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, 1999
[ ] 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: (262) 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: $5,144,012
Aggregate market value of voting stock held by non-affiliates of the issuer as
of February 1, 2000: $5,330,822
Number of shares of common stock, no par value, outstanding on March 1, 2000:
876,492
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2000 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, 1999
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......................................24
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure..................53
Part III ....................................... ............................53
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act ....................................53
Item 10. Executive Compensation....................................53
Item 11. Security Ownership of Certain Beneficial Owners
and Management..........................................53
Item 12. Certain Relationships and Related Transactions............53
Item 13. Exhibits and Reports on Form 8-K..........................53
SIGNATURES...................................................................54
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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,K to consumers. 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 49% of the Bank's consumer checking account customers
were enrolled in RidgeStone ConnectK as of December 31, 1999. In 2000, the Bank
introduced two business versions of RidgeStone ConnectK to its commercial
clients and plans to offer these PC banking services over the internet in the
near future.
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
Aforward-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 Abelieves,@
Aanticipates,@ Aexpects,@ 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
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market area, loan delinquency rates, and legislative enactments or regulatory
changes which adversely affect the business of the Company and/or the Bank.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements. The forward-looking
statements included herein are only made as of the date of this Annual Report on
Form 10-KSB and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
Business Strategy
The Bank's strategy is to concentrate on the financial service needs of
individuals and small businesses providing them with quality service, products
and on-site decision making. The Bank pursues this strategy by attracting
highly-qualified employees and utilizing state-of-the-art technology, both in
its operations and in the services it provides its customers. The Bank also
directs its marketing efforts toward a customer base it identifies as having the
potential to be highly profitable.
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 a 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. As of December 31, 1999, the
Bank had a lending limit of $1,240,000. 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.
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
------------- ---------
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 $16,956,230 as of December 31,
1999, and consisted primarily of lines of credit and loans to businesses.
Commercial lines of credit are generally used for the purpose of financing
working capital and may be secured with current assets of the borrower.
Commercial 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. Commercial loans are generally secured with
the fixed assets of the borrower.
Real Estate Commercial Loans. As of December 31, 1999, the Bank had $14,927,167
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.
The Bank also faces competition from finance companies, insurance companies,
mortgage companies, securities brokerage firms, money market funds and other
providers of financial services. Most of the Bank's competitors have been in
business for a number of years, have established customer bases, are larger and
have higher lending limits than the Bank.
The Bank competes for loans principally through its ability to communicate
effectively and professionally with its customers in understanding and meeting
their needs. Management believes that its personal service philosophy continues
to enhance its ability to compete favorably in attracting individual and
business customers. The Bank actively solicits retail customers and competes for
deposits by offering customers personal attention, professional service and
competitive interest rates.
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Supervision and Regulation
General. 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 Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act")
made significant changes in the laws governing financial institutions, including
changes which expand the permissible range of activities for bank holding
companies and their affiliates (including non-banking financial activities);
permit affiliations between banks, securities firms and insurance companies;
make substantial changes in the regulatory structure for financial institutions;
prohibit new unitary savings and loan holding companies; make changes to the
Community Reinvestment Act of 1977; and enact substantial new financial privacy
rules. The new financial privacy rules may impose some additional regulatory
burden on the Bank. It is too early to make specific predictions about how the
Act will otherwise impact the Bank and the Company.
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.
As described above, the Act now permits banks and bank holding companies to
engage in non-banking financial activities. In order for a bank or a bank
holding company to engage in such activities, however, the bank holding company
must comply with certain capital and asset requirements and elect to become a
financial holding company with the Federal Reserve Board of Governors. At this
time, the Company has not made such an election, nor does it plan to do so in
the immediate future. Therefore, subject to a future election to financial
holding company status, the Company remains under the rules of the BHCA. 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 a 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
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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 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
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required levels of capital; (ii) the total assets of the Bank increase
significantly; (iii) the income of the Bank decreases significantly; or (iv) any
combination of the foregoing occurs, then the Board of Directors of the Bank may
decide or be required by the FDIC or the Department to retain a greater portion
of the Bank's earnings to achieve or maintain the required capital.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries, on investments in stock or other
securities of the bank holding company and on the taking of such stock or
securities as collateral for loans to any borrower. Under the BHCA and
regulations of the Board, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or of any property or service.
The activities and operations of banks are subject to a number of additional
detailed, complex and sometimes overlapping federal and state laws and
regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Financial Institutions Reform, Recovery and Enforcement Act of 1989,
FDICIA, the Community Reinvestment Act, anti-redlining legislation and the
antitrust laws. The Community Reinvestment Act includes provisions under which
the federal bank regulatory agencies must consider, in connection with
applications for certain required approvals, including applications to acquire
control of a bank or 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.
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, 1999, the Company and the Bank together employed 17 full-time
and 8 part-time employees, including three personal bankers, an investment
officer, six operations specialists, seven customer service representatives, a
cashier, a receptionist, a courier, two commercial loan officers, a senior
officer in charge of retail banking, a technology specialist and the Bank
president.
Directors and Executive Officers
The directors of the Company and the Bank as of February 28, 2000 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 Retired
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; Vice President of Around the Globe
Travel, a travel agency
The executive officers of the Company and the Bank as of February 28, 2000 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. In 1999, the Bank took over
additional retail space which became available within the building housing its
main office. Once the remodeling of this additional space is completed, the
Bank's main office will occupy approximately 7,497 square feet of a larger
shopping mall that 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, 1999.
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 under the
symbol "RFSV" 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:
1998 High Low
---- ---- ---
1st Quarter $18.25 $16.43
2nd Quarter $18.25 $16.70
3rd Quarter $18.75 $16.00
4th Quarter $16.00 $12.00
1999 High Low
---- ---- ---
1st Quarter $12.38 $10.00
2nd Quarter $11.75 $ 9.00
3rd Quarter $9.75 $ 8.50
4th Quarter $8.50 $ 7.00
These quotations reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions. These quotations do
not include intra-day highs and lows. On December 31, 1999, there were
approximately 37 owners of record and approximately 459 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, generally speaking,
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, 1999 and
December 31, 1998
Net Income. Net income for the fiscal year ended December 31, 1999 increased by
45% to $479,178 compared with net income of $331,377 for fiscal 1998. Earnings
per share rose by 49% to $0.55 per diluted common share for fiscal 1999 compared
to $0.37 per diluted common share for fiscal 1998. A tax benefit related to a
tax loss carryforward accounted for $375,035 of net income for fiscal 1999 and
$202,500 of net income for fiscal 1998.
Interest Income. Interest income consists primarily of interest on loans
(including loan fees), securities, federal funds sold, and interest-bearing
deposits at other financial institutions. Total interest income for the year
ended December 31, 1999 was $4,831,816 compared to $4,940,943 for the year ended
December 31, 1998, a decrease of $109,127 or 2%. This decrease was primarily the
result of overall lower asset yields. The interest yield on average earning
assets declined to 7.93% in fiscal 1999 compared to 8.17% in fiscal 1998. The
reason for the decline in interest yields in 1999 as compared to 1998 is due
primarily to the Federal Reserve's actions in reducing interest rates in the
third and fourth quarters of 1998.
Interest Expense. Interest expense primarily represents interest paid to
depositors. Interest expense decreased to $2,417,939 in fiscal 1999 from
$2,881,181 in fiscal 1998, a decrease of $463,242 or 16%. The decrease in
interest expense was primarily due to an overall decrease in the interest yield
on interest-bearing liabilities from 5.52% in 1998 to 4.68% in 1999. Also
contributing to lower interest expense was a shift in balances of higher cost
time deposits to lower cost money market accounts and a decline in balances of
higher cost time deposits.
9
<PAGE>
Set forth below is a summary of the Company's average deposits and interest paid
on such deposits during fiscal 1999 and fiscal 1998.
