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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-9785
TRI CITY BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1158740
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6400 S. 27th Street, Oak Creek, WI
-----------------------------------
(Address of principal executive offices)
53154
Zip Code
(414) 761-1610
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
The number of shares outstanding of $1.00 par value common stock, as of July 31,
2004: 8,369,960 shares.
FORM 10-Q
TRI CITY BANKSHARES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page #
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Income
for the Three Months ended June 30, 2004
and 2003 4
Condensed Consolidated Statements of Income
for the Six Months ended June 30, 2004
and 2003 5
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2004
and 2003 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4 Controls and Procedures 18
PART II - OTHER INFORMATION
Item 2 Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23
2
ITEM 1
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
---- ----
Assets
Cash and due from banks $ 26,488,026 $ 40,849,479
Federal funds sold 0 0
------------- -------------
Cash and cash equivalents 26,488,026 40,849,479
Investment securities held to maturity
(fair value of
$169,325,124 - 2004 and
$172,873,927 - 2003 169,383,824 170,541,123
Loans 448,391,928 412,274,928
Less allowance for loan losses (5,452,869) (5,289,467)
------------- -------------
Net loans 442,939,059 406,985,461
Premises and equipment 21,136,830 21,892,460
Cash surrender value of life insurance 10,180,968 10,000,000
Mortgage servicing rights 1,004,749 998,514
Accrued interest receivable and other assets 3,684,585 3,516,178
------------- -------------
$ 674,818,041 $ 654,783,215
============= =============
Liabilities and Stockholders' Equity
Deposits
Demand $ 157,329,084 $ 148,813,893
Savings and NOW 313,985,907 312,078,384
Other time 87,979,920 95,131,632
------------- -------------
Total deposits 559,294,911 556,023,909
Federal funds purchased and securities sold
under repurchase agreements 23,250,211 9,013,622
Other borrowings 1,750,687 1,534,292
Accrued interest payable and other liabilities 1,346,230 1,927,548
------------- -------------
Total liabilities 585,642,039 568,499,371
------------- -------------
Stockholders' equity:
Common stock, $1 par value:
15,000,000 shares authorized,
Issued and outstanding:
2004 - 8,326,459 shares;
2003 - 8,223,557 shares 8,326,459 8,223,557
Additional paid in capital 15,903,993 14,010,617
Retained earnings 64,945,550 64,049,670
------------- -------------
Total stockholders' equity 89,176,002 86,283,844
------------- -------------
$ 674,818,041 $ 654,783,215
============= =============
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
---- ----
Interest income
Interest and fees on loans $6,849,575 $6,956,574
Interest on investment securities:
Taxable 874,902 772,367
Exempt from federal income tax 446,983 777,432
Federal funds sold 4,248 36,736
Other 9,663 9,663
---------- ----------
Total interest income 8,185,371 8,552,772
---------- ----------
Interest expense
Interest on deposits 1,136,877 1,290,844
Interest on federal funds purchased and
securities sold under repurchase
agreements 21,677 0
Interest on other borrowings 3,182 7,099
---------- ----------
Total interest expense 1,161,736 1,297,943
---------- ----------
Net interest income before provision for loan losses 7,023,635 7,254,829
Provision for loan losses 105,000 105,000
---------- ----------
Net interest income after provision for loan losses 6,918,635 7,149,829
---------- ----------
Non interest income
Service charges 747,011 748,596
Gain on sale of loans 182,232 779,163
Other income 770,285 636,999
---------- ----------
Total non interest income 1,699,528 2,164,758
---------- ----------
Non interest expenses
Salaries and employee benefits 3,381,319 3,431,326
Net occupancy costs 622,668 486,760
Furniture and equipment expenses 387,873 445,832
Computer services 438,758 392,887
Advertising and promotional 185,299 174,643
Regulatory agency assessments 58,502 57,758
Office supplies 145,895 129,889
Other expenses 709,925 699,704
---------- ----------
Total non interest expense 5,930,239 5,818,799
---------- ----------
Income before income taxes 2,687,924 3,495,788
Income taxes 805,000 1,035,000
---------- ----------
Net income $1,882,924 $2,460,788
