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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, 1996
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
incorporation or organization) (I.R.S. Employer Identification No.)
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. [ ]
As of March 1, 1997, 2,491,158 shares of common stock were outstanding and
the aggregate market value of the shares held by nonaffiliates was
approximately $23,798,913.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated in
Annual report to shareholders for fiscal
year ended December 31, 1996 Parts II and IV
Proxy statement for annual meeting of
shareholders to be held on June 11, 1997. Part III
Form 10-K Table of Contents
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
PART I
Item 1. BUSINESS
General
Tri City Bankshares Corporation (Registrant), a registered bank holding company,
is a Wisconsin corporation organized in 1970 which provides commercial banking
services in the metropolitan Milwaukee area. On August 15, 1990, the
Registrant's six bank subsidiaries (Tri City National Bank of Oak Creek, Tri
City National Bank of Hales Corners, Tri City National Bank of West Allis,
Tri City National Bank of Brown Deer, Tri City National Bank of Brookfield,
Tri City National Bank of Menomonee Falls), and Tri City Service Corporation, a
centralized proof and bookkeeping operation, merged to form Tri City National
Bank (the Bank). The merging of the subsidiaries enabled the surviving bank to
experience cost savings through the elimination of duplicate cash requirements
and allows customers the ability to access their accounts at any Tri City
National Bank location. Registrant owns 100% of the stock of Tri City National
Bank.
In addition to Tri City National Bank, the Registrant owns 23.5% of the
outstanding shares in First National Bank of Eagle River, Eagle River, Wisconsin
(First National). The Registrant's investment in First National is accounted for
by the equity method of accounting.
On a consolidated basis at December 31, 1996, Registrant had assets of
$436,656,160, net loans of $250,741,995, deposits of $381,013,677 and
stockholders' equity of $48,711,662. Registrant's primary function is to
coordinate the banking policies and operations of Tri City National Bank in
order to improve and expand its banking services and effect economies in its
operation by joint efforts in certain areas such as auditing, regulatory
compliance, training of personnel, advertising, proof and bookkeeping, and
business development. Registrant's services are furnished through officers of
Registrant who are also officers of Tri City National Bank. Registrant's sources
of revenues are (1) dividends paid on the shares of the subsidiary banks' stock
which it owns and (2) management fees in payment for the services it provides to
Tri City National Bank.
Registrant is engaged in only one line of business and industry segment, namely
banking.
The Registrant's banking business is principally conducted by one commercial
bank bearing the "Tri City" name. Tri City National Bank is supervised by the
Comptroller of the Currency and its deposits are insured by the Federal
Deposit Insurance Corporation. Tri City National Bank provides full-service
banking to individuals and businesses, including checking and savings accounts,
commercial and consumer loans, installment loans, real estate and mortgage
loans, mobile home loans, Master Charge cards, and personal reserve accounts.
Tri City National Bank maintains an investment portfolio consisting primarily of
U.S. Agency and state and political subdivision securities. Certain bank
locations have drive-in banking facilities. A separate department provides
centralized proof and bookkeeping services to all Tri City National Bank
locations.
1
The following table sets forth certain information regarding Tri City National
Bank:
Assets as of
Name of Bank and Location Year Organized December 31, 1996
- ------------------------- -------------- -----------------
Tri City National Bank
6400 South 27th Street
Oak Creek, Wisconsin 1963 $434,600,234
Supervision and Regulation
As a bank holding company, Registrant is registered under the Bank Holding
Company Act of 1956, as amended, and files periodic reports with, and is subject
to the supervision of, the Federal Reserve Board (the Board). The Board has
the power to make examinations of the Registrant and must give its approval
prior to the Registrant's acquiring substantially all of the assets of a bank
or direct or indirect ownership or control of any voting shares of any bank if,
after such acquisition, Registrant would control more than 5% of the voting
shares of such bank. The Board approved Registrant's acquisition of the shares
of First National by order dated October 2, 1981. The Board expects bank
holding companies, such as Registrant, to be a source of financial strength
for their subsidiary banks and, accordingly, the Board may condition approvals
of bank acquisitions on the injection of additional capital into existing banks
if capital-to-asset ratios do not meet the Board's standards. The Bank Holding
Company Act restricts Registrant's ability to engage only in those activities
which are found by the Board to be so closely related to banking as to be a
proper incident thereto.
Tri City National Bank is regularly examined by the Comptroller of the Currency
and is subject to examination by the Federal Deposit Insurance Corporation.
Areas subject to regulation by these two federal agencies include reserves,
investments, loans, mergers, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations.
The banking industry is very heavily regulated at both the state and federal
levels. Since 1979, Congress has enacted major pieces of legislation affecting
the banking industry: the Community Reinvestment Act (to encourage banks to make
loans to individuals and businesses in their immediate service areas,
particularly to low- and middle-income borrowers); the Financial Institutions
Regulatory and Interest Rate Control Act (to add restrictions dealing with loans
to officers, directors, and principal shareholders of banks and their
affiliates); the Financial Institutions Deregulation and Monetary Control Act
(to permit both banks and thrift institutions to pay interest on checking
accounts and phase out prior ceilings on interest rates); the Competitive
Equality Banking Act (to expand the definition of "bank" under the Bank Holding
Company Act to include all institutions insured by the Federal Deposit Insurance
Corporation and thereby restrict the ability of bank holding companies and
certain commercial and other nonbanking firms to acquire "non-bank banks"); and
the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or
FIRREA (comprehensive legislation to reform the
2
very nature of regulation in the financial institutions industry) and the
Federal Deposit Insurance Corporation Improvement Act (FDICIA). FDICIA, which
was enacted in 1991, affects all federally insured banks, savings banks and
thrifts. FDICIA contains a $70 billion recapitalization of the Bank
Insurance Fund (BIF) by significantly increasing the amount that the FDIC can
borrow from the Treasury. The FDIC must assess premiums that are sufficient to
give the BIF reserves of $1.25 for each $100 of insured deposits. Additional
significant provisions of FDICIA include requiring prompt corrective action by
regulators if minimum capital standards are not met; establishing early
intervention procedures for "significantly" undercapitalized institutions;
limiting FDIC reimbursement of uninsured deposits when large banks fail;
requiring an annual regulatory examination; and imposing new auditing and
accounting requirements, effective for fiscal years beginning on or after
January 1, 1993, including management and auditor reporting on internal controls
over financial reporting and on compliance with laws and regulations.
Additionally, a number of legislative and regulatory mandates have been enacted
that are designed to strengthen the federal deposit insurance system and to
improve the overall financial stability of the U.S. banking system. It is
uncertain what form future proposals may take and, if adopted, what their
effect will be on Registrant and its principal bank subsidiary.
Capital Requirements
See footnote 8 to the audited financial statements for a discussion of the
capital requirements of the Registrant and the Bank.
Monetary Policy
Registrant's operations and earnings are affected by the credit policies of
monetary authorities, including the Federal Reserve System, which regulates the
national supply of bank credit. Such regulation influences overall growth of
bank loans, investments, and deposits, and may also affect interest rates
charged on loans and paid on deposits. The monetary policies of the Federal
Reserve authorities have had a significant effect on the operating results of
bank holding companies and commercial banks in the past and are expected to
continue to do so in the future.
Competition
All of the Registrant's banking facilities are located on the perimeter of
Milwaukee County. Accordingly, the bank competes with all the major banks and
bank holding companies located in Milwaukee, most of whom are far larger in
terms of assets and deposits. The banking industry in metropolitan Milwaukee is
highly competitive and the Registrant's bank faces vigorous competition not
only from the many banks in the area, but from other financial institutions
such as savings and loan associations, credit unions, and finance companies.
3
Employees
At December 31, 1996, Registrant employed 78 officers and 357 employees in
total. Employees are provided a variety of employment benefits, and Registrant
considers its employee relations to be excellent.
The following pages set forth the statistical data required by Guide 3 of the
Guides for Preparation and Filing of Reports and Registration Statements and
Reports.
4
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, 1996, 1995 and 1994.
