Denmark Bancshares, Inc.
1998 Annual Report
Table of Contents
Graphic Presentation of Selected Financial Data ...........2
Selected Financial Data ...................................3
President's Letter ........................................4
Independent Auditors' Report ..............................4
Consolidated Financial Statements .........................5
Notes to Consolidated Financial Statements ................9
Management's Discussion and Analysis ......................23
Quarterly Financial Information ...........................38
Denmark Bancshares, Inc. ("Company"), headquartered in Denmark,
Wisconsin, is a diversified one-bank holding company. Denmark State
Bank, the Company's subsidiary bank, offers five full service banking
offices located in the Villages of Denmark, Maribel, Reedsville, and
Whitelaw, and the Town of Bellevue, serving primarily Brown, Kewaunee
and Manitowoc Counties. The Company also extends farm credit through
its subsidiary Denmark Agricultural Credit Corporation and sells a
full line of insurance products through its subsidiary McDonald-Zeamer
Insurance Agency, Inc.
<PAGE> 1
Graphic Presentation of Selected Financial Data
(Tabular representation of graphs for electronic filing)
1994 1995 1996 1997 1998
Net Income $2,182 $2,083 $2,380 $2,551 $3,138
Net Income Per Share 39.49 37.83 43.26 46.44 57.20
Dividends Per Share 8.75 9.75 10.75 11.25 13.50
Book Value Per Share 408.28 439.65 471.39 505.50 550.13
Average Total Loans 135,032 150,181 162,850 185,281 206,422
Average Total Assets 169,886 184,970 199,367 228,174 261,100
Average Total Deposits 130,501 135,644 144,254 162,838 192,780
Average Stockholders' Equity 21,846 23,271 25,064 26,935 29,100
Dollars in thousands except per share data.
<PAGE> 2
SELECTED FINANCIAL DATA
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
INCOME STATEMENT DATA
Interest income $21,050 $18,463 $16,073 $14,882 $12,828
Interest expense 10,772 9,543 8,152 7,639 5,401
------- ------- ------- ------- -------
Net interest income $10,278 $8,920 $7,921 $7,243 $7,427
Less: Provision for
possible loan losses 390 351 210 200 493
------- ------- ------- ------- -------
Net income after
provision for
possible credit losses $9,888 $8,569 $7,711 $7,043 $6,934
------- ------- ------- ------- -------
Plus:Noninterest income $955 $819 $589 $568 $625
Less:Noninterest expense 6,421 5,917 5,073 4,933 4,851
------- ------- ------- ------- -------
Net noninterest expense $(5,466) $(5,098) $(4,484) $(4,365) $(4,226)
------- ------- ------- ------- -------
Income before income taxes $4,422 $3,471 $3,227 $2,678 $2,708
Income tax expense 1,284 920 847 595 526
------- ------- ------- ------- -------
Net income $3,138 $2,551 $2,380 $2,083 $2,182
======= ======= ======= ======= =======
PER SHARE DATA (1)
Net income $57.20 $46.44 $43.26 $37.83 $39.49
Cash dividends declared 13.50 11.75 10.75 9.75 8.75
Book value (year end) 550.12 505.50 471.39 439.65 408.28
BALANCE SHEET DATA
Average balances:
Total Loans $206,422 $185,281 $162,850 $150,181 $135,032
Allowance for possible
credit losses 2,951 2,669 2,414 2,204 1,972
Investment securities 33,428 30,345 26,328 25,128 25,567
Assets 261,136 228,174 199,367 184,970 169,886
Deposits 192,780 162,838 144,254 135,644 130,501
Other borrowed funds (2) 37,220 36,557 28,408 24,538 16,254
Stockholders' equity 29,052 26,935 25,064 23,271 21,846
FINANCIAL RATIOS
Return on average equity 10.80% 9.47% 9.49% 8.95% 9.99%
Return on average assets 1.20% 1.12% 1.19% 1.13% 1.28%
Net interest spread 3.33% 3.28% 3.29% 3.24% 3.93%
Average equity to
average assets 11.13% 11.80% 12.57% 12.58% 12.86%
Total capital to assets(3) 11.64% 12.01% 13.14% 13.31% 13.61%
Allowance for credit losses
to loans (year end) 1.42% 1.42% 1.43% 1.49% 1.45%
Allowance for credit losses to
nonaccrual loans(year end) 77.69% 60.54% 75.66% 198.36% 104.72%
Dollars in thousands except per share data and financial ratios.
(1) Adjusted to reflect 2-for-1 stock split effective July 1, 1997.
(2) Includes federal funds purchased, securities sold under repurchase
agreements and other short and long-term borrowings.
(3) 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
PRESIDENT'S LETTER
TO OUR SHAREHOLDERS AND FRIENDS:
We are pleased to present the 1998 Annual Report of Denmark Bancshares, Inc.
Your Bank enjoyed another successful year and our financial strength
establishes an excellent base for future growth.
Our semi-annual dividend of $7.25 per share to shareholders of record December
8, 1998, payable January 4, 1999, represented a 16% increase over the last
semi-annual dividend and a 20 3/4% increase over the dividend paid in January
1998.
On September 3, 1998, Albert W. Konop, honorary director of Denmark State
Bank, passed away. His knowledge of the financial industry and dedication
will be missed.
With numerous bank acquisitions and interstate banking, we are proud to serve
as an independent bank holding company with local ownership. Denmark
Bancshares, Inc. remains committed to being a quality, high performing,
independent financial services company creating value for our shareholders and
customers.
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,
1998, 1997 and 1996, 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, 1998, 1997 and 1996, and
the consolidated results of their operations and their consolidated cash flows
for the years then ended in conformity with generally accepted accounting
principles.
WILLIAMS YOUNG, LLC
(signature of Williams Young)
Madison, Wisconsin
February 11, 1999
<PAGE> 4
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of December 31,
ASSETS
Assets 1998 1997 1996
-------------- ------------- -------------
Cash and due from banks $7,794,995 $7,019,405 $6,063,954
Federal funds sold 8,417,000 7,112,000 937,000
Investment Securities
Available-for-sale, at fair value 25,074,309 14,686,550 10,952,446
Held-to-maturity, at cost 19,834,609 17,139,353 17,667,237
------------- ------------- -------------
Total Investment Securities $44,908,918 $31,825,903 $28,619,683
Loans less allowance for credit
losses of $3,058,618, $2,825,921
and $2,506,728, respectively 211,927,529 196,733,051 172,707,710
Premises and equipment, net 3,343,253 3,277,168 2,960,537
Accrued interest receivable 1,466,749 1,388,253 1,153,231
Other assets 4,326,031 4,318,200 1,272,161
------------- ------------- -------------
TOTAL ASSETS $282,184,475 $251,673,980 $213,714,276
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $27,168,398 $19,494,350 $16,077,828
Interest-bearing 184,881,335 169,634,759 134,338,874
------------- ------------- -------------
Total Deposits $212,049,733 $189,129,109 $150,416,702
Short-term borrowings 22,400,273 23,091,248 26,118,837
Accrued interest payable 1,248,966 1,419,470 929,674
Other liabilities 668,138 614,076 542,426
Long-term debt 15,676,698 9,681,003 9,793,500
------------- ------------- -------------
Total Liabilities $252,043,808 $223,934,906 $187,801,139
------------- ------------- -------------
Stockholders' Equity
Common stock, no par value, authorized
320,000 shares; issued 54,789, 54,875
and 54,972 shares, excludes 551 shares
in treasury in 1998, 465 shares in
1997 and 368 shares in 1996 $10,019,609 $10,100,237 $10,168,433
Paid in capital 37,384 37,384 37,384
Retained earnings 20,050,609 17,653,233 15,747,969
Accumulated other comprehensive income
Unrealized gains
(losses) on securities 33,065 (51,780) (40,649)
------------- ------------- -------------
Total Stockholders' Equity 30,140,667 27,739,074 25,913,137
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $282,184,475 $251,673,980 $213,714,276
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
Interest Income
Loans including fees $18,329,787 $16,208,761 $14,132,315
Investment securities:
Taxable 907,190 795,005 572,214
Exempt from federal tax 1,304,176 1,274,558 1,224,226
Interest on federal funds sold 509,430 184,817 143,674
------------ ------------ ------------
$21,050,583 $18,463,141 $16,072,429
------------ ------------ ------------
Interest Expense
Deposits $8,632,510 $7,359,474 $6,471,187
Short-term borrowings 1,313,558 1,663,379 1,346,697
Long-term debt 826,415 519,907 333,823
------------ ------------ ------------
$10,772,483 $9,542,760 $8,151,707
------------ ------------ ------------
Net interest income $10,278,100 $8,920,381 $7,920,722
Provision for Credit Losses 390,000 351,000 210,000
------------ ------------ ------------
Other Income
Service fees and commissions $785,480 $668,124 $511,794
Investment security (losses) 0 0 (58,389)
Other 169,030 150,738 135,830
------------ ------------ ------------
$954,510 $818,862 $589,235
------------ ------------ ------------
Other Expense
Salaries ane employee benefits $4,076,073 $3,663,764 $3,211,702
Occupancy expenses 622,106 588,154 569,641
Data processing expenses 325,464 319,806 272,410
Other operating expenses 1,397,318 1,345,968 1,019,882
------------ ------------ ------------
$6,420,961 $5,917,692 $5,073,635
------------ ------------ ------------
Income before income taxes $4,421,649 $3,470,551 $3,226,322
Income tax expense 1,283,988 919,982 846,757
------------ ------------ ------------
NET INCOME $3,137,661 $2,550,569 $2,379,565
Other Comprehensive Income, Before Tax
Unrealized gains (losses) on
securities arising during period $129,356 $(14,244) $(68,315)
Income tax expense (benefit)
related to items of
other comprehensive income 44,511 (3,113) (31,105)
------------ ------------ ------------
Other Comprehensive Income, net
of tax $84,845 $(11,131) $(37,210)
------------ ------------ ------------
COMPREHENSIVE INCOME $3,222,506 $2,539,438 $2,342,355
============ ============ ============
EARNINGS PER COMMON SHARE $57.20 $46.44 $43.26
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------
Accumulated
Other
Paid in Retained Comprehensive
Shares Amount Capital Earnings Income Total
------- ------------ -------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 55,022 $10,196,720 $37,203 $13,959,598 $(3,439) $24,190,082
Net income
2,379,565 2,379,565
Other comprehensive income
net of tax
Change in unrealized (loss) (37,210) (37,210)
on securities available-for-sale,
net of applicable deferred income
benefit of $31,105
Cash dividends, $10.75 per share (591,194) (591,194)
Treasury stock acquisitions (70) (38,216) (38,216)
Treasury stock sales 20 9,929 181 10,110
------- ------------ -------- ----------- -------------- -----------
Balance December 31, 1996 54,972 $10,168,433 $37,384 $15,747,969 $(40,649) $25,913,137
Net income 2,550,569 2,550,569
Other comprehensive income,
net of tax
Change in unrealized (loss) on (11,131) (11,131)
securities available-for-sale,
net of applicable deferred income
tax benefit of $3,113
Cash dividends, $11.75 per share (645,305) (645,305)
Treasury stock acquisitions (97) (68,196) (68,196)
------- ------------ -------- ----------- -------------- -----------
Balance December 31, 1997 54,875 $10,100,237 $37,384 $17,653,233 $(51,780) $27,739,074
Net income 3,137,661 3,137,661
Other comprehensive income,
net of tax
Change in unrealized gain 84,845 84,845
on securities
available-for-sale, net of
applicable deferred income
tax expense of $44,511
Cash dividends, $13.50 per share (740,285) (740,285)
Treasury stock acquisitions (86) (80,628) (80,628)
------- ------------ -------- ----------- -------------- -----------
BALANCE, DECEMBER 31, 1998 54,789 $10,019,609 $37,384 $20,050,609 $33,065 $30,140,667
======= ============ ======== =========== ============== ===========
</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,
