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 SEPTEMBER 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 OCTOBER 19, 2004
--------------------- ----------------
$.01 PAR VALUE 2,527,895 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
Consolidated Balance Sheets as of September 30,
2004 (unaudited) and December 31, 2003 4
Unaudited Consolidated Statements of Income for the
Three Months Ended September 30, 2004 and 2003 5
Unaudited Consolidated Statements of Income for the
Nine Months Ended September 30, 2004 and 2003 6
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 7-8
Notes to Unaudited Consolidated Financial Statements 9-14
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. UNREGISTERED SALES OF EQUITY SECURITIES AND 29
USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 29
ITEM 5. OTHER INFORMATION 29
ITEM 6. EXHIBITS 29
SIGNATURES 30
INDEX TO EXHIBITS 31-32
EXHIBITS 33-52
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS (Dollars in thousands)
------
Cash and due from banks $ 15,020 $ 17,250
Federal funds sold and securities purchased under agreements to resell 4,433 6,120
Interest-bearing deposits in banks 1,825 2,841
Available-for-sale securities 147,015 118,107
Held to maturity securities, at amortized cost - 17,606
Loans, less allowance for loan losses of $2,350 and $3,302
at September 30, 2004 and December 31, 2003, respectively 233,049 230,142
Office buildings and equipment, net 9,660 9,981
Intangible assets 7,057 7,246
Bank-owned life insurance 6,464 6,263
Other assets 9,398 9,846
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Total Assets $433,921 $425,402
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing $ 55,437 $ 47,999
Interest-bearing 250,532 275,640
-------- --------
Total deposits 305,969 323,639
Short-term borrowings 22,550 9,486
Subordinated debentures 7,217 7,217
Long-term borrowings 66,814 55,913
Other liabilities 4,565 3,384
-------- --------
Total Liabilities 407,115 399,639
-------- --------
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: 2,527,895 at September 30, 2004, 2,522,995
at December 31, 2003 25 25
Surplus 8,863 8,818
Retained earnings 16,733 16,092
Accumulated other comprehensive income 1,185 828
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Total Stockholders' Equity 26,806 25,763
-------- --------
Total Liabilities and Stockholders' Equity $433,921 $425,402
-------- --------
-------- --------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
---- ----
INTEREST INCOME: (in thousands, except share data)
Interest and fees on loans $3,496 $2,993
Interest and dividends on securities:
Taxable 1,103 745
Nontaxable 308 286
Interest on federal funds sold and securities purchased under
agreements to resell 39 5
Interest on interest-bearing deposits in banks 14 14
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Total Interest Income 4,960 4,043
------ ------
INTEREST EXPENSE:
Interest on deposits 1,069 1,180
Interest on short-term borrowings 100 20
Interest on subordinated debentures 106 104
Interest on long-term borrowings 594 549
------ ------
Total Interest Expense 1,869 1,853
------ ------
Net Interest Income 3,091 2,190
Provision for loan losses 104 142
------ ------
Net Interest Income After Provision For Loan Losses 2,987 2,048
------ ------
NONINTEREST INCOME:
Service charges on deposits accounts 646 372
Gain on sale of loans 167 158
Securities gains, net - 50
Increase in cash value of bank-owned life insurance 70 77
Other 284 172
------ ------
Total Noninterest Income 1,167 829
------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 1,824 1,322
Occupancy 273 172
Equipment 268 202
Data processing services 279 221
Advertising and marketing 79 47
Amortization of intangibles 95 79
Professional fees 135 92
Office Supplies 64 69
Telephone 100 79
Postage 51 59
Transportation 62 46
Other 322 281
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Total Noninterest Expense 3,552 2,669
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Income Before Income Taxes 602 208
Income Taxes 113 (30)
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Net Income $ 489 $ 238
------ ------
------ ------
Basic Earnings Per Share $ 0.19 $ 0.09
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------ ------
Diluted Earnings Per Share $ 0.19 $ 0.09
------ ------
------ ------
Dividends Per Share $ 0.09 $ 0.09
------ ------
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See Notes to Unauditied Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
---- ----
INTEREST INCOME: (Dollars in thousands, except share data)
Interest and fees on loans $10,508 $ 9,261
Interest and dividends on securities:
Taxable 3,082 2,602
Nontaxable 928 821
Interest on federal funds sold and securities purchased under
agreements to resell 70 54
Interest on interest-bearing deposits in banks 44 31
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Total Interest Income 14,632 12,769
------- ------
INTEREST EXPENSE:
Interest on deposits 3,269 3,676
Interest on short-term borrowings 152 96
Interest on subordinated debentures 312 273
Interest on long-term borrowings 1,715 1,584
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Total Interest Expense 5,448 5,629
------- ------
Net Interest Income 9,184 7,140
Provision for loan losses 311 508
------- ------
Net Interest Income After Provision For Loan Losses 8,873 6,632
------- ------
NONINTEREST INCOME:
Service charges on deposits accounts 1,789 1,077
Gain on sale of loans 522 459
Securities gains, net 152 475
Increase in cash value of bank-owned life insurance 210 230
Other 729 512
------- ------
Total Noninterest Income 3,402 2,753
------- ------
NONINTEREST EXPENSE
Salaries and employee benefits 5,479 4,140
Occupancy 818 541
Equipment 876 663
Data processing services 829 619
Advertising and marketing 288 254
Amortization of intangibles 285 238
Professional fees 379 393
Office Supplies 193 186
Telephone 292 232
Postage 153 175
Transportation 190 142
Other 926 805
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Total Noninterest Expense 10,708 8,388
------- ------
Income Before Income Taxes 1,567 997
Income Taxes 244 30
------- ------
Net Income $ 1,323 $ 967
------- ------
------- ------
Basic Earnings Per Share $ 0.52 $ 0.38
------- ------
------- ------
Diluted Earnings Per Share $ 0.52 $ 0.38
------- ------
------- ------
Dividends Per Share $ 0.27 $ 0.27
------- ------
------- ------
See Notes to Unauditied Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,323 $ 966
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,022 931
