FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
[ ] 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 ID Number)
incorporation or organization)
6400 S. 27th Street, Oak Creek, WI
----------------------------------------
(Address of principal executive offices)
53154
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Zip Code
(414) 761-1610
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YES NO X
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The number of shares outstanding of $1.00 par value common stock,
as of November 10, 2004: 8,413,625
FORM 10-Q
TRI CITY BANKSHARES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page #
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Income
for the Three Months ended
September 30, 2004 and 2003 4
Condensed Consolidated Statements of Income
for the Nine Months ended
September 30, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended
September 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 8
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4 Controls and Procedures 17
PART II - OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use
of Proceeds 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
ITEM 1
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Cash and due from banks $ 28,387,232 $ 40,849,479
Federal funds sold 0 0
------------ ------------
Cash and cash equivalents
Investment securities held to maturity,
fair value of $169,325,124 and $172,873,927
as of 2004 and 2003, respectively 152,348,851 170,541,123
Loans, less allowance for loan losses of
$5,545,744 and $5,289,457
as of 2004 and 2003, respectively 453,577,160 406,985,461
Premises and equipment 20,915,187 21,892,460
Cash surrender value of life insurance 10,271,451 10,000,000
Mortgage servicing rights 977,666 998,514
Accrued interest receivable and other assets 4,273,626 3,516,178
------------ ------------
TOTAL ASSETS $670,751,173 $654,783,215
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $161,781,437 $148,813,893
Savings and NOW 316,809,295 312,078,384
Other time 89,465,694 95,131,632
------------ ------------
TOTAL DEPOSITS 568,056,426 556,023,909
Federal funds purchased and securities sold
under repurchase agreements 8,872,125 9,013,622
Other borrowings 1,437,398 1,534,292
Accrued interest payable and other liabilities 1,650,416 1,927,548
------------ ------------
TOTAL LIABILITIES 580,016,365 568,499,371
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative preferred stock, $1 par value,
200,000 authorized, no shares issued
Common stock, $1 par value
15,000,000 shares authorized, 8,369,959 and
8,223,557 shares issued and outstanding
as of 2004 and 2003, respectively 8,369,959 8,223,557
Additional paid in capital 16,704,360 14,010,617
Retained earnings 65,660,489 64,049,670
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 90,734,808 86,283,844
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $670,751,173 $654,783,215
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---------- ----------
INTEREST INCOME:
Interest and fees on loans $7,299,637 $6,752,922
Interest on investment securities:
Taxable 863,875 601,174
Exempt from federal income tax 567,428 776,946
Federal funds sold 530 70,917
---------- ----------
TOTAL INTEREST INCOME 8,731,470 8,201,959
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,170,394 1,195,475
Interest on federal funds purchased
and securities sold under
repurchase agreements 75,490 0
Interest on other borrowings 5,381 5,332
---------- ----------
TOTAL INTEREST EXPENSE 1,251,265 1,200,807
---------- ----------
Net interest income before provision
for loan losses 7,480,205 7,001,152
Provision for loan losses 105,000 105,000
---------- ----------
Net interest income after provision
for loan losses 7,375,205 6,896,152
---------- ----------
NONINTEREST INCOME:
Service charges 705,809 782,503
Gain on sale of loans 82,610 667,504
Other income 784,288 578,503
---------- ----------
TOTAL NONINTEREST INCOME 1,572,707 2,028,510
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 3,363,840 3,425,769
Net occupancy costs 446,450 522,211
Furniture and equipment expenses 398,111 446,594
Computer services 434,040 405,930
Advertising and promotional 201,046 207,039
Regulatory agency assessments 58,258 56,238
Office supplies 104,550 145,065
Other expenses 737,550 708,429
---------- ----------
