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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 19981999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-18599
BLACKHAWK BANCORP, INC.
WISCONSIN 39-1659424
(State of Incorporation) (IRS Employer ID No.)
400 Broad Street, Beloit, Wisconsin 53511
Telephone Number (608) 364-8911
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. Yes X No .
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
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Revenue for the year ended December 31, 1998 was $19,825,000---
As of March 23, 1999, 2,315,31721, 2000, 2,322,899 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 23, 1999)21, 2000) of the shares
held by non-affiliates (excludes shares reported or beneficially owned by
directors and officers - does not constitute an admission to affiliate status)
was approximately $21,151,000.$16,219,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference in the
respective parts hereof indicated:
1. Proxy Statement and Annual Meeting of stockholders,Stockholders, on May 19, 1999,17, 2000, dated
April 3, 1999.7, 2000.
Index of Exhibits on Page .Page 1 of27.
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BLACKHAWK BANCORP, INC.
FORM 10-KSB - TABLE OF CONTENTS
PART I PAGE
Item 1 Business.................................................................Business............................................................................. 3
Item 2 Properties............................................................... 10Properties........................................................................... 8
Item 3 Legal Proceedings........................................................ 11Proceedings................. .................................................. 8
Item 4 Submission of Matters To a Vote of
Security Holders....................................................... 11Holders..................................................................... 8
PART II
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters............................................ 11Matters......................................................... 8
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................. 11Operations.......................................................................... 8
Item 7 Financial Statements and Supplemental Data............................... 18Data.......................................... 14
Item 8 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................................................. 60Disclosure.......................................................................... 23
PART III
Item 9 Directors and Executive Officers of the
Registrant............................................................. 60Registrant.......................................................................... 23
Item 10 Executive Compensation................................................... 60Compensation.............................................................. 23
Item 11 Security Ownership Of Certain Beneficial
Owners and Management.................................................. 60Management............................................................... 23
Item 12 Certain Relationships and Related
Transactions........................................................... 60Transactions........................................................................ 23
PART IV
Item 13 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................... 60
Signatures......................................................................... 618-K................................................................. 23
Signatures................................................................................... 24
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PART I
ITEM 1 BUSINESS
GENERAL. Blackhawk Bancorp, Inc., (the "Company"), was incorporated under the
laws of the state of Wisconsin in November 1989. The Company owns and operates a
subsidiary financial institution, Blackhawk State Bank ("Bank"), located in
Beloit, Wisconsin.
The Bank is a Wisconsin-chartered commercial bank operating five branches in the
Greater Beloit Area, three free-standing branches and two in-store branches. Six
additional free-standing branches are in the following cities:cities in Illinois:
Belvidere (2), Oregon (1), Rochelle (1), Rockford (1) and Roscoe (1). The Bank
has three wholly
ownedwholly-owned subsidiaries. Nevahawk Investment, Inc. ("Nevahawk") is
an investment subsidiary located in Las Vegas, Nevada. RSL, Inc., a second
subsidiary whose activities include the sale of mutual funds and annuities, and
in turn owns Midland Acceptance Corporation ("MAC"), a consumer finance company
that hasmaintained offices in Rochelle and Rockford, Illinois.Illinois until December 1999.
First Financial Services, Inc. ("FFSI"), the third subsidiary, sells, on an
agency basis, mortgage-related insurance products and a variety annuity
products.
On April 30, 1997, the Company completed the purchase of all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois, for
approximately $4.2 million in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., was an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51.0 million.
This acquisition was accounted for as a purchase transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B. was merged into the charter of
Blackhawk State Bank.
As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financingconsumer finance subsidiary
with
assets of approximately $2.5 million.whose loan portfolio was sold in December 1999.
Effective September 1, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of purchase.
The principal sources of funds for the Bank's lending activities are deposit
accounts, amortization and prepayment of loans, short-term borrowings, and funds
provided from operations. The principal sources of income are interest and fees
on loans, interest on investments and non-interest income, consisting of fees
for servicing loans, service charges, trust department fees and income from
retail non-deposit investment sales.
LENDING ACTIVITIES. A majority of the loans in the Bank's loan portfolio are
secured by residential or commercial real estate. Substantially all of the real
estate securing the mortgage loans is located within thirty minutes of the
Bank's offices. Previously, Managementmanagement of the Company has restructured the loan
portfolio of the Greater Beloit Area Bank to decrease the concentration of
mortgage loans and increase commercial and installment loans. Management of the
Company anticipates the on-going restructuring of the loan portfolio of the
acquired institutions. The Analysis of Loan Portfolio, Table 2 of Item 7, shows
the changes in the types of loans from 19961997 through 1998.1999.
Commercial loans are either collateralized by assets other than real estate or
are unsecured. Interest rates on commercial loans are generally tied to an index
adjustable monthly and therefore more rate sensitive than mortgage loans.
Consumer and installment loans are generally secured by automobiles, boats, or
junior liens on real estate. A substantial percentage of automobile and boat
loans in the portfolio were purchased from area dealers. The Bank also offers
credit cards and home equity lines of credit.
Approximately $130 million in single one-to-four family loans are serviced for
others. These were acquired through the purchase transactions mentioned above.
Substantially all of these loans are 100% sold to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). MAC is a sub-prime lender, and hasmaintained
approximately $2.0 million in outstanding loans.loans until the sale of the portfolio
in December 1999.
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INVESTMENT ACTIVITIES. The investment policy under which the Company and its
subsidiary operates normally limits investments to: 1) U.S. Treasury and
government agency securities with maturities of 5 years or less; 2)
mortgage-backed securities, limited to no more than 30% of the investment
portfolio, with an average life of 5 1/2 years or less; 3) municipal securities
rated "A" or better, unless they are tax-anticipation notes issued by Wisconsin
issuers whose long-term debt is rated at least "A" or if unrated, are judged by
management to possess investment characteristics comparable to "A" rated debt
securities; and 4) corporate bonds and notes rated "A" or better with a maturity
of 4 years or less. In addition, the Bank may purchase commercial paper, bankers
acceptances and bank certificates of deposit as authorized investments to
provide additional liquidity in the investment portfolio.
Security investments made to a single entity are limited to 20% of its capital
and surplus. This limitation does not apply to investments in obligations of the
United States Treasury, Federal Land Banks, Federal Home Loan Banks, Federal
Farm Credit Banks, Federal National Mortgage Association, Export-Import Bank of
Washington or obligations fully and unconditionally guaranteed by the United
States. It is the Company's and its subsidiary's intention to hold securities
until maturity and are classified as such for IRS purposes. Generally, the recently purchased taxable securities held by the
Company, the Bank and Nevahawk are classified as available-for-sale.
Of the Bank's portfolio, approximately $9.0 million is managed at its main
office. Another $18 million is managed by the Belvidere office. The Bank may
purchase the same types ofavailable-for-sale, while
exempt securities under the same general restrictionshave been classified as are
noted above. In addition, commercial paper, bankers acceptances and bank
certificates of deposit are authorized investments to provide additional
liquidity in the investment portfolio.held-to-maturity.
During 1991, Beloit transferred approximately $21.5 million worth of its
investment securities to Nevahawk, it's wholly-owned subsidiary located in Las
Vegas, Nevada. In March 1999, an additional $7.0 million in cash was transferred
to Nevahawk. Currently, the portfolio under management by Nevahawk is
approximately $25.0$36.0 million. The transfer of an additional $7 million is
anticipated in March 1999.
The Company can maintain an investment portfolio that consists of securities
similar to those mentioned above. At December 31, 1998, securities held by1999, the Company were minimal.had no
security holdings.
DEPOSIT ACTIVITIES. Deposits are divided between interest bearing and
non-interest bearing. Non-interest bearing deposits consist of checking accounts
of individuals and non-personal entities. The interest-bearing deposits include
savings accounts, money market deposit accounts, certificates of deposit,
individual retirement accounts, NOW accounts and check club accounts. The
Bank
has few depositorsaggregate balance of accounts with account balances in excess of $100,000.$100,000 was $27.3
million at December 31, 1999. During 1997
Beloit1999 the Bank acquired approximately $1.0$6.4
million in brokered deposits which mature July 1999.in 2000. The Bank attracts deposits by
offering competitive interest rates for interest-bearing accounts and prices
services on a competitive basis for non-interest bearing accounts.
TRUST SERVICES. Through a separate department the Bank provides personal trust
services, including acting as trustee for living and testamentary trusts, and as
an agent, custodian, guardian, conservator, personal representative or
administrator for individuals or their estates. Trust offices are maintained at
the Bank's main location in Beloit, Wisconsin.
OTHER SERVICES. The Bank provides a wide range of other banking services for
both retail and commercial customers. It also provides full-service brokerage
services through Raymond James Securities, Inc. in threetwo locations.
COMPETITION. Banks experience intense competition in both attracting and
retaining deposits and in making loans. The Bank's direct competition for
deposits has come from other commercial banks, savings and loan associations,
credit unions, mutual funds and stock brokerage firms. In addition to offering
competitive types of accounts and interest rates, the principal methods used by
the Bank to attract deposits included the offering of a variety of services,
convenient business hours, and branch locations.
Competition in making real estate loans comes principally from savings and loan
associations, mortgage companies and other commercial banks. Consumer loans
provided by credit unions, finance companies and other commercial banks provide
the competition in this area. Other commercial banks are the major competition
for commercial loans.
EMPLOYMENT. As of December 31, 1998,1999, the Company and the Bank had 164 employees,
of which 114 were employed on a full time basis. The fringe benefits generally
provided to qualified employees include health insurance, 4
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long-term disability
insurance, group term life insurance, a flexible compensation plan (cafeteria
plan), a 401k deferred compensation and profit-sharing plan. Management
considers its relations with employees to be excellent.
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SUPERVISION AND REGULATION. The Company and the Bank are extensively regulated
under federal and state law. Any descriptions of statutory and regulatory
provisions contained in the following discussion are qualified in their entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulations may have a material effect on the Company.
THE COMPANY. On March 27, 1990, the Company received approval from the Federal
Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), to become a registered bank holding company by acquiring all of
the capital stock of the Bank. As a result, since consummation of the Conversion
on May 16, 1990, the Company's activities have been subject to limitations
imposed under the BHC Act. Transactions between the Company and the Bank and
their affiliates are also subject to certain restrictions. As a registered bank
holding company, the Company is subject to various filing requirements of the
FRB and is also subject to examination by the FRB.
FRB approval must be obtained before a bank holding company acquires all or
substantially all of the assets of a bank or savings association or merges or
consolidates with another bank holding company or savings and loan holding
company. Wisconsin has also adopted legislation which allows bank holding
companies from states that have adopted reciprocal legislation (the "Reciprocal
States") to acquire banks in Wisconsin, and allows Wisconsin bank holding
companies to acquire banks in the Reciprocal States. The Reciprocal States
presently include Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and
Ohio.
Under the BHC Act, bank holding companies are prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company. A bank holding company may, however, own shares of a company, the
activities of which the FRB has determined to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto; the holding
company itself also can engage in such activities. With the acquisition of
Rochelle, the Company also acquired the outstanding stock of Midland,MAC, which is a
finance company, and as such is an activity closely related to banking
activities. The Company does not have any other current plans to seek approval
to acquire any of these bank related activities. However, it may determine to do
so in the future. Much conflict has arisen in this area of the law and
regulations. In some instances regulators are authorizing activities allowed
under the law and stated above.
The FRB has adopted capital guidelines as to both minimum levels of core capital
and risk-based capital. The minimum core capital requirement ranges from 3% to
5% of total assets depending upon the regulator's determination of the holding
company's strength. The guidelines assign risk weightings to assets and
off-balance sheet items, and have minimum risk-based capital ratios. All bank
holding companies are required to have total consolidated capital of 8% of
risk-weighted assets. Core capital consists principally of shareholders' equity
less intangibles, while qualifying total capital consists of core capital,
certain debt instruments and a portion of the reserveallowance for loan losses. Table
12, filed elsewhere in this report, reflects various regulatory measures of
capital as of December 31, 1998.1999. The Company's core and risk-based capital
ratios, as shown in the table are well above the minimum levels.
Under Wisconsin law, a bank holding company is deemed to be engaged in the
banking business and is subject to supervision and examination by the Wisconsin
Department of Financial Institutions (the "Commissioner"). The Commissioner is
also empowered to issue orders to a bank holding company to remedy any condition
or policy which, in the opinion of the Commissioner, endangers the safety of
deposits of any subsidiary state bank or trust company. In the event of
non-compliance with such an order, the Commissioner has the power to direct the
operations of the state bank or trust company and to restrict dividends paid to
the bank holding company.
THE BANK. Wisconsin-chartered banks, including the Bank, are regulated and
supervised by the Wisconsin Department of Financial Institutions. Each
Wisconsin-chartered bank is required to be examined at least once each year by
either the Commissioner or its primary federal regulator. The approval of the
Commissioner is required to establish or close branches, merge with other banks
and undertake many other activities.
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Any Wisconsin bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove directors, officers or employees who have violated the law, conducted the
bank'sBank's business in a
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manner which is unsafe, unsound or contrary to the depositors' interests or been
negligent in the performance of their duties.
Wisconsin state banks are authorized to accept deposits (including demand,
savings and time deposits and certificates of deposit). Banks may make a wide
variety of loans (including mortgage loans, loans to corporations and other
commercial loans and other personal consumer loans). Other federal and state
regulations with respect to banks include required reserves, limitations as to
the nature and amount, by type and borrower, of lending, regulatory approval of
mergers and consolidations, issuance and retirement by a bank of its own
securities, and other aspects of banking operations.
Under Wisconsin law, the Commissioner has the authority, by rule or order, to
grant Wisconsin state banks the power to conduct any financial service which is
being offered by any other financial-related institution; under those
provisions, the Commissioner has approved banks engaging in general insurance
agency services and securities brokerage services. Each of the above services is
not a permitted activity of bank holding companies or bank holding company
subsidiaries. The FRB has generally not asserted jurisdiction over the powers of
state-chartered bank subsidiaries of bank holding companies.
PAYMENT OF DIVIDENDS. A Wisconsin bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account (as defined under Wisconsin law). If, on the date of declaration of a
dividend on common stock, the ratio of capital stock and surplus to total
deposits is less than 10%, there must be a transfer from net profits to the
surplus account before the dividend may be paid. Based on the Bank's strong
financial position, its entire earnings each year could be paid out as
dividends.
Nevahawk can pay dividends to the Bank from retained earnings without any tax
consequences. There are no plans, at the present, for Nevahawk to pay dividends
in 1999.2000. This status will be reviewed by Nevahawk at its regular board meetings.
FEDERAL DEPOSIT INSURANCE CORPORATION. The Bank's deposit accounts are insured
by the FDIC. FDIC insurance, at the present time, generally insures up to a
maximum of $100,000 per insured depositor. The FDIC imposes an annual assessment
on deposits. Effective January 1, 1993, premiums are assessed on the basis of a
risk rating assigned by the FDIC. Since that time the Bank's premium has been at
the lowest available rate. Beginning in 1997, financial institutions insured by
the FDIC arewere required to contribute to the FICO bond refinancing. This is
expected to occur through the year 2003. TheBeginning January 1, 2000, the Bank's
Bank Insurance Fund ("BIF") and Saving Association Insurance Fund ("SAIF") Oaker
deposits acquired with the
purchases of Rochelle and Belvidere will continue to be assessed at the higher
thriftsame rate.
The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to any merger or consolidation, or the
establishment or relocation of any branch office. This supervision and
regulation is intended primarily for the protection of depositors.
As an FDIC-insured bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC, based upon appraisals during examinations, may revalue
assets of an insured institution and require establishment of specific reserves
in amounts equal to the difference between such revaluation and the book value
of the assets. In addition, the FDIC has adopted regulations regarding capital
adequacy requirements similar to those of the FRB.
OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal and
state statutory and regulatory provisions covering, among other things, security
procedures, currency reporting, insider and affiliated party 6
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transactions,
management interlocks, community reinvestment, truth-in-lending, electronic
funds transfers, truth-in-savings, privacy, and equal credit opportunity.
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Proposals for new legislation or rule making affecting the financial services
industry are continuously being advanced and considered at both the national and
state levels. Proposals are primarily focused upon restructuring and
strengthening regulation and supervision to reduce the risks to which assets of
banks and savings institutions are exposed.
Although further changes in the regulatory framework may be enacted, specific
provisions and their ultimate effect upon the business of the Bank and the
Company cannot be reliably anticipated.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS. The earnings of the Bank
and the Company are affected not only by general economic conditions but also by
the policies of various governmental regulatory authorities. In particular, the
FRB influences general economic conditions and interest rates through the
regulation of money and credit conditions. It does so primarily through
open-market operations in U.S. Government Securities, varying the discount rate
on member and nonmember bank borrowings, and setting reserve requirements
against bank deposits. FRB monetary policies have had a significant effect on
the operating results of banks in the past and are likely to continue to do sohave
such an effect in the future. The general effect, if any, of such policies upon
the future business and earnings of the Bank cannot be accurately predicted. In
addition, losses sustained by the federal insurance funds and regulatory costs
incurred in connection with failed or failing insured depository institutions
continue to be assessed to those within the industry. As such, future earnings
will be adversely affected by regulations enacted to cover these losses and
costs.
Past
increases in FDIC insurance premiums are an example of this.
EXECUTIVE OFFICERS
NAME AND AGE PRINCIPAL OCCUPATION
Dennis M. Conerton, 4849 President and Chief Executive
Officer of the Company and
of the Bank. Prior thereto,
Vice President-Controller,
Regal-Beloit Corporation.
James P. Kelley, 5556 Executive Vice President and
Secretary of the Company
and Executive Vice President of
the Bank and the Bank's
predecessor, Beloit Savings Bank.
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Jesse L. Calkins, 5859 Senior Vice President, Treasurer and Chief Financial
Officer of the Company and Senior Vice President and
Senior Trust Officer of the Bank, and the Bank's
predecessor, Beloit Savings Bank.
Richard J. Rusch, 5455 Vice President Commercial Lending of the Bank
since August 1990. Prior thereto, Vice President
Commercial Loans, M & I Bank of Beloit.
David A. Stearns, 5253 Senior Vice President of the Bank
(October 1998 to Present); President
and Chief Executive Officer of the
Castle Bank Harvard, N.A., Harvard, IL
(1995 - 1997); President and Chief
Executive Officer of the Harris Bank
Woodstock, Woodstock, IL (1992 - 1995).
ITEM 2. PROPERTIES
On December 31, 1998,1999, the Company had eleven locations, of which three were
leased. All of these offices are considered by management to be well maintained
and adequate for the purpose intended. See the Notes to Consolidated Financial
Statements included under Item 7 of this document for further information on
properties.
ITEM 3. LEGAL PROCEEDINGS
To management's knowledge no material legal proceedings are contemplated or
pending to which it or its affiliates are or threatened to be a party, of which
any of their property would be subject, other than routine litigation incidental
to its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.1999.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE STOCKHOLDERS MATTERS
As of March 20, 199821, 2000 there were 403368 Registered Stockholders. Information in
response to this item, is found on page of this report. Aalong with a table listing the declaration of dividends
is found on page .15 of the Company's Annual Report, and is incorporated herein
by reference.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Management's Discussion and Analysis of Financial Condition and Result's of
Operation
The following discussion provides additional analysis of the Company's financial
statements presented in its annual report and should be read in conjunction with
this information. This discussion focuses on the significant factors which
affected the Company's earnings in 1998,1999, with comparisons to 19971998 and 19961997,
where applicable. As of December 31, 1998,1999, Blackhawk State Bank (the "Bank"("the Bank") was
the only direct subsidiary of the Company and its operations contribute nearly
all of the revenue and the majority of the consolidated expenses for the year.
The Bank has three wholly owned subsidiaries. Nevahawk Investment,Investments, Inc.
("Nevahawk") is an investment subsidiary located in Nevada. RSL, Inc., which operates
mutual fund and annuity activities, and in turn owns Midland Acceptance Corp.
