UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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
(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
--------
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 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. (check
one):
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
----- -----
The number of shares outstanding of $1.00 par value common stock, as of
October 25, 2006: 8,801,813 shares.
1
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of Tri City
Bankshares Corporation are as follows:
Condensed Consolidated Balance Sheets as of
September 30, 2006 and December 31, 2005
Condensed Consolidated Statements of Income
for the Three Months ended September 30, 2006
and 2005
Condensed Consolidated Statements of Income
for the Nine Months ended September 30, 2006
and 2005
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2006
and 2005
Notes to Unaudited Condensed Consolidated Financial
Statements
2
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
September 30, December 31,
2006 2005
------------- -------------
Cash and due from banks $ 23,834,458 $ 50,249,590
Federal funds sold - 6,334,444
------------- -------------
Cash and cash equivalents 23,834,458 56,584,034
Held to maturity securities, fair value of $129,507,307 and
$135,885,382 as of 2006 and 2005, respectively 131,018,138 137,911,201
Loans, less allowance for loan losses of $5,659,807 and
$5,665,519 as of 2006 and 2005, respectively 518,502,232 510,891,444
Premises and equipment - net 20,629,702 20,894,633
Cash surrender value of life insurance 11,064,253 10,753,006
Mortgage servicing rights - net 808,067 887,885
Accrued interest receivable and other assets 5,166,454 4,385,778
------------- -------------
TOTAL ASSETS $ 711,023,304 $ 742,307,981
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 143,892,362 $ 148,606,402
Savings and NOW 330,842,518 363,633,279
Other time 123,520,729 127,051,767
------------- -------------
Total Deposits 598,255,609 639,291,448
Federal funds purchased and securities sold under repurchase agreements 5,270,196 -
Other borrowings 2,978,265 2,432,163
Accrued interest payable and other liabilities 1,463,743 1,783,112
------------- -------------
Total Liabilities 607,967,813 643,506,723
------------- -------------
STOCKHOLDERS' EQUITY
Cumulative preferred stock, $1 par value, 200,000 shares
authorized, no shares issued - -
Common stock, $1 par value,
15,000,000 shares authorized, 8,783,818 and
8,615,527 shares issued and outstanding as of 2006 and 2005,
respectively 8,783,818 8,615,527
Additional paid-in capital 24,321,340 21,233,200
Retained earnings 69,950,333 68,952,531
------------- -------------
Total Stockholders' Equity 103,055,491 98,801,258
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 711,023,304 $ 742,307,981
============= =============
See notes to unaudited condensed consolidated financial statements.
3
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For Three Months Ended September 30, 2006 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2006 2005
---- ----
INTEREST INCOME
Loans $ 9,161,408 $ 7,959,212
Investment securities
Taxable 979,287 768,826
Exempt from federal income taxes 289,713 444,761
Federal funds sold 54,855 1,421
------------- -------------
Total Interest Income 10,485,263 9,174,220
------------- -------------
INTEREST EXPENSE
Deposits 2,620,413 1,786,397
Federal funds purchased and securities sold under repurchase agreements 73,728 228,522
Other borrowings 13,005 10,236
------------- -------------
Total Interest Expense 2,707,146 2,025,155
------------- -------------
Net interest income before provision for loan losses 7,778,117 7,149,065
Provision for loan losses 60,000 -
------------- -------------
Net interest income after provision for loan losses 7,718,117 7,149,065
------------- -------------
NONINTEREST INCOME
Service charges on deposits 2,221,590 1,725,434
Loan servicing income 46,715 14,239
Net gain on sale of loans 63,406 142,506
Increase in cash surrender value of life insurance 103,764 96,384
Other 353,550 267,305
------------- -------------
Total Noninterest Income 2,789,025 2,245,868
------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits 3,749,795 3,509,186
Net occupancy costs 608,842 533,464
Furniture and equipment expenses 391,837 406,779
Computer services 543,533 461,986
Advertising and promotional 386,276 352,561
Regulatory agency assessments 50,711 59,009
Office supplies 153,224 123,107
Other 778,549 713,602
------------- -------------
Total Noninterest Expenses 6,662,767 6,159,694
------------- -------------
Income before income taxes 3,844,375 3,235,239
Less: Applicable income taxes 1,325,500 1,014,000
------------- -------------
NET INCOME $ 2,518,875 $ 2,221,239
============= =============
Basic earnings per share $ 0.29 $ 0.26
Dividends per share $ 0.220 $ 0.195
Weighted average shares outstanding 8,768,577 8,551,840
See notes to unaudited condensed consolidated financial statements.