Rate Rate
1999 Paid 1998 Paid
---- ---- ---- ----
Non interest-bearing demand $ 8,697,185 -- $ 6,489,824 --
Interest-bearing demand 1,683,475 1.06% 1,454,223 1.72%
Money market accounts 30,601,480 4.64% 24,363,265 5.29%
Savings deposits 1,590,674 2.12% 1,258,761 2.77%
Time deposits 17,738,976 5.34% 25,075,721 6.11%
----------- ----- ----------- -----
Total deposits $60,311,790 4.01% $58,641,794 4.91%
=========== ===== =========== =====
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 was $2,413,877 for the year
ended December 31, 1999, an increase of $354,115 or 17% compared with net
interest income of $2,059,762 for the year ended December 31, 1998. The $463,242
decrease in interest costs, driven primarily by a reduction in deposit interest
rates and decreasing balances in time deposits, more than offset the $109,127
decline in interest income. The net interest margin increased to 3.96% at
December 31, 1999 from 3.41% at December 31, 1998.
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 1999 and
fiscal 1998.
<TABLE>
Average Balance Sheet and
Analysis of Net Interest Income
Year Ended December 31,
<CAPTION>
1999 1998
-------------------------------- --------------------------------
Average Related Yield Average Related Yield
Balance Interest Rate Balance Interest Rate
----------- ---------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Deposits in bank $ 98,958 $ 6,025 6.09% $ 105,954 $ 7,553 7.13%
Investments (taxable) 5,274,559 276,087 5.23% 3,690,491 237,396 6.43%
Funds sold and securities
purchased under
agreements to resell 5,488,217 286,165 5.21% 7,721,729 411,276 5.33%
Loans (a) 50,068,153 4,263,539 8.52% 48,971,885 4,284,718 8.75%
----------- ---------- ----------- ----------
Total earning assets $60,929,887 $4,831,816 7.93% $60,490,059 $4,940,943 8.17%
=========== ========== ===== =========== ========== =====
Interest-bearing liabilities:
NOW accounts $ 1,683,475 $ 17,908 1.06% $ 1,454,223 $ 25,039 1.72%
Savings accounts 1,590,674 33,694 2.12% 1,258,761 34,839 2.77%
Money market accounts 30,601,480 1,418,807 4.64% 24,363,265 1,289,271 5.29%
Time deposits 17,738,976 947,530 5.34% 25,075,721 1,532,032 6.11%
----------- ---------- ----------- ----------
Total interest-bearing liabs $51,614,605 $2,417,939 4.68% $52,151,970 $2,881,181 5.52%
=========== ========== ===== =========== ========== =====
Interest spread (b) $2,413,877 3.25% $2,059,762 2.65%
========== ===== ========== =====
Interest margin (c) $2,413,877 3.96% $2,059,762 3.41%
========== ===== ========== =====
</TABLE>
- ----------
(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.
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 affected the Company's interest income and interest expense for the
period indicated.
10
<PAGE>
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, 1999
Compared to
Year Ended December 31, 1998
---------------------------------------------------------
Increase (Decrease) Due To
---------------------------------------------------------
Rate/
Volume Rate Volume Net
---------- ---------- --------- ----------
Earning assets:
<S> <C> <C> <C> <C>
Deposits in bank $ (499) $ (1,102) $ 73 $ (1,528)
Investments (taxable) 101,897 (44,224) (18,982) 38,691
Funds sold and securities purchased
under agreements to resell (118,962) (8,652) 2,503 (125,111)
Loans 95,917 (114,531) (2,565) (21,179)
---------- ---------- --------- ----------
Total earning assets $ 78,353 $(168,509) $(18,971) $(109,127)
========== ========== ========= ==========
Interest-bearing liabilities:
NOW accounts $ 3,947 $ (9,570) $ (1,509) $ (7,132)
Savings accounts 9,186 (8,176) (2,156) (1,146)
Money market accounts 330,118 (159,693) (40,889) 129,536
Time deposits (448,247) (192,607) 56,354 (584,500)
---------- ---------- --------- ----------
Total interest-bearing liabilities $(104,996) $(370,046) $ 11,800 $(463,242)
---------- ---------- --------- ----------
Net change in net interest income $ 183,349 $ 201,537 $ 30,771 $ 354,115
========== ========== ========= ==========
</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 (AFASB@) 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.
The Company made a loan loss provision of $282,500 in 1999 compared with $65,000
in 1998. The increased provision was made to bring the reserve to adequate
levels as a result of increasing balances in the loan portfolio and loan
charge-offs during 1999. During fiscal 1999, the Bank charged $191,977 against
the loan loss reserve, which related primarily to a commercial loan whose
guarantors filed personal bankruptcy. The Bank also reduced Other Real Estate
Owned by $356,815 as a result of the sale of real estate assets owned by the
Bank and reclassification of $35,082 of prior year expenses.
11
<PAGE>
As of December 31, 1999, the Company's loan loss reserve was $653,270 or 1.26%
of outstanding loans compared to $562,747 or 1.15% of outstanding loans at
December 31, 1998.
Set forth below is an analysis of the Company's provision for loan losses.
Summary of Loan Loss Experience
And Loan Loss Provisions
1999 1998
---- ----
Beginning loan loss reserve $562,747 $624,740
Charge-offs:
Commercial 0 0
Real Estate:
Construction 0 0
Commercial 179,396 122,489
Other Mortgages 0 0
Installment-consumer 12,581 4,504
Recoveries:
Commercial 0 0
Real Estate:
Construction 0 0
Commercial 0 0
Other Mortgages 0 0
Installment-consumer 0 0
-------- --------
Net charge-offs $191,977 $126,993
Additions charged to operations 282,500 65,000
-------- --------
Balance at end of period $653,270 $562,747
======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.38% 0.26%
Noninterest Income. Total noninterest income consisted of service charges on
deposit accounts, secondary market loan fees, merchant credit card processing
services, commission income generated by the investment center and employee
benefit plan income. Total noninterest income (excluding losses on the sale of
securities) was $327,598 for fiscal 1999 compared to $289,859 for fiscal 1998,
an increase of $37,739 or a 13% improvement. The Bank instituted a service
charge program on business checking accounts, surcharges on noncustomer ATM
transactions and increased miscellaneous charges on both business and consumer
accounts during 1999. These service charge changes accounted for a $50,156
increase in service charge income over 1998. However, due to a higher interest
rate environment during 1999, secondary mortgage loan originations declined
which caused secondary market loan fee income to be reduced by $97,829 from
fiscal 1998. A portion of the increase in noninterest income was related to a
$104,832 increase in the cash surrender value of life insurance.
Noninterest Expenses. Total noninterest expenses consisted primarily of salaries
and employee benefits, occupancy and equipment expenses, professional fees, data
processing fees, and employee benefit plans. Total noninterest expenses for
fiscal 1999 (excluding losses on the sale of assets) were $2,291,227 compared to
$2,137,760 for fiscal 1998, an increase of $153,467 or 7%. The majority of the
increase in noninterest expenses is attributed to employee benefit plans and
occupancy expenses. The bulk of the employee benefit plan expense is offset by
income related to the employee benefit plans in noninterest income while the
increase in occupancy expense is primarily due to increases in rent and repairs
related to Other Real Estate Owned.
12
<PAGE>
In fiscal 1999, the Bank's FDIC premiums were assessed at $7,275 as required by
federal law.
Selected Financial Ratios. Set forth below are selected financial ratios of the
Company for fiscal 1999 and fiscal 1998:
1999 1998
---- ----
Return on average assets 0.71% 0.51%
Return on average equity 7.38% 5.60%
Dividend payout ratio on common stock NONE 208.30%(a)
Average equity to average assets 9.61% 9.02%
- ----------
(a) This number reflects a 5% stock dividend on the Company's common stock paid
on May 21, 1998.
Provision for Income Taxes. A tax benefit of $375,035 was recognized in fiscal
1999 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, 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 was an increase
in 1998 earnings of $289,744, or 696% over fiscal 1997. A tax benefit related to
a tax loss carryforward accounted for $202,500 of net income for fiscal 1998.
Additionally, the increased earnings was 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 was 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.
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.
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 1998 and
fiscal 1997.
