4
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, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-09785
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, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ___ Accelerated filer ___
Non-accelerated filer (Do not check if a smaller reporting company) _____
Smaller reporting company 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 the registrant's $1.00 par value common
stock as of November 12, 2008: 8,904,915 shares.
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 2008 (Unaudited) and December 31, 2007 3
(Unaudited) Consolidated Statements of Income
for the Three Months ended September 30, 2008 and 2007 4
(Unaudited) Consolidated Statements of Income
For the Nine Months ended September 30, 2008
and 2007 5
(Unaudited) Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2008 and 2007 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4T Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 1A Risk Factors 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 19
Signatures 20
Exhibit Index 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
September 30,
2008 December 31,
(Unaudited) 2007
-------------- --------------
Cash and due from banks $ 22,884,080 $ 60,079,747
Federal funds sold 17,626,070 --
-------------- --------------
Cash and cash equivalents 40,510,150 60,079,747
Held to maturity securities, fair value of $110,759,316 and
$111,160,170 as of 2008 and 2007, respectively 110,304,495 110,550,652
Loans, less allowance for loan losses of $5,989,952 and
$5,757,927 as of 2008 and 2007, respectively 587,071,827 580,520,538
Premises and equipment - net 21,238,410 20,053,314
Cash surrender value of life insurance 10,931,603 11,622,695
Mortgage servicing rights - net 617,615 658,717
Accrued interest receivable and other assets 7,264,428 6,541,335
-------------- --------------
TOTAL ASSETS $ 777,938,528 $ 790,026,998
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
COMMITMENTS AND CONTINGENCIES
LIABILITIES
Deposits
Demand $ 133,073,925 $ 137,384,198
Savings and NOW 388,384,035 411,900,132
Other time 142,479,507 116,519,450
-------------- --------------
Total Deposits 663,937,467 665,803,780
Federal funds purchased -- 12,851,264
Other borrowings 2,508,248 2,170,571
Accrued interest payable and other liabilities 2,862,487 2,434,058
-------------- --------------
Total Liabilities 669,308,202 683,259,673
-------------- --------------
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, 8,904,915 and
8,884,045 shares issued and outstanding as of 2008
and 2007, respectively 8,904,915 8,884,045
Additional paid-in capital 26,543,470 26,160,505
Retained earnings 73,181,941 71,722,775
-------------- --------------
Total Stockholders' Equity 108,630,326 106,767,325
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 777,938,528 $ 790,026,998
============== ==============
See notes to unaudited consolidated financial statements.
3
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For Three Months Ended September 30, 2008 and 2007
(Unaudited)
- --------------------------------------------------------------------------------
2008 2007
---- ----
INTEREST INCOME
Loans $ 9,516,552 $ 10,263,756
Investment securities
Taxable 746,492 901,614
Exempt from federal income taxes 390,848 298,799
Federal funds sold 24,514 725
------------ ------------
Total Interest Income 10,678,406 11,464,894
------------ ------------
INTEREST EXPENSE
Deposits 2,186,130 2,935,045
Federal funds purchased 13,782 207,382
Other borrowings 4,579 18,618
------------ ------------
Total Interest Expense 2,204,491 3,161,045
------------ ------------
Net interest income before provision for loan losses 8,473,915 8,303,849
Provision for loan losses 200,000 125,000
------------ ------------
Net interest income after provision for loan losses 8,273,915 8,178,849
------------ ------------
NONINTEREST INCOME
Service charges on deposits 2,532,720 2,355,643
Loan servicing income 63,238 54,537
Net gain on sale of loans 49,917 48,602
Increase in cash surrender value of life insurance 114,068 112,671
Other 344,417 336,814
------------ ------------
Total Noninterest Income 3,104,360 2,908,267
------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 4,067,697 4,012,442
Net occupancy costs 676,496 662,009
Furniture and equipment expenses 415,978 399,605
Computer services 677,262 598,364
Advertising and promotional 269,163 289,992
Regulatory agency assessments 71,969 64,788
Office supplies 184,000 140,040
Other 949,325 885,156
------------ ------------
Total Noninterest Expense 7,311,890 7,052,396
------------ ------------
Income before income taxes 4,066,385 4,034,720
Less: Applicable income taxes 1,357,000 1,414,500
------------ ------------
NET INCOME $ 2,709,385 $ 2,620,220
============ ============
Basic and fully diluted earnings per share $ 0.30 $ 0.29
Dividends per share $ 0.26 $ 0.25
Weighted average shares outstanding 8,904,915 8,858,293
See notes to unaudited consolidated financial statements.
