Blackhawk Bancorp, Inc. (OTCBB: BHWB) reports that its
2014 third quarter results include the recognition of a $2,611,000
impairment charge related to short-term securities, which were
backed by loans and United States Department of Agriculture
guarantees, that were found to be fraudulent. The after-tax loss
recognized on these securities was $1,593,000 resulting in a net
loss of $375,000 for the third quarter compared to net income of
$980,000 earned in the third quarter of 2013. The net loss per
diluted share for the quarter was $0.17, a $0.53 decrease compared
to the $0.36 per diluted share earned the third quarter of last
year.
The securities fraud loss caused year to date net income to drop
to $1,308,000, a 37% decrease compared to net income of $2,076,000
for the first nine months of 2013. The earnings per diluted share
for the nine months ended September 30, 2014 was $0.50, a $0.21
decrease compared to $0.71 per diluted share earned the first nine
months of 2013.
“While the fraud loss was an isolated and unfortunate event, we
are not letting it distract us from the growth and momentum we’ve
achieved improving core earnings and credit quality”, said Rick
Bastian, the Company’s chief executive officer. “Excluding the
impairment charge, third quarter net income was up 24% to
$1,218,000 and year to date net income was up 40% to $2,902,000.
The after-tax impairment charge due to the fraud equaled $0.71 per
diluted share. Excluding this charge, diluted earnings per share
increased by 50% for the quarter and 69% year to date compared to
2013”, he added. “We’ve performed an extensive review of our
processes and the due diligence surrounding the investments in
question and found no breakdown in controls or warning signs that
were missed. We recognized the impairment charge in the third
quarter; however we do expect to ultimately recover a substantial
portion of the loss in future periods”, said Bastian.
In addition, the Company’s Board of Directors has declared a
cash dividend on the Company’s common stock. Shareholders of record
on November 14, 2014 will be paid a dividend of $0.02 per share on
November 29, 2014. This amounts to $0.08 per share on an annualized
basis.
The following table summarizes key performance and asset quality
measures for the quarter ended September 30, 2014 compared to the
previous four quarters. The diluted earnings per share (Diluted
EPS), return on average assets (ROAA), and return on average common
equity (ROACE) are each presented based on actual results and the
results, excluding after tax impact of the securities fraud.
3rd Qtr
2nd Qtr
1st Qtr
4th Qtr
3rd Qtr
Key Performance and Asset Quality Measures 2014 2014
2014 2013 2013 Diluted EPS ($0.17)
$0.42 $0.24 $0.75 $0.36 Diluted EPS, excluding net securities fraud
loss $0.54 $0.42 $0.24 $0.75 $0.36 ROAA (.25%) .67% .49% 1.25% .67%
ROAA, excluding net securities fraud loss .81% .67% .49% 1.25% .67%
ROACE (3.55%) 9.37% 5.70% 17.47% 8.95% ROACE, excluding net
securities fraud loss 11.53% 9.37% 5.70% 17.47% 8.95% Efficiency
Ratio* 71.2% 69.3% 78.3% 76.2% 72.4% Net interest margin 3.66%
3.60% 3.70% 3.79% 3.69% Nonaccrual loans to total loans 1.53% 1.38%
1.49% 1.63% 1.97% Nonaccrual loans and OREO to total loans 1.79%
1.72% 1.89% 2.11% 2.75% Allowance for loan losses to total loans
1.12% 1.14% 1.26% 1.26% 1.58% Allowance for loan losses to
nonaccrual loans 73.1% 82.7% 84.7% 77.5% 82.3% Subsidiary bank
total risk-based capital 13.27% 13.94% 13.80%
13.51% 13.46%
* - The efficiency ratio calculation excludes net
gains and losses on trading and available for sale securities, net
gains and losses on other assets and the securities fraud
loss.
