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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-18599
BLACKHAWK BANCORP, INC.
WISCONSIN 39-1659424
(State of Incorporation) (IRS Employer ID No.)
400 Broad Street, Beloit, Wisconsin 53511
Telephone Number (608) 364-8911
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
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 requirement for the past 90 days. Yes X No ___.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ____
Revenue for the year ended December 31, 1996 was $12,328,645.
As of March 19, 1997, 2,291,264 shares of common stock were outstanding and
the aggregate market value (based on the bid price at March 19, 1997) of the
shares held by non-affiliates (excludes shares reported or beneficially owned
by directors and officers - does not constitute an admission to affiliate
status) was approximately $19,882,766.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference in
the respective parts hereof indicated:
1. Proxy Statement and Annual Meeting of Stockholders, on May 14,
1997, dated April 2, 1997.
Index of Exhibits on Page 59. Page 1 of 67
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BLACKHAWK BANCORP, INC.
FORM 10-KSB - TABLE OF CONTENTS
PART I PAGE
Item 1 Business.................................... 3
Item 2 Properties.................................. 9
Item 3 Legal Proceedings........................... 9
Item 4 Submission of Matters To a Vote of
Security Holders.......................... 10
PART II
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters............... 10
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 10
Item 7 Financial Statements and Supplemental Data.. 16
Item 8 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................ 57
PART III
Item 9 Directors and Executive Officers of the
Registrant................................ 57
Item 10 Executive Compensation...................... 57
Item 11 Security Ownership Of Certain Beneficial
Owners and Management..................... 57
Item 12 Certain Relationships and Related
Transactions.............................. 57
PART IV
Item 13 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................... 57
Signatures............................................ 58
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PART I
ITEM 1 BUSINESS
GENERAL. Blackhawk Bancorp, Inc., (the "Company"), was incorporated under the
laws of the state of Wisconsin in November 1989 for the purpose of acquiring
and holding all of the capital stock of Blackhawk State Bank (the "Bank"),
issued in connection with the Bank's conversion from a mutual savings bank,
operating under the name of Beloit Savings Bank, to a capital stock state
commercial bank (the "Conversion"). In the Conversion, the Company offered and
sold 747,500 shares of its common stock to the public, and used a portion of
the net proceeds to purchase all of the stock of the Bank. Prior to the
completion of the initial public offering of its capital stock, the Company did
not own any material assets or transact any material business. On June 15,
1995, the Company effected a 3 for 2 stock split in the form of a 50% stock
dividend in which each shareholder received an additional share for every two
shares owned. As of December 31, 1995, the Bank was the only subsidiary of the
Company. The executive offices of the Company are located at 400 Broad Street,
Beloit, Wisconsin.
Blackhawk State Bank is a Wisconsin - chartered commercial bank, which resulted
from the Conversion. The Conversion was completed on May 16, 1990. The Bank's
deposits are insured by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation, ("FDIC"), as were the deposits of its predecessor.
In November 1996, the Company entered into an agreement to purchase all of the
outstanding shares of Rochelle Bancorp, Inc.("Rochelle"), Rochelle, Illinois.
Rochelle does business through Rochelle Savings Bank which has two branch
locations, one in Rochelle and the other in Oregon, Illinois. The transaction
is expected to be completed in April 1997. In conjunction with this purchase,
the Company is also purchasing the remaining outstanding shares of Midland
Acceptance Corporation ("MAC"), the related financing affiliate of Rochelle
Savings Bank.
Through the Bank, the Company conducts business out of four locations. The
main office is located at 400 Broad Street, Beloit, Wisconsin. The three
branch locations are as follows: West Side at 1795 Madison Road, Beloit,
Wisconsin; East Side at 2200 Cranston Road, Beloit, Wisconsin; and the South
Branch in Cub Foods at 20 Park Avenue, Beloit, Wisconsin. The Bank recently
received the required regulatory approval to open it's fifth location, in the
newly constructed Wal-Mart Superstore. This branch is expected to be opened in
July 1997, in conjunction with the opening of the Superstore. The Bank has one
subsidiary, discussed below under "Investment Activities", located at Suite
1100, 300 South Fourth Street, Las Vegas, Nevada. The Bank's principal
business consists of attracting deposits from the general public and
originating loans. In addition, the Bank invests in various types of
securities, operates a trust department and maintains an office of Robert
Thomas Securities, Inc.
The principal sources of funds for the Bank's lending activities are deposit
accounts, amortization and prepayment of loans, short-term borrowings, and
funds provided from operations. The Bank's principal sources of income are
interest and fees on loans, interest on investments and non-interest income,
consisting of fees for services, service charges and trust department fees.
LENDING ACTIVITIES. A majority of the loans in the Bank's loan portfolio are
secured by residential or commercial real estate. Substantially all of the
real estate securing the mortgage loans is located within thirty minutes of the
Bank's main office. Management of the Bank has restructured the loan portfolio
to decrease the concentration of mortgage loans and increase commercial and
installment loans. The Analysis of Loan Portfolio, Table 2 of Item 7, shows
the changes in the types of loans from 1994 through 1996. Commercial loans are
either collateralized by assets other than real estate or are unsecured.
Interest rates on commercial loans are generally tied to an index adjustable
monthly and therefore more rate sensitive than mortgage loans. Consumer and
installment loans are generally secured by junior liens on real estate,
automobiles or boats. A substantial percentage of automobile and boat loans in
the Bank's portfolio were purchased from area dealers. The Bank also offers
credit cards and home equity lines of credit.
INVESTMENT ACTIVITIES. On July 30, 1991, Blackhawk State Bank transferred
approximately $21.5 million worth of its investment securities to Nevahawk
Investment, Inc. ("Nevahawk"), the Bank's wholly-owned subsidiary located in
Las Vegas, Nevada, in exchange for all 100 shares of the issued and outstanding
stock of Nevahawk. Currently, the portfolio under management by Nevahawk is
approximately $24.0 million. The investment policy under which Nevahawk
operates normally limits investments to: 1) U.S. Treasury and government
agency
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securities with maturities of 5 years or less; 2) mortgage-backed securities,
limited to no more than 30% of the investment portfolio, with an average life
of 5 1/2 years or less; 3) municipal securities rated "A" or better, unless
they are tax-anticipation notes issued by Wisconsin issuers whose long-term
debt is rated at least "A" or if unrated, are judged by management to possess
investment characteristics comparable to "A" rated debt securities; and 4)
corporate bonds and notes rated "A" or better with a maturity of 4 years or
less.
The balance of the Bank's portfolio, approximately $9.3 million, is managed at
its main office in Beloit, Wisconsin. The Bank may purchase the same types of
securities under the same general restrictions as are noted above with respect
to Nevahawk's activities. In addition, commercial paper, bankers acceptances
and bank certificates of deposit are authorized investments to provide
additional liquidity in the investment portfolio.
The Company also maintains an investment portfolio that consists of securities
similar to those authorized for the Bank and Nevahawk. At December 31, 1996
securities held by the Company totaled approximately $2.3 million.
Security investments made by the Bank to a single entity are limited to 20% of
its capital and surplus. This limitation does not apply to investments in
obligations of the United States Treasury, Federal Land Banks, Federal Home
Loan Banks, Federal Farm Credit Banks, Federal National Mortgage Association,
Export-Import Bank of Washington or obligations fully and unconditionally
guaranteed by the United States. It is the Company's, Bank's and Nevahawk's
intention to hold securities until maturity and are classified as such for IRS
purposes. The Financial Accounting Standards Board ("FASB") Statement 115 was
adopted in 1994. Generally, the securities held by the Bank are classified as
available-for-sale whereas the securities held by the Company and Nevahawk are
classified as held-to-maturity.
DEPOSIT ACTIVITIES. Deposits are divided between interest bearing and
non-interest bearing. Non-interest bearing deposits consist of checking
accounts of individuals and non-personal entities. The interest-bearing
deposits include savings accounts , money market deposit accounts, certificates
of deposit, individual retirement accounts, NOW accounts and check club
accounts. The Bank has few depositors with account balances in excess of
$100,000, and has no brokered deposits. The Bank attracts deposits by offering
competitive interest rates for interest-bearing accounts and services on a
competitive basis for non-interest bearing accounts.
TRUST SERVICES. Through a separate department the Bank provides personal trust
services, including acting as trustee for living and testamentary trusts, and
as an agent, custodian, guardian, conservator, personal representative or
administrator for individuals or their estates. Trust offices are maintained
at the 400 Broad Street location.
OTHER SERVICES. Other banking services provided by the Bank include safe
deposit boxes at all locations except for the South Branch, purchasing and
selling government and agency securities as agent for customers, and
participation in the TYME automated teller network. The Bank also provides
full-service brokerage services through Robert Thomas Securities, Inc.
COMPETITION. Banks experience intense competition in both attracting and
retaining deposits and in making loans. The Bank's direct competition for
deposits has come from other commercial banks, savings and loan associations,
credit unions, mutual funds and stock brokerage firms. There are four
commercial banks, two savings and loans, six credit unions, and three brokerage
firms with local offices in the Greater Beloit area. In addition to offering
competitive types of accounts and interest rates, the principal methods used by
the Bank to attract deposits included the offering of a variety of services,
convenient business hours, and branch locations.
The Wisconsin legislature enacted legislation, effective January 1, 1987, that
allows banks in Wisconsin to be acquired by financial institutions
headquartered in another state if that other state allows acquisitions by
Wisconsin financial institutions. No institution in Beloit has been purchased
by an out-of-state institution to date. The completion of the merger between
Valley Bancorporation and Marshall & Ilsley Corporation has resulted in some
consolidation of banking
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services in Rock County, Wisconsin, including the closing of two offices in
Beloit.
Competition in making real estate loans comes principally from savings and loan
associations, mortgage companies and other commercial banks. Consumer loans
provided by credit unions, finance companies and other commercial banks provide
the competition in this area. Other commercial banks are the major competition
for commercial loans.
EMPLOYMENT. As of December 31, 1996, the Company and the Bank had 75
employees, of which 46 were employed on a full time basis. The fringe benefits
generally provided to qualified employees include health insurance, long-term
disability insurance, a flexible compensation plan (cafeteria plan), a defined
non- contributory pension plan and an employee stock ownership plan.
Management considers its relations with employees to be excellent.
SUPERVISION AND REGULATION. The Company and the Bank are extensively regulated
under federal and state law. Any descriptions of statutory and regulatory
provisions contained in the following discussion are qualified in their
entirety by reference to the particular statutory and regulatory provisions.
Any change in applicable law or regulations may have a material effect on the
Company.
THE COMPANY. On March 27, 1990, the Company received approval from the Federal
Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"), to become a registered bank holding company by
acquiring all of the capital stock of the Bank in the Conversion. As a result,
since consummation of the Conversion on May 16, 1990, the Company's activities
have been subject to limitations imposed under the BHC Act. Transactions
between the Bank and the Company and the Bank's affiliate are also subject to
certain restrictions. As a registered bank holding company, the Company is
required to file an annual report and such other information as the FRB may
require and is also subject to examination by the FRB.
FRB approval must be obtained before a bank holding company acquires all or
substantially all of the assets of a bank or savings association or merges or
consolidates with another bank holding company or savings and loan holding
company. Wisconsin has also adopted legislation which allows bank holding
companies from states that have adopted reciprocal legislation (the "Reciprocal
States") to acquire banks in Wisconsin, and allows Wisconsin bank holding
companies to acquire banks in the Reciprocal States. The Reciprocal States
presently include Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and
Ohio.
Under the BHC Act, bank holding companies are prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company. A bank holding company may, however, own shares of a company, the
activities of which the FRB has determined to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto; the holding
company itself also can engage in such activities. With the acquisition of
Rochelle, the Company will also acquire the outstanding stock of MAC, which is
a finance company, and as such is an activity closely related to banking
activities. The Company does not have any other current plans to seek approval
to acquire any of these bank related activities. However, it may determine to
do so in the future.
The FRB has adopted capital guidelines as to both minimum levels of core
capital and risk-based capital. The minimum core capital requirement ranges
from 3% to 5% of total assets depending upon the regulator's determination of
the holding company's strength. The guidelines assign risk weightings to
assets and off-balance sheet items, and have minimum risk-based capital ratios.
All bank holding companies are required to have total consolidated capital of
8% of risk-weighted assets. Core capital consists principally of stockholders'
equity less intangibles, while qualifying total capital consists of core
capital, certain
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debt instruments and a portion of the reserve for loan losses. The following
table reflects various regulatory measures of capital as of December 31, 1996.
AT DECEMBER 31, 1996
--------------------
REGULATORY
RATIO REQUIREMENTS
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Equity as a percent of assets 14.54% N/A
Core capital as a percent of assets 14.37% N/A
Core capital as a percent of
risk-based assets 22.77% 4.00%
Total capital as a percent of
risk-based assets 23.47% 8.00%
Leverage Ratio 15.08% 3.00%
The Company's core and risk-based capital ratios, as shown in the table are
well above the minimum levels.
Under Wisconsin law, a bank holding company is deemed to be engaged in the
banking business and is subject to supervision and examination by the Wisconsin
Department of Financial Institutions (the "Commissioner"). The Commissioner is
also empowered to issue orders to a bank holding company to remedy any
condition or policy which, in the opinion of the Commissioner, endangers the
safety of deposits of any subsidiary state bank or trust company. In the event
of non-compliance with such an order, the Commissioner has the power to direct
the operations of the state bank or trust company and to restrict dividends
paid to the bank holding company.
THE BANK. Wisconsin-chartered banks, including the Bank, are regulated and
supervised by the Wisconsin Department of Financial Institutions. Each
Wisconsin-chartered bank is required to be examined at least once each year by
either the Commissioner or its primary federal regulator. The approval of the
Commissioner is required to establish or close branches, merge with other banks
and undertake many other activities.
Any Wisconsin bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove directors, officers or employees who have violated the law, conducted
the bank's business in a manner which is unsafe, unsound or contrary to the
depositors' interests or been negligent in the performance of their duties.
Wisconsin state banks are authorized to accept deposits (including demand,
savings and time deposits and certificates of deposit). Banks may make a wide
variety of loans (including mortgage loans, loans to corporations and other
commercial loans and other personal consumer loans). Other federal and state
regulations with respect to banks include required reserves, limitations as to
the nature and amount, by type and borrower, of lending, regulatory approval of
mergers and consolidations, issuance and retirement by a bank of its own
securities, and other aspects of banking operations.
Under Wisconsin law, the Commissioner has the authority, by rule or order, to
grant Wisconsin state banks the power to conduct any financial service which is
being offered by any other financial-related institution; under those
provisions, the Commissioner has approved banks engaging in general insurance
agency services and securities brokerage services. Each of the above services
is not a permitted activity of bank holding companies or bank holding company
subsidiaries. The FRB has generally not asserted jurisdiction over the powers
of state-chartered bank subsidiaries of bank holding companies.
PAYMENT OF DIVIDENDS. A Wisconsin bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
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account (as defined under Wisconsin law). If, on the date of declaration of a
dividend on common stock, the ratio of capital stock and surplus to total
deposits is less than 10%, there must be a transfer from net profits to the
surplus account before the dividend may be paid. Based on the Bank's strong
financial position, its entire earnings each year could be paid out as
dividends.
Nevahawk can pay dividends to the Bank from retained earnings without any tax
consequences. There are no plans, at the present, for Nevahawk to pay
dividends in 1997. This status will be reviewed by Nevahawk at its regular
board meetings.
FEDERAL DEPOSIT INSURANCE CORPORATION. Since July 17, 1934, the Bank's deposit
accounts have been insured by the FDIC and since The Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") by the Bank Insurance
Fund (the "BIF") of the FDIC. FDIC insurance, at the present time, generally
insures up to a maximum of $100,000 per insured depositor. The FDIC imposes an
annual assessment on deposits. Effective January 1, 1993, premiums are assessed
on the basis of a risk rating assigned by the FDIC. Since that time the Bank's
premium has been at the lowest available rate. Beginning in 1997, financial
institutions insured by the BIF are required to contribute to the FICO bond
refinancing. As a result, the Bank will pay an assessment of 1.3% per hundred
dollars of deposits. This is expected to occur through the year 2003.
The FDIC issues regulations, conducts periodic examinations, requires the
filing of reports and generally supervises the operations of its insured banks.
The approval of the FDIC is required prior to any merger or consolidation, or
the establishment or relocation of any branch office. This supervision and
regulation is intended primarily for the protection of depositors.
As an FDIC-insured bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC, based upon appraisals during examinations, may
revalue assets of an insured institution and require establishment of specific
reserves in amounts equal to the difference between such revaluation and the
book value of the assets. In addition, the FDIC has adopted regulations
regarding capital adequacy requirements similar to those of the FRB.
RECENT LEGISLATION. On September 23, 1994, the "Riegle Community Development
and Regulatory Improvement Act of 1994" (the "Riegle Act") was signed into
law. The provisions of Title III of the Riegle Act are intended to reduce the
paperwork and regulatory burdens of federally-insured financial institutions
and their holding companies. These provisions require the federal banking
regulators, among other things: (i) to consider the burdens and benefits to
depository institutions and their customers of proposed regulatory and
administrative requirements; (ii) within two years of the enactment of the
Riegle Act, to eliminate from their regulations and written supervisory
policies regulatory inconsistencies, outmoded or duplicative requirements and
unwarranted constraints on credit availability and to adopt uniform
requirements to implement common statutory schemes or regulatory concerns;
(iii) to create a unified examination process for financial institutions
subject to the jurisdiction of more than one regulatory; (iv) within six months
of enactment of the Riegle Act, to establish an internal regulatory appeals
process by which regulated institutions may obtain review of agency
determinations relating to such matters as examination ratings, adequacy of
loan loss reserves and significant loan classifications; (v) to streamline the
quarterly call report format; and (vi) in considering revisions to risk-based
capital requirements, to ensure that the standards take into account the size,
activities and reporting burdens of institutions. The Riegle Act also gives the
federal banking agencies greater flexibility with respect to the implementation
and enforcement of certain provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), including the FDICIA provisions
regarding safety and soundness standards, examination frequency and independent
audit requirements.
Other provisions, effective September 29, 1995, of the Riegle-Neal Act
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bank holding companies to acquire banks located in any state in the United
States without regard to geographic restrictions or reciprocity requirements
imposed by state law, but subject to certain conditions. Effective June 1,
1997, the Riegle-Neal Act also allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions.
The establishment of de novo interstate branches or the acquisition of
individual branches of a bank in another state (rather than the acquisition of
an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act
only if specifically authorized by state law. The legislation allows individual
states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting
appropriate legislation prior to June 1, 1997. Over time the provisions of the
Riegle-Neal Act may increase competition in the market served by the Company
and the Bank.
Under FDICIA, as implemented by final regulations adopted by the FDIC.
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. FDICIA, as implemented by FDIC regulations,
also prohibits FDIC-insured banks and their subsidiaries, subject to certain
exceptions, from engaging as principal in any activity that is not permitted
for a national bank of its subsidiary, respectively, unless the bank meets, and
continues to meet, its minimum regulatory capital requirements and the FDIC
determines the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. Impermissible investments and
activities must be divested or discontinued within certain time frames set by
the FDIC in accordance with the FDICIA. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
FDICIA also requires that the capital standards prescribed by each federal
banking agency include a leverage limit and a risk-based capital requirement.
Other capital standards may be imposed by regulation. FDICIA regulations
specify for each capital level the levels at which a depository institution is
well capitalized, adequately capitalized, undercapitalized and significantly
undercapitalized. Under the regulations so issued, a well capitalized bank will
have a total risk-based capital ratio of 10.0% or greater. A significantly
undercapitalized bank will have a total risk-based capital ratio of less than
6.0%. At December 31, 1996, the Bank's risk-based capital ratio was 22.8%.
OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal
and state statutory and regulatory provisions covering, among other things,
security procedures, currency reporting, insider and affiliated party
transactions, management interlocks, community reinvestment, truth-in-lending,
electronic funds transfers, truth-in-savings and equal credit opportunity.
