BHWB Blackhawk Bancorp Inc (QX)

Blackhawk Bancorp, Inc. (OTCBB: BHWB) reports net income $513,000 for the second quarter of 2013, a 31% drop compared to $745,000 earned in the second quarter of 2012. For the six months of 2013 the company’s net income was $1,096,000, a 23% decrease compared to $1,423,000 earned the first six months of 2012.

Earnings per diluted share for the quarter decreased $0.11, to $0.16 compared to $0.27 per diluted share the second quarter of 2012. For the first half of 2013 the company earned $0.35 per diluted share, a 30% decrease compared to the $0.50 per diluted share earned the first half of 2012. The company had total assets of $593.8 million at June 30, 2013, a $34.0 million increase compared to $559.8 million at December 31, 2012.

“The decline in earnings was due to elevated loan losses associated with continued weakness in local real estate values,” said Rick Bastian the company’s president & CEO. “While disappointed in the bottom line, we are very pleased with the progress we’ve made growing the core business of the bank and reducing nonperforming assets to their lowest level in years.” The company’s total revenue is little changed from last year despite continued pressure on the net interest margin from competition for high quality loans and the overall low rate environment. Loan and core deposit growth has helped offset margin contraction with average total loans for the first half of the year increasing 5% over last year. Noninterest income is down by 5% compared to last year due to a reduction in mortgage banking revenue; however the level of non-interest income continues to be strong, making up 36% of the company’s revenue so far in 2013, with mortgage banking being the largest source. Operating expenses are under control, increasing only 2% for the first six months of the year, with increases reflecting investments in talent and technology.

In addition, nonperforming assets are at their lowest level since the fourth Quarter of 2009 with total nonperforming loans and OREO of $9.2 million, or 2.55% of total loans at June 30, 2013. At June 30, 2013 the ratio of the allowance for loan losses to total loans is 1.86% and the ratio of the allowance for loan losses to nonperforming loans is 111%. The allowance coverage of nonperforming loans is the highest it’s been since the recession began in 2008.

The following table summarizes key performance and asset quality measures for the quarter ended June 30, 2013 compared to the previous four quarters:

 

2nd Qtr

     

1st Qtr

     

4th Qtr

     

3rd Qtr

     

2nd Qtr

Key Performance and Asset Quality Measures 2013       2013       2012       2012       2012   Diluted Earnings per share $0.16 $0.19 $0.28 $0.25 $0.27 Return on average assets .35% .42% .55% .50% .53% Return on common equity 3.66% 4.52% 6.69% 6.00% 6.82% Net interest margin 3.66% 3.76% 3.75% 3.72% 3.80% Efficiency ratio 68.24 74.91% 72.92% 68.16% 67.37% Nonaccrual loans to total loans 1.68% 2.46% 3.09% 3.77% 3.01% Nonaccrual loans and OREO to total loans 2.55% 3.07% 3.57% 4.38% 3.76% Allowance for loan losses to total loans 1.86% 1.77% 1.78% 1.74% 1.98% Allowance for loan losses to nonaccrual loans 110.7% 72.2% 57.11% 46.1% 65.8% Subsidiary bank total risk-based capital 13.64% 13.62% 13.51% 13.62% 13.58%  

Net Interest Income

Net interest income for the second quarter decreased less than 1% to $4,790,000 compared to $4,809,000 in the second quarter 2012. Average total earning assets for the second quarter increased by $16.8 million to $541.0 million compared to $524.2 million in the second quarter of 2012. The growth in earning assets includes a $10.8 million, or 3%, increase in average total loans and net $6.0 million increase in investment securities and short-term investments. The net interest margin realized on earning assets decreased 14 basis points to 3.66% for the quarter ended June 30, 2013 compared to 3.80% for the second quarter of 2012. Average total deposits for the second quarter increased by $14.9 million, or 3%, to $502.6 million compared to $487.7 million the second quarter of last year. The increase in average total deposits includes a $17.4 million, or 4%, increase in average non-maturity deposits such as demand deposit, interest checking, savings and money market accounts, which was offset by a $2.6 million decrease in the average balance of time deposits.

Net interest income for the six months ended June 30, 2013 increased by $21,000 to $9,521,000 compared to $9,500,000 for the first half of 2012. Average total earning assets for the first half of the 2013 increased by $12.6 million to $533.4 million compared to $520.8 million for the first half of 2012. The earning asset growth included a $17.3 million, or 5%, increase in average total loans. The net interest margin for the first six months of 2013 declined by 6 basis points to 3.71% compared to 3.77% for the first half of last year. Average total deposits for the first half of 2013 increased by $15.5 million, or 3%, to $500.4 million compared to $484.8 million in the first six months of 2012. The increase in average total deposits includes an increase of $20.5 million, or 5%, in average non-maturity deposits such as demand deposit, interest checking, savings and money market accounts. The increase in average non-maturity deposits was partially offset with a $5.0 million reduction in average time deposits.