<TABLE>
Average Balance Sheet and
Analysis of Net Interest Income
Year Ended December 31,
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Average Related Yield Average Related Yield
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
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%
========== ===== ========== =====
</TABLE>
- ----------
(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.
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 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.
14
<PAGE>
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>
Rate/Volume Analysis of Net Interest Income
Year Ended December 31, 1998
Compared to
Year Ended December 31, 1997
----------------------------------------------------------
Increase (Decrease) Due To
----------------------------------------------------------
<CAPTION>
Rate/
Volume Rate Volume Net
------ ---- ------ ---
<S> <C> <C> <C> <C>
Earning assets:
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 $ 743,952 $ 8,984 $ 2,180 $ 755,116
liabilities ----------- --------- --------- -----------
Net change in net interest $ 572,230 $(18,846) $(74,436) $ 478,948
income =========== ========= ========= ===========
</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 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.
15
<PAGE>
Summary of Loan Loss Experience
And Loan Loss Provisions
1998 1997
---- ----
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%
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%
Provision for Income Taxes. A tax benefit of $202,500 was recognized in fiscal
1998 resulting from a net operating loss carryforward, which will be utilized to
reduce taxable income in future periods.
16
<PAGE>
Financial Condition
Total Assets. The Company reported total assets of $64,838,223 at December 31,
1999, a decrease of $6,497,312 or 9% from December 31, 1998. This decrease in
total assets is related to the Company's efforts to expand its loan portfolio
and control deposit growth to further improve earnings. While this strategy has
resulted in a decline in total assets, it has also resulted in an increase in
net interest income and an improvement in net interest margin.
Cash and Cash Equivalents. Cash and due from banks was $2,400,560 at December
31, 1999 compared to $2,741,672 at December 31, 1998 and represents cash
maintained at the Bank and funds that the Bank and the Company have deposited in
other financial institutions. The Bank reported $4,532,173 of federal funds sold
(which are inter-bank funds with daily liquidity) and securities purchased under
agreements to resell on December 31, 1999 and $12,525,000 on December 31, 1998.
The $7,992,827 decrease in federal funds sold is primarily a result of a decline
in deposits and the use of cash to fund loan growth. The Bank's loan-to-deposit
funds ratio prior to loan loss reserve on December 31, 1999 was 90% compared to
76% on December 31, 1998.
Investment Securities. The Company's investment portfolio decreased from
$2,365,619 as of December 31, 1998 to $1,127,881 at December 31, 1999 as a
result of maturing securities and securities in the available for sale category
which were liquidated as deposits declined and cash was used to fund loan
growth. 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 (iii) other
corporate securities as of December 31, 1999 and December 31, 1998 were
$1,127,881 and $2,365,619 respectively.
The following table summarizes the maturity dates of those securities as of
December 31, 1999.
<TABLE>
Investment Portfolio
Repricing Schedule
<CAPTION>
After 1 year
1 year or less through 5 years After 5 years Total
-------------- --------------- ------------- -----
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury and other U.S. $ 0 $ 0 $ 0 $ 0
Govt. agencies and corporations
Weighted Average Yield 0% 0% 0% 0%
Corporate Securities 128,500 0 0 128,500
Weighted Average Yield 3.98% 0% 0% 3.98%
Total Available for Sale $ 128,500 $ 0 $ 0 $ 128,500
--------- ----- ----------- -----------
Weighted Avg. Yield of Total 3.98% 0% 0% 3.98%
Held to Maturity Securities:
U.S. Treasury and other U.S. $ 749,381 $ 0 $ 250,000 $ 999,381
Govt. agencies and corporations
Weighted Average Yield 6.66% 0% 7.38% 6.84%
Total Held to Maturity $ 749,381 $ 0 $ 250,000 $ 999,381
--------- ----- ----------- -----------
Weighted Avg. Yield of Total 6.66% 0% 7.38% 6.84%
Total Securities $ 877,881 $ 0 $ 250,000 $ 1,127,881
--------- ----- ----------- -----------
Weighted Avg. Yield of Total 6.27% 0% 7.38% 6.50%
</TABLE>
Amortized costs and fair values of available for sale securities are discussed
in Notes 4 and 5 respectively, to the Company's Consolidated Financial
Statements.
17
<PAGE>
Loans. Loans prior to the allowance for loan losses increased from $48,869,077
at December 31, 1998 to $51,692,567 at December 31, 1999, an increase of
$2,823,490 or 6%. In addition to the $51,692,567 in loans outstanding that the
Bank reported on December 31, 1999, the Bank had unfunded loan commitments of
$13,523,224. Also, during fiscal year 1999 the Bank originated $4,815,550 in
mortgage loans sold in the secondary market compared to $15,632,460 secondary
market loans originated in 1998. The decline in secondary market loan volume was
primarily driven by an increased rate environment which reduced the amount of
refinancing opportunities.
The following table summarizes the distribution of the Company's loans at
December 31, 1999 and December 31, 1998.
Loan Portfolio Composition
December 31,
-------------------------------------
1999 1998
---- ----
Commercial $16,956,230 $10,011,324
Real Estate:
Construction 4,321,625 3,592,246
Commercial 14,927,167 21,033,369
Residential 10,809,939 9,854,421
Installment and Consumer 4,677,606 4,377,717
----------- -----------
Total Loans $51,692,567 $48,869,077
=========== ===========
The following table summarizes the maturities of the Company's loan portfolio at
December 31, 1999 (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 $12,689,696 $17,136,719 $2,056,982 $31,883,397
Real estate-construction 1,172,108 3,149,517 0 4,321,625
Total $13,861,804 $20,286,236 $2,056,982 $36,205,022
</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, 1999 (excluding residential real estate, consumer and installment).
Amount of Loans Due After One Year With
----------------------------------------------
Predetermined Floating or adj.
Rates interest rates Total
----------------------------------------------
Commercial $17,121,518 $ 2,072,183 $19,193,701
Real estate-construction 2,149,517 1,000,000 3,149,517
Total $19,271,035 $ 3,072,183 $22,343,218
18
<PAGE>
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 1999.
The Bank assigns an internal loan rating to its commercial loans based upon an
internally developed rating system. The Bank uses six 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 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 2000, $1,349,087 was classified as Doubtful and $2,400,999 was
classified as Substandard. There were no loans classified as Loss. Of the assets
classified, approximately $5,307 was on non-accrual status as of February 29,
2000. 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, 1999, 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,
----------------------
1999 1998
---- ----
Non-accrual Loans $325,055 $492,540
Accruing Loans, Past Due 90 Days+ (1) $ 0 $ 0
- ---------
(1) Loans are generally placed in non-accrual when contractually past due 90
days or more.
For fiscal 1999 and fiscal 1998 the gross interest income which would have been
recorded had the non-accruing loans been current in accordance with their
original terms was $18,731 and $27,585, respectively, none of which was
recognized. The amounts of interest income on non-accruing loans that were
included in net income for fiscal 1999 and fiscal 1998 were $8,499 and $64,157,
respectively.
Allowance for Loan Losses. The Company's allowance for estimated loan losses was
$653,270, or 1.26% of loans at December 31, 1999 compared to $562,747, or 1.15%
of loans at December 31, 1998. See "Comparison of Operating Results for the
Years Ended December 31, 1999 and December 31, 1998 - 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 $566,491 (or 87% of the reserve for
19
<PAGE>
loan losses) to these loans, which comprise about 70% of the loan portfolio. The
Bank has allocated $11,466 (or approximately 2% of the reserve for loan losses)
to residential mortgages, which comprise about 21% of the loan portfolio.
Consumer loans comprise about 9% of the loan portfolio, and $28,561 (or about 4%
of the reserve for loan losses) is allocated to consumer loans. The Bank has
allocated $6,762 of the reserve for loan losses to unfunded loan commitments,
which total approximately $13,523,224. The balance of the reserve for loan
losses of $39,990 is unallocated.
Other Assets. The Company's office building, leasehold improvements and
equipment less accumulated depreciation and amortization decreased to $1,352,995
at December 31, 1999 from $1,376,660 at December 31, 1998.
