BHWB Blackhawk Bancorp Inc (QX)

Blackhawk Bancorp, Inc. (OTCQX: BHWB) reports net income of $945,000 for the fourth quarter of 2014, a 49% decrease compared to $1,840,000 earned in the fourth quarter of 2013. This equates to $0.42 earnings per diluted share, a 44% decrease compared to the $0.75 per diluted share earned in the fourth quarter of 2013. The company’s net income for the year ended December 31, 2014 was $2,252,000, a 42% decrease compared to the $3,915,000 earned in 2013. For the full year ended December 31, 2014 diluted earnings per share decreased 37% to $0.92 compared to $1.47 in 2013.

The decrease in earnings for both the quarter and the year are due to significant nonrecurring items. The prior year fourth quarter includes $2,043,000 of net securities gains, which were realized primarily on the sale of private label mortgage backed securities. There were no securities gains realized in the fourth quarter of 2014. These securities were sold in the prior year to generate cash and capital to support the redemption of the company’s preferred stock that had been issued under the TARP Capital Purchase Plan. The preferred stock was redeemed in April 2014. The securities gains, net of tax, recorded in the fourth quarter of 2013 accounted for $0.55 of the $0.75 diluted earnings per share that quarter.

The 2014 full year results include a $2,611,000 fraud loss related to repurchase agreements that were supposedly backed by loans and United States Department of Agriculture Guarantees. This loss, net of tax, reduced the 2014 diluted earnings per share by $0.71 from the $1.63 that would have otherwise been earned.

“We’re pleased with the year over year improvement in core earnings,” said Rick Bastian, the company’s chairman and chief executive officer. “The fraud loss in 2014 was an unfortunate event that dampened what would have otherwise been another year of record earnings per share for the company. The net interest margin was down only 6 basis points despite the cost of additional debt incurred to fund the redemption of the company’s TARP securities, and has shown improvement the last two quarters. Improving credit quality led to a 45% reduction in the provision for loan losses and operating expenses were down by 4%,” he added.

The following table summarizes key performance and asset quality measures for the quarter ended December 31, 2014 compared to the previous four quarters. The diluted earnings per share (Diluted EPS), return on average assets (ROAA), and return on average common equity (ROACE) are each presented based on actual results and the results, excluding after tax impact of the fraud loss on repurchase agreements.

Key Performance and Asset Quality Measures

  4th Qtr

2014

  3rd Qtr

2014

  2nd Qtr

2014

  1st Qtr

2014

  4th Qtr

2013

        Diluted EPS $0.42 ($0.17) $0.42 $0.24 $0.75 Diluted EPS, excluding net securities fraud loss $0.42 $0.54 $0.42 $0.24 $0.75 ROAA .65% (.25%) .67% .49% 1.25% ROAA, excluding net securities fraud loss .65% .81% .67% .49% 1.25% ROACE 8.93% (3.55%) 9.37% 5.70% 17.47% ROACE, excluding net securities fraud loss 8.93% 11.53% 9.37% 5.70% 17.47% Efficiency Ratio* 74.2% 71.2% 69.3% 78.3% 76.2% Net interest margin 3.73% 3.66% 3.60% 3.70% 3.79% Nonaccrual loans to total loans 1.43% 1.53% 1.38% 1.49% 1.63% Nonaccrual loans and OREO to total loans 1.66% 1.79% 1.72% 1.89% 2.11% Allowance for loan losses to total loans 1.11% 1.12% 1.14% 1.26% 1.26% Allowance for loan losses to nonaccrual loans 77.4% 73.1% 82.7% 84.7% 77.5% Subsidiary bank total risk-based capital   13.67%   13.27%   13.94%   13.80%   13.51%

* - The efficiency ratio calculation excludes net gains and losses on trading and available for sale securities, net gains and losses on other assets and the fraud loss on repurchase agreements.

