Item 1. BUSINESS
THE REGISTRANT
Tri City Bankshares Corporation (the "Registrant"), a Wisconsin corporation, was formed November 20, 1970 for the purpose of acquiring the outstanding shares of Tri City National Bank (the "Bank"). The Bank is a wholly owned subsidiary of the Registrant.
As of December 31, 2006, the Registrant had total assets of $770.0 million and total stockholders' equity of $104.0 million.
THE BANK
The Bank was chartered by the Wisconsin Banking Department (now the Wisconsin Department of Financial Institutions ("DFI")) on October 28, 1963, and converted to a National Banking Association Charter on June 25, 1969. The Bank is supervised by the Office of the Comptroller of the Currency ("OCC") and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts business out of its main office located at 6400 South 27th Street, Oak Creek, Wisconsin. In addition, the Bank maintains 36 other offices in Wisconsin throughout Milwaukee, Ozaukee, Racine and Waukesha Counties.
The Bank provides a full range of consumer and commercial banking services to individuals and businesses. The basic services offered include: demand deposit accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, direct deposits, notary services, money orders, night depository, travelers' checks, cashier's checks, savings bonds, secured and unsecured consumer, commercial, installment, real estate and mortgage loans. The Bank offers automated teller machine ("ATM") and debit cards. In addition, the Bank maintains an investment portfolio consisting primarily of U.S. agency and state and political subdivision securities.
As is the case with banking institutions generally, the Bank derives its revenues from interest on the loan and investment portfolios and fee income related to loans and deposits. Income derived from the sale of alternative investment products provides additional fee income. The source of funds for the lending activities are deposits, repayment of loans, maturity of investment securities and short-term borrowing through correspondent banking relationships and the Federal Reserve Bank of Chicago. Principal expenses are the interest paid on deposits and borrowings, and operating and general administrative expenses.
LENDING ACTIVITIES
The Bank offers a range of lending services including secured and unsecured consumer, commercial, installment, real estate and mortgage loans to individuals, small business and other organizations that are located in or conduct a substantial portion of their business in the Bank's market area. The Bank's total loans as of December 31, 2006 were $534.7 million, or approximately 70% of total assets. Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan, and are further subject to competitive pressures, cost and availability of funds and government regulations.
The Bank maintains a comprehensive loan policy that establishes guidelines with respect to all categories of lending activity. The policy establishes lending authority for each individual loan officer, the officer loan committee and the board of directors. All loans to directors and executive officers are approved by the Board of Directors. The loans are concentrated in three major areas: real estate loans, commercial loans and consumer loans. The lending strategy is the development of a high quality loan portfolio.
The Bank's real estate loans are collateralized by mortgages and consist primarily of loans to individuals for the purchase and improvement of real estate and for the purchase of residential lots and construction of single-family residential units. The Bank's residential real estate loans generally are repayable in monthly installments based on up to a thirty-year amortization schedule.
Commercial loans include loans to individuals and small businesses including loans for working capital, machinery and equipment purchases, premise and equipment acquisitions, purchase, improvement and investment in real estate development and other business needs. Commercial lines of credit are typically for a one-year term. Other commercial loans with terms or amortization schedules
of longer than one year will normally carry interest rates which vary based on the term and will become payable in full and are generally refinanced in two to four years. Commercial loans typically entail a thorough analysis of the borrower, its industry, current and projected economic conditions and other factors. The Bank typically requires commercial borrowers to have annual financial statements and requires appraisals or evaluations in connection with the loans secured by real estate. The Bank typically requires personal guarantees from principals involved with closely held corporate borrowers.
The Bank's consumer loan portfolio consists primarily of loans to individuals for various consumer purposes payable on an installment basis. The loans are generally for terms of five years or less and are collateralized by liens on various personal assets of the borrower.
