10-K/A 1 cmw169.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 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 (I.R.S. Employer Identification No.) incorporation or organization) 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) has 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 (ss.229.405 of this chapter) 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes __ No X The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002, was $59,635,856 (90,632 shares at $658 per share, which is equal to the weighted average purchase price of shares sold during the registrant's second fiscal quarter, according to information available to the registrant). As of March 1, 2003, there were 108,378 shares of the registrant's Common Stock (no par value) issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Documents* Part of Form 10-K into Which Portions of Documents are Incorporated Proxy Statement for Annual Meeting of Shareholders on April 22, 2003 Part III *Only the portions of documents specifically listed herein are to be deemed incorporated by reference. DENMARK BANCSHARES, INC. Page No. PART I 3 Item 1. Description of Business 3 Item 2. Description of Property 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II 8 Item 5. Market for Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 34 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 57 PART III 58 Item 10. Directors and Executive Officers of the Registrant 58 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management 58 Item 13. Certain Relationships and Related Transactions 59 PART IV 60 Item 14. Controls and Procedures 60 Item 15. Exhibits, Financial Statements and Reports on Form 8-K 60 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. 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 allow 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, 2002: Amounts in Thousands ---------------- Real Estate - Residential $ 108,714 Real Estate - Commercial 38,770 Real Estate - Agricultural 27,661 Real Estate - Construction 10,384 Commercial 28,719 Agricultural 34,952 Consumer and other loans 11,693 ---------------- Total Loans $ 260,893 ================ 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 $35,000,000, including $30,000,000 from the AgriBank, FCB and $5,000,000 from a private lending institution. DACC originates loans and purchases loans exclusively from the Bank. 3 As of December 31, 2002, DACC held agricultural loans totaling $29,442,396. In 2002 the net income of DACC was equal to 16.2% 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. To date, the operations of McDonald have not represented a material portion of the consolidated operating results of the Company. Areas Serviced by the Company; Competition The Company serves Kewaunee, Brown and Manitowoc Counties, including the villages of Denmark, Bellevue, Maribel, Reedsville and Whitelaw. 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, thrift institutions, 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, 2002, the Bank had 84 full-time equivalent employees; McDonald has four 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 4 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 that 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 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 5 Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. The Sarbanes-Oxley Act, which enacted sweeping measures that, among other things, tighten the rules governing auditors, corporate officers and executives, and investment banking research analysts, was signed into law as of July 30, 2002. This act requires chief executive officers and chief financial officers of public companies to personally certify that the reports their companies file with the SEC are accurate and complete. Those persons who are responsible for accounting or reporting violations are subject to harsh civil and criminal penalties. 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. On March 13, 2002, The Bank entered into a Memorandum of Understanding ("MOU") with the FDIC and with the Division. The Bank complied with all of the requirements of the MOU, and effective October 17, 2002, the MOU was terminated by the FDIC and the Division. 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 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 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 6 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 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 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. 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 a review of DACC's loan portfolio at least once every three years. 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 Investments, insurance and travel club Denmark 5,000 (construction in progress) Denmark 1,000 Insurance office occupied by McDonald 7 Each of the foregoing properties is in good condition and is solely occupied by the Company. 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. The Company sells such real estate 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, 2002. PART II ------- ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------------------------- The following table shows market price information and cash dividends paid for the Company's common stock:
Book Value End of Quarter Market Value (1) Dividends 2001 (Unaudited) High Low Paid (2) ---------------------------------------------------------------------------------------------------------- 1st Quarter $ 294 $ 644 $ 632 $ 5.13 2nd Quarter 301 664 654 3rd Quarter 294 673 500 5.38 4th Quarter 306 666 629 2002 ---------------------------------------------------------------------------------------------------------- 1st Quarter $ 311 $ 659 $ 642 $ 5.50 2nd Quarter 321 667 653 3rd Quarter 325 688 500 5.63 4th Quarter 334 696 683 2003 ---------------------------------------------------------------------------------------------------------- Through March 1 N/A $ 702 $ 702 $ 5.75
(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 205% of book value until March 27, 2001, and 210% of book value thereafter. The 8 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. As of March 1, 2003, the Company had 1,106 shareholders of record. 9 ITEM 6. SELECTED FINANCIAL DATA -----------------------
Year Ended December 31, ------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------- ------------ ------------ ------------ ------------ INCOME STATEMENT DATA Interest income $ 22,201 $ 25,922 $ 25,837 $ 22,275 $ 21,050 Interest expense 7,971 13,403 15,504 11,599 10,772 ------------- ------------ ------------ ------------ ------------ Net interest income $ 14,230 $ 12,519 $ 10,333 $ 10,676 $ 10,278 Less: Provision for possible loan losses 944 2,132 3,564 312 390 ------------- ------------ ------------ ------------ ------------ Net income after provision for possible credit losses $ 13,286 $ 10,387 $ 6,769 $ 10,364 $ 9,888 ------------- ------------ ------------ ------------ ------------ Plus: Noninterest income $ 1,707 $ 1,430 $ 1,042 $ 1,070 $ 955 Less: Noninterest expense 8,452 8,219 7,456 6,951 6,421 ------------- ------------ ------------ ------------ ------------ Net noninterest expense $ (6,745) $ (6,789) $ (6,414) $ (5,881) $ (5,466) ------------- ------------ ------------ ------------ ------------ Income before income taxes $ 6,541 $ 3,598 $ 355 $ 4,483 $ 4,422 ------------- ------------ ------------ ------------ ------------ Income tax expense 1,817 753 (390) 1,266 1,284 ------------- ------------ ------------ ------------ ------------ Net income $ 4,724 $ 2,845 $ 745 $ 3,217 $ 3,138 ============= ============ ============ ============ ============ PER SHARE DATA (1) Net income $ 43.49 $ 26.00 $ 6.79 29.26 28.60 Cash dividends declared 11.38 10.88 10.00 8.63 6.75 Book value (year end) 334.32 305.60 290.89 292.51 275.06 BALANCE SHEET DATA Average balances: Total loans (includes loans held for sale) $ 266,004 275,629 268,719 237,017 206,422 Investment securities 42,580 38,145 42,872 42,614 32,130 Assets 339,604 344,459 333,681 295,478 261,136 Deposits 249,722 245,252 223,291 207,543 192,780 Stockholders' equity 34,929 32,835 33,066 31,462 29,052 Year-end balances: Total loans (includes loans held for sale) $ 262,470 268,028 280,977 256,625 214,986 Allowance for possible credit losses 5,418 5,524 6,572 3,283 3,059 Investment securities 50,986 37,823 43,046 42,128 43,571 Assets 346,153 346,374 345,299 321,393 282,184 Deposits 257,964 252,688 245,621 211,934 212,050 Long-term debt 26,186 34,087 22,092 17,098 15,677 Stockholders' equity 36,150 33,371 31,872 32,121 30,141 FINANCIAL RATIOS Return on average equity 13.52% 8.66% 2.25% 10.23% 10.80% Return on average assets 1.39% 0.83% 0.22% 1.09% 1.20% Net interest spread (tax-equivalent) 4.28% 3.41% 2.70% 3.30% 3.60% Average equity to average assets 10.29% 9.53% 9.91% 10.65% 11.13% Allowance for credit losses to loans 2.06% 2.06% 2.34% 1.28% 1.42% Non-performing loans to allowance for loan losses 112% 126% 235% 239% 129%
Dollars in thousands except per share data and financial ratios. (1) Adjusted to reflect 2-for-1 stock split effective June 11, 2002. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- 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, 2002, 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"). This report may contain certain forward-looking statements, including without limitation, statements regarding results of operations, the adequacy of the allowance for loan losses, the amounts of charge-offs and recoveries, capital to assets ratios, capacity for paying dividends and liquidity. These forward-looking statements are inherently uncertain and actual results may differ from Company expectations. The following factors which, among others, could impact current and future performance include but are not limited to: (i) adverse changes in asset quality and resulting credit risk-related losses and expenses; (ii) adverse changes in the local economy; (iii) fluctuations in market rates and prices which can negatively affect net interest margin, asset valuations and expense expectations; and (iv) changes in regulatory requirements of federal and state agencies applicable to banks and bank holding companies, which could have materially adverse effects on the Company's future operating results. When relying on forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties. All forward-looking statements contained in this report are based upon information presently available and the Company assumes no obligation to update any forward-looking statements. Critical Accounting Policies The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices in the banking industry. The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on information available at the date of the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management believes that the Company's critical accounting policies are those relating to the allowance for loan losses and intangible assets. Allowance for Loan Losses The allowance for loan losses ("ALLL") is an estimate of the losses that may be sustained in the loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable, and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the loan's or lease's contractual terms. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 - "Selected Loan Loss Allowance Methodology and Documentation Issues" and the Federal Financial Institutions Examination Council's interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions" (the "FFIEC Policy Statement"). 11 The Bank's and DACC's boards of directors have approved policies to provide management with a systematic methodology to determine an adequate allowance for loan losses. This methodology includes a systematic loan grading system that requires quarterly reviews, identification of loans to be evaluated on an individual basis for impairment, results of independent reviews of asset quality and the adequacy of the allowance by regulatory agencies, as an integral part of their examination process, and by external auditors, consideration of current trends and volume of total nonperforming, past-due, nonaccrual and potential problem loans, and consideration of national and local economic trends and industry conditions. In applying the methodology, nonaccrual loans, restructured loans and potential problem loans (other than loans secured by 1-to-4 family residential properties, loans secured by consumer personal property and unsecured loans), above a certain size, are reviewed to determine if they are impaired. Impaired loans are individually analyzed and an allowance amount calculated for each one of these loans, based on the estimated fair value of collateral, in conjunction with FAS 114. Loans that are not impaired are segmented into groups by type of loan. The following loan types are utilized so that each segment of loans will have similar risk factors; 1) residential real estate, 2) agricultural real estate, 3) commercial real estate, 4) agricultural, 5) commercial, 6) consumer installment, and 7) other. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, the Bank and DACC further segregate loans that are not impaired by loan risk classification within each type of loan based on an assessment of risk for a particular loan. The applicable risk classifications are "special mention" and "substandard". A "substandard" loan is a loan that is inadequately protected by the current sound worth and paying capacity of the borrower or of any collateral. Loans classified "substandard" have well-defined weaknesses that jeopardize liquidation and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. Loans classified "special mention" are one step above substandard; these loans contain some weakness which if not corrected or improved upon could lead to further deterioration and a lower rating. Risk factor percentages are applied to the identified segments of each of the nonclassified and classified portions of the portfolios to calculate an allowance in conjunction with FAS 5. These risk factor percentages are based on historical loan loss experience adjusted for current economic conditions and trends and internal loan quality trends. The foregoing calculations in accordance with FAS 114 and FAS 5 are used to confirm the adequacy and appropriateness of the ALLL as developed through provisions for credit losses charged to expense, recognizing that the ALLL represents an aggregation of judgments and estimates by management. Such calculations also influence the amount of future provisions for credit losses charged to expense, pending reapplication of the described systematic methodology. Management evaluates the adequacy of the ALLL on a quarterly basis and submits to the board of directors of the Bank each quarter a recommendation of the amount of a monthly provision for loan losses. If the mix and amount of future charge-offs differ significantly from those assumptions used by management in making its determination, the ALLL and the provision for loan losses on the income statement could be materially affected. Management believes that the ALLL is adequate as of December 31, 2002. During 2001, the methodology for calculating the allowance for loan losses was changed to reflect the FFIEC Policy Statement, which was issued in July, 2001. The primary difference between the current methodology and the prior methodology is that the Company did not previously calculate an allowance amount for impaired loans when it determined the ALLL, nor did it exclude impaired loans from loans evaluated as a group. The changed methodology was applied retroactively to the year ended December 31, 2000, resulting in a restatement of the financial statements as of December 31, 2000, from those originally reported. (See Note 16 to Consolidated Financial Statements.) 12 Intangible Assets The Company has a core deposit intangible asset that was originated in connection with the Bank's expansion through an acquisition of an established branch operation in 1997. The acquisition did not meet the definition of a business combination in accordance with Statement No. 141. As such, the Company continues to amortize the intangible asset related to the acquisition over a period of fifteen years. Had management determined that this acquisition met the definition of a business combination, Statement No. 142 would have required the Company to evaluate the branch acquisition for impairment on an annual basis and record an impairment charge, if any, to earnings. 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) ------------------- 2002 2001 2000 2002/01 2001/00 -------- -------- -------- ---------- ---------- (In thousands) Interest income $22,201 $25,922 $25,837 (14.4)% 0.3% Interest expense 7,971 13,403 15,504 (40.5) (13.6) Net interest income 14,230 12,519 10,333 13.7 21.3 Provision for credit losses 944 2,132 3,564 (55.7) (40.2) Noninterest income 1,707 1,430 1,042 19.4 37.2 Noninterest expense 8,452 8,219 7,456 2.8 10.2 Net income 4,724 2,845 745 66.0 281.9
