UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington. D. C. 20549
Form 10-QSB/A
Amendment No. 1
To
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 March 31, 2005 | |
[ ] | 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 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | 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 of the issuer’s classes of common equity, as of April 30, 2005:
560,635 shares were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A (“Amendment #1”) is being filed by Luxemburg Bancshares, Inc. to amend our quarterly report on Form 10-QSB for the quarterly period ended March 31, 2005 filed with the Securities and Exchange Commission (“SEC”) on May 12, 2005 (the “Initial Report”). Amendment No. 1 relates to a description of the terms of a Memorandum of Understanding entered into by the Company’s wholly-owned subsidiary, the Bank of Luxemburg (the “Bank”), with the Wisconsin Department of Financial Institutions and the Federal Deposit Insurance Corporation and management’s restated assessment of our disclosure controls and procedures as of March 31, 2005. This restatement of our assessment related to a material weakness in our disclsoure controls and procedures related to the determination of the loan loss provision of the Bank.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Item 2 and Item 3 of Part I of the Initial Report are hereby deleted in their entirety and replaced with Item 2 and Item 3 of Part I included herein, and Part II is amended to add the exhibits set forth in such exhibit list included herein. This Amendment No. 1 does not change our previously reported financial statements and other financial disclosures contained in our Initial Report.
PART I - FINANCIAL INFORMATION
Item2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
Three Months Ended March 31,
2005 | 2004 |
Net Earnings | $ 622,320 | $ 362,890 |
Average Consolidated Balance Sheet Items: | ||
Loans | 146,748,371 | 128,963,956 |
Taxable Investment Securities | 5,566,603 | 3,153,606 |
Fed Funds Sold | 315,667 | 3,425,231 |
Municipal Loans & Investments | 10,761,229 | 10,453,078 |
Other Earning Assets | 1,061,977 | 2,864,632 |
Total Earning Assets | 164,453,847 | 148,860,503 |
Total Assets | 177,750,381 | 166,904,562 |
Interest Bearing Deposits | 132,166,397 | 125,650,167 |
Borrowings | 3,505,466 | 2,855,459 |
Shareholders’ Equity | 18,293,549 | 17,402,603 |
Key Ratios: | ||
Average Equity to Average Total Assets | 10.29% | 10.43% |
Return on Average Total Assets | 1.42% | .87% |
Return on Average Equity | 13.80% | 8.39% |
Net Interest Margin | 4.48% | 4.08% |
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 20.4% to $1,815,820 for the three months ended March 31, 2005 from $1,508,592 for the three months ended March 31, 2004. The net interest income increased $160,669 due to volume and increased $146,559 due to an increase in the interest rates. Approximately $66,000 of the rate increase is due to collection of interest on a non-accrual loan portfolio. As noted above, average assets for the three months ended March 31, 2005 were $177,750,381 compared to average assets for the three months ended March 31, 2004 of $166,904,562.
Three Months Ended March 31, | ||
2005 | 2004 | |
Interest Income | $ 2,488,807 | $ 2,099,448 |
Interest Expense | 672,987 | 590,856 |
Net Interest Income | $ 1,815,820 | $ 1,508,592 |
Net Interest Margin | 4.48% | 4.08% |
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income for the three months ended March 31, 2005 is illustrated in the following table:
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004.
Increase in Net Interest Income | |||
Net Change | Due To Rate | Due To Volume | |
Interest Income | $ 389,359 | $ 202,292 | $ 187,067 |
Interest Expense | 82,131 | 55,733 | 26,398 |
Net Interest Income | $ 307,228 | $ 146,559 | $ 160,669 |
Interest rates on the Bank’s average earning assets and interest bearing liabilities were generally higher for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Average earning assets had an average yield of 6.14% at March 31, 2005 as compared to 5.67% at March 31, 2004. Average interest bearing liabilities had an average rate of 2.01% at March 31, 2005 as compared to 1.85% at March 31, 2004. Average earning assets increased 10.5% to $164,453,847 for the three months ended March 31, 2005 compared to $148,860,503 for the three months ended March 31, 2004. Interest bearing liabilities increased 5.6% to $135,671,863 for the three months ended March 31, 2005 compared to $128,505,626 for the three months ended March 31, 2004.
OPERATING RESULTS
Net income for the three months ended March 31, 2005, was $622,320 compared to $362,890 for the three months ended March 31, 2004. The increase of $259,430 reflects a gain on sale of securities of $192,892. The gain on sale of securities included $181,792 that related to the Pulse/Discover merger payout for the shares of the previously issued Tyme Corporation stock, which was owned by the bank. The increase in net interest income of $307,228 for the three months ended March 31, 2005, compared to the three months ended March 31, 2004 is discussed in “Net Interest Income” and “Rate/Volume Analysis” elsewhere in this report.
