FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] 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
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6400 S. 27th Street, Oak Creek, WI
----------------------------------------
(Address of principal executive offices)
53154
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(Zip Code)
(414) 761-1610
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
-----
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 July 31,
2005: 8,566,273 shares.
FORM 10-Q
TRI CITY BANKSHARES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page #
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income
for the Three Months ended June 30, 2005
and 2004 4
Condensed Consolidated Statements of Income
for the Six Months ended June 30, 2005
and 2004 5
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2005
and 2004 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4 Contro1s and Procedures 18
PART II - OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities
And Use of Proceeds 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 6 Exhibits 22
Signatures 23
2
ITEM 1
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2005 2004
---- ----
Assets
Cash and due from banks
(cash and cash equivalen $ 26,861,425 $ 35,425,012
Investment securities held to
maturity (fair value of
$142,983,155 - 2005 and
$159,585,976 - 2004) 143,692,373 159,451,575
Loans less allowance for loan losses of
$5,585,347 - 2005 and
$5,641,593 - 2004 491,005,038 465,603,614
Premises and equipment 20,616,882 20,541,600
Cash surrender value of life insurance 10,558,119 10,361,935
Mortgage servicing rights 940,966 957,565
Accrued interest receivable and other assets 4,163,878 4,276,731
------------ ------------
Total Assets $697,838,681 $696,618,032
============ ============
Liabilities and Stockholders' Equity
Deposits
Demand $153,075,283 $161,574,101
Savings and NOW 312,375,649 340,020,788
Other time 102,541,343 88,810,037
------------ ------------
Total Deposits
Federal funds purchased and securities
sold under repurchase agreements 31,279,885 9,485,945
Other borrowings 1,240,421 2,748,441
Accrued interest payable and other liabilities 1,330,991 1,430,182
------------ ------------
Total Liabilities 601,843,572 604,069,494
------------ ------------
Common stock, $1 par value, 15,000,000 shares
authorized, 2005 - 8,517,100 and
2004 - 8,413,621 8,517,100 8,413,621
Additional paid in capital 19,427,062 17,507,720
Retained earnings 68,050,947 66,627,197
------------ ------------
Total stockholders' equity 95,995,109 92,548,538
------------ ------------
Total Liabilities and Stockholders' Equity $697,838,681 $696,618,032
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
2005 2004
---- ----
Interest income
Loans $7,489,661 $6,412,906
Investment securities:
Taxable 823,410 874,902
Exempt from federal income tax 450,810 446,983
Federal funds sold 19,289 4,248
Other 9,663 9,663
---------- ----------
Total interest income 8,792,833 7,748,702
---------- ----------
Interest expense
Deposits 1,539,535 1,136,877
Federal funds purchased and
securities sold under repurchase
agreements 242,055 21,677
Other borrowings 7,615 3,182
---------- ----------
Total interest expense 1,789,205 1,161,736
---------- ----------
Net interest income before provision for
loan losses 7,003,628 6,586,966
Provision for loan losses 0 105,000
---------- ----------
Net interest income after provision for
loan losses 7,003,628 6,481,966
---------- ----------
Non interest income
Service charges on deposits 1,665,221 1,547,674
Loan servicing income 40,927 3,646
Net gain on sale of loans 118,952 283,366
Increase in cash surrender value of
life insurance 97,701 90,484
Other 312,078 211,027
---------- ----------
Total non interest income 2,234,879 2,136,197
---------- ----------
Non interest expenses
Salaries and employee benefits 3,419,208 3,381,319
Net occupancy costs 492,092 622,668
Furniture and equipment expenses 410,995 387,873
Computer services 461,918 438,758
Advertising and promotional 366,093 185,299
Regulatory agency assessments 60,880 58,502
Office supplies 157,362 145,895
Other expenses 662,158 709,925
---------- ----------
Total non interest expense 6,030,706 5,930,239
---------- ----------
Income before income taxes 3,207,801 2,687,924
Less: Applicable income taxes 1,043,000 805,000
---------- ----------
Net income $2,164,801 $1,882,924
========== ==========
Basic earnings per share $ 0.26 $ 0.23
Dividends per share 0.195 0.175
Weighted average shares outstanding 8,505,357 8,315,660
See Notes to Unaudited Condensed Consolidated Financial Statements
4
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
2005 2004
---- ----
Interest income
Loans $14,596,354 $12,692,439
Investment securities:
Taxable 1,733,991 1,542,991
