UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-09785
TRI CITY BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6400 South 27th Street
Oak Creek, Wisconsin 53154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 761-1610
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
$1.00 par value common stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ____ Accelerated filer ___ Non-accelerated filer [do not
check if smaller reporting company] Smaller reporting Company _X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of June 30, 2008, the aggregate market value of the shares held by
non-affiliates was approximately $62,381,612. As of March 26, 2009, 8,904,915
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated in
Annual report to shareholders for fiscal
year ended December 31, 2008 Parts II and IV
Proxy statement for annual meeting of
shareholders to be held on June 10, 2009 Part III
Form 10-K Table of Contents
- --------------------------------------------------------------------------------
PART I PAGE #
Item 1 Business 3
Item 1A Risk Factors 12
Item 1B Unresolved Staff Comments 17
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a
Vote of Security Holders 17
PART II
Item 5 Market for the Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities 18
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures About Market Risk 19
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
Item 9A(T) Controls and Procedures 19
Item 9B Other Information 21
PART III
Item 10 Directors, Executive Officers and Corporate Governance 21
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 21
Item 13 Certain Relationships and Related Transactions,
and Director Independence 21
Item 14 Principal Accountant Fees and Services 21
PART IV
Item 15 Exhibits and Financial Statement Schedules 22
Signatures 26
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PART I
Item 1. BUSINESS
THE REGISTRANT
Tri City Bankshares Corporation (the "Registrant"), a Wisconsin corporation, was
organized in 1970 for the purpose of acquiring the outstanding shares of Tri
City National Bank (the "Bank"). The Bank is a wholly owned subsidiary of the
Registrant.
At December 31, 2008, the Registrant had total assets of $792.9 million and
total stockholders' equity of $108.9 million.
THE BANK
The Bank was chartered by the Wisconsin Banking Department (now the Wisconsin
Department of Financial Institutions ("DFI")) in 1963 and converted to a
national bank charter in 1969. The Bank is supervised by the Office of the
Comptroller of the Currency ("OCC") and its deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank conducts business out of its
main office located at 6400 South 27th Street, Oak Creek, Wisconsin. In
addition, the Bank maintains 37 other offices in Wisconsin throughout Milwaukee,
Ozaukee, Racine and Waukesha Counties.
The Bank provides a full range of consumer and commercial banking services to
individuals and businesses. The basic services offered include demand deposit
accounts, money market deposit accounts, NOW accounts, time deposits, safe
deposit services, direct deposits, notary services, money orders, night
depository, travelers' checks, cashier's checks, savings bonds, secured and
unsecured consumer, commercial, installment, real estate and mortgage loans. The
Bank offers automated teller machine ("ATM") and debit cards. In addition, the
Bank maintains an investment portfolio consisting primarily of U.S. government
sponsored agency and state and political subdivision securities.
As is the case with banking institutions generally, the Bank derives its
revenues from interest on its loan and investment portfolios and fee income
related to loans and deposits. The sale of alternative investment products
provides additional fee income. The source of funds for the lending activities
are deposits, repayment of loans, maturity of investment securities and
short-term borrowing through correspondent banking relationships and the Federal
Reserve Bank of Chicago. Principal expenses are the interest paid on deposits
and borrowings, and operating and general administrative expenses.
LENDING ACTIVITIES
The Bank offers a range of lending services including secured and unsecured
consumer, commercial, installment, real estate and mortgage loans to
individuals, small businesses and other organizations that are located in or
conduct a substantial portion of their business in the Bank's market area. The
Bank's total loans as of December 31, 2008 were $599.6 million, or approximately
75.6% of total assets. Interest rates charged on loans vary with the degree of
risk, maturity and amount of the loan, and are further subject to competitive
pressures, the cost and availability of funds and government policy.
The Bank maintains a comprehensive loan policy that establishes guidelines with
respect to all categories of lending activity. The policy establishes lending
authority for each individual loan officer, the officer loan committee and the
Board of Directors. All loans to directors and executive officers are approved
by the Board of Directors with the interested director abstaining. The loans are
concentrated in three major areas: real estate loans, commercial loans and
consumer loans. The Bank's lending strategy is focused on the development and
maintenance of a high quality loan portfolio.
The Bank's real estate loans are collateralized by mortgages and consist
primarily of loans to individuals for the purchase and improvement of real
estate and for the purchase of residential lots and construction of
single-family residential units. The Bank's residential real estate loans
generally are repayable in monthly installments based on up to a thirty-year
amortization schedule.
Commercial loans include loans to individuals and small businesses, including
loans for working capital, machinery and equipment purchases, premises and
equipment acquisitions, purchase, improvement and investment in real estate and
real estate development, and other business needs. Commercial lines of credit
are typically for a one-year term. Other commercial loans with terms or
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amortization schedules of longer than one year will normally carry interest
rates that vary based on the term and will become payable in full, and are
generally refinanced, in two to four years. Commercial loans typically entail a
thorough analysis of the borrower, its industry, current and projected economic
conditions and other factors. The Bank typically requires commercial borrowers
to provide annual financial statements and requires appraisals or evaluations in
connection with the loans collateralized by real estate. The Bank typically
requires personal guarantees from principals involved with closely-held
corporate borrowers.
The Bank's consumer loan portfolio consists primarily of loans to individuals
for various consumer purposes, payable on an installment basis. The loans are
generally for terms of five years or less and are collateralized by liens on
various personal assets of the borrower.
DEPOSIT ACTIVITIES
Deposits are the major source of the Bank's funds for lending and other
investment activities. Generally, the Bank attempts to maintain the rates paid
on its deposits at a competitive level. The Bank considers the majority of its
regular savings, investor's choice, demand, NOW and money market deposit
accounts (which comprised 78.9% of the Bank's total deposits at December 31,
2008) to be core deposits. Approximately 21.1% of the Bank's deposits at
December 31, 2008 were certificates of deposit (CDs). CDs of $100,000 and over
made up approximately 38.6% of the Bank's total CDs at December 31, 2008. The
majority of the Bank's deposits are generated from Milwaukee, Ozaukee, Racine
and Waukesha Counties. For additional information regarding the Bank's deposit
accounts, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Interest Rate Sensitivity Management" and
Note 10 of Notes to Consolidated Financial Statements, which are contained in
the Registrant's 2008 Annual Report to Shareholders ("2008 Shareholder Report"),
which discussion is incorporated by reference in Item 8 below.
INVESTMENTS
The Bank invests a portion of its assets in obligations of U.S.
government-sponsored entities, (Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association), state, county and municipal obligations,
collateralized mortgage obligations ("CMOs") and federal funds ("Fed Funds")
sold. The investments are managed in relation to the loan demand and deposit
growth and are generally used to provide for the investment of excess funds at
reduced yields and risks relative to yields and risks of the loan portfolio,
while providing liquidity to fund increases in loan demand or to offset
fluctuations in deposits. For further information regarding the Registrant's
investment portfolio, see Note 4 of Notes to Consolidated Financial Statements
in the 2008 Shareholder Report, incorporated by reference in Item 8 below.
