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PBIB > SEC Filings for PBIB > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for PORTER BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PORTER BANCORP, INC.


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This item analyzes our financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

Cautionary Note Regarding Forward-Looking Statements

This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "plan," "strive" or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to differences in our results include, but are not limited to the factors listed in Part II, Item 1A - Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2011 Annual Report on Form 10-K.


Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. We caution you however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The forward-looking statements included in this report speak only as of the date of the report. We have no duty, and do not intend to, update these statements unless applicable laws require us to do so.

Overview

Porter Bancorp, Inc. (NASDAQ: PBIB) is a Louisville, Kentucky-based bank holding company which operates 18 full-service banking offices in twelve counties through its wholly-owned subsidiary, PBI Bank. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt, and extend south along the Interstate 65 corridor to Tennessee. We serve south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is a traditional community bank with a wide range of commercial and personal banking products, including wealth management and trust services, with an online banking division which delivers competitive deposit products and services under the separate brand of Ascencia.

The Company reported net loss of $27.7 million and $26.1 million, respectively, for the three and nine months ended September 30, 2012, compared with net loss of $12.2 million and $51.4 million, respectively, for the same periods of 2011. After deductions for dividends on preferred stock, accretion on preferred stock, and loss allocated to participating securities, net loss to common shareholders was $26.9 million and $26.4 million, respectively, for the three and nine months ended September 30, 2012, compared with net loss to common shareholders of $12.2 million and $50.8 million, respectively, for the three and nine months ended September 30, 2011. Results for the first nine months of 2011 were negatively impacted by a non-recurring 100% goodwill impairment charge of $23.8 million and higher expense related to other real estate owned.

Basic and diluted loss per common share were $(2.29) and $(2.25) for the three and nine months ended September 30, 2012, respectively, compared with basic and diluted loss per common share of ($1.04) and ($4.34) for the three and nine months ended September 30, 2011, respectively.

Significant developments during the quarter and nine months ended September 30, 2012 consist of the following:

Provision for loan losses expense was $25.5 million for the third quarter of 2012, compared with $4.0 million for the second quarter of 2012, and $8.0 million for the prior year third quarter. This increase was due to the continued decline in credit trends in our portfolio that resulted in net charge-offs of $23.1 million for the third quarter. More specifically, the increase in the provision for loan losses in the third quarter 2012 is attributable to collateral value declines for impaired real estate secured loans as evidenced by new appraisals received during the quarter. This resulted in a provision for loan loss totaling approximately $6.8 million related to these loans during the third quarter of 2012.

The provision was also negatively impacted by a strategy change during the third quarter of 2012 related to classified loans which we expect to more quickly remediate by litigation or foreclosure. For loans subject to this expectation, we applied an additional fair value discount ranging from 10% to 33% to the underlying collateral in our impairment analysis estimates as resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. This resulted in a provision for loan loss of approximately $5.1 million related to these loans. Additionally, the provision for loan losses was negatively impacted by the rising level of loan charge-offs in our historical loss experience factors, which we use to estimate the general component of our allowance for loan losses as well as additional downgrades within the loan portfolio.

Net interest margin decreased 11 basis points to 3.35% in the first nine months of 2012 compared with 3.46% in the first nine months of 2011. The decrease in margin between periods was primarily due to a reduction in interest earning assets coupled with lower rates on those assets and elevated non-accrual loan levels. Average loans decreased 15.3% to $1.1 billion in the first nine months of 2012 compared with $1.3 billion in the first nine months of 2011. Net loans decreased 23.0% to $898 million at September 30 2012, compared with $1.2 billion at September 30, 2011.

We continue to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction and development loans totaled $69.3 million, or 75% of total risk-based capital, at September 30, 2012 compared with $101.5 million, or 85% of total risk-based capital, at December 31, 2011. Non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group totaled $339.9 million, or 368% of total risk-based capital, at September 30, 2012 compared with $414.6 million, or 349% of total risk-based capital, at December 31, 2011.


Loan proceeds received from the repayment of our commercial real estate and construction and development loans were used primarily to redeem maturing certificates of deposit during the quarter. Deposits decreased 14.3% to $1.18 billion compared with $1.37 billion at September 30, 2011. Certificate of deposit balances declined $142.0 million during the first nine months of 2012 to $882.3 million at September 30, 2012, from $1.02 billion at December 31, 2011. Demand deposits increased 0.3% during the first nine months of 2012 compared with the fourth quarter of 2011, and increased 6.4% compared with the first nine months of 2011.

