FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-9785
TRI CITY BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
6400 S. 27th Street, Oak Creek, WI
----------------------------------------
(Address of principal executive offices)
53154
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Zip Code
(414) 761-1610
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares outstanding of $1.00 par value common stock, as of
September 30, 1999: 2,533,835.
2
FORM 10-Q
TRI CITY BANKSHARES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page #
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
for the Three Months ended September 30,
1999 and 1998 4
Consolidated Statements of Income
for the Nine Months ended September 30,
1999 and 1998 5
Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1999
and 1998 6
Notes to Unaudited Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3 Quantitative and Quantitative
Market Risk Disclosure 17
PART II - OTHER INFORMATION
Items 6 Exhibits and Reports on Form 8-K 18
Signatures 19
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS ...................................... September 30, December 31,
1999 1998
------------- -------------
Cash and due from banks ..................... $ 30,202,926 $ 44,001,647
Federal funds sold .......................... 0 32,200,000
------------- -------------
Cash and cash equivalents ................... 30,202,926 76,201,647
Investment securities:
Held-to-maturity (fair
value of 1999 - 151,683,606
1998 - 136,420,200) ........ 153,283,674 134,537,963
Loans ....................................... 312,438,378 277,184,364
Allowance for loan losses ................... (4,388,907) (4,244,745)
------------- -------------
Net Loans .................................. 308,049,471 272,939,619
Premises and equipment ................. 21,008,392 19,864,590
Other assets ........................... 7,280,708 6,708,412
------------- -------------
$ 519,825,171 $ 510,252,231
------------- -------------
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing ................... $ 127,143,284 $ 133,120,719
Interest bearing (over $100,000) ....... 27,212,000 28,247,266
Interest bearing ....................... 280,290,042 288,167,417
------------- -------------
Total Deposits ..................... 434,645,326 449,535,402
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 15,649,900 0
Other .............................. 5,309,224 827,355
------------- -------------
Total short-term borrowings ................ 20,959,124 827,355
Other Liabilities ........................... 2,434,078 1,371,614
------------- -------------
TOTAL LIABILITIES .................. 458,038,528 451,734,371
Stockholders' equity:
Cumulative preferred stock, par value
-$1 per share authorized - 200,000
shares; issued and outstanding-none
Common stock, par value-$1 per share
authorized-5,000,000 shares; Issued and
outstanding: 1999 - 2,533,835 shares;
1997 - 2,520,205 shar 2,533,835 2,520,205
Additional paid in capital .................. 10,181,022 9,726,974
Retained earnings ........................... 49,071,786 46,270,681
------------- -------------
TOTAL STOCKHOLDERS' EQUITY ......... 61,786,643 58,517,860
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .......... $ 519,825,171 $ 510,252,231
------------- -------------
See Notes to Unaudited Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
----------- -----------
Interest income:
Loans, including fees .................. $ 6,726,926 $ 6,579,926
Investment securities:
Taxable ............................ 992,297 960,712
Exempt from federal income tax ..... 956,987 813,729
Federal funds sold ..................... 9,556 246,060
----------- -----------
TOTAL INTEREST INCOME ......... 8,685,766 8,600,427
Interest expense:
Deposits ............................... 2,616,124 2,844,236
Short-term borrowings .................. 205,928 28,804
----------- -----------
TOTAL INTEREST EXPENSE ........ 2,822,052 2,873,040
----------- -----------
NET INTEREST INCOME ........... 5,863,714 5,727,387
Provision for loan losses ................... (75,000) (150,000)
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ..... 5,788,714 5,577,387
Other income:
Service charge income .................. 872,738 915,059
Rental income .......................... 238,488 236,923
Other .................................. 574,889 589,382
----------- -----------
TOTAL OTHER INCOME ............ 1,686,115 1,741,364
Other expense:
Salaries and employee benefits ......... 2,790,611 2,715,772
Net occupancy .......................... 809,688 657,063
Equipment .............................. 240,651 333,840
Data processing ........................ 274,450 151,250
Advertising ............................ 208,293 162,777
Regulatory Agency Assessments .......... 39,983 37,666
Office Supplies ........................ 141,807 126,538
Other .................................. 704,437 724,735
----------- -----------
TOTAL OTHER EXPENSE ........... 5,209,920 4,909,641
----------- -----------
Income before income taxes .................. 2,264,909 2,409,110
Provision for income taxes .................. 528,000 621,000
----------- -----------
NET INCOME .................... $ 1,736,909 $ 1,788,110
----------- -----------
Per share data:
Net income ............................. $ 0.69 $ 0.71
