<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----- -----
COMMISSION FILE NUMBER 0-18599
BLACKHAWK BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1659424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 BROAD STREET 53511
BELOIT, WISCONSIN (ZIP CODE)
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES)
(608) 364-8911
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK SEPTEMBER 30, 1998
---------------------- ------------------
$.01 PAR VALUE 2,313,373 SHARES
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income for the
three months ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Income for the
Nine months ended September 30, 1998 and 1997 5
Consolidated Condensed Statements of Shareholders'
Equity as of September 30, 1998 and December 31, 1997 6
Consolidated Condensed Statements of Cash Flows for the
Nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Condensed Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-16
PART II - OTHER INFORMATION
ITEM 6. A) EXHIBITS 17
B) REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,1998 DECEMBER 31, 1997
----------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 15,656,000 $ 8,680,000
Federal funds sold and other short-term investments 7,348,000 8,889,000
Securities available for sale 34,014,000 9,487,000
Securities held to maturity 21,966,000 28,920,000
Total loans 184,083,000 138,298,000
Allowance for loan losses (Note 3) 1,857,000 1,523,000
------------- -------------
Net loans 182,226,000 136,775,000
Bank premises and equipment, net 7,469,000 4,353,000
Other intangible assets 6,785,000 1,850,000
Other assets 4,663,000 3,022,000
------------- -------------
Total Assets $ 280,127,000 $ 201,976,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 22,007,000 $ 19,571,000
Interest bearing 207,266,000 139,479,000
------------- -------------
Total Deposits 229,273,000 159,050,000
Borrowed Funds:
Short-term borrowings 4,750,000 12,231,000
Other borrowings 17,250,000 4,850,000
Accrued interest payable 1,065,000 892,000
Other liabilities 3,473,000 1,818,000
------------- -------------
Total Liabilities 255,811,000 178,841,000
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock
1,000,000 shares, $.01 par value per share
authorized, none issued or outstanding --- ---
Common stock
10,000,000 shares, $.01 par value per share
authorized, 2,300,861 and 2,296,414 shares
issued and outstanding 23,000 23,000
Additional paid-in capital 7,099,000 7,002,000
Employee stock options earned 140,000 131,000
Retained Earnings 16,880,000 16,045,000
Treasury Stock (120,000) (104,000)
FASB 115 Adjustment 294,000 38,000
------------- -------------
Total Shareholders' Equity 24,316,000 23,135,000
------------- -------------
Total Liabilities and Shareholder's Equity 280,127,000 $ 201,976,000
============= =============
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE> 4
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,567,000 $3,157,000
Interest on deposits with other banks 91,000 50,000
Interest on investment securities:
Taxable 623,000 573,000
Exempt from federal income taxes 75,000 37,000
Dividends
Interest on federal funds sold and
other short-term investments 72,000 41,000
---------- ----------
Total Interest Income 4,428,000 3,858,000
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,893,000 1,644,000
Interest on short-term borrowings 69,000 126,000
Interest on other borrowings 153,000 48,000
---------- ----------
Total Interest Expense 2,115,000 1,818,000
---------- ----------
Net Interest Income 2,313,000 2,040,000
Provision for loan losses (Note 3) 79,000 54,000
---------- ----------
Net Interest Income After Provision for Loan Losses 2,234,000 1,986,000
---------- ----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 59,000 44,000
Trust Department income 47,000 46,000
Service fees 286,000 254,000
Other income 160,000 116,000
---------- ----------
Total Other Operating Income 552,000 460,000
---------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,006,000 858,000
Occupancy expense of bank premises, net 167,000 140,000
Furniture and equipment 105,000 76,000
Data processing 123,000 125,000
Other operating expense 544,000 489,000
Total Other Operating Expense 1,945,000 1,688,000
Income Before Income Taxes 841,000 758,000
Provision for Income Taxes 277,000 263,000
---------- ----------
Net Income $ 564,000 $ 495,000
========== ==========
Earnings Per Share $ .25 $ .20
========== ==========
Diluted Earnings Per Share $ .24 $ .22
========== ==========
Dividends Per Share $ .12 $ .11
========== ==========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE> 5
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,893,000 $ 8,413,000
Interest on deposits with other banks 115,000 72,000
Interest on investment securities:
Taxable 1,735,000 1,709,000
Exempt from federal income taxes 184,000 109,000
Dividends
Interest on federal funds sold and
other short-term investments 210,000 118,000
----------- -----------
Total Interest Income 12,137,000 10,421,000
----------- -----------
INTEREST EXPENSE:
Interest on deposits 5,097,000 4,264,000
Interest on short-term borrowings 294,000 505,000
Interest on other borrowings 362,000 151,000
----------- -----------
Total Interest Expense 5,753,000 4,920,000
----------- -----------
Net Interest Income 6,384,000 5,501,000
Provision for loan losses (Note 3) 210,000 129,000
