U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number: 0-27984
Ridgestone Financial Services, Inc.
(Name of small business issuer in its charter)
Wisconsin 39-1797151
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13925 West North Avenue, 53005
Brookfield, Wisconsin (Zip Code)
(Address of principal executive offices)
Issuer's telephone number (414) 789-1011
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 ___.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10KSB. [X]
Issuer's revenues for its most recent fiscal year: $4,436,756
Aggregate market value of voting stock held by non-affiliates of the
issuer: $12,931,585
Number of shares of common stock, no par value, outstanding on March 2,
1998: 834,340
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1998 Annual Meeting (incorporated by reference
into Part III)
Transitional Small Business Disclosure Format: Yes ___; No X .
<PAGE>
Ridgestone Financial Services, Inc.
Index to Annual
Report on Form 10-KSB
For The Fiscal Year Ended December 31, 1997
Page
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Description of Business . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . 8
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 5. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 8
Item 6. Plan of Operation and Management's Discussion
and Analysis . . . . . . . . . . . . . . . . . . . . 9
Item 7. Financial Statements . . . . . . . . . . . . . . . . 18
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure . . . . . . . 40
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act . . . . . . . . . . 40
Item 10. Executive Compensation . . . . . . . . . . . . . . . 40
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . 40
Item 12. Certain Relationships and Related Transactions . . . 40
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . 40
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
<PAGE>
Part I
Item 1. Description of Business
General
Ridgestone Financial Services, Inc. (the "Company") was incorporated in
Wisconsin on May 25, 1994. The Company was formed to acquire all of the
issued and outstanding stock of Ridgestone Bank (the "Bank") and to engage
in the business of a bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). The organizers received a
certificate of authority to organize the Bank from the Wisconsin
Commissioner of Banking on May 9, 1995. The organizers' application for
deposit insurance was approved on May 24, 1995 by the Federal Deposit
Insurance Corporation ("FDIC"), subject to certain conditions including
conditions related to capital adequacy. The Company's application to
become a bank holding company for the Bank was approved by the Federal
Reserve Board on July 20, 1995. In November 1995, the Company sold
834,340 shares of its common stock, no par value, in an initial public
offering. The net proceeds received by the Company in this offering
totaled approximately $7.8 million. The Bank was capitalized on
December 6, 1995, and commenced operations on December 7, 1995.
The Bank provides full-service commercial and consumer banking services in
its primary market areas of Brookfield, Elm Grove and Wauwatosa,
Wisconsin. The Bank competes with other commercial banks, savings banks,
savings and loan institutions, credit unions and other financial service
organizations in the three-city area. The Bank is one of the newest
financial institutions in its market.
The Bank was the first bank in Wisconsin to introduce full-service PC
banking, called RidgeStone Connect. This on-line service enables the
Bank's customers to access their accounts in real time, pay bills,
transfer funds, access lines of credit, exchange e-mail and view product
and rate information. Approximately 19% of the Bank's consumer customers
are enrolled in RidgeStone Connect. The Bank plans to introduce a
business version of this service sometime in 1998.
The Company's principal business is the business of the Bank. The Bank's
principal business consists of attracting deposits from the public and
investing those deposits in loans and securities. The Bank's deposits
are insured to the maximum extent allowable by the FDIC. The
Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans
and securities and the interest paid on deposits. The Company's operating
results are affected by deposit service charges and other income.
Operating expenses of the Company include employee compensation and
benefits, occupancy and equipment expense, professional and data
processing fees, advertising and marketing expenses, and other
administrative expenses. The Company's operating results are also
affected by economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.
In 1996, the Bank received regulatory approval to open its first branch at
15565 W. North Avenue, Brookfield, Wisconsin. The branch opened for
business on January 2, 1997 and houses a drive-thru branch banking
facility and banking operations center.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-KSB are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the
Company "believes," "anticipates," "expects," or other words of similar
import. Similarly, statements that describe the Company's future plans,
objectives or goals are also forward-looking statements. Such forward-
looking statements are subject to certain risks and uncertainties which
are described in close proximity to such statements and which could cause
actual results to differ materially from those currently anticipated.
Additional factors that may cause actual results to differ materially from
those contemplated in the forward-looking statements include: interest
rate trends, the general economic climate in the Company's market area,
loan delinquency rates and legislative enactments or regulatory changes
which adversely affect the business of the Company and/or the Bank.
Shareholders, potential investors and other readers are urged to consider
these factors in evaluating the forward-looking statements. The forward-
looking statements included herein are only made as of the date of this
Annual Report on Form 10-KSB and the Company undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent
events or circumstances.
Business Strategy
The Bank's strategy is to concentrate on the financial service needs of
individuals and small businesses by providing on-site decision making and
using technology to enhance customer service. While the Bank has a
lending limit of $850,000 per loan, the Bank is able to attract business
loans beyond its $850,000 lending limit by using bank participations with
other banks in Wisconsin. Likewise, the Bank has purchased participations
from other area Wisconsin financial institutions.
Loan Products
The Bank offers a full range of retail and commercial lending services,
including commercial revolving lines of credit, residential and commercial
real estate mortgage loans, consumer loans and equipment financing. These
loan products are discussed below.
Although the Bank's management takes a competitive approach to lending, it
stresses high quality in its loans. To promote such quality lending, the
Board of Directors of the Bank has established maximum lending authority
for each loan officer. Each loan request exceeding a loan officer's
authority has to be approved by one or more senior officers. On a monthly
basis, the entire Board of Directors of the Bank reviews all loans over
$25,000 made in the preceding month. In addition, the Loan Committee of
the Board of Directors of the Bank reviews loans over $250,000 for prior
approval when the loan request exceeds the established limits of senior
loan officers. The Loan Committee of the Bank reviews loans with
aggregate principal amounts between the lending officer's lending
authority and $250,000. The Loan Committee is comprised of the President
of the Bank, the Executive Vice President and Loan Review Administrator.
Because of the Bank's local nature, management believes that quality
control is achievable while still providing prompt and personal service.
Management of the Bank has established relationships with a correspondent
bank and other independent financial institutions to provide other
services required by its customers, including loan participations where
the requested loan amounts exceed the Bank's policies or legal lending
limits.
In December 1997, the Bank signed a contract with Bankers' Service
Corporation, a wholly owned subsidiary of Bankers' Bank in
Madison,Wisconsin to assist in the loan review process. This process is
designed to promote early identification of credit quality problems in the
Bank's loan portfolio. While the Bank will continue to review all loans
through its Loan Review Administrator, these reviews will be augmented by
the Bankers Bank loan review function. The Bank's Loan Review
Administrator is responsible for conducting a continuous internal review
which tests the Bank's compliance with loan policy and documentation of
all loans. Any past due loans and identified problem loans are reviewed
with the Board of Directors of the Bank on a monthly basis.
Real Estate Loans. The Bank originates residential mortgage loans, which
generally are long-term with either fixed or variable interest rates. The
Bank's policy is to retain all variable interest rate mortgage loans in
the Bank's loan portfolio and to sell all fixed rate loans with their
servicing rights in the secondary market. This policy is subject to
review by management as a result of changing market and economic
conditions.
The retention of variable-rate loans in the Bank's loan portfolio helps to
reduce the Bank's exposure to fluctuations in interest rates. However,
such loans generally pose credit risks different from the risks inherent
in fixed rate loans, primarily because as interest rates rise, the
interest payments due from the borrowers rise, thereby increasing the
potential for default.
Regulatory and supervisory loan-to-value ("LTV") limits were established
by Section 304 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). The Bank's internal limitations follow those
limits and in certain cases are more restrictive than those mandated by
the regulators. Proof of insurance is required on all collateral taken as
security before loan proceeds are advanced. The regulatory limits are as
follows:
Loan Category LTV Limit
Raw Land 65%
Land Development 75%
Construction:
Commercial, multi-family, and non- 80%
residential
1-4 family residential 85%
Improved Property 85%
Owner-occupied 1-4 family and home equity 90% (1)
(1) Residential loans exceeding the 90% limit may be excluded
from reporting requirements of FDICIA if enhanced by mortgage
insurance or readily marketable collateral.
Personal Loans. The Bank makes personal loans, lines of credit and credit
cards available to consumers for various purposes, such as the purchase of
automobiles, boats and other recreational vehicles, home improvements,
education and personal investments. The Bank retains substantially all
such loans.
Commercial Loans. Commercial loans are made primarily to small and
mid-sized businesses. These loans may be secured or unsecured, and are
available for general operating purposes, acquisition of fixed assets and
real estate, purchases of equipment and machinery, and financing inventory
and accounts receivable. The Bank generally looks to a borrower's
business operations as the principal source of repayment, but also
receives, when appropriate, mortgages on real estate, security interests
in inventory, accounts receivable and other personal property and/or
personal guaranties to secure repayment.
The Bank's commercial loan portfolio totaled $14,158,697 as of
December 31, 1997, and consisted primarily of lines of credit and loans to
businesses. Lines of credit are generally used for the purpose of
financing working capital and may be secured with current assets of the
borrower. Loans are written for a period of greater than one year, are
amortized over a period of five to seven years and are used principally
for financing fixed asset expenditures. Loans are generally secured with
the fixed assets of the borrower.
Real Estate Commercial Loans. As of December 31, 1997, the Bank had
$13,474,318 of real estate commercial loans outstanding. These loans were
generally made for the purpose of purchasing manufacturing facilities,
warehouses, office buildings and multiple family commercial real estate
holdings.
Competition. The Company has identified as its primary competitors,
offices of either thrifts, credit unions or banks operating in Brookfield,
Elm Grove and Wauwatosa, Wisconsin. Although the Bank commenced
operations on December 7, 1995, its deposits as of June 1997 exceed those
of many of its area competitors which have been operating for longer
periods of time.
The Bank also faces competition from finance companies, insurance
companies, mortgage companies, securities brokerage firms, money market
funds and other providers of financial services. Most of the Bank's
competitors have been in business for a number of years, have established
customer bases, are larger and have higher lending limits than the Bank.
The Bank competes for loans principally through its ability to communicate
effectively and professionally with its customers in understanding and
meeting their needs. Management believes that its personal service
philosophy continues to enhance its ability to compete favorably in
attracting individual and business customers. The Bank actively solicits
retail customers and competes for deposits by offering customers personal
attention, professional service and competitive interest rates.
Supervision and Regulation
The operations of financial institutions, including banks and bank holding
companies, are highly regulated, both at the federal and state levels.
Numerous statutes and regulations affect the business of the Company and
the Bank. To the extent that the information below is a summary of
statutory provisions, such information is qualified in its entirety by
reference to the statutory provisions described. There are additional
laws and regulations having a direct or indirect effect on the business of
the Company or the Bank.
In recent years, the banking and financial industry has been the subject
of numerous legislative acts and proposals, administrative rules and
regulations at both federal and state regulatory levels. As a result of
many of such regulatory changes, the nature of the banking industry in
general has changed dramatically in recent years as increasing competition
and a trend toward deregulation have caused the traditional distinctions
among different types of financial institutions to be obscured. Further
changes along these lines could permit other financially oriented
businesses to offer expanded services, thereby creating greater
competition for the Company and the Bank with respect to services
currently offered or which may in the future be offered by those entities.
Proposals for new legislation or rule making affecting the financial
services industry are continuously being advanced and considered at both
the national and state levels. Neither the Company nor the Bank can
predict the effect that future legislation or regulation will have on the
financial services industry in general or on their businesses in
particular.
The performance and earnings of the Bank, like other commercial banks, are
affected not only by general economic conditions but also by the policies
of various governmental regulatory authorities. In particular, the
Federal Reserve System regulates money and credit conditions and interest
rates in order to influence general economic conditions primarily through
open-market operations in U.S. Government securities, varying the discount
rate on bank borrowings, and setting reserve requirements against bank
deposits. The policies of the Federal Reserve System have a significant
influence on overall growth and distribution of bank loans, investments
and deposits, and affect interest rates earned on loans and investments.
The general effect, if any, of such policies upon the future business and
earnings of the Bank cannot accurately be predicted.
The Company. As a registered bank holding company, the Company is subject
to regulation under the BHCA. The BHCA requires every bank holding
company to obtain the prior approval of the Board of Governors of the
Federal Reserve System (the "Board") before it may merge with or
consolidate into another bank holding company, acquire substantially all
the assets of any bank, or acquire ownership or control of any voting
shares of any bank if after such acquisition it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank.
Under the BHCA, the Company is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or holding company, and
neither the Company nor any subsidiary may engage in any business other
than banking, managing or controlling banks or furnishing services to or
performing services for its subsidiaries. The Company may, however, own
shares of a company the activities of which the Board has determined to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto, and the holding company itself may engage in such
activities. The Company has no pending acquisition plans.
As a registered bank holding company, the Company is supervised and
regularly examined by the Board. Under the BHCA, the Company is required
to file with the Board an annual report and such additional information as
may be required. The Board can order bank holding companies and their
subsidiaries to cease and desist from any actions which in the opinion of
the Board constitute serious risk to the financial safety, soundness or
stability of a subsidiary bank and are inconsistent with sound banking
principles or in violation of law. The Board has adopted regulations
which deal with the measure of capitalization for bank holding companies.