========== ==========
Net income per common share $ 0.23 $ 0.30
Dividends per common shares .175 .160
Weighted average shares outstanding 8,315,660 8,137,966
See Notes to Unaudited Condensed Consolidated Financial Statements
4
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
---- ----
Interest income
Interest and fees on loans $13,551,147 $13,933,342
Interest on investment securities:
Taxable 1,542,991 1,591,265
Exempt from federal income tax 1,150,727 1,543,932
Interest on federal funds sold 4,633 47,840
Other 9,663 9,663
----------- -----------
Total interest income 16,259,161 17,126,042
----------- -----------
Interest expense
Interest on deposits 2,267,265 2,668,462
Interest on federal funds purchased and
securities sold under repurchase
agreements 62,154 5,604
Interest on other borrowings 19,227 12,565
----------- -----------
Total interest expense 2,348,646 2,686,631
----------- -----------
Net interest income before provision for loan losses 13,910,515 14,439,411
Provision for loan losses 210,000 210,000
----------- -----------
Net interest income after provision for loan losses 13,700,515 14,229,411
----------- -----------
Non interest income
Service charges 1,461,611 1,460,392
Gain on sale of loans 312,595 1,332,575
Other income 1,500,044 1,345,087
----------- -----------
Total non interest income 3,274,250 4,138,054
Non interest expenses
Salaries and employee benefits 6,807,385 6,840,084
Net occupancy costs 1,147,173 987,155
Furniture and equipment expenses 762,158 855,224
Computer services 863,086 767,321
Advertising and promotional 357,418 346,427
Regulatory agency assessments 116,317 116,174
Office supplies 272,273 270,024
Other expenses 1,359,295 1,356,003
----------- -----------
Total non interest expense 11,685,105 11,538,412
Income before income taxes 5,289,660 6,829,053
Income taxes 1,505,000 2,008,000
----------- -----------
Net income $ 3,784,660 $ 4,821,053
=========== ===========
Net income per common share $ 0.46 $ 0.59
Dividends per common share 0.35 .032
Weighted average shares outstanding 8,292,159 8,117,639
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
---- ----
Cash Flows from Operating Activities
Net income $ 3,784,660 $ 4,821,053
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation 1,079,448 973,767
Amortization of premiums and accretion
of discounts on investment securities -
net 77,238 106,852
Gain on sale of loans (312,595) (1,332,575)
Provision for loan losses 210,000 210,000
Proceeds from sales of loans held for sale 28,468,329 74,882,267
Originations of loans held for sale (28,155,734) (73,549,692)
Increase in cash surrender value of
life insurance (180,968) 0
Net change in accrued interest receivable
and other assets (174,642) (313,308)
Net change in accrued interest payable
and other liabilities (581,323) (345,026)
------------ ------------
Net cash flows from operating activities 4,214,413 5,453,338
------------ ------------
Cash Flows from Investing Activities
Activity in held to maturity securities
Maturities, prepayments and calls 54,637,424 25,991,139
Purchases (53,557,363) (31,939,660)
Net (increase) decrease in loans (36,163,598) 5,196,549
Purchases of premises and equipment (323,818) (810,946)
------------ ------------
Net Cash Flows from Investing Activities (35,769,291) (1,562,918)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in deposits 3,271,002 (13,988,611)
Net change in federal funds purchased and
securities sold under repurchase agreements 14,236,589 0
Net change in other borrowings 216,395 (1,923,793)
Dividends paid (2,888,775) (2,586,826)
Common stock issued 1,996,278 1,440,408
------------ ------------
Net Cash Flows from Financing Activities 16,831,489 (17,058,822)
------------ ------------
Net Change in Cash and Cash Equivalents (14,361,453) (13,168,402)
Cash and Cash Equivalents - Beginning of Year 40,849,479 50,308,930
------------ ------------
Cash and Cash Equivalents - End of Year $ 26,488,026 $ 37,140,528
============ ============
See Notes to Unauditied Condensed Consolidated Financial Statements
6
TRI CITY BANKSHARES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Annual Report on Form 10-K of
Tri City Bankshares Corporation ("Tri City") for the year ended December 31,
2003. The December 31, 2003 financial information included herein is derived
from the December 31, 2003 Consolidated Balance Sheet of Tri City which is
included in the aforesaid Annual Report on Form 10-K.