----------- -----------
Net Interest Income After Provision for Loan Losses 6,174,000 5,372,000
----------- -----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 88,000 44,000
Trust Department income 153,000 137,000
Service fees 795,000 652,000
Other income 590,000 281,000
----------- -----------
Total Other Operating Income 1,626,000 1,114,000
----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,832,000 2,201,000
Occupancy expense of bank premises, net 453,000 339,000
Furniture and equipment 314,000 237,000
Data processing 354,000 314,000
Other operating expense 1.455,000 1,141,000
----------- -----------
Total Other Operating Expense 5,408,000 4,232,000
----------- -----------
Income Before Income Taxes 2,392,000 2,254,000
Provision for Income Taxes 805,000 792,000
----------- -----------
Net Income $ 1,587,000 $ 1,462,000
----------- -----------
Earnings Per Share $ .69 $ .61
=========== ===========
Diluted Earnings Per Share $ .66 $
=========== ===========
Dividends Per Share $ .35 $ .32
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE> 6
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, 1998 December 31, 1997
-------------------------------------------
<S> <C> <C>
Common Stock:
Balance at beginning and end of period $ 23,000 $ 23,000
Stock options exercised -- --
------------ ------------
Balance at end of period 23,000 23,000
------------ ------------
Additional Paid-in Capital:
Balance at beginning of period 7,002,000 6,961,000
Stock options exercised 97,000 41,000
------------ ------------
Balance at end of period 7,099,000 7,002,000
------------ ------------
Employee Stock Options Earned:
Balance at beginning of period 131,000 95,000
Unearned employee compensation 9,000 36,000
------------ ------------
Balance at end of period 140,000 131,000
------------ ------------
Retained Earnings:
Balance at beginning of period 16,045,000 15,072,000
Net Income 1,587,000 1,956,000
Dividends declared on common stock (752,000) (983,000)
------------ ------------
Balance at end of period 16,880,000 16,045,000
------------ ------------
Treasury Stock, at cost:
Balance at beginning of period (104,000) (84,000)
Purchase (16,000) (20,000)
------------ ------------
Balance at end of period (120,000) (104,000)
------------ ------------
FASB 115 Adjustment:
Balance at beginning of period 38,000 (11,000)
Net adjustment during period 256,000 49,000
------------ ------------
Balance at end of period 294,000 38,000
------------ ------------
Other:
Balance at beginning of period -- (25,000)
Principal payments on ESOP Plan -- 25,000
Balance at end of period -- --
------------ ------------
Total Shareholders' Equity $ 24,316,000 $ 23,135,000
============ ============
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
6
<PAGE> 7
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,587,000 $ 1,462,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Compensatory options recognized 9,000 27,000
Provision for loan losses 210,000 129,000
Provision for depreciation and amortization 491,000 307,000
Accretion of discount on investment securities, net (120,000) (51,000)
(Gain) on sale of loans (88,000) (44,000)
Loans originated for sale (13,843,000) (8,705,000)
Proceeds from sale of loans 13,931,000 8,749,000
Change in assets and liabilities:
(Increase) decrease in other assets (1,337,000) (1,612,000)
Increase (decrease) in accrued interest payable and other liabilities 596,000 (206,000)
------------ ------------
Net cash provided by operating activities 1,436,000 56,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities 16,338,000 5,746,000
Purchase of available-for-sale securities (18,256,000) (4,321,000)
Proceeds from maturity of investment securities 10,169,000 15,575,000
Purchase of investment securities (2,803,000) (15,951,000)
Net cash used in acquisition (6,914,000) (199,000)
Decrease in federal funds sold and
other short-term investments, net 9,566,000 2,985,000
Loans originated, net of principal collected 359,000 (1,276,000)
Purchase of bank premises and equipment (942,000) (112,000)
------------ ------------
Net cash provided by (used in) investing activities 7,517,000 2,266,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 97,000 35,000
Net increase (decrease) in deposits 5,405,000 (4,699,000)
Net increase (decrease) in borrowings 4,099,000 5,952,000
Cash dividends paid (752,000) (765,000)
Purchase of common stock for Treasury (16,000) (20,000)
------------ ------------
Net cash (used in) financing activities (1,977,000) 503,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 6,976,000 2,825,000
3,469,000
CASH AND CASH EQUIVALENTS:
Beginning of period 8,680,000 7,967,000
------------ ------------
End of period $ 15,656,000 $ 10,792,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 5,790,000 $ 4,653,000
Income taxes 796,000 664,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 515,000 $ 210,000
Principal payments on ESOP loan --- 25,000
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
7
<PAGE> 8
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
Note 1. General
The accompanying consolidated condensed financial statements
conform to generally accepted accounting principles and to general
practices within the banking industry. The more significant
policies used by the Company in preparing and presenting its
financial statements are stated in the Company's Form 10-KSB.