Total operating expenses increased 12.8% from $1,352,450 for the three months ended March 31, 2004 to $1,525,681 for the three months ended March 31, 2005. Salaries and related benefits increased 7.9% to $883,197 for the three months ended March 31, 2005 compared to $818,471 for the three months ended March 31, 2004. Increases over 2004 salaries were due to the following: annual raises, the addition of 3 full-time equivalent employees, annual increase in insurance and more employees using health insurance benefits. Other operating expenses for the three months ended March 31, 2005 increased 40.9% to $373,874 from $265,373 for the three months ended March 31, 2004 because of increases in other real estate expenses, accounting fees, and other professional fee expenses. The increase in accounting fees and professional fees can be tied to increased regulation under the Sarbanes-Oxley Act.
ALLOWANCE FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Company 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. Company 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 entirely to borrowers in Northeast Wisconsin with the exception of purchased loans.
The Company 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 Company also places loans on a non-accrual status when it deems the collection of such interest unlikely. Loans are 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 Company deems its collateral position adequate to warrant a return to accrual status.
At March 31, 2005 the Company had $8,000 in loans past due 90 days or more that were still accruing interest as compared to $63,000 for March 31, 2004. At March 31, 2005 the Company had one loan that met the definition of troubled debt restructuring contained in SFAS No. 15. In 2004 the Company had two loans that met the definition of troubled debt restructuring contained in SFAS No. 15. In addition, for each period ending as of March 31, 2005 and March 31, 2004 seven loans total were considered to be impaired under SFAS Nos 114 and 118. The Bank had $968,000 of non-accrual loans at March 31, 2005, $1,782,000 at December 31, 2004 and $2,703,000 of non-accrual loans at March 31, 2004.
During the three months ended March 31, 2005, $105,000 was charged to the provision for loan losses compared to $75,000 for the three months ended March 31, 2004. At March 31, 2005 the allowance was $2,182,835 or 1.47% of total loans. This compares to an allowance of $1,950,739 or 1.40% of total loans as of March 31, 2004. For the three months ended March 31, 2005 the Company had net charge-offs of $22,000 compared to net charge offs of $4,000 for the three months ended March 31, 2004.
The following table summarizes loan charge-offs and recoveries by type of loan for the three months ended March 31, 2005 and 2004:
Loan Type | March 31, 2005 | March 31, 2004 | ||
Charge-Off | Recovery | Charge-Off | Recovery | |
Real Estate | 0 | 0 | 7,000 | 0 |
Commercial and Industrial | 0 | 0 | 7,000 | 0 |
Agricultural | 0 | 0 | 0 | 0 |
Consumer | 28,000 | 6,000 | 2,000 | 5,000 |
TOTALS | $ 28,000 | $ 6,000 | $9,000 | $5,000 |
The Bank has allocated its allowance for loan losses at the end of each period presented as follows:
March 31, 2005 | March 31, 2004 | ||||
% of | % of | ||||
Loans to | Loans to | ||||
Balance at End of Period Applicable to: | Total | Total | |||
Amount | Loans | Amount | Loans | ||
Commercial and agricultural | $332,000 | 68% | $189,000 | 70% | |
Real estate-construction | 2,000 | 3% | 6,000 | 2% | |
Real estate-mortgage | 8,000 | 13% | 33,000 | 12% | |
Consumer | 69,000 | 16% | 45,000 | 16% | |
Total Domestic | 411,000 | 273,000 | |||
Specific Loan Allocation | 1,160,000 | 1,063,000 | |||
Unallocated | 612,000 | 615,000 | |||
TOTALS | $ 2,183,000 | 100% | $ 1,951,000 | 100% | |
The unallocated allowance for loan losses includes reserve allocations related to commercial loan growth, changes in lending policy and procedures, levels and trends for delinquency and non-accruals, national and local economic trends and the experience and ability of the loan department.
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, 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 $315,667 and $3,425,231 for the three months ended March 31, 2005 and 2004, 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 Company 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 Company 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 Company also monitors the assets and liabilities that reprice each month to determine the impact on future earnings from anticipated repricings. At March 31, 2005 the Company’s rate sensitive liabilities exceed rate sensitive assets due within one year by $17,443,000.