TOTAL NONINTEREST EXPENSE 5,743,845 5,917,275
---------- ----------
Income before income taxes 3,204,067 3,007,387
Less: Applicable income taxes 1,032,000 853,000
---------- ----------
NET INCOME $2,172,067 $2,154,387
========== ==========
Net income per common share $ 0.26 $ 0.26
Dividends per common share .175 .160
Weighted average shares outstanding 8,359,084 8,177,477
See Notes to Unaudited Condensed Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
INTEREST INCOME:
Interest and fees on loans $20,850,784 $20,686,264
Investment on investment securities:
Taxable 2,406,866 2,192,439
Exempt from federal income tax 1,718,155 2,320,878
Federal funds sold 5,163 118,757
Other 9,663 9,663
----------- -----------
TOTAL INTEREST INCOME 24,990,631 25,328,001
----------- -----------
INTEREST EXPENSE:
Interest on deposits 3,437,659 3,863,937
Interest on federal funds and
securities sold under
repurchase agreements 137,644 5,604
Interest on other borrowings 24,608 17,897
----------- -----------
TOTAL INTEREST EXPENSE 3,599,911 3,887,438
----------- -----------
Net interest income before provision
for loan losses 21,390,720 21,440,563
Provision for loan losses 315,000 315,000
----------- -----------
Net interest income after provision
for loan losses 21,075,720 21,125,563
----------- -----------
NONINTEREST INCOME:
Service charges 2,167,420 2,242,895
Gain on loan sales 395,205 2,000,079
Other income 2,284,332 1,923,590
----------- -----------
TOTAL NONINTEREST INCOME 4,846,957 6,166,564
----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 10,171,225 10,265,853
Net occupancy costs 1,593,623 1,509,366
Furniture and equipment expenses 1,160,269 1,301,818
Computer services 1,297,126 1,173,251
Advertising and promotional 558,464 553,466
Regulatory agency assessments 174,575 172,412
Office supplies 376,823 415,089
Other expenses 2,096,845 2,064,432
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TOTAL NONINTEREST EXPENSE 17,428,950 17,455,687
----------- -----------
Income before income taxes 8,493,727 9,836,440
Less: Applicable income taxes 2,537,000 2,861,000
----------- -----------
NET INCOME $ 5,956,727 $ 6,975,440
=========== ===========
Net income per common share $ .72 $ .86
Dividends per common share .525 .480
Weighted average shares outstanding 8,314,630 8,137,804
See Notes to Unaudited Condensed Consolidated Financial Statements.
TRI CITY BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,956,727 $ 6,975,440
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation 2,208,150 1,460,793
Amortization of premiums and accretion
of discounts on investment securities
- net 75,241 158,723
Gain on sale of loans (395,205) (2,000,133)
Provision for loan losses 315,000 315,000
Proceeds from sales of loans held for sale 34,716,029 107,000,446
Originations of loans held for sale (34,320,824) (105,000,313)
Increase in cash surrender value of life
insurance (271,451) 0
Net change in accrued interest receivable
and other assets (736,600) (428,910)
Net change in accrued interest payable
and other liabilities (277,135) 50,035
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Net cash flows from operating activities 7,269,932 8,531,081
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CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities:
Maturities, prepayments and calls 82,966,482 57,642,585
Purchases (64,849,451) (41,939,660)
Net (increase) decrease in loans (46,906,699) 1,229,163
Purchases of premises and equipment - net (1,230,877) (1,220,869)
------------- -------------
Net Cash Flows from Investing Activities (30,020,545) 15,711,219
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 12,032,517 (7,335,173)
Net change in federal funds purchased and
securities sold under repurchase agreements (141,497) (1,500,000)
Net change in other borrowings (96,894) (5,384,760)
Dividends paid (4,345,905) (3,890,195)
Common stock issued - net 2,840,145 2,190,275
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Net Cash Flows from Financing Activities 10,288,366 (15,919,853)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (12,462, 247) 8,322,447
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 40,849,479 50,308,930
------------- -------------
CASH AND CASH EQUIVALENTS - END OF CURRENT PERIOD $ 28,387,232 $ 58,631,377
============= =============
See Notes to Unaudited Condensed Consolidated Financial Statements.
