FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-9785
TRI CITY BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
6400 S. 27th Street, Oak Creek, WI
(Address of principal executive offices)
53154
Zip Code
(414) 761-1610
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------ ------
The number of shares outstanding of $1.00 par value common stock,
as of September 30, 1998: 2,516,220.
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FORM 10-Q
TRI CITY BANKSHARES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page #
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
for the Three Months ended September 30,
1998 and 1997 4
Consolidated Statements of Income
for the Nine Months ended September 30,
1998 and 1997 5
Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1998
and 1997 6
Notes to Unaudited Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3 Quantitative and Quantitative
Market Risk Disclosure 16
PART II - OTHER INFORMATION
Items 1 - 6 17
Signatures 18
2
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TRI CITY BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS September 30, December 31,
1998 1997
------------- -------------
Cash and due from banks $ 29,274,573 $ 39,107,888
Federal funds sold 19,350,000 5,600,000
------------- -------------
Cash and cash equivalents 48,624,573 44,707,888
Investment securities:
Available-for-sale (at fair value) 0 2,964,000
Held-to-maturity (fair
value of 1998 - 136,009,674
1997 - 124,141,964) 133,858,134 123,396,458
Loans 272,136,510 267,398,942
Allowance for loan losses (3,918,979) (3,500,050)
------------- -------------
Net Loans 268,217,531 263,898,892
Premises and equipment 18,839,225 18,126,925
Other assets 7,344,530 6,539,402
------------- -------------
TOTAL ASSETS $ 476,883,993 $ 459,633,565
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 115,971,244 $ 105,911,980
Interest bearing (over $100,000) 31,332,000 24,436,381
Interest bearing 268,624,484 268,595,009
------------- -------------
Total Deposits 415,927,728 398,943,370
Short-term borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 0 0
Other 870,850 5,710,804
-------------- -------------
Total short-term borrowings 870,850 5,710,804
Other Liabilities 2,838,210 1,481,710
-------------- -------------
TOTAL LIABILITIES 419,636,788 406,135,884
Stockholders' equity:
Cumulative preferred stock, par
value -$1 per share authorized -
200,000 shares; issued and
outstanding-none
Common stock, par value-$1 per share
authorized-5,000,000 shares; Issued
and outstanding:
1998 - 2,516,220 shares;
1997 - 2,503,118 shares 2,516,220 2,503,118
Additional paid in capital 9,600,859 9,209,826
Retained earnings 45,130,126 41,810,248
Accumulated other comprehensive income 0 (25,511)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 57,247,205 53,497,681
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 476,883,993 $ 459,633,565
See Notes to Unaudited Consolidated Financial Statements.
3
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TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
Interest income: ---- ----
Loans, including fees $ 6,579,926 $ 6,216,480
Investment securities:
Taxable 960,712 1,128,370
Exempt from federal income tax 813,729 549,299
Federal funds sold 246,060 239,176
------------ ------------
TOTAL INTEREST INCOME 8,600,427 8,133,325
Interest expense:
Deposits 2,844,236 2,629,385
Short-term borrowings 28,804 28,623
------------ ------------
TOTAL INTEREST EXPENSE 2,873,040 2,658,008
------------ ------------
NET INTEREST INCOME 5,727,387 5,475,317
Provision for loan losses (150,000) (150,000)
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,577,387 5,325,317
Other income:
Service charge income 915,059 908,408
Rental income 236,923 226,404
Other 589,382 506,729
------------ ------------
TOTAL OTHER INCOME 1,741,364 1,641,541
Other expense:
Salaries and employee benefits 2,715,772 2,537,224
Net occupancy 657,063 646,042
Equipment 333,840 318,928
Data processing 151,250 147,017
Advertising 162,777 120,595
Regulatory Agency Assessments 37,666 36,357
Office Supplies 126,538 121,455
Other 724,735 684,047
------------ ------------
TOTAL OTHER EXPENSE 4,909,641 4,611,665
------------ ------------
Income before income taxes 2,409,110 2,355,193
Provision for income taxes 621,000 670,500
------------ ------------
NET INCOME $ 1,788,110 $ 1,684,693
============ ============
Per share data:
Net income $ 0.71 $ 0.67
Average shares outstanding 2,515,222 2,498,152
See Notes to Unaudited Consolidated Financial Statements.