Exempt from federal income tax 934,757 1,150,727
Federal funds sold 20,630 4,633
Other 9,663 9,663
----------- -----------
Total interest income 17,295,395 15,400,453
----------- -----------
Interest expense
Deposits 2,907,306 2,267,265
Federal funds purchased and
securities sold under repurchase
agreements 422,577 62,154
Other borrowings 12,271 19,227
----------- -----------
Total interest expense 3,342,154 2,348,646
----------- -----------
Net interest income before provision for
loan losses 13,953,241 13,051,807
Provision for loan losses 0 210,000
----------- -----------
Net interest income after provision for
loan losses 13,953,241 12,841,807
----------- -----------
Non interest income
Service charges on deposits 3,210,730 2,985,599
Loan servicing income 106,160 28,287
Net gain on sale of loans 250,237 504,429
Increase in cash surrender value of
life insurance 196,184 180,968
Other 1,215,758 433,675
----------- -----------
Total non interest income 4,979,069 4,132,958
----------- -----------
Non interest expenses
Salaries and employee benefits 6,821,890 6,807,385
Net occupancy costs 1,039,157 1,147,173
Furniture and equipment expenses 811,291 762,158
Computer services 899,999 863,086
Advertising and promotional 642,820 357,418
Regulatory agency assessments 121,287 116,317
Office supplies 276,741 272,273
Other expenses 1,306,358 1,359,295
----------- -----------
Total non interest expense 11,685,105
----------- -----------
Income before income taxes 7,012,767 5,289,660
Less: Applicable income taxes 2,297,000 1,505,000
----------- -----------
Net income $ 4,715,767 $ 3,784,660
=========== ===========
Basic earnings per share $ 0.56 $ 0.46
Dividends per share 0.39 0.35
Weighted average shares outstanding 8,480,547 8,292,159
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
2005 2004
---- ----
Cash Flows from Operating Activities
Net income $ 4,715,767 $ 3,784,660
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation 1,089,486 1,079,448
Amortization of premiums and
accretion of discounts on
investment securities - net (17,833) 77,238
Net gain on sale of loans (250,237) (504,429)
Provision for loan losses 0 210,000
Proceeds from sales of loans held
for sale 14,926,047 28,468,329
Originations of loans held for sale (14,675,810) (27,963,900)
Increase in cash surrender value of
life insurance (196,184) (180,968)
Net change in accrued interest
receivable and Other assets 129,452 (174,642)
Net change in accrued interest
payable and other liabilities (99,189) (581,323)
------------ ------------
Net Cash Flows from Operating
Activities 5,621,499 4,214,413
------------ ------------
Cash Flows from Investing Activities
Activity in held to maturity securities
Maturities, prepayments and calls 20,318,485 54,637,424
Purchases (4,541,450) (53,557,363)
Net increase in loans (25,401,424) (36,163,598)
Purchases of premises and equipment (1,164,768) (323,818)
------------ ------------
Net Cash Flows from Investing Activities (10,789,157) (35,407,355)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in deposits (22,412,651) 3,271,002
Net change in federal funds purchased
and securities sold under repurchase
agreements 21,793,940 14,236,589
Net change in other borrowings (1,508,020) 216,395
Dividends paid (3,292,019) (2,888,775)
Common stock issued - net 2,022,821 1,996,278
------------ ------------
Net Cash Flows from Financing Activities (3,395,929) 16,831,489
------------ ------------
Net Change in Cash and Cash Equivalents (8,563,587) (14,361,453)
Cash and Cash Equivalents - Beginning of Year 35,425,012 40,849,479
------------ ------------
Cash and Cash Equivalents - End of Year $ 26,861,425 $ 26,488,026
============ ============
See Notes to Unauditied Condensed Consolidated Financial Statements
6
TRI CITY BANKSHARES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
The accompanying unaudited condensed 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 accounting principles generally
accepted 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" or, the "Corporation") for the year
ended December 31, 2004. The December 31, 2004 financial information included
herein is derived from the December 31, 2004 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
condensed consolidated financial statements contain all adjustments, consisting
of normal recurring accruals, necessary to present fairly Tri City's
consolidated financial position as of June 30, 2005 and the results of its
operations for the three month and six month periods ended June 30, 2005 and
2004, and cash flows for the six months ended June 30, 2005 and 2004. 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 six months of 2005 are not
necessarily indicative of the results which may be expected for the entire 2005
fiscal year.
