BHWB Blackhawk Bancorp Inc (QX)

Blackhawk Bancorp, Inc. (OTCBB: BHWB) reports that net income for the second quarter of 2014 increased 91% to $982,000 compared to $513,000 earned in the second quarter of 2013. Earnings per diluted share for the quarter increased $0.26 to $0.42 compared to $0.16 the second quarter last year. The company’s total assets increased 2% to $594.6 million as of June 30, 2014 compared to $583.4 million at the end of 2013.

Net income for the six months ended June 30, 2014 increased 54% to $1,683,000 compared to $1,096,000 the first half of 2013. Earnings per diluted share for the first half of the year was $0.66, up $0.31, or 89%, compared to the $0.35 per diluted share earned the first half of 2013. The return on common equity was 7.57% for the first six months compared to 4.08% the first half of last year.

“The earnings improvement was driven by a decrease in credit related losses and a reduction in operating expenses”, said Rick Bastian, the company’s president and chief executive officer. “Improvements in these two areas were strong enough to more than offset a slowdown in mortgage banking activity and a reduction in securities gains,” he added. Other than volatility in mortgage banking activity, the company’s core revenue continues to be stable. Growth in earning assets has offset a small amount of contraction in the net interest margin and asset quality continues to improve with nonaccrual loans and foreclosed assets reaching their lowest level in more than five years at 1.72% of total loans.

The Company redeemed $10.5 million of preferred stock on April 25, 2014, funding it with cash on hand and a $9.0 million senior note. “The replacement of the preferred securities with debt favorably impacts return on common equity and earnings per diluted share,” explained Todd James the company’s chief financial officer. “Without the preferred dividend burden all earnings since the redemption are attributable solely to common shareholders. However, the interest expense on the new debt hits the income statement adding some additional pressure to the net interest margin.”

The following table summarizes key performance and asset quality measures for the quarter ended June 30, 2014 compared to the previous four quarters:

                   

Key Performance and Asset Quality Measures

2nd Qtr

2014

    1st Qtr

2014

    4th Qtr

2013

    3rd Qtr

2013

    2nd Qtr

2013

  Diluted Earnings per share $0.42 $0.24 $0.75 $0.36 $0.16 Return on average assets .67% .49% 1.25% .67% .35% Return on common equity 9.37% 5.70% 17.47% 8.95% 3.66% Net interest margin 3.60% 3.70% 3.79% 3.69% 3.66% Efficiency ratio 69.7% 79.1% 62.4% 74.4% 68.2% Nonaccrual loans to total loans 1.38% 1.49% 1.63% 1.97% 1.68% Nonaccrual loans and OREO to total loans 1.72% 1.89% 2.11% 2.75% 2.55% Allowance for loan losses to total loans 1.14% 1.26% 1.26% 1.58% 1.86% Allowance for loan losses to nonaccrual loans 82.7% 84.7% 77.5% 82.3% 110.7% Subsidiary bank total risk-based capital     13.94%     13.80%     13.51%     13.46%     13.64%  

Net Interest Income

Net interest income for the second quarter decreased by 1% to $4,754,000 compared to $4,790,000 for the second quarter of 2013 with the net interest margin decreasing 6 basis points to 3.60% compared to 3.66% the second quarter last year.

Average total earning assets for the quarter increased by $7.2 million to $548.3 million compared to $541.0 million in the second quarter of 2013. The growth in earning assets includes a $16.5 million, or 5%, increase in average total loans, offset by a net reduction in average short-term investments and investment securities. Average total deposits for the second quarter increased by $4.9 million, or 1%, to $507.5 million compared to $502.6 million the second quarter of last year. The increase in average deposits was due to growth in demand deposits.

Net interest income for the first half of the year was $9,530,000 essentially flat compared to $9,521,000 the prior year. The net interest margin for the first six months was $3.65%, down 6 basis points compared to the first half of last year.

Year to date average total earning assets increased $11.4 million to $544.9 million compared to $533.4 million for the first half of 2013. The increase was driven by a $16.3 million increase in average loans. Total average deposits increased by $9.5 million with $6.8 million of the growth occurring in demand deposits.

