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 MARCH 31, 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 APRIL 21, 2004
--------------------- --------------
$.01 PAR VALUE 2,526,145 SHARES
Transitional Small Business Disclosure Format (Check one): Yes No X
----- -----
INDEX
PART I - FINANCIAL INFORMATION
Page
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ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003 4
Unaudited Consolidated Statements of Income for the
Three Months Ended March 31, 2004 and 2003 5
Unaudited Consolidated Statements of Stockholders'
Equity for the Three Months Ended March 31, 2004 and 2003 6
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 7-8
Notes to Unaudited Consolidated Financial Statements 9-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION 13-23
ITEM 3. CONTROLS AND PROCEDURES 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. A) EXHIBITS 24
B) REPORTS ON FORM 8-K 24
SIGNATURES 25
INDEX TO EXHIBITS 26
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS (Dollars in thousands)
------
Cash and due from banks $ 13,669 $ 17,250
Federal funds sold and securities purchased under agreements to resell 12,254 6,120
Interest-bearing deposits in banks 3,224 2,841
Available-for-sale securities 102,225 118,107
Held to maturity securities, at amortized cost 16,531 17,606
Loans, less allowance for loan losses of $3,173 and $3,302
at March 31, 2004 and December 31, 2003, respectively 238,370 230,142
Office buildings and equipment, net 9,822 9,981
Intangible assets 7,147 7,246
Bank-owned life insurance 6,327 6,263
Other assets 9,576 9,846
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Total Assets $419,145 $425,402
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing $ 47,615 $ 47,999
Interest-bearing 266,501 275,640
-------- --------
Total deposits 314,116 323,639
Short-term borrowings 9,169 9,486
Subordinated debentures 7,217 7,217
Long-term borrowings 57,997 55,913
Other liabilities 4,388 3,384
-------- --------
Total Liabilities 392,887 399,639
-------- --------
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 March 31, 2004, 2,522,995
at December 31, 2003 25 25
Surplus 8,845 8,818
Retained earnings 16,271 16,092
Accumulated other comprehensive income 1,117 828
-------- --------
Total Stockholders' Equity 26,258 25,763
-------- --------
Total Liabilities and Stockholders' Equity $419,145 $425,402
-------- --------
-------- --------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
INTEREST INCOME: (Dollars in thousands, except per share data)
Interest and fees on loans $3,541 $3,249
Interest and dividends on securities:
Taxable 1,056 927
Nontaxable 313 253
Interest on fed funds sold and securities purchased under
agreements to resell 13 41
Interest on interest-bearing deposits in banks 17 10
------ ------
Total Interest Income 4,940 4,480
------ ------
INTEREST EXPENSE:
Interest on deposits 1,124 1,266
Interest on short-term borrowings 29 34
Interest on subordinated debentures 103 84
Interest on long-term borrowings 560 505
------ ------
Total Interest Expense 1,816 1,889
------ ------
Net Interest Income 3,124 2,591
Provision for loan losses 104 222
------ ------
Net Interest Income After Provision For Loan Losses 3,020 2,369
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 486 339
Gain on sale of loans 147 158
Securities gains, net 80 329
Increase in cash value of bank-owned life insurance 69 77
Other 246 136
------ ------
Total Noninterest Income 1,028 1,039
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,818 1,458
Occupancy 290 189
Equipment 308 230
Data processing services 278 196
Advertising and marketing 93 63
Amortization of intangibles 95 77
Professional fees 128 185
Office supplies 72 63
Telephone 96 75
Postage 51 57
Transportation 64 44
Other 289 313
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Total Noninterest Expenses 3,582 2,950
------ ------
Income Before Income Taxes 466 458
Income Taxes 60 60
------ ------
Net Income $ 406 $ 398
------ ------
------ ------
Basic Earnings Per Share $ 0.16 $ 0.16
------ ------
------ ------
Diluted Earnings Per Share $ 0.16 $ 0.16
------ ------
------ ------
Dividends Per Share $ 0.09 $ 0.09
------ ------
------ ------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
(Dollars in thousands)
Common Stock:
Balance at beginning of period $ 25 $ 25
Stock options exercised -- --
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Balance at end of period 25 25
------- -------
Surplus:
Balance at beginning of period 8,818 8,698
Stock options exercised 27 65
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Balance at end of period 8,845 8,763
------- -------
Retained Earnings:
Balance at beginning of period 16,092 15,788
Net income 406 398
Dividends declared on common stock (227) (227)
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Balance at end of period 16,271 15,959
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Accumulated other comprehensive income:
Balance at beginning of period 828 1,287
Other comprehensive income (loss), net of taxes 289 (288)
------- -------
Balance at end of period 1,117 999
------- -------
Total Stockholders' Equity $26,258 $25,746
------- -------