4
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For Nine Months Ended September 30, 2008 and 2007
(Unaudited)
- --------------------------------------------------------------------------------
2008 2007
---- ----
INTEREST INCOME
Loans $ 29,382,252 $29,466,393
Investment securities
Taxable 2,259,400 2,728,771
Exempt from federal income taxes 1,101,110 779,513
Federal funds sold 81,510 450,335
Other 9,663 9,663
------------ -----------
Total Interest Income 32,833,935 33,434,675
------------ -----------
INTEREST EXPENSE
Deposits 7,332,402 8,950,233
Federal funds purchased 95,162 239,524
Other borrowings 19,511 56,570
------------ -----------
Total Interest Expense 7,447,075 9,246,327
------------ -----------
Net interest income before provision for loan losses 25,386,860 24,188,348
Provision for loan losses 585,000 245,000
------------ -----------
Net interest income after provision for loan losses 24,801,860 23,943,348
------------ -----------
NONINTEREST INCOME
Service charges on deposits 7,125,197 6,687,343
Loan servicing income 120,483 171,901
Net gain on sale of loans 330,223 137,911
Increase in cash surrender value of life insurance 348,478 339,232
Life insurance death benefit 606,584 --
Other 1,151,451 1,000,016
------------ -----------
Total Noninterest Income 9,682,416 8,336,403
------------ -----------
NONINTEREST EXPENSES
Salaries and employee benefits 12,453,418 11,894,423
Net occupancy costs 2,166,972 2,055,765
Furniture and equipment expenses 1,158,379 1,170,903
Computer services 1,963,378 1,749,658
Advertising and promotional 829,656 785,176
Regulatory agency assessments 197,535 184,426
Office supplies 529,962 465,674
Other 2,817,320 2,534,418
------------ -----------
Total Noninterest Expenses 22,116,620 20,840,443
------------ -----------
Income before income taxes 12,367,656 11,439,308
Less: Applicable income taxes 3,964,500 3,976,500
------------ -----------
NET INCOME $ 8,403,156 $ 7,462,808
============ ===========
Basic and fully diluted earnings per share $ 0.94 $ 0.84
Dividends per share $ 0.78 $ 0.75
Weighted average shares outstanding 8,902,780 8,837,688
See notes to unaudited consolidated financial statements.
5
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 2008 and 2007
(Unaudited)
- --------------------------------------------------------------------------------
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,403,156 $ 7,462,808
Adjustments to reconcile net income to net cash flows provided by operating
activities:
Depreciation 1,581,504 1,574,214
Amortization of servicing rights, premiums and discounts -net 317,238 240,875
Gain on sale of loans (330,223) (137,911)
Provision for loan losses 585,000 245,000
Proceeds from sales of loans held for sale 23,515,673 12,455,524
Originations of loans held for sale (23,363,008) (12,410,693)
Increase in cash surrender value of life insurance (348,478) (339,232)
Gain on death benefits of insurance policy (606,584) --
Net change in:
Accrued interest receivable and other assets (613,543) (682,593)
Accrued interest payable and other liabilities 428,430 (141,342)
------------- -------------
Net Cash Flows Provided by Operating Activities 9,569,165 8,266,650
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES Activity in held to maturity securities:
Maturities, prepayments and calls 74,821,960 26,365,083
Purchases (74,674,381) (28,504,319)
Net increase in loans (7,944,067) (27,326,137)
Purchases of premises and equipment - net (2,766,600) (978,043)
Proceeds from sale of other real estate owned 698,227 --
Proceeds of life insurance death benefit 1,646,154 --
------------- -------------
Net Cash Flows Used in Investing Activities (8,218,707) (30,443,416)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (1,866,313) (57,464,544)
Net change in federal funds purchased and securities sold under
repurchase agreements (12,851,264) 23,381,914
Net change in other borrowings 337,677 1,758,760
Dividends paid (6,943,990) (6,617,094)
Common stock issued 403,835 1,211,015
------------- -------------
Net Cash Flows Used in Financing Activities (20,920,055) (37,729,949)
------------- -------------
Net Change in Cash and Cash Equivalents (19,569,597) (59,906,715)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 60,079,747 86,183,192
------------- -------------
$ 40,510,150 $ 26,276,477
============= =============
CASH AND CASH EQUIVALENTS - END OF PERIOD
Non Cash Transactions:
Loans Receivable transferred to Other Real Estate Owned $ 807,778 $ 225,000
Mortgage Servicing Rights Resulting from Sale of Loans $ 177,558 $ 58,266
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 7,441,966 $ 9,277,943
Cash paid for income taxes $ 4,435,125 $ 4,726,866
See notes to unaudited consolidated financial statements.
