SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-9785
TRI CITY BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6400 South 27th Street
Oak Creek, Wisconsin 53154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 761-1610
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
$1.00 Par Value Common Stock
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 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
As of March 2, 1998, 862,381 shares of common stock were outstanding and the
aggregate market value of the shares held by nonaffiliates was approximately
$26,647,573.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated in
Annual report to shareholders for fiscal year ended
December 31, 1997 Parts II and IV
Proxy statement for annual meeting of shareholders
to be held on June 10, 1998. Part III
<PAGE>
PART I
Item 1 Business 1
Item 2 Properties 16
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters 19
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk 19
Item 8 Consolidated Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners and
Management 20
Item 13 Certain Relationships and Related Transactions 20
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 21
Signatures 24
<PAGE>
PART I
Item 1. BUSINESS
General
- -------
Tri City Bankshares Corporation (Registrant), a registered bank holding company,
is a Wisconsin corporation organized in 1970 which provides commercial banking
services in the metropolitan Milwaukee area. On August 15, 1990, the
Registrant's six bank subsidiaries (Tri City National Bank of Oak Creek, Tri
City National Bank of Hales Corners, Tri City National Bank of West Allis, Tri
City National Bank of Brown Deer, Tri City National Bank of Brookfield, Tri City
National Bank of Menomonee Falls), and Tri City Service Corporation, a
centralized proof and bookkeeping operation, merged to form Tri City National
Bank (the Bank). The merging of the subsidiaries enabled the surviving bank to
experience cost savings through the elimination of duplicate cash requirements
and allowed customers the ability to access their accounts at any Tri City
National Bank location. Registrant owns 100% of the stock of Tri City National
Bank.
In addition to Tri City National Bank, the Registrant owns 23.5% of the
outstanding shares in First National Bank of Eagle River, Eagle River,
Wisconsin (First National). The Registrant's investment in First National is
accounted for by the equity method of accounting.
On a consolidated basis at December 31, 1997, Registrant had assets of
$459,633,565, net loans of $263,898,892, deposits of $398,943,370 and
stockholders' equity of $53,497,681. Registrant's primary function is to
coordinate the banking policies and operations of Tri City National Bank
in order to improve and expand its banking services and effect economies in its
operation by joint efforts in certain areas such as auditing, regulatory
compliance, training of personnel, advertising, proof and bookkeeping, and
business development. Registrant's services are furnished through officers of
Registrant who are also officers of Tri City National Bank. Registrant's sources
of revenues are (1) dividends paid on the shares of the subsidiary banks' stock
which it owns and (2) management fees in payment for the services it provides to
Tri City National Bank.
Registrant is engaged in only one line of business and industry segment, namely
banking.
The Registrant's banking business is principally conducted by one commercial
bank bearing the "Tri City" name. Tri City National Bank is supervised by the
Comptroller of the Currency and its deposits are insured by the Federal Deposit
Insurance Corporation. Tri City National Bank provides full-service banking to
individuals and businesses, including checking and savings accounts, commercial
and consumer loans, installment loans, real estate and mortgage loans, mobile
home loans, Master Charge cards, and personal reserve accounts. Tri City
National Bank maintains an investment portfolio consisting primarily of U.S.
Agency and state and political subdivision securities. Certain bank locations
have drive-in banking facilities. A separate department provides centralized
proof and bookkeeping services to all Tri City National Bank locations.
1
<PAGE>
The following table sets forth certain information regarding Tri City National
Bank:
Assets as of
Name of Bank and Location Year Organized December 31, 1997
- ------------------------- -------------- -----------------
Tri City National Bank
6400 South 27th Street
Oak Creek, Wisconsin 1963 $457,497,914
Supervision and Regulation
- --------------------------
As a bank holding company, Registrant is registered under the Bank Holding
Company Act of 1956, as amended, and files periodic reports with, and is subject
to the supervision of, the Federal Reserve Board (the Board). The Board has the
power to make examinations of the Registrant and must give its approval prior
to the Registrant's acquiring substantially all of the assets of a bank or
direct or indirect ownership or control of any voting shares of any bank if,
after such acquisition, Registrant would control more than 5% of the voting
shares of such bank. The Board approved Registrant's acquisition of the shares
of First National by order dated October 2, 1981. The Board expects bank holding
companies, such as Registrant, to be a source of financial strength for their
subsidiary banks and, accordingly, the Board may condition approvals of bank
acquisitions on the injection of additional capital into existing banks if
capital-to-asset ratios do not meet the Board's standards. The Bank Holding
Company Act restricts Registrant's ability to engage only in those activities
which are found by the Board to be so closely related to banking as to be a
proper incident thereto.
Tri City National Bank is regularly examined by the Comptroller of the Currency
and is subject to examination by the Federal Deposit Insurance Corporation.
Areas subject to regulation by these two federal agencies include reserves,
investments, loans, mergers, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations.
The banking industry is very heavily regulated at both the state and federal
levels. Since 1979, Congress has enacted major pieces of legislation affecting
the banking industry: the Community Reinvestment Act (to encourage banks to make
loans to individuals and businesses in their immediate service areas,
particularly to low- and middle-income borrowers); the Financial Institutions
Regulatory and Interest Rate Control Act (to add restrictions dealing with loans
to officers, directors, and principal shareholders of banks and their
affiliates); the Financial Institutions Deregulation and Monetary Control Act
(to permit both banks and thrift institutions to pay interest on checking
accounts and phase out prior ceilings on interest rates); the Competitive
Equality Banking Act (to expand the definition of "bank" under the Bank Holding
Company Act to include all institutions insured by the Federal Deposit Insurance
Corporation and thereby restrict the ability of bank holding companies and
certain commercial and other nonbanking firms to acquire "non-bank banks"); the
Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA
2
<PAGE>
(comprehensive legislation to reform the very nature of regulation in the
financial institutions industry); and the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). FDICIA, which was enacted in 1991, affects
all federally insured banks, savings banks and thrifts. FDICIA contains a $70
billion recapitalization of the Bank Insurance Fund (BIF) by significantly
increasing the amount that the FDIC can borrow from the Treasury. The FDIC must
assess premiums that are sufficient to give the BIF reserves of $1.25 for each
$100 of insured deposits. Additional significant provisions of FDICIA include
requiring prompt corrective action by regulators if minimum capital standards
are not met; establishing early intervention procedures for "significantly"
undercapitalized institutions; limiting FDIC reimbursement of uninsured deposits
when large banks fail; requiring an annual regulatory examination; and imposing
new auditing and accounting requirements, effective for fiscal years beginning
on or after January 1, 1993, including management and auditor reporting on
internal controls over financial reporting and on compliance with laws and
regulations. Additionally, a number of legislative and regulatory mandates have
been enacted that are designed to strengthen the federal deposit insurance
system and to improve the overall financial stability of the U.S.banking system.
It is uncertain what form future proposals may take and, if adopted, what their
effect will be on Registrant and its principal bank subsidiary.
Capital Requirements
- --------------------
See footnote 8 to the audited financial statements for a discussion of the
capital requirements of the Registrant and the Bank.
Monetary Policy
- ---------------
Registrant's operations and earnings are affected by the credit policies of
monetary authorities, including the Federal Reserve System, which regulates the
national supply of bank credit. Such regulation influences overall growth of
bank loans, investments, and deposits, and may also affect interest rates
charged on loans and paid on deposits. The monetary policies of the Federal
Reserve authorities have had a significant effect on the operating results of
bank holding companies and commercial banks in the past and are expected to
continue to do so in the future.
Competition
- -----------
All of the Registrant's banking facilities are located on the perimeter of
Milwaukee County. Accordingly, the bank competes with all the major banks and
bank holding companies located in Milwaukee, most of which are far larger in
terms of assets and deposits. The banking industry in metropolitan Milwaukee
is highly competitive and the Registrant's bank faces vigorous competition
not only from the many banks in the area, but from other financial institutions
such as savings and loan associations, credit unions, and finance companies.
3
<PAGE>
Employees
- ---------
At December 31, 1997, Registrant employed 84 officers and 367 employees in
total. Employees are provided a variety of employment benefits, and Registrant
considers its employee relations to be excellent.
The following pages set forth the statistical data required by Guide 3 of the
Guides for Preparation and Filing of Reports and Registration Statements and
Reports.
4
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in Thousands)
The following table shows average assets, liabilities and stockholders' equity;
the interest earned and average yield on interest-earning assets; the interest
paid and average rate on interest-bearing liabilities, the net interest
earnings, the net interest rate spread and the net yield on interest-earning
assets for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
Year Ended December 31
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995
------------------------------------------------------------------------------------------
Average Yield Average Yield Average Yield
Balance Interest or Rate Balance Interest or Rate Balance Interest or Rate
------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $ 259,976 $ 24,764 9.53% $ 239,980 $ 22,764 9.49% $ 224,219 $ 21,280 9.49%
Taxable investment
securities 63,889 4,360 6.82 66,585 4,486 6.73 66,238 4,306 6.50
Nontaxable investment
securities(2) 56,903 4,404 7.74 50,758 3,782 7.45 30,460 2,452 8.05
Federal funds sold 6,118 340 5.56 7,194 368 5.12 9,326 520 5.58
---------------------- ----------------------- -----------------------
Total interest-earning
assets 386,886 33,868 8.75% 364,517 31,400 8.61% 330,243 8,558 8.65%
Noninterest-earning
assets:
Cash and due from
banks 28,217 25,776 20,421
Premises and
equipment, net 18,534 19,282 19,608
Other assets 2,567 1,400 1,523
-------- -------- --------
$ 436,204 $ 410,975 $ 371,795
======== ======== ========
</TABLE>
5
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
(Dollars in Thousands)
<TABLE>
Year Ended December 31
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995
------------------------------------------------------------------------------------------
Average Yield Average Yield Average Yield
Balance Interest or Rate Balance Interest or Rate Balance Interest or Rate
------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 169,513 $ 4,677 2.76% $ 162,206 $ 4,424 2.73% $ 158,557 $ 4,428 2.79%
Other time deposits 102,088 5,614 5.50 104,052 5,971 5.74 84,419 4,829 5.72
Short-term borrowings 6,649 366 5.50 4,517 250 5.53 3,964 211 5.32
------------------- ------------------- -------------------
Total interest-bearing
liabilities 278,250 10,657 3.83% 270,775 10,645 3.93% 246,940 9,468 3.83%
Noninterest-bearing
liabilities:
Demand deposits 104,493 92,038 81,492
Other 3,175 2,485 1,831
Stockholders' equity 50,286 45,677 41,532
-------- -------- --------
$ 436,204 $ 410,975 $ 371,795
======== ======== ========
Net interest earnings and
interest rate spread $ 23,211 4.92% $ 20,755 4.68% $ 19,090 4.82%
================ ================ ===============
Net yield on interest
-earning assets 6.00% 5.69% 5.78%
===== ===== =====
<FN>
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding. Interest income includes $1,431,
$1,325 and $1,258 of loan fees in 1997, 1996 and 1995, respectively.
(2) Nontaxable investment securities income has been stated on a fully taxable
equivalent basis using a 34% adjusting rate. The related tax equivalent
adjustment for calculations of yield was $1,668, $1,427 and $834 in 1997,
1996 and 1995, respectively.