DEPOSIT ACTIVITIES
Deposits are the major source of the Bank's funds for lending and other investment activities. The Bank considers the majority of its regular savings, investors choice, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised approximately 81.1% of the Bank's total deposits at December 31, 2006. Approximately 18.9% of the Bank's deposits at December 31, 2006 were certificates of deposit. Generally, the Bank attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and over made up approximately 38.8% of the Bank's total time deposits at December 31, 2006. The majority of the deposits of the Bank are generated from Milwaukee, Ozaukee, Racine and Waukesha Counties. For additional information regarding the Bank's deposit accounts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Interest Rate Sensitivity Management" and Note 9 of Notes to Consolidated Financial Statements, incorporated by reference in Item 8 below.
INVESTMENTS
The Bank invests a portion of its assets in U.S. Treasury and U.S. Governmental agency obligations, FHLMC, FNMA and FHLB securities, state, county and municipal obligations, collateralized mortgage obligations ("CMO's") and federal funds sold. The investments are managed in relation to the loan demand and deposit growth and are generally used to provide for the investment of excess funds at reduced yields and risks relative to yields and risks of the loan portfolio, while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits. For further information regarding the Registrant's investment portfolio, see Note 3 of Notes to Consolidated Financial Statements, incorporated by reference in Item 8 below.
SUPERVISION AND REGULATION
As a registered bank holding company, the Registrant is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Bank is subject to regulation and examination by the OCC and the FDIC.
Under the BHCA, the Registrant is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require. In accordance with Federal Reserve Board policy, the Registrant is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Registrant might not do so absent such policy. In addition, there are numerous federal and state laws and regulations, which regulate the activities of the Registrant and the Bank. They include requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuance of securities, dividend payments, inter-affiliate liabilities, extensions of credit and branch banking.
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 total risk-based capital ratio of 8%, of which at least one-half must be comprised of core capital elements defined as Tier 1 capital (which consists principally of stockholders' equity). 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% Tier 1 capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The Federal Reserve Board has not advised the Registrant of any specific minimum Tier 1 capital leverage ratio applicable to it.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. In addition, a bank holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of, or any FDIC-assisted transaction involving, an affiliated insured bank or savings association. The extent of the regulators' power depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." To be well capitalized under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%. At December 31, 2006, the most recent notification from the Federal Reserve Board, the Registrant was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Registrant's category. As of December 31, 2006, the Registrant had a total risk-based capital ratio of 18.98% a Tier I risk-based capital ratio of 17.99% and a leverage ratio of 14.46%. The Registrant and the Bank were deemed well capitalized as of December 31, 2006 and 2005.
Current federal law provides that adequately capitalized and managed bank holding companies from any state may acquire banks and bank holding companies located in any other state, subject to certain conditions. Banks are permitted to create interstate branching networks in states that do not "opt out" of interstate branching.
The laws and regulations to which the Registrant is subject are constantly under review by Congress, regulatory agencies and state legislatures. In 1999, Congress enacted the Gramm-Leach-Bliley Act ("the Act"), which eliminated certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial services organizations. Among other things, the Act repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the BHCA to permit bank holding companies that qualify as "financial holding companies" to engage in a broad list of "financial activities," and any non-financial activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines is "complementary" to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. The Act treats various lending, insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities as financial in nature for this purpose. Under the Act, a bank holding company may become certified as a financial holding company by filing a notice with the Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including capital, management, and Community Reinvestment Act requirements. The Registrant has determined not to become certified as a financial holding company at this time. The Registrant may reconsider this determination in the future.
In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). The USA PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the United States financial system, and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The USA PATRIOT Act requires financial services companies to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.
The earnings and business of the Registrant and the Bank are also affected by the general economic and political conditions in the United States and abroad and by the monetary and fiscal policies of various federal agencies. The Federal Reserve Board impacts the competitive conditions under which the Registrant operates by determining the cost of funds obtained from money market sources for lending and investing and by exerting influence on interest rates and credit conditions. In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The impact of fluctuating economic conditions and federal regulatory policies on the future profitability of the Registrant and its subsidiary cannot be predicted with certainty.
INDUSTRY RESTRUCTURING
For well over a decade, the banking industry has been undergoing a restructuring process which is anticipated to continue. The restructuring has been caused by product and technological innovations in the financial services industry, deregulation of interest rates, and increased competition from foreign and nontraditional banking competitors, and has been characterized principally by the gradual erosion of geographic barriers to intrastate and interstate banking and the gradual expansion of investment and lending authorities for bank institutions.
