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, 2004. |
| | [ ] | 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 (State or other jurisdiction of incorporation or organization) | 39-1457904 (I.R.S. Employer Identification No.) |
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)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each issuer’s classes of common equity, as of October 31, 2004:
557,762 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, 2004 and December 31, 2003 | 3 |
| | |
Consolidated Statements of Income – Three Months & Nine | |
Months Ended September 30, 2004 and 2003 | 4 |
| | |
Consolidated Condensed Statements of Changes | |
in Stockholders’ Equity - Nine Months Ended | |
September 30, 2004 and 2003 | 5 |
| | |
Consolidated Statements of Cash Flow – Nine Months | |
Ended September 30, 2004 and 2003 | 6 |
| | |
Notes to Consolidated Financial Statements | 7-10 |
| | |
Item 2 - Management’s Discussion and Analysis or | |
Plan of Operation | 11-16 |
| | |
Item 3- 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 | 18 |
| | |
2
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
ASSETS |
| | September 30, 2004 | December 31, 2003 |
| | | |
Cash and due from banks | $ 9,619,806 | $ 7,957,449 |
Interest-bearing deposits | 942,320 | 4,534,571 |
Federal funds sold | 853,000 | 4,050,000 |
| | | |
Cash and cash equivalents | 11,415,126 | 16,542,020 |
| | | |
Investment securities available for sale-stated at fair value | 13,174,594 | 11,325,780 |
Loans held for sale | 80,000 | 488,500 |
| | | |
Total loans | 149,887,995 | 133,448,369 |
Allowance for loan losses | (1,692,384) | (1,880,021) |
Net loans | 148,195,611 | 131,568,348 |
| | | |
Premises and equipment | 2,944,569 | 2,952,800 |
Other investments at cost | 557,718 | 546,301 |
Mortgage servicing rights, net | 884,143 | 1,094,505 |
Other assets | 3,844,200 | 3,500,849 |
| | | |
TOTAL ASSETS | $ 181,095,961 | $ 168,019,103 |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
LIABILITIES: | | |
| | | |
Non-interest-bearing deposits | $ 23,821,211 | $ 22,259,902 |
Interest-bearing deposits | 134,216,089 | 124,742,761 |
Total deposits | 158,037,300 | 147,002,663 |
| | | |
Short-term borrowings | 221,193 | 270,737 |
Borrowed funds | 3,000,000 | 2,000,000 |
Other liabilities | 2,020,846 | 1,766,348 |
| | | |
Total liabilities | 163,279,339 | 151,039,748 |
| | | |
STOCKHOLDERS’ EQUITY: | | |
| | | |
Common stock- $1.00 par value: | | |
Authorized - 2,400,000 shares, Issued – 586,044 shares in 2004 and 580,769 shares in 2003 |
586,044 |
580,769 |
Capital surplus | 4,539,306 | 4,378,689 |
Retained earnings | 12,716,918 | 11,977,127 |
Accumulated other comprehensive income | 370,433 | 434,929 |
Treasury stock at cost – 28,282 shares in 2004 and 28,184 shares in 2003 |
(396,079) |
(392,159) |
| | | |
Total stockholders’ equity | 17,816,622 | 16,979,355 |
| | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ 181,095,961 | $ 168,019,103 |
See accompanying notes to consolidated financial statements.
