<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ----- TO -----
COMMISSION FILE NUMBER 0-18599
BLACKHAWK BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1659424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 BROAD STREET 53511
BELOIT, WISCONSIN (ZIP CODE)
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES)
(608) 364-8911
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
ISSUED AT
CLASS OF COMMON STOCK OCTOBER 31, 2000
---------------------- ------------------
<S> <C>
$.01 PAR VALUE 2,323,949 SHARES
</TABLE>
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Income for the
three months ended September 30, 2000 and 1999 4
Consolidated Condensed Statements of Income for the
Nine months ended September 30, 2000 and 1999 5
Consolidated Condensed Statements of Shareholders'
Equity as of September 30, 2000 and 1999 6
Consolidated Condensed Statements of Cash Flows for the
Nine months ended September 30, 2000 and 1999 7
Notes to Consolidated Condensed Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-16
PART II - OTHER INFORMATION
ITEM 6. A) EXHIBITS 17
B) REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,713 $ 11,994
Interest-bearing deposit accounts 2,209 4,616
Federal funds sold and other short-term investments 541 91
Securities available for sale 55,683 49,071
Securities held to maturity, fair value of $17,967,000 and $19,373,000 17,969 19,696
Loans held for sale 452 540
Loans, net of allowance for loan losses of $2,108,000 and $1,996,000 209,582 190,184
Bank premises and equipment, net 6,506 7,065
Other intangible assets 6,335 7,511
Accrued interest receivable 2,332 2,028
Other assets 2,965 2,888
----------- ---------
Total Assets$ 315,287 $ 295,684
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 26,048 $ 30,552
Interest bearing 207,608 203,573
----------- ---------
Total Deposits 233,656 234,125
----------- ---------
Borrowed Funds:
Short-term borrowings 30,640 18,564
Other borrowings 24,241 16,803
----------- ---------
Total borrowed funds 54,881 35,367
----------- ---------
Accrued interest payable 1,235 1,030
Other liabilities 1,845 1,837
----------- ---------
Total Liabilities 291,617 272,359
----------- ---------
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 shares authorized;
2,334,273 and 2,323,949 shares issued and outstanding 23 23
Additional paid-in capital 7,360 7,307
Retained Earnings 16,955 16,973
Treasury stock, 10,324 shares, at cost (120) (120)
Accumulated other comprehensive deficit (548) (858)
----------- ---------
Total Shareholders' Equity 23,670 23,325
----------- ---------
Total Liabilities and Shareholder's Equity $ 315,287 $ 295,684
=========== =========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE> 4
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
--------- --------
<S> <C> <C>
INTEREST INCOME: (Dollars in Thousands)
Interest and fees on loans $ 4,578 $ 3,992
Interest on deposits with other banks 42 26
Interest on investment securities:
Taxable 952 866
Exempt from federal income taxes 144 126
Interest on federal funds sold and other short-term investments 5 22
--------- --------
Total Interest Income 5,721 5,032
--------- --------
INTEREST EXPENSE:
Interest on deposits 2,372 2,261
Interest on short-term borrowings 587 172
Interest on other borrowings 353 250
--------- --------
Total Interest Expense 3,312 2,683
--------- --------
Net Interest Income 2,409 2,349
Provision for loan losses 90 135
--------- --------
Net Interest Income After Provision for Loan Losses 2,319 2,214
--------- --------
OTHER OPERATING INCOME:
Service fees on deposit accounts 394 346
Brokerage and annuity commission 60 55
Gain on sale of loans 46 64
Gain on sale of securities -- 69
Net gain on sale of other assets 22 --
Other income 133 159
--------- --------
Total Other Operating Income 655 693
--------- --------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,237 1,231
Occupancy expense of bank premises, net 157 164
Furniture and equipment 202 197
Data processing 190 188
Intangible amortization 138 153
Other operating expense 580 549
--------- --------
Total Other Operating Expense 2,504 2,482
--------- --------
Income Before Income Taxes 470 425
Provision for Income Taxes 164 150
--------- --------
Net Income $ 306 $ 275
========= ========
Basic Earnings Per Share $ 0.13 $ 0.12
========= ========
Diluted Earnings Per Share $ 0.13 $ 0.11
========= ========
Dividends Per Share $ 0.12 $ 0.12
========= ========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE> 5
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 12,835 $ 11,741
Interest on deposits with other banks 125 224
Interest on investment securities:
Taxable 2,783 2,386
Exempt from federal income taxes 415 349
Interest on federal funds sold and
other short-term investments 20 265
