First in a five-part series.
For Porter Bancorp and John Taylor, the Louisville, Ky., company's chief executive, 2014 could be a make-or-break year.
Porter has fought through asset quality issues, a $7 million judgment from fraud litigation and calls by a large investor for management changes. Porter is one of the biggest banks still in the Troubled Asset Relief Program. It also has a consent order from regulators requiring higher capital levels.
It's a long list of issues, but Taylor says he has the $1 billion-asset company on the road to recovery. "Our risk profile is coming down," says Taylor, who is one of the community bank CEOs American Banker will be watching closely next year. (Four other CEOs will be profiled in coming days.)
(For full Countdown 2014 coverage, click here.)
"The bank is returning to profitability," he adds. "We're putting in place the support infrastructure to take care of the communities we serve and getting new, good customers."
Porter's story diverges from most troubled banks. It emerged from the early days of the recession in a strong position, even pursuing a hostile takeover in 2009 that ultimately failed.
A year later, Porter began struggling with profitability as loans soured. The company has lost more than $150 million since the fourth quarter of 2010.
Porter is still dealing with credit issues; 15% of its loans were nonperforming at Sept. 30. "We're still dealing with way too many nonaccrual loans and nonperforming assets," Taylor concedes.
Still, Porter earned $298,000 in the third quarter, compared to a $27.7 million loss a year earlier. Management has continued to shrink the balance sheet to improve capital levels, while lowering the size of the company's loan-loss provision.
While the third-quarter profit was a good sign, lingering credit woes are a major concern, says Michael Iannaccone, president of MDI Investments in Chicago. "It doesn't look like they have taken care of their problems," he says.
Taylor agrees with that assessment, noting that credit issues cannot be fixed overnight.
"It's just hard work," Taylor says. "You have to commit the resources and you have to be disciplined in how you remediate these problem assets."
Some of Porter's issues are tied to a weak local economy. All of its 18 branches are in Kentucky, in cities such as Louisville, Lexington, Owensboro, Bowling Green and some smaller towns.
The state has been slow to recover from an economic slump, says Chris Bollinger, director of the University of Kentucky's Center for Business and Economic Research. Louisville's unemployment rate is higher than the national average, he adds.
Porter made loans to residential and commercial developers that ended up moving to nonaccrual status just later than those at many other banks. The delayed effect of the recession on Porter's loan portfolio was mostly an issue of timing, Taylor says.
"It was a function of the bank getting into lending to these developers a little later in the cycle, so it showed up a little later," Taylor says.
Porter had $107 million of noncurrent loans, and $42 million of other real estate owned, at Sept. 30. If it tried to sell those assets on the open market, it would likely face a 30% discount, Iannaccone says. "That would wipe out their excess reserves," he says.
Porter's Tarp funds are another issue. The company, which owes $35 million to the Treasury Department, also has nearly $5 million in unpaid dividends. Porter hit the five-year mark for its Tarp investment late last month, so its dividend rate should spike to 9% from 5%.
Christy Romero, Tarp's special inspector general, has criticized Treasury for pursuing collection of dividends at the higher rate from banks that have deferred payments so far. "If they're not able to pay the 5% dividend, they're not going to be able to pay the 9%," Romero has said.
Since regulators count Tarp as Tier 1 capital, a bank that owes Tarp is typically unable to repay the funds, says James Stevens, a lawyer at Troutman Sanders. That's because they would need to issue new common stock to maintain an existing Tier 1 capital ratio.
Porter's best outcome would likely involve a Treasury auction, Stevens says. It would let Porter work through the repayment over time, "in light of their ongoing capital needs," he adds.
Porter hired Sandler O'Neill a year ago to help it explore options for recapitalization. The company has not provided an update on that effort, beyond saying that Sandler continues to provide advice.
"We're assessing a capital raise," Taylor says, repeating past guidance. "We're in that process and it's expected that the Tarp will be redeemed in one way, shape or form."
Some of Porter's biggest shareholders are counting on Taylor to right the ship. The push for new leadership began in 2011, when Clinton Group in New York, a large investor, sent management a letter in demanding changes.
"We have come to believe that the bank will only remain a safe and sound bank and reach its full potential if its board... brings in new executive leadership," George Hall, Clinton's president, wrote a July 2011 letter.
Taylor succeeded Maria Bouvette, a Porter co-founder who still owns 24% of its stock. Bouvette declined to comment. Chester Porter, the company's chairman emeritus who owns about 26% of its stock, did not return calls seeking comment.
Kirk Wycoff, a managing partner at Patriot Financial Partners, which owned 9.1% of Porter's stock at Sept. 30, has expressed confidence in Taylor.
"We have a team in place that people will want to invest in when they meet them," Wycoff said in July. "The former team didn't have the credibility and confidence of the market or the board."
Wycoff, a Porter director, did not return calls seeking updated comment.
The best course of action is to de-emphasize lending to real estate developers and to expand into areas such as treasury management, Taylor says. Porter has also filed an appeal of the judgment rendered in the real estate litigation.
Mostly, Porter's managers are "continuing to work on problem asset resolution and getting back to our core business," Taylor says. "It's not sexy, it's just being really good at execution."