3
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2004 | 2003 | 2004 | 2003 |
INTEREST INCOME: | | | | |
| | | | | |
Interest and fees on loans | $ 2,146,259 | $ 1,871,123 | $ 6,084,297 | $ 5,648,084 |
Interest on investment securities: | | | | |
Taxable | 46,463 | 36,853 | 114,042 | 152,253 |
Tax-exempt | 90,409 | 101,051 | 277,652 | 305,107 |
Other interest and dividend income | 16,946 | 61,230 | 63,144 | 154,372 |
| | | | | |
Total interest income | 2,300,077 | 2,070,257 | 6,539,135 | 6,259,816 |
| | | | | |
INTEREST EXPENSE: | | | | |
| | | | | |
Deposits | 587,447 | 646,187 | 1,719,748 | 2,053,304 |
Short-term borrowings | 4,607 | 37,897 | 8,504 | 102,018 |
Borrowed funds | 12,321 | 0 | 59,496 | 33,797 |
| | | | | |
Total interest expense | 604,375 | 684,084 | 1,787,748 | 2,189,119 |
| | | | | |
Net interest income | 1,695,702 | 1,386,173 | 4,751,387 | 4,070,697 |
Provision for loan losses | 575,000 | 150,000 | 725,000 | 450,000 |
| | | | | |
Net interest income after provision for loan losses | 1,120,702 | 1,236,173 | 4,026,387 | 3,620,697 |
| | | | | |
OTHER INCOME: | | | | |
| | | | | |
Service charges on deposit accounts | 180,820 | 111,344 | 430,621 | 293,715 |
Loan fees | 70,151 | 45,097 | 173,085 | 87,626 |
Mortgage underwriting fees - Secondary market | 1,163 | 99,890 | 85,443 | 440,138 |
Loan servicing fee income | 34,453 | 135,410 | 139,888 | 461,587 |
Gain on sale of loans | 28,629 | 282,540 | 127,954 | 864,114 |
Commissions and managed fees | 103,399 | 79,945 | 308,370 | 243,679 |
Other operating income | 107,793 | 84,186 | 288,388 | 245,390 |
| | | | | |
Total other income | 526,408 | 838,412 | 1,553,749 | 2,636,249 |
| | | | | |
OPERATING EXPENSES: | | | | |
| | | | | |
Salaries and related benefits | 861,250 | 801,418 | 2,535,930 | 2,294,789 |
Net occupancy expense | 92,056 | 79,588 | 290,842 | 221,464 |
Equipment rentals, depreciation, and maintenance | 115,667 | 104,324 | 335,571 | 292,849 |
Data processing | 68,028 | 51,092 | 206,035 | 162,133 |
Other operating expenses | 291,217 | 293,316 | 869,111 | 846,587 |
| | | | | |
Total operating expenses | 1,428,218 | 1,329,738 | 4,237,489 | 3,817,822 |
| | | | | |
Income before provision for income taxes | 218,892 | 744,847 | 1,342,647 | 2,439,124 |
Provision for income taxes | 23,600 | 233,169 | 346,285 | 779,493 |
| | | | | |
Net income | $ 195,292 | $ 511,678 | $ 996,362 | $ 1,659,631 |
Basic and diluted earnings per common share | $0.35 | $0.93 | $1.79 | $3.00 |
Dividends per common share | $0.00 | $0.00 | $0.46 | $0.46 |
See accompanying notes to consolidated financial statements
4
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| | Nine Months Ended
September 30, 2004 | Nine Months Ended
September 30, 2003 |
| | Shares | Equity Total | Shares | Equity Total |
| | | | | |
Balance – Beginning of period | 580,769 | $ 16,979,355 | 575,557 | $ 15,355,139 |
| | | | | |
Issuance of common stock | 5,275 | $ 165,892 | 5,212 | $ 137,953 |
Purchase of treasury stock | |
$ (3,920) |
|
$ (48,000) |
Comprehensive income: | | | | |
Net income | | $ 996,362 | | $ 1,659,631 |
Other comprehensive income - Change in net unrealized gain on securities available for sale | |
(64,496) | |
(57,177) |
| | | | | |
Total comprehensive income | | 931,866 | | 1,602,454 |
| | | | | |
Dividends paid | | 256,571 | | 254,741 |
| | | | | |
Balance - End of period | 586,044 | $ 17,816,622 | 580,769 | $ 16,792,805 |
| | | | | |
See accompanying notes to consolidated financial statements
5
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
| | Nine Months Ended September 30, 2004 | Nine Months Ended September 30, 2003 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
Net income | $ 996,362 | $ 1,659,631 |
Adjustments to reconcile net income to net cash | | |
provided by operating activities: | | |
Depreciation and amortization | 270,167 | 235,626 |
Accretion of discounts on securities | 6,132 | ( 11,626) |
Amortization of premiums on securities | 1,199 | 8,788 |
Provision for loan losses | 725,000 | 450,000 |
Stock dividend on other investments at cost | (18,000) | (21,800) |
Proceeds from sales of loans held for sale | 22,403,467 | 100,587,175 |
Originations of loans held for sale | (21,867,013) | (99,395,661) |
