<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, 1999
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.
<TABLE>
<CAPTION>
ISSUED AT
CLASS OF COMMON STOCK SEPTEMBER 30, 1999
---------------------- ------------------
<S> <C>
$.01 PAR VALUE 2,324,073 SHARES
</TABLE>
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income for the
three months ended September 30, 1999 and 1998 4
Consolidated Condensed Statements of Income for the
Nine months ended September 30, 1999 and 1998 5
Consolidated Condensed Statements of Shareholders'
Equity as of September 30, 1999 and December 31, 1998 6
Consolidated Condensed Statements of Cash Flows for the
Nine months ended September 30, 1999 and 1998 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
2
<PAGE> 3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998
- ------ -------------------- ------------------
<S> <C> <C>
Cash and cash equivalents $ 15,567,000 $ 15,973,000
Federal funds sold and other short-term investments 1,433,000 15,335,000
Securities available for sale 49,093,000 38,475,000
Securities held to maturity 19,664,000 21,896,000
Total loans 191,158,000 182,304,000
Allowance for loan losses (Note 3) 1,966,000 1,915,000
-------------------- ------------------
Net loans 189,192,000 180,389,000
Bank premises and equipment, net 7,206,000 7,483,000
Other intangible assets 7,705,000 8,152,000
Other assets 5,602,000 3,765,000
-------------------- ------------------
Total Assets $ 295,462,000 $ 291,468,000
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-interest bearing $ 22,855,000 $ 33,110,000
Interest bearing 207,899,000 208,285,000
-------------------- ------------------
Total Deposits 230,754,000 241,395,000
Borrowed Funds:
Short-term borrowings 20,676,000 4,576,000
Other borrowings 16,937,000 17,123,000
Accrued interest payable 989,000 1,046,000
Other liabilities 2,518,000 2,928,000
-------------------- ------------------
Total Liabilities 271,874,000 267,068,000
-------------------- ------------------
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, 2,324,073 and 2,313,373 shares
issued and outstanding 23,000 23,000
Additional paid-in capital 7,174,000 7,099,000
Employee stock options earned 130,000 130,000
Retained Earnings 17,044,000 16,975,000
Treasury Stock (120,000) (120,000)
FASB 115 Adjustment (663,000) 293,000
--------------------- ------------------
Total Shareholders' Equity 23,588,000 24,400,000
-------------------- ------------------
Total Liabilities and Shareholder's Equity $ 295,462,000 $ 291,468,000
==================== ==================
</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 September 30,
1999 1998
-------------------- ------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,992,000 $ 3,567,000
Interest on deposits with other banks 26,000 91,000
Interest on investment securities:
Taxable 866,000 623,000
Exempt from federal income taxes 126,000 75,000
Interest on federal funds sold and
other short-term investments 22,000 72,000
-------------------- ------------------
Total Interest Income 5,032,000 4,428,000
-------------------- ------------------
INTEREST EXPENSE:
Interest on deposits 2,261,000 1,893,000
Interest on short-term borrowings 172,000 69,000
Interest on other borrowings 250,000 153,000
-------------------- ------------------
Total Interest Expense 2,683,000 2,115,000
-------------------- ------------------
Net Interest Income 2,349,000 2,313,000
Provision for loan losses (Note 3) 135,000 79,000
-------------------- ------------------
Net Interest Income After Provision for Loan Losses 2,214,000 2,234,000
-------------------- ------------------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 64,000 52,000
Brokerage & Annuity Commissions 55,000 85,000
Service fees on Deposit Accounts 346,000 287,000
Other income 228,000 128,000
-------------------- ------------------
Total Other Operating Income 693,000 552,000
-------------------- ------------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,231,000 1,006,000
Occupancy expense of bank premises, net 164,000 167,000
Furniture and equipment 197,000 105,000
Data processing 188,000 123,000
Intangible amortization 153,000 115,000
Other operating expense 549,000 429,000
-------------------- ------------------
Total Other Operating Expense 2,482,000 1,945,000
-------------------- ------------------
Income Before Income Taxes 425,000 841,000
Provision for Income Taxes 150,000 277,000
-------------------- ------------------
Net Income $ 275,000 $ 564,000
==================== ==================
Earnings Per Share $ .12 $ .25
==================== ==================
Diluted Earnings Per Share $ .11 $ .23
==================== ==================
Dividends Per Share $ .12 $ .12
==================== ==================
</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,
1999 1998
-------------------- ------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 11,741,000 $ 9,893,000
Interest on deposits with other banks 224,000 115,000
Interest on investment securities:
Taxable 2,386,000 1,735,000
Exempt from federal income taxes 349,000 184,000
Interest on federal funds sold and
other short-term investments 265,000 210,000
-------------------- ------------------
Total Interest Income 14,965,000 12,137,000
-------------------- ------------------
INTEREST EXPENSE:
Interest on deposits 6,772,000 5,097,000
Interest on short-term borrowings 357,000 294,000
Interest on other borrowings 740,000 362,000
-------------------- ------------------
Total Interest Expense 7,869,000 5,753,000
-------------------- ------------------
Net Interest Income 7,096,000 6,384,000
Provision for loan losses (Note 3) 369,000 210,000
-------------------- ------------------
Net Interest Income After Provision for Loan Losses 6,727,000 6,174,000
-------------------- ------------------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 382,000 216,000
Brokerage & annuity commissions 246,000 149,000
Service fees on deposit accounts 958,000 753,000
Other income 550,000 508,000
-------------------- ------------------
Total Other Operating Income 2,136,000 1,626,000
-------------------- ------------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,707,000 2,832,000
Occupancy expense of bank premises, net 507,000 453,000
Furniture and equipment 593,000 314,000
Data processing 571,000 354,000
Intangible amortization 451,000 239,000
Other operating expense 1,606,000 1,216,000
-------------------- ------------------
Total Other Operating Expense 7,435,000 5,408,000
-------------------- ------------------
Income Before Income Taxes 1,428,000 2,392,000
Provision for Income Taxes 528,000 805,000
-------------------- ------------------
Net Income $ 900,000 $ 1,587,000
==================== ==================
Earnings Per Share $ .39 $ .69
==================== ==================
Diluted Earnings Per Share $ .37 $ .66
==================== ==================
Dividends Per Share $ .36 $ .35
==================== ==================
</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, 1999 December 31, 1998
------------------- ------------------------
<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 7,099,000 7,002,000
Stock options exercised 75,000 97,000
------------------- -----------------------
Balance at end of period 7,174,000 7,099,000
------------------- -----------------------
Employee Stock Options Earned:
Balance at beginning of period 130,000 131,000
Unearned employee compensation -- (1,000)
------------------- -------------------------
Balance at end of period 130,000 130,000
------------------- -----------------------
Retained Earnings:
Balance at beginning of period 16,975,000 16,045,000
Net Income 900,000 2,010,000
Dividends declared on common stock (831,000) (1,080,000)
-------------------- ----------------------
Balance at end of period 17,044,000 16,975,000
-------------------- -----------------------
Treasury Stock, at cost:
Balance at beginning of period (120,000) (104,000)
Purchase -- (16,000)
-------------------- -----------------------
Balance at end of period (120,000) (120,000)
-------------------- ----------------------
Other Comprehensive Income, net of taxes
Balance at beginning of period 293,000 38,000
Principal payments on ESOP Plan (956,000)
--------------------- ----------------------
Balance at end of period (663,000) 293,000
---------------------- -----------------------
Total Shareholders' Equity $ 23,588,000 $ 24,400,000
===================== =======================
</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, 1999 September 30, 1998
-------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 900,000 $ 1,587,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Compensatory options recognized -- 9,000
Provision for loan losses 369,000 210,000
Provision for depreciation and amortization 1,099,000 491,000
Accretion of discount on investment securities, net 69,000 (120,000)
Gain on sale of AFS securities (69,000) --
(Gain) on sale of loans (382,000) (88,000)
Loans originated for sale (23,115,000) (13,843,000)
Proceeds from sale of loans 26,936,000 13,931,000
Change in assets and liabilities:
(Increase) decrease in other assets (1,260,000) (1,337,000)
Increase (decrease) in accrued interest payable and other liabilities 295,000 596,000
-------------------- -----------------------
Net cash provided by operating activities 4,842,000 1,436,000
-------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities 16,819,000 16,338,000
Purchase of available-for-sale securities (28,962,000) (18,256,000)
Proceeds from maturity of investment securities 10,351,000 10,169,000
Purchase of investment securities (8,167,000) (2,803,000)
Proceeds from sales of available-for-sale securities 174,000 --
Net cash used in acquisition -- (6,914,000)
Decrease in federal funds sold and
other short-term investments, net 13,902,000 9,566,000
Loans originated, net of principal collected (13,572,000) 359,000
Purchase of bank premises and equipment (310,000) (942,000)
-------------------- -----------------------
Net cash provided by (used in) investing activities (9,765,000) 7,517,000
-------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 75,000 97,000
Net increase (decrease) in deposits (10,641,000) 5,405,000
Net increase (decrease) in borrowings 15,914,000 4,099,000
Cash dividends paid (831,000) (752,000)
Purchase of common stock for Treasury -- (16,000)
-------------------- -----------------------
Net cash (used in) financing activities 4,517,000 (1,977,000)
-------------------- -----------------------
Net increase (decrease) in cash and cash equivalents (406,000) 6,976,000
CASH AND CASH EQUIVALENTS:
Beginning of period 15,973,000 8,680,000
-------------------- -----------------------
End of period $ 15,567,000 $ 15,656,000
==================== =======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 7,926,000 $ 5,790,000
Income taxes 154,000 796,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 865,000 $ 515,000
</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, 1999
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, 1999 and December 31, 1998, the results of operations for the
three and nine months ended September 30, 1999 and 1998.
The results of operations for the three and nine months ended
September 30, 1999 and 1998 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
1999 1998 1998
----------------------------- --------------
<S> <C> <C> <C>
Impaired loans $ 2,479,000 $ 807,000 $ 1,479,000
Non-accruing loans 870,000 1,400,000 857,000
Past due 90 days or more and still accruing 546,000 268,000 240,000
------------ ------------ --------------
Total non-performing loan $ 3,895,000 $ 2,475,000 $ 2,576,000
============ ============ ==============
</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
1999 1998
-----------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,973,000 $ 1,351,000
Allowance associated with acquisition -- 453,000
Provision charged to expense 135,000 79,000
Loans charged off 150,000 34,000
Recoveries 8,000 9,000
-------------- --------------
Balance at end of period $ 1,966,000 $ 1,858,000
============== ==============
<CAPTION>
Nine Months Ended September 30
1999 1998
-----------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,915,000 $ 1,523,000
Allowance associated with acquisition -- 453,000
Provision charged to expense 369,000 210,000
Loans charged off 354,000 344,000
Recoveries 36,000 16,000
-------------- -------------
Balance at end of period $ 1,966,000 $ 1,858,000
============== =============
</TABLE>
8
<PAGE> 9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders $ 275,000 $ 564,000 $ 900,000 $ 1,587,000
=========== ============ =========== ===========
Weighted average shares outstanding 2,312,758 2,299,199 2,307,885 2,294,474
=========== ============ ============ ===========
Basic earnings per share $ .12 $ .25 $ .39 $ .69
=========== ============ ============ ===========
Diluted:
Net income available to common stockholders $ 275,000 $ 564,000 $ 900,000 $ 1,587,000
=========== ============ ============ ===========
Weighted average shares outstanding 2,312,758 2,271,331 2,307,885 2,294,474
Effect of dilutive stock options outstanding 123,743 138,911 115,584 130,792
----------- ------------- ------------ ------------
Diluted weighted average shares outstanding 2,436,501 2,438,110 2,423,469 2,425,266
=========== ============ ============ ===========
Diluted earnings per common share $ .11 $ .23 $ .37 $ .65
=========== ============ ============ ===========
</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,
1999 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
-------------------------
<S> <C> <C>
Net Income $ 900,000 $ 1,587,000
Other comprehensive income,
Net of tax--unrealized gain on securities
Unrealized holding gains arising during the period (956,000) 256,000
------------- ------------
Comprehensive Income $ (56,000) $ 1,843,000
============ ============
</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
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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, 1999 and 1998 after giving effect to
the First's acquisition as if it occurred on January 1, 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Total Income $ 3,042,000 $ 3,439,000 $ 9,232,000 $ 10,257,000
Net Income 275,000 441,000 900,000 841,000
Basic Earnings per share .12 .19 .39 .36
Diluted Earnings .11 .18 .37 .35
</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, 1999 and December
31, 1998 and the consolidated condensed statements of income for the three
months and nine months ended September 30, 1999 and 1998. This information is
not meant to be a substitute for the balance sheets and income statements.
RESULTS OF OPERATIONS
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 $12.5 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, 1999, interest income was $5.0 million
compared to $4.4 million for the same period in 1998. Approximately $1.1 million
of the interest income in 1999 was the result of the Belvidere purchase compared
to nearly $400,000 in 1998. The area that contributed nearly two-thirds of the
increase in interest income was interest and fees on loans. The other one-third
of the increase was from interest on investments. Interest and fees on loans
increased to $4.0 million in the current period compared to $3.6 million in the
same period in 1998. This increase of 11.9% 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, 1999
was $866,000 compared to $623,000 in 1998, an increase of 39%. Income from
tax-exempt securities increased approximately 68% in the 1999 period compared to
1998. 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, 1999 was $2.3
million compared to $1.9 million in the same period in 1998. The increase was
due to increased volumes which were the result of the Belvidere acquisition. The
average yield of deposits was lower in 1999 than in 1998, 4.36% vs. 4.68%.
Recently interest rates on deposits have begun to increase. Based on the recent
trends in interest rates, the cost of funds in the fourth quarter will be higher
than in the third quarter. Significant growth in deposits is not expected in the
fourth quarter of 1999 from current levels due to the competition for deposits.
Interest on short-term borrowings was higher in 1999 than in 1998, $172,000 and
$69,000 respectively. Short-term borrowings consist of fed funds purchased and
repurchase agreements. This increased cost was the result of greater volume and
a slightly higher interest rate. The interest cost on other borrowings, which
are advances from the Federal Home Loan Bank, ("FHLB") and borrowings to finance
the purchase of Belvidere, was $250,000 for the quarter compared to $153,000 in
1998. This increase was the result of increased volume. The loan to finance the
purchase was outstanding for three months in 1999 compared to one month in 1998
and was responsible for slightly over one-half of the interest expense in this
category.
11
<PAGE> 12
The provision for loan loss was approximately $135,000 in the quarter ended
September 30, 1999 as compared to $79,000 for the same period in 1998. 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 $693,000 from $552,000 in the third
quarter of 1998. The largest single item in each period was service fees,
totaling $346,000 and $287,000 in 1999 and 1998, respectively. Most of the
increase is the result of the inclusion of service fees on deposit accounts at
Belvidere. Although the commissions from the sale of non-deposit investments
declined in the period ending September 1999 compared to the same period in
1998, this is an area that growth of income in anticipated in the future. Income
from the servicing of fixed rate mortgages is included in other income. An
increase in revenue from the servicing of sold mortgages is anticipated with the
negative effect of prepayments reduced with the increase of interest rates.
Prior to the acquisition of Rochelle in 1997, Blackhawk's loans were sold with
servicing rights released. 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. A significant portion of the increase in other income
during the third quarter of 1999 compared to 1998 was the gain on the redemption
of an investment, approximately $69,000.
Total other operating expenses were $2.5 million in the third quarter of 1999
compared to $1.9 million in the same period in 1998. The largest single item in
this category is salaries and benefits, which were $1.2 million in 1999 compared
to $1.0 million in 1998. The increase of $225,000 is the result of three months
of the Belvidere operation in 1999 compared to one month in 1998. The lack of
increase in this area was helped by the vacancy in some management positions
during 1999. The relatively large increases in occupancy and furniture and
equipment, $197,000 in 1999 compared to $105,000 in 1998, are the result of the
upgrade of equipment to meet Y2K standards. The increase in data processing is
the result of Belvidere operating on a separate system. The consolidation of
Belvidere's data processing is not anticipated until mid-2000.
The provision for income taxes decreased to $150,000 from $277,000 for the three
month period ending September 30, 1999. The effective tax rates were 35.3%
versus 32.9% for third quarter of 1999 and 1998, respectively. The tax benefit
of increased municipal bonds was offset by an increase of non-tax deductible
expense, amortization of intangible assets acquired with the purchase of
Belvidere.
NINE MONTHS ENDED SEPTEMBER 30
Total interest income for the nine months ended September 30, 1999, was $15.0
million compared to $12.1 million for the same period in 1998. The 1999 figures
include Belvidere for the entire period but only after September 3, in 1998. The
largest category of interest income was from loans, $11.7 million in 1999
compared to $9.9 million in 1998. Interest and fees on loans, also contributed
the largest dollar increase, $1.8 million. As was discussed previously, volume
as a result of the acquisitions of Belvidere was the primary reason for the
growth of revenue in this area. As was discussed in the June report, the Federal
Reserve Board has increased interest rates. The slow down in mortgage activity
has been replace by an increase of commercial loans.
Interest on taxable securities increased 37.5%, $2.4 million as compared to $1.7
million, in 1999 compared to 1998. The increase was primarily due to the
acquisition of Belvidere. Interest income from tax-exempt securities, nearly a
90% increase, was the result of increased volume. Interest income from fed funds
sold and short-term investments was $265,000 for the nine months of 1999 as
compared to $210,000 for the same period in 1998. This $55,000 increase was due
primarily to increased volume. Income from interest bearing bank deposits was
$224,000 in 1999 compared to $115,000 in 1998. The increase in this area was due
entirely to increased volume.
Interest expense was $7.9 million in the nine months ended September 30, 1999 as
compared to $5.8 million for the same period in 1998. Interest on deposits was
$6.8 million in 1999 as compared to $5.1 million in 1998. The
12
<PAGE> 13
reduction in average rate was offset by increased volume. Most of the increased
volume was attributable to the Belvidere acquisition.
Interest on short-term borrowings was $357,000 in 1999 as compared to $294,000
in the same period of 1998. Nearly all of this increase was due to an increase
of repurchase agreements. Increased average balances account for the higher
interest expense of long-term borrowings, $740,000 compared to $362,000. The
increase was the result of the loan to finance the purchase of Belvidere, which
was on the books for all of 1999 but for only one month in 1998.
The provision for loan loss was approximately $369,000 for the nine months in
1999 compared to $210,000 in 1998. 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, 1999 was $2.1
million compared to $1.6 million for the same period in 1998. Service fees on
deposit accounts experienced an increase to $958,000 in 1999 as compared to
$753,000 in 1998. The increase in this area was the result of increased volume
of accounts as a result of the acquisition. Other income in 1999
increased 8.37% over 1998, $550,000 compared to $508,000. Trust department
income, included in other income, was approximately the same in both periods.
Prior to the acquisition of Rochelle, Blackhawk sold the fixed rate loans with
servicing rights released. Loans are now being sold with the servicing rights
retained by Blackhawk Loan servicing is another category within other income and
it accounted for much of the increase.
For the nine month period ending September 30, 1999, total other operating
expenses were $7.4 million compared to $5.4 million in 1998. The area of largest
increase was salaries and benefits, which totaled $3.7 million compared to $2.8
million in 1998. The acquisition of Belvidere account for most of the increase.
Costs associated with Belvidere are included in the 1998 total for one month and
for the entire nine months in 1999. The cost of the Roscoe Branch which was
opened in March of 1998 also contributed to the increased costs by its
inclusion for 7 months in 1998 and nine months in 1999. Increases in the areas
of occupancy, equipment and data processing are primarily the result of the
Belvidere acquisition and the Roscoe opening. Another factor in the increased
equipment costs were those associated with Y2K.
Income taxes for the period were $528,000 in 1999 compared to $805,000 in 1998.
The effective tax rate increased to 37.0%, in 1999, from 33.7% in 1998. The
increase in rate is the result of an increase in non-deductible
acquisition-related expenses that was not offset by the increase of tax-exempt
income.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares September 30, 1999
to the Company's prior fiscal year end of December 31, 1998. Total assets were
$295.5 million as compared to $291.5 million as of December 31, 1998.
Total investment securities, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $70.1
million as of September 30, 1999, as compared to $75.7 million as of December
31, 1998. During this period of time fed funds sold and short term investments
declined from $15.3 million at December 31, 1998 to $1.4 million at September
30, 1999. Securities available-for-sale increased from $38.5 million to $49.1
million. Securities held-to-maturity decreased from $21.9 million to $19.7
million. Cash
13
<PAGE> 14
and cash equivalents were also lower as of September 30, 1999 compared to
December 31, 1998, $16.0 million and $13.4 million, respectively. The reduction
in cash and investments was used to help fund the increase in loans.
Loans totaled $191.2 million on September 30, 1999 as compared to $182.3 million
on December 31, 1998. The majority of the loan increase in 1999 has been in the
commercial loan category. Early in 1999 the demand for fixed-rate mortgages,
which are usually sold to the Federal Home Loan Mortgage Corporation within one
month of origination, continued to be quite heavy. During the third quarter the
demand in this area weakened. The activity in commercial and consumer loans
continues to be good but very competitive. The strength of loan demand for the
balance of 1999 will depend to some extent on what action the Federal Reserve
Bank takes with regard to interest rates. To date Y2K has not been a strong
factor regarding loan activity and management does not believe it will become
one in the fourth quarter.
Allowance for loan losses was $2.0 million as of September 30, 1999 as compared
to $1.9 million as of December 31, 1998. 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, 1999 and 1998. Non-performing loans (see
Footnote 2) as of September 30, 1999 were $3.9 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 declined to $7.2 million from $7.5 million as of
December 31, 1998. The increase in equipment due to Y2K upgrade was offset by
depreciation. The reduction of intangible assets during 1999 to $7.7 million at
September 30, 1999 compared to $8.2 million at December 31, 1998 was the result
of amortization.
Total deposits were $230.8 million as of September 30, 1999 compared to $241.4
million as of December 31, 1998. Non-interest bearing deposits decreased to
$22.9 million from $33.1 million as of December 31, 1998. 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 decreased from year-end
levels, $208.3 million compared to $207.9 million. Affecting deposit levels has
been the strength of the overall equity markets and the strong competition in
the financial community for funds. As a result, dramatic growth of deposits is
not anticipated during the balance of 1999. To date there has not been a
definite outflow of funds due to Y2K. Steps are being taken to satisfy those
needs if they arise.
