Porter Bancorp, Inc. (NASDAQ: PBIB) ("the Company"), parent company of PBI Bank, today reported unaudited results for the third quarter of 2017. Net income available to common shareholders for the third quarter of 2017 was $1.7 million, or $0.29 per basic and diluted common share, compared with $1.3 million, or $0.22 per basic and diluted share, for the third quarter of 2016. Net income available to common shareholders for the nine months ended September 30, 2017, was $5.1 million, or $0.83 per diluted common share, compared with net income available to common shareholders of $3.8 million, or $0.66 per diluted share, for the nine months ended September 30, 2016.

The $5.1 million in net income for the first nine months of 2017 compares favorably to net income of $3.8 million for the 2016 period. Core earnings for the nine months ended September 30, 2017, outperformed the same period in 2016. The first nine months of 2016 benefitted from $1.9 million in negative loan loss provisioning, $451,000 of other real estate owned income, and $187,000 in gains on securities sales and calls.

Deferred Tax Asset Valuation Allowance - The Company has a net deferred tax asset of $51.9 million subject to a full valuation allowance at September 30, 2017. Our ability to utilize deferred tax assets depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. A key element of the evaluation is the achievement of pre-tax net income rather than pre-tax net loss on a cumulative basis for the trailing three-year period. At September 30, 2017, our trailing three-year cumulative pre-tax net loss has declined to $762,000. We continue to monitor and evaluate the positive and negative evidence and will reverse the valuation allowance when we determine it is more-likely-than-not the asset will be utilized to reduce future taxes payable related to the future taxable income of the Company.

Net Interest Income - Net interest income before provision expense increased to $7.8 million for the third quarter of 2017, compared with $7.5 million in the third quarter of 2016. Average loans increased to $669.6 million for the 2017 quarter, compared with $626.1 million in the 2016 quarter. Net interest margin decreased to 3.44% in the 2017 quarter, compared with 3.47% in the 2016 quarter.

Our yield on earning assets increased to 4.16% in the third quarter of 2017, compared to 4.15% in the third quarter of 2016. Our cost of interest bearing liabilities was 0.85% in the 2017 quarter, compared to 0.78% in the 2016 quarter.

Loan Loss Provision and Allowance for Loan Losses - There was no provision for loan losses during the first nine months of 2017. Ongoing improvements in asset quality and management's assessment of risk in the loan portfolio led to negative provisions for loan losses of $750,000 for the third quarter of 2016 and $1.9 million for the first nine months of 2016.

The allowance for loan losses to total loans was 1.32% at September 30, 2017, compared to 1.53% at September 30, 2016. The reduced level of the allowance in 2017 compared to 2016 was primarily driven by declining charge-off levels, growth in the portfolio, and improving trends in credit quality. Net loan recoveries were $10,000 for the first nine months of 2017, compared to net loan charge-offs of $652,000 for the first nine months of 2016. The allowance for loan losses for loans evaluated collectively for impairment was 1.27% at September 30, 2017, and 1.51% at September 30, 2016.

Non-performing Assets - Non-performing assets, which include loans past due 90 days and still accruing, nonaccrual loans and other real estate owned ("OREO"), decreased to $12.1 million, or 1.26% of total assets at September 30, 2017, compared with $12.8 million, or 1.34% of total assets at June 30, 2017, and $17.2 million, or 1.88% of total assets at September 30, 2016.

Non-performing loans decreased to $5.8 million, or 0.85% of total loans at September 30, 2017, compared with $6.5 million, or 0.99% of total loans at June 30, 2017, and $10.1 million, or 1.62% of total loans at September 30, 2016. The decrease from the previous quarter was primarily driven by $1.1 million in principal payments received on nonaccrual loans. OREO at September 30, 2017, remained unchanged at $6.3 million, compared with June 30, 2017, and decreased from $7.1 million at September 30, 2016. The Company acquired $130,000 in OREO and sold $30,000 in OREO during the third quarter of 2017. There were $98,000 in fair value write-downs arising from lower marketing prices or new appraisals in the first nine months of 2017, compared with $970,000 in the first nine months of 2016.

The following table details past due loans and non-performing assets as of the dates shown.