Proposals for new legislation or rule making affecting the financial services
industry are continuously being advanced and considered at both the national
and state levels. Proposals are primarily focused upon restructuring and
strengthening regulation and supervision to reduce the risks to which assets of
banks and savings institutions are exposed.
Although further changes in the regulatory framework may be enacted, specific
provisions and their ultimate effect upon the business of the Bank and the
Company cannot be reliably predicted.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS. The earnings of the
Bank and the Company are affected not only by general economic conditions but
also by the policies of various governmental regulatory authorities. In
particular, the FRB influences general economic conditions and interest rates
through the regulation of money and credit conditions. It does so primarily
through open-market operations in U.S. Government Securities, varying the
discount rate on member and nonmember bank borrowings, and setting reserve
requirements against bank deposits. FRB monetary policies have had a
significant effect on the operating results of banks in the past and are likely
to continue to do so in the future. The general effect, if any, of such
policies upon the future business and earnings of the subsidiary bank cannot be
accurately predicted. In addition, losses sustained by the federal insurance
funds and regulatory costs incurred in
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connection with failed or failing insured depository institutions continue to be
assessed to those within the industry. As such, future earnings will be
adversely affected by regulations enacted to cover these losses and costs. Past
increases in FDIC insurance premiums are an example of this.
EXECUTIVE OFFICERS
NAME AND AGE PRINCIPAL OCCUPATION
-------------- ----------------------
Dennis M. Conerton, 46 President and Chief Executive
Officer of the Company and
of the Bank. Prior thereto,
Vice President-Controller,
Regal-Beloit Corporation.
James P. Kelley, 53 Executive Vice President and
Secretary of the Company
and Executive Vice President
of the Bank and the Bank's
predecessor, Beloit Savings
Bank.
Jesse L. Calkins, 56 Senior Vice President,
Treasurer and Chief Financial
Officer of the Company and
Senior Vice President of the Bank,
and the Bank's predecessor, Beloit Savings
Bank.
Richard J. Rusch, 52 Vice President Commercial
Lending of the Bank since August 1990.
Prior thereto, Vice President Commercial
Loans, M & I Bank of Beloit.
ITEM 2 PROPERTIES
The principal office and main location of Blackhawk Bancorp, Inc. and Blackhawk
State Bank respectively is located at 400 Broad Street, Beloit, Wisconsin. The
Bank also has three branch locations located in Beloit, Wisconsin. Blackhawk
State Bank owns and fully occupies three locations. The fourth location, South
Branch, is under a lease expiring 11-3-2014. All three owned locations have
drive-up banking facilities. Depositors at the main and Cub Foods locations
have access to an Automated Teller Machine connected to the TYME system. The
main location has undergone a major remodeling project and addition, that was
completed in April 1995. This project added approximately 6,000 square feet to
this location. All properties are adequately insured against loss.
Following is a listing, with addresses, of bank locations:
Location Address
---------- ----------
Main Branch 400 Broad St., Beloit, Wisconsin
Eastside Branch 2200 Cranston Rd., Beloit, Wisconsin
Westside Branch 1795 Madison Rd., Beloit, Wisconsin
South Branch(Cub Foods) 20 Park Avenue, Beloit, Wisconsin
Nevahawk Investment, Inc. Suite 1100,
300 S. Fourth St., Las Vegas, Nevada
ITEM 3 LEGAL PROCEEDINGS
To management's knowledge no material legal proceedings are contemplated or
pending to which it or its affiliates are or threatened to be a party, of which
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any of their property would be subject, other than routine litigation
incidental to its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDERS MATTERS
As of March 11, 1997 there were 426 Registered Stockholders.
Information in response to this item is found on page 59 of this report. A
table listing the declaration of dividends is found on page 59.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion provides additional analysis of the financial
statements presented in the Company's annual report and should be read in
conjunction with this information. This discussion focuses on the significant
factors which affected the Company's earnings in 1996, with comparisons to 1995
and 1994 where applicable. As of December 31, 1996, Blackhawk State Bank (the
"Bank") was the only direct subsidiary of the Company and its operations
contributed nearly all of the revenue and expenses for the year. The Bank's
wholly owned subsidiary, Nevahawk Investment, Inc. ("Nevahawk") is an
investment subsidiary located in Nevada.
Overview. As of December 31, 1996, total assets of the Company were $151.5
million decreasing 2.6% from $155.5 million as of December 31, 1995. Total
income for 1996 was $1.73 million or $.73 per share, increasing 17.4% from
$1.47 million or $.64 per share, in 1995, which was 57.2% greater than the
$940,000 or $.41 per share, in 1994. The significant items resulting in the
above-mentioned results are discussed below.
Net Interest Income. Net interest income is the difference between interest
income and fees on loans and interest expense, and is the largest contributing
factor to net income for the Company. All discussions of rate are on a
tax-equivalent basis, which accounts for income earned on securities that are
not fully subject to federal taxes. Net interest income in 1996 was a record
$6.0 million, increasing 7.8% over the 1995 level of $5.6 million which in turn
was 6.3% over than the 1994 net interest income of $5.3 million. Net interest
income as a percentage of average earning assets was 4.33% in 1996, 4.27% in
1995, and 4.19% in 1994.
Increases in investment income and income and fees on loans were the largest
factors in the increase of net interest income in 1996. Investment income
increased 11.9% and income and fees on loans increased 5.4%. Nearly all of the
increase in these areas were the result of increased volumes. The average
balance of investments increased by 9.6% in 1996 compared to 1995. Total loans
increased 3.3% for this same period. Commercial and consumer loans continued
to increase in their percentage of the total loan portfolio. Real estate loans
continued to decline as a percent of the portfolio. However, real estate loans
still make up over 57% of the portfolio.
The largest factor in the increase in net interest income from 1994 to 1995 was
income and fees on loans. During 1995, loan income and fees increased 14.5%,
due almost equally to both increased rates and volumes. Loan demand for 1995
was very strong due to easing in national interest rates along with a strong
local
10
<PAGE> 11
economy. Outstanding commercial loans, including both variable and fixed
rate, increased by 24.2%, in 1995 while the rate earned on these balances also
increased. Outstanding balances for real estate loans remained static while
the rates earned increased. Consumer loan rates remained static while
outstanding balances increased 17.8%. It has been a strategy of the Company,
since its conversion to a commercial bank charter in 1990, to change the mix of
its loan portfolio by increasing the volume of commercial and consumer loans.
During 1994 the Bank began to offer its own credit card product. During 1995
the Bank also began to offer a home equity line of credit. Balances in both of
these accounts continue to grow in 1996 as consumers become more comfortable
using these financing alternatives. With time these products will contribute a
higher level of interest income.
Securities income increased 4.4%, in 1995 over 1994 levels. The increase in
1995 was due to increased rates, which were partially offset by decreased
volumes in securities.
Interest paid on interest bearing liabilities increased 6.2% in 1996 compared
to 1995. Approximately 84% of the increase was due to increased volume in
short-term borrowings. These borrowings were in the form of repurchase
agreements. The increased cost of interest bearing deposits was due to
increased rates. Interest paid on interest bearing liabilities increased 20.2%
in 1995 as compared to 1994. The rate increases seen in assets, as discussed
above also affect liabilities. Interest paid on interest bearing deposits
increased 14.8% in 1995 as compared to 1994. The largest factor was the
increase in rates paid, and to a lesser extent due to increased volumes.
In order to fund loan demand and leverage its capital base, the Company has
taken advances from the Federal Home Loan Bank ( "FHLB") and accepted
repurchase agreements from local municipalities. As specific commercial loan
funding requests come in, FHLB advances are taken to fund these loans. The
repurchase agreements are on a bid basis with varying periods for rebid.
Long-term loans are not funded with repurchase agreements. Also, short-term
borrowings include federal funds purchased. As short-term liquidity needs
arise, the Company may buy federal funds, secure advances from the FHLB, or
borrow from the Federal Reserve Bank.
Noninterest income and noninterest expense. Excluding security gains,
noninterest income increased by $246,000, 32.3% in 1996 compared to 1995. The
areas accounting for this increase were trust fees, $34,000 or 38.7%, service
fees, $101,000 or 21.6%, gain on sale of loans, $37,000 or 98.4%, credit card
fees, $15,000 or 23.3% and investment center commission, $60,000.
Overall noninterest income, excluding security gains, increased $162,000 or
27.1% in 1995 as compared to 1994. Increased service charges account for
approximately half of this increase and result primarily from the replacement
of several of the Company's product offerings with fee based accounts. Also
contributing to the additional income are a 19.6% increase in trust fees, and a
36.7% increase in credit card fees in 1995. An investment center selling
non-FDIC insured products was opened in the Bank in 1995. Because this was in
its start-up phase, it did not contribute a material amount to non-interest
income.
Noninterest expense increased $185,000 or 4.6% in 1996 compared to 1995.
Increases in salaries, employee benefits, data processing and other expenses
were partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.
Salaries increased $127,000 or 7.8% in 1996 compared to 1995. This increase
was the result of additional new employees hired in 1995, normal salary
increases and
11
<PAGE> 12
an increase in the officer incentive compensation related to improved financial
performance. The increase in employee benefits of $79,000, 22.2%, is the
primarily result of increased health insurance costs. The other major area of
increase was other expenses which increased $121,000 or 20.3%. Two areas that
accounted for approximately 54.0% of this increase were office supplies and
postage.
A significant decrease in FDIC premiums of $125,000, was due to the elimination
of premiums for banks that were most highly rated. The $33,000, 8.7%,
reduction in equipment expenses was primarily the result of reduced
depreciation costs.
The Bank has received the required regulatory approvals to open it's second
in-store branch, which will occur in July 1997. This branch will be located in
a newly constructed Wal-Mart Superstore. Non-interest expenses are expected to
increase as a result of this branch opening. Noninterest expense decreased
$186,000 or 4.4% in 1995 as compared to 1994. Increases in salaries and
benefits, occupancy and equipment expenses, were offset by decreases in loan
collection expenses, FDIC premiums and expenses related to the 1994
resignation of the Company's former President and CEO.
Salaries and benefits increased 5.9%, or $112,000 in 1995. The primary
contributing factor was the full year of salaries related to the Company's
supermarket branch opened in November, 1994. Also affecting the increase was
the hiring of a full-time marketing officer and investment center executive,
normal adjustments in base salaries for personnel and higher officer incentive
compensation related to improved financial performance. These increases were
partially offset by a decrease in health insurance expense as a result of
changing carriers and 1994 also included costs related to the resignation of
the Company's former President and CEO.
Occupancy expense increased $61,000 or 25.5% in 1995. This was mostly due to
expenses related to the new addition to the Bank's main facility and to a
lesser extent, the addition of a new supermarket branch, opened in November,
1994. Equipment expenses increased $86,000 or 29.1% in 1995. Again, most of
this increase is attributable to the main branch and new branch additions.
Also affecting the increase is the higher depreciation expense related to the
new computer system installed in February, 1994.
Data processing expense decreased $92,000 or 23.6% in 1995. The computer
system installed during 1994 allows more flexibility in processing and also
lowered the cost of data processing services. Loan collection expense
decreased in 1995 by $121,000 or 71.1%. This is mostly due to the legal
expenses incurred in 1994, related to the restructuring of a large
non-performing commercial loan. FDIC premiums in 1995 decreased $112,000 or
46.8%. The FDIC's tiered schedule of premiums was lowered during 1995 to $.06
per hundred dollars from $.23 per hundred dollars of deposits.
Management tracks three ratios related to noninterest income and expense: (1)
Net-noninterest expense as a percentage of average assets, (2) standard
efficiency ratio and (3) gross efficiency ratio. Net-noninterest expense as a
percentage of average assets has improved from 2.70% in 1994 to 2.31% in 1995
to 2.15% in 1996. The standard efficiency ratio (noninterest expense divided by
net operating income) improved from 73.7% to 64.3% to 60.8%. The gross
efficiency ratio (noninterest expense divided by gross income) improved from
42.4% to 35.5% to 34.2%. Management expects all three of these ratios to
improve in the future, although at a slower rate of improvement.
Provision for loan losses. The provision for loan losses was $145,000,
$180,000, and $220,000 for 1996, 1995, and 1994, respectively. In 1996 the
Bank experienced net recoveries of $112,000 compared to net charge-offs of
$65,000 and $347,000 in 1995 and 1994 respectively. The net recovery in 1996
resulted from
12
<PAGE> 13
recoveries of $221,000 off-setting charge-offs of $109,000. Most of the
recovery was from a loan that was originally charged off in 1994. Excluding
the large recovery, net charge-offs to average loans would have been .07% in
1996. Net charge-offs to average loans was .07% in 1995 and .40% in 1994. The
allowance for loan losses as a percent of loans was 1.19% at December 31, 1996
compared to .98% and .91% in 1995 and 1994, respectively. Management feels
that the allowance for loan loss provision is adequate based upon the current
portfolio and market conditions. As the loan portfolio shifts and market
conditions warrant, the provision will be adjusted.
Income taxes. The effective income tax rate increased to 32.9% in 1996 from
29.0% in 1995 and 26.9% in 1994. Because Nevahawk is located in Nevada, its
income is not subject to state income tax. As a result, as a higher proportion
of income is earned outside of Nevada, the effective rate increases.
Balance sheet analysis. Total assets as of December 31, 1996 were $151.5
million versus $155.5 million as of December 31, 1995, a decrease of 2.6%.
Total average assets were $148.7 million for the year ended December 31, 1996
versus $140.6 million in 1995, an increase of 5.8%. All comparisons below are
comparing 1996 to 1995, unless otherwise noted.
Loans. Gross loans increased 5.2% to $99.4 million from $94.5 million.
Commercial loans experienced the most growth, $2.7 million or 13.3%, as the
Bank continues to restructure its balance sheet, during 1996, to that of a more
traditional commercial bank. Total real estate loans remained static.
Consumer installment loans increased $2.3 million or 13.0%. As mentioned above
before the Bank began its own credit card program in 1994 and in 1995
introduced its home equity line of credit. The credit card program and the
home equity line of credit have experienced solid growth considering the
Bank's late entry into these markets. As of December 31, 1996, real estate
loans represented 57.8% of gross loans, commercial loans were 23.2% and
consumer loans were 19.7%. This compares to 60.2%, 21.5% and 18.3%,
respectively, at December 31, l995. The Banks loan mix is now closer to that
of the average commercial bank, which has been a goal since 1990.
Non-performing loans. Non-performing loans as a percent of total loans
increased to 1.15% as of December 31, 1996 versus .61% as of December 31, 1995.
The increase from 1995 to 1996 is the result of the change in loan mix
discussed above. Management feels that the risks involved with these loans are
manageable and monitor this area closely. It is the Bank's policy to place a
loan on non-accrual once it has become 90 days delinquent. If it is
determined that collection is questionable before that time, it would then be
placed on non-accrual.
Securities. Securities as a percent of average assets increased to 27.1% from
25.6%. The percentage held in the form of tax-exempt securities increased
slightly in 1996, 11.9% compared to 11.5%. As the yield relationship between
taxable and tax-exempt securities changes, new investments will be made in the
area that best meets the objectives of the Company.
Total earning assets were 93.0% of total average assets as of December 31,
1996, as compared to 92.6% as of December 31, 1995. In total dollars, earning
assets increased $8.2 million or 6.3%.
Deposits. Total average interest bearing deposits increased .7%, to $97.0
million from $96.3 million. They decreased as a percentage of average assets
to 65.2% in 1996 from 68.5% in 1995. Interest bearing demand deposits
experienced a 20.0% increase to $4.9 million as compared to $4.1 million, and
were 3.3% of average assets in 1996 as compared to 2.91% in 1995. The majority
of this increase was in the Bank's club checking account programs. Savings
accounts increased 7.7%. Time deposits decreased 3.5% or $2.3 million, and as
a percent
13
<PAGE> 14
of average assets decreased to 41.7% in 1996 from 45.7% in 1995.
Total average non-interest bearing demand deposits increased 15.3% and as a
percentage of average assets were 9.2% in 1996 versus 8.5% in 1995. This
increase is mostly the result of increased business customers, which is also
evident in the commercial loan activity. As banks continue to find it
difficult to retain the more traditional type of savings customers, the focus
will be building relationships with its customers and offering alternative
investment products around the core checking account. The Bank's mix of
deposits is still undergoing a change to that of a traditional commercial bank
which began in 1990. Thus it is expected that a higher percentage of the
Bank's growth will be seen in demand deposit accounts than in traditional time
deposit and savings accounts.
Other borrowings. Other borrowings has experienced the most growth of any
other area of interest bearing liabilities. Average borrowings increased 45.1%
in 1996 after an increase of 48.1% in 1995. Average borrowings of $15.2 million
in 1996 were 10.2% of average assets compared to $10.5 million and 7.4% of
average assets in 1995. The Bank has used other borrowings to fund specific
loan requests by taking advances at the FHLB to match the term and spread
required. The Bank also utilized advances from the FHLB to meet some
short-term liquidity needs and it also utilized a staggered maturity advance to
fund some consumer lending in 1995. The advances taken for short-term
liquidity needs and those used to fund the consumer loans have been retired as
they have matured.
During 1995, the Bank entered into depository relationships with four local
governmental agencies. As a result, excess funds deposited into their accounts
are invested into repurchase agreements ("repos") on a daily basis. These repo
balances will fluctuate during the year as tax dollars are collected and
disbursed. These relationships are bid on a two-year cycle, though one of the
four is on a three-year cycle. Two of the relationships that are on a two year
cycle expire at the end of June 1997. The other one expires at the end of
December. These accounts are expected to be rebid approximately three months
prior to the expiration date. It is not possible to determine the outcome of
these bids at this time.
Asset/Liability management. The Bank, like other financial institutions, is
subject to interest rate risk to the degree that its interest-bearing
liabilities, with short and medium term maturities, mature or reprice more
rapidly, or on a different basis, then its interest-earning assets. Interest
rate risk occurs when there is an imbalance between the interest-earning assets
and the interest-bearing liabilities at a given maturity or repricing schedule.
Such imbalance is commonly referred to as interest rate gap ("gap"). A
positive gap exists when there are more assets than liabilities maturing or
repricing within the same time frame, and a negative gap is one in which there
are more liabilities than assets maturing or repricing within the same time
frame. Accordingly, in a negative gap position, the Bank's net interest income
is likely to decline during periods of rising interest rates and increase
during periods of declining interest rates. The opposite is true in the case
of a positive gap position. The Bank's cumulative one-year gap generally has
been and currently is negative.
The asset/liability committee meets regularly to monitor and determine the
Bank's exposure to interest rate fluctuations. This is done by monitoring the
maturity and repricings of assets and liabilities plus monitoring the flow of
funds. It is current bank policy to have the one year cumulative gap within a
positive or negative 10% of assets. The current percentage is negative 11.7%
which compares to a positive 4.2% as of December 31, 1995.
Liquidity. Liquidity as it relates to the Bank is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal sources of funds are deposits, scheduled amortization and prepayment
14
<PAGE> 15
of loan principal, maturities of securities, income from operations, and
short-term borrowings. Additional sources include purchasing fed funds, sale
of loans, sale of securities, borrowing from the Federal Reserve Bank and the
FHLB and capital loans. Current year earnings can be paid to the Bank, from
Nevahwk, to provide additional liquidity, without incurring a tax liability
under present law. During 1996 Nevahawk did not pay a dividend however, a
dividend of $1.0 million was paid to the Bank in 1995. A payment in 1997 is
not anticipated.