1998 1997 1996
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $3,137,661 $2,550,569 $2,379,565
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 325,717 321,966 292,417
Provision for credit losses 390,000 351,000 210,000
Amortization of intangibles 214,049 102,989 11,056
Loss on sale of other real estate 0 0 7,909
Loss on sales of investments 0 0 58,389
Amortization of bond premium 42,634 57,711 37,741
Accretion of bond discount (594,330) (629,379) (561,948)
Increase in interest receivable (78,496) (235,022) (32,214)
(Decrease) increase in
interest payable (170,504) 489,796 31,512
Other, net (net of acquisition
of branch) (80,489) (425,933) (112,036)
---------- ----------- -----------
Net Cash Provided by Operating
Activities $3,186,242 $2,583,697 $2,322,391
----------- ----------- -----------
Cash Flows from Investing Activities:
Maturities of held-to-maturity
securities $1,131,480 $1,222,807 $493,445
Maturities and sales of
available-for-sale securities 4,369,888 2,511,201 3,649,278
Purchase of held-to-maturity
securities (3,281,981) (180,000) (1,406,724)
Purchase of available-for-sale
securities (14,621,350) (6,202,804) (5,307,779)
Net cash received from acquisition
of branch bank 0 13,786,977 0
Purchase of an insurance agency 0 0 (220,000)
Federal funds sold, net (1,305,000) (6,175,000) 5,963,000
Sale of other real estate 0 0 77,091
Net increase in loans made to customers
(net of acquisition of branch) (15,784,478) (22,066,629) (19,249,777)
Capital expenditures (net of
acquisition of branch) (391,802) (331,347) (214,680)
----------- ------------ -----------
Net Cash (Used) by Investing
Activities $(29,883,243) $(17,434,795) $(16,216,146)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase in deposits (net of
acquisition of branch) $22,920,624 $19,633,264 $5,598,933
Purchase of treasury stock (80,628) (68,196) (38,216)
Sale of treasury stock 0 0 10,110
Dividends paid (672,125) (618,433) (563,953)
Debt proceeds 13,958,025 24,745,411 38,764,142
Debt repayments (8,653,305) (27,885,497) (29,278,000)
----------- ------------ -----------
Net Cash Provided by Financing
Activities $27,472,591 $15,806,549 $14,493,016
------------ ------------ -----------
Net increase in cash and cash
equivalents $775,590 $955,451 $599,261
Cash and cash equivalents,
beginning 7,019,405 6,063,954 5,464,693
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, ENDING $7,794,995 $7,019,405 $6,063,954
=========== ============ ===========
Noncash Investing Activities:
Loans transferred to foreclosed
properties $200,000 $0 $85,000
=========== ============ ===========
Total (decrease) increase in
unrealized loss on securities
available-for-sale $(129,356) $14,244 $68,315
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DENMARK BANCSHARES, INC.
December 31, 1998, 1997 AND 1996
Note 1 - Summary of Significant Accounting Policies
Nature of Organization
Denmark Bancshares, Inc. is a bank holding company as defined in the Bank
Holding Company Act. As such, it exercises control over Denmark State Bank,
Denmark Ag Credit Corporation and McDonald-Zeamer Insurance Agency, Inc. A
majority of the Company's assets are held by Denmark State Bank.
Denmark State Bank, a wholly owned subsidiary of Denmark Bancshares, Inc.,
operates under a state bank charter, and provides full banking services to
its customers. Denmark Investments Inc. is a wholly owned subsidiary of
Denmark State Bank. The Company and its subsidiaries make agribusiness,
commercial and residential loans to customers throughout the state, but
primarily in eastern Wisconsin. The Company and its subsidiaries have a
diversified loan portfolio, however, a substantial portion of their debtors'
ability to honor their contract is dependent upon the agribusiness economic
sector. The main loan and deposit accounts are fully disclosed in Notes 3
and 5. The significant risks associated with financial institutions include
interest rate risk, credit risk, liquidity risk and concentration risk.
Basis of Consolidation
The consolidated financial statements include the accounts of Denmark
Bancshares, Inc. and its subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates, such as the allowance for credit losses and accounting
for the impairment of loans, are discussed specifically in the following
sections of this footnote.
Investment Securities
Investment securities are designated as available-for-sale or
held-to-maturity when purchased and remain in that classification until they
are sold or mature. Debt and equity securities classified as
available-for-sale are stated at estimated fair value, with unrealized gains
and losses, net of any applicable deferred income taxes, reported as a
separate component of stockholders' equity. As a result of the adjustment
from amortized cost to fair value, stockholders' equity, net of applicable
deferred income taxes, increased by $33,065 as of December 31, 1998 and
decreased by $51,780 and $40,649 as of December 31, 1997 and 1996,
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 and accrued by using the
simple interest method on the daily balance of the principal amount
outstanding. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full, timely collection of
interest or principal or when a loan becomes contractually past due by ninety
days or more with respect to interest or principal. When a loan is placed on
nonaccrual, all interest previously accrued but not collected is reversed
against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
A loan is impaired when, based on current information and events, it is
probable that not all amounts due will be collected according to the
contractual terms of the loan agreement. Impaired loans are measured at the
estimated fair value of the collateral. If the estimated fair value of the
impaired loan is less than the recorded investment in the loan, an impairment
is recognized by creating a valuation allowance. Interest income is
recognized in the same manner described above for nonaccrual loans.
Allowance for Credit Losses
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans, based on
evaluations of the collectibility and
<PAGE> 9
prior loss experience of loans. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall
portfolio quality, loan concentrations, specific problem loans, leases and
commitments, and current and anticipated economic conditions that may
affect the borrowers' ability to pay.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks. Cash flows from demand deposits, NOW
accounts, savings accounts, federal funds purchased and sold, cash receipts
and payments of loans and time deposits are reported net. For purposes of
cash flow reporting, income taxes paid were $1,410,964, $1,051,592 and
$929,850 and interest paid was $10,958,249, $9,061,432 and $8,130,209 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Premises and Equipment
Premises and equipment owned are stated at cost less accumulated depreciation
which is computed principally on the straight-line method over the estimated
useful lives of the assets.
Income Taxes
Deferred income taxes are provided for timing differences between items
of income or expense reported in the consolidated financial statements and
those reported for income tax purposes in accordance with FAS 109.
Treasury Stock
Treasury stock is shown at cost, and consists of 551, 465, and 368 shares,
with a cost of $316,686, $236,058 and $167,861 as of December 31, 1998, 1997
and 1996, respectively.
Stock Split
In March 1997, the Board of Directors authorized a two-for-one common stock
split to be implemented by a stock dividend of one share for each share
outstanding to shareholders of record on June 17, 1997, payable on July 1,
1997. Accordingly, outstanding shares of common stock were increased from
27,482 to 54,964 shares. Since the common stock has no par value, there was
no increase in the common stock account. References in the consolidated
financial statements and notes with regard to per share and related data have
been retroactively adjusted to give effect to the transaction.
Earnings per Common Share
Earnings per common share are computed based on the weighted average number
of shares of common stock outstanding during each year. The number of shares
used in computing basic earnings per share is 54,855, 54,927 and 55,006 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current
year.
Note 2 - Investment Securities
The amortized cost and estimated fair value of securities available-for-sale
were as follows:
December 31, 1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------- ------------ ------------
U.S. Government agencies $13,497,261 $4,500 $0 $13,501,761
Mortgage-backed securities 9,167,589 59,692 (12,323) 9,214,958
Other securities 2,357,590 0 0 2,357,590
------------ ----------- ------------ ------------
$25,022,440 $64,192 $(12,323) $25,074,309
============ ========== ============ ============
December 31, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------- ------------ ------------
U.S. Government agencies $2,743,758 $0 $(79,504) $2,664,254
Mortgage-backed securities 10,688,122 34,820 (32,803) 10,690,139
Other securities 1,332,157 0 0 1,332,157
------------ ------------ ------------ ------------
$14,764,037 $34,820 $(112,307) $14,686,550
============ ============ ============ ============
<PAGE> 10
December 31, 1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------- ------------ ------------
U.S. Government agencies $2,121,158 $0 $(41,455) $2,079,703
Mortgage-backed securities 7,441,853 7,553 (29,341) 7,420,065
Other securities 1,452,678 0 0 1,452,678
------------ ------------ ------------ ------------
$11,015,689 $7,553 $(70,796) $10,952,446
============ ============ ============ ============
The amortized cost and estimated fair value of securities held-to-maturity
were as follows:
December 31, 1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------- ------------ ------------
State and local
governments $19,834,609 $1,779,306 $(6,527) $21,607,388
------------ ------------ --------- -----------
$19,834,609 $1,779,306 $(6,527) $21,607,388
============ ============ ========= ===========
December 31, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------- ------------ ------------
State and local
governments $17,139,353 $1,684,339 $0 $18,823,692
------------ ----------- ---------- -----------
$17,139,353 $1,684,339 $0 $18,823,692
============ =========== ========== ===========
December 31, 1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized 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
============ ============ =========== ============
The amortized cost and estimated fair values of securities at December 31,
1998, by maturity were as follows:
Securities Securities
Available-for-Sale Held-to-Maturity
------------------------ -------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Amounts Maturing Cost Value Cost Value
- ------------------------ ------------ ------------- ------------ -----------
Within one year $2,461,476 $2,465,780 $1,136,410 $1,176,261
From one through five
years 16,206,114 16,253,679 5,875,692 6,550,609
From five through ten
years 4,997,260 4,997,260 7,053,758 7,618,880
After ten years 0 0 5,768,749 6,261,638
Other securities (no
stated maturity) 1,357,590 1,357,590 0 0
----------- ----------- ---------- ----------
$25,022,440 $25,074,309 $19,834,609 $21,607,388
=========== =========== =========== ===========
Mortgage-backed securities are allocated according to their expected
prepayments rather than their contractual maturities.
