U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-18599
BLACKHAWK BANCORP, INC.
(Name of small business issuer in its charter)
WISCONSIN 39-1659424
(State of Incorporation) (IRS Employer ID No.)
400 Broad Street, Beloit, Wisconsin 53511
(Address of principal executive offices)
Issuer's Telephone Number (608) 364-8911
Securities Registered Under Section 12(b) of the Exchange Act:
NONE
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, $ .01 PAR VALUE
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 .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $22,194,763
As of March 14, 2003, 2,517,131 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 14, 2003) of the shares
held by non-affiliates (excludes shares reported or beneficially owned by
directors and officers - does not constitute an admission to affiliate status)
was approximately $17,126,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Blackhawk Bancorp, Inc.' s definitive proxy statement for its Annual
Meeting of Stockholders, to be held on May 21, 2003, are incorporated by
reference into Part III hereof.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
Index of Exhibits on Page 36.
BLACKHAWK BANCORP, INC.
FORM 10-KSB - TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements 20
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 31
Item 10. Executive Compensation 31
Item 11. Security Ownership Of Certain Beneficial Owners
and Management and Related Stockholder Matters 31
Item 12. Certain Relationships and Related Transactions 32
Item 13. Exhibits and Reports on Form 8-K 32
Item 14. Controls and Procedures 32
Signatures 33
Certifications 34
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Blackhawk Bancorp, Inc. (the "Company") was incorporated under the
laws of the state of Wisconsin in November 1989. The Company owns and operates
a subsidiary financial institution, Blackhawk State Bank ("Bank") headquartered
in Beloit, Wisconsin and owns 100% of the common securities of Blackhawk
Statutory Trust I, which was formed in December 2002 for the purpose of issuing
Trust Preferred Securities.
The Bank is a Wisconsin-chartered commercial bank operating nine free-standing
branches, three of which are in Beloit, Wisconsin and six are located in the
following cities in Illinois: Belvidere (2), Oregon (1), Rochelle (1), Rockford
(1) and Roscoe (1). The Bank has three wholly-owned subsidiaries: Nevahawk
Investment, Inc. ("Nevahawk"), an investment subsidiary located in Las Vegas,
Nevada; RSL, Inc. ("RSL"), which in turn owns Midland Acceptance Corporation
("MAC"), both of which are substantially inactive; and First Financial
Services, Inc. ("FFSI"), whose primary activity is ownership of one of the
bank's facilities.
Through its nine locations the Bank provides various consumer banking, business
banking and related financial services. Consumer banking services to
individuals include demand, savings and time deposits. Consumer lending
services include installment loans, mortgage loans, overdraft protection,
personal lines of credit and credit cards. The bank also provides trust and
investment services through a separate department of the bank and also through a
third party marketing agreement with a full service brokerage company.
Business banking services, which are provided to small business, commercial and
governmental organizations include commercial and commercial real estate
lending, deposits, cash management and letters of credit.
The bank's primary source of revenue is net interest income and fees earned on
its loans, and investments. Other non-interest income consists of fees from the
sale and servicing of mortgage loans, service charges on deposits, trust
services fees and income from retail non-deposit investment sales.
RECENT DEVELOPMENTS. On March 17, 2003 Blackhawk Bancorp, Inc. announced the
signing of a definitive agreement to acquire DunC Corp. and its subsidiary,
First Bank, bc, for $7.2 million, or $1,518 per share in a cash transaction.
The agreement provides for limited adjustments in price based on the performance
of DunC Corp. The acquisition is expected to be complete in the third quarter
of 2003 and is subject to shareholder and regulatory approval. First Bank, bc,
with assets of approximately $75 million and over 40 employees, is headquartered
in Capron, Illinois. It has four full service locations in Illinois including
Capron, Belvidere, Rockford and Machesney Park. First Bank, bc offers a full
range of retail, commercial and real estate banking services. After completion
of this merger, Blackhawk will rank second in deposit balances in the fast
growing Boone County of Illinois. It also picks up a full-service facility in
the rapidly developing Rte. 173 and Forest Hills Rd. area of Machesney Park, IL.
Proxy statements will be sent to DunC Corp. shareholders for approval of the
proposed transaction. Shareholders of Blackhawk Bancorp, Inc. will not be
required to vote on the transaction.
LENDING ACTIVITIES. A significant amount of the loans in the Bank's loan
portfolio are secured by residential or commercial real estate. Substantially
all of the real estate securing the mortgage loans is located within thirty
minutes driving distance of the Bank's offices Commercial loans are either
collateralized by assets other than real estate or are unsecured. Interest
rates on commercial loans are generally tied to an index adjustable monthly and
therefore are more rate-sensitive than mortgage loans. Consumer and installment
loans are generally secured by automobiles, boats, or second liens on real
estate. A substantial percentage of automobile and boat loans in the portfolio
were purchased from area dealers. The Bank also offers credit cards and home
equity lines of credit. The Analysis of Loan Portfolio, located in Table 2 of
Item 7, shows the changes in the types of loans from 2000 through 2002.
INVESTMENT ACTIVITIES. The Bank and its subsidiary, Nevahawk, maintain
investment portfolios, which are managed to provide liquidity for lending or
deposit withdrawals, control interest rate risk and enhance the earnings of the
company. The investments held by the Bank and Nevahawk consist primarily of
U.S. government and agency securities, mutual funds, corporate bonds, mortgage-
backed securities, collateralized mortgage obligations and municipal bonds or
repurchase agreements backed by similar securities.
DEPOSIT ACTIVITIES. Deposits are divided between interest bearing and non-
interest bearing. Non-interest bearing deposits consist of checking accounts of
individuals, businesses and governmental organizations. The interest-bearing
deposits include savings accounts, money market deposit accounts, certificates
of deposit, individual retirement accounts and NOW accounts. The aggregate
balance of time deposits with balances in excess of $0.1 million was $28.9
million at December 31, 2002. The Bank attracts deposits by offering
competitive rates and fees and providing high quality customer service.
WEALTH MANAGEMENT SERVICES The Bank provides wealth management services,
including acting as trustee for living and testamentary trusts, and as an agent,
custodian, guardian, conservator, personal representative or administrator for
individuals or their estates. The Bank also provides full-service brokerage
services through a relationship with a third-party provider, Raymond James
Securities, Inc.
COMPETITION. Active competition exists for all services offered by the Company
with other state banks, national banks, credit unions, savings and loans,
finance companies, personal loan companies, brokerage and mutual fund companies,
mortgage bankers, insurance agencies, and other financial institutions in the
Company's markets. The principal competitive factors in the banking and
financial services industry are quality of services to customers, ease of access
to services, and pricing of services, including interest rates paid on deposits,
interest rates charged on loans, and fees charged for fiduciary and other
services. To compete in this environment, the Company offers competitive rates
and fees, convenient hours and locations, and high quality services, including
internet banking and a unique courier service.
EMPLOYMENT. As of December 31, 2002, the Company and the Bank had 154
employees, of which 125 were employed on a full-time basis. The Company
provides a variety of benefit plans to its employees, including health
insurance, long-term disability insurance, group term life insurance, flexible
spending accounts, profit sharing, 401k, and stock options. Management
considers its relations with employees to be good.
REGULATORY FILINGS WITH SECURITIES AND EXCHANGE COMMISSION. Copies of our
Annual Reports on Form 10-KSB, Quarterly reports on Form 10-QSB, Current Reports
on Form 8-K, and amendments to those reports are available free of charge at the
SEC's website at http://www.sec.gov and/or from the company.
SUPERVISION AND REGULATION. The Company and the Bank are extensively regulated
under federal and state law. Any descriptions of statutory and regulatory
provisions contained in the following discussion are qualified in their entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulations may have a material effect on the Company.
THE COMPANY.
On March 27, 1990, the Company received approval from the Federal Reserve Board
(the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"), to become a registered bank holding company by acquiring all of the
capital stock of the Bank. As a result, since consummation of the bank holding
company reorganization on May 16, 1990, the Company's activities have been
subject to limitations imposed under the BHC Act. Transactions between the
Company and the Bank and their affiliates are also subject to certain
restrictions. As a registered bank holding company, the Company is subject to
various filing requirements of the FRB and is also subject to examination by the
FRB.
FRB approval must be obtained before a bank holding company acquires all or
substantially all of the assets of a bank or savings association or merges or
consolidates with another bank holding company or savings and loan holding
company. Wisconsin has also adopted legislation that allows bank holding
companies from other states to acquire banks in Wisconsin, and allows Wisconsin
bank holding companies to acquire banks in other states.
GRAMM-LEACH-BLILEY ACT. The laws and regulations to which the Company is
subject are constantly under review by Congress, regulatory agencies and state
legislatures. On November 12, 1999, then President Clinton signed important
legislation passed by Congress to overturn Depression-era restrictions on
affiliations by banking organizations. This comprehensive legislation, referred
to as the Gramm-Leach-Bliley Act (the "Act"), eliminates certain barriers to and
restrictions on affiliations between banks and securities firms, insurance
companies and other financial service organizations. The Act provides for a new
type of "financial holding company" structure, under which affiliations among
these entities may occur, subject to the regulation of the Federal Reserve Board
and regulation of affiliates by the functional regulators, including the
Securities and Exchange Commission and state insurance regulators. In addition,
the Act permits certain non-banking financial and financially related activities
to be conducted by operating subsidiaries of a national bank. Under the Act, a
bank holding company may become certified as a financial holding company by
filing a notice with the Federal Reserve Board, together with a certification
that the bank holding company meets certain criteria, including capital,
management and Community Reinvestment Act requirements. The Act contains a
number of provisions allocating regulatory authority among the Federal Reserve
Board, other banking regulators, the Securities and Exchange Commission and
state insurance regulators. In addition, the Act imposes strict new limits on
the transfer and use by financial institutions of nonpublic, personal
information about their customers.
Other important provisions of the Act permit merchant banking activities,
venture capital activities, and insurance underwriting, to be conducted by a
subsidiary of a financial holding company. It also allows municipal securities
underwriting activities to be conducted directly by a national bank or by its
subsidiary. Under the Act, a financial holding company may engage in a broad
list of "financial activities," and any non-financial activity that the Federal
Reserve Board determines is "complementary" to a financial activity and poses no
substantial risk to the safety and soundness of the depository institution or
the financial system. The Company has not elected to become a financial holding
company.
On June 1, 2000, the federal bank regulatory agencies issued final regulations
implementing the Act's consumer privacy protections. Among other things, the
new privacy regulations give customers the right to "opt out" of having their
nonpublic, personal information shared by a financial institution with
nonaffiliated third parties, bars financial institutions from disclosing
customer account numbers or other such access codes to nonaffiliated third
parties for direct marketing purposes and requires annual disclosure by
financial institutions of their policies and procedures for protecting
customers' nonpublic, personal information. Full compliance with the new
privacy regulations was mandatory as of July 1, 2001.
