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PBI Bank in Louisville, Ky., has announced that it expects to enter into a consent agreement with state and federal regulators that will require it reduce its loan concentrations, improve its asset quality and maintain capital levels above regulatory minimums.
June 20
Porter Bancorp Inc. was able to avoid trouble during the darkest days of the recession, only to show up on its regulator's radar screen as many other banks are recovering.
The Louisville, Ky., company was profitable in 2008 and 2009, but its nonperforming assets have jumped in recent quarters, even as other banks have started to see stabilization or improvement. Last week, Porter said it expects to enter into a consent order with regulators to, among other things, improve its asset quality.
Analysts say the order is not a big shock given Porter's recent performance. Rather, they say Porter's plight shows how a prolonged economic malaise is hurting banks in markets suffering from a sluggish recovery. Until recently, the hardest-hit banks had largely been in states such as California, Florida and Georgia, where the recession wrecked credit.
"Areas like Kentucky may not have had the bust, but they are going through a serious economic slowdown that is now going on four years," says Jeff Gerrish, a partner at Gerrish McCreary Smith. "The economy is catching up with them."
Gerrish says states such as Colorado, Ohio, Virginia and Wisconsin are also having problems stemming from the longevity of the slump. He often reminds his clients that have managed to stay healthy so far not to expect luck to always be on their side.
"Just because you've been OK so far doesn't mean you'll stay that way," Gerrish says. "Even this late in the cycle, things can change."
Porter serves as a good case study of a bank that was thriving during the recession, earning $13.8 million in 2008 and $9.1 million in 2009. The $1.7 billion-asset company even pursued a hostile takeover of the $339 million-asset Citizens First Corp. in Bowling Green, Ky., in late 2009.
The company's performance took a turn for thw worse in late 2009, as it moved $58 million in loans to nonperforming status during the fourth quarter. Driven largely by regulatory scrutiny, the move raised total nonperforming assets to $100 million. (It also abandoned the attempted acquisition of Citizens First.)
The problems have increased since then, with nonperforming assets totaling $143.9 million at the end of the first quarter 2011, or 8.3% of total assets. Analysts have estimated a ratio of 12.5% by adding in troubled-debt restructurings.
Maria L. Bouvette, president and chief executive of Porter, did not return a call for comment.
Industry observers, however, contend that the next round of potential strugglers likely have a stronger footing than their pain-riddled predecessors.
"Banks that got in trouble in the early part of the cycle didn't have strong fundamentals," Gerrish says. "The banks that are under stress now often have great fundamentals, but they have just been whacked over time."
Catherine Mealor, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., says Porter has not sat idly as its situation deteriorated, charging off about 4% of its portfolio.
"For some of the other Southeast banks that I follow that is low, but for Kentucky banks that is high," Mealor says. "They've done a really good job of moving things through the system. They have been aggressive."
Mealor says new problems have continued to pop up and she is keenly interested in seeing what nonperformers and watch-list will look like at the end of this quarter. She estimates that the company could have another $115 million of nonperforming assets over the next three years. "If that number accelerates, we then need to worry about capital," Mealor says.
Porter raised $32 million in the third quarter of 2010, with private-equity firm Patriot Financial Partners, LP, as the lead investor in a private placement. At March 31, the bank had a leverage ratio of 9.75% and a total risk-based capital ratio of 14.96%. The company's PBI Bank already had an informal agreement with regulators to keep its ratios above 9% and 12%, respectively, and analysts said they expected those guidelines to be the same in the formal agreement.
A call to Patriot was not returned.
Given Porter's robust capital position, Mealor says the company should at least entertain the idea of a bulk loan sale, which would move the problems off the balance sheet en masse, though it would likely require a steep pricing discount. However, such a sale would be best coupled with a leveling off of the new problems.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, counters with a belief that Porter should hold off on such an aggressive move until it is confident that any loans its sell will not be immediately replaced by new problems.
"Before they even start talking about a flush to get rid of the nonperforming assets they need to be comfortable that we've peaked," Fitzsimmons say. He says that regulators are unlikely to push Porter to aggressively purge assets.
The company's new private-equity investors, may feel differently, some observers say.
"In general when private-equity comes in, they are not in it for the long-term," Gerrish says. "They don't' want to stick around for 20 years. They want to get it cleaned up so that they can either use it as a acquisition platform or flip it."