COMPETITION
The Bank's service area includes portions of Milwaukee, Ozaukee, Racine and Waukesha Counties. In Milwaukee County, the Bank competes with all the major banks and bank holding companies located in metropolitan Milwaukee, most of whom are far larger in terms of assets and deposits. Ozaukee County, with a population of approximately 86,000 residents, has twelve banks with thirty-seven offices and five savings banks with eleven offices. Racine County, with a population of approximately 196,000 residents has thirteen banks with fifty-five offices and five savings banks with fourteen offices. Waukesha County, with a population of approximately 379,000 residents, has twenty-eight banks with one hundred forty offices and thirteen savings banks with fifty offices. In addition to banks and savings banks, significant competition comes from credit unions, security and brokerage firms, mortgage companies, insurance companies and other providers of financial services in the area.
EMPLOYEES
As of December 31, 2006, the Registrant employed 289 full-time employees and 116 part-time employees. The employees are not represented by a collective bargaining unit. The Registrant considers relations with employees to be good.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
Statistical information relating to the Registrant and its subsidiaries on a consolidated basis, as required by Guide 3 of the Securities and Exchange Commission Guides for Preparation and Filing of Reports and Registration Statements and Reports, is set forth as follows:
(1) Average Balances and Interest Rates for each of the last three fiscal years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
(2) Interest Income and Expense Volume and Rate Change for each of the last two years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
(3) Investment Securities Portfolio Maturity Distribution at December 31, 2006 is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
(4) Investment Securities Portfolio for each of the last three years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
(5) Loan Portfolio Composition for each of the last five years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
(6) Summary of Loan Loss Experience for each of the last five years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
(7) Average Daily Balance of Deposits and Average Rate Paid on Deposits for each of the last three years is included in Item 7, Management's Discussion and Analysis of Financial Position and Results of Operations, incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation."
The following additional tables set forth certain statistical information relating to the Registrant and its subsidiaries on a consolidated basis.
LOAN PORTFOLIO
The following table presents information concerning the aggregate amount of nonperforming loans. Nonperforming loans are comprised of (a) loans accounted for on a nonaccrual basis and (b) loans contractually past due 90 days or more as to interest or principal payments, for which interest continues to be accrued. (Dollars in Thousands) December 31,
No interest income was recognized during 2006 on loans that were accounted for on a nonaccrual basis. No additional interest income was recognized during 2006 under the original loan terms had these loans not been assigned nonaccrual status.
The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest. Registrant's management may continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest.
There were no other loans at December 31, 2006 or 2005 whose terms had been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and there are no current loans where, in the opinion of management, there are serious doubts as to the ability of the borrower to comply with present loan repayment terms. Loans defined as impaired by Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," if any, are included in nonaccrual loans above.
RETURN ON EQUITY AND ASSETS AND SELECTED CAPITAL RATIOS
The following table shows consolidated operating and capital ratios of the Registrant for each of the last three years:
Year Ended December 31,
2006 2005 2004 Percentage of net income to: ---- ---- ---- Average stockholders equity 9.23% 9.41% 9.49% Average total assets 1.31% 1.28% 1.26%
Percentage of dividends declared per common share to net income per common share 82.48% 74.29% 69.27%
Percentage of average stockholders' equity to daily average total assets 14.16% 13.31% 13.29%
SHORT-TERM BORROWINGS (Dollars in Thousands)
Information relating to short-term borrowings follows: Federal Funds Purchased And Securities Sold Under Other short-Term Agreements to Repurchase Borrowings ------------------------- ----------------
Balance at December 31: 2006 $ - $ 3,470 2005 $ - $ 2,432 2004 $ 9,486 $ 2,748
Weighted average interest rate at year end: 2006 -% 3.14% 2005 -% 2.67% 2004 2.36% 1.02%
Maximum amount outstanding at any month's end 2006 $ 10,741 $ 3,470 2005 $ 39,787 $ 3,100 2004 $ 25,665 $ 2,748
Average amount outstanding during the year: 2006 $ 3,022 $ 1,342 2005 $ 27,345 $ 1,550 2004 $ 13,793 $ 1,415
Average interest rate during the year: 2006 5.40% 4.72% 2005 3.27% 3.03% 2004 1.43% 1.14%
Federal funds purchased and securities sold under agreements to repurchase generally mature within one to four days of the transaction date. Other short-term borrowings generally mature within 90 days.
