UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: November 21, 1996
(Earliest Event Reported)
BLACKHAWK BANCORP, INC.
WISCONSIN
0-18599 39-1659424
(Commission File No.) (I.R.S. Employer
Identification No.)
400 Broad Street
Beloit, WI 53511
(608) 364-8911
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a). Financial Statements of Business Acquired.
Consolidated Balance Sheets as of July 31, 1996 and 1995
Consolidated Statements of Income for the years ended July 31, 1996
and 1995
Consolidated Statements of Stockholder's Equity as of July 31, 1996
and 1995
Consolidated Statements of Cash Flows for the years ended July 31, 1996
and 1995
Notes to the Consolidated Financial Statements for the years ended
July 31,1996 and 1995
(b.) Pro Forma Financial Information
Pro Forma Combining Balance Sheet as of September 30, 1996
Pro Forma Combining Statement of Income for the Nine Months Ended
September 30, 1996
Pro Forma Combining Statement of Income for the year ended December
31, 1995
Notes to Pro Forma Combining Balance Sheet and Combing Statements of
Income
On November 5, 1996, Blackhawk Bancorp, Inc. ("Company") and Rochelle
Bancorp, Inc ("Rochelle") entered into an agreement where the Company agrees
to purchase each of the 554,875 outstanding shares of Rochelle for $7.52 per
share, or $4,172,660. Rochelle is the parent company of Rochelle Savings and
Loan Association ("Savings"). Savings wholly-owns RSL, Inc. which is a 50%
owner of Midland Financial Corporation ("MFC") which wholly-owns Midland
Acceptance Corporation ("MAC"). Subsequent to the agreement, Savings
converted to a state-chartered savings bank.
As part of the purchase, the Company will be acquiring the 50% equity of MAC
that Rochelle currently does not own. Also as part of the transaction, the
Company will be selling it's 50% equity of MFC to the other 50% owner. After
the purchase is complete, Savings and MAC will become subsidiaries of the
Company.
The following pro forma statements present the Company's fiscal year-end of
December 31, 1995 and the interim period of September 30, 1996. Rochelle's
fiscal year-end is July 31, and accordingly the periods presented have been
adjusted to reflect the Company's fiscal reporting periods.
ROCHELLE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
July 31, 1996
</Page>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED
FINANCIAL STATEMENTS 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5 - 6
Notes to consolidated financial statements 7 - 26
INDEPENDENT AUDITOR'S REPORT ON THE
SUPPLEMENTARY INFORMATION 27
SUPPLEMENTARY INFORMATION
Consolidated noninterest expense 28
</page>
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors
Rochelle Bancorp, Inc. and Subsidiary
Rochelle, Illinois
We have audited the accompanying consolidated statements of financial condition
of Rochelle
Bancorp, Inc. and Subsidiary as of July 31, 1996 and 1995, and the related
consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. These
consolidated financial statements are the responsibility of the Company's
management. Our
responsibility is to express an opinion on these consolidated financial state-
ments based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those tandards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audits
provide a reasonable basis for our opinion.
The Company has omitted disclosures required for 1996 under Statement of
Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, issued by the Financial Accounting
Standards Board, as discussed in Note 1 to the consolidated financial state-
ments. In our opinion, the omission of this information is a departure from
generally accepted accounting principles.
In our opinion, except for the omission of disclosures on the 1996 financial
statements noted in the preceding paragraph, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial condition of Rochelle Bancorp, Inc. and Subsidiary as of July 31,
1996 and 1995, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting prin-
ciples.
The Company changed its method of accounting for investments in debt and
equity securities in 1995, as discussed in Note 1 to the consolidated financial
statements.
The Company changed its method of accounting for mortgage servicing rights in
1995, as discussed in Note 1 to the consolidated financial statements.
LINDGREN, CALLIHAN, VAN OSDOL AND CO., LTD.
Rockford, Illinois
September 6, 1996
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
July 31, 1996 and 1995
1996 1995
ASSETS
Cash on hand and noninterest-earning deposits $ 737,806 $ 651,403
Interest-earning deposits 1,920,527 293,614
------ ------
Total cash and cash equivalents 2,658,333 945,017
Investment securities available for sale (Note 2) 274,552 230,489
Investment securities held to maturity (Note 2) 3,275,559 4,080,041
Mortgage-backed securities held to maturity (Note 3) 1,490,366 1,565,939
First mortgage loans held for sale, net of unrealized loss
of $98,284 in 1996 and $10,652 in 1995 3,511,356 2,107,885
Loans receivable, net of allowance for losses on loans of
$284,021 in 1996 and $287,859 in 1995 (Notes 4 and 9) 36,041,750 36,548,401
Accrued interest receivable 292,937 319,761
Investment in Midland Financial Corporation (Note 13) 286,777 270,569
Office properties and equipment (Note 6) 527,230 622,587
Investment in stock of the Federal Home Loan Bank of
Chicago, at cost (Note 9) 334,000 331,600
Other assets (Notes 7 and 10) 432,740 172,188
------- -------
Total assets $49,125,600 $47,194,478
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts (Note 8) $44,252,161 $43,837,054
Advances from the Federal Home Loan Bank of
Chicago (Note 9) 1,500,000 -0-
Advance payments by borrowers for taxes and insurance 231,136 162,735
Accrued interest payable 113,295 95,132
Dividends payable (Note 14) -0- 166,463
Other liabilities (Note 10) 179,910 272,642
------ -------
Total liabilities 46,276,502 44,534,026
Commitments and Contingencies (Notes 10, 12 and 16)
Stockholders' Equity: (Notes 10, 14 and 15)
Common stock, par value $1, 1,000,000 shares authorized,
554,875 shares issued and outstanding 554,875 554,875
Preferred stock, par value $100, 500,000 shares authorized,
no shares issued and outstanding -0- -0-
Additional paid-in capital 496,282 496,282
Retained earnings, substantially restricted 1,782,327 1,613,534
Net unrealized gain (loss) on securities available for sale 15,614 (4,239)
Total stockholders' equity 2,849,098 2,660,452
Total liabilities and stockholders' equity $49,125,600 $47,194,478
======= =======
See Notes to Consolidated Financial Statements.