<PAGE> 11
No securities were sold during 1998 or 1997. During 1996, available-for-sale
securities were sold for total proceeds of $1,868,929. The gross realized
gains and gross realized losses amounted to $259 and $58,648 in 1996.
There were no significant concentrations of investments (greater than 10
percent of stockholders' equity) in any individual security issuer, except
for securities issued by U.S. Government agencies and corporations.
Investment securities with an amortized cost of $305,592 and estimated fair
value of $303,084, at December 31, 1998, were pledged to secure public
deposits and securities sold under repurchase agreements and for other
purposes required or permitted by law.
Note 3 - Loans
Major categories of loans included in the loan portfolio are as follows:
December 31,
--------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Commercial:
Agricultural $30,700,423 $27,251,588 $24,494,999
Other 31,228,455 26,651,300 21,404,746
-------------- -------------- --------------
$61,928,878 $53,902,888 $45,899,745
-------------- -------------- --------------
Real estate:
Agricultural $20,068,369 $18,227,821 $16,441,788
Commercial 39,972,450 35,787,187 33,058,518
Residential 75,303,134 74,361,516 64,669,525
-------------- -------------- --------------
$135,343,953 $128,376,524 $114,169,831
-------------- -------------- --------------
Installment $16,927,234 $16,623,280 $14,590,185
-------------- -------------- --------------
Unsecured loans $786,082 $656,280 $554,677
-------------- -------------- --------------
Total loans receivable $214,986,147 $199,558,972 $175,214,438
Allowance for credit losses (3,058,618) (2,825,921) (2,506,728)
-------------- -------------- --------------
NET LOANS RECEIVABLE $211,927,529 $196,733,051 $172,707,710
============== ============== ==============
Final loan maturities and rate sensitivity of the loan portfolio, excluding
unsecured loans, at December 31, 1998, are as follows:
Within One - After
(In thousands) One Year Five Years Five Years Total
----------- ----------- ---------- ---------
Commercial and installment $61,842 $16,382 $632 $78,856
Real estate 119,871 14,149 1,324 135,344
----------- ----------- ---------- ---------
TOTAL $181,713 $30,531 $1,956 $214,200
=========== =========== ========== =========
At December 31, 1998, loans with a maturity greater than one year with a
variable interest rate totaled $415,285.
Other real estate owned represents real estate of which the Company has taken
control in partial or total satisfaction of loans. Other real estate owned
is carried at the lower of cost or fair value, less estimated costs to sell.
Losses at the time property is classified as other real estate owned are
charged to the allowance for loan losses. Subsequent gains and losses, as
well as operating income or expense related to other real estate owned, are
charged to expense. Other real estate owned, which is included in other
assets, totaled $200,000 at December 31, 1998. There was no other real estate
owned at year end 1997 or 1996.
<PAGE> 12
Nonaccrual loans totaled $3,937,112, $4,667,707 and $3,313,363 at December
31, 1998, 1997 and 1996, respectively. The reduction in interest income
associated with nonaccrual loans is as follows:
Year Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
Income in accordance with
original loan terms $500,187 $503,313 $302,466
Income recognized (576,326) (459,611) (197,091)
---------- --------- ---------
(INCREASE) REDUCTION IN INTEREST
INCOME $(76,139) $43,702 $105,375
========== ========= ==========
Information concerning the Company's investment in impaired loans is as
follows:
Year Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- -----------
Total investment in impaired loans $2,633,527 $3,425,149 $2,493,985
Loans not requiring an allowance 1,596,276 2,717,153 1,535,628
Loans requiring a related allowance 1,037,251 707,996 958,357
Related allowance (166,814) (106,505) (129,217)
Average investment in impaired
loans during the year 2,540,253 3,495,193 2,272,191
Interest income recognized on a
cash basis 283,635 299,628 137,762
Changes in the allowance for credit losses were as follows:
Year Ended December 31,
--------------------------------------
1998 1997 1996
------------ ----------- ------------
Balance - beginning of year $2,825,921 $2,506,728 $2,319,101
Charge-offs (219,673) (60,582) (56,199)
Recoveries 62,370 28,775 33,826
Provision charged to operations 390,000 351,000 210,000
------------ ----------- ------------
BALANCE - END OF YEAR $3,058,618 $2,825,921 $2,506,728
============ ============ ============
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-------------------------------------
1998 1997 1996
------------ ------------ ------------
Land $530,519 $508,220 $479,755
Buildings and improvements 3,355,207 3,188,505 2,845,622
Furniture and fixtures 2,448,402 2,273,820 2,111,525
------------ ------------ ------------
$6,334,128 $5,970,545 $5,436,902
Less: Accumulated depreciation (2,990,875) (2,693,377) (2,476,365)
------------ ------------ ------------
NET $3,343,253 $3,277,168 $2,960,537
============ ============ ============
<PAGE> 13
NOTE 5 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -------------
NOW accounts $12,831,148 $10,394,916 $9,590,972
Savings accounts 16,360,946 17,035,713 16,179,148
Money market accounts 51,461,772 40,450,756 29,104,066
Certificates of deposit 77,424,423 81,309,850 62,376,451
Time deposit open accounts 26,803,046 20,443,524 17,088,237
------------ ------------ ------------
TOTAL $184,881,335 $169,634,759 $134,338,874
============ ============ ============
The following table shows the maturity distribution of certificates of
deposit and time deposit open accounts:
December 31,
--------------------------------------
(In thousands) 1998 1997 1996
--------- --------- ---------
Within one year $72,041 $76,050 $39,595
One to two years 26,564 21,920 36,700
Two to three years 3,381 2,345 2,289
Three to four years 1,355 744 645
Over four years 886 694 236
--------- -------- --------
TOTAL $104,227 $101,753 $79,465
========= ========= =========
Certificates of deposit and time deposit open accounts issued in amounts of
$100,000 or more totaled $24,369,361, $22,448,045 and $13,493,887, at
December 31, 1998, 1997 and 1996, respectively.
NOTE 6 - SHORT-TERM BORROWINGS
The following table is a summary of short-term borrowings:
December 31,
--------------------------------------
1998 1997 1996
----------- ------------ ------------
Notes payable $22,400,272 $22,791,248 $25,839,963
U.S. Treasury demand notes 0 300,000 278,874
----------- ------------ ------------
TOTAL SHORT-TERM BORROWINGS $22,400,272 $23,091,248 $26,118,837
=========== =========== ===========
As of December 31, 1998, the Company had $17,941,228 of unused lines of
credit with banks to be drawn upon as needed. Notes payable are secured by
agricultural loans and have a variable interest rate of 5.46% at December 31,
1998.
<PAGE> 14
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
--------------------------------------
1998 1997 1996
----------- ------------ ------------
Note dated in 1998, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
4.80%, principal due and payable
on call date April 6, 1999 or
final maturity April 6, 2008. $5,000,000 $0 $0
Note dated in 1998, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.05%, principal due and payable on
call date January 20, 2001 or final
maturity January 20, 2008. 4,000,000 0 0
Note dated in 1997, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.96%, principal due and payable
December 30, 2002. 3,000,000 3,000,000 0
Note dated in 1996, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.94%, principal due and payable
March 18, 1998. 0 3,000,000 3,000,000
Note dated in 1996, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
6.02%, principal due and payable
December 27, 1999. 2,200,000 2,200,000 2,200,000
Note dated in 1996, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
6.51%, principal payments in the
amounts of $94,000, $79,000, $83,000
and $1,118,500 due and payable
December 27, 2003, 2007, 2010 and
2011, respectively. 1,374,500 1,374,500 1,374,500
Note dated in 1996, interest rate
of 8%, principal payment in the amount
of $20,000 due January 2, 1997.
Remaining balance due in eleven
installments of $3,500 through 1997,
then monthly installments of $1,092
through 2011. 102,198 106,503 156,000
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. 0 0 3,000,000
Note dated in 1992, with AgriBank,
FCB, quarterly interest due at an annual
rate of 6.30%, principal due and payable
September 22, 1997. 0 0 63,000
----------- ----------- -----------
TOTAL LONG-TERM DEBT $15,676,698 $9,681,003 $9,793,500
=========== =========== ===========
The notes payable to AgriBank, FCB and Federal Home Loan Bank of Chicago are
secured by agricultural loans and residential mortgages, respectively.
Long-term debt has aggregate maturities for the five years 1999 through 2003
as follows: $2,204,662 in 1999, $5,049 in 2000, $5,468 in 2001, $3,005,922
in 2002 and $6,413 in 2003.
<PAGE> 15
NOTE 8 - INCOME TAXES
The provision for income taxes in the consolidated statement of income is as
follows:
(In thousands) 1998 1997 1996
-------- ------- --------
Current: Federal $1,128 $865 $774
State 252 206 189
-------- ------- -------
$1,380 $1,071 $963
-------- ------- -------
Deferred Federal $(83) $(117) $(91)
State (13) (34) (25)
-------- ------- -------
$(96) $(151) $(116)
-------- ------- -------
TOTAL PROVISION FOR INCOME TAXES $1,284 $920 $847
======== ======= =======
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:
1998 1997 1996
----------------- ------------ ---------------
(In thousands) Amount % Amount % Amount %
--------- ------- ------- ---- -------- -------
Tax at statutory federal
income tax rate $1,503 34% $1,180 34% $1,097 34%
Increase (decrease) in tax
resulting from:
Tax-exempt income (396) (9) (388) (11) (374) (12)
State income tax, net of
federal tax benefit 157 3 113 3 109 3
Other, net 20 1 15 1 15 1
------ --- ---- --- ---- ---
APPLICABLE INCOME TAXES $1,284 29% $920 27% $847 26%
====== === ==== === ==== ===
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) 1998 1997 1996
------ ------- -------
Deferred tax assets:
Allowance for credit losses $1,137 $1,039 $896
Unrealized losses on
available-for-sale securities 0 25 23
State tax net operating loss
carryforward 88 87 88
Interest receivable on
nonaccrual loans 34 79 61
Other 19 22 25
------ ------- -------
Gross deferred tax assets $1,278 $1,252 $1,093
Valuation allowance (88) (87) (88)
------ ------- -------
Total deferred tax assets $1,190 $1,165 $1,005
------ ------- -------
Deferred tax liabilities:
Accumulated depreciation on
fixed assets $123 $134 $156
State income taxes 76 65 54
Unrealized gains on
available-for-sale securities 19 0 0
Accretion 8 46 28
------ ------ ------
Total deferred tax liabilities $226 $245 $238
------ ------ ------
NET DEFERRED TAX ASSET $964 $920 $767
====== ====== ======
<PAGE> 16
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan and a money purchase pension
plan. The plans essentially cover all employees who have been employed over
one-half year, and are at least twenty and one-half years old. Provisions of
the 401(k) profit sharing plan provide for the following:
* Participating employees may annually contribute up to 10% of their
compensation.
