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LIMESTONE BANCORP, INC. - Quarter Report: 2007 September (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2007

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 001-33033

 


PORTER BANCORP, INC.

(Exact name of registrant as specified in its charter)

 


 

Kentucky   61-1142247

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2500 Eastpoint Parkway, Louisville, Kentucky   40223
(Address of principal executive offices)   (Zip Code)

(502) 499-4800

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

7,628,337 shares of Common Stock, no par value, were outstanding at October 25, 2007.

 



Table of Contents

INDEX

 

          Page
PART I –    FINANCIAL INFORMATION   
ITEM 1.    FINANCIAL STATEMENTS    1
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    15
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    29
ITEM 4.    CONTROLS AND PROCEDURES    29
PART II –    OTHER INFORMATION   
ITEM 1.    LEGAL PROCEEDINGS    30
ITEM 1A.    RISK FACTORS    30
ITEM 2.    UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS    30
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES    30
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    30
ITEM 5.    OTHER INFORMATION    30
ITEM 6.    EXHIBITS    30


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

The following consolidated financial statements of Porter Bancorp Inc. and Subsidiary, PBI Bank, Inc., are submitted:

Unaudited Consolidated Balance Sheets for September 30, 2007 and December 31, 2006

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2007 and 2006

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2007

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006

Notes to Unaudited Consolidated Financial Statements

 

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PORTER BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(amounts in thousands except share data)

 

     September 30,
2007
    December 31,
2006
     (unaudited)      

Assets

    

Cash and due from financial institutions

   $ 19,541     $ 15,306

Federal funds sold

     7,387       40,957
              

Cash and cash equivalents

     26,928       56,263

Securities available for sale

     100,723       95,090

Loans, net of allowance of $14,500 and $12,832, respectively

     1,060,569       841,535

Premises and equipment

     14,935       13,774

Goodwill

     12,881       12,881

Accrued interest receivable and other assets

     39,044       31,463
              

Total assets

   $ 1,255,080     $ 1,051,006
              

Liabilities and Stockholders’ Equity

    

Deposits

    

Non-interest bearing

   $ 71,038     $ 69,180

Interest bearing

     975,740       792,676
              

Total deposits

     1,046,778       861,856

Federal funds purchased and repurchase agreements

     11,569       1,134

Federal Home Loan Bank advances

     50,207       47,562

Accrued interest payable and other liabilities

     7,328       7,108

Junior subordinated debentures

     25,000       25,000
              

Total liabilities

     1,140,882       942,660

Stockholders’ equity

    

Preferred stock, no par, 1,000,000 shares authorized

     —         —  

Common stock, no par, 10,000,000 shares authorized, 7,628,967 and 7,622,447 shares issued and outstanding, respectively

     64,820       64,820

Additional paid-in capital

     11,208       11,036

Retained earnings

     38,368       32,355

Accumulated other comprehensive income (loss)

     (198 )     135
              

Total stockholders' equity

     114,198       108,346
              

Total liabilities and stockholders’ equity

   $ 1,255,080     $ 1,051,006
              

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income

(amounts in thousands, except per share data)

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006

Interest income

           

Loans, including fees

   $ 21,941    $ 17,045    $ 60,498    $ 49,101

Taxable securities

     1,054      918      3,123      2,768

Tax exempt securities

     170      179      507      547

Fed funds sold and other

     686      422      1,712      1,082
                           
     23,851      18,564      65,840      53,498
                           

Interest expense

           

Deposits

     11,758      7,736      31,441      21,563

Federal Home Loan Bank advances

     810      829      2,292      2,057

Junior subordinated debentures

     488      543      1,433      1,564

Federal funds purchased and other

     59      34      74      150

Notes payable

     —        143      —        431
                           
     13,115      9,285      35,240      25,765
                           

Net interest income

     10,736      9,279      30,600      27,733

Provision for loan losses

     1,500      276      2,825      1,029
                           

Net interest income after provision for loan losses

     9,236      9,003      27,775      26,704

Non-interest income

           

Service charges on deposit accounts

     669      615      1,852      1,963

Secondary market brokerage fees

     67      88      232      122

Title insurance commissions

     37      41      149      97

Net gain on sales of government guaranteed loans 15

     53      30      152   

Net gain on sales of loans originated for sale

     —        44      —        284

Net gain on sales of securities

     42      23      104      50

Other

     476      453      1,423      1,345
                           
     1,306      1,317      3,790      4,013
                           

Non-interest expense

           

Salaries and employee benefits

     3,115      2,749      9,051      8,634

Occupancy and equipment

     673      612      1,837      1,972

State franchise tax

     326      267      976      807

Professional fees

     149      164      485      643

Communications

     113      121      322      404

Advertising

     140      148      393      467

Other

     1,013      592      2,532      2,013
                           
     5,529      4,653      15,596      14,940
                           

Income before income taxes

     5,013      5,667      15,969      15,777

Income tax expense

     1,714      1,858      5,380      5,135
                           

Net income

   $ 3,299    $ 3,809    $ 10,589    $ 10,642
                           

Basic and diluted earnings per share

   $ 0.44    $ 0.59    $ 1.40    $ 1.67
                           

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Nine Months Ended September 30, 2007

(amounts in thousands, except share and per share data)

 

     Common Stock    Additional    Retained
Earnings
    Accumulated
Other
    Total  
     Number of
Shares
    Amount    Paid-In
Capital
     Comprehensive
Income (Loss)
   

Balances, January 1, 2007

   7,622,447     $ 64,820    $ 11,036    $ 32,355     $ 135     $ 108,346  

Issuance of unvested stock

   7,500                 —    

Forfeited unvested stock

   (980 )     —        —        —         —         —    

Stock-based compensation expense

   —         —        172      —         —         172  

Comprehensive income:

              

Net income

   —         —        —        10,589       —         10,589  

Changes in accumulated other comprehensive income, net of taxes

   —         —        —        —         (333 )     (333 )
                    

Total comprehensive income

   —         —        —        —         —         10,256  
                    

Cash dividends ($0.60 per share)

   —         —        —        (4,576 )     —         (4,576 )
                                            

Balances, September 30, 2007

   7,628,967     $ 64,820    $ 11,208    $ 38,368     $ (198 )   $ 114,198  
                                            

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2007 and 2006

(dollars in thousands)

 

     2007     2006  

Cash flows from operating activities

    

Net income

   $ 10,589     $ 10,642  

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization

     1,691       1,569  

Provision for loan losses

     2,825       1,029  

Net amortization on securities

     6       356  

Stock-based compensation expense

     172       106  

Net gain on sales of loans

     —         (284 )

Loans originated for sale

     —         (8,825 )

Proceeds from sales of loans held for sale

     —         9,109  

Net (gain) loss on other real estate owned

     119       (32 )

Net realized gain on sales of securities

     (104 )     (50 )

Earnings on bank owned life insurance

     (206 )     (190 )

Federal Home Loan Bank stock dividends

     —         (369 )

Changes in other assets and liabilities

    

Net change in accrued interest receivable and other assets

     (2,817 )     (982 )

Net change in accrued interest payable and other liabilities

     396       (2,302 )
                

Net cash from operating activities

     12,671       9,777  
                

Cash flows from investing activities

    

Net change in interest-bearing deposits with banks

     —         200  

Purchases of available for sale securities

     (22,280 )     (11,037 )

