Blackhawk Bancorp Announces Results for Third Quarter 2008

- Q3 Net Income Up 17%





BELOIT, Wis., Oct. 15  /PRNewswire-FirstCall/ -- Blackhawk Bancorp, Inc. (OTC:BHWB) (BULLETIN BOARD: BHWB)  today announced improved financial results for the third quarter ended September 30, 2008.

Net income rose to $755,000, or $0.35 per fully diluted share, compared with $645,000, or $0.29 per diluted share in third quarter 2007.  Net income for the first nine months of the year rose to $2,164,000, or $1.00 per fully diluted share, compared with $1,728,000, or $0.77 per diluted share for the same period in 2007.  Total assets increased to $486.3 million as of September 30, 2008 compared with $464.7 million at year end 2007.

"By following a disciplined and focused approach to our business we're continuing to grow and improve performance," said Rick Bastian, president and CEO.  "The strength of our core earnings has produced record earnings while, at the same time, we increased our reserve for bad debts," he added. Blackhawk's solid performance reflects an improved net interest margin and balance sheet growth.  "Up to this point we've avoided major issues, but as the effects of the big bank problems and a weaker economy trickle down, we expect to feel some impact," said Bastian.

Net Interest Income Rises

Net interest income for the third quarter increased 18% to $3.9 million as compared with $3.3 million in the third quarter 2007.  For the first nine months of 2008, net interest income was up 18% to $11.2 million, compared to $9.5 million for the same period a year ago.  The increase in net interest income includes higher average earning assets and an improved margin.  The net interest margin for the third quarter increased 36 basis points to 3.59%, and is up 33 basis points to 3.48% for the year.  Strong loan and deposit growth and increased investment portfolio yields contributed to the gains in net interest income and improved net interest margin.

Average total loans for the quarter increased 12% to $310.7 million compared with $278.0 million in third quarter 2007.   While the balance of retail and mortgage loans grew, the majority of loan growth has been in the commercial and commercial real estate portfolios, which consist of loans to a diversified base of customers, with less than 6% of the bank's total loans being in construction and land development.

Average total deposits for the third quarter of 2008 increased 9% to $355.6 million compared with $329.9 million in the same period a year ago. This included an additional $24.8 million in interest checking, driven by the success of Blackhawk's EasyMoney Checking product, Bastian noted.  For the nine months, average total deposits increased 7% to $351.5 million compared with $327.6 million over the same period in 2007.

"Our strategy of providing high-touch advice and tailored solutions through experienced bankers continues to build customer loyalty," said Bastian.  "Our clean and strong balance sheet should generate confidence from our shareholders and peace of mind for our clients, especially as we enter this period of unprecedented economic uncertainty." he added.

Non-Interest Income and Operating Expenses

Quarterly non-interest income decreased 2% to $1.33 million, with year-to- date non-interest income up 9% to $3.9 million.  For the quarter, deposit service charges were relatively flat, down $14,000 or by 2%, compared to the third quarter of 2007.  However, revenue from mortgage-banking, asset management and bank cards increased $118,000, or by 28% over the same quarter a year ago.   The increase in these fee based revenues was offset by a $180,000 loss due to the net change in fair value of trading securities and other financial instruments for which the company has elected fair value accounting.

On a year to date basis, mortgage banking income is up $505,000, or 83% to $1,115,000 compared to $610,000 for the first three quarters of 2007.  "We believe we have assembled one of the best mortgage origination and processing teams in our market.  We're proud that they have been able to achieve this level of growth in the face of a declining market," said Bastian.  "We've been able to capitalize on the decisions of other institutions to outsource processing and servicing of mortgages, and capture a much larger share of the market.  We believe that local processing, decision making and loan servicing are a big part of the competitive advantage we enjoy," he added.

Total operating expenses for the third quarter increased 8% to $3.90 million compared with $3.62 million for 2007.  This includes a 10% increase in compensation expense, and higher occupancy, data processing and professional fees.  The increase in compensation costs is partially due to higher mortgage loan production and investment management fees, which are generated by commission-based employees. The other expense increases reflect investment in new technology, equipment and staff development and retention.

Credit Quality Remains Strong

Blackhawk strengthened its loan loss reserve in the third quarter, increasing the allowance for loan losses to total loans to .90% compared to .88% at June 30, 2008 and .82% at December 31, 2007.  The ratio of the allowance to non-performing loans has increased to 119% compared to 90% at June 30, 2008.  The provision for loan losses in third quarter was $328,000, a 165% increase over the $124,000 provision recorded in third quarter 2007.  Net charge-offs in the third quarter increased by only $21,000 to $98,000 compared to the same period in 2007.  For the year, net charge-offs increased to $343,000, or .14% of total loans on an annualized basis, compared with $264,000 for the first nine months in 2007. Blackhawk believes its prudent underwriting practices and close relationships with customers have helped ensure the credit quality of the bank's loan portfolio.   Non-performing loans plus other real estate owned equaled .89% of total assets at the end of the third quarter compared with 1.16% at June 30, 2008 and .78% at December 31, 2007.