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended July 31, 1996 and 1995
1996 1995
Interest income:
Loans $3,157,415 $2,815,644
Mortgage-backed securities 98,990 130,670
Investment securities 242,605 364,290
Interest-earning deposits 67,401 48,783
------ ------
Total interest income 3,566,411 3,359,387
Interest expense:
Deposit accounts 1,882,876 1,638,258
Advances from the Federal Home Loan Bank of Chicago 44,244 43,819
------ ------
Total interest expense 1,927,120 1,682,077
------- ------
Net interest income 1,639,291 1,677,310
Provision for loan losses (Note 4) -0- 69,042
Net interest income after provision for loan
losses 1,639,291 1,608,268
Noninterest income:
Loan servicing fees and charges 89,150 102,183
Service charges on deposit accounts 197,048 172,380
Equity in income (loss) of Midland
Financial Corporation (Note 13) 16,208 (19,890)
Gain (loss) on sales of:
Loans 42,306 29,939
Mortgage-backed securities (Note 3) -0- 1,913
Investment securities (Note 2) -0- (32,609)
Other (2,503) -0-
Unrealized gain on first mortgage loans held for sale 10,652 45,549
Brokerage and insurance commissions 55,749 46,400
Other 32,090 16,328
Total noninterest income 440,700 362,193
Noninterest expense:
Compensation and benefits (Note 11) 916,724 853,914
Occupancy and equipment, net (Note 6) 127,410 137,475
Federal deposit insurance premiums 100,374 101,316
Net cost of operations of foreclosed real estate (Note 5) -0- (7,403)
Data processing 200,283 195,237
Other 405,107 355,776
----- -----
Total noninterest expense 1,749,898 1,636,315
Income before provision for income taxes 330,093 334,146
Provision for income taxes (Note 10) 116,910 123,653
Net income $ 213,183 $ 210,493
Net income per share $.38 $.38
See Notes to Consolidated Financial Statements.
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended July 31, 1996 and 1995
Net Unrealized
Additional Gain (Loss) on Total
Common Paid-in Retained Securities Available Stockholders'
Stock Capital Earnings For Sale Equity
Balance, July 31, 1994 $554,875 $496,282 $1,569,504 $ (22,399) $2,598,262
Net income, year ended July 31, 1995
210,493 210,493
Cash dividend, $.30 per share (166,463) (166,463)
Change in net unrealized gain
(loss) on securities available
for sale (Note 1) 18,160 18,160
-------- -------- ------------ ---------- ------------
Balance, July 31, 1996 554,875 496,282 1,613,534 (4,239) 2,660,452
Net income, year ended July 31, 1996 213,183 213,183
Cash dividend, $.08 per share (44,390) (44,390)
Change in net unrealized gain
(loss) on securities available
for sale at July 31, 1996,
net of deferred income taxes of $10,000 19,853 19,853
----------- ----------- ------ ------ ---------- ------------
$554,875 $496,282 $1,782,327 $ 15,614 $2,849,098
See Notes to Consolidated Financial Statements.
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 213,183 $ 210,493
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of organization costs 7,242 -0-
Amortization of premiums, discounts and deferred fees
on loans, mortgage-backed and investment securities 39,002 49,356
Amortization of mortgage servicing rights 23,787 2,512
Provision for losses on loans and foreclosed
real estate -0- 69,042
FHLB stock dividends -0- (4,900)
(Gain) loss on sales of:
Loans (42,306) (29,939)
Investment and mortgage-backed securities -0- 30,696
Other 2,503 (7,403)
Unrealized gain on first mortgage loans held for sale (10,652) (45,549)
Depreciation of office properties and equipment 62,104 64,747
Investment income - Midland Financial Corporation (16,208) 19,890
Origination and purchase of first mortgage loans held
for sale, net of origination fees and principal
collected (14,620,679) (5,711,228)
Proceeds from sales of first mortgage loans held
for sale 13,052,302 5,232,722
Increase (decrease) in cash flows due to other
changes in:
Deferred income taxes 62,223 (25,279)
Accrued interest receivable 26,824 96,188
Other assets (133,094) 5,817
Accrued interest payable 18,163 49,770
Other liabilities (105,577) 131,597
------- --------
Net cash provided by (used in) operating activities (1,421,183) 138,532
======= ========
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and purchases, net of origination
fees and principal collected on loans 481,333 (2,348,828)
Principal collected on mortgage-backed securities
held to maturity 70,934 192,542
Purchases of investment securities available for sale (14,210) (79,954)
Purchases of investment securities held to maturity (299,563) (747,973)
Proceeds from sales of investment securities available
for sale -0- 2,099,413
Proceeds from maturities of investment securities held to
maturity 1,095,000 1,200,000
Proceeds from sales of mortgage-backed securities held to
maturity -0- 382,720
See Notes to Consolidated Financial Statements.
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31, 1996 and 1995
(CONTINUED)
1996 1995
CASH FLOWS FROM INVESTING ACTIVITIES (CONTINUED)
Proceeds from sales of foreclosed real estate $ -0- $ 136,403
Purchases of office properties and equipment (152,699) (136,978)
Proceeds from sale of land held for expansion 183,449 -0-
Purchases of FHLB stock (2,400) (5,300)
Net cash provided by investing activities 1,361,844 692,045
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 415,107 (924,438)
Net increase in advances from the Federal Home
Loan Bank of Chicago 1,500,000 -0-
Net increase in advance payments by
borrowers for taxes and insurance 68,401 9,486
Dividends paid (210,853) -0-
-------- ------
Net cash provided by (used in) financing
activities 1,772,655 (914,952)
Net increase (decrease) in cash and cash
equivalents 1,713,316 (84,375)
Cash and cash equivalents at beginning of year 945,017 1,029,392
------ ------
Cash and cash equivalents at end of year $2,658,333 $ 945,017
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $1,908,957 $1,632,307
Income taxes $ 193,800 $ 89,596
Non-cash investing activity:
Transfer of loans to (from) foreclosed
real estate $ -0- $ (26,019)
Transfer of first mortgage loans held for sale
to loans receivable $ -0- $ 847,750
Transfer of investment securities to investment
securities available for sale on August 1, 1995 $ -0- $2,252,858
See Notes to Consolidated Financial Statements.
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
Note 1. Summary of Significant Accounting Policies
The following is a description of the significant accounting policies used by
Rochelle Bancorp, Inc. and Subsidiary (Company) in the preparation of the
accompanying consolidated financial statements.
Description of the business:
Rochelle Bancorp, Inc. (Parent Company) is the holding company for its
wholly-owned subsidiary, Rochelle Savings and Loan Association
(Association), a state chartered stock savings and loan association, and its
principal business is the operation of the Association.
The Association's operations consist principally of originating and servicing
residential first mortgage loans secured by properties in northern Illinois
from its facilities located in Rochelle and Oregon, Illinois. In addition,
the Association provides consumer banking services. The Association also
offers brokerage and insurance services through its wholly-owned
subsidiary, RSL, Inc. Substantially all of the Association's assets are
derived from these savings and loan activities, and most of these activities
are with customers located in northern Illinois.
As of July 31, 1996 and 1995, 87.3% ($31,660,171) and 87.5%
($32,184,116), respectively, of the gross loan portfolio consisted of
mortgage loans. Generally, these loans are expected to be repaid from the
cash flows of the borrowers and are collateralized by the related pro-
perty. Credit losses arising from mortgage lending transactions compare
favorably with the Association's credit loss experience on its loan port-
folio as a whole.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of the Parent Company, and the accounts of the Association and its
wholly-owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.
