2
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 March 31, 2009
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
YES 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
the 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 May 6, 2009 8,904,915 shares.
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 2009 (Unaudited) and December 31, 2008 3
(Unaudited) Consolidated Statements of Income
for the Three Months ended March 31, 2009 and 2008 4
(Unaudited) Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2009 and 2008 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
March 31,
2009 December 31,
(Unaudited) 2008
------------- -------------
Cash and due from banks $ 21,318,152 $ 41,504,793
Federal funds sold - 11,457,040
------------- -------------
Cash and cash equivalents 21,318,152 52,961,833
Held to maturity securities, fair value
of $106,681,402 and $108,274,692 as of
2009 and 2008 respectively 104,883,618 106,650,798
Loans, less allowance for loan losses of
$5,983,667 and $5,945,162 as of 2009
and 2008, respectively 596,552,264 593,700,921
Premises and equipment - net 20,908,121 21,104,762
Cash surrender value of life insurance 11,174,583 11,047,591
Mortgage servicing rights - net 650,117 590,224
Accrued interest receivable and other assets 5,575,359 6,876,815
------------- -------------
TOTAL ASSETS $ 761,062,214 $ 792,932,944
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
COMMITMENTS AND CONTINGENCIES
LIABILITIES
Deposits
Demand $ 126,804,494 $ 125,556,485
Savings and NOW 377,071,936 408,931,613
Other time 142,603,530 143,190,064
------------- -------------
Total Deposits 646,479,960 677,678,162
Federal funds purchased 2,019,264 -
Other borrowings 1,420,264 3,911,054
Accrued interest payable and other
liabilities 2,118,730 2,407,462
------------- -------------
Total Liabilities 652,038,218 683,996,678
------------- -------------
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 shares
issued and outstanding as of 2009
and 2008 8,904,915 8,904,915
Additional paid-in capital 26,543,470 26,543,470
Retained earnings 73,575,611 73,487,881
------------- -------------
Total Stockholders' Equity 109,023,996 108,936,266
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 761,062,214 $ 792,932,944
============= =============
3
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For Three Months Ended March 31, 2009 and 2008
(Unaudited)
- --------------------------------------------------------------------------------
2009 2008
---- ----
INTEREST INCOME
Loans $ 8,975,735 $ 10,234,669
Investment securities
Taxable 713,137 754,441
Exempt from federal income taxes 354,578 343,287
Federal funds sold 363 25,698
----------- ------------
Total Interest Income 10,043,813 11,358,095
----------- ------------
INTEREST EXPENSE
Deposits 1,774,832 2,927,635
Federal funds purchased 29,456 65,904
Other borrowings - 7,711
----------- ------------
Total Interest Expense 1,804,288 3,001,250
----------- ------------
Net interest income before provision for loan losses 8,239,525 8,356,845
Provision for loan losses 188,000 185,000
----------- ------------
Net interest income after provision for loan losses 8,051,525 8,171,845
----------- ------------
NONINTEREST INCOME
Service charges on deposits 2,312,735 2,200,034
Net gain on sale of loans 653,937 119,341
Increase in cash surrender value of life insurance 126,992 125,242
Life insurance death benefit - 606,584
Other 226,731 462,763
----------- ------------
Total Noninterest Income 3,320,395 3,513,964
----------- ------------
NONINTEREST EXPENSE
Salaries and employee benefits 4,167,820 4,269,088
Net occupancy costs 869,175 806,072
Furniture and equipment expenses 379,945 378,802
Computer services 678,291 625,294
Advertising and promotional 224,543 244,038
Regulatory agency assessments 98,001 61,540
Office supplies 160,412 158,458
Other 968,068 897,317
----------- ------------
Total Noninterest Expense 7,546,255 7,440,609
----------- ------------
Income before income taxes 3,825,665 4,245,200
Less: Applicable income taxes 1,333,500 1,220,000
----------- ------------
NET INCOME $ 2,492,165 $ 3,025,200
=========== ============
Basic and fully diluted earnings per share $ 0.28 $ 0.34
Dividends per share $ 0.27 $ 0.26
Weighted average shares outstanding 8,904,915 8,898,485
See notes to unaudited consolidated financial statements.