* The Company will contribute 50% of each employee contribution up to a
maximum Company contribution of 2%. Employee contributions above 4% do
not receive any matching contribution.
* The Company may elect to make contributions out of profits. These profit
sharing contributions are allocated to the eligible participants based on
their salary as a percentage of total participating salaries. The
contribution percentage was 4% for 1998, 1997 and 1996.
In addition, the money purchase plan generally provides for employer
contributions of 4% of each participant's compensation.
The Company provides no post retirement benefits to employees except for the
401(k) profit sharing plan and the money purchase pension plan discussed
above which are currently funded. The Company expensed contributions of
$313,788, $275,509 and $244,433 for the years 1998, 1997 and 1996,
respectively.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF - BALANCE SHEET RISK
The Company and its subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company and its subsidiaries have in particular classes of financial
instruments.
The exposure of the Company and its subsidiaries to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual or notional amount of these instruments. The Company and
its subsidiaries use the same credit policies in making commitments and
conditional obligations as for on-balance sheet instruments. The Company and
its subsidiaries require collateral or other security to support financial
instruments with credit risk.
Contract or
Notional Amount Secured
(In thousands) December 31, 1998 Portion
-------------------- -------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $24,215 $19,108
Standby letters of credit
and financialguarantees written 983 983
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
NOTE 11 - RELATED PARTY TRANSACTIONS
At December 31, 1998, 1997 and 1996 certain Company subsidiary executive
officers, directors and companies in which they have a ten percent or more
beneficial interest, were indebted to the Company and its subsidiaries in the
amounts shown below. All such loans were made in the ordinary course of
business and at rates and terms similar to those granted other borrowers.
December 31, 1998
----------------- ------------------------------
New Ending
(In thousands) 1996 1997 Loans Payments Balance
-------- -------- -------- ---------- ----------
Aggregate related
party loans $1,415 $1,360 $492 $(393) $1,459
======= ======= ====== ======== ========
NOTE 12 - PARENT COMPANY ONLY INFORMATION
Following, in a condensed form, are parent company only statements of
financial condition, statements of income and cash flows of Denmark
Bancshares, Inc. for the years 1998, 1997 and 1996. 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) 1998 1997 1996
--------- --------- --------
Assets
Cash in banks $695 $1,074 $438
Investment
Banking subsidiary 22,280 19,524 18,909
Nonbanking subsidiaries 4,894 4,334 3,813
Real estate loans (less
allowance for credit losses
of $61, $61 and $61, respectively) 580 1,103 1,262
Fixed assets (net of depreciation
of $751, $633 and $523) 2,078 2,021 1,784
Other assets 49 50 37
--------- -------- --------
TOTAL ASSETS $30,576 $28,106 $26,243
========= ======== ========
Liabilities
Accrued expenses $38 $38 $28
Dividends payable 397 329 302
--------- -------- --------
Total Liabilities $435 $367 $330
--------- --------- --------
Stockholders' Equity
Common stock $10,020 $10,100 $10,169
Paid-in capital 37 37 37
Retained earnings 20,051 17,654 15,748
Accumulated other comprehensiveincome
Unrealized gains (losses) on securities 33 (52) (41)
--------- -------- --------
Total Stockholders' Equity $30,141 $27,739 $25,913
--------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $30,576 $28,106 $26,243
========= ======== ========
<PAGE> 18
DENMARK BANCSHARES, INC.
Statements of Income and Comprehensive Income
For the Years Ended December 31,
--------------------------------
(In thousands) 1998 1997 1996
-------- -------- --------
Income
Interest income from loans $72 $96 $113
Other interest income 35 18 14
Dividend income from banking subsidiary 0 1,500 500
Rental income from banking subsidiary 207 165 150
Rental income from nonbanking subsidiary 9 6 6
-------- -------- --------
Total Income $323 $1,785 $783
-------- -------- --------
Expenses
Management fees to banking subsidiary $120 $120 $120
Depreciation 118 111 107
Other operating expenses 146 127 118
-------- -------- --------
Total Expenses $384 $358 $345
-------- -------- --------
Income (loss) before income
taxes and undistributed income
of subsidiaries $(61) $1,427 $438
Income tax (benefit) expense (7) (16) (12)
-------- -------- --------
Income (Loss) Before Undistributed
Income of Subsidiaries $(54) $1,443 $450
Equity in Undistributed Income
of Subsidiaries
Banking subsidiary 2,671 627 1,501
Nonbank subsidiaries 521 481 429
-------- -------- --------
NET INCOME $3,138 $2,551 $2,380
-------- -------- --------
Other Comprehensive Income,
Before Tax
Unrealized gains (losses) on
securities arising during period $129 $(15) $(69)
Income tax expense (benefit) related
to items of other comprehensive income 44 (3) (31)
------- -------- --------
Other Comprehensive Income,
net of tax $85 $(12) $(38)
------- -------- --------
COMPREHENSIVE INCOME $3,223 $2,539 $2,342
======== ======== ========
<PAGE> 19
DENMARK BANCSHARES, INC.
Statements of Cash Flows
-------------------------
For the Years Ended December 31,
-------------------------------
(In thousands) 1998 1997 1996
--------- -------- ---------
Cash Flows from Operating
Activities:
Net Income $3,138 $2,551 $2,380
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 118 111 107
Equity (earnings) of banking
subsidiary (2,671) (2,127) (2,001)
Equity (earnings) of nonbanking
subsidiaries (521) (481) (429)
Dividend from banking subsidiary 0 1,500 500
Decrease (increase) in other assets 2 (12) 0
(Decrease) increase in accrued expenses 1 9 0
------- ------- --------
Net Cash Provided by Operating
Activities $67 $1,551 $557
------- ------- --------
Cash Flows from Investing
Activities:
Investment in nonbanking subsidiary $(40) $(40) $(100)
Capital expenditures (175) (348) (64)
Net decrease in real estate loans 522 160 314
------- ------- --------
Net Cash Provided (Used) by
Investing Activities $307 $(228) $150
------- ------- ---------
Cash Flows from Financing Activities:
Treasury stock proceeds $0 $0 $10
Treasury stock purchases (81) (68) (38)
Dividends paid (672) (619) (564)
------- ------- --------
Net Cash Used by Financing
Activities $(753) $(687) $(592)
------- ------- --------
Net (Decrease) Increase in Cash $(379) $636 $115
Cash, beginning 1,074 438 323
------- ------- --------
CASH, ENDING $695 $1,074 $438
======= ======== ========
Supplemental Disclosure:
Income taxes paid $(5) $(13) $(11)
===== ===== =====
NOTE 13 - BRANCH ACQUISITION
On August 4, 1997, the Company purchased the assets and assumed the
liabilities of the Reedsville Branch of M&I Bank Northeast. M&I Bank
Reedsville Branch was engaged in full banking services. The results of
operations of the Reedsville Branch are included in the accompanying
financial statements since the date of acquisition. Through the acquisition
of the Reedsville Branch the Company purchased loans of $2,309,712,
purchased premises and equipment of $307,250, assumed deposits of $19,079,143
and other liabilities net of other assets of $210,662, resulting in the
Company receiving cash of $13,786,977. For the assumption of the deposits a
premium of $2,885,866 was paid. The premium is being amortized using the
straight line method over 15 years. The amortization expense charged to
operations for 1998 and 1997 was $192,391 and $80,163, respectively.
M&I Bank did not maintain separate and complete branch accounting records for
the Reedsville Branch, therefore prior year results of operations have not
been disclosed.
<PAGE> 20
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, 1998
--------------------------
Carrying Fair
(In thousands) Amount Value
------------ ---------
Financial Assets
Cash and short-term investments $16,212 $16,212
Investment securities 44,909 46,682
Loans 214,986 214,980
Less: Allowance for credit losses (3,059) -
--------- ---------
TOTAL $273,048 $277,874
========= =========
Financial Liabilities
Deposits $212,050 $210,728
Borrowings 38,077 37,594
--------- ---------
TOTAL $250,127 $248,322
========= =========
Unrecognized Financial Instruments
Commitments to extend credit $24,215 $24,215
Standby letters of credit and financial
guarantees written 983 983
-------- --------
TOTAL $25,198 $25,198
======== ========
<PAGE> 21
NOTE 15 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Total Capital and Tier 1 Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 Capital
(as defined) to average assets (as defined). Management believes,
as of December 31, 1998, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the
table below:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Amount Adequacy Purposes: Action Provisions:
---------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Denmark Bancshares, Inc.
Total Capital (to Risk-Weighted Assets) $29,569,892 15.6% $15,120,625 >8.0% $18,900,781 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $27,198,701 14.4% $7,560,313 >4.0% $11,340,469 > 6.0%
Tier 1 Capital (to Average Assets)* $27,198,701 10.0% $10,852,706 >4.0% $13,565,883 > 5.0%
Denmark State Bank
Total Capital (to Risk-Weighted Assets) $21,619,672 13.6% $12,745,267 >8.0% $15,931,584 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $19,620,895 12.3% $6,372,633 >4.0% $9,558,950 > 6.0%
Tier 1 Capital (to Average Assets)* $19,620,895 8.1% $9,661,996 >4.0% $12,077,494 > 5.0%
As of December 31, 1997:
Denmark Bancshares, Inc.
Total Capital (to Risk-Weighted Assets) $26,791,952 15.8% $13,537,760 >8.0% $16,922,200 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $24,667,904 14.6% $6,768,880 >4.0% $10,153,320 > 6.0%
Tier 1 Capital (to Average Assets)* $24,667,904 10.1% $9,741,849 >4.0% $12,177,311 > 5.0%
Denmark State Bank
Total Capital (to Risk-Weighted Assets) $18,503,920 13.3% $11,156,041 >8.0% $13,945,051 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $16,752,896 12.0% $5,578,021 >4.0% $8,367,031 > 6.0%
Tier 1 Capital (to Average Assets)* $16,752,896 7.8% $8,553,296 >4.0% $10,691,620 > 5.0%
As of December 31, 1996:
Denmark Bancshares, Inc.
