<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 June 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 JUNE 30, 1998
--------------------- -------------
$.01 PAR VALUE 2,308,773 SHARES
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income for the
three months ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Income for the
Six months ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Shareholders'
Equity as of June 30, 1998 and December 31, 1997 6
Consolidated Condensed Statements of Cash Flows for the
six months ended June 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 18
ITEM 6. A) EXHIBITS 18
B) REPORTS ON FORM 8-K 19
SIGNATURES 20
2
<PAGE> 3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30,1998 DECEMBER 31, 1997
------------ -----------------
<S> <C> <C>
Cash and cash equivalents $ 13,493,000 $ 8,680,000
Federal funds sold and other short-term investments 347,000 8,889,000
Securities available for sale 15,813,000 9,487,000
Securities held to maturity 25,040,000 28,920,000
Total loans 137,306,000 138,298,000
Allowance for loan losses (Note 3) 1,351,000 1,523,000
------------- -------------
Net loans 135,955,000 136,775,000
Bank premises and equipment, net 4,484,000 4,353,000
Other intangible assets 1,639,000 1,850,000
Other assets 3,136,000 3,022,000
------------- -------------
Total Assets $ 199,907,000 $ 201,976,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 19,061,000 $ 19,571,000
Interest bearing 140,283,000 139,479,000
------------- -------------
Total Deposits 159,344,000 159,050,000
Borrowed Funds:
Short-term borrowings 6,229,000 12,231,000
Other borrowings 7,850,000 4,850,000
Accrued interest payable 758,000 892,000
Other liabilities 1,919,000 1,818,000
------------- -------------
Total Liabilities 176,100,000 178,841,000
------------- -------------
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, 2,308,773 and 2,296,414 shares
issued and outstanding 23,000 23,000
Additional paid-in capital 7,083,000 7,002,000
Employee stock options earned 140,000 131,000
Retained Earnings 16,540,000 16,045,000
Treasury Stock (120,000) (104,000)
FASB 115 Adjustment 141,000 38,000
------------- -------------
Total Shareholders' Equity 23,807,000 23,135,000
------------- -------------
Total Liabilities and Shareholder's Equity $ 199,907,000 $ 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 $ 3,147,000 $ 2,971,000
Interest on deposits with other banks 6,000 22,000
Interest on investment securities:
Taxable 562,000 615,000
Exempt from federal income taxes 62,000 33,000
Dividends
Interest on federal funds sold and
other short-term investments 66,000 10,000
----------- -----------
Total Interest Income 3,843,000 3,651,000
----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,598,000 1,482,000
Interest on short-term borrowings 105,000 189,000
Interest on other borrowings 105,000 67,000
----------- -----------
Total Interest Expense 1,808,000 1,738,000
----------- -----------
Net Interest Income 2,035,000 1,913,000
Provision for loan losses (Note 3) 75,000 45,000
----------- -----------
Net Interest Income After Provision for Loan Losses 1,960,000 1,868,000
----------- -----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans (54,000) (8,000)
Trust Department income 44,000 59,000
Service fees 277,000 250,000
Other income 296,000 109,000
----------- -----------
Total Other Operating Income 563,000 410,000
----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 907,000 768,000
Occupancy expense of bank premises, net 140,000 111,000
Furniture and equipment 108,000 79,000
Data processing 90,000 111,000
Other operating expense 459,000 407,000
----------- -----------
Total Other Operating Expense 1,704,000 1,476,000
----------- -----------
Income Before Income Taxes 819,000 802,000
Provision for Income Taxes 276,000 286,000
----------- -----------
Net Income $ 543,000 $ 516,000
=========== ===========
Earnings Per Share $ .24 $ .23
=========== ===========
Diluted Earnings Per Share $ .22 $ .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>
Six Months Ended June 30,
1998 1997
---------- ----------
INTEREST INCOME:
<S> <C> <C>
Interest and fees on loans $6,326,000 $5,256,000
Interest on deposits with other banks 24,000 22,000
Interest on investment securities:
Taxable 1,112,000 1,136,000
Exempt from federal income taxes 109,000 72,000
Dividends
Interest on federal funds sold and
other short-term investments 138,000 76,000
