UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D. C. 20549
Form 10-QSB
(Mark One)
[ X ] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003. |
[ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _______________ to _______________. |
Commission file number 0-22471
Luxemburg Bancshares, Inc.
(Exact name of small business issuer as specified in its charter)
Wisconsin | 39-1457904 |
630 Main Street, Luxemburg, Wisconsin 54217
(Address of principal executive offices)
(920) 845-2345
(Issuer’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
State the number of shares outstanding of each issuer’s classes of common equity, as of October 23, 2003:
552,585 shares were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
LUXEMBURG BANCSHARES, INC.
INDEX
Page No. | |
PART I – FINANCIAL INFORMATION | |
Item 1- Financial Statements (Unaudited) | |
Consolidated Balance Sheets – September 30, 2003 and December 31, 2002 | 3 |
Consolidated Statements of Income – Three Months & Nine | |
Months Ended September 30, 2003 and 2002 | 4 |
Consolidated Condensed Statements of Changes | |
in Stockholders’ Equity - Nine Months Ended | |
September 30, 2003 and 2002 | 5 |
Consolidated Statements of Cash Flow - Nine Months | |
Ended September 30, 2003 and 2002 | 6 |
Notes to Consolidated Financial Statements | 7-8 |
Item 2 – Management’s Discussion and Analysis of | |
Financial Condition and Results of Operations | 9-14 |
Item 3- Controls and Procedures | 14 |
PART II – OTHER INFORMATION | |
Item 6 – Exhibits and Reports on Form 8-K | 15 |
SIGNATURES | 15 |
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
ASSETS
September 30, 2003 | December 31, 2002 | |
Cash and due from banks | $ 7,392,447 | $ 4,883,581 |
Interest-bearing deposits | 3,178,208 | 8,571,647 |
Federal funds sold | 5,733,000 | 3,820,000 |
Cash and cash equivalents | 16,303,655 | 17,275,228 |
Investment securities available for sale - stated at fair value | 11,753,675 | 14,296,159 |
Loans held for sale | 148,000 | 475,400 |
Total loans | 128,069,622 | 116,949,029 |
Allowance for loan losses | (1,829,292) | (1,469,023) |
Net loans | 126,240,330 | 115,480,006 |
Premises and equipment | 2,775,377 | 2,463,897 |
Other investments at cost | 539,601 | 486,069 |
Mortgage servicing rights, net | 1,146,518 | 911,708 |
Other assets | 3,642,867 | 2,779,354 |
TOTAL ASSETS | $ 162,550,023 | $ 154,167,821 |
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES: | ||
Non-interest-bearing deposits | $ 19,688,681 | $ 21,546,037 |
Interest-bearing deposits | 122,038,615 | 110,898,348 |
Total deposits | 141,727,296 | 132,444,385 |
Short-term borrowings | 111,045 | 544,913 |
Borrowed funds | 2,000,000 | 4,000,000 |
Other liabilities | 1,918,877 | 1,823,384 |
Total liabilities | 145,757,218 | 138,812,682 |
STOCKHOLDERS’ EQUITY: | ||
Common stock- $1.00 par value: | ||
Authorized - 2,400,000 shares, Issued – 580,769 shares in 2003 and 575,557 shares in 2002 | 580,769 | 575,557 |
Capital surplus | 4,378,689 | 4,245,948 |
Retained earnings | 11,818,939 | 10,414,049 |
Accumulated other comprehensive income | 406,567 | 463,744 |
Less - 28,184 shares in 2003 and 26,984 shares in 2002 of treasury common stock, at cost | (392,159) |
(344,159) |
Total stockholders’ equity | 16,792,805 | 15,355,139 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ 162,550,023 | $ 154,167,821 |
See accompanying notes to consolidated financial statements.