USA PATRIOT ACT OF 2001. On October 26, 2001, President Bush signed into law
the USA Patriot Act of 2001. The requirements of the Act were scheduled to go
into effect on October 26, 2002, pending issuance of final rules. This
comprehensive legislation provides that U.S. depository institutions are
prohibited from providing correspondent banking services to foreign shell banks.
It also requires that upon request of the appropriate federal banking agency the
Bank must produce records relating to its anti-money laundering compliance or
its customers within 120 hours of the request. The Act allows the Bank to share
information relating to money laundering or suspected terrorists with the
Financial Crimes Enforcement Network (FinCEN) and other financial institutions.
In addition, the Act requires the institution to establish anti-money laundering
programs and perform due diligence on private banking and correspondent
accounts. The Act allows the Treasury to issue regulations on the maintenance
of "concentration accounts" and to prohibit an institution's customers from
anonymously directing funds into or through such accounts. The Federal Reserve
Board and other regulators are required to consider the effectiveness of a bank
holding company or its financial institution in combating money laundering when
ruling on applications.
Section 326 of the USA Patriot Act of 2001 requires the Bank to develop an
extensive Customer Identification Program and obtain certain information prior
to opening or adding a signatory to an account. The Bank must adopt risk-based
procedures for verifying the elements of customer information and must develop
procedures for determining whether the customer appears on any list of known or
suspected terrorists or terrorist organizations provided to the institution by
any federal government agency. The Bank must provide the customer prior notice
of the requirements of the Act, and must retain all records used to verify the
customer's identity for a period of five years after the account is closed.
SARBANES-OXLEY ACT OF 2002. On July 30, President Bush signed the Sarbanes-
Oxley Act of 2002 (the "Act"). This legislation 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.
The Act requires audit committees to have in place procedures to receive and
address complaints regarding accounting, internal control and auditing issues
and provides protection for corporate whistleblowers. The Company has adopted a
policy providing employees with the opportunity to confidentially report their
concerns directly to members of the Bank's Audit Committee or the Bank's
Internal Auditor and has communicated its policy to all employees.
CAPITAL ADEQUACY. The FRB has adopted capital guidelines as to both minimum
levels of core capital and risk-based capital. The minimum core capital
requirement ranges from 3% to 5% of total assets depending upon the regulator's
determination of the holding company's strength. The guidelines assign risk
weightings to assets and off-balance sheet items, and have minimum risk-based
capital ratios. All bank holding companies are required to have total
consolidated capital of 8% of risk-weighted assets. Core capital consists
principally of shareholders' equity less intangibles, while qualifying total
capital consists of core capital plus certain debt instruments and a portion of
the allowance for loan losses. Table 12 of Item 7 of this report, reflects
various regulatory measures of capital as of December 31, 2002. The Company's
core and risk-based capital ratios, as shown in the table are well above the
minimum levels.
Under Wisconsin law, a bank holding company is deemed to be engaged in the
banking business and is subject to supervision and examination by the Wisconsin
Department of Financial Institutions (the "WDFI"). The WDFI is also empowered
to issue orders to a bank holding company to remedy any condition or policy,
which, in the opinion of the WDFI, endangers the safety of deposits of any
subsidiary state bank or trust company. In the event of non-compliance with
such an order, the WDFI has the power to direct the operations of the state bank
or trust company and to restrict dividends paid to the bank holding company.
THE BANK.
Wisconsin-chartered banks, including the Bank, are regulated and supervised by
the WDFI. Each Wisconsin chartered bank is periodically examined by the WDFI or
its primary federal regulator. The approval of the WDFI is required to
establish or close branches, merge with other banks and undertake many other
activities.
Any Wisconsin bank that does not operate in accordance with the regulations,
policies and directives of the WDFI may be subject to sanctions for
noncompliance. The WDFI may, under certain circumstances, suspend or remove
directors, officers or employees who have violated the law, conducted the Bank's
business in a manner which is unsafe, unsound or contrary to the depositors'
interests or been negligent in the performance of their duties.
Wisconsin state banks are authorized to accept deposits (including demand,
savings and time deposits and certificates of deposit). Banks may make a wide
variety of loans (including mortgage loans, loans to corporations and other
commercial loans and other personal consumer loans). Other federal and state
regulations with respect to banks include required reserves, limitations as to
the nature and amount, by type and borrower, of lending, regulatory approval of
mergers and consolidations, issuance and retirement by a bank of its own
securities, and other aspects of banking operations.
PAYMENT OF DIVIDENDS. A Wisconsin bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account (as defined under Wisconsin law). Federal and state regulations limit
dividends paid by the Bank to the Company to net income of the Bank. The Bank
paid dividends to the Company of $1.5 million, $1.5 million and $1.3 million for
the years ended December 31, 2002, 2001 and 2000, respectively. During 2001 the
Bank received a waiver from state banking regulators to pay dividends to the
Company in excess of current net income.
FEDERAL DEPOSIT INSURANCE CORPORATION. The Bank's deposit accounts are insured
by the FDIC. FDIC insurance, at the present time, generally insures up to a
maximum of $0.1 million for each insured depositor. The FDIC imposes an annual
assessment on deposits. Effective January 1, 1993, premiums are assessed on the
basis of a risk rating assigned by the FDIC. Since that time the Bank's premium
has been at the lowest available rate. Beginning in 1997, financial
institutions insured by the FDIC were required to contribute to the Financing
Corporation bond refinancing. This is expected to occur through the year 2003.
Beginning January 1, 2000, the Bank's Bank Insurance Fund ("BIF") and Saving
Association Insurance Fund ("SAIF") deposits were assessed at the same rate.
The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to any merger or consolidation, or the
establishment or relocation of any branch office. This supervision and
regulation is intended primarily for the protection of depositors.
As a FDIC-insured bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC, based upon appraisals during examinations, may
revalue assets of an insured institution and require establishment of specific
reserves in amounts equal to the difference between such revaluation and the
book value of the assets. In addition, the FDIC has adopted regulations
regarding capital adequacy requirements similar to those of the FRB.
OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal and
state statutory and regulatory provisions covering, among other things, security
procedures, currency reporting, insider and affiliated party transactions,
management interlocks, community reinvestment, truth-in-lending, electronic
funds transfers, truth-in-savings, privacy, and equal credit opportunity.
Proposals for new legislation or rule making affecting the financial services
industry are continuously being advanced and considered at both the national and
state levels. Proposals are primarily focused upon restructuring and
strengthening regulation and supervision to reduce the risks to which assets of
banks and savings institutions are exposed.
Although further changes in the regulatory framework may be enacted, specific
provisions and their ultimate effect upon the business of the Bank and the
Company cannot be reliably anticipated.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS. The earnings of the
Bank and the Company are affected not only by general economic conditions but
also by the policies of various governmental regulatory authorities. In
particular, the FRB influences general economic conditions and interest rates
through the regulation of money and credit conditions. It does so primarily
through open-market operations in U.S. Government Securities, varying the
discount rate on member and nonmember bank borrowings, and setting reserve
requirements against bank deposits. FRB monetary policies have had a
significant effect on the operating results of banks in the past and are likely
to continue to have such an effect in the future. The general effect, if any,
of such policies upon the future business and earnings of the Bank cannot be
accurately predicted. In addition, losses sustained by the federal insurance
funds and regulatory costs incurred in connection with failed or failing insured
depository institutions continue to be assessed to those within the industry.
As such, future earnings will be adversely affected by regulations enacted to
cover these losses and costs.
EXECUTIVE OFFICERS
NAME AND AGE PRINCIPAL OCCUPATION
------------ --------------------
R. Richard Bastian, III, 56 President and Chief Executive Officer of the
Company since February 2002 and of the Bank
since May 2001. Previously, President of the
Bank of Kenosha from January 1999 to January
2001 and Executive Vice President and Director
of the Clean Air Action Corporation from August
1994 to January 2001.
Todd J. James, 39 Executive Vice President and Chief Financial
Officer of the Company and the Bank since
February 2003. Senior Vice President and Chief
Financial Officer from February 2002 to February
2003. Previously Senior Vice President, Amcore
Investment Group N.A. from October 1999 to
February 2002 and Vice President Amcore
Financial, Inc. from October 1998 to October
1999. Previously, Vice President, Amcore Bank
N.A.
Judith A. Gard, 62 Senior Vice President, Manager Consumer Banking
for the Bank since October 2001. Previously,
Vice President, Private Banking Manager for
Firstar Bank from February 1999 to October 2001
and Senior Vice President, Home Equity Unit
Manager for Bank One from 1996 to 1998.
Todd L. Larson, 43 Senior Vice President, Business Banking for the
Bank since January 2003. Previously Vice
President, Business Banking for the Bank from
November 1999 to January 2003, and Vice
President of Stillman BancCorp, N.A. from
November 1998 to November 1999. Previously Vice
President, Commercial Lending, Belvidere Bank.
Terri Burdick, 39 Senior Vice President, Human Resources of the
Bank since February 2003. Vice President, Human
Resources of the Bank from October 2001 to
February 2003. Employee Benefits Manager for
The Swiss Colony, Inc. from September 1999 to
October 2001. Previously, Corporate Benefits
Manager for Regal Beloit Corporation.
James A. Sylvester, 56 Vice President, Senior Mortgage Lender of the
Bank since August 2001. Previously Business
Development Director for RSM McGladrey, Inc.
from January through June 2001 and
owner/operator of Jimmy's Frozen Custard from
1996 through 2000.
Peggy Holt, 45 Vice President, Quality Control & Process
Improvement of the Bank since January 2003.
Previously Organizational Effectiveness
Consultant of the Bank from January 2002 until
December 2002. Prior thereto, Senior Consultant,
Leadership Development and Senior Vice
President, Organizational Development Bank One
Corporation.
Victoria A. Damron, 53 Vice President of Marketing for the Bank since
August 2002. Previously owner Damron
Communications.
ITEM 2. DESCRIPTION OF PROPERTY
On December 31, 2002, the Company had nine locations, of which one was
leased. All of these offices are considered by management to be well
maintained and adequate for the purpose intended. See the Note 5 to the
Consolidated Financial Statements and Table 14 included under Item 7 of
this document for further information on properties.
ITEM 3. LEGAL PROCEEDINGS
Management believes that no litigation is threatened or pending in which
the Company faces potential loss or exposure which will materially
affect the Company's financial position or results of operation, other
than noted below. Since the Company's banking subsidiary acts as a
depository of funds, trustee or escrow agent, it is named as defendant
in lawsuits involving claims to the ownership of funds in particular
accounts. This and other litigation is incidental to the Company's
business.
