LIMESTONE BANCORP, INC. - Quarter Report: 2012 March (Form 10-Q)

a50253594.htm

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 March 31, 2012

¨	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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company 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.

11,822,102 shares of Common Stock, no par value, were outstanding at April 23, 2012.

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	32
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4.	CONTROLS AND PROCEDURES	45

PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	47
ITEM 1A.	RISK FACTORS	47
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	47
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47
ITEM 4.	MINE SAFETY DISCLOSURES	47
ITEM 5.	OTHER INFORMATION	47
ITEM 6.	EXHIBITS	47

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 March 31, 2012 and December 31, 2011

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011

Notes to Unaudited Consolidated Financial Statements

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	March 31,			December 31,
	2012			2011
Assets
Cash and due from financial institutions	$	70,083		$	104,680
Federal funds sold		2,524			1,282
Cash and cash equivalents		72,607			105,962
Securities available for sale		174,918			158,833
Mortgage loans held for sale		250			694
Loans, net of allowance of $53,953 and $52,579, respectively		1,044,759			1,083,444
Premises and equipment		21,296			21,541
Other real estate owned		35,574			41,449
Federal Home Loan bank stock		10,072			10,072
Bank owned life insurance		8,180			8,106
Accrued interest receivable and other assets		21,967			25,323
Total assets	$	1,389,623		$	1,455,424

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	114,304		$	111,118
Interest bearing		1,139,443			1,212,645
Total deposits		1,253,747			1,323,763
Repurchase agreements		1,926			1,738
Federal Home Loan Bank advances		6,789			7,116
Accrued interest payable and other liabilities		11,945			7,628
Subordinated capital note		7,425			7,650
Junior subordinated debentures		25,000			25,000
Total liabilities		1,306,832			1,372,895

Stockholders’ equity
Preferred stock, no par, 1,000,000 shares authorized,
Series A – 35,000 issued and outstanding;
Liquidation preference of $35 million at March 31, 2012		34,706			34,661
Series C – 317,042 issued and outstanding;
Liquidation preference of $3.6 million at March 31, 2012		3,283			3,283
Common stock, no par, 19,000,000 shares authorized, 11,822,102
and 11,824,472 shares issued and outstanding, respectively		112,236			112,236
Additional paid-in capital		19,946			19,841
Retained deficit		(90,636	)		(91,656	)
Accumulated other comprehensive income		3,256			4,164
Total stockholders' equity		82,791			82,529
Total liabilities and stockholders’ equity	$	1,389,623		$	1,455,424

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Operations

(dollars in thousands, except per share data)

	Three Months Ended
	March 31,
	2012		2011
Interest income
Loans, including fees	$	14,512	$	18,110
Taxable securities		841		1,042
Tax exempt securities		250		260
Fed funds sold and other		152		204
		15,755		19,616
Interest expense
Deposits		4,000		5,360
Federal Home Loan Bank advances		57		142
Subordinated capital note		71		73
Junior subordinated debentures		171		155
Federal funds purchased and other		2		118
		4,301		5,848
Net interest income		11,454		13,768
Provision for loan losses		3,750		5,100
Net interest income after provision for loan losses		7,704		8,668

Non-interest income
Service charges on deposit accounts		554		630
Income from fiduciary activities		251		255
Secondary market brokerage fees		17		76
Title insurance commissions		22		31
Net gain on sales of loans originated for sale		45		221
Net gain on sales of securities		2,019		83
Other		537		491
		3,445		1,787
Non-interest expense
Salaries and employee benefits		4,312		4,124
Occupancy and equipment		886		972
Other real estate owned expense		1,257		1,367
FDIC Insurance		873		855
State franchise tax		592		582
Loan collection expense		360		262
Professional fees		356		280
Communications		180		168
Postage and delivery		122		123
Advertising		33		102
Other		676		560
		9,647		9,395
Income before income taxes		1,502		1,060
Income tax expense		—		261
Net income		1,502		799
Less:
Dividends on preferred stock		437		438
Accretion on Series A preferred stock		45		44
Earnings allocated to participating securities		35		12
Net income available to common shareholders	$	985	$	305
Basic earnings per common share	$	0.08	$	0.03
Diluted earnings per common share	$	0.08	$	0.03