("MAC"), a consumer finance company that hasoperated offices in Rochelle and
Rockford, IL. First Financial Services of Belvidere, Inc. ("FFSI") administers
and sells, on an agency basis, mortgage-related insurance products and sells on an agency basis a variety
of insurance and annuity products.
Overview
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OVERVIEW
On April 30, 1997, the Company completed the purchase of all of the
outstanding shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois,
for approximately $4.2 million in cash. Rochelle's wholly owned subsidiary,
Rochelle Savings Bank S.B., was an Illinois state chartered savings bank with
offices in Rochelle and Oregon, Illinois, and assets totaling approximately
$51.0 million. This acquisition was accounted for as a purchase transaction. On
March 31, 1998, the charter of Rochelle Savings Bank S.B. merged into the
charter of Blackhawk State Bank.
As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financingconsumer finance subsidiary.
Midland operated as a consumer finance subsidiary with
assets of approximately $2.5 million.through December, 1999 when
the outstanding loan portfolio was sold.
Effective September 1, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, and assets totaling approximately
$86.0 million, was merged into the Bank on the effective date of the purchase.
Results of operations of Rochelle and Belvidere are incorporated in the
Company's statements from the respective acquisition dates forward.
Net interest incomeNET INTEREST INCOME
Net interest income ("Interest Margin") is the difference between interest
income and fees on loans and interest expense, and is the largest contributing
factor to net income for the Company. All discussions of income amounts and
rates are on a tax-equivalent basis, which accounts for income earned on loans
and securities whichthat are not fully subject to income taxes as if they were fully
subject to income taxes. Interest Margin in 19981999 was $8.9$9.6 million, increasing
16.5%7.3% over the 19971998 level of $7.7 million, which was 26.2% higher
than the 1996 level of $6.0$8.9 million. Interest margin as a percent of
average earning assets ("Interest margin rate") was 3.64% in 1999, 4.24% in 1998
and 4.52% in 1997 and
4.33% in 1996.1997. The decrease between 19981999 and 19971998 is the result of the lower
yields on earning assets. A significant contributing factor to the decline in
yield was the addition of a full year of the Belvidere operations,operation, which had a
lower interest margin rate than the Company and the downward trend in overall interest rates during the later part
of 1998.upon its acquisition.
Interest income and fees on loans is the largest component of interest income
and was the largest factor in the 21.4%16.1% increase in interest income during 1999.
The inclusion of the Belvidere portfolio for 12 months versus four months in
1998 largely drove this increase. Internal portfolio loan growth did net an 8.0%
increase from December 31, 1998 to December 31, 1999. The yield earned on loans
decreased to 8.74% in 1999 compared to 9.10% in 1998. The Belvidere portfolio
carried a lower average yield than the balance of the Company's loan portfolio.
Additionally, yields on new loans added in the first half of 1999 were typically
lower than the existing portfolio due to prevailing market interest rates.
Interest income and fees on loans increased 21.4% and was the largest factor in
the increase of interest margin in 1998 compared to 1997. Each loan category had
an increase in average balances as compared to 1997, the result of the
acquisition of Belvidere.Belvidere on September 3, 1998. The yield earned on loans
decreased to 9.10% in 1998 compared to 9.25% in 1997. Loan yields have beenwere adversely
affected in 1998 by the decrease in overall market rates and the addition of the
Belvidere loans for four months, which are predominately one-to-four familywere predominantly one-to-four-family
mortgage loans earning lower yields.
InterestInvestment income and fees on loans increased 32.1% and was the largest factor36.1%, to $3.9 million in the increase of interest margin in 19971999 compared to 1996. The interest income$2.9
million in each of the major loan categories increased1998. Average balances for both taxable and exempt securities were
higher in 19971999 when compared to 1996 primarily
due1998 as short-term investment balances were
redeployed in March and April of 1999 to improve overall asset yield. Yields on
taxable and exempt securities declined to 5.93% and 5.91%, respectively, in 1999
from 6.31% and 6.53%, respectively, in 1998 as new investments carried lower
yields than the existing portfolio. In addition to scheduled maturities, certain
higher-yielding investments were also subject to, and were, called by their
issuers in 1999 further contributing to the Company's acquisitionoverall portfolio yield decline. The
deployment of Rochelle. Increased rates also contributedshort-term funds in March and April served to a lesser extentreduce the overall
securities portfolio yield while increasing the yield on those particular funds
that had been invested in short-term money market instruments. The Company
continued through the early part of 1999 to an increasereinvest maturities into tax exempt
securities to take advantage of favorable spreads in consumer loan interest. Total loan volumes
increased 38.5% for this same period.such securities.
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Investment income increased 12.8%, to $2.9 million in 1998 compared to $2.6
million in 1997. Average balances for both types of investmenttaxable and exempt securities were
higher in 1998 when compared to 1997. The Company reinvested maturities from
taxable securities tointo tax-exempt securities to take advantage of the favorable
spread between these two investment types. The average balances of taxable
investment securities were also affected by the Belvidere acquisition. The yield
on taxable investment securities fell to 6.31% in 1998 from 6.52% in 1997,
mostly due to lower overall market rates.
Investment income increased 4.1%, to $2.6Total interest expense was $10.7 million in 19971999, increasing 25.4% from $8.5
million in 1998. A 29.6% increase in average interest-bearing liability balances
more than offset a 15-basis point drop in the cost of such liabilities. The
increased volume was largely a function of 12 months of the Belvidere
liabilities, compared to $2.5
milliononly four months in 1996. The1998 and the full year effect of
borrowings incurred to complete the Belvidere transaction. Interest on
interest-bearing deposits increased 19.6% as a 26.1% increase during this periodin volume was
primarily the result of
increased rates on taxable securities, whichpartially offset the reduced income from
tax-exempt securities. Income from tax-exempt securities declined due to lower
volume.by declining costs. The average balance of total investmentsrate paid on interest-bearing
deposits decreased by 3.0%to 4.39% in 19971999 compared to 1996,4.63% in 1998. The favorable
repricing of the savings and time deposit portfolios and the shift in mixture of
the interest-bearing deposit portfolio towards interest-bearing transaction
accounts and savings accounts from time deposits contributed towards that
decline. Interest on borrowings increased 71.1% as the Company liquidated investment securitiesfunded loan
growth in the latter three-quarters of the year with non-deposit liabilities.
Additionally, the Company carried 12 months of borrowings for the Belvidere
acquisition on its balance sheet compared to purchase
Rochelle. The declinefour months in volume of tax exempt securities was only partially
offset by the increase in volume of taxable securities.1998.
Total interest expense was $8.5 million in 1998, increasing 27.0% from $6.7
million in 1997. Increased volumes arewere the primary factors for this increase.
These increased volumes arewere attributable to growth of the Bank's deposit base,
the acquisition of deposits from Belvidere and the use of borrowings to complete
the Belvidere transaction. This increase due to volumes was partially offset by
lower rates paid on deposits. The average rate paid on deposits decreased to
4.63% in 1998 compared to 4.70% in 1997.
Interest expense totaled $6.7OTHER OPERATING INCOME AND EXPENSES
Other operating income increased 12.2% to $2.8 million in 19971999 from $2.5 million
in 1998. Increases in service charges on deposit accounts of $199,000, brokerage
commissions of $100,000, loan servicing fees of $76,000, gains on sales of
available-for-sale securities and portfolio loans of $69,000 and $144,000
respectively, were offset by declines in gains on sales of mortgages held for
sale of $206,000 and trust fees of $51,000. The service charge, brokerage and
loan servicing increases all related to the inclusion of 12 months of the
Belvidere operation in 1999 compared to $5.4 millionfour months in 1996,
representing an increase1998. The gain on sale of
24.7%. The increased interest costportfolio loans was primarily the result of higher deposit volume acquired with the purchaseselling MAC's consumer finance loan portfolio
in 1999. The decline in gains on sales of Rochelle. The
average rate of interest on deposits remained relatively static at 4.70% and
4.71% in 1997 and 1996, respectively. The variance in interest expense between
1997 and 1996 in other borrowingsloans held for sale was primarily the result of
the increased rates on fixed rate mortgage loans in 1999. Increasing rates
deteriorated the prices received on loans as well as reduced volume.
However, the average costvolume of borrowings also declined in 1997 to 4.77% compared
to 4.80% in 1996.
Other Operating Income and Expensesloans
originated for sale.
Other operating income increased 62.7% to $2.5 million in 1998 from $1.5 million
in 1997. Gain on sale of loans and mortgage loan servicing incomebrokerage and annuity commissions were the
most significant factors in the increase. WithA $517,000 increase in the acquisitiongain on
sales of Rochellemortgage loans resulted from the addition of Belvidere for four months
and Belvidere, the Company acquired approximately $130.0 million of mortgages
servicedfavorable rate environment that existed for others. As partfixed rate mortgage lending
during 1998. Brokerage and annuity commissions more than doubled as Belvidere's
brokerage operation contributed for four months and sales increased in the
existing branches as the performance of the servicing arrangement, the Company retains a
portion of the interest collected as a
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10
servicing fee. The other major categories of other operating income also
increased significantly when comparing 1998 to 1997. Trust fees increased 19.6%
andequity markets attracted customers.
Additionally, service charges and fees on deposits increased $198,000 or 22.2%
and trust fees increased $33,000 or 19.6% between periods. The increase in
service charges and fees was largely attributable to the Belvidere acquisition,
while the increase in trust fees was the result of a larger volume of assets
under management and a higher market value of assets under management.those assets.
Other operating expenses increased 30.2% to $10.1 million in 1999 from $7.8
million in 1998. The inclusion of Belvidere for a full year in 1999 was the
biggest factor in the increase. Also contributing to the increase was the fact
that the Bank opened a stand-alone branch in service chargesRoscoe, Illinois in March 1998.
Salaries and feeswages increased $652,000 or 19.9% as continued administrative and
back-office consolidation partially offset the additional eight months of
Belvidere's operations in 1999. Amortization of purchase-accounting intangibles
increased $246,000 or 68.7% as Belvidere's amortization began in September of
1998. Furniture and equipment expenditures increased 54.0% as the Company
realized increased depreciation on newer equipment related to Y2K purchases and
due to the additional eight months of Belvidere's operation. Data processing
costs increased 41.0% with the full year effect of Belvidere's operation and Y2K
related processing costs. The organization was largelyforced to postpone its data
processing consolidation until the year 2000. Other operating expenses increased
36.9% or $516,000. Over $300,000 of the increase is attributable to the
Belvidere acquisition.
Otheradditional eight months of Belvidere's operating income increased 52.7% to $1.5 million in 1997 from $1.0 million
in 1996. Service charges and fees represented more than half of the total in
each year. They also represented $330,000 of the $530,000 increase in other
operating income. Mostexpenses. The balance of the
increase relates to an
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11
approximate 12% increase in service charges resulted from the
inclusionmiscellaneous operational expenditures. Occupancy
expenses and employee benefits increased 15.3% and 21.6%, respectively, as a
function of the Rochelleadditional eight months of Belvidere's operations. Loan servicing fees accounted for $95,000
of additional income in 1997. Trust fees and investment center commissions
experienced significant percentage gains in 1997 compared to 1996.
Other operating expensesexpense increased 31.3% to $7.8 million in 1998 from $5.9
million in 1997. Inclusions of Rochelle for a full year and Belvidere for four
months in 1998, along with the amortization of purchased intangibles, were the
biggest factors in the increase. Also contributing to the increase was the fact
that the Bank opened an in-store facility in July 1997 and a stand-alone branch
in the NorthernRoscoe, Illinois market in March 1998. Some areas of expense such as data
processing and professional fees did not increase as much as overall expenses.
This was the result of efficiencies gained as a result of merging charters and
merging of the data processing system of Rochelle's into Beloit's.
Operating expense increased 40.5% to $5.9 million in 1997 compared to 1996. The
most substantial portion of this increase was the result of the Rochelle
purchase. In addition, the opening of a second in-store facility in a newly
constructed Wal-Mart SuperCenter contributed to some of the increase. Other
operating expense increased $185,000 or 4.6% in 1997 compared to 1996. Increases
in salaries, employee benefits, data processing and other expenses were
partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.
Management monitors three ratios related to other operating income and expense:
(1) Net other operating expense as a percentage of average assets, (2) standardStandard
efficiency ratio and (3) grossGross efficiency ratio. Net other operating expense to
average assets improvedreversed the prior year's trend and increased to 2.54% in 1999
from 2.29% in 1998 fromand 2.39% in 1997 but did not attain
the 1996 level of 2.16%.1997. Considering all assets under management
(mortgage loans serviced for others and managed trust assets) this ratio decreased for the third
consecutive year, andalso
increased over 1998, but remained under 1997 levels. The adjusted ratio was
1.65% in 1999, compared to 1.56% in 1998 compared toand 1.79% in 1997 and 1.96% in
1996.1997. The standard
efficiency ratio (other operating expense divided by net interest income plus
other operating income) increased to 83.02% in 1999, compared to 68.8% in 1998
compared toand 64.8% in 1997 and 60.8% in 1996.1997. Adjusted for intangible amortization, the ratio increased to
78.06% in 1999 compared to 65.6% in 1998 compared toand 63.3% in 1997 and
60.8% in 1996.1997. The gross efficiency
ratio (other operating expense divided by interest income plus other operating
income) increased to 44.2% in 1999 compared to 39.1% in 1998 compared
toand 37.3% in 1997 and 34.2% in 1996.1997.
Adjusted for intangible amortization, the ratio increased to 41.5% in 1999,
compared to 37.2% in 1998 compared toand 36.4% in 1997 and 34.2% in 1996.1997.
The downward trend in the efficiency ratios was expected, and is attributable to
the newly acquired operations that are not fully integrated into the Company and
to the additionalthree new branch office locations.locations opened in 1997 and 1998. These
operations should begin to have a positive impact on the efficiency ratios as
they continue to increase their customer base. The gross efficiency ratios were alsoratio was
negatively impacted because ofby lower general market interest rates andwhich have steadily
reduced the overall yield on earning assets, while the standard efficiency ratio
has been hurt by Belvidere's lower relative margin as compared to the Company's
overall margin.
Provisions For LossesPROVISIONS FOR LOSSES
The provision for loan losses was $464,000, $315,000 and $192,000 for 1999,
1998, and $145,000 for 1998,
1997, and 1996, respectively. In 1998,1999, the Bank had net charge-offs of $374,000,$359,000,
(total charge-offs of $408,000 less recoveries of $49,000), compared to 1998
when it had net charge-offs of $375,000, (total charge-offs of $395,000 less
recoveries of $21,000), compared to$20,000). In 1997, when it hadBlackhawk experienced net charge-offs of
$176,000, (total charge-offs of $215,000 less recoveries of $39,000). In 1996, Beloit experienced net recoveries of $112,000.
The net recovery in 1996 resulted from recoveries of $221,000 off-setting
charge-offs of $109,000. Most of the recovery was from a loan that was
originally charged off in 1994. Excluding the large recovery, net charge-offs to
average loans would have been .07% in 1996. Net
charge-offs to average loans was
.24%were 0.20% in 1999, 0.24% in 1998 and .14%0.14% in
1997.
The allowance for loan losses as a percent of loans was 1.04% at December 31,
1999 compared to 1.08% at December 31, 1998 comparedand to 1.11% at December 31, 1997 and to 1.19% at December 31, 1996.1997.
This downward trend is attributablecontinues to be a function of the shift in the Company's
loan mix. With the acquisition of Rochelle and Belvidere, the Company has a higherincreased
its proportion of oneone-to-four-family mortgages to four familytotal loans.
One-to-four-family mortgages whichare generally are lower risk loans. Management feels
that the allowance for loan loss provisionlosses is adequate based upon the current portfolio
and market conditions. As the loan portfolio shifts and market conditions
warrant, the provisionallowance may be adjusted.
Income TaxesINCOME TAXES
The effective income tax rate increaseddecreased to 30.9% in 1999 from 37.2% in 1998 fromand
35.3% in 1997 and
32.9%1997. Contributing to the decline in 1996. The most significant reason for the increase in 1998 and 1997 is
thattax rates were the amortizationincreased
holdings of intangible assets, resulting from the acquisitions, is
not deductible for tax purposes. In addition, the Company has invested less intax-exempt municipal securities, exempt from Federal taxes during 1997, as yields on taxable
securities have become more favorable. During 1998, yields onthe percentage of income being
generated by the Company's Nevada subsidiary and the increased Illinois state
tax-exempt securities were more favorable and therefore the Company reinvested maturing
bonds into tax-exempt securities to take advantage of this difference. Becauseagency investment holdings. Income generated at Nevahawk is located in Nevada, its income is not
subject to state income tax.
Therefore, as a higher proportiontaxes while certain U.S. Government Agency investments
qualify for state tax exemption for the Bank within Illinois. Offsetting these
benefits was the increase in non-deductible amortization of income is earned outside of Nevada, the
effective rate increases. The income generated in Illinois was subject to
Illinois income tax as well as federal income tax. The Illinoispurchase-related
premiums and Wisconsin
effective tax rates are approximately the same.
Balance Sheet Analysis
10
11goodwill.
BALANCE SHEET ANALYSIS
Total assets as of December 31, 19981999 were $291.5$295.7 million increasing 44.3% from
$202.0compared to $291.5
million as of December 31, 1997. Total average assets1998. Asset growth was subdued in relation to 1998
and 1997 as the Company refrained from acquiring institutions in 1999 and turned
the focus to integration and internal growth.
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CASH AND CASH EQUIVALENTS
Cash and equivalents were $229.9$12.0 million as of December 31, 1999 compared to $9.6
million at December 31, 1998. As the end of the century approached, Blackhawk,
like other financial institutions, had higher levels of cash on hand in
preparation for extraordinary consumer withdrawals. By the year endedcentury date change
weekend depositors had demonstrated their confidence in the Company's
preparedness by refraining from withdrawing large sums and the emergency cash
went unused. The excess cash was quickly reduced during the month of January
2000 to levels comparable to the end of 1998.
INTEREST-BEARING DEPOSIT ACCOUNTS
The reduction of interest-bearing deposits to $4.6 million as of December 31,
1999, from $6.4 million on December 31, 1998 comparedwas the result of increasing cash
on hand as cash inventories are managed through lower-yielding liquid assets
such as interest-bearing deposits.
FEDERAL FUNDS SOLD AND OTHER SHORT-TERM INVESTMENTS
Federal funds sold and short-term investments decreased dramatically to $183.1$0.1
million for the year
endedas of December 31, 1997, representing an increase1999 from $22.8 million as of 25.6%. MostDecember 31, 1998. In
the late first quarter and early second quarter of the1999, short-term liquid funds
were invested in short-to-medium-term securities to improve asset yields.
SECURITIES
Available-for-sale securities grew $18.1 million, to $49.1 million as of
December 31, 1999 from $31.0 million as of December 31, 1998. As mentioned
above, much of this increase was the result of redeploying federal funds sold
and short-term investments. Securities classified as held-to-maturity declined
approximately $2.2 million, or 10%, to $19.7 million from $21.9 million.
LOANS HELD FOR SALE
As of December 31, 1999, loans held for sale were approximately $0.5 million
compared to nearly $4.4 million on December 31, 1998. These loans are generally
long-term fixed-rate loans which lost much of their consumer appeal later in
1999 as rates increased from 1998's 30-year lows.
LOANS
Net portfolio loans increased 8.0% during 1999 to $190.2 million at December 31,
1999 from $176.0 million at December 31, 1998. As intended, commercial and
consumer lending which achieves the Belvidere acquisition.
CashCompany's objective of restructuring the
balance sheets of its acquired thrift organizations fueled growth in the loan
portfolio. Growth rates in commercial (including commercial real estate) and
Cash Equivalents
Mostconsumer loans were 42.3% and 10.1% respectively during 1999. The consumer
portfolio growth occurred in spite of the increaseCompany divesting its subsidiary's
consumer finance loan portfolio consisting of $1.7 million in cash and cash equivalentsoutstandings.
