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, 1998
[ ] 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
incorporation or organization) Identification No.)
13925 West North Avenue, Brookfield, Wisconsin 53005
(Address of principal executive offices) (Zip Code)
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. [ ]
Issuer's revenues for its most recent fiscal year: $5,223,115
Aggregate market value of voting stock held by non-affiliates of the issuer:
$8,608,320
Number of shares of common stock, no par value, outstanding on March 1, 1999:
876,492
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 Annual Meeting (incorporated by reference into Part
III)
Transitional Small Business Disclosure Format: Yes ___; No X .
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Ridgestone Financial Services, Inc.
Index to Annual
Report on Form 10-KSB
For The Fiscal Year Ended December 31, 1998
Page
Part I .......................................................................1
Item 1. Description of Business.......................................1
Item 2. Description of Property.......................................8
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. Management's Discussion and Analysis .........................9
Item 7. Financial Statements.........................................26
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.......................52
Part III......................................................................52
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act..............................................52
Item 10. Executive Compensation.......................................52
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................52
Item 12. Certain Relationships and Related Transactions...............52
Item 13. Exhibits and Reports on Form 8-K.............................52
SIGNATURES ...................................................................53
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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(sm). 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
22% of the Bank's consumer customers were enrolled in RidgeStone Connect(sm) as
of December 31, 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 could cause actual results to differ
materially from those contemplated in the forward- looking statements. Such
risks include, among others: interest rate trends, the general economic climate
in the Company's market area, loan delinquency rates, risks associated with the
turning of the Year 2000, 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
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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. As of December 31, 1998, the Bank had a
lending limit of $850,000 per loan. That limit was increased to $1,000,000 in
the first quarter of 1999. The Bank is able to attract business loans beyond its
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 Senior Commercial Lender. 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.
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.
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The regulatory limits are as follows:
Loan Category LTV Limit
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Raw Land 65%
Land Development 75%
Construction:
Commercial, multi-family, and non-residential 80%
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 $10,011,324 as of December 31,
1998, 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, 1998, the Bank had $21,033,369
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 1998 exceeded 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.
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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 bank 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. After notice to or approval of the Board, the Company may,
however, own more than 5% of the 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 bank 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
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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 withhold
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.
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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 bank 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 may be 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 was required to maintain a minimum leverage ratio of 8% until December,
1998.
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 bank 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.
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Employees
As of December 31, 1998, the Company and the Bank together employed 14 full-time
and 6 part-time employees, including three personal bankers, an investment
officer, five operations specialists, six customer service representatives, a
cashier, one commercial loan officer, 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 1, 1999 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
Charles N. Ackley Owner of C.N.A. Associates, Inc., a company
engaged in the sales representation of
manufacturers
Bernard E. Adee Senior Vice President of Marshall Financial
Consulting, LLC
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. Retired President of Krause Funeral Home, Inc.
Charles G. Niebler President of Eye Care Vision Centers
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; Vice President of Around the
Globe Travel, a travel agency
The executive officers of the Company and the Bank as of March 1, 1999 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
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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, 1998.
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, and as adjusted to
reflect a 5% stock dividend paid on the Company's common stock on May 21, 1998,
for each quarter within the last two fiscal years were as follows:
1997 High Low
---- ---- ---
1st Quarter $13.33 $12.62
2nd Quarter $15.00 $13.21
3rd Quarter $15.48 $13.81
4th Quarter $16.90 $15.24
1998 High Low
---- ---- ---
1st Quarter $18.25 $16.429
2nd Quarter $18.25 $16.70
3rd Quarter $18.75 $16.00
4th Quarter $16.00 $12.00
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions. These quotations do
not include intra-day highs and lows. On December 31, 1998, there were
approximately 39 owners of record and approximately 548 beneficial owners of the
Company's common stock.
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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 cash dividends are declared, the Company
will be dependent upon dividends paid to it by the Bank for funds to pay
dividends on its common stock. The Board of Directors of the Company declared a
5% stock dividend on all shares of the Company's common stock outstanding on May
11, 1998.
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.
Additionally, 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. Management's Discussion and Analysis
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997.
Net Income. For the fiscal year ended December 31, 1998, the Company reported a
profit of $331,377 or $0.37 per diluted common share compared to a profit of
$41,633 or $0.05 per diluted common share for fiscal 1997. This is an increase
in 1998 earnings of $289,744, or 696% over fiscal 1997. A tax benefit related to
a tax loss carryforward accounted for $200,000 of net income for fiscal 1998.
Additionally, the increased earnings is attributable to increased loan growth,
improved margins and greater fee income generation in loans.
Interest Income. Interest income consists primarily of interest on loans
(including loan fees), federal funds sold, securities and interest-bearing
deposits at other financial institutions. Total interest income for the year
ended December 31, 1998 increased to $4,940,943 from $3,706,879 for the year
ended December 31, 1997, an increase of $1,234,064 or 33%. This increase was
primarily the result of greater average outstanding balances in earning assets,
which grew by $14,311,075 or 31%, in fiscal 1998. The increase in the asset
yield is a result of a change in the mix of earning assets as a greater
percentage of earning assets shifted into loans which carry a higher yield.
Interest Expense. Interest expense primarily represents interest paid to
depositors. Interest expense increased to $2,881,181 in fiscal 1998 from
$2,126,065 in fiscal 1997, an increase of $755,116 or 36%. The increase in
interest expense was due to greater average outstanding balances in
interest-bearing liabilities, primarily time deposits and money market deposit
accounts, while the yield on interest bearing liabilities remained relatively
unchanged.
-9-
<PAGE>
Set forth below is a summary of the Company's average deposits and interest paid
on such deposits during fiscal 1998 and fiscal 1997.
<TABLE>
<CAPTION>
1998 Rate Paid 1997 Rate Paid
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Non interest-bearing demand $ 6,489,824 -- $ 4,363,342 ---
Interest-bearing demand 1,454,223 1.72% 827,094 1.76%
Money market demand 24,363,265 5.29% 18,266,062 5.27%
Savings deposits 1,258,761 2.77% 827,824 2.93%
Time deposits 25,075,721 6.11% 18,506,746 6.07%
Purchased funds 0 0.00% 9,603 6.12%
----------- ----- ----------- -----
Total deposits $58,641,794 4.91% $42,800,671 4.97%
=========== ===== =========== =====
</TABLE>
Net Interest Income. Net interest income represents the difference between
interest income earned on interest-earning assets and interest expense paid on
interest-bearing liabilities. Net interest income rose from $1,580,814 for the
year ended December 31, 1997 to $2,059,762 for the year ended December 31, 1998,
an increase of $478,948 or 30%. This increase was predominantly due to the
volume increases in earning assets, predominantly in loans which are at higher
rates than other earning assets, while the average cost on interest bearing
liabilities remained relatively unchanged.
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 1998 and
fiscal 1997.
<TABLE>
<CAPTION>
Average Balance Sheet and
Analysis of Net Interest Income
Year Ended December 31,
1998 1997
Average Related Yield Average Related Yield
Balance Interest Rate Balance Interest Rate
---------------- -------------- ----------- ---------------- -------------- ---------
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Time deposits in bank $ 105,954 $ 7,553 7.13% $ 177,939 $ 15,740 8.85%
Investments (taxable) 3,690,491 237,396 6.43% 9,439,985 546,627 5.79%
Funds sold 7,721,729 411,276 5.33% 3,556,986 195,211 5.49%
Loans (a) 48,971,885 4,284,718 8.75% 33,004,074 2,949,301 8.94%
---------- --------- ---- ---------- --------- ----
Total earning assets $ 60,490,059 $ 4,940,943 8.17% 46,178,984 $ 3,706,879 8.03%
========== --------- ==== $ ========== --------- ====
Interest-bearing liabilities:
NOW accounts $ 1,454,223 $ 25,039 1.72% 827,094 $ 14,547 1.76%
Savings accounts 1,258,761 34,839 2.77% $ 827,824 24,285 2.93%
Money market accounts 24,363,265 1,289,271 5.29% 18,266,062 963,322 5.27%
Time deposits 25,075,721 1,532,032 6.11% 18,506,746 1,123,323 6.07%
Purchased funds 0 0 0.00% 9,603 588 6.12%
---------- --------- ---- ---------- --------- ----
Total interest-bearing liabs $ 52,151,970 $ 2,881,181 5.52% 38,437,329 $ 2,126,065 5.53%
========== --------- ==== $ ========== --------- ====
Interest spread (b) $ 2,059,762 2.65% $ 1,580,814 2.50%
========= ==== ========= ====
Interest margin (c) $ 2,059,762 3.41% $ 1,580,814 3.42%
========= ==== ========= ====
- ----------
(a) Non-accruing loans are included in the computation of average balances. Loan
interest income includes net loan fees.
(b) The interest spread is the difference between the yield on earning assets
and the yield on interest-bearing liabilities.
(c) The interest margin is the net interest income divided by total earning
assets.
