![](/cdn/assets/images/search/clock.png)
We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Share Name | Share Symbol | Market | Type |
---|---|---|---|
Denmark Bancshares Inc (QX) | USOTC:DMKBA | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 40.025 | 39.60 | 52.00 | 0.00 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21554
DENMARK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
39-1472124
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
103 East Main Street, Denmark, Wisconsin 54208-0130
(Address of principal executive offices, zip code)
(920) 863-2161
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
___ Large accelerated filer Accelerated filer
_ Non-accelerated filer _ X _Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 12, 2012, there were 118,568 shares of the registrant's common stock (no par value) outstanding.
DENMARK BANCSHARES, INC.
TABLE OF CONTENTS
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2012
Page No.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II. Other Information
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 6. Exhibits 32
Signatures
32
Item 1. Financial Statements
Denmark Bancshares, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
September 30,
December 31,
2012
2011
(Unaudited)
Assets
Cash and due from banks
$19,406,882
$21,905,812
Federal funds sold
9,711,000
20,187,000
Investment securities available-for-sale, at fair value
81,341,530
67,610,693
Loans
303,600,177
297,832,116
Allowance for loan losses
(6,406,310)
(6,578,087)
Net loans
$297,193,867
$291,254,029
Loans held for sale
367,806
485,926
Premises and equipment, net
7,180,990
7,085,783
Other investments, at cost
2,741,480
4,404,811
Accrued interest receivable
1,411,433
1,244,473
Other assets
10,800,625
11,807,370
TOTAL ASSETS
$430,155,613
$425,985,897
Liabilities
Deposits
Noninterest-bearing
$43,881,301
$47,469,622
Interest-bearing
289,016,844
280,323,469
Total Deposits
$332,898,145
$327,793,091
Short-term borrowings
10,710,931
11,558,861
Accrued interest payable
296,267
334,178
Other liabilities
1,133,864
1,794,808
Long-term debt
27,057,099
28,481,999
Total Liabilities
$372,096,306
$369,962,937
Stockholders' Equity
Common stock, no par value, authorized 640,000 shares; outstanding 118,568 shares at 9/30/12 and 118,917 shares at 12/31/11
$18,173,975
$18,173,975
Treasury stock shares, at cost (2,962 at 9/30/12 and 2,613 at 12/31/11)
(2,272,445)
(2,125,865)
Paid in capital
469,986
469,986
Retained earnings
41,703,655
39,918,706
Accumulated other comprehensive loss
(15,864)
(413,842)
Total Stockholders' Equity
$58,059,307
$56,022,960
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$430,155,613
$425,985,897
The accompanying notes are an integral part of these financial statements.
Denmark Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
September 30,
September 30,
2012
2011
2012
2011
Interest Income
Loans including fees
$3,820,552
$3,842,778
$11,454,139
$11,766,974
Investment securities:
Taxable
290,599
312,467
868,726
859,684
Exempt from federal tax
157,196
228,527
536,036
804,398
Interest on federal funds sold
3,457
3,579
10,593
14,552
Other interest income
20,884
18,306
87,778
91,203
$4,292,688
$4,405,657
$12,957,272
$13,536,811
Interest Expense
Deposits
$530,389
$724,852
$1,754,300
$2,317,112
Short-term borrowings
14,430
26,770
44,808
84,121
Long-term debt
239,489
250,967
728,030
756,977
$784,308
$1,002,589
$2,527,138
$3,158,210
Net interest income
$3,508,380
$3,403,068
$10,430,134
$10,378,601
Provision for Loan Losses
225,000
150,000
525,000
450,000
Net interest income after provision for loan losses
$3,283,380
$3,253,068
$9,905,134
$9,928,601
Other Income
Service fees and commissions
$228,230
$222,531
$752,331
$669,946
Loan sale gains
195,623
64,087
430,693
183,186
Investment security gains
203,183
0
203,183
31,953
Other
203,109
197,324
544,327
598,539
$830,145
$483,942
$1,930,534
$1,483,624
Other-than-Temporary Impairment Losses, Net
Total other-than-temporary impairment losses
$944,563
$1,028,888
$1,733,379
$1,028,888
Amount in other comprehensive income, before taxes
(901,394)
(983,401)
(1,613,025)
(878,574)
$43,169
$45,487
$120,354
$150,314
Other Expense
Salaries and employee benefits
$1,595,732
$1,553,044
$4,774,048
$4,565,844
Occupancy expenses
243,742
223,936
694,245
707,982
FDIC Insurance
75,000
74,000
224,463
320,000
Data processing expenses
242,818
195,337
655,940
588,291
Professional fees
102,647
89,327
298,704
274,659
Amortization of intangibles
16,032
48,097
112,228
144,293
Loss on sale of other real estate
68,389
48,143
231,771
66,034
Other real estate expenses
6,591
21,310
27,624
175,505
Other operating expenses
210,320
214,995
657,960
664,063
$2,561,271
$2,468,189
$7,676,983
$7,506,671
Income before income taxes
$1,509,085
$1,223,334
$4,038,331
$3,755,240
Income tax expense
534,746
375,241
1,393,764
1,126,086
NET INCOME
$974,339
$848,093
$2,644,567
$2,629,154
Per Share
Net income
$8.22
$7.13
$22.28
$22.11
Dividends declared
$7.25
$7.25
$7.25
$7.25
Weighted average shares outstanding
118,568
118,917
118,677
118,917
The accompanying notes are an integral part of these financial statements.
Denmark Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Nine Months Ended
September 30,
September 30,
2012
2011
Net income
$2,644,567
$2,629,154
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized holding gains arising during period
841,362
281,978
Less: Reclassification adjustment for gains included in net income
82,829
150,314
Other comprehensive income
758,533
432,292
Income tax benefit related to items of other comprehensive income
(360,555)
(129,249)
Other comprehensive income, net of tax
$397,978
$303,043
Comprehensive income
$3,042,545
$2,932,197
Denmark Bancshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Common Stock
Accumulated
Other
Paid in
Retained
Comprehensive
Shares
Amount
Capital
Earnings
Loss
Total
Balance, December 31, 2011
118,917
$16,048,110
$469,986
$39,918,706
($413,842)
$56,022,960
Comprehensive income
Net income
2,644,567
2,644,567
Other comprehensive income, net of tax
Change in unrealized loss on securities available-for-sale,
net of reclassification adjustment
397,978
397,978
Total comprehensive income
$3,042,545
Treasury stock acquisitions
(349)
(146,580)
(146,580)
Cash dividends, $7.25 per share
(859,618)
(859,618)
Balance, September 30, 2012
118,568
$15,901,530
$469,986
$41,703,655
($15,864)
$58,059,307
The accompanying notes are an integral part of these financial statements.
Denmark Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
2012
2011
Cash Flows from Operating Activities:
Net income
$2,644,567
$2,629,154
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation
284,347
300,391
Provision for credit losses
525,000
450,000
Amortization of intangibles
112,228
144,293
Gains on sales of loans
(430,693)
(183,186)
Loss on sale of other real estate and other assets
231,588
66,033
Gains on sale of securities
(203,183)
(31,953)
Loss on investment securities impairment write-downs
120,354
150,314
Amortization of bond premium
593,378
365,643
Accretion of bond discount
(66,981)
(133,183)
Mortgage loans originated for sale
(26,394,237)
(12,348,289)
Proceeds from sale of mortgage loans
26,512,358
14,846,232
Income from bank owned life insurance
(202,923)
(197,648)
Increase in interest receivable
(166,960)
(134,469)
Decrease in interest payable
(37,911)
(59,536)
Other, net
473,119
483,899
Net Cash Provided by Operating Activities
$3,994,051
$6,347,695
Cash Flows from Investing Activities:
Maturities and sales of available-for-sale securities
$20,930,183
$20,127,771
Purchases of available-for-sale securities
(34,346,055)
(22,753,354)
Money market mutual funds, net
0
(977,224)
Proceeds from sale of FHLB common stock
1,663,331
0
Federal funds sold, net
10,476,000
7,310,000
Proceeds from sale of foreclosed assets
420,146
922,266
Net (increase) decrease in loans made to customers
(6,220,910)
1,212,397
Capital expenditures
(379,554)
(116,059)
Net Cash Provided by (Used in) Investing Activities
($7,456,859)
$5,725,797
Cash Flows from Financing Activities:
Net increase (decrease) in deposits
$5,105,054
($5,267,324)
Purchase of treasury stock
(146,580)
0
Dividends paid
(1,721,766)
(1,724,297)
Debt proceeds
2,227,070
1,995,815
Debt repayments
(4,499,900)
(5,825,000)
Net Cash (Provided by) Used in Financing Activities
$963,878
($10,820,806)
Net (decrease) increase in cash and cash equivalents
($2,498,930)
$1,252,686
Cash and cash equivalents, beginning
21,905,812
16,917,728
CASH AND CASH EQUIVALENTS, ENDING
$19,406,882
$18,170,414
Noncash Investing Activities:
Loans transferred to foreclosed properties
$186,764
$2,018,860
Supplemental Cash Flow Disclosures:
Cash paid for interest
$2,570,460
$2,381,061
Cash paid for income taxes
1,062,000
766,980
The accompanying notes are an integral part of these financial statements.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated financial statements included herein are unaudited. In the opinion of management, these statements contain all adjustments necessary to present fairly the financial position of Denmark Bancshares, Inc. ("DBI"), its results of operations and cash flows for the periods presented. All adjustments necessary for the fair presentation of the financial statements are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in DBI's latest annual report on Form 10-K. DBI's subsidiaries are Denmark State Bank ("DSB"), Denmark Agricultural Credit Corporation ("DACC"), and DBI Properties, Inc. ("Properties").