Generally, the liquidity needs of the Company consist of payment of dividends
to its stockholders and a limited amount of expenses. The sources of funds to
provide this liquidity are income from securities, maturities of securities,
cash balances and dividends from the Bank. Certain restrictions are imposed
upon the Bank which could limit its ability to pay dividends if it did not have
net earnings in the future. The Company maintains adequate liquidity to pay
its expenses. The Company has entered into an agreement to purchase Rochelle
Bancorp Inc., the parent of Rochelle Savings Bank, Rochelle, Illinois. The
closing of this transaction is expected to be completed April 30, 1997. The
funds needed, totalling approximately $4.2 million, to complete this
transaction are expected to be generated internally by the Company and by the
dividends from the Bank.
Capital. Total stockholders' equity as of December 31, 1996 increased 3.9% to
$22.0 million as compared to $21.2 million as of December 31, 1995. Internal
growth in the form of increased net income was the biggest factor for this
increase. Also contributing to the increase to a lesser extent was the
exercising of stock options by employees and an increase in the adjustment for
Financial Accounting Standard 115. Equity as a percent of assets, core
capital as a percent of assets, total capital as a percent of risk based assets
and leverage ratio were 14.54%, 14.37%, 23.38%, and 15.02%, respectively, at
December 31, 1996. The Company significantly exceeds all regulatory
requirements regarding capital. The regulatory requirement for core capital as
a percent of assets is 5.50% and total capital as a percent of risk based
assets is 8.00%.
Impact of inflation and changing prices. Unlike most industrial companies,
virtually all of the assets and liabilities of the Bank are monetary in nature.
As a result, interest rates have more significant impact on the Bank's
performance and results of operations than the effect of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services as measured by the
Consumer Price Index. As discussed previously under Asset/Liability
Management, the Bank's interest rate gap position in conjunction with the
direction of the movement in interest rates, is an important factor in the
Bank's result of operation. The Bank's financial statements are prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and results of operations in terms of
historical dollars, without giving consideration to changes in the relative
purchasing power of money over time due to inflation.
Accounting developments. In 1995, the Financial Accounting Standards Board
(FASB) issued Statement No. 123, Accounting for Stock-Based Compensation. This
statement establishes financial accounting and reporting standards for such
plans including arrangements by which employees or non-employees receive shares
of stock or other equity instruments or the company incurs liabilities to
employees based on the price of the stock such as stock options. Under this
statement, the stock or equity instruments issued must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured. As an alternative to
valuing such instruments at fair value, the employer can continue to account
for these under the previous method of accounting. If the previous method of
accounting is chosen in lieu of the fair value method, as the company has done,
the Company must disclose the effects of the fair value for equity awards
granted in fiscal years beginning after December, 31,1994. There is no
material effect on the
15
<PAGE> 16
financial statements in implementing this statement.
In an effort to simplify the current standards in the United States for
computing earnings per share ("EPS") and make them compatible with
international standards, the FASB will issue Statement 128, Earnings Per Share.
Statement 128 applies to entities with publicly held common stock and is
effective for financial statements issued for periods ending after December 15,
1997. Statement 128 replaces APB Opinion 15, Earning Per Share. Opinion 15
required that entities with simple capital structures present a single
"earnings per common share" on the face of the income statement. Those
entities with complex capital structures had to present both "primary" and
"fully diluted" EPS. Primary EPS shows the amount of income attributed to each
share of common stock if every common stock equivalent were converted into
common stock. Fully diluted EPS considers common stock equivalents and all
other securities that could be converted into common stock. Statement 128
simplifies the computation of EPS by replacing the presentation of primary EPS
with a presentation of basic EPS. The Statement requires dual presentation of
basic and diluted EPS by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted EPS. The
implementation of this statement is expected to cause a slight increase in EPS
for 1997.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
BLACKHAWK BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
December 31, 1996
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS 2
FINANCIAL STATEMENTS
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
16
<PAGE> 17
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 22
17
<PAGE> 18
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Blackhawk Bancorp, Inc. and Subsidiary
Beloit, Wisconsin
We have audited the accompanying consolidated balance sheets of Blackhawk
Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1996, 1995 and 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Blackhawk Bancorp,
Inc., and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
/s/ Lindgren, Callihan, Van Osdol & Co., Ltd.
Rockford, Illinois
February 7, 1997
18
<PAGE> 19
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 7,966,929 $ 7,589,600
Federal funds sold and other short-term investments 4,677,596 11,734,905
Securities (Note 2):
Held-to-maturity 24,864,640 25,794,108
Available-for-sale 10,701,911 11,571,581
Loans, net of allowance for loan losses of $1,185,672 in
1996 and $928,817 in 1995 (Note 3) 98,241,019 93,548,027
Bank premises and equipment, net (Note 4) 3,463,491 3,732,418
Accrued interest receivable 1,041,756 1,217,561
Income tax receivable (Note 7) 94,638 35,812
Other assets (Note 7) 432,025 307,436
----------- -----------
Total assets $151,484,005 $155,531,448
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $23,193,906 $ 22,513,544
Interest bearing 95,116,941 97,203,385
----------- -----------
Total deposits 118,310,847 119,716,929
----------- -----------
Borrowed funds:
Short-term borrowings (Note 5) 7,405,451 9,679,833
Long-term borrowings (Notes 5 and 6) 2,275,456 3,629,027
----------- -----------
Total borrowed funds 9,680,907 13,308,860
----------- -----------
Accrued interest payable 680,226 693,364
Other liabilities (Note 6 and 7) 782,827 622,811
----------- -----------
Total liabilities 129,454,807 134,341,964
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 8, 9, 10, 11, and 12)
STOCKHOLDERS' EQUITY (NOTE 15):
Preferred stock, $.01 par value per share; authorized
1,000,000 shares; issued, none -0- -0-
Common stock, $.01 par value per share; authorized
10,000,000 shares; issued and outstanding 2,285,864
in 1996 and 2,282,615 in 1995
(Note 12) 22,859 22,826
Additional paid in capital (Note 10) 6,960,550 6,946,370
Employee stock options earned (Note 6) 94,764 52,165
Retained earnings (Notes 8 and 10) 15,072,129 14,210,036
Less treasury stock, at cost (84,305) -0-
Net unrealized gains (losses) on securities available-for-
sale (Note 2) (11,343) 37,114
----------- -----------
22,054,654 21,268,511
Less: Deferred compensation related to employee stock
ownership plan debt guarantee (Note 6) (25,456) (79,027)
----------- -----------
Total stockholders' equity 22,029,198 21,189,484
----------- ----------
Total liabilities and stockholders' equity $151,484,005 $155,531,448
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE> 20
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $8,777,209 $8,327,565 $ 7,270,387
Interest on securities:
Taxable 2,122,793 1,895,205 1,650,537
Exempt from federal income taxes 221,105 199,168 302,878
Interest on federal funds sold and other
short-term investments 201,741 160,031 122,381
---------- ---------- ----------
Total interest income 11,322,848 10,581,969 9,346,183
---------- ---------- ----------
Interest expense:
Interest on deposits 4,578,120 4,485,677 3,907,408
Interest on short-term borrowings 642,894 379,219 256,640
Interest on long-term borrowings 173,090 214,223 59,878
---------- ---------- ----------
Total interest expense 5,394,104 5,079,119 4,223,926
---------- ---------- ----------
Net interest income 5,928,744 5,502,850 5,122,257
Provision for loan losses (Note 3) 145,000 180,000 220,000
--------- --------- ----------
Net interest income after provision
for loan losses 5,783,744 5,322,850 4,902,257
--------- --------- ----------
Other operating income:
Trust department income 121,739 87,826 73,383
Service fees 568,951 467,800 412,991
Realized gains on securities (Note 2) -0- 17,785 -0-
Gain on sale of loans 75,372 37,996 29,331
Other income 239,735 166,496 82,413
--------- --------- ----------
Total other operating income 1,005,797 777,903 598,118
--------- --------- ----------
Other operating expenses:
Salaries and wages 1,767,328 1,640,139 1,430,820
Employee benefits (Note 6) 436,445 357,297 455,052
Occupancy expense of bank premises
(Note 11) 309,313 300,160 239,169
Furniture and equipment 349,928 383,072 296,712
Data processing 320,109 299,447 391,707
Federal deposit insurance premiums 2,000 127,272 239,208
Professional fees 199,373 207,417 365,522
Advertising and marketing 112,790 118,236 105,111
Other operating expenses 716,319 595,083 691,123
--------- --------- ----------
Total other operating expenses 4,213,605 4,028,123 4,214,424
--------- --------- ----------
Income before income taxes 2,575,936 2,072,630 1,285,951
Provision for income taxes (Note 7) 847,661 600,743 345,949
--------- --------- ----------
Net income $ 1,728,275 $ 1,471,887 $ 940,002
=========== =========== ==========
Net income per share $.73 $.64 $.41
---- ---- ----
Dividends per share $.38 $.30 $.27
==== ==== ====
</TABLE>
20
<PAGE> 21
See Notes to Consolidated Financial Statements.
21
<PAGE> 22
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1996 AND 1994
<TABLE>
<CAPTION>
Net Unreal-
ized Gains
(Losses) on
Additional Securities
Common Paid in Stock Retained Treasury Available
Stock Capital Options Earnings Stock for Sale Other Total
------- ---------- ------- ------------ -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 7,492 $6,777,046 $ 9,384 $13,089,223 (186,170) $19,696,975
Net income 940,002 940,002
Principal payments on
ESOP loan 53,571 53,571
Cash dividends declared
on common stock, $.27 per
share (599,830) (599,830)
Adoption of FASB No. 115 $160,451 160,451
Net change in unrealized
gains (losses) on securities
available-for-sale (Note 2) (320,152) (320,152)
Stock split (Note 12) 7,495 (7,495) -0-
Compensatory employee
stock options (Note 6):
Recognized 17,978 17,978
Exercised 19 13,966 (720) 13,265
------- ---------- ------- ----------- ------- -------- -----------
BALANCE, DECEMBER 31, 1994 15,006 6,791,012 26,642 13,421,900 (159,701) (132,599) 19,962,260
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Additional
Common Paid in Stock Retained
Stock Capital Options Earnings
-------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Net income 1,471,887
Principal payments on
ESOP loan
Cash dividends declared
on common stock, $.30 per
share (676,140)
Net change in unrealized
gains (losses) on
securities available-for-
sale (Note 2)
Stock split (Note 12) 7,593 (7,611)
Compensatory employee
stock options (Note 6):
Recognized 33,697
Exercised 227 155,358 (8,174)
-------- ---------- ------- -----------
BALANCE, DECEMBER 31,
1995 22,826 6,946,370 52,165 14,210,036
Net income 1,728,275
Principal payments on
ESOP loan
Cash dividends declared
on common stock, $.38 per
share (866,182)
Purchase of stock for
treasury, 7,578 shares at
$11.13 per share
Net change in unrealized
gains (losses) on
securities available-for-
sale (Note 2)
Compensatory employee
stock options (Note 6):
Recognized 42,654
Exercised or expired 33 14,180 (55)
-------- ---------- ------- -----------
BALANCE, DECEMBER 31, 1996
$22,859 $6,960,550 $94,764 $15,072,129
======== =========== ======= ===========
<CAPTION>
Net Unreal-
ized Gains
(Losses) on
Securities
Treasury Available
Stock for Sale Other Total
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income 1,471,887
Principal payments on
ESOP loan 53,572 53,572
Cash dividends declared
on common stock, $.30 per
share (676,140)
Net change in unrealized
gains (losses) on
securities available-for-
sale (Note 2) 196,815 196,815
Stock split (Note 12) (18)
Compensatory employee
stock options (Note 6):
Recognized 33,697
Exercised 247,411
----------- ---------- -----------
BALANCE, DECEMBER 31,
1995 37,114 (79,027) 21,189,484
Net income 1,728,275
Principal payments on
ESOP loan 53,571 53,571
Cash dividends declared
on common stock, $.38 per
share (866,182)
Purchase of stock for
treasury, 7,578 shares at
$11.13 per share (84,305) (84,305)
Net change in unrealized
gains (losses) on
securities available-for-
sale (Note 2) (48,457) (48,457)
Compensatory employee
stock options (Note 6):
Recognized 42,654
Exercised or expired 14,158
-------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1996
$(84,305) $ (11,343) $(25,456) $22,029,198
========= =========== =========== ===========
</TABLE>
25
See Notes to Consolidated Financial Statements.
<PAGE> 24
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Net income $ 1,728,275 $ 1,471,887 $ 940,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensatory employee stock options recognized 42,599 33,697 17,978
Provision for loan losses 145,000 180,000 220,000
Provision for depreciation and amortization 333,294 348,424 261,124
Amortization of premiums and accretion of discounts
on investment securities, net (79,542) 47,621 177,616
Gain on sale of property and equipment (2,655) -0- -0-
Realized gains on securities -0- (17,785) -0-
Gain on sale of loans (75,372) (37,996) (29,331)
Loans originated for sale (5,329,228) (3,232,399) (1,925,082)
Proceeds from sale of loans 5,164,200 3,270,395 1,954,413
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable 175,805 (84,251) (102,056)
(Increase) decrease in other assets (183,415) 184,735 (105,651)
Increase in accrued interest and other liabilities 178,910 26,669 78,870
------------ ------------ -----------
Net cash provided by operating activities 2,097,871 2,190,997 1,487,883
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 11,600 -0- -0-
Proceeds from sale of securities available-for-sale -0- 2,027,813 -0-
Proceeds from maturity of securities held-for-maturity 11,814,812 6,800,362 8,222,764
Proceeds from maturity of securities available-for-sale 22,484,382 3,806,860 4,052,950
Purchase of securities held-to-maturity (10,872,593) (6,991,719) (9,014,365)
Purchase of securities available-for-sale (21,628,410) (6,758,108) (4,882,249)
(Increase) decrease in federal funds sold and other
short-term investments, net 7,057,309 (4,683,512) (1,661,477)
Loans originated, net of principal collected (4,597,592) (5,013,115) (2,680,279)
Purchase of bank premises and equipment (73,312) (1,178,618) (747,994)
------------ ------------ -----------
Net cash provided by (used in) investing activities 4,196,196 (11,990,037) (6,710,650)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,406,082) 4,978,624 5,076,215
Net increase (decrease) in short-term borrowings (3,574,382) 6,932,833 (272,000)
Proceeds from long-term borrowings -0- 850,000 1,400,000
Dividends paid (866,182) (676,140) (599,830)
Proceeds from issuance of common stock 14,213 147,393 13,265
Purchase of common stock for treasury (84,305) -0- -0-
------------ ------------ -----------
Net cash provided by (used in) financing activities (5,916,738) 12,232,710 5,617,650
------------ ------------ -----------
Increase in cash and cash equivalents 377,329 2,433,670 394,883
Cash and cash equivalents:
Beginning 7,589,600 5,155,930 4,761,047
------------ ------------ -----------
Ending $ 7,966,929 $ 7,589,600 $ 5,155,930
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest on deposits $ 4,593,971 $ 4,397,371 $ 3,846,582
Income taxes $ 878,315 $ 710,876 $ 653,175
Interest on borrowed funds $ 813,272 $ 567,002 $ 298,320
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Other assets acquired in settlement of loans $ 225,546 $ 193,200 $ 84,544
Principal payments on ESOP loan $ 53,571 $ 53,571 $ 53,571
Common stock issued to effect stock split $ -0- $ 7,593 $ 7,495
</TABLE>
26
See Notes to Consolidated Financial Statements.
<PAGE> 25
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a
description of the more significant accounting policies:
NATURE OF BANKING ACTIVITIES:
The Bank provides a variety of banking services to individuals and
businesses through its main facility and branches in Beloit,
Wisconsin. Its primary deposit products are demand deposits, savings,
and certificates of deposit and its primary lending products are
commercial, real estate mortgage and installment loans.
As of December 31, 1996 and 1995, 57% ($56,817,700) and 60%
($56,828,551), respectively, of the gross loan portfolio consisted of
real estate loans on real estate located in Southcentral Wisconsin and
Northcentral Illinois. Generally, these loans are expected to be
repaid from the cash flows of the borrowers and are collateralized by
the related property. Credit losses arising from real estate lending
transactions compare favorably with the Bank's credit loss experience
on its loan portfolio as a whole. However, adverse changes in the
local economy would have a direct impact on the credit risk in the
loan portfolio.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of Blackhawk Bancorp, Inc. (Company) and its
wholly-owned subsidiary, Blackhawk State Bank (Bank) and its
wholly-owned subsidiary, Nevahawk Investment, Inc. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
In 1991, the Bank established a subsidiary corporation in Nevada,
Nevahawk Investment, Inc. The subsidiary is wholly-owned by the Bank
and only engages in investment security management for the Bank.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand and amounts due from banks (including cash items
in process of clearing). Cash flows from federal funds sold and other
short-term investments, with an original maturity of less than three
months, loans, deposits, and short-term borrowings with an original
maturity of less than three months, are reported net under
general practices within the banking industry.
SECURITIES HELD-TO-MATURITY:
Securities classified as held-to-maturity are those debt securities
the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are carried
at cost adjusted for amortization of premium and accretion of
discount, computed by the interest method over their contractual
lives.
27
<PAGE> 26
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SECURITIES AVAILABLE-FOR-SALE:
Securities classified as available-for-sale are those debt securities
that the Company intends to hold for an indefinite period of time but
not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the
maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available-for-sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS:
Loans are stated at unpaid principal balances, less the allowance for
loan losses and net of deferred loan fees.
Loan origination fees exceeding related costs are deferred and
amortized over the contracted life of the loan as a yield
adjustment.
Mortgage loans held for sale are recorded at the lower of cost or fair
market value. Gains and losses on the sale of mortgage loans are
included in other non-interest income.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent it is received in cash.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
managements evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired loans
are generally determined based on collateral values (or the present
value of estimated cash flows). Because of uncertainties inherent in
the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change
materially in the near term. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan
losses.
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on a straight-line
basis over the estimated useful life of each asset. Costs of major
additions and improvements are capitalized. Expenditures for
maintenance and repairs are reflected as expense when incurred.
OTHER REAL ESTATE:
Other real estate is carried in other assets at the lower of cost or
fair value less estimated disposal costs. When the property is
acquired through foreclosure, any excess of the related loan balance
over market value is charged
28
<PAGE> 27
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
to the allowance for loan losses. It is the Bank's policy to account
for collateral that has been substantively repossessed in the same
manner as collateral that has been formally repossessed. Subsequent
write-downs or losses upon sale are charged to other operating
expense. The Bank had no other real estate at December 31, 1996 and
1995.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Bank enters into sales of securities under agreements to
repurchase (reverse-repurchase agreements). Reverse-repurchase
agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the balance
sheets. The securities underlying the agreements remain in the asset
accounts.
PENSION PLAN:
The Bank has a defined-contribution plan which covers substantially
all full-time employees. Costs of the plan are based on
participants' eligibility and compensation and are funded as accrued.
TRUST ASSETS:
Assets, other than deposits in the Bank, held in a fiduciary or agency
capacity are not included in the consolidated financial statements as
they are not assets of the Bank.
29
<PAGE> 28
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES:
The Company and its Subsidiary file a consolidated federal income tax
return and separate state income tax returns.
Deferred taxes are provided on a liability method whereby deferred tax
assets recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
NET INCOME PER SHARE:
Net income per share is calculated on the basis of the weighted
average number of common shares outstanding during the year and common
stock equivalents arising from the assumed exercise of granted and
exercisable stock options.
ACCOUNTING DEVELOPMENTS:
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" SFAS 125 addresses whether the
transfer of financial assets should be accounted for as a sale and
removed from the balance sheet, or as a financing recognized as a
borrowing. The Statement uses a "financial components" approach which
focuses on control to determine whether the assets have been sold. If
the entity has surrendered control over the transferred assets, the
transaction is considered a sale. Control is considered surrendered
only if the seller has no legal rights to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets;
and the seller does not maintain effective control over the assets
through an agreement to repurchase or redeem them. SFAS 125 is
effective for transactions occurring after December 31, 1996, and is
to be applied prospectively, with earlier or retroactive application
not permitted. The adoption of SFAS 125 is not expected to have a
material impact on the Company.