Earnings Performance The Company achieved record net income of $4,723,978 in 2002. This represents an increase of $1,878,852 or 66.0% compared to 2001 earnings. The increase in net income is primarily attributable to higher net interest income, a decrease in the provision for loan losses and higher noninterest income. Net interest income increased by $1,710,861 primarily as a result of a higher net interest spread. The provision for loan losses decreased by $1,188,500 for the reasons discussed below under Financial Condition - Allowance For Credit Losses. Noninterest income increased by $276,274 or 19.4% higher than 2001. These items more than offset higher noninterest expense, which increased by $232,861, and higher income tax expense, which increased by $1,063,922. The increase in noninterest expenses is primarily attributable to increases in salaries and employee benefits expense which increased $233,686 or 4.6% higher than 2001. The increase in net income in 2002 followed an increase of $2,099,831 in 2001 compared to 2000. The increase in net income was primarily attributable to higher net interest income which increased by $2,186,149 and a decrease of $1,431,035 in the provision for loan losses. The net interest spread was 3.41% during 2001 compared to 2.70% during 2000. Higher noninterest income also contributed to the improved performance during 2001 compared to the prior year. Noninterest income increased by $387,896 or 37.2% higher than 2000. This increase was primarily the result of gains on sales of loans. These items more than offset higher noninterest expense, which increased by $762,539 and higher income tax expense, which increased by $1,142,710. The increase in noninterest expenses was primarily attributable to increases in salaries and employee benefits expense which increased $401,032 or 8.6% higher than 2000, and higher other operating expenses which increased by $308,294 or 21.3% higher than 2000. 13 On a per share basis, net income was $43.49 in 2002 compared with $26.00 in 2001 and $6.79 in 2000. Return on average assets for the Company was 1.39% in 2002 compared to .83% in 2001 and .22% in 2000. Return on average equity in 2002 was 13.52% compared to 8.66% and 2.25% in 2001 and 2000, respectively. 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. Net interest income in the following discussion has been adjusted to a taxable equivalent level (tax-exempt interest has been increased to a level that would yield the same after-tax income had that income been subject to tax at a 34% tax rate) and therefore differs from the amount reported in the Consolidated Statements of Income. Net interest income on a taxable equivalent basis increased 13.4% or $1,807,331 from 2001 to 2002. The increase is primarily attributable to a higher net interest spread, which increased from 3.41% during 2001 to 4.28% during 2002. Net interest income spread is the difference between the average yield earned on assets and the average rate incurred on liabilities. The yield on earning assets fell by 96 basis points from 8.13% to 7.17% while the cost of funds decreased by 183 basis points from 4.72% to 2.89% resulting in an increase in net interest spread of 87 basis points. The net interest spread was 4.50% in the first quarter of 2002 and narrowed to 3.97% in the fourth quarter. Management expects the interest rate spread will narrow further during 2003 as the Company prices loan rates more aggressively in an effort to increase the loan portfolio size. As indicated in the tables presented on the following pages, changes in the volume and mix of earning assets and interest-bearing liabilities contributed $0.1 million to net interest income for 2002 compared to 2001, while changes in rates added $1.7 million for a total increase of $1.8 million. Average earning assets decreased by $6.5 million or 2.0% during 2002 compared to 2001. Average interest-bearing liabilities decreased by $8.3 million or 2.9% during 2002. Net interest income increased 20.7% or $2,310,504 from 2000 to 2001. The increase was primarily attributable to a higher net interest spread, which increased from 2.70% during 2000 to 3.41% during 2001. Management attributed the increase in net interest spread to the decline in market interest rates during 2001. Beginning on January 3, 2001, and ending on December 11, 2001, the Federal Reserve lowered the federal funds rate eleven times for a total reduction of 475 basis points. As a result, banks also lowered the prime rate of interest from 9.50% to 4.75% during the same time period. The Company's net interest spread improved during that rate environment because many of the Company's interest-bearing liabilities, including money market accounts, notes payable and certain FHLB advances, repriced almost immediately. Conversely, since the Company had few loans tied to prime, the loan portfolio did not reprice as quickly. Average earning assets increased by $10.6 million or 3.3% during 2001 compared to 2000. This increase generated $1.1 million of additional interest income. Average interest-bearing liabilities increased by $8.5 million or 3.1% during 2001. This increase in the volume of interest-bearing liabilities resulted in an increase to interest expense totaling $0.5 million. The net increase to interest income attributed to the increased volume and mix of earning assets and interest-bearing liabilities was $.6 million. 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. Changes that are not due solely to volume or rate have been allocated to rate. 14
Year Ended December 31, ----------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ ------------------------------------------- Increase (Decrease) Due to Change In Increase (Decrease) Due to Change In ------------------------------------------ ------------------------------------------- (In thousands) Average Average Total Average Average Total Balance Rate Change Balance Rate Change ------------ ----------- ----------- ------------ ----------- ------------ Interest income: Loans (1) $ (800) $ (2,522) $ (3,322) $ 580 $ (235) $ 345 Taxable securities (46) (180) (226) (659) 10 (649) Nontaxable securities (1) 452 (164) 288 641 (281) 360 Federal funds sold (55) (250) (305) 527 (394) 133 Other investments 18 (78) (60) 25 (4) 21 ------------ ----------- ----------- ------------ ----------- ------------ Total interest income $ (431) $ (3,194) $ (3,625) $ 1,114 $ (904) $ 210 ------------ ----------- ----------- ------------ ----------- ------------ Interest expense: NOW accounts $ 12 $ (93) $ (81) $ 17 $ (76) $ (59) Savings accounts 36 (135) (99) (19) (54) (73) Money market accounts 80 (1,451) (1,371) 67 (1,094) (1,027) Certificates and other time deposits (138) (2,503) (2,641) 1,106 (322) 784 Other borrowed funds (516) (724) (1,240) (694) (1,031) (1,725) ------------ ----------- ----------- ------------ ----------- ------------ Total interest expense $ (526) $ (4,906) $ (5,432) $ 477 $ (2,577) $ (2,100) ------------ ----------- ----------- ------------ ----------- ------------ Net interest income $ 95 $ 1,712 $ 1,807 $ 637 $ 1,673 $ 2,310 ============ =========== =========== ============ =========== ============
(1) Shown on a fully taxable equivalent basis assuming a Federal income tax rate of 34%. 15 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:
2002 2001 2000 -------------------------------- -------------------------------- -------------------------------- (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: Loans (1) (2) $266,004 $ 19,597 7.37% $275,629 $ 22,919 8.32% $268,719 $ 22,574 8.40% Investment securities: (3) Taxable securities 5,432 141 2.60% 6,199 367 5.92% 17,630 1,016 5.76% Nontaxable securities (2) 37,148 3,062 8.24% 31,946 2,774 8.68% 25,242 2,414 9.56% Federal funds sold 12,339 194 1.57% 13,856 499 3.60% 5,675 366 6.45% Other investments 3,412 264 7.74% 3,239 325 10.03% 2,994 304 10.15% --------- --------- -------- -------- -------- ------- --------- -------- ------- Total Earning Assets $324,335 $ 23,258 7.17% $330,869 $ 26,884 8.13% $320,260 $ 26,674 8.33% --------- --------- -------- -------- -------- ------- --------- -------- ------- Noninterest-earning assets: Cash and due from banks $ 9,077 $ 7,330 $ 6,231 Allowance for credit losses (5,409) (6,307) (3,364) Premises and equipment 4,288 4,585 4,566 Other assets 7,313 7,982 5,988 --------- -------- --------- TOTAL ASSETS $339,604 $344,459 $333,681 ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW accounts $ 13,200 $ 97 0.73% $ 12,340 $ 178 1.44% $ 11,490 $ 237 2.06% Savings accounts 15,512 161 1.04% 13,634 260 1.91% 14,470 332 2.29% Money market accounts 63,865 838 1.31% 61,641 2,209 3.59% 60,402 3,237 5.36% Time deposits 129,820 5,077 3.91% 132,179 7,718 5.84% 114,003 6,934 6.08% Other borrowed funds 53,097 1,798 3.39% 63,975 3,038 4.75% 74,892 4,763 6.36% --------- --------- -------- -------- -------- ------- --------- -------- ------- Total Interest-Bearing Liabilities $275,494 $ 7,971 2.89% $283,769 $ 13,403 4.72% $275,257 $ 15,503 5.63% --------- --------- -------- -------- -------- ------- --------- -------- ------- Non-interest-bearing liabilities and stockholders' equity: Demand deposits $ 27,324 $ 25,458 $ 22,926 Other liabilities 1,857 2,397 2,432 Stockholders' equity 34,929 32,835 33,066 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $339,604 $344,459 $333,681 ========= ======== ========= Net interest income and rate spread $ 15,287 4.28% $ 13,481 3.41% $ 11,171 2.70% ========= ======== ======== ======= ======== =======
(1) 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. (2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%. (3) Securities are shown at amortized cost. Noninterest Income Total noninterest income was $1,706,713, an increase of $276,274 or 19.4% in 2002. The increase is primarily the result of higher gains from the sale of loans, which increased by $124,359. The Bank sold $39.4 million of residential real estate loans to the secondary mortgage market during 2002 compared to $26.9 million during the previous year. Mortgage refinancing activity was robust for the second consecutive year as long-term fixed mortgage rates fell by an average of 75 to 125 basis points during 2002. The Bank implemented service charge increases during the third quarter of 2001 and as a result overdraft fees and service charges on deposit accounts increased by $67,884 during 2002 compared to 2001. Commissions from insurance sales increased by $29,479. ATM and check card fees increased $14,257. Appraisal fees increased by $11,000 during 2002 compared to the previous year. 16 Noninterest income increased by $387,896 in 2001 compared to 2000. The increase was primarily the result of higher gains from the sales of loans, which increased by $270,912. Appraisal fees were $33,800 higher during 2001 compared to the previous year. Commissions from insurance sales increased by $83,786 during 2001 compared to the previous year. The higher commissions were mostly attributable to bonuses received based on volume and loss experience from prior years. The Bank implemented service charge increases during the third quarter of 2001 and as a result overdraft fees increased $54,646 compared to 2000. Brokerage fees and commissions from the sales of common stocks, mutual funds and annuities decreased by $57,773 during 2001 compared to 2000. Management attributes the decline to the volatility in the equity markets and a slowing economy, which combined to curtail investment activity. The following table sets forth certain items of noninterest income:
Percent (In thousands) Increase (Decrease) Noninterest income: 2002 2001 2000 2002/01 2001/00 ------------ ------------- ------------ ------------- ----------- Service fees and commissions $ 935 $ 851 $ 765 9.9% 11.2% Investment security gains 7 6 0 16.7 N/A Loan sale gains 424 299 28 41.8 967.9 Other 341 274 250 24.5 9.6 ------------ ------------- ------------ ------------- ----------- Total noninterest income $ 1,707 $ 1,430 $ 1,043 19.4% 37.1% ============ ============= ============ ============= ===========
Noninterest Expense Salaries and employee benefits expense increased $233,686 or 4.6% in 2002. The increase is primarily attributable to an increase of $154,300 or 4.3% in salaries. The average number of full-time equivalent employees was 88 and 90 for the years ended December 31, 2002 and 2001, respectively. Occupancy expenses decreased by $54,180 primarily as a result of lower depreciation expense which fell $42,520. Data processing expenses increased by $27,877 or 5.2% as a result of additional fees incurred for internet banking and bill payment services that were offered beginning the second quarter of 2002. Marketing expenses increased by $37,472 or 17.7%. Additional marketing expenses were incurred to promote the use of internet banking and on-line bill payment services. Professional fees were $183,062 in 2002 compared to $142,681 in 2001, an increase of $40,381. Professional fees include expenditures for legal, audit, tax and appraisal services. The increase is attributable to additional legal expenses incurred to collect delinquent loans, for services regarding the stock split and amendment to the articles of incorporation, and higher legal and audit fees incurred in connection with the MOU. FDIC deposit insurance assessment expenses increased by $33,881 as a result of the MOU in effect during 2002. Decreases in expenses on properties held as other real estate and a reduction in amortization of intangibles partially offset these increases in noninterest expense. Expenses associated with other real estate totaled $60,463, a decrease of $109,332 compared to 2001. These costs consisted primarily of insurance expenses, repairs and real estate taxes. Amortization of intangibles decreased by $52,012. During 2001, McDonald reduced goodwill associated with the previous purchases of insurance agencies by $62,914. The Company has begun construction of a new office building located in Denmark. The building, which will be completed in the third quarter of 2003 at estimated cost of $1 million, will have approximately 5,000 square feet of office space. The building will be occupied by the investment and travel club staff employees of the Bank and by the insurance staff of McDonald. Bank employees will occupy the building currently occupied by McDonald. This new office building will result in increased occupancy expenses for the Company. During 2001, salaries and employee benefits expense increased $401,032 or 8.6%. The increase was primarily attributable to an increase of $217,371 in salaries and higher insurance benefits which increased by $150,118. Occupancy expenses increased by $81,286 primarily as a result of higher depreciation expense 17 which rose $51,510. Other operating expenses increased $308,294 or 21.3% in 2001. The Bank incurred $169,795 of expenses to repair and maintain properties acquired and held as other real estate during 2001. Professional fees were $142,681 in 2001 compared to $57,749 in 2000, an increase of $84,932. The increase was attributable to additional legal expenses incurred to collect delinquent loans and higher legal and audit fees incurred in connection with the restatement of the December 31, 2000, financial statements. The amortization of intangibles increased by $39,310 in 2001. The efficiency ratios (total noninterest expense divided by the sum of net interest income on a fully taxable equivalent basis and noninterest income excluding securities gains or losses) were 49.8%, 55.1% and 61.1% for the years ended December 31, 2002, 2001 and 2000, respectively. The following table sets forth certain items of noninterest expense:
