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 JUNE 30, 2003
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 August 5, 2003
--------------------- --------------
$.01 par value 2,518,131 shares
INDEX
PART I - FINANCIAL INFORMATION
Page
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ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002 4
Unaudited Consolidated Statements of Income for the
Three Months Ended June 30, 2003 and 2002 5
Unaudited Consolidated Statements of Income for the
Six Months Ended June 30, 2003 and 2002 6
Unaudited Consolidated Statements of Stockholders'
Equity for the Six Months Ended June 30, 2003 and 2002 7
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 8-9
Notes to Unaudited Consolidated Financial Statements 10-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 15-26
ITEM 3. CONTROLS AND PROCEDURES 26
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 27
ITEM 2 CHANGES IN SECURITIES 27
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4 SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 27
ITEM 5 OTHER INFORMATION 28
ITEM 6. A) EXHIBITS 28
B) REPORTS ON FORM 8-K 28
SIGNATURES 29
INDEX TO EXHIBITS 30
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
ASSETS (Dollars in thousands)
------
Cash and due from banks $ 12,166 $ 12,572
Federal funds sold and securities purchased under agreements to resell -- 13,120
Interest-bearing deposits in banks 1,922 8,472
Available-for-sale securities 102,013 83,897
Held to maturity securities, at amortized cost 19,399 23,002
Loans, less allowance for loan losses of $2,342 and $2,079
at June 30, 2003 and December 31, 2002, respectively 183,539 186,300
Office buildings and equipment, net 6,511 6,770
Intangible assets 4,388 4,598
Other assets 13,595 13,646
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Total Assets $343,533 $352,377
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing $ 33,120 $ 35,274
Interest-bearing 215,772 227,811
-------- --------
Total deposits 248,892 263,085
Short-term borrowings 11,990 13,454
Long-term borrowings 46,600 38,900
Company Obligated Mandatorily Redeemable Preferred Securities
of subsidiary trust holding solely subordinated debentures 7,000 7,000
Other liabilities 2,909 4,140
-------- --------
Total Liabilities 317,391 326,579
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock
1,000,000 shares, $.01 par value per share
authorized, none issued or outstanding -- --
Common stock
10,000,000 shares, $.01 par value per share authorized,
shares issued and outstanding: 2,518,131 at June 30, 2003, 2,507,065
at December 31, 2002 25 25
Surplus 8,773 8,698
Retained earnings 16,062 15,788
Accumulated other comprehensive income 1,282 1,287
-------- --------
Total Stockholders' Equity 26,142 25,798
-------- --------
Total Liabilities and Stockholders' Equity $343,533 $352,377
-------- --------
-------- --------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30,
2003 2002
---- ----
INTEREST INCOME: (Dollars in thousands,
except per share data)
Interest and fees on loans $3,019 $3,673
Interest and dividends on securities:
Taxable 929 926
Nontaxable 282 209
Interest on fed funds sold and securities purchased under
agreements to resell 7 17
Interest on interest-bearing deposits in banks 8 7
------ ------
Total Interest Income 4,245 4,832
------ ------
INTEREST EXPENSE:
Interest on deposits 1,230 1,547
Interest on short-term borrowings 41 49
Interest on long-term borrowings 530 555
Interest on Company Obligated Mandatorily Redeemable
Preferred Securities 82 --
------ ------
Total Interest Expense 1,883 2,151
------ ------
Net Interest Income 2,362 2,681
Provision for loan losses 142 122
------ ------
Net Interest Income after Provision for Loan Losses 2,220 2,559
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 363 396
Gain on sale of loans 141 54
Securities gains, net 95 225
Other 281 195
------ ------
Total Noninterest Income 880 870
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,360 1,338
Occupancy 179 261
Equipment 231 208
Data processing services 203 188
Advertising and marketing 143 91
Amortization of intangibles 79 78
Professional fees 116 117
Office supplies 55 69
Telephone 79 79
Transportation and postage 112 92
Other 212 318
------ ------
Total Noninterest Expenses 2,769 2,839
------ ------
Income before Income Taxes 331 590
Income Taxes 1 160
------ ------
Net Income $ 330 $ 430
------ ------
------ ------
Basic Earnings Per Share $ 0.13 $ 0.17
------ ------
------ ------
Diluted Earnings per Share $ 0.13 $ 0.17
------ ------
------ ------
Dividends Per Share $ 0.09 $ 0.09
------ ------
------ ------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
INTEREST INCOME: (Dollars in thousands,
except per share data)
Interest and fees on loans $6,267 $7,581
Interest and dividends on securities:
Taxable 1,857 1,612
Nontaxable 535 417
Interest on fed funds sold and securities purchased under
agreements to resell 49 50
Interest on interest-bearing deposits in banks 18 34
------ ------
Total Interest Income 8,726 9,694
------ ------
INTEREST EXPENSE:
Interest on deposits 2,496 3,108
Interest on short-term borrowings 76 95
Interest on long-term borrowings 1,035 1,119
Interest on Company Obligated Mandatorily Redeemable
Preferred Securities 163 --
------ ------
Total Interest Expense 3,770 4,322
------ ------
Net Interest Income 4,956 5,372
Provision for loan losses 365 261
------ ------
Net Interest Income after Provision for Loan Losses 4,591 5,111
------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 700 745
Gain on sale of loans 301 127
Securities gains, net 424 229
Other 492 411
------ ------
Total Noninterest Income 1,917 1,512
------ ------
NONINTEREST EXPENSES:
Salaries and employee benefits 2,818 2,731
Occupancy 369 449
Equipment 461 428
Data processing services 399 387
Advertising and marketing 207 163
Amortization of intangibles 159 154
Professional fees 302 296
Office supplies 117 125
Telephone 153 151
Transportation and postage 212 182
Other 523 554
