DENMARK BANCSHARES, INC.
1996 ANNUAL REPORT
TABLE OF CONTENTS
Graphic Presentation of Selected Financial Data 2
Selected Financial Data 3
President's Letter 4
Independent Auditors' Report 4
Consolidated Financial Statements 5
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis 22
Quarterly Financial Information 36
_____________________________________________________________________________
Denmark Bancshares, Inc. ("Company"), headquartered in Denmark, Wisconsin,
is a diversified one-bank holding company. Denmark State Bank, the Company's
subsidiary bank, offers four full service banking offices located in the
Villages of Denmark, Maribel, and Whitelaw, and the Town of Bellevue, serving
primarily Brown, Kewaunee and Manitowoc Counties. The Company also extends
farm credit through its subsidiary Denmark Agricultural Credit Corporation and
sells a full line of insurance products through its subsidiary McDonald-Zeamer
Insurance Agency, Inc.
______________________________________________________________________________
<PAGE>
(Tabular representation of graphs for electronic filing)
1992 1993 1994 1995 1996
Net Income $1,526 $2,115 $2,182 $2,083 $2,380
Net Income Per Share 62.39 76.75 78.98 75.65 86.52
Dividends Per Share 13.50 15.50 17.50 19.50 21.50
Book Value Per Share 700.70 761.93 816.55 879.29 942.78
Average Total Loans 125,567 133,511 135,032 150,181 162,850
Average Total Assets 157,848 167,725 169,886 184,970 99,367
Average Total Deposits 129,107 131,185 130,501 135,644 44,254
Average Stockholders' Equity 16,683 20,089 21,846 23,271 5,064
Dollars in thousands except per share data.
<PAGE> 2
SELECTED FINANCIAL DATA
Year Ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- -------
INCOME STATEMENT DATA
Interest income $16,073 $14,882 $12,828 $13,337 $13,597
Interest expense 8,152 7,639 5,401 5,810 7,046
--------- --------- --------- --------- -------
Net interest income $7,921 $7,243 $7,427 $7,527 $6,551
Less: Provision for possible
loan losses 210 200 493 631 659
--------- --------- --------- --------- -------
Net income after provision for
possible credit losses $7,711 $7,043 $6,934 $6,896 $5,892
--------- --------- --------- --------- -------
Plus: Noninterest income $589 $568 $625 $594 $538
Less: Noninterest expense 5,073 4,933 4,851 4,596 4,304
--------- --------- --------- --------- -------
Net noninterest expense $(4,484) $(4,365) $(4,226) $(4,002) $(3,766)
--------- --------- --------- --------- -------
Income before income taxes $3,227 $2,678 $2,708 $2,894 $2,126
Income tax expense 847 595 526 779 600
--------- --------- --------- --------- -------
Net income $2,380 $2,083 $2,182 $2,115 $1,526
========= ========= ========= ========= =======
PER SHARE DATA
Net income $86.52 $75.65 $78.98 $76.75 $62.39
Cash dividends declared 21.50 19.50 17.50 15.50 13.50
Book value (year end) 942.78 879.29 816.55 761.93 700.70
BALANCE SHEET DATA
Average balances:
Total loans $162,850 $150,181 $135,032 $133,511 $125,567
Allowance for possible
credit losses 2,414 2,204 1,972 1,533 1,200
Investment securities 26,328 25,128 25,567 23,474 17,540
Assets 199,367 184,970 169,886 167,725 157,848
Deposits 144,254 135,644 130,501 131,185 129,107
Other borrowed funds (1) 28,408 24,538 16,254 15,025 10,743
Stockholders' equity 25,064 23,271 21,846 20,089 16,683
FINANCIAL RATIOS
Return on average equity 9.49% 8.95% 9.99% 10.53% 9.15%
Return on average assets 1.19% 1.13% 1.28% 1.26% 0.97%
Net interest spread 3.29% 3.24% 3.93% 4.10% 3.73%
Average equity to
average assets 12.57% 12.58% 12.86% 11.98% 10.57%
Total capital to assets (2) 13.14% 13.31% 13.61% 12.83% 11.87%
Allowance for credit losses
to loans (year end) 1.43% 1.49% 1.45% 1.27% 1.01%
Allowance for credit
losses to nonaccrual
loans (year end) 75.66% 198.36% 104.72% 92.39% 108.44%
Dollars in thousands except per share data and financial ratios.
(1) Includes federal funds purchased, securities sold under repurchase
agreements and notes payable.
(2) Consists of stockholders' equity plus allowance for possible credit
losses divided by total assets plus allowance for possible credit losses at
the end of the period.
<PAGE> 3
TO OUR SHAREHOLDERS AND FRIENDS:
We are pleased to present the 1996 Annual Report of Denmark Bancshares, Inc.
Your Bank experienced a record year in net income, attaining moderate growth
in deposits and assets, as well as shareholders' equity.
Our semi-annual dividend of $11.00 per share to shareholders of record
December 10, 1996, payable January 2, 1997, represented a 4 3/4% increase over
the last semi-annual dividend and a 10% increase over the dividend paid in
January, 1996.
Your Bank, independent and locally owned, is dedicated to meeting the needs of
local families, businesses and farmers. Our loans are channeled to the
neighborhoods where our depositors live and work, thereby supporting and
strengthening our local economies.
As always, we appreciate your continued support as shareholders and ask that
you recommend our services to your friends, relatives and business associates.
Sincerely,
(signature of Darrell R. Lemmens)
Darrell R. Lemmens
Chairman of the Board
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
DENMARK BANCSHARES, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated statements of financial
condition of Denmark Bancshares, Inc. and subsidiaries as of December 31,
1996, 1995 and 1994, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Denmark
Bancshares, Inc. and subsidiaries as of December 31, 1996, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
WILLIAMS, YOUNG & ASSOCIATES, LLC
(Signature of Williams, Young, & Associates, LLC)
Madison, Wisconsin
February 14, 1997
<PAGE> 4
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF DECEMBER 31,
ASSETS
Assets 1996 1995 1994
------------ ------------ ------------
Cash and due from banks $6,063,954 $5,464,693 $5,442,402
Federal funds sold 937,000 6,900,000 2,275,000
Investment Securities
Available-for-sale,
at fair value 10,952,446 9,330,453 5,575,222
Held-to-maturity, at cost 17,667,237 16,319,946 19,822,304
------------ ------------ ------------
Total Investment Securities $28,619,683 $25,650,399 $25,397,526
Loans less allowance for credit
losses of $2,506,728,
$2,319,101 and $2,079,007,
respectively 172,707,710 153,752,933 141,069,973
Premises and equipment, net 2,960,537 3,038,274 3,162,161
Accrued interest receivable 1,153,231 1,121,017 914,314
Other assets 1,272,161 949,629 992,526
------------ ------------ ------------
TOTAL ASSETS $213,714,276 $196,876,945 $179,253,902
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $16,077,828 $15,077,825 $14,114,491
Interest bearing 134,338,874 129,739,944 122,885,887
------------ ------------ ------------
Total Deposits $150,416,702 $144,817,769 $137,000,378
Short-term borrowings 29,230,750 23,363,195 18,422,168
Accrued interest payable 929,674 898,162 682,767
Other liabilities 542,426 544,737 491,672
Long-term borrowings 6,681,587 3,063,000 63,000
------------ ------------ ------------
Total Liabilities $187,801,139 $172,686,863 $156,659,985
------------ ------------ ------------
Stockholders' Equity
Common stock, no par value,
authorized 320,000 shares;
issued 27,486, 27,511 and
27,670 shares, respectively $10,168,433 $10,196,720 $10,336,295
Paid in capital 37,384 37,203 37,203
Retained earnings 15,747,969 13,959,598 12,412,971
Unrealized (loss) on
securities available-for-sale,
net of applicable deferred
income taxes (40,649) (3,439) (192,552)
------------ ------------ ------------
Total Stockholders' Equity $25,913,137 $24,190,082 $22,593,917
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $213,714,276 $196,876,945 $179,253,902
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME FOR YEARS ENDED DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Interest Income
Loans including fees $14,132,315 $12,964,516 $10,943,315
Investment securities:
Taxable 572,214 485,189 527,237
Exempt from federal tax 1,224,226 1,297,257 1,283,653
Interest on federal funds sold 143,674 134,953 73,805
------------ ------------ ------------
$16,072,429 $14,881,915 $12,828,010
------------ ------------ ------------
Interest Expense
Deposits $6,471,187 $6,042,092 $4,619,424
Federal funds purchased
and notes payable 1,680,520 1,596,667 781,899
------------ ------------ ------------
$8,151,707 $7,638,759 $5,401,323
------------ ------------ ------------
Net interest income $7,920,722 $7,243,156 $7,426,687
Provision for Credit Losses 210,000 200,000 493,000
------------ ------------ ------------
Net interest income after
provision for credit losses $7,710,722 $7,043,156 $6,933,687
------------ ------------ ------------
Other Income
Service fees and commissions $511,794 $421,511 $442,810
Investment security
gains (losses) (58,389) 0 21,665
Other 135,830 146,828 160,781
------------ ------------ ------------
$589,235 $568,339 $625,256
------------ ------------ ------------
Other Expense
Salaries and employee benefits $3,211,702 $2,979,821 $2,773,555
Occupancy expenses 569,641 539,923 548,511
FDIC insurance assessment 2,000 156,328 318,250
Data processing expenses 272,410 257,195 255,151
Other operating expenses 1,017,882 1,000,030 955,656
------------ ------------ ------------
$5,073,635 $4,933,297 $4,851,123
------------ ------------ ------------
Income before income taxes $3,226,322 $2,678,198 $2,707,820
Income tax expense 846,757 594,925 526,226
------------ ------------ ------------
NET INCOME $2,379,565 $2,083,273 $2,181,594
============ ============ ============
NET INCOME PER COMMON SHARE $86.52 $75.65 $78.98
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
Common Stock
--------------------
Unrealized
Loss on
Paid in Retained Securities
Shares Amount Capital Earnings Avl-for-Sale Total
-------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 27,540 $10,249,111 $18,761 $10,715,602 $20,983,474
Net income 2,181,594 2,181,594
Cash dividends, $17.50 per share (484,225) (484,225)
Treasury stock acquisitions (81) (67,578) (67,578)
Treasury stock sales 211 154,762 18,442 173,204
Net change in unrealized (loss)
on securities available-for-sale,
net of applicable deferred income
tax benefit of $77,713 (192,552) (192,552)
Balance, December 31, 1994 27,670 $10,336,295 $37,203 $12,412,971 $(192,552) $22,593,917
Net income 2,083,273 2,083,273
Cash dividends, $19.50 per share (536,646) (536,646)
Treasury stock acquisitions (169) (149,125) (149,125)
Treasury stock sales 10 9,550 9,550
Net change in unrealized (loss)
on securities available-for-sale,
net of applicable deferred income
tax liability of $8,511 189,113 189,113
Balance, December 31, 1995 27,511 $10,196,720 $37,203 $13,959,598 $(3,439) $24,190,082
Net income 2,379,565 2,379,565
Cash dividends, $21.50 per share (591,194) (591,194)
Treasury stock acquisitions (35) (38,216) (38,216)
