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 June 30, 2007
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 No.)
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 filter 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 July 31,
2007: 8,864,399 shares.
1
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2007 and December 31, 2006 3
Condensed Consolidated Statements of Income
for the Three Months ended June 30, 2007
and 2006 4
Condensed Consolidated Statements of Income
for the Six Months ended June 30, 2007
and 2006 5
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2007
and 2006 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market
Risk 16
Item 4 Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1A Risk Factors 17
Item 2 Unregistered Sales of Equity Securities and Use
of Proceeds 17
Item 4 Submission of matters to a Vote of Security Holders 18
Item 6 Exhibits 20
Signatures 21
Exhibit Index 22
2
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -------------------------------------------------------------------------------
ASSETS
June 30, December 31,
2007 2006
---- ----
Cash and due from banks $ 27,831,506 $ 53,615,568
Federal funds sold -- 32,567,624
------------ ------------
Cash and cash equivalents 27,831,506 86,183,192
Held to maturity securities, fair value of $116,820,261 and
$117,066,740 as of 2007 and 2006, respectively 117,976,224 118,312,548
Loans, less allowance for loan losses of $5,753,199 and
$5,709,397 as of 2007 and 2006, respectively 539,888,095 528,946,700
Premises and equipment - net 19,738,610 20,171,665
Cash surrender value of life insurance 11,395,502 11,168,940
Mortgage servicing rights - net 722,398 778,458
Accrued interest receivable and other assets 6,827,897 6,686,267
------------ ------------
TOTAL ASSETS $ 724,380,232 $ 772,247,770
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 135,753,619 $ 137,555,248
Savings and NOW 374,955,188 398,735,738
Other time 102,839,507 125,137,255
------------ ------------
Total Deposits 613,548,314 661,428,241
Federal funds purchased 172,425 --
Other borrowings 2,687,505 3,470,020
Accrued interest payable and other liabilities 2,694,405 3,316,795
------------ ------------
Total Liabilities 619,102,649 668,215,056
------------ ------------
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, 8,843,595 and
8,801,813 shares issued and outstanding as of 2007 and 2006,
respectively 8,843,595 8,801,813
Additional paid-in capital 25,418,242 24,651,548
Retained earnings 71,015,746 70,579,353
------------ ------------
Total Stockholders' Equity 105,277,583 104,032,714
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 724,380,232 $ 772,247,770
============ ============
See notes to unaudited condensed consolidated financial statements.
3
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For Three Months Ended June 30, 2007 and 2006
(Unaudited)
- -------------------------------------------------------------------------------
2007 2006
---- ----
INTEREST INCOME
Loans $ 9,742,190 $ 8,565,445
Investment securities
Taxable 892,791 872,661
Exempt from federal income taxes 258,949 282,851
Federal funds sold 201,687 233,196
Other 9,663 9,663
----------- -----------
Total Interest Income 11,105,280 9,963,816
----------- -----------
INTEREST EXPENSE
Deposits 2,918,588 2,514,603
Federal funds purchased 24,003 907
Other borrowings 20,756 14,324
----------- -----------
Total Interest Expense 2,963,347 2,529,834
----------- -----------
Net interest income before provision for loan losses 8,141,933 7,433,982
Provision for loan losses 60,000 60,000
----------- -----------
Net interest income after provision for loan losses 8,081,933 7,373,982
----------- -----------
NONINTEREST INCOME
Service charges on deposits 2,275,563 2,055,366
Loan servicing income 61,114 49,780
Net gain on sale of loans 52,885 84,970
Increase in cash surrender value of life insurance 113,281 102,624
Other 355,073 321,558
----------- -----------
Total Noninterest Income 2,857,916 2,614,298
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 3,994,020 3,698,070
Net occupancy costs 684,885 630,450
Furniture and equipment expenses 384,897 396,843
Computer services 590,875 547,954
Advertising and promotional 249,486 389,906
Regulatory agency assessments 66,331 51,648
Office supplies 138,460 165,268
Other 892,612 737,852
----------- -----------
Total Noninterest Expenses 7,001,566 6,617,991
----------- -----------
Income before income taxes 3,938,283 3,370,289
Less: Applicable income taxes 1,375,500 1,157,000
----------- -----------
NET INCOME $ 2,562,783 $ 2,213,289
=========== ===========
Basic earnings per share $ 0.29 $ 0.25
Dividends per share $ 0.25 $ 0.22
Weighted average shares outstanding 8,837,241 8,714,194
See notes to unaudited condensed consolidated financial statements.