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months Ended
	March 31,
	2012			2011

Net income	$	1,502		$	799

Other comprehensive income, net of tax:
Unrealized gain on securities:
Unrealized gain arising in period
(net of tax of $218 and $25, respectively)		404			46
Reclassification of amount realized through sales
(net of tax of $707 and $29, respectively)		(1,312	)		(54	)
Net unrealized loss on securities		(908	)		(8	)

Comprehensive income	$	594		$	791

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Three Months Ended March 31, 2012

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

Accumulated

Amount

Additional

Other

Series A

Series C

Series A

Series C

Paid-In

Retained

Comprehensive

Common

Preferred

Common

Preferred

Capital

Deficit

Income

Total

Balances, January 1, 2012

11,824,472

35,000

317,042

112,236

34,661

3,283

19,841

(91,656

)

4,164

82,529

Forfeited unvested stock

(2,370

)

–

Stock-based compensation expense

–

105

–

105

Net income

–

1,502

–

1,502

Net change in accumulated other

comprehensive income, net of taxes

–

(908

)

(908

)

Dividends 5% on Series A preferred

stock

–

(437

)

–

(437

)

Accretion of Series A preferred

stock discount

–

(45

)

–

Balances, March 31, 2012

11,822,102

35,000

317,042

112,236

34,706

3,283

19,946

(90,636

)

3,256

82,791

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2012 and 2011

(dollars in thousands)

	2012			2011
Cash flows from operating activities
Net income (loss)	$	1,502		$	799
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization		570			610
Provision for loan losses		3,750			5,100
Net amortization on securities		632			321
Stock-based compensation expense		105			118
Deferred income taxes		—			238
Net gain on loans originated for sale		(45	)		(221	)
Loans originated for sale		(2,328	)		(7,188	)
Proceeds from sales of loans originated for sale		2,802			7,234
Net (gain) loss on sales of investment securities		(2,019	)		(83	)
Net loss on sales of other real estate owned		402			391
Net write-down of other real estate owned		480			486
Earnings on bank owned life insurance		(74	)		(70	)
Net change in accrued interest receivable and other assets		3,231			1,130
Net change in accrued interest payable and other liabilities		3,881			(1,169	)
Net cash from operating activities		12,889			7,696
Cash flows from investing activities
Purchases of available-for-sale securities		(45,048	)		(66,641	)
Sales and calls of available-for-sale securities		21,385			2,894
Maturities and prepayments of available-for-sale securities		8,056			6,773
Proceeds from sale of other real estate owned		9,018			624
Improvements to other real estate owned		(1	)		(1,037	)
Loan originations and payments, net		30,798			12,951
Purchases of premises and equipment, net		(72	)		(42	)
Net cash from investing activities		24,136			(44,478	)
Cash flows from financing activities
Net change in deposits		(70,016	)		14,655
Net change in repurchase agreements		188			(187	)
Repayment of Federal Home Loan Bank advances		(327	)		(458	)
Repayment of subordinated capital note		(225	)		—
Cash dividends paid on preferred stock		—			(441	)
Cash dividends paid on common stock		—			(119	)
Net cash from financing activities		(70,380	)		13,450
Net change in cash and cash equivalents		(33,355	)		(23,332	)
Beginning cash and cash equivalents		105,962			185,435
Ending cash and cash equivalents	$	72,607		$	162,103

Supplemental cash flow information:
Interest paid	$	4,296		$	5,861
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	4,216		$	8,812
Financed sales of other real estate owned		192			2,041

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

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. (Company or PBI) and its subsidiary, PBI Bank (Bank). The Company owns a 100% interest in 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 (GAAP) 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 three months ended March 31, 2012 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, 2011 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, fair values of financial instruments, stock compensation, deferred tax assets, other intangibles, and fair values of other real estate owned are particularly subject to change.

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income or stockholders’ equity.

