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 March 31, 2003
[ ] 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 (IRS Employer ID Number)
of incorporation or organization)
6400 S. 27th Street, Oak Creek, WI
--------------------------------------
(Address of principal executive offices)
53154
--------
Zip Code
(414)761-1610
--------------------------------------------------
(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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
The number of shares outstanding of $1.00 par value common stock, as of
April 30, 2003: 8,146,063 shares.
FORM 10-Q
TRI CITY BANKSHARES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page #
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income
for the Three Months ended March 31, 2003
and 2002 4
Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2003
And 2002 5
Notes to Unaudited Consolidated Financial
Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 4 Controls and Procedures 13
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2003 2002
---- ----
(Unaudited)
Assets
Cash and due from banks $ 29,036,767 $ 38,804,170
Federal funds sold 12,272,265 11,504,760
------------- -------------
Cash and cash equivalents
Investment securities held
to maturity (fair value of
$166,164,759 - 2003 and
$166,747,283 - 2002 162,438,888 162,622,215
Loans 390,642,948 397,783,699
Less allowance for loan losses (5,148,155) (5,118,705)
------------- -------------
Net Loans
Premises and equipment 22,002,315 22,188,798
Mortgage Servicing Rights 875,900 789,903
Other Assets 4,295,156 4,116,888
------------- -------------
$ 616,416,084 $ 632,691,728
============= =============
Liabilities and Stockholders' Equity
Deposits $ 530,606,006 $ 543,184,250
Reverse repurchase agreements 1,108,000 1,500,000
Short-term borrowings 572,363 6,000,000
Other liabilities 2,497,113 2,169,212
------------- -------------
Total liabilities $ 534,783,482 $ 552,853,462
Stockholders' equity:
Common stock, $1 par value:
Authorized - 15,000,000 shares
Issued and outstanding:
2003 - 8,105,128 shares;
2002 - 8,062,536 shares 8,105,128 8,062,536
Additional paid in capital 11,924,824 11,243,343
Retained earnings 61,602,650 60,532,387
------------- -------------
Total stockholders' equity 81,632,602 79,838,266
------------- -------------
$ 616,416,084 $ 632,691,728
============= =============
See Notes to Unaudited Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED SATEMENTS OF INCOME
FOR THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
---- ----
Interest income
Loans, including fees $ 6,976,768 $ 7,497,479
Investment securities:
Taxable 818,898 901,009
Exempt from federal income tax 766,500 769,682
Federal funds sold 11,104 38,422
----------- -----------
Total interest income 8,573,270 9,206,592
Interest expense:
Deposits 1,377,618 2,111,270
Short-term borrowings 11,070 51,163
----------- -----------
Total interest expense
Net interest income 7,184,582 7,044,159
Provision for loan losses 105,000 105,000
----------- -----------
Net interest income after
provision for loan losses 7,079,582 6,939,159
Other income:
Service charge income 711,796 708,267
Rental income 288,876 363,729
Gain on sale of loans and servicing fees 420,758 152,954
Other 840,742 864,120
----------- -----------
Total other income 2,262,172 2,089,070
Other expenses:
Salaries and employee benefits 3,457,958 3,303,103
Occupancy 789,271 822,719
Equipment 409,392 429,932
Data processing 374,434 318,784
Advertising and promotional 171,784 151,544
Regulatory agency assessments 58,416 56,047
Office supplies 140,135 134,753
Litigation settlement 0 1,450,000
Other 607,099 710,254
----------- -----------
Total other expense 6,008,489 7,377,136
Income before income taxes 3,333,265 1,651,093
Income taxes 973,000 272,000
----------- -----------
Net income $ 2,360,265 $ 1,379,093
=========== ===========
Per share data:
Net income $ 0.290 $ 0.170
Dividends per share 0.160 0.143
Average shares outstanding 7,241,288 7,925,694
See Notes to Unaudited Consolidated Financial Statements
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $ 2,360,265 $ 1,379,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 105,000 105,000
Depreciation on premises and equipment 524,388 502,143
Gain on sale of loans (553,412) (165,454)
Proceeds from sale of loans held for sale 30,132,118 21,438,665
Origination of loans held for sale (29,578,706) (21,273,211)
Amortization of premiums and accretion of
discounts on investment securities 54,406 40,980
Decrease(increase) in interest receivable 174,536 (251,591)
(Decrease)increase in interest payable (132,466) (256,114)
Other 21,569 (213,554)