4
21
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For Six Months Ended June 30, 2007 and 2006
(Unaudited)
- -------------------------------------------------------------------------------
2007 2006
---- ----
INTEREST INCOME
Loans $19,202,637 $16,881,540
Investment securities
Taxable 1,827,157 1,760,811
Exempt from federal income taxes 480,714 618,841
Federal funds sold 449,610 349,240
Other 9,663 9,663
----------- -----------
Total Interest Income 21,969,781 19,620,095
----------- -----------
INTEREST EXPENSE
Deposits 6,015,188 4,996,689
Federal funds purchased 32,142 29,594
Other borrowings 37,952 24,018
----------- -----------
Total Interest Expense 6,085,282 5,050,301
----------- -----------
Net interest income before provision for loan losses 15,884,499 14,569,794
Provision for loan losses 120,000 120,000
----------- -----------
Net interest income after provision for loan losses 15,764,499 14,449,794
----------- -----------
NONINTEREST INCOME
Service charges on deposits 4,331,700 3,875,724
Loan servicing income 117,364 106,925
Net gain on sale of loans 89,309 159,209
Increase in cash surrender value of life insurance 226,562 207,483
Other 663,201 599,932
----------- -----------
Total Noninterest Income 5,428,136 4,949,273
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 7,881,981 7,354,485
Net occupancy costs 1,393,756 1,222,988
Furniture and equipment expenses 771,298 787,239
Computer services 1,151,294 1,089,259
Advertising and promotional 495,184 747,987
Regulatory agency assessments 119,638 108,342
Office supplies 325,634 286,133
Other 1,649,262 1,490,228
----------- -----------
Total Noninterest Expenses 13,788,047 13,086,661
----------- -----------
Income before income taxes 7,404,588 6,312,406
Less: Applicable income taxes 2,562,000 2,109,000
----------- -----------
NET INCOME $ 4,842,588 $ 4,203,406
=========== ===========
Basic earnings per share $ 0.55 $ 0.48
Dividends per share $ 0.50 $ 0.44
Weighted average shares outstanding 8,827,214 8,686,453
See notes to unaudited condensed consolidated financial statements.
5
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 2007 and 2006
(Unaudited)
- -------------------------------------------------------------------------------
2007 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,842,588 $ 4,203,406
Adjustments to reconcile net income to net cash flows provided by operating
activities
Depreciation 1,052,772 1,080,680
Amortization of servicing rights, premiums and discounts 148,845 186,746
Gain on sale of loans (89,309) (159,209)
Provision for loan losses 120,000 120,000
Proceeds from sales of loans held for sale 7,799,786 11,066,933
Originations of loans held for sale (7,768,743) (10,990,055)
Increase in cash surrender value of life insurance (226,562) (207,483)
Loss on sale of other real estate owned -- 25,449
Net change in
Accrued interest receivable and other assets (141,630) 101,304
Accrued interest payable and other liabilities (622,389) (883,315)
------------ ------------
Net Cash Flows Provided by Operating Activities 5,115,358 4,544,456
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities
Maturities, prepayments and calls 17,785,084 19,319,223
Purchases (17,483,280) (6,409,051)
Net (increase) decrease in loans (11,061,395) 6,190,830
Purchases of premises and equipment - net (619,717) (832,861)
Proceeds from sale of other real estate owned -- 104,051
------------ ------------
Net Cash Flows Provided by (Used in) Investing Activities (11,379,308) 18,372,192
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (47,879,927) (31,491,950)
Net decrease in federal funds purchased 172,425 --
Net decrease in other borrowings (782,515) (2,293,251)
Dividends paid (4,406,195) (3,803,904)
Common stock issued - net 808,476 2,212,885
------------ ------------
Net Cash Flows Used in Financing Activities (52,087,736) (35,376,220)
------------ ------------
Net Change in Cash and Cash Equivalents (58,351,686) (12,459,572)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 86,183,192 56,584,034
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 27,831,506 $ 44,124,462
============ ============
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, 2006. The December 31, 2006
financial information included herein is derived from the Consolidated Financial
Statements of Tri City, which are included in the aforesaid Annual Report on
Form 10-K.
In the opinion of Tri City's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting
of normal recurring accruals, necessary to present fairly Tri City's
consolidated financial position as of June 30, 2007 and the results of its
operations for the three and six month periods ended June 30, 2007 and 2006, and
cash flows for the six months ended June 30, 2007 and 2006. 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 six months of 2007 are not necessarily
indicative of the results which may be expected for the entire 2007 fiscal year.
7
(B) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 156 "Accounting for Servicing of Financial Assets - an amendment of
FASB Statement No. 140". SFAS No. 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 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 Corporation's 2006 consolidated financial
statements. The Corporation adopted the remaining provisions of this statement
effective January 1, 2007. The adoption of the remaining provisions of SFAS No.
156 had no effect on the Corporation's consolidated financial statements as the
Corporation continues to use the amortization method.
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 was adopted by the Corporation on
January 1, 2007. The adoption of this standard had no effect on the
Corporation's consolidated financial statements. As of the date of adoption, the
Corporation had no uncertain tax positions. The Corporation's policy is to
record interest and penalties related to income tax liabilities in income tax
expense. The Corporation, along with its subsidiaries, files U.S. Federal and
Wisconsin income tax returns. The Corporation is no longer subject to
examination by tax authorities for taxable years before 2003 for U.S. Federal
tax and 2002 for Wisconsin tax purposes.
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
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. The
Corporation will be required to adopt this statement beginning in 2008.
Management expects the adoption of this standard will have a minimal effect on
the Corporation's consolidated financial statements.
8
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. The decision to
elect the fair value option may be applied instrument by instrument, is
irrevocable and is applied to the entire instrument and not to only specified
risks, specific cash flows or portions of that instrument. An entity is
restricted in choosing the dates to elect the fair value option for an eligible
item. The Corporation will be required to adopt SFAS No. 159 in 2008. Early
adoption is permitted, provided the Corporation also elects to apply the
provisions of SFAS No. 157. Management expects to adopt SFAS No. 159 in 2008 and
the adoption of this standard will have a minimal effect on the Corporation's
consolidated financial statements.
(C) RECLASSIFICATIONS
Certain 2006 amounts have been reclassified to conform to the 2007 presentation.
9
ITEM 2
TRI CITY BANKSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
the Corporation's Annual Report on Form 10-K for the year ended December 31,
2006, which item is incorporated herein by reference.
All forward-looking statements contained in this report or which may be
contained in future statements made for or on behalf of the Corporation are
based upon information available at the time the statement is made and the
Corporation assumes no obligation to update any forward-looking statement.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
A number of accounting policies require us to use our judgment. Two of the
more significant policies are:
o ESTABLISHING THE AMOUNT OF THE PROVISION AND ALLOWANCE FOR LOAN LOSSES.
We evaluate our loan portfolio at least quarterly to determine the adequacy
of the allowance for loan losses. Included in the review are five
components: (1) historic review of losses and allowance coverage based on
peak and average loss volume; (2) review of portfolio trends in volume and
composition with attention to possible concentrations; (3) review of
delinquency trends and loan performance compared to our peer group; (4)
review of local and national economic conditions; and (5) quality review
analysis 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.
10
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.
FINANCIAL CONDITION
- -------------------
The Corporation's total assets decreased $48.6 million (6.3%) during the
first two quarters of 2007. 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. These increases result in an increase in short-term
investments at year end. Conversely, when municipal deposits decreased $39.4
million (53.3%) during the first two quarters of 2007, the subsidiary bank's
investment in Federal funds sold was reduced, in turn reducing the Corporation's
total assets.
Investment securities decreased $336,300 (0.3%) during the first six months
of 2007. Approximately $17.8 million of the banking subsidiary's investment
portfolio was redeemed through normal maturities or scheduled calls and $17.5
million of new securities were purchased. Management continues to follow its
practice of holding to maturity its investment portfolio. Approximately $15.4
million in investment securities are scheduled to mature during the next six
months. In addition, approximately $56.7 million of other securities are subject
to calls during the same period. Such calls are unlikely, however, given the
current rate environment.
Loans increased $11.0 million (2.1%) during the first two quarters of 2007.
Commercial loan volume, including commercial and industrial loans as well as
loans collateralized by commercial real estate increased $9.4 million (2.6%) and
other real estate loans to individuals increased $2.5 million (1.8%). After a
sluggish start in 2007, loan activity improved late in the second quarter.
Management remains optimistic that the loan portfolio will increase over time
despite increasing interest rate pressure and competition in the market.
The allowance for loan losses increased $43,800 (0.8%) to $5.8 million
during the first six months of 2007.
11
Asset quality remains strong in the banking subsidiary loan portfolio. A
$60,000 provision for loan loss was recorded in both the first and second
quarters of 2007. The net increase in the loan loss allowance from period to
period represents the net difference of charge-offs versus the $120,000
provision and loan recoveries.
The allowance for loan losses represents management's estimate of an amount
adequate to provide for probable credit losses in the loan portfolio. To assess
the adequacy of the allowance for loan losses, management uses significant
judgment focusing on changes in the size and the character of the portfolio,
changes in levels of nonperforming loans, risks identified within specific
credits, existing economic conditions, underlying collateral, historic losses
within the portfolio, as well as other factors that could affect probable credit
losses. Management continues to monitor the quality of new loans that the
Corporation originates each year as well as to review existing loan performance.
Deposits at the Corporation decreased $47.9 million (7.2%) during the first
six months of 2007. As noted above, there is typically a short-term increase in
municipal deposits in December of each year. These deposits tend to be
transferred to other financial institutions for investment opportunity or fund
management programs after the first of the year. In addition to the decrease in
municipal deposits, certificate of deposit balances decreased $22.3 million
(17.8%). Given slower than expected growth in the loan portfolio and rising
interest rates, management chose competitive but conservative rate offerings on
certificate of deposits during the first six months of 2007 and some run-off
occurred.
Total borrowings of the Corporation decreased $610,100 (17.6%) during the
first six months of 2007. 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 through its primary correspondent bank.
The Corporation's equity increased $1.2 million (1.2%) during the first six
months of 2007. The Corporation received proceeds of $808,500 from the sale of
common stock through the Dividend Reinvestment Plan offered to shareholders and
paid $4.4 million in dividends.
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 these 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 $55.4 million is
available for short-term liquidity through reverse repurchase agreements
available through its correspondent banking relationships.
12
CAPITAL EXPENDITURES
- --------------------
The banking subsidiary has no major capital expansion projects currently in
place for 2007, however if a project is identified or an upgrade in equipment
becomes necessary, the Corporation has sufficient liquidity to internally fund
any such expenditure.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
The Corporation's net income increased $349,500 (15.8%) during the second
quarter of 2007 compared to the same period in 2006.
Net interest income increased $708,000 (9.5%) to $8.1 million for the
second quarter of 2007 compared to $7.4 million for the second quarter last
year. Net interest income after the provision for loan losses increased by
$708,000.