AVAILABLE INFORMATION
The Registrant maintains a website at www.tcnb.com. The Registrant makes ------------ available through that website, free of charge, copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8K, and amendments to the reports, as soon as reasonably practicable after the Registrant electronically files those materials with, or furnishes them to, the Securities and Exchange Commission (the "SEC"). The Registrant's SEC reports can be accessed through the "About TCNB" link of its website.
Item 1A.
Item 1A. RISK FACTORS
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION AND RISK FACTORS.
The Registrant and its representatives may, from time to time, make written or verbal forward-looking statements. Those statements relate to developments, results, conditions or other events the Registrant expects or anticipates will occur in the future. The Registrant intends words such as "believes," "anticipates," " plans," "expects" and similar expressions to identify forward-looking statements. Without limiting the foregoing, those statements may relate to future economic or interest rate conditions, loan losses and allowances, loan and deposit growth, new branches and the competitive environment. Forward-looking statements are based on management's then current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the following important risk factors that could cause actual results to differ materially from those predicted by the forward-looking statements.
An investment in the Registrant's common stock or other securities carries certain risks. Investors should carefully consider the risks described below and other risks, which may be disclosed from time to time in the Registrant's filings with the SEC before investing in the Registrant's securities.
INCREASING INTEREST RATES COULD AFFECT OUR RESULTS AND OUR EQUITY.
The results of operations for financial institutions may be materially and adversely affected by changes in prevailing economic conditions, including rapid changes in interest rates, changes in local market conditions, changes in the habits of the public, declines in real estate market values, increases in tax rates and other operating expenses, and the policies of regulatory authorities, including the monetary and fiscal policies of the Federal Reserve. Changes in the economic environment may influence the growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing. While the Bank has taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk. The Bank is unable to predict fluctuations of market interest rates, which are affected by many factors, including inflation, recession, a rise in unemployment, tightening money supply, and domestic and international disorder and instability in domestic and foreign financial markets.
The Bank's profitability depends to a large extent upon its net interest income, which is the difference (or "spread") between interest income received on interest earning assets, such as loans and investments, and interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Most of the Bank's loans are to businesses and individuals in Wisconsin (and, more specifically, Milwaukee, Ozaukee, Racine and Waukesha Counties), and any general adverse change in the economic conditions prevailing in these areas could reduce the Bank's growth rate, impair its ability to collect loans or attract deposits, and generally have an adverse impact on the results of operations and financial condition of the Bank. If these areas experience adverse economic, political or business conditions, the Bank would likely experience higher rates of loss and delinquency on its loans than if its loans were more geographically diverse.
The Bank's net interest spread and margin will be affected by general economic conditions and other factors that influence market interest rates and the Bank's ability to respond to changes in such rates. At any given time, the Bank's assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates could have a positive or negative effect on the Bank's net income, capital and liquidity.
The mismatch between maturities and interest rate sensitivities of balance sheet items (i.e., interest-earning assets and interest-bearing liabilities) results in interest rate risk, which risk will change as the level of interest rates changes. The Bank's liabilities consist primarily of deposits, which are either of a short-term maturity or have no stated maturity. These latter deposits consist of NOW, demand accounts, savings accounts, and money market accounts. These accounts typically can react more quickly to changes in market interest rates than the Bank's assets because of the shorter maturity (or lack of maturity) and repricing characteristics of these deposits. Consequently, sharp increases or decreases in market interest rates may impact the Bank's earnings negatively or positively, respectively.