As described more fully in Note 14, the Parent Company's interest in the
Association was acquired through a reorganization effective November 1,
1995. The acquisition was accounted for in a manner similar to a pooling
of interests. Accordingly, retained earnings of the Parent Company were
retroactively adjusted to reflect pre-acquisition earnings of the
Association.
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 disclosures 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.
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ROCHELLE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 1. Summary of Significant Accounting Policies (Continued)
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents to include cash
on hand, amounts due from banks, and certificates of deposit with original
maturities of three months or less. At July 31, 1996 and 1995, cash and cash
equivalents included interest-earning deposits at the Federal Home Loan Bank
of Chicago of $1,920,527 and $293,614, respectively.
Investment and mortgage-backed securities:
The provisions of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, were
adopted on August 1, 1994. Under SFAS 115, securities have been classified as
either held-to-maturity securities or available-for-sale securities. The Com-
pany has no securities acquired for trading purposes. As required by SFAS 115,
equity securities with an amortized cost and approximate fair value of
$2,286,796 and $2,252,858, respectively, were classified as available-for-sale
securities as of August 1, 1994. The adoption of SFAS 115 did not have a
material effect on the 1995 financial statements.
Prior to the adoption of SFAS 115, all debt securities were carried at cost and
adjusted for premiums and discounts that were recognized in interest income
over the period to maturity using a method that approximates the interest
method. Equity securities were carried at the lower of aggregate cost or fair
value with temporary declines in fair value reported as a reduction in
stockholders' equity.
Securities held to maturity:
Securities held to maturity are those debt securities, including mortgage-backed
securities, that the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in gen-
eral economic conditions. These securities are carried at cost, adjusted for
premiumsand discounts that are recognized in interest income over the period to
maturity using a method that approximates the interest method.
Securities available for sale:
Securities available for sale are those debt and equity securities, including
mortgage-backed securities, that the Company intends to hold for an indefinite
period of time but not necessarily to maturity. Any decision to sell a security
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 gains or losses are reported as increases or decreases in stock-
holders' equity, net of the related deferred income tax effect.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in income.
</Page>
ROCHELLE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 1. Summary of Significant Accounting Policies (Continued)
Securities available for sale (Continued):
Premiums and discounts are recognized in interest income over the period to
maturity using a method that approximates the interest method.
First mortgage loans held for sale:
First mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by charges
to income.
Loans receivable:
Loans receivable are stated at unpaid principal balances less loans in process,
allowance for losses on loans, unearned discounts, and net deferred loan
origination fees and costs.
Loan fees and certain direct loan origination costs are deferred, and the net
deferred fee or cost is recognized as an adjustment to yield using the level-
yield method over the contractual life of the loans.
The FASB issued SFAS No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, which was amended by SFAS No. 118,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN-INCOME RECOGNITION AND DISCLOSURES. SFAS 114
became effective for fiscal years beginning after December 15, 1994. SFAS
114, as amended by SFAS 118, requires that impaired loans that are within the
scope of SFAS 114 be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or at the loan's
market price or the fair value of the collateral, if the loan is collateral
dependent. SFAS 114 is applicable to all creditors and to all loans regardless
of whether or not they are collateralized and does permit the collective
valuation of impairment for large groups of smaller-balance homogeneous loans.
The impact of adopting SFAS 114 in 1996 has not been material since all of the
Company's impaired loans are collateral dependent and the method of measuring
loss on these loans has not changed from the prior year.
When the ultimate collectibility of an impaired loan's principal is in doubt,
wholly or partially, all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent that any interest has been foregone.
Future cash receipts are recorded as recoveries of any amounts previously
charged off. When this doubt does not exist, cash receipts are applied under
the contractual terms of the loan agreement.
A loan is also considered impaired if its terms are modified in a troubled debt
restructuring after January 1, 1995. For these accruing impaired loans, cash
receipts are typically applied to principal and interest receivable in ac-
cordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. As of
July 31,1996, there were no accruing impaired loans.
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ROCHELLE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 1. Summary of Significant Accounting Policies (Continued)
Loans receivable (Continued):
The accrual of interest is generally discontinued on all loans that become 90
days past due as to principal or interest unless collection of both principal
and interest is assured by way of collateralization, guarantees or other sec-
urity. When borrowers demonstrate over an extended period the ability to repay
a loan in accordance with the contractual terms of a loan the Company has
classified as nonaccrual, such loan is returned to accrual status.
The allowance for loan losses is maintained at a level which, in management's
judgement, 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 expected future
cash flows). Because of uncertainties inherent in the estimating 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 red-
uced by charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Foreclosed real estate:
Foreclosed real estate held for sale is initially recorded at the lower of fair
value less estimated costs to sell or cost (the related loan balance, less any
specific allowance for loss, or fair value at the date of foreclosure).
Valuations are periodically performed by management and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.
Investment in Midland Financial Corporation:
The Company is accounting for its investment in Midland Financial
Corporation, a 50% owned affiliate, by the equity method of accounting. Under
the equity method, the net income (loss) of the affiliate is recognized as
income(loss) in the Company's statement of income and is added to (subtracted
from) the investment account, and dividends received from the affiliate are
treated as a reduction of the investment account. At July 31, 1996, the Com-
pany's carryingvalue was $286,777.
Midland Financial Corporation is a mortgage banking operation with a fiscal
year ending July 31.
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ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 1. Summary of Significant Accounting Policies (Continued)
Office properties and equipment:
Office properties and equipment are stated at cost less accumulated depr-
eciation. Provisions for depreciation are computed principally using the
straight-line method over the estimated useful lives of the assets. Dep-
reciation methods prescribed by the Internal Revenue Code (I.R.C.) are being
used for most additions after January 1, 1981. Depreciation expense using
methods prescribed by the I.R.C. does not differ materially from depreciation
expense calculated under generally accepted accounting principles.
Depreciation of office properties and equipment is computed over the following
estimated useful lives:
Years
Office buildings 15 - 39
Improvements to land and buildings 10 - 39
Office equipment 5 - 10
Furniture and fixtures 5 - 10
Vehicles 5
Federal Home Loan Bank stock:
Federal law requires a member institution of the Federal Home Loan Bank
(FHLB) system to hold common stock of its district FHLB according to a
predetermined formula.
Organization costs:
Organization costs are applicable to the incorporation and organization of the
Parent Company, and are amortized by the straight-line method over a period of
five years. Organization costs are included in other assets in the accompanying
consolidated statements of financial condition.