Reclassifications
- Certain amounts in the prior period financial statements have been reclassified for comparative purposes to conform to the presentation in the current year.
Deregistration
- On August 31, 2012, following passage of the Jumpstart Our Business Startups Act, which increased the number of shareholders of record threshold for deregistration under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") for banks and bank holding companies, DBI filed a Schedule 13E-3 and preliminary proxy statement with the Securities and Exchange Commission ("SEC") related to a proposed going-private transaction that would, subject to shareholder approval, establish two separate and distinct classes of DBI's common stock, Class A voting common stock and Class B non-voting common stock, and reclassify shareholders of record of less than 15 shares of DBI's common stock into shares of Class B common stock. DBI intends to hold a special meeting of its shareholders prior to the end of 2012 to approve the going-private transaction and, if approved, to promptly thereafter file a Form 15 with the SEC giving notice of termination of the registration of DBI's common stock under Section 12(g) of the Exchange Act. The termination of DBI's registration would then become effective 90 days after filing the Form 15 and would result in DBI no longer being required to file annual or periodic reports under Section 13 or 15(d) of the Exchange Act, including annual reports on Form 10-K, quarterly reports on Form 10- and current reports on Form 8-K, or to comply with the proxy rules or file proxy materials under section 14 of the Exchange Act. Furthermore, DBI's directors and executive officers will no longer be required to comply with the requirements of Section 16 of the Exchange Act. DBI would not be required to re-register its common stock until such time as it had 2,000 or more shareholders of record in any one class of its common stock as of the end of any calendar year.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair market value of securities available-for-sale were as follows:
September 30, 2012
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Government-sponsored agencies
$4,500,000
$11,200
$0
$4,511,200
U.S. Government-sponsored agency MBS
39,395,317
747,242
(29,750)
40,112,809
State and local governments
27,560,746
1,101,935
(46,483)
28,616,198
Asset-backed securities
2,456,474
0
(724)
2,455,750
Residential mortgage-backed securities
7,455,432
20,361
(1,830,220)
5,645,573
$81,367,969
$1,880,738
($1,907,177)
$81,341,530
December 31, 2011
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Government-sponsored agencies
$3,500,000
$17,050
$0
$3,517,050
U.S. Government-sponsored agency MBS
31,729,409
505,292
(8,172)
32,226,529
State and local governments
24,628,519
1,032,038
(192,058)
25,468,499
Residential mortgage-backed securities
8,537,737
26,590
(2,165,712)
6,398,615
$68,395,665
$1,580,970
($2,365,942)
$67,610,693
Proceeds of $4.1 million from normal pay-downs, $3.0 million from the sale of 15 securities and $0.9 million from calls were received during the third quarter of 2012. On a year-to-date basis for 2012, proceeds of $11.1 million from normal pay-downs, $6.1 million from calls, $3.0 million from securities sales and $0.5 million in maturities were received. Purchases for the quarter-ended September 30, 2012 comprised $4.0 million in agency mortgage-backed securities ("MBS"), $3.0 million of tax-exempt municipals, $2.4 million in asset-backed securities, $1.0 million in agencies and $0.9 million of taxable municipals. For the nine-months ended September 30, 2012 purchases of $19.1 million in agency MBS, $4.0 million of agencies, $5.9 million of tax-exempt municipals, $2.9 million of taxable municipals and $2.4 million in asset-backed securities were made.
The amortized cost and estimated fair values of securities at September 30, 2012, by maturity were as follows:
Securities Available-for-Sale
Estimated
Amortized
Fair
Amounts Maturing
Cost
Value
Within one year
$4,640,528
$4,646,691
From one through five years
40,499,640
40,409,603
From five through ten years
24,451,655
24,491,724
After ten years
11,776,146
11,793,512
$81,367,969
$81,341,530
MBS are allocated according to their expected prepayments rather than their contractual maturities. Certain state and local governments' securities are allocated according to their put date. Fair values of securities are estimated based on financial models or prices paid for similar securities. It is possible interest rates could change considerably resulting in a material change in the estimated fair value of the securities.
At September 30, 2012, twenty-two debt securities have unrealized losses with aggregate depreciation of 9.3% from DSB's amortized cost basis. Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
September 30, 2012
Less Than Twelve Months
Over Twelve Months
Gross
Estimated
Gross
Estimated
Unrealized
Fair
Unrealized
Fair
Securities Available for Sale
Losses
Value
Losses
Value
U.S. Government-sponsored agencies
$0
$0
$0
$0
U.S. Government-sponsored agency MBS
29,750
5,918,015
0
0
State and local governments
21,468
4,935,622
25,015
385,482
Asset-backed securities
724
2,455,750
0
0
Residential MBS
2,058
295,604
1,828,162
4,606,185
Total securities available for sale
$54,000
$13,604,991
$1,853,177
$4,991,667
December 31, 2011
Less Than Twelve Months
Over Twelve Months
Gross
Estimated
Gross
Estimated
Unrealized
Fair
Unrealized
Fair
Securities Available for Sale
Losses
Value
Losses
Value
U.S. Government-sponsored agency MBS
$8,172
$2,388,919
$0
$0
State and local governments
14,144
817,753
177,914
1,808,504
Residential MBS
0
0
2,165,712
5,359,064
Total securities available for sale
$22,316
$3,206,672
$2,343,626
$7,167,568
All securities with unrealized losses are assessed to determine if the impairment is other-than-temporary. Factors that are evaluated include the mortgage loan types supporting the securities, delinquency and foreclosure rates, credit support, weighted average loan-to-value, and year of origination, among others.
Currently, a quarterly analysis by a third party is performed on three residential MBS secured by non-traditional loan types in order to determine whether they are other-than-temporarily impaired ("OTTI"). The purpose of the third party evaluation is to determine if the present value of the expected cash flows is less than the amortized costs, thereby resulting in credit loss, in accordance with the authoritative accounting guidance under FASB ASC Topic 320. The third party determines an estimated fair value for each security based on discounted cash flow analyses. The estimates are based on the following key valuation assumptions - collateral, cash flows, prepayment assumptions, default rates, loss severity, liquidation lag, bond waterfall and internal rate of return. Since there is currently no active secondary market for these types of securities due to the non-traditional loan types supporting the securities, these valuations are considered Level 3 inputs as defined in Note 5 - Fair Value Measurement. Additional securities may be analyzed in the future if deemed necessary to determine whether they are OTTI and if so, if any possible credit loss exists.
Two of the three securities supported by non-traditional loan types were previously found to have credit losses since a portion of the unrealized losses is due to an expected cash flow shortfall. As such, these securities were determined to be OTTI. DBI does not intend to sell the investments and it is not more likely than not that DBI will be required to sell the securities before the anticipated recovery of their remaining amortized cost bases, which may be maturity. The analysis on the third security did not reveal any credit loss nor was the security found to be OTTI. The total credit loss that was recognized in earnings through December 31, 2011 was $0.6 million. The analysis performed as of September 30, 2012 resulted in an additional $43,169 of credit loss that was recorded through the income statement during the current period on one of the OTTI securities. This results in a total credit loss for the first nine months of 2012 of $120,354 being recognized. Unrealized losses on the three securities analyzed by the third party were recognized through accumulated other comprehensive loss on the balance sheet as of September 30, 2012, net of tax, in the amount of $1.1 million.