The repurchase agreements for which the company incurred the fraud loss were purchased through an investment advisor, as safe short-term investments, backed by loans and guarantees of the United States Department of Agriculture (USDA). Blackhawk has had a long term relationship with the advisor, a recognized leader in dealing with government guaranteed loans and securities, and has participated in similar arrangements over the entire term of the relationship. The fraudulent activity was committed by a USDA approved lender with whom the advisor, on behalf of clients, had entered into an agreement to purchase USDA guaranteed loans. It was discovered that the underlying loans and the USDA guarantees on 25 loans totaling approximately $176 million were fraudulent. Blackhawk had a $5.5 million interest in the underlying loans and USDA guarantees. The amount of the loss was mitigated by recovery efforts that resulted in a court approved agreement identifying and seizing assets that are to be liquidated for the benefit of investors. The amount to ultimately be received from the seizure and liquidation of assets may be more or less than estimated, which could result in a recovery of the loss already recognized or additional loss in future periods. In addition to proceeds expected from the seizure and liquidation of assets from the perpetrators of the fraud, recovery is being sought from the USDA under the loan guarantees, a claim on Blackhawk’s insurance policy, and the exercise of any other legal rights and remedies that may be available.

Net Interest Income

Net interest income for the fourth quarter decreased by 3% to 4,884,000 compared to $5,014,000 for the fourth quarter of the prior year. The net interest margin was down six basis points to 3.73% compared to 3.79% the fourth quarter of 2013. Average total earning assets for the quarter decreased by 1% to $536.9 million compared to $542.1 million for the fourth quarter of 2013. The decrease in average total assets includes a net reduction of $12.3 million in investment securities and short-term investments, which was offset by a $6.7 million increase in average total loans. Average total deposits for the fourth quarter of 2014 increased by $2.0 million to $504.1 million compared to $502.1 million the fourth quarter of the prior year. The increase in average total deposits includes an $11.3 million increase in core non-maturity deposits, which was offset by a $9.3 million reduction in average time deposits.

Net interest income for the full year was $19,346,000, a $37,000 decrease compared to 2013. The net interest margin for the year was down six basis points to 3.67% compared to 3.73% in 2013. The decrease in net interest income for the year included $251,000 of interest paid on debt incurred in conjunction with the redemption of the company’s preferred stock that was issued under the TARP Capital Purchase Plan. For the year average total earning assets increased $7.6 million compared to 2013. The increase included a $12.8 million, or 3%, increase in average total loans. Average total deposits for 2014 increased by $9.6 million, or 2%, to $513.6 million compared to $504.0 million in 2013. This includes a $14.0 million increase in average non-maturity deposits, which was offset $4.4 million decrease in average time deposits.

Provision for Loan Losses and Credit Quality

The company recorded a $516,000 provision for loan losses in the fourth quarter of 2014, an $84,000 reduction compared to the fourth quarter of the prior year. The provision for loan losses for the year ended December 31, 2014 decreased by $1,855,000 to $2,285,000 compared to the 2013 provision of $4,140,000. The following table summarizes the activity in the allowance for loan losses for the years ended December 31, 2014 and 2013:

 

Year Ended December 31,

(in Thousands) 2014   2013 Beginning allowance for loan losses 4,894 6,520 Provision for loan losses 2,285 4,140 Charge-offs (3,170) (6,590) Recoveries 387 824 Ending allowance for loan losses 4,396 4,894

Net charge-offs to average total loans

.72%

1.55%

Nonaccrual loans and other real estate owned totaled $6.6 million, or 1.66% of total loans, at December 31, 2014 compared to $7.0 million, or 1.79% of total loans on September 30, 2014 and $8.1 million, or 2.10% of total loans, at December 31, 2013. Net loan charge-offs for 2014 decreased by 51% to $2,783,000 compared to $5,767,000 in 2013.

