Blackhawk Bancorp, Inc. Announces Record Profits for 2018

[ACCESSWIRE]

BELOIT, WI / ACCESSWIRE / February 5, 2019 / Blackhawk Bancorp, Inc. (OTCQX: BHWB) reported net income of $8.14 million for the year ended December 31, 2018, which was a $1.94 million, or a 31.3% increase over the $6.20 million earned in 2017. Fully diluted earnings per share (''EPS'') for the year increased 23.4%, or $.47 per share, to $2.48, as compared to $2.01 for the year ended December 31, 2017. The Company's 2018 year-to-date ROAA and ROAE likewise increased to 1.06% and 10.19%, respectively, and compares favorably to an ROAA of 0.90%, and an ROAE of 8.73%, for the prior year.

Total assets increased by $96.7 million, or 13.4%, to $817.3 million at December 31, 2018, as compared to $720.6 million as of December 31, 2017. Total loans increased by $66.6 million, or 13.9%, to $541.8 million as compared to $479.5 million at the end of the prior year. Total deposits increased by $68.6 million, or 11.1%, to $685.6 million as compared to $617.0 million at the end of 2017.

''Blackhawk made a series of strategic decisions starting in early 2017 to first raise capital and then grow revenues by investing in its people, technologies, and delivery platforms that provide our value-added services and products enhancing our customers' ability to achieve financial success. Those decisions are reflected in Blackhawk's strong 2018 financial operating results, which were driven by loan and deposit growth from across our expanded business footprint,'' said Todd James, the Company's CEO & newly appointed Chairman. ''We remain grateful for the past leadership, entrepreneurial vision and community bank culture instilled by our recently retired CEO and Chairman, Rick Bastian. We remain confident that our Company is strategically positioned to build on that legacy and will continue to grow revenues by adding customer relationships through existing client referrals, organic growth, and through strategic acquisition opportunities such as our pending acquisition of First McHenry Corporation,'' he added.

The Company has received all regulatory approvals required to close on the purchase of First McHenry Corporation. The transaction is expected to close in the first quarter of 2019, with First National Bank of McHenry operating as a separate subsidiary until sometime in the third quarter when it will be merged with and into Blackhawk Bank. ''This acquisition adds to Blackhawk's profitable growth momentum, extends our Illinois presence, and cost-effectively allows us to leverage the service capabilities of the commercial team already established at our Elgin office'', said David Adkins, the Company's Chief Operating Officer, and CEO of the bank subsidiary.'' He continued, ''Our community bank values are very similar to McHenry's; however, Blackhawk offers a depth of consultative expertise and a broader array of products and value-added services not currently available to their customer base. We are confident in Blackhawk's ability to maintain McHenry's core banking relationships and at the same time attract new customers that expect a high level of service and responsive local decision making that is only available through a true community bank.''

Net income for the quarter ended December 31, 2018, was $2.10 million, which was a $725,000, or 52.9%, increase above the fourth quarter of last year. Fully diluted earnings per share for the fourth quarter of 2018 increased by $0.22, or 52%, from $0.42 in Q4 2017 to $0.64, in Q4 2018. The fourth quarter results equated to a 1.05% ROAA and a 10.13% ROAE as compared to 0.77% and 7.00%, respectively, for the same quarter last year. The earnings improvement over the fourth quarter of 2017 was driven by a $1.17 million, or 19.4%, increase in net interest income, a $336,000, or 13.3%, increase in non-interest income and a $560,000, or 78.9%, decrease in provision for loan losses. These gains were partially offset by an $803,000, or 12.3% increase in operating expenses.

Net income for the fourth quarter of 2018 as compared to the linked quarter ending September 30, 2018, decreased $482,000, or 18.7%, which likewise decreased EPS from $0.78 to $0.64 for the quarter ended December 31, 2018. The decrease in linked quarter net income included a $32,000 increase in net interest income offset by a decrease of $184,000 in gain on sale of mortgage loans, increased employment-related expenditures of $198,000, an increase in net loss on other real estate of $72,000 and increased professional fees of $93,000. Approximately $56,000 of the increase in 2018 professional fees was attributable to one-time acquisition-related costs.

The following table summarizes the net income and the high-level performance measures for the last five quarters:

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. The Federal tax rate in 2018 was 21.0% with passage of the TCJA Act whereas that rate was 34.0% in 2017. The net interest margin 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 excluding net securities gains (losses) and other gains (losses). See the footnote disclosures on the Consolidated Financial Statements of Income for discussion of this ratio calculation.

Net Interest Income

Net interest income totaled $7.22 million for the quarter ended December 31, 2018, an increase of $32,000, or 0.4%, as compared to the $7.19 million recorded for the third quarter of 2018, and an increase of $1.17 million, or 19.4%, for the quarter ended December 3, 2017. The taxable-equivalent (''TE'') net interest margin ratio for the quarter ended December 31, 2018, was 3.91%, which was unchanged from September 30, 2018, and was a twelve-basis point increase over the 3.79% TE net interest margin ratio for the fourth quarter of 2017.

