DENMARK BANCSHARES, INC.
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1999
Denmark Bancshares, Inc.
1999 Annual Report
Table of Contents
Graphic Presentation of Selected Financial Data...........................2
Selected Financial Data...................................................3
President's Letter........................................................4
Independent Auditors' Report..............................................4
Consolidated Financial Statements.........................................5
Notes to Consolidated Financial Statements................................9
Management's Discussion and Analysis.....................................23
Quarterly Financial Information..........................................36
Denmark Bancshares, Inc. ("Company"), headquartered in Denmark, Wisconsin, is
a diversified one-bank holding company. Denmark State Bank, the Company's
subsidiary bank, offers five full service banking offices located in the
Villages of Denmark, Maribel, Reedsville, and Whitelaw, and the Town of
Bellevue, serving primarily Brown, Kewaunee and Manitowoc Counties. The
Company also extends farm credit through its subsidiary Denmark Agricultural
Credit Corporation and sells a full line of insurance products through its
subsidiary McDonald-Zeamer Insurance Agency, Inc.
<PAGE> 1
Graphic Presentation of Selected Financial Data
(Tabular representation of graphs for electronic filing)
1995 1996 1997 1998 1999
Net Income $2,083 $2,380 $2,551 $3,138 $3,217
Net Income Per Share 37.83 43.26 46.44 57.20 58.51
Dividends Per Share 9.75 10.75 11.25 13.50 17.25
Book Value Per Share 439.65 471.39 505.50 550.12 585.01
Total Loans 156,072 175,214 199,559 214,986 256,625
Total Assets 196,877 213,714 251,674 282,184 321,393
Total Deposits 144,818 150,417 189,129 212,050 211,934
Stockholders' Equity 24,190 25,913 27,739 30,141 32,121
Dollars in thousands except per share data.
<PAGE> 2
SELECTED FINANCIAL DATA
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
Interest income $22,319 $21,050 $18,463 $16,073 $14,882
Interest expense 11,599 10,772 9,543 8,152 7,639
-------- -------- -------- -------- --------
Net interest income $10,720 $10,278 $8,920 $7,921 $7,243
Less: Provision for
possible loan losses 312 390 351 210 200
-------- -------- -------- -------- --------
Net income after provision
for possible credit losses $10,408 $9,888 $8,569 $7,711 $7,043
-------- -------- -------- -------- --------
Plus: Noninterest income $1,026 $955 $819 $589 $568
Less: Noninterest expense 6,951 6,421 5,917 5,073 4,933
-------- -------- -------- -------- --------
Net noninterest expense $(5,925) $(5,466) $(5,098) $(4,484) $(4,365)
-------- -------- -------- -------- --------
Income before income taxes $4,483 $4,422 $3,471 $3,227 $2,678
Income tax expense 1,266 1,284 920 847 595
-------- -------- -------- -------- --------
Net income $3,217 $3,138 $2,551 $2,380 $2,083
======== ======== ======== ======== ========
PER SHARE DATA (1)
Net income $58.51 $57.20 $46.44 $43.26 $37.83
Cash dividends declared 17.25 13.50 11.75 10.75 9.75
Book value (year end) 585.01 550.12 505.50 471.39 439.65
BALANCE SHEET DATA
Average balances:
Total loans $237,017 $206,422 $185,281 $162,850 $150,181
Investment securities 44,397 33,428 30,345 26,328 25,128
Assets 295,478 261,136 228,174 199,367 184,970
Deposits 207,543 192,780 162,838 144,254 135,644
Stockholders' equity 31,462 29,052 26,935 25,064 23,271
Year-end balances:
Total loans $256,625 $214,986 $199,559 $175,214 $156,072
Allowance for possible
credit losses 3,283 3,059 2,826 2,507 2,319
Investment securities 44,891 44,909 31,826 28,620 25,650
Assets 321,393 282,184 251,674 213,714 196,877
Deposits 211,934 212,050 189,129 150,417 144,818
Long-term debt 17,092 15,677 9,681 9,794 3,063
Stockholders' equity 32,121 30,141 27,739 25,913 24,190
FINANCIAL RATIOS
Return on average equity 10.23% 10.80% 9.47% 9.49% 8.95%
Return on average assets 1.09% 1.20% 1.12% 1.19% 1.13%
Net interest spread 3.06% 3.33% 3.28% 3.29% 3.24%
Average equity to
average assets 10.65% 11.13% 11.80% 12.57% 12.58%
Allowance for credit
losses to loans 1.28% 1.42% 1.42% 1.43% 1.49%
Dollars in thousands except per share data and financial ratios.
(1) Adjusted to reflect 2-for-1 stock split effective July 1, 1997.
See Note 13 - Branch Acquisition of the Notes to Consolidated Financial
Statements for information concerning a branch acquisition occurring during
1997.
<PAGE> 3
PRESIDENT'S LETTER
TO OUR SHAREHOLDERS AND FRIENDS:
We are pleased to present the 1999 Annual Report of Denmark Bancshares, Inc.
Your Company enjoyed another successful year with record earnings, as well as
shareholders' equity.
Our semi-annual dividend of $9.00 per share to shareholders of record
December 14, 1999, payable January 3, 2000, represented a 9% increase over
the last semi-annual dividend and a 24% increase over the dividend paid in
January 1999.
Your Bank, independent and locally owned, is dedicated to meeting the
financial needs of local families, farmers and businesses. Your support
directly helps the neighborhoods where our customers live and work, thereby
strengthening our local economies.
On April 25, 2000, James E. Renier, a dedicated and respected member of our
Board of Directors, will retire. His knowledge of the financial services
industry will be missed.
As always, we appreciate your continued support as shareholders and ask that
you continue to recommend our services to your friends, relatives and
business associates.
Sincerely,
(signature of Darrell R. Lemmens)
Darrell R. Lemmens
Chairman of the Board
- -----------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
DENMARK BANCSHARES, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated statements of financial
condition of Denmark Bancshares, Inc. and subsidiaries as of December 31,
1999, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Denmark
Bancshares, Inc. and subsidiaries as of December 31, 1999, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with generally accepted
accounting principles.
WILLIAMS YOUNG, LLC
(signature of Williams Young)
Madison, Wisconsin
February 10, 2000
<PAGE> 4
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of December 31,
ASSETS
Assets 1999 1998 1997
------------- ------------ -----------
Cash and due from banks $9,503,948 $7,794,995 $7,019,405
Federal funds sold 3,505,000 8,417,000 7,112,000
Investment Securities
Available-for-sale, at fair value 20,500,622 25,074,309 14,686,550
Held-to-maturity, at cost 24,389,906 19,834,609 17,139,353
------------ ----------- -----------
Total Investment Securities $44,890,528 $44,908,918 $31,825,903
Loans less allowance for credit
losses of $3,282,812,
$3,058,618 and $2,825,921,
respectively 253,342,216 211,927,529 196,733,051
Premises and equipment, net 4,110,927 3,343,253 3,277,168
Accrued interest receivable 1,664,314 1,466,749 1,388,253
Other assets 4,376,273 4,326,031 4,318,200
------------- ------------ ------------
TOTAL ASSETS $321,393,206 $282,184,475 $251,673,980
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $26,387,194 $27,168,398 $19,494,350
Interest-bearing 185,546,462 184,881,335 169,634,759
------------- ------------ ------------
Total Deposits $211,933,656 $212,049,733 $189,129,109
Short-term borrowings 58,108,946 22,400,273 23,091,248
Accrued interest payable 1,337,566 1,248,966 1,419,470
Other liabilities 794,128 668,138 614,076
Long-term debt 17,097,536 15,676,698 9,681,003
------------- ------------ ------------
Total Liabilities $289,271,832 $252,043,808 $223,934,906
------------ ------------ ------------
Stockholders' Equity
Common stock, no par value,
authorized 320,000 shares;
issued 54,907, 54,789 and 54,875
shares, excludes 433 shares in
treasury in 1999, 551 shares in
1998 and 465 shares in 1997 $10,030,869 $10,019,609 $10,100,237
Paid in capital 110,984 37,384 37,384
Retained earnings 22,318,876 20,050,609 17,653,233
Accumulated other comprehensive income
Unrealized (losses)
gains on securities (339,355) 33,065 (51,780)
------------- ------------ ------------
Total Stockholders' Equity $32,121,374 $30,140,667 $27,739,074
------------- ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $321,393,206 $282,184,475 $251,673,980
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1999 1998 1997
----------- ------------ ------------
Interest Income
Loans including fees $19,487,591 $18,329,787 $16,208,761
Investment securities:
Taxable 1,334,460 907,190 795,005
Exempt from federal tax 1,416,724 1,304,176 1,274,558
Interest on federal funds sold 80,134 509,430 184,817
----------- ------------ ------------
$22,318,909 $21,050,583 $18,463,141
----------- ------------ ------------
Interest Expense
Deposits $8,600,072 $8,632,510 $7,359,474
Short-term borrowings 2,165,472 1,313,558 1,663,379
Long-term debt 833,131 826,415 519,907
----------- ------------ ------------
$11,598,675 $10,772,483 $9,542,760
----------- ------------ ------------
Net interest income $10,720,234 $10,278,100 $8,920,381
Provision for Credit Losses 312,000 390,000 351,000
----------- ------------ ------------
Net interest income after
provision for credit losses $10,408,234 $9,888,100 $8,569,381
----------- ------------ ------------
Other Income
Service fees and commissions $761,568 $785,480 $668,124
Other 264,977 169,030 150,738
----------- ------------ ------------
$1,026,545 $954,510 $818,862
----------- ------------ ------------
Other Expense
Salaries and employee benefits $4,396,780 $4,076,073 $3,663,764
Occupancy expenses 679,855 622,106 588,154
Data processing expenses 437,146 325,464 319,806
Other operating expenses 1,437,573 1,397,318 1,345,968
----------- ------------ ------------
$6,951,354 $6,420,961 $5,917,692
----------- ------------ ------------
Income before income taxes $4,483,425 $4,421,649 $3,470,551
Income tax expense 1,266,042 1,283,988 919,982
----------- ------------ ------------
NET INCOME $3,217,383 $3,137,661 $2,550,569
=========== ============ ============
EARNINGS PER COMMON SHARE $58.51 $57.20 $46.44
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
<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, 1996 54,972 $10,168,433 $37,384 $15,747,969 $(40,649) $25,913,137
Comprehensive income
Net income 2,550,569 2,550,569
Other comprehensive income, net of tax
Change in unrealized (loss) on
securities available-for-sale,
net of applicable deferred income
tax benefit of $3,113 (11,131) (11,131)
-------------
Total comprehensive income $2,539,438
Cash dividends, $11.75 per share (645,305) (645,305)
Treasury stock acquisitions (97) (68,196) (68,196)
------- ------------ ------- ----------- --------- ------------
Balance, December 31, 1997 54,875 $10,100,237 $37,384 $17,653,233 $(51,780) $27,739,074
Comprehensive income
Net income 3,137,661 3,137,661
Other comprehensive income, net of tax
Change in unrealized gain on
securities available-for-sale,
net of applicable deferred income
tax expense of $44,511 84,845 84,845
-------------
Total comprehensive income $3,222,506
Cash dividends, $13.50 per share (740,285) (740,285)
Treasury stock acquisitions (86) (80,628) (80,628)
------- ----------- ------- ----------- --------- ------------
Balance, December 31, 1998 54,789 $10,019,609 $37,384 $20,050,609 $33,065 $30,140,667
Comprehensive income
Net income 3,217,383 3,217,383
Other comprehensive income, net of tax
Change in unrealized (loss) on
securities available-for-sale,
net of applicable deferred income
tax benefit of $233,535 (372,420) (372,420)
------------
Total comprehensive income $2,844,963
Cash dividends, $17.25 per share (949,116) (949,116)
Treasury stock sales 296 214,112 73,600 287,712
Treasury stock acquisitions (178) (202,852) (202,852)
------- ------------ ------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1999 54,907 $10,030,869 $110,984 $22,318,876 $(339,355) $32,121,374
======= =========== ======== =========== ========== ============
</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,
1999 1998 1997
------------ ------------- -------------
Cash Flows from Operating Activities:
Net income $3,217,383 $3,137,661 $2,550,569
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 362,598 325,717 321,966
Provision for credit losses 312,000 390,000 351,000
Amortization of intangibles 211,337 214,049 102,989
Gain on sale of assets (5,690) 0 0
