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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22471
LUXEMBURG BANCSHARES, INC.
(Name of Small Business Issuer 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) (Zip Code)
Issuer's telephone number (920) 845-2345
Securities registered under Section 12(b) of the
Exchange Act: None Securities registered under
Section 12(g) of the Exchange Act:
Common Stock, par value $1.00 per share
(Title of Class)
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 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the year ended December 31, 1998. $7,819,060.
The aggregate market value (determined using the book value per share) of common
stock held by non-affiliates of the registrant as of March 8, 1999 was
$7,476,208.
The number of shares outstanding of the registrant's common stock as of
March 8, 1999 was 243,501.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 25, 1999 to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be held
April 24, 1999 are incorporated by reference into Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
Luxemburg Bancshares, Inc. (the "Company"), a Wisconsin corporation, was
formed June 10, 1983 for the purpose of owning a Wisconsin bank. On December 30,
1983, the Company acquired a controlling interest in the Bank of Luxemburg (the
"Bank"). The Bank is now a wholly-owned subsidiary of the Company.
As of December 31, 1998, the Company had total consolidated assets of $98.0
million and total stockholders' equity of $9.5 million.
THE BANK
The Bank was chartered by the Wisconsin Banking Department (now the
Wisconsin Department of Financial Institutions ("DFI")) on October 6, 1903. Bank
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank conducts business at the Main Office at 630 Main Street, Luxemburg,
Wisconsin with other offices located at E166 County Hwy. S., Luxemburg
("Dyckesville office") and 602 Center Drive, Luxemburg ("IGA Supermarket
office") in Kewaunee County and 1311 Bellevue Street, Green Bay ("Bellevue
office") in Brown County. The Bank also maintains five automated teller machines
("ATMs") in Kewaunee, Brown and Door Counties.
During 1998 the Bank received approval from DFI to open an additional office
located at 100 Old Orchard Avenue, Casco ("Casco office"). The Casco office is
located in Kewaunee County and will have its own ATM increasing the total number
of Bank ATMs to six. Anticipated costs of the Casco office are approximately
$1.4 million and the anticipated opening date is May, 1999.
The Bank provides a full range of consumer and commercial banking services
to individuals, businesses and farms. The basic services offered include: demand
deposit accounts, money market deposit accounts, NOW accounts, time deposits,
safe deposit services, credit cards, direct deposits, notary services, money
orders, night depository, travelers' checks, cashier's checks, savings bonds,
secured and unsecured consumer, commercial and real estate loans and stand-by
letters of credit. The Bank offers automated teller machine cards through the
TYME and Cirrus ATM networks. In addition, the Bank purchased the financial
planning and alternative investment marketing of Total Financial Concepts in
January of 1996 to provide financial planning, estate planning and retirement
planning services and to market mutual funds, annuities, life insurance
products, Individual Retirement Accounts (IRAs) and other pension programs.
As is the case with banking institutions generally, the Bank derives its
revenues from interest on the loan and investment portfolios and fee income
related to loans and deposits. Income derived from the sale of alternative
investment products provides additional fee income. The source of funds for the
lending activities are deposits, repayment of loans, sale and maturity of
investment securities and borrowing from the Federal Home Loan Bank of Chicago.
Principal expenses are the interest paid on deposits and borrowings and
operating and general administrative expenses.
The Bank's business plan is based on being a strong, established, locally
owned bank providing financial services to its local communities. The Bank's
main office and two branch offices are located in western Kewaunee County,
serving approximately 25% of the county's 19,570 population. The Bank also
serves a small portion of southern Door County from these locations. The Bank
serves eastern Brown County with these locations and an office in the Green Bay,
Wisconsin market. The Bank targets the individual and small business customers
within these markets and emphasizes the advantages of local ownership, (i.e.,
responsive local loan decisions and community involvement).
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AREA DEVELOPMENT CORPORATION
The Company formed Area Development Corporation as a subsidiary to provide
the Company with a vehicle to invest in the community in real estate
developments which assist low and moderate income residents. To date, the Area
Development Corporation has assisted by working with the low-income housing
program in Luxemburg by providing officers to serve on the board and to advise
on the current and future low-income housing projects; assisting the low-income
housing development committee in Dyckesville; researching a low-income housing
project and putting aside funds to purchase property if necessary to begin the
project; and providing funds to determine the need for library services locally
for all community residents.
LUXEMBURG INVESTMENT CORPORATION.
Luxemburg Investment Corporation ("Investment Corporation") is a
wholly-owned subsidiary of the Bank. Investment Corporation is a Nevada
corporation, the business of which is to hold, invest and reinvest a portion of
the investment portfolio of the Bank. See "INVESTMENTS".
LENDING ACTIVITIES
The Bank offers a range of lending services, including real estate,
consumer, commercial and industrial and agricultural loans to individuals, small
business and other organizations that are located in or conduct a substantial
portion of their business in the Bank's market area. The Bank's total loans as
of December 31, 1998 were $63.8 million, or approximately 65% of total
consolidated assets. In addition, the Bank services $25.7 million in consumer
real estate loans sold to the Federal Home Loan Mortgage Corporation ("FHLMC").
Interest rates charged on loans vary with the degree of risk, maturity, and
amount of the loan, and are further subject to competitive pressures, cost and
availability of funds and government regulations.
The Bank maintains a comprehensive loan policy that establishes guidelines
with respect to all categories of lending activity. The policy establishes
lending authority for each individual loan officer and officer and board lending
authority. All loans to directors and executive officers are approved by the
Board of Directors. The loans are concentrated in four major areas: real estate
loans, commercial loans, consumer loans and agricultural loans. The lending
strategy is development of a high quality loan portfolio.
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.
The Bank's real estate loans are secured by mortgages and consist primarily
of loans to individuals for the purchase and improvement of real estate and for
the purchase of residential lots and construction of single-family residential
units. The Bank's residential real estate loans generally are repayable in
monthly installments based on up to a thirty year amortization schedule.
Typically, loans with terms of fifteen or thirty years must qualify for and are
sold to the FHLMC.
Commercial loans include loans to individuals and small businesses including
loans for working capital, machinery and equipment purchases, premise and
equipment acquisitions, purchase, improvement and investment in real estate
development and other business needs. Commercial lines of credit are typically
for a one year term. Other commercial loans with terms or amortization schedules
of longer than one year will normally carry interest rates which vary with the
prime lending rate and will become payable in full and are generally refinanced
in three to five years. Commercial loans typically entail a thorough analysis of
the borrower, its industry, current and projected economic conditions and other
factors. The Bank typically requires commercial borrowers to have annual
financial statements and requires appraisals or evaluations in connection with
the loans secured by real estate. The Bank often requires personal guarantees
from principals involved with closely-held corporate borrowers.
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The Bank's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes payable on an installment basis. The
loans are generally for terms of five years or less and are secured by liens on
various personal assets of the borrower. The Bank also provides consumer credit
through its credit card program. These loans are limited open-ended credits
requiring minimum monthly payments. Credit card loans are unsecured.
The Bank also provides services to support dairy farms in the rural areas of
Kewaunee and southern Door counties. About eleven (11%) percent of the Bank's
loan portfolio, $7.1 million, is in agricultural loans (including agricultural
real estate loans). The loans provide financing for real estate and personal
property purchases, as well as operational lines of credit and production
financing. The credit terms are typically similar to other commercial loans. The
Bank will provide direct financing, as well as guaranteed financing, through
Federal (FmHA) and State of Wisconsin (WHEDA) sponsored programs.
DEPOSIT ACTIVITIES
Deposits are the major source of the Bank's funds for lending and other
investment activities. The Bank considers the majority of its regular savings,
investors choice, demand, NOW and money market deposit accounts to be core
deposits. These accounts comprised approximately 45% of the Bank's total
deposits at December 31, 1998. Approximately 55% of the Bank's deposits at
December 31, 1998 were certificates of deposit. Generally, the Bank attempts to
maintain the rates paid on its deposits at a competitive level. Deposits of
$100,000 and over made up approximately 6% of the Bank's total deposits at
December 31, 1998. The majority of the deposits of the Bank are generated from
Kewaunee and Brown Counties. Brokered deposits at December 31, 1998 made up less
than 1% of the Bank's total deposits. For additional information regarding the
Bank's deposit accounts, see "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Interest Rate Sensitivity" and Note 9 of Notes to
Consolidated Financial Statements.
INVESTMENTS
The Bank invests a portion of its assets in U.S. Treasury and U.S.
Governmental agency obligations, FHLMC, FNMA and FHLB securities, state, county
and municipal obligations, collateralized mortgage obligations ("CMO's") and
federal funds sold. The investments are managed in relation to the loan demand
and deposit growth and are generally used to provide for the investment of
excess funds at reduced yields and risks relative to yields and risks of the
loan portfolio, while providing liquidity to fund increases in loan demand or to
offset fluctuations in deposits. The investments are held in Investment
Corporation as well as in the Bank. The Bank portfolio is to provide for
immediate liquidity needs and therefore maintains shorter term investments.
Investment Corporation provides for greater investment yields and therefore
maintains longer term investments. For further information regarding the
Company's investment portfolio, see Note 4 of Notes to Consolidated Financial
Statements.
SUPERVISION AND REGULATION
Bank Holding Company Regulation. The Company is a one-bank holding company,
registered with the Federal Reserve under the Bank Holding Company Act of 1956,
as amended ("BHC Act"). As such, the Company is subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve. The Company is required to furnish to the Federal Reserve
an annual report of its operations at the end of each fiscal year, and such
additional information as the Federal Reserve may require pursuant to the BHC
Act.
The BHC Act requires every bank holding company to obtain the prior approval
of the Federal Reserve before (i) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
total voting shares of the bank, (ii) it or any of its subsidiaries, other than
a bank, may acquire all or substantially all of the assets of the bank, or (iii)
it may merge or consolidate with any other bank holding company.
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The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned, which generally focuses on capital adequacy. The
Federal Reserve must also consider the convenience and needs of the community to
be served, including the parties' performance under the Community Reinvestment
Act of 1977, as amended (the "CRA"), which is discussed below.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interests, or
unsound banking practices. For example, factoring accounts receivable, acquiring
or servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. Despite prior
approval, the Federal Reserve has the power to order a bank holding company or
its subsidiaries to terminate any activity or to terminate its ownership or
control of any subsidiary when it has reasonable cause to believe that
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness, or stability of any bank subsidiary of
that bank holding company.