Percent (In thousands) Increase (Decrease) Noninterest Expense: 2002 2001 2000 2002/01 2001/00 ------------ ------------- ------------- ------------- ----------- Salaries and employee benefits $ 5,279 $ 5,045 $ 4,644 4.6% 8.6% Occupancy expenses 843 897 816 (6.0) 9.9 Data processing expenses 550 523 551 5.2 (5.1) Marketing expenses 246 209 254 17.7 (17.7) Amortization of intangibles 207 259 219 (20.1) 18.3 Printing and supplies expenses 192 180 192 6.7 (6.3) Directors and committee fees 223 204 200 9.3 2.0 Professional fees 183 143 40 28.0 257.5 Other operating expenses 729 759 540 (4.0) 40.6 ------------ ------------- ------------- ------------- ----------- Total noninterest expense $ 8,452 $ 8,219 $ 7,456 2.8% 10.2% ============ ============= ============= ============= ===========
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):
Percentage Increase (Decrease) (In thousands) 2002 2001 2000 2002/01 2001/00 ------------ ------------- ------------ ------------- ------------ Federal funds sold $ 12,297 $ 20,856 $ 5,328 (41.0)% 291.4% Investment securities 50,986 37,823 43,046 34.8 (12.1) Loans 262,470 268,028 280,977 (2.1) (4.6) Allowance for credit losses (5,418) (5,524) (6,572) (1.9) (15.9) Total assets 346,153 346,374 345,299 (0.1) 0.3 Deposits 257,964 252,688 245,621 2.1 2.9 Other borrowed funds 50,234 58,348 65,108 (13.9) (10.4) Stockholders' equity 36,150 33,371 31,872 8.3 4.7
Total assets at December 31, 2002, were $346.2 million. This represents a decrease of $.2 million, or 0.1% less than year-end 2001. Federal funds sold decreased by $8.6 million. The Bank purchased $11 million of short-term taxable municipals that were yielding about 25 basis points more than federal funds sold. Management attributes the lack of growth to several factors. During 2002, the Bank sold a record $39.4 million of fixed rate residential loans to the secondary mortgage market. Additionally, management was stressing credit quality and concentrating its efforts on collecting delinquent loans. The local economic conditions during 2002 further contributed to the lack of loan growth. The general economic climate, other than housing, could be characterized as slow. Also, the agricultural economy has been hampered by low 18 milk prices. The effect of these local economic conditions on the Bank's loan origination activities and asset quality is similar to the effects experienced in previous downturns. At December 31, 2001, total assets increased by $1.1 million or 0.3% higher than the previous year-end. Total loans declined by $12.9 million or 4.6% lower than the previous year-end. The decrease in loans was primarily attributable to the sale of $26.6 million of fixed-rate residential loans to the secondary mortgage market. Available-for-sale investment securities declined by $14.7 million compared with the previous year-end. During 2001, $13.5 million of U.S. Government agency securities were called. The proceeds were used primarily to increase the tax-exempt (classified as held-to-maturity) securities portfolio in order to reduce taxable income. Federal funds sold increased by $15.5 million primarily as a result of the liquidity provided by the sale of loans. Total deposits increased by $7.1 million or 2.9% higher than the previous year-end. The deposit growth, combined with the decline in the loan portfolio, allowed the Company to reduce other borrowings by $6.8 million. Investments The investment portfolio is managed to provide liquidity and a stable source of income. Taxable securities are purchased and designated as available-for-sale to provide liquidity to meet loan growth or deposit withdrawals. Purchases of taxable securities are limited to maturities or average lives of five years or less. Non-taxable securities are purchased and designated as held-to maturity. Generally these purchases are securities issued by state and local municipalities with maturities of 15 to 19 years and some protection against early calls (usually around 10 years). These purchases are made to take advantage of upward sloping yield curves that reward long-term investors with higher interest rates and favorable interest rate spreads when compared to U.S. Treasury and U.S. Agency securities. No securities are purchased for trading purposes. Investment balances in various categories at the end of each of the last three years were as follows:
December 31, ------------------------------------------------------------------------------------------- 2002 2001 2000 --------------------------- ---------------------------- ---------------------------- Amortized Fair Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value Cost Value ------------ ----------- ------------- ----------- ------------- ----------- U.S. Government agencies $ 0 $ 0 $ 0 $ 0 $ 13,498 $ 13,382 Mortgage-backed securities 1,109 1,136 1,523 1,537 3,085 3,072 State and municipal securities 48,910 51,081 36,026 36,641 26,578 27,475 Other securities 940 940 260 260 15 15 ------------ ----------- ------------- ----------- ------------- ----------- TOTAL $ 50,959 $ 53,157 $ 37,809 $ 38,438 $ 43,176 $ 43,944 ============ =========== ============= =========== ============= ===========
Securities available-for-sale and securities held-to-maturity are combined in the table presented above. At December 31, 2002, the carrying value of investment securities totaled $51.0 million, an increase of $13.2 million, or 34.8% higher than year-end 2001. The Bank held $11 million in short-term taxable municipal securities at year-end. The securities, yielding 1.5%, were purchased as an alternative to short-term federal funds sold, which were yielding 1.25% at year-end. The U.S. Government agencies as of year-end 2000 consisted of callable securities, which were called prior to maturity because of the lower short-term interest rates prevailing during 2001. The municipal securities portfolio increased by $9.4 million during 2001 in order to increase tax-exempt income. The securities purchased consisted of general obligation and revenue bonds with a minimum A rating (except for non-rated Wisconsin municipalities) with 15 to 17 year final maturities. These securities provided favorable tax equivalent yields compared to the yields on taxable securities. The carrying value at December 31, 2002, includes $26,783 of net unrealized gains on available-for-sale securities compared to $14,890 of net unrealized gains at year-end 2001. The net unrealized gains of the held-to-maturity securities amounted to $2,171,295 as of December 31, 2002, compared to $615,195 at year-end in 2001. 19 The following table shows the maturities of investment securities at December 31, 2002, and the weighted average yields of such securities:
U.S. Government State and Municipal Other Securities Total Securities Agencies and Mortgage-Backed Securities Securities ---------------------- ---------------------- -------------------- --------------------- Amortized Amortized Amortized Amortized (In thousands) Cost Yield Cost Yield Cost Yield Cost Yield --------- --------- --------- -------- --------- ------- ---------- ------- Due in one year or less $ 0 - $12,509 2.64% $ 940 1.05% $ 13,449 2.53% Due from one to five years 1,060 6.06% 5,219 8.57% - - 6,279 8.14% Due from six to ten years 49 5.90% 4,450 8.80% - - 4,499 8.77% Due after ten years 0 - 26,732 7.90% - - 26,732 7.90% --------- --------- --------- -------- --------- ------- ---------- ------- TOTAL $ 1,109 6.05% $48,910 6.71% $ 940 1.05% $ 50,959 6.59% ========= ========= ========= ======== ========= ======= ========== =======
Yields on tax-exempt securities have been computed on a fully taxable equivalent basis, assuming a Federal income tax rate of 34%. See Note 8 - Income Taxes in the Notes To Consolidated Financial Statements for information concerning the effect of tax-exempt income on the Company's effective tax rate and the amount of applicable income taxes reported. Mortgage-backed securities are allocated according to their expected prepayments rather than their contractual maturities. Money market mutual funds classified as other securities have been included in "Due in one year or less" in the table above. The average maturity of the portfolio was 10.8 years as of December 31, 2002, compared to 10.9 years and 6.5 years at year-end in 2001 and 2000, 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:
December 31, -------------------------------------------------------------------------------------- 2002 2001 2000 --------------------------- ------------------------ Average Average Average (In thousands) Balance Yield Balance Yield Balance Yield ------------ ----------- ----------- --------- ----------- ---------- Taxable securities $ 5,432 2.60% $ 6,199 5.92% $17,630 5.76% ontaxable securities 37,148 8.24% 31,946 8.68% 25,242 9.56% ------------ ----------- ----------- --------- ----------- ---------- TOTAL $42,580 7.52% $38,145 8.23% $42,872 8.00% ============ =========== =========== ========= =========== ==========
The average tax equivalent yield declined during each of the last two years for nontaxable securities as higher yielding securities that matured or were called were replaced with lower yielding securities of substantially the same quality. The Company has increased the nontaxable investment portfolio during the last three years in order to take advantage of higher after tax yields available and to minimize income taxes. 20 Loans The following table sets forth major types of loans (excluding loans held for sale) by primary collateral and the percentage of total loans for each type at the end of the last three years:
December 31, ------------------------------------------------------------------------------------------------ 2002 2001 2000 ----------------------------- ------------------------------ ----------------------------- (In thousands) Amount % Amount % Amount % -------------- ----------- --------------- --------------- ---------- Real Estate: Residential $ 108,714 41.7% $ 122,765 46.3% $ 135,732 48.4% Commercial 38,770 14.9% 35,760 13.5% 35,988 12.8% Agricultural 27,661 10.6% 27,870 10.5% 27,250 9.7% Construction 10,384 4.0% 11,152 4.2% 10,891 3.9% -------------- ----------- --------------- ----------- --------------- ---------- $ 185,529 71.1% $ 197,547 74.5% $ 209,861 74.8% -------------- ----------- --------------- ----------- --------------- ---------- Commercial 28,719 11.0% 26,095 9.8% 29,071 10.3% Agricultural 34,952 13.4% 30,631 11.6% 29,929 10.7% Consumer and other 11,693 4.5% 10,834 4.1% 11,811 4.2% -------------- ----------- --------------- ----------- --------------- ---------- TOTAL $ 260,893 100.0% $ 265,107 100.0% $ 280,672 99.9% ============== =========== =============== =========== =============== ==========
The following table sets forth the maturities of various categories of loans (excluding loans held-for-sale) by primary collateral at December 31, 2002:
(In thousands) Due in One Year Due from One Due after Total or Less to Five Years Five Years ----------------- ---------------- --------------- ----------------- Real Estate: Residential $ 81,608 $ 26,582 $ 524 $ 108,714 Commercial 20,995 17,637 138 38,770 Agricultural 17,958 7,716 1,987 27,661 Construction 7,440 2,944 0 10,384 ----------------- ---------------- --------------- ----------------- Sub-total Real Estate Loans $ 128,001 $ 54,879 $ 2,649 $ 185,529 ----------------- ---------------- --------------- ----------------- Commercial $ 18,365 $ 9,544 $ 810 $ 28,719 Agricultural 29,670 4,923 359 34,952 Consumer and other 2,935 8,165 593 11,693 ----------------- ---------------- --------------- ----------------- TOTAL $ 178,971 $ 77,511 $ 4,411 $ 260,893 ================= ================ =============== =================
Loans maturing in more than one year at December 31, 2003, by fixed or variable rate are as follows:
(In thousands) Fixed Rate Variable Rate Total ------------------ ------------------ ----------------- Commercial and Agricultural $ 39,924 $ 3,190 $ 43,114 Other 38,603 205 38,808 ------------------ ------------------ ----------------- TOTAL $ 78,527 $ 3,395 $ 81,922 ================== ================== =================
Loans secured by residential mortgages totaling $108.7 million or 41.7% of total loans represent the Company's largest single category of loans. These loans are substantially all fixed rate loans with original terms of one, three and five years. At the end of the original term the notes are renewed, subject to updated credit and collateral valuation information but generally without fees or closing costs to the customer. Virtually all of these notes amortize principal indebtedness over a fifteen to thirty-year period, and are repriceable at fixed rates that generally follow prevailing longer-term rates. 21 During the past two years, borrowers have increasingly chosen to lock in rates for fifteen or thirty years to take advantage of the historically low mortgage rates. These fixed-rate loans are originated and sold by the Bank to the secondary mortgage market. The Company's policy of selling these loans after origination has resulted in a declining residential real estate portfolio held by the Company. This decline in the largest single category of loans held to maturity by the Company has been only partially offset by small increases in commercial and agricultural loans, and led to a 7.0% decrease in total loans (excluding loans held for sale) between December 31, 2000 and December 31, 2002. However, origination of residential mortgages did not experience a corresponding decline, and the Company expects that an increase in interest rates will result in a greater percentage of residential mortgages originated by the Company being held to maturity. At December 31, 2002, $62.6 million or 24% 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. Most 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 $645,864 or .25% of total loans outstanding, personal reserve overdraft protection accounts, which aggregated $347,496 or .13% of total loans outstanding and deposit account overdrafts totaling $88,892 at December 31, 2002. The following table shows nonaccrual loans by primary collateral as of the end of each of the last three years:
