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, 2002
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 PRINCIPAL 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 NOVEMBER 12, 2002
--------------------- -----------------
$.01 PAR VALUE 2,507,065 SHARES
INDEX
PART I - FINANCIAL INFORMATION
Page
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ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001 3
Unaudited Consolidated Statements of Income for the
Three Months Ended September 30, 2002 and 2001 4
Unaudited Consolidated Statements of Income for the
Nine Months Ended September 30, 2002 and 2001 5
Unaudited Consolidated Statements of Shareholders'
Equity for the Nine Months Ended September 30, 2002 and 2001 6
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 7-8
Notes to Unaudited Consolidated Financial Statements 9-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 13-23
ITEM 3. CONTROLS AND PROCEDURES 24
PART II - OTHER INFORMATION
ITEM 6. A) EXHIBITS 25
B) REPORTS ON FORM 8-K 25
SIGNATURES 26
CERTIFICATIONS 27-28
INDEX TO EXHIBITS 29
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS (Dollars in thousands)
------
Cash and cash equivalents $ 11,475 $ 11,746
Interest-bearing deposit accounts 336 7,857
Federal funds sold and other short-term investments 4,009 16,417
Securities available for sale 74,001 42,623
Securities held to maturity, fair value of $25,406 and $24,172 24,287 23,735
Federal Home Loan Bank of Chicago stock, at cost 2,480 2,385
Loans held for sale 2,599 2,752
Loans, net of allowance for loan losses of $2,706 and $2,404 188,818 206,383
Bank premises and equipment, net 6,674 6,716
Accrued interest receivable 2,085 2,067
Cash value of bank owned life insurance 5,677 654
Intangible assets 4,736 5,040
Other assets 1,178 1,900
-------- --------
Total Assets $328,355 $330,275
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
Non-interest bearing $ 30,841 $ 36,618
Interest bearing 209,109 212,987
-------- --------
Total deposits 239,950 249,605
-------- --------
Borrowed Funds:
Short-term borrowings 24,368 6,087
Other borrowings 35,900 48,388
-------- --------
Total borrowed funds 60,268 54,475
-------- --------
Accrued interest payable 862 1,044
Other liabilities 1,431 1,410
-------- --------
Total Liabilities 302,511 306,534
-------- --------
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,
shares issued: 2,507,065 at September 30, 2002, 2,371,398
at December 31, 2001; shares outstanding: 2,506,188 at
September 30, 2002, 2,366,418 at December 31, 2001 25 24
Additional paid-in capital 8,700 7,555
Retained earnings 15,827 15,447
Treasury stock, 877 at September 30, 2002 and 4,980 at
December 31, 2001 shares, at cost (10) (58)
Accumulated other comprehensive income 1,302 773
-------- --------
Total Shareholders' Equity 25,844 23,741
-------- --------
Total Liabilities and Shareholders' Equity $328,355 $330,275
-------- --------
-------- --------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
INTEREST INCOME: (Dollars in thousands)
Interest and fees on loans $3,608 $4,661
Interest on securities:
Taxable 946 731
Exempt from federal income taxes 210 198
Interest on fed funds sold and other short-term investments 62 12
Interest on interest-bearing deposits 3 5
------ ------
Total Interest Income 4,829 5,607
------ ------
INTEREST EXPENSE:
Interest on deposits 1,459 2,101
Interest on short-term borrowings 89 82
Interest on other borrowings 533 711
------ ------
Total Interest Expense 2,081 2,894
------ ------
Net Interest Income 2,748 2,713
Provision for loan losses (Note 2) 422 400
------ ------
Net Interest Income After Provision For Loan Losses 2,326 2,313
------ ------
OTHER OPERATING INCOME:
Service charges on deposit accounts 396 396
Gain on sale of mortgage loans 95 151
Gain on sale of securities -- 38
Brokerage and annuity commissions 48 13
Net loss on sale of other assets (17) (22)
Other income 179 162
------ ------
Total Other Operating Income 701 738
------ ------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,233 1,300
Occupancy expense, net 193 184
Furniture and equipment 225 189
Data processing 184 176
Amortization of intangible assets 78 124
Legal and professional fees 116 158
Office supplies 63 65
Telephone and telecommunications 77 69
Other operating expenses 471 430
------ ------
Total Other Operating Expenses 2,640 2,695
------ ------
Income Before Income Taxes 387 356
Provision for Income Taxes 85 98
------ ------
Net Income $302 $258
------ ------
------ ------
Basic Earnings Per Share $ 0.12 $ 0.11
------ ------
------ ------
Diluted Earnings Per Share $ 0.12 $ 0.11
------ ------
------ ------
Dividends Per Share $ 0.09 $ 0.09
------ ------
------ ------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
INTEREST INCOME: (Dollars in thousands)
Interest and fees on loans $11,188 $14,195
Interest on securities:
Taxable 2,560 2,360
Exempt from federal income taxes 627 561
Interest on fed funds sold and other short-term investments 116 50
Interest on interest-bearing deposits 32 31
------- -------
Total Interest Income 14,523 17,197
------- -------
INTEREST EXPENSE:
Interest on deposits 4,567 6,987
Interest on short-term borrowings 184 417
Interest on other borrowings 1,652 2,081
------- -------
Total Interest Expense 6,403 9,485
------- -------
Net Interest Income 8,120 7,712
Provision for loan losses (Note 2) 683 675
------- -------
Net Interest Income After Provision For Loan Losses 7,437 7,037
------- -------
OTHER OPERATING INCOME:
Service charges on deposit accounts 1,142 1,113
Gain on sale of mortgage loans 221 381
Gain on sale of securities 229 132
Brokerage and annuity commissions 130 96
Net loss on sale of other assets (19) (17)
Other income 510 460
------- -------
Total Other Operating Income 2,213 2,165
------- -------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,964 3,897