</TABLE>
6
<PAGE>
INTEREST INCOME AND EXPENSE VOLUME AND RATE CHANGE
(Dollars in Thousands)
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned (on a fully taxable equivalent basis) and interest
paid resulting from changes in volume and changes in rates:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------- --------------------------
Volume Rate(1) Net Volume Rate(1) Net
--------------------------- --------------------------
Interest earned on:
Loans $ 1,897 $ 103 $ 2,000 $ 1,496 $ (12) $ 1,484
Taxable investment
securities (181) 55 (126) 23 157 180
Nontaxable investment
securities 457 165 622 1,634 (304) 1,330
Federal funds sold (55) 27 (28) (119) (33) (152)
------------------------- --------------------------
Total interest
-earning assets $2,118 $ 350 $ 2,468 $ 3,034 $ (192) $ 2,842
================------- =================-------
Interest paid on:
Savings deposits $ 199 $ 55 $ 253 $ 101 $ (105) $ (4)
Other time deposits (113) (244) (357) 1,123 19 1,142
Short-term borrowings 118 (2) 116 29 10 39
----------------------- ---------------------------
Total interest
-bearing liabilities $ 204 $ (192) $ 12 $ 1,253 $ (76) $ 1,177
================------- =================-------
Increase in net
interest income $ 2,456 $ 1,665
====== ======
<FN>
(1) The change in interest due to both rate and volume has been allocated to
rate changes.
</TABLE>
7
<PAGE>
INVESTMENT PORTFOLIO
(Dollars in Thousands)
The book value of investment securities at the dates indicated is:
December 31
----------------------------------
1997 1996 1995
----------------------------------
U.S. Treasury and government agencies $ 54,336 $ 64,851 $ 65,616
States and political subdivisions 72,017 60,461 43,622
Industrial revenue bonds 46 102 153
------- ------- -------
Total investment securities $ 126,399 $ 125,414 $ 109,391
======== ======== ========
The following table sets forth the maturities of investment securities at
December 31, 1997, the weighted average yields of such securities (calculated on
the basis of the cost and effective yields weighted for the scheduled maturity
of each security) and the tax-equivalent adjustment used in calculating the
yields.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity
-------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------
U.S. Treasury and
government agencies $ 3,000 8.18% $ 22,015 6.44% $ 29,321 6.56% $ --- ---
States and political
subdivisions 9,018 6.82 30,506 6.91 32,292 7.35 201 9.09%
Industrial revenue
bonds 46 14.39 --- --- --- --- --- ---
------- ------- ------- ------
$ 12,064 7.19% $ 52,521 6.71% $ 61,613 6.97% $ 201 9.09%
======= ======= ======= ======
Tax equivalent
adjustment for
calculation of yield $ 212 $ 672 $ 778 $ 6
======= ======= ======= ======
<FN>
Note: The weighted average yields on tax-exempt obligations have been
computed on a fully tax-equivalent basis assuming a tax rate of 34%.
</TABLE>
8
<PAGE>
LOAN PORTFOLIO
(Dollars in Thousands)
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan:
December 31
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial and financial $ 13,015 $ 10,414 $ 11,058 $ 10,447 $ 12,598
Real estate-construction 19,148 16,142 21,692 16,811 7,231
Real estate-mortgage 201,322 191,288 167,945 157,859 150,469
Installment 33,914 35,908 31,777 28,171 31,627
-------- -------- -------- -------- --------
$ 267,399 $ 253,752 $ 232,472 $ 213,288 $ 201,925
The maturity distribution and interest rate sensitivity of all loans at
December 31, 1997, are:
Maturity
--------------------------------------------
After One
One Year Through After
or Less Five Years Five Years Total
------- ---------- ---------- -----
Commercial and financial $ 6,938 $ 6,041 $ 36 $ 13,015
Real estate construction 19,148 --- --- 19,148
Real estate mortgage and
installment 84,418 148,842 1,976 235,236
-------- -------- -------- --------
$ 110,504 $ 154,883 $ 2,012 $ 267,399
======== ======== ======== ========
Interest Sensitivity
----------------------------
Fixed Rate Variable Rate
---------- -------------
Due after one, but within five years $ 142,756 $ 12,127
Due after five years 132 1,880
-------- --------
$ 142,888 $ 14,007
======== ========
9
<PAGE>
LOAN PORTFOLIO (Continued)
(Dollars in Thousands)
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans comprise (a) loans accounted for on a
nonaccrual basis and (b) loans contractually past due 90 days or more as to
interest or principal payments, but not included in the nonaccrual loans.
December 31
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Loans accounted for
on a nonaccrual basis $ --- $ 725 $ 1,033 $ 1,932 $ 4,362
Loans contractually
past due 90 days or
more as to interest
or principal payments 694 1,220 630 490 826
Ratio of nonaccrual
loans to total loans 0% .28% .44% .90% 2.16%
$26 thousand of interest income was recognized during 1997 on loans which were
accounted for on a nonaccrual basis. An additional $42 thousand of 1997 interest
income would have been recorded under the original loan terms had these loans
not been assigned nonaccrual status.
The accrual of interest income is generally discontinued when a loan becomes 90
days past due as to principal or interest. Registrant's management may continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest.
There were no other loans at December 31, 1997 or 1996, whose terms had been
renegotiated to provide a reduction or deferral of interest or principal because
of a deterioration in the financial position of the borrower, and there are no
current loans where, in the opinion of management, there are serious doubts as
to the ability of the borrower to comply with present loan repayment terms.
Loans defined as impaired by Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan," are included in
nonaccrual loans above.
10
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
The following table summarizes loan loss allowance balances at the beginning and
end of each year; changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off, by loan category;
additions to the allowance which have been charged to expense; and the ratio of
net charge-offs to the daily average balance of loans outstanding.
Year Ended December 31
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance of allowance for
loan losses at beginning
of period $ 3,010 $ 3,626 $ 3,395 $ 3,164 $ 2,740
Loans charged off:
Commercial and financial 57 899 --- 87 8
Real estate --- --- --- 32 ---
Installment 97 23 21 41 49
------- ------- ------- ------- -------
TOTAL LOANS CHARGED OFF 154 922 21 160 57
Recoveries of loans
previously charged off:
Commercial and financial 20 --- --- 3 ---
Real estate --- --- --- --- 22
Installment 24 6 4 13 19
------- ------- ------- ------- -------
TOTAL RECOVERIES 44 6 4 16 41
------- ------- ------- ------- -------
Net loans charged off 110 916 17 144 16
Additions to allowance
charged to expense 600 300 248 375 440
------- ------- ------- ------- -------
Balance at end of period $ 3,500 $ 3,010 $ 3,626 $ 3,395 $ 3,164
======= ======= ======= ======= =======
Ratio of net charge-offs
during the period to
average loans outstanding .04% .38% .01% .07% .01%
======= ======= ======= ======= =======
Ratio of allowance at
end of year to total loans 1.31% 1.19% 1.56% 1.59% 1.57%
======= ======= ======= ======= =======
Ratio of allowance at
end of year to nonaccrual
loans NMF* 415.17% 351.02% 175.91% 72.54%
======= ======= ======= ======= =======
*Data not meaningful, there are no nonaccrual loans at December 31, 1997.
The amount of the addition to the allowance charged to operating expense is the
amount necessary to bring the allowance for loan losses to a level which will
provide for known and potential losses in the loan portfolio. The adequacy of
the allowance is based principally upon continuing management review for
potential losses in the portfolio, actual charge-offs during the year,
historical loss experience, current and anticipated economic conditions,
estimated value of collateral and industry guidelines.
Management evaluates the adequacy of the allowance for loan losses on an overall
basis as opposed to allocating the allowance to specific categories of loans.
11
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
The Bank has a loan committee which meets periodically. Its function is to
review new loan applications and to ensure adherence to the written loan and
credit policy of the Bank. Each month, this committee reviews a summary of the
loan portfolio classified into the risk categories described below. Loans are
reviewed quarterly or as necessary as to proper classification.
1. Absence of any significant credit risk.
2. Presence of normal, but not undue, credit risk.
3. Presence of greater than normal credit risk.
4. Excess credit risk requiring continuous monitoring.
5. Doubtful and loss.
The balance in each of the aforementioned categories serves as a guideline in
determining the adequacy of the allowance for loan losses and the provision
required to bring this balance to a level necessary to absorb the present and
potential risk characteristics of the loan portfolio.
The Bank's loan committee also considers collection problems which may exist.
Loans with contractual payments more than 90 days past due are reviewed. If
collection possibilities are considered to be remote, the loan is charged to the
allowance for loan losses. Should any special circumstances exist, such as a
reasonable belief that the loan may ultimately be paid or be sufficiently
secured by collateral having established marketability, the loan may be
rewritten or carried in a nonaccrual of interest status.
At December 31, 1997, there were no unusual risks in the loan portfolio. For
management's purposes, the loan portfolio consists of real estate loans,
consumer installment loans, and commercial business loans.
Real estate loans comprise the largest portion of the loan portfolio with 82.45%
of loans outstanding at December 31, 1997. The majority of these consist of
residential mortgage loans, an area in which the Registrant has had few losses
in past years.
In the consumer loan category, which includes auto loans, home improvement
loans, and credit card loans, among others, management considers the historical
net loss experience to be the best indicator of losses to be expected in the
immediate future.
All other loans are classified as commercial, including loans to financial
institutions. While these loans carry the greatest exposure to risk of loss,
that exposure is limited to problems associated with particular companies rather
than to specific industries. Currently, the Registrant has no unusual or
significant problems in the commercial loan portfolio.
Losses in 1998 are not expected to vary significantly from net losses
experienced over the last two years.
12
<PAGE>
DEPOSITS
(Dollars in Thousands)
The average daily amount of deposits is summarized for the periods indicated in
the following table:
Year Ended December 31
1997 1996 1995
Amount Rate Amount Rate Amount Rate
Noninterest-bearing
demand deposits $ 104,493 --- $ 92,038 --- $ 81,492 ---
Interest bearing
transaction deposits 80,517 2.65% 77,635 2.58% 78,150 2.71%
Savings 88,995 2.86 84,571 2.87 80,407 2.87
Time deposits (excluding
time certificates of
deposit of $100,000
or more) 77,221 5.69 85,754 6.18 73,216 5.81
Time certificates of
deposits of $100,000
or more 24,867 4.91 18,298 3.65 11,204 5.16
--------- ---- --------- ---- --------- ----
$ 376,093 $ 358,296 $ 324,469
========= ========= =========
The maturity distribution of time certificates of deposit issued in amounts of
one hundred thousand dollars and over and outstanding at December 31, 1997, is:
Three months or less $ 8,444
After 3 through 6 months 7,001
After 6 through 12 months 3,888
After 1 year through 2 years 1,540
After 2 years through 3 years 1,856
After 3 years through 4 years 660
After 4 years through 5 years 1,047
-------
$ 24,436
========
13
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of the
Registrant for each of the last three years:
Year Ended December 31
-------------------------
1997 1996 1995
---- ---- ----
Percentage of net income to:
Average stockholders' equity 12.91% 12.71% 12.88%
Average total assets 1.49 1.41 1.44
Percentage of dividends declared
per common share to net income
per common share 32.69 29.91 23.26
Percentage of average stockholders'
equity to daily average total
assets 11.53 11.11 11.17
14
<PAGE>
SHORT-TERM BORROWINGS
(Dollars in Thousands)
Information relating to short-term borrowings follows:
Federal Funds Purchased
and Securities Sold Under Other Short-Term
Agreements to Repurchase Borrowings
------------------------- ----------------
Balance at December 31:
1997 $ --- $ 5,711
1996 3,200 2,200
1995 --- 1,915
Weighted average interest
rate at year end:
1997 --- 5.80%
1996 5.88% 5.26
1995 --- 6.36
Maximum amount outstanding
at any month's end:
1997 $ 16,500 5,711
1996 7,700 4,310
1995 9,100 5,877
Average amount outstanding
during the year:
1997 $ 4,460 $ 2,189
1996 1,550 2,074
1995 1,269 2,438
Average interest rate
during the year:
1997 5.79% 5.12%
1996 5.61 5.40
1995 4.93 5.61
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days of the transaction date. Notes payable
mature in one year and are renewable for a like term. Other short-term
borrowings generally mature within 90 days.
