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, 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 October
31, 2007: 8,884,045 shares.
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2007 and December 31, 2006 3
Condensed Consolidated Statements of Income
for the Three Months ended September 30, 2007
and 2006 4
Condensed Consolidated Statements of Income
for the Nine Months ended September 30, 2007
and 2006 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 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 1 Legal Proceedings 20
Item 1A Risk Factors 20
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits 20
Signatures 21
2
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
September 30, December 31,
2007 2006
---- ----
Cash and due from banks $ 26,276,477 $ 53,615,568
Federal funds sold -- 32,567,624
------------- -------------
Cash and cash equivalents 26,276,477 86,183,192
Held to maturity securities, fair value of $120,317,133 and
$116,997,307 as of September 30, 2007 and December 31, 2006, respectively 120,384,778 118,312,548
Loans, less allowance for loan losses of $5,681,813 and
5,709,397 as of September 30, 2007 and December 31 2006, respectively 556,027,837 528,946,700
Premises and equipment - net 19,575,494 20,171,665
Cash surrender value of life insurance 11,508,172 11,168,940
Mortgage servicing rights - net 697,667 778,458
Accrued interest receivable and other assets 7,284,751 6,686,267
------------- -------------
TOTAL ASSETS $ 741,755.176 $ 772,247,770
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 133,032,803 $ 137,555,248
Savings and NOW 369,777,707 398,735,738
Other time 101,153,187 125,137,255
------------- -------------
Total Deposits 603,963,697 661,428,241
Federal funds purchased 23,381,914 --
Other borrowings 5,228,780 3,470,020
Accrued interest payable and other liabilities 3,091,342 3,316,795
------------- -------------
Total Liabilities 635,665,733 668,215,056
------------- -------------
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, 8,864,399 and
8,801,813 shares issued and outstanding as of 2007 and 2006,
respectively 8,864,399 8,801,813
Additional paid-in capital 25,799,977 24,651,548
Retained earnings 71,425,067 70,579,353
------------- -------------
Total Stockholders' Equity 106,089,443 104,032,714
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 741,755,176 $ 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 September 30, 2007 and 2006
(Unaudited)
- --------------------------------------------------------------------------------
2007 2006
---- ----
INTEREST INCOME
Loans $10,263,756 $ 9,161,408
Investment securities
Taxable 901,614 979,287
Exempt from federal income taxes 298,799 289,713
Federal funds sold 725 54,855
----------- -----------
Total Interest Income 11,464,894 10,485,263
----------- -----------
INTEREST EXPENSE
Deposits 2,935,045 2,620,413
Federal funds purchased 207,382 73,728
Other borrowings 18,618 13,005
----------- -----------
Total Interest Expense 3,161,045 2,707,146
----------- -----------
Net interest income before provision for loan losses 8,303,849 7,778,117
Provision for loan losses 125,000 60,000
----------- -----------
Net interest income after provision for loan losses 8,178,849 7,718,117
----------- -----------
NONINTEREST INCOME
Service charges on deposits 2,355,643 2,221,590
Loan servicing income 54,537 46,715
Net gain on sale of loans 48,602 63,406
Increase in cash surrender value of life insurance 112,671 103,764
Other 336,814 353,550
----------- -----------
Total Noninterest Income 2,908,267 2,789,025
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 4,012,442 3,749,795
Net occupancy costs 662,009 608,842
Furniture and equipment expenses 399,605 391,837
Computer services 598,364 543,533
Advertising and promotional 289,992 386,276
Regulatory agency assessments 64,788 50,711
Office supplies 140,040 153,224
Other 885,156 778,549
----------- -----------
Total Noninterest Expenses 7,052,396 6,662,767
----------- -----------
Income before income taxes 4,034,720 3,844,375
Less: Applicable income taxes 1,414,500 1,325,500
----------- -----------
NET INCOME $ 2,620,220 $ 2,518,875
=========== ===========
Basic earnings per share $ 0.29 $ 0.29
Dividends per share $ 0.25 $ 0.22
Weighted average shares outstanding 8,858,293 8,768,577
See notes to unaudited condensed consolidated financial statements.
