Blackhawk Bancorp Announces Third Quarter 2014 Results and Declares Quarterly Dividend
Oct 30, 2014
OTC Disclosure News Service
–
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
%
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