15
<PAGE>
Item 2. PROPERTIES
The following table summarizes the properties in which the Registrant's bank
conducts its business:
Approximate
Floor Area
Location in Square Feet Owned or Leased
-------- -------------- ---------------
6400 South 27th Street
Oak Creek, Wisconsin 16,000 Leased (1)
3701 South 27th Street
Milwaukee, Wisconsin 570 Leased (1)
6312 South 27th Street
Oak Creek, Wisconsin 500 Leased (1)
2555 West Ryan Road
Franklin, Wisconsin 2,000 Owned
5555 South 108th Street
Hales Corners, Wisconsin 20,000 Owned
5455 South 108th Street
Hales Corners, Wisconsin 1,600 Owned
10909 West Greenfield Avenue
West Allis, Wisconsin 9,000 Owned
10200 West Bluemound Road
Wauwatosa, Wisconsin 200 Leased
10859 West Bluemound Road
Wauwatosa, Wisconsin 3,500 Owned
2625 South 108th Street
West Allis, Wisconsin 470 Leased (1)
4455 West Bradley Road
Brown Deer, Wisconsin 6,600 Leased
7213 North Teutonia
Milwaukee, Wisconsin 2,000 Owned
17100 West Bluemound Road
Brookfield, Wisconsin 5,700 Owned
16
<PAGE>
Approximate
Floor Area
Location in Square Feet Owned or Leased
-------- -------------- ---------------
12745 West Capitol Drive
Brookfield, Wisconsin 6,500 Owned
12735 West Capitol Drive
Brookfield, Wisconsin 720 Leased (1)
N96 W18221 County Line Road
Menomonee Falls, Wisconsin 4,100 Owned
7525 West Oklahoma Avenue
Milwaukee, Wisconsin 6,400 Leased (1)
3378 South 27th Street
Milwaukee, Wisconsin 1,900 Owned
6767 West Greenfield Avenue
West Allis, Wisconsin 5,200 Owned
6760 West National Avenue
West Allis, Wisconsin 460 Leased (1)
9200 North Green Bay Road
Brown Deer, Wisconsin 386 Leased
220 East Sunset Drive
Waukesha, Wisconsin 412 Leased
1827 Wisconsin Avenue
Grafton, Wisconsin 361 Leased
W61 N529 Washington Avenue
Cedarburg, Wisconsin 7,800 Owned
4200 South 76th St.
Greenfield, Wisconsin 53220 572 Leased (1)
150 West Holt Avenue
Milwaukee, Wisconsin 590 Leased (1)
6201 N. Teutonia Avenue
Milwaukee, Wisconsin 618 Leased (1)
17
<PAGE>
Approximate
Floor Area
Location in Square Feet Owned or Leased
-------- -------------- ---------------
3770 S. Howell Avenue
Milwaukee, Wisconsin 1,052 Leased (1)
4689 S. Whitnall Avenue
Milwaukee, Wisconsin 1,159 Leased (1)
7830 W. Good Hope Road
Milwaukee, Wisconsin 523 Leased
1818 W. National Avenue
Milwaukee, Wisconsin 1,188 Leased
(1) The Bank leases space from an affiliated entity. See Note 11 to
consolidated financial statements, incorporated herein by reference, for
further information.
Tri City National Bank owns buildings at twelve locations in Oak Creek,
Milwaukee, Brookfield, Menomonee Falls, West Allis, Hales Corners, Wauwatosa and
Cedarburg. Approximately 73,343 square feet is leased to third parties; such
square footage is not shown above.
Registrant believes that its bank locations are in buildings that are attractive
and efficient, and adequate for their operations, with sufficient space for
parking and drive-in facilities. Fifteen full-service banking centers are
located in metropolitan Milwaukee food discount centers.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against Registrant or its
subsidiary bank; however, the bank is involved from time to time in routine
litigation incident to the conduct of its respective businesses.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote of
security holders through the solicitation of proxies or otherwise.
18
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The information required by Item 5 is incorporated herein by reference to
Registrant's 1997 Annual Report to Shareholders under the captions entitled
"Market for Corporation's Common Stock and Related Stockholder Matters"
(Page 16) and "Selected Financial Data" (Page 15) as to cash dividends paid.
Item 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to
Registrant's 1997 Annual Report to Shareholders under the caption entitled
"Selected Financial Data" (Page 15).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference to
Registrant's 1997 Annual Report to Shareholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Pages 6 to 14).
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated herein by reference to
Registrant's 1997 Annual Report to Shareholders under the caption entitled
"Quantitative and Qualitative Disclosures about Market Risk" (Pages 12-14).
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference to
Registrant's 1997 Annual Report to Shareholders (Pages 7 to 40).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
19
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by Item 10 is incorporated herein by reference to
Registrant's definitive Proxy Statement for its annual meeting of shareholders
on June 10, 1998, under the caption entitled "Election of Directors".
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
Registrant's definitive Proxy Statement for its annual meeting of shareholders
on June 10, 1998, under the caption entitled "Executive Compensation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
Registrant's definitive Proxy Statement for its annual meeting of shareholders
on June 10, 1998, under the caption entitled "Stock Ownership of Certain
Beneficial Owners and Management".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
Registrant's definitive Proxy Statement for its annual meeting of shareholders
on June 10, 1998, under the captions entitled "Election of Directors" and "Loans
and Other Transactions with Management".
20
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) and (2) Financial statements and financial statement schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
(3) Listing of Exhibits
Exhibit 3 -- Articles of incorporation and bylaws incorporated
herein by reference to Exhibit 3a and Exhibit 3b
to Registrant's Registration Statement
No. 2-65616 on Form S-1.
Exhibit 13 --Annual Report to Shareholders for the year ended
December 31, 1997.
With the exception of the information
incorporated by reference into Items 5, 6, 7, and
8 of this Form 10-K, the 1997 Annual Report to
Shareholders is not deemed filed as part of this
report.
Exhibit 21 --Subsidiary of Registrant.
Exhibit 23 --Consent of Independent Auditors
Exhibit 27 --Financial Data Schedule
(b) Reports on Form 8-K
None
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
None
21
<PAGE>
PART IV
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1), (2) and (c)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
CERTAIN EXHIBITS
Year Ended December 31, 1997
TRI CITY BANKSHARES CORPORATION
OAK CREEK, WISCONSIN
22
<PAGE>
FORM 10-K ITEM 14(a)(1) and (2)
TRI CITY BANKSHARES CORPORATION
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and report of independent
auditors of Tri City Bankshares Corporation, included in the annual report of
the Registrant to its stockholders for the year ended December 31, 1997, are
incorporated by reference in Item 8:
Consolidated balance sheets December 31, 1997 and 1996
Consolidated statements of income Years ended December 31, 1997, 1996 and 1995
Consolidated statements of stockholders' equity Years ended December 31, 1997,
1996 and 1995
Consolidated statements of cash flows Years ended December 31, 1997, 1996 and
1995
Notes to consolidated financial statements December 31, 1997
Report of independent auditors
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
BY: /s/ David A. Ulrich Date: March 10, 1998
----------------------------- -----------------------
David A. Ulrich, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
/s/David A. Ulrich 3/10/98
- ---------------------------- -----------
David A. Ulrich Principal Executive Officer
/s/Henry Karbiner, Jr. 3/10/98
- ---------------------------- -----------
Henry Karbiner, Jr. Principal Financial and
Accounting Officer
/s/Thomas W. Vierthaler 3/10/98
- ---------------------------- -----------
Thomas W. Vierthaler Vice-President and Comptroller
/s/Frank J. Bauer 3/10/98
- ---------------------------- -----------
Frank J. Bauer Director
/s/Sanford Fedderly 3/10/98
- ---------------------------- -----------
Sanford Fedderly Director
- ---------------------------- -----------
William Gravitter Director
- ---------------------------- -----------
Christ Krantz Director
/s/Rudie L. Lauterbach 3/10/98
- ---------------------------- -----------
Rudie L. Lauterbach Director
24
<PAGE>
/s/William P. McGovern 3/10/98
- ---------------------------- -----------
William P. McGovern Director
/s/Robert W. Orth 3/10/98
- ---------------------------- -----------
Robert W. Orth Director
/s/Ronald K. Puetz 3/10/98
- ---------------------------- -----------
Ronald K. Puetz Director
/s/John M. Rupcich 3/10/98
- ---------------------------- -----------
John M. Rupcich Director
/s/David A. Ulrich, Jr. 3/10/98
- ---------------------------- -----------
David A. Ulrich, Jr. Director
/s/William J. Werry 3/10/98
- ---------------------------- -----------
William J. Werry Director
/s/Scott A. Wilson 3/10/98
- ---------------------------- -----------
Scott A. Wilson Director
25
<PAGE>
EXHIBIT 13
<PAGE>
<PAGE>
Dear Shareholders,
With hard work and commitment to service, convenience and technology, your Bank
has, for the sixth consecutive year, logged record earnings of $6.4 million. In
1997, the Bank also achieved a new high for return on equity and assets, as well
as record levels of deposits and loans. The Bank's capital now exceeds $53
million, which positions Tri City National Bank very well to meet the future
financial needs of its customers. We are pleased to report that the loan
portfolio quality remains strong with very low levels of problem loans and no
non-accrual loans. IDC Financial Publishing, Inc., a financial rating service
known for rating banks, has once again given Tri City National Bank a "Superior"
rating.
To the chagrin of the pessimists, 1997 proved to be another banner year for the
U.S. economy. Financial markets and our overall economic prosperity continued to
show strong and consistent growth. Low levels of inflation and long-term
interest rates have encouraged expansion throughout the business sector.
The low interest rates noted during 1997 caused some interesting challenges.
Securities in excess of $21 million in our investment portfolio were called
prior to their maturities. And two significant loans totaling more than $11
million were prepaid. Through diligent effort, we were able to replace these
earning assets without compromising our earnings or asset quality.
The key words to remember when it comes to community banking continue to be
convenience and service. We believe that Tri City National Bank continues to be
a hometown bank big enough to serve our customers and small enough to know them.
In January 1997, we opened our thirty-first branch inside the Clark Square Pick
`n Save Mega Food Center on the near south side in the City of Milwaukee. This
branch is helping to address needed services for that neighborhood and, based
upon the number of accounts that have already been opened, this neighborhood is
responding to our commitment. In the metropolitan Milwaukee market, our thirty-
one branch locations provide unequaled banking opportunities for our customers.
Fifteen of our branches are located inside Pick `n Save food stores, giving us
the largest network of in-store banks providing in-person services seven days a
week until 8:00 P.M. The volume of transactions processed by these offices
continues to grow and demonstrates our customers' appreciation for the personal
service they have consistently received.
1
<PAGE>
We expanded our automated teller network to twenty-five locations by adding two
new terminals in 1997. Tri City ATMs are available free of charge to our
customers, and offer convenient locations and high reliability.
We are pleased to note that the Tri City EZ Pay Check Card has consistently
grown in transaction volume, addressing the needs of our expanding customer
base. This fast-growing retail product is gaining an acceptance nationwide as a
convenient alternative to check writing.
The number of customers using Tri City's many automated banking services
continues to grow. Our Automated Voice Response Unit is now receiving sixty
thousand inquiries per month. We have committed the necessary capital to be on
the leading edge of technology when it comes to providing the services our
customers have come to expect.
Our goal is to position your Company for the future by looking for new growth
opportunities while offering unmatched levels of convenience and service. During
1998, we expect to complete the upgrading of all of our management information
systems with new technology that will ensure the Bank's data processing ability
will meet future needs for years to come. This investment will be significant
and is necessary to allow us to successfully compete in the future.