In the opinion of Tri City's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting
of normal recurring accruals, necessary to present fairly Tri City's
consolidated financial position as of June 30, 2004 and the results of its
operations for the three month and six month periods ended June 30, 2004 and
2003, and cash flows for the six months ended June 30, 2004 and 2003. 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
reported period. The operating results for the three months and six months ended
June 30, 2004 are not necessarily indicative of the results which may be
expected for the entire 2004 fiscal year.
7
(B) ACCOUNTING CHANGES
On March 9, 2004, the SEC issued Staff Accounting Bulletin ("SAB") 105,
"Application of Accounting Principles to Loan Commitments" to advise registrants
of the staff's view that fair value of the recorded loan commitments, that are
required to follow derivative accounting under Statement of Financial Accounting
Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging
Activities, should not take into consideration the expected future cash flows
related to the associated servicing of the future loan. The staff indicated its
belief that incorporating expected future cash flows related to the associated
servicing of the loan essentially results in the immediate recognition of a
servicing asset, which is only appropriate once the servicing asset has been
contractually separated from the underlying loan by sale or by securitization of
the loan with servicing retained. Furthermore, no other internally-developed
intangible assets, such as customer relationship intangibles, should be recorded
as part of the loan commitment derivative. The staff noted that recognition of
such assets is only appropriate in the event of a third-party transaction, such
as the purchase of a loan commitment either individually, in a portfolio, or in
a business combination.
In addition, SAB No. 105 requires registrants to disclose their accounting
policy for loan commitments pursuant to Accounting Principles Bulletin Opinion
No. 22, including methods and assumptions used to estimate fair value and any
associated hedging strategies, as required by Statement of Financial Accounting
Standard ("SFAS") No. 107, SFAS No. 133 and Item No. 305 of Regulation S-K
(Quantitative and Qualitative Disclosures About Market Risk).
SAB 105 does not explicitly require banks that apply derivative accounting
to their loan commitments to treat the loan commitments only as liabilities.
8
Rather, the staff appears to be deferring to the Financial Accounting Standards
Board ("FASB") to address this aspect of the fair value issue in its loan
commitment project.
The provisions of SAB 105 must be applied to loan commitments accounted for
as derivatives that are entered into after March 31, 2004. The staff will not
object to the application of existing accounting practices to loan commitments
accounted for as derivatives that are entered into on or before March 31, 2004,
with appropriate disclosures.
The issuance of SAB 105 has not had a material impact on Tri City's
Consolidated Financial Statements as the loan commitments are generally not
accounted for as derivatives.
9
ITEM 2
TRI CITY BANKSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
This report contains statements that may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, such as statements other than historical facts contained or incorporated
by reference in this report. These statements speak of Tri City Bankshares
Corporation's (the "Corporation") plans, goals, beliefs or expectations, refer
to estimates or use similar terms. Future filings by the Corporation with the
Securities and Exchange Commission, and statements other than historical facts
contained in written material, press releases and oral statements issued by, or
on behalf of the Corporation may also constitute forward-looking statements.