                         
 

September 30, 2017
 

June 30, 2017

March 31, 2017

December 31,

2016

September 30, 2016
(in thousands)
Past due loans:
30 - 59 days $ 872 $ 1,328 $ 972 $ 2,302 $ 2,335
60 - 89 days 612 765 289 315 273
90 days or more
Nonaccrual loans   5,769   6,509   8,102   9,216   10,099

Total past due and nonaccrual loans

$
7,253

$
8,602 $ 9,363 $ 11,833 $ 12,707
 

Loans past due 90 days or more

$

$
$ $ $
Nonaccrual loans 5,769 6,509 8,102 9,216 10,099
OREO 6,330 6,318 6,571 6,821 7,098
Other repossessed assets          

Total non-performing Assets

$
12,099

$
12,827   $ 14,673 $ 16,037 $ 17,197
 

In addition to nonaccrual loans and OREO, loans classified as Troubled Debt Restructures (TDRs) and on accrual totaled $1.2 million at both September 30, 2017 and June 30, 2017, compared to $6.1 million at September 30, 2016.

Non-interest Income - Non-interest income for the third quarter of 2017 increased $77,000 to $1.2 million compared with $1.1 million for the third quarter of 2016. The increase from the third quarter of 2016 was primarily due to a $48,000 increase in service charges on deposit accounts as well as an increase in bank card interchange fees of $31,000.

Non-interest Expense - Non-interest expense decreased $745,000 to $7.2 million for the third quarter of 2017, compared with $7.9 million for the third quarter of 2016. The decrease from the 2016 quarter was primarily due to a reduction in salaries and employee benefits of approximately $262,000, a reduction of OREO expense of $211,000, and a reduction of litigation and loan collection expenses of $144,000.

Non-interest expense decreased $2.6 million to $21.3 million for the first nine months of 2017, compared with $23.9 million for the same period in 2016. The decrease from the first nine months of 2016 was primarily due to reductions in OREO expense of $1.2 million, professional fees of $475,000, litigation and loan collection expenses of $454,000, and FDIC insurance expense of $403,000.

Capital - At September 30, 2017, PBI Bank's Tier 1 leverage ratio was 7.73%, compared with 7.54% at June 30, 2017, and its Total risk-based capital ratio was 11.10% at September 30, 2017, compared with 11.50% at June 30, 2017.

At September 30, 2017, Porter Bancorp's leverage ratio was 5.85%, compared with 5.65% at June 30, 2017, and its Total risk-based capital ratio was 10.05%, compared with 10.44% at June 30, 2017. At September 30, 2017, PBI Bank's Common equity Tier I risk-based capital ratio was 9.66%, and Porter Bancorp's Common equity Tier I risk-based capital ratio was 5.49%.

Deferred Tax Assets and Liabilities - The Company has a net deferred tax asset of $51.9 million at September 30, 2017, which is currently subject to a 100% valuation allowance. Deferred tax assets and liabilities are shown below.
       
September 30, December 31,
2017 2016
(in thousands)
Deferred tax assets:
Net operating loss carry-forward $ 43,515 $ 42,094
Allowance for loan losses 3,142 3,139
Other real estate owned write-down 3,401 3,366
Other   3,253     7,607  
  53,311     56,206  
 
Deferred tax liabilities:
FHLB stock dividends 928 928
Other   481     1,229  
  1,409     2,157  
Net deferred tax assets before valuation allowance   51,902     54,049  
Valuation allowance   (51,902 )   (54,049 )
Net deferred tax asset $   $  
 

Our ability to utilize deferred tax assets depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. We established a valuation allowance for all deferred tax assets as of December 31, 2011, and the valuation allowance remains in effect as of September 30, 2017.

Under Section 382 of the Internal Revenue Code, as amended ("Section 382"), the Company's net operating loss carryforwards ("NOLs") and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an "ownership change" as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.

In 2015, the Company took two measures to preserve the value of its NOLs. First, we adopted a tax benefits preservation plan designed to reduce the likelihood of an "ownership change" occurring as a result of purchases and sales of the Company's common shares. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an "acquiring person") could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights will expire upon the earlier of (i) June 29, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.

On September 23, 2015, our shareholders approved an amendment to the Company's articles of incorporation to further help protect the long-term value of the Company's NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions will expire on the earlier of (i) September 23, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

Forward-Looking Statements

Statements in this press release relating to Porter Bancorp's plans, objectives, expectations or future performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "objective," "possible," "seek," "plan," "strive" or similar words, or negatives of these words, identify forward-looking statements. These forward-looking statements are based on management's current expectations. Porter Bancorp's actual results in future periods may differ materially from those indicated by forward-looking statements due to various risks and uncertainties, including our ability to reduce our level of higher risk loans such as commercial real estate and real estate development loans, reduce our level of non-performing loans and other real estate owned, and increase net interest income in a low interest rate environment, as well as our need to increase capital. These and other risks and uncertainties are described in greater detail under "Risk Factors" in the Company's Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission. The forward-looking statements in this press release are made as of the date of the release and Porter Bancorp does not assume any responsibility to update these statements.

