FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ----- TO -----
COMMISSION FILE NUMBER 0-18599
BLACKHAWK BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1659424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 BROAD STREET
BELOIT, WISCONSIN 53511
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES)
(608) 364-8911
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 2001
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$.01 par value 2,366,418 shares
INDEX
PART I - FINANCIAL INFORMATION
PAGE
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ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
September 30, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Income for the
Three Months Ended September 30, 2001 and 2000 4
Consolidated Condensed Statements of Income for the
Nine Months Ended September 30, 2001 and 2000 5
Consolidated Condensed Statements of Shareholders'
Equity for the Nine Months Ended September 30, 2001 and 2000 6
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 7-8
Notes to Consolidated Condensed Financial Statements 9-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-17
PART II - OTHER INFORMATION
ITEM 6. A) EXHIBITS 18
B) REPORT ON FORM 8-K 19
SIGNATURES 20
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
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(Dollars in thousands)
ASSETS
- ------
Cash and cash equivalents $ 10,089 $ 13,336
Interest-bearing deposit accounts 525 780
Federal funds sold and other short-term investments 1,096 2,529
Securities available-for-sale 43,421 54,068
Securities held-to-maturity, fair value of $24,472 and $18,530 23,737 18,530
Loans held for sale 1,986 739
Loans, net of allowance for loan losses of $2,075 and $3,894 216,433 216,926
Federal Home Loan Bank of Chicago Stock 2,318 2,200
Bank premises and equipment, net 6,785 6,732
Intangible assets 5,216 5,671
Accrued interest receivable 2,236 2,481
Other assets 2,390 3,179
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Total Assets $316,232 $327,171
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-interest bearing $ 28,136 $ 28,875
Interest bearing 205,895 232,068
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Total deposits 234,031 260,943
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Borrowed funds:
Short-term borrowings 6,603 9,873
Other borrowings 48,598 30,031
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Total borrowed funds 55,201 39,904
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Accrued interest payable 1,232 1,765
Other liabilities 1,550 1,564
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Total Liabilities 292,014 304,176
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SHAREHOLDERS' EQUITY:
Preferred stock
1,000,000 shares, $.01 par value per share authorized,
none issued or outstanding -- --
Common stock
10,000,000 shares, $.01 par value per share authorized;
2,371,398 and 2,347,598 shares issued 24 23
Additional paid-in capital 7,564 7,417
Retained earnings 15,672 15,573
Treasury stock, 6,521 and 10,324 shares, at cost (81) (120)
Accumulated other comprehensive income 1,039 102
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Total Shareholders' Equity 24,218 22,995
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Total Liabilities and Shareholder's Equity $316,232 $327,171
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See Notes to Unaudited Consolidated Condensed Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended September 30,
2001 2000
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(Dollars in Thousands)
INTEREST INCOME:
Interest and fees on loans $4,661 $4,578
Interest on securities:
Taxable 731 952
Exempt from federal income taxes 198 144
Interest on federal funds sold and
other short-term investments 12 5
Interest on interest-bearing deposits 5 42
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Total Interest Income 5,607 5,721
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INTEREST EXPENSE:
Interest on deposits 2,101 2,372
Interest on short-term borrowings 82 587
Interest on other borrowings 711 353
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Total Interest Expense 2,894 3,312
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Net Interest Income 2,713 2,409
Provision for loan losses (Note 3) 400 90
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Net Interest Income After Provision for Loan Losses 2,313 2,319
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OTHER OPERATING INCOME:
Service charges on deposit accounts 464 394
Gain on sale of mortgage loans 151 46
Gain on sale of securities 38 --
Brokerage and annuity commissions 13 60
Net gain (loss) on sale of other assets (21) 22
Other income 93 133
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Total Other Operating Income 738 655
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OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,300 1,237
Occupancy expense, net 184 157
Furniture and equipment 181 202
Data processing 184 190
Amortization of intangible assets 124 138
Legal and professional fees 158 110
Office supplies 65 59
Telephone and telecommunications 69 66
Other operating expenses 430 345
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Total Other Operating Expenses 2,695 2,504
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Income Before Income Taxes 356 470
Provision for Income Taxes 98 164
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Net Income $ 258 $ 306
------ ------
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Basic Earnings Per Share $ 0.11 $ 0.13
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Diluted Earnings Per Share $ 0.11 $ 0.13
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Dividends Per Share $ 0.09 $ 0.12