Amortization of bond premium 31,026 42,634 57,711
Accretion of bond discount (467,320) (594,330) (629,379)
Mortgage loans originated for sale (6,327,955) (19,858,729) (2,952,367)
Proceeds from sale of mortgage loans 6,717,811 19,671,533 2,917,469
Increase in interest receivable (197,565) (78,496) (235,022)
Increase (decrease) in interest payable 88,600 (170,504) 489,796
Other, net(net of acquisition of branch) (299,675) (80,489) (425,933)
------------- ------------- ------------
Net Cash Provided by Operating
Activities $3,642,550 $2,999,046 $2,548,799
------------- ------------- ------------
Cash Flows from Investing Activities:
Maturities of held-to-maturity
securities $1,322,195 $1,131,480 $1,222,807
Maturities and sales of
available-for-sale securities 5,404,827 4,369,888 2,511,201
Purchase of held-to-maturity
securities (5,426,913) (3,281,981) (180,000)
Purchase of available-for-sale
securities (1,448,195) (14,621,350) (6,202,804)
Net cash received from acquisition
of branch bank 0 0 13,786,977
Federal funds sold, net 4,912,000 (1,305,000) (6,175,000)
Proceeds from sale of foreclosed
assets 302,505 0 0
Net increase in loans made to
customers (net of acquisition of
branch) (42,116,544) (15,597,282) (22,031,731)
Capital expenditures (net of
acquisition of branch) (1,130,272) (391,802) (331,347)
------------ ------------- -------------
Net Cash (Used) by Investing
Activities $(38,180,397) $(29,696,047)$(17,399,897)
------------ ------------- -------------
Cash Flows from Financing Activities:
Net increase in deposits (net of
acquisition of branch) $(116,077) $22,920,624 $19,633,264
Purchase of treasury stock (202,852) (80,628) (68,196)
Sale of treasury stock 287,712 0 0
Dividends paid (851,495) (672,125) (618,433)
Debt proceeds 48,898,674 13,958,025 24,745,411
Debt repayments (11,769,162) (8,653,305) (27,885,497)
------------ ------------- -------------
Net Cash Provided by Financing
Activities $36,246,800 $27,472,591 $15,806,549
------------ ------------- -------------
Net increase in cash and cash
equivalents $1,708,953 $775,590 $955,451
Cash and cash equivalents,
beginning 7,794,995 7,019,405 6,063,954
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, ENDING $9,503,948 $7,794,995 $7,019,405
============ ============= =============
Noncash Investing Activities:
Loans transferred to foreclosed
properties $100,000 $200,000 $0
============ ============= =============
Total increase (decrease) in
unrealized loss on securities
available-for-sale $605,955 $(129,356) $14,244
============ ============= =============
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DENMARK BANCSHARES, INC.
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Denmark Bancshares, Inc. is a bank holding company as defined in the Bank
Holding Company Act. As such, it exercises control over Denmark State Bank,
Denmark Ag Credit Corporation and McDonald-Zeamer Insurance Agency, Inc. A
majority of the Company's assets are held by Denmark State Bank.
Denmark State Bank, a wholly owned subsidiary of Denmark Bancshares, Inc.,
operates under a state bank charter, and provides full banking services to
its customers. Denmark Investments Inc. is a wholly owned subsidiary of
Denmark State Bank. The Company and its subsidiaries make agribusiness,
commercial and residential loans to customers throughout the state, but
primarily in eastern Wisconsin. The Company and its subsidiaries have a
diversified loan portfolio, however, a substantial portion of their debtors'
ability to honor their contract is dependent upon the agribusiness economic
sector. The main loan and deposit accounts are fully disclosed in Notes 3
and 5. The significant risks associated with financial institutions include
interest rate risk, credit risk, liquidity risk and concentration risk.
Basis of Consolidation
The consolidated financial statements include the accounts of Denmark
Bancshares, Inc. and its subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates, such as the allowance for credit losses and accounting
for the impairment of loans, are discussed specifically in the following
sections of this footnote.
Investment Securities
Investment securities are designated as available-for-sale or
held-to-maturity when purchased and remain in that classification until they
are sold or mature. Debt and equity securities classified as
available-for-sale are stated at estimated fair value, with unrealized gains
and losses, net of any applicable deferred income taxes, reported as a
separate component of stockholders' equity. As a result of the adjustment
from amortized cost to fair value, stockholders' equity, net of applicable
deferred income taxes, decreased by $339,355 as of December 31, 1999 and
increased by $33,065 as of December 31, 1998 and decreased by $51,780 as of
December 31, 1997. Debt securities classified as held-to-maturity are stated
at cost adjusted for amortization of premiums and accretion of discounts,
which are recognized as adjustments to interest income. Realized gains or
losses on dispositions are recorded in other operating income on the
settlement date, based on the net proceeds and the adjusted carrying amount
of the securities sold using the specific identification method.
Loans
Loans are reported at the principal amount outstanding, net of the allowance
for credit losses. Interest on loans is calculated and accrued by using the
simple interest method on the daily balance of the principal amount
outstanding.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either
when reasonable doubt exists as to the full, timely collection of interest
or principal or when a loan becomes contractually past due by ninety days or
more with respect to interest or principal. When a loan is placed on
nonaccrual, all interest previously accrued but not collected is reversed
against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
A loan is impaired when, based on current information and events, it is
probable that not all amounts due will be collected according to the
contractual terms of the loan agreement. Impaired loans are measured at the
estimated fair value of the collateral. If the estimated fair value of the
impaired loan is less than the recorded investment in the loan, an impairment
is recognized by creating a valuation allowance. Interest income is
recognized in the same manner described above for nonaccrual loans.
Allowance for Credit Losses
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management
<PAGE 9>
believes will be adequate to absorb losses inherent in existing loans,
based on evaluations of the collectibility and prior loss experience of
loans. The Evaluations take into consideration such factors as changes
in the nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, leases and commitments, and current
and anticipated economic conditions that may affect the borrowers' ability
to pay.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks. Cash flows from demand deposits, NOW
accounts, savings accounts, federal funds purchased and sold, cash receipts
and payments of loans and time deposits are reported net. For purposes of
cash flow reporting, income taxes paid were $1,526,250, $1,410,964 and
$1,051,592 and interest paid was $11,521,032, $10,958,249 and $9,061,432 for
the years ended December 31, 1999, 1998 and 1997, respectively.
Premises and Equipment
Premises and equipment owned are stated at cost less accumulated depreciation
which is computed principally on the straight-line method over the estimated
useful lives of the assets.
Income Taxes
Deferred income taxes are provided for timing differences between items
of income or expense reported in the consolidated financial
statements and those reported for income tax purposes in accordance with FAS
109.
Treasury Stock
Treasury stock is shown at cost, and consists of 433, 551 and 465 shares,
with a cost of $305,426, $316,686 and $236,058 as of December 31, 1999, 1998
and 1997, respectively.
Stock Split
In March 1997, the Board of Directors authorized a two-for-one common stock
split to be implemented by a stock dividend of one share for each share
outstanding to shareholders of record on June 17, 1997, payable on July 1,
1997. Accordingly, outstanding shares of common stock were increased from
27,482 to 54,964 shares. Since the common stock has no par value, there was
no increase in the common stock account. References in the consolidated
financial statements and notes with regard to per share and related data have
been retroactively adjusted to give effect to the transaction.
Earnings per Common Share
Earnings per common share are computed based on the weighted average number
of shares of common stock outstanding during each year. The number of shares
used in computing basic earnings per share is 54,992, 54,855 and 54,927 for
the years ended December 31, 1999, 1998 and 1997, respectively.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current
year.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities available-for-sale
were as follows:
December 31, 1999
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- --------- --------- ------------
U.S. Government agencies $13,497,261 $4,500 $0 $13,501,761
Mortgage-backed securities 9,167,589 59,692 (12,323) 9,214,958
FHLB stock 1,045,800 0 0 1,045,800
Other securities 395,785 0 0 395,785
------------- --------- --------- ------------
$21,054,708 $6,396 $(560,482) $20,500,622
============= ========= ========= ============
December 31, 1998
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- --------- --------- ------------
U.S. Government agencies $13,497,261 $4,500 $0 $13,501,761
Mortgage-backed securities 9,167,589 59,692 (12,323) 9,214,958
FHLB stock 1,045,800 0 0 1,045,800
Other securities 1,311,790 0 0 1,311,790
------------- --------- --------- ------------
$25,022,440 $64,192 $(12,323) $25,074,309
============= ========= ========= ============
<PAGE> 10
December 31, 1997
-------------------------------------------------
Goss Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- --------- --------- ------------
U.S. Government agencies $2,743,758 $0 $(79,504) $2,664,254
Mortgage-backed securities 10,688,122 34,820 (32,803) 10,690,139
FHLB stock 921,700 0 0 921,700
Other securities 410,457 0 0 410,457
------------- --------- --------- ------------
$14,764,037 $34,820 $(112,307) $14,686,550
============= ========= ========= ============
The amortized cost and estimated fair value of securities held-to-maturity
were as follows:
December 31, 1999
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- --------- --------- ------------
State and local
governments $24,389,906 $670,792 $(436,048) $24,624,650
------------- --------- --------- ------------
$24,389,906 $670,792 $(436,048) $24,624,650
============= ========= ========= ============
December 31, 1998
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- --------- --------- ------------
State and local
governments $19,834,609 $1,779,306 $(6,527) $21,607,388
------------- --------- --------- ------------
$19,834,609 $1,779,306 $(6,527) $21,607,388
============= ========= ========= ============
December 31, 1997
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- --------- --------- ------------
State and local
governments $17,139,353 $1,684,339 $0 $18,823,692
------------- --------- --------- ------------
$17,139,353 $1,684,339 $0 $18,823,692
============= ========= ========= ============
The amortized cost and estimated fair values of securities at December 31,
1999, by maturity were as follows:
Securities Securities
Available-for-Sale Held-to-Maturity
------------------------- -------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Amounts Maturing Cost Value Cost Value
- ----------------- ------------ ----------- ----------- ------------
Within one year $701,075 $697,936 $506,970 $523,735
From one through five
years 17,082,984 16,533,742 6,262,999 6,622,739
From five through ten
years 464,864 463,159 7,183,473 7,359,806
After ten years 0 0 10,436,464 10,118,370
Other securities (no
stated maturity) 2,805,785 2,805,785 0 0
------------ ----------- ----------- ------------
$21,054,708 $20,500,622 $24,389,906 $24,624,650
============ =========== =========== ============
Mortgage-backed securities are allocated according to their expected
prepayments rather than their contractual maturities.