Total interest income on loans increased $1.2 million (13.7%) in the second
quarter of 2007 compared to the second quarter of 2006. Interest rates in the
second quarter of 2007 compared to the same period in 2006 contributed
approximately $673,700 of this increase and the remaining $503,100 was
attributed to average loan growth of $29.6 million over the prior year's
quarter. Quarter-to-date 2007 loan yields were up 50 basis points (bp) to 7.29%
from 6.79% in 2006. The Board of Governors of the Federal Reserve has not
increased the discount rate since June of 2006. Accordingly the subsidiary
bank's reference rate has remained at 8.25% for the last 12 months. The yield
increase is due in large part to re-pricing the banking subsidiary's portfolio
of loans at higher interest rates.
Investment security interest income decreased $3,800 (0.3%) during the
second quarter of 2007 compared to the second quarter of 2006 due to a decrease
in the investment portfolio. The average tax equivalent quarter-to-date yield
derived from all investments increased 26 basis points to 4.43% during the
second quarter of 2007 compared to 4.17% during the second quarter of 2006.
Interest expense increased $433,500 (17.1%) during the second quarter of
2007 compared to the second quarter of 2006. An increase in the year-to-date
yield of 33 basis points on interest bearing deposits (from 2.19% to 2.52%)
accounted for the majority of this variance.
Non-interest income increased $243,600 (9.3%) during the second quarter of
2007 compared to the same period of 2006. This increase is due to growth in
retail checking accounts and fees derived from retail checking activity.
Non-interest expense increased $383,600 (5.8%) during the second quarter of
2007 compared to the same period in 2006. Salaries and employee benefits
13
increased 8.0%. This increase was primarily due to additional personnel needed
to staff four new locations opened during the last quarter of 2006 and the first
quarter of 2007.
A summary of the change in income for the quarters ended June 30, 2007 and
2006 appears below:
Three Months Ended June 30, June 30, 2007
2007 2006 Over(Under)
(UNAUDITED) (UNAUDITED) 2006
----------- ----------- ----
Revenue and Expenses: (000's)
Interest income $11,105 $ 9,964 $ 1,141
Less: Interest expense 2,963 2,530 433
------- ------- -------
Net interest income before
provision for loan losses 8,142 7,434 708
Less: Provision for loan losses 60 60 --
------- ------- -------
Net interest income after
provision for loan losses 8,082 7,374 708
Non-interest income 2,858 2,614 244
Non-interest expenses 7,002 6,618 384
------- ------- -------
Income from Operations 3,938 3,370 568
Tax Provision 1,376 1,157 219
------- ------- -------
NET INCOME $ 2,562 $ 2,213 $ 349
======= ======= =======
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Net income of the Corporation increased $639,200 (15.2%) during the six
months ended June 30, 2007 compared to the same period in 2006. This increase is
the result of a contribution from increased net interest income, non-interest
income and expense control.
Interest income on loans increased $2.3 million (13.7%) in the first half
of 2007. A volume increase of $35.4 million in commercial, real estate and
consumer loans accounts for $891,500 of the interest income increase and a 53
basis point increase in the yield (from 6.65% to 7.18%) accounts for $1.4
million of the increase in interest income.
Interest income on investment securities decreased $71,800 (3.0%) during
the first six months of 2007 compared to the same period in 2006. This decrease
is the result of a reduced investment portfolio. Management will continue to
replace maturing securities with high quality securities that have relatively
short maturities.
14
Interest expense on deposits increased $1.0 million (20.4%) in the first
six months of 2007. Of this increase, $774,500 is due to a 32 basis point
increase in the yield on interest bearing deposits (from 2.15% to 2.47%). The
remaining $244,000 of the increase is due to a growth in the average balance of
interest bearing deposits from the second quarter 2006 to the second quarter
2007.
Deposit increases during the past twelve months were 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 increased $16,500 (30.7%)
during the six months ended June 30, 2007 versus the comparable period in 2006.
The increase is due in part to increased rates on short term borrowing which
contributed $10,500 of the increase and in part to volume which contributed
$6,000 of the increase.