Sales and calls of available for sale securities

     884       4,416  

Maturities and prepayments of available for sale securities

     15,352       15,136  

Proceeds from sale of other real estate owned

     3,958       1,018  

Improvements to other real estate owned

     (370 )     —    

Loan originations and payments, net

     (231,057 )     (27,923 )

Purchases of premises and equipment, net

     (1,919 )     (248 )

Investment in bank owned life insurance

     —         (1,100 )

Acquisition of Associates Mortgage Group, net

     —         (250 )
                

Net cash from investing activities

     (235,432 )     (19,788 )
                

Cash flows from financing activities

    

Net change in deposits

     184,922       (4,161 )

Net change in federal funds purchased and repurchase agreements

     10,435       (3,275 )

Repayment of notes payable

     —         (9,600 )

Repayment of Federal Home Loan Bank advances

     (27,355 )     (32,819 )

Advances from Federal Home Loan Bank

     30,000       26,220  

Issuance of common stock for initial public offering, net

     —         26,634  

Cash dividends paid

     (4,576 )     (3,815 )
                

Net cash from financing activities

     193,426       (816 )
                

Net change in cash and cash equivalents

     (29,335 )     (10,827 )

Beginning cash and cash equivalents

     56,263       52,281  
                

Ending cash and cash equivalents

   $ 26,928     $ 41,454  
                

Supplemental cash flow information:

    

Interest paid

   $ 34,818     $ 25,037  

Income taxes paid

     5,950       5,495  

Supplemental non-cash disclosure:

    

Transfer from loans to other real estate

   $ 8,279     $ 1,278  

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements include Porter Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, PBI Bank (the “Bank”). All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K.

Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation.

New Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard was adopted on January 1, 2007. The adoption of this standard had no impact on the Company’s financial statements.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 on January 1, 2007. It had no impact on the Company’s financial statements.

The Company has no unrecognized tax benefits and does not anticipate any increase in unrecognized benefits during 2007 relative to any tax positions taken prior to January 1, 2007. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income taxes accounts; no such accruals exist as of January 1, 2007. The Company and its subsidiaries file a consolidated U.S. federal income tax return and the Company files a return in the state of Kentucky. These returns are subject to examination by taxing authorities for all years after 2003.

 

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In September 2006, the FASB ratified the Emerging Issues Task Force’s (EITF) consensus on Issue 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance.” FASB Technical Bulletin No. 85-4 requires that assets such as bank owned life insurance be carried at their cash surrender value (CSV) or the amount that could be realized, with changes in CSV reported in earnings. Issue 06-5 requires that a policyholder consider any additional amounts (e.g. claims stabilization reserves and deferred acquisition costs) included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. Certain life insurance contracts provide the policyholder with an amount that, upon surrender, is greater if all individual policies are surrendered at the same time rather than if the policies were surrendered over a period of time. The Issue requires that policyholders determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy. This Issue is effective for us beginning January 1, 2007. The Issue can be applied as either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all periods. The adoption of Issue 06-5 had no effect on the Company’s financial statements for the nine months ended September 30, 2007.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this standard, however, management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company has not completed its evaluation of the impact of adoption of EITF 06-4, however, management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. This Statement is effective for fiscal years beginning after November 15, 2007, which is January 1, 2008 for us. Management has not yet completed its evaluation of the impact of this standard.

 

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Note 2 – Stock Plans and Stock Based Compensation

At September 30, 2007, the Company has a stock option plan and a stock incentive plan. On December 31, 2005, the Company assumed the 2000 Stock Option Plan of Ascencia Bank, Inc. when the Company acquired the minority interest of Ascencia Bancorp, Inc. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan. With regard to the 2000 Option Plan, no additional grants were made subsequent to year-end and none are expected to be made in the future. The 2006 Plan permits the issuance of up to 400,000 shares of the Company’s common stock upon the exercise of stock options or upon the grant of stock awards. As of September 30, 2007, the Company had granted outstanding options to purchase 193,612 shares under the 2000 option plan and 40,316 shares under the 2006 plan. The Company also had awarded under the 2006 plan 42,800 unvested shares net of forfeitures and vesting. As of September 30, 2007, the Company had 316,884 shares available for issue under the 2006 plan. All shares issued under the above mentioned plans came from authorized and unissued shares.

On May 15, 2006, the board of directors approved the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, which was approved by holders of the Company’s voting common stock on June 8, 2006. Under the terms of the plan, 100,000 shares are reserved for issuance to non-employee directors upon the exercise of stock options granted under the plan. Options granted are granted automatically under the plan at fair market value on the date of grant, vest over a three-year period and have a five-year term. To date the Company has granted options to purchase 53,000 shares to non-employee directors. At September 30, 2007, 47,000 shares remained available for issue under this plan.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share Based Payment.” The Company elected to utilize the modified prospective transition method; therefore, prior period results were not restated. Prior to the adoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

SFAS 123R requires all share-based payments to directors, employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. Under the modified prospective method, unvested awards, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123R. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.

All stock options have an exercise price that is at least equal to the fair market value of the Company’s stock on the date the options were granted. Options granted generally become fully exercisable at the end of 3 years of continued employment. Options granted under the 2000 plan have a life of 10 years while those granted under the 2006 plan have a life of 5 years.

The following table summarizes stock option activity:

 

     Nine Months Ended
September 30, 2007
   Twelve Months Ended
December 31, 2006
     Options     Weighted
Average
Exercise
Price
   Options     Weighted
Average
Exercise
Price

Outstanding, beginning

   251,820     $ 25.29    194,004     $ 25.50

Granted

   36,500       23.01    58,816       24.60

Forfeited

   (1,392 )     25.50    (1,000 )     25.50
                 

Outstanding, ending

   286,928     $ 25.00    251,820     $ 25.29
                 

 

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The following table details stock options outstanding:

 

     September 30,
2007

Stock options vested and currently exercisable:

     215,219

Weighted average exercise price

   $ 25.43

Aggregate intrinsic value

   $ 0

Weighted average remaining life (in years)

     2.8

Total Options Outstanding:

     286,928

Aggregate intrinsic value

   $ 0

Weighted average remaining life (in years)

     3.1

The intrinsic value of stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. There were no options exercised during the first nine months of 2007. The Company recorded $92,000 of stock option compensation during the nine months ended September 30, 2007 to salaries and employee benefits. Since the stock options are non-qualified stock options, a tax benefit of $32,000 was recognized. No options were modified during the period. As of September 30, 2007, no stock options issued by the Company have been exercised.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on volatilities of similar publicly traded companies due to the limited historical trading activity of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average assumptions used are summarized as follows:

 

Risk-free interest rate

     4.85 %

Expected option life

     3.5 years  

Expected stock price volatility

     22.0 %

Expected dividend yield

     3.6 %

Fair value

   $ 3.67  

From time-to-time the Company awards unvested shares to employees. The shares vest at a rate of 10% on each one-year anniversary date of the grant date provided the employee is still employed by the Company at that date. The fair value on the date of grant ranged from $22.13 to $25.50 per share. The Company recorded $80,000 of stock-based compensation during the first nine months of 2007 to salaries and employee benefits. A tax benefit of $28,000 was recognized related to this expense.

