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, 2005



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 [X]  No [  ]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [ ]  No [X ]







APPLICABLE ONLY TO CORPORATE ISSUERS:



As of October 17, 2005, there were 120,086 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, 2005





|                                                                                                | 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                                                                             | 17      
|Signatures                                                                                      | 18      
|                                                                                                |         

















































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 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 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 net 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 appropriateness of the allowance for loan and lease losses at September 30, 2005, DBI utilized the same risk factor percentages for loans that it used at December 31, 2004.



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 appropriateness 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, 2005.



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.  Annually DBI reviews the intangible assets for impairment and records an impairment charge, if any, to earnings.



Had management determined that this acquisition met the definition of a business combination, Statement No. 142 would have required the intangible asset not to be amortized and for DBI to evaluate the branch acquisition for impairment on an annual basis and record an impairment charge, if any, to earnings.



Results of Operations



Net income for the quarter ended September 30, 2005, was $604,124, a decrease of $346,378 or 36%, compared to $950,502, for the corresponding period in 2004.  This decrease was the result of a higher provision for loan losses, higher noninterest expenses and a decrease in net interest income, which more than offset a decrease in the provision for income tax expense and higher noninterest income.



Net interest income for the quarter ended September 30, 2005, was $3,359,292, a decrease of $117,910 compared to the corresponding period in the prior year.  The following table sets forth a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:





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This decrease in net interest income was attributable to a decrease in net interest spread, which more than offset the increase in net interest income attributable to an increase in the volume of interest-earning assets and interest-bearing liabilities. The average net interest rate spread decreased from 3.72% during the third quarter of 2004 to 3.11% during the quarter ended September 30, 2005.  DBI's yield on earning assets was 6.11% during the third quarter of 2005 compared to 5.72% during the quarter ended September 30, 2004.  The average cost of funds was 3.00% during the most recent quarter, an increase of 100 basis points compared to the quarter ended September 30, 2004.  The Federal Open Market Committee has raised short-term rates eleven times (275 basis points) between June 30, 2004, and September 30, 2005.Long-term rates have not risen in a like amount during this period resulting in a flattening yield curve, which has put pressure on DSB's net interest spread. The average balance of interest-earning assets increased by $31.1 million while the volume of interest-bearing liabilities increased by $29.4 million during the third quarter of 2005 compared to the third quarter of 2004.



In the third quarter of 2005 DBI's provision for credit losses was $259,000 compared to $15,000 for the third quarter of 2004.  Net charge-offs were $116,946 in the third quarter of 2005 compared to net recoveries of $28,349 during the corresponding period in the prior year.



Noninterest income for the three months ended September 30, 2005, was $421,762, an increase of $11,753 compared to the corresponding period in 2004.  Gains from the sales of residential real estate loans increased by $6,017 during the third quarter of 2005 compared to the quarter ended September 30, 2004.  DSB sold $3.5 million of mortgage loans in the third quarter of 2005 compared to $2.8 million during the third quarter of 2004.



Noninterest expense increased by $155,524 or 6% during the three months ended September 30, 2005, compared to corresponding period in 2004.  Salaries and benefits expense increased $124,041 or 8% over the corresponding period in 2004.  This increase is primarily the result of higher salaries and wages, which increased by $81,031 primarily as a result of regular salary increases.  Higher group health insurance expenses, which increased by $33,664 or 11%, also contributed to the increase in salaries and benefits expense.



Occupancy expenses increased by $40,070 or 13% during the three months ended September 30, 2005, compared to the third quarter of 2004.  The increase is attributable to higher depreciation expense, which rose $28,950 primarily as a result of Maribel's and Wrightstown's new buildings, furniture, fixtures and equipment.  Higher real estate and personal property taxes, which increased by $16,500, also contributed to the increase in occupancy expenses.



During the third quarter of 2005, DBI recognized net losses on sales of other real estate properties acquired through foreclosure totaling $12,998 and also recorded an impairment write-down of $50,000 on an acquired commercial property held for sale since September 2003.  Previously DSB recorded impairment write-downs on this property totaling $200,867 including $100,867 during the third quarter of 2004.  DSB has accepted an offer to purchase the property at its current carrying value.  The sale should occur during the fourth quarter of 2005 and will reduce the amount of other real estate held by $500,000. Data processing expenses increased by $17,608 or 11% primarily as a result of higher communications costs.  Other operating expenses increased by $22,223 primarily as a result of penalties assessed by the IRS totaling $20,086.  The audit was closed during the third quarter.  See the following paragraph for a further discussion.