---------- ----------
Total Interest Income 7,709,000 6,562,000
---------- ----------
INTEREST EXPENSE:
Interest on deposits 3,204,000 2,620,000
Interest on short-term borrowings 225,000 378,000
Interest on other borrowings 209,000 103,000
---------- ----------
Total Interest Expense 3,638,000 3,101,000
---------- ----------
Net Interest Income 4,071,000 3,461,000
Provision for loan losses (Note 3) 131,000 75,000
---------- ----------
Net Interest Income After Provision for Loan Losses 3,940,000 3,386,000
---------- ----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 29,000 --
Trust Department income 106,000 90,000
Service fees 509,000 397,000
Other income 430,000 167,000
---------- ----------
Total Other Operating Income 1,074,000 654,000
---------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,826,000 1,342,000
Occupancy expense of bank premises, net 286,000 200,000
Furniture and equipment 209,000 161,000
Data processing 231,000 189,000
Other operating expense 911,000 652,000
---------- ----------
Total Other Operating Expense 3,463,000 2,544,000
---------- ----------
Income Before Income Taxes 1,551,000 1,496,000
Provision for Income Taxes 528,000 529,000
---------- ----------
Net Income $1,023,000 $ 967,000
========== ==========
Earnings Per Share $ .45 $ .42
========== ==========
Diluted Earnings Per Share $ .42 $ .41
========== ==========
Dividends Per Share $ .23 $ .21
========== ==========
</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>
Six Months Ended Twelve Months Ended
June 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 81,000 41,000
------------ ------------
Balance at end of period 7,083,000 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 1,023,000 1,956,000
Dividends declared on common stock (528,000) (983,000)
------------ ------------
Balance at end of period 16,540,000 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 103,000 49,000
------------ ------------
Balance at end of period 141,000 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 $ 23,807,000 $ 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>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,023,000 $ 967,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Compensatory options recognized 9,000 18,000
Provision for loan losses 131,000 75,000
Provision for depreciation and amortization 322,000 203,000
Accretion of discount on investment securities, net (93,000) (51,000)
(Gain) on sale of loans (29,000) --
Loans originated for sale (10,356,000) (3,114,000)
Proceeds from sale of loans 10,385,000 5,464,000
Change in assets and liabilities:
(Increase) decrease in other assets (114,000) (147,000)
(Increase) decrease in accrued interest payable (134,000) 129,000
Increase (decrease) in other liabilities 62,000 (345,000)
------------ ------------
Net cash provided by operating activities 1,206,000 3,199,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities 8,937,000 7,554,000
Purchase of available-for-sale securities (15,041,000) (4,321,000)
Proceeds from maturity of investment securities 6,212,000 10,415,000
Purchase of investment securities (2,803,000) (10,016,000)
Net cash used in acquisition -- (199,000)
Decrease in federal funds sold and
other short-term investments, net 8,542,000 2,742,000
Loans originated, net of principal collected 689,000 (4,734,000)
Purchase of bank premises and equipment 242,000 (112,000)
------------ ------------
Net cash provided by (used in) investing activities 6,778,000 1,329,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 81,000 23,000
Net increase (decrease) in deposits 294,000 (6,190,000)
Net increase (decrease) in borrowings (3,002,000) 5,606,000
Cash dividends paid (528,000) (478,000)
Purchase of common stock for Treasury (16,000) (20,000)
------------ ------------
Net cash (used in) financing activities (3,171,000) (1,059,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,813,000 3,469,000
CASH AND CASH EQUIVALENTS:
Beginning of period 8,680,000 7,967,000
------------ ------------
End of period $ 13,493,000 $ 11,436,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 3,772,000 $ 2,752,000
Income taxes 573,000 482,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 183,000 $ 73,000
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
June 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 June 30, 1998 and December 31,
1997, the results of operations for the three and six months ended
June 30, 1998 and 1997.
The results of operations for the three and six months ended June 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>
June 30 December 31
------------------------------ ------------
1998 1997 1997
------------- ------------ ------------
<S> <C> <C> <C>
Impaired loans $ 1,149,000 $ 632,000 $ 325,000
Non-accruing loans 644,000 334,000 610,000
Past due 90 days or more and still accruing 422,000 472,000 143,000
------------- ------------ ------------
Total non-performing loan $ 22,150,000 $ 1,438,000 $ 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 June 30
1998 1997
---------------------------
<S> <C> <C>
Balance at beginning of period $1,469,000 $1,209,000
Allowance associated with acquisition -- 345,000
Provision charged to expense 84,000 45,000
Loans charged off 204,000 153,000
Recoveries 2,000 14,000
---------- ----------
Balance at end of period $1,351,000 $1,459,000
========== ==========
<CAPTION>
Six Months Ended June 30
1998 1997
---------------------------
<S> <C> <C>
Balance at beginning of period $1,523,000 $1,186,000
Allowance associated with acquisition -- 345,000
Provision charged to expense 131,000 75,000
Loans charged off 310,000 166,000
Recoveries 7,000 19,000
---------- ----------
Balance at end of period $1,351,000 $1,459,000
========== ==========
</TABLE>
8
<PAGE> 9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Note 4: Earnings Per Share
Presented below are the calculations for basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1999
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders $ 543,000 $ 516,000 $1,023,000 $ 967,000
========== ========== ========== ==========
Weighted average shares outstanding 2,295,671 2,281,967 2,292,073 2,282,651
========== ========== ========== ==========
Basic earnings per share $ .24 $ .23 $ .45 $ .42
========== ========== ========== ==========
Diluted:
Net income available to common stockholders $ 543,000 $ 516,000 $1,023,000 $ 967,000
========== ========== ========== ==========
Weighted average shares outstanding 2,295,671 2,281,967 2,292,073 2,282,657
Effect of dilutive stock options outstanding 138,911 122,154 136,378 103,903
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,434,582 2,404,121 1,428,415 2,366,520
========== ========== ========== ==========
Diluted earnings per common share $ .22 $ .22 $ .42 $ .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 June 30, 1998
is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30
1998 1997
--------------------------
<S> <C> <C>
Net Income $ 1,023,000 $ 967,000
Other comprehensive income,
Net of tax-unrealized gain on securities
Unrealized holding gains arising during the period 103,000 5,000
----------- ----------
Comprehensive Income $ 1,126,000 $ 972,000
=========== ==========
</TABLE>
Note 6: Subsequent Event
On May 7, 1998 the Company announced a proposed acquisition of First
Financial Bancorp, Inc. of Belvidere, Illinois. The terms of the
acquisition, expected to be completed in the third quarter of this
year, call for the Company to pay $30.00 in cash for each outstanding
share of First Financial common stock, subject to a decrease in the
merger price under certain circumstances with a floor of $29.00 per
share. The transaction, with an aggregate value of approximately
$12.6 million, will be accounted for as a purchase
9
<PAGE> 10
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
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 June 30, 1998 and December 31,
1997 and the consolidated condensed statements of income for the three months
and six months ended June 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.
THREE MONTHS ENDED JUNE 30
For the three months ended June 30, 1998, interest income was $3.8 million
compared to $3.7 million for the same period in 1997. This increase of $192,000,
nearly 5.3%, was the result of increased volume which was partially offset by
reduced rates. Earning assets averaged $186.8 million during the three months
ended June 30, 1998 compared to $171.0 million for the same period in 1997. The
average yield on earning assets decreased to 8.28% for the period compared to
8.57% in 1997
Interest and fees on loans increased to $3.1 million in the current period
compared to $2.9 million in the same period in 1997. This increase of 5.9% was
due to increased volume. Most of the increase is the result of the inclusion of
three months of the Rochelle operations in 1998 versus two months in 1997.
Investment income on taxable securities for the quarter ended June 30, 1998 was
$562,000 compared to $615,000 in 1997, a decrease of 8.6%. Income due to volume
increased; however, this was more than offset by the decrease due to lower
yields. Income from tax-exempt securities increased nearly 88% 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 June 30, 1998 was $1.6
million compared to $1.5 million in the same period in 1997. The increase was
due to increased volumes which were the result of the Rochelle acquisition. The
average rate of the Rochelle deposits were slightly lower than the average
rate on the Blackhawk deposits. This rate relationship between Blackhawk and
Rochelle is expected to continue. While there has been some fluctuations in
interest rates, most have been relatively minor. If interest rates increase in
the coming months, an increase in the rates paid on deposits can be expected.
Significant growth in deposits is not expected in the third quarter of 1998 from
current levels. However, comparisons to 1997 in the future quarters will be very
positive because of the First Financial acquisition.
Interest on short-term borrowings was lower in 1998 than in 1997, $105,000
versus $189,000 respectively. Short-
11
<PAGE> 12
term borrowings consist of fed funds purchased and repurchase agreements. The
higher average rate for the quarter on these borrowings was offset by a lower
volume. The interest cost on other borrowings which are advances from the
Federal Home Loan Bank, ("FHLB"), was $105,000 for the quarter compared to
$67,000 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 first
quarter of 1998 increased to $7.9 million from $4.5 million in 1997.
The provision for loan loss was approximately $75,000 in the quarter ended June
30, 1998 as compared to $45,000 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 $563,000 from $410,000 in the second
quarter of 1997. The largest single item in each period was service fees,
totaling $277,000 and $250,000 in 1998 and 1997, respectively. Most of the
income is the result of the inclusion of three months of service fees on deposit
accounts and service fees related to mortgage servicing versus two months for
1997. Continued increases in revenue from the servicing of sold mortgages is
anticipated. Trust fees declined $15,000 to $44,000 for the quarter. 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 representing a significant amount of the
increase to $296,000 in 1998 from $109,000 in 1997. A loss on the sale of loans
of $54,000 was experienced in the second quarter of 1998 compared to a loss of
$26,000 in the same quarter of 1997. Prior to the acquisition of Rochelle,
Blackhawk's loans were sold with servicing rights. Since loans are now being
sold with the servicing rights retained by Rochelle, the proceeds from the sale
are reduced. The increased income from servicing will offset the reduced income
in this area.
Total other operating expenses were $1,704,000 in the second quarter of 1998
compared to $1,476,000 in the same period in 1997. The largest single item in
this category is salaries and benefits which were $907,000 in 1998 compared to
$768,000 in 1997. The increase of $139,000 is the result of normal salary
increases, the addition of a new facility in Roscoe, Illinois and the inclusion
of three months of the Rochelle operations versus two months for 1997. The
relatively large increases in occupancy and furniture and equipment are the
result of the acquisition of Rochelle and the addition of the Roscoe office. The
increased costs in both of these areas are expected to continue for the balance
of 1997. The decrease in data processing is the result of the consolidation of
data services providers.
Income taxes decreased to $276,000 from $286,000 for the three month period
ending June 30,1998. The effective tax rates were 33.7% versus 35.7% for 1998
and 1997 second quarters, respectively. The lower effective tax rate resulted
from a higher percentage of income subject to Illinois versus Wisconsin State
income taxes, and the increase of income from federally tax-exempt securities.
SIX MONTHS ENDED JUNE 30
Total interest income for the six months ended June 30, 1998, was $7.7 million
compared to $6.6 million for the same period in 1997. The largest area of
interest revenue, interest and fees on loans, also contributed the largest
dollar increase, $1.0 million. As was discussed previously, volume was the
primary reason for the growth of revenue in this area. The average yield in 1998
was approximately the same as in 1997. Future internal growth of loans could
slow during the second half of 1998 if the Federal Reserve Bank decides to
increase interest rates. However, this does not seem to be likely, in the
immediate future.
Interest on taxable securities was substantially the same $1.1 million as
compared to $1.1 million for the first half of 1998. The decrease in the average
yield for the period in 1998 offset the increase in volume when compared to
1997. Interest income from tax exempt securities was effected by increased
volume. Interest income from fed funds sold and short-term investments was
$138,000 for the first six months of 1998 as compared to $95,000 for the same
period in 1997. This $43,000 increase was due both to increased volume and
yield.
Interest expense was $3.6 million in the six months ended June 30, 1998 as
compared to $3.1 million for the same
12
<PAGE> 13
period in 1997. Interest on deposits was $3.2 million in 1998 as compared to
$2.6 million in 1997. The reduction in average rate was offset by increased
volume. Most of the increased volume was attributable to the Rochelle
acquisition.
Interest on short-term borrowings was $225,000 in the first half of 1998 as
compared to $378,000 in the same period of 1997. The volume in 1997 was
significantly lower and offset the effect of higher average interest rates paid.
Increased average balance plus increased average rates paid accounts for the
higher interest expense of long-term borrowings.
The provision for loan loss was approximately $131,000 for the period in 1998
compared to $75,000 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 six months ended June 30, 1998 was $1.1 million
compared to $654,000 for the same period in 1997. Service fees, the largest item
in this category, experienced the largest increase to $509,000 in 1998 as
compared to $397,000 in 1997. The increase in this area was the result of
increased volume of accounts as a result of the Rochelle acquisition, increased
fees and the additional revenues associated with the servicing of mortgages by
Rochelle. Prior to the acquisition of Rochelle, Blackhawk's loans were sold 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 will offset the reduced income in this area. Trust
department income increased 18% 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 $263,000 over 1997 levels, $430,000
compared to $167,000. 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 increase income in the future.
For the six month period ending June 30, 1998, total other operating expenses
were $3,463,000 compared to $2,544,000 in 1997. The area of largest increase was
salaries and benefits, which totaled $1,826,000 compared to $1,342,000 in 1997.
The acquisition of Rochelle, combined with normal salary and benefit increases
and additional staffing for the Roscoe branch opened in March, account for the
increase. Increases in the areas of occupancy and data processing are primarily
the result of the Rochelle acquisition.
As a result of increased federally tax-exempt income, the effective tax rate
decreased to 34.0%, in 1998, from 35.4% in 1997.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares June 30, 1998 to the
Company's prior fiscal year end December 31, 1997. Total assets were $199.9
million as compared to $202.0 million as of December 31, 1997. This represents a
decrease of approximately 1%.
Total investment securities, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $41.2
million as of June 30, 1998, as compared to $47.3 million as of December 31,
1997. The reduction of Blackhawk's investments were offset by the
increase in cash and cash equivalencies
Loans totaled $137.3 million on June 30, 1998 as compared to $138.3 million on
December 31, 1997, a decrease of $1.0 million or 1%. The majority of the loan
demand for 1998 has been for fixed-rate mortgages which are
13
<PAGE> 14
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 $1.4 million as of June 30,1998 as compared to
$1.2 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
six months ended June 30, 1998 and 1997. Non-performing loans (see Footnote 2)
as of June 30, 1998 were $2.2 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 3% to $4.5 million as of December 31,
1997. This increase was primarily the result of the Rochelle data conversion and
the upgrade of the item capture system in Beloit.
Total deposits of $159.3 million increased $294,000 as of June 30, 1998 as
compared to $159.1 million as of December 31, 1997. Non-interest bearing
deposits decreased to $19.1 million from $19.2 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. Interest bearing deposits
increased slightly from year-end levels. A significant amount of training
time was incurred for the data conversion of the Rochelle operations. With the
completion of the conversion, staff time will again be focused on attracting
deposits. 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 $6.0 million. Other
borrowings, the main component of which are advances from the FHLB, was $7.9
million at June 30, 1998 compared to $4.9 million at December 31, 1997. 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 First Financial Bancorp
transaction. The use of borrowings, both short and long, will be utilized as
future need arise.
The Company continues to maintain an excellent capital position regardless of
the measurement used. The following table shows four different measurements as
of June 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>
JUNE 30, DECEMBER 31, REGULATORY
1998 1997 REQUIREMENTS
-----------------------------------------
<S> <C> <C> <C>
Leverage capital ratio 10.76% 15.08% N/A
Core capital as a percent
of assets 10.72% 14.37% 5.50%
Core capital as a percent
of risk-based assets 15.50% 22.88% N/A
Total capital as a percent
of risk-based assets 16.47% 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-
14
<PAGE> 15
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 has declared a special dividend, payable in August 1998 of
$4.0 million. This will be used as part of the financing of the proposed
First Financial transaction.
The liquidity needs of the Company generally consists of payment of dividends to
its shareholders and a limited amount of expenses. As part of the financing of
the proposed purchase of First Financial transaction, the Company is currently
in negotiations to secure a line of credit from an unrelated third party. The
sources of funds to provide this normal liquidity are income from investments,
maturities of investments, cash balances, issuance of capital 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 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
$17.8 million as of June 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 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 Year 2000 issues. The four
phases set-forth by the Company are awareness by major area, assessment of Year
2000 compliance, system renovation (if necessary) and validation of Year 2000
preparedness. The Company's Year 2000 progress, by major area, is set-forth in
the table that follows.
<TABLE>
<CAPTION>
System Awareness Assessment Renovation Validation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Ledger Complete Complete July 1998 November 1998
Loan System Complete Complete September 1998 November 1998
Deposit System Complete Complete April 1998 November 1998
Item Capture Complete Complete April 1998 November 1998
Hardware Complete Complete April 1998 October 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. 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 not yet completed the validation phase.