7
(B) RECENT ACCOUNTING DEVELOPMENTS
On December 15, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123R, "Share-Based Payment" ("SFAS 123R"), which requires
compensation costs related to share-based payment transactions to be recognized
in the financial statements. With limited exceptions, the amount of the
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. SFAS 123R
replaces FASB Statement no. 123, "Accounting for Stock Issued to Employees."
SFAS 123R is effective for the Corporation's three-month reporting period ending
March 31, 2006. Early adoption is encouraged and retroactive application of the
provision of SFAS 123R to the beginning of the fiscal year that includes the
effective date is permitted, but not required. The Corporation has not adopted
this pronouncement and is currently evaluating the impact that the adoption of
SFAS 123R will have on its consolidated financial statements.
(C) RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform to
the current presentation. The reclassifications had no impact on previously
reported net income.
8
ITEM 2
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 the Corporation's 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
99.1 of the Corporation's Annual Report on Form 10-K for the year ended December
31, 2004, 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.
9
CRITICAL ACCOUNTING POLICIES
A number of accounting policies require us to use our judgment. Three of
the more significant policies are:
o Establishing the amount of the provision and allowance for loan losses. We
evaluate our loan portfolio at least quarterly to determine the adequacy of
the allowance for loan losses. Included in the review are five components:
(1) An historic review of losses and allowance 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 allowance and
experience additional losses, a charge to earnings may result.
o Establishing the value of mortgage servicing rights. Mortgage servicing
rights are recorded as an asset when loans are sold to third parties with
servicing rights retained. The cost of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net servicing
revenues. The carrying value of these assets is periodically reviewed for
impairment using a lower of carrying value or fair value methodology. The
fair value of the servicing rights is determined by estimating the present
value of future net cash flows, taking into consideration market loan
prepayment speeds, discount rates, servicing costs, and other economic
factors. For purposes of measuring impairment, the rights are stratified
based on predominant risk characteristics of the underlying loans which
include product type (i.e., fixed or adjustable) and interest rate bands.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights on a loan-by-loan basis exceed their fair value.
Mortgage servicing rights are carried at the lower of cost or market value.
However, if actual prepayment experience is greater than anticipated, net
servicing revenues may be less than expected and a charge to earnings may
result.
10
o Determining the amount of current and deferred income taxes. The
determination of current and deferred income taxes is based on complex
analyses of many factors including interpretation of federal and state
income tax laws, the difference between tax and financial reporting of
reversals of temporary differences and current accounting standards. The
federal and state taxing authorities who make assessments based on their
determination of tax laws periodically review the Corporation's
interpretation of federal and state tax laws. This assessment may result in
an adjustment to amounts previously provided for.
FINANCIAL CONDITION
The Corporation's total assets have increased $1.2 million (0.2%) during
the first two quarters of 2005. Cash and cash equivalents decreased $8.6 million
(24.2%) during the period, associated with activity normally seen after year
end. Typically the Corporation's banking subsidiary experiences a short-term
increase in deposits at year-end associated with municipal deposits of property
taxes and commercial deposits resulting from holiday spending, which return to
normal levels by the end of the first quarter.
Investment securities decreased $15.8 million (9.9%) during the first two
quarters of 2005. During the first two quarters, approximately $20.3 million of
the banking subsidiary's investment portfolio was redeemed through normal
maturities or scheduled calls. Management continues to replace these investments
by seeking investments with maturities of three to five years while maintaining
quality. Management continues to follow its practice of holding to maturity its
investment portfolio.