4
TRI CITY BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended March 31, 2009 and 2008
(Unaudited)
- --------------------------------------------------------------------------------
2009 2008
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,492,165 $ 3,025,200
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation 516,415 527,580
Amortization of servicing rights, premiums
and discounts -net 251,590 102,104
Gain on sale of loans (653,937) (119,341)
Provision for loan losses 188,000 185,000
Proceeds from sales of loans held for sale 37,342,470 9,429,293
Originations of loans held for sale (36,949,466) (9,380,304)
Increase in cash surrender value of life
insurance (126,992) (125,243)
Loss on sale of other real estate owned 30,712 -
Gain on death benefits of insurance policy - (606,584)
Net change in:
Accrued interest receivable and other
assets 1,191,903 496,485
Accrued interest payable and other
liabilities (288,732) (103,350)
------------ ------------
Net Cash Flows Provided (Used in) by
Operating Activities 3,994,128 3,430,840
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES Activity
in held to maturity securities:
Maturities, prepayments and calls 14,503,600 47,016,958
Purchases (12,786,970) (39,488,305)
Net (increase) decrease in loans (3,039,343) 3,454,350
Purchases of premises and equipment - net (319,774) (905,079)
Proceeds from sale of other real estate owned 78,841 -
Proceeds of life insurance death benefit - 1,646,154
------------ ------------
Net Cash Flows Used in Investing Activities (1,563,646) 11,724,078
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (31,198,202) (10,529,086)
Net change in federal funds purchased and
securities sold under repurchase agreements 2,019,264 (12,851,264)
Net change in other borrowings (2,490,790) (811,065)
Dividends paid (2,404,435) (2,313,434)
Common stock issued - 403,835
------------ ------------
Net Cash Flows Used in Financing Activities (34,074,163) (26,101,014)
------------ ------------
Net Change in Cash and Cash Equivalents (31,643,681) (10,946,096)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 52,961,833 60,079,747
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,318,152 $ 49,133,651
============ ============
Non Cash Transactions:
Loans Receivable transferred to Other Real
Estate Owned $ - $ 475,000
Mortgage Servicing Rights Resulting from
Sale of Loans $ 260,933 $ 70,352
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 1,857,680 $ 2,999,678
Cash paid for income taxes $ 302,525 $ 522,125
See notes to unaudited consolidated financial statements.
5
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 "Corporation") 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 consolidated 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, 2008 (the "2008 Form 10-K"). The December 31, 2008 financial information
included herein is derived from the December 31, 2008 Consolidated Balance Sheet
of Tri City which is included in the 2008 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
March 31, 2009 and the results of its operations and cash flows for the three
month period ended March 31, 2009 and 2008. 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 three months of 2009 are not necessarily indicative of the results
that may be expected for the entire 2009 fiscal year.
6
(B) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 160, NONCONTROLLING
INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS ("SFAS 160"). SFAS 160 amends
Accounting Research Bulletin No. 51, Consolidated Financial Statement" ("ARB
51"), to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
Corporation adopted SFAS 160 on January 1, 2009. The adoption of this statement
had no impact on the Corporation'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"). SFAS 161 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
positions, financial performance and cash flows. Because this pronouncement
affects only disclosures, it will not have an impact on the Corporation's
consolidated financial statements. The adoption of SFAS 161 is effective for the
fiscal year beginning after October 1, 2009, with early adoption permitted.
In May 2008, the FASB issued SFAS No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("SFAS 162"). This statement identifies the sources of
accounting principles and the framework for selecting the principles that are
presented in conformity with generally accepted accounting principles in the
United States of America. This statement became effective during November 2008.
The adoption of SFAS 162 did not have any effect on the Corporation's results of
operations, financial position or cash flows.
