Porter Bancorp in Louisville, Ky., is rearranging some of its capital with an eye toward improving common equity and perhaps making its pursuit of additional funds easier.

The troubled $1 billion-asset company announced Wednesday that a series of capital conversion steps should add $7.4 million to total stockholders' equity. At Sept. 30, total stockholders' equity was $29.3 million, down 18% from the end of last year. The moves should also boost total common stockholders' equity from a negative $9 million at the end of the third quarter to $26.2 million.

The retooling centers around the $35 million Porter received from the Treasury Department's Troubled Asset Relief Program in 2008, as well as $7.4 million in accrued, but unpaid, dividends and warrants tied to the Tarp funds. Also involved is $3.3 million of preferred stock the company issued in a 2010 private placement.

The plan calls for Porter to convert those capital instruments into 1.82 million shares of common stock, 105,116 shares of convertible preferred stock and 10,502 shares of non-convertible preferred stock. Though the reorganization is intended to boost common equity, the non-convertible component is likely a result of ownership limits.

Porter said it expects to complete the exchange by the end of this year. It will seek shareholder approval to convert the convertible preferred shares into common equity at a special meeting to be held during the first quarter.

If approved, each convertible preferred share would be exchanged for 100 shares of common stock. If all goes to plan, Porter's total shares outstanding would nearly double from Sept. 30, to 25.4 million.

The agency recently auctioned off the stake, one of the largest remaining under the Tarp. The winning bidders were a group designated by Porter and included directors W. Glenn Hogan and Michael Levy, along with private-equity firm Patriot Financial Partners. W. Kirk Wycoff, Patriot's general partner, is also a Porter director. The bidders bought the shares for $3.5 million, or 10 cents on the dollar, Treasury documents show.

Since the capital maneuvers do not include new capital, the exchange is unlikely to boost regulatory capital ratios at the company's PBI Bank. At Sept. 30, PBI had a 6.09% leverage ratio and an 11.01% total risk-based capital ratio. A 2012 consent order with state and federal regulators ordered the bank to lift those ratios to 9% and 12%, respectively.

Still, banks seeking recapitalizations often look to simplify their capital structure by offering common equity to preferred equity and debtholders because potential investors are wary of capital instruments that would be senior to common stock.

"We believe this transaction will be an important step in strengthening Porter Bancorp's capital position and is consistent with our plans to improve our capital ratios," John Taylor, Porter's president and chief executive, said in Wednesday's release. "We also believe our directors' participation in the exchange of [Tarp shares] highlights their confidence in Porter Bancorp's future."

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