Provision for loan losses 311 508
Gain on sale of loans (522) (459)
FHLB stock dividends (248) (202)
Amortization of premiums on securities, net 810 744
Securities gains, net (152) (475)
Decrease in accrued interest receivable 15 201
Decrease in accrued interest payable (108) (44)
(Increase) decrease in other assets 347 (503)
Increase (decrease) in other liabilities 1,144 (631)
-------- --------
Net cash provided by operations before
loan originations and sales 3,942 1,036
Origination of loans for sale (35,662) (24,385)
Proceeds from sale of loans 36,217 26,550
-------- --------
Net cash provided by operating activities 4,497 3,201
-------- --------
CASH FLOWS FROM INVESTING ACTIVITES:
Net decrease in interest-bearing deposits in banks 1,016 6,184
Net decrease in federal funds sold and securities
purchased under agreements to resell 1,687 13,120
Proceeds from sales of available-for-sale securities 25,274 33,631
Proceeds from maturities and calls of available-for-sale securities 24,181 34,096
Proceeds from maturities and calls of held-to-maturitiy securities 1,187 4,553
Purchase of available-for-sale securities (62,155) (82,773)
Purchase of held to maturity securities - (284)
Net (increase) decrease in loans (4,709) (11,481)
Net cash used in acquisition - (4,533)
Proceeds from the sale of office buildings, equipment, and
other real estate owned 1,431 369
Purchase of office buildings and equipment, net (540) (910)
-------- --------
Net cash used in investing activities (12,628) (8,028)
-------- --------
(Continued)
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits $(17,463) $(10,141)
Dividends paid (682) (679)
Proceeds from long-term borrowings 17,000 15,500
Payments on long-term borrowings (6,056) (300)
Net increase (decrease) in short-term borrowings 13,064 5,030
Proceeds from exercise of stock options 38 97
-------- --------
Net cash provided by financing activities 5,901 9,507
-------- --------
Net (decrease) increase in cash and due from banks (2,230) 4,680
CASH AND DUE FROM BANKS:
Beginning 17,250 12,572
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Ending $ 15,020 $ 17,252
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-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 5,806 $ 5,688
Income taxes $ (50) $ (21)
SUPPLEMENTAL SCHEDULES OF NON-CASH INVESTING ACTIVITIES:
Change in accumulated other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net $ 375 $ (581)
Unrealized gains (losses) on interest rate swap contract, net $ (18) $ 214
Other assets acquired in settlement of loans $ 1,339 $ 273
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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 2003 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.
Note 2. General:
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 SEPTEMBER 30,
2004 2003
---- ----
Net income, as reported $ 490 $ 238
Deduct total stock-based employee and director compensation
expense determined under fair value based method for all awards,
net of related tax effects (17) (29)
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PRO FORMA NET INCOME $ 473 $ 209
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Earnings per share:
Basic:
As reported $0.19 $0.09
Pro forma 0.19 0.08
Diluted:
As reported 0.19 0.09
Pro forma 0.19 0.08
(Dollars in thousands, except per share data) NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
---- ----
Net income, as reported $1,323 $ 966
Deduct total stock-based employee and director compensation
expense determined under fair value based method for all awards,
net of related tax effects (52) (71)
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Pro forma net income $1,271 $ 895
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Earnings per share:
Basic:
As reported $0.52 $0.38
Pro forma 0.50 0.36
Diluted:
As reported 0.52 0.38
Pro forma 0.50 0.35
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% and
4%; expected price volatility of 23% and 25%; risk-free interest rates
of 3% and 4%; and expected lives of 7 years and 10 years,
respectively.
Note 3. Allowance for Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
THREE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands)
2004 2003
---- ----
Balance at beginning of period $2,508 $2,342
Reserve acquired in merger -- 889
Provision charged to expense 104 142
Loans charged off 299 105
Recoveries 37 37
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Balance at end of period $2,350 $3,305
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NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands)
2004 2003
---- ----
Balance at beginning of period $3,305 $2,079
Reserve acquired in merger -- 889
Provision charged to expense 311 508
Loans charged off 1,400 353
Recoveries 134 182
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Balance at end of period $2,350 $3,305
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Note 4. Earnings Per Share
Presented below are the calculations for basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 490,000 $ 238,000 $1,323,000 $ 966,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,526,297 2,520,443 2,525,640 2,517,250
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $ 0.19 $ 0.09 $ 0.52 $ 0.38
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Net income available to common stockholders $ 490,000 $ 238,000 $1,323,000 $ 966,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,526,297 2,520,443 2,525,640 2,517,250
Effect of dilutive stock options outstanding 26,515 14,126 26,515 14,126
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,552,812 2,534,569 2,552,155 2,531,376
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.19 $ 0.09 $ 0.52 $ 0.38
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Note 5. Derivative Instruments
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 September 30 is as
follows:
2004 2003
---- ----
Notional amount $7,000 $7,000
Weighted average fixed rate 2.51% 2.51%
Weighted average variable rate 1.98% 1.16%
Weighted average maturity 3.25 years 4.25 years
Fair value $187 $325
Note 6. Acquisitions
As more fully described in Item 2 of Part I of this report under the
caption "Acquisition or Disposition of Assets", the Company 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 Company's
unaudited consolidated balance sheets at September 30, 2003 and at
December 31, 2003. The results of operations have been included in the
unaudited consolidated statements of income for the three and nine
months ended September 30, 2004 and affect the comparability to 2003
results.