Outlook

"We expect to continue strengthening loan loss reserves especially if economic conditions continue to deteriorate," said Bastian.  "We believe we've created a strong credit culture and processes to support it, but the potential for a prolonged economic downturn has us focused on fortifying our balance sheet," he added.

Blackhawk continues to seek profitable growth opportunities in its Wisconsin and Illinois markets, without sacrificing profitability or credit quality. It emphasizes the value of its personal attention and the service it provides that remain unmatched by larger competitors.

During the fourth quarter, Blackhawk will complete construction of a new full service facility in a manufacturing and business section of Rockford, Illinois, convenient to its niche markets of small to medium sized manufacturing companies and the area's Hispanic immigrant population.  In

spite of the soft economy, the Company believes by continuing its commitment to service and personalized attention it can continue to grow and prosper.

About Blackhawk Bancorp

Blackhawk Bancorp, Inc. is headquartered in Beloit, Wisconsin and is the parent company of Blackhawk Bank, which operates seven banking centers in south central Wisconsin and north Central Illinois, along the I-90 corridor from Belvidere, Ill. to Beloit, Wis.  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, investment management, and estate and succession planning. The bank has received numerous accolades for its work with the fast-growing Hispanic population in its served markets.

Further information is available on the Company's website at http://www.blackhawkbank.com/.

                  BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                      CONDENSED STATEMENTS OF INCOME
                               (Unaudited)

                           Three Months Ended        Nine Months Ended
                              September 30,             September 30,
  (Dollars in thousands,
   except per share data)   2008         2007         2008         2007
  Interest and Dividend
   Income                 $7,019       $7,028      $20,850      $20,498
  Interest Expense         3,111        3,723        9,644       11,023
    Net Interest and
     Dividend Income       3,908        3,305       11,206        9,475
  Provision for loan losses  328          124          785          377
  Non-Interest Income      1,331        1,363        4,262        3,899
  Non-Interest Expense     3,898        3,620       11,665       10,575
    Income Before Income
     Taxes                 1,013          924        3,018        2,422
  Income Taxes               258          279          854          694
    Net Income              $755         $645       $2,164       $1,728

       Key Ratios
  Diluted Earnings Per
   Share                   $0.35        $0.29        $1.00        $0.77
  Dividends Per Share       0.09         0.09         0.27         0.27
  Average Outstanding
   Shares              2,154,504    2,195,324    2,163,990    2,213,393
  Ending Out standing
   Shares              2,154,504    2,182,885    2,154,504    2,182,885
  Net Interest Margin       3.59%        3.23%        3.48%        3.15%
  Efficiency Ratio         73.27%       76.72%       74.38%       78.37%
  Return on Assets          0.63%        0.58%        0.61%        0.52%
  Return on Equity         12.45%       10.55%       11.75%        9.53%



                         CONDENSED BALANCE SHEETS
                               (Unaudited)

                                                 September 30,  December 31,
  (Dollars in thousands)                             2008           2007
  Assets:
  Cash and cash equivalents                        $19,244        $22,793
  Interest-bearing deposits in banks                   939          1,066
  Trading securities                                20,499         26,520
  Securities available-for sale                     98,831         92,266
  Federal Home Loan Bank Stock, at cost              4,085          4,085
  Loans, net of allowances for loan losses         315,585        292,529
  Office buildings and equipment, net                7,879          7,424
  Intangible assets, net                             6,761          6,636
  Cash surrender value of bank-owned life insurance  7,496          7,286
  Other assets                                       4,982          4,068
    Total Assets                                  $486,301       $464,673
  Liabilities and Stockholders' Equity:
  Deposits                                        $358,070       $331,239
  Borrowings                                        96,182        100,931
  Subordinated debentures                            5,158          5,158
  Other liabilities                                  2,435          2,852
    Total liabilities                              461,845        440,180
  Stockholders' equity                              24,456         24,493
    Total liabilities and stockholders' equity    $486,301       $464,673


  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"; and the inability of third party vendors to perform critical services for the company or its customers. 

DATASOURCE: Blackhawk Bancorp, Inc.



CONTACT:  Todd James, CFO, or R. Richard Bastian III, President & CEO,

both of Blackhawk Bancorp, Inc., [phone], fax, [phone]; or

Woody Wallace, , or Diane Hettwer, , both of

The Investor Relations Company, [phone], for Blackhawk Bancorp, Inc.



Web site: http://www.blackhawkbank.com/ 

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