UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-9785
TRI CITY BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6400 South 27th Street
Oak Creek, Wisconsin 53154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 761-1610
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark whether the issuer is a well-known seasoned issuer, as
defined in Rule 145 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer X
----- ----- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of June 30, 2005, the aggregate market value of the shares held by
non-affiliates was approximately $51,089,000. As of March 27, 2006, 8,674,960
shares of common stock were outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated in
Annual report to shareholders for fiscal
year ended December 31, 2005 Parts II and IV
Proxy statement for annual meeting of
shareholders to be held on June 14, 2006 Part III
Form 10-K Table of Contents
- -------------------------------------------------------------------------------
PART I PAGE #
Item 1 Business 3
Item 1A Risk Factors 9
Item 1B Unresolved Staff Comments 12
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securitites 13
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 13
Item 8 Consolidated Financial Statements and
Supplementary Data 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Item 9A Controls and Procedures 13
Item 9B Other Information 13
PART III
Item 10 Directors and Executive Officers of the Registrant 14
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 14
Item 13 Certain Relationships and Related Transactions 14
Item 14 Principal Accountant Fees and Services 14
PART IV
Item 15 Exhibits and Financial Statement Schedules 15
Signatures 18
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PART I
Item 1. BUSINESS
THE REGISTRANT
Tri City Bankshares Corporation (the "Registrant"), a Wisconsin
corporation, was formed November 20, 1970 for the purpose of acquiring the
outstanding shares of Tri City National Bank (the "Bank"). The Bank is a wholly
owned subsidiary of the Registrant.
As of December 31, 2005, the Registrant had total assets of $742.3 million
and total stockholders' equity of $98.8 million.
THE BANK
The Bank was chartered by the Wisconsin Banking Department (now the
Wisconsin Department of Financial Institutions ("DFI")) on October 28, 1963, and
converted to a National Banking Association on June 25, 1969. The Bank is
supervised by the Office of the Comptroller of the Currency ("OCC") and its
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank conducts business out of its main office located at 6400 South 27th Street,
Oak Creek, Wisconsin. In addition, the Bank maintains 34 other offices in
Wisconsin throughout Milwaukee, Ozaukee, Racine and Waukesha Counties.
The Bank provides a full range of consumer and commercial banking services
to individuals and businesses. The basic services offered include: demand
deposit accounts, money market deposit accounts, NOW accounts, time deposits,
safe deposit services, direct deposits, notary services, money orders, night
depository, travelers' checks, cashier's checks, savings bonds, secured and
unsecured consumer, commercial, installment, real estate and mortgage loans. The
Bank offers automated teller machine ("ATM") and debit cards. In addition, the
Bank maintains an investment portfolio consisting primarily of U.S. agency and
state and political subdivision securities.
As is the case with banking institutions generally, the Bank derives its
revenues from interest on the loan and investment portfolios and fee income
related to loans and deposits. Income derived from the sale of alternative
investment products provides additional fee income. The source of funds for the
lending activities are deposits, repayment of loans, maturity of investment
securities and short-term borrowing through correspondent banking relationships
and the Federal Reserve Bank of Chicago. Principal expenses are the interest
paid on deposits and borrowings, and operating and general administrative
expenses.
LENDING ACTIVITIES
The Bank offers a range of lending services including secured and unsecured
consumer, commercial, installment, real estate and mortgage loans to
individuals, small business and other organizations that are located in or
conduct a substantial portion of their business in the Bank's market area. The
Bank's total loans as of December 31, 2005 were $516.6 million, or approximately
70% of total assets. Interest rates charged on loans vary with the degree of
risk, maturity and amount of the loan, and are further subject to competitive
pressures, cost and availability of funds and government regulations.
The Bank maintains a comprehensive loan policy that establishes guidelines
with respect to all categories of lending activity. The policy establishes
lending authority for each individual loan officer, the officer loan committee
and the board of directors. All loans to directors and executive officers are
approved by the Board of Directors. The loans are concentrated in three major
areas: real estate loans, commercial loans and consumer loans. The lending
strategy is the development of a high quality loan portfolio.
The Bank's real estate loans are collateralized by mortgages and consist
primarily of loans to individuals for the purchase and improvement of real
estate and for the purchase of residential lots and construction of
single-family residential units. The Bank's residential real estate loans
generally are repayable in monthly installments based on up to a thirty-year
amortization schedule.
Commercial loans include loans to individuals and small businesses
including loans for working capital, machinery and equipment purchases, premise
and equipment acquisitions, purchase, improvement and investment in real estate
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development and other business needs. Commercial lines of credit are typically
for a one-year term. Other commercial loans with terms or amortization schedules
of longer than one year will normally carry interest rates which vary based on
the term and will become payable in full and are generally refinanced in two to
four years. Commercial loans typically entail a thorough analysis of the
borrower, its industry, current and projected economic conditions and other
factors. The Bank typically requires commercial borrowers to have annual
financial statements and requires appraisals or evaluations in connection with
the loans secured by real estate. The Bank typically requires personal
guarantees from principals involved with closely held corporate borrowers.