In April 2009, the FASB issued Financial Staff Position ("FSP") 115-2, FSP 124-2
and Emerging Issues Task Force ("EITF") 99-20-b, RECOGNITION AND PRESENTATION OF
OTHER-THAN-TEMPORARY IMPAIRMENTS. FSP 115-2, FSP 124-2 and EITF 99-20-b amend
the other-than-temporary guidance to make the guidance more operational and to
improve the presentation of other-than-temporary impairments in the financial
statements. The FSPs modify the current indicator that, to avoid considering an
impairment to be other-than temporary, management must assert that it has both
the intent and ability to hold an impaired security for a period of time
sufficient to allow for any anticipated recovery in fair value. The new FSPs
would require management to assert that (a) it does not have the intent to sell
the security and (b) it is more likely than not that it will not have to sell
the security before its recovery. The FSPs change the total amount recognized in
earnings when there are credit losses associated with an impairment of a debt
security. The impairment is separated into impairments related to credit losses
and impairments related to all other factors. The FSPs and EITF are effective
beginning with the interim period ending June 30, 2009, however, early adoption
is permitted. The Corporation did not adopt the FSPs and EITF early and is
currently evaluating the impact of the adoption of FSP 115-2, FSP 124-2 and EITF
99-20-b and on the Corporation's consolidated financial statements.
7
In April 2009, FASB issued FSP FAS 157-4, DETERMINING WHETHER A MARKET IS NOT
ACTIVE AND A TRANSACTION IS NOT DISTRESSED. FSP FAS 157-4 provides additional
guidance on determining whether a market for a financial asset is not active and
a transaction is not distressed for fair value measurements under FAS 157 Fair
Value Measurements. This FSP is effective beginning with the interim period
ending June 30, 2009, however, early adoption is permitted. The Corporation did
not early adopt and is currently evaluating the impact of the adoption of FSP
157-4 on the Corporation's consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 - INTERIM DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The FSP and APB require disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are
effective for the Corporation's interim period ending June 30, 2009. As FSP FAS
107-1 and APB 28-1 amend only the disclosure requirements about fair value of
financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB
28-1 are not expected to affect the Corporation's consolidated financial
statements.
(C) FAIR VALUE ACCOUNTING
On January 1, 2008, the Corporation adopted SFAS No. 157 Fair Value Measurements
("SFAS 157"), which, among other things, requires enhanced disclosures about
assets and liabilities carried at fair value. As defined in SFAS 157, fair value
is the price that would be received in the sale of an asset or paid in the
transfer of a liability in an orderly transaction between market participants at
the measurement date (exit price). The Corporation utilizes market data or
assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market
corroborated, or generally unobservable. The Corporation is able to classify
fair value balances based on the observability of those inputs. SFAS 157
establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3 measurement). The three
levels of the fair value hierarchy defined by SFAS 157 are as follows:
Level 1 - Fair value is based upon quoted prices (unadjusted) for identical
assets or liabilities in active markets in which the Corporation can
participate. Active markets are those in which transactions for the asset or
liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Level 1 primarily consists of financial
instruments such as listed equities and U.S. government treasury securities.
Level 2 - Pricing inputs are other than quoted prices in active markets included
in Level 1, which are either directly or indirectly observable as of the
reporting date. Level 2 includes those financial instruments that are valued
using models or other valuation methodologies.
Level 3 - Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of fair value.
At each balance sheet date, the Corporation performs an analysis of all
8
instruments subject to SFAS 157 and includes in Level 3 all of those whose fair
value is based on significant unobservable inputs.
ASSETS
LOANS HELD FOR INVESTMENT. The Bank 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 loss 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.
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
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Bank records the impaired loan as
a nonrecurring Level 2 valuation. At March 31, 2009, substantially all of the
impaired loans were evaluated based on the fair value of the collateral.
REPOSSESSED ASSETS. Loans on which the underlying collateral has been
repossessed are accounted for at the lower of carrying amount or fair value less
costs to sell upon transfer to repossessed assets. 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 Bank
records the repossessed asset as a nonrecurring Level 2 valuation.