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 financial statements and the
notes thereto included in the Annual Report on Form 10-K of Tri City Bankshares
Corporation ("Tri City" or the "Corporation") for the year ended December 31,
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 financial position as
of September 30, 2004 and the results of its operations for the three month and
nine month periods ended September 30, 2004 and 2003 and cash flows for the nine
month periods ended September 30, 2004 and 2003. The operating results for the
first nine months of 2004 are not necessarily indicative of the results which
may be expected for the entire 2004 fiscal year.
(B) ACCOUNTING CHANGE
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. 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 the Tri City's Consolidated
Financial Statements as the loan commitments are generally not accounted for as
derivatives.
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.
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. 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
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.
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 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.
CHANGES IN FINANCIAL POSITION
The Corporation's total assets have increased $16.0 million (2.4%) during the
first three quarters of 2004. Cash and cash equivalents decreased $12.5 million
(30.5%). Typically the Corporation's banking subsidiary experiences a
significant short-term increase in deposits at year-end associated with
municipal deposits of property tax receipts and commercial deposit growth from
holiday spending. This seasonal deposit growth returns to normal levels early
during the first quarter of the year.
The investment portfolio decreased $18.2 million during the nine months ended
September 30, 2004. This reduction occurred late during the third quarter of
2004. The Corporation's banking subsidiary continues to have significant levels
of securities redeemed either through normal maturities or scheduled calls.
Management continues to follow its practice of holding to maturity its
investment portfolio and the reduction of the portfolio outstandings was
replaced early in the fourth quarter. Management is continually looking for
quality securities to replace maturing investments while maintaining an
acceptable rate of return without undue risk to the Corporation's entire
portfolio.
The increase in total loans of $46.8 million (11.4%) noted during the first
three quarters of the year reflects increased loan demand and management's
efforts to expand loan volume through increased marketing. Even with the
significant increase in loan volume, credit standards have not been sacrificed
to accomplish the growth. The allowance for loan losses has increased $256,300
during the period. The allowance reflects managements best estimate of potential
losses in the current 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
borrowers ability to repay; 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 banking
subsidiary 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.
Premises and Equipment decreased $1.0 million during the first nine months of
2004, resulting from $2.2 million of normal depreciation offset by $1.2 million
of additions.
During the first nine months of 2004, total deposits for the Corporation have
increased $12.0 million. 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
opportunities or funds management programs. Deposit growth from September 30,
2003 to September 30, 2004 totaled $32.2 million (6.0%) and such growth trends
appear to be continuing. The Corporation's banking subsidiary continues to
remain competitive in the current economic climate, offering rates that are
competitive in the market place. Management believes that the Corporation's
strength lies in its reputation and business practices, which have instilled
confidence among its long-term customers, and convenience through its thirty-two
locations and seven day a week bank to attract new customers.
In the nine months ended September 30, 2004 borrowings of the Corporation have
decreased $238,400. As stated above, with the reduction in the Corporation's
banking subsidiary investment portfolio, its average level of borrowings during
the third quarter was temporarily reduced. With the replacement of the
investment portfolio assets, management expects to increase its borrowings. The
Corporation's banking subsidiary adjusts its level of daily borrowings or short
term daily investments depending on its needs each day through the subsidiary's
federal funds facility with its correspondent bank.
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 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.
The Corporation continues to offer deposit products that management believes are
competitive and will encourage depositors to retain their funds in the
Corporation's banking subsidiary. Management believes that its efforts will help
the Corporation to not only retain these deposits, but also encourage continued
growth. In the event the Corporation's primary source of liquidity, the core
deposits of its banking subsidiary, is insufficient to meet liquidity needs, the
banking subsidiary has available to meet demand at September 30, 2004 a $38.0
million federal funds purchased facility as well as $55.9 million available in
reverse repurchase agreements through its correspondent bank relationship.
CAPITAL EXPENDITURES
There are no major projects currently planned for the remainder of 2004,
however, if a project is identified or an upgrade becomes necessary, the
Corporation has sufficient liquidity to internally fund any such expenditure.