------ ------
Total Noninterest Expenses 5,720 5,620
------ ------
Income before Income Taxes 788 1,003
Income Taxes 61 256
------ ------
Net Income $ 727 $ 747
------ ------
------ ------
Basic Earnings Per Share $ 0.29 $ 0.31
------ ------
------ ------
Diluted Earnings per Share $ 0.29 $ 0.31
------ ------
------ ------
Dividends Per Share $ 0.18 $ 0.18
------ ------
------ ------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
(Dollars in thousands)
Common Stock:
Balance at beginning of period $ 25 $ 24
Stock options exercised -- 1
------- -------
Balance at end of period 25 25
------- -------
Surplus:
Balance at beginning of period 8,698 7,555
Stock options exercised 75 1,117
Sale of treasury stock -- (4)
------- -------
Balance at end of period 8,773 8,668
------- -------
Retained Earnings:
Balance at beginning of period 15,788 15,447
Net income 727 747
Dividends declared on common stock (453) (444)
------- -------
Balance at end of period 16,062 15,750
------- -------
Treasury Stock, at cost:
Balance at beginning of period -- (58)
Sale of treasury stock -- 32
------- -------
Balance at end of period -- (26)
------- -------
Accumulated other comprehensive income:
Balance at beginning of period 1,287 773
Other comprehensive income (loss), net of taxes:
Fair market value of available for sale securities (50) 214
Fair value of interest rate SWAP contract 45 --
------- -------
Balance at end of period 1,282 987
------- -------
Total Stockholders' Equity $26,142 $25,404
------- -------
------- -------
See Notes to Unaudited Consolidated Financial Statements
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 727 $ 747
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 648 617
Provision for loan losses 365 261
Gain on sale of loans (301) (127)
FHLB stock dividends (126) (60)
Amortization of premiums on securities, net 397 41
Securities gains, net (424) (229)
Decrease (increase) in accrued interest receivable 253 (74)
Decrease in accrued interest payable (55) (184)
Decrease (increase) in other assets (213) 198
Increase (decrease) in other liabilities (1,127) 8
-------- --------
Net cash provided by operations before
loan originations and sales 144 1,198
Origination of loans for sale (15,050) (9,971)
Proceeds from sale of loans 16,708 12,226
-------- --------
Net cash provided by operating activities 1,802 3,453
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in banks 6,550 7,531
Net decrease in federal funds sold and securities
purchased under agreements to resell 13,120 10,986
Proceeds from sales of available-for-sale securities 23,957 8,523
Proceeds from maturities and calls of available-for-sale securities 20,824 6,263
Proceeds from maturities and calls of held-to-maturity securities 3,574 2,363
Purchase of available-for-sale securities (62,948) (40,600)
Purchase of held-to-maturity securities -- (2,868)
Net decrease in loans 951 13,064
Proceeds from the sale of office buildings, equipment, and
other real estate owned 317 376
Purchase of office buildings and equipment, net (202) (225)
-------- --------
Net cash provided by investing activities 6,143 5,413
-------- --------
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits $(14,192) $(9,845)
Dividends paid (453) (431)
Proceeds from other borrowings 8,000 --
Payments on other borrowings (300) (7,221)
Net increase (decrease) in short-term borrowings (1,464) 8,321
Proceeds from exercise of stock options 58 1,050
Sale of treasury stock -- 28
-------- -------
Net cash used in financing activities (8,351) (8,098)
-------- -------
Net increase (decrease) in cash and due from banks (406) 768
CASH AND DUE FROM BANKS:
Beginning 12,572 11,746
-------- -------
Ending $ 12,166 $12,514
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-------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest $ 3,825 $ 4,506
Income taxes $ (163) $ (118)
SUPPLEMENTAL SCHEDULES OF NON-CASH INVESTING
ACTIVITIES:
Change in accumulated other comprehensive income
unrealized gains (losses) on available-for-sale securities, net $ (50) $ 214
Other assets acquired in settlement of loans $ 88 $ 285
See Notes to Unaudited Consolidated Financial Statements.
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
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 six months ended June
30, 2003 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, 2002 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 2002 historical
financial statements to conform to the 2003 presentation.
Stock-Based Compensation Plan: At June 30, 2003, the Company had a
-----------------------------
stock-based director, key officer and employee compensation plan. The
Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee
compensation cost is reflected in income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The table on the
following page illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
(Dollars in thousands, except per share data) Three Months Ended
June 30,
2003 2002
---- ----
Net income, as reported $330 $430
Deduct total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (21) (19)
---- ----
PRO FORMA NET INCOME $309 $411
---- ----
---- ----
Earnings per share:
Basic:
As reported $0.13 $0.17
Pro forma 0.12 0.17
Diluted:
As reported 0.13 0.17
Pro forma 0.12 0.17
(Dollars in thousands, except per share data) Six Months Ended
June 30,
2003 2002
---- ----
Net income, as reported $727 $747
Deduct total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (42) (37)
---- ----
PRO FORMA NET INCOME $685 $710
---- ----
---- ----
Earnings per share:
Basic:
As reported $0.29 $0.31
Pro forma 0.27 0.29
Diluted:
As reported 0.29 0.31
Pro forma 0.27 0.29
In determining compensation cost using the fair value method prescribed
in Statement No. 123, the value of each grant is estimated at the grant
date with the following weighted-average assumptions used for grants:
dividend yield of 4 percent; expected price volatility of 25 percent;
risk-free interest rates of 4 percent; and expected lives of 10 years.