Total Capital (to Risk-Weighted Assets) $27,465,680 18.6% $11,840,075 >8.0% $14,800,094 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $25,607,560 17.3% $5,920,038 >4.0% $8,880,056 > 6.0%
Tier 1 Capital (to Average Assets)* $25,607,560 12.5% $8,223,008 >4.0% $10,278,860 > 5.0%
Denmark State Bank
Total Capital (to Risk-Weighted Assets) $20,444,356 16.9% $9,665,106 >8.0% $12,081,382 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $18,926,725 15.7% $4,832,553 >4.0% $7,248,829 > 6.0%
Tier 1 Capital (to Average Assets)* $18,926,725 10.6% $7,148,562 >4.0% $8,935,703 > 5.0%
</TABLE>
*Average assets are based on the most recent quarter's adjusted average
total assets.
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis of financial condition and results of
operations of Denmark Bancshares, Inc. and its subsidiaries ("Company"), is
intended as a review of significant factors affecting the Company's
consolidated results of operations during the three-year period ended December
31, 1998, 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 for the Company on a consolidated basis
during the most recent three fiscal years:
Percent
Increase
1998 1997 1996 1998/97 1997/96
-------- -------- -------- ------- -------
(In thousands)
Interest income $21,050 $18,463 $16,073 14.0% 14.9%
Interest expense 10,772 9,543 8,152 12.9 17.1
Net interest income 10,278 8,920 7,921 15.2 12.6
Provision for credit losses 390 351 210 11.1 67.1
Noninterest income 955 819 589 16.6 39.0
Noninterest expense 6,421 5,917 5,073 8.5 16.6
Net income 3,138 2,551 2,380 23.0 7.2
Earnings Performance
The Company recorded net income of $3,137,661 in 1998. This represents an
increase of $587,092 or 23.0% compared to 1997 earnings. The increase in net
income is primarily attributable to higher net interest income and noninterest
income which increased by $1,357,719 and $135,648 respectively. These items
more than offset higher noninterest expenses and higher income taxes which
increased by $503,269 and $364,006 respectively. The increase in net interest
income was primarily the result of higher average earning assets. Average
earning assets increased by $30.3 million during 1998 compared to 1997. Loan
growth accounted for much of this increase as average loans increased by $21.1
million or 11.4%. The increase in noninterest expenses is primarily
attributable to increases in salaries and employee benefits expense which
increased $412,309 or 11.2% compared to 1997.
The increase in net income in 1998 followed an increase of $171,004 or 7.2% in
1997 compared to 1996 earnings. The increase in net income was primarily
attributable to higher net interest income and noninterest income which
increased by $999,659 and $229,627 respectively. These items more than offset
an increase in the provision for credit losses, higher noninterest expenses
and higher income taxes which increased by $141,000, $844,057 and $73,225
respectively. The increase in net interest income was primarily the result of
higher average earning assets. Average earning assets increased by $27.2
million during 1997 compared to 1996. The increase in noninterest expenses
was primarily attributable to increases in salaries and employee benefits
expense and to higher operating expenses as a result of the acquisition of the
Reedsville Branch. The Company incurred approximately $108,000 of
nonrecurring operating expenses related to the acquisition of the Reedsville
Branch. The nonrecurring expenses included legal fees, data processing
conversion fees, fees for printing customer checks, supply items and marketing
materials. Net income for 1997 includes five months of operations for the
Reedsville Branch.
On a per share basis, net income was $57.20 in 1998 compared with $46.44 in
1997 and $43.26 in 1996. Return on average assets for the Company was 1.20%
in 1998 compared to 1.12% in 1997 and 1.19% in 1996. Return on average equity
in 1998 was 10.80% compared to 9.47% and 9.49% in 1997 and 1996 respectively.
<PAGE> 23
Net Interest Income
Net interest income is the largest component of the Company's operating
income. Net interest income represents the difference between interest income
on earning assets, such as loans and securities, and the interest expense on
deposits and other borrowed funds. Net interest income is affected by
fluctuations in interest rates and by changes in the volume of earning assets
and interest bearing liabilities outstanding.
Net interest income increased 15.2% or $1,357,719 from 1997 to 1998. The
increase is primarily attributable to higher average earning assets which
generated additional interest income of $2,383,662. Average earning assets
increased by $30.3 million or 13.8% during 1998 compared to 1997. The
increase in earning assets is the result of increases in average loans
amounting to $21.1 million, average federal funds sold totaling $6.2 million
and average investment securities which grew $3.0 million. The increase in
interest income more than offset the increased interest expense of $1,229,723
resulting primarily from higher average interest-bearing liabilities. Average
interest-bearing liabilities increased by $25.6 million or 13.8% during 1998.
An increase in the Company's net interest income spread from 3.28% in 1997 to
3.33% in 1998 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 increased 12.6%, or $999,659 from 1996 to 1997. The
increase was primarily attributable to higher average earning assets which
generated additional interest income of $2,239,742. Average earning assets
increased by $27.2 million or 14.2% during 1997 compared to 1996. Loan growth
accounted for much of this increase as average loans increased by $22.4
million or 13.8%. The increase in interest income more than offset the
increased interest expense of $1,391,053 resulting primarily from higher
average interest-bearing liabilities. Average interest-bearing liabilities
increased by $25.0 million or 15.6% during 1997.
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,
------------------------------------------------
1998 1997
------------------------- ----------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
Change In Change In
------------------------- ----------------------
(In thousands) Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
--------- ------- ------ ------- ------- -------
Interest income:
Loans $1,850 $272 $2,122 $1,946 $130 $2,076
Taxable securities 129 (17) 112 183 40 223
Nontaxable securities 68 (38) 30 70 (20) 50
Federal funds sold 337 (13) 324 40 1 41
--------- ------- ------ ------- ------- -------
Total interest income $2,384 $204 $2,588 $2,239 $151 $2,390
--------- ------- ------ ------- ------- -------
Interest expense:
NOW accounts $42 $2 $44 $3 $1 $4
Savings accounts 3 (9) (6) (10) 1 (9)
Money market accounts 562 (3) 559 272 41 313
Certificates and
other time deposits 621 55 676 654 (74) 580
Other borrowed funds 40 (83) (43) 482 21 503
--------- ------- ------ ------- ------- -------
Total interest expense $1,268 $(38) $1,230 $1,401 $(10) $1,391
--------- ------- ------ ------- ------- -------
Net interest income $1,116 $242 $1,358 $838 $161 $999
========= ======= ====== ======= ======= =======
For purposes of the above table, changes which are not due solely to volume or
rate have been allocated to rate.
<PAGE>24
The Company's consolidated average statements of financial condition, interest
earned and interest paid, and the average interest rates earned and paid for
each of the last three years are:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- --------------------------- -----------------------------
(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
-------- -------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Taxable loans $206,080 $18,310 8.88% $184,964 $16,190 8.75% $162,563 $14,116 8.68%
Nontaxable loans 342 20 5.85% 317 19 5.99% 287 17 5.92%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Total Loans $206,422 $18,330 8.88% $185,281 $16,209 8.75% $162,850 $14,133 8.68%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Taxable securities $14,749 $907 6.15% $12,688 $795 6.27% $9,639 $572 5.93%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Nontaxable securities 18,673 1,304 6.98% 17,731 1,274 7.19% 16,767 1,224 7.30%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Total Securities $33,422 $2,211 6.62% $30,419 $2,069 6.80% $26,406 $1,796 6.80%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Federal funds sold $9,563 $509 5.32% $3,385 $185 5.47% $2,647 $144 5.44%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Total Earning Assets $249,407 $21,050 8.44% $219,085 $18,463 8.43% $191,903 $16,073 8.38%
-------- ------- ------ -------- ------- -------- -------- ------- -----
Noninterest-earning assets:
Cash and due from banks $5,579 $4,825 $4,677
Allowance for credit losses (2,951) (2,669) (2,414)
Premises and equipment 3,262 3,116 3,030
Other assets 5,839 3,817 2,171
------- -------- --------
TOTAL ASSETS $261,136 $228,174 $199,367
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW accounts $11,220 $229 2.04% $9,112 $184 2.02% $8,959 $180 2.01%
Savings accounts 16,635 412 2.48% 16,521 419 2.54% 16,911 428 2.53%
Money market accounts 45,336 2,122 4.68% 33,352 1,564 4.69% 27,383 1,250 4.56%
Time deposits 100,476 5,869 5.84% 89,744 5,193 5.79% 78,608 4,613 5.87%
Other borrowed funds 37,220 2,140 5.75% 36,557 2,183 5.97% 28,408 1,681 5.92%
-------- ------- ------ -------- ------ ------- -------- ------ -----
Total Interest-
Bearing Liabilities $210,887 $10,772 5.11% $185,286 $9,543 5.15% $160,269 $8,152 5.09%
-------- ------- ------ -------- ------ ------- -------- ------ -----
Noninterest-bearing liabilities
and stockholders' equity:
Demand deposits $19,114 $14,108 $12,393
Other liabilities 2,083 1,845 1,641
Stockholders' equity 29,052 26,935 25,064
-------- -------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $261,136 $228,174 $199,367
======== ======== ========
Net interest income
and rate spread $10,278 3.33% $8,920 3.28% $7,921 3.29%
======= ====== ====== ======= ====== =====
</TABLE>
For purposes of the above table, nonaccrual loans are included in the average
daily balance figure, but interest income associated with these loans is
recognized under the cash basis method of accounting. Securities are shown at
amortized cost.
<PAGE> 25
Noninterest Income
Total noninterest income increased by $135,648 in 1998. The increase is
primarily the result of higher service fees and commissions which increased
$117,356 or 17.7% higher than 1997. Brokerage commissions on the sales of
mutual funds, annuities and equity securities increased by $72,277.
Commissions from the sales of insurance increased by $41,920.
Total noninterest income increased by $229,627 in 1997. The increase was
primarily the result of higher service fees and commissions which increased
$156,330 or 30.7% higher than 1996. Commissions on the sales of mutual funds
and insurance products increased by $150,348 primarily as a result of the
acquisition of an insurance agency by McDonald at year end 1996. Appraisal
fees, a component of other noninterest income, increased by $12,075 during
1997.
The following table sets forth certain items of noninterest income:
Percent
Increase
(In thousands) (Decrease)
Noninterest income: 1998 1997 1996 1998/97 1997/96
-------- ------- ------ --------- --------
Service fees and commissions $786 $668 $511 17.7% 30.7%
Investment security losses 0 0 (58) 0.0 (100.0)
Other 169 151 136 11.9 11.0
------ ------ ------ ------- -------
Total noninterest income $955 $819 $589 16.6% 39.0%
====== ====== ====== ======= =======
Noninterest Expense
Salaries and employee benefits expense increased $412,309 or 11.2% in 1998.