Such regulations are essentially the same as those adopted by the FDIC,
described below. The Board's regulations also provide that its capital
requirements will generally be applied on a bank-only (rather than a
consolidated) basis in the case of a bank holding company with less than
$150 million in total consolidated assets. The Board has also issued a
policy statement on the payment of cash dividends by bank holding
companies, wherein the board has stated that a bank holding company
experiencing earnings weaknesses should not pay cash dividends exceeding
its net income or which could only be funded in ways that weaken the bank
holding company's financial health, such as by borrowing.
Under Wisconsin law, the Company is also subject to supervision and
examination by the Wisconsin Department of Financial Institutions (the
"Department"). The Department is also empowered to issue orders to a bank
holding company to remedy any condition or policy which, in its
determination, endangers the safety of deposits in any subsidiary state
bank, or the safety of the bank or its depositors. In the event of
noncompliance with such an order, the Department has the power to direct
the operation of the state bank subsidiary and withholding dividends from
the holding company.
The Company, as the holder of the stock of a Wisconsin state-chartered
bank, may be subject to assessment to restore impaired capital of the bank
to the extent provided in Section 220.07, Wisconsin Statutes. Any such
assessment would apply only to the Company and not to any shareholder of
the Company. The Company has committed to the Department that if the
Bank's contingent fund decreases to less than $250,000, the Company will
transfer funds to the Bank's contingent fund sufficient to restore the
contingent fund to at least $500,000.
Federal law prohibits the acquisition of "control" of a bank holding
company by individuals or business entities or groups or combinations of
individuals or entities acting in concert without prior notice to the
appropriate federal bank regulator. For this purpose, "control" is
defined in certain instances as the ownership of or power to vote 10% or
more of the outstanding shares of the bank holding company.
The Bank. As a state-chartered institution, the Bank is subject to
regulation and supervision by the Department and the Wisconsin Banking
Review Board and is periodically examined by the Department's staff.
Deposits of the Bank are insured by the Bank Insurance Fund administered
by the FDIC and as a result the Bank is also subject to regulation by the
FDIC and periodically examined by its staff.
The Federal Deposit Insurance Act requires that the appropriate federal
regulatory authority -- the FDIC in the case of the Bank (as an insured
state bank which is not a member of the Federal Reserve System) -- approve
any acquisition by it through merger, consolidation, purchase of assets,
or assumption of deposits. The same regulatory authority also supervises
compliance by the Bank with provisions of federal banking laws which,
among other things, prohibit the granting of preferential loans to
executive officers, directors, and principal shareholders of banks which
have a correspondent relationship with one another.
Wisconsin banking laws restrict the payment of cash dividends by state
banks by providing that (i) dividends may be paid only out of a bank's
undivided profits, and (ii) prior consent of the Department is required
for the payment of a dividend which exceeds current year income if
dividends declared have exceeded net profits in either of the two
immediately preceding years. The various bank regulatory agencies have
authority to prohibit a bank regulated by them from engaging in an unsafe
or unsound practice; the payment of a dividend by a bank could, depending
upon the circumstances, be considered such an unsafe or unsound practice.
In the event that (i) the FDIC or the Department should increase minimum
required levels of capital; (ii) the total assets of the Bank increase
significantly; (iii) the income of the Bank decreases significantly; or
(iv) any combination of the foregoing occurs, then the Board of Directors
of the Bank may decide or be required by the FDIC or the Department to
retain a greater portion of the Bank's earnings to achieve or maintain the
required capital.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or any of its subsidiaries, on
investments in stock or other securities of the bank holding company and
on the taking of such stock or securities as collateral for loans to any
borrower. Under the BHCA and regulations of the Board, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-
in arrangements in connection with any extension of credit or of any
property or service.
The activities and operations of banks are subject to a number of
additional detailed, complex and sometimes overlapping federal and state
laws and regulations. These include state usury and consumer credit laws,
state laws relating to fiduciaries, the Federal Truth-in-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B,
the Fair Credit Reporting Act, the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, FDICIA, the Community Reinvestment Act, anti-
redlining legislation and the antitrust laws. The Community Reinvestment
Act includes provisions under which the federal bank regulatory agencies
must consider, in connection with applications for certain required
approvals, including applications to acquire control of a bank or holding
company or to establish a branch, the records of regulated financial
institutions in satisfying their continuing and affirmative obligations to
help meet the credit needs of their local communities, including those of
low and moderate-income borrowers.
FDICIA, among other things, establishes five tiers of capital
requirements: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. The FDIC
has adopted regulations which define the relevant capital measures for the
five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio (total capital to
risk-weighted assets) of 10% or greater, a Tier I risk-based capital ratio
(Tier I Capital to risk weighted assets) of 6% or greater, and a Tier I
leverage capital ratio (Tier I Capital to average assets) of 5% or
greater, and is not subject to a regulatory order, agreement, or directive
to meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier I risk-based capital of
4% or greater, and (generally) a Tier I leverage capital ratio of 4% or
greater, and the institution does not meet the definition of a well
capitalized institution. An institution is deemed to be
"undercapitalized" if it has a total risk-based capital ratio less than
8%, or a Tier I risk-based capital ratio less than 4%, or (generally) a
Tier I leverage ratio of less than 4%. An institution is deemed to be
"significantly undercapitalized" if it has a total risk-based capital
ratio less than 6%, or a Tier I risk-based capital ratio less than 3%, or
a Tier I leverage ratio less than 3%. An institution is deemed to be
"critically undercapitalized" if it has a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or less than
2%. Undercapitalized banks are subject to growth limitations and are
required to submit a capital restoration plan. If an undercapitalized
bank fails to submit an acceptable plan, it is treated as if it is
"significantly undercapitalized." Significantly undercapitalized banks
may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets, and cessation of receipt of deposits
from correspondent banks. "Critically undercapitalized" institutions may
not, beginning 60 days after becoming critically undercapitalized, make
any payment of principal or interest on their subordinated debt. The Bank
currently exceeds the regulatory definitions of a well capitalized
financial institution.
As a condition to the regulatory approvals incident to the Bank's
formation, the Bank is required to maintain a minimum leverage ratio of 8%
during the Bank's first three years of operation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle Act"), among other things, permits bank holding companies to
acquire banks in any state effective September 29, 1995. The Riegle Act
contains certain exceptions relative to acquisitions. For example, a
holding company may not acquire a bank that has not been in existence for
less than a minimum period established by the home state; however, the
minimum period cannot exceed five years. The Riegle Act makes a
distinction between interstate banking and interstate branching. Under
the Riegle Act, banks can merge with banks in another state beginning June
1, 1997, unless a state has adopted a law preventing interstate branching.
Under terms of the BHCA, an acquiring bank may not control more than 10
percent of federal or 30 percent of state total deposits of insured
depository institutions. Wisconsin law requires approval by the
Department for all acquisitions of Wisconsin banks, whether by an in-state
or out-of-state purchaser and requires, in an interstate acquisition, that
the acquired bank must have been in existence for at least five years.
Employees
The Company and the Bank together employ seventeen full-time and six part-
time employees, including five personal bankers, an investment officer,
four operations specialists, six customer service representatives, a
cashier, a business calling representative, two commercial loan officers,
a senior officer in charge of retail banking, a technology specialist and
the Bank president.
Directors and Executive Officers
The directors of the Company and the Bank as of March 2, 1998 were as
follows:
Name of Director Principal Occupation
Paul E. Menzel President and Chief Executive Officer of
the Company and the Bank
William R. Hayes Vice President and Treasurer of the
Company and Vice President,
Cashier/Controller of the Bank
Christine V. Lake Vice President and Secretary of the
Company and Executive Vice President and
Secretary of the Bank
Name of Director Principal Occupation
Charles N. Ackley Owner of C.N.A. Associates, Inc., a
company engaged in the sales
representation of manufacturers
Gregory J. Hoesly President of L.L. Richards Machinery Co.,
Inc., a machine tool dealer
John E. Horning Chairman of the Board and Chief Executive
Officer of Shorewest Realtors Inc.,
Wisconsin Mortgage Corporation, and
Heritage Title Service
William F. Krause, Jr. President of Krause Funeral Home, Inc.
Charles G. Niebler President of Eye Care Vision Centers
Frederick I. Olson Retired Professor of History at the
University of Wisconsin-Milwaukee and
former Associate Dean of the University's
College of Letters and Science
James E. Renner Owner of Renner Oldsmobile and Renner
Mitsubishi
Richard A. Streff Chairman of the Board of Streff
Advertising, Inc.
William J. Tetzlaff President of Tetzlaff Associates, Inc., a
consulting services company; President of
Advanced Plastics Technology, Inc., a
distribution company; Vice President of
Executive Travel Services, Ltd., a travel
agency
The executive officers of the Company and the Bank as of March 2, 1998
were as follows:
Name of Executive Officer Position
Paul E. Menzel President and Chief Executive Officer of
the Company and the Bank
William R. Hayes Vice President and Treasurer of the
Company and Vice President,
Cashier/Controller of the Bank
Christine V. Lake Vice President and Secretary of the
Company and Executive Vice President and
Secretary of the Bank
Item 2. Description of Property
The Company has leased space at 13925 West North Avenue, Brookfield,
Wisconsin for use as the Bank's main office and the Company's
headquarters. The lease has a five-year term with renewal and purchase
options. The Bank's main office occupies approximately 5,000 square feet
of a larger shopping mall which houses various retail establishments.
The Bank opened its drive-up branch on January 2, 1997. The branch is
located in a turn-of-the-century schoolhouse building, which has been
renovated to house a branch banking facility. The Company owns this
facility, which is located on approximately one acre of land at 15565 W.
North Avenue, Brookfield, Wisconsin and has approximately 1,057 square
feet of space. It provides four drive-up kiosks and room for one drive-up
automated teller machine.
Item 3. Legal Proceedings
Neither the Company nor the Bank is party to any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the shareholders of the Company for a
vote during the fourth quarter of the year ended December 31, 1997.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock has traded in the over-the-counter market since
the completion of the company's initial public offering in November 1995.
High and low bid prices, as reported on the OTC Bulletin Board, for each
quarter within the last two fiscal years are as follows:
1996 High Low
1st Quarter $10.75 $10.05
2nd Quarter 11.50 10.438
3rd Quarter 12.375 11.25
4th Quarter 12.875 12.00
1997 High Low
1st Quarter $14.00 $13.25
2nd Quarter 15.75 13.875
3rd Quarter 16.25 14.50
4th Quarter 17.75 16.00
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. Fiscal
1997 quotations do not include intra-day highs and lows. On December 31,
1997, there were approximately 40 owners of record and approximately 600
beneficial owners of the Company's common stock.
No cash dividends have been declared to date on the Company's common
stock. The Company expects that all earnings, if any, will be retained to
finance the growth of the Company and the Bank and that no cash dividends
will be paid for the foreseeable future. If and when dividends are
declared, the Company will be dependent upon dividends paid to it by the
Bank for funds to pay dividends on the common stock.
Wisconsin banking laws restrict the payment of cash dividends by state
banks by providing that (i) dividends may be paid only out of a bank's
undivided profits, and (ii) prior consent of the Department is required
for the payment of a dividend which exceeds the current year's income if
dividends declared have exceeded net profits in either of the two
immediately preceding years. The various bank regulatory agencies have
authority to prohibit a bank regulated by them from engaging in an unsafe
or unsound practice. The payment of a dividend by a bank could, depending
upon the circumstances, be considered such an unsafe or unsound practice.
In the event that (i) the FDIC or the Department should increase minimum
required levels of capital; (ii) the total assets of the Bank increase
significantly; (iii) the income of the Bank decreases significantly; or
(iv) any combination of the foregoing occurs, then the Board of Directors
of the Bank may decide or be required by the FDIC or the Department to
retain a greater portion of the Bank's earnings to achieve or maintain the
required capital. In addition to the foregoing, Wisconsin corporations
such as the Company are prohibited by the Wisconsin Business Corporation
Law from paying dividends while they are insolvent or if the payment of
dividends would render them unable to pay debts as they come due in the
usual course of business.
Item 6. Plan of Operation and Management's Discussion and Analysis
Plan of Operation
Market Area. The Company selected its market location because the area
has a demographic profile with a large number of people that management
believes are most likely to become long-term, high-value customers. The
Company is beginning to realize the potential of the demographic profile
of these residents.
The Bank's main office is in Brookfield, Wisconsin and its primary market
area is divided almost equally between Elm Grove, Brookfield and
Wauwatosa, Wisconsin. Per capita income and median home values in 1990
were almost three times the Wisconsin average in Elm Grove, almost two
times the state average in Brookfield, and almost one and a half times the
state average in Wauwatosa. The Bank's primary market area also has a
mature population. As of 1990, the percentage of residents 65 years or
older was 12.6% in Brookfield, 19.8% in Wauwatosa and 20.6% in Elm Grove,
compared to an overall national average of 12.6% of the total population.
Marketing and Sales. In 1997, the Bank committed to continue to
implement the Bank's business strategy of focusing on providing banking
services to targeted individuals and businesses within the Bank's market
area. This strategy has been implemented and has shown results. The Bank
has enjoyed significant growth by emphasizing its local management and
by providing a high level of personal service to customers, employing
technology that is enabling Bank personnel to provide individualized
service to customers on a cost-effective basis.
