Blackhawk Bancorp Reports Second Quarter 2009 Earnings

- Quarterly net interest margin up by 20 basis points compared to 2nd Quarter 2008 - 2nd Quarter mortgage banking revenue up 231% over 2008 - $240,000 special assessment drives $380,000 increase in FDIC insurance


BELOIT, Wis., July 17  /PRNewswire-FirstCall/ -- Blackhawk Bancorp, Inc. (OTC:BHWB) (BULLETIN BOARD: BHWB)  today reported net income for the quarter ended June 30, 2009 of $519,000, a 36% decrease compared to $812,000 earned the same quarter last year.  Earnings per share for the quarter decreased 54% to $0.17 per diluted common share compared to $0.37 per diluted common share earned in the second quarter of 2008.  Net income for the six months ended June 30, 2009 was $1,182,000, a 16% decrease compared to $1,409,000 earned in the first six months of 2008. Earnings per share for first six months were 29% lower at $0.46 per diluted common share compared to the $0.65 per share earned for the same period a year ago.

Improvement in the net interest margin and strong mortgage refinance activity partially offset increases in FDIC insurance expense and loan loss provision. "Despite the elevated level of nonperforming assets in the first half of 2009, our net interest margin is holding up well," said Rick Bastian, President and CEO.  "It's actually improved in each of the last two quarters," he added. "In addition, our mortgage banking team continued producing at a record level, cementing our position as one of the top mortgage producers in our local markets," he said.

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

  Net interest margin           3.61%    3.46%    3.39%    3.59%    3.41%
  Efficiency ratio              75.5%    70.9%    78.9%    73.3%    72.5%
  Return on average assets       .39%     .53%     .31%     .63%     .68%
  Return on common equity       5.68%    9.62%    6.32%   12.45%   13.14%
  Nonperforming loans to
   total loans                  2.20%    2.24%    1.50%     .75%     .98%
  Allowance to total loans      1.18%    1.08%     .90%     .90%     .88%
  Subsidiary bank total risk
   based capital               12.46%   12.75%   10.41%   10.81%   11.35%



The increase in bank failures throughout the country has driven up the cost of FDIC insurance. In addition to the special assessment of $240,000 that was accrued during the second quarter of 2009 the regular quarterly assessment has gone up. Blackhawk projects total FDIC insurance cost of approximately $900,000 for 2009 compared to $50,000 in 2008.  The increase in FDIC insurance and other regulatory compliance burdens combined with further deterioration in the economy during the first two quarters of 2009 has Blackhawk continuing its efforts to fortify the balance sheet, focusing on three key areas: capital, reserve for loan losses, and liquidity.

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 investment to ensure that it had an adequate capital cushion to continue meeting the credit needs of customers, even in the face of a prolonged economic downturn. At June 30, 2009 the subsidiary bank's total risk-based capital was 12.46% compared to 10.41% at December 31, 2008.

A higher provision for loan losses, was well in excess of net charge-offs, increased the ratio of allowance for loan losses to total loans to 1.18% at June 30, 2009 compared to 1.08% at March 31, 2009, and .90% at December 31, 2008. Management continually assesses the adequacy of the allowance for loan losses and anticipates continuing  to increase it as a percentage of total loans if the economy does not start to improve.

Strong deposit growth has resulted in a substantial increase in liquidity, which is being held on the balance sheet in short-term investments classified as cash equivalents. Cash and cash equivalents to total assets equaled 9.5% at June 30, 2009 compared to 3.7% at December 31, 2008. The increased liquidity allows the bank to reduce reliance on more volatile wholesale funding sources and to be more responsive to customer borrowing and deposit activity, even in periods of volatile activity.

Net Interest Income Rises

Net interest income for the second quarter increased 17% to $4.3 million compared with $3.7 million in the second quarter of 2008. This includes an increase in both the earning asset base and the net interest margin. The net interest margin for the quarter increased 20 basis points to 3.61% compared to 3.41% in the second quarter of 2008. Average earning assets for the quarter ended June 30, 2009 increased by $50 million, or 11%, over the second quarter of 2008. Strong loan growth in the second half of 2008, continued strong deposit growth, and higher investment portfolio yields accounted for the gains in net interest income and the improved net interest margin.

For the six months ended June 30, 2009, net interest income increased 13% to $8.3 million compared to $7.3 million earned in the same six months in 2008.  Average earning assets increased by $44.9 million, or 10%, to $482.6 million compared to $437.7 million for the first six months of 2008. This increase includes a $31.3 million, or 11%, increase in average total loans for the first half of 2009 compared to the first two quarters of 2008. The net interest margin for the first six months of 2009 increased 12 basis points to 3.54% compared to 3.42% for the same six month period in 2008.

Average total deposits for the second quarter of 2009 increased by $42.9 million, or 12% to $399.3 million compared with $356.4 million in second quarter of 2008. This includes a $44.2 million increase in the average balance of interest checking, driven by the success of Blackhawk's EasyMoney Checking product. For the first six months of 2009 average total deposits have increased by $41.4 million, or 12% to $390.9 million compared to $349.5 million for the same six months a year ago.  In addition to the growth driven by the popular EasyMoney Checking product, some larger municipal deposits have been shifted to low interest checking accounts in order to receive unlimited FDIC insurance.

"The number of new checking accounts opened, net of the accounts closed, was up by 83% for the first half of  2009 compared the first half of last year," explained Bastian. "Our attractive product line and solutions-oriented customer service has helped us earn the confidence of new and existing customers, especially in this uncertain economic environment," said Bastian. "This confidence has translated into phenomenal growth in deposits, which are up by $30.0 million, or 8%, since December 31, 2008," he added.

Noninterest Income and Operating Expenses

Noninterest income for the quarter increased 37% to $2,182,000 compared to $1,591,000 the second quarter of 2008.  Gain on sale of mortgage loans increased $904,000, or 231%, to $1,295,000 compared to $391,000 the second quarter of 2008. The increase in gain on sale of mortgage loans was partially offset by a $92,000 decrease in net loan servicing income due to accelerated amortization of servicing rights on loans refinanced out of the bank's servicing portfolio, a $136,000 decrease in deposit service fees due to a reduced level of overdraft fees, and an increase of $108,000 in net losses on sale of investments and charges related to financial instruments accounted for at fair value. For the six months ended June 30, 2009 noninterest income is up 47% to $4,316,000 compared to $2,931,000 in the same six month period in 2008.

Total operating expenses for the second quarter increased 29% to $5.0 million compared with $3.9 million for the second quarter of 2008. This includes a $380,000 increase in FDIC insurance assessments, reflecting a substantial increase in the on-going quarterly assessment and the one-time special assessment levied on all banks for the second quarter. The increase in expenses also includes an increase of $393,000 in compensation and benefits.  For the six months ended June 30, 2009 operating expenses increased $1.6 million, or 21%, to $9.4 million, compared to $7.8 million for the first six months of 2008. The increase in compensation and benefits, for both the quarter and six months, is primarily due to the high level of mortgage loan originations, which are produced by commission-based employees, however it also reflects merit increases and operation of the new Rockford banking center, which was opened in the fourth quarter of 2008.  FDIC insurance expense for the first six months is up $544,000 compared to the first six months of 2008.

Credit Quality

Management believes that the credit quality of the loan portfolio is good, despite the increased level of nonperforming loans. At June 30, 2009 nonperforming loans totaled $7.1 million compared to $7.3 million at March 31, 2009, and $4.9 million at December 31, 2008.

The provision for loan losses was $850,000, up by $622,000, or 273% compared to the $228,000 provided in the second quarter of last year.  For the first six months of the year the provision for loan losses was $1,625,000, a $1,169,000, or 256% increase over the $456,000 provision recorded in the first half of 2008. The higher provision levels have increased the allowance for loan losses to total loans to 1.18% compared to .90% at December 31, 2008. Net loan charge-offs for the first six months of 2009 equaled $745,000, a $500,000 increase over the $245,000 of net charge-offs during the first six months of the prior year. Annualized net loan charge-offs to total average loans for the first six months of 2009 was .46% compared to .26% for the year ended December 31, 2008.

The ratio of the allowance for loan losses to non-performing loans was 54% at June 30, 2009 compared to 48% at March 31, 2009, and 60% at December 31, 2008.  Non-performing loans plus other real estate owned equaled 2.63% of total assets at June 30, 2009 compared to 2.41% at March 31, 2009, 1.64% at December 31, 2008. We expect to continue strengthening loan loss reserves if economic conditions don't improve or continue to deteriorate," said Bastian. "We believe we've created a strong credit culture and processes to support it, but in this economic environment losses are going to occur," he added.

The mortgage business, which was very strong in the first half of the year, is expected to slow in the third and fourth quarters.  While this would reduce noninterest income, the reduction would be offset by a reduction in variable expenses such as compensation and amortization of mortgage servicing rights.

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.

In the fourth quarter of 2008, Blackhawk completed 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 economic downturn, 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 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.

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    Six Months Ended
                                      June 30,             June 30,
  (Dollars in thousands,
   except per share data)         2009       2008       2009       2008
  -----------------------         ----       ----       ----       ----

  Interest and
   Dividend Income              $7,114     $6,796    $13,962    $13,834
  Interest Expense               2,783      3,106      5,693      6,536
                                 -----      -----      -----      -----
    Net Interest and
     Dividend Income             4,331      3,690      8,269      7,298
  Provision for loan losses        850        228      1,625        456
  Non-Interest Income            2,182      1,591      4,316      2,931
  Non-Interest Expense           4,991      3,883      9,362      7,768
                                 -----      -----      -----      -----
    Income Before Income Taxes     672      1,170      1,598      2,005
  Income Taxes                     153        358        416        596
                                   ---        ---        ---        ---
    Net Income                    $519       $812     $1,182     $1,409
                                  ====       ====     ======     ======

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

  Diluted Earnings Per
   Common Share                  $0.17      $0.37      $0.46      $0.65
  Dividends Per Common Share      0.09       0.09       0.18       0.18
  Average Outstanding
   Common Shares             2,163,678  2,165,607  2,161,194  2,168,785
  Ending Outstanding
   Common Shares             2,163,678  2,154,504  2,163,678  2,154,504
  Net Interest Margin             3.61%      3.41%      3.54%      3.42%
  Efficiency Ratio               75.45%     72.50%     73.25%     74.94%
  Return on Assets                0.39%      0.68%      0.46%      0.60%
  Return on Common Equity         5.68%     13.14%      7.59%     11.40%



                          CONDENSED BALANCE SHEETS
                                 (Unaudited)
                                                    June 30,    December 31,
  (Dollars in thousands)                              2009          2008
  ----------------------                              ----          ----
  Assets:
  -------
  Cash and cash equivalents                          $51,045       $18,558
  Interest-bearing deposits in banks                   5,266         1,080
  Securities held-to-maturity                          9,989             -
  Trading securities                                  11,323        19,603
  Securities available-for-sale                      101,666       103,274
  Federal Home Loan Bank Stock, at cost                4,085         4,085
  Loans, net of allowances for loan losses           321,103       326,358
  Office buildings and equipment, net                  8,766         9,042
  Intangible assets, net                               7,593         6,739
  Cash surrender value of bank-owned life insurance    8,063         7,915
  Other assets                                         5,541         3,787
                                                       -----         -----
       Total Assets                                 $534,440      $500,441
                                                    ========      ========
  Liabilities and Stockholders' Equity:
  -------------------------------------
  Deposits                                          $407,035      $376,995
  Borrowings                                          81,909        88,369
  Subordinated debentures                              4,958         5,158
  Other liabilities                                    4,054         3,569
                                                       -----         -----
       Total liabilities                             497,956       474,091
  Preferred Stock                                     10,033             -
  Common Stockholders' equity                         26,451        26,350
                                                      ------        ------
  Total Stockholders' equity                          36,484        26,350
                                                      ------        ------
       Total liabilities and stockholders' equity   $534,440      $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]



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

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