Blackhawk Bancorp, Inc. Reports Third Quarter Earnings

BELOIT, Wis., Oct. 9  /PRNewswire-FirstCall/ -- Blackhawk Bancorp, Inc. (OTC:BHWB) (BULLETIN BOARD: BHWB)  today reported net income for the third quarter ended September 30, 2009 of $189,000, a 75% decrease compared to $755,000 for the third quarter of 2008.  Earnings per diluted common share for the third quarter decreased by 97% to $0.01 compared to $0.35 per common share earned the same quarter last year.  For the nine months ended September 30, 2009 net income decreased by 37% to $1,371,000 compared to $2,164,000 earned in the first nine months of 2008.  Earnings per diluted common share for the nine months ended September 30, 2009 decreased by 53% to $0.47 compared to $1.00 per common share earned the first nine months of 2008.

The lower earnings for both the third quarter and first nine months of 2009 was primarily due to increased loan loss provisions and higher FDIC insurance expense.  Improvements in net interest income and a high level of mortgage banking revenue partially offset these expense increases.  The following table summarizes some of the key performance ratios over the last five quarters:

                                3rd Qtr  2nd Qtr  1st Qtr  4th Qtr  3rd Qtr
  Key Performance Ratios         2009     2009     2009     2008     2008
                                 ----     ----     ----     ----     ----

  Diluted Earnings per share    $0.01    $0.17    $0.29    $0.18    $0.35
  Return on average assets        .14%     .39%     .53%     .31%     .63%
  Return on common equity         .43%    5.68%    9.62%    6.32%   12.45%
  Net interest margin            3.62%    3.61%    3.46%    3.39%    3.59%
  Efficiency ratio               69.6%    75.5%    70.9%    78.9%    73.3%

  Asset quality



The provision for loan losses for the three and nine month periods ended September 30, 2009 increased 446% and 335% to $1,790,000 and $3,415,000 compared to $328,000 and $785,000, for the same three and nine month periods of 2008, respectively.  "The company's asset quality is a reflection of the economies of the communities we serve," said Rick Bastian, President and CEO.  "While there are reports the economy has bottomed out and the recession has likely ended, the recovery is expected to be slow, especially in areas with high unemployment, which has soared to well above fifteen percent in the markets in which we operate," he added.  "The increase in nonperforming loans experienced during the first half of year has leveled off, however performing loans to customers with weakened balance sheets, or secured by collateral with depressed value pose increased risk, especially if the economy continues to deteriorate," said Bastian.

Sound underwriting and credit administration practices, including substantial diversification in the loan portfolio have helped Blackhawk maintain its level of nonperforming loans below that of its peer group, however asset quality has been negatively affected by the current economic downturn.  Total nonperforming loans equaled $6.8 million at September 30, 2009 compared to $7.1 million at June 30, 2009 and $4.9 million at December 31, 2008.  The following table summarizes asset quality and reserve coverage ratios as of the end of the last five quarters.

                                 3rd Qtr  2nd Qtr  1st Qtr  4th Qtr  3rd Qtr
  Asset Quality Ratios            2009     2009     2009     2008     2008
                                  ----     ----     ----     ----     ----

  Nonperforming loans to
   total loans                    2.11%    2.20%    2.24%    1.50%     .75%
  Nonperforming assets to
   total loans                    2.60%    2.63%    2.41%    1.64%     .89%
  Allowance for loan losses
   to total loans                 1.57%    1.18%    1.08%     .90%     .90%
  Allowance for loan losses
   to nonperforming loans           75%      54%      48%      60%     119%
  Subsidiary bank total risk
   based capital                  12.8%   12.46%   12.75%   10.41%   10.81%



The increased loan loss provision, which has significantly outpaced loan charge-offs, has substantially strengthened the allowance for loan losses.  The ratio of the allowance for loan losses to total loans increased to 1.57% at September 30, 2009 compared to the 1.18% reported at June 30, 2009 and 0.90% at December 31, 2008.  The ratio of the allowance for loan losses to non-performing loans increased to 75% as of September 30, 2009 compared to 54% at June 30, 2009 and 60% at December 31, 2008.  Net loan charge-offs for the nine months ended September 30, 2009 equaled $1,281,000 compared to $344,000 for the first nine months of 2008.  The activity in the allowance for loan losses for the nine month periods ended September 30, 2009 and 2008 and the year ended December 31, 2008 is summarized in the following table.