The Bank's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes payable on an installment basis. The
loans are generally for terms of five years or less and are collateralized by
liens on various personal assets of the borrower.
DEPOSIT ACTIVITIES
Deposits are the major source of the Bank's funds for lending and other
investment activities. The Bank considers the majority of its regular savings,
investors choice, demand, NOW and money market deposit accounts to be core
deposits. These accounts comprised approximately 80.1% of the Bank's total
deposits at December 31, 2005. Approximately 19.9% of the Bank's deposits at
December 31, 2005 were certificates of deposit. Generally, the Bank attempts to
maintain the rates paid on its deposits at a competitive level. Deposits of
$100,000 and over made up approximately 40.0% of the Bank's total time deposits
at December 31, 2005. The majority of the deposits of the Bank are generated
from Milwaukee, Ozaukee, Racine and Waukesha Counties. For additional
information regarding the Bank's deposit accounts, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Interest Rate Sensitivity Management" and Note 9 of Notes to Consolidated
Financial Statements, incorporated by reference in Item 8 below.
INVESTMENTS
The Bank invests a portion of its assets in U.S. Treasury and U.S.
Governmental agency obligations, FHLMC, FNMA and FHLB securities, state, county
and municipal obligations, collateralized mortgage obligations ("CMO's") and
federal funds sold. The investments are managed in relation to the loan demand
and deposit growth and are generally used to provide for the investment of
excess funds at reduced yields and risks relative to yields and risks of the
loan portfolio, while providing liquidity to fund increases in loan demand or to
offset fluctuations in deposits. For further information regarding the
Registrant's investment portfolio, see Note 3 of Notes to Consolidated Financial
Statements, incorporated by reference in Item 8 below.
SUPERVISION AND REGULATION
As a registered bank holding company, the Registrant is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). The Bank is subject to regulation and examination by
the OCC and the FDIC.
Under the BHCA, the Registrant is subject to periodic examination by the
Federal Reserve Board, and is required to file with the Federal Reserve Board
periodic reports of its operations and such additional information as the
Federal Reserve Board may require. In accordance with Federal Reserve Board
policy, the Registrant is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where the
Registrant might not do so absent such policy. In addition, there are numerous
federal and state laws and regulations, which regulate the activities of the
Registrant and the Bank. They include requirements and limitations relating to
capital and reserve requirements, permissible investments and lines of business,
transactions with affiliates, loan limits, mergers and acquisitions, issuance of
securities, dividend payments, inter-affiliate liabilities, extensions of credit
and branch banking.
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 total risk-based capital ratio of 8%, of which at least one-half must be
comprised of core capital elements defined as Tier 1 capital (which consists
principally of stockholders' equity). 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% Tier 1 capital to total assets, while
lower rated banking organizations must maintain a ratio of at least 4% to 5%.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possible additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the consolidated financial
statements. The risk-based and leverage standards presently used by the Federal
Reserve Board are minimum requirements, and higher capital levels will be
required if warranted by the particular circumstances or risk profiles of
individual banking organizations. The Federal Reserve Board has not advised the
Registrant of any specific minimum Tier 1 capital leverage ratio applicable to
it.
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Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. In addition, a bank holding company's controlled insured
depository institutions are liable for any loss incurred by the FDIC in
connection with the default of, or any FDIC-assisted transaction involving, an
affiliated insured bank or savings association. The extent of the regulators'
power depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
or "critically undercapitalized." To be well capitalized under the regulatory
framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital
ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%. At
December 31, 2005, the most recent notification from the Federal Reserve Board,
the Registrant was categorized as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Registrant's
category. As of December 31, 2005, the Registrant had a total risk-based capital
ratio of 19.54% a Tier I risk-based capital ratio of 18.48% and a leverage ratio
of 13.88%. The Registrant and the Bank were deemed well capitalized as of
December 31, 2005 and 2004.
Current federal law provides that adequately capitalized and managed bank
holding companies from any state may acquire banks and bank holding companies
located in any other state, subject to certain conditions. Banks are permitted
to create interstate branching networks in states that do not "opt out" of
interstate branching.