Non-Interest Income and Operating Expenses

Non-interest income for the fourth quarter of 2014 totaled $2,201,000, a $1,785,000 decrease compared to the fourth quarter of 2013. The decrease was due to $2,043,000 of securities gains that were recognized in the fourth quarter of 2013. Excluding these gains from the prior year fourth quarter non-interest income was up $257,000. This included a $362,000 improvement in net gain/loss on the sale of assets acquired in settlement of loans.

Non-interest income for the year totaled $5,956,000, a $5,318,000 decrease compared to 2013. The decrease year over year reflects a $2,224,000 reduction in net securities gains and a $2,611,000 securities fraud loss that was incurred in 2014. Excluding these nonrecurring items non-interest income for 2014 was down by $483,000 compared to 2013. This includes a $901,000 reduction in mortgage banking revenue, which was offset by an improvement in net losses on the sale of assets acquired in the settlement of loans.

Operating expenses for the fourth quarter of 2014 totaled $5,360,000, a $360,000, or 6%, decrease compared to the fourth quarter of 2013. For the year operating expenses decreased by $945,000, or 4%, to $20,750,000 compared to $21,695,000 for 2013.

Outlook

Blackhawk has created a strong credit culture and the processes to support it; however, economic uncertainties 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 is expected to 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 Janesville, 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”; 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.

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 December 31, 2014   2013 (Amounts in thousands, except share and per share data) Interest Income:   Interest and fees on loans $ 4,765 $ 4,897 Interest on trading securities 1 11 Interest and dividends on securities: Taxable 529 452 Tax-exempt 321 341 Interest on federal funds sold and securities purchased under agreements to resell 1 75 Interest on interest-bearing deposits in banks   2   2   Total interest and dividend income   5,619   5,778   Interest Expenses: Interest on deposits 489 585 Interest on borrowings 93 26 Interest on subordinated debentures   153   153   Total interest expense   735   764   Net interest and dividend income 4,884 5,014 Provision for loan losses   516   600   Net interest and dividend income after provision for loan losses   4,368   4,414     Noninterest Income: Service charges on deposits accounts 731 722 Net gain on sale of loans 533 596 Net mortgage servicing income 44 49 Debit card interchange fees 543 543 Net gains (losses) on trading activities - 72 Net gains (losses) on available-for-sale securities - 1,971 Net other gains (losses) 14 (348 ) Increase in cash value of bank-owned life insurance 71 70 Other   265   311   Total noninterest income   2,201   3,986     Noninterest Expenses: Salaries and employee benefits 2,859 2,993 Occupancy and equipment 619 667 Data processing 587 577 Advertising and marketing 82 57 Amortization of intangibles - 35 Professional fees 187 281 Office Supplies 88 93 Telephone 106 89 Other   832   928   Total noninterest expenses   5,360   5,720   Income before income taxes 1,209 2,680 Provision for income taxes   264   840   Net income $ 945 $ 1,840     Key Ratios           Basic Earnings Per Common Share $ 0.42 $ 0.76 Diluted Earnings Per Common Share 0.42 0.75 BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)  

