1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ----TO----
COMMISSION FILE NUMBER 0-18599
BLACKHAWK BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1659424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 BROAD STREET 53511
BELOIT, WISCONSIN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(608) 364-8911
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK JUNE 30, 1997
----------------------- --------------------
$.01 PAR VALUE 2,291,264 SHARES
2
INDEX
PART I - FINANCIAL INFORMATION
Page
------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Income for the
three months ended June 30, 1997 and 1996 4
Consolidated Condensed Statements of Income for the
six months ended June 30, 1997 and 1996 5
Consolidated Condensed Statements of Shareholders'
Equity as of June 30, 1997 and December 31, 1996 6
Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 7-8
Notes to Consolidated Condensed Financial Statements 9-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13-18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 19
ITEM 6. A) EXHIBITS 19
B) REPORTS ON FORM 8-K 19
SIGNATURES 20
3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
-------- 1997 1996
--------------- --------------
Cash and cash equivalents $ 11,435,909 $ 7,966,929
Federal funds sold and other short-term
investments 1,935,658 4,677,596
Securities available for sale 8,413,014 10,701,911
Securities held to maturity 29,081,903 24,864,640
Total loans 140,810,932 99,426,691
Allowance for loan losses (Note 3) 1,458,972 1,185,672
------------ ------------
Net loans 139,351,960 98,241,019
Bank premises and equipment, net 4,288,291 3,463,491
Accrued interest receivable 1,106,759 1,041,756
Goodwill (Note 8) 816,532 --
Other assets 2,330,996 526,663
------------ ------------
Total Assets $198,761,022 $151,484,005
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 17,621,861 $ 23,193,906
Interest bearing 138,491,495 95,116,941
------------ ------------
Total deposits 156,113,356 118,310,847
Borrowed Funds:
Short-term borrowings (Note 4) 13,066,997 7,405,451
Other borrowings (Note 5) 3,950,000 2,275,456
Accrued interest payable 919,202 680,226
Other liabilities 2,141,685 782,827
------------ ------------
Total Liabilities 176,191,240 129,454,807
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock
1,000,000 shares, $.01 par value per share
authorized, none issued or outstanding -- --
Common stock
10,000,000 shares, $.01 par value
per share authorized, 2,291,264 and
2,285,864 shares issued and outstanding 22,913 22,859
Additional paid-in capital 6,983,267 6,960,550
Employee stock options earned 112,784 94,764
Retained Earnings 15,561,670 15,072,129
Treasury Stock (104,174) (84,305)
FASB 115 Adjustment (6,678) (11,343)
------------ ------------
22,569,782 22,054,654
Less: Deferred compensation related
to employee stock ownership
plan debt guarantee -- (25,456)
------------ ------------
Total Shareholders' Equity 22,569,782 22,029,198
------------ ------------
Total Liabilities and
Shareholders' Equity $198,761,022 $151,484,005
============ ============
See Notes to Unaudited Consolidated Condensed Financial Statements
3
4
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
1997 1996
------------- -------------
INTEREST INCOME:
Interest and fees on loans $ 2,971,088 $ 2,181,640
Interest on deposits with other banks 21,650 817
Interest on investment securities:
Taxable 614,864 540,434
Exempt from federal income taxes 33,478 66,420
Interest on federal funds sold
and other short-term investments 9,698 50,200
----------- -----------
Total Interest Income 3,650,778 2,839,511
----------- -----------
INTEREST EXPENSE:
Interest on deposits 1,481,572 1,142,011
Interest on short-term borrowings 189,296 186,602
Interest on other borrowings 67,144 46,395
----------- -----------
Total Interest Expense 1,738,012 1,375,008
----------- -----------
Net Interest Income 1,912,766 1,464,503
Provision for loan losses (Note 3) 44,657 40,000
----------- -----------
Net Interest Income After
Provision For Loan Losses 1,868,109 1,424,503
----------- -----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans (8,025) 23,036
Trust department income 58,803 39,915
Service fees 250,467 137,430
Other income 108,331 58,886
----------- -----------
Total Other Operating Income 409,576 259,267
----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 767,571 537,707
Occupancy expense of bank premises, net 111,496 81,284
Furniture and equipment 78,792 90,827
Data processing 110,993 84,410
Other operating expenses 407,251 249,480
----------- -----------
Total Other Operating Expenses 1,476,103 1,043,708
----------- -----------
Income Before Income Taxes 801,582 640,062
Provision for Income Taxes 286,306 209,365
----------- -----------
Net Income $ 515,276 $ 430,697
=========== ===========
Earnings Per Share $ 0.22 $ .18
=========== ===========
Dividends Per Share $ 0.11 $ 0.10
=========== ===========
See Notes to Unaudited Consolidated Condensed Financial Statements
4
5
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
1997 1996
----------- ------------
INTEREST INCOME:
Interest and fees on loans $ 5,255,823 $ 4,306,099
Interest on deposits with other banks 21,926 1,234
Interest on investment securities:
Taxable 1,136,081 1,043,317
Exempt from federal income taxes 71,904 117,471
Interest on federal funds sold
and other short-term investments 75,974 139,158
--------- ---------
Total Interest Income 6,561,708 5,607,279
--------- ---------
INTEREST EXPENSE:
Interest on deposits 2,620,212 2,280,977
Interest on short-term borrowings 378,351 354,603
Interest on other borrowings 102,859 102,378
--------- ---------
Total Interest Expense 3,101,422 2,737,958
--------- ---------
Net Interest Income 3,460,286 2,869,321
Provision for loan losses (Note 3) 74,657 85,000
--------- ---------
Net Interest Income After
Provision For Loan Losses 3,385,629 2,784,321
--------- ---------
OTHER OPERATING INCOME:
Investment securities gains (losses) -- 99
Gain (loss) on sale of loans 440 40,647
Trust department income 90,303 63,694
Service fees 397,485 261,145
Other income 165,579 128,242
--------- ---------
Total Other Operating Income 653,807 493,827
--------- ---------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,342,227 1,064,324
Occupancy expense of bank premises, net 199,530 161,400
Furniture and equipment 160,873 180,843
Data processing 188,613 165,140
Other operating expenses 652,004 515,478
--------- ---------
Total Other Operating Expenses 2,543,247 2,087,185
--------- ---------
Income Before Income Taxes 1,496,190 1,190,963
Provision for Income Taxes 528,789 388,619
========= ==========
Net Income $ 967,401 $ 802,344
========= ==========
Earnings Per Share $ 0.41 $ 0.34
========= ==========
Dividends Per Share $ 0.21 $ 0.18
========= ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
5
6
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS TWELVE MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1996
----------- --------------
Common Stock:
Balance at beginning of period $ 22,859 $ 22,826
Stock options exercised 54 33
----------- -----------
Balance at end of period 22,913 22,859
----------- -----------
Additional Paid-in Capital:
Balance at beginning of period 6,960,550 6,946,370
Stock options exercised 22,717 14,180
----------- -----------
Balance at end of period 6,983,267 6,960,550
----------- -----------
Employee Stock Options Earned:
Balance at beginning of period 94,764 52,165
Stock options exercised (55)
Unearned employee compensation 18,020 42,654
----------- -----------
Balance at end of period 112,784 94,764
----------- -----------
Retained Earnings:
Balance at beginning of period 15,072,129 14,210,036
Net income 967,401 1,728,275
Dividends declared on common stock (477,860) (866,182)
----------- -----------
Balance at end of period 15,561,670 15,072,129
----------- -----------
Treasury Stock, at cost:
Balance at beginning of period (84,305) --
Purchase (19,869) (84,305)
----------- -----------
Balance at end of period (104,174) (84,305)
----------- -----------
FASB 115 Adjustment:
Balance at beginning of period (11,343) 37,114
Net adjustment during period 4,665 (48,457)
----------- -----------
Balance at end of period (6,678) (11,343)
----------- -----------
Other:
Balance at beginning of period (25,456) (79,027)
Principal payments on ESOP loan 25,456 53,571
----------- -----------
Balance at end of period -- (25,456)
----------- -----------
Total Shareholders' Equity $22,569,782 $22,029,198
=========== ===========
See Notes to Unaudited Consolidated Condensed Financial Statements
6
7
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 967,401 $ 802,344
Adjustments to reconcile net income
to net cash provided by operating
activities:
Compensatory options recognized 18,020 --
Provision for loan losses 74,657 85,000
Provision for depreciation and
amortization 202,974 168,960
Amortization of premiums (accretion of
discounts) on investment securities, net (50,191) (18,548)
(Gains) losses on investment securities -- (99)
(Gain) on sale of loans (440) (40,647)
Loans originated for sale (3,114,125) (3,232,399)
Proceeds from sale of loans 5,463,689 3,273,046
Change in assets and liabilities:
(Increase) decrease in accrued
interest receivable 362,371 (45,797)
(Increase) decrease in other assets (509,079) 34,612
Increase (decrease) in accrued
interest payable 128,590 (35,392)
Increase (decrease) in other
liabilities (344,738) (35,032)
---------- ----------
Net cash provided by operating
activities 3,199,129 956,048
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-
for-sale securities 7,553,375 9,062,683
Purchase of available-for-sale securities (4,320,568) (13,172,673)
Proceeds from maturity of investment
securities 10,414,826 3,684,942
Purchase of investment securities (10,016,031) (5,578,360)
Net cash used in acquisition (198,587) --
Decrease in federal funds sold and
other short-term investments, net 2,741,938 11,485,855
Loans originated, net of
principal collected (4,733,793) 402,367
Purchase of bank premises and equipment (111,842) (35,645)
---------- ----------
Net cash provided by (used in)
investing activities 1,329,318 5,849,169
---------- ----------
See Notes to Unaudited Consolidated Condensed Financial Statements.
