U. S. 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, 1998.
[ ] 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 (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
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 November 11, 1998:
243,501 shares were outstanding.
Transitional Small Business Disclosure Format (check
one): Yes _____ No __X__
LUXEMBURG BANCSHARES, INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income -
Three and Nine Months Ended September
30, 1998 and 1997 4
Consolidated Condensed Statements of
Changes in Stockholders' Equity - Nine
Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flow -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial
Statements 7 - 8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 15
PART I - FINANCIAL INFORMATION
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
September 30, 1998 and December 31, 1997
ASSETS
1998 1997
Cash and due from banks $2,525,893 $3,326,444
Interest-bearing deposits 518,110 639,264
Federal funds sold 6,143,000 1,167,000
Cash and cash equivalents 9,187,003 5,132,708
Investment securities available for 15,935,019 14,113,429
sale-Stated at fair value
Total loans 62,253,862 60,904,981
Allowance for credit losses (753,052) (677,101)
Net loans 61,500,810 60,227,880
Premises and equipment 1,675,984 1,711,350
Other investments at cost 275,050 253,050
Other assets 2,172,459 2,115,831
TOTAL ASSETS $90,746,325 $83,554,248
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
LIABILITIES:
Non-interest-bearing deposits $ 8,458,795 $ 9,103,744
Interest-bearing deposits 71,634,783 63,542,623
Total deposits 80,093,578 72,646,367
Short-term borrowings 190,943 640,002
Borrowed funds 92,103 632,828
Other liabilities 1,030,200 1,106,175
Total liabilities 81,406,824 75,025,372
STOCKHOLDERS' EQUITY:
Common stock- $1.00 par value:
Authorized - 2,400,000 shares, 270,500
Issued - 270,500 shares
Common stock- $.1667 par value:
Authorized - 300,000 shares, 45,083
Issued - 270,500 shares
Capital surplus 3,206,508 3,431,925
Retained earnings 5,964,423 5,293,023
Other comprehensive income - 242,420 103,195
Unrealized gain on investment
securities available for sale -
Net of tax
Less - 26,999 shares of treasury (344,350) (344,350)
common stock, at cost
Total stockholders' equity 9,339,501 8,528,876
TOTAL LIABILITIES AND STOCKHOLDERS' $90,746,325 $83,554,248
EQUITY
See accompanying notes to consolidated financial
statements.
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
Three and Nine Months Ended September 30, 1998 and 1997
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
INTEREST INCOME:
Interest and fees on loans $1,379,032 $1,372,085 $4,056,676 $3,912,117
Interest on investment
securities:
Taxable 163,738 182,186 502,011 536,364
Tax-exempt 56,459 36,098 152,248 95,920
Other interest and dividend 111,074 9,816 213,832 34,379
income
Total interest income 1,710,303 1,600,185 4,924,767 4,578,780
INTEREST EXPENSE:
Deposits 853,193 737,913 2,391,932 2,122,710
Short-term borrowings 4,518 23,106 10,452 50,067
Borrowed funds 9,539 12,159 31,676 25,680
Total interest expense 867,250 773,178 2,434,060 2,198,457
Net interest income 843,053 827,007 2,490,707 2,380,323
Provision for credit losses 37,500 30,000 112,500 90,000
Net interest income after 805,553 797,007 2,378,207 2,290,323
provision for credit
losses
OTHER INCOME:
Service charges on deposit 49,658 50,401 143,146 142,771
accounts
Mortgage underwriting fees - 27,961 50,724 161,942 91,296
Secondary market
Loan servicing fee income 19,267 15,271 58,960 36,544
Other operating income 135,498 113,782 471,926 375,969
Total other income 232,384 230,178 835,974 646,580
OPERATING EXPENSES:
Salaries and related benefits 406,770 374,779 1,189,451 1,092,114
Net occupancy expense 42,134 38,040 125,473 122,651
Equipment rentals, 63,936 60,922 214,413 157,403
depreciation, and maintenance
Data processing 33,498 26,256 90,865 155,473
Other operating expenses 157,279 172,726 478,670 464,805
Total operating expenses 703,617 672,723 2,098,872 1,992,446
Income before provision for 334,320 354,462 1,115,309 944,457
income taxes
Provision for income taxes 92,986 106,857 329,466 279,632
Net income $ 241,334 $ 247,605 $ 785,843 $ 664,825
Basic earnings per common $0.99 $1.02 $3.23 $2.74
share
See accompanying notes to consolidated financial
statements.