Treasury stock sales 10 9,929 181 10,110
Net change in unrealized (loss)
on securities available-for-sale,
net of applicable deferred income
tax benefit of $22,594 (37,210) (37,210)
BALANCE, DECEMBER 31, 1996 27,486 $10,168,433 $37,384 $15,747,969 $(40,649) $25,913,137
======= =========== ======= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
------------- ------------- -------------
Cash Flows from Operating
Activities:
Net income $2,379,565 $2,083,273 $2,181,594
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation 292,417 278,610 291,472
Provision for credit losses 210,000 200,000 493,000
Loss on sale of other
real estate 7,909 0 0
Loss (gain) on sales of
investments 58,389 0 (21,665)
Amortization of bond premium 37,741 61,902 79,774
Accretion of bond discount (561,948) (527,905) (535,039)
Increase in
interest receivable (32,214) (206,703) (15,767)
Increase in interest payable 31,512 215,395 97,660
Other, net (100,980) (16,383) 45,867
------------- ------------- -------------
Net Cash Provided by Operating
Activities $2,322,391 $2,088,189 $2,616,896
------------- ------------- -------------
Cash Flows from
Investing Activities:
Maturities of held-to-maturity
securities $493,445 $2,288,687 $3,140,528
Maturities and sales of
available-for-sale securities 3,649,278 1,348,963 2,732,897
Purchase of held-to-maturity
securities (1,406,724) 0 (5,163,668)
Purchase of available-for-sale
securities (5,307,779) (3,149,183) (669,500)
Purchase of an insurance agency (220,000) 0 0
Federal funds sold, net 5,963,000 (4,625,000) 5,450,000
Sale of other real estate 77,091 0 0
Net increase in loans
made to customers (19,249,777) (12,882,960) (9,408,279)
Capital expenditures (214,680) (154,723) (153,139)
------------- ------------- -------------
Net Cash Used by Investing
Activities $(16,216,146) $(17,174,216) $(4,071,161)
------------- ------------- -------------
Cash Flows from
Financing Activities:
Net increase in deposits $5,598,933 $7,817,392 $321,316
Purchase of treasury stock (38,216) (149,125) (67,578)
Sale of treasury stock 10,110 9,550 173,204
Dividends paid (563,953) (510,527) (455,579)
Debt proceeds 38,764,142 22,630,938 13,099,425
Debt repayments (29,278,000) (14,689,910) (11,026,141)
------------- ------------- -------------
Net Cash Provided by
Financing Activities $14,493,016 $15,108,318 $2,044,647
------------- ------------- -------------
Net increase in cash
and cash equivalents $599,261 $22,291 $590,382
Cash and cash equivalents,
beginning 5,464,693 5,442,402 4,852,020
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
ENDING $6,063,954 $5,464,693 $5,442,402
============= ============= =============
Noncash Investing Activities:
Loans transferred to foreclosed
properties $85,000 $38,938 $90,000
============= ============= =============
Total increase (decrease)
in unrealized loss on
securities available-for-sale $68,315 $(275,337) $270,265
============= ============= =============
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DENMARK BANCSHARES, INC.
December 31, 1996, 1995 and 1994
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 4 and 6. 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 material intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates, such as the allowance for credit losses and accounting
for the impairment of loans, are discussed specifically in the following
sections of this footnote.
Investment Securities
The Company adopted Statement of Financial Accounting Standards (FAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" in 1994.
Investment securities are designated as available-for-sale or held-to-maturity
when purchased and remain in that classification until they are sold or
mature. Debt and equity securities classified as available-for-sale are
stated at estimated fair value, with unrealized gains and losses, net of any
applicable deferred income taxes, reported as a separate component of
stockholders' equity. As a result of the adjustment from amortized cost to
fair value, stockholders' equity, net of applicable deferred income taxes,
decreased by $40,649, $3,439 and $192,552 for the years ended December 31,
1996, 1995 and 1994, respectively. 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 by using the simple
interest method on the daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or
more with respect to interest or principal. When a loan is placed on
nonaccrual, all interest previously accrued but not collected is reversed
against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.
In 1995, the Company implemented a new accounting Standard which addresses the
accounting treatment for impaired loans. 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
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
charged against the allowance for credit losses when management believes that
the collectibility of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb losses inherent in
existing loans, based on evaluations of the collectibility and prior loss
experience of loans. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, leases and commitments, and
current and anticipated economic conditions that may affect the borrowers'
ability to pay.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks. Cash flows from demand deposits, NOW
accounts, savings accounts, federal funds purchased and sold, cash receipts and
payments of loans and time deposits are reported net. For purposes of cash
flow reporting, income taxes paid were $929,850, $672,714 and $735,009 and
interest paid was $8,130,209, $7,435,059 and $5,312,357 for the years ended
December 31, 1996, 1995 and 1994, 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. Land is carried at cost.
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, which the Company adopted
in 1993. As of December 31, 1993, deferred state income tax charges of $82,000
were not recorded because they were immaterial. Subsequently, management
determined that there may come a time in the foreseeable future when deferred
state income tax charges will become material. Therefore, although still
considered immaterial in amount, management elected in 1994 to record deferred
state income tax charges. The cumulative effect of recording such charges as
of December 31, 1993, is included in the company's 1994 tax provision and is
shown as other.
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.
Reclassifications
For comparability, certain 1994 items have been reclassified to conform with
classifications adopted in 1995.
Note 2 - Compensating Cash Balances As compensation for check clearing and
other correspondent services, compensating balances of $1,339,000 were required
to be maintained by the Company's subsidiaries with correspondent banks at
December 31, 1996.
Note 3 - Investment Securities
The amortized cost and estimated fair value of securities available-for-sale
were as follows:
December 31, 1996
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
Cost Gains (Losses) Value
- ------------------------------------------------------------------------------
Mortgage-backed securities $9,563,011 $7,553 $(70,796) $9,499,768
Equity securities 1,452,678 0 0 1,452,678
----------- ----------- ----------- -----------
$11,015,689 $7,553 $(70,796) $10,952,446
=========== =========== =========== ===========
December 31, 1995
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
Cost Gains (Losses) Value
- ------------------------------------------------------------------------------
Mortgage-backed securities $7,457,407 $67,666 $(40,439) $7,484,634
Equity securities 1,867,974 0 (22,155) 1,845,819
------------- ----------- ------------------------
$9,325,381 $67,666 $(62,594) $9,330,453
=========== =========== =========== ===========
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
Cost Gains (Losses) Value
- ------------------------------------------------------------------------------
Mortgage-backed securities $3,981,609 $350 $(197,100) $3,784,859
Equity securities 1,863,878 0 (73,515) 1,790,363
------------- ----------- ------------------------
$5,845,487 $350 $(270,615) $5,575,222
=========== =========== =========== ===========
The amortized cost and estimated fair value of securities held-to-maturity
were as follows:
December 31, 1996
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
Cost Gains (Losses) Value
- ------------------------------------------------------------------------------
State and local governments $17,667,237 $1,597,100 $(22,822) $19,241,515
------------- ----------- ------------------------
$17,667,237 $1,597,100 $(22,822) $19,241,515
=========== =========== =========== ===========
December 31, 1995
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
Cost Gains (Losses) Value
- ------------------------------------------------------------------------------
State and local governments $16,319,946 $1,744,038 $(29,478) $18,034,506
------------- ----------- ------------------------
$16,319,946 $1,744,038 $(29,478) $18,034,506
=========== =========== =========== ===========
December 31, 1994
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
Cost Gains (Losses) Value
- ------------------------------------------------------------------------------
Mortgage-backed securities $1,701,990 $5,594 $(95,889) $1,611,695
State and local governments 18,120,314 1,196,725 (682,820) 18,634,219
------------- ----------- ------------------------
$19,822,304 $1,202,319 $(778,709) $20,245,914
=========== =========== =========== ===========
The amortized cost and estimated fair values of securities at December 31,
1996, by maturity were as follows:
Securities Available-for-Sale Securities Held-to-Maturity
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealilzed Fair
- ------------------------------------------------------------------------------
Amounts Maturing Cost Gains (Losses) Value
Within one year $1,149,639 $1,147,702 $1,018,394 $1,061,073
From one through five years 5,482,033 5,430,447 4,334,072 5,018,070
From five through ten years 700,649 700,648 6,091,976 6,624,611
After ten years 2,230,690 2,220,971 6,222,795 6,537,761
Equity securities
(no stated maturity) 1,452,678 1,452,678 0 0
------------- ----------- ------------ -----------
$11,015,689 $10,952,446 $17,667,237 $19,241,515
=========== =========== =========== ===========
Mortgage-backed securities are allocated according to their expected
prepayments rather than their contractual maturities.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, available-for-sale securities were sold for total proceeds of
$1,868,929. No securities were sold during 1995. During 1994,
available-for-sale securities were sold for total proceeds of $48,348. The
gross realized gains and gross realized losses amounted to $259 and $58,648 in
1996, and $21,665 and zero in 1994, respectively.