Mortgage servicing rights:
The provisions of FASB SFAS No. 122, Accounting for Mortgage Servicing
Rights, were adopted as of August 1, 1994. Under SFAS 122, the cost of
mortgage servicing rights (MSR) have been capitalized on mortgages
acquired after July 31, 1994 which have been sold or securitized. The al-
location of the total cost of the mortgages to MSR and the mortgages (without
MSR) is based on their relative fair values. MSR are amortized in proportion
to and over the period of estimated net servicing income. The periodic
evaluation of MSR for impairment is based on their fair value, with impairment
being recognized through a valuation allowance. MSR totaling $44,460 were
capitalized in 1995. MSR are included in other assets in the accompanying
consolidated statements of financial condition.
Income taxes:
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 bases.
Deferred tax assets are reduced by a valuation allowance
</Page>
ROCHELLE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 1. Summary of Significant Accounting Policies (Continued)
Income taxes (Continued):
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
dates of enactment.
Net income per share:
Net income per share is calculated on the basis of the weighted average number
of shares outstanding during the year.
Fair value disclosures of financial instruments:
The FASB issued SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, which became effective for the Company's year
ended July 31, 1996. SFAS 107 requires entities to disclose the fair value of
financial instruments of both assets and liabilities recognized and not re-
cognized in the statement of financial condition. Management has elected to
omit the disclosure requirements of SFAS 107 which is a departure from gen-
erally accepted accounting principles.
Note 2. Investment Securities
Debt and equity securities have been classified in the consolidated statements
offinancial condition according to management's intent. The amortized cost of
investment securities and their approximate fair value at July 31 are
summarized as follows:
Securities available for sale:
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities:
AMF adjustable rate
mortgage portfolio
mutual fund $222,938 $ 718 $ -0- $223,656
Other 26,000 24,896 -0- 50,896
$248,938 $25,614 $ -0- $274,552
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities:
AMF adjustable rate
mortgage portfolio
mutual fund $ 209,728 $ 961 $ -0- $210,689
Other 25,000 -0- 5,200 19,800
$ 234,728 $ 961 $ 5,200 $230,489
====== ===== ===== ======
/Page
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 2. Investment Securities (Continued)
Securities held to maturity:
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities:
U.S. Government and
agency $3,051,989 $ 4,233 $23,692 $3,032,530
State and municipal 223,570 5,460 -0- 229,030
$3,275,559 $ 9,693 $23,692 $3,261,560
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities:
U.S. Government and
agency $3,856,587 $11,731 $28,729 $3,839,589
State and municipal 223,454 10,546 -0- 234,000
======= ===== ===== =======
$4,080,041 $22,277 $28,729 $4,073,589
The carrying value and fair market value of securities held to maturity as of
July 31, 1996, by contractual maturity, are shown below. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $1,352,121 $1,356,238
Due after one year through five years 1,724,868 1,701,350
Due after five years through ten years -0- -0-
Due after ten years 198,570 203,972
------- -------
$3,275,559 $3,261,560
======= ========
Proceeds from the sales of shares in the AMF adjustable rate mortgage portfolio
mutual fund for the years ended July 31 are summarized as follows:
1996 1995
Proceeds $ -0- $2,099,413
Realized gains -0- -0-
Realized losse -0- 32,609
Net gain (loss -0- (32,609)
- 13 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 2. Investment Securities (Continued)
At July 31, 1996, the Association had U.S. Government and agency obligations
with an amortized cost of $1,350,121 (approximate fair value - $1,346,679)
pledged as collateral on certain customer deposit accounts which exceeded
federal deposit insurance coverage.
Note 3. Mortgage-backed Securities
Mortgage-backed securities have been classified in the consolidated statements
of financial condition according to management's intent. The amortized cost of
mortgage-backed securities and their approximate fair value at July 31 are
summarized as follows:
Securities held to maturity:
1996
Principal Unamortized Unaccreted Amortized
Balance Premiums Discounts Cost
GNMA $ 513,748 $27,350 $ -0- $ 541,098
FNMA REMICs 947,149 2,119 -0- 949,268
------- ----- ------ -------
$1,460,897 $29,469 $ -0- $1,490,366
======= ===== ====== =======
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
GNMA $ 541,098 $ -0- $18,200 $ 522,898
FNMA REMICs 949,268 8,916 24,400 933,784
----- ----- ----- ------
$1,490,366 $ 8,916 $42,600 $1,456,682
===== ===== ===== ======
1995
Principal Unamortized Unaccreted Amortized
Balance Premiums Discounts Cost
GNMA $ 584,682 $31,908 $ -0- $ 616,590
FNMA REMICs 947,149 2,200 -0- 949,349
------ ----- ------ -------
$1,531,831 $34,108 $ -0- $1,565,939
======= ===== ====== =======
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------- ------- ------- --------
GNMA $ 616,590 $ -0- $17,934 $ 598,656
FNMA REMICs 949,349 6,150 20,738 934,761
------- ------- ------- -------
$1,565,939 $ 6,150 $38,672 $1,533,417
- 14 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 3. Mortgage-backed Securities (Continued)
Proceeds from the sales of mortgage-backed securities for the years ended July
31 are summarized as follows:
1996 1995
Proceeds $ -0- $382,720
Realized gains -0- 1,913
Realized losses -0- -0-
Net gain (loss) -0- 1,913
Note 4. Loans Receivable
Loans receivable at July 31 are summarized as follows:
1996 1995
Mortgage loans $31,660,171 $32,184,116
Nonmortgage loans 4,620,780 4,588,837
-------- -------
36,280,951 36,772,953
Less:
Loans in process (110) (855)
Deferred loan origination fees and
costs, net 44,930 64,162
Allowance for losses on loans (284,021) (287,859)
-------- -------
(239,201) (224,552)
-------- -------
$36,041,750 $36,548,401
======= =======
Activity in the allowance for losses on loans for the years ended July 31 is
summarized as follows:
1996 1995
Balance, beginning of year $287,859 $218,951
Provision charged to income -0- 69,042
Loans charged off, net of recoveries (3,838) (134)
------ ------
Balance, end of year $284,021 $287,859
====== ======
At July 31, 1996, the Company had no loans that were specifically classified as
impaired. The principal balance of nonaccrual loans, which include all loans
more than 90 days past due, totaled $157,732 and $220,839 at July 31, 1996 and
1995, respectively. The Company has no commitments to loan additional funds
to the borrowers of nonaccrual loans.
Loans are made, in the normal course of business, to executive officers and
directors of the Company. The terms of these loans including interest rates and
collateral, are similar to those prevailing for comparable transactions and
management believes these loans do not involve more than the normal risk of
collectibility. The outstanding balance of such loans totaled $107,808 and
$237,343 at July 31, 1996 and 1995, respectively.