Provision for Loan Losses and Credit Quality

The provision for loan losses in the second quarter increased by $440,000, or 29%, to $1,980,000 compared to $1,540,000 in second quarter 2012. For the six months ended June 30, 2013 the provision for loan losses increased by $260,000, or 9%, to $3,060,000 compared to $2,800,000 for the first half of 2012.

The company had net loan charge-offs of $2,858,000 in the first six months of 2013, compared to $2,665,000 for the first half of 2012. Nonaccrual loans and other real estate owned totaled $9.2 million, or 2.55% of total loans, at June 30, 2013 compared to $11.1 million, or 3.07% of total loans, at March 31, 2013, and $13.2 million, or 3.6% of total loans, at December 31, 2012.

The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2013 and 2012, and the year ended December 31, 2012:

Activity in Allowance for Loan Losses:   Six Months Ended       Year Ended (In Thousands) June 30, December 31, 2013   2012 2012 Beginning allowance for loan losses 6,520 6,943 6,943 Provision for loan losses 3,060 2,800 5,620 Charge-offs (3,001) (2,852) (6,391) Recoveries 143 187 348 Ending allowance for loan losses 6,722 7,078 6,520  

Net charge-offs to average total loans, annualized

1.59% 1.51% 1.71%  

The ratio of allowance for loan losses to total loans was 1.86% as of June 30, 2013 compared to 1.77% at March 31, 2013, and 1.78% at December 31, 2012. The ratio of the allowance for loan losses to nonaccrual loans was 111% at June 30, 2013, compared to 72% at March 31, 2013 and 57% at December 31, 2012.

Non-Interest Income and Operating Expenses

Noninterest income for the second quarter of 2013 increased by $126,000, or 4%, to $3,042,000 compared to $2,916,000 the second quarter of the prior year. A net decrease of $180,000 in mortgage banking revenue was offset with increases in securities gains. For the six months ended June 30, 2013 noninterest income decreased $272,000 to $5,200,000 compared to $5,472,000 the first half of 2012. The decrease is primarily attributable to a reduction in mortgage banking revenue.

Operating expenses for the second quarter increased $147,000, or 3%, to $5,444,000 compared to $5,297,000 in the second quarter of 2012. For the six months ended June 30, 2013 operating expenses increased by $252,000, or 2% to $10,711,000 compared to $10,459,000 the first half of 2012. The increase in operating expenses for both the three and six month periods ended June 30, 2013 was due to increased compensation expense and occupancy and equipment costs related to technology investments.

Outlook

Blackhawk has created a strong credit culture and the processes to support it; however, the economic recession and depressed real estate values have resulted in an elevated level of nonperforming loans. While the level of nonperforming loans has begun to decrease and should result in improved earnings, 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.

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.

    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2013 AND DECEMBER 31, 2012 (UNAUDITED) June 30, December 31, Assets   2013   2012 (Amounts in thousands, except share and per share data) Cash and due from banks $ 14,041 $ 11,579 Federal funds sold and securities purchased under agreements to resell 38,705 25,442 Interest-bearing deposits in banks   9,308     1,539   Total cash and cash equivalents   62,054     38,560   Trading securities 1,207 1,614 Securities available-for-sale 131,232 121,077 Loans held for sale 4,945 2,558 Federal Home Loan Bank (FHLB) Stock, at cost 2,266 2,266

Loans, less allowance for loan losses of $6,722 and $6,425 at June 30, 2013 and December 31, 2012, respectively

354,647 359,928 Office buildings and equipment, net 9,055 8,407 Intangible assets, net 8,267 8,274 Cash surrender value of bank-owned life insurance 9,166 9,016 Other assets   10,933     8,059   Total assets $ 593,772   $ 559,759     Liabilities and Stockholders' Equity   Liabilities Deposits: Noninterest-bearing $ 86,491 $ 84,311 Interest-bearing   430,515     409,510   Total deposits 517,006 493,821

Borrowings (including $2,176 and $2,217 at fair value at June 30, 2013 and December 31, 2012, respectively)

16,176 10,010

Subordinated debentures (including $834 at fair value at June 30, 2013 and December 31, 2012)

10,874 4,958 Other liabilities   3,374     3,146   Total liabilities   547,430     511,935     Stockholders’ equity Preferred stock, $0.01 par value, 1,000,000 shares authorized;

10,500 shares issued as of June 30, 2013 and December 31, 2012, respectively

10,433 10,383 Common stock, $0.01 par value, 10,000,000 shares authorized;

2,299,496 and 2,287,496 shares issued as of June 30, 2013 and December 31, 2012, respectively