In 1995, mortgage-backed agency securities with an amortized cost of
$3,143,704 were transferred from held-to-maturity to available-for-sale. The
transfers from held-to-maturity to available-for-sale were made in accordance
with the guidelines provided by the Financial Accounting Standards Board for a
one-time reclassification of securities. The securities had an unrealized
gain of $42,124.
There were no significant concentrations of investments (greater than 10
percent of stockholders' equity) in any individual security issuer, except for
mortgage-backed securities issued by U.S. Government agencies and
corporations.
Investment securities with an amortized cost of $990,117 and estimated fair
value of $994,800, at December 31, 1996, were pledged to secure public
deposits and securities sold under repurchase agreements and for other
purposes required or permitted by law.
Note 4 - Loans
Major categories of loans included in the loan portfolio are:
December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Commercial:
Agricultural $24,494,999 $21,680,676 $19,995,941
Other 21,404,746 19,513,517 16,106,055
----------- ------------------------
$45,899,745 $41,194,193 $36,101,996
Real estate:
Agricultural $16,441,788 $15,062,096 $15,366,238
Commercial 33,058,518 26,838,176 25,649,425
Residential 64,669,525 59,186,926 53,885,349
----------- ------------------------
$114,169,831 $101,087,198 $94,901,012
Installment $14,590,185 $13,301,405 $11,650,458
----------- ------------------------
Unsecured loans $554,677 $489,238 $495,514
----------- ------------------------
Total loans receivable $175,214,438 $156,072,034 $143,148,980
Allowance for credit losses (2,506,728) (2,319,101) (2,079,007)
----------- ------------ ------------
NET LOANS RECEIVABLE $172,707,710 $153,752,933 $141,069,973
=========== =========== ===========
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Final loan maturities and rate sensitivity of the loan portfolio, excluding
unsecured loans, at December 31, 1996, are as follows:
Within One - After
(In thousands) One Year Five Years Five Years Total
- ------------------------------------------------------------------------------
Commercial and installment $48,262 $11,988 $240 $60,490
Real estate 97,854 16,316 0 114,170
----------- ----------- ---------- ---------
TOTAL $146,116 $28,304 $240 $174,660
=========== =========== =========== ===========
All loans with a maturity greater than one year are at fixed interest rates.
Nonaccrual loans totaled $3,313,363, $1,169,136 and $1,985,369 at December
31, 1996, 1995 and 1994, respectively. The reduction in interest income
associated with nonaccrual loans is as follows:
Year Ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Income in accordance with
original loan terms $302,466 $192,250 $202,293
Income recognized 197,091 196,453 133,772
----------- ----------- ------------
REDUCTION (INCREASE) IN INTEREST INCOME $105,375 $(4,203) $68,521
=========== =========== ===========
Information concerning the Company's investment in impaired loans is as
follows:
Year Ended December 31,
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
Total investment in impaired loans $2,493,985 $821,561
Loans not requiring an allowance 1,535,628 456,254
Loans requiring a related allowance 958,357 365,307
Related allowance (129,217) (131,877)
Average investment in impaired loans during the year 2,272,191 1,224,260
Interest income recognized on a cash basis 137,762 118,891
Changes in the allowance for credit losses were as follows:
Year Ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Balance - beginning of year $2,319,101 $2,079,007 $1,703,688
Charge-offs (56,199) (129,013) (163,561)
Recoveries 33,826 169,107 45,880
Provision charged to operations 210,000 200,000 493,000
----------- ------------------------
BALANCE - END OF YEAR $2,506,728 $2,319,101 $2,079,007
=========== =========== ===========
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Land $479,755 $416,327 $416,327
Buildings and improvements 2,845,622 2,839,486 2,830,503
Furniture and fixtures 2,111,525 1,991,155 1,860,288
----------- ------------------------
$5,436,902 $5,246,968 $5,107,118
Less: Accumulated depreciation (2,476,365) (2,208,694) (1,944,957)
----------- ------------------------
NET $2,960,537 $3,038,274 $3,162,161
=========== =========== ===========
NOTE 6 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
NOW accounts $9,590,972 $9,345,126 $9,513,319
Savings accounts 16,179,148 16,908,964 18,831,709
Money market accounts 29,104,066 25,775,384 20,985,443
Certificates of deposit 62,376,451 60,672,654 57,544,930
Time deposit open accounts 17,088,237 17,037,816 16,010,486
----------- ------------------------
TOTAL $134,338,874 $129,739,944 $122,885,887
=========== =========== ===========
The following table shows the maturity distribution of certificates of deposit
and time deposit open accounts:
December 31,
- ------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
Within one year $39,595 $56,903 $49,575
One to two years 36,700 15,473 17,631
Two to three years 2,289 3,999 4,234
Three to four years 645 974 1,834
Over four years 236 361 281
----------- ------------------------
TOTAL $79,465 $77,710 $73,555
=========== =========== ===========
Certificates of deposit and time deposit open accounts issued in amounts of
$100,000 or more totaled $13,493,887, $12,327,501 and $12,041,328 at December
31, 1996, 1995 and 1994, respectively.
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
The provision for income taxes in the consolidated statement of income is as
follows:
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
Current: Federal $774 $541 $615
State 189 127 144
----------- ------------------------
$963 $668 $759
----------- ------------------------
Deferred: Federal $(91) $(62) $(90)
State (25) (11) (61)
Other 0 0 (82)
----------- ------------------------
$(116) $(73) $(233)
----------- ------------------------
TOTAL PROVISION FOR INCOME TAXES $847 $595 $526
=========== =========== ===========
Other represents 1993's deferred state income tax charges that were not
recorded because they were considered immaterial.
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:
1996 1995 1994
- ------------------------------------------------------------------------------
(In thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------
Tax at statutory
federal income tax rate $1,097 34% $911 34% $921 34%
Increase (decrease)
in tax resulting from:
Tax-exempt income (374) (12) (394) (15) (403) (15)
State income tax,
net of federal tax benefit 109 3 77 3 0 0
Other, net 15 1 1 0 8 0
----- ----- ----- ----- ----- -----
APPLICABLE INCOME TAXES $847 26% $595 22% $526 19%
===== ===== ===== ===== ===== =====
The net deferred tax asset in the accompanying statements of financial
condition include the following amounts of deferred tax assets and deferred
tax liabilities:
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $896 $824 $722
Unrealized losses on available-for-sale
securities 23 0 83
State tax net operating loss carryforward 88 88 81
Interest receivable on nonaccrual loans 61 18 41
Other 25 15 18
----------- ------------------------
Gross deferred tax assets $1,093 $945 $945
Valuation allowance (88) (88) (81)
----------- ------------------------
Total deferred tax assets $1,005 $857 $864
----------- ------------------------
Deferred tax liabilities:
Accumulated depreciation on fixed assets $156 $162 $160
State income taxes 54 44 45
Unrealized gains on available-for-sale securities 0 8 0
Accretion 28 7 5
----------- ------------------------
Total deferred tax liabilities $238 $221 $210
----------- ------------------------
NET DEFERRED TAX ASSET $767 $636 $654
=========== =========== ===========
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHORT-TERM BORROWINGS
December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Notes payable $25,839,963 $23,309,938 $18,267,500
U.S. Treasury demand notes 278,874 53,257 148,770
Current maturities of
long-term borrowings 3,111,913 0 5,898
----------- ------------------------
TOTAL SHORT-TERM BORROWINGS $29,230,750 $23,363,195 $18,422,168
=========== =========== ===========
At December 31, 1996, the Company had $11,097,037 of unused lines of credit
with banks to be drawn upon as needed.
NOTE 9 - LONG-TERM BORROWINGS
December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Note dated in 1996, with Federal Home
Loan Bank of Chicago, monthly interest
due at an annual rate of 5.94%,
principal due and payable March 18, 1998. $3,000,000 $0 $0
Note dated in 1996, with Federal Home
Loan Bank of Chicago, monthly interest
due at an annual rate of 6.02%,
principal due and payable
December 27, 1999. 2,200,000 0 0
Note dated in 1996, with Federal Home
Loan Bank of Chicago, monthly interest
due at an annual rate of 6.51%,
principal payments in the amounts of
$94,000, $79,000, $83,000 and
$1,118,500 due and payable December 27,
2003, 2007, 2010 and 2011, respectively. 1,374,500 0 0
Note dated in 1995, with Federal Home
Loan Bank of Chicago, monthly
interest due at an annual rate
of 6.04%, principal due and
payable July 20, 1997. 3,000,000 3,000,000 0
Note dated in 1992, with AgriBank, FCB,
quarterly interest due at an annual
rate of 6.30%, principal due and
payable September 22, 1997. 63,000 63,000 63,000
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. 156,000 0 0
Note dated in 1985, interest rate of
11%, due in monthly installments of
$1,212 through 1995. 0 0 5,898
----------- ------------------------
$9,793,500 $3,063,000 $68,898
Less current maturities 3,111,913 0 5,898
----------- ------------------------
TOTAL LONG-TERM BORROWINGS $6,681,587 $3,063,000 $63,000
=========== =========== ===========
The notes payable to AgriBank, FCB and Federal Home Loan Bank of Chicago are
secured by agricultural loans and residential mortgages, respectively.
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EMPLOYEE BENEFIT PLANS
As of July 1, 1994, the Company adopted a 401(k) profit sharing plan and
amended its existing money purchase pension plan. The plans essentially cover
all employees who have been employed over one-half year, and are at least
twenty and one-half years old. Provisions of the 401(k) profit sharing plan
provide for the following:
* Participating employees may annually contribute up to 10% of their
compensation.
