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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Tri City Bankshares Corporation
Year ended December 31, 2000
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Dear Shareholders,
To paraphrase a recent article from Federal Reserve, the economic experience of
2000 was similar to riding in a car that slows from 90 miles per hour to 60
miles per hour. As the 5.2% growth rate of the first half of 2000 was reduced to
2.2% and 1.1% in the third and fourth quarters the question became, "How slow?"
The Federal Reserve subsequently reduced the discount rate three times in the
first quarter, a 1.5% reduction in all.
Despite slowing in the second half, the continued economic expansion during the
year 2000 provided a robust setting for the continued growth and profitability
of Tri City Bankshares. We all watched the stock market soar to unprecedented
levels only to come crashing back to earth. As you know, we do not invest your
money in the stock market. We prefer, instead, to invest dollars helping
Milwaukee area residents buy homes, send their kids to college and buy a new car
or two. We also appreciate the opportunity to lend to solid businesses that
grow, provide jobs and promote the economic vitality of Southeastern Wisconsin.
Both these strategies - providing exceptional service to consumers and
businesses - helped Tri City report record growth in 2000.
As you will see in the accompanying financial statements, Tri City Bankshares
earned a record $7.88 million in 2000, a 12.4% increase from 1999. A key reason
for the growth in profitability was a 13.4% increase in loan volume. This
increase of $42.9 million in loans to the community was the end result of both
strategies successfully deployed. As we move forward into 2001, we expect to
keep Tri City growing as it has for nearly four decades.
During the past year the Comptroller of the Currency approved the addition of
another location. The new office at 2115 So. 10th Ave in South Milwaukee, WI
brings our total to 32 locations throughout the Milwaukee area. Our Oak Creek
roots give us excellent name recognition in this neighboring community and we
believe the departure of a competing national bank from the downtown South
Milwaukee area creates a great opportunity.
During the past year we also made the commitment to offer alternate, non-FDIC
insured products to our customers. Tri City Investment Services began offering
annuities, mutual funds and other packaged products in January 2001. In keeping
with our passion for personal service, our broker-representatives can transact
business with customers at any of our locations by appointment. While still in
its infancy, we see Tri City Investment Services providing a strong alternative
for our customers looking for other types of investments.
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During the past year Tri City has also put a significant effort in the
development of an Internet banking product. We have managed our Internet
strategy with a careful eye on electronic bill presentment. We believe this
aspect of e-commerce will drive businesses and consumers to utilize the Internet
in significantly increasing numbers. While the main players in electronic bill
presentment are still emerging, our web site is open and will be ready when
billers make e-bills the preferred delivery method. Customers have already begun
to use the newly opened Tri City National Bank web site (visit us at
www.tcnb.com) to perform a wide array of banking activities online. Funds
transfer, electronic bill pay, account inquiry, stop payments and check orders
are gaining popularity as are loan applications and new account requests.
You can rest assured that our Internet strategy includes our brand of customer
service. Unlike the Internet-only banks that offer no branch network to their
customers, or some banks that direct users away from the branch, Tri City has
given the customer service bankers in our lobbies Internet access and training
to handle customer inquiries. Once again, Tri City will be a service leader,
providing 24x7 online support through the Internet in most cases, but also
giving Internet assistance in person for those times when a customer just wants
to come in, sit down and talk to a banker.
We feel the future looks bright for Tri City. Earnings are strong for the first
quarter and we have the new initiatives as discussed for 2001. Perhaps most
important is this aspect: despite the slowing economy, our loan portfolio is as
strong and problem-free as ever. The board of directors and management continue
to apply our conservative lending and underwriting standards to protect and
enhance your investment as we build toward the future.
Sincerely,
Henry Karbiner, Jr.
Chairman, President, CEO
TRI CITY BANKSHARES Corporation
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Directors and Officers of the Corporation
DIRECTORS
Frank J. Bauer President of Frank Bauer Construction Company, Inc.
Sanford Fedderly Retired Registered Pharmacist
William Gravitter President of Hy-View Mobile Home Court, Inc.
Henry Karbiner, Jr. Chairman of the Board, President and Chief Executive Officer
of the Corporation ; Chairman of the Board and Chief
Executive Officer of Tri City National Bank; Director of
Roundy's, Inc.
William L. Komisar Partner, Komisar Brady & Co., LLP, CPA
Christ Krantz Vice President of K.R.K., Inc. (corporation owning Ramada -
Airport Motel, Milwaukee) and partner in Veterans Linen
Supply Company
Rudie L. Lauterbach Accountant, Elm Grove, Wisconsin
William P. McGovern Attorney-at-Law, Milwaukee, Wisconsin
Robert W. Orth Executive Vice President of Tri City National Bank, and Senior
Vice President of the Corporation
Ronald K. Puetz Executive Vice President of the Corporation; President and
Chief Operating Officer of Tri City National Bank
John M. Rupcich Vice President - Real Estate of the Corporation; Independent
Investor; Retired President of N.D.C., Inc.; Retired
Executive Vice President and Director of Mega Marts, Inc.;
Director of N.D.C., LLC
Agatha T. Ulrich Chairman and Director of N.D.C., LLC, President and Director of
the David A. and Agatha T. Ulrich Foundation, Inc.
David A. Ulrich, Jr. Independent Investor; Retired Vice President and Director of
Mega Marts, Inc.; Retired Vice President and Director of
N.D.C., Inc.; Director of the David A. and Agatha T.
Ulrich Foundation, Inc.
William J. Werry Retired Unit President of Tri City National Bank
Scott A. Wilson Senior Vice President, Secretary of the Corporation;
Executive Vice President, Secretary of Tri City National Bank
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Directors and Officers of the Corporation (continued)
OFFICERS
Henry Karbiner, Jr. Chairman of the Board, President and Chief Executive Officer
Ronald K. Puetz Executive Vice President
Robert W. Orth Senior Vice President
Scott A. Wilson Senior Vice President and Secretary
John M. Rupcich Vice President - Real Estate
Thomas W. Vierthaler Vice President and Comptroller
George E. Mikolajczak Vice President - Human Resources
Gary J. Hafemann Assistant Vice President and Auditor
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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 of 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.
FINANCIAL CONDITION
Assets of the Corporation increased $33.9 million (6.4%)in 2000 compared to an
increase of $18.9 million (3.7%) in 1999. The economy continued to grow at a
more moderate pace and was plagued by the instability in the investment sector.
Consumer confidence, however, remained a positive factor in the Corporation's
increase in both asset growth and income.
Cash and cash equivalents decreased $272,000 (0.6%) during 2000 compared to a
decrease of $30.7 million (40.3%) during 1999. The 1999 decrease is the result
of strong loan demand with the planned transfer of cash into loan assets. The
matching of funds from deposit growth, the bank's funding from customer
repurchasing agreements, and the reduction of funds being invested in securities
into loan assets flowed evenly. As a result, the Corporation had little need for
federal funds sold, or cash equivalent investments. As a result of the bank's
strong loan demand, management has not reinvested funds from maturing securities
back into other investment instruments. Therefore, investment securities have
decreased $7.7 million (5.4%) during 2000 compared to an increase of $7.5
million (5.6%) in 1999. The yield on new loans was more appealing and the bank's
investment portfolio was sufficient to provide the bank with necessary
liquidity.
