Blackhawk Bancorp Year-to-Date Earnings Up 56%

BELOIT, Wis., Oct. 26 /PRNewswire-FirstCall/ -- Blackhawk Bancorp, Inc. (OTC Bulletin Board: BHWB) today reported earnings of $822,000 for the quarter ended September 30, 2010, compared to reported earnings of $189,000 for the third quarter of 2009.  For the nine months ended September 30, 2010 the company earned $2,139,000, a 56% increase over the $1,371,000 earned in the first nine months of 2009.  "A strong net interest margin and a high level of mortgage banking activity generated enough revenue to offset elevated loan loss provisions and other credit related expenses," said R. Richard Bastian, President & CEO.  

Earnings per common share for the quarter increased to $0.30 compared to $0.01 the third quarter of last year.  For the nine month period ended September 30, 2010 earnings per common share increased by 62% to $0.76, compared to $0.47 for the same nine month period a year ago.   "With non-performing asset levels stabilizing, we feel like we've weathered the storm pretty well, but with the combination of a very slow economic recovery, increasing regulatory burden and increasing capital requirements, there are still plenty of challenges ahead," said Bastian.  "However, as the whole industry faces these same issues, we expect to see great opportunities for banks that are able to meet these challenges head on," he added.

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

Key Performance and Asset Quality Measures	3rd Qtr 2010	2nd Qtr 2010	1st Qtr 2010	4th Qtr 2009	3rd Qtr 2009
Diluted Earnings per share	$0.30	$0.23	$0.23	$0.19	$0.01
Return on average assets	.60%	.50%	.50%	.45%	.14%
Return on common equity	8.91%	7.19%	7.12%	6.55%	.42%
Net interest margin	4.07%	3.92%	3.96%	3.86%	3.62%
Efficiency ratio	63.34%	68.24%	68.4%	73.7%	69.6%
Nonperforming loans to total loans	2.30%	2.45%	2.55%	1.90%	2.11%
Nonperforming assets to total loans	2.68%	2.70%	2.80%	2.09%	2.44%
Allowance for loan losses to total loans	1.88%	1.79%	1.87%	1.67%	1.57%
Allowance for loan losses to nonperforming loans	82%	73%	74%	88%	75%
Subsidiary bank total risk based capital	13.05%	13.16%	13.48%	12.92%	12.80%

Net Interest Income

Net interest income for the third quarter increased 16% to $5.1 million compared to $4.4 million in the third quarter 2009.  The average balance of total earning assets increased $14.9 million, or 3%, compared to the third quarter of 2009 while the net interest margin increased by 45 basis points to 4.07% compared to 3.62% the year before.  

Net interest income for the nine months ended September 30, 2010 increased 15% to $14.6 million compared to $12.6 million for the first nine months of 2009.  Average earning assets for the nine months ended September 30, 2010 increased by $8.9 million, or 2%, compared to the first nine months of 2009, and the net interest margin increased by 46 basis points to 4.05% compared to 3.59% the year before.

The improvement in the net interest margin reflects the bank's success in generating core deposits.  Average total deposits for the third quarter increased $56.5 million, or 14%, compared to the third quarter of 2009.  Total average deposits for the nine months ended September 30, 2010 increased by $48.2 million, or 12%, compared to the same nine month period in 2009.  Most of the deposit growth occurred in non-maturity deposit products such as checking, interest checking, savings and money market accounts.  In addition to funding earning assets, the deposit growth was used to pay down borrowings, decreasing the average balance of borrowings for the third quarter of 2010 by $46.1 million, or 56%, compared to the average balance in the third quarter of 2009.      

Non-Interest Income and Operating Expenses

Noninterest income for the third quarter increased 23% to $2.3 million compared to $1.9 million the third quarter of the prior year.  For the nine month period ended September 30, 2010 non-interest income is down 9% to $5.6 million compared to $6.2 million the first half of 2009.  The change in non-interest income for both the quarter and the nine month period is due primarily to mortgage banking activity.  Refinance activity was strong during the third quarter of 2010 increasing net revenues from the sale and servicing of mortgage loans by $0.3 million to $1.0 million compared to $0.7 million for the third quarter of 2009.  For the nine months ended September 30, 2010 the net revenue from the sale and servicing of mortgage loans is down $0.8 million to $2.2 million compared to $3.0 million realized in the first nine months of 2009.  Loan production was driven by strong refinance activity during the first half of 2009 and then slowed for the remainder of 2009 and into the first half of 2010.  However, interest rates have dropped even lower and activity picked up again in the third quarter of 2010.   Strong refinance activity and related mortgage banking revenue is expected to continue into the fourth quarter of 2010.  

Operating expenses increased 7% to $4.7 million in the third quarter of 2010 compared to $4.4 million the same quarter a year ago.  The increase for the quarter was primarily due to an increase in compensation expense, including higher variable compensation paid for mortgage originations.  For the nine months ended September 30, 2010 operating expenses decreased by $0.1 million, or 1%, to $13.6 compared to $13.7 million for the same period last year.  

Provision for Loan Losses and Credit Quality

Nonperforming assets equaled $9.0 million, or 2.68% of total loans, at September 30, 2010, compared to $6.8 million, or 2.09% of total loans, at December 31, 2009 and $7.9 million, or 2.44% of total loans, at September 30, 2009.  "While nonperforming loan levels have stabilized, the weak economy continues to challenge credit quality," said Bastian.  "With continued high unemployment and depressed real estate values in our markets we expect the nonperforming loans and charge-offs to remain at elevated levels through 2011," he added.  

The provision for loan losses in the third quarter decreased by 21% to $1.4 million compared to $1.8 million in third quarter 2009.  For the first nine months of 2010 the provision for loan losses was $3.4 million, essentially flat compared to the first nine months of 2009.  Net charge-offs for the nine months ended September 30, 2010 increased by $1.3 million to $2.5 million compared to $1.2 million for the first nine months of 2009.

The ratio of allowance for loan losses to total loans was 1.88% at September 30, 2010 compared to 1.67% at December 31, 2009, and 1.57% at September 30, 2009.  The ratio of the allowance for loan losses to nonperforming loans was 82% at September 30, 2010 down from 88% at December 31, 2009, but up from 75% at September 30, 2009.  

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

Activity in Allowance for Loan Losses	Nine Months Ended September 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	3,433,000		3,415,000		4,090,000
Charge-offs	(2,671,000)		(1,416,000)		(1,779,000)
Recoveries	135,000		135,000		190,000
Ending allowance for loan losses	$     6,368,000		$  5,104,000		$     5,471,000
Net charge-offs to average total loans (annualized)	1.05%		.53%		.52%

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 State 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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