The effect of timing differences in the recognition of revenue and
expense for tax liability is not determined until the end of each
fiscal year.
In the opinion of Management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of normal recurring accruals) necessary to present
fairly the financial position of the Corporation as of September
30, 1998 and December 31, 1997, the results of operations for the
three and nine months ended September 30, 1998 and 1997.
The results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year.
Note 2. Non-Performing Loans
Non-performing loans includes loans which have been categorized by
management as non-accruing because collection of interest is not
assured, and loans which are past-due ninety days or more as to
interest and/or principal payments. The following summarizes
information concerning non-performing loans:
<TABLE>
<CAPTION>
September 30 December 31
----------------------------- -----------
1998 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
Impaired loans $ 807,000 $ 228,000 $ 325,000
Non-accruloans 1,400,000 369,000 610,000
Past due 90 days or more and still accruing 268,000 181,000 143,000
---------- ---------- ----------
Total non-performing loan $2,475,000 $ 778,000 $1,078,000
========== ========== ==========
</TABLE>
Note 3. Allowance For Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30
1998 1997
--------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,351,000 $ 1,459,000
Allowance associated with acquisition 453,000 --
Provision charged to expense 79,000 54,000
Loans charged ofF 34,000 (40,000)
Recoveries 9,000 3,000
----------- -----------
Balance at end of period $ 1,858,000 $ 1,476,000
=========== ===========
<CAPTION>
Nine Months Ended September 30
1998 1997
--------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,523,000 $ 1,186,000
Allowance associated with acquisition 453,000 345,000
Provision charged to expense 210,000 129,000
Loans charged off 344,000 (206,000)
Recoveries 16,000 22,000
----------- -----------
Balance at end of period $ 1,858,000 $ 1,476,000
=========== ===========
</TABLE>
8
<PAGE> 9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
Note 4: Earnings Per Share
Presented below are the calculations for basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders $ 564,000 $ 495,000 $1,587,000 $1,967,000
========== ========== ========== ==========
Weighted average shares outstanding 2,299,199 2,281,967 2,294,474 2,282,651
========== ========== ========== ==========
Basic earnings per share $ .25 $ .20 $ .69 $ .61
========== ========== ========== ==========
Diluted:
Net income available to common stockholders $ 564,000 $ 495,000 $1,587,000 $1,462,000
========== ========== ========== ==========
Weighted average shares outstanding 2,271,331 2,281,967 2,294,474 2,282,657
Effect of dilutive stock options outstanding 130,792 122,154 130,792 103,903
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,402,123 2,404,121 2,425,266 2,366,520
========== ========== ========== ==========
Diluted earnings per common share $ .24 $ .22 $ .65 $ .41
========== ========== ========== ==========
</TABLE>
Note 5: Comprehensive Income
The Financial Accounting Standards Board (FASB) has issued SFAS No.
130, "Reporting Comprehensive Income", which is effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in
a full set of general purpose financial statements. This statement
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted SFAS
No. 130 on January 1, 1998, and all required disclosures will be
included beginning with the Company's 1998 Form 10-K Annual Report.
The Company's comprehensive income for the period ended September
30, 1998 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
------------------------------
<S> <C> <C>
Net Income $1,587,000 $1,462,000
Other comprehensive income,
Net of tax--unrealized gain on securities
Unrealized holding gains arising during the period 256,000 29,000
---------- ----------
Comprehensive Income $1,843,000 $1,491,000
========== ==========
</TABLE>
Note 6. Acquisition of First Financial Bancorp, Inc.