Banks are subject to the provisions of the CRA. Under the terms of the CRA,
the appropriate federal bank regulatory agency is required, in connection with
its examination of a bank, to assess such bank's record in meeting the credit
needs of the community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office, or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.
Bank Regulation. The Bank is chartered under the laws of the State of
Wisconsin and its deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the extent provided by law. The Bank is subject to
comprehensive regulation, examination and supervision by the FDIC and DFI and to
other laws and regulations applicable to banks. Such regulations include
limitations on loans to a single borrower and to its directors, officers and
employees; restrictions on the opening and closing of branch offices; the
maintenance of required capital and liquidity ratios; the granting of credit
under equal and fair conditions; and the disclosure of the costs and terms of
such credit. The Bank is examined periodically by the FDIC and DFI to which it
submits periodic reports regarding its financial condition and other matters.
The FDIC and DFI have a broad range of powers to enforce regulations under their
jurisdiction, and to take discretionary actions determined to be for the
protection of the safety and soundness of insured banks, including the
institution of cease and desist orders and the removal of directors and
officers. The FDIC and DFI also have the authority to approve or disapprove
mergers, consolidations, and similar corporate actions.
Under federal law, federally insured banks are subject, with certain
exceptions, to certain restrictions on any extension of credit to their parent
holding companies or other affiliates, on investment in the stock or other
securities of affiliates, and on the taking of such stock or securities as
collateral from any borrower. In addition,
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such banks are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or the providing of any property or
service.
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") was enacted. FIRREA contains major regulatory reforms, stronger
capital standards for savings and loan associations and stronger civil and
criminal enforcement provisions. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC insured institution in danger of default.
In 1991, the FDIC Improvement Act of 1991 ("FDICIA") was enacted. FDICIA
made a number of reforms addressing the safety and soundness of deposit
insurance funds, supervision, accounting, and prompt regulatory action, and also
implements other regulatory improvements. Annual full-scope, on-site
examinations are required of all insured depository institutions. The cost for
conducting an examination of an institution may be assessed to that institution,
with special consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks also are precluded
from engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. FDICIA also recodified current law restricting extensions of credit
to insiders under the Federal Reserve Act.
Dividends. Dividends from the Bank constitute the primary source of funds
for dividends to be paid by the Company. There are various statutory and
contractual limitations on the ability of Bank to pay dividends, extend credit,
or otherwise supply funds to the Company. The Federal Reserve, the FDIC and DFI
also have the general authority to limit the dividends paid by bank holding
companies and insured banks, respectively, if such payment may be deemed to
constitute an unsafe and unsound practice. In general, under Wisconsin law
applicable to the Bank, the board of directors of a state bank may declare and
pay a dividend from so much of the bank's undivided profits as the board deems
expedient, provided that the payment of such dividend does not in any way impair
or diminish the bank's capital, other than by reducing undivided profits.
Effect of Governmental Policies. The earnings and business of the Company
and the Bank are effected by the policies of various regulatory authorities of
the United States, especially the Federal Reserve. The Federal Reserve, among
other things, regulates the supply of credit and deals with general economic
conditions within the United States. The instruments of monetary policy employed
by the Federal Reserve for those purposes influence in various ways the overall
level of investments, loans, other extensions of credits, and deposits, and the
interest rates paid on liabilities and received on assets.
Enforcement Powers. Congress has provided the federal bank regulatory
agencies with an array of powers to enforce laws, rules, regulations and orders.
Among other things, the agencies may require that institutions cease and desist
from certain activities, may preclude persons from participating in the affairs
of insured depository institutions, may suspend or remove deposit insurance, and
may impose civil money penalties against institution-affiliated parties for
certain violations.
Change of Control. Federal law restricts the amount of voting stock of a
bank holding company and a bank that a person may acquire without the prior
approval of banking regulators. The overall effect of such laws is to make it
more difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of the Company may be less likely to
benefit from the rapid increases in stock prices that may result from tender
offers or similar efforts to acquire control of other companies. Federal law
also imposes restrictions on acquisitions of stock in a bank holding company and
a state bank. Under the federal Change in Bank Control Act and the regulations
thereunder, a person or group must give advance notice to the Federal Reserve
before acquiring control of any bank holding company and the FDIC and DFI before
acquiring control of an insured state bank (such as the Bank). Upon receipt of
such notice, the Federal Reserve or the FDIC and DFI, as the case may be, may
approve or disapprove the acquisition. The Change in Bank Control Act creates a
rebuttable presumption of control if a member or group acquires a certain
percentage or more of a bank holding company's or bank's voting stock, or if one
or more other control factors set forth in the Act are present.
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Insurance of Deposits. The Bank's deposit accounts are insured by the FDIC
up to a maximum of $100,000 per insured depositor. The FDIC issues regulations,
conducts periodic examinations, requires the filing of reports and generally
supervises the operations of its insured banks. Any insured bank which is not
operated in accordance with or does not conform to FDIC regulations, policies
and directives may be sanctioned for non-compliance. Proceedings may be
instituted against any insured bank or any director, officer, or employee of
such bank engaging in unsafe and unsound practices, including the violation of
applicable laws and regulations. The FDIC has the authority to terminate
insurance of accounts pursuant to procedures established for that purpose.
Capital Requirements. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain all ratios well in excess of the minimums.
The current guidelines generally require bank holding companies and
federally-regulated banks to maintain a minimum total risk-based capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. For bank holding
companies with assets less than $150 million, such as the Company, capital
ratios are determined at the subsidiary bank level. Tier 1 capital includes
common stockholders' equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, less the amounts of
goodwill and most other intangibles. Tier 2 capital includes the excess of any
preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses up to 1.25%
of risk-weighted assets. At December 31, 1998, the Bank's Tier 1 and total
risk-based capital ratios were 13.5% and 14.6%, respectively.
FDICIA contains "prompt corrective action" provisions pursuant to which
banks are to be classified into one of five categories based upon capital
adequacy, ranging from "well capitalized" to "critically undercapitalized" and
which require (subject to certain exceptions) the appropriate federal banking
agency to take prompt corrective action with respect to an institution which
becomes "significantly undercapitalized" or "critically undercapitalized".
The FDIC has issued regulations to implement the "prompt corrective action"
provisions of FDICIA. In general, the regulations define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level for any capital measures; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The FDIC also, after an opportunity for
a hearing, has authority to downgrade an institution from "well capitalized" to
"adequately capitalized" or to subject an "adequately capitalized" or
"under-capitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. As of December 31, 1998, the Bank
had a total risk-based capital ratio of 14.6%, a Tier 1 risk-based capital ratio
of 13.5%, and a leverage ratio of 9.4%.
Additionally, FDICIA requires, among other things, that (i) only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and (ii) the appropriate federal banking agency annually
examine all insured depository institutions, with some exceptions for small,
"well capitalized" institutions and state-chartered institutions examined by
state regulators. FDICIA also contains a number of consumer banking provisions,
including disclosure requirements and substantive contractual limitations with
respect to deposit accounts.
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Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 provides for nationwide interstate banking and branching.
Under the law, interstate acquisitions of banks or bank holding companies in any
state by bank holding companies in any other state is permissible subject to
certain limitations. Wisconsin also has a law that allows out-of-state bank
holding companies (located in states that allow Wisconsin bank holding companies
to acquire banks and bank holding companies in that state) to acquire Wisconsin
banks and Wisconsin bank holding companies. The law essentially provides for
out-of-state entry by acquisition only (and not by interstate branching) and
requires the acquired Wisconsin bank to have been in existence for at least five
years. Interstate branching and consolidation of existing bank subsidiaries in
different states is permissible. Out-of-state banks that do not operate a branch
in Wisconsin are prohibited from establishing a de novo branch in Wisconsin. A
Wisconsin bank may establish, maintain, and operate one or more branches in a
state other than Wisconsin pursuant to an interstate merger transaction in which
the Wisconsin bank is the resulting bank. An interstate merger transaction
resulting in the acquisition by an out-of-state bank of a Wisconsin bank is not
permitted unless the Wisconsin bank has been in existence and continuously
operating, on the day of the acquisition, for more than five years.
INDUSTRY RESTRUCTURING
For well over a decade, the banking industry has been undergoing a
restructuring process which is anticipated to continue. The restructuring has
been caused by product and technological innovations in the financial services
industry, deregulation of interest rates, and increased competition from foreign
and nontraditional banking competitors, and has been characterized principally
by the gradual erosion of geographic barriers to intrastate and interstate
banking and the gradual expansion of investment and lending authorities for bank
institutions.
COMPETITION
The Bank's service area includes portions of Kewaunee, Brown and Door
Counties. Kewaunee County, with a population of 19,570 residents, has six banks
with eleven offices and one credit union with two offices. Brown County, with a
population of approximately 214,000 residents, has sixteen banks with fifty
offices, two saving banks with thirteen offices and fourteen credit unions with
sixteen offices. Door County, with a population of approximately 26,500
residents, has three banks with fourteen offices and one savings bank with two
offices. In addition to the financial institutions, significant competition
comes from security and brokerage firms, mortgage companies, insurance companies
and other providers of financial services in the area. The Bank competes as a
locally owned banking institution that responds quickly with personal service.
EMPLOYEES
As of December 31, 1998, the Company employed 34 full-time employees and 16
part-time employees. The employees are not represented by a collective
bargaining unit. The Company considers relations with employees to be good.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
For additional statistical, financial and other information regarding the
Company, see "Management's Discussion and Analysis or Plan of Operation" and
"Notes to Consolidated Financial Statements."
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ITEM 2. DESCRIPTION OF PROPERTIES.
The Company and the Bank have their main office in Luxemburg, Wisconsin at
630 Main Street. The building is a two story building. The Bank owns the main
office.
The Bank opened its Dyckesville, Wisconsin office (located at E166 County
Hwy. S, Luxemburg) during May, 1987. This office was purchased on land contract
by the Company on September 30, 1994. The Bank leases this office from the
Company under a five year lease expiring in 1999.
The Bank opened its Bellevue Office (located at 1311 Bellevue Street, Green
Bay, Wisconsin) during August, 1989. The Bank owns its Bellevue Office.
On April 17, 1996, the Bank opened its IGA office (located at 602 Center
Street, Luxemburg). The Bank has executed a lease for this property expiring in
2001.