--------- ---------
Total Interest Income 16,178 14,965
--------- ---------
INTEREST EXPENSE:
Interest on deposits 6,828 6,772
Interest on short-term borrowings 1,361 357
Interest on other borrowings 874 740
--------- ---------
Total Interest Expense 9,063 7,869
--------- ---------
Net Interest Income 7,115 7,096
Provision for loan losses (Note 3) 270 369
--------- ---------
Net Interest Income After Provision for Loan Losses 6,845 6,727
--------- ---------
OTHER OPERATING INCOME:
Service fees on deposit accounts 1,108 958
Brokerage and annuity commissions 201 246
Gain on sale of loans 99 382
Gain on sale of securities 24 69
Net gain on sale of other assets 22 --
Other income 405 481
--------- ---------
Total Other Operating Income 1,859 2,136
--------- ---------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,646 3,707
Occupancy expense of bank premises, net 488 507
Furniture and equipment 610 593
Data processing 569 571
Intangible amortization 417 451
Other operating expense 1,742 1,606
--------- ---------
Total Other Operating Expense 7,472 7,435
--------- ---------
Income Before Income Taxes 1,232 1,428
Provision for Income Taxes 413 528
--------- ---------
Net Income $ 819 $ 900
========= =========
Basic Earnings Per Share $ 0.35 $ 0.39
========= =========
Diluted Earnings Per Share $ 0.34 $ 0.37
========= =========
Dividends Per Share $ 0.36 $ 0.36
========= =========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE> 6
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Common Stock:
Balance at beginning and end of period $ 23 $ 23
Stock options exercised -- --
------------- -----------
Balance at end of period 23 23
------------- -----------
Additional Paid-in Capital:
Balance at beginning of period 7,307 7,229
Stock options exercised 53 75
------------- -----------
Balance at end of period 7,360 7,304
------------- -----------
Retained Earnings:
Balance at beginning of period 16,973 16,975
Net Income 819 900
Dividends declared on common stock (837) (831)
------------- -----------
Balance at end of period 16,955 17,044
------------- -----------
Treasury Stock, at cost:
Balance at beginning of period (120) (120)
Purchase -- --
------------- -----------
Balance at end of period (120) (120)
------------- -----------
Accumulated other comprehensive income (deficit):
Balance at beginning of period (858) 293
Other comprehensive loss, net of taxes 310 (956)
------------- -----------
Balance at end of period (548) (663)
------------- -----------
Total Shareholders' Equity $ 23,670 $ 23,588
============= ===========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
6
<PAGE> 7
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 819 $ 900
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 270 369
Provision for depreciation and amortization 1,098 1,099
Amortization of premiums (accretion of discount)
on investment securities, net 28 69
Gain on sale of loans (99) (382)
Gain on sale of available-for-sale securities (24) (69)
Gain on sale of other fixed and intangible assets (22) --
Loans originated for sale, net of principal collected (5,779) (23,115)
Proceeds from sales of loans 5,950 26,936
Change in assets and liabilities:
(Increase) decrease in other assets 6 (1,493)
(Increase) decrease in accrued interest receivable (304) 233
Increase (decrease) in accrued interest payable 204 100
Increase (decrease) in other liabilities 46 195
----------- -----------
Net cash provided by operating activities 2,193 4,842
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in federal funds sold and
other short-term investments, net 1,957 13,902
Proceeds from maturity of available-for-sale securities 2,223 16,819
Purchase of available-for-sale securities (13,119) (28,962)
Proceeds from maturity of held-to-maturity securities 3,635 10,351
Purchase of securities held-to-maturity (1,954) (8,167)
Proceeds from sales of available-for-sale securities 4,820 174
Loans originated, net of principal collected (20,058) (13,572)
Proceeds from sale of other fixed and intangible assets 992 --
Purchase of bank premises and equipment (213) (310)
----------- -----------
Net cash provided by (used in) investing activities (21,717) (9,765)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 35 75
Net increase (decrease) in deposits (469) (10,641)
Net increase (decrease) in borrowings 19,514 15,914
Cash dividends paid (837) (831)
----------- -----------
Net cash provided by (used in) financing activities 18,243 4,517
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,281) (406)
CASH AND CASH EQUIVALENTS:
Beginning of period 11,994 15,973
----------- -----------
End of period $ 10,713 $ 15,567
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 8,859 $ 7,926
Income taxes 332 154
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 389 $ 865
