Board of Porter Bancorp (Kentucky) Finishes Probe, Imposes Reforms

Sometimes a quarterly report includes a noteworthy item that happened after the quarter ended. Porter Bancorp Inc. in Louisville, Ky., had three of them.

The $1.5 billion-asset company said in a Securities and Exchange Commission filing that its board's oversight committee has finished an investigation into allowances for loan losses, its foreclosed property valuations and representations made during a private placement of capital in 2010.

Concerns were raised in several letters earlier this year by the Clinton Group, which invested $5 million in the company as part of the $32 million private placement.

"While recognizing opportunities for procedural improvements existed in the bank's lending and nonperforming asset administration, the oversight committee concluded that this did not rise to a level that would result in the financial statements, or representations and warranties with respect to the financial statements, being misleading to investors in the 2010 private placement offering of the company's stock," the filing said. Investors were given "ample opportunity" to conduct due diligence, it said.

However, Porter disclosed several changes being made at the urging of the committee, including: making the board of its PBI Bank unit bigger and more independent; reassigning Chief Financial Officer David Pierce to chief risk officer; making the bank's chief financial officer, Phillip Barnhouse Jr., CFO of the parent company; creating the job of senior loan officer job; and establishing a new long-term strategic plan for the bank.

Secondly, Porter said it supplied capital to the bank so that it could comply with a consent order with the Federal Deposit Insurance Corp. and the Kentucky Department of Financial Institutions. The bank's leverage ratio was 8.57% at the end of the third quarter, so the parent pushed down $3 million of capital to boost the ratio above the 9% threshold demanded in the order.

Lastly, Porter has deferred payments on its trust-preferred securities and the preferred shares it issued to the Treasury Department as part of the Troubled Asset Relief Program to preserve capital.

Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners LP, said in a research note on Friday that the deferrals and downstreaming of capital were "definitely negative developments," but added that they were not surprising given the company's condition the last several quarters.

Late last month, Porter reported a loss of $12.2 million, compared with earnings of $1.8 million a year earlier, largely stemming from increased credit costs.

Fitzsimmons added in his note that he believes the company is pursuing a bulk sale of problem loans. Nonperforming assets totaled $104.7 million at the end of the third quarter.