Loan balances increased $42.9 million (13.4%) during 2000 compared to an
increase of $41.7 million (15.0%) during 1999. Loan demand has continued to
remain high despite predictions of a recession from some sectors of the economy.
Strong consumer confidence continues to help the Corporation to grow at a steady
pace. Management has worked hard to increase the production of new loans and has
been competitive in their approach to attract new customers. Average loan
balances increased $45.8 million in 2000 which indicates that the Corporation
was able
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to maintain its existing loan portfolio as well as attract new customers.
The allowance for loan losses of $4,521,465 increased $181,100 (4.2%) during the
year 2000 compared to an increase of $95,600 (2.2%) during 1999. The provision
for loan losses increased to $300,000 in 2000, as compared to $225,000 in 1999.
Although loan balances increased 13.4% in 2000, losses charged against the
allowance for loan losses continued to be less than those experienced by banks
our size, and the allowance is considered to be adequate. Management continues
to monitor the loan portfolio and tries to maintain a quality base for future
growth. By maintaining a low level of problem loans as well as charged off
loans, the Corporation has been able to enhance earnings through the reduction
of expenses associated with loan losses and collection of non-performing loans.
Loans in a non-accrual status as of December 31 were $214,000 and $595,000 in
2000 and 1999, respectively.
During 2000 total deposits increased $10.7 million (2.3%) compared to an
increase of $9.9 million (2.2%) in 1999. Management has placed high importance
on deposit growth, and continues in their efforts to attract new deposits to the
Corporation. The Corporation continues to offer competitive rates as well as
several convenient locations with attractive hours to potential and existing
customers.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
Liquidity is defined as the Corporation's ability to generate adequate amounts
of cash to pay obligations as they mature, to maintain lending capacity, and to
provide for planned growth while maximizing the bank's return on its
investments. Monitoring the correlation between interest earning assets and
interest bearing liabilities is one means of accomplishing this task.
Fluctuations in interest rates can be the main cause for the flow of funds
either into or out of a financial institution. As interest rates rise,
depositors attempt to maximize yields on investments without sacrificing
liquidity and thus deposits may increase while loans decline. A decrease in
rates will stimulate the demand for loans, while discouraging deposit growth.
Management has been diligent in growing its core deposit base and maintaining a
low borrowing position for the Corporation so that as these fluctuations occur,
the Corporation can respond more readily.
The banking subsidiary of the Corporation has the ability to borrow up to $45.0
million through prearranged federal funds facilities, and an additional $17.0
million under reverse repurchase agreements, through its correspondent banks. In
addition to its correspondent facilities, the subsidiary also has a $43.8
million credit facility through the Federal Reserve Bank of Chicago. These
arrangements are further discussed in Note 12 of the consolidated financial
statements.
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Federal law restricts extensions of credit by a bank to its parent bank holding
company and, with certain exceptions, to other affiliates and the amount of
dividends the Corporation's subsidiary may pay to the parent bank holding
company. Note 13 to the consolidated financial statements discuss the
application of these limitations to the Corporation and its subsidiary bank.
In addition to the repayment of loans, scheduled maturities of marketable
investment securities are significant sources of liquidity. Securities maturing
in one year or less amounted to $11.9 million at December 31, 2000, representing
8.9% of total investment securities. The Corporation has not, in the past,
relied on sales of investment securities to meet its liquidity needs, and
management does not intend to do so in the future.
CAPITAL RESOURCES
During the first quarter of 2000 the Corporation completed its acquisition of a
building site in the Southeastern corner of Milwaukee County. The site was the
location of a competitor who chose to combine two facilities into a single
location in another community. With good name recognition and a reasonable
market penetration already in the area, management saw an opportunity. A new
facility is under construction and will be completed and in operation during the
second quarter of 2001. The cost of this construction is expected to be about
$1.2 million and will be funded internally.
The Corporation is also in the process of remodeling its subsidiary branch
location in West Allis, Wisconsin. The cost of this project is estimated at
$300,000 and will be funded internally. This remodeling should be completed
sometime during the first quarter of 2001.
During 2000 Tri City National Bank also committed to the development and
deployment of an internet banking product. Vendors are researched and contracted
for website design and hosting, and for on-line banking services. The project
began in the third quarter of 2000. Project costs to date are $150,000 and will
be funded internally. The development of both the website and the on-line
banking module will be completed by the second quarter of 2001 and made
available to customers at that time. There are no other major projects currently
underway.
The OCC has issued guidelines, which impose certain risk-based capital and
leverage standards upon national banks. These guidelines, as well as the capital
requirements of bank regulators, are discussed in Note 8 to the consolidated
financial statements. Failure to meet applicable capital guidelines could
subject a national bank to a variety of enforcement remedies available to the
federal regulatory authorities.
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The Corporation continues to exceed the minimum capital ratios. It is the
Corporation's policy to avoid those categories of assets classified by the
capital requirements as having higher credit risk, and to avoid highly leveraged
or foreign loans. The Corporation's banking subsidiary believes it will continue
to exceed the "risk-based" capital requirements and continue to meet regulatory
definitions of "well capitalized."
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
During 2000 net income for the Corporation increased $867,000 (12.4%) compared
to an increase of $43,000 (0.6%) in 1999. Management has been able to attract
new clientele through various marketing promotions and by maintaining the
banking subsidiary's competitive pricing structure.
Interest income and fees on loans increased $4.7 million (18.1%) in 2000
compared to an increase of $318,000 (1.2%) in 1999. Average loans outstanding
increased by $45.8 million in 2000 and generated a yield which was approximately
24 basis points higher than in 1999. This was the primary source of increase in
net income for the Corporation. Management's review standards for all loans have
enabled the Corporation to experience continued low nonperforming loan ratios
and charge-off's during the past several years.
Investment securities' interest income has decreased $595,700 (7.8%) in 2000
compared to an increase of $549,900 (7.7%) during 1999. Management has not been
replacing called or matured investment securities because its strong loan demand
has required the use of these funds. The investment securities, which are
currently available, do not offer yields which could compete with the yields
attained on loans. Management reviews both the investment securities portfolio
as well as the loan portfolio and tries to maintain a workable balance in both
for liquidity and yield.
Other income increased $572,700 in 2000 primarily due the gain realized on the
sale of the Corporation's investment in the First National Bank of Eagle River,
Eagle River Wisconsin. Other expenses decreased $364,400 (12.6%) in 2000
compared to an increase of $1.2 million (6.0%) in 1999.
Interest expense on deposits and short-term borrowings increased $2.7 million
(24.4%) during 2000 compared to a decrease of $208,000 (1.9%) during 1999. The
Corporation entered into several short term funding agreements at the end of the
first quarter of 2000. These agreements provided the Corporation a lower cost of
borrowed funds, and an opportunity to improve earnings through short term
investing of these funds. The yield on time and saving deposits averaged about
3.63% during 2000 compared to a 3.38% yield during 1999.
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Occupancy and equipment expenses increased only slightly during 2000 since there
were no major projects underway during the year. The new facility in South
Milwaukee, Wisconsin is not expected to add any major expense during 2001. The
effective tax rate for the Corporation was 26.8% and 22.6% in 2000 and 1999
respectively.
1999 COMPARED TO 1998
Net income for the Corporation increased $43,000 (0.6%) during 1999 compared to
an increase of $478,000 (7.4%) during 1998. The Corporation was able to increase
net income despite increased expenses associated with the banking subsidiary's
conversion of data processing providers in November 1998, increased costs
related to the new operations center and the expansion of the branch network in
Sturtevant, Wisconsin.
