1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 SEPTEMBER 30, 1997
------------------------- -------------------
$.01 PAR VALUE 2,285,136 SHARES
2
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Income for the
three months ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Income for the
nine months ended September 30, 1997 and 1996 5
Consolidated Condensed Statements of Shareholders'
Equity as of September 30, 1997 and December 31, 1996 6
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 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 6. A) EXHIBITS 19
B) REPORTS ON FORM 8-K 19
SIGNATURES 21
3
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Cash and cash equivalents $ 10,792,000 $7,967,000
Federal funds sold and other short-term investments 1,693,000 4,678,000
Securities available for sale 9,277,000 10,702,000
Securities held to maturity 32,032,000 24,865,000
Total loans 137,179,000 99,427,000
Allowance for loan losses (Note 3) 1,476,000 1,186,000
------------ ----------
Net loans 135,703,000 98,241,000
Bank premises and equipment, net 4,266,000 3,463,000
Accrued interest receivable 1,116,000 1,042,000
Goodwill (Note 8) 464,000 --
Other assets 3,787,000 526,000
------------ ----------
Total Assets $199,130,000 $151,484,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 17,063,000 $23,194,000
Interest bearing 140,541,000 95,117,000
------------ ----------
Total Deposits 157,604,000 118,311,000
Borrowed Funds:
Short-term borrowings (Note 4) 12,282,000 7,405,000
Other borrowings (Note 5) 3,350,000 2,276,000
Accrued interest payable 836,000 680,000
Other liabilities 2,235,000 784,000
------------ ----------
Total Liabilities 176,307,000 129,455,000
------------ ----------
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 23,000 23,000
Additional paid-in capital 6,995,000 6,960,000
Employee stock options earned 122,000 95,000
Retained Earnings 15,769,000 15,072,000
Treasury Stock (104,000) (84,000)
FASB 115 Adjustment 18,000 (11,000)
------------ ----------
22,823,000 22,055,000
Less: Deferred compensation related
to employee stock ownership
plan debt guarantee -- (26,000)
------------ ----------
Total Shareholders' Equity 22,823,000 22,029,000
------------ ----------
Total Liabilities and
Shareholders' Equity $199,130,000 $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
SEPTEMBER 30,
1997 1996
---- ----
INTEREST INCOME:
Interest and fees on loans $3,157,000 $2,191,000
Interest on deposits with other banks 50,000 1,000
Interest on investment securities:
Taxable 573,000 562,000
Exempt from federal income taxes 37,000 65,000
Interest on federal funds sold
and other short-term investments 41,000 30,000
--------- ----------
Total Interest Income 3,858,000 2,849,000
--------- ----------
INTEREST EXPENSE:
Interest on deposits 1,644,000 1,146,000
Interest on short-term borrowings 126,000 160,000
Interest on other borrowings 48,000 36,000
--------- ----------
Total Interest Expense 1,818,000 1,342,000
--------- ----------
Net Interest Income 2,040,000 1,507,000
Provision for loan losses (Note 3) 54,000 35,000
--------- ----------
Net Interest Income After
Provision For Loan Losses 1,986,000 1,472,000
--------- ----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 44,000 14,000
Trust department income 46,000 26,000
Service fees 254,000 154,000
Other income 116,000 56,000
--------- ----------
Total Other Operating Income 460,000 250,000
--------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 858,000 560,000
Occupancy expense of bank premises, net 140,000 78,000
Furniture and equipment 76,000 88,000
Data processing 125,000 84,000
Other operating expenses 489,000 252,000
--------- ----------
Total Other Operating Expenses 1,688,000 1,062,000
--------- ----------
Income Before Income Taxes 758,000 660,000
Provision for Income Taxes 263,000 221,000
--------- ----------
Net Income $ 495,000 $ 439,000
========= ==========
Earnings Per Share $ .21 $ .19
========= ==========
Dividends Per Share $ .11 $ .10
========= ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
4
5
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
---- ----
INTEREST INCOME:
Interest and fees on loans $8,413,000 $6,497,000
Interest on deposits with other banks 72,000 2,000
Interest on investment securities:
Taxable 1,709,000 1,605,000
Exempt from federal income taxes 109,000 183,000
Interest on federal funds sold
and other short-term investments 117,000 169,000
---------- ----------
Total Interest Income 10,420,000 8,456,000
---------- ----------