Occupancy expense, net 641 571
Furniture and equipment 654 588
Data processing 570 498
Amortization of intangible assets 232 372
Legal and professional fees 412 369
Office supplies 188 214
Telephone and telecommunications 227 216
Other operating expenses 1,372 1,225
------- -------
Total Other Operating Expenses 8,260 7,950
------- -------
Income Before Income Taxes 1,390 1,252
Provision for Income Taxes 341 376
------- -------
Net Income $1,049 $876
------- -------
------- -------
Basic Earnings Per Share $ 0.43 $ 0.37
------- -------
------- -------
Diluted Earnings Per Share $ 0.43 $ 0.37
------- -------
------- -------
Dividends Per Share $ 0.27 $ 0.33
------- -------
------- -------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---- ----
(Dollars in thousands)
Common Stock:
Balance at beginning of period $ 24 $ 23
Stock options exercised 1 1
------- -------
Balance at end of period 25 24
------- -------
Additional Paid-in Capital:
Balance at beginning of period 7,555 7,417
Stock options exercised 1,152 150
Sale of treasury stock (7) (3)
------- -------
Balance at end of period 8,700 7,564
------- -------
Retained Earnings:
Balance at beginning of period 15,447 15,573
Net income 1,049 876
Dividends declared on common stock (669) (777)
------- -------
Balance at end of period 15,827 15,672
------- -------
Treasury Stock, at cost:
Balance at beginning of period (58) (120)
Sale of treasury stock 48 39
------- -------
Balance at end of period (10) (81)
------- -------
Accumulated other comprehensive income:
Balance at beginning of period 773 102
Other comprehensive income, net of taxes 529 937
------- -------
Balance at end of period 1,302 1,039
------- -------
Total Shareholders' Equity $25,844 $24,218
------- -------
------- -------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,049 $ 876
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 683 675
Provision for depreciation and amortization 939 1,033
Amortization of premiums and (accretion of
discounts) on Investment securities, net 105 47
Gain on sale of loans held for sale (221) (381)
FHLB stock dividends (92) (111)
(Gain) loss on sale of property, equipment and OREO 94 17
Gain on sale of securities (229) (132)
Tax benefit of non-qualified stock options exercised (72) (39)
Change in assets and liabilities:
Decrease in other assets 455 412
(Increase) decrease in accrued interest receivable (22) 239
Decrease in accrued interest payable (182) (534)
Increase (decrease) in other liabilities (110) 115
------- -------
Net cash provided by operations
before loan originations and sales 2,397 2,217
Loans originated for sale (18,094) (22,325)
Proceeds from sale of loans held for sale 18,468 21,460
------- -------
Net cash provided by operating activities 2,771 1,352
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest-bearing deposit accounts 7,521 255
Decrease in federal funds sold and other short-term investments 12,409 1,433
Proceeds from maturities and calls of securities available-for-sale 7,886 26,093
Purchase of securities available-for-sale (46,757) (18,110)
Proceeds from maturities and calls of securities held-to-maturity 2,914 1,972
Purchase of securities held-to-maturity (3,522) (7,234)
Proceeds from sale of securities available-for-sale 8,523 4,297
(Loans originated), net of principal collected 16,547 (1,046)
Purchase of bank owned life insurance (5,000) --
Proceeds from the sale of property, equipment and OREO 430 730
Purchase of bank premises and equipment (669) (756)
------- -------
Net cash provided by investing activities 282 7,634
------- -------
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---- ----
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised $ 1,153 $ 190
Sale of treasury stock 41 36
Net decrease in deposits (9,654) (26,912)
Net increase (decrease) in short-term borrowings 18,281 (3,270)
Proceeds from other borrowings -- 19,200
Payments on other borrowings (12,488) (632)
Dividends paid (657) (845)
------- -------
Net cash used in financing activities (3,324) (12,233)
------- -------
Increase in cash and cash equivalents (271) (3,247)
CASH AND CASH EQUIVALENTS:
Beginning 11,746 13,336
------- -------
Ending $11,475 $10,089
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------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 6,586 $10,019
Income taxes $ (50) $ 108
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Other assets acquired in settlement of loans $ 335 $ 741
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Note 1. General:
The unaudited consolidated financial statements include the accounts
of Blackhawk Bancorp, Inc. and its subsidiaries. In the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial
position, results of operation and cash flows for the interim periods
have been made. The results of operations for the three and nine
months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America and industry practice. Certain information in
footnote disclosure normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States of America and industry practice has been condensed or
omitted pursuant to rules and regulations of the Securities and
Exchange Commission. The more significant policies used by the Company
in preparing and presenting its financial statements are stated in the
Corporation's Form 10-KSB. These financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2001 audited financial
statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions which affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements, as well as
the reported amounts of income and expenses during the reported
periods. Actual results could differ from those estimates.
Certain reclassifications have been made to the 2001 historical
financial statements to conform to the 2002 presentation.