Interest and fees on loans have increased $318,000 (1.2%) in 1999 compared to an
increase of $919,000 (3.7%) in 1998. This increase was primarily due to the
increase in average loans outstanding and partially offset by a decrease in
average yields. Most of this growth occurred during the fourth quarter of 1999.
Management has been diligent in their efforts to attract new customers, make new
loans in the community and maintain portfolio credit quality. Their conservative
review of all loan applications has enabled the Corporation to experience a very
low nonperforming loan ratio and charge-off history.
Interest income on investment securities, including federal funds sold,
decreased $70,000 (0.9%) during 1999 compared to an increase of $527,800 (7.2%)
during 1998. The decline resulted primarily from decreases in the average
balance in federal funds sold and yields on other investment securities offset
by increases in the average balance of other investment securities. The
Corporation invested funds primarily in municipal securities in order to
maximize after-tax yields.
There was little change in other income while other expenses increased $1.2
million (6.0%) in 1999 compared to an increase of $962,000 (5.2%) in 1998. The
majority of the increase is due to increased data processing charges stemming
from the conversion to a new processor in November of 1998. Charges for data
processing increased $431,000 (66.5%) for the year. This increase was necessary
in order to upgrade all of the Corporation's systems to be Year 2000 compliant
and to allow the bank to make operational improvements.
Interest expense on deposits and short-term borrowings decreased $208,000 (1.9%)
in 1999 compared to an increase of $513,000 (4.8%) in 1998. The average yield on
saving and time deposits was 3.38% in 1999 compared to an average yield of 3.77%
in 1998.
Occupancy expense increased in 1999 $415,000 (16.7%) due to the additional
facilities placed in operation for our operations center and a new branch office
in Sturtevant, Wisconsin. The banking facility was opened in order to better
serve our customers from this location and the surrounding area.
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Management is prepared to lead the Corporation into the next millennium and to
continue to prosper and grow. Management is confident that the Corporation's
family of employees will help to ensure its continued growth. The effective tax
rate for the Corporation was 22.6% in 1999 and 25.6% in 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of a financial institution are monetary
in nature. Therefore, the effects of inflation on financial institutions differ
greatly from most commercial and industrial companies that have significant
investments in fixed assets or inventories. The growth of total assets in the
banking industry caused by inflation results in the need to increase equity
capital in order to maintain an appropriate equity-to-assets ratio. The
Corporation's management recognizes the need to both control asset growth and
maintain a reasonable dividend policy in order to promote the adequate internal
growth of capital and provide an appropriate dividend yield to its shareholders.
Another significant effect of inflation is on other expenses, which tend to rise
during periods of general inflation.
Management believes the most significant impact on inflation and changing prices
on financial results is the Corporation's ability to react to changes in
interest rates. Management attempts to maintain a reasonably balanced position
between interest-rate sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Corporation's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure.
Interest rate risk (IRR) is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value; however, excessive
levels of IRR could pose a significant threat to the Corporation's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Corporation's safety and soundness.
When assessing IRR, the Corporation seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Corporation to assess the
existing and potential future effects of changes in interest rates on its
consolidated financial condition, including capital adequacy, earnings,
liquidity and, where appropriate, asset quality.
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Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest rate
changes. For example, assume that an institution's assets carry intermediate- or
long-term fixed rates and that those assets are funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or, possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest rate ceilings, or rate-sensitive
assets are funded by longer-term, fixed-rate liabilities in a decreasing rate
environment.
Several ways an institution can manage IRR include: selling existing assets or
repaying certain liabilities; matching repricing periods for new assets and
liabilities, for example, by shortening terms of new loans or investments; and
hedging existing assets, liabilities or anticipated transactions. An institution
might also invest in more complex financial instruments intended to hedge or
otherwise change IRR. Interest rate swaps, futures contracts, options on futures
and other such derivative financial instruments often are used for this purpose.
Because these instruments are sensitive to interest rate changes, they require
management expertise to be effective. The Corporation has not purchased
derivative financial instruments in the past and does not presently intend to
purchase such instruments.
Financial institutions are also subject to prepayment risk in falling rate
environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refund its obligations at new, lower
rates. Prepayments of assets carrying higher rates reduce the Corporation's
interest income and overall asset yields. Certain portions of an institution's
liabilities may be short-term or due on demand, while most of its assets may be
invested in long-term loans or investments. Accordingly, the Corporation seeks
to have in place sources of cash to meet short-term demands. These funds can be
obtained by increasing deposits, borrowing or selling assets. Also, short-term
borrowings provide additional sources of liquidity for the Corporation.
The following tables summarize interest rate sensitive assets and liabilities by
year of maturity as of December 31, 2000 and 1999.
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Tri City Bankshares Corporation
Quantitative Disclosures of Market Risk
December 31, 2000
(In Thousands)
PRINCIPAL AMOUNT MATURING IN FAIR VALUE
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2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00
---- ---- ---- ---- ---- ---------- ----- --------
Rate-sensitive assets:
Fixed interest rate loans $ 97,638 $71,431 $89,985 $21,241 $11,709 $ 8,303 $300,307 $295,655
Average interest rate 8.43% 8.22% 8.52% 7.85% 8.14% 8.04% 8.34%
Variable interest rate
loans $ 28,276 $7,186 $ 3,738 $ 2,433 $ 4,623 $15,209 $ 61,464 $ 60,512
Average interest rate 9.32% 9.62% 6.62% 9.30% 9.32% 8.10% 9.07%
Fixed interest rate securities $ 11,939 $21,220 $27,805 $31,080 $23,475 $18,768 $134,287 $134,173
Average interest rate 4.61% 4.90% 5.21% 5.33% 5.66% 4.68% 5.14%
Other interest bearing
assets $ 1,336 $1,336 $ 1,336
Average interest rate 6.26% 6.26%
Rate-sensitive liabilities:
Savings and interest-bearing
checking $193,072 $193,072 $193,072
Average interest rate 2.91% 2.91%
Time deposits $ 94,927 $27,550 $ 6,158 $ 2,026 $ 9,884 $ 0 $140,546 $140,756
Average interest rate 5.67% 6.38% 5.80% 5.25% 6.23% 0.00% 5.85%
Variable interest rate
borrowings $ 22,020 $ 22,020 $ 22,020
Average interest rate 6.08% 6.08%
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Tri City Bankshares Corporation
Quantitative Disclosures of Market Risk
December 31, 1999
(In Thousands)
PRINCIPAL AMOUNT MATURING IN FAIR VALUE
----------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