Note 7. Sale of Branches
As more fully described in Item 2 of Part I of this report under the
caption "Acquisition or Disposition of Assets", on October 8, 2004,
the Company's subsidiary, Blackhawk State Bank, completed the sale of
its branches located in the Illinois communities of Rochelle and
Oregon, as outlined in the definitive agreement incorporated herein by
reference to exhibit 2.1 to Form 8-K dated March 17, 2004. The
Company will recognize a $1,803,000 gain in the fourth quarter of 2004
due to the sale of these branches. The sale included deposits of
$33,574,000 and certain fixed assets. The sale did not include loans
of either branch, or the real estate associated with the Rochelle
branch. In accordance with generally accepted accounting principles,
the assets and liabilities of these two branches and their results of
operations and cash flows have been included in the Company's
unaudited consolidated financial statements for all periods presented.
Note 8. 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 the 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.
In March 2004, the Financial Accounting Standards Board ("FASB")
issued an Exposure Draft, Share-Base Payment - an amendment of
Statements No. 123 and 95. This Statement amends SFAS Statement No.
123, Accounting for Stock-Based Compensation, SFAS Statement No. 95,
Statement of Cash Flows, and APB Opinion No. 125, Accounting for Stock
Issued to Employees. The objective of the amendment to SFAS No. 123 is
to recognize in the financial statements the cost of employee services
received in exchange for equity instruments and liabilities incurred
as the result of such transactions. The grant-date fair value of stock
options would be determined using an option-pricing model, and expense
would be recognized over the vesting period. In October 2004, the FASB
postponed the effective date of the proposed standard from fiscal
years beginning after December 15, 2004 to periods beginning after
June 15, 2005. The FASB is expected to issue a final standard by the
end of calendar 2004. Management is reviewing the proposed standard to
determine the impact on the financial statements.
Note 9. 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 would 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. However, as more fully
described in Item 2 of Part I of this report, under the caption of
"Proposed Going Private Transaction", on October 22, 2004 the Company
announced a plan to suspend its obligation to file reports with the
Securities and Exchange Commission, by means of a 1-for-1,000 reverse
stock split of the Company's common stock, followed immediately by a
1,000-for-1 forward split.
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 OF
PLAN OF OPERATION
The purpose of this management's discussion and analysis is to provide relevant
information regarding the Company'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 the Company. 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 the
Company'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; terrorist
attacks which could disrupt the financial markets or harm the economy; success
in gaining regulatory approvals when required; changes in the Federal Reserve
Board monetary policies; unexpected outcomes of new and existing litigation in
which the Company 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.
PROPOSED GOING PRIVATE TRANSACTION
On October 22, 2004, the Company's board of directors announced a plan to
suspend its obligation to file reports with the Securities and Exchange
Commission, by means of a 1-for-1,000 reverse split of the Company's common
stock, followed immediately by a 1,000-for-1 forward split. The effect of this
transaction would be to reduce the number of shareholders of record to less than
300, thereby the Company's obligation to file reports with the SEC.
Shareholders with less than 1,000 shares of common stock, held of record in
their name, immediately before the split will receive a cash payment equal to
$15.25 per pre-split share. Shareholders with 1,000 or more shares of record in
their name immediately before the split will continue to hold the same number of
shares after completion of the split transaction. The proposed transaction is
subject to shareholder approval.
ACQUISITION OR DISPOSITION OF ASSETS
Acquisition. On September 30, 2003, the Company acquired DunC Corp. and its
wholly owned subsidiary, First Bank, bc, an Illinois state bank for cash in the
aggregate amount of $7,223,000, which was paid to former DunC Corp.
shareholders.
The Company and the Bank were the surviving entities, in a series of mergers,
and DunC Corp. and First Bank ceased to exist.
The merger consideration was funded through a term loan for $7,500,000, which
matures on September 26, 2008.
In accordance with the requirements of purchase accounting, the operations of
the acquired companies have been included with the operations of the Company
since the date of acquisition. Because of the relative size of the Company and
DunC Corp., 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.
The following provides certain summary financial information about the financial
condition of DunC Corp. and the assets and liabilities acquired in the
acquisition, and DunC Corp.' s operations, prior to the acquisition to
illustrate their impact upon the Company:
Balance Sheet
-------------
(Dollars in thousands)
----------------------
At September 30, 2003
---------------------
Loans $46,781
Allowance for loan losses (889)
Fed funds & short term investments 9,572
Investment securities 11,104
Total assets 77,726
Deposits 64,237
Borrowings 3,631
Income Statement
----------------
(Dollars in thousands)
---------------------- Nine Months Ended Year Ended
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
Noninterest income 1,819 2,497
Noninterest expenses 4,701 4,208
------ ------
Income (loss) before income taxes (287) 810
On September 30, 2003, 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.
Branch Sale. On October 8, 2004, the Bank completed the sale of its Rochelle
and Oregon, Illinois branches to The First National Bank and Trust Company of
Rochelle, Illinois (referred to as the "purchaser").
The purchaser assumed $33,574,000 in deposits associated with these two
locations and acquired $744,000 in assets, including certain real estate and
cash associated with the branches. The Bank paid the purchaser cash equal to
the net liabilities assumed by the purchaser, less a premium equal to 6.77% of
core deposit liabilities. The Bank retained the loans of these two branches,
and the real estate related to the Rochelle branch.
The Bank funded the sale of the branches by issuing brokered certificates of
deposit, obtaining Federal Home Loan Bank advances and other short-term
borrowings, and liquidating investment securities. A gain of $1,803,000 will be
recognized by the Bank in the fourth quarter of 2004, as a result of the branch
sale transaction.
RESULTS OF OPERATIONS
The Company reported net income of $490,000 for the three months ended September
30, 2004, an increase of $252,000 or 106% from the $238,000 reported for the
same three month period in 2003. Net income for the nine month period ended
September 30, 2004 was $1,323,000, an increase of $356,000, or 37% from the
$967,000 reported for the same period in 2003.
Diluted earnings per share were $0.19 and $0.52 for the three and nine months
ended September 30, 2004, respectively, compared to $0.09 and $0.38 for the same
periods in 2003. This represents an increase of 111% and 37% for the three
month and nine 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 nine month periods ended September 30, 2004 and 2003.