On August 31, 1998 the Company completed its acquisition of First
Financial Bancorp, Inc. (First). First was the parent bank holding
company of First Federal Savings Bank, Belvidere, Illinois. Cash of
$12,465,000 was paid for all outstanding shares of First. The
acquisition was recorded using purchase accounting. First's
consolidated financial condition has been included in the Company's
consolidated balance sheet as of September 30, 1998, and First's
consolidated results of operations have been reflected in the
Company's consolidated statements of income beginning as of the
acquisition date.
9
<PAGE> 10
On a pro forma basis, the pro forma total income, net income, basic
earnings per share, and diluted earnings per share for the three
and nine months ended September 30, 1998 and 1997 after giving
effect to the Rochelle's acquisition as if it occurred on January
1, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
Total Income $ 3,439,000 $ 3,313,000 $ 18,181,000 $ 16,491,000
Net Income 441,000 371,000 841,000 809,000
Basic Earnings per share .19 .16 .36 .35
Diluted Earnings .18 .15 .35 .33
</TABLE>
Note 7: Future Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
This statement requires that all derivative financial instruments
be recognized as either assets or liabilities in the statement of
financial position. Derivative financial instruments not designed
as hedges will be measured at fair value with changes in fair value
being recognized in earnings in the period of change. If a
derivative is designated as a hedge, the accounting for changes in
fair value will depend on the specific exposure being hedged. The
statement is effective for fiscal years beginning after June 15,
1999. Management, at this time, cannot determine the effect the
adoption of this statement may have on the financial statements of
the Company as the effect is dependent of the amount and nature of
derivatives and hedges held at the time of adoption of the
statement.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction with
the consolidated condensed balance sheets as of September 30, 1998 and December
31, 1997 and the consolidated condensed statements of income for the three
months and nine months ended September 30, 1998 and 1997. This information is
not meant to be a substitute for the balance sheets and income statements.
RESULTS OF OPERATIONS
On April 30, 1997, the Company completed the purchase of all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois, for
approximately $4.2 million in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., is an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51.0 million.
This acquisition was accounted for as a purchase and the cash consideration paid
for the outstanding shares approximates the fair market value of tangible and
intangible assets acquired less the liabilities assumed.
As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
offices in Rochelle and Rockford, Illinois and assets of approximately $2.5
million.
Results of operations of Rochelle and MAC are incorporated in the Company's
statements from the acquisition date forward.
On September 3, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, was merged into the Company's
subsidiary, Blackhawk State Bank, on the effective date of the purchase.
Results of operations of Belvidere are incorporated in the Company's statements
from the acquisition date forward.
THREE MONTHS ENDED SEPTEMBER 30
For the three months ended September 30, 1998, interest income was $4.4 million
compared to $3.8 million for the same period in 1997. Approximately $200,000 of
the increase in interest income was the result of the Belvidere purchase. The
balance of the $570,000 increase was the result of increased volume of earning
assets excluding Belvidere. Total earning assets averaged nearly $210 million
for the third quarter of 1998 compared to $180 million in the same period in
1997. Average earning assets are expected to be approximately $260 million in
the fourth quarter as Belvidere will be included for all three months of the
quarter. The average tax-equivalent yield for the three months in 1998 was 8.52%
compared to 8.58% in the same period of 1997.
Interest and fees on loans increased to $3.6 million in the current period
compared to $3.2 million in the same period in 1997. This increase of 13.0% was
due to increased volume, again as the result of the purchase of Belvidere.
Investment income on taxable securities for the quarter ended September 30, 1998
was $623,000 compared to $573,000 in 1997, an increase of 8.7%. Approximately
40% of the $50,000 was the result of increased yield and
11
<PAGE> 12
60% was the result of increased volume. Income from tax-exempt securities
increased nearly 103% in the 1998 period compared to 1997. This was due almost
entirely to increased volumes. Security volumes are further addressed in the
discussion of the analysis of financial condition.
Interest paid on deposits in the three months ended September 30, 1998 was $1.9
million compared to $1.6 million in the same period in 1997. The increase was
due to increased volumes which were the result of the Belvidere acquisition. The
average yield of deposits were slightly lower in 1998 than in 1997, 4.63% vs.
4.68%. Unless interest rates increase in the coming months, a decrease in the
rates paid on deposits can be expected. The rates on maturing deposits are
slightly higher than the rates currently being offered on similar maturities.