------- -------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 406 $ 398
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 357 328
Provision for loan losses 104 222
Gain on sale of loans (147) (158)
FHLB stock dividends (87) (53)
Amortization of premiums on securities, net 171 152
Securities gains, net (80) (329)
Decrease in accrued interest receivable 98 116
Decrease in accrued interest payable (3) (3)
(Increase) decrease in other assets 10 (2,701)
Increase (decrease) in other liabilities 855 (221)
-------- --------
Net cash provided by (used in) operations before
loan originations and sales 1,684 (2,249)
Origination of loans for sale (10,868) (6,883)
Proceeds from sale of loans 9,856 8,989
-------- --------
Net cash provided by (used in) operating activities 672 (143)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in banks (383) 7,245
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell (6,134) 7,120
Proceeds from sales of available-for-sale securities 19,501 10,884
Proceeds from maturities and calls of available-for-sale securities 8,463 9,032
Proceeds from maturities and calls of held-to-maturity securities 1,064 2,274
Purchase of available-for-sale securities (11,601) (45,155)
Net (increase) decrease in loans (7,378) 6,587
Proceeds from the sale of office buildings, equipment, and
other real estate owned 209 131
Purchase of office buildings and equipment, net (118) (83)
-------- --------
Net cash provided by (used in) investing activities 3,623 (1,965)
-------- --------
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits $(9,453) $(11,696)
Dividends paid (227) (226)
Proceeds from long-term borrowings 6,000 5,000
Payments on long-term borrowings (3,900) --
Net increase (decrease) in short-term borrowings (317) 9,543
Proceeds from exercise of stock options 21 49
------- -------
Net cash provided by (used in) financing activities (7,876) 2,670
------- -------
Net increase (decrease) in cash and due from banks (3,581) 562
CASH AND DUE FROM BANKS:
Beginning 17,250 12,572
------- -------
Ending $13,669 $13,134
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,904 $ 1,890
Income taxes $ -- $ --
SUPPLEMENTAL SCHEDULES OF NON-CASH INVESTING
ACTIVITIES:
Change in accumulated other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net $ 390 $ (288)
Unrealized gains (losses) on interest rate swap contract, net (101) --
Other assets acquired in settlement of loans $ 163 $ 64
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 effect 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 months ended March 31, 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
Corporation'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.
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 March 31,
2004 2003
---- ----
Net income, as reported $ 406 $ 398
Deduct total stock-based employee and director
compensation expense determined under fair
value based method for all awards, net of
related tax effects (17) (21)
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Pro forma net income $ 389 $ 377
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Earnings per share:
Basic:
As reported $0.16 $0.16
Pro forma 0.15 0.15
Diluted:
As reported 0.16 0.16
Pro forma 0.15 0.15
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
MARCH 31,
---------
(Dollars in thousands)
2004 2003
---- ----
Balance at beginning of period $ 3,302 $ 2,079
Provision charged to expense 104 222
Loans charged off 257 157
Recoveries 24 53
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Balance at end of period $ 3,173 $2,197
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Note 3. Earnings Per Share
Presented below are the calculations for basic and diluted earnings
per share:
THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
Basic:
Net income available to common stockholders $ 406,000 $ 398,000
---------- ----------
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Weighted average shares outstanding 2,524,472 2,514,018
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Basic earnings per share $ 0.16 $ 0.16
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Diluted:
Net income available to common stockholders $ 406,000 $ 398,000
---------- ----------
---------- ----------
Weighted average shares outstanding 2,524,472 2,514,018
Effect of dilutive stock options outstanding 27,668 4,721
---------- ----------
Diluted weighted average shares outstanding 2,552,140 2,518,739
---------- ----------
---------- ----------
Diluted earnings per share $ 0.16 $ 0.16
---------- ----------
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Note 4. Derivative Instrument
During June, 2003, the Company entered into an interest rate swap
transaction, which resulted in the Company converting its $7,000,000
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 March 31 is as
follows:
2004 2003
---- ----
(Dollars in thousands)
Notional amount $7,000 --
Weighted average fixed rate 2.51% --
Weighted average variable rate 1.13% --
Weighted average maturity 3.75 years --
Fair value $70 --
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 March 31, 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 statement of income for the three months ended March 31,
2004 and will effect the comparability to 2003 results.