- 15 -
</Page>
ROCHELLE BANCORP, INC.AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 4. Loans Receivable (Continued)
Certain customer deposit accounts which amounted to $585,761 at July 31, 1996
are secured by unencumbered mortgage loans with unpaid principal balances
aggregating no less than 170% of the outstanding deposit accounts.
Note 5. Foreclosed Real Estate
The Company had no foreclosed real estate at July 31, 1996 and 1995,
respectively.
Activity in the allowance for losses on foreclosed real estate for the years
ended July 31 is summarized as follows:
1996 1995
Balance, beginning of year $ -0- $197,182
Provision charged to income -0- -0-
Charge-offs -0- (197,182)
------ -------
Balance, end of year $ -0- $ -0-
====== ======
Note 6. Office Properties and Equipment
Office properties and equipment at July 31 are summarized as follows:
1996 1995
Land and land improvements - office properties $ 100,890 $ 100,890
Other land held for expansion -0- 185,952
Buildings and improvements 746,935 668,511
Furniture, fixtures and equipment 699,824 625,549
Vehicles 49,843 49,843
Leasehold improvements 22,940 22,940
------ ------
1,620,432 1,653,685
Less accumulated depreciation 1,093,202 1,031,098
------ ------
$ 527,230 $ 622,587
====== ======
The provision for depreciation amounted to $62,104 and $64,747 for the years
ended July 31, 1996 and 1995, respectively.
Note 7. Loan Servicing
First mortgage loans serviced for the Federal Home Loan Mortgage Corporation
totaled $39,568,370 and $32,147,838 at July 31, 1996 and 1995, respectively.
These loans are not reflected in the balance of loans receivable in the
consolidated financial statements. Custodial escrow balances maintained in
connection with the foregoing loan servicing, and included in demand deposit
accounts, were $570,842 and $635,905 at July 31, 1996 and 1995, respectively.
- 16 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 7. Loan Servicing (Continued)
Activity in mortgage servicing rights for the years ended July 31 is summarized
as follows:
1996 1995
---- ----
Balance, beginning of year $ 41,948 $ -0-
Additions 119,580 44,460
Amortization (23,787) (2,512)
Provision for impairment -0- -0-
----- -----
Balance, end of year $137,741 $41,948
===== =====
Note 8. Deposit Accounts
Deposit accounts at July 31 are summarized as follows:
1996 1995
Amount Percent Amount Percent
Passbook accounts (1996 -
2.60%, 1995 - 2.75%) $ 7,184,687 16.24% $ 7,052,004 16.09%
Negotiable order of withdrawal
(NOW) accounts:
Noninterest-bearing 3,280,424 7.41 2,218,328 5.06
Interest-bearing (1996 - 1.50%,
1995 - 1.00% to 2.00%) 4,849,423 10.96 5,590,663 12.75
Variable rate insured money
market accounts (1996 - 1.50% to
2.50%, 1995 - 2.50%) 1,629,198 3.68 2,055,215 4.69
------ --- ------- ---
Total demand deposits 16,943,732 38.29 16,916,210 38.59
------ --- ------- ---
Certificates of deposit:
3.00% to 3.99% 209,950 .47 808,826 1.85
4.00% to 5.99% 17,984,090 40.64 16,998,761 38.78
6.00% to 7.99% 7,830,116 17.70 9,016,325 20.57
8.00% 1,284,273 2.90 96,932 .21
------ ---- ------- ----
Total certificates of
deposit 27,308,429 61.71 26,920,844 61.41
------- ---- ------- ----
$44,252,161 100.00% $43,837,054
100.00%
======= ===== ======= ====
Weighted average cost of
deposit accounts at year-end: 4.39% 4.10%
==== ====
- 17 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 8. Deposit Accounts (Continued)
At July 31, 1996, scheduled maturity dates of certificates of deposits are
summarized as follows:
Year Ending
--------
July 31, 1997 $17,713,132
July 31, 1998 5,982,632
July 31, 1999 2,095,201
July 31, 2000 1,023,705
July 31, 2001 493,759
-------
$27,308,429
=======
Certificates of deposit issued in denominations of $100,000 or more totaled
$3,199,479 and $2,662,968 at July 31, 1996 and 1995, respectively.
Note 9. Advances from the Federal Home Loan Bank of Chicago
Advances from the Federal Home Loan Bank (FHLB) of Chicago at July 31,
1996 are summarized as follows:
Secured fixed rate (5.57%), due September 27, 1996 $ 500,000
Secured, floating rate (6.70%), open line of credit, due
on demand 1,000,000
------
$1,500,000
=======
The Company has adopted a collateral pledge agreement whereby the Company
has agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, qualifying first mortgage loans with unpaid principal balances
aggregating no less than 170% of the outstanding advances due to the FHLB of
Chicago. In addition, the Company's stock in the FHLB of Chicago is pledged
as additional collateral for these advances.
- 18 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 10. Income Taxes
The provision for income taxes for the years ended July 31 is summarized as
follows:
1996 1995
--- ---
Current:
Federal $ 54,843 $135,364
State (156) 13,568
----- -----
Total current 54,687 148,932
----- -----
Deferred:
Federal 50,874 (14,471)
State 11,349 (10,808)
---- -----
Total deferred 62,223 (25,279)
---- -----
Total $116,910 $123,653
===== =====
A reconciliation of income taxes computed at the statutory federal income tax
rate to actual income taxes recorded above for the years ended July 31 is
summarized as follows:
1996 1995
--- ---
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal income tax
benefits 1.1 0.6
Equity in earnings of Midland Financial
Corporation (1.3) 1.6
Valuation allowance for capital losses (2.8) 3.3
Tax exempt income (1.4) (1.4)
Adjustment to deferred income tax assets and
liabilities for enacted changes in tax laws
and rates 9.6 .0
Other, net (3.8) (1.1)
---- ----
Effective tax rate 35.4% 37.0%
==== ====
The income tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at July 31 are
summarized as follows:
1996 1995
Deferred tax assets:
Capital losses, not recognized for tax purposes $13,247 $12,632
Excess of general allowances for loan losses
over tax accumulated bad debt reserves 78,266 111,513
Reserves for uncollected interest 6,006 7,905
Other 483 1,066
---- -----
98,002 133,116
---- ------
- 19 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 10. Income Taxes (Continued)
1996 1995
Deferred tax liabilities:
Mortgage servicing rights $ 53,359 $ 16,250
Deferred loan origination expense, net 7,557 10,076
FHLB stock dividends 13,989 13,989
Depreciation 166 913
Equity investment in Midland Financial Corp. 21,134 19,878
Unrealized gain on securities available
for sale 10,000 -0-
Other 1,395 -0-
---- -----
107,600 61,106
----- -----
Total deferred tax asset (liability) (9,598) 72,010
Valuation allowance 3,247 12,632
----- ------
Net deferred tax asset (liability) $(12,845) $ 59,378
===== =====
The Small Business Job Protection Act (Act) was signed into law on August 20,
1996. The Act contains tax changes that will require the Association to pay
income taxes on approximately $82,000 of tax bad debt reserves to be recaptured
over a six year recapture period beginning in 1997. As a result of the enacted
changes in tax laws, an additional deferred income liability of $31,760 was
recognized as of July 31, 1996.