Residential mortgage loans decreased 5.6% during 1999 as borrowers refinanced
out of adjustable rate mortgages early in 1999 to lock in long-term fixed rates.
The Company generally sells such loans into the secondary market.
BANK PREMISES AND EQUIPMENT
The decrease to $7.1 million as of December 31, 1999 from $7.5 million the
previous year-end was the result of depreciation offset partially by the
Belvidere acquisition. Also contributingacquisition of new equipment. New equipment purchases totaled $660,000. Most
purchases were to the increase was the addition of a
new branch in March 1998,replace and increased cash items in collection (cash letters).
As a percent of average assets, cash and cash equivalents have remained
relatively static.
Federal Funds Sold And Other Short-term Investments
The increase in federal funds sold and other short-term investments ("fed
funds") is mostly attributable to Belvidere. Belvidere is holding additional fed
fundsupgrade equipment in anticipation of possible deposit runoffY2K.
INTANGIBLE ASSETS
These assets consist of goodwill and purchase premiums resulting from a certificatethe
purchases of deposit
special scheduled to mature during the first quarter of 1999. Depending on the
runoff amount, the remainder of fed funds will be invested into longer-term
securities. As a percent of averageRochelle and Belvidere institutions as well as originated
mortgage servicing rights. The decrease in intangible assets fed funds increased to 3.0% duringbetween December
31, 1999 and December 31, 1998 as compared to 1.5% in 1997.
Securities
The increase in securities is mostly attributable to the Belvidere acquisition.
Without the acquisition, security balances would have declined in 1998 as
compared 1997. As a percent of average assets, securities decreased to 19.7% in
1998 compared to 21.4% in 1997. It is expected that the average balance of
securities will increase in 1999. As previously discussed, the Company shifted
maturing investments from taxable securities to tax-exempt securities. Given the
current rate environment, this shift is expected to continue.
Loans
Again, the increase in loan balances iswas primarily the result of the Belvidere acquisition.
Withoutamortization of
the acquisition, loanpurchase-accounting intangible assets.
DEPOSITS
Total deposits at December 31, 1999 were $234.1 million. This compares to $241.4
million at December 31, 1998. The Company experienced significant price
competition on interest-bearing deposits in several of its markets and elected
to shift towards alternative funding sources to attempt to preserve its interest
margin. With the exception of money market accounts, the balances would havein each type
of interest-bearing deposit liability decreased when comparing 1998during 1999. Pricing pressures
continued through the end of 1999 and are expected to 1997. This waspersist in the short-term.
As a result, of a very competitive environment in all loan
categories. Many real estate customers took advantage of low fixed-rate
mortgages and refinanced their adjustable-rate mortgages. The Bank has
traditionally kept adjustable-rate mortgages in its portfolio while selling
fixed rate mortgagestime deposits may continue to the secondary market. The installment loan market is
also very competitive, with consumers having many financing options available to
them. Average loans decreased slightlydecline as a percentpercentage of
average assets to 66.8%
in 1998 compared to 67.7% in 1997. It is expected that average loan balances as
a percentliabilities.
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OTHER BORROWINGS
The use of average assets will increasealternative funding sources increased during 1999. Non-Performing Loans
Non-performing loans as a percent of total loansOther borrowings
increased to 1.45%$35.4 million as of December 31, 1998 from .77%1999 compared to $21.7 million as
of December 31, 1997. Most1998. Because of this increasepricing considerations, deposit growth has not
been sufficient to fund growth and increases in other borrowings can be expected
to continue. The primary source for these borrowings has been, and is expected
to continue to be, the Federal Home Loan Bank of Chicago ("FHLB"). Advances from
the FHLB as of December 31, 1999 totaled $19.7 million.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the resultprocess of higher impaired loans. Impaired loans are those loans that are not
necessarily past due or non-accruing, but collection ofidentifying, measuring and managing
the risk to the Company's earnings and capital resulting from the movements in
interest is not assured.
The average balance of impaired loans also increased $634,000 in 1998 compared
to $405,000 in 1997.rates. It is the Company's policyobjective to place a loan on non-accrual
once it has become 90 days delinquent or if it is determined that collection is
questionable. As the level of consumerprotect earnings and commercial loans increase, wider
fluctuations for non-performing loans may occur.
Deposits
Total deposits increased to $241.4 million in 1998 from $159.1 million in 1997,
mostly the result of the Belvidere acquisition. Without the acquisition, average
deposits would have increased 4.4%. Average deposits increased to $163.5 million
in 1998 from $126.3 million in 1997. The biggest increase in average balances
was in savings accounts, which include money market account funds. The mix of
deposits as a percent of average assets experienced very little shift comparing
1998 to 1997.capital
while achieving liquidity, profitability and strategic goals.
During 1999 the mixCompany began to focus its measure of deposits is expected to be weighted more
towards time deposits. The Company is planning to shift this mix closer to that
of a traditional commercial bank, which would be away from higher interest time
deposits.
Total non-interest bearing demand accounts increased due more to growth in
existing accounts and less because of the Belvidere acquisition. As a percentage
of average assets, non-interest bearing demand accounts were 9.5% in 1998 versus
9.0% in 1997. The Company plans to increase business relationships in the
Rochelle and Belvidere markets, which over time should increase the balance in
these accounts. Traditionally, neither Rochelle nor Belvidere sought commercial
deposits.
Other Borrowings
Other borrowings increased to $21.7 million in 1998 versus $17.1 in 1997. The
majority of this growth was the result of borrowings of $7.8 million used in
part to finance the acquisition of Belvidere. Approximately, $6.0 million of
this borrowing is at a fixed rate, requiring principal and interest payments of
approximately $900,000 per year for five years. An additional $1.8 million bears
interest at a variable rate based upon the monthly LIBOR rate. At the end of
five years, both parts of the loan are due. At the Company's discretion, part or
all of variable portion could be converted to the fixed rate or paid without
penalty. This loan is secured with the stock of the Bank. Other long-term
borrowings also increased as a result of additional Federal Home Loan Bank
("FHLB") borrowings and FHLB borrowings assumed in the Belvidere acquisition.
The Bank took additional FHLB borrowings early in 1998 to meet current and
projected liquidity needs.
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12
Short-term borrowings consist of repurchase agreements and fed funds purchased.
From time-to-time the Bank will buy fed funds to meet short-term liquidity needs
and to manage its Federal Reserve Bank account. The average balance of
short-term borrowings decreased considerably during 1998. This was the result of
fewer customers using repurchase agreements to invest their excess funds. No
significant change is expected during 1999.
Asset/Liabilities Management
The Company, like other financial institutions, is subject to interest rate risk on the
effect a shift in interest rates would have on earnings rather than on the
amount of assets and/or liabilities subject to repricing in a given time period.
Since not all assets or liabilities move at the same rate and at the same time,
a determination must be made as to how each interest earning asset and each
interest bearing liability adjusts with each change in the base rate. The
Company develops, evaluates and amends its assumptions on an ongoing basis and
analyzes its earnings exposure monthly.
In addition to the degree that itseffect on earnings, a monthly evaluation is made to determine
the change in the economic value of the equity with various changes in interest
bearing liabilities, with short and medium term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest earning assets. Interest rate risk occurs when there is an imbalance
betweenrates. This determination indicates how much the interest earningvalue of the assets and the
interest bearingvalue of the liabilities atchange with a given maturity or repricing schedule. Such imbalance is commonly referred to as
interest rate gap ("gap"). A positive gap exists when there are more assets than
liabilities maturing or repricing within the same time frame.
Generally,specified change in a negative gap position, net interest income will decline during
periods of rising interest rates and increase during periods of declining interest rates. The
opposite would be expected in a positive gap position.
However, with current interest rates at a historically low level, certain
liabilities are not as interest rate sensitive and therefore offsetnet of the earnings
change anticipated ineconomic values of the gap analysis. The Company's cumulative one-year gap
generally has been and currently is negative.
The Asset Liability Committee meets regularly to monitor and determine the
Company's exposure to interest rate fluctuations. Monitoring the maturities and
repricings of assets and liabilities the flowresults in an economic
value of funds, and the relationship of
interest rate changes of loans and deposits to the general market does this. The
consolidated interest rate risk exposure is monitored by the Company on a
quarterly basis.
Liquidityequity.
LIQUIDITY
Liquidity as it relates to the subsidiary bank is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal source of funds are deposits, scheduled amortization and prepayment of
loan principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing fedfederal funds, salesales of loans,
salesales of securities, borrowing from the Federal Reserve Bank and the FHLB and
capital loans. Current year earnings can be paid to the Bank, from Nevahawk, to
provide additional liquidity, without incurring a tax liability under present
law.
During 1998 and 1997 Nevahawk did not pay a dividend. A payment in 1999 is also
not anticipated.
Generally, the liquidity needs of the Company consist of payment of dividends to
its shareholders, the repayment of debt used for the Belvidere acquisition and a
limited amount of expenses. The sources of funds to provide this liquidity are
income from cash balances, dividends from the Bank and a $2.0 million line of
credit with a non-affiliated third-party bank. To date, this line of credit has
not been used. Certain restrictions are imposed upon banks, which could limit
their ability to pay dividends if they do not generate future net earnings. The
Company maintains adequate liquidity to pay its expenses. In addition, the
Company may also borrow from external sources leveraging its strong capital
base.
CapitolCAPITAL
Total shareholders'shareholders equity as of December 31, 1998 increased 5.5%1999 was $23.3 million compared to
$24.4
million as compared to $23.1 million as of December 31, 1997. Internal growth1998. The decrease primarily resulted from the
net decline in the formmarket value of increased net income was the biggest factorsecurities available for this increase. Also
contributing to the increase, to a lesser extent, was the exercising of stock
options by employees and an increase in the adjustment for Financial Accounting
Standard 115. Tier Isale. The capital
ratio, total capital ratio and Tier I leverage
ratio were 8.36%, 9.31% and 6.00%, respectively, at December 31, 1998 compared
to 15.26%, 16.35% and 10.99%, respectively, at December 31, 1997. The change in
these ratios between years, reflects the effect of the Belvidere acquisitionCompany are in which the Company chose to leverage its capital to complete the transaction. The
Company still exceeds all regulatory requirements regarding capital asexcess of the regulatory requirement for Tier I capital as a percent of assets is 4.0% and for
totalrequirements. Core capital
as a percent of risk based assets for 1999 is 9.52% compared to a December 31,
1998 ratio of 8.36% and a regulatory requirement of 4.00%. Total capital as a
percent of risk based assets for 1999 is 10.61% compared to a December 31, 1998
ratio of 9.31% and a regulatory requirement of 8.00%. ImpactThe leverage ratio for the
Company is 6.10% compared to a December 31, 1998 ratio of Inflation6.00% and Changing Pricesa 3.00%
regulatory requirement.
IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, most of the assets and liabilities of the Bank
are monetary in nature. Consequently, interest rates have more significant
impact on the Company's performance and results of operations than the effect of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously under
Asset/Liability Management, the Bank's interest rate gap positionexposure in conjunction
with the direction of the movement in interest rates, is an important factor in
the Company's results of operations. The Company's financial statements are
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and
13
14
results of operations in terms of historical dollars, without giving
consideration to changes in the relative purchasing power of money over time due
to inflation.
Accounting DevelopmentsACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")(FASB) issued Statement
of Financial Accounting Standards ("FAS")(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 thatand entity to recognize all derivative
financial instruments be recognizedderivatives as either assets or
liabilities in the statement of financial position. Derivative financialbalance sheet and measure those 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, thevalue.
The accounting for changes 12
13
in the fair value will dependof a derivative depends on the
specific exposure being hedged.intended use of the derivative and the resulting designation. The statement is
effective for fiscal years beginning after June 15, 1999.2000. Management, at this
time, cannot determine the effect the adoption of this statement may have on the
consolidated financial statements of the Company as the effectaccounting for
derivatives is dependent on the amount and nature of derivatives and hedges heldin place at the
time of adoption of the statement.
Year 2000 Issues
Year 2000 ("Y2K") issues affect the Company to the extent that it operates in an
industry which heavily relies upon information technology systems and has
material relationships with third parties, both vendors and customers.
Therefore, the Company has undertaken a four-phase process to determine to what
extent the Company is vulnerable to Y2K issues. The four phases set-forth by the
Company are awareness by major area, assessment of Y2K compliance, system
renovation (if necessary) and validation of Y2K preparedness. The Company's Y2K
progress, by major area, is set-forth in the table that follows.
System Awareness Assessment Renovation Validation
General
Ledger Complete Complete Complete Complete
Loan
System Complete Complete Complete Complete
Deposit
System Complete Complete Complete Complete
Item
Capture Complete Complete Complete Complete
Hardware Complete Complete In Process June `99
Individual
Loan
Customers Complete Complete Basis Ongoing
The Company has approved a budget for $600,000 for the cost of hardware and
software remediation. A majority of these costs were planned expenditures to
upgrade existing hardware and software regardless of Y2K. Most of these funds
have been expended and will be amortized over the useful life of the asset.
As is shown in the table, the Company has completed a majority of the validation
phase of several critical areas. A Y2K contingency plan has been formulated. The
validation processes completed indicate that mission critical systems are Y2K
compliant. If the results of the validation processes not yet completed lead
management to believe otherwise, then a contingency plan, with a timetable will
be implemented for those additional areas.
Because of the potential negative effect of Y2K non-compliance by some of the
Bank customers, the Bank has implemented an external Y2K awareness campaign that
provides them with information that will assist them in becoming compliant.
Requests have been sent to larger commercial customers to provide the bank with
information as to their status of compliance.
Private Securities Litigation Reform Act ofadoption.
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 include, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, and other general economic conditions
Itemconditions.
ITEM 7 Financial Statements and Supplemental DataFINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Incorporated by reference to pages 30 through 49 of this report on Form 10-KSB.
Following are supplemental data tables of the Company:
TABLE 1 Years Ended December 31,RATE/VOLUME ANALYSIS
Average Balance Average Rate Interest Earned or Paid
1998 1997 1996 1998 1997 1996 1998 1997 1996
Interest Earning Assets:
39,3131999 1998 1997 1999 1998 1997 1999 1998 1997
Interest Earning Assets:
54,669 39,314 35,778 35,5105.93% 6.31% 6.52% 5.98% Taxable investment securities3,240 2,482 2,331
2,123securities
11,343 5,992 3,394 4,8625.91% 6.53% 6.33% 6.66% Tax-exempt investment securities 670 391 215
32466,012 45,306 39,172 40,3725.62% 6.34% 6.50% 6.06% Total investments 3,910 2,873 2,546
2,447
13
14
181,089 153,600 125,403 95,0428.74% 9.10% 9.25% 9.24% Loans 13,97615,821 13,975 11,597
8,7774,201 6,948 2,678 3,9576.86% 5.39% 5.29% 5.05%5.30% Federal funds sold & short term investments 288 375 142
200
4,46011,585 4,461 2,103 432.17% 5.15% 4.09% 4.65% Interest bearing deposits in banks 251 230 86
2262,887 210,315 169,356 139,4147.71% 8.30% 8.49% 8.20% TOTAL EARNING ASSETS20,270 17,453 14,371
11,426ASSETS
Interest Bearing Liabilities:
17,468 13,776 10,786 4,9331.08% 1.18% 1.40% 1.44% Interest bearing demand deposits 189 162 151
7162,869 47,645 34,960 30,0562.97% 3.19% 3.05% 3.05% Savings depositsdeposit 1,866 1,519 1,065
917125,920 102,083 80,557 62,0055.55% 5.77% 5.85% 5.79% Time deposits 6,994 5,888 4,715
3,590206,257 163,504 126,303 96,9944.39% 4.63% 4.70% 4.72% Total interest bearing deposits 9,049 7,569 5,931
4,57821,732 6,897 11,651 12,4112.97% 5.28% 5.25% 5.18% Short-term borrowings 646 364 612
6436,873 10,795 2,999 2,75414.71% 5.60% 5.90% 6.28% Long-term borrowings 604 177 1731,011 604 177
14
15
TABLE 1 RATE/VOLUME ANALYSIS (CONTINUED)
234,862 181,196 140,953 112,1594.56% 4.71% 4.77% 4.81% TOTAL INTEREST BEARINGBEARINGS LIABILITIES 10,706 8,538 6,720
5,3943.07% 3.59% 3.72% 3.39% INTEREST RATE
SPREAD
NET INTEREST
MARGIN/
3.64% 4.24% 4.52% 4.33% NET INTEREST INCOME9,565 8,915 7,651
6,032INCOME
1999 Compared to 1998 1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) due to Increase (Decrease) Duedue to