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 $0.5 million 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. has filed a counterclaim seeking a $0.4 million
reimbursement of legal fees. The court has not made a final ruling on
the case or any counter claims that have been or may be filed by Fiserv,
Inc. Although the ultimate disposition of any counterclaims can not be
predicted with any certainty, the Company believes that the case will
not have a material adverse effect on the Company's consolidated
financial position, though it could have a material adverse effect on
the Company's consolidated results of operations in a given year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 2002 the company has approximately 900 holders of record
of its common stock. The Company's stock is publicly traded on the Over
the Counter Market under the symbol BKHB. The following table sets
forth the stock price and dividend information for each quarter during
the years ended December 31, 2002 and 2001. Stock price information
represents high and low bid quotations and as such reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
For the Quarter Ended
12/31/02 09/30/02 06/30/02 03/31/02 12/31/01 09/30/01 06/30/01 03/31/01
-------- -------- -------- -------- -------- -------- -------- --------
Stock Price
High $ 9.50 $ 9.50 $ 9.70 $ 9.65 $ 9.50 $ 10.62 $ 10.30 $ 10.38
Low 8.25 8.55 9.35 9.10 8.50 8.80 8.38 8.00
Dividends 0.09 0.09 0.09 0.09 0.09 0.09 0.12 0.12
For disclosures required under the company's equity compensation plans
see Notes 1 and 10 to the Company's Consolidated Financial Statements
attached as Exhibit 99 of this Form 10-KSB.
A Wisconsin bank may only pay dividends on its capital stock if such
payment would not impair the bank's capital stock and surplus account
(as defined under Wisconsin law). Federal and state regulations limit
dividends paid by the Bank to the Company to net income of the Bank.
Thus, the ability of the Company to pay dividends will be impacted by
the profitability of the Bank. The Bank paid dividends to the Company of
$1.5 million, $1.5 million and $1.3 million for the years ended December
31, 2002, 2001 and 2000, respectively. During 2001 the Bank received a
waiver from state banking regulators to pay dividends to the Company in
excess of current net income.
ITEM 6. 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. This discussion focuses on the significant factors which
affected the Company's earnings in 2002, with comparisons to 2001 and 2000,
where applicable.
FACTORS INFLUENCING FORWARD-LOOKING STATEMENTS
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. Forward-looking statements speak only as of the
date they are made, and Blackhawk undertakes no obligation to update
publicly any of them in light of new information or future events.
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.
CRITICAL ACCOUNTING POLICIES
The financial condition and results of operations for Blackhawk Bancorp,
Inc. presented in the Consolidated Financial Statements, accompanying notes
to the Consolidated Financial Statements, selected financial data appearing
elsewhere within this report, and management's discussion and analysis are,
to a large extent, dependent upon the Company's accounting policies. The
selection and application of these accounting policies involve judgements,
estimates and uncertainties that are susceptible to change.
Presented below are discussions of those accounting policies that
management believes are the most important (Critical Accounting Policies)
to the portrayal and understanding of the Company's financial condition and
results of operations. These Critical Accounting Policies require
management's most difficult, subjective and complex judgements about
matters that are inherently uncertain. In the event that different
assumptions or conditions were to prevail, and depending upon the severity
of such changes, the possibility of materially different financial
condition or results of operations is a reasonable likelihood. See also
Note 1 of the Notes to Consolidated Financial Statements.
LOANS
Loans are the Company's largest income earning asset category. Loans are
recorded at the amount advanced to the borrower plus certain costs incurred
by the Bank to originate the loan, less certain origination fees that are
collected from the borrower. The carrying amount of loans is reduced as
principal payments are made. Payments made by the borrower are allocated
between interest income and principal payment based upon the outstanding
principal amount, the contractual rate of interest and other contractual
terms. The carrying amount is further adjusted to reflect amortization of
the origination costs net of origination fees. These items are amortized
over the expected life of the loan.
The accrual of interest income is generally discontinued (Non-Accrual
Status) when management believes that collection of principal and/or
interest is doubtful or when payment becomes 90 days past due. Payments
received from the borrower after a loan is placed on Non-Accrual Status are
applied to reduce the principal balance of the loan until such time that
collectibility of remaining principal and interest is no longer doubtful.
Unpaid interest that has previously been recorded as income is reversed
against interest income when a loan is placed on Non-Accrual Status. The
outstanding loan balance is written-off against the allowance for loan
losses when management determines that probability of collection of
principal will not occur. See also the discussion of Allowance for Loan
Losses that follows.
Those judgements and assumptions that are most critical to the application
of this accounting policy are the initial and on-going credit-worthiness of
the borrower, the amount and timing of future cash flows of the borrower
that are available for repayment of the loan, the sufficiency of underlying
collateral and the enforceability of third-party guarantees. These
judgements and assumptions are dependent upon or can be influenced by a
variety of factors including the breadth and depth of experience of lending
officers, credit administration and loan review staff that periodically
review the status of the loan, changing economic and industry conditions,
changes in the financial condition of the borrower and changes in the value
and availability of the underlying collateral and guarantees.
If different assumptions or conditions were to prevail, the amount and
timing of interest income and loan losses, due to the inability to collect
all of the remaining principal balance that is due from a borrower, could
be materially different. These factors are most pronounced during economic
downturns. See also Table 2 and Note 4 of the Notes to Consolidated
Financial Statements.
ALLOWANCE FOR LOAN LOSSES
Management periodically reviews the loan portfolio in order to establish an
estimated allowance for loan losses (Allowance) that are probable as of the
respective reporting date. Additions to the Allowance are charged against
earnings for the period as a provision for loan losses (Provision). Actual
loan losses are charged against (reduce) the Allowance when management
believes that the collection of principal will not occur. Unpaid interest
for loans that are placed on Non-Accrual Status is reversed against the
interest income previously recognized. Subsequent recoveries of amounts
previously charged to the Allowance, if any, are credited to (increase) the
Allowance.
The Allowance is regularly reviewed by management to determine whether or
not the amount is considered adequate to absorb probable losses. If not, an
additional Provision is made to increase the Allowance. This evaluation
includes specific loss estimates on certain individually reviewed loans,
statistical loss estimates for loan groups or pools that are based on
historical loss experience and general loss estimates that are based upon
the size, quality, and concentration characteristics of the various loan
portfolios, adverse situations that may affect a borrower's ability to
repay, and current economic and industry conditions.
In addition to the judgements and assumptions noted in the preceding
discussion of Loans, those most critical to the application of this
accounting policy are the frequency and subjectivity of loan reviews and
risk gradings, emerging or changing trends that might not be fully captured
in the historical loss experience, and charges against the Allowance for
actual losses that are greater than previously estimated. While the Company
strives to reflect all known risk factors in its evaluation of the adequacy
of the Allowance, estimation or judgement errors may occur.
If different assumptions or conditions were to prevail, the Allowance may
not be adequate to absorb the new estimate of probable losses. If so, an
additional Provision may be necessary and the amount could be material. See
also Table 2 and Note 4 of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $1.2 million for the year ended December
31, 2002. This compares to $0.9 million for the year ended 2001 and a net
loss of $0.3 million in 2000. This represents an increase of $0.4 million
or 43.06% when comparing 2002 to 2001, and an increase of $1.1 million when
comparing 2001 to 2000.
Diluted earnings per share for 2002 were $0.50 compared to $0.36 in 2001
and ($0.12) in 2000. This represents an increase of $0.14 per share or
38.89% when comparing 2002 to 2001, and an increase of $0.48 per share when
comparing 2001 to 2000. The percentage increase in diluted earnings per
share is less than the percentage increase in net income due to a 4.86%
increase in the weighted average common shares outstanding, resulting from
the issuance of shares for stock options exercised.
The company's return on average equity for 2002 was 4.92% versus 3.65% in
2001 and (1.19%) in 2000. The company's return on average assets for 2002
was 0.38% compared to 0.27% in 2001 and (0.09%) in 2000.
Both the Company and the Bank continue to exceed the minimum capital
requirements established by regulators for banks and bank holding
companies. In addition, the Bank continues to be "well capitalized" as
defined by regulatory guidelines. See Note 15 to the Consolidated
Financial Statements attached as Exhibit 99 of this form 10-KSB.
The 2002 results include the write-off of a $0.3 million receivable related
to a claim against a former data processing provider. On August 18, 2000
the bank filed a breach of contract lawsuit to recover $0.5 million that
was charged to its check clearing account in error. In the fourth quarter
of 2000, $0.3 million of the original claim was written off and the
remaining amount was written off in the fourth quarter of 2002. On
February 14, 2003 a Waukesha County, Wisconsin jury delivered a verdict
that the data processor did not breach its contract with the bank. The
after tax charge to income in the fourth quarter of 2002 was $0.2 million.
During the third quarter of 2002 the bank closed its Wal Mart in-store
branch. The 2002 results include an after tax charge of $40.0 thousand due
to the abandonment of leasehold improvements.
In 2002 the bank changed its vacation policy to eliminate the vesting of
vacation on December 31 for the following year. Instead, vacation will be
earned and used in the same calendar year. This change resulted in a $0.1
million decrease in salary and benefits expense.
Pursuant to SFAS No. 142, an accounting standard effective January 1, 2002,
amortization of goodwill, which resulted from purchase accounting
adjustments from previous acquisitions, was discontinued. Goodwill
amortization for 2001 and 2000 was $0.2 million or $0.08 per share. No
transition or impairment charge was required for 2002.
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. As shown in Item 7, Table 1 of this report, net interest income
increased by $0.4 million, or 3.96%, to $11.2 million for the year ended
December 31, 2002, compared to $10.8 million for the comparable period in
2001. The net interest margin, which is the tax equivalent net interest
income divided by average interest earning assets was 3.77% in 2002, 3.66%
in 2001 and 3.48% in 2000. The increase in Net Interest Margin between 2002
and 2001 is primarily due to the impact of lower market rates paid on
deposit accounts not being fully offset as earning assets re-priced more
slowly in 2002. If this trend continues into 2003 the Bank may see a lower
Net Interest Margin as assets re-price with less incremental benefit from
lower interest costs on deposit accounts. Net interest income and the net
interest margin are expected to continue to be pressured from the shifts in
the asset mix from loans to investment securities. The increase in Net
Interest Margin between 2001 and 2000 is primarily due to Bank growth, a
mix shift in deposit accounts to more transaction accounts and the effects
of the lower interest rate environment on time deposits.
For the year ended December 31, 2002, total tax equivalent interest income
decreased by $3.2 million or 13.96%, to $19.6 million compared to $22.8
million for the year ended December 31, 2001. The decrease in interest
income is due to a 115 basis point decrease in the yield on average earning
assets to 6.58% for 2002, compared to 7.73% for the same period in 2001.
