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, 1998
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
The registrant 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 and
has been subject to such filing requirements for the past 90 days.
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 1, 1999 2,524,812 shares of common stock were outstanding and
the aggregate market value of the shares held by nonaffiliates was approximately
$29,908,125.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated in
Annual report to shareholders for fiscal
year ended December 31, 1998 Parts II and IV
Proxy statement for annual meeting of
shareholders to be held on June 9, 1999. 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 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, through its wholly-owned subsidiary
Tri City National Bank (the 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, 1998, Registrant had assets of
$510,252,231, net loans of $272,939,619, deposits of $449,535,402 and
stockholders' equity of $58,517,860. 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 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.
<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, 1998
Tri City National Bank
6400 South 27th Street
Oak Creek, Wisconsin 1963 $508,031,908
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 capital,
allowance for loan loss, 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"); and
the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or
FIRREA (comprehensive legislation to reform the
<PAGE>
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 for banks with assets in excess of
$500 million. 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 in Milwaukee, Waukesha
and Ozaukee Counties. Accordingly, the bank competes with all the major banks
and bank holding companies located in metropolitan Milwaukee, most of whom are
far larger in terms of assets and deposits. The banking industry in this area 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.
<PAGE>
Employees
At December 31, 1998, Registrant employed 88 officers and 348 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
Securities and Exchange Commission Guides for Preparation and Filing of Reports
and Registration Statements and Reports.
<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, 1998, 1997 and 1996.
<TABLE>
Year Ended December 31
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
Average Yield Average Yield Average Yield
Balance Interest or Rate Balance Interest or Rate Balance Interest or Rate
--------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $272,324 $25,593 9.39% $259,976 $24,764 9.53% $239,980 $22,764 9.49%
Taxable investment securities 56,055 3,855 6.88 63,889 4,360 6.82 66,585 4,486 6.73
Nontaxable investment
securities(2) 70,586 4,866 6.89 56,903 4,404 7.74 50,758 3,782 7.45
Federal funds sold 15,664 824 5.26 6,118 340 5.56 7,194 368 5.12
------- ------- ------- ------ ------- -------
Total interest-earning assets 414,629 35,138 8.47% 386,886 33,868 8.75% 364,517 31,400 8.61%
Noninterest-earning assets:
Cash and due from banks 30,063 28,217 25,776
Premises and
equipment, net 18,362 18,534 19,282
Other assets 2,383 2,567 1,400
------- ------- -------
$465,437 $436,204 $410,975
======= ======= =======
</TABLE>
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
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 $182,111 4,978 2.73% $169,513 $ 4,677 2.76% $162,206 $ 4,424 2.73%
Other time deposits 109,690 6,010 5.48 102,088 5,614 5.50 104,052 5,971 5.74
Short-term borrowings 3,004 183 6.09 6,649 366 5.50 4,517 250 5.53
--------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 294,805 11,171 3.79% 278,250 10,657 3.83% 270,775 10,645 3.93%
Noninterest-bearing liabilities:
Demand deposits 112,504 104,493 92,038
Other 3,006 3,175 2,485
Stockholders' equity 55,122 50,286 45,677
------- ------- -------
$465,437 $436,204 $410,975
======= ======= =======
Net interest earnings and
interest rate spread $23,967 4.68% $23,211 4.92% $20,755 4.68%
=============== ================ ===============
Net yield on interest-earning assets 5.78% 6.00% 5.69%
</TABLE>
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding. Interest income includes $1,747,
1,431 and $1,325 of loan fees in 1998, 1997 and 1996, 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 $1,538, $1,668 and $1,427 in 1998,
1997 and 1996, respectively.
<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>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- ---------------------------------
Volume Rate(1) Net Volume Rate(1) Net
Interest earned on:
Loans $1,176 $ (347) $829 $1,897 $ 103 $2,000
Taxable investment securities (534) 29 (505) (181) 55 (126)
Nontaxable investment securities 1,059 (597) 462 457 165 622
Federal funds sold 531 (47) 484 (55) 27 (28)
------------------------------- ---------------------------------
Total interest-earning assets $2,232 (962) $1,270 $2,118 $ 350 $2,468
======================--------- ====================-------------
Interest paid on:
Savings deposits 348 (47) 301 $ 199 $ 55 $ 254
Other time deposits 418 (22) 396 (113) (244) (357)
Short-term borrowings (200) 17 (183) 118 (2) 116
------------------------------- ----------------------------------
Total interest-bearing liabilities $ 566 (52) 514 $ 204 $(191) 13
======================--------- ====================--------------
Increase in net interest income $ 756 $2,455
======== ============
(1) The change in interest due to both rate and volume has been allocated to rate changes.
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
(Dollars in Thousands)
The book value of investment securities at the dates indicated is:
<TABLE>
<S> <C> <C> <C>
December 31
------------------------------------------
1998 1997 1996
------------------------------------------
U.S. Treasury and government agencies $ 56,948 $ 54,336 $ 64,851
States and political subdivisions 77,590 72,017 60,461
Industrial revenue bonds 0 46 102
------------------------------------------
Total investment securities $134,538 $126,399 $125,414
==========================================
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1998, 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 $ 2,000 6.64% $24,996 6.40% $29,952 6.18% $ -- --
States and political subdivisions 5,000 6.76 38,000 6.82 34,490 7.01 100 9.09%
------- ------- ------- ------
$ 7,000 6.73% $62,996 6.65% $64,442 6.63% $ 100 9.09%
======= ======= ======= ======
Tax equivalent adjustment for
calculation of yield $ 101 $ 684 $ 811 $ 3
======= ======= ======= ======
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>
<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
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
Commercial .............. $ 13,730 $ 13,015 $ 10,414 $ 11,058 $ 10,447
Real estate - construction 16,358 19,148 16,142 21,692 16,811
Real estate - mortgage .. 215,381 201,322 191,288 167,945 157,859
Installment ............. 31,715 33,914 35,908 31,777 28,171
------- ------- ------- ------- -------
$277,184 $267,399 $253,752 $232,472 $213,288
The maturity distribution and interest rate sensitivity of all loans at December
31, 1998, are:
Maturity
After One
One Year Through After
or Less Five Years Five Years Total
--------- -------- ---------- -------
Commercial .............. $ 6,235 $ 7,361 $ 134 $ 13,730
Real estate construction 12,892 3,466 0 16,358
Real estate mortgage and
installment 86,670 149,417 11,009 247,096
------- ------- ------- -------
$105,797 $160,244 $ 11,143 $277,184
Interest Sensitivity
---------------------------
Fixed Rate Variable Rate
---------- -------------
Due after one, but within five years ........... $153,209 $ 7,035
Due after five years .......................... 8,910 2,233
------- -------
$162,119 $ 9,268
<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, for which interest continues to be accrued.
December 31
1998 1997 1996 1995 1994
----- ------ ----- ----- -----
Loans accounted for on
a nonaccrual basis ..... $ 334 $ -0- $ 725 $1,033 $1,932
Loans contractually past
due 90 days or more as to
interest or principal payments 1,848 694 1,220 630 490
Ratio of nonaccrual loans to
total loans ............ .12% 0% .28% .44% .90%
$10 thousand of interest income was recognized during 1998 on loans which were
accounted for on a nonaccrual basis. An additional $27 thousand of 1998 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, 1998 or 1997 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," if any, are included in
nonaccrual loans above.