The short-term securities, which incurred the impairment, were
purchased through an arrangement with Pennant Management, Inc., a
Milwaukee based investment advisor, as safe short-term investments,
backed by loans and guarantees of the United States Department of
Agriculture (USDA). Blackhawk has a twelve year history with
Pennant, a recognized leader in dealing with government guaranteed
loans and securities, and has participated in similar arrangements
over the entire term of the relationship. The fraudulent activity
was committed by a USDA approved lender with whom Pennant, on
behalf of its clients, had entered into an agreement to purchase
USDA guaranteed loans. It was discovered that the underlying loans
and the USDA guarantees on 25 loans totaling approximately $176
million were fraudulent. Blackhawk had a $5.5 million interest in
the underlying loans and USDA guarantees. The amount of the loss
was mitigated by recovery efforts that resulted in a court approved
agreement identifying and seizing assets that are to be liquidated
for the benefit of investors. While the amount and timing of
additional recoveries is uncertain, Blackhawk expects the
recoveries in future periods to be substantial. Additional recovery
is being sought from a number of sources including, but not limited
to: claims being made on the USDA to honor their guarantees,
continued seizure of assets from the perpetrator of the fraud, a
potential claim on Blackhawk’s insurance, and the exercise of any
other legal rights and remedies that may be available to
Blackhawk.
Net Interest Income
Net interest income for the third quarter increased by 2% to
$4,932,000 compared to $4,848,000 for the third quarter of 2013
with the net interest margin decreasing 3 basis points to 3.66%
compared to 3.69% the third quarter last year.
Average total earning assets for the quarter increased by $13.1
million to $552.6 million compared to $539.5 million in the third
quarter of 2013. The growth in earning assets includes an $11.8
million, or 3%, increase in average total loans. Average total
deposits for the third quarter increased by $2.3 million to $507.9
million compared to $505.5 million the third quarter of last year.
A $7.3 million, or 8%, increase in average demand deposits was
offset by a decrease in time deposits.
Net interest income for the first three quarters of the year
increased $94,000, or 1%, to $14,463,000 compared to $14,369,000
prior year. The net interest margin for the first nine months was
$3.65%, down 5 basis points compared to the first nine months of
last year.
Year to date average total earning assets increased $12.0
million to $547.5 million compared to $535.5 million for the first
nine months of 2013. The increase was driven by a $14.8 million
increase in average loans. Total average deposits increased by
$10.4 million with $7.0 million of the growth occurring in demand
deposits.
Provision for Loan Losses and Credit Quality
The provision for loan losses in the third quarter dropped by
$98,000, or 20%, to $578,000 compared to $480,000 in third quarter
of 2013. The provision for the nine months ended September 30, 2014
was $1,768,000, 50% less than the $3,540,000 provision recorded the
first nine months of 2013.
Nonaccrual loans and other real estate owned totaled $7.0
million, or 1.79% of total loans, at September 30, 2014 compared to
$8.1 million, or 2.10% of total loans, at December 31, 2013 and
$10.4 million, or 2.68% of total loans, at September 30, 2013.
Net loan charge-offs for the first nine months of 2014 decreased
by 42% to $2,276,000 compared to $3,930,000 the first three
quarters of 2013. The following table summarizes the activity in
the allowance for loan losses for the nine months ended September
30, 2014 and 2013 and the year ended December 31, 2013:
Nine Months Ended Year Ended September 30, December
31, (in Thousands) 2014 2013 2013 Beginning allowance for
loan losses 4,894 6,520 6,520 Provision for loan losses 1,769 3,540
4,140 Charge-offs (2,556) (4,695) (6,590) Recoveries 280 765 824
Ending allowance for loan losses 4,387 6,130 4,894
Net charge-offs to average total loans
0.80% 1.43%
1.55%
Non-Interest Income and Operating Expenses
Excluding the impairment charge on short-term securities,
non-interest income for the third quarter of 2014 increased by 12%
to $2,448,000 compared to $2,191,000 the third quarter of the prior
year. The increase in non-interest income was driven by a $361,000
increase in net other gains (losses), primarily related to sale of
assets acquired in foreclosure.
Excluding the impairment charge on short-term securities,
non-interest income for the first nine months of the year totaled
$6,393,000, a 14% decrease compared to $7,391,000 the nine months
of 2013. The decrease reflects the slow- down in mortgage refinance
activity. Revenue from the sale and servicing of secondary market
mortgages dropped by $834,000 to $1,483,000 compared to $2,317,000
the first nine months last year.
Operating expenses for the third quarter decreased by $219,000,
or 4%, to $5,147,000 compared to $5,366,000 the third quarter of
last year. Year to date operating expenses are down $661,000, or
4%, to $15,416,000 compared to $16,077,000 the first three quarters
of 2013.