6
TRI CITY BANKSHARES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Tri City
Bankshares Corporation ("Tri City" or the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007 (the
"2007 Form 10-K"). The December 31, 2007 financial information included herein
is derived from the December 31, 2007 Consolidated Balance Sheet of Tri City
which is included in the 2007 Form 10-K.
The Company's business is conducted primarily through its wholly owned banking
subsidiary, Tri City National Bank ("Bank").
In the opinion of Management, the accompanying unaudited 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, 2008 and the results of its operations and cash flows for the
three- and nine-month periods ended September 30, 2008 and 2007. 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 2008 are not necessarily
indicative of the results that may be expected for the entire 2008 fiscal year.
7
20
(B) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS 157") which defines fair value, establishes a framework for measuring
fair value in accordance with GAAP, and expands disclosures about fair value
measurements. SFAS 157 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, emphasizes that fair value is a market-based
measurement and not an entity-specific measurement, and establishes a fair value
hierarchy used in fair value measurements and expands the required disclosures
of assets and liabilities measured at fair value. The Company adopted SFAS 157
on January 1, 2008. The adoption of this Statement had no effect on the
Company's consolidated financial statements. SFAS 157 is discussed further under
"Fair Value Accounting," below.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), which 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 on an instrument-by-instrument basis,
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 Company adopted SFAS 159 on January 1, 2008. The adoption of SFAS 159
had no effect on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements" ("SFAS 160"), which amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. The Company will be
required to adopt SFAS 160 on January 1, 2009. The adoption of SFAS 160 is not
expected to have any impact on the Company's consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133"
("SFAS 161"), which requires enhanced disclosures about an entity's derivative
and hedging activities and thereby improves on the transparency of financial
reporting. In adopting SFAS 161, entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance and
cash flows. Because SFAS 161 affects only disclosures, it will not have an
impact on the Company's consolidated financial statements. SFAS 161 is effective
for fiscal years beginning after November 15, 2008, with early adoption
permitted.
8
In May 2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"), which identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with GAAP. The adoption of SFAS 162 will be effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles". Management does not expect that
the adoption of SFAS 162 will have a material impact on the Company's
consolidated financial statements.
(C) FAIR VALUE ACCOUNTING
VALUATION HIERARCHY
SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair
value measurements. The valuation hierarchy favors the transparency of inputs to
the valuation of an asset or liability as of the measurement date. The three
levels are defined as follows.
o Level 1 - Fair value is based upon quoted prices (unadjusted) for identical
assets or liabilities in active markets in which the Company can
participate.
o Level 2 - Fair value is based upon quoted prices for similar (i.e., not
identical) assets and liabilities in active markets, and other inputs that
are observable for the asset or liability, either directly or indirectly,
for substantially the full term of the financial instrument.
o Level 3 - Fair value is based upon financial models using primarily
unobservable inputs.
A financial instrument's categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.
The following is a description of the valuation methodologies used by the
Company for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation hierarchy.
Loans held for investment. The Company does not record loans held for investment
at fair value on a recurring basis. However, from time to time, a particular
loan may be considered impaired and an allowance for loan losses established.
Loans for which it is probable that payment of interest and principal will not
be made in accordance with the contractual terms of the loan agreement are
considered impaired. Once a loan is identified as individually impaired,
management measures impairment in accordance with SFAS 114, "Accounting by
Creditors for Impairment of a Loan." The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value or discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At September 30, 2008, substantially all of the
impaired loans were evaluated based on the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based
on the fair value of collateral require classification in the fair value
9
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan
as a nonrecurring Level 2 valuation.