Year Ended December 31
1996 1995 1994
------------------------------------------------------------------------------------
Average Yield Average Yield Average Yield
Balance Interest or Rate Balance Interest or rate Balance Interest or Rate
------------------------------------------------------------------------------------
ASSETS:
Interest-earning
assets:
Loans (1) $239,980 $22,764 9.49% $224,219 $21,280 9.49% $201,000 $18,362 9.14%
Taxable investment
securities 66,585 4,486 6.73 66,238 4,306 6.50 68,007 4,463 6.56
Nontaxable
investment
securities (2) 50,758 3,782 7.45 30,460 2,452 8.05 28,803 2,420 8.40
Federal funds sold 7,194 368 5.12 9,326 520 5.58 2,233 81 3.63
------------------ ------------------ ------------------
Total interest-
earning assets 364,517 31,400 8.61% 330,243 28,558 8.65% 300,043 25,326 8.44%
Noninterest-earning
assets:
Cash and due
from banks 25,776 20,421 18,162
Premises and
equipment, net 19,282 19,608 19,645
Other assets 1,400 1,523 2,652
--------- --------- ---------
$410,975 $371,795 $340,502
========= ========= =========
5
DISTRIBUTION OF ASSETS, LIABILITIES & STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
(Dollars in Thousands)
Year Ended December 31
1996 1995 1994
---------------------------------------------------------------------------------------------
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 $162,206 $ 4,424 2.73% $158,557 $ 4,428 2.79% $165,224 $ 4,123 2.50%
Other time deposits 104,052 5,971 5.74 84,419 4,829 5.72 58,417 2,345 4.01
Short-term borrowings 4,517 250 5.53 3,964 211 5.32 7,898 391 4.95
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 270,775 10,645 3.93% 246,940 9,468 3.83% 231,539 6,859 2.96%
Noninterest-bearing
liabilities:
Demand deposits 92,038 81,492 70,928
Other 2,485 1,831 1,984
Stockholders' equity 45,677 41,532 36,051
--------- --------- ---------
$410,975 $371,795 $340,502
========= ========= =========
Net interest earnings
and interest rate spread $20,755 4.68% $19,090 4.82% $18,467 5.48%
================ =============== ===============
Net yield on interest-
earning assets 5.69% 5.78% 6.15%
===== ===== =====
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding. Interest income includes $1,325,
$1,258 and $1,331 of loan fees in 1996, 1995 and 1994, 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 $1,427, $834 and $823 in 1996, 1995
and 1994, respectively.
6
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:
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate(1) Net Volume Rate(1) Net
---------------------------------------------------------
Interest earned on:
Loans $1,496 $ (12) $1,484 $2,122 $ 796 $2,918
Taxable investment
securities 23 157 180 (116) (41) (157)
Nontaxable
investment
securities 1,634 (304) 1,330 139 (107) 32
Federal funds sold (119) (33) (152) 257 182 439
---------------------------------------------------------
Total interest-
earning assets $3,034 $(192) 2,842 $2,402 $ 830 3,232
===================-------- ==================--------
Interest paid on:
Savings deposits $ 101 $(105) $ (4) $ (167) $ 472 $ 305
Other time deposits 1,123 19 1,142 1,043 1,441 2,484
Short-term borrowings 29 10 39 (194) 14 (180)
---------------------------------------------------------
Total interest-bearing
liabilities $1,253 $ (76) 1,177 $ 682 $1,927 2,609
Increase in net
interest income $1,665 $ 623
======= =======
(1) The change in interest due to both rate and volume has been allocated to
rate changes.
INVE
INVESTMENT PORTFOLIO
(Dollars in Thousands)
The book value of investment securities at the dates indicated is:
December 31
--------------------------------------
1996 1995 1994
--------------------------------------
U.S. Treasury and government agencies $ 64,851 $ 65,616 $ 62,011
States and political subdivisions 60,461 43,622 31,067
Industrial revenue bonds 102 153 200
-------------------------------------
Total investment securities $125,414 $109,391 $ 93,278
The following table sets forth the maturities of investment securities at
December 31, 1996, 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.
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 $ - -% $19,523 7.04% $45,328 6.71% $ - -%
States and
political
subdivisions 10,168 8.05 20,574 7.00 28,605 7.34 1,114 8.86
Industrial
revenue bonds - - 102 14.39 - - - -
-------- -------- -------- --------
$10,168 8.05% $40,199 7.04% $73,933 6.95% $ 1,114 8.86%
Tax equivalent
adjustment for
calculation of
yield $ 266 $ 469 $ 658 $ 34
========= ========= ========= ========
Note: The weighted average yields on tax-exempt obligations have been computed
on a fully tax-equivalent basis assuming a tax rate of 34%.
8
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
1996 1995 1994 1993 1992
Commercial and
financial $ 10,414 $ 11,058 $ 10,447 $ 12,598 $ 19,544
Real estate - construction 16,142 21,692 16,811 7,231 7,943
Real estate - mortgage 191,288 167,945 157,859 150,469 147,524
Installment 35,908 31,777 28,171 31,627 23,851
-------- -------- -------- -------- --------
$ 253,752 $ 232,472 $ 213,288 $ 201,925 $198,862
The maturity distribution and interest rate sensitivity of all loans at
December 31, 1996, are:
Maturity
After One
One Year Through After
or Less Five Years Five Years Total
-------- ---------- ---------- ------
Commercial and financial $ 6,479 $ 3,850 $ 85 $ 10,414
Real estate construction 16,142 - - 16,142
Real estate mortgage and
installment 88,015 138,151 1,030 227,196
-------- --------- ---------- --------
$110,636 $ 142,001 $ 1,115 $253,752
======== ========= ========== ========
Interest Sensitivity
Fixed Rate Variable Rate
Due after one, but within five years $ 129,395 $12,606
Due after five years 72 1,043
--------- -------
$ 129,467 $13,649
========= =======
9
LOAN PORTFOLIO (Continued)
(Dollars in Thousands)
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans comprise (a) loans accounted for on a
nonaccrual basis and (b) loans contractually past due 90 days or more as to
interest or principal payments, but not included in the nonaccrual loans.
December 31
1996 1995 1994 1993 1992
Loans accounted for on a
nonaccrual basis $ 725 $ 1,033 $ 1,932 $ 4,362 $ 3,580
Loans contractually past
due 90 days or more as
to interest or principal
payments 1,220 630 490 826 3,560
Ratio of nonaccrual loans
to total loans .28% .44% .90% 2.16% 1.80%
$15 thousand of interest income was recognized during 1996 on loans which were
accounted for on a nonaccrual basis. An additional $67 thousand of 1996 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, 1996 or 1995, whose terms had been
renegotiated to provide a reduction or deferral of interest or principal because
of a deterioration in the financial position of the borrower, and there are no
current loans where, in the opinion of management, there are serious doubts as
to the ability of the borrower to comply with present loan repayment terms.
Loans defined as impaired by Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," are included in
nonaccrual loans above.
10
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
1996 1995 1994 1993 1992
Balance of allowance for
loan losses at beginning
of period $3,626 $3,395 $3,164 $2,740 $2,254
Loans charged off:
Commercial and financial 899 - 87 8 76
Real estate - - 32 - 82
Installment 23 21 41 49 93
------ ------ ------ ------ ------
TOTAL LOANS CHARGED OFF 922 21 160 57 251
Recoveries of loans
previously charged off:
Commercial and financial - - 3 - -
Real estate - - - 22 -
Installment 6 4 13 19 7
------ ------ ------ ------ ------
TOTAL RECOVERIES 6 4 16 41 7
------ ------ ------ ------ ------
Net loans charged off 916 17 144 16 244
Additions to allowance
charged to expense 300 248 375 440 730
------ ------ ------ ------ ------
Balance at end of period $ 3,010 $ 3,626 $ 3,395 $ 3,164 $ 2,740
====== ====== ====== ====== ======
Ratio of net charge-offs
during the period to
average loans outstanding .38% .01% .07% .01% .13%
====== ====== ====== ====== ======
Ratio of allowance at end of
year to total loans 1.19% 1.56% 1.59% 1.57% 1.38%
====== ====== ====== ====== ======
Ratio of allowance at end of
year to nonaccrual loans 415.17% 351.02% 175.91% 72.54% 76.54%
====== ====== ====== ====== ======
The amount of the addition to the allowance charged to operating expense is the
amount necessary to bring the allowance for loan losses to a level which will
provide for known and potential losses in the loan portfolio. The adequacy of
the allowance is based principally upon continuing management review for
potential losses in the portfolio, actual charge-offs during the year,
historical loss experience, current and anticipated economic conditions,
estimated value of collateral and industry guidelines.
Management evaluates the adequacy of the allowance for loan losses on an overall
basis as opposed to allocating the allowance to specific categories of loans.
11
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
The Bank has a loan committee which meets periodically. Its function is to
review new loan applications and to ensure adherence to the written loan and
credit policy of the Bank. Each month, this committee reviews a summary of the
loan portfolio classified into the risk categories described below. Loans are
reviewed quarterly or as necessary as to proper classification.
1. Absence of any significant credit risk.
2. Presence of normal, but not undue, credit risk.
3. Presence of greater than normal credit risk.
4. Excess credit risk requiring continuous monitoring.
5. Doubtful and loss.
The balance in each of the aforementioned categories serves as a guideline in
determining the adequacy of the allowance for loan losses and the provision
required to bring this balance to a level necessary to absorb the present and
potential risk characteristics of the loan portfolio.
The Bank's loan committee also considers collection problems which may exist.
Loans with contractual payments more than 90 days past due are reviewed. If
collection possibilities are considered to be remote, the loan is charged to the
allowance for loan losses. Should any special circumstances exist, such as a
reasonable belief that the loan may ultimately be paid or be sufficiently
secured by collateral having established marketability, the loan may be
rewritten or carried in a nonaccrual of interest status.
At December 31, 1996, there were no unusual risks in the loan portfolio. For
management's purposes, the loan portfolio consists of real estate loans,
consumer installment loans, and commercial business loans.
Real estate loans comprise the largest portion of the loan portfolio with 81.75%
of loans outstanding at December 31, 1996. The majority of these consist of
residential mortgage loans, an area in which the Registrant has had few losses
in past years.
In the consumer loan category, which includes auto loans, home improvement
loans, and credit card loans, among others, management considers the historical
net loss experience to be the best indicator of losses to be expected in the
immediate future.
