BHWB - Blackhawk Bancorp Achieves Record Earnings for 2019

BELOIT, WI / ACCESSWIRE / January 30, 2020 / Blackhawk Bancorp, Inc. (OTCQX:BHWB) reported net income of $2.35 million for the fourth quarter of 2019, a 31% decrease as compared to the $3.42 million earned in the most recent quarter ended September 30, 2019, but a 12% increase over the $2.10 million earned the fourth quarter of 2018. Diluted earnings per share (EPS) for the quarter ended December 31, 2019 was $0.71, a decrease of $0.32 as compared to $1.03 for the quarter ended September 30, 2019 but an increase of $0.07 as compared to $0.64 for the same quarter a year ago. The fourth quarter 2019 results produced an annualized Return on Average Equity (ROAE) of 9.60% and Return on Average Assets (ROAA) of 0.97%.

The decrease in earnings as compared to the most recent quarter was driven by a $273,000 decrease in net interest income, a $400,000 increase in the provision for loan losses and a $1.03 million decrease in net gain on sale of securities and other assets.

The increase in earnings as compared to the fourth quarter of 2018 was attributable to increases of $1.51 and $1.0 million in net interest income and non-interest income, respectively. These revenue increases were partially offset by an $830,000 increase in the provision for loan losses and a $1.19 million increase in operating expenses.

For the year ended December 31, 2019, the company reported record net income of $9.60 million, an 18% increase over the $8.14 million reported for 2018. Diluted earnings per share for 2019 increased by $0.43, or 17%, to a record $2.91 compared to $2.47 in 2018. The annual results produced an ROAE of 10.49% and an ROAA of 1.02%. The 2019 results include non-recurring acquisition related expenses totaling $1.45 million (net of tax), which negatively affected EPS by $0.44, and ROAE and ROAA by 1.58 and .15 percentage points, respectively. The negative effect of the acquisition related expenses was partially offset by gains on the sale of securities of $843,000 (net of tax), which contributed $0.25 to EPS, and .92 and .09 percentage points to ROAE and ROAA, respectively.

Excluding the non-recurring acquisition related expenses and securities gains, 2019 core earnings increased 25% compared to 2018. The growth in core earnings was driven by increases of $6.21 and $2.46 million in net interest income and non-interest income, respectively. These improvements were offset by an $830,000 increase in the provision for loan losses and $4.9 million increase in operating expenses, excluding the acquisition related expenses.

"The past year has been an exciting and productive one for Blackhawk," said Todd James, the Company's Chief Executive Officer. "In addition to achieving record earnings, we successfully integrated the First McHenry acquisition and continued to make investments in the talent and technology required to drive future growth," he added. "However, we are a little disappointed in how we finished the year. Our fourth quarter was negatively affected by an increase in the provision for loan losses, and about a $15 million decrease in total loans outstanding. Excluding intentional reductions in exposure to certain credit relationships, gross loans outstanding were essentially unchanged from the previous quarter end," stated James.

Total assets increased by $146.6 million, or 18%, to $963.9 million at December 31, 2019, compared to $817.3 million as of December 31, 2018. Total gross loans increased by $79.6 million, or 14%, during 2019 to $633.8 million compared to $554.3 million at December 31, 2018. This includes $37 million in net organic growth as the acquisition of First McHenry included $42.5 million of total loans at closing. Total deposits increased by $144.0 million, or 21%, to $829.6 million as compared to $685.6 million at the end of 2018, and included $150.5 million of total deposits at closing from the First McHenry acquisition. With the acquisition of First McHenry and the core deposit base that came with it, the company was able to reduce institutional deposits by $29.8 million and Federal Home Loan Bank advances by $26.5 million during 2019. The reduction in Federal Home Loan Bank borrowings was partially offset by a $14 million increase in senior debt added at the Holding Company level used to partially fund the First McHenry acquisition.

Net Interest Income

Net interest income for the fourth quarter of 2019 totaled $8.57 million, decreasing $273,000, or 3%, compared to $8.84 million for the previous quarter and up $1.35 million, or 19%, from the fourth quarter of last year. The net interest margin was 3.83% for the fourth quarter of 2019 as compared to 3.93% for the quarter ended September 30, 2019, and 3.91% for the fourth quarter of last year.