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||
2003 | 2002 | 2003 | 2002 | |||
INTEREST INCOME: | ||||||
Interest and fees on loans | $ 1,871,123 | $ 1,990,784 | $ 5,648,084 | $ 5,877,705 | ||
Interest on investment securities: | ||||||
Taxable | 36,853 | 87,020 | 152,253 | 291,459 | ||
Tax-exempt | 101,051 | 102,578 | 305,107 | 307,734 | ||
Other interest and dividend income | 61,230 | 51,621 | 154,372 | 125,824 | ||
Total interest income | 2,070,257 | 2,232,003 | 6,259,816 | 6,602,722 | ||
INTEREST EXPENSE: | ||||||
Deposits | 646,187 | 866,819 | 2,053,304 | 2,688,952 | ||
Short-term borrowings | 37,897 | 1,083 | 102,018 | 19,852 | ||
Borrowed funds | 0 | 49,947 | 33,797 | 115,279 | ||
Total interest expense | 684,084 | 917,849 | 2,189,119 | 2,824,083 | ||
Net interest income | 1,386,173 | 1,314,154 | 4,070,697 | 3,778,639 | ||
Provision for loan losses | 50,000 | 205,000 | 450,000 | 326,000 | ||
Net interest income after provision for credit losses | 1,236,173 | 1,109,154 | 3,620,697 | 3,452,639 | ||
OTHER INCOME: | ||||||
Service charges on deposit accounts | 111,344 | 102,018 | 293,715 | 263,906 | ||
Loan fees | 45,097 | 19,605 | 87,626 | 69,941 | ||
Mortgage underwriting fees – Secondary market | 99,890 | 33,734 | 440,138 | 389,784 | ||
Loan servicing fee income | 135,410 | 311,335 | 461,587 | 296,091 | ||
Gain on sale of loans | 282,540 | 123,314 | 864,114 | 173,309 | ||
Commissions and managed fees | 79,945 | 63,552 | 243,679 | 226,170 | ||
Other operating income | 84,186 | 74,491 | 245,390 | 241,894 | ||
Total other income | 838,412 | 728,049 | 2,636,249 | 1,661,095 | ||
OPERATING EXPENSES: | ||||||
Salaries and related benefits | 801,418 | 655,868 | 2,294,789 | 1,857,863 | ||
Net occupancy expense | 79,588 | 69,281 | 221,464 | 206,620 | ||
Equipment rentals, depreciation, and maintenance | 104,324 | 76,917 | 292,849 | 221,824 | ||
Data processing | 51,092 | 67,676 | 162,133 | 177,218 | ||
Other operating expenses | 293,316 | 206,579 | 846,587 | 671,558 | ||
Total operating expenses | 1,329,738 | 1,076,321 | 3,817,822 | 3,135,083 | ||
Income before provision for income taxes | 744,847 | 760,882 | 2,439,124 | 1,978,651 | ||
Provision for income taxes | 233,169 | 227,655 | 779,493 | 583,279 | ||
Net income | $ 511,678 | $ 533,227 | $ 1,659,631 | $1,395,372 | ||
Basic and diluted earnings per common share | $ 0.93 | $ 0.97 | $ 3.00 | $ 2.54 | ||
Dividends per common share | $ 0.00 | $ 0.00 | $ 0.46 | $ 0.38 | ||
See accompanying notes to consolidated financial statements
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) |
Nine Months Ended | Nine Months Ended | ||||||
Shares | Equity Total | Shares | Equity Total | ||||
Balance – Beginning of period | 575,557 | $ 15,355,139 | 571,225 | $ 13,489,714 | |||
Issuance of common stock | 5,212 | $ 137,953 | 4,332 | $ 99,009 | |||
Purchase of treasury stock | $ (48,000) | ||||||
Comprehensive income: | |||||||
Net Income | 1,659,631 | $ 1,395,372 | |||||
Other comprehensive income - change | |||||||
in net unrealized gain (loss) on | |||||||
securities available for sale | (57,177) | 365,980 | |||||
Total comprehensive income | 1,602,454 | 1,761,352 | |||||
Dividends paid | 254,741 | 208,458 | |||||
Balance - end of period | 580,769 | $ 16,792,805 | 575,557 | $ 15,141,617 | |||
See accompanying notes to consolidated financial statements
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months EndedSeptember 30, 2003 | Nine Months EndedSeptember 30, 2002 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net income | $ 1,659,631 | $ 1,395,372 |
Adjustments to reconcile net income to net cash | ||
Provided by operating activities: | ||
Depreciation and amortization | 235,626 | 223,499 |