Note 2.Allowance for Loan Losses
A summary of transactions in the allowance for loan losses is as
follows:
THREE MONTHS ENDED
JUNE 30,
--------
(Dollars in thousands)
2003 2002
---- ----
Balance at beginning of period $2,197 $2,517
Provision charged to expense 142 122
Loans charged off 90 131
Recoveries 93 11
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Balance at end of period $2,342 $2,519
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------ ------
Six Months Ended
June 30,
--------
(Dollars in thousands)
2003 2002
---- ----
Balance at beginning of period $2,079 $2,404
Provision charged to expense 365 261
Loans charged off 247 182
Recoveries 145 36
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Balance at end of period $2,342 $2,519
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Note 3.Earnings per Share
Presented below are the calculations for basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 330,000 $ 430,000 $ 727,000 $ 747,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,517,219 2,478,283 2,515,627 2,431,572
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $ 0.13 $ 0.17 $ 0.29 $ 0.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Net income available to common stockholders $ 330,000 $ 430,000 $ 727,000 $ 747,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 2,517,219 2,478,283 2,515,627 2,431,572
Effect of dilutive stock options outstanding 17,267 9,782 17,267 9,782
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 2,534,486 2,488,065 2,532,894 2,441,354
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.13 $ 0.17 $ 0.29 $ 0.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Note 4. Derivative Instrument
As of June 30, 2003, the Company has entered into an interest rate swap
transaction, which resulted in the Company converting its $7,000,000 of
variable rate Company Obligated Mandatorily Redeemable Preferred
Securities into fixed rate debt. This swap transaction requires the
payment of interest by the Company at a fixed rate equal to 2.47% using
an actual/360 day basis. In turn the Company receives a variable rate
interest payment based on the 90 day LIBOR rate adjusted quarterly.
Summary information about the interest rate swap at June 30 is as
follows:
2003 2002
---- ----
(Dollars in thousands)
Notional amount $7,000 --
Weighted average fixed rate 2.51% --
Weighted average variable rate 1.02% --
Weighted average maturity 4.5 years --
Fair value $69 --
Note 5. Recent Accounting Developments
The Financial Accounting Standards Board has issued Statement 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging".
This Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement
133. The Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June
30, 2003. Implementation of the Statement is not expected to have a
material impact on the company's financial statements.
The Financial Accounting Standards Board has issued Statement 150,
"Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity". This Statement establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity and requires that certain
freestanding financial instruments be reported as liabilities in the
balance sheet. Depending on the type of financial instrument, it is
required to be accounted for at either fair value or the present value
of future cash flows determined at each balance sheet date with the
change in that value reported as interest expense in the income
statement. Prior to the application of Statement No. 150, either those
financial instruments were not required to be recognized, or if
recognized were reported in the balance sheet as equity and changes in
the value of those instruments were normally not recognized in net
income. For the Company, the Statement is effective July 1, 2003 and
implementation is not expected to have a material impact on the
consolidated financial statements.
Note 6. Recent Regulatory Developments
On July 30, 2002, 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, 2002.
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of Blackhawk Bancorp, Inc. Statements that are not
historical facts, including statements about beliefs and expectations, are
forward-looking statements. These statements are based upon beliefs and
assumptions of Blackhawk's management and on information currently available to
such management. The use of the words "believe", "expect", "anticipate", "plan",
"estimate", "may", "will" or similar expressions are forward-looking statements.
Contemplated, projected, forecasted or estimated results in such forward-looking
statements involve certain inherent risks and uncertainties. A number of factors
- many of which are beyond the ability of the company to control or predict -
could cause actual results to differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
include, but are not limited to: heightened competition; adverse state and
federal regulation; failure to obtain new or retain existing customers; ability
to attract and retain key executives and personnel; changes in interest rates;
unanticipated changes in industry trends; unanticipated changes in credit
quality and risk factors, including general economic conditions; success in
gaining regulatory approvals when required; changes in the Federal Reserve Board
monetary policies; unexpected outcomes of new and existing litigation in which
Blackhawk or its subsidiaries, officers, directors or employees is named
defendants; technological changes; changes in accounting principles generally
accepted in the United States; changes in assumptions or conditions affecting
the application of critical accounting policies; and the inability of second
party vendors to perform critical services for the company or its customers.
The Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
RESULTS OF OPERATIONS
The company reported net income of $330,000 for the three months ended June 30,
2003, a decrease of $100,000 or 23.3% from the $430,000 reported for the same
three month period in 2002. Net income for the six month period ended June 30,
2003 was $727,000, a decrease of $20,000, or 2.7% from the $747,000 reported for
the same period in 2002.
Diluted earnings per share were $0.13 and $0.29 for the three and six months
ended June 30, 2003, respectively, compared to $0.17 and $0.31 for the same
periods in 2002. This represents a decrease of 23.5% and 6.5% for the three
month and six month periods, respectively.
NET INTEREST INCOME
Net interest income, which is the sum of interest and certain fees generated by
earning assets minus interest paid on deposits and other funding sources, is the
primary source of the company's earnings. All discussions of interest income
amounts and rates are on a tax-equivalent basis, which accounts for income
earned on loans and securities that are not fully subject to income taxes as if
they were fully subject to income taxes. The following table sets forth the
company's consolidated average balances of assets, liabilities and stockholders'
equity, interest income and expense on related items, and the company's average
rate for the three and six month periods ended June 30, 2003 and 2002. 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 June 30, 2003 Three Months ended June 30, 2002
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits
in banks $ 1,409 $ 8 2.28% $ 1,428 $ 7 1.97%