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY - (UNAUDITED)
Nine Months Ended September 30, 1998 and 1997
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
Shares Equity Shares Equity
Total Total
Balance - Beginning of period 243,501 $8,528,876 242,736 $7,680,016
Comprehensive income:
Net income 785,843 664,825
Other comprehensive income 139,227 65,723
- Change in net
unrealized gain/loss on
securities available for sale
Total comprehensive income 925,070 730,548
Dividends paid (114,445) (97,220)
Employee stock bonus
315 10,080
Balance - End of period 243,501 $9,339,501 243,051 $8,323,424
See accompanying notes to consolidated financial statements.
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW - (UNAUDITED)
Nine Months Ended September 30, 1998 and 1997
1998 1997
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 785,843 $ 664,825
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 222,799 138,584
Accretion of discounts on ( 23,215) (28,935)
securities
Amortization of premiums on 7,505 22,038
securities
Provision for credit losses 112,500 90,000
Employee stock bonus 10,080
Gain on sale of other real (164)
estate
Gain on sale of premises and (443)
equipment
Credit for deferred taxes (30,600) ( 12,911)
Change in other operating assets (168,935) (197,251)
Change in other operating (22,431) (10,084)
liabilities
Total adjustments 97,459 11,078
Net cash provided by operating 883,302 675,903
activities
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities of 2,167,506 5,070,306
securities available for sale
Purchase of securities available (3,761,846) (5,406,226)
for sale
Net increase in loans (1,385,430) (5,061,871)
Purchase of additional life (17,300) (17,300)
insurance
Proceeds from sale of other real 15,164
estate
Proceeds from sale of premises 1,584
and equipment
Capital expenditures (168,083) (460,914)
Purchase of other investments (22,000) (1,400)
Net cash used in investing (3,171,989) (5,875,821)
activities
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase in deposits 7,447,211 4,822,147
Net increase (decrease) in short- (449,059) 775,605
term borrowings
Loan from (repayment to) FHLMC (500,000) 500,000
Principal payments on borrowed (40,725) (50,022)
funds
Dividends paid (114,445) (97,220)
Net cash provided by financing 6,342,982 5,950,510
activities
Net increase in cash and cash 4,054,295 750,592
equivalents
Cash and cash equivalents at 5,132,708 3,732,501
beginning
Cash and cash equivalents at end $9,187,003 $4,483,093
Supplemental information:
Cash paid during the period for:
Interest $2,601,265 $2,275,105
Income taxes $ 366,515 $ 276,545
The Company entered into capital leases of $73,931 in
1997 for the purchase of computer equipment.
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, 1997 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.
Goodwill acquired in a business acquisition is being
amortized on a straight-line basis over five years.
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 necessary to be in conformity with
generally accepted accounting principles.
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
243,501 in 1998 and 243,051 in 1997. The basic and
diluted earnings per share are the same for 1998 and
1997.
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 is as follows:
Notional Amount
September 30, December 31,
1998 1997
Commitments to extend credit $4,765,000 $3,457,000
Credit card arrangements 603,000 590,000
Standby letters of credit 59,000 100,000
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 Bank
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 Bank to guarantee the performance 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 Bank 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 Bank. Management does not anticipate any
material losses as a result of these letters of credit.