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See Notes to Unaudited Consolidated Condensed Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
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(Dollars in Thousands)
INTEREST INCOME:
Interest and fees on loans $14,195 $12,835
Interest on securities:
Taxable 2,360 2,783
Exempt from federal income taxes 561 415
Interest on federal funds sold and
other short-term investments 50 20
Interest on interest-bearing deposits 31 125
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Total Interest Income 17,197 16,178
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INTEREST EXPENSE:
Interest on deposits 6,987 6,828
Interest on short-term borrowings 417 1,361
Interest on other borrowings 2,081 874
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Total Interest Expense 9,485 9,063
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Net Interest Income 7,712 7,115
Provision for loan losses (Note 3) 675 270
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Net Interest Income After Provision for Loan Losses 7,037 6,845
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OTHER OPERATING INCOME:
Service charges on deposit accounts 1,288 1,108
Gain on sale of mortgage loans 381 99
Gain on sale of securities 132 24
Brokerage and annuity commissions 96 201
Net gain (loss) on sale of other assets (17) 22
Other income 285 405
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Total Other Operating Income 2,165 1,859
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OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,897 3,646
Occupancy expense, net 571 488
Furniture and equipment 571 610
Data processing 515 569
Amortization of intangible assets 372 417
Legal and professional fees 369 243
Office supplies 214 174
Telephone and telecommunications 216 188
Other operating expenses 1,225 1,137
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Total Other Operating Expenses 7,950 7,472
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Income Before Income Taxes 1,252 1,232
Provision for Income Taxes 376 413
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Net Income $ 876 $ 819
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------- -------
Basic Earnings Per Share $ 0.37 $ 0.35
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Diluted Earnings Per Share $ 0.37 $ 0.34
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Dividends Per Share $ 0.33 $ 0.36
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See Notes to Unaudited Consolidated Condensed Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
-------- --------
(Dollars in thousands)
Common Stock:
Balance at beginning of period $ 23 $ 23
Stock options exercised 1 --
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Balance at end of period 24 23
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Additional Paid-in Capital:
Balance at beginning of period 7,417 7,307
Stock options exercised 147 53
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Balance at end of period 7,564 7,360
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Retained Earnings:
Balance at beginning of period 15,573 16,973
Net income 876 819
Dividends declared on common stock (777) (837)
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Balance at end of period 15,672 16,955
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Treasury Stock, at cost:
Balance at beginning of period (120) (120)
Sale of treasury stock 39 --
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Balance at end of period (81) (120)
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Accumulated other comprehensive income (loss):
Balance at beginning of period 102 (858)
Other comprehensive income (loss), net of taxes 937 310
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Balance at end of period 1,039 (548)
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Total Shareholders' Equity $24,218 $23,670
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See Notes to Unaudited Consolidated Condensed Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
-------- --------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 876 $ 819
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 675 270
Provision for depreciation and amortization 1,033 1,098
Amortization of premiums and (accretion of
discounts) on Investment securities, net 47 28
Gain on sale of loans held for sale (381) (99)
FHLB stock dividends (111) --
Loss (gain) on sale of property, equipment and OREO 17 (22)
Gain on sale of securities (132) (24)
Loans originated for sale (22,325) (5,779)
Proceeds from sale of loans held for sale 21,460 5,950
Change in assets and liabilities:
Decrease in other assets 412 6
(Increase) decrease in accrued interest receivable 239 (304)
Increase (decrease) in accrued interest payable (534) 204
Increase in other liabilities 115 46
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Net cash provided by operating activities 1,391 2,193
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CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in federal funds sold, interest-bearing deposits
And other short-term investments, net 1,688 1,957
Proceeds from maturities and calls of
securities available-for-sale 26,093 2,223
Purchase of securities available-for-sale (18,110) (13,119)
Proceeds from maturities and calls of
securities held-to-maturity 1,972 3,635
Purchase of securities held-to-maturity (7,234) (1,954)
Proceeds from sale of securities available-for-sale 4,297 4,820
Loans originated, net of principal collected (1,046) (20,058)
Proceeds from the sale of property, equipment and OREO 730 992
Purchase of bank premises and equipment (756) (213)
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Net cash provided by (used in) investing activities 7,634 (21,717)