Federal funds sold &
securities purchased under
agreements to resell 1,640 7 1.71% 3,885 17 1.76%
Investment securities:
Taxable investment securities 98,069 929 3.80% 72,345 926 5.13%
Tax-exempt investment
securities 28,387 427 6.03% 19,598 317 6.49%
-------- ------ ----- -------- ------ -----
Total investment securities 126,456 1,356 4.30% 91,943 1,243 5.42%
Loans 182,962 3,019 6.62% 196,087 3,674 7.52%
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS $312,467 $4,390 5.64% $293,343 $4,941 6.76%
------ ----- ------ -----
Allowance for loan losses (2,278) (2,518)
Cash and due from banks 11,263 10,173
Other assets 21,351 16,980
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TOTAL ASSETS $342,803 $317,978
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 39,047 $ 75 .77% $ 33,172 $ 89 1.08%
Savings deposits 54,466 102 .75% 53,730 157 1.17%
Time deposits 124,229 1,053 3.40% 121,827 1,301 4.28%
-------- ------ ----- -------- ------ -----
Total interest bearing deposits 217,742 1,230 2.27% 208,729 1,547 2.97%
Short-term borrowings 13,463 41 1.22% 10,879 49 1.81%
Long-term borrowings 44,029 530 4.83% 41,306 555 5.39%
Trust preferred securities 7,000 82 4.75% -0- -0- -0-%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES $282,234 $1,883 2.68% $260,914 $2,151 3.31%
------ ----- ------ -----
NET INTEREST SPREAD 2.96% 3.45%
----- -----
----- -----
Noninterest bearing deposits 32,535 30,274
Other liabilities 2,140 2,011
-------- --------
Total liabilities 316,909 293,199
Stockholders' equity 25,894 24,779
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $342,803 $317,978
-------- --------
-------- --------
NET INTEREST MARGIN $2,507 3.22% $2,790 3.81%
------ ----- ------ -----
------ ----- ------ -----
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES
(yields on a tax-equivalent basis) Six Months ended June 30, 2003 Six Months ended June 30, 2002
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS:
Interest-bearing deposits
in banks $ 1,774 $ 18 2.05% $ 3,842 $ 34 1.78%
Federal funds sold &
securities purchased under
agreements to resell 5,072 49 1.95% 6,154 50 1.64%
Investment securities:
Taxable investment securities 91,393 1,857 4.10% 61,424 1,613 5.30%
Tax-exempt investment
securities 26,692 810 6.12% 19,453 631 6.54%
-------- ------ ----- -------- ------ -----
Total investment securities 118,085 2,667 4.55% 80,876 2,244 5.60%
Loans 182,960 6,268 6.91% 199,942 7,583 7.65%
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS $307,891 $9,002 5.90% $290,815 $9,911 6.87%
------ ----- ------ -----
Allowance for loan losses (2,212) (2,518)
Cash and due from banks 10,860 9,816
Other assets 21,514 17,224
-------- --------
TOTAL ASSETS $338,053 $315,336
-------- --------
-------- --------
INTEREST BEARING LIABILITIES:
Interest bearing checking accounts $ 38,513 $ 162 .85% $ 32,150 $ 173 1.09%
Savings deposits 53,527 212 .80% 53,779 321 1.20%
Time deposits 123,518 2,122 3.46% 121,431 2,614 4.34%
-------- ------ ----- -------- ------ -----
Total interest bearing deposits 215,559 2,496 2.34% 207,360 3,108 3.02%
Short-term borrowings 12,958 76 1.18% 10,333 95 1.85%
Long-term borrowings 42,445 1,035 4.92% 41,844 1,119 5.39%
Trust preferred securities 7,000 163 4.70% -0- -0- -0-%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES $277,962 $3,770 2.74% $259,537 $4,322 3.36%
------ ----- ------ -----
NET INTEREST SPREAD 3.16% 3.51%
----- -----
----- -----
Noninterest bearing deposits 32,164 29,260
Other liabilities 2,046 2,134
-------- --------
Total liabilities 312,172 290,931
Stockholders' equity 25,881 24,405
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $338,053 $315,336
-------- --------
-------- --------
NET INTEREST MARGIN $5,232 3.43% $5,589 3.88%
------ ----- ------ -----
------ ----- ------ -----
Net interest income decreased by $283,000, or 10.1%, to $2,507,000 for the
quarter ended June 30, 2003, compared to $2,790,000 for the comparable period in
2002. On a year to date basis net interest income decreased by $357,000, or
6.4%, to $5,232,000 compared to $5,589,000 for the first six months of 2002.
The net interest margin, which is the tax equivalent net interest income divided
by average interest earning assets was 3.22% and 3.43% for the three and six
month periods ended June 30, 2003. The second quarter net interest margin
represents a 59 basis point decrease compared to the 2002 second quarter net
interest margin of 3.81%. The year to date net interest margin of 3.43%
represents a 45 basis point increase compared to the 3.88% net interest margin
realized for the same period in 2002.
For the three months ended June 30, 2003, total interest income decreased by
$551,000, or 11.2%, to $4,390,000 compared to $4,941,000 for the same period in
2002. The decrease in interest income is due to a 112 basis point decrease in
the yield on average earning assets to 5.64% for the second quarter of 2003,
compared to 6.76% for the same period in 2002. The decrease in the yield on
average earning assets for the second quarter of 2003 compared to the second
quarter of 2002 is offset by a $19,124,000 increase in average earning assets.
For the six months ended June 30, 2003, total interest income decreased by
$909,000, or 9.2%, to $9,002,000 compared to $9,911,000 for the same period in
2002. The decrease in interest income is due to a 97 basis point decrease in
the yield on average earning assets to 5.90% compared to 6.87% for the same
period in 2002 partially offset by a 5.9% increase 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 for the three and six month
periods ended June 30, 2003 compared to the same periods in 2002. The decrease
in the yield on average earning assets also reflects the difficulty of finding
attractive investments due to the lower interest rate environment during the
second quarter and first six months of 2003 compared to the same periods in
2002. Managed and long-term interest rates are at historical lows. 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 bank
assets reprice.
Interest and fees on loans decreased 17.8% to $3,019,000 for the three months
ended June 30, 2003 compared to $3,674,000 for the same period of 2002. This
decrease was the result of a $13,125,000 or 6.7% decrease in average loans
outstanding and a 90 basis point decrease in yield on the portfolio. Interest
and fees on loans decreased 17.3% to $6,268,000 for the six months ended June
30, 2003 compared to $7,583,000 in same period of 2002. This decrease was the
result of a $16,982,000 or 8.5% decrease in average loans outstanding and a 74
basis point decrease in yield on the portfolio. The decrease in average loans
outstanding for the three and six month periods ended June 30, 2003 compared to
the same periods in 2002 is largely attributable to the refinancing activity in
the residential real estate market, weak commercial and consumer loan demand and
competitive pricing pressure for quality credits. The decrease in the bank's
residential real estate portfolio accounted for $16,431,000 of the overall year
to date decrease and was partially offset by a $10,655,000 increase in
commercial real estate loans. Year to date average commercial loans decreased
by $5,469,000 or 16.9% to $26,901,000 and year to date average consumer loans
decreased by $6,179,000 or 23.5% to $20,101,000.