Forward-looking statements are subject to significant risks and
uncertainties; and the Corporation's actual results may differ materially from
the results discussed in such forward-looking statements. Factors that might
cause actual results to differ from the results discussed in forward-looking
statements include, but are not limited to the factors set forth in Exhibit 99.1
of the Corporation's Annual Report on Form 10-K for the year ended December 31,
2003, which exhibit is incorporated herein by reference.
All forward-looking statements contained in this report or which may be
contained in future statements made for or on behalf of the Corporation are
based upon information available at the time the statement is made and the
Corporation assumes no obligation to update any forward-looking statement.
10
CRITICAL ACCOUNTING POLICIES
A number of accounting policies require us to use our judgment. Three of the
more significant policies are: o Establishing the amount of the provision for
loan losses.
o We evaluate our loan portfolio at least quarterly to determine
the adequacy of the allowance for loan losses. Included in the
review are five components: (1) An historic review of losses
and allowance coverage based on peak and average loss volume; (2)
A review of portfolio trends in volume and composition with
attention to possible concentrations; (3) A review of delinquency
trends and loan performance compared to our peer group; (4) A
review of local and national economic conditions; and (5) A
quality analysis review of non-performing loans identifying
charge-offs, potential loss after collateral liquidation and
credit weaknesses requiring above normal supervision. If we
misjudge the adequacy of the allowance and experience additional
losses, a charge to earnings may result.
o Establishing the value of mortgage servicing rights. Mortgage
servicing rights ("MSRs") are established on loans (primarily
mortgage loans) that we originate and sell, but continue to
service as we collect the payments and tax escrows. Generally
accepted accounting principles require that we recognize, as
income, the estimated fair market value of the asset when
originated, even though management does not intend to sell these
rights. The estimated value of MSRs is the present value of
future net cash flows from the servicing relationship using
current market assumptions for factors such as prepayments and
servicing costs. As the loans are repaid and the servicing
revenue is earned, MSRs are amortized. Net servicing revenues and
newly originated MSRs generally exceed this amortization expense.
However, if actual prepayment experience is greater than
anticipated, and new loan volume declines, net servicing revenues
may be less than expected and a charge to earnings may result.
11
o Determining the amount of current and deferred income taxes. The
determination of current and deferred income taxes is based on
complex analyses of many factors including interpretation of
federal and state income tax laws, the difference between tax and
financial reporting of reversals of temporary differences and
current accounting standards. The federal and state taxing
authorities who make assessments based on their determination of
tax laws periodically review the Corporation's interpretation of
federal and state tax laws. This assessment may result in an
adjustment to amounts previously provided for.
FINANCIAL CONDITION
The Corporation's total assets have increased $20.0 million (3.1%) during the
first two quarters of 2004. Cash and cash equivalents decreased $14.4 million
(35.2%) while net loans increased $36.0 million (8.8%). Typically the
Corporation's banking subsidiary experiences a short-term increase in deposits
at year-end associated with municipal deposits of property taxes and commercial
deposits resulting from holiday spending which returns to normal levels by the
end of the first quarter.
There has been a $1.2 million (0.7%) decrease in the investment portfolio during
the first two quarters of the year. The Corporation's banking subsidiary
continues to have significant redeemed securities either through normal
maturities or scheduled calls. Management continues to follow its practice of
holding to maturity its investment portfolio.
The increase in net loans of $36.0 million (8.8%) noted during the first half of
the year is a reflection of improved demand for loans and management's efforts
to expand loan volume through increased marketing. Although significant
increases in loan production have been achieved, management believes that credit
standards have not been sacrificed to accomplish the growth. The allowance for
loan losses has increased $163,000 during this period. The allowance reflects
management's best estimate of probable and estimatable losses in the current
12
loan portfolio that may occur in the ordinary course of business taking into
consideration past loan loss experience; the level of nonperforming and
classified assets; current economic conditions; volume, growth and composition
of the loan portfolio; adverse situations that may affect the borrower's ability
to repay; the estimated value of any underlying collateral; peer group
comparisons; regulatory guidance; and other relevant factors. Management
continues to monitor the quality of new loans that the Corporation originates
each year as well as review existing loan performance. Management continues to
believe that the overall quality of the portfolio is excellent and that the
allowance for loan losses is adequate. Charge off of non-performing loans
continue to be at below industry levels.