Dividends .............................. .30 .25
Average shares outstanding ............. 2,532,856 2,515,222
See Notes to Unaudited Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
------------ ------------
Interest income:
Loans, including fees .................. $ 19,210,777 $ 19,421,297
Investment securities:
Taxable ............................ 2,958,381 2,669,864
Exempt from federal income tax ..... 2,812,389 2,415,103
Federal funds sold ..................... 184,176 474,642
------------ ------------
TOTAL INTEREST INCOME ......... 25,165,723 24,980,906
Interest expense:
Deposits ............................... 7,836,535 8,171,350
Short-term borrowings .................. 283,441 161,414
------------ ------------
TOTAL INTEREST EXPENSE ........ 8,119,976 8,332,764
------------ ------------
NET INTEREST INCOME ........... 17,045,747 16,648,142
Provision for loan losses ................... (225,000) (450,000)
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ..... 16,820,747 16,198,142
Other income:
Service charge income .................. 2,460,246 2,605,924
Rental income .......................... 724,026 717,757
Other .................................. 1,915,360 1,749,440
------------ ------------
TOTAL OTHER INCOME ............ 5,099,632 5,073,121
Other expense:
Salaries and employee benefits ......... 8,207,831 8,116,343
Net occupancy .......................... 2,180,734 1,908,727
Equipment .............................. 962,317 979,527
Data processing ........................ 809,510 451,902
Advertising ............................ 492,848 376,512
Regulatory Agency Assessments .......... 120,747 112,738
Office Supplies ........................ 500,344 401,419
Other .................................. 2,080,615 1,932,465
------------ ------------
TOTAL OTHER EXPENSE ........... 15,354,946 14,279,633
------------ ------------
Income before income taxes .................. 6,565,433 6,991,630
Provision for income taxes .................. 1,492,000 1,791,000
------------ ------------
NET INCOME .................... $ 5,073,433 $ 5,200,630
------------ ------------
Per share data:
Net income ............................. $ 2.01 $ 2.07
Common stock investment ................ $ 24.44 $ 22.80
Dividends .............................. $ 0.900 $ 0.750
Average shares outstanding ............. 2,528,227 2,510,970
See Notes to Unaudited Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net income ............................. $ 5,073,433 $ 5,200,630
Adjustments to reconcile net
income to net cash provided
by operating activities:
Proceeds from sale of loans
held for sale ..................... 13,170,090 16,878,377
Origination of loans held
for sale .......................... (13,170,090) (16,878,377)
Amortization of investment
securities premiums and
accretion of discounts........... 154,778 84,764
Provision for loan losses .......... 225,000 450,000
Provision for depreciation ......... 1,405,437 1,312,512
Increase (decrease) in interest receiva (315,279) (640,431)
Increase (decrease) in interest payable ..... (46,773) 691,411
Other .............................. 852,221 487,276
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES .......... 7,348,817 7,586,162
INVESTING ACTIVITIES
Available for Sale:
Proceeds from maturities and redemptions
of investment securities ........... 0 3,000,000
Held to Maturity:
Proceeds from maturities and redemptions
of investment securities ........... 14,111,148 25,290,748
Purchase of investment securities ...... (33,011,638) (36,577,474)
Net increase in loans .................. (35,334,852) (4,025,726)
Purchases of premises and equipment .... (2,549,239) (2,024,812)
------------ ------------
NET CASH USED
BY INVESTING ACTIVITIES ...... (56,784,581) (14,337,264)
FINANCING ACTIVITIES
Sale of Common Stock ................... 467,678 404,135
Net increase (decrease) in deposits .... (14,890,076) 16,984,358
Net increase(decrease) in short-term
borrowings ......................... 20,131,769 (4,839,954)
Cash dividends ......................... (2,272,328) (1,880,752)
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .......... 3,437,043 10,667,787
------------ ------------
INCREASE IN CASH
AND CASH EQUIVALENTS ......... (45,998,721) 3,916,685
Cash and cash equivalents at the
beginning of the period ............ 76,201,647 44,707,888
------------ ------------
CASH AND CASH EQUIVALENTS
AT THE END OF THE PERIOD .... $ 30,202,926 $ 48,624,573
------------ ------------
See Notes to Unaudited Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the financial statements and the notes thereto incorporated herein by
reference to the Annual Report on Form 10-K of Tri City Bankshares Corporation
("Tri City") for the year ended December 31, 1998. In the opinion of Tri City's
management, the accompanying unaudited consolidated financial statements contain
all adjustments consisting of normal recurring accruals, necessary to present
fairly Tri City's financial position as of September 30, 1999 and the results of
its operations for the three month and nine month periods ended September 30,
1999 and 1998 and its cash flows for the nine month periods ended September 30,
1999 and 1998. The operating results for the first nine months of 1999 are not
necessarily indicative of the results which may be expected for the entire 1999
fiscal year.