The unrealized losses on the remainder of the residential MBS are due to the distressed and illiquid markets for collateralized mortgage obligations. The securities are investments in senior tranches with adequate credit support from subordinate tranches, are supported by traditional mortgage loans that originated between 2002 and 2005, have low delinquency and foreclosure rates, and reasonable loan-to-value ratios. DBI does not consider these investments to be OTTI at September 30, 2012.
Changes in credit losses recognized for securities with OTTI were as follows:
For the Nine Months Ended
For the Year Ended
September 30,
December 31,
2012
2011
2011
Credit losses recognized in earnings, beginning of period
($637,245)
($432,488)
($432,488)
Credit losses for OTTI not previously recognized
(120,354)
(150,314)
(204,757)
Credit losses recognized in earnings, end of period
($757,599)
($582,802)
($637,245)
NOTE 3 - 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. Loan origination fees are credited to income when received and the related loan origination costs are expensed as incurred. Capitalization of the fees net of the related costs would not have a material effect on the consolidated financial statements.
DBI's customer information system tracks the past due status of all loans beginning with the first day a payment is late. On a weekly basis, lenders are given a report with all loans past due one day or more to allow them to actively monitor the portfolio and attempt to keep past due levels to a minimum.
All loans are given an internal risk rating when the loan is originated. On a quarterly basis, risk rating reports are distributed to the lenders to ensure that loans are appropriately rated. On an annual basis, all commercial loans over $100,000 and agricultural loans over $200,000 are reviewed by the loan officer and/or credit analyst. All loans over $1 million are independently reviewed annually by the Chief Credit Officer. An independent third party also performs periodic reviews of risk ratings to ensure that loans are accurately graded. The internal risk ratings are defined as:
DBI's policy is to place into nonaccrual status all loans that are contractually past due 90 days or more, along with other loans as to which reasonable doubt exists to the full and timely collection of principal and/or interest based on management's view of the financial condition of the borrower. 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 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.
Loan charge-offs for all loans will occur as soon as there is a reasonable probability of loss. When the amount of the loss can be readily calculated, the charge-off will be recorded as soon as practical within the calendar quarter the loss was identified. Loans that are partially charged-off will be placed in nonaccrual status unless the remaining loan is restructured with adequate collateral and payments are assured and current.
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. Interest income is recognized in the same manner described above for nonaccrual loans. Further detail on the analysis of impaired loans can be found in the discussion of the Allowance for Loan Losses, below.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that have been incurred in the loan portfolio. The allowance is based on two basic accounting principles: (1) FASB Accounting Standards Codification (ASC) Topic 310-10 "Receivables - Overall," (formerly FAS 114), which requires that losses be accrued when it is probable that DBI will not collect all principal and interest payments according to the loan's contractual terms, and (2) FASB ASC Topic 450, "Contingencies," (formerly FAS 5), which requires that losses be accrued when they are probable of occurring and estimable. The FFIEC "Interagency Policy Statement on the Allowance for Loan and Lease Losses" provides additional guidance on the allowance methodology.
On a quarterly basis, management utilizes a systematic methodology to determine an appropriate allowance for loan losses. This methodology includes a loan grading system that requires quarterly reviews; identification of loans to be evaluated on an individual basis for impairment; results of independent reviews of asset quality and the adequacy of the allowance by regulatory agencies; consideration of current trends and volumes of nonperforming, past-due, nonaccrual and potential problem loans; as well as national and local economic trends and industry conditions.
In applying the methodology, all troubled debt restructurings, regardless of size, are considered impaired and will be individually evaluated. All nonaccrual and watchlist commercial real estate, construction and land development, agricultural real estate, multifamily residential real estate, commercial, and agricultural production loans over $50,000 are evaluated individually to determine if they are impaired. Nonaccrual residential real estate or consumer loans with characteristics that differ from loans that are typical for DBI will also be considered impaired and evaluated individually as there would be no pool of similar loans to evaluate these loans under ASC Topic 450. 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 in conjunction with ASC Topic 310-10.
Loans that are not impaired are segmented into groups by type of loan. The following loan types are utilized so each segment of loans will have similar risk factors: (1) residential real estate, (2) agricultural real estate, (3) commercial real estate, (4) construction and land development, (5) commercial, (6) agricultural, (7) consumer, (8) guaranteed loans and (9) other. These loans are further segmented by internal risk ratings of non-classified, special mention, substandard and doubtful, which are defined above.
Risk factor percentages are applied to the risk rating segments of the non-impaired loans to calculate an allowance allocation in conjunction with ASC Topic 450. The risk factor percentages are based on historical loan loss experience for each loan type and are adjusted for current economic conditions and trends as well as internal loan quality trends. The historical loan loss percentages are applied to the non-classified portion of the portfolio to determine the required allocation to the allowance. The historical loan loss percentages are then multiplied by a factor based on current economic conditions to calculate the allocation for each of the remaining risk rating categories of the non-impaired loans. The current economic conditions take into account items such as vacancy rates for rental properties; property values based on actual sales transactions; income projections based on current prices such as dairy commodities; and other available economic data.
The above steps result in calculations that estimate the loan losses inherent in the portfolio at that time. The calculations are used to confirm the adequacy and appropriateness of the actual balance of the allowance, recognizing that the allowance represents an aggregation of judgments and estimates by management. Such calculations will influence the amount of future provisions for loan losses charged to expense.
The calculation is submitted to DSB's Board of Directors quarterly along with a recommendation for the amount of the monthly provision to the allowance. If the mix and amount of future charge-offs differ significantly from those assumptions used by management in making its determination, the allowance and provision expense could be materially affected.
Major categories of loans included in the loan portfolio are as follows:
September 30,
December 31,
2012
2011
Real Estate:
Residential
$70,114,164
$72,655,569
Commercial
59,090,321
60,864,761
Agricultural
76,039,949
78,767,692
Construction
13,304,574
11,655,550
218,549,008
223,943,572
Commercial
41,007,441
35,178,049
Agricultural
33,433,291
27,661,420
Consumer and other
10,610,437
11,049,075
TOTAL
$303,600,177
$297,832,116
The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2012 and September 30, 2011:
Nine months ended
September 30, 2012
September 30, 2011
$(000)s
Average
Interest
Average
Interest
Recorded
Income
Recorded
Income
Investment
Recognized
Investment
Recognized
With no related allowance:
Residential Real Estate
$1,353
$16
$579
$10
Commercial Real Estate
2,256
22
2,054
28
Construction & Land Dev
366
4
2,941
80
Agricultural Real Estate
0
0
0
0
Commercial
810
12
1,228
10
Agricultural
0
0
0
0
Consumer
0
0
44
1
With a related allowance:
Residential Real Estate
$1,071
$16
$1,088
$2
Commercial Real Estate
1,872
32
2,964
(6)
Construction & Land Dev
4,492
39
2,835
60
Agricultural Real Estate
0
0
246
2
Commercial
58
0
103
2
Agricultural
0
0
0
0
Consumer
0
0
148
0
Total:
Residential Real Estate
$2,424
$32
$1,667
$12
Commercial Real Estate
4,128
54
5,018
22
Construction & Land Dev
4,858
43
5,776
140
Agricultural Real Estate
0
0
246
2
Commercial
868
12
1,331
12
Agricultural
0
0
0
0
Consumer
0
0
192
1
Total
$12,278
$141
$14,230
$189
The following tables show the investment in impaired loans and the corresponding allowance for those loans as of September 30, 2012 and December 31, 2011:
Impaired Loans
$(000)s
Unpaid
Recorded
Principal
Related
September 30, 2012
Investment
Balance
Allowance
With no related allowance:
Residential Real Estate
$1,174
$1,333
$0
Commercial Real Estate
1,785
2,079
0
Construction & Land Dev
243
243
0
Agricultural Real Estate
0
0
0
Commercial
836
895
0
Agricultural
0
0
0
Consumer
0
0
0
With a related allowance:
Residential Real Estate
$973
$1,067
$168
Commercial Real Estate
1,706
1,841
505
Construction & Land Dev
4,420
4,470
1,030
Agricultural Real Estate
0
0
0
Commercial
51
57
27
Agricultural
0
0
0
Consumer
0
0
0
Total:
Residential Real Estate
$2,147
$2,400
$168
Commercial Real Estate
3,491
3,920
505
Construction & Land Dev
4,663
4,713
1,030
Agricultural Real Estate
0
0
0
Commercial
887
952
27
Agricultural
0
0
0
Consumer
0
0
0
Total
$11,188
$11,985
$1,730
$(000)s
Unpaid
Recorded
Principal
Related
December 31, 2011
Investment
Balance
Allowance
With no related allowance:
Residential Real Estate
$805
$841
$0
Commercial Real Estate
1,433
1,698
0
Construction & Land Dev
2,658
2,658
0
Agricultural Real Estate
0
0
0
Commercial
890
935
0
Agricultural
0
0
0
Consumer
43
43
0
With a related allowance:
Residential Real Estate
$1,190
$1,392
$171
Commercial Real Estate
2,482
2,615
721
Construction & Land Dev
2,832
2,832
580
Agricultural Real Estate
0
0
0
Commercial
38
41
14
Agricultural
0
0
0
Consumer
142
144
129
Total:
Residential Real Estate
$1,995
$2,233
$171
Commercial Real Estate
3,915
4,313
721
Construction & Land Dev
5,490
5,490
580
Agricultural Real Estate
0
0
0
Commercial
928
976
14
Agricultural
0
0
0
Consumer
185
187
129
Total
$12,513
$13,199
$1,615
Recorded Investment in Financing Receivables
September 30,
2012
2011
December 31, 2011
Ending Balance
Ending Balance
Ending Balance
Individually
Individually
Individually
$(000)s
Ending
Evaluated
Ending
Evaluated
Ending
Evaluated
Balance
for Impairment
Balance
for Impairment
Balance
for Impairment
Residential Real Estate
$70,114
$2,147
$75,384
$1,632
$72,656
$1,995
Commercial Real Estate
59,090
3,491
60,420
4,491
60,865
3,915
Construction & Land Dev
13,305
4,663
13,144
5,769
11,655
5,490
Agricultural Real Estate
76,040
0
76,893
246
78,768
0
Commercial
41,008
887
35,090
1,083
35,178
928
Agricultural
33,433
0
24,104
0
27,661
0
Consumer
10,610
0
10,476
189
11,049
185
Unallocated
0
0
0
0
0
0
Total
$303,600
$11,188
$295,511
$13,410
$297,832
$12,513
Allowance for Loan Losses
For the Nine Months Ended September 30, 2012 and 2011
$(000)s
Ending Balance
Beginning
Ending
Individually
Balance
Balance
Evaluated
2012
1/1/2012
Charge-offs
Recoveries
Provision
9/30/2012
for Impairment
Residential Real Estate
$1,132
($414)
$14
$350
$1,082
$168
Commercial Real Estate
2,858
(180)
13
(245)
2,446
505
Construction & Land Dev
1,163
0
0
673
1,836
1,030
Agricultural Real Estate
198
0
0
162
360
0
Commercial
202
(6)
16
56
268
27
Agricultural
263
0
0
35
298
0
Consumer
150
(151)
11
11
21
0
Unallocated
612
0
0
(517)
95
0
Total
$6,578
($751)
$54
$525
$6,406
$1,730
Ending Balance
$(000)s
Beginning
Ending
Individually
Balance
Balance
Evaluated
2011
1/1/2011
Charge-offs
Recoveries
Provision
9/30/2011
for Impairment
Residential Real Estate
$1,429
($50)
$124
($125)
$1,378
$230
Commercial Real Estate
2,849
(461)
6
174
2,568
693
Construction & Land Dev
880
(225)
25
459
1,139
478
Agricultural Real Estate
204
0
0
48
252
40
Commercial
278
(252)
40
173
239
52
Agricultural
347
0
7
(131)
223
0
Consumer
160
(15)
4
4
153
131
Unallocated
718
0
0
(152)
566
0
Total
$6,865
($1,003)
$206
$450
$6,518
$1,624
Nonaccrual loans totaled $6.2 million and $8.7 million at September 30, 2012 and December 31, 2011, respectively. There were no loans past due ninety days or more and still accruing. A schedule of loans by the number of days past due (including nonaccrual loans) along with a schedule of credit quality indicators follows:
Age Analysis of Past Due Financing Receivables
30-89 Days
90 Days
Total
Total Financing
$(000)s
Past Due
& Over
Past Due
Current
Receivables
September 30, 2012
Residential Real Estate
$929
$332
$1,261
$68,853
$70,114
Commercial Real Estate
127
681
808
58,282
59,090
Construction & Land Dev
0
714
714
12,591
13,305
Agricultural Real Estate
1,085
116
1,201
74,839
76,040
Commercial
8
360
368
40,640
41,008
Agricultural
90
0
90
33,343
33,433
Consumer
19
26
45
10,565
10,610
Total
$2,258
$2,229
$4,487
$299,113
$303,600
30-89 Days
90 Days
Total
Total Financing
$(000)s
Past Due
& Over
Past Due
Current
Receivables
December 31, 2011
Residential Real Estate
$1,319
$866
$2,185
$70,471
$72,656
Commercial Real Estate
1,103
1,074
2,177
58,688
60,865
Construction & Land Dev
0
1,452
1,452
10,203
11,655
Agricultural Real Estate
0
0
0
78,768
78,768
Commercial
185
200
385
34,793
35,178
Agricultural
0
0
0
27,661
27,661
Consumer
63
81
144
10,905
11,049
Total
$2,670
$3,673
$6,343
$291,489
$297,832
Credit Quality Indicators
$(000)s
Special
September 30, 2012
Non-Classified
Mention
Substandard
Doubtful
Total
Residential Real Estate
$57,241
$5,848
$5,280
$1,745
$70,114
Commercial Real Estate
48,261
5,703
2,725
2,401
59,090
Construction & Land Dev
7,106
931
2,712
2,556
13,305
Agricultural Real Estate
69,852
5,363
825
0
76,040
Commercial
37,313
2,383
1,132
180
41,008
Agricultural
30,884
2,549
0
0
33,433
Consumer
10,483
78
28
21
10,610
Total
$261,140
$22,855
$12,702
$6,903
$303,600
$(000)s
Special
December 31, 2011
Non-Classified
Mention
Substandard
Doubtful
Total
Residential Real Estate
$58,960
$6,277
$6,501
$918
$72,656
Commercial Real Estate
49,547
3,668
4,787
2,863
60,865
Construction & Land Dev
4,691
898
4,154
1,912
11,655
Agricultural Real Estate
70,412
8,356
0
0
78,768
Commercial
32,600
1,250
1,164
164
35,178
Agricultural
23,779
3,882
0
0
27,661
Consumer
10,678
102
127
142
11,049
Total
$250,667
$24,433
$16,733
$5,999
$297,832
Modifications
As of September 30, 2012
Pre-Modification
Post-Modification
Recorded
Impact to
$(000)s
Number of
Recorded
Recorded
Investment
Allowance
Contracts
Investment
Investment
as of 9/30/2012
for Credit Losses
Residential Real Estate
5
$480
$354
$353
$254
Total
5
$480
$354
$353
$254
Since December 31, 2011 there were no loans that were modified as troubled debt restructurings that subsequently defaulted.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2011, FASB issued ASU No. 2011-03 Reconsideration of Effective Control for Repurchase Agreements. This update to Topic 860, "Transfers and Servicing," modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than a sale. The provisions of ASU No. 2011-03 remove from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and the collateral maintenance implementation guidance related to that criterion. This update does not change the other existing criteria used in the assessment of effective control. ASU No. 2011-03 is effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. These amendments did not have any impact on DBI's financial statements.
In May 2011, FASB issued ASU No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. These amendments to Topic 820, "Fair Value Measurement," result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows; (a) the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets; (b) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets, however ASU No. 2011-04 extends that prohibition to all fair value measurements; (c) an exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity's net exposure to either of those risks which allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (d) aligns the fair value measurement of instruments classified within an entity's shareholders' equity with the guidance for liabilities; and (e) disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04 are effective for interim reporting periods beginning on or after December 15, 2011. See Note 5 for the impact that the adoption of ASU No. 2011-04 had on DBI's financial statements.
In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This update to Topic 220, "Comprehensive Income," allows an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive must be reclassified to net income. ASU No. 2011-05 is effective for interim reporting periods beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 changed the presentation of DBI's income statement and the addition of a statement of other comprehensive income. The adoption did not have any impact on DBI's statement of financial condition.
