Exhibit 99.2
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION AND RISK FACTORS.
The Registrant and its representatives may, from time to time, make written
or verbal forward-looking statements. Those statements relate to developments,
results, conditions or other events the Registrant expects or anticipates will
occur in the future. The Registrant intends words such as "believes,"
"anticipates," " plans," "expects" and similar expressions to identify
forward-looking statements. Without limiting the foregoing, those statements may
relate to future economic or interest rate conditions, loan losses and
allowances, loan and deposit growth, new branches and the competitive
environment. Forward-looking statements are based on management's then current
views and assumptions and, as a result, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Any such forward-looking statements are qualified by the following
important risk factors that could cause actual results to differ materially from
those predicted by the forward-looking statements.
An investment in the Registrant's common stock or other securities
carries certain risks. Investors should carefully consider the risks described
below and other risks, which may be disclosed from time to time in the
Registrant's filings with the SEC before investing in the Registrant's
securities.
INTEREST RATES AND ECONOMIC CONDITIONS
The results of operations for financial institutions may be materially and
adversely affected by changes in prevailing economic conditions, including rapid
changes in interest rates, changes in local market conditions, changes in the
habits of the public, declines in real estate market values, increases in tax
rates and other operating expenses, and the policies of regulatory authorities,
including the monetary and fiscal policies of the Federal Reserve. Changes in
the economic environment may influence the growth rate of loans and deposits,
the quality of the loan portfolio and loan and deposit pricing. While the Bank
has taken measures intended to manage the risks of operating in a changing
interest rate environment, there can be no assurance that such measures will be
effective in avoiding undue interest rate risk. The Bank is unable to predict
fluctuations of market interest rates, which are affected by many factors,
including inflation, recession, a rise in unemployment, tightening money supply,
and domestic and international disorder and instability in domestic and foreign
financial markets.
The Bank's profitability depends to a large extent upon its net interest
income, which is the difference (or "spread") between interest expense paid on
interest-bearing liabilities, such as deposits and borrowings. Most of the
Bank's loans are to businesses and individuals in Wisconsin (and, more
specifically, Milwaukee, Ozaukee, Racine and Waukesha Counties), and any general
adverse change in the economic conditions prevailing in these areas could reduce
the Bank's growth rate, impair its ability to collect loans or attract deposits,
and generally have an adverse impact on the results of operations and financial
condition of the Bank. If these areas experience adverse economic, political or
business conditions, the Bank would likely experience higher rates of loss and
delinquency on its loans than if its loans were more geographically diverse.
The Bank's net interest spread and margin will be affected by general
economic conditions and other factors that influence market interest rates and
the Bank's ability to respond to changes in such rates. At any given time, the
Bank's assets and liabilities will be such that they are affected differently by
a given change in interest rates. As a result, an increase or decrease in rates
could have a positive or negative effect on the Bank's net income, capital and
liquidity.
The mismatch between maturities and interest rate sensitivities of balance
sheet items (i.e., interest-earning assets and interest-bearing liabilities)
results in interest rate risk, which risk will change as the level of interest
rates changes. The Bank's liabilities consist primarily of deposits, which are
either of a short-term maturity or have no stated maturity. These latter
deposits consist of NOW, demand accounts, savings accounts, and money market
accounts. These accounts typically can react more quickly to changes in market
interest rates than the Bank's assets because of the shorter maturity (or lack
of maturity) and repricing characteristics of these deposits. Consequently,
sharp increases or decreases in market interest rates may impact the Bank's
earnings negatively or positively, respectively.
To manage vulnerability to interest rate changes, the Bank's management
monitors the Bank's interest rate risks. The Bank has established investment
policies and procedures through its Asset/Liability Committee, which ultimately
reports to the Board of Directors. The Committee generally meets quarterly and
reviews the Bank's interest rate risk position, loan and securities repricing,
current interest rates and programs for raising deposit-based maturity gaps,
including retail and non-brokered deposits, and loan origination pipeline. The
Bank's assets and liabilities maturing and repricing within one year generally
result in a negative one-year gap, which occurs when the level of liabilities
estimated to mature and reprice within one year are greater than the level of
assets estimated to mature and reprice within that same time frame. If interest
rates were to rise significantly, and for a prolonged period, the Bank's
operating results could be adversely affected. Gap analysis attempts to estimate
the Bank's earnings sensitivity based on many assumptions, including, but not
limited to, the impact of contractual repricing and maturity characteristics for
rate-sensitive assets and liabilities.