The decrease in the yield on average earning assets for 2002 compared to
2001 is partially offset by a $2.8 million increase in average earning
assets. For the year ended December 31, 2001, total tax equivalent interest
income increased by $0.5 million, or 2.34%, to $22.8 million compared to
$22.3 million for the same period in 2000. The increase in interest income
was due to bank growth offset by the impact of lower interest rates as the
yield on earning assets decreased from 7.96% for 2000 to 7.73% in 2001.
The decrease in the yield on average earning assets reflects a shift in the
asset mix from loans to investment securities and short-term investments
for the year ended December 31, 2002 compared to the same period in 2001.
The decrease in the yield on average earning assets also reflects the lower
interest rate environment during 2002 compared to 2001, which resulted from
the Federal Reserve Bank's lowering of managed rates by 375 basis points
during 2001 and another 50 basis points in November of 2002. If managed
rates continue to decrease or even remain at current levels, interest
income and the average rate on earning assets are expected to continue to
decline as more assets re-price.
Interest and fees on loans decreased 20.61% to $14.7 million for the year
ended December 31, 2002 compared to $18.5 million for the same period of
2001. This decrease was the result of a $25.3 million or 11.38% decrease
in average loans outstanding and an 87 basis point decrease in yield on the
portfolio. The decrease in average loans outstanding for the year ended
December 31, 2002 is largely attributable to the refinancing activity in
the residential real estate market. The remaining decrease is the result of
economic conditions and lower loan demand in the company's primary markets.
The lower overall portfolio yield on average loans reflects the overall
lower interest rate environment and competitive pricing pressure for
quality credit customers and the Federal Reserve Bank's lowering of managed
rates by 375 basis points during 2001 and another 50 basis points in
November of 2002. Interest and fees on loans increased 5.03% to $18.5
million for the year ended December 31, 2001 compared to $17.6 million in
2000. This increase was the result of an $18.2 million or 8.90% increase in
average loans outstanding offset by a 31 basis point decrease in yield on
the portfolio.
Interest income on taxable securities increased by $0.4 million or 13.76%
in 2002 to $3.5 million compared to $3.1 million for 2001. Average balances
of taxable investment securities increased 39.59% to $71.9 million for 2002
compared to $51.5 million for the same period in the prior year. However,
the yield on average taxable investment securities decreased 110 basis
points to 4.86% for 2002 compared to 5.96% for 2001. Interest income on tax
exempt securities increased $0.1 million or 11.86% to $1.3 million compared
to $1.2 million in 2001. This is the result of a $2.1 million increase in
the average balance of tax exempt investment securities to $20.1 million
for 2002 compared to $18.0 for 2001. The yield on tax exempt securities
was 6.43% in 2002 and 6.42% in 2001.
Interest income on taxable securities decreased by $0.7 million or 17.48%
in 2001 to $3.1 million compared to $3.7 million for the same period in
2000. Average balances of taxable investment securities decreased 11.79% to
$51.5 million for 2001 compared to $58.4 million for the same period in the
prior year. Also, the average yield decreased .42% to 5.96% for 2001
compared to 6.38% for 2000. Average tax exempt securities increased to
$18.0 million in 2001 compared to $15.1 for the same period in 2000, while
their average tax equivalent yield increased from 5.33% for 2000 to 6.42%
for 2001.
Interest from fed funds sold and repurchase agreements increased to $0.1
million for the year ended December 31, 2002, compared to $49.0 thousand
during the same period in 2001. The increase in interest on fed funds sold
and repurchase agreements is due to increased average balances. Funds from
the reduction in the loan portfolio were held in short-term investments
before being used to purchase longer-term investment securities. The
Company invested a portion of these funds in short-term reverse repurchase
agreements backed by U.S. Government guaranteed securities.
Total interest expense decreased by $3.6 million, or 30.12%, to $8.4
million for 2002 compared to $12.0 million for the same period in 2001.
For 2001 total interest expense decreased by $0.5 million, or 4.36%, to
$12.0 million compared to $12.5 million for the same period in 2000. The
decrease in total interest expense is the result of the aforementioned
lower interest rate environment coupled with favorable shifts in the
company's funding mix.
While interest paid on deposits decreased $2.9 million, or 32.51% to $5.9
million during 2002 compared to $8.8 million for the same period in 2001,
average total interest bearing deposits increased $0.9 million over the
year. Year to date interest paid on deposits in 2001 decreased $0.6
million, or 5.92% to $8.8 million compared to $9.3 million for the same
period in 2000 while average total interest bearing deposits increased by
$5.2 million. In addition to the impact of the overall lower interest rate
environment the company's funding cost was reduced due to favorable shifts
in the funding mix. For 2002 the average balance of time deposits
decreased $6.0 million, or 4.65%, to $122.6 million compared to $128.6
million for the same period in 2001. The decrease in the average balance of
time deposits was offset with increases in the average balances of checking
accounts, interest-bearing checking accounts and savings accounts of $4.0
million, $4.3 million and $2.6 million, respectively.
Interest on short-term borrowings decreased $0.2 million to $0.3 million in
2002 compared to $0.5 million in 2001. This decrease is the result of the
lower managed interest rate environment in 2002 previously discussed which
offset the 33.97% increase in average balances outstanding.
Interest on short-term borrowings decreased $1.5 million to $0.5 million in
2001 compared to $1.9 million for the same period in 2000. This decrease
is the net result of the decreasing interest rate environment as mentioned
earlier, and the refinancing of short-term FHLBC advances to long-term.
Interest expense on other borrowings decreased $0.6 million to $2.2 million
compared to $2.8 million in 2001. The decrease is primarily the result of
the maturity of $6.8 million of Federal Home Loan Bank term advances in
January 2002.
PROVISIONS 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 for loan losses of $1.0 million for 2002 represents a $0.2
million or 17.84% decrease compared to $1.2 million for 2001. In 2002, the
provision includes $0.5 million to cover a loss on one commercial
relationship that was also charged off against the allowance in 2002. The
provision of $1.2 million in 2001 includes an increased amount based on
management's assessment of the portfolio and economic conditions in the
bank's primary markets, even though it represents a $1.0 million or 45.93%
decrease compared to 2000. The decrease from 2000 is due to the 2000
provision including $1.9 million related to one commercial real estate
loan. This loan was subsequently charged off in 2001. In 2002, Blackhawk
had net charge-offs of $1.3 million (total charge-offs of $1.4 million less
recoveries of $0.1 million). In 2001, the Bank had net charge-offs of $2.7
million (total charge-offs of $2.8 million less recoveries of $0.1
million), compared to 2000, when it had net charge-offs of $0.4 million
(total charge-offs of $0.4 million less recoveries of $0.0 million). Net
charge-offs to average loans were 0.67% in 2002, 1.22% in 2001 and 0.18% in
2000. The allowance for loan losses as a percent of loans was 1.10% at
December 31, 2002 compared to 1.14% at December 31, 2001 and to 1.76% at
December 31, 2000.
NONINTEREST INCOME
Noninterest income increased 6.37% to $3.0 million in 2002 from $2.8
million in 2001. The majority of this increase was from net security gains
as they increased $0.2 million or 143.18% to $0.3 million for 2002 compared
to $0.1 million in 2001. Service charges on deposit accounts increased
$0.1 million or 4.77% to $1.6 million and primarily reflect higher volumes
of demand deposits in 2002. The gain on sale of loans decreased $0.1
million and is the result of turn-over in the company's mortgage banking
management and origination staff. Management believes that these changes in
staff have resulted in better quality control and risk management in the
company's mortgage banking activities. In 2002, $33.8 million of mortgages
were sold to the secondary market at an average gain of 1.34% compared to
an average gain of 1.75% on the $32.2 million of mortgage loans sold to the
secondary market in 2001. Approximately 75% of the loan volume sold to the
secondary market was from refinance activity. The level of market interest
rates and the volume of higher rate mortgage loans that are eligible for
refinancing will impact the Bank's level of gains reported in future
periods. Brokerage and annuity commissions increased $33.0 thousand or
26.83% to $0.2 million. On September 30, 2002 Blackhawk State Bank
purchased $5.0 million in Bank Owned Life Insurance (BOLI) assets. The
BOLI, which insures the lives of key employees, was purchased to help
offset the cost of increasing employee benefits. Thus the cash value of
life insurance increase is $0.1 million or 181.78% for the year ended
December 31, 2002. These increases were offset by a $63.0 thousand loss
from abandonment of leasehold improvements related to the closing of the
Bank's Wal-Mart in-store branch in October 2002 and the $0.1 million write
down of an OREO property based on a change in the estimate of its net
realizable value.
Noninterest income for 2001 increased $0.4 million, or 18.49% to $2.8
million compared to $2.4 million in 2000. The increase included a net
increase of $0.2 million, or 93.23% in revenues from the sale and servicing
of mortgage loans and an increase of $0.1 million in gain on sale of
securities. The increase in revenues from the sale and servicing of
mortgage loans was driven by the high level of refinancing activity that
occurred in 2001 compared to 2000 due to the lower interest rate
environment in 2001. The interest rate environment and economic uncertainty
had the opposite effect on brokerage and annuity commission income, which
decreased 46.05% from $0.2 million in 2000 to $0.1 million in 2001. Deposit
service charges increased $0.2 million, or 17.04% from $1.3 million in 2000
to $1.5 million in 2001. The increase in deposit service charges was
achieved as a result of increased focus on gathering transaction accounts
and a restructuring of account fees.
NONINTEREST EXPENSE
Noninterest expense increased 3.69% to $11.3 million in 2002 from $10.9
million in 2001, including a $0.3 million charge to write off the balance
of a receivable related to the Bank's breach of contract claim against a
former data processor. On February 14, 2003 a Waukesha County, Wisconsin
jury delivered a verdict that the data processor did not breach its
contract.
Total salary and benefits increased $0.2 million or 3.72% in 2002 compared
to 2001. Salaries and employee benefits for 2002 were reduced by $0.1
million as a result of the Company's change in vacation policy. The
Company changed its vacation policy to eliminate the vesting of vacation on
December 31 for the following year. Instead vacation will be earned and
used in the same year. Excluding the favorable impact from the change in
vacation policy, salary and benefits increased 6.51%. This increase
reflects the costs associated with attracting several key members of the
management team that have joined the organization in the second half of
2001 and throughout 2002. These key managers include the chief executive
officer R. Richard Bastian, III, chief financial officer Todd J. James and
other officers listed in Part I Item 1 of this filing.
Equipment expense increased $0.1 million or 17.34% to $0.9 million in 2002
from $0.8 million in 2001. The increase is primarily due to higher
depreciation expense on computer equipment and systems in 2002.
Professional fees, while down $0.1 million or 11.16% compared to 2001 are
still higher than normal, primarily due to the on-going lawsuit, against
Fiserv, Inc. Amortization of intangibles decreased by $0.2 million as a
result of FASB 142 which was adopted by the Company on January 1, 2002 and
eliminated the amortization of goodwill resulting from prior acquisitions
accounted for under the purchase method of accounting. Goodwill is subject
to an annual impairment test. No impairment charge was required for the
year. Other expense includes $0.1 million of charges to accrue severance
payments for former executives. In addition, the company realized a $0.1
million credit against other expenses due to an adjustment related to stale
reconciling items.