4
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For Nine Months Ended September 30, 2007 and 2006
(Unaudited)
- --------------------------------------------------------------------------------
2007 2006
---- ----
INTEREST INCOME
Loans $29,466,393 $26,042,948
Investment securities
Taxable 2,728,771 2,740,098
Exempt from federal income taxes 779,513 908,554
Federal funds sold 450,335 404,095
Other 9,663 9,663
----------- -----------
Total Interest Income 33,434,675 30,105,358
----------- -----------
INTEREST EXPENSE
Deposits 8,950,233 7,617,102
Federal funds purchased 239,524 103,322
Other borrowings 56,570 37,023
----------- -----------
Total Interest Expense 9,246,327 7,757,447
----------- -----------
Net interest income before provision for loan losses 24,188,348 22,347,911
Provision for loan losses 245,000 180,000
----------- -----------
Net interest income after provision for loan losses 23,943,348 22,167,911
----------- -----------
NONINTEREST INCOME
Service charges on deposits 6,687,343 6,097,314
Loan servicing income 171,901 153,640
Net gain on sale of loans 137,911 222,615
Increase in cash surrender value of life insurance 339,232 311,247
Other 1,000,016 953,482
----------- -----------
Total Noninterest Income 8,336,403 7,738,298
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 11,894,423 11,104,280
Net occupancy costs 2,055,765 1,831,830
Furniture and equipment expenses 1,170,903 1,179,076
Computer services 1,749,658 1,632,792
Advertising and promotional 785,176 1,134,263
Regulatory agency assessments 184,426 159,053
Office supplies 465,674 439,357
Other 2,534,418 2,268,777
----------- -----------
Total Noninterest Expenses 20,804,443 19,749,428
----------- -----------
Income before income taxes 11,439,308 10,156,781
Less: Applicable income taxes 3,976,500 3,434,500
----------- -----------
NET INCOME $ 7,462,808 $ 6,722,281
=========== ===========
Basic earnings per share $ 0.84 $ 0.77
Dividends per share $ 0.75 $ 0.66
Weighted average shares outstanding 8,837,688 8,714,128
See notes to unaudited condensed consolidated financial statements.
5
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 2007 and 2006
(Unaudited)
- --------------------------------------------------------------------------------
2007 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,462,808 $ 6,722,281
Adjustments to reconcile net income to net cash flows provided
by operating activities
Depreciation 1,574,214 1,629,285
Amortization of servicing rights, premiums and discounts 240,875 282,819
Gain on sale of loans (137,911) (222,615)
Provision for loan losses 245,000 180,000
Proceeds from sales of loans held for sale 12,455,524 16,262,970
Originations of loans held for sale (12,410,693) (16,159,205)
Increase in cash surrender value of life insurance (339,232) (311,247)
Loss on sale of other real estate owned -- 25,449
Net change in
Accrued interest receivable and other assets (682,593) (1,552,847)
Accrued interest payable and other liabilities (141,342) 323,303
------------ ------------
Net Cash Flows Provided by Operating Activities 8,266,650 7,180,193
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities
Maturities, prepayments and calls 26,365,083 23,279,660
Purchases (28,504,319) (16,470,749)
Net increase in loans (27,326,137) (7,790,788)
Purchases of premises and equipment - net (978,043) (1,364,354)
Proceeds from sale of other real estate owned -- 104,051
------------ ------------
Net Cash Flows Used in Investing Activities (30,443.416) (2,242,180)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (57,464,544) (41,035,839)
Net increase in federal funds purchased 23,381,914 5,270,196
Net increase in other borrowings 1,758,760 546,102
Dividends paid (6,617,094) (5,724,479)
Common stock issued - net 1,211,015 3,256,431
------------ ------------
Net Cash Flows Used in Financing Activities (37,729,949) (37,687,589)
------------ ------------
Net Change in Cash and Cash Equivalents (59,906,715) (32,749,576)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 86,183,192 56,584,034
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 26,276,477 $ 23,834,458
============ ============
Loans Receivable transferred to Other Real Estate Owned $ 225,000 $ --
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 the rules and regulations of the Securities and
Exchange Commission (SEC) and, accordingly, the unaudited condensed consolidated
financial statements 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 September 30, 2007 and the results of its
operations for the three and nine month periods ended September 30, 2007 and
2006, and cash flows for the nine months ended September 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 nine 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's federal tax returns for 2004 and
prior, and its 2003 and prior year Wisconsin tax returns, are no longer subject
to examination by tax authorities.
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:
Establishing the amount of the provision and allowance for loanlosses.