Repossessed assets. Loans on which the underlying collateral has been
repossessed are adjusted to fair value upon transfer to repossessed assets.
Subsequently, repossessed assets are carried at the lower of carrying value or
fair value. Fair value is based upon independent market prices, appraised values
of the collateral or management's estimation of the value of the collateral.
When the fair value of the collateral is based on an observable market price or
a current appraised value, the Company records the repossessed asset as a
nonrecurring Level 2 valuation.
Mortgage Servicing Rights. The Company does not record Mortgage Servicing Rights
(MSR's) at fair value on a recurring basis. However, from time to time, MSR's
may be considered impaired and an allowance for losses established. MSR's for
which it is probable that payment of principal will not be made in accordance
with the MSR agreement are considered impaired. The fair value of MSR's is
estimated using the Office of Thrift Supervision selected asset price tables for
servicing cost and servicing fees applied to the Company's portfolio of serviced
loans. If the MSR's fair value is less than the MSR's amortized value, then
MSR's are considered impaired. At September 30, 2008, MSR's were evaluated based
on their fair value. In accordance with FSAS 157, impaired MSR's where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company records the impaired MSR as a nonrecurring Level 2 valuation.
ASSETS MEASURED ON A NON-RECURRING BASIS
($ in thousands)
Fair Value Measurements at September 30, 2008
Significant
Quoted Prices in Other Significant
Active Markets Observable Unobservable
For Identical Assets Inputs Inputs
September 30, 2008 (Level 1) (Level 2) (Level 3)
Assets:
Impaired Loans $ 11,596 $ - $ 11,596 $ -
Repossessed Assets 110 - 110 -
10
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 Company's plans, goals, beliefs or
expectations, refer to estimates or use similar terms. Forward looking
statements are identified generally by statements containing words and phrases
such as "may," "project," "are confident," "should be," "predict," "believe,"
"plan," "expect," "estimate," "anticipate" and similar expressions. Future
filings by the Company with the Securities and Exchange Commission, and
statements other than historical facts contained in this Report and in any
written material, press releases and oral statements issued by, or on behalf of
the Company may also constitute forward-looking statements.
Forward-looking statements are subject to significant risks and uncertainties
and the Company'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 2007
Form 10-K, which item is incorporated herein by reference, and any other risks
identified in this Report.
All forward-looking statements contained in this Report or which may be
contained in future statements made for or on behalf of the Company are based
upon information available at the time the statement is made and the Company
assumes no obligation to update any forward-looking statement.
CRITICAL ACCOUNTING POLICIES
A number of accounting policies require us to use our judgment. One of the more
significant policies is establishing the amount of our allowance for loan
losses. The Bank evaluates its loan portfolio at least quarterly to determine
the adequacy of the allowance for loan losses. Included in the Bank's review are
five components: (1) historic losses and allowance coverage based on peak and
average loss volume; (2) portfolio trends in volume and composition with
attention to possible concentrations; (3) delinquency trends and loan
performance compared to the Bank's peer group; (4) 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 the Bank misjudges the adequacy of the
allowance and experiences additional losses, it could reduce earnings as a
result.
11
FINANCIAL CONDITION
The Company's total assets decreased $12.1 million (1.5%) during the first nine
months of 2008. Cash and cash equivalents decreased $19.6 million (32.6%) during
that period, associated with activity normally occurring during the first nine
months of the year. The Bank typically experiences a short-term increase in
deposits at year-end associated with municipal deposits of property taxes and
commercial deposits resulting from holiday spending, which deposits typically
run off subsequent to year-end or are transferred into alternative investment
vehicles.