---- ---- ---- ---- ---- ---------- ----- ----------
Rate-sensitive assets:
Fixed interest rate loans $ 85,681 $64,887 $65,515 $30,845 $19,071 $10,097 $276,096 $270,271
Average interest rate 8.25% 8.15% 7.97% 7.60% 7.59% 7.44% 8.01%
Variable interest rate
loans $ 21,365 $ 3,921 $ 2,355 $ 733 $ 2,095 $12,334 $ 42,803 $ 41,090
Average interest rate 8.65% 8.53% 8.65% 8.46% 8.53% 7.99% 8.44%
Fixed interest rate securities $ 6,731 $13,209 $21,455 $27,234 $31,095 $42,298 $142,022 $139,238
Average interest rate 5.57% 4.55% 4.91% 5.20% 5.33% 5.23% 5.15%
Other interest bearing
assets $ 2,700 $ 2,700 $ 2,700
Average interest rate 4.67% 4.67%
Rate-sensitive liabilities:
Savings and interest-bearing
checking $211,699 $211,699 $211,699
Average interest rate 2.39% 2.39%
Time deposits $ 88,638 $17,558 $ 4,294 $ 5,016 $ 4,185 $ -- $119,691 $119,798
Average interest rate 5.07% 5.25% 5.81% 5.77% 5.17% 0.00% 5.16%
Variable interest rate
borrowings $ 4,579 $ 4,579 $ 4,579
Average interest rate 5.05% 5.05%
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Tri City Bankshares Corporation
Selected Financial Data
2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
Total interest income $38,564,214 $33,788,288 $33,540,240 $32,109,169 $30,114,579 $27,724,625 $24,503,080
Total interest expense 13,640,563 10,962,687 11,170,653 10,657,307 10,645,630 9,468,149 6,859,209
Net interest income 24,923,651 22,825,601 22,369,587 21,451,862 19,468,949 18,256,476 17,643,871
Provision for loan losses 300,000 225,000 600,000 600,000 300,000 248,139 375,000
Net interest income after
provision for loan losses 24,623,651 22,600,601 21,769,587 20,851,862 19,168,949 18,008,337 17,268,871
Income before income taxes 10,769,069 9,066,001 9,370,239 8,910,197 7,761,293 7,509,719 6,769,767
Net income 7,880,069 7,013,001 6,970,239 6,492,197 5,807,293 5,350,578 4,876,814
Net income per share 3.08 2.77 2.77 2.60 2.34 2.17 2.04
Cash dividends declared per share 1.40 1.20 1.00 .85 .70 .50 .40
Average daily balances: (In Thousands)
Total assets $ 546,183 $ 507,232 $ 465,437 $ 436,204 $ 410,975 $ 371,795 $ 340,502
Total net loans 339,243 293,541 269,773 257,907 237,524 220,969 197,540
Total investment securities 136,523 150,943 126,641 120,792 115,810 105,758 96,810
Total deposits 440,620 435,046 404,305 376,093 358,296 324,469 294,568
Total stockholders' equity 65,427 60,144 55,122 50,266 45,677 41,532 36,051
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Tri City Bankshares Corporation
Market for Corporation's Common Stock
and Related Stockholder Matters
The Corporation's common stock is not traded on any exchange or in the
over-the-counter market. The price ranges reflected in the following table show
sales prices in isolated sales of which the Corporation has knowledge.
2000 1999
---- ----
High Low High Low
---- --- ---- ---
Price range:
First quarter $ 38.05 $ 37.25 $34.30 $33.75
Second quarter 39.00 38.35 35.10 34.55
Third quarter 39.95 39.30 36.05 35.45
Fourth quarter 40.90 40.25 36.95 36.35
As of December 31, 2000, the number of holders of record of the Corporation's
common stock was 746.
The Corporation declared four quarterly cash dividends in 2000 in the amount of
$0.35 per share. These dividends were declared on January 7, April 12, July 12
and October 11, payable on January 18, April 19, July 20 and October 19,
respectively. Quarterly dividends of $0.30 per share were declared during each
of the four quarters of 1999.
The Corporation is not party to any loan agreement, indenture or other agreement
which restricts its ability to pay dividends; however, the Wisconsin Business
Corporation Law authorizes directors to declare and pay cash dividends only out
of the Corporation's unreserved and unrestricted earned surplus. See Note 13 to
the consolidated financial statements for restrictions imposed by regulatory
agencies upon the subsidiary bank's ability to transfer funds to the parent
corporation.
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Report of Independent Auditors
Board of Directors
Tri City Bankshares Corporation
We have audited the accompanying consolidated balance sheets of Tri City
Bankshares Corporation as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tri
City Bankshares Corporation at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
February 16, 2001
Milwaukee, Wisconsin
15
18
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2000 1999
------------- -------------
ASSETS
Cash and due from banks $ 43,873,802 $ 42,781,918
Federal funds sold 1,335,776 2,700,000
------------- -------------
Cash and cash equivalents 45,209,578 45,481,918
Investment securities held to maturity (fair value of
$134,164,593--2000 and $139,237,806--1999) 134,287,069 142,022,068
Loans 361,771,147 318,899,435
Less allowance for loan losses (4,521,465) (4,340,357)
------------- -------------
Net loans 357,249,682 314,559,078
Premises and equipment 21,593,336 20,824,179
Other assets 4,735,268 6,303,572
------------- -------------
$ 563,074,933 $ 529,190,815
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 136,522,645 $ 128,079,686
Interest-bearing - over $100,000 44,214,855 26,092,149
Interest-bearing - other 289,403,636 305,298,102
------------- -------------
Total deposits 470,141,136 459,469,937
Reserve repurchase agreements 19,787,032 --
Short-term borrowings 2,233,059 4,579,060
Other liabilities 2,017,264 2,016,985
------------- -------------
Total liabilities 494,178,491 466,065,982
Stockholders' equity:
Common stock, $1 par value:
Authorized - 5,000,000 shares
Issued and outstanding (2000--2,575,797 shares;
1999--2,538,232 shares) 2,575,797 2,538,232
Additional paid-in capital 11,757,507 10,335,369
Retained earnings 54,563,138 50,251,232
------------- -------------
Total stockholders' equity 68,896,442 63,124,833
------------- -------------
$ 563,074,933 $ 529,190,815
============= =============
See accompanying notes.
16
19
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
2000 1999 1998
----------- ----------- -----------
Interest income:
Loans, including fees $30,591,678 $25,911,622 $25,593,267
Investment securities:
Taxable 3,480,675 3,891,009 3,855,225
Exempt from federal income tax 3,596,888 3,782,237 3,268,120
Federal funds sold 894,973 203,420 823,628
----------- ----------- -----------
Total interest income 38,564,214 33,788,288 33,540,240
Interest expense:
Deposits 11,383,039 10,503,566 10,987,242
Short-term borrowings 2,257,524 459,121 183,411
----------- ----------- -----------
Total interest expense 13,640,563 10,962,687 11,170,653
----------- ----------- -----------
Net interest income 24,923,651 22,825,601 22,369,587
Provision for loan losses 300,000 225,000 600,000
----------- ----------- -----------
Net interest income after provision for loan losses 24,623,651 22,600,601 21,769,587
Other income:
Service charges 2,925,366 3,301,439 3,440,023
Rental income 1,006,234 971,584 958,866
Gain on sale of loans 17,578 35,451 98,719
Other 3,213,046 2,640,375 2,428,912
----------- ----------- -----------
Total other income 7,162,224 6,948,849 6,926,520
Other expenses:
Salaries and employee benefits 11,669,021 10,818,947 10,751,993
Occupancy 2,916,829 2,897,760 2,483,067
Equipment 1,445,745 1,353,479 1,390,623
Data processing 1,140,979 1,079,788 648,559
Advertising and promotional 550,357 621,221 430,338
Regulatory agency assessments 206,487 161,081 150,268
Office supplies 568,658 666,126 609,380
Other 2,518,730 2,885,047 2,861,640
----------- ----------- -----------
Total other expenses 21,016,806 20,483,449 19,325,868
----------- ----------- -----------
Income before income taxes 10,769,069 9,066,001 9,370,239
Income taxes 2,889,000 2,053,000 2,400,000
----------- ----------- -----------
Net income $ 7,880,069 $ 7,013,001 $ 6,970,239
=========== =========== ===========
Net income per share $ 3.08 $ 2.77 $ 2.77
=========== =========== ===========
Average shares outstanding 2,556,178 2,530,520 2,513,003
=========== =========== ===========
See accompanying notes.