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BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
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(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 148 35
Sale of treasury stock 39 --
Net decrease in deposits (26,912) (469)
Net increase in borrowings 15,298 19,514
Dividends paid (845) (837)
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Net cash provided by (used in) financing activities (12,272) 18,243
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Decrease in cash and cash equivalents (3,247) (1,281)
CASH AND CASH EQUIVALENTS:
Beginning 13,336 11,994
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Ending $ 10,089 $ 10,713
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 10,019 $ 8,859
Income taxes 108 332
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Other assets acquired in settlement of loans $ 741 $ 389
See Notes to Unaudited Consolidated Condensed Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2001
Note 1. General
The accompanying consolidated condensed financial statements conform
to generally accepted accounting principles and to general practices
within the banking industry. The more significant policies used by
the Company in preparing and presenting its financial statements are
stated in the Company's Form 10-KSB.
The effect of timing differences in the recognition of revenue and
expense for tax liability is not determined until the end of each
fiscal year.
In the opinion of Management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial
position of the Corporation as of September 30, 2001, and the results
of operations for the three and nine months ended September 30, 2001
and 2000.
The results of operations for the three and nine months ended
September 30, 2001 and 2000 are not necessarily indicative of the
results to be expected for the full year.
Certain reclassifications have been made to the 2000 historical
financial statements to conform to the 2001 presentation.
Note 2. Non-Performing Loans
Non-performing loans includes loans which have been categorized by
management as non-accruing because collection of interest is not
assured, and loans which are past-due ninety days or more as to
interest and/or principal payments. The following summarizes
information concerning non-performing loans:
Sept. 30,
---------------------
(Dollars in Thousands) 2001 2000
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Non-accruing loans $1,553 $2,004
Past due 90 days or more and still accruing 940 1,496
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Total non-performing loans $2,493 $3,500
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Performing loans classified as impaired $936 $ --
Note 3. Allowance For Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
Three Months Ended September 30,
Dollars in Thousands) 2001 2000
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Balance at beginning of period $2,057 $2,069
Provision charged to expense 400 90
Loans charged off 394 60
Recoveries 12 9
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Balance at end of period $2,075 $2,108
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Nine Months Ended September 30,
(Dollars in Thousands) 2001 2000
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Balance at beginning of period $3,894 $1,996
Provision charged to expense 675 270
Loans charged off 2,562 187
Recoveries 68 29
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Balance at end of period $2,075 $2,108
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Note 4. Earnings Per Share
Presented below are the calculations for basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Basic:
Net income available to common stockholders $ 258,000 $ 306,000 $ 876,000 $ 819,000
---------- ---------- ---------- ----------
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Weighted average shares outstanding 2,363,312 2,323,949 2,350,300 2,321,536
---------- ---------- ---------- ----------
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Basic.earnings per share $ 0.11 $ 0.13 $ 0.37 $ 0.35
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Net income available to common stockholders $ 258,000 $ 306,000 $ 876,000 $ 819,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,363,312 2,323,949 2,350,300 2,321,536
Effect of dilutive stock options outstanding 23,053 58,289 23,053 58,289
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,386,365 2,382,238 2,373,353 2,379,825
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.11 $ 0.13 $ 0.37 $ 0.34
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Note 5. Recent Accounting Developments
Business Combinations
In September 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 supersedes Accounting Principles
Board (APB) Opinion No. 16, "Business Combinations", and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased
Enterprises." SFAS No. 141 requires the use of the purchase method of
accounting for business combinations initiated after September 30,
2001. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets acquired outside
of a business combination should be accounted for upon acquisition and
how goodwill and other intangible assets should be accounted for after
they have been initially recognized. SFAS No. 142 eliminates the
amortization for goodwill and other intangible assets with indefinite
lives. Other intangible assets with a finite life will be amortized
over their useful life. Goodwill and other intangible assets with
indefinite useful lives shall be tested for impairment annually or
more frequently if events or changes in circumstances indicate that
the asset may be impaired. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001.