The Corporation's equity increased $4.5 million (5.2%) during the first three
quarters of 2004. Both the Corporation and its banking subsidiary remain
profitable, as discussed further below.
Like many financial institutions located in Wisconsin, the Corporation's banking
subsidiary transferred investment securities to a Nevada investment subsidiary,
which 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 banking
subsidiary. On August 10, 2004 the banking subsidiary entered into a
confidential settlement with the Department with respect to its Nevada
investment subsidiary; no other issues were raised by the audit.
The settlement resulted in an immaterial payment of taxes and interest for the
years under audit. The settlement will limit the tax benefit we may realize from
our Nevada investment subsidiary going forward; however, the effect on our
after-tax profitability will be nominal. We project that for 2004 the additional
Wisconsin taxes resulting from the settlement will reduce our after tax earnings
by less than $.02 per share.
A federal income tax audit of the Corporation and its subsidiaries has resulted
in proposed adjustments for the years ended December 31, 1999 - 2002 totaling
$431,000 plus interest of $82,000 through May 21, 2004. The Corporation does not
agree with the proposed adjustment and has filed a protest with the Internal
Revenue Service appeals office. Management believes the Corporation has
adequately provided for this item in its tax provision.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2004 and 2003
The Corporation remains profitable, with net income increasing $17,700 (0.8%)
during the third quarter of 2004 compared to the third quarter of 2003. Revenue
trends continue to be strong and management is optimistic as to continued
favorable operating results. During the third quarter of 2004, loan growth has
been sufficient to offset the decline in net interest margin, as well as revenue
generated from the sale of residential mortgage loans in the secondary market.
Continued loan demand and the resulting growth in the subsidiary bank's loan
portfolio directly offsets margin compression and ensures future earnings
growth. Interest income and fees on loans increased $546,700 (8.1%) during the
third quarter of 2004. The average yield on loans for the third quarter of 2004
of 5.74% represents a slight increase over the yield of 5.73% for the second
quarter of 2004. Although some improvement has been noted, yields for the
current quarter are well below the average yield of 6.12% noted during the third
quarter of 2003. Management believes this early trend indicates that the
three-year decline in loan portfolio yields has come to an end. The banking
subsidiary's net interest margin continues to be strong when compared to other
banks in its peer group.
Investment security interest income increased $53,200 (3.9%) during the third
quarter of 2004 compared to the third quarter of 2003. The average yield derived
from all investments decreased 52 basis points during the third quarter of 2004
as compared to the same period of 2003. The decline in interest rates for the
portfolio has been offset through increased average loan volume. Minimal
portfolio growth was experienced as a result of a temporary significant
reduction in outstanding investments during the month of September 2004. These
assets were replaced during the month of October 2004. The current tax
equivalent yield of the portfolio of 4.12% during the quarter is down
significantly from the tax equivalent yield one year ago of 4.64%.
The liquidity of the banking subsidiary's investment portfolio is considered by
management to be excellent. The banking subsidiary is in a position to take
advantage of any increase in interest rates. Approximately $27.3 million of the
banking subsidiary's investment portfolio is scheduled to mature during the next
twelve months.
Interest expense paid on deposits decreased $25,100 (2.1%) for the three months
ended September 30, 2004 compared to the same period in 2003. Rates are at
historical lows. The Corporation's banking subsidiary pays competitive rates,
yielding an average 1.14% on all interest bearing funds for the three months
ending September 30, 2004 as compared to 1.21% for the same period in 2003.
Non-interest income has decreased $455,800 (22.5%) during the quarter ended
September 30, 2004 compared to the quarter ended September 30, 2003, primarily
due to the decrease in revenue generated from the sale of residential mortgage
loans in the secondary market.
A summary of the change in income for the quarters ended September 30, 2004 and
2003 appears below:
Three Months Ended September 30, September 30, 2004
2004 2003 Over(Under)
(Unaudited) (Unaudited) 2003
---------- ---------- ----------
Revenue and Expenses: (000's)
Interest Income $8,731 $8,202 $ 529
Less: Interest Expense 1,251 1,201 50
---------- ---------- ----------
Net Interest Income 7,480 7,001 479
Less: Provision for Loan Losses 105 105 --
Non Interest Expense Net of
Non Interest Income 4,171 3,889 282
---------- ---------- ----------
Income Before Income Taxes 3,204 3,007 197
Tax Provision 1,032 853 179
---------- ---------- ----------
NET INCOME $2,172 $2,154 $ 18
========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net income for the first nine months of 2004 decreased $1.0 million (14.6%)
compared to the first nine months of 2003. The decrease is primarily attributed
to two factors: 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 for the year 2003.
During the first nine months of 2004, interest income and fees on loans
increased $164,500 (0.8%) compared to the same period in 2003. Although average
yield on the banking subsidiary's loan portfolio has declined compared to 2003,
the growth in the portfolio as discussed above has offset the lower yields
noted. The average yield on loans for the first three quarters of 2004 was 5.76%
as compared to 6.38% for the same period of 2003.
Interest income on investment securities has decreased $388,300 (8.6%) during
the first nine months of 2004 compared to the same period in 2003. As discussed
above, yields have been significantly lower during the first three quarters of
2004 than for the comparable period during 2003. Management continues to replace
maturing securities with securities that have relatively short maturities and
high quality. Management is maintaining a high level of liquidity so that the
banking subsidiary can take advantage of the anticipated rising rate
environment.
Interest expense on deposits has also been affected by lower interest rates,
decreasing $426,300 (11.0%) during the first nine months of 2004 compared to the
first nine months of 2003. The average yield on deposits decreased almost 19
basis points during the twelve month period ended September 30, 2004. Management
has reduced the overall yield paid on deposits as yields on deposits have
declined throughout the financial sector of the economy. Deposits increased
during the past twelve months, tending to be short term in nature also
reflecting our depositors' efforts to remain liquid so as to take advantage of
potential rising interest rates.
Interest expense related to short term borrowings increased $139,000 during the
first three quarters ending September 30, 2004 as compared to the same period in
2003. 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 the average cost to fund its loan growth has been favorable.
Other non-interest income decreased $1.3 million (21.4%) during the first nine
months of 2004 compared to the same period in 2003. 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 short term opportunity
during the first seven months of 2003, resulting in the very heavy demand for
fixed rate residential mortgages. The Corporation's effective income tax
provision for the nine months ended September 30, 2004 was 29.9% compared to
29.1% for the nine months ended September 30, 2003. The increase in the tax rate
was due primarily to litigation settlements discussed above.
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%.
The risk-based capital ratio for the Corporation at September 30, 2004 was
20.12% and its leverage ratio was 13.41%.
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
Based on his evaluation of the Corporation's disclosure controls and procedures
as of September 30, 2004, the Corporation's President, Chief Executive Officer
and Treasurer has determined that the disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Corporation
is recorded, processed, summarized and reported by the filing date of this
report, and that information required to be disclosed in the report is
communicated to management, as appropriate, to allow timely decisions regarding
required disclosure.
There were no significant changes in the Corporation's internal control over
financial reporting identified in connection with the evaluation discussed above
that occurred during the Corporation's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
During the quarter ended September 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 6 Exhibits
31 Rule 13a - 14(a) Certification
32 Section 1350 Certification
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
(registrant)
DATE: November 11, 2004 /s/Henry Karbiner,Jr.
------------------------- ----------------------------------
Henry Karbiner, Jr., President and
Chief Executive Officer
(Principal Executive Officer)
DATE: November 11, 2004 /s/Thomas W. Vierthaler
------------------------- ----------------------------------
Thomas W. Vierthaler
Vice President and Comptroller
(Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit 31 Rule 13a - 14(a) Certification
Exhibit 32 Section 1350 Certification