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 which may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, but are not limited to, the following
possibilities: (i) lower than anticipated loan and deposit growth due to a
variety of factors, including changes in the interest rate environment and an
increase in competitive pressures in the banking and financial services
industry; (ii) insufficient reserves for loan losses; (iii) poorer than expected
general economic conditions; (iv) legislation or regulatory changes which
adversely affect the banking industry; and (v) other unanticipated occurrences.
CHANGES IN FINANCIAL POSITION
Net assets of Tri City Bankshares Corporation, (the"Corporation") have increased
$9.6 million (1.9%) during the nine month period ending September 30, 1999
compared to an increase of $17.3 million (3.8%) during the same period in 1998.
Loan growth was the primary contributor to this increase in 1999 with total
loans increasing $36.2 million (13.1%) during the first nine months compared to
an increase of $4.7 million (1.8%) during the first nine months of 1998.
Management has been pushing for an increase in loan growth as a means to better
invest funds into areas which will provide higher yields than what currently can
be achieved through investment securities. The reserve for loan losses only
increased $144,000 (3.4%) during the nine months ended September 30, 1999
compared to an increase of $419,000 (12.0%) during the nine months ended
September 30, 1998. Management has reviewed the adequacy of the Corporation's
reserve for loan loss, considering the quality of the loan portfolio, the level
of non-performing loans, loan portfolio size and composition, borrower financial
condition, general economic conditions, collateral adequacy and historical loss
experience. Since the history of the Corporation's loan charge-offs has declined
over the past several years, and there are currently no adverse trends in the
other factors, management believes that the allowance for loan loss can be
reduced and still provide adequately for loan losses which may occur during
1999. The ratio of the allowance for loan loss to loans decreased from 1.53% at
December 31, 1998 to 1.40% at September 30, 1999.
Investment securities have also increased $17.8 million (13.2%) during the first
nine months of 1999 compared to an increase of $10.5 million (8.5%) during the
same period in 1998. Although yields on investment securities are not very
lucrative at this time, the average yield derived from the investment portfolio
is still higher than the interest paid on funds sold. Currently the Corporation
is experiencing an average yield on securities of 6.5% in 1999 compared to an
average yield of 6.7% in 1998.
Since funds were used to purchase additional investment securities and to
finance new loans, the cash and cash equivalents of the Corporation decreased
$46.0 million (60.4%) during the first nine months of 1999 compared to an
increase of $3.9 million (8.8%) during the same period in 1998.
Total deposits decreased $14.9 million (3.3%) during the first nine months of
1999 compared to an increase of $17.0 million (4.3%) in the first nine months of
1998. Borrowings have increased $15.6 million in 1999 compared to a decrease of
$4.8 million in 1998. Other borrowings consist of tax deposits made by
individuals and businesses which are only submitted to the United States
Treasurers' office when called.