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
7
<PAGE> 8
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
Note 1. General
The accompanying consolidated condensed financial statements
conform to generally accepted accounting principles and to general
practices within the banking industry. The more significant
policies used by the Company in preparing and presenting its
financial statements are stated in the Company's Form 10-KSB.
The effect of timing differences in the recognition of revenue and
expense for tax liability is not determined until the end of each
fiscal year.
In the opinion of Management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of normal recurring accruals) necessary to present
fairly the financial position of the Corporation as of September
30, 2000 and December 31, 1999, the results of operations for the
three and nine months ended September 30, 2000 and 1999.
The results of operations for the three and nine months ended
September 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the full year.
Certain reclassifications have been made to the 1999 historical
financial statements to conform to the 2000 presentation.
Note 2. Non-Performing Loans
Non-performing loans includes loans which have been categorized by
management as non-accruing because collection of interest is not
assured, and loans which are past-due ninety days or more as to
interest and/or principal payments. The following summarizes
information concerning non-performing loans:
<TABLE>
<CAPTION>
September 30,
------------------------------
(Dollars in Thousands) 2000 1999
------------- ------------- -
<S> <C> <C>
Non-accruing loans $ 2,004 $ 870
Past due 90 days or more and still accruing 1,496 546
------------- -------------
Total non-performing loans $ 3,500 $ 1,416
============= =============
Performing loans classified as impaired $ -- $ 2,479
</TABLE>
8
<PAGE> 9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 3. Allowance For Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
(Dollars on Thousands) 2000 1999
-----------------------------------
<S> <C> <C>
Balance at beginning of period $ 2,069 $ 1,973
Provision charged to expense 90 135
Loans charged off 60 150
Recoveries 9 8
------------ --------------
Balance at end of period $ 2,108 $ 1,966
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
(Dollars on Thousands) 2000 1999
-----------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,996 $ 1,915
Provision charged to expense 270 369
Loans charged off 187 354
Recoveries 29 36
------------ --------------
Balance at end of period $ 2,108 $ 1,966
============ ==============
</TABLE>
Note 4: Earnings Per Share
Presented below are the calculations for basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders $ 306,000 $ 275,000 $ 819,000 $ 900,000
============ ============ ============= ============
Weighted average shares outstanding 2,323,949 2,312,758 2,321,536 2,307,885
============ ============ ============= ============
Basic earnings per share $ 0.13 $ 0.12 $ 0.35 $ 0.39
============ ============ ============= ============
Diluted:
Net income available to common stockholders $ 306,000 $ 275,000 $ 819,000 $ 900,000
============ =========== ============= ============
Weighted average shares outstanding 2,323,949 2,312,758 2,321,536 2,307,885
Effect of dilutive stock options outstanding 58,289 123,743 58,289 115,584
------------ ----------- ------------- ------------
Diluted weighted average shares outstanding 2,382,238 2,436,501 2,379,825 2,423,469
============ =========== ============= ============
Diluted earnings per common share $ 0.13 $ 0.11 $ 0.34 $ 0.37
============ =========== ============= ============
</TABLE>
9
<PAGE> 10
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 5: Contingencies
On August 18, 2000, the Company filed a complaint in the Circuit Court
of Waukesha County, Wisconsin against a former data processing service
provider ("Provider"). The complaint seeks to recover $541,000
improperly charged to the Company's check clearing account maintained
with the Federal Home Loan Bank of Chicago. Upon discovery of the
Provider's error and following the Provider's acknowledgement of such,
the Company worked closely with the Provider to attempt to recover
such funds. During the third quarter of 2000, the Company was notified
by the Provider, despite their previous assurances to the contrary,
that they would be unable to further pursue the matter and indemnify
the Company. It is possible that the costs of litigation will not be
recoverable as the Company pursues the matter, however, the Company
cannot currently estimate the potential total costs of litigation. The
pending recovery is carried on the Company's books as a receivable in
other assets.