<PAGE> 11
During 1999, available-for-sale securities were sold for total proceeds of
$2,997,578. There were no significant gross realized gains or losses in
1999. No securities were sold during 1998 or 1997.
There were no significant concentrations of investments (greater than 10
percent of stockholders' equity) in any individual security issuer, except
for securities issued by U.S. Government agencies and corporations.
Investment securities with an amortized cost of $245,434 and estimated fair
value of $243,572, at December 31, 1999, were pledged to secure public
deposits and for other purposes required or permitted by law.
NOTE 3 - LOANS
Major categories of loans included in the loan portfolio are as follows:
December 31,
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
Commercial:
Agricultural $33,316,273 $30,700,423 $27,251,588
Other 37,858,231 31,228,455 26,651,300
------------- ------------- -------------
$71,174,504 $61,928,878 $53,902,888
------------- ------------- -------------
Real estate:
Agricultural $22,156,129 $20,068,369 $18,227,821
Commercial 52,964,149 39,972,450 35,787,187
Residential 90,913,047 75,303,134 74,361,516
------------- ------------- -------------
$166,033,325 $135,343,953 $128.376.524
------------- ------------- -------------
Installment $18,552,100 $16,927,234 $16,623,280
------------- ------------- -------------
Unsecured loans $865,099 $786,082 $656,280
------------- ------------- -------------
Total loans receivable $256,625,028 $214,986,147 $199,558,972
Allowance for credit losses (3,282,812) (3,058,618) (2,825,921)
------------- ------------- -------------
NET LOANS RECEIVABLE $253,342,216 $211,927,529 $196,733,051
============= ============= =============
Final loan maturities and rate sensitivity of the loan portfolio, excluding
unsecured loans, at December 31, 1999, are as follows:
Within One - After
(In thousands) One Year Five Years Five Years Total
--------- --------- --------- ---------
Commercial and installment $64,781 $24,267 $679 $89,727
Real estate 139,369 26,039 625 166,033
--------- --------- --------- ---------
TOTAL $204,150 $50,306 $1,304 $255,760
========= ========= ========= =========
At December 31, 1999, loans with a maturity greater than one year with a
variable interest rate totaled $1,165,854.
Other real estate owned represents real estate of which the Company has taken
control in partial or total satisfaction of loans. Other real estate owned
is carried at the lower of cost or fair value, less estimated costs to sell.
Losses at the time property is classified as other real estate owned are
charged to the allowance for loan losses. Subsequent gains and losses, as
well as operating income or expense related to other real estate owned, are
charged to expense. Other real estate owned, which is included in other
assets, totaled $200,000 at December 31, 1998. There was no other real
estate owned at year end 1999 or 1997.
<PAGE> 12
Nonaccrual loans totaled $7,835,123, $3,937,112 and $4,667,707 at December
31, 1999, 1998 and 1997, respectively. The reduction in interest income
associated with nonaccrual loans is as follows:
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Income in accordance with
original loan terms $733,461 $500,187 $503,313
Income recognized (507,687) (576,326) (459,611)
--------- --------- ---------
REDUCTION (INCREASE) IN INTEREST INCOME $225,774 $(76,139) $43,702
========= ========= =========
Information concerning the Company's investment in impaired loans is as
follows:
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Total investment in impaired loans $6,533,918 $2,633,527 $3,425,149
Loans not requiring an allowance 5,302,854 1,596,276 2,717,153
Loans requiring a related allowance 1,231,064 1,037,251 707,996
Related allowance (343,245) (166,814) (106,505)
Average investment in impaired loans
during the year 5,435,962 2,540,253 3,495,193
Interest income recognized on a cash
basis 251,230 283,635 299,628
Changes in the allowance for credit losses were as follows:
Year ended December 31,
----------------------------------
1999 1998 1997
----------- ---------- -----------
Balance - beginning of year $3,058,618 $2,825,921 $2,506,728
Charge-offs (150,329) (219,673) (60,582)
Recoveries 62,523 62,370 28,775
Provision charged to operations 312,000 390,000 351,000
----------- ---------- -----------
BALANCE - END OF YEAR $3,282,812 $3,058,618 $2,825,921
=========== ========== ===========
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-----------------------------------
1999 1998 1997
------------ ---------- -----------
Land $541,241 $530,519 $508,220
Buildings and improvements 3,383,374 3,355,207 3,188,505
Furniture and fixtures 2,939,304 2,448,402 2,273,820
Construction in progress 550,793 0 0
----------- ---------- ----------
$7,414,712 $6,334,128 $5,970,545
Less: Accumulated depreciation (3,303,785) (2,990,875) (2,693,377)
----------- ---------- ----------
NET $4,110,927 $3,343,253 $3,277,168
=========== ========== ==========
As of December 31, 1999, there were approximately $400,000 of commitments
outstanding to complete construction in progress.
<PAGE> 13
NOTE 5 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
------------------------------------------
1999 1998 1997
------------- ------------ -------------
NOW accounts $12,610,990 $12,831,148 $10,394,916
Savings accounts 15,505,764 16,360,946 17,035,713
Money market accounts 57,726,080 51,461,772 40,450,756
Certificates of deposit 71,691,449 77,424,423 81,309,850
Time deposit open accounts 28,012,179 26,803,046 20,443,524
------------- ------------ -------------
TOTAL $185,546,462 $184,881,335 $169,634,759
============= ============ =============
The following table shows the maturity distribution of certificates of
deposit and time deposit open accounts:
December 31,
-----------------------------
(In thousands) 1999 1998 1997
------- -------- --------
Within one year $56,430 $72,041 $76,050
One to two years 37,394 26,564 21,920
Two to three years 4,150 3,381 2,345
Three to four years 1,463 1,355 744
Over four years 267 886 694
------- -------- --------
TOTAL $99,704 $104,227 $101,753
======= ======== ========
Certificates of deposit and time deposit open accounts issued in amounts of
$100,000 or more totaled $20,306,581, $24,369,361 and $22,448,045, at
December 31, 1999, 1998 and 1997, respectively.
NOTE 6 - SHORT-TERM BORROWINGS
The following table is a summary of short-term borrowings:
December 31,
---------------------------------------
1999 1998 1997
----------- ------------ ------------
Federal Home Loan Bank advances $31,200,000 $0 $0
Notes payable 26,908,946 22,400,272 22,791,248
U.S. Treasury demand notes 0 0 300,000
----------- ------------ ------------
TOTAL SHORT-TERM BORROWINGS $58,108,946 $22,400,272 $23,091,248
=========== ============ ============
As of December 31, 1999, the Company had $14,091,054 of unused lines of
credit with banks to be drawn upon as needed. Federal Home Loan Bank
advances are secured by residential mortgages and have fixed and adjustable
rates ranging from 4.74% to 6.50% as of December 31, 1999. Notes payable are
secured by agricultural loans, Denmark State Bank and Denmark Ag Credit
Corporation stock and have variable interest rates ranging from 6.01% to
8.19% as of December 31, 1999.
<PAGE> 14
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ----------
Note dated in 1999, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.71%, principal due and payable
every 90 days or final maturity
December 30, 2004. $5,000,000 $0 $0
Note dated in 1999, with Federal
Home Loan Bank of Chicago, monthly
interest due at a variable rate
which changes monthly, principal
due and payable on call date
October 29,2000 or every quarter
thereafter or final maturity
October 29, 2004. 5,000,000 0 0
Note dated in 1998, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
4.80%, principal due and payable on
call date April 6, 1999 or final
maturity April 6, 2008. 0 5,000,000 0
Note dated in 1998, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.05%, principal due and payable on
call date January 20, 2001 or final
maturity January 20, 2008. 4,000,000 4,000,000 0
Note dated in 1997, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.96%, principal due and payable
December 30, 2002. 3,000,000 3,000,000 3,000,000
Note dated in 1996, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
5.94%, principal due and payable
March 18, 1998. 0 0 3,000,000
Note dated in 1996, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
6.02%, principal due and payable
December 27, 1999. 0 2,200,000 2,200,000
Note dated in 1996, with Federal
Home Loan Bank of Chicago, monthly
interest due at an annual rate of
6.51%, principal payments in the
amounts of $94,000, $79,000, $83,000
and $1,118,500 due and payable
December 27, 2003, 2007, 2010 and
2011, respectively. 0 1,374,500 1,374,500
Note dated in 1996, interest rate of
8%, principal payment in the amount
of $20,000 due January 2, 1997.
Remaining balance due in eleven
installments of $3,500 through 1997,
then monthly installments of $1,092
through 2011. 97,536 102,198 106,503
------------ ------------ ----------
TOTAL LONG-TERM DEBT $17,097,536 $15,676,698 $9,681,003
============ ============ ==========
The notes payable to Federal Home Loan Bank of Chicago are secured by
residential mortgages. Long-term debt has aggregate maturities for the five
years 2000 through 2004 as follows: $5,049 in 2000, $5,468 in 2001,
$3,005,922 in 2002, $6,413 in 2003 and $10,006,946 in 2004.
<PAGE> 15
NOTE 8 - INCOME TAXES
The provision for income taxes in the consolidated statement of income is as
follows:
(In thousands) 1999 1998 1997
-------- -------- --------
Current: Federal $1,162 $1,128 $865
State 281 252 206
-------- -------- --------
$1,443 $1,380 $1,071
-------- -------- --------
Deferred: Federal $(137) $(83) $(117)
State (40) (13) (34)
-------- -------- --------
$(177) $(96) $(151)
-------- -------- --------
TOTAL PROVISION FOR INCOME TAXES $1,266 $1,284 $920
======== ======== ========
Applicable income taxes for financial reporting purposes differ from the
amount computed by applying the statutory federal income tax rate for the
reasons noted in the table below:
1999 1998 1997
------------ ------------- -------------
(In thousands) Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Tax at statutory federal
income tax rate $1,524 34% $1,503 34% $1,180 34%
Increase (decrease) in tax
resulting from:
Tax-exempt income (431) (10) (396) (9) (388) (11)
State income tax, net of
federal tax benefit 158 4 157 3 113 3
Other, net 15 1 20 1 15 1
------ ---- ------ ---- ------ ----
APPLICABLE INCOME TAXES $1,266 29% $1,284 29% $920 27%
====== ==== ====== ==== ====== ====
Other assets in the accompanying statements of financial condition include
the following amounts of deferred tax assets and deferred tax liabilities:
(In thousands) 1999 1998 1997
------ ------ ------
Deferred tax assets:
Allowance for credit losses $1,219 $1,137 $1,039
Unrealized losses on
available-for-sale securities 215 0 25
State tax net operating loss carryforward 94 88 87
Interest receivable on nonaccrual loans 121 34 79
Other 31 19 22
------ ------ ------
Gross deferred tax assets $1,680 $1,278 $1,252
Valuation allowance (94) (88) (87)
------ ------ ------
Total deferred tax assets $1,586 $1,190 $1,165
------ ------ ------
Deferred tax liabilities:
Accumulated depreciation on fixed assets $127 $123 $134
State income taxes 87 76 65
Unrealized gains on available-for-sale
securities 0 19 0
Accretion 7 8 46
------ ------ ------
Total deferred tax liabilities $221 $226 $245
------ ------ ------
NET DEFERRED TAX ASSET $1,365 $964 $920
====== ====== ======
<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 1999, 1998 and 1997.