We believe that the future of the Bank continues to be bright. By continuing our
philosophy and commitment to independent community banking, we will meet the
needs of the consumer and the businessman alike and the Bank will have a
healthy, prosperous future. Be assured, the Board of Directors, officers and
staff will continue to build your Company and preserve your investment.
Sincerely,
/s/David A. Ulrich
David A. Ulrich
Chairman, President and Chief Executive Officer
Tri City Bankshares Corp.
2
<PAGE>
YOUR HOMETOWN BANK.
LARGE ENOUGH TO SERVE YOU. SMALL ENOUGH TO KNOW YOU.
CORPORATE PROFILE
Tri City Bankshares Corp. is the parent of Tri City National Bank, a commercial
bank that operates 31 offices throughout the Milwaukee area. Tri City Bankshares
was formed in 1970. Tri City National Bank was founded in 1963.
Tri City National Bank logged year-end 1997 assets of $459.6 million and
deposits of $398.9 million, making it one of the Milwaukee area's largest
independent commercial banks. Tri City Bankshares itself is the eighth largest
bank holding company in Wisconsin. Both the bank and the holding company are
based in the Milwaukee suburb of Oak Creek.
Tri City National Bank operates full-service banks in Brookfield, Brown Deer,
Cedarburg, Grafton, Greenfield, Hales Corners, Menomonee Falls, Milwaukee, Oak
Creek, St. Francis, Waukesha, Wauwatosa and West Allis.
BUILDING A BANK ONE LOCATION AT A TIME
Acquisitions make the big headlines in the banking business. We at Tri City
National Bank have made headlines with a much different type of growth.
You see, we've never bought another bank. Instead, we've expanded by steadily
opening new locations, a tally that now numbers 31 offices throughout the
Milwaukee area. In fact, our newest bank just opened in January inside a Pick `n
Save Mega Food Center at 1818 W. National Ave. on Milwaukee's near south side.
The strategy has given us solid growth and the ability to remain a hometown,
locally owned bank. Most important, it's given us an unmatched level of customer
service. At our 15 Pick 'n Save locations, we're open seven days a week until 8
p.m.
As you can see, we take pride in our service. In fact, our slogan says we're
"Your hometown bank. Large enough to serve you. Small enough to know you."
Sure, other banks may make similar claims. We prove it--seven days a week.
3
<PAGE>
Directors and Officers of the Corporation
DIRECTORS
Frank J. Bauer President of Frank Bauer Construction Company, Inc.
Sanford Fedderly Retired Registered Pharmacist
William Gravitter President of Hy-View Mobile Home Court, Inc.
Henry Karbiner, Jr. President of Tri City National Bank, and Executive
Vice President, Secretary and Treasurer of the
Corporation
Christ Krantz Vice President of K.R.K., Inc. and President of
Krantz Realty, Inc (corporations owning Ramada --
Airport Motel, Milwaukee, and Days Inn Motel,
Wauwatosa), and partner in Veterans Linen Supply
Company
Rudie L. Lauterbach Accountant, Elm Grove, Wisconsin
William P. McGovern Attorney-at-Law, Milwaukee, Wisconsin
Robert W. Orth Executive Vice President of Tri City National Bank,
and Senior Vice President of the Corporation
Ronald K. Puetz Executive Vice President of Tri City National Bank,
and Senior Vice President of the Corporation
John M. Rupcich Vice President -- Real Estate of the Corporation and
President and Director of N.D.C., Inc. and Executive
Vice President of and Director of Mega Marts, Inc.
David A. Ulrich President, Chief Executive Officer and Chairman of
the Board of the Corporation and Chief Executive
Officer and Chairman of the Board of Tri City
National Bank
David A. Ulrich, Jr. Vice President and Director of Mega Marts, Inc.
and Vice President and Director of N.D.C., Inc.
William J. Werry Retired Unit President of Tri City National Bank
Scott A. Wilson Executive Vice President of Tri City National Bank,
and Senior Vice President of the Corporation
4
<PAGE>
OFFICERS
David A. Ulrich President, Chief Executive Officer and Chairman of
the Board
Henry Karbiner, Jr. Executive Vice President, Secretary and Treasurer
Robert W. Orth Senior Vice President
Ronald K. Puetz Senior Vice President
Scott A. Wilson Senior Vice President
John M. Rupcich Vice President -- Real Estate
Thomas W. Vierthaler Vice President and Comptroller
Gary J. Hafemann Assistant Vice President and Auditor
Tri City Bankshares Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This 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 that 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 growth due to a variety of factors, including
changes in the interest rate environment and increases in competitive pressures
in the banking and financial services industry; (ii) insufficient reserves for
loan losses; (iii) poorer then expected general economic conditions; (iv)
legislation or regulatory changes which adversely affect the banking industry;
and (v) other unanticipated occurrences.
FINANCIAL CONDITION
During 1997, Tri City Bankshares Corporation (the Corporation) increased total
assets $22.9 million (5.3%) compared to an increase of $39.0 million (9.8%) in
1996. This increase reflects the net growth in assets during 1997, despite the
fact that numerous securities were called and several large loans were prepaid.
Total cash and cash equivalents for the Corporation increased $9.2 million
(25.9%) in 1997 compared to an increase of $783,000 (2.3%) during 1996. Cash and
cash equivalents can show material fluctuations which reflect deposit timing of
our customers but are not indicative of trends. This was largely the case at
December 31, 1997. However, cash balances required for our normal operations did
increase in 1997 as the result of one new bank location and two new ATMs which
were opened. Management continues to emphasize the need to minimize average cash
balances.
During 1997, investment securities increased $885,000 (0.7%) as compared to an
increase of $16.1 million (14.7%) in 1996. While the net increase is less than
1%, a significant amount of activity occurred. A total of $29 million of federal
agency and municipal securities were purchased. Of that total, over $21 million
were purchases made to replace securities which had exercised call options.
"Available for Sale" securities decreased $7.1 million (70.7%) during 1997
compared to a decrease of $2.7 million (20.9%) in 1996, while "Held to Maturity"
securities increased $8.0 million (7.0%) compared to an increase of $18.7
million (19.4%) during the same periods. This activity is a part of the
aggregate $29 million of purchases previously addressed and merely represents a
shift in classification.
6
<PAGE>
Loan balances increased $13.6 million (5.4%) during 1997 compared to an increase
of $21.3 million (9.2%) during 1996. As a result of this growth, the Corporation
again closed the year with record high outstanding loan balances. While loan
growth fell short of the goal management had set for the Corporation, the
increase and the new balance high were achieved despite the payment of a short-
term municipal loan in the amount of $5 million originated November 1996 and
paid January 31, 1997, as well as the prepayment of a single commercial loan in
the amount of $6 million. The legal lending limit for a single borrower now
exceeds $8 million at Tri City National Bank. The Bank's underwriting preference
remains to originate loans of $1 million or less. Management has selectively
approved, and the banking subsidiary has booked, a few larger loans when
circumstances warranted. However, when these loans are repaid, the impact is
noticeable on year-end totals.
The basic philosophy of management is unchanged: a commitment to reinvesting in
the communities serviced by the Corporation. Funding new businesses, expansion
of existing businesses and retail credit extended through mortgages and equity
loans will provide a base for continued growth. Management, through its loan
review committee, is monitoring new as well as renewal loans for quality and
collectibility. We have continued to maintain a low percentage of nonperforming
loans and other real estate owned. As of December 31, 1997, the reserve for loan
losses totaled $3,500,050 and equaled 1.31% of the loan portfolio. During 1997,
the provision for loan loss totaled $600,000 while losses charged against the
reserve amounted to $170,000, which compares to 1996 levels of $300,000 and
$922,000, respectively. Management believes the reserve for loan losses is
adequate to support portfolio growth and absorb any losses which may occur.
Total deposits of the Corporation increased $17.9 million (4.7%) during 1997
compared to an increase of $30.8 million (8.8%) in 1996. The growth in core
deposits has remained steady. Interest rates have remained low and non-bank
competition from mutual funds and others has been keen. Management believes the
Corporation has a good reputation in the community for convenient hours, many
locations and servicing our customers' financial needs. Continued growth in
deposits has enabled the Corporation to fund loan growth with little reliance on
borrowed funds or any other volatile liability dependence. Borrowings increased
$311,000 (5.8%) in 1997 compared to an increase of $3.5 million (182.1%) in
1996.
Liquidity and Interest Rate Sensitivity Management
Liquidity is defined as the Corporation's ability to generate adequate amounts
of cash to meet both current and future needs to pay obligations as they mature,
to maintain lending capacity, to provide for planned growth, and to provide a
competitive return on investment.
7
<PAGE>
The Corporation has been able to continue deposit growth which is the primary
source of funds for its lending and investment functions. The Corporation has
endeavored to maintain an adequate matching of maturities between its deposit
base and its investment and loan portfolios so as not to expose the Corporation
to unacceptable levels of interest rate risk and to maintain liquidity at levels
which do not unduly impact earnings.
The banking subsidiary of the Corporation has the ability to borrow up to $16.0
million in federal funds and an additional $50.0 million under reverse
repurchase agreements. Cash needs of the Corporation can also be met through
borrowings from other lenders, if needed. These arrangements are further
discussed in Note 12 of the consolidated financial statements.
Federal law restricts extensions of credit by a bank to its parent bank holding
company and, with certain exceptions, to other affiliates and also the amount of
dividends the Corporation's subsidiary may pay to the parent bank holding
company. Note 13 to the consolidated financial statements discusses the
application of these limitations to the Corporation and its subsidiary bank.
In addition, the repayment of loans and scheduled maturities of marketable
investment securities are significant sources of liquidity. Securities maturing
in one year or less amounted to $12.1 million at December 31, 1997, representing
9.5% of total investment securities. Management believes it has maintained a
liquidity position to meet everyday monetary demands. The Corporation has not,
in the past, relied on sales of investment securities to meet its liquidity
needs, and management does not intend to do so in the future.
Capital Resources
During January 1997, one new branch location was opened inside a new Pick `n
Save food store in the Clark Square neighborhood, a low- to moderate-income area
in Milwaukee, Wisconsin. The cost of this facility was approximately $100,000,
which was internally funded. There were no major capital expenditures made in
1997. Management has a $1.5 million capital expenditure planned for 1998 to re-
equip all banking locations with new telecommunications equipment as well as new
teller and customer service workstations. In addition, a new operations center
is being planned which will require an estimated capital investment budget of $3
million.
The OCC has issued guidelines which impose upon national banks certain risk-
based capital and leverage standards. These guidelines, as well as the capital
requirements of bank regulators, are discussed in Note 8, beginning on page 28.
Failure to meet applicable capital guidelines could subject a national bank to a
variety of enforcement remedies available to the federal regulatory authorities.
Depending upon circumstances, the regulatory agencies may require an institution
to surpass minimum capital ratios established and may also take more restrictive
action.
8
<PAGE>
It is the Corporation's philosophy to avoid those categories of assets
classified by the capital requirements as having higher credit risk, and to
avoid highly leveraged or certain foreign loans. The Corporation's banking
subsidiary believes it will continue to exceed the "risk-based" capital
requirements and continue to meet regulatory definitions of "well capitalized."
Results of Operations
1997 vs. 1996
The Corporation's net income increased $685,000 (11.8%) during 1997 compared to
an increase of $457,000 (8.5%) during 1996. Revenue growth from the loan
portfolio and fee income were the drivers of this increase as efforts to attract
new loans and a favorable rate environment resulted in an increase of $1.9
million (8.4%) in interest and fees on loans in 1997 compared to an increase of
$1.5 million (7.0%) in 1996.