INTEREST EXPENSE:
Interest on deposits 4,264,000 3,427,000
Interest on short-term borrowings 505,000 515,000
Interest on other borrowings 151,000 138,000
Total Interest Expense 4,920,000 4,080,000
---------- ----------
Net Interest Income 5,500,000 4,376,000
Provision for loan losses (Note 3) 129,000 120,000
---------- ----------
Net Interest Income After
Provision For Loan Losses 5,371,000 4,256,000
---------- ----------
OTHER OPERATING INCOME:
Gain (loss) on sale of loans 44,000 54,000
Trust department income 137,000 89,000
Service fees 652,000 415,000
Other income 281,000 185,000
---------- ----------
Total Other Operating Income 1,114,000 743,000
---------- ----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,201,000 1,624,000
Occupancy expense of bank premises, net 339,000 239,000
Furniture and equipment 237,000 269,000
Data processing 314,000 249,000
Other operating expenses 1,140,000 767,000
---------- ----------
Total Other Operating Expenses 4,231,000 3,148,000
---------- ----------
Income Before Income Taxes 2,254,000 1,851,000
Provision for Income Taxes 792,000 610,000
---------- ----------
Net Income $1,462,000 $1,241,000
========== ==========
Earnings Per Share $.61 $.53
========== ==========
Dividends Per Share $.32 $.28
========== ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
5
6
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
Common Stock:
Balance at beginning and end of period $ 23,000 $ 23,000
------------ ------------
Additional Paid-in Capital:
Balance at beginning of period 6,960,000 6,946,000
Stock options exercised 35,000 14,000
------------ ------------
Balance at end of period 6,995,000 6,960,000
------------ ------------
Employee Stock Options Earned:
Balance at beginning of period 95,000 52,000
Unearned employee compensation 27,000 43,000
------------ ------------
Balance at end of period 122,000 95,000
------------ ------------
Retained Earnings:
Balance at beginning of period 15,072,000 14,210,000
Net income 1,462,000 1,728,000
Dividends declared on common stock (765,000) (866,000)
------------ ------------
Balance at end of period 15,769,000 15,072,000
------------ ------------
Treasury Stock, at cost:
Balance at beginning of period (84,000) --
Purchase (20,000) (84,000)
------------ ------------
Balance at end of period (104,000) (84,000)
------------ ------------
FASB 115 Adjustment:
Balance at beginning of period (11,000) 37,000
Net adjustment during period 29,000 (48,000)
------------ ------------
Balance at end of period 18,000 (11,000)
------------ ------------
Other:
Balance at beginning of period (26,000) (79,000)
------------ ------------
Principal payments on ESOP loan 26,000 53,000
Balance at end of period -- (26,000)
------------ ------------
Total Shareholders' Equity $ 22,823,000 $ 22,029,000
============ ============
See Notes to Unaudited Consolidated Condensed Financial Statements
6
7
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,462,000 $1,241,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Compensatory options recognized 27,000
Provision for loan losses 129,000 120,000
Provision for depreciation and
amortization 307,000 253,000
Amortization of premiums (accretion of
discounts) on investment securities, net (51,000) (57,000)
(Gain) on sale of loans (44,000) (54,000)
Loans originated for sale (8,705,000) (3,834,000)
Proceeds from sale of loans 8,749,000 3,888,000
Change in assets and liabilities:
(Increase) decrease in accrued
interest receivable 353,000 (45,000)
(Increase) decrease in other assets (1,965,000) 9,000
Increase (decrease) in accrued
interest payable 46,000 (106,000)
Increase (decrease) in other
liabilities (252,000) (2,000)
------------ ------------
Net cash provided by operating activities 56,000 1,413,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-
for-sale securities 5,746,000 20,666,000
Purchase of available-for-sale securities (4,321,000) (21,143,000)
Proceeds from maturity of held-to-maturity securities 15,575,000 6,296,000
Purchase of held-to-maturity securities (15,951,000) (8,392,000)
Net cash used in acquisition (199,000) ---
Decrease in federal funds sold and
other short-term investments, net 2,985,000 7,133,000
Loans originated, net of
principal collected (1,276,000) (1,891,000)
Purchase of bank premises and equipment (293,000) (60,000)
------------ ------------
Net cash provided by (used in)
investing activities 2,266,000 2,609,000
------------ ------------
See Notes to Unaudited Consolidated Condensed Financial Statements.
7
8
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised $ 35,000 $ 14,000
Purchase of Treasury Stock (20,000) (84,000)
Net (decrease) in deposits (4,699,000) (8,951,000)
Net increase (decrease) in borrowings 5,952,000 4,930,000
Cash dividends paid (765,000) (638,000)
----------- -----------
Net cash (used in) financing activities 503,000 (4,729,000)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,825,000 (707,000)
CASH AND CASH EQUIVALENTS:
Beginning of Period 7,967,000 7,590,000
----------- -----------
End of Period $10,792,000 $ 6,883,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 4,653,000 $ 4,186,000
Income taxes 664,000 477,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Other assets acquired in settlement of loans 210,000 170,000
Principal payments on ESOP loan (Note 5) 26,000 40,000
See Notes to Unaudited Consolidated Condensed Financial Statements.
8
9
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 September
30, 1997 and December 31, 1996, the results of operations for the
three and nine months ended September 30, 1997 and 1996, and cash
flows for the nine months ended September 30, 1997 and 1996.
The results of operations for the three and nine months ended
September 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:
SEPTEMBER 30, DECEMBER 31
------------- -----------
1997 1996 1996
---- ---- ----
Impaired loans $ 228,000 $ -- $ 445,000
Non-accruing loans $ 369,000 719,000 443,000
Past due 90 days or more
and still accruing $ 181,000 73,000 252,000
---------- ---------- -------------
Total non-performing loan $ 778,000 $ 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
SEPTEMBER 30
1997 1996
---------- ----------
Balance at beginning of period $1,459,000 $993,000
Provision charged to expense 54,000 35,000
Loans charged off (40,000) (25,000)
Recoveries 3,000 6,000
---------- ----------
Balance at end of period $1,476,000 $1,009,000
========== ==========
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10
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Note 3: Allowance For Loan Losses (Continued)
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
---------- -------------
Balance at beginning of period $ 1,186,000 $ 929,000
Allowance associated with acquisition 345,000 --
Provision charged to expense 129,000 120,000
Loans charged off (206,000) (79,000)
Recoveries 22,000 39,000
----------- -----------
Balance at end of period $ 1,476,000 $ 1,009,000
=========== ===========
Note 4. Short-Term Borrowings
A summary of short-term borrowings is as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
Securities sold under agreement to repurchase $ 8,932,000 $ 7,405,000
Federal Funds Purchased 3,350,000 --
----------- -----------
$12,282,000 $7,405,000
=========== ===========
Note 5. Other Borrowings
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
ESOP Debt Guarantee $ -- $ 26,000
FHLB Borrowings 3,350,000 2,250,000
----------- ------------
$ 3,350,000 $2,276,000
=========== ============
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
$13,550,000.
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:
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11
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(CONTINUED)
Note 6. Stock Option Plan (continued)
SEPTEMBER 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 (8,550) (3,249)
------- -------
Shares under option, end of period 297,576 275,776
======= =======
Options exercisable, end of period 212,926 184,492
======= =======
Available to grant, end of period 83,000 114,300
======= =======
Average prices: Granted during the period $11.40 $11.20
Exercised during the period $ 4.02 $ 5.25
Under option $ 7.56 $ 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:
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- ----------
Loan commitments $21,476,000 $9,328,000
Standby letters of credit 248,000 356,000
----------- ----------
$21,724,000 $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 outstanding shares of Rochelle.
The acquisition was recorded using purchase accounting. Rochelle's
consolidated financial condition has been included in the Company's
consolidated balance sheet as of September 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 nine months ended September
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 NINE MONTH ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
--------------------------- --------------------------
Total Income $ 4,318,000 $ 4,060,000 $13,065,000 $ 12,350,000
Net Income 495,000 479,000 1,462,000 1,371,000
Net Income per share .21 .21 .61 .59
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12
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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
$52,637,000 and $0 at September 30, 1997 and December 31, 1996,
respectively.
Mortgage servicing rights of $51,000 and $0 were capitalized in
the nine months ended September 30, 1997 and 1996, respectively.
Mortgage servicing rights have a fair value of $523,000 and $0 at
September 30, 1997 and December 31, 1996, respectively. Amortization
of mortgage servicing rights was $22,000 and $0 for the nine months
ended September 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
------------------------ --------------------
Basic Earnings Per Share $ 0.22 $ 0.19 $ 0.64 $ 0.54
Diluted Earnings Per Share $ 0.21 $ 0.19 $ 0.61 $ 0.53
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction with
the consolidated condensed balance sheets as of September 30, 1997 and December
31, 1996 and the consolidated condensed statements of income for the three and
nine months ended September 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 1997 is expected to be positive.
Net income for the three months ended September 30, 1997 was $495,000 compared
to $439,000 for the similar period in 1996. For the nine months ended
September 30, 1997 net income was $1,462,000 compared to $1,241,000 for nine
months ended September 30, 1996. The discussion that follows will provide
information about the various areas of income and expense that resulted in the
aforementioned results.
THREE MONTHS ENDED SEPTEMBER 30
For the three months ended September 30, 1997, interest income was $3,858,000
compared to $2,849,000 for the same period in 1996. This increase of
approximately 35.4% ( $1,009,000) was primarily the result of increased volumes
from the Rochelle purchase.
Interest and fees on loans increased to $3,157,000 in the third quarter of 1997
compared to $2,191,000 in the same period of 1996. The average balance of loans
was $135.9 million in 1997 compared to $94.0 million in 1996. The average
yield on loans decreased to 9.29% in the third quarter of 1997 from 9.32% in
the same period in 1996. Nearly all of the increased loan income was the
result of increased volume and loan mix. At the beginning of the quarter
Rochelle completed the sale of $5.5 million of fixed rate mortgages. The
proceeds were invested in securities and other short-term investments. This
resulted in the moving of income from loans to investments in the third
quarter. Over the next year it is anticipated that these funds will be used to
fund new loans.
Investment income on taxable securities was $573,000 for the three months ended
September 30, 1997 compared to $562,000 for the same three months in 1996. The
increase was due to increased rates. The average yield on taxable investments
for the quarter was 6.37%. Interest income from tax exempt securities
decreased to $37,000 from $65,000 in 1996. The average yield increased, but the
average volume for the quarter decreased from approximately $5.5 million to
$3.3 million.
Interest from fed funds sold and other short-term investments increased to
$41,000 in 1997 from $30,000 in 1996. Average fed funds sold decreased to $1.6
million in 1997 from $2.2 million in 1996, accounting for the decreased
income in this category. The yield was greater on fed funds in the third
quarter of 1997 than in the same period in
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1996.
Interest paid on deposits increased to $1,644,000 in the three months ended
September 30, 1997 compared to $1,146,000 for the same period in 1996. The
average balance of interest bearing deposits increased to $140.6 million in
1997 compared to $96.9 million in 1996, approximately 45.1%. A larger
percentage of these deposits was in the lower rate accounts which resulted in a
lower average rate on interest bearing deposits in 1997 compared to 1996. The
average rates were 4.68% and 4.73%, in 1997 and 1996 respectively. The
actions of the Federal Reserve will affect the level and direction of interest
rates in the future. Management is not able to predict their actions but, at
this time, no significant changes are expected during the fourth quarter of
1997.
Interest on short-term borrowings decreased to $126,000 in 1997 from $160,000
in 1996, for a reduction of $34,000. Repurchase agreements and fed funds
purchased had a lower average balance in 1997 than in 1996, $9.8 million and
$12.1 million, respectively. The interest rates paid decreased to 5.14% in
1997 from 5.32% in 1996.
Other borrowings, which are represented by Federal Home Loan Bank ("FHLB")
advances, incurred an interest expense of $48,000 in the third quarter of 1997
compared to $36,000 in the same period of 1996. This was the result of average
borrowings from the FHLB increasing to $3.6 million in 1997 from $2.3 million
in 1996.
The provision for loan loss was $54,000 for the three months in 1997 compared
to $35,000 in 1996. Approximately 17% of the 1997 provision is attributable to
the new Rochelle operation. It is management's opinion that this amount is an
adequate provision.
Total other operating income increased to $460,000 from $250,000 for the three
months ended September 30, 1997 and 1996, respectively. Gain on sale of loans
in the third quarter of 1997 was $44,000 compared to $14,000 in 1996. Service
fees increased to over $254,000 in 1997 from $154,000 in 1996. Most of this
amount is attributable to checking account fees. The increase was due
primarily to Rochelle although Blackhawk experienced an increase of 10%. Fees
generated from trust activities, credit cards, the sale of non-deposit
investments and other activities were $162,000 for the three months ended
September 30, 1997 compared to $82,000 in the same period in 1996.
