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PBIB > SEC Filings for PBIB > Form 10-Q on 15-May-2013All 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.


15-May-2013

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, 2012 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 $69,000 for the three months ended March 31, 2013, compared with net income of $1.5 million for the same period of 2012. After deductions for dividends on preferred stock, accretion on preferred stock, and loss allocated to participating securities, net loss to common shareholders was $524,000 for the three months ended March 31, 2013, compared with net income to common shareholders of $985,000 for the three months ended March 31, 2012.

Basic and diluted loss per common share were $(0.04) for the three months ended March 31, 2013 compared with basic and diluted income per common share of $0.08 for the three months ended March 31, 2012.


The following significant developments occurred during the quarter ended March 31, 2013:

? Provision for loan losses expense was $450,000 for the first quarter of 2013, compared with $3.8 million for the prior year first quarter. The decrease was primarily attributable to the reduction in the loan portfolio size, the slower pace of loans migrating downward in risk grade classification, and stable collateral values for collateral dependent loans. Net charge-offs of $17.3 million were recognized for the first quarter. These elevated charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent in accordance with regulatory guidance.

? Net interest margin decreased 38 basis points to 3.07% in the first three months of 2013 compared with 3.45% in the first three months of 2012. 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 22.0% to $872.5 million in the first three months of 2013 compared with $1.1 billion in the first three months of 2012. Net loans decreased 24.7% to $787.2 million at March 31, 2013, compared with $1.0 billion at March 31, 2012.

? We continued to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction and development loans totaled $62.5 million, or 73% of total risk-based capital, at March 31, 2013 compared with $70.3 million, or 82% of total risk-based capital, at December 31, 2012. Non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group totaled $299.4 million, or 351% of total risk-based capital, at March 31, 2013 compared with $311.1 million, or 362% of total risk-based capital, at December 31, 2012.

? 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 17.3% to $1.0 billion compared with $1.3 billion at March 31, 2012. Certificate of deposit balances declined $20.6 million during the first three months of 2013 to $739.9 million at March 31, 2013, from $760.6 million at December 31, 2012. Demand deposits decreased 4.8% during the first three months of 2013 compared with the fourth quarter of 2012, and the first three months of 2012.

? Non-performing loans increased $26.3 million to $120.9 million at March 31, 2013, compared with $94.6 million at December 31, 2012. The increase was primarily attributable to loans for two significant borrowing relationships being placed on non-accrual during the quarter. At December 31, 2012 one of these relationships was past due 30-59 days and totaled $23.5 million; the other was past due 60-89 days and totaled $12.7 million. The increase in non-performing loans was partially offset by net loan charge-offs in the first quarter of 2013 which totaled $17.3 million. These elevated charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent, in accordance with regulatory guidance.

? Loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $8.1 million at March 31, 2013 and loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $3.0 million at March 31, 2013.

? Foreclosed properties were $44.2 million at March 31, 2013, compared with $43.7 million at December 31, 2012, and $35.6 million at March 31, 2012. The Company acquired $3.7 million of OREO and sold $2.9 million of OREO during the first quarter of 2013. In addition, fair value write-downs of $307,000 were recorded during the first quarter of 2013 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 14.58% at March 31, 2013, compared with 11.89% at December 31, 2012, and 9.61% at March 31, 2012.

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, 2012.

Going Concern Considerations and Future Plans

During the first three months of 2013, we reported net loss to common shareholders of $524,000, compared with net income to common shareholders of $985,000 for the first three months of 2012. This loss was primarily attributable to reduced net interest income, with a lower net interest margin due to lower average loans outstanding, loans repricing at lower rates, and the level of non-performing assets in our portfolio. Also, a gain on sale of securities of $2.0 million was recognized in the first quarter of 2012, while no securities were sold in the first quarter of 2013.

For the year ended December 31, 2012, we reported net loss to common shareholders of $33.4 million. This loss was attributable primarily to $40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of $36.1 million, OREO expense of $10.5 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 re-pricing at lower rates, and the level of non-performing loans in our portfolio. We had a net loss to common shareholders of $33.4 million for the year ended December 31, 2012 compared with net loss to common shareholders of $105.2 million for the year ended December 31, 2011.

In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock issued to the U.S. Treasury. At March 31, 2013, cumulative accrued and unpaid dividends on this stock totaled $3.0 million. If we defer dividend payments for six quarters, the holder of our Series A Preferred Stock (currently the U.S. Treasury) would then have the right to appoint up to two representatives to our Board of Directors. We will continue to accrue any deferred dividends, which will be deducted from income to common shareholders for financial statement purposes.