Note 6. 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. The Federal Reserve Board intends to review the regulatory
implications of the change in accounting treatment of subsidiary
trusts that issue trust preferred securities and, if necessary or
warranted, provide further appropriate guidance. 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.
The Financial Accounting Standards Board has issued Statement 149,
Amendment of Statement 133 on Derivative Instruments and Hedging.
This Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
Statement 133. The Statement was effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Implementation of the Statement on
July 1, 2003 did not have a material impact on the consolidated
financial statements.
Note 7. 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. Other provisions will become
effective as the SEC adopts appropriate rules.
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 March 31, 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
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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
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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.
RESULTS OF OPERATIONS
The company reported net income of $406,000 for the three months ended March
31, 2004, an increase of $8,000 or 2.0% from the $398,000 reported for the
same three month period in 2003. Diluted earnings per share were $0.16 for
the three months ended March 31, 2004 and 2003.
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
shareholders' equity, interest income and expense on related items, and the
company's average rate for the three month periods ended March 31, 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 March 31, 2004 Three Months ended March 31, 2003
--------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits in banks $ 2,847 $ 17 2.40% $ 2,144 $ 10 1.89%
Federal funds sold & securities
purchased under agreements to
resell 3,985 13 1.31% 8,543 41 1.95%
Investment securities:
Taxable investment securities 102,043 1,056 4.16% 86,439 927 4.35%
Tax-exempt investment securities 32,303 474 5.90% 24,978 383 6.22%
-------- ------ ----- -------- ------ -----
Total investment securities 134,346 1,530 4.58% 111,417 1,310 4.77%
Loans 237,601 3,542 6.00% 182,957 3,249 7.20%
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS $378,779 $5,102 5.42% $305,061 $4,610 6.13%
------ ----- ------ -----
Allowance for loan losses (3,251) (2,146)
Cash and due from banks 13,450 10,453
Other assets 27,721 20,026
-------- --------
TOTAL ASSETS $416,699 $333,394
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 47,327 $ 68 .58% $ 37,974 $ 87 .93%
Savings and money market deposits 76,796 150 .79% 52,577 110 .85%
Time deposits 139,174 906 2.62% 122,800 1,069 3.53%
-------- ------ ----- -------- ------ -----
Total interest bearing deposits 263,297 1,124 1.72% 213,351 1,266 2.41%
Short-term borrowings 14,062 29 .83% 12,448 34 1.11%
Subordinated debentures 7,217 103 5.74% 7,217 84 4.67%
Long-term borrowings 56,461 560 3.99% 40,844 505 5.01%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING LIABILITIES $341,037 $1,816 2.14% $273,860 $1,889 2.80%
------ ----- ------ -----
INTEREST RATE SPREAD 3.28% 3.33%
----- -----
----- -----
Checking accounts 46,447 31,789
Other liabilities 3,113 1,878
-------- --------
Total liabilities 390,597 307,527
Stockholders' equity 26,102 25,867
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $416,699 $333,394
-------- --------
-------- --------
NET INTEREST INCOME/MARGIN $3,286 3.49% $2,721 3.62%
------ ----- ------ -----
------ ----- ------ -----
Net interest income increased by $565,000, or 20.8%, to $3,286,000 for the
quarter ended March 31, 2004, compared to $2,721,000 for the comparable
period in 2003. The net interest margin, which is the tax equivalent net
interest income divided by average interest earning assets was 3.49% for the
three months ended March 31, 2004 compared to 3.62% for the same period in
2003. The 13 basis point decrease in net interest margin is primarily due to
the impact of the sustained low interest rate environment and the inability
of the Company to offset the effects of asset repricings with equivalent
reductions in funding costs.