All other loans are classified as commercial, including loans to financial
institutions. While these loans carry the greatest exposure to risk of loss,
that exposure is limited to problems associated with particular companies
rather than to specific industries. Currently, the Registrant has no unusual
or significant problems in the commercial loan portfolio.
Losses in 1997 are not expected to vary significantly from net losses
experienced over the last two years.
12
DEPOSITS
(Dollars in Thousands)
The average daily amount of deposits is summarized for the periods indicated in
the following table:
Year Ended December 31
1996 1995 1994
-------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------------------------------------------------
Noninterest-bearing demand
deposits $ 92,038 - $ 81,492 - $ 70,927 -
Savings 162,206 2.73% 158,557 2.79% 165,224 2.50%
Time deposits (excluding
time certificates of
deposit of $100,000
or more) 85,754 6.18 73,216 5.81 48,770 4.10
Time certificates of
depositsof $100,000
or more 18,298 3.65 11,204 5.16 9,647 3.58
------- ------- -------
$358,296 $324,469 $294,568
======= ======= =======
The maturity distribution of time certificates of deposit issued in amounts of
one hundred thousand dollars and over and outstanding at December 31, 1996, is:
Three months or less $ 9,786
After 3 through 6 months 3,837
After 6 through 12 months 2,828
After 12 months 5,586
------
$22,037
=======
13
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
1996 1995 1994
--------------------------
Percentage of net income to:
Average stockholders' equity 12.71% 12.88% 13.53%
Average total assets 1.41 1.44 1.43
Percentage of dividends declared per common
share to net income per common share 29.91 23.26 19.61
Percentage of average stockholders' equity
to daily average total assets 11.11 11.17 10.59
14
SHORT-TERM BORROWINGS
(Dollars in Thousands)
Information relating to short-term borrowings follows:
Federal Funds Purchased
and Securities Sold Under Notes Other Short-Term
Agreements to Repurchase Payable Borrowings
------------------------- ------- ----------------
Balance at December 31:
1996 $ 3,200 $ - $ 2,200
1995 - - 1,915
1994 13,900 - 2,407
Weighted average interest
rate at year end:
1996 5.88% -% 5.26%
1995 - - 6.36
1994 5.82 - 5.12
Maximum amount outstanding
at any month's end:
1996 $ 7,700 $ - $ 4,310
1995 9,100 - 5,877
1994 13,900 2,000 5,095
Average amount outstanding
during the year:
1996 $ 1,550 $ - $ 2,074
1995 1,269 - 2,438
1994 4,129 1,667 2,272
Average interest rate
during the year:
1996 5.61% -% 5.40%
1995 4.93 - 5.61
1994 4.56 6.90 3.81
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days of the transaction date. Notes payable
mature in one year and are renewable for a like term. Other short-term
borrowings generally mature within 90 days.
15
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)
6312 South 27th Street
Oak Creek, Wisconsin 500 Leased (1)
2555 West Ryan Road
Franklin, Wisconsin 2,000 Owned
5555 South 108th Street
Hales Corners, Wisconsin 20,000 Owned
5455 South 108th Street
Hales Corners, Wisconsin 1,600 Owned
10909 West Greenfield Avenue
West Allis, Wisconsin 9,000 Owned
10200 West Bluemound Road
Wauwatosa, Wisconsin 200 Leased
10859 West Bluemound Road
Wauwatosa, Wisconsin 3,500 Owned
2625 South 108th Street
West Allis, Wisconsin 470 Leased (1)
4455 West Bradley Road
Brown Deer, Wisconsin 6,600 Leased
7213 North Teutonia
Milwaukee, Wisconsin 2,000 Owned
17100 West Bluemound Road
Brookfield, Wisconsin 5,700 Owned
16
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 460 Leased (1)
9200 North Green Bay Road
Brown Deer, Wisconsin 386 Leased
220 East Sunset Drive
Waukesha, Wisconsin 412 Leased
1827 Wisconsin Avenue
Grafton, Wisconsin 361 Leased
W61 N529 Washington Avenue
Cedarburg, Wisconsin 7,800 Owned
4200 South 76th St.
Greenfield, Wisconsin 53220 572 Leased (1)
150 West Holt Avenue
Milwaukee, Wisconsin 590 Leased (1)
6201 N. Teutonia Avenue
Milwaukee, Wisconsin 618 Leased (1)
17
Approximate
Location Floor Area in Square Feet Owned or Leased
-------- ------------------------- ---------------
3770 S. Howell Avenue
Milwaukee, Wisconsin 1,052 Leased (1)
4689 S. Whitnall Avenue
Milwaukee, Wisconsin 1,159 Leased (1)
7830 W. Good Hope Road
Milwaukee, Wisconsin 523 Leased
(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 71,500 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. Eight 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 1996 to a vote of
security holders through the solicitation of proxies or otherwise.
18
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 1996 Annual Report to Shareholders under the captions entitled
"Market for Corporation's Common Stock and Related Stockholder Matters"
(Page 13) and "Selected Financial Data" (Page 12) as to cash dividends paid.
Item 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to
Registrant's 1996 Annual Report to Shareholders under the caption entitled
"Selected Financial Data" (Page 12).
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 1996 Annual Report to Shareholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Pages 6 to 11).
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference to
Registrant's 1996 Annual Report to Shareholders (Pages 14 to 37).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
19
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 11, 1997, 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 11, 1997, 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 11, 1997, 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 11, 1997, 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).
20
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, 1996.
With the exception of the information incorporated
by reference into Items 5, 6, 7, and 8 of this
Form 10-K, the 1996 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
21
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, 1996
TRI CITY BANKSHARES CORPORATION
OAK CREEK, WISCONSIN
22
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, 1996, are
incorporated by reference in Item 8:
Consolidated balance sheets-December 31, 1996 and 1995
Consolidated statements of income-Years ended December 31, 1996, 1995 and
1994
Consolidated statements of stockholders' equity-Years ended December 31,
1996, 1995 and 1994
Consolidated statements of cash flows-Years ended December 31, 1996, 1995
and 1994
Notes to consolidated financial statements-December 31, 1996
Report of independent auditors
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
BY: /s/ David A Ulrich
---------------------------------
David A. Ulrich, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/David A. Ulrich 3/17/97
David A. Ulrich Principal Executive Officer
/s/Henry Karbiner, Jr. 3/12/97
Henry Karbiner, Jr. Principal Financial and
Accounting Officer
/s/Thomas W. Vierthaler 3/12/97
Thomas W. Vierthaler Vice-President and Comptroller
/s/Frank J. Bauer 3/12/97
Frank J. Bauer Director
/s/Sanford Fedderly 3/12/97
Sanford Fedderly Director
William Gravitter Director
/s/Christ Krantz 3/12/97
Christ Krantz Director
/s/Rudie L. Lauterbach 3/12/97
Rudie L. Lauterbach Director
/s/William P. McGovern 3/12/97
William P. McGovern Director
24
/s/Robert W. Orth 3/12/97
Robert W. Orth Director
/s/Ronald K. Puetz 3/12/97
Ronald K. Puetz Director
/s/John M. Rupcich 3/12/97
John M. Rupcich Director
Marilyn T. Ulrich-Graves Director
/s/William J. Werry 3/12/97
William J. Werry Director
/s/Scott A. Wilson 3/12/97
Scott A. Wilson Director
25
EXHIBIT 3
EXHIBIT 13
Dear Shareholders,
Federal Reserve Chairman Alan Greenspan prompted some wild stock market swings
earlier this year when he offered some warnings to investors. Specifically,
Greenspan questioned whether corporate earnings could continue to meet the
"irrationally exuberant" prices dictated by the market's recent euphoric rise.
Ever the hawk on inflation, Greenspan worried that continued price hikes might
spur a return of our old nemesis.
Greenspan certainly could be right in his assessment of the national picture.
But a snapshot of Tri City National Bank offers a far different take on
earnings. In 1996, your bank logged its fifth consecutive year of record
profits. And 1997 already is looking like another banner year.
But let's take a look back at 1996. It was 366 days that many would characterize
as the year of the Internet. The mere mention of the word prompted some stocks
to soar far above any rational price. TV ads offered visions of a world where
kids could use their computers to walk through far-off lands. And words like web
and surf suddenly took on new meanings.
Most important for us, banking magazines and the mass media swooned over the
rise of this expanding technology in banking. Customers, they predicted, soon
would do most of their banking over computers.
Well, to paraphrase Mark Twain, reports of the demise of personal banking have
been greatly exaggerated.
Tri City National Bank boasts just about the largest network of any Milwaukee
bank. At locations inside Pick `n Save stores, we set the standard in
convenience, offering banking until 8 p.m. seven days a week.
Customers tell us they relish our convenience, a personal touch that comes only
from dealing with a real person. In fact, a couple years ago, a customer called
me with a complaint. After venting sufficiently, she said she would remain a
customer. "You're just too convenient," she added.
Of course, we also offer the latest in technology - a battalion of automated
teller machines, including three new ones in 1996; a 24-hour telephone line with
direct access to account information; our new EZ Pay Check Card.
In fact, 16% of the bank's transaction volume is in automated transfers, such
items as direct deposit of payroll checks. That's more than triple the national
average.