4
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TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
Interest income: ---- ----
Loans, including fees $ 19,421,297 $ 18,545,104
Investment securities:
Taxable 2,669,864 3,356,056
Exempt from federal income tax 2,415,103 1,876,272
Federal funds sold 474,642 246,701
------------ ------------
TOTAL INTEREST INCOME 24,980,906 24,024,133
Interest expense:
Deposits 8,171,350 7,636,210
Short-term borrowings 161,414 326,373
------------ ------------
TOTAL INTEREST EXPENSE 8,332,764 7,962,583
------------ ------------
NET INTEREST INCOME 16,648,142 16,061,550
Provision for loan losses (450,000) (450,000)
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,198,142 15,611,550
Other income:
Service charge income 2,605,924 2,585,909
Rental income 717,757 662,481
Other 1,749,440 1,343,062
------------ ------------
TOTAL OTHER INCOME 5,073,121 4,591,452
Other expense:
Salaries and employee benefits 8,116,343 7,549,298
Net occupancy 1,908,727 1,938,740
Equipment 979,527 943,494
Data processing 451,902 457,580
Advertising 376,512 346,878
Regulatory Agency Assessments 112,738 108,772
Office Supplies 401,419 373,803
Other 1,932,465 1,901,688
------------ ------------
TOTAL OTHER EXPENSE 14,279,633 13,620,253
------------ ------------
Income before income taxes 6,991,630 6,582,749
Provision for income taxes 1,791,000 1,806,500
------------ ------------
NET INCOME $ 5,200,630 $ 4,776,249
============ ============
Per share data:
Net income $ 2.07 $ 1.92
Common stock investment $ 22.80 $ 20.88
Dividends $ 0.750 $ 0.638
Average shares outstanding 2,510,970 2,494,004
See Notes to Unaudited Consolidated Financial Statements.
5
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TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
OPERATING ACTIVITIES ---- ----
Net income $ 5,200,630 $ 4,776,249
Adjustments to reconcile net
income to net cash provided
by operating activities:
Proceeds from sale of loans
held for sale 16,878,377 5,670,799
Origination of loans held
for sale (16,878,377) (5,670,799)
Amortization of investment
securities premiums and
accretion of discounts 84,764 152,008
Provision for loan losses 450,000 450,000
Provision for depreciation 1,312,512 1,252,111
(Increase) decrease in interest
receivable (640,431) 108,095
Increase in interest payable 691,411 673,966
Other 487,276 (246,794)
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,586,162 7,165,635
INVESTING ACTIVITIES
Available for Sale:
Proceeds from maturities and redemptions
of investment securities 3,000,000 2,000,000
Held to Maturity:
Proceeds from maturities and redemptions
of investment securities 25,290,748 17,264,660
Purchase of investment securities (36,577,474) (8,048,927)
Net increase in loans (4,025,726) (1,309,290)
Purchases of premises and equipment (2,024,812) (648,180)
------------ ------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (14,337,264) 9,258,263
FINANCING ACTIVITIES
Sale of Common Stock 404,135 359,357
Net increase in deposits 16,984,358 3,580,589
Net increase(decrease) in short-term
borrowings (4,839,954) 29,648,930
Cash dividends (1,880,752) (1,587,906)
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 10,667,787 32,000,970
------------ ------------
INCREASE IN CASH
AND CASH EQUIVALENTS 3,916,685 48,424,868
Cash and cash equivalents at the
beginning of the period 44,707,888 35,507,815
------------ ------------
CASH AND CASH EQUIVALENTS
AT THE END OF THE PERIOD $ 48,624,573 $ 83,932,683
============ ============
See Notes to Unaudited Consolidated Financial Statements.
6
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TRI CITY BANKSHARES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements
should be read in conjunction with the financial statements and the notes
thereto incorporated herein by reference to the Annual Report on Form 10-K
of Tri City Bankshares Corporation ("Tri City") for the year ended
December 31, 1997. The December 31, 1997 financial information included
herein is derived from the December 31, 1997 Consolidated Balance Sheet
of Tri City which is incorporated herein by reference to the aforesaid
Annual Report on Form 10-K.
In the opinion of Tri City's management, the accompanying unaudited
consolidated financial statements contain all adjustments consisting of
normal recurring accruals, necessary to present fairly Tri City's
financial position as of September 30, 1998, the results of its
operations for the three month and nine month periods ended September 30,
1998 and 1997 and its cash flows for the nine month periods ended
September 30, 1998 and 1997. The operating results for the first nine
months of 1998 are not necessarily indicative of the results which may be
expected for the entire 1998 fiscal year.