4
6
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For Nine Months Ended September 30, 2006 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2006 2005
---- ----
INTEREST INCOME
Loans $ 26,042,948 $ 22,555,566
Investment securities
Taxable 2,740,098 2,502,817
Exempt from federal income taxes 908,554 1,379,518
Federal funds sold 404,095 22,051
Other 9,663 9,663
------------- -------------
Total Interest Income 30,105,358 26,469,615
------------- -------------
INTEREST EXPENSE
Deposits 7,617,102 4,693,703
Federal funds purchased and securities sold under repurchase agreements 103,322 651,099
Other borrowings 37,023 22,507
------------- -------------
Total Interest Expense 7,757,447 5,367,309
------------- -------------
Net interest income before provision for loan losses 22,347,911 21,102,306
Provision for loan losses 180,000 -
------------- -------------
Net interest income after provision for loan losses 22,167,911 21,102,306
------------- -------------
NONINTEREST INCOME
Service charges on deposits 6,097,314 4,936,164
Loan servicing income 153,640 120,399
Net gain on sale of loans 222,615 392,743
Increase in cash surrender value of life insurance 311,247 292,568
Gain on sale of other assets - 684,368
Other 953,482 798,695
------------- -------------
Total Noninterest Income 7,738,298 7,224,937
------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits 11,104,280 10,331,076
Net occupancy costs 1,831,830 1,572,621
Furniture and equipment expenses 1,179,076 1,218,070
Computer services 1,632,792 1,361,985
Advertising and promotional 1,134,263 995,381
Regulatory agency assessments 159,053 180,296
Office supplies 439,357 399,848
Other 2,268,777 2,019,960
------------- -------------
Total Noninterest Expenses 19,749,428 18,079,237
------------- -------------
Income before income taxes 10,156,781 10,248,006
Less: Applicable income taxes 3,434,500 3,311,000
------------- -------------
NET INCOME $ 6,722,281 $ 6,937,006
============= =============
Basic earnings per share $ 0.77 $ 0.82
Dividends per share $ 0.660 $ 0.585
Weighted average shares outstanding 8,714,128 8,504,572
See notes to unaudited condensed consolidated financial statements.