The Company's strategy over the past several years has included
business combinations accounted for under the purchase accounting
method which created goodwill upon the transactions' closings. The
Company has goodwill of $3.2 million on its balance sheet as of
September 30, 2001 which is being amortized over 20 years. The
pronouncement will have the effect of eliminating the amortization of
this asset and will subject it to periodic impairment analysis.
Management, at this time, cannot determine the effect that adoption of
SFAS No. 142 may have on the financial statements of the Company as
the statement requires a comprehensive review of previous combinations
accounted for under the purchase accounting method and an analysis of
impairment as of the date of adoption. The impairment analysis for
goodwill and other intangible assets with an indefinite useful life
has not been completed. The impairment analysis will be completed
within the timelines outlined in SFAS No. 142 which include an initial
transitional goodwill impairment test to be completed by September 30,
2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction with
the consolidated condensed balance sheets as of September 30, 2001 and December
31, 2000 and the consolidated condensed statements of income for the three
months and nine months ended September 30, 2001 and 2000. This information is
not meant to be a substitute for the consolidated condensed balance sheets and
income statements.
RESULTS OF OPERATIONS
Net income for the three and nine months ended September 30, 2001 was $258,000
and $876,000, respectively, compared to $306,000 and $819,000 for the similar
periods in 2000. The discussion that follows will provide information about the
various areas of income and expense that resulted in the aforementioned
financial performance.
THREE MONTHS ENDED SEPTEMBER 30
For the three months ended September 30, 2001, interest income was $5,607,000
compared to $5,721,000 for the same period in 2000. This decrease of $114,000,
or 2.0%, was the result of increased interest and fees on loans of $83,000,
offset by a decrease in interest on securities of $167,000 and a decrease of
$30,000 on short-term investments and deposits with banks in the aggregate.
Interest and fees on loans increased 1.8% to $4,661,000 for the three months
ended September 30, 2001 compared to $4,578,000 in the same period of 2000.
Average loans outstanding during the three months ended September 30, 2001 were
$219.8 million, representing a $12.5 million, or 6.0%, increase over 2000 levels
for the similar period. Partially offsetting the increase in average balances
was a decline in loan yields to 8.41% for the three months ended September 30,
2001 from 8.76% for the same period in 2000.
Investment income on taxable securities and FHLB stock for the quarter ended
September 30, 2001 decreased $221,000 to $731,000, compared to $952,000 for the
same period in 2000, a decrease of 23.2%. The decrease was the result of a
decrease in volume that was partially offset by a portfolio yield increase
during the 2001 quarter as compared to the 2000 quarter. Income from tax-exempt
securities increased to $198,000 for the three months ended September 30, 2001
from $144,000. This increase was due to increased volumes and improved yields.
Interest on interest-bearing deposits, federal funds sold and other short-term
investments decreased to $17,000 in aggregate for the three months ended
September 30, 2001, from $47,000 for the 2000 period.