On December 31, 1999, the Bank had $905,938 in Other Real Estate Owned which is
represented by 14 fully improved residential lots and one completed model home.
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. Since December 31, 1999, the Bank has sold one
additional lot and has an executed offer to purchase on another one.
Accrued interest receivable on loans and other assets increased to $1,136,683 at
December 31, 1999 compared to $663,617 at December 31, 1998. The increase is
primarily due to deferred income taxes on prior years' losses.
Deposits. The Bank experienced deposit decline during fiscal 1999. Total
deposits decreased by $7,058,465 from $64,522,856 as of December 31, 1998 to
$57,464,391 on December 31, 1999. This was the result of a deliberate strategy
to reduce liability costs by trimming the Bank of single-service, unprofitable
relationships.
As of December 31, 1999, time deposits over $100,000 represented 7.40% of total
deposits. Set forth below is a schedule of the maturities as of December 31,
1999 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. Over
or less thru 6 mos. thru 12 mos. 12 mos.
------- ----------- ------------ -------
Certificates of Deposit $201,477 $ 0 $3,852,016 $200,510
Other Liabilities. Accrued interest payable and other liabilities of $712,424 at
December 31, 1999 compared to $614,535 at December 31, 1998 were made up of
accrued interest payable on deposit accounts, accounts payable and deferred
employee benefits.
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, 1999 the Bank had
$7,325,257, primarily in federal funds, available to meet future liquidity
demands.
Capital Resources. The Bank's most recent notification as of August 23, 1999
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 18 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
20
<PAGE>
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.
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 interest rate volatility. 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 monthly
GAP position within +or- 25% of 1.00.
The following table summarizes the repricing opportunities as of December 31,
1999 for each major category of interest-earning assets and interest-bearing
liabilities:
<TABLE>
Interest Rate-Sensitive Assets
and Liabilities
(In thousands)
<CAPTION>
0-89 90-179 180-359 360+
Days Days Days Days Total
---- ------ ------- ---- -----
<S> <C> <C> <C> <C> <C>
Investments $ 633 0 245 250 $ 1,128
Loans $21,978 1,505 1,092 27,117 $51,692
- ----------------------------------------------------------------------------------------------------
Total Rate Sensitive Assets $22,611 1,505 1,337 27,367 $52,820
Rate Sensitive Liabilities (1) $31,264(2) 1,507 10,196 3,562 $46,529
- ----------------------------------------------------------------------------------------------------
GAP $(8,653) (2) (8,859) 23,805
Cumulative GAP $(8,653) (8,655) (17,514) 6,291
GAP/Rate Sensitive Assets (38.3%) (35.9%) (68.8%) 11.9%
(1) Savings, NOW, and Money Market Demand Deposits are considered as
immediately repricable.
(2) Includes total money market demand account balances.
</TABLE>
With the recent action of the Federal Reserve in raising interest rates,
management has attempted to lengthen the maturities of its liabilities.
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
21
<PAGE>
Company's consolidated financial statements and notes are generally prepared in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation.
Year 2000 Impact
In order to ensure that neither the Company nor the Bank would experience
material disruption of its operations due to computer-related malfunctions as a
result of the turning of the Year 2000 ("Y2K"), the Bank completed a
comprehensive testing and manufacturer certification process with respect to all
of its internal computer software, hardware and embedded systems prior the end
of 1999. The Bank also assessed the Y2K readiness of nearly all of its material
vendors and commercial customers. The cost to the Bank of assessing its and its
vendors' and customers' Y2K readiness was approximately $6,000. As of the date
hereof, neither the Company nor the Bank has experienced any disruption in the
operation of its internal computer software, hardware or embedded systems or
other significant problems as a result of the Y2K transition. Additionally,
neither the Company nor the Bank experienced or has been informed of any such
problems related to any of its material third-party vendors or commercial
customers. Despite the testing process and lack of disruption as of the date
hereof, there can be no assurance that Y2K related disruptions will not occur in
the future and will not have a material adverse impact on the Bank's results of
operations. Based on currently-available information, however, the Bank and the
Company believe that any Y2K related disruptions that may occur in the future
will not have a material adverse impact on their results of operations. The Bank
has developed contingency plans to deal with potential Y2K related disruptions
and will continue to monitor its exposure as appropriate and act to resolve any
problems that may occur.
22
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Average Balance Sheet
1999 1998
---- ----
Cash and due from banks $ 2,185,088 $ 1,913,542
Federal funds sold and securities purchased
under agreement to resell 8,625,770 7,721,729
Interest-bearing deposits in other banks 98,958 56,955
Investment securities:
U.S. Treasury, agency and other securities 2,137,006 3,690,491
Loans:
Real estate mortgages 11,531,501 12,264,601
Consumer-net 3,099,319 3,684,486
Commercial and other 35,437,333 33,022,799
------------ ------------
Total 50,068,153 48,971,886
Less allowance for loan losses (516,397) (544,812)
------------ ------------
Net loans 49,551,756 48,427,074
Fixed assets 1,364,062 1,364,536
Other real estate owned 1,077,062 1,461,638
Cash surrender value of life insurance 1,184,816 448,048
Other assets 1,364,965 494,134
------------ ------------
Total assets $67,589,483 $65,578,147
============ ============
Interest-bearing deposits:
NOW accounts $ 1,683,475 $ 1,454,223
Savings accounts 1,590,674 1,258,761
Money Market deposit accounts 30,601,480 24,363,265
Time deposits 17,738,976 25,075,721
------------ ------------
Total interest-bearing deposits 51,614,605 52,151,970
Demand deposits 8,697,185 6,489,825
------------ ------------
Total deposits 60,311,790 58,641,795
Other liabilities 784,150 1,021,300
------------ ------------
Total liabilities 61,095,940 59,663,095
Equity capital 6,493,543 5,915,052
------------ ------------
Total liabilities and capital $67,589,483 $65,578,147
============ ============
23
<PAGE>
Item 7. Financial Statements
Page
Independent Auditor's Report................................................25
Consolidated Balance Sheets.................................................26
Consolidated Statements of Income...........................................27
Consolidated Statements of Changes in Stockholders' Equity..................28
Consolidated Statements of Cash Flows.......................................29
Notes to Consolidated Financial Statements..................................31
24
<PAGE>
Independent Auditor's Report
Board of Directors
RidgeStone Financial Services, Inc. and Subsidiary
Brookfield, Wisconsin
We have audited the accompanying consolidated balance sheets of RidgeStone
Financial Services, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1999, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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. and Subsidiary as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for the years ended December 31, 1999, 1998
and 1997, in conformity with generally accepted accounting principles.