The Corporation was able to attract new customers and increase the loan
portfolio by $13.6 million (5.4%) compared to an increase of $21.3 million
(9.2%) in 1996. This increase was achieved through an active commercial calling
program and moderate demand for retail mortgage loans. Although management is
conservative in its approval of loan requests, it has been open to all requests
and has worked with the Corporation's loan officers in getting loans approved.
Management has been able to keep the Corporation's exposure to nonperforming
loans and charged-off loans to a minimum. Total nonaccrual loans have decreased
from a high of $4.4 million on December 31, 1993 to $0 as of December 31, 1997.
Interest income on investment securities increased $113,000 (1.6%) during 1997
compared to an increase of $1.1 million (17.9%) during 1996. The increase in
interest income on investment securities is primarily due to a minimal increase
in yields rather than the increase in investment balances. During 1996, several
investment securities classified as available-for-sale were called. In keeping
with management's policy of holding investment securities until they mature, the
Corporation chose to replace available-for-sale securities with those classified
as held-to-maturity.
Although deposit balances increased $17.9 million (4.7%) during 1997 compared to
an increase of $30.8 million (8.8%) during 1996, interest expense on deposits
decreased $104,000 (1.0%) compared to an increase of $1.1 million (12.3%) in
1997 and 1996, respectively. The average yields paid on time deposits were
approximately 30 basis points less and average balances were approximately $5.0
million lower during 1997 than in 1996. Interest expense paid on borrowed funds,
however, increased $116,000 (46.3%) in 1997 compared to a increase of $39,000
(18.5%) in 1996. The net effect for 1997 amounted to an increase of $12,000
(0.1%) in interest expense compared to an increase of $1.2 million (12.4%) in
1996.
9
<PAGE>
Total other income increased $482,000 (8.1%) during 1997 compared to a decrease
of $40,000 (0.7%) during 1996. Management instituted a surcharge on Automatic
Teller Machine transactions which are originated at the Corporation's ATMs by
non-customers. This accounted for an additional $297,000 in gross other income
in 1997.
Total other expense increased $1.0 million (5.9%) during 1997 compared to an
increase of $869,000 (5.3%) increase during 1996. Salaries and employee benefits
increased $933,000 (10.0%) in 1997 compared to an increase of $698,000 (8.1%) in
1996. This accounted for 93.3% of the total increase in other expense compared
to 80.3% of the total increase in other expense in 1997 and 1996, respectively.
There was one new banking facility which was opened in 1997, but it did not
significantly affect net income during the year.
The Corporation has posted its sixth straight year of increased net income.
Management is optimistic that the Corporation should be able to continue this
upward growth. The effective tax rate has remained low for the Corporation at
27.1% in 1997 and 25.2% in 1996.
10
<PAGE>
Results of Operations
1996 vs. 1995
Net income of the Corporation increased $456.7 thousand (8.54%) during 1996
compared to an increase of $473.7 thousand (9.7%) during 1995. Increases in loan
and investment security interest income were the primary sources for this
increase in 1996.
Interest income on loans, including fees, increased $1.5 million (7.0%) in 1996
compared to an increase of $2.9 million (16.0%) in 1995. The demand for loans
has remained strong through 1996 with an increase of $21.3 million (9.2%) in
loan balances compared with a $19.1 million (9.0%) increase during 1995.
Management has attempted to attract new loan customers by offering competitive
rates and providing attentive customer service while maintaining the quality of
the portfolio as established by the Corporation's lending policy. Investment
security interest income increased $1.1 million (17.9%) during 1996 compared to
a decrease of $136.1 thousand (2.0%) during 1995. The Corporation increased
investment security balances in 1996 by $16.1 million, the same as in 1995. This
volume increase was the primary reason for the rise in investment security
interest income, since yields on these securities have only slightly increased.
Management has tried to invest in only those securities which will provide the
Corporation with maximum yield while still minimizing risk exposure. The
Corporation does carry some investments categorized as available for sale;
however, the general intent is to hold all securities until maturity. Interest
income on Federal Funds Sold decreased $152.0 thousand (29.2%) during 1996
compared to an increase of $439.9 thousand (546.0%) during 1995. The Corporation
did not need to invest in the short term since the demand for loans was
relatively high. Total interest expense increased $1.2 million (12.4%) during
1996 compared to an increase of $2.6 million (38.0%) during 1995. Interest rates
on deposits and short-term borrowings remained relatively the same for the
entire year. The increase in deposit balances in 1996 account primarily for the
increase in interest expense.
Total other income decreased $39.8 thousand (0.7%) in 1996 compared to an
increase of $748.4 thousand (14.3%) in 1995. The increase in 1995 was primarily
due to a gain of $465 thousand which was realized on the sale of other real
estate owned. There were no such transactions recorded in 1996. Total other
expense increased $869.3 thousand (5.3%) in 1996 compared to an increase of
$747.9 thousand (4.8%) in 1995. Increases in salaries and employee benefits as
well as occupancy expense contributed to this increase. The Corporation had
opened four new banking locations during 1995 and the full impact of the added
personnel and facilities was not felt until 1996.
The Corporation increased the amount of tax-exempt securities which it holds in
its portfolio by $11.4 million during 1996. The increase in tax-exempt
securities was the primary cause of the decrease in the Corporation's effective
tax rate. The Corporation's effective tax rates for 1996 and 1995 were 25.2% and
28.8%, respectively.
11
<PAGE>
Recent Accounting Developments
See Note 1 of the consolidated financial statements for a discussion of pending
accounting changes.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution, including the
Corporation, are monetary in nature. Therefore, the effects of inflation on
financial institutions differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories. The
growth of total assets in the banking industry caused by inflation results in
the need to increase equity capital at higher than normal rates in order to
maintain an appropriate equity-to-assets ratio. The Corporation's management
recognizes the need to both control asset growth and maintain a reasonable
dividend policy in order to promote the adequate internal growth of capital.
Another significant effect of inflation is on other expenses, which tend to rise
during periods of general inflation.
Management believes that the Corporation's ability to react to changes in
interest rates has the most impact on inflation and changing prices. Management
attempts to maintain a reasonably balanced position between interest-sensitive
assets and liabilities in order to protect against wide interest rate
fluctuations.
Year 2000
Year 2000 is the term used to describe the fact that many existing computer
programs use only two digits to identify a year in a date field. These programs
were designed without considering the impact of the upcoming change in century.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000.
The Corporation began addressing the Year 2000 issue in 1997 as part of a
restructuring of the Corporation's internal accounting systems. This
restructuring is expected to be completed in late 1998 and is expected to result
in a new accounting system which will be Year 2000 compliant. The total dollar
amount the Corporation estimates it will spend to remediate its Year 2000 issues
is not expected to have a material financial impact on the Corporation.
Qualitative and Quantitative Disclosures about Market Risk
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Corporation's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure.
12
<PAGE>
Interest rate risk (IRR) is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value; however, excessive
levels of IRR could pose a significant threat to the Corporation's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Corporation's safety and soundness.
When assessing IRR, the Corporation seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Corporation to assess the
existing and potential future effects of changes in interest rates on its
consolidated financial condition, including capital adequacy, earnings,
liquidity and, where appropriate, asset quality.
Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest rate
changes. For example, assume that an institution's assets carry intermediate- or
long-term fixed rates and that those assets are funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or, possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest rate ceilings, or rate-sensitive
assets are funded by longer-term, fixed-rate liabilities in a decreasing rate
environment.
Several ways an institution can manage IRR include: selling existing assets or
repaying certain liabilities; matching repricing periods for new assets and
liabilities, for example, by shortening terms of new loans or investments; and
hedging existing assets, liabilities or anticipated transactions. An institution
might also invest in more complex financial instruments intended to hedge or
otherwise change IRR. Interest rate swaps, futures contracts, options on
futures, and other such derivative financial instruments often are used for this
purpose. Because these instruments are sensitive to interest rate changes, they
require management expertise to be effective. The Corporation has not purchased
derivative financial instruments in the past and does not presently intend to
purchase such instruments.
Financial institutions are also subject to prepayment risk in falling rate
environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refund its obligations at new, lower
rates. Prepayments of assets carrying higher rates reduce the Corporation's
interest income and overall asset yields. Certain
13
<PAGE>
portions of an institution's liabilities may be short-term or due on demand,
while most of its assets may be invested in long-term loans or investments.
Accordingly, the Corporation seeks to have in place sources of cash to meet
short-term demands. These funds can be obtained by increasing deposits,
borrowing or selling assets. Also, Federal Home Loan Bank advances and short-
term borrowings provide additional sources of liquidity for the Corporation.
Tri City Bankshares Corporation
Quantitative Disclosures of Market Risk
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Amount Maturing in Fair value
----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
----------------------------------------------------------------------------------
Rate sensitive assets:
Fixed interest rate loans $ 75,971 $72,902 $56,446 $ 7,677 $ 6,079 $ 1,849 $220,924 $223,460
Average interest rate 8.84% 8.81% 8.78% 8.82% 8.67% 7.87% 8.80%
Variable interest rate loans $ 34,532 $ 7,283 $ 4,101 $ 361 $ 35 $ 163 $ 46,475 $ 47,109
Average interest rate 9.21% 8.28% 8.53% 7.69% 9.76% 9.26% 8.99%
Fixed interest rate securities $ 11,284 $ 3,635 $16,152 $13,846 $18,888 $59,591 $123,396 $127,106
Average interest rate 5.50% 4.59% 5.78% 5.18% 5.94% 5.77% 5.67%
Other interest-bearing assets $ 5,600 $ 5,600 $ 5,600
Average interest rate 5.63% 5.63%
Rate sensitive liabilities:
Savings and interest-bearing
checking $189,115 $189,115 $189,115
Average interest rate 2.76% 2.76%
Time deposits $ 79,056 $ 9,187 $ 6,805 $ 2,742 $ 6,126 $103,916 $104,035
Average interest rate 5.88% 6.60% 7.10% 7.58% 8.08% 6.20%
Variable interest rate
borrowings $ 5,711 $ 5,711 $ 5,711
Average interest rate 5.25% 5.25%
</TABLE>
14
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
-----------------------------------------------------------------
Total interest income $32,109,169 $30,114,579 $27,724,625 $24,503,080 $ 24,206,977
Total interest expense 10,657,307 10,645,630 9,468,149 6,859,209 6,845,644
Net interest income 21,451,862 19,468,949 18,256,476 17,643,871 17,361,333
Provision for loan
losses 600,000 300,000 248,139 375,000 440,000
Net interest income
after provision for
loan losses 20,851,862 19,168,949 18,008,337 17,268,871 16,921,333
Income before income
taxes 8,910,197 7,761,293 7,509,719 6,769,767 6,468,118
Net income 6,492,197 5,807,293 5,350,578 4,876,814 4,640,068
Basic earnings per
share 2.60 2.34 2.17 2.04 1.97
Cash dividends declared
per share .85 .70 .50 .40 .315
Average daily balances: (In Thousands)
Total assets $ 436,204 $ 410,975 $ 371,795 $ 340,502 $ 317,431
Total net loans 257,907 237,524 220,969 197,540 195,984
Total investment
securities 120,792 115,810 105,758 96,810 74,246
Total deposits 376,093 358,296 324,469 294,568 276,127
Total stockholders'
equity 50,266 45,677 41,532 36,051 31,327
</TABLE>
15
<PAGE>
The Corporation's common stock is not traded on any exchange or in the over-the-
counter market. The price ranges reflected in the following table show sales
prices in isolated sales of which the Corporation has knowledge.
1997 1996
--------------------------------------
High Low High Low
--------------------------------------
Price range:
First quarter $27.80 $27.30 $25.00 $24.55
Second quarter 28.50 28.00 25.60 25.15
Third quarter 29.30 28.80 26.25 25.80
Fourth quarter 30.15 29.55 27.05 26.50
As of December 31, 1997, the number of holders of record of the Corporation's
common stock was 727.