* The Company will contribute 50% of each employee contribution up to a
maximum Company contribution of 2%. Employee contributions above 4% do
not receive any matching contribution.
* The Company may elect to make contributions out of profits. These
profit sharing contributions are allocated to the eligible participants
based on their salary as a percentage of total participating salaries.
The contribution percentage was 4% for 1996, 1995 and 1994.
In addition, the amended money purchase plan generally provides for employer
contributions of 4% of each participant's compensation.
The Company provides no post retirement benefits to employees except for the
401(k) profit sharing plan and the money purchase pension plan discussed above
which are currently funded. The Company expensed contributions of $244,433,
$237,373 and $205,064 for the years 1996, 1995 and 1994, respectively.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF - BALANCE SHEET RISK
The Company and its subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company and its subsidiaries have in particular classes of financial
instruments.
The exposure of the Company and its subsidiaries to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual or notional amount of these instruments. The Company and its
subsidiaries use the same credit policies in making commitments and
conditional obligations as for on-balance sheet instruments. The Company and
its subsidiaries require collateral or other security to support financial
instruments with credit risk.
- ------------------------------------------------------------------------------
Contract or
Notional Amount Secured
(In thousands) December 31, 1996 Portion
- ------------------------------------------------------------------------------
Financial instruments whose
contract amounts represent credit risk:
Commitments to extend credit $14,049 $10,437
Standby letters of credit and
financial guarantees written 724 724
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company and its
subsidiaries evaluate each customer's creditworthiness on a case-by-case
basis. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support commercial business transactions. A majority
of the letters of credit expire within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loans to customers. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties and residential properties. All letters of credit are
fully collateralized.
Federal funds sold to correspondent banks are not insured.
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS
At December 31, 1996, 1995 and 1994 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 reflects the sale of a participated loan and a guaranty by an
insider.
December 31, 1996
- ------------------------------------------------------------------------------
New Other Ending
(In thousands) 1994 1995 Loans Payments Changes Balance
- ------------------------------------------------------------------------------
Aggregate related party loans $1,239 $1,503 $339 $(282) $(145) $1,415
====== ====== ===== ====== ====== ======
NOTE 13 - 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 1996, 1995 and 1994. 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) 1996 1995 1994
- ------------------------------------------------------------------------------
Assets
Cash in banks $438 $323 $324
Due from nonbanking subsidiary 0 0 6
Investment
Banking subsidiary 18,909 17,445 15,493
Nonbanking subsidiaries 3,813 3,284 2,930
Real estate loans (less allowance for credit
losses of $61, $61 and $59, respectively) 1,262 1,576 3,175
Fixed assets (net of depreciation
of $523, $415 and $308) 1,784 1,827 1,924
Other assets 37 39 41
----------- ------------------------
TOTAL ASSETS $26,243 $24,494 $23,893
=========== =========== ===========
Liabilities
Accrued expenses $28 $28 $44
Dividends payable 302 275 249
Note payable - unrelated bank 0 0 1,000
Note payable - individual 0 0 6
----------- ------------------------
Total Liabilities $330 $303 $1,299
----------- ------------------------
Stockholders' Equity
Common stock $10,169 $10,197 $10,336
Paid-in capital 37 37 37
Retained earnings 15,748 13,960 12,413
Unrealized (loss) on securities
available-for-sale,
net of applicable deferred income taxes (41) (3) (192)
----------- ------------------------
Total Stockholders' Equity $25,913 $24,191 $22,594
----------- ------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $26,243 $24,494 $23,893
=========== =========== ===========
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DENMARK BANCSHARES, INC.
Statements of Income
For the Years Ended December 31,
- ------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
Income
Interest income from loans $113 $175 $242
Other interest income 14 18 12
Dividend income from banking subsidiary 500 0 0
Dividend income - nonrelated 0 0 2
Rental income from banking subsidiary 150 150 150
Rental income from nonbanking subsidiary 6 6 6
----------- ------------------------
Total Income $783 $349 $412
Expenses
Management fees to banking subsidiary $120 $120 $120
Interest expense 0 51 74
Provision for credit losses 0 2 15
Depreciation 107 107 107
Investment security losses 0 0 4
Other operating expenses 118 103 117
----------- ------------------------
Total Expenses $345 $383 $437
Income (loss) before income taxes and
undistributed income of subsidiaries $438 $(34) $(25)
Income tax (benefit) expense (12) 1 3
Income (Loss) Before Undistributed
Income of Subsidiaries $450 $(35) $(28)
Equity in Undistributed Income of Subsidiaries
Banking subsidiary 1,501 1,764 1,935
Nonbank subsidiaries 429 354 275
----------- ------------------------
NET INCOME $2,380 $2,083 $2,182
=========== =========== ===========
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DENMARK BANCSHARES, INC.
Statements of Cash Flows
For the Years Ended December 31,
- ------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $2,380 $2,083 $2,182
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 107 107 107
Provision for credit losses 0 2 15
Loss from sales of available-for-sale securities 0 0 4
Equity (earnings) of banking subsidiary (2,001) (1,764) (1,935)
Equity (earnings) of nonbanking subsidiaries (429) (354) (275)
Dividend from banking subsidiary 500 0 0
Decrease (increase) in other assets 0 3 (17)
(Decrease) increase in accrued expenses 0 (15) 7
----------- ------------------------
Net Cash Provided by Operating Activities $557 $62 $88
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale
securities $0 $0 $48
Investment in nonbanking subsidiary (100) 0 0
Loan repayments by nonbanking subsidiary 0 6 13
Capital expenditures (64) (9) (1)
Net decrease (increase) in real estate loans 314 1,596 (127)
----------- ------------------------
Net Cash Provided (Used) by
Investing Activities $150 $1,593 $(67)
Cash Flows from Financing Activities:
Debt repayment $0 $(1,006) $(13)
Treasury stock proceeds 10 10 173
Treasury stock purchases (38) (149) (67)
Dividends paid (564) (511) (456)
----------- ------------------------
Net Cash Used by Financing
Activities $(592) $(1,656) $(363)
----------- ------------------------
Net Increase (Decrease) in Cash $115 $(1) $(342)
Cash, beginning 323 324 666
----------- ------------------------
CASH, ENDING $438 $323 $324
=========== =========== ===========
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1996
- ------------------------------------------------------------------------------
(In thousands) Carrying Amount Fair Value
- ------------------------------------------------------------------------------
Financial Assets
Cash and short-term investments $7,001 $7,001
Investment securities 28,620 30,194
Loans 175,214 170,314
Less: Allowance for credit losses (2,507) -
----------- -----------
TOTAL $208,328 $207,509
=========== ===========
Financial Liabilities
Deposits $150,417 $151,230
Borrowings 35,912 36,104
----------- -----------
TOTAL $186,329 $187,334
=========== ===========
Unrecognized Financial Instruments
Commitments to extend credit $14,049 $14,049
Standby letters of credit and
financial guarantees written 724 724
----------- -----------
TOTAL $14,773 $14,773
=========== ===========
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis of financial condition and results of
operations of Denmark Bancshares, Inc. and its subsidiaries ("Company"), is
intended as a review of significant factors affecting the Company's
consolidated results of operations during the three-year period ended December
31, 1996, and the Company's consolidated financial condition at the end of
each year during this period. This discussion should be read in conjunction
with the "CONSOLIDATED FINANCIAL STATEMENTS" including the accompanying notes,
and the "SELECTED FINANCIAL DATA" presented elsewhere in this report. The
Company's subsidiaries are the Denmark State Bank ("Bank"), Denmark
Agricultural Credit Corporation ("DACC") and the McDonald-Zeamer Insurance
Agency, Inc. ("McDonald").
RESULTS OF OPERATIONS
The following table sets forth certain items of income and expense as well as
period-to-period percentage increases (decreases) for the Company on a
consolidated basis during the most recent three fiscal years:
Percent
Increase (Decrease)
1996 1995 1994 1996/95 1995/94
------------------------------------------------
(In thousands)
Interest income $16,073 $14,882 $12,828 8.0% 16.0%
Interest expense 8,152 7,639 5,401 6.7 41.4
Net interest income 7,921 7,243 7,427 9.4 (2.5)
Provision for credit losses 210 200 493 5.0 (59.4)
Noninterest income 589 568 625 3.7 (9.1)
Noninterest expense 5,073 4,933 4,851 2.8 1.7
Net income 2,380 2,083 2,182 14.2 (4.5)
Earnings Performance
The Company recorded net income of $2,379,565 in 1996. This represents an
increase of $296,292, or 14.2% compared to 1995 earnings. The increase in net
income is primarily attributable to higher net interest income and noninterest
income which increased by $677,566 and $20,896 respectively. These items more
than offset higher noninterest expenses and income taxes which increased by
$140,338 and $251,832 respectively. The increase in net interest income is
primarily the result of higher average earning assets. Average earning assets
increased by $14.1 million during 1996 compared to 1995. Loan growth
accounted for much of this increase as average loans increased by $12.7
million or 8.4%. FDIC insurance premiums declined by $154,328. This
reduction helped contain the increase to total noninterest expenses for 1996
to $140,338 or 2.8%.
The increase in net income in 1996 followed a decrease of $98,321, or 4.5% in
1995 compared to 1994 earnings. The decrease in net income was primarily
attributable to lower net interest income and noninterest income and higher
noninterest expenses and income taxes. Net interest income was adversely
affected during 1995 because the increase in cost of funds was substantially
greater than the increase in yield on earning assets.
Return on average assets for the Company was 1.19% in 1996, compared to 1.13%
in 1995 and 1.28% in 1994.
On a per share basis, net income was $86.52 in 1996 compared with $75.65 in
1995 and $78.98 in 1994. Return on average equity in 1996 was 9.49% compared
to 8.95% and 9.99% in 1995 and 1994 respectively. Average stockholders'
equity increased 7.7% during 1996 compared to 1995. The earnings growth of
14.2% outpaced the growth of average equity and resulted in a higher return on
average equity during 1996. During 1995, the growth of average equity
combined with the earnings decline resulted in a lower return on average
equity.