VIRCHOW, KRAUSE & COMPANY, LLP
Milwaukee, Wisconsin
January 27, 2000
25
<PAGE>
<TABLE>
RIDGESTONE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 2,400,560 $ 2,741,672
Federal funds sold and securities purchased under
agreements to resell 4,532,173 12,525,000
Interest-bearing deposits in banks 264,024 2,649
Available for sale securities 128,500 615,284
Held to maturity securities, fair value of $995,203 and
$1,780,700 in 1999 and 1998, respectively 999,381 1,750,335
Loans, less allowance for loan losses of $653,270 and
$562,747 in 1999 and 1998, respectively 51,039,297 48,306,330
Mortgage loans held for sale 136,000 259,000
Office building, leasehold improvements and equipment, net 1,352,995 1,376,660
Other real estate owned 905,938 1,297,835
Cash surrender value of life insurance 1,942,672 1,797,153
Other assets 1,136,683 663,617
----------- -----------
TOTAL ASSETS $64,838,223 $71,335,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
LIABILITIES
Deposits
Demand $10,935,647 $ 8,552,053
Savings and NOW accounts 29,609,892 34,013,384
Other Time 16,918,852 21,957,419
----------- -----------
Total Deposits 57,464,391 64,522,856
Accrued expense and other liabilities 712,424 614,535
----------- -----------
Total Liabilities 58,176,815 65,137,391
----------- -----------
COMMITMENTS AND CONTINGENCIES
<CAPTION>
<S> <C> <C>
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares
authorized no shares issued and outstanding - -
Common stock, no par value; 10,000,000 shares
authorized, 876,492 shares issued and outstanding 8,417,117 8,417,117
Retained deficit (1,717,271) (2,196,449)
----------- -----------
6,699,846 6,220,668
Accumulated other comprehensive loss (38,438) (22,524)
----------- -----------
Total Stockholders' Equity 6,661,408 6,198,144
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $64,838,223 $71,335,535
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
RIDGESTONE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
---- ---- ----
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $4,263,539 $4,284,718 $2,949,301
Interest on securities - taxable 276,087 237,396 546,627
Interest on federal funds sold and securities
purchased under agreements to resell 286,165 411,276 195,211
Interest on deposits in banks 6,025 7,553 15,740
---------- ---------- ----------
Total Interest Income 4,831,816 4,940,943 3,706,879
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 2,417,939 2,881,181 2,125,477
Interest on federal funds purchased - - 588
---------- ---------- ----------
Total Interest Expense 2,417,939 2,881,181 2,126,065
---------- ---------- ----------
Net Interest Income Before Provision
for Loan Losses 2,413,877 2,059,762 1,580,814
PROVISION FOR LOAN LOSSES 282,500 65,000 290,000
---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 2,131,377 1,994,762 1,290,814
---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 87,322 40,532 24,418
Secondary market loan fees 55,446 153,275 32,932
Gain (loss) on sale of securities, net (15,402) (7,687) 571,382
Increase in cash surrender value of life insurance 104,832 - -
Other income 79,998 96,052 101,145
---------- ---------- ----------
Total Noninterest Income 312,196 282,172 729,877
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,223,532 1,129,696 1,021,304
Occupancy expenses 313,395 260,134 205,833
Equipment expenses 116,550 130,922 150,507
Professional fees 124,078 169,483 137,767
Data processing fees 136,573 104,626 91,346
Other expenses 425,302 342,899 338,025
---------- ---------- ----------
Total Noninterest Expenses 2,339,430 2,137,760 1,944,782
---------- ---------- ----------
Income Before Income Taxes 104,143 139,174 75,909
Less: Applicable income taxes (benefits) (375,035) (192,203) 34,276
---------- ---------- ----------
NET INCOME $ 479,178 $ 331,377 $ 41,633
========== ========== ==========
Basic earnings per share $ 0.55 $ 0.38 $ 0.05
========== ========== ==========
Diluted earnings per share $ 0.55 $ 0.37 $ 0.05
========== ========== ==========
Weighted average shares outstanding 876,492 876,239 834,340
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
<TABLE>
RIDGESTONE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
Accumulated
Retained Other
Common Earnings Comprehensive
Stock (Deficit) Income (Loss) Total
------ --------- ------------- -----
<S> <C> <C> <C> <C>
BALANCES - December 31, 1996 $7,721,399 $(1,879,126) $ 25,732 $5,868,005
----------
Comprehensive income
Net income - 41,633 - 41,633
Unrealized gains (losses) on
securities available for sale - - (90,654) (90,654)
Reclassification adjustment for
gains (losses) realized in
net income - - 14,690 14,690
Income tax effect - - 29,626 29,626
----------
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 - 1998 - 331,377 - 331,377
Unrealized gains (losses) on
securities available for sale - - 4,543 4,543
Reclassification adjustment for
gains (losses) realized in
net income - - (7,687) (7,687)
Income tax effect - - 1,226 1,226
----------
Total Comprehensive Income 329,459
----------
5% Stock dividend 690,333 (690,333) - -
Issuance of 437 new shares of stock for
the exercise of stock options 5,385 - - 5,385
---------- ----------- -------- ----------
BALANCES - December 31, 1998 8,417,117 (2,196,449) (22,524) 6,198,144
----------
Comprehensive income
Net income - 1999 - 479,178 - 479,178
Unrealized gains (losses) on
securities available for sale - - (10,687) (10,687)
Reclassification adjustment for
gains (losses) realized in
net income - - (15,402) (15,402)
Income tax effect - - 10,175 10,175
----------
Total Comprehensive Income 463,264
---------- ----------- -------- ----------
BALANCES - DECEMBER 31, 1999 $8,417,117 $(1,717,271) $(38,438) $6,661,408
========== =========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
RIDGESTONE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 479,178 $ 331,377 $ 41,633
---------- ---------- -----------
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities
Depreciation 152,026 170,166 184,473
Provision for loan losses 282,500 65,000 290,000
Provision (benefit) for deferred taxes (375,035) (202,500) -
(Gain) loss on sale of investment securities 15,402 7,687 (571,382)
Loss on sale of other real estate owned 80,986 - -
Amortization and accretion of bond
premiums and discounts - net 562 (839) (1,752)
Amortization of organizational costs - - 2,120
Net decrease in mortgage loans held for sale 123,000 442,250 143,850
Net increase in cash surrender value of life insurance (145,519) (1,797,153) -
(Increase) decrease in other assets (98,031) 33,992 (249,573)
Increase (decrease) in accrued expenses
and other liabilities 97,889 (138,237) 483,903
---------- ---------- -----------
Total Adjustments 133,780 (1,419,634) 281,639
---------- ---------- -----------
Net Cash Flows Provided By
(Used In) Operating Activities 612,958 (1,088,257) 323,272
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits in banks (261,375) 1,536 180,452
Net (increase) decrease in federal funds and securities
purchased under agreements to resell 7,992,827 (4,531,000) 5,265,000
Activity in available for sale securities:
Sales 55,548 391,316 2,701,397
Maturities, prepayments and calls 1,465,000 - -
Purchases (1,064,688) (138,200) (1,994,683)
Activity in held to maturity securities:
Maturities, prepayments and calls 1,000,000 2,500,000 750,000
Purchases (250,000) - -
Purchase of office building, leasehold improvements
and equipment (128,361) (143,744) (76,333)
Net expenditures on other real estate owned (622,589) (186,681) (1,125,790)
Proceeds from sales of other real estate owned 933,500 663,335 -
Net increase in loans (3,015,467) (3,438,299) (27,665,473)
---------- ---------- -----------
Net Cash Flows Provided by
(Used In) Investing Activities 6,104,395 (4,881,737) (21,965,430)
---------- ---------- -----------
</TABLE>
29
<PAGE>
<TABLE>
RIDGESTONE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised - 5,385 -
Net increase (decrease) in deposits (7,058,465) 6,035,231 22,818,965
----------- ----------- -----------
Net Cash Flows Provided By
(Used In) Financing Activities (7,058,465) 6,040,616 22,818,965
----------- ----------- -----------
Net Increase (Decrease) in Cash
and Due from Banks (341,112) 70,622 1,176,807
CASH AND DUE FROM BANKS - Beginning of Year 2,741,672 2,671,050 1,494,243
----------- ----------- -----------
CASH AND DUE FROM BANKS - END OF YEAR $ 2,400,560 $ 2,741,672 $ 2,671,050
=========== =========== ===========
Supplemental cash flow disclosures
Cash paid during the year for
Interest $ 2,641,890 $ 2,862,321 $ 1,865,394
Income taxes $ 50 $ 10,297 $ 30,096
Noncash transactions
Transfer of foreclosed assets
from loans to other assets $ - $ - $ 648,699
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
A. 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.
B. Nature of Banking Activities
The consolidated income 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.
C. Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of foreclosed real estate and deferred tax assets.
D. 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.
E. Reclassifications
Certain 1997 and 1998 amounts have been reclassified to conform to the 1999
presentation. The reclassifications have no effect on reported amounts of net
income or equity.
F. 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.
31
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
G. 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.
H. 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.
I. 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.
J. 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.
32
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
J. 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.
K. 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.
L. Other Real Estate Owned
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 losses on foreclosed real estate.
M. 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.
N. Income Taxes
The Company files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax benefits
of those companies having taxable federal losses or credits are reimbursed by
the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The differences relate principally to the reserve
for loan losses, operating loss carryforwards and fixed assets. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
O. 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.
33
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
P. Earnings Per Share Data
Earnings per common share data have 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.