Interest paid on deposits decreased 11.4% to $2,101,000 for the three months
ended September 30, 2001, from $2,372,000 for the three months ended September
30, 2000.
Interest on short-term borrowings decreased to $82,000 for the three months
ended September 30, 2001 from $587,000 in 2000, a decrease of $505,000.
Interest on long-term borrowings increased to $711,000 for the three months
ended September 30, 2001, from $353,000 for the same period in 2000. Short-term
borrowings, including repurchase agreements, fed funds purchased, an open line
of credit with the Federal Home Loan Bank of Chicago ("FHLB"), and a line of
credit with a third party commercial bank, decreased as the Company reduced
reliance on these types of borrowings by converting portions to longer maturity
term debt earlier in the year. Costs also declined with these borrowings as
short-term rates continued to fall during the quarter. The increase in long-
term borrowing costs was driven by volume as average funding costs declined from
the prior year period.
The provision for loan losses was $400,000 for the quarter ended September 30,
2001 as compared to $90,000 for the same period in 2000. Net charge offs for the
quarter ended September 30, 2001 were $382,000 compared to $51,000 for the same
period in 2000. Higher net charge offs and loan growth in commercial and
installment lending areas resulted in a larger loan loss provision. The Company
is also affected by the manufacturing economic slowdown, which has had a
negative impact upon the local economies in markets served by the Company. It
is management's opinion that this amount represents an adequate provision.
Total non-interest income increased to $738,000, from $655,000 for the three
months ended September 30, 2001 and 2000, respectively. The primary reason for
the increase was the $105,000 increase in the gain on the sale of mortgage loans
during the third quarter of 2001 as compared to the 2000 quarter. Lower overall
interest rates in the mortgage market contributed to a shift towards fixed rate
loans in the purchase money mortgage market and a significant increase in
refinancing activity. With the Company's policy of marketing most fixed rate
mortgages to the secondary market, gains on mortgage loans intended for the
secondary market increased as sales volumes increased to $7.8 million for the
quarter ended September 30, 2001 from $2.5 million for the same period in 2000.
The Company recognized gains on the sales of investments of $38,000 for the
three months ended September 30, 2001. No gains were recognized in the similar
period in the prior fiscal year. An additional increase in deposit service
charges was substantially offset by a decline in Brokerage and Annuity
Commissions of $47,000 or 78.3% and a decline in mortgage servicing revenues
which resulted from the sale of the majority of the Company's mortgage servicing
portfolio in the second half of 2000.
For the three months ended September 30, 2001, total non-interest expense
increased to $2,695,000 from $2,504,000 for the same period in 2000. Exclusive
of personnel costs, other non-interest expenses increased $128,000, or 10.1%.
Salaries and employee benefits increased $63,000, or 5.1%, during the 2001
quarter as variable compensation for mortgage production increased and as the
Company added staff in the loan operations area. Increases in other non-
interest expense reflected higher costs to collect delinquent loans and service
foreclosed assets and higher legal and professional fees as the Company
continued to pursue its claim against a former data processing service provider.
Income taxes decreased to $98,000, from $164,000, for the three-month period
ending September 30, 2001. The effective tax rates were 27.5% versus 34.9% for
the 2001 and 2000 second quarters, respectively. The decreased total income tax
expense resulted primarily from more tax advantaged municipal investments in the
third quarter of 2001 compared to 2000 and the lower level of pre-tax profit
reported in the three months ended September 30, 2001 compared to the same
period in 2000.
NINE MONTHS ENDED SEPTEMBER 30
For the nine months ended September 30, 2001, interest income was $17.2 million
compared to $16.2 million for the same period in 2000. This increase of $1.0
million was the result of increased interest and fees on loans of $1.4 million.
Partially offsetting the loan income was a slight net decrease in interest on
securities, short-term investments and interest on deposits with banks.