The Company realized a nominal $32,000 increase in net interest income in the fourth quarter compared to the linked quarter ended September 30, 2019, despite a $24.4 million or 4.8% growth in average loans. While the robust loan growth is a positive for the Company's core net interest margin, the benefit of that growth, as compared to the linked quarter, was offset by a decrease in net interest income that was earned in the third quarter due to large temporary deposits. The large temporary deposits were included in the average balance of interest-bearing checking, which had an average rate 0.55% in the third quarter, and decreased by $24.5 million for the fourth quarter compared to the linked quarter. The average balance of interest-bearing deposits at other banks included the liquidity provided by the temporary deposits, which had an average rate of 1.99% in the third quarter, and decreased by $33.8 million for the quarter ended December 31, 2018, compared to the linked quarter. With average total earning assets for the fourth quarter increasing by $3.4 million compared to the linked quarter, despite the loss of the temporary deposit and liquidation of interest-earning deposits, the Company's funding mix changed to include a $12.7 million increase in average time deposits and a $14.1 million increase in other borrowings, both of which were at rates substantially higher than the average rate paid on interest-bearing checking.

The $1.17 million increase in net interest income in the fourth quarter of 2018 compared to the same quarter a year ago was driven by growth. Average total earning assets increased $87.1 million, or 13.3%, to $744.4 million compared to $657.3 million the fourth quarter of 2017. This includes an increase in average total loans of $61.8 million, or 13.1%, and an increase of $22.0 million in average investment securities. The earning asset growth was funded by a $75.2 million, or 12.3%, increase in average total deposits. The average rate on earning assets increased by 49 basis points to 4.71% and the average rate on interest-bearing liabilities increased by 46 basis points to 1.02% compared to 4.22% and .56%, respectively, in the fourth quarter of 2017.

Net interest income for the year ended December 31, 2018, increased by $4.59 million, or 20.1%, to $27.5 million, as compared to $22.9 million for the year ended December 31, 2017. The 2018 TE net interest margin ratio also increased to 3.91%, or 21 basis points, from 3.70% for the year ended December 31, 2017, and was largely the result of strong loan and deposit growth. Average earning assets increased by $75.1 million over the prior year, which included a $71.8 million, or 16.3%, increase in average loans. Average total deposits increased by$73.6 million, or 12.3%, including a $4.0 million increase in average non-interest-bearing checking deposits.

Provision for Loan Losses and Credit Quality

The provision for loan losses of $150,000 for the quarter ended December 31, 2018, was unchanged from the linked quarter ended September 30, 2018, and was lower by $560,000 as compared to $710,000 for the fourth quarter of 2017. The provision for loan losses for the year ended December 31, 2018, totaled $1.18 million as compared to $1.79 million for 2017. Loan charge-offs, net of recoveries, equaled a net recovery of $656,000 for the year ended December 31, 2018, as compared to a $1.07 million net charge-off the prior year.

Total nonperforming assets, which include troubled debt restructures that are performing in accordance with their modified terms, equaled $6.23 million as of December 31, 2018, as compared to $7.47 million as of September 30, 2018, and $8.65 million at December 31, 2017. On December 31, 2018, the ratio of nonperforming assets to total assets equaled 0.76% as compared to 0.97% at September 30, 2018, and 1.20% at December 31, 2017. The ratio of the allowance for loan losses to total loans was 1.32% at December 31, 2018, as compared to 1.41% at September 30, 2018, and 1.13% at December 31, 2017.

Non-Interest Income and Operating Expenses

Non-interest income for the quarter ended December 31, 2018, totaled $2.87 million, a $272,000, or 8.7% decrease as compared to the $3.14 million reported for the quarter ended September 30, 2018, and a $336,000, or 13.3% increase over the $2.53 million reported for the fourth quarter of 2017. The decrease in noninterest income compared to the most recent quarter ended September 30, 2018, includes a decrease of $184,000 in net gain on the sale of mortgage loans combined with a $72,000 net loss on other-real-estate, and a $19,000 net loss on the sale of investment securities. The $336,000 non-interest income increase in the fourth quarter of 2018 as compared to the fourth quarter of last year includes a $191,000 increase in gain on sale of mortgage loans and a $140,000 decrease in net losses on sale of securities.

Non-interest income for the year ended December 31, 2018, totaled $11.54 million, which was a $1.48 million, or 14.7%, increase as compared to $10.06 million for the year ended December 31, 2017. The 2018 results include a $212,000, or 7.1%, increase in deposit service charges, a $947,000, or 38.9%, increase in gain on sale of mortgage loans, and a $304,000, or 12.6%, increase in debit interchange income.