7
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TRI CITY BANKSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion contains certain forward-looking statements,
including statements concerning objectives and future events or
performance, and other statements which are other than historical fact.
Factors which may cause actual results to differ materially from those
contemplated by such forward-looking statements include, but are not
limited to, the following possibilities: (I) lower than anticipated loan
and deposit growth due to a variety of factors, including changes in the
interest rate environment and an increase in competitive pressures in the
banking and financial services industry; (ii) insufficient reserves for
loan losses; (iii) poorer than expected general economic conditions; (iv)
legislation or regulatory changes which adversely affect the banking
industry; (v) changes in projected capital expenditures, (vi) costs
incurred due to business disruptions caused by the third parties and
(vii) other unanticipated occurrences.
COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the
Corporation's net income or stockholders' equity. Statement 130 requires
changes in the reporting of items which currently bypass the income
statement and are recorded directly as a component of stockholders'
equity such as unrealized gains or losses on the Corporation's available-
for-sale securities. Under the Statement, comprehensive income must be
displayed prominently in the financial statements. The Corporation
adopted SFAS No. 130 on January 1, 1998, and all annual required
disclosures will be included beginning with the Corporation's 1998 Form
10-K Annual Report. Prior period financial statements have been
reclassified to conform to the requirements of Statement 130.
During the three and nine months ended September 30 of 1998 and 1997,
total comprehensive income amounted to $10,000, $26,000, $47,000 and
$(53,000) respectively.
8
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CHANGES IN FINANCIAL POSITION
Net assets for Tri City Bankshares Corporation (the Corporation ) grew
$17.3 million (3.8%) during the first nine months of 1998 compared to an
increase of $37.8 million (8.6%) during the first nine months of 1997. In
1997 a short-term deposit was received on September 30 for $29.4 million
which accounts for the majority of the gain in that year. This money was
held in Federal Funds because of the short-term nature of the deposit.
Investment securities for the Corporation have increased $10.5 million
(8.5%) in the first nine months of 1998 compared to a decrease of $12.2
million (9.8%) during the same period in 1997. Management has replaced
maturing securities with additional municipal securities which are exempt
from federal taxes. Until other suitable investments can be acquired,
excess funds will be invested in Federal Funds Sold for the short term.
Loans of the Corporation have increased $4.7 million (1.8%) during the
first nine months of 1998 compared to an increase of $2.0 million (0.8%)
during the same period in 1997. Management has actively pursued new loan
customers in 1998 to increase the Corporation s loan portfolio. Loans
currently provide the Corporation with a higher yield on its investment
than securities can presently offer. The allowance for loan losses
increased $419,000 (12.0%) during the nine months ended September 30,
1998 compared to an increase of $392,000 (13.0%) in the nine months ended
September 30, 1997. Management believes that this reserve is adequate to
cover any losses which may occur in the loan portfolio. The
Corporation s experience rate for non-performing loans is below one
percent.
With the year 2000 quickly approaching, management has taken steps to be
ready for the new millennium. The Corporation is undergoing a major
conversion of all loan, deposit and accounting systems to ensure that it
will be ready for the year 2000. New equipment has been purchased for
this purpose, which resulted in an increase in premises and equipment of
$712,000 (3.96%) during the first nine months of 1998 compared to a
decrease of $604,000 (3.2%) during the same period in 1997. Other assets
have increased due to the increase in accrued interest from the
additional investment securities and new loans.
9
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Total deposits of the Corporation increased $17.0 million (4.3%) during
the first nine months of 1998 compared to an increase of $3.6 million
(0.9%) during the first nine months of 1997. This growth is primarily in
non-interest bearing deposits and time deposits over $100,000. The
Corporation has maintained its primary deposit base while management
strives to attract new accounts by offering various promotional items
such as discounted tickets to various summer festivals and attractions.
Total borrowings for the Corporation have decreased $4.8 million (84.8%)
during the first nine months of 1998 compared to an increase of $29.6
million (549.1%) during the same period in 1997. Other liabilities
increased $1.4 million on September 30, 1998 compared to an increase on
September 30, 1997 of $1.0 million.