Accretion of discounts on securities | ( 11,626) | ( 16,645) |
Amortization of premiums on securities | 8,788 | 5,555 |
Provision for loan losses | 450,000 | 326,000 |
Stock dividend on other investments @ cost | (21,800) | (13,700) |
(Gain) loss on sale of other real estate | 0 | (7,252) |
Proceeds from sales of loans held for sale | 100,587,175 | 48,744,558 |
Originations of loans held for sale | (99,395,661) | (50,619,663) |
Gain on sale of loans held for sale | (864,114) | (173,309) |
Loss on sale of premises and equipment | 0 | 850 |
Change in other operating assets and liabilities | ||
Mortgage servicing rights | (234,810) | (160,454) |
Other assets | (97,145) | 1,870,836 |
Other liabilities | 126,201 | 44,573 |
Total adjustments | 782,634 | 224,848 |
Net cash provided by operating activities | 2,442,265 | 1,620,220 |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Proceeds from maturities of securities available for sale | 2,457,437 | 2,409,734 |
Purchase of securities available for sale | 0 | (212,500) |
Net increase in loans | (11,290,324) | (14,518,968) |
Purchase of additional life insurance | (681,100) | 0 |
Capital expenditures | (547,106) | (228,288) |
Purchase of investment at cost | (37,000) | 0 |
Net cash used in investing activities | (10,098,093) | (12,550,022) |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Net increase in deposits | 9,282,911 | 17,240,343 |
Net increase in short-term borrowings | (433,868) | 467,896 |
Principal payments on borrowed funds | (2,000,000) | (2,000,000) |
Proceeds from borrowed funds | 0 | 2,000,000 |
Director and Employee Stock Purchase Plans | 137,953 | 99,009 |
Purchase of treasury stock | (48,000) | 0 |
Dividends Paid | (254,741) | (208,458) |
Net cash provided by financing activities | 6,684,255 | 17,598,790 |
Net (decrease) increase in cash and cash equivalents | (971,573) | 6,668,988 |
Cash and cash equivalents at beginning | 17,275,228 | 13,892,443 |
Cash and cash equivalents at end | $ 16,303,655 | $ 20,561,431 |
Supplemental information: | ||
Cash paid during the period for: | ||
Interest | $ 2,070,200 | $ 2,826,518 |
Income taxes | $ 792,016 | $ 621,744 |
Loans transferred to other real estate | $ 149,004 | $ 248,414 |
See accompanying notes to consolidated financial statements
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of Luxemburg Bancshares, Inc. (“Company”), all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included. Refer to the Notes to Consolidated Financial Statements which appear in the Company’s Form 10-KSB for the Fiscal Year ended December 31, 2002 for the Company’s accounting policies which are pertinent to these financial statements.
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Company, a bank holding company, include the accounts of Company and Subsidiaries - Bank of Luxemburg, Luxemburg Investment Corporation, and Area Development Corporation. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements.
For purposes of reporting cash flows, the Company considers cash on hand, interest-bearing and non-interest bearing deposits in banks and federal funds sold as cash and cash equivalents.
Earnings per common share are based upon the weighted average number of common shares outstanding. The weighted average number of shares outstanding was 553,159 for the three months ending September 30, 2003 and 548,573 for the three months ending September 30, 2002. The weighted average number of shares outstanding was 553,142 for the nine months ending September 30, 2003 and 548,285 for the nine months ending September 30, 2002. The basic and diluted earnings per share were the same for both periods in 2003 and 2002.
NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank of Luxemburg’s (“Bank’s”) financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk, and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities at each balance sheet date were as follows:
Notional Amount | ||
September 30, 2003 | December 31, 2002 | |
Commitments to extend credit | $12,075,000 | $7,984,000 |
Credit card arrangements | 1,701,000 | 1,449,000 |
Standby letters of credit | 1,202,000 | 535,000 |
Commitments to extend credit and credit card arrangements are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A portion of the commitments are expected to be drawn upon, thus representing future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; real estate; and stocks and bonds. Management does not anticipate any material losses as a result of these commitments.
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Standby letters of credit are conditional commitments issued by the Company to guarantee the payment of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. Because these instruments have fixed maturity dates and because many of them expire without being drawn upon, they do not generally present significant liquidity risk to the Company. Management does not anticipate any material losses as a result of these letters of credit.
The Company’s commitments to sell residential mortgage loans to the secondary market and commitments to fund such loans to individual borrowers represent mortgage derivatives. Commitments outstanding at September 30, 2003 were $2,057,000.
NOTE 3: ACCOUNTING CHANGES-In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” as an amendment to SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. The Corporation has not voluntarily changed to the fair value-based method of accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). The objective of this interpretation is to provide guidance on how to identify a variable interest entity and determine when the assets, liabilities, non-controlling interests, and results of operations of a variable interest entity need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the variable interest entity is such that the company will absorb a majority of the variable interest entity’s losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other signif icant variable interest holders. The provisions of this interpretation are effective upon issuance. The requirements of FIN 46 did not have a material impact on the results of operations, financial position, or liquidity.
In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 will not have a material impact on the results of operations, financial position, or liquidity.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
Item 2:
Three Months Ended
Nine Months Ended
September 30
September 30
2003 | 2002 | 2003 | 2002 |
Net Earnings | $ 511,678 | $ 533,227 | $1,659,631 | $1,395,372 | |
Average Consolidated Balance Sheet Items: | |||||
Loans | 121,975,221 | 112,775,971 | 119,747,400 | 107,870,745 | |
Taxable Investment Securities | 3,213,451 | 6,361,711 | 4,053,836 | 6,835,848 | |
Fed Funds Sold | 7,970,125 | 3,261,346 | 4,669,751 | 2,407,285 | |
Municipal Loans & Investments | 10,433,373 | 10,256,479 | 10,496,917 | 10,177,410 | |
Other Earning Assets | 7,929,792 | 5,270,119 | 8,063,937 | 3,948,666 | |
Total Earning Assets | 151,521,962 | 137,925,626 | 147,031,841 | 131,239,954 | |
Total Assets | 167,540,834 | 149,600,280 | 161,276,979 | 142,628,768 | |
Deposits | 118,107,110 | 109,485,751 | 114,677,683 | 107,370,321 | |
Shareholders’ Equity | 16,669,656 | 14,898,014 | 16,272,056 | 14,412,836 | |
Key Ratios: | |||||
Average Equity to Average Total Assets | 9.95% | 9.96% | 10.09% | 10.11% | |
Return on Average Total Assets | 1.21% | 1.41% | 1.38% | 1.31% | |
Return on Average Equity | 12.18% | 14.20% | 13.64% | 12.94% | |
Net Interest Margin | 3.63% | 3.78% | 3.70% | 3.85% | |
NET INTEREST INCOME
Net interest income, the principle source of earnings, is the amount by which interest generated by earning assets exceeds the interest costs of liabilities obtained to fund them. As shown below, net interest income has increased $72,019 or 5.5% to $1,386,173 for the three months ended September 30, 2003, from $1,314,154 for the three months ended September 30, 2002. Net interest income has increased $292,058 or 7.7% to $4,070,697 for the nine months ended September 30, 2003, from $3,778,639 for the nine months ended September 30, 2002. The net interest income has increased due to Bank growth.