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
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 $30.5 million (4.0%) during the
first nine months of 2007. Typically the Corporation's banking subsidiary, Tri
City National Bank (the "Bank"), 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. Therefore, when municipal deposits
decreased $56.1 million (69.3%) during the first three quarters of 2007, the
Bank's investment in Federal funds sold was reduced, in turn reducing the
Corporation's total assets.
Investment securities increased $2.1 million (1.8%) during the first nine
months of 2007. Approximately $26.4 million of the Bank's investment portfolio
was redeemed through normal maturities or scheduled calls and $28.5 million of
new securities were purchased. Management continues to follow its practice of
holding to maturity its investment portfolio. Approximately $6.8 million in
investment securities are scheduled to mature during the next three months. In
addition, approximately $51.7 million of other securities are subject to calls
during the same period. The Corporation believes that such calls are unlikely,
however, given the current interest rate environment.
11
Amortized costs and fair values of held to maturity securities as of
September 30, 2007 and December 31, 2006 are summarized as follows:
September 30, 2007
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Obligations of: Cost Gains Losses Value
--------------- ---- ----- ------ -----
U.S. Treasury and other U.S.
Government agencies and corporations $ -- $ -- $ -- $ --
States of the U.S. and Political
Subdivisions $ 40,051,574 $ 62,267 $ 81,387 $ 40,032,454
Other securities consisting of U.S.
Government Sponsored entities and the
Federal Reserve Bank $ 88,333,204 $ 307,630 $ 356,155 $ 80,284,679
------------ ------------ ------------ ------------
Total $120,384,778 $ 369,897 $ 437,542 $120,317,133
============ ============ ============ ============
December 31, 2006
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Obligations of: Cost Gains Losses Value
--------------- ---- ----- ------ -----
U.S. Treasury and other U.S.
Government agencies and corporations $ -- $ -- $ -- $ --
States of the U.S. and Political
Subdivisions $ 27,689,251 $ 15,641 $ 196,234 $ 27,508,664
Other securities consisting of U.S.
Government Sponsored entities and the
Federal Reserve Bank $ 90,623,291 $ 169,527 $ 1,304,175 $ 89,488,643
------------ ------------ ------------ ------------
Total $118,312,548 $ 185,168 $ 1,500,409 $116,997,307
============ ============ ============ ============
Loans increased $27.1 million (5.1%) during the first three quarters of
2007. Commercial loan volume, including commercial and industrial loans as well
as loans collateralized by commercial real estate increased $20.6 million (5.6%)
and other real estate loans to individuals increased $6.9 million (4.9%). After
a sluggish start in 2007, loan activity improved late in the second quarter and
remained strong throughout the third quarter. Management remains optimistic that
the loan portfolio will increase over time despite a slowing economy, increasing
interest rate pressure and competition in the market.
Mortgage servicing rights (MSRs) decreased $81,000 during the first nine
months of 2007. The Corporation capitalized $93,000, amortized $174,000 and did
not sell any MSRs. The principal balance of loans serviced was $184.4 million at
September 30, 2007 compared with $187.6 million at December 31, 2006 with the
decrease due to amortization and pre-payments of existing loans serviced
exceeding originations of new loans sold with servicing retained. The carrying
value of MSRs was $0.7 million, or 0.38% on loans serviced at September 30, 2007
12
compared with $0.8 million, or 0.41% on loans serviced at December 31, 2006.
The allowance for loan losses decreased $27,600 (0.5%) to $5.7 million
during the first nine months of 2007. A $60,000 provision for loan loss was
recorded in both the first and second quarters of 2007. In the third quarter the
Bank recorded a $125,000 provision. The net decrease in the loan loss allowance
from period to period represents the net difference of charge-offs versus the
$245,000 provision and loan recoveries made year-to-date. Asset quality remains
strong in the Bank's loan portfolio. The increased third quarter provision was
due to recognition of losses on two specific credits as recommended by
management's analysis of the adequacy of the allowance for loan losses.
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.
The allowance for loan losses reflected in the accompanying condensed
consolidated financial statements represents the allowance available to absorb
loan losses inherent in the portfolio.
