Porter Bancorp, Inc. Announces Second Quarter 2010 Results

Porter Bancorp, Inc. (NASDAQ: PBIB), parent company of PBI Bank, with 18 full-service banking offices in Kentucky, today reported results for the second quarter and six months ended June 30, 2010.

The Company reported a net loss of $829,000 for the second quarter of 2010 compared with net income of $3.2 million for the second quarter of 2009. Earnings for the six months ended June 30, 2010, were $2.4 million compared with $6.3 million for the first six months of 2009. Including the preferred stock dividend and related accretion, the net loss to common shareholders was $1.3 million, or ($0.15) per fully diluted common share, for the second quarter of 2010 compared with net income of $2.8 million, or $0.31 per fully diluted common share, for the second quarter of 2009. Net income available to common shareholders for the six months ended June 30, 2010, was $1.5 million, or $0.17 per fully diluted common share, compared with $5.3 million, or $0.61 per fully diluted common share, for comparable period of 2009.

"Porter Bancorp’s core operations remained solid in the second quarter of 2010 with higher net interest income, net interest margin and non-interest income, and strengthened capital base compared with the second quarter of 2009 and the first quarter of 2010,” stated Maria L. Bouvette, President and CEO of Porter Bancorp. "The growth in our core business was more than offset by a substantial increase in our provision for loan losses that resulted in our second quarter loss. We charged-off $6.3 million of nonperforming loans and wrote down $3.4 million of other real estate owned (OREO) in the second quarter to account for lower valuations on the underlying real estate collateral. We took these write-downs as part of our ongoing review of non-performing loans and OREO to reflect the continued weakness in the market and corresponding weakness in selling prices for residential lots, single family homes and other real estate properties in our markets.

"We remain focused on strengthening our balance sheet by reducing problem loans and building our capital base,” noted Ms. Bouvette. "We made solid progress on these key metrics in the latest quarter. Our non-performing loans declined $11.8 million in the latest three months and our total non-performing assets declined $3.0 million. We strengthened our allowance for loan losses to $26.8 million, or 2.01% of total loans. We also raised $27 million in new capital during the quarter, increasing our total risk-based capital ratio to 15.93% for the holding company, well above the 10.0% requirement for a well-capitalized institution, the highest regulatory rating.”

Second Quarter Results

• Net interest margin increased 58 basis points to 3.71% in the second quarter of 2010 compared with 3.13% in the second quarter of 2009. The increase in margin since last year benefited from a lower average cost of funds. Net interest margin was also up from the first quarter of 2010 by 39 basis points primarily due to lower average cost of funds.
• Net interest income increased 14.9% to $14.7 million for the three months ended June 30, 2010, compared with the same quarter of 2009 benefiting from a lower average cost of funds.
• The Company recorded a net loss of $829,000 for the three months ended June 30, 2010, compared with net income of $3.2 million for the second quarter of 2009. The loss for the 2010 quarter was due primarily to a $5.0 million increase in the provision for loan losses to $6.6 million in the second quarter of 2010 compared with $1.6 million in the second quarter of 2009 and write-downs of $3.4 million of OREO.
• Average loans decreased 0.2% to $1.357 billion in the second quarter of 2010 compared with $1.360 billion in the second quarter of 2009. Net loans decreased 2.3% to $1.31 billion in the second quarter of 2010, compared with $1.34 billion at June 30, 2009.
• Deposits increased 3.7% to $1.41 billion compared with $1.36 billion at June 30, 2009.
• Total assets increased 3.0% to $1.76 billion compared with $1.71 billion at June 30, 2009.
• Efficiency ratio was 69.1% in the second quarter of 2010, compared with 55.9% in the prior year second quarter. Our efficiency ratio for the second quarter of 2010 increased from 48.7% to 69.1% as a result of $3.4 million in OREO write-downs.
• Non-performing loans decreased $11.8 million, or 19.5%, during the second quarter to $48.7 million at June 30, 2010, compared with $60.5 million at March 31, 2010. The decrease was primarily attributable to non-performing loans moving through the collection, foreclosure and disposition process.
• Non-performing assets decreased $3.0 million, or 2.5%, during the second quarter to $117.2 million at June 30, 2010.
• Shareholders’ equity rose to$196.2 million at the end of the second quarter and benefited from a stock offering that raised $27.0 million in gross proceeds that closed June 30, 2010. The proceeds resulted in improved capital ratios, including 11.11% tier 1 leverage ratio and 14.00% tier 1 risk-based capital ratio as of June 30, 2010.

Net Interest Income

Net interest income increased 14.9% to $14.7 million for the three months ended June 30, 2010, an increase of $1.9 million, compared with $12.8 million for the same period in 2009. Net interest income rose 16.6% to $28.9 million for the six months ended June 30, 2010, an increase of $4.1 million, compared with $24.8 million for the same period in 2009. The increase in net interest income was primarily attributable to an increase in net interest margin compared with 2009.