Significant growth in deposits is not expected in the fourth quarter of 1998
from current levels. However, comparisons to 1997 in the future quarters will be
very positive because of the Belvidere acquisition.
Interest on short-term borrowings was lower in 1998 than in 1997, $69,000 versus
$126,000 respectively. Short-term borrowings consist of fed funds purchased and
repurchase agreements. This reduced cost was the result of lower volume and a
lower interest rate. The interest cost on other borrowings, which are advances
from the Federal Home Loan Bank, ("FHLB"), was $153,000 for the quarter compared
to $48,000 in 1997. This increase was the result of increased volume. In an
effort to economically fund cash needs, average borrowings from the FHLB in the
third quarter of 1998 increased to $10.7 million from $3.6 million in 1997.
The provision for loan loss was approximately $79,000 in the quarter ended
September 30, 1998 as compared to $54,000 for the same period in 1997. On a
regular basis, management determines the adequacy of the loan loss reserve and,
if necessary, adjusts the loan loss provision.
Total other operating income increased to $552,000 from $460,000 in the second
quarter of 1997. The largest single item in each period was service fees,
totaling $286,000 and $254,000 in 1998 and 1997, respectively. Most of the
increase is the result of the inclusion of service fees on deposit accounts and
service fees related to mortgage servicing at Belvidere. Continued increases in
revenue from the servicing of sold mortgages is anticipated. Trust fees for the
quarter increased to $47,000 from $46,000 in 1997. It is anticipated that this
area will provide increased revenue in the future. Other income includes the
revenue from the capitalization of mortgage servicing rights and the sale of
non-deposit investments. These items represent a significant amount of the
increase to $160,000 in 1998 from $116,000 in 1997. A gain on the sale of loans
of $59,000 was experienced in the third quarter of 1998 compared to a gain of
$44,000 in the same quarter of 1997. Prior to the acquisition of Rochelle in
1997, Blackhawk's loans were sold with servicing rights. Loans are now being
sold with the servicing rights retained. This will reduce the profit from the
sale of loans, however, it is anticipated that the increased income from
servicing will offset the reduced income from the sales.
Total other operating expenses were $1,945,000 in the third quarter of 1998
compared to $1,688,000 in the same period in 1997. The largest single item in
this category is salaries and benefits, which were $1,006,000 in 1998 compared
to $858,000 in 1997. The increase of $1148,000 is the result of normal salary
increases, the addition of a new facility in Roscoe, Illinois and the inclusion
of one month of the Belvidere operations. The relatively large increases in
occupancy and furniture and equipment are the result of the acquisition of
Belvidere and the addition of the Roscoe office. The expenses in both of these
areas are expected to continue to be higher in 1998 than in 1997. The decrease
in data processing is the result of the consolidation of data services
providers. This positive comparison is expected to disappear in the coming
quarters. The consolidation of Belvidere's data processing is not anticipated
until mid 1999.
Income taxes increased to $277,000 from $263,000 for the three month period
ending September 30, 1998. The effective tax rates were 33% versus 35% for third
quarters of1998 and 1997, respectively. The lower effective tax rate resulted
from a higher percentage of income subject to Illinois State income taxes, and
the increase of income from federally tax-exempt securities.
NINE MONTHS ENDED SEPTEMBER 30
12
<PAGE> 13
Total interest income for the nine months ended September 30, 1998, was $12.1
million compared to $10.4 million for the same period in 1997. The 1997 figures
include Rochelle for the period after April 30 and the 1998 figures include
Belvidere after September 3. The largest category of interest income was from
loans, $9.9 million in 1998 compared to $8.4 million in 1997. Interest and fees
on loans, also contributed the largest dollar increase, $1.5 million. As was
discussed previously, volume as a result of the acquisitions was the primary
reason for the growth of revenue in this area. The average yield on the total
loan portfolio in 1998 was slightly less than in 1997, 9.17% vs. 9.22%. If the
Federal Reserve Board reduces interest rates in late 1998 or early 1999, as is
predicted by many, the rates on the loan portfolio can be expected to decline
also.
Interest on taxable securities increased 1.5%, $1.735 million as compared to
$1.709 million, in 1998 compared to 1997. The decrease in the average yield for
the period in 1998 nearly offset the increase of income due to volume when
compared to 1997. Interest income from tax-exempt securities was affected by
increased volume. Interest income from fed funds sold and short-term investments
was $210,000 for the nine months of 1998 as compared to $118,000 for the same
period in 1997. This $92,000 increase was due primarily to increased volume.
Income from interest bearing bank deposits was $115,000 in 1998 compared to
$72,000 in 1997. The increase in this area was due entirely to increased volume.
Interest expense was $5.8 million in the nine months ended September 30, 1998 as
compared to $4.9 million for the same period in 1997. Interest on deposits was
$5.1 million in 1998 as compared to $4.3 million in 1997. The reduction in
average rate was offset by increased volume. Most of the increased volume was
attributable to the Rochelle and Belvidere acquisitions.
Interest on short-term borrowings was $294,000 in 1998 as compared to $505,000
in the same period of 1997. The volume in 1998 was significantly lower and added
to the effect of lower average interest rates paid. Increased average balance
accounts for the higher interest expense of long-term borrowings, $362,000
compared to $151,000. Lower interest rates paid had little effect on the total
in this category.
The provision for loan loss was approximately $210,000 for the nine months in
1998 compared to $129,000 in 1997. Management believes that the provision was
appropriate based on their regular review of the adequacy of the overall
reserve.
Other operating income for the nine months ended September 30, 1998 was $1.6
million compared to $1.1 million for the same period in 1997. Service fees
experienced an increase to $795,000 in 1998 as compared to $652,000 in 1997. The
increase in this area was the result of increased volume of accounts as a result
of the acquisitions, increased fees and the additional revenues associated with
the servicing of mortgages by Rochelle and Belvidere. Prior to the acquisition
of Rochelle, Blackhawk sold the fix rate loans with servicing rights. Loans are
now being sold with the servicing rights retained by Blackhawk. Therefore,
proceeds from these sales are reduced. The increased income from servicing is
expected to offset the reduced income in this area. Trust department income
increased nearly 12% in 1998, when compared to 1997, as a result of additional
business. Continued improvement in this area is anticipated for the balance of
1998. Other income increased $309,000 over 1997 levels, $590,000 compared to
$281,000. Income from the sale of non-deposit investments and the capitalization
of mortgage servicing rights are included in this category. It is anticipated
that these activities will result in increased income in the future.
For the nine month period ending September 30, 1998, total other operating
expenses were $5.4 million compared to $4.2 million in 1997. The area of largest
increase was salaries and benefits, which totaled $2.8 million compared to $2.2
million in 1997. The acquisition of Rochelle, combined with normal salary and
benefit increases and additional staffing for the Roscoe branch which opened in
March, 1998, and the acquisition of Belvidere account for most of the increase.
Increases in the areas of occupancy and data processing are primarily
13
<PAGE> 14
the result of the Rochelle acquisition. The effect of the Belvidere acquisition
is expected to result in an increase in both of these areas when comparing the
fourth quarter of 1998 to the fourth quarter of 1997.
Income taxes for the period were $805,000 in 1998 compared to $792,000 in 1997.
As a result of increased federally tax-exempt income, the effective tax rate
decreased to 34%, in 1998, from 35% in 1997.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares September 30, 1998
to the Company's prior fiscal year end of December 31, 1997. Total assets were
$280.1 million as compared to $202.0 million as of December 31, 1997. This
represents an increase of approximately 38.7%, due primarily to the purchase of
Belvidere.
Total investment securities, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $63.3
million as of September 30, 1998, as compared to $56.0 million as of December
31, 1997. Most of this increase was the result of the purchase of Belvidere.
Cash and cash equivalents were also significantly higher as of September 30,
1998 compared to December 31, 1998, $15.7 million and $8.7 million respectively.
This was also the result of the Belvidere acquisition.
Loans totaled $184.1 million on September 30, 1998 as compared to $138.3 million
on December 31, 1997, an increase of $45.8 million or 33.1%. Nearly all of this
increase came from Belvidere. The majority of the loan demand for 1998 has been
for fixed-rate mortgages which are usually sold to the Federal Home Loan
Mortgage Corporation within one month of origination. The majority of the loan
originators' time has been dedicated to these loans. The strength of loan demand
for the balance of 1998 will depend to some extent on what action the Federal
Reserve Bank takes with regard to interest rates.
Allowance for loan losses was $1.9 million as of September 30, 1998 as compared
to $1.5 million as of December 31, 1997. Footnote 3 to the financial statements
indicates the activity in the allowance for loan loss account for the three and
nine months ended September 30, 1998 and 1997. Non-performing loans (see
Footnote 2) as of September 30, 1998 were $2.5 million. The potential loss
resulting from these loans has been provided for in management's determination
of the adequacy of the loan loss reserve. Management believes that the allowance
is adequate at this time.