September 30, 2007 December 31, 2006
------------------ -----------------
% of Loans % of Loans
in each in each
Balance applicable to: Amount category Amount category
Domestic ------ -------- ------ --------
Commercial, financial, agricultural $ 500,688 5.3% $ 562,682 6.1%
Real estate - construction $ 875,203 6.6% $ 893,973 7.9%
Real estate - commercial mortgage $ 2,695,788 46.4% $ 2,542,770 44.3%
Real estate - residential mortgage $ 1,503,954 39.2% $ 1,587,549 38.9%
Installment loans to individuals $ 106,180 2.5% $ 122,423 2.8%
Lease financing $ -- -% $ -- -%
Foreign $ -- -% $ -- -%
Unallocated $ -- -% $ -- -%
----------- ------ ----------- ------
Total $5,681,813 100.0% $ 5,709,397 100.0%
=========== ====== =========== ======
Deposits decreased $57.5 million (8.7%) during the first nine months of
2007. As noted previously, 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. Year-to-date municipal deposits have
decreased $56.1 million (69.3%) accounting for most of the decrease in the
Bank's total deposits. In addition to the decrease in municipal deposits,
13
certificate of deposit balances decreased $24.0 million (19.2%). Management
chose competitive but conservative rate offerings on certificates of deposit
during the first nine months of 2007 and the aforementioned run-off occurred. In
comparison, total deposits decreased $41.0 million (6.4%) during the first nine
months of 2006.
Total borrowings increased $25.1 million (724.5%) during the first nine
months of 2007. The Bank 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 Bank's federal funds facility through its primary
correspondent bank.
Stockholders' equity increased $2.1 million (2.0%) during the first three
quarters of 2007. The Corporation received proceeds of $1.2 million from the
sale of common stock through the Dividend Reinvestment Plan offered to
shareholders and paid $6.6 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 Bank continues to offer products that are
competitive and encourage depositors to place their funds in the Bank's deposit
offerings . Management believes that these efforts will help the Corporation to
not only retain these deposits, but also encourage continued growth. The Bank
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.
There has been no material change in liquidity during the first nine months of
2007.
CAPITAL EXPENDITURES
- --------------------
In September 2007 the Bank broke ground for a new location for the Bank's
Brown Deer, Wisconsin branch office on property across the street from the
current Brown Deer branch. The new location will serve the Bank's existing
customer base well and the corner location will provide better access and
visibility. The building will feature a community room in the lower level and
office space on the second floor. The Bank will occupy the entire first floor.
The project is estimated to cost $1.9 million and will be funded internally by
the Bank. The relocation is expected to be completed in the second quarter of
2008.
The Corporation has not had any material changes in its commitments for
capital expenditures during the first nine months of 2007.
14
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
----------------------------------------------
The Corporation's net income increased $101,300 (4.0%) during the third
quarter of 2007 compared to the same period in 2006.
Total interest income on loans increased $1.1 million (12.0%) in the third
quarter of 2007 compared to the third quarter of 2006 as the Bank's loan
portfolio continues to be the engine that drives profitability. Improved
portfolio yields as a result of matured loans in the portfolio being renewed at
higher rates contributed approximately $718,300 of this increase in the third
quarter of 2007 compared to the same period in 2006. Third quarter 2007 loan
yields increased 44 basis points (bp) to 7.36% from 6.92% in third quarter of
2006. The Board of Governors of the Federal Reserve decreased the discount rate
in September 2007. Accordingly the Bank's reference rate decreased to 7.75% at
the end of the third quarter. Going forward, the rate reduction will negatively
impact the yield on that part of the Bank's loan portfolio which is tied to the
reference rate. However, most portfolio loans are fixed rate and therefore the
decrease in floating rate yields is expected to impact the Bank's net interest
margin to a lesser degree than financial institutions with commercial and
industrial credits tied to a floating index.
Loan growth in commercial real estate of $22.3 million over the prior
year's quarter added the remaining $384,000 of the total interest income
increase. Net interest income increased $525,700 (6.8%) to $8.3 million for the
third quarter of 2007 compared to $7.8 million for the third quarter of 2006.
Investment security interest income decreased $68,600 (5.4%) during the
third quarter of 2007 compared to the third quarter of 2006 due to a $10.6
million decrease in the investment portfolio. The average tax equivalent
quarter-to-date yield derived from all investments increased 15 basis points to
4.49% during the third quarter of 2007 compared to 4.34% during the third
quarter of 2006.
Interest expense increased $453,900 (16.8%) during the third quarter of
2007 compared to the third quarter of 2006. An increase in the year-to-date
yield of 15 bp on interest bearing deposits (from 2.30% to 2.45%) accounted for
the majority of this variance.
Non-interest income increased $119,200 (4.3%) during the third 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 $389,600 (5.8%) during the third quarter of
2007 compared to the same period in 2006. Salaries and employee benefits
increased 7.0%. This increase was primarily due to additional personnel required
to staff four new locations opened since September 30, 2006.
