UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21554
DENMARK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1472124
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
103 East Main Street, Denmark, Wisconsin 54208-0130
(Address of principal executive offices)
(920) 863-2161
(Registrant's telephone number, including area code)
___________________________________________________________________________
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1)has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class January 25, 1999
Common Stock 54,777
(no par value)
DENMARK BANCSHARES, INC.
TABLE OF CONTENTS
Quarterly Report On Form 10-Q/A
For The Quarter Ended September 30, 1998
Page No.
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
Signatures 7
DENMARK BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1998, was $788,373, or
$14.37 per share, an increase of $242,123 or 44%, compared to $546,250, or
$9.95 per share, for the corresponding period in 1997. This increase was
primarily the result of an increase in net interest income and higher
noninterest income which more than offset increases in noninterest expenses.
Third quarter 1997 results include substantially all of the costs incurred to
acquire the Reedsville Branch.
Net interest income for the quarter ended September 30, 1998, was
$2,601,815 an increase of $374,579 over the corresponding period in the prior
year. 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:
Increase (Decrease)
Due to Change In
Average Average Total
(In thousands) Balance Rate Change
Interest income 509 98 607
Interest expense 242 (10) 232
--- --- ---
Net interest income 267 108 375
This increase was primarily attributable to higher volume as average
earning assets during the third quarter of 1998 increased by $25.7 million and
average interest-bearing liabilities increased by $19.7 million compared to the
third quarter of 1997. An increase in the average interest rate spread also
contributed to the increase in net interest income. The Company's average
interest rate spread was 3.33% during the third quarter of 1998 compared to
3.17% during the quarter ended September 30, 1997. The yield on earning assets
increased by eleven basis points while the cost of funds decreased by five
basis points.
In the third quarter of 1998 the Company's provision for credit losses was
$82,500 compared to $87,000 for the third quarter of 1997. Net charge-offs
were $158,535 in the third quarter of 1998 compared to net charge-offs of
$9,075 during the third quarter of 1997. During the quarter ended September
30, 1998, the Bank charged-off loans totaling $157,127 to settle a pending
lawsuit. The loans were forgiven as part of a negotiated settlement reached
during a mediation conference.
Noninterest income for the three months ended September 30, 1998, was
$256,027, an increase of $56,158 over the corresponding period in 1997. This
increase is primarily the result of an increase of $53,001 in commissions from
the sales of annuities, mutual funds and property insurance and an increase of
$4,095 in appraisal fees.
Noninterest expense increased by $52,723 or 3% during the three months
ended September 30, 1998, over the corresponding period in 1997. Salaries and
benefits expense increased $98,374 or 10% over the corresponding period in
1997. This increase is primarily attributed to the hiring of additional staff
members and regular salary increases. Legal and professional fees decreased
$52,263. Third quarter 1997 legal and professional fees included the costs
incurred to acquire the Reedsville Branch. Amortization of intangibles expense
increased by $15,657 as a result of the write-down of intangible assets related
to the acquisition of the branch bank during the third quarter of 1997.
Return on average assets in the third quarter of 1998 was 1.20%, compared
to .93% for the corresponding period in 1997. Return on average equity in the
third quarter of 1998 was 10.7%, compared to 8.0% for the corresponding period
in the prior year.
Page 3
FINANCIAL CONDITION
Total assets increased by $22,487,868 between December 31, 1997, and
September 30, 1998. Federal funds sold increased by $5,670,000 and investment
securities increased by $5,068,555 during the nine months ended September 30,
1998. Loan demand continues to be strong as total loans increased by
$11,736,923 during the first nine months of 1998. In addition, the Bank sold
$10.2 million of residential real estate loans to the secondary mortgage market
during the first nine months.
The allowance for credit losses increased by $97,567 during the nine
months ended September 30, 1998. The allowance equals 1.38% of total loans at
September 30, 1998, compared to 1.42% at December 31, 1997. Nonaccrual loans
totaled $3,591,946 at September 30, 1998, a decrease of $1,075,761 over
December 31, 1997. The Company's ratio of loans more than 30 days past due
(including nonaccrual loans) to total loans was 2.4% at September 30, 1998,
compared to 3.3% at December 31, 1997.
Demand deposits increased $7,908,981 or 40.6% during the first nine months
of 1998. The increase in demand deposits is attributable to a new business
depositor with a balance of $8.5 million at September 30, 1998. Excluding the
funds of this depositor, demand deposits declined slightly due to a normal
seasonal fluctuation. Interest bearing deposits increased by $7,108,310 or
4.2% between December 31, 1997, and September 30, 1998.
Other borrowed funds increased by $5,619,160 or 17.2% during the first
nine months of 1998. The Bank borrowed long-term funds to accommodate the loan
growth.
Stockholders' equity increased by $2,000,138 to $29,739,212 as of
September 30, 1998. The Company and the Bank continue to maintain capital
levels well above the regulatory minimum levels. As of September 30, 1998, the
Company's leverage ratio was 10.6%, the risk-based core capital ratio was 14.5%
and the risk-based total capital ratio was 15.8%.
Historically, the Company's Board of Directors has held a meeting during
the third quarter of each calendar year and declared a semiannual dividend.
The Board of Directors did not meet during the third quarter of 1998. On
October 27, 1998, the Company's Board of Directors declared a semiannual $7.25
per share dividend payable on January 4, 1999, to all shareholders of record on
December 8, 1998.
LIQUIDITY
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet the Company's needs for cash. Cash and cash equivalents decreased
by $48,207 during the first nine months of 1998. The federal funds sold
totaling $12.8 million and the available-for-sale investment portfolio
amounting to $16.6 million as of September 30, 1998, are readily convertible to
cash if needed.