Note 2. 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)
2002 2001
---- ----
Balance at beginning of period $2,519 $2,057
Provision charged to expense 422 400
Loans charged off 237 394
Recoveries 2 12
------ ------
Balance at end of period $2,706 $2,075
------ ------
------ ------
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands)
2002 2001
---- ----
Balance at beginning of period $2,404 $3,894
Provision charged to expense 683 675
Loans charged off 419 2,562
Recoveries 38 68
------ ------
Balance at end of period $2,706 $2,075
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Note 3. 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,
2002 2001 2002 2001
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 302,000 $ 258,000 $1,049,000 $ 876,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,503,832 2,363,312 2,455,923 2,350,300
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $0.12 $0.11 $0.43 $0.37
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Net income available to common stockholders $ 302,000 $258,000 $1,049,000 $876,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,503,832 2,363,312 2,455,923 2,350,300
Effect of dilutive stock options outstanding 6,176 23,053 6,176 23,053
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,510,008 2,386,365 2,462,099 2,373,353
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $0.12 $0.11 $0.43 $0.37
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Note 4. 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 $3.1 million on its balance sheet as of
September 30, 2002. It was previously being amortized over 20 years.
The pronouncement eliminates amortization of this asset and subjects
it to periodic impairment analysis.
The Company's balance sheet also includes $1,420,000 and $1,652,000
of other intangible assets, primarily deposit intangibles, related to
business combinations, as of September 30, 2002 and December 31, 2001.
Amortization expense related to these other intangible assets totaled
$232,000 for the nine months ended September 30, 2002 and 2001.
The Company adopted SFAS No. 142 on January 1, 2002. The Company has
completed the first step of its impairment testing of goodwill and has
concluded that there is no impairment. The impact of this standard on
the three and nine month periods ended September 30, 2002 and 2001 is
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $ 302,000 $ 258,000 $1,049,000 $ 876,000
Add back: goodwill amortization -- 46,000 -- 140,000
---------- ---------- ---------- ----------
Adjusted net income $ 302,000 $ 304,000 $1,049,000 $1,016,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
BASIC EARNINGS PER SHARE:
Reported net income $0.12 $0.11 $0.43 $0.37
Add back: goodwill amortization -- 0.02 -- 0.06
----- ----- ----- -----
Adjusted net income $0.12 $0.13 $0.43 $0.43
----- ----- ----- -----
----- ----- ----- -----
DILUTED EARNINGS PER SHARE:
Reported net income $0.12 $0.11 $0.43 $0.37
Add back: goodwill amortization -- 0.02 -- 0.06
----- ----- ----- -----
Adjusted net income $0.12 $0.13 $0.43 $0.43
----- ----- ----- -----
----- ----- ----- -----
Note 5. Recent Regulatory Developments
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The purpose of Management's discussion and analysis is to provide relevant
information regarding the Registrant's financial condition and its results of
operations. The information included herein should be read in conjunction
with the company's consolidated financial statements and footnotes thereto
for the year ended December 31, 2001.
This quarterly Report contains certain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak
only as of the date made. The company wishes to advise readers that the
factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RESULTS OF OPERATIONS
The company reported net income of $302,000 for the three months ended September
30, 2002, an increase of $44,000 or 17.1% from the $258,000 reported for the
same three month period in 2001. Net income for the nine month period ended
September 30, 2002 was $1,049,000, an increase of $173,000, or 19.7% from the
$876,000 reported for the same period in 2001.
Diluted earnings per share were $0.12 and $0.43 for the three and nine months
ended September 30, 2002, respectively, compared to $0.11 and $0.37 for the same
periods in 2001. This represents an increase of 9.1% and 16.2% for the three
month and nine month periods, respectively.
Net income for the three and nine months periods ended September 30, 2002
includes the effect of adopting Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." Accordingly,
amortization of intangible assets with indeterminable useful lives resulting
from prior acquisitions accounted for under the purchase method of accounting
was discontinued. The adoption of SFAS No. 142 had the impact of increasing
net income by $46,000 and $140,000 for the three and nine months ended
September 30, 2002, respectively, compared to the same periods in 2001.
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. Net interest income increased by
$35,000, or 1.3%, to $2,748,000 for the quarter ended September 30, 2002,
compared to $2,713,000 for the comparable period in 2001. On a year to date
basis net interest income increased by $408,000, or 5.3%, to $8,120,000 compared
to $7,712,000 for the first nine months of 2001. The net interest margin,
which is the tax equivalent net interest income divided by average interest
earning assets was 3.76% and 3.83% for the three and nine month periods ended
September 30, 2002. The third quarter net interest margin represents a 5 basis
point decrease compared to the 2001 third quarter net interest margin of 3.81%.
The year to date net interest margin of 3.83% represents a 21 basis point
increase compared to the 3.62% net interest margin realized for the same period
in 2001.