December 31, ---------------------------------------------------------------------- 2002 2001 2000 ------------------- ------------------- ------------------- Secured By Real Estate Residential $ 2,228,345 $ 3,100,803 $ 1,658,821 Agricultural 379,265 426,402 243,680 Commercial 2,129,183 1,689,678 2,591,900 ------------------- ------------------- ------------------- Subtotal $ 4,736,793 $ 5,216,883 $ 4,494,401 Secured by commercial assets 972,507 1,629,967 3,445,837 Secured by agricultural assets 317,470 13,788 2,118 Secured by other assets 63,722 122,821 203,163 ------------------- ------------------- ------------------- TOTAL $ 6,090,492 $ 6,983,459 $ 8,145,519 =================== =================== ===================
Approximately 78% or $4.7 million, of the total nonaccrual loans at December 31, 2002, are secured by real estate. Management considers these loans adequately secured. Business assets secure approximately 16% or $1.0 million, of the total nonaccrual loans at year-end. Of the nonaccrual loans secured by business assets, $385,013 are secured by equipment used in logging and lumber businesses, and $291,861 are secured by trucking equipment. These loans are marginally secured and management expects some charge-offs to occur in 2003. The Bank has initiated legal proceedings against several of the borrowers whose loans are nonperforming as of year-end. 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 the current earnings, and interest income thereafter is recorded only when received. 22 Restructured loans at December 31, 2002, were $1,027,966 compared to $886,617 and $3,507,825 as of year-end 2001 and 2000, respectively. 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 lengthening of the amortization period. Restructured loans declined at year-end 2001 compared to the previous year-end because a $1.8 million loan previously considered restructured is performing as agreed since the second quarter of 1999 and is paying a market rate and consequently is no longer considered restructured, and a $1.0 million loan was transferred to other real estate owned during 2001. Potential problem loans totaled $13,898,552 as of December 31, 2002. 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. Other real estate owned, which is included in other assets, totaled $780,674, $1,129,506, and $119,449 at December 31, 2002, 2001 and 2000, respectively. The other real estate held at December 31, 2002, consisted of three residential properties totaling $432,884 and three commercial properties totaling $347,790 acquired in satisfaction of loans. 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, ------------------------------------------------------------------------------------------------ 2002 2001 2000 ----------------------------- ---------------------------- ----------------------------- (In thousands) % of Total % of Total % of Total Amount Loans Amount Loans Amount Loans ------------ ------------ ----------- ------------- ------------ ------------ Nonaccrual loans (1) $ 6,090 2.32% $ 6,983 2.61% $ 8,146 2.90% Restructured loans (2) - - - - 1,758 0.63% ------------ ------------ ----------- ------------- ------------ ------------ TOTAL $ 6,090 2.32% $ 6,983 2.61% $ 9,904 3.53% ============ ============ =========== ============= ============ ============ Other real estate owned $ 781 $ 1,130 $ 119 ============ =========== ============
(1) Includes impaired loans of $3,158,831, $3,838,623 and $6,546,199 as of December 31, 2002, 2001 and 2000, respectively. (2) Excludes restructured loans of $1,027,966, $866,617 and $1,750,072 as of the years ended December 31, 2002, 2001 and 2000, respectively, which are included with nonaccrual loans. See Note 11 - Related Party Transactions in the Notes To Consolidated Financial Statements for information concerning aggregate loans to related parties. 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. The 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 23 anticipated economic conditions. The Company applies risk factor percentages to certain categories of loans to estimate an adequate allowance for loan losses. Impaired loans are evaluated individually to determine an allowance related to those loans. 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, 2002, the Company's investment in impaired loans totaled $3,676,944 compared to $4,475,345 one year earlier. The reduction in impaired loans at year-end is primarily the result of charging-off $1.0 million of these loans and transferring $.3 million to other real estate during 2002. The impaired loans required a related allowance for credit losses of $320,670 at December 31, 2002. Impaired loans are measured at the estimated fair value of the collateral. In 2002 the Company's provision for credit losses was $944,000 compared to $2,132,500 and $3,563,535 during 2001 and 2000, respectively. Net charge-offs were $1,050,373 for the year ended December 31, 2002, compared to net charge-offs of $3,179,768 and $274,786 for the years ended 2000 and 1999, respectively. The ratio of allowance for credit losses to total loans was 2.06% at December 31, 2002, representing no change from the previous year-end. The net decrease to the allowance was $106,373 or 1.9% lower than year-end 2001. Although the allowance for losses declined at year-end because net-charge-offs exceeded the provision for loan losses, the allowance for losses was deemed adequate because total loans outstanding (excluding loans held for sale) declined by $4.2 million, the portion of the allowance required for impaired loans fell by $.4 million and the volume of nonaccrual and past due loans declined compared to the previous year-end. In determining the adequacy of the allowance for losses at year-end the Company utilized the same risk factor percentages for loans other than agricultural loans and impaired loans that it used at December 31, 2001. The risk factors for agricultural real estate loans and other agricultural loans were slightly increased because of the potential for increased risk as a result of the prolonged drop in the price of milk. The Company's ratio of loans more than 30 days past due (including nonaccrual loans) to total loans was 3.87% at December 31, 2002, compared to 4.27% and 3.99% at December 31, 2001 and 2000, 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 24.0% of total loans as of December 31, 2002. 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 three 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 $1,613,587 at December 31, 2002. This represents .62% of total loans outstanding and 15.9% of the Company's total past due loans. During 2002 there were $149,745 of net charge-offs on loans considered agricultural-related compared to $5,590 of net recoveries during 2001. Management does not believe that these risks associated with the Company's loan portfolio have changed materially during the past three years. Management believes its allowance for credit losses as of December 31, 2002, of $5,417,920 (equal to 2.06% of the total loans) is adequate to cover credit risks in the loan portfolio. 24 Changes in the allowance for credit losses in each of the three most recent years were as follows:
Year Ended December 31, ------------------------------------------------------------------- 2002 2001 2000 ------------------- ------------------- ------------------- Balance - beginning of year $ 5,524,293 $ 6,571,561 $ 3,282,812 Charge-offs: Residential real estate $ 173,175 $ 52,000 $ 11,186 Commercial real estate 263,324 788,790 0 Agricultural real estate 25,000 0 0 Commercial loans 597,416 2,323,130 215,532 Agricultural loans 130,000 0 55,122 Credit cards and related plans 26,869 13,997 5,156 Other consumer $ 82,341 49,603 16,339 ------------------- ------------------- ------------------- $ 1,298,125 $ 3,227,520 $ 303,335 ------------------- ------------------- ------------------- Recoveries: Residential real estate $ 24,824 $ 25,469 $ 0 Commercial real estate 151,773 0 0 Agricultural real estate 0 0 0 Commercial loans 38,154 9,302 1,932 Agricultural loans 5,255 5,590 5,590 Credit cards and related plans 1,620 1,168 155 Other consumer 26,126 6,223 20,872 ------------------- ------------------- ------------------- $ 247,752 $ 47,752 $ 28,549 ------------------- ------------------- ------------------- Net charge-offs $ 1,050,373 $ 3,179,768 $ 274,786 ------------------- ------------------- ------------------- Provision charged to operations $ 944,000 $ 2,132,500 $ 3,563,535 ------------------- ------------------- ------------------- Balance - end of year $ 5,417,920 $ 5,524,293 $ 6,571,561 =================== =================== =================== Ratio of net charge-offs during the year to average loans outstanding during the year 0.39% 1.15% 0.10% =================== =================== =================== Ratio of allowance for credit losses to total loans at the end of year 2.06% 2.06% 2.34% =================== =================== ===================
In 2002 the Company's ratio of charge-off loans to average loans outstanding was .49% compared to 1.17% and .11% during 2001 and 2000, respectively. The charge-offs during 2002 include $182,000 of loans secured by a restaurant. The remaining balance of loans to this borrower totaled $380,473 as of December 31, 2002. These loans are included in the impaired and nonaccrual loan totals at year-end and foreclosure proceedings have commenced. The 2002 charge-offs also include $368,949 attributable to three borrowers that derived their income from the sale of used automobiles and parts. The charge-offs during 2001 included $2.2 million attributable to four borrowers that derived their income from the sale of used automobiles and parts. Weaknesses in the Bank's floor plan lending procedures combined with apparent fraud on the part of the borrowers contributed to the losses. Assets subject to security interests were sold without a corresponding reduction of the loans. The Company does not expect future recoveries from these borrowers. The 2001 charge-offs also included $346,000 of a loan to a real estate developer. During 2002, the borrower provided additional collateral in the form of undeveloped 25 residential lots and recoveries totaling $148,884 were recorded when lots were sold. Management expects to recover the remaining charge-off when additional lots are sold. 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) 2002 2001 2000 2002/01 2001/00 ------------- ------------- ------------- ---------- ---------- Non-interest bearing accounts $ 31,235 $ 30,187 $ 33,635 3.5% (10.3)% NOW accounts 14,873 13,732 13,094 8.3 4.9 Savings accounts 16,255 14,135 13,505 15.0 4.7 Money market accounts 63,468 64,687 56,409 (1.9) 14.7 Certificates of deposit and other time deposits 132,133 129,947 128,978 1.7 0.8 ------------- ------------- ------------- ---------- ---------- Total deposits $ 257,964 $ 252,688 $ 245,621 2.1% 2.9% ============= ============= ============= ========== ==========
At December 31, 2002, total deposits were $257,963,545, an increase of $5,275,873 or 2.1% compared to December 31, 2001. The increase in savings accounts resulted primarily from depositors that shifted funds from money market accounts to avoid service charges after the minimum balance required on money market accounts was increased. The combined balances of money market and passbook savings accounts increased $.9 million or 1.1% at year-end while certificates of deposit increased by $2.2 million or 1.7%. Management did not aggressively seek deposits during 2002 because of the lack of need for funds due to the lack of loan growth during this period, as described above under "Loans." The Bank continues to face strong competition for core deposits in all of its market areas. Total deposits increased $7,066,369 or 2.9% at December 31, 2001, compared to year-end 2000. The decrease in non-interest bearing deposits was primarily attributable to a business depositor whose balance at year-end was $3.2 million lower than the previous year-end. The combined balances of money market and passbook savings accounts increased $8.9 million or 12.7% at year-end 2001 compared to the previous year-end. Management attributed the growth in liquid savings accounts during 2001 and the flatness of growth in certificates of deposit to the low interest rate environment. The following table shows, as of December 31, 2002, 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 $ 3,738 $ 3,068 $ 8,361 $ 9,924 $ 25,091 Other time deposits 0 101 830 5,354 6,285 ------------- -------------- ------------- ------------- -------------- Total $ 3,738 $ 3,169 $ 9,191 $ 15,278 $ 31,376 ============= ============== ============= ============= ==============
26 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) 2002 2001 2000 -------------- --------------- -------------- Short-term borrowings: Notes payable to banks $ 24,048 $ 24,261 $ 26,237 Federal Home Loan Bank advances 0 0 16,300 Securities sold under agreements to repurchase 0 0 478 -------------- --------------- -------------- Total short-term borrowings $ 24,048 $ 24,261 $ 43,015 -------------- --------------- -------------- Long-term debt: Federal Home Loan Bank advances $ 24,000 $ 32,000 $ 22,000 Other long-term debt 2,186 2,087 92 -------------- --------------- -------------- Total long-term debt $ 26,186 $ 34,087 $ 22,092 -------------- --------------- -------------- Total other borrowed funds $ 50,234 $ 58,348 $ 65,107 ============== =============== ============== Short-term borrowings: Average amounts outstanding during the year $ 27,707 $ 31,129 $ 51,417 Average interest rates on amounts outstanding during the year 2.49% 4.84% 6.46% Weighted average interest rate at year end 2.42% 2.51% 6.87% Maximum month-end amounts outstanding $ 30,852 $ 42,215 $ 64,935
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 (FHLB) advances and notes payable to banks consist of secured borrowing under existing lines of credit. At December 31, 2002, the Company had $91.2 million of established lines of credit. DACC's primary sources of funding are short-term and long-term notes payable to banks. As of December 31, 2002, DACC had established lines of credit of $35 million of which $21.4 million were drawn in the form of short-term notes payable and $2.1 million in long-term notes payable. Deposit growth during the last two years, combined with the decline in total loans, allowed the Bank to reduce borrowings from the FHLB during the last two years. The total of short and long-term advances decreased by $6.0 million from $32.0 million at December 31, 2001, to $24.0 million at year-end. This followed a decrease of $6.3 million from $38.3 million at year-end 2000 to $32 million as of year-end 2001. During 2002, the Company replaced maturing FHLB advances with five-year fixed-rate borrowings because of the low interest rate environment and the expectation for higher rates. 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 27 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 the end of the three most recent years, and the applicable regulatory requirements.