Rate/Volume Rate/Volume
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
Interest Earning Assets:
Interest Earning Assets:
Taxable investment securities(151) 969 (59) 759 (72) 230 (7) 151
191 16 1 208securities
Tax-exempt investment securities (37) 349 (33) 279 6 165 5 176
(16) (98) 5 (109)
Total investments (188) 1,318 (92) 1,038 (66) 395 (2) 327
175 (82) 6 99
Loans (557) 2,501 (100) 1,844 (189) 2,612 (45) 2,379 38 2,783 (2) 2,820
Federal funds sold & short term
investments 100 (148) (39) (87) 3 226 4 233 10 (65) (3) (58)
investments
Interest bearing deposits in banks (133) 367 (213) 21 22 97 25 143
(0) 96 (11) 84
TOTAL EARNING ASSETS (778) 4,038 (444) 2,816 (230) 3,330 (18) 3,082 222 2,732 (10) 2,945
Interest Bearing Liabilities:
Interest bearing demand deposits (13) 44 (4) 27 (24) 42 (7) 11
(2) 84 (3) 80
Savings deposits (106) 486 (34) 346 50 386 18 454
(1) 150 (0) 148
Time deposits (220) 1,375 (51) 1,104 (69) 1,260 (18) 1,173
39 1,074 12 1,125
Total interest bearing deposits (339) 1,905 (89) 1,477 (43) 1,688 (7) 1,638
36 1,308 9 1,353
Short-term borrowings (159) 783 (342) 282 2 (250) (1) (248)
9 (39) (1) (31)
Long-term borrowings 983 (220) (357) 406 (9) 460 (24) 427
(10) 15 (1) 4
14
15
TOTAL INTEREST BEARING
LIABILITIES 485 2,468 (788) 2,165 (50) 1,899 (32) 1,817
35 1,284 8 1,326
NET INTEREST MARGIN (1,263) 1,570 344 651 (180) 1,431 14 1,265 188 1,448 (18) 1,618
TABLE15
16
Table 2
ANALYSIS OF LOAN PORTFOLIO
1999 1998 1997
(in thousands) December 31,
1998 1997 1996
Percent% of Percent% of Percent% of
Amount Total Amount Total Amount Total
Real estate-mortgage 136,943 71.80% 130,924 72.58% 83,398 60.98%
55,475 56.33%
Real estate-construction 2,047 1.07% 3,535 1.96% 3,956 2.89%
1,343 1.36%
Real estate-held-for-sale 540 0.28% 4,362 2.42% 1,024 0.75%
240
Consumer 29,224 15.32% 26,532 14.71% 25,006 18.28%
19,586 19.89%
Commercial 23,965 12.57% 17,131 9.50% 25,333 18.52%
23,023 23.38%
Gross loans 192,719 101.05% 182,484 101.16% 138,717 101.42%
99,667 100.96%
Unearned income 0 0.00% (180) (0.10%)-0.10% (420) 0.00% -- 0.00%-0.31%
Allowance for loan loss (1,996) -1.05% (1,915) (1.06%)-1.06% (1,523) (1.11%) (1,186) (1.20%)-1.11%
Net loans 190,723 100.00% 180,389 100.00% 136,774 100.00% 98,481 99.76%
ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY
Percent of Percent of Percent of
Gross of Gross ofLoans Gross Loans byGross Loans
Amount by Loans by
Amount Category Amount by Category Amount by Category
Real estate-mortgage 677 33.92% 705 36.81% 545 35.78% 540 45.53%
Real estate-construction 0 0.00% 0 0.00% 0 0.00%
Consumer 578 28.96% 644 33.63% 353 23.18%
173 14.59%
Commercial 741 37.12% 566 29.56% 625 41.04%
473 39.88%
Commercial paperPaper 0 0.00% 0 0.00% 0 0.00%
Total 1,996 100.00% 1,915 100.00% 1,523 100.00% 1,186 100.00%
SUMMARY OF LOAN LOSS EXPERIENCE
December 31,
1999 1998 1997 1996 1996
Allowance for loan losses, beginning 1,915 1,523 1,186 929
Amounts associated with acquisition 0 452 321
Amounts associated with sale 24 0 0
Amounts charged-off:
Real estate-mortgage 94 1 110
0
Consumer 314 180 104
98
Commercial 0 214 1
11Total Charge-offs 408 395 215
1516
1617
Table 2 (Continued)
Total charge-offs 395 215 109
Recoveries on amounts previously charged-off:charge-off:
Real estate-mortgage 5 0 2
0
Consumer 44 13 17
40
Commercial 0 7 20
181
Total recoveries 49 20 39
221
Net charge-offs 359 375 176 (112)
Provision charged to expense 464 315 192 145
Allowance for loan losses, ending 1,996 1,915 1,523 1,186
NON-PERFORMING LOANS AT PERIOD END
Impaired loans 1,4791,984 2,389 325
445
Non-accrual 565 857 610 443
Past due 90 days or more and still accruing 529 240 143 252
Total non-performing loans 2,5763,078 3,486 1,078 1,140
RATIOS
Allowance for loan loss to period-end loans 1.04% 1.08% 1.11% 1.19%
Net charge-offs to average loans 0.20% 0.24% 0.14% (0.12%)
Recoveries to charge-offs 12.01% 5.06% 18.14% 202.75%
Non-performing loans to gross loans 1.60% 1.41% 0.78% 1.14%
EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized 35 33 34 30
Income that would have been recognized in 73 76 78 52
accordance with the original loan terms
TABLE17
18
Table 3
OTHER INCOME AND EXPENSE
Years Ended December 31,1999 1998 1997
1996(in thousands) % of % of % of
Average Average Average
(in thousands)
Amount Assets Amount Assets Amount Assets
Non-interest expense 10,098 3.52% 7,757 3.37% 5,909 3.23%
4,214 2.83%
Non-interest income 2,806 0.98% 2,499 1.09% 1,536 0.84%
1,006 0.68%
Net non-interest expense 7,292 2.54% 5,258 2.28% 4,373 2.39% 3,208 2.15%
TABLETable 4
Three-Year Comparison of Average Balance Sheets
Years Ended December 31,
1999 1998 1997 1996
Percent of Percent of Percent of
(in thousands) Amount Total Amount Total Amount Total
ASSETS:
Federal funds sold
and short term investments 4,201 1.47% 6,948 3.02% 2,678 1.46%
Interest bearing deposits
in banks 11,585 4.04% 4,461 1.94% 2,103 1.15%
Taxable investment securities
securities 54,669 19.07% 39,314 17.10% 35,793 19.55%
Tax-exempt investment
securities 11,343 3.96% 5,992 2.61% 3,394 1.85%
Loans, net of unearned
income 181,089 63.18% 153,600 66.82% 124,008 67.74%
Total earning assets 262,887 91.72% 210,315 91.49% 167,976 91.76%
Cash and due from banks 5,256 1.83% 7,988 3.47% 6,426 3.51%
Bank premises and equipment 7,065 2.46% 5,544 2.41% 4,305 2.35%
Other non-earning assets 11,460 4.00% 6,039 2.63% 4,361 2.38%
Total non-earning assets 23,781 8.30% 19,571 8.51% 15,092 8.24%
TOTAL ASSETS 286,668 100.00% 229,886 100.00% 183,068 100.00%
LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
Interest bearing demand 17,468 6.09% 13,776 5.99% 10,786 5.89%
Savings accounts 62,869 21.93% 47,645 20.73% 34,960 19.10%
Time deposits 125,920 43.93% 102,083 44.41% 80,557 44.00%
Total interest bearing
deposits 206,257 71.96% 163,504 71.12% 126,303 68.99%
1618
1719
Table 4 (Continued)
Federal funds sold
and short term investments 6,948 3.02% 2,678 1.46% 3,957 2.66%
Interest bearing deposits
in banks 4,460 1.94% 2,103 1.15% 43 0.03%
Taxable investment securities
securities 39,313 17.10% 35,793 19.55% 35,475 23.85%
Tax-exempt investment
securities 5,992 2.61% 3,394 1.85% 4,862 3.27%
Loans, net of unearned
income 153,600 66.82% 124,008 67.74% 94,034 63.23%
Total earning assets 210,315 91.49% 167,976 91.76% 138,371 93.04%
Cash and due from banks 7,988 3.47% 6,426 3.51% 5,196 3.49%
Bank premises and equipment 5,544 2.41% 4,305 2.35% 3,463 2.33%
Other non-earning assets 6,039 2.63% 4,361 2.38% 1,685 1.13%
Total non-earning assets 19,572 8.51% 15,092 8.24% 10,344 6.96%
TOTAL ASSETS 229,886 100.00% 183,068 100.00% 148,715 100.00%
LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
Interest bearing demand 13,776 5.99% 10,786 5.89% 4,933 3.32%
Savings accounts 47,645 20.73% 34,960 19.10% 30,056 20.21%
Time deposits 102,083 44.41% 80,557 44.00% 62,005 41.69%
Total interest bearing
deposits 163,504 71.12% 126,303 68.99% 96,994 65.22%
Short-term borrowings 21,732 7.58% 6,897 3.00% 11,651 6.36%
12,411 8.35%
Long-term borrowings 6,873 2.40% 10,795 4.70% 2,999 1.64%
2,754 1.85%
Total interest bearing
liabilities 234,862 81.94% 181,196 78.82% 140,953 76.99%
112,159 75.42%
Non-interest bearing deposits 25,538 8.91% 21,941 9.54% 16,510 9.02%
13,725 9.23%
Other liabilities 2,394 0.84% 3,252 1.41% 2,902 1.59%
957 0.64%
Total liabilities 262,794 91.68% 206,389 89.78% 160,365 87.60%
126,841 85.29%
Stockholders' Equity/Capital 23,874 8.33% 23,497 10.22% 22,703 12.40%
21,874 14.71%
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITYSTOCKHOLDERS EQUITY/CAPITAL 286,668 100.00% 229,886 100.00% 183,068 100.00% 148,715 100.00%
TABLETable 5
INVESTMENT SECURITIES
December 31,
1999 1998 1997 1996
Available-for-Sale
US Treasury 504246 503 1,252 2,758
US Government Agency 27,51142,745 27,060 7,389 6,727
Tax-exempt obligations 163155 162 0 0
17
18
Other securities 10,2975,925 3,257 847 1,217
Total market value of
investment securities 38,47549,071 30,982 9,488 10,702
Held-to-Maturity
US Treasury 2,000 5,058 10,191 11,403
US Government Agency 5,225 8,895 13,900
9,341
Tax-exempt obligations 12,471 8,135 4,341 3,118
Other securities 0 0 488 1,003
Total book value of
investment securities 19,696 22,088 28,920 24,865
Total market value of
investment securities 19,373 21,896 29,073
24,939
Total Securities 60,56368,767 53,070 38,408 35,567
19
20
TABLE 6
MATURITY OF INVESTMENT SECURITIES
December 31, 1998
Within After One but After Five butAfter
One Year but Within Five Yearsbut Within Ten Years
AfterFive Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
Amount
Available-for-Sale
US Treasury 504 6.06%246 6.07% 0 0.00% 0 0.00% 0 0.00%
US Government Agency 1,294 5.54% 31,744 6.12% 6,042 6.65% 3,665 6.19%
Tax-exempt obligations 0 0.00% 0 0.00% 0 0.00% 0 US Government Agency 3,453 5.47% 12,138 5.74% 2,048 6.25% 9,872 6.21% 0
Tax-exempt obligations0.00%
Other securities 502 6.35% 3,517 5.88% 0 0.00% 161 5.93% 0 0.00% 0 0.00% 0
Other securities 7,193 5.54% 1,010 5.92% 0 0.00% 0 0.00% 2,0942,061 6.16%
Total 11,150 5.54% 13,309 5.75% 2,048 6.25% 9,872 6.21% 2,0942,042 5.80% 35,261 6.10% 6,042 6.65% 5,726 6.18%
Held-to-Maturity
US Treasury 2,992 7.57% 2,0052,000 6.03% 0 0.00% 0 0.00% 0 0.00%
US Government Agency 0 0.00% 500 5.38% 502501 5.80% 7,872 6.95% 0418 5.80% 4,307 6.12%
Tax-exempt obligations 235 4.70% 5,567 4.22% 2,223 4.38%715 4.44% 7,810 4.17% 3,945 4.31% 0 0.00% 0
Other securities 0 0.00% 0 0.00% 0 0.00% 0 0.00%
0
Total 3,227 7.36% 8,072 4.74% 2,725 4.64% 7,872 6.95% 02,715 5.61% 8,311 4.27% 4,363 4.45% 4,307 6.12%
Grand Total 14,377 5.95% 21,381 5.37% 4,773 5.33% 17,744 6.54% 2,094
No Fixed
Maturity
Yield Amount Yield
Available-for-Sale
US Treasury 0.00% 504 6.06%
US Government Agency 0.00% 27,511 5.91%
Tax-exempt obligations 0.00% 161 5.93%
Other securities 5.83% 10,297 5.63%
Total 5.83% 38,473 5.84%
Held-to-Maturity
US Treasury 0.00% 4,997 6.95%
US Government Agency 0.00% 8,874 6.79%
Tax-exempt obligations 0.00% 8,025 4.28%
Other securities 0.00% 0 0.00%
Total 0.00% 21,896 5.91%
Grand Total 5.83% 60,368 5.86%4,757 5.69% 43,572 5.75% 10,405 5.73% 10,033 6.15%
TABLETable 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31,1998
18
1931,1999
Greater than
(in thousands) Time Remaining to Maturity one year
After one Fixed Floating
Due Within but Within After Five Interest Interest
One Year Five Years Years Total Rate Rate
Real estate-mortgage 38,268 52,697 23,076 114,041 68,530 7,24342,847 67,116 26,981 136,944 57,632 36,465
Real estate-construction 3,886 451,790 257 0 3,931 452,047 257 0
Consumer 12,300 15,155 122 27,577 15,106 17110,665 17,996 563 29,224 17,423 1,136
Commercial 25,962 10,793 0 36,755 10,658 1358,683 12,601 2,681 23,965 12,399 2,883
Gross Loans 80,416 78,690 23,198 182,304 94,339 7,54963,985 97,970 30,225 192,180 87,711 40,484
TABLE20
21
Table 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID
Years Ended December 31,
1999 1998 1997
Average Percent of Average Average Percent of Average
(in thousands) Balance Total Rate Balance Total Rate
Non-interest bearing demand deposits25,538 11.02% -- 21,941 11.83% --
16,510 11.56% --deposits
Interest bearing demand deposits 17,468 7.54% 1.08% 13,776 7.43% 1.18%
10,786 7.55% 1.40%
Savings deposits 62,869 27.12% 2.95% 47,645 25.69% 3.19%
34,960 24.48% 3.05%
Time deposits 125,920 54.32% 5.56% 102,083 55.05% 5.77%
80,557 56.41% 5.85%
Total 231,795 100.00% 4.38% 185,445 100.00% 4.63% 142,813 100.00% 4.70%
Years Ended December 31,
19961997
Average Percent of Average
(in thousands) Balance Total Rate
Non-interest bearing demand 16,510 11.56% --
deposits 13,725 12.40% --
Interest bearing demand deposits 4,933 4.46% 1.44%10,786 7.55% 1.40%
Savings deposits 30,056 27.15%34,960 24.48% 3.05%
Time deposits 62,005 56.00% 5.79%80,557 56.41% 5.85%
Total 110,719142,813 100.00% 4.72%4.70%
TABLETable 9
MATURITY OF TIME DEPOSITSInterest Rate Risk Analysis
December 31, 1999
December 31, 1998
Time Remaining to Maturity
Due Within Four to Seven to After
(in thousands) 3 months 6 months 12 months 12 months Total
Three Months Six Months Twelve Months Twelve Months
Certificates of Deposit
Less than $100,000 23,361 13,134 27,318 46,573 110,38626,051 19,062 17,176 36,434 98,723
More than $100,000 5,174 2,631 3,016 6,649 17,47011,768 6,721 5,319 3,504 27,312
Total 28,535 15,765 30,334 53,222 127,85637,819 25,783 22,495 39,938 126,035
TABLE 10
Short-term BorrowingsBorrowing
1999 1998 1997
1996
Balance outstanding December 31,
Repurchase agreements 4,164 4,576 10,256 7,405
Fed funds purchased 4,400 0 0
FHLB Open line of credit 10,000 0 1,975
0
-------------------------------------------------------------------------------
18,564 4,576 12,231
7,405
===============================================================================
Weighted rate December 31,
Repurchase agreements 3.25% 4.51% 5.28% 5.01%
19
20
Fed funds purchased 4.00% 0.00% 5.96%
FHLB Open line of credit 4.74% 0.00% -------------------------------------0.00%
==========================================
4.23% 4.51% 5.39%
5.01%
===============================================================================
Maximum month-end outstanding balance
Repurchase agreementsagreement 10,121 11,387 17,038 17,202
Fed funds purchased 13,500 1,600 4,150
6,000FHLB Open line of credit 10,000 0 0
21
22
Table 10 (Continued)
1999 1998 1997
Year-to-date average amount outstanding
Repurchase agreements 3,734 6,411 1,087 11,970
Fed funds purchased 6,873 486 10,564 441
-------------------------------------FHLB Open line of credit 1,570 0 0
------------------------------------------
12,177 6,897 11,651 12,411
===============================================================================
Year-to-date average weighted rate
Repurchase agreements 4.93% 5.20% 5.25% 5.16%
Fed funds purchased 5.64% 6.34% 5.25%
5.71%
-------------------------------------FHLB Open line of credit 5.62% 0.00% 0.00%
------------------------------------------
5.41% 5.28% 5.25%
5.18%
===============================================================================
TABLETable 11
Interest Rate Risk Analysis
December 31, 1999
Two- Four- Seven- Ten- Over
December 31, 1998 One three six nine twelve oneOne
(in thous)thousands) Month months months months months year Total
- ----------------------------------------------------------------------------------------------------------------------------
Federal funds sold and short-term investments 15,335 15,335
Interest bearing deposits 8,190 8,190
Taxable investment securities 9,115 5,179 1,499 189 253 35,765 52,000
Tax-exempt investment
securities91 0 0 0 0 235 8,063 8,2980 91
Interest bearing deposits 4,616 0 0 0 0 0 4,616
Taxable investment securities 2,221 1,504 1,698 0 770 50,103 56,296
Tax-exempt investment securities 410 0 180 0 126 11,755 12,471
Loans 28,028 9,183 14,577 12,126 16,502 101,888 182,30412,838 18,602 20,398 12,487 15,262 113,132 192,719
Total interest-earning assets 60,668 14,362 16,076 12,315 16,990 145,716 266,127
Interest bearing demand deposits 18,427 18,427
Savings deposits 61,206 61,206
Time deposits 7,724 20,811 15,765 14,566 15,768 53,222 127,856
Repurchase agreements and fed
funds purchased 4,576 4,576
Long-term borrowings 800 16,323 17,123
Total interest-bearing liabilities 92,733 20,811 15,765 14,566 15,768 69,545 229,188
Net gap (32,065) (6,449) 311 (2,251) 1,222 76,171 36,939
Cumulative Gap (32,065) (38,514) (38,203) (40,454) (39,232) 36,939
% of total assets (11.00%) (13.21%) (13.11%) (13.88%) (13.46%) 12.67%20,176 20,106 22,276 12,487 16,158 174,990 266,193
TABLETable 12
Selected Equity Ratios
1999 1998 1997 Regulatory
Ratio Ratio Requirement
Equity as a percent of assets 7.89% 10.22% 12.40% N/A
20
21
Core capital as a percent of risk based assets 9.52% 8.36% 17.43% 4.00%
Total capital as a percent of risk based assets 10.61% 9.31% 18.67% 8.00%
Leverage ratio 6.10% 6.00% 11.79% 3.00%
TABLETable 13
Selected Financial Ratios
1999 1998 1997 1996 1995 1994
Return on average assets 8.70%0.39% 0.87% 1.07% 1.16% 1.05% 0.70%
Return on average equity 4.64% 8.33% 8.61% 7.85% 7.06% 4.63%
Average equity to average assets 7.43% 10.22% 12.40% 14.54% 13.62%
14.10%
Dividend payout ratio 100.18% 53.41% 50.00% 50.67% 46.88%
65.57%
Interest rate spread 2.98% 3.59% 3.72% 3.39% 3.39%
3.38%
Net interest margin 3.06% 4.24% 4.52% 4.33% 4.27% 4.19%
Net non-interest expense to assets 3.42% 2.29% 2.38% 2.15% 2.86%
3.15%
Efficiency ratio 83.02% 68.82% 64.76% 60.76% 64.13% 73.67%
Allowance for loan losses to total loans at end of period1.04% 1.08% 1.11% 1.19% 0.98%
0.91%period
2122
2223
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
THE REGISTRANT; COMPLIANCE WITH SECTION 16(a)16(A) OF THE EXCHANGE
ACT
(a)a) Directors of the registrant. The information that will appear
under "Election of Directors" in the definitive Proxy Statement to
be prepared and filed for the Company's Annual Meeting of
Stockholders on May 19, 199917, 2000 is incorporated herein by this
reference.
(b)b) Executive officers of the Registrant. The information presented in
Item I of this report is incorporated herein by this reference.
ITEM 10 EXECUTIVE COMPENSATION
The information that will appear under "Director and Executive
Compensation" in the definitive Proxy Statement to be prepared and
filed for the Company's Annual Meeting of Stockholders on May 19, 199917, 2000
is incorporated herein by this reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information that will appear under "Beneficial Ownership of
Securities" in the definitive Proxy Statement to be prepared and filed
for the Company's Annual Meeting of Stockholders on May 19, 199917, 2000 is
incorporated herein by this reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information that will appear under "Certain Transactions with
Management and Others" in the definitive Proxy Statement to be prepared
and filed for the Company's Annual Meeting of Stockholders on May 19, 1999 in17,
2000 is incorporated herein by this reference.
ITEM 13 EXHIBITS AND REPORTS FORM 8-K
(a)a) Documents Filed:
1 and 2. Financial Statements. See the following "Index to Financial
Statements," which is incorporated herein by this reference.
3.3 Exhibits. See "Exhibit Index" which is incorporated herein by
this reference.
(b)b) Reports On Form 8-K:
There were no reports filed on Form 8-K during the fourth quarter
of 1998.
221999.
23
2324
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1998.30, 2000.
Blackhawk Bancorp, Inc.
By /s/ James P. Kelley
--------------------------------------------------------------------
James P. Kelley
Executive Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on.on March 30, 2000.
Principal Executive Officer and Director:
Director, President and /s/ Dennis MM. Conerton
Chief Executive Officer ----------------------------------------------------------------------
Dennis M. Conerton, President and Chief
Executive Officer
Principal Financial Officer, Accounting
Officer and Director: /s/ Jesse LL. Calkins
----------------------------------------------------
Jesse L. Calkins,
Senior Vice President
Treasurer and Chief Financial Officer
Directors:
/s/ John B. Clark /s/ James P. Kelley
- ----------------- -------------------
John B. Clark James P. Kelley
/s/ H. Daniel Green /s/ Fred Klett
- ------------------- --------------
Dr. H. Daniel Green Fred Klett
/s/ Charles Hart /s/ George Merchant
- ---------------- -------------------
Charles Hart George Merchant
/s/ Kenneth A Hendricks /s/ Roger Taylor
- ----------------------- ------------------------------------
Kenneth A. Hendricks Roger Taylor
23
24
Blackhawk Bancorp, Inc.