Gain on sale of loans held for sale | (127,954) | (864,114) |
Change in other operating assets and liabilities | | |
Mortgage servicing rights | 210,362 | (234,810) |
Other assets | (127,879) | (97,145) |
Other liabilities | 287,502 | 126,201 |
| | | |
Total adjustments | 1,762,983 | 782,634 |
| | | |
Net cash provided by operating activities | 2,759,345 | 2,442,265 |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Proceeds from maturities of securities available for sale | 1,522,081 | 2,457,437 |
Purchase of securities available for sale | (3,475,729) | 0 |
Net increase in loans | (17,561,151) | (11,290,324) |
Purchase of additional life insurance | 0 | (681,100) |
Capital expenditures | (261,936) | (547,106) |
Purchase of investment at cost | 0 | (37,000) |
| | | |
Net cash used in investing activities | (19,776,735) | (10,098,093) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Net increase in deposits | 11,034,639 | 9,282,911 |
Net decrease in short-term borrowings | (49,544) | (433,868) |
Principal payments on borrowed funds | (2,000,000) | (2,000,000) |
Proceeds from borrowed funds | 3,000,000 | 0 |
Director and employee stock purchase plans | 165,892 | 137,953 |
Dividends paid Purchase of treasury stock | (256,571) (3,920) | (254,741) (48,000) |
| | | |
Net cash provided by financing activities | 11,890,496 | 6,684,255 |
| | | |
Net decrease in cash and cash equivalents | (5,126,894) | (971,573) |
Cash and cash equivalents at beginning | 16,542,020 | 17,275,228 |
| | | |
Cash and cash equivalents at end | $ 11,415,126 | $16,303,655 |
| | | |
Supplemental information: | | |
Cash paid during the period for: | | |
Interest | $ 1,752,483 | $ 2,070,200 |
Income taxes | $ 439,041 | $ 792,016 |
Loans transferred to other real estate | $ 208,888 | $ 149,004 |
See accompanying notes to consolidated financial statements
6
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, 2003 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.
Certain reclassifications have been made to 2003 consolidated financial statements to conform to 2004 classifications.
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 557,762 for the three months ended September 30, 2004 and 553,159 for the three months ended September 30, 2003. The weighted average number of shares outstanding was 557,378 for the nine months ended September 30, 2004 and 553,142 for the nine months ended September 30, 2003. The basic and diluted earnings per share were the same for both periods in 2004 and 2003.
NOTE 2: CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements contained in the Company's Annual Report on Form 10-KSB and updated as necessary in its Quarterly Reports on Form 10-QSB. Certain accounting policies involve significant judgments and assumptions by management which may have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of the operations of the Company.
Management considers the following to be those accounting policies that require significant judgments and assumptions:
Allowance for Loan Losses
The allowance for loan losses is determined using a methodology which reserves currently for those loans in which it is determined that a loss is probable based on characteristics of the individual loan, historical loss patterns of similar "homogeneous" loans and environmental factors unique to each measurement date. This reserving methodology has the following components:
Specific Reserve. The amount of specific reserves is determined through a loan-by-loan analysis of
7
problem loans over a minimum size that considers expected future cash flows, the value of collateral and other factors that may impact the borrower's ability to make payments when due. Included in this group are those non-accrual or renegotiated loans that meet the criteria as being "impaired" under the definition in SFAS 114. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Problem loans also include those credits that have been internally classified as credits requiring management's attention due to underlying problems in the borrower's business or collateral concerns. Ranges of loss are determined based on best-and worst-case scenarios for each loan.