Noninterest expense increased 5.98% to $10.9 million for the year ended
December 31, 2001 from $10.3 million for the year ended December 31, 2000.
Salary and benefits increased $0.3 million or 6.94% from $4.9 million for
the year ended December 31, 2000 to $5.2 million for the year ended
December 31, 2001. The Bank also incurred a significant level of legal fees
related to its lawsuit against a former check processor to recover funds
improperly charged to the Bank's correspondent bank account during 1998.
Total professional fees increased $0.3 million or 73.30% to $0.6 million in
2001 from $0.4 million in 2000. Loan expenses increased 193.02% or $0.2
million from $0.1 million in 2000 to $0.3 million in 2001 and reflect the
increased costs of working through a higher level of problem credits in
2001.
Management monitors two ratios related to other operating income and
expense: (1) Net other operating expense as a percentage of average assets,
and (2) Standard efficiency ratio. Net other operating expense to average
assets increased slightly to 2.56% in 2002 from 2.52% in 2001 compared to
2.57% in 2000. The increase from 2001 to 2002 reflected management's
commitment to invest resources to create long-term shareholder value,
including the recruitment of a number of key managers and upgrading desktop
computers and operating systems. The standard efficiency ratio (non-
interest expense divided by net interest income plus other non-interest
income) decreased to 81.61% in 2002, compared to 82.04% in 2001 and 86.23%
in 2000. For 2002, the standard efficiency ratio reflects the Company's
ability to grow net interest income and other operating income in excess of
the growth in operating expenses.
INCOME TAXES
The effective income tax rate for the Company in 2002 was 19.53%. The
effective income tax rate was 25.32% in 2001 and (54.50%) in 2000. The
resulting effective rate for 2000 was not reflective of the Company's
effective tax rate under normal operating results, but was reflective of
the pre-tax loss for the year and the net effect of non-deductible and non-
taxable income and expenses upon that relatively smaller taxable base. Thus
we are comparing effective income tax rates from 2002 and 2001. The primary
reasons for the decline in the effective income tax rate from 2001 to 2002
were the increased holdings of tax-exempt municipal securities, the
decrease in non-deductible amortization of intangibles and the Bank's
purchase of $5.0 million of BOLI, on which the earnings are tax exempt.
Income generated at Nevahawk is not subject to state income taxes while
certain U.S. government agency investments qualify for state tax exemption
for the Bank within Illinois.
BALANCE SHEET ANALYSIS
OVERVIEW
Total assets as of December 31, 2002 increased $22.1 million or 6.69% to
$352.4 million compared to $330.3 million as of December 31, 2001. Total
average assets for the year increased $3.2 million or 1.00% to $322.4
million compared to $319.2 million in 2001. December 31 total assets
included short-term year-end deposits from one commercial customer of $18.6
million in 2002 and $14.4 million in 2001. Excluding those deposits total
assets increased 5.67% year over year.
SECURITIES
Available-for-sale securities increased $41.3 million, to $83.9 million, as
of December 31, 2002 from $42.6 million as of December 31, 2001. During
2002 the Bank experienced loan run-off of $23.2 million and deposit growth
of $9.3 million, excluding the short-term year end deposits of $18.6
million and $14.4 million at December 31, 2002 and 2001, respectively. The
funds provided from loans and deposits as well as the Bank's excess
liquidity at December 31, 2001 were invested in investment securities.
FEDERAL HOME LOAN BANK OF CHICAGO STOCK
The Bank's investment in stock of the Federal Home Loan Bank of Chicago
increased from $2.4 million at December 31, 2001 to $4.5 million at
December 31, 2002. The increase is due to the purchase of $2.0 million in
additional stock and stock dividends received. The additional stock was
purchased as the returns on the FHLB stock are expected to be at least as
high as debt securities allowed by the bank's investment policy without
price risk.
LOANS
Net loans decreased 10.92% during 2002 to $186.3 million at December 31,
2002 from $209.1 million at December 31, 2001. The composition of and
changes to the Bank's loan portfolio are detailed in Table 2 of Item 7 of
this report. The decrease occurred across all categories of loans and
reflects low loan demand due to economic weakness in the bank's primary
markets. In addition, the historically low interest rate environment has
created a significant amount of refinancing of loans in the bank's one to
four family mortgage portfolio. The company's focus on relationship
banking has resulted in the subsidiary bank not pursuing certain
"transactions" that may have resulted in increased loan balances, but
offered no opportunity to form other relationships with the client.
Management expects continued weak loan demand and competition for quality
credits.
NON-PERFORMING LOANS
Non-performing loans include loans that have been placed in non-accrual
status, are determined by management to be impaired because full collection
of principal and interest is doubtful, and loans which are past-due ninety
days or more as to interest and/or principal payments. For additional
discussion of the Bank's non-performing loans see table 2 of Part I Item 7
of this filing and footnote 4 to the Consolidated Financial Statements.
ASSET QUALITY
The allowance for loan losses was $2.1 million or 1.10% of total loans at
December 31, 2002 compared to $2.4 million or 1.14% of total loans at
December 31, 2001. As of December 31, 2002, non-performing loans and
performing loans classified as impaired totaled $3.0 million compared to
$4.3 million at December 31, 2001. 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. Table 2 of item 7 of this filing contains
an allocation of the allowance for loan losses by category. At December
31, 2002, $1.4 million or 67.91% of the allowance is allocated to real
estate mortgage loans. Approximately $0.9 million of this allocation is due
to historic loss experience and the remaining amount is due to economic
factors and an increase in the number of commercial real estate loans added
to the bank's internal watch list. The decrease in the allocation to
consumer loans is the result of a change in the handling of loans to
customers in bankruptcy. During the fourth quarter of 2002 approximately
$0.1 million of consumer loans were charged off, despite the existence of
collateral. Future payments on these loans will be credited to the
allowance account as recoveries.
POTENTIAL PROBLEM LOANS
The bank uses an internal asset classification system as a means of
identifying and reporting problem and potential problem loans. All
commercial and commercial real loans are graded on a scale of 1 to 7, with
1 being the best credit grade. Loans graded 5, 6, or 7 are classified as
"watch", "substandard" and "doubtful", respectively. An asset is
classified as substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor, or the collateral pledged, if
any. Substandard assets include those characterized by the distinct
possibility that the company will sustain some loss if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses
inherent in those classified as substandard with the added characteristic
that the weaknesses present make collection or liquidation in full, on the
basis of currently existing facts, conditions and values, highly
questionable and improbable. Once an asset is considered uncollectible and
viewed as non-bankable it is charged off as a loss against the allowance
account. Assets that do not currently expose the company to sufficient
risk to warrant classification in one of the aforementioned categories, but
possess weakness that may or may not be within the control of the customer
are deemed to be watch loans. The classified loans are reviewed monthly by
the directors' loan committee, which must approve all additions and
deletions from the classified list.
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 December 31, 2002 the allowance for loan losses to total non-performing
and impaired loans equaled 69.21% compared to 55.76% at December 31, 2001.
While the total nonperforming and impaired loans decreased by $1.3 million
there was a considerable shift in the make-up of non-performing loans. As
a result of increased collection efforts total residential real estate
loans either on non-accrual or past due 90 days and still accruing was
reduced by $0.8 million to $1.8 million compared to $2.5 million at
December 31, 2001. The reduction in non-performing residential real estate
loans was offset by an increase in nonperforming commercial and industrial
loans of $0.3 million to $0.5 million at December 31, 2002 compared to $0.2
million at December 31, 2001.
DEPOSITS
Total deposits at December 31, 2002 were $263.1 million as compared to
$249.6 million at December 31, 2001. Excluding short-term deposits of
$18.6 million and $14.4 million made on the final business day of 2002 and
2001, respectively, deposits increased 3.95%. During 2002, the Bank
generated more transaction accounts. The average balance of non-interest-
bearing checking accounts increased $4.0 million or 15.18% to $30.3 million
for the year ended December 31, 2002, the average balance of interest
bearing checking accounts increased $4.3 million or 15.09% to $32.7 million
and the average balance of savings deposits increased $2.6 million or 5.10%
to $53.7 million. These favorable mix shifts to lower cost of funds
deposits offset a decrease of $6.0 million or 4.65% in average time
deposits from $128.6 million for the year ended December 31, 2001 to $122.6
million in the current year.
SHORT-TERM BORROWINGS
Total short term borrowings increased $7.4 million or 121.03% to $13.5
million compared to $6.1 million at December 31, 2001. This increase is
primarily due to an increase in repurchase agreements with business and
governmental organizations. The bank's customers use repurchase agreements
to invest excess liquidity on a daily basis. During 2002 the Company's
$5.7 million term loan was refinanced as a line of credit. However, upon
issuance of the trust preferred securities described below, the line of
credit was reduced to $0.1 million.
LONG-TERM BORROWINGS
Long-term borrowings decreased $9.5 million to $38.9 million at December
31, 2002 compared to $48.4 million at December 31, 2001. The bank's
primary source for long-term borrowings has been, and is expected to
continue to be, the Federal Home Loan Bank of Chicago ("FHLB"). Early in
2002, the Bank paid off $6.8 million in FHLB advances. In the fourth
quarter of 2002, $3.0 million was borrowed from the FHLB to fund investment
purchases. As mentioned above the Company's $5.7 million term bank loan
was refinanced as a line of credit.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED DEBENTURES
In December of 2002 the Company capitalized Blackhawk Statutory Trust I for
the purpose of issuing $7.0 million in trust preferred capital securities.
The Company capitalized the trust and then issued $7.2 million of
subordinated debentures to the trust, which in turn issued $7.0 million of
capital securities to an outside investor. Management believes that this
is an advantageous method of funding the Company's growth strategies. The
subordinated debentures do not contain restrictions or covenants typically
found in bank financing arrangements. Also, while it qualifies as tier I
capital, with certain limitations, it does not dilute the ownership of the
existing shareholders. The capital provided was initially used to reduce
outstanding bank debt, however, bank debt financing will likely increase to
prior levels upon the closing of the pending acquisition of DunC Corp. See
footnote 9 to the Consolidated Financial Statements for further discussion
of Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures.
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 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.
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 December 31, 2002 ( in
thousands):
Time Long-term Operating
Deposits debt(1) Leases Total
-------- ----------- --------- -----
2003 $ 66,224 $ 6,600 $ 50 $ 72,874
2004 28,359 10,400 50 38,809
2005 17,661 7,450 50 25,161
2006 5,395 450 50 5,895
2007 5,602 0 50 5,652
Thereafter 0 21,000 0 21,000
-------- ------- ---- --------
Total $123,241 $45,900 $250 $169,391
-------- ------- ---- --------
-------- ------- ---- --------
Commitments to extend credit $ 25,596
(1) Long-term debt includes company-obligated mandatorily redeemable
preferred securities.