The Bank currently has 4,500 consumer and business deposit and loan
accounts from over 1,800 customers. The demographic make-up of those 1,800
customers continues to mirror the demographic make-up of what national
studies indicate to be among the most desirable customer relationships
available to banks.
The Bank's marketing efforts in 1997 in developing these relationships
were primarily through direct mail, telephone solicitations and referrals.
Throughout the year, the Bank sent approximately 18,000 pieces of direct
mail to persons residing in its primary market area and made over 4,700
personal contacts with customers and prospects. In addition to direct
marketing, the Bank gained a significant number of new relationships
through customer referrals.
Once an initial customer relationship is established with the Bank, the
Bank's sales force then pursues expansion of that relationship through the
sale of additional products and services. The Bank's salespeople manage a
portfolio of assigned clients and prospects, and their performance is
measured by the overall profitability of those relationships.
Recognizing that the future value of the Company's franchise is dependent
upon the quality of the Bank's customer base, the Bank invested heavily in
1996 in attracting long-term, high-value customers. The Bank spent
1997 attracting new relationships and expanding existing ones. The
significant improvement in the operating results of the Company is a
direct result of the effective implementation of these strategies.
Industry statistics show that retaining and expanding relationships with
the right customers is less costly, and therefore more profitable for
financial institutions.
In part through frequent contacts by the Bank's sales force, the Bank
succeeded in retaining 91% of its customer relationships during 1997.
The average household deposit size has grown from $30,000 to $37,000 and
average loan size has grown from $97,000 to $117,000, excluding secondary
market mortgage loans, indirect dealer loans and credit cards.
In an effort to expand customer satisfaction and profitability, the
Company has developed and implemented a database to track customer
financial goals, needs and banking preferences. This database allows each
employee to provide customers individualized service and product offerings
and to respond promptly to service requests, providing the level of
service each relationship dictates.
The application of current technology is becoming a priority within the
banking industry. Significant dollars are being spent to obtain and use
technology to allow financial institutions to communicate and operate with
increased efficiency. The Bank has invested in state-of-the-art
technology in an effort to provide better service to its customers and has
recognized improvement in earnings due partly to the effective use of
these systems.
Results of Operations.
During the fiscal year ended December 31, 1997, the Company reported a
profit of $41,633 or $.05 per share compared to a net loss of $1,271,070
or $1.52 per share for fiscal 1996. Although a loss in the second year of
operation was anticipated for a new banking venture, it is noteworthy to
indicate that the modest profit in 1997 resulted even after a loan loss
provision of $290,000.
Comparative information on results of operations between fiscal 1996 and
fiscal 1995 is not provided herein since the Bank commenced operations on
December 7, 1995, and, therefore, had only three weeks of operations during
fiscal 1995.
The Company's return on average equity and return on average assets during
fiscal 1997 and fiscal 1996 are as follows:
1997 1996
Return on average assets 0.01% -4.81%
Return on average equity 0.70% -19.97%
Dividend payout ratio on common stock None None
Average equity to average assets 11.98% 24.06%
Total interest income for the year ended December 31, 1997 increased to
$3,739,811 from $1,583,724 for the year ended December 31, 1996, an
increase of $2,156,087. This increase was primarily the result of greater
average outstanding balances in earning assets and improved yields. The
Company's earning assets grew by $20,207,554 or 52.40% in fiscal 1997
while the yield on total earning assets improved by 1.59%, from 6.51%
to 8.10%. Interest income consisted primarily of interest on loans
(including loan fees), federal funds sold, securities and interest-
bearing deposits at other financial institutions. Management anticipates
that interest income will continue to grow as the Bank's loan portfolio
and other assets increase.
The following table summarizes the distribution of the Company's loans at
December 31, 1997 and December 31, 1996.
December 31,
1997 1996
Commercial $14,158,697 $ 6,967,836
Real Estate:
Construction 4,640,119 2,565,144
Commercial 13,474,318 4,632,272
Residential 10,877,347 4,634,990
Installment and 3,108,540 585,855
Consumer
----------- -----------
Total Loans $46,259,201 $19,386,097
Interest expense increased to $2,126,065 in fiscal 1997 from $1,025,524 in
fiscal 1996, an increase of $1,100,541. Interest expense primarily
represents interest paid to depositors. The increase in expense was due
to greater average outstanding balances in interest bearing liabilities,
primarily deposits. The yield on interest bearing liabilities decreased
by .22% from 5.75% in 1996 to 5.53% in 1997.
Set forth below is a summary of the Company's average deposits and
interest paid on such deposits during fiscal 1997 and fiscal 1996.
<TABLE>
<CAPTION>
1997 Rate Paid 1996 Rate Paid
<S> <C> <C> <C> <C>
Non interest-bearing demand $4,363,343 -- $2,086,618 --
Interest-bearing demand 827,094 1.76% 444,072 1.76%
Money Market demand 18,266,062 5.27% 8,316,058 5.69%
Savings deposits 827,824 2.93% 326,895 2.89%
Time deposits 18,506,745 6.07% 8,763,340 6.11%
Purchased Funds 9,603 6.12% 0 0.00%
---------- ------- --------- -----
Total Deposits $42,800,671 5.53% $19,936,983 5.75%
Set forth below is a schedule of the maturities for the Company's time deposits of $100,000 or more.
</TABLE>
Over 3 Over 6
3 Months mos. mos.
or less thru 6 thru 12 Over 12
mos. mos. mos.
Certificates of $ 1,825,000 $ 309,366 $ 3,289,460 $ 106,517
Deposit
Total $ 1,825,000 $ 309,366 $ 3,289,460 $ 106,517
Net interest income rose from $558,200 for the year ended December 31,
1996 to $1,613,746 for the year ended December 31, 1997, an increase of
$1,055,546 or 189.1%. Net interest income represents the difference
between interest income earned on earning assets and interest expense paid
on interest bearing liabilities.
The following table sets forth an analysis of the interest rates and
interest differential of the Company's earning assets, which earn interest
income, and interest bearing liabilities, which accrue interest expense,
for fiscal 1996 and fiscal 1997. The interest margin increased to 3.49%
in 1997 from 2.29% in 1996 as the average cost of interest bearing
liabilities declined and the average yield on total earning assets
improved.
<TABLE>
<CAPTION>
1997 1996
Average Related Yield Average Related Yield
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits in bank $ 177,939 15,740 8.85% $680,715 37,226 5.47%
Investments (taxable) 9,439,985 546,627 5.79% 5,171,489 289,707 5.60%
Investments (nontaxable) 0 0 0 0
Funds sold 3,556,986 195,211 5.49% 11,642,626 614,803 5.28%
Loans (a) 33,004,074 2,982,233 9.04% 6,833,651 641,988 9.39%
---------- --------- ------ ---------- -------- -----
Total Earning assets $46,178,984 $3,739,811 8.10% $24,328,480 1,583,724 6.51%
========== ========= ====== ========== ======== =====
Interest-bearing liabilities:
NOW accounts $ 827,094 14,547 1.76% $444,072 7,818 1.76%
Savings accounts 827,824 24,285 2.93% 326,895 9,460 2.89%
Money Market accounts 18,266,062 963,322 5.27% 8,316,058 472,769 5.69%
Time deposits 18,506,746 1,123,323 6.07% 8,763,340 535,477 6.11%
Purchased Funds 9,603 588 6.12% 0 0 0.00%
---------- --------- ----- --------- ------- -----
Total Interest-bearing
liabs $ 38,434,329 2,126,065 5.53% $17,850,366 1,025,524 5.75%
=========== ========= ===== ========== ========= =====
Interest spread $ 1,613,746 2.57% $ 558,200 0.76%
========= ===== ======== =====
Interest margin $ 1,613,746 3.49% $ 558,200 2.29%
========= ===== ======== =====
----------
(a) No loans have been placed on nonaccrual. Loan interest income includes net
loan fees.
</TABLE>
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest
expense for the period indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume), (iii) changes
attributable to changes in rate/volume (changes in rate multiplied by
changes in volume), and (iv) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately
to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,1996
Compared to
Year Ended December 31,1997
Increase (Decrease) Due To
Volume Rate Rate/Volume Net
<S> <C> <C> <C> <C>
Earning assets:
Time deposits in bank $(27,502) $ 23,008 $ (16,992) $ (21,486)
Investments(taxable) 239,036 9,774 8,110 256,920
Investments(nontaxable) 0 0 0 0
Funds sold (426,922) 24,450 (17,120) (419,592)
Loans 2,457,403 (23,918) (93,241) 2,340,243
--------- --------- --------- ----------
Total Earning $2,242,015 $ 33,314 $ (119,243) $ 2,156,085
assets ========= ========== =========== ==========
Interest-bearing
liabilities:
NOW accounts $ 6,729 $ 0 $ 0 $ 6,729
Savings accounts 14,477 131 217 14,825
Money Market deposit
accounts 566,155 (34,927) (40,675) 490,553
Time deposits 595,322 (3,505) (3,971) 587,845
Purchased funds 0 0 588 588
---------- --------- ---------- ---------
Total
interest-bearing
liabilities $ 1,182,683 $ (38,302) $ (43,841) $ 1,100,540
--------- ----------- ------------ ----------
Net change in net
interest income $ 1,059,331 $ 71,616 $ (75,402) $ 1,055,545
========= =========== ============ ==========
</TABLE>
The provision for loan losses is based on management's evaluation of
factors such as the local and national economy and the risk associated
with the loans in the portfolio. The Company's reserve for loan losses
was $624,740 at December 31, 1997 compared to $334,740 at December 31, 1996.
Of the provision, $290,000 was charged against earnings in 1997 and
$325,740 was charged against earnings in 1996. As of December 31, 1997,
the Company's loan loss reserve was 1.35% of outstanding loans compared to
1.73% at December 31, 1996. Set forth below is an analysis of the Company's
provision for loan losses.
1997 1996
Beginning loan loss reserve $ 334,740 $ 9,000
Charge-offs:
Commercial 0 0
Real Estate:
Construction 0 0
Commercial 0 0
Other Mortgages 0 0
Installment-consumer 0 0
Recoveries:
Commercial 0 0
Real Estate:
Construction 0 0
Commercial 0 0
Other Mortgages 0 0
Installment-consumer 0 0
---------- ---------
Net Charge-offs 0 0
Additions charged to operations 290,000 325,740
---------- ---------
Balance at end of period $ 624,740 $ 334,740
========== =========
For each year ending December 31, the determination of the additions to
loan loss reserve charged to operating expenses was based on an evaluation
of the loan portfolio, current domestic economic conditions, and other
factors.
Management believes that the majority of risk in the Bank's loan portfolio
lies in commercial loans, which include commercial real estate and
construction loans. Accordingly, the Bank has allocated $382,317 or 61%
of the reserve for loan losses to these loans, which comprise about 69% of
the loan portfolio. The Bank has allocated $10,919 or about 2% of the
reserve for loan losses to residential mortgages, which comprise about 24%
of the loan portfolio. Consumer loans comprise about 7% of the loan
portfolio, and $31,959 or about 5% of the reserve for loan losses is
allocated to consumer loans. The Bank has allocated $6,385 of the reserve
for loan losses to unfunded loan commitments, which total approximately
$12,769,278. The balance of the reserve for loan losses or $193,160 is
unallocated.
There were no loan charge-offs or recoveries or any impaired loans during
1997. The Bank evaluated the adequacy of the reserve for loan losses
based on an analysis of specific problem loans, as well as on an aggregate
basis. The reserve for loan losses is maintained at a level management
considers adequate to provide for potential future losses. The following
table summarizes the Company's nonperforming loans as of December 31, 1997
and December 31, 1996.
December 31,
1997 1996
Nonaccrual Loans 0.00 0.00
Past Due 90 Days+ (1) 0.00 0.00
Restructured Loans (2) 0.00 0.00
(1) Loans are generally placed on nonaccrual status when
contractually past due 90 days or more.
(2) There were no restructured loans for each of the presented
years.
Each of the loans which becomes contractually past due 90 days or more as
to principal or interest payments will be reviewed by management and
reported to the Loan Committee of the Board of Directors of the Bank.
These loans would then be placed on a nonaccrual basis.
As of December 31, 1997, management, to the best of its knowledge, is not
aware of any significant loans, group of loans or segments of the loan
portfolio not included above, where there are serious doubts as to the
ability of the borrowers to comply with the present loan payment terms.
Other operating income was $696,945 for fiscal 1997 compared to $52,855
for fiscal 1996, an increase of $644,090 or 1,218.6%. Other operating
income consisted of service charges on deposit accounts, merchant credit
card processing services, commission income generated by the investment
center and gains on the sale of securities. The increased operating income
for fiscal 1997 was in large part due to a gain of $571,382 from the sale
of securities.
Operating expenses consisted primarily of salaries and benefits, occupancy
and equipment expenses, data processing fees, marketing expenses,
professional fees and other expenses. Operating expenses for fiscal 1997
were $1,944,782 compared to $1,555,451 for fiscal 1996, an increase of
$389,331 or 25.0%. The primary increase came in the area of salaries and
benefits which increased by $301,759 or 41.9%. This increase occurred
primarily as a result of the addition of a commercial lender, two new
retail banking officers, staffing the new drive-up facility and the
president drawing a full year's salary. Occupancy and equipment expenses
increased by $57,739 or 19.3% and other expenses increased by $29,832 or
5.6% primarily due to the opening of the drive-thru branch.