Collective Loan Impairment. This component of the allowance for loan losses is based on the following:
The Company makes a significant number of loans, which due to their underlying similar characteristics, are assessed for loss as "homogeneous" pools. Included in the homogeneous pools are loans from the retail sector and commercial loans under a certain size, which have been excluded from the specific reserve allocation previously discussed. The Company segments the pools by type of loan and uses historical loss information estimates on each of the total loan type portfolio pools as a loss reserve for each pool. In previous quarters we had used the historical loss information estimates on the total loan portfolio as a loss reserve for each pool. We changed this to be more accurate in our loss percentages.
The Company's senior lending management also allocates reserves for environmental conditions which are unique to the measurement period. These include environmental factors, such as economic conditions in certain geographical or industry segments of the portfolio, economic trends in the retail lending sector and peer-group loss history. Reserves allocated are based on estimates of loss that senior lending management has isolated based on these economic trends or conditions.
The Company has not substantively changed any aspect to its overall approach in the determination of the allowance for loan losses. Except as described above, there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated.
Mortgage Servicing Rights
Mortgage servicing rights (MSR's) are established on loans (primarily mortgage loans) that we originate and sell, but continue to service as we collect the payments. The estimated value of MSR's 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, MSR's are amortized. Net servicing revenues and newly originated MSR's 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. Management does not intend to sell mortgage servicing rights.
Determining the Amount of Current and Deferred Income Taxes
The determination of current and deferred income taxes is based on complex analysis of many factors, including interpretation of federal and state income tax laws, the difference between tax and financial reporting of reversals of temporary differences and current accounting standards. The federal and state taxing authorities who make assessments based on their determination of tax laws periodically review the Company’s interpretation of federal and state tax laws. Tax liabilities could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities based on the completion of taxing authority examinations.
NOTE 3: 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 is as follows:
8
| | Notional Amount |
| | September 30, 2004 | December 31, 2003 |
| | | |
Commitments to extend credit | $13,827,000 | $11,296,000 |
Credit card arrangements | 1,311,000 | 1,402,000 |
Standby letters of credit | 1,124,000 | 1,525,000 |
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.
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 any 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, 2004 were $1,246,000.
9
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4: ACCOUNTING CHANGES-Securities Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 105, “Application of Accounting Principles to Loan Commitments” was issued on March 9, 2004 and is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. SAB No. 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding expected future cash flows related to the customers relationship or loan servicing. Because of the SAB’s limit on the types of cash flows that can be considered in the fair-value measurement, mortgage-loan commitments could be recognized as liabilities if the guaranteed rate in the commitment is less than the market interest rate. In addition, SAB No. 105 requires registrants to disclose their accounting policy for loan commitments pursuant to APB Opinion No. 22, including methods and assumptions used to estimate fair value and any associated hedging strategies, as required by Statement No. 107, Statement No. 133 and Item No. 305 of Regulation S-K (Quantitative and Qualitative Disclosures About Market Risk). The provisions of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The implementation of this SAB had a minimal impact on the financial condition or the results of operations of the Company.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
Item 2:
SELECTED QUARTERLY FINANCIAL DATA
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2004 | 2003 | | 2004 | 2003 |
| | | | | | |
Net Earnings | $ 195,292 | $ 511,678 | | $996,362 | $1,659,631 |
Average Consolidated Balance Sheet Items: | | | | | |
Loans | 145,120,580 | 121,975,221 | | 137,896,528 | 119,747,400 |
Taxable Investment Securities | 4,920,422 | 3,213,451 | | 4,099,494 | 4,053,836 |
Fed Funds Sold | 340,931 | 7,970,125 | | 1,423,077 | 4,669,751 |
Municipal Loans & Investments | 10,044,817 | 10,433,373 | | 10,046,016 | 10,496,917 |
Other Earning Assets | 1,019,875 | 7,929,792 | | 1,921,264 | 8,063,937 |
Total Earning Assets | 161,446,625 | 151,521,962 | | 155,386,379 | 147,031,841 |
Total Assets | 178,233,041 | 167,540,834 | | 172,791,099 | 161,276,979 |
Deposits | 132,416,609 | 118,107,110 | | 128,117,105 | 114,677,683 |
Shareholders’ Equity | 17,923,779 | 16,669,656 | | 17,587,275 | 16,272,056 |
| | | | | | |
Key Ratios: | | | | | |
Average Equity to Average Total Assets | 10.06% | 9.95% | | 10.18% | 10.09% |
Return on Average Total Assets | .44% | 1.21% | | .77% | 1.38% |
Return on Average Equity | 4.33% | 12.18% | | 7.57% | 13.64% |
Net Interest Margin | 4.18% | 3.63% | | 4.07% | 3.70% |
| | | | | | |
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 22% to $1,695,702 for the three months ended September 30, 2004, from $1,386,173 for the three months ended September 30, 2003. Net interest income has increased 17% to $4,751,387 for the nine months ended September 30, 2004, from $4,070,697 for the nine months ended September 30, 2003. Of this increase, $484,473 was attributable to volume and $196,217 was attributable to a change in interest rates. Approximately $48,000 of the volume is due to collection of interest on a non-accrual loan. As noted above, average assets for the nine months ended September 30, 2004 were $172,791,099 compared to average assets for the nine months ended September 30, 2003 of $161,276,979.