LIQUIDITY
Management strives to maintain a strong liquidity position for the
Corporation. They have carefully monitored the correlation between
interest earning assets and interest bearing liabilities. Fluctuations
in interest rates can be the main cause for the flow of funds either into
or out of a financial institution. As interest rates rise, depositors
want to acquire the best yield they can and thus deposits may increase,
and as rates decrease the demand for loans generally increases
substantially. Management maintains a low borrowing position for the
Corporation so that as these fluctuations occur, the Corporation can
respond more readily.
CAPITAL RESOURCES
During the first quarter of 1998, the Corporation entered into a contract
to outsource all of its data processing systems before year end. This
will include loan, deposit and accounting systems. New equipment which
has been purchased and will cost approximately $2.0 million will be
financed through the Corporation s banking subsidiary. This conversion
should be accomplished by the middle of the fourth quarter in 1998. The
Corporation has purchased land and is currently constructing a building
which will house its data processing and financial services departments.
The cost of this project is estimated to be $2.2 million and will be
financed by the Corporation s banking subsidiary.
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Several of the subsidiary s banking locations have or will remodel their
facilities. This expense will be nominal and will be borne by each
location affected.
Presently no additional expenditures are planned for the remainder of
this year; however, management will continue to examine any opportunities
which may present themselves for the continued growth and profitability
of the Corporation.
RESULTS OF OPERATIONS
Net income for the third quarter of 1998 increased $103,000 (6.1%)
compared to an increase of $211,000 (14.3%) in the third quarter of 1997.
This increase can be attributed primarily to the increase in interest
income and fees on loans which increased $363,000 (5.8%) in the third
quarter of 1998 compared to an increase of $460,000 (8.0%) in the third
quarter of 1997. Management has continued in their effort to attract new
loan customers and build the Corporation s loan portfolio. Management
seeks to avoid compromising the Corporation's loan portfolio by adding
questionable loans and therefore the Corporation s senior loan committee
reviews all loan requests submitted to them.
Investment security interest income increased $97,000 (5.8%) in the third
quarter of 1998 compared to a decrease of $146,000 (8.0%) in the third
quarter of 1997. Management has been conservative in their investment
strategies and to avoid exposing the Corporation to undue risk. They
will not pursue high risk investments but will seek investments that will
provide the Corporation with a good yield. Because the Corporation is
not in the business of buying and selling securities, it will hold all
securities until they mature or are called.
Interest expense on deposits increased $215,000 (8.2%) in the three
months ended September 30, 1998 compared to a decrease of $32,000 (1.2%)
during the three months ended September 30, 1997. Deposit balances
increased even though rates remained fairly steady.
Other income increased $100,000 (6.1%) in the third quarter of 1998
compared to an increase of $169,000 (11.4%) in the third quarter of 1997.
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Total other expenses increased $298,000(6.5%) in the third quarter of
1998 compared to an increase of $185,000 (4.2%) in the third quarter of
1997. The Corporation is beginning to experience some of the costs
associated with its upcoming systems upgrade.
A summary statement of the change in income for the quarters ended
September 30, 1998 and 1997 appears below :
Three Months Ended: September 30, September 30, 1998
1998 1997 Over(Under)
(Unaudited) (Unaudited) 1997
------------- ------------- -----------
Revenue and Expenses:(000 s)
Interest Income $ 8,600 $ 8,133 $ 467
Less: Interest Expense 2,873 2,658 215
------- ------- ------
Net Interest Income 5,727 5,475 252
Provision for Loan Loss 150 150 0
Other Operating Expense
Net of Other Operating Revenues 3,168 2,970 198
------- ------- ------
Income Before Income Taxes 2,409 2,355 54
Tax Provision 621 670 (49)
------- ------- ------
NET INCOME $ 1,788 $ 1,685 $ 103
======= ======= ======
During the first nine months of 1998 net income increased $424,000 (8.9%)
compared to an increase of $713,000 (17.5%) during the first nine months
of 1997. During most of 1998, interest rates on investments and loans
decreased slightly which resulted in lower interest income. Management
believes that the Corporation has performed well this year considering
the fluctuating economy.
Interest income increased $957,000 (4.0%) during the first nine months of
1998 compared to an increase of $1.6 million(7.2%) in the first nine
months of 1997. Although loan activity has been favorable, interest
rates have slowly declined which prompted many customers to refinance
their mortgages. In addition, investment securities which were purchased
have lower yields.
Total interest expense increased $370,000 (4.6%) during the first nine
months of 1998 compared to a decrease of $52,000 (0.6%) during the same
period in 1997. Although interest rates on investments declined,
interest rates paid on deposits remained steady. Since interest bearing
deposits grew $6.9 million in 1998 interest income increased.