Bank premises and equipment increased 71.6% to $7.5 million from $4.4 million as
of December 31, 1997. This increase was primarily the result of the Belvidere
purchase. Equipment to accomplish Rochelle's data processing conversion and the
upgrade of the item capture system in Beloit also contributed to the increase..
Total deposits of $229.3 million increased $70.2 million as of September 30,
1998 as compared to $159.1 million as of December 31, 1997. Non-interest bearing
deposits decreased to $22.0 million from $19.6 million as of December 31, 1997.
Several commercial customers have historically increased their demand deposit
balances at year-end. As a result, subsequent interim reporting dates typically
have balances lower than the previous year-ends. The addition of Belvidere
helped to offset this usual occurrence. Interest bearing deposits increased from
year-end levels, $207.3 million compared to $139.5 million. The addition of
Belvidere's deposits offset the slight decrease experienced by Blackhawk State
Bank. Also affecting deposit levels has been the strength of the overall equity
markets. Competition for deposit dollars continues to be intense. As a result,
dramatic growth of deposits, except those related to the Belvidere purchase, is
not anticipated during the balance of 1998.
Short-term borrowing consists mainly of repurchase agreements with customers.
During the first quarter of 1998, one of these relationships was terminated,
which accounts for the majority of the decrease of $7.5 million.
14
<PAGE> 15
Other borrowings, the main component until the purchase of Belvidere were
advances from the FHLB. The bank took advantage of some very favorable rates
being offered by the FHLB in early 1998. The advances will be used in part to
finance the Belvidere transaction. An additional loan commitment was obtained to
partially finance the Belvidere purchase. These items represent the increase in
other borrowings when comparing September 30, 1998 amount to December 31, 1997,
$17.3 million and $4.9 million respectively.
The company continues to maintain an excellent capital position regardless of
the measurement used. The following table shows four different measurements as
of September 30, 1998 and December 31, 1997, and the regulatory requirement, if
any. Management does not anticipate the need for additional capital resources in
the near future.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, REGULATORY
1998 1997 REQUIREMENTS
--------------------------------------------
<S> <C> <C>
Leverage capital ratio 7.41% 15.08% N/A
Core capital as a percent
of assets 6.00% 14.37% 5.50%
Core capital as a percent
of risk-based assets 8.38% 22.88% N/A
Total capital as a percent
of risk-based assets 9.32% 23.47% 8.00%
</TABLE>
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. Its principal sources of
funds are deposits, scheduled amortization and prepayment of loan principal,
maturities of investment securities, income from operations, and short term
borrowings. Additional sources include purchasing fed funds, sale of loans,
borrowing from both the Federal Reserve Bank and Federal Home Loan Bank, capital
loans. Also dividends paid by Nevahawk to Blackhawk provide an additional
source. Under present law, accumulated earnings could be paid as dividends
without incurring a tax liability. The Bank paid a special dividend in August
1998 of $4.0 million. This was used as part of the financing of the Belvidere
transaction.
The liquidity needs of the Company generally consists of payment of dividends to
its shareholders and a limited amount of expenses. The sources of funds to
provide this liquidity are income from investments, maturities of investments,
cash balances, issuance of capital and dividends from its subsidiary bank.
Certain restrictions are imposed upon the Bank which could limit its ability to
pay dividends if they did not have net earnings or adequate capital in the
future. The Company maintains adequate liquidity to pay its expenses.
Off-balance sheet items consist of credit card lines of credit, mortgage
commitments, letters of credit and other commitments totaling approximately
$31.8 million as of September 30, 1998. This compares to $20.0 million at
December 31, 1997. The Bank has historically funded off-balance sheet
commitments with its primary sources of funds, and management anticipates that
this will continue.
YEAR 2000 ISSUES. Year 2000("Y2K") issues will affect the Company to the extent
that it operates in an industry which heavily relies upon information technology
systems and has material relationships with third parties, both vendors and
customers. As a result, the Company has undertaken a four-phase process to
determine to what extent the Company is vulnerable to Y2K issues. The four
phases set-forth by the Company are awareness by major area, assessment of Y2K
compliance, system renovation (if necessary) and validation of Y2K preparedness.
The Company's Y2K progress, by major area, is set-forth in the table that
follows.