Additional Information

Unaudited supplemental financial information for the third quarter ending September 30, 2017, follows.
             

PORTER BANCORP, INC.

Unaudited Financial Information

(in thousands, except share and per share data)
 
Three Three Three Nine Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
9/30/17 6/30/17 9/30/16 9/30/17 9/30/16

 

 

 
Income Statement Data
Interest income $ 9,446 $ 9,134 $ 8,931 $ 27,805 $ 26,821
Interest expense   1,659   1,546   1,473   4,689   4,516
Net interest income 7,787 7,588 7,458 23,116 22,305
Provision (negative provision) for loan losses       (750 )     (1,900 )
Net interest income after provision 7,787 7,588 8,208 23,116 24,205
 
Service charges on deposit accounts 568 548 520 1,617 1,422
Bank card interchange fees 245 255 214 713 637
Other real estate owned income 46 451
Bank owned life insurance income 103 104 101 309 316
Gain (loss) on sales and calls of securities, net (5 ) (16 ) (5 ) 187
Other   266   205   240   723   635
Non-interest income 1,182 1,107 1,105 3,357 3,648
 
Salaries & employee benefits 3,683 3,803 3,945 11,433 11,624
Occupancy and equipment 836 844 842 2,501 2,504
Professional fees 232 241 374 776 1,251
Marketing expense 364 262 289 880 706
FDIC insurance 356 357 442 1,055 1,458
Data processing expense 321 318 295 931 887
State franchise and deposit tax 225 225 255 675 765
Other real estate owned expense 111 (3 ) 322 92 1,284
Litigation and loan collection expense 78 40 222 121 575
Other   969   899   934   2,826   2,893
Non-interest expense 7,175 6,986 7,920 21,290 23,947
 
Income before income taxes 1,794 1,709 1,393 5,183 3,906
Income tax expense           21
Net income 1,794 1,709 1,393 5,183 3,885
Less:
Earnings allocated to participating securities   45   42   46   133   129
Net income available to common $ 1,749 $ 1,667 $ 1,347 $ 5,050 $ 3,756
 
Weighted average shares - Basic 6,102,452 6,096,981 6,016,216 6,084,593 5,702,205
Weighted average shares - Diluted 6,102,452 6,096,981 6,016,216 6,084,593 5,702,205
 
Basic earnings per common share $ 0.29 $ 0.27 $ 0.22 $ 0.83 $ 0.66
Diluted earnings per common share $ 0.29 $ 0.27 $ 0.22 $ 0.83 $ 0.66
Cash dividends declared per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
 

           

PORTER BANCORP, INC.

Unaudited Financial Information

(in thousands, except share and per share data)
 
Three Three Three Nine Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
9/30/17 6/30/17 9/30/16 9/30/17 9/30/16

 

 

 
Average Balance Sheet Data
Assets $ 951,687 $ 941,982 $ 917,625 $ 943,813 $ 930,288
Loans 669,592 654,801 626,095 657,980 621,824
Earning assets 907,723 899,393 864,307 899,859 874,185
Deposits 870,623 870,138 839,926 864,835 854,580
Long-term debt and advances 36,046 29,759 27,270 33,921 27,649
Interest bearing liabilities 777,597 773,301 748,585 772,824 764,852
Stockholders' equity 39,159 37,018 42,170 36,656 38,324
 
 
Performance Ratios
Return on average assets 0.75 % 0.73 % 0.60 % 0.73 % 0.56 %
Return on average equity 18.18 18.52 13.14 18.90 13.54
Yield on average earning assets (tax equivalent) 4.16 4.11 4.15 4.17 4.14
Cost of interest bearing liabilities 0.85 0.80 0.78 0.81 0.79
Net interest margin (tax equivalent) 3.44 3.42 3.47 3.47 3.45
Efficiency ratio 80.00 80.30 92.32 80.41 92.94
 
 
Loan Charge-off Data
Loans charged-off $ (67 ) $ (307 ) $ (405 ) $ (700 ) $ (2,082 )
Recoveries   159   226   540   710   1,430
Net recoveries (charge-offs) $ 92 $ (81 ) $ 135 $ 10 $ (652 )
 