15
A summary of the change in income for the quarters ended September 30, 2007
and 2006 appears below:
Three Months Ended September 30, September 30, 2007
2007 2006 Over(Under)
(UNAUDITED) (UNAUDITED) 2006
Revenue and Expenses: (000's)
Interest income $11,465 $10,485 $ 980
Less: Interest expense 3,161 2,707 454
------- ------- -------
Net interest income before
provision for loan losses 8,304 7,778 526
Less: Provision for loan losses 125 60 65
------- ------- -------
Net interest income after
provision for loan losses 8,179 7,718 461
Non-interest income 2,908 2,789 119
Non-interest expenses 7,052 6,663 389
------- ------- -------
Income from Operations 4,035 3,844 191
Tax Provision 1,415 1,325 90
------- ------- -------
NET INCOME $ 2,620 $ 2,519 $ 101
======= ======= =======
16
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
---------------------------------------------
Net income of the Corporation increased $740,500 (11.0%) during the nine
months ended September 30, 2007 compared to the same period in 2006. This
increase is the result of a combination of increased net interest income,
non-interest income and expense control.
Interest income on loans increased $3.4 million (13.1%) in the first three
quarters of 2007. A volume increase of $27.1 million in commercial, real estate
and consumer loans accounts for $1.3 million of the interest income increase and
a 72 basis point increase in the yield (from 6.59% to 7.31%) accounts for $2.1
million of the increase in interest income.
Interest income on investment securities decreased $140,400 (3.8%) during
the first nine months of 2007 compared to the same period in 2006. This decrease
is the result of a reduced investment portfolio partially offset by improved
investment yields. The year to date average balance of investment securities for
the nine months ending September 2007 declined $13 million (10.0%) while the
yield on investment securities increased 27 bp from 4.27% to 4.54% for the same
period. Management will continue to replace maturing securities with high
quality securities that have relatively short maturities.
Interest expense on deposits increased $1.3 million (17.5%) in the first
nine months of 2007. Of this increase, $964,100 is due to a 31 basis point
increase in the yield on interest bearing deposits (from 2.18% to 2.49%). The
remaining $369,000 of the increase is due to an increase of $20.5 million in the
year-to-date average balances of interest bearing deposits for the nine months
ended September 2007 compared to the same period in 2006. The increase of year-
to-date average balances impacts the 9 month income comparison despite the fact
that actual balances of interest bearing deposits for the nine months ended
September 2007 declined compared to the period ended balances for December 2006.
Savings and NOW deposits declined $29.0 million (7.3%) to $369.8 million at
September 30, 2007 due primarily to large municipal deposits received at year
end 2006. Time deposits also decreased $24 million (19.2%) to $101.2 million as
a result of management's decision to offer less aggressive rates.
Interest expense related to short-term borrowings increased $155,700
(111.0%) during the nine months ended September 30, 2007 versus the comparable
period in 2006. The increase is due in part to increased rates on short term
borrowing which contributed $56,700 of the increase and in part to volume which
contributed $99,000 of the increase.
Non-interest income increased $598,100 (7.7%) for the first nine 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 $1.1 million (5.5%) during the nine months
ended September 30, 2007 compared to the same period in 2006. The largest single
component of the increase was payroll, which increased by $790,100 (7.1%) during
the first nine months of 2007 compared to the first nine months of 2006.
Increased staffing, due to the opening of four additional branch locations, was
17
primarily responsible for this variance. Occupancy expenses increased $223,900
(12.2%) 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 $116,900 (7.2%) during
the first nine 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 19.7% and its leverage ratio is
14.5% as of September 30, 2007.
18
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.
It should be noted that any system of controls however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
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.
19
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There have been no material changes to the legal proceedings disclosed
in response to Item 1 to Part I of the Corporation's Annual
Report on Form 10-K for the Year Ended December 31, 2006 ("2006
Annual Report")
ITEM 1A RISK FACTORS
There have been no material changes to the risk factors disclosed in
response to Item 1A to Part I of the 2006 Annual Report.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Corporation's
security holders during the third quarter of fiscal 2007
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
20
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 12, 2007 /s/Henry Karbiner Jr.
-------------------- --------------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer and
Treasurer (Principal Executive Officer)
DATE: November 12, 2007 /s/Thomas W. Vierthaler
-------------------- --------------------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)