The tax-equivalent yield calculations assume a Federal tax rate of 34%.
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES (DOLLARS IN THOUSANDS)
(yields on a tax-equivalent basis) Three Months ended September 30, 2004 Three Months ended September 30, 2003
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits in banks $ 2,309 $ 14 2.46% $ 2,563 $ 14 2.17%
Federal funds sold & securities
purchased under agreements to
resell 7,763 39 1.99% 2,151 5 0.92%
Investment securities:
Taxable investment securities 117,558 1,103 3.73% 93,369 745 3.17%
Tax-exempt investment securities 32,315 467 5.75% 29,585 434 5.82%
-------- ------- ----- -------- ------- -----
Total Investment securities 149,873 1,570 4.17% 122,954 1,179 3.80%
Loans 232,671 3,496 5.98% 193,267 2,993 6.14%
-------- ------- ----- -------- ------- -----
TOTAL EARNING ASSETS $392,616 $ 5,119 5.19% $320,935 $ 4,191 5.18%
------- ----- ------- -----
Allowance for loan losses (2,475) (2,412)
Cash and due from banks 13,333 11,316
Other Assets 26,899 20,394
-------- --------
TOTAL ASSETS $430,373 $350,233
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 44,867 $ 60 0.54% $ 19,489 $ 61 1.25%
Savings and money market deposits 82,274 170 0.82% 55,021 93 0.67%
Time deposits 129,783 839 2.57% 148,093 1,025 2.75%
-------- ------- ----- -------- ------- -----
Total interest bearing deposits 256,924 1,069 1.66% 222,603 1,180 2.10%
Short-term borrowings 28,007 100 1.42% 11,254 20 0.71%
Subordinated debentures 7,217 106 5.84% 7,217 104 5.72%
Long-term borrowings 59,860 594 3.95% 48,428 549 4.50%
-------- ------- ----- -------- ------- -----
TOTAL INTEREST-BEARING LIABILITIES $352,008 $ 1,869 2.11% $289,502 $ 1,853 2.54%
------- ----- ------- -----
INTEREST RATE SPREAD 3.07% 2.64%
----- -----
----- -----
Noninterest checking accounts 49,981 33,149
Other liabilities 2,425 1,823
-------- --------
Total liabilities 404,414 324,474
Stockholders' equity 25,959 25,759
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $430,373 $350,233
-------- --------
-------- --------
NET INTEREST INCOME/MARGIN $ 3,250 3.29% $ 2,338 2.89%
------- ----- ------- -----
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES (DOLLARS IN THOUSANDS)
(yields on a tax-equivalent basis) Nine Months ended September 30, 2004 Nine Months ended September 30, 2003
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits in banks $ 2,515 $ 44 2.31% $ 2,040 $ 54 3.54%
Federal funds sold & securities
purchased under agreements to
resell 5,603 70 1.67% 4,088 31 1.01%
Investment securities:
Taxable investment securities 107,601 3,082 3.83% 93,560 2,602 3.72%
Tax-exempt investment securities 32,287 1,406 5.82% 27,307 1,242 6.08%
-------- ------- ----- -------- ------- -----
Total Investment securities 139,888 4,488 4.29% 120,867 3,844 4.25%
Loans 236,145 10,508 5.94% 186,433 9,262 6.64%
-------- ------- ----- -------- ------- -----
TOTAL EARNING ASSETS $384,151 $15,110 5.25% $313,428 $13,191 5.63%
------- ----- ------- -----
Allowance for loan losses (2,948) (2,279)
Cash and due from banks 13,440 11,014
Other Assets 27,152 20,119
-------- --------
TOTAL ASSETS $421,795 $342,282
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 46,152 $ 185 0.54% $ 37,832 $ 225 0.80%
Savings and money market deposits 80,582 477 0.79% 54,030 305 0.75%
Time deposits 134,592 2,607 2.59% 126,071 3,146 3.34%
-------- ------- ----- -------- ------- -----
Total interest bearing deposits 261,326 3,269 1.67% 217,933 3,676 2.26%
Short-term borrowings 17,990 152 1.13% 12,384 96 1.04%
Subordinated debentures 7,217 312 5.78% 7,217 272 5.04%
Long-term borrowings 57,915 1,715 3.95% 44,461 1,584 4.76%
-------- ------- ----- -------- ------- -----
TOTAL INTEREST-BEARING LIABILITIES $344,448 $ 5,448 2.11% $281,995 $ 5,628 2.67%
------- ----- ------- -----
INTEREST RATE SPREAD 3.14% 2.96%
----- -----
----- -----
Noninterest checking accounts 48,885 32,496
Other liabilities 2,580 1,972
-------- --------
Total liabilities 395,913 316,463
Stockholders' equity 25,882 25,819
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $421,795 $342,282
-------- --------
-------- --------
NET INTEREST INCOME/MARGIN $ 9,662 3.36% $ 7,563 3.23%
------- ----- ------- -----
Net interest income increased by $912,000, or 39%, to $3,250,000 for the quarter
ended September 30, 2004, compared to $2,338,000 for the comparable period in
2003. On a year to date basis, net interest income increased by $2,099,000, or
28%, to $9,662,000 compared to $7,563,000 for the first nine months of 2003.
The increase in net interest income was primarily due to the DunC Corp.
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, increased 40 basis points to 3.29% for the
three months ended September 30, 2004 compared to 2.89% for the third quarter of
2003. The increase in the third quarter net interest margin compared to 2003
reflected the Company's ability to slightly increase its yield on earning assets
to 5.19% compared to 5.18% the year before, while lowering the cost of interest
bearing liabilities by 43 basis points to 2.11% compared to 2.54% the year
before. The Company maintained the yield on earning assets due to improvements
in the yield on taxable investment securities to 3.73% for the third quarter
compared to 3.17% the year before, offsetting the 16 basis point decrease in the
yield on average loans to 5.98% compared to 6.14% the year before. During the
third quarter of 2003 the yield on taxable investment securities suffered due to
accelerated prepayments on mortgage-backed securities. For the nine months
ended September 30, 2004, the net interest margin increased 13 basis points to
3.36% compared to 3.23% for the same period in 2003.