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(UNAUDITED)
NOTE 3: ACCOUNTING CHANGES
In June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprises and
Related Information." This statement establishes
standards for the way that public business enterprises
report information about operating segments in annual
financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to
stockholders. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report
information about major customers. It also amends SFAS
No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure
requirements for previously unconsolidated
subsidiaries. The statement is effective for fiscal
years beginning after December 15, 1997. In the initial
year of application, comparative information for
earlier years is to be restated. This statement need
not be applied to interim financial statements in the
initial year of application. The statement is not
expected to have an effect on the financial position or
operating results of the Company, but may require
additional disclosures in the consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement
requires that all derivative financial instruments be
recognized as either assets or liabilities in the
consolidated balance sheet. Derivative financial
instruments not designated as hedges will be measured
at fair value with changes in fair value being
recognized in earnings in the period of change. If a
derivative is designated as a hedge, the accounting for
changes in fair value will depend on the specific
exposure being hedged. This statement is effective for
fiscal years beginning after June 15, 1999. Management,
at this time, cannot determine the effect the adoption
of this statement may have on the financial statements
of the Company, as the effect is dependent on the
amount and nature of derivatives and hedges held at the
time of adoption of the statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net Earnings $ 241,334 $ 247,605 $ 785,843 $ 664,825
Average Consolidated
Balance Sheet Items:
Loans 58,598,329 58,399,002 57,728,177 56,336,197
Taxable Investment 10,125,982 11,385,419 10,268,149 11,605,020
Securities
Fed Funds Sold 7,480,120 166,033 4,598,180 242,666
Municipal Loans & 5,992,927 4,430,925 5,531,345 4,119,411
Investments
Other Earning Assets 532,755 507,961 588,415 580,975
Total Earning 82,730,113 74,889,340 78,714,266 72,884,269
Assets
Total Assets 88,619,481 80,648,388 84,487,357 78,297,992
Deposits 78,460,120 71,463,836 74,496,788 69,298,202
Shareholders' Equity 9,094,606 8,198,693 8,909,001 8,025,696
Key Ratios:
Average Equity to 10.26% 10.17% 10.54% 10.25%
Average Total Assets
Return on Average 1.09% 1.23% 1.24% 1.13%
Total Assets
Return on Average 10.61% 12.08% 11.76% 11.04%
Equity
Net Interest Margin 4.04% 4.38% 4.23% 4.37%
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 $16,046 or 1.94% to $843,053 for
the three months ended September 30, 1998, from
$827,007 for the three months ended September 30, 1997.
The Company's average yield on earning assets for the
three months ended September 30, 1998 was 8.20%
compared to 8.48% for the three months ended September
30, 1997. This decrease is primarily caused by a mix
shift away from loans and into fed funds sold. Loans
carry the highest interest rate of all earning assets
and fed funds sold one of the lowest. The average rate
paid on interest-bearing deposits, was 4.96% for the
three months ended September 30, 1998 compared to 4.80%
for the three months ended September 30, 1997. The
increase is caused by an increase in the average rate
paid on savings and certificates of deposit for the
three months ended September 30, 1998 compared to the
three months ended September 30, 1997 and a mix shift
to certificates of deposit for the three months ended
September 30, 1998 compared to the three months ended
September 30, 1997.
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Interest Income $1,710,303 $1,600,185 $4,924,767 $4,578,780
Interest Expense 867,250 773,178 2,434,060 2,198,457
Net Interest Income $ 843,053 $ 827,007 $2,490,707 $2,380,323
Net Interest Margin 4.04% 4.38% 4.23% 4.37%
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, 1998 is illustrated in the following
tables:
Three Months Ended September 30, 1998 Compared to Three
Months Ended September 30, 1997.
Increase (Decrease) in Net Interest Income
Net Change Due To Due To
Rate Volume
Interest Income $110,118 $ 5,203 $ 104,915
Interest Expense 94,072 20,503 73,569
Net Interest Income $ 16,046 $(15,300) $ 31,346
Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997.