SUPERVISION AND REGULATION
The Registrant and the Bank are subject to extensive supervision and
regulation by federal and state agencies. The following is a summary of the
regulatory agencies, statutes and related regulations that have, or could have,
a significant impact on the Registrant's business. This discussion is qualified
in its entirety by reference to such regulations and statutes.
BANK HOLDING COMPANY
The Registrant is a legal entity separate and distinct from its
subsidiaries and affiliated companies. As a registered bank holding
company, the Registrant is subject to regulation under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and to inspection,
examination and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board").
The Federal Reserve Board also has extensive enforcement authority over
bank holding companies. In general, the Federal Reserve Board may initiate
enforcement actions for violations of laws and regulations and unsafe or
unsound practices. The Registrant is also required to file reports and
other information with the Federal Reserve Board regarding its business
operations and those of its subsidiaries.
SUBSIDIARY BANK
The Bank is subject to regulation and examination primarily by the Office
of the Comptroller of the Currency ("OCC") and secondarily by the Federal
Deposit Insurance Corporation ("FDIC").
The Bank is subject to certain restrictions imposed by the Federal Reserve
Act and Federal Reserve Board regulations regarding such matters as the
maintenance of reserves against deposits, extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock
4
or other securities of the bank holding company or its subsidiaries and the
taking of such stock or securities as collateral for loans to any borrower.
NON-BANKING SUBSIDIARIES
The Registrant's non-banking subsidiaries are also subject to regulation by
the Federal Reserve Board and other applicable federal and state agencies.
OTHER REGULATORY AGENCIES
SECURITIES AND EXCHANGE COMMISSION ("SEC"). The Registrant is also under
the jurisdiction of the SEC and certain states securities commissions for
matters relating to the offering and sale of its securities. The Registrant
is subject to disclosure and regulatory requirements of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as administered by the SEC.
THE FDIC/DEPOSITORY INSURANCE. The FDIC is an independent federal agency
which insures the deposits, up to prescribed statutory limits, of
federally-insured banks and savings associations and safeguards the safety
and soundness of the financial institution industry. The Bank's deposits
are insured up to applicable limits by the Deposit Insurance Fund of the
FDIC and subject to deposit insurance assessments to maintain the Deposit
Insurance Fund.
The FDIC uses a risk-based assessment system that imposes insurance
premiums based upon a four-tier risk matrix based upon a bank's capital
level and supervisory, or CAMELS, rating. Currently the Bank is in the best
risk category and pays deposit assessments ranging from 12 to 14 cents per
$100 of assessable deposits. On February 27, 2009, the FDIC adopted a final
rule that changes the way its assessment system differentiates risk and
changes assessment rates beginning April 1, 2009. For banks in the best
risk category, the initial base rates will range from 12 to 16 cents per
$100 of assessable deposits on an annual basis effective April 1, 2009. The
FDIC also adopted an interim rule imposing an emergency special assessment
of 20 cents per $100 of assessable deposits on all insured institutions on
June 30, 2009, which will be collected on September 30, 2009. The interim
rule also permits the FDIC to impose an emergency special assessment after
June 30, 2009, of up to 10 cents per $100 of assessable deposits if
necessary to maintain public confidence in federal deposit insurance. The
interim rule is subject to a 30-day comment period. The FDIC may take
further actions in the future that result in higher assessment rates that
could have a material effect on earnings.
The FDIC may terminate insurance coverage upon a finding that the insured
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable
law, regulation, rule, order or condition enacted or imposed by the
institution's regulatory agency.
BANK HOLDING COMPANY ACT
In general, the BHCA limits the business of bank holding companies to
banking, managing or controlling banks and other activities that the
Federal Reserve Board has determined to be so closely related to banking as
to be a proper incident thereto.
The BHCA and other federal and state statutes regulate acquisitions of
commercial banks. The BHCA requires the prior approval of the Federal
Reserve Board for the direct or indirect acquisition of more than 5% of the
voting shares of a commercial bank or its parent holding company. Under the
Federal Bank Merger Act, the prior approval of the OCC is required for a
national bank to merge with another bank or purchase the assets or assume
the deposits of another bank. In reviewing applications seeking approval of
merger and acquisition transactions, the bank regulatory authorities will
consider, among other things, the competitive effect and public benefits of
the transactions, the capital position of the combined organization, the
applicant's performance record under the Community Reinvestment Act and
fair housing laws and the effectiveness of the subject organizations in
combating money laundering activities.
In 1999, Congress enacted the Gramm-Leach-Bliley Act ("the Act"), which
eliminated certain barriers to and restrictions on affiliations between
banks and securities firms, insurance companies and other financial
services organizations. Among other things, the Act repealed certain
Glass-Steagall Act restrictions on affiliations between banks and
securities firms, and amended the BHCA to permit bank holding companies
that qualify as "financial holding companies" to engage in a broad list of
"financial activities," and any non-financial activity that the Federal
5
Reserve Board, in consultation with the Secretary of the Treasury,
determines is "complementary" to a financial activity and poses no
substantial risk to the safety and soundness of depository institutions or
the financial system. The Act treats various lending, insurance
underwriting, insurance company portfolio investment, financial advisory,
securities underwriting, dealing and market-making, and merchant banking
activities as financial in nature for this purpose. Under the Act, a bank
holding company may become certified as a financial holding company by
filing a notice with the Federal Reserve Board, together with a
certification that the bank holding company meets certain criteria,
including capital, management, and Community Reinvestment Act requirements.
The Registrant has determined not to become certified as a financial
holding company at this time. The Registrant may reconsider this
determination in the future.
CAPITAL ADEQUACY AND PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for
insured depository institutions and requires the respective federal
regulatory agencies to implement systems for "prompt corrective action" for
insured depository institutions that do not meet minimum capital
requirements within such categories. The federal regulatory agencies,
including the Federal Reserve Board and the OCC, have adopted substantially
similar regulatory capital guidelines and regulations consistent with the
requirements of FDICIA, as well as established a system of prompt
corrective action to resolve certain of the problems of undercapitalized
institutions. This system is based on five capital level categories for
insured depository institutions: "well-capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized."
Both the Registrant and the Bank are required to maintain sufficient
capital to meet both a risk-based asset ratio test and leverage ratio test.
From time to time, the regulatory agencies may require the Registrant and
the Bank to maintain capital above these minimum levels should certain
conditions exist, such as deterioration of their financial condition or
growth in assets, either actual or expected.
The Registrant and the Bank were deemed well capitalized as of both
December 31, 2008 and 2007. Additional information regarding the
Registrant's and the Bank's capital requirements and ratios can be found in
Note 18 of the Notes to the Consolidated Financial Statements.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") requires depository
institutions to assist in meeting the credit needs of their market areas
consistent with safe and sound banking practice. Under the CRA, each
depository institution is required to help meet the credit needs of its
market areas by, among other things, providing credit to low and
moderate-income individuals and communities. Depository institutions are
periodically examined for compliance with the CRA and assigned ratings. As
of December 31, 2008, the most recent performance evaluation by the OCC
resulted in an overall rating of satisfactory.