------------ ------------
Net cash provided by operating activities 3,107,698 1,305,957
INVESTING ACTIVITIES
Proceeds from repayment, calls, and maturities of
investment securities held to maturity 12,164,449 12,389,158
Purchases of investment securities held to maturity (12,035,527) (3,997,840)
Net (increase)decrease in loans 7,065,201 (11,690,766)
Net purchases of premises and equipment (337,905) (348,951)
------------ ------------
Net cash (used)provided by investing activities 6,856,218 (3,648,399)
FINANCING ACTIVITIES
Sale of common stock 724,073 674,907
Net (decrease)increase in deposits (12,578,244) (16,737,871)
Net (decrease)increase in short-term borrowings (5,819,637) 2,602,874
Cash dividends (1,290,006) (1,130,826)
------------ ------------
Net cash used by financing activities (18,963,814) (14,590,916)
------------ ------------
Decrease in cash and cash equivalents (8,999,898) (16,933,358)
Cash and cash equivalents at the beginning of year 50,308,930 63,737,151
------------ ------------
Cash and cash equivalents at the end of year $ 41,309,032 $ 46,803,793
============ ============
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 accounting principles generally accepted in the
United States 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 in the United States for complete financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Annual Report on Form
10-K of Tri City Bankshares Corporation ("Tri City") for the year ended December
31, 2002. The December 31, 2002 financial information included herein is derived
from the December 31, 2002 Consolidated Balance Sheet of Tri City which is
included in the aforesaid Annual Report on Form 10-K.
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 consolidated
financial position as of March 31, 2003 and the results of its operations and
cash flows for the three month periods ended March 31, 2003 and 2002. The
preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities and the reported amounts of revenues and expenses during the
reported period. The operating results for the first three months of 2003 are
not necessarily indicative of the results, which may be expected for the entire
2003 fiscal year.
TRI CITY BANKSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
This report contains statements that may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, such as statements other than historical facts contained or incorporated
by reference in this report. These statements speak of Tri City Bankshares' (the
"Corporation") plans, goals, beliefs or expectations, refer to estimates or use
similar terms. Future filings by the Corporation with the Securities and
Exchange Commission, and statements other than historical facts contained in
written material, press releases and oral statements issued by, or on behalf of
the Corporation, may also constitute forward-looking statements.
Forward-looking statements are subject to significant risks and
uncertainties; and the Corporation's actual results may differ materially from
the results discussed in such forward-looking statements. Factors that might
cause actual results to differ from the results discussed in forward-looking
statements include, but are not limited to the factors set forth in exhibit 99.2
of the Corporation's Annual Report on Form 10-K for the year ended December 31,
2002, which exhibit is incorporated herein by reference.
All forward-looking statements contained in this report or which may be
contained in future statements made for or on behalf of the Corporation are
based upon information available at the time the statement is made and the
Corporation assumes no obligation to update any forward-looking statement.
CRITICAL ACCOUNTING POLICIES
A number of accounting policies require us to use our judgment. Two of the
more significant policies are:
* Establishing the amount of the provision for loan loss reserve.
We evaluate our loan portfolio at least quarterly to determine the adequacy
of the loan loss reserve. Included in the review are five components: (1) A
historic review of losses and reserve coverage based on peak and average loss
volume; (2) A review of portfolio trends in volume and composition with
attention to possible concentrations; (3) A review of delinquency trends and
loan performance compared to our peer group; (4) A review of local and national
economic conditions; and (5) A quality analysis review of non-performing loans
identifying charge-offs, potential loss after collateral liquidation and credit
weaknesses requiring above normal supervision. If we misjudge the adequacy of
the reserve and experience a loss, a charge to earnings may result.