Short-term borrowing consists mainly of repurchase agreements with customers and
fed funds purchased. The level of fed funds purchased has increased to offset
the decline in deposits. At the end of June, two of the repurchase agreement
relationships were extended for another two years. Other borrowings, consisting
primarily of advances from the Federal Home Loan Bank ("FHLB"),were nearly the
same at September 30 as they were at year end, $16.9 million and $ 17.1 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, 1999 and December 31, 1998, 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
1999 1998 REQUIREMENTS
------------------------------------------------
<S> <C> <C> <C>
Leverage capital ratio 6.27% 6.00% 3.00%
Core capital as a percent
of risk-based assets 9.52% 8.36% 4.00%
Total capital as a percent
of risk-based assets 10.60% 9.31% 8.00%
</TABLE>
14
<PAGE> 15
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 securities,
sale of loans, borrowing from both the Federal Reserve Bank and Federal Home
Loan Bank, and 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 liquidity needs of the Company generally consists of payment of dividends to
its shareholders, payments of principal and interest on borrowed funds 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
$28.1 million as of September 30, 1999. This compares to $33.7 million at
December 31, 1998. 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("Y2K"). 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.
<TABLE>
<S> <C> <C> <C> <C>
System Awareness Assessment Renovation Validation
General
Ledger Complete Complete Complete Complete
Loan
System Complete Complete Complete Complete
Deposit
System Complete Complete Complete Complete
Item
Capture Complete Complete Complete Complete
Hardware Complete Complete In Process Oct `99
Individual
Loan
Customers Complete Complete Basis Ongoing
</TABLE>
The Company originally approved a budget in the amount of $666,000 for the cost
of hardware and software remediation. Subsequent additions have increased the
budget to approximately $790,000. 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.
15
<PAGE> 16
As is shown in the table, the Company has completed all phases of Y2K
preparedness with the exception of certain hardware which is being replaced in
August through October 1999 and with respect to its individual loan customers
which is ongoing. A formal written and tested contingency plan has been
developed for all mission critical areas to provide for business continuity
through the century date change.
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 include, 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 6. A) EXHIBITS
See Exhibit Index following the signature page in this report which
is incorporated herein by this reference.
B) REPORTS ON FORM 8-K
There were no reports on Form 8-K for the quarter ended September
30, 1999.
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, 1999 /s/ Dennis M. Conerton
----------------------------------------
Dennis M. Conerton
President and Chief Executive Officer
Date: November 13, 1999 /s/ Jesse L. Calkins
----------------------------------------
Jesse L. Calkins
Senior Vice President
(Chief Financial and Accounting 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.
- ------ ----------- ------------- ---- ---
<C> <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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,155,000
<INT-BEARING-DEPOSITS> 2,412,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,526,000
<INVESTMENTS-CARRYING> 19,664,000
<INVESTMENTS-MARKET> 19,413,000
<LOANS> 191,158,000
<ALLOWANCE> 1,966,000
<TOTAL-ASSETS> 295,462,000
<DEPOSITS> 230,754,000
<SHORT-TERM> 20,676,000
<LIABILITIES-OTHER> 3,457,000
<LONG-TERM> 16,937,000
0
0
<COMMON> 23,000
<OTHER-SE> 23,565,000
<TOTAL-LIABILITIES-AND-EQUITY> 295,462,000
<INTEREST-LOAN> 11,741,000
<INTEREST-INVEST> 2,735,000
<INTEREST-OTHER> 489,000
<INTEREST-TOTAL> 14,965,000
<INTEREST-DEPOSIT> 6,772,000
<INTEREST-EXPENSE> 7,869,000
<INTEREST-INCOME-NET> 7,096,000
<LOAN-LOSSES> 369,000
<SECURITIES-GAINS> 69,000
<EXPENSE-OTHER> 7,435,000
<INCOME-PRETAX> 1,428,000
<INCOME-PRE-EXTRAORDINARY> 1,428,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 900,000
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 3.83
<LOANS-NON> 670,000
<LOANS-PAST> 546,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,497,000
<ALLOWANCE-OPEN> 1,915,000
<CHARGE-OFFS> 354,000
<RECOVERIES> 36,000
<ALLOWANCE-CLOSE> 1,966,000
<ALLOWANCE-DOMESTIC> 1,966,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,965,000
</TABLE>