Note 6: 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, 2000. 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.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction with
the consolidated condensed balance sheets as of September 30, 2000 and December
31, 1999 and the consolidated condensed statements of income for the three
months and nine months ended September 30, 2000 and 1999. This information is
not meant to be a substitute for the balance sheets and income statements.
RESULTS OF OPERATIONS
Net income for the three and nine months ended September 30, 2000 was $306,000
and $819,000, respectively, compared to $275,000 and $900,000 for the similar
period in 1999. The discussion that follows will provide information about the
various areas of income and expense that resulted in the aforementioned
financial performance.
THREE MONTHS ENDED SEPTEMBER 30
For the three months ended September 30, 2000, interest income was $5,721,000
compared to $5,032,000 for the same period in 1999. Nearly all of the increase
was derived from the loan portfolio where interest and fees increased $586,000.
The balance of the improvement in interest income came from the investment
portfolio where interest income increased $104,000, while interest income on
federal funds sold, short term investments and deposits with other banks
remained substantially unchanged.
Interest and fees on loans increased to $4,578,000 for the three months ended
September 30, 2000 compared to $3,992,000 during the same period of 1999.
Average loans outstanding during the three months ended September 30, 2000 were
$207.3 million, representing a $22.8 million, or 12.4%, increase over 1999
levels for the similar period. $12.4 million of the increase in average loans
was generated in the areas of commercial real estate and commercial and
industrial loans. The concentration of growth in the area of commercial lending
is expected to continue as the Company continues to pursue its strategic
direction of diversifying the former thrift balance sheets acquired in recent
years to that of a commercial bank. In addition to increased volumes, the
Company experienced higher yields in the 2000 quarter. A yield increase of 18
basis points was the product of increasing base rates over the past year for
variable rate loans and higher rates on new loan production during 2000.
Investment income on taxable securities for the quarter ended September 30, 2000
was $952,000 compared to $866,000 in 1999, an increase of 9.9%. Income from
tax-exempt securities increased approximately 14% in the 2000 period compared to
1999. Increased investment security volumes and higher reinvestment rates on
cash flows from the securities portfolio generated the interest income
increases.
Interest on deposits with other banks, federal funds sold and other short-term
investments remained substantially unchanged at $47,000 for the three months
ended September 30, 2000, compared to $48,000 for the same period in 1999, as
the Company has been a net short-term borrower during both periods and has
consequently maintained minimal balances in short-term investments.
Interest paid on deposits for the three months ended September 30, 2000 was
$2,372,000 compared to $2,261,000 for the same period in 1999. The increase was
the result of a 32 basis point increase in the average rate paid on deposits
more than offsetting a $4.8 million decrease in interest-bearing deposit
balances. The increased cost of funds was the result of higher costs on
certificates of deposit and a shift in the interest-bearing deposit portfolio
towards time deposits. Such deposits generally carry the highest rates among
interest bearing deposit liabilities.
Interest on short-term borrowings increased to $587,000 for the three months
ended September 30, 2000 from $172,000
11
<PAGE> 12
in 1999, an increase of $415,000. Interest on other borrowings also
increased to $353,000 for the three months ended September 30, 2000 from
$250,000 for the same period in 1999. Short-term borrowings, including
repurchase agreements, fed funds purchased, an open line of credit with the
Federal Loan Bank of Chicago ("FHLB") and a line of credit with an unaffiliated
commercial bank increased as asset growth outpaced deposit growth. Other
borrowings include term advances from the FHLB and a term loan with an
unaffiliated commercial bank which, in part, financed the First Financial
Bancorp, Inc. acquisition in 1998.
The provision for loan loss was $90,000 during the quarter ended September 30,
2000 as compared to $135,000 for the same period in 1999. It is management's
opinion that this amount represents an adequate provision.
Total non-interest income decreased $38,000, to $655,000 for the three months
ended September 30, 2000, from $693,000 for the same period in 1999. Gain on
sale activity accounted for the decline in non-interest income from year to year
with aggregate net gains of $133,000 during the three months ended September 30,
1999 decreasing to $68,000 for the same period in 2000. Gains on the sale of
securities decreased from $69,000 during the 1999 quarter, to nothing during the
2000 period. Gains on the sale of loans decreased $18,000, to $46,000, during
the 2000 quarter from $64,000 for the 1999 period. Net gains on the sale of
other assets, including fixed assets and mortgage servicing rights, increased to
$22,000 in the 2000 period from nothing in the prior year. The net gain on the
sale of other assets includes a $241,000 gain on the sale of approximately
two-thirds of the Company's mortgage servicing portfolio. As a result of this
sale, the Company will experience a decrease in mortgage servicing revenues in
future years. The Company expects, however, that this revenue reduction will be
substantially offset by reduced overhead to support the servicing of these loans
and the sale will allow management to keep its focus directed towards the growth
of its commercial banking business lines. The offsetting component of the net
gain is a $219,000 loss on the sale and disposal of certain leasehold
improvements and equipment and associated relocation costs attributable to the
consolidation of an in-store branch in Beloit, Wisconsin, with a nearby
stand-alone facility. The Company had not realized the necessary growth to
maintain the in-store branch since it was opened in 1994 and made the decision
to consolidate the facility, which is expected to result in cost savings in the
areas of personnel and occupancy. Offsetting the decline in gain on sale
activity was a $48,000 increase in deposit service charges to $394,000 for the
three months ended September 30, 2000 which resulted from an increase in
transaction accounts and a new deposit pricing structure implemented early in
the second quarter of 2000.
For the three months ended September 30, 2000, total non-interest expense
increased slightly to $2,504,000, from $2,482,000 for the same period in 1999.
Core operating expenses of personnel, occupancy, equipment and data processing
costs increased, in aggregate $6,000, or 0.3%, to $1,786,000 during the quarter
ended September 30, 2000, from $1,780,000 during the same period in 1999.
Intangible amortization declined $15,000, or 9.8%, to $138,000 for the quarter
ended September 30, 2000, from $153,000 for the 1999 quarter. This decline was
the result of accelerated amortization on the intangible assets from the
Company's acquisitions. Other non-interest expenses increased $31,000, to
$580,000, for the three months ended September 30, 2000. This represents a 5.6%
increase over the $549,000 total for the same period in 1999. The increase was
driven by increased legal costs and professional fees primarily attributable to
the Company's lawsuit against a former data processing provider as detailed in
the footnotes to the financial statements.
The provision for income taxes increased to $164,000 from $150,000 for the
three-month period ending September 30, 2000. The effective tax rates were 34.9%
versus 35.3% for third quarter of 2000 and 1999, respectively. Lower effective
tax rates resulted from increased municipal bonds holdings and decreased
non-deductible intangible amortization. The non-deductible amortization expense
is the result of the purchase method of accounting the Company has used for its
acquisitions.
NINE MONTHS ENDED SEPTEMBER 30
For the nine months ended September 30, 2000, interest income was $16,178,000
compared to $14,965,000 for the same period in 1999. Nearly all of the increase
occurred in the loan portfolio where interest and fees increased $1,094,000.
Interest on securities increased $463,000, while interest income on federal
funds sold, short-term investments and interest-earning deposits decreased
$344,000 in aggregate.
12
<PAGE> 13
Interest and fees on loans increased to $12,835,000 for the nine months ended
September 30, 2000 compared to $11,741,000 in the same period of 1999. Increased
average balances of $20.5 million more than offset a 15 basis point year-to-date
decrease in yield on loans. Of this decrease, 9 basis points is attributable to
the elimination of the Company's consumer finance portfolio in December 1999.
Interest income on taxable securities for the quarter ended September 30, 2000
increased $397,000, to $2,783,000, as a 15% increase in average balances in the
2000 year-to-date period accounted for substantially all of the increase. A
slight increase in yields on such investments complemented the volume increase.
Interest income on tax-exempt securities for the quarter ended September 30,
2000 increased $66,000, to $415,000 for the nine months ended September 30,
2000, from $349,000 for the prior year period. The increase was primarily the
result of increased volumes.
Interest on federal funds sold, other short-term investments and
interest-bearing deposits decreased $344,000, to $145,000 for the nine months
ended September 30, 2000. Comparatively, the Company earned $489,000 for the
nine-month period ended September 30, 1999. The substantial decline was the
result of excess liquidity held by the Company during the first quarter of 1999,
which was redeployed into long-term securities and the loan portfolio late in
the first quarter and early during the second quarter of 1999.
Interest expense on interest-bearing deposits increased to $6,828,000 for the
nine months ended September 30, 2000 from $6,772,000 for the same period in
1999. The $56,000, or 0.8%, increase was the result of a higher average cost of
funds more than offsetting a decline of 1.9% in average balances.
Interest expense on short-term borrowings increased to $1,361,000 for the nine
months ended September 30, 2000, from $357,000 for the same period in 1999.
Interest expense on other borrowings increased to $874,000 for the 1999 period,
from $740,000 for the nine months ended September 30, 1999. The short-term
borrowings cost increased as a result of the Company electing to use those types
of funding sources within its interest rate risk parameters as an interim
funding mechanism for the growth in the balance sheet.
The provision for loan loss was $270,000 for the nine months ended September 30,
2000 as compared to $369,000 for the same period in 1999. It is management's
opinion that this amount represents an adequate provision.
Total non-interest income decreased to $1,859,000 for the nine months ended
September 30, 2000, from $2,136,000 for the same period in 1999. The primary
reason for the decline was the $283,000 decrease in the gain on sales of
mortgage loans during the nine months ended September 30, 2000, as compared to
the same period in 1999. The decline was driven by higher interest rates on
fixed rate long-term mortgage loans for much of the 2000 period in relation to
the early months of the 1999 period. Deposit service charges increased as
account volumes have increased and a new pricing structure was introduced during
the second quarter of 2000. Brokerage and annuity commissions have declined
slightly as uncertainties in the financial markets have created hesitation and
attractive yields have become more widely available on insured deposit product
alternatives. Other non-interest income decreased primarily as the result of a
decline in insurance sales commissions, due to the sale of the consumer finance
loan portfolio late in 1999 and a decline in trust fees as the 1999 period
included the effect of several larger estate liquidations.
For the nine months ended September 30, 2000, total non-interest expense
remained substantially unchanged at $7,472,000, a slight increase from the
$7,435,000 total for the same period in 1999. The increase was the result of a
$136,000 increase in other non-interest expenses. The increase in other
non-interest expense was primarily caused by the one-time charge of $67,000 the
Company took to write off a portion of an insurance claim receivable resulting
from a prior claim made under the Company's financial institution bond.
Additionally, higher legal and professional fees have been incurred in the 2000
period. Legal fees have increased as a result of the aforementioned legal action
while professional fees have increased as the Company has engaged professional
firms to assist in the areas of marketing and asset/liability management during
the 2000 period.
The provision for income taxes decreased to $413,000 during the current year,
from $528,000 for the nine-month period
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<PAGE> 14
ending September 30, 1999. The effective tax rates were 33.5% versus 37.0%
for nine-month periods ended September 30, 2000 and 1999, respectively. Lower
effective tax rates resulted from increased municipal bonds holdings and
decreases in the amount of non- deductible intangible amortization. The
non-deductible amortization expense is the result of the purchase method of
accounting the Company has used for its acquisitions.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares September 30, 2000
to the Company's prior fiscal year end of December 31, 1999. Total assets were
$315.3 million as compared to $295.7 million as of December 31, 1999.
Total investment securities, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $74.2
million as of September 30, 2000, as compared to $68.9 million as of December
31, 1999. The portfolio increased as the result of the Company's continued
efforts to leverage its capital position and increase its return on equity.
Net portfolio loans totaled $209.6 million on September 30, 2000 as compared to
$190.2 million on December 31, 1999, an increase of $19.4 million. Of this
increase, $9.0 million occurred in the commercial real estate and commercial and
industrial loan portfolios while $4.9 million occurred in the 1-4 family
residential loan portfolio.
The allowance for loan losses was $2.1 million as of September 30, 2000 as
compared to $2.0 million as of December 31, 1999. Footnote 3 to the financial
statements indicates the activity in the allowance for loan loss account for the
three and nine months ended September 30, 2000 and 1999.
Bank premises and equipment declined to $6.5 million from $7.1 million as of
December 31, 1999. $0.2 million of the decrease is attributable to the
consolidation of an in-store office into that of a traditional facility and the
resulting sale of the equipment and leasehold improvements. The balance of the
decline is the result of depreciation exceeding capital expenditures by $0.3
million.
Total deposits as of September 30, 2000 were $233.7 million, as compared to
$234.1 million as of December 31, 1999. Non-interest bearing deposits decreased
to $26.0 million, from $31.0 million as of December 31, 1999. Several commercial
depositors have historically increased their deposit balances at year-end.
Consequently, subsequent interim reporting dates typically have balances lower
than the previous year-ends. Interest-bearing deposits increased 2.0% from
year-end levels. The Company was able to make progress during the most recent
quarter in attracting interest-bearing deposits. A component of that success was
the introduction of a premium-rate high balance checking account. The Company
has been pleased with its success in attracting depositors to this new product.
Recent quarters have been characterized by intense competition for certificate
of deposit and money market deposits within most of the markets served by the
Company. The Company will continue to pursue deposit niches within those markets
and evaluate alternative sources to minimize its funding costs.
Short-term borrowings, fed funds purchased and repurchase agreements increased
to $30.6 million at September 30, 2000 from $18.6 million at December 31, 1999.
Other borrowings, consisting of long-term borrowings incurred, in part, to
complete the First Financial Bancorp, Inc. acquisition in 1998 and advances from
the FHLB for terms greater than one year, were $24.2 million at September 30,
2000, up from $16.8 million at year-end. These non-deposit funding sources have
been used to fund much of the balance sheet growth for the first nine months of
the year. The use of FHLB advances in the future will depend upon the Company's
need for funds and the rates at which they may be obtained.
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<PAGE> 15
The Company continues to maintain an excellent capital position regardless of
the measurement used. The following table shows three different measurements as
of September 30, 2000 and December 31, 1999, and the regulatory requirement, if
any. Management does not anticipate the need for additional capital resources in
the near future.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, REGULATORY
2000 1999 REQUIREMENTS
------------- ------------ ------------
<S> <C> <C> <C>
Tier I Capital (To average assets) 5.95% 6.10% 3.00%
Tier I Capital (To risk-weighted assets) 8.91% 9.52% 4.00%
Total Capital (To risk-weighted assets) 9.96% 10.61% 8.00%
</TABLE>
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 sources of funds are deposits, scheduled amortization and prepayment
of loan principal, maturities of investment securities, income from operations,
and short-term borrowings. Additional sources include purchasing fed funds, sale
of securities, sale of loans, borrowing from both the Federal Reserve Bank and
Federal Home Loan Bank, and dividends paid by Nevahawk to the Bank. Under
present law, accumulated earnings could be paid as dividends without incurring a
tax liability.
The liquidity needs of the Company generally consists of payment of dividends to
its shareholders, payments of principal and interest on borrowed funds, and a
limited amount of expenses. The sources of funds to provide this liquidity are
income from investments, maturities of investments, cash balances, issuance of
capital and dividends from its subsidiary bank. Certain restrictions are imposed
upon the Bank, which could limit its ability to pay dividends if they did not
have net earnings or adequate capital in the future. The Company maintains
adequate liquidity to pay its expenses.
Off-balance sheet items consist of credit card lines of credit, mortgage
commitments, letters of credit and other commitments totaling approximately
$33.3 million as of September 30, 2000. This compares to $30.6 million at
December 31, 1999. The Bank has historically funded off-balance sheet
commitments with its primary sources of funds, and management anticipates that
this will continue.
The Company's consolidated assets include a $541,000 receivable that relates to
an improper charge made by the Company's former data processing service provider
("Provider") to the Company's check clearing account maintained with the Federal
Home Loan Bank of Chicago. Upon discovery of the Provider's error and following
the Provider's initial acknowledgment of that error, the Company worked closely
with the Provider to attempt to recover the amount improperly charged. During
the third quarter of 2000, the Provider notified the Company that it is unable
to pursue the matter further and does not intend to indemnify the Company for
this amount. The Company filed a complaint in the Circuit Court of Waukesha
County, Wisconsin on August 18, 2000, seeking to recover the amount of the
improper charge from the Provider. While the Company believes it is entitled to
recovery, there can be no assurance that the Company ultimately will prevail in
this litigation. Moreover, the Company will incur costs and legal fees in
connection with its pursuit of this matter, and it may be unable to recover
those costs and fees. The potential amount of those costs and fees depends on
how this litigation develops and ultimately is resolved, and cannot be predicted
at this time. In the unlikely event that the Company is unsuccessful in
recovering any portion of this improper charge, the Company would be required to
write off the entire amount through a charge against earnings in the period in
which the write-off occurs. Legal costs and fees incurred during the proceedings
will be charged against earnings during the period incurred.
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 such a variance to occur included, but are
not limited to, changes in interest
15
<PAGE> 16
rates, levels of consumer bankruptcies, customer loan and deposit preferences,
and other general economic conditions.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 6. A) EXHIBITS
See Exhibit Index following the signature page in this report, which is
incorporated herein by this reference.
B) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K during the three months ended
September 30, 2000. The report was dated July 19, 2000 and announced
the election of two new members, Sunil Puri and Charles J. Howard, to
the Blackhawk Bancorp, Inc. Board of Directors.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
----------------------------------
(Registrant)
Date: November 14, 2000 /s/ Dennis M. Conerton
----------------------------------
Dennis M. Conerton
President and Chief Executive
Officer
Date: November 14, 2000 /s/ Keith D. Hill
----------------------------------
Keith D. Hill
Vice President
(Chief Financial and Accounting
Officer)
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<PAGE> 19
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporated Filed
Exhibit Herein By Here- Page
Number Description Reference To: with No.
------ ----------- ------------- ---- ---
<S> <C> <C> <C> <C>
4.1 Amended and Exhibit 3.1 to
restated Articles Amendment No. 1 to
of Incorporation Registrant's
of the Registrant Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.2 By-laws of Regis- Exhibit 3.2 to
trant as amended Amendment No. 1 to
Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.3 Plan of Conversion Exhibit 1.2 to
Beloit Savings Amendment No. 1 to
Bank as amended Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
</TABLE>
19