MORTGAGE SERVICING RIGHTS. The Bank does not record Mortgage Servicing Rights
(MSRs) at fair value on a recurring basis. However, from time to time, MSRs may
be considered impaired and a valuation allowance established. 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 Bank's portfolio of
serviced loans. If the MSR's fair value is less than the MSRs amortized value,
then MSRs are considered impaired. At March 31, 2009, MSRs were evaluated based
on their fair value and no valuation allowance was deemed necessary. In
accordance with SFAS 157, impaired MSRs where a valuation 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 pricing
inputs indirectly observed, the Bank records the impaired MSR as a nonrecurring
Level 2 valuation.
As of March 31, 2009, the Bank does not carry any assets that are measured at
fair value on a recurring basis or use significant unobservable inputs.
9
ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS
The Bank has assets that under certain conditions are subject to measurement at
fair value on a non-recurring basis. These include assets that are measured at
the lower of cost or market and had a fair value below cost at the end of the
period as summarized below.
Balance at
03/31/09 Level 1 Level 2 Level 3
-------- ------- ------- -------
Loans held for investment $ 10,610,457 $ - $ 10,610,457 $ -
------------ ------------ ------------ ------------
Totals $ 10,610,457 $ - $ 10,610,457 $ -
============ ============ ============ =============
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 Corporation'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 Corporation 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 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,
2008, 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 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 the use of management's judgment.
Management considers the most significant accounting policy to be the
determination of the amount of the 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 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 our 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. Since the
allowance for loan losses is an estimate, there is a risk that actual results
will differ from expectations and that additional losses and a corresponding
reduction in earnings could result.
11
FINANCIAL CONDITION
The Corporation's total assets decreased $31.9 million (-4.0%) during the
first quarter of 2009. Cash and cash equivalents decreased $31.6 million
(-59.7%) during that period, associated with activity normally seen during the
first quarter. The Corporation's banking subsidiary, Tri City National Bank (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 typically run off during the first
quarter as excess deposits are transferred into alternative investment vehicles.
Investment securities decreased $1.8 million (-1.7%) during the first
quarter of 2009. Approximately $14.5 million of the Bank's investment portfolio
was redeemed through normal maturities or scheduled calls and $12.7 million of
new securities were purchased. Management continues to follow its practice of
holding the securities in its investment portfolio to maturity.
Loans increased $2.9 million (0.5%) during the first quarter of 2009. New
commercial loan volume reflected the sluggish nature of the economy during the
first quarter of 2009. New loan originations were slightly ahead of the
amortization of portfolio loans resulting in a modest increase in total loans to
$602.5 million at March 31, 2009 compared to $599.6 million at December 31,
2008. Management allowed a portion of the commercial portfolio to refinance
elsewhere if management determined that the credit had the potential to
deteriorate significantly in a prolonged recession. Conversely, management
continues to emphasize selective marketing and requires extra scrutiny of
equity, cash flow and borrower character for loan opportunities created as
borrowers refinance their credits out of competitor banks.
The allowance for loan losses ("ALL") increased $39,000 (0.6%) during the
first three months of 2009. A $188,000 provision for loan loss was recorded in
the first quarter of 2009 and $148,000 in loans were charged-off during the
quarter. The Bank's charge offs and the corresponding provision for loan losses
reflect the adverse effects of the downturn in the economy, however management
believes the Bank's portfolio remains strong. The Bank had 29 borrowers in
foreclosure at March 31, 2009, and although the actions involve different
relationships, the count is the same as it was on March 31, 2008 and is lower
12
than the 32 borrowers in foreclosure at December 31, 2008. As of March 31, 2009
the Bank had a base of over 4,000 collateralized real estate loans in its
portfolio. Also notable is the fact that the Bank had no Other Real Estate Owned
("OREO," which is real estate acquired through foreclosure that has not yet been
liquidated) as of March 31, 2009 compared to $475,000 in OREO at March 31, 2008
and $110,000 at December 31, 2008. The provision for loan loss represents the
amount periodically added to the Bank's ALL and charged to earnings in the
relevant period. The Bank's loan portfolio has been negatively impacted by the
economic downturn but Management believes the loan portfolio has maintained its
strength given the small number of foreclosures relative to the portfolio size
and the fact that the Bank has no OREO to be liquidated.