 

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The following table summarizes unvested share activity as of and for the periods indicated:

 

     Nine Months Ended
September 30, 2007
   Twelve Months Ended
December 31, 2006
     Shares     Weighted
Average
Grant
Price
   Shares     Weighted
Average
Grant
Price

Outstanding, beginning

   40,000     $ 25.33    —       $ —  

Granted

   7,500       23.02    41,600       25.34

Forfeited

   (980 )     25.50    (1,600 )     25.50

Vested

   (3,720 )     25.50    —         —  
                 

Outstanding, ending

   42,800     $ 24.91    40,000     $ 25.33
                 

Unrecognized stock based compensation expense related to stock options and unvested shares for the remainder of 2007 and beyond is estimated as follows (in thousands):

 

October 2007 – December 2007

   $ 65

2008

     230

2009

     190

2010

     133

2011 & thereafter

     628

 

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Note 3 – Securities

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

     Fair Value    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
 
     (dollars in thousands)  

September 30, 2007

        

U.S. Government and federal agency

   $ 18,945    $ 19    $ (177 )

State and municipal

     18,962      124      (236 )

Mortgage-backed

     55,959      174      (602 )

Corporate bonds

     1,401      23      —    

Other debt securities

     704      —        —    
                      

Total debt securities

     95,971      340      (1,015 )

Equity

     4,752      618      (248 )
                      

Total

   $ 100,723    $ 958    $ (1,263 )
                      

December 31, 2006

        

U.S. Government and federal agency

   $ 15,713    $ 1    $ (345 )

State and municipal

     17,918      280      (60 )

Mortgage-backed

     54,848      150      (642 )

Corporate bonds

     2,451      84      —    
                      

Total debt securities

     90,930      515      (1,047 )

Equity

     4,160      876      (140 )
                      

Total

   $ 95,090    $ 1,391    $ (1,187 )
                      

Securities pledged at September 30, 2007 and December 31, 2006 had carrying values of approximately $51,725,000 and $32,404,000, respectively, and were pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

As of September 30, 2007, the Company has 62 equity securities. Of these securities, ten had an unrealized loss of $130,000 and had been in an unrealized loss position for less than twelve months and thirteen had an unrealized loss of $118,000 and had been in an unrealized loss position for more than twelve months. Management monitors the credit quality and current market pricing for these equity securities monthly. Management has made a practice of selling equity securities where recovery does not seem likely but does not have the present intent to sell securities with unrealized losses. As of September 30, 2007, there are no securities management would classify as other than temporarily impaired.

 

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Note 4 – Loans

Loans were as follows:

 

     September 30,
2007
    December 31,
2006
 
     (dollars in thousands)  

Commercial

   $ 82,239     $ 59,113  

Real estate

     945,034       751,017  

Agriculture

     15,002       13,436  

Consumer

     31,822       29,709  

Other

     972       1,092  
                

Subtotal

     1,075,069       854,367  

Less: Allowance for loan losses

     (14,500 )     (12,832 )
                

Loans, net

   $ 1,060,569     $ 841,535  
                

Activity in the allowance for loan losses was as follows:

 

     September 30,
2007
    September 30,
2006
 
     (dollars in thousands)  

Beginning balance

   $ 12,832     $ 12,197  

Provision for loan losses

     2,825       1,029  

Loans charged-off

     (1,345 )     (774 )

Loan recoveries

     188       203  
                

Ending balance

   $ 14,500     $ 12,655  
                

Impaired loans were as follows:

 

     September 30,
2007
   December 31,
2006
     (dollars in thousands)

Loans with no allocated allowance for loan losses

   $ 778    $ 2,048

Loans with allocated allowance for loan losses

     2,622      3,090
             

Total

   $ 3,400    $ 5,138
             

Amount of the allowance for loan losses allocated

   $ 497    $ 896

Nonperforming loans were as follows:

 

     September 30,
2007
   December 31,
2006
     (dollars in thousands)

Loans past due 90 days or more still on accrual

   $ 2,829    $ 2,010

Non-accrual loans

     5,536      6,930

Nonperforming loans include all impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.

 

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Note 5 – Advance from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank (FHLB) were as follows:

 

     September 30,
2007
   December 31,
2006
     (dollars in thousands)

Single maturity advances with fixed rates from 4.48% to 5.64% maturing from 2009 through 2012

   $ 36,500    $ 6,500

Single maturity advance with a variable rate of 5.37% maturing 2008

     —        25,000

Monthly amortizing advances with fixed rates from 0.00% to 9.10% and maturities ranging from 2007 through 2035

     13,707      16,062
             

Total

   $ 50,207    $ 47,562
             

Each advance is payable according to its individual terms and is subject to a prepayment penalty. The advances were collateralized by first mortgage loans, under a blanket lien arrangement. At September 30, 2007, the Bank had unused borrowing capacity of $118.2 million with the FHLB.

Note 6 – Earnings per Share

The factors used in the earnings per share computation follow:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (in thousands, except share and per share data)

Basic

           

Net income

   $ 3,299    $ 3,809    $ 10,589    $ 10,642
                           

Weighted average voting and non-voting common shares outstanding

     7,586,167      6,454,730      7,585,063      6,373,656
                           

Basic earnings per common share

   $ 0.44    $ 0.59    $ 1.40    $ 1.67
                           

Diluted

           

Net income

   $ 3,299    $ 3,809    $ 10,589    $ 10,642
                           

Weighted average voting and non-voting common shares outstanding

     7,586,167      6,454,730      7,585,063      6,373,656

Add: dilutive effects of assumed exercises of stock options and unvested shares

     —        —        22      —  
                           

Average shares and potential common shares

     7,586,167      6,454,730      7,585,085      6,373,656
                           

Diluted earnings per common share

   $ 0.44    $ 0.59    $ 1.40    $ 1.67
                           

 

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Unvested shares of common stock of 35,300 for 2007 and 38,050 for 2006, along with stock options for 286,928 shares of common stock for 2007 and options for 251,820 shares of common stock for 2006, were not considered in computing earnings per common share because they were anti-dilutive.

Note 7 – Total Comprehensive Income

Total comprehensive income was as follows:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007     2006
     (dollars in thousands)

Net income

   $ 3,299    $ 3,809    $ 10,589     $ 10,642

Change in unrealized gain (loss) on securities held for sale, net of reclassifications and tax effects

     506      1,058      (333 )     363
                            

Total comprehensive income

   $ 3,805    $ 4,867    $ 10,256     $ 11,005
                            

Note 8 – Subsequent Acquisition of Ohio County Bancshares, Inc.

On October 1, 2007, the Company acquired 100% of the outstanding shares of Ohio County Bancshares, Inc. (OCB). Operating results of OCB will be included in the consolidated financial statements of the Company beginning in the fourth quarter of 2007. As a result of the acquisition, the Company expects to further improve its market share in the Bowling Green, Ohio County, and Owensboro markets, expand its customer base to improve deposit fee income, provide an opportunity to market additional products and services to new customers, and reduce operating costs through economies of scale. The aggregate purchase price was $12.0 million. Approximately $6.0 million was paid in cash and $6.0 million was paid through the issuance of the Company’s common stock to OCB shareholders. The purchase price resulted in approximately $3.2 million in goodwill, and $3.5 million in core deposit intangible.

Total assets of approximately $111.5 million were acquired, which includes approximately $84.0 million in loans, and $17.4 million in investments. Liabilities assumed in the acquisition totaled approximately $106.2 million, which includes $94.4 million in deposits and $5.6 million in Federal Home Loan Bank advances.