Net loans increased $25.4 million (5.5%) during the first two quarters of
2005. While commercial loan growth was generally strong in 2004, with total
loans increasing $59.0 million or 14.3% from year-end 2003 to 2004, it slowed in
the last two quarters of 2004 and remained slow during the first quarter of
2005. Gross loans grew $5.7 million (1.2%) during the first quarter of 2005.
Growth in the second quarter of 2005 improved, however, as gross loan balances
increased $19.7 million (4.2%) to $496.6 million. Management remains optimistic
that this pace of growth of the loan portfolio will continue despite pressure
from increased rates and the competitive market.
11
The allowance for loan losses decreased $56,200 (1.0%) to $5.6 million
during the first six months of 2005. The continued high quality of the assets in
the banking subsidiary's commercial, real estate and installment loan portfolios
have resulted in no additions to the loan loss allowance for the first two
quarters of 2005. The nominal decrease represents the net difference of
charge-offs versus loan recoveries since December 31, 2004.
The allowance reflects management's best estimate of probable and
estimatable losses in the current loan portfolio that may occur in the ordinary
course of business, taking into consideration 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. Management continues to monitor the quality of new loans that
the Corporation originates each year as well as review existing loan
performance.
Deposits at the Corporation decreased $22.4 million (3.8%) during the first
six months of 2005. As noted above, there is typically a short-term increase in
municipal and commercial deposits in December of each year. These deposits tend
to be subsequently transferred to other financial institutions for investment
opportunity or funds management programs.
Total borrowings of the Corporation increased $20.3 million (165.8%) during
the first six months of 2005. The Corporation's banking subsidiary adjusts its
level of daily borrowing or short term daily investment depending upon its needs
each day. Excess funds or funding requirements are addressed at the close of
each business day. Funding needs are available through the banking subsidiary's
federal funds facilities through two correspondent banks.
The Corporation's equity increased $3.4 million (3.7%) during the first two
quarters of 2005. The Corporation received proceeds of $2.0 million from the
sale of common stock primarily through the Dividend Reinvestment Plan offered to
shareholders and paid $3.3 million in dividends.
12
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 its 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 $85.0 million in federal funds purchased, and an additional $59.3 million is
available for short-term liquidity through reverse repurchase agreements
available through its correspondent banking relationships.
CAPITAL EXPENDITURES
The banking subsidiary is currently upgrading 200 employee PC workstations
at a cost of $0.8 million. In addition, the Office of the Comptroller of the
Currency approved three new branch applications of the banking subsidiary during
the first quarter of 2005. These locations are all in-store branches in new Pick
'n Save grocery stores in the Milwaukee area scheduled to open during the year.
There are no other major projects currently in place for 2005, however, if
a project is identified or an upgrade in equipment becomes necessary, the
Corporation has sufficient liquidity to internally fund any such expenditure.
Results of Operations
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
The Corporation's net income increased $281,900 (15.0%) during the second
quarter of 2005 compared to the same period in 2004. Net interest income
increased $521,700 (8.0%) to $7.0 million for the second quarter of 2005
compared to $6.5 million for the second quarter last year. The net interest
income after provision for loan losses was favorably impacted by a $105,000
decrease in the provision for loan losses during the second quarter of 2005 as
compared to the comparable period in 2004.
13
Interest income on loans increased $1.1 million (16.8%) in the second
quarter of 2005 compared to the second quarter of 2004. Year-to-date 2005 loan
yields are up slightly to 6.08% from 5.91% in 2004. In addition, the Board of
Governors of the Federal Reserve increased the prime rate by an additional 50
basis points during the second quarter to 6.25%. However, portfolio growth of
$48.1 million over the comparable period last year is the primary reason for the
increase in interest earnings.
Interest income on investment securities decreased $47,700 (3.6%) during
the second quarter of 2005 compared to the second quarter of 2004. The average
tax equivalent year-to-date yield derived from all investments increased
modestly by 7 basis points during the second quarter of 2005 compared to the
second quarter of 2004. Accordingly this decrease is primarily due to volume, as
average balances of investment securities have declined $8.1 million (5.0%).