The following tables set forth the company's consolidated average balances of
assets, liabilities and shareholders' equity, interest income and expense on
related items, and the company's average rate for the three and nine month
periods ended September 30, 2002 and 2001. The tax-equivalent yield calculations
assume a Federal Tax Rate of 34%:
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES
-------------------------------------------------------
(yields on a tax-equivalent basis)
Three Months ended September 30, 2002 Three Months ended September 30, 2001
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS:
Interest-bearing deposit
accounts $ 477 $ 3 2.50% $ 535 $ 5 3.71%
Federal funds sold &
short-term investments 10,197 62 2.41% 1,366 12 3.49%
Investment securities:
Taxable investment securities 77,182 946 4.86% 48,697 731 5.96%
Tax-exempt investment
securities 19,784 210 6.38% 18,623 198 6.39%
-------- ------ ----- -------- ------ -----
Total investment
securities 96,966 1,156 5.17% 67,320 929 6.08%
Loans 193,773 3,608 7.39% 223,776 4,661 8.26%
TOTAL EARNING ASSETS $301,413 $4,829 6.50% $292,997 $5,607 7.73%
------ ----- ------ -----
Allowance for loan losses (2,491) (2,193)
Cash and cash equivalents 10,569 10,068
Other assets 17,013 17,963
-------- --------
TOTAL ASSETS $326,504 $318,835
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking
accounts $ 32,461 $ 86 1.05% $ 29,439 $ 146 1.97%
Savings deposits 53,901 153 1.13% 51,861 266 2.03%
Time deposits 123,716 1,220 3.91% 125,906 1,689 5.32%
-------- ------ ----- -------- ------ -----
Total interest bearing
deposits 210,078 1,459 2.76% 207,206 2,101 4.02%
Short-term borrowings 18,405 89 1.92% 8,984 82 3.62%
Other borrowings 39,442 533 5.36% 48,763 711 5.78%
TOTAL INTEREST-BEARING
LIABILITIES $267,925 $2,081 3.08% $264,953 $2,894 4.33%
------ ----- ------ -----
NET INTEREST SPREAD 3.42% 3.40%
----- -----
----- -----
Checking accounts 30,641 27,548
Other liabilities 2,217 2,550
-------- --------
Total liabilities 300,783 295,051
Shareholders' equity 25,721 23,784
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $326,504 $318,835
-------- --------
-------- --------
NET INTEREST MARGIN $2,748 3.76% $2,713 3.81%
------ ----- ------ -----
------ ----- ------ -----
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES
(yields on a tax-equivalent basis)
Nine Months ended September 30, 2002 Nine Months ended September 30, 2001
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS:
Interest-bearing deposit
accounts $ 2,327 $ 32 1.84% $ 846 $ 31 4.90%
Federal funds sold &
short-term investments 7,901 116 1.96% 1,504 50 4.44%
Investment securities:
Taxable investment securities 66,732 2,560 5.13% 51,324 2,360 6.15%
Tax-exempt investment
securities 19,565 627 6.49% 17,529 561 6.48%
-------- ------- ----- -------- ------- -----
Total investment securities 86,297 3,187 5.44% 68,853 2,921 6.23%
Loans 197,854 11,188 7.56% 224,351 14,195 8.46%
TOTAL EARNING ASSETS $294,379 $14,523 6.74% $295,553 $17,197 7.91%
------- ----- ------- -----
Allowance for loan losses (2,509) (3,307)
Cash and cash equivalents 10,073 10,048
Other assets 17,104 18,007
-------- --------
TOTAL ASSETS $319,047 $320,302
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 32,253 $ 259 1.07% $ 27,659 $ 486 2.35%
Savings deposits 53,819 474 1.18% 50,532 913 2.42%
Time deposits 122,204 3,834 4.19% 130,825 5,589 5.71%
-------- ------- ----- -------- ------- -----
Total interest bearing deposits 208,276 4,567 2.93% 209,016 6,987 4.47%
Short-term borrowings 13,058 184 1.88% 11,680 417 4.77%
Other borrowings 41,027 1,652 5.38% 47,615 2,081 5.84%
TOTAL INTEREST-BEARING
LIABILITIES $262,361 $ 6,403 3.26% $268,311 $ 9,485 4.73%
------- ----- ------- -----
NET INTEREST SPREAD 3.48% 3.18%
----- -----
----- -----
Checking accounts 29,723 25,918
Other liabilities 2,115 2,566
-------- --------
Total liabilities 294,199 296,795
Shareholders' equity 24,848 23,507
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $319,047 $320,302
-------- --------
-------- --------
NET INTEREST MARGIN $8,120 3.83% $7,712 3.62%
------- ----- ------- -----
------- ----- ------- -----
For the three months ended September 30, 2002, total interest income decreased
by $778,000, or 13.9%, to $4,829,000 compared to $5,607,000 for the same period
in 2001. The decrease in interest income is due to a 123 basis point decrease
in the yield on average earning assets to 6.50% for the third quarter of 2002,
compared to 7.73% for the same period in 2001. The decrease in the yield on
average earning assets for the third quarter of 2002 compared to the third
quarter of 2001 is offset by an $8.4 million increase in average earning assets.
For the nine months ended September 30, 2002, total interest income decreased by
$2,674,000, or 15.5%, to $14,523,000 compared to $17,197,000 for the same period
in 2001. The decrease in interest income is due to a 117 basis point decrease
in the yield on average earning assets to 6.74% compared to 7.91% for the same
period in 2001 and a .4% decrease in average earning assets.
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
three and nine month periods ended September 30, 2002 compared to the same
periods in 2001. The decrease in the yield on average earning assets also
reflects the lower interest rate environment during the third quarter and first
nine months of 2002 compared to the same periods in 2001, which resulted from
the Federal Reserve Bank's lowering of managed rates by 375 basis points during
2001. 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 reprice.
Interest and fees on loans decreased 22.6% to $3,608,000 for the three months
ended September 30, 2002 compared to $4,661,000 for the same period of 2001.
This decrease was the result of a $30.0 million or 13.4% decrease in average
loans outstanding and an 87 basis point decrease in yield on the portfolio.
Interest and fees on loans decreased 21.2% to $11,188,000 for the nine months
ended September 30, 2002 compared to $14,195,000 in same period of 2001. This
decrease was the result of a $26.5 million or 11.8% decrease in average loans
outstanding and a 90 basis point decrease in yield on the portfolio. The
decrease in average loans outstanding for the three and nine month periods ended
September 30, 2002 compared to the same periods in 2001 is largely attributable
to the refinancing activity in the residential real estate market. The decrease
in the bank's residential real estate portfolio accounted for $18.6 million of
the overall year to date decrease. The remaining decrease is the result of
economic conditions and lower loan demand in the company's primary markets. The
lower yield on average loans reflects the overall lower interest rate
environment and competitive pricing pressure for quality credit customers.