But our goal is to enhance that technology with Tri City National Bank's
unmatched brand of personal service and convenience. No other bank offers a
similar strategy. But it's a strategy that seems to be working - if financial
results can be used as a gauge.
While the media heaped attention in 1996 on the potential of the Internet, your
bank:
* Logged earnings of $5.8 million.
* Saw loan balances jump 9.2% for the best number in six years.
And 1997 looks like an equally promising year.
* Earnings are increasing at a healthy pace.
* A new location that opened inside a Pick `n Save on Milwaukee's near
south side is opening dozens of new accounts each week. By the way, the
office gives us 15 locations inside Pick `n Save stores, further
solidifying our position as Milwaukee's supermarket banking leader.
Most important, your bank's officers and directors continue to work diligently
to build an even better bank. Such hard work may not be as trendy as the
Internet, but it's a philosophy that will continue to ensure a solid return on
your investment.
Sincerely,
/s/ David A. Ulrich
David A. Ulrich
Chairman, President and Chief Executive Officer
Tri City Bankshares Corp.
2
YOUR HOMETOWN BANK.
LARGE ENOUGH TO SERVE YOU. SMALL ENOUGH TO KNOW YOU.
Corporate Profile
Tri City Bankshares Corp., is the parent of Tri City National Bank, a commercial
bank that operates 31 offices throughout the Milwaukee area. Tri City Bankshares
was formed in 1970. Tri City National Bank was founded in 1963.
Tri City National Bank logged year-end 1996 assets of $436.7 million and
deposits of $381 million, making it one of the Milwaukee area's largest
independent commercial banks. Tri City Bankshares itself is the eight largest
bank holding company in Wisconsin. Both the bank and the holding company are
based in the Milwaukee suburb of Oak Creek.
Tri City National Bank operates full-service banks in Brookfield, Brown Deer,
Cedarburg, Grafton, Greenfield, Hales Corners, Menomonee Falls, Milwaukee, Oak
Creek, St. Francis, Waukesha, Wauwatosa and West Allis.
Building a Bank One Location at a Time
Acquisitions make the big headlines in the banking business. But we at Tri City
National Bank have made headlines with a much different type of growth.
You see, we've never bought another bank. Instead, we've expanded by steadily
opening new locations, a tally that now numbers 31 offices throughout the
Milwaukee area. In fact, our newest bank just opened in January inside a Pick `n
Save Mega Food Center at 1818 W. National Ave. on Milwaukee's near south side.
The strategy has given us solid growth and the ability to remain a hometown,
locally owned bank. Most important, it's given us an unmatched level of customer
service. At our 15 Pick `n Save locations, we're open seven days a week until
8 p.m.
As you can see, we take pride in our service. In fact, our slogan says we're
"Your hometown bank. Large enough to serve you. Small enough to know you."
Sure, other banks may make similar claims. We prove it - seven days a week.
3
DIRECTORS AND OFFICERS OF THE CORPORATION
DIRECTORS
Frank J. Bauer President of Frank Bauer Construction Company, Inc.
Sanford Fedderly Retired Registered Pharmacist
William Gravitter President of Hy-View Mobile Home Court, Inc.
Henry Karbiner, Jr. President of Tri City National Bank, and Executive
Vice President, Secretary and Treasurer of the
Corporation
Christ Krantz Vice President of K.R.K., Inc. and President of
Krantz Realty, Inc. (corporations owning Ramada -
Airport Motel, Milwaukee, and Days Inn Motel,
Wauwatosa), and partner in Veterans Linen Supply
Company
Rudie L. Lauterbach Accountant, Elm Grove, Wisconsin
William P. McGovern Attorney-at-Law, Milwaukee, Wisconsin
Robert W. Orth Executive Vice President of Tri City National Bank,
and Senior Vice President of the Corporation
Ronald K. Puetz Executive Vice President of Tri City National Bank,
and Senior Vice President of the Corporation
John M. Rupcich Vice President - Real Estate of the Corporation and
President and Director of N.D.C., Inc. and Executive
Vice President of and Director of Mega Marts, Inc.
David A. Ulrich President, Chief Executive Officer and Chairman of
the Board of the Corporation and Chief Executive
Officer and Chairman of the Board of Tri City
National Bank
Marilyn T. Ulrich-Graves Vice President of the Corporation
William J. Werry Retired Unit President of Tri City National Bank
Scott A. Wilson Executive Vice President of Tri City National Bank,
and Senior Vice President of the Corporation
4
DIRECTORS AND OFFICERS OF THE CORPORATION(continued)
Officers
David A. Ulrich President, Chief Executive Officer and Chairman of
the Board
Henry Karbiner, Jr. Executive Vice President, Secretary and Treasurer
Robert W. Orth Senior Vice President
Ronald K. Puetz Senior Vice President
Scott A. Wilson Senior Vice President
Marilyn T. Ulrich-Graves Vice President
John M. Rupcich Vice President - Real Estate
Thomas W. Vierthaler Vice President and Comptroller
Gary J. Hafemann Assistant Vice President and Auditor
5
Tri City Bankshares Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion contains certain "forward-looking statements,"
including statements concerning objectives and future events or performance, and
other statements which are other than historical fact. Factors 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 an increase in competitive
pressures in the banking and financial services industry; (ii) insufficient
reserves for loan losses; (iii) poorer then expected general economic
conditions; (iv) legislation or regulatory changes which adversely affect the
banking industry; and (v) other unanticipated occurrences.
FINANCIAL CONDITION
Tri City Bankshares Corporation (the Corporation) reported record net income for
1996 of $5.8 million, an 8.5% increase over 1995 net income. Asset growth of
$39.0 million (9.8%) and $40.3 million (11.3%) for 1996 and 1995, respectively,
coupled with sound investment strategy and loan philosophy, enabled the
Corporation to report a fifth consecutive year of record earnings.
Cash and cash equivalents for the Corporation have increased $783,000 (2.3%) in
1996 compared to an increase of $6.7 million (23.8%) in 1995. Management works
diligently to minimize nonearning assets by channeling funds into earning assets
such as loans, security investments and Federal Funds sold. During 1995 and 1996
four additional banking locations were opened and seven additional ATM units
were put into operation.
Investment securities increased $16.1 million (14.7%) during 1996 compared to a
$16.1 million (17.3%) in 1995. Approximately $5.0 million of this growth in 1996
is attributed to a short-term municipal loan which was classified as an
investment security and was paid in full on January 31, 1997. Deposit growth of
the Corporation outpaced loan production, and therefore, excess funds were
placed into investment securities. Securities classified as held-to-maturity
increased $18.7 million (19.4%) during 1996 compared to an increase of $3.3
million (3.6%) in 1995 after a $12.8 million reclassification of investment
securities from held-to-maturity to available-for-sale. In 1996, available-for-
sale securities decreased $2.7 million (20.9%) as a result of maturities. The
investment philosophy of the Corporation remains unchanged; management does not
actively trade investment securities. However, with respect to investment
portfolio decisions, management attempts to ensure that the Corporation receives
the highest return it can while maintaining the quality of the portfolio and a
secondary source of liquidity.
6
Loan growth continues to increase as management emphasizes this area of asset
deployment. During 1996, loans increased $21.3 million (9.2%) on total loan
closings of $202 million compared to an increase of $19.1 million (9.0%) on
total loan closings of $164 million in 1995. Loan production of high quality
assets, which conform to management's underwriting standards, is achieved by the
continued effort of the Corporation's loan officers. The Corporation believes
its reputation in the communities it serves as a local lender providing
competitive rates and terms for all loans - commercial and retail - will
continue to provide loan growth.
During 1996, loans charged against the reserve for loan losses amounted to
$922,000 as compared to $21,000 during 1995. Nonperforming loans and loan losses
remain well below peer group totals, as they have historically. Management
believes that the reserve for loan loss remains adequate to provide for losses
inherent in the loan portfolio.
The Corporation's deposits grew $30.8 million (8.8%) during 1996 which compares
favorably to a combined 5.5% deposit growth at other financial institutions in
the metropolitan Milwaukee market. Although less than 1995, deposit growth of
$50.1 million (16.7%) was achieved despite a $19 million decrease in balances
generated by a promotional rate time deposit offered in 1995. This decrease in
promotional time deposits was closely monitored by management and was
intentional. Even with the aforementioned increase in loan growth, this funding
was not necessary and the strategy employed increased the Corporation's net
interest margin 30 basis points. Acquisition of core deposits continues to
be the focus of management, which has a commitment to service and convenience,
hours and locations, attracting commercial and retail deposits alike.
Short-term borrowings increased $3.5 million (182.1%) in 1996 compared to a
decrease of $14.4 million (88.3%) in 1995. This increase was used to help fund
the $5.0 million short-term municipal loan issued in November of 1996 and was
paid in full on January 31, 1997.
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, through management's efforts, 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.
7
The banking subsidiary of the Corporation has the ability to borrow up to $17.0
million in federal funds from two banks and an additional $58.0 million under
existing reverse repurchase agreements. 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.
Cash needs of the Corporation can also be met through borrowings from other
lenders, if needed. The terms of the Corporation's existing line of credit
arrangement are described in Note 12 of the consolidated financial statements.