<PAGE> 22
MANAGEMENTS' DISCUSSION AND ANALYSIS
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 increased 9.4%, or $677,566 from 1995 to 1996. The
increase is primarily attributable to higher average earning assets which
generated additional interest income of $1,171,857. This more than offset the
increased interest expense of $661,491 resulting from higher average
interest-bearing liabilities. An increase in the Company's net interest
income spread from 3.24% in 1995 to 3.29% in 1996 also contributed to higher
net interest income. Net interest income spread is the difference between the
average yield earned on assets and the average rate incurred on liabilities.
Net interest income decreased 2.5%, or $183,531 from 1994 to 1995. The
decrease was attributable to a decline in the Company's net interest income
spread from 3.93% in 1994 to 3.24% in 1995. The average yield on earning
assets increased by 48 basis points while the average cost of funds increased
by 117 basis points. The decrease in net interest income spread resulted in a
decrease in net interest income of $905,387. This more than offset the
increase in net interest income of $721,856 resulting primarily from the
higher volume of earning assets.
The following table sets forth a summary of the changes in interest earned and
interest paid resulting from changes in volume and changes in rates:
Year Ended December 31,
------------------------------------------------
1996 1995
------------------------------------------------
Increase Increase
(Decrease Due to) (Decrease) Due to
(In Thousands) Change In Change In
------------------------------------------------
Interest income:
Loans $1,094 $74 $1,168 $1,228 $793 $2,021
Taxable securities 105 (18) 87 (92) 50 (42)
Nontaxable securities (41) (32) (73) 106 (92) 14
Federal funds sold 14 (5) 9 17 44 61
------- ------- -------------- --------------
Total interest income $1,172 $19 $1,191 $1,259 $795 $2,054
------- ------- -------------- --------------
Interest expense:
NOW accounts $8 $(8) $0 $(1) $(5) $(6)
Savings accounts (29) (27) (56) (59) 24 (35)
Money market accounts 235 (131) 104 169 458 627
Certificates and other time deposits 195 186 381 30 807 837
Other borrowed funds 252 (168) 84 399 416 815
------- ------- -------------- --------------
Total interest expense $661 $(148) $513 $538 $1,700 $2,238
------- ------- -------------- --------------
Net interest income $511 $167 $678 $721 $(905) $(184)
====== ======= ============== ==============
For purposes of the above table, changes which are not due solely to volume or
rate have been allocated to rate.
<PAGE> 23
MANAGEMENT DISCUSSION AND ANALYSIS
<TABLE>
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:
<CAPTION>
1996 1995 1994
----------------------------- ---------------------------- --------------------------
(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:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable loans $162,563 $14,116 8.68% $150,036 $12,957 8.64% $134,910 $10,937 8.11%
Nontaxable loans 287 17 5.92% 145 8 5.52% 122 6 4.92%
--------- ------- ----- ------- ------- ---- ------- ------- -----
Total Loans $162,850 $14,133 8.68% $150,181 $12,965 8.63% $135,032 $10,943 8.10%
--------- ------- ----- ------- ------- ----- ------- ------- -----
Taxable securities $9,639 $572 5.93% $7,952 $485 6.10% $9,582 $527 5.50%
Nontaxable securities 16,767 1,224 7.30% 17,306 1,297 7.49% 15,985 1,284 8.03%
--------- ------- ----- ------- ------- ----- ------- ------- -----
Total Securities $26,406 $1,796 6.80% $25,258 $1,782 7.06% $25,567 $1,811 7.08%
--------- ------- ----- ------- ------- ----- ------- ------- -----
Federal funds sold $2,647 $144 5.44% $2,401 $135 5.62% $1,940 $74 3.81%
--------- ------- ----- ------- ------- ----- ------- ------- -----
Total Earning Assets $191,903 $16,073 8.38% $177,840 $14,882 8.37% $162,539 $12,828 7.89%
--------- ------- ----- ------- ------- ----- ------- ------- -----
Noninterest-earning assets
Cash and due from banks $4,677 $4,167 $4,119
Allowance for credit losses (2,414) (2,204) (1,972)
Premises and equipment 3,030 3,107 3,244
Other assets 2,171 2,060 1,956
--------- -------- ---------
TOTAL ASSETS $199,367 $184,970 $169,886
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts $8,959 $180 2.01% $8,569 $180 2.10% $8,634 $186 2.15%
Savings accounts 16,911 428 2.53% 17,977 483 2.69% 20,282 518 2.55%
Money market accounts 27,383 1,250 4.56% 22,719 1,146 5.04% 16,511 519 3.14%
Time deposits 78,608 4,613 5.87% 75,149 4,233 5.63% 74,486 3,396 4.56%
Other borrowed funds 28,408 1,681 5.92% 24,538 1,597 6.51% 16,253 782 4.81%
-------- ------ ----- ------- ------- ----- ------- ------- -----
Total Interest-Bearing
Liabilities $160,269 $8,152 5.09% $148,952 $7,639 5.13% $136,166 $5,401 3.96%
--------- ------ ----- ------- ------- ----- ------- ------- -----
<CAPTION>
Noninterest-bearing liabilities and stockholders' equity:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $12,393 $11,230 $10,588
Other liabilities 1,641 1,517 1,286
Stockholders' equity 25,064 23,271 21,846
------- ------- -------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $199,367 $184,970 $169,886
======== ======== ========
Net interest income
and rate spread $7,921 3.29% $7,243 3.24% $7,427 3.93%
======= ===== ======= ===== ======= =====
<CAPTION>
For purposes of the above table, nonaccrual loans are included in the average daily balance figure, but
interest income associated with these loans is recognized under the cash basis method of accounting.
</TABLE>
<PAGE> 24
MANAGEMENTS' DISCUSSION AND ANALYSIS
Noninterest Income
Total noninterest income increased by $20,896 in 1996. The increase is
primarily the result of higher service fees and commissions which more than
offset the loss on investment securities. Commissions on the sales of mutual
funds and insurance products increased by $55,487 primarily as a result of
hiring an additional investment representative in mid 1995. Overdraft fees
increased $49,231 as a result of a fee increase implemented during the first
quarter of 1996. Service charges on deposit accounts decreased by $14,416 as
the Bank offered a fee free checking account in order to attract additional
demand deposit accounts. The Bank took a write-down against 1996 income of
$37,500 on a municipal security that defaulted on its latest interest payment.
The par value of the security is $75,000. Pending the outcome of ongoing
litigation between the municipality and the trustee representing the
bondholders, the Bank may need to take an additional write-down or it may
recover some of the amount previously expensed. The Bank also realized a loss
on securities of $21,148 when it sold all of its investment in a mutual fund
that invested in indexed government securities.
Total noninterest income decreased by $56,917 in 1995. The decrease was
primarily the result of a decline in investment security gains of $21,665,
lower commissions on the sales of mutual funds and insurance products, which
declined by approximately $18,000, and a decline in real estate appraisal
fees, which dropped by approximately $14,000. Service charges, overdraft fees
and other fees were relatively unchanged during 1995 compared to 1994. The
gain during 1994 was from the sale of an equity security.
The following table sets forth certain items of noninterest income:
------------------------------------------------
Percent
Increase (Decrease)
(In thousands) 1996 1995 1994 1996/95 1995/94
------------------------------------------------
Noninterest income:
Service fees and commissions $511 $421 $443 21.4% (5.0)%
Investment security (losses) gains (58) 0 21 0.0 (100.0)
Other 136 47 61 (7.5) (8.7)
------ ------ ------ ------ ------
Total noninterest income $589 $568 $625 3.7% (9.1)%
====== ====== ====== ====== ======
Noninterest Expense
Salaries and employee benefits expense increased $231,881, or 7.8% in 1996.
The increase is attributable to the hiring of additional staff and to regular
salary increases. Occupancy expenses increased $29,718, or 5.6%. This
increase is primarily the result of increased costs associated with investment
in technology by the Bank. The Denmark location installed a local area
network to improve efficiency within the office. A voice response unit was
purchased to provide 24 hour telephone access for customers. Each office
purchased hardware and software to automate the process of preparing loan
documents. FDIC insurance expense decreased by $154,328 as a result of lower
premium rates assessed against banks. Marketing expenses increased $34,675 as
the bank promoted checking accounts and checking related products such as
check cards and telephone banking services in order to increase the deposit
base.
Total noninterest expense increased by $82,174, or 1.7% in 1995. Salaries and
employee benefits expense increased by $206,266, or 7.4%. The increase to
salaries and employee benefits was the result of additional staff and regular
salary increases. FDIC insurance costs decreased by $161,922 as a result of
lower premium rates assessed against banks.