Increase (Decrease) in Net Interest Income
Net Change Due To Due To
Rate Volume
Interest Income $ 345,987 $ 83,759 $ 262,228
Interest Expense 235,603 68,690 166,913
Net Interest Income $ 110,384 $ 15,069 $ 95,315
The above analysis shows that for the three months
ended September 30, 1998 compared to the three months
ended September 30, 1997 the Company offset a net
decrease in interest margin due to rates of $15,300
with an increase in interest margin due to volume of
$31,346. A review of the quarterly trend for 1998 shows
a negative trend in the due to rate portion of the
Rate/Volume Analysis. While average yields on loans and
taxable investments for the three months ended March
31, 1998, June 30, 1998 and September 30, 1998 exceeded
the average yields for the comparable periods in 1997,
the quarterly trend in 1997 was increasing yields while
in 1998 the quarterly trend was decreasing yields.
These trends reflect a general worsening of economic
conditions and increased competition for loans in the
Company's market area. In addition, in 1998 the Company
relied on Certificates of Deposit to fund a larger
portion of its total interest-bearing liabilities
compared to the same quarters in 1997. Certificates of
Deposit carry the highest rate paid on all of the
Bank's interest-bearing deposit accounts. The Company's
third quarter 1998 Rate/Volume Analysis shows that the
Company was not able to offset the higher cost of its
interest-bearing liabilities with an increase in the
average yield of its earning assets.
OPERATING RESULTS
Net income for the three months ended September 30,
1998, decreased $6,271 or 2.5% to $241,334 from
$247,605 for the three months ended September 30, 1997.
The increase in net interest income is $16,046 for the
three months ended September 30, 1998, compared to the
three months ended September 30, 1997, and is discussed
in "Net Interest Income" and "Rate/Volume Analysis"
elsewhere in this report. Mortgage underwriting fees -
Secondary market decreased $22,763 or 44.88% to $27,961
for the three months ended September 30, 1998, compared
to $50,724 for the three months ended September 30,
1997. This decrease is primarily due to increased
amortization expense for the Company's Mortgage
Servicing Rights, as the balance of the intangible
assets has increased since implementation of FASB 122
effective January 1, 1996, and the sale of two loans at
a gain of $11,500 in the secondary market for the three
months ended September 30, 1997. Other operating income
increased $21,716 or 19.09% for the three months ended
September 30, 1998 compared to the three months ended
September 30, 1997. The main reason for this increase
was increased sales of alternative investment products
by the Company's Financial Resource Center (FRC).
Commission income for the FRC increased $21,202 or
43.40% to $70,055 for the three months ended September
30, 1998 compared to $48,853 for the three months ended
September 30, 1997.
Operating expenses for the three months ended September
30, 1998 increased $30,894 or 4.6% to $703,617 compared
to $672,723 for the three months ended September 30,
1997. Salaries and related benefits for the three
months ended September 30, 1998 increased $31,991 or
8.54% to $406,770 compared to $374,779 for the three
months ended September 30, 1997. This increase is
primarily caused by normal wage increases and higher
costs for employee fringe benefits. Data processing
expense increased $7,242 or 27.6% from $26,256 for the
three months ended September 30, 1997 to $33,498 for
the three months ended September 30, 1998. Expenses in
1998 include costs of correcting the Year 2000 problem
and costs related to the introduction of a debit card
program. Other operating expenses decreased $15,447 or
8.9% to $157,279 for the three months ended September
30, 1998 compared to $172,726 for the three months
ended September 30, 1997. For the three months ended
September 30, 1997 the Company had a loss on Other Real
Estate of $12,837 that did not recur in 1998.
Net income for the Nine Months ended September 30,
1998, increased $121,018 or 18.2% to $785,843 from
$664,825 for the Nine Months ended September 30, 1997.
The increase in net interest income is $110,384 for the
Nine Months ended September 30, 1998, compared to the
Nine Months ended September 30, 1997, and is discussed
in "Net Interest Income" and "Rate/Volume Analysis"
elsewhere in this report. Mortgage underwriting fees -
Secondary market increased $70,646 or 77.38% to
$161,942 for the Nine Months ended September 30, 1998,
compared to $91,296 for the Nine Months ended September
30, 1997. This increase is primarily due to increased
volume as for the Nine Months ended September 30, 1998,
the Company originated $11,064,700 of loans for the
secondary market compared to $3,233,100 for the Nine
Months ended September 30, 1997. Other operating income
increased $95,957 or 25.52% to $471,926 for the Nine
Months ended September 30, 1998 compared to $375,969
for the Nine Months ended September 30, 1997. The main
reason for this increase was increased sales of
alternative investment products by the Company's
Financial Resource Center (FRC). Commission income for
the FRC increased $86,710 or 48.55% to $265,326 for the
Nine Months ended September 30, 1998 compared to
$178,616 for the Nine Months ended September 30, 1997.