In addition to cash and due from banks and federal funds sold, the repayment of
loans and rescheduled maturities of marketable investment securities are the
principal sources of liquidity. Securities maturing in one year or less
amounted to $10.2 million at December 31, 1996, representing 8.1% 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
There were no major capital expenditures made during 1996. Management had
planned on opening a new branch location inside a Pick`n Save food store located
at Clarke Square in Milwaukee, Wisconsin, during the fourth quarter of 1996.
However, this location was not opened until January 19, 1997.
Federal banking regulatory agencies have established capital adequacy rules
which take into account risk attributable to balance sheet assets and off-
balance-sheet activities. All banks and bank holding companies must meet a
minimum risk-based capital ratio of 8%, of which 4% must be comprised of Tier I
Capital. These agencies also have adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a minimum leverage ratio of at least 3.0% Tier 1
Capital to total assets, while lower rated banking organizations must maintain a
ratio of at least 4.0% to 5.0%. The Corporation's banking subsidiary's risk-
based capital and leverage ratios are further discussed in Note 8 to the
consolidated financial statements.
It is the Corporation's philosophy to avoid those categories of assets
classified by the capital requirements as having higher credit risk, as well as
highly leveraged or certain foreign loans. The Corporation's banking subsidiary
believes it will continue to exceed these risk-based capital requirements and
continue to meet regulatory definitions of "well capitalized."
8
RESULTS OF OPERATIONS
1996 vs. 1995
Net income of the Corporation increased $456.7 thousand (8.54%) during 1996
compared to an increase of $473.7 thousand (9.7%) during 1995. Increases in loan
and investment security interest income were the primary sources for this
increase in 1996.
Interest income on loans, including fees, increased $1.5 million (7.0%) in 1996
compared to an increase of $2.9 million (16.0%) in 1995. The demand for loans
has remained strong through 1996 with an increase of $21.3 million (9.2%) in
loan balances compared with a $19.1 million (9.0%) increase during 1995.
Management has attempted to attract new loan customers by offering competitive
rates and providing attentive customer service while maintaining the quality of
the portfolio as established by the Corporation's lending policy. Investment
security interest income increased $1.1 million (17.9%) during 1996 compared
to a decrease of $136.1 thousand (2.0%) during 1995. The Corporation increased
investment security balances in 1996 by $16.1 million, the same as in 1995.
This volume increase was the primary reason for the rise in investment security
interest income, since yields on these securities have only slightly increased.
Management has tried to invest in only those securities which will provide the
Corporation with maximum yield while still minimizing risk exposure. The
Corporation does carry some investments categorized as available for sale;
however, the general intent is to hold all securities until maturity. Interest
income on Federal Funds Sold decreased $152.0 thousand (29.2%) during 1996
compared to an increase of $439.9 thousand (546.0%) during 1995. The
Corporation did not need to invest in the short term since the demand for loans
was relatively high. Total interest expense increased $1.2 million (12.4%)
during 1996 compared to an increase of $2.6 million (38.0%) during 1995.
Interest rates on deposits and short-term borrowings remained relatively the
same for the entire year. The increase in deposit balances in 1996 account
primarily for the increase in interest expense.
Total other income decreased $39.8 thousand (0.7%) in 1996 compared to an
increase of $748.4 thousand (14.3%) in 1995. The increase in 1995 was primarily
due to a gain of $465 thousand which was realized on the sale of other real
estate owned. There were no such transactions recorded in 1996. Total other
expense increased $869.3 thousand (5.3%) in 1996 compared to an increase of
$747.9 thousand (4.8%) in 1995. Increases in salaries and employee benefits as
well as occupancy expense contributed to this increase. The Corporation had
opened four new banking locations during 1995 and the full impact of the
added personnel and facilities was not felt until 1996.
The Corporation increased the amount of tax-exempt securities which it holds in
its portfolio by $11.4 million during 1996. The increase in tax-exempt
securities was the primary cause of the decrease in the Corporation's effective
tax rate. The Corporation's effective tax rates for 1996 and 1995 were 25.2% and
28.8%, respectively.
9
RESULTS OF OPERATIONS
1995 vs. 1994
During 1995, net income increased $473.7 thousand (9.7%) compared to an increase
of $236.7 thousand (5.1%) during 1994. A gain on the sale of other real estate
owned and a decrease in regulatory agency assessments were the primary reasons
for this increase.
Net interest income increased $612.6 thousand (3.47%) during 1995 compared to an
increase of $282.5 thousand (1.6%) during 1994. Interest income and fees on
loans increased $2.9 million (16.0%) in 1995 compared to a decrease of $590.1
thousand (3.1%) in 1994. The influx of over $19 million in net new loans
contributed to this substantial increase in loan income during 1995. Lending
officers, through the guidance of management, have been able to attract new loan
customers while maintaining and servicing the needs of established loan
customers. Investment security interest income decreased $136.1 thousand (2.0%)
during 1995 compared to an increase of $906.1 thousand (17.6%) during 1994.
Income derived from the increase in municipal securities was not adequate to
replace the yield obtained as municipal securities matured. Total interest
expense in 1995 increased $2.6 million (38.0%) compared with an increase of
$13.6 thousand (0.2%) in 1994 as a result of deposit balances increasing $50.1
million and rates increasing slightly. Interest expense on short-term borrowings
declined $180.2 thousand (46.1%) from 1994 to 1995 due to a reduction in
borrowed funds for the year.
Since the ratio of nonperforming loans to total loans remained low for 1995, the
provision for loan losses decreased $126.9 thousand (33.8%) in 1995 compared to
a decrease of $65.0 thousand (14.8%) during 1994. Management has been diligent
in its efforts to maintain a loan portfolio which not only provides the
Corporation with a satisfactory yield but also a sound base on which to build
and grow. Through their careful monitoring of the loan portfolio, management has
determined that the reserve for loan loss is adequate to absorb losses which may
occur due to the default and consequential charge-off of a bad loan.
Total other income increased $748.4 thousand (14.3%) in 1995 compared to a
decrease of $37.4 thousand (.7%) during 1994 primarily due to the $465 thousand
gain received from the sale of other real estate owned. Total other expenses
increased $747.9 thousand (4.8%) during 1995 compared to an increase of $8.4
thousand (0.1%) during 1994. Increases in salaries and employee benefits,
advertising, postage and other miscellaneous expenses all contributed to this
increase.
Income tax expense increased $266.2 thousand (14.1%) in 1995 compared to an
increase of $64.9 thousand (3.6%) in 1994. Tax-exempt interest income decreased
$168.3 thousand (10.5%) and income before income taxes had increased $740.0
thousand (11.0%) during 1995, which accounted for this increase in tax expense.
The effective tax rates for the Corporation were 28.8% and 27.9% in 1995 and
10
1994, respectively, and are less than the statutory rates, largely as a result
of tax-exempt interest income earned on municipal securities.
RECENT ACCOUNTING DEVELOPMENTS
See Note 1 of the consolidated financial statements for a discussion of a
pending accounting change.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of a financial institution, including the
Corporation, are monetary in nature. Therefore, the effects of inflation on
financial institutions differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories. The
growth of total assets in the banking industry caused by inflation results in
the need to increase equity capital at higher than normal rates in order to
maintain an appropriate equity-to-assets ratio. The Corporation's management
recognizes the need to both control asset growth and maintain a reasonable
dividend policy in order to promote the adequate internal growth of capital.
Another significant effect of inflation is on other expenses, which tend to rise
during periods of general inflation.
Management believes that the Corporation's ability to react to changes in
interest rates has the most impact on inflation and changing prices. Management
attempts to maintain a reasonably balanced position between interest-sensitive
assets and liabilities in order to protect against wide interest rate
fluctuations.
11
TRI CITY BANKSHARES CORPORATION
Selected Financial Data
1996 1995 1994 1993 1992
----------------------------------------------------------------------
Total interest income $30,114,579 $27,724,625 $24,503,080 $24,206,977 $ 24,498,827
Total interest expense 10,645,630 9,468,149 6,859,209 6,845,644 8,752,164
Net interest income 19,468,949 18,256,476 17,643,871 17,361,333 15,746,663
Provision for loan losses 300,000 248,139 375,000 440,000 730,000
Net interest income after
provision for loan losses 19,168,949 18,008,337 17,268,871 16,921,333 15,016,663
Income before income taxes 7,761,293 7,509,719 6,769,767 6,468,118 5,376,706
Net income 5,807,293 5,350,578 4,876,814 4,640,068 3,909,981
Net income per share 2.34 2.17 2.04 1.97 1.66
Cash dividends declared
per share .70 .50 .40 .315 .225
Average daily balances: (In Thousands)
Total assets $ 410,975 $ 371,795 $ 340,502 $ 317,431 $ 297,136
Total net loans 237,524 220,969 197,540 195,984 187,341
Total investment securities 115,810 105,758 96,810 74,246 65,002
Total deposits 358,296 324,469 294,568 276,127 256,394
Total stockholders' equity 45,677 41,532 36,051 31,327 27,686
12
TRI CITY BANKSHARES CORPORATION
Market for Corporation's Common Stock
and Related Stockholder Matters
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.