The following table sets forth certain items of noninterest expense:
------------------------------------------------
Percent
Increase (Decrease)
(In thousands) 1996 1995 1994 1996/95 1995/94
------------------------------------------------
Noninterest expense:
Salaries and employee benefits $3,212 $2,980 $2,774 7.8% 7.4%
Occupancy expenses 570 540 548 5.6 (1.5)
FDIC insurance assessment 2 156 318 (98.7) (50.9)
Data processing expenses 272 257 255 5.8 0.8
Marketing expenses 193 158 153 22.2 3.3
Directors and committee fees 168 159 152 5.7 4.6
Other operating expenses 656 683 651 (4.0) 4.9
------ ------ ------ ------ ------
Total noninterest expense $5,073 $4,933 $4,851 2.8% 1.7%
====== ====== ====== ====== =====
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
The following table sets forth certain assets and liabilities of the Company
on a consolidated basis as of the end of each of the three most recent fiscal
years and period-to-period percentage increases (decreases):
Percent Increase
(Decrease)
(In thousands) 1996 1995 1994 1996/95 1995/94
- ------------------------------------------------------------------------------
Federal funds sold $937 $6,900 $2,275 (86.4)% 203.3%
Investment securities 28,620 25,650 25,398 11.6 1.0
Loans 175,214 156,072 143,149 12.3 9.0
Allowance for credit losses (2,507) (2,319) (2,079) 8.1 11.5
Total assets 213,714 196,877 179,254 8.6 9.8
Deposits 150,417 144,818 137,000 3.9 5.7
Other borrowed funds 35,912 26,426 18,485 35.9 43.0
Stockholders' equity 25,913 24,190 22,594 7.1 7.1
Total assets at December 31, 1996, were $213.7 million. This represents an
increase of $16.8 million, or 8.6% over year end 1995. This followed an
increase of $17.6 million, or 9.8% at December 31, 1995, compared to year end
1994. Management attributes the growth during 1996 and 1995 to strong loan
demand. Total loans outstanding at December 31, 1996, were $175.2 million
compared to $156.1 million and $143.1 million at year end 1995 and 1994,
respectively. Total loans grew $19.1 million or 12.3% during 1996. This
followed an increase of $12.9 million or 9.0% during 1995. The loan growth
was funded primarily through deposit growth and by an increase in other
borrowed funds.
At December 31, 1996, the Company had total stockholders' equity of $25.9
million, an increase of $1.7 million, or 7.1% over year end 1995. The book
value per share at December 31, 1996, was $943 compared with $879 and $817 per
share at year end 1995 and 1994 respectively.
Investments
Investment balances in various categories at the end of each of the last three
years were as follows:
December 31,
---------------------------------------------
1996 1995 1994
(In thousands) Amortized Amortized Amortized
Fair Fair Fair
Cost Value Cost Value Cost Value
------- ------- -------------- --------------
Mortgage-backed securities $9,563 $9,500 $7,457 $7,485 $5,684 $5,397
State and municipal securities 17,667 19,241 16,320 18,035 18,120 18,634
Other securities 1,453 1,453 1,868 1,846 1,864 1,790
------- ------- -------------- --------------
TOTAL $28,683 $30,194 $25,645$27,366 $25,668$25,821
======= ======= ============== ==============
Securities available-for-sale and securities held-to-maturity are combined in
the table presented above.
The investment securities portfolio is structured to provide the Company with
adequate liquidity by purchasing readily marketable securities. At December
31, 1996, investment securities totaled $28.6 million, an increase of $3
million, or 11.6% over December 31, 1995. This followed an increase at year
end 1995, of $.3 million, or 1.0% over December 31, 1994. The carrying value
at December 31, 1996, includes $63,243 of net unrealized losses on
available-for-sale securities compared to $5,072 of net unrealized gains at
year end 1995. The net unrealized gains of the held-to-maturity securities
amounted to $1,574,278 as of December 31, 1996, compared to $1,714,560 at year
end 1995.
<PAGE> 26
MANAGEMENTS' DISCUSSION AND ANALYSIS
The following table shows the maturities of investment securities at
December 31, 1996, and the weighted average yields of such securities:
<TABLE>
<CAPTION>
Mortgage-backed State and Municipal
Securities Securities Equity Securities Total Securities
Amortized Amortized Amortized Amortized
(In thousands) Cost Yield Cost Yield Cost Yield Cost Yield
------------------ ----------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less $1,150 5.33% $1,018 9.48% $1,453 5.87% $3,621 6.57%
Due from one to five years 5,482 6.04% 4,334 9.38% - - 9,816 7.52%
Due from six to ten years 700 6.95% 6,092 7.26% - - 6,792 7.23%
Due after ten years 2,231 7.18% 6,223 5.84% - - 8,454 6.19%
------ ----- ------- ----- ------ ----- -------- -----
TOTAL $9,563 6.29% $17,667 7.41% $1,453 5.87% $28,683 6.93%
====== ===== ======= ===== ====== ===== ======== =====
</TABLE>
Yields on tax exempt securities have not been computed on a tax equivalent
basis. Mortgage-backed securities are allocated according to their expected
prepayments rather than their contractual maturities. Stocks and other
securities having no stated maturity have been included in "Due in one year or
less" in the table above. Securities available-for-sale and securities
held-to-maturity are combined in the table presented above.
The following table shows the average balance and tax equivalent yield for
each of the last three years:
Year Ended December 31,
------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
Average Average Average
Balance Yield Balance Yield Balance Yield
-------------- -------------- ------- -------
Taxable securities $9,639 5.93% $7,952 6.10% $9,582 5.50%
Nontaxable securities 16,767 11.06% 17,306 11.36% 15,985 12.17%
-------------- -------------- ------- -------
TOTAL $26,406 9.19% $25,258 9.70% $25,567 9.67%
============== ============== ======= =======
The weighted average tax equivalent yield declined during 1996 as higher
yielding securities that matured or were called were replaced with lower
yielding securities of substantially the same quality.
The Bank reduced its federal funds sold (unsecured loans of immediately
available funds to correspondent banks for one business day) by $5,963,000 at
December 31, 1996, compared to year end 1995, to provide funds for higher
yielding and longer term investments and to fund loan growth.
There were no significant concentrations of investments (greater than 10
percent of stockholders' equity) in any individual security issuer, except for
mortgage-backed securities issued by U. S. Government agencies and
corporations.
Loans
Total loans outstanding at the end of each of the last three years were as
follows:
December 31,
------------------------------------
(In thousands) 1996 1995 1994
--------- --------- ---------
Real estate $114,170 $101,087 $94,901
Commercial 45,900 41,194 36,102
Installment 14,590 13,302 11,650
Other 554 489 496
--------- --------- ---------
TOTAL $175,214 $156,072 $143,149
========= ========= =========
<PAGE> 27
MANAGEMENTS' DISCUSSION AND ANALYSIS
The following sets forth the maturities of various categories of loans at
December 31, 1996:
Due from
Due in One One to Due after
Year or Less Five Years Five Years
(In thousands)
--------- --------- ---------
Real estate $97,854 $16,316 $0
Commercial 40,791 5,041 133
Installment 7,471 6,947 107
--------- --------- ---------
TOTAL $146,116 $28,304 $240
========= ========= =========
All loans maturing over one year are at fixed interest rates.
Of the real estate loans shown in the above table, $65 million or 57% are
residential mortgages, the Company's largest single category of loans.
Approximately $51 million of these are one-year notes which are renewed
annually, subject to updated credit and collateral valuation information but
generally without fees or closing costs to the customer. The remaining
mortgages are fixed rate loans for three and five year terms. Virtually all
of these notes amortize principal indebtedness over a ten to twenty-five year
period, and are repriceable at fixed rates that generally follow prevailing
longer term rates.
At December 31, 1996, $41 million or 23% of the Company's outstanding loans
were deemed "agriculture-related", constituting the highest industrial
concentration in the portfolio. Of these loans, over 90% relate directly to
the dairy farming industry. Virtually all of these notes are written on a
one-year basis, which allows the Company to review credit information and
collateral values annually to ensure continued loan quality.
The Company does not make unsecured loans other than credit card advances,
which aggregated $353,655 at December 31, 1996, or .20% of total loans
outstanding, and personal reserve overdraft protection accounts, which
aggregated $148,598 or .08% of total loans outstanding at December 31, 1996.
Nonaccrual loans totaled $3,313,363, $1,169,136 and $1,985,369 at December 31,
1996, 1995 and 1994 respectively. Approximately $1.5 million of the total
nonaccrual loans at December 31, 1996, are real estate loans. Approximately
half of these are secured by residential properties and half are secured by
commercial properties. Approximately $1.6 million are commercial loans.
Almost $700,000 of the commercial nonaccrual loans are to a single borrower.
Management considers the loans to this borrower, which are secured by personal
property, commercial real estate and residential real estate, well secured.
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. Therefore, the Company is aware of
no potential problem loans that have not been placed on nonaccrual status.
Previously accrued but uncollected interest on loans placed on nonaccrual
status is charged against current earnings, and interest income thereafter is
recorded only when received.
Impaired loans were $2,493,985 at December 31, 1996, compared to $821,561 at
December 31, 1995. Impaired loans include some loans that are also considered
nonaccrual and/or restructured. Impaired loans totaling $766,125, to a
construction company and its owners, account for almost half of the increase
in impaired loans at year end. Management considers the loans well secured.
Partial liquidation of collateral is a strong possibility.
Management does not feel the substantial increases to nonaccrual and impaired
loans at year end are indicative of a trend. However, in response to these
increases, management intends in 1997 to increase the provision for loan
losses by $140,000 in addition to the amount that will be added to reflect
current charges and increases in loan volume.
Restructured loans at December 31, 1996, were $882,871 compared to $776,452
and $1,040,343 in 1995 and 1994 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. All
except one of the restructured loans involved the granting of a reduced
interest rate. A loan, with a remaining balance of $166,679 as of December
31, 1996, was restructured during 1996. The restructuring involved the
lengthening of the amortization period. The decline in restructured loans at
year end 1995 is primarily the result of loans paid by a borrower from the
sale of a business.
<PAGE> 28
MANAGEMENTS' DISCUSSION AND ANALYSIS
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,
-----------------------------------------------
1996 1995 1994
--------------- -----------------------------
(In thousands) % of Total % of Total % of Total
Amount Loans Amount Loans Amount Loans
-------------- -------------- ------- -------
Nonaccrual loans (1) $3,313 1.89% $1,169 0.75% $1,985 1.39%
Restructured loans (2) 299 0.17 501 0.32 549 0.38
-------------- -------------- ------- -------
Total $3,612 2.06% $1,670 1.07% $2,534 1.77%
============== ============== ======= =======
Other real estate owned $0 $0 $20
======= ======= ======
(1) Includes impaired loans of $2,228,438 and $676,437 as of December 31, 1996
and 1995, respectively.
