-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O41/6RIjOz1fawFz7Xo+u2M/q94UVAAhsdeA6JDgIfZAwjGaRxVf14xyg9qFAA28 4C8fZNR+kUSMcLAeyla8iw== 0000885531-00-000004.txt : 20000331 0000885531-00-000004.hdr.sgml : 20000331 ACCESSION NUMBER: 0000885531-00-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENMARK BANCSHARES INC CENTRAL INDEX KEY: 0000885531 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391472124 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21554 FILM NUMBER: 585051 BUSINESS ADDRESS: STREET 1: 103 EAST MAIN STREET CITY: DENMARK STATE: WI ZIP: 54208 BUSINESS PHONE: 4148632161 MAIL ADDRESS: STREET 1: 103 EAST MAIN STREET CITY: DENMARK STATE: WI ZIP: 54208 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-21554 DENMARK BANCSHARES, INC. (Exact name of registrant as specified in its charter) Wisconsin 39-1472124 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 103 East Main Street, Denmark, Wisconsin 54208-0130 (Address of principal executive offices) Registrant's telephone number, including area code: (920) 863-2161 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 2000, was $52,336,540 (44,353 shares at $1,180 per share). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) As of March 1, 2000, there were 54,997 shares of the registrant's Common Stock (no par value) issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into Which Portions of Documents are Documents Incorporated ----------- ----------------------------- Annual Report to Shareholders for the fiscal year ended December 31, 1999 Parts I, II and IV year ended December 31, 1999 Proxy Statement for Annual Meeting of Shareholders on April 25, 2000 Part III 1 DENMARK BANCSHARES, INC. Page No. PART I Item 1. Description of Business 3 Item 2. Description of Property 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 8 Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 9 PART III Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial Owners and Management 10 Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11 SIGNATURES 12 2 PART I ITEM 1. DESCRIPTION OF BUSINESS - ------------------------------- History and General Business of the Company Denmark Bancshares, Inc. ("Company") was formed in 1983 as a Wisconsin bank holding company for the purpose of acquiring and holding the Common Stock of the Denmark State Bank ("Bank"). The holding company was formed to allow the Bank to expand its line of financial products, enabling it to compete with other financial institutions. The Company acquired the Bank in 1983 through an exchange offer for shares of the Bank. On August 4, 1997, the Bank purchased the assets and assumed the liabilities of the Reedsville Branch of M&I Bank Northeast. The Company's subsidiaries are the Bank, Denmark Agricultural Credit Corporation ("DACC"), which offers certain types of farm credit, and the McDonald-Zeamer Insurance Agency, Inc. ("McDonald"), which sells a full line of insurance products. Unless the context otherwise requires, when used herein the term "Company" refers to Denmark Bancshares, Inc. and all of its subsidiaries. The Bank The Bank offers a full line of retail banking services, including checking, time deposits of various types, loans for business, real estate and personal use, and other miscellaneous banking services. The Bank employs two experienced investment representatives that provide financial planning and sell annuities, mutual funds and other investment securities. The Bank has five offices, serving primarily Kewaunee, Brown and Manitowoc Counties. The Bank also has eight automated teller machines at various locations throughout its market area. The Bank also offers home banking 24 hours a day via telephone or personal computer. These services allows customers to transfer funds between deposit accounts and inquire about their balances or recent transaction activity as well as providing information about current interest rates. No significant portion of the loan portfolio of the Bank is concentrated in one individual or group of individuals, and management believes that the portfolio's industry weighting is prudent. Seasonal factors do not materially affect the size or quality of the loan portfolio of the Bank. Set forth below is a schedule of the concentration of the Company's loans, including loans of the Bank and DACC, at December 31, 1999: Amounts in Thousands ---------- Agriculture Related $55,473 Commercial 37,858 Real Estate -- Construction 12,049 Real Estate -- Mortgage 131,828 Installment Loans to Individuals 18,552 Other 865 -------- Total Loans $256,625 Denmark Agricultural Credit Corporation DACC commenced business in 1986 to provide a source of funds for farm loans and to provide a source of liquidity for the Bank. As of the close of the fiscal year, DACC had lines of working capital credit in the aggregate amount of $37,000,000, including $30,000,000 from the AgriBank, FCB and $7,000,000 from a private lending institution. DACC originates loans and purchases loans exclusively from the Bank. As of December 31, 1999, DACC held agricultural loans totaling $30,995,269. In 1999 the net income of DACC was equal to 17.80% of the consolidated net income of the Company. Insurance Subsidiary McDonald sells life, health, casualty, auto and all other general types of insurance, and performs certified residential appraisals for the Bank. In 1996, McDonald purchased the Zeamer Insurance Agency. To date, the operations of McDonald have not represented a material portion of the consolidated operating results of the Company. 3 Areas Serviced by the Company; Competition The Company serves Kewaunee, Brown and Manitowoc Counties, including the villages of Denmark, Maribel, Reedsville and Whitelaw and the town of Bellevue. The population of the Bank's primary service area is approximately 15,000. The local economy of the area served is based on agriculture and light industry but the extended service area has a generally diversified economy. Extreme competition exists in obtaining new deposits and loans. The Company faces intense competition from other banks, savings and loan, credit unions, insurance agencies, and securities brokerage firms. Many of the Company's competitors are larger and have significantly greater financial resources than the Company. Employees of the Company At December 31, 1999, the Bank had 81 full-time equivalent employees; McDonald has six full-time employees. The Company considers its relationship with its employees to be excellent. Supervision and Regulation The operations of financial institutions, including banks and bank holding companies, are highly regulated, both at the federal and state levels. Numerous statutes and regulations affect the businesses of the Company and its subsidiaries. To the extent that the information below is a summary of statutory provisions, such information is qualified in its entirety by reference to the statutory provisions described. There are additional laws and regulations having a direct or indirect effect on the business of the Company or the Bank. In recent years, the banking and financial industry has been the subject of numerous legislative acts and proposals, administrative rules and regulations at both federal and state regulatory levels. As a result of many of such regulatory changes, the nature of the banking industry in general has changed dramatically in recent years as increasing competition and a trend toward deregulation have caused the traditional distinctions among different types of financial institutions to be obscured. The performance and earnings of the Bank, like other commercial banks, are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the Federal Reserve System regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open-market operations in U.S. Government securities, varying the discount rate on bank borrowings, and setting reserve requirements against bank deposits. The policies of the Federal Reserve have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates earned on loans and investments. The general effect, if any, of such policies upon the future business and earnings of the Bank cannot accurately be predicted. The Company As a registered bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"). The Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board (the "Board") before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under the Act, the Company is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or holding company, and neither the Company nor any subsidiary may engage in any business other than banking, managing or controlling banks or furnishing services to or performing services for its subsidiaries. The Company may, however, own shares of a company the activities of which the Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, and the holding company itself may engage in such activities. The Company is authorized under the Act to own its two nonbank subsidiaries, DACC and McDonald. As a registered bank holding company, the Company is supervised and regularly examined by the Board. Under the Act, the Company is required to file with the Board an annual report and such additional information as may be required. The Board can order bank holding companies and their subsidiaries to cease and desist from any actions which in the opinion of the Board constitute serious risk to the financial safety, soundness or stability of a subsidiary bank and are inconsistent with sound banking principles or in violation of law. The Board has adopted regulations which deal with the measure of capitalization for bank holding companies. Such regulations are essentially the same as those adopted by the FDIC, described below. The Board has also issued a policy statement on the payment of cash dividends by bank holding companies, wherein the board has stated that a bank holding 4 company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Under Wisconsin law, the Company is also subject to supervision and examination by the Division of Banking of the Wisconsin Department of Financial Institutions (the "Division"). The Division is also empowered to issue orders to a bank holding company to remedy any condition or policy which, in its determination, endangers the safety of deposits in any subsidiary state bank, or the safety of the bank or its depositors. In the event of noncompliance with such an order, the Division has the power to direct the operation of the state bank subsidiary and withhold dividends from the holding company. The Company, as the holder of the stock of a Wisconsin state-chartered bank, may be subject to assessment to restore impaired capital of the bank to the extent provided in Section 220.07, Wisconsin Statutes. Any such assessment would apply only to the Company and not to any shareholder of the Company. Federal law prohibits the acquisition of "control" of a bank holding company by individuals or business entities or groups or combinations of individuals or entities acting in concert without prior notice to the appropriate federal bank regulator. For this purpose, "control" is defined in certain instances as the ownership of or power to vote 10% or more of the outstanding shares of the bank holding company. On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 was signed into law. This Act, commonly referred to as the Financial Modernization Act is intended to modernize the financial industry. The Act, among other things, repeals the provisions of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act prohibiting affiliations with other types of financial services firms. The Act allows bank holding companies to engage in a full range of financial activities through a new entity known as a financial holding company or a national bank to engage in financial activities through a financial subsidiary. The Act allows banks to affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. Other major provisions of the Act include the following: (1) Closing off the "unitary thrift holding company loophole" which permitted commercial companies to own and operate thrifts. The Act prohibits commercial companies from chartering new thrifts after May 4, 1999, and prohibits the future sale of existing unitaries to any commercial company; (2) Reforms the Federal Home Loan Bank System by easing requirements to obtain funds from the FHLB. The Act permits FHLB members with less than $500 million in assets to pledge small business and agricultural loans as collateral for FHLB advances; (3) The Act provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies. Regulatory jurisdiction will be based on the financial activity being undertaken but the Federal Reserve Board has umbrella supervision responsibilities for financial holding companies; (4) The Act creates a new federal privacy law that requires financial institutions to create and disclose their privacy policies and procedures for protecting certain information regarding their customers; (5) The Act requires disclosure of CRA agreements between insured depository institutions or their affiliates and community groups and requires community groups to submit annual reports to the appropriate federal regulator or to the insured depository institution that is party to the agreement describing the use of funds received pursuant to CRA agreements; and (6) The Act requires ATM operators which impose fees for use of their machines to clearly post a notice on the machine, as well as either on the screen or on a paper notice, that a fee will be assessed. In addition, the operators must note the amount the of the fee on the screen or on paper notice and give the user an opportunity to decide whether to authorize the charge prior to completing the transaction. Neither the Company nor the Bank can predict the impact the Act may have on the financial services industry in general or on their businesses in particular. The Bank As a state-chartered institution, the Bank is subject to regulation and supervision by the Division and the Wisconsin Banking Review Board and is periodically examined by the Division's staff. Deposits of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation (the "FDIC") and as a result the Bank is also subject to regulation by the FDIC and periodically examined by its staff. The Federal Deposit Insurance Act requires that the appropriate federal regulatory authority -- the FDIC in the case of the Bank (as an insured state bank which is not a member of the Federal Reserve System) -- approve any acquisition by it through merger, consolidation, purchase of assets, or assumption of deposits. The same regulatory authority also supervises 5 compliance by the Bank with provisions of federal banking laws which, among other things, prohibit the granting of preferential loans by a bank to executive officers, directors, and principal shareholders of the bank and of other banks which have a correspondent relationship with the bank. Wisconsin banking laws restrict the payment of cash dividends by state banks by providing that (i) dividends may be paid only out of a bank's undivided profits, and (ii) prior consent of the Division is required for the payment of a dividend which exceeds current year income if dividends declared have exceeded net profits in either of the two immediately preceding years. The various bank regulatory agencies have authority to prohibit a bank regulated by them from engaging in an unsafe or unsound practice; the payment of a dividend by a bank could, depending upon the circumstances, be considered such an unsafe or unsound practice. In the event that (i) the FDIC or the Division should increase minimum required levels of capital; (ii) the total assets of the Bank increase significantly; (iii) the income of the Bank decreases significantly; or (iv) any combination of the foregoing occurs, then the Board of Directors of the Bank may decide or be required by the FDIC or the Division to retain a greater portion of the Bank's earnings thereby reducing dividends. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in stock or other securities of the bank holding company and on the taking of such stock or securities as collateral for loans to any borrower. Under the Federal Reserve Act and regulations of the Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or of any property or service. The activities and operations of banks are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Financial Institutions Reform, Recovery and Enforcement Act of 1989, The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Community Reinvestment Act, anti-redlining legislation and the antitrust laws. The Community Reinvestment Act includes provisions under which the federal bank regulatory agencies must consider, in connection with applications for certain required approvals, including applications to acquire control of a bank or holding company or to establish a branch, the records of regulated financial institutions in satisfying their continuing and affirmative obligations to help meet the credit needs of their local communities, including those of low and moderate-income borrowers. FDICIA, among other things, establishes five tiers of capital requirements: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC has adopted regulations which define the relevant capital measures for the five capital categories. An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio (total capital to risk-weighted assets) of 10% or greater, a Tier I risk-based capital ratio (Tier I Capital to risk weighted assets) of 6% or greater, and a Tier I leverage capital ratio (Tier I Capital to total assets) of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. The other categories are identified by descending levels of capitalization. Undercapitalized banks are subject to growth limitations and are required to submit a capital restoration plan. If an undercapitalized bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." Significantly undercapitalized banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. The Bank currently exceeds the regulatory definitions of a well capitalized financial institution. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle Act"), among other things, permits bank holding companies to acquire banks in any state effective September 29, 1995. The Riegle Act contains certain exceptions relative to acquisitions. For example, a holding company may not acquire a bank that has not been in existence for less than a minimum period established by the home state; however, the minimum period cannot exceed five years. The Riegle Act makes a distinction between interstate banking and interstate branching. Under the Riegle Act, banks can merge with banks in another state beginning June 1, 1997, unless a state has adopted a law preventing interstate branching. Under terms of the Riegle-Neal Act, an acquiring bank may not acquire control of more than 10 percent of federal or 30 percent of state total deposits of insured depository institutions. Wisconsin law requires approval by the Division for all acquisitions of Wisconsin banks, whether by an in-state or out-of-state purchaser and requires, in an interstate acquisition, that the acquired bank must have been in existence for at least five years. Effective July 1, 1996, Wisconsin adopted comprehensive new banking legislation. Among other things, the new law enhances investment powers of state banks by increasing the authority of state banks to make equity investments from 10% to 20% of capital, and expanding the types of equity investments, including additional authority to invest in real estate. These investment powers are subject to regulation and limitation, and in some cases prior approval, of the Division, and also 6 to limitations of FDICIA, which prohibits state banks from acquiring or retaining any equity investments that are not permissible for national banks. The new law also modifies the statutory definition of "capital," which has the effect (generally) of easing limitations on loans to one borrower and any other limitations on state banks that are expressed as a percentage of capital, including the investment limits discussed above. Other Subsidiaries The Company's two non-bank subsidiaries are also subject to various forms of regulation. To the extent that lending of DACC is funded by loans from one or more Farm Credit Banks, its operations are subject to regulations promulgated by the federal Farm Credit Administration. Currently, the AgriBank, FCB (a wholesale lending cooperative whose primary function is to provide credit to farm service centers) conducts an annual review of DACC's loan portfolio. Also, loans originated by DACC are subject to the same consumer protection regulation that governs loan procedures of the Bank. McDonald is required to operate through individuals licensed as insurance agents in Wisconsin, and is subject to Wisconsin statutes and regulations governing marketing methods, providing minimum requirements for record keeping and mandating other internal procedures. ITEM 2. DESCRIPTION OF PROPERTY - ------------------------------- The following table sets forth certain information relating to the Company's corporate offices and other facilities, all of which are owned by the Company or its subsidiaries: Approximate Location Square Feet Principal Uses Denmark 22,000 Principal corporate and banking offices Bellevue 10,000 Branch bank Maribel 2,400 Branch bank Reedsville 3,700 Branch bank Whitelaw 3,400 Branch bank Denmark 1,000 Insurance office occupied by McDonald Each of the foregoing properties is in good condition and is solely occupied by the Company. Approximately 73% of the Company's loans are secured by real estate. The Company generally takes a first mortgage in such real estate, which includes residential, agricultural and commercial properties. The Company has a comprehensive loan policy that, among other things, sets acceptable loan-to-value percentages by type of real estate, defines the trade area in which the Company will extend credit and sets acceptable percentage ranges for the mix of the real estate portfolio to ensure sufficient risk diversification. A description of the Company's investment portfolio is contained in the section captioned "Management's Discussion and Analysis" in the Annual Report and is incorporated herein by reference. In the opinion of management, all of the Company's properties are adequately covered by insurance. In addition to the Company's corporate offices and banking facilities, the Company from time to time acquires real estate upon foreclosure. Such real estate is sold by the Company as soon as practicable after it is acquired. ITEM 3. LEGAL PROCEEDINGS - ------------------------- Neither the Company nor any of its subsidiaries is a party to any legal proceedings which, individually or in the aggregate, are material to the Company as a whole. From time to time the Company (through its subsidiaries) is involved in routine litigation, including collection matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1999. 7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------- The information contained under the caption "Market Information" in the Quarterly Financial Information section of the Annual Report is incorporated herein by reference. Information concerning restrictions that limit the Company's ability to pay dividends is contained under the caption "Stockholders' Equity" in the Management's Discussion and Analysis section of the Annual Report and is also incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The information contained in the section captioned "Selected Financial Data" in the Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------------------- The information contained in the section captioned "Management's Discussion and Analysis" in the Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The Company's principal market risk exposure is interest rate risk. The objectives of the Company's interest rate risk management are to minimize the adverse effects of changing interest rates on the earnings of the Company while maintaining adequate liquidity and optimizing net interest margin. Interest rate risk is managed by maintaining an acceptable matching of the Company's asset and liability maturity and repricing periods, thus controlling and limiting the level of earnings volatility arising from rate movements. The Company does not hold any assets or liabilities for trading purposes. The Company's interest rate risk is limited by the short-term nature of the loan portfolio and by the short maturity structure of the time deposits. The Company's investment securities portfolio and long-term debt instruments contain more interest rate risk because of their long-term structure. During periods of an upward-sloping yield curve, management has purchased longer-term securities to take advantage of the higher yields. The held-to-maturity portion of the investment portfolio contains municipal securities with maturities as long as sixteen years and consequently is subject to greater market value volatility during periods of rising or falling interest rates. The current risk of the held-to-maturity portfolio is mitigated by the excess of market value over cost and the held-to-maturity portfolio represents only 7.6% of total assets at year end. The Bank's Interest Rate Risk Management Committee monitors rate sensitive assets and liabilities and develops appropriate strategies and pricing policies. The committee, which meets monthly, consists of at least three members of senior management. The committee operates under quantifiable financial guidelines measuring interest rate risk as approved by the Bank's Board of Directors in the Interest Rate Risk Management Policy. The committee reports to the Board of Directors on a quarterly basis. The committee relies on, among other things, modeling simulations to project the potential effect of various rate scenarios on net interest income. The following table summarizes results of simulations as of December 31, 1999: Projected Net Increase Percent Change in Interest Rates Interest Income (Decrease) Change -------------------------------------------------------------------- 100 basis point rise $12,072,529 $395,252 3.38% No change $11,677,277 -- -- 100 basis point decline $11,259,025 $(418,252) (3.58)% The above results show the behavior of the Company's interest margin as rates move up and down using a technique known as rate shock. It simulates ramping rate changes over the next twelve months and the reinvestment of maturing cash flows and repricing of both earning assets and interest-bearing liabilities. In order to simulate activity, maturing balances are replaced with new balances at the new rate level and repricing balances are adjusted to the new rate shock level. The interest is recalculated for each level along with the new average yield. Net interest margin is then calculated and margin risk profile is developed. 8 The computations of the forecasted effects of hypothetical interest rate changes on projected net interest income are based on numerous assumptions. The calculations assume a constant yield curve and do not take into account any loan prepayments in the event of a decline in interest rates. The computed forecasted effects should not be relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the Interest Rate Risk Management Committee could implement in response to changes in interest rates. Management also measures the Company's exposure to interest rate risk by computing the estimated rate shocked economic value of equity. Under this technique the components of the balance sheet are marked-to-market to compute the market value of equity. It is similar to a liquidation value assuming all of the assets are sold at fair market value and all of the liabilities are paid off at fair market value. The market value volatility is a function of term. The longer the maturity term, the greater the volatility (risk). Balances with very short terms have little market value risk, while long-term balances, such as those contained in the Bank's investment portfolio, have much greater market value risk. Market value calculations are complex and require good cash flow information in order to be precise. The simulation model the Company utilizes approximates the average life of earning assets and interest-bearing liabilities and therefore the resulting market value computations are estimates. The average life calculations are then used as a proxy for duration. Duration is defined as the percent change in price, or market rates. Using this technique, the approximate market values for the major balance sheet categories are calculated for various rate changes. The market value of equity is equal to the market value of assets minus the market value of liabilities. The following table presents the Company's projected change in the market value of equity for various levels of interest rates as of December 31, 1999: Estimated Market Increase Percent Change in Interest Rates Value of Equity (Decrease) Change ---------------------------------------------------------------------- 100 basis point rise $28,936,733 $(1,341,245) (4.43)% No change $30,277,978 -- -- 100 basis point decline $31,573,928 $1,295,950 4.28% This analysis assesses the risk of loss in market rate sensitive instruments in the event of sudden and sustained changes in prevailing market interest rates. As of December 31, 1999, the Company's estimated changes in the market value of equity are within limitations established by the Company's Board of Directors. Certain shortcomings are inherent in the method of analysis presented in the computation of market value of equity. Actual results may differ from those projections presented should market conditions vary from assumptions used in theses calculations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The financial statements, including the notes thereto and the independent auditors' report, required by this item are contained in the sections captioned "Consolidated Financial Statements" and "Notes to the Consolidated Financial Statements" in the 1999 Annual Report and are incorporated herein by reference. The supplementary data required by this item is contained in the section captioned "Selected Financial Information" under the heading "Quarterly Financial Information". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------- The Company has not, within the 24 months before the date of the most recent financial statements, changed its accountants, nor have there been any disagreements on accounting and financial disclosures. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The information contained under the section captioned "Proposal I-Election of Directors" in the Company's proxy statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. Certain information with respect to the Company's other executive officers is set forth below: NAME AGE POSITION ---------------- --- ------------------------------------------------ Dennis J. Heim 40 Mr. Heim has served as Vice President of the Company since 1995 and Treasurer since 1993. Mr. Heim has also served as Senior Vice President and Chief Financial Officer of the Bank since January 1999. Mr. Heim has held other positions with the Bank since 1983. Roger L. Lemmens 50 Mr. Lemmens has served as a Vice President of Assistant Vice President of the Bank since the Bank since 1991 and prior thereto was an 1986. Mr. Lemmens has been a Branch Manager for the Bank since 1988. Mr. Lemmens has also served as a director of the Bank since February 1993. Roger L. Lemmens is the brother of Darrell R. Lemmens, Chairman of the Board and President of the Company. John P. Olsen 49 Mr. Olsen has served as President of DACC director of DACC since 1985. Mr. Olsen has since 1986, as Treasurer since 1996 and as a served as a Senior Vice President and Chief Credit Officer of the Bank since January 1999. Mr. Olsen has held other positions with the Bank since 1985. David H. Radue 51 Mr. Radue has served as a director, Vice President and Branch Manager of the Bank since 1986. Mr. Radue was a director of the Maribel Bank from 1984 until its consolidation with the Bank in 1986. Mr. Radue has also been a director of DACC since 1986. Glenn J. Whipp 49 Mr. Whipp has served as a director of the Bank since 1983. Mr. Whipp has also been a Vice President and Branch Manager of the Bank since 1984. ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information in the Company's proxy statement, prepared for the 2000 Annual Meeting of Shareholders, which contains information concerning this item, under the captions "Committees, Meetings and Compensation of Directors", "Executive Compensation", "Board Compensation Committee Report on Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information in the Company's proxy statement, prepared for the 2000 Annual Meeting of Shareholders, which contains information concerning this item, under the caption "Voting Securities and Security Ownership of Certain Beneficial Owners and Management," is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information in the Company's proxy statement, prepared for the 2000 Annual Meeting of Shareholders, which contains information concerning this item, under the caption "Certain Relationships and Related Transactions," is incorporated herein by reference. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K - --------------------------------------------------------------- (a) 1 and 2. Financial Statements and Financial Statement Schedules The following financial statements and financial statement schedules are contained in the Annual Report to Shareholders and are incorporated herein by reference: Consolidated Statements of Financial Condition as of December 31, 1999, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Independent Auditors' Report Selected Financial Information (a) 3. The "Index to Exhibits" is shown below. (b) The Company filed no reports on Form 8-K during the fourth quarter of 1999. INDEX TO EXHIBITS DENMARK BANCSHARES, INC. FORM 10-K Exhibit Number Description of Exhibit -------- ------------------------------------------------------- 3.1 Articles of Incorporation [Incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-1 (No. 33-46600), as amended] 3.3 Restated Bylaws [Incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-1 (No. 33-46600), as amended] 4.1 Specimen Common Stock Certificate [Incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-1 (No. 33-46600), as amended] 11.1 Statement Re Computation of Per Share Earnings 13.1 Annual Report to Shareholders for the Fiscal Year Ended December 31, 1999 21.1 List of Subsidiaries 23.1 Consent of Williams Young, LLC 27.1 Financial Data Schedule SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DENMARK BANCSHARES, INC. By: /s/ Darrell R. Lemmens -------------------------- Darrell R. Lemmens, Chairman of the Board, President and a Director Date: March 28, 2000 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. By: /s/ Darrell R. Lemmens By: /s/ Dennis J. Heim --------------------------- -------------------------- Darrell R. Lemmens, Dennis J. Heim, Principal Executive Vice President, Treasurer, Officer, Principal Financial and Chairman of the Board, Accounting Officer President and Director By: /s/ Terese M. Deprey By: /s/ Mark E. Looker ---------------------------- --------------------------- Terese M. Deprey, Mark E. Looker, Secretary and Director Vice President and Director By: /s/ B. E. Mleziva, DVM By: /s/ James E. Renier --------------------------- --------------------------- B. E. Mleziva, DVM James E. Renier, Director Director By: /s/ C. J. Stodola By: /s/ Norman F. Tauber --------------------------- ---------------------------- C. J. Stodola, Norman F. Tauber, Director Director By: /s/ Thomas F. Wall ---------------------------- Thomas F. Wall, Director Date: March 28, 2000 12 EX-11 2 DENMARK BANCSHARES, INC. EXHIBIT (11.1) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS For the Years Ended December 31, 1999 1998 1997 ---------------------------------- Net income $3,217,383 $3,137,661 $2,550,569 Weighted average shares outsdtanding (1) 54,992 54,855 54,927 Net income per share (1) $58.51 $57.20 $46.44 (1) Weighted average shares outstanding and net income per share have been restated to reflect the 2-for-1 stock split effective July 1, 1997. EX-13 3 DENMARK BANCSHARES, INC. EXHIBIT (13.1) ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1999 Denmark Bancshares, Inc. 1999 Annual Report Table of Contents Graphic Presentation of Selected Financial Data...........................2 Selected Financial Data...................................................3 President's Letter........................................................4 Independent Auditors' Report..............................................4 Consolidated Financial Statements.........................................5 Notes to Consolidated Financial Statements................................9 Management's Discussion and Analysis.....................................23 Quarterly Financial Information..........................................36 Denmark Bancshares, Inc. ("Company"), headquartered in Denmark, Wisconsin, is a diversified one-bank holding company. Denmark State Bank, the Company's subsidiary bank, offers five full service banking offices located in the Villages of Denmark, Maribel, Reedsville, and Whitelaw, and the Town of Bellevue, serving primarily Brown, Kewaunee and Manitowoc Counties. The Company also extends farm credit through its subsidiary Denmark Agricultural Credit Corporation and sells a full line of insurance products through its subsidiary McDonald-Zeamer Insurance Agency, Inc. 1 Graphic Presentation of Selected Financial Data (Tabular representation of graphs for electronic filing) 1995 1996 1997 1998 1999 Net Income $2,083 $2,380 $2,551 $3,138 $3,217 Net Income Per Share 37.83 43.26 46.44 57.20 58.51 Dividends Per Share 9.75 10.75 11.25 13.50 17.25 Book Value Per Share 439.65 471.39 505.50 550.12 585.01 Total Loans 156,072 175,214 199,559 214,986 256,625 Total Assets 196,877 213,714 251,674 282,184 321,393 Total Deposits 144,818 150,417 189,129 212,050 211,934 Stockholders' Equity 24,190 25,913 27,739 30,141 32,121 Dollars in thousands except per share data. 2 SELECTED FINANCIAL DATA Year Ended December 31, -------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- INCOME STATEMENT DATA Interest income $22,319 $21,050 $18,463 $16,073 $14,882 Interest expense 11,599 10,772 9,543 8,152 7,639 -------- -------- -------- -------- -------- Net interest income $10,720 $10,278 $8,920 $7,921 $7,243 Less: Provision for possible loan losses 312 390 351 210 200 -------- -------- -------- -------- -------- Net income after provision for possible credit losses $10,408 $9,888 $8,569 $7,711 $7,043 -------- -------- -------- -------- -------- Plus: Noninterest income $1,026 $955 $819 $589 $568 Less: Noninterest expense 6,951 6,421 5,917 5,073 4,933 -------- -------- -------- -------- -------- Net noninterest expense $(5,925) $(5,466) $(5,098) $(4,484) $(4,365) -------- -------- -------- -------- -------- Income before income taxes $4,483 $4,422 $3,471 $3,227 $2,678 Income tax expense 1,266 1,284 920 847 595 -------- -------- -------- -------- -------- Net income $3,217 $3,138 $2,551 $2,380 $2,083 ======== ======== ======== ======== ======== PER SHARE DATA (1) Net income $58.51 $57.20 $46.44 $43.26 $37.83 Cash dividends declared 17.25 13.50 11.75 10.75 9.75 Book value (year end) 585.01 550.12 505.50 471.39 439.65 BALANCE SHEET DATA Average balances: Total loans $237,017 $206,422 $185,281 $162,850 $150,181 Investment securities 44,397 33,428 30,345 26,328 25,128 Assets 295,478 261,136 228,174 199,367 184,970 Deposits 207,543 192,780 162,838 144,254 135,644 Stockholders' equity 31,462 29,052 26,935 25,064 23,271 Year-end balances: Total loans $256,625 $214,986 $199,559 $175,214 $156,072 Allowance for possible credit losses 3,283 3,059 2,826 2,507 2,319 Investment securities 44,891 44,909 31,826 28,620 25,650 Assets 321,393 282,184 251,674 213,714 196,877 Deposits 211,934 212,050 189,129 150,417 144,818 Long-term debt 17,092 15,677 9,681 9,794 3,063 Stockholders' equity 32,121 30,141 27,739 25,913 24,190 FINANCIAL RATIOS Return on average equity 10.23% 10.80% 9.47% 9.49% 8.95% Return on average assets 1.09% 1.20% 1.12% 1.19% 1.13% Net interest spread 3.06% 3.33% 3.28% 3.29% 3.24% Average equity to average assets 10.65% 11.13% 11.80% 12.57% 12.58% Allowance for credit losses to loans 1.28% 1.42% 1.42% 1.43% 1.49% Dollars in thousands except per share data and financial ratios. (1) Adjusted to reflect 2-for-1 stock split effective July 1, 1997. See Note 13 - Branch Acquisition of the Notes to Consolidated Financial Statements for information concerning a branch acquisition occurring during 1997. 3 PRESIDENT'S LETTER TO OUR SHAREHOLDERS AND FRIENDS: We are pleased to present the 1999 Annual Report of Denmark Bancshares, Inc. Your Company enjoyed another successful year with record earnings, as well as shareholders' equity. Our semi-annual dividend of $9.00 per share to shareholders of record December 14, 1999, payable January 3, 2000, represented a 9% increase over the last semi-annual dividend and a 24% increase over the dividend paid in January 1999. Your Bank, independent and locally owned, is dedicated to meeting the financial needs of local families, farmers and businesses. Your support directly helps the neighborhoods where our customers live and work, thereby strengthening our local economies. On April 25, 2000, James E. Renier, a dedicated and respected member of our Board of Directors, will retire. His knowledge of the financial services industry will be missed. As always, we appreciate your continued support as shareholders and ask that you continue to recommend our services to your friends, relatives and business associates. Sincerely, (signature of Darrell R. Lemmens) Darrell R. Lemmens Chairman of the Board - ----------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS DENMARK BANCSHARES, INC. AND SUBSIDIARIES We have audited the accompanying consolidated statements of financial condition of Denmark Bancshares, Inc. and subsidiaries as of December 31, 1999, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Denmark Bancshares, Inc. and subsidiaries as of December 31, 1999, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. WILLIAMS YOUNG, LLC (signature of Williams Young) Madison, Wisconsin February 10, 2000 4 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION As of December 31, ASSETS Assets 1999 1998 1997 ------------- ------------ ----------- Cash and due from banks $9,503,948 $7,794,995 $7,019,405 Federal funds sold 3,505,000 8,417,000 7,112,000 Investment Securities Available-for-sale, at fair value 20,500,622 25,074,309 14,686,550 Held-to-maturity, at cost 24,389,906 19,834,609 17,139,353 ------------ ----------- ----------- Total Investment Securities $44,890,528 $44,908,918 $31,825,903 Loans less allowance for credit losses of $3,282,812, $3,058,618 and $2,825,921, respectively 253,342,216 211,927,529 196,733,051 Premises and equipment, net 4,110,927 3,343,253 3,277,168 Accrued interest receivable 1,664,314 1,466,749 1,388,253 Other assets 4,376,273 4,326,031 4,318,200 ------------- ------------ ------------ TOTAL ASSETS $321,393,206 $282,184,475 $251,673,980 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $26,387,194 $27,168,398 $19,494,350 Interest-bearing 185,546,462 184,881,335 169,634,759 ------------- ------------ ------------ Total Deposits $211,933,656 $212,049,733 $189,129,109 Short-term borrowings 58,108,946 22,400,273 23,091,248 Accrued interest payable 1,337,566 1,248,966 1,419,470 Other liabilities 794,128 668,138 614,076 Long-term debt 17,097,536 15,676,698 9,681,003 ------------- ------------ ------------ Total Liabilities $289,271,832 $252,043,808 $223,934,906 ------------ ------------ ------------ Stockholders' Equity Common stock, no par value, authorized 320,000 shares; issued 54,907, 54,789 and 54,875 shares, excludes 433 shares in treasury in 1999, 551 shares in 1998 and 465 shares in 1997 $10,030,869 $10,019,609 $10,100,237 Paid in capital 110,984 37,384 37,384 Retained earnings 22,318,876 20,050,609 17,653,233 Accumulated other comprehensive income Unrealized (losses) gains on securities (339,355) 33,065 (51,780) ------------- ------------ ------------ Total Stockholders' Equity $32,121,374 $30,140,667 $27,739,074 ------------- ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $321,393,206 $282,184,475 $251,673,980 ============ ============ ============ The accompanying notes are an integral part of these financial statements. 5 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1999 1998 1997 ----------- ------------ ------------ Interest Income Loans including fees $19,487,591 $18,329,787 $16,208,761 Investment securities: Taxable 1,334,460 907,190 795,005 Exempt from federal tax 1,416,724 1,304,176 1,274,558 Interest on federal funds sold 80,134 509,430 184,817 ----------- ------------ ------------ $22,318,909 $21,050,583 $18,463,141 ----------- ------------ ------------ Interest Expense Deposits $8,600,072 $8,632,510 $7,359,474 Short-term borrowings 2,165,472 1,313,558 1,663,379 Long-term debt 833,131 826,415 519,907 ----------- ------------ ------------ $11,598,675 $10,772,483 $9,542,760 ----------- ------------ ------------ Net interest income $10,720,234 $10,278,100 $8,920,381 Provision for Credit Losses 312,000 390,000 351,000 ----------- ------------ ------------ Net interest income after provision for credit losses $10,408,234 $9,888,100 $8,569,381 ----------- ------------ ------------ Other Income Service fees and commissions $761,568 $785,480 $668,124 Other 264,977 169,030 150,738 ----------- ------------ ------------ $1,026,545 $954,510 $818,862 ----------- ------------ ------------ Other Expense Salaries and employee benefits $4,396,780 $4,076,073 $3,663,764 Occupancy expenses 679,855 622,106 588,154 Data processing expenses 437,146 325,464 319,806 Other operating expenses 1,437,573 1,397,318 1,345,968 ----------- ------------ ------------ $6,951,354 $6,420,961 $5,917,692 ----------- ------------ ------------ Income before income taxes $4,483,425 $4,421,649 $3,470,551 Income tax expense 1,266,042 1,283,988 919,982 ----------- ------------ ------------ NET INCOME $3,217,383 $3,137,661 $2,550,569 =========== ============ ============ EARNINGS PER COMMON SHARE $58.51 $57.20 $46.44 =========== ============ ============ The accompanying notes are an integral part of these financial statements. 6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Accumulated -------------------------- Other Paid in Retained Comprehensive Shares Amount Capital Earnings Income Total -------- ------------- --------- ------------ ---------- ------------- Balance, December 31, 1996 54,972 $10,168,433 $37,384 $15,747,969 $(40,649) $25,913,137 Comprehensive income Net income 2,550,569 2,550,569 Other comprehensive income, net of tax Change in unrealized (loss) on securities available-for-sale, net of applicable deferred income tax benefit of $3,113 (11,131) (11,131) ------------- Total comprehensive income $2,539,438 Cash dividends, $11.75 per share (645,305) (645,305) Treasury stock acquisitions (97) (68,196) (68,196) ------- ------------ ------- ----------- --------- ------------ Balance, December 31, 1997 54,875 $10,100,237 $37,384 $17,653,233 $(51,780) $27,739,074 Comprehensive income Net income 3,137,661 3,137,661 Other comprehensive income, net of tax Change in unrealized gain on securities available-for-sale, net of applicable deferred income tax expense of $44,511 84,845 84,845 ------------- Total comprehensive income $3,222,506 Cash dividends, $13.50 per share (740,285) (740,285) Treasury stock acquisitions (86) (80,628) (80,628) ------- ----------- ------- ----------- --------- ------------ Balance, December 31, 1998 54,789 $10,019,609 $37,384 $20,050,609 $33,065 $30,140,667 Comprehensive income Net income 3,217,383 3,217,383 Other comprehensive income, net of tax Change in unrealized (loss) on securities available-for-sale, net of applicable deferred income tax benefit of $233,535 (372,420) (372,420) ------------ Total comprehensive income $2,844,963 Cash dividends, $17.25 per share (949,116) (949,116) Treasury stock sales 296 214,112 73,600 287,712 Treasury stock acquisitions (178) (202,852) (202,852) ------- ------------ ------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1999 54,907 $10,030,869 $110,984 $22,318,876 $(339,355) $32,121,374 ======= =========== ======== =========== ========== ============
The accompanying notes are an integral part of these financial statements. 7 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999 1998 1997 ------------ ------------- ------------- Cash Flows from Operating Activities: Net income $3,217,383 $3,137,661 $2,550,569 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 362,598 325,717 321,966 Provision for credit losses 312,000 390,000 351,000 Amortization of intangibles 211,337 214,049 102,989 Gain on sale of assets (5,690) 0 0 Amortization of bond premium 31,026 42,634 57,711 Accretion of bond discount (467,320) (594,330) (629,379) Mortgage loans originated for sale (6,327,955) (19,858,729) (2,952,367) Proceeds from sale of mortgage loans 6,717,811 19,671,533 2,917,469 Increase in interest receivable (197,565) (78,496) (235,022) Increase (decrease) in interest payable 88,600 (170,504) 489,796 Other, net(net of acquisition of branch) (299,675) (80,489) (425,933) ------------- ------------- ------------ Net Cash Provided by Operating Activities $3,642,550 $2,999,046 $2,548,799 ------------- ------------- ------------ Cash Flows from Investing Activities: Maturities of held-to-maturity securities $1,322,195 $1,131,480 $1,222,807 Maturities and sales of available-for-sale securities 5,404,827 4,369,888 2,511,201 Purchase of held-to-maturity securities (5,426,913) (3,281,981) (180,000) Purchase of available-for-sale securities (1,448,195) (14,621,350) (6,202,804) Net cash received from acquisition of branch bank 0 0 13,786,977 Federal funds sold, net 4,912,000 (1,305,000) (6,175,000) Proceeds from sale of foreclosed assets 302,505 0 0 Net increase in loans made to customers (net of acquisition of branch) (42,116,544) (15,597,282) (22,031,731) Capital expenditures (net of acquisition of branch) (1,130,272) (391,802) (331,347) ------------ ------------- ------------- Net Cash (Used) by Investing Activities $(38,180,397) $(29,696,047)$(17,399,897) ------------ ------------- ------------- Cash Flows from Financing Activities: Net increase in deposits (net of acquisition of branch) $(116,077) $22,920,624 $19,633,264 Purchase of treasury stock (202,852) (80,628) (68,196) Sale of treasury stock 287,712 0 0 Dividends paid (851,495) (672,125) (618,433) Debt proceeds 48,898,674 13,958,025 24,745,411 Debt repayments (11,769,162) (8,653,305) (27,885,497) ------------ ------------- ------------- Net Cash Provided by Financing Activities $36,246,800 $27,472,591 $15,806,549 ------------ ------------- ------------- Net increase in cash and cash equivalents $1,708,953 $775,590 $955,451 Cash and cash equivalents, beginning 7,794,995 7,019,405 6,063,954 ------------ ------------- ------------- CASH AND CASH EQUIVALENTS, ENDING $9,503,948 $7,794,995 $7,019,405 ============ ============= ============= Noncash Investing Activities: Loans transferred to foreclosed properties $100,000 $200,000 $0 ============ ============= ============= Total increase (decrease) in unrealized loss on securities available-for-sale $605,955 $(129,356) $14,244 ============ ============= ============= The accompanying notes are an integral part of these financial statements. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DENMARK BANCSHARES, INC. DECEMBER 31, 1999, 1998 AND 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization Denmark Bancshares, Inc. is a bank holding company as defined in the Bank Holding Company Act. As such, it exercises control over Denmark State Bank, Denmark Ag Credit Corporation and McDonald-Zeamer Insurance Agency, Inc. A majority of the Company's assets are held by Denmark State Bank. Denmark State Bank, a wholly owned subsidiary of Denmark Bancshares, Inc., operates under a state bank charter, and provides full banking services to its customers. Denmark Investments Inc. is a wholly owned subsidiary of Denmark State Bank. The Company and its subsidiaries make agribusiness, commercial and residential loans to customers throughout the state, but primarily in eastern Wisconsin. The Company and its subsidiaries have a diversified loan portfolio, however, a substantial portion of their debtors' ability to honor their contract is dependent upon the agribusiness economic sector. The main loan and deposit accounts are fully disclosed in Notes 3 and 5. The significant risks associated with financial institutions include interest rate risk, credit risk, liquidity risk and concentration risk. Basis of Consolidation The consolidated financial statements include the accounts of Denmark Bancshares, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates, such as the allowance for credit losses and accounting for the impairment of loans, are discussed specifically in the following sections of this footnote. Investment Securities Investment securities are designated as available-for-sale or held-to-maturity when purchased and remain in that classification until they are sold or mature. Debt and equity securities classified as available-for-sale are stated at estimated fair value, with unrealized gains and losses, net of any applicable deferred income taxes, reported as a separate component of stockholders' equity. As a result of the adjustment from amortized cost to fair value, stockholders' equity, net of applicable deferred income taxes, decreased by $339,355 as of December 31, 1999 and increased by $33,065 as of December 31, 1998 and decreased by $51,780 as of December 31, 1997. Debt securities classified as held-to-maturity are stated at cost adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Realized gains or losses on dispositions are recorded in other operating income on the settlement date, based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method. Loans Loans are reported at the principal amount outstanding, net of the allowance for credit losses. Interest on loans is calculated and accrued by using the simple interest method on the daily balance of the principal amount outstanding. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on nonaccrual, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. A loan is impaired when, based on current information and events, it is probable that not all amounts due will be collected according to the contractual terms of the loan agreement. Impaired loans are measured at the estimated fair value of the collateral. If the estimated fair value of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by creating a valuation allowance. Interest income is recognized in the same manner described above for nonaccrual loans. Allowance for Credit Losses The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans, based on evaluations of the collectibility and prior loss experience of loans. The Evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, leases and commitments, and current and anticipated economic conditions that may affect the borrowers' ability to pay. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Cash flows from demand deposits, NOW accounts, savings accounts, federal funds purchased and sold, cash receipts and payments of loans and time deposits are reported net. For purposes of cash flow reporting, income taxes paid were $1,526,250, $1,410,964 and $1,051,592 and interest paid was $11,521,032, $10,958,249 and $9,061,432 for the years ended December 31, 1999, 1998 and 1997, respectively. Premises and Equipment Premises and equipment owned are stated at cost less accumulated depreciation which is computed principally on the straight-line method over the estimated useful lives of the assets. Income Taxes Deferred income taxes are provided for timing differences between items of income or expense reported in the consolidated financial statements and those reported for income tax purposes in accordance with FAS 109. Treasury Stock Treasury stock is shown at cost, and consists of 433, 551 and 465 shares, with a cost of $305,426, $316,686 and $236,058 as of December 31, 1999, 1998 and 1997, respectively. Stock Split In March 1997, the Board of Directors authorized a two-for-one common stock split to be implemented by a stock dividend of one share for each share outstanding to shareholders of record on June 17, 1997, payable on July 1, 1997. Accordingly, outstanding shares of common stock were increased from 27,482 to 54,964 shares. Since the common stock has no par value, there was no increase in the common stock account. References in the consolidated financial statements and notes with regard to per share and related data have been retroactively adjusted to give effect to the transaction. Earnings per Common Share Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during each year. The number of shares used in computing basic earnings per share is 54,992, 54,855 and 54,927 for the years ended December 31, 1999, 1998 and 1997, respectively. Reclassifications Certain amounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year. NOTE 2 - INVESTMENT SECURITIES The amortized cost and estimated fair value of securities available-for-sale were as follows: December 31, 1999 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- --------- --------- ------------ U.S. Government agencies $13,497,261 $4,500 $0 $13,501,761 Mortgage-backed securities 9,167,589 59,692 (12,323) 9,214,958 FHLB stock 1,045,800 0 0 1,045,800 Other securities 395,785 0 0 395,785 ------------- --------- --------- ------------ $21,054,708 $6,396 $(560,482) $20,500,622 ============= ========= ========= ============ December 31, 1998 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- --------- --------- ------------ U.S. Government agencies $13,497,261 $4,500 $0 $13,501,761 Mortgage-backed securities 9,167,589 59,692 (12,323) 9,214,958 FHLB stock 1,045,800 0 0 1,045,800 Other securities 1,311,790 0 0 1,311,790 ------------- --------- --------- ------------ $25,022,440 $64,192 $(12,323) $25,074,309 ============= ========= ========= ============ 10 December 31, 1997 ------------------------------------------------- Goss Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- --------- --------- ------------ U.S. Government agencies $2,743,758 $0 $(79,504) $2,664,254 Mortgage-backed securities 10,688,122 34,820 (32,803) 10,690,139 FHLB stock 921,700 0 0 921,700 Other securities 410,457 0 0 410,457 ------------- --------- --------- ------------ $14,764,037 $34,820 $(112,307) $14,686,550 ============= ========= ========= ============ The amortized cost and estimated fair value of securities held-to-maturity were as follows: December 31, 1999 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- --------- --------- ------------ State and local governments $24,389,906 $670,792 $(436,048) $24,624,650 ------------- --------- --------- ------------ $24,389,906 $670,792 $(436,048) $24,624,650 ============= ========= ========= ============ December 31, 1998 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- --------- --------- ------------ State and local governments $19,834,609 $1,779,306 $(6,527) $21,607,388 ------------- --------- --------- ------------ $19,834,609 $1,779,306 $(6,527) $21,607,388 ============= ========= ========= ============ December 31, 1997 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- --------- --------- ------------ State and local governments $17,139,353 $1,684,339 $0 $18,823,692 ------------- --------- --------- ------------ $17,139,353 $1,684,339 $0 $18,823,692 ============= ========= ========= ============ The amortized cost and estimated fair values of securities at December 31, 1999, by maturity were as follows: Securities Securities Available-for-Sale Held-to-Maturity ------------------------- ------------------------- Estimated Estimated Amortized Fair Amortized Fair Amounts Maturing Cost Value Cost Value - ----------------- ------------ ----------- ----------- ------------ Within one year $701,075 $697,936 $506,970 $523,735 From one through five years 17,082,984 16,533,742 6,262,999 6,622,739 From five through ten years 464,864 463,159 7,183,473 7,359,806 After ten years 0 0 10,436,464 10,118,370 Other securities (no stated maturity) 2,805,785 2,805,785 0 0 ------------ ----------- ----------- ------------ $21,054,708 $20,500,622 $24,389,906 $24,624,650 ============ =========== =========== ============ Mortgage-backed securities are allocated according to their expected prepayments rather than their contractual maturities. 11 During 1999, available-for-sale securities were sold for total proceeds of $2,997,578. There were no significant gross realized gains or losses in 1999. No securities were sold during 1998 or 1997. There were no significant concentrations of investments (greater than 10 percent of stockholders' equity) in any individual security issuer, except for securities issued by U.S. Government agencies and corporations. Investment securities with an amortized cost of $245,434 and estimated fair value of $243,572, at December 31, 1999, were pledged to secure public deposits and for other purposes required or permitted by law. NOTE 3 - LOANS Major categories of loans included in the loan portfolio are as follows: December 31, ----------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Commercial: Agricultural $33,316,273 $30,700,423 $27,251,588 Other 37,858,231 31,228,455 26,651,300 ------------- ------------- ------------- $71,174,504 $61,928,878 $53,902,888 ------------- ------------- ------------- Real estate: Agricultural $22,156,129 $20,068,369 $18,227,821 Commercial 52,964,149 39,972,450 35,787,187 Residential 90,913,047 75,303,134 74,361,516 ------------- ------------- ------------- $166,033,325 $135,343,953 $128.376.524 ------------- ------------- ------------- Installment $18,552,100 $16,927,234 $16,623,280 ------------- ------------- ------------- Unsecured loans $865,099 $786,082 $656,280 ------------- ------------- ------------- Total loans receivable $256,625,028 $214,986,147 $199,558,972 Allowance for credit losses (3,282,812) (3,058,618) (2,825,921) ------------- ------------- ------------- NET LOANS RECEIVABLE $253,342,216 $211,927,529 $196,733,051 ============= ============= ============= Final loan maturities and rate sensitivity of the loan portfolio, excluding unsecured loans, at December 31, 1999, are as follows: Within One - After (In thousands) One Year Five Years Five Years Total --------- --------- --------- --------- Commercial and installment $64,781 $24,267 $679 $89,727 Real estate 139,369 26,039 625 166,033 --------- --------- --------- --------- TOTAL $204,150 $50,306 $1,304 $255,760 ========= ========= ========= ========= At December 31, 1999, loans with a maturity greater than one year with a variable interest rate totaled $1,165,854. Other real estate owned represents real estate of which the Company has taken control in partial or total satisfaction of loans. Other real estate owned is carried at the lower of cost or fair value, less estimated costs to sell. Losses at the time property is classified as other real estate owned are charged to the allowance for loan losses. Subsequent gains and losses, as well as operating income or expense related to other real estate owned, are charged to expense. Other real estate owned, which is included in other assets, totaled $200,000 at December 31, 1998. There was no other real estate owned at year end 1999 or 1997. 12 Nonaccrual loans totaled $7,835,123, $3,937,112 and $4,667,707 at December 31, 1999, 1998 and 1997, respectively. The reduction in interest income associated with nonaccrual loans is as follows: Year Ended December 31, ------------------------------- 1999 1998 1997 --------- --------- --------- Income in accordance with original loan terms $733,461 $500,187 $503,313 Income recognized (507,687) (576,326) (459,611) --------- --------- --------- REDUCTION (INCREASE) IN INTEREST INCOME $225,774 $(76,139) $43,702 ========= ========= ========= Information concerning the Company's investment in impaired loans is as follows: Year Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Total investment in impaired loans $6,533,918 $2,633,527 $3,425,149 Loans not requiring an allowance 5,302,854 1,596,276 2,717,153 Loans requiring a related allowance 1,231,064 1,037,251 707,996 Related allowance (343,245) (166,814) (106,505) Average investment in impaired loans during the year 5,435,962 2,540,253 3,495,193 Interest income recognized on a cash basis 251,230 283,635 299,628 Changes in the allowance for credit losses were as follows: Year ended December 31, ---------------------------------- 1999 1998 1997 ----------- ---------- ----------- Balance - beginning of year $3,058,618 $2,825,921 $2,506,728 Charge-offs (150,329) (219,673) (60,582) Recoveries 62,523 62,370 28,775 Provision charged to operations 312,000 390,000 351,000 ----------- ---------- ----------- BALANCE - END OF YEAR $3,282,812 $3,058,618 $2,825,921 =========== ========== =========== NOTE 4 - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31, ----------------------------------- 1999 1998 1997 ------------ ---------- ----------- Land $541,241 $530,519 $508,220 Buildings and improvements 3,383,374 3,355,207 3,188,505 Furniture and fixtures 2,939,304 2,448,402 2,273,820 Construction in progress 550,793 0 0 ----------- ---------- ---------- $7,414,712 $6,334,128 $5,970,545 Less: Accumulated depreciation (3,303,785) (2,990,875) (2,693,377) ----------- ---------- ---------- NET $4,110,927 $3,343,253 $3,277,168 =========== ========== ========== As of December 31, 1999, there were approximately $400,000 of commitments outstanding to complete construction in progress. 13 NOTE 5 - INTEREST-BEARING DEPOSITS Interest-bearing deposits consisted of the following: December 31, ------------------------------------------ 1999 1998 1997 ------------- ------------ ------------- NOW accounts $12,610,990 $12,831,148 $10,394,916 Savings accounts 15,505,764 16,360,946 17,035,713 Money market accounts 57,726,080 51,461,772 40,450,756 Certificates of deposit 71,691,449 77,424,423 81,309,850 Time deposit open accounts 28,012,179 26,803,046 20,443,524 ------------- ------------ ------------- TOTAL $185,546,462 $184,881,335 $169,634,759 ============= ============ ============= The following table shows the maturity distribution of certificates of deposit and time deposit open accounts: December 31, ----------------------------- (In thousands) 1999 1998 1997 ------- -------- -------- Within one year $56,430 $72,041 $76,050 One to two years 37,394 26,564 21,920 Two to three years 4,150 3,381 2,345 Three to four years 1,463 1,355 744 Over four years 267 886 694 ------- -------- -------- TOTAL $99,704 $104,227 $101,753 ======= ======== ======== Certificates of deposit and time deposit open accounts issued in amounts of $100,000 or more totaled $20,306,581, $24,369,361 and $22,448,045, at December 31, 1999, 1998 and 1997, respectively. NOTE 6 - SHORT-TERM BORROWINGS The following table is a summary of short-term borrowings: December 31, --------------------------------------- 1999 1998 1997 ----------- ------------ ------------ Federal Home Loan Bank advances $31,200,000 $0 $0 Notes payable 26,908,946 22,400,272 22,791,248 U.S. Treasury demand notes 0 0 300,000 ----------- ------------ ------------ TOTAL SHORT-TERM BORROWINGS $58,108,946 $22,400,272 $23,091,248 =========== ============ ============ As of December 31, 1999, the Company had $14,091,054 of unused lines of credit with banks to be drawn upon as needed. Federal Home Loan Bank advances are secured by residential mortgages and have fixed and adjustable rates ranging from 4.74% to 6.50% as of December 31, 1999. Notes payable are secured by agricultural loans, Denmark State Bank and Denmark Ag Credit Corporation stock and have variable interest rates ranging from 6.01% to 8.19% as of December 31, 1999. 14 NOTE 7 - LONG-TERM DEBT Long-term debt consisted of the following: December 31, -------------------------------------- 1999 1998 1997 ------------ ------------ ---------- Note dated in 1999, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 5.71%, principal due and payable every 90 days or final maturity December 30, 2004. $5,000,000 $0 $0 Note dated in 1999, with Federal Home Loan Bank of Chicago, monthly interest due at a variable rate which changes monthly, principal due and payable on call date October 29,2000 or every quarter thereafter or final maturity October 29, 2004. 5,000,000 0 0 Note dated in 1998, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 4.80%, principal due and payable on call date April 6, 1999 or final maturity April 6, 2008. 0 5,000,000 0 Note dated in 1998, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 5.05%, principal due and payable on call date January 20, 2001 or final maturity January 20, 2008. 4,000,000 4,000,000 0 Note dated in 1997, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 5.96%, principal due and payable December 30, 2002. 3,000,000 3,000,000 3,000,000 Note dated in 1996, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 5.94%, principal due and payable March 18, 1998. 