The Company experienced a decrease in cash and cash equivalents, its primary source of liquidity, of $3,991,879 for the three months ended March 31, 2005. The primary source of cash flow for the three months ended March 31, 2005 was cash provided by a decrease in loan principal of $2,075,343. Cash outflow for the three months ended March 31, 2005 was primarily used for financing activities, specifically decrease in deposits of $6,425,597 and principal payments on borrowed funds of $1,000,000. 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 March 31, 2005, 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 | $ 1,114,000 | |||
Investment Securities | 3,459,000 | $ 4,906,000 | $ 3,520,000 | $ 1,699,000 |
Loans | ||||
Variable Rate | 15,168,000 | 14,435,000 | 698,000 | 2,679,000 |
Real Estate-Construction | 4,019,000 | 223,000 | ||
Real Estate-Other | 6,092,000 | 13,091,000 | 206,000 | 311,000 |
Commercial and Industrial | 24,801,000 | 26,869,000 | 279,000 | 2,030,000 |
Agricultural | 3,627,000 | 5,509,000 | 358,000 | 1,164,000 |
Consumer | 3,813,000 | 18,445,000 | 552,000 | 73,000 |
Municipals | 43,000 | 309,000 | 1,961,000 | -0- |
Other | 570,000 | -0- | -0- | -0- |
Total Interest Earning Assets | $ 62,706,000 | $ 83,787,000 | $ 7,574,000 | $ 7,956,000 |
Interest Bearing Liabilities: | ||||
Interest Bearing Demand | $ 8,665,000 | |||
Savings Deposits | $ 11,198,000 | 26,128,000 | ||
Money Market Accounts | 1,471,000 | 3,431,000 | ||
Certificates of Deposit | 47,671,000 | $ 9,080,000 | ||
Jumbo CD’s | 18,521,000 | 3,268,000 | ||
Other | 1,288,000 | 1,000,000 | -0- | -0- |
Total Interest Bearing Liabilities | $ 80,149,000 | $13,348,000 | $ -0- | $38,224,000 |
Interest Sensitivity Gap per Period | $(17,443,000) | $70,439,000 | $ 7,574,000 | $(30,268,000) |
Cumulative Interest Sensitivity Gap | $(17,443,000) | $52,996,000 | $60,570,000 | $ 30,302,000 |
Interest Sensitivity Gap as a | ||||
Percentage of Earning Assets | (10.77)% | 43.47% | 4.67% | (18.68%) |
Cumulative Sensitivity Gap as a | ||||
Percentage of Earning Assets | (10.77)% | 32.71% | 37.38% | 18.70% |
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2005, 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 operation, liquidity or capital.
REGULATORY MATTERS
In December 2004, following a routine regulatory examination by the Wisconsin Department of Financial Institutions (“WDFI”) and the Federal Deposit Insurance Corporation (“FDIC”), the Bank entered into a Memorandum of Understanding (“MOU”) with the WDFI and FDIC. The MOU requires the implementation of certain policies and procedures for the operation of the Bank to improve lending operations and management of the loan portfolio. Specifically, the MOU requires the Bank to: 1) adopt a written plan of action to lessen the Bank’s risk position in each asset aggregating over $100,000 or more and classified as “substandard;” 2) eliminate from its books, by collection, charge-off or otherwise, all assets or portion of assets classified “Loss;” 3) take all steps necessary to eliminate technical exceptions in its supporting loan information identified during the examination; 4) require complete loan d ocumentation, realistic repayment terms and current financial information adequate to support the outstanding indebtedness of each borrower; 5) make a provisions for loan losses to replenish the allowance for loan and lease losses for the loans charged off as a result of the examination and reflecting the potential for further losses in the remaining classified loans and other loans in the portfolio; 6) review the methodology used to calculate the adequacy of the allowance for loan and lease losses and modify the methodology to ensure the level of the allowance is commensurate with the risk in the loan portfolio; 7) cause a written review to be made of the Bank’s staffing requirements, with particular emphasis on its loan administration needs and commence a program or adequately train the number of personnel needed to comply with the results of the review; 8) formulate and implement a written profit plan; 9) correct deficiencies in its interest rate risk management practices identified during the examin ation; 10) correct deficiencies noted in the information technology assessment identified during the examination; 11) amend its June 30, 2004 Reports of Condition and Income (“Call Report”) filed with the FDIC to reflect an adequate provision for loan and lease losses and an allowance for loan and lease losses; 12) have such amended Call Report, provision for loan and lease losses and allowance for loan and lease losses approved by its board of directors; 13) submit quarterly progress reports to the WDFI and FDIC concerning the matters contained in the MOU; and 14) maintain Tier 1 capital of at least 8%.
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 March 31, 2005. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s current disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Management determined that there is a material weakness in the Company 46;s disclosure controls and procedures related to the determination of the Bank’s loan loss provision. In October 2004, in response to a regulatory examination of the Bank, the Bank took an additional charge to its loan loss provision of $500,000, above and beyond its normal monthly provision, related to commercial loans to two separate customers. In addition, as a result of the regulatory examination, the Bank entered into a Memorandum of Understanding with the Wisconsin Department of Financial Institutions and the Federal Deposit Insurance Corporation, as described more fully in Management’s Discussion and Analysis or Plan of Operation.
Management has taken certain action since December 31, 2004 to remediate the material weakness in the Company’s disclosure controls and procedures, and in response to the Memorandum of Understanding, as follows:
· The senior lending officer of the Bank, along with the Credit Analyst, has established an enhanced loan loss analysis that better reflects both the asset quality of the loan portfolio and the character of the Bank’s lending activities; · the Bank contracted with an independent accounting firm to review and make recommendations for improvements to the Bank’s loan grading system, which have since been adopted by the Bank; and · the Bank engaged an independent consulting firm to review its lending operation staffing. The consulting firm made certain staffing recommendations that have been implemented by the Bank, including the addition of an internal credit review officer, the engagement of an external credit review consultant, the addition of a loan compliance processor who is independent from the Bank’s lending function. |
(b)
Except as noted above, 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 6. Exhibits
Exhibits
31.1 Rule 13a-14(a) Certification of CEO and CFO
32.1 Section 1350 Certification of CEO and 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
John A. Slatky,
President and Chief Executive Officer
and Chief Financial Officer
Date: August 18, 2005