Operating expenses for the quarter ended December 31, 2018, totaled $7.30 million, increasing $399,000, or 5.8%, as compared to the quarter ended September 30, 2018, and $803,000, or 12.3%, as compared to the fourth quarter of 2017. Operating expenses for the year ended December 31, 2018, totaled $27.73 million, an increase of $4.11 million, or 17.4%, as compared to $23.62 million for 2017. The largest year over year increases included a $2.78 million increase in salary and benefits, a $796,000 increase in occupancy and equipment expenses, a $246,000 increase in professional fees, a $149,000 increase in data processing and a $119,000 increase in debit card related expenditures. The employment-related increases include the addition of lending talent to increase capacity in the company's business and mortgage banking areas along with appropriate support staff and an increase in the cost of health benefits. The non-interest expense increases also include costs related to the Janesville, Wisconsin full-service branch, which opened in the fourth quarter of 2017 and the Elgin, Illinois loan production office, which opened during the first quarter of 2018. The $246,000 increase in professional fees includes $56,000 of acquisition-related expenses, other legal fees, and additional outsourced internal audit work that has begun to assess, implement, document, and test processes and procedures needed to ensure eventual compliance with FDICIA internal control reporting requirements.

Income Taxes

The provision for income taxes was $538,000 in the fourth quarter of 2018 as compared to $695,000 for the quarter ended September 30, 2018, and a net benefit of $3 thousand dollars for the fourth quarter of 2017. The provision for income taxes for the year ended December 31, 2018, was $1.96 million, or 19.4% of pre-tax income, as compared to $1.33 million, or 17.7% of pre-tax income, for 2017. The Company reversed a valuation allowance related to a state net operating loss carryover in the fourth quarter of 2017, reducing the provision for income taxes by $310,000. The tax benefit from the reversal of that valuation allowance was partially offset by a charge of $92,000 that resulted from the enactment of The Tax Cuts and Jobs Act of 2017 federal tax rate reduction. Without these two adjustments, the effective rate for the year ended December 31, 2017, would have been 20.6%. Note that the Company's effective tax rate differs from statutory tax rates due to varying levels of tax-exempt income from municipal securities, increases in cash surrender value of life insurance, tax benefits of a captive insurance company, and tax credits related to a Low-Income Housing Tax Credit investment.

Capital

As of December 31, 2018, the company's Tier 1 capital ratio to risk-weighted assets and total risk-based capital ratios were 12.9% and 14.00%, respectively, as compared to 11.05% and 14.74%, respectively, at December 31, 2017.

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 ongoing strengthening of the company's credit quality, is expected to lead to improved earnings. 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, which operates eight full-service banking centers and a dedicated commercial office, which are located in south central Wisconsin and north central Illinois along the I-90 corridor from Elgin, Illinois, to Janesville, Wisconsin. The company offers a variety of value-added consultative services to its business customers and their employees related to the financial products it provides.

Forward-Looking Statements

When used in this communication, the words ''believes,'' ''expects,'' ''anticipated,'' ''intends,'' ''may,'' ''likely,'' ''will,'' 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; volatile credit and financial markets both domestic and foreign, 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 this forward-looking information should not be construed as a representation by the Company or any person that future events, plans, or expectations 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, future events, or otherwise.

Blackhawk Bank is a member of the FDIC and is an Equal Housing Lender. Further information is available on the company's website at www.blackhawkbank.com.

Blackhawk Bancorp, Inc.

Todd J. James, Chairman & CEO
[email protected]
Phone: (608) 364-8911

Mary King McGovern, SVP & CFO
[email protected]

BLACKHAWK BANCORP, INC. AND SUBSIDIARY
CONDENSED STATEMENTS OF INCOME
(Unaudited)

(1) Net interest margin and the efficiency ratio are calculated on a taxable-equivalent basis. See Consolidated Statement of Income footnote disclosures.
(2) Efficiency ratio is calculated excluding net securities gains (losses) and other gains (losses)

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND DECEMBER 31, 2017
(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 fully taxable equivalent basis ("FTE"). The Federal tax rate in 2018 was 21.0% with passage of the TCJA Act whereas that rate was 34.0% in 2017. The net interest margin 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 an FTE basis, noninterest income less any securities gains (losses) or other gains (losses), and also includes an FTE 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 fully taxable equivalent basis ("FTE"). The Federal tax rate in 2018 was 21.0% with passage of the TCJA Act whereas that rate was 34.0% in 2017. The net interest margin 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 an FTE basis, noninterest income less any securities gains (losses) or other gains (losses), and also includes an FTE adjustment on the increases in cash surrender value of bank-owned life insurance.

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
AVERAGE BALANCE SHEET WITH RESULTANT INTEREST ANDRATES

Average Balance Sheetwith Resultant Interest and Rates