During the forth quarter of 1998, the Bank began construction of its Casco
office (located at 100 Old Orchard Avenue, Casco, Wisconsin). The Bank owns its
Casco Office.
The Bank has installed an ATM at its Dyckesville Office, the Main Street
Station in Luxemburg, the Hwy. 54 T-Mart in New Franken, FS Fast Stop in
Forestville and the Hwy. 29 & P C-Mart in Henrysville. The Bank has committed to
the installation of an ATM at its Casco Office. These remote ATMs provide
additional banking convenience for the customers of the Bank, and generate an
additional source of fee income.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company, the Bank nor any other subsidiary are subject to any
material pending litigation at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders during the fourth quarter of
1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the persons who were the executive officers of Luxemburg
Bancshares, Inc. as of December 31, 1998, their ages as of March 31, 1999, their
current titles and positions held during the past five years:
JOHN A. SLATKY, - Age 47. Mr. Slatky is President, Chief Executive Officer
and a director of the Company. He commenced employment with the Bank in 1984 and
has held various executive positions with the Company or the Bank since 1986. He
was employed at the Kimberly State Bank (an Associated Bank) from 1974 through
1983. Mr. Slatky has been a director of the Company since 1987 and a director of
the Bank since 1986.
THOMAS L. LEPINSKI, C.P.A. - Age 43. Mr. Lepinski is Vice
President-Operations & Finance for the Bank and is Treasurer of the Company,
positions held since February, 1997. From 1978 through 1992 he was employed by
Wipfli Ullrich Bertelson LLP where he was responsible for providing tax, audit
and examination services to community banks. He was Controller-Treasurer of the
Sorg Paper Company from 1992 through 1996. At Sorg he was responsible for the
company's financial operations, annual planning and budgeting and handling
shareholder communications and relations. Mr. Lepinski is a member of the
American Institute of CPAs and is licensed as a CPA in the states of Wisconsin
and Minnesota.
DAVID L. LUEBBERS, - Age 49. Mr. Luebbers is Executive Vice President and
Chief Financial Officer at the Bank, a position he has held since 1989. Mr.
Luebbers is responsible for overseeing all loan operations and servicing
accounts. Mr. Luebbers also serves as one of the Company's Vice Presidents.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
There is no established public trading market for the Common Stock and such
trading activity, as it occurs, takes place in privately negotiated
transactions.
At December 31, 1998 there were approximately 526 shareholders of record of
the Common Stock.
The Company has paid the following cash dividends on its shares of Common
Stock since 1994:
<TABLE>
<CAPTION>
Year Ended December 31 Dividends Per Share
---------------------- -------------------
<S> <C>
1994 $0.57
1995 $0.69
1996 $0.76
1997 $0.85
1998 $0.97
</TABLE>
In determining the dividends to be paid, the Board of Directors will examine the
then-existing circumstances, including the Company's rate of growth,
profitability, financial condition, existing and anticipated capital
requirements, the amount of funds legally available for the payment of
dividends, regulatory constraints and such other factors as the Board determines
relevant. The primary source of funds for payment of dividends by the Company is
dividends paid to the Company by the Bank. The Bank is limited by Wisconsin
statute in the amount of dividends it is allowed to pay. Under the law, a bank
may pay dividends from its undivided profits after making provision for payment
of all expenses, losses, required reserves, taxes and interest accrued or due
from the bank. If a bank has declared and paid dividends in either of two
preceding years in excess of its net income in such year, it may not declare or
pay any dividend which exceeds year-to-date net income except with the written
approval of DFI.
10
<PAGE> 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis of the Company relates to the years ended
December 31, 1998 and 1997 and should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
The Company's results of operations depend primarily on the level of its net
interest margin, its provision for credit losses, its non-interest income and
its operating expenses. Net interest income depends on the volume of and rates
associated with interest earning assets and interest bearing liabilities which
results in the net interest margin. Net income increased $143,788 or 15.6% to
$1,063,529 for the year ended December 31, 1998 from $919,741 for the year ended
December 31, 1997. This increase is primarily due to the growth of the Bank,
which increased net interest margin, growth in the Bank's portfolio of loans
sold to and serviced for the secondary market and additional sales of
alternative investment products by the Bank's Financial Resource Center
division. The following table summarizes the Company's operating performance for
the years specified.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Return on Assets 1.22% 1.16%
Return on Equity 11.75% 11.30%
</TABLE>
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 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. Jack Henry & Associates has
substantially completed the proxy testing of the system used by the Company to
process the Bank's work. The results are being reviewed by Bank of Luxemburg
employees to determine that the proxy banks used by Jack Henry & Associates were
reflective of our operation. 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.
11
<PAGE> 12
The Bank is also in the process of renovating and testing its local area
network (LAN) and wide area network (WAN) systems. The renovations and
validation of these systems include the equipment and software for the new
branch office that is scheduled to open in May, 1999. The Bank is in the process
of obtaining similar information and commitment for the Bank's less critical
system vendors. Testing procedures are being obtained and used to insure the all
systems and upgrades have been successfully renovated. To date, all systems
tested have passed the testing procedures. 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.
Loan and deposit customers identified as having potential Year 2000 risks
have been surveyed by bank officers. These officers determined how the Year 2000
issue will effect each customer's business and the steps each company is taking
to resolve their Year 2000 issues. The surveys returned indicate that the
companies with potential Year 2000 risks have established procedures to address
and mitigate their Year 2000 problems. Senior management has assessed potential
risks from customer related problems as low.
The Bank spent approximately $30,000 in 1998 on Year 2000 renovation and
testing. The Technology Committee has budgeted $20,000 for technology
improvements for 1999, a portion which 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. A business resumption
contingency plan is also being written to establish procedures to address
unanticipated operational problems that may occur before and after December 31,
1999. The contingency plan identifies the core business processes and
establishes alternative procedures in the event of a year 2000 failure. The Bank
has contracted with Bankers Services, Inc. to review the Bank's Year 2000
progress and report their findings to the Board of Directors.
Net Interest Income. Net interest income increased $109,140 or 3.4% to
$3,336,656 for the year ended December 31, 1998 from $3,227,516 for the year
ended December 31, 1997. Total interest income increased $468,595 for the year
ended December 31, 1998 to $6,690,283 from $6,221,688 for the year ended
December 31, 1997. This increase is primarily the result of Bank growth as
average earning assets increased by 10.2% for the year ended December 31, 1998
compared to the year ended December 31, 1997. However, $5 million of this
average asset growth occurred in Fed Funds Sold, which have the lowest tax
equivalent yield of all the Company's earning assets, reducing the average yield
on earning assets from 8.43% for the year ended December 31, 1997 to 8.22% for
the year ended December 31, 1998. Management plans to seek new loans to increase
Bank profits in 1999.
12
<PAGE> 13
The following table summarizes average total loans by category for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Type of Loan December 31, 1998 December 31, 1997
------------ ----------------- -----------------
<S> <C> <C>
Real Estate Loans $ 16,945,342 $ 19,169,168
Commercial and Industrial 25,908,974 22,448,688
Agricultural 6,304,252 6,095,262
Consumer 9,143,334 9,056,693
Other 201,972 333,210
------------ ------------
Total gross average loans 58,503,874 57,103,021
Less: Allowance for credit losses 726,349 673,847
------------ ------------
Total net average loans $ 57,777,525 $ 56,429,174
============ ============
Supplemental Disclosure:
Municipal Loans $ 1,605,712 $ 1,561,998
</TABLE>
The Bank does not separately track average real estate construction loans.
Total interest expense increased $359,455 or 12.0% to $3,353,627 for the
year ended December 31, 1998 from $2,994,172 for the year ended December 31,
1997. This increase is due to bank growth and higher average rates paid on
savings and other time deposits for the year ended December 31, 1998 compared to
the year ended December 31, 1997. Total interest bearing liabilities averaged
approximately $68,500,000 for the year ended December 31, 1998 as compared to
approximately $62,800,000 for the year ended December 31, 1997. The average rate
paid on savings accounts increased to 3.63% for the year ended December 31, 1998
compared to 3.47% for the year ended December 31, 1997. The average rate paid on
other time deposits increased to 5.84% for the year ended December 31, 1998
compared to 5.71% for the year ended December 31, 1997. The average cost of
interest bearing liabilities for the year ended December 31, 1998 was 4.90%
compared to an average cost of interest bearing liabilities of 4.77% for the
year ended December 31, 1997.
The following table summarizes the maturities of time deposits of $100,000
or more as of December 31, 1998:
<TABLE>
<CAPTION>
Certificates of Deposit of Other Time Deposits of
Time Until Maturity $100,000 or More $100,000 or More
------------------- ---------------- ----------------
<S> <C> <C>
3 months or less $ 570,000 $100,000
3 through 6 months 424,000 587,000
6 through 12 months 2,325,000 109,000
over 12 months 977,000 0
---------- --------
Totals $4,296,000 $796,000
========== ========
</TABLE>
13
<PAGE> 14
The following table details average balances, interest income/expense and
average rates/yields for the Company's earning assets and interest bearing
liabilities for the years ended December 31, 1998 and 1997. For purposes of the
analysis below, any adjustments of interest income due to loans being placed on
non-accrual status, the recovery of previously charged off past due interest or
the return of a loan to full accrual status have been included in interest
income on loans and have been included in the analysis of the reported yield on
loans. The analysis below excludes any changes in the fair market value of
investment securities available for sale. For purposes of the analysis below,
the Company does not report yields and earnings on its tax-exempt investments
and loans on a tax-equivalent basis.