In September 2011, FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. This update to Topic 350, "Intangibles - Goodwill and Other," permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance under Topic 350 required an entity to test goodwill for impairment on at least an annual basis by comparing the fair value of a reporting unit with its carrying amount (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments of this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. An entity has the option under this update to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The adoption of ASU No. 2011-08 had no impact on DBI's financial statements.
In July 2012, FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The provisions of this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test, as is currently required by GAAP. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Since DBI does not have any indefinite-lived intangible asses, the adoption of ASU No. 2012-02 is not anticipated to have any impacted on DBI's financial statements.
NOTE 5 - FAIR VALUE MEASURMENT
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in a transaction between market participants on the measurement date. Some assets and liabilities are measured on a recurring basis while others are measured on a non-recurring basis, as required by U.S. GAAP, which also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. The three levels of inputs defined in the standard that may be used to measure fair value are as follows:
Level 1: Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that are supported by little, if any, market activity. These unobservable inputs reflect estimates that market participants would use in pricing the assets or liability.
DBI used the following methods and significant assumptions to estimate fair value:
Cash, Cash Equivalents, and Federal Funds Sold:
For cash, cash equivalents and federal funds sold, the carrying amount is a reasonable estimate of fair value.
Investment Securities:
Investment securities available-for-sale ("AFS") are recorded at fair value on a recurring basis. The fair value measurement of most of DBI's AFS securities is currently determined by an independent provider using Level 2 inputs (except as noted below). The measurement is based upon quoted prices for similar assets, if available. If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speed and default rates. Two of DBI's AFS MBS that are secured by non-traditional mortgage loans and one AFS MBS secured by traditional mortgage loans that was previously downgraded were analyzed by a third party in order to determine an estimated fair value. The estimated fair values were based on discounted cash flow analyses and are considered Level 3 inputs.
Refer to Note 2 - Investment Securities for additional detail on the assumptions used in determining the estimated fair values, the valuation techniques and significant unobservable inputs for Level 3 assets as well as additional disclosures regarding DBI's investment securities. 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, net:
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 characteristics and for the same remaining maturities.
Loans Held for Sale:
Mortgage loans held for sale are recorded at the lower of cost or market value. The fair value is based on a market commitment for the sale of the loan in the secondary market. These loans are typically sold within one week of funding. DBI classifies mortgage loans held for sale as nonrecurring Level 2 assets.
Impaired Loans:
As defined below in the Glossary of Loan Terms section, a loan is considered impaired when, based on current information or events, it is probable that not all amounts due will be collected according to the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral. The collateral value is determined based on appraisals and other market valuations for similar assets. Under FASB ASC Topic 820, "Fair Value Measurements and Disclosures," the fair value of impaired loans is reported before selling costs of the related collateral, while FASB ASC Topic 310, "Receivables," requires that impaired loans be reported on the balance sheet net of estimated selling costs. Therefore, significant estimated selling costs would result in the reported fair value of impaired loans being greater than the measurement value of impaired loans as maintained on the balance sheet. In most instances, selling costs were estimated for real estate-secured collateral and included broker commissions, legal and title transfer fees and closing costs. Given the valuation technique and significant unobservable inputs utilized to determine the fair value, impaired loans are classified as nonrecurring Level 3 assets.
Other Investments:
For other investments, the carrying amount is a reasonable estimate of fair value.
Other Real Estate Owned:
Real estate that DBI has taken control of in partial or full satisfaction of debt is valued at the lower of book value or fair value. The fair value is determined by analyzing the collateral value of the real estate using appraisals and other market valuations for similar assets less any estimated selling costs. The value carried on the balance sheet for other real estate owned is estimated fair value of the properties. Other real estate owned is classified as a nonrecurring Level 2 asset.
Bank Owned Life Insurance:
The carrying amount of bank owned life insurance approximates fair value.
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 the estimate of discounted cash flows using the rates currently offered for deposits of similar remaining maturities.
Borrowings:
Rates currently available to DSB 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 not material.
Assets Recorded at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis, are summarized in the table below:
September 30, 2012
Fair Value Measurements Using
Description
Level 1
Level 2
Level 3
Fair Value
U.S. Government-sponsored agencies
$0
$4,511,200
$0
$4,511,200
U.S. Government-sponsored agency MBS
0
40,112,809
0
40,112,809
State and local governments
0
28,616,198
0
28,616,198
Asset-backed securities
0
2,455,750
0
2,455,750
Residential MBS
0
2,047,348
3,598,225
5,645,573
Total securities available for sale
$0
$77,743,305
$3,598,225
$81,341,530
December 31, 2011
Fair Value Measurements Using
Description
Level 1
Level 2
Level 3
Fair Value
U.S. Government-sponsored agencies
$0
$3,517,050
$0
$3,517,050
U.S. Government-sponsored agency MBS
0
32,226,529
0
32,226,529
State and local governments
0
25,468,499
0
25,468,499
Residential MBS
0
2,355,680
4,042,935
6,398,615
Total securities available for sale
$0
$63,567,758
$4,042,935
$67,610,693
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2012.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Available-
for-Sale
Securities
Beginning balance, January 1, 2012
$4,042,935
Total realized and unrealized gains/(losses):
Included in earnings
(120,354)
Included in other comprehensive income
194,999
Purchases, issuances, sales and settlements
Purchases
0
Issuances
0
Sales
0
Settlements
(519,355)
Transfers into Level 3
0
Transfers out of Level 3
0
Ending balance, September 30, 2012
$3,598,225
Assets Recorded at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis, are summarized in the following table:
September 30, 2012
Fair Value Measurements Using
Description
Level 1
Level 2
Level 3
Fair Value
Loans held for sale
$0
$367,806
$0
$367,806
Other real estate owned
0
336,719
0
336,719
Impaired loans
0
0
10,634,032
10,634,032
Total Assets
$0
$704,525
$10,634,032
$11,338,557
December 31, 2011
Fair Value Measurements Using
Description
Level 1
Level 2
Level 3
Fair Value
Loans held for sale
$0
$485,926
$0
$485,926
Other real estate owned
0
801,689
0
801,689
Impaired loans
0
0
13,260,619
13,260,619
Total Assets
$0
$1,287,615
$13,260,619
$14,548,234
The tables below summarize fair value of financial assets and liabilities at September 30, 2012 and December 31, 2011.
September 30, 2012
Carrying
Fair
Fair Value Hierarchy Level
Amount
Value
Level 1
Level 2
Level 3
$(000s)
Financial Assets
Cash and federal funds sold
$29,118
$29,118
$29,118
$0
$0
Investment securities
81,341
81,341
0
77,743
3,598
Loans, net of allowance for loan losses
297,194
298,277
0
0
298,277
Loans held for sale
368
368
0
368
0
Bank owned life insurance
7,286
7,286
0
7,286
0
Other investments, at cost
2,741
2,741
0
0
2,741
TOTAL
$418,048
$419,131
$29,118
$85,397
$304,616
Financial Liabilities
Deposits
$332,898
$334,074
$0
$0
$334,074
Borrowings
37,768
39,873
0
0
39,873
TOTAL
$370,666
$373,947
$0
$0
$373,947
December 31, 2011
Carrying
Fair
Fair Value Hierarchy Level
Amount
Value
Level 1
Level 2
Level 3
$(000s)
Financial Assets
Cash and federal funds sold
$42,093
$42,093
$42,093
$0
$0
Investment securities
67,611
67,611
0
63,568
4,043
Loans, net of allowance for loan losses
291,254
291,427
0
0
291,427
Loans held for sale
486
486
0
486
0
Bank owned life insurance
7,083
7,083
0
7,083
0
Other investments, at cost
4,405
4,405
0
0
4,405
TOTAL
$412,932
$413,105
$42,093
$71,137
$299,875
Financial Liabilities
Deposits
$327,793
$328,864
$0
$0
$328,864
Borrowings
40,041
41,935
0
0
41,935
TOTAL
$367,834
$370,799
$0
$0
$370,799
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Denmark Bancshares, Inc. and Subsidiaries
Selected Quarterly Financial Data
(Unaudited)
Financial Highlights
3rd Qtr
2nd Qtr
1st Qtr
4th Qtr
3rd Qtr
($000s, except per share data)
2012
2012
2012
2011
2011
Operating Results
Interest income
$4,292
$4,360
$4,305
$4,340
$4,406
Interest expense
784
847
896
946
1,003
Net interest income
3,508
3,513
3,409
3,394
3,403
Provision for loan losses
225
150
150
150
150
Noninterest income
830
505
596
539
484
Noninterest expense
2,604
2,621
2,572
2,328
2,514
Net income
974
821
849
982
848
Per Share Data
Net income per share
$8.22
$6.93
$7.14
$8.26
$7.13
Book value per share
$489.67
$480.21
$479.09
$471.11
$470.88
Financial Condition (1)
Total Loans
$303,600
$304,594
$301,606
$297,832
$295,511
Allowance for credit losses
6,406
6,585
6,603
6,578
6,518
Investment securities
81,342
78,031
76,787
67,611
65,757
Assets
430,156
421,540
422,731
425,986
412,560
Deposits
332,898
324,367
324,922
327,793
315,232
Other borrowed funds
37,768
38,151
39,683
40,041
39,759
Stockholders' equity
58,059
56,938
56,804
56,023
55,996
Financial Ratios
Return on average equity
6.77%
5.77%
5.99%
7.14%
6.20%
Return on average assets
0.93%
0.79%
0.80%
0.96%
0.83%
Interest rate spread
3.33%
3.33%
3.17%
3.37%
3.29%
Average equity to average assets
13.67%
13.60%
13.39%
13.23%
13.37%
Allowance for loan losses
to total loans (1)
2.11%
2.16%
2.19%
2.21%
2.21%
Non-performing loans to allowance for
loan losses (1)
96%
109%
137%
132%
125%
(1) As of the period ending.