Provision for Loan Losses and Credit Quality

The provision for loan losses in the second quarter dropped by $1,299,000, or 66%, to $681,000 compared to $1,980,000 in second quarter of 2013. The provision for the six months ended June 30, 2014 was $1,191,000, 61% less than the $3,060,000 provision recorded in the first half of 2013.

Nonaccrual loans and other real estate owned totaled $6.5 million, or 1.72% of total loans, at June 30, 2014 compared to $8.1 million, or 2.10% of total loans, at December 31, 2013 and $9.2 million, or 2.55% of total loans, at June 30, 2013.

Net loan charge-offs for the first six months of 2014 decreased by 38% to $1,762,000 compared to $2,858,000 the first half of 2013. The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013 and the year ended December 31, 2013:

        Activity in Allowance For Loan Losses: Year Ended

(in Thousands)

Six Months Ended June 30, December 31, 2014     2013 2013 Beginning allowance for loan losses 4,894 6,520 6,520 Provision for loan losses 1,191 3,060 4,140 Charge-offs (1,940) (3,000) (6,590) Recoveries 178 142 824 Ending allowance for loan losses 4,323 6,722 4,894  

Net charge-offs to average total loans

0.93% 1.58%

1.55%

 

Non-Interest Income and Operating Expenses

Non-interest income for the second quarter of 2014 decreased by 31% to $2,103,000 compared to $3,042,000 the second quarter of the prior year. The decrease in noninterest income was driven by a $422,000, or 44%, decrease in revenue from the sale and servicing of secondary market mortgage loans and a $530,000 decrease in net securities gains.

Non-interest income for the first six months of the year totaled $3,919,000, a 25% decrease compared to $5,200,000 the first half of 2013. Revenue from the sale and servicing of secondary market mortgages dropped by $792,000 to $895,000 compared to $1,687,000 the first six months last year. In addition, securities gains were down by $332,000 and the net loss on sale of foreclosed assets was $351,000 more than the first half of 2013.

Operating expenses for the second quarter decreased by $545,000, or 10%, to $4,899,000 compared to $5,444,000 the second quarter of last year. Year to date operating expenses are down $469,000, or 4%, to $10,242,000 compared to $10,711,000 the first half of 2013.