Investment securities decreased $0.2 million (0.2%) during the first nine months
of 2008. Given the turbulence of the financial markets, particularly in the
closing weeks of the third quarter, it is important to note that the Bank's
investment in bonds consists solely of municipal bonds and U.S. government
agency securities. With the United States government takeover of the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae") the value of the Bank's investments in general debt
obligations of these mortgage giants improved. As of the date of this report the
Federal Housing Finance Agency ("FHFA") has acknowledged that bondholders
effectively have the guarantee of the U. S. Treasury. More importantly, the Bank
held no common or preferred stock in either Freddie Mac or Fannie Mae that would
have otherwise resulted in losses when the U.S. Government intervened. The Bank
has never held in its investment portfolio any mortgage backed securities or
collateralized debt obligations, which in many instances include packaged
sub-prime mortgage loans. Management continues to follow its practice of holding
securities in the Bank's investment portfolio to maturity.
Gross loans increased $6.8 million (1.2%) during the first nine months of 2008.
Weakened loan demand due to the sluggish economy and prepayments due to
competitive pricing pressures resulted in a $1.0 million decrease to the Bank's
loan portfolio from January through July 2008. However, $7.8 million in new loan
closing volume in August and September resulted in a $6.8 million net increase
for the nine months ending September 30, 2008. Management remains optimistic
that with continued selective marketing efforts the loan portfolio can continue
to increase during the fourth quarter despite the slow economy.
The allowance for loan losses increased $0.2 million during the first nine
months of 2008, which resulted from a $0.6 million provision for loan loss
offset by a $0.4 million in loan losses charged against the allowance during the
period. Despite the economic slowdown and mortgage foreclosures challenging the
banking industry, the Company believes the asset quality of the Bank's loan
portfolio remains high. The Bank's charge offs and the corresponding provision
for loan losses reflect the adverse effects of the downturn in the economy, but
compare favorably to the Bank's peer group. The Bank had 28 foreclosures in
process at September 30, 2008, up from 21 foreclosures in process a year
earlier. As of September 30, 2008 the Bank had over 4,000 collateralized real
estate loans in its portfolio.
The allowance for loan losses represents management's estimate of the amount
necessary to provide for probable and inherent 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
12
the loan portfolio, changes in levels of nonperforming loans, risks identified
within specific credits, existing economic conditions, underlying collateral,
historic losses within the loan portfolio, as well as other factors that could
affect probable and inherent credit losses. Management continues to monitor the
quality of new loans that the Bank originates as well as to review the
performance of loans in the Bank's existing loan portfolio and believes that as
of September 30, 2008 the Company has adequately reserved for potential losses
in the loan portfolio.
Cash surrender value of life insurance decreased $0.7 million during the first
nine months of 2008 due to the receipt of extraordinary income of $0.6 million
resulting from the receipt of non-taxable Bank Owned Life Insurance (BOLI) death
benefit proceeds during the second quarter.
Deposits at the Bank decreased $1.9 million (0.3%) during the first nine months
of 2008. As previously noted, there is typically a short-term increase in cash
and cash equivalents and a corresponding increase in commercial and municipal
deposits in December of each year. However, this increase is seasonal as these
deposits tend to be transferred to other financial institutions for other
investment opportunities or funds management programs after the first of the
year.
Total borrowings, including federal funds purchased decreased $12.5 million
(83.3%) during the first nine months of 2008. As a result of slower growth in
the loan portfolio, the Bank's borrowing needs were reduced. 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 addressed primarily with the Bank's
federal funds facility through its primary correspondent bank.
The Company's equity increased $1.9 million (1.7%) during the first nine months
of 2008. The Company posted net income of $8.4 million for the first nine months
of 2008 and received proceeds of $0.4 million in January 2008 from the sale of
common stock through its Dividend Reinvestment Plan. The Dividend Reinvestment
Plan was discontinued by the Board of Directors following the January 2008 stock
sale. The Company paid $6.9 million in dividends during the first nine months of
2008.
LIQUIDITY
The ability to provide the necessary funds for the day-to-day operations of the
Company depends on a sound liquidity position. Management has continued to
monitor the Company'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 Company continues to offer products that are
competitive and encourages depositors to invest their funds in the Bank's
products. Management believes that these efforts will help the Bank to not only
retain these deposits, but also encourage continued growth. The Bank has the
ability to borrow up to $25.0 million in federal funds purchased, and an
additional $32.0 million is available for short-term liquidity through Federal
Reserve Notes Payable (collateralized borrowing) from the Federal Reserve Bank
of Chicago.