Forward Looking Statements
This report may contain certain forward-looking statements, including without limitation, statements regarding results of operations, the appropriateness of the allowance for loan losses, the amounts of charge-offs and recoveries, capital to asset ratios, capacity for paying dividends and liquidity. These statements speak of DBI's plans, goals, beliefs or expectations, and refer to estimates or use of similar terms. Forward-looking statements can generally be identified because they contain words and phrases such as "may," "project," "are confident," "should," "predict," "believe," "plan," "expect," "estimate," "anticipate," and similar expressions. These forward-looking statements are inherently uncertain and actual results may differ from DBI's expectations. The factors that, among others, could impact current and future performance include but are not limited to: (i) adverse changes in asset quality and resulting credit risk-related losses and expenses; (ii) adverse changes in the local economy; (iii) fluctuations in market rates and prices which can negatively affect net interest margin, asset valuations and expense expectations; (iv) changes in regulatory requirements of federal and state agencies applicable to banks and bank holding companies; and (v) the factors set forth in Item 1A of DBI's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report"), which item is incorporated herein by reference, as well as other risks identified in this Report. When reviewing forward-looking statements to make decisions with respect to DBI, investors and others are cautioned to consider these and other risks and uncertainties. All forward-looking statements contained in this report are based upon information presently available and DBI assumes no obligation to update any forward-looking statements.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") into law. This legislation makes extensive changes to the laws regulating financial services firms and requires significant rulemaking, some of which has yet to be finalized. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. While the full effects of the legislation on DBI and DSB cannot yet be determined, this legislation is generally perceived as negatively impacting the banking industry. This legislation may result in higher compliance and other costs, reduced revenues and higher capital and liquidity requirements, among other things, which could adversely affect DBI's and DSB's business.
Critical Accounting Policies
The accounting and reporting policies of DBI are in accordance with accounting principles generally accepted in the United States of America and conform to general practices in the banking industry. The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on information available at the date of the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management believes that DBI's critical accounting policies are those relating to the allowance for loan losses, the valuation of investment securities and intangible assets.
Allowance for Loan Losses
The allowance for loan losses ("ALL") is an estimate of the losses that may be sustained in the loan portfolio. Please refer to the Allowance for Loan Losses section of Note 3 - Loans for detail on the allowance methodology. Management believes the ALL is appropriate as of September 30, 2012.
Valuation of Investment Securities
Investment securities are classified as available-for-sale and are valued at their fair market value. Please refer to Note 2 - Investment Securities and Note 5 - Fair Value Measurement for additional details on the valuation of investment securities.
Other Real Estate Owned
Real estate that DBI has taken control of in partial or full satisfaction of debt is valued at the lower of book value or market value. Please refer to Note 5 - Fair Value Measurement for additional information on the accounting polices related to the valuation of other real estate owned.
Glossary of Loan Terms
Impaired Loan -
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.
Nonaccrual Loan -
DSB'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 for 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. 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 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.
Non-Performing Assets -
Non-performing assets include nonaccrual loans as defined above and real and personal properties acquired in satisfaction of debts previously owed.
Past Due Accruing Loans -
A loan on which all or part of a scheduled payment is delinquent by more than 30 days but less than 90 days, except loans that are considered nonaccrual.
Potential Problem Loans -
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 DBI 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.
Restructured Loans -
Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in the payment schedule, the amortization term, the interest rate, or a combination of these.
Risk Rating -
Risk rating, which is also sometimes referred to as loan grade, is the credit quality grade assigned to each loan. Loans are assigned a risk rating upon origination. Lenders and credit review analysts conduct periodic reviews and evaluations and make adjustments to the assigned grades when appropriate. The range of categories from the best quality to the worst is as follows: highest quality, solid quality, some weakness, inherent industry weakness, special mention, substandard, doubtful and loss. Impaired loans are generally rated a substandard or lower risk rating.
Special Mention Loans -
Loans classified "special mention" are one step above substandard loans as described below. These loans contain some weaknesses, which if not corrected or improved upon could lead to further deterioration and a lower rating.
Substandard -
A "substandard" loan is a loan that is inadequately protected by the current net worth and paying capacity of the borrower or the value of the collateral. Loans classified "substandard" have well-defined weaknesses that jeopardize prospects for liquidation and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.
Results of Operations
Net income for the quarter ended September 30, 2012, was $1.0 million, an increase of $0.1 million or 14.9% from $0.9 million for the corresponding period in 2011. This increase was primarily the result of $0.2 million security sales gains, a $0.1 million increase in loan sales gains and a $0.1 million improvement in net interest income from the same period during 2011. These items were partially offset by a $0.1 million increase in the provision for loan losses and a $0.2 million increase in tax expense for the period.
Year-to-date net income for the first nine months of 2012 was steady at $2.6 million when compared to the same period in 2011.
Net interest income was $3.5 million for the quarter ended September 30, 2012, an increase of $0.1 million or 3.1% from $3.4 million during the third quarter of 2011. Net interest income for the first nine months of 2012 as well as the first nine months of 2011 was $10.4 million. The following tables set forth a summary of the changes in average balances of interest-earning assets and interest-bearing liabilities as well as the amount of interest earned and interest paid with the resulting average yield or rate for both the current quarter and year-to-date 2012:
Three Months Ended September 30,
2012
2011
($000s)
Average
Income
Average
Average
Income
Average
Daily
and
Yield or
Daily
and
Yield or
Balance
Expense
Rate
Balance
Expense
Rate
ASSETS
Interest-earning assets:
Loans (1) (2)
$304,839
$3,825
5.02%
$296,619
$3,847
5.19%
Investment securities: (3)
Taxable securities
62,521
291
1.86%
50,388
313
2.48%
Nontaxable securities (2)
15,148
238
6.29%
18,142
346
7.63%
Federal funds sold
9,776
3
0.14%
10,677
4
0.13%
Other investments
6,616
21
1.26%
11,250
18
0.65%
Total earning assets
$398,900
$4,378
4.39%
$387,076
$4,528
4.68%
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts
$23,184
$11
0.18%
$19,765
$9
0.18%
Savings accounts
23,240
16
0.28%
21,201
16
0.30%
Money market accounts
136,063
140
0.41%
123,042
229
0.74%
Time deposits
102,517
363
1.42%
111,291
471
1.69%
Other borrowed funds
37,812
254
2.69%
42,533
278
2.61%
Total interest-bearing liabilities
$322,816
$784
0.97%
$317,832
$1,003
1.26%
Net interest income and rate spread
$3,594
3.42%
$3,525
3.42%
Net yield on interest earning assets
3.60%
3.64%
Nine Months Ended September 30,
2012
2011
($000s)
Average
Income
Average
Average
Income
Average
Daily
and
Yield or
Daily
and
Yield or
Balance
Expense
Rate
Balance
Expense
Rate
ASSETS
Interest-earning assets:
Loans (1) (2)
$302,308
$11,466
5.06%
$297,729
$11,779
5.28%
Investment securities: (3)
Taxable securities
60,499
869
1.91%
45,397
860
2.52%
Nontaxable securities (2)
15,291
812
7.08%
21,465
1,219
7.57%
Federal funds sold
10,104
10
0.14%
12,234
15
0.16%
Other investments
11,821
88
0.99%
10,944
91
1.11%
Total earning assets
$400,023
$13,245
4.41%
$387,769
$13,964
4.80%
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts
$22,316
$30
0.18%
$20,596
$29
0.19%
Savings accounts
22,448
49
0.29%
20,787
50
0.32%
Money market accounts
135,816
538
0.53%
120,383
693
0.77%
Time deposits
103,892
1,137
1.46%
115,068
1,545
1.79%
Other borrowed funds
38,862
773
2.65%
43,386
841
2.58%
Total interest-bearing liabilities
$323,334
$2,527
1.04%
$320,220
$3,158
1.32%
Net interest income and rate spread
$10,718
3.37%
$10,806
3.48%
Net yield on interest earning assets
3.57%
3.72%
(1) Nonaccrual loans are included in the average daily balance figure, but interest income associated with these loans is recognized under the cash basis method of accounting.