Three Months Ended, | Nine Months Ended, | |||
2003 | 2002 | 2003 | 2002 | |
Interest Income | $ 2,070,257 | $ 2,232,003 | $ 6,259,816 | $ 6,602,722 |
Interest Expense | 684,084 | 917,849 | 2,189,119 | 2,824,083 |
Net Interest Income | $ 1,386,173 | $ 1,314,154 | $ 4,070,697 | $ 3,778,639 |
Net Interest Margin | 3.63% | 3.78% | 3.70% | 3.85% |
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income for the three and nine months ended September 30, 2003 is illustrated in the following table:
Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002.
Increase (Decrease) in Net Interest Income
| Net Change | Due To Rate | Due To Volume |
Interest Income | $ (161,746) | $ (308,028) | $ 146,282 |
Interest Expense | (233,765) | (274,066) | 40,301 |
Net Interest Income | $ 72,019 | $ (33,962) | $ 105,981 |
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002.
Increase (Decrease) in Net Interest Income
| Net Change | Due To Rate | Due To Volume |
Interest Income | $ (342,906) | $ (941,065) | $ 598,159 |
Interest Expense | (634,964) | (786,100) | 151,136 |
Net Interest Income | $ 292,058 | $ (154,965) | $ 447,023 |
Interest rates on the Bank’s earning assets and interest bearing liabilities were generally lower for the three months and nine months ended September 30, 2003 compared to the three months and nine months ended September 30, 2002. Average earning assets increased 9.9% and 12.0%, respectively to $151,521,962 for the three months ended September 30, 2003 from $137,925,626 for the three months ended September 30, 2002 and to $147,031,841 for the nine months ended September 30, 2003 from $131,239,954 for the nine months ended September 30, 2002. However, interest bearing liabilities increased 7.1% and 8.6%, respectively to $121,607,195 for the three months ended September 30, 2003 compared to $113,599,744 for the three months ended September 30, 2002 and to $118,635,089 for the nine months ended September 30, 2003, compared to $110,742,411 for the nine months end ed September 30, 2002.
OPERATING RESULTS
Net income for the three months ended September 30, 2003, was $511,678 compared to $533,227 for the three months ended September 30, 2002. The decrease of $21,549 reflects an increase in operating expenses. Salaries and related benefit expenses and equipment rentals, depreciation, and maintenance increased $145,550 and $27,407 respectively. Equipment rentals, depreciation and maintenance has increased due to the addition of the Algoma branch in August 2003 and technology equipment updates. Salaries and related benefits increased due to the addition of several positions in the areas of loans, internal audit and the Algoma office staff. The increase in net interest income of $72,019 for the three months ended September 30, 2003, compared to the three months ended September 30, 2002 is discussed in “Net Interest Income” and “Rat e/Volume Analysis” elsewhere in this report.
Total operating expenses increased $253,417 or 23.5% from $1,076,321 for the three months ended September 30, 2002 to $1,329,738 for the three months ended September 30, 2003. Salaries and related benefits increased $145,550 or 22.2% to $801,418 for the three months ended September 30, 2003 compared to $655,868 for the three months ended September 30, 2002. An increase in full time equivalent employees accounted for the majority of the increase. Data processing expense decreased $16,584 or -24.5% to $51,092 for the three months ended September 30, 2003 compared to $67,676 for the three months ended September 30, 2002. Equipment rentals, depreciation, and maintenance for the three months ended September 30, 2003 increased $27,407 or 35.6% to $104,324 compared to $76,917 for the three months ended September 30, 2002. Finally, other operating expenses for the t hree months ended September 30, 2003 increased $86,737 or 42.0% to $293,316 from $206,579 for the three months ended September 30, 2002 due primarily to increases in deferred compensation for directors, other real estate expenses, and the addition of the Algoma branch.
