<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ ------
COMMISSION FILE NUMBER 0-18599
BLACKHAWK BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1659424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 BROAD STREET 53511
BELOIT, WISCONSIN (ZIP CODE)
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES)
(608) 364-8911
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK JUNE 30, 1999
---------------------- -------------
$.01 PAR VALUE 2,318,373 SHARES
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income for the
three months ended June 30, 1999 and 1998 4
Consolidated Condensed Statements of Income for the
Six months ended June 30, 1999 and 1998
5
Consolidated Condensed Statements of Shareholders'
Equity as of June 30, 1999 and December 31, 1998 6
Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 7
Notes to Consolidated Condensed Financial Statements 8-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 15
ITEM 6. A) EXHIBITS 15
B) REPORTS ON FORM 8-K 15
SIGNATURES 16
2
<PAGE> 3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30,1999 DECEMBER 31, 1998
------------ -----------------
<S> <C> <C>
Cash and cash equivalents $ 15,888,000 $ 15,973,000
Federal funds sold and other short-term investments 1,341,000 15,335,000
Securities available for sale 49,683,000 38,475,000
Securities held to maturity 20,195,000 21,896,000
Total loans 183,011,000 182,304,000
Allowance for loan losses (Note 3) (1,974,000) 1,915,000
------------- -------------
Net loans 181,037,000 180,389,000
Bank premises and equipment, net 7,320,000 7,483,000
Other intangible assets 7,908,000 8,152,000
Other assets 3,795,000 3,765,000
------------- -------------
Total Assets $ 287,167,000 $ 291,468,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 26,000,000 $ 33,110,000
Interest bearing 204,750,000 208,285,000
------------- -------------
Total Deposits 230,750,000 241,395,000
Borrowed Funds:
Short-term borrowings 13,277,000 4,576,000
Other borrowings 16,067,000 17,123,000
Accrued interest payable 825,000 1,046,000
Other liabilities 2,293,000 2,928,000
------------- -------------
Total Liabilities 263,212,000 267,068,000
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock
1,000,000 shares, $.01 par value per share
authorized, none issued or outstanding --- ---
Common stock
10,000,000 shares, $.01 par value per share
authorized, 2,318,373 and 2,285,864 shares
issued and outstanding 23,000 23,000
Additional paid-in capital 7,148,000 7,099,000
Employee stock options earned 130,000 130,000
Retained Earnings 17,046,000 16,975,000
Treasury Stock (120,000) (120,000)
FASB 115 Adjustment (272,000) 293,000
------------- -------------
Total Shareholders' Equity 23,955,000 24,400,000
------------- -------------
Total Liabilities and Shareholder's Equity $ 287,167,000 $ 291,468,000
============= =============
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE> 4
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,869,000 $3,147,000
Interest on deposits with other banks 85,000 6,000
Interest on investment securities:
Taxable 839,000 562,000
Exempt from federal income taxes 120,000 62,000
Interest on federal funds sold and
other short-term investments 62,000 66,000
---------- ----------
Total Interest Income 4,975,000 3,843,000
---------- ----------
INTEREST EXPENSE:
Interest on deposits 2,229,000 1,598,000
Interest on short-term borrowings 95,000 105,000
Interest on other borrowings 246,000 105,000
---------- ----------
Total Interest Expense 2,570,000 1,808,000
---------- ----------
Net Interest Income 2,405,000 2,035,000
Provision for loan losses (Note 3) 126,000 75,000
---------- ----------
Net Interest Income After Provision for Loan Losses 2,279,000 1,960,000
---------- ----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 96,000 135,000
Brokerage and annuity commission 116,000 31,000
Service fees on deposit accounts 318,000 232,000
Other income 181,000 165,000
---------- ----------
Total Other Operating Income 711,000 563,000
---------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,233,000 907,000
Occupancy expense of bank premises, net 168,000 140,000
Furniture and equipment 207,000 108,000
Data processing 215,000 90,000
Intangible amortization 153,000 77,000
Other operating expense 515,000 382,000
---------- ----------
Total Other Operating Expense 2,491,000 1,704,000
---------- ----------
Income Before Income Taxes 499,000 819,000
Provision for Income Taxes 185,000 276,000
---------- ----------
Net Income $ 314,000 $ 543,000
========== ==========
Basic Earnings Per Share $ .14 $ .24
========== ==========
Diluted Earnings Per Share $ .13 $ .22
========== ==========
Dividends Per Share $ .12 $ .12
========== ==========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE> 5
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- -----------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $7,749,000 $6,326,000
Interest on deposits with other banks 198,000 24,000
Interest on investment securities:
Taxable 1,520,000 1,112,000
Exempt from federal income taxes 223,000 109,000
Interest on federal funds sold and
other short-term investments 243,000 138,000
---------- ----------
Total Interest Income 9,933,000 7,709,000
---------- ----------
INTEREST EXPENSE:
Interest on deposits 4,511,000 3,204,000
Interest on short-term borrowings 185,000 225,000
Interest on other borrowings 490,000 209,000
---------- ----------
Total Interest Expense 5,186,000 3,638,000
---------- ----------