Deposits of the Corporation's banking subsidiary have increased $3.3 million
(0.6%) during the first six months of 2004. As noted above, there is typically a
short-term increase in municipal and commercial deposits in December of each
year. These deposits tend to be transferred to other financial institutions for
investment opportunity or funds management programs. Deposit growth from June
30, 2003 to June 30, 2004 totaled $30.1 million (5.7%) and such growth trends
appear to be continuing. The Corporation continues to remain competitive in the
current economic climate, offering rates in the upper quartile of those offered
by its competition. Management believes that the Corporation's strength lies in
its reputation and business practices which have instilled confidence among its
long term customers.
Total borrowings of the Corporation increased $14.4 million (137.0%) during the
first six months of 2004. The proceeds were used to fund loan growth not funded
by increased deposits. The Corporation's banking subsidiary adjusts its level of
daily borrowings or short term daily investment depending upon its needs each
day through the banking subsidiary's federal funds facility with its primary
correspondent bank.
LIQUIDITY
The ability to provide the necessary funds for the day-to-day operations of the
Corporation depends upon a sound liquidity position. Management has continued to
monitor the Corporation's liquidity position 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.
13
The Corporation continues to offer deposit products that it believes are
competitive and will encourage depositors to leave their funds in the
Corporation's banking subsidiary. Management believes that their efforts will
help the Corporation to both retain existing deposits as well as encourage
deposit growth. The banking subsidiary of the Corporation has the ability to
borrow up to $38.0 million in federal funds purchased, and an additional $69.8
million in available short-term liquidity through reverse repurchase agreements
available through its correspondent banking relationships.
CAPITAL RESOURCES
There are no major projects currently planned for 2004, however if a project is
identified or an upgrade becomes necessary, the Corporation has sufficient
liquidity to internally fund any expenditure.
The Corporation's equity increased $2.9 million (3.4%) during the first half of
the 2004. Both the Corporation and its banking subsidiary remain profitable, as
discussed further below.
Like many financial institutions located in Wisconsin, the Bank transferred
investment securities to a Nevada investment subsidiary, which now holds and
manages those assets. The investment subsidiary has not filed returns with, or
paid income or franchise taxes to the State of Wisconsin. The Wisconsin
Department of Revenue (the Department) recently implemented a program to audit
Wisconsin financial institutions which formed investment subsidiaries located in
Nevada. The Department has generally indicated that it will assess income or
franchise taxes on the income of the Nevada investment subsidiaries of Wisconsin
banks. The Department completed such an audit at the Bank. On August 10, 2004 we
entered into a confidential settlement with the Department with respect to our
Nevada investment subsidiary; no other issues were raised by the audit.
The settlement resulted in a minimal payment of additional taxes and interest
for prior years. The settlement will limit the tax benefits we may realize from
our Nevada investment subsidiary going forward; however, the effect on our
after-tax profits will be nominal. We project that for 2004 the additional
Wisconsin taxes resulting from the settlement will reduce our after tax earning
by less than $.02 per share.
14
A federal income tax audit of the Corporation and its subsidiaries has resulted
in proposed adjustments for years ended December 31, 1999 - 2002, totaling
$431,000.00 plus interest of $82,000.00 through May 21, 2004. We disagree with
the proposed adjustments and have filed our protest with the Internal Revenue
Service's appeals office, We believe we have adequately provided for this item
in our tax provisions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
The Corporation remains profitable, however its net income decreased $577,900
(23.5%) during the second quarter of 2004. The decrease was the result of a
decline in the net interest margin coupled with a dramatic decline in revenues
generated from the sale of residential mortgage loans in the secondary market.