Operating expenses for the Nine Months ended September
30, 1998 increased $106,426 or 5.3% to $2,098,872
compared to $1,992,446 for the Nine Months ended
September 30, 1997. Salaries and related benefits
increased $97,337 or 8.9% to $1,189,451 for the Nine
Months
ended September 30, 1998 compared to $1,092,114
for the Nine Months ended September 30, 1997. The
increase is due to normal wage increases and higher
costs for employee benefit programs. Equipment rentals,
depreciation, and maintenance for the Nine Months ended
September 30, 1998 increased $57,010 or 36.22% to
$214,413 compared to $157,403 for the Nine Months ended
September 30, 1997. Included in this total is equipment
depreciation which increased $59,096 or 54.9% to
$166,650 for the Nine Months ended September 30, 1998
compared to $107,554 for the Nine Months ended
September 30, 1997; this increase is due primarily to
the purchase of the banks in-house computer system in
May, 1997. Data Processing expense decreased $64,608 or
41.6% from $155,473 for the Nine Months ended September
30, 1997 to $90,865 for the Nine Months ended September
30, 1998. Expenses in 1997 included deconversion costs
for converting the Bank's data to its in-house computer
system and data processing costs paid to its service
bureau which were partially replaced by additional
equipment depreciation in 1998.
On October 16, 1998, the Wisconsin Department of
Financial Institutions approved the Bank's application
to establish a branch at 100 Orchard Avenue in Casco,
Wisconsin. The ultimate profitability of the branch
will be determined by the additional overhead costs of
this branch and the Bank's success at attracting loans
and deposits in the Casco market area. The Bank
anticipates that it will incur losses at this new
branch in the initial years of operation.
Year 2000 Risks. The Company is exposed to
future uncertainty, potential future reduction in
earnings, and future losses, including litigation, due
to business interruption or errors, if its computer
systems are not modified to ensure that dates after
December 31, 1999 are not misrepresented by those
systems. This eventuality is commonly referred to as
the Year 2000 problem.
The Bank uses computer-related technologies and
software throughout its business that will be affected
by the date change in the year 2000. The Bank's
directors, senior management and staff are aware of
these Year 2000 issues and have appointed a technology
committee to study and direct the project to bring all
of the computer-related systems into Year 2000
compliance during 1998 and 1999. The technology
committee is reviewing both Information Technology
systems and non-Information Technology Systems
including the Bank's telephone systems, HVAC systems
and security equipment. In accordance with the
guidelines of the FDIC, the technology committee is
addressing the issue using the following phases :
1) Awareness
2) Assessment
3) Renovation
4) Validation
5) Implementation
The Bank has recently converted its main
data processing system from a service bureau to an in-
house system supported by Jack Henry & Associates. The
vendor has provided the Bank with a copy of its Year
2000 project plan and warranted that the software is
Year 2000 compliant. Should there arise any failures
in its internal processing, the Bank has contracted
with Jack Henry & Associates for off-site processing.
Since the processing systems provide the personnel with
critical information for the daily operation,
procedures have been established to allow for the daily
operation should there be a Year 2000 related system
failure.
The Bank is also in the process of
renovating and testing its LAN and WAN network systems.
The renovations and validation of these systems should
be completed by December 31, 1998. The Bank is in the
process of obtaining similar information and commitment
for the Bank's less critical system vendors. The
Bank is acting upon the belief and understanding that
all federal agencies are actively managing the Year
2000 problems which are inherent in the global banking
and payments system.
The loan and deposit customers identified
as having potential Year 2000 risks have been surveyed
by the Bank officers to determine the effect the Year
2000 problems may affect their business and the
preparedness of the companies affected. With most of
the surveys returned, the indication is that the
companies with potential Year 2000 risk, have
established procedures to address and implement changes
necessary to mitigate the Year 2000 problems.