(2) The yield on tax-exempt loans and securities is computed on a fully taxable equivalent basis assuming a tax rate of 34%.
(3) Securities are shown at amortized cost.
Net interest income for the quarter-ended September 30, 2012 was stable when compared to the same period of 2011. The net interest rate spread on a tax equivalent basis was 3.42% for both the quarter ended September 30, 2012 and 2011. DBI's yield on earning assets declined 29 basis points from 4.68% for the quarter ended September 30, 2011 to 4.39% as of the quarter ended September 30, 2012. This was due in large part to a decline in the yield on tax-exempt securities of 134 basis points and a decline of 62 basis points in the yield on taxable securities for the current quarter when compared to the same period of 2011. The reduction in the yield on earning assets was offset by a decline in the cost of funds of 29 basis points from 1.26% for the quarter ended September 30, 2011 to 0.97% during the third quarter of 2012. This reduction in the cost of funds was primarily impacted by a 33 basis point reduction in the rate on money market accounts and a shift in average balances from higher cost certificates of deposits to lower cost money market accounts.
During the first nine months of 2012, the net interest rate spread on a tax equivalent basis fell 11 basis points compared to the first nine months of the prior year from 3.48% at September 30, 2011 to 3.37% at September 30, 2012. The yield on earning assets fell 39 basis points during this period from 4.80% in 2011 to 4.41% in 2012 due in large part to a 22 basis point decline in the yield on loans as well as a 61 basis point reduction in the yield on taxable securities during this same period. This decline in the yield on earning assets was partially offset by a decrease in the cost of funds of 28 basis points from 1.32% year-to-date 2011 to 1.04% for the same period in 2012. The reduction in the cost of funds was primarily impacted by a 33 basis point reduction in the rate and an $11.2 million decline in the average balances on certificates of deposits.
DBI's provision for loan losses was $0.2 million for both the third quarter of 2012 and the same period of 2011. Net charge-offs of $0.4 million were recognized in the third quarter of 2012 compared to nominal net charge-offs during the corresponding period in 2011. For both the nine months ended September 30, 2012 and 2011 DBI's provision for loan losses totaled $0.5 million. Net charge-offs for the nine-month period ended September 30, 2012 totaled $0.7 million versus $0.8 million for the comparable period in 2011.
Noninterest income for the three months ended September 30, 2012 was $0.8 million, an increase of $0.3 million or 71.5% compared to $0.5 million during the corresponding period in 2011. During the third quarter of 2012, gains on the sale of securities of $0.2 million were recognized while no gains were recorded during the same period during 2011. For tax purposes, thirteen taxable municipals were sold during the most recent quarter along with two agency pools resulting in the recorded gains. Also, gains on the sale of loans to the secondary market were $0.1 million higher than the same period for 2011. This is due to an increase in the volume of loans sold by $4.3 million to $11.2 million in the third quarter of 2012. Noninterest income for the nine months ended September 30, 2012 was $1.9 million an increase of $0.4 million or 30.1% versus $1.5 million recorded during the nine months ended September 30, 2011. This was primarily due to an increase of $0.2 million in gains on both the sale of loans as well as securities sales during the first nine months of 2012 compared to the same period of 2011.
Noninterest expense increased $0.1 million or 3.8% to $2.6 million for the quarter ended September 30, 2012 compared to $2.5 million for the third quarter of 2011. Slight increases in data processing expenses along with salaries and employee benefits for the current quarter compared to the same period of 2011 are the primary reasons for this increase. Higher health insurance costs along with additional staffing led to this increase. For the nine months ended September 30, 2012, noninterest expense increased $0.2 million or 2.3% to $7.7 million compared to $7.5 million for the nine months ended September 30, 2011. Salaries and employee benefits were $0.2 million higher during the first three quarters of 2012 when compared to the same period for 2011. In addition to higher health insurance costs and staffing, there was an accrual adjustment made during the first quarter of 2011 to correct an over-accrual for 2010 bonuses. This adjustment was not repeated during 2012. A decline of $0.1 million in FDIC insurance premiums for the first nine months of 2012 compared to the same period of 2011 partially offset the increase in salaries and employee benefit costs. The lower FDIC insurance premiums resulted from a new premium structure implemented by the FDIC effective April 1, 2011.
Additional OTTI credit loss was recognized during the most recent quarter on one of the two securities previously determined to be other-than-temporarily-impaired. The credit loss recognized through the income statement was nominal during the three months ended September 30, 2012 and the third quarter of 2011 on the same security. For the nine months ended September 30, 2012 OTTI credit losses recognized on two securities previously determined to be other-than-temporarily-impaired totaled $0.1 million compared to $0.2 million for the same period in 2011.
For the three months ended September 30, 2012 DBI recorded combined federal and state income tax expense of $0.5 million, an increase of $0.2 million or 42.5% compared to income tax expense recorded for the third quarter of 2011. These provisions reflect effective income tax rates of 35% for the third quarter of 2012 and 31% for the third quarter of 2011. DBI's combined statutory tax rate is 39%. The lower effective income tax rates are primarily due to certain federally tax exempt interest earned on state and local government investment securities. The effective tax rates for the nine months ended September 30, 2012 and 2011 were 35% and 30%, respectively.
Financial Condition
Total assets increased by $4.2 million between December 31, 2011 and September 30, 2012. Increases in investment securities of $13.7 million, or 20.3%, and loans of $5.8 million, or 1.9%, during the first nine months of 2012 were the primary factors for the higher assets at September 30, 2012. Cash, cash equivalents and fed funds sold decreased by $13.0 million, or 30.8%, since December 31, 2011, and other investments declined $1.7 million, or 37.8%, during the same period to partially offset these increases.
The following table sets forth major types of loans, excluding loans held for sale, by primary collateral and the percentage of total loans for each type:
September 30, 2012
December 31, 2011
$(000)s
Amount
%
Amount
%
Real Estate:
Residential
$70,114
23.1%
$72,656
24.4%
Commercial
59,090
19.5%
60,865
20.4%
Agricultural
76,040
25.0%
78,768
26.5%
Construction
13,305
4.4%
11,655
3.9%
$218,549
72.0%
$223,944
75.2%
Commercial
41,008
13.5%
35,178
11.8%
Agricultural
33,433
11.0%
27,661
9.3%
Consumer and other
10,610
3.5%
11,049
3.7%
TOTAL
$303,600
100.0%
$297,832
100.0%
During 2011, management made the decision to purchase government guaranteed loans given the lack of quality loan growth potential currently available within DSB's lending market. As of September 30, 2012 there were approximately $12.9 million of government guaranteed loans recorded, of which $9.3 million are secured by agricultural real estate and $3.6 million by commercial real estate. The average maturity of the loans purchased is approximately 10 years. The premiums on the loans are being amortized over a three year period. Management will continue to evaluate DSB's loan portfolio and may make additional purchases as deemed appropriate. Management is authorized to invest up to $15 million in government guaranteed loan purchases.
The allowance for loan losses declined $0.2 million during the first nine months of 2012 to $6.4 million. Provisions of $0.5 million were added to the allowance in the first nine months of 2012,which were offset by net charge-offs of approximately $0.7 million during the period. The allowance equals 2.11% of total loans as of September 30, 2012 compared to 2.21% at December 31, 2011. Nonaccrual loans totaled $6.2 million at September 30, 2012, a decrease of approximately $2.5 million compared to nonaccrual loans of $8.7 million at December 31, 2011.