0 0 3,000,000 Note dated in 1996, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 6.02%, principal due and payable December 27, 1999. 0 2,200,000 2,200,000 Note dated in 1996, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 6.51%, principal payments in the amounts of $94,000, $79,000, $83,000 and $1,118,500 due and payable December 27, 2003, 2007, 2010 and 2011, respectively. 0 1,374,500 1,374,500 Note dated in 1996, interest rate of 8%, principal payment in the amount of $20,000 due January 2, 1997. Remaining balance due in eleven installments of $3,500 through 1997, then monthly installments of $1,092 through 2011. 97,536 102,198 106,503 ------------ ------------ ---------- TOTAL LONG-TERM DEBT $17,097,536 $15,676,698 $9,681,003 ============ ============ ========== The notes payable to Federal Home Loan Bank of Chicago are secured by residential mortgages. Long-term debt has aggregate maturities for the five years 2000 through 2004 as follows: $5,049 in 2000, $5,468 in 2001, $3,005,922 in 2002, $6,413 in 2003 and $10,006,946 in 2004. 15 NOTE 8 - INCOME TAXES The provision for income taxes in the consolidated statement of income is as follows: (In thousands) 1999 1998 1997 -------- -------- -------- Current: Federal $1,162 $1,128 $865 State 281 252 206 -------- -------- -------- $1,443 $1,380 $1,071 -------- -------- -------- Deferred: Federal $(137) $(83) $(117) State (40) (13) (34) -------- -------- -------- $(177) $(96) $(151) -------- -------- -------- TOTAL PROVISION FOR INCOME TAXES $1,266 $1,284 $920 ======== ======== ======== Applicable income taxes for financial reporting purposes differ from the amount computed by applying the statutory federal income tax rate for the reasons noted in the table below: 1999 1998 1997 ------------ ------------- ------------- (In thousands) Amount % Amount % Amount % ------ ---- ------ ---- ------ ---- Tax at statutory federal income tax rate $1,524 34% $1,503 34% $1,180 34% Increase (decrease) in tax resulting from: Tax-exempt income (431) (10) (396) (9) (388) (11) State income tax, net of federal tax benefit 158 4 157 3 113 3 Other, net 15 1 20 1 15 1 ------ ---- ------ ---- ------ ---- APPLICABLE INCOME TAXES $1,266 29% $1,284 29% $920 27% ====== ==== ====== ==== ====== ==== Other assets in the accompanying statements of financial condition include the following amounts of deferred tax assets and deferred tax liabilities: (In thousands) 1999 1998 1997 ------ ------ ------ Deferred tax assets: Allowance for credit losses $1,219 $1,137 $1,039 Unrealized losses on available-for-sale securities 215 0 25 State tax net operating loss carryforward 94 88 87 Interest receivable on nonaccrual loans 121 34 79 Other 31 19 22 ------ ------ ------ Gross deferred tax assets $1,680 $1,278 $1,252 Valuation allowance (94) (88) (87) ------ ------ ------ Total deferred tax assets $1,586 $1,190 $1,165 ------ ------ ------ Deferred tax liabilities: Accumulated depreciation on fixed assets $127 $123 $134 State income taxes 87 76 65 Unrealized gains on available-for-sale securities 0 19 0 Accretion 7 8 46 ------ ------ ------ Total deferred tax liabilities $221 $226 $245 ------ ------ ------ NET DEFERRED TAX ASSET $1,365 $964 $920 ====== ====== ====== 16 NOTE 9 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) profit sharing plan and a money purchase pension plan. The plans essentially cover all employees who have been employed over one-half year, and are at least twenty and one-half years old. Provisions of the 401(k) profit sharing plan provide for the following: * Participating employees may annually contribute up to 10% of their compensation. * The Company will contribute 50% of each employee contribution up to a maximum Company contribution of 2%. Employee contributions above 4% do not receive any matching contribution. * The Company may elect to make contributions out of profits. These profit sharing contributions are allocated to the eligible participants based on their salary as a percentage of total participating salaries. The contribution percentage was 4% for 1999, 1998 and 1997. In addition, the money purchase plan generally provides for employer contributions of 4% of each participant's compensation. The Company provides no post retirement benefits to employees except for the 401(k) profit sharing plan and the money purchase pension plan discussed above which are currently funded. The Company expensed contributions of $324,854, $313,788 and $275,509 for the years 1999, 1998 and 1997, respectively. NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF - BALANCE SHEET RISK The Company and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract or notional amounts of those instruments reflect the extent of involvement the Company and its subsidiaries have in particular classes of financial instruments. The exposure of the Company and its subsidiaries to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of these instruments. The Company and its subsidiaries use the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. The Company and its subsidiaries require collateral or other security to support financial instruments with credit risk. Contract or Notional Amount Secured (In thousands) December 31, 1999 Portion ----------------- --------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $24,846 $18,927 Standby letters of credit and financial guarantees written 1,024 1,024 Commitments to extend credit 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company and its subsidiaries evaluate each customer's creditworthiness on a case-by-case basis. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support commercial business transactions. A majority of the letters of credit expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties and residential properties. All letters of credit are fully collateralized. Federal funds sold to correspondent banks are not insured. 17 NOTE 11 - RELATED PARTY TRANSACTIONS At December 31, 1999, 1998 and 1997 certain Company subsidiary executive officers, directors and companies in which they have a ten percent or more beneficial interest, were indebted to the Company and its subsidiaries in the amounts shown below. All such loans were made in the ordinary course of business and at rates and terms similar to those granted other borrowers. December 31, 1999 --------------- --------------------------- New Ending (In thousands) 1997 1998 Loans Payments Balance ------ ------ ------ -------- -------- Aggregate related party loans $1,360 $1,459 $1,653 $(347) $2,765 ====== ====== ====== ======== ======== NOTE 12 - PARENT COMPANY ONLY INFORMATION Following, in a condensed form, are parent company only statements of financial condition, statements of income and cash flows of Denmark Bancshares, Inc. for the years 1999, 1998 and 1997. The financial information contained in this footnote is to be read in association with the preceding accompanying notes to the consolidated financial statements. DENMARK BANCSHARES, INC. Statements of Financial Condition December 31, -------- -------- -------- (In thousands) 1999 1998 1997 -------- -------- -------- Assets Cash in banks $1,004 $695 $1,074 Investment Banking subsidiary 23,675 22,280 19,524 Nonbanking subsidiaries 5,489 4,894 4,334 Real estate loans (less allowance for credit losses of $61, $61 and $61, respectively) 358 580 1,103 Fixed assets (net of depreciation of $1,374, $751 and $633) 2,980 2,078 2,021 Other assets 69 49 50 -------- -------- -------- TOTAL ASSETS $33,575 $30,576 $28,106 ======== ======== ======== Liabilities Accrued expenses $59 $38 $38 Dividends payable 495 397 329 Note payable - unrelated bank 900 0 0 -------- -------- -------- Total Liabilities $1,454 $435 $367 -------- -------- -------- Stockholders' Equity Common stock $10,031 $10,020 $10,100 Paid-in capital 110 37 37 Retained earnings 22,319 20,051 17,654 Accumulated other comprehensive income Unrealized (losses) gains on securities (339) 33 (52) -------- -------- -------- Total Stockholders' Equity $32,121 $30,141 $27,739 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,575 $30,576 $28,106 ======== ======== ======== 18 DENMARK BANCSHARES,INC. Statements of Income For the Years Ended December 31, -------- -------- -------- (In thousands) 1999 1998 1997 -------- -------- -------- Income Interest income from loans $36 $72 $96 Other interest income 19 35 18 Dividend income from banking subsidiary 1,000 0 1,500 Rental income from banking subsidiary 232 207 165 Rental income from nonbanking subsidiar 9 9 6 -------- -------- -------- Total Income $1,296 $323 $1,785 -------- -------- -------- Expenses Management fees to banking subsidiary $120 $120 $120 Interest expense 26 0 0 Depreciation 138 118 111 Other operating expenses 153 146 127 -------- -------- -------- Total Expenses $437 $384 $358 -------- -------- -------- Income (loss) before income taxes and undistributed income of subsidiaries $859 $(61) $1,427 Income tax (benefit) expense (36) (7) (16) -------- -------- -------- Income (Loss) Before Undistributed Income of Subsidiaries $895 $(54) $1,443 Equity in Undistributed Income of Subsidiaries Banking subsidiary 1,767 2,671 627 Nonbank subsidiaries 555 521 481 -------- -------- -------- NET INCOME $3,217 $3,138 $2,551 ======== ======== ======== 19 DENMARK BANCSHARES, INC. Statements of Cash Flows For the Years Ended December 31, ---------------------------- (In thousands) 1999 1998 1997 -------- -------- -------- Cash Flows from Operating Activities: Net Income $3,217 $3,138 $2,551 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 138 118 111 Equity (earnings) of banking subsidiary (2,767) (2,671) (2,127) Equity (earnings) of nonbanking subsidiaries (555) (521) (481) Dividend from banking subsidiary 1,000 0 1,500 (Increase) decrease in other assets (21) 2 (12) Increase in accrued expenses 21 1 9 -------- -------- -------- Net Cash Provided by Operating Activities $1,033 $67 $1,551 -------- -------- -------- Cash Flows from Investing Activities: Investment in nonbanking subsidiary $(40) $(40) $(40) Capital expenditures (1,040) (175) (348) Net decrease in real estate loans 222 522 160 -------- -------- -------- Net Cash (Used) Provided by Investing Activities $(858) $307 $(228) -------- -------- -------- Cash Flows from Financing Activities: Debt proceeds $900 $0 $0 Treasury stock proceeds 288 0 0 Treasury stock purchases (203) (81) (68) Dividends paid (851) (672) (619) -------- -------- -------- Net Cash Provided (Used) by Financing Activities $134 $(753) $(687) -------- -------- -------- Net Increase (Decrease) in Cash $309 $(379) $636 Cash, beginning 695 1,074 438 -------- -------- -------- CASH, ENDING $1,004 $695 $1,074 ======== ======== ======== Supplemental Disclosure: Income taxes paid $(21) $(5) $(13) ======== ======== ======== NOTE 13 - BRANCH ACQUISITION On August 4, 1997, the Company purchased the assets and assumed the liabilities of the Reedsville Branch of M&I Bank Northeast. M&I Bank Reedsville Branch was engaged in full banking services. The results of operations of the Reedsville Branch are included in the accompanying financial statements since the date of acquisition. Through the acquisition of the Reedsville Branch the Company purchased loans of $2,309,712, purchased premises and equipment of $307,250, assumed deposits of $19,079,143 and other liabilities net of other assets of $210,662, resulting in the Company receiving cash of $13,786,977. For the assumption of the deposits a premium of $2,885,866 was paid. The premium is being amortized using the straight line method over 15 years. The amortization expense charged to operations for 1999, 1998 and 1997 was $192,391, $192,391 and $80,163, respectively. M&I Bank did not maintain separate and complete branch accounting records for the Reedsville Branch, therefore prior year results of operations have not been disclosed. NOTE 14 - SUBSEQUENT EVENT The Company issued options to employees to purchase 267 common shares after December 31, 1999, which, had it taken place during fiscal 1999, it would have changed the number of shares used in the computation of earnings per share. 20 NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments - ------------------------------- For cash and short-term investments, the carrying amount is a reasonable estimate of fair value. Investment Securities - --------------------- For securities held for investment purposes and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Receivable - ---------------- The fair value 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 and for the same remaining maturities. Deposit Liabilities - ------------------- The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings - ---------- Rates currently available to the bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written - ---------------------------------------------------------------------------- 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 and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the Company's financial instruments are as follows: December 31, 1999 -------------------- Carrying Fair (In thousands) Amount Value -------- -------- Financial Assets Cash and short-term investments $13,009 $13,009 Investment securities 44,891 45,125 Loans 256,625 253,184 Less: Allowance for credit losses (3,283) - -------- -------- TOTAL $311,242 $311,318 ======== ======== Financial Liabilities Deposits $211,934 $212,193 Borrowings 75,206 74,768 -------- -------- TOTAL $287,140 $286,961 ======== ======== Unrecognized Financial Instruments Commitments to extend credit $24,846 $24,846 Standby letters of credit and financial guarantees written 1,024 1,024 -------- -------- TOTAL $25,870 $25,870 ======== ======== 21 NOTE 16 - REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company'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 Company to maintain minimum amounts and ratios (set forth in the table below) of Total Capital and Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation 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 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's actual capital amounts and ratios are also presented in the table below:
To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Amount Purposes: Action Provisions: ------------------ ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ----------- ------ ----------- ------ ----------- ------- As of December 31, 1999: Denmark Bancshares, Inc. Total Capital (to Risk-Weighted Assets) $32,557,936 14.6% $17,832,980 >8.0% $22,291,225 >10.0% Tier 1 Capital (to Risk-Weighted Assets) $29,765,404 13.4% $8,916,490 >4.0% $13,374,735 > 6.0% Tier 1 Capital (to Average Assets)* $29,765,404 9.6% $12,372,077 >4.0% $15,465,096 > 5.0% Denmark State Bank Total Capital (to Risk-Weighted Assets) $23,944,069 12.7% $15,062,635 >8.0% $18,828,293 >10.0% Tier 1 Capital (to Risk-Weighted Assets) $21,585,054 11.5% $7,531,317 >4.0% $11,296,976 > 6.0% Tier 1 Capital (to Average Assets)* $21,585,054 7.8% $11,018,701 >4.0% $13,773,376 > 5.0% As of December 31, 1998: Denmark Bancshares, Inc. Total Capital (to Risk-Weighted Assets) $29,570,127 15.6% $15,122,148 >8.0% $18,902,685 >10.0% Tier 1 Capital (to Risk-Weighted Assets) $27,198,701 14.4% $7,561,074 >4.0% $11,341,611 > 6.0% Tier 1 Capital (to Average Assets)* $27,198,701 10.0% $10,853,491 >4.0% $13,566,864 > 5.0% Denmark State Bank Total Capital (to Risk-Weighted Assets) $21,619,907 13.6% $12,746,790 >8.0% $15,933,488 >10.0% Tier 1 Capital (to Risk-Weighted Assets) $19,620,895 12.3% $6,373,395 >4.0% $9,560,093 > 6.0% Tier 1 Capital (to Average Assets)* $19,620,895 8.1% $9,662,781 >4.0% $12,078,476 > 5.0% As of December 31, 1997: Denmark Bancshares, Inc. Total Capital (to Risk-Weighted Assets) $26,791,631 15.8% $13,535,678 >8.0% $16,919,597 >10.0% Tier 1 Capital (to Risk-Weighted Assets) $24,667,904 14.6% $6,767,839 >4.0% $10,151,758 > 6.0% Tier 1 Capital (to Average Assets)* $24,667,904 10.1% $9,741,088 >4.0% $12,176,359 > 5.0% Denmark State Bank Total Capital (to Risk-Weighted Assets) $18,503,599 13.3% $11,153,959 >8.0% $13,942,448 >10.0% Tier 1 Capital (to Risk-Weighted Assets) $16,752,896 12.0% $5,576,979 >4.0% $8,365,469 > 6.0% Tier 1 Capital (to Average Assets)* $16,752,896 7.8% $8,552,535 >4.0% $10,690,669 > 5.0%