The ALL 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 ALL management uses significant judgment focusing on changes in
the size and the character of 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 credit losses. Management
continues to monitor the quality of new loans that the Bank originates each year
as well as to review the Bank's existing loan performance.
Deposits at the Bank decreased $31.2 million (-4.6%) during the first
quarter of 2009. As noted above, there is typically a short-term increase in
commercial and municipal deposits in December of each year. These deposits tend
to be transferred to corporate funds management programs or in the case of
municipal deposits to the State of Wisconsin investment fund after the first of
the year.
The Corporation's total borrowings decreased $0.5 million (-12.1%) during
the first three months of 2009. The Bank adjusts its level of daily borrowing or
short term daily investment depending upon its needs each day. Excess funds or
13
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.
The Corporation's equity increased $0.1 million (0.1%) during the first
quarter of 2009. The Corporation posted net income of $2.5 million and paid $2.4
million in dividends during the first quarter of 2009.
LIQUIDITY
The ability to provide the necessary funds for the day-to-day operations of
the Corporation depends on a sound liquidity position. Management has continued
to monitor the Corporation's liquidity by reviewing the maturity distribution
between interest earning assets and interest bearing liabilities. Fluctuations
in interest rates can be the primary cause for the flow of funds into or out of
a financial institution. The Corporation continues to offer products that are
competitive and 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 $45.0 million in federal funds purchased, and an
additional $32.3 million available for short-term liquidity through the Federal
Reserve Bank Discount window.
CAPITAL EXPENDITURES
The Bank has two capital projects currently in place for 2009, the
relocation of its Grafton in-store banking facility (necessitated by a move of
the retailer to a new building) and a new in-store facility on Mayfair Road
between Bluemound Road and North Avenue scheduled to open late in 2009. The
projected capital expenditures will be less than $0.3 million. The Corporation
has sufficient liquidity to internally fund the expenditures.
14
RESULTS OF OPERATIONS
The Corporation's net income for the first quarter of 2009 was $2.5 million, a
decrease of $0.5 million (-17.6%) compared to the first quarter of 2008.
The decrease was the result of the net effect of the following:
o an increase of $0.4 million (277%) in fees and income associated with
mortgage originations as a result of reduced rates stimulating
activity in mortgage refinancing,
o a decrease of $0.1 million (-1.4%) in net interest income,
o an increased provision for income taxes of $0.1million,
o two items of non-recurring income that were received in 2008 (but not
in 2009): $0.6 million in 2008 from the receipt of non-taxable Bank
Owned Life Insurance (BOLI) death benefit proceeds, and $0.1 million
in 2008 from a gain on the redemption of VISA stock upon that
company's initial public offering
Total interest income on loans decreased $1.3 million (-12.3%) in the first
three months of 2009 compared to the first three months of 2008. The effect of
declining rates throughout 2008 more than offset interest income increases due
to loan growth from year to year. Interest income increased by $0.3 million for
the first quarter of 2009 compared to the first quarter of 2008 due to increased
volume as the loan portfolio grew $2.9 million from March 31, 2008 to March 31,
2009. Loan yields declined 96 basis points to 6.00% for the 2009 first quarter
compared to 6.96% for the first quarter of 2008, which resulted in a $1.6
million decrease in interest income for the 2009 first quarter compared to the
first quarter of 2008.
Investment security interest income decreased $30,000 (-2.7%) during the
first quarter of 2009 compared to the first quarter of 2008. This change is the
net result of a decrease in the amount of investments, with a $1.8 million
decrease (-1.7%) in U. S. government sponsored agency and municipal securities
offset by an increase of 5 basis points in the average tax equivalent
year-to-date yield derived from all investments to 4.80% during the first
quarter of 2009 compared to 4.75% in the first quarter of 2008.