Interest and fees on loans increased 10.6% to $14.2 million for the nine months
ended September 30, 2001, compared to $12.8 million in the same period of 2000.
Similar to the three-month period ended September 30, 2001, increased volume was
the most significant factor for the increase. Offsetting the increase in
volume, yields were lower than 2000 levels for the nine months ended September
30, 2001. Investment income on taxable securities for the nine months ended
September 30, 2001 decreased $0.4 million to $2.4 million, compared to $2.8
million for the same period in 2000. The decrease was primarily the result of
lower balances of investment securities held during the nine months ended
September 30, 2001. Income from tax-exempt securities increased to $561,000 for
the nine months ended September 30, 2001, from $415,000 for the prior year
period. This increase was due primarily to increased volumes.
Interest paid on deposits increased $0.2 million to $7.0 million, or 2.3%, for
the nine months ended September 30, 2001, from $6.8 million for the nine months
ended September 30, 2000. The increase was the result of higher average
interest-bearing deposit balances in the 2001 period. Average interest-bearing
deposit balances increased from $202.1 million for the nine months ended
September 30, 2000 to $209.0 for the nine months ended September 30, 2001, an
increase of 3.4%.
Interest on short-term borrowings decreased to $0.4 million for the nine months
September 30, 2001, from $1.4 million in 2000. Interest on long-term borrowings
increased to $2.1 million for the nine months ended September 30, 2001, from
$0.9 million for the nine months ended September 30, 2000. Early in 2001, the
Company restructured a substantial portion of its short-term borrowings into
termed borrowings. As a result, volumes have increased in the long-term
borrowings, while they have decreased in the short-term borrowings.
The provision for loan losses was $675,000 for the nine months ended September
30, 2001, as compared to $270,000 for the same period in 2000. Net charge offs
for the nine months ended September 30, 2001 were $2,494,000 compared to
$158,000 for the same period in 2000. Higher net charge offs and loan growth in
commercial and installment lending areas resulted in a larger loan loss
provision. Also influencing the level of loan loss provision is the
manufacturing sector slowdown, which has had a negative impact upon the local
economies in markets served by the Company. It is management's opinion that this
amount represents an adequate provision.
Total non-interest income increased 16.5% to $2.2 million, from $1.9 million for
the nine months ended September 30, 2001 and 2000, respectively. The primary
reason for the increase was the $282,000 increase in the gain on the sale of
mortgage loans during the nine months ended September 30, 2001, as compared to
the same period in 2000. The increase was driven by lower mortgage rates as
discussed previously. Increases in service charges on deposit accounts and the
gain on sale of securities were nearly offset by a decline of $105,000 in
brokerage and annuity commissions and other income. Deposit service charges
have benefited from pricing structure changes while brokerage fees have been
negatively impacted by uncertainties that have developed in the financial
markets. Other income decreased primarily as a result of the sale of the
majority of the bank's serviced loan portfolio in the second half of 2000.
Total non-interest expense increased to $8.0 million for the nine months ended
September 30, 2001, from $7.5 million for the comparable period in 2000. The
$478,000, or 6.4%, increase was predominantly the result of a $251,000 increase
in personnel costs for the same reasons as the quarter-to-date increase noted
previously. Additional significant increases occurred in legal and professional
fees due to the Company's lawsuit against a former data processing provider and
in loan expenses as the Company collects on problem credits and maintains
foreclosed assets.
Income taxes decreased to $376,000, from $413,000, for the nine-month period
ending September 30, 2001. The effective tax rates were 30.0% versus 33.5% for
the nine months ended September 30, 2001 and 2000, respectively. The decreased
total income tax expense resulted primarily from more tax advantaged municipal
investments in the nine months ended September 30, 2001 compared to the similar
period in 2000.
ANALYSIS OF FINANCIAL CONDITION
This analysis of the Company's financial condition compares September 30, 2001
to the Company's prior fiscal year end, December 31, 2000. Total assets were
$316.2 million, as compared to $327.2 million as of December 31, 2000. This
represents a decrease of 3.3%.