Interest income on taxable securities increased by $3,000 or 0.3% in the second
quarter of 2003 to $929,000 compared to $926,000 for the same period in 2002.
Average balances of taxable investment securities increased 35.6% to $98,069,000
for the quarter ended June 30, 2003 compared to $72,345,000 for the same period
in the prior year. However, the yield on average taxable investment securities
decreased 133 basis points to 3.80% for the second quarter of 2003 compared to
5.13% for the second quarter of 2002. The decrease in the yield on taxable
investments is due to accelerated pre-payment speeds on mortgaged backed
securities and collateralized mortgage obligations and management's decision to
keep portfolio duration short during this historically low rate environment.
Tax exempt investment securities increased $8,789,000, or 44.8% to an average
balance of $28,387,000 for the three months ended June 30, 2003 compared to
$19,598,000 for the same period in 2002. Interest income on tax exempt
securities increased $110,000 or 34.7% to $427,000 for the second quarter of
2003 compared to $317,000 for the second quarter of 2002.
Interest income on taxable securities increased by $244,000 or 15.1% in the
first six months of 2003 to $1,857,000 from $1,613,000 for the same period in
2002. Average balances of taxable investment securities increased 48.8% to
$91,393,000 for the six months ended June 30, 2003 compared to $61,424,000 for
the same period in the prior year. The increase in average balances outstanding
was offset by a decrease of 120 basis points in average yield to 4.10% for the
first six months of 2003 compared to 5.30% for the first six months of 2002.
The decrease in the yield on taxable investments is due to accelerated pre-
payment speeds on mortgaged backed securities and collateralized mortgage
obligations and management's decision to keep portfolio duration short during
this historically low rate environment. Average tax exempt securities increased
to $26,692,000 for the six months ended June 30, 2003 compared to $19,453,000
for the same period in 2002 and their average tax equivalent yield decreased
from 6.54% for the six months ended June 30, 2002 to 6.12% for the same period
in 2003.
Interest from fed funds sold and securities purchased under agreements to resell
decreased to $7,000 and $49,000 for the three and six month periods ended June
30, 2003, respectively, compared to $17,000 and $50,000 during the same periods
in 2002. The quarterly and year to date decreases in interest on fed funds sold
and securities purchased under agreements to resell were due to lower average
balances.
Total interest expense decreased by $268,000, or 12.4%, to $1,883,000 for the
three months ended June 30, 2003 compared to $2,151,000 for the same period in
2002. For the six months ended June 30, 2003 total interest expense decreased
by $552,000, or 12.8%, to $3,770,000 compared to $4,322,000 for the same period
in 2002. The decrease in total interest expense is the result of the
aforementioned lower interest rate environment.
While interest paid on deposits decreased $317,000, or 20.4% to $1,230,000
during the three months ended June 30, 2003 compared to $1,547,000 for the same
period in 2002, average interest bearing deposits increased $9,013,000 quarter
over quarter. Year to date interest paid on deposits decreased $612,000, or
19.7% to $2,496,000 compared to $3,108,000 for the same period in 2002 while
average total interest bearing deposits increased by $8,199,000.
Interest on short-term borrowings decreased $8,000 to $41,000 for the three
months ended June 30, 2003 compared to $49,000 for the same period in 2002.
This decrease is the result of an increase of $3,943,000 in average fed funds
purchased for the three months ended June 30, 2003 compared to the same period
in 2002 offset by lower rates due to the decrease in managed interest rates.
For the six months ended June 30, 2003 interest on short-term borrowings
decreased $19,000 to $76,000 compared to $95,000 for the same period in 2002.
This decrease is the net result of the decrease in managed interest rates as
mentioned earlier and a $2,625,000, or 25.4% increase in average short-term
borrowings to $12,958,000 for the six months ended June 30, 2003 compared to
$10,333,000 for the same period in 2002.
Interest expense on long-term borrowings decreased $25,000 and $84,000 to
$530,000 and $1,035,000 for the three and six month periods ended June 30, 2003
compared to $555,000 for the second quarter and $1,119,000 for the first six
months of 2002. The decrease is primarily the result of additional Federal Home
Loan Bank advances in 2003, at lower market interest rates, and the pay-off of
the bank debt of Blackhawk Bancorp, Inc. during December, 2002 co-incident with
the issuance of the company's Trust Preferred Securities.
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 $142,000 in the second quarter of 2003, an increase of $20,000
or 16.4% from the $122,000 in the second quarter of 2002. For the first six
months of 2003, the provision was $365,000 compared to $261,000 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 second quarter of 2003 decreased by $123,000 to net recoveries of $3,000
compared to net charge-offs of $120,000 for the second quarter of 2002. Year to
date net charge-offs decreased $44,000 or 30.1% to $102,000 compared to $146,000
for the first six months of 2002.
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 1.26% at June 30, 2003 compared to
1.10% at December 31, 2002.
NONINTEREST INCOME
Total noninterest income increased $10,000, or 1.1%, to $880,000 for the three
months ended June 30, 2003 compared to $870,000 for the same period in 2002.
Year to date total noninterest income increased $405,000, or 26.8%, to
$1,917,000 compared to $1,512,000 for the same period in 2002.
Service charges on deposit accounts totaled $363,000 for the quarter ended June
30, 2003 compared to $396,000 for the second quarter of 2002. The decrease is
primarily due to lower overdraft fees collected which decreased by $46,000 or
18.0% to $210,000 for the quarter ended June 30, 2003 compared to $256,000 for
the second quarter of 2002. Year to date service charges on deposits decreased
$45,000, or 6.0%, to $700,000 compared to $745,000 in the prior year primarily
due to lower levels of overdraft fees collected for the six months ended June
30, 2003.