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30 |
| | 2004 | 2003 | 2004 | 2003 |
| | | | | |
Interest Income | $ 2,300,077 | $ 2,070,257 | $ 6,539,135 | $ 6,259,816 |
Interest Expense | 604,375 | 684,084 | 1,787,748 | 2,189,119 |
Net Interest Income | $ 1,695,702 | $ 1,386,173 | $ 4,751,387 | $ 4,070,697 |
| | | | | |
Net Interest Margin | 4.18% | 3.63% | 4.07% | 3.70% |
| | | | | |
11
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, 2004 is illustrated in the following table:
Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003.
| | Increase (Decrease) in Net Interest Income |
| Net Change | Due To Rate | Due To Volume |
Interest Income | $ 229,820 | $ (36,765) | $ 266,585 |
Interest Expense | (79,709) | (132,743) | 53,034 |
Net Interest Income | $ 309,529 | $ 95,978 | $ 213,551 |
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003.
| | Increase (Decrease) in Net Interest Income |
| Net Change | Due To Rate | Due To Volume |
Interest Income | $ 279,319 | $ (381,933) | $ 661,252 |
Interest Expense | (401,371) | (578,150) | 176,779 |
Net Interest Income | $ 680,690 | $ 196,217 | $ 484,473 |
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, 2004 compared to the three months and nine months ended September 30, 2003. For the three months ended September 30, 2004 and 2003, average earning assets had an average yield of 5.67% and 5.42%, respectively. For the nine months ended September 30, 2004 and 2003, average earning assets had an average yield of 5.61% and 5.69% respectively. For the three months ended September 30, 2004 and 2003, average interest bearing liabilities had an average rate of 1.77% and 2.23%, respectively. For the nine months ended September 30, 2004 and 2003, average interest bearing liabilities had an average rate of 1.81% and 2.47%, respectively. Average earning assets increased 6.5% to $161,446,625 for the three months ended September 30, 2004 compared to $151,521,962 for the three months ended S eptember 30, 2003. Average earning assets increased 5.7% to $155,386,379 for the nine months ended September 30, 2004 compared to the $147,031,841 for the nine months ended September 30, 2003. Interest bearing liabilities increased 11.6% to $135,749,644 for the three months ended September 30, 2004 compared to $121,607,195 for the three months ended September 30, 2003. Interest bearing liabilities increased 11.1% to $131,821,565 for the nine months ended September 30, 2004 compared to $118,635,089 for the nine months ended September 30, 2003.