 

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Table of Contents

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. This section should be read in conjunction with the unaudited 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 under the Private Securities Litigation Reform Act. Forward-looking statements are based on 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 2, Item 1A – Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2006 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.

 

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Table of Contents

Overview

Porter Bancorp, Inc. (NASDAQ: PBIB) is a Louisville, Kentucky-based bank holding company which operates 13 full-service banking offices in ten 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 and southern Kentucky from banking offices in Cumberland, Butler, Green, Hart, Edmonson, Warren and Barren Counties. In June 2007, we expanded into central Kentucky by opening a loan production office in the state’s second largest city Lexington, in Fayette County. Our market area has experienced annual positive deposit growth rates in recent years with the trend expected to continue for the next few years.

On October 1, 2007, we completed the acquisition of Ohio County Bancshares and its wholly-owned subsidiary, Kentucky Trust Bank. Kentucky Trust Bank operates six retail banking offices in three central Kentucky counties, including the Beaver Dam, Bowling Green, and Owensboro markets.

On October 25, 2007, we announced that PBI Bank had signed a definitive agreement to acquire Paramount Bank in Lexington, Kentucky. Paramount Bank is a division of SCB Bank, the bank subsidiary of Blue River Bancshares, Inc. (OTC: BRBI) of Shelbyville, Indiana. Paramount has approximately $75 million in assets. The acquisition is valued at approximately $5 million and will be paid in cash. The proposed acquisition is expected to close at the beginning of the first quarter of 2008.

For the three and nine months ended September 30, 2007, respectively, the Company reported net income of $3.3 million and $10.6 million. This compares to net income of $3.8 million and $10.6 million for the same periods of 2006. Basic and diluted earnings per share were $0.44 and $1.40 for the three and nine months ended September 30, 2007, respectively, compared with $0.59 and $1.67 for the same periods of 2006. The reduction in earnings per share between periods is partially attributable to the issuance of 1,250,000 shares of common stock in our initial public offering in September 2006.

Highlights for the quarter and nine months ended September 30, 2007 consist of the following:

 

   

Our earnings per share decreased 5 cents per share to 44 cents from the prior quarter due to robust loan growth with the intent to keep strong reserves. Earnings for the quarter were impacted by 7 cents per share for additional loan loss provisioning. The loan loss provision rose to $1,500,000 for the third quarter of 2007 compared with $276,000 in the same quarter of 2006.

 

   

Net interest income increased 15.7% to $10.7 million for the three months ended September 30, 2007, compared with the same quarter of 2006.

 

   

Total assets increased 25.6% to $1.3 billion since the third quarter of 2006, fueled by strong growth in loans.

 

   

Loans grew 31.5% to $1.1 billion compared with the third quarter of 2006.

 

   

Deposits grew 30.5% to $1.05 billion since the third quarter of 2006. The Bank’s core customer non-interest bearing deposit accounts increased from $59.8 million to $65.0 million, or 8.6%, during the first nine months of 2007.

 

   

The efficiency ratio for the third quarter was a strong 46.1%. The year-to-date ratio improved to 45.5% at September 30, 2007, from 47.1% at September 30, 2006.

 

   

Nonperforming loans as a percentage of total loans at September 30, 2007, were 0.78%, a decline of 44 basis points since September 30, 2006 and 5 basis points since June 30, 2007. Nonperforming assets at September 30, 2007, were 1.42% of total loans, a decline of 6 basis points from September 30, 2006 and an increase of 27 basis points since June 30, 2007. The linked quarter increases in non-performing assets were driven by the residential real estate market and consist primarily of one borrowing relationship. This relationship has been thoroughly analyzed and we believe we have established adequate reserves to account for potential losses. The loans affiliated with this account are in other real estate and/or foreclosure status.

 

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Table of Contents
   

After the close of the third quarter, Porter Bancorp completed the acquisition of Ohio County Bancshares, Inc., the holding company for Kentucky Trust Bank, which operates six retail banking offices in three Kentucky counties, including the Bowling Green and Owensboro markets. Headquartered in Beaver Dam, Kentucky, Kentucky Trust Bank has assets of approximately $120 million. The total acquisition price paid was $12 million, approximately 50% in cash and 50% in Porter Bancorp shares. The acquisition was closed effective October 1, 2007, and will add approximately 260,000 shares to the fourth quarter’s average weighted shares outstanding.

The following discussion and analysis covers the primary factors affecting our performance and financial condition.

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, 2007 compared with the same period of 2006:

 

     For the Three Months
Ended September 30,
  

Change from

Prior Period

 
     2007    2006    Amount     Percent  
     (dollars in thousands)  

Gross interest income

   $ 23,851    $ 18,564    $ 5,287     28.5 %

Gross interest expense

     13,115      9,285      3,830     41.2  

Net interest income

     10,736      9,279      1,457     15.7  

Provision for loan losses

     1,500      276      1,224     443.5  

Non-interest income

     1,306      1,317      (11 )   (0.8 )

Non-interest expense

     5,529      4,653      876     18.8  

Net income before taxes

     5,013      5,667      (654 )   (11.5 )

Income tax expense

     1,714      1,858      (144 )   (7.8 )

Net income

     3,299      3,809      (510 )   (13.4 )

Net income of $3,299,000 for the three months ended September 30, 2007 decreased $510,000, or 13.4%, from $3,809,000 for the comparable period of 2006. This decrease in earnings was primarily attributable to increased provision for loan losses and other non-interest expense, which was partially offset by increased net interest income. The increase in net interest income was attributable to growth in our loan portfolio partially offset by the reduction in net interest margin reflecting the effect of a flat yield curve, Federal Reserve interest rate reductions, and the use of higher cost deposits to fund our loan growth. Provision for loan losses increased $1.2 million, or 443.5%, compared with the third quarter of 2006 as a result of strong growth in our loan portfolio requiring a larger provision to remain consistent with historical experience, and our current assessment of borrowers’ ability to repay, and our collateral positions related to impaired and non-performing loans.

Non-interest income decreased from the prior year due to decreased gain on sales of loans originated for sale, decreased gain on sales of government guaranteed loans, which reflects the cyclical nature of this type of income, and decreased secondary market brokerage fees. These decreases were partially offset by increased service charges on deposit accounts.

Non-interest expense increased from the prior year due to salary and employee benefits expense increasing $366,000, or 13.3%, from the prior year third quarter as a result of annual employee performance evaluation adjustments and planned staff increases related to our expansion into new markets. We incurred expense related to other real estate owned of $226,000 during the third quarter of 2007 compared with $49,000 for the same

 

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period of 2006. Loan collection expense was $98,000 for the current year third quarter compared to $7,000 for the third quarter of 2006. The increases in OREO expenses and loan collection expenses are primarily attributable to our efforts to foreclose, complete construction, and sell single family homes connected to certain borrowing relationships with residential builders suffering from the recent downturn in the housing market. We continue to monitor our portfolio very closely administering proactive collection efforts as prudently possible. FDIC insurance expense increased $59,000, or 355.1%, from the prior year third quarter as a result of the impact of provisions of the FDIC reform act of 2005 taking effect during the quarter.