The decrease in net interest income compared to the most recent quarter ended September 30, 2019 included a $73,000 decrease in net accretion of loan and deposit fair value marks, which was $56,000 in the fourth quarter compared to $129,000 in the third quarter. The third quarter amount was elevated due to pre-payments. In addition, the three rate cuts by the Federal Reserve Bank in the second half of 2019 increased pressure on the company's net interest margin, as much of the C&I portfolio is indexed to prime. The increase in net interest income for the fourth quarter compared to the same quarter a year ago was due to growth in earning assets and core deposits, including organic growth and the effect of the First McHenry acquisition. Average total loans for the quarter ended December 31, 2019 equaled $642.4 million, a $9.2 million, or 2% increase over the previous quarter and a $106.7 million, or 20% increase, over the same quarter a year ago. Average total deposits for the quarter ended December 31, 2019 equaled $830 million a $2 million, or 0.23% decrease, from the previous quarter and a $142.4 million, or 21% increase, over the same quarter a year ago.

Net interest income for 2019, increased by $6.21 million, or 23%, to $33.68 million as compared to $27.47 million in 2018.The net interest margin for 2019 decreased by three basis points to 3.88% compared to 3.91% in 2018. Average total loans for 2019 were $610.5 million, an increase of $97.9 million, or 19%, as compared to $512.5 million for 2018, with the First McHenry acquisition contributing approximately $35.0 million to the 2019 year to date average balance. Average total deposits for 2019 were $813.7 million, an increase of $140.2 million, or 21%, as compared to $673.5 for 2018 with the First McHenry acquisition contributing approximately $125.0 million to total average deposits for the year.

Provision for Loan Losses and Credit Quality

The provision for loan losses for the quarter ended December 31, 2019 totaled $980,000, as compared to $580,000 for the quarter ended September 30, 2019, and $150,000 for the fourth quarter of 2018. The provision for loan losses was $2.01 million for the full year 2019, increasing by $830,000 compared to 2018. The increase in the fourth quarter and full year provision was related to a credit tied to the Northern White frac sand industry. The provision taken reflects what management believes to be a worst case scenario for that credit, which is the company's only exposure to the industry. Net charge-offs for 2019, equaled $1.41 million, with $1.22 million related to the frac sand industry credit mentioned above.

Total nonperforming assets, which include troubled debt restructures, that are performing in accordance with their modified terms equaled $13.6 million as of December 31, 2019 compared to $9.10 million as of September 30, 2019 and $6.2 million at December 31, 2018. The increase in the fourth quarter of 2019 was attributable to one commercial relationship that is experiencing financial difficulty and was moved to nonaccrual status, although no principal loss is expected. At December 31, 2019, the ratio of nonperforming assets to total assets equaled 1.41%, as compared to 0.93% at September 30, 2019, and 0.76% at December 31, 2018. The allowance for loan losses to total loans was 1.25% as of December 31, 2019, as compared to 1.28% at September 30, 2019, and 1.32% as of December 31, 2018. The ratio of the allowance for loan losses to nonperforming loans was 59% as of December 31, 2019, compared to 95% at September 30, 2019, and 120% at December 31, 2018.

Non-Interest Income and Operating Expenses

Non-interest income for the quarter ended December 31, 2019 totaled $3.87 million, a $773,000 decrease compared to $4.65 million the prior quarter, and a $1.01 million increase over the $2.87 million recorded in the fourth quarter of 2018. The decrease compared to the most recent quarter included an $866,000 decrease in gain on sale of securities. The increase in non-interest income compared to the same quarter a year ago includes an increase of $320,000 from the sale and servicing of mortgage loans, and increases of $153,000 and $193,000 in deposit service charges and debit card interchange, respectively.

Non-interest income for the year 2019 increased $3.59 million to $15.13 million as compared to $11.54 million for 2018. Excluding the $1.13 million increase in the gain on sale of securities, non-interest income increased by $2.46 million, including increases of $527,000, $503,000 and $686,000 in deposit service fees, revenue from sale and servicing of mortgage loans, and debit card interchange, respectively.

Operating expenses for the quarter ended December 31, 2019, totaled $8.49 million, essentially unchanged compared to the quarter ended September 30, 2019, and increasing by $1.2 million, or 16%, compared to the fourth quarter of 2018. The increase over the fourth quarter of 2018 included the increased staffing and occupancy and equipment expenses related to the acquired locations.