Retained earnings includes approximately $575,000 at July 31, 1996 for which
no provision for income taxes has been made. This amount represents
allocations of income prior to 1988 to bad debt deductions for income tax
purposes only. If the amounts that qualify as deductions for income tax
purposes are later used for purposes other than to absorb bad debt losses, or if
the Association fails to meet the tax requirements to qualify as a bank, they
will be subject to income tax at the then current corporate rate. The unrec-
orded deferred income tax liability on the above amount was approximately
$225,000 at July 31, 1996.
Note 11. Employee Benefit Plans
401(K) profit-sharing plan:
The Company has adopted a profit-sharing plan 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.
The Company may elect to make contributions to the plan out of the Company's
profits, and for 1996, has elected to match 100% of each participant's pre-tax
contributions up to a maximum of 3% of each participant's salary. Discretionary
employer contributions vest at a rate of 20% per year beginning on the third
year of service by an employee. The Company made contributions totaling
$39,505 and $34,775 during the plan periods ended July 31, 1996 and 1995,
respectively.
- 20 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 11. Employee Benefit Plans (Continued)
Executive bonus plan:
The Company has adopted an incentive bonus plan for the president of the
Company, providing a cash bonus based upon the financial performance of the
Association and the performance of the president. Bonus compensation payable
under the plan totaled $17,526 and $15,069 for the years ended July 31, 1996
and 1995, respectively.
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. 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 the
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 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. Financial instruments whose contract amounts represent credit
risk at July 31, 1996, are summarized as follows:
Contract
Amount
Commitments to purchase or originate
mortgage loans:
Fixed-rate $ 562,000
Adjustable-rate 787,000
Commitments to purchase mortgage loans from
Midland Financial Corporation (See Note 13) 5,111,000
Unused lines of credit 2,609,000
Commitments to sell mortgage loans 325,000
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 the Company upon extension of credit, is based on
management's credit evaluation. Collateral is primarily residential real
estate, but may include accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties and other real estate.
The aforementioned commitments, which are subject to certain limitations,
extend over varying periods of time with all to be fulfilled over a 12 month
period. The Company does not anticipate any significant losses as a result of
these commitments.
- 21 -
</Page>
ROCHELLE BANCORP, INC.AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 13. Related Party Transactions
The Company owns 500 shares or a 50% interest in Midland Financial
Corporation (Midland), a mortgage banking company. The Company
purchased 145 and 93 loans with unpaid principal balances totaling
approximately $12,321,000 and $6,258,000 from Midland during the years
ended July 31, 1996 and 1995, respectively. At July 31, 1996, the Company had
outstanding commitments to purchase loans from Midland of approximately
$5,111,000.
The Company had an outstanding secured line of credit to Midland, with a
balance of $2,171,082 at July 31, 1996. Loan interest is payable monthly at an
annual rate of 2% over the Company's average cost of funds, rounded to the next
1/4%. The loan is due December 15, 1996, and is collateralized by first
mortgage loans funded with the loan proceeds from the Company, and all other
assets of Midland. The loan is included in other loans receivable (Note 4).
Interest earned on the line of credit with Midland amounted to approximately
$81,500 and $79,000 for the years ended July 31, 1996 and 1995, respectively.
The Company charged Midland $12,000 for accounting services for the year
ended July 31,1996.
Midland charged the Company $12,000 for secondary marketing of mortgage
loans for the year ended July 31, 1996.
At July 31, 1996, Midland had accounts payable to the Company of $104,147.
The Company leased office space to Midland s wholly-owned subsidiary
beginning December 1, 1995. The lease requires monthly payments of $430 per
month and expires November 30, 1998. Rental income earned on the lease for
the year ended July 31, 1996 was $3,440.
Note 14. Stockholders' Equity
On March 17, 1995, an investor group purchased 541,118 shares or 97.52% of
the Association's issued and outstanding permanent reserve shares from the
Resolution Trust Corporation as receiver for First State Federal Savings
Association (RTC) for an aggregate purchase price of $1,600,000 or $2.96 per
share. The RTC had no involvement in the management of the Association
during the period it held the shares. Push-down accounting was not applied in
these financial statements as a result of the transaction.
On August 4, 1995, the Board of Directors of the Association, adopted a plan of
reorganization whereby, effective November 1, 1995, the corporate structure of
the Association was reorganized into a holding company form of ownership.
The Association became a wholly-owned subsidiary of Rochelle Bancorp, Inc.
(Company), a newly formed holding company, and each outstanding
permanent reserve share of the Association was converted into one share of
common stock of the Company. The reorganization was accounted for in a
manner similar to a pooling of interests.
On August 20, 1996, a cash dividend of $.08 per share, or $44,390, was
approved and paid on August 31, 1996.
- 22 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 15. Regulatory Matters
The Association is 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 discre-
tionary actions by regulators that, if undertaken, could have a direct material
effect on the Association's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines that involve quantitative
measure of the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total capital
to risk-weighted assets, and core (Tier I) and tangible capital to total
adjusted assets. Management believes, as of July 31, 1996, that the Bank meets
all capital adequacy requirements to which it is subject.
The Association has been notified that it has been categorized as WELL
CAPITALIZED under the regulatory framework for prompt corrective action.
To be categorized as WELL CAPITALIZED the Association must maintain
minimum total risk-based, core (Tier I) risk-based, and core (Tier I) leverage
ratios. There are no conditions or events since that notification that mana-
gement believes have changed the Association's category. The Association's
actual regulatory capital amounts and ratios and its minimum regulatory capital
requirements, as of July 31, 1996, are summarized as follows (in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
----- ---- ----- ---- ----- ----
Federal:
Total capital
(To risk-weighted
assets) $2,665 10.1% $2,116 8% $2,645 10%
Core (Tier I) capital
(To risk-weighted
assets) 2,757 10.4% 1,587 6%
Core (Tier I) capital
(To adjusted total
assets) 2,757 5.6% 1,480 3% 2,466 5%
Tangible capital
(To total adjusted
assets) 2,757 5.6% 740 1.5%
- 23 -
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 15. Regulatory Matters (Continued)
The differences between the Association's stockholders' equity in accordance
with generally accepted accounting principles (GAAP) and regulatory capital at
July 31, 1996 are summarized as follows (in thousands):
Stockholders' equity, GAAP $2,773
Less net unrealized gain on securities
available for sale (16)
----
Tangible and core capital 2,757
General loan loss allowances 195
Less deduction for equity investments (285)
----
Total regulatory capital $2,665
====
Note 16. Contingency
Deposit accounts are currently insured by the Federal Deposit Insurance
Corporation (FDIC) under the Savings Association Insurance Fund (SAIF).