The following table summarizes components of income and expense and the change in those components for the nine months ended September 30, 2007 compared with the same period of 2006:

 

     For the Nine Months
Ended September 30,
  

Change from

Prior Period

 
     2007    2006    Amount     Percent  
     (dollars in thousands)  

Gross interest income

   $ 65,840    $ 53,498    $ 12,342     23.1 %

Gross interest expense

     35,240      25,765      9,475     36.8  

Net interest income

     30,600      27,733      2,867     10.3  

Provision for loan losses

     2,825      1,029      1,796     174.5  

Non-interest income

     3,790      4,013      (223 )   (5.6 )

Non-interest expense

     15,596      14,940      656     4.4  

Net income before taxes

     15,969      15,777      192     1.2  

Income tax expense

     5,380      5,135      245     4.8  

Net income

     10,589      10,642      (53 )   (0.5 )

Net income of $10,589,000 for the nine months ended September 30, 2007 decreased $53,000, or -0.5%, from $10,642,000 for the comparable period of 2006. This decrease in earnings was primarily attributable to increased provision for loan losses, increased other non-interest expense, and lower non-interest income, which was partially offset by increased net interest income. The increase in net interest income was attributable to growth in our loan portfolio partially offset by the reduction in net interest margin reflecting the effect of a flat yield curve, Federal Reserve interest rate reductions, and the use of higher cost deposits to fund our loan growth. Provision for loan losses increased $1.8 million, or 174.5%, in comparison to the first nine months of 2006 as a result of strong growth in our loan portfolio, requiring a larger provision to remain consistent with historical experience, and our current assessment of borrowers’ ability to repay and our collateral positions related to impaired and non-performing loans. Non-interest income decreased from the prior year due to decreased gain on sales of loans originated for sale, decreased gain on sales of government guaranteed loans, which reflects the cyclical nature of this type of income, and decreased service charges on deposit accounts. Service charges on deposit accounts decreased as a result of changes in product fee structures which we believe will make certain products more competitive, thereby increasing product sales over time.

While we recorded a gain of $284,000 from the sale of loans originated for sale in the first nine months of 2006, we had no revenue from this activity in the first nine months of 2007. This is the result of the company’s strategic decision during the latter portion of 2006 to migrate from higher-overhead residential secondary market correspondent lending to lower-overhead residential secondary market brokerage. We recorded brokerage revenue of $232,000 during the first nine months of 2007 compared with $122,000 for the same period of 2006.

The increase in non-interest expense from the prior year is primarily due to increased salary and employee benefits expense, and loan related expense. Salary and employee benefits expense increased $417,000, or 4.8%, from the first nine month of 2006 as a result of annual employee performance evaluation adjustments and planned staff increases related to our expansion into new markets. We incurred expense related to other real estate owned of $327,000 during the first nine months of 2007 compared with $172,000 for the same period of

 

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Table of Contents

2006. Loan collection expense was $229,000 for the first nine months of 2007 compared to $36,000 for the same period of 2006. The increases in OREO expenses and loan collection expenses are primarily attributable to our efforts to foreclose, complete construction, and sell single family homes connected to certain borrowing relationships with residential builders suffering from the recent downturn in the housing market. We continue to monitor our portfolio very closely administering proactive collection efforts as prudently possible.

Net Interest Income – Our net interest income was $10,736,000 for the three months ended September 30, 2007, an increase of $1,457,000, or 15.7%, compared with $9,279,000 for the same period of 2006. Net interest spread and margin were 3.03% and 3.60%, respectively, for the third quarter of 2007, compared with 3.47% and 3.95%, respectively, for the third quarter of 2006. Net interest income was $30,600,000 for the nine months ended September 30, 2007, an increase of $2,867,000, or 10.3%, compared with $27,733,000 for the same period of 2006. Net interest spread and margin were 3.13% and 3.73%, respectively, for the first nine months of 2007, compared with 3.56% and 4.00%, respectively, for the first nine months of 2006.

Net interest margin for the third quarter of 2007 declined to 3.60% compared with 3.95% for the third quarter of 2006. Our yield on earning assets increased to 7.96% for the third quarter of 2007 compared to 7.87% for the third quarter of 2006 while our cost of funds increased to 4.93% for the third quarter of 2007 compared to 4.40% for the third quarter of 2006. Net interest margin decreased 9 basis points from our margin of 3.69% in the second quarter of 2007. Our yield on earning assets remained unchanged from 7.96% earned during the second quarter of 2007 while our cost of funds increased 7 basis points from 4.86%. This was due in part to our use of promotional pricing in our marketing efforts to attract premium customers in our new markets, Federal Reserve interest rate reductions, and the use of higher cost deposits to fund our loan growth.

Our average interest-earning assets were $1.1 billion for the nine months ended September 30, 2007, compared with $936.8 million for the nine months ended September 30, 2006, an 18.2% increase primarily attributable to loan growth. Average loans were $962.8 million for the nine months ended September 30, 2007, compared with $807.1 million for the nine months ended September 30, 2006, a 19.3% increase. Our total interest income increased by 23.1% to $65.8 million for the nine months ended September 30, 2007, compared with $53.5 million for the same period of 2006. The change was due to a combination of higher interest rates and higher loan volume.

Our average interest-bearing liabilities increased by 16.1% to $971.6 million for the nine months ended September 30, 2007, compared with $836.9 million for the nine months ended September 30, 2006. Our total interest expense increased by 36.8% to $35.2 million for the nine months ended September 30, 2007, compared with $25.8 million during the same period of 2006, due primarily to an increase in the volume of, and higher interest rates paid on, certificates of deposit and NOW and money market deposit accounts (MMDA’s). Our average volume of certificates of deposit increased by 13% to $713.2 million for the nine months ended September 30, 2007, compared with $631.4 million for the nine months ended September 30, 2006. The average interest rate paid on certificates of deposits increased to 5.09% for the nine months ended September 30, 2007, compared with 4.25% for the nine months ended September 30, 2006. Our average volume of NOW and MMDA’s increased by 69.6% to $141.8 million for the nine months ended September 30, 2007, compared with $83.6 million for the first nine month of 2006. The average rate paid on NOW and MMDA’s increased to 3.78% for the nine months ended September 30, 2007, compared with 2.13% for the first nine months of 2006. The increase in cost of funds was the result of the continued repricing of certificates of deposit at maturity at higher interest rates and increases in MMDA rates driven by increases in market rates and competition.

 

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Average Balance Sheets

The following table presents the average balance sheets for the three month periods ending September 30, 2007 and 2006, 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 September 30,  
     2007     2006  
    

Average

Balance

   

Interest

Earned/Paid

  

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   Average
Yield/Cost
 
     (dollars in thousands)  

ASSETS

              

Interest-earning assets:

              

Loan receivables (1)(2)

   $ 1,039,355     $ 21,941    8.38 %%   $ 811,838     $ 17,045    8.33 %

Securities

              

Taxable

     81,373       1,008    4.91       77,240       882    4.53  

Tax-exempt (3)

     16,476       170    6.30       17,148       179    6.37  

FHLB stock

     8,978       147    6.50       8,720       127    5.78  

Other equity securities

     4,141       46    4.41       3,389       36    4.21  

Federal funds sold and other

     42,904       539    4.98       22,496       295    5.20  
                                  

Total interest-earning assets

     1,193,227       23,851    7.96 %     940,831       18,564    7.87 %
                      

Less: Allowance for loan losses

     (13,762 )          (12,791 )     

Non-interest earning assets

     67,684            60,225       
                          

Total assets

   $ 1,247,149          $ 988,265       
                          

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Certificates of deposit and other time deposits