Approximately 60% of the increase is attributable to activities of the Rochelle
operation. Rochelle does not currently have a trust department.
Total other operating expenses increased to $1,688,000 for the three months
ended September 30, 1997 compared to $1,062,000 for the same period in 1996.
Of the $626,000 increase, nearly $300,000 can be attributed to the salary and
benefits area. The salaries and benefits at the acquired company is
responsible for a large percentage of this increase. The increases of expense
amounts in the areas of occupancy, data processing and other operating expenses
can almost entirely be attributed to the acquired operation.
Income taxes increased to $263,000 from $221,000. This increase was due to a
larger amount of income before taxes and a higher effective tax rate of 34.7%
in 1997 verses 33.5% in 1996.
NINE MONTHS ENDED SEPTEMBER 30
Total interest income for the nine months ended September 30 was $10,420,000
and $8,456,000, in 1997 and 1996, respectively. Nearly all of the increase was
attributable to interest and fees on loans. This increase was due primarily to
increased volume although the yield increased slightly. The average loan
balance for the first nine months of 1997 was $121.6 million, compared to $94.1
million in 1996. The average yields were 9.22% and 9.20%, 1997 and 1996,
respectively.
Interest on taxable securities increased to $1,709,000 for the nine months
ended September 30, 1997 from $1,605,000 for the same period in 1996. All of
this increase is attributable to an increase in yield which was more than
enough to offset the loss of income due to lower volume.
Interest from tax exempt securities was $109,000 in 1997 compared to $183,000
in 1996. The lower income was the result of both lower volume and lower average
yields.
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The income from fed funds sold and other short term investments was $117,000
for the first nine months of 1997 compared to $169,000 in 1996. The increase
due to a slightly higher yield was not sufficient to offset the reduction of
income due to the lower volume in 1997 compared to 1996.
Interest on deposits was $4,264,000 for the nine months ended September 30,
1997 compared to $3,427,000 for the same period in 1996. Nearly all of this
increase can be attributed to greater volume which resulted from the
acquisition of Rochelle. IRAs and CD's experienced a higher average rate in
1997 than in 1996, (5.82% and 5.76%, respectively). Although 1997 has not been
an increasing interest rate environment, maturing deposits have rates lower
than the rates being offered, thus the average yields increased. As a result,
the average rates on IRAs and CDS are increasing.
Interest on short-term borrowings, consisting of repurchase agreements and fed
funds purchased, was $505,000 in 1997 compared to $515,000 in 1996. The
decrease in the average balance of these borrowings was enough to offset a
slight increase in rate. Interest on other borrowings represents interest
paid on borrowings from the Federal Home Loan Bank ("FHLB"). The increase to
$151,000 from $138,000 for the periods ended September 30 1997 and 1996
respectively was the result of additional borrowings by Blackhawk.
The provision for loan loss was $129,000 in 1997 compared to $120,000 in 1996.
The additional provision was due to Rochelle. The provision by Blackhawk was
the same for both 1997 and 1996. Management is of the opinion that the current
provision is adequate.
For the nine months of 1997, total other operating income was $1,114,000
compared to $743,000 for the same period in 1996. Included in these figures
are service fees which were $652,000 in 1997 compared to $415,000 in 1996. The
majority of these are fees associated with primarily checking accounts.
Approximately $67,000 of the increase in service fees are the result of a
larger number of accounts and an increased fee schedule from Blackhawk. The
remaining $160,000 of the increase was from Rochelle. Two other areas that
experienced sizeable increases were trust department income and other income.
Trust income increased to $137,000 in 1997 from $89,000 in 1996. This was
entirely the result of an increase in trust accounts at Blackhawk. The increase
of other income to $281,000 from $185,000 in 1996 was due to increased fees
from the investment center and revenue from Rochelle.
Total other operating expenses were $4,231,000 for the nine months of 1997
compared to $3,148,000 for the same period of 1996. The largest amount of the
$1,083,000 increase was in salaries and employee benefits which experienced an
increase of $577,000. Of this amount approximately $408,000 was due to the
acquisition. A significant portion of the balance was the result of opening
an in-store branch in Wal Mart early in the third quarter, by Blackhawk.