Non-performing loans increased $8.4 million to $90.1 million at September 30, 2012, compared with $81.7 million at June 30 2012. The increase was primarily in the commercial real estate and residential real estate segments of our portfolio, partially offset by a decrease in the construction real estate segment.

Loans past due 30-59 days increased from $6.7 million at June 30, 2012 to $9.6 million at September 30, 2012 and loans past due 60-89 days decreased from $4.4 million at June 30, 2012 to $3.6 million at September 30, 2012.

Foreclosed properties were $48.8 million at September 30, 2012, compared with $54.4 million at June 30, 2012, and $44.9 million at September 30, 2011. The Company acquired $3.4 million of OREO and sold $4.7 million of OREO during the third quarter of 2012. In addition, fair value write-downs of $4.3 million were recorded during the third quarter of 2012 to reflect declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies. Our ratio of non-performing assets to total assets increased to 10.8% at September 30, 2012, compared with 10.2% at June 30, 2012, and 6.64% at September 30, 2011.

In October 2012, PBI Bank entered into a new Consent Order with the FDIC and KDFI. Under the new order, the Bank agreed to maintain the capital levels required by the June 2011 order and also agreed should the capital levels not be reached, and if directed in writing by the FDIC, the Bank would develop a plan to immediately raise sufficient capital, or to sell or merge itself into another FDIC insured institution. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 order.

These items are discussed in further detail throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" Section. For a discussion of our accounting policies, please see "Application of Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the calendar year ended December 31, 2011.

Recent Developments and Future Plans

During the first nine months of 2012, we reported net loss to common shareholders of $26.4 million. This loss was primarily attributable to $33.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of $31.8 million, OREO expense of $7.7 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense. We also had lower net interest margin due to lower average loans outstanding, loans repricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $26.4 million, for the first nine months of 2012, compares with net loss to common shareholders of $50.8 million for the first nine months of 2011.

During the year ended December 31, 2011, we recorded a net loss to common shareholders of $105.2 million. This loss was attributable to a $23.8 million goodwill impairment charge, the establishment of a $31.7 million valuation allowance on our deferred tax assets, OREO expense of $47.5 million related to valuation adjustments for our change in strategy related to certain properties, fair value write-downs related to new appraisals received for properties in the portfolio during 2011, net loss on the sale of OREO properties, and increase in carrying costs associated with carrying these higher levels of assets. We also recorded a provision for loan losses expense of $62.6 million due to the continued decline in credit trends within our portfolio.

In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements.


We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan previously submitted by the Bank. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of September 30, 2012, the capital ratios required by the Consent Order were not met.

In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the following objectives:

Continuing to operate the Company and Bank in a safe and sound manner. This strategy will require us to continue to reduce the size of our balance sheet, reduce our lending concentrations, consider selling loans, and reduce other noninterest expense through the disposition of OREO.

Continuing with succession planning and adding resources to the management team. In March 2012, the Board of Directors formed a search committee comprised of its five independent directors to identify and hire a President and CEO for PBI Bank. John T. Taylor was named to these positions and appointed to the board of directors in July 2012. Additionally, John R. Davis was appointed Chief Credit Officer of PBI Bank, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization.

Evaluating our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment. To this end, we believe the opportunity exists for the centralization of key processes which will lead to improved execution and cost savings.

Raising capital by selling common stock through a public offering or private placement to existing and new investors. At our 2012 annual meeting of shareholders, our shareholders approved an increase in our common shares authorized for issuance from 19 million shares to 86 million shares. We continue to evaluate our opportunities to improve our capital structure and to increase common equity through the sale of additional common shares. The Board of Directors has engaged an investment banking firm to assist in this evaluation and to explore options for the redemption of our Series A preferred stock issued to the US Treasury in 2008 under the Capital Purchase Program.

Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.

o We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010 to $1.1 billion at December 31, 2011, and $952 million at September 30, 2012. We have significantly improved our staffing in the commercial lending area which is now led by John R. Davis, who joined the team in August and now serves as Chief Credit Officer.

o Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. We were in compliance at September 30, 2012 with construction and development loans representing 75% of total risk-based capital. These loans totaled $69.3 million, or 75% of total risk-based capital, at September 30, 2012 and $101.5 million, or 85% of total risk-based capital, at December 31, 2011.

o Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group, to not more than 250% of total risk-based capital. While we have made significant improvements over the last year, we were not in compliance with this concentration limit at September 30, 2012. These loans totaled $339.9 million, or 368% of total risk-based capital, at September 30, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.


o We are working to reduce these loans by curtailing new construction and development lending and new non-owner occupied commercial real estate lending. We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale. We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $69.3 million at September 30, 2012. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $214.5 million at September 30, 2012.

Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.

o The remediation process for loans secured by real estate has led the Bank to acquire significant levels of OREO in 2010 and 2011. This trend has continued into 2012. The Bank acquired $90.8 million and $41.9 million during 2010 and 2011, respectively. For the first nine months of 2012, we acquired $31.5 million of OREO.

o We have incurred significant losses in disposing of this real estate. We incurred losses totaling $13.9 million and $42.8 million in 2010 and 2011, respectively, from sales and fair value write-downs attributable to declining valuations as evidenced by new appraisals and from changes in our sales strategies. During the nine month period ended September 30, 2012, we incurred OREO losses totaling $6.6 million, which consisted of $1.5 million in loss on sale and $5.1 million from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies.

o To ensure that we maximize the value we receive upon the sale of OREO, we continue to evaluate sales opportunities and channels. We are targeting multiple sales opportunities and channels through internal marketing and the use of brokers, auctions, technology sales platforms, and bulk sale strategies. Proceeds from the sale or OREO totaled $17.6 million during the nine months ended September 30, 2012 and $25.0 and $26.0 million during fiscal 2010 and 2011, respectively.

o At December 31, 2011 the OREO portfolio consisted of 75% construction, development, and land assets. At September 30, 2012 this concentration had declined to 54%. This is consistent with our reduction of construction, development and other land loans, which have declined to $69.3 million at September 30, 2012 compared to $101.5 million at December 31, 2011. Over the past nine months, the composition of our OREO portfolio has shifted to be more heavily weighted towards commercial real estate properties with a cash flow opportunity and 1-4 family residential properties, which we have found to be more liquid than construction, development, and land assets. Commercial real estate of this nature represents 31% of the portfolio at September 30, 2012 compared with 15% at December 31, 2011. 1-4 family residential properties represent 14% of the portfolio at September 30, 2012 compared with 7% at December 31, 2011.

Evaluating other strategic alternatives, such as the sale of assets or branches.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.

Results of Operations

The following table summarizes components of income and expense and the change
in those components for the three months ended September 30, 2012, compared with
the same period of 2011:

                                   For the Three Months             Change from
                                    Ended September 30,             Prior Period
                                    2012           2011         Amount       Percent
                                                (dollars in thousands)

Gross interest income            $    13,987     $  18,103     $  (4,116 )      (22.7 )%
Gross interest expense                 3,855         5,448        (1,593 )      (29.2 )
Net interest income                   10,132        12,655        (2,523 )      (19.9 )
Provision for loan losses             25,500         8,000        17,500        218.8
Non-interest income                    1,721         1,700            21          1.2
Non-interest expense                  14,150        25,423       (11,273 )      (44.3 )
Net income (loss) before taxes       (27,797 )     (19,068 )      (8,729 )       45.8
Income tax expense (benefit)             (65 )      (6,906 )       6,841        (99.1 )
Net income (loss)                    (27,732 )     (12,162 )     (15,570 )      128.0


Net loss for the three months ended September 30, 2012 increased $15.6 million to $27.7 million compared with net loss of $12.2 million for the comparable period of 2011. Provision for loan losses expense increased $17.5 million in the third quarter of 2012 compared with the same period in 2011 as the result of collateral value declines for certain larger collateral dependent commercial real estate credits as evidenced by new appraisals received during the quarter, higher net charge-offs, and a continued decline in credit trends in our portfolio. In addition, the third quarter 2012 provision for loan losses was negatively impacted by a strategy change during the third quarter of 2012 related to classified loans which we expect to more quickly remediate by litigation or foreclosure. For loans subject to this expectation, we applied an additional fair value discount to the underlying collateral in our impairment analysis estimates. Net interest income decreased $2.5 million from the 2011 third quarter due to a 15 basis point decline in net interest margin due to lower earning asset levels, lower average rates, and higher non-performing assets. These results were partially off-set by a decrease in OREO expense of $11.8 million for the third quarter of 2012 compared with the same period of 2011 due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expense.