Interest income on taxable securities increased by $215,000 or 29.4% in the
third quarter of 2002 to $946,000 compared to $731,000 for the same period in
2001. Average balances of taxable investment securities increased 58.5% to $77.2
million for the quarter ended September 30, 2002 compared to $48.7 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 the third quarter
of 2002 compared to 5.96% for the third quarter of 2001. Tax exempt investment
securities increased $1.2 million, or 6.2% to an average balance of $19.8
million for the three months ended September 30, 2002 compared to $18.6 for the
same period in 2001. Interest income on taxable securities increased by
$200,000 or 8.5% in the first nine months of 2002 to $2,560,000 from $2,360,000
for the same period in 2001. Average balances of taxable investment securities
increased 30.0% to $66.7 million for the nine months ended September 30, 2002
compared to $51.3 million for the same period in the prior year. The increase
in average balances outstanding was offset by a decrease of 102 basis points in
average yield to 5.13% for the first nine months of 2002 compared to 6.15% for
the first nine months of 2001. Average tax exempt securities increased to $19.6
million for the nine months ended September 30, 2002 compared to $17.5 for the
same period in 2001, while their average tax equivalent yield increased from
6.48% for the nine months ended September 30, 2001 to 6.49% for the same period
in 2002.
Interest from fed funds sold and short-term investments increased to $62,000 and
$116,000 for the three and nine month periods ended September 30, 2002,
respectively, compared to $12,000 and $50,000 during the same periods in 2001.
The quarterly and year to date increases in interest on fed funds sold and
short-term investments 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 a short-term reverse repurchase agreement having an
average balance of $6.9 million for the third quarter of 2002 compared to a $0
balance for the same period in 2001. Funds were held in this temporary
investment in anticipation of the purchase of a bank-owned life insurance asset,
$5 million of which was funded on September 30, 2002.
Total interest expense decreased by $813,000, or 28.1%, to $2,081,000 for the
three months ended September 30, 2002 compared to $2,894,000 for the same
period in 2001. For the nine months ended September 30, 2002 total interest
expense decreased by $3,082,000, or 32.5%, to $6,403,000 compared to $9,485,000
for the same period in 2001. 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 $642,000, or 30.6% to $1,459,000
during the three months ended September 30, 2002 compared to $2,101,000 for the
same period in 2001, average total deposits increased $6.0 million quarter over
quarter. Year to date interest paid on deposits decreased $2,420,000, or 34.6%
to $4,567,000 compared to $6,987,000 for the same period in 2001 while average
total deposits decreased by $740,000. 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 the nine months ended September 30,
2002 the average balance of time deposits decreased $8.6 million, or 6.6%, to
$122.2 million compared to $130.8 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 $3.8 million, $4.6 million and $3.3 million,
respectively.
Interest on short-term borrowings increased $7,000 to $89,000 for the three
months ended September 30, 2002 compared to $82,000 for the same period in 2001.
This increase is the result of an increase of $7.2 million in average securities
repurchase agreements entered into with the company's commercial customers for
the three months ended September 30, 2002 compared to the same period in 2001.
The substantial increase in balances is offset by lower rates due to the
decrease in managed interest rates mentioned earlier. For the nine months ended
September 30, 2002 iInterest on short-term borrowings decreased $233,000 to
$184,000 compared to $417,000 for the same period in 2001. This decrease is the
net result of the decrease in managed interest rates as mentioned earlier and a
$1.4 million, or 11.8% increase in average short-term borrowings to $13.1
million for the nine months ended September 30, 2002 compared to $11.7 million
for the same period in 2001.
Interest expense on other borrowings decreased $178,000 and $429,000 to $533,000
and $1,652,000 for the three and nine month periods ended September 30, 2002
compared to $711,000 for the third quarter and $2,081,000 for the first nine
months of 2001. The decrease is primarily the result of the maturity of $6.8
million of Federal Home Loan Bank term advances in January 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses (provision) is an amount added to the allowance
for loan losses (allowance) to provide for the known and estimated amount of
loans that will not be collected. Actual loan losses are charged against
(reduce) the allowance when management believes that the collection of principal
will not occur. Subsequent recoveries of amounts previously charged to the
allowance, if any, are credited to (increase) the allowance. Management
determines the appropriate provision based upon a number of criteria, including
a detailed evaluation of certain credits, historical performance, economic
conditions and overall quality of the loan portfolio.
The provision was $422,000 in the third quarter of 2002, an increase of $22,000
or 5.5% from the $400,000 in the third quarter of 2001. For the first nine
months of 2002, the provision was $683,000 compared to $675,000 during the same
time period a year ago.
Activity in the allowance for loan losses is detailed in footnote 2 to
the unaudited consolidated financial statements. Charge-offs, net of recoveries
for the third quarter of 2002 decreased by $147,000 or 38.5% to $235,000
compared to $382,000 for the third quarter of 2001. Year to date net charge-offs
decreased $2,113,000 or 84.7% to $381,000 compared to $2,494,000 for the first
nine months of 2001. The 2001 year to date net charge-offs include $1.9 million
related to one large commercial real estate loan that was provided for in 2000.