Total investments, including securities held-to-maturity, securities available-
for-sale, Federal Home Loan Bank Stock, fed funds sold and other short-term
investments, were $70.6 million as of September 30, 2001, as compared to $77.3
million as of December 31, 2000.
Net portfolio loans totaled $216.4 million on September 30, 2001, as compared to
$216.9 million on December 31, 2000, a decrease of $0.5 million. The Company saw
increases in the average balances of Rental and Commercial Real Estate Loans to
$56.6 million for the nine months ended September 30, 2001 compared to $29.6
million for the same period in 2000 and Construction and Land Development Loans
which increased 311.2 % to $7.5 million for the nine months ended September 30,
2001. The average balance of Commercial loans decreased 18.7% to $37.5 million
for the nine months ended September 30, 2001 from $46.1 million for the same
period in 2000.
The allowance for loan losses decreased to $2.1 million as of September 30,
2001, as compared to $3.9 million as of December 31, 2000. As of September 30,
2001, non-performing loans were $2.5 million compared to $4.2 million at
December 31, 2000. During the second quarter, the Company charged off a
commercial real estate loan with a balance of $1.95 million due to the continued
deterioration of the borrowers financial condition and the resulting decline in
the realizable value of the collateral. Management believes that the allowance
is adequate at this time.
Net bank premises and equipment totaled $6.8 million at September 30, 2001,
compared to $6.7 million at December 31, 2000. The increase occurred as capital
expenditures of $0.8 million, primarily related to the recent system conversion,
exceeded the period's depreciation provision of $0.6 million.
Total deposits as of September 30, 2001 were $234.0 million, a decline of 10.3%,
compared to $260.9 million as of December 31, 2000. Several commercial customers
have historically increased their deposit balances at year-end, which accounted
for the majority of the total decline in deposits from December 31, 2000 levels.
Excluding short-term deposits held at December 31, 2000 of $25.3 million,
interest-bearing deposits decreased $0.9 million to $205.9 million. Non-interest
bearing deposits also decreased to $28.1 million, from $28.9 million as of
December 31, 2000.
Short-term borrowings, fed funds purchased and repurchase agreements decreased
to $6.6 million at September 30, 2001, from $9.9 million as of year-end. Other
borrowings, consisting of debt incurred, in part, to complete the First
Financial acquisition in 1998 and term advances from the FHLB were $48.6 million
at September 30, 2001, up from $30.0 million at year end. These sources of non-
deposit funding were utilized to replace the large year-end short-term
commercial deposits. The use of FHLB advances in the future will depend on the
Company's need for funds and the rates at which they may be obtained.
The company continues to maintain a well-capitalized position. The following
table shows three different measurements as of September 30, 2001 and December
31, 2000, and the regulatory requirement, if any. The increases in the Leverage
Capital Ratio and Tier I Capital to Risk-Based Assets Ratio are generally
attributable to the appreciation of $937,000 on Securities available-for-sale.
The decline in the Total Capital to Risk-Weighted Assets Ratio was predominantly
due to the decline in Tier 2 capital resulting from the $1.95 million dollar
charge-off, which reduced the allowance for loan loss includable in Tier 2
capital
SEPT. 30, DECEMBER 31, REGULATORY
2001 2000 REQUIREMENTS
-----------------------------------------
Leverage capital ratio 5.83% 5.60% 4.00%
Tier I capital as a percent
of risk-based assets 8.38% 8.30% 4.00%
Total capital as a percent
of risk-based assets 9.33% 9.60% 8.00%
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, maturities of investment securities, income from operations,
and short-term borrowings. 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 to the Bank. Under
present law, accumulated earnings could be paid as dividends without incurring a
tax liability.
