The increase in net interest income compared to the third quarter of last year was driven by the overall increase in earning assets and recognition $0.7 million of PPP fees. Balance sheet growth reflects the origination of approximately $84 million of PPP loans, liquidity from other pandemic stimulus programs and an overall influx of deposits. While the increase in overall earning assets added to net interest income, the net interest margin on the assets added was lean, with PPP loans earning 1% and the remaining liquidity being deployed in the investment portfolio, where yields were at historical lows, or held at the Federal Reserve. Despite the deployment of funds into lower interest rate assets the net interest margin held up well at 3.83% for the third quarter of 2020 as recognition of PPP fees offset the effect of the low interest being earned rate on the PPP loans.

Average total loans for the quarter ended September 30, 2020, equaled $693.4 million, a $7.7 million, or 1%, decrease as compared to the previous quarter, and a $60.2 million, or 10%, increase over the same quarter a year ago. The average total loans for the third quarter and second quarters of 2020 included $84 million and $63 million of average PPP loans, respectively.

Average total deposits for the quarter ended September 30, 2020, equaled $943.8 million, a $25.0 million, or 3% increase over the previous quarter, and a $111.9 million, or 13%, 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.

Net interest income for the nine months ended September 30, 2020, increased by $3.3 million, or 13%, to $28.4 million as compared to $25.1 million for the first nine months of 2019. The net interest margin for the first nine months of 2020 decreased by two basis points to 3.89% compared to 3.91% for the first nine months of 2019. Average total loans for the first nine months of 2020 were $674.5 million, an increase of $74.8 million, or 12%, as compared to $599.7 million for the first nine months of 2019. Average total deposits for the first nine months of 2020 were $901.5 million, an increase of $93.3 million, or 12%, as compared to $808.2 million for the first nine months of 2019. The Federal Reserve's aggressive rate cuts to address the economic fallout from the pandemic resulted in a forty-four basis point decrease in the year to date yield on average earning assets as compared to the first three quarters of 2019. The Company acted swiftly to lower funding costs achieving a forty-four basis point decrease in the cost of deposits and a fifty basis point drop in cost of funds limiting the decrease in the net interest margin to two basis points compared to the first three quarters of 2019.

Provision for Loan Losses and Asset Quality

The provision for loan losses for the quarter ended September 30, 2020, totaled $2.6 million, as compared to $2.5 million for the quarter ended June 30, 2020, and $0.6 million for the third quarter of 2019. The provision for the first nine months of 2020 increased to $5.9 million compared to $1 million for the first nine months of 2019. The increased provision reflects elevated charge-offs in the third quarter of 2020, and uncertainty related to the impact COVID-19 may have on future loan losses. Net charge-offs during the third quarter equaled $2.8 million, bringing the total up to $3.9 million for the first nine months of 2020. The charge-offs in the third quarter included $2.7 million related to one relationship.

Total nonperforming assets, which include troubled debt restructures that were performing in accordance with their modified terms, equaled $11.0 million as of September 30, 2020, as compared to $11.6 million as of June 30, 2020, and $9.1 million at September 30, 2019. At September 30, 2020, the ratio of nonperforming assets to total assets equaled 0.97%, as compared to 1.05% at June 30, 2020, and 0.93% at September 30, 2019. The allowance for loan losses to total loans was 1.44% as of September 30, 2020, as compared to 1.43% at June 30, 2020, and 1.28% as of September 30, 2019. The allowance for loan losses to total loans, excluding PPP loans, at September 30, 2020 is 1.64% compared to 1.60% at June 30, 2020. The ratio of the allowance for loan losses to nonperforming loans decreased to 90.8% as of September 30, 2020, as compared to 93.6% at June 30, 2020, and 94.7% at September 30, 2019.

While overall delinquency rates and non-performing asset levels have not increased, management believes that current economic conditions could result in elevated losses in future quarters. Many borrowers have taken advantage of PPP, other stimulus programs, and the loan modifications provided by Blackhawk. Management expects to continue recording elevated provision for loan losses for the rest of the year, and will continue being proactive with borrowers to ensure credit issues are identified and addressed as early as possible, improving the overall probability of repayment.

