Porter Bancorp's shareholders have granted the struggling company more flexibility to raise capital to meet the demands of regulators.
The $1.4 billion-asset Porter (PBIB) announced Wednesday that its shareholders at its annual meeting approved a proposal to increase the number of shares of voting common stock from 19 million to 86 million, while the number of non-voting common stock was increased from 1.4 million to 34.4 million.
The company, in Louisville, Ky., said in its proxy statement last month that any increase in outstanding shares could be used to bring in fresh equity.
Porter's PBI Bank unit was placed under a consent order by the Federal Deposit Insurance Corp. and the Kentucky Department of Financial Institutions in June 2011. The order requires the bank to have a leverage ratio of 9% and a total risk-based capital ratio of 12%. At March 31, those ratios were at 6.23% and 10.86%.
Although the company said in the proxy statement that it has no plans to issue the new shares immediately, it acknowledged it is the most likely way to refill the coffers.
"While considering a number of alternatives for increasing capital levels, the board expects to explore raising additional capital through the sale of common stock in a public offering or private placement," it said in the April filing. "Additional capital would strengthen our company's balance sheet and give us more flexibility to take advantage of opportunities to grow our business and increase earnings."
The company's stock is currently trading at about half of its tangible book value so any raise would be highly dilutive to existing shareholders, it said in the proxy statement. The shares closed at $1.82 Thursday, down nearly 7%.
Catherine Mealor, an analyst at Keefe, Bruyette & Woods, said in an interview that Porter needs $24 million just to hit the capital ratios assigned by the regulators. She added that any capital raise would also likely contemplate the repayment of the company's $40 million of equity held by the Treasury Department under the Troubled Asset Relief Program and would be done alongside a bulk sale. She added that she doesn't think the company will raise capital until the inflow of problem credits stabilizes.
Although the proposal to authorize more shares passed, one activist shareholder said he voted against it because of the company's credit quality. At March 31, nonperforming assets totaled $133.5 million, or 9.6% of total assets.
"They are too careless and more shares could make them even more careless," said Gerald R. Armstrong, a Denver-based activist shareholder who owns 1,914 shares.
Armstrong also proposed the establishment of a policy that would have required the company's chairman to be an independent director who has not served as an executive of the company. Porter instructed its shareholders not to vote for the measure and it did not pass. Armstrong has made similar proposals at several companies, including Wells Fargo, where it failed, and KeyCorp, where it passed on Thursday.
"I think having an independent chairman is part of the checks and balances. It puts someone to look over the president's shoulder and hold them accountable, Armstrong said. "I don't think (the economic downturn) would have not been as bad if we had more independent chairman. Too many companies were just in denial and were not paying enough attention to the loan portfolio. They were just happy to book the business."
Armstrong said his proposal at Porter was doomed from the beginning because of the insider control of Porter. J. Chester Porter, the company's longtime chairman who officially stepped down at the annual meeting, owns 27.1% of the company's stock, while Maria Bouvette, its chief executive and president and newly elected chairman, owns 24.2%. A call to Porter was not returned.
"I just wanted to get the issue in front of them," Armstrong said. "And the proposal did very well among the public shareholders."
Although the company advised its shareholders to vote against Armstrong's proposal, it did note that as part of Bouvette's move into the chairman's role, it has formed a search committee to find a new president and chief executive for PBI Bank. Bouvette would then be able to focus on "strategic organization-wide matters," it said.
"We believe by reallocating operational authority through this appointment and the other recent changes to our senior management team, we will have strengthened our leadership and operational oversight function," it said in the proxy.