15
Interest expense decreased $1.2 million (-39.9%) during the first quarter
of 2009 compared to the first quarter of 2008, entirely as a result of reduced
rates. Seven reductions to the target rate established by the Federal Open
Market Committee reduced interest paid in 2008 on the Bank's variable rate
deposit products. Annualized yields on interest-bearing deposits declined 95
basis points to 1.38% for the first quarter of 2009 from 2.33% for the first
quarter of 2008.
Non-interest income decreased $0.2 million (-5.5%) during the first quarter
of 2009 compared to the same period of 2008. This decrease is the net result of
increases to two significant non-interest income sources in 2009 that did not
quite equal the non-recurring income realized in 2008. Income derived from
service charges to deposit accounts increased $0.1 million (5.1%) during the
first quarter of 2009 compared to the same period of 2008. Increased activity in
mortgage refinancing resulted in additional income of $0.4 million (277%) during
the first quarter of 2009 compared to the same period of 2008 from fees
associated with the transaction closing, gains on sale of the loans in the
secondary market and increases to Mortgage Servicing Rights ("MSRs") held by the
Bank. However, in 2008 the Bank received $0.1 million from VISA stock redeemed
in conjunction with that company's initial public offering and also received
non-taxable BOLI death benefit proceeds in the amount of $0.6 million. The
absence of the VISA and BOLI income items in 2009 more than offset the increased
income from deposit accounts and mortgage activity in 2009.
16
A summary of the change in income for the quarters ended March 31, 2009 and
2008 appears below:
Three Months Ended March 31, March 31, 2009
2009 2008 Over(Under)
(Unaudited) (Unaudited) 2008
----------- ----------- -----------
Revenue and Expenses: (000's)
Interest income $ 10,044 $ 11,358 $ (1,314)
Interest expense (1,804) (3,001) 1,197
-------- -------- --------
Net interest income before
provision for loan losses 8,240 8,357 (117)
Provision for loan losses (188) (185) (3)
-------- -------- --------
Net interest income after
provision for loan losses 8,052 8,172 (120)
Non-interest income 3,320 3,514 (194)
Non-interest expenses (7,546) (7,441) (105)
-------- -------- --------
Income from Operations 3,826 4,245 (419)
Tax Provision 1,334 1,220 (114)
-------- -------- --------
Net income $ 2,492 $ 3,025 $ (533)
======== ======== ========
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 comprise Tier 1
capital. The Bank's risk-based capital ratio is 19.1% as of March 31, 2009.
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 as of
March 31, 2009 was 14.3%.
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 March 31, 2009, the Bank's loan-related commitments, including
standby letters of credit and financial guarantees, totaled $94.6 million.
During the year, the Bank manages its overall liquidity, taking into
consideration funded and unfunded commitments as a percentage of its liquidity
sources. The Bank's liquidity sources have been and are expected to be
sufficient to meet the cash requirements of its lending activities.
17
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------
The Corporation's Annual Report on Form 10-K for the year ended December
31, 2008 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
("Exchange Act"), is recorded and processed, summarized and reported within the
time periods specified in the SEC's rules and forms. At March 31, 2009 the
Corporation 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 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 the Chief Financial Officer of the Corporation
concluded that the Corporation's disclosure controls and procedures are
effective as of the end of the period covered by this report.
There have been no changes in the Corporation's internal control over
financial reporting identified in connection with the evaluation discussed above
that occurred during the quarter ended March 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
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 2008 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 2008 Form 10-K.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------------------------
During the quarter ended March 31, 2009 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 March 31, 2009.
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: May 6, 2009 /s/Ronald K. Puetz
------------------------------- -----------------------------------
Ronald K. Puetz
President, Chief Executive Officer
(Principal Executive Officer)
DATE: May 6, 2009 /s/Scott A. Wilson
-------------------------------- -----------------------------------
Scott A. Wilson
Executive Vice President, Treasurer
(Chief Financial Officer)
20
Tri City Bankshares Corporation
Index of Exhibits
Exhibit No.
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