1996 1995
-------------------------------------------------
High Low High Low
-------------------------------------------------
Price range:
First quarter $25.00 $24.55 $22.50 $22.00
Second quarter 25.60 25.16 23.10 22.70
Third quarter 26.25 25.80 23.65 23.25
Fourth quarter 27.05 26.50 24.35 23.90
As of December 31, 1996, the number of holders of record of the Corporation's
common stock was 712.
The Corporation declared four quarterly cash dividends in 1996 in the amount of
$0.175 per share. These dividends were declared on January 5, April 10, July 10
and October 9, payable on January 19, April 25, July 24 and October 24,
respectively. Quarterly dividends of $0.175 per share were declared during each
of the four quarters of 1995.
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.
13
Tri City Bankshares Corporation
Consolidated Balance Sheets
December 31
1996 1995
-------------------------------
ASSETS
Cash and due from banks $ 35,507,815 $ 32,535,066
Federal funds sold - 2,190,000
-------------------------------
Cash and cash equivalents 35,507,815 34,725,066
Investment securities:
Available-for-sale (at fair value) 10,100,875 12,763,844
Held-to-maturity (fair value of
$115,264,736-1996 and
$96,883,742-1995) 115,374,235 96,627,721
Loans 253,752,225 232,472,708
Less allowance for loan losses (3,010,230) (3,626,217)
-------------------------------
Net loans 250,741,995 228,846,491
Premises and equipment 18,918,098 19,550,437
Other assets 6,013,142 5,135,365
-------------------------------
$ 436,656,160 $ 397,648,924
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 103,807,536 $ 90,745,057
Interest-bearing - over $100,000 22,037,030 14,516,000
Interest-bearing - other 255,169,111 244,958,463
-------------------------------
Total deposits 381,013,677 350,219,520
Short-term borrowings:
Federal funds purchased 1,350,000 -
Securities sold under agreements
to repurchase 1,850,000 -
Other 2,199,957 1,914,521
-------------------------------
Total short-term borrowings 5,399,957 1,914,521
Other liabilities 1,530,864 1,200,152
-------------------------------
Total liabilities 387,944,498 353,334,193
Stockholders' equity:
Common stock, $1 par value:
Authorized - 5,000,000 shares
Issued and outstanding
(1996-2,486,098 shares;
1995-2,470,449 shares) 2,486,098 2,470,449
Additional paid-in capital 8,750,861 8,372,997
Retained earnings 37,437,024 33,363,037
Net unrealized gain on investment
securities available-for-sale 37,679 108,248
-------------------------------
Total stockholders' equity 48,711,662 44,314,731
-------------------------------
$ 436,656,160 $ 397,648,924
===============================
14
Tri City Bankshares Corporation
Consolidated Statements of Income
Year ended December 31
1996 1995 1994
-----------------------------------------
Interest income:
Loans, including fees $ 22,763,914 $ 21,279,637 $ 18,361,828
Investment securities:
Taxable 4,485,899 4,305,969 4,463,267
Exempt from federal
income tax 2,496,299 1,618,576 1,597,422
Federal funds sold 368,467 520,443 80,563
-----------------------------------------
Total interest income 30,114,579 27,724,625 24,503,080
Interest expense:
Deposits 10,395,596 9,257,091 6,467,870
Short-term borrowings 250,034 211,058 391,339
-----------------------------------------
Total interest expense 10,645,630 9,468,149 6,859,209
-----------------------------------------
Net interest income 19,468,949 18,256,476 17,643,871
Provision for loan losses 300,000 248,139 375,000
-----------------------------------------
Net interest income after
provision for loan losses 19,168,949 18,008,337 17,268,871
Other income:
Service charges 3,384,804 3,201,320 2,856,165
Rental income 899,580 773,573 797,611
Gain on sale of loans 33,141 41,979 54,553
Investment securities gains - - 3,017
Other 1,622,554 1,962,967 1,520,124
-----------------------------------------
Total other income 5,940,079 5,979,839 5,231,470
Other expenses:
Salaries and employee benefits 9,306,142 8,608,117 8,017,745
Occupancy 2,379,634 2,244,481 2,288,081
Equipment 1,245,513 1,189,597 1,099,037
Data processing 542,274 496,950 613,811
Advertising and promotional 410,844 498,280 397,293
Regulatory agency assessments 97,021 433,345 732,209
Office supplies 539,355 458,247 387,211
Other 2,826,952 2,549,440 2,195,187
-----------------------------------------
Total other expenses 17,347,735 16,478,457 15,730,574
-----------------------------------------
Income before income taxes 7,761,293 7,509,719 6,769,767
Income taxes 1,954,000 2,159,141 1,892,953
-----------------------------------------
Net income $ 5,807,293 $ 5,350,578 $ 4,876,814
=========================================
Net income per common share $ 2.34 $ 2.17 $ 2.04
Average shares outstanding 2,479,373 2,464,770 2,392,121
15
Tri City Bankshares Corporation
Consolidated Statements of Stockholders' Equity
Net Unrealized Gain
on Investment
Common Additional Retained Securities
Stock Paid-In Capital Earnings Available-for-sale Total
-------------------------------------------------------------------------
Balances at January 1, 1994 $2,362,545 $6,215,002 25,315,907 - $33,893,454
Net income - - 4,876,814 - 4,876,814
Cash dividends declared-
$.40 per share - - (949,026) - (949,026)
Common stock issued under
dividend reinvestment plan-
25,709 shares 25,709 492,010 - - 517,719
Common stock issued upon
termination of pension plan-
69,235 shares 69,235 1,384,700 - - 1,453,935
-------------------------------------------------------------------------
Balances at December 31, 1994 2,457,489 8,091,712 29,243,695 - 39,792,896
Net income - - 5,350,578 - 5,350,578
Cash dividends declared-
$.50 per share - - (1,231,236) - (1,231,236)
Common stock issued under
dividend reinvestment plan-
12,975 shares 12,975 281,447 - - 294,422
Common stock fractional shares
redeemed (15) (162) - - (177)
Net unrealized gain on invest-
ment securities available-for-
sale (net of tax) - - - 108,248 108,248
-------------------------------------------------------------------------
Balances at December 31, 1995 2,470,449 8,372,997 33,363,037 108,248 44,314,731
Net income - - 5,807,293 - 5,807,293
Cash dividends declared-
$.70 per share - - (1,733,306) - (1,733,306)
Common stock issued under
dividend reinvestment plan-
15,656 shares 15,656 378,030 - - 393,686
Common stock fractional shares
redeemed (7) (166) - - (173)
Net unrealized loss on invest-
ment securities available-for-
sale (net of tax) - - - (70,569) (70,569)
-------------------------------------------------------------------------
Balances at December 31, 199 $2,486,098 $8,750,861 $37,437,024 $ 37,679 $48,711,662
==========================================================================
16
Tri City Bankshares Corporation
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995 1994
-----------------------------------------------
Operating activities
Net income $ 5,807,293 $ 5,350,578 $ 4,876,814
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Proceeds from sale of
loans held for sale 4,887,563 5,554,152 6,315,354
Origination of loans held
for sale (4,887,563) (5,554,152) (6,315,354)
Provision for loan losses 300,000 248,139 375,000
Provision for depreciation 1,561,886 1,515,475 1,505,145
Amortization of investment
securities premiums
and accretion of discounts 242,278 328,945 436,708
Realized investment securities
gains - - (3,017)
Undistributed earnings of
affiliate (101,176) (91,786) (83,134)
Decrease (increase) in
interest receivable (644,959) (538,039) 174,718
Increase (decrease) in
interest payable (11,243) 320,642 6,426
Other 265,416 1,346,776 (598,784)
----------------------------------------------
Net cash provided by
operating activities 7,419,495 8,480,730 6,689,876
Investing activities:
Proceeds from repayment,
calls and maturities of
investments available for sale 2,500,000 - -
Proceeds from repayment,
calls and maturities of
investment securities held
to maturity 22,304,252 35,117,130 18,333,240
Purchases of investment
securities held to maturity (41,255,744) (51,373,597) (13,546,716)
Net increase in loans (22,195,504) (19,201,991) (11,506,246)
Net purchases of premises and
equipment (929,550) (1,152,857) (1,463,776)
-------------------------------------------------
Net cash used by investing
activities (39,576,546) (36,611,315) (8,183,498)
Financing activities:
Sale of common stock 393,513 294,245 1,971,654
Net increase in deposits 30,794,157 50,143,025 7,941,711
Net increase (decrease) in
short-term borrowings 3,485,436 (14,392,449) (1,618,445)
Cash dividends (1,733,306) (1,231,236) (949,026)
-----------------------------------------------
Net cash provided by
financing activities 32,939,800 34,813,585 7,345,894
-----------------------------------------------
Increase in cash and
cash equivalents 782,749 6,683,000 5,852,272
Cash and cash equivalents
at beginning of year 34,725,066 28,042,066 22,189,794
----------------------------------------------
Cash and cash equivalents
at end of year $ 35,507,815 $ 34,725,066 $ 28,042,066
Supplementary information:
Interest paid $ 10,664,315 $ 9,147,507 $ 6,852,783
Income taxes paid 1,300,000 2,080,000 1,823,000
Investment securities
transferred to available for
sale (at amortized cost) - 12,577,396 -
17
Tri City Bankshares Corporation
Notes to Consolidated Financial Statements
December 31, 1996
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.