The Corporation declared four quarterly cash dividends in 1997 in the amount of
$0.2125 per share. These dividends were declared on January 3, April 16, July 9
and October 8, payable on January 22, May 1, July 23 and October 23,
respectively. Quarterly dividends of $0.175 per share were declared during each
of the four quarters of 1996.
The Corporation is not party to any loan agreement, indenture or other agreement
which restricts its ability to pay dividends; however, the Wisconsin Business
Corporation Law authorizes directors to declare and pay cash dividends only out
of the Corporation's unreserved and unrestricted earned surplus. See Note 13 to
the consolidated financial statements for restrictions imposed by regulatory
agencies upon the subsidiary bank's ability to transfer funds to the parent
corporation.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31
1997 1996
----------------------------------
Assets
Cash and due from banks $ 39,107,888 $ 35,507,815
Federal funds sold 5,600,000 --
----------------------------------
Cash and cash equivalents 44,707,888 35,507,815
Investment securities:
Available-for-sale (at fair value) 2,964,000 10,100,875
Held-to-maturity (fair value of
$124,141,964--1997 and
$115,264,736--1996) 123,396,458 115,374,235
Loans 267,398,942 253,752,225
Less allowance for loan losses (3,500,050) (3,010,230)
----------------------------------
Net loans 263,898,892 250,741,995
Premises and equipment 18,126,925 18,918,098
Other assets 6,539,402 6,013,142
----------------------------------
$ 459,633,565 $ 436,656,160
==================================
Liabilities and stockholders' equity
Deposits:
Noninterest-bearing $ 105,911,980 $ 103,807,536
Interest-bearing -- over $100,000 24,436,381 22,037,030
Interest-bearing -- other 268,595,009 255,169,111
----------------------------------
Total deposits 398,943,370 381,013,677
Short-term borrowings:
Federal funds purchased -- 1,350,000
Securities sold under agreements to
repurchase -- 1,850,000
Other 5,710,804 2,199,957
----------------------------------
Total short-term borrowings 5,710,804 5,399,957
Other liabilities 1,481,710 1,530,864
----------------------------------
Total liabilities 406,135,884 387,944,498
Stockholders' equity:
Common stock, $1 par value:
Authorized -- 5,000,000 shares
Issued and outstanding (1997--
2,503,118 shares; 1996--
2,486,098 shares) 2,503,118 2,486,098
Additional paid-in capital 9,209,826 8,750,861
Retained earnings 41,810,248 37,437,024
Net unrealized gain (loss) on
investment securities
available-for-sale (25,511) 37,679
----------------------------------
Total stockholders' equity 53,497,681 48,711,662
----------------------------------
$ 459,633,565 $ 436,656,160
==================================
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
1997 1996 1995
-------------------------------------------
Interest income:
Loans, including fees $24,673,957 $22,763,914 $21,279,637
Investment securities:
Taxable 4,359,562 4,485,899 4,305,969
Exempt from federal income tax 2,735,986 2,496,299 1,618,576
Federal funds sold 339,664 368,467 520,443
-------------------------------------------
Total interest income 32,109,169 30,114,579 27,724,625
Interest expense:
Deposits 10,291,509 10,395,596 9,257,091
Short-term borrowings 365,798 250,034 211,058
-------------------------------------------
Total interest expense 10,657,307 10,645,630 9,468,149
Net interest income 21,451,862 19,468,949 18,256,476
Provision for loan losses 600,000 300,000 248,139
-------------------------------------------
Net interest income after
provision for loan losses 20,851,862 19,168,949 18,008,337
Other income:
Service charges 3,486,469 3,384,804 3,201,320
Rental income 890,894 899,580 773,573
Gain on sale of loans 44,904 33,141 41,979
Other 1,999,811 1,622,554 1,962,967
-------------------------------------------
Total other income 6,422,078 5,940,079 5,979,839
Other expenses:
Salaries and employee benefits 10,238,765 9,306,142 8,608,117
Occupancy 2,495,224 2,379,634 2,244,481
Equipment 1,226,110 1,245,513 1,189,597
Data processing 623,169 542,274 496,950
Advertising and promotional 474,328 410,844 498,280
Regulatory agency assessments 145,350 97,021 433,345
Office supplies 498,989 539,355 458,247
Other 2,661,808 2,826,952 2,549,440
-------------------------------------------
Total other expenses 18,363,743 17,347,735 16,478,457
-------------------------------------------
Income before income taxes 8,910,197 7,761,293 7,509,719
Income taxes 2,418,000 1,954,000 2,159,141
-------------------------------------------
Net income $ 6,492,197 $ 5,807,293 $ 5,350,578
===========================================
Basic earnings per share $ 2.60 $ 2.34 $ 2.17
===========================================
Average shares outstanding 2,496,050 2,479,373 2,464,770
===========================================
18
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Unrealized Gain
(Loss) on Investment
Common Additional Retained Securities Available-
Stock Paid-In Capital Earnings for-Sale Total
-------------------------------------------------------------------------------
Balances at December
31, 1994 $2,457,489 $8,091,712 $29,243,695 $ -- $39,792,896
Net income -- -- 5,350,578 -- 5,350,578
Cash dividends
declared--$.50
per share -- -- (1,231,236) -- (1,231,236)
Common stock issued
under dividend
reinvestment
plan--12,975 shares 12,975 281,447 -- -- 294,422
Common stock fractional
shares redeemed (15) (162) -- -- (177)
Net unrealized gain
on investment securities
available-for-sale
(net of tax) -- -- -- 108,248 108,248
------------------------------------------------------------------------------
Balances at December
31, 1995 2,470,449 8,372,997 33,363,037 108,248 44,314,731
Net income -- -- 5,807,293 -- 5,807,293
Cash dividends
declared--$.70 per
share -- -- (1,733,306) -- (1,733,306)
Common stock issued
under dividend
reinvestment plan--
15,656 shares 15,656 378,030 -- -- 393,686
Common stock
fractional
shares redeemed (7) (166) -- -- (173)
Net unrealized loss on
investment securities
available-for-sale
(net of tax) -- -- -- (70,569) (70,569)
------------------------------------------------------------------------------
Balance at December
31, 1996 2,486,098 8,750,861 37,437,024 37,679 48,711,662
Net income -- -- 6,492,197 -- 6,492,197
Cash dividends
declared--$.85
per share -- -- (2,118,973) -- (2,118,973)
Common stock issued
under dividend
reinvestment plan--
17,029 shares 17,029 459,214 -- -- 476,243
Common stock fractional
shares redeemed (9) (249) -- -- (258)
Net unrealized loss on
investment securities
available-for-sale
(net of tax) -- -- -- (63,190) (63,190)
------------------------------------------------------------------------------
Balances at December
31, 1997 $2,503,118 $9,209,826 $41,810,248 $ (25,511) $53,497,681
==============================================================================
</TABLE>
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
1997 1996 1995
------------------------------------------
Operating activities
Net income $ 6,492,197 $ 5,807,293 $ 5,350,578
Adjustments to reconcile net
income to net cash provided
by operating activities:
Proceeds from sale of loans
held for sale 11,433,205 4,887,563 5,554,152
Origination of loans held
for sale (11,433,205) (4,887,563) (5,554,152)
Provision for loan losses 600,000 300,000 248,139
Provision for depreciation 1,587,843 1,561,886 1,515,475
Amortization of investment
securities premiums and
accretion of discounts 154,227 242,278 328,945
Undistributed earnings of
affiliate (99,620) (101,176) (91,786)
Decrease (increase) in
interest receivable 83,099 (644,959) (538,039)
Increase (decrease) in
interest payable 76,843 (11,243) 320,642
Other (599,523) 265,416 1,346,776
------------------------------------------
Net cash provided by operating
activities 8,295,066 7,419,495 8,480,730
Investing activities
Proceeds from repayment,
calls and maturities of
investments available for
sale 7,010,082 2,500,000 --
Proceeds from repayment,
calls and maturities of
investment securities
held to maturity 21,133,878 22,304,252 35,117,130
Purchases of investment
securities held to maturity (29,282,938) (41,255,744) (51,373,597)
Net increase in loans (13,756,897) (22,195,504) (19,201,991)
Net purchases of premises and
equipment (796,670) (929,550) (1,152,857)
------------------------------------------
Net cash used by investing
activities (15,692,545) (39,576,546) (36,611,315)
Financing activities
Sale of common stock 475,985 393,513 294,245t
Net increase in deposits 17,929,693 30,794,157 50,143,025
Net increase (decrease) in
short-term borrowings 310,847 3,485,436 (14,392,449)
Cash dividends (2,118,973) (1,733,306) (1,231,236)
------------------------------------------
Net cash provided by financing
activities 16,597,552 32,939,800 34,813,585
------------------------------------------
Increase in cash and cash
equivalents 9,200,073 782,749 6,683,000
Cash and cash equivalents at
beginning of year 35,507,815 34,725,066 28,042,066
------------------------------------------
Cash and cash equivalents at
end of year $44,707,888 $35,507,815 $34,725,066
==========================================
Supplementary information:
Interest paid $10,588,438 $10,664,315 $ 9,147,507
Income taxes paid 2,440,000 1,300,000 2,080,000
Investment securities
transferred to available-
for-sale (at amortized
cost) -- -- 12,577,396
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
The accounting policies followed by Tri City Bankshares Corporation (the
Corporation) and the methods of applying those principles which materially
affect the determination of its financial position, cash flows or results of
operations are summarized below.
Organization
Tri City Bankshares Corporation and its wholly owned subsidiary, Tri City
National Bank (the Bank), provide banking services to domestic markets,
primarily in the metropolitan Milwaukee, Wisconsin, area. The Corporation and
its subsidiary are subject to competition from other financial institutions. The
Corporation and its subsidiary are also subject to the regulations of certain
federal agencies and undergo periodic examinations by these regulatory
authorities.
Consolidation
The consolidated financial statements include the accounts of the Corporation
and its subsidiary. All significant intercompany balances and transactions have
been eliminated. The Corporation's investment in an unconsolidated affiliated
bank (see Note 4) is recorded using the equity method of accounting.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts of assets and liabilities
as of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, interest-bearing deposits and federal
funds sold.
21
<PAGE>
1. Accounting Policies (continued)
Investment Securities
Securities are classified as held-to-maturity and carried at amortized cost if
management has the intent and ability to hold the securities to maturity.
Securities not classified as held-to-maturity are designated as available-for-
sale and carried at fair value, with unrealized gains and losses net of income
taxes, reflected in stockholders' equity.
Interest and dividends are included in interest income from the related
securities as earned. Realized gains and losses are computed on a specific
identification basis and declines in value judged to be other than temporary are
included in gains (losses) on sale of securities.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The
cost of premises and equipment is depreciated using the straight-line method
over the estimated useful lives of the assets. Repairs and maintenance costs are
expensed as incurred.
Interest on Loans
Interest on loans is computed on a daily basis based on the principal amount
outstanding. The accrual of interest income is discontinued when a loan becomes
90 days past due as to principal or interest. Management may elect to continue
the accrual of interest when the estimated fair value of collateral is
sufficient to cover the principal balance and accrued interest.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amounts are being amortized as an adjustment of
the related loan's yield. The Corporation is amortizing these amounts using the
level-yield method over the contractual life of the related loans. The net
deferred amounts related to loans sold are recognized as income at the time of
sale. Fees related to stand-by letters of credit are recognized over the
commitment period.
22
<PAGE>
1. Accounting Policies (continued)
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth, adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and other relevant factors. The
allowance is increased by provisions for loan losses charged to earnings and
reduced by charge-offs, net of recoveries.