<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
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance of allowance for
loan losses at beginning
of period $3,500 $3,010 $3,626 $3,395 $3,164
Loans charged off:
Commercial 0 57 899 0 87
Real estate 0 0 0 0 32
Installment 154 97 23 21 41
------ ------ ------ ------ ------
TOTAL LOANS CHARGED OFF 154 154 922 21 160
Recoveries of loans previously charged off:
Commercial 0 20 0 0 3
Real estate 244 0 0 0 0
Installment 55 24 6 4 13
------ ------ ------ ------ ------
TOTAL RECOVERIES 299 44 6 4 16
------ ------ ------ ------ ------
Net loans charged off(recovered) (145) 110 916 17 144
Additions to allowance
charged to expense 600 600 300 248 375
------ ------ ------ ------ ------
Balance at end of period $4,245 $3,500 $3,010 $3,626 $3,395
====== ====== ====== ====== ======
Ratio of net charge-offs
(recoveries)during the
period to average loans
outstanding (.05%) .04% .38% .01% .07%
Ratio of allowance at end
of year to total loans 1.53% 1.31% 1.19% 1.56% 1.59%
Ratio of allowance at end
of year to nonaccrual loans NMF* NMF* 415.17% 351.02% 175.91%
* Data not meaningful, there are $334,000 of nonaccrual loans at December 31,
1998, and 0 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 estimable 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.
<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.
Real estate loans comprise the largest portion of the loan portfolio with 83.60%
of loans outstanding at December 31, 1998. 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. 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 and are
generally more difficult to predict.
Losses in 1999 are not expected to vary significantly from net losses
experienced over the last two years.
<PAGE>
DEPOSITS
(Dollars in Thousands)
The average daily balance of deposits and the average rate paid on these deposit
categories is summarized for the periods indicated in the following table:
Year Ended December 31
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------
Noninterest-bearing
demand deposits $112,504 0% $104,493 0% $ 92,038 0%
Interest bearing
transaction deposits 80,090 2.69 80,517 2.65 77,635 2.58
Savings 102,021 2.77 88,995 2.86 84,571 2.87
Time deposits
(excluding time
certificates of
deposit of $100,000
or more) 81,877 5.85 77,221 5.69 85,754 6.18
Time certificates of
deposits of $100,000
or more 27,813 4.39 24,867 4.91 18,298 3.65
-------- -------- --------
$404,305 $376,093 $358,296
======== ======== ========
The maturity distribution of time certificates of deposit issued in amounts of
one hundred thousand dollars and over and outstanding at December 31, 1998, is:
Three months or less $ 7,930
After 3 through 6 months 7,519
After 6 through 12 months 6,112
After 1 year through 2 years 2,136
After 2 years through 3 years 902
After 3 years through 4 years 809
After 4 years through 5 years 2,839
-------
$ 28,247
=======
<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
1998 1997 1996
---- ---- ----
Percentage of net income to:
Average stockholders' equity 12.65% 12.91% 12.71%
Average total assets 1.50 1.49 1.41
Percentage of dividends declared per
common share to net income per common share 36.10 32.69 29.91
Percentage of average stockholders' equity
to daily average total assets 11.84 11.53 11.11
<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:
1998 $ 0 $ 827
1997 0 5,711
1996 3,200 2,200
Weighted average interest rate at year end:
1998 4.66% 5.54%
1997 0 5.80
1996 5.88 5.26
Maximum amount outstanding at any month's end:
1998 $ 10,000 $ 5,265
1997 16,500 5,711
1996 7,700 4,310
Average amount outstanding during the year:
1998 $ 769 $ 1,847
1997 4,460 2,189
1996 1,550 2,074
Average interest rate during the year:
1998 5.94% 6.12%
1997 5.79 5.12
1996 5.61 5.40
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.
<PAGE>
Item 2. PROPERTIES
The following table summarizes the properties in which the Registrant's bank
conducts its business:
Approximate
Location Floor Area 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)
6462 South 27th Street
Oak Creek, Wisconsin 580 Leased (1)
2555 West Ryan Road
Oak Creek, 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 640 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
<PAGE>
Approximate
Location Floor Area 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 710 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)
<PAGE>
Approximate
Location Floor Area in Square Feet Owned or Leased
-------- ------------------------- ---------------
8770 S. Howell Avenue
Oak Creek, 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)
(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 72,891 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 1998 to a vote of
security holders through the solicitation of proxies or otherwise.
<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 1998 Annual Report to Shareholders under the captions entitled
"Market for Corporation's Common Stock and Related Stockholder Matters" (Page
20) and "Selected Financial Data" (Page 19) as to cash dividends paid.
Item 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to
Registrant's 1998 Annual Report to Shareholders under the caption entitled
"Selected Financial Data" (Page 19).
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 1998 Annual Report to Shareholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Pages 7 to 18).
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference to
Registrant's 1998 Annual Report to Shareholders (Pages 21 to 43).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<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 9, 1999, under the caption entitled "Election of Directors" which
definitive Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(c).
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 9, 1999, under the caption entitled "Executive Compensation" which
definitive Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(c).
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 9, 1999, under the caption entitled "Stock Ownership of Certain
Beneficial Owners and Management" which definitive Proxy Statement will be filed
with the Securities and Exchange Commission pursuant to Rule 14a-6(c).
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 9, 1999, under the captions entitled "Election of Directors" and "Loans
and Other Transactions with Management" which definitive Proxy Statement will be
filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c).
<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, 1998.
With the exception of the information incorporated by reference into Items 5, 6,
7, and 8 of this Form 10-K, the 1998 Annual Report to Shareholders is not deemed
filed as part of this report.
Exhibit 22 - Subsidiary of Registrant.
Exhibit 24 - Consent of Independent Auditors
(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
<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, 1998
TRI CITY BANKSHARES CORPORATION
OAK CREEK, WISCONSIN
<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, 1998, are
incorporated by reference in Item 8:
Consolidated balance sheets-December 31, 1998 and 1997
Consolidated statements of income-Years ended December31, 1998, 1997 and 1996
Consolidated statements of stockholders' equity-Years ended December 31, 1998,
1997 and 1996
Consolidated statements of cash flows-Years ended December 31, 1998, 1997 and
1996
Notes to consolidated financial statements-December 31, 1998
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.
<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/ Henry Karbiner, Jr.
-------------------------------
Henry Karbiner, Jr., 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/ Henry Karbiner, Jr. 03/10/99
- ------------------------------ ----------
Henry Karbiner, Jr. Principal Executive Officer
/s/ Scott A. Wilson 03/10/99
- ------------------------------ ----------
Scott A. Wilson Secretary
/s/ Thomas W. Vierthaler 03/10/99
- ------------------------------ ----------
Thomas W. Vierthaler Vice-President and
Comptroller
/s/ Frank J. Bauer 03/10/99
- ------------------------------ ----------
Frank J. Bauer Director
/s/ Sanford Fedderly 03/10/99
- ------------------------------ ----------
Sanford Fedderly Director
- ------------------------------ ----------
William Gravitter Director
/s/ Christ Krantz 03/10/99
- ------------------------------ ----------
Christ Krantz Director
<PAGE>
/s/ Rudie L. Lauterbach 03/10/99
- ------------------------------ ----------
Rudie L. Lauterbach Director
/s/ William P. McGovern 03/10/99
- ------------------------------ ----------
William P. McGovern Director
/s/ Robert W. Orth 03/10/99
- ------------------------------ ----------
Robert W. Orth Director
/s/ Ronald K. Puetz 03/10/99
- ------------------------------ ----------
Ronald K. Puetz Director
/s/ John M. Rupcich 03/10/99
- ------------------------------ ----------
John M. Rupcich Director
/s/ David A. Ulrich, Jr. 03/10/99
- ------------------------------ ----------
David A. Ulrich, Jr. Director
/s/ William J. Werry 03/10/99
- ------------------------------ ----------
William J. Werry Director
<PAGE>
EXHIBIT 3
<PAGE>
Tribute to David A. Ulrich
David A. Ulrich often credited his success to failure.
The story is well-known to many who knew Dave. Growing up on Milwaukee's West
Side, Dave failed two years at St. Anthony of Padua Grade School in Wauwatosa.