7
8
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 22,771 12,054
Purchase of Treasury Stock (19,869) (84,305)
Net (decrease) in deposits (6,189,639) (11,616,491)
Net increase (decrease) in borrowings 5,605,130 2,954,445
Cash dividends paid (477,860) (411,285)
----------- -----------
Net cash (used in)
financing activities (1,059,467) (9,145,582)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 3,468,980 (2,340,365)
CASH AND CASH EQUIVALENTS:
Beginning of Period 7,966,929 7,589,600
----------- -----------
End of Period $11,435,909 $ 5,249,235
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash payments for:
Interest $ 2,752,060 $ 2,773,350
Income taxes $ 482,355 $ 236,825
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Other assets acquired in settlement of
loans $ 73,188 $ 152,191
Principal payments on ESOP loan (Note 5) $ 25,456 $ 26,785
See Notes to Unaudited Consolidated Condensed Financial Statements.
8
9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
Note 1. General
The accompanying consolidated condensed financial statements conform
to generally accepted accounting principles and to general practices
within the banking industry. The more significant policies used by
the Company in preparing and presenting its financial statements are
stated in the Corporation's Form 10-KSB, with the exception of FAS
128, Earnings Per Share, which the Company adopted as of January 1,
1997.
The effect of timing differences in the recognition of revenue and
expense for tax liability is not determined until the end of each
fiscal year.
In the opinion of Management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial
position of the Corporation as of June 30, 1997 and December 31,
1996, the results of operations for the three and six months ended
June 30, 1997 and 1996, and cash flows for the six months ended June
30, 1997 and 1996.
The results of operations for the three and six months ended June 30,
1997 and 1996 are not necessarily indicative of the results to be
expected for the full year.
Note 2. Non-Performing Loans
Non-performing loans includes loans which have been categorized by
management as non-accruing because collection of interest is not
assured, and loans which are past-due ninety days or more as to
interest and/or principal payments. The following summarizes
information concerning non-performing loans:
JUNE 30, DECEMBER 31
--------------------- -----------
1997 1996 1996
---------- --------- -----------
Impaired loans $ 632,000 $ -- $ 445,000
Non-accruing loans $ 334,000 719,000 443,000
Past due 90 days or more
and still accruing $ 472,000 73,000 252,000
---------- --------- -----------
Total non-performing loan $1,438,000 $ 792,000 $ 1,140,000
========== ========= ===========
Note 3: Allowance For Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
Three Months Ended
June 30
------------------------
1997 1996
---------- ----------
Balance at beginning of
period $1,208,782 $ 938,961
Allowance associated with
acquisition 345,096 --
Provision charged to expense 44,657 40,000
Loans charged off (153,389) (14,905)
Recoveries 13,826 28,693
---------- ---------
Balance at end of period $1,458,972 $ 992,749
========== =========
9
10
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
Note 3: Allowance For Loan Losses (Continued)
SIX MONTHS ENDED
JUNE 30
-------------------------
1997 1996
---------- -----------
Balance at beginning of
period $1,185,672 $ 928,817
Allowance associated with
acquisition 345,096 --
Provision charged to expense 74,657 85,000
Loans charged off (166,148) (53,766)
Recoveries 19,695 32,698
----------- -----------
Balance at end of period $1,458,972 $ 992,749
=========== ===========
Note 4. Short-Term Borrowings
A summary of short-term borrowings is as follows:
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
Securities sold under agreement to
repurchase $12,216,997 $ 7,405,451
Federal Funds Purchased 850,000 --
----------- -----------
$13,066,997 $ 7,405,451
=========== ===========
Note 5. Other Borrowings
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
ESOP Debt Guarantee $ -- $ 25,456
FHLB Borrowings 3,950,000 2,250,000
----------- -----------
$ 3,950,000 $ 2,275,456
=========== ===========
The Company has an Employee Stock Ownership Plan for the benefit of
the employees of the Company and Blackhawk State Bank. The ESOP
borrowed funds from a third party lender and purchased 112,101 shares
of the Company's stock. Accordingly, the debt has been recorded in
the accompanying consolidated condensed balance sheets together with
the related deferred compensation. The debt and related deferred
compensation are reduced as the ESOP makes principal payments.