Q. 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 and securities purchased under
agreements to resell
Interest-bearing deposits in banks
Available for sale securities
Variable rate loans that reprice frequently where no
significant change in credit risk has occurred
Mortgage loans held for sale
Accrued interest receivable
Cash surrender value of life insurance
Demand deposits
Variable rate money market accounts
Variable rate certificates of deposit
Accrued interest payable
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
34
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Q. 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
non-fee-producing, variable rate commitments, the Company has determined it does
not have a distinguishable fair value.
- --------------------------------------------------------------------------------
NOTE 2 - Cash and Due from Banks
The subsidiary Bank is required to maintain vault cash or reserve balances with
Federal Reserve Banks based upon a percentage of deposits. These requirements
approximated $158,000 and $112,000 at December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
NOTE 3 - Securities Purchased Under Agreements to Resell
The bank enters into purchases of securities under agreements to resell
substantially identical securities. These agreements are classified as secured
loans. Securities purchased under agreements to resell at December 31, 1999
consist of SBA Loans. There were no securities purchased under agreements to
resell at December 31, 1998.
The amounts advanced under these agreements are reflected as assets in the
consolidated balance sheet. It is the subsidiary Bank's policy to take
possession of securities purchased under agreements to resell. Agreements with
third parties specify the subsidiary Bank's rights to request additional
collateral, based on its monitoring of the fair value of the underlying
securities on a daily basis. The securities are delivered by appropriate entry
into a third-party custodian's account designated by the subsidiary Bank under a
written custodial agreement that explicitly recognizes the subsidiary Bank's
interest in the securities. At December 31, 1999 these agreements matured within
90 days and no material amount of agreements to resell securities purchased was
outstanding with any individual dealer.
35
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 4 - Available for Sale Securities
Amortized costs and fair values of available for sale securities as of December
31, 1999 and 1998 are summarized as follows:
December 31, 1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Corporate securities $ 45,000 $ - $ - $ 45,000
Equity securities 121,938 - 38,438 83,500
-------- --- ------- --------
$166,938 $ - $38,438 $128,500
======== === ======= ========
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
U.S. Treasury securities $249,608 $ 470 $ - $250,078
Obligations of other U.S.
government agencies and 250,000 1,406 - 251,406
corporations -------- ------ ------- --------
499,608 1,876 - 501,484
138,200 - 24,400 113,800
Equity securities -------- ------ ------- --------
$637,808 $1,876 $24,400 $615,284
======== ====== ======= ========
Expected maturities will differ from contractual maturities in corporate and
other equity securities since the anticipated maturities are not readily
determinable.
36
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 4 - Available for Sale Securities (continued)
Realized gains and losses on sale of available for sale securities for the years
ended December 31, 1999, 1998 and 1997 are as follows:
Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
Proceeds from sales of
available for sale securities $ 55,548 $ 391,316 $2,701,397
======== ========= ==========
Gross gains on sales $ - $ 23,748 $ 574,885
Gross losses on sales (15,402) (31,435) (3,503)
-------- --------- ----------
$(15,402) $ (7,687) $ 571,382
======== ========= ==========
Related income taxes (benefit) $ (6,084) $ (3,036) $ 34,276
======== ========= ==========
- --------------------------------------------------------------------------------
NOTE 5 - Held to Maturity Securities
Amortized costs and fair values of held to maturity securities as of December
31, 1999 and 1998 are summarized as follows:
<TABLE>
December 31, 1999
-------------------------------------------------
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $749,381 $2,572 $ - $751,953
Obligations of other U.S. government
agencies and corporations 250,000 - 6,750 243,250
-------- ------ ------ --------
$999,381 $2,572 $6,750 $995,203
======== ====== ====== ========
December 31, 1998
-------------------------------------------------
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
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>
37
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 5 - Held to Maturity Securities (continued)
The amortized cost and fair value of held to maturity securities as of December
31, 1999, by contractual maturity, are shown below:
December 31, 1999
-------------------------
Amortized Fair
Cost Value
--------- -----
Due in one year or less $749,381 $751,953
Due after one year through 5 years - -
Due after 5 years through 10 years 250,000 243,250
-------- --------
$999,381 $995,203
======== ========
- --------------------------------------------------------------------------------
NOTE 6 - Loans
Major classifications of loans are as follows:
December 31,
----------------------------------
1999 1998
---- ----
Commercial $16,956,230 $10,011,324
Real estate
Construction 4,321,625 3,592,246
Commercial 14,927,167 21,033,369
Residential 10,809,939 9,854,421
Installment and consumer 4,677,606 4,377,717
----------- -----------
51,692,567 48,869,077
Less: Allowance for loan losses (653,270) (562,747)
----------- -----------
Net Loans $51,039,297 $48,306,330
=========== ===========
Impaired loans at December 31, 1999 and 1998 of $325,055 and $492,540,
respectively, have been recognized in conformity with FASB Statement No. 114 as
amended by FASB Statement No. 118. The average recorded investment in impaired
loans during 1999 and 1998 was $320,466 and $365,672, respectively. The total
allowance for loan losses related to these loans was $28,023 and $-0- for
December 31, 1999 and 1998, respectively. Interest income on impaired loans of
$8,499 and $64,157 was recognized for cash payments received in 1999 and 1998,
respectively.
Certain directors, executive officers and principal shareholders of the Company,
and their related interests, had loans outstanding in the aggregate amounts of
$2,109,415 and $3,576,818 at December 31, 1999 and 1998, respectively. During
1999, $1,069,424 of new loans were made with $2,536,827 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.
38
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 7 - 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,
---------------------------
1999 1998
---- ----
BALANCE - Beginning of Year $ 562,747 $ 72,200
Change-offs (191,977) (126,993)
Provision charged to operations 282,500 65,000
--------- ---------
BALANCE - END OF YEAR $ 653,270 $ 562,747
========= =========
- --------------------------------------------------------------------------------
NOTE 8 - 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,
-----------------------
1999 1998
---- ----
Land $ 72,200 $ 72,200
Building and leasehold improvements 1,041,147 1,034,147
Furniture and equipment 1,021,974 900,613
---------- ----------
2,135,321 2,006,960
Less: Accumulated depreciation and amortization 782,326 630,300
---------- ----------
Total Office Building, Leasehold
Improvements and Equipment $1,352,995 $1,376,660
========== ==========
Depreciation and amortization expense amounted to $152,026, $170,166 and
$184,473 in 1999, 1998 and 1997, respectively.
39
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 9 - Deposits
The aggregate amount of other Time deposits (including CD's), each with a
minimum denomination of $100,000, was $4,254,004 and $4,103,776 in 1999 and
1998, respectively.
At December 31, 1999 the scheduled maturities of other Time deposits are as
follows:
2000 $14,368,533
2001 1,521,569
2002 856,398
2003 32,050
2004 140,302
-----------
Total $16,918.852
===========
- --------------------------------------------------------------------------------
NOTE 10 - Income Taxes
The provision for income taxes included in the accompanying consolidated
financial statements consists of the following:
Years Ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
Current Taxes
Federal $ - $ - $ -
State - 10,297 34,276
--------- --------- -------
- 10,297 34,276
--------- --------- -------
Deferred Income Taxes (Benefit)
Federal (324,045) (170,100) -
State (50,990) (32,400) -
--------- --------- -------
(375,035) (202,500) -
--------- --------- -------
Total Provision (Benefit)
for Income Taxes $(375,035) $(192,203) $34,276
========= ========= =======
At December 31, 1999, the Company had a net operating loss carryforward for
income tax purposes of approximately $810,000 which, if not utilized to reduce
taxable income in future periods, will expire as follows:
December 31,
2011 $ 707,000
2013 103,000
---------
$ 810,000
=========
40
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 10 - Income Taxes (continued)
The following amounts make up the deferred tax assets and liabilities:
December 31,
----------------------------
1999 1998
---- ----
Deferred Tax Assets
Allowance for loan losses $216,797 $143,989
Startup costs 36,171 75,633
Net operating loss carryforward 318,829 433,280
Deferred compensation 69,919 19,478
Other 16,656 -
Deferred Tax Liabilities
Depreciation (8,598) (2,280)
Other - (10,151)
Valuation - (385,210)
-------- ---------
$649,774 $ 274,739
======== =========
Management believes it is more likely than not that the gross deferred tax
assets as of December 31, 1999 will be fully realized. A valuation allowance was
recorded as of December 31, 1998 to reduce the deferred tax assets to their
realizable value.