In fiscal 1997, the Bank's FDIC premiums were assessed at $3,263 as
required by federal law.
Financial Condition.
The Bank reported total assets of $65,103,697 at December 31, 1997, an
increase of $23,298,163 or 55.7% from December 31, 1996.
Cash and due from banks was $2,671,050 at December 31, 1997 compared to
$1,494,243 at December 31, 1996 and represents cash maintained at the
Bank and funds that the Bank and the Company have deposited in other
financial institutions. The Bank reported $7,994,000 of Federal Funds
sold on December 31, 1997 and $13,259,000 on December 31, 1996, which are
inter-bank funds with daily liquidity. The Bank's loan-to-deposit funds
ratio on December 31, 1997 was 79% compared to 54% on December 31, 1996.
The Bank's investment portfolio decreased from $6,057,419 as of December
31, 1996 to $5,127,501 at December 31, 1997 as a result of maturing
securities. A portion of these securities was originally purchased with
the intent to hold the securities until they mature. Another portion of
the securities was placed in the available for sale category as the
securities may be liquidated to provide cash for operating or financing
purposes. As of December 31, 1997 and December 31, 1996, the book value of
U.S. Treasuries, U.S. Government agencies and corporate securities were
$5,122,404 and $6,031,688 respectively. The following table summarizes the
maturities of those securities:
<TABLE>
<CAPTION>
1 Year or After 1 year After 5 After 10 Total
less through 5 years years
years through 10
years
<S> <C> <C> <C> <C> <C>
Available for Sale Securities:
U. S. Treasury and other
U. S. Govt. agencies
and corporations $ 250,234 $501,124 $ 0 $ 0 $ 751,406
Weighted average yield 6.19% 6.63% 0.00% 0.00% 6.48%
Corporate Securities 123,000 0 0 0 123,000
Weighted average yield 0.00% 0.00% 0.00% 0.00% 0.00%
Total Available For Sale $ 373,234 $ 501,124 $ 0 $ 0 $ 874,406
---------- --------- ------ --------- ---------
Weighted Avg. Yield of
Total 4.15% 6.63% 0.00% 0.00% 5.57%
Held to Maturity Securities:
U. S. Treasury and other
U. S. Govt. agencies
and corporations $1,501,498 $ 2,251,597 $500,000 $ 0 $4,253,095
Weighted average yield 6.15% 6.87% 7.00% 0.00% 6.63%
Total Held to Maturity $1,501,498 $ 2,251,597 $500,000 $ 0 $4,253,095
---------- ----------- -------- ---------- ----------
Weighted Avg. Yield of 6.15% 6.87% 7.00% 0.00% 6.63%
Total
Total Securities $1,874,732 $2,752,769 $500,000 $ 0 $5,127,501
========= ========== ======== ========== ==========
Weighted Avg. Yield of 5.75% 6.83% 7.00% 0.00% 6.45%
Total
</TABLE>
Amortized costs and fair values of available for sale securities are
discussed in Notes D and E, respectively, to the Company's Consolidated
Financial Statements.
Loans prior to the allowance for loan losses increased from $19,386,097 at
December 31, 1996 to $46,259,021 at December 31, 1997, an increase of
$26,872,924 or 139%. In addition to the $46,259,000 in loans outstanding
that the Bank reported on December 31, 1997, the Bank had unfunded loan
commitments of $12,769,000. Also, during fiscal 1997 the Bank
originated $4,101,128 in mortgage loans sold in the secondary market.
The Company's allowance for estimated loan losses was $624,740, or 1.35%
of loans at December 31, 1997 compared to $334,740, or 1.73% of loans at
December 31, 1996. See AResults of Operations.
The Company's office building, leasehold improvements and equipment less
accumulated depreciation and amortization decreased to $1,403,082 at
December 31, 1997 from $1,511,222 at December 31, 1996. On December 31,
1997 the Bank had in Other Real Estate Owned $1,262,489 which is
represented by 24 fully improved residential lots. The Bank entered into a
contract for the exclusive build-out of those lots by an area builder. In
addition, the Company has on its books as an asset three homes with a
value of $512,000. These lots and homes are carried by the Company as
Other Real Estate Owned as a result of a real estate loan extended by the
Bank with an original principal amount of $650,000 secured by these real
estate assets. This loan was placed in nonaccrual in the second quarter of
1997. The entity owning the underlying real estate assets securing this
loan filed for bankruptcy in the third quarter of 1997. The Bank
purchased these real estate assets from the bankruptcy court on October
27, 1997 for an additional $953,790. All of this real estate has been
placed for sale. The Bank currently anticipates that the three houses
will be sold in fiscal 1998, producing proceeds of approximately $512,000,
and that the remaining parcels of land will be liquidated over a two year
period.
Accrued interest receivable on loans and other assets increased to
$495,109 at December 31, 1997 compared to $247,656 at December 31, 1996.
The Bank experienced significant deposit growth during fiscal 1996 and
fiscal 1997. Total deposits increased by $22,818,965 from $35,668,660 as
of December 31, 1996 to $58,487,625 on December 31, 1997.
Accrued interest payable and other liabilities of $752,772 at December 31,
1997 compared to $268,869 at December 31, 1996 were made up of accrued
interest payable on deposit accounts and accounts payable.
Capital Resources. The Bank's most recent notification as of April 28,
1997 from the Department categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, the Bank must maintain the minimum total risk-based,
Tier I risk-based, and leverage ratios as set forth in "Description of
Business--Supervision and Regulation." There have been no conditions or
events since these notifications that management believes will change the
Bank's classification. See Note Q to the Company's Consolidated Financial
Statements.
The Company has made a commitment to the Federal Reserve Bank of Chicago
that it will not incur any debt until December 7, 2000, without prior
approval from the Federal Reserve System. The Bank has committed to the
FDIC that it will maintain a Tier I capital to total asset ratio of not
less than 8% for its first three years of operations starting
December 7, 1995.
Asset/Liability Management. The principal function of asset/liability
management is to manage the balance sheet mix, maturities, repricing
characteristics and pricing components to provide an adequate and stable
net interest margin with an acceptable level of risk over time and through
interest rate cycles.
Interest-sensitive assets and liabilities are those that are subject to
repricing within a specific relevant time horizon. The Company measures
interest-sensitive assets and liabilities and their relationship with each
other at terms of immediate, quarterly intervals up to one year and over
one year.
Changes in net interest income, other than volume related changes, arise
when interest rates on assets reprice in a time frame or interest rate
environment that is different from the repricing period for liabilities.
Changes in net interest income also arise from changes in the mix of
interest earning assets and interest-bearing liabilities.
The following table summarizes the maturities and sensitivity to
changes in interest rates of the Company's loan portfolio at
December 31, 1997.
<TABLE>
<CAPTION>
Loan Maturities Amount over one year with
1 year After 1 After 5 Predetermined Floating or adj.
or less through 5 years Total rates interest rates Total
years
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $16,069,000 13,526,000 184,000 $29,779,000 14,688,000 2,139,000 $16,827,000
Real estate-construction 749,000 703,000 0 1,452,000 0 0 0
----------- ---------- -------- ---------- ---------- --------- ----------
TOTAL $16,818,000 14,229,000 184,000 $31,231,000 14,688,000 2,139,000 $16,827,000
=========== ========== ======== ========== ========== ========= ==========
</TABLE>
The Company's strategy with respect to asset/liability management is to
maximize net interest income while limiting exposure to potential downward
movement. This strategy is implemented by the Bank's management, which
takes action based upon its analysis of the Bank's present positioning,
its desired future positioning, economic forecasts, and its goals. The
Company' s goal is to maintain a cumulative GAP of +or- 25% of assets at
the 0 to 359 day time frame.
The following table summarizes the repricing opportunities as of December
31, 1997 for each major category of interest-bearing asset and interest-
bearing liability:
(Millions) 0-89 90-179 180-359 +360 Total
Days Days Days Days
Investments $0.1 1.0 .8 3.2 5.1
Loans $21.6 4.6 13.5 6.5 46.2
Total Rate $21.7 5.6 14.3 9.7 51.3
Sensitive Assets
Rate Sensitive $34.1 1.7 13.9 1.5 51.2
Liabilities (1)
GAP (12.4) 3.9 .4 8.2
Cumulative GAP (12.4) (8.5) (8.1) .1
GAP/Rate (0.6%) (31.0%) (19.0%) (0.0%)
Sensitive Assets
(1) Savings, NOW, and Money Market Demand Deposits are considered
as immediately repricable.
Liquidity. For banks, liquidity generally represents the ability to meet
withdrawals from deposits and the funding of loans. The assets that
provide liquidity are cash, federal funds sold and short-term loans and
securities. Liquidity needs are influenced by economic conditions,
interest rates and competition. Management believes that current
liquidity levels are sufficient to meet future demands. Management
believes the current liquidity position of the Bank allows it opportunity
to expand the Bank's loan portfolio and account for any deposit
withdrawals which may occur. As of December 31, 1997 the Bank had
$11,543,643 available to meet future demand.
Impact of Inflation and Changing Prices. Unlike most industries,
essentially all of the assets and liabilities of a bank are monetary in
nature. As such, the level of prices has less effect than do interest
rates. Prices and interest rates do not always move in the same
direction. The Company's consolidated financial statements and notes are
generally prepared in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to
inflation.
Year 2000 Matters. Many computer programs use two digits rather than four
to describe a year in a date field. As a result, certain of these
programs will experience malfunctions associated with the turning of the
year 2000. The Bank has appointed a committee to conduct an assessment
and recommend methods of remediation of internal and external year 2000
software concerns. This committee reports to the Board of Directors on a
regular basis. While the Company expects to incur certain costs
associated with becoming fully operable during the year 2000, the Company
does not anticipate those costs to be material or to have a material
affect on the business or results of operation of the Company or the Bank.
The committee has contacted certain outside service providers used by the
Bank to perform data processing and other services to determine the status
of those vendors' year 2000 compliance processes, and has generally been
informed that such vendors have undertaken review and remediation of
potential year 2000 issues. However, there can be no assurance that such
vendors will not experience system malfunctions associated with the year
2000 which could have a material adverse effect on the Company's results
of operations. The Company expects its internal operations to be year
2000 compliant by early 1999.
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Average Balance Sheet
1997 1996
<S> <C> <C>
Cash and due from banks $1,411,013 $ 900,071
Federal funds sold and securities purchased under 3,556,986 11,642,626
agreement to resell
Interest-bearing deposits in other banks 72,096 680,715
Investment securities:
U.S. Treasury agency
and other 9,439,985 5,171,489
Unrealized Gain (Loss) on securities
Loans:
Real estate mortgages 8,527,547 709,204
Consumer-net 2,094,599 1,901,982
Commercial and other 22,381,928 4,264,643
---------- ---------
Total 33,004,074 6,875,829
Less allowance for loan losses 335,534 42,178
Net loans 32,668,540 6,833,651
Fixed assets 1,475,555 1,087,955
Other real estate owned 416,353 0
Other assets 389,910 133,839
---------- ---------
Total assets $ 49,425,438 $26,450,345
========== ==========
Interest-bearing deposits:
NOW accounts $ 827,094 $ 444,072
Savings accounts 827,824 326,895
Money Market deposit accounts 18,266,062 8,316,058
Time deposits 18,506,745 8,763,340
----------- ----------
Total interest-bearing deposits 38,427,725 17,850,366
Demand deposits 4,363,343 2,086,618
Total deposits 42,791,068 19,936,983
Other liabilities 714,924 148,611
----------- ----------
Total liabilities 43,505,992 20,085,594
Equity capital 5,919,446 6,364,750
----------- ----------
Total liabilities and capital $ 49,425,438 $26,450,345
=========== ==========
</TABLE>
<PAGE>
Item 7. Financial Statements
Page
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . 21
Consolidated Statement of Changes in Stockholders' Equity. . . . . . . 22
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
RidgeStone Financial Services, Inc.
Brookfield, Wisconsin
We have audited the accompanying consolidated balance sheets of RidgeStone
Financial Services, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, statements of comprehensive income,
changes in stockholders' equity, and cash flows for the years ended
December 31, 1997 and 1996 and period from March 31, 1995 through December
31, 1995. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
RidgeStone Financial Services, Inc. as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for the years ended
December 31, 1997 and 1996 and period from March 31, 1995 through December
31, 1995, in conformity with generally accepted accounting principles.
As described in Note B to the financial statements, the 1996 and 1995
financial statements have been restated to reflect the adoption of FASB
No. 130.
