Total assets of the company increased by $137.2 million, or 14%, to $1.1 billion at June 30, 2020, compared to $963.9 million as of December 31, 2019. Total gross loans increased by $74.1 million, or 12%, and total investment securities increased $64.2 million, or 27%, during the first six months of 2020. Total Deposits increased by $109.5 million, or 13%, to $939.1 million compared to $829.6 million at the end of 2019.

"In light of the challenges that the COVID-19 pandemic crisis has presented, we're pleased with the financial results for the second quarter of 2020 and we are extremely proud of how our employees have responded to the crisis," said Todd James, the company's Chairman and CEO. "Despite the fear and anxiety this pandemic may be causing in their personal lives, our officers and staff have stepped up to make sure we continued to deliver superior service and products that our customers have come to expect. Our Business Banking team originated about 800 PPP loans totaling $82 million, learning the program themselves and educating and coaching our customers about it at the same time. Our mortgage origination team has been working tirelessly to help our customers take advantage of record low mortgage rates. Our tellers, in-branch staff, customer service team and support staff have been on the front-line of this pandemic from the start, making sure we stayed open and that essential financial services remained available to our customers," he added.

In addition to participating in the PPP, Blackhawk has provided payment relief to borrowers negatively affected by the pandemic. The relief modifications included three month payment deferrals, three or six-month interest-only payments, forbearance agreements and other relief. The first table below summarize Blackhawk's exposure to Industries impacted the most by COVID-19. The second schedule summarizes remaining exposure. Both tables include the company's outstanding balance, balance of loans by modification type, total balance of loans modified and the percent of loans modified within each industry. The balances in these tables exclude loans originated under PPP, which are 100% guaranteed by the SBA:

Net Interest Income

Net interest income for the second quarter of 2020 totaled $9.87 million, increasing $1.26 million, or 15%, from $8.62 million the previous quarter and up $1.40 million, or 17%, from the second quarter of last year. The net interest margin was 3.99% for the second quarter of 2020 as compared to 3.83% for the quarter ended March 31, 2020, and 3.88% for the second quarter of last year. The increase in net interest income compared to both the previous quarter and second quarter of last year is driven by the overall increase in earning assets, which includes the effect of PPP, and other pandemic stimulus, and the recognition of $522,000 of PPP loan fees. While the increase in overall earning assets, which was driven by the PPP and other pandemic stimulus that has incrementally increased net interest income, the net margin on the assets added is very thin, with PPP loans earning 1% and the remaining liquidity being deployed in the investment portfolio, where yields are historically low. Excluding the PPP fees recognized during the second quarter, the net interest margin would have decreased three basis points to 3.96% compared to 3.83% in the most recent quarter, despite the margin pressure from the drastic rate drops earlier in the year. The company was able to significantly lower funding costs during the second quarter to mitigate the impact of the drop-in rates. The Company has received approximately $3.2 million in net PPP fees and will recognize those fees based on the estimated average life of the PPP loans, which assumes the majority of PPP loans will be repaid through the loan forgiveness process within a year to 18 months from origination.

Average total loans for the quarter ended June 30, 2020, equaled $701.1 million, a $72.3 million, or 12% increase over the previous quarter, and a $99.9 million, or 17%, increase over the same quarter a year ago. The average total loans for the second quarter of 2020 included $63 million average balance of PPP loans. Excluding the PPP loans, average total loans increased by $9.2 million, or less than 2%, over the most recent quarter, and increased by $36.8 million, or 6% over the total average loans for second quarter of 2019.

Average total deposits for the quarter ended June 30, 2020, equaled $918.8 million, a $77.4 million, or 9% increase over the previous quarter, and a $91.0 million, or 11% increase over the same quarter a year ago. The increase in average total deposits included PPP funds deposited by borrowers, other stimulus money received by customers and other deposit growth. Additionally, the cost of interest-bearing deposits decreased by thirty-seven basis points to 0.44%, compared to 0.81% the quarter before, and by fifty-nine basis points compared to 1.03% the second quarter of 2019.

Net interest income for the six months ended June 30, 2020, increased by $2.2 million, or 14%, to $18.5 million as compared to $16.3 million for the first half of 2019. The net interest margin for the first half of 2020 increased by two basis points to 3.92% compared to 3.90% for the first half of 2019. Average total loans for the first half of 2020 were $664.9 million, an increase of $82.2 million, or 12%, as compared to $582.7 million for the first half of 2019. Average total deposits for the first-half of 2020 were $880.1 million, an increase of $84.0 million, or 11%, as compared to $796.1 million for the first half of 2019.

Provision for Loan Losses and Credit Quality

The provision for loan losses for the quarter ended June 30, 2020, totaled $2.51 million, as compared to $765,000 for the quarter ended March 31, 2020, and $180,000 for the second quarter of 2019. The provision for the first-half 2020 increased to $3.3 million compared to $450,000 for the first-half of 2019. The increased provision reflects deterioration in economic conditions and uncertainty related to the impact COVID-19 may have on future loan losses. Net charge-offs during the second quarter equaled $563,000, bringing the total up to $1.1 million for the first six months of 2020.