Gain on the sale of mortgage loans increased $87,000 or 161.1% to $141,000 for
the second quarter of 2003 compared to the $54,000 of gains recognized during
the second quarter of 2002. The increase was due to higher volumes and margins
during the second quarter of 2003. In the second quarter of 2003, $7,719,000 of
loans were sold to the secondary market compared to $3,917,000 for the same
period in 2002. Year to date gain on sale of mortgage loans increased $174,000
or 137.0% to $301,000 compared to $127,000 for the same period in 2002. The
increase is due to a higher volume of loans sold and better margins. The average
gain in 2003 was 1.80% on $16,708,000 in loans sold to the secondary market
compared to an average gain of 1.04% on the $12,226,000 of loans sold in the
same period in 2002. The lower volume in 2002 is the result of turn-over in the
company's mortgage banking management and origination staff.
The Company recognized $95,000 in securities gains in the second quarter of 2003
compared to $225,000 in the second quarter of 2002. Year to date the company
has realized $424,000 in securities gains, a $195,000 or 85.2% increase over the
$229,000 realized for the six months ended June 30, 2002.
Other noninterest income increased $86,000 or 44.1% to $281,000 for the quarter
ended June 30, 2003 compared to $195,000 for the second quarter of 2002. The
increase is primarily due to additional income on the bank's investment in bank
owned life insurance. The increase in the cash surrender value of life
insurance increased by $67,000 in the second quarter of 2003 compared to the
second quarter of 2002. The bank invested $5,000,000 in bank owned life
insurance on September 30, 2002. Year to date other noninterest income
increased by $81,000 or 19.7% to $492,000 for the six months ended June 30, 2003
from $411,000 for the six months ended June 30, 2002. The year to date increase
is due to an increase in cash surrender value of bank owned life insurance of
$135,000 offset by the unamortized portion of mortgage servicing rights written
off on early payoffs of loans serviced for others.
NONINTEREST EXPENSES
Total operating expenses decreased $70,000, or 2.5%, to $2,769,000 for the three
months ended June 30, 2003 compared to $2,839,000 for the same period in 2002.
The second quarter of 2002 included a $75,000 charge for closing the bank's Wal-
Mart facility and a $50,000 employee severance charge. Excluding these non-
recurring items, operating expenses increased by $55,000 for the quarter. The
increase in operating expenses, net of the non-recurring items, is due to an
increase in marketing and advertising expense. For the first six months of 2002
total operating expenses increased $100,000, or 1.8%, to $5,720,000 compared to
$5,620,000 for the same period in 2002.
Salaries and employee benefits increased $22,000 or 1.6% to $1,360,000 for the
quarter ended June 30, 2003 compared to $1,338,000 for the second quarter of
2002. For the first six months of 2002 total salaries and employee benefits
increased $87,000 or 3.2% to $2,818,000 compared to $2,731,000 for the same
period in 2002.
Occupancy expenses for 2002 included a $75,000 charge related to the Wal-Mart
branch consolidation. Excluding this one time charge, occupancy expenses for
the three months ended June 30, 2003 decreased to $179,000 from $186,000 for the
second quarter of 2002. Occupancy expenses for the six months ended June 30,
2003 decreased to $369,000 compared to $374,000 for the same period in 2002.
Furniture and equipment expenses increased $23,000 or 11.1% to $231,000 for the
quarter ended June 30, 2003 compared to $208,000 for the same quarter in 2002.
For the first six months of 2002 furniture and equipment expense increased
$33,000, or 7.7%, to $461,000 compared to $428,000 for the same period in 2002.
The increase relates primarily to increased depreciation and maintenance on
computer equipment purchased.
Data processing costs increased $15,000, or 8.0%, to $203,000 for the quarter
ended June 30, 2003 and $12,000, or 3.1%, to $399,000 for the six months ended
June 30, 2003. These increases reflect higher volumes of service utilized from
our core processor.
Advertising and marketing costs increased $52,000, or 57.1% to $143,000 for the
second quarter of 2003 compared to $91,000 for the same period in 2002. Year to
date advertising and marketing costs increased $44,000, or 27.0% to 207,000 from
$163,000. The increase is primarily due to the timing of expenses as a number
of major marketing campaigns occurred during the second quarter of 2003.
Transportation and postage increased $20,000 or 21.7% to $112,000 for the second
quarter of 2003 compared to $92,000 for the second quarter of 2002. For the
first six months of 2003 transportation and postage increased $30,000 or 16.4%
to $212,000 compared to $182,000 for the same period in 2002. The increase is
primarily due to additional costs from an expansion of the bank's courier
program in 2003.
Other noninterest expenses decreased $106,000 or 33.3% to $212,000 for the three
months ended June 30, 2003 compared to $318,000 for the same period a year ago.
For the first six months of 2003 other noninterest expenses decreased $31,000 or
5.6% to $523,000 compared to $554,000 for the same period in 2002. Other
noninterest expenses in 2002 included $117,000 of charges to accrue severance
payments for executive officers that left the company in 2002 partially offset
by an $87,000 credit from adjustment of stale reconciling items. The company
also incurred lower net loan expenses in 2003 compared to the same periods in
2002.
Income taxes decreased $159,000, or 99.4%, to $1,000 for the three months ended
June 30, 2003 from $160,000 for the same period in 2002. For the six months
ended June 30, 2003 income taxes decreased $195,000, or 76.2%, to $61,000 from
$256,000 for the same period in 2002. The decrease reflects greater tax
efficiency brought about by an increase in non-taxable interest from the
municipal bond portfolio and the purchase of bank owned life insurance on
September 30, 2002.
BALANCE SHEET ANALYSIS
OVERVIEW
Total assets decreased to $343,533,000 at June 30, 2003 compared to $352,377,000
at December 31, 2002, a decrease of 2.5%. The December 31, 2002 balance sheet
included short-term year-end deposits of $18,600,000, which were invested in
federal funds sold and interest bearing deposits in banks at December 31, 2002.
Excluding these deposits, total assets increased 2.9% from December 31, 2002 to
June 30, 2003. While total assets excluding the short-term year-end deposits
increased by $9,756,000, there was a considerable shift in balances from short-
term investments to investment securities. Securities increased by $14,513,000,
while short investments decreased by $19,670,000.