 
Nonaccrual Loan Activity
Nonaccrual loans at beginning of period $ 6,509 $ 8,102 $ 11,599 $ 9,216 $ 14,087
Net principal pay-downs (1,068 ) (1,944 ) (592 ) (4,464 ) (4,035 )
Charge-offs (57 ) (242 ) (303 ) (528 ) (1,291 )
Loans foreclosed and transferred to OREO (130 ) (40 ) (667 ) (270 ) (1,243 )
Loans returned to accrual status (63 ) (402 ) (199 ) (751 )
Loans placed on nonaccrual during the period   515   696   464   2,014   3,332
Nonaccrual loans at end of period $ 5,769 $ 6,509 $ 10,099 $ 5,769 $ 10,099
 
Troubled Debt Restructurings (TDRs)
Accruing $ 1,226 $ 1,235 $ 6,114 $ 1,226 $ 6,114
Nonaccrual   1,932   1,967   3,379   1,932   3,379
Total $ 3,158 $ 3,202 $ 9,493 $ 3,158 $ 9,493
 
Other Real Estate Owned (OREO) Activity
OREO at beginning of period $ 6,318 $ 6,571 $ 12,322 $ 6,821 $ 19,214
Real estate acquired 130 40 667 270 1,243
Valuation adjustment write-downs (98 ) (320 ) (98 ) (970 )
Proceeds from sales of properties (30 ) (320 ) (5,623 ) (738 ) (12,610 )
Gain (loss) on sales, net   10   27   52   75   221
OREO at end of period $ 6,330 $ 6,318 $ 7,098 $ 6,330 $ 7,098
 

   

PORTER BANCORP, INC.

Unaudited Financial Information

(in thousands, except share and per share data)
 
As of
9/30/17     6/30/17     3/31/17     12/31/16     9/30/16
 
Assets
Loans $ 682,511 $ 654,938 $ 664,183 $ 639,236 $ 621,697
Allowance for loan losses   (8,977 )   (8,885 )   (8,966 )   (8,967 ) (9,489 )
Net loans 673,534 646,053 655,217 630,269 612,208
Loans held for sale 134
Securities held to maturity 41,424 41,635 41,752 41,818 41,883
Securities available for sale 149,797 154,993 156,001 152,790 142,433
Federal funds sold & interest bearing deposits 37,812 51,413 32,329 56,867 57,578
Cash and due from financial institutions 9,557 9,297 5,456 9,449 6,266
Premises and equipment 16,975 17,164 17,687 17,848 18,481
Bank owned life insurance 15,131 15,033 14,935 14,838 14,741
FHLB Stock 7,323 7,323 7,323 7,323 7,323
Other real estate owned 6,330 6,318 6,571 6,821 7,098
Accrued interest receivable and other assets   5,082   5,228   5,083   7,154 7,135
Total Assets $ 962,965 $ 954,457 $ 942,354 $ 945,177 $ 915,280
 
Liabilities and Equity
Certificates of deposit $ 445,577 $ 458,068 $ 470,029 $ 444,639 $ 454,742
Interest checking 94,523 97,169 104,811 103,876 88,386
Money market 156,905 153,700 122,434 142,497 140,995
Savings   35,946   36,363   36,380   34,518 33,816
Total interest bearing deposits 732,951 745,300 733,654 725,530 717,939
Demand deposits   133,896   129,518   127,049   124,395 119,005
Total deposits 866,847 874,818 860,703 849,925 836,944
FHLB advances 16,847 2,158 17,313 22,458 2,619
Junior subordinated debentures 23,475 23,700 23,925 24,150 24,375
Senior debt 10,000 10,000
Accrued interest payable and other liabilities   5,728   5,388   4,908   15,911 7,721
Total liabilities 922,897 916,064 906,849 912,444 871,659
 
Preferred stockholders' equity 2,771 2,771 2,771 2,771 2,771
Common stockholders' equity   37,297   35,622   32,734   29,962 40,850
Total stockholders' equity   40,068   38,393   35,505   32,733 43,621
Total Liabilities and Stockholders' Equity $ 962,965 $ 954,457 $ 942,354 $ 945,177 $ 915,280
 
Ending shares outstanding 6,259,864 6,259,864 6,247,520 6,224,533 6,222,994
Book value per common share $ 5.96 $ 5.69 $ 5.24 $ 4.81 $ 6.56
Tangible book value per common share 5.96 5.69 5.23 4.79 6.53
 

   

PORTER BANCORP, INC.

