BHWB - Blackhawk Bancorp Earns $3.49 Million in Third Quarter 2022; Highlighted by Net Interest Margin Expansion

BELOIT, WI / ACCESSWIRE / October 24, 2022 / Blackhawk Bancorp, Inc. (OTCQX:BHWB), (the "Company") the parent company of Blackhawk Bank (the "Bank"), today reported net income of $3.49 million for the quarter ended September 30, 2022, a modest increase compared to $3.48 million earned in the preceding quarter, and an 8% increase compared to the $3.22 million earned during the third quarter of 2021. Diluted Earnings per Share (EPS) for the current quarter was $1.21, the same as the preceding quarter, and a $0.08, or 7%, increase compared to the quarter ended September 30, 2021. The third quarter of 2022 results yielded a Return on Average Equity (ROAE) of 16.73% and a Return on Average Assets (ROAA) of 1.02%.

Earnings were essentially flat compared to the most recent quarter despite a $1.10 million, or 10% increase in net interest income. The preceding quarter included two non-recurring items, a negative provision of $1.50 million and a $1.27 million charge related to announced branch closures, which contributed a net $230,000 to second quarter pre-tax net income, partially offsetting the third quarter increase in net interest income. In addition, excluding the charge for announced branch closures, operating expenses increased by $707,000 led primarily by increases in salaries and benefits expense and debit card processing expense.

The increase in net income for the third quarter of 2022, compared to the third quarter of the prior year, included a $1.87 million, or 19%, increase in net interest income. This earnings growth was partially offset by a $1.17 million decrease in income from the sale and servicing of mortgage loans and a $373,000, or 4%, increase in operating expenses.

"Our net interest income generation during the third quarter was strong, reflecting the loan growth achieved over the last several quarters. The net interest margin was also boosted by the current rate environment, which has essentially offset the lost revenue from the slowdown in mortgage lending," said Todd James, Chairman and CEO. "Net loan growth during the third quarter slowed compared to the last several quarters reflecting the pay-off of a significant loan relationship upon the sale of our customer's company. Despite the uncertainty in the market, we continue to see opportunities to grow the loan portfolio and have potential for additional margin expansion in the current rate environment."

Third Quarter 2022 Financial Highlights (at or for the three months ended September 30, 2022)

• Net income was $3.49 million, or $1.21 per diluted share, compared to $3.22 million, or $1.13 per diluted share, in the third quarter of 2021.
• Net interest margin was 3.63%, compared to 3.31% in the preceding quarter and 3.11% in the third quarter a year ago.
• Annualized return on average assets was 1.02%, compared to 0.96% in the third quarter of 2021.
• Annualized return on average equity was 16.73%, compared to 12.57% in the third quarter a year ago.
• Excluding Paycheck Protection Program (PPP) loans, average total loans increased $153.5 million, or 25% to $779.7 million for the quarter ended September 30, 2022, compared to $626.2 million for the third quarter of 2021.
• Total deposits grew by $94.1 million to $1.26 billion at September 30, 2022 compared to $1.17 billion a year earlier.
• Allowance for loan losses to total loans was 1.14% at quarter end.
• Nonperforming assets to total assets was 0.36% at September 30, 2022 compared to 0.74% a year ago.
• On September 23, 2022, the Company paid a quarterly cash dividend of $0.12 per share, marking the 33^rd consecutive quarterly cash dividend paid.

Net Interest Income

Net interest income totaled $11.64 million for the quarter ended September 30, 2022, an increase of $1.10 million, or 11%, compared to the second quarter of 2022, and an increase of $1.87 million, or 19%, compared to the third quarter of the prior year. The benefit to net interest income from the recognition of PPP loan fees decreased to $53,000 for the third quarter of 2022 compared to $280,000 the preceding quarter and $850,000 in the third quarter of 2021. As of September 30, 2022, only $33,000 of net deferred PPP fee income remains to be recognized in future periods.

The Company's net interest margin was 3.63% for the third quarter of 2022, compared to 3.31% for the quarter ended June 30, 2022, and 3.11% for the third quarter of 2021. The tax-equivalent yield on earning assets increased by 47 basis points to 3.98% and the cost of deposits increased by 14 basis points to 0.26% for the third quarter of 2022, as compared to 3.51% and 0.12%, respectively, for the most recent quarter ended June 30, 2022. The tax-equivalent yield on earning assets and cost of total deposits increased by 64 basis points and 12 basis points, respectively, compared to the third quarter of 2021.

Average total loans for the quarter ended September 30, 2022 were $780.9 million, a $28.1 million, or 4%, increase over the most recent quarter ended June 30, 2022 and a $105.8 million, or 16%, increase compared to the third quarter of 2021.

Average deposits totaled $1.24 billion for the third quarter of 2022, an increase of $2.1 million, or less than 1%, compared to the quarter ended June 30, 2022, and an increase of $52.8 million, or 4%, compared to the third quarter of 2021.

Net interest income for the nine months ended September 30, 2022 increased $2.19 million, or 7%, to $31.84 million compared to $29.65 million for the first nine months of 2021. For the first nine months of 2022, the company's net interest margin was 3.36%, compared to 3.32% for the same period in the prior year. The tax-equivalent yield on earning assets increased by seven basis points to 3.61% for the first nine months of 2022, compared to 3.54% the first nine months of 2021. The cost of deposits increased by one basis point to 0.12% compared to 0.11% for the first nine months of 2021. The growth in net interest income and net interest margin reflects the $62.8 million increase in average total loans to $749.7 million compared to $686.9 million for the first nine months of 2021.

The benefit to net interest income from recognition of PPP fees was $930,000 for the first nine months of 2022, compared to $3.28 million for the first nine months of 2021. Net interest income for both the quarter and the nine months ended September 30, 2022 benefited from the repricing of variable rate loans and investments due to the increase in short term rates by the Federal Reserve Bank.

Provision for Loan Losses and Asset Quality

The Company recorded a provision for loan losses of $100,000 for the quarter ended September 30, 2022. This compares to a negative provision of $1.5 million the most recent quarter, and no provision for loan losses for the third quarter of 2021. For the nine months ending September 30, 2022 the Company recorded a negative provision of $1.4 million, compared to a $500,000 provision for loan losses for the first nine months of 2021.

Total nonperforming assets, which include troubled debt restructures performing in accordance with their modified terms, equaled $5.0 million as of September 30, 2022, as compared to $6.0 million as of June 30, 2022, and $9.8 million at September 30, 2021. At September 30, 2022, the ratio of nonperforming loans to total loans equaled 0.64%, as compared to 0.78% at June 30, 2022, and 1.46% at September 30, 2021.

The allowance for loan losses to total loans was 1.14% at September 30, 2022, compared to 1.22% at June 30, 2022, and 1.68% at September 30, 2021. The allowance for loan losses to nonperforming loans increased to 179.0% at September 30, 2022, compared to 157.3% at June 30, 2022, and 114.5% at September 30, 2021.

Noninterest Income and Operating Expenses

Noninterest income for the quarter ended September 30, 2022, totaled $3.74 million, a $79,000 decrease compared to $3.82 million the prior quarter and a $1.02 million decrease from the $4.76 million recorded in the third quarter of 2021. The net revenue from the sale and servicing of mortgage loans decreased $200,000 and service charges on deposit accounts increased $55,000 compared to the second quarter of 2022. The decline in noninterest income compared to the third quarter of 2021 was primarily due to a $1.17 million decrease in revenue from the sale and servicing of mortgage loans, which was partially offset by a $236,000 increase in deposit service fees.

Noninterest income for the nine months ended September 30, 2022 totaled $11.48 million, a $3.29 million decrease compared to the $14.76 million for the same period in the prior year. The net revenue from the sale and servicing of mortgages decreased by $3.33 million. This was partially offset by a $764,000 increase in deposit service fees during the same period.

Operating expenses for the quarter ended September 30, 2022, totaled $10.69 million, a decrease of $563,000, or 5%, compared to the second quarter of 2022, and an increase of $373,000, or 4%, compared to the third quarter of 2021. The decrease compared to the most recent quarter was due to the previous quarter including a $1.27 million charge related to announced branch closures. Excluding the branch closure charge recognized in the second quarter, total operating expenses for the third quarter increased by $707,000 compared to the quarter ended June 30, 2022. This increase includes a $356,000 increase in salaries and benefits, which is primarily attributable to increased cost of medical benefits, and a $133,000 increase in debit card processing expenses due to the mass re-issuance of cards to adopt new requirements and touchless functionality.

Operating expenses for the nine months ended September 30, 2022 totaled $32.12 million, a $2.34 million, or 8%, increase compared to the same period in 2021. The increase includes a $1.10 million increase in salaries and employee benefits as well as a $1.27 million one-time charge relating to the announced branch closures. Excluding the one-time charge related to the announced branch closures, total operating expenses for the nine months ended September 30, 2022 increased $1.1 million, or 4%, compared to the first nine months of 2021.

Excluding the one-time charge related to the announced branch closures, the efficiency ratio was 69.04% for the third quarter of 2022. This compared to 68.96% for the preceding quarter and 70.70% for the third quarter a year ago.

Capital

Tangible book value per share was $21.01 at September 30, 2022, compared to $23.91 at June 30, 2022 and $31.17 at September 30, 2021. The decrease in tangible book value per share during the current quarter was primarily due to a $6.23 million decrease in accumulated other comprehensive income ("AOCI") related to an increase in the unrealized loss on available for sale securities reflecting the increase in interest rates during the current quarter. Excluding AOCI, tangible book value per share was $33.62 at September 30, 2022, an increase of $1.20 and $3.98 compared to June 30, 2022 and September 30, 2021, respectively.

About Blackhawk Bancorp

Blackhawk Bancorp, Inc. is headquartered in Beloit, Wisconsin, and is the parent company of Blackhawk Bank. The combined entity operates ten full-service banking centers located in Rock County, Wisconsin, and the Illinois counties of Winnebago, Boone, McHenry, and Kane. 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 acquisition-related expenses, securities gains and losses and other non-recurring gains or losses 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

Matthew McDonnell, SVP & CFO
mmcdonnell@blackhawkbank.com

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
(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 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.

(3)The efficiency ratio excludes the one?time charge totaling $1.27 million related to the previously announced branch closures.

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.

(3)The efficiency ratio excludes the one?time charge totaling $1.27 million related to the previously announced branch closures.

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
ANALYSIS of AVERAGE BALANCES & TAX EQUIVALENT INTEREST RATES