NOTE 2. SECURITIES
Debt securities have been classified in the balance sheets according
to management's intent under Held-to-maturity or
Available-for-sale. The carrying amount of securities and their
approximate fair values at December 31, were as follows:
HELD-TO-MATURITY SECURITIES:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $11,403,001 $135,417 $(26,855) $11,511,563
U.S. Government agencies 9,341,386 30,546 (46,076) 9,325,856
Obligations of states and
political subdivisions 3,117,794 4,098 (30,687) 3,091,205
</TABLE>
30
<PAGE> 29
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
Other securities 1,002,459 7,618 1,010,077
--------- -------- --------- ---------
$24,864,640 $177,679 $(103,618) $24,938,701
=========== ======== ========= ===========
<CAPTION>
1995
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,398,623 $288,009 $ (49,242) $15,637,390
U.S. Government agencies 6,393,371 58,438 (9,105) 6,442,704
Obligations of states and political
subdivisions 3,902,114 25,759 (7,448) 3,920,425
Other securities 100,000 100,000
--------- -------- --------- ---------
$25,794,108 $372,206 $ (65,795) $26,100,519
=========== ======== ========= ===========
NOTE 2. SECURITIES (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES:
<CAPTION>
1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,750,977 $ 6,601 $ 2,757,578
U.S. Government agencies 7,256,468 47,500 7,227,378
Other securities 716,286 669 $ (76,590) 716,955
----------- -------- --------- ---------
$10,723,731 $ 54,770 $ (76,590) $10,701,911
=========== ======== ========= ===========
<CAPTION>
1995
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,752,007 $ 29,212 $ (4,422) $ 4,776,797
U.S. Government agencies 5,867,047 49,484 (16,913) 5,899,618
Obligations of states and political
subdivisions 110,000 2,042 (734) 109,266
Other securities 783,858 785,900
--------- -------- --------- ---------
</TABLE>
31
<PAGE> 30
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
$11,512,912 $80,738 $(22,069) $11,571,581
=========== ======= ========= ===========
</TABLE>
The amortized cost and fair value of securities as of December 31,
1996, by contractual maturity, are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because
the mortgages underlying the securities may be called or repaid without
any penalties. Therefore, these securities are not included in the
maturity categories in the following maturity summary:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,431,590 $ 6,423,753 $ 1,948,637 $ 1,952,958
Due after one year through five years 14,086,307 14,169,676 5,556,128 5,515,775
Due after five years through ten years -0- -0- 511,950 502,188
Mortgage-backed securities 4,346,743 4,345,272 2,240,716 2,264,690
Other securities -0- -0- 466,300 466,300
----------- ----------- ----------- -----------
$24,864,640 $24,938,701 $10,723,731 $10,701,911
=========== =========== =========== ===========
</TABLE>
The net unrealized gains (losses) on securities available-for-sale as
of December 31, 1996 and 1995 were $(11,343) and $37,114, respectively,
which is reflected net of deferred tax (benefits) of $(10,477) and
$21,555, respectively, in stockholders' equity.
There were $0, $17,785 and $-0- in realized gains or losses on
securities for 1996, 1995 and 1994, respectively.
Securities available-for-sale with a carrying value of $8,663,098 and
$10,284,187 at December 31, 1996 and 1995, respectively, were pledged
to secure public deposits and for other purposes as required or
permitted by law. Securities held-to-maturity with a carrying value of
$5,911,482 at December 31, 1996 were pledged to secure public deposits
and for other purposes as required or permitted by law.
NOTE 3. LOANS
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Real estate - mortgage $55,475,000 $54,818,984
Real estate - construction 1,342,700 2,009,567
Consumer 19,585,915 17,324,572
Commercial 23,023,076 20,323,721
----------- -----------
99,426,691 94,476,844
Less: Allowance for loan losses 1,185,672 928,817
----------- -----------
Loans, net $98,241,019 $93,548,027
=========== ===========
</TABLE>
There were $240,400 and $-0- loans held for sale at December 31, 1996 and 1995,
32
<PAGE> 31
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
respectively.
Nonperforming loans includes loans which have been categorized by
management as impaired and non-accruing because collection of interest
is not assured, non-accruing loans (not considered impaired loans) and
loans which are past-due ninety days or more as to interest and/or
principal payments. The following summarizes information concerning
nonperforming loans:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Impaired loans $ 444,594 $133,981
Non-accruing loans 442,897 206,064
Past due 90 days or more and still accruing 252,163 238,003
---------- --------
Total nonperforming loans $1,139,654 $578,048
========== ========
</TABLE>
The average balance of loans classified as impaired totaled
approximately $601,615 and $142,000 for the years ended December 31,
1996 and 1995, respectively. The allowance for loan losses related to
impaired loans amounted to approximately $180,277 and $46,160 at
December 31, 1996 and 1995, respectively. Interest income on impaired
loans of $51,762 and $17,029 was recognized for cash payments received
in 1996 and 1995, respectively.
The Bank has $27,027 in commitments to loan additional funds to the
borrowers of impaired or nonaccrual loans.
The effect on interest income of the non-accruing loans is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Income recognized $29,578 $12,952 $ 80,113
======= ======= ========
Income that would have been recognized in
accordance with the original loan terms $52,194 $22,967 $201,215
======= ======= ========
A summary of transactions in the allowance for loan losses is as follows:
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 928,817 $814,115 $ 940,905
Provision charged to expense 145,000 180,000 220,000
Loans charged off (109,486) (77,042) (376,065)
Recoveries 221,341 11,744 29,275
--------- ------- --------
Balance at end of year $1,185,672 $928,817 $ 814,115
========= ======= ========
</TABLE>
NOTE 3. LOANS (CONTINUED)
Loans are made, in the normal course of business, to directors,
executive officers, their immediate families and affiliated companies
in which they are a principal stockholder (commonly referred to as
related parties). The terms of these loans, including interest rates
and collateral, are similar to those prevailing for comparable
transactions and management believes they do not involve more than a
normal risk of collectibility. Such direct and indirect loans are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Balance at beginning of year $ 961,933 $ 1,850,145
New loans 4,951,115 3,473,883
Principal repayments (4,003,526) (4,362,095)
---------- -----------
Balance at end of year $1,909,522 $ 961,933
========== ===========
</TABLE>
33
<PAGE> 32
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In addition, the Bank has loan commitments to the aforementioned
related parties of $1,253,787 and $650,198 in 1996 and 1995,
respectively.
NOTE 4. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land $ 294,364 $ 294,364
Buildings and improvements 4,155,979 4,152,435
Equipment 1,494,867 1,464,902
Vehicles 137,903 131,996
---------- ----------
6,083,113 6,043,697
Less accumulated depreciation 2,619,622 2,311,279
---------- ----------
Bank premises and equipment, net $3,463,491 $3,732,418
========== ==========
</TABLE>
Depreciation charged to operating expense was $333,294, $348,424 and
$261,124 for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE 5. BORROWED FUNDS
<TABLE>
<CAPTION>
A summary of borrowed funds is as follows:
1996 1995
--------- ----------
<S> <C> <C>
Secured Advances from Federal Home Loan Bank of Chicago:
Fixed rate of 6.48%, due 5/11/96 $ -0- $ 1,000,000
Fixed rate of 6.14%, due 6/16/96 -0- 300,000
Fixed rate of 6.19%, due 6/16/97 300,000 300,000
Fixed rate of 6.74%, due 8/2/97 600,000 600,000
Fixed rate of 6.26%, due 6/16/98 400,000 400,000
Fixed rate of 5.44%, due 1/10/99 800,000 800,000
Fixed rate of 7.12%, due 4/17/00 150,000 150,000
Securities sold under an agreement to repurchase 7,405,451 9,679,833
---------- -----------
$9,655,451 $13,229,833
========== ===========
</TABLE>
Advances from the Federal Home Loan Bank of Chicago are collateralized
by substantially all one-to-four family real estate loans.
NOTE 6. EMPLOYEE BENEFIT PLANS
PENSION PLAN:
The Bank has a noncontributory, defined contribution money-purchase
pension plan covering substantially all of its employees. The Bank
contributes, on behalf of the eligible employees, 4.2% of total annual
compensation plus 4.2% of compensation in excess of $13,200.
The total pension expense was $77,568, $74,347, and $71,244 for the
years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
EXECUTIVE BONUS PLAN:
Beginning January 1, 1991, the Company has adopted a revised incentive
bonus plan for officers providing cash bonuses based upon the financial
performance
34
<PAGE> 33
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
of the Company and performance of the respective officers. Bonus compensation
payable under this plan totaled $149,786 and $115,176 in 1996 and 1995,
respectively.
Bonus compensation expense was $159,410, $112,417 and $20,339 for the years
1996, 1995 and 1994, respectively.
STOCK OPTION PLANS:
The Company has reserved 240,000 shares of common stock for issuance to
directors and key employees under incentive stock option and purchase plans.
Options are granted at prices equal to the fair market value and 90% of the
fair market value on the dates of grant for directors and key employees,
respectively, and are exercisable in cumulative installments over a three year
period. Other pertinent information related to the plans is as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1996 Price 1995 Price 1994 Price
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning of year 262,235 $ 6.72 196,701 $4.84 204,450 $7.21
Granted during the year 17,300 11.20 108,350 9.40 9,450 6.83
Terminated and canceled during the year (510) 5.85 (11,100) 5.40 (13,899) 8.77
Exercised during the year (3,249) 5.25 (31,716) 4.65 (3,300) 4.02
------- ------ ------- ----- ------- -----
Shares under option, end of year 275,776 $ 7.02 262,235 $6.72 196,701 $4.84
======= ====== ======= ===== ======= =====
Options exercisable, end of year 184,492 $ 5.73 113,543 $4.97 101,052 $4.20
======= ====== ======= ===== ======= =====
Available to grant, end of year 114,350 131,650 11,400
======= ======= =======
Weighted average fair value of options
granted during the year $4.58 $5.66 $5.58
======= ======= =======
</TABLE>
Compensation expense related to granting compensatory employee stock
options totaled $42,599, $33,697 and $17,978 in 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
Outstanding Options Vested Options
------------------------------------- -------------------------------
Outstanding Weighted Weighted
Year of Shares Average Shares Average
Expiration Granted Price Vested Price
- ---------- ----------- -------- ------ --------
<S> <C> <C> <C> <C>
2000 5,250 $ 3.33 5,250 $3.33
2001 29,550 $ 3.54 29,550 $3.54
2002 6,300 $ 4.33 6,300 $4.33
2003 102,726 $ 5.24 102,726 $5.24
2004 7,350 $ 6.83 4,900 $6.83
2005 107,300 $ 9.40 35,766 $9.39
2006 17,300 $11.20 -0- $0.00
------- ------ ------- -----
275,776 $ 7.02 184,492 $5.73
======= ====== ======= =====
</TABLE>
35
<PAGE> 34
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
36
<PAGE> 35
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its stock
options. Had compensation costs been determined on the basis of fair
value pursuant to FASB Statement No. 123, net income and earnings per
share would have been reduced as follows:
1996 1995
---------- ----------
Net income
As reported $1,728,275 $1,471,887
========== ==========
Pro forma $1,644,430 $1,370,769
========== ==========
Net income per share
As reported $ .73 $ .64
========== ==========
Pro forma $ .69 $ .61
========== ==========
The fair value of each stock option grant has been estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
1996 1995
-------- --------
Risk-free interest rate 5% 7%
Expected life 10 years 10 years
Expected volatility 33% 40%
Expected dividend yield 3% 3%
No options were granted in 1994 after December 15, 1994.
EMPLOYEE STOCK OWNERSHIP PLAN:
The Bank has an Employee Stock Ownership Plan for the benefit of
employees who meet the eligibility requirements. The Plan was
established in 1990. The Plan holds 112,101 shares of the Company's
common stock in a trust established in the Bank. The stock was acquired
by the Plan by using the proceeds from a loan obtained from a nonrelated
commercial lender. The loan is collateralized by the stock which has
not been allocated to individual participant accounts. In addition, the
Company guarantees this obligation. Cash payments to the Plan consist
of contributions and dividend payments, in amounts sufficient for it to
satisfy the debt service requirements. Accordingly, the debt has been
recorded in the accompanying consolidated balance sheets together with
the related deferred compensation. The debt and deferred compensation
are reduced as the Plan makes principal payments.
The loan referred to above bears interest at the lender's prime rate,
which was 8.25% at December 31, 1996. The loan requires principal
payments of $13,393, plus interest each quarter. The future principal
payments on the loan of $25,456 are due in 1997.
Cash payments to the Plan during the years ended December 31, 1996, 1995
and 1994 consisted of the following:
1996 1995 1994
------- ------- -------
Contributions $33,000 $33,250 $51,000
Dividends 35,751 30,600 29,894
------ ------ ------
$68,751 $63,850 $80,894
======= ======= =======
37
<PAGE> 36
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For financial statement purposes, expense for the Plan is determined
based on the percentage of shares allocated to participants each
period (allocations are based on principal and interest payments)
times the original amount of the debt plus the interest incurred. The
components of the amount charged to expense for the years ended
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Compensation $32,545 $40,763 $50,904
Interest 5,022 10,008 11,331
------ ------ ------
$37,567 $50,771 $62,235
======= ======= =======
</TABLE>
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
In accordance with the applicable federal income tax regulations, the
Bank is expected to honor the rights of certain participants to
diversify their vested account balances or to liquidate their vested
ownership of the stock in the event of employment termination. The
purchase price of the stock is based on the market value. In
addition, the deferred compensation recorded in connection with the
debt incurred by the Plan has been offset against the stock.
NOTE 7. INCOME TAXES
Net deferred tax (assets) liabilities consist of the following
components as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $171,571 $106,721
Unrealized gains on securities available-for-sale -0- 21,555
Securities 41,227 16,469
------- -------
Total deferred tax liabilities 212,798 144,745
------- -------
Deferred tax assets:
Allowance for loan losses 228,134 126,461
Unrealized losses on securities available-for-sale 10,477 -0-
Accrued expenses 25,630 9,123
Other -0- 2,373
------- -------
Total deferred tax assets 264,241 137,957
------- -------
Net deferred tax (assets) liabilities $(51,443) $ 6,788
======== ========
</TABLE>
No valuation allowance was necessary.
The provision for income taxes charged to operations for the years
ended December 31, 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $778,733 $768,641 $476,949
State 95,127 27,869 -0-
------- -------- --------
Total current 873,860 796,510 476,949
------- -------- --------
</TABLE>
38
<PAGE> 37
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C> <C> <C>
Deferred:
Federal (15,199) (195,767) (135,000)
State (11,000) -0- 4,000
------- -------- --------
Total deferred (26,199) (195,767) (131,000)
------- -------- --------
Total $847,661 $600,743 $345,949
======== ======== ========
</TABLE>
NOTE 7. INCOME TAXES (CONTINUED)
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax income
for the years ended December 31, 1996, 1995 and 1994 due to the
following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Income taxes at federal statutory rate $875,818 $704,694 $437,223
Increase (decrease) in income taxes
resulting from:
Tax exempt income (75,175) (67,717) (89,308)
State income taxes, net of federal
income tax benefit 55,524 24,224 (1,818)
Excess stock option compensation (7,409) (59,062) -0-
Other (1,097) (1,396) (148)
------- ------- -------
$847,661 $600,743 $345,949
======== ======== ========
</TABLE>
The Bank previously qualified under provisions of the Internal Revenue
Code which permit as a deduction from taxable income an allowance for
bad debts which differs from the provision for such losses charged to
income. Accordingly, retained earnings at December 31, 1989 included
approximately $3,377,661, representing the Bank's federal bad debt
deduction in excess of actual losses for which no provision for federal
income taxes had been made.
In 1989, the Corporators and Board of Trustees of the Bank adopted a
Plan of Conversion whereby the Bank was converted from a mutual savings
bank to a capital stock commercial bank. The Conversion to a commercial
bank resulted in a loss of the Bank's eligibility under the foregoing
provisions and required the amounts previously deducted to be recaptured
as income. Accordingly, a deferred tax charge of $1,075,000 was made to
the financial statement income at the time of Conversion. A private
letter ruling had been requested from the Internal Revenue Service to
determine if and when the actual payments of the deferred tax charge
must be remitted to the Internal Revenue Service. Subsequent notice was
received indicating that the Internal Revenue Service expected to issue
specific regulations on this issue. Regulations proposed in 1992 would
permit the Bank to use a six-year recapture period consistent with
Section 481 of the Internal Revenue Code of 1986, as amended. The Bank
therefore is presently using a six-year recapture period.
NOTE 8. DIVIDEND LIMITATIONS
Dividend distributions by the Bank are limited by state banking
regulations. Generally, the regulations provide that dividends are
limited to current year net income of the Bank provided that the surplus
of the Bank exceeds the capital stock. Accordingly, the Bank will only
be able to pay dividends to the Company derived from income earned in
1996 unless prior consent is obtained from the Wisconsin Commissioner of
Banking.
Further, the Bank may not declare or pay a cash dividend, or repurchase
any of its stock, if the effect thereof would cause the net worth of the
Bank to be
39
<PAGE> 38
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
reduced below either the amount required for the liquidation account (as
detailed in Note 10) or the net worth requirements imposed by the
Commissioner and the Federal Deposit Insurance Corporation (F.D.I.C.).
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk, acquired in the normal course of business to meet the financing
needs of its customers. These financial instruments include various
commitments to extend credit and standby letters of credit. These
instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract
amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure 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 amount
of those instruments. The Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
A summary of the amount of the Bank's exposure to credit loss for loan
commitments (unfunded loans and unused lines of credit) and standby
letters of credit outstanding at December 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loan commitments $9,327,753 $7,733,617
Standby letters of credit 355,991 201,793
---------- ----------
$9,683,744 $7,935,410
========== ==========
</TABLE>
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 the
commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation.
Collateral varies but may include accounts receivable, inventory,
property, plant and equipment, income-producing commercial properties
and real estate.
NOTE 10. LIQUIDATION ACCOUNT
In May, 1990, the Bank was converted from a Wisconsin chartered mutual
savings bank to a Wisconsin chartered capital stock commercial bank
subsidiary of Blackhawk Bancorp, Inc. (Holding Company). Pursuant to
the Plan, shares of capital stock of the Holding Company were offered at
a predetermined price to eligible account holders and others as provided
in the Plan.
Subsequent to the conversion to a stock bank, a Special Liquidation
Account was established by restructuring a portion of retained earnings
for the purpose of granting deposit account holders prior to the
Conversion a priority claim if the Bank were to liquidate in the future.
In the event of such a liquidation (and only in such event), such
deposit account holders who continue to maintain their deposit account
shall be entitled to receive a distribution from the liquidation account
after payment to creditors. The balance attributable to the Special
Liquidation Account is decreased by a proportionate amount as each
deposit account holder closes an account or reduces the balance in such
deposit account
40
<PAGE> 39
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
as of any future fiscal year end. The balance of the Special
Liquidation Account was $2,687,000 on December 31, 1996.
NOTE 11. LEASE COMMITMENTS
The Bank leases branch office space in a grocery store in Beloit,
Wisconsin under a lease expiring November 3, 2014. The lease can be
terminated every five years, but the Bank could be liable for remodeling
or removal costs to the leased office space if the lease is terminated
before the 14th year of the agreement. Because of the early termination
costs, management does not intend to exercise the termination prior to
expiration of the lease. The total minimum rental commitment under the
lease at December 31, 1996 is due as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 35,500
1998 35,500
1999 38,267
2000 52,100
2001 52,100
2002 and later 767,617
-------
$981,084
========
</TABLE>
On October 11, 1996, the Bank entered into an agreement to lease space for
a future branch office in Beloit, Wisconsin. The terms and conditions of
the lease have not been formalized. Once a lease inception date is
determined and terms are established, the Bank will have to pay a one-time
non-refundable fee of $50,000 and the last month's rent payment. The
projected opening date of the new branch is July, 1997.