To manage vulnerability to interest rate changes, the Bank's management monitors the Bank's interest rate risks. The Bank's officers have established investment policies and procedures, which ultimately are reported to the Board of Directors. Management and the Board of Directors generally meet quarterly and review the Bank's interest rate risk position, loan and securities repricing, current interest rates and programs for raising deposit-based maturity gaps, including retail and non-brokered deposits, and loan origination pipeline. The Bank's assets and liabilities maturing and repricing within one year generally result in a negative one-year gap, which occurs when the level of liabilities estimated to mature and reprice within one year are greater than the level of assets estimated to mature and reprice within that same time frame. If interest
rates were to rise significantly, and for a prolonged period, the Bank's operating results could be adversely affected. Gap analysis attempts to estimate the Bank's earnings sensitivity based on many assumptions, including, but not limited to, the impact of contractual repricing and maturity characteristics for rate-sensitive assets and liabilities.
Changes in interest rates will also affect the level of voluntary prepayments on the Bank's loans and the receipt of payments on the Bank's mortgage-backed securities, resulting in the receipt of proceeds that the Bank may have to reinvest at a lower rate than the loan or mortgage-backed security being prepaid. Finally, changes in interest rates can result in the flow of funds away from the banking institutions into investments in U.S. government and corporate securities, and other investment vehicles which, because of the absence of federal insurance premiums and reserve requirements, among other reasons, generally can pay higher rates of return than banking institutions.
A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED ON SMALL TO MEDIUM BUSINESS CUSTOMERS, WHICH MAKES US MORE VULNERABLE TO ECONOMIC DOWNTURNS.
One of the primary focal points of the Bank's business strategy is serving the banking and financial services needs of small to medium-sized businesses in the Bank's geographic region. Small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions deteriorate in the Milwaukee, Ozaukee, Racine and Waukesha County region of Wisconsin, the businesses of the Bank's lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Bank's results of operations and financial condition may be adversely affected.
THE REGISTRANT AND THE BANK OPERATE IN A HIGHLY REGULATED ENVIRONMENT, WHICH COULD INCREASE OUR COST STRUCTURE OR HAVE OTHER NEGATIVE IMPACT ON OUR OPERATIONS.
The Registrant and the Bank are subject to extensive state and federal government supervision, regulation and control. Existing state and federal banking laws subject the Registrant and the Bank to substantial limitations with respect to loans, purchase of securities, payment of dividends and many other aspects of the Bank's banking business. There can be no assurance that future legislation or government policy will not adversely affect the banking industry or the operations of the Bank, to the advantage of the Bank's non-bank competitors. In addition, economic and monetary policy of the Federal Reserve may increase the Bank's cost of doing business and affect its ability to attract deposits and make loans. The techniques used by the Federal Reserve include setting the reserve requirements of banks and establishing the discount rate on bank borrowings. The policies of the Federal Reserve have a direct effect on the amount of bank loans and deposits, and the interest rates charged and paid there on.
IF WE HAVE SIGNIFICANT LOAN LOSSES, WE WOULD NEED TO FURTHER INCREASE OUR ALLOWANCE FOR LOAN LOSSES AND OUR EARNINGS WOULD DECREASE.
The Bank's loan customers may not repay their loans according to their terms, and the collateral securing the repayment of these loans may be insufficient to assure repayment. The risk of nonpayment of loans is inherent in commercial banking, and such nonpayment, if it occurs, may have a material adverse effect on the Bank's results of operations and overall financial condition. The Bank's management attempts to minimize the Bank's credit exposure by carefully monitoring the concentration of its loans within specific industries and through prudent loan application and approval procedures, including a determination of the creditworthiness of borrowers and the value of the assets serving as collateral for repayment of certain loans. However, there can be no assurance that such monitoring and procedures will reduce such lending risks.
IF WE HAVE UNDERESTIMATED OUR ALLOWANCE FOR LOAN LOSSES, WE MAY HAVE TO TAKE ADDITIONAL CHARGES TO OUR INCOME TO RESTORE THE BALANCE IN ALLOWANCE.