LIQUIDITY
Management has continued to monitor the Corporation's liquidity position by
reviewing the maturity distribution between interest earning assets and interest
bearing liabilities. Fluctuations in interest rates can be the primary cause for
the flow of funds into or out of a financial institution. Since interest rates
have been relatively stable, it is important to track the maturity of loans and
investments and match them to the maturity terms of time deposits. A sudden
rapid rise in rates could trigger a flow of funds into higher yielding
investments that may be offered within or outside the Corporation. The
Corporation continues to offer products that are competitive and hopefully will
encourage the depositor to leave his/her funds on deposit or add to them as well
to attract and maintain quality loans. Management believes that their efforts
will help to enhance the Corporation's ability to not only maintain its asset
base but also to help it grow.
CAPITAL RESOURCES
During the first quarter of 1999, the Corporation completed construction of a
new facility for its growing operations center. The cost of this building was
$2.2 million and was funded internally. This facility has enabled the
Corporation to better serve its customers and provide enough room for future
expansion in the years to come.
During the second quarter of 1999, the Oak Creek branch of the Corporation's
banking subsidiary was remodeled to enhance its appearance and better serve the
customers with an improved design. A new branch location was also opened during
the second quarter of 1999 in Sturtevant, Wisconsin. An existing building was
purchased and renovated for this purpose. All costs were funded internally and
borne by the Corporation's banking subsidiary. These new facilities are the main
reason that premises and equipment increased $1.1 million (5.8%) during the
first nine months of 1999.
At the end of June new equipment was installed to update the current proof area
of the Corporation's Operations Center. This equipment was necessary to enhance
the performance of the proof area and to be year 2000 compliant. Testing was
done during the last week of June and full operation was accomplished by July
15, 1999. The cost of this equipment was considered minimal and was funded
internally.
There are no other major projects scheduled at present, however management is
continually looking for new ways to better serve the Corporation's customers and
expand its operations.
RESULTS OF OPERATIONS
Three Months ended September 30, 1999:
The Corporation's net income for the third quarter of 1999 decreased $51,200
(2.9%) compared to an increase of $103,000 (6.1%) for the third quarter of 1998.
During the third quarter of 1999 interest income and fees on loans increased
$147,000 (2.2%) compared to a third quarter increase of $363,000 (5.8%) in 1998.
The majority of new loans were added during September and therefore the impact
of interest income will not be felt until the fourth quarter. Loan demand has
declined but management is optimistic that the Corporation will be able to
attract additional customers during the fourth quarter of 1999.
Interest income on Investment Securities has increased $174,800 (9.9%) during
the three months ended September 30, 1999 compared to an increase of $97,000
(5.8%) during the three months ended September 30, 1998. Management has
continued to keep the Corporation's funds working by investing in those items
which will achieve the best yield and will help to maximize profits.
Interest expense paid on deposits has decreased $228,100 (8.0%) during the third
quarter of 1999 compared to an increase of $215,000 (8.2%) during the third
quarter of 1998. Deposit balances have declined during 1999 which is the main
reason for this decrease in interest expense. Interest expense paid on borrowed
funds however, has increased $177,100 during this same period compared to no
change in the third quarter of 1998.
Other income declined $55,200 (3.2%) during the third quarter of 1999 compared
to an increase of $100,000 (6.1%) during the same period in 1998. This was due
to a decrease in service charges which is attributed to the decline in deposit
balances. Total other expenses have increased $300,300 (6.1%) during the third
quarter of 1999 compared to an increase of $298,000 (6.5%) in the third quarter
of 1998. Since the Corporation converted its data processing functions in
November of 1998, management has carefully monitored expenses associated with
the new system.
Occupancy expense has increased for the third quarter of 1999 $152,600 (23.2%)
primarily due to the additional expenses associated with the new building
occupied by the Corporation's operations center and the new branch bank located
in Sturtevant, Wisconsin. Data processing expenses have also increased $123,200
(81.5%) due to the new system which is year 2000 compliant.
A summarized change in income for the quarters appears below :
Three Months Ended September 30, September 30, 1999
1999 1999 Over (Under)
(Unaudited) (Unaudited) 1998
------ ------ -----
Revenue and Expenses: (000's)
Interest Income $8,686 $8,600 $ 86
Less: Interest Expense 2,822 2,873 (51)
------ ------ -----
Net Interest Income 5,864 5,727 137
Provision for Loan Loss 75 150 (75)
Other Operating Expenses
Net of Other Operating
Revenues 3,524 3,168 356
------ ------ -----
Income Before Income Taxes .. 2,265 2,409 (144)
Tax Provision 528 621 (93)
------ ------ -----
NET INCOME $1,737 $1,788 $ (51)
====== ====== =====
Nine Months ended September 30, 1999:
During the first nine months of 1999 the Corporation's net income decreased
$127,200 (2.4%) compared to an increase of $424,000 (8.9%) during the same
period in 1998. The conversion to the new data processing system and the
addition of new facilities for the Corporation's operations center in West Allis
and new branch bank in Sturtevant, Wisconsin have all accounted for increased
operational costs amounting to approximately $630,000 in additional expense for
the first nine months in 1999.
