BHWB - Blackhawk Bancorp Announces 2019 Third Quarter Earnings

BELOIT, WI / ACCESSWIRE / October 17, 2019 / Blackhawk Bancorp, Inc. (OTCQX:BHWB) reported net income of $3.4 million for the third quarter of 2019, a 24% increase over the $2.75 million earned the previous quarter, and a 33% increase over the $2.58 million earned the third quarter of 2018. Fully diluted earnings per share (EPS) for the quarter ended September 30, 2019, was $1.03, an increase of $0.20 as compared to $0.83 for the quarter ended June 30, 2019 and an increase of $0.25 as compared to $0.78 for the same quarter a year ago. The third quarter 2019 results produced an annualized Return on Average Equity (ROAE) of 14.25% and Return on Average Assets (ROAA) of 1.40%. The third quarter results were boosted by a $624,000 (net of tax), gain on the sale of securities, which contributed $0.19 to fully diluted EPS, 2.62% to annualized ROAE and .26% to annualized ROAA.

For the nine months ended September 30, 2019, the company reported net income of $7.25 million, a 20% increase over the $6.05 million reported for the first nine months of 2018. Diluted earnings per share for the first nine months of 2019 increased by 20% to $2.20 compared to $1.83 for same period last year. The nine-month results produced a return on average assets of 1.04% and a return on average equity of 10.82%. The 2019 results include $1.45 million (net of tax) of non-recurring acquisition and integration related expenses, which negatively affected fully diluted EPS by $0.44, annualized ROAE by 2.16% and ROAA by .21%. The negative effect of the acquisition related expenses were partially offset by $843,000 (net of tax) of gains on the sale of securities, which contributed $0.25 to fully diluted EPS, 1.25% to annualized ROAE and .12% to annualized ROAA.

"We're extremely pleased with our results for the quarter and the earnings momentum we have heading into the final quarter of the year," said Todd James, the company's Chief Executive Officer. "This momentum is being driven by loan growth supported by a strong core deposit base, which was bolstered by the First McHenry acquisition we made earlier in the year. The integration of the First McHenry locations is essentially complete with great retention of both customers and staff," he added. "In the third quarter, we also took advantage of an opportunity the market gave us. We sold certain municipal and other non-government securities at historically low spreads to US Treasuries, harvesting the gains and redeploying the funds into our loan portfolio at higher yields. While the gains are non-recurring in nature, redeployment of liquidity acquired in the First McHenry acquisition was one of the strategic objectives of that transaction. The market conditions allowed us to generate gains in the process, accelerating the tangible book value earn-back." Stated James.

Total assets increased by $159.0 million, or 19.5%, to $976.4 million at September 30, 2019, compared to $817.3 million as of December 31, 2018. Total gross loans increased by $94.6 million, or 17.1%, during the first nine months of 2019 to $648.9 million compared to $554.3 million at December 31, 2018. This includes $54.8 million in net organic growth as the acquisition of First McHenry included $39.8 million of total loans at closing. Total deposits increased by $158.1 million, or 23.1%, to $843.7 million as compared to $685.6 million at the end of 2018 and included $151.3 million from the First McHenry acquisition.

Net Interest Income

Net interest income for the third quarter of 2019 totaled $8.84 million, increasing $368,000, or 4.3%, compared to $8.48 million for the previous quarter and up $1.66 million, or 23.0%, from the third quarter of last year. The net interest margin was 3.93% for the third quarter of 2019 as compared to 3.88% for the quarter ended June 30, 2019, and 3.91% for the third quarter of last year.

The increasing trend in net interest income and stability in the net interest margin have been driven by the First McHenry acquisition and strong organic loan growth. Average total loans for the quarter ended September 30, 2019, equaled $633.2 million, a $32.0 million, or 5.3% increase over the previous quarter, and a $121.9 million, or 23.8% increase over the same quarter a year ago. Average total deposits for the quarter ended September 30, 2019, equaled $832.0 million, a $4.2 million, or 0.51% increase over the previous quarter, and a $132.0 million, or 18.9% increase over the same quarter a year ago.

Net interest income for the nine months ended September 30, 2019, increased by $4.9 million, or 24.0%, to $25.1 million as compared to $20.3 million for the first nine months of 2018. The net interest margin for the first nine months of 2019 increased by three basis points to 3.91% compared to 3.88% for the first nine months of 2018. Average total loans for the first nine months of 2019 were $599.7 million, an increase of $95.0 million, or 18.8%, as compared to $504.8 million for the first nine months of 2018, with the First McHenry acquisition contributing approximately $31 to the growth. Average total deposits for the first nine months of 2019 were $808.2 million, an increase of $139.5 million, or 20.9%, as compared to $668.7 for the first nine months of 2018, with the First McHenry acquisition contributing approximately $118 million to the growth.

Provision for Loan Losses and Credit Quality

The provision for loan losses for the quarter ended September 30, 2019, totaled $580,000, as compared to $180,000 for the quarter ended June 30, 2019, and $150,000 for the third quarter of 2018. The provision was increased in the third quarter to accommodate the establishment of a specific reserve for a loan impairment that was identified during the third quarter. The provision, which totaled $1,030,000 for the first nine months of 2019, was unchanged compared to the first nine months of 2018. Net charge-offs for the nine months ended September 30, 2019, equaled $45,000.

Total nonperforming assets, which include troubled debt restructures that are performing in accordance with their modified terms, equaled $9.11 million as of September 30, 2019, as compared to $7.80 million as of June 30, 2019, and $7.47 million at September 30, 2018. At September 30, 2019, the ratio of nonperforming assets to total assets equaled 0.93%, as compared to 0.80% at June 30, 2019, and 0.97% at September 30, 2018. The allowance for loan losses to total loans was 1.28% as of September 30, 2019, as compared to 1.24% at June 30, 2019, and 1.41% as of September 30, 2018. The ratio of the allowance for loan losses to nonperforming loans was 94.7% as of September 30, 2019, as compared to 106.1% at June 30, 2019, and 99.7% at September 30, 2018.

Non-Interest Income and Operating Expenses

Non-interest income for the quarter ended September 30, 2019, totaled $4.65 million, a $1,020,000 increase compared to $3.63 million the prior quarter, and a $1,506,000 increase over the $3.14 million recorded in the third quarter of 2018. The increase compared to the most recent quarter included a $720,000 increase in gain on sale of securities, in addition to growth in gain on sale of loans, deposit service fees and debit card revenue. These increases were offset by a $262,000 decrease in loan servicing income, which reflects the establishment of a valuation allowance of $218,000 against the company's OMSR (Originated Mortgage Servicing Right) asset. The increase in non-interest income compared to the same quarter a year ago includes an $866,000 increase in gain on sale of securities and growth in essentially all other non-interest income sources, except for loan servicing. A $262,000 decrease in loan servicing revenue reflects the establishment of the aforementioned valuation allowance.

Non-interest income for the first nine months of 2019 increased $2.88 million to $11.6 million as compared to $8.7 million for the first nine months of 2018. The Company has realized growth in all non-interest income categories, except for loan servicing income due to the valuation allowance mentioned above.

Operating expenses for the quarter ended September 30, 2019, totaled $8.5 million, increasing by $121,000 compared to the quarter ended June 30, 2019, and increasing by $1.6 million, or 23.0%, compared to the third quarter of 2018. The Company incurred another $138,000 of non-recurring acquisition and integration expenses in the third quarter, including $119,000 of data processing and $19,000 in professional fees. The non-recurring acquisition expenses were more than offset by the recognition of an FDIC deposit insurance credit of $222,000, which is reflected in other expenses.

Operating expenses for the nine month period ended September 30, 2019, totaled $26.1 million, a $5.7 million, or 27.9% increase over the first nine months of 2018. That increase includes the $1.98 million in acquisition and integration expenses. Excluding those expenses, operating expenses increased $3.7 million, or 18.2%. The increase is partially driven by seven months of operations of the First McHenry locations in 2019.

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 such 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 net interest income to interest-earning assets, 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 and the impact such net expenses 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.

(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.

(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.

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ANALYSIS of AVERAGE BALANCES & TAX EQUIVALENT INTEREST RATES