Although net charge-offs, even after excluding the $1.9 million related to one
loan, have decreased, the provision for loan losses has remained slightly above
the prior year levels. The provision level has been maintained due to an
increase in non-performing loans to $3,206,000 at September 30, 2002 compared to
$3,164,000 at December 31, 2001.
The year to date increases in the provision combined with reduced net charge-
offs and a decrease in the loan portfolio have resulted in an increase in the
ratio of the allowance to total loans to 1.39% at September 30, 2002 compared to
1.14% at December 31, 2001.
OTHER OPERATING INCOME
Total other operating income decreased $37,000, or 5.0%, to $701,000 for the
three months ended September 30, 2002 compared to $738,000 for the same period
in 2001. Year to date total other operating income increased $48,000, or 2.2%,
to $2,213,000 compared to $2,165,000 for the same period in 2001.
Service charges on deposit accounts were $396,000 for the quarters ended
September 30, 2002 and 2001. Year to date service charges on deposits increased
$29,000, or 2.6%, to $1,142,000 compared to $1,113,000 in the prior year.
Gain on the sale of mortgage loans decreased $56,000 or 37.1% to $95,000 for the
third quarter of 2002 compared to the $151,000 of gains recognized during the
third quarter of 2001. In the third quarter of 2002, $6.2 million of loans were
sold to the secondary market compared to $7.8 million for the same period in
2001. Year to date gain on sale of mortgage loans decreased $160,000 or 42.0% to
$221,000 compared to $381,000 for the same period in 2001. The decrease is due
to lower volume and lower margins on the loans sold. The average gain in 2002
was 1.20% on $18.5 million in loans sold to the secondary market compared to an
average gain of 1.77% on the $21.5 million of loans sold in the same period in
2001. The lower volume in 2002 is the result of turn-over in the company's
mortgage banking management and origination staff. These changes in staff have
resulted in better quality control and risk management in the company's mortgage
banking activities.
The Company recognized no securities gains in the third quarter of 2002 compared
to $38,000 in the third quarter of 2001. Year to date the company has realized
$229,000 in securities gains, a $97,000 or 73.4% increase over the $132,000
realized for the nine months ended September 30, 2001.
Brokerage and annuity commissions increased $35,000 to $48,000 for the quarter
ended September 30, 2002 compared to $13,000 for the same period in 2001. Year
to date brokerage and annuity commissions increased $34,000, or 35.4%, to
$130,000 for the first nine months of 2002 compared to $96,000 for the same
period in 2001.
OPERATING EXPENSES
Total operating expenses decreased $55,000, or 2.0%, to $2,640,000 for the three
months ended September 30, 2002 compared to $2,695,000 for the same period in
2001. For the first nine months of 2002 total operating expenses increased
$310,000, or 3.9%, to $8,260,000 compared to $7,950,000 for the same period in
2001. The decrease in operating expenses for the third quarter compared to last
year is attributable to a change in the company's vacation policy that resulted
in the reversal of $157,000 of accrued vacation, and the discontinuance of
amortization of goodwill pursuant to SFAS No. 142. Operating expenses for the
first nine months of 2002 include increases due to the recruitment of several
key management personnel during 2001 and 2002 and severance payments to former
executives. These increases are partially off-set by $145,000 of benefit
realized for the nine months ended September 30, 2002 from the change in the
company's vacation policy.
Salaries and employee benefits decreased $67,000 or 5.2% to $1,233,000 for the
quarter ended September 30, 2002 compared to $1,300,000 for the third quarter of
2001. For the first nine months of 2002 total salaries and employee benefits
increased $67,000 or 1.7% to $3,964,000 compared to $3,897,000 for the same
period in 2001. Salaries and employee benefits were reduced by $157,000 and
$145,000 for the three and nine month periods ended September 30, 2002,
respectively, as a result of the company's change in its 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.
Occupancy expenses increased 12.3%, or $70,000, to $641,000 for the nine months
ended September 30, 2002 compared to $571,000 for the nine months ended
September 30, 2001. This increase includes a $75,000 charge related to the Wal-
Mart branch consolidation discussed in The Company's second quarter 2002 Form
10-QSB.
Furniture and equipment expenses increased $36,000 or 19.0% to $225,000 for the
quarter ended September 30, 2002 compared to $189,000 for the same quarter in
2001. For the first nine months of 2002 furniture and equipment expense
increased $66,000, or 11.2%, to $654,000 compared to $588,000 for the same
period in 2001, The increase relates primarily to increased depreciation and
maintenance on computer equipment.
Data processing costs increased $72,000, or 14.4%, to $570,000 for the nine
months ended September 30, 2002. This increase reflects the cost of the
company's internet banking and platform systems, which were implemented at the
end of 2001, and a conversion credit that was received in the first nine months
of 2001.
Amortization of intangible assets decreased $46,000 or 37.1% to $78,000 for the
three months ended September 30, 2002 compared to $124,000 for the third quarter
of 2001. For the first nine months of 2002 amortization of intangible assets
decreased $140,000 or 37.6% to $232,000 compared to $372,000 for the same period
in 2001, reflecting the discontinuance of amortization of goodwill pursuant to
SFAS No. 142, as discussed in Note 4 to the unaudited consolidated financial
statements.
Legal and professional fees decreased $42,000 or 26.6% to $116,000 for the third
quarter of 2002 compared to $158,000 for the third quarter of 2001. For the
first nine months of 2002 legal and professional fees increased $43,000 or 11.7%
to $412,000 compared to $369,000 for the same period in 2001. The increase in
the year to date legal fees compared to the first nine months of 2001 relate to
a legal claim against a former data processing service provider and charges in
the first quarter of 2002 for a bank regulatory exam. The suit against the
company's former data provider has not yet been settled, but is set to go to
trial in February, 2003. Management expects to incur additional legal expenses
as the trial date approaches.