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 losses and nonperforming loans. While the level of nonperforming loans has been decreasing 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 STATEMENTS OF INCOME (UNAUDITED)         Three months ended June 30, 2014     2013 (Amounts in thousands, except share and per share data) Interest Income: Interest and fees on loans $ 4,594 $ 4,714 Interest on trading securities 4 13 Interest and dividends on securities: Taxable 522 518 Tax-exempt 333 288 Interest on federal funds sold and securities purchased under agreements to resell 46 115 Interest on interest-bearing deposits in banks   1     1   Total interest and dividend income   5,500     5,649   Interest Expenses: Interest on deposits 526 658 Interest on borrowings 68 48 Interest on subordinated debentures   152     153   Total interest expense   746     859   Net interest and dividend income 4,754 4,790 Provision for loan losses   681     1,980   Net interest and dividend income after provision for loan losses   4,073     2,810     Noninterest Income: Service charges on deposits accounts 705 684 Net gain on sale of loans 478 968 Net mortgage servicing income 46 (22 ) Debit card interchange fees 577 579 Net gains (losses) on trading activities (11 ) 3 Net gains (losses) on available-for-sale securities 57 587 Net other gains (losses) (95 ) 56 Increase in cash value of bank-owned life insurance 70 69 Other   276     118   Total noninterest income   2,103     3,042     Noninterest Expenses: Salaries and employee benefits 2,708 2,825 Occupancy and equipment 603 646 Data processing 572 601 Advertising and marketing 49 63 Amortization of intangibles - 35 Professional fees 223 301 Office Supplies 88 92 Telephone 90 98 Other   566     783   Total noninterest expenses   4,899     5,444   Income before income taxes 1,277 408 Provision for income taxes   295     (105 ) Net income $ 982   $ 513     BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)     Six months ended June 30, 2014     2013 (Amounts in thousands, except share and per share data) Interest Income:     Interest and fees on loans $ 9,213 $ 9,407 Interest on trading securities 8 27 Interest and dividends on available-for-sale securities: Taxable 987 1,055 Tax-exempt 668 579 Interest on federal funds sold and securities purchased under agreements to resell 110 209 Interest on interest-bearing deposits in banks   2     4   Total interest and dividend income   10,988     11,281   Interest Expense: Interest on deposits 1,060 1,405 Interest on borrowings 94 147 Interest on subordinated debentures and notes   304     208   Total interest expense   1,458     1,760   Net interest and dividend income before provision for loan losses 9,530 9,521 Provision for loan losses   1,191     3,060   Net interest and dividend income after provision for loan losses   8,339     6,461     Noninterest Income: Service charges on deposits accounts 1,359 1,339 Net gain on sale of loans 775 1,740 Net loan servicing income (loss) 120 (53 ) Debit card interchange fees 1,119 1,124 Net gains (losses) on trading activities 7 7 Net gains (losses) on available-for-sale securities 255 587 Net other gains (losses) (371 ) (20 ) Increase in cash surrender value of bank-owned life insurance 150 149 Other   505     327   Total noninterest income   3,919     5,200     Noninterest Expenses: Salaries and employee benefits 5,591 5,579 Occupancy and equipment 1,271 1,305 Data processing 1,178 1,182 Advertising and marketing 112 151 Amortization of intangibles 25 70 Professional fees 452 574 Office Supplies 178 178 Telephone 182 185 Other   1,253     1,487   Total noninterest expenses   10,242     10,711   Income before income taxes 2,016 950 Provision for income taxes   333     (146 ) Net income $ 1,683   $ 1,096     BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2014 AND DECEMBER 31, 2013 (UNAUDITED)           June 30,         December 31, Assets         2014         2013 (Amounts in thousands, except share and per share data) Cash and due from banks $ 15,590 $ 11,350 Federal funds sold and securities purchased under agreements to resell 15,027 21,064 Interest-bearing deposits in banks   573     2,078   Total cash and cash equivalents   31,190     34,492   Trading securities 121 315 Securities available-for-sale 151,151 127,985 Loans held for sale 1,949 1,161 Federal Home Loan Bank stock, at cost 2,266 2,266 Loans, less allowance for loan losses of $4,323 and $4,894 at June 30, 2014 and December 31, 2013, respectively 374,446 382,295 Office buildings and equipment, net 8,677 8,922 Goodwill 5,037 5,037 Other intangible assets, net 2,826 3,091 Cash surrender value of bank-owned life insurance 9,460 9,311 Other assets   7,457     8,565   Total assets $ 594,580   $ 583,440     Liabilities and Stockholders' Equity   Liabilities Deposits: Noninterest-bearing $ 91,155 $ 91,450 Interest-bearing   428,116     419,308   Total deposits 519,271 510,758 Borrowings (including $0 and $2,157 at fair value at June 30, 2014 and December 31, 2013, respectively) 19,500 10,157 Subordinated debentures and notes (including $1,031 at fair value at June 30, 2014 and December 31, 2013) 11,255 11,255 Other liabilities   3,494     2,968   Total liabilities   553,520     535,138     Stockholders’ equity Preferred stock, $0.01 par value, 1,000,000 shares authorized; 0 and 10,500 shares issued as of June 30, 2014 and December 31, 2013, respectively - 10,483 Common stock, $0.01 par value, 10,000,000 shares authorized; 2,229,230 and 2,216,244 shares issued as of June 30, 2014 and December 31, 2013, respectively 23 23 Surplus 9,846 9,768 Retained earnings 30,610 29,166 Treasury stock, 87,167 and 83,252 shares at cost as of June 30, 2014 and December 31, 2013, respectively (960 ) (909 ) Accumulated other comprehensive income (loss)   1,541     (229 ) Total stockholders' equity   41,060     48,302   Total liabilities and stockholders' equity $ 594,580   $ 583,440     BLACKHAWK BANCORP, INC. AND SUBSIDIARIES AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES                 Average Balance Sheet with Resultant Interest and Rates (Amounts in thousands) (yields on a tax-equivalent basis) Three months ended June 30, 2014 Three months ended June 30, 2013 Average Average Average Average