/s/ CONLEY MCDONALD LLP
Brookfield, Wisconsin
January 30, 1998
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
Cash and due from banks (Note C) $ 2,671,050 $ 1,494,243
Federal funds sold 7,994,000 13,259,000
Interest-bearing deposits in banks 4,185 184,637
---------- ----------
Cash and cash equivalents 10,669,235 14,937,880
Available for sale securities stated
at fair value (Note D) 874,406 1,051,813
Held to maturity securities, fair value of
$4,298,356 and $5,041,826 in 1997 and
1996 respectively (Note E) 4,253,095 5,005,606
Loans, less allowance for loan losses of
$624,740 and $334,740 in 1997 and 1996
respectively (Notes F, G and O) 44,933,031 18,206,257
Mortgage loans held for sale 701,250 845,100
Office building, leasehold improvements and
equipment, net (Note H) 1,403,082 1,511,222
Other real estate 1,774,489 -
Accrued interest receivable and other assets 495,109 247,656
---------- ----------
Total assets $65,103,697 $41,805,534
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits: (Note I)
Demand $ 7,296,264 $ 3,365,496
Savings and NOW accounts 28,221,885 17,282,081
Other Time 22,969,476 15,021,083
---------- -----------
Total deposits 58,487,625 35,668,660
Accrued interest payable and other
liabilities 752,772 268,869
---------- -----------
Total liabilities 59,240,397 35,937,529
---------- -----------
Commitments and contingencies (Notes M,
N and S)
Stockholders' equity: (Note P)
Common stock, no par value; 1,000,000
shares unauthorized, 834,340 shares
issued and outstanding (Note P) 7,721,399 7,721,399
Retained deficit (Notes Q, R and S) (1,837,493) (1,879,126)
---------- ----------
5,883,906 5,842,273
Accumulated other comprehensive
income (loss) - (20,606) 25,732
---------- ----------
Total stockholders' equity 5,863,300 5,868,005
---------- ----------
Total liabilities and stockholders'
equity $ 65,103,697 $ 41,805,534
=========== ==========
See Notes to Consolidated Financial Statements.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31, 1997 and 1996
and Period from March 31, 1995 through December 31, 1995
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans (Note F) $2,982,233 $ 641,988 $ 4,927
Interest on securities - taxable 546,627 289,707 -
Interest on federal funds sold 195,211 614,803 20,307
Interest on deposits in banks 15,740 37,226 6,156
---------- ---------- -----------
Total interest income 3,739,811 1,583,724 31,390
---------- ---------- -----------
Interest expense:
Interest on deposits (Note J) 2,125,477 1,025,524 4,055
Interest on federal funds purchased 588 - -
---------- ---------- -----------
Total interest expense 2,126,065 1,025,524 4,055
---------- ---------- -----------
Net interest income before provision for loan losses 1,613,746 558,200 27,335
Provision for loan losses (Note G) 290,000 325,740 9,000
---------- ---------- -----------
Net interest income after provision for loan losses 1,323,746 232,460 18,335
---------- ---------- -----------
Other operating income:
Service charges on deposit accounts 24,418 7,829 335
Gain on sale of securities, net (Note D) 571,382 22,500 -
Other 101,145 22,526 -
---------- ---------- -----------
Total other operating income 696,945 52,855 335
---------- ---------- -----------
Other operating expenses:
Salaries and employee benefits (Note L) 1,021,304 719,544 39,220
Occupancy expenses (Notes H and M) 205,833 130,901 10,375
Equipment expenses (Note H) 150,507 167,700 -
Professional fees 137,767 92,889 -
Data processing fees 91,346 80,632 -
Other 338,025 363,785 1,682
Pre-opening expenses (Notes S and T) - - 575,449
----------- ----------- ------------
Total other operating expenses 1,944,782 1,555,451 626,726
----------- ----------- ------------
Income (loss) before income taxes 75,909 (1,270,136) (608,056)
Less applicable income taxes (Note K) 34,276 934 -
----------- ----------- ------------
Net income (loss) $ 41,633 $(1,271,070) $ (608,056)
=========== =========== ============
Earnings (loss) per share:
Basic $ 0.05 $ (1.52) $ (0.73)
=========== =========== ============
Diluted $ 0.05 $ (1.52) $ (0.73)
=========== =========== ============
Weighted average shares outstanding 834,340 834,340 834,340
=========== =========== ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income (loss) $ 41,633 $ (1,271,070) $ (608,056)
--------- ---------- -----------
Other comprehensive income, net of taxes:
Unrealized gains (losses) arising during period (12,338) 25,732 --
Less reclassified adjustment for
gains included in net income (34,000) -- --
--------- ---------- ----------
Total other comprehensive income (46,338) 25,732 --
--------- ---------- ----------
Comprehensive income $ (4,705) $ (1,245,338) $ (608,056)
========= ========== ==========
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<CAPTION>
Years ended December 31, 1997 and 1996
and Period from March 31, 1995 through December 31, 1995
Accumulated
other Total
Common Retained comprehensive stockholders'
stock deficit income (loss) equity
<S> <C> <C> <C> <C>
Balance, March 31, 1995 $ - $ - $ - $ -
Proceeds from sale of 834,340 shares of common
stock, net of stock offering costs (Note O) 7,721,399 - - 7,721,399
Net loss - (608,056) - (608,056)
----------- ---------- ---------- ---------
Balance, December 31, 1995 7,721,399 (608,056) - 7,113,343
Net loss - (1,271,070) - (1,271,070)
Other comprehensive income - change
in unrealized gain on securities - - 25,732 25,732
----------- ---------- ---------- ----------
Balance, December 31, 1996 7,721,399 (1,879,126) 25,732 5,868,005
Net income - 41,633 - 41,633
Other comprehensive income - change in
unrealized gain (loss) on securities - - (46,338) (46,338)
----------- ---------- ---------- ----------
Balance, December 31, 1997 $ 7,721,399 $(1,837,493) $ (20,606) $5,863,300
=========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
and Period from March 31, 1995 through December 31, 1995
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 41,633 $ (1,271,070) $ (608,056)
----------- ------------ -------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 184,473 182,032 96,689
Provision for loan losses 290,000 325,740 9,000
Gain on sale of investment securities (571,382) (22,500) -
Amortization and accretion of bond premiums
and discounts - net (1,752) - -
Amortization of organizational costs 2,120 2,275 519
(Increase) decrease in assets:
Interest receivable (227,625) (200,631) (2,483)
Other assets (21,948) 2,352 (49,688)
Increase in liabilities:
Accrued interest 260,671 250,002 3,921
Other liabilities 223,232 13,418 1,528
--------- -------- --------
Total adjustments 137,789 552,688 59,486
--------- -------- --------
Net cash provided by (used in) operating
activities 179,422 (718,382) (548,570)
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 2,701,397 9,335,817 -
Purchase of available for sale securities (1,994,683) (10,339,643) -
Proceeds from maturities of held to maturity securities 750,000 500,000 -
Purchase of held to maturity securities - (5,505,361) -
Purchase of office building, leasehold improvements
and equipment (76,333) (636,516) (1,153,427)
Net expenditures on other real estate (1,125,790) - -
Net increase in loans (27,521,623) (18,656,327) (729,770)
--------- ---------- ---------
Net cash used in investing activities: (27,267,032) (25,302,030) (1,883,197)
---------- ---------- ---------
Cash flows from financing activities:
Net increase in deposits 22,818,965 32,360,129 3,308,531
Proceeds from the issuance of common stock, net - - 7,721,399
Proceeds from notes payable - - 414,900
Payment of notes payable - - (414,900)
--------- ---------- ----------
Net cash provided by financing activities 22,818,965 32,360,129 11,029,930
--------- ---------- ----------
Increase (decrease) in cash and cash equivalents (4,268,645) 6,339,717 8,598,163
Cash and cash equivalents:
Beginning 14,937,880 8,598,163 -
---------- ---------- ----------
Ending $ 10,669,235 $ 14,937,880 $ 8,598,163
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 1,865,394 $ 775,522 $ 5,212
========= ========== ==========
Income taxes $ 30,096 $ 934 $ -
========= ========== ==========
Supplemental schedule of non-cash investing and
financing activities:
Net change in unrealized gain on
available for sale securities $ (46,338) $ 25,732 $ -
========= ========== ==========
Transfer of foreclosed assets from
loans to other assets $ 648,699 $ - $ -
========= ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
1. Consolidation:
The consolidated financial statements of RidgeStone Financial Services,
Inc. (the "Company") include the accounts of its wholly owned subsidiary,
RidgeStone Bank (the "subsidiary Bank"). The consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles and conform to general practices within the banking
industry. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
2. Nature of banking activities:
The consolidated income (loss) of the Company is principally from income
of its subsidiary. The subsidiary Bank grants commercial, installment and
residential loans and accepts deposits from customers primarily in
southeastern Wisconsin. The subsidiary Bank is subject to competition from
other financial institutions and nonfinancial institutions providing
financial products. Additionally, the Company and the subsidiary Bank are
subject to the regulations of certain regulatory agencies and undergo
periodic examinations by those regulatory agencies.
3. Basis of financial statement presentation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
4. Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and investments
with an original maturity of three months or less. Generally, federal
funds are sold for one-day periods.
The subsidiary Bank maintains amounts due from banks which, at times, may
exceed federally insured limits. The subsidiary Bank has not experienced
any losses in such accounts.
5. Available for sale securities:
Securities classified as available for sale are those debt securities that
the Company and its subsidiary Bank intend to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a
security classified as available for sale would be based on various
factors, including significant movements in interest rates, changes in the
maturity mix of the subsidiary Bank's assets and liabilities, liquidity
needs, regulatory capital consideration, and other similar factors.
Securities classified as available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
comprehensive income, net of the related deferred tax effect. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
6. Held to maturity securities:
Securities classified as held to maturity are those debt securities the
Company and its subsidiary Bank have both the intent and ability to hold
to maturity regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are carried at
cost, adjusted for amortization of premium and accretion of discount,
computed by the interest method over their contractual lives. The sale of
a security within three months of its maturity date or after collection of
at least 85 percent of the principal outstanding at the time the security
was acquired is considered a maturity for purposes of classification and
disclosure.
7. Loans:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the amount
of unpaid principal, reduced by the allowance for loan losses. Interest
on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. The accrual of interest
income on impaired loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to
meet payment of interest or principal when they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Cash
collections on impaired loans are credited to the loan receivable balance,
and no interest income is recognized on those loans until the principal
balance is current. Accrual of interest is generally resumed when the
customer is current on all principal and interest payments and has been
paying on a timely basis for a period of time.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized as an adjustment to interest income using
the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on the subsidiary Bank's historical prepayment
experience.
8. Mortgage loans held for sale:
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. All sales are made without recourse.
9. Allowance for loan losses:
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluation of the collectibility of loans
and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are
significant changes in economic conditions. Impaired loans (primarily
commercial loans) are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as
a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. A loan is
impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the
terms of the loan agreement.
In addition, various regulatory agencies periodically review the allowance
for loan losses. These agencies may require the subsidiary Bank to make
additions to the allowance for loan losses based on their judgments of
collectibility based on information available to them at the time of their
examination.
10. Office building, leasehold improvements and equipment:
Depreciable assets are stated at cost less accumulated depreciation.
Provisions for depreciation are computed on straight-line and accelerated
methods over the estimated useful lives of the assets, which are 39 years
for office building and leasehold improvements and 3 to 7 years for
equipment.
11. Foreclosed real estate:
Other real estate owned, acquired through partial or total satisfaction of
loans is carried at the lower of cost or fair value less cost to sell. At
the date of acquisition losses are charged to the allowance for loan
losses. Revenue and expenses from operations and changes in the valuation
allowance are included in loss on foreclosed real estate.
12. Profit-sharing plan:
The Company has established a trusteed contributory 401(k) profit-sharing
plan for qualified employees. The Company's policy is to fund
contributions as accrued.
13. Income taxes:
The Company files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax
benefits of those companies having taxable federal losses or credits are
reimbursed by the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes. The differences relate principally to the reserve for loan
losses, operating loss carryforwards and fixed assets. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized.
14. Off-balance-sheet financial instruments:
In the ordinary course of business, the subsidiary Bank has entered into
off-balance-sheet financial instruments consisting of commitments to
extend credit, commitments under credit card arrangements, commercial
letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded
or related fees are incurred or received.
15. Per share data:
Net income (loss) per common share data has been computed based upon the
weighted average number of shares outstanding during the period.
16. Fair value of financial instruments:
Financial Accounting Standards Board Statement No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
Listed on the following page are the methods and assumptions used by the
Company in estimating the fair value of its financial instruments:
Carrying amounts approximate fair values for the following
instruments:
Cash and cash equivalents
Federal funds sold
Accrued interest receivable
Accrued interest payable
Variable rate loans that reprice frequently where no
significant change in credit risk has occurred
Demand deposits
Variable rate money market accounts
Variable rate certificates of deposit
Available for sale securities
Quoted market prices:
Where available, or if not available, based on quoted market
prices of comparable instruments for the following instrument:
Held to maturity securities
Discounted cash flows:
Using interest rates currently being offered on instruments
with similar terms and with similar credit quality:
All loans except variable rate loans described above
Fixed rate certificates of deposit
Quoted fees currently being charged for similar instruments:
Taking into account the remaining terms of the agreements and
the counterparties' credit standing:
Off-balance-sheet instruments:
Guarantees
Letters of credit
Lending commitments
Since the majority of the Company's off-balance-sheet instruments consists
of nonfee-producing, variable rate commitments, the Company has determined
it does not have a distinguishable fair value.