Year ended December 31,

2014

  2013 (Amounts in thousands, except share and per share data) Interest Income:   Interest and fees on loans $ 18,711 $ 19,060 Interest on trading securities 13 49 Interest and dividends on available-for-sale securities: Taxable 2,106 1,953 Tax-exempt 1,314 1,257 Interest on federal funds sold and securities purchased under agreements to resell 156 367 Interest on interest-bearing deposits in banks   5     7   Total interest and dividend income   22,305     22,693   Interest Expense: Interest on deposits 2,067 2,591 Interest on borrowings 283 206 Interest on subordinated debentures and notes   609     513   Total interest expense   2,959     3,310   Net interest and dividend income before provision for loan losses 19,346 19,383 Provision for loan losses   2,285     4,140   Net interest and dividend income after provision for loan losses   17,061     15,243     Noninterest Income: Service charges on deposits accounts 2,832 2,820 Net gain on sale of loans 1,824 2,948 Net loan servicing income (loss) 236 13 Debit card interchange fees 2,223 2,230 Net gains (losses) on trading activities 4 112 Net gains (losses) on available-for-sale securities 470 2,586 Net other gains (losses) (258 ) (630 ) Loss on repurchase agreement fraud (2,611 ) - Increase in cash surrender value of bank-owned life insurance 291 295 Other   945     900   Total noninterest income   5,956     11,274     Noninterest Expenses: Salaries and employee benefits 11,296 11,412 Occupancy and equipment 2,522 2,623 Data processing 2,344 2,346 Advertising and marketing 249 262 Amortization of intangibles 25 139 Professional fees 875 1,161 Office Supplies 373 371 Telephone 386 367 Other   2,680     3,014   Total noninterest expenses   20,750     21,695   Income before income taxes 2,267 4,822 Provision for income taxes   15     907   Net income $ 2,252   $ 3,915     Key Ratios           Basic Earnings Per Common Share $ 0.92 $ 1.48 Diluted Earnings Per Common Share 0.92 1.47 BLACKHAWK BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2014 AND DECEMBER 31, 2013 (UNAUDITED)     December 31, December 31, Assets   2014   2013 (Amounts in thousands, except share and per share data) Cash and due from banks $ 9,847 $ 11,350 Federal funds sold and securities purchased under agreements to resell 21 21,064 Interest-bearing deposits in banks   11,723     2,078   Total cash and cash equivalents   21,591     34,492   Trading securities 35 315 Securities available-for-sale 129,184 127,985 Loans held for sale 1,537 1,161 Federal Home Loan Bank stock, at cost 2,266 2,266 Loans, less allowance for loan losses of $4,396 and $4,894 at December 31, 2014 and December 31, 2013, respectively 391,448 382,295 Office buildings and equipment, net 8,320 8,922 Goodwill 5,037 5,037 Other intangible assets, net 2,640 3,091 Cash surrender value of bank-owned life insurance 9,602 9,311 Other assets   9,813     8,565   Total assets $ 581,473   $ 583,440     Liabilities and Stockholders' Equity   Liabilities Deposits: Noninterest-bearing $ 99,068 $ 91,450 Interest-bearing   416,716     419,308   Total deposits 515,784 510,758 Borrowings (including $0 and $2,157 at fair value at December 31, 2014 and December 31, 2013, respectively) 9,000 10,157 Subordinated debentures and notes (including $1,031 at fair value at December 31, 2014 and December 31, 2013) 11,255 11,255 Other liabilities   3,398     2,968   Total liabilities   539,437     535,138     Stockholders’ equity Preferred stock, $0.01 par value, 1,000,000 shares authorized; 0 and 10,500 shares issued as of December 31, 2014 and December 31, 2013, respectively - 10,483 Common stock, $0.01 par value, 10,000,000 shares authorized; 2,318,496 and 2,299,496 shares issued as of December 31, 2014 and December 31, 2013, respectively 23 23 Surplus 9,960 9,768 Retained earnings 31,091 29,166 Treasury stock, 87,865 and 83,252 shares at cost as of December 31, 2014 and December 31, 2013, respectively (969 ) (909 ) Accumulated other comprehensive income (loss)   1,931     (229 ) Total stockholders' equity   42,036     48,302   Total liabilities and stockholders' equity $ 581,473   $ 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 December 31, 2014 Three months ended December 31, 2013 Average Average Average Average

Balance

 

Interest

 

Rate

Balance

 

Interest

 