During the first nine months of 1998 other income increased $482,000
(10.5%) compared to an increase of $260,000 (6.0%) in the first nine
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months of 1997. Nine months of the ATM surcharge on non-customer
transactions which was initiated in June of 1997 were realized in 1998
compared to only four months in 1997.
Other expenses increased $659,000 (4.8%) during the first three quarters
of 1998 compared to an increase of $518,000 (4.0%) during the first three
quarters of 1997.
CAPITAL ADEQUACY
The office of the Comptroller of the Currency ( OCC ) has issued
guidelines which impose upon national banks certain risk-based capital
and leverage standards. Failure to meet applicable capital guidelines
could subject a national bank to a variety of enforcement remedies which
are available to the federal regulatory authorities. Depending upon the
circumstances, the regulatory agencies may require an institution to
surpass minimum capital ratios established and may also take more
restrictive action.
As of December 31, 1997, the most recent notification from the OCC, the
Corporation was categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios of 10%, 6% and 5%, respectively.
The total risk-based capital ratio for the Corporation is 20.4%, Tier I
risk-based capital ratio of 19.2% and its leverage ratio in 12.1%.
YEAR 2000 PROBLEM
At midnight on December 31, 1999, unless the proper modifications have
been made, the program logic in many computer systems will start to
produce erroneous results because, among other things, the systems will
incorrectly read the date "01/01/00" as being January 1 of the year 1900
or another incorrect date. In addition, certain systems may fail to
detect that the year 2000 is a leap year. Problems can also arise
earlier that January 1, 2000 as dates in the next millennium are entered
into non-Year 2000 complaint programs. Like most financial service
providers, the Corporation may be significantly affected by the Year 2000
Problem due to the nature of financial information.
COMPLIANCE PROGRAM
In order to address the Year 2000 Problem and to minimize its potential
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adverse impact, in 1997 the Corporation initiated a corporate wide
project to address the impact of the Year 2000 Problem on its computer
application systems, information technology ("IT") related equipment,
system software, building controls, and non-IT embedded systems found in
such equipment as security systems, currency counters, and elevators.
The evaluation of Year 2000 issues included an assessment of the
potential impact of the Year 2000 Problem on the Corporation including
monitoring significant customers, service suppliers and other parties
material to the Corporation's operations; testing changes provided by
these suppliers; and developing contingency plans for any critical
systems that are not effectively reprogrammed. In the course of this
evaluation, the Corporation has sought written assurances from such third
parties as to their state of Year 2000 readiness. The Corporation's Year
2000 Compliance Program is divided into five phases; (1) awareness (2)
assessment; (3) renovation; (4) validation; and (5) implementation.
THE CORPORATION'S STATE OF READINESS
Work on the Year 2000 project has been prioritized in accordance with
risk. The highest priority has been assigned to activities that would
disrupt the accuracy and delivery of the Corporation's banking services
to its customers; next is an assessment of the potential credit risk to
the Corporation resulting from its credit customers state of Year 2000
readiness, or lack thereof, and the potential impact of those efforts on
the customer's ability to meet contractual payment obligations; the
lowest priority has been assigned to activities that would cause
inconvenience or productivity loss in normal business operations such as
issues related to internal office machinery, heating and air conditioning
systems and elevators.
The Corporation has substantially completed the first two phases of the
plan and is currently working internally and with external vendors on the
final three phases. Because the Corporation out sources its data
processing, a significant component of the Year 2000 Compliance Program
is working with external vendors to test and certify their systems are
year 2000 compliant. During the week of November 16, 1998, the
Corporation will be converting to a new primary Data Service provider
which is Year 2000 compliant. After the conversion, the Corporation will
perform a variety of tests to determine the proper functionality of the
new platform. The Corporation's other external vendors have surveyed
their programs to inventory the necessary changes and have begun
correcting the applicable computer programs and replacing equipment so
that the Corporation's information systems will be Year 2000 compliant
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prior to December 31, 1998. This will enable the Corporation to devote
substantial time to the testing of the upgraded systems prior to the
arrival of the new millennium. The Corporation expects to complete its
timetable for carrying out its plans to address Year 2000 issues, and to
finish initial testing by March 30, 1999.
The Corporation has also conducted an evaluation of its significant
credit customers to determine their state of Year 2000 readiness.