A substantial portion of the Bank's loans are to customers located in
southeastern Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is susceptible to changes in
market conditions in that area.
Income Taxes
The Corporation and its subsidiary file a consolidated federal income tax
return. The subsidiary provides for income taxes on a separate-return basis and
remits to the Corporation amounts determined to be currently payable.
The Corporation accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts estimated to
be receivable or payable based on current tax law and the Corporation's tax
status.
Per Share Data
Basic earnings per share are based on the weighted average number of shares of
common stock outstanding during each year. The Company has no potentially
dilutive securities outstanding during the three years ended December 31, 1997.
The resulting number of shares used in computing basic earnings per share is
2,496,050, 2,479,393 and 2,464,770 for the years ended December 31, 1997, 1996
and 1995, respectively.
23
<PAGE>
1. Accounting Policies (continued)
Interim Financial Data
The interim financial data (see Note 17) is unaudited; however, in management's
opinion, the interim data includes all adjustments, consisting only of normal,
recurring adjustments necessary for a fair presentation of results for the
interim periods.
Accounting Changes
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as of January 1, 1997, which provides new
accounting and reporting standards for sales, securitization and servicing of
receivables and other financial assets and extinguishments of liabilities. The
adoption of SFAS No. 125 did not have a significant impact on the financial
statements.
Pending Accounting Changes
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires changes in the reporting of items which currently bypass
the income statement and which are recorded directly as a component of
stockholders' equity (comprehensive income). Current period comprehensive income
and its components must be displayed prominently in the financial statements. An
example of such an item would include unrealized gains and losses on available-
for-sale securities. The statement does not require a specific format for the
presentation of comprehensive income, but it does require that an amount
representing total comprehensive income be separately reported.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the reporting of financial information from operating segments in annual and
interim financial statements. This statement requires that financial information
be reported on the basis that it is reported internally for evaluating segment
performance and deciding how to allocate resources to segments.
Because these statements address how financial information is disclosed in
annual and interim reports, the adoption will have no material impact on the
financial statements. SFAS Nos. 130 and 131 will become effective in 1998.
24
<PAGE>
2. Restrictions on Cash and Due From Bank Accounts
The subsidiary bank is required to maintain non-interest-earning reserve
balances with the Federal Reserve Bank or in vault cash. The amount of the
reserve requirement as of December 31, 1997 was approximately $8,386,000.
3. Investment Securities
The amortized cost and estimated fair values of investments in debt securities
were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------
At December 31, 1997:
Available-for-sale --
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 3,002,625 $ -- $ 38,625 $ 2,964,000
===================================================
Held-to-maturity:
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 51,333,650 $ 457,319 $288,626 $ 51,502,343
Obligations of
states and
political
subdivisions 72,016,813 733,396 156,583 72,593,626
Industrial revenue bonds 45,995 -- -- 45,995
---------------------------------------------------
$123,396,458 $1,190,715 $445,209 $124,141,964
===================================================
At December 31, 1996:
Available-for-sale --
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 10,040,096 $ 134,221 $ 73,442 $ 10,100,875
===================================================
Held-to-maturity:
U.S. Treasury
securities and
obligations of
U.S. government
agencies $ 54,810,888 $ 400,017 $673,127 $ 54,537,778
Obligations of
states and
political
subdivisions 60,460,980 488,420 324,809 60,624,591
Industrial revenue bonds 102,367 -- -- 102,367
---------------------------------------------------
$115,374,235 $ 888,437 $997,936 $115,264,736
===================================================
25
<PAGE>
3. Investment Securities (continued)
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers or issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
-----------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------
Due in one year or less $ 12,064,287 $ 12,056,934 $ -- $ --
Due after one year
through five years 52,521,698 52,714,641 -- --
Due after five years
through ten years 58,610,473 59,162,188 3,002,625 2,964,000
After ten years 200,000 208,201 -- --
-----------------------------------------------------
$123,396,458 $124,141,964 $ 3,002,625 $ 2,964,000
====================================================
There were no gains on early redemption of securities in 1997, 1996 or 1995, nor
were there any sales of securities in 1997, 1996 or 1995. At December 31, 1997,
investment securities with a carrying value of $9,984,000 were pledged as
collateral to secure public funds.
4. Investment in Affiliated Bank
The Corporation owns 23.54% of the common stock of the First National Bank of
Eagle River (First National Bank). This investment is included in other assets
and is accounted for using the equity method.
Summarized unaudited financial information for First National Bank was as
follows:
As of and for the year ended
December 31
1997 1996
--------------------------------------
Total assets $ 81,572,000 $ 82,179,000
Total deposits 71,420,000 72,469,000
Stockholders' equity 7,214,000 6,667,000
Net income 689,000 661,000
26
<PAGE>
5. Loans
Loan balances classified by type were as follows:
December 31
1997 1996
-------------------------------------
Commercial $ 13,015,000 $ 10,414,000
Real estate -- construction 19,148,000 16,142,000
Real estate -- mortgage:
Single family 100,457,000 93,876,000
Multi family 7,518,000 7,018,000
Nonresidential 93,347,000 90,394,000
Installment 33,914,000 35,908,000
-------------------------------------
$267,399,000 $253,752,000
=====================================
In the ordinary course of business, the Bank grants loans to related parties,
which include certain directors and officers of the Corporation, and entities in
which such persons are principal shareholders. These loans are made at terms
which do not vary from terms that would have been obtained if the transactions
had been with unrelated parties and do not involve more than normal risk of
collectibility. Loans outstanding at December 31, 1997 and 1996, to such related
parties approximated $2,329,000 and $2,133,000, respectively. During 1997,
$1,217,000 of new loans were made and repayments totaled $1,021,000. These
amounts have been restated to reflect changes in directors and officers of the
Corporation.
6. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 1997, were as follows:
1997 1996 1995
--------------------------------------------
Balance at beginning of year $ 3,010,230 $ 3,626,217 $ 3,395,101
Provision for loan losses 600,000 300,000 248,139
Loans charged off (170,014) (922,219) (21,084)
Recoveries on loans charged off 59,834 6,232 4,061
---------------------------------------------
Balance at end of year $ 3,500,050 $ 3,010,230 $ 3,626,217
=============================================
Nonaccrual loans totaled approximately $0 and $725,110 at December 31, 1997 and
1996, respectively.
27
<PAGE>
7. Premises and Equipment
Premises and equipment were comprised of the following:
December 31
1997 1996
-------------------------------
Land $ 4,607,788 $ 4,597,956
Buildings and leasehold improvements 17,942,576 17,567,836
Furniture and equipment 7,770,691 7,757,270
-------------------------------
30,321,055 29,923,062
Less accumulated depreciation (12,194,130) (11,004,964)
--------------------------------
$18,126,925 $18,918,098
================================
8. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
federal 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios of 10%, 6%, and 5%, respectively. There are no conditions
or events since that notification that management believes have changed the
institution's category.
28
<PAGE>
8. Regulatory Capital (continued)
The Bank's actual capital amounts and ratios are also presented in the table.
For Capital
Actual Adequacy Purposes
------------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------------
As of December 31, 1997:
Total Capital
(to Risk Weighted
Assets):
Consolidated $57,023,000 19.82% $23,011,000 >8.0%
Tri City Bank 54,522,000 19.10 22,840,000 >8.0
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 53,523,000 18.61 11,505,000 >4.0
Tri City Bank 51,022,000 17.87 11,420,000 >4.0
Tier I Capital --
Leverage ratio
(to Average Assets):
Consolidated 53,523,000 11.95 17,912,000 >4.0
Tri City Bank 51,022,000 11.45 17,827,000 >4.0
As of December 31, 1996:
Total Capital
(to Risk Weighted
Assets):
Consolidated $51,684,000 18.11% $22,827,000 >8.0%
Tri City Bank 49,281,000 17.40 22,662,000 >8.0
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 48,674,000 17.06 11,413,000 >4.0
Tri City Bank 46,271,000 16.33 11,331,000 >4.0
Tier I Capital --
Leverage ratio
(to Average Assets):
Consolidated 48,674,000 11.44 17,018,000 >4.0
Tri City Bank 46,271,000 10.93 16,937,000 >4.0
29
<PAGE>
9. Employee Benefit Plan
The Corporation has a contributory defined contribution 401(k) plan. This plan
covers all employees who have attained the age of 21 and completed one year of
service. Participants may contribute a portion of their compensation (up to IRS
limits) to the plan. The Corporation may make regular and matching contributions
to the plan each year. In 1997 and 1996, the Corporation provided a dollar-for-
dollar match of employee contributions up to 5%. Participants direct the
investment of their contributions into one or more investment options. The
Corporation recorded expense of $219,161, $215,457 and $206,349 for 1997, 1996
and 1995, respectively.
10. Income Taxes
The significant components of income tax expense for each of the three years in
the period ended December 31, 1997, were:
1997 1996 1995
------------------------------------------
Federal $2,150,000 $1,767,000 $1,948,500
State 268,000 187,000 210,641
------------------------------------------
$2,418,000 $1,954,000 $2,159,141
Current $2,591,000 $1,196,000 $2,162,141
Deferred expense (benefit) (173,000) 758,000 (3,000)
------------------------------------------
$2,418,000 $1,954,000 $2,159,141
==========================================
Differences between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before income taxes for
each of the three years in the period ended December 31, 1997, are as follows:
1997 1996 1995
------------------------------------------
Income before income taxes $8,910,197 $7,761,293 $7,509,719
==========================================
Income tax at statutory rate $3,029,466 $2,638,840 $2,553,305
Increase (reduction) resulting
from:
Tax-exempt interest income (835,711) (759,928) (496,749)
State income taxes, net of
federal tax benefit 176,880 123,420 130,674
Other 47,365 (48,332) (28,089)
-------------------------------------------
$2,418,000 $1,954,000 $2,159,141
===========================================
30
<PAGE>
10. Income Taxes (continued)
At December 31, 1997, the Corporation had state net operating loss carryforwards
of approximately $925,000. These carryforwards expire in years 2006 to 2011.
The components of the Corporation's net deferred income tax liability were as
follows:
1997 1996
------------------------------
Deferred tax assets:
Loan loss reserves $ 1,128,000 $ 936,000
Excess servicing gains 56,000 72,000
State net operating loss carryforwards 50,000 48,000
Net unrealized loss on investment
securities available-for-sale 13,000 --
Other -- 54,000
------------------------------
1,247,000 1,110,000
------------------------------
Deferred tax liabilities:
Excess tax depreciation (218,000) (393,000)
Safe harbor lease (180,000) (188,000)
Net unrealized gains on investment
securities available-for-sale -- (23,000)
Deferred loan fees (480,000) (173,000)
Undistributed earnings of subsidiary (449,000) (410,000)
Other -- (209,000)
-------------------------------
(1,327,000) (1,396,000)
-------------------------------
Net deferred tax liability before
valuation allowance (286,000)
Valuation allowance (55,000) (58,000)
-------------------------------
Net deferred tax liability $ (135,000) $ (344,000)
===============================
11. Leases
The Corporation leases various banking facilities under operating lease
agreements from companies owned by a director and major shareholder of the
Corporation. All of the agreements include renewal options and one agreement
requires the Bank to pay insurance, real estate taxes and maintenance costs
associated with the lease. Rental amounts are subject to annual escalation based
upon increases in the Consumer Price Index. Aggregate rental expense under the
leases amounted to $521,712 in 1997, $440,156 in 1996, and $368,787 in 1995.