The bank has established a line of credit with the Federal Home Loan
Bank ("FHLB"). Periodic draws are taken against this line to fund
specific loans. The total line of credit is $16,900,000, with an
available balance of $12,950,000.
Note 6. Stock Option Plan
Under the Company's 1994 Director's and Executive Stock Option
Plans,options are granted at prices equal to the fair market value for
directors and at prices from 90% to 100% of fair market value for key
employees. The options vest over three years and are exercisable to
10 years from the date of grant. Other pertinent information related
to the plans is as follows:
10
11
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(CONTINUED)
Note 6. Stock Option Plan (continued)
JUNE 30 DECEMBER 31,
1997 1996
-------- ------------
Shares under option, beginning of year 275,776 262,235
Granted during the year 31,350 17,300
Terminated and canceled during the year (1,000) (510)
Exercised during the year (5,400) (3,249)
-------- --------
Shares under option, end of period 300,726 275,776
======== ========
Options exercisable, end of period 215,742 184,492
======== ========
Available to grant, end of period 83,000 114,300
======== ========
Average prices: Granted during the period $ 11.40 $ 11.20
Exercised during the period $ 4.22 $ 5.25
Under option $ 7.52 $ 7.02
Note 7. Commitments and Contingent Liabilities
A summary of the amount of exposure to credit loss for loan
commitments (unfunded loans and unused lines of credit) and standby
letters of credit outstanding is as follows:
JUNE 30, DECEMBER 31,
1997 1996
----------- ----------
Loan commitments $22,533,000 $9,328,000
Standby letters of credit 447,000 356,000
----------- ----------
$22,980,000 $9,684,000
=========== ==========
Note 8. Acquisition of Rochelle Bancorp, Inc.
On April 30, 1997 the company completed its acquisition of Rochelle
Bancorp Inc. (Rochelle). Rochelle was the parent bank holding
company of Rochelle Savings Bank, Rochelle, Illinois. Cash of
$4,173,000 was paid for the 554,875 outstnding shares of Rochelle.
The acquisition was recorcded using purchase accounting. Rochelle's
consolidated financial condition has been included in the Company's
consolidated balance sheet as of June 30, 1997, and Rochelle's
consolidated results of operations have been reflected in the
Company's consolidated statements of income beginning as of the
acquisition date.
On a pro forma basis, the pro forma total income, net income, and net
income per share for the three and six months ended June 30, 1997 and
1996 after giving effect to the Rochelle's acquisition as if it
occurred on January 1, 1996 are as follows:
Three Months Ended Six Month Ended
June 30 June 30
1997 1996 1997 1996
---------------------- ----------------------
Total Income $4,449,417 $4,247,279 $8,747,685 $8,288,985
Net Income $ 305,265 $ 489,856 $ 757,391 $ 893,028
Net Income per share $ .13 $ .21 $ .31 $ .38
11
12
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(CONTINUED)
Note 9. Mortgage Servicing Rights
Mortgage loan servicing rights were acquired with the Company's
purchase of Rochelle Bancorp, Inc. (Note 8).
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
unpaid principal balances of mortgage loans serviced for others was
$47,217,000 and $0 at June 30, 1997 and December 31, 1996,
respectively.
Mortgage servicing rights of $39,000 and $0 were capitalized in the
six months ended June 30, 1997 and 1996, respectively. Mortgage
servicing rights have a fair value of $404,000 and $0 at June 30, 1997
and December 31, 1996, respectively. Amortization of mortgage
servicing rights was $13,000 and $0 for the six months ended June 30,
1997 and 1996, respectively.
Note 10. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, ("Statement 128") which is
required to be adopted on December 31, 1997. Statement 128 may not be
adopted early. Upon adoption, the Company will be required to change
the method currently used to compute earnings per share and to restate
earnings per share for all prior periods according to the methodology
detailed in Statement 128.