In addition, the money purchase plan generally provides for employer
contributions of 4% of each participant's compensation.
The Company provides no post retirement benefits to employees except for the
401(k) profit sharing plan and the money purchase pension plan discussed
above which are currently funded. The Company expensed contributions of
$324,854, $313,788 and $275,509 for the years 1999, 1998 and 1997,
respectively.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF - BALANCE SHEET RISK
The Company and its subsidiaries are parties to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company and its subsidiaries have in particular classes of financial
instruments.
The exposure of the Company and its subsidiaries to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual or notional amount of these instruments. The Company and
its subsidiaries use the same credit policies in making commitments and
conditional obligations as for on-balance sheet instruments. The Company and
its subsidiaries require collateral or other security to support financial
instruments with credit risk.
Contract or
Notional Amount Secured
(In thousands) December 31, 1999 Portion
----------------- ---------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $24,846 $18,927
Standby letters of credit
and financial guarantees written 1,024 1,024
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company and its
subsidiaries evaluate each customer's creditworthiness on a case-by-case
basis. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support commercial business transactions. A majority
of the letters of credit expire within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loans to customers. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties and residential properties. All
letters of credit are fully collateralized.
Federal funds sold to correspondent banks are not insured.
<PAGE> 17
NOTE 11 - RELATED PARTY TRANSACTIONS
At December 31, 1999, 1998 and 1997 certain Company subsidiary executive
officers, directors and companies in which they have a ten percent or more
beneficial interest, were indebted to the Company and its subsidiaries in the
amounts shown below. All such loans were made in the ordinary course of
business and at rates and terms similar to those granted other borrowers.
December 31, 1999
--------------- ---------------------------
New Ending
(In thousands) 1997 1998 Loans Payments Balance
------ ------ ------ -------- --------
Aggregate related party loans $1,360 $1,459 $1,653 $(347) $2,765
====== ====== ====== ======== ========
NOTE 12 - PARENT COMPANY ONLY INFORMATION
Following, in a condensed form, are parent company only statements of
financial condition, statements of income and cash flows of Denmark
Bancshares, Inc. for the years 1999, 1998 and 1997. The financial
information contained in this footnote is to be read in association with the
preceding accompanying notes to the consolidated financial statements.
DENMARK BANCSHARES, INC.
Statements of Financial Condition
December 31,
-------- -------- --------
(In thousands) 1999 1998 1997
-------- -------- --------
Assets
Cash in banks $1,004 $695 $1,074
Investment
Banking subsidiary 23,675 22,280 19,524
Nonbanking subsidiaries 5,489 4,894 4,334
Real estate loans (less
allowance for credit losses
of $61, $61 and $61, respectively) 358 580 1,103
Fixed assets (net of depreciation
of $1,374, $751 and $633) 2,980 2,078 2,021
Other assets 69 49 50
-------- -------- --------
TOTAL ASSETS $33,575 $30,576 $28,106
======== ======== ========
Liabilities
Accrued expenses $59 $38 $38
Dividends payable 495 397 329
Note payable - unrelated bank 900 0 0
-------- -------- --------
Total Liabilities $1,454 $435 $367
-------- -------- --------
Stockholders' Equity
Common stock $10,031 $10,020 $10,100
Paid-in capital 110 37 37
Retained earnings 22,319 20,051 17,654
Accumulated other comprehensive income
Unrealized (losses) gains on securities (339) 33 (52)
-------- -------- --------
Total Stockholders' Equity $32,121 $30,141 $27,739
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $33,575 $30,576 $28,106
======== ======== ========
<PAGE> 18
DENMARK BANCSHARES,INC.
Statements of Income
For the Years Ended
December 31,
-------- -------- --------
(In thousands) 1999 1998 1997
-------- -------- --------
Income
Interest income from loans $36 $72 $96
Other interest income 19 35 18
Dividend income from banking subsidiary 1,000 0 1,500
Rental income from banking subsidiary 232 207 165
Rental income from nonbanking subsidiar 9 9 6
-------- -------- --------
Total Income $1,296 $323 $1,785
-------- -------- --------
Expenses
Management fees to banking subsidiary $120 $120 $120
Interest expense 26 0 0
Depreciation 138 118 111
Other operating expenses 153 146 127
-------- -------- --------
Total Expenses $437 $384 $358
-------- -------- --------
Income (loss) before income taxes and
undistributed income of subsidiaries $859 $(61) $1,427
Income tax (benefit) expense (36) (7) (16)
-------- -------- --------
Income (Loss) Before Undistributed
Income of Subsidiaries $895 $(54) $1,443
Equity in Undistributed Income of Subsidiaries
Banking subsidiary 1,767 2,671 627
Nonbank subsidiaries 555 521 481
-------- -------- --------
NET INCOME $3,217 $3,138 $2,551
======== ======== ========
<PAGE> 19
DENMARK BANCSHARES, INC.
Statements of Cash Flows
For the Years Ended
December 31,
----------------------------
(In thousands) 1999 1998 1997
-------- -------- --------
Cash Flows from Operating Activities:
Net Income $3,217 $3,138 $2,551
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 138 118 111
Equity (earnings) of banking subsidiary (2,767) (2,671) (2,127)
Equity (earnings) of nonbanking subsidiaries (555) (521) (481)
Dividend from banking subsidiary 1,000 0 1,500
(Increase) decrease in other assets (21) 2 (12)
Increase in accrued expenses 21 1 9
-------- -------- --------
Net Cash Provided by
Operating Activities $1,033 $67 $1,551
-------- -------- --------
Cash Flows from Investing Activities:
Investment in nonbanking subsidiary $(40) $(40) $(40)
Capital expenditures (1,040) (175) (348)
Net decrease in real estate loans 222 522 160
-------- -------- --------
Net Cash (Used) Provided by
Investing Activities $(858) $307 $(228)
-------- -------- --------
Cash Flows from Financing Activities:
Debt proceeds $900 $0 $0
Treasury stock proceeds 288 0 0
Treasury stock purchases (203) (81) (68)
Dividends paid (851) (672) (619)
-------- -------- --------
Net Cash Provided (Used) by
Financing Activities $134 $(753) $(687)
-------- -------- --------
Net Increase (Decrease) in Cash $309 $(379) $636
Cash, beginning 695 1,074 438
-------- -------- --------
CASH, ENDING $1,004 $695 $1,074
======== ======== ========
Supplemental Disclosure:
Income taxes paid $(21) $(5) $(13)
======== ======== ========
NOTE 13 - BRANCH ACQUISITION
On August 4, 1997, the Company purchased the assets and assumed the
liabilities of the Reedsville Branch of M&I Bank Northeast. M&I Bank
Reedsville Branch was engaged in full banking services. The results of
operations of the Reedsville Branch are included in the accompanying
financial statements since the date of acquisition. Through the acquisition
of the Reedsville Branch the Company purchased loans of $2,309,712,
purchased premises and equipment of $307,250, assumed deposits of $19,079,143
and other liabilities net of other assets of $210,662, resulting in the
Company receiving cash of $13,786,977. For the assumption of the deposits a
premium of $2,885,866 was paid. The premium is being amortized using the
straight line method over 15 years. The amortization expense charged to
operations for 1999, 1998 and 1997 was $192,391, $192,391 and $80,163,
respectively.
M&I Bank did not maintain separate and complete branch accounting records for
the Reedsville Branch, therefore prior year results of operations have not
been disclosed.
NOTE 14 - SUBSEQUENT EVENT
The Company issued options to employees to purchase 267 common shares after
December 31, 1999, which, had it taken place during fiscal 1999, it would
have changed the number of shares used in the computation of earnings per
share.
<PAGE> 20
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments
- -------------------------------
For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
- ---------------------
For securities held for investment purposes and marketable equity securities
held for investment purposes, fair values are based on quoted market prices
or dealer quotes. For other securities held as investments, fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans Receivable
- ----------------
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities
- -------------------
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowings
- ----------
Rates currently available to the bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written
- ----------------------------------------------------------------------------
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting
date.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1999
--------------------
Carrying Fair
(In thousands) Amount Value
-------- --------
Financial Assets
Cash and short-term investments $13,009 $13,009
Investment securities 44,891 45,125
Loans 256,625 253,184
Less: Allowance for credit losses (3,283) -
-------- --------
TOTAL $311,242 $311,318
======== ========
Financial Liabilities
Deposits $211,934 $212,193
Borrowings 75,206 74,768
-------- --------
TOTAL $287,140 $286,961
======== ========
Unrecognized Financial Instruments
Commitments to extend credit $24,846 $24,846
Standby letters of credit and financial
guarantees written 1,024 1,024
-------- --------
TOTAL $25,870 $25,870
======== ========
<PAGE> 21
NOTE 16 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Total Capital and Tier 1 Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1999, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the table
below:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Amount Purposes: Action Provisions:
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Denmark Bancshares, Inc.
Total Capital (to Risk-Weighted Assets) $32,557,936 14.6% $17,832,980 >8.0% $22,291,225 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $29,765,404 13.4% $8,916,490 >4.0% $13,374,735 > 6.0%
Tier 1 Capital (to Average Assets)* $29,765,404 9.6% $12,372,077 >4.0% $15,465,096 > 5.0%
Denmark State Bank
Total Capital (to Risk-Weighted Assets) $23,944,069 12.7% $15,062,635 >8.0% $18,828,293 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $21,585,054 11.5% $7,531,317 >4.0% $11,296,976 > 6.0%
Tier 1 Capital (to Average Assets)* $21,585,054 7.8% $11,018,701 >4.0% $13,773,376 > 5.0%
As of December 31, 1998:
Denmark Bancshares, Inc.
Total Capital (to Risk-Weighted Assets) $29,570,127 15.6% $15,122,148 >8.0% $18,902,685 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $27,198,701 14.4% $7,561,074 >4.0% $11,341,611 > 6.0%
Tier 1 Capital (to Average Assets)* $27,198,701 10.0% $10,853,491 >4.0% $13,566,864 > 5.0%
Denmark State Bank
Total Capital (to Risk-Weighted Assets) $21,619,907 13.6% $12,746,790 >8.0% $15,933,488 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $19,620,895 12.3% $6,373,395 >4.0% $9,560,093 > 6.0%
Tier 1 Capital (to Average Assets)* $19,620,895 8.1% $9,662,781 >4.0% $12,078,476 > 5.0%
As of December 31, 1997:
Denmark Bancshares, Inc.