                                          Nine Months Ended          Year
  Activity in Allowance for             September    September      Ended
   Loan Losses                           30, 2009     30, 2008     December
                                                                   31, 2008
                                        ---------    ---------     --------
  Beginning allowance for loan
   losses                              $2,970,000   $2,411,000   $2,411,000
  Provision for loan losses             3,415,000      785,000    1,322,000
  Charge-offs                          (1,416,000)    (498,000)    (988,000)
  Recoveries                              135,000      154,000      225,000
                                          -------      -------      -------
  Ending allowance for loan losses     $5,104,000   $2,852,000   $2,970,000
                                       ==========   ==========   ==========
  Net charge-offs to average
   total loans (annualized)                   .52%         .15%         .26%
                                              ===          ===          ===

  Net Interest Income



Net interest income for the third quarter increased by $453,000, or 12%, to $4,361,000 compared to $3,908,000 in the third quarter of 2008.  The net interest margin for the third quarter increased by 3 basis points to 3.62% compared to 3.59% the third quarter of last year.  Net interest income for the nine months ended September 30, 2009 increased by $1,423,000, or 13% to $12,629,000 compared to $11,206,000 for the first nine months of 2008.  The net interest margin for the first nine months of 2009 increased by 11 basis points to 3.59% compared to 3.48% for the same nine month period in 2008.

The improvement in net interest income reflects strong core deposit growth and the implementation of pricing strategies that account for the increased credit risk of lending in the current economic environment.  Total average deposits for the three months ended September 30, 2009 equaled $404 million, a $48 million, or 13.6% increase over total average deposits for the third quarter of 2008.  The majority of this deposit growth has been driven by success of the bank's EasyMoney checking product that rewards customers with a high interest rate and ATM fee refunds for using electronic delivery channels for accessing their account.

Non-Interest Income and Operating Expenses

Non-interest income continues to be strong and increased by $528,000, or 40% to $1,859,000 for the third quarter compared to $1,331,000 for the third quarter of last year.  For the first nine months of 2009 non-interest income is up by $1,913,000, or 45%, to $6,175,000 compared to $4,262,000 for the nine months ended September 30, 2008.  The increase in non-interest income for both the quarter and nine months ended September 30, 2009 is primarily due to strong mortgage banking revenue.  The bank also realized increases in debit card interchange income as a result of growth in the EasyMoney checking product and broader acceptance and use of debit cards by the bank's customer base.

Operating expenses increased by $504,000, or 12.9% for the quarter to $4,402,000 compared to $3,898,000 for the third quarter of last year.  For the nine month period ended September 30, 2009 expenses were up $2,098,000, or 18.0%, to $13,763,000 compared to $11,665,000 for the first nine months of 2008.  Expense increases for both the quarter and nine months ended September 30, 2009 reflect variable compensation expense related to mortgage loan production, increased FDIC insurance premiums, increased occupancy expense related to the new branch opened in November of 2008, and increased data processing costs, reflecting an increase in the number of accounts and transactions processed.

Balance Sheet Strength

In 2009 Blackhawk has been focused on fortifying the balance sheet to ensure that the company continues to be strong in the face of economic uncertainty.  This strategy includes increasing the provision for loan losses, which builds reserves to cover potential future loan charge-offs; improving the bank's liquidity position by growing the core deposit base and reducing reliance on volatile wholesale funds; and strengthening capital.  While Blackhawk meets regulatory capital requirements and the subsidiary bank is well capitalized, management believes that regulatory agencies are unofficially increasing capital expectations, which could constrain Blackhawk's ability to grow and take advantage of market opportunities.

In March 2009 the company received $10 million in capital under the U.S. Treasury's voluntary Capital Purchase Program, a part of the Emergency Economic Stabilization Act of 2008, designed to provide capital to healthy financial institutions to promote confidence and stabilization in the economy. Blackhawk accepted this capital as other sources of capital had become cost prohibitive, if available at all.