Index To Financial Statements And Financial Statement Schedules
The following Consolidated Financial Statements of the Blackhawk Bancorp, Inc.
are located in Item 7 of this 10-KSB. 10-KSB page as indicated:
Annual
Report Pages
Report of Independent Public Accountants....................................16
Consolidated Balance Sheets - December 31, 1997
and 1996..................................................................17
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995..........................................18
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995.........................19-20
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995...................................21-22
Notes to the Consolidated Financial Statements.............................23-45
24
25
Blackhawk Bancorp, Inc.
Exhibit Index To
19961999 Annual Report on Form 10-KSB
Filed
Exhibit Incorporated Herein Here-
Page
Number Description By Reference To: with Page No.
- ------ ----------- ---------------- ---- -----------
3.1 Amended and Restated Exhibit 3.1 to
Articles of Incorporation Amendment No. 1 to Registration
of Blackhawk Bancorp, Inc. Registration Statement on Form S-1(Reg. No.
33.32351)
3.2 By-Laws of Blackhawk Exhibit 3.2 to Amendment No. 1
Bancorp, Inc., as to Registration Statement on Form
amended. Form S-1
3.3 Amendments to By-Laws Exhibit 3.3 to 1994 Form 10-KSB dated
of Blackhawk Bancorp, dated March 29, 1995
Inc., as amended.
3.4 Amendments to By-Laws of Exhibit 3.4 to 1994 Form 10-KSB dated
Blackhawk Bancorp, Inc., as dated March 29, 1995.
amended.
4.1 Sections 15 and 19 of Plan Exhibit 1.2 to Amendment No. 1
of Conversion of Beloit to Registration Statement on
Savings Bank, as amended Form-1 (No. 33-32351) filed on March
5, 1990.
10.12 Blackhawk State Bank Exhibit 10.12 to 1996 Form 10-KSB,
Officer Bonus Plan, as 10-KSB, dated March 28, 1997
amended
10.2 Written description of Plan Proxy Statement for its Annual
for Life Insurance of Meeting of Stockholders, on May 8,
Blackhawk State Bank 8, 1991, dated April 4, 1991
10.3 Blackhawk Bancorp, Inc. Exhibit 10.3 to 1990 Form 10-K,
Employee Stock Ownership dated March 31, 1990
Plan
10.31 Amendment to Blackhawk Exhibit 10.31 to 1994 Form 10-KSB,
Bancorp, Inc. Employee 10-KSB, dated March 29, 1995
Stock Ownership Plan
10.4 Blackhawk Bancorp, Inc. Exhibit 10.4 to Amendment No. 1
Employee Stock Ownership 1 to Registration Statement Form
Trust Form S-1 (No. 33-32351)
25
26
Filed
Exhibit Incorporated Herein Here-
Page
Number Description By Reference To: with Page No.
- ------ ----------- ---------------- ---- -----------
10.5 Blackhawk Bancorp, Inc. Exhibit 10.5 to Amendment No. 1
Directors' Stock Option Plan 1 to Registration Statement Form
S-1 (No. 33-32351)
10.6 Blackhawk Bancorp, Inc. Exhibit 10.6 to Registration
Executive Stock Option Plan Statement Form S-1 (No. 33-32351)
10.7 Form of Severance Payment Exhibit 10.8 to Amendment No. 1
Agreement entered into 1 to Registration Statement Form
between Blackhawk State Form S-1 (No. 33-32351)
Bank and Messrs. Calkins,
Kelley and Rusch
10.71 Form of Severance Payment Exhibit 10.8 to 1994 Form 10-KSB,
Agreement entered into dated March 29, 1995
between Blackhawk State
Bank and Mr. Conerton
10.8 Blackhawk Bancorp, Inc. Exhibit 10.9 to 1994 Form 10-KSB,
Directors' Stock Option Plan dated March 29, 1995
10.9 Blackhawk Bancorp, Inc. Proxy Statement for its Annual
Executive Stock Option Plan Meeting of Stockholders on May 13,
1998, dated April 2, 1998
13 1999 Annual Report To Proxy Statement for its Annual
Stockholders Meeting of Stockholders on May 13, 1998,17,
2000, dated April 2, 1998
227, 2000
21 Subsidiaries of X
Registrant
23 Proxy Statement for its22 Proxy Statement for its
Annual Annual Meeting of Meeting of
Stockholders on May Stockholders on May 19, 1999 13, 1998, dated April 2, 199817, 2000
27 Financial Data Schedule X
26
27
BLACKHAWK BANCORP, INC.
Index To Financial Statements And Financial Statement Schedules
The following Consolidated Financial Statements of the Blackhawk Bancorp, Inc.
are located in Item 7 of this 10-KSB. 10-KSB page as indicated:
Annual
Report Pages
-------------
Report of Independent Public Accountants.................................30
Consolidated Balance Sheets - December 31, 1999
and 1998 ..............................................................31
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 ......................................32
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997.......................33
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 ................................34
Notes to the Consolidated Financial Statements...........................36-49
27
28
BLACKHAWK BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
1999
28
Index To Consolidated Financial Statements
Page
----
INDEPENDENT AUDITOR'S REPORT 3
FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Income 5
Consolidated Statements of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-22
2
29
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Blackhawk Bancorp, Inc.
Beloit, Wisconsin
We have audited the accompanying consolidated balance sheetsheets of Blackhawk
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
yearyears then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.audits. The consolidated financial statements
of Blackhawk Bancorp, Inc. and Subsidiary as of and for each of the two years in
the periodyear ended December 31, 1997,
werewas audited by other auditors whose report dated February 20, 1998, expressed an
unqualified opinion on those statements.
We conducted our auditaudits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Blackhawk Bancorp, Inc. and Subsidiary at December 31, 1999 and 1998, and the
results of their operations and their cash flows for the yearyears then ended in
conformity with generally accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
January 21, 1999February 4, 2000
Green Bay, Wisconsin
329
30
BLACKHAWK BANCORP, INC. AND SUBSIDIARIESSUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 19981999 AND 19971998
1999 1998 1997
---- ----
ASSETS
ASSETS $ 15,973,000 $ 8,680,000
Cash and cash equivalents 15,335,000 8,889,000$ 11,994,000 $ 9,598,000
Interest-bearing deposit accounts 4,616,000 6,375,000
Federal Funds sold and other short-term investments 91,000 22,828,000
Securities:
Available-for-sale 38,475,000 9,488,00049,071,000 30,982,000
Held-to-maturity, fair value of $19,373,000 in 1999 and $20,088,000 in 1998 19,696,000 21,896,000 28,920,000
Loans held for sale 540,000 4,362,000 1,024,000
Loans, net of allowance for loan losses of $1,996,000 in 1999 and $1,915,000 in 1998 and $1,523,000 in 1997190,184,000 176,027,000
135,750,0001998
Bank premises and equipment, net 7,065,000 7,483,000 4,353,000
Accrued interest receivable 2,028,000 1,908,000
1,467,000
Other intangibleIntangible assets 7,511,000 8,152,000 1,850,000
Other assets 2,888,000 1,857,000
1,555,000
---------------- ------------------------------- ---------------
Total Assets $ 295,684,000 $ 291,468,000
$ 201,976,000
================ =============================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 30,552,000 $ 33,110,000
$ 19,572,000
Interest Bearingbearing 203,573,000 208,285,000
139,479,000
---------------- ------------------------------- ---------------
Total Depositsdeposits 234,125,000 241,395,000
159,051,000
---------------- ------------------------------- ---------------
Borrowed funds:
Short-term borrowings 18,564,000 4,576,000 12,231,000
Long-term borrowings 16,803,000 17,123,000
4,850,000
---------------- ------------------------------- ---------------
Total Borrowed Fundsborrowed funds 35,367,000 21,699,000
17,081,000
---------------- ------------------------------- ---------------
Accrued interest payable 1,030,000 1,046,000 892,000
Other liabilities 1,837,000 2,928,000
1,817,000
---------------- ------------------------------- ---------------
Total Liabilities 272,359,000 267,068,000
178,841,000
---------------- ------------------------------- ---------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value per share; authorized
1,000,000 shares; issued, none - -
Common stock, $.01 par value per share; authorized
10,000,000 shares; issued 2,324,673 in 1999 and 2,313,373 in 1998 and 2,296,414 in 1997 23,000 23,000
Additional paid in capital 7,178,000 7,099,000 7,002,000
Employee stock options earned 129,000 130,000 131,000
Retained earnings 16,973,000 16,975,000
16,045,000
LessTreasury stock, 10,324 and 9,278 shares, of treasury stock, at cost at December 31, 1998 and 1997, respectively (120,000) (104,000)(120,000)
Accumulated other comprehensive income (deficit) (858,000) 293,000
38,000
---------------- -------------------------------
Total Shareholders' Equity 23,325,000 24,400,000
23,135,000
---------------- ------------------------------- ---------------
Total Liabilities and Shareholders' Equity $ 295,684,000 $ 291,468,000
$ 201,976,000
============== ============================= ===============
See Notes to Consolidated Financial Statements
430
31
BLACKHAWK BANCORP, INC. AND SUBSIDIARIESSUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 1997 AND 19961997
1999 1998 1997 1996
---- ---- ----
Interest Income:
Interest and fees on loans $ 15,817,000 $ 13,975,000 $ 11,597,000 $ 8,777,000
Interest on securities:
Taxable 3,240,000 2,482,000 2,433,000 2,123,000
Exempt from federal income taxes 467,000 265,000 152,000 221,000
Interest on federal funds sold and other short-term investments 604,000 126,000 202,000
--------------- ---------------288,000 363,000 41,000
Interest on interest-bearing deposits 251,000 241,000 85,000
------------- ------------- --------------
Total interest income 20,063,000 17,326,000 14,308,000
11,323,000
--------------- --------------- ------------- ------------- --------------
Interest Expense:
Interest on deposits 9,049,000 7,569,000 5,931,000 4,578,000
Interest on short-term borrowings 646,000 364,000 612,000 643,000
Interest on long-term borrowings 1,011,000 621,000 177,000
173,000
--------------- --------------- ------------- ------------- --------------
Total interest expense 10,706,000 8,554,000 6,720,000
5,394,000
--------------- ----------------------------- ------------- --------------
Net interest income 9,357,000 8,772,000 7,588,000 5,929,000
Provision for loan losses 464,000 315,000 192,000
145,000
--------------- --------------- ------------- ------------- --------------
Net interest income after provision for loan losses 8,893,000 8,457,000 7,396,000
5,784,000
--------------- --------------- ------------- ------------- --------------
Other Operating Income:
Trust department income 201,000 168,000 122,000
Service charges and fees 1,096,000on deposit accounts 1,294,000 1,095,000 897,000 569,000
Loan servicing fees 286,000 95,000 -
Gain on sale of mortgage loans 443,000 65,000 75,000414,000 620,000 103,000
Brokerage and annuity commissions 338,000 228,000 100,000
Trust department income 150,000 201,000 168,000
Loan servicing fees 146,000 70,000 57,000
Gain on sales of securities 69,000 - -
Other income 473,000 311,000 240,000
--------------- ---------------395,000 285,000 211,000
------------- ------------- --------------
Total other operating income 2,806,000 2,499,000 1,536,000
1,006,000
--------------- --------------- ------------- ------------- --------------
Other Operating Expenses:
Salaries and wages 3,352,0003,924,000 3,272,000 2,436,000 1,768,000
Employee benefits 648,000887,000 730,000 631,000 437,000
Occupancy expense, net 588,000681,000 590,000 426,000 309,000
Furniture and equipment 804,000 522,000 329,000
350,000
Data processing 764,000 542,000 445,000
320,000
Professional fees 169,000236,000 174,000 342,000 199,000
Advertising and marketing 284,000 171,000 139,000 113,000
Amortization of intangible assets 604,000 358,000 137,000 -
Other operating expenses 1,407,0001,914,000 1,398,000 1,024,000
718,000
--------------- ---------------- ------------- ------------- --------------
Total other operating expenses 10,098,000 7,757,000 5,909,000
4,214,000
--------------- ---------------- ------------- ------------- --------------
Income before income taxes 1,601,000 3,199,000 3,023,000 2,576,000
Provision for income taxes 494,000 1,189,000 1,067,000
848,000
--------------- --------------- ------------- ------------- --------------
Net Income $ 1,107,000 $ 2,010,000 $ 1,956,000
$ 1,728,000
=============== ================ ============= ============= ==============
Basic Earnings Per Share $ .880.48 $ .860.88 $ .76
=============== ===============0.86
============= ============= =============
Diluted Earnings Per Share $ .830.46 $ .820.83 $ .73
=============== ===============0.82
============= ============= =============
Dividends Per Share $ .470.48 $ .430.47 $ .38
=============== ===============0.43
============= ============= =============
See Notes to Consolidated Financial Statements.
5Statements
31
32
BLACKHAWK BANCORP, INC. AND SUBSIDIARIESSUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 1997 AND 19961997
Additional
Common Paid inIn Stock Retained Treasury
Stock Capital Options Earnings Stock
----- ------- ------- -------- -----
Balance December 31, 19951996 $ 23,000 $6,946,000 $ 52,000 $14,210,0006,960,000 $ -95,000 $15,072,000 $ (84,000)
Net Income 1,728,0001,956,000
Other comprehensive income
Total comprehensive income
Principal payments on ESOP loan
Cash dividends declared on common stock $.38 per (866,000)
share(983,000)
Purchase of stock for treasury, 7,5781,700 shares at
(84,000)
$11.13$11.69 per share Other comprehensive (loss)(20,000)
Compensatory employee stock options:
Recognized 43,00036,000
Exercised or expired 14,000
--------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 23,000 6,960,000 95,000 15,072,000 (84,000)
NET INCOME 1,956,000
PRINCIPAL PAYMENTS ON ESOP LOAN
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.43 PER (983,000)
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,700 SHARES AT (20,000)
$11.69 PER SHARE
Other comprehensive income
COMPENSATORY EMPLOYEE STOCK OPTIONS:
RECOGNIZED 36,000
EXERCISED OR EXPIRED 42,000
--------- ---------- ---------- ---------- --------------------- --------- ----------- ---------
Balance December 31, 1997 23,000 7,002,000 131,000 16,045,000 (104,000)
NET INCOMENet Income 2,010,000
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.47 PER (1,080,000)
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,046 SHARES AT (16,000)
$15.00 PER SHARE
Other comprehensive income
COMPENSATORY EMPLOYEE STOCK OPTIONS:
EXERCISED OR EXPIREDTotal comprehensive income
Cash dividends declared on common stock (1,080,000)
Purchase of stock for treasury, 1,046 shares at
$15.00 per share (16,000)
Exercise of non-compensatory stock options 97,000
Compensatory employee stock options:
Recognized (1,000)
--------- ----------- ---------- ------- ---------- --------------------- ---------
Balance December 31, 1998 23,000 7,099,000 130,000 16,975,000 (120,000)
Net Income 1,107,000
Other comprehensive loss
Total comprehensive loss
Cash dividends declared on common stock (1,109,000)
Exercise of non-compensatory stock options 78,000
Compensatory employee stock options:
Exercised or expired 1,000 (1,000)
--------- ----------- ---------- ----------- ---------
Balance December 31, 1999 $ 23,000 $7,099,000 $ 130,000 $16,975,0007,178,000 $ 129,000 $16,973,000 $(120,000)
========= ========== ===================== ========= =========== ==========
Accumulated
Other
Comprehensive
Income (Deficit) Other Total
---------------- ----- -----
Balance December 31, 19951996 $ 37,000 $(79,000) $21,189,000(11,000) $ (26,000) $22,029,000
Net Income 1,728,0001,956,000
Other comprehensive income 49,000 49,000
-----------
Total comprehensive income 2,005,000
Principal payments on ESOP loan 53,000 53,00026,000 26,000
Cash dividends declared on common stock $.38 per (866,000)
share(983,000)
Purchase of stock for treasury, 7,5781,700 shares at (84,000)
$11.13(20,000)
$11.69 per share
Other comprehensive (loss) (48,000) (48,000)
Compensatory employee stock options:
Recognized 43,00036,000
Exercised or expired 14,000
---------- --------- -----------
Balance, December 31, 1996 (11,000) (26,000) 22,029,000
NET INCOME 1,956,000
PRINCIPAL PAYMENTS ON ESOP LOAN 26,000 26,000
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.43 PER (983,000)
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,700 SHARES AT (20,000)
$11.69 PER SHARE
Other comprehensive income 49,000 49,000
COMPENSATORY EMPLOYEE STOCK OPTIONS:
RECOGNIZED 36,000
EXERCISED OR EXPIRED 42,000
------------------------- --------- -----------
Balance December 31, 1997 38,000 - 23,135,000
NET INCOMENet Income 2,010,000
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.47 PER (1,080,000)
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,046 SHARES AT (16,000)
$15.00 PER SHARE
Other comprehensive income 255,000 255,000
COMPENSATORY EMPLOYEE STOCK OPTIONS:
EXERCISED OR EXPIRED 96,000
---------------------
Total comprehensive income 2,265,000
Cash dividends declared on common stock (1,080,000)
Purchase of stock for treasury, 1,046 shares at (16,000)
$15.00 per share
Exercise of non-compensatory stock options 97,000
Compensatory employee stock options:
Recognized (1,000)
--------------- --------- ------------
Balance December 31, 1998 293,000 - 24,400,000
Net Income 1,107,000
Other comprehensive loss (1,151,000) (1,151,000)
------------
Total comprehensive loss (44,000)
Cash dividends declared on common stock (1,109,000)
Exercise of non-compensatory stock options 78,000
Compensatory employee stock options:
Exercised or expired -
--------------- --------- -----------
Balance December 31, 19981999 $ 293,000(858,000) $ - $24,400,000
==========$23,325,000
================ ========= ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6See Notes to Consolidated Financial Statements
32
33
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TOSUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 (CONTINUED)AND 1997
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997 1996
---- ---- ----
Net Income $ 1,107,000 $ 2,010,000 $ 1,956,000 $ 1,728,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Compensatory employee stock options recognized - (1,000) 36,000 43,000
Provision for loan losses 464,000 315,000 192,000 145,000
Provision for depreciation and amortization 1,337,000 791,000 476,000 333,000
Amortization of premiums and (accretion of
discounts) on
Investment securities, net 67,000 (92,000) (112,000)
(80,000)
investmentGain on sale of loans held for sale (414,000) (443,000) (65,000)
Gain on sale of finance subsidiary loan portfolio (144,000) - -
Gain on sale of securities net
Gainavailable for sale (69,000) - -
Loss on sale of property and equipment -- -- (3,000)
Gain on sale of loans (443,000) (65,000) (75,000)23,000 - -
Loans originated for sale (23,999,000) (34,938,000) (11,372,000)
(5,329,000)
Proceeds from the sale of loans held for sale 28,004,000 30,127,000 10,654,000 5,164,000
Change in assets and liabilities:
Decrease(Increase) decrease in accrued interest receivable (120,000) 62,000 2,000 176,000
(Increase) decrease in other assets (45,000) (845,000) 565,000
(183,000)
Increase(Decrease) increase in accrued interest and other liabilities (1,092,000) 209,000 34,000
179,000
------------ ------------ -------------------------- ------------- -------------
Net cash provided by (used in) operating activities 5,119,000 (2,805,000) 2,366,000
2,098,000
------------ ------------ ------------------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in federal funds sold,
interest-bearing deposits and other short-term investments, net 24,496,000 (4,796,000) (4,212,000)
Proceeds from maturities and calls of Securities
available-for-sale 7,998,000 22,798,000 7,824,000
Proceeds from maturities and calls of Securities held-to-maturity 8,840,000 13,248,000 20,723,000
Purchases of securities available-for-sale (25,513,000) (28,892,000) (6,242,000)
Purchases of securities held-to-maturity (9,055,000) (4,831,000) (21,139,000)
Proceeds from the sale of securities available-for-sale 229,000 - -
Net cash used in acquisitions - (7,140,000) (444,000)
Proceeds from the sale of finance subsidiary loan
portfolio 1,383,000 - -
Loans originated, net of principal collected (15,860,000) 5,499,000 (1,077,000)
Proceeds from sale of property and equipment -- -- 12,000
Proceeds from maturity of securities available-for-sale
22,798,000 7,824,000 22,484,000
Proceeds from maturity of securities held-to-maturity
13,248,000 20,723,000 11,815,000
Purchase of securities available-for-sale (28,892,000) (6,242,000) (21,628,000)
Purchase of securities held-to-maturity (4,831,000) (21,139,000) (10,873,000)
Net cash used in acquisitions (7,140,000) (444,000) --
(Increase) decrease in federal funds sold and other
short-term investments, net (4,212,000)
1,579,000 7,057,000
Loans originated, net of principal collected (1,077,000) (4,598,000)
5,499,00052,000 - -
Purchase of bank premises and equipment (660,000) (848,000) (298,000)
(73,000)
------------ ------------ -------------------------- -------------- --------------
Net cash provided by (used in)used in investing activities 1,413,000(8,090,000) (4,962,000) (4,865,000)
4,196,000
------------ ------------ -------------------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase (decrease) in deposits (7,270,000) 7,066,000 (3,253,000) (1,406,000) 7,066,000
Net increase (decrease) in short-term borrowings 13,988,000 (7,655,000) 4,826,000 (2,275,000)
Proceeds from long-term borrowings 3,500,000 10,400,000 3,500,000 --
Payments on long-term borrowings (3,820,000) (127,000) (900,000)
(1,300,000)
Dividends paid (1,109,000) (1,080,000) (983,000) (866,000)
Proceeds from issuance of common stock 78,000 97,000 42,000 14,000
Purchase of common stock for treasury - (16,000) (20,000)
(84,000)
------------ ------------ ------------------------- -------------- --------------
Net cash provided by (used in) financing activities 5,367,000 8,685,000 3,212,000
(5,917,000)
------------ ------------ ------------------------- ------------- -------------
Increase in cash and cash equivalents 7,293,0002,396,000 918,000 713,000 377,000
Cash and cash equivalents:
Beginning 9,598,000 8,680,000 7,967,000
7,590,000
------------ ------------ ------------------------- ------------- -------------
Ending $ 15,973,00011,994,000 $ 9,598,000 $ 8,680,000
$ 7,967,000
============ ============ ========================= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 10,722,000 $ 8,849,000 $ 7,264,000
$ 5,407,000
Income taxes 742,000 1,016,000 341,000 878,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
Financing activitiesFINANCING ACTIVITIES
Other assets acquired in settlement of loans 874,000 637,000 292,000 226,000
Principal payments on ESOP Loan --loan - - 26,000 53,000
Purchase of net assets
Fair value of non cash assets - 83,258,000 45,595,000
Liabilities assumed - 78,335,000 45,451,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
733
See Notes to Consolidated Financial Statements
34
BLACKHAWK BANCORP, INC. AND SUBSIDIARIESSUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements conform to
generally accepted accounting principles and to general
practices within the banking industry. The following is a
description of the more significant accounting policies:
NATURE OF BANKING ACTIVITIES:
The Company provides a variety of banking services to
individuals and businesses through its eleven facilities in
Beloit, Wisconsin and Belvidere, Rockford, Roscoe, Oregon and
Rochelle, Illinois. Its primary deposit products are demand
deposits, savings, and certificates of deposit and its primary
lending products are commercial, real estate mortgage and
installment loans.
As of December 31, 1999 and 1998, 71% and 1997, 74% and 71% , respectively,
of the gross loan portfolio consisted of real estate loans on
real estate located in Southcentral Wisconsin and Northcentral
Illinois. Generally, these loans are expected to be repaid
from the cash flows of the borrowers and are collateralized by
the related property. Credit losses arising from real estate
lending transactions compare favorably with Blackhawk's credit
loss experience on its loan portfolio as a whole. However,
adverse changes in the local economy would have a direct
impact on the credit risk in the loan portfolio.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of Blackhawk Bancorp, Inc. and its wholly owned
subsidiary, Blackhawk State Bank (Blackhawk) and Blackhawk's
wholly owned subsidiaries Nevahawk Investment, Inc., and RSL,
Inc., Midland
Acceptance Corporation, and First Financial Services, Inc. RSL, Inc. includes
the accounts of its wholly owned subsidiary Midland Acceptance
Corporation. All significant intercompany transactions and
accounts have been eliminated in consolidation.
On September 1, 1998, the Company acquired for cash all of the
outstanding shares of First Financial Bancorp, Inc. and its
wholly-owned subsidiaries. The total acquisition cost was
$12,690,000. The excess of the total acquisition cost over the
fair value of the net assets acquired of $2,951,000 is being
amortized over 20 years by the straight-line method. The
acquisition has been accounted for as a purchase and the
results of operations of First Financial since the date of
acquisition are included in the Consolidated Financial
Statements. The assets of First Financial were subsequently
merged into the Company.
The unaudited proforma effect of the transaction had it
occurred prior to 1997 is as follows: (dollars in thousands,
except per share information)
1998 1997
---- ----
Net interest income:
Blackhawk Bancorp, Inc. $ 8,772 $ 7,588
First Financial Bancorp, Inc. 1,253 1,997
------------ ---------------------- ----------
Total $ 10,025 $ 9,585
============ ====================== ==========
Net income:
Blackhawk Bancorp, Inc. $ 2,010 $ 1,956
First Financial Bancorp, Inc. $ (530) $ (613)
------------ ---------------------- ----------
Total $ 1,480 $ 1,343
============ ====================== ==========
Basic Earnings per share:
Blackhawk Bancorp, Inc. $ .880.88 $ .860.86
First Financial Bancorp, Inc. (.24) (.27)
------------ ------------(0.24) (0.27)
---------- ----------
Total $ .640.64 $ .59
============ ============0.59
========== ==========
Diluted earnings per share:
Blackhawk Bancorp, Inc. $ .830.83 $ .820.82
First Financial Bancorp, Inc. (.22) (.26)
------------ ------------(0.22) (0.26)
---------- ----------
Total $ .610.61 $ .56
============ ============0.56
========== ==========
On April 30, 1997, the Company acquired for cash all of the
outstanding shares of Rochelle Bancorp, Inc. and its wholly-owned
subsidiaries. The total acquisition cost was $4,319,000. The excess
of the total acquisition cost over the fair value of the net assets
acquired of $1,934,000 is being amortized over 10 to 20 years by the
straight-line method. The acquisition has been accounted for as a
purchase and the results of operations of Rochelle since the date of
acquisition are included in the consolidated financial statements.
The assets of Rochelle Bancorp, Inc. were subsequently merged into
the Company.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
8
35
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,RECLASSIFICATIONS:
Certain reclassifications have been made to the 1998 (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)and 1997
historical financial statements to conform to the 1999
presentation.
STATEMENTS OF CASH FLOWS:
For the purpose of reporting cash flows, cash and cash
equivalents includes cash on hand and amounts due from banks
(including cash items in process of clearing). Cash flows from
interest-bearing deposits, federal funds sold, and other
short-term investments with an original maturity of less than
three months and loans, deposits, and short-term borrowings with
an original maturity of less than three months,
are reported net under general practices within the banking
industry.
34
35
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AVAILABLE-FOR-SALE:
Securities classified as available-for-sale are those debt
securities that the Company intends to hold for an indefinite
period but not necessarily to maturity. Any decision to sell a
security classified as available-for-sale would be based on
various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized
holding gains and losses on securities available-for-sale are
reported as accumulated other comprehensive income within
shareholders' equity until realized. Realized gains or losses,
determined on the basis of the cost of specific securities
sold, are included in earnings.
SECURITIES HELD-TO-MATURITY:
Securities classified as held-to-maturity are those debt
securities the Company has both the intent and ability to hold
to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization
of premium and accretion of discount, computed by the interest
method over their contractual lives.
LOANS:
Loans are stated at unpaid principal balances, less the
allowance for loan losses and net of deferred loan fees.
Loan origination fees exceeding related costs are deferred and
amortized over the contractual life of the loan as a yield
adjustment.
Mortgage loans held for sale are recorded at the lower of cost
or fair market value. Gains and losses on the sale of mortgage
loans are included in other non-interest income.
The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to
meet payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent
it is received in cash.
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral
values (or the present value of estimated cash flows). Because
of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan
portfolio and the related allowance may change materially in
the near term. The allowance is increased by a provision for
loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the
provision for loan losses.
SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING:
The Company sells first mortgage loans with yield rates to the
buyer based upon the current market rates, which may differ
from the contractual rate on the loans sold. At the time that
loans are sold, a gain or loss is recorded which reflects the
difference between the assumed cash flow to be generated by
the contractual interest rates of the loans sold and the
assumed cash flow resulting from the yield to be paid to the
purchaser, adjusted for servicing and discounted to reflect
present value. Loan servicing fees are recognized over the
lives of the related loans. Real estate loans serviced for
others are not included in the accompanying balance sheets.
MORTGAGE SERVICING RIGHTS:
The Company capitalizes the estimated value of mortgage
servicing rights through the origination and sale of mortgage
loans. When the originated mortgage loans are sold or
securitized into the secondary market, the Company allocates
the total cost of the mortgage loans between mortgage
servicing rights and the loans, based on their relative fair
values. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing
revenues. Mortgage servicing rights 9
36
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE SERVICING RIGHTS (CONTINUED)
are periodically evaluated
for impairment. For purposes of measuring impairment, the
servicing rights are stratified into pools based on one or
more predominant risk characteristics of the underlying loans
including loan type, interest rate and term. Impairment
represents the excess of carrying value of a stratified pool
over its fair value, and is recognized through a valuation
allowance. The fair value of each servicing rights pool is
evaluated based on the present value of estimated future cash
flows using a discount rate commensurate with the risk
associated with that pool, given current market conditions.
Estimates of fair value include assumptions about prepayment
speeds, interest rates, and other factors, which are subject
to change over time. Changes in these underlying assumptions
could cause the fair value of mortgage servicing rights, and
the related valuation allowance, to change significantly in
the future.
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally
on a straight-line basis over the estimated useful life of
each asset. Expenditures for maintenance and repairs are
reflected as expense when incurred. Gains or losses andon
disposition of premises and equipment are reflected in income.
35
36
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE:
Other real estate is carried in other assets at the lower of
cost or fair value less estimated disposal costs. When the
property is acquired through foreclosure, any excess of the
related loan balance over market value is charged to the
allowance for loan losses. It is Blackhawk's policy to account
for collateral that has been substantively repossessed in the
same manner as collateral that has been formally repossessed.
Subsequent write-downs or losses upon sale are charged to
other operating expense.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Bank enters into sales of securities under agreements to
repurchase (reverse-repurchase agreements). Reverse-repurchase
agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the
balance sheets. The securities underlying the agreements
remain in the asset accounts.
PENSION PLAN:
Blackhawk has a defined-contribution plan which covers substantially
all full-time employees. Costs of the plan are based on
participants' eligibility and compensation and pension expense is
recorded as benefits are earned.
TRUST ASSETS:
Assets held in a fiduciary or agency capacity are not included
in the consolidated financial statements as they are not
assets of Blackhawk.
INCOME TAXES:
The Company, Blackhawk and Blackhawk's subsidiaries file a
consolidated federal income tax return and separate state
income tax returns.
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE DATA:
The per share data is based on the weighted average number of
common stock and common stock equivalents outstanding during
each year.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other
comprehensive income.income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on securities available
for sale which are recognized as a separate component of
equity, accumulated other comprehensive income (deficit).
10
37
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging
activities. This statement requires an entity to recognize all
derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the
resulting designation. This statement is effective for fiscal
years beginning after June 15, 1999.2000. 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.
NOTE 2. FUTURE ACCOUNTING CHANGES
Effective January 1,1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which was issued in June 1997. In
accordance with this statement, the Company reports those items
defined as comprehensive incomeRESTRICTIONS ON CASH AND CASH EQUIVALENT
Cash and cash equivalents in the statementamount of changes in
stockholders' equity. The adoption$500,000 were
restricted at December 31, 1999 and 1998, to meet the reserve
requirements of SFAS No. 130 did not have an
impact on the Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information," which was issued in June 1997. This statement
establishes new standards for reporting information about operating
segments in annual and interim financial statements. The standard
also requires descriptive information about the way operating
segments are determined, the products and services provided by the
segments, and the nature of differences between reportable segment
measurements and those used for the consolidated enterprise. The
disclosure requirements had no impact on the Company's financial
position or results of operations.Federal Reserve System.
NOTE 3. SECURITIES
Debt securities have been classified in the balance sheets
according to management's intent as either available for sale
or held-to-maturity. The carrying amount of securities and
their approximateestimated fair values at December 31, is as follows:
36
37
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 3. SECURITIES (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES:
1999
Gross Gross Unrealized Estimated
Amortized Cost Unrealized Gains (Losses) Fair Value
-------------- ---------------- -------- ----------
U.S. Treasury Securities $ 250,000 $ - $ (4,000) $ 246,000
U.S. Government Agencies 36,664,000 - (1,128,000) 35,536,000
Mortgage-backed securities 7,372,000 13,000 (176,000) 7,209,000
Obligations of states and political
subdivisions 155,000 - - 155,000
Corporate Securities 3,999,000 - (135,000) 3,864,000
Mutual funds and equity securities 2,001,000 71,000 (11,000) 2,061,000
------------- ----------- -------- -------------
Total $ 50,441,000 $ 84,000 $(1,454,000) $ 49,071,000
============= =========== ============ =============
1998
----
Gross Unrealized Gross Unrealized Estimated
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
U.S. Treasury Securities $ 500,000 $ 4,0003,000 $ --- $ 504,000503,000
U.S. Government Agencies 27,294,000 264,000 (47,000) 27,511,00017,456,000 197,000 (13,000) 17,640,000
Mortgage-backed securities 9,395,000 58,000 (33,000) 9,420,000
Obligations of states and political
subdivisions 161,000160,000 2,000 -- 163,000
Other- 162,000
Corporate Securities 10,212,000 90,000960,000 12,000 - 972,000
Mutual funds and equity securities 2,205,000 85,000 (5,000) 10,297,000
------------ ------------ ------------ ------------2,285,000
------------- ----------- ------------- -------------
Total $ 38,167,00030,676,000 $ 360,000357,000 $ (52,000)(51,000) $ 38,475,000
============ ============ ============ ============30,982,000
============= =========== ============= =============
1997
----HELD-TO-MATURITY SECURITIES:
1999
Gross Unrealized Gross Unrealized Estimated
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
U.S. Treasury Securities $ 1,251,0002,000,000 $ 2,0003,000 $ --- $ 1,253,0002,003,000
U.S. Government Agencies 7,333,000 75,000 (20,000) 7,388,000
Other Securities 847,000 847,000
------------ ------------ ------------ ------------500,000 - (13,000) 487,000
Mortgage-backed securities 4,725,000 - (135,000) 4,590,000
Obligations of states and political
subdivisions 12,471,000 10,000 (188,000) 12,293,000
------------- ----------- ------------- -------------
Total $ 9,431,00019,696,000 $ 77,00013,000 $ (20,000)(336,000) $ 9,488,000
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES:19,373,000
============= =========== ============= =============
1998
----Gross Gross Unrealized Gross UnrealizedEstimated
Amortized Cost Unrealized Gains (Losses) Fair Value
-------------- --------------------- -------- ----------
U.S. Treasury Securities $ 4,997,000 $ 61,000 $ --- $ 5,058,000
U.S. Government Agencies 8,874,000 33,0003,849,000 5,000 - 3,854,000
Mortgage-backed securities 5,025,000 28,000 (12,000) 8,895,0005,041,000
Obligations of states and political
subdivisions 8,025,000 112,000 (2,000) 8,135,000
------------ ------------ ------------ ------------------------- ----------- ------------- -------------
Total $ 21,896,000 $ 206,000 $ (14,000) $ 22,088,000
============ ============ ============ ============
1997
----
Gross Unrealized Gross Unrealized
Amortized Cost Gains (Losses) Fair Value
-------------- ----- -------- ----------
U.S. Treasury Securities $ 10,191,000 $ 97,000 $ (2,000) $ 10,286,000
U.S. Government Agencies 13,900,000 81,000 (13,000) 13,968,000
Obligations of states and
Political subdivisions 4,340,000 23,000 (8,000) 4,355,000
Other Securities 489,000 489,000
------------ ------------ ------------ ------------
$ 28,920,000 $ 201,000 $ (23,000) $ 29,098,000
============ ============ ============ ========================= =========== ============= =============
11
38
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 3. SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of December 31,
1998,1999, by contractual maturity, are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid without
any penalties. Therefore, these securities are not included in the
maturity categories in the following maturity summary:
Available-For-Sale Held-to-Maturity
------------------ -------------------------------------------------- ----------------------------------
Estimated Estimated
Amortized Cost Fair Value Amortized Cost Fair Value
---------------- -------------- ---------- -------------- -------------------------- -------------
Due in one year or less $ 10,558,0001,502,000 $ 10,649,0001,494,000 $ 3,727,0002,715,000 $ 3,755,0002,719,000
Due after one year through five years 13,756,000 13,766,000 10,921,000 11,021,00035,143,000 34,061,000 8,311,000 8,212,000
Due after five years through ten years 2,001,000 2,094,000 2,223,000 2,271,0004,423,000 4,246,000 3,945,000 3,852,000
Mortgage-backed securities 9,838,000 9,872,000 5,025,000 5,041,000
Other Securities 2,014,000 2,094,0007,372,000 7,209,000 4,725,000 4,590,000
Mutual funds and equity securities 2,001,000 2,061,000 - -
------------- ----------- ------------- -------------- ---------------------------
Total $ 38,167,00050,441,000 $49,071,000 $ 38,475,00019,696,000 $ 21,896,000 $ 22,088,00019,373,000
============= ============== ============== ========================= ============= =============
Fair values of many securities are estimates based on financial
methods or prices paid for similar securities. It is possible
interest rates could change considerable resulting in a material
change in the estimated fair value.
Realized gains and losses on sales of securities
available-for-sale totaled $69,000 and $0, respectively in 1999.
There were no realized gains or losses on securities
available-for-sale for 1998 1997
and 1996.1997.
Investment securities with an amortized cost of $28,447,000 in
1999 and $19,941,000 in 1998 and a fair value of $27,697,000 in
37
38
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 3. SECURITIES (CONTINUED)
1999 and $20,059,000 in 1998, respectively, were pledged to
secure public deposits, short-term borrowings, and other purposes
required by law as of December 31, 1998.31.
NOTE 4. LOANS
The composition of the loan portfolio is as follows:
1999 1998 1997
---- ----
Real Estateestate - Mortgage $ 136,944,000 $ 130,924,000
$ 96,995,000
Real Estateestate - Construction 2,047,000 3,535,000
3,956,000
Consumer 29,224,000 26,532,000
25,086,000
Commercial 23,965,000 17,131,000 11,656,000
------------- -------------
Total loans $ 192,180,000 $ 178,122,000 $ 137,693,000
Less: Allowance for loan losses 1,996,000 1,915,000 1,523,000
Unearned Income - 180,000 420,000
------------- -------------
Loans, Netnet $ 176,027,000190,184,000 $ 135,750,000176,027,000
============= =============
NonperformingNon-performing loans includesinclude loans which have been categorized by
management as impaired and non-accruing because collection of
interest is not assured, non-accruing loans (not considered
impaired loans) and loans which are past-due ninety days or more
as to interest and/or principal payments. The following
summarizes information concerning nonperforming loans:
1999 1998 1997
---- ----
Impaired Loansloans $ 1,479,0001,984,000 $ 325,0002,389,000
Non-accruing Loansloans 565,000 857,000 664,000
Past due 90 days or more and still accruing 529,000 240,000
90,000
------------ ------------------------ -------------
Total Non-Performing Loansnon-performing loans $ 2,576,0003,078,000 $ 1,079,0003,486,000
============= ========================
The average balance of loans classified as impaired totaled
approximately $634,000$2,716,000 and $405,000$634,000 for the years ended
December 31, 19981999 and 1997,1998, respectively. The allowance for loan
losses related to impaired loans amounted to approximately $100,000$0
and $115,000$100,000 at December 31, 19981999 and 1997, respectively. Interest income on
impaired loans of $31,000 and $30,000 was recognized for cash
payments received in 1998, and 1997, respectively.
The Company has $0 and $133,000 inno commitments to loan additional funds to the
borrowers of nonperforming loans for the years ended December
31, 19981999 and 1997, respectively.
12
39
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 4. LOANS (CONTINUED)1998.
The effect on interest income of the non-accruing loans is as
follows:
1999 1998 1997 1996
---- ---- ----
Income recognized $ 35,000 $ 47,000 $ 31,000 $ 29,000
Income that would have been recognized in
accordance with the original loan terms 73,000 76,000 77,000 52,000
A summary of transactions in the allowance for loan losses is as
follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 1,915,000 $ 1,523,000 $ 1,186,000 $ 929,000
Acquired allowance for loan losses - 452,000 321,000
--
----------- ----------- ----------------------- ------------ ------------
Adjusted balance at beginning of year 1,915,000 1,975,000 1,507,000
929,000Allowance associated with finance subsidiary
loans sold (24,000) - -
Provision charged to expense 464,000 315,000 192,000
145,000
Loans charged-off (408,000) (395,000) (216,000)
(109,000)
Recoveries 49,000 20,000 40,000
221,000
----------- ----------- ----------------------- ------------ ------------
Balance at End of YearDecember 31 $ 1,996,000 $ 1,915,000 $ 1,523,000
$ 1,186,000
=========== =========== ======================= ============ ============
Loans are made, in the normal course of business, to directors,
executive officers, their immediate families and affiliated
companies in which they are a principal shareholder (commonly
referred to as related parties). The terms of these loans,
including interest rates and collateral, are similar to those
prevailing for comparable transactions and management believes
they do not involve more than a normal risk of collectibility.
Such direct and indirect loans are summarized as follows:
1999 1998 1997
---- ----
Balance at beginning of year $ 2,215,000 $ 1,910,000
Loans acquired -- 168,000
----------- -----------
Adjusted balance at beginning of year 2,215,000 2,077,000
New loans 4,299,000 4,909,000
Principal repayments (3,317,000) (4,771,000)
----------- -----------
Balance at End of Year $ 3,197,000 $ 2,215,000
=========== ===========New loans 3,488,000 5,386,000
Principal repayments, net of advances on existing loans (2,644,000) (4,404,000)
------------- -------------
Balance at December 31 $ 4,041,000 $ 3,197,000
============ ============
38
39
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 4. LOANS (CONTINUED)
In addition, the Company has loan commitments to the
aforementioned related parties of $3,303,000 and $2,754,000 as of
December 31, 1999 and $1,683,000 in 1998, and 1997, respectively.
NOTE 5. MORTGAGE SERVICING RIGHTS:
The unpaid principal balance of mortgage loans serviced for
others, which are not included on the consolidated balance
sheets, waswere $127,139,000 and $132,691,000 and $55,087,000 at December 31, 1999
and 1998, and 1997,
respectively. Management believes that the remaining bookThe carrying value of the mortgage
servicing rights is included with intangible assets and
approximates the fair market value at December 31, 19981999 and 1997.1998.
The following is an analysis of the activity for mortgage
servicing rights for the years ended December 31, 1998 and 1997 respectively:31.
1999 1998 1997
---- ----
Balance at beginning of year $ 545,0001,028,000 $ --545,000
Mortgage servicing rights acquired through business combinations - 257,000 227,000
Fair value of servicing rights acquired in purchases - 208,000 241,000
Additions of originated mortgage servicing rights 231,000 544,000
135,000
Amortization (201,000) (526,000) (58,000)
----------- -----------
Balance at end of year $ 1,028,0001,058,000 $ 545,0001,028,000
=========== ===========
NOTE 6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
1999 1998 1997
---- ----
Land and Improvements $ 1,079,0001,111,000 $ 395,0001,117,000
Buildings and Improvements 7,036,000 5,329,0007,085,000 7,152,000
Equipment 4,718,000 2,503,0004,755,000 4,472,000
Vehicles 211,000 192,000209,000 186,000
----------- -----------
13,044,000 8,419,00013,160,000 12,927,000
Less Accumulated Depreciation 5,561,000 4,066,000accumulated depreciation 6,095,000 5,444,000
----------- -----------
Bank Premises and Equipment, Netequipment, net $ 7,483,0007,065,000 $ 4,353,0007,483,000
=========== ===========
Depreciation charged to operating expenses was $733,000,
$433,000, $336,000,
and $333,000$336,000 for the years ended December 31, 1999,
1998 and 1997, and 1996,
respectively.
13
40
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 7. DEPOSITS
Deposit accounts at December 31 are summarized as follows:
1999 1998 1997
---- ----
Non-interest bearingNon-interest-bearing demand $ 33,110,00030,552,000 $ 19,572,00033,110,000
Interest-bearing demand deposits 17,323,000 18,427,000 14,555,000
Savings deposits 27,902,000 30,108,000
20,804,000
Money Marketmarket deposits 32,313,000 30,338,000 16,467,000
Time deposits 126,035,000 129,412,000 87,653,000
------------ ------------
Total deposits $234,125,000 $241,395,000
$159,051,000
============ =========================
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $27,312,000 and
$17,470,000 in 1999 and $9,078,000 in 1998, and 1997, respectively. Interest expense on
time deposits of $100,000 or more was approximately $1,263,000,
$724,000 $389,000
and $356,000$389,000 for the years ended December 31, 1999, 1998
1997 and 1996,1997, respectively.
At December 31, 1998,1999, the scheduled maturities of CDs are as
follows:
1999
2000 $ 74,634,000
2000 40,305,00086,097,000
2001 9,935,00028,340,000
2002 2,504,0008,012,000
2003 2,554,000
2004 and thereafter 478,0001,032,000
------------
$127,856,000Total certificates of deposit $126,035,000
============
NOTE 8. BORROWED FUNDS
A summary of borrowed funds is as follows:
1999 1998 1997
---- ----
Federal funds purchased $ 4,400,000 $ -
Federal Home Loan Bank of Chicago open line of credit 10,000,000 -
Securities sold under an agreement to repurchase 4,164,000 4,576,000
------------ ------------
Total short-term borrowings $ 18,564,000 $ 4,576,000
39
40
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 8. BORROWED FUNDS (CONTINUED)
Term Loan $ 7,673,0007,153,000 $ --7,673,000
Secured Advances from Federal Home Loan Bank of Chicago:
Fixed rate of 6.26%, due 6/16/98 -- 400,000
Fixed rate of 5.44%, due 1/10/99 800,000- 800,000
Fixed rate of 7.12%, due 4/17/00 150,000 150,000
Fixed rate of 5.80% due 8/28/00 2,000,000 -
Fixed rate of 5.71%, due 6/18/02 2,000,000 2,000,000
Fixed rate of 5.20%, due 12/11/02, callable 12/11/99 - 1,500,000
Fixed rate of 5.63% due 12/13/04, callable 12/13/00 1,500,000 -
Fixed rate of 4.70% due 1/15/08, callable 1/15/99 - 1,000,000 --
Fixed rate of 5.30% due 1/16/08, callable 1/16/03 4,000,000 --
Securities sold under an agreement to repurchase 4,576,000 10,256,000
Federal funds purchased -- 1,975,000
----------- -----------
$21,699,000 $17,081,000
=========== ===========4,000,000
------------ ------------
Total long-term borrowings $ 16,803,000 $ 17,123,000
Total borrowings $ 35,367,000 $ 21,699,000
============ ============
The scheduled principal maturities of borrowed funds at December
31, 19981999 are as follows:
19992000 $ 5,901,000
2000 710,00020,714,000
2001 599,000-
2002 4,139,0002,000,000
2003 5,350,000
After 2003 5,000,0007,153,000
2004 and thereafter 5,500,000
------------
Total borrowings $ 21,699,00035,367,000
============
The term loan consists of a $6,000,000$5,353,000 loan with a fixed interest
rate of 6.60% and a variable portion of $1,800,000 with a current
rate of 7.10%7.96%. The loan requires quarterly principal and interest
payments of $225,000 on the fixed portion and quarterly interest
only payments on the variable portion. The total loan matures
August 21, 2003. Collateral for this loan consists of the stock
of the Bank.
A covenant placed upon the Company includes limitations on
further mergers without consent of the lender. The lender could
also immediately call the loan if the Bank's aggregate
outstanding balance of classified assets exceeds 50% of primary
capital, if the Bank's tangible capital were less than 5% of
total tangible assets, if the Bank's non-performing assets were
greater than 25% of primary capital or if the total equity of the
Bank were less than $30 million.
AdvancesThe Federal Home Loan Bank Open Line of Credit is an overnight
line of credit with rates determined daily. At December 31, 1999,
the rate was 4.74% All advances from the Federal Home Loan Bank
of Chicago, both term and open line of credit, are collateralized
by substantially all one-to-four family real estate loans.
14
41
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)loans and
Federal Home Loan Bank stock.
NOTE 9. EMPLOYEE BENEFIT PLANS
PENSION PLAN:AND 401(K) PLANS:
Blackhawk hashad a noncontributory, defined contribution
money-purchase pension plan covering substantially all of its
employees.employees until January 1, 1999. Blackhawk contributes,contributed, on behalf
of the eligible employees, 4.2% of total annual compensation plus
4.2% of compensation in excess of $13,200. Effective January 1,
1999, Blackhawk amended and restated its pension plan to a
profit-sharing plan with a 401(k) provision. Rochelle and
Belvidere had existing profit-sharing plans, which meet the
qualifications of Section 401(k) of the Internal Revenue Code
(Code). Effective January 1, 1999 both of these plans were
amended and merged into Blackhawk's plan that went into effect
January 1, 1999. Under the amended plans, eligible employees are
allowed to make voluntary contributions to the plan. Blackhawk
makes a matching contribution of 25% of the first 6% of an
employee's compensation that they voluntarily contribute.
Additionally, Blackhawk may make a discretionary profit sharing
contribution. The total pension expense was $123,000, $104,000,expenses for these plans were $146,000,
$135,000 and $78,000,$114,000 for the years ended December 31, 1999, 1998
1997 and 1996,1997, respectively.
EXECUTIVE BONUS PLAN:
The Company has adopted a revised incentive bonus plan for
officers providing cash bonuses based upon the financial
performance of the Company and performance of the respective
officers. Bonus compensation expense was $32,000, $92,000 and
$127,000 $159,000 for the years 1999, 1998 1997 and 1996,1997, respectively.
STOCK OPTION PLANS:
The Company has reserved shares of common stock for issuance to
directors and key employees under incentive and non-qualified
stock option plans. Options are granted at prices equal to the
fair market value and 90% of the fair market value on the dates
of grant for directors and key employees, respectively, and are
exercisable in cumulative installments over a three year period.
Other pertinent information related to the plans is as follows:
40
41
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------1999 Price 1998 Price 1997 Price 1996 Price
---- ----- ---- ----- ---- -----
Shares under option,
beginning of year 295,576 $ 7.59 275,776 $ 7.02 262,235 $ 6.72
Granted during the year 60,850 15.00 31,350 11.40 16,300 11.20
Terminated and canceled
during the year (5,335) 11.38 (1,000) 11.25 (510) 5.85
Exercised during the year (16,959) 5.74 (10,550) 3.92 (2,249) 5.25
------- --------- -------- --------- ------- ---------
Shares under option,
end of year 334,132 $ 8.98 295,576 $ 7.59 275,776 $ 7.02
=======Granted during the year 25,500 13.75 60,850 15.00 31,350 11.40
Terminated and canceled
during the year (12,333) 13.73 (5,335) 11.38 (1,000) 11.25
Exercised during the year (11,300) 6.86 (16,959) 5.74 (10,550) 3.92
---------- ---------- --------- --------- --------- ---------
Shares under option,
end of year 335,999 9.24 334,132 $ 8.98 295,576 $ 7.59
========== ========== ========= ======== ========= ================= =========
Options exercisable,
end of year 252,281270,150 8.02 252,948 $ 7.32 217,592 $ 6.57
84,492 $ 5.73
================= ========== ========= ======== ========= ================= =========
Available to grant,
end of year 312,650 338,150 84,000
115,300
======== ======== ================== ========= =========
Weighted average fair
value of options granted
during the year $ 1.19 $ 1.34 $ 5.74
$ 4.58========== ========= =========
Compensation expense related to granting compensatory employee stock
options totaled $1,000,$0, ($1,000), and $36,000 in 1999, 1998 and $43,000 in 1998, 1997, and 1996,
respectively.
Outstanding Options Vested Options
------------------- --------------
Year of Outstanding Weighted Weighted
Expiration Shares Granted Average Price Shares Vested Average Price
---------- -------------- ------------- ------------- -------------
2000 4,200 $ 3.33 4,200 $ 3.33
2001 16,950 3.16 16,95014,150 3.50 14,150 3.16
2002 5,250 4.33 5,250 4.33
2003 93,249 5.26 93,24988,749 5.28 88,749 5.26
2004 7,350 6.83 7,350 6.83
2005 106,633 9.38 106,633106,300 9.37 106,300 9.37
2006 16,300 11.20 10,86616,300 11.20
2007 23,350 11.41 7,783 11.4115,350 11.43 10,233 11.43
2008 60,850 15.00 -- --
------- ------ ------- ------
334,13252,850 15.05 17,617 15.05
2009 25,500 13.75 - -
------------- --------- ----------- ----------
Total 335,999 $ 8.98 252,2819.24 270,150 $ 7.32
======= ====== ======= ======8.02
============= ========= =========== ==========
15
42
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its stock options.
Had compensation costs been determined on the basis of fair value pursuant
to FASB Statement No. 123, net income and earnings per share would have
been reduced as follows:
1999 1998 1997 1996
---- ---- ----
Net Income:
Net Income:
As reported $ 1,107,000 $ 2,010,000 $ 1,956,000
$ 1,728,000
Pro Forma $ 1,049,000 1,898,000 1,862,000 1,644,000
Earnings Per Share:
As reported:
Basic $ .880.48 $ .860.88 $ .730.86
============ ============ ============
Diluted $ .830.46 $ .810.83 $ .690.82
============ ============ ============
Pro Forma:
Basic $ .850.45 $ .820.85 $ .710.82
============ ============ ============
Diluted $ .800.43 $ .780.80 $ .670.78
============ ============ ============
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
1999 1998 1997 1996
---- ---- ----
Risk-free interest rate 5% 5% 5%
Expected Life 10 years 10 years 10 years
Expected Volatility 17% 17% 29% 3%
Expected Dividend Yield 3% 3% 3%
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has an Employee Stock Ownership Plan for the benefit of
employees who meet the eligibility requirements. The Plan was
established in 1990. The Plan holds 112,101held 77,530 shares of the Company's
common stock, as of December 31, 1999, in a trust established in
Blackhawk. The stock was acquired by the Plan by using the proceeds
from a loan obtained from a nonrelated commercial lender. The loan
was collateralized by the stock which hashad not been allocated to
individual participant accounts. In addition, the Company
quaranteedguaranteed this obligation. Cash payments to the Plan consist of
contributions and dividend payments, in
41
42
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
amounts sufficient for it to satisfy the debt service requirements.
Accordingly, the debt has been recorded in the accompanying
consolidated balance sheets together with the related deferred
compensation. The debt and deferred compensation are reduced as the
Plan makes principal payments.
The loan required principal payments of $13,000, plus interest each
quarter and was paid in full at December 31, 1997.
Cash payments to the Plan during the years ended December 31, 1999,
1998 1997 and 19961997 consisted of the following:
1999 1998 1997 1996
---- ---- ----
Contributions $ 36,000- $ 36,00027,000 $ 33,00024,000
Dividends 38,000 38,000 36,00038,000
---------- ---------- ---------
----------- -----------
74,000 74,000 69,000Total $ 38,000 $ 65,000 $ 62,000
========== ========== ========= =========== ===========
For financial statement purposes, expense for the Plan is
determined based on the percentage of shares allocated to
participants each period (allocations are based on principal and
interest payments) times the original amount of the debt plus the
interest incurred. The components of the amount charged to expense
for the years ended December 31, 1999, 1998 1997 and 19961997 are as
follows:
1999 1998 1997 1996
---- ---- ----
Compensation $ 36,000- $ 36,00027,000 $ 32,54524,000
-
Interest - - 5,022-
---------- ---------- ---------
----------Total $ 36,000- $ 36,00027,000 $ 37,56724,000
========== ========== ========= ==========
In accordance with the applicable federal income tax regulations,
Blackhawk is expected to honor the rights of certain participants
to diversify their vested account balances or to liquidate their
vested ownership of the stock in the event of employment
termination. The purchase price of the stock is based on the market
value. In addition, the deferred compensation recorded in
connection with the debt incurred by the Plan has been offset
against the stock.
401(K) PROFIT-SHARING PLAN:
Rochelle and Belvidere have profit-sharing plans which meets the
qualifications of Section 401(k) of the Internal Revenue Code
(Code). Under the Plan, employees 21 years of age or older with one
year of service and 1,000 hours of service during that period may
make pre-tax contributions up to applicable limits under the Code.
Employees are 100% vested in their contributions. Discretionary
employer contributions vest at a rate of 20% per year beginning on
the third year of service by an employee. Contributions totaling
$12,000 and $10,000 were made during the years ended December 31,
1998 and 1997, respectively.
16
43
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFERRED COMPENSATION PLAN:
In addition,As a result of acquisitions, Blackhawk assumed deferred
compensation agreements with certain officers of Rochelle.Rochelle and
Belvidere. Amounts are accumulated in an account from which
benefits will be paid to the officers at termination or retirement.
As of December 31, 19981999 and 19971998 deferred compensation liability
totaled $273,000$296,000 and 251,000,$273,000, respectively.
The agreements also provide for an acceleration of benefits upon
the deaths of these officers, payable to their beneficiaries.
RochelleBlackhawk has purchased life insurance policies on the lives of the
officers in order to fund the acceleration of benefits at death.
RochelleBlackhawk is owner and beneficiary of these policies which provide
for death benefits totaling $1,307,000 and $1,303,000$1,307,000 as of
December 31, 19981999 and 1997,1998, respectively. These policies have a
cash surrender value of $583,000$596,000 and $556,000$583,000 as of December 31,
19981999 and 1997,
respectively.1998.