* Establishing the value of mortgage servicing rights.
Mortgage servicing rights (MSR's) are established on loans (primarily
mortgage loans) that we originate and sell, but continue to service as we
collect the payments and tax escrows. Generally Accepted Accounting Principles
require that we recognize, as income, the estimated fair market value of the
asset when originated, even though management does not intend to sell these
rights. The estimated value of MSR's is the present value of future net cash
flows from the servicing relationship using current market assumptions for
factors such as prepayments and servicing costs. As the loans are repaid and the
servicing revenue is earned, MSR's are amortized. Net servicing revenues and
newly originated MSR's generally exceed this amortization expense. However, if
actual prepayment experience is greater than anticipated and new loan volume
declines, net-servicing revenues may be less than expected and a charge to
earnings may result.
CHANGES IN FINANCIAL POSITION
The Corporation's net assets have decreased $16.2 million (2.6%) during the
first quarter of 2003. Cash and due from banks decreased $9.8 million (25.2%) in
the first three months of 2003. This decrease is not unusual during the first
quarter of each year. There is typically a short-term increase of cash and cash
equivalents during the month of December each year; because municipal deposits
increase due to payments of property taxes, and commercial deposits increase due
to holiday spending. Net loans decreased $7.1 million (1.8%) during the first
quarter of 2003. Loan demand declined in the second half of 2002 due to the
sluggish economy. Uncertainty about the war in Iraq continued to plague the
economy for most of the first quarter of 2003, and soft loan demand continued as
a result.
The allowance for loan losses increased $29,450 (0.6%) in the first three
months of 2003. Management believes the quality of the loan portfolio is
excellent and that the level of exposure remains low. Management continues to
monitor the quality of new loans that the Corporation originates each year as
well as review existing loan performance.
Deposits of the Corporation decreased $12.6 million (2.3%) during the first
quarter of 2003. Interest rates have stopped the drastic decline of the past
year. Depositors have shifted their funds to short-term investments, such as
certificates of deposit with maturities less than 12 months, and in many cases
out of certificates and into money market products as a result of the low rate
environment. Additionally, as noted above, there is typically a short-term
increase in municipal and commercial deposits in December. Total borrowings of
the corporation decreased $5.8 million (77.6%) during the first three months of
2003.
The Corporation's equity increased $1.8 million (2.2%) during the first
quarter of 2003 due to a strong net interest margin and continuing profitable
activity in the consumer mortgage sector.
LIQUIDITY
The ability to provide the necessary funds for the day-to-day operations of
the Corporation depends on a sound liquidity position. Management has continued
to monitor the Corporation's liquidity 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. The Corporation continues to offer products that are
competitive and encourage depositors to invest their funds in the Corporation's
banking subsidiary. Management believes that their efforts will help the
Corporation to not only retain these deposits, but also encourage continued
growth. The banking subsidiary of the Corporation has the ability to borrow up
to $30.0 million in federal funds purchased, and an additional $41.0 million is
available for short-term liquidity through reverse repurchase agreements
available through its correspondent banking relationships.
CAPITAL RESOURCES
During the first quarter of 2003, the Corporation began installation of a
new telecommunications data network. Benefits will include improved security,
intrusion monitoring and reporting. The Corporation's banking subsidiary will
fund this new network equipment internally and expects the cost of this project
will be nominal. There are no other major projects currently planned for 2003.
RESULTS OF OPERATIONS
The Corporation's net income increased $981,200 (71.1%) during the first
quarter of 2003 compared to the same period in 2002. The change was the result
of operating income increasing $140,000 in the first quarter of 2003 and the
negative effect of a one-time after tax charge to earnings of approximately
$850,000 in the first quarter of 2002. The charge was the result of a mediated
settlement of a lawsuit.