The FDIC also maintains another insurance fund, the Bank Insurance Fund
(BIF), which primarily insures commercial bank and some state savings bank
deposits. In 1995, both SAIF and BIF members paid deposit insurance
premiums based on a schedule of from $0.23 to $0.31 per $100 of deposits. The
FDIC has reduced BIF premiums to $2,000 for the highest rated banks and up
to $0.27 per $100 of deposits for other banks, since the BIF has achieved the
required 1.25% insurance reserve ratio. FDIC does not intend to reduce SAIF
premiums since the SAIF fund is underfunded.
Certain legislative proposals have been introduced in Congress that propose a
plan to recapitalize the Savings Association Insurance Fund (SAIF) and resolve
the BIF/SAIF deposit premium disparity, as well as changes to overhaul the
thrift industry, including elimination of the federal thrift charter. Certain
proposals, if enacted, would require each SAIF member, including the
Association, to pay a one-time fee, payable in fiscal year 1997, of 0.85% to
0.90% of its deposit accounts to recapitalize the SAIF fund. If these pro-
posals were enacted in their current form, the fee would reduce fiscal year
1997 netincome by approximately $229,000 to $243,000, net of the related
income tax effect. However, SAIF premiums would be significantly less in
1997 and thereafter. Management cannot predict whether these or any other leg-
islative proposals will be enacted, or, if enacted, the final form of the law.
- 24 -
</Page>
ROCHELLE BANCORP, INC. ASSOCIATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 17. Rochelle Bancorp, Inc. (Parent Company)
Condensed Parent Company statement of financial condition at July 31, 1996:
ASSETS
Cash and cash equivalents $ 41,582
Investment in subsidiary 2,772,308
Organization costs, net 47,076
Other assets 14,675
-------
Total assets $2,875,641
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, subsidiary $ 26,543
Stockholder's equity:
Common stock 554,875
Additional paid-in capital 496,282
Retained earnings 1,782,327
Other 15,614
------
Total stockholders' equity 2,849,098
------
Total liabilities and stockholders' equity $2,875,641
======
Condensed Parent Company statement of income for the period from November
1, 1995 to July 31, 1996:
Income:
Dividends from subsidiary $ 144,390
------
- 25 -
</Page>
ROCHELLE BANCORP, INC. ASSOCIATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(CONTINUED)
Note 17. Rochelle Bancorp, Inc. (Parent Company)
Expense:
Professional fees $ 21,846
Management fees, subsidiary 6,535
Amortization, organization expense 7,242
Other 2,262
-----
37,885
-----
Income before income tax benefit and equity in
undistributed net income of subsidiary 106,505
Income tax benefit 14,675
-----
Income before equity in undistributed net income of
subsidiary 121,180
Equity in undistributed net income of subsidiary 92,003
-----
Net income $213,183
=====
Condensed Parent Company statement of cash flows for the period from
November 1, 1995 to July 31, 1996:
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $213,183
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of subsidiary (92,003)
Amortization of organization costs 7,242
Organization expense paid (54,318)
Increase in other assets (14,675)
Increase in other liabilities 26,543
-----
Net cash provided by operating activities 85,972
-----
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided by investing activities -0-
-----
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (44,390)
-----
Net cash used in financing activities (44,390)
-----
Increase in cash and cash equivalents 41,582
Cash and cash equivalents:
Beginning -0-
-----
Ending $41,582
=====
- 26 -
</Page>
INDEPENDENT AUDITOR'S REPORT ON THE
SUPPLEMENTARY INFORMATION
Board of Directors
Rochelle Bancorp, Inc.
Rochelle, Illinois
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. Such infor-
mation has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Rockford, Illinois
September 6, 1996
</Page>
ROCHELLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED NONINTEREST EXPENSE
Years ended July 31, 1996 and 1995
1996 1995
---- ----
Compensation and benefits:
Compensation of directors, officers and employees $ 741,827 $ 653,860
Payroll taxes 53,812 49,091
Group insurance 68,560 71,025
Profit-sharing plan 38,649 37,790
Expenses of directors, officers and employees 32,877 52,452
Other benefits 6,180 13,267
----- -----
941,905 877,494
Less direct loan origination costs deferred (25,181) (23,580)
----- -----
916,724 853,914
----- -----
Occupancy and equipment, net:
Office building 16,278 17,410
Furniture and equipment 49,028 55,318
Depreciation of furniture and equipment 39,654 43,055
Depreciation of buildings 22,450 21,692
----- -----
127,410 137,475
----- -----
Federal deposit insurance premiums 100,374 101,316
----- -----
Net cost of operations of foreclosed real estate:
Loss on operation and sale of foreclosed real estate -0- (7,403)
Provision for losses on foreclosed real estate -0- -0-
----- -----
-0- (7,403)
----- -----
Data processing 200,283 195,237
----- -----
Other:
Advertising 41,822 44,887
Stationery, printing and office supplies 55,032 53,370
Telephone, postage and express 62,969 62,423
Insurance and surety bond premiums 38,340 26,026
Audit and accounting services 27,533 43,289
Legal services 32,341 14,539
Supervisory fees 34,894 34,434
Other 112,176 76,808
----- -----
405,107 355,776
----- -----
$1,749,898 $1,636,315
======= ======
- 28 -
</Page>
<Page >
Blackhawk Bancorp, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet at September 30, 1996
Pro Forma
Adjustments Pro Forma
Historical RBI Other Results
ASSETS
Cash and cash equivalents $ 6,882,867 $ 748,486 $ 183,912 (2,3) $ 7,815,265
Fed funds sold
and other short-term investments 4,601,803 1,256,350 5,858,153
Securities:
Held-to-maturity 27,890,922 4,577,806 (4,172,660) (1) 28,296,068
Available-for-sale 11,967,516 584,181 12,551,697
Loans, net 95,318,689 40,708,032 136,026,721
Bank premises and equipment, net 3,539,401 551,051 4,090,452
Other assets 1,619,230 722,713 1,494,886(1,2,3) 3,836,829
--------------- ------------- -------------- ----------------
Total Assets 151,820,428 49,148,619 (2,493,862) 198,475,185
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing 15,634,344 769,689 16,404,033
Interest bearing 95,132,140 43,035,902 138,168,042
--------------- ------------- ---------------
Total Deposits 110,766,484 43,805,591 154,572,075
Borrowed funds:
Short-term borrowings 15,910,278 150,513 16,060,791
Long-term borrowings 2,288,849 1,916,020 4,204,869
------------- ------------ --------------
Total borrowed funds 18,199,127 2,066,533 20,265,660