</TABLE>
-10-
<PAGE>
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>
Rate/Volume Analysis of Net Interest Income
Year Ended December 31, 1998
Compared to
Year Ended December 31, 1997
--------------------------------------------------------------------------------
Increase (Decrease) Due To
--------------------------------------------------------------------------------
Volume Rate Rate/Volume Net
---------------- --------------- ---------------- -----------------
Earning assets:
<S> <C> <C> <C> <C>
Time deposits in bank $ (6,367) $ (3,056) $ 1,236 $ (8,187)
Investments (taxable) (332,927) 60,613 (36,917) (309,231)
Funds sold 228,565 (5,758) (6,742) 216,065
Loans 1,426,911 (61,661) (29,833) 1,335,417
---------------- --------------- ---------------- -----------------
Total earning assets $ 1,316,182 $ (9,862) $ (72,256) $ 1,234,064
================ =============== ================ =================
Interest-bearing liabilities:
NOW accounts $ 11,030 $ (306) $ (232) $ 10,492
Savings accounts 12,642 (1,373) (715) 10,554
Money market accounts 321,557 3,293 1,099 325,949
Time deposits 398,723 7,370 2,616 408,709
Purchased funds 0 0 (588) (588)
---------------- --------------- ---------------- -----------------
Total interest-bearing liabilities $ 743,952 $ 8,984 $ 2,180 $ 755,116
---------------- --------------- ---------------- -----------------
Net change in net interest income $ 572,230 $ (18,846) $ (74,436) $ 478,948
================ =============== ================ =================
</TABLE>
Provision for Loan Losses. The provision for loan losses is based on
management's evaluation of factors such as the local and national economies and
the risks associated with the loans in the portfolio. In accordance with
Financial Accounting Standards Board ("FASB") Statements No. 5 and 114, the
allowance is provided for losses that have potentially been incurred based on
the Bank's outstanding loan balance as of the balance sheet date. The Bank
evaluates the adequacy of the loan loss reserve based on past events and current
economic conditions, and does not include the effects of potential losses on
specific loans or groups of loans that are related to future events or changes
in economic conditions which are then unknown to the Bank.
For each year ending December 31, the determination of additions to the loan
loss reserve charged to operating expenses was based on an evaluation of the
loan portfolio, current domestic economic conditions, and other factors.
As of December 31, 1998, the Company's loan loss reserve was $562,747 or 1.15%
of outstanding loans compared to $624,740 or 1.37% of outstanding loans at
December 31, 1997.
The Company's provision for loan losses was $65,000 in 1998 compared to $290,000
during 1997. During fiscal 1998, the Bank charged $4,504 against the loan loss
reserve related to consumer credit card losses. The Bank also reduced Other Real
Estate Owned by $122,489 and charged this amount against the loan loss reserve
in order to reduce the value of Other Real Estate Owned to the appraised value
as received on December 30, 1997. During 1998, the Bank further reduced
-11-
<PAGE>
Other Real Estate Owned by $476,654 as a result of the sale of real estate
assets owned by the Bank. Set forth below is an analysis of the Company's
provision for loan losses.
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
And Loan Loss Provisions
1998 1997
--------------------- -------------------
<S> <C> <C>
Beginning loan loss reserve $ 624,740 $ 334,740
Charge-offs:
Commercial 0 0
Real Estate:
Construction 0 0
Commercial 122,489 0
Other Mortgages 0 0
Installment-consumer 4,504 0
Recoveries:
Commercial 0 0
Real Estate:
Construction 0 0
Commercial 0 0
Other Mortgages 0 0
Installment-consumer 0 0
------- --------
Net charge-offs $ 126,993 $ 0
Additions charged to operations 65,000 290,000
------- --------
Balance at end of period $ 562,747 $ 624,740
======= ========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.26% 0.0%
</TABLE>
Noninterest Income. Total noninterest income (excluding gains and losses on the
sale of securities) was $289,859 for fiscal 1998 compared to $158,495 for fiscal
1997, an increase of $131,364 or 83%. Total noninterest 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. Fee income generation from real estate loans sold in the secondary
market accounted for the majority of this increase.
Noninterest Expenses. Total noninterest expenses consisted primarily of salaries
and benefits, occupancy and equipment expenses, data processing fees, marketing
expenses, professional fees and other expenses. Noninterest expenses for fiscal
1998 were $2,137,760 compared to $1,944,782 for fiscal 1997, an increase of
$192,978 or 10%. The primary increase came in the area of salaries and benefits
which increased by $108,392 or 11%. Occupancy and equipment expenses increased
by $34,716 or 10% and all other noninterest expenses increased by $49,870 or 9%
primarily due to an increase in professional and data processing fees.
In fiscal 1998, the Bank's FDIC premiums were assessed at $6,643 as required by
federal law.
Selected Financial Ratios. Set forth below are selected financial ratios of the
Company for fiscal 1998 and fiscal 1997:
1998 1997
---- ----
Return on average assets 0.51% 0.08%
Return on average equity 5.60% 0.70%
Dividend payout ratio on common stock 208.30% None
Average equity to average assets 9.02% 11.98%
-12-
<PAGE>
Provision for Income Taxes. A tax benefit of $200,000 was recognized in fiscal
1998 resulting from a net operating loss carryforward, which will be utilized to
reduce taxable income in future periods.
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996.
Net Income. During the fiscal year ended December 31, 1997, the Company reported
a profit of $41,633 or $.05 per diluted share compared to a net loss of
$1,271,070 or $1.52 per diluted 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.
Interest Income. Total interest income for the year ended December 31, 1997
increased to $3,706,879 from $1,564,422 for the year ended December 31, 1996, an
increase of $2,142,457. This increase was primarily the result of greater
average outstanding balances in earning assets and improved yields. The
Company's earning assets grew by $21,850,503 or 90% in fiscal 1997 while the
yield on total earning assets improved by 1.60%, from 6.43% to 8.03%. Interest
income consisted primarily of interest on loans (including loan fees), federal
funds sold, securities and interest-bearing deposits at other financial
institutions.
Interest Expense. 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 .17% from 5.14%
in 1996 to 4.97% 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 $4,363,342 -- $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 18,506,746 6.07% 8,763,340 6.11%
Purchased funds 9,603 6.12% 0 0.00%
----------- ----- ----------- -----
Total deposits $42,800,671 4.97% $19,936,983 5.14%
=========== ===== =========== =====
</TABLE>
Net Interest Income. Net interest income rose from $538,898 for the year ended
December 31, 1996 to $1,580,814 for the year ended December 31, 1997, an
increase of $1,041,916 or 193%. Net interest income represents the difference
between interest income earned on earning assets and interest expense paid on
interest bearing liabilities.
-13-
<PAGE>
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 3.42% in 1997 from 2.22% in 1996
as the average cost on interest bearing liabilities declined and the average
yield on total earning assets improved.
<TABLE>
<CAPTION>
Average Balance Sheet and
Analysis of Net Interest Income
Year Ended December 31,
1997 1996
Average Related Yield Average Related Yield
Balance Interest Rate Balance Interest Rate
---------------- -------------- ----------- ---------------- -------------- ---------
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
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%
Funds sold 3,556,986 195,211 5.49% 11,642,626 614,803 5.28%
Loans (a) 33,004,074 2,949,301 8.94% 6,833,651 622,686 9.11%
---------- --------- ---- --------- ------- ----
Total Earning assets $ 46,178,984 3,706,879 8.03% $ 24,328,481 1,564,422 6.43%
========== ========= ==== ========== ========= ====
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 $ 38,437,329 2,126,065 5.53% $ 17,850,365 1,025,524 5.75%
========== ========= ==== ========== ========= ====
Interest spread (b) $ 1,580,814 2.50% $ 538,898 0.68%
========= ==== ======= ====
Interest margin (c) $ 1,580,814 3.42% $ 538,898 2.22%
========= ==== ======= ====
- ----------
(a) No loans have been placed on nonaccrual. Loan interest income includes net
loan fees.
(b) The interest spread is the difference between the yield on earning assets
and the yield on interest-bearing liabilities.
(c) The interest margin is the net interest income divided by total earning
assets.
</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.
-14-
<PAGE>
<TABLE>
<CAPTION>
Rate/Volume Analysis of Net Interest Income
Year Ended December 31, 1997
Compared to
Year Ended December 31, 1996
---------------------------------------------------------------------------
Increase (Decrease) Due To
---------------------------------------------------------------------------
Volume Rate Rate/Volume Net
------------------ ------------------ --------------- --------------
Earning assets:
<S> <C> <C> <C> <C>
Time deposits in bank $ (27,495) $ 22,988 $ (16,979) $ (21,486)
Investments(taxable) 239,121 9,751 8,048 256,920
Funds sold (426,972) 24,156 (16,776) (419,592)
Loans 2,384,663 (12,019) (46,029) 2,326,615
------------------ ------------------ --------------- --------------
Total Earning assets $ 2,169,317 $ 44,876 $ (71,736) $ 2,142,457
================== ================== =============== ==============
Interest-bearing liabilities:
NOW accounts $ 6,743 $ (8) $ (7) $ 6,729
Savings accounts 14,496 130 199 14,825
Money market accounts 565,659 (34,194) (40,912) 490,553
Time deposits 595,363 (3,560) (3,958) 587,845
Purchased funds 0 0 588 588
------------------ ------------------ --------------- --------------
Total interest-bearing liabilities $ 1,182,262 $ (37,632) $ (44,090) $ 1,100,541
------------------ ------------------ --------------- --------------
Net change in net interest income $ 987,056 $ 82,507 $ (27,646) $ 1,041,916
================== ================== =============== ==============
</TABLE>
Provision for Loan Losses. 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 1.37% of outstanding loans compared to 1.81% at
December 31, 1996. Set forth below is an analysis of the Company's provision for
loan losses.
Summary of Loan Loss Experience
And Loan Loss Provisions
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
=========== ===========
-15-
<PAGE>
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.
Noninterest Income. Total noninterest income was $729,877 for fiscal 1997
compared to $72,157 for fiscal 1996, an increase of $657,720 or 912%. Total
noninterest 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 noninterest income for
fiscal 1997 was in large part due to a gain of $571,382 from the sale of
securities.
Noninterest Expense. Total noninterest expenses consisted primarily of salaries
and benefits, occupancy and equipment expenses, data processing fees, marketing
expenses, professional fees and other expenses. Total noninterest 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 $301,760 or 42%. 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% and
other expenses increased by $29,832 or 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.
Selected Financial Ratios. Set forth below are selected financial ratios of the
Company for fiscal 1997 and fiscal 1996:
1997 1996
---- ----
Return on average assets 0.08% -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%
Financial Condition
Total Assets. The Company reported total assets of $71,335,535 at December 31,
1998, an increase of $6,231,838 or 10% from December 31, 1997.
Cash and Cash Equivalents. Cash and due from banks was $2,741,672 at December
31, 1998 compared to $2,671,050 at December 31, 1997 and represents cash
maintained at the Bank and funds that the Bank and the Company have deposited in
other financial institutions. The Bank reported $12,525,000 of federal funds
sold on December 31, 1998 and $7,994,000 on December 31, 1997, which are
inter-bank funds with daily liquidity. The Bank's loan-to-deposit funds ratio
prior to loan loss reserve on December 31, 1998 was 76% compared to 78% on
December 31, 1997.
Investment Securities. The Company's investment portfolio decreased from
$5,127,501 as of December 31, 1997 to $2,365,619 at December 31, 1998 as a
result of maturing securities. The proceeds of the maturing securities were
placed in federal funds. A portion of the securities in the Company's investment
portfolio was originally purchased with the intent to hold the securities until
they mature. Another portion was placed in the available for sale category as
the securities may be liquidated to provide cash for operating or financing
purposes. The book values of (i) U.S. Treasuries and (ii) U.S. Government
agencies and corporate securities as of December 31, 1998 and December 31, 1997
were $2,251,819 and $5,004,501 respectively.
-16-
<PAGE>
The following table summarizes the maturity dates of those securities as of
December 31, 1998.
<TABLE>
<CAPTION>
Investment Portfolio
Repricing Schedule
After 1 year
through 5
1 Year or less years Total
--------------- --------------- --------------
Available for Sale Securities:
<S> <C> <C> <C>
U. S. Treasury and other U. S.
Govt. agencies and
corporations $ 250,078 $ 251,406 $ 501,484
Weighted average yield 7.25% 7.06% 6.04%
Corporate Securities 113,800 0 113,800
Weighted average yield 0.00% 0.00% 0.00%
Total Available For Sale $ 363,878 $ 251,406 $ 615,284
--------------- --------------- --------------
Weighted Avg. Yield of Total 3.46% 7.06% 4.92%
Held to Maturity Securities:
U. S. Treasury and other U. S.
Govt. agencies and corporations $ 251,110 $ 1,499,225 $ 1,750,335
Weighted average yield 7.25% 6.89% 6.94%
Total Held to Maturity $ 251,110 $ 1,499,225 $ 1,750,335
--------------- --------------- --------------
Weighted Avg. Yield of Total 7.25% 6.89% 6.94%
Total Securities $ 614,988 $ 1,750,631 $ 2,365,619
======= ============= =========
Weighted Avg. Yield of Total 5.00% 6.91% 6.42%
</TABLE>
None of the securities listed in the above table matures after five years.
Amortized costs and fair values of available for sale securities are discussed
in Notes C and D respectively, to the Company's Consolidated Financial
Statements.
Loans. Loans prior to the allowance for loan losses increased from $45,557,771
at December 31, 1997 to $48,869,077 at December 31, 1998, an increase of
$3,311,306 or 7%. In addition to the $48,869,077 in loans outstanding that the
Bank reported on December 31, 1998, the Bank had unfunded loan commitments of
$13,564,868. Also, during fiscal year 1998 the Bank originated $15,632,460 in
mortgage loans sold in the secondary market compared to $4,101,128 secondary
market loans originated in 1997.
-17-
<PAGE>
The following table summarizes the distribution of the Company's loans at
December 31, 1998 and December 31, 1997.
Loan Portfolio Composition
December 31,
----------------------------------
1998 1997
----------------------------------
Commercial $10,011,324 $ 14,158,697
Real Estate:
Construction 3,592,246 4,640,119
Commercial 21,033,369 13,474,318
Residential 9,854,421 10,176,097
Installment and Consumer 4,377,717 3,108,540
----------- -----------
Total Loans $48,869,077 $45,557,771
=========== ===========
The following table summarizes the maturities of the Company's loan portfolio at
December 31, 1998 (excluding residential, real estate, consumer and
installment).
<TABLE>
<CAPTION>
Loan Maturities
---------------------------------------------------------------------
1 year After 1 After 5
or less through 5 years years Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 12,791,109 $ 16,642,901 $ 1,610,683 $ 31,044,693
Real estate-construction 3,089,788 170,930 331,528 3,592,246
--------- ------- ------- ---------
Total $ 15,880,897 $ 16,813,831 $ 1,942,211 $ 34,636,939
========== ========== ========= ==========
</TABLE>
The following table summarizes the sensitivity of Company's loan portfolio to
interest rate changes by fixed and adjustable-rate loans due after one year at
December 31, 1998 (excluding residential, real estate, consumer and
installment).
Amount of Loans Due After One Year With
--------------------------------------------------
Predetermined Floating or adj.
rates interest rates Total
--------------------------------------------------
Commercial $ 14,762,091 $ 3,491,493 $ 18,253,584
Real estate-construction 502,458 0 502,458
---------- - ----------
Total $ 15,264,549 $ 3,491,493 $ 18,756,042
========== ========= ==========
Non-Performing Assets. The Bank undertakes a continuous loan review process to
promote early identification of credit quality problems in its loan portfolio
and to ensure compliance with its loan policy and documentation. Any past due
loans and identified problem loans are reviewed with the Board of Directors of
the Bank on a monthly basis. An outside consulting firm assisted the Bank in its
loan review function in fiscal 1998.
The Bank assigns an internal loan rating to its commercial loans based upon an
internally developed rating system. The Bank uses five classifications of
assets, three of which relate to problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized by
a possibility that the Bank could sustain some loss if the deficiencies are not
corrected. Doubtful assets exhibit the same weaknesses as Substandard assets,
coupled with the higher possibility of loss because collection or liquidation in
full is questionable in light of current existing information, conditions and
values. An asset classified as Loss is considered uncollectible and of such
limited value that
-18-
<PAGE>
continuance as an asset of the Bank is not warranted. Assets classified as
Substandard or Doubtful require the Bank to establish prudent general allowances
for loan losses. If an asset or portion thereof is classified as Loss, the Bank
must either establish specific allowances for loan losses of 100% of the portion
of the asset classified Loss, or charge-off such amount. On the basis of the
most recent comprehensive loan review conducted in the first quarter of 1999,
$25,000 was classified as Doubtful and $1.5 million was classified as
Substandard. There were no loans classified as Loss. Of the assets classified,
approximately $493,000 were on non-accrual status. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
collectibility of the loan.
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 non-accrual status.
As of December 31, 1998, management was not aware of any significant loans,
group of loans or segments of the loan portfolio not included above, where there
were serious doubts as to the ability of the borrowers to comply with the loan
payment terms.
The following table summarizes the Company's nonperforming loans as of December
31, 1998 and December 31, 1997.
December 31,
-------------------------------
1998 1997
-------------------------------
Non-accrual Loans $ 492,540 $ 0
Accruing Loans, Past Due 90 Days+ (1) $ 0 $ 0
Restructured Loans (2) $ 0 $ 0
(1) Loans are generally placed in non-accrual when contractually past due 90
days or more.
(2) There were no restructured loans for each of the presented years.
For fiscal 1998 and fiscal 1997 the gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms was $27,585 and $0, respectively, none of which was recognized.
The amount of interest income on non-accruing loans that was included in net
income for fiscal 1998 was $64,157 and $0 for fiscal 1997.
Allowance for Loan Losses. The Company's allowance for estimated loan losses was
$562,747, or 1.15% of loans at December 31, 1998 compared to $624,740, or 1.37%
of loans at December 31, 1997. See "Comparison of Operating Results for the
Years Ended December 31, 1998 and December 31, 1997 - Provision for Loan
Losses."
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 $255,595 (or 45% of the reserve for
loan losses) to these loans, which comprise about 71% of the loan portfolio. The
Bank has allocated $9,080 (or approximately 2% of the reserve for loan losses)
to residential mortgages, which comprise about 20% of the loan portfolio.
Consumer loans comprise about 9% of the loan portfolio, and $38,839 (or about 7%
of the reserve for loan losses) is allocated to consumer loans. The Bank has
allocated $6,782 of the reserve for loan losses to unfunded loan commitments,
which total approximately $13,564,867. The balance of the reserve for loan
losses of $252,451 is unallocated.
Other Assets. The Company's office building, leasehold improvements and
equipment less accumulated depreciation and amortization decreased to $1,376,660
at December 31, 1998 from $1,403,082 at December 31, 1997.
-19-
<PAGE>
On December 31, 1998, the Bank had $1,297,835 in Other Real Estate Owned which
is represented by 19 fully improved residential lots and 2 partially completed
model homes. The Bank purchased these real estate assets from the bankruptcy
court in fiscal 1997 after the Bank's borrower filed for bankruptcy. The Bank
has a contract for the exclusive build-out of those lots by an area builder. All
of this real estate has been placed for sale. The Bank holds executed offers to
purchase on the 2 models that will produce proceeds of approximately $419,400.
The Bank anticipates the remaining parcels of land will be liquidated over the
next 18 months.
Accrued interest receivable on loans and other assets increased to $663,617 at
December 31, 1998 compared to $495,109 at December 31, 1997.
Deposits. The Bank experienced significant deposit growth during fiscal 1998.
Total deposits increased by $6,035,231 from $58,487,625 as of December 31, 1997
to $64,522,856 on December 31, 1998.
As of December 31, 1998, time deposits over $100,000 represented 6.36% of total
deposits. Set forth below is a schedule of the maturities as of December 31,
1998 for the Company's time deposits of $100,000 or more.
Time Deposits of $100,000 or more
Maturity Schedule
3 mos. Over 3 mos. Over 6 mos.
or less thru 6 mos. thru 12 mos. Over 12 mos.
Certificates of Deposit $ 719,651 $ 408,160 $ 2,975,965 $ 0
Other Liabilities. Accrued interest payable and other liabilities of $614,535 at
December 31, 1998 compared to $752,772 at December 31, 1997 were made up of
accrued interest payable on deposit accounts and accounts payable.
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, 1998 the Bank had
$15,884,605, primarily in federal funds, available to meet future demands.
Capital Resources. The Bank's most recent notification as of February 4, 1998
from the FDIC 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 R 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 met its commitment to the FDIC that it
would maintain a Tier I capital to total asset ratio of not less than 8% for its
first three years of operations, which ended in December 1998.
Asset/Liability Management. Closely related to liquidity management is the
management of interest-earning assets and interest-bearing liabilities. The
Company manages its rate sensitivity position to avoid wide swings in net
interest margins and to minimize risk due to changes in interest rates.
-20-
<PAGE>
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 Company currently does not expect to experience any material fluctuations in
its net interest income in the short term as a consequence of changes in
interest rates.
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,
1998 for each major category of interest-bearing asset and interest-bearing
liability:
<TABLE>
<CAPTION>
Interest Rate-Sensitive Assets
and Liabilities
(In thousands)
0-89 90-179 180-359 360+
Days Days Days Days Total
<S> <C> <C> <C> <C> <C>
Investments $ 365 0 252 1,749 $ 2,366
Loans $ 24,238 5,667 14,403 4,561 $ 48,869
- --------------------------------------------------------------------------------------------------
Total Rate Sensitive Assets $ 24,603 5,667 14,655 6,310 $ 51,235
Rate Sensitive Liabilities (1) $ 41,103 3,147 9,888 1,833 $ 55,971
- --------------------------------------------------------------------------------------------------
GAP $ (16,500) 2,520 4,767 4,477
Cumulative GAP $ (16,500) (13,980) (9,213) (4,736)
GAP/Rate Sensitive Assets (59.9%) (46.2%) (20.5%) (9.2%)
</TABLE>
(1) Savings, NOW, and Money Market Demand Deposits are considered as
immediately repricable.
The larger negative Gap position of the Company in the 0-89 day time frame was a
result of maturing Certificates of Deposit shifting into the more liquid Money
Market accounts due to a general decline in market interest rates.
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.
-21-
<PAGE>
Year 2000 Impact
Existing computer programs generally recognize dates and perform calculations by
using only the last two digits of any given year. These computer programs may
not recognize a year that begins with "20" instead of "19." As a result, the
functions of computer software, hardware and embedded systems at many
businesses, including the Bank, may experience failures or produce incorrect
results when the calendar changes to January 1, 2000. Systems failures or
miscalculations at the Bank or the Bank's vendors or customers may result in
disruption of operations, including a failure to process information and/or a
reduced likelihood of collecting loan payments on a timely basis.
The Bank's Readiness. To determine whether and to what extent it may experience
disruptions as a result of the turning of the Year 2000 ("Y2K"), the Bank has
established a committee to oversee the assessment process and report
periodically to Bank management. The Bank is currently in the process of
assessing (i) the Y2K status of its own internal systems, including computer
equipment (hardware), applications (software), and other electronically
controlled equipment that does not process data (embedded systems); (ii) the Y2K
status of its vendors' systems; and (iii) the Y2K status of its customers'
systems.
The Bank has completed testing or received manufacturer certification of Y2K
compliance with respect to 100% of its internal hardware and embedded systems.
All such systems appear to be Y2K compliant. The Bank spent approximately $1,500
on testing these systems to date and does not expect to incur additional costs
in testing internal computer hardware or embedded systems.
The following chart displays the current status of the Bank's mission-critical
software with respect to assessing Y2K compliance.
Vendor-
Internal Mission-critical Software certified
Category Compliant? Status of Testing/Replacement
- ------------------------------------ ---------- ------------------------------
Operating systems Yes Testing complete-satisfactory
Banking platform applications Yes Testing Phase 1 complete -
satisfactory Phase 2 - in
process - satisfactory to date
On-line PC banking Yes Testing in process -
satisfactory
Telephone banking No Replacement installation in
process
Loan documentation Yes Replacement configuration in
process
Document management Yes Testing complete - satisfactory
Contact management Yes Testing complete - satisfactory
General office applications Yes Testing complete - satisfactory
Data warehousing Yes Testing complete - satisfactory
All the systems are vendor-certified compliant except for the telephone banking
system. This system is in the process of being upgraded to a Y2K compliant
version. The hardware is in place and the conversion is expected to be completed
by April 1, 1999. This conversion is being done at no cost to the Bank.
-22-
<PAGE>
The remaining systems have all been successfully tested for Y2K readiness,
except for the loan documentation system. This system is being configured and
should be operational by the end of April, 1999. Both the current loan
documentation system and its replacement have been certified Y2K ready by the
vendor.
The platform banking system went through a series of tests in May of 1998 and
passed successfully. Because of the critical nature of these systems, the Bank
is currently undertaking a second round of testing of this software.
The Bank may experience loan collection or other credit-related problems if
significant customers are not Y2K compliant before the turn of the century. In
order to assess their Y2K compliance, the Bank has sent Y2K surveys to a
majority of its commercial customers. Many of these customers have responded to
the Bank's inquiries and continue to update the Bank as new data becomes
available. The Bank intends to continue surveying new customers as appropriate
to assess their Y2K readiness. To date, the Bank has received satisfactory
responses from most of its major commercial customers, and management currently
does not anticipate the Bank will experience material adverse effects on
operations as a result of customer non-compliance.
Similarly, the Bank is receiving regular updates from almost all of the vendors
who provide mission-critical products and services. The Bank is making efforts
to contact those vendors who have not yet provided information regarding their
Y2K readiness. Of those vendors whose compliance status is known to the Bank,
all are either already compliant or appear to be making satisfactory progress
toward compliance.
Y2K Compliance Costs. The Bank outsources a majority of its information
processing, and its internal computer systems generally rely on software
provided by third-party vendors. As a result, the Bank has incurred very little
cost to date, less than $5,000, in assessing its internal readiness. The Bank
will incur additional remediation costs which are not expected to be material,
generally in connection with (i) its continuing dialogue with vendors and
customers to assess their readiness, (ii) the installation of one new system and
the replacement of one old system, and (iii) contingency planning and status
updates. The Bank currently expects that such additional costs will not exceed
$15,000.
Y2K Risks. The most significant Y2K risks to the Bank are associated with the
potential non-compliance of its third-party vendors who provide mission-critical
services. Since the Bank outsources most of its information processing to
third-party vendors, such a failure could result in higher operating costs,
increased staffing needs or the inability to provide needed services to
customers. Likewise, the failure of those vendors providing critical
infrastructure services, specifically, power and communications, could result in
temporary operational difficulties at the bank.
Y2K failures of the Bank's significant commercial customers could result in the
inability of those customers to make timely payments on loans, potentially
resulting in a loss of revenue, adjustments to the Bank's loan loss reserves,
reduced deposit balances or increased cash requirements.
Another area of risk to the Bank lies with consumer deposit behavior. If a
significant number of customers were to withdraw substantial amounts of
deposits, the Bank could face a shortage of liquid assets. Management currently
intends to maintain additional levels of cash on hand to meet potential demands,
and expects to be able to meet such cash demands satisfactorily.
The Bank does not anticipate material failures of its embedded systems, since
virtually none of these systems rely on date- based control systems.
Contingency Plans. The Bank is currently developing contingency plans to deal
with potential business interruptions caused by Y2K non-compliance of its
vendors, customers or internal systems. These plans address a wide range of
potential problems. The Bank's plan is about 80% complete, and should be 100%
complete sometime in the second quarter of 1999.
-23-
<PAGE>
Although the Bank has taken many steps to ensure that Y2K will not adversely
impact its results of operations or financial condition, there can be no
assurance that it will not have such an effect. Whether the Bank will experience
adverse effects as a result of Y2K will depend on certain risks and factors
including risks associated with (i) Y2K readiness of the vendors who supply the
Bank with critical information processing, credit delivery and other services;
(ii) Y2K readiness of the Bank's key commercial customers; (iii) unanticipated
expenses associated with ongoing assessment or remediation of potential internal
Y2K problems which could affect the Bank's operations; (iv) the potential
inadequacy or failure of the testing procedures used by the Bank in performing
its internal Y2K assessments; (v) the inaccuracy of Y2K compliance certification
received by the Bank from certain outside vendors regarding those vendors'
systems which are used by the Bank; and (vi) the failure of the Bank to design
adequate contingency plans in the event of internal or external Y2K
non-compliance.