The Bank makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for loan losses based on a number of factors. The Bank's allowance for loan losses is established by management and is maintained at a level considered adequate by management to absorb loan losses that are inherent in the Bank's portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond the Bank's control, and such losses may exceed current estimates. Although the Bank's management believes that the allowance for loan losses as of the end of each fiscal quarter is adequate to absorb probable and estimatible losses in its portfolio of loans, there can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future.
In addition, federal and state regulators periodically review the Bank's allowance for potential loan losses and may require the Bank to increase its provision for potential loan losses or recognize further loan charge-offs, based on judgments different than those of the Bank's management. Any increase in the Bank's allowance for potential loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on the operating results of the Bank.
Non-performing loans at December 31, 2006 were $3.4 million compared to $2.9 million at December 31, 2005. Management believes that the recent increase in non-performing loans is a result of normal business fluctuations. No assurance can be given that non-performing loans will not increase in the future.
A SIGNIFICANT PORTION OF OUR LENDING IS CONCENTRATED IN MORTGAGES AND CONSTRUCTION LOANS, WHICH MAKES US MORE AT RISK FOR DOWNTURNS IN THOSE AREAS.
The Bank offers fixed and adjustable interest rates on loans, with terms of up to 30 years. Although the majority of the residential mortgage loans that the Bank originates are fixed-rate, adjustable rate mortgage ("ARM") loans increase the responsiveness of the Bank's loan portfolios to changes in market interest rates. However, because ARM loans are more responsive to changes in market interest rates than fixed-rate loans, ARM loans also increase the possibility of delinquencies in periods of high interest rates.
The Bank also originates loans secured by mortgages on commercial real estate and multi-family residential real estate. Since these loans usually are larger than one-to-four family residential mortgage loans, they generally involve greater risks than one-to-four family residential mortgage loans. In addition, since customers' ability to repay these loans often is dependent on operating and managing those properties successfully, adverse conditions in the real estate market or the economy generally can impact repayment more severely than loans secured by one-to-four family residential properties. Moreover, the commercial real estate business is subject to downturns, overbuilding and local economic conditions.
The Bank also makes construction loans for residences and commercial buildings, as well as on unimproved property. While these loans enable the Bank to increase the interest rate sensitivity of its loan portfolios and receive higher yields than those obtainable on permanent residential mortgage loans, the higher yields correspond to higher risk perceived to be associated with construction lending. These include risks associated generally with loans on the type of property securing the loan. Moreover, commercial construction lending often involves disbursing substantial funds with repayment dependent largely on the success of the ultimate project instead of the borrower's or guarantor's ability to repay. Again, adverse conditions in the real estate market or the economy generally can impact repayment more severely than loans secured by one-to-four family residential properties.
AN INCREASE IN THE COMPETITION IN MARKETS WE SERVE COULD NEGATIVELY IMPACT OUR RESULTS.
The financial services industry is highly competitive. The Bank faces intense competition from financial institutions in Milwaukee, Ozaukee, Racine and Waukesha Counties and surrounding markets, and from non-bank financial institutions, such as mutual funds, brokerage firms and insurance companies that are aggressively expanding into markets traditionally served by banks. Many of the Bank's non-bank competitors are not subject to the same degree of regulation as are imposed on bank holding companies, federally insured banks and Wisconsin-chartered state banks. As a result, such non-bank competitors may have advantages over the Bank in providing certain services. The Bank also competes indirectly with regional and national financial institutions, many of which have greater liquidity, lending limits, access to capital and market recognition and resources than the Bank. Expanded interstate banking may increase competition from out-of-state banking organizations and other financial institutions. As a relatively small bank, the Bank may lack the resources to compete effectively in the financial services market.
WE MAY NOT BE ABLE TO EFFECTIVELY IMPLEMENT NEW TECHNOLOGY, WHICH COULD PUT AS AT A COMPETITIVE DISADVANTAGE AND NEGATIVE IMPACT OUR RESULTS.
The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Bank's future success will depend in part on its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as create additional efficiencies in the Bank's operations. A number of the Bank's competitors may have substantially greater resources to invest in technological improvements. There can be no assurance that the Bank will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to its customers.