15
<PAGE> 16
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
System Awareness Assessment Renovation Validation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Ledger Complete Complete Complete November 1998
- ------------------------------------------------------------------------------------------------------------
Loan System Complete Complete Complete November 1998
- ------------------------------------------------------------------------------------------------------------
Deposit System Complete Complete Complete November 1998
- ------------------------------------------------------------------------------------------------------------
Item Capture Complete Complete Complete November 1998
- ------------------------------------------------------------------------------------------------------------
Hardware Complete Complete In Process December 1998
- ------------------------------------------------------------------------------------------------------------
Loan Customers Complete Complete Individual Basis December 1998
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has approved a budget in the amount of $600,000 for the cost of
hardware and software remediation. A majority of these costs were planned
expenditures to upgrade existing hardware and software regardless of Y2K. Most
of these funds have been expended, and will be amortized over the useful life of
the asset.
As is shown in the table, the Company has begun the validation phase of several
critical areas. A contingency plan has been formulated for some of the areas of
concern as to Y2K compliance. The expected results of the validation process are
that mission critical systems will be Y2K compliant. If the results of the
validation process lead management to believe otherwise, then a contingency
plan, with a timetable for implementation will be implemented for those
additional areas. The validation of the systems noted above that are scheduled
for November are expected to be completed by December 1, 1998.
Because of the negative effect of Y2K non-compliance by some of the Bank
customers, The Bank has implemented an external Y2K awareness campaign that
provides them with information that will assist them in becoming compliant.
Requests have been sent to larger commercial customers to provide the bank with
information as to their status of compliance.
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause such a variance to occur included, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, and other general economic conditions.
16
<PAGE> 17
PART II
OTHER INFORMATION
B) REPORTS ON FORM 8-K
There were no reports on Form 8-K for the quarter ended September
30, 1998.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
-----------------------------------
(Registrant)
Date: November 13, 1998 /s/ Dennis M. Conerton
-----------------------------------
Dennis M. Conerton
President and Chief Executive Officer
Date: November 13, 1998 /s/ Jesse L. Calkins
-----------------------------------
Jesse L. Calkins
Senior Vice President
(Chief Financial and Officer)
18
<PAGE> 19
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporated Filed
Exhibit Herein By Here- Page
Number Description Reference To: with No.
- ------ ----------- ------------- ---- ---
<S> <C> <C> <C> <C>
4.1 Amended and Exhibit 3.1 to
restated Articles Amendment No. 1 to
of Incorporation Registrant's
of the Registrant Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.2 By-laws of Regis- Exhibit 3.2 to
trant as amended Amendment No. 1 to
Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.3 Plan of Conversion Exhibit 1.2 to
Beloit Savings Amendment No. 1 to
Bank as amended Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,656,000
<INT-BEARING-DEPOSITS> 6,975,000
<FED-FUNDS-SOLD> 7,348,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,014,000
<INVESTMENTS-CARRYING> 21,966,000
<INVESTMENTS-MARKET> 22,160,000
<LOANS> 184,083,000
<ALLOWANCE> 1,857,000
<TOTAL-ASSETS> 280,127,000
<DEPOSITS> 229,273,000
<SHORT-TERM> 4,750,000
<LIABILITIES-OTHER> 4,538,000
<LONG-TERM> 17,250,000
0
0
<COMMON> 23,000,000
<OTHER-SE> 24,293,000
<TOTAL-LIABILITIES-AND-EQUITY> 280,127,000
<INTEREST-LOAN> 9,893,000
<INTEREST-INVEST> 1,919,000
<INTEREST-OTHER> 325,000
<INTEREST-TOTAL> 12,137,000
<INTEREST-DEPOSIT> 5,097,000
<INTEREST-EXPENSE> 5,753,000
<INTEREST-INCOME-NET> 6,384,000
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,408,000
<INCOME-PRETAX> 2,392,000
<INCOME-PRE-EXTRAORDINARY> 2,392,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,587,000
<EPS-PRIMARY> .69
<EPS-DILUTED> .66
<YIELD-ACTUAL> 8.41
<LOANS-NON> 1,400,000
<LOANS-PAST> 268,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 807,000
<ALLOWANCE-OPEN> 1,523,000
<CHARGE-OFFS> 344,000
<RECOVERIES> 16,000
<ALLOWANCE-CLOSE> 1,858,000
<ALLOWANCE-DOMESTIC> 1,858,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,858,000
</TABLE>