Other liabilities 1,137,054 708,000 58,000(2) 1,903,054
-------------- ------------ ---------- ----------------
Total liabilities 130,102,665 46,580,124 58,000 176,740,789
--------------- ------------- ----------- --------------
Stockholders' Equity:
Preferred stock
Common stock 22,859 554,875 (554,875)(1) 22,859
Additional paid in capital 6,960,190 496,282 (496,282)(1) 6,960,190
Retained earnings 14,812,592 1,500,706 (1,500,706)(1,2) 14,812,592
Other equity (77,878) 16,632 (61,246)
------------- ------------ ------------- -------------
Total stockholders' equity 21,717,763 2,568,495 (2,551,863) 21,734,395
Total liabilities& -------------- ------------- --------------- --------------
stockholders' equity 151,820,428 49,148,619 (2,493,863) 198,475,185
========= ========= ======== =========
Blackhawk Bancorp, Inc and Subsidiaries
Pro Forma Condensed Consolidated Income Statement
For the Nine Months Ended September 30, 1996
Pro Forma
Adjustments Pro Forma
Historical RBI Other Results
Interest Income:
Interest and fees on loan $ 6,497,293 $ 2,697,161 $9,194,454
Interest on securities:
Taxable 1,605,135 248,494 (114,227)(4) 1,739,402
Exempt from Federal income taxes 182,617 10,917 (42,248)(4) 151,286
Interest on fed funds sold &
other short-term investments 171,112 57,709 228,821
------------ ------------ ------------- --------------
Total interest income 8,456,157 3,014,281 (156,475) 11,313,963
------------ ------------ ------------ -------------
Interest expense:
Interest on deposits 3,427,262 1,414,268 4,841,530
Interest on short-term borrowings 514,815 21,999 536,814
Interest on long-term borrowings 137,760 97,044 234,804
------------ ----------- -------------- -------------
Total interest expense 4,079,837 1,533,311 5,613,148
------------ ----------- ------------- ------------
Net interest income 4,376,320 1,480,970 (156,475) 5,700,815
Provision for loan losses 120,000 52,122 172,122
Net int income after ------------ ------------ ------------ -----------
provision for loan losses 4,256,320 1,428,848 (156,475) 5,528,693
Other operating income: ------------- ------------ ------------ -----------
Service fees 414,945 229,735 644,680
Other income 328,408 127,402 455,810
----------- ---------- ------------- ------------
Total other operating income 743,353 357,137 1,100,490
---------- ---------- ------------- -------------
Other operating expenses:
Salaries and wages 1,624,544 794,061 2,418,605
Occupancy expense of bank premises 239,502 40,224 279,726
Furniture and equipment 268,634 96,898 365,532
Data processing 249,003 158,742 407,745
Federal deposit insurance premiums 1,500 353,700 355,200
Other operating expenses 765,800 341,122 87,840(5) 1,194,762
----------- ----------- ------------ ------------
Total other operating expenses 3,148,983 1,784,747 87,840 5,021,570
------------ ------------ ---------- -------------
Income before income taxes 1,850,690 1,238 (244,315) 1,607,613
Provision for income taxes 609,778 1,985 (96,515) 515,248
------------ ------------ ----------- --------------
Net income $1,240,912 $ (747) $(147,800) $1,092,365
======== ======== ======== ========
Net income per share $ 0.53 $ 0.46
======== =======
Shares Used to Calculate EPS 2,358,269
Blackhawk Bancorp, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Income Statement
For the Year Ended December 31, 1995
Pro Forma
Adjustments Pro Forma
Historical RBI Other Results
Interest income:
Interest and fees on loans $ 8,327,565 $3,320,878 $11,648,443
Interest on securities:
Taxable 1,895,205 426,562 (152,302)(4) 2,169,465
Exempt from Federal income taxes 199,168 15,179 (56,331)(4) 158,016
Interest on fed funds sold
& other short-term investments 160,031 51,685 211,716
------------- ------------ ------------- -------------
Total interest income 10,581,969 3,814,304 (208,633) 14,187,640
------------ ------------ ------------- -------------
Interest expense:
Interest on deposits 4,485,677 1,770,198 6,255,875
Interest on short-term borrowings 480,094 61,495 541,589
Interest on long-term borrowings 113,348 43,744 157,092
------------ ------------ ------------ ------------
Total interest expense 5,079,119 1,875,437 6,954,556
------------ ------------ ----------- ------------
Net interest income 5,502,850 1,938,867 (208,633) 7,233,084
Provision for loan losses 180,000 110,376 290,376
Net interest income ----------- ------------ ------------ ------------
after provision for loan losses 5,322,850 1,828,491 (208,633) 6,942,708
Other operating income: ----------- ------------ ------------- ------------
Service fees 467,800 286,673 754,473
Other income 310,103 164,030 474,133
----------- ------------- ------------- -------------
Total other operating income 777,903 450,703 1,228,606
------------ ------------- -------------- -------------
Other operating expenses:
Salaries and Wages 1,997,436 1,039,386 3,036,822
Occupancy expense of bank premises 300,160 56,478 356,638
Furniture and equipment 383,072 105,596 488,668
Data processing 299,447 200,134 499,581
Federal deposit insurance premiums 127,272 99,882 227,154
Other operating expenses 920,736 348,901 117,120(5) 1,386,757
------------ ------------- ----------- -------------
Total other operating expenses 4,028,123 1,850,377 117,120 5,995,620
------------ ------------ ----------- ------------
Income before income taxes 2,072,630 428,817 (325,753) 2,175,694
Provision for income taxes 600,743 151,763 (128,687) 623,819
------------- ----------- ------------ ------------
Net income $1,471,887 $277,054 $(197,066) $1,551,875
======== ======= ========= ========
Net income per share $ 0.64 $ 0.50 $ 0.68
======== ========= ========
Shares Used to Calculate EPS 2,294,221
(1) Reflects the consideration paid of $4,172,660, which is to come from
securities held by the Company plus the elimination of the equity of RBI
and the recording of intangibles as required by purchase method accounting.
(2) Reflect the sale of the investment in Midland Financial Corporation for
$220,000, recording of the a deferred tax liability and removal of the equity
of Midland Financial Corporation.
(3) Reflect the purchase of the remaining 50% of Midland Acceptance Corp-
oration, not currently owned by RBI.
(4) Reflect the elimination of interest on taxable and non-taxable securities,
based on an average yield of 5%.
(5) Reflect the amortization of core deposits intangibles and other goodwill.
Core deposit intangibles are amortized using the sum-of-the-years-digits method
for 10 years. Goodwill is amortized using the straight-line method for 20 years.
(6) Reflect the income tax benefit due to reduced interest income. An effec-
tive tax rate of 39.5% is used.