Interest income for the first nine months of 1999 increased $185,000 (0.7%)
compared to an increase of $957,000 (4.0%) after the first nine months of 1998.
Interest income on investment securities increased $685,800, while interest
income on loans and federal funds sold decreased $501,000 in 1999. The yield on
the loan portfolio decreased due to a lower average blance of loans outstanding
for the quarter. However, loans outstanding have increased at the end of the
quarter and therefore should result in an increase in loan interest income
during the fourth quarter of 1999. Since deposit balances have decreased the
Corporation has been in a borrowed position for the short term.
The favorable effect of the decrease in deposit balances in the first nine
months of 1999 is that interest expense on deposits has decreased $334,800
(2.4%) compared to an increase of $535,100 (7.0%) during the nine months ended
September 30, 1998. Interest expense on borrowed funds however has increased
$122,000 (75.6%) in 1999 compared to a decrease of $165,000 (50.5%) in 1998 for
the same nine month period.
Other income during the nine months ended September 30, 1999 increased $26,500
compared to an increase of $482,000 (10.5%). Other expenses increased $1.1
million (7.5%) in the first nine months of 1999 compared to an increase of
$659,000 (4.8%) in the first nine months of 1998. The increased costs can be
attributed to the new data processing system. Occupancy expense has increased
$272,000 (14.3%) and data processing expense has increased $357,600 (79.1%) in
the first nine months of 1999 compared to decreases of $30,000 (1.5%) and $5,700
(1.2%) in 1998, respectively.
CAPITAL ADEQUACY
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 8.0% of which 4.0% must be comprised of tier
1 capital.
The federal banking 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 risk-based capital ratio for the Corporation
is 19.24% and its leverage ratio is 11.91%. YEAR 2000 PROBLEM
At midnight on December 31, 1999, unless the proper modifications have been
made, the program logic in many computer systems may produce erroneous results
because, among other things, the systems will incorrectly read the date
"01/01/00" as being January 1 of the year 1900 or another incorrect date. In
addition, certain systems may fail to detect that the year 2000 is a leap year.
Problems can also arise earlier than January 1, 2000 as dates in the next
millennium are entered into non-Year 2000 compliant programs.
COMPLIANCE PROGRAM
In order to address the Year 2000 Problem and to minimize its potential adverse
impact, in 1997 the Corporation initiated a corporate wide project to address
the impact of the Year 2000 Problem on its computer application systems,
information technology (IT) related equipment, system software, building
controls, and non-IT embedded systems found in such equipment as security
systems, currency counters, and elevators. The evaluation of Year 2000 issues
included an assessment of the potential impact of the Year 2000 Problem on the
Corporation including monitoring significant customers, service suppliers and
other parties material to the Corporation's operations; testing changes provided
by these suppliers; and developing contingency plans for any critical systems
that are not effectively reprogrammed. In the course of this evaluation, the
Corporation has sought written assurances from such third parties as to their
state of Year 2000 readiness. The Corporation's Year 2000 Compliance Program is
divided into five phases: (1)awareness; (2)assessment; (3)renovation;
(4)validation; and (5)implementation.
THE CORPORATION'S STATE OF READINESS
Work on the Year 2000 project has been prioritized in accordance with risk. The
highest priority has been assigned to activities that would disrupt the accuracy
and delivery of the Corporation's banking services to its customers. Next is an
assessment of the potential credit risk to the Corporation resulting from its
credit customers' state of Year 2000 readiness, or lack thereof, and the
potential impact of those efforts on the customers' ability to meet contractual
payment obligations. The lowest priority has been assigned to activities that
would cause inconvenience or productivity loss in normal business operations
such as issues related to internal office machinery, heating and air
conditioning systems and elevators.