NOTE 11. LEASE COMMITMENT (CONTINUED)
Total rent expense for the years ended December 31, 1996, 1995 and 1994
was $35,500, $32,083 and $5,059, respectively.
NOTE 12. ACQUISITION
The Board of Directors entered into an agreement in 1996 to acquire all
outstanding shares of Rochelle Bancorp, Inc. (Rochelle) and its
wholly-owned subsidiary Rochelle Savings Bank, Rochelle, Illinois. In
addition, the agreement provides for the purchase of the remaining
outstanding shares of Midland Acceptance Corp., (Midland) a 50% owned
subsidiary of Rochelle Savings Bank, Rochelle, Illinois. The acquisition
of the shares of Rochelle and Midland are contingent on a number of future
events and regulatory approval. The agreement provides for a price of
approximately $4.2 million for the shares of Rochelle and Midland. It is
anticipated that the acquisition would be consummated on April 30, 1997
and that the transaction would be accounted for under the purchase method
of accounting.
NOTE 13. COMMON STOCK SPLIT
On March 31, 1994, the Company issued the 749,200 additional shares, at
$.01 per share par value, necessary to effect a 2 for 1 common stock
split.
On June 15, 1995, the Company issued the 759,301 additional shares, at
$.01 per share par value, necessary to effect a 3 for 2 common stock
split.
The dividends per common share and earnings per common share for the year
ended December 31, 1994 has been retroactively adjusted for these splits.
41
<PAGE> 40
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
of the instrument. Statement 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. These
fair value disclosures are not intended to represent the market value of
the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash, cash equivalents and federal funds sold: For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Securities: For securities, fair value equals quoted market price, where
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans receivable: The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings for the same remaining
maturities.
Deposits: The fair value of demand deposits and savings accounts is the
amount payable at the reporting date. The fair value of fixed- maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Short-term and long-term borrowings: The carrying amounts of
variable-rate borrowings and notes payable approximate their fair values.
The fair value of fixed rate borrowings is estimated using rates currently
available for debt with similar terms and remaining maturities.
Off-balance sheet financial instruments: The fair value of off-balance
sheet instruments was estimated based on the amount the Company would pay
to terminate the contracts or agreements, using current rates and, when
appropriate, the current creditworthiness of the customer.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company s financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,966 $ 7,966 $ 7,590 $ 7,590
Federal fund sold and other
short-term investments 4,678 4,678 11,735 11,735
</TABLE>
42
<PAGE> 41
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Securities 35,567 35,641 37,366 37,672
Loans, net of allowance for loan losses 98,241 97,979 93,548 93,738
Financial liabilities and other
off-balance sheet instruments:
Demand deposit and savings 56,233 56,233 54,941 54,941
Time deposits 62,077 62,367 64,776 65,308
Borrowings 9,681 9,674 13,309 13,341
Loan commitments -0- -0- -0- -0-
Standby letters of credit -0- 4 -0- 3
</TABLE>
NOTE 15. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect the Company's and the
Bank's financial statements. Under capital adequacy guidelines and
regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total capital and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and the
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1996, that the Company and the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
NOTE 15. REGULATORY MATTERS (CONTINUED)
The actual capital amounts and ratios are also presented in the table (in
thousand's).
<TABLE>
<CAPTION>
To be Well Capitalized
Under prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- --------- ----- --------- -----
Company
-------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk
Weighted Assets) $23,226 23.47% $7,914 8.0% $9,892 10.0%
</TABLE>
43
<PAGE> 42
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital (To Risk
Weighted Assets) $22,040 22.27% $3,957 4.0% $5,935 6.0%
Tier I Capital (To
Average Assets) $22,040 15.08% $4,383 3.0% $7,305 5.0%
Bank
----
Total Capital (To Risk
Weighted Assets) $19,181 19.48% $7,874 8.0% $9,843 10.0%
Tier I Capital (To Risk
Weighted Assets) $17,995 18.28% $3,937 4.0% $5,906 6.0%
Tier I Capital (To
Average Assets) $17,995 12.51% $5,753 4.0% $7,192 5.0%
</TABLE>
NOTE 16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED PARENT COMPANY BALANCE SHEETS:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,326,460 $ 864,695
Investment in subsidiary 17,984,004 17,837,577
Investment securities held-to-maturity 2,197,449 2,126,095
Due from subsidiary, net 742,459 572,269
Accrued interest receivable 14,165 18,234
Income tax receivable 26,009 62,056
Other assets 40,903 -0-
----------- -----------
Total assets $22,331,449 $21,480,926
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other borrowings $ 25,456 $ 79,027
Other liabilities 276,795 212,415
----------- -----------
Total liabilities 302,251 291,442
----------- -----------
Stockholders' Equity:
Preferred stock -0- -0-
Common stock 22,859 22,826
Additional paid in capital 7,055,314 6,998,535
Retained earnings 15,072,129 14,210,036
Less treasury stock, at cost (84,305) -0-
Net unrealized gains (losses) on securities available-for-sale (11,343) 37,114
Less: Deferred compensation related to employee stock
ownership plan debt guarantee (25,456) (79,027)
----------- -----------
Total stockholders' equity 22,029,198 21,189,484
----------- -----------
</TABLE>
44
<PAGE> 43
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C> <C>
Total liabilities and stockholders' equity $22,331,449 $21,480,926
=========== ===========
</TABLE>
NOTE 16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF INCOME:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
Income:
Dividends from subsidiary $1,436,000 $1,200,000 $697,500
Interest income 170,827 127,074 98,303
---------- ---------- --------
Total income 1,606,827 1,327,074 795,803
---------- ---------- --------
Expenses:
Professional fees 32,350 33,885 53,990
Other 31,001 21,990 25,938
---------- ---------- --------
Total expenses 63,351 55,875 79,928
---------- ---------- --------
Income before income tax benefits and equity in
undistributed net income of subsidiary 1,543,476 1,271,199 715,875
Income tax expense (benefits) 10,084 7,055 (11,048)
---------- ---------- --------
Income before equity in undistributed net income
of subsidiary 1,533,392 1,264,144 726,923
Equity in undistributed net income of subsidiary 194,883 207,743 213,079
---------- ---------- --------
Net income $1,728,275 $1,471,887 $940,002
========== ========== ========
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:
1996 1995 1994
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,728,275 $1,471,887 $940,002
Adjustments to reconcile net income to net cash
provide by operating activities:
Equity in undistributed net income of
subsidiary (194,883) (207,743) (213,079)
(Increase) decrease in due from subsidiary (170,190) (572,269) 393,581
Accretion of discounts on investment
securities, net (46,324) (14,862) (349)
(Increase) decrease in accrued interest
receivable 4,069 1,203 (6,771)
</TABLE>
45
<PAGE> 44
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Increase) decrease in income tax
receivable 36,047 87,379 (120,511)
Increase in other assets (40,903) -0- -0-
Increase in other liabilities 64,380 40,836 35,333
Increase (decrease) in due to subsidiary -0- (165,344) 165,344
---------- ----------- ---------
Net cash provided by operating activities 1,380,471 641,087 1,193,550
---------- ----------- ---------
</TABLE>
NOTE 16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C> <C>
Purchase of securities (5,334,005) (2,510,327) (999,222)
Proceeds from maturity of securities 5,308,975 1,500,000 785,000
---------- ----------- ---------
Net cash used in investing activities (25,030) (1,010,327) (214,222)
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (866,182) (676,140) (599,830)
Proceeds from sale of common stock 56,811 181,090 31,243
Purchase of common stock for treasury (84,305) -0- -0-
---------- ----------- ---------
Net cash used in financing activities (893,676) (495,050) (568,587)
---------- ----------- ---------
Increase (decrease) in cash and cash
equivalents 461,765 (864,290) 410,741
Cash and cash equivalents:
Beginning 864,695 1,728,985 1,318,244
---------- ----------- ---------
Ending $1,326,460 $ 864,695 $1,728,985
========== =========== ==========
</TABLE>
46
<PAGE> 45
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Guide Three Disclosures
Table 1
ANAYLSIS OF NET INTEREST INCOME-TAX EQUIVALENT BASIS
Years Ended December 31,
<TABLE>
<CAPTION>
Average Balance Average Rate Interest Earned or Paid
1996 1995 1994 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
35,510 32,117 30,364 5.98% 5.90% 5.44% Taxable investment securities 2,123 1,895 1,651
4,862 4,163 6,463 6.66% 7.01% 6.87% Tax-exempt investment securities 324 292 444
- ----------------------------------------- -------------------------
40,372 36,280 36,827 6.06% 6.03% 5.69% Total investments 2,447 2,187 2,095
95,042 92,020 85,862 9.23% 9.05% 8.47% Loans 8,777 8,328 7,272
Federal funds sold
3,957 2,759 2,983 5.05% 5.76% 4.02% and short term investments 200 159 120
43 34 95 4.65% 5.88% 3.16% Interest bearing deposits in banks 2 2 3
- ----------------------------------------- --------------------------
139,414 131,093 125,767 8.20% 8.14% 7.55% TOTAL EARNING ASSETS 11,426 10,676 9,490
- ----------------------------------------- --------------------------
Interest Bearing Liabilities:
4,933 4,111 3,869 1.44% 1.53% 1.58% Interest bearing demand deposits 71 63 61
30,056 27,920 27,663 3.05% 2.99% 2.48% Savings deposits 917 836 687
62,005 64,257 62,826 5.79% 5.58% 5.03% Time deposits 3,590 3,587 3,159
- ----------------------------------------- --------------------------
96,994 96,288 94,358 4.72% 4.66% 4.14% Total interest bearing deposits 4,578 4,486 3,907
12,411 7,007 6,036 5.18% 5.41% 4.26% Short-term borrowings 643 379 257
2,754 3,444 1,021 6.28% 6.21% 5.88% Long-term borrowings 173 214 60
- ----------------------------------------- --------------------------
112,159 106,739 101,415 4.81% 4.76% 4.17% TOTAL INTEREST BEARING LIABILITIES 5,394 5,079 4,224
- ----------------------------------------- --------------------------
3.39% 3.39% 3.38% INTEREST RATE SPREAD
NET INTEREST MARGIN/
4.33% 4.27% 4.19% NET INTEREST INCOME 6,032 5,597 5,266
</TABLE>
<TABLE>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
<C> <C> <C> <C> <C> <C> <C>
</TABLE>
47
<PAGE> 46
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Taxable 25 200 3 228 141 95 8 244
Tax-exempt securities (15) 49 (2) 32 9 (158) (3) (152)
--------------------------------------------------------------------
Total 11 249 0 260 150 (63) 5 92
Loans 170 273 6 449 499 522 36 1,056
Federal funds sold and
other short-term investments (20) 69 (8) 41 52 (9) (4) 39
Interest bearing deposits
in other banks (0) 1 (0) 0 3 (2) (2) (1)
--------------------------------------------------------------------
TOTAL EARNING ASSETS 161 592 (3) 750 703 448 35 1,186
--------------------------------------------------------------------
Interest Bearing Liabilities:
Interest bearing
demand deposits (4) 13 (1) 8 (2) 4 (0) 2
Savings deposits 16 64 1 81 141 6 1 149
Time deposits 133 (126) (5) 3 348 72 8 428
---------------------------------------------------------------------
Total interest
bearing deposits 145 (49) (4) 92 488 82 9 579
Short-term borrowings (16) 292 (12) 264 69 41 11 122
Long-term borrowings 2 (43) (0) (41) 3 142 8 154
---------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 132 200 (17) 315 561 266 28 855
---------------------------------------------------------------------
NET INTEREST MARGIN 29 392 14 435 142 182 7 331
---------------------------------------------------------------------
</TABLE>
Table 2 ANALYSIS OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
(in thousands) December 31,
1996 1995 1994
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage 55,475 56.47% 54,819 58.60% 53,974 60.84%
Real estate-construction 1,343 1.37% 2,009 2.15% 2,360 2.66%
Consumer 19,586 19.94% 17,325 18.52% 16,986 19.15%
Commercial 23,023 23.44% 20,324 21.73% 16,210 18.27%
Commercial paper -- 0.00% 0 0.00% -- 0.00%
----------------------------------------------------------
Gross loans 99,427 101.21% 94,477 100.99% 89,530 100.92%
Unearned income -- 0.00% -- 0.00% -- 0.00%
</TABLE>
48
<PAGE> 47
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan loss (1,186) -1.21% (929) -0.99% (814) (0.92%)
-----------------------------------------------------
Net loans 98,241 100.00% 93,548 100.00% 88,716 100.00%
=====================================================
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY
<TABLE>
<CAPTION>
Percent Percent Percent
of Gross of Gross of Gross
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage 540 45.53% 521 56.08% 473 58.11%
Real estate-construction 0 0.00% 0 0.00% 0 0.00%
Consumer 173 14.59% 181 19.48% 147 18.06%
Commercial 473 39.88% 227 24.43% 194 23.83%
Commercial paper 0 0.00% 0 0.00% 0 0.00%
--------------------------------------------------
Total 1,186 100.00% 929 100.00% 814 100.00%
==================================================
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Allowance for loan losses, beginning 929 814 941
Amounts charged-off:
Real estate-mortgage 0 0 176
Consumer 98 40 19
Commercial 11 37 181
----------------------
Total charge-offs 109 77 376
----------------------
Recoveries on amounts previously charged-off:
Real estate-mortgage 0 0 0
Consumer 40 11 4
Commercial 181 1 25
----------------------
Total recoveries 221 12 29
----------------------
Net charge-offs (112) 65 347
Provision charged to expense 145 180 220
----------------------
Allowance for loan losses, ending 1,186 929 814
======================
NON-PERFORMING LOANS AT PERIOD END
Impaired loans 445 134 0
Non-accrual 443 206 314
Past due 90 days or more
and still accruing 252 238 170
----------------------
Total non-performing loans 1,140 578 484
</TABLE>
49
<PAGE> 48
<TABLE>
RATIOS
<S> <C> <C> <C>
Allowance for loan loss to
period-end loans 1.19% 0.98% 0.91%
Net charge-offs to average loans (0.12%) 0.07% 0.40%
Recoveries to charge-offs 202.75% 8.33% 7.71%
Non-performing loans to gross loans 1.15% 0.61% 0.54%
EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized 30 13 80
Income that would have been recognized
in accordance with the original
loan terms 52 23 201
</TABLE>
Table 3
OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
% of % of % of
Average Average Average
(in thousands) Amount Assets Amount Assets Amount Assets
<S> <C> <C> <C> <C> <C> <C>
Non-interest expense 4,214 2.83% 4,028 2.86% 4,214 3.15%
Non-interest income 1,006 0.68% 778 0.55% 598 0.45%
---------------------------------------------------------
Net non-interest expense 3,208 2.15% 3,250 2.31% 3,616 2.70%
=========================================================
</TABLE>
Table 4
Three-Year Comparison of Average Balance Sheets
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
Percent of Percent of Percent of
(in thousands) Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold
and short term investments 3,957 2.66% 2,759 1.96% 2,983 2.23%
Interest bearing deposits
in banks 43 0.03% 34 0.02% 95 0.07%
Taxable investment
securities 35,475 23.85% 32,058 22.80% 30,364 22.67%
Tax-exempt investment
securities 4,862 3.27% 4,163 2.96% 6,463 4.83%
Loans, net of unearned
income 94,034 63.23% 91,141 64.83% 84,901 63.38%
-----------------------------------------------------------
Total earning assets 138,371 93.04% 130,155 92.58% 124,806 93.18%
Cash and due from banks 5,196 3.49% 5,128 3.65% 4,799 3.58%
Bank premisis and equipment 3,463 2.33% 3,762 2.68% 2,514 1.88%
</TABLE>
50
<PAGE> 49
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Other non-earning assets 1,685 1.13% 1,548 1.10% 1,807 1.36%
--------------------------------------------------------
Total non-earning assets 10,344 6.96% 10,438 7.42% 9,120 6.82%
--------------------------------------------------------
TOTAL ASSETS 148,715 100.00% 140,593 100.00% 133,926 100.00%
========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
Interest bearing demand 4,933 3.32% 4,111 2.92% 3,869 2.89%
Savings accounts 30,056 20.21% 27,920 19.86% 27,663 20.66%
Time deposits 62,005 41.69% 64,257 45.70% 62,826 46.91%
--------------------------------------------------------
Total interest bearing
deposits 96,994 65.23% 96,288 68.49% 94,358 70.46%
Short-term borrowings 12,411 8.35% 7,007 4.98% 6,036 4.51%
Long-term borrowings 2,754 1.85% 3,444 2.45% 1,021 0.76%
--------------------------------------------------------
Total interest bearing
liabilities 112,159 75.43% 106,739 75.92% 101,415 75.72%
Non-interest bearing
deposits 13,725 9.23% 11,908 8.47% 10,819 8.08%
Other liabilities 957 0.64% 1,088 0.77% 1,372 1.02%
--------------------------------------------------------
Total liabilities 126,841 85.29% 119,735 85.16% 113,606 84.83%
Stockholders' Equity/
Capital 21,874 14.71% 20,858 14.84% 20,320 15.17%
--------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY/CAPITAL 148,715 100.00% 140,593 100.00% 133,926 100.00%
</TABLE>
Table 5
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Held-to-Maturity
US Treasury 11,403 15,399 14,767
US Government Agency 9,341 6,393 5,477
Tax-exempt obligations 3,118 3,902 4,297
Other securities 1,003 100 100
----------------------------
Total carrying value 24,865 25,794 24,641
----------------------------
Total market value 24,939 26,101 23,875
</TABLE>
51
<PAGE> 50
<TABLE>
<S> <C> <C> <C>
Available-for-Sale
US Treasury 2,758 4,777 5,248
US Government Agency 7,2277 5,900 5,244
Tax-exempt obligations 0 109 206
Other securities 717 786 745
----------------------------------
Total market value 10,702 11,572 11,443
----------------------------------
Total Securities 35,567 37,366 36,084
----------------------------------
</TABLE>
Table 6
MATURITY OF INVESTMENT SECURITIES
December 31, 1996
<TABLE>
<CAPTION>
Within After One but After Five but
One Within Five Within Ten After Ten No Fixed
Year Years Years Years Maturity Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
US Treasury 2,518 4.55% 8,885 6.51% 0 0.00% 0 0.00% 0 0.00% 11,403 6.08%
US Government Agency 3,446 5.26% 4,056 6.93% 0 0.00% 1,839 6.80% 0 0.00% 9,341 6.29%
Tax-exempt obligations 917 4.58% 2,201 4.46% 0 0.00% 0 0.00% 0 0.00% 3,118 4.50%
Other securities 0 0.00% 0 0.00% 0 0.00% 1,003 7.56% 0 0.00% 1,003 7.56%
-------------------------------------------------------------------------------------------------------
Total 6,881 4.91% 15,142 6.32% 0 0.00% 2,842 7.07% 0 0.00% 24,865 6.02%
-------------------------------------------------------------------------------------------------------
Available-for-Sale
US Treasury 1,753 6.02% 1,005 5.95% 0 0.00% 0 0.00% 0 0.00% 2,758 5.99%
US Government Agency 0 0.00% 3,961 5.41% 1,915 6.43% 851 6.53% 0 0.00% 6,727 5.84%
Tax-exempt obligations 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Other securities 200 6.20% 551 6.75% 0 0.00% 0 0.00% 466 7.00% 1,217 6.76%
-------------------------------------------------------------------------------------------------------
Total 1,953 6.04% 5,517 5.64% 1,915 6.43% 851 6.53% 466 7.00% 10,702 5.99%
-------------------------------------------------------------------------------------------------------
Grand Total 8,834 5.16% 20,659 6.14% 1,915 6.43% 3,693 6.94% 466 7.00% 35,567 6.01%