13
As an additional measure of liquidity, approximately $7.2 million in investment
securities are scheduled to mature during the remainder of 2008. In addition,
approximately $29.4 million of other securities are subject to calls during the
same period.
The Bank's liquidity and strength were tested during the third quarter when both
of the local correspondent banks with whom the Bank had a federal funds
borrowing privilege advised the Bank that the correspondent bank's ability to
fund (and honor the maximum limit approved for Tri City) would be reduced. The
Bank's ability to borrow was decreased from a total of $85 million at the two
correspondent banks to $25 million at one correspondent bank with the other
being eliminated entirely. Senior management enacted the Bank's contingency
funding plan and the Bank's availability of unpledged municipal securities on
hand made the transition to collateralized borrowing at the Federal Reserve Bank
of Chicago a ready alternative.
CAPITAL EXPENDITURES
The Bank has recently completed the only significant capital project in place
for 2008, the relocation of its Brown Deer banking office. This capital
expenditure of $1.9 million, net of credits from the Village of Brown Deer, was
incurred during the first nine months of 2008. The Company had sufficient
liquidity to internally fund this expenditure. No other capital projects are
planned for the remainder of 2008.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
The Company's net income for the third quarter of 2008 was $2.7 million, an
increase of $0.1 million (3.4%) compared to the third quarter of 2007. Total
interest income on loans decreased $0.7 million (7.3%) in the third quarter of
2008 compared to the third quarter of 2007. Declining rates in 2008 partially
offset increased earnings attributed to loan volume over the same period in
2007. Volume increases contributed $3.2 million to interest income as the loan
portfolio increased $31.4 million to $593.1 million at September 30, 2008 from
$561.7 million at September 30, 2007. Average yields declined 87 basis points to
6.48% during the third quarter of 2008 from 7.35% in 2007, resulting in a $3.9
million reduction in interest income.
Interest income on investment securities decreased $0.1 million (5.3%) to $1.1
million for the third quarter of 2008 compared to $1.2 million for the third
quarter of 2007. The cause of the pre-tax decrease is twofold; a shift from
taxable U.S. Agency securities in the investment portfolio to tax exempt
municipal securities and an overall decrease in total investment securities.
Investments in U.S. Agency securities decreased $19.9 million to $60.4 million
at September 30, 2008 from $80.3 million as of September 30, 2007. Investments
in municipal securities increased $9.9 million to $49.9 million at September 30,
2008 from $40.0 million as of September 30, 2007. The result was a net decrease
in total investment securities of $10.0 million (8.4%) to $110.3 million at
September 30, 2008 from $120.4 million as of September 30, 2007.
Interest expense decreased $1.0 million (30.3%) to $2.2 million for the quarter
ended September 30, 2008 from $3.2 million for the third quarter of 2007. This
14
decrease resulted from an increase in deposit volume which was more than offset
by declining rates in the third quarter of 2008. Volume increased interest
expense $0.6 million as interest-bearing deposits increased $59.9 million (9.9%)
to $663.9 million at September 30, 2008 from $604.0 million as of September 30,
2007. Annualized yields on interest-bearing deposits declined 72 basis points to
1.70% for the third quarter of 2008 from 2.42% for the third quarter of 2007
reducing interest expense $1.6 million comparing the two periods.
Non-interest income increased $0.2 million (6.7%) to $3.1 million for the
quarter ending September 30, 2008 from $2.9 million for the same period in 2007.
The increase is the result of increased fees from deposit account service
charges. The largest contributor to the increase is the discount paid to the
Bank as card issuer by merchants accepting our depositor's VISA check card.
Continued increased usage of Tri City's EZ Pay check card is due to improved
activation rates and additional activity from an increasing base of consumer
accounts.
Non-interest expense increased $0.3 million (3.7%) to $7.3 million for the
quarter ended September 30, 2008 from $7.1 million for the same period in 2007.
The increase is primarily the result of salaries and benefits and data
processing, each of which increased $0.1 million for the period ending September
30, 2008 compared to the same period in 2007.
The provision for income taxes decreased $0.1 million as a result of additional
tax exempt municipal interest income in the third quarter of 2008 compared to
the same period in 2007. After tax net income increased $0.1 million (3.4%) to
$2.7 million for the quarter ended September 30, 2008 from $2.6 million for the
same period in 2007.
