UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ---- TO ----
COMMISSION FILE NUMBER 0-18599
BLACKHAWK BANCORP, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER 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
BELOIT, WISCONSIN 53511
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(608) 364-8911
(ISSUER'S TELEPHONE NUMBER)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
OUTSTANDING AT
CLASS OF COMMON STOCK JULY 31, 2004
--------------------- -------------
$.01 PAR VALUE 2,526,145 SHARES
Transitional Small Business Disclosure Format (Check one): Yes No X
----- -----
INDEX
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30,
2004 (unaudited) and December 31, 2003 4
Unaudited Consolidated Statements of Income for the
Three Months Ended June 30, 2004 and 2003 5
Unaudited Consolidated Statements of Income for the
Six Months Ended June 30, 2004 and 2003 6
Unaudited Consolidated Statements of Stockholders'
Equity for the Six Months Ended June 30, 2004 and 2003 7
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 8-9
Notes to Unaudited Consolidated Financial Statements 10-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION 15-28
ITEM 3. CONTROLS AND PROCEDURES 29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 29-30
ITEM 5. OTHER INFORMATION 30
ITEM 6. A) EXHIBITS 30
B) REPORTS ON FORM 8-K 30
SIGNATURES 31
INDEX TO EXHIBITS 32-33
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
JUNE 30, DECEMBER 31,
2004 2003
---- ----
ASSETS (Dollars in thousands)
------
Cash and due from banks $ 14,813 $ 17,250
Federal funds sold and securities purchased under agreements to resell 5,294 6,120
Interest-bearing deposits in banks 2,012 2,841
Available-for-sale securities 129,584 118,107
Held to maturity securities, at amortized cost -0- 17,606
Loans, less allowance for loan losses of $2,508 and $3,302
at June 30, 2004 and December 31, 2003, respectively 231,723 230,142
Office buildings and equipment, net 9,657 9,981
Intangible assets 7,048 7,246
Bank-owned life insurance 6,395 6,263
Other assets 9,385 9,846
-------- --------
Total Assets $415,911 $425,402
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing $ 49,190 $ 47,999
Interest-bearing 257,536 275,640
-------- --------
Total deposits 306,726 323,639
Short-term borrowings 16,887 9,486
Subordinated debentures 7,217 7,217
Long-term borrowings 57,232 55,913
Other liabilities 2,651 3,384
-------- --------
Total Liabilities 390,713 399,639
-------- --------
STOCKHOLDERS' 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,
shares issued and outstanding: 2,526,145 at June 30, 2004, 2,522,995
at December 31, 2003 25 25
Surplus 8,845 8,818
Retained earnings 16,470 16,092
Accumulated other comprehensive income (loss) (142) 828
-------- --------
Total Stockholders' Equity 25,198 25,763
-------- --------
Total Liabilities and Stockholders' Equity $415,911 $425,402
-------- --------
-------- --------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30,
2004 2003
---- ----
INTEREST INCOME: (Dollars in thousands, except per share data)
Interest and fees on loans $3,472 $3,065
Interest and dividends on securities:
Taxable 922 929
Nontaxable 306 282
Interest on federal funds sold and securities purchased under
agreements to resell 18 7
Interest on interest-bearing deposits in banks 13 8
------ ------
Total Interest Income 4,731 4,291
------ ------
INTEREST EXPENSE:
Interest on deposits 1,076 1,230
Interest on short-term borrowings 23 41
Interest on subordinated debentures 103 84
Interest on long-term borrowings 561 530
------ ------
Total Interest Expense 1,763 1,885
------ ------
Net Interest Income 2,968 2,406
Provision for loan losses 103 142
------ ------
Net Interest Income After Provision For Loan Losses 2,865 2,264
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 629 365
Gain on sale of loans 208 141
Securities gains, net 72 95
Increase in cash value of bank-owned life insurance 71 77
Other 220 204
------ ------
Total Noninterest Income 1,200 882
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,837 1,360
Occupancy 255 179
Equipment 300 231
Data processing services 272 203
Advertising and marketing 117 143
Amortization of intangibles 95 79
Professional fees 116 116
Office supplies 58 55
Telephone 96 79
Postage 51 60
Transportation 64 52
Other 307 258
------ ------
Total Noninterest Expenses 3,568 2,815
------ ------
Income Before Income Taxes 497 331
Income Taxes 71 1
------ ------
Net Income $ 426 $ 330
------ ------
------ ------
Basic Earnings Per Share $ 0.17 $ 0.13
------ ------
------ ------
Diluted Earnings Per Share $ 0.17 $ 0.13
------ ------
------ ------
Dividends Per Share $ 0.09 $ 0.09
------ ------
------ ------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30,
2004 2003
---- ----
INTEREST INCOME: (Dollars in thousands, except per share data)
Interest and fees on loans $7,013 $6,327
Interest and dividends on securities:
Taxable 1,978 1,857
Nontaxable 619 535
Interest on federal funds sold and securities purchased under
agreements to resell 31 49
Interest on interest-bearing deposits in banks 30 18
------ ------
Total Interest Income 9,671 8,786
------ ------
INTEREST EXPENSE:
Interest on deposits 2,200 2,496
Interest on short-term borrowings 52 76
Interest on subordinated debentures 206 168
Interest on long-term borrowings 1,121 1,035
------ ------
Total Interest Expense 3,579 3,775
------ ------
Net Interest Income 6,092 5,011
Provision for loan losses 207 365
------ ------
Net Interest Income After Provision For Loan Losses 5,885 4,646
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 1,115 704
Gain on sale of loans 355 301
Securities gains, net 152 424
Increase in cash value of bank-owned life insurance 140 153
Other 466 340
------ ------
Total Noninterest Income 2,228 1,922
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,655 2,818
Occupancy 545 369
Equipment 608 461
Data processing services 550 399
Advertising and marketing 210 207
Amortization of intangibles 190 159
Professional fees 244 302
Office supplies 130 117
Telephone 192 153
Postage 102 116
Transportation 128 96
Other 596 583
------ ------
Total Noninterest Expenses 7,150 5,780
------ ------
Income Before Income Taxes 963 788
Income Taxes 131 61
------ ------
Net Income $ 832 $ 727
------ ------
------ ------
Basic Earnings Per Share $ 0.33 $ 0.29
------ ------
------ ------
Diluted Earnings Per Share $ 0.33 $ 0.29
------ ------
------ ------
Dividends Per Share $ 0.18 $ 0.18
------ ------
------ ------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED
JUNE 30,
2004 2003
(Dollars in thousands)
Common stock:
Balance at beginning of period $ 25 $ 25
Stock options exercised -- --
------- -------
Balance at end of period 25 25
------- -------
Surplus:
Balance at beginning of period 8,818 8,698
Stock options exercised 27 75
------- -------
Balance at end of period 8,845 8,773
------- -------
Retained earnings:
Balance at beginning of period 16,092 15,788
Net income 832 727
Dividends declared on common stock (454) (453)
------- -------
Balance at end of period 16,470 16,062
------- -------
Accumulated other comprehensive income (loss):
Balance at beginning of period 828 1,287
Other comprehensive income (loss), net of taxes (970) (5)
------- -------
Balance at end of period (142) 1,282
------- -------
Total Stockholders' Equity $25,198 $26,142
------- -------
------- -------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
2004 2003
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 832 $ 727
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 706 648
Provision for loan losses 207 365
Gain on sale of loans (355) (301)
FHLB stock dividends (167) (126)
Amortization of premiums on securities, net 509 397
Securities gains, net (152) (424)
Decrease in accrued interest receivable 241 253
Decrease in accrued interest payable (119) (55)
(Increase) decrease in other assets 64 (213)
Increase (decrease) in other liabilities 14 (1,127)
-------- --------
Net cash provided by operations before
loan originations and sales 1,780 144
Origination of loans for sale (25,349) (15,050)
Proceeds from sale of loans 24,506 16,708
-------- --------
Net cash provided by operating activities 937 1,802
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in banks 829 6,550
Net decrease in federal funds sold and securities
purchased under agreements to resell 826 13,120
Proceeds from sales of available-for-sale securities 25,274 23,957
Proceeds from maturities and calls of available-for-sale securities 17,525 20,824
Proceeds from maturities and calls of held-to-maturity securities 1,188 3,574
Purchase of available-for-sale securities (39,960) (62,948)
Net (increase) decrease in loans (1,711) 951
Proceeds from the sale of office buildings, equipment, and
other real estate owned 1,333 317
Purchase of office buildings and equipment, net (222) (202)
-------- --------
Net cash provided by investing activities 5,082 6,143
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (16,776) (14,192)
Dividends paid (454) (453)
Proceeds from long-term borrowings 6,000 8,000
Payments on long-term borrowings (4,650) (300)
Net increase (decrease) in short-term borrowings 7,401 (1,464)
Proceeds from exercise of stock options 23 58
-------- --------
Net cash used in financing activities (8,456) (8,351)
-------- --------
Net decrease in cash and due from banks (2,437) (406)
CASH AND DUE FROM BANKS:
Beginning 17,250 12,572
-------- --------
Ending $ 14,813 $ 12,166
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 3,866 $ 3,825
Income taxes $ (160) $ (163)
SUPPLEMENTAL SCHEDULES OF NON-CASH INVESTING
ACTIVITIES:
Change in accumulated other comprehensive income:
Unrealized losses on available-for-sale securities, net $ (1,026) $ (50)
Unrealized gain on interest rate swap contract, net $ 56 $ --
Other assets acquired in settlement of loans $ 1,040 $ 88
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Note 1. General:
The unaudited consolidated financial statements include the accounts of
Blackhawk Bancorp, Inc. and its subsidiary. Effective September 30,
2003, Blackhawk Bancorp, Inc. acquired the assets of DunC Corp. and its
subsidiary, First Bank, bc., in a transaction accounted for as a
purchase. The assets and liabilities and results of operations of
those acquired companies have been included in the consolidated
financial statements of Blackhawk Bancorp, Inc. subsequent to the date
of acquisition and affect comparability of 2004 results with 2003.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
financial position, results of operation and cash flows for the interim
periods have been made. The results of operations for the three and
six months ended June 30, 2004 are not necessarily indicative of the
results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America and industry practice. Certain information in
footnote disclosure normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States of America and industry practice has been condensed or
omitted pursuant to rules and regulations of the Securities and
Exchange Commission. The more significant policies used by the Company
in preparing and presenting its financial statements are stated in the
Company's Form 10-KSB. These financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2003 audited financial
statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions which affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements, as well as
the reported amounts of income and expenses during the reported
periods. Actual results could differ from those estimates.
Certain reclassifications have been made to the 2003 historical
financial statements to conform to the 2004 presentation with no effect
on net income or stockholders' equity.
Stock-Based Compensation Plan: The Company's stock-based director, key
-----------------------------
officer and employee compensation plans expired on December 31, 2003.
The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based
employee compensation cost is reflected in income, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The table
on the following page illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. The pro-forma compensation expense is recognized over
the three year option vesting period.
(Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30,
2004 2003
---- ----
Net income, as reported $ 426 $ 330
Deduct total stock-based employee and director compensation
expense determined under fair value based method for all awards,
net of related tax effects (18) (21)
----- -----
PRO FORMA NET INCOME $ 408 $ 309
----- -----
----- -----
Earnings per share:
Basic:
As reported $0.17 $0.13
Pro forma 0.16 0.12
Diluted:
As reported 0.17 0.13
Pro forma 0.16 0.12
(Dollars in thousands, except per share data) SIX MONTHS ENDED JUNE 30,
2004 2003
---- ----
Net income, as reported $ 832 $ 727
Deduct total stock-based employee and director compensation
expense determined under fair value based method for all awards,
net of related tax effects (35) (42)
----- -----
PRO FORMA NET INCOME $ 797 $ 685
----- -----
----- -----
Earnings per share:
Basic:
As reported $0.33 $0.29
Pro forma 0.32 0.27
Diluted:
As reported 0.33 0.29
Pro forma 0.31 0.27
In determining compensation cost using the fair value method prescribed
in Statement No. 123, the value of each grant is estimated at the grant
date with the following weighted-average assumptions used for grants in
2003 and 2002, respectively: dividend yield of 3 percent and 4 percent;
expected price volatility of 23 percent and 25 percent; risk-free
interest rates of 3 percent and 4 percent; and expected lives of 7
years and 10 years, respectively.
Note 2. Allowance for Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
THREE MONTHS ENDED
JUNE 30,
(Dollars in thousands)
2004 2003
---- ----
Balance at beginning of period $3,173 $2,197
Provision charged to expense 103 142
Loans charged off 844 90
Recoveries 76 93
------ ------
Balance at end of period $2,508 $2,342
------ ------
------ ------
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands)
2004 2003
---- ----
Balance at beginning of period $3,302 $2,079
Provision charged to expense 207 365
Loans charged off 1,101 247
Recoveries 100 145
------ ------
Balance at end of period $2,508 $2,342
------ ------
------ ------
Note 3. Earnings Per Share
Presented below are the calculations for basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 426,000 $ 330,000 $ 832,000 $ 727,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,526,145 2,517,219 2,525,308 2,515,627
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $ 0.17 $ 0.13 $ 0.33 $ 0.29
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Net income available to common stockholders $ 426,000 $ 330,000 $ 832,000 $ 727,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,526,145 2,517,219 2,525,308 2,515,627
Effect of dilutive stock options outstanding 30,540 17,267 30,540 17,267
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,556,685 2,534,486 2,555,848 2,532,894
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.17 $ 0.13 $ 0.33 $ 0.29
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Note 4. Derivative Instrument
During June 2003, the Company entered into an interest rate swap
transaction, which resulted in the Company converting $7,000,000 of its
$7,217,000 of variable rate subordinated debentures into fixed rate
debt. This swap transaction requires the payment of interest by the
Company at a fixed rate equal to 2.47% using an actual/360 day basis.
In turn the Company receives a variable rate interest payment based on
the 90 day LIBOR rate adjusted quarterly.
Summary information about the interest rate swap at June 30 is as
follows:
2004 2003
---- ----
(Dollars in thousands)
Notional amount $7,000 $7,000
Weighted average fixed rate 2.51% 2.51%
Weighted average variable rate 1.61% 1.02%
Weighted average maturity 3.5 years 4.5 years
Fair value $308 $69
Note 5. Acquisition of DunC Corp.
As more fully described in Item 2 of this report under the caption
"Acquisition or Disposition of Assets", Blackhawk Bancorp, Inc.
acquired DunC Corp. on September 30, 2003 in a transaction accounted
for as a purchase. The assets and liabilities of DunC Corp., valued at
fair market value, on the date of acquisition are included in the
unaudited consolidated balance sheet of Blackhawk Bancorp, Inc. and
Subsidiary at June 30, 2004 and in the audited consolidated balance
sheet of Blackhawk Bancorp, Inc. and Subsidiary at December 31, 2003.
The results of operations have been included in the unaudited
consolidated statements of income for the three and six months ended
June 30, 2004 and will affect the comparability to 2003 results.
Note 6. Sale of Branches Located in Rochelle and Oregon, Illinois
As more fully described in Item 2 of this report under the caption
"Acquisition or Disposition of Assets", on June 22, 2004 Blackhawk
State Bank entered into a definitive agreement for the sale of its
branches located in the Illinois communities of Rochelle and Oregon.
The sale includes only the branch facilities and deposits, not loans.
The two branches currently have approximately $35 million in combined
deposits. The transaction, which is subject to regulatory and other
customary closing conditions, is expected to close in the fourth
quarter of 2004. In accordance with generally accepted accounting
principals, the assets and liabilities of these two branches and their
results of operations and cash flows have been included in the
financial statements of Blackhawk Bancorp, Inc. for all periods
presented.
Note 7. Recent Accounting Developments
FIN No. 46 Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (Revised December
2003). FIN 46 establishes accounting guidance for consolidation of
variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a
VIE is the entity that absorbs a majority of the VIE's expected losses,
receives a majority of the VIE's expected residual returns, or both, as
a result of ownership, controlling interest, contractual relationship
or other business relationship with a VIE. Prior to the implementation
of FIN 46, VIEs were generally consolidated by an enterprise when the
enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The provisions of FIN 46
were effective immediately for all arrangements entered into after
January 31, 2003. However, subsequent revisions to the interpretation
deferred the implementation date of FIN 46 until the first period
ending after March 15, 2004.
The Company adopted FIN 46, as revised, in connection with its
consolidated financial statements for the quarter ended March 31, 2004.
The implementation of FIN 46 required the Company to de-consolidate its
investment in Blackhawk Statutory Trust I (the "Trust") because the
Company is not the primary beneficiary. There was no impact on
stockholders' equity, or net income upon adoption of the standard.
The trust preferred securities issued by the Trust are currently
included in the Tier 1 capital of the Company for regulatory capital
purposes. However, because the financial statements of the Trust will
no longer be included in the Company's consolidated financial
statements, the Federal Reserve Board may in the future disallow
inclusion of the trust preferred securities in Tier 1 capital for
regulatory capital purposes. In July 2003, the Federal Reserve Board
issued a supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in their Tier 1
capital for regulatory capital purposes until notice is given to the
contrary. On May 6, 2004 the Federal Reserve Board issued a proposed
rule limiting the amount of trust preferred securities eligible for
inclusion in Tier 1 capital to 25% of core capital elements, net of
goodwill. This proposed change would be fully effective on March 31,
2007 after a three year phase in period. The proposed rule will limit
the Company's trust preferred securities eligible for inclusion in Tier
1 capital to $6,870,000. Under the proposed rule, the balance of the
Company's trust preferred securities will be included in Tier 2
capital. There can be no assurance that the Federal Reserve Board will
continue to permit institutions to include trust preferred securities
in Tier 1 capital for regulatory capital purposes.
Note 8. Recent Regulatory Developments
The Sarbanes-Oxley Act of 2002 (the "Act") impacts corporate governance
of public companies, affecting their officers and directors, their
audit committees, their relationships with their accountants and the
audit function itself. Certain provisions of the Act became effective
on July 30, 2002. The requirements of Section 404 of the Act become
effective for the Company for the year ended December 31, 2005. Section
404 requires an evaluation of and report on the Company's internal
control environment and an auditors' opinion on managements' evaluation
of internal control.
The Act implements a broad range of corporate governance and accounting
measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from
corporate wrongdoing. The Act includes the creation of an independent
accounting oversight board to oversee the audit of public companies and
their auditors, provisions restricting non-audit services performed by
independent accountants for public companies and additional corporate
governance and responsibility provisions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN 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 company's consolidated financial statements and footnotes thereto
for the year ended December 31, 2003.
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of Blackhawk Bancorp, Inc. Statements that are not
historical facts, including statements about beliefs and expectations, are
forward-looking statements. These statements are based upon beliefs and
assumptions of Blackhawk's management and on information currently available
to such management. The use of the words "believe", "expect", "anticipate",
"plan", "estimate", "may", "will" or similar expressions are forward-looking
statements.
Contemplated, projected, forecasted or estimated results in such forward-
looking statements involve certain inherent risks and uncertainties. A number
of factors - many of which are beyond the ability of the company to control
or predict - could cause actual results to 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: heightened competition;
adverse state and federal regulation; failure to obtain new or retain
existing customers; ability to attract and retain key executives and
personnel; changes in interest rates; unanticipated changes in industry
trends; unanticipated changes in credit quality and risk factors, including
general economic conditions; success in gaining regulatory approvals when
required; changes in the Federal Reserve Board monetary policies; unexpected
outcomes of new and existing litigation in which Blackhawk or its
subsidiaries, officers, directors or employees is named defendants;
technological changes; changes in accounting principles generally accepted in
the United States; changes in assumptions or conditions affecting the
application of critical accounting policies; and the inability of third party
vendors to perform critical services for the company or its customers.
The Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
ACQUISITION OR DISPOSITION OF ASSETS
On September 30, 2003 (the "Effective Date"), Blackhawk Bancorp, Inc., (the
"Corporation") consummated its acquisition of DunC Corp. ("DunC"), a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, and DunC's wholly owned subsidiary, First Bank, bc ("First Bank"),
an Illinois state bank.
The Corporation acquired DunC and First Bank pursuant to an Agreement and Plan
of Merger dated as of March 17, 2003 (the "Merger Agreement"), between the
Corporation, DunC Merger Corporation ("Merger Corp"), a wholly owned
subsidiary of the Corporation, and DunC through a series of mergers.
Pursuant to the Merger Agreement, Merger Corp was merged with and into DunC at
the close of business on the Effective Date, and DunC became a wholly owned
subsidiary of the Corporation. The merger consideration was cash in the
aggregate amount of $7,223,000, which was paid to former DunC shareholders.
The price paid by the Corporation for the DunC common stock was arrived at
through arms-length negotiations.
The terms of the merger of Merger Corp with and into DunC are described more
fully in the Merger Agreement filed as Exhibit 2.1 to the Corporation's Form
10-QSB for the quarterly period ended June 30, 2003, which is incorporated
herein by reference. The description of the transaction set forth above is
qualified in its entirety by the terms set forth in the Merger Agreement.
Immediately following the merger of Merger Corp into DunC, DunC merged with
and into the Corporation, and First Bank merged with and into Blackhawk State
Bank, a wholly owned subsidiary of the Corporation. As a result of these
mergers the Corporation and Blackhawk State Bank were the surviving entities,
and DunC and First Bank ceased to exist.
The merger consideration paid to the former shareholders of DunC was funded
through a term loan with U.S. Bank National Association, Milwaukee,
Wisconsin. The term loan for $7.5 million was entered into in the ordinary
course of business and on terms commensurate with prevailing market
conditions on September 26, 2003. The term loan matures on September 26,
2008. A copy of the term loan agreement was filed as an exhibit on the
Corporation's Current Report on Form 8-K dated September 30, 2003 and is
incorporated herein by reference.
In accordance with the requirements of purchase accounting, the operations
of the acquired companies have been included with the operations of the
Company since date of acquisition. Because of the relative size of the
Company and DunC, the acquisition has had a significant effect on both the
operations and balance sheets of the Company, and significantly affects
comparisons between 2003 and 2004. In addition, as part of that
acquisition, the Company committed to its regulators to maintain the Bank's
Tier 1 leverage capital at not less than 7% for three years, and to raise
capital in the event that the cash flow required to service debt incurred
in the acquisition exceeds 80% of Bank net income.
The following provides certain summary financial information about the
financial condition of DunC and the assets and liabilities acquired in the
acquisition, and DunC's operations, prior to the acquisition to illustrate
their impact upon the corporation:
Balance Sheet
-------------
(Dollars in thousands) At September 30, 2003
---------------------- ---------------------
Loans $46,781
Allowance for Loan Losses (889)
Investments 11,104
Total Assets 77,726
Deposits 64,237
Borrowings 3,631
Income Statement
---------------- Nine Months Ended Year Ended
(Dollars in thousands) September 30, 2003 December 31, 2002
---------------------- ------------------ -----------------
Total Interest Income $ 3,645 $ 4,602
Total Interest Expense 850 1,453
------- -------
Net Interest Income 2,795 3,149
Provision for Loan Losses 200 628
Non-Interest Income 1,819 2,497
Non-Interest Expense 4,701 4,208
------- -------
Net Income (Loss) before Tax (287) 810
On the acquisition date, the First Bank branch located at 417 Ware Avenue,
Rockford, Illinois was closed with its accounts being consolidated into the
Bank's Rockford office located at 2475 North Perryville Road. On January 31,
2004 the Bank closed its branch office located at 1021 North State Street,
Belvidere, Illinois and consolidated the accounts into the office located at
2141 North State Street, Belvidere, Illinois, which is a former First Bank
branch obtained in the acquisition.
On June 22, 2004 the Bank entered into an agreement to sell its Rochelle and
Oregon, Illinois branches to The First National Bank and Trust Company of
Rochelle, Illinois. The agreement was filed as exhibit 2.1 to Form 8-K dated
June 22, 2004 and is incorporated herein by reference. The description of
the transaction set forth below is qualified in its entirety by the terms set
forth in the Agreement.
The purchaser will assume the deposits of these two locations and will
acquire their premises and equipment. The Bank will transfer assets equal to
the liabilities assumed net of a premium equal to 6.77% of Core Deposit
Liabilities transferred. Currently these two branches have deposits of
approximately $35 million. The Bank will retain the loans of these two
branches.
The Bank plans to replace these deposits with brokered deposits, Federal Home
Loan Bank borrowings, liquidation of investment securities, or some
combination thereof. The transaction is subject to regulatory and other
customary closing conditions and is expected to close in the fourth quarter
of 2004.
In accordance with generally accepted accounting principals, the deposits to
be transferred and the results of operations of these two branches are
included in the company's June 30, 2004 and December 31, 2003 balance sheets
and in its results of operations and cash flows for all periods presented.
RESULTS OF OPERATIONS
The company reported net income of $426,000 for the three months ended June 30,
2004, an increase of $96,000 or 29.1% from the $330,000 reported for the same
three month period in 2003. Net income for the six month period ended June 30,
2004 was $832,000, an increase of $105,000, or 14.4% from the $727,000 reported
for the same period in 2003.
Diluted earnings per share were $0.17 and $0.33 for the three and six months
ended June 30, 2004, respectively, compared to $0.13 and $0.29 for the same
periods in 2003. This represents an increase of 30.8% and 13.8% for the three
month and six month periods, respectively.
NET INTEREST INCOME
Net interest income, which is the sum of interest and certain fees generated by
earning assets minus interest paid on deposits and other funding sources, is the
primary source of the company's earnings. All discussions of interest income
amounts and rates are on a tax-equivalent basis, which accounts for income
earned on loans and securities that are not fully subject to income taxes as if
they were fully subject to income taxes. The following table sets forth the
company's consolidated average balances of assets, liabilities and stockholders'
equity, interest income and expense on related items, and the company's average
rate for the three and six month periods ended June 30, 2004 and 2003. The tax-
equivalent yield calculations assume a Federal Tax Rate of 34%:
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES
(yields on a tax-equivalent basis) Three Months ended June 30, 2004 Three Months ended June 30, 2003
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits in banks $ 2,394 $ 13 2.18% $ 1,409 $ 8 2.28%
Federal funds sold & securities
purchased under agreements to resell 5,036 18 1.44% 1,640 7 1.71%
Investment securities:
Taxable investment securities 103,092 922 3.60% 99,804 929 3.73%
Tax-exempt investment securities 32,241 464 5.79% 28,387 427 6.03%
-------- ------ ----- -------- ------ -----
Total investment securities 135,333 1,386 4.12% 128,191 1,356 4.24%
Loans 238,200 3,473 5.86% 182,962 3,065 6.72%
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS $380,963 $4,890 5.16% $314,202 $4,436 5.66%
------ ----- ------ -----
Allowance for loan losses (3,124) (2,278)
Cash and due from banks 13,539 11,263
Other assets 26,838 19,833
-------- --------
TOTAL ASSETS $418,216 $343,020
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 46,277 $ 57 .50% $ 39,047 $ 75 .77%
Savings and money market deposits 82,659 157 .76% 54,466 102 .75%
Time deposits 134,869 862 2.57% 124,229 1,053 3.40%
-------- ------ ----- -------- ------ -----
Total interest bearing deposits 263,805 1,076 1.64% 217,742 1,230 2.27%
Short-term borrowings 11,791 23 .78% 13,463 41 1.22%
Subordinated debentures 7,217 103 5.74% 7,217 84 4.67%
Long-term borrowings 57,404 561 3.93% 44,029 530 4.83%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING LIABILITIES $340,217 $1,763 2.08% $282,451 $1,885 2.67%
------ ----- ------ -----
INTEREST RATE SPREAD 3.08% 2.99%
----- -----
----- -----
Checking accounts 50,211 32,535
Other liabilities 2,203 2,140
-------- --------
Total liabilities 392,631 317,126
Stockholders' equity 25,585 25,894
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $418,216 $343,020
-------- --------
-------- --------
NET INTEREST INCOME/MARGIN $3,127 3.30% $2,551 3.26%
------ ----- ------ -----
------ ----- ------ -----
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES
(yields on a tax-equivalent basis) Six Months ended June 30, 2004 Six Months ended June 30, 2003
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits in banks $ 2,621 $ 30 2.30% $ 1,774 $ 18 2.05%
Federal funds sold & securities
purchased under agreements to resell 4,511 31 1.38% 5,072 49 1.95%
Investment securities:
Taxable investment securities 102,568 1,978 3.88% 93,158 1,857 4.02%
Tax-exempt investment securities 32,272 938 5.85% 26,692 810 6.12%
-------- ------ ----- -------- ------ -----
Total investment securities 134,840 2,916 4.35% 119,850 2,667 4.49%
Loans 237,899 7,015 5.93% 182,960 6,328 6.97%
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS $379,871 $9,992 5.29% $309,656 $9,062 5.90%
------ ----- ------ -----
Allowance for loan losses (3,188) (2,212)
Cash and due from banks 13,495 10,860
Other assets 27,280 19,930
-------- --------
TOTAL ASSETS $417,458 $338,234
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 46,802 $ 125 .54% $ 38,513 $ 162 .85%
Savings and money market deposits 79,728 307 .77% 53,527 212 .80%
Time deposits 137,021 1,768 2.59% 123,518 2,122 3.46%
-------- ------ ----- -------- ------ -----
Total interest bearing deposits 263,551 2,200 1.68% 215,558 2,496 2.34%
Short-term borrowings 12,927 52 .81% 12,958 76 1.18%
Subordinated debentures 7,217 206 5.74% 7,217 168 4.68%
Long-term borrowings 56,932 1,121 3.96% 42,445 1,035 4.92%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING LIABILITIES $340,627 $3,579 2.11% $278,178 $3,775 2.74%
------ ----- ------ -----
INTEREST RATE SPREAD 3.18% 3.16%
----- -----
----- -----
Checking accounts 48,329 32,164
Other liabilities 2,658 2,011
-------- --------
Total liabilities 391,614 312,353
Stockholders' equity 25,844 25,881
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $417,458 $338,234
-------- --------
-------- --------
NET INTEREST INCOME/MARGIN $6,413 3.39% $5,287 3.44%
------ ----- ------ -----
------ ----- ------ -----
Net interest income increased by $576,000, or 22.6%, to $3,127,000 for the
quarter ended June 30, 2004, compared to $2,551,000 for the comparable period in
2003. On a year to date basis net interest income increased by $1,126,000, or
21.3%, to $6,413,000 compared to $5,287,000 for the first six months of 2003.
The increase in net interest margin is primarily due to the DunC acquisition
which added $69,300,000 of earning assets and $54,000,000 of interest bearing
liabilities at the acquisition date of September 30, 2003.
The net interest margin, which is the tax equivalent net interest income divided
by average interest earning assets was 3.30% and 3.39% for the three and six
month periods ended June 30, 2004. The second quarter net interest margin
represents a 4 basis point increase compared to the 2003 second quarter net
interest margin of 3.26%. The year to date net interest margin of 3.39%
represents a 5 basis point decrease compared to the 3.44% net interest margin
realized for the same period in 2003. The increase in second quarter net
interest margin reflects management's efforts to shift the earning asset mix
from investments to loans and to shift the liability mix from time deposits to
savings and demand deposits. These shifts offset the negative impact of asset
re-pricings at interest rates that remain at 46 year historical lows.
For the three months ended June 30, 2004, total interest income increased by
$454,000, or 10.2%, to $4,890,000 compared to $4,436,000 for the same period in
2003. The increase in interest income is due to an increase in average earning
assets of 21.2% or $66,761,000 offset by a 50 basis point decrease in average
yield on earning assets. The average balance sheet with resultant interest and
rates reflects the earning assets of DunC for the first two quarters of 2004,
but not the first two quarters of 2003, as the acquisition was completed on
September 30, 2003. At September 30, 2003 DunC had earning assets of
$69,300,000. Earning assets adjusted to reflect the DunC acquisition decreased
$2,539,000 or 0.7% quarter over quarter.
For the six months ended June 30, 2004, total interest income increased by
$930,000, or 10.3%, to $9,992,000 compared to $9,062,000 for the same period in
2003. The increase in interest income is due to an increase in average earning
assets of 22.7% or $70,215,000 offset by a 61 basis point decrease in the yield
on average earning assets to 5.29% compared to 5.90% for the same period in
2003. Earning assets for the six months ended June 30, 2004 adjusted to reflect
the DunC acquisition increased $915,000 or 0.2%.
Managed and long-term interest rates remained at 46 year historical lows during
the second quarter of 2004. On June 30, 2004 the Federal Reserve Board of
Governors increased managed interest rates by 25 basis points. While management
believes they have adequate systems and processes in place to manage interest
rate risk, the pace and magnitude of interest rate changes could have an adverse
impact on net interest income in the future.
Interest and fees on loans increased 13.3% to $3,473,000 for the three months
ended June 30, 2004 compared to $3,065,000 for the same period of 2003. This
increase was the result of a $55,238,000 or 30.2% increase in average loans
outstanding offset by an 86 basis point decrease in yield on the portfolio.
Interest and fees on loans increased 10.9% to $7,015,000 for the six months
ended June 30, 2004 compared to $6,328,000 in same period of 2003. This
increase was the result of a $54,939,000 or 30.0% increase in average loans
outstanding and a 104 basis point decrease in yield on the portfolio. The
Company acquired $46,781,000 of gross loans at September 30, 2003 in connection
with the DunC acquisition. Excluding the loans obtained in the DunC acquisition,
average total loans increased $8,457,000 or 3.7% for the three months ended
June 30, 2004 and $8,158,000 or 3.6% for the six months ended June 30. 2004.
The lower yield on average loans continues to reflect the overall lower interest
rate environment previously discussed and continuing competitive pricing
pressure for quality credit customers.
Interest income on taxable securities decreased by $7,000 or 0.8% in the second
quarter of 2004 to $922,000 compared to $929,000 for the same period in 2003.
Average balances of taxable investment securities increased 3.3% to $103,092,000
for the quarter ended June 30, 2004 compared to $99,804,000 for the same period
in the prior year. The yield on average taxable investment securities decreased
13 basis points to 3.60% for the second quarter of 2004 compared to 3.73% for
the second quarter of 2003. Tax exempt investment securities increased
$3,854,000, or 13.6% to an average balance of $32,241,000 for the three months
ended June 30, 2004 compared to $28,387,000 for the same period in 2003.
Interest income on tax exempt securities increased $37,000 or 8.7% to $464,000
for the second quarter of 2004 compared to $427,000 for the second quarter of
2003. The DunC acquisition added $8,800,000 of taxable investment securities
and $2,300,000 of tax-exempt investment securities at the acquisition date.
Excluding the securities acquired in the DunC acquisition taxable investment
securities decreased $5,512,000 or 5.1% and tax exempt investment securities
increased $1,544,000 or 5.1%.
Interest income on taxable securities increased by $121,000, or 6.5%, in the
first six months of 2004 to $1,978,000 from $1,857,000 for the same period in
2003. Average balances of taxable investment securities increased 10.1% to
$102,568,000 for the six months ended June 30, 2004 compared to $93,158,000 for
the same period in the prior year. The increase in average balances outstanding
was offset by a decrease of 14 basis points in average yield to 3.88% for the
first six months of 2004 compared to 4.02% for the first six months of 2003.
Average tax exempt securities increased to $32,272,000 for the six months ended
June 30, 2004 compared to $26,692,000 for the same period in 2003 and their
average tax equivalent yield decreased from 6.12% for the six months ended June
30, 2003 to 5.85% for the same period in 2004. The DunC acquisition added
$8,800,000 of taxable investment securities and $2,300,000 of tax-exempt
investment securities at the acquisition date. Excluding the securities acquired
in the DunC acquisition taxable investment securities increased $610,000 or 0.6%
and tax exempt investment securities increased $3,280,000 or 11.3%.
Interest from federal funds sold and securities purchased under agreements to
resell increased to $18,000 for the three month period ended June 30, 2004,
compared to $7,000 during the same period in 2003. The average balance of
federal funds sold and securities purchased under agreements to resell increased
by $3,396,000 or 207.1% to $5,036,000 for the three months ended June 30, 2004.
Interest from federal funds sold and securities purchased under agreements to
resell decreased to $31,000 for the six month period ended June 30, 2004,
compared to $49,000 during the same period in 2003. The average balance of
federal funds sold and securities purchased under agreements to resell decreased
by $561,000 or 11.1% to $4,511,000 for the six months ended June 30, 2004.
Total interest expense decreased by $122,000, or 6.5%, to $1,763,000 for the
three months ended June 30, 2004 compared to $1,885,000 for the same period in
2003. For the six months ended June 30, 2004 total interest expense decreased
by $196,000, or 5.2%, to $3,579,000 compared to $3,775,000 for the same period
in 2003. The decrease in total interest expense is the result of the
aforementioned lower interest rate environment which reduced the average rate
paid on interest bearing liabilities from 2.67% for the three months ended June
30, 2003 to 2.08% for the three months ended June 30, 2004 and from 2.74% for
the six months ended June 30, 2003 to 2.11% for the six months ended June 30,
2004. The DunC acquisition increased interest bearing liabilities by
$54,000,000 at the acquisition date. Excluding the acquisition, interest
bearing liabilities increased by $3,766,000 or 1.1% and by $8,449,000 or 2.5%
for the three and six month periods ended June 30, 2004.
While interest paid on deposits decreased $154,000, or 12.5% to $1,076,000
during the three months ended June 30, 2004 compared to $1,230,000 for the same
period in 2003, average interest bearing deposits increased $46,063,000, or
21.2% quarter over quarter. Year to date interest paid on deposits decreased
$296,000, or 11.9% to $2,200,000 compared to $2,496,000 for the same period in
2003 while average total interest bearing deposits increased by $47,993,000, or
22.3%. The DunC acquisition added $50,300,000 in interest bearing deposits as
of September 30, 2003. Excluding the acquisition, interest bearing deposits
decreased $4,237,000 or 1.6% and $2,307,000 or 0.9% for the three and six month
periods ended June 30, 2004. The decrease in interest paid on deposits was
primarily due to the overall lower interest rate environment.
Interest on short-term borrowings decreased $18,000 to $23,000 for the three
months ended June 30, 2004 compared to $41,000 for the same period in 2003. This
decrease is the result of a $1,672,000 decrease in average balances outstanding
for the three months ended June 30, 2004 compared to the same period in 2003
combined with the effect of the sustained low interest rate environment. For the
six months ended June 30, 2004 interest on short-term borrowings decreased
$24,000 to $52,000 compared to $76,000 for the same period in 2003. This
decrease is the result of the sustained low interest rate environment and a
$31,000 or 0.2% decrease in average short-term borrowings to $12,927,000 for the
six months ended June 30, 2004 compared to $12,958,000 for the same period in
2003.
Interest expense on subordinated debentures increased by $19,000 to $103,000 for
the second quarter of 2004 compared to $84,000 in the second quarter of 2003 and
by $38,000 to $206,000 for the six months ended June 30, 2004 compared to
$168,000 for the same period in 2003. The increase reflects the use of an
interest rate swap, which was entered into by the company on June 26, 2003 to
fix the cost of this borrowing. During the first six months of 2003 the interest
rate adjusted quarterly and was set at 325 basis points over the 3 month LIBOR
rate. The interest rate swap was part of the Company's overall interest rate
risk management strategy and was utilized to minimize significant fluctuations
in earnings caused by interest rate volatility.
Interest expense on long-term borrowings increased $31,000 and $86,000 to
$561,000 and $1,121,000 for the three and six month periods ended June 30, 2004
compared to $530,000 for the second quarter and $1,035,000 for the first six
months of 2003. The average balance outstanding increased $13,375,000 or 30.4%
for the three months ended June 30, 2004 and $14,487,000 or 34.1% for the six
months ended June 30, 2004. The increase in the average balance of long-term
borrowings outstanding reflects the $7,500,000 in bank debt issued to finance
the DunC acquisition and additional FHLB borrowings in 2004.
PROVISION FOR LOAN LOSSES
The provision for loan losses (provision) is an amount added to the allowance
for loan losses (allowance) to provide for the known and estimated amount of
loans that will not be collected. Actual loan losses are charged against the
allowance when management believes that the collection of principal will not
occur. Subsequent recoveries of amounts previously charged to the allowance, if
any, are credited to (increase) the allowance. Management determines the
appropriate provision based upon a number of criteria, including a detailed
evaluation of certain credits, historical performance, economic conditions and
overall quality of the loan portfolio.
The provision was $103,000 in the second quarter of 2004, a decrease of $39,000
or 27.5% from the $142,000 in the second quarter of 2003. For the first six
months of 2004, the provision was $207,000 compared to $365,000 during the same
time period a year ago.
Activity in the allowance for loan losses is detailed in Note 2 to the unaudited
consolidated financial statements. Charge-offs, net of recoveries for the second
quarter of 2004 totaled $768,000 compared to net recoveries of $3,000 for the
second quarter of 2003. Year to date net charge-offs increased $899,000 or
881.4% to $1,001,000 compared to $102,000 for the first six months of 2003.
During the second quarter of 2004 the bank recognized charge-offs totaling
$668,000 on two commercial real estate loans. These loans were in non-performing
status at December 31, 2003. The collateral on one of the loans has been
liquidated and the other is held in other real estate at its estimated net
realizable value at June 30, 2004. The charge-offs related to these two loans
resulted in a decrease in the allowance to total loans to 1.07% at June 30,
2004 compared to 1.26% at June 30, 2003 and 1.41% at December 31, 2003. These
loans had specific reserve allocations of $470,000 at December 31, 2003.
NONINTEREST INCOME
Total noninterest income increased $318,000, or 36.1%, to $1,200,000 for the
three months ended June 30, 2004 compared to $882,000 for the same period in
2003. Year to date total noninterest income increased $306,000, or 15.9%, to
$2,228,000 compared to $1,922,000 for the same period in 2003.
Service charges on deposit accounts increased $264,000 to $629,000 for the
quarter ended June 30, 2004 compared to $365,000 for the second quarter of 2003,
and increased $411,000 to $1,115,000 for the six months ended June 30, 2004
compared to the same period in 2003. These increases are due to the accounts
obtained in the DunC acquisition and the introduction of an overdraft privilege
program in the second quarter of 2004.
Gains on the sales of mortgage loans increased $67,000 or 47.5% to $208,000 for
the second quarter of 2004 compared to the $141,000 of gains recognized during
the second quarter of 2003. In the second quarter of 2004, $14,650,000 of loans
were sold to the secondary market compared to $7,719,000 for the same period in
2003. Year to date gain on sale of mortgage loans increased $54,000 or 17.9% to
$355,000 compared to $301,000 for the same period in 2003. The average gain in
2004 was 1.45% on $24,506,000 in loans sold to the secondary market compared to
an average gain of 1.80% on the $16,708,000 of loans sold in the same period in
2003. At June 30, 2004 the pipeline of held for sale loans has decreased
substantially from the level that existed at March 31, 2004. The decrease is due
to a rise in market interest rates which has reduced the demand for mortgage
refinancings and turnover in the mortgage origination staff. The decrease in
the held for sale loan pipeline may negatively impact the gains on sales of
mortgage loans realized in the next quarter.
The Company recognized $72,000 in securities gains in the second quarter of 2004
compared to $95,000 in the second quarter of 2003. Year to date the company has
realized $152,000 in securities gains, a $272,000 or 64.2% decrease compared to
the $424,000 in gains realized for the six months ended June 30, 2003.
Securities are sold from time to time to reposition the portfolio into
investments that offer better risk reward characteristics under a number of
potential future interest rate scenarios.
Other noninterest income increased $16,000 or 7.8% to $220,000 for the quarter
ended June 30, 2004 compared to $204,000 for the second quarter of 2003.
Year to date other noninterest income increased by $126,000 or 37.1% to $466,000
for the six months ended June 30, 2004 from $340,000 for the six months ended
June 30, 2003.
NONINTEREST EXPENSES
Total noninterest expense increased $753,000, or 26.7%, to $3,568,000 for the
three months ended June 30, 2004 compared to $2,815,000 for the same period in
2003. Year to date noninterest expense increased by $1,370,000, or 23.7% to
$7,150,000 for the six months ended June 30, 2004 compared to $5,780,000 for the
six months ended June 30, 2003. The increases reflect increased costs in 2004 as
a result of the DunC acquisition offset by the accretive benefits from the
elimination of duplicative expenses.
Salaries and employee benefits increased $477,000 or 35.1% to $1,837,000 for the
quarter ended June 30, 2004 compared to $1,360,000 for the second quarter of
2003. For the first six months of 2003 total salaries and employee benefits
increased $837,000 or 29.7% to $3,655,000 compared to $2,818,000 for the same
period in 2003. The increases reflect additional staffing due to the DunC
acquisition, additional costs of employee benefits and normal salary increases.
Equipment expenses increased $69,000 or 29.9% to $300,000 for the quarter ended
June 30, 2004 compared to $231,000 for the same quarter in 2003. For the first
six months of 2003 equipment expense increased $147,000, or 31.9%, to $608,000
compared to $461,000 for the same period in 2003. The increases relate primarily
to increased depreciation and maintenance on assets acquired in the DunC
acquisition and additional depreciation and maintenance on a new items
processing system installed during the third quarter of 2003.
Data processing costs increased $69,000, or 34.0%, to $272,000 for the quarter
ended June 30, 2004 and $151,000, or 37.8%, to $550,000 for the six months ended
June 30, 2004. These increases reflect higher volumes of service utilized from
our core processor due to additional accounts added in the DunC acquisition and
the outsourcing of network support services in 2004.
Professional fees decreased $58,000 or 19.2%, to $244,000 for the six months
ended June 30, 2004 compared to $302,000 for the same period in 2003 primarily
as a result of lower legal fees in 2004 related to the Fiserv, Inc. litigation.
There is an appeal in this case still pending and the Company may incur
additional legal fees in future periods as more fully discussed under the
heading "OFF BALANCE SHEET ITEMS AND CONTINGENCIES" in Part I Item 2 of this
report.
Other noninterest expenses increased $49,000 or 19.0% to $307,000 for the three
months ended June 30, 2004 compared to $258,000 for the same period a year ago.
For the first six months of 2004 other noninterest expenses increased $13,000 or
2.2% to $596,000 compared to $583,000 for the same period in 2003. Other
expenses for the quarter ended March 31, 2003 included a non-recurring expense
of $56,000 related to a sales and use tax audit.
BALANCE SHEET ANALYSIS
OVERVIEW
Total assets decreased to $415,911,000 at June 30, 2004 compared to $425,402,000
at December 31, 2003, a decrease of 2.2%. The December 31, 2003 balance sheet
included short-term year-end deposits of $11,750,000, which were invested in
federal funds sold and interest bearing deposits in banks at December 31, 2003.
Excluding these deposits, total assets increased $2,259,000, or 0.5% from
December 31, 2003 to June 30, 2004.
LOANS
Net loans increased $1,581,000, or 0.7%, to $231,723,000 on June 30, 2004
compared to $230,142,000 on December 31, 2003. The composition of loans is shown
in the following table:
As a % of Total Loans
June 30, December 31, Change in June 30, December 31,
2004 2003 Balance 2004 2003
-------- ------------ --------- -------- ------------
(Dollars in millions)
Residential Real Estate $99.9 $97.5 $2.4 42.7% 41.8%
Commercial Real Estate $69.2 $67.0 $2.2 29.5% 28.7%
Construction and Land
Development $16.8 $11.3 $5.5 7.2% 4.8%
Commercial $27.3 $35.6 ($8.3) 11.7% 15.3%
Consumer $18.6 $19.2 ($0.6) 7.9% 8.2%
Other $2.4 $2.8 ($0.4) 1.0% 1.2%
During the second quarter of 2004 loans decreased by $7,312,000 due to principal
amortization on outstanding loans, the pay-off of a $2,493,000 commercial
relationship due to a sale of the customer's business and the partial charge off
of two commercial relationships. Management intends to aggressively pursue
quality credits in future periods and plans a consumer loan promotion.
NON-PERFORMING LOANS
Non-performing loans include loans that are determined by management to be
impaired because full collection of interest and principal is doubtful, have
been placed in non-accrual status, and accruing 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,
(Dollars in thousands) 2004 2003
-------- ------------
Impaired loans-still accruing $ 875 $ 923
Impaired loans-non-accrual 994 2,058
Other non-accrual 1,285 1,030
Past due 90 days or more and still accruing 515 42
------ ------
Total non-performing loans $3,669 $4,053
------ ------
------ ------
ASSET QUALITY
The allowance for loan losses was $2,508,000 or 1.07% of total loans at June 30,
2004 compared to $3,302,000 or 1.41% of total loans at December 31, 2003. As of
June 30, 2004, non-performing loans totaled $3,669,000 compared to $4,053,000 at
December 31, 2003. The decrease during the second quarter of 2004 is due to the
resolution of two commercial loan relationships totaling $1,285,000. The
collateral on one of the loan relationships has been liquidated and the
collateral on the other loan relationship is held in other real estate at its
estimated net realizable value at June 30, 2004. Management believes the
allowance for loan losses is adequate at June 30, 2004.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance for loan losses is adequate to cover probable credit losses relating
to specifically identified loans, as well as probable credit losses inherent in
the balance of the loan portfolio. In accordance with FASB Statements 5 and
114, the allowance is provided for losses that have been incurred as of the
balance sheet date. The allowance is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions. Management reviews a calculation of the allowance for
loan losses on a quarterly basis. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the bank to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination. The policy of
the Company is to place a loan on non-accrual status if: (a) payment in full of
interest and principal is not expected, or (b) principal or interest has been in
default for a period of 90 days or more, unless the obligation is both in the
process of collection and well secured. Well secured is defined as collateral
with sufficient market value to repay principal and all accrued interest. A debt
is in the process of collection if collection of the debt is proceeding in due
course either through legal action, including judgement enforcement procedures,
or in appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
its restoration to current status.
At June 30, 2004 the allowance for loan losses to total non-performing and
restructured loans equaled 68.4% compared to 81.5% at December 31, 2003.
SHORT-TERM INVESTMENTS
Federal funds sold and securities purchased under agreements to resell decreased
$826,000 to $5,294,000 at June 30, 2004 compared to $6,120,000 at December 31,
2003.
Interest-bearing deposits in banks decreased $829,000 to $2,012,000 at June 30,
2004 compared to $2,841,000 at December 31, 2003.
INVESTMENT SECURITIES
During the second quarter of 2004 the Bank and it's Nevahawk subsidiary
transferred $16,345,000 of securities in the held to maturity portfolio to the
available for sale portfolio. The transfer allows for more flexibility in the
management of the investment portfolio to increase total return. Investment
securities decreased $6,129,000, or 4.5%, to $129,584,000 at June 30, 2004
compared to $135,713,000 at December 31, 2003. The decrease was used to fund the
deposit decrease discussed below.
DEPOSITS
Total deposits decreased $16,913,000 to $306,726,000 at June 30, 2004 compared
to $323,639,000 at December 31, 2003. As noted above, the Company's December 31,
2003 financial statements reflect short-term year-end deposits of $11,750,000.
Excluding the short-term year-end deposits, total deposits decreased 1.7% from
December 31, 2003. Excluding the short-term year-end deposits, non-interest
bearing deposits increased by $1,191,000 and interest bearing deposits decreased
by $6,354,000 at June 30, 2004 compared to December 31, 2003.
BORROWINGS
Short-term borrowings increased $7,401,000 to $16,887,000 at June 30, 2004
from $9,486,000 at year-end. The increase is due to higher outstanding balances
of repurchase agreements with commercial customers.
Long-term borrowings consist of Blackhawk Bancorp's bank term loan of
$7,500,000 and term advances from the Federal Home Loan Bank ("FHLB") that were
$49,732,000 at June 30, 2004 compared to $48,413,000 at December 31, 2003. The
increase reflects a net additional $1,350,000 in FHLB advances outstanding at
June 30, 2004.
SHAREHOLDERS' EQUITY
Total shareholders' equity decreased $565,000 to $25,198,000 at June 30, 2004
compared to $25,763,000 at December 31, 2003. The decrease is due to the impact
of changes in market interest rates on the value of the investment portfolio.
Accumulated other comprehensive income decreased $970,000 to ($142,000) at June
30, 2004 from $828,000 at December 31, 2003. Accumulated other comprehensive
income consists of two parts. The unrealized gains (losses) on available-for-
sale securities net of tax decreased by $1,026,000 to a net loss of $345,000 at
June 30, 2004 compared to a net gain of $681,000 at December 31, 2003. The
unrealized gains on the Company's interest rate swap contract net of tax
increased by $56,000 to $203,000 at June 30, 2004 compared to $147,000 at
December 31, 2003. During the first six months of 2004 surplus increased by
$27,000 from the sale of stock for stock options exercised. In addition the
company declared two quarterly dividends of $0.09 per share on common stock,
which totaled $454,000.
The Company is subject to certain regulatory capital requirements and continues
to remain in compliance with the requirements. The following table shows the
company's capital ratios and regulatory requirements.
JUNE 30, DECEMBER 31, REGULATORY
2004 2003 REQUIREMENTS
---- ---- ------------
Total Capital (To Risk-Weighted Assets) 10.9% 10.9% 8.0%
Tier I Capital (To Risk-Weighted Assets) 9.9% 9.6% 4.0%
Tier I Capital (To Average Assets) 6.2% 6.0% 4.0%
The Company's subsidiary bank also meets regulatory capital requirements to be
considered well capitalized.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of identifying, measuring and
managing the risk to the Company's earnings and capital resulting from the
movements in interest rates. It is the Company's objective to protect
earnings and capital while achieving liquidity, profitability and strategic
goals.
The Company focuses its measure of interest rate risk on the effect a shift
in interest rates would have on earnings. Since not all assets or
liabilities move at the same rate and at the same time, a determination must
be made as to how each interest earning asset and each interest bearing
liability adjusts with each change in the base rate. The Company develops,
evaluates and amends its assumptions on an ongoing basis and analyzes its
earnings exposure quarterly.
In addition to the effect on earnings, a quarterly evaluation is made to
determine the change in the economic value of equity with various changes in
interest rates. This determination indicates how much the value of the
assets and the value of the liabilities change with a specified change in
interest rates. The net difference between the economic values of the assets
and liabilities results in an economic value of equity.
During June 2003, the Company entered into an interest rate SWAP agreement
related to the subordinated debentures. This SWAP is utilized to manage
variable interest rate exposure and is designated as a highly effective cash
flow hedge. The differential to be paid or received on the SWAP agreement is
accrued as interest rates change and is recognized over the life of the
agreement in interest expense. The SWAP agreement expires in December 2007
and essentially fixes the rate to be paid at 5.72%. The notional amount is
$7,000,000. Included in other comprehensive income is a gain of $308,000,
less $105,000 of deferred income tax, relating to the fair market value of
the SWAP agreement as of June 30, 2004. Risk management results for the
period ended June 30, 2004 related to the balance sheet hedging of the
subordinated debentures indicate that the hedge was 100% effective and that
there was no component of the derivative instrument's gain or loss which was
excluded from the assessment of hedge effectiveness.
LIQUIDITY
Liquidity, as it relates to the subsidiary bank, is a measure of its ability
to fund loans and withdrawals of deposits in a cost-effective manner. The
Bank's principal sources of funds are deposits, scheduled amortization and
prepayment of loan principal, amortization, prepayment and maturity of
investment securities, short-term borrowings and income from operations.
Additional sources include purchasing fed funds, sale of securities, sale of
loans, borrowing from both the Federal Reserve Bank and Federal Home Loan
Bank, and dividends paid by Nevahawk, a wholly owned subsidiary of the Bank.
The liquidity needs of the Company generally consist of payment of dividends
to its shareholders, payments of principal and interest on borrowed funds and
subordinated debentures, and a limited amount of expenses. The sources of
funds to provide this liquidity are issuance of capital stock and dividends
from its subsidiary bank. Certain restrictions are imposed upon the Bank,
which could limit its ability to pay dividends if it did not have net
earnings or adequate capital in the future. The Company maintains adequate
liquidity to pay its expenses.
The following table summarizes The Company's significant contractual
obligations and other potential funding needs at June 30, 2004 (in
thousands):
Data
Time Long-term Operating Processing
Deposits debt(1) Leases Commitment Total
-------- ----------- --------- ---------- -----
2005 $ 83,561 $17,129 $ 164 $ 534 $101,388
2006 21,053 5,087 164 534 26,838
2007 13,329 7,141 164 534 21,168
2008 11,156 7,875 135 534 19,700
2009 1,907 10,000 114 134 12,155
Thereafter 104 17,217 934 0 18,255
-------- ------- ------ ------ --------
Total $131,110 $64,449 $1,675 $2,270 $199,504
-------- ------- ------ ------ --------
-------- ------- ------ ------ --------
Commitments to extend credit $36,227
(1) Long-term debt includes subordinated debentures.
OFF BALANCE SHEET ITEMS AND CONTINGENCIES
Off-balance sheet items consist of commitments to originate mortgage loans,
unused lines of credit and standby letters of credit totaling approximately
$36,227,000 as of June 30, 2004. This compares to $34,356,000 at December
31, 2003. The Company's commitments to originate mortgage loans are offset by
commitments of third party investors to purchase the loans. The Company's
obligation to deliver the loans is on a best effort basis; therefore there
are no contingent liabilities associated with them. The Bank has historically
funded off-balance sheet commitments with its primary sources of funds and
management anticipates that this will continue.
In 2000 the Bank filed a lawsuit in Waukesha County, Wisconsin, against
Fiserv, Inc., a former data processing services provider, for breach of
contract. The bank was seeking to recover damages sustained due to a
processing error in which approximately $500,000 was improperly charged to the
Bank's check clearing account at the Federal Home Loan Bank of Chicago. On
February 14, 2003 a jury delivered a verdict that Fiserv, Inc. did not breach
its contract with the Bank. Fiserv, Inc. then filed a counterclaim seeking
approximately $380,000 in reimbursement of legal fees. On May 12, 2003 a
judge in the case denied Fiserv's motion for reimbursement of legal fees. In
July, Fiserv appealed the trial court's denial of its request to have its
legal fees reimbursed. The Bank thereafter cross-appealed on several grounds,
including the trial court's denial of its motion for a new trial. Fiserv
filed a motion to dismiss the Bank's cross-appeal on procedural grounds. This
motion was denied and the appeal and cross-appeal are currently pending. The
Company plans to aggressively contest Fiserv's appeal of the decision on legal
fees and has not accrued the legal fee reimbursement claimed by Fiserv. The
Bank also intends to aggressively pursue its appeal for a new trial. Although
the ultimate disposition of any appeal can not be predicted with any
certainty, the Company believes that the outcome of the case will not have a
material adverse effect on the Company's consolidated financial position,
though an adverse result could have a material adverse effect on the Company's
consolidated results of operations in a given year.
Like out-of-state subsidiaries of many Wisconsin financial institutions,
Nevahawk (an out-of-state subsidiary of the Bank) which holds and manages
investment assets, has not been subject to Wisconsin tax. The Wisconsin
Department of Revenue has instituted an audit program, including an audit of
Blackhawk, specifically aimed at out-of-state bank subsidiaries and has
indicated that it may withdraw favorable rulings previously issued in
connection with such subsidiaries.
In July 2004, the Wisconsin Department of Revenue sent letters to banks in
Wisconsin (whether or not they were undergoing an audit) reporting on
settlements involving 17 banks and their out-of-state investment subsidiaries.
The letter provided a summary of currently available settlement parameters. For
periods before 2004, they include: restrictions on the types of subsidiary
income which may be excluded from Wisconsin taxation; possible assessment of
certain back taxes for a limited period of time; limitations on net operating
loss carry forwards and interest deductions related to subsidiary loans; and
interest (but not penalties) on any past-due taxes. For 2004 and going forward,
the letter states similar provisions, including limits on subsidiaries' assets.
Settlement on those terms would result in the rescission of prior letter
rulings, and the Department states that a settlement would be binding going
forward except for future legislation or change by mutual agreement. The letter
appears to accept by implication the general proposition that some out-of-state
investment subsidiary income is not subject to Wisconsin taxes.
The Department has not yet made any assessment against the Company's subsidiary
nor has the Company determined how it intends to respond. The Department's
letter did not provide sufficient detail to permit the Company to assess what
effects the acceptance of such a settlement offer might have upon it, nor does
it provide sufficient information for the Company to determine what the
Department's position would be if an assessment were made and the Company were
to challenge it. The Company expects to seek further detail from the Department
and will evaluate the impact of such a settlement after receiving more specific
details.
ITEM 3. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING: There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 2004, at the annual meeting of stockholders of the Company,
the stockholders re-elected Prudence A. Harker, Charles J. Howard and
Merritt J. Mott and elected Marco T. Lenis to three-year terms
expiring in 2007. The vote, with respect to the election of each
director was as follows:
Prudence A. Harker
2,526,145 total votes eligible to be cast
2,126,100 votes were represented at the Annual Meeting
2,033,911 votes were cast "For" re-election
No votes were cast "Against" re-election
92,189 votes were withheld
Charles J. Howard
2,526,145 total votes eligible to be cast
2,126,100 votes were represented at the Annual Meeting
2,100,515 votes were cast "For" re-election
No votes were cast "Against" re-election
25,585 votes were withheld
Merritt J. Mott
2,526,145 total votes eligible to be cast
2,126,100 votes were represented at the Annual Meeting
2,097,585 votes were cast "For" re-election
No votes were cast "Against" re-election
28,515 votes were withheld
Marco T. Lenis
2,526,145 total votes eligible to be cast
2,126,100 votes were represented at the Annual Meeting
2,095,985 votes were cast "For" election
No votes were cast "Against" election
30,115 votes were withheld
The following directors continue to serve until 2005: R. Richard
Bastian, III, Roger G. Bryden, John B. Clark and Charles Hart.
Stephen P. Carter, Kenneth A. Hendricks, George D. Merchant and
Stephen R. Thomas serve as directors with terms expiring in 2006.
In addition, as detailed in the Company's Proxy Statement dated April
9, 2004, the stockholders ratified the appointment of McGladrey &
Pullen, LLP as the Company's independent accountants for fiscal 2004.
The result of the vote is as follows:
2,526,145 total votes eligible to be cast
2,126,100 votes were represented at the Annual Meeting
2,107,335 votes were cast "For" the proposal
1,000 votes were cast "Against" the proposal
17,765 votes abstained
ITEM 5. OTHER INFORMATION
None.
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
The Company furnished a Report on Form 8-K dated April 29, 2004 under
Item 12 which reported 1st quarter 2004 results; that report is not
deemed "filed".
The Company filed a Report on Form 8-K dated June 22, 2004 under Item
5 which reported that the Company had entered into a definitive
agreement for the sale of its Rochelle and Oregon branches.
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 9, 2004 /s/ R. Richard Bastian, III
----------------------------------------
R. Richard Bastian, III
President and Chief Executive Officer
/s/ Todd J. James
----------------------------------------
Todd J. James
Executive Vice President and
Chief Financial Officer
/s/ Thomas L. Lepinski
----------------------------------------
Thomas L. Lepinski, CPA
Principal Accounting Officer
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
Incorporated Filed
Exhibit Herein By Here-
Number Description Reference To: with
------- ----------- ----------------- -----
2.1 Agreement and Plan of Merger Exhibit 2.1 to Form 8-K dated
By and Among Blackhawk March 17, 2003
Bancorp, Inc. DunC Merger
Corporation and DunC Corp
2.1 Office Purchase and Assumption Exhibit 2.1 to Form 8-K dated
Agreement By and Between June 22, 2004
Blackhawk State Bank and The
First National Bank and Trust
Company of Rochelle dated as of
June 22, 2004
3.1 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)
3.2 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 Credit Agreement with US Bank Form 8-K dated September
National Association dated 30, 2003
September 26, 2003
31.1 Certification of Chief Executive
Officer Pursuant to Rule 13a-14(a)/
15d-14(a) X
31.2 Certification of Chief Financial
Officer Pursuant to Rule 13a-14(a)/
15d-14(a) X
32.1 Certification Pursuant to 18
U. S. C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002 X
32.2 Certification Pursuant to 18
U. S. C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002 X