Loan volume continues to increase, however that growth has not offset the
declining yield on these earning assets. Interest income and fees on loans
decreased $107,000 (1.5%) during the second quarter of 2004 compared to a
decrease of $446,700 (6.0%) during the second quarter of 2003. The average yield
on loans continues to decline, although at a slower pace than previously noted,
as the portfolio of notes mature and are repriced. The average yield on loans
for the second quarter of 2004 was 5.73%. compared to 6.42% in the second
quarter of 2003. The net interest margin continues to be strong when compared to
other banks similar to the Corporation's banking subsidiary.
Investment security interest income decreased $227,900 (14.6%) during the second
quarter of 2004 compared to a decrease of $93,900 (5.7%) during the second
quarter of 2003. The average yield derived from all investments decreased 62
basis points during the first half of 2004 compared to the first half of 2003.
In anticipation of rising rates, management continues to invest in relatively
short term securities. The liquidity of the banking subsidiary's investment
portfolio is considered by management to be excellent and it is in a position to
take advantage of any increase in interest rates. Approximately $29.4 million of
the banking subsidiary's investment portfolio is scheduled to mature during the
next twelve months with an additional $92.6 million in securities subject to
potential calls.
15
Interest expense on deposits decreased $154,000 (11.9%) during the three months
ended June 30, 2004. Rates have declined to historical lows. The Corporation's
banking subsidiary pays competitive rates, yielding an average 1.15% on all
interest bearing funds for the three months ended June 30, 2004 compared to
1.40% for the same period in 2003.
Non-interest income decreased $465,200 (21.5%) during the second quarter of
2004. The decrease is principally associated with the substantially lower gain
on sale of loans sold in the secondary market. Historically low interest rates
during the first half of 2003 resulted in a record number of refinancings at the
Corporation's banking subsidiary.
A summary of the change in income for the quarters ended June 30, 2004 and 2003
appears below:
Three Months Ended June 30, June 30,
2004 2003 Increase
(UNAUDITED) (UNAUDITED) (Decrease)
---------- ---------- ----------
Revenue and Expenses: (000's)
Interest Income $8,185 $8,553 $ (368)
Less: Interest Expense 1,161 1,298 137
------ ------ -------
Net Interest Income 7,024 7,255 (231)
Less: Provision for Loan Losses 105 105 --
Non Interest Expense Net of
Non Interest Income 4,231 3,654 577
------ ------ -------
Income before Income Taxes 2,688 3,496 (808)
Tax Provision 805 1,035 (230)
------ ------ -------
NET INCOME $1,883 $2,461 $ (578)
====== ====== =======
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Net income of the Corporation decreased $1.0 million (21.5%) during the six
months ended June 30, 2004. The decrease is primarily attributable to two
factors: Continued decline in the net interest margin, and a decrease in the
extraordinary level of revenue generated from the sale of residential mortgage
loans in the secondary market.
Interest and fees on loans decreased $382,200 (2.7%) in the first half of 2004.
Loan volume continues to increase, however that growth has not been sufficient
to offset the decline in loan yields. The average yield on loans for the first
half of 2004 was 5.77% as compared to 6.51% for first half of 2003.
16
Interest income on investment securities decreased $441,500 (14.1%) during the
first six months of 2004. As discussed above yields continue to decline.
Management continues to replace maturing securities with securities that have
relatively short maturities and high quality. Management wants to maintain a
high level of liquidity so that the banking subsidiary can take advantage of
rising rates.
Interest expense on deposits decreased $401,200 (15.0%) in the first six months
of 2004. Management carefully monitors competition in an effort to remain
competitive, however has reduced its overall yield on deposits to reflect the
overall yield on deposits throughout the financial sector of the economy.
Deposits increased during the past twelve months, tending to be short-term in
nature. This trend has helped the banking subsidiary to maintain a strong net
interest margin compared to other banks in its peer group.