For the three months ended September 30, 2004, total interest income increased
by $928,000, or 22%, to $5,119,000 compared to $4,191,000 for the same period in
2003. The increase in interest income was primarily due to a $71,681,000, or
22%, increase in average earning assets, including $69,300,000 of earning assets
acquired in the DunC Corp. acquisition. The average balance sheets, with
resultant interest and rates for the three and nine month periods ended
September 30, 2004, included the assets obtained in the DunC Corp. acquisition,
but the same periods ended in 2003 did not. The acquisition was completed on
September 30, 2003 and the assets were included in the Company's balance sheet
on that date and thereafter. Earning assets for the third quarter of 2004,
excluding those obtained in the DunC Corp. acquisition, increased $2,381,000 or
0.7%, from the same quarter in 2003.
For the nine months ended September 30, 2004, total interest income increased by
$1,919,000, or 15%, to $15,110,000 compared to $13,191,000 for the same period
in 2003. The increase in interest income was due to a $70,723,000, or 23%,
increase in average earning assets, offset by a 38 basis point decrease in the
yield on average earning assets to 5.25% compared to 5.63% for the same period
in 2003. Earning assets for the nine months ended September 30, 2004, not
including the assets obtained in the DunC Corp. acquisition, increased
$1,423,000 or 0.5%.
Interest and fees on loans increased 17% to $3,496,000 for the three months
ended September 30, 2004 compared to $2,993,000 for the same period of 2003.
This increase was the result of a $39,404,000 or 20% increase in average loans
outstanding offset by a 16 basis point decrease in yield on the portfolio.
Interest and fees on loans increased 13% to $10,508,000 for the nine months
ended September 30, 2004 compared to $9,262,000 in the same period of 2003. This
increase was the result of a $49,712,000 or 27% increase in average loans
outstanding and a 70 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 Corp. acquisition. Excluding the loans obtained in the DunC Corp.
acquisition, average total loans decreased $7,377,000 or 3.8% for the three
months ended September 30, 2004 and increased $2,931,000 or 1.6% for the nine
months ended September 30. 2004. The lower yield on average loans reflected
continued asset re-pricing in the current historically low interest rate
environment. Management expects recent monetary policy decisions by the Federal
Reserve Bank to increase managed interest rates by 100 basis points, including a
25 basis point increase announced on November 10, 2004, to have a positive
effect on loan yields.
Interest income on taxable securities increased by $358,000 or 48% in the third
quarter of 2004 to $1,103,000 compared to $745,000 for the same period in 2003.
Average balances of taxable investment securities increased 26% to $117,558,000
for the quarter ended September 30, 2004 compared to $93,369,000 for the same
period in the prior year. The yield on average taxable investment securities
increased 56 basis points to 3.73% for the third quarter of 2004 compared to
3.17% for the third quarter of 2003. The yield on taxable investment securities
was lower in the third quarter of 2003 due to accelerated premium amortization
on mortgage-backed securities, which was caused by historically high prepayment
speeds on the underlying mortgage loans. Tax exempt investment securities
increased $2,730,000, or 9% to an average balance of $32,315,000 for the three
months ended September 30, 2004 compared to $29,585,000 for the same period in
2003. Interest income on tax exempt securities increased $33,000 or 8% to
$467,000 for the third quarter of 2004 compared to $434,000 for the third
quarter of 2003. Excluding the $8,800,000 and $2,300,000 of taxable and tax
exempt securities, respectively, acquired in the DunC Corp. acquisition, average
taxable investment securities increased $15,389,000, or 17%, and tax exempt
securities increased $430,000, or 1.5%.
Interest income on taxable securities increased by $480,000, or 18%, in the
first nine months of 2004 to $3,082,000 from $2,602,000 for the same period in
2003. Average balances of taxable investment securities increased 15% to
$107,601,000 for the nine months ended September 30, 2004 compared to
$93,560,000 for the same period in the prior year. The increase in average
balances outstanding was augmented by an increase of 11 basis points in average
yield to 3.83% for the first nine months of 2004 compared to 3.72% for the first
nine months of 2003. Interest income on tax-exempt securities for the nine
months ended September 30, 2004 increased $164,000, or 13.2%, to $1,406,000
compared to $1,242,000. The increase was due to a $4,980,000, or 18.3% increase
in the average balance of tax exempt securities to $32,287,000 for the nine
months ended September 30, 2004 compared to $27,307,000 for the same period in
2003. This increase was offset by a 26 basis point decrease in the tax
equivalent yield to 5.82% for the nine months ended September 30, 2004 compared
to 6.08% for the same period a year ago. Excluding the securities acquired in
the DunC Corp. acquisition, taxable investment securities increased $5,241,000
or 5.6% and tax exempt investment securities increased $2,680,000 or 9.8%, for
the nine months ended September 30, 2004.
Interest from Federal funds sold and securities purchased under agreements to
resell increased to $39,000 for the three month period ended September 30, 2004,
compared to $5,000 during the same period in 2003. The average balance of
Federal funds sold and securities purchased under agreements to resell increased
by $5,612,000 or 261% to $7,763,000 for the three months ended September 30,
2004. Interest from Federal funds sold and securities purchased under
agreements to resell increased to $70,000 for the nine month period ended
September 30, 2004, compared to $31,000 during the same period in 2003. The
average balance of Federal funds sold and securities purchased under agreements
to resell increased by $1,515,000 or 37% to $5,603,000 for the nine months ended
September 30, 2004. The short term investments that were accumulated in the
third quarter of 2004 were used to fund the sale of the Bank's Oregon and
Rochelle branches, which was completed on October 8, 2004.