<TABLE>
Years Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<CAPTION>
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of statutory to
effective taxes
Federal income taxes at
statutory rate $ 35,409 34.0% $ 47,319 34.0% $ 25,809 34.0%
Adjustments for
Increases in taxes
resulting from state
income taxes - - 6,178 4.4 22,622 29.8
Increase in cash
surrender value of
life insurance (35,643) (34.2) - - - -
Reduction of deferred tax
valuation allowance (385,211) (369.9) (235,179) (162.5) (14,155) (18.6)
Other - net 10,410 10.0 (10,521) (14.0) - -
--------- ------ --------- -------- -------- ------
Effective Income
Taxes - Operations $(375,035) (360.1)% $(192,203) (138.1)% $ 34,276 45.2%
========= ====== ========= ======== ======== ======
</TABLE>
41
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 11 - Profit-Sharing Plan
The Company has a trusteed 401(k) plan. The Company contributed $32,938, $20,592
and $28,700 in 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
NOTE 12 - 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. The payments are being accrued
over the employees' anticipated remaining period of employment. The salary
continuation accrual balance was $183,818 and $49,500 at December 31, 1999 and
1998, respectively. Agreement expense for the years ended December 31, 1999 and
1998 was $141,877 and $49,500, respectively.
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. The cash surrender value of the life insurance was
$1,942,672 and $1,797,153 at December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
NOTE 13 - Facilities Lease
Lease expense for the years ended December 31, 1999, 1998 and 1997 was $113,167,
$94,235 and $81,936, respectively. The lease term, which is accounted for as an
operating lease, expires on May 31, 2000 and has two five-year renewal options.
Monthly rental payments of $8,878 are required under the terms of the lease.
During 1999, the Company exercised an option to lease additional space which
required additional monthly payments of $1,018 per month. The Company also has
the option of purchasing the building upon the fourth anniversary of the
commencement of the lease for $1,000,000.
In connection with the lease of the subsidiary Bank's main office, the Company
paid broker's commissions to an entity whose principals are an organizer of the
subsidiary Bank and a director of the Company, in the amount of $4,158, $3,812
and $4,518 in 1999, 1998 and 1997, 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,
2000 $ 49,479
========
42
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - 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:
1999 1998
Financial instruments whose contract ---- ----
amounts represent credit risk:
Commitments to extend credit $12,497,170 $12,754,818
Credit card commitments $ 916,854 $ 781,350
Standby letters of credit $ 109,200 $ 28,700
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.
43
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 15 - 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 6.
- --------------------------------------------------------------------------------
NOTE 16 - Stockholders' Equity
The RidgeStone Financial Services, Inc. 1996 Stock Option Plan (the "Plan")
provides for the granting of options to purchase up to 500,000 shares of common
stock to key officers and employees of the Company. Options granted to date
under the Plan have been granted at the fair market value of the common stock on
the date of the grant. Options granted to date under the Plan may be exercised
33.33% per year beginning one year after the date of the grant and must be
exercised within a ten year period.
Activity of the Plan is summarized in the following table:
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Fair Value Average
of Option Options Options Exercise
Granted Available Exercisable Outstanding Price
---------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
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
Granted $5.48 (63,300) 63,300 11.00
Canceled 675 (675) 14.37
------- -------
BALANCE - DECEMBER 31, 1999 311,526 99,824 213,037 $13.78
======= =======
</TABLE>
44
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16 - Stockholders' Equity (continued)
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------ -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- -------- ----------- ---------------- --------- ----------- ---------
$11.75 49,798 6.5 years $11.75 49,798 $ 11.75
14.63 50,139 7.3 years 14.63 33,428 14.63
18.50 49,800 8.3 years 18.50 16,598 18.50
11.00 63,300 9.5 years 11.00 - 11.00
------- ------
213,037 99,824
======= ======
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:
Years Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Net income - as reported $479,178 $331,337 $41,633
Pro forma $336,501 $248,306 $ 1,692
Basic earnings per share - as reported $ 0.55 $ 0.38 $ 0.05
Pro forma $ 0.38 $ 0.28 $ -
Diluted earnings per share - as reported $ 0.55 $ 0.37 $ 0.05
Pro forma $ 0.38 $ 0.28 $ -
45
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16 - Stockholders' Equity (continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of $-0-, $- 0-, and $-0-; expected volatility of 25.93%, 24.22% and 13.4%,
risk-free interest rates of 7.04%, 5.35% and 5.59%; and expected lives of 8
years, 8 years and 8 years, respectively.
A reconciliation of the numerators and the denominators of earnings per share
and earnings per share assuming dilutions are:
Per Share
Income Shares Amount
------ ------ ---------
1999
Earnings per share $479,178 876,492 $0.55
Effect of options - - ======
-------- -------
Earnings Per Share - Assuming Dilution $479,178 876,492 $0.55
======== ======== ======
1998
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
Earnings per share $ 41,633 834,340 $0.05
Effect of options - 12,056 ======
-------- -------
Earnings Per Share - Assuming Dilution $ 41,633 846,396 $0.05
======== ======== ======
- --------------------------------------------------------------------------------
NOTE 17 - Retained Earnings and Restriction on Dividends
The principal source of income and funds of the Company will be dividends from
the subsidiary Bank. Under Wisconsin law, the subsidiary Bank will be 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 earnings. 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. Unless exempted
by the Wisconsin Department of Financial Institutions, Division of Banking, a
state bank may not pay or declare dividends on capital stock in excess of 50% of
its net earnings until its surplus fund is fully restored to an amount equal to
100% of the bank's capital stock. 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.
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.
46
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 18 - Regulatory Capital Requirements
The Company (on a consolidated basis) and the subsidiary Bank are 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 Company's and
the subsidiary Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
subsidiary Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk- weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999 and 1998, the Company and the subsidiary Bank met all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the regulatory
agencies categorized the subsidiary Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the institution must maintain minimum total risk-based, Tier I
risk-based, and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the subsidiary Bank's category.
47
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 18 - Regulatory Capital Requirements (continued)
The Company and subsidiary Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998 are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital (to risk-weighted assets)
RidgeStone Financial
Services, Inc. $6,936,116 12.4% $4,476,857 8.0% N/A
RidgeStone Bank $6,534,774 11.7% $4,465,039 8.0% $5,581,298 10.0%
Tier I capital (to risk-weighted assets)
RidgeStone Financial
Services, Inc. $6,282,846 11.2% $2,238,428 4.0% N/A
RidgeStone Bank $5,881,504 10.5% $2,232,519 4.0% $3,348,778 6.0%
Tier I capital (to average assets)
RidgeStone Financial
Services, Inc. $6,282,846 9.5% $2,631,706 4.0% N/A
RidgeStone Bank $5,881,504 9.0% $2,626,440 4.0% $3,283,050 5.0%
As of December 31, 1998
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%
</TABLE>
- --------------------------------------------------------------------------------
NOTE 19 - 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.