=======================================================================================================
</TABLE>
Table 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31,1996
<TABLE>
<CAPTION>
Greater than
(in thousands) Time Remaining to Maturity one year
After one Fixed Floating
Due Within but Within After Five Interest Interest
One Year Five Years Years Total Rate Rate
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage 19,478 35,707 298 55,475 36,005 0
</TABLE>
52
<PAGE> 51
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Real estate-construction 1,314 29 0 1,343 29 0
Consumer 7,523 12,037 18 19,586 12,055 0
Commercial 16,362 6,041 620 23,023 6,661 0
-------------------------------------------------------------
Goss Loans 44,677 53,814 936 99,427 54,750 0
-------------------------------------------------------------
</TABLE>
Table 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID
<TABLE>
<CAPTION>
(in thousands)
Years Ended December 31,
1996 1995 1994
Average Percent of Average Average Percent of Average Average Percent of Average
Balance Total Rate Balance Total Rate Balance Total Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits 13,725 12.40% -- 11,908 11.01% -- 10,819 10.29% --
Interest bearing
demand deposits 4,933 4.46% 1.44% 4,111 3.80% 1.53% 3,869 3.68% 1.58%
Savings deposits 30,056 27.15% 3.05% 27,920 25.81% 2.99% 27,663 26.30% 2.48%
Time deposits 62,005 56.00% 5.79% 64,257 59.39% 5.58% 62,826 59.73% 5.03%
-------------------------------------------------------------------------------------
Total 110,719 100.00% 4.72% 108,196 100.00% 4.66% 105,177 100.00% 4.14%
=====================================================================================
Table 9
MATURITY OF TIME DEPOSITS
December 31, 1996 Time Remaining to Maturity
<CAPTION>
Due Within Four to Seven to After
Three Months Six Months Twelve Months Twelve Months Total
<S> <C> <C> <C> <C> <C>
Certificates of Deposit
Less than $100,000 9,541 7,599 14,215 24,553 55,908
More than $100,000 616 1,144 1,903 2,511 6,174
-------------------------------------------------------
Total 10,157 8,743 16,118 27,064 62,082
=======================================================
Table 10
Short-term Borrowings
1996 1995 1994
Balance outstanding December 31,
Repurchase agreements 7,405 9,680 4,047
Fed funds purchased 0 0 0
----------------------
7,405 9,680 4,047
----------------------
Weighted rate December 31,
Repurchase agreements 5.01% 4.95% 4.73%
Fed funds purchased 0.00% 0.00% 0.00%
----------------------
</TABLE>
53
<PAGE> 52
<TABLE>
<CAPTION>
5.01% 4.95% 4.73%
=======================
<S> <C> <C>
Maximum month-end outstanding balance
Repurchase agreements 17,202 11,055 10,582
Fed funds purchased 6,000 5,100 2,300
Year-to-date average amount outstanding
Repurchase agreements 11,970 6,140 5,758
Fed funds purchased 441 867 278
----------------------
12,411 7,007 6,036
----------------------
Year-to-date average weighted rate
Repurchase agreements 5.16% 5.31% 4.24%
Fed funds purchased 5.71% 6.11% 4.66%
-----------------------
5.18% 5.41% 4.26%
=======================
</TABLE>
Table 11
Interest Rate Risk Exposure
<TABLE>
<CAPTION>
Two- Four- Seven- Ten- Over
December 31, 1996 One three six nine twelve one
(in thousands) Month months months months months year Total
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and
short-term investments 4,678 0 0 0 0 0 4,678
Interest bearing deposits 32 0 0 0 0 0 32
Taxable investment securities 3,215 63 2,206 748 2,151 23,407 31,790
Tax-exempt investment
securities 0 0 566 101 250 2,201 3,118
Loans 17,444 4,689 6,436 6,489 9,619 54,750 99,427
------------------------------------------------------
Total interest-earning assets 25,369 4,752 9,208 7,338 12,020 80,358 139,045
------------------------------------------------------
Interest bearing demand
deposits 4,790 4,790
Savings deposits 28,245 28,245
Time deposits 3,227 6,930 8,743 7,693 8,425 27,064 62,082
Repurchase agreements 7,405 7,405
Long-term borrowings 25 300 600 1,350 2,275
------------------------------------------------------
Total interest-bearing
liabilities 43,692 6,930 9,043 8,293 8,425 28,414 104,797
------------------------------------------------------
Net gap (18,323) (2,178) 165 (955) 3,595 51,944 34,248
Cummualtive Gap (18,323)(20,501)(20,336)(21,291)(17,696) 34,248
% of total assets (12.10%)(13.53%)(13.42%)(14.05%)(11.68%) 22.61%
Table 12
</TABLE>
54
<PAGE> 53
<TABLE>
<CAPTION>
Capital Ratios
1996 1995 Regulatory
Ratio Ratio Requirement
<S> <C> <C> <C>
Equity as a percent of assets 14.54% 13.62% N/A
Core capital as a percent of assets 14.37% 13.51% N/A
Core capital as a percent of risk based 22.27% 22.88% 4.00%
Total capital as a percent of risk base 23.47% 23.89% 8.00%
Leverage ratio 15.08% 14.60% 3.00%
Table 13
Selected Financial Ratios
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Return on average assets 1.16% 1.05% 0.70% 1.25% 1.19%
Return on equity 7.85% 7.06% 4.63% 8.24% 8.36%
Equity to assets 14.54% 13.62% 14.10% 15.15% 14.23%
Dividend payout ratio 49.32% 46.88% 65.57% 27.99% 29.88%
Interest rate spread 3.39% 3.39% 3.38% 3.79% 3.56%
Net interest margin 4.33% 4.27% 4.19% 4.58% 4.46%
Non-interest expense to assets 2.15% 2.86% 3.15% 2.70% 2.57%
Allowance for loan losses to
total loans at end of period 1.19% 0.98% 0.91% 1.08% 1.25%
Non-performing assets to total
assets at end of period .75% 0.40% 0.35% 0.23% 0.46%
Table 14
Quarterly Financial Information
<CAPTION>
1996 1995
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income 2,867 2,849 2,839 2,768 2,748 2,706 2,608 2,520
Interest expense 1,314 1,342 1,375 1,363 1,314 1,353 1,269 1,143
----------------------------------------------------------
Net interest income 1,553 1,507 1,464 1,405 1,434 1,353 1,339 1,377
Provision for loan loss 25 35 40 45 45 45 45 45
Other income 267 249 255 235 240 213 189 136
Other expense 1,070 1,060 1,040 1,044 1,070 1,004 979 979
-----------------------------------------------------------
Income before income
tax 725 661 639 551 559 517 504 489
Applicable income taxes 238 221 210 179 119 165 163 154
-----------------------------------------------------------
Net income 487 440 429 372 440 352 341 335
===========================================================
Per share data
Earnings 0.20 0.19 0.18 0.16 0.19 0.15 0.15 0.15
Dividends 0.10 0.10 0.10 0.08 0.08 0.08 0.07 0.07
</TABLE>
55
<PAGE> 54
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price ranges
-hi 13.50 11.50 10.50 10.75 13.00 13.25 11.50 11.33
-low 10.88 10.50 11.75 12.00 11.00 11.00 8.67 8.67
Book value per share 9.64 9.50 9.39 9.35 9.28 9.15 9.08 8.96
</TABLE>
56
<PAGE> 55
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) Directors of the registrant. The information that will appear under
"Election of Directors" in the definitive Proxy Statement to be prepared
and filed for the Company's Annual Meeting of Stockholders on May 14, 1997
is incorporated herein by this reference.
(b) Executive officers of the Registrant. The information presented in Item 1
on page 11 of this report is incorporated herein by this reference.
ITEM 10 EXECUTIVE COMPENSATION
The information that will appear under "Director and Executive Compensation" in
the definitive Proxy Statement to be prepared and filed for the Company's
Annual Meeting of Stockholders on May 14, 1997 is incorporated herein by this
reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information that will appear under "Beneficial Ownership of Securities" in
the definitive Proxy Statement to be prepared and filed for the Company's
Annual Meeting of Stockholders on May 14, 1997 is incorporated herein by this
reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information that will appear under "Certain Transactions with Management
and Others" in the definitive Proxy Statement to be prepared and filed for the
Company's Annual Meeting of Stockholders on May 14, 1997 is incorporated herein
by this reference.
ITEM 13 EXHIBITS AND REPORTS FORM 8-K
(a) Documents Filed:
1 and 2. Financial Statements. See the following "Index to Financial
Statements," which is incorporated herein by this reference.
3. Exhibits. See "Exhibit Index" which is incorporated herein by
this reference.
(b) Reports On Form 8-K:
There was one report on Form 8-K filed during the fourth quarter of 1996.
This report relates to the Company's pending purchase of Rochelle Bancorp,
Inc.
57
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 27, 1997.
Blackhawk Bancorp, Inc.
By /s/ James P. Kelley
-----------------------------------
James P. Kelley
Executive Vice President
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 27, 1997.
Principal Executive Officer and Director:
Director, President and /s/ Dennis M. Conerton
Chief Executive Officer -----------------------
Dennis M. Conerton
Principal Financial Officer, Accounting
Officer and Director: /s/ Jesse L. Calkins
Director, Senior Vice President, ----------------------
Treasurer and Chief Financial Officer Jesse L. Calkins
Directors:
/s/ John B. Clark /s/ James P. Kelley
- ----------------------- ------------------------
John B. Clark James P. Kelley
/s/ Dr. H. Daniel Green /s/ Fred Klett
- ----------------------- ------------------------
Dr. H. Daniel Green Fred Klett
/s/ Charles Hart /s/ George Merchant
- ----------------------- ------------------------
Charles Hart George Merchant
/s/ Kenneth A. Hendricks /s/ Roger Taylor
- ----------------------- ------------------------
Kenneth A. Hendricks Roger Taylor
58
<PAGE> 57
Blackhawk Bancorp, Inc.
Index To Financial Statements And Financial Statement Schedules
The following Consolidated Financial Statements of the Blackhawk Bancorp, Inc.
are located in Item 7 of this 10-KSB. 10-KSB page as indicated:
<TABLE>
<CAPTION>
Annual
Report Pages
---------------
<S> <C>
Report of Independent Public Accountants..................18
Consolidated Balance Sheets - December 31, 1996
and 1995................................................19
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994........................20
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994.....23-24
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994..................25
Notes to the Consolidated Financial Statements....... 26-45
</TABLE>
59
<PAGE> 58
Blackhawk Bancorp, Inc.
Exhibit Index To
1996 Annual Report on Form 10-KSB
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed Page
Number Description By Reference To: Herewith No.
- ------ ----------- ------------------- ---------- ----
<S> <C> <C> <C> <C>
3.1 Amended and Restated Articles of Exhibit 3.1 to Amendment No. 1 to
Incorporation of Blackhawk Bancorp, Registration Statement on Form S-1
Inc. (Reg. No. 33-32351)
3.2 By-Laws of Blackhawk Bancorp, Inc., Exhibit 3.2 to Amendment No. 1 to
as amended. Registration Statement on Form S-1
3.3 Amendments to By-Laws of Blackhawk Exhibit 3.3 to 1994 Form 10-KSB
Bancorp, Inc., as amended. dated March 29, 1995
3.4 Amendments to By-Laws of Blackhawk Exhibit 3.4 to 1994 Form 10-KSB
Bancorp, Inc., as amended. dated March 29, 1995.
4.1 Sections 15 and 19 of Plan of Exhibit 1.2 to Amendment No. 1 to
Conversion of Beloit Savings Bank, Registration Statement on Form-1
as amended (No. 33-32351) filed on March 5, 1990.
10.12 Blackhawk State Bank Officer Exhibit 10.12 to 1996 Form 10-KSB, X
Bonus Plan, as amended dated March 28, 1997
10.2 Written description of Plan for Life Proxy Statement for its Annual Meeting
Insurance of Blackhawk State Bank of Stockholders, on May 8, 1991, dated
April 4, 1991
10.3 Blackhawk Bancorp, Inc. Employee Exhibit 10.3 to 1990 Form 10-K,
Stock Ownership Plan dated March 31, 1990
10.31 Amendment to Blackhawk Bancorp, Inc. Exhibit 10.31 to 1994 Form 10-KSB,
Employee Stock Ownership Plan dated March 29, 1995
10.4 Blackhawk Bancorp, Inc. Employee Exhibit 10.4 to Amendment No. 1 to
Stock Ownership Trust Registration Statement Form S-1
(No. 33-32351)
</TABLE>
60
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed Page
Number Description By Reference To: Herewith No.
- ------ ----------- ------------------- ---------- ----
<S> <C> <C> <C> <C>
10.5 Blackhawk Bancorp, Inc. Exhibit 10.5 to Amendment No. 1 to
Directors' Stock Option Plan Registration Statement Form S-1
(No. 33-32351)
10.6 Blackhawk Bancorp, Inc. Exhibit 10.6 to
Executive Stock Option Plan Registration Statement Form S-1
(No. 33-32351)
10.7 Form of Severance Payment
Agreement entered into
between Blackhawk State
Bank and Messrs. Calkins,
Kelley and Rusch
10.71 Form of Severance Payment Exhibit 10.8 to Amendment No. 1
Agreement entered into to Registration Statement Form S-1
between Blackhawk State Bank (No. 33-32351)
and Mr. Conerton
10.8 Blackhawk Bancorp, Inc. Exhibit 10.8 to 1994 Form 10-KSB,
Directors' Stock Option Plan dated March 29, 1995
10.9 Blackhawk Bancorp, Inc. Exhibit 10.9 to 1994 Form 10-KSB, dated
Executive Stock Option Plan March 29, 1995
13 1996 Annual Report to Stockholders Proxy Statement for its Annual Meeting x
of Stockholders on May 14, 1997, dated
April 2, 1997
21 Subsidiaries of Registrant x
23 Proxy Statement for its Annual Meeting Proxy Statement for its Annual Meeting of
of Stockholders on May 14, 1997 Stockholders on May 14, 1997, dated
April 2, 1997
27 Financial Data Schedule x
</TABLE>
61
<PAGE> 1
Exhibit 10.12
BLACKHAWK STATE BANK
OFFICER BONUS PLAN
1. Purpose
The purpose of a Blackhawk State Bank (the "Bank") Officer Bonus Plan
(the "Bonus Plan") is to provide annual incentive bonuses to certain officers
who contribute significantly to the performance of Blackhawk State Bank and its
holding company, Blackhawk Bancorp, Inc. (the "Holding Company"). The Bonus
Plan is intended to reinforce corporate goals and enhance the ability of the
Bank to attract and retain officers of superior managerial ability and to
motivate them to use their best efforts towards the Bank's and Holding
Company's progress and profitability.
2. Definitions
"Compensation Committee" means the salary and compensation committee
of the Board of Directors of the Holding Company and the Bank.
"Executive Committee" means the executive committee of the Board of
Directors of the Holding Company and the Bank.
"Covered Officer" means an officer of the Bank and/or Holding Company
designated by the Compensation Committee to be covered by this Bonus Plan, from
time to time.
"Base Salary" of a Covered Officer means the annual salaried earnings,
exclusive of incentive earnings, bonuses, imputed income attributable to
employee benefits, stock option grants, and the like, but shall include any
voluntary salary reductions such as savings plan contributions.
3. Choosing the Covered Officers
The President of the Bank shall, at the beginning of each calendar
year, recommend to the Compensation Committee, and by January 31 the
Compensation Committee shall designate the Bank and/or Holding Company officers
who will be the Covered Officers for that current year. Until designated
otherwise by the Compensation Committee, the following Bank officers shall be
covered by the Covered Officer:
Chief Executive Officer
President
Senior Officers
Executive Vice President
Senior Vice President
Vice President - Commercial Lending
Other Officers
Vice President - Lending
Assistant Vice President
Cashier
<PAGE> 2
Trust Officer
Assistant Cashiers
4. Establishing Bonus Limits
By January 31 of each year, based upon the recommendation of the
President of the Bank, the Compensation Committee shall establish the maximum
potential bonus for each Covered Officer, stated as a percentage of Base
Salary. Until designated otherwise by the Compensation Committee, the maximum
potential bonus ("Maximum Potential Bonus") for the Covered Officers shall be
as follows:
<TABLE>
<CAPTION>
Maximum Potential
Bonus as a % of
Covered Officers Base Salary
---------------- -----------------
<S> <C>
President 50%
Executive Vice President 20%
Senior Vice President 20%
Vice President - Commercial Lending 20%
Vice President - Lending 15%
Assistant Vice President 15%
Cashier 15%
Trust Officer 15%
Assistant Cashiers 15%
</TABLE>
The actual bonus shall be comprised of bonuses earned for achieving
both corporate performance goals and individual performance goals, as otherwise
explained in this Bonus Plan, however, shall not exceed the Maximum Potential
Bonus.
5. Criteria for Awarding Bonuses
The criteria for the awarding of bonuses shall be based upon the
achievement of certain corporate performance goals and certain individual
performance goals. The corporate performance goals shall be based upon the
audited consolidated financial results of the Bank and Holding Company.
Each Covered Officer's bonus shall be given a weighted mix, based upon
a) the achievement of corporate performance goals, and b) the achievement of
individual performance goals; both to be stated as a percentage of the Maximum
Potential Bonus, with the Maximum Potential Bonus representing 100 percent.
The weighted mix between corporate performance goals and individual
performance goals for each Covered Officer, stated as a percentage of the
Maximum Potential Bonus, until designated otherwise by the Compensation
Committee, is as follows:
o CEO and Senior Officers
- 80 percent of the Maximum Potential Bonus shall be
based upon corporate performance goals; and
- 20 percent of the Maximum Potential Bonus shall be
based upon individual performance goals
o Other Officers
<PAGE> 3
- 60 percent of the Maximum Potential Bonus shall be
based upon corporate performance goals; and
- 40 percent of the Maximum Potential Bonus shall be
based upon individual performance goals
6. Establishing Performance Goals
A. Corporate Performance Goals
On or before January 31 of each year, the Executive Committee
shall establish the corporate performance goals for that current year. The
corporate performance goals shall be made up of two parts, which are as
follows:
(i) Fifty percent of the corporate performance goals
shall be based upon the current year's Return on Assets ("ROA"), (the average
ROA during the year for the consolidated statement of the Bank and the Holding
Company); and
(ii) Fifty percent of the corporate performance goals
shall be based upon the Profit Plan, which includes the consolidated (Bank and
Holding Company) operating budget for revenues and expenses, and is defined as
the annual profitability level (excess of revenues over expenses).
By January 31 of each year, the Executive Committee shall
establish the Minimum ROA achievement level and the Target ROA achievement
level, and shall establish a Minimum Profit Plan achievement level and a Target
Profit Plan achievement level.
Example:
<TABLE>
<CAPTION>
Minimum ROA Target ROA
Achievement Level Achievement Level
----------------- -----------------
<S> <C> <C>
ROA .90 .99
<CAPTION>
Minimum Profit Plan Target Profit Plan
Achievement Level Achievement Level
----------------- -----------------
<S> <C> <C>
Profit Plan $1,260,000 $1,386,000
</TABLE>
If the Minimum ROA achievement level is reached, 50 percent of the
bonus allocated to the ROA portion of the bonus allocated to the ROA portion of
the corporate performance goal bonus shall be earned, and if the Target ROA
achievement level is reached, 100 percent shall be earned. If the ROA falls in
between the Minimum ROA achievement level and the Target ROA achievement level,
the bonus shall be pro-rated, on a proportionate basis. For example, if the
actual performance falls halfway between the Minimum ROA achievement level and
the Target ROA achievement level, the bonus will be 75 percent of the maximum
bonus allocated to the ROA portion.
By the same token, if the Minimum Profit Plan achievement level is
reached, 50 percent of the bonus allocated
<PAGE> 4
to the Profit Plan portion of the corporate performance goal bonus shall be
earned, and if the Target Profit Plan achievement level is reached, 100 percent
shall be earned. If the Profit Plan falls in between the Minimum Profit Plan
achievement level and the Target Profit Plan achievement level, the bonus shall
be pro-rated, on a proportionate basis.