17
20
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Common Additional Retained Comprehensive
Stock Paid-In Capital Earnings Income Total
----- --------------- -------- ------ -----
Balances at January 1, 1998 $ 2,503,118 $ 9,209,826 $ 41,810,248 $ (25,511) $ 53,497,681
Net income -- -- 6,970,239 -- 6,970,239
Change in net unrealized loss on
investment securities
available-for-sale (net of tax) -- -- -- 25,511 25,511
------------
Comprehensive income 6,995,750
------------
Cash dividends declared--$1.00
per share -- -- (2,509,806) -- (2,509,806)
Common stock issued under
dividend reinvestment
plan--17,103 shares 17,103 517,642 -- -- 534,745
Common stock fractional shares
redeemed (16) (494) -- -- (510)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 2,520,205 9,726,974 46,270,681 -- 58,517,860
Net income -- -- 7,013,001 -- 7,013,001
Cash dividends declared--$1.20
per share -- -- (3,032,450) -- (3,032,450)
Common stock issued under
dividend reinvestment
plan--18,039 shares 18,039 608,790 -- -- 626,829
Common stock fractional shares
redeemed (12) (395) -- -- (407)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1999 2,538,232 10,335,369 50,251,232 -- 63,124,833
Net income -- -- 7,880,069 -- 7,880,069
Cash dividends declared--$1.40
per share -- -- (3,568,163) -- (3,568,163)
Common stock issued under
dividend reinvestment
plan--37,595 shares 37,595 1,423,271 -- -- 1,460,866
Common stock fractional shares
redeemed (30) (1,133) -- -- (1,163)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 $ 2,575,797 $ 11,757,507 $54,563,138 $ -- $ 68,896,442
============ ============ =========== ============ ============
See accompanying notes.
18
21
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 7,880,069 $ 7,013,001 $ 6,970,239
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of loans held for sale 5,010,060 13,812,028 27,184,355
Origination of loans held for sale (5,010,060) (13,812,028) (27,184,355)
Provision for loan losses 300,000 225,000 600,000
Depreciation on premises and equipment 1,836,314 1,957,472 1,703,716
Amortization of premiums and accretion of
discounts on investment securities 220,488 215,260 (87,426)
Undistributed earnings of affiliate -- (94,346) (107,708)
Decrease (increase) in interest receivable (298,366) (7,633) (168,846)
Increase (decrease) in interest payable 389,003 (329) 37,994
Other (1,165,124) 1,152,519 (53,650)
------------ ------------ ------------
Net cash provided by operating activities 9,162,384 10,460,944 8,894,319
INVESTING ACTIVITIES
Proceeds from repayment, calls and maturities of
investments available for sale -- -- 3,000,000
Proceeds from repayment, calls and maturities of
investment securities held to maturity 8,514,506 25,312,273 43,663,386
Purchases of investment securities held to
maturity (1,000,000) (33,011,638) (54,714,850)
Net increase in loans (43,018,594) (41,844,459) (9,640,727)
Net purchases of premises and equipment (2,605,471) (2,917,061) (3,441,381)
Proceeds from sale of unconsolidated subsidiary 2,671,064 -- --
------------ ------------ ------------
Net cash used by investing activities (35,438,495) (52,460,885) (21,133,572)
FINANCING ACTIVITIES
Sale of common stock 1,459,703 626,422 534,235
Net increase in deposits 10,671,200 9,934,535 50,592,032
Net increase (decrease) in short-term borrowings 17,441,031 3,751,705 (4,883,449)
Cash dividends (3,568,163) (3,032,450) (2,509,806)
------------ ------------ ------------
Net cash provided by financing activities 26,003,771 11,280,212 43,733,012
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (272,340) (30,719,729) 31,493,759
Cash and cash equivalents at beginning of year 45,481,918 76,201,647 44,707,888
------------ ------------ ------------
Cash and cash equivalents at end of year $ 45,209,578 $ 45,481,918 $ 76,201,647
============ ============ ============
Supplementary information:
Interest paid $ 13,251,560 $ 10,964,981 $ 11,144,358
Income taxes paid 2,685,000 1,395,000 2,445,000
See accompanying notes.
19
22
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ACCOUNTING POLICIES
The accounting policies followed by Tri City Bankshares Corporation (the
Corporation) and the methods of applying those principles which materially
affect the determination of its financial position, cash flows or results of
operations are summarized below.
ORGANIZATION
Tri City Bankshares Corporation and its wholly owned subsidiary, Tri City
National Bank (the Bank), provide banking services to domestic markets,
primarily in the metropolitan Milwaukee, Wisconsin, area. The Corporation and
its subsidiary are subject to competition from other financial institutions. The
Corporation and its subsidiary are also subject to the regulations of certain
federal agencies and undergo periodic examinations by these regulatory
authorities.
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiary. All significant intercompany balances and transactions have
been eliminated. The Corporation's investment in an unconsolidated affiliated
bank (see Note 4) is recorded using the equity method of accounting prior to its
sale in 2000.
USE OF ESTIMATES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts of assets and liabilities
as of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, interest-bearing deposits and federal
funds sold.
20
23
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Debt securities are classified as held-to-maturity and carried at amortized cost
if management has the intent and ability to hold the securities to maturity.
Securities not classified as held-to-maturity are designated as
available-for-sale and carried at fair value, with unrealized gains and losses
net of income taxes, reflected in stockholders' equity.
Interest and dividends are included in interest income from the related
securities as earned. Realized gains and losses are computed on a specific
identification basis and declines in value judged to be other than temporary are
included in gains (losses) on sale of securities.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation. The
cost of premises and equipment is depreciated using the straight-line method
over the estimated useful lives of the assets. Repairs and maintenance costs are
expensed as incurred.
INTEREST ON LOANS
Interest on loans is computed on a daily basis based on the principal amount
outstanding. The accrual of interest income is discontinued when a loan becomes
90 days past due as to principal or interest. Management may elect to continue
the accrual of interest when the estimated fair value of collateral is
sufficient to cover the principal balance and accrued interest.
LOAN FEES AND RELATED COSTS
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amounts are being amortized as an adjustment of
the related loan's yield. The Corporation is amortizing these amounts using the
level-yield method over the contractual life of the related loans. The net
deferred amounts related to loans sold are recognized as income at the time of
sale. Fees related to stand-by letters of credit are recognized over the
commitment period.
21
24
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is composed of specific and general valuation
allowances. The Corporation establishes specific valuation allowances on
income-producing real estate loans considered impaired. A loan is considered
impaired (and a specific valuation allowance established for an amount equal to
the impairment) when the carrying amount of the loan exceeds the present value
of the expected future cash flows, discounted at the loans original effective
interest rate, or the fair value of the underlying collateral. General valuation
allowances are based on an evaluation of the various risk components that are
inherent in the credit portfolio. The risk components that are evaluated include
past loan loss experience; the level of nonperforming and classified assets;
current economic conditions; volume, growth and composition of the loan
portfolio; adverse situations that may affect the borrower's ability to repay;
the estimated value of any underlying collateral; peer group comparisons;
regulatory guidance; and other relevant factors.