Statement 128 will require a dual presentation of earnings per share
regardless of the difference between earnings per common share and
fully diluted earnings per share for companies having common stock
equivalents such as stock options. Additionally, Statement 128
requires some modifications to the calculation of the dilutive effect
of common stock equivalents. The following table sets forth a pro
forma calculation of the Company's basic and dilutive earnings per
share as calculated pursuant to Statement 128 for the periods
indicated.
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
------------------ ----------------
Basic Earnings Per Share $0.23 $0.19 $0.42 $0.35
Diluted Earnings Per Share $0.22 $0.18 $0.41 $0.34
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction with
the consolidated condensed balance sheets as of June 30, 1997 and December 31,
1996 and the consolidated condensed statements of income for the three months
and six months ended June 30, 1997 and 1996. This information is not meant to
be a substitute for the balance sheets and income statements.
RESULTS OF OPERATIONS
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 $4,173,000 in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., is an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51,000,000.
This acquisition was accounted for as a purchase and the cash consideration
paid for the outstanding shares approximates the fair market value of tangible
and intangible assets acquired less the liabilities assumed.
As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
offices in Rochelle and Rockford, Illinois and assets of approximately
$2,500,000.
Results of operations of Rochelle and MAC are incorporated in the Company's
statements from the acquisition date forward. The impact on the Company's net
income for the balance of 1997 is expected to be positive.
THREE MONTHS ENDED JUNE 30
For the three months ended June 30, 1997, interest income was $3,651,000
compared to $2,840,000 for the same period in 1996. This increase of $811,000,
nearly 29%, was the result of both increased rate and increased volume.
Earning assets averaged $171.0 million during the three months ended June 30,
1997 compared to $141.4 million for the same period in 1996. Virtually all of
the increased volume is attributed to Rochelle. The average yield on earning
assets increased to 8.54% for the period compared to 8.03% in 1996. Both of
the main operating units, Blackhawk State Bank,("Blackhawk"), and Rochelle,
averaged approximately the same yield during the current period.
Interest and fees on loans increased to $2,971,000 in the current period
compared to $2,182,000 in the same period in 1996. This increase of 36% was
due to increased volume. Approximately 28% of the 36% volume increase is due
to Rochelle, and nearly all of their loans are secured by real estate. The
average yield on loans was approximately the same for both periods. Within the
various loan categories, the reduction of income in the real estate loans due
to rates was offset by an increase in the consumer loan area, of an equal
amount. The comparisons of interest and fees on loans in the third and fourth
quarters of 1997 to the respective quarters in 1996 are expected to be very
favorable.
Investment income on taxable securities for the quarter ended June 30, 1997 was
$596,000 compared to $540,000 in 1996, an increase of 10%. Income due to
volume decreased; however, this was more than offset by the increase due to
increased yields. Income from tax-exempt securities declined nearly 50% in the
1997 period compared to 1996. This was due almost entirely to reduced volumes.
Security volumes are further addressed in the discussion of the analysis of
financial condition.
13
14
In the second quarter of 1997 interest on fed funds and other short-term
investments decreased to $29,000 from $50,000 in the same period in 1996. The
reduction in volume in this category will be explained in the analysis of
financial condition discussion. Income from interest bearing deposits in banks
increased from less than $1,000 to nearly $22,000. All of this increase is due
to increased volume which was obtained with the acquisition of Rochelle.
Interest paid on deposits in the three months ended June 30, 1997 was
$1,482,000 compared to $1,142,000 in the same period in 1996. Of the $340,000
increase, $313,000 was due to increased volumes which were the result of the
Rochelle acquisition. The average yield of the Rochelle deposits were slightly
lower than the average yield on the Blackhawk deposits. This yield
relationship between Blackhawk and Rochelle is expected to continue. Earlier
this year many were expecting interest rates to increase during 1997. While
there has been some fluctuations in rates, they have been relatively minor. If
interest rates increase in the coming months, an increase in the rates paid on
deposits can be expected. Significant growth in deposits is not expected in the
third quarter of 1997 from current levels. However, comparisons to 1996 in the
future quarters will be very positive because of the Rochelle acquisition.
Interest on short-term borrowings was slightly higher in 1997 than in 1996,
$189,000 versus $186,000 respectively. Short-term borrowings consist of fed
funds purchased and repurchase agreements. The slightly higher average rate
for the quarter on these borrowings resulted in a larger cost that was nearly
offset by a lower volume. The interest cost on other borrowings which are
advances from the Federal Home Loan Bank, ("FHLB"), was $67,000 for the quarter
compared to $46,000 in 1996. This increase was the result of increased volume.
The average rate on the borrowings was nearly the same for the second quarters
of 1997 and 1996.