RECENT REGULATORY DEVELOPMENTS
In response to global credit and liquidity issues involving a number of
financial institutions, the United States government, particularly the
United States Department of Treasury (the "U.S. Treasury") and the FDIC,
have taken a variety of extraordinary measures designed to restore
confidence in the financial markets and to strengthen financial
institutions, including capital injections, guarantees of bank liabilities
and the acquisition of illiquid assets from banks.
On October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the "EESA") enacted by the U.S. Congress.
Pursuant to the EESA, the U.S. Treasury was granted the authority to take a
range of actions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets and has proposed several programs, including the
purchase by the U.S. Treasury of certain troubled assets from financial
institutions (the "Troubled Asset Relief Program" or "TARP") and the direct
purchase by the U.S. Treasury of equity of healthy financial institutions
(the "Capital Purchase Program" or "CPP") The EESA also temporarily raised
the limit on federal deposit insurance coverage provided by the FDIC from
$100,000 to $250,000 per depositor.
Among other programs and actions taken by the U.S. regulatory agencies, the
FDIC implemented the Temporary Liquidity Guarantee Program ("TLGP") to
strengthen confidence and encourage liquidity in the banking system. The
TLGP comprises the Debt Guaranty Program ("DGP") and the Transaction
Account Guarantee Program ("TAGP"). The DGP guarantees all newly issued
senior unsecured debt (e.g., promissory notes, unsubordinated unsecured
notes and commercial paper) up to prescribed limits issued by participating
entities beginning on October 14, 2008 and continuing through June 30,
2009. For eligible debt issued by that date, the FDIC will provide the
6
guarantee coverage until the earlier of the maturity date of the debt or
June 30, 2012. The TAGP offers full guarantee for noninterest-bearing
transaction accounts held at FDIC-insured depository institutions. The
unlimited deposit coverage was voluntary for eligible institutions and was
in addition to the $250,000 FDIC deposit insurance per account that was
included as part of the EESA. The limits are presently scheduled to return
to $100,000 on January 1, 2010. The TAGP coverage became effective on
October 14, 2008 and will continue for participating institutions until
December 31, 2009.
CAPITAL PURCHASE PROGRAM
After careful consideration by the Board of Directors of the
Registrant, the Registrant elected not to participate in the CPP,
although it believed that it was eligible to do so.
TEMPORARY LIQUIDITY GUARANTEE PROGRAM
Initially, the TLGP programs, the DGP and TAGP, were provided at no
cost for the first 30 days. On November 3, 2008, the FDIC extended the
opt-out period to December 5, 2008 to provide eligible institutions
additional time to consider the terms before making a final decision
regarding participation in the program. The Registrant elected not to
"opt out" of the TAGP in order to provide unlimited FDIC coverage to
the Bank's transaction account depositors. The Bank elected not to
"opt out" of the DGP and, as a result, will continue participating in
the DGP to the extent applicable.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009
(the "ARRA") was signed into law. Section 7001 of the ARRA amended Section
111 of the EESA in its entirety. While the U.S. Treasury must promulgate
regulations to implement the restrictions and standards set forth in
Section 7001, the ARRA, among other things, significantly expands the
executive compensation restrictions previously imposed by the EESA. Such
restrictions apply to any entity that has received or will receive
financial assistance provided under TARP, and shall generally continue to
apply for as long as any obligation arising from financial assistance
provided under TARP, including preferred stock issued under the CPP,
remains outstanding. Since the Registrant elected not to participate in the
CPP, Section 7001 of the ARRA does not apply to it.
DIVIDEND RESTRICTIONS
Current federal banking regulations impose restrictions on the Bank's
ability to pay dividends to the Registrant. These restrictions include a
limit on the amount of dividends that may be paid in a given year without
prior approval of the OCC and a prohibition on paying dividends that would
cause the Bank's total capital to be less than the required minimum levels
under the risk-based capital requirements imposed by the OCC. The Bank's
regulators may prohibit the payment of dividends at any time if the
regulators determine the dividends represent unsafe and/or unsound banking
practices or reduce the Bank's total capital below adequate levels.
The Registrant's ability to pay dividends to its shareholders may also be
restricted. Under current Federal Reserve Board policy, the Registrant is
expected to act as a source of financial strength to, and commit resources
to support, the Bank. Under this policy, the Federal Reserve Board may
require the Registrant to contribute additional capital to the Bank, which
could restrict the amount of cash available for dividends.
Even when the legal ability exists, the Registrant or the Bank may decide
to limit the payment of dividends in order to retain earnings for corporate
use.
CUSTOMER PRIVACY AND OTHER CONSUMER PROTECTIONS
The Registrant is subject to regulations limiting the ability of financial
institutions to disclose non-public information about consumers to
nonaffiliated third parties. These limitations require disclosure of
privacy policies to consumers and, in some circumstances, allow consumers
to prevent disclosure of certain personal information to a nonaffiliated
party. The Registrant is also subject to numerous federal and state laws
aimed at protecting consumers, including the Home Mortgage Disclosure Act,
the Real Estate Settlement Procedures Act, the Equal Credit Opportunity
Act, the Truth in Lending Act, the Bank Secrecy Act, the Community
Reinvestment Act and the Fair Credit Reporting Act.
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USA PATRIOT ACT
The Uniting and Strengthening of America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT
Act") and related regulations, among other things, require financial
institutions to establish programs specifying procedures for obtaining
identifying information from customers and establishing enhanced due
diligence policies, procedures and controls designed to detect and report
suspicious activity. The Bank has established policies and procedures that
the Registrant believes comply with the requirements of the USA PATRIOT
Act.
MONETARY POLICY
The Federal Reserve Board regulates money and credit conditions and
interest rates in order to influence general economic conditions primarily
through open market operations in U.S. government securities, changes in
the discount rate on bank borrowings, and changes in the reserve
requirements against depository institutions' deposits. These policies and
regulations significantly affect the overall growth and distribution of
loans, investments and deposits, as well as interest rates charged on loans
and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of financial institutions in the past and
are expected to continue to have significant effects in the future. In view
of the changing conditions in the economy, the money markets and the
activities of monetary and fiscal authorities, the Registrant can make no
definitive predictions as to future changes in interest rates, credit
availability or deposit levels.
INDUSTRY RESTRUCTURING
For well over a decade, the banking industry has been undergoing a restructuring
process that is anticipated to continue. The restructuring has been caused by
product and technological innovations in the financial services industry,
deregulation of interest rates, and increased competition from foreign and
nontraditional banking competitors, and has been characterized principally by
the gradual erosion of geographic barriers to intrastate and interstate banking
and the gradual expansion of investment and lending authorities for bank
institutions.
COMPETITION
The Bank's service area includes portions of Milwaukee, Ozaukee, Racine and
Waukesha Counties. In Milwaukee County, the Bank competes with all the major
banks and bank holding companies located in metropolitan Milwaukee, most of whom
are far larger in terms of assets and deposits. Ozaukee County, with a
population of approximately 87,000 residents, has eleven banks with thirty-five
offices and five savings banks with eleven offices. Racine County, with a
population of approximately 196,300 residents, has thirteen banks with
fifty-eight offices and five savings banks with fourteen offices. Waukesha
County, with a population of approximately 382,700 residents, has twenty-six
banks with one hundred forty-five offices and thirteen savings banks with
fifty-three offices. In addition to banks and savings banks, significant
competition comes from credit unions, security and brokerage firms, mortgage
companies, insurance companies and other providers of financial services in the
area.