A summary of the change in income for the quarters ended September 30, 2008 and
2007 appears below:
Three Months Ended September 30, September 30, 2008
2008 2007 Over/(Under)
(Unaudited) (Unaudited) 2007
------------- ------------- ------------
Revenue and Expenses: (000's)
Interest income $ 10,678 $ 11,465 $ (787)
Interest expense (2,204) (3,161) 957
-------- -------- --------
Net interest income before
provision for loan losses 8,474 8,304 170
Provision for loan losses (200) (125) (75)
-------- -------- --------
Net interest income after
provision for loan losses 8,274 8,179 95
Noninterest income 3,104 2,908 196
Noninterest expense (7,312) (7,052) (260)
-------- -------- --------
Income from operations 4,066 4,035 31
Tax provision (1,357) (1,415) 58
-------- -------- --------
Net income $ 2,709 $ 2,620 $ 89
======== ======== ========
15
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
The Company's net income for the nine months ended September 30, 2008 increased
$0.9 million (12.6%) compared to the first nine months of 2007. The following
items contributed to the increase:
o an increase of $0.2 million (1.8%) in operating income,
o income of $0.6 million resulting from the receipt of non-taxable Bank Owned
Life Insurance (BOLI) death benefit proceeds,
o gain of $0.1 million due to the redemption of VISA stock upon that
company's initial public offering.
Interest income on loans decreased $0.1 million (0.3%) to $29.4 million for the
first nine months of 2008 from $29.5 million for the same period in 2007. The
decrease was net of increased interest income due to volume and decreased
interest income due to lower yields on loans. Portfolio loan volume increased
$31.4 million in commercial, real estate and consumer loans for the period ended
September 30, 2008 compared to the prior year, providing a $2.4 million increase
to interest income while declining rates decreased interest income $2.5 million
as loan yields declined 55 basis points (from 7.28% to 6.73%) from a year
earlier.
Interest income on investment securities decreased $0.1 million (4.2%) to $3.4
million for the nine months ended September 30, 2008 from $3.5 million for the
same period in 2007. The investment portfolio was reduced $0.1 million as $74.8
million of investment securities were redeemed through normal maturities and
calls and $74.7 million of investments were purchased. The decreased interest
income on investment securities is also the result of a shift to municipal
securities and lower pre-tax yields on tax-exempt investments during the first
nine months of 2008.
Interest on federal funds sold decreased $0.4 million (81.9%) during the first
nine months of 2008 compared to the same period in 2007. Additional deposits
acquired in 2007 were invested in federal funds sold. For the nine months ended
September 30, 2008 excess funds invested in federal funds sold were reduced as
these funds were deployed to support loan growth achieved during the fourth
quarter of 2007 and the first nine months of 2008. Volume contributed $0.3
million to the decrease. Additionally, the federal funds target rate has been
reduced eight times since September 30, 2007. As of September 30, 2008 the
target rate stood at 2.00%, down 275 basis points from 4.75% at September 30,
2007. Rate accounted for the remaining $0.1 million of the decrease.
Interest expense on deposits for the first nine months of 2008 decreased $1.6
million (18.1%) to $7.3 million from $8.9 million for the same period in 2007.
The decrease resulted from a $2.3 million decrease in interest expense due to a
55 basis point decrease in the yield on interest-bearing deposits (from 2.47% to
1.92%) partially offset by a $0.7 million increase due to a growth in the
average balance of interest-bearing deposits from the first nine months of 2007
to the first nine months of 2008.
16
New deposits between September 30, 2007 and September 30, 2008 were a mix of
short-term, lower yielding liabilities, due to the growth in personal checking
and municipal deposits and some higher-yielding time deposits. This trend has
helped the Bank maintain a strong net interest margin bolstered by the low cost
of funds associated with predominantly core deposit funding. Savings and
transaction account balances increased $18.6 million (5.0%) to $388.4 million at
September 30, 2008 from $369.8 million for as of September 30, 2007. Time
deposits accounted for most of the increase as balances increased $41.3 million
(40.9%) to $142.5 million at September 30, 2008 from $101.2 million as of
September 30, 2007. The result was an increase in total deposits of $60.0
million (9.9%) to $663.9 million at September 30, 2008 from $604.0 million as of
September 30, 2007.