Approximately $18.9 million in investment securities are scheduled to
mature during the next six months. In addition, approximately $84.3 million of
other securities are subject to calls during the same period, however, such
calls are unlikely, given the current rising rate environment.
Interest expense increased $627,500 (54.0%) during the second quarter of
2005 compared to the second quarter of 2004. An increase in the year-to-date
yield of 37 basis points (from 1.15% to 1.52%) accounted for $552,200 of this
variance. The remaining $75,300 variance resulted from the increase in volume of
average interest bearing deposits and average borrowed funds of $29.2 million
during 2005 as compared to 2004.
Non-interest income increased $98,700 (4.6%) during the second quarter of
2005 compared to the same period of 2004. This is primarily the result of
increased service charges on deposit accounts, including overdraft fees.
14
A summary of the change in the components of net income for the quarters
ended June 30, 2005 and 2004 appears below:
Three Months Ended June 30, June 30, 2005
2005 2004 (Over(Under)
(UNAUDITED) (UNAUDITED) 2004
----------- ----------- ----
Dollars in thousands
Interest Income $ 8,793 $ 7,749 $ 1,044
Less: Interest Expense 1,789 1,162 627
------- ------- -------
Net Interest Income 7,004 6,587 417
Less: Provision for loan losses 0 105 (105)
------- ------- -------
Net interest income after
provision for loan losses 7,004 6,482 522
Non-interest Income 2,235 2,136 99
Non-interest Expenses 6,031 5,930 101
------- ------- -------
Income from Operations 3,208 2,688 520
Tax Provision 1,043 805 238
------- ------- -------
NET INCOME $ 2,165 $ 1,883 $ 282
======= ======= =======
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Net income of the Corporation increased $931,100 (24.6%) during the six
months ended June 30, 2005. The increase is attributable to increases in net
interest income and a reduction in the provision for loan losses, during both
the first and second quarter 2005 plus a gain on sale of $684,000, resulting
from the first quarter sale of the banking subsidiary's ownership interest in
Pulse, the driver of our ATM network, to Discover, Inc.
Interest income on loans increased $1.9 million (15.0%) in the first half
of 2005. Volume increase of $48.1 million (10.9%) to $491 million as of June 30,
2005 in commercial, real estate and consumer loans accounts for $1.5 million of
the interest income increase and a 17 basis point increase in the yield (from
5.91% to 6.08%) accounts for $0.4 million of the increase.
Interest income on investment securities decreased $25,000 (0.9%) during
the first six months of 2005 compared to the same period in 2004.
As discussed above, yields continue to decline. Management continues to
replace maturing securities with securities that have relatively short
15
maturities and are of high quality. Management wants to maintain a high level of
liquidity so that the banking subsidiary can take advantage of rising rates.
Interest expense on deposits increased $640,000 (28.2%) in the first six
months of 2005. Of this increase, $566,000 is due to a 27 basis point increase
in the yield on interest bearing deposits (from 1.15% to 1.42%). The remainder
of the increase of $74,000 is due to a growth of average balances of interest
bearing deposits from the second quarter 2004 to the second quarter 2005.
Management carefully monitors competition in an effort to remain
competitive and, accordingly, has reduced its overall yield on deposits to
mirror the overall yield on deposits throughout the financial sector of the
economy. Deposits increased during the past twelve months, tending to be
short-term in nature. This trend has helped the banking subsidiary to maintain a
strong net interest margin compared to other banks in its peer group.
Interest expense related to short-term borrowings increased $353,500
(434.3%) during the six months ended June 30, 2005 versus the comparable period
in 2004. This increase reflects interest expense necessary to support the
banking subsidiary's growth in its loan portfolio.
As loan growth has out-paced deposit growth, the banking subsidiary has
utilized its lines of credit with correspondent banks to fund increased loan
balances. This increase is almost entirely due to volume. This increase reflects
interest expense necessary to support the banking subsidiary's growth in its
loan portfolio.
Non interest income increased $846,100 (20.5%) during the first six months
of 2005 primarily due to a $684,000 gain from the sale of the Corporation's
interest in Pulse, Inc., upon a switch in the Corporation's ATM network
provider.