Rate

Interest Earning Assets: Interest-bearing deposits in banks $ 4,959 $ 2 0.18 % $ 2,142 $ 2 0.37 % Federal funds sold & securities purchased under agreements to resell 728 1 0.67 % 22,784 75 1.30 % Investment securities: Taxable investment securities 99,045 530 2.12 % 90,311 463 2.04 % Tax-exempt investment securities   38,076       321   5.02 %   39,512       341   5.13 % Total Investment securities 137,121 851 2.92 % 129,823 804 2.86 % Loans   394,045       4,765   4.80 %   387,392       4,897   5.02 %   Total Earning Assets $ 536,853 $ 5,619   4.27 % $ 542,141 $ 5,778   4.35 % Allowance for loan losses (4,482 ) (5,591 ) Cash and due from banks 13,128 12,970 Other assets   35,947     35,865     Total Assets $ 581,446   $ 585,385     Interest Bearing Liabilities: Interest bearing checking accounts $ 157,000 $ 111 0.28 % $ 159,188 $ 125 0.31 % Savings and money market deposits 155,190 64 0.16 % 146,158 57 0.16 % Time deposits   96,931       314   1.29 %   106,248       403   1.50 % Total interest bearing deposits 409,121 489 0.47 % 411,594 585 0.56 % Subordinated debentures 11,255 152 5.38 % 11,029 153 5.49 % Borrowings   11,019       93   3.34 %   15,917       26   0.66 %   Total Interest-Bearing Liabilities $ 431,395 $ 734   0.68 % $ 438,540 $ 764   0.69 %   Interest Rate Spread 3.59 % 3.66 %   Noninterest checking accounts 94,996 90,517 Other liabilities   12,749     7,441   Total liabilities 539,140 536,498 Preferred Stock - 10,471 Common Stockholders' equity   42,306     38,416   Total Stockholders' equity 42,306 48,887 Total Liabilities and Stockholders' Equity $ 581,446   $ 585,385     Net Interest Income/Margin $ 4,885   3.73 % $ 5,014   3.79 %   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) Twelve months ended December 31, 2014 Twelve months ended December 31, 2013 Average Average Average Average

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

Interest Earning Assets: Interest-bearing deposits in banks $ 3,245 $ 5 0.17 % $ 3,120 $ 7 0.23 % Federal funds sold & securities purchased under agreements to resell 11,536 156 1.35 % 30,112 367 1.22 % Investment securities: Taxable investment securities 106,584 2,119 1.99 % 95,545 2,002 2.09 % Tax-exempt investment securities   38,853       1,314   5.08 %   36,561       1,257   5.17 % Total Investment securities 145,437 3,433 2.82 % 132,106 3,259 2.95 % Loans   384,583       18,711   4.87 %   371,827       19,060   5.13 %   Total Earning Assets $ 544,801 $ 22,305   4.22 % $ 537,165 $ 22,693   4.34 % Allowance for loan losses (4,609 ) (6,336 ) Cash and due from banks 12,981 13,051 Other assets   34,103     36,232     Total Assets $ 587,276   $ 580,112     Interest Bearing Liabilities: Interest bearing checking accounts $ 162,483 $ 465 0.29 % $ 161,425 $ 667 0.41 % Savings and money market deposits 155,447 228 0.15 % 148,800 229 0.15 % Time deposits   101,632       1,374   1.35 %   106,121       1,695   1.60 % Total interest bearing deposits 419,562 2,067 0.49 % 416,346 2,591 0.62 % Subordinated debentures and notes 14,852 609 5.44 % 9,736 513 5.27 % Borrowings   11,199       283   1.91 %   14,553       206   1.42 %   Total Interest-Bearing Liabilities $ 445,613 $ 2,959   0.66 % $ 440,635 $ 3,310   0.75 %   Interest Rate Spread 3.56 % 3.59 %   Noninterest checking accounts 94,015 87,652 Other liabilities   3,600     3,705   Total liabilities 543,228 531,992 Preferred Stock 3,278 10,430 Common Stockholders' equity   40,770     37,690   Total Stockholders' equity 44,048 48,120 Total Liabilities and Stockholders' Equity $ 587,276   - $ 580,112   -   Net Interest Income/Margin $ 19,346   3.67 % $ 19,383   3.73 %

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