OPERATING RESULTS
Net income for the three months ended September 30, 2004, was $195,292 compared to $511,678 for the three months ended September 30, 2003. The decrease of $316,386 reflects a $500,000 provision for loan losses made for the third quarter above and beyond the normal monthly loan loss provisions, as well as decreases in loan servicing fee income, mortgage underwriting fees-secondary market and gain on sale of loans resulting from the general slow down in the mortgage refinancing market during 2004 from the record levels experienced in 2003. On October 26, 2004, the Board of Directors of the Company’s wholly-owned subsidiary, Bank of Luxemburg, authorized an additional provision for loan losses of $500,000 above and beyond the normal monthly loan loss provision. The additional provision relates to commercial loans to two separate customers and was taken in response to a recent regulatory examination. The additional charge is reflecte d in operating results for the Company’s third fiscal quarter and is not expected to result in any future cash expenditures by the Company. Gain on sale of loans, loan service fee income and mortgage underwriting fees-secondary market decreased $253,911, $100,957, and $98,727 respectively for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The increase in net interest income of $309,529 for the three months ended September 30, 2004, compared to the three months ended September 30, 2003 is discussed in “Net Interest Income” and “Rate/Volume Analysis” elsewhere in this report.
Total operating expenses increased 7.4% from $1,329,738 for the three months ended September 30, 2003 to $1,428,218 for the three months ended September 30, 2004. Salaries and related benefits increased 7.5% to $861,250 for the three months ended September 30, 2004 compared to $801,418 for the three months ended September 30, 2003. Increases over 2003 salaries were due to the following: annual raises, the addition of
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three full-time equivalent employees, annual increase in insurance and more employees using health insurance benefits. Data processing expense increased $16,936 or 33.1% to $68,028 for the three months ended September 30, 2004 compared to $51,092 for the three months ended September 30, 2003. The increase was primarily due to data processing expenses related to outsourcing statement production and increased automated teller machine expenses.
Net income for the nine months ended September 30, 2004, was $996,362 compared to $1,659,631 for the nine months ended September 30, 2003. The decrease of $663,269 reflects the $500,000 provision for loan losses made for third quarter above and beyond the normal monthly loan loss provisions and also the decreases in loan servicing fee income, mortgage underwriting fees-secondary market and gain on sale of loans resulting from the general slow down in the mortgage refinancing market during 2004 from the record levels experienced in 2003. Gain on sale of loans, loan service fee income and mortgage underwriting fees-secondary market decreased $736,160, $321,699, and $354,695 respectively for the nine months ended September 30, 2004 versus the comparable period in 2003. The increase in net interest income of $405,690 for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003 is discussed in “Net Interest I ncome” and “Rate/Volume Analysis” elsewhere in this report.
Total operating expenses increased 11.0% from $3,817,822 for the nine months ended September 30, 2003 to $4,237,489 for the nine months ended September 30, 2004. Salaries and related benefits increased 10.5% to $2,535,930 for the nine months ended September 30, 2004 compared to $2,294,789 for the nine months ended September 30, 2003. Increases over 2003 salaries were due to the following: annual raises, the addition of five full-time equivalent employees, annual increase in insurance and more employees using health insurance. Net occupancy expense increased 31.3% from $221,464 for the nine months ended September 30, 2003 to $290,842 for the nine months ended September 30, 2004 mostly due to the addition of the Algoma and the Forestville branches in late 2003 and early 2004, respectively. Data processing expense increased 27.1% to $206,035 for the nine months ended September 30, 2004 compared to $162,133 for the nine months ended September 3 0, 2003. Equipment rentals, depreciation, and maintenance for the nine months ended September 30, 2004 increased 14.6% to $335,571 compared to $292,849 for the nine months ended September 30, 2003. Other operating expenses for the nine months ended September 30, 2004 increased 2.7% to $869,111 from $846,587 for the nine months ended September 30, 2003.
STATE INCOME TAX AUDIT
Like many financial institutions located in Wisconsin, the Bank transferred investment securities to a Nevada investment subsidiary, which now holds and manages those assets. The investment subsidiary has not filed returns with, or paid income or franchise taxes to, the State of Wisconsin. The Wisconsin Department of Revenue (the “Department”) recently implemented a program to audit Wisconsin financial institutions which formed investment subsidiaries located in Nevada. The Department has generally indicated that it will assess income or franchise taxes on the income of the Nevada investment subsidiaries of Wisconsin banks. The Bank is currently undergoing such an audit; however, the Department has not yet issued an assessment to the Bank.