NOTE 10. INCOME TAXES
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
Company's assets and liabilities. The major components of net
deferred tax assets at December 31 are as follows:
1999 1998 1997
---- ----
Deferred Tax Liabilities:
Property and Equipment $ (473,000)(444,000) $ (226,000)(473,000)
Unrealized gains on securities available-for-sale - (75,000) (19,000)
Purchase Accounting (410,000) (525,000) (575,000)
Mortgage Servicing Rights (303,000) (342,000)
(128,000)
Other (68,000) (89,000)
(74,000)
---------- ------------------------- -------------
Total Deferred Tax Liabilities (1,225,000) (1,504,000)
(1,022,000)
---------- ------------------------- -------------
Deferred Tax Assets:
Reserve for loan losses 756,000 706,000 451,000
Accrued liabilities 341,000 538,000 104,000
State net operating loss carryovers 40,000 58,000
Unrealized losses on securities available-for-sale 512,000 -
---------------------- ------------
Total Deferred Tax Assets 1,649,000 1,302,000
555,000
---------------------- ------------
Net Deferred Tax LiabilitiesAssets (Liabilities) $ 424,000 $ (202,000)
$ (467,000)
========== ============ =============
The provision for income taxes consists of the following:
42
43
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 10. INCOME TAXES (CONTINUED)
1999 1998 1997 1996
---- ---- ----
Current tax expense:
Current tax expense:
Federal $ 506,000 $ 989,000 $ 957,000
$ 779,000
State 27,000 225,000 129,000
95,000
------------- -------------- ----------------------- -------------
Total Current 533,000 1,214,000 1,086,000
874,000
------------- -------------- ----------------------- -------------
Deferred tax provision (credit):
Federal (38,000) 28,000 (13,000)
(15,000)
State (1,000) (53,000) (6,000)
(11,000)
-------------- -------------- ----------------------- -------------
Total Deferred (39,000) (25,000) (19,000)
(26,000)
-------------- -------------- ----------------------- -------------
Total provision for
income taxes $ 494,000 $ 1,189,000 $ 1,067,000
$ 848,000
============= ============== ======================= =============
A summary of the source of differences between income taxes at the
federal statutory rate and the provision for income taxes for the
years ended December 31 follows:
1999 1998 1997 1996
---- ---- ----
Tax expense at statutory rate $ 544,000 $ 1,088,000 $ 1,028,000 $ 876,000
Increase (decrease) in taxes resulting
from:
Tax exempt interest (166,000) (89,000) (59,000) (75,000)
State income taxes, net of federal
tax benefit 17,000 114,000 76,000
56,000
tax benefit
AmortizedAmortization of goodwill and other
intangibles 205,000 122,000 62,000
Other (106,000) (46,000) (40,000)
(9,000)
----------- ----------- ----------------------- ------------- ------------
Provision for income taxes $ 494,000 $ 1,189,000 $ 1,067,000
============ ============ ===========
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is shown in the statement of changes in
shareholders' equity. The Company's accumulated other
comprehensive income is comprised of the unrealized gain or loss
on securities available for sale. The following shows the activity
in accumulated other comprehensive income:
1999 1998 1997
---- ---- ----
Accumulated other comprehensive income
at beginning $ 848,000293,000 $ 38,000 $ (11,000)
------------ ------------ ------------
Activity:
Unrealized gain on securities
available for sale (1,607,000) 398,000 74,000
Tax impact 498,000 (143,000) (25,000)
------------ ------------- ------------
Net unrealized gain (loss) on securities
available for sale (1,151,000) 255,000 49,000
------------ ------------ -----------
Reclassification adjustment for
realized gains on securities
available-for-sale (69,000) - -
Tax impact 27,000 - -
------------ ------------ -----------
Net reclassification adjustment (42,000) - -
------------ ------------ ----------
Other comprehensive income (loss) (1,151,000) 255,000 49,000
------------ ------------ -----------
Accumulated other comprehensive income
(deficit) at end $ (858,000) $ 293,000 $ 38,000
============= ============ =========== =========== ==========
17
44
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with
off-balance-sheet risk, acquired in the normal course of business
to meet the financing needs of its customers. These financial
instruments include various commitments to extend credit and
standby letters of credit. These instruments involve, to a varying
degree, elements of credit risk in excess of the amount recognized
in the balance sheet. The contract amounts of these instruments
reflect the extent of involvement Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers. The Company holds collateral supporting those
commitments for which collateral is deemed necessary. Because
these instruments have fixed maturity dates and because many of them
expire without being drawn upon, they do not generally present any
significant liquidity risk to the Company.
43
44
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The Company frequently enters into loan sale commitments prior to
closing loans in order to limit interest rate risk for the period
of time between when a loan is committed and when it is sold.
These sale commitments are typically made on a loan by loan basis.
A summary of the amount of Company's exposure to credit loss for
loan commitments (unfunded loans and unused lines of credit) and
standby letters of credit outstanding at December 31, 19981999 and
19971998 was as follows:
1999 1998 1997
---- ----
Loan Commitments $ 40,213,00029,314,000 $ 20,883,00040,213,000
Standby Letters of Credit $ 161,000723,000 $ 583,000161,000
Commitments to Sell $ 6,675,000540,000 $ 1,459,0006,675,000
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Company upon extension of credit,
is based on management's credit evaluation. Collateral varies but
may include accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties and real estate.
NOTE 13. LEASE COMMITMENTS
The Bank leases two branch office locations in Beloit, Wisconsin
under leases expiring November 2014Wisconsin.
The first is currently month-to-month and the other expires in
July 2012.2002. The leases can be terminated everyrenewed for an additional five years, butyears.
Should the Bank not renew the leases, it could be liable for
remodeling or removal costs to the leased office spaces if the
leases are terminated before the 14th year of the agreements.agreements, 2010
and 2012, respectively. The lease that expired in November 1999
has been extended on a month-to-month basis with a 120-day notice
of termination by either party.
The Bank also leases an office in Roscoe, Illinois under aan
operating lease expiring in December 2002. The lease is subject to
inflationary adjustments after three years fromof occupancy. In
addition, the Bank is obligated to pay a portion of the real
estate taxes, insurance, and common area maintenance.
The Bank leases an administration office in Belvidere, Illinois
under a lease expiring in April 2000.
The total minimum rental commitment under the leases at December
31, 19981999 is as follows:
Year Ending December 31:
1999
2000 $ 95,000
2000 108,00079,000
2001 108,00065,000
2002 108,000
2003 and later 1,023,000
------------54,000
----------
Total $ 1,442,000
============198,000
==========
Total rent expense for the years ended December 31, 1999, 1998 and
1997 was $108,000, $92,000, and 1996 was $92,000, $49,000, and $36,000, respectively.
NOTE 14. EARNINGS PER SHARE
Basic earnings per share are arrived at by dividing net income
available to common shareholders by the weighted-average number of
common shares outstanding and do not include the impact of any
potentially dilutive common stock equivalents. The diluted
earnings per share calculation is arrived at by dividing net
income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options, and
any other common stock equivalents. The following table shows the
computation of the basic and diluted earnings per share:
18
45
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 14. EARNINGS PER SHARE (CONTINUED)
Income Share Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
For the Year Ended December 31, 19981999
Basic Earnings Per Share:Share $ 2,010,0001,107,000 2,309,345 $ 2,296,636 $ 0.88
================== 120,283 =============0.48
=============== =========
Effect of Dilutive Stock Options ----------------112,641
-------------
Diluted Earnings Per Share:Share $ 1,107,000 2,422,076 $ 0.46
=============== ============= =========
For the Year Ended December 31, 1998
Basic Earnings Per Share $ 2,010,000 2,296,636 $ 0.88
=============== =========
Effect of Dilutive Stock Options 120,283
-------------
Diluted Earnings Per Share $ 2,010,000 2,416,919 $ 0.83
================== =============================== ============= =========
For the Year Ended December 31, 1997
Basic Earnings Per Share:Share $ 1,956,000 $ 2,283,428 $ 0.86
================== 101,160 =============
----------------=============== =========
Effect of Dilutive Stock Options Diluted Earnings Per Share: $ 1,956,000 $ 2,384,588 $ 0.82
================== ================ =============
For the Year Ended December 31, 1996
Basic Earnings Per Share $ 1,728,000 $ 2,279,494 $ 0.76
================== 92,973 =============
----------------
Effect of Dilutive Stock Options101,160
-------------
Diluted Earnings Per Share $ 1,728,0001,956,000 2,384,588 $ 2,372,467 $ 0.73
================== ================0.82
=============== ============= =========
44
45
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 15. COMMON STOCK SPLIT
On June 15, 1996,SEGMENT INFORMATION
The Company, through the Company issuedbranch network of its subsidiary,
Blackhawk, provides a full range of consumer and commercial
banking services to individuals, businesses, and farms in
southern Wisconsin and northern Illinois. These services
include demand, time and savings deposits; safe deposit
services; credit cards; secured and unsecured consumer,
commercial, and real estate loans; ATM processing; cash
management; and trust services. While the 759,301 additional shares,
at $.01 per share par value, necessaryCompany's chief
decision makers monitor the revenue streams of the various
products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly,
all of the Company's banking operations are considered by
management to effect a 3 for 2 common
stock split.be aggregated in one reportable operating
segment.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. These fair value
disclosures are not intended to represent the market value of the
Company.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash, cash equivalents, interest-bearing deposit accounts and
federal funds sold: For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities: For securities, fair value equals quoted market price,
where available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
Loans receivable: The fair value of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities.
Deposits: The fair value of demand deposits and savings accounts
is the amount payable at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining
maturities.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Short-term and long-term borrowings: The carrying amounts of
variable-rate borrowings and notes payable approximate their fair
values. The fair value of fixed rate borrowings is estimated using
rates currently available for debt with similar terms and
remaining maturities.
Off-balance sheet financial instruments: The fair value of
off-balance sheet instruments was estimated based on the amount
the Company would pay to terminate the contracts or agreements,
using current rates and, when appropriate, the current
creditworthiness of the customer.
The estimated fair values of the Company's financial instruments
are as follows:
19
46
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
December 31, 19981999 December 31, 19971998
----------------- -----------------
Carrying Carrying
Amount Fair Value Amount Fair Value
(in thousands) (in thousands)------ ---------- ------ ----------
Financial Assets
Cash, and cash equivalents 15,973 15,973 8,680 8,680$ 11,994,000 $ 11,994,000 $ 9,598,000 $ 9,598,000
Interest-bearing deposit 4,616,000 4,616,000 6,375,000 6,375,000
accounts
Federal funds sold and other
short-termShort-term investments 15,335 15,335 8,889 8,88991,000 91,000 22,828,000 22,828,000
Securities 60,371 60,563 38,407 38,58668,767,000 68,444,000 52,572,000 53,072,000
Loans held for sale 540,000 540,000 4,362,000 4,362,000
Loans, net of allowance for
loanLoan losses 180,389 183,500 135,750 136,219190,184,000 190,723,000 176,027,000 179,138,000
Financial Liabilities and Other
off-balance sheet instruments:
Demand deposit and savings 112,157 112,157 71,402 71,402$108,090,000 $ 108,090,000 $ 112,157,000 $ 112,157,000
Time deposits 129,238 133,194 87,648 87,923126,035,000 125,633,000 129,238,000 133,194,000
Borrowings 21,699 21,396 17,081 17,114
Loan Commitments - - - -
Standby Letters of Credit - - - 635,367,000 35,293,000 21,699,000 21,396,000
Limitations: Fair value estimates are made at a specific point
in time based on relevant market information and information
about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular
instrument. Because no market exists for a significant portion
of the Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties
and matters that could affect the estimates. Fair value
estimates are based on existing on-and off-balance-sheet
financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
Deposits with no stated maturities are defined as having a
fair value equivalent to the amount payable on demand. This
prohibits adjusting fair value derived from retaining those
deposits for an expected future period of time. This
component, commonly referred to as a deposit base intangible,
is neither considered in the above amounts nor is it recorded
as an intangible asset on the balance sheet. Significant
assets and liabilities that are not considered financial
assets and liabilities include premises and equipment. In
addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in the
estimates. With respect to off-balance sheet instruments, the
amounts were deemed immaterial and therefore no fair values
are presented.
45
46
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 17. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material
effect on the Company and the Bank's financial statements. Under
capital adequacy guidelines and regulatory framework for prompt
corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total capital
and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and the Tier I capital (as
defined) to average assets (as defined). Management believes, as
of December 31, 1998,1999, that the Company and the Bank meet all
capital adequacy requirements to which it is subject.
As of December 31, 1998,1999, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believe have changed the Company and
the Bank's category.
The actual capital amounts and ratios as of December 31, 1998 are also
presented in the table (in thousand's)thousands).
20
47
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 17 REGULATORY MATTERS (CONTINUED)
To be Well Capitalized
Under prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
-------- ------------------- ---------------------
As of December 31, 1998:1999: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company
Total Capital (To Risk
Weighted Assets) $ 19,647 10.61% $ 14,819 8.0%
Tier I Capital (To Risk
Weighted Assets) 17,625 9.52% 7,410 4.0%
Tier I Capital (To
Average Assets) 17,625 6.10% 8,665 3.0%
Bank
Total Capital (To Risk
Weighted Assets) $ 26,476 14.25% $ 15,357 8.0% $ 19,196 10.0%
Tier I Capital (To Risk
Weighted Assets) 24,454 13.17% 7,678 4.0% 11,518 6.0%
Tier I Capital (To
Average Assets) 24,454 8.48% 11,572 4.0% 14,464 5.0%
As of December 31, 1998:
Company
Total Capital (To Risk
Weighted Assets) $ 18,746 9.31% $ 16,111 8.0%
Tier I Capital (To Risk
Weighted Assets) 16,830 8.36% 8,055 4.0%
Tier I Capital (To
Average Assets) 16,830 6.00% 8,744 3.0%
Bank
Total Capital (To Risk
Weighted Assets) $ 25,704 12.79% $ 16,075 8.0% $ 20,093 10.0%
Tier I Capital (To Risk
Weighted Assets) 23,788 11.84% 8,037 4.0% 12,056 6.0%
Tier I Capital (To
Average Assets) 23,788 8.50% 11,488 4.0% 14,360 5.0%
As of December 31, 1997:
Company
Total Capital (To Risk
Weighted Assets) $22,895 18.67% $9,811 8.0%
Tier I Capital (To Risk
Weighted Assets) 21,373 17.43% 4,905 4.0%
Tier I Capital (To
Average Assets) 21,373 11.79% 5,439 3.0%
Blackhawk - Beloit
Total Capital (To Risk
Weighted Assets) 19,253 18.22% 8,456 8.0% 10,570 10.0%
Tier I Capital (To Risk
Weighted Assets) 18,092 17.12% 4,22823,788 11.84% 8,037 4.0% 6,34212,056 6.0%
Tier I Capital (To
Average Assets) 18,092 12.43% 5,82223,788 8.50% 11,488 4.0% 7,277 5.0%
Blackhawk - Rochelle
Total Capital (To Risk
Weighted Assets) 2,932 8.48% 2,765 8.0% 3,456 10.0%
Tier I Capital (To Risk
Weighted Assets) 2,621 7.58% 1,382 4.0% 1,728 6.0%
Tier I Capital (To
Average Assets) 2,621 5.29% 1,982 4.0% 2,47914,360 5.0%
46
47
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 18. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED PARENT COMPANY BALANCE SHEETS:
1999 1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 37,000 $ 791,000
$ 136,000Short-term investments 5,000 -
Investment securities available-for-sale - 189,000
Investment in subsidiaries 30,154,000 31,212,000 22,411,000
Investment securities available-for-sale 189,000 -
Investment securities held-to-maturity - 110,000
Due from subsidiaries, net 231,000 105,000 697,000
Other assets 402,000 156,000
89,000
---------------- -------------------------- -----------
Total Assets $ 32,453,000 $ 23,443,000
================ ===============
21
48
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
NOTE 18. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
$30,829,000 $32,453,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other borrowings $ 7,673,0007,153,000 $ -7,673,000
Other liabilities 351,000 380,000
308,000
------------------ --------------------------- -----------
Total Liabilities 7,504,000 8,053,000
308,000
------------------ --------------------------- -----------
Shareholders' Equity:
Preferred Stock - -
Common Stock 23,000 23,000
Additional paid in capital 7,307,000 7,229,000 7,133,000
Retained earnings 16,973,000 16,975,000 16,045,000
Less treasury stock, at cost (120,000) (104,000)(120,000)
Accumulated other comprehensive income (858,000) 293,000
38,000
------------------ --------------------------- -----------
Total Shareholders' Equity 23,325,000 24,400,000
23,135,000
------------------ --------------------------- -----------
Total liabilities and shareholders' equity $ 32,453,000 $ 23,443,000
================== ================$30,829,000 $32,453,000
=========== ===========
CONDENSED PARENT COMPANY STATEMENTS OF INCOME:
1999 1998 1997
1996
------------ ------------ ---------------- ---- ----
Income:
Dividends from subsidiaries $ 1,450,000 $ 1,800,000 $ 1,750,000
$ 1,436,000Gain on sale of securities
available-for-sale 69,000 - -
Interest income 12,000 20,000 74,000
171,000
------------ ------------ ----------------------- -------------
Total Income 1,531,000 1,820,000 1,824,000
1,607,000
------------ ------------ ----------------------- -------------
Expenses:
Interest Expense 503,000 169,000 -- ---
Professional fees 47,000 46,000 27,000
33,000
Other 68,000 44,000 45,000 31,00044,000
------------ ------------ ----------------------- -------------
Total Expenses 618,000 259,000 72,000 64,00071,000
------------ ------------ ----------------------- -------------
Income before income tax benefits and equity
in undistributed net income of subsidiaries 913,000 1,561,000 1,752,000 1,543,0001,753,000
Income tax expense (benefits)benefit (201,000) (73,000) -- 10,000-
------------ ------------ ----------------------- -------------
Income before equity in undistributed net
income of Subsidiaries 1,114,000 1,634,000 1,752,000 1,533,0001,753,000
Equity in undistributed net income of
subsidiaries (7,000) 376,000 203,000
195,000
------------ ------------ ----------------------- -------------
Net Income $ 1,107,000 $ 2,010,000 $ 1,956,000
$ 1,728,000
============ ============ ============
=========== =============
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:
1999 1998 1997
1996
------------ ------------ ---------------- ---- ----
Cash Flows From Operating Activities
Net income $ 1,107,000 $ 2,010,000 $ 1,956,000 $ 1,728,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensatory employee stock options recognized - (1,000) 36,000 43,000
Amortization of intangible assets 38,000 28,000 13,000 --
Equity in undistributed net income of subsidiaries 7,000 (376,000) (203,000)
(195,000)
(Increase) decreaseGain on sale of available-for-sale securities (69,000) - -
Decrease in due from subsidiaries (126,000) 650,000 44,000 (170,000)
Accretion of discounts on investment securities,
net --- - (35,000) (46,000)
(Increase) decrease in other assets (300,000) (745,000) 39,000
(1,000)
Increase(Decrease) increase in other liabilities (29,000) 25,000 31,000
63,000
------------ ------------------------- ----------- ------------
Net cash provided by operating activities 628,000 1,591,000 1,881,000
1,422,000
------------------------
------------ ------------ ------------============ =========== ============
47
48
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS: (CONTINUED)
1999 1998 1997
---- ---- ----
Cash Flows From Investing Activities
Net increase in short-term investments (5,000) - -
Purchase of securities --- - (4,967,000) (5,334,000)
Proceeds from maturity of securities - 110,000 7,090,000
5,309,000Proceeds from the sales of securities 174,000 - -
Payments for investments in subsidiary - (12,636,000) -- (4,233,000)
Repayment of investments in subsidiaries - 4,915,000 -- ---
------------ ----------------------- ------------
Net cash used inprovided by (used in) investing
activities 169,000 (7,611,000) (2,111,000) (25,000)(2,110,000)
------------ ------------ -------------
Cash Flows From Financing Activities
Proceeds from long-term debt - 7,800,000 -- ---
Repayment of long-term debt (520,000) (127,000) -- ---
Dividends paid (1,109,000) (1,080,000) (983,000) (866,000) (1,080,000)
Proceeds from sale of common stock 78,000 98,000 42,000 14,000
Purchase of common stock for treasury - (16,000) (20,000)
(84,000)
------------ ------------ -------------------------
Net cash provided by (used in) financing
activities (1,551,000) 6,675,000 (961,000)
(936,000)
------------ ------------ ------------------------- ----------- -------------
Increase (decrease) in cash and cash equivalents (754,000) 655,000 (1,190,000) 461,000
Cash and Cash Equivalents:
Beginning 791,000 136,000 1,326,000
865,000
------------ ----------------------- ------------
Ending $ 37,000 $ 791,000 $ 136,000
$ 1,326,000
============ ======================= ============
2248