Ratios as of December 31, ------------------------------------------------- December 31, ------------------------------------------------- 2002 2001 2000 Regulatory Requirements ------------- ------------- ------------- ---------------- Equity as a % of assets 10.4% 9.6% 9.2% N/A Core capital as a % of average assets 9.9% 9.1% 8.7% 4.0% Core capital as a % of risk-based assets 13.4% 12.8% 12.1% 4.0% Total capital as a % of risk-based assets 14.7% 14.1% 13.4% 8.0%
The Company's core and risk-based capital ratios are well above the minimum levels. Stockholders' equity at December 31, 2002, increased 8.3% to $36,149,584 or $334 per share, compared with $33,371,362 or $306 per share one year ago. Cash dividends declared in 2002 were $11.38 per share compared with $10.88 and $10.00, in 2001 and 2000, respectively. The dividend payout ratio (dividends declared as a percentage of net income) was 26.1%, 41.8% and 147.2% in 2002, 2001 and 2000, 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 15 - Regulatory Matters of the Notes To Consolidated Financial Statements contains information concerning capital ratios of the Bank. Management believes that 2002 earnings of the Bank will be sufficient to pay dividends to the Company. The Company could also receive dividends from DACC. DACC has paid $600,000 in dividends to the Company during each of the last two years. DACC had net income of $764,764, $741,406 and $628,231 for the years ended December 31, 2002, 2001 and 2000, respectively. The core capital as a percent of risk-based assets ratio of DACC as of December 31, 2002, was 20.3%. DACC has the earnings and capital strength to provide additional dividends to the Company. 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. During 2002, net cash provided by operating activities amounting to $8.2 million, the net decrease in federal funds sold totaling $8.6 million and the increase in deposits amounting to $5.3 million, as shown in the Consolidated Statements of Cash Flows, provided the major sources of funding. The $13.1 million increase in investment securities and the net decrease in other borrowings of $8.1 million were the major uses of cash during 2002. 28 During 2001 the major sources of funds were loan repayments, net cash provided by operating activities of $2.4 million, a $5.6 million decrease in investment securities, a $10.6 million decrease in loans and an increase in deposits amounting to $7.1 million. The increase in federal funds sold of $15.5 million and the net decrease in other borrowings of $6.8 million were the major uses of cash during 2001. 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 $18 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 88.0%, 92.0% and 100.2% at December 31, 2002, 2001 and 2000, respectively. A high net loan to deposit ratio creates a greater challenge in managing adverse fluctuations in deposit balances and consequently this can limit 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 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, 2002, the amount owed to the Federal Home Loan Bank was $24.0 million. The borrowings are secured by residential mortgages. The amount of eligible borrowing from the FHLB of Chicago is determined by the amount of the 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. The Bank could borrow an additional $26.2 million from the FHLB based on its $3.1 million investment in FHLB common stock and eligible collateral. The Bank also sells loans to DACC and to the secondary mortgage market to improve its liquidity position. During 2002 the Bank sold $39.4 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, 2002, DACC has unused lines of credit of $11.4 million and the parent company has an available line of credit of $3.4 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, 2002, is adequate under current economic conditions. 29 Selected Quarterly Financial Information The following table sets forth certain unaudited results of operations for the periods indicated:
(In thousands except per share data) For the Quarter Ended 2001 March 31 June 30 September 30 December 31 --------------------------------------------------------------------------------------------------------------------------------- Interest income $ 6,885 $ 6,566 $ 6,444 $ 6,027 Interest expense 4,008 3,626 3,178 2,591 Provision for credit losses 111 174 1,811 36 Net income 826 830 (77) 1,266 Net income per share 7.54 7.57 (0.71) 11.60 2002 --------------------------------------------------------------------------------------------------------------------------------- Interest income $ 5,855 $ 5,605 $ 5,450 $ 5,291 Interest expense 2,119 1,990 1,954 1,908 Provision for credit losses 211 211 186 336 Net income 1,304 1,115 1,211 1,094 Net income per share 11.96 10.27 11.15 10.11
The steady successive reductions in both interest income and interest expense experienced during all eight quarters reflect the effect of steadily declining interest rates on the income respectively received by DBI on its loans and investment securities and paid by DBI on its deposits. The large increase in the provision for credit losses in the third quarter of 2001 is primarily the result of the charge-off of $2.2 million in loans attributable to four borrowers as a result of apparent fraud. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Allowance for Credit Losses." 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 seventeen years and consequently is subject to greater market value volatility during periods of rising or falling interest rates. The excess of market value over cost mitigates the current risk of the held-to-maturity portfolio and the held-to-maturity portfolio represents only 11.0% 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 30 relies on, among other things, modeling simulations to project the potential effect of various rate scenarios on net interest income. The tables on the following page 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. The following table summarizes results of simulations as of the end of the two most recent years:
As of December 31, 2002 ----------------------------------------------------------------------------------------------------------------------------------- Projected Net Increase Percent Change in Interest Rates Interest Income (Decrease) Change ----------------------------------------------------------------------------------------------------------------------------------- 100 basis point rise $ 14,709,000 $ 110,000 0.8% No change $ 14,599,000 -- -- 100 basis point decline $ 14,402,000 $ (197,000) (1.4)% As of December 31, 2001 ----------------------------------------------------------------------------------------------------------------------------------- Projected Net Increase Percent Change in Interest Rates Interest Income (Decrease) Change ----------------------------------------------------------------------------------------------------------------------------------- 100 basis point rise $ 15,900,000 $ 300,000 1.9% No change $ 15,600,000 -- -- 100 basis point decline $ 15,300,000 $ (300,000) (1.9)%
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 assume the Interest Rate Risk Management Committee takes no action 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 that the Company utilizes approximates the average life of earning assets and interest-bearing liabilities; 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 market value (price) of a financial instrument for every 100 basis point change in interest 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. 31 The following table presents the Company's projected change in the market value of equity for various levels of interest rates as of the end of the two most recent years:
As of December 31, 2002 ----------------------------------------------------------------------------------------------------------------------------------- Estimated Market Increase Percent Change in Interest Rates Value of Equity (Decrease) Change ----------------------------------------------------------------------------------------------------------------------------------- 100 basis point rise $ 32,725,000 $ (5,957,000) (15.4)% No change $ 38,682,000 -- -- 100 basis point decline $ 43,114,000 $ 4,432,000 11.5% As of December 31, 2001 ----------------------------------------------------------------------------------------------------------------------------------- Estimated Market Increase Percent Change in Interest Rates Value of Equity (Decrease) Change ----------------------------------------------------------------------------------------------------------------------------------- 100 basis point rise $ 31,100,000 $ (3,700,000) (10.6)% No change $ 34,800,000 -- -- 100 basis point decline $ 38,100,000 $ 3,300,000 9.5%
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, 2002, 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. 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, 2002:
(In thousands) 0 to 6 7 to 12 1 to 2 Over 2 Months Months Years Years ----------------- --------------- ---------------- ---------------- Loans $ 99,625 $ 90,491 $ 25,363 $ 46,991 Investment securities 13,449 0 345 37,192 Federal funds sold 12,297 0 0 0 Other investments 0 0 0 3,472 ----------------- --------------- ---------------- ---------------- Total earning assets $ 125,371 $ 90,491 $ 25,708 $ 87,655 ----------------- --------------- ---------------- ---------------- Interest-bearing deposits $ 132,433 $ 41,515 $ 42,367 $ 10,414 Other borrowed funds 16,051 10,003 7 24,173 ----------------- --------------- ---------------- ---------------- Total interest-bearing liabilities $ 148,484 $ 51,518 $ 42,374 $ 34,587 ----------------- --------------- ---------------- ---------------- Rate sensitivity gap $ (23,113) $ 38,973 $ (16,666) $ 53,068 Cumulative rate sensitivity gap $ (23,113) $ 15,860 $ (806) $ 52,262 Cumulative ratio of rate sensitive assets to rate sensitive liabilities 84.43% 107.93% 99.67% 118.87% Ratio of cumulative gap to average earning assets (7.13)% 4.89% (0.25)% 16.11%
Mortgage backed securities are allocated according to their expected prepayments rather than their contractual maturities. For purposes of this analysis, NOW, savings and money market accounts are considered repriceable within six months. The above 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 32 repricing liabilities and a negative gap exists when total interest-bearing repricing liabilities exceed total interest-earning repricing assets. 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- 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, 2002, 2001 and 2000, 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 auditing standards generally accepted in the United States of America. 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, 2002, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. WILLIAMS YOUNG, LLC /s/ Williams Young, LLC Madison, Wisconsin February 6, 2003 34 Consolidated Statements of Financial Condition As of December 31
ASSETS Assets 2002 2001 2000 ----------------- ----------------- ----------------- Cash and due from banks $ 11,710,003 $ 9,665,338 $ 7,393,322 Federal funds sold 12,297,000 20,856,000 5,328,000 Investment Securities Available-for-sale, at fair value 13,076,237 1,797,492 16,468,716 Held-to-maturity, at cost 37,909,811 36,025,522 26,577,783 ----------------- ----------------- ----------------- Total Investment Securities $ 50,986,048 $ 37,823,014 $ 43,046,499 Loans less allowance for credit losses of $5,417,920, $5,524,293 and $6,571,561, respectively 255,475,083 259,582,740 274,100,586 Loans held for sale 1,576,813 2,921,299 305,333 Premises and equipment, net 4,224,079 4,441,128 4,624,475 Accrued interest receivable 1,610,010 1,846,783 1,984,859 Other assets 8,273,965 9,237,511 8,516,313 ----------------- ----------------- ----------------- TOTAL ASSETS $ 346,153,001 $ 346,373,813 $ 345,299,387 ================= ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 31,234,875 $ 30,187,195 $ 33,635,248 Interest-bearing 226,728,670 222,500,477 211,986,055 ----------------- ----------------- ----------------- Total Deposits $ 257,963,545 $ 252,687,672 $ 245,621,303 Short-term borrowings 24,047,779 24,261,252 43,015,255 Accrued interest payable 854,800 1,094,675 1,878,957 Other liabilities 951,196 871,833 819,172 Long-term debt 26,186,097 34,087,019 22,092,487 ----------------- ----------------- ----------------- Total Liabilities $ 310,003,417 $ 313,002,451 $ 313,427,174 ================= ================= ================= Stockholders' Equity Common stock, no par value, authorized 320,000 shares; issued 108,129, 109,202 and 109,568 shares, excludes 2,551 shares in treasury in 2002, 1,478 shares in 2001 and 1,112 shares in 2000 $ 8,906,475 $ 9,626,921 $ 9,871,263 Paid in capital 113,151 112,227 112,374 Retained earnings 27,113,719 23,623,187 21,967,386 Accumulated other comprehensive income Unrealized gains (losses) on securities 16,239 9,027 (78,810) ----------------- ----------------- ----------------- Total Stockholders' Equity $ 36,149,584 $ 33,371,362 $ 31,872,213 ----------------- ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 346,153,001 $ 346,373,813 $ 345,299,387 ================= ================= =================
The accompanying notes are an integral part of these financial statements. 35 Consolidated Statements of Income for the Years Ended December 31
2002 2001 2000 ----------------- ----------------- ----------------- Interest Income Loans including fees $ 19,579,961 $ 22,900,839 $ 22,557,702 Investment securities: Taxable 141,439 367,236 1,016,306 Exempt from federal tax 2,020,919 1,830,834 1,593,468 Interest on federal funds sold 194,130 498,743 365,565 Other interest income 264,386 324,846 303,541 ----------------- ----------------- ----------------- $ 22,200,835 $ 25,922,498 $ 25,836,582 ----------------- ----------------- ----------------- Interest Expense Deposits $ 6,173,175 $ 10,365,040 $ 10,740,311 Short-term borrowings 690,959 1,505,923 3,321,426 Long-term debt 1,106,639 1,532,334 1,441,793 ----------------- ----------------- ----------------- $ 7,970,773 $ 13,403,297 $ 15,503,530 ----------------- ----------------- ----------------- Net interest income $ 14,230,062 $ 12,519,201 $ 10,333,052 Provision for Credit Losses 944,000 2,132,500 3,563,535 ----------------- ----------------- ----------------- Net interest income after provision for credit losses $ 13,286,062 $ 10,386,701 $ 6,769,517 ----------------- ----------------- ----------------- Other Income Service fees and commissions $ 934,855 $ 851,219 $ 765,164 Investment security gains 7,350 6,384 0 Loan sale gains 423,267 298,908 27,996 Other 341,241 273,928 249,383 ----------------- ----------------- ----------------- $ 1,706,713 $ 1,430,439 $ 1,042,543 ----------------- ----------------- ----------------- Other Expense Salaries and employee benefits $ 5,278,543 $ 5,044,857 $ 4,643,825 Occupancy expenses 843,148 897,328 816,042 Data processing expenses 550,417 522,540 550,613 Marketing expenses 246,294 208,552 254,270 Other operating expenses 1,533,424 1,545,688 1,191,676 ----------------- ----------------- ----------------- $ 8,451,826 $ 8,218,965 $ 7,456,426 ----------------- ----------------- ----------------- Income before income taxes $ 6,540,949 $ 3,598,175 $ 355,634 Income tax expense (benefit) 1,816,971 753,049 (389,661) NET INCOME $ 4,723,978 $ 2,845,126 $ 745,295 ================= ================= ================= EARNINGS PER COMMON SHARE $ 43.49 $ 26.00 $ 6.79 ================= ================= =================