The following table summarizes components of income and expense and the change in those components for the nine months ended September 30, 2012 compared with the same period of 2011:

                                   For the Nine Months             Change from
                                   Ended September 30,             Prior Period
                                    2012          2011         Amount       Percent
                                               (dollars in thousands)

Gross interest income            $   44,554     $  56,917     $ (12,363 )      (21.7 )%
Gross interest expense               12,173        17,053        (4,880 )      (28.6 )
Net interest income                  32,381        39,864        (7,483 )      (18.8 )
Provision for credit losses          33,250        26,800         6,450         24.1
Non-interest income                   8,184         6,352         1,832         28.8
Non-interest expense                 33,459        89,577       (56,118 )      (62.6 )
Net income (loss) before taxes      (26,144 )     (70,161 )      44,017        (62.7 )
Income tax expense (benefit)            (65 )     (18,809 )      18,744        (99.7 )
Net income (loss)                   (26,079 )     (51,352 )      25,273        (49.2 )

Net loss of $26.1 million for the nine months ended September 30, 2012 represented a decrease of $25.3 million from net loss of $51.4 million for the comparable period of 2011. A non-recurring 100% goodwill impairment charge of $23.8 million was recorded during the first nine months of 2011. OREO expense decreased $32.8 million from the first nine months of 2011 due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expense. Additionally, gain on sales of investment securities was $3.5 million for the first nine months of 2012 compared with $1.1 million for the first nine months of 2011. These improvements were partially offset by a decrease of $7.5 million in net interest income from the first nine months of 2011 due to an 11 basis point decline in net interest margin. In addition, provision for loan losses expense increased $6.5 million in the first nine months of 2012 compared with the same period in 2011 as the result of the continued decline in credit trends in our portfolio that resulted in higher net charge-offs compared to the previous period. More specifically, the 2012 provision for loan losses was negatively impacted by collateral value declines for certain larger collateral dependent commercial real estate credits as evidenced by new appraisals received during the period and a strategy change during the third quarter of 2012 related to classified loans which we expect to more quickly remediate by litigation or foreclosure. For loans subject to this expectation, we applied an additional fair value discount to the underlying collateral in our impairment analysis estimates.


Net Interest Income - Our net interest income was $10.1 million for the three months ended September 30, 2012, a decrease of $2.5 million, or 19.9%, compared with $12.7 million for the same period in 2011. Net interest spread and margin were 3.09% and 3.23%, respectively, for the third quarter of 2012, compared with 3.22% and 3.38%, respectively, for the third quarter of 2011. Net interest income was $32.4 million for the nine months ended September 30, 2012, a decrease of $7.5 million, or 18.8%, compared with $39.9 million for the same period of 2011. Net interest spread and margin were 3.19% and 3.35%, respectively, for the first nine months of 2012, compared with 3.30% and 3.46%, respectively, for the first nine months of 2011. Net average non-accrual loans were $90.2 million and $62.4 million in the first nine months of 2012 and 2011, respectively.

Average loans receivable declined approximately $219.0 million for the quarter ended September 30, 2012 compared with the third quarter of 2011. This resulted in a decline in interest revenue of approximately $3.9 million for the quarter ended September 30, 2012 compared with the prior year period. Average loans receivable declined approximately $193.4 million for the nine months ended September 30, 2012 compared with the first nine months of 2011. This resulted in a decline in interest revenue of approximately $11.4 million for the nine months ended September 30, 2012 compared with the prior year period. This decline in loan volume is attributable to soft loan demand in our markets as well as our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio.

Net interest margin decreased 15 basis points from our margin of 3.38% in the prior year third quarter. The yield on earning assets declined 36 basis points from the third quarter of 2011, compared with a 23 basis point decline in rates paid on interest-bearing liabilities. Net interest margin for the first nine months of 2012 decreased 11 basis points from our margin of 3.46% in the first . . .

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