CAPITAL
Total shareholders equity as of December 31, 2002 was $25.8 million
compared to $23.7 million as of December 31, 2001. The increase resulted
from the sale of 135,667 shares of company stock under employee and
director option plans and the favorable impact of interest rate changes
during 2002 on the Bank's available-for-sale security portfolio carried in
shareholders' equity as accumulated other comprehensive income. The capital
ratios of the Company are in excess of the regulatory requirements. Under
guidelines issued by the Federal Reserve Bank, the $7.0 million of company
obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely subordinated debentures issued in December 2002 are included
in Tier 1 and total capital of the Company at December 31, 2002. The
issuance of these securities is the primary driver behind the increase in
the Company's capital ratios year over year. Tier I capital as a percent of
risk based assets for 2002 is 12.94% compared to a December 31, 2001 ratio
of 8.49% and a regulatory requirement of 4.0%. Total capital as a percent
of risk based assets for 2002 is 13.94% compared to a December 31, 2001
ratio of 9.61% and a regulatory requirement of 8.0%. The leverage ratio for
the Company for 2002 is 8.29% compared to a December 31, 2001 ratio of
5.87% and a 4.0% regulatory requirement.
IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, most of the assets and liabilities of the
Bank are monetary in nature. Consequently, interest rates have a more
significant impact on the Company's performance and results of operations
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the
prices of goods and services as measured by the Consumer Price Index. As
discussed previously under Asset/Liability Management, the Bank's interest
rate exposure in conjunction with the direction of the movement in interest
rates, is an important factor in the Company's results of operations. The
Company's financial statements are prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and results of operations in terms of historical dollars, without
giving consideration to changes in the relative purchasing power of money
over time due to inflation.
ITEM 7. FINANCIAL STATEMENTS
The required financial statements are attached to Form 10-KSB as Exhibit 99
and herein incorporated by reference.
Following are supplemental data tables of the Company:
TABLE 1
RATE/VOLUME ANALYSIS
The following rate/volume analysis is prepared with non-accruing loans treated
on a cash basis in accordance with the Company's practices as described in Note
4 to the Consolidated Financial Statements attached to this report. Tax
equivalency is calculated based on an effective combined income tax rate of 34%.
Average Balance Average Rate Interest Earned or Paid
2002 2001 2000 2002 2001 2000 (Dollars in thousands) 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
Interest Earning Assets:
$ 71,938 $ 51,536 $ 58,424 4.86% 5.96% 6.38% Taxable investment securitie $ 3,497 $ 3,074 $ 3,725
20,088 17,992 15,095 6.43% 6.42% 5.33% Tax-exempt investment securities (1) 1,292 1,155 805
92,026 69,528 73,519 5.20% 6.08% 6.16% Total investments 4,789 4,229 4,530
196,903 222,176 204,021 7.44% 8.31% 8.62% Loans 14,659 18,465 17,580
6,635 1,679 705 2.00% 2.92% 3.83% Federal funds sold & repurchase agreements 133 49 27
2,510 1,889 1,962 1.83% 3.65% 7.85% Interest bearing deposits in banks 46 69 154
298,074 295,272 280,207 6.58% 7.73% 7.96% TOTAL EARNING ASSETS $19,627 $22,812 $22,291
-2,529 -3,065 -1,966 Allowance for loan losses
10,114 10,017 11,106 Cash & cash equivalents
16,780 17,012 17,175 Other assets
$322,439 $319,236 $306,522 TOTAL ASSETS
Interest Bearing Liabilities:
$ 32,736 $ 28,443 $ 18,499 1.04% 2.13% 1.71% Interest bearing checking accounts $ 342 $ 607 $ 316
53,672 51,068 56,749 1.13% 2.20% 1.88% Savings and money market deposits 604 1,123 1,066
122,616 128,596 127,702 4.06% 5.48% 6.23% Time deposits 4,980 7,051 7,952
209,024 208,107 202,950 2.84% 4.22% 4.60% Total interest bearing deposits 5,926 8,781 9,334
Company obligated mandatorily redeemable
249 -0- -0- 5.22% preferred securities of subsidiary trust 13 -0- -0-
15,325 11,439 30,394 1.91% 4.04% 6.38% Short-term borrowings 292 462 1,941
40,327 47,157 20,039 5.34% 5.84% 6.33% Other borrowings 2,152 2,753 1,268
264,925 266,703 253,383 3.16% 4.50% 4.95% TOTAL INTEREST BEARING LIABILITIES $ 8,383 $11,996 $12,543
3.42% 3.23% 3.01% INTEREST RATE SPREAD
30,309 26,315 26,651 Checking accounts
2,075 2,531 2,651 Other liabilities
297,309 295,549 282,685 TOTAL LIABILITIES
25,130 23,687 23,837 Shareholders' equity
TOTAL LIABILITIES AND
$322,439 $319,236 $306,522 SHAREHOLDERS EQUITY
3.77% 3.66% 3.48% NET INTEREST MARGIN/INCOME $11,244 $10,816 $ 9,748
TABLE 1
RATE/VOLUME ANALYSIS (CONTINUED)
2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) due to Increase (Decrease) due to
Rate/Volume Rate/Volume
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
Interest Earning Assets:
Taxable investment securities ($ 569) $ 1,217 ($ 225) $ 423 ($ 77) ($ 586) $ 12 ($ 651)
Tax-exempt investment securities (1) 2 135 0 137 164 154 32 350
Total investments (567) 1,351 (225) 560 87 (432) 44 (301)
Loans (1,924) (2,100) 219 (3,806) (624) 1,564 (55) 885
Federal funds sold & repurchase
agreements (15) 145 (45) 84 (4) 58 (9) 45
Interest bearing deposits in banks (34) 23 (11) (23) (87) (48) 27 (108)
TOTAL EARNING ASSETS (2,541) (582) (63) (3,185) (628) 1,142 7 521
Interest Bearing Liabilities:
Interest bearing checking accounts (310) 92 (47) (265) 79 170 42 291
Savings and money market deposits (548) 57 (28) (519) 182 (107) (18) 57
Time deposits (1,828) (328) 85 (2,071) (951) 56 (6) (901)
Total interest bearing deposits (2,686) (179) 10 (2,855) (690) 119 18 (553)
Company obligated mandatorily redeemable
preferred securities of subsidiary trust 0 0 13 13
Short-term borrowings (244) 157 (83) (170) (711) (1,210) 442 (1,479)
Other borrowings (237) (399) 34 (601) (98) 1,716 (133) 1,485
TOTAL INTEREST BEARING
LIABILITIES (3,167) (421) (25) (3,613) (1,499) 625 327 (547)
NET INTEREST MARGIN $ 626 ($ 161) ($ 37) $ 428 $ 871 $ 517 ($ 320) $1,068
(1)Tax exempt investment securities are presented on a tax-equivalent basis.
TABLE 2
ANALYSIS OF LOAN PORTFOLIO
2002 2001 2000
(Dollars in thousands) % of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Real estate-mortgage $127,295 68.33% $136,625 65.33% $153,033 70.30%
Real estate-construction 8,916 4.79% 9,806 4.69% 4,551 2.09%
Real estate-held-for-sale 2,315 1.24% 2,752 1.31% 739 0.34%
Consumer 21,598 11.59% 27,851 13.32% 32,139 14.77%
Commercial 28,255 15.17% 34,505 16.50% 31,097 14.29%
Gross loans 188,379 101.12% 211,539 101.15% 221,559 101.79%
Allowance for loan loss (2,079) -1.12% (2,404) -1.15% (3,894) -1.79%
Net loans $186,300 100.00% $209,135 100.00% $217,665 100.00%
ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY
2002 2001 2000
Percent of Percent of Percent of
Gross Loans Gross Loans Gross Loans
(Dollars in thousands) Amount By Category Amount By Category Amount By Category
------ ----------- ------ ----------- ------ -----------
Real estate-mortgage $ 1,412 67.91% $ 939 39.06% $ 2,717 69.77%
Real estate-construction 0 0.00% 0 0.00% 0 0.00%
Consumer 244 11.74% 809 33.65% 568 14.59%
Commercial 364 17.51% 656 27.29% 609 15.64%
Unallocated 59 2.84%
Total $ 2,079 100.00% $ 2,404 100.00% $ 3,894 100.00%
SUMMARY OF LOAN LOSS EXPERIENCE
December 31,
(Dollars in thousands) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Allowance for loan losses, beginning $ 2,404 $ 3,894 $ 1,996 $ 1,915 $ 1,523
Amounts associated with acquisition 0 0 0 0 452
Amounts associated with sale 0 0 0 24 0
Amounts charged-off:
Real estate-mortgage 78 2,445 196 94 1
Consumer 542 340 170 314 180
Commercial 769 0 28 0 214
Total Charge-offs 1,389 2,785 394 408 395
TABLE 2 (CONTINUED)
December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Recoveries on amounts previously charged-off:
Real estate-mortgage $ 2 $ 30 $ 1 $ 5 $ 0
Consumer 56 43 31 44 13
Commercial 2 0 0 0 7
Total recoveries 60 73 32 49 20
Net charge-offs 1,329 2,712 362 359 375
Provision charged to expense 1,004 1,222 2,260 464 315
Allowance for loan losses, ending $ 2,079 $ 2,404 $ 3,894 $ 1,996 $ 1,915
NON-PERFORMING LOANS AT PERIOD END
Restructured/Impaired loans $ 418 $ 1,147 $ 2,063 $ 1,984 $ 2,389
Non-accrual 2,560 2,808 1,819 565 857
Past due 90 days or more and still accruing 26 356 280 529 240
Total problem loans $ 3,004 $ 4,311 $ 4,162 $ 3,078 $ 3,486
RATIOS
Allowance for loan loss to period-end loans 1.10% 1.14% 1.76% 1.04% 1.08%
Net charge-offs to average loans 0.67% 1.22% 0.18% 0.20% 0.24%
Recoveries to charge -offs 4.32% 2.62% 8.12% 12.01% 5.06%
Problem loans to gross loans 1.59% 2.04% 1.88% 1.60% 1.41%
EFFECT ON INTEREST INCOME OF
NON-ACCRUAL LOANS
Income recognized $ 12 $ 177 $ 74 $ 35 $ 33
Income that would have been recognized
in accordance with the original loan terms 156 185 178 73 76
TABLE 3
NON-INTEREST INCOME AND EXPENSE
2002 2001 2000
(Dollars in thousands) % of % of % of
Average Average Average
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Non-interest expense $11,271 3.49% $10,870 3.41% $10,257 3.35%
Non-interest income 3,006 0.93% 2,826 0.89% 2,385 0.78%
Net non-interest expense $ 8,265 2.56% $ 8,044 2.52% $ 7,872 2.57%