Note B. Accounting Change
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, "Reporting Comprehensive Income", which requires all entities to
report comprehensive income in the financial statements. This Statement
is effective for fiscal years beginning after December 15, 1997 with early
adoption permitted. The Company has elected to early adopt FASB No. 130.
As provided by this Statement, 1996 and 1995 comparative financial
statements have been restated for the change in accounting principle.
Adoption of this Statement has no effect on total stockholders' equity.
Note C. Cash and Due from Banks
The Company's subsidiary Bank is required to maintain vault cash or
reserve balances with Federal Reserve Banks based upon a percentage of
deposits. These requirements approximated $58,000 at December 31, 1997.
At December 31, 1996, the subsidiary Bank was not required to maintain
vault cash or reserve balances with Federal Reserve Banks based upon a
percentage of deposits.
Note D. Available for Sale Securities
Amortized costs and fair values of available for sale securities as of
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses values
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 496,009 $ 2,350 $ - $ 498,359
Obligations of other U.S. government
agencies and corporations 250,000 3,047 - 253,047
----------- ---------- -------- ----------
746,009 5,397 - 751,406
Equity securities 149,003 1,000 27,003 123,000
----------- ---------- -------- ----------
$ 895,012 $ 6,397 $ 27,003 $ 874,406
=========== ========== ======== ==========
<CAPTION>
December 31, 1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses values
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 489,793 $ 8,709 $ 2,564 $ 495,938
Equity securities 536,288 26,775 7,188 555,875
----------- ---------- --------- ----------
$ 1,026,081 $ 35,484 $ 9,752 $ 1,051,813
=========== ========== ========= ==========
</TABLE>
The amortized cost and fair value of available for sale securities as of
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities in other equity
securities since the anticipated maturities are not readily determinable.
Therefore, these securities are not included in the maturity categories in
the following maturity summary:
December 31, 1997
Amortized Fair
cost value
Due in one year or less $ 249,495 $ 250,234
Due after one year through 5 years 496,514 501,172
---------- -----------
$ 746,009 $ 751,406
========== ===========
Realized gains and losses on sale of available for sale securities as of
December 31, 1997 and 1996 are as follows:
December 31,
1997 1996 1995
Proceeds from sales of available for
sale securities $2,701,397 $9,355,817 $ -
========== ========== =======
Gross gains on sales $ 574,885 $ 22,500 $ -
Gross losses on sales (3,503) - -
---------- ---------- -------
$ 571,382 $ 22,500 $ -
========== ========== =======
Related income taxes $ 34,276 $ - $ -
========== ========== =======
Note E. Held to Maturity Securities
Amortized costs and fair values of held to maturity securities as of
December 31, 1997 and 1996 are summarized as follows:
December 31, 1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $ 2,503,095 $ 22,764 $ - $2,525,859
Obligations of other U.S.
government agencies and
corporations 1,750,000 22,497 - 1,772,497
---------- --------- ------ ----------
$ 4,253,095 $ 45,261 $ - $4,298,356
========== ========= ====== ==========
December 31, 1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $ 2,757,325 $ 25,800 $ - $2,783,125
Obligations of other U.S.
government agencies and
corporations 2,248,281 10,850 (430) 2,258,701
---------- -------- ------- ---------
$ 5,005,606 $ 36,650 $(430) $5,041,826
========== ======== ======= =========
The amortized cost and fair value of held to maturity securities as of
December 31, 1997, by contractual maturity, are shown below.
December 31, 1997
Amortized Fair
cost value
Due in one year or less $ 1,501,498 $ 1,505,781
Due after one year through five years 2,251,597 2,279,725
Due after five years through ten years 500,000 512,850
---------- ----------
$ 4,253,095 $ 4,298,356
========== ==========
Note F. Loans
Major classifications of loans are as follows:
December 31,
1997 1996
Commercial $ 14,158,697 $ 6,967,836
Real estate:
Construction 4,640,119 2,565,144
Commercial 13,474,318 4,632,272
Residential 10,877,347 4,634,990
Installment and consumer 3,108,540 585,855
------------ ------------
46,259,021 19,386,097
Allowance for loan losses (624,740) (334,740)
------------ ------------
Net loans $ 45,634,281 $ 19,051,357
============ ============
There were no loans that were impaired at December 31, 1997 or 1996.
There was no interest income recognized on a cash basis during the years
ended December 31, 1997, 1996 or 1995.
Certain directors, executive officers and principal shareholders of the
Company, and their related interests, had loans outstanding in the
aggregate amounts of $3,969,100 and $1,223,122 at December 31, 1997 and
1996 respectively. During 1997, $3,569,336 of new loans were made with
$823,358 of repayments. These loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other persons and did not
involve more than normal risks of collectibility or present other
unfavorable features.
Note G. Allowance for Loan Losses
The allowance for loan losses reflected in the consolidated financial
statements represents the allowance available to absorb loan losses. An
analysis of changes in the allowance is presented in the following
tabulation:
December 31,
1997 1996
Balance, beginning $334,740 $9,000
Loans charged off - -
Recoveries on loans previously charged off - -
Provision charged to operations 290,000 325,740
-------- -------
Balance, ending $624,740 $334,740
======== =======
Note H. Office Building, Leasehold Improvements and Equipment
Office building, leasehold improvements and equipment are stated at cost
less accumulated depreciation and amortization and are summarized as
follows:
December 31,
1997 1996
Land $ 72,200 $72,200
Building and leasehold improvements 1,034,147 1,015,898
Furniture and equipment 756,869 701,845
--------- ---------
1,863,216 1,789,943
Less accumulated depreciation and
amortization 460,134 278,721
--------- ---------
Total office building, leasehold
improvements and equipment $1,403,082 $1,511,222
========= =========
Depreciation and amortization expense amounted to $184,473, $182,032 and
$96,689 in 1997, 1996 and 1995 respectively.
Note I. Deposits
The aggregate amount of other Time deposits (including CD's), each with a
minimum denomination of $100,000, was $5,530,343 and $2,712,309 in 1997
and 1996 respectively.
At December 31, 1997, the scheduled maturities of other Time deposits are
as follows:
1998 $ 21,443,687
1999 226,050
2000 267,515
2001 579,839
2002 452,385
-------------
$ 22,969,476
=============
Note J. Interest on Deposits
Interest expense on deposits is as follows:
December 31,
1997 1996 1995
Interest bearing demand accounts $ 14,547 $ 7,818 $ 112
Money market demand accounts 963,323 472,769 3,369
Savings deposits 24,285 9,460 36
Time, $100,000 and over 248,636 94,837 356
Time, under $100,000 874,686 440,640 182
--------- --------- -------
Total $2,125,477 $1,025,524 $4,055
========= ========= =======
Note K. Income Taxes
The provision for income taxes included in the accompanying consolidated
financial statements consists of the following:
December 31,
1997 1996 1995
Current taxes:
Federal $ - $ - $ -
State 34,276 934 -
------- ------- --------
34,276 934 -
------- ------- --------
Deferred income taxes (benefit):
Federal - - -
State - - -
------- ------- --------
- - -
------- ------- --------
Total provision for income taxes $ 34,276 $ 934 $ -
======= ======= ========
At December 31, 1997, the Company had a net operating loss carryforward
for income tax purposes of approximately $1,044,000 which, if not utilized
to reduce taxable income in future periods, will expire at December 31,
2011.
The following amounts make up the deferred tax assets and liabilities
reduced by a valuation allowance:
December 31,
1997 1996
Deferred tax assets:
Allowance for loan losses $ 144,502 $ 70,681
Depreciation 14,834 22,942
Start up costs 101,876 150,224
Net operating loss carryforward 412,467 496,684
Unrealized loss on available for sale
securities 7,000 -
Other 11,949 -
Deferred tax liabilities:
Unrealized gain on available for sale
securities - (1,016)
Other - (419)
Valuation (692,628) (739,096)
---------- --------
$ - $ -
========== =========
Note L. Profit-Sharing Plan
The Company established a 401(k) plan during 1996. The Company
contributed $28,700 and $16,650 in 1997 and 1996 respectively. There was
no contribution in 1995.
Note M. Facilities Lease
Lease expense for the years ended December 31, 1997, 1996 and 1995 was
$81,936, $88,771 and $41,275 respectively. The lease term which is
accounted for as an operating lease, expires on May 31, 2000, requires
monthly base rental payments of $6,828 and has two five-year renewal
options. The Company also has the option of purchasing the building upon
the fourth anniversary of the commencement of the lease for $1,000,000.
In connection with the lease of the subsidiary Bank's main office, the
Company paid broker's commissions to an entity whose principals are an
organizer of the subsidiary Bank and a director of the Company, in the
amount of $4,518, $6,584 and $2,425 in 1997, 1996 and 1995 respectively.
Additional commissions may be payable if the Company exercises its options
for further lease terms and if the Company later purchases the shopping
mall in which the subsidiary Bank premises are located.
Minimum future rental payments under the noncancelable operating lease
are:
Year ending December 31,
1998 $ 81,936
1999 81,936
2000 34,140
----------
Total minimum future rental payments $ 198,012
==========
Note N. Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the
consolidated financial statements.
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, financial guarantees and standby letters of credit. They involve,
to varying degrees, elements of credit risk in excess of amounts
recognized on the consolidated balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit
policies in making commitments and issuing letters of credit as it does
for on-balance-sheet instruments.
A summary of the contract or notional amount of the Company's exposure to
off-balance-sheet risk as of December 31 is as follows:
1997 1996
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit $ 12,031,882 $ 8,373,142
Credit card commitments $ 599,716 $ 297,615
Commercial letters of credit $ 137,680 $ 60,955
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property and equipment, and income-producing commercial properties.
Credit card commitments are unsecured.
The Company and the subsidiary Bank do not engage in the use of interest
rate swaps, futures, forwards or option contracts.
Note O. Concentration of Credit Risk
Practically all of the subsidiary Bank's loans, commitments, and
commercial and standby letters of credit have been granted to customers in
the subsidiary Bank's market area. Although the subsidiary Bank has a
diversified loan portfolio, the ability of its debtors to honor their
contracts is dependent on the economic conditions of the counties
surrounding the subsidiary Bank. The concentration of credit by type of
loan are set forth in Note F.
Note P. Stockholders' Equity
Common stock at December 31, 1997 represents 834,340 shares issued at no
par value per share less associated costs for professional fees and
underwriting discounts and commissions.
Proceeds from public stock offering at $10 per share $ 8,343,400
Associated costs (622,001)
-------------
Common stock, net $ 7,721,399
=============
In 1996, the Company established a Stock Option Plan (the "Plan") which
was approved by the shareholders at the 1997 annual meeting, providing for
the granting of options for up to 100,000 shares of common stock to key
officers and employees of the Company. Options granted to date under the
Plan have been granted at the fair market value of the common stock on the
date of the grant. Options granted to date under the Plan may be
exercised 33.33% per year beginning one year after the date of the grant
and must be exercised within a ten year period.
Activity of the Plan is summarized in the following table:
Options Options Option price
available outstanding per share
Balance, December 31, 1995 - - $ -
Stock options authorized 100,000 -
Granted (49,025) 49,025 11.75
Exercise of stock option - - -
Canceled - - -
------- --------
Balance, December 31, 1996 50,975 49,025 11.75
Granted (49,000) 49,000 14.63
Canceled 1,150 (1,150) 11.75-14.63
------- --------
Balance, December 31, 1997 3,125 96,875 11.75-14.63
======= ========
The Company applies APB Opinion 25 and related interpretation in
accounting for its Plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Plan been
determined based upon the fair value at the grant dates for awards under
the Plan consistent with the method of FASB Statement 123, the Company's
net income and earnings per share would be reduced to the pro forma
amounts indicated below:
1997 1996 1995
Net income - as reported $ 41,633 $(1,270,136) $(608,056)
Pro forma $ (59,840) $(1,270,136) $(608,056)
Basic earnings per share - as
reported $ 0.05 $ (1.52) $ (0.73)
Pro forma $ (0.07) $ (1.52) $ (0.73)
Diluted earnings per share - as
reported $ 0.05 $ (1.52) $ (0.73)
Pro forma $ (0.07) $ (1.52) $ (0.73)
Per share
Income Shares amount
1997:
Earnings per share $ 41,633 834,340 $ 0.05
========
Effect of options - 12,056
-------- -------
Earnings per share - assuming
dilution $ 41,633 846,396 $ 0.05
======== ======= ========
1996:
Loss per share $(1,271,070) 834,340 $ (1.52)
========
Effect of options - -
---------- --------
Loss per share - assuming
dilution $(1,271,070) 834,340 $ (1.52)
========== ======== ========
1995:
Loss per share $ (608,056) 834,340 $ (0.73)
========
Effect of options - -
---------- --------
Loss per share - assuming
dilution $ (608,056) 834,340 $ (0.73)
========== ======== ========
Note Q. Retained Earnings and Restriction on Dividends
Under Wisconsin law, the subsidiary Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. A Wisconsin bank may
not pay dividends except out of net profits. Unless exempted by the
Wisconsin Department of Financial Institutions, Division of Banking, a
state bank may not pay any dividend until an amount equal to at least 20%
of net profits for the preceding half year or dividend period has been
transferred to surplus. Such transfers are required until the surplus fund
equals 100% of the bank's capital stock. A bank's ability to pay dividends
may also be restricted in the event that losses in excess of undivided
profits have been charged against surplus and in certain other
circumstances. Federal regulators have authority to prohibit a bank from
engaging in any action deemed by them to constitute an unsafe or unsound
practice, including the payment of dividends. In addition to the
foregoing, Wisconsin business corporations such as the subsidiary Bank are
prohibited by Wisconsin law from paying dividends while they are insolvent
or if the payment of dividends would render them unable to pay debts as
they come due in the usual course of business.