The Corporation has substantially completed all phases of the plan. Because the
Corporation outsources its data processing, a significant component of the Year
2000 Compliance Program is working with external vendors to test and certify
that their systems are Year 2000 compliant. During the week of November 16,
1998, the Corporation converted to a new primary Data Service provider, which is
on schedule with its remediation to become Year 2000 compliant. The Corporation
is performing a variety of tests to determine the proper functionality of the
new platform and monitoring the proxy testing being performed by the primary
Data Service provider. The Corporation's other external vendors have surveyed
their programs to inventory the necessary changes and have begun correcting the
applicable computer programs and replacing equipment so that the Corporation's
information systems are substantially Year 2000 compliant as of June 30, 1999.
This will enable the Corporation to devote substantial time to the testing of
the upgraded systems prior to the arrival of the new millennium. The Corporation
has completed its timetable for carrying out its plans to address Year 2000
issues.
The Corporation has also conducted an evaluation of its significant credit
customers to determine their state of Year 2000 readiness. Evaluations were
completed for all customers whose outstanding loan balance or loan commitment
exceeded $250,000. In addition, as part of its ongoing credit underwriting
practices, all new and renewed loans must have a Year 2000 risk assessment
completed and reported as part of the loan approval process. Based upon the
information received from these surveys, the Corporation does not expect to
experience any material collection problems resulting from its customers' Year
2000 readiness or lack thereof.
COST TO ADDRESS YEAR 2000 COMPLIANCE ISSUES
Managing the Year 2000 Project will result in additional direct and indirect
costs to the Corporation. Based upon current internal studies, as well as
recently solicited bids from various computer hardware and software vendors, the
Corporation estimates the total direct cost of remediating the issues discovered
in its assessment of the Year 2000 problem to be $600,000 and $800,000. During
the review of the Corporation's operation, a decision was made to upgrade
hardware and much of the Corporation's dated technology, which had been in use
for 8 - 12 years. The upgrades are expected to result in greater employee
efficiencies and enhanced products for the Corporation's customers. The total
costs of upgrades is $2.2 million. Any remaining costs related to resolving the
Year 2000 Problem will be expended in 1999. The Corporation expects to fund
these expenditures through internal sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors.
RISK OF NONCOMPLIANCE AND CONTINGENCY PLANS
The major applications which pose the greatest Year 2000 risks to the
Corporation if the Year 2000 implementation of the Year 2000 Project is not
successful, are the Corporation's data services systems supported by third-party
vendors, loan customers' ability to meet contractual payment obligations in the
event the Year 2000 Problem has a significant negative impact to their business,
internal computer networks, and item processing equipment which renders
customers' bank statements and banking transactions. The potential problems
which could result from the inability of these applications to correctly process
the Year 2000 are the inaccurate calculation of interest income and expense,
service delivery interruptions to the Corporation's banking customers, credit
losses resulting from the Corporation's loan customers' inability to make
contractual credit obligations, interrupted financial data gathering, and poor
customer relations resulting from inaccurate or delayed transaction processing,
respectively.
Although the Corporation has completed substantially all Year 2000 remediation
and testing activities as of September 30, 1999, and although the Corporation
has initiated Year 2000 communications with significant customers, key vendors,
service providers, and other parties material to the Corporation's operations
and is diligently monitoring the progress of such third parties in their Year
2000 compliance, such third parties nonetheless represent a risk that cannot be
assessed with precision or controlled with certainty. For that reason, the
Corporation has developed contingency plans to address alternatives in the event
that Year 2000 failures of automatic systems and equipment occur. Such plans
address substantially all control components and management feels the remaining
areas are risk managable.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's Annual Report on Form 10-K for the year ended December 31,
1998, contains certain disclosures about market risks affecting the Corporation.
There have been no material changes to the information provided which would
require additional disclosures as of the date of this filing.
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
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27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
DATE: November 9,1999 /s/Henry Karbiner, Jr.
-------------------- ----------------------------
Henry Karbiner,Jr., President
(Chief Executive Officer)
DATE: November 9, 1999 /s/Thomas W. Vierthaler
-------------------- ----------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule