<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, 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.
OUTSTANDING AT
CLASS OF COMMON STOCK JULY 31, 2000
---------------------- -------------
$.01 PAR VALUE 2,323,949 SHARES
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Independent Accountant's Report 3
Consolidated Condensed Balance Sheets as of
June 30, 2000 and December 31, 1999 4
Consolidated Condensed Statements of Income for the
Three months ended June 30, 2000 and 1999 5
Consolidated Condensed Statements of Income for the
Six months ended June 30, 2000 and 1999 6
Consolidated Condensed Statements of Shareholders'
Equity as of June 30, 2000 and 1999 7
Consolidated Condensed Statements of Cash Flows for the
Six months ended June 30, 2000 and 1999 8
Notes to Consolidated Condensed Financial Statements 9-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 17
ITEM 6. A) EXHIBITS 17
B) REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors and Shareholders
Blackhawk Bancorp, Inc.
Beloit, Wisconsin
We have reviewed the accompanying unaudited consolidated balance sheet of
Blackhawk Bancorp, Inc. and Subsidiary as of June 30, 2000, the related
unaudited consolidated statements of income and shareholders' equity for the
three-month and six-month periods then ended, and the related unaudited
consolidated statements of cash flows for the six-month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
August 14, 2000
Green Bay, Wisconsin
3
<PAGE> 4
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
----------------- -----------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 12,308 $ 11,994
Interest-bearing deposit accounts 3,109 4,616
Federal funds sold and other short-term investments 155 91
Securities available for sale 55,073 49,071
Securities held to maturity, fair value of $17,523,000 and $19,373,000 17,900 19,696
Loans held for sale 545 540
Loans, net of allowance for loan losses of $2,069,000 and $1,996,000 201,763 190,184
Bank premises and equipment, net 6,826 7,065
Other intangible assets 7,131 7,511
Accrued interest receivable 2,187 2,028
Other assets 2,534 2,888
----------------- -----------------
Total Assets $ 309,531 $ 295,684
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 27,260 $ 30,552
Interest bearing 199,877 203,573
----------------- -----------------
Total Deposits 227,137 234,125
----------------- -----------------
Borrowed Funds:
Short-term borrowings 36,452 18,564
Other borrowings 19,380 16,803
----------------- -----------------
Total borrowed funds 55,832 35,367
----------------- -----------------
Accrued interest payable 1,199 1,030
Other liabilities 2,033 1,837
----------------- -----------------
Total Liabilities 286,201 272,359
----------------- -----------------
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 16,929 16,973
Treasury stock, 10,324 shares, at cost (120) (120)
Accumulated other comprehensive deficit (862) (858)
----------------- -----------------
Total Shareholders' Equity 23,330 23,325
----------------- -----------------
Total Liabilities and Shareholder's Equity $ 309,531 $ 295,684
================= =================
</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>
Three Months Ended June 30,
2000 1999
----------------- -----------------
INTEREST INCOME: (Dollars in Thousands)
<S> <C> <C>
Interest and fees on loans $ 4,208 $ 3,869
Interest on deposits with other banks 43 85
Interest on investment securities:
Taxable 963 839
Exempt from federal income taxes 138 120
Interest on federal funds sold and other short-term investments 7 62
----------------- -----------------
Total Interest Income 5,359 4,975
----------------- -----------------
INTEREST EXPENSE:
Interest on deposits 2,236 2,229
Interest on short-term borrowings 483 95
Interest on other borrowings 255 246
----------------- -----------------
Total Interest Expense 2,974 2,570
----------------- -----------------
Net Interest Income 2,385 2,405
Provision for loan losses 90 126
----------------- -----------------
Net Interest Income After Provision for Loan Losses 2,295 2,279
----------------- -----------------
OTHER OPERATING INCOME:
Service fees on deposit accounts 398 318
Brokerage and annuity commission 67 116
Gain on sale of loans 38 164
Gain on sale of securities 24 -
Other income 128 113
----------------- -----------------
Total Other Operating Income 655 711
----------------- -----------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,212 1,233
Occupancy expense of bank premises, net 160 168
Furniture and equipment 202 207
Data processing 190 215
Intangible amortization 139 153
Other operating expense 663 515
----------------- -----------------
Total Other Operating Expense 2,566 2,491
----------------- -----------------
Income Before Income Taxes 384 499
Provision for Income Taxes 123 185
----------------- -----------------
Net Income $ 261 $ 314
================= =================
Basic Earnings Per Share $ 0.11 $ 0.14
================= =================
Diluted Earnings Per Share $ 0.11 $ 0.13
================= =================
Dividends Per Share $ 0.12 $ 0.12
================= =================
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE> 6
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------------- -----------------
INTEREST INCOME: (Dollars in Thousands)
<S> <C> <C>
Interest and fees on loans $ 8,257 $ 7,749
Interest on deposits with other banks 83 198
Interest on investment securities:
Taxable 1,831 1,520
Exempt from federal income taxes 271 223
Interest on federal funds sold and
other short-term investments 15 243
----------------- -----------------
Total Interest Income 10,457 9,933
----------------- -----------------
INTEREST EXPENSE:
Interest on deposits 4,456 4,511
Interest on short-term borrowings 774 185
Interest on other borrowings 521 490
----------------- -----------------
Total Interest Expense 5,751 5,186
----------------- -----------------
Net Interest Income 4,706 4,747
Provision for loan losses (Note 3) 180 234
----------------- -----------------
Net Interest Income After Provision for Loan Losses 4,526 4,513
----------------- -----------------
OTHER OPERATING INCOME:
Service fees on deposit accounts 714 612
Brokerage and annuity commissions 141 191
Gain on sale of loans 53 318
Gain on sale of securities 24 -
Other income 272 322
----------------- -----------------
Total Other Operating Income 1,204 1,443
----------------- -----------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,409 2,476
Occupancy expense of bank premises, net 331 343
Furniture and equipment 408 396
Data processing 379 383
Intangible amortization 279 298
Other operating expense 1,162 1,057
----------------- -----------------
Total Other Operating Expense 4,968 4,953
----------------- -----------------
Income Before Income Taxes 762 1,003
Provision for Income Taxes 249 378
----------------- -----------------
Net Income $ 513 $ 625
================= =================
Basic Earnings Per Share $ 0.22 $ 0.27
================= =================
Diluted Earnings Per Share $ 0.21 $ 0.26
================= =================
Dividends Per Share $ 0.24 $ 0.24
================= =================
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
6
<PAGE> 7
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
----------------- -----------------
(Dollars in thousands)
Common Stock:
<S> <C> <C>
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 49
----------------- -----------------
Balance at end of period 7,360 7,278
----------------- -----------------
Retained Earnings:
Balance at beginning of period 16,973 16,975
Net Income 513 625
Dividends declared on common stock (557) (554)
----------------- -----------------
Balance at end of period 16,929 17,046
----------------- -----------------
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 (4) (565)
----------------- -----------------
Balance at end of period (862) (272)
----------------- -----------------
Total Shareholders' Equity $ 23,330 $ 23,955
================= =================
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
7
<PAGE> 8
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Dollars in thousands)
<S> <C> <C>
Net Income $ 513 $ 625
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 180 234
Provision for depreciation and amortization 795 756
Amortization of premiums (accretion of
discount) on investment securities, net 24 37
Gain on sale of loans (53) (250)
Gain on sale of securities (24) -
Loans originated for sale, net of principal collected (3,372) (16,864)
Proceeds from sale of loans 3,404 19,425
Change in assets and liabilities:
Decrease in other assets 736 247
(Increase) decrease in accrued interest receivable (159) (129)
Increase (decrease) in accrued interest payable 169 (172)
Increase (decrease) in other liabilities 168 (266)
----------------- -----------------
Net cash provided by operating activities 2,381 3,643
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in federal funds sold and
other short-term investments, net 1,443 13,994
Proceeds from maturity of available-for-sale securities 1,789 16,094
Purchase of available-for-sale securities (12,582) (28,289)
Proceeds from maturity of securities held-to-maturity 3,389 9,540
Purchase of securities held-to-maturity (1,624) (7,867)
Sales of securities available-for-sale 4,820 -
Loans originated, net of principal collected (12,137) (3,505)
Purchase of bank premises and equipment (137) (190)
----------------- -----------------
Net cash used in investing activities (15,039) (223)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 53 49
Net decrease in deposits (6,989) (10,645)
Net increase in borrowings 20,465 7,645
Cash dividends paid (557) (554)
----------------- -----------------
Net cash provided by (used in) financing activities 12,972 (3,505)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 314 (85)
CASH AND CASH EQUIVALENTS:
Beginning of period 11,994 15,973
----------------- -----------------
End of period $ 12,308 $ 15,888
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 5,582 $ 5,057
Income taxes 150 425
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 379 $ 217
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
8
<PAGE> 9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 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 June 30, 2000 and December 31, 1999,
the results of operations for the three and six months ended June 30,
2000 and 1999.
The results of operations for the three and six months ended June 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>
June 30,
------------------------------
(Dollars in Thousands) 2000 1999
------------- -------------
<S> <C> <C>
Non-accruing loans $ 1,892 $ 1,455
Past due 90 days or more and still accruing 693 136
------------- -------------
Total non-performing loans $ 2,585 $ 1,591
============= =============
Performing loans classified as impaired $ - $ 2,897
</TABLE>
9
<PAGE> 10
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30,
(Dollars on Thousands) 2000 1999
-----------------------------------
<S> <C> <C>
Balance at beginning of period $ 2,015 $ 1,952
Provision charged to expense 90 126
Loans charged off 53 117
Recoveries 17 13
------------ --------------
Balance at end of period $ 2,069 $ 1,974
============ ==============
Six Months Ended June 30,
(Dollars on Thousands) 2000 1999
-----------------------------------
Balance at beginning of period $ 1,996 $ 1,915
Provision charged to expense 180 234
Loans charged off 127 203
Recoveries 20 28
------------ --------------
Balance at end of period $ 2,069 $ 1,974
============ ==============
</TABLE>
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,
2000 1999 2000 1999
----------------------------- -----------------------------
Basic:
<S> <C> <C> <C> <C>
Net income available to common stockholders $ 261,000 $ 314,000 $ 513,000 $ 625,000
============= ============= ============= =============
Weighted average shares outstanding 2,323,384 2,306,489 2,320,317 2,305,000
============= ============= ============= =============
Basic earnings per share $ 0.11 $ 0.14 $ 0.22 $ 0.27
============= ============= ============= =============
Diluted:
Net income available to common stockholders $ 261,000 $ 314,000 $ 513,000 $ 625,000
============= ============= ============= =============
Weighted average shares outstanding 2,323,384 2,306,489 2,320,317 2,305,409
Effect of dilutive stock options outstanding 138,156 110,558 138,156 110,588
------------- ------------- ------------- -------------
Diluted weighted average shares outstanding 2,461,540 2,417,047 2,458,473 2,415,997
============= ============= ============= =============
Diluted earnings per common share $ 0.11 $ 0.13 $ 0.21 $ 0.26
============= ============= ============= =============
</TABLE>
10
<PAGE> 11
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
Note 5: Subsequent Events
During the month of August 2000, the Company expects to file 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 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.
11
<PAGE> 12
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, 2000 and December 31,
1999 and the consolidated condensed statements of income for the three months
and six months ended June 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 six months ended June 30, 2000 was $261,000 and
$513,000 respectively compared to $314,000 and $625,000 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 JUNE 30
For the three months ended June 30, 2000, interest income was $5,359,000
compared to $4,975,000 for the same period in 1999. This increase of $384,000
was primarily the result of increased interest and fees on loans of $339,000.
Interest on securities increased $142,000 while short-term investments and
interest on deposits with banks decreased $97,000 in the aggregate.
Interest and fees on loans increased to $4,208,000 for the three months ended
June 30, 2000 compared to $3,869,000 in the same period of 1999. Average loans
outstanding during the three months ended June 30, 2000 were $197.6 million,
representing a $21.5 million, or 12.2%, increase over 1999 levels for the
similar period. Of the increase in average loans outstanding, $13.0 million was
generated in the categories of commercial real estate and commercial and
industrial loans. The commercial loan portfolio growth is expected to continue
as the Company pursues its strategic direction of diversifying the former thrift
balance sheets acquired in recent years to that of a commercial bank. Partially
offsetting the volume-driven increase in interest income was a 26 basis point
decline in the loan yields. Of that decline in yield, 10 basis points resulted
from the sale of the assets of the finance company subsidiary in late 1999.