As a result, a formal contingency plan is still being formulated. The expected
results of the validation process are that mission critical systems will be Year
2000 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.
15
<PAGE> 16
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
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 13, 1998 , at the annual meeting of shareholders of the Company, the
shareholders re-elected James P. Kelley, Frederick G. Klett and Roger K. Taylor
to three-year terms expiring in 2001, and approved an ammendment to the
Blackhawk Bancorp, Inc. 1994 Executive Stock Option Plan and the Blackhawk
Bancorp, Inc. 1994 Directors Stock Option Plan. The vote, with respect to the
re-election of each was as follows:
James P. Kelley
2,300,861 total votes eligible to be cast
1,911,606 votes were represented at the Annual Meeting
1,897,511 votes were cast "For" re-election
-0- votes were cast "Against" re-election
14,095 votes abstained
Frederick G. Klett
2,300,861 total votes eligible to be cast
1,911,606 votes were represented at the Annual Meeting
1,893,011 votes were cast "For" re-election
-0- votes were cast "Against" re-election
18,595 votes abstained
Roger K. Taylor
2,300,861 total votes eligible to be cast
1,911,606 votes were represented at the Annual Meeting
1,896,476 votes were cast "For" re-election
-0- votes were cast "Against" re-election
15,130 votes abstained
The vote on the amendments to the Stock Option Plans were as follows:
2,300,861 total votes eligible to be cast
1,911,606 votes were represented at the Annual Meeting
1,301,660 votes were "For" the amendment
184,826 votes were "Against" the amendment
65,421 votes abstained
359,699 votes were broker non-votes
ITEM 6. A) EXHIBITS
See Exhibit Index following the signature page in this report, which
is incorporated herein by this reference.
18
<PAGE> 18
B) REPORTS ON FORM 8-K
There was one report on Form 8-K filed during the second quarter of
1998. The report was dated May 20, 1998 and was related to the change
in the Company's certifying accountant, from Lindgren, Callihan,
VanOsdol and Co., LTD. To Wipfli, Ullrich, Bertelson, LLP.
There was also one amended 8-K/A filing, dated July 11, 1998. The
amended report was related to the Company's proposed purchase of
First Financial Bancorp, Inc. Financial statements filed included
financial statements of the business acquired along with pro forma
financial information.
19
<PAGE> 19
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: August 13, 1998 /s/ Dennis M. Conerton
----------------------------------------
Dennis M. Conerton
President and Chief Executive Officer
Date: August 13, 1998 /s/ Jesse L. Calkins
----------------------------------------
Jesse L. Calkins
Senior Vice President
(Chief Financial and Accounting Officer)
20
<PAGE> 20
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>
21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,785,000
<INT-BEARING-DEPOSITS> 4,706,000
<FED-FUNDS-SOLD> 347,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,813,000
<INVESTMENTS-CARRYING> 25,040,000
<INVESTMENTS-MARKET> 25,125,000
<LOANS> 137,306,000
<ALLOWANCE> 1,351,000
<TOTAL-ASSETS> 199,907,000
<DEPOSITS> 159,344,000
<SHORT-TERM> 6,229,000
<LIABILITIES-OTHER> 2,677,000
<LONG-TERM> 7,850,000
0
0
<COMMON> 23,000
<OTHER-SE> 23,784,000
<TOTAL-LIABILITIES-AND-EQUITY> 199,907,000
<INTEREST-LOAN> 6,326,000
<INTEREST-INVEST> 1,221,000
<INTEREST-OTHER> 162,000
<INTEREST-TOTAL> 7,709,000
<INTEREST-DEPOSIT> 3,204,000
<INTEREST-EXPENSE> 3,638,000
<INTEREST-INCOME-NET> 4,071,000
<LOAN-LOSSES> 131,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,463,000
<INCOME-PRETAX> 1,551,000
<INCOME-PRE-EXTRAORDINARY> 1,023,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,023,000
<EPS-PRIMARY> .45
<EPS-DILUTED> .42
<YIELD-ACTUAL> 8.362
<LOANS-NON> 644,000
<LOANS-PAST> 422,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,149,000
<ALLOWANCE-OPEN> 1,523,000
<CHARGE-OFFS> 310,000
<RECOVERIES> 7,000
<ALLOWANCE-CLOSE> 1,351,000
<ALLOWANCE-DOMESTIC> 1,351,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,351,000
</TABLE>