Years later, Dave returned to the school to thank the School Sisters of St.
Francis for turning his life around.
"Whatever I amount to, I owe an awful lot to those sisters," Dave would often
say.
Dave's unique view of business, his wisdom, his entrepreneurial zeal, his brand
of success, his sense of humor and his ready smile were lost to the world last
fall when he died after a courageous battle with cancer. His death prompted a
big story in the Milwaukee Journal Sentinel and a line of mourners that extended
out the door at St. Charles Borromeo Catholic Church in Milwaukee.
Dave left behind more than a loving family and a successful business empire that
included Tri City National Bank, Mega Marts, Inc. and NDC, Inc. He also left
behind a legacy of loyalty - to family, friends, business colleagues and, maybe
most visibly, to those who helped him along the way.
Dave's most high-profile way to say thanks was through philanthropy. He
appreciated a good education, so a chapel at Pius XI High School bears the name
of his beloved wife, Agatha. And countless students - Dave and Agatha provided
scholarships for several years at Pius and Alverno College - can thank the
Ulrichs for their schooling.
Dave loved his adopted hometown of Oak Creek, so he gave much and helped raise
more to build the Oak Creek Community Center. Now the community can celebrate
inside the center's Ulrich Hall.
He was a proud American, a veteran of World War II who lost a brother in battle.
He gave thanks by providing the money to refurbish West Allis' Veterans Park.
But there were other, much more subtle, efforts. Tri City Bankshares stock,
since first offered to the public in 1963, has increased in value many times
over proving an excellent investment for original stockholders, and those who
joined him along the way. More important to him, Dave helped to provide many
thousands of jobs, both through Tri City National Bank and its 31 locations and
through Mega Marts which now numbers 16 Pick'n Save Mega Food Centers throughout
southeastern Wisconsin.
Dave's intense loyalty prompted the same in those he met. It's not uncommon to
find - in an age when people change jobs as often as they change cars - people
who have spent
<PAGE>
their entire business lives in an Ulrich company. Leaving meant more than
changing a place of employment. It meant disappointing Dave.
"Dave was one of the most straight-arrow people I ever met," said Sister Joel
Read, president of Alverno College. "He appreciated greatly what other people
assisted him to do and to become. He was a very, very loyal man."
And he even had some humorous ways to say thanks. Few in those cities may know
it, but Oak Creek, Franklin and Greenfield are the three cities in the name of
Tri City National Bank. A fourth city, Milwaukee, also meets at the corner of
27th Street and College Avenue, the spot where Dave's business life began. But a
fight many years ago left the big neighbor to the northeast out of the name.
Though Dave gave of himself and his money, he expected much in return. Donna
Kassens, director of development at Pius, said Dave and Agatha pledged $500,000
to the school in a capital drive to build a new chapel, library and media
center. But Dave released the funds in increments - $100,000 each time the
school raised $500,000.
"He was a kind and caring man, but he challenged you to reach for the stars,"
Pius' Kassens told the Milwaukee Journal Sentinel. "He truly lived his life in
service to other people."
Dave's work, of course, will continue. His efforts in the philanthropic world
will bear fruit for many years to come.
Just as important, Tri City National Bank will innovate; look for sound,
profitable growth; focus on its small-business roots; and provide an unmatched
brand of convenience - just as it has since the day in 1963 when Dave Ulrich,
William Gravitter and a group of other local businessmen founded the bank.
Dave wouldn't want it any other way.
<PAGE>
Dear Shareholders:
The year 1998 was truly bittersweet for Tri City Bankshares Corporation. We all
mourn the tragic loss of our founder and friend, David A. Ulrich in whose memory
and honor the Board of Directors has dedicated this annual report.
To the surprise of many, the U.S. economy finished 1998 with an increase in the
gross domestic product of nearly 4%. The Federal Reserve had projected growth
rates as low as 2%, but vibrant consumer spending as a result of low inflation,
low unemployment and a strong stock market fueled the economic growth. This
strength continued to provide a robust environment for your bank.
During 1998, net assets increased $50.6 million, which resulted in total assets
of $510,000,000 at year end, marking the first time your corporation surpassed
the "half billion" dollar milestone. As in 1997, the low interest rates during
1998 provided a very competitive environment that limited growth and rates of
return for our loan and securities portfolio. A record high of $46.7 million in
securities were called or matured during the year. Through a diligent effort
there has been an increase in outstanding loan balances of $9.8 million to a new
high and an increase of $8.2 million over 1997 in investment securities. The
increase in earning assets has been accomplished without compromising our
earnings or loan standards. We are most pleased to report that 1998 produced an
all-time record $6,970,000 net after-tax income representing a very substantial
1.50% return on average assets.
Nineteen ninety-eight was a year of operational change for your bank. Our 1997
assessment of Y2K preparedness and operating systems resulted in a decision to
move our data processing to a new third-party vendor. Conversion planning and
preparation consumed much of the year and was successfully completed November
16, 1998. The change was total in that new hardware and software were installed
at the branch level and operations centers. A new telecommunications wide area
network linking the branches was also installed.
<PAGE>
To complete the improvements we began construction of a new item processing
center mid year. This function is also being upgraded with new Y2K compliant
hardware and software. The exciting news here is that the new technology creates
more efficiency for our staff through the use of document imaging. This new
functionality will be available to our customers in the second half of 1999.
None of our major competitors in the metropolitan Milwaukee market offer check
imaging at this time. We believe it will afford us cost savings and a product
advantage as well.
Looking forward, we have also made a commitment to expand our trade area to
better serve the Racine and Kenosha markets. In 1998 your bank received approval
from the Comptroller of the Currency to open a new branch in Sturtevant,
Wisconsin. Plans are underway for a summer 1999 grand opening. For years our
brand of service has attracted a number of customers from these communities to
our Ryan Road Office. This year we expanded our automated voice response system
to include a toll-free number. Our customers in Racine and Kenosha can already
dial 1-888-T-R-I-C-I-T-Y and get account information. Very soon they will have a
local branch for their convenience as well.
From the beginning, your bank has believed growth and earnings follow a well
managed, functionally sound organization. While all of us, stockholders,
directors, customers, management and staff miss Dave, it was his vision that
assured a solid organization to continue what he began. I am taking the liberty
to close with the final paragraph of Dave's letter to the stockholders last year
with two changes highlighted.
"We believe that the future of the Bank continues to be bright. By continuing
Dave's 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 enhance your investment."
Sincerely,
/s/Henry Karbiner, Jr.
Henry Karbiner, Jr.
Chairman, President and Chief Executive Officer
Tri City Bankshares Corporation
<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. Chairman of the Board, President and Chief Executive
Officer of the Corporation and Chairman of the Board
and President of Tri City National Bank
Christ Krantz Vice President of K.R.K., Inc. (corporation owning
Ramada - Airport Motel, Milwaukee) 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, 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 Senior Vice President and Secretary of the Corporation,
and Executive Vice President and Secretary of Tri City
National Bank
<PAGE>
Directors and Officers of the Corporation (continued)
Officers
Henry Karbiner, Jr. Chairman of the Board, President and
Chief Executive Officer
Robert W. Orth Senior Vice President
Ronald K. Puetz Senior Vice President
Scott A. Wilson Senior Vice President and Secretary
John M. Rupcich Vice President - Real Estate
Thomas W. Vierthaler Vice President and Comptroller
George E. Mikolajczak Vice President - Human Resources
Gary J. Hafemann Assistant Vice President and Auditor
<PAGE>
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 of 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 than expected general economic conditions; (iv)
legislation or regulatory changes which adversely affect the banking industry;
and (v) other unanticipated occurrences.