The allowance is increased by provisions charged to earnings and reduced by
charge-offs, net of recoveries. Management may transfer reserves between
specific and general valuation allowances as considered necessary. The adequacy
of the allowance for loan losses is approved quarterly by the Corporations board
of directors. The allowance reflects management's best estimate of the reserves
needed to provide for the impairment of income-producing real estate loans, as
well as other credit risks of the Banks and is based on a risk model developed
and implemented by management and approved by the Corporation's board of
directors.
A substantial portion of the Bank's loans are to customers located in
southeastern Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is susceptible to changes in
market conditions in that area.
ADVERTISING COSTS
All advertising costs incurred by the Corporation are expensed in the period in
which they are incurred.
INCOME TAXES
The Corporation and its subsidiary file a consolidated federal income tax
return. The subsidiary provides for income taxes on a separate-return basis and
remits to the Corporation amounts determined to be currently payable.
22
25
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
The Corporation accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts estimated to
be receivable or payable based on current tax law and the Corporation's tax
status.
PER SHARE DATA
Basic earnings per share are based on the weighted average number of shares of
common stock outstanding during each year. The Company has no potentially
dilutive securities outstanding during the three years ended December 31, 2000.
INTERIM FINANCIAL DATA
The interim financial data (see Note 17) is unaudited; however, in management's
opinion, the interim data includes all adjustments, consisting only of normal,
recurring adjustments necessary for a fair presentation of results for the
interim periods.
SEGMENT REPORTING
The Corporation has determined that it has one reportable segment - commercial
banking. The Corporation offers the following products and services to external
customers: deposits and loans; and, to a much lesser extent, leases space in
branch facilities to third parties. Revenues for each of these products and
services are disclosed in the consolidated statements of income.
PENDING ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (as amended), provides a
comprehensive and consistent standard for the recognition of derivatives and
hedging activities. SFAS 133 requires all derivatives to be recorded on the
balance sheet at fair value. However, special accounting is provided for certain
derivatives that meet the definition of hedges. Changes in the fair value of
derivatives that do not meet the definition of hedges are required to be
reported in earnings in the period of change. The Company does not use
derivative financial instruments such as futures, swaps, caps floors, options or
interest or principal-only strips of similar instruments. Therefore, SFAS
No. 133 is not expected to have a significant impact on the Company. The Company
will implement this statement on January 1, 2001.
23
26
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Additionally, SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued in September 2000. This
Statement replaces SFAS No. 125 on the same topic and requires few changes in
accounting principle for mortgage banking activities, such as that of the
Company. Because mortgage servicing assets of this Company are not significant,
this statement is not expected to noticeably impact the Company.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The subsidiary bank is required to maintain non-interest-earning reserve
balances with the Federal Reserve Bank or in vault cash. The amount of the
reserve requirement as of December 31, 2000, was approximately $10,790,000.
3. INVESTMENT SECURITIES
The amortized cost and fair values of investments in debt securities were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
At December 31, 2000:
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 53,954,624 $ 31,633 $ 393,149 $ 53,593,108
Obligations of states and political
subdivisions 80,332,445 510,180 271,141 80,571,485
------------ ------------ ------------ ------------
$134,287,069 $ 541,813 $ 664,290 $134,164,593
============ ============ ============ ============
At December 31, 1999:
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 56,445,675 $ 8,380 $ 1,788,910 $ 54,665,145
Obligations of states and political
subdivisions 85,576,393 175,716 1,179,448 84,572,661
------------ ------------ ------------ ------------
$142,022,068 $ 184,096 $ 2,968,358 $139,237,806
============ ============ ============ ============
24
27
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 2000, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers or issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 11,939,371 $ 11,937,588
Due after one year through five years 103,579,956 103,478,866
Due after five years through ten years 18,767,742 18,748,139
------------ ------------
$134,287,069 $134,164,593
============ ============
There were no sales of securities in 2000, 1999 or 1998. At December 31, 2000,
investment securities with a carrying value of $102,611,807 were pledged as
collateral to secure public funds, customer deposits and various borrowing
arrangements.
4. SALE OF INVESTMENT IN AFFILIATE BANK
In January of 2000, the Corporation sold its 23.54% ownership interest of First
National Bank of Eagle River (FNER), which was accounted for using the equity
method of accounting. Gain on sale of the investment of $810,748 in 2000 and
equity in income of FNER's income of $0, $94,346 and $107,709 for 2000, 1999 and
1998, respectively are included in other income in the consolidated statements
of income.
5. LOANS
Loan balances classified by type were as follows:
DECEMBER 31
2000 1999
------------ ------------
Commercial $ 38,012,000 $ 26,954,000
Real estate - construction 19,733,000 16,503,000
Real estate - mortgage:
Single family 144,827,000 131,902,000
Multi-family 10,347,000 10,971,000
Nonresidential 121,313,000 105,084,000
Installment 27,539,000 27,485,000
------------ ------------
$361,771,000 $318,899,000
============ ============
25
28
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LOANS
In the ordinary course of business, the Bank grants loans to related parties,
which include certain directors and officers of the Corporation, and entities in
which such persons are principal shareholders. These loans are made at terms
which do not vary from terms that would have been obtained if the transactions
had been with unrelated parties and do not involve more than normal risk of
collectibility. Loans outstanding at December 31, 2000 and 1999, to such related
parties approximated $1,408,000 and $1,512,000, respectively. During 2000 and
1999, $757,000 and $911,000 of new loans were made and repayments totaled
$861,000 and $702,000, respectively.
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 2000, were as follows:
2000 1999 1998
---------- ---------- ----------
Balance at beginning of year $4,340,357 $4,244,745 $3,500,050
Provision for loan losses 300,000 225,000 600,000
Loans charged off (200,754) (186,000) (154,513)
Recoveries on loans charged off 81,862 56,612 299,208
---------- ---------- ----------
Balance at end of year $4,521,465 $4,340,357 $4,244,745
========== ========== ==========
Nonaccrual loans totaled approximately $214,000 and $595,000 at December 31,
2000 and 1999, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following:
DECEMBER 31
2000 1999
------------ ------------
Land $ 4,818,476 $ 4,779,602
Buildings and leasehold improvements 22,229,601 20,735,023
Furniture and equipment 8,970,778 8,404,936
------------ ------------
36,018,855 33,919,561
Less accumulated depreciation (14,425,519) (13,095,382)
------------- -------------
$ 21,593,336 $ 20,824,179
============ ============
26
29
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REGULATORY CAPITAL
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation and
the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require minimum amounts and ratios (set forth in the table below) of total and
Tier I capital to risk-weighted assets, and of Tier I capital to average assets,
those terms are defined in the regulations. Management believes, as of December
31, 2000, that both the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Office of the
Comptroller of Currency categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios of 10%, 6% and 5%, respectively. There are no
conditions or events since that notification that management believes have
changed the institution's category.