23 23 Surplus 9,689 9,619 Retained earnings 26,669 25,896

Treasury stock, 83,252 shares at cost as of June 30, 2013 and December 31, 2012

(909 ) (909 ) Accumulated other comprehensive income (loss)   437     2,812   Total stockholders' equity   46,342     47,824   Total liabilities and stockholders' equity $ 593,772   $ 559,759       BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended June 30, 2013   2012 (Amounts in thousands, except share and per share data) Interest Income: Interest and fees on loans $ 4,714 $ 4,908 Interest on trading securities 13 22 Interest and dividends on securities: Taxable 518 710 Tax-exempt 288 289 Interest on federal funds sold and securities purchased under agreements to resell 115 70 Interest on interest-bearing deposits in banks   1     4   Total interest and dividend income   5,649     6,003   Interest Expenses: Interest on deposits 658 922 Interest on short-term borrowings 1 2 Interest on long-term borrowings 47 234 Interest on subordinated debentures   153     36   Total interest expense   859     1,194   Net interest and dividend income 4,790 4,809 Provision for loan losses   1,980     1,540   Net interest and dividend income after provision for loan losses   2,810     3,269     Noninterest Income: Service charges on deposits accounts 684 682 Net gain on sale of loans 968 1,168 Net mortgage servicing income (22 ) (42 ) Debit card interchange fees 579 587 Net gains (losses) on trading activities 3 (27 ) Net gains (losses) on available-for-sale securities 587 296 Net other gains (losses) 56 (43 ) Increase in cash value of bank-owned life insurance 69 71 Other   118     224   Total noninterest income   3,042     2,916     Noninterest Expenses: Salaries and employee benefits 2,825 2,711 Occupancy and equipment 646 598 Data processing 601 634 FDIC assessment 185 185 Advertising and marketing 63 89 Amortization of intangibles 35 35 Professional fees 301 301 Office Supplies 92 100 Telephone 98 77 Other   598     567   Total noninterest expenses   5,444     5,297   Income before income taxes 408 888 Provision for income taxes   (105 )   143   Net income $ 513   $ 745     Key Ratios           Basic Earnings Per Common Share $ 0.16 $ 0.27 Diluted Earnings Per Common Share 0.16 0.27   Net Interest Margin (FTE) 3.66 % 3.80 % Efficiency Ratio (FTE) 0.00 % 67.37 % Return on Assets 0.35 % 0.53 % Return on Common Equity 3.66 % 6.82 %     BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Six months ended June 30, 2013   2012 (Amounts in thousands, except share and per share data) Interest Income: Interest and fees on loans $ 9,407 $ 9,639 Interest on trading securities 27 33 Interest and dividends on available-for-sale securities: Taxable 1,055 1,499 Tax-exempt 579 577 Interest on federal funds sold and securities purchased under agreements to resell 209 149 Interest on interest-bearing deposits in banks   4     6   Total interest and dividend income   11,281     11,903   Interest Expenses: Interest on deposits 1,405 1,875 Interest on borrowings 147 455 Interest on subordinated debentures   208     73   Total interest expense   1,760     2,403   Net interest and dividend income before provision for loan losses 9,521 9,500 Provision for loan losses   3,060     2,800   Net interest and dividend income after provision for loan losses   6,461     6,700     Noninterest Income: Service charges on deposits accounts 1,339 1,297 Net gain on sale of loans 1,740 2,067 Net loan servicing income (loss) (53 ) (122 ) Debit card interchange fees 1,124 1,148 Net gains (losses) on trading activities 7 (43 ) Net gains (losses) on available-for-sale securities 587 522 Net other gains (losses) (20 ) (17 ) Increase in cash surrender value of bank-owned life insurance 149 153 Other   327     467   Total noninterest income   5,200     5,472     Noninterest Expenses: Salaries and employee benefits 5,579 5,427 Occupancy and equipment 1,305 1,204 Data processing 1,182 1,254 FDIC assessment 370 370 Advertising and marketing 151 179 Amortization of intangibles 70 70 Professional fees 574 555 Office Supplies 178 196 Telephone 185 152 Other   1,117     1,052   Total noninterest expenses   10,711     10,459   Income before income taxes 950 1,713 Provision for income taxes   (146 )   290   Net income $ 1,096   $ 1,423     Key Ratios           Basic Earnings Per Common Share $ 0.35 $ 0.50 Diluted Earnings Per Common Share 0.35 0.50   Net Interest Margin (FTE) 3.71 % 3.77 % Efficiency Ratio (FTE) 71.34 % 68.59 % Return on Assets 0.39 % 0.51 % Return on Common Equity 4.09 % 6.42 %

Blackhawk Bancorp, Inc.R. Richard Bastian, III, President & CEOrbastian@blackhawkbank.comorTodd J. James, EVP & CFOtjames@blackhawkbank.comPhone: (608) 364-8911