B. Individual Performance Goals
Individual performance goal bonuses may be earned, regardless
of whether any of the corporate performance goals are achieved.
At the beginning of each year the President of the Bank shall
recommend, and by January 31 the Compensation Committee shall determine,
the individual performance goals for each Covered Officer (at least two goals
for each) for the current year. The individual performance goal shall have
only one degree of achievement established for each goal; you either achieve
it, or you receive no bonus allocated to that performance goal.
In calculating this, the maximum bonus allocated to the
individual performance goal portion of the total bonuses shall first
be divided by the number of goals specified for that Covered Officer.
If, for example, there are three goals for a Covered Officer,
first the maximum bonus available for individual performance goals
shall be ascertained and divided by three. Next, the bonus for each of the
three goals shall be calculated, based upon whether each goal was achieved.
By march 15 of each year, after receiving recommendations from
the President of the Bank, the Compensation Committee shall determine, for each
Covered Officer, whether each of the performance goals for the preceding year
has or has not been achieved.
7. Payment of Bonuses
All bonuses to be paid under this Bonus Plan for each year shall be
paid by April 15 of the following year. The ROA and Profit Plan shall be
determined from the audited financial statements for the year in question.
8. Termination of Employment
A. Death
In the event of the death of a Covered Officer, the estate of
the Covered Officer shall be paid the maximum bonus allocated to individual
performance goals, as if the year were completed and all of the goals achieved,
plus any bonus which would have been earned for achieving corporate performance
goals, if the Covered Officer had lived through the year end.
B. Disability
In the event of the disability of a Covered Officer, the bonus
allocated to individual performance goal achievement and the bonus allocated to
corporate performance goal achievement shall be calculated in the same manner
as for other Covered Officers; and the disabled Covered Officer shall be paid a
pro-rata portion of the bonus, based upon the percentage of the year he or she
actually worked.
C. Voluntary Termination
In the event of voluntary termination before the end of the
year, a Covered Officer shall not
<PAGE> 5
be paid any bonus under this Bonus Plan for such year.
D. Involuntary Termination
In the event of the involuntary termination of a Covered
Officer, the bonus allocated to individual performance goal achievement
and the bonus allocated to corporate performance goal achievement shall be
calculated in the same manner as for other Covered Officers, and the
involuntarily terminated Covered Officer shall be paid a pro-rata portion of
the bonus, based upon the percentage of the year he or she actually worked.
E. Retirement
In the event of the retirement of a Covered Officer, the bonus
allocated to individual performance goal achievement and the bonus allocated to
corporate performance goal achievement shall be calculated in the same manner
as for other Covered Officers, and the retired Covered Officer shall be paid a
pro-rata portion of the bonus, based upon the percentage of the year he or she
actually worked.
9. Employment Rights of Covered Officers
Nothing in this Plan shall interfere with or limit in any way the
right of the Bank and/or Holding Company to terminate any Covered Officer's
employment at any time.
10. Administration of the Bonus Plan
The Compensation Committee shall be responsible for the administration
of the Bonus Plan. The Compensation Committee shall, in its own judgment, and
its decision in this regard shall be final, interpret this Bonus Plan if there
are any disputes, or questions of Bonus Plan construction.
Any rules and regulations adopted by the Compensation Committee
relating to the administration of the Bonus Plan shall be conclusive and
binding on all parties.
11. Amendment, Modifications, Termination of the Bonus Plan
The Board of Directors of the Bank and of the Holding Company, upon
recommendation of the Compensation Committee, at any time, may terminate, amend
or modify the Bonus Plan; however, no amendment, modification or termination
which occurs after January 31 of any year, may reduce the bonus which would
have otherwise been paid to a Covered Officer during such year, if the
amendment, modification or termination had not occurred.
Amendments and/or modifications and/or terminations may be made with
or without prior notice to the Covered Officers.
<PAGE> 6
February 13,1991
ADDENDUM TO BSB OFFICER BONUS PLAN
This addendum, passed by unanimous vote of the Directors at the regularly
scheduled meeting held February 13, 1991, is to clarify 6B Individual
Performance Goals. The clarification addresses who shall approve the
individual goals of the President and determine if they were achieved.
"At the beginning of each year the President of the Bank will submit his
individual goals for the current year to the Executive Committee for
approval by January 31st.
My March 15th of the following year, the Executive Committee shall determine if
the individual goals for the preceding year have or have not been achieved.
This information will then be forwarded to the Compensation Committee."
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
(in thousands except for per share data)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income.................................. $11,323 $ 10,582 $9,346 $9,588 $10,491
Interest expense................................. 5,394 5,079 4,224 4,277 5,343
------- --------- ------ ------ ------
Net interest income.............................. 5,929 5,503 5,122 5,311 5,148
Provision for loan losses........................ 145 180 220 120 238
------- --------- ------ ------ ------
Net income after provision for loan losses....... 5,784 5,323 4,902 5,191 4,910
Gains from sale of securities.................... -- 18 -- -- --
Non-interest income, less gains from sales
of securities.................................. 1,006 760 598 623 482
Non-interest expense............................. 4,214 4,028 4,214 3,464 3,246
------- --------- ------ ------ ------
Income before income taxes....................... 2,576 2,073 1,286 2,350 2,146
Income tax expense............................... 848 601 346 745 645
------- --------- ------ ------ ------
NET INCOME....................................... $1,728 $ 1,472 $ 940 $1,605 $1,501
------- --------- ------ ------ ------
Income per common share (1)...................... $ 0.73 $ 0.64 $ 0.41 $ 0.71 $ 0.67
------- --------- ------ ------ ------
Cash dividend declared per share (1)............. $ 0.36 $ 0.30 $ 0.27 $ 0.20 $ 0.20
------- --------- ------ ------ ------
</TABLE>
(1) Restated for a 2 for 1 stock split as of March 31, 1994, and a 3 for 2
stock split as of June 15, 1995.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets...................................... $151,484 155,531 141,570 $135,181 $133,298
Securities, net................................... 35,567 37,366 36,084 34,907 33,722
Total loans, net.................................. 98,241 93,548 88,716 86,256 79,804
Deposits.......................................... 118,311 119,717 114,738 109,662 107,932
Repurchase agreements and federal funds purchased 7,405 9,680 4,047 4,319 5,237
Long-term debt................................... 2,275 3,629 1,533 186 240
Total capital.................................... 22,029 21,189 19,962 19,697 18,463
</TABLE>
TOTAL AVERAGE DEPOSITS (in thousands of dollars)
[BAR CHART]
TOTAL AVERAGE ASSETS (in thousands of dollars)
[BAR CHART]
NET INTEREST INCOME (in thousands of dollars)
[BAR CHART]
BLACKHAWK BANCORP 1 ANNUAL REPORT 1996
<PAGE> 2
Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, 1996, and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------------------
<S> <C> <C>
Cash and cash equivalents............................................................... $ 7,966,929 $ 7,589,600
Federal funds sold and other short-term investments..................................... 4,677,596 11,734,905
Securities:
Held-to-maturity...................................................................... 24,864,640 25,794,108
Available-for-sale.................................................................... 10,701,911 11,571,581
Loans, net of allowance for loan losses of $1,185,672 in 1996 and $928,817 in 1995...... 98,241,019 93,548,027
Bank premises and equipment, net........................................................ 3,463,491 3,732,418
Accrued interest receivable............................................................. 1,041,756 1,217,561
Income tax receivable................................................................... 94,638 35,812
Other assets............................................................................ 432,025 307,436
--------------------------
TOTAL ASSETS.......................................................................... $151,484,005 $155,531,448
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing.................................................................. $ 23,193,906 $ 22,513,544
Interest bearing...................................................................... 95,116,941 97,203,385
--------------------------
TOTAL DEPOSITS...................................................................... 118,310,847 119,716,929
--------------------------
Borrowed funds:
Short-term borrowings................................................................ 7,405,451 9,679,833
Long-term borrowings................................................................. 2,275,456 3,629,027
--------------------------
TOTAL BORROWED FUNDS............................................................... 9,680,907 13,308,860
--------------------------
Accrued interest payable............................................................. 680,226 693,364
Other liabilities.................................................................... 782,827 622,811
--------------------------
TOTAL LIABILITIES.................................................................. 129,454,807 134,341,964
--------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share; authorized 1,000,000 shares; issued, none -- --
Common stock, $.01 par value per share; authorized 10,000,000 shares;
issued and outstanding 2,285,864 in 1996 and 2,282,615 in 1995.................... 22,859 22,826
Additional paid in capital.......................................................... 6,960,550 6,946,370
Employee stock options earned....................................................... 94,764 52,165
Retained earnings................................................................... 15,072,129 14,210,036
Less treasury stock, at cost........................................................ (84,305) --
Net unrealized gains (losses) on securities available-for-sale...................... (11,343) 37,114
--------------------------
22,054,654 21,268,511
Less: Deferred compensation related to employee stock ownership
plan debt guarantee............................................................ (25,456) (79,027)
--------------------------
TOTAL STOCKHOLDERS' EQUITY..................................................... 22,029,198 21,189,484
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $151,484,005 $155,531,448
==========================
</TABLE>
BLACKHAWK BANCORP 6 ANNUAL REPORT 1996
<PAGE> 3
Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
NTEREST INCOME:
Interest and fees on loans................................... $ 8,777,209 $ 8,327,565 $ 7,270,387
Interest on securities:
Taxable...................................................... 2,122,793 1,895,205 1,650,537
Exempt from Federal income taxes............................. 221,105 199,168 302,878
Interest on federal funds sold and other short-term investments 201,741 160,031 122,381
-------------------------------------
TOTAL INTEREST INCOME...................................... 11,322,848 10,581,969 9,346,183
-------------------------------------
INTEREST EXPENSE:
Interest on deposits............................................ 4,578,120 4,485,677 3,907,408
Interest on short-term borrowings............................... 642,894 379,219 256,640
Interest on long-term borrowings................................ 173,090 214,223 59,878
-------------------------------------
TOTAL INTEREST EXPENSE..................................... 5,394,104 5,079,119 4,223,926
-------------------------------------
NET INTEREST INCOME........................................ 5,928,744 5,502,850 5,122,257
Provision for loan losses....................................... 145,000 180,000 220,000
-------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........ 5,783,744 5,322,850 4,902,257
-------------------------------------
OTHER OPERATING INCOME:
Trust department income......................................... 121,739 87,826 73,383
Service fees.................................................... 568,951 467,800 412,991
Realized gains on securities.................................... -- 17,785 --
Gain on sale of loans........................................... 75,372 37,996 29,331
Other income.................................................... 239,735 166,496 82,413
-------------------------------------
TOTAL OTHER OPERATING INCOME............................... 1,005,797 777,903 598,118
-------------------------------------
OTHER OPERATING EXPENSES:
Salaries and wages............................................. 1,767,328 1,640,139 1,430,820
Employee benefits.............................................. 436,445 357,297 455,052
Occupancy expense of bank premises............................. 309,313 300,160 239,169
Furniture and equipment........................................ 349,928 383,072 296,712
Data processing................................................ 320,109 299,447 391,707
Federal deposit insurance premiums............................. 2,000 127,272 239,208
Professional fees.............................................. 199,373 207,417 365,522
Advertising and marketing...................................... 112,790 118,236 105,111
Other operating expenses....................................... 716,319 595,083 691,123
-------------------------------------
TOTAL OTHER OPERATING EXPENSES.............................. 4,213,605 4,028,123 4,214,424
-------------------------------------
INCOME BEFORE INCOME TAXES.................................. 2,575,936 2,072,630 1,285,951
Provision for income taxes..................................... 847,661 600,743 345,949
-------------------------------------
NET INCOME.................................................. $ 1,728,275 $ 1,471,887 $ 940,002
=====================================
NET INCOME PER SHARE........................................ $ .73 $ .64 $ .41
=====================================
DIVIDENDS PER SHARE......................................... $ .38 $ .30 $ .27
=====================================
</TABLE>
BLACKHAWK BANCORP 7 ANNUAL REPORT 1996
<PAGE> 4
Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, and 1995
<TABLE>
<CAPTION>
Additional
Common Paid in Stock Retained
Stock Capital Options Earnings
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 .......................... $ 7,492 $ 6,777,046 $ 9,384 $13,089,223
Net income .......................................... -- -- -- 940,002
Principal payments on ESOP loan ..................... -- -- -- --
Cash dividends declared on
common stock, $.27 per share ...................... -- -- -- (599,830)
Adoption of FASB #115 ............................... -- -- -- --
Net change in unrealized gains (losses) on securities
available-for-sale ................................. -- -- -- --
Stock Split ......................................... 7,495 -- -- (7,495)
Compensatory employee stock options:
Recognized ........................................ -- -- 17,978 --
Exercised ......................................... 19 13,966 (720) --
--------------------------------------------------
BALANCE, DECEMBER 31, 1994 .......................... 15,006 6,791,012 26,642 13,421,900
Net income .......................................... -- -- -- 1,471,887
Principal payments on ESOP loan ..................... -- -- -- --
Cash dividends declared on common
stock, $.30 per share ............................. -- -- -- (676,140)
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- -- -- --
Stock split ......................................... 7,593 -- -- (7,611)
Compensatory employee stock options:
Recognized ........................................ -- -- 33,697 --
Exercised ......................................... 227 155,358 (8,174) --
--------------------------------------------------
BALANCE, DECEMBER 31, 1995 .......................... 22,826 6,946,370 52,165 14,210,036
Net income .......................................... -- -- -- 1,728,275
Principal payments on ESOP loan ..................... -- -- -- --
Cash dividends declared on common
stock, $.38 per share ............................. -- -- -- (866,182)
Purchase of stock for treasury, 7,578 shares
at $11.13 per share ............................... -- -- -- --
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- -- -- --
Compensatory employee stock options:
Recognized ........................................ -- -- 42,654 --
Exercised or expired .............................. 33 14,180 (55) --
--------------------------------------------------
BALANCE, DECEMBER 31, 1996 .......................... $ 22,859 $ 6,960,550 $ 94,764 $15,072,129
==================================================
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on
Securities
Treasury Available
Stock for Sale Other Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 .......................... -- -- $ (186,170) $ 19,696,975
Net income .......................................... -- -- -- 940,002
Principal payments on ESOP loan ..................... -- -- 53,571 53,571
Cash dividends declared on
common stock, $.27 per share ...................... -- -- -- (599,830)
Adoption of FASB #115 ............................... -- 160,451 -- 160,451
Net change in unrealized gains (losses) on securities
available-for-sale ................................ -- (320,152) -- (320,152)
Stock Split ......................................... -- -- -- --
Compensatory employee stock options:
Recognized ........................................ -- -- -- 17,978
Exercised ......................................... -- -- -- 13,265
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 .......................... -- (159,701) (132,599) 19,962,260
Net income .......................................... -- -- -- 1,471,887
Principal payments on ESOP loan ..................... -- -- 53,572 53,572
Cash dividends declared on common
stock, $.30 per share ............................. -- -- -- (676,140)
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- 196,815 -- 196,815
Stock split ......................................... -- -- -- (18)
Compensatory employee stock options:
Recognized ........................................ -- -- -- 33,697
Exercised ......................................... -- -- -- 147,411
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 .......................... -- 37,114 (79,027) 21,189,484
Net income .......................................... -- -- -- 1,728,275
Principal payments on ESOP loan ..................... -- -- 53,571 53,571
Cash dividends declared on common
stock, $.38 per share ............................. -- -- -- (866,182)
Purchase of stock for treasury, 7,578 shares
at $11.13 per share ............................... (84,305) -- -- (84,305)
Net change in unrealized gains (losses)
on securities available-for-sale .................. -- (48,457) -- (48,457)
Compensatory employee stock options:
Recognized ........................................ -- -- -- 42,654
Exercised or expired .............................. -- -- -- 14,158
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 .......................... (84,305) $ (11,343) $ (25,456) $ 22,029,198
================================================================
</TABLE>
BLACKHAWK BANCORP 8 ANNUAL REPORT 1996
<PAGE> 5
Blackhawk Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Net income ...................................................................... $ 1,728,275 $ 1,471,887 $ 940,002
Adjustments to reconcile net income to net cash provided by operating activities:
Compensatory employee stock options recognized ................................ 42,599 33,697 17,978
Provision for loan losses ..................................................... 145,000 180,000 220,000
Provision for depreciation and amortization ................................... 333,294 348,424 261,124
Amortization of premiums and accretion of discounts on investment securities, net (79,542) 47,621 177,616
Gain on sale of property equipment ............................................ (2,655) -- --
Realized gains on securities .................................................. -- (17,785) --
Gain on sale of loans ......................................................... (75,372) (37,996) (29,331)
Loans originated for sale ..................................................... (5,329,228) (3,232,399) (1,925,082)
Proceeds from sale of loans ................................................... 5,164,200 3,270,395 1,954,413
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable .......................... 175,805 (84,251) (102,056)
(Increase) decrease in other assets ......................................... (183,415) 184,735 (105,651)
Increase in accrued interest and other liabilities .......................... 178,910 26,669 78,870
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 2,097,871 2,190,997 1,487,883
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment .................................. 11,600 -- --
Proceeds from sale of securities available-for-sale ........................... -- 2,027,813 --
Proceeds from maturity of securities held-for-maturity ........................ 11,814,812 6,800,362 8,222,764
Proceeds from maturity of securities available-for-sale ....................... 22,484,382 3,806,860 4,052,950
Purchase of securities held-to-maturity ....................................... (10,872,593) (6,991,719) (9,014,365)
Purchase of securities available-for-sale ..................................... (21,628,410) (6,758,108) (4,882,249)
(Increase) decrease in federal funds sold and other short-term investments, net 7,057,309 (4,683,512) (1,661,477)
Loans originated, net of principal collected .................................. (4,597,592) (5,013,115) (2,680,279)
Purchase of bank premises and equipment ....................................... (73,312) (1,178,618) (747,994)
--------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................ 4,196,196 (11,990,037) (6,710,650)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ........................................... (1,406,082) 4,978,624 5,076,215
Net increase (decrease) in short-term borrowings .............................. (3,574,382) 6,932,833 (272,000)
Proceeds from long-term borrowings ............................................ -- 850,000 1,400,000
Dividends paid ................................................................ (866,182) (676,140) (599,830)
Proceeds from issuance of common stock ........................................ 14,213 147,393 13,265
Purchase of common stock for treasury ......................................... (84,305) -- --
--------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................ (5,916,738) 12,232,710 5,617,650
--------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 377,329 2,433,670 394,883
Cash and cash equivalents:
Beginning .................................................................... 7,589,600 5,155,930 4,761,047
--------------------------------------
Ending .................................................................... $ 7,966,929 $ 7,589,600 $ 5,155,930
======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest on deposits ........................................................ $ 4,593,971 $4,397,371 $3,846,582
Income taxes ................................................................ $ 878,315 $ 710,876 $ 653,175
Interest on borrowed funds .................................................. $ 813,272 $ 567,002 $ 298,320
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Other assets acquired in settlement of loans ................................ $ 225,546 $ 193,200 $ 84,544
Principal payments on ESOP loan ............................................. $ 53,571 $ 53,571 $ 53,571
Common stock issued to effect stock split ................................... -- $ 7,593 $ 7,495
</TABLE>
BLACKHAWK BANCORP 9 ANNUAL REPORT 1996
<PAGE> 6
Blackhawk Bancorp, Inc. and Subsidiary
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Blackhawk Bancorp, Inc. and Subsidiary
Beloit, Wisconsin
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of Blackhawk Bancorp, Inc. and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended; and in our
report dated February 7, 1997, we expressed an unqualified opinion on those
consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated financial statements is fairly stated, in all material respects,
in relation to the consolidated financial statements from which it has been
derived.
[SIGNATURE]
Lindgren, Callihan, Van Osdol & Co., Ltd.