27
30
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REGULATORY CAPITAL (CONTINUED)
The actual and required capital amounts and ratios were as follows:
For Capital
Actual Adequacy Purposes
-------------------- ----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
AS OF DECEMBER 31, 2000
Total Capital
(to Risk-Weighted Assets):
Consolidated $73,418,000 19.31% $30,414,000 8.0%
Tri City Bank 69,362,000 18.27 30,379,000 8.0
Tier I Capital
(to Risk-Weighted Assets):
Consolidated 68,896,000 18.12 15,207,000 4.0
Tri City Bank 64,841,000 17.08 15,190,000 4.0
Tier I Capital - Leverage ratio
(to Average Assets):
Consolidated 68,896,000 12.64 21,807,000 4.0
Tri City Bank 64,841,000 11.90 21,790,000 4.0
AS OF DECEMBER 31, 1999
Total Capital
(to Risk-Weighted Assets):
Consolidated $67,457,000 19.47% $27,724,000 8.00%
Tri City Bank 64,615,000 18.77 27,533,000 8.00
Tier I Capital
(to Risk-Weighted Assets):
Consolidated 63,125,000 18.22 13,862,000 4.00
Tri City Bank 60,312,000 17.52 13,767,000 4.00
Tier I Capital - Leverage ratio
(to Average Assets):
Consolidated 63,125,000 12.12 20,830,000 4.00
Tri City Bank 60,312,000 11.63 20,736,000 4.00
28
31
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLAN
The Corporation has a contributory defined-contribution 401(k) plan. This plan
covers all employees who have attained the age of 21 and completed one year of
service. Participants may contribute a portion of their compensation (up to IRS
limits) to the plan. The Corporation may make regular and matching contributions
to the plan each year. In 2000, 1999 and 1998, the Corporation provided a
dollar-for-dollar match of employee contributions up to 5% of their
compensation. Participants direct the investment of their contributions into one
or more investment options. The Corporation recorded expense of $263,096,
$289,475 and $244,745 for 2000, 1999 and 1998, respectively.
10. INCOME TAXES
The significant components of income tax expense for each of the three years in
the period ended December 31, 2000, were:
2000 1999 1998
---------- ---------- ----------
Federal $2,505,000 $1,798,000 $2,127,000
State 384,000 255,000 273,000
---------- ---------- ----------
$2,889,000 $2,053,000 $2,400,000
========== ========== ==========
Current $3,258,000 $2,201,000 $3,096,000
Deferred expense (benefit) (369,000) (148,000) (696,000)
---------- ---------- ----------
$2,889,000 $2,053,000 $2,400,000
========== ========== ==========
Differences between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before income taxes for
each of the three years in the period ended December 31, 2000, were as follows:
2000 1999 1998
----------- ----------- -----------
Income before income taxes $10,769,069 $ 9,066,001 $ 9,370,239
=========== =========== ===========
Income tax at statutory rate $3,661,483 $ 3,082,440 $3,185,881
Increase (reduction) resulting from:
Tax-exempt interest income (1,084,714) (1,164,147) (994,994)
State income taxes, net of federal tax benefit 253,440 168,300 180,180
Other 58,791 (33,593) 28,933
----------- ----------- -----------
$ 2,889,000 $ 2,053,000 $ 2,400,000
=========== =========== ===========
29
32
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The components of the Corporation's net deferred income tax asset were as
follows:
2000 1999
----------- -----------
Deferred tax assets:
Loan loss reserves $ 1,576,000 $ 1,442,000
Excess servicing gains 23,000 32,000
State net operating loss carryforwards -- 55,000
Depreciation -- 20,000
Other 5,000 8,000
----------- -----------
1,604,000 1,557,000
----------- -----------
Deferred tax liabilities:
Depreciation (19,000) --
Safe harbor lease (145,000) (159,000)
Deferred loan fees (310,000) (124,000)
Undistributed earnings of an unconsolidated subsidiary -- (528,000)
Other -- (2,000)
----------- -----------
(474,000) (813,000)
Valuation allowance (65,000) (48,000)
----------- -----------
Net deferred tax asset $ 1,065,000 $ 696,000
=========== ===========
11. LEASES
The Corporation leases various banking facilities under operating lease
agreements from companies held by an estate of a former director and major
shareholder of the Corporation. All of the agreements include renewal options
and one agreement requires the Bank to pay insurance, real estate taxes and
maintenance costs associated with the lease. Rental amounts are subject to
annual escalation based upon increases in the Consumer Price Index. Aggregate
rental expense under the leases amounted to $495,293 in 2000, $541,554 in 1999
and $534,105 in 1998.
30
33
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LEASES (CONTINUED)
Future minimum rentals, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 2000:
Year ending December 31:
2001 $ 478,208
2002 442,135
2003 368,555
2004 and thereafter 1,278,358
-----------
Total minimum future rentals $ 2,567,256
===========
12. SHORT-TERM BORROWINGS
The Bank has the ability to borrow federal funds of up to $45,000,000 under a
revolving line-of-credit agreement with lenders. Such borrowings bear interest
at the lender bank's announced daily federal funds rate and mature daily. There
were no federal funds borrowings outstanding at December 31, 2000 or 1999. In
addition, the Bank may borrow under customer repurchase agreements. The Bank
borrowed $19,787,032 under customer repurchase agreements at December 31, 2000.
The Bank pledged U.S. government agencies and municipal obligations whose
carrying value was $20,954,518 as collateral. There were no balances at December
31, 1999. Other short-term borrowings represent treasury, tax and loan accounts
due to the Federal Reserve Bank under a $6,000,000 line of credit. Such amounts
are secured by a pledge of investment securities in the amount of $6,967,227 at
December 31, 2000. Treasury, Tax and Loan account balances were $2,233,059 and
$4,579,060 at December 31, 2000 and 1999, respectively.
The Bank may borrow under a short-term secured credit facility with the Federal
Reserve Bank of Chicago. This credit facility is secured by municipal
obligations with a carrying value of $48,602,666. There were no amounts
outstanding at December 31, 2000 or 1999. Assets collateralizing Reverse
Repurchase Agreements consist of U.S. government and agency obligations held by
the lender bank. Finally, at December 31, 2000, the Bank could borrow up to
$17,000,000 under existing reverse repurchase agreements with another bank.
There were no reverse repurchase agreements outstanding at December 31, 2000 or
1999.
31
34
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY
Certain regulatory restrictions exist regarding the ability of the Bank to
transfer funds to the Corporation in the form of cash dividends, loans or
advances. As of December 31, 2000, retained earnings of the Bank in the amount
of $13,818,505 were available for distribution to the Corporation as dividends
without prior approval of regulatory agencies.
Under Federal Reserve regulations, the Bank is limited as to the amount it may
lend to its affiliates, including the Corporation. Such loans are required to be
collateralized by investments defined in the regulations. In addition, the
maximum amount available for transfer from the Bank to the Corporation in the
form of loans is limited to 10% of the Bank's stockholders' equity in the case
of any one affiliate or 20% in the case of all affiliates.
14. LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
Loan commitments are made to accommodate the financial needs of the
Corporation's customers. Standby letters of credit commit the Corporation to
make payments on behalf of customers when certain specified future events occur.
Both arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Corporation's normal credit
policies. Collateral (largely real estate) is required based on management's
credit assessment of the customer.