-24-
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Average Balance Sheet
1998 1997
-------------------- -----------------------
<S> <C> <C>
Cash and due from banks $ 1,913,542 $ 1,411,013
Federal funds sold and securities purchased under 7,721,729 3,556,986
agreement to resell
Interest-bearing deposits in other banks 56,955 72,096
Investment securities:
U.S. Treasury agency and other 3,690,491 9,439,985
Unrealized Gain (Loss) on securities
Loans:
Real estate mortgages 12,264,601 8,527,547
Consumer-net 3,684,486 2,094,599
Commercial and other 33,022,799 22,381,928
---------- ----------
Total 48,971,886 33,004,074
Less allowance for loan losses (544,812) (335,534)
---------- ----------
Net loans 48,427,074 32,668,540
Investment in subsidiary 0
Fixed assets 1,364,536 1,475,555
Other real estate owned 1,461,638 416,353
Other assets 942,182 389,910
---------- ----------
Total assets $ 65,578,147 $ 49,430,438
========== ==========
Interest-bearing deposits:
NOW accounts $ 1,454,223 $ 827,094
Savings accounts 1,258,761 827,824
Money Market deposit accounts 24,363,265 18,266,062
Time deposits 25,075,721 18,506,746
---------- ----------
Total interest-bearing deposits 52,151,970 38,427,726
Demand deposits 6,489,825 4,363,343
---------- ----------
Total deposits 58,641,795 42,791,069
Other liabilities 1,021,300 714,924
---------- ----------
Total liabilities 59,663,095 43,505,993
Equity capital 5,915,052 5,919,445
---------- ----------
Total liabilities and capital $ 65,578,147 $ 49,425,438
========== ==========
</TABLE>
-25-
<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, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
VIRCHOW, KRAUSE & COMPANY, LLP
/s/Virchow, Krause & Company, LLP
Brookfield, Wisconsin
January 29, 1999
-26-
<PAGE>
<TABLE>
<CAPTION>
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
- -------------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Cash and due from banks (Note B) $ 2,741,672 $ 2,671,050
Interest-bearing deposits in banks 2,649 4,185
Federal funds sold 12,525,000 7,994,000
Available for sale securities stated at fair value (Note C) 615,284 874,406
Held to maturity securities, fair value of $1,780,700 and $4,298,356 in
1998 and 1997 respectively (Note D) 1,750,335 4,253,095
Loans, less allowance for loan losses of $562,747 and $624,740 in 1998 and
1997 respectively (Notes E, F and O) 48,306,330 44,933,031
Mortgage loans held for sale 259,000 701,250
Office building, leasehold improvements and equipment, net (Note G) 1,376,660 1,403,082
Other real estate 1,297,835 1,774,489
Cash surrender value of life insurance (Note L) 1,797,153 -
Accrued interest receivable and other assets (Note J) 663,617 495,109
------------------ ------------------
Total assets $ 71,335,535 $ 65,103,697
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits: (Note H)
Demand $ 8,552,053 $ 7,296,264
Savings and NOW accounts 34,013,384 28,221,885
Other Time 21,957,419 22,969,476
------------------ ------------------
Total deposits 64,522,856 58,487,625
Accrued interest payable and other liabilities (Note J) 614,535 752,772
------------------ ------------------
Total liabilities 65,137,391 59,240,397
------------------ ------------------
Commitments and contingencies (Notes M, N and S)
Stockholders' equity: (Note P)
Preferred stock, no par value; 2,000,000 and -0- shares authorized in 1998
and 1997 respectively, no shares issued and outstanding - -
Common stock, no par value; 10,000,000 and 1,000,000 shares authorized in
1998 and 1997 respectively, 876,492 and 834,340 shares issued and
outstanding in 1998 and 1997 respectively 8,417,117 8,411,732
Retained deficit (Notes Q, R and S) (2,196,449) (2,527,826)
------------------ ------------------
6,220,668 5,883,906
Accumulated other comprehensive loss (22,524) (20,606)
------------------ ------------------
Total stockholders' equity 6,198,144 5,863,300
------------------ ------------------
Total liabilities and stockholders' equity $ 71,335,535 $ 65,103,697
================== ==================
See Notes to Consolidated Financial Statements.
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Interest income:
<S> <C> <C> <C>
Interest on fees and loans (Note E) $ 4,284,718 $ 2,949,301 $ 622,686
Interest on securities - taxable 237,396 546,627 289,707
Interest on federal funds sold 411,276 195,211 614,803
Interest on deposits in banks 7,553 15,740 37,226
----------------- ----------------- -----------------
Total interest income 4,940,943 3,706,879 1,564,422
----------------- ----------------- -----------------
Interest expense:
Interest on deposits (Note H) 2,881,181 2,125,477 1,025,524
Interest on federal funds purchased - 588 -
----------------- ----------------- -----------------
Total interest expense 2,881,181 2,126,065 1,025,524
----------------- ----------------- -----------------
Net interest income before provision for loan losses 2,059,762 1,580,814 538,898
Provision for loan losses (Note F) 65,000 290,000 325,740
----------------- ----------------- -----------------
Net interest income after provision for loan losses 1,994,762 1,290,814 213,158
----------------- ----------------- -----------------
Noninterest income:
Service charges on deposit accounts 40,532 24,418 7,829
Secondary market loan fees 153,275 32,932 19,302
Gain (loss) on sale of securities, net (Note C) (7,687) 571,382 22,500
Other 96,052 101,145 22,526
----------------- ----------------- -----------------
Total noninterest income 282,172 729,877 72,157
----------------- ----------------- -----------------
Noninterest expenses:
Salaries and employee benefits (Notes K and L) 1,129,696 1,021,304 719,544
Occupancy expenses (Notes G and M) 260,134 205,833 130,901
Equipment expenses (Note G) 130,922 150,507 167,700
Professional fees 169,483 137,767 92,889
Data processing fees 104,626 91,346 80,632
Other 342,899 338,025 363,785
----------------- ----------------- -----------------
Total noninterest expenses 2,137,760 1,944,782 1,555,451
----------------- ----------------- -----------------
Income (loss) before income taxes 139,174 75,909 (1,270,136)
Less applicable income taxes (benefits) (Note J) (192,203) 34,276 934
----------------- ----------------- -----------------
Net income (loss) $ 331,377 $ 41,633 $ (1,271,070)
================= ================= =================
Earnings (loss) per share:
Basic $ 0.38 $ 0.05 $ (1.52)
================= ================= =================
Diluted $ 0.37 $ 0.05 $ (1.52)
================= ================= =================
Weighted average shares outstanding 876,239 834,340 834,340
================= ================= =================
See Notes to Consolidated Financial Statements.
</TABLE>
-28-
<PAGE>
<TABLE>
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Retained comprehensive
stock earnings income (loss) Total
----------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Balances, December 31,1995 $ 7,721,399 $ (608,056) $ - $ 7,113,343
---------------
Comprehensive income (loss):
Net loss - (1,271,070) - (1,271,070)
Change in net unrealized gain (loss) on
available for sale securities, net of
reclassification adjustment and tax
effect - - 25,732 25,732
---------------
Total comprehensive income (loss) (1,245,338)
-------------------------------------------------------------------
Balances, December 31, 1996 7,721,399 (1,879,126) 25,732 5,868,005
---------------
Comprehensive income (loss):
Net Income - 41,633 - 41,633
Change in net unrealized gain (loss) on
available for sale securities, net of
reclassification adjustment and tax
effect - - (46,338) (46,338)
---------------
Total comprehensive income (loss) (4,705)
--------------------------------------------------------------------
Balances, December 31, 1997 7,721,399 (1,837,493) (20,606) 5,863,300
---------------
Comprehensive income:
Net income - 331,377 - 331,377
Change in net unrealized gain (loss) on
available for sale securities, net of
reclassification adjustment and tax
effect - - (1,918) (1,918)
---------------
Total comprehensive income 329,459
---------------
5% Stock dividend (Note P) 690,333 (690,333) - -
Issuance of 437 new shares of stock for the
exercise of stock options (Note P) 5,385 - - 5,385
--------------------------------------------------------------------
Balances, December 31, 1998 $ 8,417,117 $ (2,196,449) $ (22,524) $ 6,198,144
================ ================= ================= ===============
See Notes to Consolidated Financial Statements.
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 331,377 $ 41,633 $ (1,271,070)
----------------- ---------------- -----------------
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 170,166 184,473 182,032
Provision for loan losses 65,000 290,000 325,740
Provision (benefit) for deferred taxes (202,500) - -
(Gain) loss on sale of investment securities 7,687 (571,382) (22,500)
Amortization and accretion of bond premiums and
discounts - net (839) (1,752) -
Amortization of organizational costs - 2,120 2,275
Net (increase) decrease in mortgage loans held for sale 442,250 143,850 (845,100)
Net increase in cash surrender value of life insurance (1,797,153) - -
(Increase) decrease in assets:
Interest receivable 36,466 (227,625) (200,631)
Other assets (2,474) (21,948) 2,352
Increase (decrease) in liabilities:
Accrued interest 18,860 260,671 250,002
Other liabilities (157,097) 223,232 13,418
----------------- ---------------- -----------------
Total adjustments (1,419,634) 281,639 (292,412)
----------------- ---------------- -----------------
Net cash provided by (used in) operating activities (1,088,257) 323,272 (1,563,482)
----------------- ---------------- -----------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in banks 1,536 180,452 2,259,394
Net (increase) decrease in federal funds (4,531,000) 5,265,000 (7,632,000)
Purchase of available for sale securities (138,200) (1,994,683) (10,339,643)
Proceeds from sales of available for sale securities 391,316 2,701,397 9,335,817
Proceeds from maturities of held to maturity securities 2,500,000 750,000 500,000
Purchase of held to maturity securities - - (5,505,361)
Purchase of office building, leasehold improvements and
equipment (143,744) (76,333) (636,516)
Net expenditures on other real estate (186,681) (1,125,790) -
Proceeds from sales of other real estate 663,335 - -
Net increase in loans (3,438,299) (27,665,473) (17,811,227)
----------------- ---------------- -----------------
Net cash used in investing activities (4,881,737) (21,965,430) (29,829,536)
----------------- ---------------- -----------------
-30-
<PAGE>
<CAPTION>
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Years ended December 31, 1998, 1997 and 1996
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from stock options exercised $ 5,385 $ - $ -
Net increase in deposits 6,035,231 22,818,965 32,360,129
--------------- --------------- ---------------
Net cash provided by financing activities 6,040,616 22,818,965 32,360,129
--------------- --------------- ---------------
Increase in cash and due from banks 70,622 1,176,807 967,111
Cash and due from banks:
Beginning 2,671,050 1,494,243 527,132
--------------- --------------- ---------------
Ending $ 2,741,672 $ 2,671,050 $ 1,494,243
=============== =============== ===============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 2,862,321 $ 1,865,394 $ 775,522
=============== =============== ===============
Income taxes $ 10,297 $ 30,096 $ 934
=============== =============== ===============
Supplemental schedule of non-cash investing and financing
activities:
Net change in unrealized gain on available for sale $ (1,918) $ (46,338) $ 25,732
=============== =============== ===============
Transfer of foreclosed assets from loans to other assets $ - $ 648,699 $ -
=============== =============== ===============
See Notes to Consolidated Financial Statements.