Net Interest Income 4,747,000 4,071,000
Provision for loan losses (Note 3) 234,000 131,000
---------- ----------
Net Interest Income After Provision for Loan Losses 4,513,000 3,940,000
---------- ----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 250,000 169,000
Brokerage and annuity commissions 191,000 64,000
Service fees on deposit accounts 612,000 466,000
Other income 390,000 375,000
---------- ----------
Total Other Operating Income 1,443,000 1,074,000
---------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,476,000 1,826,000
Occupancy expense of bank premises, net 343,000 286,000
Furniture and equipment 396,000 209,000
Data processing 383,000 231,000
Intangible amortization 298,000 124,000
Other operating expense 1,057,000 787,000
---------- ----------
Total Other Operating Expense 4,953,000 3,463,000
---------- ----------
Income Before Income Taxes 1,003,000 1,551,000
Provision for Income Taxes 378,000 528,000
---------- ----------
Net Income $ 625,000 $1,023,000
========== ==========
Basic Earnings Per Share $ .27 $ .45
========== ==========
Diluted Earnings Per Share $ .26 $ .42
========== ==========
Dividends Per Share $ .24 $ .23
========== ==========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE> 6
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Twelve Months Ended
June 30, 1999 December 31, 1998
---------------- -------------------
<S> <C> <C>
Common Stock:
Balance at beginning and end of period $ 23,000 $ 23,000
Stock options exercised -- --
------------ ------------
Balance at end of period 23,000 23,000
------------ ------------
Additional Paid-in Capital:
Balance at beginning of period 7,099,000 7,002,000
Stock options exercised 49,000 97,000
------------ ------------
Balance at end of period 7,148,000 7,099,000
------------ ------------
Employee Stock Options Earned:
Balance at beginning of period 130,000 131,000
Unearned employee compensation -- (1,000)
------------ ------------
Balance at end of period 130,000 130,000
------------ ------------
Retained Earnings:
Balance at beginning of period 16,975,000 16,045,000
Net Income 625,000 2,010,000
Dividends declared on common stock (554,000) (1,080,000)
------------ ------------
Balance at end of period 17,046,000 16,975,000
------------ ------------
Treasury Stock, at cost:
Balance at beginning of period (120,000) (104,000)
Purchase -- (16,000)
------------ ------------
Balance at end of period (120,000) (120,000)
------------ ------------
Accumulated other comprehensive income:
Balance at beginning of period 293,000 38,000
Other comprehensive income, net of taxes (565,000) 255,000
------------ ------------
Balance at end of period (272,000) 293,000
------------ ------------
Total Shareholders' Equity $ 23,955,000 $ 24,400,000
============ ============
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
6
<PAGE> 7
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 625,000 $ 1,023,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Compensatory options recognized --- 9,000
Provision for loan losses 234,000 131,000
Provision for depreciation and amortization 756,000 322,000
Amortization of premiums (accretion
discount) on investment securities, net 37,000 (93,000)
(Gain) on sale of loans (250,000) (29,000)
Loans originated for sale (16,864,000) (10,356,000)
Proceeds from sale of loans 19,425,000 10,385,000
Change in assets and liabilities:
(Increase) decrease in other assets 246,000 (114,000)
(Increase) decrease in accrued interest receivable (129,000)
(Increase) decrease in accrued interest payable (172,000) (134,000)
Increase (decrease) in other liabilities (266,000) 62,000
------------ ------------
Net cash provided by operating activities 3,642,000 1,206,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities 16,094,000 8,937,000
Purchase of available-for-sale securities (28,289,000) (15,041,000)
Proceeds from maturity of investment securities 9,540,000 6,212,000
Purchase of investment securities (7,867,000) (2,803,000)
Decrease in federal funds sold and
other short-term investments, net 13,994,000 8,542,000
Loans originated, net of principal collected (3,505,000) 689,000
Purchase of bank premises and equipment (190,000) 242,000
------------ ------------
Net cash provided by (used in) investing activities (223,000) 6,778,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 49,000 81,000
Net increase (decrease) in deposits (10,645,000) 294,000
Net increase (decrease) in borrowings 7,645,000 (3,002,000)
Cash dividends paid (553,000) (528,000)
Purchase of common stock for Treasury --- (16,000)
------------ ------------
Net cash (used in) financing activities (3,504,000) (3,171,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (85,000) 4,813,000
CASH AND CASH EQUIVALENTS:
Beginning of period 15,973,000 8,680,000
------------ ------------
End of period $ 15,888,000 $ 13,493,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 5,014,000 $ 3,772,000
Income taxes 425,000 573,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 217,000 $ 183,000
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
7
<PAGE> 8
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1999
Note 1. General
The accompanying consolidated condensed financial statements conform to
generally accepted accounting principles and to general practices within
the banking industry. The more significant policies used by the Company
in preparing and presenting its financial statements are stated in the
Company's Form 10-KSB.