The Corporation's maximum credit exposure for loan commitments (unfunded loans
and unused lines of credit) and standby letters of credit outstanding at
December 31, 2000, was $40,565,000 and $1,113,000, respectively. All such
arrangements expire in fiscal 2001.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table discloses fair value information about financial
instruments, whether or not recognized in the consolidated balance sheets, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. These techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
32
35
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
realized in immediate settlement of the instrument. The table excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The Corporation does not routinely measure the market value of financial
instruments such as presented herein, because such measurements represent
point-in-time estimates of value. It is not the intent of the Corporation to
liquidate and therefore realize the difference between market value and carrying
value and even if it were, there is no assurance that the estimated market
values could be realized. Thus, the information presented is not relevant to
predicting the Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents approximate those assets' fair values.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
LOANS RECEIVABLE
For variable-rate loans that reprice frequently (within the 12-month period
following the date of measurement), and with no significant credit risk, fair
values are based on carrying values. The fair values for all other loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair value.
33
36
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Corporation's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value of such
instruments at December 31, 2000 and 1999, is not material.
DEPOSITS
The fair values for demand deposits (e.g., interest and noninterest checking,
passbook savings and certain types of money market accounts) are equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
The carrying amounts for variable-rate fixed-term money market accounts and
certificates of deposit and fixed-rate certificates of deposit scheduled to
mature or reprice within the 12-month period following the date of measurement
approximates their fair value at the reporting date. Fair values for fixed-rate
certificates of deposit scheduled to mature or reprice after 12 months from the
date of measurement are estimated using a discounted cash flow analysis that
applies interest rates currently being offered on similar certificates to a
schedule of aggregated expected monthly maturities of the time deposits. The
carrying amount of accrued interest approximates its fair value.
REVERSE REPURCHASE AGREEMENTS AND SHORT-TERM BORROWINGS
The carrying amount of reverse repurchase agreements and short-term borrowings
and related accrued interest, approximates their fair values at the reporting
date.
34
37
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Corporation's financial instruments
consisted of the following at December 31, 2000 and 1999:
2000 1999
----------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------- --------------------------
(In Thousands)
Cash and cash equivalents $ 45,210 $ 45,210 $ 45,482 $ 45,482
========= ========= ======== ========
Investment securities $ 134,287 $ 134,165 $142,022 $139,238
========= ========= ======== ========
Loans $ 361,771 $ 356,366 $318,899 $312,133
========= ========= ======== ========
Deposits:
Withdrawable on demand $ 329,595 $ 329,595 $339,779 $339,779
Certificates of deposit $ 140,546 $ 140,756 $119,691 $119,798
--------- --------- -------- --------
$ 470,141 $ 470,351 $459,470 $459,577
========= ========= ======== ========
Reverse repurchase agreements $ 19,787 $ 19,787 $ - $ -
Short-term borrowings $ 2,233 $ 2,233 $ 4,579 $ 4,579
========= ========= ======== ========
16. TRI CITY BANKSHARES CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31
2000 1999
----------- -----------
ASSETS
Cash on deposit with subsidiary bank $ 3,328,161 $ 417,624
Investment in subsidiary 63,254,445 58,669,133
Investment in affiliated bank -- 1,860,317
Bank premises and equipment 1,851,156 1,966,246
Other net assets 462,680 211,513
----------- -----------
Total assets $68,896,442 $63,124,833
=========== ===========
STOCKHOLDERS' EQUITY
Common stock $ 2,575,797 $ 2,538,232
Additional paid-in capital 11,757,507 10,335,369
Retained earnings 54,563,138 50,251,232
----------- -----------
Total liabilities and stockholders' equity $68,896,442 $63,124,833
=========== ===========
35
38
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. TRI CITY BANKSHARES CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
2000 1999 1998
---------- ---------- ----------
Income from subsidiary bank:
Dividends $2,884,000 $2,510,000 $2,085,000
Management fees 496,800 499,800 571,800
Rental income 289,196 270,978 226,051
---------- ---------- ----------
3,669,996 3,280,778 2,882,851
Other income 993,396 84,934 81,346
Expenses:
Administrative and general 1,003,637 933,468 965,897
---------- ---------- ----------
Income before income taxes and equity in
undistributed net income of subsidiary and
affiliated bank 3,659,755 2,432,244 1,998,300
Income tax expense 365,000 12,000 41,000
---------- ---------- ----------
Income before equity in undistributed net income
of subsidiary and affiliated bank 3,294,755 2,420,244 1,957,300
Equity in undistributed net income of subsidiary
and affiliated bank 4,585,314 4,592,757 5,012,939
---------- ---------- ----------
Net income $7,880,069 $7,013,001 $6,970,239
========== ========== ==========
36
39
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. TRI CITY BANKSHARES CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 7,880,069 $ 7,013,001 $ 6,970,239
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 119,636 120,364 117,625
Equity in undistributed net income of
subsidiary and affiliated bank (4,585,314) (4,592,757) (5,012,939)
Other (1,061,912) 17,804 41,623
----------- ----------- -----------
Net cash provided by operating activities 2,352,479 2,558,412 2,116,548
INVESTING ACTIVITIES
Net purchases of premises and equipment (4,546) (107,262) (37,057)
Proceeds from sale of unconsolidated subsidiary 2,671,064 -- --
----------- ----------- -----------
Net cash used in investing activities 2,666,518 (107,262) (37,057)
FINANCING ACTIVITIES
Sale of common stock 1,459,703 626,422 534,235
Cash dividends (3,568,163) (3,032,450) (2,509,806)
----------- ----------- -----------
Net cash used in financing activities (2,108,460) (2,406,028) (1,975,571)
----------- ----------- -----------
Increase in cash 2,910,537 45,122 103,920
Cash at beginning of year 417,624 372,502 268,582
----------- ----------- -----------
Cash at end of year $ 3,328,161 $ 417,624 $ 372,502
=========== =========== ===========
37
40
TRI CITY BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999:
THREE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
(In Thousands, Except for Per Share Data)
2000
Interest income $9,821 $10,000 $9,903 $8,840
Interest expense 3,562 3,573 3,622 2,883
Net interest income 6,259 6,427 6,281 5,957
Provision for loan losses (75) (75) (75) (75)
Other income 1,681 1,550 1,586 2,344
Other expense 5,180 5,304 5,299 5,233
Income before income taxes 2,684 2,598 2,493 2,993
Income tax expense 717 684 652 836
Net income 1,968 1,914 1,841 2,157
Basic earnings per share 0.77 0.75 0.72 0.85
1999
Interest income $8,622 $8,686 $8,326 $8,154
Interest expense 2,843 2,822 2,662 2,636
Net interest income 5,780 5,864 5,664 5,518
Provision for loan losses - (75) (75) (75)
Other income 1,850 1,686 1,803 1,610
Other expense 5,128 5,210 5,133 5,012
Income before income taxes 2,500 2,265 2,260 2,041
Income tax expense 561 528 522 442
Net income 1,939 1,737 1,738 1,599
Basic earnings per share 0.76 0.69 0.69 0.63
18. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions arising in the normal course of
business. Management, after taking into consideration legal counsel's evaluation
of such actions, is of the opinion that the outcome of these matters will not
have a material adverse effect on the financial position or operations of the
Company.
38
41
FORM 10-K
Shareholders interested in obtaining a copy of the Corporation's Annual Report
to the Securities and Exchange Commission as filed on Form 10-K may do so at no
cost by writing to:
Office of the Secretary
Tri City Bankshares Corporation
6400 South 27th Street
Oak Creek, Wisconsin 53154
39