Balance

Interest

Rate

Balance

Interest

Rate

Interest Earning Assets: Interest-bearing deposits in banks $ 3,202 $ 1 0.17 % $ 3,175 $ 1 0.12 % Federal funds sold & securities purchased under agreements to resell 13,175 46 1.41 % 38,386 115 1.20 % Investment securities: Taxable investment securities 113,868 526 1.85 % 103,681 531 2.06 % Tax-exempt investment securities   39,541       333   5.08 %   33,812       288   5.14 % Total Investment securities 153,409 859 2.68 % 137,493 819 2.81 % Loans   378,502       4,594   4.87 %   361,985       4,714   5.22 %   Total Earning Assets $ 548,288 $ 5,500   4.15 % $ 541,039 $ 5,649   4.30 % Allowance for loan losses (4,733 ) (6,488 ) Cash and due from banks 12,936 13,556 Other assets   33,593     35,561     Total Assets $ 590,084   $ 583,668     Interest Bearing Liabilities: Interest bearing checking accounts $ 165,314 $ 120 0.29 % $ 163,220 $ 177 0.44 % Savings and money market deposits 147,844 57 0.16 % 144,054 49 0.14 % Time deposits   98,209       349   1.43 %   105,563       432   1.64 % Total interest bearing deposits 411,367 526 0.51 % 412,837 658 0.64 % Subordinated debentures 12,637 152 5.45 % 10,870 153 5.64 % Borrowings   11,201       68   2.16 %   14,404       48   1.36 %   Total Interest-Bearing Liabilities $ 435,205 $ 746   0.69 % $ 438,111 $ 859   0.79 %   Interest Rate Spread 3.46 % 3.51 %   Noninterest checking accounts 96,164 89,771 Other liabilities   11,496     6,289   Total liabilities 542,865 534,171 Preferred Stock 2,769 10,417 Common Stockholders' equity   44,450     39,080   Total Stockholders' equity 47,219 49,497 Total Liabilities and Stockholders' Equity $ 590,084   $ 583,668     Net Interest Income/Margin $ 4,754   3.60 % $ 4,790   3.66 %   BLACKHAWK BANCORP, INC. AND SUBSIDIARIES AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES                 Average Balance Sheet with Resultant Interest and Rates (Amounts in thousands) (Yields on a tax-equivalent basis) Six months ended June 30, 2014 Six months ended June 30, 2013 Average Average Average Average Balance   Interest   Rate Balance   Interest   Rate Interest Earning Assets: Interest-bearing deposits in banks $ 3,020 $ 2 0.16 % $ 3,494 $ 4 0.21 % Federal funds sold & securities purchased under agreements to resell 16,442 110 1.35 % 34,586 209 1.22 % Investment securities: Taxable investment securities 106,990 995 1.88 % 98,768 1,082 2.21 % Tax-exempt investment securities   39,366       668   5.15 %   33,831       579   5.20 % Total Investment securities 146,356 1,663 2.76 % 132,599 1,661 2.97 % Loans   379,093       9,213   4.90 %   362,748       9,407   5.23 %   Total Earning Assets $ 544,911 $ 10,988   4.19 % $ 533,427 $ 11,281   4.38 % Allowance for loan losses (4,826 ) (6,375 ) Cash and due from banks 12,832 13,294 Other assets   33,897     35,698     Total Assets $ 586,814   $ 576,044     Interest Bearing Liabilities: Interest bearing checking accounts $ 162,644 $ 236 0.29 % $ 160,643 $ 411 0.52 % Savings and money market deposits 152,258 109 0.15 % 146,994 120 0.17 % Time deposits   101,550       715   1.42 %   106,129       874   1.66 % Total interest bearing deposits 416,452 1,060 0.51 % 413,766 1,405 0.68 % Subordinated debentures and notes 14,141 304 5.50 % 8,500 208 4.94 % Borrowings   11,142       94   1.35 %   14,758       147   2.01 %   Total Interest-Bearing Liabilities $ 441,735 $ 1,458   0.67 % $ 437,024 $ 1,760   0.81 %   Interest Rate Spread 3.52 % 3.57 %   Noninterest checking accounts 93,434 86,582 Other liabilities   3,306     3,179   Total liabilities 538,475 526,785 Preferred Stock 6,610 10,405 Common Stockholders' equity   41,729     38,854   Total Stockholders' equity 48,339 49,259 Total Liabilities and Stockholders' Equity $ 586,814   $ 576,044     Net Interest Income/Margin $ 9,530   3.65 % $ 9,521   3.71 %

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