TABLE 4
THREE-YEAR COMPARISON OF AVERAGE BALANCE SHEETS
Years Ended December 31,
2002 2001 2000
Percent of Percent of Percent of
(Dollars in thousands) Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
ASSETS:
Federal funds sold
and repurchase agreements $ 6,635 2.06% $ 1,679 0.53% $ 705 0.23%
Interest bearing deposits
in banks 2,510 0.78% 1,889 0.59% 1,962 0.64%
Taxable investment
Securities 71,938 22.31% 51,537 16.14% 58,424 19.07%
Tax-exempt investment
Securities 20,088 6.23% 17,992 5.64% 15,095 4.92%
Loans, net of unearned
Income 196,903 61.06% 222,176 69.60% 204,021 66.56%
Total earning assets 298,074 92.44% 295,273 92.50% 280,207 91.42%
Cash and due from banks 10,114 3.14% 10,016 3.14% 11,106 3.62%
Office buildings and equipment 6,659 2.07% 6,838 2.14% 6,802 2.22%
Other non-earning assets 7,592 2.35% 7,108 2.22% 8,407 2.74%
Total non-earning assets 24,365 7.56% 23,962 7.50% 26,315 8.58%
TOTAL ASSETS $322,439 100.00% $319,235 100.00% $306,522 100.00%
TABLE 4 (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES: Years Ended December 31,
2002 2001 2000
% of % of % of
Average Average Average
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Interest bearing checking accounts $ 32,736 10.15% $ 28,443 8.91% $ 18,499 6.04%
Savings deposits 53,672 16.65% 51,068 16.00% 56,749 18.51%
Time deposits 122,616 38.03% 128,596 40.28% 127,702 41.66%
Total interest bearing deposits 209,024 64.83% 208,107 65.19% 202,950 66.21%
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust 249 0.08% -0- 0.00% -0- 0.00%
Short-term borrowings 15,325 4.75% 11,439 3.58% 30,394 9.90%
Other borrowings 40,327 12.51% 47,157 14.78% 20,039 6.54%
Total interest-bearing liabilities 264,925 82.17% 266,703 83.55% 253,383 82.67%
Checking accounts 30,309 9.40% 26,315 8.24% 26,651 8.69%
Other liabilities 2,075 0.64% 2,530 0.79% 2,651 0.86%
Total liabilities 297,309 92.21% 295,548 92.58% 282,685 92.22%
Stockholders' Equity/Capital 25,130 7.79% 23,687 7.42% 23,837 7.78%
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY/CAPITAL $322,439 100.00% $319,235 100.00% $306,522 100.00%
TABLE 5
INVESTMENT SECURITIES
December 31,
(Dollars in thousands) 2002 2001 2000
---- ---- ----
Available-for-Sale
US Treasury $ 0 $ 0 $ 0
US Government Agency 36,766 37,459 49,142
Tax-exempt obligations 3,951 233 556
Other securities 43,180 4,903 4,370
Total market value of available for sale 83,897 42,595 54,068
securities
Held-to-Maturity
US Treasury 0 0 0
US Government Agency 3,305 4,768 4,253
Tax-exempt obligations 19,697 18,967 14,277
Total book value of held-to-maturity
securities 23,002 23,735 18,530
Total market value of held-to-maturity
securities 24,016 24,172 18,530
Total book value of securities $106,899 $ 66,330 $ 72,598
TABLE 6
MATURITY OF INVESTMENT SECURITIES
Within After One but After Five but
One Year Within Five Years Within Ten Years After Ten Years
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Available-for-Sale
US Government Agency $ 5,558 4.24% $27,635 5.02% $ 5,265 5.63% $24,250 5.25%
Tax-exempt obligations 0 0.00% 685 2.59% 3,265 3.46% 0 0.00%
Other securities 6,933 3.23% 3,861 5.69% 6,445 5.33% 0 0.00%
Total 12,491 3.68% 32,181 5.05% 14,975 5.03% 24,250 5.25%
Held-to-Maturity
US Government Agency 0 0.00% 0 0.00% 3,061 5.62% 244 6.49%
Tax-exempt obligations 3,143 4.12% 11,993 4.27% 4,561 4.25% 0 0.00%
Total 3,143 4.12% 11,993 4.27% 7,622 4.80% 244 6.49%
Grand Total $15,634 3.77% $44,174 4.84% $22,597 4.95% $24,494 5.26%
TABLE 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31, 2002
Greater Than
(Dollars in thousands) Time Remaining to Maturity One Year
After One Fixed Floating
Due Within But Within After Five Interest Interest
One Year Five Years Years Total Rate Rate
-------- ---------- ----- ----- ---- ----
Real estate-mortgage $ 4,648 $ 7,501 $38,061 $ 50,210 $10,128 $35,434
Real estate-construction 3,963 4,829 93 8,885 -0- 4,922
Real estate-held for sale 2,315 -0- -0- 2,315 -0- -0-
Consumer 4,067 28,393 1,637 34,097 22,217 7,813
Commercial 34,459 56,384 2,029 92,872 50,071 8,342
Gross Loans $49,452 $97,107 $41,820 $188,379 $82,416 $56,511
TABLE 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID
Years Ended December 31,
2002 2001 2000
Average Percent of Average Average Percent of Average Average Percent of Average
(Dollars in thousands) Balance Total Rate Balance Total Rate Balance Total Rate
------- ----- ---- ------- ----- ---- ------- ----- ----
Non-interest bearing demand
deposits $ 30,309 12.66% -- $ 26,315 11.23% -- $ 26,651 11.61% --
Interest bearing demand deposits 32,736 13.68% 1.04% 28,443 12.13% 2.13% 18,499 8.05% 1.71%
Savings deposits 53,672 22.43% 1.13% 51,068 21.78% 2.20% 56,749 24.72% 1.88%
Time deposits 122,616 51.23% 4.06% 128,596 54.86% 5.48% 127,702 55.62% 6.23%
Total $239,333 100.00% 2.84% $234,422 100.00% 4.22% $229,601 100.00% 4.98%
TABLE 9
INTEREST RATE RISK ANALYSIS
Time Remaining to Maturity
December 31, 2002 Due Within Four to Seven to After
(Dollars in thousands) 3 months 6 months 12 months 12 months Total
-------- -------- --------- --------- -----
Certificates of Deposit
Less than $100,000 $12,410 $ 9,572 $24,704 $47,683 $ 94,369
More than $100,000 5,069 7,042 7,427 9,334 28,872
Total $17,479 $16,614 $32,131 $57,017 $123,241
TABLE 10
SHORT-TERM BORROWINGS
(Dollars in thousands)
Balance outstanding December 31, 2002 2001 2000
---- ---- ----
Repurchase agreements $13,399 $5,037 $9,323
Fed funds purchased 0 0 0
FHLB Open line of credit 0 0 0
Line of Credit 55 1,050 550
------- ------ ------
$13,454 $6,087 $9,873
------- ------ ------
------- ------ ------
Weighted rate December 31,
Repurchase agreements 0.95% 1.25% 4.34%
Fed funds purchased -- -- --
FHLB Open line of credit -- -- --
Line of Credit 3.38% 3.93% 7.91%
------- ------ ------
0.96% 1.71% 4.53%
------- ------ ------
------- ------ ------
TABLE 10 (CONTINUED)
(Dollars in thousands) 2002 2001 2000
---- ---- ----
Maximum month-end outstanding balance
Repurchase agreement $18,131 $12,599 $15,132
Fed funds purchased 6,395 6,865 10,200
FHLB Open line of credit 0 0 25,500
Line of Credit 6,056 1,050 550
(Dollars in thousands) 2002 2001 2000
---- ---- ----
Year-to-date average amount outstanding
Repurchase agreements $11,924 $8,071 $10,651
Fed funds purchased 921 1,004 3,793
FHLB Open line of credit -0- 697 15,770
Line of Credit 2,480 1,010 180
------- ------ ------
$15,325 $10,782 $30,394
------- ------ ------
------- ------ ------
Year-to-date average weighted rate 2002 2001 2000
---- ---- ----
Repurchase agreements 1.49% 3.92% 5.77%
Fed funds purchased 1.93% 5.14% 6.74%
FHLB Open line of credit 0.00% 6.43% 6.69%
Line of Credit 3.86% 4.94% 7.98%
------- ------ ------
1.90% 4.29% 6.38%
------- ------ ------
------- ------ ------
TABLE 11
INTEREST RATE RISK ANALYSIS
Two- Four- Seven- Ten- Over
December 31, 2002 One three six nine twelve One
(Dollars in thousands) Month months months months months year Total
---- ------ ------ ------ ------ ---- -----
Federal funds sold and short-term investments $13,120 $ 0 $ 0 $ 0 $ 0 $ 0 $13,120
Interest bearing deposits 8,472 0 0 0 0 0 8,472
Taxable investment securities 9,077 1,514 3,098 1,614 2,625 65,324 83,252
Tax-exempt investment securities 0 1,803 815 350 925 19,754 23,647
Federal Home Loan Bank of Chicago stock 0 4,511 0 0 0 0 4,511
Loans 48,887 3,295 6,497 7,890 8,464 113,346 188,379
Total interest-earning assets $79,159 $11,123 $10,410 $9,854 $12,014 $198,821 $321,381
TABLE 12
SELECTED EQUITY RATIOS 2002 2001 Regulatory
Ratio Ratio Requirement
----- ----- -----------
Equity as a percent of assets 7.37% 7.19% N/A
Core capital as a percent of risk based assets 12.94% 8.49% 4.00%
Total capital as a percent of risk based assets 13.94% 9.61% 8.00%
Leverage ratio 8.29% 5.87% 4.00%
TABLE 13
SELECTED FINANCIAL RATIOS
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Return on average assets 0.38% 0.27% (0.09)% 0.39% 0.87%
Return on average equity 4.92% 3.65% (1.19)% 4.64% 8.33%
Average equity to average assets 7.79% 7.42% 7.78% 7.43% 10.22%
Dividend payout ratio 72.41% 114.58% n/m 100.18% 53.41%
Interest rate spread 3.42% 3.23% 3.01% 3.15% 3.59%
Net interest margin 3.77% 3.66% 3.48% 3.64% 4.24%
Net non-interest expense to assets 2.56% 2.52% 2.57% 2.54% 2.29%
Efficiency ratio 81.61% 82.04% 86.23% 81.66% 68.06%
Allowance for loan losses to total loans at end of period 1.10% 1.14% 1.79% 1.04% 1.08%
TABLE 14
LOCATIONS Owned or Owned or
Address Leased Address Leased
------- ------ ------- ------
400 Broad St., Beloit, WI 53511 Owned 1021 N. State St., Owned
Belvidere, IL 61008
2200 Cranston Rd., Beloit, WI 53511 Owned 121 E. Locust Ave., Owned
Belvidere, IL 61008
1795 Madison Rd., Beloit, WI 53511 Owned 422 Cherry Ave., Owned
Rochelle, IL 61068
5206 Elevator Rd., Roscoe, IL 61073 Leased 307 N. Franklin Dr., Owned
Oregon, IL 61061
2475 N. Perryville Road, Rockford, IL 61107 Owned
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 27, 2002, the Audit Committee of the Board of Directors of
Blackhawk Bancorp, Inc. ("the Company") approved a change in auditors. The
Board of Directors ratified the Audit Committee's engagement of McGladrey &
Pullen, LLP to serve as the Company's independent public accountants and
replacement of Wipfli Ullrich Bertelson LLP (Wipfli") as the Company's
independent public accountants, effective August 28, 2002.