Outlook
Blackhawk has created a strong credit culture and the processes
to support it; however, economic uncertainties and depressed real
estate values have resulted in an elevated level of losses and
nonperforming loans. While the level of nonperforming loans has
been decreasing and should result in improved earnings, the
potential for continuing economic weakness presents a heightened
level of risk. For that reason, the company expects to continue
fortifying its balance sheet by conserving capital, strengthening
the allowance for loan losses and maintaining ample liquidity to
meet the demands of its customer base. The company will however
continue to seek profitable growth opportunities in its Wisconsin
and Illinois markets, without sacrificing profitability or credit
quality. Blackhawk emphasizes the value of its personal attention
and the service it provides that remain unmatched by larger
competitors.
About Blackhawk Bancorp
Blackhawk Bancorp, Inc. is headquartered in Beloit, Wisconsin
and is the parent company of Blackhawk Bank, which operates eight
banking centers in south central Wisconsin and north central
Illinois, along the I-90 corridor from Belvidere, Illinois to
Janesville, Wisconsin. Blackhawk’s locations serve individuals and
small businesses, primarily with fewer than 200 employees. The
company offers a variety of value-added consultative services to
small businesses and their employees related to its banking
products such as health savings accounts and investment
management.
Forward-Looking Statements
When used in this communication, the words “believes,”
“expects,” and similar expressions are intended to identify
forward-looking statements. The company’s actual results may 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”; inability to recover
previously recorded losses as anticipated, and the inability of
third party vendors to perform critical services for the company or
its customers.
Further information is available on the Company’s website at
www.blackhawkbank.com.
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2014 AND
DECEMBER 31, 2013 (UNAUDITED) September 30,
December 31, Assets 2014
2013 (Amounts in thousands, except share and per share data)
Cash and due from banks $ 13,233 $ 11,350 Federal funds sold and
securities purchased under agreements to resell 8,453 21,064
Interest-bearing deposits in banks 4,525 2,078
Total cash and cash equivalents 26,211
34,492 Trading securities 79 315 Securities
available-for-sale 144,077 127,985 Loans held for sale 1,791 1,161
Federal Home Loan Bank stock, at cost 2,266 2,266
Loans, less allowance for loan losses of
$4,387 and $4,894 at September 30, 2014 and December 31, 2013,
respectively
387,454 382,295 Office buildings and equipment, net 8,656 8,922
Goodwill 5,037 5,037 Other intangible assets, net 2,732 3,091 Cash
surrender value of bank-owned life insurance 9,532 9,311 Other
assets 10,762 8,565 Total assets $
598,597 $ 583,440
Liabilities and
Stockholders' Equity Liabilities Deposits:
Noninterest-bearing $ 97,768 $ 91,450 Interest-bearing
418,716 419,308 Total deposits 516,484 510,758
Borrowings (including $0 and $2,157 at
fair value at September 30, 2014 and December 31, 2013,
respectively)
25,500 10,157
Subordinated debentures and notes
(including $1,031 at fair value at September 30, 2014 and December
31, 2013)
11,255 11,255 Other liabilities 4,353 2,968
Total liabilities 557,592
535,138
Stockholders’ equity
Preferred stock, $0.01 par value,
1,000,000 shares authorized;
0 and 10,500 shares issued as of September
30, 2014 and December 31, 2013, respectively
- 10,483 Common stock, $0.01 par value, 10,000,000 shares
authorized;
2,316,397 and 2,299,496 shares issued as
of September 30, 2014 and December 31, 2013, respectively
23 23 Surplus 9,909 9,768 Retained earnings 30,191 29,166
Treasury stock, 87,865 and 83,252 shares
at cost as of September 30, 2014 and December 31, 2013,
respectively