*Average assets are based on the most recent quarter's adjusted average total assets. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS Management's discussion and analysis of financial condition and results of operations of Denmark Bancshares, Inc. and its subsidiaries ("Company"), is intended as a review of significant factors affecting the Company's consolidated results of operations during the three-year period ended December 31, 1999, and the Company's consolidated financial condition at the end of each year during this period. This discussion should be read in conjunction with the "CONSOLIDATED FINANCIAL STATEMENTS" including the accompanying notes, and the "SELECTED FINANCIAL DATA" presented elsewhere in this report. The Company's subsidiaries are the Denmark State Bank ("Bank"), Denmark Agricultural Credit Corporation ("DACC") and the McDonald-Zeamer Insurance Agency, Inc. ("McDonald"). RESULTS OF OPERATIONS - --------------------- The following table sets forth certain items of income and expense as well as period-to-period percentage increases (decreases) for the Company on a consolidated basis during the most recent three fiscal years: Percent Increase (Decrease) 1999 1998 1997 1999/98 1998/97 (In thousands) ------- ------- ------- ------- ------- Interest income $22,319 $21,050 $18,463 6.0% 14.0% Interest expense 11,599 10,772 9,543 7.7 12.9 Net interest income 10,720 10,278 8,920 4.3 15.2 Provision for credit losses 312 390 351 (20.0) 11.1 Noninterest income 1,026 955 819 7.4 16.6 Noninterest expense 6,951 6,421 5,917 8.3 8.5 Net income 3,217 3,138 2,551 2.5 23.0 Earnings Performance - -------------------- The Company recorded net income of $3,217,383 in 1999. This represents an increase of $79,722 or 2.5% compared to 1998 earnings. The increase in net income is primarily attributable to higher interest income and noninterest income which increased by $1,268,326 and $72,035 respectively, and a lower provision for loan losses which decreased by $78,000. These items more than offset higher interest expense and noninterest expenses which increased by $826,192 and $530,393 respectively. The increase in interest income was the result of higher average earning assets. Average earning assets increased by $33.6 million during 1999 compared to 1998. Loan growth accounted for much of this increase as average loans increased by $30.6 million or 14.8%. The increase in interest expenses was the result of higher average interest-bearing liabilities. Average interest-bearing liabilities increased by $29.4 million during 1999 compared to 1998. The increase in noninterest expenses is primarily attributable to increases in salaries and employee benefits expense which increased $320,707 or 7.9% compared to 1998, and higher data processing expense which increased by $111,682 or 34% higher than 1998. The increase in net income in 1999 followed an increase of $587,092 or 23.0% in 1998 compared to 1997 earnings. The increase in net income was primarily attributable to higher net interest income and noninterest income which increased by $1,357,719 and $135,648 respectively. These items more than offset higher noninterest expenses and higher income taxes which increased by $503,269 and $364,006 respectively. The increase in net interest income was primarily the result of higher average earning assets. Average earning assets increased by $30.3 million during 1998 compared to 1997. Loan growth accounted for much of this increase as average loans increased by $21.1million or 11.4%. The increase in noninterest expenses is primarily attributable to increases in salaries and employee benefits expense which increased $412,309 or 11.2% compared to 1997. Net income for 1997 includes five months of operations for the Reedsville Branch On a per share basis, net income was $58.51 in 1999 compared with $57.20 in 1998 and $46.44 in 1997. Return on average assets for the Company was 1.09% in 1999 compared to 1.20% in 1998 and 1.12% in 1997. Return on average equity in 1999 was 10.23% compared to 10.80% and 9.47% in 1998 and 1997 respectively. 23 Net Interest Income - ------------------- Net interest income is the largest component of the Company's operating income. Net interest income represents the difference between interest income on earning assets, such as loans and securities, and the interest expense on deposits and other borrowed funds. Net interest income is affected by fluctuations in interest rates and by changes in the volume of earning assets and interest bearing liabilities outstanding. The following table sets forth a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: Year Ended December 31, -------------------------------------------------- 1999 1998 --------------------------- ---------------------- Increase Increase (Decrease) Due to (Decrease) Due to Change In Change In --------------------------- ---------------------- (In thousands) Average Average Total Average Average Total Balance Rate Change Balance Rate Change --------- ---------- ------ ------ -------- ------ Interest income: Loans $2,717 $(1,559) $1,158 $1,850 $272 $2,122 Taxable securities 493 (66) 427 129 (17) 112 Nontaxable securities 207 (94) 113 68 (38) 30 Federal funds sold (423) (7) (430) 337 (13) 324 --------- ---------- ------ ------ -------- ------ Total interest income $2,994 $(1,726) $1,268 $2,384 $204 $2,588 --------- ---------- ------ ------ -------- ------ Interest expense: NOW accounts $31 $(1) $30 $42 $2 $44 Savings accounts (14) (30) (44) 3 (9) (6) Money market accounts 451 (202) 249 562 (3) 559 Certificates and other time deposits 98 (366) (268) 621 55 676 Other borrowed funds 984 (125) 859 40 (83) (43) --------- ---------- ------ ------ -------- ------ Total interest expense $1,550 $(724) $826 $1,268 $(38) $1,230 --------- ---------- ------ ------ -------- ------ Net interest income $1,444 $(1,002) $442 $1,116 $242 $1,358 ========= ========== ====== ====== ======== ====== For purposes of the above table, changes which are not due solely to volume or rate have been allocated to rate. Net interest income increased 4.3% or $442,134 from 1998 to 1999. The increase is primarily attributable to higher average earning assets which generated additional interest income of $2,993,675. Average earning assets increased by $33.6 million or 13.5% during 1999 compared to 1998. The yield on earning assets fell from 8.44% during 1998 to 7.89% during 1999. The net effect of higher earning assets and the lower yield, which resulted in a decrease of $1,725,350 in interest income, was an increase of $1,268,326 in total interest income in 1999 compared to 1998. The increase in interest income more than offset the increased interest expense of $826,192 resultingprimarily from higher average interest-bearing liabilities. Average interest-bearing liabilities increased by $29.4 million or 13.9% during 1999. The cost of funds fell from 5.11% during 1998 to 4.83% during 1999. The Company's net interest income spread fell from 3.33% in 1998 to 3.06% during 1999. Net interest income spread is the difference between the average yield earned on assets and the average rate incurred on liabilities. Net interest income increased 15.2% or $1,357,719 from 1997 to 1998. The increase was primarily attributable to higher average earning assets which generated additional interest income of $2,383,662. Average earning assets increased by $30.3 million or 13.8% during 1998 compared to 1997. The increase in interest income more than offset the increased interest expense of $1,229,723 resulting primarily from higher average interest-bearing liabilities. Average interest-bearing liabilities increased by $25.6 million or 13.8% during 1998. 24 The Company's consolidated average statements of financial condition, interest earned and interest paid, and the average interest rates earned and paid for each of the last three years are:
1999 1998 1997 ----------------------------- ---------------------------- --------------------------- (In thousands) Average Income Average Average Income Average Average Income Average Daily and Yield or Daily and Yield or Daily and Yield or Balance Expense Rate Balance Expense Rate Balance Expense Rate ---------- ---------- -------- --------- -------- --------- -------- --------- -------- ASSETS Interest-earning assets: Taxable loans $236,517 $19,460 8.23% $206,080 $18,310 8.88% $184,964 $16,190 8.75% Nontaxable loans 500 28 5.60% 342 20 5.85% 317 19 5.99% -------- ------- ----- -------- ------- ----- -------- -------- ----- Total Loans $237,017 $19,488 8.22% $206,422 $18,330 8.88% $185,281 $16,209 8.75% -------- ------- ----- -------- ------- ----- -------- ------- ----- Taxable securities $22,764 $1,334 5.86% $14,749 $907 6.15% $12,688 $795 6.27% Nontaxable securities 21,633 1,417 6.55% 18,673 1,304 6.98% 17,731 1,274 7.19% -------- ------- ----- -------- ------- ----- -------- ------- ----- Total Securities $44,397 $2,751 6.20% $33,422 $2,211 6.62% $30,419 $2,069 6.80% -------- ------- ----- -------- ------- ----- -------- ------- ----- Federal funds sold $1,626 $80 4.92% $9,563 $509 5.32% $3,385 $185 5.47% -------- ------- ----- -------- ------- ----- -------- ------- ----- Total Earning Assets $283,040 $22,319 7.89% $249,407 $21,050 8.44% $219,085 $18,463 8.43% -------- ------- ----- -------- ------- ----- -------- ------- ----- Noninterest-earning assets: Cash and due from banks $6,245 $5,579 $4,825 Allowance for credit losses (3,222) (2,951) (2,669) Premises and equipment 3,589 3,262 3,116 Other assets 5,826 5,839 3,817 -------- ------- -------- TOTAL ASSETS $295,478 $261,136 $228,174 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $12,735 $259 2.03% $11,220 $229 2.04% $9,112 $184 2.02% Savings accounts 16,080 368 2.29% 16,635 412 2.48% 16,521 419 2.54% Money market accounts 54,970 2,372 4.32% 45,336 2,122 4.68% 33,352 1,564 4.69% Time deposits 102,152 5,601 5.48% 100,476 5,869 5.84% 89,744 5,193 5.79% Other borrowed funds 54,329 2,999 5.52% 37,220 2,140 5.75% 36,557 2,183 5.97% -------- ----- ----- -------- ------- ----- -------- ------- ----- Total Interest-Bearing Liabilities $240,266 $11,599 4.83% $210,887 $10,772 5.11% $185,286 $9,543 5.15% -------- ------- ----- -------- ------- ----- -------- ------- ----- Noninterest-bearing liabilities and stockholders' equity: Demand deposits $21,606 $19,114 $14,108 Other liabilities 2,144 2,083 1,845 Stockholders'equity 31,462 29,052 26,935 -------- ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $295,478 $261,136 $228,174 ======== ======== ======== Net interest income and rate spread $10,720 3.06% $10,278 3.33% $8,920 3.28% ======= ===== ======= ===== ======= =====
For purposes of the above table, nonaccrual loans are included in the average daily balance figure, but interest income associated with these loans is recognized under the cash basis method of accounting. Securities are shown at amortized cost. 25 Noninterest Income - ------------------ Total noninterest income increased by $72,035 in 1999. The increase is primarily the result of higher revenue from ATM surcharges and check card fees which rose by $73,274. The Bank began surcharging non-customers that used the Bank's ATMs. Overdraft fees increased by $31,809 during 1999. Commissions from the sales of insurance decreased by $58,171. McDonald receives bonus commissions from the companies it sells policies for based on their loss experience. These bonuses decreased by $30,847 during 1999. Noninterest income increased by $135,648 during 1998. The increase was primarily the result of higher service fees and commissions which increased $117,356 or 17.7% higher than 1997. Brokerage commissions on the sales of mutual funds, annuities and equity securities increased by $72,277. Commissions from the sales of insurance increased by $41,920. The following table sets forth certain items of noninterest income: Percent Increase (In thousands) (Decrease) Noninterest income: 1999 1998 1997 1999/98 1998/97 ------- ------- ------- ------- ------- Service fees and commissions $761 $786 $668 (3.2)% 17.7% Other 265 169 151 56.8 11.9 ------- ------- ------- ------- ------ Total noninterest income $1,026 $955 $819 7.4% 16.6% ======= ======= ======= ======= ====== Noninterest Expense - ------------------- Salaries and employee benefits expense increased $320,707 or 7.9% in 1999. The increase is primarily attributable to an increase of $186,473 in salaries and higher insurance benefits which increased by $114,365. Occupancy expenses increased by $57,749 primarily as a result of higher depreciation expense which rose $36,880. Data processing expenses increased by $111,682. The increases in depreciation and data processing expenses are the result of considerable technology improvements implemented by the Bank. The improvements included the purchase of sixty-nine personal computers, the purchase and installation of local area network equipment at each branch office, installation of a software system that automates the process of opening new deposit accounts and the implementation of a bank wide on-line teller system. These technology improvements are intended to improve customer service, increase operating efficiency and replace a system that was not year 2000 compliant. The Bank began a major remodeling of the Bellevue facility in the third quarter. The project was completed in March 2000, with total costs, including furniture and equipment, totaling approximately $1 million. Printing and supplies expenses increased $20,973 or 11.8% in 1999. Marketing expenses increased by $18,620. The Bank incurred expenses during 1999 to raise customer awareness concerning its readiness for year 2000. During 1998, salaries and employee benefits expense increased $412,309 or 11.2%. The increase was attributable to an increase of seven full-time equivalent staff members and to regular salary increases. Occupancy expenses increased by $33,952 primarily as a result of the additional branch facility acquired in August of 1997 and the acquisition of an office building for McDonald during 1998. Amortization of intangibles expense increased by $111,061 as a result of the write-down of intangible assets related to the acquisitions of the branch bank and the insurance agency. The intangibles are being amortized over fifteen years. The following table sets forth certain items of noninterest expense: Percent (In thousands) Increase Noninterest expense: (Decrease) 1999 1998 1997 1999/98 1998/97 ------- ------- ------- ------- ------- Salaries and employee benefits $4,397 $4,076 $3,664 7.9% 11.2% Occupancy expenses 680 622 588 9.3 5.8 Data processing expenses 437 326 320 34.0 1.9 Marketing expenses 234 215 214 8.8 0.5 Amortization of intangibles 213 214 103 (0.5) 107.8 Printing and supplies expense 199 178 218 11.8 (18.3) Directors and committee fees 189 175 173 8.0 1.2 Other operating expenses 602 615 637 (2.1) (3.5) ------- ------- ------- ------- ------- Total noninterest expense $6,951 $6,421 $5,917 8.3% 8.5% ======= ======= ======= ====== ===== 26 FINANCIAL CONDITION - ------------------- The following table sets forth certain assets and liabilities of the Company on a consolidated basis as of the end of each of the three most recent fiscal years and period-to-period percentage increases (decreases): Percent Increase (Decrease) (In thousands) 1999 1998 1997 1999/98 1998/97 -------- -------- -------- ------- ------- Federal funds sold $3,505 $8,417 $7,112 (58.4)% 18.3% Investment securities 44,891 44,909 31,826 0.0 41.1 Loans 256,625 214,986 199,559 19.4 7.7 Allowance for credit losses (3,283) (3,059) (2,826) 7.3 8.2 Total assets 321,393 282,184 251,674 13.9 12.1 Deposits 211,934 212,050 189,129 (0.1) 12.1 Other borrowed funds 75,206 38,077 32,772 97.5 16.2 Stockholders' equity 32,121 30,141 27,739 6.6 8.7 Total assets at December 31, 1999, were $321.4 million. This represents an increase of $39.2 million, or 13.9% over year end 1998. Management attributes the growth during 1999 to heavy loan demand which resulted in an increase in total loans amounting to $41.6 million or 19.4% higher than year end 1998. Federal funds sold (unsecured loans of immediately available funds to correspondents banks) were reduced by $4.9 million primarily to fund loans. The above average loan growth coupled with a decrease in total deposits caused the Company to significantly increase other borrowed funds. Other borrowed funds increased by 97.5% or $37.1 million at year end 1999 compared to the prior year end. At December 31, 1998, total assets increased by $30.5 million or 12.1% higher than the previous year end. The Bank experienced above average deposit growth during 1998. Total deposits increased by $22.9 million or 12.1% higher compared to a year earlier. The above average deposit growth was used primarily to fund loans and to increase the investment portfolio. Investments - ----------- Investment balances in various categories at the end of each of the last three years were as follows: December 31, ------------------------------------------------------- 1999 1998 1997 ----------------- ------------------ ------------------ Amortized Fair Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value Cost Value -------- -------- -------- --------- --------- -------- U.S. Government $13,498 $12,982 $13,497 $13,502 $2,744 $2,664 agencies Mortgage-backed 4,751 4,713 9,167 9,215 10,688 10,690 securities State and municipal 24,390 24,625 19,835 21,607 17,139 18,824 securities Other securities 2,806 2,806 2,358 2,358 1,332 1,332 -------- -------- -------- --------- --------- -------- TOTAL $45,445 $45,126 $44,857 $46,682 $31,903 $33,510 ======== ======== ======== ========= ========= ======== Securities available-for-sale and securities held-to-maturity are combined in the table presented above. The investment securities portfolio is structured to provide the Company with adequate liquidity by purchasing readily marketable securities. At December 31, 1999, the carrying value of investment securities totaled $44.9 million, or approximately the same amount as of December 31, 1998. This followed an increase at year end 1998, of $13.1 million, or 41.1% over December 31, 1997. The increase in investment securities at year end 1998 was attributable to the strong deposit growth during 1998. The carrying value at December 31, 1999, includes $554,086 of net unrealized losses on available-for-sale securities compared to $51,869 of net unrealized gains at year end 1998. The net unrealized gains of the held-to-maturity securities amounted to $234,744 as of December 31, 1999, compared to $1,772,779 at year end 1998. The rise in interest rates during 1999 caused the fair value of the investment securities to decline. The yield on a one year Treasury Bill increased approximately one hundred fifty basis points from year end 1998 to year end 1999. 27 The following table shows the maturities of investment securities at December 31, 1999, and the weighted average yields of such securities:
U.S. Government Agencies and State and Mortgage-backed Municipal Other Total Securities Securities Securities Securities --------------- -------------- -------------- --------------- Amortized Amortized Amortized Amortized (In thousands) Cost Yield Cost Yield Cost Yield Cost Yield ------- ------- ------- ------ ------- ------ ------- -------- Due in one year or less $701 5.90% $507 10.03% $2,806 5.08% $4,014 6.01% Due from one to five years 17,083 5.77% 6,263 8.35% - - 23,346 6.46% Due from six to ten years 465 6.16% 7,184 5.61% - - 7,649 5.64% Due after ten years - - 10,436 5.45% - - 10,436 5.45% ------ ----- ------ ----- ------ ----- ------- ----- TOTAL $18,249 5.79% $24,390 6.34% $2,806 5.08% $45,445 6.05% ======= ===== ======= ===== ====== ===== ======= =====
Yields on tax exempt securities have not been computed on a tax equivalent basis in the table above. Mortgage-backed securities are allocated according to their expected prepayments rather than their contractual maturities. Stocks and other securities having no stated maturity have been included in "Due in one year or less" in the table above. The average maturity of the portfolio was 6.5 years as of December 31, 1999, compared to 5.6 years and 5.8 years at year end 1998 and 1997 respectively. Securities available-for-sale and securities held-to-maturity are combined in the table presented above. The following table shows the average balance and tax equivalent yield for each of the last three years: Year Ended December 31, --------------------------------------------------- 1999 1998 1997 --------- ------ -------- ------- -------- -------- In thousands) Average Average Average Balance Yield Balance Yield Balance Yield ------- ----- ------- ----- ------- ----- Taxable securities $22,764 5.86% $14,749 6.15% $12,688 6.27% Nontaxable securities 21,633 9.92% 18,673 10.58% 17,731 10.89% --------- ------ -------- ------- -------- -------- TOTAL $44,397 7.84% $33,422 8.63% $30,419 8.96% ========= ====== ======== ======= ======== ======== The weighted average tax equivalent yield declined during each of the last two years as higher yielding securities that matured or were called were replaced with lower yielding securities of substantially the same quality. There were no significant concentrations of investments (greater than 10 percent of stockholders' equity) in any individual security issuer, except for securities issued by U. S. Government agencies and corporations. Loans - ----- The following table sets forth major types of loans and the percentage of total loans for each type at the end of each of the last three years: December 31, ----------------------------------------------------- 1999 1998 1997 ---------------- ----------------- ------------------ (In thousands) Amount % Amount % Amount % --------- ------ --------- ------- ---------- ------- Real estate $166,033 64.7% $135,344 63.0% $128,377 64.3% Commercial 71,175 27.7% 61,929 28.8% 53,903 27.0% Installment 18,552 7.2% 16,927 7.9% 16,623 8.3% Other 865 0.4% 786 0.3% 656 0.4% --------- ------ --------- ------- ---------- ------- Total $256,625 100.0% $214,986 100.0% $199,559 100.0% ========= ====== ========= ======= ========== ======= 28 The following sets forth the maturities of various categories of loans at December 31, 1999: Due From Due in One One to Due After Year or Less Five Years Five Years (In thousands) ------------ ------------ ---------- Real estate $139,369 $26,039 $625 Commercial 56,490 14,163 522 Installment 8,291 10,104 157 -------- ------- ------ TOTAL $204,150 $50,306 $1,304 ======== ======= ====== Substantially all loans maturing over one year are at fixed interest rates. Of the real estate loans shown in the above table, $91.0 million or 55% are residential mortgages, the Company's largest single category of loans. Approximately $78.6 million of these are one-year notes which are renewed annually, subject to updated credit and collateral valuation information but generally without fees or closing costs to the customer. The remaining residential mortgages are fixed rate loans for three and five year terms. Virtually all of these notes amortize principal indebtedness over a ten to twenty-five year period, and are repriceable at fixed rates that generally follow prevailing longer term rates. At December 31, 1999, $55.5 million or 22% of the Company's outstanding loans were deemed "agriculture-related", constituting the highest industrial concentration in the portfolio. Of these loans, over 90% relate directly to the dairy farming industry. Virtually all of these notes are written on a one-year basis, which allows the Company to review credit information and collateral values annually to ensure continued loan quality. The Company does not make unsecured loans other than credit card advances, which aggregated $481,468 at December 31, 1999, or .19% of total loans outstanding, and personal reserve overdraft protection accounts, which aggregated $297,060 or .12% of total loans outstanding at December 31, 1999. Nonaccrual loans totaled $7,835,123, $3,937,112 and $4,667,707 at December 31, 1999, 1998 and 1997 respectively. Approximately $5.0 million of the total nonaccrual loans at December 31, 1999, are real estate loans. Of the nonaccrual real estate loans, $2.5 million are secured by apartment buildings, $1.5 million are secured by commercial properties and $1.0 million are secured by residential mortgages. Management considers these loans adequately secured. Approximately $2.7 million of the total nonaccrual loans are commercial loans. Of the nonaccrual commercial loans, $2.1 million are secured by used automobiles and parts. Management considers these loans marginally secured with the possibility of some charge-offs occurring in 2000. The Company has no accruing loans that are past due 90 days or more. The Bank's policy is to place in nonaccrual status all loans which are contractually past due 90 days or more as to any payment of principal or interest and all other loans as to which reasonable doubt exists as to the full, timely collection of interest or principal based on management's view of the financial condition of the borrower. Previously accrued but uncollected interest on loans placed on nonaccrual status is charged against current earnings, and interest income thereafter is recorded only when received. Restructured loans at December 31, 1999, were $3,312,693 compared to $1,914,564 and $974,519 in 1998 and 1997 respectively. All of the restructured loans at December 31, 1999, are included in the nonaccrual loan totals discussed previously. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate. The restructured loans at year end involved the granting of a reduced interest rate or the lengthening of the amortization period or both. The increase in restructured loans at year end is primarily the result of the restructuring of loans totaling $1.8 million secured by mortgages on apartment buildings into a single loan. The restructured loan has been performing as agreed since the second quarter of 1999. Potential problem loans totaled $12,035,023 as of December 31, 1999. Potential problem loans are accruing loans in which there exists doubt as to the ability of the borrower to comply with present loan repayment terms. Management's decision to place loans in this category does not necessarily mean that the Company expects losses to occur on these loans, but that management recognizes that a higher degree of risk is associated with these accruing loans and they deserve closer scrutiny. The potential problem loans are not concentrated in a particular industry or type. 29 Other real estate at December 31, 1998, was $200,000. This consisted of a commercial property acquired in satisfaction of loans. The Bank realized a small gain from the sale of the property during the first quarter of 1999. The following table sets forth certain data concerning nonaccrual loans, restructured loans and other real estate owned (property acquired through foreclosure or in satisfaction of loans): December 31, ------------------------------------------------ 1999 1998 1997 --------------- ---------------- --------------- (In thousands) % of % of % of Total Total Total Amount Loans Amount Loans Amount Loans -------- ------ -------- ------- ------- ------- Nonaccrual loans (1) $7,835 3.05% $3,937 1.83% $4,668 2.34% Restructured loans (2) - - - - 406 0.20 -------- ------ -------- ------- ------- ------ Total $7,835 3.05% $3,937 1.83% $5,074 2.54% ======== ====== ======== ======= ======= ====== Other real estate owned $0 $200 $0 ======== ======== ======= (1)Includes impaired loans of $6,533,918, $2,633,527 and $3,056,643 as of December 31, 1999, 1998 and 1997, respectively. (2)Excludes restructured loans of $3,312,693, $1,914,564 and $568,042 as of the years ended December 31, 1999, 1998 and 1997, respectively, which are included with nonaccrual loans. Allowance For Credit Losses - --------------------------- The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collection of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit. These evaluations take into consideration a number of factors, including the Bank's and DACC's loss experience in relation to outstanding loans and the existing level of the allowance for credit losses, changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, regular examinations and appraisals of loan portfolios conducted by state and federal supervisory agencies, and current and anticipated economic conditions. The allowance for credit losses represents management's best judgment as to a prudent aggregate allowance in connection with the total loan portfolio. At December 31, 1999, the Company's investment in impaired loans totaled $6,533,918. The investment in impaired loans that does not require a related allowance for credit losses amounted to $5,302,854 while the remaining impaired loans totaling $1,231,064 require a related allowance for credit losses of $343,245. In 1999 the Company's provision for credit losses was $312,000 compared to $390,000 and $351,000 during 1998 and 1997, respectively. Net charge-offs were $87,806 for the year ended December 31, 1999, compared to net charge-offs of $157,303 and $31,807 for the years ended 1998 and 1997, respectively. The ratio of allowance for credit losses to total loans at year end was 1.28% compared to 1.42% at December 31, 1998. The net increase to the allowance was $244,194 or 7.3% higher than year end 1998. The Company's ratio of loans more than 30 days past due (including nonaccrual loans) to total loans was 3.72% at December 31, 1999, compared to 2.38% and 3.29% at December 31, 1998 and 1997, respectively. The Company's portfolio is heavily concentrated in the Bank's three-county primary service area and would be subject to fluctuations in local economic conditions. The Company does have a concentration of agricultural-related loans amounting to approximately 22% of total loans as of December 31, 1999. The factors that influence the agricultural economy are complex and difficult to predict. The prices paid to dairy farmers for milk have fluctuated significantly during the last two years. Management believes these price fluctuations are cyclical and underwriting practices have taken these fluctuations into consideration. Agricultural loans more than 30 days past due (including nonaccrual loans) totaled $379,653 at December 31, 1999. This represents .15% of total loans outstanding and 4% of the Company's total past due loans. During 1999 there were $69,410 of net charge-offs on loans considered agricultural-related compared to $5,740 of net recoveries during 1998. Management does not believe that these risks associated with the Company's loan portfolio have changed materially during the past three years. 30 Management believes its allowance for credit losses as of December 31, 1999, of $3,282,812 (equal to 1.28% of the total loans) is adequate to cover credit risks in the loan portfolio. Changes in the allowance for credit losses in each of the three most recent years were as follows: Year Ended December 31, -------------------------------------- 1999 1998 1997 ----------- ----------- ------------ Balance - beginning of year $3,058,618 $2,825,921 $2,506,728 ----------- ----------- ----------- Charge-offs: Real estate $0 $107,218 $0 Installment 33,616 37,248 18,643 Credit cards and related plans 8,898 5,210 1,277 Commercial loans 107,815 69,997 40,662 ----------- ----------- ----------- $150,329 $219,673 $60,582 ----------- ----------- ----------- Recoveries: Real estate $3,941 $5,019 $3,861 Installment 38,193 37,561 10,535 Credit cards and related plans 4,541 604 787 Commercial loans 15,848 19,186 13,592 ----------- ----------- ----------- $62,523 $62,370 $28,775 ----------- ----------- ----------- Net charge-offs $87,806 $157,303 $31,807 ----------- ----------- ----------- Provision charged to operations $312,000 $390,000 $351,000 ----------- ------------- ------------ Balance - end of year $3,282,812 $3,058,618 $2,825,921 =========== =========== =========== Ratio of net charge-offs during the year to average loans outstanding during the year 0.04% 0.08% 0.02% =========== =========== =========== Ration of allowance for credit losses to total loans at the end of year 1.28% 1.42% 1.42% =========== =========== =========== In 1999 the Company's ratio of charge-off loans to average loans outstanding was .06% compared to .11% and .03% during 1998 and 1997, respectively. The charge-offs during 1999 include $75,000 attributable to a single agricultural borrower. The 1998 charge-offs include real estate loan charge-offs amounting to $107,218 and commercial loan charge-offs totaling $49,909 attributable to a single commercial borrower. The Company does not expect future recoveries from these borrowers. During 1999 the installment loan recoveries included recoveries of $13,025 from a borrower whose loans were charged-off in 1995 and $9,318 from a borrower whose loans were charged-off during 1992. Recoveries on loans increased by $33,595 in 1998 compared to 1997. The installment loan recoveries included recoveries of $13,947 from a borrower whose loans were charged-off in 1995 and $12,000 from a borrower whose loans were charged-off during 1998. 31 Deposits - -------- The following table sets forth the deposits as of the end of each of the three most recent fiscal years and period-to-period percentage increases (decreases): Percent Increase (Decrease) (In thousands) 1999 1998 1997 1999/98 1998/97 -------- --------- --------- ------- ------- Non-interest bearing accounts $26,387 $27,168 $19,494 (2.9)% 39.4% NOW accounts 12,611 12,831 10,395 (1.7) 23.4 Savings accounts 15,506 16,361 17,036 (5.2) (4.0) Money market accounts 57,726 51,462 40,451 12.2 27.2 Certificates of deposit and other time deposits 99,704 104,228 101,753 (4.3) 2.4 -------- --------- --------- ------- ------- Total deposits $211,934 $212,050 $189,129 (0.1)% 12.1% ======== ========= ========= ======= ====== At December 31, 1999, total deposits were $211,933,656, a decrease of $116,077 or .1% compared to December 31, 1998. The decrease in demand deposits is attributable to a business depositor whose balance at year end was $2.7 million lower than the previous year end. The combined balances of money market and passbook savings accounts increased by $5.4 million or 8% compared to December 31, 1998. Certificates of deposit and other time deposits decreased by $4.5 million or 4.3% compared to the previous year end. The decrease in certificates of deposit is primarily the result of a $4.5 million decrease attributed to a local business depositor. These funds were deposited during the second quarter of 1998 and were withdrawn as expected at maturity during the second quarter of 1999. Management attributes the lack of overall deposit growth to the strong competition for core deposits in all of the Bank's market areas and to the outflow of funds to alternative investments. Total deposits increased $22,920,624 or 12.1% at December 31, 1998, compared to year end 1997. Demand deposits increased $7,674,048 or 39.4% during the year ended December 31, 1998. Much of this increase was attributable to a new business depositor with a balance of $4.7 million at year end 1998. Money market deposits increased by $11 million or 27.2% over the previous year end. Some of this increase was a result of a shift by depositors from lower yielding savings accounts into higher yielding money market accounts. Depositors also shifted funds from certificates of deposit to money market accounts because of the lower interest rates prevailing during the third and fourth quarters of 1998 compared to 1997. The yield on a two year certificate of deposit fell more than 1 full percentage point from 6.04% to 4.99% while the yield on money market accounts declined from 5.12% to 4.54% at year end 1998 compared to December 31, 1997. This change in rates resulted in a smaller spread between money