EMPLOYEES
As of December 31, 2008, the Registrant employed 329 full-time employees and 115
part-time employees. The employees are not represented by a collective
bargaining unit. The Registrant considers relations with employees to be good.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
Statistical information relating to the Registrant and its subsidiaries on a
consolidated basis, as required by Guide 3 of the Securities and Exchange
Commission Guides for Preparation and Filing of Reports and Registration
Statements and Reports, is set forth in the Management's Discussion and Analysis
of Financial Position and Results of Operations ("MD&A") section of the 2008
Shareholder Report, as follows:
(1) Average Balances and Interest Rates for each of the last three fiscal
years;
(2) Interest Income and Expense Volume and Rate Change for each of the last two
years;
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(3) Investment Securities Portfolio Maturity Distribution at December 31, 2008;
(4) Investment Securities Portfolio for each of the last three years;
(5) Loan Portfolio Composition for each of the last five years;
(6) Summary of Loan Loss Experience for each of the last five years; and
(7) Average Daily Balance of Deposits and Average Rate Paid on Deposits for
each of the last three years.
The following additional tables set forth certain statistical information
relating to the Registrant and its subsidiaries on a consolidated basis.
LOAN PORTFOLIO
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans are comprised of (a) loans accounted
for on a nonaccrual basis and (b) loans contractually past due 90 days or more
as to interest or principal payments, for which interest continues to be
accrued.
(Dollars in Thousands)
December 31,
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
Nonaccrual loans $ 2,930 $ 2,024 $ -- $ 1,905 $ 275
Loans past due 90 days or more 5,684 3,703 3,417 1,005 1,688
------- ------- ------- ------- ------
Total nonperforming loans $ 8,614 $ 5,727 $ 3,417 $ 2,910 $1,963
======= ======= ======= ======= ======
Ratio of nonaccrual loans to
total loans 0.49% 0.35% -% 0.36% 0.06%
Ratio of nonperforming loans
to total loans 1.44% 0.98% 0.64% 0.56% 0.42%
Interest income of $60,501 was recognized during 2008 on loans that were
accounted for on a nonaccrual basis. Additional interest income would have been
recognized during 2008 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. 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 loans at December 31, 2008 or 2007, 2006, 2005 or 2004 whose terms
had been renegotiated to provide a reduction or deferral of interest or
principal because of a deterioration in the financial position of the borrower,
and there are no current loans where, in the opinion of management, there are
serious doubts as to the ability of the borrower to comply with present loan
repayment terms. Loans defined as impaired by Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," if any,
are included in nonaccrual loans above.
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RETURN ON EQUITY AND ASSETS AND SELECTED CAPITAL RATIOS
The following table shows consolidated operating and capital ratios of the
Registrant for each of the last three years:
Year Ended December 31,
-----------------------
2008 2007 2006
Percentage of net income to:
Average stockholders' equity 10.21% 9.49% 9.23%
Average total assets 1.46% 1.36% 1.31%
Percentage of dividends declared per
common share to net income per
common share 83.99% 88.54% 82.48%
Percentage of average stockholders'
equity to daily average total assets 14.33% 14.36% 14.16%
SHORT-TERM BORROWINGS
(Dollars in Thousands)
Information relating to short-term borrowings follows:
Federal Funds Purchased Other Short-
and Securities Sold Under term
Agreements to Repurchase Borrowings
Balance at December 31:
2008 $ - $ 3,911
2007 $ 12,851 $ 2,171
2006 $ - $ 3,470
Weighted average interest rate
at year end:
2008 -% 0.07%
2007 4.49% 4.13%
2006 -% 3.14%
Maximum amount outstanding at
any month's end
2008 $ 24,332 $ 3,911
2007 $ 38,083 $ 5,229
2006 $ 10,741 $ 3,470
Average amount outstanding
during the year:
2008 $ 4,949 $ 1,488
2007 $ 12,489 $ 1,494
2006 $ 3,022 $ 1,342
Average interest rate during
the year:
2008 1.96% 1.77%
2007 5.12% 4.84%
2006 5.40% 4.72%
10
Fed Funds purchased and securities sold under agreements to repurchase generally
mature within one to four days of the transaction date. Other short-term
borrowings generally mature within 90 days.
AVAILABLE INFORMATION
The Registrant maintains a website at www.tcnb.com. The Registrant makes
available through its website, free of charge, copies of its Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8K, and
amendments to the reports, as soon as reasonably practicable after the
Registrant electronically files those materials with, or furnishes them to, the
Securities and Exchange Commission (the "SEC"). The Registrant's SEC reports can
be accessed through the "About TCNB" link of its website. The Registrant's web
address is included as an inactive textual reference only and the information
thereon shall not be deemed to be incorporated by reference in this Report. Any
reference to an SEC report available on the Registrant's website is qualified
with reference to any later-dated SEC report, regardless of whether such
later-dated SEC report is immediately available on the Registrant's website.
11
Item 1A. RISK FACTORS
------------
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION AND RISK FACTORS.
The Registrant and its representatives may, from time to time, make written or
verbal forward-looking statements. Those statements relate to developments,
results, conditions or other events the Registrant expects or anticipates will
occur in the future. The Registrant intends words such as "believes,"
"anticipates," "plans," "expects" and similar expressions to identify
forward-looking statements. Without limiting the foregoing, those statements may
relate to future economic or interest rate conditions, loan losses and
allowances, loan and deposit growth, new branches and the competitive
environment. Forward-looking statements are based on management's then current
views and assumptions and, as a result, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Any such forward-looking statements are qualified by the following
important risk factors that could cause actual results to differ materially from
those predicted by the forward-looking statements.
An investment in the Registrant's common stock or other securities carries
certain risks. Investors should carefully consider the risks described below and
other risks, which may be disclosed from time to time in the Registrant's
filings with the SEC before investing in the Registrant's securities.
THE REGISTRANT AND THE BANK ARE AFFECTED BY CONDITIONS IN THE FINANCIAL MARKETS
AND ECONOMIC CONDITIONS GENERALLY.
The United States economy has been in a downward cycle since the end of 2007,
which has been marked by reduced business activity across a wide range of
industries and regions. Many businesses are experiencing serious difficulty due
to the lack of consumer spending and the lack of liquidity in the credit
markets. In addition, unemployment has increased significantly and continues to
grow.
The financial services industry and the securities markets generally have been
materially and adversely affected by significant declines in the values of
nearly all asset classes and by a serious lack of liquidity. This was initially
triggered by declines in home prices and the resulting impact on sub-prime
mortgages but has since spread to all mortgage and real estate asset classes, as
well as equity securities.