Federal Reserve Board policy provides that a bank holding company should
not pay dividends unless (i) the dividends can be fully funded out of net
income from the Company's net earnings over the prior year and (ii) the
prospective rate of earnings retention appears consistent with the
Company's (and its subsidiary) capital needs, asset quality and overall
financial conditions.
Note R. Regulatory Capital Requirements
The subsidiary Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the subsidiary Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the subsidiary Bank must meet specific
capital guidelines that involve quantitative measures of the subsidiary
Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The subsidiary Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk- weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiary Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 1997, the subsidiary Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the regulatory
agencies categorized the Company and subsidiary Bank as well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well-capitalized, the Company and subsidiary Bank must
maintain minimum total risk-based, Tier I risk-based, and leverage ratios
as set forth in the table. There are no conditions or events since these
notifications that management believes have changed the institution's
category.
Following is a comparison of the Company and subsidiary Bank's 1997 and 1996
actual with the minimum requirements for well-capitalized and adequately
capitalized banks, as defined by the federal regulatory agencies' Prompt
Corrective Action Rules:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
As of December 31, 1997: Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 6,493,883 13.3% $ 3,902,674 8.0% $4,878,343 10.0%
RidgeStone Bank 5,457,770 11.4% 3,810,246 8.0% 4,762,808 10.0%
Tier I capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 5,883,906 12.1% $ 1,951,337 4.0% $2,927,006 6.0%
RidgeStone Bank 4,842,056 10.2% 1,905,123 4.0% 2,857,685 6.0%
Tier I capital (to average assets):
RidgeStone Financial
Services, Inc. $ 5,883,906 10.5% $ 2,234,412 4.0% $2,793,015 5.0%
RidgeStone Bank 4,842,056 9.9% 1,961,142 4.0% 2,451,428 5.0%
As of December 31, 1996:
Total capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 6,125,583 27.1% $ 1,809,072 8.0% $2,261,340 10.0%
RidgeStone Bank 5,074,748 23.1% 1,754,262 8.0% 2,192,828 10.0%
Tier I capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 5,842,273 25.8% $ 904,536 4.0% $1,356,804 6.0%
RidgeStone Bank 4,799,897 21.9% 877,131 4.0% 1,315,697 6.0%
Tier I capital (to average assets):
RidgeStone Financial
Services, Inc. $ 5,842,273 21.5% $ 1,085,076 4.0% $1,356,345 5.0%
RidgeStone Bank 4,799,897 19.0% 1,009,802 4.0% 1,262,253 5.0%
</TABLE>
Note S. Regulatory Restriction
RidgeStone Financial Services, Inc. (Holding Company only) has made a
commitment to the Federal Reserve Bank, Chicago not to incur any debt
until the later of August 31, 2000 or five years from the date of
consummation of operation (December 7, 1995), without prior approval from
the Federal Reserve Bank.
RidgeStone Bank has committed to the FDIC that its Tier-I capital to total
asset ratio will not fall below 8% during the first three years of
operations starting December 7, 1995.
Note T. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Carrying Estimated Carrying Estimated
amount fair value amount fair value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 10,669,235 $ 10,669,235 $ 14,937,880 $ 14,937,880
=========== ========== ========== ==========
Securities $ 5,127,501 $ 5,172,762 $ 6,057,419 $ 6,093,639
=========== ========== ========== ==========
Net loans $ 45,634,281 $ 45,776,376 $ 19,051,357 $ 19,017,760
=========== ========== ========== ==========
Accrued interest receivable $ 430,739 $ 430,739 $ 203,114 $ 203,114
=========== ========== ========== ==========
Financial liabilities:
Deposits $ 58,487,625 $ 58,489,781 $ 35,668,660 $ 35,679,914
=========== ========== ========== ==========
Accrued interest payable $ 514,594 $ 514,594 $ 253,923 $ 253,923
=========== ========== ========== ==========
</TABLE>
The estimated fair value of fee income on letters of credit at December
31, 1997 and 1996 is insignificant. Loan commitments on which the
committed interest rate is less than the current market rate are also
insignificant at December 31, 1997 and 1996.
The Company assumes interest rate risk (the risk that general interest
rate levels will change) as a result of its normal operations. As a
result, fair values of the Company's financial instruments will change
when interest rate levels change and that change may be either favorable
or unfavorable to the Company. Management attempts to match maturities of
assets and liabilities to the extent believed necessary to minimize
interest rate risk. However, borrowers with fixed rate obligations are
less likely to prepay in a rising rate environment and more likely to
prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in
a rising rate environment and less likely to do so in a falling rate
environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms
of new loans and deposits and by investing in securities with terms that
mitigate the Company's overall interest rate risk.
Note U. RidgeStone Financial Services, Inc. (Parent Company only)
Financial Information
CONDENSED BALANCE SHEETS
December 31,
ASSETS 1997 1996
Cash and cash equivalents $ 378,345 $ 468,535
Available for sale securities stated at fair
value 123,000 555,875
Investment in subsidiary 4,847,453 4,806,041
Leasehold improvements and equipment, net - 32,933
Other real estate 512,000 -
Other assets 11,619 13,474
--------- ----------
Total assets $ 5,872,417 $ 5,876,858
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities - other liabilities $ 9,117 $ 8,853
--------- ----------
Stockholders' equity:
Common stock, no par value; 1,000,000 shares
authorized, 834,340 shares issued 7,721,399 7,721,399
Retained deficit (1,837,493) (1,879,126)
Accumulated other comprehensive
income (loss) - (20,606) 25,732
---------- ---------
Total stockholders' equity 5,863,300 5,868,005
---------- ---------
Total liabilities and stockholders'
equity $ 5,872,417 $ 5,876,858
========== ==========
CONDENSED STATEMENTS OF INCOME
December 31,
1997 1996 1995
Income:
Interest $ 15,742 $ 37,226 $ 6,156
Gain on sale of securities 569,429 22,500 -
Other - 1,900 -
------- ------- -------
Total income 585,171 61,626 6,156
------- ------- -------
Expenses:
Salaries and employee benefits 9,532 3,766 -
Occupancy and depreciation - 7,892 418
Pre-opening - - 43,371
Other 41,914 31,097 -
------- ------- -------
Total expenses 51,446 42,755 43,789
------- ------- -------
Income (loss) before income taxes and
equity in undistributed loss at
subsidiary 533,725 18,871 (37,633)
Income taxes 34,251 - -
-------- ------- -------
Income (loss) before equity in
undistributed loss at subsidiary 499,474 18,871 (37,633)
Equity in undistributed net loss at
subsidiary (457,841) (1,289,941) (570,423)
-------- --------- --------
Net income (loss) $ 41,633 $(1,271,070) $(608,056)
======== ========= ========
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
December 31,
1997 1996 1995
Net income (loss) $ 41,633 $(1,271,070) $(608,056)
--------- ---------- --------
Other comprehensive income, net of
taxes:
Unrealized gains (losses) on
securities arising during period $ (12,338) $ 25,732 $ -
Less reclassified adjustment for
(gains) losses included in
net income (34,000) - -
--------- --------- -------
Total other comprehensive
income (46,338) 25,732 -
--------- --------- -------
Comprehensive income $ (4,705) $(1,245,338) (608,056)
========= ========= =======
CONDENSED STATEMENTS OF CASH FLOWS
December 31,
1997 1996 1995
Cash flows from operating activities:
Net income (loss) $ 41,633 $(1,271,070) $ (608,056)
--------- ---------- ---------
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation - 5,983 418
Gain on sale of investment
securities (569,429) (22,500) -
Amortization of organizational
costs 2,120 2,120 265
(Increase) decrease in other
assets (265) 48 (15,907)
Increase in other liabilities 264 - 8,853
Equity in undistributed loss of
subsidiary 457,841 1,289,941 570,423
-------- --------- --------
Total adjustments (109,469) 1,275,592 564,052
-------- --------- --------
Net cash provided by (used in)
operating activities (67,836) 4,522 (44,004)
-------- --------- --------
Cash flows from investing activities:
Proceeds from sales of available for
sale securities 2,701,397 1,446,042 -
Purchase of available for sale
securities (1,744,684) (1,959,829) -
Investment in subsidiary Bank (500,000) (1,660,261) (5,000,000)
Purchase of office building and
equipment - (36,411) (169,900)
Proceeds from sale of office
building and equipment to
subsidiary Bank 32,933 166,977 -
Purchase of other real estate from
subsidiary Bank (512,000) -
--------- --------- --------
Net cash used in investing
activities (22,354) (2,043,482) (5,169,900)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net - - 7,721,399
Proceeds from notes payable - - 414,900
Payment of notes payable - - (414,900)
--------- --------- ---------
Net cash provided by financing
activities - - 7,721,399
--------- --------- ---------
Increase (decrease) in cash
and cash equivalents (90,190) (2,038,960) 2,507,495
--------- --------- ---------
Cash and cash equivalents:
Beginning 468,535 2,507,495 -
--------- --------- ---------
Ending $ 378,345 $ 468,535 $2,507,495
========= ========= =========
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ - $ - $ 5,078
========= ========= =========
Income taxes $ 30,071 $ 909 $ -
========= ========= =========
Supplemental schedule of non-cash
investing and financing activities:
Net change in unrealized gain
(loss) on available for sale
securities $ (46,338) $ 25,732 $ -
========= ========= ========
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's
independent auditors regarding accounting and financial disclosure
required to be reported pursuant to this Item.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The information required by this Item is hereby incorporated by reference
to the information under the captions entitled "Election of Directors,"
"Executive Officers" and "Miscellaneous - Section 16(a) Beneficial
Ownership Reporting Compliance" set forth in the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Shareholders (the "Proxy
Statement").
Item 10. Executive Compensation
The information required by this Item is hereby incorporated by reference
to the information under the captions entitled "Board of Directors -
Director Compensation" and "Executive Compensation" set forth in the Proxy
Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is hereby incorporated by reference
herein to the information under the caption entitled "Principal
Shareholders" set forth in the Proxy Statement.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is hereby incorporated by reference
herein to the information under the caption entitled "Certain
Transactions" set forth in the Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference is made to the separate exhibit index contained on page E-1
hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 17,
1998.
RIDGESTONE FINANCIAL
SERVICES, INC.
By: /s/ Paul E. Menzel
Paul E. Menzel
President and Chief Executive Officer
In accordance with the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant in the capacities indicated on March 17, 1998:
Signatures Title
/s/ Paul E. Menzel President, Chief Executive
Paul E. Menzel Officer and Director (Principal
Executive Officer)
/s/ William R. Hayes Vice President, Treasurer and
William R. Hayes Director (Principal Financial and
Accounting Officer)
/s/ Christine V. Lake Vice President, Secretary and
Christine V. Lake Director
/s/ Charles N. Ackley Director
Charles N. Ackley
/s/ Gregory J. Hoesly Director
Gregory J. Hoesly
/s/ John E. Horning Director
John E. Horning
Director
William F. Krause, Jr.
/s/ Charles G. Niebler Director
Charles G. Niebler
/s/ Frederick I. Olson Director
Frederick I. Olson
/s/ James E. Renner Director
James E. Renner
Director
Richard A. Streff
/s/ William J. Tetzlaff Director
William J. Tetzlaff
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
3.1 Articles of Incorporation of Ridgestone
Financial Services, Inc., as amended
[Incorporated by reference to Exhibit 3.1 to
Ridgestone Financial Services, Inc.'s
Registration Statement on Form SB-2
(Registration No. 33-97644)]
3.2 By-Laws of Ridgestone Financial Services, Inc.
[Incorporated by reference to Exhibit 3.2 to
Ridgestone Financial Services, Inc.'s
Registration Statement on Form SB-2
(Registration No. 33-97644)]
10.1 Lease Agreement between CDJLT Investments and
Ridgestone Financial Services, Inc. dated as
of March 31, 1995 [Incorporated by reference
to Exhibit 10.2 to Ridgestone Financial
Services, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-97644)]
10.2 Consolidated Agreement between Ridgestone
Financial Services, Inc. and Unisys
Corporation, dated as of May 31, 1995
[Incorporated by reference to Exhibit 10.3 to
Ridgestone Financial Services, Inc.'s
Registration Statement on Form SB-2
(Registration No. 33-97644)]
10.3 Real Estate Purchase Contract between J.M. and
P.L. Wilson and Ridgestone Financial Services,
Inc. dated June 23, 1995 [Incorporated by
reference to Exhibit 10.5 to Ridgestone
Financial Services, Inc.'s Registration
Statement on Form SB-2 (Registration No. 33-
97644)]
10.4 Data Processing Service Agreement between
Ridgestone Bank and United Financial Services,
Inc. dated as of September 1, 1995
[Incorporated by reference to Exhibit 10.10 to
Ridgestone Financial Services, Inc.'s
Registration Statement on Form SB-2
(Registration No. 33-97644)]
*10.5 Ridgestone Financial Services, Inc. 1996 Stock
Option Plan [Incorporated by reference to
Exhibit 10.1 to Ridgestone Financial Services,
Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File
No. 0-27984)]
*10.6 Form of Stock Option Agreement used in conjunction
with the Ridgestone Financial Services, Inc. 1996
Stock Option Plan [Incorporated by reference to
Exhibit 4.4 to Ridgestone Financial Services, Inc.'s
Registration Statement on Form S-8 (Registration No.