</TABLE>
-31-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
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 are defined as
those amounts included in the balance sheet caption "cash and due from banks".
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. Reclassifications:
Certain 1996 and 1997 amounts have been reclassified to conform to the 1998
presentation.
6. 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.
-32-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A. Summary of Significant Accounting Policies (continued)
7. 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.
8. 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.
9. 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.
10. 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 for loan losses is adequate to cover probable credit losses relating
to specifically identified loans, as well as probable credit losses inherent in
the balance of the loan portfolio. In accordance with Financial Accounting
Standards Board Statements 5 and 114, the allowance is provided for losses that
have been potentially incurred as of the balance sheet date. The allowance is
based on past events and current economic conditions, and does not include the
effects of expected losses on specific loans or groups of loans that are related
to future events or expected changes in economic conditions. 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 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.
-33-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A. Summary of Significant Accounting Policies (continued)
10. Allowance for loan losses: (continued)
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.
11. 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 buildings
and leasehold improvements and 3 to 7 years for equipment.
12. Other 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.
13. 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.
14. 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 carrryforwards and fixed assets. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
15. 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.
-34-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A. Summary of Significant Accounting Policies (continued)
16. Earnings per share data:
Earnings (loss) per common share data has been computed based upon the weighted
average number of shares outstanding during the period. In the computation of
diluted earnings per share, all dilutive stock options are assumed to be
exercised at the beginning of each year and the proceeds are used to purchase
shares of the Company's common stock at the average market price during the
year.
17. 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.
The following methods and assumptions were 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
Interest-bearing deposits in banks
Accrued interest receivable
Accrued interest payable
Variable rate loans that reprice frequently where no significant
change in credit risk has occurred
Mortgage loans held for sale
Demand deposits
Variable rate money market accounts
Variable rate certificates of deposit Available for sale
securities
Cash surrender value of life insurance
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
-35-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A. Summary of Significant Accounting Policies (continued)
17. Fair value of financial instruments: (continued)
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. 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 $112,000 and $58,000 at December 31, 1998 and 1997
respectively.
Note C. Available for Sale Securities
Amortized costs and fair values of available for sale securities as of December
31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Values
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 249,608 $ 470 $ - $ 250,078
Obligations of other U.S. government
agencies and corporations 250,000 1,406 - 251,406
---------------- --------------- --------------- ---------------
499,608 1,876 - 501,484
Equity securities 138,200 - 24,400 113,800
---------------- --------------- --------------- ---------------
$ 637,808 $ 1,876 $ 24,400 $ 615,284
================ =============== =============== ===============
December 31, 1997
----------------------------------------------------------------
Gross Gross
Amortized Unrealized unrealized Fair
cost gains losses Values
---------------- --------------- --------------- ---------------
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
================ =============== =============== ===============
</TABLE>
-36-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note C. Available for Sale Securities (continued)
The amortized cost and fair value of available for sale securities as of
December 31, 1998, 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 summary:
December 31, 1998
-------------------------------
Amortized Fair
cost value
--------------- ---------------
Due in one year or less $ 249,608 $ 250,078
Due after one year through 5 years 250,000 251,406
--------------- ---------------
$ 499,608 $ 501,484
=============== ===============
Realized gains and losses on sale of available for sale securities as of
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
Proceeds from sales of available for sale securities $ 391,316 $ 2,701,397 $ 9,355,817
================= =============== ===============
Gross gains on sales $ 23,748 $ 574,885 $ 22,500
Gross losses on sales (31,435) (3,503) -
----------------- --------------- ---------------
$ (7,687) $ 571,382 $ 22,500
================= =============== ===============
Related income taxes (benefits) $ (3,036) $ 34,276 $ -
================= =============== ===============
</TABLE>
Note D. Held to Maturity Securities
Amortized costs and fair values of held to maturity securities as of December
31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
costs gains losses value
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,000,335 $ 21,931 $ - $ 1,022,266
Obligations of other U.S. government
agencies and corporations 750,000 8,434 - 758,434
---------------- --------------- --------------- ---------------
$ 1,750,335 $ 30,365 $ - $ 1,780,700
================ =============== =============== ===============
</TABLE>
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note D. Held to Maturity Securities (continued)
December 31, 1997
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
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
================ =============== =============== ===============
</TABLE>
The amortized cost and fair value of held to maturity securities as of December
31, 1998, by contractual maturity, are shown below:
December 31, 1998
-------------------------------
Amortized Fair
cost value
--------------- ---------------
Due in one year or less $ 251,110 $ 254,219
Due after one year through five years 1,499,225 1,526,481
--------------- ---------------
$ 1,750,335 $ 1,780,700
=============== ===============
Note E. Loans
Major classifications of loans are as follows:
December 31,
-------------------------------
1998 1997
--------------- ---------------
Commercial $ 10,011,324 $ 14,158,697
Real Estate:
Construction 3,592,246 4,640,119
Commercial 21,033,369 13,474,318
Residential 9,854,421 10,176,097
Installment and consumer 4,377,717 3,108,540
--------------- ---------------
48,869,077 45,557,771
Allowance for loan losses (562,747) (624,740)
--------------- ---------------
Net loans $48,306,330 $44,933,031
=============== ===============
Impairment of loans having recorded investment at December 31, 1998 of $492,540
has been recognized in conformity with FASB Statement No. 114 as amended by FASB
Statement No. 118. There were no impaired loans at December 31, 1997. The
average recorded investment in impaired loans during 1998 was $365,672. The
total allowance for loan losses related to these loans was $-0- for December 31,
1998. Interest income on impaired loans of $64,157 was recognized for cash
payments received in 1998.
-38-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note E. Loans (continued)
Certain directors, executive officers and principal shareholders of the Company,
and their related interests, had loans outstanding in the aggregate amounts of
$3,576,818 and $3,969,100 at December 31, 1998 and 1997 respectively. During
1998, $3,809,332 of new loans were made with $4,201,614 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 F. 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,
------------------------------
1998 1997
--------------- --------------
Balance, beginning $ 624,740 $ 334,740
Loans charged off (126,993) -
Recoveries on loans previously charged off - -
Provision charged to operations 65,000 290,000
--------------- --------------
Balance, ending $ 562,747 $ 624,740
=============== ==============
Note G. 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,
------------------------------
1998 1997
--------------- --------------
Land $ 72,200 $ 72,200
Building and leasehold improvements 1,034,147 1,034,147
Furniture and equipment 900,613 756,869
--------------- --------------
2,006,960 1,863,216
Less accumulated depreciation and amortization 630,300 460,134
--------------- --------------
Total office building, leasehold
improvements and equipment $ 1,376,660 $ 1,403,082
=============== ==============
Depreciation and amortization expense amounted to $170,166, $184,473 and
$182,032 in 1998, 1997 and 1996 respectively.
Note H. Deposits
The aggregate amount of other Time deposits (including CD's), each with a
minimum denomination of $100,000, was $4,103,776 and $5,530,343 in 1998 and 1997
respectively.
-39-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note H. Deposits (continued)
At December 31, 1998, the scheduled maturities of other Time deposits are as
follows:
1999 $ 20,123,967
2000 454,149
2001 907,555
2002 36,968
2003 434,780
----------------------
$ 21,957,419
======================
Note I. Interest on Deposits
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Interest bearing demand accounts $ 25,039 $ 14,547 $ 7,818
Money market demand accounts 1,289,270 963,323 472,769
Savings deposits 34,839 24,285 9,460
Time, $100,000 and over 315,703 248,636 94,837
Time, under $100,000 1,216,330 874,686 440,640
------------------- ------------------- -------------------
Total $ 2,881,181 $ 2,125,477 $ 1,025,524
=================== =================== ===================
</TABLE>
Note J. Income taxes
The provision for income taxes included in the accompanying consolidated
financial statements consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Current taxes:
<S> <C> <C> <C>
Federal $ - $ - $ -
State 10,297 34,276 934
------------------- ------------------- -------------------
10,297 34,276 934
------------------- ------------------- -------------------
Deferred income taxes (benefit):
Federal (170,100) - -
State (32,400) - -
------------------- ------------------- -------------------
(202,500) - -
------------------- ------------------- -------------------
Total provision (benefit) for income taxes $ (192,203) $ 34,276 $ 934
=================== =================== ===================
</TABLE>
At December 31, 1998, the Company had a net operating loss carryforward for
income tax purposes of approximately $1,101,092 which, if not utilized to reduce
taxable income in future periods, will expire at December 31, 2011. As of
December 31, 1998, management believes it is more likely than not, that the
deferred income tax benefit of $202,500 will be fully realized.