Unauthorized disclosure of sensitive or confidential customer information, whether through a breach of the Bank's computer system or otherwise, could severely harm the Bank's business.
As part of the Bank's normal course of business, it collects, processes and retains sensitive and confidential customer information. Despite the security measures the Bank has in place, its facilities and systems, and those if its third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by the Bank or its vendors, could severely damage its reputation, expose it to the risk of litigation and liability, disrupt its operations and harm its business.
THE REGISTRANT'S SHAREHOLDERS MAY NOT BE ABLE TO LIQUIDATE THIS COMMON STOCK WHEN NEEDED.
Shareholders may be unable to resell their stock quickly or on favorable terms.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS -------------------------
None.
Item 2.
Item 2. PROPERTIES ---------- Tri City National Bank has thirty-six locations in the Metropolitan Milwaukee area, including Oak Creek, Milwaukee, Brookfield, Menomonee Falls, West Allis, Hales Corners, Wauwatosa, Cedarburg, Sturtevant and South Milwaukee. The Bank owns fourteen of its locations and leases twenty-two locations, including twenty full service banking centers located in grocery stores.
Registrant believes that its bank locations are in buildings that are attractive, efficient and adequate for their operations, with sufficient space for parking and drive-in facilities.
Item 3.
Item 3. LEGAL PROCEEDINGS ----------------- The Registrant is not party to any material legal proceedings.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
No matters were submitted during the fourth quarter of 2006 to a vote of security holders.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ------------------------------------------------------------------ AND ISSUER PURCHASES OF EQUITY SECURITTIES ------------------------------------------
The information required by Item 5 is incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Market for Corporation's Common Stock and Related Stockholder Matters" (Page 30).
Item 6.
Item 6. SELECTED FINANCIAL DATA -----------------------
The information required by Item 6 is incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Selected Financial Data" (Page 29).
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATION --------------------
The information required by Item 7 is incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation" (Pages 4 to 29).
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------------------------
The information required by Item 7A is incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders under the caption entitled "Quantitative and Qualitative Disclosures About Market Risk" (Pages 23 to 25).
Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --------------------------------------------------------
The information required by Item 8 is incorporated herein by reference to Registrant's 2006 Annual Report to Stockholders (Pages 33 to 65).
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None
Item 9A.
Item 9A. 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 Registrant's last fiscal quarter that have materially affected, or are reasonable likely to materially affect, the Registrant's internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION ----------------- None
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT ----------------------------------------------
The information required by Item 10 is incorporated herein by reference to Registrant's definitive Proxy Statement for its annual meeting of stockholders on June 13, 2007 ("The 2006 Proxy Statement") under the captions entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance".
The Registrant has a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. Copies of our Code of Ethics are available upon request, free of charge, by contacting the Registrant at 6400 South 27th Street, Oak Creek, Wisconsin, 53154.
Item 11.
Item 11. EXECUTIVE COMPENSATION ---------------------- The information required by Item 11 is incorporated herein by reference to the 2007 Proxy Statement under the caption entitled "Executive Compensation".
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- AND RELATED STOCKHOLDER MATTERS -------------------------------
The information required by Item 12 is incorporated herein by reference to the 2007 Proxy Statement under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information".
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
The information required by Item 13 is incorporated herein by reference to the 2007 Proxy Statement under the caption entitled "Loans and Other Transactions with Management".
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES --------------------------------------
The information required by Item 14 is incorporated herein by reference to the 2007 Proxy Statement under the caption entitled "Principal Accountant Fees and Services."
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES -------------------------------------------
(a) (1) and (2) Financial statements and financial statement schedules --------------------------------------------------------------------
The response to this portion of Item 15 is submitted as a separate section of this report.
(3) Listing of Exhibits
Exhibit 3.1 - Restated Articles of incorporation (incorporated herein by reference to Exhibit 3.2 to Registrant's current report on Form 8-K filed February 12, 2003).
Exhibit 3.2 - By-Laws (incorporated herein by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2000).
Exhibit 10.1*- Tri City Bankshares Corporation 2003 Stock Purchase Plan, incorporated herein by reference to Exhibit 99 of the Registrant's Registration Statement on Form S-8 (Reg. No.333-111617) filed on December 30, 2003.
Exhibit 10.2*- Summary of compensation arrangements with certain persons
Exhibit 10.4*- Summary of director compensation
Exhibit 10.5*- Description of consulting arrangements between Registrant and Mr. William J. Werry.
Exhibit 13 - Annual Report to Stockholders for the year ended December 31, 2006.
With the exception of the information incorporated by reference into Items 5, 6, 7, 7A, and 8 of this Form 10-K, the 2006 Annual Report to Stockholders is not deemed filed as part of this report.
Exhibit 21 - Subsidiaries of Registrant.
Exhibit 23 - Consent of Virchow, Krause & Company, LLP
Exhibit 31 - Rule 13a-14(a) or 15d-14(a) Under the Securities and Exchange Act of 1934, as amended, Certification
Exhibit 32 - 18 U.S.C. Section 1350 Certification
*A Management contract or compensation plan or arrangement
PART IV
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1), (2) and (b)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
CERTAIN EXHIBITS
Year Ended December 31, 2006
TRI CITY BANKSHARES CORPORATION
OAK CREEK, WISCONSIN
FORM 10-K-ITEM 15(a)(1) and (2)
TRI CITY BANKSHARES CORPORATION
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and reports of independent auditors of Tri City Bankshares Corporation, included in the annual report of the Registrant to its stockholders for the year ended December 31, 2006, are incorporated by reference in Item 8:
Consolidated Balance Sheets-December 31, 2006 and 2005
Consolidated Statements of Income-Years ended December 31, 2006,2005 and 2004
Consolidated Statements of Stockholders' Equity-Years ended December 31, 2006, 2005 and 2004.
Consolidated Statements of Cash Flows-Years ended December 31, 2006, 2005 and 2004.
Notes to Consolidated Financial Statements-Years ended December 31, 2006, 2005 and 2004.
Report of Independent Registered Public Accounting Firm
Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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
BY: /s/ Henry Karbiner, Jr. ------------------------------ Henry Karbiner, Jr., President
Date: March 28, 2007 -------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Capacity Date ---- -------- ----
/s/ Henry Karbiner, Jr. Chairman of the Board and 03/28/07 ----------------------- Chief Executive Officer -------- Henry Karbiner, Jr. (Principal Executive and Financial Officer)
/s/ Ronald K. Puetz Executive Vice-President and 03/28/07 ----------------------- Director -------- Ronald K. Puetz
/s/ Scott A. Wilson Senior Vice President and 03/28/07 ----------------------- Secretary and Director -------- Scott A. Wilson
/s/ Robert W. Orth Senior Vice President and 03/28/07 - ------------------------ Director -------- Robert W. Orth
/s/ Scott D. Gerardin Senior Vice President, General 03/28/07 ----------------------- Counsel and Director -------- Scott D. Gerardin
/s/ Thomas W. Vierthlaer Vice President and Comptroller 03/28/07 - ------------------------ (Principal Accounting Officer) -------- Thomas W. Vierthaler
/s/ Frank J. Bauer Director 03/28/07 - ------------------------ -------- Frank J. Bauer
/s/ William N. Beres Director 03/28/07 ----------------------- -------- William N. Beres
/s/ Sanford Fedderly Director 03/28/07 - ------------------------ -------- Sanford Fedderly
Director 03/28/07 - ------------------------ -------- William Gravitter
/s/ Christ Krantz Director 03/28/07 - ------------------------ -------- Christ Krantz
/s/ Brian T. McGarry Director 03/28/07 ----------------------- -------- Brian T. McGarry
/s/ Agatha T. Ulrich Director 03/28/07 ----------------------- -------- Agatha T. Ulrich
/s/ David A. Ulrich, Jr. Director 03/28/07 ----------------------- -------- David A. Ulrich, Jr.
/s/ William J. Werry Director 03/28/07 - ------------------------ -------- William J. Werry