In addition to on-balance sheet sources of funds the Company also has
off-balance sheet sources available to meet liquidity needs. The Company has
unused lines of credit of $17.3 million as of September 30, 1998. The Company
has commitments to extend credit of $23.6 million as of September 30, 1998.
Management believes the Company's liquidity position as of September 30, 1998,
is adequate under current economic conditions.
Page 4
YEAR 2000
The Company is reliant on both information technology ("IT") and non-IT
systems to conduct its daily operations. IT systems include computer
hardware, software and peripheral devices. Non-IT systems include telephone
systems, heating systems, security devices, elevators, calculators, fax
machines and copiers. A year 2000 problem exists because many existing
computer programs use only two digits to identify a year in a date field.
These programs were developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could
fail or create erroneous results. A year 2000 problem also exists in
equipment with imbedded technology that is time sensitive and may fail to
recognize the year 2000 correctly.
The Company has adopted a Year 2000 Policy to address concerns about whether
its systems will properly recognize date sensitive information when the year
changes to 2000.
STATE OF READINESS
The Company's year 2000 preparedness is proceeding on schedule. The Company's
directors, senior management and staff are aware of these year 2000 issues
and have appointed a committee and project coordinator to direct the project
and to bring all of the computer related systems into year 2000 compliance
during 1998 and 1999. In accordance with the guidelines of the FDIC,
the committee is addressing the issue using the following phases:
1. Awareness
2. Assessment
3. Renovation
4. Validation
5. Implementation
The Company's core processing system is provided by a national third party
service bureau. The Company has followed the service bureau's year 2000
efforts closely. In October of 1998 the core application systems were
converted and are now running on year 2000 compliant software. "19xx" testing
and system verification have been completed. Additional "20xx" testing and
verification are currently in process with completion expected in March 1999.
The Company is in the midst of installing a year 2000 compliant item
processing system to replace the old system acquired in 1989 that is non-
compliant. The system is scheduled for installation and testing in February
of 1999 and fully operational in March 1999.
Additionally, the Company is upgrading its local area network ("LAN")
infrastructure. The LAN conversion is scheduled for completion in April 1999.
Other software programs including spreadsheets, word processing and industry
specific specialty software packages have been tested. Non-compliant packages
have been upgraded in accordance with the vendor's specifications.
The Company has completed its assessment of non-IT systems. The Company has
tested those systems that allow year 2000 testing. The Company has received
assurances from non-IT system vendors regarding year 2000 certification of
their systems.
The Company also has a risk that major loan customers may incur year 2000
problems that might inhibit their ability to repay their loans. Major loan
customers identified as having potential year 2000 risks have been surveyed
by the Company. Identified risks will be incorporated into the Company's
assessment of the adequacy of the allowance for loan losses.
5
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
Costs associated with year 2000 compliance are not expected to have a
significant impact on the Company's results of operations. The service
bureau renovation costs are included in the monthly data processing charges.
These charges are specified by contract, and as such, will not be impacted by
expenditures made by the service provider to renovate its software. The
estimated cost of the item processing system is $85,000. This cost will be
capitalized and depreciated over five years. The LAN software upgrades are
anticipated to cost $10,000.
RISKS OF COMPANY'S YEAR 2000 ISSUES
The Company is exposed to future uncertainty, potential future reduction in
earnings, and future losses, including litigation due to business interruption
or errors if its computer systems are not modified to ensure that dates after
December 1999 are not misrepresented by those systems. The Company is exposed
to loan default risk by customers who may not be year 2000 compliant, and thus
cannot generate the cash flow to service their obligations. The Company faces
the risk of loss of deposits and consequent liquidity problems should bank
customers lose confidence in the institution in particular, or the banking
system in general, and choose to withdraw their funds. Customers who
experience cash flow problems due to their own lack of year 2000 preparedness
could fund their cash shortfall by withdrawing their deposits from the
Company, thereby causing liquidity problems for the Company.
In addition to the steps discussed above concerning the actions of the Company
to mitigate the risks of year 2000, the Company is making its preparedness
well known to its customers so as not to cause a loss of consumer confidence
in the Company. The Company also intends to increase its cash reserves during
the final months of 1999 and take any other steps deemed necessary to meet
liquidity needs.
CONTINGENCY PLANS
The Board of Directors of the Company has adopted a Year 2000 Contingency Plan
to be utilized in the event of systems or communications failures come
January 4, 2000. A major system failure would reduce the ability to process
customer transactions in the normal manner. The Company is prepared to
operate for a period of days without external communications to the service
bureau. The Company can produce paper account balance records on premises,
and as a contingency will produce such a paper back up immediately prior to
January 1, 2000. Since virtually all transactions processed by the Company
originate with a paper record that is read by a machine, preserving those
paper records affords substantial protection from a temporary machine failure
related to Year 2000. Additionally, all reports generated by the service
bureau, including trial balances and transaction journals are archived on the
Company's premises utilizing an optical storage system. These steps should
insulate the company from catastrophic effects in the event of a temporary
communication failure resulting in loss of service bureau contact.
6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENMARK BANCSHARES, INC.
Date: January 26, 1999 /s/ Darrell R. Lemmens
Darrell R. Lemmens,
Principal Executive Officer,
Chairman of the Board,
and President
Date: January 26, 1999 /s/ Dennis J. Heim
Dennis J. Heim,
Vice President and Treasurer,
Principal Financial and
Accounting Officer
Page 7