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 March 31, 2013, 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:

? Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We have engaged a financial advisor to assist our Board in evaluating our options for increasing capital and redeeming our Series A preferred stock issued to the US Treasury in 2008 under the Capital Purchase Program.

? 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.

? 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, to $899.1 million at December 31, 2012, and $827.1 million at March 31, 2013. We have significantly improved our staffing in the commercial lending area which is now led by John R. Davis.

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 are now in compliance with construction and development loans totaling $62.5 million, or 73% of total risk-based capital, at March 31, 2013, down from $70.3 million, or 82% of total risk-based capital, at December 31, 2012.

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 March 31, 2013. These loans totaled $299.4 million, or 351% of total risk-based capital, at March 31, 2013 and $311.1 million, or 362% of total risk-based capital, at December 31, 2012.

o We are working to reduce our loan concentrations 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 $62.5 million at March 31, 2013. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $187.2 million at March 31, 2013.


? 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 2012, 2011, and 2010. This trend has continued at a slower pace in 2013. The Bank acquired $33.5 million, $41.9 million, and $90.8 million during 2012, 2011 and 2010, respectively. For the first three months of March 31, 2013, we acquired $3.7 million of OREO. We have nonaccrual loans totaling $120.9 million at March 31, 2013. We expect to resolve many of these loans by foreclosure which could result in further additions to our OREO portfolio.

o We have incurred significant losses in disposing of this real estate. We incurred losses totaling $9.3 million, $42.8 million, and $13.9 million in 2012, 2011 and 2010, 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 three month period ended March 31, 2013, we incurred OREO losses totaling $504,000, which consisted of $197,000 in loss on sale and $307,000 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 continually 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 of OREO totaled $2.7 million during the three months ended March 31, 2013 and $22.5 million, $26.0 million and $25.0 million during fiscal 2012, 2011 and 2010, respectively.

o At December 31, 2012 the OREO portfolio consisted of 51% construction, development, and land assets. At March 31, 2013 this concentration had declined to 49%. This is consistent with our reduction of construction, development and other land loans, which have declined to $62.5 million at March 31, 2013 compared to $70.3 million at December 31, 2012. Over the past three months, the composition of our OREO portfolio has shifted toward 1-4 family residential properties, which we have found to be more liquid than construction, development, and land assets, while commercial real estate has declined slightly as a percentage of the portfolio. Commercial real estate of this nature represents 34% of the portfolio at March 31, 2013 compared with 35% at December 31, 2012. 1-4 family residential properties represent 15% of the portfolio at March 31, 2013 compared with 12% at December 31, 2012.

? 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 March 31, 2013, compared with the
same period of 2012:

                                   For the Three Months             Change from
                                      Ended March 31,              Prior Period
                                    2013            2012        Amount      Percent
                                               (dollars in thousands)

Gross interest income            $    11,258      $ 15,755     $ (4,497 )      (28.5 )%
Gross interest expense                 2,960         4,301       (1,341 )      (31.2 )
Net interest income                    8,298        11,454       (3,156 )      (27.6 )
Provision for loan losses                450         3,750       (3,300 )      (88.0 )
Non-interest income                    1,647         3,445       (1,798 )      (52.2 )
Non-interest expense                   9,564         9,647          (83 )       (0.9 )
Net income (loss) before taxes           (69 )       1,502       (1,571 )     (104.6 )
Income tax expense (benefit)               -             -            -            -
Net income (loss)                        (69 )       1,502       (1,571 )     (104.6 )

Net loss for the three months ended March 31, 2013 decreased $1.6 million to a net loss of $69,000, compared with net income of $1.5 million for the comparable period of 2012. Provision for loan losses expense decreased $3.3 million in the first quarter of 2013 compared with the same period in 2012. This decrease in provision expense is primarily attributable to the reduction in the loan portfolio size, the lower pace of loans migrating downward in risk grade classification, and stable collateral values for collateral dependent loans. Net charge-offs of $17.3 million were recognized for the first quarter. Those charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent in accordance with regulatory guidance. Net interest income decreased $3.2 million from the 2012 first quarter due to a 38 basis point decline in net interest margin due to lower earning asset levels and lower average rates on earning assets. In addition, net interest income and net interest margin were adversely affected by $1.5 million and $790,000 of interest lost on nonaccrual loans in the first quarters of 2013 and 2012, respectively. These results were partially off-set by a decrease in OREO expense of $466,000 for the first quarter of 2013 compared with the same period of 2012 due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expense.