The economic downturn has also resulted in the failure of a number of prominent
financial institutions, resulting in further losses as a consequence of defaults
on securities issued by them and defaults under contracts with such entities as
counterparties. In addition, declining asset values, defaults on mortgages and
consumer loans, the lack of market and investor confidence and other factors
have all combined to cause rating agencies to lower credit ratings and to
otherwise increase the cost and decrease the availability of liquidity. Some
banks and other lenders have suffered significant losses and have become
reluctant to lend, even on a secured basis, due to the increased risk of default
and the impact of declining collateral values. In 2008, the U.S. government, the
Federal Reserve, and other regulators have taken numerous steps to increase
liquidity and to restore investor confidence, including investing in the equity
of other banking organizations. In spite of this, asset values have continued to
decline, and access to liquidity continues to be very limited.
UNCERTAINTY IN THE FINANCIAL MARKETS COULD RESULT IN LOWER FAIR VALUES FOR
INVESTMENT SECURITIES HELD BY REGISTRANT AND THE BANK.
The upheaval in the financial markets over the past year has adversely impacted
investor demand for all classes of securities and has resulted in volatility in
the fair values of our investment securities. Significant prolonged reduction in
investor demand could result in lower fair values for these securities and may
result in recognition of an other-than-temporary impairment charge, which would
have a direct adverse impact on results of operations.
WE MAY BE ADVERSELY AFFECTED BY THE SOUNDNESS OF OTHER FINANCIAL INSTITUTIONS.
Financial services institutions are interrelated as a result of trading,
clearing, counterparty, or other relationships. We routinely execute
transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, investment banks, and other institutional
clients. Many of these transactions expose us to credit risk in the event of a
default by a counterparty. In addition, our credit risk may be heightened when
the collateral we hold cannot be realized upon liquidation or is liquidated at
prices not sufficient to recover the full amount of the credit or derivative
exposure due to us. Any such losses could have a material adverse effect on our
financial condition and results of operations.
12
FLUCTUATING INTEREST RATES IMPACT OUR RESULTS OF OPERATIONS AND OUR EQUITY.
The results of operations for financial institutions may be materially and
adversely affected by changes in prevailing economic conditions, including rapid
changes in interest rates, changes in local market conditions, changes in the
habits of the public, declines in real estate market values, increases in tax
rates and other operating expenses, and the policies of regulatory authorities,
including the monetary and fiscal policies of the Federal Reserve. Changes in
the economic environment may influence the growth rate of loans and deposits,
the quality of the loan portfolio and loan and deposit pricing. While the Bank
has taken measures intended to manage the risks of operating in a changing
interest rate environment, there can be no assurance that such measures will be
effective in avoiding undue interest rate risk. The Bank is unable to predict
fluctuations of market interest rates, which are affected by many factors,
including inflation, recession, a rise in unemployment, tightening money supply,
and domestic and international disorder and instability in domestic and foreign
financial markets.
The Bank's profitability depends to a large extent upon its net interest income,
which is the difference (or "spread") between interest income received on
interest earning assets, such as loans and investments, and interest expense
paid on interest-bearing liabilities, such as deposits and borrowings. The
Bank's net interest spread and margin will be affected by general economic
conditions and other factors that influence market interest rates and the Bank's
ability to respond to changes in such rates. At any given time, the Bank's
assets and liabilities will be such that they are affected differently by a
given change in interest rates. As a result, an increase or decrease in rates
could have a positive or negative effect on the Bank's net income, capital and
liquidity.
The mismatch between maturities and interest rate sensitivities of balance sheet
items (i.e., interest-earning assets and interest-bearing liabilities) results
in interest rate risk, which risk will change as the level of interest rates
changes. The Bank's liabilities consist primarily of deposits, which are either
of a short-term maturity or have no stated maturity. These latter deposits
consist of NOW accounts, demand accounts, savings accounts, and money market
accounts. These accounts typically can react more quickly to changes in market
interest rates than the Bank's assets because of the shorter maturity (or lack
of maturity) and repricing characteristics of these deposits. Consequently,
sharp increases or decreases in market interest rates may impact the Bank's
earnings negatively or positively, respectively.
To manage vulnerability to interest rate changes, the Bank's management monitors
the Bank's interest rate risks. The Bank's officers have established investment
policies and procedures, which ultimately are reported to the Board of
Directors. Management and the Board of Directors generally meet quarterly and
review the Bank's interest rate risk position, loan and securities repricing,
current interest rates and programs for raising deposit-based maturity gaps,
including retail and non-brokered deposits, and loan origination pipeline. The
Bank's assets and liabilities maturing and repricing within one year generally
result in a negative one-year gap, which occurs when the level of liabilities
estimated to mature and reprice within one year are greater than the level of
assets estimated to mature and reprice within that same time frame. If interest
rates were to rise significantly, and for a prolonged period, the Bank's
operating results could be adversely affected. Gap analysis attempts to estimate
the Bank's earnings sensitivity based on many assumptions, including, but not
limited to, the impact of contractual repricing and maturity characteristics for
rate-sensitive assets and liabilities.
Changes in interest rates will also affect the level of voluntary prepayments on
the Bank's loans and the receipt of payments on the Bank's mortgage-backed
securities, resulting in the receipt of proceeds that the Bank may have to
reinvest at a lower rate than the loan or mortgage-backed security being
prepaid. Finally, changes in interest rates can result in the flow of funds away
from the banking institutions into investments in U.S. government and corporate
securities, and other investment vehicles that, because of the absence of
federal insurance premiums and reserve requirements, among other reasons,
generally can pay higher rates of return than banking institutions.
WE ARE VULNERABLE BECAUSE OF THE CONCENTRATION OF OUR BUSINESS IN A LIMITED
GEOGRAPHIC AREA, AND BECAUSE OF OUR FOCUS ON PROVIDING CERTAIN TYPES OF LOAN
PRODUCTS TO SMALL TO MEDIUM BUSINESS CUSTOMERS
Most of the Bank's loans are to businesses and individuals in Wisconsin (and,
more specifically, Milwaukee, Ozaukee, Racine and Waukesha Counties), and any
general adverse change in the economic conditions prevailing in these areas
could reduce the Bank's growth rate, impair its ability to collect loans or
attract deposits, and generally have an adverse impact on the results of
13
operations and financial condition of the Bank. If these areas experience
adverse economic, political or business conditions, the Bank would likely
experience higher rates of loss and delinquency on its loans than if its loans
were more geographically diverse.
One of the primary focal points of the Bank's business strategy is serving the
banking and financial services needs of small to medium-sized businesses in the
Bank's geographic region. Small to medium-sized businesses generally have fewer
financial resources in terms of capital or borrowing capacity than larger
entities. If general economic conditions deteriorate in the Milwaukee, Ozaukee,
Racine and Waukesha County regions of Wisconsin, the businesses of the Bank's
lending clients and their ability to repay outstanding loans may be negatively
affected. As a consequence, the Bank's results of operations and financial
condition may be adversely affected.
The Bank offers fixed and adjustable interest rates on loans, with terms of up
to 30 years. Although the majority of the residential mortgage loans that the
Bank originates are fixed-rate mortgages, adjustable-rate mortgage ("ARM") loans
increase the responsiveness of the Bank's loan portfolio to changes in market
interest rates. However, because ARM loans are more responsive to changes in
market interest rates than fixed-rate loans, ARM loans also increase the
possibility of delinquencies in periods of high interest rates.