48
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 20 - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks $ 2,400,560 $ 2,400,560 $ 2,741,672 $ 2,741,672
=========== =========== =========== ===========
Interest bearing deposits in banks $ 264,024 $ 264,024 $ 2,649 $ 2,649
=========== =========== =========== ===========
Federal funds sold $ 4,532,173 $ 4,532,173 $12,525,000 $12,525,000
=========== =========== =========== ===========
Available for sale securities $ 128,500 $ 128,500 $ 615,284 $ 615,284
=========== =========== =========== ===========
Held to maturity securities $ 999,381 $ 995,203 $ 1,750,335 $ 1,780,700
=========== =========== =========== ===========
Net loans $51,039,297 $51,216,732 $48,306,330 $48,614,751
=========== =========== =========== ===========
Mortgage loans held for sale $ 136,000 $ 136,000 $ 259,000 $ 259,000
=========== =========== =========== ===========
Cash surrender value of life $ 1,942,672 $ 1,942,672 $ 1,797,153 $ 1,797,153
insurance =========== =========== =========== ===========
Accrued interest receivable $ 401,784 $ 401,784 $ 394,273 $ 394,273
=========== =========== =========== ===========
FINANCIAL LIABILITIES
Deposits $57,464,391 $57,472,425 $64,522,856 $64,561,674
=========== =========== =========== ===========
Accrued interest payable $ 309,503 $ 309,503 $ 533,454 $ 533,454
=========== =========== =========== ===========
</TABLE>
The estimated fair value of fee income on letters of credit at December 31, 1999
and 1998 is insignificant. Loan commitments on which the committed interest rate
is less than the current market rate are also insignificant at December 31, 1999
and 1998.
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.
49
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 21 - RidgeStone Financial Services, Inc. (Parent Company Only) Financial
Information
<TABLE>
CONDENSED BALANCE SHEETS
December 31,
<CAPTION>
----------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 8,740 $ 274,880
Interest-bearing deposits in banks 258,165 2,649
Available for sale securities 83,500 113,800
Investment in subsidiary 6,298,503 5,720,592
Other real estate - 81,222
Other assets 12,500 14,119
---------- ---------
TOTAL ASSETS $6,661,408 $6,207,262
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ - $ 9,118
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized,
no shares issued and outstanding -
Common stock, no par value; 10,000,000 shares authorized,
and 876,492 shares issued and outstanding. 8,417,117 8,417,117
Retained deficit (1,717,271) (2,196,449)
---------- ----------
6,699,846 6,220,668
Accumulated other comprehensive loss (38,438) (22,524)
---------- ----------
Total Stockholders' Equity 6,661,408 6,198,144
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,661,408 $6,207,262
========== ==========
</TABLE>
50
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 21 - RidgeStone Financial Services, Inc. (Parent Company Only) Financial
Information (continued)
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME
Interest $ 6,025 $ 7,553 $ 15,742
Gain (loss) on sale of securities (15,402) (7,687) 569,429
Other 4,765 3,364 --
--------- --------- ---------
Total Income (Expense) (4,612) 3,230 585,171
--------- --------- ---------
EXPENSES
Salaries and employee benefits -- 2,827 9,532
Other 95,973 42,889 41,914
--------- --------- ---------
Total Expenses 95,973 45,716 51,446
--------- --------- ---------
Income (Loss) Before Income Taxes and
Equity in Undistributed Net Income
(Loss) of Subsidiary (100,585) (42,486) 533,725
INCOME TAXES 25 7,797 34,251
--------- --------- ---------
Income (Loss) Before Equity in Undistributed
Net Income (Loss) of Subsidiary (100,610) (50,283) 499,474
EQUITY IN UNDISTRIBUTED NET INCOME
(LOSS) OF SUBSIDIARY 579,788 381,660 (457,841)
--------- --------- ---------
NET INCOME $ 479,178 $ 331,377 $ 41,633
========= ========= =========
</TABLE>
51
<PAGE>
RIDGESTONE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 21 - RidgeStone Financial Services, Inc. (Parent Company Only) Financial
Information (continued)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 479,178 $ 331,377 $ 41,633
--------- --------- ---------
Adjustments to reconcile net income to net
cash flows used in operating activities
(Gain) loss on sale of investment securities 15,402 7,687 (569,429)
Loss on sale of other real estate owned 54,497 -- --
Amortization of organizational costs -- -- 2,120
Increase (decrease) in other assets 1,620 (2,500) (265)
Increase (decrease) in other liabilities (9,118) 1 264
Equity in undistributed (income) loss
of subsidiary (579,788) (381,660) 457,841
--------- --------- ---------
Total Adjustments (517,387) (376,472) (109,469)
--------- --------- ---------
Net Cash Flows Used in
Operating Activities (38,209) (45,095) (67,836)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing
deposits in banks (255,516) 1,536 180,452
Activity in available for sale securities
Sales 55,548 -- --
Purchases (54,688) -- --
Investment in subsidiary Bank -- (495,000) (500,000)
Proceeds from sale of office building and
equipment to subsidiary Bank -- -- 32,933
Proceeds from sales of other real estate owned 32,015 430,778 --
Net expenditures on other real estate owned (5,290) -- --
Purchase of other real estate from subsidiary Bank -- -- (512,000)
--------- --------- ---------
Net Cash Flows
Used in Investing Activities (227,931) (62,686) (798,615)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised -- 5,385 --
--------- --------- ---------
Decrease in Cash (266,140) (102,396) (866,451)
Cash - Beginning of Year 274,880 374,160 283,898
--------- --------- ---------
CASH (DEFICIT) - END OF YEAR $ 8,740 $ 271,764 $(582,553)
========= ========= =========
</TABLE>
52
<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.
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 2000
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 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 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, 1999.
53
<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, 2000.
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, 2000:
Signatures Title
/s/ Paul E. Menzel President, Chief Executive Officer and
- -------------------------------- Director (Principal Executive Officer)
Paul E. Menzel
/s/ William R. Hayes Vice President, Treasurer and Director
- -------------------------------- (Principal Financial and Accounting Officer)
William R. Hayes
/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
/s/ John E. Horning 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
54
<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 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)]
*10.3 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)]
*10.4 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, 1996 (File No. 0-27984)]
*10.5 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)]
*10.6 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, 1996 (File No. 0-27984)]
*10.7 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)]
*10.8 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, 1996 (File No. 0-27984)]
E-1
<PAGE>
*10.9 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)]
*10.10 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)]
*10.11 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)]
*10.12 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)]
*10.13 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)]
*10.14 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)]
23 Independent Auditor's Consent
27 Financial Data Schedule (EDGAR version only)
99 Definitive Proxy Statement for the Company's 2000 annual
meeting of shareholders scheduled to he held on April 25,
2000 (previously filed with the Commission under Regulation
14A on March 15, 2000 and incorporated by reference herein
to extent indicated in this Form 10-KSB).
*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-2
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 27, 2000, on our audit of the
consolidated financial statements for the year ended December 31, 1999, which
report is included in this Annual Report on Form 10-KSB.
VIRCHOW, KRAUSE & COMPANY, LLP
/s/ Virchow, Krause & Company, LLP
--------------------------------------------
Milwaukee, Wisconsin
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF RIDGESTONE FINANCIAL SERVICES, INC. AS
OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,400,560
<INT-BEARING-DEPOSITS> 264,024
<FED-FUNDS-SOLD> 4,532,173
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,500
<INVESTMENTS-CARRYING> 999,381
<INVESTMENTS-MARKET> 995,203
<LOANS> 51,692,567
<ALLOWANCE> 653,270
<TOTAL-ASSETS> 64,838,223
<DEPOSITS> 57,464,391
<SHORT-TERM> 0
<LIABILITIES-OTHER> 712,424
<LONG-TERM> 0
0
0
<COMMON> 8,417,117
<OTHER-SE> (1,717,271)
<TOTAL-LIABILITIES-AND-EQUITY> 64,838,223
<INTEREST-LOAN> 4,263,539
<INTEREST-INVEST> 276,087
<INTEREST-OTHER> 292,190
<INTEREST-TOTAL> 4,831,816
<INTEREST-DEPOSIT> 2,417,939
<INTEREST-EXPENSE> 2,417,939
<INTEREST-INCOME-NET> 2,413,877
<LOAN-LOSSES> 191,977
<SECURITIES-GAINS> (15,402)
<EXPENSE-OTHER> 2,339,430
<INCOME-PRETAX> 104,143
<INCOME-PRE-EXTRAORDINARY> 104,143
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,143
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 7.93
<LOANS-NON> 325,055
<LOANS-PAST> 1,471,621
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 562,747
<CHARGE-OFFS> 191,977
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 653,270
<ALLOWANCE-DOMESTIC> 613,280
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 39,990
</TABLE>