While many banking companies have recently raised additional capital, it has been very expensive and dilutive to existing shareholders. Our board is evaluating its options to enhance the company's capital and to position the company to be able to repay the capital received under the U.S. Treasury's Capital Purchase Program.  At this point, earnings retention appears to be the least expensive source capital available, and reduction or suspension of the quarterly dividend is being evaluated by the board of directors.

Regulatory Financial Reports

Of the $1,790,000 provision for loan losses recorded in the quarter ended September 30, 2009, $1,040,000 will be reflected in amended regulatory financial filings as being recorded in the quarter ended June 30, 2009.  This adjustment, which decreases after tax net income by $634,000, was not reflected in the second quarter 2009 results previously reported, nor have the results been restated, instead the reduction in net income is reflected in the results of the quarter ended September 30, 2009.

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, 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.

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.

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

                                       Three Months          Nine Months
                                          Ended                 Ended
  (Dollars in thousands, except        September 30,         September 30,
   per share data)                    2009       2008       2009       2008
  -----------------------------       ----       ----       ----       ----

  Interest and Dividend Income      $6,892     $7,019    $20,859    $20,850
  Interest Expense                   2,531      3,111      8,230      9,644
                                     -----      -----      -----      -----
     Net Interest and Dividend
      Income                         4,361      3,908     12,629     11,206
  Provision for loan losses          1,790        328      3,415        785
  Non-Interest Income                1,859      1,331      6,175      4,262
  Non-Interest Expense               4,402      3,898     13,763     11,665
                                     -----      -----     ------     ------
     Income Before Income Taxes         28      1,013      1,626      3,018
  Income Taxes                        (161)       258        255        854
                                      ----        ---        ---        ---
     Net Income                       $189       $755     $1,371     $2,164
                                      ====       ====     ======     ======

            Key Ratios
            ----------

  Diluted Earnings Per Common
   Share                             $0.01      $0.35      $0.47      $1.00
  Dividends Per Common Share          0.09       0.09       0.27       0.27
  Average Outstanding Common
   Shares                        2,163,678  2,154,504  2,162,031  2,163,990
  Ending Outstanding Common
   Shares                        2,163,678  2,154,504  2,163,678  2,154,504
  Net Interest Margin                 3.62%      3.59%      3.59%      3.48%
  Efficiency Ratio                   69.63%     73.27%     71.76%     74.38%
  Return on Assets                    0.14%      0.63%      0.35%      0.61%
  Return on Common Equity             0.43%     12.45%      5.23%     11.75%



                        CONDENSED BALANCE SHEETS
                               (Unaudited)
                                               September 30,  December 31,
  (Dollars in thousands)                           2009          2008
  ----------------------                           ----          ----
  Assets:
  -------
  Cash and cash equivalents                      $42,759       $18,558
  Interest-bearing deposits in banks               2,310         1,080
  Securities held-to-maturity                     11,372             -
  Trading securities                              10,274        19,603
  Securities available-for-sale                  103,849       103,274
  Federal Home Loan Bank Stock, at cost            4,085         4,085
  Loans, net of allowances for loan losses       319,652       326,358
  Office buildings and equipment, net              8,565         9,042
  Intangible assets, net                           7,666         6,739
  Cash surrender value of bank-owned life
   insurance                                       8,092         7,915
  Other assets                                     6,263         3,787
                                                   -----         -----
     Total Assets                               $524,887      $500,441
                                                ========      ========
  Liabilities and Stockholders' Equity:
  -------------------------------------
  Deposits                                      $402,133      $376,995
  Borrowings                                      78,565        88,369
  Subordinated debentures                          4,958         5,158
  Other liabilities                                3,512         3,569
                                                   -----         -----
     Total liabilities                           489,168       474,091
  Preferred Stock                                 10,058             -
  Common Stockholders' equity                     25,661        26,350
                                                  ------        ------
  Total Stockholders' equity                      35,719        26,350
                                                  ------        ------
     Total liabilities and stockholders'
      equity                                    $524,887      $500,441
                                                ========      ========


DATASOURCE: Blackhawk Bancorp, Inc.



CONTACT:  R. Richard Bastian, III, President & CEO,

, or Todd J. James, EVP & CFO,

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

Woody Wallace of The Investor Relations Company, [phone], for

Blackhawk Bancorp, Inc.

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