The Bank also originates loans collateralized by mortgages on commercial real
estate and multi-family residential real estate. Since these loans usually are
larger than one-to-four family residential mortgage loans, they generally
involve greater risks than one-to-four family residential mortgage loans. In
addition, since customers' ability to repay these loans often is dependent on
operating and managing those properties successfully, adverse conditions in the
real estate market or the economy generally can impact repayment more severely
than loans collateralized by one-to-four family residential properties.
Moreover, the commercial real estate business is subject to downturns,
overbuilding and local economic conditions.
The Bank also makes construction loans for residences and commercial buildings,
as well as on unimproved property. While these loans enable the Bank to increase
the interest rate sensitivity of its loan portfolios and receive higher yields
than those obtainable on permanent residential mortgage loans, the higher yields
correspond to higher risk construction lending. These include risks associated
generally with loans on the type of property collateralizing the loan. Moreover,
commercial construction lending often involves disbursing substantial funds with
repayment dependent largely on the success of the ultimate project instead of
the borrower's or guarantor's ability to repay. Again, adverse conditions in the
real estate market or the economy generally can impact repayment more severely
than loans collateralized by one-to-four family residential properties.
THE REGISTRANT AND THE BANK OPERATE IN A HIGHLY REGULATED ENVIRONMENT, WHICH
COULD INCREASE OUR COST STRUCTURE OR HAVE ANOTHER NEGATIVE IMPACT ON OUR
OPERATIONS.
The Registrant and the Bank are subject to extensive state and federal
government supervision, regulation and control. Existing state and federal
banking laws subject the Registrant and the Bank to substantial limitations with
respect to loans, purchase of securities, payment of dividends and many other
aspects of the Bank's business. There can be no assurance that future
legislation or government policy will not adversely affect the banking industry
or the operations of the Bank, to the advantage of the Bank's non-bank
competitors. In addition, economic and monetary policy of the Federal Reserve
may increase the Bank's cost of doing business and affect its ability to attract
deposits and make loans. The techniques used by the Federal Reserve include
setting the reserve requirements of banks and establishing the discount rate on
bank borrowings. The policies of the Federal Reserve have a direct effect on the
amount of bank loans and deposits, and the interest rates charged and paid
thereon.
RECENT LEGISLATIVE AND REGULATORY ACTIONS TAKEN TO STABILIZE THE UNITED STATES
BANKING SYSTEM AND ADDITIONAL ACTIONS BEING CONSIDERED MAY NOT SUCCEED OR MAY
DISADVANTAGE US.
In response to the recent financial market crisis, the United States government,
specifically the Department of Treasury, Federal Reserve and FDIC, working in
cooperation with foreign governments and other central banks, has taken a
variety of extraordinary measures designed to restore confidence in the
financial markets and to strengthen financial institutions, including measures
available under the Emergency Economic Stability Act ("EESA"). The EESA
followed, and has been followed by, numerous actions by the Federal Reserve,
United States Congress, Department of Treasury, FDIC, SEC and others to address
the current liquidity and credit crisis. These measures include homeowner relief
that encourages loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
14
investment banks, the lowering of the Fed Funds rate; emergency action against
short selling practices; a temporary guaranty program for money market funds;
the establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; and coordinated international efforts to
address illiquidity and other weaknesses in the financial sector. The purpose of
these legislative and regulatory actions is to stabilize the U.S. banking
system. However, there can be no assurance as to the actual impact the EESA will
have on the financial markets, including the extreme levels of volatility and
limited credit availability currently being experienced by some institutions,
and they may not have the desired effects. If the volatility in the markets
continues and economic conditions fail to improve or worsen, our business,
financial condition, and results of operations could be materially adversely
affected.
The Treasury is currently developing additional programs to further alleviate
the ongoing financial crisis. There can be no assurance that we will be able to
participate in future programs. If we are unable to participate, it may have a
material adverse effect on our competitive position, financial condition and
results of operations.
WE ARE SUBJECT TO INCREASES in FDIC insurance premiums and a one-time special
ASSESSMENT BY THE FDIC.
Effective January 1, 2007, the FDIC adopted a risk-based system for assessment
of deposit insurance premiums under which all institutions are required to pay
at least minimum annual premiums. In addition, in an effort to replenish the
Deposit Insurance Fund in the wake of the recent increase in bank failures in
the United States, the FDIC changed its rate structure in December 2008 to
generally increase premiums effective for assessments in the first quarter of
2009. Further, in February 2009, the FDIC issued an interim rule to impose a
special one-time 20 bps assessment against all financial institutions in the
second quarter of 2009, payable in the third quarter of 2009. The system
categorizes institutions into one of four risk categories depending on
capitalization and supervisory rating criteria. Due to these changes to the FDIC
rate structure, our FDIC insurance expense could increase significantly for 2009
and have a material adverse effect on our results of operation.
IF WE HAVE SIGNIFICANT LOAN LOSSES, WE WOULD NEED TO FURTHER INCREASE OUR
ALLOWANCE FOR LOAN LOSSES AND OUR EARNINGS WOULD DECREASE.
The Bank's loan customers may not repay their loans according to their terms,
and the collateral securing the repayment of these loans may be insufficient to
assure repayment. The risk of nonpayment of loans is inherent in commercial
banking, and such nonpayment, if it occurs, may have a material adverse effect
on the Bank's results of operations and overall financial condition. The Bank's
management attempts to minimize its credit exposure by carefully monitoring the
concentration of its loans within specific industries and through prudent loan
underwriting and approval procedures, including a determination of the
creditworthiness of borrowers and the value of the assets serving as collateral
for repayment of certain loans. However, there can be no assurance that such
monitoring and procedures will reduce such lending risks.
IF WE HAVE UNDERESTIMATED OUR ALLOWANCE FOR LOAN LOSSES, WE MAY HAVE TO TAKE
ADDITIONAL CHARGES TO OUR INCOME TO RESTORE THE BALANCE IN ALLOWANCE.
The Bank makes various assumptions and judgments about the collectability of its
loan portfolio and provides an allowance for loan losses based on a number of
factors. The Bank's allowance for loan losses is established by management and
is maintained at a level considered adequate by management to absorb loan losses
that are probable and inherent in the Bank's portfolio. The amount of future
losses is susceptible to changes in economic, operating and other conditions,
including changes in interest rates, that may be beyond the Bank's control, and
such losses may exceed current estimates. Although the Bank's management
believes that the allowance for loan losses as of the end of each fiscal quarter
is adequate to absorb probable and estimatible losses in its portfolio of loans,
there can be no assurance that the allowance will prove sufficient to cover
actual loan losses in the future.
In addition, federal and state regulators periodically review the Bank's
allowance for loan losses and may require the Bank to increase its provision for
loan losses or recognize further loan charge-offs, based on judgments different
than those of the Bank's management. Any increase in the Bank's allowance for
loan losses or loan charge-offs as required by these regulatory agencies would
have a negative effect on the operating results of the Bank.
Non-performing loans at December 31, 2008 were $8.6 million, compared to $5.7
million at December 31, 2007. Management believes that the recent increase in
15
non-performing loans is a result of normal business fluctuations and the recent
downturn in the real estate loan market and the US and local economies in
general. No assurance can be given that non-performing loans will not increase
in the future.