Interest income and fees on loans decreased $520,700 (6.9%) in the first
three months of 2003 compared to the first three months of 2002. The average
yield on loans continues to decline as portfolio notes mature and reprice. The
net interest margin, however, has remained strong as interest expense has also
decreased significantly.
Investment balances as of March 31, 2003 have increased $27.1 million
(20.0%) from March 31, 2002. The average yield derived from all investments
decreased 84 basis points during the first quarter of 2003, compared to the
first quarter of 2002 due to historically low rates and management's decision to
invest in relatively short-term securities on new purchases in anticipation of
rising rates. However, our liquidity is excellent and we are in a position to
take advantage of any increase in interest rates. Approximately $6.6 million in
investment securities is scheduled to mature during the next five months with a
possible $18.0 million additional securities called during the same period.
These proceeds are likely to be reinvested at lower interest rates than rates
they are currently earning.
Interest expense on deposits decreased $733,700 (34.7%) during the first
quarter of 2003 compared to the first quarter of 2002. The primary cause of this
decrease is significantly lower yields paid on deposits.
Other income increased $173,100 (8.3%) during the first quarter of 2003
compared to the same period of 2002. This increase is principally associated
with the gain on sale of loans and servicing fees for loans sold in the
secondary market. Historically low rates during the first quarter of 2003
resulted in record numbers of refinancings at the Corporation's banking
subsidiary.
A summarized change in income for the quarters appears below:
Three Months Ended March 31, March 31, 2003
2003 2002 Over(Under)
(UNAUDITED) (UNAUDITED) 2002
Revenue and Expenses: (000's)
Interest Income $ 8,573 $ 9,206 $ (633)
Less: Interest Expense 1,389 2,162 (773)
------- ------- -------
Net Interest Income
Less: Provision for Loan Loss 105 105 0
Other Operating Expense
Net of Other Operating Revenues 3,746 5,288 (1,542)
Income Before Income Taxes 3,333 1,651 1,682
Tax Provision 973 272 701
------- ------- -------
NET INCOME $ 2,360 $ 1,379 $ 981
======= ======= =======
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 20.95% and its leverage ratio is 13.45%.
ITEM 4 - CONTROLS AND PROCEDURES
The Registrant maintains a set of disclosure controls and procedures that
are designed to ensure that information required to be disclosed by it in the
reports filed by it under the Securities Exchange Act of 1934, as amended, is
recorded and processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Within the 90 days prior to the date of
this report, the Registrant carried out an evaluation, under the supervision and
with the participation of management, including the Chief Executive Officer and
President who is also the Chief Financial Officer of the Registrant, of the
effectiveness of the design and operation of the Registrant's disclosure
controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based on
that evaluation, the Chief Executive Officer and President who is also the Chief
Financial Officer of the Registrant concluded that the Registrant's disclosure
controls and procedures are effective.
There have been no significant changes in the Registrant's internal
controls or other factors that could significantly affect those controls
subsequent to the conclusion of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Mr. Karbiner
(b) Reports on Form 8-K
The Corporation filed one Form 8-K during the quarter covered by
this report as follows:
(1) Form 8-K dated February 14, 2003 under Items 5 and 7
regarding the three-for-one stock split effective
February 28, 2003.
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: May 13, 2003 /s/Henry Karbiner, Jr.
------------------------------- ----------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer
and Treasurer (Principal Executive
Officer)
DATE: May 13, 2003 /s/Thomas W. Vierthaler
------------------------------- ----------------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
Certifications
I, Henry Karbiner, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tri City Bankshares
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 13, 2003
-----------------------
/s/Henry Karbiner, Jr.
--------------------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer and
Treasurer
(Principal Executive and Financial Officer)
INDEX TO EXHIBITS
Exhibit 99.1
Certification of CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley
Act of 2003.