Total Capital (to Risk-Weighted Assets) $26,791,631 15.8% $13,535,678 >8.0% $16,919,597 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $24,667,904 14.6% $6,767,839 >4.0% $10,151,758 > 6.0%
Tier 1 Capital (to Average Assets)* $24,667,904 10.1% $9,741,088 >4.0% $12,176,359 > 5.0%
Denmark State Bank
Total Capital (to Risk-Weighted Assets) $18,503,599 13.3% $11,153,959 >8.0% $13,942,448 >10.0%
Tier 1 Capital (to Risk-Weighted Assets) $16,752,896 12.0% $5,576,979 >4.0% $8,365,469 > 6.0%
Tier 1 Capital (to Average Assets)* $16,752,896 7.8% $8,552,535 >4.0% $10,690,669 > 5.0%
</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, 1999, and the Company's consolidated financial condition at the
end of each year during this period. This discussion should be read in
conjunction with the "CONSOLIDATED FINANCIAL STATEMENTS" including the
accompanying notes, and the "SELECTED FINANCIAL DATA" presented elsewhere in
this report. The Company's subsidiaries are the Denmark State Bank ("Bank"),
Denmark Agricultural Credit Corporation ("DACC") and the McDonald-Zeamer
Insurance Agency, Inc. ("McDonald").
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain items of income and expense as well as
period-to-period percentage increases (decreases) for the Company on a
consolidated basis during the most recent three fiscal years:
Percent
Increase
(Decrease)
1999 1998 1997 1999/98 1998/97
(In thousands) ------- ------- ------- ------- -------
Interest income $22,319 $21,050 $18,463 6.0% 14.0%
Interest expense 11,599 10,772 9,543 7.7 12.9
Net interest income 10,720 10,278 8,920 4.3 15.2
Provision for credit losses 312 390 351 (20.0) 11.1
Noninterest income 1,026 955 819 7.4 16.6
Noninterest expense 6,951 6,421 5,917 8.3 8.5
Net income 3,217 3,138 2,551 2.5 23.0
Earnings Performance
- --------------------
The Company recorded net income of $3,217,383 in 1999. This represents an
increase of $79,722 or 2.5% compared to 1998 earnings. The increase in net
income is primarily attributable to higher interest income and noninterest
income which increased by $1,268,326 and $72,035 respectively, and a lower
provision for loan losses which decreased by $78,000. These items more than
offset higher interest expense and noninterest expenses which increased by
$826,192 and $530,393 respectively. The increase in interest income was the
result of higher average earning assets. Average earning assets increased by
$33.6 million during 1999 compared to 1998. Loan growth accounted for much
of this increase as average loans increased by $30.6 million or 14.8%. The
increase in interest expenses was the result of higher average
interest-bearing liabilities. Average interest-bearing liabilities increased
by $29.4 million during 1999 compared to 1998. The increase in noninterest
expenses is primarily attributable to increases in salaries and employee
benefits expense which increased $320,707 or 7.9% compared to 1998, and
higher data processing expense which increased by $111,682 or 34% higher than
1998.
The increase in net income in 1999 followed an increase of $587,092 or 23.0%
in 1998 compared to 1997 earnings. The increase in net income was primarily
attributable to higher net interest income and noninterest income which
increased by $1,357,719 and $135,648 respectively. These items more than
offset higher noninterest expenses and higher income taxes which increased by
$503,269 and $364,006 respectively. The increase in net interest income was
primarily the result of higher average earning assets. Average earning
assets increased by $30.3 million during 1998 compared to 1997. Loan growth
accounted for much of this increase as average loans increased by
$21.1million or 11.4%. The increase in noninterest expenses is primarily
attributable to increases in salaries and employee benefits expense which
increased $412,309 or 11.2% compared to 1997. Net income for 1997 includes
five months of operations for the Reedsville Branch
On a per share basis, net income was $58.51 in 1999 compared with $57.20 in
1998 and $46.44 in 1997. Return on average assets for the Company was 1.09%
in 1999 compared to 1.20% in 1998 and 1.12% in 1997. Return on average
equity in 1999 was 10.23% compared to 10.80% and 9.47% in 1998 and 1997
respectively.
<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.
The following table sets forth a summary of the changes in interest earned
and interest paid resulting from changes in volume and changes in rates:
Year Ended December 31,
--------------------------------------------------
1999 1998
--------------------------- ----------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
Change In Change In
--------------------------- ----------------------
(In thousands) Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
--------- ---------- ------ ------ -------- ------
Interest income:
Loans $2,717 $(1,559) $1,158 $1,850 $272 $2,122
Taxable securities 493 (66) 427 129 (17) 112
Nontaxable
securities 207 (94) 113 68 (38) 30
Federal funds sold (423) (7) (430) 337 (13) 324
--------- ---------- ------ ------ -------- ------
Total interest income $2,994 $(1,726) $1,268 $2,384 $204 $2,588
--------- ---------- ------ ------ -------- ------
Interest expense:
NOW accounts $31 $(1) $30 $42 $2 $44
Savings accounts (14) (30) (44) 3 (9) (6)
Money market accounts 451 (202) 249 562 (3) 559
Certificates and
other time deposits 98 (366) (268) 621 55 676
Other borrowed funds 984 (125) 859 40 (83) (43)
--------- ---------- ------ ------ -------- ------
Total interest expense $1,550 $(724) $826 $1,268 $(38) $1,230
--------- ---------- ------ ------ -------- ------
Net interest income $1,444 $(1,002) $442 $1,116 $242 $1,358
========= ========== ====== ====== ======== ======
For purposes of the above table, changes which are not due solely to volume
or rate have been allocated to rate.
Net interest income increased 4.3% or $442,134 from 1998 to 1999. The
increase is primarily attributable to higher average earning assets which
generated additional interest income of $2,993,675. Average earning assets
increased by $33.6 million or 13.5% during 1999 compared to 1998. The yield
on earning assets fell from 8.44% during 1998 to 7.89% during 1999. The net
effect of higher earning assets and the lower yield, which resulted in a
decrease of $1,725,350 in interest income, was an increase of $1,268,326 in
total interest income in 1999 compared to 1998. The increase in interest
income more than offset the increased interest expense of $826,192
resultingprimarily from higher average interest-bearing liabilities. Average
interest-bearing liabilities increased by $29.4 million or 13.9% during 1999.
The cost of funds fell from 5.11% during 1998 to 4.83% during 1999. The
Company's net interest income spread fell from 3.33% in 1998 to 3.06% during
1999. Net interest income spread is the difference between the average yield
earned on assets and the average rate incurred on liabilities.
Net interest income increased 15.2% or $1,357,719 from 1997 to 1998. The
increase was primarily attributable to higher average earning assets which
generated additional interest income of $2,383,662. Average earning assets
increased by $30.3 million or 13.8% during 1998 compared to 1997. The
increase in interest income more than offset the increased interest expense
of $1,229,723 resulting primarily from higher average interest-bearing
liabilities. Average interest-bearing liabilities increased by $25.6 million
or 13.8% during 1998.
<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>
1999 1998 1997
----------------------------- ---------------------------- ---------------------------
(In thousands) Average Income Average Average Income Average Average Income Average
Daily and Yield or Daily and Yield or Daily and Yield or
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- ---------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Taxable loans $236,517 $19,460 8.23% $206,080 $18,310 8.88% $184,964 $16,190 8.75%
Nontaxable loans 500 28 5.60% 342 20 5.85% 317 19 5.99%
-------- ------- ----- -------- ------- ----- -------- -------- -----
Total Loans $237,017 $19,488 8.22% $206,422 $18,330 8.88% $185,281 $16,209 8.75%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Taxable securities $22,764 $1,334 5.86% $14,749 $907 6.15% $12,688 $795 6.27%
Nontaxable securities 21,633 1,417 6.55% 18,673 1,304 6.98% 17,731 1,274 7.19%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Securities $44,397 $2,751 6.20% $33,422 $2,211 6.62% $30,419 $2,069 6.80%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Federal funds sold $1,626 $80 4.92% $9,563 $509 5.32% $3,385 $185 5.47%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Earning Assets $283,040 $22,319 7.89% $249,407 $21,050 8.44% $219,085 $18,463 8.43%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest-earning assets:
Cash and due from banks $6,245 $5,579 $4,825
Allowance for credit losses (3,222) (2,951) (2,669)
Premises and equipment 3,589 3,262 3,116
Other assets 5,826 5,839 3,817
-------- ------- --------
TOTAL ASSETS $295,478 $261,136 $228,174
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW accounts $12,735 $259 2.03% $11,220 $229 2.04% $9,112 $184 2.02%
Savings accounts 16,080 368 2.29% 16,635 412 2.48% 16,521 419 2.54%
Money market accounts 54,970 2,372 4.32% 45,336 2,122 4.68% 33,352 1,564 4.69%
Time deposits 102,152 5,601 5.48% 100,476 5,869 5.84% 89,744 5,193 5.79%
Other borrowed funds 54,329 2,999 5.52% 37,220 2,140 5.75% 36,557 2,183 5.97%
-------- ----- ----- -------- ------- ----- -------- ------- -----
Total Interest-Bearing
Liabilities $240,266 $11,599 4.83% $210,887 $10,772 5.11% $185,286 $9,543 5.15%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest-bearing liabilities
and stockholders' equity:
Demand deposits $21,606 $19,114 $14,108
Other liabilities 2,144 2,083 1,845
Stockholders'equity 31,462 29,052 26,935
-------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $295,478 $261,136 $228,174
======== ======== ========
Net interest income
and rate spread $10,720 3.06% $10,278 3.33% $8,920 3.28%
======= ===== ======= ===== ======= =====
</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 $72,035 in 1999. The increase is
primarily the result of higher revenue from ATM surcharges and check card
fees which rose by $73,274. The Bank began surcharging non-customers that
used the Bank's ATMs. Overdraft fees increased by $31,809 during 1999.
Commissions from the sales of insurance decreased by $58,171. McDonald
receives bonus commissions from the companies it sells policies for based on
their loss experience. These bonuses decreased by $30,847 during 1999.
Noninterest income increased by $135,648 during 1998. The increase was
primarily the result of higher service fees and commissions which increased
$117,356 or 17.7% higher than 1997. Brokerage commissions on the sales of
mutual funds, annuities and equity securities increased by $72,277.
Commissions from the sales of insurance increased by $41,920.
The following table sets forth certain items
of noninterest income: Percent
Increase
(In thousands) (Decrease)
Noninterest income: 1999 1998 1997 1999/98 1998/97
------- ------- ------- ------- -------
Service fees and commissions $761 $786 $668 (3.2)% 17.7%
Other
265 169 151 56.8 11.9
------- ------- ------- ------- ------
Total noninterest income $1,026 $955 $819 7.4% 16.6%
======= ======= ======= ======= ======
Noninterest Expense
- -------------------
Salaries and employee benefits expense increased $320,707 or 7.9% in 1999.
The increase is primarily attributable to an increase of $186,473 in salaries
and higher insurance benefits which increased by $114,365. Occupancy
expenses increased by $57,749 primarily as a result of higher depreciation
expense which rose $36,880. Data processing expenses increased by $111,682.