Rockford, Illinois
February 7, 1997
BLACKHAWK BANCORP 10 ANNUAL REPORT
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides additional analysis of the financial
statements presented in the Company's annual report and should be read in
conjunction with this information. This discussion focuses on the significant
factors which affected the Company's earnings in 1996, with comparisons to 1995
and 1994 where applicable. As of December 31, 1996, Blackhawk State Bank (the
"Bank") was the only direct subsidiary of the Company and its operations
contributed nearly all of the revenue and expenses for the year. The Bank's
wholly owned subsidiary, Nevahawk Investment, Inc. ("Nevahawk") is an
investment subsidiary located in Nevada.
OVERVIEW
As of December 31, 1996, total assets of the Company were $151.5
million decreasing 2.6% from $155.5 million as of December 31, 1995. Total
income for 1996 was $1.73 million or $.73 per share, increasing 17.4% from
$1.47 million or $.64 per share, in 1995, which was 57.2% greater than the
$940,000 or $.41 per share, in 1994. The significant items resulting in the
above-mentioned results are discussed below.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees on loans
and interest expense, and is the largest contributing factor to net income for
the Company. All discussions of rate are on a tax-equivalent basis, which
accounts for income earned on securities that are not fully subject to federal
taxes. Net interest income in 1996 was a record $6.0 million, increasing 7.8%
over the 1995 level of $5.6 million which in turn was 6.3% over the 1994 net
interest income of $5.3 million. Net interest income as a percentage of
average earning assets was 4.33% in 1996, 4.27% in 1995, and 4.19% in 1994.
Increases in investment income and income and fees on loans were the largest
factor in the increase of net interest income in 1996. Investment income
increased 11.9% and income and fees on loans increased 5.4%. Nearly all of the
increase in these areas were the result of increased volumes. The average
balance of investments increased by 9.6% in 1996 compared to 1995. Total loans
increased 3.3% for this same period. Commercial and consumer loans continued
to increase in their percentage of the total loan portfolio. Real estate
loans continued to decline as a percent of the portfolio. However, real estate
loans still make up over 57% of the portfolio.
The largest factor in the increase in net interest income from 1994 to 1995 was
income and fees on loans. During 1995, loan income and fees increased 14.5%,
due almost equally to both increased rates and volumes. Loan demand for 1995
was very strong due to an easing in national interest rates along with a
strong local economy. Outstanding commercial loans, including both variable
and fixed rate, increased by 24.2%, in 1995 while the rate earned on these
balances also increased. Outstanding balances for real estate loans remained
static while the rates earned increased. Consumer loan rates remained static
while outstanding balances increased 17.8%. It has been a strategy of the
Company, since its conversion to a commercial bank charter in 1990, to change
the mix of its loan portfolio by increasing the volume of commercial and
consumer loans.
During 1994 the Bank began to offer its own credit card product. During 1995
the Bank also began to offer a home equity line of credit. Balances in both of
these accounts continue to grow in 1996 as consumers become more comfortable
using these financing alternatives. With time these products will contribute a
higher level of interest income.
Securities income increased 4.4%, in 1995 over 1994 levels. The increase in
1995 was due to increased rates, which were partially offset by decreased
volumes in securities.
Interest paid on interest bearing liabilities increased 6.2% in 1996 compared
to 1995. Approximately 84% of the increase was due to increased volume in
short-term borrowings. These borrowings were in the form of repurchase
agreements. The increased cost of interest bearing deposits was due to
increased rates. Interest paid on interest bearing liabilities increased 20.2%
in 1995 as compared to 1994. The rate increases seen in assets, as discussed
above also affect liabilities. Interest paid on interest bearing deposits
increased 14.8% in 1995 as compared to 1994. The largest factor was the
increase in rates paid, and to a lesser extent due to increased volumes.
In order to fund loan demand and leverage its capital base, the Company has
taken advances from the Federal Home Loan Bank ("FHLB") and accepted
repurchase agreements from local municipalities. As specific commercial loan
funding requests come in, FHLB advances are taken to fund these loans. The
repurchase agreements are on a bid basis with varying periods for rebid.
Long-term loans are not funded with repurchase agreements. Also, short-term
borrowings include federal funds purchased. As short-term liquidity needs
arise, the Company may buy federal funds, secure advances from the FHLB, or
borrow from the Federal Reserve Bank.
NONINTEREST INCOME AND
NONINTEREST EXPENSE
Excluding security gains, noninterest income increased by $246,000, or 32.3%
in 1996 compared to 1995. The areas accounting for this increase were trust
fees, $34,000 or 38.7%, service fees, $101,000 or 21.6%, gain on sale of loans,
$37,000 or 98.4%, credit card fees, $15,000 or 23.3% and investment center
commissions, $60,000.
Overall noninterest income, excluding security gains, increased
BLACKHAWK BANCORP 11 ANNUAL REPORT 1996
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$162,000 or 27.1% in 1995 as compared to 1994. Increased service charges
account for approximately half of this increase and result primarily from the
replacement of several of the Company's product offerings with fee based
accounts. Also contributing to the additional income are a 19.6% increase in
trust fees, and a 36.7% increase in credit card fees in 1995. An investment
center selling non-FDIC insured products was opened in the Bank in 1995.
Because this was in its start-up phase, it did not contribute a material amount
to non-interest income.
Noninterest expense increased $185,000 or 4.6% in 1996 compared to 1995.
Increases in salaries, employee benefits, data processing and other expenses
were partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.
Salaries increased $127,000 or 7.8% in 1996 compared to 1995. This increase
was the result of additional new employees hired in 1995, normal salary
increases and an increase in the officer incentive compensation related to
improved financial performance. The increase in employee benefits of $79,000
or 22.2%, is primarily the result of increased health insurance costs. The
other major area of increase was other expenses which increased $121,000 or
20.3%. Two areas that accounted for approximately 54.0% of this increase were
office supplies and postage.
A significant decrease in FDIC premiums of $125,000, was due to the elimination
of premiums for banks that were most highly rated. The $33,000, 8.7%,
reduction in equipment expenses was primarily the result of reduced
depreciation costs.
Noninterest expense decreased $186,000 or 4.4% in 1995 as compared to 1994.
Increases in salaries and benefits, occupancy and equipment expenses, were
offset by decreases in loan collection expenses, FDIC premiums and expenses
related to the 1994 resignation of the Company's former President and CEO.
The bank has received the required regulatory approvals to open its second
in-store branch, which will occur in July 1997. This branch will be located in
a newly constructed Wal-Mart Superstore. Noninterest expenses are expected to
increase as a result of this branch opening.
Salaries and benefits increased 5.9%, or $112,000 in 1995. The primary
contributing factor was the full year of salaries related to the Company's
supermarket branch opened in November, 1994. Also affecting the increase was
the hiring of a full-time marketing officer and investment center executive,
normal adjustments in base salaries for personnel and higher officer incentive
compensation related to improved financial performance. These increases were
partially offset by a decrease in health insurance expense as a result of
changing carriers and 1994 also included costs related to the resignation of
the Company's former President and CEO.
Occupancy expense increased $61,000 or 25.5% in 1995. This was mostly due to
expenses related to the new addition to the Bank's main facility and to a
lesser extent, the addition of a new supermarket branch, opened in November,
1994. Equipment expenses increased $86,000 or 29.1% in 1995. Again, most of
this increase is attributable to the main bank and new branch additions. Also
affecting the increase is the higher depreciation expense related to the new
computer system installed in February, 1994.
Data processing expense decreased $92,000 or 23.6% in 1995. The computer
system installed during 1994 allows more flexibility in processing and also
lowered the cost of data processing services. Loan collection expense
decreased in 1995 by $121,000 or 71.1%. This is mostly due to the legal
expenses incurred in 1994, related to the restructuring of a large
non-performing commercial loan. FDIC premiums in 1995 decreased $112,000 or
46.8%. The FDIC's tiered schedule of premiums was lowered during 1995 to $.06
per hundred dollars from $.23 per hundred dollars of deposits.
Management tracks three ratios related to noninterest income and expense: (1)
Net-noninterest expense as a percentage of average assets, (2) standard
efficiency ratio and (3) gross efficiency ratio. Net-noninterest expense as a
percentage of average assets has improved from 2.70% in 1994 to 2.31% in 1995
to 2.15% in 1996. The standard efficiency ratio (noninterest expense divided by
net operating income) improved from 73.7% to 64.3% to 60.8%. The gross
efficiency ratio (noninterest expense divided by gross income) improved from
42.4% to 35.5% to 34.2%. Management expects all three of these ratios to
improve in the future, although at a slower rate of improvement.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $145,000, $180,000, and $220,000 for 1996,
1995, and 1994, respectively. In 1996 the Bank experienced net recoveries of
$112,000 compared to net charge-offs of $65,000 and $347,000 in 1995 and 1994
respectively. The net recovery in 1996 resulted from recoveries of $221,000
off-setting charge-offs of $109,000. Most of the recovery was from a loan that
was originally charged off in 1994. Excluding the large recovery, net
charge-offs to average loans would have been .07% in 1996. Net charge-offs to
average loans was .07% in 1995 and .40% in 1994. The allowance for loan losses
as a percent of loans was 1.19% at December 31, 1996 compared to .98% and .91%
in 1995 and 1994, respectively. Management feels that the allowance for loan
loss provision is adequate based upon the current portfolio and market
conditions. As the loan portfolio shifts and market conditions warrant, the
provision will be adjusted.
BLACKHAWK BANCORP 12 ANNUAL REPORT 1996
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
The effective income tax rate increased to 32.9% in 1996 from 29.0% in 1995 and
26.9% in 1994. Because Nevahawk is located in Nevada, its income is not
subject to state income tax. As a result, as a higher proportion of income is
earned outside of Nevada, the effective rate increases.
BALANCE SHEET ANALYSIS
Total assets as of December 31, 1996 were $151.5 million versus $155.5 million
as of December 31, 1995, a decrease of 2.6%. Total average assets were $148.7
million for the year ended December 31, 1996 versus $140.6 million in 1995, an
increase of 5.8%. All comparisons below are comparing 1996 to 1995, unless
otherwise noted.
LOANS
Gross loans increased 5.2% to $99.4 million from $94.5 million. Commercial
loans experienced the most growth, $2.7 million or 13.3%, as the Bank continues
to restructure its balance sheet, during 1996, to that of a more traditional
commercial bank. Total real estate loans remained static. Consumer
installment loans increased $2.3 million or 13.0%. As mentioned above the Bank
began its own credit card program in 1994 and in 1995 introduced its home
equity line of credit. The credit card program and the home equity line of
credit have experienced solid growth considering the Bank's late entry into
these markets. As of December 31, 1996, real estate loans represented 57.8% of
gross loans, commercial loans were 23.2% and consumer loans were 19.7%. This
compares to 60.2%, 21.5% and 18.3%, respectively, at December 31, l995. The
Bank's loan mix is now closer to that of the average commercial bank, which has
been a goal since 1990.
NON-PERFORMING LOANS
Non-performing loans as a percent of total loans increased to 1.15 % as of
December 31, 1996 versus .61% as of December 31, 1995. The increase from 1995
to 1996 is the result of the change in loan mix discussed above. Management
feels that the risks involved with these loans are manageable and monitor this
area closely. It is the Bank's policy to place a loan on non-accrual once it
has become 90 days delinquent. If it is determined that collection is
questionable before that time, it would then be placed on non-accrual.
SECURITIES
Securities as a percent of average assets increased to 27.1% from 25.6%. The
percentage held in the form of tax-exempt securities increased slightly in
1996, 11.9% compared to 11.5%. As the yield relationship between taxable and
tax-exempt securities changes, new investments will be made in the area that
best meets the objectives of the Company.
Total earning assets were 93.0% of total average assets as of December 31,
1996, as compared to 92.6% as of December 31, 1995. In total dollars, earning
assets increased $8.2 million or 6.3%.
DEPOSITS
Total average interest bearing deposits increased .7%, to $97.0 million from
$96.3 million. They decreased as a percentage of average assets to 65.2% in
1996 from 68.5% in 1995. Interest bearing demand deposits experienced a 20.0%
increase to $4.9 million as compared to $4.1 million, and were 3.3% of average
assets in 1996, as compared to 2.9% in 1995. The majority of this increase was
in the Bank's club checking account programs. Savings accounts increased 7.7%.
Time deposits decreased 3.5% or $2.3 million, and as a percent of average
assets decreased to 41.7% in 1996 from 45.7% in 1995.
Total average non-interest bearing demand deposits increased 15.3% and as a
percentage of average assets were 9.2% in 1996 versus 8.5% in 1995. This
increase is mostly the result of increased business customers, which is also
evident in the commercial loan activity. As banks continue to find it
difficult to retain the more traditional type of savings customers, the focus
will be building relationships with its customers and offering alternative
investment products around the core checking account. The Bank's mix of
deposits is still undergoing a change to that of a traditional commercial bank
which began in 1990. Thus it is expected that a higher percentage of the
Bank's growth will be seen in demand deposit accounts than in traditional time
deposit and savings accounts.
OTHER BORROWINGS
Other borrowings has experienced the most growth of any other area of interest
bearing liabilities. Average borrowings increased 45.1% in 1996 after an
increase of 48.1% in 1995. Average borrowings of $15.2 million in 1996 were
10.2% of average assets compared to $10.5 million and 7.4% of average assets in
1995. The Bank has used other borrowings to fund specific loan requests by
taking advances at the FHLB to match the term and spread required. The Bank
also utilized advances from the FHLB to meet some short-term liquidity needs
and it also utilized a staggered maturity advance to fund some consumer lending
in 1995. The advances taken for short-term liquidity needs and those used to
fund the consumer loans have been retired as they have matured.
During 1995, the Bank entered into depository relationships with four local
governmental agencies. As a result, excess funds deposited into their accounts
are invested into repurchase agreements ("repos") on a daily basis. These repo
balances will fluctuate during the year as tax dollars are collected and
disbursed. These relationships are bid on a two-year cycle, though one of the
four is on a three-year cycle. Two of the relationships that are on a two year
cycle expire at the end of June
BLACKHAWK BANCORP 13 ANNUAL REPORT 1996
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1997. The other one expires at the end of December. These accounts are
expected to be rebid approximately three months prior to the expiration date.
It is not possible to determine the outcome of these bids at this time.
ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate risk
to the degree that its interest-bearing liabilities, with short and medium term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest-earning assets. Interest rate risk occurs when there is an imbalance
between the interest-earning assets and the interest-bearing liabilities at a
given maturity or repricing schedule. Such imbalance is commonly referred to as
interest rate gap ("gap"). A positive gap exists when there are more assets
than liabilities maturing or repricing within the same time frame, and a
negative gap is one in which there are more liabilities than assets maturing
or repricing within the same time frame. Accordingly, in a negative gap
position, the Bank's net interest income is likely to decline during periods of
rising interest rates and increase during periods of declining interest rates.
The opposite is true in the case of a positive gap position. The Bank's
cumulative one-year gap generally has been and currently is negative.
The asset/liability committee meets regularly to monitor and determine the
Bank's exposure to interest rate fluctuations. This is done by monitoring the
maturity and repricings of assets and liabilities plus monitoring the flow of
funds. It is current bank policy to have the one year cumulative gap within a
positive or negative 10% of assets. The current percentage is negative 11.7%
which compares to a positive 4.2% as of December 31, 1995.
LIQUIDITY
Liquidity as it relates to the Bank is a measure of its ability to fund loans
and withdrawals of deposits in a cost-effective manner. The Bank's principal
sources of funds are deposits, scheduled amortization and prepayment of loan
principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing fed funds, sale of loans,
sale of securities, borrowing from the Federal Reserve Bank and the FHLB and
capital loans. Current year earnings can be paid to the Bank, from Nevahwk, to
provide additional liquidity, without incurring a tax liability under present
law. During 1996 Nevahawk did not pay a dividend however, a dividend of $1.0
million was paid to the Bank in 1995. A payment in 1997 is not anticipated.
Generally liquidity needs of the Company consist of payment of dividends to its
stockholders and a limited amount of expenses. The sources of funds to provide
this liquidity are income from securities, maturities of securities, cash
balances and dividends from the Bank. Certain restrictions are imposed upon
the Bank which could limit its ability to pay dividends if it did not have net
earnings in the future. The Company maintains adequate liquidity to pay its
expenses. The Company has entered into an agreement to purchase Rochelle
Bancorp Inc., the parent of Rochelle Savings Bank, Rochelle, Illinois. The
closing of this transaction is expected to be completed April 30, 1997. The
funds, totaling approximately $4.2 million, needed to complete this transaction
are expected to be generated internally by the Company and by the dividends
from the Bank.
CAPITAL
Total stockholders' equity as of December 31, 1996 increased 3.9% to $22.0
million as compared to $21.2 million as of December 31, 1995. Internal growth
in the form of increased net income was the biggest factor for this increase.
Also contributing to the increase to a lesser extent was the exercising of
stock options by employees and an increase in the adjustment for Financial
Accounting Standard 115. Equity as a percent of assets, core capital as a
percent of assets, total capital as a percent of risk based assets and leverage
ratio were 14.54%, 14.37%, 23.47%, and 15.08 %, respectively, at December 31,
1996. The Company significantly exceeds all regulatory requirements regarding
capital. The regulatory requirement for core capital as a percent of assets is
5.50% and total capital as a percent of risk based assets is 4.0%.
IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and liabilities
of the Bank are monetary in nature. As a result, interest rates have more
significant impact on the Bank's performance and results of operations than the
effect of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services as measured by the Consumer Price Index. As discussed previously
under Asset/Liability Management, the Bank's interest rate gap position in
conjunction with the direction of the movement in interest rates, is an
important factor in the Bank's result of operation. The Bank's financial
statements are prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and results of
operations in terms of historical dollars, without giving consideration to
changes in the relative purchasing power of money over time due to inflation.
ACCOUNTING DEVELOPMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement No.
123, Accounting for Stock-Based Compensation. This statement establishes
financial accounting and reporting standards for such plans including
arrangements by which employees or non-employees receive shares of stock or
other equity instruments or the company incurs liabilities to employees based
on the price of the stock such as stock options. Under this statement, the
stock or equity instruments issued must be accounted for based on the fair
value of the considera-
BLACKHAWK BANCORP 14 ANNUAL REPORT 1996
<PAGE> 1
Exhibit 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Percent of Capital
-------------------
Stock Owned At
---------------
Name Location December 31, 1996
- ----------------------- ------------------ -------------------
<S> <C> <C>
Blackhawk State Bank Beloit, Wisconsin 100%
(Wisconsin - chartered
Commercial Bank)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,966,929
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,677,596
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,701,911
<INVESTMENTS-CARRYING> 24,864,640
<INVESTMENTS-MARKET> 24,938,701
<LOANS> 99,426,691
<ALLOWANCE> 1,185,672
<TOTAL-ASSETS> 151,484,005
<DEPOSITS> 118,310,847
<SHORT-TERM> 7,405,451
<LIABILITIES-OTHER> 1,463,053
<LONG-TERM> 2,275,456
0
0
<COMMON> 22,859
<OTHER-SE> 22,006,339
<TOTAL-LIABILITIES-AND-EQUITY> 151,484,005
<INTEREST-LOAN> 8,777,209
<INTEREST-INVEST> 2,343,898
<INTEREST-OTHER> 201,741
<INTEREST-TOTAL> 11,322,848
<INTEREST-DEPOSIT> 4,578,120
<INTEREST-EXPENSE> 5,394,104
<INTEREST-INCOME-NET> 5,928,744
<LOAN-LOSSES> 145,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,213,605
<INCOME-PRETAX> 2,575,936
<INCOME-PRE-EXTRAORDINARY> 1,728,275
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,728,275
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
<YIELD-ACTUAL> 4.33
<LOANS-NON> 442,897
<LOANS-PAST> 252,163
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 444,594
<ALLOWANCE-OPEN> 928,817
<CHARGE-OFFS> 109,486
<RECOVERIES> 221,341
<ALLOWANCE-CLOSE> 1,185,672
<ALLOWANCE-DOMESTIC> 1,185,672
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