Financial Condition
Tri City Bankshares Corporation (the Corporation), the parent company of its
wholly owned subsidiary, Tri City National Bank (the Bank), increased in net
assets $50.6 million (11.0%) during 1998 compared to an increase of $22.9
million (5.3%) in 1997. This increase resulted in total assets of $510 million
which marked the first year end the Corporation surpassed the "half billion"
dollar milestone. Despite the passing of David A. Ulrich, our founder and
Chairman of the Board, during 1998, customers have continued to show their
confidence and support in the Corporation and its management.
Cash and cash equivalents of the Corporation increased $31.5 million (70.4%)
during 1998 compared to an increase of $9.2 million (25.9%) during 1997. The
usual trend at year end is an increase in deposits which in turn generates
excess cash which the Corporation invests for the short term in Federal Funds
Sold, anticipating the withdrawal of some of these deposits during January of
the following year.
Investment securities increased $8.2 million (6.5%) in 1998 compared to an
increase of $885,000 (0.7%) in 1997. During 1998 all securities which the
Corporation had classified as available-for-sale were called and management did
not classify any new securities purchased as available-for-sale. The
Corporation's preference is to hold all securities to maturity. In 1998, $46.7
million in securities were called or matured and the Corporation replaced these
investments with $54.7 million of new securities. This increase of $8.0 million
was split evenly between Agency and Municipal securities.
The increase in loan balances for 1998 was $9.8 million (3.6%) compared to an
increase in 1997 of $13.6 million (5.4%). Although the Corporation has increased
its loan portfolio, competition for new loan customers is very strong.
Management, however,
<PAGE>
feels that their planning and conservative approach to lending and investing
policies has kept the Corporation competitive in offering similar or better
products to the prospective customer. The Corporation's presence and reputation
in the marketplace has also enabled it to retain and attract a sound customer
base.
Although recent acquisitions within the banking industry have increased the
number of larger banks competing in the Milwaukee area, management of the
Corporation believes that they can remain competitive and offer customers a
"Home Town' approach to their banking needs. As a financial institution with
half a billion dollars in assets, the Corporation has an excellent niche; large
enough to provide all services, but small enough to maintain the "Home Town"
approach. The basic philosophy of management has remained unchanged: a
commitment to reinvesting in the communities serviced by the Corporation.
Through its loan review committee, they have continued to maintain a quality
loan portfolio which has been able to keep nonperforming loans at a minimum. As
of December 31, 1998, the reserve for loan losses was $4.2 million compared to
$3.5 million on December 31, 1997. In 1998, the provision for loan loss remained
at $600,000 for the year, even though loans increased $9.8 million. Losses
charged against the reserve for loan loss were $154,000 in 1998 compared to
charge-offs of $154,000 in 1997. Management continues to believe that the
reserve for loan loss is adequate to support additional portfolio growth and
provide for any losses which may occur.
Total deposits for the Corporation increased $50.6 million (12.7%) during 1998
compared to an increase of $17.9 million (4.7%) during 1997. The continued
confidence of depositors in the Corporation that this increase shows has enabled
management to keep the Corporation's borrowing from outside sources at a minimum
and to remain competitive in its rates. Management has continued to research
ways to offer the best products to the Corporation's customers to maintain their
loyalty and satisfaction while still promoting a means to attract new customers.
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.
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
<PAGE>
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 $7.0 million at December 31, 1998, representing
5.2% 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 the first quarter of 1998, the Corporation entered into a contract to
outsource all of its data processing systems to a different vendor. This
conversion took place on November 16, 1998. In preparation for this move, new
equipment was purchased and installed at a cost of approximately $2.0 million,
which was financed through the Corporation's banking subsidiary. The Corporation
has also purchased land and has almost completed construction of a new building
to house the check processing operations center. New equipment and technology
will also be used in the operations center, which will include digital imaging
of checks. This technology will make the operations of check handling, archival
and research more efficient and will provide digitally imaged checking account
statements. Occupancy is expected to be completed during the first quarter of
1999 and the cost of this facility is estimated to be approximately $2.3 million
and will be financed internally.
The OCC has issued guidelines, which impose certain risk-based capital and
leverage standards upon national banks. These guidelines, as well as the capital
requirements of bank regulators, are discussed in Note 8, beginning on page 32.
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.
The Corporation has always exceeded the minimum capital ratios by a wide margin
and continues to do so. 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
<PAGE>
continue to exceed the "risk-based" capital requirements and continue to meet
regulatory definitions of "well capitalized."
Results of Operations
1998 vs. 1997
Net income for the Corporation increased $478,000 (7.4%) during 1998 compared to
an increase of $685,000 (11.8%) during 1997. Interest income and fees on loans,
investment security investment income and interest on federal funds sold were
the principal components of the increase.
Interest and fees on loans contributed an increase of $919,000 (3.7%) in 1998
compared to an increase of $1.9 million (8.4%) in 1997. Although loan balances
have increased during the year, rates have declined slightly. Some loans have
also been prepaid and new loans replacing these as well as the repricing of cash
flow generated from scheduled amortization have resulted in a decline of 20
basis points in the overall loan portfolio. Management's conservative policies
have kept the Corporation from experiencing large charge-offs or a high
percentage of nonperforming loans. A quality loan portfolio has been maintained
while still providing competitive products to offer in the community. The
Corporation's nonaccrual loans were $334,000 as of December 31, 1998 compared to
no nonaccrual loans as of December 31, 1997.
Investment securities interest income, including federal funds sold, increased
$527,800 (7.2%) during 1998 compared to an increase of $84,000 (1.2%) during
1997. During 1998, $46.7 million of investment securities matured or were
called, including $3.0 million which were classified as available-for-sale.
However, replacement securities are offering a lower yield. The goal of
management is to acquire investments which will give the Corporation a high
yield but will not expose it to the potential high risk which accompanies a
higher rate of return. Interest expense on deposits increased $696,000 (6.8%) in
1998 compared to a decrease of $104,000 (1.0%) in 1997, primarily due to the
large increase in deposit balances during 1998. Since the Corporation has had
excess funds to invest for much of 1998, short-term borrowing interest decreased
$182,000 (49.9%) compared to an increase of $116,000 (46.3%) in 1997.
Other income increased $504,000 (7.9%) in 1998 compared to an increase of
$482,000 (8.1%) during 1997.
Other expenses have increased $962,000 (5.2%) in 1998 compared to an increase of
$1.0 million (5.9%) in 1997. Due to the new facility for the Corporation's
operations center, occupancy expenses are expected to increase substantially
during 1999.
Management is very optimistic for the Corporation in 1999. They believe that the
Corporation should continue with good growth through the end of the century. The
effective tax rate for the Corporation is 25.6% in 1998 and 27.1% in 1997.
<PAGE>
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.
Total other income increased $482,000 (8.1%) during 1997 compared to a decrease
of $40,000 (0.7%) during 1996. 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.
<PAGE>
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.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution 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 the most significant impact of inflation and changing prices
on financial results is the Corporation's ability to react to changes in
interest rates. 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 Problem
At midnight on December 31, 1999, unless the proper modifications have been
made, the program logic in many computer systems may produce erroneous results
because, among other things, the systems will incorrectly read the date
"01/01/00" as being January 1 of the year 1900 or another incorrect date. In
addition, certain systems may fail to detect that the year 2000 is a leap year.
Problems can also arise earlier than January 1, 2000 as dates in the next
millennium are entered into non-Year 2000 compliant programs. Like most
financial service providers, the Corporation may be significantly affected by
the Year 2000 Problem due to the nature of financial information.
Compliance Program
In order to address the Year 2000 Problem and to minimize its potential adverse
impact, in 1997 the Corporation initiated a corporate-wide project to address
the impact of the Year 2000 Problem on its computer application systems,
information technology (IT) related equipment, system software, building
controls, and non-IT embedded systems found in such equipment as security
systems, currency counters, and elevators. The evaluation of Year 2000 issues
included an assessment of the potential impact of the Year 2000 Problem on the
Corporation including monitoring significant customers, service
<PAGE>
suppliers and other parties material to the Corporation's operations; testing
changes provided by these suppliers; and developing contingency plans for any
critical systems that are not effectively reprogrammed. In the course of this
evaluation, the Corporation has sought written assurances from such third
parties as to their state of Year 2000 readiness. The Corporation's Year 2000
Compliance Program is divided into five phases: (1) awareness; (2) assessment;
(3) renovation; (4) validation; and (5) implementation.
The Corporation's State of Readiness
Work on the Year 2000 project has been prioritized in accordance with risk. The
highest priority has been assigned to activities that would disrupt the accuracy
and delivery of the Corporation's banking services to its customers. Next is an
assessment of the potential credit risk to the Corporation resulting from its
credit customers' state of Year 2000 readiness, or lack thereof, and the
potential impact of those efforts on the customers' ability to meet contractual
payment obligations. The lowest priority has been assigned to activities that
would cause inconvenience or productivity loss in normal business operations
such as issues related to internal office machinery, heating and air
conditioning systems and elevators.
The Corporation has substantially completed all phases of the plan. Because the
Corporation outsources its data processing, a significant component of the Year
2000 Compliance Program is working with external vendors to test and certify
that their systems are Year 2000 compliant. During the week of November 16,
1998, the Corporation converted to a new primary Data Service provider, which is
on schedule with its remediation to become Year 2000 compliant. The Corporation
is performing a variety of tests to determine the proper functionality of the
new platform and monitoring the proxy testing being performed by the primary
Data Service provider. The Corporation's other external vendors have surveyed
their programs to inventory the necessary changes and have begun correcting the
applicable computer programs and replacing equipment so that the Corporation's
information systems will be substantially Year 2000 compliant prior to March 31,
1999. This will enable the Corporation to devote substantial time to the testing
of the upgraded systems prior to the arrival of the new millennium. The
Corporation expects to complete its timetable for carrying out its plans to
address Year 2000 issues, and to finish initial testing by March 31, 1999.
The Corporation has also conducted an evaluation of its significant credit
customers to determine their state of Year 2000 readiness. Evaluations were
completed for all customers whose outstanding loan balance or loan commitment
exceeded $250,000. In addition, as part of its ongoing credit underwriting
practices, all new and renewed loans must have a Year 2000 risk assessment
completed and reported as part of the loan approval process. Based upon the
information received from these surveys, the Corporation does not expect to
experience any material collection problems resulting from its customers' Year
2000 readiness or lack thereof.
<PAGE>
Cost to Address Year 2000 Compliance Issues
Managing the Year 2000 Project will result in additional direct and indirect
costs to the Corporation. Based upon current internal studies, as well as
recently solicited bids from various computer hardware and software vendors, the
Corporation estimates the total direct cost of remediating the issues discovered
in its assessment of the Year 2000 problem to be $600,000 and $800,000. During
the review of the Corporation's operation, a decision was made to upgrade
hardware and much of the Corporation's dated technology which had been in use
for 8 - 12 years. The upgrades are expected to result in greater employee
efficiencies and enhanced products for the Corporation's customers. The total
costs of upgrades will be $2.0 to $2.2 million. To date, the Corporation has
expended $1.8 million. The majority of the remaining costs related to resolving
the Year 2000 Problem are expected to be expended in 1999. The Corporation
expects to fund these expenditures through internal sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors.
Risk of Noncompliance and Contingency Plans
The major applications which pose the greatest Year 2000 risks to the
Corporation if the Year 2000 implementation of the Year 2000 Project is not
successful, are the Corporation's data services systems supported by third-party
vendors, loan customers' ability to meet contractual payment obligations in the
event the Year 2000 Problem has a significant negative impact to their business,
internal computer networks, and item processing equipment which renders
customers' bank statements and banking transactions. The potential problems
which could result from the inability of these applications to correctly process
the Year 2000 are the inaccurate calculation of interest income and expense,
service delivery interruptions to the Corporation's banking customers, credit
losses resulting from the Corporation's loan customers' inability to make
contractual credit obligations, interrupted financial data gathering, and poor
customer relations resulting from inaccurate or delayed transaction processing,
respectively.
Although the Corporation intends to complete substantially all Year 2000
remediation and testing activities by March 31, 1999, and although the
Corporation has initiated Year 2000 communications with significant customers,
key vendors, service providers, and other parties material to the Corporation's
operations and is diligently monitoring the progress of such third parties in
their Year 2000 compliance, such third parties nonetheless represent a risk that
cannot be assessed with precision or controlled with certainty. For that reason,
the Corporation intends to develop contingency plans to
<PAGE>
address alternatives in the event that Year 2000 failures of automatic systems
and equipment occur. Preliminary discussions have been held regarding the
contingency plan and a final contingency plan is scheduled to be completed by
the end of the first quarter of 1999.
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.
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
<PAGE>
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 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.
The following tables summarize interest rate sensitive assets and liabilities by
year of maturity as of December 31, 1998 and 1997.
<PAGE>
Tri City Bankshares Corporation
Quantitative Disclosures of Market Risk
December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Amount Maturing in Fair Value
--------------------------------------------------------------------------------- -------------
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Rate sensitive assets:
Fixed interest rate loans $ 88,496 $57,666 $50,617 $ 9,975 $20,481 $ 6,992 $234,227 $233,981
Average interest rate 8.57% 8.72% 8.37% 8.47% 7.61% 7.89% 8.46%
Variable interest rate $ 19,869 $ 7,589 $ 2,197 $ 598 $ 605 $12,099 $ 42,957 $ 42,913
loans
Average interest rate 7.97% 8.72% 8.21% 8.12% 8.77% 7.86% 8.10%
Fixed interest rate securitie$ 7,000 $ 8,830 $14,975 $16,103 $23,283 $64,347 $134,538 $136,420
Average interest rate 6.44% 6.90% 6.63% 6.69% 6.54% 6.63% 6.63%
Other interest-bearing assets $ 32,200 $ 32,200 $ 32,200
Average interest rate 5.26% 5.26%
Rate sensitive liabilities:
Savings and interest-bearing
checking $204,969 $204,969 $204,969
Average interest rate 2.69% 2.69%
Time deposits $ 84,353 $13,034 $ 4,319 $ 3,281 $ 6,459 $111,446 $112,116
Average interest rate 5.27% 5.88% 5.95% 6.30% 5.83% 5.43%
Variable interest rate
borrowings $ $ $
827 827 827
Average interest rate 6.12% 6.12%
<PAGE>
Tri City Bankshares Corporation
Quantitative Disclosures of Market Risk
December 31, 1997
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 $ 34,532 $ 7,283 $ 4,101 $ 361 $ 35 $ 163 $ 46,475 $ 47,109
loans
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 $62,594 $126,399 $127,106
Average interest rate 5.50% 4.59% 5.78% 5.18% 5.94% 5.77% 5.67%
Other interest-bearing assets$ 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>
<PAGE>
Tri City Bankshares Corporation
Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
Total interest income $33,540,240 $32,109,169 $30,114,579 $27,724,625 $24,503,080
Total interest expense 11,170,653 10,657,307 10,645,630 9,468,149 6,859,209
Net interest income 22,369,587 21,451,862 19,468,949 18,256,476 17,643,871
Provision for loan losses 600,000 600,000 300,000 248,139 375,000
Net interest income after
provision for loan losses 21,769,587 20,851,862 19,168,949 18,008,337 17,268,871
Income before income taxes 9,370,239 8,910,197 7,761,293 7,509,719 6,769,767
Net income 6,970,239 6,492,197 5,807,293 5,350,578 4,876,814
Net income per share 2.77 2.60 2.34 2.17 2.04
Cash dividends declared
per share 1.00 .85 .70 .50 0.40
Average daily balances: (In Thousands)
Total assets $ 465,437 $ 436,204 $ 410,975 $ 371,795 $ 340,502
Total net loans 269,773 257,907 237,524 220,969 197,540
Total investment 126,641 120,792 115,810 105,758 96,810
securities
Total deposits 404,305 376,093 358,296 324,469 294,568
Total stockholders' equity 55,122 50,266 45,677 41,532 36,051
</TABLE>
<PAGE>
Tri City Bankshares Corporation
Market for Corporation's Common Stock
and Related Stockholder Matters
1 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.
1998 1997
-----------------------------------------------------
High Low High Low
-----------------------------------------------------
Price range:
First quarter $30.90 $30.40 $27.80 $27.30
Second quarter 31.75 31.15 28.50 28.00
Third quarter 32.60 32.00 29.30 28.80
Fourth quarter 33.45 32.90 30.15 29.55
As of December 31, 1998, the number of holders of record of the Corporation's
common stock was 728.
The Corporation declared four quarterly cash dividends in 1998 in the amount of
$0.25 per share. These dividends were declared on January 7, April 8, July 8 and
October 14, payable on January 23, April 23, July 23 and October 30,
respectively. Quarterly dividends of $0.2125 per share were declared during each
of the four quarters of 1997.
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.
<PAGE>
Tri City Bankshares Corporation
Consolidated Balance Sheets
See accompanying notes.
December 31
1998 1997
-----------------------------------------
Assets
Cash and due from banks $ 44,001,647 $ 39,107,888
Federal funds sold 32,200,000 5,600,000
-----------------------------------------
Cash and cash equivalents 76,201,647 44,707,888
Investment securities:
Available-for-sale (at fair value) - 2,964,000
Held-to-maturity (fair value of
$136,420,200-1998 and $124,141,964--1997) 134,537,963 123,396,458
Loans 277,184,364 267,398,942
Less allowance for loan losses (4,244,745) (3,500,050)
-----------------------------------------
Net loans 272,939,619 263,898,892
Premises and equipment 19,864,590 18,126,925
Other assets 6,708,412 6,539,402
-----------------------------------------
$510,252,231 $459,633,565
=========================================
Liabilities and stockholders' equity Deposits:
Noninterest-bearing $133,120,719 $105,911,980
Interest-bearing-- over $100,000 28,247,266 24,436,381
Interest-bearing-- other 288,167,417 268,595,009
-----------------------------------------
Total deposits 449,535,402 398,943,370
Short-term borrowings 827,355 5,710,804
Other liabilities 1,371,614 1,481,710
-----------------------------------------
Total liabilities 451,734,371 406,135,884
Stockholders' equity:
Common stock, $1 par value:
Authorized - 5,000,000 shares
Issued and outstanding
(1998-2,520,205 shares;
1997-2,503,118 shares) 2,520,205 2,503,118
Additional paid-in capital 9,726,974 9,209,826
Retained earnings 46,270,681 41,810,248
Accumulated other comprehensive
income, net unrealized loss
on investment securities
available-for-sale - (25,511)
-----------------------------------------
Total stockholders' equity 58,517,860 53,497,681
-----------------------------------------
$510,252,231 $459,633,565
=========================================
See accompanying notes
<PAGE>
Tri City Bankshares Corporation
Consolidated Statements of Income
Year ended December 31
1998 1997 1996
----------------------------------------------------
Interest income:
Loans, including fees $25,593,267 $24,673,957 $22,763,914
Investment securities:
Taxable 3,855,225 4,359,562 4,485,899
Exempt from federal
income tax 3,268,120 2,735,986 2,496,299
Federal funds sold 823,628 339,664 368,467
----------------------------------------------------
Total interest income 33,540,240 32,109,169 30,114,579
Interest expense:
Deposits 10,987,242 10,291,509 10,395,596
Short-term borrowings 183,411 365,798 250,034
----------------------------------------------------
Total interest expense 11,170,653 10,657,307 10,645,630
----------------------------------------------------
Net interest income 22,369,587 21,451,862 19,468,949
Provision for loan losses 600,000 600,000 300,000
----------------------------------------------------
Net interest income after
provision for loan losses 21,769,587 20,851,862 19,168,949
Other income:
Service charges 3,440,023 3,486,469 3,384,804
Rental income 958,866 890,894 899,580
Gain on sale of loans 98,719 44,904 33,141
Other 2,428,912 1,999,811 1,622,554
----------------------------------------------------
Total other income 6,926,520 6,422,078 5,940,079
Other expenses:
Salaries and employee
benefits 10,751,993 10,238,765 9,306,142
Occupancy 2,483,067 2,495,224 2,379,634
Equipment 1,390,623 1,226,110 1,245,513
Data processing 648,559 623,169 542,274
Advertising and
promotional 430,338 474,328 410,844
Regulatory agency
assessments 150,268 145,350 97,021
Office supplies 609,380 498,989 539,355
Other 2,861,640 2,661,808 2,826,952
----------------------------------------------------
Total other expenses 19,325,868 18,363,743 17,347,735
----------------------------------------------------
Income before income taxes 9,370,239 8,910,197 7,761,293
Income taxes 2,400,000 2,418,000 1,954,000
----------------------------------------------------
Net income $ 6,970,239 $ 6,492,197 $ 5,807,293
====================================================
Net income per share $ 2.77 $ 2.60 $ 2.34
====================================================
Average shares outstanding 2,513,003 2,496,050 2,479,373
====================================================
See accompanying notes.
<PAGE>
Tri City Bankshares Corporation
Consolidated Statements of Stockholders' Equity
See accompanying notes.
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumulated Other
Common Additional Retained Comprehensive
Stock Paid-In Capital Earnings Income Total
--------------------------------------------------------------------------------------
Balances at January 1, 1996 $2,470,449 $8,372,997 $33,363,037 $108,248 $44,314,731
Net income - - 5,807,293 - 5,807,293
Change in net unrealized loss
on investment securities
available-for-sale (net of - - - (70,569) (70,569)
tax)
----------------
Comprehensive income 5,736,724
----------------
Cash dividends declared--$.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)
--------------------------------------------------------------------------------------
Balances 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
Change in net unrealized loss on
investment securities
available-for-sale (net of tax) - - - (63,190) (63,190)
----------------
Comprehensive income 6,429,007
----------------
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)
--------------------------------------------------------------------------------------
Balances at December 31, 1997 2,503,118 9,209,826 41,810,248 (25,511) 53,497,681
Net income - - 6,970,239 - 6,970,239
Change in net unrealized gain on
investment securities
available-for-sale (net of tax) - - - 25,511 25,511
----------------
Comprehensive income 6,995,750
----------------
Cash dividends declared--$1.00
per share - - (2,509,806) - (2,509,806)
Common stock issued under
dividend reinvestment
plan--17,103 shares 17,103 517,642 - - 534,745
Common stock fractional shares
redeemed (16) (494) - - (510)
======================================================================================
Balances at December 31, 1998 $2,520,205 $9,726,974 $46,270,681 $ - $58,517,860
======================================================================================
</TABLE>
<PAGE>
Tri City Bankshares Corporation
Consolidated Statements of Cash Flows
See accompanying notes.
<TABLE>
<S> <C> <C> <C>
Year ended December 31
1998 1997 1996
------------------------------------------------------
-------------------
Operating activities
Net income $ 6,970,239 $ 6,492,197 $ 5,807,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of loans held for sale 27,184,355 11,433,205 4,887,563
Origination of loans held for sale (27,184,355) (11,433,205) (4,887,563)
Provision for loan losses 600,000 600,000 300,000
Provision for depreciation 1,703,716 1,587,843 1,561,886
Amortization premiums and accretion of discounts
on investment securities (87,426) 154,227 242,278
Undistributed earnings of affiliate (107,708) (99,620) (101,176)
Decrease (increase) in interest receivable (168,846) 83,099 (644,959)
Increase (decrease) in interest payable 37,994 76,843 (11,243)
Other (53,650) (599,523) 265,416
------------------------------------------------------
-------------------
Net cash provided by operating activities 8,894,319 8,295,066 7,419,495
Investing activities
Proceeds from repayment, calls and maturities
of investments available for sale 3,000,000 7,010,082 2,500,000
Proceeds from repayment, calls and maturities
of investment securities held to maturity 43,663,386 21,133,878 22,304,252
Purchases of investment securities held to maturity (54,714,850) (29,282,938) (41,255,744)
Net increase in loans (9,640,727) (13,756,897) (22,195,504)
Net purchases of premises and equipment (3,441,381) (796,670) (929,550)
------------------------------------------------------
Net cash used by investing activities (21,133,572) (15,692,545) (39,576,546)
Financing activities
Sale of common stock 534,235 475,985 393,513
Net increase in deposits 50,592,032 17,929,693 30,794,157
Net increase (decrease) in short-term borrowings (4,883,449) 310,847 3,485,436
Cash dividends (2,509,806) (2,118,973) (1,733,306)
------------------------------------------------------
Net cash provided by financing activities 43,733,012 16,597,552 32,939,800
------------------------------------------------------
Increase in cash and cash equivalents 31,493,759 9,200,073 782,749
Cash and cash equivalents at beginning of year 44,707,888 35,507,815 34,725,066
------------------------------------------------------
Cash and cash equivalents at end of year $ 76,201,647 $ 44,707,888 $ 35,507,815
======================================================
Supplementary information:
Interest paid $ 11,144,358 $ 10,588,438 $ 10,664,315
Income taxes paid 2,445,000 2,440,000 1,300,000
</TABLE>
<PAGE>
Tri City Bankshares Corporation
Notes to Consolidated Financial Statements
December 31, 1998
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.
<PAGE>
Tri City Bankshares Corporation
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Investment Securities
Debt 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.
<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, 1998.
The resulting number of shares used in computing basic earnings per share is
2,513,003, 2,496,050 and 2,479,393 for the years ended December 31, 1998, 1997
and 1996, respectively.
<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
As of January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards (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. Examples of such an
item are unrealized gains and losses on available-for-sale securities. The
adoption of this statement had no impact on the Corporation's net income.
Effective January 1, 1998, the Corporation adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
superseded FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position. The Corporation has
determined that it has one reportable segment - commercial banking. As such,
additional segment information is not required to be disclosed. The Corporation
offers the following products and services to external customers: deposits and
loans; and, to a much lesser extent, leases space in branch facilities to third
parties. Revenues for each of these products and services are disclosed in the
consolidated statement of income.
<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, 1998 was approximately $12,001,000.
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, 1998:
Held-to-maturity:
U.S. Treasury securities
and obligations of
U.S. government agencies $ 56,947,707 $ 410,247 $ 72,501 $ 57,285,453
Obligations of states and
political subdivisions 77,590,256 1,616,796 72,305 79,134,747
==================================================
$134,537,963 $ 2,027,043 $ 144,806 $136,420,200
==================================================
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
==================================================
<PAGE>
3. Investment Securities (continued)
The amortized cost and estimated fair value of debt securities at December 31,
1998, 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.
Amortized Fair
Cost Value
-------------------------------------
Due in one year or less $ 7,000,395 $ 7,023,853
Due after one year through five years 62,995,865 63,831,069
Due after five years through ten years 64,441,703 65,459,684
Due after ten years 100,000 105,594
-------------------------------------
$134,537,963 $136,420,200
=====================================
There were no gains on early redemption of securities in 1998, 1997 or 1996, nor
were there any sales of securities in 1998, 1997 or 1996. At December 31, 1998,
investment securities with a carrying value of $14,980,000 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
1998 1997
--------------------------------------
Total assets $86,468,000 $81,572,000
Total deposits 76,316,000 71,420,000
Stockholders' equity 7,819,000 7,214,000
Net income 754,000 689,000
<PAGE>
5. Loans
Loan balances classified by type were as follows:
December 31
1998 1997
-----------------------------------------
Commercial $ 13,730,000 $ 13,015,000
Real estate - construction 16,358,000 19,148,000
Real estate - mortgage:
Single family 114,570,000 100,457,000
Multi family 9,136,000 7,518,000
Nonresidential 91,675,000 93,347,000
Installment 31,715,000 33,914,000
=========================================
$277,184,000 $267,399,000
=========================================
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, 1998 and 1997, to such related
parties approximated $1,303,000 and $2,084,000, respectively. During 1998,
$1,227,000 of new loans were made and repayments totaled $2,008,000. 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, 1998, were as follows:
1998 1997 1996
----------------------------------------------
Balance at beginning of year $3,500,050 $3,010,230 $ 3,626,217
Provision for loan losses 600,000 600,000 300,000
Loans charged off (154,513) (170,014) (922,219)
Recoveries on loans charged off 299,208 59,834 6,232
----------------------------------------------
Balance at end of year $4,244,745 $3,500,050 $ 3,010,230
==============================================
Nonaccrual loans totaled approximately $334,000 and $0 at December 31, 1998 and
1997, respectively.
<PAGE>
7. Premises and Equipment
Premises and equipment were comprised of the following:
December 31
1998 1997
--------------------------------------
Land $ 4,772,156 $ 4,607,788
Buildings and leasehold improvements 19,092,071 17,942,576
Furniture and equipment 9,501,886 7,770,691
--------------------------------------
33,366,113 30,321,055
Less accumulated depreciation (13,501,523) (12,194,130)
--------------------------------------
$ 19,864,590 $ 18,126,925
======================================
8. Regulatory Capital
The Corporation and the Bank are 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 financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation and
the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require 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, 1998, that both the Corporation and the
Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, 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.
<PAGE>
8. Regulatory Capital (continued)
The actual and required capital amounts and ratios were as follows:
For Capital
Actual Adequacy Purposes
--------------------- ---------------------
Amount Ratio Amount Ratio
----------- ------- ----------- ------
As of December 31, 1998
Total Capital
(to Risk Weighted Assets):
Consolidated $62,395,000 20.14% $24,783,000 8.00%
Tri City Bank 59,720,000 19.42 24,602,000 8.00
Tier I Capital
(to Risk Weighted Assets):
Consolidated 58,518,000 18.89 12,391,000 4.00
Tri City Bank 55,871,000 18.17 12,301,000 4.00
Tier I Capital - Leverage ratio
(to Average Assets):
Consolidated 58,518,000 11.97 19,553,000 4.00
Tri City Bank 55,871,000 11.48 19,466,000 4.00
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
<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 1998, 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 $244,745, $219,161 and $215,457 for 1998, 1997
and 1996, respectively.
10. Income Taxes
The significant components of income tax expense for each of the three years in
the period ended December 31, 1998, were:
1998 1997 1996
-----------------------------------------------
Federal $2,127,000 $2,150,000 $1,767,000
State 273,000 268,000 187,000
-----------------------------------------------
$2,400,000 $2,418,000 $1,954,000
===============================================
Current $3,096,000 $2,591,000 $1,196,000
Deferred expense (benefit) (696,000) (173,000) 758,000
-----------------------------------------------
$2,400,000 $2,418,000 $1,954,000
===============================================
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, 1998, are as follows:
1998 1997 1996
-----------------------------------------------
Income before income taxes $9,370,239 $8,910,197 $7,761,293
===============================================
Income tax at statutory rate $3,185,881 $3,029,466 $2,638,840
Increase (reduction) resulting
from:
Tax-exempt interest income (994,994) (835,711) (759,928)
State income taxes, net of
federal tax benefit 180,180 176,880 123,420
Other 28,933 47,365 (48,332)
-----------------------------------------------
$2,400,000 $2,418,000 $1,954,000
===============================================
<PAGE>
10. Income Taxes (continued)
At December 31, 1998, the Corporation had state net operating loss carryforwards
of approximately $1,025,490. These carryforwards expire in years 2006 to 2013.
The components of the Corporation's net deferred income tax (liability) asset
were as follows:
1998 1997
------------------------------
Deferred tax assets:
Loan loss reserves $1,420,000 $ 1,128,000
Excess servicing gains 43,000 56,000
State net operating loss
carryforwards 53,000 50,000
Net unrealized loss on
investment securities
available-for-sale - 13,000
Excess tax depreciation 16,000 -
Other 1,000 -
------------------------------
1,533,000 1,247,000
------------------------------
Deferred tax liabilities:
Excess tax depreciation - (218,000)
Safe harbor lease (170,000) (180,000)
Deferred loan fees (272,000) (480,000)
Undistributed earnings of
an unconsolidated subsidiary (491,000) (449,000)
Other - -
------------------------------
(933,000) (1,327,000)
Valuation allowance (52,000) (55,000)
==============================
Net deferred tax asset (liability) $ 548,000 $ (135,000)
==============================
11. Leases
The Corporation leases various banking facilities under operating lease
agreements from companies held by an estate of a former 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 $534,105 in 1998, $521,712 in 1997
and $440,156 in 1996.
<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, 1998:
Year ending December 31:
1999 $ 344,788
2000 274,637
2001 132,885
2002 87,389
2003 and thereafter 678,816
------------------
Total minimum future rentals $1,518,515
==================
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, 1998, under
existing arrangements, the Bank could borrow up to $50,000,000 under reverse
repurchase agreements. The maximum amount of repurchase agreements outstanding
was $0 and $7,900,000 for the years ended December 31, 1998 and 1997,
respectively. The average amount of repurchase agreements was $272,260 and
$1,747,140 for the years ended December 31, 1998 and 1997, respectively. There
were no reverse repurchase agreements outstanding at December 31, 1998 or 1997.
At December 31, 1998, 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 lender bank's announced daily federal funds rate
and mature daily. There were no federal funds borrowings outstanding at December
31, 1998 or 1997. 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, 1998.
<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, 1998, retained earnings of the Bank in the amount
of $13,870,040 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, 1998 was $29,367,000 and $4,364,000, respectively. All such
arrangements expire in fiscal 1999.
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 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.
<PAGE>
15. Fair Value of Financial Instruments (continued)
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 presented herein, 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.
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, 1998 and 1997, is not material.
<PAGE>
15. Fair Value of Financial Instruments (continued)
Deposits
The fair values 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.
The carrying amounts and fair values of the Corporation's financial instruments
consisted of the following at December 31, 1998 and 1997:
1998 1997
-------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
(In Thousands)
Cash and cash equivalents $ 76,202 $ 76,202 $ 44,708 $ 44,708
=================== =======================
Investment securities $134,538 $136,420 $126,399 $127,106
=================== =======================
Loans receivable $277,184 $276,894 $267,399 $270,569
=================== =======================
Deposits:
Withdrawable on demand $338,089 $338,089 $295,027 $295,027
Certificates of deposit 111,446 112,116 103,916 104,035
------------------- -----------------------
$449,535 $450,205 $398,943 $399,062
=================== =======================
Short-term borrowings $ 827 $ 827 $ 5,711 $ 5,711
=================== =======================
<PAGE>
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information
Balance Sheets
December 31
1998 1997
---------------------------------
Assets
Cash on deposit with subsidiary bank $ 372,502 $ 268,582
Investment in subsidiary 54,170,722 49,239,980
Investment in affiliated bank 1,765,971 1,658,263
Bank premises and equipment 1,979,348 2,059,916
Other net assets 229,317 270,940
---------------------------------
Total assets $ 58,517,860 $ 53,497,681
=================================
Stockholders' equity
Common stock $ 2,520,205 $ 2,503,118
Additional paid-in capital 9,726,974 9,209,826
Retained earnings 46,270,681 41,810,248
Net unrealized gain on investment securities
available-for-sale - (25,511)
---------------------------------
Total liabilities and stockholders' equity $ 58,517,860 $ 53,497,681
=================================
<PAGE>
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information (continued)
Statements of Income
Year ended December 31
1998 1997 1996
---------------------------------------------
Income from subsidiary bank:
Dividends $2,085,000 $1,725,000 $1,450,000
Management fees 571,800 526,800 492,000
Rental income 226,051 225,255 210,503
--------------------------------------------
2,882,851 2,477,055 2,152,503
Other income 81,346 70,555 61,949
Expenses -
Administrative and general 965,897 920,359 865,269
--------------------------------------------
Income before income taxes and
equity in undistributed net
income of subsidiary and
affiliated bank 1,998,300 1,627,251 1,349,183
Income tax expense (benefit) 41,000 43,000 (30,000)
--------------------------------------------
Income before equity in
undistributed net income of
subsidiary and affiliated bank 1,957,300 1,584,251 1,379,183
Equity in undistributed net
income of subsidiary and
affiliated bank 5,012,939 4,907,948 4,428,110
---------------------------------------------
Net income $6,970,239 $6,492,199 $5,807,293
=============================================
<PAGE>
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information (continued)
Statements of Cash Flows
Year ended December 31
1998 1997 1996
----------------------------------------
Operating activities
Net income $ 6,970,239 $ 6,492,199 $ 5,807,293
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for depreciation 117,625 116,496 103,419
Equity in undistributed net
income of subsidiary and
affiliated bank (5,012,939) (4,907,948) (4,428,110)
Other 41,623 48,950 (53,830)
----------------------------------------
Net cash provided by operating
activities 2,116,548 1,749,697 1,428,772
Investing activities
Net purchases of premises and
equipment (37,057) (43,758) (150,946)
----------------------------------------
Net cash used in investing activities (37,057) (43,758) (150,946)
Financing activities
Sale of common stock 534,235 475,985 393,513
Cash dividends (2,509,806) (2,118,973) (1,733,306)
---------------------------------------
Net cash used in financing activities (1,975,571) (1,642,988) (1,339,793)
---------------------------------------
Increase (decrease) in cash 103,920 62,951 (61,967)
Cash at beginning of year 268,582 205,631 267,598
---------------------------------------
Cash at end of year $ 372,502 $ 268,582 $ 205,631
=======================================
<PAGE>
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1998 and 1997.
Three Months Ended
December 31 September 30 June 30 March 31
--------------------------------------------------
(In Thousands, Except for Per Share Data)
1998
Interest income $8,559 $8,600 $8,329 $8,052
Interest expense 2,838 2,873 2,747 2,713
Net interest income 5,721 5,727 5,582 5,339
Provision for loan losses (150) (150) (150) (150)
Other income 1,854 1,741 1,662 1,669
Other expense 5,046 4,909 4,619 4,751
Income before income taxes 2,379 2,409 2,475 2,107
Income tax expense 609 621 659 511
Net income 1,770 1,788 1,816 1,596
Basic earnings per share 0.70 0.71 0.72 0.64
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 2,329 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
<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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ey
February 5, 1999
<PAGE>
Form 10-K
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
EXHIBIT 13
<PAGE>
EXHIBIT 22
SUBSIDIARY OF REGISTRANT
Name Percentage of Shares Owned
- ----- --------------------------
Tri City National Bank 100.0%
<PAGE>
EXHIBIT 24
CONSENT OF 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 5, 1999 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, 1998.
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 5, 1999, 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, 1998
/s/ Ernst & Young
Milwaukee, Wisconsin
March 31, 1999
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