Investment income on taxable securities for the quarter ended June 30, 2000
increased $124,000 to $963,000, compared to $839,000 for the same period in
1999, an increase of 14.8%. The increase was the result of increases in both
volumes and yields during the 2000 quarter as compared to the 1999 quarter.
Income from tax-exempt securities increased to $138,000 for the three months
ended June 30, 2000 from $120,000. This increase was primarily due to increased
volumes.
Interest on federal funds sold and other short-term investments decreased to
$50,000 for the three months ended June 30, 2000, from $147,000 for the 1999
period. Loan portfolio growth has driven the reduction in balances maintained in
short-term lower-yielding investments while the remainder of the growth was
funded with non-deposit liabilities.
Interest paid on deposits remained unchanged at $2.2 million for the three
months ended June 30, 2000 and 1999. An increase in average non-interest bearing
deposits of $2.5 million kept overall deposit costs for the three months ended
June 30, 2000 within four basis points of the 1999 levels. Interest-bearing
deposit costs continue to increase due to increases in general interest rate
levels and the competitive environment that exist for deposit balances within
the Company's markets.
12
<PAGE> 13
Interest on short-term borrowings increased to $483,000 for the three months
June 30, 2000 from $95,000 in 1999, an increase of $388,000. Interest on other
borrowings increased to $255,000 for the three months ended June 30, 2000, from
$246,000 for the same period in 1999. Short-term borrowings, including
repurchase agreements, fed funds purchased, an open line of credit with the
Federal Home Loan Bank of Chicago ("FHLB"), and a line of credit with a third
party commercial bank, increased as asset growth outpaced deposit growth. Other
borrowings include term advances from the FHLB and a term loan with a third
party commercial bank which, in part, financed the First Financial Bancorp, Inc.
acquisition in 1998.
The provision for loan loss was $90,000 for the quarter ended June 30, 2000 as
compared to $126,000 for the same period in 1999. It is management's opinion
that this amount represents an adequate provision.
Total non-interest income decreased to $655,000, from $711,000 for the three
months ended June 30, 2000 and 1999, respectively. The primary reason for the
decline was the $126,000 decrease in the gain on the sale of mortgage loans
during the second quarter of 2000 as compared to the 1999 quarter. Higher
overall interest rates in the mortgage market as well as the flatter yield curve
contributed to a shift towards adjustable rate loans in the purchase money
mortgage market and a significant reduction in refinancing activity. With the
Company's policy towards retaining most adjustable rate mortgages for its
portfolio, production of mortgage loans intended for the secondary market
declined. Partially offsetting the decline in gains on sales of mortgage loans
was an $80,000 increase in service charges on deposit accounts as account
volumes increased and a new pricing structure was implemented during the second
quarter of 2000.
For the three months ended June 30, 2000, total non-interest expense increased
slightly to $2,566,000 from $2,491,000 for the same period in 1999. Although the
Company was successful in keeping the major expense categories in line, other
expenses increased $148,000 to $663,000 for the three months ended June 30,
2000. This increase offset an aggregate decrease of $59,000 in the core
operating expenses of personnel, occupancy, equipment and data processing. The
increase in other expenses primarily resulted from the Company recording a
one-time charge of $67,000 related to the write-off of a portion of an insurance
claim receivable resulting from a prior claim made under the Company's financial
institution bond.
Income taxes decreased to $123,000, from $185,000 for the three-month period
ending June 30, 2000. The effective tax rates were 32.0% versus 37.1% for the
2000 and 1999 second quarters, respectively. The decrease resulted from
tax-exempt income more closely offsetting non-deductible intangible
amortization. The non-deductible amortization expenses are the result of the
purchase method of accounting the Company has used for its acquisitions.
SIX MONTHS ENDED JUNE 30
For the six months ended June 30, 2000, interest income was $10.5 million
compared to $9.9 million for the same period in 1999. This increase of $0.6
million was primarily from increased interest and fees on loans of $0.5 million.
Interest on securities increased $0.4 million while short-term investments and
interest on deposits with banks decreased a combined $0.3 million.
Interest and fees on loans increased to $8.3 million for the six months ended
June 30, 2000, compared to $7.7 million in the same period of 1999. As indicated
for the three-month period, volume increases significantly outpaced declines in
yield on the loan portfolio.
Investment income on taxable securities for the six months ended June 30, 2000
increased $0.3 million to $1.8 million, compared to $1.5 million for the same
period in 1999. The increase was primarily the result of increased volumes,
although yield improvements also contributed to the increase. Income from
tax-exempt securities increased to $271,000 for the six months ended June 30,
2000, from $223,000 for the prior year period. This increase was also primarily
due to increased volumes.
13
<PAGE> 14
Interest on federal funds sold and other short-term investments decreased to
$0.1 million for the six months ended June 30, 2000, from $0.4 million for the
1999 period. Excess liquidity, which was held by the Company during much of the
first quarter of 1999, was deployed to the long-term securities and loan
portfolios in the late first quarter and early second quarter of 1999.
Comparable excess liquidity was not maintained in 2000 period.
Interest paid on deposits remained materially unchanged at approximately $4.5
million for the six months ended June 30, 2000 and 1999. The slight $55,000
decrease was the result of lower interest-bearing deposit balances in the 2000
period.
Interest on short-term borrowings increased to $0.8 million for the six months
June 30, 2000, from $0.2 million in 1999. Interest on other borrowings increased
remained unchanged at $0.5 million for both the six months ended June 30, 2000
and 1999. The short term borrowing costs 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 $180,000 for the six months ended June 30, 2000,
as compared to $234,000 for the same period in 1999. It is management's opinion
that this amount represents an adequate provision.
Total non-interest income decreased to $1.2 million, from $1.4 million for the
six months ended June 30, 2000 and 1999, respectively. The primary reason for
the decline was the $265,000 decrease in the gain on the sale of mortgage loans
during the six months ended June 30, 2000, as compared to the same period in
1999. The decline was driven by rates as discussed previously. An increase in
service charges on deposit accounts and the gain on bond sales were nearly
offset by declines in brokerage and annuity commissions and other income.
Deposit service charges have benefited from account volume increases and pricing
structure changes while brokerage fees have suffered with the uncertainties that
have developed in the financial markets and the increased rates on insured
deposit products which provide attractive alternatives. Other income decreased
primarily as a result of lower trust fees as the 1999 period included the effect
of several larger estate liquidations.
For the six months ended June 30, 2000 and 1999, total non-interest expense
remained materially unchanged at $5.0 million. The slight $15,000 increase was
the result of a $105,000 increase in other expenses. The primary component of
this increase is the aforementioned one-time charge of $67,000. Personnel costs
represent the largest decrease, $67,000, from the six months ended June 30,
1999, to the six months ended June 30, 2000. Certain portions of this decline
result from reduced variable compensation paid on loans and securities sales.
The remainder of the non-interest expenses declined in the aggregate as the
Company continues to identify consolidation opportunities within its integration
process.
Income taxes decreased to $249,000, from $378,000, for the six-month period
ending June 30, 2000. The effective tax rates were 32.7% versus 37.7% for 2000
and 1999 second quarters, respectively.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares June 30, 2000 to the
Company's prior fiscal year end, December 31, 1999. Total assets were $309.5
million, as compared to $295.7 million as of December 31, 1999. This represents
an increase of 4.7%.
Total investments, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $73.1
million as of June 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
14
<PAGE> 15
and increase its return on equity.
Net portfolio loans totaled $201.8 million on June 30, 2000, as compared to
$190.2 million on December 31, 1999, an increase of $11.6 million. $6.5 million
of the increase from December 31, 1999 occurred in the commercial and commercial
real estate portfolios. The balance of the growth came primarily from the 1-4
family mortgage portfolio which increased $3.6 million from December 31, 1999 to
June 30, 2000. Although strong gains in the loan portfolio occurred during the
first six months of the year, management anticipates loan demand will be
adversely impacted by the upward movements in interest rates initiated by the
Federal Reserve Board of Governors during the first half of the year.
The allowance for loan losses increased to $2.1 million as of June 30, 2000, as
compared to $2.0 million as of December 31, 1999. As of June 30, 2000,
non-performing loans were $2.6 million compared to $3.1 million at December 31,
1999. Management believes that the allowance is adequate at this time.
Net bank premises and equipment was $6.8 million at June 30, 2000, compared to
$7.1 million at December 31, 1999. The decline occurred as the provision for
depreciation of $333,000 outpaced capital expenditures of $137,000.
Total deposits as of June 30, 2000 were $227.1 million, as compared to $234.1
million as of December 31, 1999. Non-interest bearing deposits decreased to
$27.3 million, from $30.6 million as of December 31, 1999. Several commercial
customers have historically increased their demand deposit balances at year-end.
Consequently, subsequent interim reporting dates typically have balances lower
than the previous year-ends. Interest bearing deposits decreased 1.8% from
year-end levels. Continued aggressive competition for interest-bearing deposits
in the Company's markets has driven the decrease. Management does not expect
that environment to change considerably in the near term and, therefore, does
not expect substantial growth in such accounts for the balance of the year.
Short-term borrowings, fed funds purchased and repurchase agreements increased
to $36.5 million at June 30, 2000, from $18.6 million as of year-end. Other
borrowings, consisting of long-term borrowings incurred, in part, to complete
the First Financial acquisition in 1998 and advances from the FHLB for terms
greater than one year, were $19.4 million at June 30, 2000, up from $16.8
million at year end. These sources of non-deposit funding have been used to fund
much of the balance sheet growth for the first half of the year. The use of FHLB
advances in the future will depend on the Company'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 three different measurements as
of June 30, 2000 and December 31, 1999, and the regulatory requirement, if any.
The decline in capital ratios has been driven by the shift in the lending
portfolio to commercial loans and commercial real estate that carry a higher
risk weighting than 1-4 family mortgages. This change is expected to improve
earnings. Management does not anticipate the need for additional capital
resources in the near future.
15
<PAGE> 16
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, REGULATORY
2000 1999 REQUIREMENTS
---------------------------------------------
<S> <C> <C> <C>
Tier I capital 6.07% 6.10% 3.00%
(To Average Assets)
Tier I capital as a percent
(To Risk weighted Assets) 9.03% 9.52% 4.00%
Total capital
(To Risk weighted Assets) 10.09% 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 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 bank. Certain
restrictions are imposed upon the Bank, 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
$30.5 million as of June 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 acknowledgement 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 expects to file a complaint in the Circuit Court of
Waukesha County, Wisconsin 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, together with costs and fees incurred in the proceedings, and such
amounts would be charged against earnings for the period in which the write-off
occurs.
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 rates, levels of consumer bankruptcies,
customer loan and deposit preferences, and other general economic conditions.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 17, 2000, at the annual meeting of shareholders of the Company, the
shareholders re-elected Dennis M. Conerton, Kenneth A. Hendricks and George D.
Merchant to three-year terms expiring in 2003. The vote, with respect to the
re-election of each was as follows:
Dennis M. Conerton
2,322,899 total votes eligible to be cast
1,850,257 votes were represented at the Annual Meeting
1,689,577 votes were cast "For" re-election
160,680 votes were cast "Against" re-election
- - votes abstained
Kenneth A. Hendricks
2,322,899 total votes eligible to be cast
1,850,257 votes were represented at the Annual Meeting
1,757,085 votes were cast "For" re-election
92,758 votes were cast "Against" re-election
414 votes abstained
George D. Merchant
2,322,899 total votes eligible to be cast
1,850,257 votes were represented at the Annual Meeting
1,758,673 votes were cast "For" re-election
91,584 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 three months ended
June 30, 2000.
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: August 14, 2000 /s/ Dennis M. Conerton
----------------------------------------
Dennis M. Conerton
President and Chief Executive Officer
Date: August 14, 2000 /s/ Keith D. Hill
----------------------------------------
Keith D. Hill
Vice President
(Chief Financial and Accounting Officer)
18
<PAGE> 19
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporated Filed
Exhibit Herein By Here- Page
Number Description Reference To: with No.
------ ----------- ------------ ----- ----
<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