The laws and regulations to which the Registrant is subject are constantly
under review by Congress, regulatory agencies and state legislatures. In 1999,
Congress enacted the Gramm-Leach-Bliley Act ("the Act"), which eliminated
certain barriers to and restrictions on affiliations between banks and
securities firms, insurance companies and other financial services
organizations. Among other things, the Act repealed certain Glass-Steagall Act
restrictions on affiliations between banks and securities firms, and amended the
BHCA to permit bank holding companies that qualify as "financial holding
companies" to engage in a broad list of "financial activities," and any
non-financial activity that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines is "complementary" to a financial activity
and poses no substantial risk to the safety and soundness of depository
institutions or the financial system. The Act treats various lending, insurance
underwriting, insurance company portfolio investment, financial advisory,
securities underwriting, dealing and market-making, and merchant banking
activities as financial in nature for this purpose. Under the Act, a bank
holding company may become certified as a financial holding company by filing a
notice with the Federal Reserve Board, together with a certification that the
bank holding company meets certain criteria, including capital, management, and
Community Reinvestment Act requirements. The Registrant has determined not to
become certified as a financial holding company at this time. The Registrant may
reconsider this determination in the future.
In 2001, Congress enacted the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the "USA PATRIOT Act"). The USA PATRIOT Act is designed to deny terrorists
and criminals the ability to obtain access to the United States financial
system, and has significant implications for depository institutions, brokers,
dealers, and other businesses involved in the transfer of money. The USA PATRIOT
Act requires financial services companies to implement additional policies and
procedures with respect to, or additional measures designed to address, any or
all of the following matters, among others: money laundering, terrorist
financing, identifying and reporting suspicious activities and currency
transactions, and currency crimes.
The earnings and business of the Registrant and the Bank are also affected
by the general economic and political conditions in the United States and abroad
and by the monetary and fiscal policies of various federal agencies. The Federal
Reserve Board impacts the competitive conditions under which the Registrant
operates by determining the cost of funds obtained from money market sources for
lending and investing and by exerting influence on interest rates and credit
conditions. In addition, legislative and economic factors can be expected to
have an ongoing impact on the competitive environment within the financial
services industry. The impact of fluctuating economic conditions and federal
regulatory policies on the future profitability of the Registrant and its
subsidiary cannot be predicted with certainty.
INDUSTRY RESTRUCTURING
For well over a decade, the banking industry has been undergoing a
restructuring process which is anticipated to continue. The restructuring has
been caused by product and technological innovations in the financial services
industry, deregulation of interest rates, and increased competition from foreign
and nontraditional banking competitors, and has been characterized principally
by the gradual erosion of geographic barriers to intrastate and interstate
banking and the gradual expansion of investment and lending authorities for bank
institutions.
5
COMPETITION
The Bank's service area includes portions of Milwaukee, Ozaukee, Racine and
Waukesha Counties. In Milwaukee County, the Bank competes with all the major
banks and bank holding companies located in metropolitan Milwaukee, most of whom
are far larger in terms of assets and deposits. Ozaukee County, with a
population of approximately 86,000 residents, has twelve banks with thirty-seven
offices and five savings banks with ten offices. Racine County, with a
population of approximately 194,000 residents has fourteen banks with fifty-six
offices and five savings banks with thirteen offices. Waukesha County, with a
population of approximately 377,200 residents, has twenty-seven banks with one
hundred thirty-four offices and fourteen savings banks with forty-seven offices.
In addition to banks and savings banks, significant competition comes from
credit unions, security and brokerage firms, mortgage companies, insurance
companies and other providers of financial services in the area.
EMPLOYEES
As of December 31, 2005, the Registrant employed 283 full-time employees
and 111 part-time employees. The employees are not represented by a collective
bargaining unit. The Registrant considers relations with employees to be good.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
Statistical information relating to the Registrant and its subsidiaries on
a consolidated basis, as required by Guide 3 of the Securities and Exchange
Commission Guides for Preparation and Filing of Reports and Registration
Statements and Reports, is set forth as follows:
(1) Average Balances and Interest Rates for each of the last three fiscal years
is included in Item 7, Management's Discussion and Analysis of Financial
Position and Results of Operations, incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
(2) Interest Income and Expense Volume and Rate Change for each of the last two
years is included in Item 7, Management's Discussion and Analysis of
Financial Position and Results of Operations, incorporated herein by
reference to Registrant's 2005 Annual Report to Stockholders under the
caption entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
(3) Investment Securities Portfolio Maturity Distribution at December 31, 2005
is included in Item 7, Management's Discussion and Analysis of Financial
Position and Results of Operations, incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
(4) Investment Securities Portfolio for each of the last three years is
included in Item 7, Management's Discussion and Analysis of Financial
Position and Results of Operations, incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
(5) Loan Portfolio Composition for each of the last five years is included in
Item 7, Management's Discussion and Analysis of Financial Position and
Results of Operations, incorporated herein by reference to Registrant's
2005 Annual Report to Stockholders under the caption entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
(6) Summary of Loan Loss Experience for each of the last five years is included
in Item 7, Management's Discussion and Analysis of Financial Position and
Results of Operations, incorporated herein by reference to Registrant's
2005 Annual Report to Stockholders under the caption entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
(7) Average Daily Balance of Deposits and Average Rate Paid on Deposits for
each of the last three years is included in Item 7, Management's Discussion
and Analysis of Financial Position and Results of Operations, incorporated
herein by reference to Registrant's 2005 Annual Report to Stockholders
under the caption entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
6
The following additional tables set forth certain statistical information
relating to the Registrant and its subsidiaries on a consolidated basis.