The provision for loan loss was approximately $45,000 in the quarter ended June
30, 1997 as compared to $40,000 for the same period in 1996. On a regular
basis, management determines the adequacy of the loan loss reserve and, if
necessary, adjusts the loan loss provision.
Total other operating income increased to $410,000 from $259,000 in the second
quarter of 1996. The largest single item in each period was service fees,
totaling $250,000 and $137,000 in 1997 and 1996, respectively. Nearly $100,000
of this increase is attributed to Rochelle and includes the servicing income
from mortgages sold. Continued increases in revenue from the servicing of sold
mortgages is anticipated. Another area that experienced a significant increase
was trust fees, which totaled $59,000 as compared to $40,000 in the second
quarter of 1996. It is anticipated that this area will also provide increased
revenue in the future. Other income includes the revenue from the sale of
non-deposit investments and represents a significant amount of the increase to
$108,000 in 1997 from $59,000 in 1996. A loss on the sale of loans of $8,000
was experienced in the second quarter of 1997 compared to income of $23,000 in
the same quarter of 1996. Prior to the acquisition of Rochelle, Blackhawk's
loans were sold with servicing rights. Since loans are now being sold with the
servicing rights retained by Rochelle, the proceeds from the sale are reduced.
The increased income from servicing will offset the reduced income in this
area.
Total other operating expenses were $1,476,000 in the second quarter of 1997
compared to $1,044,000 in the same period in 1996. The largest single item in
this category is salaries and benefits which were $768,000 in 1997 compared to
$538,000 in 1996. Of this $230,000 increase, $164,000 is attributed to
Rochelle. The amount relating to Blackhawk is the result of normal increases
and the addition of another in-store facility. In preparation for the opening
of this facility in mid-July, new employees were hired for training during the
second quarter. The relatively large increases in occupancy and data
processing are the result of the
14
15
acquisition of Rochelle. The increased costs in both of these areas are
expected to continue for the balance of 1997.
Income taxes increased to $286,000 from $209,000 for the three month period
ending June 30,1997. The increase was due to higher income and also a higher
effective tax rate of 36% versus 33% for the comparable quarter of 1996. The
higher effective tax rate resulted from a higher percentage of income subject
to state income taxes, Wisconsin and Illinois, and the reduction of income from
federally tax-exempt securities.
SIX MONTHS ENDED JUNE 30
Total interest income for the six months ended June 30, 1997, was $6,562,000
compared to $5,607,000 for the same period in 1996. The largest area of
interest revenue, interest and fees on loans, also contributed the largest
dollar increase, $950,000. As was discussed previously, volume was the primary
reason for the growth of revenue in this area. The average yield in 1997 was
approximately the same as in 1996. Future internal growth of loans could slow
during the second half of 1997 if the Federal Reserve Bank decides to increase
interest rates. However, this does not seem to be likely, in the immediate
future.
Interest on taxable securities increased to $1,117,000 as compared to
$1,043,000 for the first half of 1996. The increase in the average yield for
the period in 1997 was sufficient to offset the decrease in volume when
compared to 1996. Interest income from tax-exempt securities was also effected
by reduced volume. However, the average yield on the tax-exempt securities was
approximately the same for both periods, therefore income from these
investments decreased by $46,000 because of reduced volume.
Interest income from fed funds sold and short-term investments was $95,000 for
the first six months of 1997 as compared to $139,000 for the same period in
1996. This $44,000 decrease was due entirely to reduced volume. The average
yield on these investments was approximately 10 basis points higher in 1997
than in 1996. Income from interest bearing bank deposits was due to increased
volume. This increase was a direct result of the Rochelle acquisition. Rather
than selling fed funds, Rochelle historically has invested in interest bearing
deposits of other banks for short-term investments.
Interest expense was $3,101,000 in the six months ended June 30, 1997 as
compared to $2,738,000 for the same period in 1996. Interest on deposits was
$2,620,000 in 1997 as compared to $2,281,000 in 1996. The average rate was the
nearly the same for both periods and nearly all of the increased cost was the
result of increased volume. Most of the increased volume was attributable to
the Rochelle acquisition.
Interest on short-term borrowings was $378,000 in the first half of 1997 as
compared to $355,000 in the same period of 1996. The volume in 1997 was
significantly higher and offset the effect of lower average interest rates
paid.
The provision for loan loss was approximately $75,000 for the period in 1997
compared to $85,000 in 1996. Management believes that the provision was
appropriate based on their regular review of the adequacy of the overall
reserve.