Total interest expense increased by $16,000, or 0.9%, to $1,869,000 for the
three months ended September 30, 2004 compared to $1,853,000 for the same period
in 2003. For the nine months ended September 30, 2004, total interest expense
decreased by $180,000, or 3%, to $5,448,000 compared to $5,628,000 for the same
period in 2003. The decrease in total interest expense was due to continued re-
pricing of deposit liabilities in a historically low interest rate environment,
which resulted in a 43 basis point decrease in the rate on interest bearing
liabilities to 2.11% for the third quarter of 2004 compared to 2.54% for the
same quarter last year. For the nine months ended September 30, 2004, the rate
paid on average interest bearing liabilities decreased 56 basis points to 2.11%
compared to 2.67% for the same period in 2003. The DunC Corp. acquisition
increased interest bearing liabilities by $54,000,000 at the acquisition date.
Excluding $54,000,000 of interest bearing liabilities acquired in the DunC Corp.
acquisition, average interest bearing liabilities increased by $8,506,000 or
2.9% and $8,454,000 or 3.0% for the three and nine month periods ended September
30, 2004, compared to the same periods a year ago.
While interest paid on deposits decreased $111,000, or 9% to $1,069,000 during
the three months ended September 30, 2004 compared to $1,180,000 for the same
period in 2003, average interest bearing deposits increased $34,321,000, or 15%
quarter over quarter. Year to date interest paid on deposits decreased
$407,000, or 11% to $3,269,000 compared to $3,676,000 for the same period in
2003 while average total interest bearing deposits increased by $43,393,000, or
20%. The rate on average interest bearing deposits decreased by 44 and 59 basis
points to 1.66% and 1.67% for the respective three and nine month periods ended
September 30, 2004 compared to the same periods a year ago. The decrease in the
rates paid on average interest bearing deposits reflected the Company's strategy
to attract nonmaturity deposits such as checking, savings and money market
accounts rather than higher cost certificates of deposit. The DunC Corp.
acquisition added $50,300,000 in interest bearing deposits as of September 30,
2003. Excluding the interest bearing deposits obtained in the acquisition,
average interest bearing deposits decreased $15,979,000, or 7.2%, for the three
months ended September 30, 2004, and $6,907,000, or 3%, for the nine months
ended September 30, 2004.
Interest on short-term borrowings increased $80,000 to $100,000 for the three
months ended September 30, 2004 compared to $20,000 for the same period in 2003.
This increase was the result of a $16,753,000 increase in average short-term
borrowings to $28,007,000 for the three months ended September 30, 2004 compared
to $11,254,000 for the same period in 2003. The increase was due to excess
liquidity being maintained to help fund the sale of the Oregon and Rochelle
branches, which was completed after the end of the third quarter on October 8,
2004. For the nine months ended September 30, 2004, interest on short-term
borrowings increased $56,000 to $152,000 compared to $96,000 for the same period
in 2003. This increase was the result of a $5,606,000 or 45% increase in
average short-term borrowings to $17,990,000 for the nine months ended September
30, 2004 compared to $12,384,000 for the same period in 2003.
Interest expense on subordinated debentures increased by $2,000 to $106,000 for
the third quarter of 2004 compared to $104,000 in the third quarter of 2003 and
by $40,000 to $312,000 for the nine months ended September 30, 2004 compared to
$272,000 for the same period in 2003. The year to date increase was due to the
interest rate swap transaction that was entered into on June 26, 2003. The swap
transaction effectively converted $7,000,000 of the $7,217,000 debenture from a
variable rate of 325 basis points plus the 90 day LIBOR rate, to a fixed rate of
5.72%. This increased the effective interest rate on the debenture, but reduced
the Company's exposure to increasing interest rates.
Interest expense on long-term borrowings increased $45,000 and $131,000 to
$594,000 and $1,715,000 for the three and nine month periods ended September 30,
2004 compared to $549,000 and $1,584,000 for the same periods in 2003. The
average balance outstanding increased $11,432,000 or 24% for the three months
ended September 30, 2004 and $13,454,000 or 30% for the nine months ended
September 30, 2004. The increase in the average balance of long-term borrowings
outstanding reflected the $7,500,000 in bank debt issued to finance the DunC
Corp. acquisition and additional Federal Home Loan Bank 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 $104,000 in the third quarter of 2004, a decrease of $38,000
or 27% from the $142,000 in the third quarter of 2003. For the first nine months
of 2004, the provision was $311,000 compared to $508,000 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 third
quarter of 2004 totaled $262,000 compared to $68,000 for the third quarter of
2003. Year to date net charge-offs increased $1,092,000 to $1,263,000 compared
to $171,000 for the first nine months of 2003. A significant portion of this
increase during 2004 related to loans obtained in the DunC Corp. acquisition,
which had already been provided for in the reserve obtained as part of the
acquisition. The year to date charge-offs included $788,000 on three commercial
and commercial real estate loans. These loans were identified as impaired at
December 31, 2003, with $570,000 specifically allocated in the allowance for
loan losses. The charge-offs related to these loans resulted in a decrease in
the allowance to total loans to 1.07% at September 30, 2004 compared to 1.35% at
September 30, 2003 and 1.41% at December 31, 2003.
NONINTEREST INCOME
Total noninterest income increased $338,000, or 41%, to $1,167,000 for the three
months ended September 30, 2004 compared to $829,000 for the same period in
2003. Year to date total noninterest income increased $649,000, or 24%, to
$3,402,000 compared to $2,753,000 for the same period in 2003.
Service charges on deposit accounts increased $274,000, or 73.7% to $646,000 for
the quarter ended September 30, 2004 compared to $372,000 for the third quarter
of 2003, and increased $712,000, or 66.1%, to $1,789,000 for the nine months
ended September 30, 2004 compared to the same period in 2003. These increases
were due to the accounts obtained in the DunC Corp. acquisition, increased focus
on attracting and retaining transaction accounts and the introduction of an
overdraft privilege program in the second quarter of 2004.