Other operating expenses increased $41,000 or 9.5% to $471,000 for the three
months ended September 30, 2002 compared to $430,000 for the same period a year
ago. For the first nine months of 2002 other operating expenses increased
$147,000 or 12% to $1,372,000 compared to $1,225,000 for the same period in
2001. The increase in the third quarter of 2002 compared to the same period in
2001 reflects higher costs for marketing, postage and travel and entertainment.
The increase on a year to date basis also includes $117,000 of charges to accrue
severance payments for executive officers that left the company in 2002. These
charges were partially offset by an $87,000 credit against other operating
expenses due to an adjustment related to stale reconciling items.
Income taxes decreased $13,000, or 13.3%, to $85,000 for the three months ended
September 30, 2002 from $98,000 for the same period in 2001. For the nine months
ended September 30, 2002 income taxes decreased $35,000, or 9.3%, to $341,000
from $376,000 for the same period in 2001. The decline in effective tax rate to
24.5% for the nine month period ended September 30, 2002 from 30.0% for the same
period of 2001 is reflective of greater tax efficiency brought about by an
increase in non-taxable interest from the municipal bond portfolio and a
reduction in nondeductible purchase accounting amortization.
BALANCE SHEET ANALYSIS
OVERVIEW
Total assets decreased to $328.4 million at September 30, 2002 compared to
$330.3 million at December 31, 2001, a decrease of .6%. The December 31, 2001
balance sheet included short-term year-end deposits of $14.4 million, which were
invested in federal funds sold at December 31, 2001. Excluding these deposits,
total assets increased 4.0% from December 31, 2001 to September 30, 2002. While
total assets, excluding the short-term year-end deposits, increased by $12.5
million, there was a considerable shift in balances from loans and short-term
investments to investment securities. Securities available for sale increased by
$31.4 million, while loans, net of allowance for loan losses, decreased by $17.6
million Short-term investments, excluding the overnight investments related to
year-end deposits of $14.4 million, decreased by $5.5 million. In addition, 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 off-set the cost of increasing employee
benefits. The company's subsidiary bank is the owner and sole beneficiary of
all BOLI contracts.
LOANS
Net portfolio loans decreased $17.6 million, or 8.5%, to $188.8 million on
September 30, 2002 compared to $206.4 million on December 31, 2001. The
composition of loans is shown in the following table:
As a % of Total Loans
September 30, December 31, Change in September 30, December 31,
2002 2001 Balance 2002 2001
--------------------------------------------------------------------------
(Dollars in millions)
Residential Real Estate $76.0 $83.3 ($7.3) 39.1% 39.4%
Commercial Real Estate $32.4 $35.0 ($2.6) 16.7% 16.5%
Construction and Land
Development $7.6 $6.2 $1.3 3.9% 2.9%
Commercial $53.0 $56.5 ($3.6) 27.3% 26.7%
Consumer $24.5 $29.5 ($5.0) 12.6% 14.0%
Other $0.7 $1.0 ($0.3) 0.4% 0.5%
The historically low interest rate environment has led to substantial
prepayments on the company's 1-4 family residential real estate portfolio. Also,
the economic conditions in the company's primary markets have adversely effected
loan demand leading to decreases in all categories of loans outstanding, except
for construction and land development. In addition, 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.
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:
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 2002 2001
---- ----
Non-accruing loans $3,106 $2,808
Past due 90 days or more
and still accruing 100 356
------ ------
Total non-performing loans $3,206 $3,164
------ ------
------ ------
Performing loans classified as impaired $ 769 $1,147
ASSET QUALITY
The allowance for loan losses was $2.7 million or 1.39% of total loans at
September 30, 2002 compared to $2.4 million or 1.14% of total loans at December
31, 2001. As of September 30, 2002, non-performing loans and performing loans
classified as impaired totaled $3,975,000 compared to $4,311,000 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.
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 dept or in
its restoration to current status.
At September 30, 2002 the allowance for loan losses to total non-performing and
impaired loans equaled 68.1% compared to 55.7% at December 31, 2001. While the
total nonperforming and impaired loans decreased by $336,000 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 $1,132,000 to
$1,412,000 compared to $ $2,544,000 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 $1,171,000 to $1,392,000 at
September 30, 2002 compared to $221,000 at December 31, 2001. The majority of
this increase relates to one loan that was added to nonperforming during the
third quarter of 2002.
SHORT-TERM INVESTMENTS
Fed funds sold and other short-term investments decreased $12.4 million to $4.0
million at September 30, 2002 compared to $16.4 million at December 31, 2001.
The decrease primarily reflects the liquidation of short-term year-end
investments on January 2, 2002 associated with the December 31, 2001 year-end
deposits of $14.4 million.
INVESTMENT SECURITIES
Securities available for sale increased $31.4 million, or 73.6%, to $74.0
million at September 30, 2002 compared to $42.6 million at December 31, 2001.
The increase in investments in securities available for sale resulted from the
redeployment of cash flows from the decrease in loans. Securities held to
maturity increased $.6 million or 2.3% to $24.3 million at September 30, 2002
from $23.7 million at December 31, 2001.