Net income for nine months ended September 30, 2003, was $1,659,631 compared to $1,395,372 for the nine months ended September 30, 2002. The increase of $264,259 reflects an increase in gain on sale of loans and loan servicing fee income. Gain on sale of loans and loan service fee income increased $690,805 and $165,496 respectively for the nine months ended September 30, 2003. The increase in net interest income of $292,058 for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002 is discussed in “Net Interest Income” and “Rate/Volume Analysis” elsewhere in this report.
Total operating expenses increased $682,739 or 21.8% from $3,135,083 for the nine months ended September 30, 2002 to $3,817,822 the nine months ended September 30, 2003. Salaries and related benefits increased $436,926 or 23.5% to $2,294,789 for the nine months ended September 30, 2003 compared to $1,857,863 for the nine months ended September 30, 2002. An increase in full time equivalent employees accounted for the majority of the increase. Equipment rentals, depreciation, and maintenance for the nine months ended September 30, 2003 increased $71,025 or 32% to $292,849 compared to $221,824 for the nine months ended September 30, 2002. Other operating expenses for the nine months ended September 30, 2003 increased $175,029 or 26.1% to $846,587 from $671,558 for the nine months ended September 30, 2002 due primarily to increases in deferred compen sation for directors, use tax expense, other real estate expenses, and the addition of the Algoma branch.
ALLOWANCE FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio. The level of this allowance is dependent upon the total amount of past due and non-performing loans, general economic conditions and management’s assessment of potential losses based upon internal credit evaluations of the loan portfolio and particular loans. Management allocated the allowance based on an assigned risk factor for each category of loans and adjusting the allocation by potential losses of individual loans. Loans are primarily to borrowers in Northeast Wisconsin.
The Bank generally places loans on non-accrual status when the loan is past due as to the payment of interest and/or principal in excess of 90 days. The Bank also places loans on a non-accrual status when it deems the collection of such interest unlikely. Loans are generally returned to full accrual status when the loan is brought current according to all terms of the loan agreement, all past due principal and interest is paid and the Bank deems its collateral position adequate to warrant a return to accrual status.
At September 30, 2003 the Company had loans in the amount of $10,000, past due 90 days or more, that were still accruing interest as compared to $22,000 as of September 30, 2002. At September 30, 2003 the Company had one loan for $1,153,246 that met the definition of “Troubled Debt Restructuring”. At September 30, 2002 the Company did not have any loans that met the definition of “Troubled Debt Restructuring”. There were five loans considered impaired under SFAS Nos 114 & 118 for $800,000 as of September 30, 2003. No loans were considered to be impaired as of September 30, 2002. The Bank had $4,303,000 of non-accrual loans at September 30, 2003 and $1,989,000 of non-accrual loans at September 30, 2002. One additional loan portfolio placed on non-accrual status in 2003 accounts for $1,670,000 of the $2,314,000 increas e in non-accrual loans. The loan is guaranteed by the Small Business Administration (SBA). Senior loan management expects a loss of approximately $150,000 on this loan portfolio.
During the three months ended September 30, 2003, $150,000 was charged to the provision for loan losses compared to $205,000 for the three months ended September 30, 2002. At September 30, 2003 the allowance was $1,829,000 or 1.43% of total loans. This compares to an allowance of $1,400,000 or 1.21% of total loans as of September 30, 2002. For the three months ended September 30, 2003 the Bank had net charge -offs of $63,000 compared to net charge-offs of $38,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003 the Bank had net charge-offs of $90,000 compared to net charge-offs of $29,000 for the nine months ended September 30, 2002.