Gains on the sales of mortgage loans increased $9,000, or 6%, to $167,000 for
the third quarter of 2004 compared to the $158,000 of gains recognized during
the third quarter of 2003. In the third quarter of 2004, loans totaling
$11,711,000 were sold to the secondary market compared to $9,842,000 for the
same period in 2003. Year to date gains on sales of mortgage loans increased
$63,000, or 14%, to $522,000 compared to $459,000 for the same period in 2003.
The average gain in 2004 was 1.4% on $36,217,000 in loans sold to the secondary
market compared to an average gain of 1.7% on the $26,550,000 of loans sold in
the same period in 2003. Mortgage origination volume is highly dependent on the
interest rate environment. If we enter a period of increasing interest rates,
mortgage volume could slow as it becomes less economical for consumers to
refinance mortgages.
The Company did not recognize any securities gains in the third quarter of 2004
compared to $50,000 in the third quarter of 2003. Year to date, the Company has
realized $152,000 in securities gains, a $323,000 or 68% decrease compared to
the $475,000 in gains realized for the nine months ended September 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. Securities are also sold from time to
time to meet the liquidity needs of the Company.
Other noninterest income increased $112,000, or 65%, to $284,000 for the quarter
ended September 30, 2004 compared to $172,000 for the third quarter of 2003.
Year to date other noninterest income increased by $216,000 or 42% to $728,000
for the nine months ended September 30, 2004 from $512,000 for the nine months
ended September 30, 2003. These increases included increased interchange, ATM
and debit card income as a result of an increase in the number of accounts and
cardholders from the DunC Corp. acquisition, fee increases and increased
utilization by existing customers.
NONINTEREST EXPENSE
Total noninterest expense increased $883,000, or 33%, to $3,552,000 for the
three months ended September 30, 2004 compared to $2,669,000 for the same period
in 2003. Year to date noninterest expense increased by $2,320,000, or 28% to
$10,708,000 for the nine months ended September 30, 2004 compared to $8,388,000
for the nine months ended September 30, 2003. The increases reflect increased
costs in 2004 as a result of the DunC Corp. acquisition offset by the benefits
of reducing or eliminating duplicative expenses between DunC Corp. and the
Company.
Salaries and employee benefits, the largest component of noninterest expense,
increased $502,000, or 38%, to $1,824,000 for the quarter ended September 30,
2004 compared to $1,322,000 for the third quarter of 2003. For the first nine
months of 2003, total salaries and employee benefits increased $1,339,000, or
32%, to $5,479,000 compared to $4,140,000 for the same period in 2003. The
increases reflected additional staffing due to the DunC Corp. acquisition,
additional costs of employee benefits and normal salary increases.
Equipment expenses increased $66,000, or 33%, to $268,000 for the quarter ended
September 30, 2004 compared to $202,000 for the same quarter in 2003. For the
first nine months of 2003, equipment expense increased $213,000, or 32%, to
$876,000 compared to $663,000 for the same period in 2003. The increases
related primarily to increased depreciation and maintenance on assets acquired
in the DunC Corp. acquisition and additional depreciation and maintenance on a
new items processing system installed during the third quarter of 2003.
Data processing costs increased $58,000, or 26%, to $279,000 for the quarter
ended September 30, 2004 and $210,000, or 34%, to $829,000 for the nine months
ended September 30, 2004. These increases reflected higher volumes of service
utilized from our core processor due to additional accounts added in the DunC
Corp. acquisition and the outsourcing of network support services in 2004.
Professional fees decreased $14,000, or 4%, to $379,000 for the nine months
ended September 30, 2004 compared to $393,000 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 $42,000, or 15%, to $323,000 for the three
months ended September 30, 2004 compared to $281,000 for the same period a year
ago. For the first nine months of 2004, other noninterest expenses increased
$120,000, or 15%, to $925,000 compared to $805,000 for the same period in 2003.
BALANCE SHEET ANALYSIS
OVERVIEW
Total assets increased to $433,921,000, or 2%, at September 30, 2004 compared to
$425,402,000 at December 31, 2003. 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 $20,269,000, or 5% from
December 31, 2003 to September 30, 2004.
LOANS
Net loans increased $2,907,000, or 1%, to $233,049,000 on September 30, 2004
compared to $230,142,000 on December 31, 2003. The composition of loans is shown
in the following table:
As a % of Gross Loans
September 30, December 31, Change in September 30, December 31,
2004 2003 Balance 2004 2003
------------- ------------ --------- ------------- ------------
(Dollars in millions)
Residential real estate $ 100.20 $ 97.50 $ 2.70 42.6% 41.8%
Commercial real estate $ 68.20 $ 67.00 $ 1.20 29.0% 28.7%
Construction and land development $ 16.60 $ 11.30 $ 5.30 7.1% 4.8%
Commercial $ 29.60 $ 35.60 $ (6.00) 12.6% 15.3%
Consumer $ 18.20 $ 19.20 $ (1.00) 7.7% 8.2%
Other $ 2.60 $ 2.80 $ (0.20) 1.1% 1.2%
NON-PERFORMING AND OTHER IMPAIRED OR PROBLEM LOANS
Non-performing loans include loans that are determined by management to be
impaired because full collection of interest and principal is doubtful, and have
been placed in non-accrual status, or accruing loans which are past-due ninety
days or more as to interest and/or principal payments. Other impaired problem
loans are loans that are still performing in accordance with their original
terms and are still accruing interest; however management has identified
deterioration in the borrower's financial condition or underlying collateral
value.