WE ARE SUBJECT TO ENVIRONMENTAL LIABILITY RISK ASSOCIATED WITH COLLATERAL
SECURING OUR REAL ESTATE LENDING.
Because a significant portion of our loan portfolio is secured by real property,
from time to time we may find it necessary to foreclose on and take title to
properties securing such loans. In doing so, there is a risk that hazardous or
toxic substances could be found on those properties. If such substances are
found, we may be liable for remediation costs, as well as for personal injury
and property damage. We may also be required to incur substantial expenses that
could materially reduce the affected property's value or limit our ability to
use or sell the affected property. In addition, future environmental laws or
more stringent interpretations or enforcement policies with respect to existing
laws may increase our exposure to environmental liability. Although we are
careful to perform environmental reviews on properties prior to loan closing,
our reviews may not detect all environmental hazards.
AN INCREASE IN THE COMPETITION IN MARKETS THE BANK SERVE COULD NEGATIVELY IMPACT
OUR RESULTS.
The financial services industry is highly competitive. The Bank faces intense
competition from financial institutions in Milwaukee, Ozaukee, Racine and
Waukesha Counties and surrounding markets, and from non-bank financial
institutions, such as mutual funds, brokerage firms and insurance companies that
are aggressively expanding into markets traditionally served by banks. Many of
the Bank's non-bank competitors are not subject to the same degree of regulation
as are imposed on bank holding companies, federally insured banks and
Wisconsin-chartered state banks. As a result, such non-bank competitors may have
advantages over the Bank in providing certain services. The Bank also competes
indirectly with regional and national financial institutions, many of which have
greater liquidity, lending limits, access to capital and market recognition and
resources than the Bank. Expanded interstate banking may increase competition
from out-of-state banking organizations and other financial institutions. As a
relatively small bank, the Bank may lack the resources to compete effectively in
the financial services market.
THE BANK MAY NOT BE ABLE TO EFFECTIVELY IMPLEMENT NEW TECHNOLOGY, THAT COULD PUT
IT AT A COMPETITIVE DISADVANTAGE AND NEGATIVELY IMPACT ITS RESULTS.
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. The Bank's future success
will depend in part on its ability to address the needs of its customers by
using technology to provide products and services that will satisfy customer
demands for convenience as well as create additional efficiencies in the Bank's
operations. A number of the Bank's competitors may have substantially greater
resources to invest in technological improvements. There can be no assurance
that the Bank will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services
to its customers.
UNAUTHORIZED DISCLOSURE OF SENSITIVE OR CONFIDENTIAL CUSTOMER INFORMATION,
WHETHER THROUGH A BREACH OF THE BANK'S COMPUTER SYSTEM OR OTHERWISE, COULD
SEVERELY HARM THE BANK'S BUSINESS.
As part of the Bank's normal course of business, it collects, processes and
retains sensitive and confidential customer information. Despite the security
measures the Bank has in place, its facilities and systems, and those if its
third party service providers, may be vulnerable to security breaches, acts of
vandalism, computer viruses, misplaced or lost data, programming and/or human
errors, or other similar events. Any security breach involving the
misappropriation, loss or other unauthorized disclosure of confidential
information, whether by the Bank or its vendors, could severely damage its
reputation, expose it to the risk of litigation and liability, disrupt its
operations and harm its business.
THE REGISTRANT'S SHAREHOLDERS MAY NOT BE ABLE TO LIQUIDATE THEIR HOLDINGS OF THE
REGISTRANT'S COMMON STOCK WHEN DESIRED.
Shares of the Registrant's stock are thinly traded. While the stock is quoted on
the Over-the-Counter Bulletin Board, shareholders may be unable to resell their
stock quickly or on favorable terms.
16
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Tri City National Bank has thirty-seven locations in the Metropolitan Milwaukee
area, including Oak Creek, Milwaukee, Brookfield, Menomonee Falls, West Allis,
Hales Corners, Wauwatosa, Cedarburg, Sturtevant, South Milwaukee and Mount
Pleasant. The Bank owns fourteen of its locations and leases twenty-three
locations, including twenty-one full service banking centers located in grocery
stores.
Registrant believes that its bank locations are in buildings that are
attractive, efficient and adequate for their operations, with sufficient space
for parking and drive-in facilities.
Item 3. LEGAL PROCEEDINGS
The Registrant is not party to any material legal proceedings other than routine
litigation arising in the ordinary course of conducting the Registrant's and the
Bank's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2008 to a vote of
security holders.
17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICE FOR AND DIVIDENDS ON COMMON STOCK
Information pertaining to the Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters specified in Item 201 of
Regulation S-K and required under Item 5(a) of Form 10-K is incorporated herein
by reference to Registrant's 2008 Annual Report to Stockholders under the
caption entitled "Market for Corporation's Common Stock and Related Stockholder
Matters" (Page 30).
RECENT SALES OF UNREGISTERED SECURITIES
During the three-year period ended December 31, 2008, the Registrant sold a
total of approximately 284,895 unregistered shares of its common stock under its
Dividend Reinvestment Plan ("DRIP") at a per-share price of $19.35 per share and
aggregate consideration of approximately $5,513,000. All of these shares were
sold to persons who were shareholders of the Registrant as of the respective
dividend record dates who had elected to and participated in the DRIP from time
to time. At the time the DRIP was terminated in January 2008 there were
approximately 390 shareholders of the Registrant who were participants in the
DRIP. The shares were issued in lieu of cash dividends that would otherwise have
been paid to the participants.
All the shares issued under the DRIP, in excess of the original 250,000
registered shares, were offered and sold without registration under the
Securities Act of 1933 ("Securities Act") and no exemption from the registration
requirements of the Securities Act may have been available to the Registrant in
respect thereof. If these offerings were held to be in violation of the
Securities Act of 1933, the Registrant could be required to repurchase the
shares sold to purchasers in these offerings at the original purchase price,
plus statutory interest from the date of purchase, less dividends received by
purchasers on the shares, for a period of one year following the date of the
violation. The Registrant believes that any liability that could arise out of
its sale of securities without registration would not be material, although
there can be no assurance to such effect.
Although these shares were issued and sold without registration under the
Securities Act of 1933, they were nevertheless validly issued under the
Wisconsin Business Corporation Law and the Registrant's Articles of
Incorporation and are issued and outstanding for all purposes with all rights
(such as voting, dividend and liquidation rights) as all other issued and
outstanding shares of the Registrant's common stock.
Detailed historical information about the Registrant's sale of registered and
unregistered shares pursuant to the DRIP from October 2002 through termination
of the DRIP in January 2008 is included in Item 5. Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities in Registrant's Annual Report on Form 10-K for the year ended
December 31, 2007. Such information is incorporated herein by reference.
ISSUER PURCHASES OF EQUITY SECURITIES
The Registrant did not repurchase any shares of its common stock during the
fourth quarter of 2008.
Item 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to
Registrant's 2008 Annual Report to Stockholders under the caption entitled
"Selected Financial Data" (Page 30)
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required by Item 7 is incorporated herein by reference to
Registrant's 2008 Annual Report to Stockholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" (Pages 4 to 31).