Wipfli performed audits of the consolidated financial statements for the
two years ended December 31, 2001 and 2000. Their reports did not contain
an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.
During the two years ended December 31, 2001, and from December 31, 2001
through the effective date of the Wipfli termination, there have been no
disagreements between the Registrant and Wipfli on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope
or procedure, which disagreements would have caused Wipfli to make
reference to the subject matter of such disagreements in connection with
this report.
During the two years ended December 31, 2001, and from December 31, 2001
until the effective date of the dismissal of Wipfli, Wipfli did not advise
the Registrant of any of the following matters:
1. That the internal controls necessary for the Registrant to develop
reliable financial statements did not exist;
2. That information had come to Wipfli's attention that had lead it to no
longer be able to rely on management's representations, or that had
made it unwilling to be associated with the financial statements
prepared by management;
3. That there was a need to expand significantly the scope of the audit of
the Registrant, or that information had come to Wipfli's attention that
if further investigated: (i) may materially impact the fairness or
reliability of either a previously-issued audit report or underlying
financial statements, or the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the most
recent financial statements covered by an audit report (including
information that may prevent it from rendering an unqualified audit
report on those financial statements) or (ii) may cause it to be
unwilling to rely on management's representation or be associated with
the Registrant's financial statements and that, due to its dismissal,
Wipfli did not so expand the scope of its audit or conduct such further
investigation;
4. That information had come to Wipfli's attention that it had concluded
materially impacted the fairness or reliability of either: (i) a
previously-issued audit report or the underlying financial statements
or (ii) the financial statements issued or to be issued covering the
fiscal period subsequent to the date of the most recent financial
statements covered by an audit report (including information that,
unless resolved to the accountant's satisfaction, would prevent it from
rendering an unqualified audit report on those financial statements),
or that, due to its dismissal, there were no such unresolved issues as
of the date of its dismissal.
Wipfli has furnished a letter to the SEC dated August 29, 2002, stating
that it agrees with the above statements, and is attached hereto as Exhibit
16.1.
During the two years ended December 31, 2001, and from December 31, 2001
through engagement of McGladrey & Pullen, LLP as the Registrant's
independent accountant, neither the Registrant nor anyone on its behalf had
consulted McGladrey & Pullen, LLP with respect to any accounting or
auditing issues involving the Registrant. In particular, there was no
discussion with the Registrant regarding the application of accounting
principles to a specified transaction, the type of audit opinion that might
be rendered on the financial statements, or any related item.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
a) Directors of the registrant. The information that will appear under
"Election of Directors" in the definitive Proxy Statement to be
prepared and filed for the Company's Annual Meeting of Stockholders to
be held on May 21, 2003 is incorporated herein by this reference.
b) Executive officers of the Registrant. The information presented in
Item I of this report is incorporated herein by this reference.
c) Section 16(a) Beneficial Ownership Reporting Compliance. The
information that will appear under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the definitive proxy statement to be prepared
and filed for the Company's Annual Meeting of stockholders to be held
on May 21, 2003 is incorporated herein by this reference.
ITEM 10. EXECUTIVE COMPENSATION
The information that will appear under "Director and Executive
Compensation" in the definitive Proxy Statement to be prepared and filed
for the Company's Annual Meeting of Stockholders to be held on May 21, 2003
is incorporated herein by this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information that will appear under "Beneficial Ownership of Securities"
in the definitive Proxy Statement to be prepared and filed for the
Company's Annual Meeting of Stockholders to be held on May 21, 2003 is
incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information that will appear under "Certain Transactions with
Management and Others" in the definitive Proxy Statement to be prepared and
filed for the Company's Annual Meeting of Stockholders to be held on May
21, 2003 is incorporated herein by this reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Documents Filed:
1. and 2. Financial Statements. See the following "Index to Financial
Statements and Financial Statement Schedules" which is incorporated herein
by this reference.
3. Exhibits. See "Exhibit Index" which is incorporated herein by
this reference.
b) Reports On Form 8-K:
During the fourth quarter of 2002 the Company filed one report on
Form 8-K. An 8-K filed on December 26, 2002 announced the sale of $7
million in floating-rate trust-preferred securities in a private
placement.
ITEM 14. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports
filed by us under the Securities Exchange Act of 1934, as amended
("Exchange Act") is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Within the 90 days
prior to the date of this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our
President and Chief Executive Officer, and Executive Vice President and
Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-14 of the
Exchange Act. Based on that evaluation, our President and Chief Executive
Officer, and Executive Vice President and Chief Financial Officer concluded
that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls or other
factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 25, 2003.
Blackhawk Bancorp, Inc.
By /s/ Todd J. James
------------------------------------
Todd J. James
Executive Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 25, 2003.
Principal Executive Officer and Director:
Director, President and /s/ R. Richard Bastian, III
Chief Executive Officer ----------------------------------------
R. Richard Bastian, III, President and
Chief Executive Officer
Principal Financial Officer /s/ Todd J. James
----------------------------------------
Todd J. James
Executive Vice President,
Treasurer and Chief Financial Officer
Principal Accounting Officer /s/ Thomas L. Lepinski
----------------------------------------
Thomas L. Lepinski, C.P.A.,
Principal Accounting Officer
Directors:
/s/ Merritt J. Mott
----------------------------- ------------------------------
John B. Clark Merritt J. Mott
/s/ Roger G. Bryden /s/ Sunil Puri
----------------------------- ------------------------------
Roger G. Bryden Sunil Puri
/s/ George D. Merchant
----------------------------- ------------------------------
Charles Hart George D. Merchant
/s/ Kenneth A Hendricks /s/Prudence A. Harker
----------------------------- ------------------------------
Kenneth A. Hendricks Prudence A. Harker
----------------------------- ------------------------------
Charles J. Howard Dennis M. Conerton
CERTIFICATIONS
I, R. Richard Bastian, III, certify that:
1. I have reviewed this annual report on Form 10-KSB of Blackhawk Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
/s/ R. Richard Bastian, III
---------------------------
R. Richard Bastian, III
President and CEO
I, Todd J. James, certify that:
1. I have reviewed this annual report on Form 10-KSB of Blackhawk Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
/s/Todd J. James
----------------
Todd J. James
Executive Vice President and CFO
Blackhawk Bancorp, Inc.
Exhibit Index To
2002 Annual Report on Form 10-KSB
Exhibit Incorporated Herein Filed Page
Number Description By Reference To: with No.
------ ----------- ---------------- ---- ---
3.1 Amended and Restated Exhibit 3.1 to
Articles of Incorporation Amendment No. 1 to
of Blackhawk Bancorp, Registration Statement
Inc. on Form S-1(Reg. No.
33.32351)
3.2 By-Laws of Blackhawk Exhibit 3.2 to
Bancorp, Inc., as Amendment No. 1 to
amended. Registration Statement
on Form S-1
3.3 Amendments to By-Laws Exhibit 3.3 to 1994 Form
of Blackhawk Bancorp, 10-KSB dated March 29,
Inc., as amended. 1995
3.4 Amendments to By-Laws of Exhibit 3.4 to 1994 Form
Blackhawk Bancorp, Inc., 10-KSB dated March 29,
as amended. 1995.
4.1 Sections 15 and 19 of Exhibit 1.2 to Amendment
Plan of Conversion of No. 1 to Registration
Beloit Savings Bank, as Statement on Form-1 (No.
amended 33-32351) filed on March 5,
1990.
10.12 Blackhawk State Bank Exhibit 10.12 to 1996 Form
Officer Bonus Plan, as 10-KSB, dated March 28, 1997
amended *
10.2 Written description of Proxy Statement for its
Plan for Life Insurance Annual Meeting of
of Blackhawk State Stockholders, on May 8,
Bank * 1991, dated April 4, 1991
10.3 Blackhawk Bancorp, Inc. Exhibit 10.3 to 1990 Form
Employee Stock Ownership 10-K, dated March 31,
Plan * 1990
10.31 Amendment to Blackhawk Exhibit 10.31 to 1994
Bancorp, Inc. Employee Form 10-KSB, dated March
Stock Ownership 29, 1995
Plan *
10.4 Blackhawk Bancorp, Inc. Exhibit 10.4 to
Employee Stock Ownership Amendment No. 1 to
Trust * Registration Statement
Form S-1 (No. 33-32351)
10.5 Blackhawk Bancorp, Inc. Exhibit 10.5 to
Directors' Stock Option Amendment No. 1 to
Plan * Registration Statement
Form S-1 (No. 33-32351)
10.6 Blackhawk Bancorp, Inc. Exhibit 10.6 to
Executive Stock Option Registration Statement
Plan * Form S-1 (No. 33-32351)
10.7 Form of Severance Payment Exhibit 10.8 to
Agreement entered into Amendment No. 1 to
between Blackhawk State Registration Statement
Bank and Messrs. Calkins, Form S-1 (No. 33-32351)
Kelley and Rusch *
10.71 Form of Severance Exhibit 10.8 to 1994 Form
Payment Agreement entered 10-KSB, dated March 29,
into between Blackhawk 1995
State Bank and Mr.
Conerton *
10.8 Blackhawk Bancorp, Inc. Exhibit 10.9 to 1994 Form
Directors' Stock Option 10-KSB, dated March 29,
Plan * 1995
10.9 Blackhawk Bancorp, Inc. Proxy Statement for its
Executive Stock Option Annual Meeting of Stockholders
Plan* on May 13, 1998, dated April
2, 1998
16.1 Letter on Change in X 38
Certifying Accountant
21 Subsidiaries of X 39
Registrant
99 Financial Statements X 40
99.1 Certification Pursuant to X 40
18 U. S. C. Section 1350,
as Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002
99.2 Certification Pursuant to X 41
18 U. S. C. Section 1350,
as Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002
* Each management contract and compensatory plan or arrangement required
to be filed as an exhibit to this report is identified in the Exhibit
Index by an asterisk following the description of the exhibit.