for possible loan losses of $2.6 million
represented 1.25% of total loans compared with 1.31% at the end of 1994.
Commercial, agricultural and other loans net charge-offs represented 27.0% of
the total net charge-offs as compared with 74.9% of total net charge-offs in
1995. Real estate mortgage loan net charge-offs represented 40.6% of the total
net charge-offs in 1996. Installment loan net charge-offs in 1996 were 32.4%
of the total net charge-offs as compared with 25.1% of total net charge-offs in
1995. In the commercial sector, three particular charge-offs contributed to the
increase. The remaining commercial loan charge-offs during 1996 were offset
for the most part by their eventual recoveries in 1996. Real estate mortgage
loan charge-offs consisted of two commercial properties secured by real estate.
The majority of charge-offs in the installment loan sector occurred as a result
of automobile loans. Six charge-offs totaling $20,000 were made in 1996 with
minimal recoveries occurring. Credit card loans showed net charge-offs of
$30,000 in 1996 compared to net charge-offs of $4,400 in 1995. Although the
Bank has experienced higher interest returns on approximately $1.5 million in
credit card balances, credit card loans are inherently risky in nature. The
Bank continues to work with the credit card issuer to solicit quality loan
accounts based on designated criteria and actively pursue collection efforts in
a more timely fashion. Loans charged-off are subject to continuous review and
specific efforts are taken to achieve maximum recovery of principal and accrued
interest.
Management regularly reviews the adequacy of the allowance for possible loan
losses to ensure that the allowance is sufficient to absorb potential losses
arising from the credit granting process. Factors considered include the
levels of non-performing loans, other real estate, trends in past due loans,
loan portfolio growth, changes in loan portfolio composition, historical net
charge-offs, present and prospective financial condition of borrowers, general
and local economic conditions, specific industry conditions and other
regulatory or legal issues that could affect the Registrant's loss potential.
Management believes that the balance of the allowance for possible loan losses
as of December 31, 1996 is sufficient to absorb potential loan losses.
Non-Performing Loans, Potential Problem Loans and Other Real Estate
Management remains committed to a philosophy that encourages early
identification of non-accrual and problem loans. The philosophy is embodied
through the monitoring and reviewing of credit policies and procedures to
ensure that all problem loans are identified quickly and the risk of loss is
minimized.
Non-performing loans remain a leading indicator of future loan loss potential.
Non-performing loans are defined as non-accrual loans, guaranteed
38
loans 90 days or more past due but still accruing, and restructured loans.
Loans are placed in non-accrual status when contractually past due 90 days or
more as to interest or principal payments. Additionally, whenever management
becomes aware of facts or circumstances that may adversely impact on the
collectibility of principal or interest on loans, it is the practice of
management to place such loans on non-accrual status immediately rather than
waiting until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed and income is recorded only to
the extent that interest payments are subsequently received on a cash basis and
a determination has been made that the loan's principal is collectible. If the
collectibility of principal is doubtful, payments received are applied to loan
principal.
Restructuring loans involve the granting of some concession to the borrower
involving a loan modification, such as payment schedule or interest rate
changes.
Non-performing loans at December 31, 1996 were $4.7 million, an increase of
$3.2 million from the level at December 31, 1995. Approximately $1.9 million
of the increase consists of one non-accrual commercial real estate credit which
is experiencing cashflow problems. Management believes that collateral is
sufficient in the event of default. $770,000 of the increase consists of three
non-accrual commercial real estate loans. $369,000 of this amount consists of
a commercial rental property for which rental payments have been slow. Efforts
are being made to correct the problem. $237,000 consists of a credit for a
manufacturer that has incurred ongoing operating losses. Management continues
to monitor progress in this credit. $164,000 consists of a bar and restaurant
business that has experienced cashflow problems. Management believes that
collateral is sufficient in these three credits in the event of default.
Approximately $627,000 of the increase consists of one non-accrual commercial
loan which has personal guarantees supporting the loan. Management continues
to monitor progress in this credit and expects repayment to be made in full.
As a result the ratio of non-performing loans to total loans at the end of 1996
was 1.8% compared to .7% at 1995 year end. The Registrant's allowance for
possible loan losses balance was 61.9% of total non-performing loans at
December 31, 1996 compared to 175.2% at year end 1995. Troubled debt
restructurings increased $352,000 or 54.3% and is largely composed of
commercial real estate loans which are current as to payment status at year end
1996. Management believes that collateral is sufficient in those loans
classified as troubled debt in event of default.
Potential problem loans are performing loans in which there is doubt that the
borrower will be able to comply with loan repayment terms. Management's
decision to place loans in this category does not necessarily mean that the
Registrant expects to take losses on such loans, but that management needs to
be more vigilant in its efforts to oversee the loan and recognize that a higher
degree risk is associated with these nonperforming loans. At December 31,
1996, potential problem loans amounted to a total of $1.4 million compared to
$2.2 million at year end 1995. $375,000 of the 1996 problem loans stems from
vacant commercial property which has been listed for sale. $237,000 of the
problem loans stems from credits for a manufacturer that has incurred ongoing
operating losses. $630,000 of the problem loans stem from a commercial
customer who is currently experiencing cashflow concerns. Various commercial
loans totaling $55,000 and consumer loans totaling $95,000
39
make up the remaining totals. With the exceptions noted above, potential
problem loans are not concentrated in a particular industry but rather cover a
diverse range of businesses.
The placement of performing loans in the potential problem loan category
indicated management's willingness to more closely monitor the financial
condition of the borrower and collateral positions of the Registrant or will
strengthen the loans with additional collateral if significant losses from
credits are expected in this category.
Other real estate owned which represents property to which the Registrant has
acquired through foreclosure or in satisfaction of debt, consisted of one
commercial real estate property totaling $110,000 at year end 1996. There
existed no other real estate owned at year end 1995. Management actively seeks
to ensure that properties held are administered to minimize any risk of loss.
Net cost of operation of other real estate for 1996, 1995, and 1994 consists of
the following:
1996 1995 1994
------ ------ ------
(In Thousands of Dollars)
Loss on disposition of
properties and other costs $ 102 $ 66 $ 45
Gains on disposition of
properties and expense
recoveries (290) (150) (49)
------ ----- ------
Net costs (gains) $(188) $ (84) $ (4)
Other properties taken in as a result of foreclosure or surrender include a
restaurant and hotel facility that exists as a subsidiary of Bank named Karsten
Resources, Inc. The intent on forming the corporation was to allow the
business