-40-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note J. Income Taxes (continued)
The following amounts make up the deferred tax assets and liabilities reduced by
a valuation allowance:
December 31,
-------------------------------
1998 1997
--------------- ---------------
Deferred tax assets:
Allowance for loan losses $ 143,989 $ 144,502
Depreciation - 14,834
Start up costs 75,633 101,876
Net operating loss carryforward 433,280 412,467
Deferred compensation 19,478 11,850
Other - 7,099
Deferred tax liabilities:
Depreciation (2,280) -
Other (10,151) -
Valuation (457,449) (692,628)
--------------- ---------------
$ 202,500 $ -
=============== ===============
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997
---------------------------- ------------------------------
% of % of
pretax pretax
Amount income Amount income
------------- -------------- --- -------------- ---------------
<S> <C> <C> <C> <C>
Reconciliation of statutory to effective taxes:
Federal income taxes at statutory rate $ 47,319 34.0% $ 25,809 34.0%
Adjustmens for:
Increases in taxes resulting
from state income taxes 6,178 4.4 22,622 29.8
Reduction of deferred tax valuation allowance (235,179) (162.5) (14,155) (18.6)
Other - net (10,521) (14.0) - -
------------- -------------- --- -------------- ---------------
Effective income taxes - operations $ (192,203) (138.1)% $ 34,276 45.2%
============= ============== === ============== ===============
</TABLE>
Note K. Profit-Sharing Plan
The Company established a 401(k) plan during 1996. The Company contributed
$20,592, $28,700 and $16,650 in 1998, 1997 and 1996 respectively.
Note L. Salary Continuation Agreement
During 1998, the Company entered into salary continuation agreements with
various executive officers. The agreements provide for the payment of specified
amounts upon the employees' retirement or death which is being accrued over the
anticipated remaining period of employment.
Although not part of the agreements, the Company purchased paid-up split dollar
life insurance on the officers. The insurance could provide funding for the
payments of benefits.
-41-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note M. Facilities Lease
Lease expense for the years ended December 31, 1998, 1997 and 1996 was $94,235,
$81,936 and $88,771 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 $3,812, $4,518
and $6,584 in 1998, 1997 and 1996 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,
1999 $ 81,936
2000 34,140
----------------------
Total minimum future rental payments $ 116,076
======================
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:
1998 1997
--------------- --------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 12,754,818 $ 12,031,882
Credit card commitments $ 781,350 $ 599,716
Commercial letters of credit $ 28,700 $ 137,680
-42-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note N. Commitments and Contingencies (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. 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 is set forth in Note E.
Note P. Stockholders' Equity
In 1996, the Company established The RidgeStone Financial Services, Inc. 1996
Stock Option Plan (the "Plan") which was approved by the shareholders at the
1997 annual meeting, providing for the granting of options to purchase up to
100,000 shares of common stock to key officers and employees of the Company. In
1998, the Plan was amended to provide for the granting of options to purchase up
to 500,000 shares. 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.
-43-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note P. Stockholders' Equity (continued)
Activity of the Plan is summarized in the following table:
<TABLE>
<CAPTION>
Weighted-
average Weighted-
fair value average
of option Options Options exercise
granted available Exercisable outstanding price
--------------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 - -
Stock options authorized 100,000 -
Granted $4.10 (49,025) 49,025 $11.75
-------------- ---------------
Balance, December 31, 1996 50,975 - 49,025 11.75
Granted $3.92 (49,000) 49,000 14.63
Canceled 1,150 (1,150) 12.50
-------------- ---------------
Balance, December 31, 1997 3,125 16,057 96,875 13.20
Additional stock options authorized 400,000 -
Stock dividend 20,153 4,847 13.20
Exercise of stock options - (437) 12.32
Granted $6.06 (52,050) 52,050 18.50
Canceled 2,923 (2,923) 17.24
-------------- ---------------
Balance, December 31, 1998 374,151 50,174 150,412 $14.96
============== ===============
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income - as reported $ 331,337 $ 41,633 $ (1,271,070)
Pro forma $ 248,306 $ 1,692 $ (1,271,070)
Basic earnings per share - as reported $ 0.38 $ 0.05 $ (1.52)
Pro forma $ 0.28 $ - $ (1.52)
Diluted earnings per share - as reported $ 0.37 $ 0.05 $ (1.52)
Pro forma $ 0.28 $ - $ (1.52)
</TABLE>
-44-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note P. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Per share
Income Shares amount
------------------ ----------------- -----------------
1998:
<S> <C> <C> <C>
Earnings per share $ 331,337 876,239 $ 0.38
=================
Effect of options - 13,118
------------------ -----------------
Earnings per share - assuming dilution $ 331,337 889,357 $ 0.37
================== ================= =================
1997:
Loss per share $ 41,633 834,340 $ 0.05
=================
Effect of options - 12,056
------------------ -----------------
Loss 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)
================== ================= =================
</TABLE>
At the annual shareholders' meeting on April 28, 1998, an amendment to the
Company's Articles of Incorporation was approved increasing the shares of common
stock authorized for issuance to 10,000,000.
The Articles of Incorporation were also amended to establish a class of
preferred stock and authorize 2,000,000 shares for issuance.
On May 21, 1998, the Company declared a five percent (5%) stock dividend. The
dividend totaled 41,715 shares.
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.
-45-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note Q. Retained Earnings and Restriction on Dividends (continued)
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 on the following page) 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,
1998, the subsidiary Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, 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 subsidiary Bank's category.
Listed on the following page is a comparison of the Company and subsidiary
Bank's 1998 and 1997 actual with the minimum requirements for well-capitalized
and adequately capitalized banks, as defined by the federal regulatory agencies'
Prompt Corrective Action Rules:
-46-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note R. Regulatory Capital Requirements (continued)
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------------- ---------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ --------------- ------------ ------------ -----------
As of December 31, 1998:
<S> <C> <C> <C> <C> <C>
Total capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 6,783,415 12.4% $ 4,372,779 8.0% $ N/A
RidgeStone Bank 6,281,463 11.6% 4,349,713 8.0% 5,437,141 10.0%
Tier I capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 6,220,668 11.4% $ 2,186,389 4.0% $ N/A
RidgeStone Bank 5,718,716 10.5% 2,147,856 4.0% 3,262,285 6.0%
Tier I capital (to average
assets):
RidgeStone Financial
Services, Inc. $ 6,220,668 8.2% $ 3,047,520 4.0% $ N/A
RidgeStone Bank 5,718,716 8.2% 2,791,280 4.0% 3,489,100 5.0%
As of December 31, 1997:
Total capital (to risk-weighted
assets):
RidgeStone Financial
Services, Inc. $ 6,493,883 13.3% $ 3,902,674 8.0% $ N/A
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% $ N/A
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% $ N/A
RidgeStone Bank 4,842,056 9.9% 1,961,142 4.0% 2,451,428 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.
-47-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note T. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------------------- -------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 2,741,672 $ 2,741,672 $ 2,671,050 $ 2,671,050
==================== =================== === ================= ===================
Interest-bearing deposits in
banks $ 2,649 $ 2,649 $ 4,185 $ 4,185
==================== =================== === ================= ===================
Federal funds sold $ 12,525,000 $ 12,525,000 $ 7,994,000 $ 7,994,000
==================== =================== === ================= ===================
Available for sale securities $ 615,284 $ 615,284 $ 874,406 $ 874,406
==================== =================== === ================= ===================
Held to maturity securities $ 1,750,335 $ 1,780,700 $ 4,253,095 $ 4,298,356
==================== =================== === ================= ===================
Net loans $ 48,306,330 $ 48,614,751 $ 44,933,031 $ 45,075,126
==================== =================== === ================= ===================
Mortgage loans held for sale $ 259,000 $ 259,000 $ 701,250 $ 701,250
==================== =================== === ================= ===================
Cash surrender value of life
insurance $ 1,797,153 $ 1,797,153 $ - $ -
==================== =================== === ================= ===================
Accrued interest receivable $ 394,273 $ 394,273 $ 430,739 $ 430,739
==================== =================== === ================= ===================
Financial liabilities
Deposits $ 64,522,856 $ 64,561,674 $ 58,487,625 $ 58,489,781
==================== =================== === ================= ===================
Accrued interest payable $ 533,454 $ 533,454 $ 514,594 $ 514,594
==================== =================== === ================= ===================
</TABLE>
The estimated fair value of fee income on letters of credit at December 31, 1998
and 1997 is insignificant. Loan commitments on which the committed interest rate
is less than the current market rate are also insignificant at December 31, 1998
and 1997.
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.