Non-interest income increased $1.3 million (16.1%) to $9.7 million for the
nine-month period ending September 30, 2008 from $8.4 million for the same
period in 2007. This increase is primarily due to income from two transactions.
The Bank received $0.1 million from VISA stock redeemed in conjunction with that
company's initial public offering and also received non-taxable Bank Owned Life
Insurance death benefit proceeds of $1.6 million, which resulted in a gain of
$0.6 million. The remainder of the increase is due to increased revenue
generated from deposit account service fees and fees from the sale of loans in
the secondary mortgage market.
Non-interest expense increased $1.3 million (6.1%) during the nine months ending
September 30, 2008 compared to the same period in 2007. Contributing factors to
the increase were payroll, which increased by $0.6 million (4.7%) for the first
nine months of 2008 compared to the first nine months of 2007, due primarily to
increased staffing levels attributable to the opening of one additional location
and management's continued commitment to improved service levels at the Bank's
twenty-one in-store locations. Occupancy expenses increased $0.1 million (5.4%)
from the first nine months of 2007 to the first nine months of 2008 due to rent
increases and increased utility expenses in existing facilities. Data processing
expenses (including website and on-line banking) also increased $0.2 million
(12.2%) during the first nine months of 2008 compared to the same period in
2007, resulting primarily from increased account and transaction volume and
additional services accounts.
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 maintain
a minimum risk-based capital ratio of 8.0%, of which 4.0% must be Tier 1 capital
to be considered "well-capitalized" under the regulatory framework for prompt
corrective action categorization. At September 30, 2008, the Bank's risk-based
capital ratio was 19.1%, of which 18.1% was 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 Tier 1 capital to
total assets of at least 3.0%, while lower rated banking organizations must
maintain an average ratio of at least 4.0%. The Bank's leverage ratio at
September 30, 2008 was 14.5%.
17
OFF-BALANCE SHEET ARRANGEMENTS
The Bank's obligations also include off-balance sheet arrangements consisting of
loan-related commitments, of which only a portion are expected to be funded. At
September 30, 2008, the Bank's loan-related commitments, including standby
letters of credit and financial guarantees, totaled $88.1 million. During the
year, the Bank manages its overall liquidity taking into consideration funded
and unfunded commitments as a percentage of our liquidity sources. The Bank's
liquidity sources have been and are expected to be sufficient to meet the cash
requirements of its lending activities.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The 2007 Form 10-K contains certain disclosures about market risks affecting the
Company (see Item 7A of the 2007 Form 10-K and the information incorporated
therein from our 2007 Annual Report to Shareholders). There have been no
material changes to the information provided therein that would require
additional disclosures as of the date of this Report.
ITEM 4T - CONTROLS AND PROCEDURES
The Company 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 September 30, 2008 the Company
carried out an evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer of the Company, of the effectiveness of the design and operation of the
Company'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 the Chief Financial Officer of the Company concluded that the
Company'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 Company's internal control over financial
reporting identified in connection with the evaluation discussed above that
occurred during the quarter ended September 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
18
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
- ------ -----------------
There have been no material changes to the discussion in response to Item 3 of
Part I of the 2007 Form 10-K.
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 2007 Form 10-K.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------------------------
During the quarter ended September 30, 2008, the Company did not sell any equity
securities which were not registered under the Securities Act or repurchase any
of its equity securities.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None during the quarter ended September 30, 2008.
ITEM 5 OTHER INFORMATION
- ------ -----------------
Not applicable
ITEM 6 EXHIBITS
- ------ --------
31.1 Certification of Ronald K. Puetz, Chief Executive Officer, under
Rule 13a-14(a)/15d-14(a)
31.2 Certification of Scott A. Wilson, Chief Financial Officer, under
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Ronald K. Puetz, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Scott A. Wilson, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
19
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, 2008 /s/Ronald K. Puetz
----------------------- -----------------------------------
Ronald K. Puetz
President, Chief Executive Officer
(Principal Executive Officer)
DATE: November 12, 2008 /s/Scott A. Wilson
----------------------- -----------------------------------
Scott A. Wilson
Executive Vice President, Treasurer
(Chief Financial Officer)
20