DEPOSITS
Total deposits decreased $9.7 million to $239.9 million at September 30, 2002
compared to $249.6 million at December 31, 2001. As noted above, the Company's
December 31, 2001 financial statements reflect short-term year-end deposits of
$14.4 million. Excluding the short-term year-end deposits, total deposits
increased 2.0% from December 31, 2001. Excluding the short-term year-end
deposits of $5.9 million and $8.5 million included in non-interest bearing and
interest bearing deposits, respectively, non-interest bearing deposits increased
by $0.1 million and interest bearing deposits increased by $4.6 million at
September 30, 2002 compared to December 31, 2001.
BORROWINGS
Short-term borrowings increased $18.3 million to $24.4 million at September 30,
2002 from $6.1 million at year-end. The increase is due to higher outstanding
balances of repurchase agreements with commercial customers, $3.8 million in
Fed funds purchased at September 30, 2002 and the refinancing of $5.2 million
of term debt into a one year revolving note during August 2002. Other
borrowings, consisting of long-term borrowings incurred in part to complete the
First Financial acquisition and term advances from the Federal Home Loan Bank
("FHLB"), were $35.9 million at September 30, 2002 compared to $48.4 million at
December 31, 2001. The decrease primarily reflects the repayment of $6.8
million in FHLB advances during January 2002 and the August 2002 refinancing of
the term debt into a revolving note.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $2.1 million to $25.8 million at September
30, 2002 compared to $23.7 million at December 31, 2001. During the first nine
months of 2002 additional paid in capital increased by $1.1 million from stock
options exercised. Accumulated other comprehensive income, which is the
adjustment of securities available for sale to market value, net of tax,
increased $.5 million to $1.3 million at September 30, 2002 from $.8 million at
December 31, 2001. In addition the company declared three dividends of $0.09
per share on common stock, which totaled $669,000.
The Company is subject to certain regulatory capital requirements and continues
to remain in compliance with the requirements. The following table shows the
company's capital ratios and regulatory requirements.
SEPTEMBER 30, DECEMBER 31, REGULATORY
2002 2001 REQUIREMENTS
---- ---- ------------
Total Capital (To Risk-Weighted Assets) 10.9% 9.6% 8.0%
Tier I Capital (To Risk-Weighted Assets) 9.7% 8.5% 4.0%
Tier I Capital (To Average Assets) 6.2% 5.9% 4.0%
The Company's subsidiary bank meets regulatory capital requirements to be
considered well capitalized.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of identifying, measuring and managing
the risk to the Company's earnings and capital resulting from the movements in
interest rates. It is the Company's objective to protect earnings and capital
while achieving liquidity, profitability and strategic goals.
The Company focuses its measure of interest rate risk on the effect a shift in
interest rates would have on earnings rather than on the amount of assets and/or
liabilities subject to repricing 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 monthly evaluation is made to determine
the change in the economic value of the equity with various changes in interest
rates. This determination indicates how much the value of the assets and the
value of the liabilities change with a specified change in interest rates. The
net difference between the economic values of the assets and liabilities results
in an economic value of equity.
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, maturities 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 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.
OFF BALANCE SHEET ITEMS AND CONTINGENCIES
Off-balance sheet items consist of commitments to originate mortgage loans,
unused lines of credit and standby letters of credit totaling approximately
$32.9 million as of September 30, 2002. This compares to $25.8 million at
December 31, 2001. The Company's commitments to originate mortgage loans are on
a best effort basis; therefore there are no contingent liabilities associated
with them. The Bank has historically funded off-balance sheet commitments with
its primary sources of funds and management anticipates that this will continue.
At September 30, 2002 the Company continues to carry a $271,000 receivable
related to a $541,000 claim against a former data processing service provider
("Provider"). The claim relates to an improper charge made by ("Provider") to
the Company's check clearing account maintained with the Federal Home Loan Bank
of Chicago. Trial in this matter has been rescheduled for February 2003. The
receivable will be adjusted based on the results of the upcoming trial or other
developments as they occur. Legal fees relating to this matter are being
expensed as incurred. Management intends to aggressively pursue recovery of the
entire $541,000, that was improperly charged, and related legal fees.
ITEM 3. 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 Senior 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 Senior 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.
PART II
OTHER INFORMATION
ITEM 6. A) EXHIBITS
See Exhibit Index following the signature page in this report, which
is incorporated herein by this reference.
B) REPORTS ON FORM 8-K
There were two reports on Form 8-K filed during the third quarter of
2002.
A report dated July 17, 2002 announced the election of Prudence A.
Harker as a director of Blackhawk Bancorp, Inc. and its subsidiary,
Blackhawk State Bank.
A report dated August 28, 2002 announced a change in the registrant's
certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Blackhawk Bancorp, Inc.
-----------------------------------------------
(Registrant)
Date: November 12, 2002 /s/R. Richard Bastian, III
-----------------------------------------------
R. Richard Bastian, III
President and Chief Executive Officer
/s/Todd J. James
-----------------------------------------------
Todd J. James
Senior Vice President and Chief Financial Officer
/s/Thomas L. Lepinski
-----------------------------------------------
Thomas L. Lepinski, CPA
Principal Accounting Officer
CERTIFICATIONS
I, R. Richard Bastian, III, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Blackhawk Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 the 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
quarterly report whether or not 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: November 12, 2002
/s/R. Richard Bastian, III
-----------------------------
R. Richard Bastian, III
President and CEO
I, Todd J. James, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Blackhawk Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 the 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
quarterly report whether or not 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: November 12, 2002
/s/Todd J. James
----------------------------------
Todd J. James
Senior Vice President and CFO
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)
4.4 Employment Agreement X 30-44
99 Certification Pursuant X 44
to 18 U. S. C. Section
1350, as Adopted
Pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002