Net Interest Income - Our net interest income was $8.3 million for the three months ended March 31, 2013, a decrease of $3.2 million, or 27.6%, compared with $11.5 million for the same period in 2012. Net interest spread and margin were 2.93% and 3.07%, respectively, for the first quarter of 2013, compared with 3.30% and 3.45%, respectively, for the first quarter of 2012. Net average non-accrual loans were $111.4 million and $92.0 million in the first three months of 2013 and 2012, respectively.

Average loans receivable declined approximately $246.7 million for the quarter ended March 31, 2013 compared with the first quarter of 2012. This resulted in a decline in interest revenue of approximately $3.0 million for the quarter ended March 31, 2013 compared with the prior year period. The decline in loan volume is attributable to our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio, as well as soft loan demand in our markets.

Net interest margin decreased 38 basis points from our margin of 3.45% in the prior year first quarter. The yield on earning assets declined 58 basis points from the first quarter of 2012, compared with a 21 basis point decline in rates paid on interest-bearing liabilities. This resulted in a net $1.1 million reduction in net interest income.

Net interest margin for the first quarter of 2013 decreased 12 basis points from our margin of 3.19% in the fourth quarter of 2012, due primarily to lower average loan receivables and lower yield on loans, coupled with lower yield on investment securities. Average loan receivables declined $56.5 million from the fourth quarter of 2012, due to our efforts to reduce concentrations in our construction and development loan portfolio and in our non-owner occupied commercial real estate loan portfolio, and increased charge-offs. Yield on loans was adversely affected by an increase in foregone interest on non-accrual loans. Interest foregone on non-accrual loans totaled $1.5 million in the first quarter of 2013, compared with $1.3 million in the fourth quarter of 2012, and $790,000 in the first quarter of 2012. The decrease in yield on investment securities was the result of our reinvestment of scheduled principal and interest payment proceeds into lower-yielding securities. Yield on average earning assets for the first quarter of 2013 decreased 23 basis points from 4.38% in the fourth quarter of 2012, compared with a 10 basis points decrease in rates paid on interest-bearing liabilities from 1.32% in the fourth quarter of 2012.


Average Balance Sheets

The following table presents the average balance sheets for the three month
periods ended March 31, 2013 and 2012, along with the related calculations of
tax-equivalent net interest income, net interest margin and net interest spread
for the related periods.

                                                                 Three Months Ended March 31,
                                                    2013                                               2012
                                 Average         Interest          Average          Average         Interest          Average
                                 Balance        Earned/Paid       Yield/Cost        Balance        Earned/Paid       Yield/Cost
                                                                    (dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)        $   872,505     $      10,033             4.66 %   $ 1,119,181     $      14,512             5.22 %
Securities
Taxable                            145,171               852             2.38         125,502               826             2.65
Tax-exempt (3)                      28,470               221             4.84          27,103               250             5.71
FHLB stock                          10,072               108             4.35          10,072               114             4.55
Other equity securities              1,359                15             4.48           1,359                15             4.44
Federal funds sold and other        53,892                29             0.22          67,661                38             0.23
Total interest-earning
assets                           1,111,469            11,258             4.15 %     1,350,878            15,755             4.73 %
Less: Allowance for loan
losses                             (55,340 )                                          (52,894 )
Non-interest earning assets         95,687                                            114,622
Total assets                   $ 1,151,816                                        $ 1,412,606

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Certificates of deposit and
other time deposits            $   749,832     $       2,537             1.37 %   $   976,448     $       3,772             1.55 %
NOW and money market
deposits                           153,524               133             0.35         153,098               186             0.49
Savings accounts                    40,390                34             0.34          37,085                42             0.46
Repurchase agreements                2,566                 1             0.16           1,673                 2             0.48
FHLB advances                        5,424                43             3.22           6,906                57             3.32
Junior subordinated
debentures                          31,745               212             2.71          32,645               242             2.98
Total interest-bearing
liabilities                        983,481             2,960             1.22 %     1,207,855             4,301             1.43 %

Non-interest-bearing
liabilities:
Non-interest-bearing
deposits                           110,138                                            112,656
Other liabilities                   10,448                                              7,436
Total liabilities                1,104,067                                          1,327,947
Stockholders' equity                47,749                                             84,659
Total liabilities and
stockholders' equity           $ 1,151,816                                        $ 1,412,606

Net interest income                            $       8,298                                      $      11,454

Net interest spread                                                      2.93 %                                             3.30 %
. . .
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