18
1. Accounting Policies (continued)
Investment Securities
Securities are classified as held-to-maturity and carried at amortized cost if
management has the intent and ability to hold the securities to maturity.
Securities not classified as held-to-maturity are designated as available-for-
sale and carried at fair value, with unrealized gains and losses net of income
taxes, reflected in stockholders' equity.
Interest and dividends are included in interest income from the related
securities as earned. Realized gains and losses are computed on a specific
identification basis and declines in value judged to be other than temporary are
included in gains (losses) on sale of securities.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The
cost of premises and equipment is depreciated using the straight-line method
over the estimated useful lives of the assets. Repairs and maintenance costs are
expensed as incurred.
Interest on Loans
Interest on loans is computed on a daily basis based on the principal amount
outstanding. The accrual of interest income is discontinued when a loan becomes
90 days past due as to principal or interest. Management may elect to continue
the accrual of interest when the estimated fair value of collateral is
sufficient to cover the principal balance and accrued interest.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amounts are being amortized as an adjustment of
the related loan's yield. The Corporation is amortizing these amounts using the
level-yield method over the contractual life of the related loans. The net
deferred amounts related to loans sold are recognized as income at the time of
sale. Fees related to stand-by letters of credit are recognized over the
commitment period.
19
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
Earnings per share are computed based on the weighted average number of shares
outstanding during the year.
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.
20
1. Accounting Policies (continued)
Pending Accounting Change
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which is effective for
transfers occurring after December 31, 1996. This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on a consistent application of the
financial-components approach that focuses on control. The FASB subsequently
issued SFAS No. 127 in December 1996, which provided for the deferral of the
effective date of certain provisions of SFAS No. 125. Management believes that
the effect of adopting these statements will not be material to the
Corporation's financial condition or results of operations.
2. Restrictions on Cash and Due From Bank Accounts
The subsidiary bank is required to maintain noninterest-earning reserve balances
with the Federal Reserve Bank or in vault cash. The amount of the reserve
requirement as of December 31, 1996 was approximately $7,433,000.
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, 1996:
Available-for-sale -
U.S. Treasury securities
and obligations of U.S.
government agencies $ 10,040,096 $ 134,221 $ 73,442 $ 10,100,875
=====================================================
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government agencies $ 54,810,888 $ 400,017 $ 673,127 $ 54,537,778
Obligations of states and
political subdivisions 60,460,980 488,420 324,809 60,624,591
Industrial revenue bonds 102,367 - - 102,367
----------------------------------------------------
$115,374,235 $ 888,437 $ 997,936 $115,264,736
21
3. Investment Securities (continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
At December 31, 1995:
Available-for-sale -
U.S. Treasury securities
and obligations of U.S.
government agencies $ 12,577,396 $ 262,623 $ 76,175 $ 12,763,844
=====================================================
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government agencies $ 52,852,341 $ 552,907 $ 733,588 $ 52,671,660
Obligations of states
and political
subdivisions 43,621,699 593,381 156,679 44,058,401
Industrial revenue bonds 153,681 - - 153,681
-----------------------------------------------------
$ 96,627,721 $ 1,146,288 $ 890,267 $ 96,883,742
=====================================================
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers or issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
-------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------------------------
Due in one year
or less $ 10,167,710 $ 10,178,762 $ - $ -
Due after one
year through
five years 37,198,808 37,268,208 3,000,000 3,085,625
Due after five
years through
ten years 66,892,735 66,668,131 7,040,096 7,015,250
Due after ten
years 1,114,982 1,149,635 - -
-------------------------------------------------------------
$115,374,235 $115,264,736 $ 10,040,096 $ 10,100,875
============================ =============================
Gross gains of $3,017 were realized on the early redemption of securities in
1994. There were no sales of securities in 1996, 1995 or 1994.
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.
22
4. Investment in Affiliated Bank (continued)
Summarized unaudited financial information for First National Bank was as
follows:
As of and for the year ended
December 31
1996 1995
--------------------------------
Total assets $ 82,179,000 $ 78,458,000
Total deposits 72,469,000 69,920,000
Stockholders' equity 6,667,000 6,206,000
Net income 661,000 583,000
5. Loans
Loan balances classified by type were as follows:
December 31
1996 1995
--------------------------------
Commercial $ 10,414,000 $ 11,058,000
Real estate - construction 16,142,000 21,692,000
Real estate - mortgage:
Single family 93,876,225 80,551,708
Multi family 7,018,000 5,553,000
Nonresidential 90,394,000 81,841,000
Installment 35,908,000 31,777,000
-------------------------------
$253,752,225 $232,472,708
==============================
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, 1996 and 1995, to such
related parties approximated $1,723,906 and $2,050,000, respectively. During
1996, $1,091,665 of new loans were made and repayments totaled $1,417,759.
23
6. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 1996, were as follows:
1996 1995 1994
---------------------------------------
Balance at beginning of year $ 3,626,217 $ 3,395,101 $ 3,163,931
Provision for loan losses 300,000 248,139 375,000
Loans charged off (922,219) (21,084) (159,877)
Recoveries on loans charged off 6,232 4,061 16,047
----------------------------------------
Balance at end of year $ 3,010,230 $ 3,626,217 $ 3,395,101
========================================
Nonaccrual loans totaled approximately $725,110 and $1,033,434 at December 31,
1996 and 1995, respectively.
7. Premises and Equipment
Premises and equipment were comprised of the following:
December 31
1996 1995
------------------------------
Land $ 4,597,956 $ 3,965,073
Buildings and leasehold improvements 17,567,836 17,863,311
Furniture and equipment 7,757,270 7,379,900
------------------------------
29,923,062 29,208,284
Less accumulated depreciation (11,004,964) (9,657,847)
------------------------------
$ 18,918,098 $ 19,550,437
==============================
8. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
24
8. Regulatory Capital (continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, 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.
25
8. Regulatory Capital (continued)
The Bank's actual capital amounts and ratios are also presented in the table.
For Capital
Actual Adequacy Purposes
-------------------------------------------
Amount Ratio Amount Ratio
-------------------------------------------
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets):
Consolidated $51,684,000 18.11% $22,827,000 8.0%
Tri City Bank 49,281,000 17.40 22,662,000 8.0
Tier I Capital
(to Risk Weighted Assets):
Consolidated 48,674,000 17.06 11,413,000 4.0
Tri City Bank 46,271,000 16.33 11,331,000 4.0
Tier I Capital
(to Average Assets):
Consolidated 48,674,000 11.44 17,018,000 4.0
Tri City Bank 46,271,000 10.93 16,937,000 4.0
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets):
Consolidated 47,833,000 18.50 20,679,000 8.0
Tri City Bank 45,627,000 17.78 20,532,000 8.0
Tier I Capital
(to Risk Weighted Assets):
Consolidated 44,206,000 17.10 10,340,000 4.0
Tri City Bank 42,001,000 16.37 10,266,000 4.0
Tier I Capital
(to Average Assets):
Consolidated 44,206,000 11.28 15,670,000 4.0
Tri City Bank 42,001,000 10.71 15,597,000 4.0
26
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 1996 and 1995, 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 $215,457, $206,349 and $199,802 for 1996, 1995
and 1994, respectively.
10. Income Taxes
The significant components of income tax expense for each of the three years in
the period ended December 31, 1996, were:
1996 1995 1994
----------------------------------------
Federal $1,767,000 $1,948,500 $1,721,953
State 187,000 210,641 171,000
----------------------------------------
$1,954,000 $2,159,141 $1,892,953
========================================
Current $1,196,000 $2,162,141 $2,526,387
Deferred expense (benefit) 758,000 (3,000) (633,434)
----------------------------------------
$1,954,000 $2,159,141 $1,892,953
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, 1996, are as follows:
1996 1995 1994
-----------------------------------------
Income before income taxes $7,761,293 $7,509,719 $6,769,767
=========================================
Income tax at statutory rate $2,638,840 $2,553,305 $2,301,721
Increase (reduction) resulting from:
Tax-exempt interest income (759,928) (496,749) (503,227)
State income taxes, net of federal
tax benefit 123,420 130,674 120,320
Other (48,332) (28,089) (25,861)
-----------------------------------------
$1,954,000 $2,159,141 $1,892,953
=========================================
27
10. Income Taxes (continued)
At December 31, 1996, the Corporation had state net operating loss carryforwards
of approximately $925,000. These carryforwards expire in years 2006 to 2011.
The components of the Corporation's net deferred income tax liability were as
follows:
1996 1995
-------------------------------
Deferred tax assets:
Loan loss reserves $ 936,000 $ 1,138,000
Excess servicing gains 72,000 90,000
State net operating loss carryforwards 48,000 178,000
Other 54,000 141,000
---------------------------------
1,110,000 1,547,000
---------------------------------
deferred tax liabilities:
Excess tax depreciation (393,000) (573,000)
Safe harbor lease (188,000) (213,000)
Net unrealized gains on investment
securities available-for-sale (23,000) (69,000)
Deferred loan fees (173,000) (95,000)
Undistributed earnings of subsidiary (410,000) (370,000)
Other (209,000) (62,000)
---------------------------------
(1,396,000) (1,382,000)
---------------------------------
Net deferred tax liability before
valuation allowance (286,000) 165,000
Valuation allowance (58,000) (167,000)
---------------------------------
Net deferred tax liability $ (344,000) $ (2,000)
=================================
11. Leases
The Corporation leases various banking facilities under operating lease
agreements from companies owned by a director and major shareholder of the
Corporation. All of the agreements include renewal options and one agreement
requires the Bank to pay insurance, real estate taxes and maintenance costs
associated with the lease. Rental amounts are subject to annual escalation based
upon increases in the Consumer Price Index. Aggregate rental expense under the
leases amounted to $440,156 in 1996, $368,787 in 1995, and $351,064 in 1994.