The increases in depreciation and data processing expenses are the result of
considerable technology improvements implemented by the Bank. The
improvements included the purchase of sixty-nine personal computers, the
purchase and installation of local area network equipment at each branch
office, installation of a software system that automates the process of
opening new deposit accounts and the implementation of a bank wide on-line
teller system. These technology improvements are intended to improve
customer service, increase operating efficiency and replace a system that was
not year 2000 compliant. The Bank began a major remodeling of the Bellevue
facility in the third quarter. The project was completed in March 2000, with
total costs, including furniture and equipment, totaling approximately $1
million. Printing and supplies expenses increased $20,973 or 11.8% in 1999.
Marketing expenses increased by $18,620. The Bank incurred expenses during
1999 to raise customer awareness concerning its readiness for year 2000.
During 1998, salaries and employee benefits expense increased $412,309 or
11.2%. The increase was attributable to an increase of seven full-time
equivalent staff members and to regular salary increases. Occupancy expenses
increased by $33,952 primarily as a result of the additional branch facility
acquired in August of 1997 and the acquisition of an office building for
McDonald during 1998. Amortization of intangibles expense increased by
$111,061 as a result of the write-down of intangible assets related to the
acquisitions of the branch bank and the insurance agency. The intangibles
are being amortized over fifteen years.
The following table sets forth certain items
of noninterest expense:
Percent
(In thousands) Increase
Noninterest expense: (Decrease)
1999 1998 1997 1999/98 1998/97
------- ------- ------- ------- -------
Salaries and employee benefits $4,397 $4,076 $3,664 7.9% 11.2%
Occupancy expenses 680 622 588 9.3 5.8
Data processing expenses 437 326 320 34.0 1.9
Marketing expenses 234 215 214 8.8 0.5
Amortization of intangibles 213 214 103 (0.5) 107.8
Printing and supplies expense 199 178 218 11.8 (18.3)
Directors and committee fees 189 175 173 8.0 1.2
Other operating expenses 602 615 637 (2.1) (3.5)
------- ------- ------- ------- -------
Total noninterest expense $6,951 $6,421 $5,917 8.3% 8.5%
======= ======= ======= ====== =====
<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) 1999 1998 1997 1999/98 1998/97
-------- -------- -------- ------- -------
Federal funds sold $3,505 $8,417 $7,112 (58.4)% 18.3%
Investment securities 44,891 44,909 31,826 0.0 41.1
Loans 256,625 214,986 199,559 19.4 7.7
Allowance for credit losses (3,283) (3,059) (2,826) 7.3 8.2
Total assets 321,393 282,184 251,674 13.9 12.1
Deposits 211,934 212,050 189,129 (0.1) 12.1
Other borrowed funds 75,206 38,077 32,772 97.5 16.2
Stockholders' equity 32,121 30,141 27,739 6.6 8.7
Total assets at December 31, 1999, were $321.4 million. This represents an
increase of $39.2 million, or 13.9% over year end 1998. Management
attributes the growth during 1999 to heavy loan demand which resulted in an
increase in total loans amounting to $41.6 million or 19.4% higher than year
end 1998. Federal funds sold (unsecured loans of immediately available funds
to correspondents banks) were reduced by $4.9 million primarily to fund
loans. The above average loan growth coupled with a decrease in total
deposits caused the Company to significantly increase other borrowed funds.
Other borrowed funds increased by 97.5% or $37.1 million at year end 1999
compared to the prior year end.
At December 31, 1998, total assets increased by $30.5 million or 12.1% higher
than the previous year end. The Bank experienced above average deposit
growth during 1998. Total deposits increased by $22.9 million or 12.1%
higher compared to a year earlier. The above average deposit growth was used
primarily to fund loans and to increase the investment portfolio.
Investments
- -----------
Investment balances in various categories at the end of each of the last
three years were as follows:
December 31,
-------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value Cost Value
-------- -------- -------- --------- --------- --------
U.S. Government $13,498 $12,982 $13,497 $13,502 $2,744 $2,664
agencies
Mortgage-backed 4,751 4,713 9,167 9,215 10,688 10,690
securities
State and municipal 24,390 24,625 19,835 21,607 17,139 18,824
securities
Other securities 2,806 2,806 2,358 2,358 1,332 1,332
-------- -------- -------- --------- --------- --------
TOTAL $45,445 $45,126 $44,857 $46,682 $31,903 $33,510
======== ======== ======== ========= ========= ========
Securities available-for-sale and securities held-to-maturity are combined in
the table presented above.
The investment securities portfolio is structured to provide the Company with
adequate liquidity by purchasing readily marketable securities. At December
31, 1999, the carrying value of investment securities totaled $44.9 million,
or approximately the same amount as of December 31, 1998. This followed an
increase at year end 1998, of $13.1 million, or 41.1% over December 31, 1997.
The increase in investment securities at year end 1998 was attributable to
the strong deposit growth during 1998. The carrying value at December 31,
1999, includes $554,086 of net unrealized losses on available-for-sale
securities compared to $51,869 of net unrealized gains at year end 1998. The
net unrealized gains of the held-to-maturity securities amounted to $234,744
as of December 31, 1999, compared to $1,772,779 at year end 1998. The rise
in interest rates during 1999 caused the fair value of the investment
securities to decline. The yield on a one year Treasury Bill increased
approximately one hundred fifty basis points from year end 1998 to year
end 1999.
<PAGE> 27
The following table shows the maturities of investment securities at December
31, 1999, and the weighted average yields of such securities:
<TABLE>
<CAPTION>
U.S. Government
Agencies and State and
Mortgage-backed Municipal Other Total
Securities Securities Securities Securities
--------------- -------------- -------------- ---------------
Amortized Amortized Amortized Amortized
(In thousands) Cost Yield Cost Yield Cost Yield Cost Yield
------- ------- ------- ------ ------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less $701 5.90% $507 10.03% $2,806 5.08% $4,014 6.01%
Due from one to five years 17,083 5.77% 6,263 8.35% - - 23,346 6.46%
Due from six to ten years 465 6.16% 7,184 5.61% - - 7,649 5.64%
Due after ten years - - 10,436 5.45% - - 10,436 5.45%
------ ----- ------ ----- ------ ----- ------- -----
TOTAL $18,249 5.79% $24,390 6.34% $2,806 5.08% $45,445 6.05%
======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
Yields on tax exempt securities have not been computed on a tax equivalent
basis in the table above. Mortgage-backed securities are allocated according
to their expected prepayments rather than their contractual maturities.
Stocks and other securities having no stated maturity have been included in
"Due in one year or less" in the table above. The average maturity of the
portfolio was 6.5 years as of December 31, 1999, compared to 5.6 years and
5.8 years at year end 1998 and 1997 respectively. Securities
available-for-sale and securities held-to-maturity are combined in the table
presented above.
The following table shows the average balance and tax equivalent yield for
each of the last three years:
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
--------- ------ -------- ------- -------- --------
In thousands) Average Average Average
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Taxable securities $22,764 5.86% $14,749 6.15% $12,688 6.27%
Nontaxable securities 21,633 9.92% 18,673 10.58% 17,731 10.89%
--------- ------ -------- ------- -------- --------
TOTAL $44,397 7.84% $33,422 8.63% $30,419 8.96%
========= ====== ======== ======= ======== ========
The weighted average tax equivalent yield declined during each of the last
two years as higher yielding securities that matured or were called were
replaced with lower yielding securities of substantially the same quality.
There were no significant concentrations of investments (greater than 10
percent of stockholders' equity) in any individual security issuer, except
for securities issued by U. S. Government agencies and corporations.
Loans
- -----
The following table sets forth major types of loans and the percentage of
total loans for each type at the end of each of the last three years:
December 31,
-----------------------------------------------------
1999 1998 1997
---------------- ----------------- ------------------
(In thousands) Amount % Amount % Amount %
--------- ------ --------- ------- ---------- -------
Real estate $166,033 64.7% $135,344 63.0% $128,377 64.3%
Commercial 71,175 27.7% 61,929 28.8% 53,903 27.0%
Installment 18,552 7.2% 16,927 7.9% 16,623 8.3%
Other 865 0.4% 786 0.3% 656 0.4%
--------- ------ --------- ------- ---------- -------
Total $256,625 100.0% $214,986 100.0% $199,559 100.0%
========= ====== ========= ======= ========== =======
<PAGE> 28
The following sets forth the maturities of various categories of loans at
December 31, 1999:
Due From
Due in One One to Due After
Year or Less Five Years Five Years
(In thousands) ------------ ------------ ----------
Real estate $139,369 $26,039 $625
Commercial 56,490 14,163 522
Installment 8,291 10,104 157
-------- ------- ------
TOTAL $204,150 $50,306 $1,304
======== ======= ======
Substantially all loans maturing over one year are at fixed interest rates.
Of the real estate loans shown in the above table, $91.0 million or 55% are
residential mortgages, the Company's largest single category of loans.
Approximately $78.6 million of these are one-year notes which are renewed
annually, subject to updated credit and collateral valuation information but
generally without fees or closing costs to the customer. The remaining
residential mortgages are fixed rate loans for three and five year terms.
Virtually all of these notes amortize principal indebtedness over a ten to
twenty-five year period, and are repriceable at fixed rates that generally
follow prevailing longer term rates.
At December 31, 1999, $55.5 million or 22% of the Company's outstanding loans
were deemed "agriculture-related", constituting the highest industrial
concentration in the portfolio. Of these loans, over 90% relate directly to
the dairy farming industry. Virtually all of these notes are written on a
one-year basis, which allows the Company to review credit information and
collateral values annually to ensure continued loan quality.
The Company does not make unsecured loans other than credit card advances,
which aggregated $481,468 at December 31, 1999, or .19% of total loans
outstanding, and personal reserve overdraft protection accounts, which
aggregated $297,060 or .12% of total loans outstanding at December 31, 1999.
Nonaccrual loans totaled $7,835,123, $3,937,112 and $4,667,707 at December
31, 1999, 1998 and 1997 respectively. Approximately $5.0 million of the
total nonaccrual loans at December 31, 1999, are real estate loans. Of the
nonaccrual real estate loans, $2.5 million are secured by apartment
buildings, $1.5 million are secured by commercial properties and $1.0 million
are secured by residential mortgages. Management considers these loans
adequately secured. Approximately $2.7 million of the total nonaccrual loans
are commercial loans. Of the nonaccrual commercial loans, $2.1 million are
secured by used automobiles and parts. Management considers these loans
marginally secured with the possibility of some charge-offs occurring in
2000.
The Company has no accruing loans that are past due 90 days or more. The
Bank's policy is to place in nonaccrual status all loans which are
contractually past due 90 days or more as to any payment of principal or
interest and all other loans as to which reasonable doubt exists as to the
full, timely collection of interest or principal based on management's view
of the financial condition of the borrower. Previously accrued but
uncollected interest on loans placed on nonaccrual status is charged against
current earnings, and interest income thereafter is recorded only when
received.