(969 ) (909 ) Accumulated other comprehensive income (loss)
1,851 (229 ) Total stockholders' equity 41,005
48,302
Total liabilities and stockholders'
equity $ 598,597 $ 583,440
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED) Three months ended
September 30, 2014 2013 (Amounts in
thousands, except share and per share data) Interest Income:
Interest and fees on loans $ 4,732 $ 4,757 Interest on trading
securities 4 11 Interest and dividends on securities: Taxable 591
445 Tax-exempt 325 337 Interest on federal funds sold and
securities purchased under agreements to resell 45 83 Interest on
interest-bearing deposits in banks 1 2
Total interest and dividend income 5,698
5,635 Interest Expenses: Interest on deposits 518 602
Interest on borrowings 96 33 Interest on subordinated debentures
152 152
Total interest expense
766 787
Net interest and dividend
income 4,932 4,848 Provision for loan losses 578
480
Net interest and dividend income after
provision for loan losses 4,354 4,368
Noninterest Income: Service charges on deposits
accounts 741 760 Net gain on sale of loans 516 613 Net mortgage
servicing income 72 17 Debit card interchange fees 561 564 Net
gains (losses) on trading activities (3 ) 33 Net gains (losses) on
available-for-sale securities 214 27 Net other gains (losses)
(2,512 ) (262 ) Increase in cash value of bank-owned life insurance
71 74 Other 176 365
Total
noninterest income (164 ) 2,191
Noninterest Expenses: Salaries and employee benefits 2,845 2,840
Occupancy and equipment 632 651 Data processing 579 587 Advertising
and marketing 55 54 Amortization of intangibles - 35 Professional
fees 235 305 Office Supplies 108 100 Telephone 98 93 Other
594 701
Total noninterest expenses
5,146 5,366
Income before income
taxes (956 ) 1,193 Provision for income taxes (581 )
213
Net income $ (375 ) $ 980
Key Ratios Basic Earnings
Per Common Share $ (0.17 ) $ 0.37 Diluted Earnings Per Common Share
(0.17 ) 0.36
BLACKHAWK BANCORP, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) Nine months ended September 30,
2014 2013 (Amounts in thousands, except share
and per share data) Interest Income: Interest and fees on loans $
13,946 $ 14,163 Interest on trading securities 12 38 Interest and
dividends on available-for-sale securities: Taxable 1,578 1,501
Tax-exempt 994 916 Interest on federal funds sold and securities
purchased under agreements to resell 154 292 Interest on
interest-bearing deposits in banks 3 6
Total interest and dividend income 16,687
16,916 Interest Expense: Interest on deposits 1,578
2,006 Interest on borrowings 191 180 Interest on subordinated
debentures and notes 456 361
Total
interest expense 2,225 2,547
Net
interest and dividend income before provision for loan losses
14,462 14,369 Provision for loan losses 1,769
3,540
Net interest and dividend income after provision
for loan losses 12,693 10,829
Noninterest Income: Service charges on deposits accounts
2,100 2,099 Net gain on sale of loans 1,291 2,353 Net loan
servicing income (loss) 192 (36 ) Debit card interchange fees 1,680
1,687 Net gains (losses) on trading activities 4 40 Net gains
(losses) on available-for-sale securities 469 614 Net other gains
(losses) (2,883 ) (282 ) Increase in cash surrender value of
bank-owned life insurance 221 224 Other 681
692
Total noninterest income 3,755
7,391 Noninterest Expenses: Salaries and
employee benefits 8,436 8,419 Occupancy and equipment 1,903 1,956
Data processing 1,757 1,769 Advertising and marketing 167 205
Amortization of intangibles 25 104 Professional fees 688 880 Office
Supplies 285 278 Telephone 280 278 Other 1,848
2,188
Total noninterest expenses 15,389
16,077
Income before income taxes 1,059 2,143
Provision for income taxes (249 ) 67
Net
income $ 1,308 $ 2,076
Key Ratios
Basic Earnings Per Common Share
$ 0.50 $ 0.72 Diluted Earnings Per Common Share 0.50 0.71
BLACKHAWK
BANCORP, INC. AND SUBSIDIARIES AVERAGE BALANCE SHEET WITH
RESULTANT INTEREST AND RATES Average Balance Sheet