<TABLE>
<CAPTION>
Year End December 31, 1998 Year End December 31, 1997
-------------------------- --------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Bearing:
Loans $58,503,874 $5,374,267 9.19% $57,103,021 $5,239,799 9.18%
Taxable Investments
and Mortgage Backed
Securities 10,575,782 694,774 6.57% 11,364,032 709,503 6.24%
Fed Funds Sold 5,354,420 282,378 5.27% 332,566 18,084 5.44%
Municipal Loans and
Investments 6,248,440 300,748 4.81% 4,401,030 218,927 4.97%
Other 665,330 38,116 5.73% 630,618 35,375 5.61%
----------- ---------- ----------- ----------
Total 81,347,846 $6,690,283 8.22% 73,831,267 $6,221,688 8.43%
========== ==========
CSV Life Insurance 1,176,095 1,109,921
Non-Earning Assets 4,660,180 4,344,366
----------- -----------
TOTAL ASSETS $87,184,121 $79,285,554
=========== ===========
LIABILITIES:
Interest Bearing:
Demand $ 5,099,630 $ 76,102 1.49% $ 4,823,989 $ 84,894 1.76%
Savings 19,313,059 700,200 3.63% 18,194,938 631,506 3.47%
Other Time Deposits 43,361,397 2,530,257 5.84% 38,020,245 2,172,177 5.71%
Other 735,639 47,068 6.40% 1,718,079 105,595 6.15%
----------- ---------- ----------- ----------
Total 68,509,725 $3,353,627 4.90% 62,757,251 $2,994,172 4.77%
========== ==========
Non-Interest-bearing
Liabilities 8,544,432 7,403,356
Other Liabilities 1,079,775 984,955
----------- -----------
Total Liabilities 78,133,932 71,145,562
Equity 9,050,189 8,139,992
----------- -----------
TOTAL LIABILITIES & EQUITY
$87,184,121 $79,285,554
=========== ===========
Recap:
Interest Income $6,690,283 8.22% $6,221,688 8.43%
Interest Expense 3,353,627 4.90% 2,994,172 4.77%
---------- ----- ---------- -----
Net Interest Income/
Spread $3,336,656 3.32% $3,227,516 3.66%
========== ==========
Contribution of Non-
Interest-Bearing Funds 0.78% 0.71%
----- -----
Net Interest Margin 4.10% 4.37%
===== =====
Ratio of Average Interest-
Earning Assets to Average
Interest-Bearing Liabilities 118.74% 117.65%
</TABLE>
Average balances are computed using daily average balances.
14
<PAGE> 15
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average earning assets and
average interest bearing liabilities. The table distinguishes between the
changes related to average outstanding balances of assets and liabilities
(changes in volume holding the initial average rate constant) and the changes
related to average interest rates (changes in the average rate holding the
initial average outstanding balance constant). The change in interest due to
both volume and rate has been allocated to volume and rate changes in proportion
to the relationship of the absolute dollar amounts of the change in each.
Year ended December 31, 1998 compared to year ended December 31, 1997.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
----------------------------------------------
Net Due to Due to
Change Rate Volume
------ ---- ------
<S> <C> <C> <C>
Interest Earning Assets:
Loans $134,468 $ 5,789 $128,679
Taxable Investments and
Mortgage Backed
Securities (14,729) 35,951 (50,680)
Fed Funds Sold 264,294 (562) 264,856
Municipal Loans and
Investments 81,821 (7,312) 89,133
Other 2,741 764 1,977
-------- --------- --------
TOTAL 468,595 34,630 433,965
-------- --------- --------
Interest Bearing Liabilities:
Interest Bearing
Demand 8,792 13,441 (4,649)
Savings (68,694) (28,884) (39,810)
Other Time Deposits (358,080) (47,270) (310,810)
Other 58,527 (4,166) 62,693
-------- --------- --------
TOTAL (359,455) (66,879) (292,576)
-------- --------- --------
Net Change in Net
Interest Income $109,140 $ (32,249) $141,389
======== ========= ========
</TABLE>
Provision 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 loan portfolios and particular loans. Specific factors
considered by management in setting the reserve for loan losses consist of the
following:
- Total loans outstanding.
- The balance of the allowance for credit losses as a percent of total
loans outstanding.
- The allowance for credit losses as a percent of past due loans,
classified loans and non-performing loans.
- The level of past due loans.
- Non-accrual loans.
- The level of watch list loans which include past due loans, loans
identified as potential problem loans, loans with inadequate
collateral, work out loans and loans where a change in repayment
ability has occurred due to death or divorce.
` 15
<PAGE> 16
The Bank generally places loans on non-accrual status, as discussed in
Footnotes 1 and 5 of the Company's Consolidated Financial Statements, when the
loan is past due as to the payment of interest and/or principal in excess of 90
days unless the Bank deems the loan collateral adequate to secure both the
payment of all loan principal and all uncollected accrued interest receivable.
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 and all
past due principal and interest is paid and the Bank deems its collateral
position adequate to warrant a return to accrual status.
At December 31, 1998 and 1997 the Company did not have any loans that meet
the definition of troubled debt restructuring contained in SFAS No. 15. Also,
the Company did not have any loans considered to be impaired under SFAS Nos. 114
& 118 at December 31, 1998 and 1997 or for the years ended December 31, 1998 and
1997. Loans past due 90 days or more that were still accruing interest totaled
$144,000 at December 31, 1998. At December 31, 1997 loans past due 90 days or
more that were still accruing interest totaled $291,000.
During the year ended December 31, 1998, $150,000 was charged to the
provision for loan losses compared to $120,000 for the year ended December 31,
1997. At December 31, 1998, the allowance was $773,000 or 1.21% of total loans.
This compares to an allowance of $677,000 or 1.11% of total loans as of December
31, 1997. Net charge offs were $54,000 for the year ended December 31, 1998 and
$96,000 for the year ended December 31, 1997. Non-performing loans at December
31, 1998 were $438,000.
The following table summarizes loan charge-offs and recoveries by type of
loan for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
LOAN TYPE DECEMBER 31, 1998 DECEMBER 31, 1997
--------- ----------------- -----------------
Charge-Off Recovery Charge-Off Recovery
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Real Estate $ ---- $ 1,000 $ ---- $ 2,000
Commercial and Industrial 13,000 ---- 31,000 ----
Agricultural 1,000 11,000 ---- 25,000
Consumer 64,000 12,000 101,000 9,000
--------- -------- --------- --------
TOTALS $ 78,000 $ 24,000 $ 132,000 $ 36,000
========= ======== ========= ========
</TABLE>
The Company had net charge-offs to average total loans of .09 % for the year
ended December 31, 1998 and .17% for the year ended December 31, 1997.
16
<PAGE> 17
The Bank has allocated its allowance for credit losses at the end of each
period presented as follows:
<TABLE>
<CAPTION>
Balance at End of Period Applicable to: December 31, 1998 December 31, 1997
--------------------------------------- ----------------- -----------------
% of % of
Loans to Loans to
total total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial and agricultural $ ---- 52% $ ---- 49%
Real Estate-construction ---- 6% ---- 6%
Real Estate-mortgage ---- 31% ---- 34%
Consumer 38,000 11% 41,000 11%
---------- --- -------- ---
Total Domestic 38,000 100% 41,000 100%
Unallocated 735,000 636,000
---------- --------
TOTALS $ 773,000 100% $677,000 100%
========== === ======== ===
</TABLE>
Other Operating Income. Other operating income for the year ended December
31, 1998, increased $240,504 or 27.1% to $1,128,777 from $888,273 for the year
ended December 31, 1997. Alternative Investment Commission Income increased
$87,385 or 37.2% to $322,149 for the year ended December 31, 1998 from $234,764
for the year ended December 31, 1997. Mortgage Underwriting Fees for the year
ended December 31, 1998 increased $132,559 or 83.3% to $291,751 from $159,192
for the year ended December 31, 1997. This increase is primarily due to
increased volume as for the year ended December 31, 1998, the Company originated
$19,221,200 of loans for the secondary market compared to $5,282,200 for the
year ended December 31, 1997. Loan Servicing Fee Income for the year ended
December 31, 1998 increased $9,604 or 27.5% to $44,533 from $34,929 for the year
ended December 31, 1997. This increase is primarily due to increased volume as
for the year ended December 31, 1998, average serviced loans totaled $22,036,000
compared to $15,731,000 for the year ended December 31, 1997.
Operating Expenses. Operating expenses for the year ended December 31, 1998
increased $133,166 or 4.95% to $2,820,733 from $2,687,567 for the year ended
December 31, 1997. Salaries and related benefits increased $115,153 or 7.8% to
$1,585,032 for the year ended December 31, 1998 from $1,469,879 for the year
ended December 31, 1997. This increase is primarily due to normal wage increases
and higher costs for employee benefit programs. Equipment rentals, depreciation
and maintenance increased $30,989 or 12.3% to $282,897 for the year ended
December 31, 1998 from $251,908 for the year ended December 31, 1997. This
increase is primarily due to additional depreciation expense on computer
equipment acquired to support the conversion to an in-house data processing
system on May 15, 1997. In 1998 there was twelve months of depreciation on this
equipment reflected in expense whereas in 1997 only seven months of depreciation
was expensed. Data Processing expense decreased $57,476 or 30.8% from $186,537
for the year ended December 31, 1997 to $129,061 for the year ended December 31,
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. Other operating expenses increased $43,062 or 7.0% to
$660,301 for the year ended December 31, 1998 from $617,239 for the year ended
December 31, 1997. This increase results from additional expenses associated
with the Bank's Director's Deferred Compensation Plan, the contracting of the
Bank's Internal Audit effort in 1998 and increases in spending on supplies and
legal fees 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.
17
<PAGE> 18
Dividends and Equity Capital. The Company paid its shareholders dividends of
$236,196 or $0.97 per share for the year ended December 31, 1998 and $206,593 or
$0.85 per share for the year ended December 31, 1997. The following table
summarizes the Company's dividend pay out ratio and average capital position for
the years specified.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1997
---- ----
<S> <C> <C>
Dividend Payout Ratio 22.21% 22.46%
Equity to Assets Ratio 10.38% 10.27%
</TABLE>
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. Primarily 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 $5,400,000 and $300,000 for the years ended December 31, 1998 and
1997, respectively. Brokered deposits totaled $298,059 at December 31, 1998.
Maturities in the Company's loan and investment portfolios are monitored
regularly to avoid matching short-term deposits and 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 which 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 endeavors 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 due to anticipated repricings. At December 31, 1998, the Company's rate
sensitive assets exceed rate sensitive liabilities due within one year by
$8,086,000.
As part of managing liquidity, the Company monitors its loan to deposit
ratio on a daily basis. At December 31, 1998 the ratio was 73.1% which is within
the Company's acceptable range. The Company also monitors the levels of assets
and liabilities that reprice with changes in the prime rate. At December 31,
1998, the Bank had net repriceable prime rate sensitive assets of $3,852,307.
However, the Bank's repriceable liabilities had a 5.5 % floor and were at that
rate at December 31, 1998.