For the three months ended March 31, 2004, total interest income increased by
$492,000, or 10.7%, to $5,102,000 compared to $4,610,000 for the same period in
2003. The yield on average earning assets decreased 71 basis points to 5.42%
for the first quarter of 2004, compared to 6.13% for the same period in 2003.
The decrease in the yield on earning assets is due to the impact of the
sustained low interest rate environment on the Bank's asset repricing. Interest
rates continued to remain at 45-year lows. The average balance sheet with
resultant interest and rates reflects the earning assets of DunC for the first
quarter of 2004, but not in the first quarter of 2003, as the acquisition was
completed on September 30, 2003. At September 30, 2003 DunC had earning assets
of $69,300,000. Other earning assets increased $4,418,000 or 1.2% quarter over
quarter. The increase in total interest income is primarily due to the effects
of the DunC acquisition offset by the Bank's lower overall yield on earning
assets.
Interest and fees on loans increased 9.0% to $3,542,000 for the three months
ended March 31, 2004 compared to $3,249,000 for the same period of 2003. This
increase was the result of a $54,644,000 or 29.9% increase in average loans
outstanding, which was partially offset by a 120 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 $7,863,000 or 4.3% and
reflect the Company's efforts to reverse negative trends due to loan run-off.
The lower yield on average loans reflects the overall lower interest rate
environment previously discussed and competitive pricing pressure for quality
credit customers.
Interest income on taxable securities increased by $129,000 or 13.9% in the
first quarter of 2004 to $1,056,000 compared to $927,000 for the same period in
2003. Average balances of taxable investment securities increased 18.1% to
$102,043,000 for the quarter ended March 31, 2004 compared to $86,439,000 for
the same period in the prior year. However, the yield on average taxable
investment securities decreased 19 basis points to 4.16% for the first quarter
of 2004 compared to 4.35% for the first quarter of 2003. Tax exempt investment
securities increased $7,325,000, or 29.3% to an average balance of $32,303,000
for the three months ended March 31, 2004 compared to $24,978,000 for the same
period in 2003, while the tax-equivalent yield decreased 32 basis points to
5.90%. 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 $6,804,000 or 7.9% and tax exempt investment securities
increased $5,025,000 or 20.1%.
Interest from fed funds sold and securities purchased under agreements to resell
decreased to $13,000 for the three month period ended March 31, 2004, compared
to $41,000 during the same period in 2003. The average balance of fed funds sold
and securities purchased under agreements to resell decreased by $4,558,000 or
53.4% to $3,985,000 for the three months ended March 31, 2004 and reflects the
reinvestment of excess funds into higher yielding investment securities.
Total interest expense decreased by $73,000, or 3.9%, to $1,816,000 for the
three months ended March 31, 2004 compared to $1,889,000 for the same period in
2003. The decrease in total interest expense is primarily the result of the
aforementioned lower market interest rate environment which reduced the average
cost of interest-bearing liabilities by 66 basis points to 2.14% for the quarter
ended March 31, 2004 compared to 2.80% for the same period in 2003. The DunC
acquisition increased interest bearing liabilities by $54,000,000 at the
acquisition date. Excluding the acquisition, interest bearing liabilities
increased by $13,177,000 or 4.8% and partially offset the impact of lower rates.
Interest paid on deposits decreased $142,000, or 11.2% to $1,124,000 during the
three months ended March 31, 2004 compared to $1,266,000 for the same period in
2003. The DunC acquisition added $50,300,000 in interest bearing deposits as of
September 30, 2003. Excluding the acquisition, interest bearing deposits
decreased $354,000 or 0.2% for the quarter ended March 31, 2004 compared to the
same period in 2003. The decrease in interest paid on deposits was primarily
due to the overall lower interest rate environment.