-48-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note U. RidgeStone Financial Services, Inc. (Parent Company only) Financial
Information
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
-----------------------------------------
ASSETS 1998 1998
- --------------------------------------------------------------------------------------------- --------------------
<S> <C> <C>
Cash and due from banks $ 274,880 $ 374,160
Interest-bearing deposits in banks 2,649 4,185
Available for sale securities stated at fair value 113,800 123,000
Investment in subsidiary 5,720,592 4,847,453
Other real estate 81,222 512,000
Other assets 14,199 11,619
-------------------- --------------------
Total assets $ 6,207,262 $ 5,872,417
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------- --------------------
Liabilities - other liabilities $ 9,118 $ 9,117
-------------------- --------------------
Stockholders' equity:
Preferred stock, no par value; 2,000,000 and -0- shares authorized
in 1998 and 1997 respectively, no shares issued and outstanding -- --
Common stock, no par value; 10,000,000 and 1,000,000 shares
authorized in 1998 and 1997 respectively, 876,492 and 834,340
shares issued and outstanding in 1998 and 1997 respectively 8,417,117 8,411,732
Retained deficit (2,196,449) (2,527,826)
Accumulated other comprehensive loss (22,524) (20,606)
-------------------- --------------------
Total stockholders' equity 6,198,144 5,863,300
-------------------- --------------------
Total liabilities and stockholders' equity $ 6,207,262 $ 5,872,417
==================== ====================
</TABLE>
-49-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note U. RidgeStone Financial Services, Inc. (Parent Company only) Financial
Information (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
December 31,
-----------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Income:
<S> <C> <C> <C>
Interest $ 7,553 $ 15,742 $ 37,226
Gain (loss) on sale of securities (7,687) 569,429 22,500
Other 3,364 - 1,900
------------------- ------------------- -------------------
Total income 3,230 585,171 61,626
------------------- ------------------- -------------------
Expenses:
Salaries and employee benefits 2,827 9,532 3,766
Occupancy and depreciation - - 7,892
Other 42,889 41,914 31,097
------------------- ------------------- -------------------
Total expenses 45,716 51,446 42,755
------------------- ------------------- -------------------
Income (loss) before income taxes and
equity in undistributed loss at
subsidiary (42,486) 533,725 18,871
Income taxes 7,797 34,251 -
------------------- ------------------- -------------------
Income (loss) before equity in undistributed
loss at subsidary (50,283) 499,474 18,871
Equity in undistributed net income (loss) at subsidiary 381,660 (457,841) (1,289,941)
------------------- ------------------- -------------------
Net income (loss) $ 331,377 $ 41,633 $ (1,271,070)
=================== =================== ===================
</TABLE>
-50-
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note U. RidgeStone Financial Services, Inc. (Parent Company only) Financial
Information (continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
December 31,
---------------------------------------------------
1998 1997 1996
----------------- ----------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 331,377 $ 41,633 $ (1,271,070)
----------------- ----------------- ---------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation - - 5,983
(Gain) loss on sale of investment securities 7,687 (569,429) (22,500)
Amortization of organizational costs - 2,120 2,120
(Increase) decrease in other assets (2,500) (265) 48
Increase in other liabilities 1 264 -
Equity in undistributed (income) loss of subsidiary (381,660) 457,841 1,289,941
----------------- ----------------- ---------------
Total adjustments (376,472) (109,469) 1,275,592
----------------- ----------------- ---------------
Net cash provided by (used in) operating activities (45,095) (67,836) 4,522
----------------- ----------------- ---------------
Cash flows from investing activities:
Net decreases in interest-bearing deposits in banks 1,536 180,452 2,259,394
Proceeds from sales of available for sale securities 141,316 2,701,397 1,446,042
Purchase of available for sale securities (138,200) (1,744,684) (1,959,829)
Investment in subsidiary Bank (495,000) (500,000) (1,660,261)
Purchase of office building and equipment - - (36,411)
Proceeds from sale of office building and equipment to
subsidiary Bank - 32,933 166,977
Proceeds from sales of other real estate 430,778 - -
Purchase of other real estate from subsidiary Bank - (512,000) -
----------------- ----------------- ---------------
Net cash provided by (used in) investing activities (59,570) 158,098 215,912
Cash flows from financing activities -
proceeds from stock options exercised 5,385 - -
----------------- ----------------- ---------------
Increase (decrease) in cash and due from banks (99,280) 90,262 220,434
----------------- ----------------- ---------------
Cash and due from banks:
Beginning 374,160 283,898 63,464
----------------- ----------------- ---------------
Ending $ 274,880 $ 374,160 $ 283,898
================= ================= ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 10,297 $ 30,071 $ 909
================= ================= ===============
Supplemental schedule of non-cash investing and financing
activities:
Net change in unrealized gain (loss) on available for sale
securities $ (1,918) $ (46,338) $ 25,732
================= ================= ===============
</TABLE>
-51-
<PAGE>
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 1999
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, 1998.
-52-
<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 16, 1999.
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 16, 1999:
Signatures Title
/s/ Paul E. Menzel President, Chief Executive Officer and Director
Paul E. Menzel (Principal Executive Officer)
/s/ William R. Hayes Vice President, Treasurer and Director
William R. Hayes (Principal Financial and Accounting Officer)
/s/ Christine V. Lake Vice President, Secretary and Director
Christine V. Lake
/s/ Charles N. Ackley Director
Charles N. Ackley
/s/ Gregory J. Hoesly Director
Gregory J. Hoesly
Director
John E. Horning
/s/ William F. Krause, Jr. Director
William F. Krause, Jr.
/s/ Charles G. Niebler Director
Charles G. Niebler
/s/ Bernard E. Adee Director
Bernard E. Adee
/s/ James E. Renner Director
James E. Renner
/s/ Richard A. Streff Director
Richard A. Streff
/s/ William J. Tetzlaff Director
William J. Tetzlaff
-53-
<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 4.4 to
Ridgestone Financial Services, Inc.'s Registration Statement on
Form S-8 (Registration No. 333-52323)]
3.2 By-Laws of Ridgestone Financial Services, Inc., as amended.
[Incorporated by reference to Exhibit 4.6 to Ridgestone
Financial Services, Inc.'s Registration Statement on Form S-8
(Registration No. 333-52323)]
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, as
amended. [Incorporated by reference to Exhibit 4.1 to Ridgestone
Financial Services, Inc.'s Registration Statement on Form S-8
(Registration No. 333-52323)]
*10.6 Form of Stock Option Agreement used in conjunction with the
Ridgestone Financial Services, Inc. 1996 Stock Option Plan, as
amended. [Incorporated by reference to Exhibit 4.2 to Ridgestone
Financial Services, Inc.'s Registration Statement on Form S-8
(Registration No. 333-52323)]
*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-KSB 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. [Incorporated by reference to Exhibit 10.8 to
Ridgestone Financial Services, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 (File No.
0-27984)]
E-1
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
*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-KSB 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. [Incorporated by reference to Exhibit 10.10 to
Ridgestone Financial Services, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 (File No.
0-27984)]
*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-KSB 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. [Incorporated by reference to Exhibit 10.12
to Ridgestone Financial Services, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 (File No.
0-27984)]
*10.13 Salary Continuation Agreement, dated October 20, 1998, by and
between Ridgestone Bank and Paul E. Menzel. [Incorporated by
reference to Exhibit 10.1 to Ridgestone Financial Services,
Inc.'s Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998 (File No. 0-27984)]
*10.14 Split Dollar Agreement, dated October 20, 1998, by and between
Ridgestone Bank and Paul E. Menzel. [Incorporated by reference
to Exhibit 10.2 to Ridgestone Financial Services, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1998 (File No. 0-27984)]
*10.15 Split Dollar Agreement, dated October 20, 1998, by and between
Ridgestone Bank and Paul E. Menzel. [Incorporated by reference
to Exhibit 10.3 to Ridgestone Financial Services, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1998 (File No. 0-27984)]
*10.16 Form of Executive Incentive Retirement Agreement, dated October
20, 1998, by and between Ridgestone Bank and each of Christine
V. Lake and William R. Hayes. [Incorporated by reference to
Exhibit 10.4 to Ridgestone Financial Services, Inc.'s Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1998
(File No. 0-27984)]
*10.17 Form of Split Dollar Agreement, dated October 20, 1998, by and
between Ridgestone Bank and each of Christine V. Lake and
William R. Hayes. [Incorporated by reference to Exhibit 10.5 to
Ridgestone Financial Services, Inc.'s Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998 (File No.
0-27984)]
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)]
E-2
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
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.
E-3
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders
Ridgestone Financial Services, Inc.
We consent to the incorporation by reference in the Registration Statements of
Ridgestone Financial Services, Inc. on Form S-8 (File No. 333-28299 and File No.
333-52323) of our report dated January 29, 1999, on our audit of the
consolidated financial statements for the year ended December 31, 1998, which
report is included in this Annual Report on Form 10-KSB.
VIRCHOW, KRAUSE & COMPANY, LLP
/s/ Virchow, Krause & Company, LLP
Brookfield, Wisconsin
March 16, 1999
<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 YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,741,672
<INT-BEARING-DEPOSITS> 2,649
<FED-FUNDS-SOLD> 12,525,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 615,284
<INVESTMENTS-CARRYING> 1,750,335
<INVESTMENTS-MARKET> 1,780,700
<LOANS> 48,869,077
<ALLOWANCE> 562,747
<TOTAL-ASSETS> 71,335,535
<DEPOSITS> 64,552,856
<SHORT-TERM> 0
<LIABILITIES-OTHER> 614,535
<LONG-TERM> 0
0
0
<COMMON> 8,417,117
<OTHER-SE> (2,196,449)
<TOTAL-LIABILITIES-AND-EQUITY> 71,335,535
<INTEREST-LOAN> 4,284,718
<INTEREST-INVEST> 237,396
<INTEREST-OTHER> 418,829
<INTEREST-TOTAL> 4,940,943
<INTEREST-DEPOSIT> 2,881,181
<INTEREST-EXPENSE> 2,881,181
<INTEREST-INCOME-NET> 2,059,762
<LOAN-LOSSES> 126,993
<SECURITIES-GAINS> (7,687)
<EXPENSE-OTHER> 2,137,760
<INCOME-PRETAX> 139,174
<INCOME-PRE-EXTRAORDINARY> 139,174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,174
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 8.17
<LOANS-NON> 492,540
<LOANS-PAST> 2,511,942
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 30,000
<ALLOWANCE-OPEN> 624,740
<CHARGE-OFFS> 126,993
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 562,747
<ALLOWANCE-DOMESTIC> 310,296
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 252,451
</TABLE>