Other operating income for the six months ended June 30, 1997 was $654,000
compared to $494,000 for the same period in 1996. Service fees, the largest
item in this category, experienced the largest increase to $397,000 in 1997 as
compared to $261,000 in 1996. The increase in this area was the result of
increased volume of accounts, increased fees and the additional
15
16
revenues associated with the servicing of mortgages by Rochelle. Prior to the
acquisition of Rochelle, Blackhawk's loans were sold with servicing rights.
Loans are now being sold with the servicing rights retained by Rochelle,
therefore proceeds from these sales are reduced. The increased income from
servicing will offset the reduced income in this area. Trust department income
increased 42% in 1997, when compared to 1996, as result of additional business.
Continued improvement in this area is anticipated for the balance of 1997.
Other income increased $37,000 over 1996 levels, $165,000 compared to $128,000.
Income from the sale of non-deposit investments is included in this category.
It is anticipated that this activity will result in increased income in the
future.
For the six month period ending June 30, 1997, total other operating expenses
were $2,543,000 compared to $2,087,000 in 1996. The area of largest increase
was salaries and benefits, which totaled $1,342,000 compared to $1,064,000 in
1996. The acquisition of Rochelle, combined with normal salary and benefit
increases and additional staffing for the in-store branch opened in mid-July,
account for the increase. Increases in the areas of occupancy and data
processing are primarily the result of the Rochelle acquisition.
As a result of higher income subject to state income taxes and reduced
federally tax-exempt income, the effective tax rate increased to 35% in 1997,
from 33% in 1996.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares June 30, 1997 to
the Company's prior fiscal year end December 31, 1996. Total assets were
$198.8 million as compared to $151.5 million as of December 31, 1996. This
represents an increase of approximately $47.3 million or 31%. The purchase of
Rochelle, which was completed on April 30, 1997, accounted for virtually all of
the overall increase.
Total investment securities, including securities held-to-maturity, securities
available-for-sale, fed funds sold and short-term investments, were $39.4
million as of June 30, 1997, as compared to $40.2 million as of December 31,
1996. The reduction of Blackhawk's investments resulting from funding the
increase in loans and the purchase of Rochelle was partially offset by the
securities acquired with the Rochelle acquisition.
Loans totaled $140.8 million on June 30, 1997 as compared to $99.4 million on
December 31, l996, an increase of $41.4 million or 41.6%. Approximately $36.9
million or 89%, of the increase is the result of the Rochelle acquisition and
of these, $28.8 million are real estate loans. Diversification of Rochelle's
loan portfolio as to type of loans, will be an objective. Loan demand
continues to be steady. The strength of loan demand for the balance of 1997
will depend to some extent on what action the Federal Reserve Bank takes with
regard to interest rates.
Allowance for loan losses was $1.46 million as of June 30,1997 as compared to
$1.19 million as of December 31, 1996. Footnote 3 to the financial statements
indicates the activity in the allowance for loan loss account for the six
months ended June 30, 1997 and 1996. Non-performing loans (see Footnote 2)as
of June 30, 1997 were $1.44 million. The potential loss resulting from these
loans has been provided for in management's determination of the adequacy of
the loan loss reserve. Management believes that the allowance is adequate at
this time.
Bank premises and equipment increased 24% to $4.29 million as compared to $3.46
million at December 31, 1996. This increase of $825,000 was primarily the
result of the Rochelle acquisition as there were no other significant purchases
in the first half of 1997.
16
17
Total deposits of $156.1 million increased $37.8 million as of June 30, 1997 as
compared to $118.3 million as of December 31, 1996. Non-interest bearing
deposits decreased to $17.6 million from $23.2 million as of December 31, 1996.
Several commercial customers have historically increased their demand deposit
balances at year end. As a result, subsequent interim reporting dates
typically have balances lower than the previous year-ends. The non-interest
bearing deposits acquired with Rochelle was not sufficient to overcome this
reduction. The 46% increase in interest-bearing deposits,$138.5 million
compared to $96.1 million, was primarily the result of Rochelle. Excluding
Rochelle, the increase would have been approximately 1%. Competition for
deposit dollars continues to be intense. As a result, dramatic growth of
deposits is not anticipated during the balance of 1997.
The make-up of short-term borrowings and other borrowings is discussed in
footnotes 4 and 5 to the financial statements, respectively. The increases in
these categories were used to fund the increase in the loan portfolio and other
liquidity needs of Blackhawk. The use of borrowings, both short and long, will
be utilized as future need arise.