Restructured loans at December 31, 1999, were $3,312,693 compared to
$1,914,564 and $974,519 in 1998 and 1997 respectively. All of the
restructured loans at December 31, 1999, are included in the nonaccrual loan
totals discussed previously. Restructured loans involve the granting of some
concession to the borrower involving the modification of terms of the loan,
such as changes in payment schedule or interest rate. The restructured loans
at year end involved the granting of a reduced interest rate or the
lengthening of the amortization period or both. The increase in restructured
loans at year end is primarily the result of the restructuring of loans
totaling $1.8 million secured by mortgages on apartment buildings into a
single loan. The restructured loan has been performing as agreed since the
second quarter of 1999.
Potential problem loans totaled $12,035,023 as of December 31, 1999.
Potential problem loans are accruing loans in which there exists doubt as to
the ability of the borrower to comply with present loan repayment terms.
Management's decision to place loans in this category does not necessarily
mean that the Company expects losses to occur on these loans, but that
management recognizes that a higher degree of risk is associated with these
accruing loans and they deserve closer scrutiny. The potential problem loans
are not concentrated in a particular industry or type.
<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,
------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
(In thousands) % of % of % of
Total Total Total
Amount Loans Amount Loans Amount Loans
-------- ------ -------- ------- ------- -------
Nonaccrual loans (1) $7,835 3.05% $3,937 1.83% $4,668 2.34%
Restructured loans (2) - - - - 406 0.20
-------- ------ -------- ------- ------- ------
Total $7,835 3.05% $3,937 1.83% $5,074 2.54%
======== ====== ======== ======= ======= ======
Other real estate owned $0 $200 $0
======== ======== =======
(1)Includes impaired loans of $6,533,918, $2,633,527 and $3,056,643 as of
December 31, 1999, 1998 and 1997, respectively.
(2)Excludes restructured loans of $3,312,693, $1,914,564 and $568,042 as of
the years ended December 31, 1999, 1998 and 1997, respectively, which are
included with nonaccrual loans.
Allowance For Credit Losses
- ---------------------------
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collection of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and commitments to
extend credit. These evaluations take into consideration a number of
factors, including the Bank's and DACC's loss experience in relation to
outstanding loans and the existing level of the allowance for credit losses,
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, regular examinations and
appraisals of loan portfolios conducted by state and federal supervisory
agencies, and current and anticipated economic conditions. The allowance for
credit losses represents management's best judgment as to a prudent aggregate
allowance in connection with the total loan portfolio.
At December 31, 1999, the Company's investment in impaired loans totaled
$6,533,918. The investment in impaired loans that does not require a related
allowance for credit losses amounted to $5,302,854 while the remaining
impaired loans totaling $1,231,064 require a related allowance for credit
losses of $343,245.
In 1999 the Company's provision for credit losses was $312,000 compared to
$390,000 and $351,000 during 1998 and 1997, respectively. Net charge-offs
were $87,806 for the year ended December 31, 1999, compared to net
charge-offs of $157,303 and $31,807 for the years ended 1998 and 1997,
respectively. The ratio of allowance for credit losses to total loans at
year end was 1.28% compared to 1.42% at December 31, 1998. The net increase
to the allowance was $244,194 or 7.3% higher than year end 1998. The
Company's ratio of loans more than 30 days past due (including nonaccrual
loans) to total loans was 3.72% at December 31, 1999, compared to 2.38% and
3.29% at December 31, 1998 and 1997, respectively.
The Company's portfolio is heavily concentrated in the Bank's three-county
primary service area and would be subject to fluctuations in local economic
conditions. The Company does have a concentration of agricultural-related
loans amounting to approximately 22% of total loans as of December 31, 1999.
The factors that influence the agricultural economy are complex and difficult
to predict. The prices paid to dairy farmers for milk have fluctuated
significantly during the last two years. Management believes these price
fluctuations are cyclical and underwriting practices have taken these
fluctuations into consideration. Agricultural loans more than 30 days past
due (including nonaccrual loans) totaled $379,653 at December 31, 1999.
This represents .15% of total loans outstanding and 4% of the Company's total
past due loans. During 1999 there were $69,410 of net charge-offs on loans
considered agricultural-related compared to $5,740 of net recoveries during
1998. Management does not believe that these risks associated with the
Company's loan portfolio have changed materially during the past three years.
<PAGE> 30
Management believes its allowance for credit losses as of December 31, 1999,
of $3,282,812 (equal to 1.28% of the total loans) is adequate to cover credit
risks in the loan portfolio.
Changes in the allowance for credit losses in each of the three most recent
years were as follows:
Year Ended December 31,
--------------------------------------
1999 1998 1997
----------- ----------- ------------
Balance - beginning of year $3,058,618 $2,825,921 $2,506,728
----------- ----------- -----------
Charge-offs:
Real estate $0 $107,218 $0
Installment 33,616 37,248 18,643
Credit cards and related plans 8,898 5,210 1,277
Commercial loans 107,815 69,997 40,662
----------- ----------- -----------
$150,329 $219,673 $60,582
----------- ----------- -----------
Recoveries:
Real estate $3,941 $5,019 $3,861
Installment 38,193 37,561 10,535
Credit cards and related plans 4,541 604 787
Commercial loans 15,848 19,186 13,592
----------- ----------- -----------
$62,523 $62,370 $28,775
----------- ----------- -----------
Net charge-offs $87,806 $157,303 $31,807
----------- ----------- -----------
Provision charged to operations $312,000 $390,000 $351,000
----------- ------------- ------------
Balance - end of year
$3,282,812 $3,058,618 $2,825,921
=========== =========== ===========
Ratio of net charge-offs during
the year to average loans
outstanding during the year 0.04% 0.08% 0.02%
=========== =========== ===========
Ration of allowance for credit
losses to total loans
at the end of year 1.28% 1.42% 1.42%
=========== =========== ===========
In 1999 the Company's ratio of charge-off loans to average loans outstanding
was .06% compared to .11% and .03% during 1998 and 1997, respectively. The
charge-offs during 1999 include $75,000 attributable to a single agricultural
borrower. The 1998 charge-offs include real estate loan charge-offs amounting
to $107,218 and commercial loan charge-offs totaling $49,909 attributable to
a single commercial borrower. The Company does not expect future recoveries
from these borrowers.
During 1999 the installment loan recoveries included recoveries of $13,025
from a borrower whose loans were charged-off in 1995 and $9,318 from a
borrower whose loans were charged-off during 1992. Recoveries on loans
increased by $33,595 in 1998 compared to 1997. The installment loan
recoveries included recoveries of $13,947 from a borrower whose loans were
charged-off in 1995 and $12,000 from a borrower whose loans were charged-off
during 1998.
<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) 1999 1998 1997 1999/98 1998/97
-------- --------- --------- ------- -------
Non-interest bearing accounts $26,387 $27,168 $19,494 (2.9)% 39.4%
NOW accounts 12,611 12,831 10,395 (1.7) 23.4
Savings accounts 15,506 16,361 17,036 (5.2) (4.0)
Money market accounts 57,726 51,462 40,451 12.2 27.2
Certificates of deposit and
other time deposits 99,704 104,228 101,753 (4.3) 2.4
-------- --------- --------- ------- -------
Total deposits $211,934 $212,050 $189,129 (0.1)% 12.1%
======== ========= ========= ======= ======
At December 31, 1999, total deposits were $211,933,656, a decrease of
$116,077 or .1% compared to December 31, 1998. The decrease in demand
deposits is attributable to a business depositor whose balance at year end
was $2.7 million lower than the previous year end. The combined balances of
money market and passbook savings accounts increased by $5.4 million or 8%
compared to December 31, 1998. Certificates of deposit and other time
deposits decreased by $4.5 million or 4.3% compared to the previous year end.
The decrease in certificates of deposit is primarily the result of a $4.5
million decrease attributed to a local business depositor. These funds were
deposited during the second quarter of 1998 and were withdrawn as expected at
maturity during the second quarter of 1999. Management attributes the lack
of overall deposit growth to the strong competition for core deposits in all
of the Bank's market areas and to the outflow of funds to alternative
investments.
Total deposits increased $22,920,624 or 12.1% at December 31, 1998, compared
to year end 1997. Demand deposits increased $7,674,048 or 39.4% during the
year ended December 31, 1998. Much of this increase was attributable to a new
business depositor with a balance of $4.7 million at year end 1998.
Money market deposits increased by $11 million or 27.2% over the previous
year end. Some of this increase was a result of a shift by depositors from
lower yielding savings accounts into higher yielding money market accounts.
Depositors also shifted funds from certificates of deposit to money market
accounts because of the lower interest rates prevailing during the third and
fourth quarters of 1998 compared to 1997. The yield on a two year
certificate of deposit fell more than 1 full percentage point from 6.04% to
4.99% while the yield on money market accounts declined from 5.12% to 4.54%
at year end 1998 compared to December 31, 1997. This change in rates
resulted in a smaller spread between money market accounts and certificates
of deposit.
The following table shows, as of December 31, 1999, the maturities of time
certificates of deposit in amounts of $100,000 or more and other time
deposits in amounts of $100,000 or more:
3 Months 3 to 6 7 to 12 Over 12
Or Less Months Months Months Total
--------- --------- -------- -------- --------
(In thousands)
Certificates of deposit $2,774 $1,877 $4,718 $5,979 $15,348
Other time deposits 1,137 124 608 3,090 4,959
--------- --------- -------- -------- --------
Total $3,911 $2,001 $5,326 $9,069 $20,307
========= ========= ======== ======== ========
<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) 1999 1998 1997
-------- -------- ---------
Short-term borrowings:
Notes payable to banks $26,909 $22,400 $22,791
Federal Home Loan Bank advances 31,200 0 0
U.S. Treasury demand notes 0 0 300
Total short-term borrowings $58,109 $22,400 $23,091
-------- -------- ---------
Long-term debt:
Federal Home Loan Bank advances $17,000 $15,575 $9,574
Other long-term debt 98 102 107
-------- -------- ---------
Total long-term debt $17,098 $15,677 $9,681
-------- -------- ---------
Total other borrowed funds $75,207 $38,077 $32,772
======== ======== =========
Short-term borrowings:
Average amounts outstanding during the year $38,916 $22,399 $28,147
Average interest rates on amounts
outstanding during the year 5.18% 5.86% 5.91%
Weighted average interest rate at year end 5.96% 5.46% 6.05%
Maximum month-end amounts outstanding $58,109 $23,284 $31,928
The Company utilizes a variety of short-term and long-term borrowings as a
source of funds for the Company's lending and investment activities and for
general business purposes. The Company has in place asset/liability and
interest rate risk guidelines that determine in part whether borrowings will
be short-term or long-term in nature. Federal Home Loan Bank advances and
notes payable to banks consists of secured borrowings under existing lines of
credit. At December 31, 1999, the Company had $89.2 million of established
lines of credit.
DACC's primary sources of funding are short-term notes payable to banks. As
of December 31, 1999, DACC had established lines of credit of $37 million of
which $26 million were drawn in the form of short-term notes payable. The
proceeds from the borrowings incurred during 1999 were used primarily to fund
loans.
During 1999, the Bank borrowed $31.2 million from the Federal Home Loan Bank
in the form of short-term advances. The funds were used primarily to fund
the Bank's loan portfolio which grew by $37.8 million during 1999.
Note 7 -- Long-Term Debt of the Notes To Consolidated Financial Statements
contains information concerning the significant terms of the long-term
borrowings.