The accompanying notes are an integral part of these financial statements. 36 Consolidated Statements of Changes in Stockholders' Equity
Accumulated Common Stock Other ------------ Paid in Retained Comprehensive Shares Amount Capital Earnings Income Total ---------- -------------- ----------- ------------- ------------- ------------- Balance, December 31, 1999 109,814 $10,030,869 $110,984 $22,318,876 $(339,355) $32,121,374 Comprehensive income Net income 745,295 745,295 Other comprehensive income, net of tax Change in unrealized (loss) on securities available-for-sale, net of applicable deferred income tax benefit of $164,696 260,545 260,545 ------------- Total comprehensive income $ 1,005,840 Cash dividends, $10.00 per share (1,096,785) (1,096,785) Treasury stock sales 224 130,770 1,390 132,160 Treasury stock acquisitions (470) (290,376) (290,376) ---------- -------------- ----------- ------------- ------------- ------------- Balance, December 31, 2000 109,568 $ 9,871,263 $112,374 $21,967,386 $ (78,810) $31,872,213 Comprehensive income Net income 2,845,126 2,845,126 Other comprehensive income, net of tax Change in unrealized gain on securities available-for-sale, net of applicable deferred income tax expense of $55,897 87,837 87,837 ------------- Total comprehensive income $ 2,932,963 Cash dividend, $10.88 per share (1,189,325) (1,189,325) Treasury stock sales 210 134,127 (147) 133,980 Treasury stock acquisitions (576) (378,469) (378,469) ---------- -------------- ----------- ------------- ------------- ------------- Balance, December 31, 2001 109,202 $ 9,626,921 $112,227 $23,623,187 $ 9,027 $33,371,362 Comprehensive income Net income 4,723,978 4,723,978 Other comprehensive income, net of tax Change in unrealized gain on securities available-for-sale, net of applicable deferred income tax expense of $4,682 7,212 7,212 ------------- Total comprehensive income $ 4,731,190 Cash dividend, $11.38 per share (1,233,446) (1,233,446) Treasury stock sales 188 122,874 924 123,798 Treasury stock acquisitions (1,261) (843,320) (843,320) ---------- -------------- ----------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 2002 108,129 $ 8,906,475 $113,151 $27,113,719 $ 16,239 $36,149,584 ========== ============== =========== ============= ============= =============
The accompanying notes are an integral part of these financial statements. 37 Consolidated Statements of Cash Flow For the Years Ended December 31,
2002 2001 2000 ----------------- ------------------ ---------------- Cash Flows from Operating Activities: Net income $ 4,723,978 $ 2,845,126 $ 745,295 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 457,188 499,708 457,269 Provision for credit losses 944,000 2,132,500 3,563,535 Amortization of intangibles 206,811 258,823 219,513 Gain on sale of assets (464,835) (283,970) (36,945) Amortization of bond premium 11,440 14,579 16,225 Accretion of bond discount (200,473) (251,192) (427,090) Mortgage loans originated for sale (37,498,243) (29,287,258) (1,474,595) Proceeds from sale of mortgage loans 39,423,693 26,939,407 1,453,895 Decrease (increase) in interest receivable 236,773 138,076 (320,545) (Decrease) increase in interest payable (239,875) (784,282) 541,390 Other, net 617,176 183,574 (1,326,420) ----------------- ------------------ ---------------- Net Cash Provided by Operating Activities $ 8,217,633 $ 2,405,091 $ 3,411,527 ----------------- ------------------ ---------------- Cash Flows from Investing Activities: Maturities of held-to-maturity securities $ 1,787,350 $ 3,865,156 $ 1,595,166 Maturities and sales of available-for-sale securities 13,769,796 15,058,333 1,688,091 Purchases of held-to-maturity securities (3,468,984) (13,067,843) (3,365,621) Purchases of available-for-sale securities (25,042,918) (245,429) 0 Purchases of Federal Home Loan Bank stock (155,800) (195,800) (357,400) Federal funds sold, net 8,559,000 (15,528,000) (1,823,000) Proceeds from sale of foreclosed assets 1,394,173 813,081 1,245,481 Net decrease (increase) in loans made to customers 1,996,879 10,571,678 (25,934,522) Capital expenditures (242,182) (316,361) (970,817) ----------------- ------------------ ---------------- Net Cash (Used) Provided by Investing Activities $ (1,402,686) $ 954,815 $(27,922,622) ----------------- ------------------ ---------------- Cash Flows from Financing Activities: Net increase in deposits $ 5,275,873 $ 7,066,369 $ 33,687,648 Purchase of treasury stock (843,320) (378,469) (290,376) Sale of treasury stock 123,798 133,980 132,160 Dividends paid (1,212,239) (1,150,299) (1,030,223) Securities sold under repurchase agreements, net 0 (477,797) 477,797 Debt proceeds 46,909,514 66,649,439 12,780,512 Debt repayments (55,023,908) (72,931,113) (23,357,049) ----------------- ------------------ ---------------- Net Cash (Used) Provided by Financing Activities $ (4,770,282) $ (1,087,890) $ 22,400,469 ----------------- ------------------ ---------------- Net increase (decrease) in cash and cash equivalents $ 2,044,665 $ 2,272,016 $ (2,110,626) Cash and cash equivalents, beginning 9,665,338 7,393,322 9,503,948 ----------------- ------------------ ---------------- CASH AND CASH EQUIVALENTS, ENDING $ 11,710,003 $ 9,665,338 $ 7,393,322 ================= ================== ================ Noncash Investing Activities: Loans transferred to foreclosed properties $ 1,009,081 $ 1,839,619 $ 1,350,256 ================= ================== ================ Total decrease in unrealized loss on securities available for sale $ (11,894) $ (143,734) $ (425,241) ================= ================== ================
The accompanying notes are an integral part of these financial statements. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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, increased by $16,239, and $9,027 as of December 31, 2002 and 2001, respectively and decreased by $78,810 as of December 31, 2000. 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 held for sale are carried in the aggregate at lower of cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. 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 the management, the loans are estimated to 39 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 to 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 $1,255,000, $599,345 and $847,300 and interest paid was $8,221,497, $14,202,928 and $14,978,902 for the years ended December 31, 2002, 2001 and 2000, respectively. Other Real Estate Owned 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 $780,674, $1,129,506 and $119,449 at December 31, 2002, 2001 and 2000, 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. The estimated useful lives of the assets are forty years for buildings, fifteen years for leasehold improvements and three to seven years for furniture and equipment. Intangible Assets Other intangibles are amortized on a straight-line basis generally over a period of up to 15 years. Intangible assets, net of accumulated amortization, included in Other Assets at December 31, 2002, 2001 and 2000 total $2,010,178, $2,216,989 and $2,475,812, respectively. Core deposit intangibles totaling $1,843,748 as of December 31, 2002, will be amortized over their remaining useful life of 9.5 years. 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 2,551, 1,478 and 1,112 shares, with a cost of $1,429,820, $709,374 and $465,032 as of December 31, 2002, 2001 and 2000, respectively. 40 Stock Split In March 2002, 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 11, 2002, payable on July 1, 2002. Accordingly, outstanding shares of common stock were increased from 54,365 to 108,730 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 108,626, 109,438 and 109,750 for the years ended December 31, 2002, 2001 and 2000, 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. 41 NOTE 2 - INVESTMENT SECURITIES The amortized cost and estimated fair value of securities available-for-sale were as follows:
December 31, 2002 ----------------------------------------------------------------------------- Amortized Cost Gross Gross Unrealized Unrealized Estimated Fair Gains (Losses) Value ---------------- --------------- ---------------- ----------------- Mortgage-backed securities $ 1,109,454 $ 26,783 $ 0 $ 1,136,237 State and local governments 11,000,000 0 0 11,000,000 Other securities 940,000 0 0 940,000 ---------------- --------------- ---------------- ----------------- $ 13,049,454 $ 26,783 $ 0 $ 13,076,237 ================ =============== ================ ================= December 31, 2001 ----------------------------------------------------------------------------- Amortized Cost Gross Gross Unrealized Unrealized Estimated Fair Gains (Losses) Value ---------------- --------------- ---------------- ----------------- Mortgage-backed securities $ 1,522,577 $ 14,890 $ 0 $ 1,537,467 Other securities 260,025 0 0 260,025 ---------------- --------------- ---------------- ----------------- $ 1,782,602 $ 14,890 $ 0 $ 1,797,492 ================ =============== ================ ================= December 31, 2000 ----------------------------------------------------------------------------- Amortized Cost Gross Gross Unrealized Unrealized Estimated Fair Gains (Losses) Value ---------------- --------------- ---------------- ----------------- U.S. Government agencies $ 13,498,164 $ 0 $(116,314) $ 13,381,850 Mortgage-backed securities 3,084,800 7,941 (20,471) 3,072,270 Other securities 14,596 0 0 14,596 ---------------- --------------- ---------------- ----------------- $ 16,597,560 $ 7,941 $(136,784) $ 16,468,716 ================ =============== ================ =================
The amortized cost and estimated fair value of securities held-to-maturity were as follows:
December 31, 2002 ----------------------------------------------------------------------------- Amortized Cost Gross Gross Unrealized Unrealized Estimated Fair Gains (Losses) Value ---------------- --------------- ---------------- ----------------- State and local governments $ 37,909,811 $2,171,304 $ (9) $ 40,081,106 ---------------- --------------- ---------------- ----------------- $ 37,909,811 $2,171,304 $ (9) $ 40,081,106 ================ =============== ================ =================
42
December 31, 2001 ----------------------------------------------------------------------------- Amortized Cost Gross Gross Unrealized Unrealized Estimated Fair Gains (Losses) Value ---------------- --------------- ---------------- ----------------- State and local governments $ 36,025,522 $ 899,722 $(284,527) $ 36,640,717 ---------------- --------------- ---------------- ----------------- $ 36,025,522 $ 899,722 $(284,527) $ 36,640,717 ================ =============== ================ ================= December 31, 2000 ----------------------------------------------------------------------------- Amortized Cost Gross Gross Unrealized Unrealized Estimated Fair Gains (Losses) Value ---------------- --------------- ---------------- ----------------- State and local governments $ 26,577,783 $ 932,316 $ (35,573) $ 27,474,526 ---------------- --------------- ---------------- ----------------- $ 26,577,783 $ 932,316 $ (35,573) $ 27,474,526 ================ =============== ================ =================
The amortized cost and estimated fair values of securities at December 31, 2002, by maturity were as follows:
Securities Available-for-Sale Securities Held-to-Maturity ------------------------------------ ------------------------------------ Estimated Estimated Fair Amounts Maturing Amortized Cost Fair Value Amortized Cost Value --------------------------------------------------- ----------------- --------------- --------------- ---------------- Within one year $ 11,000,000 $11,000,000 $ 1,509,183 $ 1,517,311 From one through five years 1,059,772 1,085,895 5,218,991 5,541,412 From five through ten years 49,682 50,342 4,449,893 4,951,413 After ten years 0 26,731,744 28,070,970 Other securities (no stated maturity) 940,000 940,000 ----------------- --------------- --------------- ---------------- $ 13,049,454 $13,076,237 $37,909,811 $ 40,081,106 ================= =============== =============== ================
Mortgage-backed securities are allocated according to their expected prepayments rather than their contractual maturities. Certain state and local governments securities are allocated according to their put date. During 2001 available-for-sale securities were sold for total proceeds of $2,560,631. No securities were sold during 2002 and 2000. Gross realized gains totaled $3,659 and gross realized losses totaled $469 for 2001. During 2002 and 2001 gross realized gains of $7,350 and $3,194, respectively, were included in earnings as a result of held-to-maturity securities being called. The amortized cost of these securities totaled $300,000 and $379,963 in 2002 and 2001, respectively. There were no dispositions of held to maturity securities during 2000. As of December 31, 2002, the Company held an Oklahoma State Student Loan Taxable Revenue Bond with an amortized cost and market value of $5,000,000, which represents an investment greater than 10 percent of stockholders' equity. Investment securities with an amortized cost of $129,400 and estimated fair value of $129,654, at December 31, 2002, were pledged to secure public deposits and for other purposes required or permitted by law. 43 NOTE 3 - LOANS Major categories of loans included in the loan portfolio are as follows:
December 31, ------------------------------------------------------------------ 2002 2001 2000 ------------------- ------------------- ------------------- Real estate: Residential $ 108,713,845 $ 122,764,541 $ 135,732,574 Commercial 38,770,381 35,759,987 35,988,237 Agricultural 27,661,442 27,869,918 27,249,365 Construction 10,383,706 11,152,048 10,890,850 ------------------- ------------------- $ 185,529,374 $ 197,546,494 $ 209,861,026 ------------------- ------------------- ------------------- Commercial $ 28,719,193 $ 26,094,711 $ 29,071,479 Agricultural 34,951,613 30,631,256 29,929,206 Consumer Installment 11,692,823 10,834,572 11,810,436 ------------------- ------------------- ------------------- Total loans receivable $ 260,893,003 $ 265,107,033 $ 280,672,147 Allowance for credit losses (5,417,920) (5,524,293) (6,571,561) ------------------- ------------------- ------------------- NET LOANS RECEIVABLE $ 255,475,083 $ 259,582,740 $ 274,100,586 =================== =================== ===================
Nonaccrual loans totaled $6,090,492, $6,983,459 and $8,145,519 at December 31, 2002, 2001 and 2000, respectively. The reduction in interest income associated with nonaccrual loans is as follows:
Year Ended December 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ---------------- --------------- Income in accordance with original loan terms $719,251 $905,201 $898,191 Income recognized (598,884) (496,270) (604,116) ----------------- ---------------- --------------- REDUCTION IN INTEREST INCOME $120,367 $408,931 $294,075 ================= ================ ===============
Information concerning the Company's investment in impaired loans is as follows:
Year Ended December 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ---------------- --------------- Total investment in impaired loans $3,676,944 $4,475,345 $8,303,953 Loans not requiring an allowance 0 0 1,498,842 Loans requiring a related allowance 3,676,944 4,475,345 6,805,111 Related allowance (320,670) (740,334) (2,677,110) Average investment in impaired loans during the year 4,805,898 7,343,535 8,313,738 ----------------- ---------------- --------------- Interest income recognized on a cash basis 277,038 316,857 467,761 ================= ================ ===============
Changes in the allowance for credit losses were as follows:
Year Ended December 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ---------------- --------------- Balance - beginning of year $5,524,293 $6,571,561 $3,282,812 Charge-offs (1,298,125) (3,227,520) (303,335) Recoveries 247,752 47,752 28,549 Provision charged to operations 944,000 2,132,500 3,563,535 ----------------- ---------------- --------------- BALANCE - END OF YEAR $5,417,920 $5,524,293 $6,571,561 ================= ================ ===============
44 NOTE 4 - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ---------------- --------------- Land $ 734,629 $ 734,629 $ 541,241 Buildings and improvements 4,353,394 4,340,368 4,340,367 Furniture and fixtures 3,327,484 3,384,499 3,306,201 Construction in progress 167,232 0 0 ----------------- ---------------- --------------- $8,582,739 $8,459,496 $8,187,808 Less: Accumulated depreciation (4,358,660) (4,018,368) (3,563,333) ----------------- ---------------- --------------- NET $4,224,079 $4,441,129 $4,624,475 ================= ================ ===============
As of December 31, 2002, there were approximately $833,074 of commitments outstanding to complete construction in progress. 45 NOTE 5 - INTEREST-BEARING DEPOSITS Interest-bearing deposits consisted of the following:
December 31, ----------------------------------------------------------------------- 2002 2001 2000 ---------------------- ------------------ -------------------- NOW accounts $14,872,542 $13,732,065 $13,094,417 Savings accounts 16,254,430 14,134,833 13,504,855 Money market accounts 63,468,356 64,686,731 56,408,626 Time deposit accounts 132,133,342 129,946,848 128,978,157 ---------------------- ------------------ -------------------- TOTAL $226,728,670 $222,500,477 $211,986,055 ====================== ================== ====================
The following table shows the maturity distribution of time deposit accounts:
December 31, -------------------------------------------------------- (In thousands) 2002 2001 2000 ----------------- ----------------- --------------- Within one year $77,391 $92,942 $99,565 One to two years 44,328 28,854 25,892 Two to three years 5,984 6,767 2,587 Three to four years 2,280 752 712 Over four years 2,150 632 222 ----------------- ----------------- --------------- TOTAL $132,133 $129,947 $128,978 ================= ================= ===============
Time deposit accounts issued in amounts of $100,000 or more totaled $31,375,654, $30,202,649 and $27,471,867 at December 31, 2002, 2001 and 2000, respectively. NOTE 6 - SHORT-TERM BORROWINGS The following table is a summary of short-term borrowings:
December 31, 2002 2001 2000 ----------------- ------------------ ----------------- Securities sold under agreements to repurchase $ 0 $ 0 $ 477,797 Federal Home Loan Bank advances 0 0 16,300,000 Notes payable 24,047,779 24,261,252 26,237,458 ----------------- ------------------ ----------------- TOTAL SHORT-TERM BORROWINGS $24,047,779 $24,261,252 $43,015,255 ================= ================== =================
As of December 31, 2002, the Company had $41,065,961 of unused lines of credit with banks to be drawn upon as needed. Notes payable are secured by agricultural loans, Denmark State Bank and Denmark Ag Credit Corporation stock and have fixed and variable interest rates ranging from 1.68% to 3.66% as of December 31, 2002. 46 NOTE 7 - LONG-TERM BORROWINGS Long-term debt consisted of the following:
December 31, ---------------------------------------------------------- 2002 2001 2000 ----------------- ----------------- ---------------- Note dated in 2002, with AgriBank, FCB, quarterly interest due at an annual rate of 3.78%, principal due and payable September 20, 2006. $ 105,000 $ 0 $ 0 Note dated in 2001, with AgriBank, FCB, quarterly interest due at an annual rate of 3.25%, principal due and payable November 20, 2003. 2,000,000 2,000,000 0 Note dated in 2002, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 3.59% principal due and payable October 30, 2007. 5,000,000 0 0 Note dated in 2002, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 3.86% principal due and payable September 18, 2007. 5,000,000 0 0 Note dated in 2001, with Federal Home Loan Bank of Chicago, monthly interest due at an annual rate of 4.80% principal due and payable on call date January 16, 2003 or final maturity January 16, 2011. 10,000,000 10,000,000 0 Note dated in 2000, with Federal Home Loan Bank of Chicago, monthly interest due at a variable rate which changes monthly, principal due and payable every month or final maturity April 7, 2002. 0 15,000,000 15,000,000 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 4,000,000 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. 0 3,000,000 3,000,000 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. 81,097 87,019 92,487 ----------------- ----------------- ---------------- TOTAL LONG-TERM DEBT $26,186,097 $34,087,019 $22,092,487 ================= ================= ================
The notes payable to Federal Home Loan Bank of Chicago are secured by residential mortgages. AgriBank, FCB notes payable are secured by agricultural loans. Long-term debt has aggregate maturities for the five years 2003 through 2007 as follows: $2,006,413 in 2003, $6,946 in 2004, $7,522 in 2005, $113,147 in 2006 and $10,008,823 in 2007. 47 NOTE 8 - INCOME TAXES The provision for income taxes in the consolidated statement of income is as follows:
December 31, -------------------------------------------- (In thousands) 2002 2001 2000 ----------- ----------- ----------- Current: Federal $927 $402 $712 State 338 66 181 ----------- ----------- ----------- $l,265 $468 $893 Deferred: Federal $489 $167 ($1,018) State 63 118 (265) ----------- ----------- ----------- $552 $285 ($1,283) ----------- ----------- ----------- TOTAL PROVISION FOR INCOME TAXES $1,817 $753 ($390) =========== =========== ===========
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:
December 31, -------------------------------------------------------------------------------------- 2000 2001 2002 ------------------------- ------------------------- ---------------------------- (In thousands) Amount % Amount % Amount % ------------ ---------- ------------ --------- ------------ ------------ Tax at statutory federal income tax rate: $2,224 34% $1,223 34% $121 34% Increase (decrease) in tax resulting from: Tax-exempt income (691) (10) (618) (17) (471) (132) State income tax, net of federal tax benefit 265 4 122 3 (56) 16 Other, net 19 0 26 1 (16) 4 ------------ ---------- ------------ --------- ------------ ------------ APPLICABLE INCOME TAXES $1,817 28% $753 21% $(390) (110%) ============ ========== ============ ========= ============ ============
48 Other assets in the accompanying statements of financial condition include the following amounts deferred tax liabilities:
December 31, -------------------------------------------------- (In thousands) 2002 2001 2000 ------------- ------------ ------------ Deferred tax assets: Allowance for credit losses $1,912 $2,157 $2,612 Alternative minimum tax 29 274 0 Unrealized losses on available-for-sale securities 0 0 50 State tax net operating loss carryforward 178 148 120 Interest receivable on nonaccrual loans 87 151 219 Other 69 2 27 ------------- ------------ ------------ Gross deferred tax assets $2,275 $2,732 $3,028 Valuation allowance (178) (148) (120) ------------- ------------ ------------ Total deferred tax assets $2,097 $2,584 $2,908 ------------- ------------ ------------ Deferred tax liabilities: Accumulated depreciation on fixed assets $148 $161 $154 State income taxes 117 138 178 FHLB stock dividends received 227 130 82 Unrealized gains on available-for-sale securities 11 6 0 Accretion 4 3 6 ------------- ------------ ------------ Total deferred tax liabilities $507 $438 $420 ------------- ------------ ------------ NET DEFERRED TAX ASSET $1,590 $2,146 $2,488 ============= ============ ============
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: o 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. o 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 3% for 2002, 2001 and 2000. In addition, the money purchase plan generally provides for employer contributions of 5% in 2002, 2001 and 2000, 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 $374,843, $338,686 and $322,358 for the years 2002, 2001 and 2000, 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. 49 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.
(In thousands) Contract or Secured Notional Amount December 31, 2002 Portion ------------------------ --------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $26,319 $19,329 Standby letters of credit and financial guarantees written 1,541 1,541
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. As of December 31, 2002, variable rate commitments totaled $8,751,858. 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. When a customer fails to perform according to the terms of the agreement, the bank honors drafts drawn by the third party in amounts up to the contract amount. 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. The Company maintains deposits at other financial institutions. These deposits are insured by the Federal Deposit Insurance Corporation up to $100,000. The balance in excess of the insured amount as of December 31, 2002, was approximately $3,232,000. Federal funds sold to correspondent banks are not insured. NOTE 11 - RELATED PARTY TRANSACTIONS At December 31, 2002, 2001 and 2000 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. Other changes reflect the retirement of an insider.
December 31, 2002 -------------------------- ------------------------------------------------------------ (In thousands) 2000 2001 New Loans Payments Other Ending Changes Balance ----------- ----------- ---------- ------------- ------------ ----------- Aggregate related party loans $2,798 $2,709 $943 $ (969) $ (1,519) $1,164 =========== =========== ========== ============= ============ ===========
50 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 2002, 2001 and 2000. 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) 2002 2001 2000 ---------------- --------------- ---------------- Assets Cash in banks $ 713 $ 694 $ 624 Investment Banking subsidiary 28,961 26,231 23,745 Nonbanking subsidiary 6,312 6,157 6,073 Real estate loans (less allowance for credit losses of $3, $3 and $3, respectively) 99 195 282 Fixed assets (net of depreciation of $1,853, $1,709 and $1,544) 3,281 3,245 3,216 Other assets 73 115 58 ---------------- --------------- ---------------- TOTAL ASSETS $ 39,439 $ 36,637 $ 33,998 ================ =============== ================ Liabilities Accrued expenses $ 67 $ 65 $ 64 Dividends payable 622 601 562 Note payable - unrelated bank 2,600 2,600 1,500 ---------------- --------------- ---------------- Total Liabilities $ 3,289 $ 3,266 $ 2,126 ---------------- --------------- ---------------- Stockholders' Equity Common stock $ 8,907 $ 9,627 $ 9,871 Paid-in earnings 113 112 112 Retained earnings 27,114 23,623 21,968 Accumulated other comprehensive income Unrealized gains (losses) on securities 16 9 (79) ---------------- --------------- ---------------- Total Stockholders' Equity $ 36,150 $ 33,371 $ 31,872 ---------------- --------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,439 $ 36,637 $ 33,998 ================ =============== ================
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DENMARK BANCSHARES, INC. Statements of Income
December 31, -------------------------------------------------------- (In thousands) 2002 2001 2000 ---------------- --------------- ---------------- Income Interest income from loans $ 9 $ 20 $ 30 Other interest income 1 5 21 Dividend income from banking subsidiary 1,500 0 500 Dividend income from nonbanking subsidiary 600 600 0 Rental income from banking subsidiary 257 257 257 Rental income from nonbanking subsidiary 7 7 9 ---------------- --------------- ---------------- Total Income $ 2,374 $ 889 $ 817 ---------------- --------------- ---------------- ---------------- --------------- ---------------- Expenses Management fees to banking subsidiary $ 150 $ 120 $ 120 Interest expense 106 130 105 Provision for credit losses 0 0 (58) Depreciation 144 165 170 Other operating expenses 251 221 177 ---------------- --------------- ---------------- Total Expenses $ 651 $ 636 $ 514 ---------------- --------------- ---------------- Income before income taxes and undistributed income of subsidiaries $ 1,723 $ 253 $ 303 Income tax benefit (123) (109) (50) ---------------- --------------- ---------------- Income before Undistributed Income of Subsidiaries $ 1,846 $ 362 $ 353 Equity in Undistributed Income of Subsidiaries Banking subsidiary 2,723 2,399 (191) Nonbank subsidiaries 155 84 583 ---------------- --------------- ---------------- NET INCOME $ 4,724 $ 2,845 $ 745 ================ =============== ================
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DENMARK BANCSHARES, INC. Statements of Cash Flows
December 31, -------------------------------------------------------- (In thousands) 2002 2001 2000 ---------------- --------------- ---------------- Cash Flows from Operating Activities: Net Income $ 4,724 $ 2,845 $ 745 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 144 165 170 Provision for credit losses 0 0 (58) Equity (earnings) of banking subsidiary (4,223) (2,399) (309) Equity (earnings) of nonbanking subsidiary (755) (684) (583) Dividend from banking subsidiary 1,500 0 500 Dividend from nonbanking subsidiary 600 600 0 Decrease (increase) in other assets 43 (57) 10 Increase in accrued expenses 1 1 5 ---------------- --------------- ---------------- Net Cash Provided by Operating Activities $ 2,034 $ 471 $ 480 ---------------- --------------- ---------------- Cash flows from Investing Activities: Capital expenditures $ (180) $ (194) $ (406) Net decrease in real estate loans 96 88 134 ---------------- --------------- ---------------- Net cash Used by Investing Activities $ (84) $ (106) $ (272) ---------------- --------------- ---------------- Cash Flows from Financing Activities: Debt proceeds $ 1,100 $ 1,100 $ 600 Debt repayments (1,100) 0 0 Treasury stock proceeds 124 134 132 Treasury stock purchases (843) (379) (290) Dividends paid (1,212) (1,150) (1,030) ---------------- --------------- ---------------- Net Cash Used by Financing Activities $ (1,931) $ (295) $ (588) ---------------- --------------- ---------------- Net Increase (Decrease) in Cash $ 19 $ 70 $ (380) Cash, beginning 694 624 1,004 ---------------- --------------- ---------------- CASH, ENDING $ 713 $ 694 $ 624 ================ =============== ================ ================ =============== ================ Supplemental Disclosure: Income taxes received $ (170) $ (51) $ (57) ================ =============== ================