Total nonperforming assets, which include troubled debt restructures that are performing in accordance with their modified terms, equaled $11.6 million as of June 30, 2020, as compared to $13.4 million as of March 31, 2020, and $7.6 million at June 30, 2019. At June 30, 2020, the ratio of nonperforming assets to total assets equaled 1.05%, as compared to 1.37% at March 31, 2020, and 0.79% at June 30, 2019. The allowance for loan losses to total loans was 1.43% as of June 30, 2020, as compared to 1.29% at March 31, 2020, and 1.24% as of June 30, 2019. The allowance for loan losses to total loans, excluding PPP loans, at June 30, 2020 is just over 1.6%. The ratio of the allowance for loan losses to nonperforming loans increased to 93.6% as of June 30, 2020, as compared to 61.4% at March 31, 2020, and 106.1% at June 30, 2019.

Management expects loan losses to increase in future quarters as the full impact of the COVID-19 crisis works its way through the economy. Overall delinquency rates and non-performing asset levels have not increased; however, many customers have taken advantage of PPP, other stimulus programs, and the loan modifications we provided. Management expects to continue building the allowance for loan losses in the second half of the year and continue being proactive with borrowers to ensure credit issues are identified and addressed as early as possible, improving the overall probability of repayment.

Non-Interest Income and Operating Expenses

Non-interest income for the quarter ended June 30, 2020, totaled $4.85 million, a $1.65 million increase compared to $3.20 million the prior quarter, and a $1.22 million increase over the $3.63 million recorded in the second quarter of 2019. The increase in non-interest income was driven by mortgage banking activity, with gain on sale of loans increasing by $2.3 million and $2.2 million compared to the most recent quarter and the second quarter of 2019, respectively. The large increase in gain on sale of loans for the quarter was offset by a $499,000 and $560,000 decrease in net loan servicing income compared to the most recent quarter and second quarter of 2019, respectively. This decrease in loan servicing income reflects $482,000 increase in the valuation allowance against the company's originated mortgage servicing rights asset. In addition, deposit service charge revenue decreased by $287,000, or 32%, compared to the most recent quarter and by $275,000, or 31%, compared to the second quarter of 2019.

Non-interest income for the first half of 2020 increased $1.74 million, or 26%, to $8.4 million as compared to $6.6 million for the first half of 2019, including a $2.5 million increase in gain on sale of loans. This increase was offset by $186,000, or 11%, decrease in deposit service charges and a $622,000, or 182%, decrease in loan servicing income.

Operating expenses for the quarter ended June 30, 2020, totaled $8.95 million, increasing by $462,000, or 5%, compared to the quarter ended March 31, 2020, and increasing by $577,000, or 7%, compared to the second quarter of 2019. The increases compared to the most recent quarter and to the second quarter of 2019 were due to increased salaries and benefits, reflecting variable compensation related to the high level of mortgage loan originations.

Operating expenses for the six-month period ended June 30, 2020, totaled $17.7 million, a $113,000, or less than 1%, increase over the first half of 2019. The 2019 results included $1.83 million of nonrecurring acquisition related expenses. Excluding these expenses, operating expenses would have increased by $1.94 million, or 12%, over the first half of last year. The increase reflects operating the three acquired locations for the full six months, versus only four months in the first half of 2019, and the increased variable compensation related to the mortgage banking activity.

Outlook

The outlook for Blackhawk as well as the entire banking industry is clouded by uncertainty related to the COVID-19 pandemic crisis. Blackhawk expects to see elevated credit losses in future quarters as the economic impact of the crisis plays out, and will be taking steps to increase revenue, implement government stimulus programs and work with credit customers to offset and mitigate losses to the extent possible. Management believes the Company's financial position is strong and it has ample resources to withstand a potentially severe and protracted recession. In addition to responding to this crisis, Blackhawk will continue to pursue 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 organic growth opportunities, Blackhawk may also pursue growth through selective acquisitions. Ability to grow or maintain profitability may be affected by 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 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, nonrecurring securities gains 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
JUNE 30, 2020 AND DECEMBER 31, 2019
(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 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.

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.

5,155 5,155 5,155 5,155

13,611 14,000 14,000 14,000 14,000 29,000 10,000 10,035 10,042 13,992 9,758 6,083 7,738 7,516 6,614 104,507 98,706 97,324 95,942 92,391 $1,101,097 $977,005 $963,861 $976,358 $969,471

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
ANALYSIS of AVERAGE BALANCES & TAX EQUIVALENT INTEREST RATES
Average Balance Sheet with Resultant Interest and Rates
(Dollars in thousands - unaudited)
(Yields on a tax-equivalent basis) (1)

(1) Management discloses certain non-GAAP financial measures to evaluate and measure the Company's performance including a presentation of net interest income with a net interest margin ratio on a tax-equivalent (TE) basis. 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. Nonaccrual loans are included in the above-stated average balances.

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)(1)

(1) Management discloses certain non-GAAP financial measures to evaluate and measure the Company's performance including a presentation of net interest income with a net interest margin ratio on a tax equivalent (TE) basis. 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. Nonaccrual loans are included in the above-stated average balances.

SOURCE: Blackhawk Bancorp, Inc.

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