333-28299)]
*10.7 Employment Agreement, dated as of December 31,
1996, between Ridgestone Financial Services,
Inc. and Paul E. Menzel. [Incorporated by
reference to Exhibit 10.6 to Ridgestone
Financial Services, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December
31, 1997 (File No. 0-27984)]
*10.8 First Amendment to Employment Agreement, dated
as of December 31, 1997, between Ridgestone
Financial Services, Inc. and Paul E. Menzel.
*10.9 Employment Agreement, dated as of December 31,
1996, between Ridgestone Financial Services,
Inc. and William R. Hayes. [Incorporated by
reference to Exhibit 10.7 to Ridgestone
Financial Services, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December
31, 1997 (File No. 0-27984)]
*10.10 First Amendment to Employment Agreement, dated
as of December 31, 1997, between Ridgestone
Financial Services, Inc. and William R. Hayes.
*10.11 Employment Agreement, dated as of December 31,
1996, between Ridgestone Financial Services,
Inc. and Christine V. Lake. [Incorporated by
reference to Exhibit 10.8 to Ridgestone
Financial Services, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December
31, 1997 (File No. 0-27984)]
*10.12 First Amendment to Employment Agreement, dated
as of December 31, 1997, between Ridgestone
Financial Services, Inc. and Christine V.
Lake.
21 Subsidiaries of Ridgestone Financial Services,
Inc. [Incorporated by reference to Exhibit
21.1 to Ridgestone Financial Services, Inc.'s
Registration Statement on Form SB-2
(Registration No. 33-97644)]
23 Independent Auditor's Consent
27 Financial Data Schedule (EDGAR version only)
--------------------
* This exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-KSB
pursuant to Item 13(a) of Form 10-KSB.
Exhibit 10.8
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement ("First Amendment")
is made as of the 31st day of December 1997, by and between RIDGESTONE
BANK, Brookfield, Wisconsin, a state chartered bank ("Bank") and PAUL E.
MENZEL ("Executive").
WHEREAS, Executive and Bank are currently parties to an
Employment Agreement ("Agreement"), dated as of December 31, 1996,
pursuant to which Executive serves as President of the Bank; and
WHEREAS, Executive and Bank desire to amend the Agreement as
described herein.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, it is hereby agreed
that:
1. Paragraph 2 of the Agreement is hereby amended to read in
its entirety as follows:
Unless employment has sooner terminated in accordance with
paragraph 5 of this Agreement, the term of Executive's employment
under this Agreement shall be deemed to commence as of December 31,
1997, and shall continue until December 31, 2000; provided, however,
that on each December 31st during the term of this Agreement (except
the first day of the Employment Term) the Employment Term shall
automatically be extended for one additional year so that the
Employment Term shall be annually restored to a full three (3) year
term, unless on or before 60 days immediately preceding any such
renewal date, Bank, in connection with an annual performance review
of Executive conducted by the Board of Directors, or for any other
reason, or Executive gives notice to the other that the term shall
not be extended beyond the then current expiration date of the term.
The period of employment is the "Employment Term."
2. The first paragraph of Paragraph 5.d. of the Agreement is
hereby amended to read in its entirety as follows:
d. Compensation for Termination Under Paragraph 5.b. If
the Employment Term is terminated for any of the reasons in paragraph
5.b., Executive shall at Executive's option receive either a lump sum
severance payment, or a series of installment severance payments for
a period of three years commencing on the termination date. The lump
sum payment of cash shall be in a total cash amount (without making a
present value adjustment) equal to three times the sum of (a)
Executive's then current annual base salary, plus (b) the average of
Executive's annual cash bonuses, if any, for the three year ends
immediately preceding the termination date. If Executive elects to
receive installment payments, Executive shall receive the same amount
as would be provided by a lump sum payment, but payment shall be made
in equal installments for a period of three years commencing on the
termination date, on the same dates as Bank's regular payroll
payments are made.
3. The second paragraph of Paragraph 5.d. of the Agreement is
hereby amended to read in its entirety as follows:
Executive shall continue to receive for three (3) years
following the termination date, and not via a lump sum, all other
benefits that Executive was receiving or was entitled to receive
immediately prior to the termination date; provided, however, if it
is impractical to continue a particular benefit (for example, a
benefit plan limits benefits to active employees) Bank shall provide
a reasonably equivalent substitute benefit to Executive or shall pay
in cash to Executive the reasonable equivalent value of the benefit.
4. Except as specifically provided by this First Amendment,
the Agreement shall be otherwise unchanged and shall remain in full force
and effect.
5. This First Amendment shall be governed by the internal laws
of the State of Wisconsin.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the day and year first above written.
EXECUTIVE BANK
/s/ Paul E. Menzel /s/ Christine V. Lake
Paul E. Menzel By: Christine V. Lake
Vice President
Exhibit 10.10
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement ("First Amendment")
is made as of the 31st day of December 1997, by and between RIDGESTONE
BANK, Brookfield, Wisconsin, a state chartered bank ("Bank") and WILLIAM
R. HAYES ("Executive").
WHEREAS, Executive and Bank are currently parties to an
Employment Agreement ("Agreement"), dated as of December 31, 1996,
pursuant to which Executive serves as Vice President of the Bank; and
WHEREAS, Executive and Bank desire to amend the Agreement as
described herein.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, it is hereby agreed
that:
1. Paragraph 2 of the Agreement is hereby amended to read in
its entirety as follows:
Unless employment has sooner terminated in accordance with
paragraph 5 of this Agreement, the term of Executive's employment
under this Agreement shall be deemed to commence as of
December 31, 1997, and shall continue until December 31, 2000;
provided, however, that on each December 31st during the term of this
Agreement (except the first day of the Employment Term) the Employment
Term shall automatically be extended for one additional year so that
the Employment Term shall be annually restored to a full three (3)
year term, unless on or before 60 days immediately preceding any such
renewal date, Bank, in connection with an annual performance review
of Executive conducted by the Board of Directors, or for any other
reason, or Executive gives notice to the other that the term shall not
be extended beyond the then current expiration date of the term. The
period of employment is the "Employment Term."
2. The first paragraph of Paragraph 5.d. of the Agreement is
hereby amended to read in its entirety as follows:
d. Compensation for Termination Under Paragraph 5.b. If the
Employment Term is terminated for any of the reasons in paragraph
5.b., Executive shall at Executive's option receive either a lump
sum severance payment, or a series of installment severance payments
for a period of three years commencing on the termination date. The
lump sum payment of cash shall be in a total cash amount (without
making a present value adjustment) equal to three times the sum of (a)
Executive's then current annual base salary, plus (b) the average of
Executive's annual cash bonuses, if any, for the three year ends
immediately preceding the termination date. If Executive elects to
receive installment payments, Executive shall receive the same
amount as would be provided by a lump sum payment, but payment shall
be made in equal installments for a period of three years commencing
on the termination date, on the same dates as Bank's regular payroll
payments are made.
3. The second paragraph of Paragraph 5.d. of the Agreement is
hereby amended to read in its entirety as follows:
Executive shall continue to receive for three (3) years
following the termination date, and not via a lump sum, all other
benefits that Executive was receiving or was entitled to receive
immediately prior to the termination date; provided, however, if it
is impractical to continue a particular benefit (for example, a
benefit plan limits benefits to active employees) Bank shall provide
a reasonably equivalent substitute benefit to Executive or shall pay
in cash to Executive the reasonable equivalent value of the benefit.
4. Except as specifically provided by this First Amendment,
the Agreement shall be otherwise unchanged and shall remain in full force
and effect.
5. This First Amendment shall be governed by the internal laws
of the State of Wisconsin.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the day and year first above written.
EXECUTIVE BANK
/s/ William R. Hayes /s/ Paul E. Menzel
William R. Hayes By: Paul E. Menzel
President
Exhibit 10.12
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement ("First Amendment")
is made as of the 31st day of December 1997, by and between RIDGESTONE
BANK, Brookfield, Wisconsin, a state chartered bank ("Bank") and CHRISTINE
V. LAKE ("Executive").
WHEREAS, Executive and Bank are currently parties to an
Employment Agreement ("Agreement"), dated as of December 31, 1996,
pursuant to which Executive serves as Vice President of the Bank; and
WHEREAS, Executive and Bank desire to amend the Agreement as
described herein.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, it is hereby agreed
that:
1. Paragraph 2 of the Agreement is hereby amended to read in
its entirety as follows:
Unless employment has sooner terminated in accordance with
paragraph 5 of this Agreement, the term of Executive's employment
under this Agreement shall be deemed to commence as of December 31,
1997, and shall continue until December 31, 2000; provided, however,
that on each December 31st during the term of this Agreement (except
the first day of the Employment Term) the Employment Term shall
automatically be extended for one additional year so that the
Employment Term shall be annually restored to a full three (3) year
term, unless on or before 60 days immediately preceding any such
renewal date, Bank, in connection with an annual performance review
of Executive conducted by the Board of Directors, or for any other
reason, or Executive gives notice to the other that the term shall
not be extended beyond the then current expiration date of the term.
The period of employment is the "Employment Term."
2. The first paragraph of Paragraph 5.d. of the Agreement is
hereby amended to read in its entirety as follows:
d. Compensation for Termination Under Paragraph 5.b. If
the Employment Term is terminated for any of the reasons in paragraph
5.b., Executive shall at Executive's option receive either a lump sum
severance payment, or a series of installment severance payments for
a period of three years commencing on the termination date. The lump
sum payment of cash shall be in a total cash amount (without making a
present value adjustment) equal to three times the sum of (a)
Executive's then current annual base salary, plus (b) the average of
Executive's annual cash bonuses, if any, for the three year ends
immediately preceding the termination date. If Executive elects to
receive installment payments, Executive shall receive the same amount
as would be provided by a lump sum payment, but payment shall be made
in equal installments for a period of three years commencing on the
termination date, on the same dates as Bank's regular payroll
payments are made.
3. The second paragraph of Paragraph 5.d. of the Agreement is
hereby amended to read in its entirety as follows:
Executive shall continue to receive for three (3) years
following the termination date, and not via a lump sum, all other
benefits that Executive was receiving or was entitled to receive
immediately prior to the termination date; provided, however, if it
is impractical to continue a particular benefit (for example, a
benefit plan limits benefits to active employees) Bank shall provide
a reasonably equivalent substitute benefit to Executive or shall pay
in cash to Executive the reasonable equivalent value of the benefit.
4. Except as specifically provided by this First Amendment,
the Agreement shall be otherwise unchanged and shall remain in full force
and effect.
5. This First Amendment shall be governed by the internal laws
of the State of Wisconsin.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the day and year first above written.
EXECUTIVE BANK
/s/ Christine V. Lake /s/ Paul E. Menzel
Christine V. Lake By: Paul E. Menzel
President
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors and
Shareholders
RidgeStone Financial Services, Inc.
We consent to the incorporation by reference in the registration statement
of RidgeStone Financial Services, Inc. on Form S-8 (File No. 333-28299)
of our report dated January 30, 1998, on our audit of the consolidated
financial statements for the year ended December 31, 1997, which report
is included in this Annual Report on Form 10-KSB.
CONLEY MCDONALD LLP
March 12, 1998
Brookfield, Wisconsin
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF RIDGESTONE FINANCIAL SERVICES, INC. AS OF
AND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,671,050
<INT-BEARING-DEPOSITS> 4,185
<FED-FUNDS-SOLD> 7,994,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 874,406
<INVESTMENTS-CARRYING> 4,253,095
<INVESTMENTS-MARKET> 9,298,356
<LOANS> 46,259,021
<ALLOWANCE> 624,740
<TOTAL-ASSETS> 65,103,697
<DEPOSITS> 58,487,625
<SHORT-TERM> 0
<LIABILITIES-OTHER> 752,772
<LONG-TERM> 0
0
0
<COMMON> 7,721,399
<OTHER-SE> (1,837,493)
<TOTAL-LIABILITIES-AND-EQUITY> 5,883,906
<INTEREST-LOAN> 2,982,233
<INTEREST-INVEST> 546,627
<INTEREST-OTHER> 210,951
<INTEREST-TOTAL> 3,739,811
<INTEREST-DEPOSIT> 2,126,065
<INTEREST-EXPENSE> 2,126,065
<INTEREST-INCOME-NET> 1,613,746
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 571,382
<EXPENSE-OTHER> 1,944,782
<INCOME-PRETAX> 41,633
<INCOME-PRE-EXTRAORDINARY> 41,633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,633
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<YIELD-ACTUAL> 7.86
<LOANS-NON> 948,048
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 624,740
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 624,740
<ALLOWANCE-DOMESTIC> 431,580
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 193,160
</TABLE>