Operating expenses for the year 2019, totaled $34.6 million, a $6.9 million, or 25% increase over 2018. That increase includes the $1.98 million in non-recurring acquisition related expenses. Excluding the acquisition related expenses, operating expenses increased $4.9 million, or 18%. The increase is partially driven by ten months of operations of the First McHenry locations in 2019, and includes $398,000 of amortization of the deposit intangible related to the acquisition.

Outlook

Blackhawk expects to grow by pursuing creditworthy and profitable business and consumer relationships in its Wisconsin and Illinois markets, emphasizing the value of its personal attention and service that remains unmatched by larger competitors. In addition to the organic growth opportunities, Blackhawk may also pursue growth through selective acquisition opportunities. Growth, combined with the Company's strong credit quality, is expected to lead to continued earnings improvement. Growth and earnings could, however, be tempered by such occurrences as uncertain economic conditions, competitive pressures, changes in regulatory burden and the interest rate environment.

About Blackhawk Bancorp

Blackhawk Bancorp, Inc. is headquartered in Beloit, Wisconsin and is the parent company of Blackhawk Bank. The combined entity operates eleven full-service banking centers and a dedicated commercial office, which are located in Rock County, Wisconsin and the Illinois counties of Winnebago, Boone, McHenry, Lake, and Kane. The Company's footprint stretches along the I-90 corridor from Janesville, Wisconsin to Elgin, Illinois and into the Northwest collar counties of the Chicagoland area. The company offers a variety of value-added consultative services to its business customers and their employees related to the financial products it provides.

Disclosures Regarding non-GAAP Measures

This report refers to financial measures that are identified as non-GAAP that the Company believes help to evaluate and measure the Company's performance, including the presentation of the net interest margin ratio and efficiency ratio calculations on a taxable-equivalent basis. Non-GAAP measures are also used to assist investor comparison by identifying nonrecurring events such as the 2019 acquisition-related expenses, nonrecurring securities gains and the impact such items have on the performance measures of return on average assets, return on average equity, diluted earnings per share, and the efficiency ratio. This supplemental information should not be considered in isolation or as a substitute for the related GAAP measures.

Forward-Looking Statements

When used in this communication, the words "believes," "expects," "likely", "would", 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 particularly in the Company's markets; potential deterioration in real estate values, 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"; inability to recover previously recorded losses as anticipated, and the inability of third party vendors to perform critical services for the company or its customers. The inclusion of forward-looking information should not be construed as a representation by the Company or any person that future events or plans contemplated by the Company will be achieved. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information or otherwise.

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

Blackhawk Bancorp, Inc.

Todd J. James, Chairman & CEO
tjames@blackhawkbank.com
Phone: (608) 364-8911

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2019 AND DECEMBER 31, 2018
(UNAUDITED)

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(1) Non-GAAP Presentations: Management discloses certain non-GAAP financial measures to evaluate and measure the Company's performance, including the presentation of the net interest margin and efficiency ratio calculations on a taxable equivalent basis ("TE"). The net interest margin ratio is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period. Management believes this measure provides investors with information regarding comparative balance sheet profitability.

(2) The efficiency ratio is calculated as noninterest expense divided by the sum of net interest income on a TE basis, noninterest income less any securities gains (losses) or other gains (losses), and also includes a TE adjustment on the increases in cash surrender value of bank-owned life insurance.

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(1) Non-GAAP Presentations: Management discloses certain non-GAAP financial measures to evaluate and measure the Company's performance, including the presentation of net interest income, net interest margin and efficiency ratio calculations on a taxable equivalent basis ("TE"). The net interest margin is calculated by dividing net interest income on a TE basis by average earning assets for the period. Management believes this measure provides investors with information regarding comparative balance sheet profitability.

(2) The efficiency ratio is calculated as noninterest expense divided by the sum of net interest income on an TE basis, noninterest income less any securities gains (losses) or other gains (losses), and also includes a TE adjustment on interest on tax-exempt securities, loans, and the increases in cash surrender value of bank-owned life insurance.

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES
(Amounts in thousands)
(yields on a tax-equivalent basis) (1)