The following table summarizes loan charge -offs and recoveries by type of loan for the three months ended September 30, 2003 and 2002:
Loan Type | September 30, 2003 | September 30, 2002 | ||
Charge-Off | Recovery | Charge-Off | Recovery | |
Real Estate | $ 19,000 | $ 0 | $ 0 | $ 0 |
Commercial and Industrial | 42,000 | 0 | 7,000 | 1,000 |
Agricultural | 0 | 0 | 0 | 1,000 |
Consumer | 8,000 | 6,000 | 34,000 | 1,000 |
TOTALS | $ 69,000 | $ 6,000 | $ 41,000 | $ 3,000 |
The following table summarizes loan charge -offs and recoveries by type of loan for the nine months ended September 30, 2003 and 2002:
Loan Type | September 30, 2003 | September 30, 2002 | ||
Charge-Off | Recovery | Charge-Off | Recovery | |
Real Estate | $ 19,000 | $ 1,000 | $ 0 | $ 0 |
Commercial and Industrial | 81,000 | 0 | 10,000 | 1,000 |
Agricultural | 0 | 0 | 0 | 2,000 |
Consumer | 22,000 | 31,000 | 45,000 | 23,000 |
TOTALS | $ 122,000 | $ 32,000 | $ 55,000 | $ 26,000 |
The Bank has allocated its allowance for loan losses at the end of each period presented as follows:
September 30, 2003 | September 30, 2002 | ||||
| % of loans to total | % of loans to total | |||
Amount | Loans | Amount | Loans | ||
Commercial and agricultural | $ 915,000 | 67% | $ 926,000 | 57% | |
Real Estate-construction | 6,000 | 3% | 31,000 | 0% | |
Real Estate-mortgage | 24,000 | 13% | 115,000 | 25% | |
Consumer | 95,000 | 17% | 200,000 | 18% | |
Total Domestic | 1,040,000 | 100% | 1,272,000 | 100% | |
Unallocated | 789,292 | 128,000 | |||
TOTALS | $ 1,829,292 | 100% | $ 1,400,000 | 100% | |
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company must maintain an adequate liquidity position in order to respond to the short-term demand for funds caused by withdrawals from deposit accounts, extensions of credit and for the payment of operating expenses. Maintaining this position of adequate liquidity is accomplished through the management of a combination of liquid assets; those which can be converted into cash and access to additional sources of funds. Primary liquid assets of the Company are cash and due from banks, interest bearing deposits, federal funds sold, investments held as “available for sale” and maturing loans. Federal funds purchased and loans from the Federal Home Loan Bank system represent the Company’s primary source of immediate liquidity and were maintained at a level to meet immediate needs. Federal Funds Sold averaged approximately $7,970,125 and $3 ,261,346 for the three months ended September 30, 2003 and 2002, respectively. Maturities in the Company’s loan and investment portfolios are monitored regularly to avoid matching short -term deposits with long-term loans and investments. Other assets and liabilities are also monitored to provide the proper balance between liquidity, safety, and profitability. This monitoring process must be continuous due to the constant flow of cash that is inherent in a financial institution.
The Company actively manages its interest rate sensitive assets and liabilities to reduce the impact of interest rate fluctuations. In addition, the Bank monitors the interest rates paid on certificates of deposit as advertised by its competitors and strives to pay competitive interest rates to retain and attract certificates of deposit. Should competitive pressures dictate, the Bank may have to increase rates paid to retain the certificates of deposit that mature in the next year and any increase in interest rates paid on certificates of deposit may reduce future Company earnings. The Bank also monitors the assets and liabilities that reprice each month to determine the impact on future earnings from anticipated repricings. At September 30, 2003 the Company’s rate sensitive assets exceed the Company’s rate sensitive liabilities due within one year by $2 ,597,000.
As part of managing liquidity, the Company monitors its loan to deposit ratio on a daily basis. At September 30, 2003 the ratio was 91% which is within the Company’s policy range.
The Company experienced a decrease in cash and cash equivalents, its primary source of liquidity, of $971,573 for the nine months ended September 30, 2003. The primary source of cash flow for the nine months ended September 30, 2003 was cash provided by financing activities of $6,684,255 which consisted primarily of an increase in deposits of $9,282,911. Cash outflow for the nine months ended September 30, 2003 was primarily an increase in loans of $11,290,324. The Company’s management believes its liquidity sources are adequate to meet its operating needs and does not know of any trends, events or uncertainties that may result in a significant adverse effect on the Company’s operations or liquidity position.