(2) Excludes restructured loans of $584,164, $275,962 and $491,465 as of the
years ended December 31, 1996, 1995 and 1994, respectively, which are
included with nonaccrual loans.
Allowance For Credit Losses
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that the collection of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and commitments to extend
credit. These evaluations take into consideration a number of factors,
including the Bank's and DACC's loss experience in relation to outstanding
loans and the existing level of the allowance for credit losses, changes in
the nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, regular examinations and appraisals of
loan portfolios conducted by state and federal supervisory agencies, and
current and anticipated economic conditions. The allowance for credit losses
represents management's best judgment as to a prudent aggregate allowance in
connection with the total loan portfolio.
At December 31, 1996, the Company's investment in impaired loans totaled
$2,493,985. The investment in impaired loans that does not require a related
allowance for credit losses amounted to $1,535,628 while the remaining
impaired loans totaling $958,357 require a related allowance for credit losses
of $129,217.
In 1996 the Company's provision for credit losses was $210,000 compared to
$200,000 and $493,000 during 1995 and 1994 respectively. Net charge-offs were
$22,373 for the year ended December 31, 1996, compared to net recoveries of
$40,094 and net charge-offs of $117,681 for the years ended 1995 and 1994
respectively. The ratio of allowance for credit losses to total loans at
year end decreased from 1.49% at December 31, 1995, to 1.43% at December 31,
1996, as the total increase to the allowance amounting to $187,627 or 8.1%
lagged loan growth of 12.3%.
The Company's ratio of loans more than 30 days past due (including nonaccrual
loans) to total loans was 2.92% at December 31, 1996, compared to 1.56% and
2.37% at December 31, 1995 and 1994, 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 23% of total loans as of December 31, 1996.
The factors that influence the agricultural economy are complex and difficult
to predict. Agricultural loans more than 30 days past due (including
nonaccrual loans) totaled $221,311 at December 31, 1996. This represents
.13% of total loans outstanding and 4.3% of the Company's total past due
loans. During 1996 there were no charge-offs or recoveries on loans
considered agricultural-related. 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, 1996,
of $2,506,728 (equal to 1.43% of the total loans) is adequate to cover credit
risks in the loan portfolio.
<PAGE> 29
MANAGEMENTS' DISCUSSION AND ANALYSIS
Changes in the allowance for credit losses in each of the three most recent
years were as follows:
Year Ended December 31,
-----------------------------------
1996 1995 1994
---------- ----------- -----------
Balance - beginning of year $2,319,101 $2,079,007 $1,703,688
---------- ----------- -----------
Charge-offs:
Real estate $0 $2,650 $30,469
Installment 3,322 46,676 57,780
Credit cards and related plans 4,877 1,690 300
Commercial loans 48,000 77,997 75,012
--------- --------- -----------
$56,199 $129,013 $163,561
---------- ----------- -----------
Recoveries:
Real estate $5,019 $69,588 $15,314
Installment 24,527 27,298 22,731
Credit cards and related plans 267 767 1,552
Commercial loans 4,013 71,454 6,283
---------- ----------- -----------
$33,826 $169,107 $45,880
---------- ----------- -----------
Net charge-offs (recoveries) $22,373 $(40,094) $117,681
---------- ----------- -----------
Provision charged to operations $210,000 $200,000 $493,000
---------- ----------- -----------
Balance - end of year $2,506,728 $2,319,101 $2,079,007
=========== =========== ===========
Ratio of net charge-offs (recoveries)
during the year to average loans
outstanding during the year 0.01% (0.03)% 0.09%
=========== =========== ===========
Ratio of allowance for credit losses
to total loans at the end of year
loans at the end of year 1.43% 1.49% 1.45%
=========== =========== ===========
Charge-offs on loans have decreased the past two years. Charge-offs on
installment loans decreased by $43,354 in 1996 compared to 1995. This
followed a decrease in installment loan charge-offs from 1994 to 1995
amounting to $11,104. Installment loan charge-offs during 1995 included a
loss of $26,000 to a single borrower. Charge-offs on commercial loans
decreased by $29,997 in 1996 compared to 1995. The 1996 commercial loan
charge-offs include a loss of $35,000 to a single borrower. Charge-offs on
commercial loans increased slightly in 1995 compared to 1994. The 1995
charge-offs include a loss of $34,000 to a single borrower while the 1994
charge-offs include a loss of $67,000 to a single borrower. The Company does
not expect future recovery from these three commercial borrowers.
Recoveries on loans decreased by $135,281 in 1996 compared to 1995.
Recoveries on real estate loans during 1995 totaling $60,000 were from loans
charged-off prior to 1990 on agricultural properties. The 1995 commercial
loan recoveries include $48,000 from a single borrower whose loan was charged
off during 1993.
<PAGE> 30
MANAGEMENTS' DISCUSSION AND ANALYSIS
Deposits
At December 31, 1996, total deposits were $150,416,702, an increase of
$5,598,933 or 3.9% compared to December 31, 1995. This followed an increase
of $7,817,391 or 5.7% at December 31, 1995, compared to year end 1994.
Average total deposits increased by $8,609,320 or 6.35% during 1996. The
average balance of money market accounts increased by $4,662,693 or 20.5%.
Certificates of deposit and other time deposits increased on average
$3,459,623 or 4.6%. The average balance of noninterest-bearing checking
accounts increased by $1,162,801 or 10.4%.
Average total deposits increased by $5,142,930 or 3.9% during 1995 primarily
as a result of an increase in money market accounts. The Company began
offering money market accounts that pay interest at rates comparable to money
market mutual funds during the fourth quarter of 1994 . The average balance
of money market accounts increased by $6,208,627 or 37.6% during 1995. Some of
this increase can be attributed to a shift by depositors from lower yielding
passbook savings accounts. The average balance of passbook savings accounts
decreased by $2,304,640 or 11.4%.
The following sets forth the daily weighted average balance of deposits during
each of the last three years, together with the average rate paid on each
category of interest-bearing deposits:
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
----------------------------------------------
Average Average Average
Average Int Average Int Average Int
Amount Rate Amount Rate Amount Rate
Interest-bearing accounts -------------- -------------- ------- -------
(thousands)
NOW accounts $8,959 2.01% $8,569 2.10% $8,634 2.16%
Savings accounts 16,911 2.53% 17,977 2.69% 20,282 2.56%
Money market accounts 27,383 4.56% 22,719 5.05% 16,511 3.14%
Certificates of deposit 61,612 5.87% 58,697 5.57% 58,797 4.43%
Time deposit open accounts 16,996 5.92% 16,452 5.85% 15,689 5.04%
-------------- -------------- ------- -------
Total $131,861 5.09% $124,414 4.86% $119,913 3.85%
Noninterest-bearing
demand accounts 12,393 N/A 11,230 N/A 10,588 N/A
-------------- -------------- ------- -------
Total deposits $144,254 $135,644 $130,501
========= ======== ========
The following table shows, as of December 31, 1996, 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 $3,309 $383 $2,667 $4,335 $10,694
Other time deposits 0 464 279 2,057 2,800
-------- -------- -------- ----------------
Total $3,309 $847 $2,946 $6,392 $13,494
======== ======== ======== ================
<PAGE> 31
MANAGEMENTS' DISCUSSION AND ANALYSIS
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) 1996 1995 1994
--------- --------- ---------
Short-term borrowings:
Notes payable to banks $25,840 $23,310 $18,267
U.S. Treasury demand notes 279 53 149
Current maturities of long-term borrowings 3,112 0 6
--------- --------- ---------
Total short-term borrowings $29,231 $23,363 $18,422
--------- --------- ---------
Long-term borrowings:
Long-term borrowings $9,793 $3,063 $69
Less: Current maturities 3,112 0 6
--------- --------- ---------
Total long-term borrowings $6,681 $3,063 $63
--------- --------- ---------
Total other borrowed funds $35,912 $26,426 $18,485
======== ======== ========
Average amounts outstanding during the year $28,408 $24,628 $16,254
Average interest rates on amounts
outstanding during the year 5.92% 6.48% 4.81%
Weighted average interest rate at year end 5.89% 6.25% 6.17%
Maximum month-end amounts outstanding $35,912 $26,636 $18,485
Notes payable to banks consists of secured borrowings under existing lines of
credit. At December 31, 1996, the Company had $32 million of established
lines of credit. The increase in other borrowed funds at year end 1996 is
attributable to an increase in notes payable by the Bank amounting to $5.6
million and by DACC amounting to $3.5 million. The increase in other borrowed
funds at year end 1995 was attributable to an increase in notes payable by the
Bank. The Bank borrowed $9 million from the Federal Home Loan Bank of
Chicago. The borrowings consisted of a $6 million short-term note and a $3
million long-term note. The proceeds from the borrowings incurred during the
last two years were used primarily to fund loans.
Note 9 of the Notes To Consolidated Financial Statements contains information
concerning the significant terms of the long-term borrowings.
Stockholders' Equity
Pursuant to regulations promulgated by the Federal Reserve Board, bank holding
companies are required to maintain minimum levels of core capital as a
percentage of total assets (leverage ratio) and total capital as a percentage
of risk-based assets. Under these regulations, the most highly rated banks
must meet a minimum leverage ratio of at least 3%, while lower rated banks
must maintain a ratio of at least 4% to 5%. The regulations assign risk
weightings to assets and off-balance sheet items and require a minimum
risk-based capital ratio of 8%. At least half of the required 8% must consist
of core capital. Core capital consists principally of shareholders' equity
less intangibles, while qualifying total capital consists of core capital,
certain debt instruments and a portion of the allowance for credit losses.
The table set forth below describes the ratios of the Company as of December
31, 1996, and the applicable regulatory requirements. The Company's core and
risk-based capital ratios, as shown on the table, are well above the minimum
levels.