Unaudited Financial Information

(in thousands, except share and per share data)
 
As of
9/30/17     6/30/17     3/31/17     12/31/16     9/30/16
Asset Quality Data
Loan 90 days or more past due still on accrual $ $ $ $ $
Nonaccrual loans   5,769   6,509   8,102   9,216   10,099  
Total non-performing loans 5,769 6,509 8,102 9,216 10,099
Real estate acquired through foreclosures 6,330 6,318 6,571 6,821 7,098
Other repossessed assets            
Total non-performing assets $ 12,099 $ 12,827 $ 14,673 $ 16,037 $ 17,197  
 
Non-performing loans to total loans 0.85 % 0.99 % 1.22 % 1.44 % 1.62 %
Non-performing assets to total assets 1.26 1.34 1.56 1.70 1.88
Allowance for loan losses to non-performing loans 155.61 136.50 110.66 97.30 93.96
 
Allowance for loans evaluated individually $ 425 $ 254 $ 332 $ 399 $ 339
Loans evaluated individually for impairment 7,509 8,273 9,891 15,131 16,214
Allowance as % of loans evaluated individually 5.66 % 3.07 % 3.36 % 2.64 % 2.09 %
 
Allowance for loans evaluated collectively $ 8,552 $ 8,631 $ 8,634 $ 8,568 $ 9,150
Loans evaluated collectively for impairment 675,002 646,665 654,292 624,105 605,483
Allowance as % of loans evaluated collectively 1.27 % 1.33 % 1.32 % 1.37 % 1.51 %
 
Allowance for loan losses to total loans 1.32 % 1.36 % 1.35 % 1.40 % 1.53 %
 
Loans by Risk Category
Pass $ 633,203 $ 610,356 $ 617,361 $ 586,430 $ 551,075
Watch 35,167 29,433 26,442 30,431 46,049
Special Mention 598 604 492 497 603
Substandard 13,543 14,545 19,888 21,878 23,970
Doubtful            
Total $ 682,511 $ 654,938 $ 664,183 $ 639,236 $ 621,697
 
Risk-based Capital Ratios - Company
Tier I leverage ratio 5.85 % 5.65 % 5.43 % 5.27 % 6.21 %
Common equity Tier I risk-based capital ratio 5.49 5.58 5.29 5.20 6.37
Tier I risk-based capital ratio 7.31 7.46 7.09 6.99 8.48
Total risk-based capital ratio 10.05 10.44 10.15 10.21 11.57
 
Risk-based Capital Ratios - PBI Bank
Tier I leverage ratio 7.73 % 7.54 % 6.37 % 6.24 % 6.97 %
Common equity Tier I risk-based capital ratio 9.66 9.97 8.33 8.28 9.53
Tier I risk-based capital ratio 9.66 9.97 8.33 8.28 9.53
Total risk-based capital ratio 11.10 11.50 9.89 9.88 11.18
 
FTE employees 217 221 230 238 233
 

Non-GAAP Financial Measures Reconciliation

Tangible book value per common share is a non-GAAP financial measure derived from GAAP-based amounts. We calculate tangible book value per common share by excluding the balance of intangible assets from common stockholders' equity. We calculate tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which we calculate by dividing common stockholders' equity by common shares outstanding. We believe this is consistent with bank regulatory agency treatment, which excludes tangible assets from the calculation of risk-based capital.

The efficiency ratio is a non-GAAP measure of expense control relative to revenue from net interest income and fee income. We calculate the efficiency ratio by dividing total non-interest expenses as determined under GAAP by net interest income and total non-interest income, but excluding net gains on the sale of securities from the calculation. We believe this provides a reasonable measure of primary banking expenses relative to primary banking revenue.
   
As of
9/30/17     6/30/17     3/31/17       12/31/16       9/30/16
Tangible Book Value Per Share (in thousands, except share and per share data)
 
Common stockholder's equity $ 37,297 $ 35,622 $ 32,734 $ 29,962 $ 40,850
Less: Intangible assets           42     140     239  
Tangible common equity 37,297 35,622 32,692 29,822 40,611
 
Shares outstanding   6,259,864     6,259,864     6,247,520     6,224,533     6,222,994  
Tangible book value per common share $ 5.96 $ 5.69 $ 5.23 $ 4.79 $ 6.53
Book value per common share 5.96 5.69 5.24 4.81 6.56
 
 
Three Months Ended Nine Months Ended
9/30/17 6/30/17 9/30/16 9/30/17 9/30/16
Efficiency Ratio (in thousands)
 
Net interest income $ 7,787 $ 7,588 $ 7,458 $ 23,116 $ 22,305
Non-interest income 1,182 1,107 1,105 3,357 3,648
Less: Net gain (loss) on securities       (5 )   (16 )   (5 )   187  
Revenue used for efficiency ratio   8,969     8,700     8,579     26,478     25,766  
Non-interest expense 7,175 6,986 7,920 21,290 23,947
 
Efficiency ratio 80.00 % 80.30 % 92.32 % 80.41 % 92.94 %
 

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