LOAN PORTFOLIO
The following table presents information concerning the aggregate amount of
nonperforming loans. Nonperforming loans are comprised of (a) loans accounted
for on a nonaccrual basis and (b) loans contractually past due 90 days or more
as to interest or principal payments, for which interest continues to be
accrued. (Dollars in Thousands) December 31,
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Nonaccrual loans $1,905 $ 275 $ 181 $ 337 $ 128
Loans past due 90 days or more 1,005 1,688 1,280 2,361 2,511
------ ------ ------ ------ ------
Total nonperforming loans $2,910 $1,963 $1,461 $2,698 $2,639
====== ====== ====== ====== ======
Ratio of nonaccrual loans to
total loans 0.36% 0.06% 0.04% 0.08% 0.03%
Ratio of nonperforming loans to
total loans 0.56% 0.42% 0.35% 0.68% 0.71%
Interest income of $191,600 was recognized during 2005 on loans that were
accounted for on a nonaccrual basis. No additional interest income was
recognized during 2005 under the original loan terms had these loans not been
assigned nonaccrual status.
The accrual of interest income is generally discontinued when a loan becomes 90
days past due as to principal or interest. Registrant's management may continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest.
There were no other loans at December 31, 2005 or 2004 whose terms had been
renegotiated to provide a reduction or deferral of interest or principal because
of a deterioration in the financial position of the borrower, and there are no
current loans where, in the opinion of management, there are serious doubts as
to the ability of the borrower to comply with present loan repayment terms.
Loans defined as impaired by Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," if any, are included in
nonaccrual loans above.
RETURN ON EQUITY AND ASSETS AND SELECTED CAPITAL RATIOS
The following table shows consolidated operating and capital ratios of the
Registrant for each of the last three years:
Year Ended December 31,
2005 2004 2003
Percentage of net income to:
Average stockholders equity 9.41% 9.49% 10.56%
Average total assets 1.28% 1.26% 1.41%
Percentage of dividends declared per
common share to net income per
common share 74.29% 69.27% 59.65%
Percentage of average stockholders'
equity to daily average total assets 13.31% 13.29% 13.30%
7
SHORT-TERM BORROWINGS
(Dollars in Thousands)
Information relating to short-term borrowings follows:
Federal Funds Purchased
And Securities Sold Under Other Short-Term
Agreements to Repurchase Borrowings
------------------------- ----------------
Balance at December 31:
2005 $ - $ 2,432
2004 $ 9,486 $ 2,748
2003 $ 9,014 $ 1,534
Weighted average interest rate at year end:
2005 -% 2.67%
2004 2.36% 1.02%
2003 1.20% 0.78%
Maximum amount outstanding at any month's end
2005 $ 39,787 $ 3,100
2004 $ 25,665 $ 2,748
2003 $ 9,014 $ 4,636
Average amount outstanding during the year:
2005 $ 27,345 $ 1,550
2004 $ 13,793 $ 1,415
2003 $ 1,682 $ 1,753
Average interest rate during the year:
2005 3.27% 3.03%
2004 1.43% 1.14%
2003 1.16% 0.94%
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days of the transaction date. Other
short-term borrowings generally mature within 90 days.
AVAILABLE INFORMATION
The Registrant maintains a website at www.tcnb.com. The Registrant makes
available through that website, free of charge, copies of its Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8K, and
amendments to the reports, as soon as reasonably practicable after the
Registrant electronically files those materials with, or furnishes them to, the
Securities and Exchange Commission (the "SEC"). The Registrant's SEC reports can
be accessed through the "About TCNB" link of its website.
8
Item 1A. RISK FACTORS
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION AND RISK FACTORS.
The Registrant and its representatives may, from time to time, make written or
verbal forward-looking statements. Those statements relate to developments,
results, conditions or other events the Registrant expects or anticipates will
occur in the future. The Registrant intends words such as "believes,"
"anticipates," " plans," "expects" and similar expressions to identify
forward-looking statements. Without limiting the foregoing, those statements may
relate to future economic or interest rate conditions, loan losses and
allowances, loan and deposit growth, new branches and the competitive
environment. Forward-looking statements are based on management's then current
views and assumptions and, as a result, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Any such forward-looking statements are qualified by the following
important risk factors that could cause actual results to differ materially from
those predicted by the forward-looking statements.
An investment in the Registrant's common stock or other securities carries
certain risks. Investors should carefully consider the risks described below and
other risks, which may be disclosed from time to time in the Registrant's
filings with the SEC before investing in the Registrant's securities.
INTEREST RATES AND ECONOMIC CONDITIONS
The results of operations for financial institutions may be materially and
adversely affected by changes in prevailing economic conditions, including rapid
changes in interest rates, changes in local market conditions, changes in the
habits of the public, declines in real estate market values, increases in tax
rates and other operating expenses, and the policies of regulatory authorities,
including the monetary and fiscal policies of the Federal Reserve. Changes in
the economic environment may influence the growth rate of loans and deposits,
the quality of the loan portfolio and loan and deposit pricing. While the Bank
has taken measures intended to manage the risks of operating in a changing
interest rate environment, there can be no assurance that such measures will be
effective in avoiding undue interest rate risk. The Bank is unable to predict
fluctuations of market interest rates, which are affected by many factors,
including inflation, recession, a rise in unemployment, tightening money supply,
and domestic and international disorder and instability in domestic and foreign
financial markets.
The Bank's profitability depends to a large extent upon its net interest income,
which is the difference (or "spread") between interest income received on
interest earning assets, such as loans and investments, and interest expense
paid on interest income received on interest-earning assets, such as loans and
investments, and interest-bearing liabilities, such as deposits and borrowings.
Most of the Bank's loans are to businesses and individuals in Wisconsin (and,
more specifically, Milwaukee, Ozaukee, Racine and Waukesha Counties), and any
general adverse change in the economic conditions prevailing in these areas
could reduce the Bank's growth rate, impair its ability to collect loans or
attract deposits, and generally have an adverse impact on the results of
operations and financial condition of the Bank. If these areas experience
adverse economic, political or business conditions, the Bank would likely
experience higher rates of loss and delinquency on its loans than if its loans
were more geographically diverse.
The Bank's net interest spread and margin will be affected by general economic
conditions and other factors that influence market interest rates and the Bank's
ability to respond to changes in such rates. At any given time, the Bank's
assets and liabilities will be such that they are affected differently by a
given change in interest rates. As a result, an increase or decrease in rates
could have a positive or negative effect on the Bank's net income, capital and
liquidity.
The mismatch between maturities and interest rate sensitivities of balance sheet
items (i.e., interest-earning assets and interest-bearing liabilities) results
in interest rate risk, which risk will change as the level of interest rates
changes. The Bank's liabilities consist primarily of deposits, which are either
of a short-term maturity or have no stated maturity. These latter deposits
consist of NOW, demand accounts, savings accounts, and money market accounts.
These accounts typically can react more quickly to changes in market interest
rates than the Bank's assets because of the shorter maturity (or lack of
maturity) and repricing characteristics of these deposits. Consequently, sharp
increases or decreases in market interest rates may impact the Bank's earnings
negatively or positively, respectively.
To manage vulnerability to interest rate changes, the Bank's management monitors
the Bank's interest rate risks. The Bank's officers have established investment
policies and procedures, which ultimately is reported to the Board of Directors.
Management and the Board of Directors generally meets quarterly and reviews the
Bank's interest rate risk position, loan and securities repricing, current
interest rates and programs for raising deposit-based maturity gaps, including
9
retail and non-brokered deposits, and loan origination pipeline. The Bank's
assets and liabilities maturing and repricing within one year generally result
in a negative one-year gap, which occurs when the level of liabilities estimated
to mature and reprice within one year are greater than the level of assets
estimated to mature and reprice within that same time frame. If interest rates
were to rise significantly, and for a prolonged period, the Bank's operating
results could be adversely affected. Gap analysis attempts to estimate the
Bank's earnings sensitivity based on many assumptions, including, but not
limited to, the impact of contractual repricing and maturity characteristics for
rate-sensitive assets and liabilities.
Changes in interest rates will also affect the level of voluntary prepayments on
the Bank's loans and the receipt of payments on the Bank's mortgage-backed
securities, resulting in the receipt of proceeds that the Bank may have to
reinvest at a lower rate than the loan or mortgage-backed security being
prepaid. Finally, changes in interest rates can result in the flow of funds away
from the banking institutions into investments in U.S. government and corporate
securities, and other investment vehicles which, because of the absence of
federal insurance premiums and reserve requirements, among other reasons,
generally can pay higher rates of return than banking institutions.
CONCENTRATION ON SMALL TO MEDIUM-SIZED BUSINESS CUSTOMERS
One of the primary focal points of the Bank's business strategy is serving the
banking and financial services needs of small to medium-sized businesses in the
Bank's geographic region. Small to medium-sized businesses generally have fewer
financial resources in terms of capital or borrowing capacity than larger
entities. If general economic conditions deteriorate in the Milwaukee, Ozaukee,
Racine and Waukesha County region of Wisconsin, the businesses of the Bank's
lending clients and their ability to repay outstanding loans may be negatively
affected. As a consequence, the Bank's results of operations and financial
condition may be adversely affected.
GOVERNMENT REGULATION AND MONETARY POLICY
The Registrant and the Bank are subject to extensive state and federal
government supervision, regulation and control. Existing state and federal
banking laws subject the Registrant and the Bank to substantial limitations with
respect to loans, purchase of securities, payment of dividends and many other
aspects of the Bank's banking business. There can be no assurance that future
legislation or government policy will not adversely affect the banking industry
or the operations of the Bank, to the advantage of the Bank's non-bank
competitors. In addition, economic and monetary policy of the Federal Reserve
may increase the Bank's cost of doing business and affect its ability to attract
deposits and make loans. The techniques used by the Federal Reserve include
setting the reserve requirements of banks and establishing the discount rate on
bank borrowings. The policies of the Federal Reserve have a direct effect on the
amount of bank loans and deposits, and the interest rates charged and paid there
on.
BANK'S BORROWERS
The Bank's loan customers may not repay their loans according to their terms,
and the collateral securing the repayment of these loans may be insufficient to
assure repayment. The risk of nonpayment of loans is inherent in commercial
banking, and such nonpayment, if it occurs, may have a material adverse effect
on the Bank's results of operations and overall financial condition. The Bank's
management attempts to minimize the Bank's credit exposure by carefully
monitoring the concentration of its loans within specific industries and through
prudent loan application and approval procedures, including a determination of
the creditworthiness of borrowers and the value of the assets serving as
collateral for repayment of certain loans. However, there can be no assurance
that such monitoring and procedures will reduce such lending risks.
ALLOWANCE FOR LOAN LOSSES
The Bank makes various assumptions and judgments about the collectability of its
loan portfolio and provides an allowance for loan losses based on a number of
factors. The Bank's allowance for loan losses is established by management and
is maintained at a level considered adequate by management to absorb loan losses
that are inherent in the Bank's portfolio. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond the Bank's control, and such
losses may exceed current estimates. Although the Bank's management believes
that the allowance for loan losses as of the end of each fiscal quarter is
adequate to absorb probable and estimatible losses in its portfolio of loans,
there can be no assurance that the allowance will prove sufficient to cover
actual loan losses in the future.
In addition, federal and state regulators periodically review the Bank's
allowance for potential loan losses and may require the Bank to increase its
provision for potential loan losses or recognize further loan charge-offs, based
on judgments different than those of the Bank's management. Any increase in the
10
Bank's allowance for potential loan losses or loan charge-offs as required by
these regulatory agencies could have a negative effect on the operating results
of the Bank.
Non-performing loans at December 31, 2005 were $2.9 million compared to
$1,963,000 at December 31, 2004. Management believes that the recent increase in
non-performing loans is a result of normal business fluctuations. No assurance
can be given that non-performing loans will not increase in the future.
MORTGAGE AND CONSTRUCTION LOANS
The Bank offers fixed and adjustable interest rates on loans, with terms of up
to 30 years. Although the majority of the residential mortgage loans that the
Bank originates are fixed-rate, adjustable rate mortgage ("ARM") loans increase
the responsiveness of the Bank's loan portfolios to changes in market interest
rates. However, because ARM loans are more responsive to changes in market
interest rates than fixed-rate loans, ARM loans also increase the possibility of
delinquencies in periods of high interest rates.
The Bank also originates loans secured by mortgages on commercial real estate
and multi-family residential real estate. Since these loans usually are larger
than one-to-four family residential mortgage loans, they generally involve
greater risks than one-to-four family residential mortgage loans. In addition,
since customers' ability to repay these loans often is dependent on operating
and managing those properties successfully, adverse conditions in the real
estate market or the economy generally can impact repayment more severely than
loans secured by one-to-four family residential properties. Moreover, the
commercial real estate business is subject to downturns, overbuilding and local
economic conditions.
The Bank also makes construction loans for residences and commercial buildings,
as well as on unimproved property. While these loans enable the Bank to increase
the interest rate sensitivity of its loan portfolios and receive higher yields
than those obtainable on permanent residential mortgage loans, the higher yields
correspond to higher risk perceived to be associated with construction lending.
These include risks associated generally with loans on the type of property
securing the loan. Moreover, commercial construction lending often involves
disbursing substantial funds with repayment dependent largely on the success of
the ultimate project instead of the borrower's or guarantor's ability to repay.
Again, adverse conditions in the real estate market or the economy generally can
impact repayment more severely than loans secured by one-to-four family
residential properties.
LENDING LIMITS
The Bank's current lending limit, as of December 31, 2005 is approximately
$14,892,000 per customer. Some of the Bank's competitors have higher lending
limits. Accordingly, the size of the loans that the Bank can offer to potential
customers is sometimes less than the size of loans that the Bank's competitors
are able to offer. This limit may affect the ability of the Bank to seek
relationships with area businesses and to generate an acceptable return on
assets. The Bank attempts to accommodate loan volume in excess of its lending
limit through the sale of participations in such loans to other banks or sell
the loan outright while retaining the servicing right. However, there can be no
assurance that the Bank will be successful in attracting or maintaining
customers seeking larger loans or that the Bank will be able to engage in
participations of such loans or on terms favorable to the Bank.
COMPETITION
The financial services industry is highly competitive. The Bank faces intense
competition from financial institutions in Milwaukee, Ozaukee, Racine and
Waukesha Counties and surrounding markets, and from non-bank financial
institutions, such as mutual funds, brokerage firms and insurance companies that
are aggressively expanding into markets traditionally served by banks. Many of
the Bank's non-bank competitors are not subject to the same degree of regulation
as are imposed on bank holding companies, federally insured banks and
Wisconsin-chartered state banks. As a result, such non-bank competitors may have
advantages over the Bank in providing certain services. The Bank also competes
indirectly with regional and national financial institutions, many of which have
greater liquidity, lending limits, access to capital and market recognition and
resources than the Bank. Expanded interstate banking may increase competition
from out-of-state banking organizations and other financial institutions. As a
relatively small bank, the Bank may lack the resources to compete effectively in
the financial services market.
TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
11
and enables financial institutions to reduce costs. The Bank's future success
will depend in part on its ability to address the needs of its customers by
using technology to provide products and services that will satisfy customer
demands for convenience as well as create additional efficiencies in the Bank's
operations. A number of the Bank's competitors may have substantially greater
resources to invest in technological improvements. There can be no assurance
that the Bank will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services
to its customers.
ABILITY TO RESELL STOCK
There is no public or other trading market for the Registrant's common stock and
no market is expected to develop in the foreseeable future. Therefore,
shareholders may be unable to resell their stock quickly or on favorable terms.
Item 1B. UNRESOLVED STAFF COMMENTS
-------------------------
None
Item 2. PROPERTIES
----------
Tri City National Bank has thirty-four locations in the Metropolitan Milwaukee
area, including Oak Creek, Milwaukee, Brookfield, Menomonee Falls, West Allis,
Hales Corners, Wauwatosa, Cedarburg, Sturtevant and South Milwaukee. The Bank
owns fourteen of its locations and leases twenty locations, including eighteen
full service banking centers located in grocery stores.
Registrant believes that its bank locations are in buildings that are
attractive, efficient and adequate for their operations, with sufficient space
for parking and drive-in facilities.
Item 3. LEGAL PROCEEDINGS
-----------------
The Registrant is not party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted during the fourth quarter of 2005 to a vote of
security holders.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITTIES
----------------------------------------------------------------------
The information required by Item 5 is incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Market for Corporation's Common Stock and Related Stockholder Matters" (Page
29).
Item 6. SELECTED FINANCIAL DATA
-----------------------
The information required by Item 6 is incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Selected Financial Data" (Page 28).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
----------------------------------------------------------------------
The information required by Item 7 is incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" (Pages 4 to 28).
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information required by Item 7A is incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders under the caption entitled
"Quantitative and Qualitative Disclosures About Market Risk" (Pages 22 to 24).
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------
The information required by Item 8 is incorporated herein by reference to
Registrant's 2005 Annual Report to Stockholders (Pages 31 to 60).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
----------------------------------------------------------------------
None
Item 9A. CONTROLS AND PROCEDURES
-----------------------
The Registrant maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed by it in the
reports filed by it under the Securities Exchange Act of 1934, as amended, is
recorded and processed, summarized and reported within the time periods
specified in the SEC's rules and forms. At the end of the last fiscal quarter,
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-15 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 as of the end of the period covered by
this report.
There have been no changes in the Registrant's internal control over financial
reporting identified in connection with the evaluation discussed above that
occurred during the Registrant's last fiscal quarter that have materially
affected, or are reasonable likely to materially affect, the Registrant's
internal control over financial reporting.
Item 9B. OTHER INFORMATION
-----------------
None
13
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
The information required by Item 10 is incorporated herein by reference to
Registrant's definitive Proxy Statement for its annual meeting of stockholders
on June 14, 2006 ("The 2006 Proxy Statement") under the captions entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance".
Item 11. EXECUTIVE COMPENSATION
----------------------
The information required by Item 11 is incorporated herein by reference to the
2006 Proxy Statement under the caption entitled "Executive Compensation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------
The information required by Item 12 is incorporated herein by reference to the
2006 Proxy Statement under the caption entitled "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by Item 13 is incorporated herein by reference to the
2006 Proxy Statement under the caption entitled "Loans and Other Transactions
with Management".
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
The information required by Item 14 is incorporated herein by reference to the
2006 Proxy Statement under the caption entitled "Principal Accountant Fees and
Services."
14
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
-------------------------------------------
(a) (1) and (2) Financial statements and financial statement schedules
------------------------------------------------------------------
The response to this portion of Item 15 is submitted as a separate
section of this report.
(3) Listing of Exhibits
Exhibit 3.1 - Restated Articles of incorporation (incorporated
herein by reference to Exhibit 3.2 to Registrant's
current report on Form 8-K filed February 12,2003).
Exhibit 3.2 - By-Laws (incorporated herein by reference to Exhibit
3.2 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000).
Exhibit 10.1*- Tri City Bankshares Corporation 2003 Stock Purchase
Plan, incorporated herein by reference to Exhibit 99
of the Registrant's Registration Statement on Form
S-8(Reg. No. 333-111617) filed on December 30, 2003.
Exhibit 10.2* - Summary of compensation arrangements with certain
persons
Exhibit 10.4* - Summary of director compensation
Exhibit 10.5* - Description of consulting arrangements between
Registrant and Mr. William J. Werry.
Exhibit 13 - Annual Report to Stockholders for the year ended
December 31, 2005.
With the exception of the information incorporated
by reference into Items 5, 6, 7, 7A, and 8 of this
Form 10-K, the 2004 Annual Report to Stockholders
is not deemed filed as part of this report.
Exhibit 21 - Subsidiaries of Registrant.
Exhibit 23 - Consent of Virchow, Krause & Company, LLP
Exhibit 31 - Rule 13a -14(a) or 15d-14(a) Under the Securities
and Exchange Act of 1934, as amended, Certification
Exhibit 32 - 18 U.S.C. Section 1350 Certification
*A Management contract or compensation plan or arrangement
15
PART IV
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1), (2) and (b)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
CERTAIN EXHIBITS
Year Ended December 31, 2005
TRI CITY BANKSHARES CORPORATION
OAK CREEK, WISCONSIN
16
FORM 10-K-ITEM 15(a)(1) and (2)
TRI CITY BANKSHARES CORPORATION
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and reports of independent
auditors of Tri City Bankshares Corporation, included in the annual report of
the Registrant to its stockholders for the year ended December 31, 2005, are
incorporated by reference in Item 8:
Consolidated Balance Sheets-December 31, 2005 and 2004
Consolidated Statements of Income-Years ended December 31, 2005, 2004 and
2003
Consolidated Statements of Stockholders' Equity-Years ended December 31,
2005, 2004 and 2003.
Consolidated Statements of Cash Flows-Years ended December 31, 2005, 2004
and 2003.
Notes to Consolidated Financial Statements-Years ended December 31, 2005,
2004 and 2003.
Report of Independent Registered Public Accounting Firm
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
BY: /s/ Henry Karbiner, Jr.
------------------------------
Henry Karbiner, Jr., President
Date: March 29, 2006
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
/s/ Henry Karbiner, Jr. 03/29/06
----------------------- --------
Henry Karbiner, Jr. Chairman of the Board and
Chief Executive Officer
(Principal Executive and
Financial Officer)
/s/ Ronald K. Puetz 03/29/06
----------------------- --------
Ronald K. Puetz Executive Vice-President and
Director
/s/ Scott A. Wilson 03/29/06
----------------------- --------
Scott A. Wilson Senior Vice President and
Secretary and Director
/s/ Robert W. Orth 03/29/06
- ------------------------ --------
Robert W. Orth Senior Vice President and
Director
/s/ Scott D. Gerardin 03/29/06
----------------------- --------
Scott D. Gerardin Senior Vice President, General
Counsel and Director
/s/ Thomas W. Vierthaler 03/29/06
- ------------------------ --------
Thomas W. Vierthaler Vice President and Comptroller
(Principal Accounting Officer)
18
/s/ Frank J. Bauer 03/29/06
- ------------------------ --------
Frank J. Bauer Director
/s/ William N. Beres 03/29/06
----------------------- --------
William N. Beres Director
03/29/06
- ------------------------ --------
Sanford Fedderly Director
03/29/06
- ------------------------ --------
William Gravitter Director
03/29/06
- ------------------------ --------
Christ Krantz Director
/s/ Brian T. McGarry 03/29/06
----------------------- --------
Brian T. McGarry Director
/s/ Agatha T. Ulrich 03/29/06
----------------------- --------
Agatha T. Ulrich Director
/s/ David A. Ulrich, Jr. 03/29/06
----------------------- --------
David A. Ulrich, Jr. Director
/s/ William J. Werry 03/29/06
- ------------------------ --------
William J. Werry Director
19