31
<PAGE>
11. Leases (continued)
Future minimum rentals, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 1997:
Year ending December 31:
1998 $ 370,020
1999 369,064
2000 218,576
2001 138,546
2002 82,860
2003 and thereafter 662,880
----------
Total minimum future rentals $ 1,841,946
==========
12. Short-Term Borrowings
Assets collateralizing Reverse Repurchase Agreements consist of U.S. government
and agency obligations held by the lender bank. At December 31, 1997, under
existing arrangements, the Bank could borrow up to $50,000,000 under reverse
repurchase agreements. The maximum amount of repurchase agreements outstanding
was $7,900,000 and $7,700,000 for the years ended December 31, 1997 and 1996,
respectively. The average amount of repurchase agreements was $1,747,140 and
$1,550,000 for the years ended December 31, 1997 and 1996, respectively. There
were no reverse repurchase agreements outstanding at December 31, 1997. There
were $1,850,000 in reverse repurchase agreements outstanding at December 31,
1996.
At December 31, 1997, the Bank had the ability to borrow federal funds of up to
$16,000,000 under a revolving line of credit agreement with lenders. Such
borrowings bear interest at the Bank's announced daily federal funds rate and
mature daily. There were no federal funds borrowings outstanding at December 31,
1997. There were $1,350,000 in federal funds borrowings outstanding at December
31, 1996. Other short-term borrowings represent treasury, tax and loan accounts
due to the Federal Reserve Bank under a $6,000,000 line of credit. Such amounts
are secured by a pledge of investment securities in the amount of $7,000,000 at
December 31, 1997.
32
<PAGE>
13. Stockholders' Equity
Certain regulatory restrictions exist regarding the ability of the Bank to
transfer funds to the Corporation in the form of cash dividends, loans or
advances. As of December 31, 1997, retained earnings of the Bank in the amount
of $13,137,688 were available for distribution to the Corporation as dividends
without prior approval of regulatory agencies.
Under Federal Reserve regulations, the Bank is limited as to the amount it may
lend to its affiliates, including the Corporation. Such loans are required to be
collateralized by investments defined in the regulations. In addition, the
maximum amount available for transfer from the Bank to the Corporation in the
form of loans is limited to 10% of the Bank's stockholders' equity in the case
of any one affiliate or 20% in the case of all affiliates.
14. Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of the
Corporation's customers. Standby letters of credit commit the Corporation to
make payments on behalf of customers when certain specified future events occur.
Both arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Corporation's normal credit
policies. Collateral (largely real estate) is required based on management's
credit assessment of the customer.
The Corporation's maximum credit exposure for loan commitments (unfunded loans
and unused lines of credit) and standby letters of credit outstanding at
December 31, 1997 was $24,037,000 and $2,715,000, respectively. All such
arrangements expire in fiscal 1998.
15. Fair Value of Financial Instruments
The following table discloses fair value information about financial
instruments, whether or not recognized in the consolidated balance sheets, 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. These 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
33
<PAGE>
15. Fair Value of Financial Instruments (continued)
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Corporation.
The Corporation does not routinely measure the market value of financial
instruments such as is required by SFAS No. 107, because such measurements
represent point-in-time estimates of value. It is not the intent of the
Corporation to liquidate and therefore realize the difference between market
value and carrying value and even if it were, there is no assurance that the
estimated market values could be realized. Thus, the information presented is
not relevant to predicting the Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents approximate those assets' fair values.
Investment Securities
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans Receivable
For variable-rate loans that reprice frequently (within the twelve-month period
following the date of measurement), and with no significant credit risk, fair
values are based on carrying values. The fair values for all other loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair value.
34
<PAGE>
15. Fair Value of Financial Instruments (continued)
Off-Balance-Sheet Instruments
Fair values for the Corporation's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value of such
instruments at December 31, 1997 and 1996, is not material.
Deposits
The fair values disclosed for demand deposits (e.g., interest and noninterest
checking, passbook savings and certain types of money market accounts) are,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts for variable-rate fixed-term money
market accounts and certificates of deposit and fixed-rate certificates of
deposit scheduled to mature or reprice within the twelve-month period following
the date of measurement approximates their fair value at the reporting date.
Fair values for fixed-rate certificates of deposit scheduled to mature or
reprice after twelve months from the date of measurement are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on similar certificates to a schedule of aggregated expected monthly
maturities of the time deposits. The carrying amount of accrued interest
approximates its fair value.
Short-Term Borrowings
The carrying amount of short-term borrowings and related accrued interest,
approximates their fair values at the reporting date.
35
<PAGE>
15. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Corporation's financial instruments
consisted of the following at December 31, 1997 and 1996:
1997 1996
-----------------------------------------------
Carrying Fair Carrying Fair
-----------------------------------------------
(In Thousands)
Cash and cash equivalents $ 44,708 $ 44,708 $ 35,508 $ 35,508
===============================================
Investment securities $126,360 $127,106 $125,475 $125,366
===============================================
Loans receivable $267,399 $270,569 $253,752 $255,397
===============================================
Deposits:
Withdrawable on demand $295,027 $295,027 $283,679 $283,679
Certificates of deposit 103,916 104,035 97,335 97,467
-----------------------------------------------
$398,943 $399,062 $381,014 $381,146
===============================================
Short-term borrowings $ 5,711 $ 5,711 $ 5,400 $ 5,400
===============================================
36
<PAGE>
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information
Balance Sheets
December 31
1997 1996
-------------------------------
Assets
Cash on deposit with subsidiary bank $ 268,582 $ 205,631
Investment in subsidiary 49,239,980 44,494,845
Investment in affiliated bank 1,658,263 1,558,642
Bank premises and equipment 2,059,916 2,132,654
Other net assets 270,940 319,890
-------------------------------
Total assets $53,497,681 $48,711,662
Stockholders' equity
Common stock $ 2,503,118 $ 2,486,098
Additional paid-in capital 9,209,826 8,750,861
Retained earnings 41,810,248 37,437,024
Net unrealized gain on investment
securities available-for-sale (25,511) 37,679
-------------------------------
Total liabilities and stockholders' equity $53,497,681 $48,711,662
==============================
37
<PAGE>
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information (continued)
Statements of Income
Year ended December 31
1997 1996 1995
----------------------------------------
Income from subsidiary bank:
Dividends $1,725,000 $1,450,000 $1,150,000
Management fees 526,800 492,000 510,000
Rental income 225,255 210,503 178,913
----------------------------------------
2,477,055 2,152,503 1,838,913
Other income 70,555 61,949 148,927
Expenses:
Administrative and general 920,359 865,269 839,970
Interest -- -- --
----------------------------------------
920,359 865,269 839,970
----------------------------------------
Income before income taxes
and equity in undistributed
net income of subsidiary
and affiliated bank 1,627,251 1,349,183 1,147,870
Income tax expense (benefit) 43,000 (30,000) 5,141
----------------------------------------
Income before equity in
undistributed net income of
subsidiary and affiliated
bank 1,584,251 1,379,183 1,142,729
Equity in undistributed net
income of subsidiary and
affiliated bank 4,907,948 4,428,110 4,207,849
----------------------------------------
Net income $6,492,199 $5,807,293 $5,350,578
========================================
38
<PAGE>
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information (continued)
Statements of Cash Flows
Year ended December 31
1997 1996 1995
------------------------------------------
Operating activities
Net income $6,492,199 $5,807,293 $5,350,578
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation 116,496 103,419 87,377
Equity in undistributed net
income of subsidiary and
affiliated bank (4,907,948) (4,428,110) (4,207,849)
Other 48,948 (53,830) (52,896)
-------------------------------------------
Net cash provided by operating
activities 1,749,695 1,428,772 1,177,210
Investing activities
Net sales (purchases) of
premises and equipment (43,758) (150,946) 2,380
------------------------------------------
Net cash provided by (used in)
investing activities (43,758) (150,946) 2,380
Financing activities
Decrease in short-term
borrowings -- -- --
Sale of common stock 475,985 393,513 294,245
Cash dividends (2,118,971) (1,733,306) (1,231,236)
-------------------------------------------
Net cash used in financing
activities (1,642,986) (1,339,793) (936,991)
-------------------------------------------
Increase (decrease) in cash 62,951 (61,967) 242,599
Cash at beginning of year 205,631 267,598 24,999
------------------------------------------
Cash at end of year $ 268,582 $ 205,631 $ 267,598
==========================================
39
<PAGE>
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.
Three Months Ended
December 31 September 30 June 30 March 31
(In Thousands, Except for Per Share Data)
1997
Interest income $8,085 $8,133 $8,008 $7,883
Interest expense 2,694 2,658 2,645 2,659
Net interest income 5,391 5,475 5,363 5,223
Provision for loan losses (150) (150) (150) (150)
Other income 1,831 1,642 1,554 1,396
Other expense 4,743 4,612 4,584 4,425
Income before income taxes 2,327 2,355 2,183 2,045
Income tax expense 612 670 598 538
Net income 1,716 1,685 1,585 1,507
Basic earnings per share .69 .67 .64 .61
1996
Interest income $7,811 $7,614 $7,443 $7,247
Interest expense 2,630 2,706 2,691 2,618
Net interest income 5,180 4,909 4,752 4,628
Provision for loan losses 75 75 75 75
Other income 1,465 1,521 1,491 1,463
Other expense 4,245 4,426 4,367 4,309
Income before income taxes 2,361 1,916 1,788 1,696
Income tax expense 618 442 462 432
Net income 1,743 1,474 1,326 1,264
Basic earnings per share .70 .59 .54 .51
40
<PAGE>
Report of Independent Auditors
Board of Directors
Tri City Bankshares Corporation
We have audited the accompanying consolidated balance sheets of Tri City
Bankshares Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 consolidated financial position of Tri
City Bankshares Corporation at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
February 6, 1998
41
<PAGE>
FORM 10K
Shareholders interested in obtaining a copy of the Corporation's Annual Report
to the Securities and Exchange Commission as filed on Form 10-K may do so at no
cost by writing to:
Office of the Secretary
Tri City Bankshares Corporation
6400 South 27th Street
Oak Creek, Wisconsin 53154
42
EXHIBIT 21
SUBSIDIARY OF REGISTRANT
Name Percentage of Shares Owned
- ---- --------------------------
Tri City National Bank 100.0%
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP,INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Tri City Bankshares Corporation of our report dated February 6, 1998, with
respect to the consolidated financial statements of Tri City Bankshares
Corporation, included in the Annual Report to Shareholders of Tri City
Bankshares Corporation for the year ended December 31, 1997.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3) of Tri City Bankshares Corporation pertaining to the Automatic
Dividend Reinvestment Plan of Tri City Bankshares Corporation and in the related
Prospectus of our report dated February 6, 1998, with respect to the
consolidated financial statements of Tri City Bankshares Corporation
incorporated by reference in this Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000313337
<NAME> TRI CITY BANKSHARES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 39,108
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,964
<INVESTMENTS-CARRYING> 123,396
<INVESTMENTS-MARKET> 124,142
<LOANS> 267,399
<ALLOWANCE> 3,500
<TOTAL-ASSETS> 459,634
<DEPOSITS> 398,943
<SHORT-TERM> 5,711
<LIABILITIES-OTHER> 1,482
<LONG-TERM> 0
0
0
<COMMON> 2,503
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 459,634
<INTEREST-LOAN> 24,674
<INTEREST-INVEST> 7,095
<INTEREST-OTHER> 340
<INTEREST-TOTAL> 32,109
<INTEREST-DEPOSIT> 10,292
<INTEREST-EXPENSE> 10,657
<INTEREST-INCOME-NET> 21,452
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,364
<INCOME-PRETAX> 8,910
<INCOME-PRE-EXTRAORDINARY> 6,492
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,492
<EPS-PRIMARY> 2.600
<EPS-DILUTED> 2.600
<YIELD-ACTUAL> 5.634
<LOANS-NON> 0
<LOANS-PAST> 694
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,010
<CHARGE-OFFS> 154
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 3,500
<ALLOWANCE-DOMESTIC> 3,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