Interest on short-term borrowings decreased $5,000 to $29,000 for the three
months ended March 31, 2004 compared to $34,000 for the same period in 2003.
This decrease is the result of lower market rates paid on short-term borrowings.
The decrease due to lower rates was partially offset by a $1,614,000 or 13.0%
increase in the average balance of short-term borrowings.
Interest expense on long-term borrowings increased $55,000 to $560,000 for the
three month period ended March 31, 2004 compared to $505,000 for the first three
months of 2003. The increase is the result of a $15,617,000 or 38.2% increase
in the average balance outstanding offset by a 102 basis point decrease in the
average rate to 3.99% for the first quarter of 2004 compared to 5.01% for the
first quarter of 2003. 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 dependence on FHLBC borrowings in 2004.
Interest expense on subordinated debentures increased $19,000 to $103,000 for
the first quarter of 2004 compared to $84,000 in the first quarter of 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 quarter 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 unplanned fluctuations in earnings caused by interest rate
volatility.
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
(reduce) 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 $104,000 in the first quarter of 2004, a decrease of $118,000
or 53.2% from the $222,000 in the first quarter of 2003.
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 first
quarter of 2004 increased by $129,000 or 124.0% to $233,000 compared to $104,000
for the first quarter of 2003.
The ratio of the allowance to total loans was 1.31% at March 31, 2004 compared
to 1.22% at March 31, 2003.
NONINTEREST INCOME
Total noninterest income decreased $11,000, or 1.1%, to $1,028,000 for the three
months ended March 31, 2004 compared to $1,039,000 for the same period in 2003.
Service charges on deposit accounts were $486,000 for the quarter ended March
31, 2004 compared to $339,000 for the first quarter of 2003. The increase
reflects a higher number of accounts as a result of the DunC acquisition and
increased fee realization on previously existing accounts.
Gain on the sale of mortgage loans decreased $11,000 or 7.0% to $147,000 for the
first quarter of 2004 compared to the $158,000 of gains recognized during the
first quarter of 2003 primarily as the result of lower margins in 2004. In the
first quarter of 2004, $9,856,000 of mortgage loans were sold to the secondary
market compared to $8,989,000 for the same period in 2003. The average gain in
2004 was 1.49% compared to an average gain of 1.76% on the loans sold in the
first quarter of 2003. The decrease in the margin is the result of more
competitive pricing in 2004.
The Company recognized $80,000 of securities gains in the first quarter of 2004
compared to $329,000 in the first quarter of 2003. The decrease is primarily due
to the one time sale of $10,884,000 of investment securities in the quarter
ended March 31, 2003. These securities would have matured or been called in the
next 12 to 18 months and the proceeds were reinvested into longer term
securities.
Other noninterest income increased $110,000 or 80.9% for the three months ended
March 31, 2004. Serviced loan fees increased $25,000 due to reduced
amortization of mortgage servicing rights as mortgage prepayments slowed in the
first quarter of 2004 compared to 2003. Service charges for customer services
increased $40,000. Insurance commissions increased $16,000 and the Company
recognized gains on the sale of OREO properties of $29,000 in 2004.
NONINTEREST EXPENSES
Total noninterest expense increased $632,000, or 21.4%, to $3,582,000 for the
three months ended March 31, 2004 compared to $2,950,000 for the same period in
2003. The increase reflects increased costs in 2004 as a result of the DunC
acquisition offset by the accretive benefits from the elimination of duplicative
expenses.
Professional fees decreased $57,000 or 30.8%, to $128,000 for the three months
ended March 31, 2004 compared to $185,000 for the same period in 2003 primarily
as a result of lower legal fees in 2004 related to the Fiserv, Inc. litigation.
Other expenses decreased $24,000 or 7.7% to $289,000 for the three months ended
March 31, 2004 compared to $313,000 for the same period a year ago. 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.