The following summarizes information concerning non-performing loans:
September 30, December 31,
(Dollars in thousands) 2004 2003
------------- ------------
Impaired loans-non-accrual $ 890 $ 2,058
Other non-accrual 1,365 1,030
Past due 90 days or more and still accruing 20 42
------- -------
$ 2,275 $ 3,130
Other problem loans 773 923
------- -------
Total non-performing and problem loans $ 3,048 $ 4,053
------- -------
------- -------
ASSET QUALITY
The allowance for loan losses was $2,350,000 or 1.0% of total loans at September
30, 2004 compared to $3,302,000 or 1.4% of total loans at December 31, 2003. As
of September 30, 2004, non-performing and impaired loans totaled $3,048,000
compared to $4,053,000 at December 31, 2003. The decrease during 2004 was
primarily due to the resolution of three commercial loan relationships totaling
$788,000.
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 evaluates the adequacy 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 judgment 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 September 30, 2004, the allowance for loan losses to total non-performing and
problem loans equaled 77.1% compared to 81.5% at December 31, 2003.
SHORT-TERM INVESTMENTS
Federal funds sold and securities purchased under agreements to resell decreased
$1,687,000 to $4,433,000 at September 30, 2004 compared to $6,120,000 at
December 31, 2003.
Interest-bearing deposits in banks decreased $1,016,000 to $1,825,000 at
September 30, 2004 compared to $2,841,000 at December 31, 2003.
INVESTMENT SECURITIES
During the second quarter of 2004, the Bank and Nevahawk Investment, Inc., a
wholly owned subsidiary of the Bank, 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 using a total return approach. Investment securities increased
$11,302,000, or 8%, to $147,015,000 at September 30, 2004 compared to
$135,713,000 at December 31, 2003.
DEPOSITS
Total deposits decreased $17,670,000 to $305,969,000 at September 30, 2004
compared to $323,639,000 at December 31, 2003. As noted above, the Company's
December 31, 2003 financial statements reflected short-term year-end deposits of
$11,750,000. Excluding the short-term year-end deposits, total deposits
decreased $5,920,000, or 1.8%, from December 31, 2003. Excluding the short-term
year-end deposits, non-interest bearing deposits increased by $7,438,000 and
interest bearing deposits decreased by $13,358,000 at September 30, 2004
compared to December 31, 2003. The decrease in interest bearing deposits was
due to non-renewal of maturing certificates of deposits, reflecting the
Company's emphasis on nonmaturity deposits such as checking, savings and money
market accounts.
BORROWINGS
Short-term borrowings increased $13,064,000 to $22,550,000 at September 30, 2004
from $9,486,000 at year-end. This increase was primarily due to an increase in
repurchase agreements entered into with commercial customers.
Long-term borrowings consisted of the Company's bank term loan of $7,344,000 and
term advances from the Federal Home Loan Bank ("Federal Home Loan Bank") that
were $59,470,000 at September 30, 2004 compared to $48,413,000 at December 31,
2003. The increase reflected a net additional $11,057,000 in Federal Home Loan
Bank advances outstanding at September 30, 2004.
STOCKHOLDERS' EQUITY
Total stockholders' equity increased $1,043,000 to $26,806,000 at September 30,
2004 compared to $25,763,000 at December 31, 2003. Retained earnings increased
by $640,000 to $16,732,000 compared to $16,092,000 at December 31, 2003.
Accumulated other comprehensive income increased $357,000 to $1,185,000 at
September 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 increased by $374,000 to a net gain of
$1,055,000 at September 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, decreased by $23,000 to $124,000 at September 30, 2004 compared to
$147,000 at December 31, 2003. During the first nine months of 2004, surplus
increased by $45,000 from the sale of stock for stock options exercised. The
increases in total stockholders' equity were net quarterly dividends of $0.09
per share declared on the Company's common stock for each of the first three
quarters of 2004, which totaled $682,000.
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.
September 30, December 31, Regulatory
2004 2003 Requirements
---- ---- ------------
Total Capital (To Risk-Weighted Assets) 10.20% 10.9% 8.0%
Tier I Capital (To Risk-Weighted Assets) 9.34% 9.6% 4.0%
Tier I Capital (To Average Assets) 6.05% 6.0% 4.0%
The 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 was a gain of $187,000, less
$64,000 of deferred income tax, relating to the fair market value of the swap
agreement as of September 30, 2004. Risk management results for the period
ended September 30, 2004 related to the balance sheet hedging of the
subordinated debentures indicated 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 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 federal funds, sale of securities, sale of loans, borrowing from both
the Federal Reserve Bank and Federal Home Loan Bank, and dividends paid by
Nevahawk Investment.
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 the
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 September 30, 2004 (in thousands):
Data
Time Long-term Operating Processing
Deposits debt(1) Leases Commitment Total
-------- ----------- --------- ---------- -----
2005 $ 79,203 $18,910 $ 164 $ 534 $ 98,811
2006 21,068 5,850 164 534 27,616
2007 23,777 7,335 164 534 31,810
2008 2,222 17,719 135 534 20,610
2009 1,416 7,000 114 0 8,530
Thereafter 104 17,217 901 0 18,222
-------- ------- ------ ------ --------
Total $127,790 $74,031 $1,642 $2,136 $205,599
-------- ------- ------ ------ --------
-------- ------- ------ ------ --------
Commitments to extend credit $32,275
(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
$32,275,000 as of September 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 sought 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 Investment, which is incorporated in Nevada and 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 the
Company, 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 Bank or Nevahawk
Investment nor has the Company determined how it intends to respond. The
Department's letter did not provide sufficient details to permit the Company to
assess what effects the acceptance of 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 receive 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
September 30, 2004, 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. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
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. EXHIBITS
See Exhibit Index following the signature page in this report, which
is incorporated herein by this reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Blackhawk Bancorp, Inc.
----------------------------------------------------
(Registrant)
Date: November 12, 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
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 Corp Merger
Corporation and DunC Corp
dated as of March 17, 2003
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)
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
4.1 Credit Agreement with US Bank Form 8-K dated September
National Association dated 30, 2003
September 26, 2003
4.2 Employment Agreement by and X
between Blackhawk State Bank
and Todd J. James dated
October 26, 2004