For the three months ended September 30, 2005 and 2004, DBI recorded combined federal and state income tax provisions of $103,369 and $262,672.  These provisions reflect effective income tax rates of 15% and 22%, in 2005 and 2004, respectively, which are less than DSB's combined statutory tax rate of 39%. The lower effective income tax rates are primarily attributable to certain federally tax



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exempt interest earned on state and local government investment securities.  The Internal Revenue Service completed an audit of DBI's 2002 and 2003 tax returns during the third quarter of 2005.  As a result of the audit, DBI paid $121,908 in additional income taxes for the years audited. DBI also paid $20,086 in penalties and $10,595 of interest.  DBI accrued an additional $95,000 of federal income tax expense during the second quarter of 2005 in anticipation of the audit assessment.  The IRS is auditing a number of Wisconsin banks primarily disputing the calculation of the amount of interest expense that is nondeductible based on holding tax-exempt securities in Nevada subsidiaries. DBI disagrees with the position of the IRS but paid the tax and reserves the right to file a refund claim should a bank be successful on this issue in U.S. Tax Court.



On a per share basis, net income was $5.03 in the third quarter of 2005 compared with $7.86 in the third quarter of 2004.  Return on average assets in the third quarter of 2005 was 0.61%, compared to 1.04% for the corresponding period in 2004.  Return on average equity in the third quarter of 2005 was 4.8%, compared to 7.6% for the corresponding period in the prior year.



Financial Condition



Total assets increased by $9,460,371 between December 31, 2004, and September 30, 2005.  Federal funds sold decreased by $14.1 million as short-term liquid funds were reduced to provide funding for loan growth .  Total loans, excluding loans held for sale, increased by $19.6 million during the first nine months.  Premises and equipment increased by $1.8 million as a result of the capital expenditures related to the new Maribel building which opened during May.  Total deposits increased by $2.4 million during the nine-month period ending September 30, 2005.  Other borrowings increased by $6.6 million.



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:





Commercial real estate loans and other commercial loans increased by $4.1 million and $6.5 million, respectively during the nine months ended September 30, 2005.  Construction real estate loans increased by $6.0 million and residential real estate loans increased by $1.1 million during the first nine months of 2005.  The growth in construction loans is primarily attributed to an increase in commercial real estate, which has added approximately $4.2 million in construction loans this year.









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The allowance for credit losses increased by $385,021 during the nine months ended September 30, 2005. The allowance equals 1.94% of total loans at September 30, 2005, compared to 1.93% at December 31, 2004.  Nonaccrual loans totaled $6,919,218 at September 30, 2005, an increase of $1,018,843 compared to December 31, 2004.  DBI's ratio of loans more than 30 days past due (including nonaccrual loans) to total loans was 2.92% at quarter end, compared to 3.40% at year-end.



As of September 30, 2005 management has identified $11.7 million of potential problem loans compared to $13.8 million at year-end.  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.



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. 



Demand deposits increased $1,155,837 or 3% during the first nine months of 2005.  Interest bearing deposits decreased by $1,238,176 between December 31, 2004 and September 30, 2005.



Stockholders' equity decreased by $390,644 to $49,992,588 as of September 30, 2005.  As of September 30, 2005, DBI's leverage ratio was 12.3%, the risk-based core capital ratio was 14.9% and the risk-based total capital ratio was 16.1%.  DBI and DSB continue to maintain capital levels well above the regulatory minimum levels.



Liquidity









14





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 $40.8 million as of September 30, 2005.  Management believes DBI's liquidity position as of September 30, 2005, is 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 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, 2005, 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 over financial reporting or in other factors that could significantly affect these controls during the quarter ended September 30, 2005, 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 2005:



1. DBI announced a Stock Repurchase Policy on March 30, 1995, as an accommodation to shareholders.
2. DBI limits purchases under the Policy in any nine-month period to less than six percent of the common shares outstanding.  The Policy has no fixed expiration date, although DBI may terminate the Policy at any time.  DBI is not soliciting or encouraging shareholders to sell shares under the Policy.



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 the Common Stock is largely dependent upon the ability of DSB to pay dividends on the 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 to pay dividends.  In addition, Wisconsin law provides that state chartered banks may



16

declare and pay dividends out of undivided profits but only after provision has been made for all expenses, losses, required reserves, taxes and interest accrued or due from the bank.  Payment of dividends in some circumstances may require the written consent of the Division.



DSB is restricted by banking regulations from making dividend distributions to DBI that exceed the retained net income for the most current year plus retained net income for the preceding two years.  Under this formula, dividends of approximately $8,393,000 may be paid without prior regulatory approval as of December 31, 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.











17





















































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 18, 2005 | Darrell R. Lemmens,                               
|                        | Principal Executive Officer,                      
|                        | Chairman of the Board, and                        
|                        | President



/s/ Dennis J. Heim                   
|Date:  October 18, 2005 | Dennis J. Heim                                    
|                        | Vice President and Treasurer,                     
|                        | Principal Financial and                           
|                        | Accounting Officer                                















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