Income taxes were $60,000 for the three months ended March 31, 2004 and 2003.
The decline in effective tax rate to 12.9% for the three month period ended
March 31, 2004 from 13.1% for the same period of 2003 is reflective of greater
tax efficiency brought about by an increase in non-taxable interest from the
municipal bond portfolio offset by a reduction in non-taxable life insurance
cash surrender value increases and a higher level of nondeductible intangible
amortization as a result of the DunC acquisition.
BALANCE SHEET ANALYSIS
OVERVIEW
Total assets decreased to $419,145,000 at March 31, 2004 compared to
$425,402,000 at December 31, 2003, a decrease of 1.5%. 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 $5,493,000,
or 1.3% from December 31, 2003 to March 31, 2004. In addition, excluding the
effect of the short-term year end deposits there was a considerable shift in
balances from investment securities to loans. Securities decreased by
$16,957,000, while loans, net of allowance for loan losses, increased by
$8,228,000.
LOANS
Net loans increased $8,228,000, or 3.6%, to $238,370,000 on March 31, 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
March 31, December 31, Change in March 31, December 31,
2004 2003 Balance 2004 2003
--------- ------------ --------- --------- ------------
(Dollars in millions)
Residential Real
Estate $101.7 $97.5 $4.2 42.1% 41.8%
Commercial Real
Estate $69.2 $67.0 $2.2 28.7% 28.7%
Construction and Land
Development $16.3 $11.3 $5.0 6.7% 4.8%
Commercial $32.1 $35.6 ($3.5) 13.3% 15.3%
Consumer $19.3 $19.2 $0.1 8.0% 8.2%
Other $2.9 $2.8 $0.1 1.2% 1.2%
All categories of loans except for commercial loans increased at March 31, 2004
compared to December 31, 2003. The bank held a consumer loan promotion during
the first quarter of 2004 and has adopted strategies to aggressively price
quality credits. In addition, improved loan demand in its primary markets is
expected to lead to higher loan balances outstanding.
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:
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2004 2003
--------- ------------
Impaired loans-still accruing $1,016 $ 923
Impaired loans-non-accrual 2,301 2,058
Other non-accrual 1,300 1,030
Past due 90 days or more and still accruing 622 42
------ ------
Total non-performing loans $5,239 $4,053
------ ------
------ ------
ASSET QUALITY
The allowance for loan losses was $3,173,000 or 1.31% of total loans at March
31, 2004 compared to $3,302,000 or 1.41% of total loans at December 31, 2003. As
of March 31, 2004, non-performing loans totaled $5,239,000 compared to
$4,053,000 at December 31, 2003. The increase during the first quarter of 2004
is due to three commercial loan relationships totaling $1,196,000 being added to
non-performing loans. These loans are considered in determining the adequacy of
the allowance for loan losses. Management believes the allowance for loan losses
is adequate at March 31, 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 March 31, 2004 the allowance for loan losses to total non-performing and
restructured loans equaled 60.6% compared to 81.5% at December 31, 2003.
SHORT-TERM INVESTMENTS
Fed funds sold and securities purchased under agreements to resell increased
$6,134,000 to $12,254,000 at March 31, 2004 compared to $6,120,000 at December
31, 2003.
Interest-bearing deposits in banks increased $383,000 to $3,224,000 at March 31,
2004 compared to $2,841,000 at December 31, 2003. The increase reflects an
increase in reinvestable balances at the company's Nevahawk subsidiary net of
decreases in bank owned certificates of deposit.
INVESTMENT SECURITIES
Securities available for sale decreased $15,882,000, or 13.4%, to $102,225,000
at March 31, 2004 compared to $118,107,000 at December 31, 2003. The decrease in
investments in securities available for sale resulted from the redeployment of
balances to fund increased loan demand and the holding of funds in short-term
investments awaiting appropriate reinvestment opportunities. Securities held to
maturity decreased $1,075,000 or 6.1% to $16,531,000 at March 31, 2004 from
$17,606,000 at December 31, 2003 as a result of security maturities.