The following table illustrates the projected maturities and the repricing mechanisms of the major asset/liability categories of the Company as of September 30, 2003, based on certain assumptions. No prepayment rate assumptions have been made for the loan portfolio. Maturities and repricing dates for investments have been projected by applying the assumptions set forth below to contractual maturities and repricing dates.
1 Year or Less | 1 - 5 Years | 5 - 10 Years | After 10 Years | |
Interest Earning Assets: | ||||
Short Term Investments | $ 8,911,000 | |||
Investment Securities | $ 1,885,000 | $ 4,271,000 | $ 4,953,000 | $ 645,000 |
Loans | ||||
Variable Rate | $ 33,976,000 | |||
Real Estate- Construction | $ 3,803,000 | $ 514,000 | ||
Real Estate-Other | $ 5,071,000 | $ 11,027,000 | $ 351,000 | $ 690,000 |
Commercial and Industrial | $ 20,001,000 | $ 21,643,000 | $ 514,000 | $ 1,347,000 |
Agricultural | $ 2,878,000 | $ 3,722,000 | $ -0- | $ 244,000 |
Consumer | $ 3,736,000 | $ 16,753,000 | $ 427,000 | $ 44,000 |
Municipal | $ 124,000 | $ 372,000 | $ 981,000 | |
Other | $ 540,000 | $ -0- | $ -0- | $ -0- |
Total Interest Earning Assets | $ 80,925,000 | $ 58,302,000 | $ 7,226,000 | $ 2,970,000 |
Interest Bearing Liabilities: | ||||
Interest Bearing Demand | $ 6,804,000 | |||
Savings Deposits | $ 10,248,000 | $23,913,000 | ||
Money Market Accounts | $ 1,302,000 | $ 3,037,000 | ||
Certificates of Deposit | $ 46,854,000 | $ 8,924,000 | ||
Jumbo CD’s | $ 17,813,000 | $ 3,143,000 | ||
Other | $ 2,111,000 | $ -0- | -0- | -0- |
Total Interest Bearing Liabilities | $ 78,328,000 | $12,067,000 | -0- | $ 33,754,000 |
Interest Sensitivity Gap per Period | $ 2,597,000 | $46,235,000 | $ 7,226,000 | $(30,784,000) |
Cumulative Interest Sensitivity Gap | $ 2,597,000 | $48,832,000 | $56,058,000 | $ 25,274,000 |
Interest Sensitivity Gap as a Percentage of Earning Assets | 1.7% | 30.9% | 4.8% | (20.6%) |
Cumulative Sensitivity Gap as a Percentage of Earning Assets | 1.7% | 32.7% | 37.5% | 16.9% |
Item 3.
Controls and Procedures
(a)
The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchanged Act) as of September 30, 2003. Based upon that evaluation, the Company��s Chief Executive Officer and Chief Financial Officer has each concluded that the Company’s disclosure controls and procedures are effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in Company’s filings under the Securities and Exchange Act of 1934, as amended.
(b)
There were no significant changes in the Company’s internal controls or in other factors that
could significantly affect the controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
Item 5. Other information
On September 6, 2003 the Company’s former Chairman of the Board Mr. Irvin G. Vincent passed away. On October 28, 2003 the Company elected Mr. Thomas J. Rueckl to replace Mr. Vincent as Chairman of the Board. Mr. Rueckl was formally Vice Chairman of the Board for the Company and has been acting Chairman since Irvin’s death.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
31.1
Rule 13a-14(a) Certification of CEO
31.2
Rule 13a-14(a) Certification of CFO
32.1
Section 1350 Certification of CEO
32.2
Section 1350 Certification of CFO
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LUXEMBURG BANCSHARES, INC. | |
(Registrant) | |
/s/ John A. Slatky | /s/ Sheri L. Knope |
John A. Slatky | Sheri L. Knope, |
President and Chief Executive Officer | Treasurer/CFO |
Date November 5, 2003 | Date November 5, 2003 |