LOANS
Gross loans decreased $2,498,000, or 1.3%, to $185,881,000 on June 30, 2003
compared to $188,379,000 on December 31, 2002. The composition of loans is shown
in the following table:
As a % of Total Loans
June 30, December 31, Change in June 30, December 31,
2003 2002 Balance 2003 2002
-------- ------------ --------- -------- ------------
(Dollars in millions)
Residential Real Estate $77.0 $71.8 $5.2 41.4% 38.1%
Commercial Real Estate $55.2 $59.0 ($3.8) 29.7% 31.4%
Construction and Land
Development $7.7 $6.4 $1.3 4.1% 3.4%
Commercial $26.4 $28.3 ($1.9) 14.2% 15.0%
Consumer $19.1 $22.3 ($3.2) 10.3% 11.8%
Other $0.5 $0.6 ($0.1) 0.3% 0.3%
The historically low interest rate environment has led to substantial
prepayments on the company's 1-4 family residential real estate loan portfolio.
To offset this loan run-off, the bank has retained new adjustable and fixed rate
mortgages with lives of 15 years or less. This has lead to an increase of
$5,200,000 or 7.2% in residential real estate loans for the six months ended
June 30, 2003. This increase has partially offset decreases of $5,700,000 in
Commercial and Commercial Real Estate loans and $3,200,000 in Consumer loans
over the same period. 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:
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002
-------- ------------
Non-accruing loans $3,233 $2,560
Past due 90 days or more and still accruing 17 26
------ ------
Total non-performing loans $3,250 $2,586
------ ------
------ ------
Restructured loans performing in accordance
with modified terms $ 393 $ 418
ASSET QUALITY
The allowance for loan losses was $2,342,000 or 1.26% of total loans at June 30,
2003 compared to $2,079,000 or 1.10% of total loans at December 31, 2002. As of
June 30, 2003, non-performing loans and restructured loans performing in
accordance with modified terms totaled $3,643,000 compared to $3,004,000 at
December 31, 2002. The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance for loan losses is adequate to cover
probable credit losses relating to specifically identified loans, as well as
probable credit losses inherent in the balance of the loan portfolio. In
accordance with FASB Statements 5 and 114, the allowance is provided for losses
that have been incurred as of the balance sheet date. The allowance is based on
past events and current economic conditions, and does not include the effects of
expected losses on specific loans or groups of loans that are related to future
events or expected changes in economic conditions. Management reviews a
calculation of the allowance for loan losses on a quarterly basis. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the bank to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination. The policy of
the Company is to place a loan on non-accrual status if: (a) payment in full of
interest and principal is not expected, or (b) principal or interest has been in
default for a period of 90 days or more, unless the obligation is both in the
process of collection and well secured. Well secured is defined as collateral
with sufficient market value to repay principal and all accrued interest. A debt
is in the process of collection if collection of the debt is proceeding in due
course either through legal action, including judgement enforcement procedures,
or in appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
its restoration to current status.
At June 30, 2003 the allowance for loan losses to total non-performing and
impaired loans equaled 64.3% compared to 69.2% at December 31, 2002. Total
nonperforming and impaired loans increased by $639,000 primarily as the result
of two large loans. One is a commercial real estate loan and the other is a
single family residence. Both loans are in foreclosure.
SHORT-TERM INVESTMENTS
Fed funds sold and securities purchased under agreements to resell decreased
$13,120,000 to $0 at June 30, 2003 compared to $13,120,000 at December 31, 2002.
The decrease primarily reflects the liquidation of short-term year-end
investments on January 2, 2002 associated with the December 31, 2002 year-end
deposits of $18,600,000.
INVESTMENT SECURITIES
Securities available for sale increased $18,116,000, or 21.6%, to $102,013,000
at June 30, 2003 compared to $83,897,000 at December 31, 2002. The increase in
investments in securities available for sale resulted from the redeployment of
short-term investments and cash flows from held to maturity securities. In
addition, proceeds from the net decrease in loans have been invested in
available for sale securities.
DEPOSITS
Total deposits decreased $14,193,000 to $248,892,000 at June 30, 2003 compared
to $263,085,000 at December 31, 2002. As noted above, the Company's December 31,
2002 financial statements reflect short-term year-end interest-bearing deposits
of $18,600,000. Excluding the short-term year-end deposits, total deposits
increased 1.8% from December 31, 2002. Excluding the short-term year-end
deposits, non-interest bearing deposits decreased by $2,154,000 and interest
bearing deposits increased by $6,561,000 at June 30, 2003 compared to December
31, 2002.
BORROWINGS
Short-term borrowings decreased $1,464,000 to $11,990,000 at June 30, 2003 from
$13,454,000 at year-end. The decrease is due to lower outstanding balances of
repurchase agreements with commercial customers, offset by $2,560,000 in Fed
funds purchased at June 30, 2003.
Long-term borrowings consist of term advances from the Federal Home Loan Bank
("FHLB") and were $46,600,000 at June 30, 2003 compared to $38,900,000 at
December 31, 2002. The increase reflects an additional $8,000,000 in FHLB
advances net of a $300,000 repayment invested into securities during 2003.
STOCKHOLDERS' EQUITY
Total stockholders' equity increased $344,000 to $26,142,000 at June 30, 2003
compared to $25,798,000 at December 31, 2002. During the first six months of
2003 additional paid in capital increased by $75,000 from stock options
exercised. Accumulated other comprehensive income, which is composed of the
adjustment of securities available for sale to market value, net of tax, and the
fair value of Blackhawk Bancorp, Inc.'s interest rate SWAP contract, net of
tax, was $1,282,000 at June 30, 2003 compared to $1,287,000 at December 31,
2002. In addition the company declared two quarterly dividends of $0.09 per
share on its common stock, which totaled $453,000.
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.
June 30, December 31, Regulatory
2003 2002 Requirements
---- ---- ------------
Total Capital (To Risk-Weighted Assets) 14.9% 13.9% 8.0%
Tier I Capital (To Risk-Weighted Assets) 13.7% 12.9% 4.0%
Tier I Capital (To Average Assets) 8.2% 8.3% 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.