The company continues to maintain an excellent capital position regardless of
the measurement used. The following table shows four different measurements as
of June 30, 1997 and December 31, 1996, and the regulatory requirement, if any.
Management does not anticipate the need for additional capital resources in
the near future.
JUNE 30, DECEMBER 31, REGULATORY
1997 1996 REQUIREMENTS
-------- ------------ ------------
Leverage capital ratio 13.35% 15.08% N/A
Core capital as a percent
of assets 11.21% 14.37% 5.50%
Core capital as a percent
of risk-based assets 18.41% 22.88% N/A
Total capital as a percent
of risk-based assets 19.62% 23.47% 8.00%
Liquidity as it relates to the subsidiary banks is a measure of their ability
to fund loans and withdrawals of deposits in a cost-effective manner. Their
principal sources of funds are deposits, scheduled amortization and prepayment
of loan principal, maturities of investment securities, income from operations,
and short term borrowings. Additional sources include purchasing fed funds,
sale of loans, borrowing from both the Federal Reserve Bank and Federal Home
Loan Bank, capital loans. Also dividends paid by Nevahawk to Blackhawk provide
an additional source to Blackhawk. Under present law, accumulated earnings
could be paid as dividends without incurring a tax liability.
The liquidity needs of the Company consist of payment of dividends to its
shareholders and a limited amount of expenses. The sources of funds to provide
this liquidity are income from investments, maturities of investments, cash
balances, issuance of capital and dividends from its subsidiary banks. Certain
restrictions are imposed upon the Banks which could limit their ability to pay
dividends if they did not have net earnings or adequate capital in the future.
The Company maintains adequate liquidity to pay its expenses.
17
18
Off-balance sheet items consist of credit card lines of credit, mortgage
commitments, letters of credit and other commitments totaling approximately
$23.0 million as of June 30, 1997. This compares to $9.7 million at December
31, 1996. The bank's have historically funded off-balance sheet commitments
with their primary sources of funds, and management anticipates that this will
continue.
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
included, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
18
19
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(CONTINUED)
PART II
OTHER INFORMATION
ITEM 4.SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 14, 1997, at the annual meeting of shareholders of the Company, the
shareholders re-elected Jesse L. Calkins, Dennis M. Conerton, Kenneth A.
Hendricks and George D. Merchant to three-year terms expiring in 2000. The
vote, with respect to the re-election of each, was as follows:
Jesse L. Calkins:
2,283,686 total votes eligible to be cast.
1,921,671 votes were represented at the Annual Meeting.
1,920,071 votes were case "For" re-election.
-0- votes were cast "Against" re-election.
1,600 votes abstained
Dennis M. Conerton:
2,283,686 total votes eligible to be cast.
1,921,671 votes were represented at the Annual Meeting.
1,920,671 votes were cast "For" re-election.
-0- votes were cast "Against" re-election.
1,000 votes abstained.
Kenneth A. Hendricks:
2,283,686 total votes eligible to be cast.
1,921,671 votes were represented at the Annual Meeting.
1,918,571 votes were cast "For" re-election.
-0- votes were cast "Against" re-election.
3,100 votes abstained.
George D. Merchant:
2,283,686 total votes eligible to be cast.
1,921,671 votes were represented at the Annual Meeting.
1,918,871 votes were cast "For" re-election.
-0- votes were cast "Against" re-election.
2,800 votes abstained.
ITEM 6. A)EXHIBITS
See Exhibit Index following the signature page in this report, which
is incorporated herein by this reference.
B)REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the second quarter of
1997.
19
20
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
------------------------------
(Registrant)
Date: August 14, 1997 /s/Dennis M. Conerton
------------------------------
Dennis M. Conerton
President and
Chief Executive Officer
Date: August 14, 1997 /s/ Jesse L. Calkins
------------------------------
Jesse L. Calkins
Senior Vice President
(Chief Financial and
Accounting Officer)
20
21
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
Incorporated Filed
Exhibit Herein By Here- Page
Number Description Reference To: with No.
-------------------------------------------------------------------------
2.1 Plan of Acquisition Exhibit 99.1 to Form
8-K/A filed April 25,
1997.
4.1 Amended and Exhibit 3.1 to
restated Articles Amendment No. 1 to
of Incorporation Registrant's
of the Registrant Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.2 By-laws of Regis- Exhibit 3.2 to
trant as amended Amendment No. 1 to
Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.3 Plan of Conversion Exhibit 1.2 to
Beloit Savings Amendment No. 1 to
Bank as amended Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
27 Financial Data X
Schedule
21