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. 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, 2004 the Company had loans of $8,000 past due 90 days or more that were still accruing interest as compared to $10,000 for September 30, 2003. At September 30, 2004 the Company had two loans that met the definition of “Troubled Debt Restructuring”. At September 30, 2003 the Company had one loan
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that met the definition of “Troubled Debt Restructuring”. At September 30, 2003 the Company had five loans considered impaired for $800,000 under SFAS Nos 114 & 118. Nine loans were considered to be impaired for $1,168,000 under SFAS Nos. 114 & 118 as of September 30, 2004. The Bank had $1,517,000 of non-accrual loans at September 30, 2004 and $4,303,000 of non-accrual loans at September 30, 2003.
During the three months ended September 30, 2004 and September 30, 2003, $575,000 and $150,000 was charged to the provision for loan losses. On October 26, 2004, the Board of Directors of the Company’s wholly-owned subsidiary, Bank of Luxemburg, authorized an additional provision for loan losses of $500,000 above and beyond the normal monthly loan loss provision. The additional provision relates to commercial loans to two separate customers and was taken in response to a recent regulatory examination. At September 30, 2004 the allowance was $1,692,000 or 1.13% of total loans. This compares to an allowance of $1,829,000 or 1.43% of total loans as of September 30, 2003. For the three months ended September 30, 2004 the Bank had net charge-offs of $727,000 compared to net charge-offs of $63,000 for the three months ended September 30, 2003. For the nine months ended September 30, 2004 the Bank had net charge-offs of $913,000 c ompared to net charge-offs of $90,000 for the nine months ended September 30, 2003.
The following table summarizes loan charge-offs and recoveries by type of loan for the three months ended September 30, 2004 and 2003:
Loan Type | September 30, 2004 | September 30, 2003 |
| | Charge-Off | Recovery | Charge-Off | Recovery |
| | | | | |
Real Estate | $ 0 | $ 0 | $ 19,000 | $ 0 |
Commercial and Industrial | 730,000 | 0 | 42,000 | 0 |
Agricultural | 0 | 0 | 0 | 0 |
Consumer | 7,000 | 10,000 | 8,000 | 6,000 |
| | | | | |
TOTALS | $ 737,000 | $ 10,000 | $ 69,000 | $ 6,000 |
The following table summarizes loan charge-offs and recoveries by type of loan for the nine months ended September 30, 2004 and 2003:
Loan Type | September 30, 2004 | September 30, 2003 |
| | Charge-Off | Recovery | Charge-Off | Recovery |
| | | | | |
Real Estate | $ 0 | $ 0 | $ 19,000 | $ 1,000 |
Commercial and Industrial | 905,000 | 0 | 81,000 | 0 |
Agricultural | 0 | 0 | 0 | 0 |
Consumer | 25,000 | 17,000 | 22,000 | 31,000 |
| | | | | |
TOTALS | $ 930,000 | $ 17,000 | $ 122,000 | $ 32,000 |
| | | | | |
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The Bank has allocated its allowance for loan losses at the end of each period presented as follows:
| | September 30, 2004 | September 30, 2003 |
| | | |
Balance at End of Period Applicable to: |
Amount | % of Loans to Total Loans |
Amount | % of Loans to Total Loans |
| | | | | |
Commercial and agricultural | $ 329,000 | 69% | $ 115,000 | 67% |
Real Estate-construction | 0 | 3% | 6,000 | 3% |
Real Estate-mortgage | 0 | 12% | 24,000 | 13% |
Consumer | 123,000 | 16% | 30,000 | 17% |
Total Domestic | 452,000 | 100% | 175,000 | 100% |
| | | | | |
National & Local Economic Trend Allocation |
50,000 | |
0 | |
Specific Loan Allocation | 1,168,000 | | 865,000 | |
Unallocated | 22,000 | | 789,000 | |
| | | | | |
TOTALS | $ 1,692,000 | 100% | $ 1,829,000 | 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 $340,931 and $7,970,125 for the three months ended September 30, 2004 and 2003, respectively. T he Company has shifted from a Federal Funds Sold position to a Federal Funds Purchased position for the majority of days in the third quarter of 2004. Federal Funds Purchased have averaged $836,645 for the third quarter of 2004. 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, 2004 the Company’s rate sensitive assets exceed rate sensitive liabilities due within one year by $1,952,000 based on certain assumptions.
