UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004



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)



(920) 863-2161

(Registrant's telephone number, including area code)





---

(Former name, address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes [X]  No [ ]



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes [ ]  No [X]





APPLICABLE ONLY TO CORPORATE ISSUERS:



As of October 22, 2004, there were 120,860 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, 2004





|                                                                                                | Page No.
|----------------------------------------------------------------------------------------------- | --------
|                                                                                                |         
|PART I.Financial Information                                                                    |         
|                                                                                                |         
|Item 1.    Financial Statements                                                                 |         
|                                                                                                |         
|Consolidated Statements of Financial Condition                                                  | 3       
|                                                                                                |         
|Consolidated Statements of Income                                                               | 4       
|                                                                                                |         
|Consolidated Statement of Changes in Stockholders' Equity                                       | 5       
|                                                                                                |         
|Consolidated Statements of Cash Flows                                                           | 6       
|                                                                                                |         
|Notes to Consolidated Financial Statements                                                      | 7       
|                                                                                                |         
|Item 2.    Managements Discussion and Analysis of Financial Condition
and Results of Operations | 9       
|                                                                                                |         
|Item 3.    Quantitative and Qualitative Disclosures About Market Risk                           | 15      
|                                                                                                |         
|Item 4.    Controls and Procedures                                                              | 16      
|PART II.Other Information                                                                       |         
|                                                                                                |         
|Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds                          | 16      
|                                                                                                |         
|Item 6.    Exhibits                                                                             | 16      
|Signatures                                                                                      | 17      
|                                                                                                |         









































This report may contain certain forward-looking statements, including without limitation, statements regarding results of operations, the adequacy of the allowance for loan losses, the amounts of charge-offs and recoveries, capital to assets ratios, capacity for paying dividends and liquidity.  These forward-looking statements are inherently uncertain and actual results may differ from Company expectations. The following factors which, 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; and (iv) changes in regulatory requirements of federal and state agencies applicable to banks and bank holding companies, which could have materially adverse effects on DBI's future operating results. When relying on 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.





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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 and lease losses and intangible assets.



Allowance for Loan and Lease Losses



The allowance for loan and lease losses ("ALLL") is an estimate of the losses that may be sustained in the loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable, and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", 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 or lease's contractual terms. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 - "Selected Loan Loss Allowance Methodology and Documentation Issues" and the Federal Financial Institutions Examination Council's interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions" (the "FFIEC Policy Statement").



DSB's and DACC's boards of directors have approved policies to provide management with a systematic methodology to determine an adequate allowance for loan and lease losses. This methodology includes a systematic 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, as an integral part of their examination process, and by external auditors, consideration of current trends and volume of total nonperforming, past-due, nonaccrual and potential problem loans, and consideration of national and local economic trends and industry conditions.



In applying the methodology, nonaccrual loans, restructured loans and potential problem loans (other than loans secured by 1-to-4 family residential properties, loans secured by consumer personal property and unsecured loans), above a certain size, are reviewed to determine if they are impaired. Impaired loans are individually analyzed and an allowance amount is calculated for each one of these loans, based on the estimated fair value of collateral, in conjunction with FAS 114. Loans that are not impaired are segmented into groups by type of loan. The following loan types are utilized so that each segment of loans will have similar risk factors; 1) residential real estate, 2) agricultural real estate, 3) commercial real estate, 4) agricultural, 5) commercial, 6) consumer installment, and 7) other. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, DSB and DACC further segregate loans that are not impaired by loan risk classification within each type of loan based on an assessment of risk for a particular loan. The applicable risk classifications are "special mention" and "substandard". A "substandard" loan is a loan that is inadequately protected by the current sound worth and paying capacity of the borrower or of any collateral. Loans classified "substandard" have well-defined weaknesses that jeopardize liquidation and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.

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Loans classified "special mention" are one step above substandard; these loans contain some weakness which if not corrected or improved upon could lead to further deterioration and a lower rating. Risk factor percentages are applied to the identified segments of each of the nonclassified and classified portions of the portfolios to calculate an allowance in conjunction with FAS 5. These risk factor percentages are based on historical loan loss experience adjusted for current economic conditions and trends and internal loan quality trends.  In determining the adequacy of the allowance for loan and lease losses at September 30, 2004, DBI utilized the same risk factor percentages for loans other than agricultural loans that it used at December 31, 2003.  The risk factor percentages for agricultural real estate loans and other agricultural loans were slightly decreased because of the improvement in the price of milk paid to dairy farmers.