with Resultant Interest and Rates (Amounts in thousands)
(yields on a tax-equivalent basis) Three months ended September 30,
2014 Three months ended September 30, 2013 Average Average Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
Interest Earning Assets: Interest-bearing deposits in banks
$ 1,973 $ 1 0.14 % $ 3,362 $ 2 0.24 %
Federal funds sold & securities
purchased under agreements to resell
12,693 45 1.39 % 28,636 83 1.15 % Investment securities: Taxable
investment securities 113,325 595 2.08 % 94,436 456 1.91 %
Tax-exempt investment securities 38,623
325 5.02 % 38,982 337
5.17 % Total Investment securities 151,948 920 2.83 % 133,418 793
2.86 % Loans 385,923 4,732 4.86
% 374,124 4,757 5.04 %
Total Earning Assets $ 552,537 $
5,698 4.21 % $ 539,540
$ 5,635 4.27 % Allowance for
loan losses (4,310 ) (7,005 ) Cash and due from banks 13,129 12,653
Other assets 32,914 37,594
Total Assets $ 594,270 $ 582,782
Interest Bearing Liabilities: Interest bearing checking
accounts $ 167,651 $ 118 0.28 % $ 165,199 $ 130 0.31 % Savings and
money market deposits 143,616 54 0.15 % 147,445 52 0.14 % Time
deposits 102,407 346 1.34 %
105,977 420 1.57 % Total
interest bearing deposits 413,674 518 0.50 % 418,621 602 0.57 %
Subordinated debentures 11,255 152 5.37 % 10,876 152 5.56 %
Borrowings 20,084 96 1.90 %
12,784 33 1.01 %
Total
Interest-Bearing Liabilities $ 445,013 $
766 0.68 % $ 442,281
$ 787 0.71 % Interest
Rate Spread 3.53 % 3.56 %
Noninterest checking accounts 94,177 86,890 Other liabilities
13,180 6,368 Total liabilities 552,370
535,539 Preferred Stock - 10,442 Common Stockholders' equity
41,900 36,801
Total Stockholders'
equity 41,900 47,243
Total Liabilities and Stockholders'
Equity
$ 594,270 $ 582,782
Net Interest
Income/Margin $ 4,932 3.66 %
$ 4,848 3.69 %
BLACKHAWK BANCORP, INC. AND SUBSIDIARIES AVERAGE BALANCE
SHEET WITH RESULTANT INTEREST AND RATES
Average Balance Sheet with
Resultant Interest and Rates (Amounts in thousands) (Yields on
a tax-equivalent basis) Nine months ended September 30, 2014 Nine
months ended September 30, 2013 Average Average Average Average
Balance
Interest
Rate
Balance
Interest
Rate
Interest Earning Assets: Interest-bearing deposits in banks
$ 2,667 $ 3 0.16 % $ 3,450 $ 6 0.23 %
Federal funds sold & securities
purchased under agreements to resell
15,179 154 1.36 % 32,581 292 1.20 % Investment securities: Taxable
investment securities 109,125 1,590 1.95 % 97,308 1,539 2.11 %
Tax-exempt investment securities 39,116
994 5.11 % 35,567 916
5.18 % Total Investment securities 148,241 2,584 2.78 % 132,875
2,455 2.94 % Loans 381,395 13,946
4.89 % 366,582 14,163
5.17 %
Total Earning Assets $ 547,482
$ 16,687 4.20 % $
535,488 $ 16,916 4.34 %
Allowance for loan losses (4,652 ) (6,587 ) Cash and due from banks
12,932 13,078 Other assets 33,531 36,334
Total Assets $ 589,293 $ 578,313
Interest Bearing Liabilities: Interest bearing
checking accounts $ 164,331 $ 354 0.29 % $ 162,178 $ 542 0.45 %
Savings and money market deposits 152,495 164 0.14 % 148,382 173
0.16 % Time deposits 103,216 1,060
1.37 % 106,078 1,291 1.63
% Total interest bearing deposits 420,042 1,578 0.50 % 416,638
2,006 0.64 % Subordinated debentures and notes 11,180 456 5.46 %
9,300 361 5.18 % Borrowings 16,144 191
1.58 % 14,093 180 1.70 %
Total Interest-Bearing Liabilities $
447,366 $ 2,225 0.66 %
$ 440,031 $ 2,547 0.77
% Interest Rate Spread 3.54 %
3.57 % Noninterest checking accounts 93,684
86,686 Other liabilities 3,378 3,017
Total liabilities 544,428 529,734 Preferred Stock 4,382 10,417
Common Stockholders' equity 40,483 38,162
Total Stockholders' equity 44,865 48,579
Total Liabilities and Stockholders'
Equity
$ 589,293 $ 578,313
Net Interest
Income/Margin $ 14,462 3.65
% $ 14,369 3.70 %
For further information:Blackhawk Bancorp, Inc.R. Richard
Bastian, III, CEOrbastian@blackhawkbank.comorTodd J. James, EVP
& CFOtjames@blackhawkbank.comPhone: (608) 364-8911
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