During June 2003, the Company entered into an interest rate SWAP agreement
related to the company obligated mandatorily redeemable preferred securities.
This SWAP is utilized to manage variable interest rate exposure and is
designated as a highly effective cash flow hedge. The differential to be paid
or received on the SWAP agreement is accrued as interest rates change and is
recognized over the life of the agreement in interest expense. The SWAP
agreement expires in December 2007 and essentially fixes the rate to be paid at
5.72%. The notional amount is $7,000,000. Included in other comprehensive
income is a gain of $69,000, less $24,000 of deferred income tax, relating to
the fair market value of the SWAP agreement as of June 30, 2003. Risk
management results for the six months ended June 30, 2003 related to the balance
sheet hedging of the company obligated mandatorily redeemable preferred
securities indicate that the hedge was 100% effective and that there was no
component of the derivative instrument's gain or loss which was excluded from
the assessment of hedge effectiveness.
LIQUIDITY
Liquidity, as it relates to the subsidiary bank, is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal sources of funds are deposits, scheduled amortization and prepayment
of loan principal, 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 Stockholders, payments of principal and interest on borrowed funds and
subordinated debentures, and a limited amount of expenses. The sources of funds
to provide this liquidity are issuance of capital stock and dividends from its
subsidiary bank. Certain restrictions are imposed upon the Bank, which could
limit its ability to pay dividends if it did not have net earnings or adequate
capital in the future. The Company maintains adequate liquidity to pay its
expenses.
The following table summarizes The Company's significant contractual
obligations and other potential funding needs at June 30, 2003 (in
thousands):
Year Ended Time Long-term Operating
June 30, Deposits debt(1) Leases Total
-------- ----------- --------- -----
2004 $ 71,589 $10,450 $ 50 $ 82,089
2005 36,912 15,500 50 52,462
2006 6,753 1,950 50 8,753
2007 6,569 1,450 50 8,069
2008 4,622 7,250 25 11,897
Thereafter 0 17,000 0 17,000
-------- ------- ---- --------
Total $126,445 $53,600 $225 $180,270
-------- ------- ---- --------
-------- ------- ---- --------
Commitments to extend credit $ 36,684
(1) Long-term debt includes company-obligated mandatorily redeemable
preferred securities.
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
$36,684,000 as of June 30, 2003. This compares to $30,939,000 at December 31,
2002. The increase in commitments since December 31, 2002 is primarily due to
the volume of mortgage refinancings due to interest rates being at 45 year
historical lows. 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.
On August 18, 2000, the Bank filed a lawsuit in Waukesha County, Wisconsin,
against Fiserv, Inc., a former data processing services provider, for breach of
contract. The Bank was seeking to recover damages sustained due to a processing
error in which approximately $500,000 was improperly charged to the Bank's check
clearing account at the FHLB of Chicago. On February 14, 2003, a jury delivered
a verdict that Fiserv, Inc. did not breach its contract with the Bank. Fiserv,
Inc. has filed a counterclaim seeking approximately $380,000 in reimbursement of
legal fees. On May 12, 2003 a judge in the case denied Fiserv's motion for
reimbursement of legal fees. Fiserv has filed an appeal of the judge's decision.
The company plans to aggressively contest their appeal of the initial decision
and has not accrued the legal fee reimbursement claimed by Fiserv.
ITEM 3. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING: There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2003, at the annual meeting of stockholders of the Company,
the stockholders re-elected Kenneth A. Hendricks and George D.
Merchant and elected Stephen R. Thomas and Stephen P. Carter to three-
year terms expiring in 2006. The vote, with respect to the election
of each director was as follows:
Kenneth A. Hendricks
2,517,131 total votes eligible to be cast
2,033,870 votes were represented at the Annual Meeting
1,957,087 votes were cast "For" re-election
No votes were cast "Against" re-election
76,783 votes were withheld
George D. Merchant
2,517,131 total votes eligible to be cast
2,033,870 votes were represented at the Annual Meeting
1,944,859 votes were cast "For" re-election
No votes were cast "Against" re-election
89,011 votes were withheld
Stephen R. Thomas
2,517,131 total votes eligible to be cast
2,033,870 votes were represented at the Annual Meeting
1,934,054 votes were cast "For" election
No votes were cast "Against" election
99,816 votes were withheld
Stephen P. Carter
2,517,131 total votes eligible to be cast
2,033,870 votes were represented at the Annual Meeting
1,933,554 votes were cast "For" election
No votes were cast "Against" election
100,316 votes were withheld
In addition, as detailed in the Company's Proxy Statement dated April
11, 2003, the stockholders ratified the appointment of McGladrey &
Pullen, LLP as the Company's independent accountants for fiscal 2003.
The result of the vote is as follows:
2,517,131 total votes eligible to be cast
2,033,870 votes were represented at the Annual Meeting
1,961,235 votes were cast "For" the proposal
1,717 votes were cast "Against" the proposal
70,918 votes abstained
ITEM 5 OTHER INFORMATION
None.
ITEM 6. A) EXHIBITS
See Exhibit Index following the signature page in this report, which
is incorporated herein by this reference.
B) REPORTS ON FORM 8-K
There was one report on Form 8-K filed during the second quarter of
2003. A report dated May 5, 2003 disclosed the Company's first
quarter 2003 results under provisions of Regulation FD.
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: August 5, 2003 /s/ R. Richard Bastian III
----------------------------------------
R. Richard Bastian, III
President and Chief Executive Officer
/s/ Todd J. James
----------------------------------------
Todd J. James
Executive Vice President
and Chief Financial Officer
/s/ Thomas L. Lepinski
----------------------------------------
Thomas L. Lepinski, CPA
Principal Accounting Officer
BLACKHAWK BANCORP, INC.
INDEX TO EXHIBITS
Incorporated Filed
Exhibit Herein By Here-
Number Description Reference To: with
------- ----------- ------------- -----
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)
31.1 Certification X
31.2 Certification X
32.1 Certification Pursuant to 18
U. S. C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002 X
32.2 Certification Pursuant to 18
U. S. C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002 X