Evaluations were completed for all customers whose outstanding loan
balance or loan commitment exceeded $250,000. In addition, as part of
its ongoing credit underwriting practices, all new and renewed loans must
have a Year 2000 risk assessment completed and reported as part of the
loan approval process. Based upon the information received from these
surveys, the Corporation does not expect to experience any material
collection problems resulting from its customers Year 2000 readiness or
lack thereof.
COST TO ADDRESS YEAR 2000 COMPLIANCE ISSUES
Managing the Year 2000 Project will result in additional direct and
indirect costs to the Corporation. Based upon current internal studies,
as well as recently solicited bids from various computer hardware and
software vendors, the Corporation estimates that the total direct cost of
resolving the Year 2000 Problem will be between $2.0 and $2.4. To
date the corporation has expended $700,000 in addressing the Year 2000
Problem, all of which has been related to hardware/software purchases.
The majority of the remaining costs related to resolving the Year 2000
Problem are expected to be expended in 1999. The Corporation expects to
fund these expenditures through internal sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
such estimates are based on numerous assumptions by management, including
assumptions regarding the continued availability of certain resources,
the accuracy of representations made by third parties concerning their
compliance with Year 2000 issues, and other factors.
RISK OF NON-COMPLIANCE AND CONTINGENCY PLANS
The major applications which pose the greatest Year 2000 risks to the
Corporation if the Year 2000 implementation of the Year 2000 Project is
not successful are the Corporation's data services systems supported by
third party vendors, loan customers ability to meet contractual payment
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obligations in the event the Year 2000 Problem has a significant negative
impact to their business, internal computer networks, and items
processing equipment which renders customers bank statements and banking
transactions. The potential problems which could result from the
inability of these applications to correctly process the Year 2000 are
the inaccurate calculation of interest income and expense, service
delivery interruptions to the Corporation's banking customers, credit
losses resulting from the Corporation's loan customers inability to make
contractual credit obligations, interrupted financial data gathering, and
poor customer relations resulting from inaccurate or delayed transaction
processing, respectively.
Although the Corporation intends to complete substantially all Year 2000
remediation and testing activities by December 31, 1998, and although the
Corporation has initiated Year 2000 communications with significant
customers, key vendors, service providers, and other parties material to
the Corporation's operations and is diligently monitoring the progress of
such third parties in their Year 2000 compliance, such third parties
nonetheless represent a risk that cannot be assessed with precision or
controlled with certainty. For that reason, the Corporation intends to
develop contingency plans to address alternatives in the event that Year
2000 failures of automatic systems and equipment occur. Preliminary
discussions have been held regarding the contingency plan and a final
contingency plan is scheduled to be completed by the end of the first
quarter of 1999.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
The Corporation s Annual Report on Form 10-K contains certain disclosures
about market risks affecting the Corporation. There have been no
material changes to the information provided which would require
additional disclosures as of the date of this filing.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
DATE: November 10,1998 /s/Henry Karbiner, Jr.
--------------------- ----------------------
Henry Karbiner, Jr., President
(Chief Executive Officer)
DATE: November 10, 1998 /s/Thomas W. Vierthaler
--------------------- -----------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,275
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,350
<TRADING-ASSETS> 0
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<INVESTMENTS-CARRYING> 133,858
<INVESTMENTS-MARKET> 136,010
<LOANS> 272,137
<ALLOWANCE> 3,919
<TOTAL-ASSETS> 476,884
<DEPOSITS> 415,928
<SHORT-TERM> 871
<LIABILITIES-OTHER> 2,838
<LONG-TERM> 0
0
0
<COMMON> 2,516
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 476,884
<INTEREST-LOAN> 19,421
<INTEREST-INVEST> 5,085
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<INTEREST-TOTAL> 24,981
<INTEREST-DEPOSIT> 8,171
<INTEREST-EXPENSE> 8,333
<INTEREST-INCOME-NET> 16,648
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<EXPENSE-OTHER> 14,280
<INCOME-PRETAX> 6,992
<INCOME-PRE-EXTRAORDINARY> 5,201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,201
<EPS-PRIMARY> 2.07
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<YIELD-ACTUAL> 5.44
<LOANS-NON> 0
<LOANS-PAST> 1,605
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<CHARGE-OFFS> 71
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 3,919
<ALLOWANCE-DOMESTIC> 3,919
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</TABLE>