The Company experienced an increase in cash and cash equivalents, its
primary source of liquidity, of $7,188,143 during 1998. The primary sources of
cash flow for 1998 were a net increase in deposits of $14,665,800 and the
Company's cash flow from operations of $1,160,488. Cash flow from investing
activities used $3,150,404 to fund loan growth, $3,770,753 to fund net security
purchases and $340,431 for capital expenditures. 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 liquidity position.
The Company estimates the cost of the Casco branch at approximately $1.4
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.
18
<PAGE> 19
The following table illustrates the projected maturities and the repricing
mechanisms of the major asset/liability categories of the Company as of December
31, 1998, based on certain assumptions. No prepayment assumptions have been made
for the loan portfolio. Maturities and repricing dates for investments have been
projected by applying the classifications set forth below to contractual
maturities and repricing dates. The Bank's variable rate loans consist primarily
of commercial loans which reprice with changes in the prime rate and are
generally written for a 1 year term.
<TABLE>
<CAPTION>
1 Year or Less 1 - 5 Years 5 - 10 Years After 10
-------------- ----------- ------------ --------
Years
------
<S> <C> <C> <C> <C>
Interest Earning Assets:
Fed Funds Sold $ 8,482,000 $ -- $ -- $ --
Investment Securities 3,757,000 2,085,000 6,084,000 6,139,000
Loans:
Variable Rate 8,717,000 -- -- --
Real Estate-Construction 2,854,000 662,000 -- 24,000
Real Estate-Other 8,438,000 5,873,000 182,000 293,000
Commercial and Industrial 13,392,000 7,677,000 434,000 152,000
Agricultural 3,964,000 1,307,000 29,000 394,000
Consumer 3,921,000 5,535,000 168,000 36,000
------------ ----------- ----------- -----------
Total Loans 41,286,000 21,054,000 813,000 899,000
------------ ----------- ----------- -----------
Other 1,184,000 -- -- --
============ =========== =========== ===========
Total Interest Earning Assets 54,709,000 23,139,000 6,897,000 7,038,000
------------ ----------- ----------- -----------
Interest Bearing Liabilities:
Interest Bearing Demand -- -- -- 6,022,000
Savings Deposits 5,305,000 -- -- 12,996,000
Money Market Accounts 1,174,000 -- -- 2,740,000
Certificates of Deposit 31,330,000 7,107,000 -- --
Jumbo CD's 3,319,000 977,000 -- --
IRA's 5,365,000 218,000 -- --
Other 130,000 28,000 -- --
============ =========== =========== ===========
Total Interest Bearing Liabilities 46,623,000 8,330,000 0 21,758,000
------------ ----------- ----------- -----------
Interest Sensitivity Gap per Period $ 8,086,000 $14,809,000 $ 6,897,000 ($14,720,000)
============ =========== =========== ===========
Cumulative Interest Sensitivity Gap $ 8,086,000 $22,895,000 $29,792,000 $15,072,000
============ =========== =========== ===========
Interest Sensitivity Gap as a
Percentage of Earning Assets 8.8% 16.1% 7.5% (16.0%)
Cumulative Sensitivity Gap as a
Percentage of Earning Assets 8.8% 24.9% 32.4% 16.4%
</TABLE>
19
<PAGE> 20
The Company does not have any security concentrations exceeding 10% of
stockholder's equity that are required to be disclosed.
The Company evaluates its tax position and the relative tax equivalent yield
of various alternative investments and reviews the yield curve in making its
investment decisions. The Company has increased its municipal loan and
investment position based on this evaluation from an average investment of
$4,401,030 in 1997 to $6,248,440 in 1998.
CAPITAL RESOURCES
The Company's primary source of capital since commencing operations has been
from issuance of common stock and retained operating profit. The Company does
not have any long term debt facility arrangements at December 31, 1998. Capital
for the Bank is above regulatory requirements at December 31, 1998. Pertinent
capital ratios for the Bank as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Minimum
Actual Requirements
------ ------------
<S> <C> <C>
Tier 1 Risk-Based Capital Ratio 13.5% 4.0%
Total Risk-Based Capital Ratio 14.6% 8.0%
Leverage Ratio 9.4% 4.0%
</TABLE>
Dividends from the Bank to the Company may not exceed the undivided profits of
the Bank (included in consolidated retained earnings) without prior approval of
a federal regulatory agency. The Bank paid $216,300 and $459,600 in dividends to
the Company for the years ended December 31, 1998 and 1997, respectively. At
December 31, 1998 the Bank could have paid the Company approximately $2,239,000
of additional dividends without prior regulatory approval. In addition, Federal
banking laws limit the amount of loans the bank may make to the Company, subject
to certain collateral requirements. No loans were made by the Bank to the
Company during 1998 or 1997.
20
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS.
LUXEMBURG BANCSHARES, INC. AND
SUBSIDIARIES
Luxemburg, Wisconsin
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
21
<PAGE> 22
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT................................................................23
FINANCIAL STATEMENTS
Consolidated Balance Sheets..............................................................24
Consolidated Statements of Income........................................................25
Consolidated Statements of Changes in Stockholders'Equity................................26
Consolidated Statements of Cash Flows....................................................27
Notes to Consolidated Financial Statements...............................................28
</TABLE>
22
<PAGE> 23
[WIPFLI ULLRICH LOGO]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Luxemburg Bancshares, Inc.
Luxemburg, Wisconsin
We have audited the accompanying consolidated balance sheets of Luxemburg
Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Luxemburg
Bancshares, Inc. and Subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Wipfli Ullrich Bertelson LLP
February 10, 1999
Green Bay, Wisconsin
23
<PAGE> 24
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $2,931,179 $3,326,444
Interest-bearing deposits 907,672 639,264
Federal funds sold 8,482,000 1,167,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 12,320,851 5,132,708
Investment securities available for sale-Stated at fair value 18,064,562 14,113,429
Loans held for sale 246,000 156,000
Total loans receivable 63,806,248 60,748,981
Allowance for credit losses (773,116) (677,101)
- ----------------------------------------------------------------------------------------------------------------------------
Net loans receivable 63,033,132 60,071,880
Premises and equipment 1,779,477 1,711,350
Other investments at cost 276,050 253,050
Other assets 2,250,553 2,115,831
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $97,970,625 $83,554,248
============================================================================================================================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities:
Non-interest-bearing deposits $10,758,991 $9,103,744
Interest-bearing deposits 76,553,176 63,542,623
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 87,312,167 72,646,367
Short-term borrowings 79,574 640,002
Borrowed funds 78,031 632,828
Other liabilities 1,044,420 1,106,,175
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 88,514,192 75,025,372
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $0.01 par value:
Authorized - 400,000 shares, no shares outstanding
Common stock - $1.00 and $0.1667 par value, respectively:
Authorized - 2,400,000 shares and 300,000 shares, respectively
Issued - 270,500 shares 270,500 45,083
Capital surplus 3,206,508 3,431,925
Retained earnings 6,120,356 5,293,023
Accumulated other comprehensive income 203,419 103,195
Less - 26,999 shares of treasury common stock, at cost (344,350) (344,350)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,456,433 8,528,876
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,970,625 $83,554,248
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Interest and fees on loans $5,454,302 $5,321,337
Interest on investment securities:
Taxable 694,774 709,503
Tax-exempt 220,713 137,389
Other interest and dividend income 320,494 53,459
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 6,690,283 6,221,688
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 3,306,559 2,888,577
Short-term borrowings 13,021 68,157
Borrowed funds and capital lease obligation 34,047 37,438
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,353,627 2,994,172
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 3,336,656 3,227,516
Provision for credit losses 150,000 120,000
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 3,186,656 3,107,516
- -------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 192,236 193,259
Mortgage underwriting fees - Secondary market 291,751 159,192
Loan servicing fee income - Net 44,533 34,929
Other operating income 600,257 500,893
- -------------------------------------------------------------------------------------------------------------------------
Total other income 1,128,777 888,273
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related benefits 1,585,032 1,469,879
Net occupancy expense 163,442 162,004
Equipment rentals, depreciation, and maintenance 282,897 251,908
Data processing 129,061 186,537
Other operating expenses 660,301 617,239
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,820,733 2,687,567
- -------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,494,700 1,308,222
Provision for income taxes 431,171 388,481
- -------------------------------------------------------------------------------------------------------------------------
Net income $1,063,529 $919,741
=========================================================================================================================
Basic earnings per common share $4.37 $3.78
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Treasury
Common Capital Retained Comprehensive Common
Stock Surplus Earnings Income Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $45,083 $3,416,080 $4,579,875 ($6,913) ($354,109) $7,680,016
Dividends paid (206,593) (206,593)
Employee stock bonus - 765 shares 15,845 9,759 25,604
Comprehensive income:
Net income 919,741 919,741
Other comprehensive income 110,108 110,108
----------
Total comprehensive income 1,029,849
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 45,083 3,431,925 5,293,023 103,195 (344,350) 8,528,876
Change in par value 225,417 (225,417) 0
Dividends paid (236,196) (236,196)
Comprehensive income:
Net income 1,063,529 1,063,529
Other comprehensive income 100,224 100,224
----------
Total comprehensive income 1,163,753
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $270,500 $3,206,508 $6,120,356 $203,419 ($344,350) $9,456,433
=================================================================================================================================
</TABLE>
26
<PAGE> 27
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,063,529 $ 919,741
- -----------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and net amortization 269,895 248,599
Provision for loss on other real estate 7,500 18,838
Provision for credit losses 150,000 120,000
Proceeds from sales of loans held for sale 19,141,060 5,310,398
Originations of loans held for sale (19,184,900) (5,452,020)
Gain on sale of assets - Net (46,324) (15,745)
Employee stock bonuses 0 25,604
Credit for deferred taxes (17,928) (33,919)
Change in operating assets and liabilities (222,344) (128,893)
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments 96,959 92,862
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,160,488 1,012,603
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 4,395,681 6,202,461
Purchase of securities available for sale (8,166,434) (6,073,340)
Net increase in loans (3,150,404) (5,708,311)
Purchase of additional life insurance (17,300) (17,300)
Proceeds from sale of assets 15,164 1,367
Capital expenditures (340,431) (489,180)
Purchase of other investments (23,000) (1,400)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,286,724) (6,085,703)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 14,665,800 6,488,906
Net decrease in short-term borrowings (560,428) (240,074)
Proceeds from borrowed funds 0 500,000
Principal payments on borrowed funds and capital lease obligations (554,797) (68,932)
Dividends paid (236,196) (206,593)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,314,379 6,473,307
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 7,188,143 1,400,207
Cash and cash equivalents at beginning 5,132,708 3,732,501
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end $12,320,851 $5,132,708
=============================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 3,465,568 $2,979,462
Income taxes 460,116 478,165
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1997, the Company entered into a capital lease of $73,931 for the purchase of
computer equipment.