   $ 771,297     $ 10,029    5.16 %   $ 632,689     $ 7,246    4.54 %

NOW and money market deposits

     162,026       1,631    3.99       75,791       425    2.22  

Savings accounts

     25,153       98    1.55       24,202       65    1.07  

Federal funds purchased and repurchase agreements

     5,662       59    4.13       3,222       34    4.19  

FHLB advances

     67,149       810    4.79       67,063       829    4.90  

Junior subordinated debentures

     25,000       488    7.74       25,000       543    8.62  

Other borrowing

     —         —      —         9,414       143    6.03  
                                  

Total interest-bearing liabilities

     1,056,287       13,115    4.93 %     837,381       9,285    4.40 %
                      

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     69,591            65,226       

Other liabilities

     7,921            7,248       
                          

Total liabilities

     1,133,799            909,855       

Stockholders’ equity

     113,350            78,410       
                          

Total liabilities and stockholders’ equity

   $ 1,247,149          $ 988,265       
                          

Net interest income

     $ 10,736        $ 9,279   
                      

Net interest spread

        3.03 %        3.47 %
                      

Net interest margin

        3.60 %        3.95 %
                      

(1) Includes loan fees in both interest income and the calculation of yield on loans.
(2) Calculations include non-accruing loans in average loan amounts outstanding.
(3) Taxable equivalent yields are calculated assuming a 35% federal income tax rate.

 

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Table of Contents

Average Balance Sheets

The following table presents the average balance sheets for the nine month periods ending September 30, 2007 and 2006, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

     Nine Months Ended September 30,  
     2007     2006  
    

Average

Balance

   

Interest

Earned/Paid

  

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   Average
Yield/Cost
 
     (dollars in thousands)  

ASSETS

              

Interest-earning assets:

              

Loan receivables (1)(2)

   $ 962,822     $ 60,498    8.40 %   $ 807,104     $ 49,101    8.13 %

Securities

              

Taxable

     81,688       3,002    4.91       79,835       2,650    4.44  

Tax-exempt (3)

     16,364       507    6.37       17,378       547    6.47  

FHLB stock

     8,978       434    6.46       8,598       370    5.75  

Other equity securities

     3,753       121    4.31       3,456       118    4.56  

Federal funds sold and other

     33,899       1,278    5.04       20,450       712    4.65  
                                  

Total interest-earning assets

     1,107,504       65,840    7.98 %     936,821       53,498    7.68 %
                      

Less: Allowance for loan losses

     (13,394 )          (12,647 )     

Non-interest earning assets

     65,144            60,900       
                          

Total assets

   $ 1,159,254          $ 985,074       
                          

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Certificates of deposit and other time deposits

   $ 713,241     $ 27,161    5.09 %   $ 631,396     $ 20,086    4.25 %

NOW and money market deposits

     141,831       4,015    3.78       83,613       1,335    2.13  

Savings accounts

     24,744       265    1.43       23,387       142    0.81  

Federal funds purchased and repurchase agreements

     2,801       74    3.53       4,694       150    4.27  

FHLB advances

     63,954       2,292    4.79       59,241       2,057    4.64  

Junior subordinated debentures

     25,000       1,433    7.66       25,000       1,564    8.36  

Other borrowing

     —         —      —         9,528       431    6.05  
                                  

Total interest-bearing liabilities

     971,571       35,240    4.85 %     836,859       25,765    4.12 %
                      

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     68,499            65,173       

Other liabilities

     7,087            7,097       
                          

Total liabilities

     1,047,157            909,129       

Stockholders’ equity

     112,097            75,945       
                          

Total liabilities and stockholders’ equity

   $ 1,159,254          $ 985,074       
                          

Net interest income

     $ 30,600        $ 27,733   
                      

Net interest spread

        3.13 %        3.56 %
                      

Net interest margin

        3.73 %        4.00 %
                      

(1) Includes loan fees in both interest income and the calculation of yield on loans.
(2) Calculations include non-accruing loans in average loan amounts outstanding.
(3) Taxable equivalent yields are calculated assuming a 35% federal income tax rate.

 

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Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

 

    

Three Months Ended September 30,

2007 vs. 2006

   

Nine Months Ended September 30,

2007 vs. 2006

 
     Increase (decrease)
due to change in
    Net
Change
    Increase (decrease)
due to change in
    Net
Change
 
     Rate     Volume       Rate     Volume    
     (in thousands)  

Interest-earning assets:

            

Loan receivables

   $ 93     $ 4,803     $ 4,896     $ 1,658     $ 9,739     $ 11,397  

Securities

     77       40       117       284       28       312  

FHLB stock

     16       4       20       47       17       64  

Other equity securities

     2       8       10       (7 )     10       3  

Federal funds sold and other

     (11 )     255       244       63       503       566  
                                                

Total increase (decrease) in interest income

     177       5,110       5,287       2,045       10,297       12,342  
                                                

Interest-bearing liabilities:

            

Certificates of deposit and other time deposits

     1,063       1,720       2,783       4,267       2,808       7,075  

NOW and money market accounts

     496       710       1,206       1,410       1,270       2,680  

Savings accounts

     30       3       33       115       8       123  

Federal funds purchased and repurchase agreements

     —         25       25       (23 )     (53 )     (76 )

FHLB advances

     (20 )     1       (19 )     67       168       235  

Junior subordinated debentures

     (55 )     —         (55 )     (131 )     —         (131 )

Other borrowings

     —         (143 )     (143 )     —         (431 )     (431 )
                                                

Total increase (decrease) in interest expense

     1,514       2,316       3,830       5,705       3,770       9,475  
                                                

Increase in net interest income

   $ (1,337 )   $ 2,794     $ 1,457     $ (3,660 )   $ 6,527     $ 2,867  
                                                

 

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Table of Contents

Non-Interest Income – The following table presents the major categories of non-interest income for the three and nine months ended September 30, 2007 and 2006:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (in thousands)          

Service charges on deposit accounts

   $ 669    $ 615    $ 1,852    $ 1,963

Secondary market brokerage fees

     67      88      232      122

Title insurance commissions

     37      41      149      97

Gains on sales of government guaranteed loans, net

     15      53      30      152

Gains on sales of loans originated for sale

     —        44      —        284

Gains on sales of securities, net

     42      23      104      50

Other

     476      453      1,423      1,345
                           

Total non-interest income

   $ 1,306    $ 1,317    $ 3,790    $ 4,013
                           

Non-interest income for the third quarter ended September 30, 2007 decreased $11,000, or 0.8%, in comparison with the third quarter of 2006. For the nine months ended September 30, 2007 non-interest income decreased by $223,000 to $3.8 million compared with $4.0 million for same period of 2006. The decrease in non-interest income for both the third quarter and nine months ended September 30, 2007, was attributable to decreased income from secondary market residential lending operations. For the nine months ended September 30, 2007 we also experienced a decrease in service charges on deposit accounts. The decrease in service charges on deposit accounts was a result of changes in product fee structures that the Company believes will make certain products more competitive, thereby increasing product sales over time.

While we recorded a gain of $284,000 from the sale of loans originated for sale in the first nine months of 2006, we had no revenue from this activity in the same period of 2007. This is the result of the company’s strategic decision during the latter portion of 2006 to migrate from higher-overhead residential secondary market correspondent lending to lower-overhead residential secondary market brokerage. We recorded brokerage revenue of $232,000 during the first nine months of 2007 compared with $122,000 for the same period of 2006. Based on current trends in residential lending and housing markets we believe our strategic decision will better position us over the long-term in this business line.