The foregoing calculations in accordance with FAS 114 and FAS 5 are used to confirm the adequacy and appropriateness of the ALLL as developed through provisions for credit losses charged to expense, recognizing that the ALLL represents an aggregation of judgments and estimates by management. Such calculations also influence the amount of future provisions for credit losses charged to expense, pending reapplication of the described systematic methodology.



Management evaluates the adequacy of the ALLL on a quarterly basis and submits to the board of directors of DSB each quarter a recommendation of the amount of a monthly provision for loan losses. If the mix and amount of future charge-offs differ significantly from those assumptions used by management in making its determination, the ALLL and the provision for loan losses on the income statement could be materially affected. Management believes that the ALLL is adequate as of September 30, 2004.



Intangible Assets



DBI has a core deposit intangible asset that was originated in connection with DSB's expansion through an acquisition of an established branch operation in 1997. The acquisition did not meet the definition of a business combination in accordance with Statement No. 141. As such, DBI continues to amortize the intangible asset related to the acquisition over a period of fifteen years.  DBI evaluates the core deposit intangible asset for impairment on an annual basis.



Results of Operations



Net income for the quarter ended September 30, 2004, was $950,502, a decrease of $63,390 or 6.3%, compared to $1,013,892, for the corresponding period in 2003.  This decrease was the result of lower noninterest income and higher noninterest expenses, which more than offset an increase in net interest income and a lower provision for loan losses.









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This increase was partly attributable to a change in the volume and mix of interest-earning assets. The average balance of interest-earning assets increased by $11.0 million during the third quarter of 2004 compared to the third quarter of 2003. Average total loans increased by $27.8 million while lower yielding federal funds sold decreased by $10.5 million during the third quarter of 2004 compared to the corresponding period in 2003.  The average net interest rate spread increased from 3.58% during the third quarter of 2003 to 3.72% during the quarter ended September 30, 2004.  DBI's yield on earning assets was 5.72% during the third quarter of 2004 compared to 5.81% during the quarter ended September 30, 2003.  The average cost of funds was 2.00% during the most recent quarter, a decrease of 23 basis points compared to the quarter ended September 30, 2003.



In the third quarter of 2004 DBI's provision for credit losses was $15,000 compared to $87,000 for the third quarter of 2003.  Net recoveries were $28,349 in the third quarter of 2004 compared to net charge-offs of $252,247 during the corresponding period in the prior year.



Noninterest income for the three months ended September 30, 2004, was $410,009, a decrease of $206,521 compared to the corresponding period in 2003.  Gains from the sales of residential real estate loans decreased by $210,565 during the third quarter of 2004.  DSB sold $2.8 million of mortgage loans in the third quarter of 2004 compared to $22.7 million during the third quarter of 2003.



Noninterest expense increased by $271,552 or 11% during the three months ended September 30, 2004, compared to the corresponding period in 2003.  Salaries and benefits expense increased $146,124 or 10% over the corresponding period in 2003.  This increase is primarily the result of higher salaries and wages, which increased by $99,486 or 10% as a result of regular salary increases and the addition of ten full-time equivalent employees.  The additional staff is primarily attributed to the new Wrightstown branch office that opened during the third quarter of 2004.  Higher group health insurance expenses, which increased by $36,816 or 14%, also contributed to the increase in salaries and benefits expense.



Occupancy expenses increased by $66,441 or 28% during the three months ended September 30, 2004, compared to the third quarter of 2003.  The increase is primarily attributable to higher depreciation expense, which increased $50,633 as a result of DBI's Financial Center and the Wrightstown branches.



Other operating expenses increased by $89,755 or 28% during the three months ended September 30, 2004, compared to the corresponding period in 2003.  This increase is primarily the result of a valuation adjustment totaling $100,867 on a commercial property held as acquired property.  DSB has two acquired properties totaling $845,143 as of September 30, 2004.



On a per share basis, net income was $7.85 in the third quarter of 2004 compared with $9.35 in the third quarter of 2003.  Return on average assets in the third quarter of 2004 was 1.04%, compared to 1.15% for the corresponding period in 2003.  Return on average equity in the third quarter of 2004 was 7.6%, compared to 10.6% for the corresponding period in the prior year.  The reduction for the three months ended September 30, 2004, was caused by a substantial increase in the weighted average shares from 108,435 in the third quarter of 2003 to 120,995 during the third quarter of 2004 as a result of the sale of an additional 12,850 shares of stock in November 2003.