market accounts and certificates of deposit. The following table shows, as of December 31, 1999, the maturities of time certificates of deposit in amounts of $100,000 or more and other time deposits in amounts of $100,000 or more: 3 Months 3 to 6 7 to 12 Over 12 Or Less Months Months Months Total --------- --------- -------- -------- -------- (In thousands) Certificates of deposit $2,774 $1,877 $4,718 $5,979 $15,348 Other time deposits 1,137 124 608 3,090 4,959 --------- --------- -------- -------- -------- Total $3,911 $2,001 $5,326 $9,069 $20,307 ========= ========= ======== ======== ======== 32 Other Borrowed Funds - -------------------- The following sets forth information concerning other borrowed funds for the Company during each of the last three years: December 31, --------------------------- (In thousands) 1999 1998 1997 -------- -------- --------- Short-term borrowings: Notes payable to banks $26,909 $22,400 $22,791 Federal Home Loan Bank advances 31,200 0 0 U.S. Treasury demand notes 0 0 300 Total short-term borrowings $58,109 $22,400 $23,091 -------- -------- --------- Long-term debt: Federal Home Loan Bank advances $17,000 $15,575 $9,574 Other long-term debt 98 102 107 -------- -------- --------- Total long-term debt $17,098 $15,677 $9,681 -------- -------- --------- Total other borrowed funds $75,207 $38,077 $32,772 ======== ======== ========= Short-term borrowings: Average amounts outstanding during the year $38,916 $22,399 $28,147 Average interest rates on amounts outstanding during the year 5.18% 5.86% 5.91% Weighted average interest rate at year end 5.96% 5.46% 6.05% Maximum month-end amounts outstanding $58,109 $23,284 $31,928 The Company utilizes a variety of short-term and long-term borrowings as a source of funds for the Company's lending and investment activities and for general business purposes. The Company has in place asset/liability and interest rate risk guidelines that determine in part whether borrowings will be short-term or long-term in nature. Federal Home Loan Bank advances and notes payable to banks consists of secured borrowings under existing lines of credit. At December 31, 1999, the Company had $89.2 million of established lines of credit. DACC's primary sources of funding are short-term notes payable to banks. As of December 31, 1999, DACC had established lines of credit of $37 million of which $26 million were drawn in the form of short-term notes payable. The proceeds from the borrowings incurred during 1999 were used primarily to fund loans. During 1999, the Bank borrowed $31.2 million from the Federal Home Loan Bank in the form of short-term advances. The funds were used primarily to fund the Bank's loan portfolio which grew by $37.8 million during 1999. Note 7 -- Long-Term Debt of the Notes To Consolidated Financial Statements contains information concerning the significant terms of the long-term borrowings. Stockholders' Equity - -------------------- Pursuant to regulations promulgated by the Federal Reserve Board, bank holding companies are required to maintain minimum levels of core capital as a percentage of total assets (leverage ratio) and total capital as a percentage of risk-based assets. Under these regulations, the most highly rated banks must meet a minimum leverage ratio of at least 3%, while lower rated banks must maintain a ratio of at least 4%. The regulations assign risk weightings to assets and off-balance sheet items and require a minimum risk-based capital ratio of 8%. At least half of the required 8% must consist of core capital. Core capital consists principally of shareholders' equity less intangibles, while qualifying total capital consists of core capital, certain debt instruments and a portion of the allowance for credit losses. The table set forth below describes the ratios of the Company as of December 31, 1999, and the applicable regulatory requirements. 33 The Company's core and risk-based capital ratios, as shown in the table, are well above the minimum levels. Regulatory Ratio Requirements -------- ------------ Equity as a % of assets 9.99% N/A Core capital as a % of average assets 9.62% 4.00% Core capital as a % of risk-based assets 13.35% 4.00% Total capital as a % of risk-based assets 14.61% 8.00% Stockholders' equity at December 31, 1999, increased 6.6% to $32,121,374 or $585 per share, compared with $30,140,667 or $550 per share one year ago. Cash dividends declared in 1999 were $17.25 per share compared with $13.50 and $11.75, in 1998 and 1997, respectively. The dividend payout ratio (dividends declared as a percentage of net income) was 29.50%, 23.59% and 25.30% in 1999, 1998 and 1997, respectively. The ability of the Company to pay dividends on the Common Stock is largely dependent upon the ability of the Bank to pay dividends on the stock held by the Company. The Bank's ability to pay dividends is restricted by both state and federal laws and regulations. The Bank is subject to policies and regulations issued by the FDIC and the Division of Banking of the Wisconsin Department of Financial Institutions ("the Division") which, in part, establish minimum acceptable capital requirements for banks, thereby limiting the ability to pay dividends. In addition, Wisconsin law provides that state chartered banks may declare and pay dividends out of undivided profits but only after provision has been made for all expenses, losses, required reserves, taxes and interest accrued or due from the bank. Payment of dividends in some circumstances may require the written consent of the Division. Note 16 -- Regulatory Matters of the Notes To Consolidated Financial Statements contains information concerning capital ratios of the Bank. During 1998 the Company's Board of Directors approved the 1998 Employees Stock Purchase Plan. The Plan allows the Company to issue treasury shares at fair market value to eligible employees. The purpose of the plan is to allow employees to share in the ownership of the Company. Employees of the Company purchased 296 shares each at $972 during 1999. The adequacy of the Company's capital is reviewed periodically to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. Management is committed to maintaining capital at a level that will allow the Company to take advantage of future opportunities when they arise. The Company's current level of capitalization is strong. This will allow the Company to pursue profitable growth opportunities. Liquidity - --------- Liquidity refers to the ability of the Company to generate adequate amounts of cash to meet the Company's needs for cash. Loan requests typically present the greatest need for cash but liquidity must also be maintained to accommodate possible outflows in deposits. Loan repayments as well as net cash provided by operating activities amounting to $3.6 million, an increase in other borrowings amounting to $37.1 million and a $4.9 million decrease in federal funds sold, as shown in the Consolidated Statements of Cash Flows, all provided sources of funds during 1999. The net increase in loans of $42.1 million was the major use of cash during 1999. During 1998 the major sources of funds were loan repayments, net cash provided by operating activities of $3.0 million, an increase in deposits totaling $22.9 million and an increase in other borrowings amounting to $5.3 million. The net increase in loans of $15.6 million, the net increase in investment securities of $12.4 million and the net increase in federal funds sold of $1.3 million were the major uses of cash during 1998. The Bank maintains liquid assets to meet its liquidity needs. These include cash and due from banks, marketable investment securities designated as available-for-sale and federal funds sold. The Bank also has the ability to borrow approximately $20 million by means of the purchase of short-term federal funds from its principal correspondent banks. Management strives to maintain enough liquidity to satisfy customer credit needs, meet deposit withdrawal requests and any other expected needs for cash. Excess liquid assets are reallocated to achieve higher yields. One ratio used to measure the liquidity of banking institutions is the net loan to deposit ratio. The net loan to deposit ratio of the Bank was 104.2%, 86.8% and 88.9% at December 31, 1999, 1998 and 1997, respectively. A high net loan to deposit ratio creates a greater challenge in managing adverse fluctuations in deposit balances and consequently this can limit loan growth. The net loan to deposit ratio reflects only on-balance sheet items. Off-balance sheet items such as commitments to extend credit and established borrowing lines 34 of credit also affect the liquidity position. In order to increase available funding sources the Bank is a member of the Federal Home Loan Bank (FHLB) of Chicago. As of December 31, 1999, the amount owed to the Federal Home Loan Bank was $48.2 million. The borrowings are secured by residential mortgages. The amount of eligible borrowing from the FHLB of Chicago is determined by the amount of residential loans held by the Bank and by the amount of common stock of FHLB of Chicago purchased by the Bank. The maximum amount of collateral that can be pledged to FHLB by the Bank is limited by state law to four times capital. An additional investment in stock of $180,125 would allow the Bank to borrow another $3.6 million and thereby maximize its eligible borrowing with FHLB. The Bank has also sold loans to DACC and to the secondary mortgage market to improve its liquidity position. During 1999 the Bank sold $6.7 million of residential loans to the secondary mortgage market. Other sources of liquidity for the Company consist of established lines of credit by DACC and by the parent company. As of December 31, 1999, DACC has unused lines of credit of $11.0 million and the parent company has an unused line of credit of $3.1 million. See Note 10 -- Financial Instruments with Off-Balance Sheet Risk in the Notes To Consolidated Financial Statements for a discussion of the Company's commitments to extend credit. Management believes the Company's liquidity position as of December 31, 1999, is adequate under current economic conditions. Interest Rate Sensitivity - ------------------------- The following table shows the repricing period for interest-earning assets and interest-bearing liabilities and the related gap based on contractual maturities, at December 31, 1999: (In thousands) 0 to 6 7 to 12 1 to 2 Over 2 Months Months Years Years --------- -------- --------- --------- Loans $101,767 $102,082 $18,430 $34,347 Investment securities 741 507 11,104 32,538 Federal funds sold 3,505 0 0 0 --------- -------- --------- --------- Total interest-earning assets $106,013 $102,589 $29,534 $66,885 --------- -------- --------- --------- Interest-bearing deposits $125,513 $21,175 $33,546 $5,312 Other borrowed funds 61,111 7,003 4,005 3,087 --------- -------- --------- --------- Total interest-bearing liabilities $186,624 $28,178 $37,551 8,399 --------- -------- --------- --------- Rate sensitivity gap $(80,611) $74,411 $(8,017) $58,486 Cumulative rate sensitivity gap $(80,611) $(6,200) $(14,217) $44,269 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 56.81% 97.11% 94.37% 116.98% Ratio of cumulative gap to average earning assets (28.48)% (2.19)% (5.02)% 15.64% Mortgage backed securities are allocated according to their expected prepayments rather than their contractual maturities. Interest rate risk is the exposure to a bank's earnings arising from changes in future interest rates. Interest rate sensitivity is measured using gap analysis. Gap analysis is used to identify mismatches in the repricing of assets and liabilities within specified periods of time or interest sensitivity gaps. The rate sensitivity or repricing gap is equal to total interest-earning assets less total interest-bearing liabilities available for repricing during a given time interval. A positive gap exists when total interest-earning repricing assets exceed total interest-bearing repricing liabilities and a negative gap exists when total interest-bearing repricing liabilities exceed total interest-earning repricing assets. Generally a positive repricing gap will result in increased net interest income in a rising rate environment and decreased net interest income in a falling rate environment. A negative gap tends to produce increased net interest income in a falling rate environment and decreased net interest income in a rising rate environment. The preceding table indicates the Company has a negative gap of $6.2 million or 2.2% of average earning assets for all assets and liabilities repricing within one year. The cumulative ratio of rate sensitive assets to rate sensitive liabilities within one year is 97.1%. For purposes of this analysis, NOW, savings and money market accounts are considered repriceable within six months. 35 MARKET INFORMATION - ------------------ The following table shows market price information and cash dividends paid for the Company's common stock: Book Value Market End of Quarter Value (1) Dividends 1998 (Unaudited) High Low Paid (2) - ---------------------------------------------------------------------- 1st Quarter $513 $733 $733 $6.00 2nd Quarter 527 915 897 - 3rd Quarter 542 * * 6.25 4th Quarter 550 952 939 - 1999 - ---------------------------------------------------------------------- 1st Quarter $557 $972 $963 $7.25 2nd Quarter 570 1,132 1,116 - 3rd Quarter 573 1,157 1,140 8.25 4th Quarter 585 1,166 1,147 - 2000 - ---------------------------------------------------------------------- Through March 1 N/A $1,180 $1,170 $9.00 (1) In recent years the Common Stock has traded sparsely. To the knowledge of management the price of each share has ranged in value as shown in the table. There is no established market for the Common Stock of the Company and it is unlikely that such a market for the shares will develop in the foreseeable future. Most of the transactions at the prices reported in the table are purchases by the Company pursuant to a Stock Repurchase Policy. The Stock Repurchase Policy provides that shares offered to the Company may be purchased as an accommodation to shareholders at a specified percentage of book value computed as of the end of the month preceding the purchase. The applicable percentage was 145% of book value until March 16, 1998, 175% of book value until March 16, 1999, and 200% of book value thereafter. The Board of Directors of the Company may consider changes in the applicable percentage at future meetings. (2) The ability of the Company to pay dividends is subject to certain limitations. See "Stockholders'Equity" in Management's Discussion and Analysis. * Indicates no reported sale of stock occurred in that quarter. As of March 1, 2000, the Company had 991 shareholders of record. SELECTED FINANCIAL INFORMATION - ------------------------------ The following table sets forth certain unaudited results of operations for the periods indicated: (In thousands except For the Quarter Ended per share data) 1998 March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------- Interest income $5,001 $5,217 $5,342 $5,490 Interest expense 2,632 2,661 2,740 2,739 Provision for credit losses 83 83 82 142 Net income 681 771 788 898 Net income per share 12.41 14.05 14.37 16.37 1999 - ---------------------------------------------------------------------------- Interest income $5,455 $5,497 $5,525 $5,842 Interest expense 2,678 2,769 2,963 3,189 Provision for credit losses 78 78 78 78 Net income 862 814 742 799 Net income per share 15.70 14.79 13.48 14.54 36 EX-21 4 DENMARK BANCSHARES, INC. EXHIBIT (21.1) List of Subsidiaries Jurisdiction of Name Incorporation ---------------------------------------------------------- 1. Denmark State Bank Wisconsin 2. Denmark Agricultural Credit Corporation Wisconsin 3. McDonald-Zeamer Insurance Agency, Inc. Wisconsin 4. Denmark Investments, Inc. Nevada All subsidiaries listed are 100% directly owned by Denmark Bancshares, Inc. except that Denmark Investments, Inc. is 100% owned by Denmark State Bank. EX-23 5 DENMARK BANCSHARES, INC. EXHIBIT (23.1) CONSENT OF WILLIAMS YOUNG, LLC Williams Young, LLC 2901 West Beltline Highway P.O. Box 8700 Madison, WI 53708 1-608-274-8085 INDEPENDENT AUDITORS' CONSENT Shareholders and Board of Directors Denmark Bancshares, Inc. We consent to the inclusion of our report dated February 10, 2000, relating to the consolidated statements of financial condition of Denmark Bancshares, Inc. and subsidiaries as of December 31, 1999, 1998, and 1997, and the related consolidated statements of income, shareholders' equity and cash flows and the related schedules for each of the years in the three year period ended December 31, 1999 in the Form 10-K of Denmark Bancshares, Inc. for the fiscal year ended December 31, 1999 and to the use of our name in such form. WILLIAMS YOUNG, LLC (signature of Williams Young) Madison, Wisconsin March 14, 2000 EX-27 6
9 12-MOS DEC-31-1999 DEC-31-1999 9,503,948 0 3,505,000 0 20,500,622 24,389,906 24,624,650 256,625,028 3,282,812 321,393,206 211,933,656 58,108,946 2,131,694 17,097,536 0 0 10,030,869 22,090,505 321,393,206 19,487,591 2,831,318 0 22,318,909 8,600,072 11,598,675 10,720,234 312,000 0 6,951,354 4,483,425 3,217,383 0 0 3,217,383 58.51 58.51 3.79 7,835,123 0 0 12,035,023 3,058,618 150,329 62,523 3,282,812 0 0 3,282,812
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