The following table sets forth nonaccrual loans by major category:
September 30,
December 31,
$(000)s
2012
2011
Secured By Real Estate:
Residential
$1,282
$2,195
Agricultural
116
0
Commercial
1,755
2,299
Construction
2,556
3,364
Subtotal Real Estate Loans
5,709
7,858
Secured by commercial assets
406
563
Secured by agricultural assets
0
0
Secured by other assets
43
235
TOTAL
$6,158
$8,656
DBI's ratio of loans more than 30 days past due (including nonaccrual loans) to total loans was 2.78% at September 30, 2012, compared to 3.58% at year-end 2011. As of September 30, 2012, management had identified $42.8 million of potential problem loans compared to $38.2 million at year-end 2011. Loan quality continues to be a concern and improving the portfolio is the primary focus for management. DBI has no accruing loans that are past due 90 days or more at September 30, 2012.
DBI's investment in other real estate (property acquired through foreclosure or in satisfaction of loans) decreased $0.5 million in the first nine months of 2012. At September 30, 2012 the $0.3 million balance in other real estate comprised three construction/land development properties totaling approximately $0.2 million, one property secured by agricultural-related real estate with an estimated value of $0.1 million and one nominal residential real estate property. This compares to the seven parcels held at year-end 2011 consisting of $0.3 million in construction/land development properties, $0.2 million in commercial real estate, $0.2 million in agricultural-related real estate and $0.1 million in residential real estate.
The following table sets forth certain data concerning nonaccrual loans, past due accruing loans, restructured loans and other real estate:
September 30, 2012
December 31, 2011
% of Total
% of Total
$(000)s
Amount
Loans
Amount
Loans
Nonaccrual Loans (1)
$6,158
2.0%
$8,656
2.9%
Restructured Accruing Loans
5,393
1.7%
4,449
1.4%
Accruing Loans Past Due
90 Days or More
0
0.0%
0
0.0%
Total
$11,551
3.7%
$13,105
4.3%
Other Real Estate
$337
$802
(1) Includes restructured loans of $2.7 million as of September 30, 2012 and $4.3 million as of December 31, 2011.
Total deposits increased $5.1 million at September 30, 2012 compared to balances at December 31, 2011. Noninterest-bearing deposits decreased by $3.6 million, or 7.6%, during the first nine months of 2012. Interest-bearing deposits increased $8.7 million or 3.1% between December 31, 2011 and September 30, 2012. Money market accounts increased $8.5 million or 6.5% during the first nine months of 2012 and savings accounts increased $2.5 million or 11.6% during the same period. The trend in money market balances continues to increase given the current rate environment and depositors reluctance to commit to long-term rates. NOW account balances increased $1.7 million or 7.5% since year-end 2011, while certificates of deposit declined $4.0 million, or 3.7%, during the same period. Given the current interest rate environment, there has been a shift away from certificates of deposit into money market accounts as customers are reluctant to lock into a rate at this time. DBI's money market rates are comparable to its rates for short-term certificates of deposit.
Interest-bearing deposits consisted of the following:
$(000)s
9/30/2012
12/31/2011
NOW accounts
$23,945
$22,278
Savings accounts
23,585
21,129
Money market accounts
139,490
130,959
Certificates of deposit
101,997
105,957
TOTAL
$289,017
$280,323
Short-term borrowings decreased $0.8 million or 7.3% as of September 30, 2012 compared to December 31, 2011. Loan volume for DACC was relatively stable during the first quarter of 2012, thereby eliminating the need to advance funds against the line of credit at Agribank, FCB. Long-term borrowings declined $1.4 million or 5.0% since year-end 2011 due to maturities of FHLB advances.
Capital Resources
Stockholders' equity increased by $2.0 million to $58.0 million as of September 30, 2012 from $56.0 million at December 31, 2011 due primarily to earnings for the period of $2.6 million and a decrease in other comprehensive loss of $0.4 million that were partially offset by the dividend payment of $0.9 million and purchase of treasury stock of $0.1 million. As of September 30, 2012 DBI's leverage ratio was 13.8%, its risk-based core capital ratio was 18.7% and its risk-based total capital ratio was 19.9%. As of September 30, 2012, DSB's leverage ratio was 10.6% and its risk-based total capital ratio was 16.4%. DBI and DSB continue to maintain capital levels well above regulatory minimum levels established for "well-capitalized" institutions. DBI believes its and DSB's capital positions as of September 30, 2012 are adequate under current economic conditions.
Liquidity
Liquidity refers to the ability of DBI to generate adequate amounts of cash to meet its needs. DBI maintains liquid assets and established lines of credit to meet its liquidity needs. DBI's Board of Directors annually approves a Consolidated Contingent Liquidity Plan, which reviews the sources and uses of liquidity for DBI, DSB and DACC. Cash, cash equivalents and federal funds sold decreased $13.0 million or 30.8% to $29.1 million during the first nine months of 2012 primarily due to the increases in investment securities of $13.7 million and loans of $5.8 million during this period. The major sources and uses of cash are detailed in the accompanying Consolidated Statements of Cash Flows.
In addition to on-balance sheet sources of funds, DBI also has off-balance sheet sources available to meet liquidity needs. Specifically, DBI has unused lines of credit of $49.1 million as of September 30, 2012. This includes a $20.0 million line of credit with the Federal Reserve Bank of Chicago that was established in 1999. DSB has not borrowed on this line. DBI also has $80.1 million of eligible loans and securities that could be pledged to increase its available credit. Management believes DBI's and DSB's liquidity positions as of September 30, 2012 are adequate under current economic conditions.
Off-Balance Sheet Arrangements
DBI 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 their customers. These financial instruments include commitments to extend credit and stand-by 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 condition. The contract or notional amounts of those instruments reflect the extent of involvement DBI and its subsidiaries have in particular classes of financial instruments.
The exposure of DBI 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. DBI and its subsidiaries use the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. DBI and its subsidiaries require collateral or other security to support financial instruments with credit risk. The following table sets forth DBI's commitments to extend credit and standby letters of credit:
Contract or
Notional Amount
Secured
(In thousands)
September 30, 2012
Portion
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
$43,722
$40,251
Standby letters of credit and financial guarantees written
1,424
1,424
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. DBI 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 DSB to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support commercial business transactions. When a customer fails to perform according to the terms of the agreement, DSB honors drafts drawn by the third party in amounts up to the contract amount. A majority of the letters of credit expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties and residential properties. All letters of credit are fully collateralized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
DBI's primary market risk position has not materially changed from that disclosed in DBI's 2011 Annual Report.
Item 4. Controls and Procedures
As required by Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, DBI's management, under the supervision and with the participation of DBI's principal executive officer and principal financial officer, has evaluated DBI's disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, DBI's principal executive officer and principal financial officer believe that DBI's disclosure controls and procedures are effective as of the end of the period covered by this Report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no significant changes in DBI's internal controls over financial reporting or in other factors that have significantly affected those controls during the fiscal quarter covered by this Report, including any correction actions with regard to significant deficiencies and material weaknesses.
Part II. Other Information
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A - Risk Factors of DBI's 2011 Annual Report, which could materially affect DBI's business, financial condition or future results. There have been no material changes in risk factors as described in such Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2012, DBI did not sell any equity securities which were not registered under the Securities Act of 1033, as amended, or repurchase any of its equity securities.
The Federal Reserve Board ("the Board") has adopted regulations that deal with the measure of capitalization for bank holding companies. The Board has also issued a policy statement on the payment of cash dividends by bank holding companies, wherein the Board has stated that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing.
The ability of DBI to pay dividends on its common stock is largely dependent upon the ability of DSB to pay dividends on its stock held by DBI. DSB's ability to pay dividends is restricted by both state and federal laws and regulations. DSB 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 of such banks 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. Payments of dividends in some circumstances may require the written consent of the Division.
Item 6. Exhibits
(a) Exhibits:
31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text. *
* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DENMARK BANCSHARES, INC.
Date: November 12, 2012 /s/ John P. Olsen
John P. Olsen
President and CEO
Date: November 12, 2012 /s/ Dennis J. Heim
Dennis J. Heim
Vice President, CFO and Treasurer
1 Year Denmark Bancshares (QX) Chart |
1 Month Denmark Bancshares (QX) Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions