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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-18599
BLACKHAWK BANCORP, INC.
WISCONSIN 39-1659424
(State of Incorporation) (IRS Employer ID No.)
400 Broad Street, Beloit, Wisconsin 53511
Telephone Number (608) 364-8911
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. Yes X No .
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Revenue for the year ended December 31, 1998 was $19,825,000
As of March 23, 1999, 2,315,317 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 23, 1999) of the shares
held by non-affiliates (excludes shares reported or beneficially owned by
directors and officers - does not constitute an admission to affiliate status)
was approximately $21,151,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference in the
respective parts hereof indicated: 1. Proxy Statement and Annual Meeting of
Stockholders, on May 19, 1999, dated April 3, 1999.
Index of Exhibits on Page 25. Page 1 of 51.
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BLACKHAWK BANCORP, INC.
FORM 10-KSB - TABLE OF CONTENTS
PART I PAGE
Item 1 Business............................................................. 3
Item 2 Properties........................................................... 8
Item 3 Legal Proceedings.................................................... 8
Item 4 Submission of Matters To a Vote of
Security Holders...................................................... 8
PART II
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters........................................... 8
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................ 8
Item 7 Financial Statements and Supplemental Data........................... 13
Item 8 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................................................ 22
PART III
Item 9 Directors and Executive Officers of the
Registrant............................................................ 22
Item 10 Executive
Compensation.......................................................... 22
Item 11 Security Ownership Of Certain Beneficial
Owners and Management................................................. 22
Item 12 Certain Relationships and Related
Transactions.......................................................... 22
PART IV
Item 13 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................... 22
Signatures.................................................................. 23
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PART I
ITEM 1 BUSINESS
GENERAL. Blackhawk Bancorp, Inc., (the "Company"), was incorporated under the
laws of the state of Wisconsin in November 1989. The Company owns and operates a
subsidiary financial institution, Blackhawk State Bank ("Bank"), located in
Beloit, Wisconsin.
The Bank is a Wisconsin-chartered commercial bank operating five branches in the
Greater Beloit Area, three free-standing branches and two in-store branches. Six
additional free-standing branches are in the following cities: Belvidere (2),
Oregon (1), Rochelle (1), Rockford (1) and Roscoe (1). The Bank has three wholly
owned subsidiaries. Nevahawk Investment, Inc. ("Nevahawk") is an investment
subsidiary located in Las Vegas, Nevada. RSL, Inc., a second subsidiary whose
activities include the sale of mutual funds and annuities, and in turn owns
Midland Acceptance Corporation ("MAC"), a consumer finance company that has
offices in Rochelle and Rockford, Illinois. First Financial Services, Inc.
("FFSI"), the third subsidiary, sells, on an agency basis, mortgage-related
insurance products and a variety annuity products.
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., was 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 transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B. merged into the charter of Blackhawk
State Bank.
As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
assets of approximately $2.5 million.
Effective September 1, 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, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of purchase.
The principal sources of funds for the Bank's lending activities are deposit
accounts, amortization and prepayment of loans, short-term borrowings, and funds
provided from operations. The principal sources of income are interest and fees
on loans, interest on investments and non-interest income, consisting of fees
for servicing loans, service charges, trust department fees and income from
retail non-deposit investment sales.
LENDING ACTIVITIES. A majority of the loans in the Bank's loan portfolio are
secured by residential or commercial real estate. Substantially all of the real
estate securing the mortgage loans is located within thirty minutes of the
Bank's offices. Previously, Management of the Company has restructured the loan
portfolio of the Greater Beloit Area Bank to decrease the concentration of
mortgage loans and increase commercial and installment loans. Management of the
Company anticipates the restructuring of the loan portfolio of the acquired
institutions. The Analysis of Loan Portfolio, Table 2 of Item 7, shows the
changes in the types of loans from 1996 through 1998.
Commercial loans are either collateralized by assets other than real estate or
are unsecured. Interest rates on commercial loans are generally tied to an index
adjustable monthly and therefore more rate sensitive than mortgage loans.
Consumer and installment loans are generally secured by automobiles, boats, or
junior liens on real estate. A substantial percentage of automobile and boat
loans in the portfolio were purchased from area dealers.
The Bank also offers credit cards and home equity lines of credit.
Approximately $130 million in single one-to-four family loans are serviced for
others. These were acquired through the purchase transactions mentioned above.
Substantially all of these loans are 100% sold to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). MAC is a sub-prime lender, and has approximately
$2.0 million in outstanding loans.
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INVESTMENT ACTIVITIES. The investment policy under which the Company and its
subsidiary operates normally limits investments to: 1) U.S. Treasury and
government agency securities with maturities of 5 years or less; 2)
mortgage-backed securities, limited to no more than 30% of the investment
portfolio, with an average life of 5 1/2 years or less; 3) municipal securities
rated "A" or better, unless they are tax-anticipation notes issued by Wisconsin
issuers whose long-term debt is rated at least "A" or if unrated, are judged by
management to possess investment characteristics comparable to "A" rated debt
securities; and 4) corporate bonds and notes rated "A" or better with a maturity
of 4 years or less.
Security investments made to a single entity are limited to 20% of its capital
and surplus. This limitation does not apply to investments in obligations of the
United States Treasury, Federal Land Banks, Federal Home Loan Banks, Federal
Farm Credit Banks, Federal National Mortgage Association, Export-Import Bank of
Washington or obligations fully and unconditionally guaranteed by the United
States. It is the Company's and its subsidiary's intention to hold securities
until maturity and are classified as such for IRS purposes. Generally, the
recently purchased securities held by the Company, the Bank and Nevahawk are
classified as available-for-sale.
Of the Bank's portfolio, approximately $9.0 million is managed at its main
office. Another $18 million is managed by the Belvidere office. The Bank may
purchase the same types of securities under the same general restrictions as are
noted above. In addition, commercial paper, bankers acceptances and bank
certificates of deposit are authorized investments to provide additional
liquidity in the investment portfolio.
During 1991, Beloit transferred approximately $21.5 million worth of its
investment securities to Nevahawk, it's wholly-owned subsidiary located in Las
Vegas, Nevada. Currently, the portfolio under management by Nevahawk is
approximately $25.0 million. The transfer of an additional $7 million is
anticipated in March 1999.
The Company can maintain an investment portfolio that consists of securities
similar to those mentioned above. At December 31, 1998, securities held by the
Company were minimal.
DEPOSIT ACTIVITIES. Deposits are divided between interest bearing and
non-interest bearing. Non-interest bearing deposits consist of checking accounts
of individuals and non-personal entities. The interest-bearing deposits include
savings accounts, money market deposit accounts, certificates of deposit,
individual retirement accounts, NOW accounts and check club accounts. The Bank
has few depositors with account balances in excess of $100,000. During 1997
Beloit acquired approximately $1.0 million in brokered deposits which mature
July 1999. The Bank attracts deposits by offering competitive interest rates for
interest-bearing accounts and services on a competitive basis for non-interest
bearing accounts.
TRUST SERVICES. Through a separate department the Bank provides personal trust
services, including acting as trustee for living and testamentary trusts, and as
an agent, custodian, guardian, conservator, personal representative or
administrator for individuals or their estates. Trust offices are maintained at
the Bank's main location in Beloit, Wisconsin.
OTHER SERVICES. The Bank provides a wide range of other banking services for
both retail and commercial customers. It also provides full-service brokerage
services through Raymond James Securities, Inc. in three locations.
COMPETITION. Banks experience intense competition in both attracting and
retaining deposits and in making loans. The Bank's direct competition for
deposits has come from other commercial banks, savings and loan associations,
credit unions, mutual funds and stock brokerage firms. In addition to offering
competitive types of accounts and interest rates, the principal methods used by
the Bank to attract deposits included the offering of a variety of services,
convenient business hours, and branch locations.
Competition in making real estate loans comes principally from savings and loan
associations, mortgage companies and other commercial banks. Consumer loans
provided by credit unions, finance companies and other commercial banks provide
the competition in this area. Other commercial banks are the major competition
for commercial loans.
EMPLOYMENT. As of December 31, 1998, the Company and the Bank had 164 employees,
of which 114 were employed on a full time basis. The fringe benefits generally
provided to qualified employees include health insurance,
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long-term disability insurance, a flexible compensation plan (cafeteria plan), a
401k deferred compensation and profit-sharing plan. Management considers its
relations with employees to be excellent.
SUPERVISION AND REGULATION. The Company and the Bank are extensively regulated
under federal and state law. Any descriptions of statutory and regulatory
provisions contained in the following discussion are qualified in their entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulations may have a material effect on the Company.
THE COMPANY. On March 27, 1990, the Company received approval from the Federal
Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), to become a registered bank holding company by acquiring all of
the capital stock of the Bank. As a result, since consummation of the Conversion
on May 16, 1990, the Company's activities have been subject to limitations
imposed under the BHC Act. Transactions between the Company and the Bank and
their affiliates are also subject to certain restrictions. As a registered bank
holding company, the Company is subject to various filing requirements of the
FRB and is also subject to examination by the FRB.
FRB approval must be obtained before a bank holding company acquires all or
substantially all of the assets of a bank or savings association or merges or
consolidates with another bank holding company or savings and loan holding
company. Wisconsin has also adopted legislation which allows bank holding
companies from states that have adopted reciprocal legislation (the "Reciprocal
States") to acquire banks in Wisconsin, and allows Wisconsin bank holding
companies to acquire banks in the Reciprocal States. The Reciprocal States
presently include Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and
Ohio.
Under the BHC Act, bank holding companies are prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company. A bank holding company may, however, own shares of a company, the
activities of which the FRB has determined to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto; the holding
company itself also can engage in such activities. With the acquisition of
Rochelle, the Company also acquired the outstanding stock of Midland, which is a
finance company, and as such is an activity closely related to banking
activities. The Company does not have any other current plans to seek approval
to acquire any of these bank related activities. However, it may determine to do
so in the future. Much conflict has arisen in this area of the law and
regulations. In some instances regulators are authorizing activities allowed
under the law and stated above.
The FRB has adopted capital guidelines as to both minimum levels of core capital
and risk-based capital. The minimum core capital requirement ranges from 3% to
5% of total assets depending upon the regulator's determination of the holding
company's strength. The guidelines assign risk weightings to assets and
off-balance sheet items, and have minimum risk-based capital ratios. All bank
holding companies are required to have total consolidated capital of 8% of
risk-weighted assets. Core capital consists principally of shareholders' equity
less intangibles, while qualifying total capital consists of core capital,
certain debt instruments and a portion of the reserve for loan losses. Table 12,
filed elsewhere in this report, reflects various regulatory measures of capital
as of December 31, 1998. The Company's core and risk-based capital ratios, as
shown in the table are well above the minimum levels.
Under Wisconsin law, a bank holding company is deemed to be engaged in the
banking business and is subject to supervision and examination by the Wisconsin
Department of Financial Institutions (the "Commissioner"). The Commissioner is
also empowered to issue orders to a bank holding company to remedy any condition
or policy which, in the opinion of the Commissioner, endangers the safety of
deposits of any subsidiary state bank or trust company. In the event of
non-compliance with such an order, the Commissioner has the power to direct the
operations of the state bank or trust company and to restrict dividends paid to
the bank holding company.
THE BANK. Wisconsin-chartered banks, including the Bank, are regulated and
supervised by the Wisconsin Department of Financial Institutions. Each
Wisconsin-chartered bank is required to be examined at least once each year by
either the Commissioner or its primary federal regulator. The approval of the
Commissioner is required to establish or close branches, merge with other banks
and undertake many other activities.
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Any Wisconsin bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove directors, officers or employees who have violated the law, conducted the
bank's business in a manner which is unsafe, unsound or contrary to the
depositors' interests or been negligent in the performance of their duties.
Wisconsin state banks are authorized to accept deposits (including demand,
savings and time deposits and certificates of deposit). Banks may make a wide
variety of loans (including mortgage loans, loans to corporations and other
commercial loans and other personal consumer loans). Other federal and state
regulations with respect to banks include required reserves, limitations as to
the nature and amount, by type and borrower, of lending, regulatory approval of
mergers and consolidations, issuance and retirement by a bank of its own
securities, and other aspects of banking operations.
Under Wisconsin law, the Commissioner has the authority, by rule or order, to
grant Wisconsin state banks the power to conduct any financial service which is
being offered by any other financial-related institution; under those
provisions, the Commissioner has approved banks engaging in general insurance
agency services and securities brokerage services. Each of the above services is
not a permitted activity of bank holding companies or bank holding company
subsidiaries. The FRB has generally not asserted jurisdiction over the powers of
state-chartered bank subsidiaries of bank holding companies.
PAYMENT OF DIVIDENDS. A Wisconsin bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account (as defined under Wisconsin law). If, on the date of declaration of a
dividend on common stock, the ratio of capital stock and surplus to total
deposits is less than 10%, there must be a transfer from net profits to the
surplus account before the dividend may be paid. Based on the Bank's strong
financial position, its entire earnings each year could be paid out as
dividends.
Nevahawk can pay dividends to the Bank from retained earnings without any tax
consequences. There are no plans, at the present, for Nevahawk to pay dividends
in 1999. This status will be reviewed by Nevahawk at its regular board meetings.
FEDERAL DEPOSIT INSURANCE CORPORATION. The Bank's deposit accounts are insured
by the FDIC. FDIC insurance, at the present time, generally insures up to a
maximum of $100,000 per insured depositor. The FDIC imposes an annual assessment
on deposits. Effective January 1, 1993, premiums are assessed on the basis of a
risk rating assigned by the FDIC. Since that time the Bank's premium has been at
the lowest available rate. Beginning in 1997, financial institutions insured by
the FDIC are required to contribute to the FICO bond refinancing. This is
expected to occur through the year 2003. The deposits acquired with the
purchases of Rochelle and Belvidere will continue to be assessed at the higher
thrift rate.
The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to any merger or consolidation, or the
establishment or relocation of any branch office. This supervision and
regulation is intended primarily for the protection of depositors.
As an FDIC-insured bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC, based upon appraisals during examinations, may revalue
assets of an insured institution and require establishment of specific reserves
in amounts equal to the difference between such revaluation and the book value
of the assets. In addition, the FDIC has adopted regulations regarding capital
adequacy requirements similar to those of the FRB.
OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal and
state statutory and regulatory provisions covering, among other things, security
procedures, currency reporting, insider and affiliated party
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transactions, management interlocks, community reinvestment, truth-in-lending,
electronic funds transfers, truth-in-savings and equal credit opportunity.
Proposals for new legislation or rule making affecting the financial services
industry are continuously being advanced and considered at both the national and
state levels. Proposals are primarily focused upon restructuring and
strengthening regulation and supervision to reduce the risks to which assets of
banks and savings institutions are exposed.
Although further changes in the regulatory framework may be enacted, specific
provisions and their ultimate effect upon the business of the Bank and the
Company cannot be reliably
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS. The earnings of the Bank
and the Company are affected not only by general economic conditions but also by
the policies of various governmental regulatory authorities. In particular, the
FRB influences general economic conditions and interest rates through the
regulation of money and credit conditions. It does so primarily through
open-market operations in U.S. Government Securities, varying the discount rate
on member and nonmember bank borrowings, and setting reserve requirements
against bank deposits. FRB monetary policies have had a significant effect on
the operating results of banks in the past and are likely to continue to do so
in the future. The general effect, if any, of such policies upon the future
business and earnings of the Bank cannot be accurately predicted. In addition,
losses sustained by the federal insurance funds and regulatory costs incurred in
connection with failed or failing insured depository institutions continue to be
assessed to those within the industry. As such, future earnings will be
adversely affected by regulations enacted to cover these losses and costs. Past
increases in FDIC insurance premiums are an example of this.
EXECUTIVE OFFICERS
NAME AND AGE PRINCIPAL OCCUPATION
------------ --------------------
Dennis M. Conerton, 48 President and Chief Executive
Officer of the Company and
of the Bank. Prior thereto,
Vice President-Controller,
Regal-Beloit Corporation.
James P. Kelley, 55 Executive Vice President and
Secretary of the Company
and Executive Vice President of
the Bank and the Bank's
predecessor, Beloit Savings Bank.
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Jesse L. Calkins, 58 Senior Vice President, Treasurer and
Chief Financial Officer of the
Company and Senior Vice President of
the Bank, and the Bank's
predecessor, Beloit Savings Bank.
Richard J. Rusch, 54 Vice President Commercial Lending of
the Bank since August 1990. Prior
thereto, Vice President Commercial
Loans, M & I Bank of Beloit.
David A. Stearns, 52 Senior Vice President of the Bank
(October 1998 to Present); President
and Chief Executive Officer of the
Castle Bank Harvard, N.A., Harvard,
IL (1995 - 1997); President and
Chief Executive Officer of the
Harris Bank Woodstock, Woodstock, IL
(1992 - 1995).
ITEM 2. PROPERTIES
On December 31, 1998, the Company had eleven locations, of which three
were leased. All of these offices are considered by management o be
well maintained and adequate for the purpose intended. See the Notes to
Consolidated Financial Statements included under Item 7 of this
document for further information on properties.
ITEM 3. LEGAL PROCEEDINGS
To management's knowledge no material legal proceedings are
contemplated or pending to which it or its affiliates are or threatened
to be a party, of which any of their property would be subject, other
than routine litigation incidental to its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE STOCKHOLDERS
MATTERS
As of March 23, 1999 there were 372 Registered Stockholders.
Information in response to this item is found on page of this report. A
able listing the declaration of dividends is found on page 28 of the
Company's Annual Report, and is incorporated herein by reference.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Management's Discussion and Analysis of Financial Condition and
Result's of Operation
The following discussion provides additional analysis of the Company's
financial statements presented in its annual report and should be read
in conjunction with this information. This discussion focuses on the
significant factors which affected the Company's earnings in 1998, with
comparisons to 1997 and 1996 where applicable. As of December 31, 1998,
Blackhawk State Bank (the "Bank") was the only direct subsidiary of the
Company and its operations contribute nearly all of the revenue and
expenses for the year. The Bank has three wholly owned subsidiaries.
Nevahawk Investment, Inc. ("Nevahawk") is an investment subsidiary
located in Nevada. RSL, Inc., which operates mutual fund and annuity
activities, and in turn owns Midland Acceptance Corp. ("MAC"), a
consumer finance company that has offices in Rochelle and Rockford, IL.
First Financial Services of Belvidere, Inc. ("FFSI") administers and
sells, on an agency basis, mortgage-related insurance products and
sells on an agency basis a variety of annuity products.
Overview
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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., was 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 transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B. merged into the charter of Blackhawk
State Bank.
As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
assets of approximately $2.5 million.
Effective September 1, 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, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of the purchase.
Results of operations of Rochelle and Belvidere are incorporated in the
Company's statements from the respective acquisition dates forward.
Net interest income
Net interest income ("Interest Margin") is the difference between interest
income and fees on loans and interest expense, and is the largest contributing
factor to net income for the Company. All discussions of income amounts and
rates are on a tax-equivalent basis, which accounts for income earned on loans
and securities, which are not fully subject to income taxes as if they were
fully subject to income taxes. Interest Margin in 1998 was $8.9 million,
increasing 16.5% over the 1997 level of $7.7 million, which was 26.2% higher
than the 1996 level of $6.0 million. Interest margin as a percent of average
earning assets ("Interest margin rate") was 4.24% in 1998, 4.52% in 1997 and
4.33% in 1996. The decrease between 1998 and 1997 is the result of the addition
of the Belvidere operations, which had a lower interest margin rate than the
Company and the downward trend in overall interest rates during the later part
of 1998.
Interest income and fees on loans is the largest component of interest income
and was the largest factor in the 21.4% increase in interest income during 1998.
Each loan category had an increase in average balances as compared to 1997, the
result of the acquisition of Belvidere. The yield earned on loans decreased to
9.10% in 1998 compared to 9.25% in 1997. Loan yields have been adversely
affected by the decrease in overall market rates and the addition of Belvidere
loans, which are predominately one-to-four family mortgage loans earning lower
yields.
Interest income and fees on loans increased 32.1% and was the largest factor in
the increase of interest margin in 1997 compared to 1996. The interest income in
each of the major loan categories increased in 1997 compared to 1996 primarily
due to the Company's acquisition of Rochelle. Increased rates also contributed
to a lesser extent to an increase in consumer loan interest. Total loan volumes
increased 38.5% for this same period.
Investment income increased 12.8%, to $2.9 million in 1998 compared to $2.6 in
1997. Average balances for both types of investment securities were higher in
1998 when compared to 1997. The Company reinvested maturities from taxable
securities to tax-exempt securities to take advantage of the favorable spread
between these two investment types. The average balances of taxable investment
securities were also affected by the Belvidere acquisition. The yield on taxable
investment securities fell to 6.31% in 1998 from 6.52% in 1997, mostly due to
lower overall market rates.
Investment income increased 4.1%, to $2.6 million in 1997 compared to $2.5
million in 1996. The increase during this period was primarily the result of
increased rates on taxable securities, which offset the reduced income from
tax-exempt securities. Income from tax-exempt securities declined due to lower
volume. The average balance of total investments decreased by 3.0% in 1997
compared to 1996, as the Company liquidated investment securities to purchase
Rochelle. The decline in volume of tax exempt securities was only partially
offset by the increase in volume of taxable securities.
Total interest expense was $8.5 million in 1998, increasing 27.0% from $6.7
million in 1997. Increased volumes are the primary factors for this increase.
These increased volumes are attributable to growth of the Bank's deposit base,
the acquisition of deposits from Belvidere and the use of borrowings to complete
the Belvidere transaction. This increase due to volumes was partially offset by
lower rates paid on deposits. The average rate paid on deposits decreased to
4.63% in 1998 compared to 4.70% in 1997.
Interest expense totaled $6.7 million in 1997 compared to $5.4 million in 1996,
representing an increase of 24.7%. The increased interest cost was primarily the
result of higher deposit volume acquired with the purchase of Rochelle. The
average rate of interest on deposits remained relatively static at 4.70% and
4.71% in 1997 and 1996, respectively. The variance in interest expense between
1997 and 1996 in
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other borrowings was primarily the result of reduced volume. However, the
average cost of borrowings also declined in 1997 to 4.77% compared to 4.80% in
1996.
Other Operating Income and Expenses
Other operating income increased 62.7% to $2.5 million in 1998 from $1.5 million
in 1997. Gain on sale of loans and mortgage loan servicing income were the most
significant factors in the increase. With the acquisition of Rochelle and
Belvidere, the Company acquired approximately $130.0 million of mortgages
serviced for others. As part of the servicing arrangement, the Company retains a
portion of the interest collected as a servicing fee. The other major categories
of other operating income also increased significantly when comparing 1998 to
1997. Trust fees increased 19.6% and service charges and fees increased 22.2%
between periods. The increase in trust fees was the result of a larger volume of
assets under management and a higher market value of assets under management.
The increase in service charges and fees was largely attributable to the
Belvidere acquisition.
Other operating income increased 52.7% to $1.5 million in 1997 from $1.0 million
in 1996. Service charges and fees represented more than half of the total in
each year. They also represented $330,000 of the $530,000 increase in other
operating income. Most of the increase in service charges resulted from the
inclusion of the Rochelle operations. Loan servicing fees accounted for $95,000
of additional income in 1997. Trust fees and investment center commissions
experienced significant percentage gains in 1997 compared to 1996. Other
operating expenses increased 31.3% to $7.8 million in 1998 from $5.9 million in
1997. Inclusions of Rochelle for a full year and Belvidere for four months in
1998 along with the amortization of purchased intangibles were the biggest
factors in the increase. Also contributing to the increase was the fact that the
Bank opened an in-store facility in July 1997 and a stand-alone branch in the
Northern Illinois market in March 1998. Some areas of expense such as data
processing and professional fees did not increase as much as overall expenses.
This was the result of efficiencies gained as a result of merging charters and
merging of the data processing system of Rochelle's into Beloit's.
Operating expense increased 40.5% to $5.9 million in 1997 compared to 1996. The
most substantial portion of this increase was the result of the Rochelle
purchase. In addition, the opening of a second in-store facility in a newly
constructed Wal-Mart SuperCenter contributed to some of the increase. Other
operating expense increased $185,000 or 4.6% in 1997 compared to 1996. Increases
in salaries, employee benefits, data processing and other expenses were
partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.
Management monitors three ratios related to other operating income and expense:
(1) Net other operating expense as a percentage of average assets, (2) standard
efficiency ratio and (3) gross efficiency ratio. Net other operating expense to
average assets improved to 2.29% in 1998 from 2.39% in 1997 but did not attain
the 1996 level of 2.16%. Considering all assets under management (mortgage loans
serviced for others and managed trust assets) this ratio decreased for the third
consecutive year, and was 1.56% in 1998, compared to 1.79% in 1997 and 1.96% in
1996. The standard efficiency ratio (other operating expense divided by net
interest income plus other operating income) increased to 68.8% in 1998,
compared to 64.8% in 1997 and 60.8% in 1996. Adjusted for intangible
amortization, the ratio increased to 65.6% in 1998 compared to 63.3% in 1997 and
60.8% in 1996. The gross efficiency ratio (other operating expense divided by
interest income plus other operating income) increased to 39.1% in 1998 compared
to 37.3% in 1997 and 34.2% in 1996. Adjusted for intangible amortization the
ratio increased to 37.2% in 1998, compared to 36.4% in 1997 and 34.2% in 1996.
The downward trend in the efficiency ratios was expected, and is attributable to
the newly acquired operations that are not fully integrated into the Company and
to the additional branch office locations. These operations should begin to have
a positive impact on the efficiency ratios as they continue to increase their
customer base. The efficiency ratios were also negatively impacted because of
lower market interest rates and Belvidere's lower relative margin as compared to
the Company's overall margin.
Provisions For Losses
The provision for loan losses was $315,000, $192,000 and $145,000 for 1998,
1997, and 1996, respectively. In 1998, the Bank had net charge-offs of $374,000,
(total charge-offs of $395,000 less recoveries of $21,000), compared to 1997
when it had net charge-offs of $176,000, (total charge-offs of $215,000 less
recoveries of $39,000). In 1996, Beloit experienced net recoveries of $112,000.
The net recovery in 1996 resulted from recoveries of $221,000 off-setting
charge-offs of $109,000. Most of the recovery was from a loan that was
originally charged off in 1994. Excluding the large recovery, net charge-offs to
average loans would have been .07% in 1996. Net charge-offs to average loans was
.24% in 1998 and .14% in 1997.
The allowance for loan losses as a percent of loans was 1.08% at December 31,
1998 compared to 1.11% at December 31, 1997 and to 1.19% at December 31, 1996.
This downward trend is attributable to a shift in the Company's loan mix. With
the acquisition of Rochelle and Belvidere, the Company has a higher proportion
of one to four family mortgages, which generally are lower risk loans.
Management feels that the allowance for loan loss provision is adequate based
upon the current portfolio and market conditions. As the loan portfolio shifts
and market conditions warrant, the provision may be adjusted.
10
<PAGE> 11
Income Taxes
The effective income tax rate increased to 37.2% in 1998 from 35.3% in 1997 and
32.9% in 1996. The most significant reason for the increase in 1998 and 1997 is
that the amortization of intangible assets, resulting from the acquisitions, is
not deductible for tax purposes. In addition, the Company has invested less in
municipal securities exempt from Federal taxes during 1997, as yields on taxable
securities have become more favorable. During 1998, yields on tax-exempt
securities were more favorable and therefore the Company reinvested maturing
bonds into tax-exempt securities to take advantage of this difference. Because
Nevahawk is located in Nevada, its income is not subject to state income tax.
Therefore, as a higher proportion of income is earned outside of Nevada, the
effective rate increases. The income generated in Illinois was subject to
Illinois income tax as well as federal income tax. The Illinois and Wisconsin
effective tax rates are approximately the same.
Balance Sheet Analysis
Total assets as of December 31, 1998 were $291.5 million increasing 44.3% from
$202.0 million as of December 31, 1997. Total average assets were $229.9 million
for the year ended December 31, 1998 compared to $183.1 million for the year
ended December 31, 1997, representing an increase of 25.6%. Most of the increase
was the result of the Belvidere acquisition.
Cash and Cash Equivalents
Most of the increase in cash and cash equivalents was the result of the
Belvidere acquisition. Also contributing to the increase was the addition of a
new branch in March 1998, and increased cash items in collection (cash letters).
As a percent of average assets, cash and cash equivalents have remained
relatively static.
Federal Funds Sold And Other Short-term Investments
The increase in federal funds sold and other short-term investments ("fed
funds") is mostly attributable to Belvidere. Belvidere is holding additional fed
funds in anticipation of possible deposit runoff from a certificate of deposit
special scheduled to mature during the first quarter of 1999. Depending on the
runoff amount, the remainder of fed funds will be invested into longer-term
securities. As a percent of average assets, fed funds increased to 3.0% during
1998 as compared to 1.5% in 1997.
Securities
The increase in securities is mostly attributable to the Belvidere acquisition.
Without the acquisition, security balances would have declined in 1998 as
compared 1997. As a percent of average assets, securities decreased to 19.7% in
1998 compared to 21.4% in 1997. It is expected that the average balance of
securities will increase in 1999. As previously discussed, the Company shifted
maturing investments from taxable securities to tax-exempt securities. Given the
current rate environment, this shift is expected to continue.
Loans
Again, the increase in loan balances is the result of the Belvidere acquisition.
Without the acquisition, loan balances would have decreased when comparing 1998
to 1997. This was the result of a very competitive environment in all loan
categories. Many real estate customers took advantage of low fixed-rate
mortgages and refinanced their adjustable-rate mortgages. The Bank has
traditionally kept adjustable-rate mortgages in its portfolio while selling
fixed rate mortgages to the secondary market. The installment loan market is
also very competitive, with consumers having many financing options available to
them. Average loans decreased slightly as a percent of average assets to 66.8%
in 1998 compared to 67.7% in 1997. It is expected that average loan balances as
a percent of average assets will increase during 1999.
Non-Performing Loans
Non-performing loans as a percent of total loans increased to 1.45% as of
December 31, 1998 from .77% as of December 31, 1997. Most of this increase is
the result of higher impaired loans. Impaired loans are those loans that are not
necessarily past due or non-accruing, but collection of interest is not assured.
The average balance of impaired loans also increased $634,000 in 1998 compared
to $405,000 in 1997. It is the Company's policy to place a loan on non-accrual
once it has become 90 days delinquent or if it is determined that collection is
questionable. As the level of consumer and commercial loans increase, wider
fluctuations for non-performing loans may occur.
Deposits
Total deposits increased to $241.4 million in 1998 from $159.1 million in 1997,
mostly the result of the Belvidere acquisition. Without the acquisition, average
deposits would have increased 4.4%. Average deposits increased to $163.5 million
in 1998 from $126.3 million in 1997. The biggest increase in average balances
was in savings accounts, which include money market account funds. The mix of
deposits as a percent of average assets experienced very little shift comparing
1998 to 1997. During 1999, the mix of deposits is expected to be weighted more
towards time deposits. The Company is planning to shift this mix closer to that
of a traditional commercial bank, which would be away from higher interest time
deposits.
Total non-interest bearing demand accounts increased due more to growth in
existing accounts and less because of the Belvidere acquisition. As a percentage
of average assets, non-interest bearing demand accounts were 9.5% in 1998 versus
9.0% in 1997. The
11
<PAGE> 12
Company plans to increase business relationships in the Rochelle and Belvidere
markets, which over time should increase the balance in these accounts.
Traditionally, neither Rochelle nor Belvidere sought commercial deposits.
Other Borrowings
Other borrowings increased to $21.7 million in 1998 versus $17.1 in 1997. The
majority of this growth was the result of borrowings of $7.8 million used in
part to finance the acquisition of Belvidere. Approximately, $6.0 million of
this borrowing is at a fixed rate, requiring principal and interest payments of
approximately $900,000 per year for five years. An additional $1.8 million bears
interest at a variable rate based upon the monthly LIBOR rate. At the end of
five years, both parts of the loan are due. At the Company's discretion, part or
all of variable portion could be converted to the fixed rate or paid without
penalty. This loan is secured with the stock of the Bank. Other long-term
borrowings also increased as a result of additional Federal Home Loan Bank
(OFHLBO) borrowings and FHLB borrowings assumed in the Belvidere acquisition.
The Bank took additional FHLB borrowings early in 1998 to meet current and
projected liquidity needs.
Short-term borrowings consist of repurchase agreements and fed funds purchased.
From time-to-time the Bank will buy fed funds to meet short-term liquidity needs
and to manage its Federal Reserve Bank account. The average balance of
short-term borrowings decreased considerably during 1998. This was the result of
fewer customers using repurchase agreements to invest their excess funds. No
significant change is expected during 1999.
Asset/Liabilities Management
The Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest bearing liabilities, with short and medium term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest earning assets. Interest rate risk occurs when there is an imbalance
between the interest earning assets and the interest bearing liabilities at a
given maturity or repricing schedule. Such imbalance is commonly referred to as
interest rate gap ("gap"). A positive gap exists when there are more assets than
liabilities maturing or repricing within the same time frame.
Generally, in a negative gap position, net interest income will decline during
periods of rising interest rates and increase during periods of declining
interest rates. The opposite would be expected in a positive gap position.
However, with current interest rates at a historically low level, certain
liabilities are not as interest rate sensitive and therefore offset the earnings
change anticipated in the gap analysis. The Company's cumulative one-year gap
generally has been and currently is negative.
The Asset Liability Committee meets regularly to monitor and determine the
Company's exposure to interest rate fluctuations. Monitoring the maturities and
repricings of assets and liabilities, the flow of funds, and the relationship of
interest rate changes of loans and deposits to the general market does this. The
consolidated interest rate risk exposure is monitored by the Company on a
quarterly basis.
Liquidity
Liquidity as it relates to the subsidiary bank is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal source of funds are deposits, scheduled amortization and prepayment of
loan principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing fed funds, sale of loans, sale
of securities, borrowing from the Federal Reserve Bank and the FHLB and capital
loans. Current year earnings can be paid to the Bank, from Nevahawk, to provide
additional liquidity, without incurring a tax liability under present law.
During 1998 and 1997 Nevahawk did not pay a dividend. A payment in 1999 is also
not anticipated.
Generally, the liquidity needs of the Company consist of payment of dividends to
its shareholders, the repayment of debt used for the Belvidere acquisition and a
limited amount of expenses. The sources of funds to provide this liquidity are
income from cash balances, dividends from the Bank and a $2.0 million line of
credit with a non-affiliated third-party bank. To date, this line of credit has
not been used. Certain restrictions are imposed upon banks, which could limit
their ability to pay dividends if they do not generate future net earnings. The
Company maintains adequate liquidity to pay its expenses. In addition, the
Company may also borrow from external sources leveraging its strong capital
base.
Capital
Total shareholders' equity as of December 31, 1998 increased 5.5% to $24.4
million as compared to $23.1 million as of December 31, 1997. Internal growth in
the form of increased net income was the biggest factor for this increase. Also
contributing to the increase, to a lesser extent, was the exercising of stock
options by employees and an increase in the adjustment for Financial Accounting
Standard 115. Tier I capital ratio, total capital ratio and Tier I leverage
ratio were 8.36%, 9.31% and 6.00%, respectively, at December 31, 1998 compared
to 15.26%, 16.35% and 10.99%, respectively, at December 31, 1997. The change in
these ratios, between years, reflects the effect of the Belvidere acquisition in
which the Company chose to leverage its capital to complete the transaction. The
Company still exceeds all regulatory requirements regarding capital as the
regulatory requirement for Tier I capital as a percent of assets is 4.0% and for
total capital as a percent of risk based assets is 8.00%.
12
<PAGE> 13
Impact of Inflation and Changing Prices
Unlike most industrial companies, most of the assets and liabilities of the Bank
are monetary in nature. Consequently, interest rates have more significant
impact on the Company's performance and results of operations than the effect of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously under
Asset/Liability Management, the Bank's interest rate gap position in conjunction
with the direction of the movement in interest rates, is an important factor in
the Company's results of operations. The Company's financial statements are
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars, without giving consideration to changes in the relative
purchasing power of money over time due to inflation.
Accounting Developments
In 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 on the amount and nature of derivatives and hedges
held at the time of adoption of the statement.
Year 2000 Issues
Year 2000 ("Y2K") issues 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.
Therefore, 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>
<CAPTION>
<S> <C> <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 June `99
Individual
Loan
Customers Complete Complete Basis Ongoing
</TABLE>
The Company has approved a budget for $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 completed a majority of the validation
phase of several critical areas. A Y2K contingency plan has been formulated. The
validation processes completed indicate that mission critical systems are Y2K
compliant. If the results of the validation processes not yet completed lead
management to believe otherwise, then a contingency plan, with a timetable will
be implemented for those additional areas.
Because of the potential 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.
Private Securities Litigation Reform Act of 1995
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
13
<PAGE> 14
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
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Incorporated by reference to pages 28 through 49 of this report on Form 10-KSB.
Following are supplemental data tables of the Company:
TABLE 1 RATE/VOLUME ANALYSIS
Years Ended December 31,
<TABLE>
<CAPTION>
Average Balance Average Rate Interest Earned or Paid
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
39,313 35,778 35,510 6.31% 6.52% 5.98% Taxable investment securities 2,482 2,331 2,123
5,992 3,394 4,862 6.53% 6.33% 6.66% Tax-exempt investment securities 391 215 324
45,306 39,172 40,372 6.34% 6.50% 6.06% Total investments 2,873 2,546 2,447
153,600 125,403 95,042 9.10% 9.25% 9.24% Loans 13,976 11,597 8,777
6,948 2,678 3,957 5.39% 5.29% 5.05% Federal funds sold & short term investments 375 142 200
4,460 2,103 43 5.15% 4.09% 4.65% Interest bearing deposits in banks 230 86 2
210,315 169,356 139,414 8.30% 8.49% 8.20% TOTAL EARNING ASSETS 17,453 14,371 11,426
Interest Bearing Liabilities:
13,776 10,786 4,933 1.18% 1.40% 1.44% Interest bearing demand deposits 162 151 71
47,645 34,960 30,056 3.19% 3.05% 3.05% Savings deposits 1,519 1,065 917
102,083 80,557 62,005 5.77% 5.85% 5.79% Time deposits 5,888 4,715 3,590
163,504 126,303 96,994 4.63% 4.70% 4.72% Total interest bearing deposits 7,569 5,931 4,578
6,897 11,651 12,411 5.28% 5.25% 5.18% Short-term borrowings 364 612 643
10,795 2,999 2,754 5.60% 5.90% 6.28% Long-term borrowings 604 177 173
181,196 140,953 112,159 4.71% 4.77% 4.81% TOTAL INTEREST BEARING LIABILITIES 8,538 6,720 5,394
3.59% 3.72% 3.39% INTEREST RATE SPREAD
NET INTEREST MARGIN/
4.24% 4.52% 4.33% NET INTEREST INCOME 8,915 7,651 6,032
</TABLE>
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) due to Increase (Decrease) Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Taxable investment securities (72) 230 (7) 151 191 16 1 208
Tax-exempt investment securities 6 165 5 176 (16) (98) 5 (109)
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investments (66) 395 (2) 327 175 (82) 6 99
Loans (189) 2,612 (45) 2,379 38 2,783 (2) 2,820
Federal funds sold & short term 3 226 4 233 10 (65) (3) (58)
investments
Interest bearing deposits in banks 22 97 25 143 (0) 96 (11) 84
TOTAL EARNING ASSETS (230) 3,330 (18) 3,082 222 2,732 (10) 2,945
Interest Bearing Liabilities:
Interest bearing demand deposits (24) 42 (7) 11 (2) 84 (3) 80
Savings deposits 50 386 18 454 (1) 150 (0) 148
Time deposits (69) 1,260 (18) 1,173 39 1,074 12 1,125
Total interest bearing deposits (43) 1,688 (7) 1,638 36 1,308 9 1,353
Short-term borrowings 2 (250) (1) (248) 9 (39) (1) (31)
Long-term borrowings (9) 460 (24) 427 (10) 15 (1) 4
TOTAL INTEREST BEARING LIABILITIES (50) 1,899 (32) 1,817 35 1,284 8 1,326
NET INTEREST MARGIN (180) 1,431 14 1,265 188 1,448 (18) 1,618
</TABLE>
TABLE 2
ANALYSIS OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
(in thousands) December 31,
1998 1997 1996
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage 130,924 72.58% 83,398 60.98% 55,475 56.33%
Real estate-construction 3,535 1.96% 3,956 2.89% 1,343 1.36%
Real estate-held-for-sale 4,362 2.42% 1,024 0.75% 240
Consumer 26,532 14.71% 25,006 18.28% 19,586 19.89%
Commercial 17,131 9.50% 25,333 18.52% 23,023 23.38%
Gross loans 182,484 101.16% 138,717 101.42% 99,667 100.96%
Unearned income (180) (0.10%) (420) 0.00% -- 0.00%
Allowance for loan loss (1,915) (1.06%) (1,523) (1.11%) (1,186) (1.20%)
Net loans 180,389 100.00% 136,774 100.00% 98,481 99.76%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY
<TABLE>
<CAPTION>
Percent Percent Percent
of Gross of Gross of Gross
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage 705 36.81% 545 35.78% 540 45.53%
Real estate-construction 0 0.00% 0 0.00% 0 0.00%
Consumer 644 33.63% 353 23.18% 173 14.59%
Commercial 566 29.56% 625 41.04% 473 39.88%
Commercial paper 0 0.00% 0 0.00% 0 0.00%
Total 1,915 100.00% 1,523 100.00% 1,186 100.00%
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
December 31,
1997 1996 1996
<S> <C> <C> <C>
Allowance for loan losses, beginning 1,523 1,186 929
Amounts associated with acquisition 452 321
Amounts charged-off:
Real estate-mortgage 1 110 0
Consumer 180 104 98
Commercial 214 1 11
Total charge-offs 395 215 109
Recoveries on amounts previously charged-off:
Real estate-mortgage 0 2 0
Consumer 13 17 40
Commercial 7 20 181
Total recoveries 20 39 221
Net charge-offs 375 176 (112)
Provision charged to expense 315 192 145
Allowance for loan losses, ending 1,915 1,523 1,186
NON-PERFORMING LOANS AT PERIOD END
Impaired loans 1,479 325 445
Non-accrual 857 610 443
Past due 90 days or more and still accruing 240 143 252
Total non-performing loans 2,576 1,078 1,140
RATIOS
Allowance for loan loss to period-end loans 1.08% 1.11% 1.19%
Net charge-offs to average loans 0.24% 0.14% (0.12%)
Recoveries to charge-offs 5.06% 18.14% 202.75%
Non-performing loans to gross loans 1.41% 0.78% 1.14%
EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized 33 34 30
Income that would have been recognized in 76 78 52
accordance with the original loan terms
</TABLE>
TABLE 3
OTHER INCOME AND EXPENSE
16
<PAGE> 17
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
% of % of % of
Average Average Average
(in thousands) Amount Assets Amount Assets Amount Assets
<S> <C> <C> <C> <C> <C> <C>
Non-interest expense 7,757 3.37% 5,909 3.23% 4,214 2.83%
Non-interest income 2,499 1.09% 1,536 0.84% 1,006 0.68%
Net non-interest expense 5,258 2.28% 4,373 2.39% 3,208 2.15%
</TABLE>
TABLE 4
Three-Year Comparison of Average Balance Sheets
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
Percent of Percent of Percent of
(in thousands) Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold
and short term investments 6,948 3.02% 2,678 1.46% 3,957 2.66%
Interest bearing deposits
in banks 4,460 1.94% 2,103 1.15% 43 0.03%
Taxable investment securities
securities 39,313 17.10% 35,793 19.55% 35,475 23.85%
Tax-exempt investment
securities 5,992 2.61% 3,394 1.85% 4,862 3.27%
Loans, net of unearned
income 153,600 66.82% 124,008 67.74% 94,034 63.23%
Total earning assets 210,315 91.49% 167,976 91.76% 138,371 93.04%
Cash and due from banks 7,988 3.47% 6,426 3.51% 5,196 3.49%
Bank premises and equipment 5,544 2.41% 4,305 2.35% 3,463 2.33%
Other non-earning assets 6,039 2.63% 4,361 2.38% 1,685 1.13%
Total non-earning assets 19,572 8.51% 15,092 8.24% 10,344 6.96%
TOTAL ASSETS 229,886 100.00% 183,068 100.00% 148,715 100.00%
LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
Interest bearing demand 13,776 5.99% 10,786 5.89% 4,933 3.32%
Savings accounts 47,645 20.73% 34,960 19.10% 30,056 20.21%
Time deposits 102,083 44.41% 80,557 44.00% 62,005 41.69%
Total interest bearing
deposits 163,504 71.12% 126,303 68.99% 96,994 65.22%
Short-term borrowings 6,897 3.00% 11,651 6.36% 12,411 8.35%
Long-term borrowings 10,795 4.70% 2,999 1.64% 2,754 1.85%
Total interest bearing
liabilities 181,196 78.82% 140,953 76.99% 112,159 75.42%
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits 21,941 9.54% 16,510 9.02% 13,725 9.23%
Other liabilities 3,252 1.41% 2,902 1.59% 957 0.64%
Total liabilities 206,389 89.78% 160,365 87.60% 126,841 85.29%
Stockholders' Equity/Capital 23,497 10.22% 22,703 12.40% 21,874 14.71%
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 229,886 100.00% 183,068 100.00% 148,715 100.00%
</TABLE>
TABLE 5
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Available-for-Sale
US Treasury 504 1,252 2,758
US Government Agency 27,511 7,389 6,727
Tax-exempt obligations 163 0 0
Other securities 10,297 847 1,217
Total market value of
investment securities 38,475 9,488 10,702
Held-to-Maturity
US Treasury 5,058 10,191 11,403
US Government Agency 8,895 13,900 9,341
Tax-exempt obligations 8,135 4,341 3,118
Other securities 0 488 1,003
Total book value of
investment securities 22,088 28,920 24,865
Total market value of
investment securities 21,896 29,073 24,939
Total Securities 60,563 38,408 35,567
</TABLE>
TABLE 6
MATURITY OF INVESTMENT SECURITIES
December 31, 1998
<TABLE>
<CAPTION>
Within After One but After Five but
One Year Within Five Years Within Ten Years
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale
US Treasury 504 6.06% 0 0.00% 0 0.00%
US Government Agency 3,453 5.47% 12,138 5.74% 2,048 6.25%
Tax-exempt obligations 0 0.00% 161 5.93% 0 0.00%
Other securities 7,193 5.54% 1,010 5.92% 0 0.00%
</TABLE>
<TABLE>
<CAPTION>
No Fixed
After Ten Years Total Maturity
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale
US Treasury 0 0.00% 0 0.00% 504 6.06%
US Government Agency 9,872 6.21% 0 0.00% 27,511 5.91%
Tax-exempt obligations 0 0.00% 0 0.00% 161 5.93%
Other securities 0 0.00% 2,094 5.83% 10,297 5.63%
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total 11,150 5.54% 13,309 5.75% 2,048 6.25% 9,872 6.21% 2,094 5.83%
Held-to-Maturity
US Treasury 2,992 7.57% 2,005 6.03% 0 0.00% 0 0.00% 0 0.00%
US Government Agency 0 0.00% 500 5.38% 502 5.80% 7,872 6.95% 0 0.00%
Tax-exempt obligations 235 4.70% 5,567 4.22% 2,223 4.38% 0 0.00% 0 0.00%
Other securities 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Total 3,227 7.36% 8,072 4.74% 2,725 4.64% 7,872 6.95% 0 0.00%
Grand Total 14,377 5.95% 21,381 5.37% 4,773 5.33% 17,744 6.54% 2,094 5.83%
</TABLE>
TABLE 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
<TABLE>
<CAPTION>
December 31,1998
Greater than
(in thousands) Time Remaining to Maturity one year
After one Fixed Floating
Due Within but Within After Five Interest Interest
One Year Five Years Years Total Rate Rate
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage 38,268 52,697 23,076 114,041 68,530 7,243
Real estate-construction 3,886 45 0 3,931 45 0
Consumer 12,300 15,155 122 27,577 15,106 171
Commercial 25,962 10,793 0 36,755 10,658 135
Gross Loans 80,416 78,690 23,198 182,304 94,339 7,549
</TABLE>
TABLE 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
Average Percent of Average Average Percent of Average
(in thousands) Balance Total Rate Balance Total Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits 21,941 11.83% -- 16,510 11.56% --
Interest bearing demand deposits 13,776 7.43% 1.18% 10,786 7.55% 1.40%
Savings deposits 47,645 25.69% 3.19% 34,960 24.48% 3.05%
Time deposits 102,083 55.05% 5.77% 80,557 56.41% 5.85%
Total 185,445 100.00% 4.63% 142,813 100.00% 4.70%
</TABLE>
TABLE 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID
<TABLE>
<CAPTION>
Years Ended December 31,
1996
Average Percent of Average
(in thousands) Balance Total Rate
<S> <C> <C> <C>
Non-interest bearing demand deposits 13,725 12.40% --
Interest bearing demand deposits 4,933 4.46% 1.44%
Savings deposits 30,056 27.15% 3.05%
Time deposits 62,005 56.00% 5.79%
Total 110,719 100.00% 4.72%
</TABLE>
TABLE 9
MATURITY OF TIME DEPOSITS
<TABLE>
<CAPTION>
December 31, 1998 Time Remaining to Maturity
Due Within Four to Seven to After Total
<S> <C> <C> <C> <C> <C>
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months Twelve Months
<S> <C> <C> <C> <C> <C>
Certificates of Deposit
Less than $100,000 23,361 13,134 27,318 46,573 110,386
More than $100,000 5,174 2,631 3,016 6,649 17,470
Total 28,535 15,765 30,334 53,222 127,856
</TABLE>
TABLE 10
<TABLE>
<CAPTION>
Short-term Borrowings
1998 1997 1996
<S> <C> <C> <C>
Balance outstanding December 31,
Repurchase agreements 4,576 10,256 7,405
Fed funds purchased 0 1,975 0
-------------------------------------
4,576 12,231 7,405
=====================================
Weighted rate December 31,
Repurchase agreements 4.51% 5.28% 5.01%
Fed funds purchased 0.00% 5.96% 0.00%
-------------------------------------
4.51% 5.39% 5.01%
=====================================
Maximum month-end outstanding balance
Repurchase agreements 11,387 17,038 17,202
Fed funds purchased 1,600 4,150 6,000
Year-to-date average amount outstanding
Repurchase agreements 6,411 1,087 11,970
Fed funds purchased 486 10,564 441
-------------------------------------
6,897 11,651 12,411
=====================================
Year-to-date average weighted rate
Repurchase agreements 5.20% 5.25% 5.16%
Fed funds purchased 6.34% 5.25% 5.71%
-------------------------------------
5.28% 5.25% 5.18%
=====================================
</TABLE>
TABLE 11
<TABLE>
<CAPTION>
Interest Rate Risk Analysis
Two- Four- Seven- Ten- Over
December 31, 1998 One three six nine twelve one
(in thous) Month months months months months year Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and
short-term investments 15,335 15,335
Interest bearing deposits 8,190 8,190
Taxable investment securities 9,115 5,179 1,499 189 253 35,765 52,000
Tax-exempt investment
securities 0 0 0 0 235 8,063 8,298
Loans 28,028 9,183 14,577 12,126 16,502 101,888 182,304
Total interest-earning assets 60,668 14,362 16,076 12,315 16,990 145,716 266,127
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits 18,427 18,427
Savings deposits 61,206 61,206
Time deposits 7,724 20,811 15,765 14,566 15,768 53,222 127,856
Repurchase agreements and fed
funds purchased 4,576 4,576
Long-term borrowings 800 16,323 17,123
Total interest-bearing liabilities 92,733 20,811 15,765 14,566 15,768 69,545 229,188
Net gap (32,065) (6,449) 311 (2,251) 1,222 76,171 36,939
Cumulative Gap (32,065) (38,514) (38,203) (40,454) (39,232) 36,939
% of total assets (11.00%) (13.21%) (13.11%) (13.88%) (13.46%) 12.67%
</TABLE>
TABLE 12
<TABLE>
<CAPTION>
Selected Equity Ratios
1998 1997 Regulatory
Ratio Ratio Requirement
<S> <C> <C> <C>
Equity as a percent of assets 10.22% 12.40% N/A
Core capital as a percent of risk based assets 8.36% 17.43% 4.00%
Total capital as a percent of risk based assets 9.31% 18.67% 8.00%
Leverage ratio 6.00% 11.79% 3.00%
</TABLE>
TABLE 13
<TABLE>
<CAPTION>
Selected Financial Ratios
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Return on average assets 8.70% 1.07% 1.16% 1.05% 0.70%
Return on average equity 8.33% 8.61% 7.85% 7.06% 4.63%
Average equity to average assets 10.22% 12.40% 14.54% 13.62% 14.10%
Dividend payout ratio 53.41% 50.00% 50.67% 46.88% 65.57%
Interest rate spread 3.59% 3.72% 3.39% 3.39% 3.38%
Net interest margin 4.24% 4.52% 4.33% 4.27% 4.19%
Net non-interest expense to assets 2.29% 2.38% 2.15% 2.86% 3.15%
Efficiency ratio 68.82% 64.76% 60.76% 64.13% 73.67%
Allowance for loan losses to total loans at end of period 1.08% 1.11% 1.19% 0.98% 0.91%
</TABLE>
21
<PAGE> 22
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
a) Directors of the registrant. The information that will appear under
"Election of Directors" in the definitive Proxy Statement to be prepared and
filed for the Company's Annual Meeting of Stockholders on May 19, 1999 is
incorporated herein by this reference.
b) Executive officers of the Registrant. The information presented in Item I of
this report is incorporated herein by this reference.
ITEM 10 EXECUTIVE COMPENSATION
The information that will appear under "Director and Executive Compensation" in
the definitive Proxy Statement to be prepared and filed for the Company's Annual
Meeting of Stockholders on May 19, 1999 is incorporated herein by this
reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information that will appear under "Beneficial Ownership of Securities" in
the definitive Proxy Statement to be prepared and filed for the Company's Annual
Meeting of Stockholders on May 19, 1999 is incorporated herein by this
reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information that will appear under "Certain Transactions with Management and
Others" in the definitive Proxy Statement to be prepared and filed for the
Company's Annual Meeting of Stockholders on May 19, 1999 in incorporated herein
by this reference.
ITEM 13 EXHIBITS AND REPORTS FORM 8-K
a) Documents Filed:
1 and 2. Financial Statements. See the following "Index to Financial
Statements," which is incorporated herein by this reference.
3 Exhibits. See "Exhibit Index" which is incorporated herein by this
reference.
b) Reports On Form 8-K:
There were no reports filed on Form 8-K during the fourth quarter of 1998.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1999.
Blackhawk Bancorp, Inc.
By /s/ James P. Kelley
--------------------------
James P. Kelley
Executive Vice President and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 31, 1999.
Principal Executive Officer and Director:
Director, President and /s/ Dennis M Conerton
Chief Executive Officer ---------------------------------
Dennis M. Conerton, President and
Chief Executive Officer
Principal Financial Officer, Accounting
Officer and Director: /s/ Jesse L Calkins
---------------------------------
Jesse L. Calkins,
Senior Vice President
Treasurer and Chief Financial
Officer
Directors:
/s/ John B. Clark /s/ James P. Kelley
- ------------------------------- --------------------------------
John B. Clark James P. Kelley
/s/ H. Daniel Green /s/ Fred Klett
- ------------------------------- --------------------------------
Dr. H. Daniel Green Fred Klett
/s/ Charles Hart /s/ George Merchant
- ------------------------------- --------------------------------
Charles Hart George Merchant
/s/ Kenneth A Hendricks /s/ Roger Taylor
- ------------------------------- --------------------------------
Kenneth A. Hendricks Roger Taylor
23
<PAGE> 24
BLACKHAWK BANCORP, INC.
Index To Financial Statements And Financial Statement Schedules
The following Consolidated Financial Statements of the Blackhawk Bancorp, Inc.
are located in Item 7 of this 10-KSB. 10-KSB page as indicated:
<TABLE>
<CAPTION>
Annual
Report Pages
------------
<S> <C>
Report of Independent Public Accountants............................30
Consolidated Balance Sheets - December 31, 1998
and 1997 .........................................................31
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 .................................32
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996..................33
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 ...........................34
Notes to the Consolidated Financial Statements......................35-49
</TABLE>
24
<PAGE> 25
Blackhawk Bancorp, Inc.
Exhibit Index To
1998 Annual Report on Form 10-KSB
<TABLE>
<CAPTION>
Filed
Exhibit Incorporated Herein Here- Page
Number Description By Reference To: with No.
- ------ ----------- ---------------- ---- ---
<S> <C> <C>
3.1 Amended and Restated Exhibit 3.1 to
Articles of Incorporation Amendment No. 1 to Registration
of Blackhawk Bancorp, Inc. Statement on Form S-1(Reg. No.
33.32351)
3.2 By-Laws of Blackhawk Exhibit 3.2 to Amendment No. 1
Bancorp, Inc., as to Registration Statement on Form
amended. S-1
3.3 Amendments to By-Laws Exhibit 3.3 to 1994 Form 10-KSB dated
of Blackhawk Bancorp, March 29, 1995
Inc., as amended.
3.4 Amendments to By-Laws of Exhibit 3.4 to 1994 Form 10-KSB dated
Blackhawk Bancorp, Inc., as March 29, 1995.
amended.
4.1 Sections 15 and 19 of Plan Exhibit 1.2 to Amendment No. 1
of Conversion of Beloit to Registration Statement on
Savings Bank, as amended Form-1 (No. 33-32351) filed on March
5, 1990.
10.12 Blackhawk State Bank Exhibit 10.12 to 1996 Form 10-KSB,
Officer Bonus Plan, as dated March 28, 1997
amended
10.2 Written description of Plan Proxy Statement for its Annual
for Life Insurance of Meeting of Stockholders, on May 8,
Blackhawk State Bank 1991, dated April 4, 1991
10.3 Blackhawk Bancorp, Inc. Exhibit 10.3 to 1990 Form 10-K,
Employee Stock Ownership dated March 31, 1990
Plan
10.31 Amendment to Blackhawk Exhibit 10.31 to 1994 Form 10-KSB,
Bancorp, Inc. Employee dated March 29, 1995
Stock Ownership Plan
10.4 Blackhawk Bancorp, Inc. Exhibit 10.4 to Amendment No. 1
Employee Stock to Registration Statement Form
Ownership Trust S-1 (No. 33-32351)
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Incorporated Herein Filed
Exhibit By Reference To: Here- Page
Number Description ------------------- with No.
- ------ ----------- ---- ---
<C> <C> <C> <C> <C>
10.5 Blackhawk Bancorp, Inc. Exhibit 10.5 to Amendment No. 1
Directors' Stock Option Plan to Registration Statement Form
S-1 (No. 33-32351)
10.6 Blackhawk Bancorp, Inc. Exhibit 10.6 to Registration
Executive Stock Option Plan Statement Form S-1 (No. 33-32351)
10.7 Form of Severance Payment Exhibit 10.8 to Amendment No. 1
Agreement entered into to Registration Statement Form
between Blackhawk State S-1 (No. 33-32351)
Bank and Messrs. Calkins,
Kelley and Rusch
10.71 Form of Severance Payment Exhibit 10.8 to 1994 Form 10-KSB,
Agreement entered into dated March 29, 1995
between Blackhawk State
Bank and Mr. Conerton
10.8 Blackhawk Bancorp, Inc. Exhibit 10.9 to 1994 Form 10-KSB,
Directors' Stock Option Plan dated March 29, 1995
Blackhawk Bancorp, Inc. Proxy Statement for its Annual
10.9 Executive Stock Option Plan Meeting of Stockholders on May 13,
1998, dated April 2, 1998
13 1998 Annual Report To Proxy Statement for its Annual
Stockholders Meeting of Stockholders on May 19,
1999, dated April 3, 1999
22 Subsidiaries of
Registrant
23 Proxy Statement for its
Annual Meeting of
Stockholders on May 19, 1999
X 27
</TABLE>
26
<PAGE> 27
BLACKHAWK BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE> 28
Index To Consolidated Financial Statements
Page
----
INDEPENDENT AUDITOR'S REPORT 3
FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Income 5
Consolidated Statements of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-22
2
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Blackhawk Bancorp, Inc.
Beloit, WI 53511
We have audited the accompanying consolidated balance sheet of Blackhawk
Bancorp, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Blackhawk Bancorp, Inc. and Subsidiary as of and for each of the two years in
the period ended December 31, 1997, were audited by other auditors whose report
dated February 20, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blackhawk
Bancorp, Inc. and Subsidiary at December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
January 21, 1999
Green Bay, Wisconsin
3
<PAGE> 30
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,973,000 $ 8,680,000
Federal Funds sold and other short-term investments 15,335,000 8,889,000
Securities:
Available-for-sale 38,475,000 9,488,000
Held-to-maturity 21,896,000 28,920,000
Loans held for sale 4,362,000 1,024,000
Loans, net of allowance for loan losses of $1,915,000 in 1998 and $1,523,000 in 176,027,000 135,750,000
1997
Bank premises and equipment, net 7,483,000 4,353,000
Accrued interest receivable 1,908,000 1,467,000
Other intangible assets 8,152,000 1,850,000
Other assets 1,857,000 1,555,000
--------------- -------------
Total Assets $ 291,468,000 $ 201,976,000
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 33,110,000 $ 19,572,000
Interest Bearing 208,285,000 139,479,000
--------------- -------------
Total Deposits 241,395,000 159,051,000
--------------- -------------
Borrowed funds:
Short-term borrowings 4,576,000 12,231,000
Long-term borrowings 17,123,000 4,850,000
--------------- -------------
Total Borrowed Funds 21,699,000 17,081,000
--------------- -------------
Accrued interest payable 1,046,000 892,000
Other liabilities 2,928,000 1,817,000
--------------- -------------
Total Liabilities 267,068,000 178,841,000
--------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share; authorized
1,000,000 shares; issued, none - -
Common stock, $.01 par value per share; authorized
10,000,000 shares; issued 2,313,373 in 1998 and 2,296,414 in 1997 23,000 23,000
Additional paid in capital 7,099,000 7,002,000
Employee stock options earned 130,000 131,000
Retained earnings 16,975,000 16,045,000
Less 10,324 and 9,278 shares of treasury stock, at cost,
at December 31, 1998 and 1997, respectively (120,000) (104,000)
Accumulated other comprehensive income 293,000 38,000
--------------- -------------
Total Shareholders' Equity 24,400,000 23,135,000
--------------- -------------
Total Liabilities and Shareholders' Equity $ 291,468,000 $ 201,976,000
=============== =============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 31
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 13,975,000 $ 11,597,000 $ 8,777,000
Interest on securities:
Taxable 2,482,000 2,433,000 2,123,000
Exempt from federal income taxes 265,000 152,000 221,000
Interest on federal funds sold and other short-term investments 604,000 126,000 202,000
------------- -------------- --------------
Total interest income 17,326,000 14,308,000 11,323,000
------------- -------------- --------------
Interest Expense:
Interest on deposits 7,569,000 5,931,000 4,578,000
Interest on short-term borrowings 364,000 612,000 643,000
Interest on long-term borrowings 621,000 177,000 173,000
------------- -------------- --------------
Total interest expense 8,554,000 6,720,000 5,394,000
------------- -------------- --------------
Net interest income 8,772,000 7,588,000 5,929,000
Provision for loan losses 315,000 192,000 145,000
Net interest income after provision for loan losses 8,457,000 7,396,000 5,784,000
Other Operating Income:
Trust department income 201,000 168,000 122,000
Service charges and fees 1,096,000 897,000 569,000
Loan servicing fees 286,000 95,000 -
Gain on sale of loans 443,000 65,000 75,000
Other income 473,000 311,000 240,000
------------- -------------- --------------
Total other operating income 2,499,000 1,536,000 1,006,000
------------- -------------- --------------
Other Operating Expenses:
Salaries and wages 3,352,000 2,436,000 1,768,000
Employee benefits 648,000 631,000 437,000
Occupancy expense, net 588,000 426,000 309,000
Furniture and equipment 522,000 329,000 350,000
Data processing 542,000 445,000 320,000
Professional fees 169,000 342,000 199,000
Advertising and marketing 171,000 139,000 113,000
Amortization of intangible assets 358,000 137,000 -
Other operating expenses 1,407,000 1,024,000 718,000
------------- -------------- --------------
Total other operating expenses 7,757,000 5,909,000 4,214,000
------------- -------------- --------------
Income before income taxes 3,199,000 3,023,000 2,576,000
Provision for income taxes 1,189,000 1,067,000 848,000
------------- -------------- --------------
Net Income $ 2,010,000 $ 1,956,000 $ 1,728,000
============= ============== ==============
Basic Earnings Per Share $ .88 $ .86 $ .76
============= ============= ==============
Diluted Earnings Per Share $ .83 $ .82 $ .73
============= ============= ==============
Dividends Per Share $ .47 $ .43 $ .38
============= ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 32
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Paid In Stock Retained Treasury
Stock Capital Options Earnings Stock
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 23,000 $ 6,946,000 $ 52,000 $14,210,000 $ -
Net Income 1,728,000
Other comprehensive (loss)
Total comprehensive income
Principal payments on ESOP loan
Cash dividends declared on common stock, $.38 per (866,000)
share
Purchase of stock for treasury, 7,578 shares at (84,000)
$11.13 per share
Compensatory employee stock options:
Recognized 43,000
Exercised or expired 14,000
--------- ----------- --------- ----------- ---------
Balance December 31, 1996 23,000 6,960,000 95,000 15,072,000 (84,0000
Net Income 1,956,000
Other comprehensive income
Total comprehensive income
Principal payments on ESOP loan
Cash dividends declared on common stock, $.43 per (983,000)
share
Purchase of stock for treasury, 1,700 shares at (20,000)
$11.69 per share
Compensatory employee stock options:
Recognized 36,000
Exercised or expired 42,000
--------- ----------- --------- ----------- ---------
Balance December 31, 1997 23,000 7,002,000 131,000 16,045,000 (104,000)
Net Income 2,010,000
Other comprehensive income
Total comprehensive income
Cash dividends declared on common stock, $.47 per (1,080,000)
share
Purchase of stock for treasury, 1,046 shares at (16,000)
$15.00 per share
Compensatory employee stock options:
Exercised or expired 97,000 (1,000)
--------- ----------- --------- ----------- ---------
Balance, December 31, 1998 $ 23,000 $ 7,099,000 $ 130,000 $16,975,000 $(120,000)
========= =========== ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
Income (Deficit) Other Total
<S> <C> <C> <C>
Balance, December 31, 1995 $ 37,000 $ (79,000) $21,189,000
Net Income 1,728,000
Other comprehensive (loss) (48,000) (48,000)
-----------
Total comprehensive income 1,680,000
-----------
Principal payments on ESOP loan 53,000 53,000
Cash dividends declared on common stock, $.38 per (866,000)
share
Purchase of stock for treasury, 7,578 shares at (84,000)
$11.13 per share
Compensatory employee stock options:
Recognized 43,000
Exercised or expired 14,000
--------------- --------- -----------
Balance December 31, 1996 (11,000) (26,000) 22,029,000
Net Income 1,956,000
Other comprehensive income 49,000 49,000
-----------
Total comprehensive income 2,005,000
-----------
Principal payments on ESOP loan 26,000 26,000
Cash dividends declared on common stock, $.43 per (983,000)
share
Purchase of stock for treasury, 1,700 shares at (20,000)
$11.69 per share
Compensatory employee stock options:
Recognized 36,000
Exercised or expired 42,000
--------------- --------- -----------
Balance December 31, 1997 38,000 - 23,135,000
Net Income 2,010,000
Other comprehensive income 255,000 255,000
-----------
Total comprehensive income 2,265,000
-----------
Cash dividends declared on common stock, $.47 per (1,080,000)
share
Purchase of stock for treasury, 1,046 shares at (16,000)
$15.00 per share
Compensatory employee stock options:
Exercised or expired 96,000
--------------- --------- -----------
Balance, December 31, 1998 $ 293,000 $ - $24,400,000
=============== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 33
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income $ 2,010,000 $ 1,956,000 $ 1,728,000
Adjustments to reconcile net income to net cash provided
by (used in)
operating activities:
Compensatory employee stock options recognized (1,000) 36,000 43,000
Provision for loan losses 315,000 192,000 145,000
Provision for depreciation and amortization 791,000 476,000 333,000
Amortization of premiums and (accretion of
discounts) on
investment securities, net (92,000) (112,000) (80,000)
Gain on sale of property and equipment - - (3,000)
Gain on sale of loans (443,000) (65,000) (75,000)
Loans originated for sale (34,938,000) (11,372,000) (5,329,000)
Proceeds from sale of loans 30,127,000 10,654,000 5,164,000
Change in assets and liabilities:
Decrease in accrued interest receivable 62,000 2,000 176,000
(Increase) decrease in other assets (845,000) 565,000 (183,000)
Increase in accrued interest and other liabilities 209,000 34,000 179,000
------------- ------------- -------------
Net cash provided by (used in) operating activities (2,805,000) 2,366,000 2,098,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment - - 12,000
Proceeds from maturity of securities available-for-sale 22,798,000 7,824,000 22,484,000
Proceeds from maturity of securities held-to-maturity 13,248,000 20,723,000 11,815,000
Purchase of securities available-for-sale (28,892,000) (6,242,000) (21,628,000)
Purchase of securities held-to-maturity (4,831,000) (21,139,000) )10,873,000)
Net cash used in acquisitions (7,140,000) (444,000) -
(Increase) decrease in federal funds sold and other
Short-term investments, net 1,579,000 (4,212,000) 7,057,000
Loans originated, net of principal collected 5,499,000 (1,077,000) (4,598,000)
Purchase of bank premises and equipment (848,000) (298,000) (73,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,413,000 (4,865,000) 4,196,000
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 7,066,000 (3,253,000) (1,406,000)
Net increase (decrease) in short-term borrowings (7,655,000) 4,826,000 (2,275,000)
Proceeds from long-term borrowings 10,400,000 3,500,000 -
Payments on long-term borrowings (127,0000 (900,000) (1,300,000)
Dividends paid (1,080,000) (983,000) (866,000)
Proceeds from issuance of common stock 97,000 42,000 14,000
Purchase of common stock for treasury (16,000) (20,000) (84,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities 8,685,000 3,212,000 (5,917,000)
------------- ------------- -------------
Increase in cash and cash equivalents 7,293,000 713,000 377,000
Cash and cash equivalents:
Beginning 8,680,000 7,967,000 7,590,000
------------- ------------- -------------
Ending $ 15,973,000 $ 8,680,000 $ 7,967,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 8,849,000 $ 7,264,000 $ 5,407,000
Income taxes 1,016,000 341,000 878,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Other assets acquired in settlement of loans 637,000 292,000 226,000
Principal payments on ESOP loan - 26,000 53,000
Purchase of net assets
Fair value of non cash assets 83,258,000 45,595,000
Liabilities assumed 78,335,000 45,451,000
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE> 34
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a description of the
more significant accounting policies:
NATURE OF BANKING ACTIVITIES:
The Company provides a variety of banking services to individuals
and businesses through its eleven facilities in Beloit, Wisconsin
and Belvidere, Rockford, Roscoe, Oregon and Rochelle, Illinois. Its
primary deposit products are demand deposits, savings, and
certificates of deposit and its primary lending products are
commercial, real estate mortgage and installment loans.
As of December 31, 1998 and 1997, 74% and 71% , respectively, of
the gross loan portfolio consisted of real estate loans on real
estate located in Southcentral Wisconsin and Northcentral Illinois.
Generally, these loans are expected to be repaid from the cash
flows of the borrowers and are collateralized by the related
property. Credit losses arising from real estate lending
transactions compare favorably with Blackhawk's credit loss
experience on its loan portfolio as a whole. However, adverse
changes in the local economy would have a direct impact on the
credit risk in the loan portfolio.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of Blackhawk Bancorp, Inc. and its wholly owned
subsidiary, Blackhawk State Bank (Blackhawk) and Blackhawk's wholly
owned subsidiaries Nevahawk Investment, Inc., RSL, Inc., Midland
Acceptance Corporation, and First Financial Services, Inc. All
significant intercompany transactions and accounts have been
eliminated in consolidation.
On September 1, 1998, the Company acquired for cash all of the
outstanding shares of First Financial Bancorp, Inc. and its
wholly-owned subsidiaries. The total acquisition cost was
$12,690,000. The excess of the total acquisition cost over the fair
value of the net assets acquired of $2,951,000 is being amortized
over 20 years by the straight-line method. The acquisition has been
accounted for as a purchase and the results of operations of First
Financial since the date of acquisition are included in the
Consolidated Financial Statements. The assets of First Financial
were subsequently merged into the Company.
The unaudited proforma effect of the transaction had it occurred
prior to 1997 is as follows: (dollars in thousands, except per
share information)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net interest income:
Blackhawk Bancorp, Inc. $ 8,772 $ 7,588
First Financial Bancorp, Inc. 1,253 1,997
---------- ----------
Total $ 10,025 $ 9,585
========== ==========
Net income:
Blackhawk Bancorp, Inc. $ 2,010 $ 1,956
First Financial Bancorp, Inc. (530) (613)
---------- ----------
Total $ 1,480 $ 1,343
========== ==========
Basic Earnings per share:
Blackhawk Bancorp, Inc. $ .88 $ .86
First Financial Bancorp, Inc. (.24) (.27)
---------- ----------
Total $ .64 $ .59
========== ==========
Diluted earnings per share:
Blackhawk Bancorp, Inc. $ .83 $ .82
First Financial Bancorp, Inc. (.22) (.26)
---------- ----------
Total $ .61 $ .56
========== ==========
</TABLE>
On April 30, 1997, the Company acquired for cash all of the
outstanding shares of Rochelle Bancorp, Inc. and its wholly-owned
subsidiaries. The total acquisition cost was $4,319,000. The excess
of the total acquisition cost over the fair value of the net assets
acquired of $1,934,000 is being amortized over 10 to 20 years by
the straight-line method. The acquisition has been accounted for as
a purchase and the results of operations of Rochelle since the date
of acquisition are included in the consolidated financial
statements. The assets of Rochelle Bancorp, Inc. were subsequently
merged into the Company.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
8
<PAGE> 35
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS:
For the purpose of reporting cash flows, cash and cash equivalents
includes cash on hand and amounts due from banks (including cash
items in process of clearing). Cash flows from federal funds sold
and other short-term investments, with an original maturity of less
than three months, loans, deposits, and short-term borrowings with
an original maturity of less than three months, are reported net
under general practices within the banking industry.
SECURITIES AVAILABLE-FOR-SALE:
Securities classified as available-for-sale are those debt
securities that the Company intends to hold for an indefinite
period but not necessarily to maturity. Any decision to sell a
security classified as available-for-sale would be based on various
factors, including significant movements in interest rates, changes
in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and other
similar factors. Securities available-for-sale are carried at fair
value. Unrealized holding gains and losses on securities
available-for-sale are reported as accumulated other comprehensive
income within shareholders' equity until realized. Realized gains
or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
SECURITIES HELD-TO-MATURITY:
Securities classified as held-to-maturity are those debt securities
the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are
carried at cost adjusted for amortization of premium and accretion
of discount, computed by the interest method over their contractual
lives.
LOANS:
Loans are stated at unpaid principal balances, less the allowance
for loan losses and net of deferred loan fees.
Loan origination fees exceeding related costs are deferred and
amortized over the contractual life of the loan as a yield
adjustment.
Mortgage loans held for sale are recorded at the lower of cost or
fair market value. Gains and losses on the sale of mortgage loans
are included in other non-interest income.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments
as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent it is received in cash.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values (or the
present value of estimated cash flows). Because of uncertainties
inherent in the estimation process, management's estimate of credit
losses inherent in the loan portfolio and the related allowance may
change materially in the near term. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced
by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision
for loan losses.
SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING:
The Company sells first mortgage loans with yield rates to the
buyer based upon the current market rates which may differ from the
contractual rate on the loans sold. At the time that loans are
sold, a gain or loss is recorded which reflects the difference
between the assumed cash flow to be generated by the contractual
interest rates of the loans sold and the assumed cash flow
resulting from the yield to be paid to the purchaser, adjusted for
servicing and discounted to reflect present value. Loan servicing
fees are recognized over the lives of the related loans. Real
estate loans serviced for others are not included in the
accompanying balance sheets.
MORTGAGE SERVICING RIGHTS:
The Company capitalizes the estimated value of mortgage servicing
rights through the origination and sale of mortgage loans. When the
originated mortgage loans are sold or securitized into the
secondary market, the Company allocates the total cost of the
mortgage loans between mortgage servicing rights and the loans,
based on their relative fair values. The cost of mortgage servicing
rights is amortized in proportion to, and over the period of,
estimated net servicing revenues. Mortgage servicing rights.
9
<PAGE> 36
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE SERVICING RIGHTS (CONTINUED)
are periodically evaluated for impairment. For purposes of
measuring impairment, the servicing rights are stratified into
pools based on one or more predominant risk characteristics of the
underlying loans including loan type, interest rate and term.
Impairment represents the excess of carrying value of a stratified
pool over its fair value, and is recognized through a valuation
allowance. The fair value of each servicing rights pool is
evaluated based on the present value of estimated future cash flows
using a discount rate commensurate with the risk associated with
that pool, given current market conditions. Estimates of fair value
include assumptions about prepayment speeds, interest rates, and
other factors, which are subject to change over time. Changes in
these underlying assumptions could cause the fair value of mortgage
servicing rights, and the related valuation allowance, to change
significantly in the future.
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on a
straight-line basis over the estimated useful life of each asset.
Expenditures for maintenance and repairs are reflected as expense
when incurred. Gains or losses and disposition of premises and
equipment are reflected in income.
OTHER REAL ESTATE:
Other real estate is carried in other assets at the lower of cost
or fair value less estimated disposal costs. When the property is
acquired through foreclosure, any excess of the related loan
balance over market value is charged to the allowance for loan
losses. It is Blackhawk's policy to account for collateral that has
been substantively repossessed in the same manner as collateral
that has been formally repossessed. Subsequent write-downs or
losses upon sale are charged to other operating expense.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Bank enters into sales of securities under agreements to
repurchase (reverse-repurchase agreements). Reverse-repurchase
agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the
balance sheets. The securities underlying the agreements remain in
the asset accounts.
PENSION PLAN:
Blackhawk has a defined-contribution plan which covers
substantially all full-time employees. Costs of the plan are based
on participants' eligibility and compensation and pension expense
is recorded as benefits are earned.
TRUST ASSETS:
Assets held in a fiduciary or agency capacity are not included in
the consolidated financial statements as they are not assets of
Blackhawk.
INCOME TAXES:
The Company, Blackhawk and Blackhawk's subsidiaries file a
consolidated federal income tax return and separate state income
tax returns.
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
EARNINGS PER SHARE DATA:
The per share data is based on the weighted average number of
common stock and common stock equivalents outstanding during each
year.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are recognized as a
separate component of equity, accumulated other comprehensive
income (deficit).
10
<PAGE> 37
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. This statement
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the
resulting designation. This statement is effective for fiscal years
beginning after June 15, 1999. Management, at this time, cannot
determine the effect adoption of this statement may have on the
consolidated financial statements of the Company as the accounting
for derivatives is dependent on the amount and nature of
derivatives in place at the time of adoption.
NOTE 2. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1,1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which was issued in June 1997. In
accordance with this statement, the Company reports those items
defined as comprehensive income in the statement of changes in
shareholders' equity. The adoption of SFAS No. 130 did not have an
impact on the Company's financial position or results of
operations.
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information," which was issued in June 1997. This statement
establishes new standards for reporting information about operating
segments in annual and interim financial statements. The standard
also requires descriptive information about the way operating
segments are determined, the products and services provided by the
segments, and the nature of differences between reportable segment
measurements and those used for the consolidated enterprise. The
disclosure requirements had no impact on the Company's financial
position or results of operations.
NOTE 3. SECURITIES
Debt securities have been classified in the balance sheets
according to management's intent as either available for sale or
held-to-maturity. The carrying amount of securities and their
approximate fair values at December 31, is as follows:
AVAILABLE-FOR-SALE SECURITIES:
<TABLE>
<CAPTION>
1998
----
Gross Unrealized Gross Unrealized
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 500,000 $ 4,000 $ - $ 504,000
U.S. Government Agencies 27,294,000 264,000 (47,000) 27,511,000
Obligations of states and
political subdivisions 161,000 2,000 - 163,000
Other Securities 10,212,000 90,000 (5,000) 10,297,000
------------- ------------- ------------ -------------
$ 38,167,000 $ 360,000 $ (52,000) $ 38,475,000
============= ============= ============ =============
<CAPTION>
1997
----
Gross Unrealized Gross Unrealized
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
U.S. Treasury Securities $ 1,251,000 $ 2,000 $ - $ 1,253,000
U.S. Government Agencies 7,333,000 75,000 (20,000) 7,388,000
Other Securities 847,000 847,000
------------- ------------- ------------ -------------
$ 9,431,000 $ 77,000 $ (20,000) $ 9,488,000
============= ============= ============ =============
<CAPTION>
HELD-TO-MATURITY SECURITIES:
1998
----
Gross Unrealized Gross Unrealized
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
U.S. Treasury Securities $ 4,997000 $ 61,000 $ - $ 5,058,000
U.S. Government Agencies 8,874,000 33,000 (12,000) 8,895,000
Obligations of states and
political subdivisions 8,025,000 112,000 (2,000) 8,135,000
------------- ------------- ------------ -------------
$ 21,896,000 $ 206,000 $ (14,000) $ 22,088,000
============= ============= ============ =============
<CAPTION>
1997
----
Gross Unrealized Gross Unrealized
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
U.S. Treasury Securities $ 10,191,000 $ 97,000 $ (2,000) $ 10,286,000
U.S. Government Agencies 13,900,000 81,000 (13,000) 13,968,000
Obligations of states and
political subdivisions 4,340,000 23,000 (8,000) 4,355,000
Other Securities 489,000 489,000
------------- ------------- ------------ -------------
$ 28,920,000 $ 201,000 $ (23,000) $ 29,098,000
============= ============= ============ =============
</TABLE>
11
<PAGE> 38
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 3. SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of December 31,
1998, by contractual maturity, are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or
prepaid without any penalties. Therefore, these securities are not
included in the maturity categories in the following maturity
summary:
<TABLE>
<CAPTION>
Available-For-Sale Held-to-Maturity
------------------ ----------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 10,558,000 $ 10,649,000 $ 3,727,000 $ 3,755,000
Due after one year through five
years 13,756,000 13,766,000 10,921,000 11,021,000
Due after five years through ten
years 2,001,000 2,094,000 2,223,000 2,271,000
Mortgage-backed securities 9,838,000 9,872,000 5,025,000 5,041,000
Other Securities 2,014,000 2,094,000 - -
------------- ------------- ------------- -------------
$ 38,167,000 $ 38,475,000 $ 21,896,000 $ 22,088,000
============= ============= ============= =============
</TABLE>
There were no realized gains or losses on securities for 1998, 1997
and 1996.
Investment securities with an amortized cost of $19,941,000 and a
fair value of $20,059,000, respectively, were pledged to secure
public deposits, short-term borrowings, and other purposes required
by law as of December 31, 1998.
NOTE 4. LOANS
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real Estate - Mortgage $ 130,924,000 $ 96,995,000
Real Estate - Construction 3,535,000 3,956,000
Consumer 26,532,000 25,086,000
Commercial 17,131,000 11,656,000
------------- -------------
$ 178,122,000 $ 137,693,000
Less: Allowance for loan losses 1,915,000 1,523,000
Unearned Income 180,000 420,000
------------- -------------
Loans, Net $ 176,027,000 $ 135,750,000
============= =============
</TABLE>
Nonperforming loans includes loans which have been categorized by
management as impaired and non-accruing because collection of
interest is not assured, non-accruing loans (not considered
impaired loans) and loans which are past-due ninety days or more as
to interest and/or principal payments. The following summarizes
information concerning nonperforming loans:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Impaired Loans $ 1,479,000 $ 325,000
Non-accruing Loans 857,000 664,000
Past due 90 days or more and still accruing 240,000 90,000
------------- -------------
Total Non-Performing Loans $ 2,576,000 $ 1,079,000
============= =============
</TABLE>
The average balance of loans classified as impaired totaled
approximately $634,000 and $405,000 for the years ended December
31, 1998 and 1997, respectively. The allowance for loan losses
related to impaired loans amounted to approximately $100,000 and
$115,000 at December 31, 1998 and 1997, respectively. Interest
income on impaired loans of $47,000, $31,000 and $29,000 was
recognized for cash payments received in 1998, 1997 and 1996,
respectively.
The Company has $0 and $133,000 in commitments to loan additional
funds to the borrowers of nonperforming loans for the years ended
December 31, 1998 and 1997, respectively.
12
<PAGE> 39
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 4. LOANS (CONTINUED)
The effect on interest income of the non-accruing loans is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income recognized $ 47,000 $ 31,000 $ 29,000
Income that would have been recognized in
accordance with the original loan terms 76,000 77,000 52,000
A summary of transactions in the allowance for
loan losses is as follows:
Balance at beginning of year $ 1,523,000 $ 1,186,000 $ 929,000
Acquired allowance for loan losses 452,000 321,000 -
------------- ------------- -------------
Adjusted balance at beginning of year 1,975,000 1,507,000 929,000
Provision charged to expense 315,000 192,000 145,000
Loans charged-off (395,000) (216,000) (109,000)
Recoveries 20,000 40,000 221,000
------------- ------------- -------------
Balance at End of Year $ 1,915,000 $ 1,523,000 $ 1,186,000
============= ============= =============
</TABLE>
Loans are made, in the normal course of business, to directors,
executive officers, their immediate families and affiliated
companies in which they are a principal shareholder (commonly
referred to as related parties). The terms of these loans,
including interest rates and collateral, are similar to those
prevailing for comparable transactions and management believes they
do not involve more than a normal risk of collectibility. Such
direct and indirect loans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 2,215,000 $ 1,910,000
Loans acquired - 167,000
------------ ------------
Adjusted balance at beginning of year 2,215,000 2,077,000
New loans 4,299,000 4,909,000
Principal repayments (3,317,000) (4,771,000)
------------ ------------
Balance at End of Year $ 3,197,000 $ 2,215,000
============ ============
</TABLE>
In addition, the Company has loan commitments to the aforementioned
related parties of $2,754,000 and $1,683,000 in 1998 and 1997,
respectively.
NOTE 5. MORTGAGE SERVICING RIGHTS:
The unpaid principal balance of mortgage loans serviced for others,
which are not included on the consolidated balance sheets, was
$132,691,000 and $55,087,000 at December 31, 1998 and 1997,
respectively. Management believes that the remaining book value of
mortgage servicing rights approximates the fair value at December
31, 1998 and 1997.
The following is an analysis of the activity for mortgage servicing
rights for the years ended December 31, 1998 and 1997 respectively:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 545,000 $ -
Mortgage servicing rights acquired through business combinations 257,000 227,000
Fair value of servicing rights acquired in purchases 208,000 241,000
Additions of originated mortgage servicing rights 544,000 135,000
Amortization (526,000) (58,000)
------------ ------------
Balance at end of year $ 1,028,000 $ 545,000
============ ============
</TABLE>
NOTE 6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and Improvements $ 1,079,000 $ 395,000
Buildings and Improvements 7,036,000 5,329,000
Equipment 4,718,000 2,503,000
Vehicles 211,000 192,000
----------- ------------
13,044,000 8,419,000
Less Accumulated Depreciation 5,561,000 4,066,000
----------- ------------
Bank Premises and Equipment, Net $ 7,483,000 $ 4,353,000
=========== ============
</TABLE>
Depreciation charged to operating expenses was $433,000, $336,000,
and $333,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
13
<PAGE> 40
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 7. DEPOSITS
Deposit accounts at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Non-interest bearing demand $33,110,000 $ 19,572,000
Interest-bearing demand deposits 18,427,000 14,555,000
Savings deposits 30,108,000 20,804,000
Money Market deposits 30,338,000 16,467,000
Time deposits 129,412,000 87,653,000
------------ ------------
Total deposits $241,395,000 $159,051,000
============ ============
</TABLE>
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $17,470,000 and
$9,078,000 in 1998 and 1997, respectively. Interest expense on time
deposits of $100,000 or more was approximately $724,000, $389,000
and $356,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998, the scheduled maturities of CDs are as
follows:
<TABLE>
<S> <C>
1999 $ 76,190,000
2000 40,305,000
2001 9,935,000
2002 2,504,000
2003 and thereafter 478,000
-------------
$ 129,412,000
=============
</TABLE>
NOTE 8. BORROWED FUNDS
A summary of borrowed funds is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Term Loan $ 7,673,000 $ -
Secured Advances from Federal Home Loan Bank of Chicago:
Fixed rate of 6.26%, due 6/16/98 - 400,000
Fixed rate of 5.44%, due 1/10/99 800,000 800,000
Fixed rate of 7.12%, due 4/17/00 150,000 150,000
Fixed rate of 5.71%, due 6/18/02 2,000,000 2,000,000
Fixed rate of 5.20%, due 12/11/02 1,500,000 1,500,000
Fixed rate of 4.70% due 1/15/08, callable 1/15/99 1,000,000 -
Fixed rate of 5.30% due 1/16/08, callable 1/16/03 4,000,000 -
Securities sold under an agreement to repurchase 4,576,000 10,256,000
Federal funds purchased - 1,975,000
------------- ------------
$ 21,699,000 $ 17,081,000
============= ============
</TABLE>
The scheduled principal maturities of borrowed funds at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 5,901,000
2000 710,000
2001 599,000
2002 4,139,000
2003 5,350,000
After 2003 5,000,000
-----------
$21,699,000
</TABLE>
The term loan consists of a $6,000,000 loan with a fixed interest
rate of 6.60% and a variable portion of $1,800,000 with a current
rate of 7.10%. The loan requires quarterly principal and interest
payments of $225,000 on the fixed portion and quarterly interest
only payments on the variable portion. The total loan matures
August 21, 2003. Collateral for this loan consists of the stock of
the Bank.
A covenant placed upon the Company includes limitations on further
mergers without consent of the lender. The lender could also
immediately call the loan if the Bank's aggregate outstanding
balance of classified assets exceeds 50% of primary capital, if the
Bank's tangible capital were less than 5% of total tangible assets,
if the Bank's non-performing assets were greater than 25% of
primary capital or if the total equity of the Bank were less than
$30 million.
Advances from the Federal Home Loan Bank of Chicago are
collateralized by substantially all one-to-four family real estate
loans.
14
<PAGE> 41
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS
PENSION PLAN:
Blackhawk has a noncontributory, defined contribution
money-purchase pension plan covering substantially all of its
employees. Blackhawk contributes, on behalf of the eligible
employees, 4.2% of total annual compensation plus 4.2% of
compensation in excess of $13,200. The total pension expense was
$123,000, $104,000, and $78,000, for the years ended December 31,
1998, 1997 and 1996, respectively.
EXECUTIVE BONUS PLAN:
The Company has adopted a revised incentive bonus plan for officers
providing cash bonuses based upon the financial performance of the
Company and performance of the respective officers. Bonus
compensation expense was $92,000, $127,000, $159,000 for the years
1998, 1997 and 1996, respectively.
STOCK OPTION PLANS:
The Company has reserved shares of common stock for issuance to
directors and key employees under incentive and non-qualified stock
option plans. Options are granted at prices equal to the fair
market value and 90% of the fair market value on the dates of grant
for directors and key employees, respectively, and are exercisable
in cumulative installments over a three year period. Other
pertinent information related to the plans is as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1998 Price 1997 Price 1996 Price
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Shares under option,
beginning of year 295,576 $ 7.59 275,776 $ 7.02 262,235 $ 6.72
Granted during the year 60,850 15.00 31,350 11.40 16,300 11.20
Terminated and canceled
during the year (5,335) 11.38 (1,000) 11.25 (510) 5.85
Exercised during the year (16,959) 5.74 (10,550) 3.92 (2,249) 5.25
--------- --------- --------- --------- -------- ---------
Shares under option,
end of year 334,132 $ 8.98 295,576 $ 7.59 275,776 $ 7.02
========= ========= ========= ========= ========= =========
Options exercisable,
end of year 252,281 $ 7.32 217,592 $ 6.57 84,492 $ 5.73
========= ========= ========= ========= ========= =========
Available to grant,
end of year 338,150 84,000 115,300
========= ========= =========
Weighted average fair
value of options granted
during the year $ 1.34 $ 5.74 $ 4.58
========= ========= =========
</TABLE>
Compensation expense related to granting compensatory employee
stock options totaled $1,000, $36,000, and $43,000 in 1998, 1997
and 1996, respectively.
<TABLE>
<CAPTION>
Outstanding Options Vested Options
------------------- --------------
Year of Outstanding Weighted Weighted
Expiration Shares Granted Average Price Shares Vested Average Price
---------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
2000 4,200 $ 3.33 4,200 $ 3.33
2001 16,950 3.16 16,950 3.16
2002 5,250 4.33 5,250 4.33
2003 93,249 5.26 93,249 5.26
2004 7,350 6.83 7,350 6.83
2005 106,633 9.38 106,633 9.37
2006 16,300 11.20 10,866 11.20
2007 23,350 11.41 7,783 11.41
2008 60,850 15.00 - -
----------- ----------- ----------- ----------
334,132 $ 8.98 252,281 $ 7.32
=========== =========== =========== ==========
</TABLE>
15
<PAGE> 42
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its stock
options. Had compensation costs been determined on the basis of
fair value pursuant to FASB Statement No. 123, net income and
earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income:
As reported $ 2,010,000 $ 1,956,000 $1,728,000
Pro Forma 1,898,000 1,862,000 1,644,000
Earnings Per Share:
As reported:
Basic $ .88 $ .86 $ .76
=========== =========== ==========
Diluted $ .83 $ .81 $ .69
=========== =========== ==========
Pro Forma:
Basic $ .85 $ .82 $ .73
=========== =========== ==========
Diluted $ .80 $ .78 $ .67
=========== =========== ==========
</TABLE>
The fair value of each stock option grant has been estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5% 5% 5%
Expected Life 10 years 10 years 10 years
Expected Volatility 17% 29% 3%
Expected Dividend Yield 3% 3% 3%
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has an Employee Stock Ownership Plan for the benefit of
employees who meet the eligibility requirements. The Plan was
established in 1990. The Plan holds 112,101 shares of the Company's
common stock in a trust established in Blackhawk. The stock was
acquired by the Plan by using the proceeds from a loan obtained
from a nonrelated commercial lender. The loan was collateralized by
the stock which has not been allocated to individual participant
accounts. In addition, the Company quaranteed this obligation. Cash
payments to the Plan consist of contributions and dividend
payments, in amounts sufficient for it to satisfy the debt service
requirements. Accordingly, the debt has been recorded in the
accompanying consolidated balance sheets together with the related
deferred compensation. The debt and deferred compensation are
reduced as the Plan makes principal payments.
The loan required principal payments of $13,000, plus interest each
quarter and was paid in full at December 31, 1997.
Cash payments to the Plan during the years ended December 31, 1998,
1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Contributions $ 36,000 $ 36,000 $ 33,000
Dividends 38,000 38,000 36,000
------------ ------------ ------------
74,000 74,000 69,000
============ ============ ============
</TABLE>
For financial statement purposes, expense for the Plan is
determined based on the percentage of shares allocated to
participants each period (allocations are based on principal and
interest payments) times the original amount of the debt plus the
interest incurred. The components of the amount charged to expense
for the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Compensation $ - $ 36,000 $ 33,000
Interest - - 5,000
------------ ------------ -----------
$ - $ 36,000 $ 38,000
============ ============ ===========
</TABLE>
In accordance with the applicable federal income tax regulations,
Blackhawk is expected to honor the rights of certain participants
to diversify their vested account balances or to liquidate their
vested ownership of the stock in the event of employment
termination. The purchase price of the stock is based on the market
value. In addition, the deferred compensation recorded in
connection with the debt incurred by the Plan has been offset
against the stock.
401(K) PROFIT-SHARING PLAN:
Rochelle and Belvidere have profit-sharing plans which meets the
qualifications of Section 401(k) of the Internal Revenue Code
(Code). Under the Plan, employees 21 years of age or older with one
year of service and 1,000 hours of service during that period may
make pre-tax contributions up to applicable limits under the Code.
Employees are 100% vested in their contributions. Discretionary
employer contributions vest at a rate of 20% per year beginning on
the third year of service by an employee. Contributions totaling
$12,000 and $10,000 were made during the years ended December 31,
1998 and 1997, respectively.
16
<PAGE> 43
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFERRED COMPENSATION PLAN:
In addition, Blackhawk assumed deferred compensation agreements
with certain officers of Rochelle. Amounts are accumulated in an
account from which benefits will be paid to the officers at
termination or retirement. As of December 31, 1998 and 1997
deferred compensation liability totaled $273,000 and 251,000,
respectively.
The agreements also provide for an acceleration of benefits upon
the deaths of these officers, payable to their beneficiaries.
Rochelle has purchased life insurance policies on the lives of the
officers in order to fund the acceleration of benefits at death.
Rochelle is owner and beneficiary of these policies which provide
for death benefits totaling $1,307,000 and $1,303,000 as of
December 31, 1998 and 1997, respectively. These policies have a
cash surrender value of $583,000 and $556,000 as of December 31,
1998 and 1997, respectively.
NOTE 10. INCOME TAXES
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
Company's assets and liabilities. The major components of net
deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Liabilities:
Property and Equipment $ (473,000) $ (226,000)
Unrealized gains on securities available-for-sale (75,000) (19,000)
Purchase Accounting (525,000) (575,000)
Mortgage Servicing Rights (342,000) (128,000)
Other (89,000) (74,000)
--------------- ------------
Total Deferred Tax Liabilities (1,504,000) (1,022,000)
--------------- ------------
Deferred Tax Assets:
Reserve for loan losses 706,000 451,000
Accrued liabilities 538,000 104,000
State net operating loss carryovers 58,000 -
--------------- -------------
Total Deferred Tax Assets 1,302,000 555,000
--------------- -------------
Net Deferred Tax Liabilities $ (202,000) $ (467,000)
=============== ============
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal $ 989,000 $ 957,000 $ 779,000
State 225,000 129,000 95,000
--------------- ---------------- --------------
Total Current 1,214,000 1,086,000 874,000
--------------- ---------------- --------------
Deferred tax provision (credit):
Federal 28,000 (13,000) (15,000)
State (53,000) (6,000) (11,000)
--------------- ---------------- --------------
Total Deferred (25,000) (19,000) (26,000)
--------------- ---------------- --------------
Total provision for
income taxes $ 1,189,000 $ 1,067,000 $ 848,000
=============== ================ ==============
</TABLE>
A summary of the source of differences between income taxes at the
federal statutory rate and the provision for income taxes for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate $ 1,088,000 $ 1,028,000 $ 876,000
Increase (decrease) in taxes
resulting from:
Tax exempt interest (89,000) (59,000) (75,000)
State income taxes, net of
federal 114,000 76,000 56,000
tax benefit
Amortized of goodwill and
other intangibles 122,000 62,000
Other (46,000) (40,000) (9,000)
--------------- ------------- ------------
Provision for income taxes $ 1,189,000 $ 1,067,000 $ 848,000
=============== ============= ============
</TABLE>
17
<PAGE> 44
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is shown in the statement of changes in
shareholders' equity. The Company's accumulated other comprehensive
income is comprised of the unrealized gain or loss on securities
available for sale. The following shows the activity in accumulated
other comprehensive income:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accumulated other comprehensive income (deficit) at $ 38,000 $ (11,000)
beginning
Activity:
Unrealized gain on securities available for sale 398,000 74,000
Tax impact (143,000) (25,000)
--------------- -------------
Net unrealized gain on securities available for sale 255,000 49,000
--------------- -------------
Accumulated other comprehensive income at end $ 293,000 $ 38,000
=============== =============
</TABLE>
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with
off-balance-sheet risk, acquired in the normal course of business
to meet the financing needs of its customers. These financial
instruments include various commitments to extend credit and
standby letters of credit. These instruments involve, to a varying
degree, elements of credit risk in excess of the amount recognized
in the balance sheet. The contract amounts of these instruments
reflect the extent of involvement Company has in particular classes
of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers. The Company holds collateral supporting those
commitments for which collateral is deemed necessary. Because these
instruments have fixed maturity dates and because many of them
expire without being drawn upon, they do not generally present any
significant liquidity risk to the Company.
The Company frequently enters into loan sale commitments prior to
closing loans in order to limit interest rate risk for the period
of time between when a loan is committed and when it is sold. These
sale commitments are typically made on a loan by loan basis.
A summary of the amount of Company's exposure to credit loss for
loan commitments (unfunded loans and unused lines of credit) and
standby letters of credit outstanding at December 31, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loan Commitments $ 40,213,000 $ 20,883,000
Standby Letters of Credit $ 161,000 $ 583,000
Commitments to Sell $ 6,675,000 $ 1,459,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Company upon extension of credit,
is based on management's credit evaluation. Collateral varies but
may include accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties and real estate.
NOTE 13. LEASE COMMITMENTS
The Bank leases two branch office locations in Beloit, Wisconsin
under leases expiring November 2014 and July 2012. The leases can
be terminated every five years, but the Bank could be liable for
remodeling or removal costs to the leased office spaces if the
leases are terminated before the 14th year of the agreements.
The Bank also leases an office in Roscoe, Illinois under a lease
expiring in December 2002. The lease is subject to inflationary
adjustments after three years from occupancy. In addition, the Bank
is obligated to pay a portion of the real estate taxes, insurance,
and common area maintenance.
The total minimum rental commitment under the leases at December
31, 1998 is as follows:
18
<PAGE> 45
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 13. LEASE COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
Year Ending December 31:
<S> <C>
1999 $ 95,000
2000 108,000
2001 108,000
2002 108,000
2003 and later 1,023,000
-----------
$ 1,442,000
</TABLE>
Total rent expense for the years ended December 31, 1998, 1997 and
1996 was $92,000, $49,000, and $36,000, respectively.
NOTE 14. EARNINGS PER SHARE
Basic earnings per share are arrived at by dividing net income
available to common shareholders by the weighted-average number of
common shares outstanding and do not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings
per share calculation is arrived at by dividing net income by the
weighted-average number of shares outstanding, adjusted for the
dilutive effect of outstanding stock options, and any other common
stock equivalents. The following table shows the computation of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Income Share Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the Year Ended December 31, 1998
Basic Earnings Per Share $ 2,010,000 2,296,636 $ 0.88
=============== =========
Effect of Dilutive Stock Options 120,283
-------------
Diluted Earnings Per Share $ 2,010,000 2,416,919 $ 0.83
=============== ============= =========
For the Year Ended December 31, 1997
Basic Earnings Per Share $ 1,956,000 2,283,428 $ 0.86
=============== =========
Effect of Dilutive Stock Options 101,160
-------------
Diluted Earnings Per Share $ 1,956,000 2,384,588 $ 0.82
=============== ============= =========
For the Year Ended December 31, 1996
Basic Earnings Per Share $ 1,728,000 2,279,494 $ 0.76
=============== =========
Effect of Dilutive Stock Options 92,973
-------------
Diluted Earnings Per Share $ 1,728,000 2,372,467 $ 0.73
=============== ============= =========
</TABLE>
NOTE 15. COMMON STOCK SPLIT
On June 15, 1996 the Company issued the 759,301 additional shares,
at $.01 per share par value, necessary to effect a 3 for 2 common
stock split.
NOTE 16. SEGMENT INFORMATION
The Company, through the branch network of its subsidiary,
Blackhawk, provides a full range of consumer and commercial banking
services to individuals, businesses, and farms in southern
Wisconsin and northern Illinois. These services include demand,
time and savings deposits; safe deposit services; credit cards;
secured and unsecured consumer, commercial, and real estate loans;
ATM processing; cash management; and trust services. While the
Company's chief decision makers monitor the revenue streams of the
various products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all
of the Company's banking operations are considered by management to
be aggregated in one reportable operating segment.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions for the Company's
financial instruments are summarized below.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash, cash equivalents and federal funds sold: For these short-term
instruments, the carrying amount is a reasonable estimate of fair
value.
Securities: For securities, fair value equals quoted market price,
where available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
19
<PAGE> 46
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans receivable: The fair value of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities.
Deposits: The fair value of demand deposits and savings accounts is
the amount payable at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Short-term and long-term borrowings: The carrying amounts of
variable-rate borrowings and notes payable approximate their fair
values. The fair value of fixed rate borrowings is estimated using
rates currently available for debt with similar terms and remaining
maturities.
Off-balance sheet financial instruments: The fair value of
off-balance sheet instruments was estimated based on the amount the
Company would pay to terminate the contracts or agreements, using
current rates and, when appropriate, the current creditworthiness
of the customer.
The estimated fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying Carrying
Amount Fair Value Amount Fair Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash, cash equivalents, federal funds
sold and other short term investments 15,973 15,973 8,680 8,680
Federal funds sold and other
short-term investments 15,335 15,335 8,889 8,889
Securities 60,371 60,563 38,408 38,586
Loans, net of allowance for
loan losses 180,389 183,500 136,774 137,243
Financial Liabilities and Other
Off-balance Sheet Instruments:
Demand deposit and savings 112,157 112,157 71,398 71,402
Time deposits 129,238 133,194 87,653 87,923
Borrowings 21,699 21,396 17,081 17,114
Loan Commitments - - - -
Standby Letters of Credit - - - 6
</TABLE>
Limitations: Fair value estimates are made at a specific point in
time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters that could affect the estimates. Fair
value estimates are based on existing on-and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Deposits with no
stated maturities are defined as having a fair value equivalent to
the amount payable on demand. This prohibits adjusting fair value
derived from retaining those deposits for an expected future period
of time. This component, commonly referred to as a deposit base
intangible, is neither considered in the above amounts nor is it
recorded as an intangible asset on the balance sheet. Significant
assets and liabilities that are not considered financial assets and
liabilities include premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates
and have not been considered in the estimates.
NOTE 18. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Company
and the Bank's financial statements. Under capital adequacy
guidelines and regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are
also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total capital
and Tier I capital (as defined in the regulations) to risk-
20
<PAGE> 47
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 18. REGULATORY MATTERS (CONTINUED)
weighted assets (as defined), and the Tier I capital (as defined)
to average assets (as defined). Management believes, as of December
31, 1998, that the Company and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believe have changed the Company and
the Bank's category.
The actual capital amounts and ratios as of December 31, are also
presented in the table (in thousand's).
<TABLE>
<CAPTION>
To be Well
Capitalized
For Capital Under prompt
Actual Adequacy Purposes Corrective
Action Provisions
As of December 31, 1998: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Company
-------
Total Capital (To Risk
Weighted Assets) 18,746 9.31% 16,111 8.0%
Tier I Capital (To Risk
Weighted Assets) 16,830 8.36% 8,055 4.0%
Tier I Capital (To
Average Assets) 16,830 6.00% 8,744 3.0%
Bank
----
Total Capital (To Risk
Weighted Assets) 25,704 12.79% 16,075 8.0% 20,093 10.0%
Tier I Capital (To Risk
Weighted Assets) 23,788 11.84% 8,037 4.0% 12,056 6.0%
Tier I Capital (To
Average Assets) 23,788 8.50% 11,488 4.0% 14,360 5.0%
As of December 31, 1997:
Company
-------
Total Capital (To Risk
Weighted Assets) $ 22,895 18.67% $ 9,811 8.0%
Tier I Capital (To Risk
Weighted Assets) 21,373 17.43% 4,905 4.0%
Tier I Capital (To
Average Assets) 21,373 11.79% 5,439 3.0%
Blackhawk - Beloit
------------------
Total Capital (To Risk
Weighted Assets) 19,253 18.22% 8,456 8.0% 10,570 10.0%
Tier I Capital (To Risk
Weighted Assets) 18,092 17.12% 4,228 4.0% 6,342 6.0%
Tier I Capital (To
Average Assets) 18,092 12.43% 5,822 4.0% 7,277 5.0%
Blackhawk - Rochelle
--------------------
Total Capital (To Risk
Weighted Assets) 2,932 8.48% 2,765 8.0% 3,456 10.0%
Tier I Capital (To Risk
Weighted Assets) 2,621 7.58% 1,382 4.0% 1,728 6.0%
Tier I Capital (To
Average Assets) 2,621 5.29% 1,982 4.0% 2,479 5.0%
</TABLE>
NOTE 19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED PARENT COMPANY BALANCE SHEETS:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 791,000 $ 136,000
Investment in subsidiaries 31,212,000 22,411,000
Investment securities available-for-sale 189,000 -
Investment securities held-to-maturity - 110,000
Due from subsidiaries, net 105,000 697,000
Other assets 156,000 89,000
---------------- ---------------
Total Assets $ 32,453,000 $ 23,443,000
================ ===============
</TABLE>
21
<PAGE> 48
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
<TABLE>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other borrowings $ 7,673,000 $ -
Other liabilities 380,000 308,000
---------------- ----------------
Total Liabilities 8,053,000 308,000
---------------- ----------------
Shareholders' Equity:
Preferred Stock - -
Common Stock 23,000 23,000
Additional paid in capital 7,229,000 7,133,000
Retained earnings 16,975,000 16,045,000
Less treasury stock, at cost (120,000) (104,000)
Accumulated other comprehensive income 293,000 38,000
---------------- ----------------
Total Shareholders' Equity 24,400,000 23,135,000
---------------- ----------------
Total liabilities and shareholders' equity $ 32,453,000 $ 23,443,000
================ ================
CONDENSED PARENT COMPANY STATEMENTS OF INCOME:
1998 1997 1996
---- ---- ----
Income:
Dividends from subsidiaries $ 1,800,000 $ 1,750,000 $ 1,436,000
Interest income 20,000 74,000 171,000
----------- ------------ -----------
Total Income 1,820,000 1,824,000 1,607,000
----------- ------------ -----------
Expenses:
Interest Expense 169,000 - -
Professional fees 46,000 27,000 33,000
Other 44,000 44,000 31,000
----------- ------------ -----------
Total Expenses 259,000 71,000 64,000
----------- ------------ -----------
Income before income tax benefits and equity in
undistributed net income of subsidiaries 1,561,000 1,753,000 1,543,000
Income tax expense (benefits) (73,000) - 10,000
----------- ------------ -----------
Income before equity in undistributed net income of
Subsidiaries 1,634,000 1,753,000 1,533,000
Equity in undistributed net income of subsidiaries 376,000 203,000 195,000
----------- ------------ -----------
Net Income $ 2,010,000 $ 1,956,000 $ 1,728,000
=========== ============ ===========
<CAPTION>
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,010,000 $ 1,956,000 $ 1,728,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensatory employee stock options recognized (1,000) 36,000 43,000
Amortization of intangible assets 28,000 13,000 -
Equity in undistributed net income of subsidiaries (376,000) (203,000) (195,000)
(Increase) decrease in due from subsidiaries 650,000 44,000 (170,000)
Accretion of discounts on investment securities, net - (35,000) (46,000)
(Increase) decrease in other assets (745,000) 39,000 (1,000)
Increase in other liabilities 25,000 31,000 63,000
----------- ------------ -----------
Net cash provided by operating activities 1,591,000 1,881,000 1,422,000
----------- ------------ -----------
Cash Flows From Investing Activities
Purchase of securities - (4,967,000) (5,334,000)
Proceeds from maturity of securities 110,000 7,090,000 5,309,000
Payments for investments in subsidiary (12,636,000) (4,233,000) -
Repayment of investments in subsidiaries 4,915,000 - -
---------- ------------ -----------
Net cash used in investing activities (7,611,000) (2,110,000) (25,000)
----------- ------------- -----------
Cash Flows From Financing Activities
Proceeds from long-term debt 7,800,000 - -
Repayment of long-term debt (127,000) - -
Dividends paid (1,080,000) (983,000) (866,000)
Proceeds from sale of common stock 98,000 42,000 14,000
Purchase of common stock for treasury (16,000) (20,000) (84,000)
----------- ------------- -----------
Net cash provided by (used in) financing
activities 6,675,000 (961,000) (936,000)
---------- ------------- -----------
Increase (decrease) in cash and cash equivalents 655,000 (1,190,000) 461,000
Cash and Cash Equivalents:
Beginning 136,000 1,326,000 865,000
---------- ------------ -----------
Ending $ 791,000 $ 136,000 $ 1,326,000
========== ============ ===========
</TABLE>
22
<PAGE> 1
Exhibit 22
Subsidiaries of Registrant
Percent of Capital
Stock Owned At
Name Location December 31, 1998
- ---- -------- -------------------
Blackhawk State Bank Beloit, Wisconsin 100%
(Wisconsin-chartered
Commercial Bank