28
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, 1996:
Year ending December 31:
1997 $ 373,020
1998 370,020
1999 369,064
2000 218,576
2001 138,546
2002 and thereafter 745,740
----------
Total minimum future rentals $2,214,966
==========
12. Short-Term Borrowings
Borrowings under reverse repurchase agreements bore an average interest rate of
5.88% at December 31, 1996, and matured within one day of year end. Assets
collateralizing such agreements, consisting of U.S. government and agency
obligations, are held by the lender bank. At December 31, 1996, under existing
arrangements, the Bank could borrow up to $58,000,000 under reverse repurchase
agreements. The maximum amount of repurchase agreements outstanding was
$7,700,000 and $9,100,000 for the years ended December 31, 1996 and 1995,
respectively. The average amount of repurchase agreements was $1,550,000 and
$1,269,000 for the years ended December 31, 1996 and 1995, respectively.
There were $1,850,000 in reverse repurchase agreements outstanding at
December 31, 1996. No amounts were outstanding at December 31, 1995.
At December 31, 1996, the Bank had the ability to borrow federal funds of up to
$17,000,000 under a revolving line of credit agreement with lenders. Such
borrowings bear interest at the Bank's announced daily federal funds rate and
mature daily. There were $1,350,000 in federal funds borrowings outstanding at
December 31, 1996. There were no federal funds borrowings outstanding at
December 31, 1995. 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, 1996.
29
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, 1996, retained earnings of the Bank in the amount
of $12,298,000 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, 1996 was $25,937,000 and $1,597,000, respectively. All such
arrangements expire in fiscal 1997.
15. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the 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. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
30
15. Fair Value of Financial Instruments (continued)
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The Corporation does not routinely measure the market value of financial
instruments such as is required by SFAS No. 107, because such measurements
represent point-in-time estimates of value. It is not the intent of the
Corporation to liquidate and therefore realize the difference between market
value and carrying value and even if it were, there is no assurance that the
estimated market values could be realized. Thus, the information presented
is not relevant to predicting the Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents approximate those assets' fair values.
Investment Securities
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans Receivable
For variable-rate loans that reprice frequently (within the twelve-month period
following the date of measurement), and with no significant credit risk, fair
values are based on carrying values. The fair values for all other loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair value.
31
15. Fair Value of Financial Instruments (continued)
Off-Balance-Sheet Instruments
Fair values for the Corporation's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value of such
instruments at December 31, 1996 and 1995, is not material.
Deposits
The fair values disclosed for demand deposits (e.g., interest and noninterest
checking, passbook savings and certain types of money market accounts) are,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts for variable-rate fixed-term money
market accounts and certificates of deposit and fixed-rate certificates of
deposit scheduled to mature or reprice within the twelve-month period following
the date of measurement approximates their fair value at the reporting date.
Fair values for fixed-rate certificates of deposit scheduled to mature or
reprice after twelve months from the date of measurement are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on similar certificates to a schedule of aggregated expected monthly
maturities of the time deposits. The carrying amount of accrued interest
approximates its fair value.
Short-Term Borrowings
The carrying amount of short-term borrowings and related accrued interest,
approximates their fair values at the reporting date.
32
15. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Corporation's financial instruments
consisted of the following at December 31, 1996 and 1995:
1996 1995
------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------
(In Thousands)
Cash and cash equivalen $ 35,508 $ 35,508 $ 34,725 $ 34,725
================================================
Investment securities $125,475 $125,366 $109,392 $109,648
================================================
Loans receivable $253,752 $255,397 $232,473 $234,096
================================================
Deposits:
Withdrawable on demand $283,679 $283,679 $249,412 $249,412
Certificates of deposit 97,335 97,467 100,808 100,913
------------------------------------------------
$381,014 $381,146 $350,220 $350,325
================================================
Short-term borrowings $ 5,400 $ 5,400 $ 1,914 $ 1,914
================================================
33
16. Tri City Bankshares Corporation (Parent Company Only) Financial Information
Balance Sheets
December 31
1996 1995
--------------------------------
Assets
Cash on deposit with subsidiary bank $ 205,631 $ 267,598
Investment in subsidiary 44,494,845 40,238,480
Investment in affiliated bank 1,558,642 1,457,466
Bank premises and equipment 2,132,654 2,085,127
Other net assets 319,890 266,060
--------------------------------
Total assets $48,711,662 $44,314,731
================================
Stockholders' equity
Common stock $ 2,486,098 $ 2,470,449
Additional paid-in capital 8,750,861 8,372,997
Retained earnings 37,437,024 33,363,037
Net unrealized gain on investment
securities available-for-sale 37,679 108,248
--------------------------------
Total liabilities and stockholders' equity $48,711,662 $44,314,731
================================
34
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information (continued)
Statements of Income
Year ended December 31
1996 1995 1994
-----------------------------------------
Income from subsidiary bank:
Dividends $ 1,450,000 $ 1,150,000 $ 1,000,000
Management fees 492,000 510,000 507,600
Rental income 210,503 178,913 161,227
-----------------------------------------
2,152,503 1,838,913 1,668,827
Other income 61,949 148,927 51,338
Expenses:
Administrative and general 865,269 839,970 839,575
Interest - - 116,583
-----------------------------------------
865,269 839,970 956,158
Income before income taxes and
equity in undistributed net
income of subsidiary and
affiliated bank 1,349,183 1,147,870 764,007
Income tax expense (benefit) (30,000) 5,141 (33,200)
-----------------------------------------
Income before equity in
undistributed net income of
subsidiary and affiliated bank 1,379,183 1,142,729 797,207
Equity in undistributed net
income of subsidiary and
affiliated bank 4,428,110 4,207,849 4,079,607
-----------------------------------------
Net income $ 5,807,293 $ 5,350,578 $ 4,876,814
=========================================
35
16. Tri City Bankshares Corporation (Parent Company Only) Financial
Information (continued)
Statements of Cash Flows
Year ended December 31
1996 1995 1994
---------------------------------------------
Operating activities:
Net income $ 5,807,293 $ 5,350,578 $ 4,876,814
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation 103,419 87,377 78,758
Equity in undistributed
net income of subsidiary
and affiliated bank (4,428,110) (4,207,849) (4,079,607)
Other (53,830) (52,896) (64,125)
---------------------------------------------
Net cash provided by operating
activities 1,428,772 1,177,210 811,840
Investing activities:
Net sales (purchases) of
premises and equipment (150,946) 2,380 (56,980)
---------------------------------------------
Net cash provided by (used in)
investing activities (150,946) 2,380 (56,980)
Financing activities:
Decrease in short-term borrowings - - (2,000,000)
Sale of common stock 393,513 294,245 1,971,654
Cash dividends (1,733,306) (1,231,236) (949,026)
---------------------------------------------
Net cash used in financing
activities (1,339,793) (936,991) (977,372)
---------------------------------------------
Increase (decrease) in cash (61,967) 242,599 (222,512)
Cash at beginning of year 267,598 24,999 247,511
---------------------------------------------
Cash at end of year $ 205,631 $ 267,598 $ 24,999
=============================================
36
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995.
Three Months Ended
December 31 September 30 June 30 March 31
------------------------------------------------------
(In Thousands, Except for Per Share Data)
1996:
Interest income $7,811 $7,614 $7,443 $7,247
Interest expense 2,630 2,706 2,691 2,618
Net interest income 5,180 4,909 4,752 4,628
Provision for loan losses 75 75 75 75
Other income 1,465 1,521 1,491 1,463
Other expense 4,245 4,426 4,367 4,309
Income before income taxes 2,361 1,916 1,788 1,696
Income tax expense 618 442 462 432
Net income 1,743 1,474 1,326 1,264
Per common share:
Net income .70 .59 .54 .51
1995:
Interest income $7,318 $7,097 $6,771 $6,538
Interest expense 2,579 2,486 2,336 2,067
Net interest income 4,739 4,611 4,435 4,471
Provision for loan losses 75 75 23 75
Other income 1,474 1,422 1,315 1,769
Other expense 4,129 4,095 4,172 4,082
Income before income taxes 2,009 1,863 1,555 2,083
Income tax expense 550 530 437 642
Net income 1,459 1,333 1,118 1,441
Per common share:
Net income .59 .54 .45 .59
37
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
February 7, 1997
38
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
39
EXHIBIT 22
SUBSIDIARY OF REGISTRANT
Name Percentage of Shares Owned
---- --------------------------
Tri City National Bank 100.0%
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 7, 1997, 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, 1996.
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 7, 1997, 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, 1996.
/s/ Ernst & Young
Milwaukee, Wisconsin
March 25, 1997