Occupancy costs increased $100,000 of which $79,000 is attributable to
Rochelle. Most of the remaining increase was the result of opening the
in-store branch. Data processing costs also increased significantly. This
also was the result of the Rochelle acquisition. Of the $373,000 increase in
other operating expenses, $1,140,000 in 1997 compared to $767,000 in 1996,
$290,000 is due to Rochelle.
The income tax provision was $792,000 in 1997 compared to $610,000 in 1996.
These amounts represent effective tax rates of 35.1% and 3.0% respectively.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares September 30, 1997
to the Company's prior fiscal year end December 31, 1996. Total assets were
$199.1 million as compared to $151.5 million as of December 31, 1996. This
represents an increase of approximately $47.6 million or 31.4%. 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 $43.0
million as of September 30, 1997, as compared to $40.2 million as of December
31, 1996. The reduction of Blackhawk's investments resulting from the funding
of the increase in loans and the purchase of Rochelle was offset by the
securities acquired with the Rochelle acquisition and subsequent purchases by
Rochelle.
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Loans totaled $137.2 million on September 30, 1997 as compared to $99.4 million
on December 31, 1996, an increase of $37.8 million or 38.0%. Approximately
$34.2 million or 90%, of the increase is the result of the Rochelle acquisition
and of these, $28.8 million are real estate loans. At the beginning of the
quarter Rochelle completed the sale of $5.5 million of fixed rate mortgages.
The proceeds were invested in securities and other short-term investments.
Over the next year it is anticipated that these funds will be used to fund new
loans. Diversification of Rochelle's loan portfolio, as to type of loans, will
be an objective going forward. 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 $1.5 million as of September 30,1997 as compared
to $1.2 million as of December 31, 1996. Footnote 3 to the financial
statements indicates the activity in the allowance for loan loss account for
the three months and nine months ended September 30, 1997 and 1996.
Non-performing loans (see Footnote 2) as of September 30, 1997 were $.8
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 $4.3 million as compared to $3.5
million at December 31, 1996. This increase of $800,000 was primarily the
result of the Rochelle acquisition as there have not been any significant
purchases in 1997.
Total deposits of $157.6 million as of September 30, 1997 was an increase of
$39.3 million as compared to $118.3 million as of December 31, 1996.
Non-interest bearing deposits decreased to $17.1 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-end. The
non-interest bearing deposits acquired with Rochelle was not sufficient to
overcome this reduction. The 48% increase in interest-bearing deposits to
$140.5 million compared to $95.1 million, was primarily the result of Rochelle.
Excluding Rochelle, the increase would have been approximately 2%.
Competition for deposit dollars continues to be intense. As a result, dramatic
growth of deposits is not anticipated during the balance of 1997.
The items included in 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 needs arise.
The company continues to maintain an excellent capital position regardless of
the measurement used. The following table shows four different measurements as
of September 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.
SEPTEMBER 30 DECEMBER 31, REGULATORY
1997 1996 REQUIREMENTS
---- ---- ------------
Leverage capital ratio 12.63% 15.08% N/A
Core capital as a percent
of assets 10.87% 14.37% 5.50%
Core capital as a percent
of risk-based assets 18.03% 22.88% N/A
Total capital as a percent
of risk-based assets 19.63% 23.47% 8.00%
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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 the purchase of fed
funds, sale of loans, borrowing from both the Federal Reserve Bank and Federal
Home Loan Bank, and capital loans. Also dividends paid by Nevahawk
Investments, Inc. ("Nevahawk") to Blackhawk provide an additional source to
Blackhawk. Nevahawk is the investment subsidiary of 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.
Off-balance sheet items consist of credit card lines of credit, mortgage
commitments, letters of credit and other commitments totaling approximately
$21.7 million as of September 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
include, but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
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PART II
OTHER INFORMATION
ITEM 6.
A) EXHIBITS
See Exhibit Index following the signature page in this report, which is
incorporated herein by this reference.
B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the third quarter of 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
-----------------------
(Registrant)
Date: November 11, 1997 /s/ Dennis M. Conerton
-----------------------
Dennis M. Conerton
President and Chief Executive Officer
Date: November 11, 1997 /s/ Jesse L. Calkins
-----------------
Jesse L. Calkins
Senior Vice President
(Chief Financial and
Accounting Officer)
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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 21
Schedule
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