The Bank has substantially completed the
assessment phase and has tentatively identified the
costs of dealing with the Year 2000 problem at $50,000.
The Technology Committee, the committee responsible for
the Year 2000 plan, has estimated that an additional
$25,000.00 to 50,000.00 may be required for consulting
and technical assistance in the testing of the
information and non-information systems. These costs,
when incurred, will be capitalized or expensed by the
Company, as appropriate. Costs expensed will reduce the
Company's future reported earnings.
The Bank has established as part of its
Year 2000 plan a contingency plan to establish
procedures to address problems in the renovation and
validation phases of the Year 2000 Plan. The
contingency plan develops options for mission critical
systems that fail, cannot be made Year 2000 ready or
are unable to meet the Bank's scheduled renovation or
testing dates. The contingency plan also establishes
procedures to address unanticipated operational
problems that may occur before and after December 31,
1999. The Bank has contracted with Bankers Services,
Inc. to review the Bank Year 2000 progress on a
quarterly basis and report their finding to the Board
of Directors.
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. The Bank's credit customers are subject to
potential losses as a result of Year 2000 exposure in
their own computer systems as well as the computer
systems of their suppliers and customers. The Bank is
working with those customers that may be significantly
affected by the Year 2000 exposure. The exposure, if
not adequately addressed, will be taken into account in
assessing the loss potential, if any, associated with
each credit relationship. Loans are entirely 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
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, 1998 the Company had $94,000 of loans
past due 90 days or more that were still accruing
interest. At September 30, 1997 the Company had
$369,000 of loans past due 90 days or more that were
still accruing interest. At September 30, 1998 and 1997
the Company did not have any loans that meet the
definition of "Troubled Debt Restructuring" contained
in SFAS No. 15; in addition, there were no loans
considered to be impaired in accordance with the
requirements of SFAS No. 114. The Bank had $192,000 of
nonaccrual loans at September 30, 1998 and $246,000 of
nonaccrual loans at September 30, 1997.
During the three months ended September 30, 1998,
$37,500 was charged to the provision for loan losses
compared to $30,000 for the three months ended
September 30, 1997. At September 30, 1998 the allowance
for credit losses was $753,052 or 1.21% of total loans.
This compares to an allowance of $644,791 or 1.07% of
total loans as of September 30, 1997. For the three
months ended September 30, 1998 the Bank had net charge-
offs of $5,000 compared to net charge-offs of $87,000
for the three months ended September 30, 1997.
The following table summarizes loan charge-offs and
recoveries by type of loan for the three months ended
September 30, 1998 and 1997:
Loan Type September 30, 1998 September 30, 1997
Charge- Recovery Charge- Recovery
Off Off
Real Estate $ 0 $ 1,000 $ 0 $ 2,000
Commercial and 1,000 3,000 68,000 0
Industrial
Agricultural 0 0 0 8,000
Consumer 11,000 3,000 29,000 0
TOTALS $ 12,000 $ 7,000 $97,000 $10,000
The following table summarizes loan charge-offs and
recoveries by type of loan for the Nine Months ended
September 30, 1998 and 1997:
Loan Type September 30, 1998 September 30, 1997
Charge- Recovery Charge- Recovery
Off Off
Real Estate $ 0 $ 1,000 $ 0 $ 2,000
Commercial and 14,000 8,000 68,000 3,000
Industrial
Agricultural 0 0 0 20,000
Consumer 42,000 10,000 60,000 5,000
TOTALS $ 56,000 $ 19,000 $128,000 $30,000
The Bank has allocated its allowance for credit losses
at the end of each period presented as follows:
September 30, 1998 September 30,
1997
% of % of
loans loans
Balance at End of to to
Period Applicable to: total total
Amount Loans Amount Loans
Commercial and $ 0 50% $ 0 47%
agricultural
Real Estate- 6% 0 6%
construction
Real Estate-mortgage 33% 0 35%
Consumer 32,000 11% 12%
38,000
Total Domestic 32,000 100% 38,000 100%
Unallocated 721,000 607,000
TOTALS $753,000 100% $645,000 100%
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, 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 $7,480,000 and $166,000 for the three
months ended September 30, 1998 and 1997, 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 the 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, 1998, the Company's rate sensitive
assets exceed rate sensitive liabilities due within one
year by $8,301,000.