The Company experienced a decrease in cash and cash equivalents, its primary source of liquidity, of $5,126,894 for the nine months ended September 30, 2004. The primary source of cash flow for the nine months ended September 30, 2004 was cash provided by financing activities of $11,890,496 which consisted primarily of an increase in deposits of $11,034,639. Cash outflow for the nine months ended September 30, 2004 was primarily due to an increase in loans of $17,561,151. 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.
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The following table illustrates the projected maturities and the repricing mechanisms of the major asset/liability categories of the Company as of September 30, 2004, 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 | $ 942,000 | | | |
Investment Securities | $ 1,112,000 | $ 7,175,000 | $ 4,069,000 | $ 819,000 |
Loans | | | | |
Variable Rate | $ 33,477,000 | $ 3,236,000 | $ 1,185,000 | |
Real Estate- Construction | $ 4,350,000 | $ 103,000 | $ -0- | $ -0- |
Real Estate-Other | $ 17,844,000 | $ 72,000 | $ -0- | $ 165,000 |
Commercial and Industrial | $ 20,220,000 | $29,875,000 | $ 296,000 | $ 2,646,000 |
Agricultural | $ 3,603,000 | $ 4,885,000 | $ 20,000 | $ 217,000 |
Consumer | $ 3,951,000 | $19,409,000 | $ 305,000 | $ 53,000 |
Municipal | $ 12,000 | $ 416,000 | $ 1,936,000 | $ -0- |
Other | $ 558,000 | $ -0- | $ -0- | $ -0- |
| | | | | |
Total Interest Earning Assets | $ 86,069,000 | $65,171,000 | $ 7,811,000 | $ 3,900,000 |
| | | | | |
Interest Bearing Liabilities: | | | | |
Interest Bearing Demand | | | | $ 9,539,000 |
Savings Deposits | $ 11,092,000 | | | $ 25,881,000 |
Money Market Accounts | $ 1,735,000 | | | $ 4,048,000 |
Certificates of Deposit | $ 47,321,000 | $ 9,013,000 | | |
Jumbo CD’s | $ 21,748,000 | $ 3,838,000 | | |
Other | $ 2,221,000 | $ 1,000,000 | -0- | -0- |
| | | | | |
Total Interest Bearing Liabilities | $ 84,117,000 | $13,851,000 | -0 | $ 39,468,000 |
| | | | | |
Interest Sensitivity Gap per Period | $ 1,952,000 | $51,320,000 | $ 7,811,000 | $(35,568,000) |
| | | | | |
Cumulative Interest Sensitivity Gap | $ 1,952,000 | $53,272,000 | $ 61,083,000 | $ 25,515,000 |
| | | | | |
Interest Sensitivity Gap as a | | | | |
Percentage of Earning Assets | 1.2% | 31.5% | 4.8% | (21.8%) |
| | | | | |
Cumulative Sensitivity Gap as a | | | | |
Percentage of Earning Assets | 1.2% | 32.7% | 37.5% | 15.7% |
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2004, there have been no substantive changes with respect to the Company’s off-balance sheet activities. See Note 2 to the Consolidated Financial Statements for a description of the Company’s financial instruments with off-balance sheet risk. Based upon the off-balance sheet arrangements with which it is presently involved, the Company does not believe that such off-balance sheet arrangements either have, or are reasonably likely to have, a material impact on its current or future financial condition, results of operations, liquidity or capital.
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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 Exchange Act) as of September 30, 2004. 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.
There were no significant changes in the Company’s internal controls over financial reporting identified in connection with the evaluation discussed above that occurred during the Company’s last fiscal quarter that had materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended, the Company did not sell any equity securities which were not registered under the Securities Act or repurchase any of its equity securities.
Item 6. Exhibits
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 |
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 10, 2004_________ Date __November 10, 2004_________________
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