The increase is attributable to an increase of seven full-time equivalent
staff members and to regular salary increases. Occupancy expenses increased
by $33,952 primarily as a result of the additional branch facility acquired in
August of 1997 and the acquisition of an office building for McDonald during
1998. Printing and supplies expenses decreased $39,803 or 18.3% in 1998.
Included in printing and supplies expenses during 1997 were approximately
$25,000 of fees for printing the acquired customers' checks. Additional
expenses were incurred during 1997 to update supply items such as letterhead
paper, envelopes, brochures, etc., to reflect the additional branch location.
Legal and professional fees decreased $76,135 in 1998. Approximately $63,000
of legal fees were incurred during 1997 in connection with the branch
acquisition. Amortization of intangibles expense increased by $111,061 as a
result of the write-down of intangible assets related to the acquisitions of
the branch bank and the insurance agency. The intangibles are being amortized
over fifteen years.
Salaries and employee benefits expense increased $452,062 or 14.1% in 1997.
The increase was attributable to the hiring of eight full-time equivalent
staff members and to regular salary increases. The expenses included five
months of salaries and benefits for the acquired branch staff and the addition
of two employees by McDonald as a result of their acquisition. Occupancy
expenses increased by $18,513 primarily as a result of the additional branch
facility. Data processing expenses increased by $47,396. Of this increase,
$20,400 represents a one-time fee to convert the acquired customers' records
into the Company's computer system automatically. Printing and supplies
expenses increased $60,113 or 38.0% in 1997. Legal and professional fees
increased $95,912 in 1997. Amortization of intangibles expense increased by
$94,926.
The following table sets forth certain items of noninterest expense:
Percent
(In thousands) Increase(Decrease)
------- ------- ------- ------- -------
Noninterest expense: 1998 1997 1996 1998/97 1997/96
Salaries and employee benefits $4,076 $3,664 $3,212 11.2% 14.1%
Occupancy expenses 622 588 570 5.8 3.2
Data processing expenses 326 320 272 1.9 17.6
Marketing expenses 215 214 193 0.5 10.9
Amortization of intangibles 214 103 11 107.8 836.4
Printing and supplies expenses 178 218 158 (18.3) 38.0
Directors and committee fees 175 173 168 1.2 3.0
Other operating expenses 615 637 489 (3.5) 30.3
------ ------ ------ ------ ------
Total noninterest expense $6,421 $5,917 $5,073 8.5% 16.6%
====== ====== ====== ====== ======
<PAGE> 26
FINANCIAL CONDITION
The following table sets forth certain assets and liabilities of the Company
on a consolidated basis as of the end of each of the three most recent fiscal
years and period-to-period percentage increases (decreases):
Percent
Increase
(Decrease)
(In thousands) 1998 1997 1996 1998/97 1997/96
-------- ---------- --------- -------- -------
Federal funds sold $8,417 $7,112 $937 18.3% 659.0%
Investment securities 44,909 31,826 28,620 41.1 11.2
Loans 214,986 199,559 175,214 7.7 13.9
Allowance for credit losses (3,059) (2,826) (2,507) 8.2 12.7
Total assets 282,184 251,674 213,714 12.1 17.8
Deposits 212,050 189,129 150,417 12.1 25.7
Other borrowed funds 38,077 32,772 35,912 16.2 (8.7)
Stockholders' equity 30,141 27,739 25,913 8.7 7.0
Total assets at December 31, 1998, were $282.2 million. This represents an
increase of $30.5 million, or 12.1% over year end 1997. This followed an
increase of $38.0 million or 17.8% at December 31, 1997, compared to year end
1996. Management attributes the growth during 1998 and 1997 to strong loan
demand and to the acquisition of the Reedsville Branch during 1997. Total
loans grew $15.4 million or 7.7% during 1998. This followed an increase of
$24.3 million or 13.9% during 1997.
The acquisition of the Reedsville Branch during 1997 provided the Company
approximately $13.8 million in cash, additional loans of approximately $2.3
million, and the fixed assets of approximately $300,000 associated with the
Branch, in consideration of the assumption of approximately $19.1 million of
deposits. Other assets increased by $3.0 million primarily as a result of the
intangible assets associated with the acquisition of the Branch. The cash
provided in the transaction was used primarily to reduce other borrowed funds,
purchase investment securities and to increase liquidity by purchasing federal
funds sold (unsecured loans of immediately available funds to correspondent
banks for one business day).
Investments
Investment balances in various categories at the end of each of the last three
years were as follows:
December 31,
---------------------------------------------------------
1998 1997 1996
---------------- -------------------- -------------------
(In thousands) Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- --------- --------
U.S. Government
agencies $13,497 $13,502 $2,744 $2,664 $2,121 $2,080
Mortgage-backed
securities 9,167 9,215 10,688 10,690 7,442 7,420
State and municipal
securities 19,835 21,607 17,139 18,824 17,667 19,241
Other securities 2,358 2,358 1,332 1,332 1,453 1,453
-------- -------- -------- -------- --------- --------
TOTAL $44,857 $46,682 $31,903 $33,510 $28,683 $30,194
======== ======== ======== ======== ========= ========
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, 1998, investment securities totaled $44.9 million, an increase of $13.1
million, or 41.1% over December 31, 1997. This followed an increase at year
end 1997, of $3.2 million, or 11.2% over December 31, 1996. The increase in
investment securities at year end 1998 is attributable to the strong deposit
growth during 1998. The carrying value at December 31, 1998, includes $51,869
of net unrealized gains on available-for-sale securities compared to $77,487
of net unrealized losses at year end 1997. The net unrealized gains of the
held-to-maturity securities amounted to $1,772,779 as of December 31, 1998,
compared to $1,684,339 at year end 1997.
<PAGE> 27
The following table shows the maturities of investment securities at
December 31, 1998, and the weighted average yields of such securities:
<TABLE>
<CAPTION>
U.S. Government
Agencies and
Mortgage-backed State and Municipal
Securities Securities Other 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 $1,462 5.91% $1,136 9.31% $2,357 5.71% $4,955 6.55%
Due from one to five years 16,206 5.98% 5,876 8.55% - - 22,082 6.67%
Due from six to ten years 4,997 5.79% 7,054 5.81% - - 12,051 5.80%
Due after ten years - - 5,769 5.58% - - 5,769 5.58%
------- ------- ------- ------- -------- ----- -------- -----
TOTAL $22,665 5.94% $19,835 6.75% $2,357 5.71% $44,857 6.28%
======= ======= ======= ======= ======== ===== ======== =====
</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. The average maturity of the portfolio was 5.6 years
as of December 31, 1998, compared to 5.8 years and 7.3 years at year end 1997
and 1996 respectively. Securities available-for-sale and securities
held-to-maturity are combined in the table presented above.
The following table shows the average balance and tax equivalent yield for
each of the last three years:
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Average Average Average
(In thousands) Balance Yield Balance Yield Balance Yield
------- ------ ------- ------ ------- ------
Taxable securities $14,749 6.15% $12,688 6.27% $9,639 5.93%
Nontaxable securities 18,673 10.58% 17,731 10.89% 16,767 11.06%
------- ------ ------- ------ ------- ------
TOTAL $33,422 8.63% $30,419 8.96% $26,406 9.19%
======= ====== ======= ====== ======= ======
The weighted average tax equivalent yield declined during 1998 by thirty-three
basis points as higher yielding securities that matured or were called were
replaced with lower yielding securities of substantially the same quality.
There were no significant concentrations of investments (greater than 10
percent of stockholders' equity) in any individual security issuer, except for
securities issued by U. S. Government agencies and corporations.
Loans
The following table sets forth major types of loans and the percentage of
total loans for each type at the end of each of the last three years:
December 31,
---------------------------------------------------------
1998 1997 1996
------------------- ------------------- -----------------
(In thousands) Amount % Amount % Amount %
--------- --------- ---------- -------- --------- -------
Real estate $135,344 63.0% $128,377 64.3% $114,170 65.2%
Commercial 61,929 28.8% 53,903 27.0% 45,900 26.2%
Installment 16,927 7.9% 16,623 8.3% 14,590 8.3%
Other 786 0.3% 656 0.4% 554 0.3%
-------- ------ -------- ------ -------- ------
TOTAL $214,986 100.0% $199,559 100.0% $175,214 100.0%
======== ====== ======== ====== ======== ======
<PAGE> 28
The following sets forth the maturities of various categories of loans at
December 31, 1998:
Due in One Due from One Due after
(In thousands) Year or Less To Five Years Five Years
------------ ------------- -----------
Real estate $119,871 $14,149 $1,324
Commercial 53,561 8,013 355
Installment 8,281 8,369 277
-------- ------- ------
TOTAL $181,713 $30,531 $1,956
======== ======= ======
Substantially all loans maturing over one year are at fixed interest rates.
Of the real estate loans shown in the above table, $75 million or 55% are
residential mortgages, the Company's largest single category of loans.
Approximately $64 million of these are one-year notes which are renewed
annually, subject to updated credit and collateral valuation information but
generally without fees or closing costs to the customer. The remaining
residential mortgages are fixed rate loans for three and five year terms.
Virtually all of these notes amortize principal indebtedness over a ten to
twenty-five year period, and are repriceable at fixed rates that generally
follow prevailing longer term rates.
At December 31, 1998, $51 million or 24% of the Company's outstanding loans
were deemed "agriculture-related", constituting the highest industrial
concentration in the portfolio. Of these loans, over 90% relate directly to
the dairy farming industry. 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 $426,599 at December 31, 1998, or .20% of total loans
outstanding, and personal reserve overdraft protection accounts, which
aggregated $239,721 or .11% of total loans outstanding at December 31, 1998.
Nonaccrual loans totaled $3,937,112, $4,667,707 and $3,313,363 at December 31,
1998, 1997 and 1996 respectively. Approximately $2.3 million of the total
nonaccrual loans at December 31, 1998, are real estate loans. Of the
nonaccrual real estate loans, $1.3 million are secured by residential
mortgages and $1.0 million are secured by commercial properties.
Approximately $1.4 million of the total nonaccrual loans 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. Previously accrued but uncollected
interest on loans placed on nonaccrual status is charged against current
earnings, and interest income thereafter is recorded only when received.
Restructured loans at December 31, 1998, were $1,914,564 compared to $974,519
and $882,871 in 1997 and 1996 respectively. Restructured loans involve the
granting of some concession to the borrower involving the modification of
terms of the loan, such as changes in payment schedule or interest rate. The
restructured loans at year end involved the granting of a reduced interest
rate or the lengthening of the amortization period or both. The increase in
restructured loans at year end is primarily the result of the restructuring of
$734,665 of commercial loans to a single borrower.
Potential problem loans totaled $6,523,121 as of December 31, 1998. Potential
problem loans are accruing loans in which there exists doubt as to the ability
of the borrower to comply with present loan repayment terms. Management's
decision to place loans in this category does not necessarily mean that the
Company expects losses to occur on these loans, but that management recognizes
that a higher degree of risk is associated with these accruing loans and they
deserve closer scrutiny. Approximately $3.0 million of the potential problem
loans are to borrowers whose primary business is the sale of used automobiles.