The liquidity needs of the Company generally consists of payment of dividends to
its shareholders, payments of principal and interest on borrowed funds, and a
limited amount of expenses. The sources of funds to provide this liquidity are
income from investments, maturities of investments, cash balances, issuance of
capital and dividends from its subsidiary 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.
Off-balance sheet items consist of credit card lines of credit, mortgage
commitments, letters of credit and other commitments totaling approximately
$27.9 million as of September 30, 2001. This compares to $34.0 million at
December 31, 2000. The Bank has historically funded off-balance sheet
commitments with its primary sources of funds, and management anticipates that
this will continue.
The Company's consolidated assets include a $271,000 receivable that relates to
an improper charge made by the Company's former data processing service provider
("Provider") to the Company's check clearing account maintained with the Federal
Home Loan Bank of Chicago. Upon discovery of the Provider's error and following
the Provider's initial acknowledgement of that error, the Company worked closely
with the Provider to attempt to recover the amount improperly charged. During
the third quarter of 2000, the Provider notified the Company that it was unable
to pursue the matter further and that the Provider did not intend to indemnify
the Company on account of this error.
In response, the Company filed a complaint in the Circuit Court of Waukesha
County, Wisconsin on August 18, 2000, seeking to recover the amount of the
improper charge from the Provider. While the Company believes it is entitled to
recovery, it can provide no assurance that it will ultimately prevail in the
litigation. Moreover, the Company will incur costs and legal fees in connection
with its pursuit of this matter, and it may be unable to recover those costs and
fees. The potential amount of those costs and fees depends on how this
litigation develops and ultimately is resolved, and the Company cannot predict
that amount with certainty at this time.
Given the lack of significant movement toward a resolution of this matter in the
final quarter of 2000, and pursuant to the application of regulatory guidelines
and principles under these circumstances, the Company wrote this contingent
asset down approximately 50% to the current level of $271,000. In the unlikely
event that the Company is unsuccessful in recovering any portion of this
improper charge, the Company would be required to write off the remaining
$271,000 balance of this contingent asset through a further charge against
earnings in the period in which the receivable is deemed uncollectable. Legal
costs and fees incurred in connection with these proceedings are being charged
against earnings as incurred.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report, including expectations regarding interest
income, interest expense, and net interest margin, operating results and net
income are forward-looking statements that involve risks and uncertainties. The
assumptions and risk factors that may cause actual results to differ materially
include but are not limited to, changes in interest rates or in the volume of
earning assets and liabilities, increases in non-performing or delinquent loans,
increased competition, changes in the volume of loans originated for the
secondary market and changes in the volume sales of non-deposit investment
products by the Company's brokerage operation, as well as those described from
time to time in the Company's SEC filings.
PART II
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OTHER INFORMATION
ITEM 6. A) EXHIBITS
See Exhibit Index following the signature page in this report, which
is incorporated herein by this reference.
B) REPORT ON FORM 8-K
There was one report on Form 8-K filed during the three months ended
September 30, 2001.
The report dated September 27, 2001 detailed the resignation of the
Company's Chief Financial Officer, Keith D. Hill. effective October 5,
2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
--------------------------------------
(Registrant)
Date: November 9, 2001 /s/ Dennis M. Conerton
--------------------------------------
Dennis M. Conerton
Chairman and Chief Executive Officer
Interim Chief Financial and Accounting Officer
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
Incorporated Filed
Exhibit Herein By Here- Page
Number Description Reference To: with No.
- ------ ----------- ------------- ---- ---
4.1 Amended and Exhibit 3.1 to
restated Articles Amendment No. 1 to
of Incorporation Registrant's
of the Registrant Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.2 By-laws of Regis- Exhibit 3.2 to
trant as amended Amendment No. 1 to
Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)
4.3 Plan of Conversion Exhibit 1.2 to
Beloit Savings Amendment No. 1 to
Bank as amended Registrant's
Registration
Statement on Form
S-1 (Reg. No.
33-32351)