53 NOTE 13 - EMPLOYEE STOCK PURCHASE PLAN In December of 1998, the company adopted an Employee Stock Purchase Plan. All company employees, except executive officers and members of the board of directors, are afforded the right to purchase a maximum number of shares set from time to time by the board of directors. Rights granted must be exercised during a one-month purchase period prescribed by the board. Typically rights have been approved in December with the purchase period falling in the next year. Rights are exercised at fair market value. A recap of plan activity is as follows:
Number of Number of Price per Granted in December Rights Exercised in Rights Exercised Share ------------------- ---------------- ----------------- ----------------- ------------- 2000 564 2001 210 $638 2001 552 2002 188 $659 2002 450 2003 Not Yet Available
NOTE 14 - 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. 54 The estimated fair values of the Company's financial instruments are as follows:
For the Years Ended December 31 ------------------------------------------------------------------------------------- 2002 2001 2000 ---------------------------- -------------------------- -------------------------- Carrying Fair Value Carrying Fair Value Carrying Fair Value Amount Amount Amount -------------- ------------ ------------ ------------ ------------ ------------ (In thousands) Financial Assets Cash and short-term investments $ 24,007 $ 24,007 $ 30,521 $ 30,521 $ 12,721 $ 12,721 Investments securities 50,986 53,157 37,823 38,438 43,046 43,943 Loans 260,893 264,027 268,028 263,313 280,978 277,710 Less: Allowance for credit losses (5,418) - (5,524) - (6,572) - -------------- ------------ ------------ ------------ ------------ ------------ TOTAL $ 330,468 $ 341,191 $ 330,848 $ 332,272 $ 330,173 $ 334,374 ============== ============ ============ ============ ============ ============ Financial Liabilities Deposits $ 257,964 $ 259,545 $ 252,688 $ 254,417 $ 245,621 $ 246,824 Borrowings 50,234 50,928 58,348 58,839 65,108 65,742 -------------- ------------ ------------ ------------ ------------ ------------ TOTAL $ 308,198 $ 310,473 $ 311,036 $ 313,256 $ 310,729 $ 312,566 ============== ============ ============ ============ ============ ============ Unrecognized Financial Instruments Commitments to extend credit $ 26,319 $ 26,319 $ 32,058 $ 32,058 $ 21,227 $ 21,227 Standby letters of credit and financial guarantees written 1,541 1,541 1,556 1,556 1,622 1,622 -------------- ------------ ------------ ------------ ------------ ------------ TOTAL $ 27,860 $ 27,860 $ 33,614 $ 33,614 $ 22,849 $ 22,849 ============== ============ ============ ============ ============ ============
NOTE 15 - REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state 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, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2002, 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. 55 The Company's actual capital amounts and ratios are also presented in the table below:
To Be Well Capitalized For Capital Under Prompt Corrective Amount Adequacy Purposes: Action Provision: ----------------------- ------------------------ ------------------------ Amount Ratio Amount Ratio Amount Ratio ---------- -------- ---------- --------- ---------- --------- As of December 31, 2002: Denmark Bancshares, Inc. Total Capital (to Risk-Weighted Assets) $37,331,414 14.7% $20,356,007 ** 8.0% $25,445,009 ** l0.0% Tier 1 Capital (to Risk-Weighted Assets) 34,123,167 13.4% 10,178,004 ** 4.0% 15,267,006 ** 6.0% Tier 1 Capital (to Average Assets)* 34,123,167 9.9% 13,849,591 ** 4.0% 17,311,989 ** 5.0% Denmark State Bank Total Capital (to Risk-Weighted Assets) $29,891,627 13.5% $17,698,030 ** 8.0% $22,122,537 ** 10.0% Tier 1 Capital (to Risk-Weighted Assets) 27,101,074 12.3% 8,849,015 ** 4.0% 13,273,522 ** 6.0% Tier 1 Capital (to Average Assets)* 27,101,074 8.7% 12,536,206 ** 4.0% 15,670,258 ** 5.0% As of December 31, 2001: Denmark Bancshares, Inc. Total Capital (to Risk-Weighted Assets) $34,216,698 14.1% $19,460,420 ** 8.0% $24,325,525 ** l0.0% Tier 1 Capital (to Risk-Weighted Assets) 31,145,346 12.8% 9,730,210 ** 4.0% 14,595,315 ** 6.0% Tier 1 Capital (to Average Assets)* 31,145,346 9.1% 13,723,764 ** 4.0% 17,154,705 ** 5.0% Denmark State Bank Total Capital (to Risk-Weighted Assets) $26,841,907 12.8% $16,804,918 ** 8.0% $21,006,148 ** l0.0% Tier 1 Capital (to Risk-Weighted Assets) 24,186,089 11.5% 8,402,459 ** 4.0% 12,603,689 ** 6.0% Tier 1 Capital (to Average Assets)* 24,186,089 7.8% 12,428,060 ** 4.0% 15,535,075 ** 5.0% As of December 31, 2000: Denmark Bancshares, Inc. Total Capital (to Risk-Weighted Assets) $32,557,038 13.4% $19,544,514 ** 8.0% $24,305,643 ** 10.0% Tier 1 Capital (to Risk-Weighted Assets) 29,475,211 12.1% 9,722,257 ** 4.0% 14,583,386 ** 6.0% Tier 1 Capital (to Average Assets)* 29,475,211 8.7% 13,542,222 ** 4.0% 16,927,777 ** 5.0% Denmark State Bank Total Capital (to Risk-Weighted Assets) $24,244,672 11.6% $16,692,227 ** 8.0% $20,865,284 ** 10.0% Tier 1 Capital (to Risk-Weighted Assets) 21,591,537 10.4% 8,346,113 ** 4.0% 12,519,170 ** 6.0% Tier 1 Capital (to Average Assets)* 21,591,537 7.1% 12,180,524 ** 4.0% 15,225,655 ** 5.0%
*Average assets are based on the most recent quarter's adjusted average total assets. **greater than or equal to On March 13, 2002, Denmark State Bank ("Bank"), the Company's primary subsidiary, entered into a Memorandum of Understanding ("MOU") with the FDIC and with the State of Wisconsin Department of Financial Institutions, Division of Banking. The MOU is an informal administrative action designed to guide the Bank in its corrective efforts. The MOU was requested by the FDIC following a regularly scheduled examination of the Bank as of September 30, 2001. The Bank complied with all of the requirements of the MOU and effective October 17, 2002, the MOU was terminated by the FDIC and the Division of Banking. NOTE 16 - RESTATED FINANCIAL STATEMENTS During 2001, the Company's largest subsidiary, the Bank, changed its methodology for calculating the allowance for credit losses to reflect the allowance for credit losses in accordance with a Federal Financial Institutions Examination Council (FFIEC) Interagency Policy Statement on ALLL, issued July, 2001. The Company's management, with the concurrence of federal regulators, chose to adopt this methodology for determining the adequacy of the allowance for credit losses retroactively to the year ended December 31, 2000, resulting in a restatement of the financial statements as of December 31, 2000, from those originally reported. The Bank also increased the risk factor percentages applied to certain categories of its loans used to determine the allowance for loan losses as of December 31, 2000. The effect of this restatement of the allowance for credit losses is summarized below: 56
As Originally Stated As Restated -------------------- ------------------- Allowance for credit losses $ 3,471,561 $ 6,571,561 Retained earnings 23,846,903 21,967,386 Net income before taxes 3,455,634 355,634 Income tax expense (benefit) 830,822 (389,661) Net income $ 2,624,812 $ 745,295 ==================== ===================
Management determined that the effect of this change in methodology did not significantly change the allowance for credit losses for prior years. The current methodology to determine an adequate allowance for loan losses includes a systematic loan grading system that requires quarterly reviews, identification of loans to be evaluated on an individual basis for impairment, results of independent reviews of asset quality and the adequacy of the allowance by regulatory agencies, as an integral part of their examination process, and by external auditors, consideration of current trends and volume of total nonperforming, past-due, nonaccrual and potential problem loans, and consideration of national and local economic trends and industry conditions. In applying the methodology, nonaccrual loans, restructured loans and potential problem loans (other than loans secured by 1-to-4 family residential properties, loans secured by consumer personal property and unsecured loans), above a certain size, are reviewed to determine if they are impaired. Impaired loans are individually analyzed and an allowance amount calculated for each one of these loans, based on the estimated fair value of collateral, in conjunction with FAS 114. Loans that are not impaired are segmented into groups by type of loan. The following loan types are utilized so that each segment of loans will have similar risk factors; 1) residential real estate, 2) agricultural real estate, 3) commercial real estate, 4) agricultural, 5) commercial, 6) consumer installment, and 7) other. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, loans that are not impaired are further segregated by loan risk classification within each type of loan based on an assessment of risk for a particular loan. The applicable risk classifications are "special mention" and "substandard". A "substandard" loan is a loan that is inadequately protected by the current sound worth and paying capacity of the borrower or of any collateral. Loans classified "substandard" have well-defined weaknesses that jeopardize liquidation and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. Loans classified "special mention" are one step above substandard; these loans contain some weakness which if not corrected or improved upon could lead to further deterioration and a lower rating. Risk factor percentages are applied to the identified segments of each of the nonclassified and classified portions of the portfolios to calculate an allowance in conjunction with FAS 5. These risk factor percentages are based on historical loan loss experience adjusted for current economic conditions and trends and internal loan quality trends. The primary difference between the current methodology and the methodology prior to December 31, 2000, is that the Company did not previously calculate an allowance amount for impaired loans when it determined the ALLL, nor did it exclude impaired loans from loans evaluated as a group. 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. 57 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 2003 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 43 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 53 Mr. Lemmens has served as a Vice President of the Bank since 1991 and prior thereto was an Assistant Vice President of the Bank since 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 52 Mr. Olsen has served as President of DACC since 1986, as Treasurer since 1996 and as a director of DACC since 1985. Mr. Olsen has 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 54 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. Jeffrey J. Van Rens 51 Mr. Van Rens has served as a Vice President of the Bank since 2002. Mr. Van Rens has held other positions with the Bank since 1996. Mr. Van Rens has also been a director of DACC since 2002. Glenn J. Whipp 52 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 2003 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 -------------------------------------------------------------- 58 The information in the Company's proxy statement, prepared for the 2003 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 2003 Annual Meeting of Shareholders, which contains information concerning this item, under the caption "Certain Relationships and Related Transactions," is incorporated herein by reference. 59 PART IV ITEM 14. CONTROLS AND PROCEDURES ----------------------- The Company's management, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, has evaluated the Company's disclosure controls and procedures within 90 days prior to the filing date of this report. Based on that evaluation, management believes that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time period specified by the Securities and Exchange Commission's rules and forms. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of management's evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. 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 filed as part of this Annual Report on Form 10-K: Consolidated Statements of Financial Condition as of December 31, 2002, 2001 and 2000 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Independent Auditors' Report Selected Financial Information 3. Exhibits The exhibits listed on the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the fourth quarter of 2002. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Denmark, State of Wisconsin, on September 23, 2003. DENMARK BANCSHARES, INC. By: /s/ Darrell R. Lemmens --------------------------------------------- Darrell R. Lemmens, Chairman of the Board, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Darrell R. Lemmens ------------------------------- Chairman of the Board, President and Director September 23, 2003 Darrell R. Lemmens (Principal Executive Officer) /s/ Dennis J. Heim ------------------------------- Vice President and Treasurer (Principal September 23, 2003 Dennis J. Heim Accounting and Financial Officer) /s/ Terese M. Deprey ------------------------------- Director September 23, 2003 Terese M. Deprey /s/ Thomas N. Hartman ------------------------------- Director September 23, 2003 Thomas N. Hartman /s/ Mark E. Looker ------------------------------- Director September 23, 2003 Mark E. Looker /s/ B. E. Mleziva ------------------------------- Director September 23, 2003 B. E. Mleziva /s/ Edward W. Opichka ------------------------------- Director September 23, 2003 Edward Q. Opichka /s/ Norman F. Tauber ------------------------------- Director September 23, 2003 Norman F. Tauber Thomas F. Wall ------------------------------- Director September 23, 2003 Thomas F. Wall
61 INDEX TO EXHIBITS DENMARK BANCSHARES, INC. FORM 10-K/A Exhibit Number Description of Exhibit ------ ---------------------- (3.1) Articles of Incorporation [Incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-Q for the quarter ended June 30, 2002] (3.2) Restated Bylaws [Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-Q for the quarter ended June 30, 2002] (11.1) Statement Re Computation of Per Share Earnings* (13.1) Annual Report to Shareholders for the Fiscal Year Ended December 31, 2002* (21.1) List of Subsidiaries* (23.1) Consent of Williams Young, LLC (31.1) Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Previously filed. 62