The remaining potential problem loans are not concentrated in a particular
industry or type.
<PAGE> 29
Other real estate at December 31, 1998, was $200,000. This consisted of a
commercial property acquired in satisfaction of loans. The Bank realized a
small gain from the sale of the property during the first quarter of 1999.
The following table sets forth certain data concerning nonaccrual loans,
restructured loans and other real estate owned (property acquired through
foreclosure or in satisfaction of loans):
December 31,
-------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
(In thousands) Amount % of Total % of Total % of Total
Loans Amount Loans Amount Loans
------ ----------- ------- ---------- ------- ----------
Nonaccrual loans(1) $3,937 1.83% $4,668 2.34% $3,313 1.89%
Restructured loans(2) - - 406 0.20 299 0.17
----- ------ ------ ------ ------ ------
Total $3,937 1.83% $5,074 2.54% $3,612 2.06%
====== ====== ====== ====== ====== ======
Other real estate owned $200 $0 $0
==== ==== ====
(1)Includes impaired loans of $2,633,527, $3,056,643 and $2,228,438 as of
December 31, 1998, 1997 and 1996, respectively.
(2)Excludes restructured loans of $1,914,564, $568,042 and $584,164 as of the
years ended December 31, 1998, 1997 and 1996, 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, 1998, the Company's investment in impaired loans totaled
$2,633,527. The investment in impaired loans that does not require a related
allowance for credit losses amounted to $1,596,276 while the remaining
impaired loans totaling $1,037,251 require a related allowance for credit
losses of $166,814.
In 1998 the Company's provision for credit losses was $390,000 compared to
$351,000 and $210,000 during 1997 and 1996, respectively. Net charge-offs
were $157,303 for the year ended December 31, 1998, compared to net
charge-offs of $31,807 and $22,373 for the years ended 1997 and 1996,
respectively. The ratio of allowance for credit losses to total loans at
year end was 1.42% compared to 1.42% at December 31, 1997. The net increase
to the allowance was $232,697 or 8.2% higher than year end 1997.
The Company's ratio of loans more than 30 days past due (including nonaccrual
loans) to total loans was 2.38% at December 31, 1998, compared to 3.29% and
2.92% at December 31, 1997 and 1996, respectively.
The Company's portfolio is heavily concentrated in the Bank's three-county
primary service area and would be subject to fluctuations in local economic
conditions. The Company does have a concentration of agricultural-related
loans amounting to approximately 24% of total loans as of December 31, 1998.
The factors that influence the agricultural economy are complex and difficult
to predict. During March 1999, the price paid to dairy farmers for milk
declined significantly. Management believes these price fluctuations are
cyclical and underwriting practices have taken these fluctuations into
consideration. Agricultural loans more than 30 days past due (including
nonaccrual loans) totaled $94,572 at December 31, 1998. This represents .04%
of total loans outstanding and 2% of the Company's total past due loans.
During 1998 there were $5,740 of net recoveries on loans considered
agricultural-related compared to $22,627 of net charge-offs during 1997.
Management does not believe that these risks associated with the Company's
loan portfolio have changed materially during the past three years.
<PAGE> 30
Management believes its allowance for credit losses as of December 31, 1998,
of $3,058,618 (equal to 1.42% of the total loans) is adequate to cover credit
risks in the loan portfolio. However, if the recent drop in milk prices
discussed previously were to continue for an extended period of time, the
ability of agricultural borrowers to repay their loans would be adversely
affected. This would cause management to consider the adequacy of the
allowance for loan losses under those conditions.
Changes in the allowance for credit losses in each of the three most recent
years were as follows:
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ------------ -------------
Balance - beginning of year $2,825,921 $2,506,728 $2,319,101
----------- ------------ -------------
Charge-offs:
Real Estate $107,218 $0 $0
Installment 37,248 18,643 3,322
Credit cards and related plans 5,210 1,277 4,877
Commercial loans 69,997 40,662 48,000
----------- ------------ -------------
$219,673 $60,582 $56,199
----------- ------------ -------------
Recoveries:
Real Estate $5,019 $3,860 $5,019
Installment 37,561 10,535 24,527
Credit cards and related plans 604 787 267
Commercial loans 19,186 13,592 4,013
----------- ------------ -------------
$62,370 $28,775 $33,826
----------- ------------ -------------
Net charge-offs $157,303 $31,807 $22,373
----------- ------------ -------------
Provision charged to operations $390,000 $351,000 $210,000
----------- ------------ -------------
Balance - end of year $3,058,618 $2,825,921 $2,506,728
============ ============ =============
Ratio of net charge-offs
during the year to average
loans outstanding during
the year 0.08% 0.02% 0.01%
============ ============ =============
Ratio of allowance for
credit losses to total
loans at the end of year 1.42% 1.42% 1.43%
============ ============ =============
In 1998 the Company's ratio of charge-off loans to average loans outstanding
was .11% compared to .03% and .03% during 1997 and 1996, respectively. The
increase in charge-offs during 1998 is primarily attributable to losses
sustained to a single commercial borrower. Real estate loan charge-offs
amounting to $107,218 and commercial loan charge-offs totaling $49,909 are
attributable to this borrower. The Company does not expect future recoveries
from this borrower. Charge-offs on loans were notably low during 1997 and
1996. Management attributes this to the strong local economic conditions
during the last several years.
Recoveries on loans increased by $33,595 in 1998 compared to 1997. The
installment loan recoveries included recoveries of $13,947 from a borrower
whose loans were charged-off in 1995 and $12,000 from a borrower whose loans
were charged-off during 1998.
<PAGE> 31
Deposits
The following table sets forth the deposits as of the end of each of the three
most recent fiscal years and period-to-period percentage increases
(decreases):
Percent
Increase (Decrease)
(In thousands) 1998 1997 1996 1998/97 1997/96
-------- -------- -------- ------- --------
Non-interest bearing
accounts $27,168 $19,494 $16,078 39.4% 21.2%
NOW accounts 12,831 10,395 9,591 23.4 8.4
Savings accounts 16,361 17,036 16,179 (4.0) 5.3
Money market accounts 51,462 40,451 29,104 27.2 39.0
Certificates of deposit
and other time deposits 104,228 101,753 79,465 2.4 28.0
-------- -------- -------- ------ ------
Total deposits $212,050 $189,129 $150,417 12.1% 25.7%
======== ======== ======== ====== ======
At December 31, 1998, total deposits were $212,049,733, an increase of
$22,920,624 or 12.1% compared to December 31, 1997. Demand deposits increased
$7,674,048 or 39.4% during the year ended December 31, 1998. Much of this
increase is attributable to a new business depositor with a balance of $4.7
million at year end. Money market deposits increased by $11 million or 27.2%
over the previous year end. Some of this increase is a result of a shift by
depositors from lower yielding savings accounts into higher yielding money
market accounts. Depositors also shifted funds from certificates of deposit
to money market accounts because of the lower interest rates prevailing during
the third and fourth quarters of 1998 compared to 1997. The yield on a two
year certificate of deposit fell more than 1 full percentage point from 6.04%
to 4.99% while the yield on money market accounts declined from 5.12% to 4.54%
at year end 1998 compared to December 31, 1997. This change in rates resulted
in a smaller spread between money market accounts and certificates of deposit.
There is strong competition for core deposits in all of the Bank's market
areas. The Bank is committed to expanding its relationship with its loan
customers to include a core deposit account. The Bank is also focused on
providing additional services and obtaining multiple deposit relationships
with its existing deposit customers. During 1998 the Bank hired a consulting
firm to assist in the training of staff on customer service and cross-selling
techniques. Management feels that our quality customer service is one of the
Bank's competitive advantages and will continue to emphasize quality customer
service in the future.
Total deposits increased $38,712,407 or 25.7% at December 31, 1997, compared
to year end 1996. The Reedsville Branch added $20,233,266 of deposits at year
end 1997. The increase in total deposits, excluding the Reedsville deposits,
was $18.5 million or 12.3% at year end 1997 compared to December 31, 1996.
The following table shows, as of December 31, 1998, 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 $3,982 $6,376 $6,338 $3,681 $20,377
Other time deposits 0 589 688 2,715 3,992
------ ------ ------ ------ -------
Total $3,982 $6,965 $7,026 $6,396 $24,369
====== ====== ====== ====== =======
<PAGE> 32
Other Borrowed Funds
The following sets forth information concerning other borrowed funds for the
Company during each of the last three years:
December 31,
----------------------------
(In thousands) 1998 1997 1996
--------- -------- ---------
Short-term borrowings:
Notes payable to banks $22,400 $22,791 $25,840
U.S. Treasury demand notes 0 300 279
--------- -------- ---------
Total short-term borrowings $22,400 $23,091 $26,119
--------- -------- ---------
Long-term debt:
Notes payable to banks $15,575 $9,574 $9,637
Other long-term debt 102 107 156
--------- -------- ---------
Total long-term debt: $15,677 $9,681 $9,793
--------- -------- ---------
Total other borrowed funds $38,077 $32,772 $35,912
========= ======== =========
Short-term borrowings:
Average amounts outstanding during the year $22,399 $28,147 $22,908
Average interest rates on amounts
outstanding during the year 5.86% 5.91% 5.88%
Weighted average interest end rate at year 5.46% 6.05% 5.81%
Maximum month end amounts outstanding $23,284 $31,928 $26,119
The Company utilizes a variety of short-term and long-term notes payable as a
source of funds for the Company's lending and investment activities and for
general business purposes. The Company has in place asset/liability and
interest rate risk guidelines that determine in part whether borrowings will
be short-term or long-term in nature. Notes payable to banks consists of
secured borrowings under existing lines of credit. At December 31, 1998, the
Company had $56 million of established lines of credit. DACC's primary
sources of funding are short and long-term notes payable to banks. As of
December 31, 1998, DACC had established lines of credit of $31 million of
which $22,400,272 were drawn in the form of short-term notes payable. DACC
had no long-term debt as of year end. The increase in long-term debt at year
end 1998 is primarily a result of an increase in notes payable by the Bank.
The decrease in other borrowed funds at year end 1997 is attributable to a
reduction in notes payable by the Bank amounting to $5.0 million which more
than offset an increase in notes payable by DACC amounting to $1.9 million.
Cash received in consideration for the assumption of the deposit liabilities
of the acquired Branch was used in part to reduce other borrowed funds of the
Bank. DACC used the proceeds of the additional notes payable to fund loans.
Note 7 -- Long-Term Debt of the Notes To Consolidated Financial Statements
contains information concerning the significant terms of the long-term
borrowings.