As part of managing liquidity, the Company monitors its
loan to deposit ratio on a daily basis. At September
30, 1998 the ratio was 77.7% which is within the
Company's acceptable range.
The Company experienced an increase in cash and cash
equivalents, its primary source of liquidity, of
$4,054,295 for the Nine Months ended September 30,
1998. The primary sources of cash flow for the Nine
Months ended September 30, 1998 were a net increase in
deposits of $7,447,211 and cash provided by operating
activities of $883,302. Cash outflow for the Nine
Months ended September 30, 1998 primarily consisted of
the following: An increase in loans of $1,385,430, net
security purchases of $1,594,340, a reduction in short-
term borrowings and loan repayments of $989,784,
capital expenditures of $168,083 and dividends paid of
$114,445. 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. In addition, at September 30, 1998, the
Company had Fed Funds Sold of $6,143,000 to meet the
Company's short-term liquidity needs.
The Company estimates the cost of the Casco branch at
approximately $1.3 million. The funding for the Casco
branch has not yet been determined, but may include
available cash or the sale of Company stock. Start up
losses for the Casco branch are expected to be funded
out of cash flow from operations of the existing
locations of the Company.
The following table illustrates the projected
maturities and the repricing mechanisms of the major
asset/liability categories of the Company as of
September 30, 1998, 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 1 - 5 5 - 10 After 10
or Less Years Years Years
Interest Earning
Assets:
Fed Funds Sold $ 6,143,000
Investment $ 2,308,000 $ 1,655,000 $ 6,277,000 $ 5,695,000
Securities
Loans
Variable Rate $ 8,566,000
Real Estate- $ 3,321,000 $ 581,000
Construction
Real Estate- $ 9,853,000 $ 4,941,000 $ 163,000 $ 405,000
Other
Commercial and $11,242,000 $ 7,043,000 $ 465,000 $ 158,000
Industrial
Agricultural $ 4,511,000 $ 985,000 $ 27,000 $ 397,000
Consumer $ 4,333,000 5,206,000 57,000
Other $ 793,000 -0- -0- -0-
Total Interest $51,070,000 $20,411,000 $ 6,989,000 $ 6,655,000
Earning Assets
Interest Bearing
Liabilities:
Interest Bearing
Demand $ 4,941,000
Savings Deposits $ 4,720,000 $ 11,891,000
Money Market $ 1,029,000 $ 2,399,000
Accounts
Certificates of $28,598,000 $ 8,654,000
Deposit
Jumbo CD's $ 3,487,000 $ 1,072,000
IRA's $ 4,686,000 $ 158,000
Other $ 249,000 $ 34,000 -0- -0-
Total Interest $42,769,000 $ 9,918,000 -0- $ 19,231,000
Bearing Liabilities
Interest Sensitivity $ 8,301,000 $10,493,000 $ 6,989,000 ($12,576,000)
Gap per Period
Cumulative Interest $ 8,301,000 $18,794,000 $25,783,000 $13,207,000
Sensitivity Gap
Interest Sensitivity 9.8% 12.3% 8.2% (14.8%)
Gap as a Percentage
of Earning Assets
Cumulative Sensitivity 9.8% 22.1% 30.3% 15.5%
Gap as a Percentage
of Earning Assets
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1998,
the registrant did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto
duly authorized.
LUXEMBURG BANCSHARES, INC.
(Registrant)
/s/ John A. Slatky /s/ Thomas L. Lepinski
- ---------------------- -------------------------
John A. Slatky, Thomas L. Lepinski, C. P. A.
President and Chief Treasurer
Executive Officer (Principal Accounting Officer)
Date November 11, 1998 Date November 11, 1998