Changes in interest rates will also affect the level of voluntary
prepayments on the Bank's loans and the receipt of payments on the Bank's
mortgage-backed securities, resulting in the receipt of proceeds that the Bank
may have to reinvest at a lower rate than the loan or mortgage-backed security
being prepaid. Finally, changes in interest rates can result in the flow of
funds away from the banking institutions into investments in U.S. government and
corporate securities, and other investment vehicles which, because of the
absence of federal insurance premiums and reserve requirements, among other
reasons, generally can pay higher rates of return than banking institutions.
CONCENTRATION ON SMALL TO MEDIUM-SIZED BUSINESS CUSTOMERS
One of the primary focal points of the Bank's business strategy is serving
the banking and financial services needs of small to medium-sized businesses in
the Bank's geographic region. Small to medium-sized businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger
entities. If general economic conditions deteriorate in the Milwaukee, Ozaukee,
Racine and Waukesha County region of Wisconsin, the businesses of the Bank's
lending clients and their ability to repay outstanding loans may be negatively
affected. As a consequence, the Bank's results of operations and financial
condition may be adversely affected.
GOVERNMENT REGULATION AND MONETARY POLICY
The Registrant and the Bank are subject to extensive state and federal
government supervision, regulation and control. Existing state and federal
banking laws subject to the Registrant and the Bank to substantial limitations
with respect to loans, purchase of securities, payment of dividends and many
other aspects of the Bank's banking business. There can be no assurance that
future legislation or government policy will not adversely affect the banking
industry or the operations of the Bank, to the advantage of the Bank's non-bank
competitors. In addition, economic and monetary policy of the Federal Reserve
may increase the Bank's cost of doing business and affect its ability to attract
deposits and make loans. The techniques used by the Federal Reserve include
setting the reserve requirements of banks and establishing the discount rate on
bank borrowings. The policies of the Federal Reserve have a direct effect on the
amount of bank loans and deposits, and the interest rates charged and paid there
on.
BANK'S BORROWERS
The Bank's loan customers may not repay their loans according to their
terms, and the collateral securing the repayment of these loans may be
insufficient to assure repayment. The risk of nonpayment of loans is inherent in
commercial banking, and such nonpayment, if it occurs, may have a material
adverse effect on the Bank's results of operations and overall financial
condition. The Bank's management attempts to minimize the Bank's credit exposure
by carefully monitoring the concentration of its loans within specific
industries and through prudent loan application and approval procedures,
including a determination of the creditworthiness of borrowers and the value of
the assets serving as collateral for repayment of certain loans. However, there
can be no assurance that such monitoring and procedures will reduce such lending
risks.
ALLOWANCE FOR POTENTIAL LOAN LOSSES
The Bank makes various assumptions and judgments about the collectability
of its loan portfolio and provides an allowance for potential losses based on a
number of factors. The Bank's allowance for potential loan losses is established
in consultation with its management and is maintained at a level considered
adequate by management to absorb loan losses that are inherent in the Bank's
portfolio. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond the Bank's control, and such losses may exceed current estimates.
Although the Bank's management believes that the allowance for potential loan
losses as of the end of each fiscal quarter is adequate to absorb losses that
may develop in its existing portfolio of loans, there can be no assurance that
the allowance will prove sufficient to cover actual loan losses in the future.
In addition, federal and state regulators periodically review the Bank's
allowance for potential loan losses and may require the Bank to increase its
provision for potential loan losses or recognize further loan charge-offs, based
on judgments different than those of the Bank's management. Any increase in the
Bank's allowance for potential loan losses or loan charge-offs as required by
these regulatory agencies could have a negative effect on the operating results
of the Bank.