We also experienced a decrease in gains on sales of government guaranteed loans, reflecting the cyclical nature of originations and sales of this type of loan.

 

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Table of Contents

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the three and nine months ended September 30, 2007 and 2006:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (in thousands)          

Salary and employee benefits

   $ 3,115    $ 2,749    $ 9,051    $ 8,634

Occupancy and equipment

     673      612      1,837      1,972

State franchise tax

     326      267      976      807

Professional fees

     149      164      485      643

Advertising

     140      148      393      467

Postage and delivery

     126      119      388      383

Office supplies

     105      113      348      366

Communications

     113      121      322      404

Other real estate owned expense

     226      49      327      172

Other

     556      311      1,469      1,092
                           

Total non-interest expense

   $ 5,529    $ 4,653    $ 15,596    $ 14,940
                           

Non-interest expense for the third quarter ended September 30, 2007 increased $876,000, or 18.9%, compared with the third quarter of 2006. For the nine months ended September 30, 2007, non-interest expense increased $656,000, or 4.4%, to $15.6 million compared with $14.9 million for the first nine months of 2006. The increase in non-interest expense was primarily attributable to increased salary and employee benefits expense, state franchise tax expense, other real estate owned expense, and loan collection expense. These increases were partially offset by reduced occupancy and equipment, professional fees, advertising and communications expenses. Salary and employee benefits expense increased as a result of annual employee performance evaluation adjustments and planned staff increases related to our expansion into new markets. We incurred increases in other real estate owned expense of $155,000 and loan collection expense (included in Other) of $193,000 over the same nine month period of 2006. The increases in OREO expenses and loan collection expenses are primarily attributable to our efforts to foreclose, complete construction, and sell single family homes connected to certain borrowing relationships with residential builders suffering from the recent downturn in the housing market. We continue to monitor our portfolio very closely administering proactive collection efforts as prudently possible. Our diligent focus on expense control resulted in an improved efficiency ratio of 45.5% for the first nine months of 2007, compared with 47.1% for the same period of 2006. Our efficiency ratio could increase modestly in future quarters as we make investments to grow into new markets.

Income Tax ExpenseIncome tax expense was $1.7 million, or 34.2% of pre-tax income, for the third quarter ended September 30, 2007, and $5.4 million, or 33.7% of pre-tax income for the first nine months of 2007, compared with $1.9 million, or 32.8% of pre-tax income, for the third quarter of 2006, and $5.1 million, or 32.5% of pre-tax income, for the first nine months of 2006. The slight increase in effective tax rate is attributable to a modest decline in tax-exempt earning assets as a percentage of total interest earning assets between periods.

Analysis of Financial Condition

Total assets increased $204.1 million, or 19.4%, to $1.3 billion at September 30, 2007 from $1.05 billion at December 31, 2006. This increase was primarily attributable to an increase of $219 million in net loans from loan growth. In addition, securities available for sale increased $5.6 million during the first nine months of 2007. Total assets at September 30, 2007 increased $255.4 million from $999.7 million at September 30, 2006, representing a 25.6% increase.

Loans ReceivableLoans receivable increased $220.7 million, or 25.8%, during the nine months ended September 30, 2007 to $1.08 billion. Our commercial, commercial real estate, farmland, and real estate construction portfolios increased by an aggregate of $168.5 million, or 28.3%, during the nine months and comprised 71.1% of the total loan portfolio at September 30, 2007.

 

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Table of Contents

Loan Portfolio CompositionThe following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in our portfolio; and other than commercial real estate, construction real estate and residential real estate; there is no concentration of loans in any industry exceeding 10% of total loans.

 

     As of September 30,
2007
    As of December 31,
2006
 
     Amount    Percent     Amount    Percent  
     (dollars in thousands)  

Type of Loan:

          

Real estate:

          

Commercial

   $ 329,032    30.60 %   $ 277,029    32.42 %

Construction

     284,114    26.43       211,973    24.81  

Residential

     243,774    22.68       195,591    22.89  

Farmland

     68,551    6.38       47,325    5.54  

Home equity

     19,563    1.82       19,099    2.24  

Commercial

     82,239    7.65       59,113    6.92  

Consumer

     31,822    2.96       29,709    3.48  

Agriculture

     15,002    1.39       13,436    1.57  

Other

     972    0.09       1,092    0.13  
                          

Total loans

   $ 1,075,069    100.00 %   $ 854,367    100.00 %
                          

Non-Performing AssetsNon-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets.

The following table sets forth information with respect to non-performing assets as of September 30, 2007 and December 31, 2006.

 

     September 30,
2007
    December 31,
2006
 
     (dollars in thousands)  

Loans past due 90 days or more still on accrual

   $ 2,829     $ 2,010  

Non-accrual loans

     5,536       6,930  
                

Total non-performing loans

     8,365       8,940  

Real estate acquired through foreclosure

     6,862       2,415  

Other repossessed assets

     —         9  
                

Total non-performing assets

   $ 15,227     $ 11,364  
                

Non-performing loans to total loans

     0.78 %     1.05 %
                

Non-performing assets to total loans

     1.42 %     1.33 %
                

Nonperforming loans at September 30, 2007 were $8.4 million, or 0.78% of total loans, compared with $10.0 million, or 1.22% of total loans, at September 30, 2006, and $8.9 million, or 1.05% of total loans at December 31, 2006. The decrease of $575,000 in non-performing loans from December 31, 2006 to September 30, 2007 is primarily attributable to our collection efforts via foreclosure and collateral repossession.

 

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Table of Contents

Foreclosed properties at September 30, 2007 were $6.9 million compared with $2.1 million at September 30, 2006, and $2.4 million at December 31, 2006. The increase in foreclosed properties reflects the normal progression of troubled loans through workout, collateral repossession, and ultimate disposition. We value foreclosed properties at fair value when acquired and expect to liquidate these properties to recover our investment in the due course of business.

Allowance for Loan LossesThe allowance for loan losses is based on management’s continuing review and risk evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require current recognition in estimating loan losses.

Management has established loan grading procedures that result in specific allowance allocations for any estimated inherent risk of loss. For loans not individually graded, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

Our loan loss reserve as a percentage of total loans at September 30, 2007 decreased to 1.35% from 1.55% at September 30, 2006 and 1.50% at December 31, 2006. Provision for loan losses increased $1.2 million to $1.5 million for the third quarter of 2007 compared with the third quarter of 2006. Provision for loan losses increased $1.8 million to $2.8 million for the nine months ended September 30, 2007, compared with $1.0 million for the same nine month period of 2006. The loan loss provision for the three and nine months ended September 30, 2007, was increased largely due to the robust growth in the loan portfolio and to remain consistent with historical loan loss experience. Net loan charge-offs were $479,000 for third quarter of 2007 compared with $232,000 for the same period of 2006. Net loan charge-offs for the nine months ended September 30, 2007 were $1.2 million, or 0.12% of average loans, compared with $571,000, or 0.07%, for the first nine months of 2006.