DEPOSITS
Total deposits decreased $9,523,000 to $314,116,000 at March 31, 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 increased 0.7% from
December 31, 2003. Excluding the short-term year-end deposits, non-interest
bearing deposits decreased by $384,000 and interest bearing deposits increased
by $2,611,000 at March 31, 2004 compared to December 31, 2003.
BORROWINGS
Short-term borrowings decreased $317,000 to $9,169,000 at March 31, 2004 from
$9,486,000 at year-end. The decrease is due to lower 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 $50,497,000 at March 31, 2004 compared
to $48,413,000 at December 31, 2003. The increase reflects a net additional
$2,100,000 in FHLB advances outstanding at March 31, 2004.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $495,000 to $26,258,000 at March 31, 2004
compared to $25,763,000 at December 31, 2003. During the first three months of
2004 surplus increased by $27,000 from the sale of stock for options exercised.
Accumulated other comprehensive income increased $289,000 to $1,117,000 at March
31, 2004 from $828,000 at December 31, 2003. In addition the company declared a
dividend of $0.09 per share on common stock, which totaled $227,000.
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.
MARCH 31, DECEMBER 31, REGULATORY
2004 2003 REQUIREMENTS
--------- ------------ ------------
Total Capital (To Risk-Weighted Assets) 10.8% 10.9% 8.0%
Tier I Capital (To Risk-Weighted Assets) 9.6% 9.6% 4.0%
Tier I Capital (To Average Assets) 6.1% 6.0% 4.0%
The Company's subsidiary bank 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 rather than on the amount of assets and/or
liabilities subject to re-pricing in a given time period. Since not all assets
or liabilities move at the same rate and at the same time, a determination must
be made as to how each interest earning asset and each interest bearing
liability adjusts with each change in the base rate. The Company develops,
evaluates and amends its assumptions on an ongoing basis and analyzes its
earnings exposure quarterly.
In addition to the effect on earnings, a quarterly evaluation is made to
determine the change in the economic value of the 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 $70,000,
less $24,000 of deferred income tax, relating to the fair market value of the
SWAP agreement as of March 31, 2004. Risk management results for the period
ended March 31, 2004 related to the balance sheet hedging of the company
obligated mandatorily redeemable preferred securities 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 March 31, 2004 (in
thousands):
Time Long-term Operating Data Processing
Deposits debt(1) Leases Commitment Total
-------- ----------- --------- --------------- -----
2005 $ 81,560 $17,729 $ 164 $ 534 $ 99,987
2006 31,262 5,090 164 534 37,050
2007 11,146 7,147 164 534 18,991
2008 11,167 4,875 148 534 16,724
2009 1,745 13,156 114 267 15,282
Thereafter 102 17,217 966 0 18,285
-------- ------- ------ ------ --------
Total $136,982 $65,214 $1,720 $2,403 $206,319
-------- ------- ------ ------ --------
-------- ------- ------ ------ --------
Commitments to extend credit $ 39,135
(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
$39,135,000 as of March 31, 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.
On August 18, 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 FHLB of Chicago. On February 14, 2003, a jury delivered
a verdict that Fiserv, Inc. did not breach its contract with the Bank. Fiserv,
Inc. has filed a counterclaim seeking approximately $380,000 in reimbursement of
legal fees. On May 12, 2003 the judge denied Fiserv's motion for reimbursement
of legal fees. Fiserv has filed an appeal of the judge's decision. The company
plans to aggressively contest their appeal of the initial decision and has not
accrued the legal fee reimbursement claimed by Fiserv.
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. As a result of these developments, the Department may
take the position that the income of the out-of-state subsidiaries is taxable in
Wisconsin. Such a determination will likely be challenged by financial
institutions in the state, including the Bank. If the Department is successful
in its efforts, it could result in a substantial negative impact on the earnings
of the Company, depending upon the determination made. As of the date of this
filing, the Department has not provided the Company with information to
determine the negative impact of the Department's position in the matter.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 February 10, 2004
under Item 12 which reported 4th quarter 2003 results; that report is
not deemed "filed".
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: May 3, 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
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