Non-performing loans at December 31, 2002 was $337,010 compared to $128,000
at December 31, 2001. Management believes that the recent increase in
non-performing loans is a result of the difficult economic environment affecting
many of the Bank's customers. No assurance can be given that such economic
conditions will improve.
MORTGAGE AND CONSTRUCTION LOANS
The Bank offers fixed and adjustable interest rates on loans, with terms of
up to 30 years. Although the majority of the residential mortgage loans that the
Bank originates are fixed-rate, adjustable rate mortgage ("ARM") loans increase
the responsiveness of the Bank's loan portfolios to changes in market interest
rates. However, because ARM loans are more responsive to changes in market
interest rates than fixed-rate loans, ARM loans also increase the possibility of
delinquencies in periods of high interest rates.
The Bank also originates loans secured by mortgages on commercial real
estate and multi-family residential real estate. Since these loans usually are
larger than one-to-four family residential mortgage loans, they generally
involve greater risks than one-to-four family residential mortgage loans. In
addition, since customers' ability to repay these loans often is dependent on
operating and managing those properties successfully, adverse conditions in
the real estate market or the economy generally can impact repayment more
severely than loans secured by one-to-four family residential properties.
Moreover, the commercial real estate business is subject to downturns,
overbuilding and local economic conditions.
The Bank also makes construction loans for residences and commercial
buildings, as well as on unimproved property. While these loans enable the Bank
to increase the interest rate sensitivity of its loan portfolios and receive
higher yields than those obtainable on permanent residential mortgage loans, the
higher yields correspond to higher risk perceived to be associated with
construction lending. These include risks associated generally with loans on the
type of property securing the loan. Moreover, commercial construction lending
often involves disbursing substantial funds with repayment dependent largely on
the success of the ultimate project instead of the borrower's or guarantor's
ability to repay. Again, adverse conditions in the real estate market or the
economy generally can impact repayment more severely than loans secured by
one-to-four family residential properties.
LENDING LIMITS
The Bank's current lending limit, as of December 31, 2002, is approximately
$12,048,000 per customer. Some of the Bank's competitors have higher lending
limits. Accordingly, the size of the loans that the Bank can offer to potential
customers is sometimes less than the size of loans that the Bank's competitors
are able to offer. This limit may affect the ability of the Bank to seek
relationships with area businesses and to generate an acceptable return on
assets. The Bank attempts to accommodate loan volume in excess of its lending
limit through the sale of participations in such loans to other banks or sell
the loan outright while retaining the servicing right. However, there can be no
assurance that the Bank will be successful in attracting or maintaining
customers seeking larger loans or that the Bank will be able to engage in
participations of such loans or on terms favorable to the Bank.
COMPETITION
The financial services industry is highly competitive. The Bank faces
intense competition from financial institutions in Milwaukee, Ozaukee, Racine
and Waukesha Counties and surrounding markets, and from non-bank financial
institutions, such as mutual funds, brokerage firms and insurance companies that
are aggressively expanding into markets traditionally served by banks. Many of
the Bank's non-bank competitors are not subject to the same degree of regulation
as are imposed on bank holding companies, federally insured banks and
Wisconsin-chartered state banks. As a result, such non-bank competitors may have
advantages over the Bank in providing certain services. The Bank also competes
indirectly with regional and national financial institutions, many of which have
greater liquidity, lending limits, access to capital and market recognition,
resources and banking experience than the Bank. Expanded interstate banking may
increase competition from out-of-state banking organizations and other financial
institutions. As a relatively small bank, the Bank may lack the resources to
compete effectively in the financial services market.
TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Bank's future
success will depend in part on its ability to address the needs of its customers
by using technology to provide products and services that will satisfy customer
demands for convenience as well as create additional efficiencies in the Bank's
operations. A number of the Bank's competitors may have substantially greater
resources to invest in technological improvements. There can be no assurance
that the Bank will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services
to its customers.
ABILITY TO RESELL STOCK
There is no public or other trading market for the Registrant's common
stock and no market is expected to develop in the foreseeable future. Therefore,
shareholders may be unable to resell their stock quickly or on favorable terms.