Interest expense related to short-term borrowings increased $63,200 (347.9%)
during the six months ended June 30, 2004. This increase reflects interest
expense necessary to support the banking subsidiary's growth in its loan
portfolio. The net interest margin between its yield on loans and average cost
to fund such loans has been very favorable.
Non interest income decreased $863,800 (20.9%) during the first six months of
2004. The decrease is principally associated with the substantial decrease in
the gain on sale of residential mortgage loans in the secondary market. As
discussed above historically low interest rates provided the banking subsidiary
with a window of opportunity during the first half 2003.
CAPITAL ADEQUACY
Federal banking regulatory agencies have established capital adequacy rules,
which take into account risk attributable to balance sheet assets and
off-balance-sheet activities. All banks and bank holding companies must meet a
minimum risk-based capital ratio of 8.0%, of which 4.0% must be comprised of
Tier 1 capital.
The federal banking agencies also have adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a minimum leverage ratio of at least 3.0% Tier 1
capital to total assets, while lower rated banking organizations must maintain a
ratio of at least 4.0% to 5.0%.
17
At June 30, 2004, the risk-based capital ratio for the Corporation was 20.11%
and its leverage ratio was 13.59%.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's Annual Report on Form 10-K for the year ended December 31,
2003 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 Registrant maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed by it in the
reports filed by it under the Securities Exchange Act of 1934, as amended, is
recorded and processed, summarized and reported within the time periods
specified in the SEC's rules and forms. At the end of the last fiscal quarter,
the Registrant carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and President
who is also the Chief Financial Officer of the Registrant, of the effectiveness
of the design and operation of the Registrant's disclosure controls and
procedures pursuant to Rule 13a -15 of the Exchange Act. Based on that
evaluation, the Chief Executive Officer and President, who is also the Chief
Financial Officer of the Registrant, concluded that the Registrant'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 Registrant's internal control
over financial reporting identified in connection with the evaluation discussed
above that occurred during the Corporation's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the quarter ended June 30, 2004, the Corporation did not sell any equity
securities which were not registered under the Securities Act or repurchase any
of its equity securities.
Item 4 Submission of Matters to a Vote of Security Holders
On June 9, 2004, Tri City Bankshares Corporation held its annual shareholders'
meeting. The only item held for a vote of shareholders was for the election of
Directors for the ensuing year. The number of shares of common stock represented
by proxy and in person was 7,176,931 which represented approximately 86.2% of
the total outstanding shares entitled to vote for directors. There was no
solicitation in opposition to management's nominees for directors and all such
nominees were elected pursuant to the following vote:
Director's Name: Frank Bauer
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: William Beres
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Sanford Fedderly
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
19
Director's Name: Scott Gerardin
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: William Gravitter
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Henry Karbiner, Jr.
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Christ Krantz
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Robert Orth
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Ronald K. Puetz
For 7,166,673
Against 0
Withheld 10,258
Abstain 0
Broker Non-Vote 0
20
Director's Name: David Ulrich, Jr.
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: William Werry
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Scott A. Wilson
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
Director's Name: Agatha T. Ulrich
For 7,166,984
Against 0
Withheld 9,947
Abstain 0
Broker Non-Vote 0
No other matters were voted on at the annual meeting.
21
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
(b) Reports on Form 8-K
The Corporation furnished one Form 8-K during the quarter
covered by this report as follows:
(1) Form 8-K dated April 23, 2004 under Item 12 regarding
Results of Operations and Financial Condition as of March
31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRI CITY BANKSHARES CORPORATION
DATE: August 11, 2004 /s/ Henry Karbiner, Jr.
--------------------------- --------------------------------------
Henry Karbiner, Jr.
President, Chief Executive Officer
and Treasurer
(Principal Executive Officer)
DATE: August 11, 2004 /s/ Thomas W. Vierthaler
--------------------------- --------------------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
23