Net interest margin increased 58 basis points to 3.71% in the second quarter of 2010 from our margin of 3.13% in the prior year second quarter due primarily to lower cost of funds. The yield on earning assets declined 18 basis points from the 2009 second quarter while rates paid on interest-bearing liabilities declined 93 basis points. Net interest margin increased 39 basis points to 3.71% from our margin of 3.32% in the first quarter of 2010 due primarily to a lower average cost of funds. The yield on earning assets increased 27 basis points from the first quarter of 2010 compared with a 15 basis point decline in rates paid on interest-bearing liabilities.

Average earning assets declined 3.2% to $1.61 billion for the three months ended June 30, 2010, compared with $1.66 billion for the three months ended June 30, 2009. The decline in average earning assets was due primarily to lower average loans resulting from a slowdown in new loan originations and loans moved to other real estate owned (OREO).

Average deposits increased 4.6% to $1.46 billion, up from $1.39 billion for the three months ended June 30, 2009.

Non-Interest Income

Non-interest income for the second quarter of 2010 increased 3.5%, or $67,000, to $1.96 million compared with $1.90 million in the second quarter of 2009. The increase in non-interest income was due to increased income from service charges, fiduciary activities, net gains on sales of securities, offset partially by lower gains on sales of loans originated for sale.

Non-Interest Expense

Non-interest expense for the second quarter of 2010 increased from the prior year’s second quarter due primarily to the $3.4 million of write-downs of other real estate owned. This was partially off-set by lower FDIC fees. Total FDIC fees were $706,000 in the second quarter of 2010 compared with $1.3 million in the second quarter of 2009. The 2009 FDIC fees included a special assessment of $781,000. FDIC insurance premiums rose 40.4% to $706,000 in the second quarter of 2010 compared with $503,000 in the second quarter of 2009. Salary and employee benefits expense rose 3.1% to $3.9 million in the second quarter of 2010 compared with $3.8 million in the prior year second quarter. State franchise tax expense increased 20.7% to $543,000 in the second quarter of 2010 compared with $450,000 in the second quarter of 2009. Other real estate owned expense increased to $3.85 million in the second quarter of 2010 compared with $226,000 in the second quarter of 2009 primarily due to the write-downs.

Balance Sheet Review

Total assets rose 3.0%, or $50.8 million, to $1.76 billion at June 30, 2010, from $1.71 billion at June 30, 2009. The Company’s loan portfolio decreased 1.8%, or $24.6 million, to $1.34 billion from $1.36 billion at June 30, 2009, primarily due to efforts to move troubled loans through the collection, foreclosure, and disposition process. Deposits at June 30, 2010, increased 3.7% to $1.41 billion from $1.36 billion at June 30, 2009, primarily due to growth in certificates of deposit and demand deposits.

Asset Quality

Non-performing loans decreased to $48.7 million, or 3.64% of total loans, at June 30, 2010, compared with $60.5 million, or 4.44% of total loans, at March 31, 2010. Non-performing loans were up $19.3 million, or 1.42% of total loans, from the second quarter of last year primarily due to troubled loans working their way through the collection, foreclosure and disposition process. As a result, foreclosed properties at June 30, 2010, rose to $68.5 million compared with $59.7 million at March 31, 2010, and $9.6 million at June 30, 2009. Our ratio of non-performing assets to total assets slightly decreased during the quarter to 6.66% at June 30, 2010, compared with 6.84% at March 31, 2010. Approximately $9.0 million in OREO was sold during the second quarter of 2010.

Our loan loss reserve as a percentage of total loans increased to 2.01% at June 30, 2010, compared with 1.52% at June 30, 2009. Net loan charge-offs for the second quarter of 2010 were $6.3 million, or 0.46% of average loans for the quarter.

Our provision for loan losses was $6.6 million in the second quarter of 2010 which is up significantly from $3.0 million in the first quarter of 2010, and $1.6 million in the prior year second quarter due to an increase in charge-offs. The increase in charge-offs was primarily related to lower valuations on the collateral underlying certain construction and development loans, including loans for lots and residential construction units, where underlying property values remain under pressure due to the soft market conditions and the extension of the estimated sell out times.

"We continue to aggressively review our loan portfolio and OREO to assure that collateral and other economic measures support the value on our books,” continued Ms. Bouvette. "We believe the charge-offs and write-downs of OREO in the second quarter reflect our approach in this process and aligns our loan portfolio values with the current economic conditions in our markets.

"We have increased our reserve for loan losses over the past year to reflect the changes in market conditions and will continue to take proactive measures to reduce problem loans on our books. We believe these steps will be an important part in minimizing potential losses and restoring our earnings power in the future. In addition, we believe that our strengthened capital base and reserve for loan losses will be important buffers against any prolonged weakness in the economy,” concluded Ms. Bouvette.

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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. These forward-looking statements are based on management’s current expectations. Porter Bancorp’s actual results in future periods may differ materially from those currently expected due to various risks and uncertainties, including those discussed 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 second quarter ending June 30, 2010 follows.