An analysis of changes in allowance for loan losses and selected ratios for the three and nine month periods ended September 30, 2007 and 2006 follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  
     (dollars in thousands)              

Balance at beginning of period

   $ 13,479     $ 12,611     $ 12,832     $ 12,197  

Provision for loan losses

     1,500       276       2,825       1,029  

Recoveries

     40       49       188       203  

Charge-offs

     (519 )     (281 )     (1,345 )     (774 )
                                

Balance at end of period

   $ 14,500     $ 12,655     $ 14,500     $ 12,655  
                                

Allowance for loan losses to period-end loans

     1.35 %     1.55 %     1.35 %     1.55 %
                                

Net charge-offs to average loans

     0.05 %     0.03 %     0.12 %     0.07 %
                                

Allowance for loan losses to non-performing loans

     173.34 %     126.91 %     173.34 %     126.91 %
                                

LiabilitiesTotal liabilities at September 30, 2007 were $1.1 billion compared to $942.7 million at December 31, 2006, an increase of $198.2 million, or 21%. The increase was primarily attributable to an increase in deposits of $184.9 million, or 21.5%, at September 30, 2007 to $1.05 billion from $861.9 million at December 31, 2006, primarily due to an increase in both time deposits and transactional accounts from promotional efforts throughout the period. The core customer non-interest bearing deposit account growth of $5.1 million during the first nine months of 2007 is attributable to our new deposit growth focus which includes new incentives for our employees and product improvements.

 

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Table of Contents

Federal Home Loan Bank advances also increased $2.6 million, or 5.6%, to $50.2 million from $47.6 million at December 31, 2006. These advances are used from time to time to fund asset growth and manage interest rate risk in accordance with our asset/liability management strategies.

Deposits are our primary source of funds. The following table sets forth the average daily balances and weighted average rates paid for our deposits for the periods indicated:

 

     For the Nine Months
Ended September 30,
2007
   

For the Year

Ended December 31,
2006

 
     Average
Balance
   Average
Rate
    Average
Balance
   Average
Rate
 
     (dollars in thousands)  

Demand

   $ 68,499    —       $ 64,778    —    

Interest checking

     49,503    1.74 %     51,127    1.60 %

Money market

     92,328    4.88       36,140    3.43  

Savings

     24,744    1.43       23,455    0.90  

Certificates of deposit

     713,241    5.09       634,919    4.40  
                  

Total deposits

   $ 948,315    4.43     $ 810,419    3.73  
                  

The following table sets forth the average daily balances and weighted average rates paid for our certificates of deposit for the periods indicated:

 

     For the Nine Months
Ended September 30,
2007
   

For the Year Ended
December 31,

2006

 
     Average
Balance
   Average
Rate
    Average
Balance
   Average
Rate
 
     (dollars in thousands)  

Less than $100,000

   $ 518,647    5.04 %   $ 473,813    4.36 %

$100,000 or more

     194,594    5.22       161,106    4.53  
                  

Total

   $ 713,241    5.09     $ 634,919    4.40  
                  

 

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Table of Contents

The following table shows at September 30, 2007 and December 31, 2006 the amount of our time deposits of $100,000 or more by time remaining until maturity:

 

Maturity Period

   As of
September 30,
2007
   As of
December 31,
2006
     (dollars in thousands)

Three months or less

   $ 55,156    $ 49,079

Three months through six months

     88,746      42,288

Six months through twelve months

     69,393      61,690

Over twelve months

     29,494      29,834
             

Total

   $ 242,789    $ 182,891
             

Liquidity

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that the cash flow requirements of depositors and borrowers, as well as our operating cash needs, are met, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also includes ensuring cash flow needs are met at a reasonable cost. We maintain an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The liquidity position is continually monitored and reviewed by our Asset Liability Committee.

Funds are available from a number of sources, including the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, brokered deposits and other wholesale funding. During 2006 and the first nine months of 2007, PBI Bank utilized brokered and wholesale deposits to supplement its funding strategy. At September 30, 2007, these deposits totaled $740,000. PBI Bank also secured federal funds borrowing lines from major correspondent banks totaling $21.0 million on an unsecured basis and an additional $15.0 million on a secured basis.

Traditionally, PBI Bank has utilized borrowings from the FHLB to supplement our funding requirements. At September 30, 2007, the Bank had an unused borrowing capacity with the FHLB of $118.2 million. Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

We use cash to pay dividends on common stock, if and when declared by the board of directors, and to service debt. The main sources of funding include dividends paid by PBI Bank, management fees received from PBI Bank and affiliated banks and financing obtained in the capital markets.

Capital

Stockholders’ equity increased $5.9 million to $114.2 million at September 30, 2007 compared with $108.3 million at December 31, 2006. The increase was due to net income of $10.6 million earned during the first nine months of 2007 reduced by $4.6 million in dividends declared. The Company and the Bank qualified as well capitalized under regulatory guidelines at September 30, 2007.

Each of the federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness.

 

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Table of Contents

The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and PBI Bank at the dates indicated:

 

    

Regulatory
Minimums

   

Well-Capitalized
Minimums

    September 30, 2007     December 31, 2006  
         Porter
Bancorp
    PBI
Bank
    Porter
Bancorp
    PBI
Bank
 

Tier I capital

   4.0 %   6.0 %   11.84 %   9.62 %   14.32 %   11.56 %

Total risk-based capital

   8.0     10.0     13.09     10.87     15.57     12.81  

Tier I leverage ratio

   4.0     5.0     10.22     8.28     11.86     9.56  

Porter Bancorp, Inc. and PBI Bank had ratios of Tier I capital and total capital to risk-adjusted assets and leverage ratios significantly above the regulatory minimums and minimums for well-capitalized financial institutions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at September 30, 2007, and December 31, 2006. Given an instantaneous 100 basis point decrease in rates that was sustained for 12 months, base net interest income would decrease by an estimated 6.1% at September 30, 2007 compared with a decrease of 6.3% at December 31, 2006. Given a 100 basis point increase in interest rates, base net interest income would increase by an estimated 5.8% at September 30, 2007, compared with an increase of 5.4% at December 31, 2006.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September 30, 2007, as calculated using the static shock model approach:

 

    

Change in Future

Net Interest Income

 
     Dollar Change     Percentage Change  
     (dollars in thousands)  

+ 200 basis points

   $ 4,618     10.91 %

+ 100 basis points

     2,471     5.84  

- 100 basis points

     (2,597 )   (6.13 )

- 200 basis points

     (5,994 )   (14.16 )

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

In the normal course of operations, we are defendants in various legal proceedings. In the opinion of management, there is no proceeding pending or, to the knowledge of our management, threatened litigation in which an adverse decision could result in a material adverse change in our business or consolidated financial position.

 

Item 1A. Risk Factors

Information regarding risk factors appears in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under Item 1A – Risk Factors. There have been no material changes from the risk factors previously discussed in our Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 3. Default Upon Senior Securities

Not applicable.

 

Item 4. Submission of Matters to a Vote of Securities Holders

Not applicable.

 

Item 5. Other Information

Not applicable.

 

Item 6. Exhibits

 

(a) Exhibits

The following exhibits are filed or furnished as part of this report:

 

Exhibit
Number
 

Description of Exhibit

31.1   Certification of Principal Executive Officer, pursuant to Rule 13a – 14(a).
31.2   Certification of Principal Financial Officer, pursuant to Rule 13a – 14(a).
32.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act if 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  PORTER BANCORP, INC.
  (Registrant)

November 13, 2007

  By:  

/s/ Maria L. Bouvette

    Maria L. Bouvette
    President & Chief Executive Officer

November 13, 2007

  By:  

/s/ David B. Pierce

    David B. Pierce
    Chief Financial Officer and Chief Accounting Officer

 

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