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.
16
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% Tier 1 capital to total assets. The
risk-based capital ratio for the Corporation is 19.87% and its leverage ratio is
13.88% as of June 30, 2005.
17
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's Annual Report on Form 10-K for the year ended December
31, 2004 contains certain disclosures about market risks affecting the
Corporation. There have been no material changes to the information provided
which would require additional disclosures as of the date of this filing.
ITEM 4 - CONTROLS AND PROCEDURES
The Corporation maintains a set of disclosure controls and procedures that
are designed to ensure that information required to be disclosed by it in the
reports filed by it under the Securities Exchange Act of 1934, as amended, is
recorded and processed, summarized and reported within the time periods
specified in the SEC's rules and forms. At the end of the last fiscal quarter,
the Corporation 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 Corporation, of the effectiveness
of the design and operation of the Corporation's disclosure controls and
procedures pursuant to Rule 13a-(15e) and 15d - 15(e) of the Exchange Act. Based
on that evaluation, the Chief Executive Officer and President who is also the
Chief Financial Officer of the Corporation concluded that the Corporation's
disclosure controls and procedures are effective as of the end of the period
covered by this report.
There have been no changes in the Corporation's internal control over
financial reporting identified in connection with the evaluation discussed above
that occurred during the Corporation's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2005, the Corporation did not sell any
equity securities which were not registered under the Securities Act or
repurchase any of its equity securities.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 2005, Tri City Bankshares Corporation held its annual
shareholders' meeting. The only item held for a vote of shareholders was for the
election of Directors for the ensuing year. The number of shares of common stock
represented by proxy and in person was 6,538,289 which represented approximately
76.8% of the total outstanding shares entitled to vote for directors. There was
no solicitation in opposition to management's nominees for directors and all
such nominees were elected pursuant to the following vote:
Director's Name: Frank Bauer
For 6,533,291
Against 0
Withheld 4,998
Abstain 0
Broker Non-Vote 0
Director's Name: William Beres
For 6,533,788
Against 0
Withheld 4,501
Abstain 0
Broker Non-Vote 0
Director's Name: Sanford Fedderly
For 6,534,071
Against 0
Withheld 4,218
Abstain 0
Broker Non-Vote 0
19
Director's Name: Scott Gerardin
For 6,533,951
Against 0
Withheld 4,338
Abstain 0
Broker Non-Vote 0
Director's Name: William Gravitter
For 6,534,071
Against 0
Withheld 4,218
Abstain 0
Broker Non-Vote 0
Director's Name: Henry Karbiner, Jr.
For 6,534,026
Against 0
Withheld 4,263
Abstain 0
Broker Non-Vote 0
Director's Name: Christ Krantz
For 6,523,586
Against 0
Withheld 14,703
Abstain 0
Broker Non-Vote 0
Director's Name: Brian T. McGarry
For 6,404,921
Against 0
Withheld 133,368
Abstain 0
Broker Non-Vote 0
Director's Name: Robert Orth
For 6,534,026
Against 0
Withheld 4,263
Abstain 0
Broker Non-Vote 0
20
Director's Name: Ronald K. Puetz
For 6,523,545
Against 0
Withheld 14,744
Abstain 0
Broker Non-Vote 0
Director's Name: Agatha T. Ulrich
For 6,533,951
Against 0
Withheld 4,338
Abstain 0
Broker Non-Vote 0
Director's Name: David Ulrich, Jr.
For 6,533,291
Against 0
Withheld 4,998
Abstain 0
Broker Non-Vote 0
Director's Name: William Werry
For 6,531,935
Against 0
Withheld 6,354
Abstain 0
Broker Non-Vote 0
Director's Name: Scott A. Wilson
For 6,533,443
Against 0
Withheld 4,846
Abstain 0
Broker Non-Vote 0
No other matters were voted on at the annual meeting.
21
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
22
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: August 11, 2005 /s/Henry Karbiner, Jr.
--------------- ----------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer
and Treasurer
(Principal Executive Officer)
DATE: August 11, 2005 /s/ Thomas W Vierthaler
--------------- ------------------------------
Thomas W Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
23