The effect of timing differences in the recognition of revenue and
expense for tax liability is not determined until the end of each fiscal
year.
In the opinion of Management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial
position of the Corporation as of June 30, 1999 and December 31, 1998,
the results of operations for the three and six months ended June 30,
1999 and 1998.
The results of operations for the three and six months ended June 30,
1999 and 1998 are not necessarily indicative of the results to be
expected for the full year.
Note 2. Non-Performing Loans
Non-performing loans includes loans which have been categorized by
management as non-accruing because collection of interest is not
assured, and loans which are past-due ninety days or more as to interest
and/or principal payments. The following summarizes information
concerning non-performing loans:
<TABLE>
<CAPTION>
June 30 December 31
----------- -----------
1999 1998 1998
-------- -------- -----------
<S> <C> <C> <C>
Impaired loans $2,897,000 $1,149,000 $ 1,479,000
Non-accruing loans 1,455,000 644,000 857,000
Past due 90 days or more and still accruing 136,000 422,000 240,000
---------- ---------- -----------
Total non-performing loan $4,488,000 $2,215,000 $ 2,576,000
========== ========== ===========
</TABLE>
Note 3. Allowance For Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30
1999 1998
-----------------------------
<S> <C> <C>
Balance at beginning of period $1,952,000 $1,469,000
Provision charged to expense 126,000 75,000
Loans charged off 117,000 195,000
Recoveries 13,000 2,000
---------- ----------
Balance at end of period $1,974,000 $1,351,000
========== ==========
Six Months Ended June 30
1999 1998
-----------------------
Balance at beginning of period $1,915,000 $1,523,000
Provision charged to expense 234,000 131,000
Loans charged off 203,000 310,000
Recoveries 28,000 7,000
---------- ----------
Balance at end of period $1,974,000 $1,351,000
========== ==========
</TABLE>
8
<PAGE> 9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Note 4: Earnings Per Share
Presented below are the calculations for basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders $ 314,000 $ 543,000 $ 625,000 $1,023,000
========== ========== ========== ==========
Weighted average shares outstanding 2,306,489 2,295,671 2,305,000 2,292,073
========== ========== ========== ==========
Basic earnings per share $ .14 $ .24 $ .27 $ .45
========== ========== ========== ==========
Diluted:
Net income available to common stockholders $ 314,000 $ 543,000 $ 625,000 $1,023,000
========== ========== ========== ==========
Weighted average shares outstanding 2,306,489 2,295,671 2,305,409 2,292,073
Effect of dilutive stock options outstanding 110,558 138,911 110,588 136,378
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,417,047 2,434,582 2,415,967 2,428,451
========== ========== ========== ==========
Diluted earnings per common share $ .13 $ .22 $ .26 $ .42
========== ========== ========== ==========
</TABLE>
Note 5: Future Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement
requires that all derivative financial instruments be recognized as
either assets or liabilities in the statement of financial position.
Derivative financial instruments not designed as hedges will be measured
at fair value with changes in fair value being recognized in earnings in
the period of change. If a derivative is designated as a hedge, the
accounting for changes in fair value will depend on the specific
exposure being hedged. The statement is effective for fiscal years
beginning after June 15, 1999. Management, at this time, cannot
determine the effect the adoption of this statement may have on the
financial statements of the Company as the effect is dependent of the
amount and nature of derivatives and hedges held at the time of adoption
of the statement.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction with
the consolidated condensed balance sheets as of June 30, 1999 and December 31,
1998 and the consolidated condensed statements of income for the three months
and six months ended June 30, 1999 and 1998. This information is not meant to be
a substitute for the balance sheets and income statements.
RESULTS OF OPERATIONS
On September 3, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, was merged into the Company's
subsidiary, Blackhawk State Bank, on the effective date of the purchase.
Results of operations of Belvidere are incorporated in the Company's statements
from the acquisition date forward.
THREE MONTHS ENDED JUNE 30
For the three months ended June 30, 1999, interest income was nearly $5.0
million compared to $3.8 million for the same period in 1998. This increase of
approximately $1.2 million, nearly 30%, was primarily the result of the
Belvidere acquisition. The two areas that combined contributed nearly $1.1
million of the increase were loans and investments, $722,000 and $335,000
respectively.
Interest and fees on loans increased to $3.9 million in the current period
compared to $3.1 million in the same period in 1998. This increase of 23.0% was
due primarily to increased volume resulting from the Belvidere acquisition
discussed above. Approximately $600,000 of the increase was in the area of real
estate loans and another $200,000 was from commercial loans. Consumer loan
income was approximately the same in both periods.
Investment income on taxable securities for the quarter ended June 30, 1999 was
$839,000 compared to $562,000 in 1997, an increase of 23.0%. Income due to
volume increased, again as a result of the acquisition. Income from tax-exempt
securities increased nearly 94.0% in the 1999 period compared to 1998. This was
due almost entirely to increased volumes.
10
<PAGE> 11
Interest on deposits for the three months ended June 30, 1999 was $2.2 million
compared to $1.6 million in the same period in 1998. The increase was due to
increased volumes, which were the result of the Belvidere acquisition. While
there has been some fluctuations in interest rates, most have been relatively
minor. If interest rates increase in the coming months, an increase in the rates
paid on deposits can be expected. Significant growth in deposits is not expected
in the third quarter of 1999 from current levels. However, comparisons to 1998
in the third quarter will be very positive because of the Belvidere acquisition.
Interest on short-term borrowings was significantly higher in 1999 than in 1998,
$246,000 versus $105,000 respectively. Short-term borrowings consist of fed
funds purchased, repurchase agreements, loans from the Federal Home Loan Bank,
("FHLB"), and loans of the company to fund part of the purchase of Belvidere.
This increase was the primarily the result of loan to fund the acquisition. Late
in the second quarter of 1999, the Bank began purchasing fed funds to fund its
cash needs. It is anticipated that this source of funding will continue to be
utilized in the third quarter of 1999.
The provision for loan loss was approximately $126,000 in the quarter ended June
30, 1999 as compared to $75,000 for the same period in 1998. On a regular basis,
management determines the adequacy of the loan loss reserve and, if necessary,
adjusts the loan loss provision. As the volume of loans increase, an increase of
the loan loss provision can be anticipated.
Total other operating income increased to $711,000 from $563,000 in the second
quarter of 1998. The largest single item in this category is fees relating to
depository accounts, $318,000 in 1999 compared to $232,000 in 1998. Another
significant area of income in this category was the gain on sale of loans,
$96,000 in the second quarter of 1999 compared to $135,000 in the same period of
1998. As the level of interest rates increase the rate of new fixed-rate loan
generation is expected to decrease and with it the level of revenue from the
sale of these loans. Income from the sale of non-deposit investments increased
to $116,000 in the second quarter of 1999 from $31,000 in the same period in
1998. The increase was the result of the addition of Belvidere and increased
volume at Beloit. Other income includes trust fees, which increased $16,000 to
$60,000 for the quarter compared to $44,000 for the same period in 1998.
Total other operating expenses were $2,491,000 in the second quarter of 1999
compared to $1,704,000 in the same period in 1998. The largest single item in
this category is salaries and benefits which were $1,233,000 in 1999 compared to
$907,000 in 1998. The increase of $326,000 is the result of normal salary
increases, and the inclusion of the Belvidere operation, which will affect all
of the other expenses also. The relatively large increases in data processing
expense include costs related to upgrading computer systems to be Y2K compliant.
A portion of the equipment expense increase can also be attributed to the Y2K
situation. The increased costs in both of these areas are expected to continue
for the balance of 1999.
Income taxes decreased to $185,000 from $276,000 for the three month period
ending June 30,1998. The effective tax rates were 37% versus 34% for 1999 and
1998 second quarters, respectively. The increase of income from federally
tax-exempt securities was negated by the non tax exempt amortization of the
intangible assets acquired in the Belvidere and the Rochelle purchases.
SIX MONTHS ENDED JUNE 30
Total interest income for the six months ended June 30, 1999, was $9.9 million
compared to $7.7 million for the same period in 1998. The largest area of
interest revenue, interest and fees on loans, also contributed the largest
dollar increase, $1.4 million. As was discussed previously, volume was the
primary reason for the growth of revenue in this area. The average yield in 1999
was slightly less than in 1998. Future internal growth of loans could slow
during the second half of 1999 if the Federal Reserve Bank decides to increase
interest rates. Some slow down has been experienced in the residential real
estate area but this has not carried over to the other lending areas.
Interest on taxable securities was up substantially in the first half of 1999
compared to 1998, $1.5 million and $1.1 million respectively. The decrease in
the average yield for the period in 1999 was more than offset by the increase in
volume when compared to 1998. Interest income from tax exempt securities was
effected by increased volume as the average yield was slightly less in 1999 than
in 1998. Interest income from fed funds sold and short-term investments was
$243,000 for the first six months of 1999 as compared to $138,000 for the same
period in 1998. This $105,000 increase was due to increased volume. All of this
increase occurred in the first half of the period.
Interest expense was $5.2 million in the six months ended June 30, 1999 as
compared to $3.6 million for the same period
11
<PAGE> 12
in 1998. Interest on deposits was $4.5 million in 1999 as compared to $3.6
million in 1998. Most of this increase is attributable to the deposits obtained
in the Belvidere acquisition.
Interest on short-term borrowings was $185,000 in the first half of 1999 as
compared to $225,000 in the same period of 1998. The lower expense in 1999 was
the result of lower volume and a lower average rate. Increased average balances
plus increased average rates paid accounts for the higher interest expense of
long-term borrowings. Part of the volume increase was the loan to partially fund
the Belvidere purchase.
The provision for loan loss was approximately $234,000 for the period in 1999
compared to $131,000 in 1998. Management believes that the provision was
appropriate based on their regular review of the adequacy of the overall
reserve.
Other operating income for the six months ended June 30, 1999 was $1.4 million
compared to $1.1 million for the same period in 1998. Service fees, the largest
item in this category, experienced the largest increase to $612,000 in 1999 as
compared to $466,000 in 1998. The increase in this area was the result of
increased volume of accounts as a result of the Belvidere acquisition and
increased fees. Income from the sale of non-deposit investments was $191,000 for
the first half of 1999 compared to $64,000 for the same period of 1998. Other
income increased to $390,000 in 1999 compared to $375,000. Trust department
income, which is included in other income, increased to $120,000 in 1999
compared to $106,000 in 1998. Income from mortgage servicing is also included in
this category. It is anticipated that this activity will result in increased
income in the future.
For the six month period ending June 30, 1999, total other operating expenses
were $4,953,000 compared to $3,463,000 in 1998. The area of largest increase was
salaries and benefits, which totaled $2,476,000 compared to $1,826,000 in 1998.
The acquisition of Belvidere, combined with normal salary and benefit increases
and additional staffing for the Roscoe branch opened in March 1998, account for
the increase. Increases in the areas of occupancy and data processing are
primarily the result of the Belvidere acquisition. The increased expense in the
area of furniture and equipment is a combination of the Belvidere purchase and
expenses related to Y2K.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares June 30, 1999 to the
Company's prior fiscal year end December 31, 1998. Total assets were $287.2
million as compared to $291.5 million as of December 31, 1998. This represents a
decrease of approximately 1.5%.
Total investment securities, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $71.2
million as of June 30, 1999, as compared to $75.7 million as of December 31,
1998. The reduction of investments was the result of funding the increase in
loans and the reduction in deposits.
Loans totaled $183.0 million on June 30, 1998 as compared to $182.3 million on
December 31, 1998, an increase of $0.7 million. The majority of the loan demand
for the first half of the period in 1999 has been for fixed-rate mortgages which
are usually sold to the Federal Home Loan Mortgage Corporation within one month
of origination. This was true for the entire period in 1998. During the second
quarter of 1999 the demand for commercial loans has increased. The strength of
loan demand for the balance of 1999 will depend to some extent on what action
the Federal Reserve Bank takes with regard to interest rates.
Allowance for loan losses was $2.0 million as of June 30,1998 as compared to
$1.9 million as of June 30,1998. Footnote 3 to the financial statements
indicates the activity in the allowance for loan loss account for the three and
six months ended June 30, 1999 and 1998. Non-performing loans (see Footnote 2)
as of June 30, 1999 were $4.5 million. The potential loss resulting from these
loans has been provided for in management's determination of the adequacy of the
loan loss reserve. Management believes that the allowance is adequate at this
time.
Total deposits as of June 30, 1998 were $230.8 million as compared to $241.4
million as of December 31, 1998. Non-interest bearing deposits decreased to
$26.0 million from $33.1 million as of December 31, 1998. Several commercial
customers have historically increased their demand deposit balances at year end.
As a result, subsequent interim reporting dates typically have
12
<PAGE> 13
balances lower than the previous year-ends. Interest bearing deposits increased
slightly from year-end levels. Also affecting deposit levels has been the
strength of the overall equity markets. Competition for deposit dollars
continues to be intense. As a result, dramatic growth of deposits is not
anticipated during the balance of 1999.
Other borrowings, the main component of which is long-term borrowings incurred
in part to complete the Belvidere acquisition, was $16.1 million at June 30,
1999 compared to $17.1 million at December 31, 1998. Also, part of other
borrowings are advances from the FHLB. The advances were used to fund some loans
in the past and to also provide liquidity. The use of FHLB advances in the
future will depend on the Bank's need for funds and the rates at which they may
be obtained.
The company continues to maintain an excellent capital position regardless of
the measurement used. The following table shows four different measurements as
of June 30, 1999 and December 31, 1998, and the regulatory requirement, if any.
Management does not anticipate the need for additional capital resources in the
near future.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, REGULATORY
1999 1998 REQUIREMENTS
-----------------------------------------
<S> <C> <C> <C>
Leverage capital ratio 6.29% 6.00% 3.00%
Tier I capital as a percent
of risk-based assets 9.15% 8.36% 4.00%
Total capital as a percent
of risk-based assets 10.24% 9.31% 8.00%
</TABLE>
Liquidity as it relates to the bank is a measure of its ability to fund loans
and withdrawals of deposits in a cost-effective manner. Its principal sources of
funds are deposits, scheduled amortization and prepayment of loan principal,
maturities of investment securities, income from operations, and short term
borrowings. Additional sources include purchasing fed funds, sale of loans,
borrowing from both the Federal Reserve Bank and Federal Home Loan Bank, capital
loans. Also dividends paid by Nevahawk to Blackhawk provide an additional
source. Under present law, accumulated earnings could be paid as dividends
without incurring a tax liability.
The liquidity needs of the Company generally consists of payment of dividends to
its shareholders and a limited amount of expenses. As part of the financing of
the proposed purchase of First Financial transaction, the Company negotiated a
line of credit from an unrelated third party. The sources of funds to provide
this liquidity are income from investments, maturities of investments, cash
balances, issuance of capital and dividends from its subsidiary banks. Certain
restrictions are imposed upon the Banks which could limit their ability to pay
dividends if they did not have net earnings or adequate capital in the future.
The Company maintains adequate liquidity to pay its expenses.
Off-balance sheet items consist of credit card lines of credit, mortgage
commitments, letters of credit and other commitments totaling approximately
$26.2 million as of June 30, 1999. This compares to $33.7 million at December
31, 1998. The Bank has historically funded off-balance sheet commitments with
its primary sources of funds, and management anticipates that this will
continue.
YEAR 2000 ISSUES Year 2000 issues will affect the Company to the extent that it
operates in an industry which heavily relies upon information technology systems
and has material relationships with third parties, both vendors and customers.
As a result the Company has undertaken a four-phase process to determine to what
extent the Company is vulnerable to Year 2000 issues. The four phases set-forth
by the Company are awareness by major area, assessment of Year 2000 compliance,
system renovation (if necessary) and validation of Year 2000 preparedness. The
Company's Year 2000 progress, by major area, is set-forth in the table that
follows.
System Awareness Assessment Renovation Validation
General
Ledger Complete Complete Complete Complete
Loan
13
<PAGE> 14
System Complete Complete Complete Complete
Deposit
System Complete Complete Complete Complete
Item
Capture Complete Complete Complete Complete
Hardware Complete Complete In Process Oct `99
Individual
Loan
Customers Complete Complete Basis Ongoing
The Company has approved a budget in the amount of $666,000 for the cost of
hardware and software remediation. A majority of these costs were planned
expenditures to upgrade existing hardware and software. Most of these funds have
been expended, and will be amortized over the useful life of the asset.
As is shown in the table, the Company has completed all phases of year 2000
preparedness with the exception of certain hardware which is being replaced in
August through October 1999 and with respect to its individual loan customers
which is ongoing. A formal written and tested contingency plan has been
developed for all mission critical areas to provide for business continuity
through the century date change.
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause such a variance to occur included, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, and other general economic conditions
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 19, 1999, at the annual meeting of shareholders of the Company, the
shareholders re-elected John Clark, H. Daniel Green and Charles Hart to
three-year terms expiring in 2001. The vote, with respect to the re-election of
each was as follows:
John Clark
2,305,049 total votes eligible to be cast
2,010,408 votes were represented at the Annual Meeting
2,004,253 votes were cast "For" re-election
6,155 votes were cast "Against" re-election
--- votes abstained
H. Daniel Green
2,305,049 total votes eligible to be cast
2,010,408 votes were represented at the Annual Meeting
2,000,713 votes were cast "For" re-election
9,695 votes were cast "Against" re-election
--- votes abstained
Charles Hart
2,305,049 total votes eligible to be cast
2,010,408 votes were represented at the Annual Meeting
1,997,734 votes were cast "For" re-election
12,694 votes were cast "Against" re-election
--- votes abstained
ITEM 6. A) EXHIBITS
See Exhibit Index following the signature page in this report, which is
incorporated herein by this reference.
B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the first quarter of
1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
-------------------------------------------------
(Registrant)
Date: August 13, 1999 /s/ Dennis M. Conerton
-----------------------------------------------
Dennis M. Conerton
President and Chief Executive Officer
Date: August 13, 1999 /s/ Jesse L. Calkins
----------------------------------------------
Jesse L. Calkins
Senior Vice President
(Chief Financial and Accounting Officer)
16
<PAGE> 17
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporated Filed
Exhibit Herein By Here- Page
Number Description Reference To: with No.
- ------ ----------- ------------- ---- ---
<S> <C> <C> <C> <C>
4.1 Amended and Exhibit 3.1 to
restated Articles Amendment No. 1 to
of Incorporation Registrant's
of the Registrant Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.2 By-laws of Regis- Exhibit 3.2 to
trant as amended Amendment No. 1 to
Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.3 Plan of Conversion Exhibit 1.2 to
Beloit Savings Amendment No. 1 to
Bank as amended Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
27 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,888,000
<INT-BEARING-DEPOSITS> 4,986,000
<FED-FUNDS-SOLD> 1,341,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,683,000
<INVESTMENTS-CARRYING> 20,195,000
<INVESTMENTS-MARKET> 20,032,000
<LOANS> 183,011,000
<ALLOWANCE> 1,974,000
<TOTAL-ASSETS> 287,167,000
<DEPOSITS> 230,750,000
<SHORT-TERM> 13,277,000
<LIABILITIES-OTHER> 3,118,000
<LONG-TERM> 18,067,000
0
0
<COMMON> 23,000
<OTHER-SE> 23,932,000
<TOTAL-LIABILITIES-AND-EQUITY> 287,167,000
<INTEREST-LOAN> 7,749,000
<INTEREST-INVEST> 1,743,000
<INTEREST-OTHER> 441,000
<INTEREST-TOTAL> 9,933,000
<INTEREST-DEPOSIT> 4,511,000
<INTEREST-EXPENSE> 5,186,000
<INTEREST-INCOME-NET> 4,747,000
<LOAN-LOSSES> 234,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,953,000
<INCOME-PRETAX> 1,003,000
<INCOME-PRE-EXTRAORDINARY> 1,003,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625,000
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 3.86
<LOANS-NON> 1,455,000
<LOANS-PAST> 138,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,897,000
<ALLOWANCE-OPEN> 1,915,000
<CHARGE-OFFS> 203,000
<RECOVERIES> 28,000
<ALLOWANCE-CLOSE> 1,974,000
<ALLOWANCE-DOMESTIC> 1,974,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,974,000
</TABLE>