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Financial Condition



Total assets increased by $13.5 million between December 31, 2003, and September 30, 2004.  Interest-bearing deposits in other banks decreased by $4.0 million.  DSB redeemed a $4 million short-term certificate of deposit for liquidity purposes.  Federal funds sold (unsecured loans of immediately available funds to correspondent banks for one business day) decreased by $8.2 million.  Total loans, excluding loans held for sale, increased by $26.6 million during the first nine months.  Premises and equipment increased by $1.9 million primarily as a result of the furniture and equipment purchases and construction-in-progress payments related to the new Wrightstown branch banking office that opened during the third quarter of 2004.  Total deposits increased by $0.9 million during the nine-month period ending September 30, 2004.



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:





Construction real estate loans which are primarily secured by construction-in-progress 1-to-4 family residential properties increased by $9.9 million and residential real estate loans increased by $5.1 million during the first nine months of 2004.  Commercial real estate loans and other commercial loans increased by $6.6 million and $3.0 million, respectively during the nine months ended September 30, 2004.



The allowance for credit losses increased by $155,153 during the nine months ended September 30, 2004. The allowance equals 1.94% of total loans at September 30, 2004, compared to 2.07% at December 31, 2003.  Nonaccrual loans totaled $6,805,613 at the end of the most recent quarter, an increase of $524,141 compared to December 31, 2003.  DBI's ratio of loans more than 30 days past due (including nonaccrual loans) to total loans was 4.03% at quarter end, compared to 3.67% at year-end.



As of September 30, 2004 management has identified $14.3 million of potential problem loans compared to $12.4 million at year-end.  The increase in potential problem loans is primarily attributable to the addition of three commercial borrowers with loans totaling $2.3 million as of September 30, 2004.  An annual review of their financial statements indicated some negative earnings trends.  Potential problem loans are loans that are performing but have a greater risk of nonperformance.



DBI has no accruing loans that are past due 90 days or more.  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 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 the current earnings, and interest income thereafter is recorded only when received.



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The following table sets forth certain data concerning nonaccrual loans, past due accruing loans, restructured loans and other real estate (property acquired through foreclosure or in satisfaction of loans):







(1) Includes restructured loans of $1,075,423 and $1,141,041 as of September 30, 2004 and December 31, 2003, respectively.



Demand deposits decreased $1.0 million or 3% during the first nine months of 2004.  The decrease is primarily attributable to a typical seasonal fluctuation.  Interest bearing deposits increased by $1.9 million between December 31, 2003 and September 30, 2004.



Short-term borrowings and long-term debt increased $3.7 million and $7.3 million, respectively, during the first nine months of 2004.  DSB borrowed an additional $7.0 million during the third quarter from the Federal Home Loan Bank of Chicago.  The note requires monthly interest due at a fixed rate of 3.79% and principal due September 28, 2009.  The increases in borrowings were used to fund loan growth.



Stockholders' equity increased by $1.1 million to $49.6 million as of September 30, 2004.  As of September 30, 2004, DBI's leverage ratio was 13.2%, the risk-based core capital ratio was 16.3% and the risk-based total capital ratio was 17.6%.  DBI and DSB continue to maintain capital levels well above the regulatory minimum levels.  On September 28, 2004, DBI's board of directors declared a semiannual $6.75 per share dividend payable on January 3, 2005, to all shareholders of record on December 14, 2004.



Liquidity







In addition to on-balance sheet sources of funds DBI also has off-balance sheet sources available to meet liquidity needs.  DBI has unused lines of credit of $38.5 million as of September 30, 2004.  Management believes DBI's liquidity position as of September 30, 2004, is adequate under current economic conditions.



14











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 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 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:





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







15













Item 4.  Controls and Procedures

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 prior to the filing date of this report.  Based on that evaluation, management believes that DBI's disclosure controls and procedures as of the end of the September 30, 2004, quarter are effective in ensuring that information required to be disclosed by DBI in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time period specified by the Securities and Exchange Commission's rules and forms.



There were no significant changes in DBI's internal controls or in other factors that could significantly affect these controls subsequent to the date of management's evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Part II.  Other Information

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Following are DBI's monthly common stock purchases during the third quarter of 2004:





Item 6.  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.





16







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.



/s/ Darrell R. Lemmens
|----------------------- | --------------------------------------------------
|Date:  October 22, 2004 | Darrell R. Lemmens,                               
|                        | Principal Executive Officer,                      
|                        | Chairman of the Board, and                        
|                        | President



/s/ Dennis J. Heim                   
|Date:  October 22, 2004 | Dennis J. Heim                                    
|                        | Vice President and Treasurer,                     
|                        | Principal Financial and                           
|                        | Accounting Officer                                















17