5
TRI CITY BANKSHARES CORPORATION
CONDENCED CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 2006 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,722,281 $ 6,937,006
Adjustments to reconcile net income to net cash flows provided by operating
activities
Depreciation 1,629,285 1,643,478
Amortization of servicing rights, premiums and discounts 282,819 234,014
Gain on sale of loans (222,615) (392,743)
Provision for loan losses 180,000 -
Gain on sale of other assets - (684,368)
Proceeds from sales of loans held for sale 16,262,970 25,890,611
Originations of loans held for sale (16,159,205) (25,693,817)
Increase in cash surrender value of life insurance (311,247) (292,568)
Loss on sale of other real estate owned 25,449 8,392
Net change in
Accrued interest receivable and other assets (910,174) (548,408)
Accrued interest payable and other liabilities (319,370) 371,273
------------- -------------
Net Cash Flows Provided by Operating Activities 7,180,193 7,472,870
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities
Maturities, prepayments and calls 23,279,660 24,142,996
Purchases (16,470,749) (5,366,450)
Net increase in loans (7,790,788) (41,021,973)
Purchases of premises and equipment - net (1,364,354) (1,897,684)
Proceeds from sale of other assets - 684,368
Proceeds from sale of other real estate owned 104,051 108,308
------------- -------------
Net Cash Flows Used in Investing Activities (2,242,180) (23,350,435)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (41,035,839) 2,213,726
Net increase in federal funds purchased and securities sold under repurchase
agreements 5,270,196 8,376,955
Net increase in other borrowings 546,102 351,751
Dividends paid (5,724,479) (4,952,856)
Common stock issued - net 3,256,431 2,974,321
------------- -------------
Net Cash Flows Provided by (Used in) Financing Activities (37,687,589) 8,963,897
------------- -------------
Net Change in Cash and Cash Equivalents (32,749,576) (6,913,668)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 56,584,034 35,425,012
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 23,834,458 $ 28,511,344
============= =============
Loans receivable transferred to Other Real Estate Owned $ - $ 176,700
See notes to unaudited 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 of America 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 of America 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, 2005. The December 31, 2005
financial information included herein is derived from the December 31, 2005
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 September 30, 2006 and the results of its
operations for the three and nine month periods ended September 30, 2006 and
2005, and cash flows for the nine months ended September 30, 2006 and 2005. 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
reporting period. The operating results for the first nine months of 2006 are
7
not necessarily indicative of the results which may be expected for the entire
2006 fiscal year.
(B) RECENT ACCOUNTING DEVELOPMENTS
In December 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 was effective January 1, 2006. The Corporation issues a limited number
of shares to certain Bank employees at fair value each year and does not issue
stock options. Consequently, the adoption of SFAS 123R did not have an effect on
the Corporation's consolidated financial statements for the nine month period
ended September 30, 2006.
In March 2006, the FASB issued SFAS 156 "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140". SFAS 156 requires an
entity to recognize a servicing asset or liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract.
It requires all separately recognized servicing assets and servicing liabilities
to be initially measured at fair value. SFAS 156 permits an entity to choose
either an amortization or fair value measurement method for each class of
separately recognized servicing assets and servicing liabilities. It also
permits a one-time reclassification of available-for-sale securities to trading
8
securities by entities with recognized servicing rights. Lastly, it requires
separate presentation of servicing assets and servicing liabilities subsequently
measured at fair value and additional disclosures for all separately recognized
servicing assets and servicing liabilities. Adoption of the initial measurement
provision of this statement was required upon issuance. The adoption of this
provision had no significant effect on the Company's 2006 consolidated financial
statements. The Company is required to adopt all other provisions of this
statement beginning in 2007 although earlier adoption was permitted in 2006
prior to filing of an entity's first financial report for that year. The Company
has not adopted the remaining provisions of SFAS 156 in 2006. Management is
currently evaluating the impact that the adoption of the remaining provisions of
SFAS 156 will have on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." This interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The standard is required to be adopted by the
Corporation on January 1, 2007. The adoption of this standard is not expected to
have a material impact on the Corporation's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in accordance with U.S. GAAP, and expands disclosures about fair value
measurements. The statement clarifies that the exchange price is the price in an
9
orderly transaction between market participants to sell an asset or transfer a
liability at the measurement date. The statement emphasizes that fair value is a
market-based measurement and not an entity-specific measurement. The statement
establishes a fair value hierarchy used in fair value measurements and expands
the required disclosures of assets and liabilities measured at fair value.
Management will be required to adopt this statement beginning in 2008. The
adoption of this standard is not expected to have a material impact on the
Corporation's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158 "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans". SFAS No. 158 amends
SFAS statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to
recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for a plan's underfunded status. Secondly, it
requires employers to measure the plans assets and obligations that determine
its funded status as of the end of the fiscal year. Lastly, employers are
required to recognize changes in the funded status of a defined benefit
postretirement plan in the year that the changes occur with the changes reported
in comprehensive income. The standard is required to be adopted by entities
having fiscal years ending after December 15, 2006. Because the Corporation does
not have any defined benefit plan or other post retirement plans, this standard
is not expected to have an impact on the Corporation's consolidated financial
statement.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 expresses the views of
the SEC regarding the process of quantifying financial statement misstatements.
This statement focuses on addressing the diversity in practice of quantifying
financial statement misstatements. The standard is required to be adopted by the
10
Corporation on January 1, 2007. The adoption of this standard is not expected to
have a material impact on the Corporation's 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.
11
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 Item 1A of
Part II of this report and in Item 1A of the Corporation's Annual Report on Form
10-K for the year ended December 31, 2005.
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:
o Establishing the amount of the provision and allowance for loan
losses.
12
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.
13
FINANCIAL CONDITION
The Corporation's total assets have decreased $31.3 million (4.2%) during
the first three quarters of 2006. Cash and cash equivalents decreased $32.7
million (57.9%) during that period, associated with activity normally seen
following 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.
Investment securities decreased $6.9 million (5.0%) during the first three
quarters of 2006. Approximately $23.3 million of the banking subsidiary's
investment portfolio was redeemed through normal maturities or scheduled calls.
Management continues to follow its practice of holding to maturity its
investment portfolio.
Loans increased $7.6 million (1.5%) during the first three quarters of
2006. Commercial loan growth slowed in the last quarter of 2005, and remained
sluggish during the first two quarters of 2006. This trend reversed in the third
quarter of 2006, during which quarter loan growth was the highest increase per
quarter in 2006. Gross loan balances increased $13.9 million (2.7%) during the
third quarter of 2006 resulting in the year to date increase of $7.8 million to
$524.2 million outstanding loans. Management remains optimistic that the pace of
the increases in the loan portfolio will continue to grow in the fourth quarter
despite pressure from rising rates and a competitive market.
The allowance for loan losses remained at $5.7 million during the first
nine months of 2006. Asset quality remains strong in the banking subsidiary's
loan portfolio. A $60,000 provision for loan loss was recorded in each of the
first three quarters of 2006 resulting in a provision for loan losses of
$180,000. The nominal net decrease in the loan loss allowance from period to
period represents the difference of charge-offs versus the newly allocated
provision, plus any loan recoveries. The allowance reflects management's best
estimate of 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
14
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.
Total accrued interest receivable, included in other assets, increased
$365,100 (10.6%) in September 2006 over the same period in 2005. The primary
reason for this increase is due to an increase in yields which averaged 6.18%
for interest income during the first nine months of 2006 compared to an average
yield of 5.55% during the first nine months of 2005.
Deposits at the Corporation decreased $41.0 million (6.4%) during the first
nine months of 2006. Most of the year-to-date decrease is attributable to
municipal deposit run-off. 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 transferred to investment funds management programs at the
beginning of the succeeding year. Demand deposits have decreased $4.7 million
(3.2%) while savings and now accounts decreased $32.8 million (9.0%) from
December 31, 2005. Other time deposits decreased only $3.5 million (2.8%) during
the same period in 2006.
Total borrowings of the Corporation increased $5.8 million (239.1%) during
the first nine months of 2006. As a result of increases in the loan portfolio,
the borrowing needs of the banking subsidiary shifted. 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 facility with two correspondent banks.
Accrued interest payable increased $158,000 (33.7%) as of September 2006
compared to September 2005. The average rate paid on interest bearing
liabilities during the first nine months of 2006 was 2.24% compared to 1.63%
average rate paid during the first nine months of 2005. The average rate paid
during September 2006 was 2.40% compared to 1.89% paid during September 2005.
15
The Corporation's equity increased $4.3 million (4.3%) during the first
three quarters of 2006. The Corporation received proceeds of $3.3 million
primarily from the sale of common stock through the Dividend Reinvestment Plan
offered to shareholders which, along with earnings of $6.7 million for the first
three quarters of 2006, were offset by $5.7 million in dividends paid during the
nine month period.
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 $71.7 million is
available for short-term liquidity through reverse repurchase agreements
available through its correspondent banking relationships.
CAPITAL EXPENDITURES
The banking subsidiary has no major capital expansion projects currently in
place for the final quarter of 2006 however, if a project is identified or an
upgrade in equipment becomes necessary, the Corporation has sufficient liquidity
to internally fund any such expenditure.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
The Corporation's net income increased $297,600 (13.4%) during the third
quarter of 2006 compared to the same period in 2005. Net interest income
increased $629,100 (8.8%) to $7.8 million for the third quarter of 2006 compared
to $7.1 million for the third quarter last year. The net interest income after
provision for loan losses was impacted by a $60,000 increase in the provision
for loan losses during the third quarter of 2006 as compared to no such
provision in the comparable period in 2005. As a result, net interest income
after the provision for loan losses increased $569,100 (8.0%) during the third
quarter of 2006 compared to the third quarter of 2005.
Interest income on loans increased $1.2 million (15.1%) in the third
quarter of 2006 compared to the third quarter of 2005. Year-to-date 2006 loan
yields were up to 6.71% from 6.00% in 2005. This 71 basis point increase is the
primary reason for the increase in interest earnings on loans. Additionally, an
increase in the loan portfolio as of September 30, 2006 versus September 30,
2005 of $12.2 million (2.4%) has contributed to the increase.
Interest income on investment securities increased $55,400 (4.6%) during
the third quarter of 2006 compared to the third quarter of 2005. The average tax
equivalent year-to-date yield derived from all investments increased by 7 basis
points during the third quarter of 2006 compared to the third quarter of 2005.
Accordingly this increase is due exclusively to rate, as balances of investment
securities for the period ending September 30, 2006 have declined $9.7 million
(6.9%) compared to September 30, 2005.
Approximately $6.1 million in investment securities are scheduled to mature
during the next three months. In addition, approximately $66.0 million of other
securities are subject to calls during the same period however, such calls are
unlikely given the current rising rate environment.
17
Interest expense increased $682,000 (33.7%) during the third quarter of
2006 compared to the third quarter of 2005. An increase in the year-to-date
yield of 70 basis points (from 1.52% to 2.22%) accounted for $725,300 of this
variance. The remaining $43,300 variance resulted from the decrease in volume of
average interest bearing liabilities during 2006 as compared to 2005.
Noninterest income increased $543,200 (24.2%) during the third quarter of
2006 compared to the same period of 2005. This is primarily the result of
increased service charges on deposit accounts, including overdraft fees.
Noninterest expense increased $503,100 (8.2%) during the third quarter of
2006 compared to the same period in 2005. Payroll increases of $240,600 (6.9%)
during this period in 2006 compared to 2005 were the largest single component of
the increase. The variance was the result of increased staffing due to the
opening of four additional branch locations. The new locations were also the
primary reason for increase in occupancy expenses of $75,400 (14.1%) for the
third quarter of 2006 compared to the same period in 2005.
18
A summary of the change in the components of net income for the three
months ended September 30, 2006 and 2005 appears below:
Three Months Ended September 30, September 30, 2006
2006 2005 Over(Under)
(UNAUDITED) (UNAUDITED) 2005
Revenues and Expenses: (000's)
Interest Income $ 10,485 $ 9,174 $ 1,311
Less: Interest Expense 2,707 2,025 682
-------- -------- --------
Net Interest Income 7,778 7,149 629
Less: Provision for loan losses 60 - 60
-------- -------- --------
Net interest income after
provision for loan losses 7,718 7,149 569
Noninterest Income 2,789 2,246 543
Noninterest Expenses 6,663 6,160 503
-------- -------- --------
Income from Operations 3,844 3,235 609
Tax Provision 1,325 1,014 311
-------- -------- --------
NET INCOME $ 2,519 $ 2,221 $ 298
======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Net income of the Corporation decreased $214,700 (3.1%) during the nine
months ended September 30, 2006 compared to the same period in 2005. The
decrease is attributable to increases to payroll and occupancy expense as a
result of four offices newly opened in 2005. Another contributing factor is the
one-time pre-tax gain of $684,000 ($417,000 after tax) during the first quarter
of 2005 resulting from the sale of the banking subsidiary's ownership interest
in Pulse, the driver of our ATM network, to Discover, Inc.
Interest income on loans increased $3.5 million (15.5%) in the first nine
months of 2006 versus the comparable period last year. A volume increase of
19
$13.9 million in the third quarter of 2006 in commercial, real estate and
consumer loans accounted for $1.1 million of the interest income increase and a
71 basis point increase in the yield (from 6.00% to 6.71%) accounted for $2.4
million of the increase in interest income.
Interest income on investment securities decreased $233,700 (6.0%) during
the first nine months of 2006 compared to the same period in 2005. This decrease
is the result of a reduced investment portfolio. The total investment security
portfolio declined $9.7 million (6.9%) to $131.0 million as of September 30,
2006 from $140.7 million at September 30, 2005. Management will continue to
replace maturing securities with securities that have relatively short
maturities and are of high quality.
Interest expense on deposits increased $2.9 million (62.3%) in the first
nine months of 2006. Of this increase, $2.4 million is due to a 70 basis point
increase in the yield on interest bearing deposits (from 1.52% to 2.22%). The
remaining $0.5 million of the increase is due to a growth in the average balance
of interest bearing deposits during the nine month period ending September 30,
2006 compared to the nine month period ended September 30, 2005.
Deposits increased $5.6 million during the past twelve months. The increase
was comprised of short-term, low yielding liabilities, due to the growth in
personal checking and municipal deposits. 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 decreased $533,300
(79.2%) during the nine months ended September 30, 2006 versus the comparable
period in 2005. This decrease reflects the decreased funding needs due to
reduced growth in the banking subsidiary's loan portfolio.
Noninterest income increased $513,400 (7.1%) for the first nine months of
2006 versus the comparable period in 2005. This is the result of a $1.2 million
increase in deposit account service fees during the first nine months of 2006,
more than offsetting the one-time gain of $684,000 from the sale of the
20
Corporation's interest in Pulse, Inc., the banking subsidiary's ATM network
provider during the same period in 2005.
Noninterest expense increased $1.7 million (9.2%) during the nine months
ending September 30, 2006 compared to the same period in 2005. Payroll increases
of $773,200 (7.5%) during the first nine months of 2006 compared to the first
nine months of 2005 were the largest single component of the increase. Increased
staffing, due to the opening of four additional branch locations, was primarily
responsible for this variance. Occupancy expenses increased $259,200 (16.5%)
during the same period in 2006 compared to the same period in 2005 due to the
new locations. Computer service expenses increased $270,800 (19.9%) during the
first nine months of 2006 compared to the same period in 2005. Debit card and
transaction volume growth accounts for $114,000 of the variance and additional
expenses for a new communications network, brought on-line in December 2005, and
additional account volume comprise the rest.
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% Tier 1 capital to total assets. The
risk-based capital ratio for the Corporation is 20.49% and its leverage ratio is
14.60% as of September 30, 2006.
21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's Annual Report on Form 10-K for the year ended December
31, 2005 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-15(e) 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.
22
PART II - OTHER INFORMATION
ITEM 1A RISK FACTORS
There have been no material changes to the risk factors previously
disclosed in response to Item 1A to Part I of our 2005 Annual Report
on Form 10-K.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2006, the Corporation did not
sell any equity securities which were not registered under the
Securities Act or repurchase any of its equity securities.
ITEM 6 EXHIBITS
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
DATE: November 9, 2006 /s/Henry Karbiner Jr.
-------------------------- ---------------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer and
Treasurer (Principal Executive Officer)
DATE: November 9, 2006 /s/Thomas W. Vierthaler
-------------------------- ---------------------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
24