Regulatory
Ratio Requirements
---------------------
Equity as a % of assets 12.13% N/A
Core capital as a % of assets 11.98% 4.00%
Core capital as a % of risk-based assets 17.30% 4.00%
Total capital as a % of risk-based assets 18.56% 8.00%
<PAGE> 32
MANAGEMENTS' DISCUSSION AND ANALYSIS
Subsequent to year end, the Bank agreed in principle to purchase the assets
and assume the liabilities of a branch bank. Closing of the transaction is
subject to regulatory approval and is expected to occur during the second
quarter. If the transaction had occurred prior to December 31, 1996, core
capital as a percent of total assets would decline to approximately 9.7%
assuming year end combined figures.
Stockholders' equity at December 31, 1996, increased 7.1% to $25,913,137 or
$943 per share, compared with $24,190,082 or $879 per share one year ago.
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 Secretary 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
Secretary.
Cash dividends declared in 1996 were $21.50 per share compared with $19.50
and $17.50, in 1995 and 1994, respectively. The dividend payout ratio
(dividends declared as a percentage of net income) was 24.84%, 25.76% and
22.20% in 1996, 1995 and 1994, respectively.
The adequacy of the Company's capital is reviewed periodically to
ensure that sufficient capital is available for current and future needs
and is in compliance with regulatory guidelines. Management is committed to
maintaining capital at a level that will allow the Company to take advantage
of future opportunities when they arise. The Company's current level of
capitalization is strong. This will allow the Company to pursue profitable
growth opportunities.
Liquidity
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet the Company's need for cash. Loan repayments as well as net cash
provided by operating activities amounting to $2.3 million, a reduction of
$6.0 million of federal funds sold, an increase in deposits totaling $5.6
million, and a net increase in other borrowed funds of $9.5 million, as shown
in the Consolidated Statements of Cash Flows, all provided sources of funds
during 1996. The net increase in loans of $19.2 million and the net increase
in available-for sale and held-to-maturity investment securities of $2.6
million were the major uses of cash during 1996.
During 1995 the major sources of funds were loan repayments, net cash provided
by operating activities of $2.1 million, an increase in deposits totaling
$7.8 million and a net increase in other borrowed funds amounting to $7.9
million. The major uses of funds during 1995 were the net increase in loans
of $12.9 million and the increase in federal funds sold of $4.6 million.
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 $10 million by means of the purchase of short-term
federal funds from its principal correspondent banks. One ratio used to
measure the liquidity of banking institutions is the liquidity ratio (net
liquid assets to deposits and short-term liabilities). The Bank's liquidity
ratio was 23.4% as of December 31, 1996, compared to 26.4% as of December 31,
1995. Short-term notes payable totaling $8 million and $6 million have been
excluded from the liquidity ratio as of December 31, 1996 and 1995,
respectively. Management intends to renew those notes under an existing line
of credit and therefore no cash will be required to pay them off. Management
strives to maintain a liquidity ratio between twenty and thirty percent.
Ratios that are too high may indicate the opportunity for asset reallocation
to achieve better yields. Ratios that are too low may indicate the inability
to satisfy customer credit needs or meet deposit withdrawal requests.
Another 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 97.5%,
90.8% and 85.9% at December 31, 1996, 1995 and 1994, respectively. A high net
loan to deposit ratio creates a greater challenge in managing adverse
fluctuations in deposit balances and consequently this can limit loan growth.
<PAGE> 33
MANAGEMENTS' DISCUSSION AND ANALYSIS
The liquidity ratio and the net loan to deposit ratio reflect 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. To
reduce the potential impact of the declining liquidity position, as measured
by the loan-to-deposit ratio discussed above, the Bank became a member of the
Federal Home Loan Bank (FHLB) of Chicago during 1994. Membership enables the
Bank to borrow on a secured basis approximately $15.7 million. As of December
31, 1996, the amount owed to the Federal Home Loan Bank was $14.6 million.
The amount of eligible borrowing from the FHLB of Chicago is determined by the
amount of residential loans held by the Bank and by the amount of common stock
of FHLB of Chicago purchased by the Bank. An additional investment in stock
of $1.2 million would allow the Bank to borrow up to $40 million from FHLB of
Chicago. The Bank has also sold loans to DACC, the parent company and to the
secondary mortgage market to improve its liquidity position. Subsequent to
year end, the Bank agreed in principle to purchase the assets and assume the
liabilities of a branch bank. Pending regulatory approval, the transaction
would provide the Bank approximately $13.5 million in cash in consideration of
the assumption of deposit liabilities.
Other sources of liquidity for the Company consist of established lines of
credit by DACC and by the parent company. As of December 31, 1996, DACC has
unused lines of credit of $7.1 million and the parent company has an unused
line of credit of $4 million. See Note 11 -- 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, 1996, is adequate under
current economic conditions.
Interest Rate Sensitivity
The following table shows the repricing period for interest earning assets and
interest-bearing liabilities and the related gap based on contractual
maturities, at December 31, 1996:
(In thousands) 0 to 6 7 to 12 1 to 2 Over 2
Months Months Years Years
--------- --------- --------- ---------
Loans $76,495 $70,142 $10,053 $18,524
Investment securities 1,484 1,123 3,611 22,401
Federal funds sold 937 0 0 0
--------- --------- --------- ---------
Total interest-earning assets $78,916 $71,265 $13,664 $40,925
--------- --------- --------- ---------
Interest-bearing deposits $78,917 $15,553 $36,700 $3,169
Other borrowed funds 18,152 11,079 3,004 3,677
--------- --------- --------- ---------
Total interest-bearing
liabilities $97,069 $26,632 $39,704 $6,846
--------- --------- --------- ---------
Rate sensitivity gap $(18,153) $44,633 $(26,040) $34,079
Cumulative rate
sensitivity gap $(18,153) $26,480 $440 $34,519
Cumulative ratio of rate
sensitive assets to
rate sensitive liabilities 81.30% 121.41% 100.27% 120.28%
Ratio of cumulative gap
to average earning assets (9.11)% 13.28% 0.22% 17.31%
Mortgage backed securities are allocated according to their expected
prepayments rather than their contractual maturities.
Interest rate risk is the exposure to a bank's earnings arising from changes
in future interest rates. Interest rate sensitivity is measured using gap
analysis. Gap analysis is used to identify mismatches in the repricing of
assets and liabilities within specified periods of time or interest
sensitivity gaps. The rate sensitivity or repricing gap is equal to total
interest-earning assets less total interest-bearing liabilities available for
repricing during a given time interval. A positive gap exists when total
interest-earning repricing assets exceed total interest-bearing repricing
liabilities and a negative gap exists when total interest-bearing repricing
liabilities exceed total interest-earning repricing assets. Generally a
positive repricing gap will result in increased net interest income in a
rising rate environment and decreased net interest income in a falling rate
environment. A negative gap tends to produce increased net interest income in
a falling rate environment and decreased net interest income in a rising rate
environment.
<PAGE> 34
MANAGEMENTS' DISCUSSION AND ANALYSIS
The preceding table indicates the Company has a positive gap of $26 million or
13.3% of average earning assets for all assets and liabilities repricing
within one year. The cumulative ratio of rate sensitive assets to rate
sensitive liabilities within one year is 121.4%. For purposes of this
analysis, NOW, savings and money market accounts are considered repriceable
within six months.
Accounting Developments
In June 1996, FASB issued FAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" effective January 1,
1997. This statement supersedes FAS No. 122, "Accounting for Mortgage
Servicing Rights" which was effective for fiscal years beginning after
December 15, 1995. FAS No. 125 applies an accounting treatment similar to
that outlined in FAS No. 122 for mortgage servicing rights and extends it to
servicing assets on all financial assets. The adoption of FAS No. 125 will
not have a material adverse effect on the Company's financial statement in the
year of adoption.
<PAGE> 35
MANAGEMENTS' DISCUSSION AND ANALYSIS
MARKET INFORMATION
The following table shows market price information and cash dividends paid for
the Company's common stock:
Book Value Market
End of Quarter Value (1) Dividends
1995 (Unaudited) High Low Paid (2)
- -----------------------------------------------------------------------------
1st Quarter $825 $863 $863 $9.00
2nd Quarter 843 963 955 -
3rd Quarter 853 975 975 9.50
4th Quarter 879 1,000 991 -
1996
- -----------------------------------------------------------------------------
1st Quarter $886 $1,011 $1,011 $10.00
2nd Quarter 905 * * -
3rd Quarter 916 1,132 1,132 10.50
4th Quarter 943 1,170 1,170 -
1997
- -----------------------------------------------------------------------------
Through March 1 N/A $1,190 $1,179 $11.00
(1) In recent years the Common Stock has traded sparsely. To the knowledge of
management the price of each share has ranged in value as shown in the
table. There is no established market for the Common Stock of the
Company and it is unlikely that such a market for the shares will develop
in the foreseeable future. All of the transactions at the prices reported
in the table are either purchases by the Company pursuant to a Stock
Repurchase Policy or sales by the Company made at its direction to its
employee pension plan. 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 month preceding
the purchase. The applicable percentage was 105% of book value until April
25, 1995, 115% of book value until March 26, 1996, and 125% of book value
thereafter. The Board of Directors of the Company may consider changes in
the applicable percentage at future meetings.
(2) The ability of the Company to pay dividends is subject to certain
limitations. See "Stockholders' Equity" in Management's Discussion and
Analysis.
* Indicates no reported sale of stock occurred in that quarter.
As of March 1, 1997, the Company had 789 shareholders of record.
SELECTED 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
1995 March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------
Interest income $3,395 $3,669 $3,839 $3,979
Interest expense 1,697 1,896 2,001 2,045
Provision for credit losses 52 49 50 49
Net income 436 425 539 683
Net income per share 15.84 15.45 19.58 24.78
1996
- -----------------------------------------------------------------------------
Interest income $3,903 $3,936 $4,051 $4,183
Interest expense 2,029 2,005 2,049 2,069
Provision for credit losses 51 51 51 57
Net income 543 556 601 680
Net income per share 19.73 20.20 21.87 24.72
<PAGE> 36