Blackhawk has provided payment relief to borrowers negatively affected by the COVID-19 pandemic, including payment deferrals, interest only payments and forbearance agreements offering other relief. During the third quarter many of these customers had returned to normal payments, however, some were still under the original or extended modification agreements. The total balance of loans under COVID-related modifications decreased by $45.5 million to $23.2 million as of September 30, 2020 compared to $68.7 million in June 30, 2020. Blackhawk's exposure to borrowers in high risk industries that received a modification and not returned to normal payments as of September 30, 2020 decreased by $39.5 million or 76%, compared to June 30, 2020. The table below summarizes the company's total outstanding balance and modified loan balance by industry code. The balances in the tables exclude loans originated under PPP, which are 100% guaranteed by the SBA:

Non-Interest Income and Operating Expenses

Non-interest income for the quarter ended September 30, 2020, totaled $5.7 million, a $0.8 million increase compared to $4.9 million the prior quarter, and a $1.0 million increase over the $4.6 million recorded in the third quarter of 2019. The increase compared to the second quarter of 2020 includes increases of $0.2 million in net gain on sale of loans, $0.4 million in net loan servicing income and $0.1 million in deposit service charges. The increase compared to the third quarter of 2019 includes a $2.1 million increase in net gain on sale of loans, which was offset by a $0.3 million decrease in deposit service fees and an $0.9 million decrease in net gains on the sale of securities.

Non-interest income for the first nine months of 2020 increased $2.5 million, or 22%, to $13.8 million as compared to $11.3 million for the first nine months of 2019, including a $4.6 million increase in gain on sale of loans. This increase was offset by $0.5 million decrease in deposit service charges, a $0.5 million decrease in loan servicing income and a $1.1 million decrease in gain on sale of securities.

Operating expenses for the quarter ended September 30, 2020, totaled $9.3 million, increasing by $0.3 million, or 4%, compared to the quarter ended June 30, 2020, and increasing by $0.8 million, or 9%, compared to the third quarter of 2019. The increases compared to the third quarter of 2019 were driven primarily by the variable compensation related to increased mortgage loan originations.

Operating expenses for the nine-month period ended September 30, 2020, totaled $26.8 million, a $0.7 million, or 3%, increase over the first nine month of 2019. The 2019 results included $2 million of nonrecurring acquisition related expenses. Excluding these expenses, operating expenses would have increased by $2.7 million, or 11%, over the first nine months of last year. The increase reflects operating the three acquired locations for the full nine months, versus only seven months in the first nine months of 2019, and the increased variable compensation related to the mortgage banking activity.

Share Repurchase Program

At its meeting on October 21, 2020, the Company's Board of Directors authorized a share repurchase program, under which the Company may repurchase up to 200,000 shares of its outstanding common stock.

According to Todd James, Blackhawk Bancorp, Inc.'s President and CEO, "the stock repurchase program announced today is part of an overall plan to balance the use of Company resources to support all of its stakeholders. As we manage through these unprecedented times, Blackhawk has been and will continue supporting its customers, communities and employees that are negatively affected by COVID-19. This repurchase plan was adopted to extend similar support to our shareholders. While the number of shares authorized to be repurchased is relatively low, it demonstrates our confidence in the strength of our Company and will provide some level of liquidity for shareholders at a time when other alternatives may not be readily available," added James.

Under the share repurchase program, the Company may purchase, from time to time, on the open market or otherwise, shares of common stock of the Company in such quantities, at such prices, in such manner and on such terms and conditions as the Company's management team may deem appropriate, so long as the aggregate number of shares of common stock repurchased shall not exceed 200,000. Unless extended by the Board, the repurchase program will terminate on the twelve-month anniversary of its adoption.

The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, capital requirements and other corporate considerations, as determined by the Company's management team. The repurchase program may be suspended or discontinued at any time. The Company expects to finance the purchases with existing cash balances.

Outlook

The outlook for Blackhawk as well as the entire banking industry is clouded by uncertainty related to the COVID-19 pandemic crisis. Blackhawk believes there is risk of elevated credit losses in future quarters as the economic impact of the crisis plays out, and will continue 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
Phone: (608) 364-8911

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.

2,892 639 633 1,463 52 118 76 87 100 47 2,774 563 546 1,363 5 $9,943 $10,102 $8,160 $7,941 $8,324

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.

BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
MODIFIED LOAN BALANCES BY INDUSTRY CODE (UNAUDITED)

SOURCE: Blackhawk Bancorp, Inc.

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