Stockholders' Equity
- --------------------
Pursuant to regulations promulgated by the Federal Reserve Board, bank
holding companies are required to maintain minimum levels of core capital as
a percentage of total assets (leverage ratio) and total capital as a
percentage of risk-based assets. Under these regulations, the most highly
rated banks must meet a minimum leverage ratio of at least 3%, while lower
rated banks must maintain a ratio of at least 4%. The regulations assign
risk weightings to assets and off-balance sheet items and require a minimum
risk-based capital ratio of 8%. At least half of the required 8% must
consist of core capital. Core capital consists principally of shareholders'
equity less intangibles, while qualifying total capital consists of core
capital, certain debt instruments and a portion of the allowance for credit
losses. The table set forth below describes the ratios of the Company as of
December 31, 1999, and the applicable regulatory requirements.
<PAGE> 33
The Company's core and risk-based capital ratios, as shown in the table, are
well above the minimum levels.
Regulatory
Ratio Requirements
-------- ------------
Equity as a % of assets 9.99% N/A
Core capital as a % of average assets 9.62% 4.00%
Core capital as a % of risk-based assets 13.35% 4.00%
Total capital as a % of risk-based assets 14.61% 8.00%
Stockholders' equity at December 31, 1999, increased 6.6% to $32,121,374 or
$585 per share, compared with $30,140,667 or $550 per share one year ago.
Cash dividends declared in 1999 were $17.25 per share compared with $13.50
and $11.75, in 1998 and 1997, respectively. The dividend payout ratio
(dividends declared as a percentage of net income) was 29.50%, 23.59% and
25.30% in 1999, 1998 and 1997, respectively.
The ability of the Company to pay dividends on the Common Stock is largely
dependent upon the ability of the Bank to pay dividends on the stock held by
the Company. The Bank's ability to pay dividends is restricted by both state
and federal laws and regulations. The Bank is subject to policies and
regulations issued by the FDIC and the Division of Banking of the Wisconsin
Department of Financial Institutions ("the Division") which, in part,
establish minimum acceptable capital requirements for banks, thereby limiting
the ability to pay dividends. In addition, Wisconsin law provides that state
chartered banks may declare and pay dividends out of undivided profits but
only after provision has been made for all expenses, losses, required
reserves, taxes and interest accrued or due from the bank. Payment of
dividends in some circumstances may require the written consent of the
Division. Note 16 -- Regulatory Matters of the Notes To Consolidated
Financial Statements contains information concerning capital ratios of the
Bank.
During 1998 the Company's Board of Directors approved the 1998 Employees
Stock Purchase Plan. The Plan allows the Company to issue treasury shares at
fair market value to eligible employees. The purpose of the plan is to allow
employees to share in the ownership of the Company. Employees of the
Company purchased 296 shares each at $972 during 1999.
The adequacy of the Company's capital is reviewed periodically to
ensure that sufficient capital is available for current and future needs
and is in compliance with regulatory guidelines. Management is committed to
maintaining capital at a level that will allow the Company to take advantage
of future opportunities when they arise. The Company's current level of
capitalization is strong. This will allow the Company to pursue profitable
growth opportunities.
Liquidity
- ---------
Liquidity refers to the ability of the Company to generate adequate amounts
of cash to meet the Company's needs for cash. Loan requests typically
present the greatest need for cash but liquidity must also be maintained to
accommodate possible outflows in deposits. Loan repayments as well as net
cash provided by operating activities amounting to $3.6 million, an increase
in other borrowings amounting to $37.1 million and a $4.9 million decrease in
federal funds sold, as shown in the Consolidated Statements of Cash Flows,
all provided sources of funds during 1999. The net increase in loans of
$42.1 million was the major use of cash during 1999.
During 1998 the major sources of funds were loan repayments, net cash
provided by operating activities of $3.0 million, an increase in deposits
totaling $22.9 million and an increase in other borrowings amounting to $5.3
million. The net increase in loans of $15.6 million, the net increase in
investment securities of $12.4 million and the net increase in federal funds
sold of $1.3 million were the major uses of cash during 1998.
The Bank maintains liquid assets to meet its liquidity needs. These include
cash and due from banks, marketable investment securities designated as
available-for-sale and federal funds sold. The Bank also has the ability to
borrow approximately $20 million by means of the purchase of short-term
federal funds from its principal correspondent banks. Management strives to
maintain enough liquidity to satisfy customer credit needs, meet deposit
withdrawal requests and any other expected needs for cash. Excess liquid
assets are reallocated to achieve higher yields. One ratio used to measure
the liquidity of banking institutions is the net loan to deposit ratio. The
net loan to deposit ratio of the Bank was 104.2%, 86.8% and 88.9% at December
31, 1999, 1998 and 1997, respectively. A high net loan to deposit ratio
creates a greater challenge in managing adverse fluctuations in deposit
balances and consequently this can limit loan growth. The net loan to
deposit ratio reflects only on-balance sheet items. Off-balance sheet items
such as commitments to extend credit and established borrowing lines
<PAGE> 34
of credit also affect the liquidity position. In order to increase available
funding sources the Bank is a member of the Federal Home Loan Bank (FHLB) of
Chicago. As of December 31, 1999, the amount owed to the Federal Home Loan
Bank was $48.2 million. The borrowings are secured by residential
mortgages. The amount of eligible borrowing from the FHLB of Chicago is
determined by the amount of residential loans held by the Bank and by the
amount of common stock of FHLB of Chicago purchased by the Bank. The maximum
amount of collateral that can be pledged to FHLB by the Bank is limited by
state law to four times capital. An additional investment in stock of
$180,125 would allow the Bank to borrow another $3.6 million and thereby
maximize its eligible borrowing with FHLB. The Bank has also sold loans to
DACC and to the secondary mortgage market to improve its liquidity position.
During 1999 the Bank sold $6.7 million of residential loans to the secondary
mortgage market.
Other sources of liquidity for the Company consist of established lines of
credit by DACC and by the parent company. As of December 31, 1999, DACC has
unused lines of credit of $11.0 million and the parent company has an unused
line of credit of $3.1 million. See Note 10 -- Financial Instruments with
Off-Balance Sheet Risk in the Notes To Consolidated Financial Statements for
a discussion of the Company's commitments to extend credit. Management
believes the Company's liquidity position as of December 31, 1999, is
adequate under current economic conditions.
Interest Rate Sensitivity
- -------------------------
The following table shows the repricing period for interest-earning assets
and interest-bearing liabilities and the related gap based on contractual
maturities, at December 31, 1999:
(In thousands) 0 to 6 7 to 12 1 to 2 Over 2
Months Months Years Years
--------- -------- --------- ---------
Loans $101,767 $102,082 $18,430 $34,347
Investment securities 741 507 11,104 32,538
Federal funds sold 3,505 0 0 0
--------- -------- --------- ---------
Total interest-earning assets $106,013 $102,589 $29,534 $66,885
--------- -------- --------- ---------
Interest-bearing deposits $125,513 $21,175 $33,546 $5,312
Other borrowed funds 61,111 7,003 4,005 3,087
--------- -------- --------- ---------
Total interest-bearing liabilities $186,624 $28,178 $37,551 8,399
--------- -------- --------- ---------
Rate sensitivity gap $(80,611) $74,411 $(8,017) $58,486
Cumulative rate sensitivity gap $(80,611) $(6,200) $(14,217) $44,269
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities 56.81% 97.11% 94.37% 116.98%
Ratio of cumulative gap to
average earning assets (28.48)% (2.19)% (5.02)% 15.64%
Mortgage backed securities are allocated according to their expected
prepayments rather than their contractual maturities.
Interest rate risk is the exposure to a bank's earnings arising from changes
in future interest rates. Interest rate sensitivity is measured using gap
analysis. Gap analysis is used to identify mismatches in the repricing of
assets and liabilities within specified periods of time or interest
sensitivity gaps. The rate sensitivity or repricing gap is equal to total
interest-earning assets less total interest-bearing liabilities available for
repricing during a given time interval. A positive gap exists when total
interest-earning repricing assets exceed total interest-bearing repricing
liabilities and a negative gap exists when total interest-bearing repricing
liabilities exceed total interest-earning repricing assets. Generally a
positive repricing gap will result in increased net interest income in a
rising rate environment and decreased net interest income in a falling rate
environment. A negative gap tends to produce increased net interest income
in a falling rate environment and decreased net interest income in a rising
rate environment.
The preceding table indicates the Company has a negative gap of $6.2 million
or 2.2% of average earning assets for all assets and liabilities repricing
within one year. The cumulative ratio of rate sensitive assets to rate
sensitive liabilities within one year is 97.1%. For purposes of this
analysis, NOW, savings and money market accounts are considered repriceable
within six months.
<PAGE> 35
MARKET INFORMATION
- ------------------
The following table shows market price information and cash dividends paid
for the Company's common stock:
Book Value Market
End of Quarter Value (1) Dividends
1998 (Unaudited) High Low Paid (2)
- ----------------------------------------------------------------------
1st Quarter $513 $733 $733 $6.00
2nd Quarter 527 915 897 -
3rd Quarter 542 * * 6.25
4th Quarter 550 952 939 -
1999
- ----------------------------------------------------------------------
1st Quarter $557 $972 $963 $7.25
2nd Quarter 570 1,132 1,116 -
3rd Quarter 573 1,157 1,140 8.25
4th Quarter 585 1,166 1,147 -
2000
- ----------------------------------------------------------------------
Through March 1 N/A $1,180 $1,170 $9.00
(1) In recent years the Common Stock has traded sparsely. To the
knowledge of management the price of each share has ranged in value
as shown in the table. There is no established market for the
Common Stock of the Company and it is unlikely that such a market
for the shares will develop in the foreseeable future. Most of the
transactions at the prices reported in the table are purchases by the
Company pursuant to a Stock Repurchase Policy. The Stock Repurchase
Policy provides that shares offered to the Company may be purchased
as an accommodation to shareholders at a specified percentage of book
value computed as of the end of the month preceding the purchase.
The applicable percentage was 145% of book value until March 16,
1998, 175% of book value until March 16, 1999, and 200% of book value
thereafter. The Board of Directors of the Company may consider changes
in the applicable percentage at future meetings.
(2) The ability of the Company to pay dividends is subject to
certain limitations. See "Stockholders'Equity" in Management's
Discussion and Analysis.
* Indicates no reported sale of stock occurred in that quarter.
As of March 1, 2000, the Company had 991 shareholders of record.
SELECTED FINANCIAL INFORMATION
- ------------------------------
The following table sets forth certain unaudited results of operations for
the periods indicated:
(In thousands except For the Quarter Ended
per share data)
1998 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------
Interest income $5,001 $5,217 $5,342 $5,490
Interest expense 2,632 2,661 2,740 2,739
Provision for credit losses 83 83 82 142
Net income 681 771 788 898
Net income per share 12.41 14.05 14.37 16.37
1999
- ----------------------------------------------------------------------------
Interest income $5,455 $5,497 $5,525 $5,842
Interest expense 2,678 2,769 2,963 3,189
Provision for credit losses 78 78 78 78
Net income 862 814 742 799
Net income per share 15.70 14.79 13.48 14.54
<PAGE> 36
