Blackhawk Bancorp Reports 28% Increase in Second Quarter 2010 Earnings

BELOIT, Wis., July 26 /PRNewswire-FirstCall/ -- Blackhawk Bancorp, Inc.  (OTC Bulletin Board: BHWB) today reported earnings of $664,000 for the quarter ended June 30, 2010, a 28% increase compared to reported earnings of $519,000 for the second quarter of 2009.  For the six months ended June 30, 2010 the company earned $1,317,000, an 11% increase over the $1,182,000 earned in the first six months of 2009.  "In spite of an anemic economy, a strong net interest margin, a stabilized level of non-performing assets and a focus on expense control have helped us show improvement over 2009," said R. Richard Bastian, President & CEO, in commenting on the results.

Earnings per share for the quarter increased by 35% to $0.23 compared to $0.17 the second quarter of last year. For the six month period ended June 30, 2010 earnings per share was $0.46, unchanged from the same period a year ago. Improvements in the net interest margin and expense reductions were offset by a decline in mortgage banking revenue and an increase in the provision for loan losses for both the second quarter and first six months of 2010.

Net income and earnings per share were essentially unchanged compared to the first quarter of 2010.  Net income in the second quarter increased by $11,000 compared to $653,000 in the first quarter of 2010, with earnings per share of $0.23 for both quarters.        

Total assets increased during the first six months of 2010 to $539.3 million from $523.4 million at December 31, 2009.  Strong deposit growth lead to an increase in investment securities and reduction in borrowings from the wholesale markets, continuing to strengthen the company's liquidity position.  While total loans outstanding had decreased during the first quarter of the year, growth during the second quarter more than offset the decline, resulting in year to date loan growth of 1%.  

The following table summarizes key performance and asset quality measures for the quarter ended June 30, 2010 compared to the previous four quarters.    

Key Performance and Asset Quality Measures	2nd Qtr 2010	1st Qtr 2010	4th Qtr 2009	3rd  Qtr 2009	2nd  Qtr 2009
Diluted Earnings per share	$.023	$0.23	$0.19	$0.01	$0.17
Return on average assets	.50%	.50%	.45%	.14%	.39%
Return on common equity	7.19%	7.12%	6.55%	.42%	5.22%
Net interest margin	3.92%	3.96%	3.86%	3.62%	3.61%
Efficiency ratio	68.24%	68.4%	73.7%	69.6%	75.5%
Nonperforming loans to total loans	2.45%	2.55%	1.90%	2.11%	2.20%
Nonperforming assets to total loans	2.70%	2.80%	2.09%	2.44%	2.63%
Allowance for loan losses to total loans	1.79%	1.87%	1.67%	1.57%	1.18%
Allowance for loan losses to nonperforming loans	73%	74%	88%	75%	54%
Subsidiary bank total risk based capital	13.16%	13.48%	12.92%	12.80%	12.46%

Net Interest Income

Net interest income for the second quarter increased 10% to $4.8 million compared to $4.3 million in the second quarter 2009, and increased 3% compared to the previous quarter net interest income of $4.6 million.  The average balance of total earning assets was essentially unchanged compared to the second quarter of 2009, however, the net interest margin increased by 31 basis points to 3.92% compared to 3.61% the previous year.  The second quarter net interest margin decreased by 4 basis points compared to the previous quarter margin of 3.96%.

Net interest income for the six months ended June 30, 2010 increased 13% to $9.4 million compared to $8.3 million for the first six months of 2009.  Average earning assets for the six months ended June 30, 2010 increased by only 1% compared to the first six months of 2009; however, the net interest margin increased by 40 basis points to 3.94% compared to 3.54%.

The improvement in the net interest margin reflects the bank's success in generating core deposits.  Average total deposits for the second quarter increased $41.4 million, or 10%, compared to the second quarter of 2009, and by $12.3 million, or 3% compared to the previous quarter.  Total average deposits for the six months ended June 30, 2010 increased by $39.0 million, or 11%, compared to the same six month period in 2009.  All of the deposit growth occurred in non-maturity deposit products such as checking, interest checking, savings and money market accounts.  The growth in deposits was used to pay down borrowings, decreasing the average balance of borrowings for the second quarter of 2010 by $45.0 million, or 54%, compared to the average balance in the second quarter of 2009.      

Non-Interest Income and Operating Expenses

Noninterest income for the second quarter decreased 19% to $1.8 million compared to $2.2 million the second quarter of the prior year.  For the six month period ended June 30, 2010 non-interest income is down 19% to $3.5 million compared to $4.3 million the first half of 2009.  The decrease for both the quarter and six month period reflects a lower volume of origination and sale of residential mortgage loans in the secondary market.  Gain on sale of mortgage loans, net of amortization of mortgage servicing rights decreased by $1.1 million for the six months ended June 30, 2010 compared to the first half of 2009.  This decrease was partially offset by increases in debit card interchange fees, investment management fees and deposit service charges.  While mortgage banking revenues are down compared to the prior year, activity in the first half of 2010 still exceeded management expectations, as near historic low interest rates, low home values, and government programs fueled refinance and purchase activity.

Operating expenses decreased 9% to $4.5 million in the second quarter of 2010 compared to $5.0 million the same quarter a year ago.  The decrease in total operating expense for the quarter was due to a decrease in compensation expense, reflecting lower variable compensation paid to mortgage originators and a decrease in FDIC insurance, which included a special assessment that was expensed in the second quarter of 2009.  For the six months ended June 30, 2010 operating expenses decreased by $0.5 million, or 5%, to $8.9 compared to $9.4 million for the same period last year.  This decrease is primarily due to lower variable compensation for mortgage originators.      

Provision for Loan Losses and Credit Quality

Nonperforming assets equaled $8.9 million, or 2.70% of total loans, at June 30, 2010, compared to $6.8 million, or 2.09% of total loans, at December 31, 2009 and $8.5 million, or 2.63% of total loans, at June 30, 2009.  "Economic conditions continue to challenge borrowers," said Bastian.  "In addition to the stress the recessionary economy puts on our business customers, high unemployment and deteriorating real estate values are increasing default rates and the severity of loss when a default occurs," he added.   Non-performing assets are expected to remain at elevated levels throughout 2010.

The provision for loan losses in the second quarter increased by 25% to $1.0 million compared to $0.9 million in second quarter 2009.  For the first six months of 2010 the provision for loan losses increased by 24% to $2.0 million compared to $1.6 million for first six months of 2009.  Net charge-offs for the six months ended June 30, 2010 increased by $0.9 million to $1.6 million compared to $0.7 million for the first half of 2009.

The ratio of allowance for loan losses to total loans was 1.79% at June 30, 2010 compared to 1.67% at December 31, 2009, and 1.18% at June 30, 2009.  The ratio of the allowance for loan losses to nonperforming loans was 73% at June 30, 2010 down from 88% at December 31, 2009, but up from 54% at June 30, 2009.  

The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2010 and 2009, and the year ended December 31, 2009.

Activity in Allowance for Loan Losses	Six Months Ended June 30,				Year Ended December 31,
	2010		2009		2009
Beginning allowance for loan losses	$     5,471,000		$   2,970,000		$     2,970,000
Provision for loan losses	2,022,000		1,625,000		4,090,000
Charge-offs	(1,692,000)		(830,000)		(1,779,000)
Recoveries	85,000		85,000		190,000
Ending allowance for loan losses	$     5,886,000		$   3,850,000		$     5,471,000
Net charge-offs to average total loans (annualized)	1.00%		.46%		.49%

Outlook

Blackhawk has created a strong credit culture and the processes to support it, but 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 Beloit, 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. The bank has received numerous accolades for its work with the fast-growing Hispanic population in the markets it serves.  

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.

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

For further information:
Blackhawk Bancorp, Inc.
R. Richard Bastian, III, President & CEO	Todd J. James, EVP & CFO
[e-mail]	[e-mail]
Phone: [phone]

SOURCE Blackhawk Bancorp, Inc.

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