Non-interest income increased $478,900 (9.7%) for the first six months of
2007 versus the comparable period in 2006. This increase is attributable to the
growing base of consumer accounts and the fees generated from products and
services associated with those accounts.
Non-interest expense increased $701,400 (5.4%) during the six months ending
June 30, 2007 compared to the same period in 2006. The largest single component
of the increase was payroll, which increased by $527,500 (7.2%) during the first
six months of 2007 compared to the first six months of 2006. Increased staffing,
due to the opening of four additional branch locations, was primarily
responsible for this variance. Occupancy expenses increased $170,800 (14.0%)
during the same period in 2007 compared to the same period in 2006 due to the
new locations as well as rent increases and increased utility expenses in
existing facilities. Data processing expenses increased $62,000 (5.7%) during
the first six months of 2007 compared to the same period in 2006. Increased
account and transaction volume accounts for most of the variance.
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 19.8% and its leverage ratio is
14.6% as of June 30, 2007.
15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Corporation's Annual Report on Form 10-K for the year ended December
31, 2006 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.
16
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 2006 Annual Report on Form
10-K.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2007, the Corporation did not sell any
equity securities which were not registered under the Securities Act or
repurchase any of its equity securities.
17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 2007, Tri City Bankshares Corporation held its annual
shareholders' meeting. The only item held for a vote of shareholders was for the
election of Directors for the ensuing year. The number of shares of common stock
represented by proxy and in person was 7,073,504 which represented approximately
80.17% of the total outstanding shares entitled to vote for directors. There was
no solicitation in opposition to management's nominees for directors and all
such nominees were elected pursuant to the following vote:
Director's Name: Frank Bauer
For 7,041,318
Against 0
Withheld 32,186
Abstain 0
Broker Non-Vote 0
Director's Name: William Beres
For 7,054,361
Against 0
Withheld 19,143
Abstain 0
Broker Non-Vote 0
Director's Name: Sanford Fedderly
For 7,054,391
Against 0
Withheld 19,113
Abstain 0
Broker Non-Vote 0
Director's Name: Scott Gerardin
For 7,050,145
Against 0
Withheld 23,359
Abstain 0
Broker Non-Vote 0
18
Director's Name: William Gravitter
For 7,044,536
Against 0
Withheld 28,968
Abstain 0
Broker Non-Vote 0
Director's Name: Henry Karbiner, Jr.
For 7,050,145
Against 0
Withheld 23,359
Abstain 0
Broker Non-Vote 0
Director's Name: Christ Krantz
For 7,054,391
Against 0
Withheld 19,113
Abstain 0
Broker Non-Vote 0
Director's Name: Brian T. McGarry
For 7,041,978
Against 0
Withheld 31,526
Abstain 0
Broker Non-Vote 0
Director's Name: Robert Orth
For 7,050,145
Against 0
Withheld 23,359
Abstain 0
Broker Non-Vote 0
19
Director's Name: Ronald K. Puetz
For 7,050,145
Against 0
Withheld 23,359
Abstain 0
Broker Non-Vote 0
Director's Name: Agatha T. Ulrich
For 7,040,374
Against 0
Withheld 33,130
Abstain 0
Broker Non-Vote 0
Director's Name: David Ulrich, Jr.
For 7,039,714
Against 0
Withheld 33,790
Abstain 0
Broker Non-Vote 0
Director's Name: William Werry
For 7,052,787
Against 0
Withheld 20,717
Abstain 0
Broker Non-Vote 0
Director's Name: Scott A. Wilson
For 7,050,145
Against 0
Withheld 23,359
Abstain 0
Broker Non-Vote 0
No other matters were voted on at the annual meeting.
20
ITEM 6 EXHIBITS
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
DATE: August 14, 2007 /s/Henry Karbiner Jr.
--------------- ---------------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer and
Treasurer (Principal Executive Officer)
DATE: August 14, 2007 /s/Thomas W. Vierthaler
--------------- ---------------------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)