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated herein by reference to
Registrant's 2008 Annual Report to Stockholders under the caption entitled
"Quantitative and Qualitative Disclosures About Market Risk" (Pages 24 to 27).
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference to
Registrant's 2008 Annual Report to Stockholders (Pages 32 to 61).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Item 9A(T). CONTROLS AND PROCEDURES
The Registrant maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed by it in the
reports filed by it under the Securities Exchange Act of 1934, as amended, is
recorded and processed, summarized and reported within the time periods
specified in the SEC's rules and forms. At year end, the Registrant carried out
an evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer of the
Registrant, of the effectiveness of the design and operation of the Registrant's
disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer of the Registrant concluded that the Registrant's disclosure controls
and procedures were effective as of the end of the period covered by this
report.
The Registrant's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in 13a-15(f) and
15d-15(f) under the Exchange Act. A company's internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Registrant, (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Registrant are being made only in accordance
with authorizations of management and directors of the Registrant; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Registrant's assets that
could have a material effect on interim or annual consolidated financial
statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
19
The Registrant's management, with the participation of its CEO and the CFO,
conducted an evaluation of the effectiveness of the Registrant's internal
controls over financial reporting as of December 31, 2008 based on the framework
and criteria established in Internal Controls - Integrated Framework, issued by
the Committee of Sponsoring Organizations of the Treadway Commission. This
evaluation included review of the documentation of controls, evaluation of the
design effectiveness of controls, testing of the operating effectiveness of
controls and a conclusion on this evaluation. Based on this evaluation,
management concluded that the Registrant's internal control over financial
reporting is effective as of December 31, 2008.
This annual report on Form 10-K does not include an attestation of the
Registrant's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Registrant's independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Registrant to provide
only management's report in this annual report on Form 10-K.
There have been no changes in the Registrant's internal control over financial
reporting identified in connection with the evaluation discussed above that
occurred during the Registrant's last fiscal quarter that have materially
affected, or are reasonable likely to materially affect, the Registrant's
internal control over financial reporting.
20
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference to
Registrant's definitive Proxy Statement for its annual meeting of stockholders
on June 10, 2009 ("The 2009 Proxy Statement") under the captions entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance".
The Registrant has a Code of Ethics that applies to its principal executive
officer, principal financial officer and principal accounting officer. Copies of
our Code of Ethics are available upon request, free of charge, by contacting the
Registrant at 6400 South 27th Street, Oak Creek, Wisconsin, 53154.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
2009 Proxy Statement under the caption entitled "Executive Compensation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference to the
2009 Proxy Statement under the caption entitled "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated herein by reference to the
2009 Proxy Statement under the caption entitled "Loans and Other Transactions
with Management".
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the
2009 Proxy Statement under the caption entitled "Principal Accountant Fees and
Services".
21
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial statements and financial statement schedules
------------------------------------------------------------------
The response to this portion of Item 15 is submitted as a
separate section of this report.
(3) Listing of Exhibits
Exhibit 3.1 - Restated Articles of Incorporation (incorporated herein
by reference to Exhibit 3.2 to Registrant's current
report on Form 8-K filed February 12, 2003).
Exhibit 3.2 - By-Laws (incorporated herein by reference to Exhibit 3.2
to Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000).
Exhibit 10.1* - Summary of compensation arrangements with certain
persons
Exhibit 10.2* - Summary of director compensation
Exhibit 10.3* - Description of consulting arrangements between
Registrant and Mr. William J. Werry.
Exhibit 10.4* - Summary of executive bonus arrangements
Exhibit 13 - Annual Report to Stockholders for the year ended December
31, 2008.
With the exception of the information incorporated by
reference into Items 5, 6, 7, 7A,and 8 of this Form 10-K,
the 2008 Annual Report to Stockholders is not deemed
filed as part of this report.
Exhibit 21 - Subsidiaries of Registrant.
Exhibit 23 - Consent of Virchow, Krause & Company, LLP
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a -14(a) or 15d-14(a) under the Securities and Exchange
Act of 1934, as amended
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a -14(a) or 15d-14(a) under the Securities and Exchange
Act of 1934, as amended
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
22
*A Management contract or compensation plan or arrangement
(b) Exhibits
See Item 15(a)(3)
(c) Financial Statement Schedules
See Item 15(a)(2)
23
PART IV
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1), (2) and (b)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
CERTAIN EXHIBITS
Year Ended December 31, 2008
TRI CITY BANKSHARES CORPORATION
OAK CREEK, WISCONSIN
24
FORM 10-K-ITEM 15(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
registered public accounting firm of Tri City Bankshares Corporation, included
in the annual report of the Registrant to its stockholders for the year ended
December 31, 2008, are incorporated by reference in Item 8:
Consolidated Balance Sheets-December 31, 2008 and 2007
Consolidated Statements of Income-Years ended December 31, 2008,2007 and 2006
Consolidated Statements of Stockholders' Equity-Years ended December 31,
2008, 2007 and 2006.
Consolidated Statements of Cash Flows-Years ended December 31, 2008, 2007 and
2006.
Notes to Consolidated Financial Statements-Years ended December 31, 2008,
2007 and 2006.
Report of Independent Registered Public Accounting Firm
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
nonapplicable and, therefore, have been omitted.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
BY: /s/ Ronald K. Puetz.
--------------------------------------------
Ronald K. Puetz, President, Chairman and CEO
Date: 03/26/09
--------
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/ Ronald K. Puetz President, Chairman, Chief 03/26/09
-------------------- Executive Officer and Director --------
Ronald K. Puetz (Principal Executive Officer)
/s/ Scott A. Wilson Executive Vice President, 03/26/09
-------------------- Chief Financial Officer, --------
Scott A. Wilson Treasurer and Director
/s/ Robert W. Orth Executive Vice President and 03/26/09
- --------------------- Director --------
Robert W. Orth
/s/ Scott D. Gerardin Senior Vice President, 03/26/09
--------------------- General Counsel and Director --------
Scott D. Gerardin
/s/ Thomas W. Vierthlaer Vice President and Comptroller 03/26/09
- ------------------------ (Principal Accounting Officer) --------
Thomas W. Vierthaler
/s/ Frank J. Bauer Director 03/26/09
- ------------------------ --------
Frank J. Bauer
/s/ William N. Beres Director 03/26/09
-------------------- --------
William N. Beres
/s/ Sanford Fedderly Director 03/26/09
- -------------------- --------
Sanford Fedderly
26
/s/ William Gravitter Director 03/26/09
- --------------------- --------
William Gravitter
/s/ Christ Krantz Director 03/26/09
- --------------------- --------
Christ Krantz
/s/ Brian T. McGarry Director 03/26/09
-------------------- --------
Brian T. McGarry
/s/ Agatha T. Ulrich Director 03/26/09
-------------------- --------
Agatha T. Ulrich
/s/ David A. Ulrich, Jr. Director 03/26/09
------------------------ --------
David A. Ulrich, Jr.
/s/ William J. Werry Director 03/26/09
- --------------------- --------
William J. Werry
27