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Luxemburg Bancshares, Inc. (the
"Company") and its subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry. Significant
accounting and reporting policies are summarized below.
Organization - The Company provides banking services to individual and corporate
customers through its wholly owned subsidiary, Bank of Luxemburg (the "Bank").
The Bank operates as a full-service financial institution with a primary market
area including, but not limited to, west Kewaunee County and northeast Brown
County. The Bank emphasizes variable rate commercial and consumer real estate
loans. In addition, the Bank holds a variety of securities through its wholly
owned subsidiary, Luxemburg Investment Corporation, a Nevada investment
corporation. The Company is subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by those regulatory
authorities.
Principles of Consolidation - The consolidated financial statements include the
accounts of Luxemburg Bancshares, Inc. and its subsidiaries, Bank of Luxemburg,
Luxemburg Investment Corporation, and Area Development Corporation.
All significant intercompany balances and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements - The preparation of the
accompanying consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from these
estimates.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, interest-bearing and non-interest-bearing
deposits in banks, and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
Investment in Securities - The Company's investments in securities are
classified as available for sale and accounted for as follows:
Securities available for sale consist of debt, equity, and
mortgage-related securities. These securities are stated at fair value.
Unrealized holding gains and losses, net of tax, on securities available
for sale are reported as accumulated other comprehensive income within
stockholders' equity until realized.
Amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the period to maturity. Gains and losses
on the sale of securities available for sale are determined using the
specific-identification method.
Loans Held for Sale - Loans held for sale consist of the current origination of
certain fixed-rate mortgage loans and are recorded at the lower of aggregate
cost or fair value. Fees received from the borrower are deferred and recorded as
an adjustment of the sale price. A gain or loss is recognized at the time of the
sale reflecting the present value of the difference between the contractual
interest rate of the loans sold and the yield to the investor, adjusted for the
initial value of mortgage servicing rights. The servicing fee is recognized as
the related loan payments are received.
Loans Receivable and Related Interest Income and Fees - Interest on loans is
credited to income as earned. Interest income is not accrued on loans where
management has determined collection of such interest is doubtful. When a loan
is placed on nonaccrual status, previously accrued but unpaid interest deemed
uncollectible is reversed and charged against current income. Loan-origination
fees and certain direct origination costs are capitalized and recognized as an
adjustment of the yield on the related loan.
28
<PAGE> 29
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Credit Losses - The allowance for credit losses includes specific
allowances related to commercial loans which have been judged to be impaired. A
loan is impaired when, based on current information, it is probable that the
Company will not collect all amounts due in accordance with the contractual
terms of the loan agreement. These specific allowances are based on discounted
cash flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is collateral
dependent.
The Company continues to maintain a general allowance for credit losses for
loans not considered impaired. The allowance for credit losses is maintained at
a level which management believes is adequate to provide for possible credit
losses. Management periodically evaluates the adequacy of the allowance using
the Company's past loan loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective since it requires
material estimates that may be susceptible to significant change.
Mortgage Servicing Rights - The cost of mortgage servicing rights is amortized
in proportion to, and over the period of, estimated net servicing revenue.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the rights
are stratified by rate in the quarter in which the related mortgage loans were
sold.
Premises and Equipment - Premises and equipment are stated at cost. Maintenance
and repair costs are charged to expense as incurred. Gains or losses on
disposition of premises and equipment are reflected in income. Depreciation is
computed on the straight-line method and is based on the estimated useful lives
of the assets which range from three to thirty-five years.
OTHER INVESTMENTS - Other investments consist of Federal Home Loan Bank stock
and Bankers Bancorporation of Wisconsin, Inc. stock which are carried at cost.
Other investments are evaluated for impairment on an annual basis.
Goodwill - Goodwill acquired in a business acquisition is being amortized on a
straight-line basis over five years.
Income Taxes - Deferred income taxes have been provided under the liability
method. Deferred tax assets and liabilities are determined based on the
difference between the consolidated financial statement and tax bases of assets
and liabilities as measured by the current enacted tax rates which will be in
effect when these differences are expected to reverse. Deferred tax expense
(benefit) is the result of changes in the deferred tax asset and liability.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
Off-Balance-Sheet Financial Instruments - In the ordinary course of business,
the Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit, and standby letters of credit. Such financial
instruments are recorded in the consolidated financial statements when they
become payable.
Earnings per Share - 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 1997. The basic and diluted earnings
per share computations are the same for 1998 and 1997.
29
<PAGE> 30
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications - Certain reclassifications have been made to the 1997
consolidated financial statements to conform to the 1998 classifications.
Comprehensive Income - Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are recognized as a separate
component of equity, accumulated other comprehensive income.
Future Accounting Change - 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
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This statement requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for fiscal years beginning after June
15, 1999. Management, at this time, cannot determine the effect adoption of this
statement may have on the consolidated financial statements of the Company as
the accounting for derivatives is dependent on the amount and nature of
derivatives in place at the time of adoption.
NOTE 2 CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which was issued in June 1997. In accordance with this
statement, the Company reports those items defined as comprehensive income in
the statement of changes in stockholders' equity. The adoption of SFAS No. 130
did not have an impact on the Company's financial position or results of
operations.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which was issued in June
1997. This statement establishes new standards for reporting information about
operating segments in annual and interim financial statements. The standard also
requires descriptive information about the way operating segments are
determined, the products and services provided by the segments, and the nature
of differences between reportable segment measurements and those used for the
consolidated enterprise. The disclosure requirements had no impact on the
Company's financial position or results of operations.
NOTE 3 RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $261,000 were restricted at December
31, 1998, to meet the reserve requirements of the Federal Reserve System.
30
<PAGE> 31
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
1998 COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations $2,396,240 $58,280 $0 $2,454,520
Obligations of states and
political subdivisions 5,613,364 162,651 0 5,776,015
Mortgage-related securities 7,746,049 104,651 16,673 7,834,027
Commercial paper 2,000,000 0 0 2,000,000
--------------------------------------------------------------------------------------------------------------------------
Total $17,755,653 $325,582 $16,673 $18,064,562
==========================================================================================================================
<CAPTION>
1997
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations $4,079,496 $52,664 $2,175 $4,129,985
Obligations of states and
political subdivisions 3,594,785 83,275 0 3,678,060
Mortgage-related securities 6,282,411 38,476 15,503 6,305,384
--------------------------------------------------------------------------------------------------------------------------
Total $13,956,692 $174,415 $17,678 $14,113,429
==========================================================================================================================
</TABLE>
Fair values of securities are estimates based on financial models or
prices paid for similar securities. It is possible interest rates
could change considerably resulting in a material change in the
estimated fair value.
31
<PAGE> 32
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 INVESTMENT SECURITIES (Continued)
The amortized cost, estimated fair value, and weighted average yield
of investment securities available for sale at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED WEIGHTED
COST FAIR VALUE AVERAGE YIELD
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 3,748,724 $ 3,756,785 5.51%
Due after one year through five years 2,026,396 2,085,358 5.54%
Due after five years through ten years 3,163,932 3,301,174 4.92%
Due after ten years 1,070,552 1,087,218 4.69%
---------------------------------------------------------------------------------------------------------------------
10,009,604 10,230,535
Mortgage-related securities 7,746,049 7,834,027 6.43%
---------------------------------------------------------------------------------------------------------------------
Total investment securities $17,755,653 $18,064,562 5.76%
=====================================================================================================================
</TABLE>
There were no sales of debt securities during 1998 and 1997.
Investment securities with an amortized cost of $998,813 and estimated
fair value of $1,005,800 were pledged to secure public deposits,
short-term borrowings, and other purposes required by law as of
December 31, 1998.
NOTE 5 LOANS
The composition of loans at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------------------------
Real estate:
<S> <C> <C>
Construction $ 3,539,754 $ 3,453,016
Other 19,889,646 20,754,707
Commercial and industrial 27,540,944 24,140,174
Agricultural 5,847,901 5,409,905
Consumer 69,88,003 6,991,179
-------------------------------------------------------------------------------------------------------------------
Total loans $63,806,248 $60,748,981
===================================================================================================================
</TABLE>
The aggregate amount of nonperforming loans was approximately $438,000
and $535,000 at December 31, 1998 and 1997, respectively.
Nonperforming loans are those which are contractually past due 90 days
or more as to interest or principal payments, on a nonaccrual of
interest status, or loans the terms of which have been renegotiated to
provide a reduction or deferral of interest or principal. The interest
income recorded and that which would have been recorded had nonaccrual
and renegotiated loans been current, or not troubled, are not material
to the consolidated financial statements for the years ended December
31, 1998 and 1997.
At December 31, 1998 and 1997, there were no loans considered to be
impaired. There were also no impaired loans during 1998 and 1997.
The subsidiary bank in the ordinary course of banking business grants
loans to the Companys executive officers and directors, including
their families and firms in which they are principal owners.
32
<PAGE> 33
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 LOANS (Continued)
Substantially all loans to employees, officers, directors, and stockholders
owning 5% or more of the Company were made on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others and did not involve more than the normal risk of
collectibility or present other unfavorable features.
Activity in such loans during 1998 is summarized below:
<TABLE>
<S> <C>
Loans outstanding, December 31, 1997 $2,532,593
New loans 2,201,950
Repayment (1,457,004)
----------------------------------------------------------------------------
Loans outstanding, December 31, 1998 $3,277,539
============================================================================
</TABLE>
An analysis of the allowance for credit losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning $677,101 $653,535
Provision charged to operating expense 150,000 120,000
Recoveries on loans 23,636 36,108
Loans charged off (77,621) (132,542)
-------------------------------------------------------------------------------------------------------------
Balance at end $773,116 $677,101
=============================================================================================================
</TABLE>
NOTE 6 LOAN SERVICING
Mortgage loans of $25,651,000 and $17,162,000 as of December 31, 1998 and 1997,
respectively, were serviced for others. These loans are not included in the
accompanying consolidated balance sheets. Mortgage servicing rights are
capitalized when the serviced loans are sold. This asset is amortized over the
estimated period that servicing income is recognized. The following is an
analysis of changes in mortgage servicing rights:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $80,167 $43,271
Capitalized amounts 131,803 52,802
Amortization (36,223) (15,906)
---------------------------------------------------------------------------------------------------
Balance, December 31 $175,747 $80,167
===================================================================================================
</TABLE>
No impairment of mortgage servicing rights existed at December 31, 1998;
therefore, no valuation allowance was recorded.
The carrying value of the mortgage servicing rights is included with other
assets and approximates fair market value at December 31, 1998.
33
<PAGE> 34
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $70,246 $70,246
Buildings and improvements 1,463,146 1,447,459
Furniture and equipment 1,535,375 1,409,553
---------------------------------------------------------------------------------------------------------
Totals 3,068,767 2,927,258
Construction in progress 198,921 0
Less - Accumulated depreciation (1,488,211) (1,215,908)
---------------------------------------------------------------------------------------------------------
Net depreciated value $1,779,477 $1,711,350
=========================================================================================================
</TABLE>
Depreciation and amortization of premises and equipment charged to operating
expense totaled $272,304 in 1998 and $232,549 in 1997.
NOTE 8 LEASE
In 1997, the Company entered into a lease for computer equipment. The computer
lease, which expires in 2000, is classified as a capital lease.
Premises and equipment include the following amounts for the computer lease that
has been capitalized:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $73,931 $73,931
Less - Accumulated amortization 31,868 13,385
-------------------------------------------------------------------------------------------------
Totals $42,063 $60,546
=================================================================================================
</TABLE>
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregate, under the capital lease
as of December 31, 1998, consist of the following:
<TABLE>
<S> <C>
1999 $28,271
2000 6,817
-----------------------------------------------------------------------------------------
Total minimum lease payments 35,088
Amount representing interest (1,828)
-----------------------------------------------------------------------------------------
Present value of net minimum lease payments $33,260
=========================================================================================
</TABLE>
The carrying value of the capital lease obligation is included with other
liabilities and approximates fair market value at December 31, 1998.
34
<PAGE> 35
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 DEPOSITS
The distribution of deposits at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest-bearing demand deposits $10,758,991 $ 9,103,744
Interest-bearing demand deposits 6,805,296 7,126,486
Savings deposits 17,516,126 12,963,780
Money market deposits 3,914,723 3,959,132
Time deposits 48,317,031 39,493,225
-----------------------------------------------------------------------------------------------
Total deposits $87,312,167 $72,646,367
===============================================================================================
</TABLE>
Time deposits of $100,000 or more were approximately $5,092,000
and $4,580,000 at December 31, 1998 and 1997, respectively. Interest expense on
time deposits of $100,000 or more was approximately $247,000 and $180,000 for
the years ended December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1999 $36,946,031
2000 9,534,000
2001 683,000
2002 127,000
2003 1,027,000
------------------------------------
Total $48,317,031
====================================
</TABLE>
NOTE 10 SHORT-TERM BORROWINGS
Short-term borrowings consist of treasury tax and loan deposits of $79,574 and
$640,002 at December 31, 1998 and 1997, respectively, which generally mature
within 1 to 120 days from the transaction date.
NOTE 11 BORROWED FUNDS
Borrowed funds consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
6.19% FHLB note, secured by pledges of mortgage loans
and FHLB stock, due September 18, 1998, interest payable $ 0 $500,000
6.63% land contract, payable at $2,831 per month
including interest, due September 1, 1999 24,787 55,981
8.0% note, payable at $2,408 per month including interest,
due December 31, 2000 53,244 76,847
---------------------------------------------------------------------------------------------------------
Totals $78,031 $632,828
=========================================================================================================
</TABLE>
35
<PAGE> 36
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 BORROWED FUNDS (Continued)
Required payments of principal on the borrowed funds at December 31, 1998, are
summarized as follows:
<TABLE>
<S> <C>
1999 $50,349
2000 27,682
-----------------------------------------------------------------------
Total $78,031
=======================================================================
</TABLE>
NOTE 12
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is shown in the consolidated statements of changes in
stockholders' equity. The Company's accumulated other comprehensive income is
comprised of the unrealized gain or loss on securities available for sale. The
following shows the activity in accumulated other comprehensive income:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated other comprehensive income (deficit) at
beginning $103,195 ($6,913)
-------------------------------------------------------------------------------------------------------
Activity:
Unrealized gain on securities available for sale 151,855 166,830
Tax impact (51,631) (56,722)
-------------------------------------------------------------------------------------------------------
Net unrealized gain on securities available for sale 100,224 110,108
-------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income at end $203,419 $103,195
=======================================================================================================
</TABLE>
NOTE 13 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current tax expense:
Federal $389,183 $365,550
State 59,916 56,850
---------------------------------------------------------------------------------------------------------
Total current 449,099 422,400
---------------------------------------------------------------------------------------------------------
Deferred tax credit:
Federal (15,386) (28,267)
State (3,861) (7,068)
---------------------------------------------------------------------------------------------------------
Total deferred (19,247) (35,335)
---------------------------------------------------------------------------------------------------------
Change in valuation allowance 1,319 1,416
---------------------------------------------------------------------------------------------------------
Total provision for income taxes $431,171 $388,481
=========================================================================================================
</TABLE>
36
<PAGE> 37
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 INCOME TAXES (Continued)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities net of a valuation allowance for deferred tax assets not likely to
be realized. The major components of net deferred tax assets at December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $200,049 $162,398
Deferred compensation 137,600 106,591
Intangible assets 20,094 13,345
Net operating loss carryovers 21,543 20,224
Other 2,941 7,387
-----------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 382,227 309,945
-----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (157,988) (144,423)
Accretion (12,950) (10,960)
Mortgage servicing rights (68,917) (31,437)
Unrealized gain on investment securities available for (105,490) (53,542)
-----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (345,345) (240,362)
-----------------------------------------------------------------------------------------------------------------------------
Total valuation allowance recognized for net deferred tax (21,543) (20,224)
-----------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $15,339 $49,359
=============================================================================================================================
</TABLE>
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------
% OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax expense at statutory rate $508,198 34.0 $444,795 34.0
Increase (decrease) in taxes resulting
from:
Tax-exempt interest (96,934) (6.5) (70,361) (5.4)
State income taxes - Net of federal
tax benefit 37,867 2.5 33,790 2.6
Cash surrender value of life
insurance in excess of premiums (16,630) (1.1) (16,264) (1.2)
Other (1,330) (0.1) (3,479) (0.3)
-----------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $431,171 28.8 $388,481 29.7
=============================================================================================================================
</TABLE>
The Company has state net operating loss carryforwards of approximately
$413,000. The net operating losses begin to expire in 1999.
37
<PAGE> 38
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 PROFIT SHARING PLAN
The Bank has a 401(k) profit sharing plan covering substantially all employees.
The plan provides for discretionary contributions and matching contributions up
to 8% of employee compensation; however, all contributions are at the discretion
of the Board of Directors. Profit sharing expense for 1998 and 1997 was $54,043
and $46,500, respectively.
NOTE 15 DEFERRED COMPENSATION
The Company has a deferred compensation plan which permits directors to defer a
portion of their compensation. The deferred compensation is accrued but
unfunded, is distributable in cash after retirement, and amounted to $350,895
and $271,820 at December 31, 1998 and 1997, respectively. The Company has
insured the lives of the directors who participate in the deferred compensation
plan to assist in the funding of the deferred compensation liability. The
Company is the owner and beneficiary of the insurance policies. At December 31,
1998 and 1997, the cash surrender value of these policies was $1,203,458 and
$1,137,276, respectively. The amount charged to operations for deferred
compensation was $79,075 and $70,676 for the years ended December 31, 1998 and
1997, respectively.
NOTE 16 COMMITMENTS AND CONTINGENCIES
Property and Equipment - As of December 31, 1998, the Company was committed to
the construction of a new branch facility in Casco, Wisconsin, and additions of
furniture, fixtures, and equipment totaling approximately $1,400,000.
Stock Redemption Policy - Luxemburg Bancshares, Inc. adopted a stock redemption
policy to assist in the establishment of a fair price for its shares. The
Company can redeem stock up to 10% of stockholders' equity in any 12-month
period without specific prior approval from the Federal Reserve Bank. At
December 31, 1998, the redemption price was determined to be 80% of the book
value of the stock. Thus the maximum commitment at December 31, 1998, would be
$31.07 per share.
Financial Instruments With Off-Balance-Sheet Risk - The 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 December 31 is
as follows:
<TABLE>
<CAPTION>
Notional Amount
-------------------------------------
1998 1997
---------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $4,545,000 $3,457,000
Credit card arrangements 561,000 590,000
Standby letters of credit 132,000 100,000
</TABLE>
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.
38
<PAGE> 39
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 COMMITMENTS AND CONTINGENCIES (Continued)
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.
NOTE 17 CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and standby letters of credit have been
granted to customers in the Bank's market area. The concentrations of credit by
type are set forth in Note 5. Standby letters of credit were granted primarily
to commercial borrowers.
NOTE 18 SEGMENT INFORMATION
Luxemburg Bancshares, Inc., through a branch network of its subsidiary, Bank of
Luxemburg, provides a full range of consumer and commercial banking services to
individuals, businesses, and farms in northeastern Wisconsin. These services
include demand, time, and savings deposits; safe deposit services; credit cards;
notary services; night depository; money orders, traveler's checks, and
cashier's checks; savings bonds; secured and unsecured consumer, commercial, and
real estate loans; ATM processing; cash management; and financial planning.
While the Company's chief decision makers monitor the revenue streams of various
Company products and services, operations are managed and financial performance
is evaluated on a Company wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
NOTE 19 REGULATORY MATTERS
At December 31, 1998, Bank of Luxemburg could have paid approximately $2,239,000
of additional dividends to the Company without prior regulatory approval. The
payment of dividends is subject to the statutes governing state chartered banks
and may be further limited because of the need for the Bank to maintain capital
ratios satisfactory to applicable regulatory agencies.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets and of Tier I capital
to average assets. Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
39
<PAGE> 40
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19 REGULATORY MATTERS (Continued)
As of December 31, 1998 and 1997, the most recent notification from the Office
of the Commissioner of Banking categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios of 8.0%, 4.0%, and 4.0%, respectively. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual and regulatory capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMP CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -----------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998:
Total capital (to risk-
weighted assets) $9,657,000 14.60% >=$5,279,000 >=8.0% >=$6,599,000 >=10.0%
Tier I capital (to risk-
weighted assets) $8,884,000 13.50% >=$2,640,000 >=4.0% >=$3,960,000 >=6.0%
Tier I capital (to average
assets) $8,884,000 9.40% >=$3,797,000 >=4.0% >=$4,746,000 >=5.0%
DECEMBER 31, 1997:
Total capital (to risk-
weighted assets) $8,654,000 14.40% >=$4,820,000 >=8.0% >=$6,024,000 >=10.0%
Tier I capital (to risk-
weighted assets) $7,977,000 13.20% >=$2,410,000 >=4.0% >=$3,615,000 >=6.0%
Tier I capital (to average
assets) $7,977,000 9.70% >=$3,627,000 >=4.0% >=$4,084,000 >=5.0%
</TABLE>
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions for the Company's financial
instruments are summarized below.
Cash and Cash Equivalents - The carrying values approximate the fair values for
these assets.
Investment Securities Available for Sale - Fair value is based on quoted market
prices where available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
40
<PAGE> 41
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans Receivable and Loans Held for Sale - For certain homogeneous categories of
loans, such as fixed-rate residential mortgages, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings. The
carrying amount of accrued interest approximates its fair value. Impaired loans
are measured at the estimated fair value of the expected future cash flows at
the loan's effective interest rate, the loan's observable market price, or the
fair value of the collateral for loans which are collateral dependent.
Therefore, the carrying value of impaired loans approximates the estimated fair
value for these assets.
Other Investments - The carrying amount reported in the consolidated balance
sheets for other investments approximates the fair value of these assets.
Deposits - The fair value of deposits with no stated maturity, such as demand
deposits, savings, and money market accounts, is the amount payable on demand on
the reporting date. The fair value of fixed-rate time deposits is calculated
using discounted cash flows applying interest rates currently being offered on
similar certificates.
Short-Term Borrowings and Borrowed Funds - The carrying amount reported in the
consolidated balance sheets for short-term borrowings and borrowed funds
approximates the fair value of the liabilities.
Off-Balance-Sheet Instruments - The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements, the current interest rates, and the
present creditworthiness of the counterparties. Since this amount is immaterial,
no amounts for fair value are presented.
The carrying value and estimated fair value of financial instruments at December
31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------------------------------------------
ESTIMATED FAIR ESTIMATED FAIR
CARRYING VALUE VALUE CARRYING VALUE VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $12,320,851 $12,320,851 $5,132,708 $5,132,708
Investment securities
available for sale 18,064,562 18,064,562 14,113,429 14,113,429
Total loans - Net 63,279,132 64,415,194 60,227,880 60,975,986
Other investments 276,050 276,050 253,050 253,050
-----------------------------------------------------------------------------------------------------------------
Total financial assets $93,940,595 $95,076,657 $79,727,067 $80,475,173
Financial liabilities:
Deposits $87,312,167 $87,826,118 $72,646,367 $72,800,822
Short-term borrowings 79,574 79,574 640,002 640,002
Borrowed funds 78,031 78,031 632,828 632,828
-----------------------------------------------------------------------------------------------------------------
Total financial liabilities $87,469,772 $87,983,723 $73,919,197 $74,073,652
=================================================================================================================
</TABLE>
41
<PAGE> 42
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Limitations - Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters that
could affect the estimates. Fair value estimates are based on existing on- and
off-balance-sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Deposits with no stated maturities are
defined as having a fair value equivalent to the amount payable on demand. This
prohibits adjusting fair value derived from retaining those deposits for an
expected future period of time. This component, commonly referred to as a
deposit base intangible, is neither considered in the above amounts nor is it
recorded as an intangible asset on the balance sheet. Significant assets and
liabilities that are not considered financial assets and liabilities include
premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
42
<PAGE> 43
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 PARENT COMPANY ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31, 1998 and 1997
Assets 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $3,618 $49,238
Premises and equipment 361,043 381,776
Investment in subsidiaries 9,135,401 8,188,105
Other 16,600 20,921
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS 9,516,662 8,640,040
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------
Borrowed funds $24,787 $55,981
Other liabilities 35,442 55,183
Total stockholders' equity 9,456,433 8,528,876
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,516,662 $8,640,040
===================================================================================================
<CAPTION>
STATEMENTS OF INCOME
Years Ended December 31, 1998 and 1997
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividends from subsidiaries $216,300 $459,600
Undistributed equity in earnings of subsidiaries 847,072 479,740
Other operating income 174,000 97,339
- ---------------------------------------------------------------------------------------------------
Total income 1,237,372 1,036,679
Operating expenses 167,325 121,033
Interest expense 6,399 8,602
- ---------------------------------------------------------------------------------------------------
Total expenses 173,724 129,635
- ---------------------------------------------------------------------------------------------------
Income before provision (credit) for income taxes 1,063,648 907,044
Provision (credit) for income taxes 119 -12,697
- ---------------------------------------------------------------------------------------------------
Net income $1,063,529 $919,741
===================================================================================================
</TABLE>
43
<PAGE> 44
LUXEMBURG BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
1998 1997
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,063,529 $919,741
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 85,177 55,092
Accretion 0 (1,339)
Employee stock bonuses 0 25,604
Undistributed earnings of subsidiary (847,072) (479,740)
Provision for deferred taxes 8,699 0
Change in other operating assets (4,378) (20,921)
Change in other liabilities (19,741) (3,026)
Total adjustments (777,315) (424,330)
Net cash provided by operating activities 286,214 495,411
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - Capital expenditures (64,444) (213,812)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on borrowed funds and capital lease
obligations (31,194) (45,400)
Dividends paid (236,196) (206,593)
-------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (267,390) (251,993)
---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (45,620) 29,606
Cash at beginning 49,238 19,632
---------------------------------------------------------------------------------------------------------------------
Cash at end 3,618 49,238
=====================================================================================================================
Supplemental Information:
Cash paid during the year for interest 6,575 8,767
=====================================================================================================================
</TABLE>
44
<PAGE> 45
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
This item is not applicable.
45
<PAGE> 46
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
Information called for by Item 9 is contained under "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's
Proxy Statement, dated March 25, 1999 with respect to the Annual Meeting of
Shareholders to be held on April 24, 1999 to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 and which is incorporated herein by
reference in response to this item.
Reference is also made to "Executive Officers Of The Registrant" included at
the end of Part I of this Form 10-KSB in partial response to Item 9.
ITEM 10. EXECUTIVE COMPENSATION.
The information appearing under "Director Compensation" and " Executive
Compensation" of the Company's Proxy Statement dated March 25, 1999 is
incorporated herein by reference in response to this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under "Beneficial Ownership of Principal
Shareholders, Directors and Management" of the Company's Proxy Statement dated
March 25, 1999 is incorporated herein by reference in response to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under "Related Transactions" of the Company's
Proxy Statement dated March 25, 1999 is incorporated herein by reference in
response to this item.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1998.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation, incorporated herein by
reference to Exhibit 3(i) of the Company's Quarterly
Report on Form 10-QSB for the Quarter Ended June 30,
1998
3.2 Bylaws, incorporated herein by reference to Exhibit 3.2
of the Company's Registration Statement on Form 10-SB
10.1 Director Deferred Compensation Plan for Bank of
Luxemburg, incorporated herein by reference to Exhibit
10.1 of the Company's Registration Statement on Form
10-SB
21 Subsidiaries of the Registrant
27 Financial Data Schedule
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S><C>
LUXEMBURG BANCSHARES, INC.
Date: March 10, 1999 By: /s/ John Slatky
--------------------------------------------------------
John Slatky
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 10, 1999.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ John Slatky
-----------------------------------------
John A. Slatky President and Chief Executive Officer and
a Director
By: /s/ Thomas L. Lepinski
-----------------------------------------
Thomas L. Lepinski, C. P. A. Treasurer, Chief Financial Officer and
Chief Accounting Officer
By: /s/ Irvin G. Vincent
-----------------------------------------
Irvin G. Vincent Chairman of the Board of Directors
By:
-----------------------------------------
Willard Marchant Director
By:
-----------------------------------------
Thomas J. Rueckl Director
By: /s/ James J. Jadin
-----------------------------------------
James J. Jadin Director
By: /s/ Ronald A. Ledvina
-----------------------------------------
Ronald A. Ledvina Director
By:
-----------------------------------------
Richard L. Dougherty Director
By: /s/ Donald E. Pritzl
-----------------------------------------
Donald E. Pritzl Director
</TABLE>
47
<PAGE> 1
Exhibit 21
Subsidiaries
Name Jurisdiction of Organization
Bank of Luxemburg Wisconsin
Area Development Corporation Wisconsin
Luxemburg Investment Corporation * Nevada
* A wholly-owned subsidiary of Bank of Luxemburg
48
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,931,179
<INT-BEARING-DEPOSITS> 907,672
<FED-FUNDS-SOLD> 8,482,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,064,562
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 64,052,248
<ALLOWANCE> 773,116
<TOTAL-ASSETS> 97,970,625
<DEPOSITS> 87,312,167
<SHORT-TERM> 79,574
<LIABILITIES-OTHER> 1,044,420
<LONG-TERM> 78,031
0
0
<COMMON> 270,500
<OTHER-SE> 9,185,933
<TOTAL-LIABILITIES-AND-EQUITY> 97,970,625
<INTEREST-LOAN> 5,454,302
<INTEREST-INVEST> 915,487
<INTEREST-OTHER> 320,494
<INTEREST-TOTAL> 6,690,283
<INTEREST-DEPOSIT> 3,306,559
<INTEREST-EXPENSE> 3,353,627
<INTEREST-INCOME-NET> 3,336,656
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,820,733
<INCOME-PRETAX> 1,494,700
<INCOME-PRE-EXTRAORDINARY> 1,494,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063,529
<EPS-PRIMARY> 4.37
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.10
<LOANS-NON> 294,000
<LOANS-PAST> 144,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 677,101
<CHARGE-OFFS> 77,621
<RECOVERIES> 23,636
<ALLOWANCE-CLOSE> 773,116
<ALLOWANCE-DOMESTIC> 38,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 735,000
</TABLE>