Stockholders' Equity
Pursuant to regulations promulgated by the Federal Reserve Board, bank holding
companies are required to maintain minimum levels of core capital as a
percentage of total assets (leverage ratio) and total capital as a percentage
of risk-based assets. Under these regulations, the most highly rated banks
must meet a minimum leverage ratio of at least 3%, while lower rated banks
must maintain a ratio of at least 4% 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, 1998, and the applicable regulatory requirements.
<PAGE> 33
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 10.68% N/A
Core capital as a % of average assets 10.02% 4.00%
Core capital as a % of risk-based assets 14.39% 4.00%
Total capital as a % of risk-based assets 15.64% 8.00%
Stockholders' equity at December 31, 1998, increased 8.7% to $30,140,667 or
$550 per share, compared with $27,739,074 or $506 per share one year ago.
Cash dividends declared in 1998 were $13.50 per share compared with $11.75 and
$10.75, in 1997 and 1996, respectively. The dividend payout ratio (dividends
declared as a percentage of net income) was 23.59%, 25.30% and 24.84% in 1998,
1997 and 1996, respectively.
The ability of the Company to pay dividends on the Common Stock is largely
dependent upon the ability of the Bank to pay dividends on the stock held by
the Company. The Bank's ability to pay dividends is restricted by both state
and federal laws and regulations. The Bank is subject to policies and
regulations issued by the FDIC and the Division of Banking of the Wisconsin
Department of Financial Institutions ("the Division") which, in part,
establish minimum acceptable capital requirements for banks, thereby limiting
the ability to pay dividends. In addition, Wisconsin law provides that state
chartered banks may declare and pay dividends out of undivided profits but
only after provision has been made for all expenses, losses, required
reserves, taxes and interest accrued or due from the bank. Payment of
dividends in some circumstances may require the written consent of the
Division. Note 15 -- Regulatory Matters of the Notes To Consolidated
Financial Statements contains information concerning capital ratios of the
Bank.
The Company's Board of Directors approved the 1998 Employees Stock Purchase
Plan. The Plan allows the Company to issue treasury shares at fair market
value to eligible employees. The purpose of the plan is to allow employees to
share in the ownership of the Company. Since only treasury shares can be
issued under the Plan, it will not have a significant impact on total
stockholders' equity of the Company.
The adequacy of the Company's capital is reviewed periodically to
ensure that sufficient capital is available for current and future needs
and is in compliance with regulatory guidelines. Management is committed to
maintaining capital at a level that will allow the Company to take advantage
of future opportunities when they arise. The Company's current level of
capitalization is strong. This will allow the Company to pursue profitable
growth opportunities.
Liquidity
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet the Company's needs for cash. Loan requests typically present
the greatest need for cash but liquidity must also be maintained to
accommodate possible outflows in deposits. Loan repayments as well as net
cash provided by operating activities amounting to $3.2 million, an increase
in deposits totaling $22.9 million and an increase in other borrowings
amounting to $5.3 million, as shown in the Consolidated Statements of Cash
Flows, all provided sources of funds during 1998. The net increase in loans
of $15.8 million, the net increase in investment securities of $12.4 million
and the net increase in federal funds sold of $1.3 million were the major uses
of cash during 1998.
During 1997 the major sources of funds were loan repayments, net cash provided
by operating activities of $2.6 million, net cash received from the
acquisition of the branch of $13.8 million and an increase in deposits
totaling (net of the acquired deposits) $19.6 million. The net increase in
loans of $22.1 million (net of the acquired loans), the net increase in
federal funds sold of $6.2 million, the net decrease in other borrowed funds
of $3.1 million, and the net increase in investment securities of $2.7 million
were the major uses of cash during 1997.
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. Management strives to
maintain enough liquidity to satisfy customer credit needs, meet deposit
withdrawal requests and any other expected needs for cash. Excess liquid
assets are reallocated to achieve higher yields. One ratio used to measure
the liquidity of banking institutions is the net loan to deposit ratio. The
net loan to deposit ratio of the Bank was 86.8%, 88.9% and 97.5% at December
31, 1998, 1997 and 1996, 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> 34
The net loan to deposit ratio reflects only on-balance sheet items.
Off-balance sheet items such as commitments to extend credit and established
borrowing lines of credit also affect the liquidity position. In order to
increase available funding sources the Bank is a member of the Federal Home
Loan Bank (FHLB) of Chicago. Membership enables the Bank to borrow on a
secured basis approximately $20.9 million. As of December 31, 1998, the
amount owed to the Federal Home Loan Bank was $15.6 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 $1.3
million would allow the Bank to borrow up to $46.9 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. During 1998 the
Bank originated and sold $19.9 million of residential loans to the secondary
mortgage market.
Other sources of liquidity for the Company consist of established lines of
credit by DACC and by the parent company. As of December 31, 1998, DACC has
unused lines of credit of $8.6 million and the parent company has an unused
line of credit of $4 million. See Note 10 -- Financial Instruments with
Off-Balance Sheet Risk in the Notes To Consolidated Financial Statements for a
discussion of the Company's commitments to extend credit. Management believes
the Company's liquidity position as of December 31, 1998, 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, 1998:
0 to 6 7 to 12 1 to 2 Over 2
(In thousands) Months Months Years Years
--------- -------- --------- ---------
Loans $87,320 $94,751 $13,169 $19,746
Investment Securities 1,316 2,306 2,471 38,816
Federal funds sold 8,417 0 0 0
-------- -------- -------- --------
Total interest-earning assets $97,053 $97,057 $15,640 $58,562
-------- -------- -------- --------
Interest-bearing deposits $127,939 $29,785 $21,536 $5,622
Other borrowed funds 27,403 2,202 5 8,467
-------- -------- -------- --------
Total interest-bearing
liabilities $155,342 $31,987 $21,541 $14,089
-------- ------- ------- -------
Rate sensitivity gap $(58,289) $65,070 $(5,901) $44,473
Cumulative rate sensitivity gap $(58,289) $6,781 $880 $45,353
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities 62.48% 103.62% 100.42% 120.34%
Ratio of cumulative gap
to average earning assets (23.37)% 2.72% 0.35% 18.18%
Mortgage backed securities are allocated according to their expected
prepayments rather than their contractual maturities.
Interest rate risk is the exposure to a bank's earnings arising from changes
in future interest rates. Interest rate sensitivity is measured using gap
analysis. Gap analysis is used to identify mismatches in the repricing of
assets and liabilities within specified periods of time or interest
sensitivity gaps. The rate sensitivity or repricing gap is equal to total
interest-earning assets less total interest-bearing liabilities available for
repricing during a given time interval. A positive gap exists when total
interest-earning repricing assets exceed total interest-bearing repricing
liabilities and a negative gap exists when total interest-bearing repricing
liabilities exceed total interest-earning repricing assets. Generally a
positive repricing gap will result in increased net interest income in a
rising rate environment and decreased net interest income in a falling rate
environment. A negative gap tends to produce increased net interest income in
a falling rate environment and decreased net interest income in a rising rate
environment.
The preceding table indicates the Company has a positive gap of $6.8 million
or 2.7% 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 103.6%. For purposes of this
analysis, NOW, savings and money market accounts are considered repriceable
within six months.
<PAGE> 35
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. The "19xx"
testing and system verifications 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.
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.
<PAGE> 36
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
3, 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.
Accounting Developments
In February 1998, the Financial Accounting Standards Board (FASB) issued FAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" effective for financial statements issued after December 15, 1997.
This statement revises disclosures about pension and other postretirement
benefit plans. FAS No. 132 had no effect on the Company's financial
statements because the Company provides no postretirement benefits to
employees except for a 401(k) profit sharing plan and a money purchase pension
plan which are currently funded.
In June 1998, FASB issued FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement requires that all derivatives are recognized as either assets or
liabilities in the statement of financial position and that those instruments
are measured at fair value. The Company anticipates that the adoption FAS No.
133 will not have a material impact in the Company's financial statements.
In October 1998, FASB issued FAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise: an amendment of FAS No. 65" effective for
the first fiscal quarter beginning after December 15, 1998. This statement
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability
and intent to sell or hold those investments. This statement conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. The Company anticipates that the adoption of
FAS No. 134 will not have a material impact in the Company's financial
statements.
<PAGE> 37
QUARTERLY FINANCIAL INFORMATION
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
1997 (Unaudited) High Low Paid (2)
- ----------------------------------------------------------------------
1st Quarter $478 $595 $590 $5.50
2nd Quarter 490 704 693 -
3rd Quarter 493 715 710 5.75
4th Quarter 506 728 725 -
1998
- ----------------------------------------------------------------------
1st Quarter $513 $733 $733 $6.00
2nd Quarter 527 915 897 -
3rd Quarter 542 * * 6.25
4th Quarter 550 952 939 -
1999
- ----------------------------------------------------------------------
Through March 1 N/A $972 $963 $7.25
(1) In recent years the Common Stock has traded sparsely. To the
knowledge of management the price of each share has ranged in value
as shown in the table. There is no established market for the
Common Stock of the Company and it is unlikely that such a market
for the shares will develop in the foreseeable future. Most of the
transactions at the prices reported in the table are purchases by the
Company pursuant to a Stock Repurchase Policy. The Stock Repurchase
Policy provides that shares offered to the Company may be purchased
as an accommodation to shareholders at a specified percentage of book
value computed as of the end of the month preceding the purchase.
The applicable percentage was 125% of book value until March 25,
1997, 145% of book value until March 16, 1998, 175% of book value
until March 16, 1999 and 200% of book value thereafter. The Board
of Directors of the Company may consider changes in the applicable
percentage at future meetings.
(2) The ability of the Company to pay dividends is subject to
certain limitations. See "Stockholders'Equity" in Management's
Discussion and Analysis.
* Indicates no reported sale of stock occurred in that quarter.
Per share amounts have been adjusted to reflect the 2-for-1 stock split
effective July 1, 1997.
As of March 1, 1999, the Company had 925 shareholders of record.
SELECTED FINANCIAL INFORMATION
The following table sets forth certain unaudited results of operations for
the periods indicated:
(In thousands except For the Quarter Ended
per share data)
1997 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------
Interest income $4,336 $4,402 $4,735 $4,990
Interest expense 2,151 2,257 2,508 2,627
Provision for credit losses 87 87 87 90
Net income 684 632 546 689
Net income per share (1) 12.44 11.49 9.95 12.56
1998
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Interest income $5,001 $5,217 $5,342 $5,490
Interest expense 2,632 2,661 2,740 2,739
Provision for credit losses 83 83 82 142
Net income 681 771 788 898
Net income per share 12.41 14.05 14.37 16.37
(1) Adjusted to reflect the 2-for-1 stock split effective July 1, 1997.
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