Note 2 – Recent Developments and Future Plans

During the first quarter of 2012, we reported net income available to common shareholders of $985,000. This was an improvement from our 2011 results. During the year ended December 31, 2011, we recorded a net loss to common shareholders of $105.2 million. This loss was primarily attributable to a $23.8 million goodwill impairment charge, the establishment of a $31.7 million valuation allowance on our deferred tax assets, OREO expense of $47.5 million related to valuation adjustments for our change in strategy related to certain properties, fair value write-downs related to new appraisals received for properties in the portfolio during 2011, net loss on the sale of OREO properties, and increase in carrying costs associated with carrying these higher levels of assets, as well as provision for loan losses expense of $62.6 million due to the continued decline in credit trends within our portfolio.

In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. As of March 31, 2012, these capital ratios were not met.

In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies including the following:

●

Continuing to operate the Company and Bank in a safe and sound manner. This strategy will require us to continue to reduce the size of our balance sheet, reduce our lending concentrations, consider selling loans, and reduce other noninterest expense through the disposition of OREO.

●

Continuing with succession planning and add resources to management team. On March 29, 2012, the Board of Directors announced that it had formed a search committee comprised of its five independent directors to identify and hire a President and CEO for PBI Bank.

●

Addressing construction and development lending.

We recorded net construction and development loan charge-offs totaling $522,000 during the first quarter of 2012. This represented approximately 22% of our total net loan charge-offs for the first quarter of 2012. We recorded net construction and development loan charge-offs totaling $11.0 million and $11.4 million for the years ended December 31, 2011 and 2010, respectively. This represented approximately 27% and 51% of our total net loan charge-offs in 2011 and 2010, respectively.

In 2011, management determined, with the concurrence of the Board of Directors, that certain properties held in OREO were not likely to be successfully disposed of in an acceptable time-frame using routine marketing efforts. It became apparent due to weakness in the economy and softness in demand for housing that certain land development and residential condominium projects would require extended holding periods to sell the properties at recent appraised values. Accordingly, in June of 2011, the Company sold, in a single transaction, 54 finished condominium property units from condominium developments held in our OREO portfolio with a carrying value of approximately $11.0 million, for $5.2 million, resulting in a pre-tax loss of $5.8 million.

Although we were carrying our OREO at fair market value less estimated cost to sell, we subsequently adjusted our valuations for land development and residential development properties held in OREO similar to the properties we sold earlier in 2011. Our 2011 fair value adjustments totaled approximately $25.6 million to reflect our intent to market these properties more aggressively to retail and bulk buyers. Additionally, we recorded approximately $9.3 million of fair value adjustments related to new appraisals received for properties in the portfolio during 2011.

In summary, for the years ended December 31, 2011 and 2010, respectively, we recorded net construction and development OREO fair value adjustments and loss on sale of OREO totaling $38.7 million and $10.4 million. This represents approximately 89% and 71% of our total OREO fair value adjustments and loss on sale in 2011 and 2010, respectively.

For the first quarter of 2012, we recorded net construction and development OREO fair value adjustments and loss on sale of construction and development OREO of $ 222,000. This represents approximately 25% of our total OREO fair value adjustments and loss on sale of OREO in the first quarter of 2012.

●

We are committed to reducing loan concentrations and balance sheet risk.

Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. These loans totaled $92.0 million, or 77% of total risk-based capital, at March 31, 2012 and $101.5 million, or 85% of total risk-based capital, at December 31, 2011.

Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group, to not more than 250% of total risk based capital. These loans totaled $398.6 million, or 331% of total risk-based capital, at March 31, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.

We are working to reduce these loans by curtailing new construction and development lending and new non-owner occupied commercial real estate lending. We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale. While we have not yet reduced our balances in these categories to the required percentages, we have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $92.0 million at March 31, 2012. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $246.1 million at March 31, 2012.

●

Raising capital by selling common stock through a public offering or private placement to existing and new investors.

●

Evaluating other strategic alternatives, such as the sale of assets or branches.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.

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 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(in thousands)
March 31, 2012
U.S. Government and federal agency	$	5,746	$	445	$	—		$	6,191
Agency mortgage-backed: residential		118,049		2,712		(50	)		120,711
State and municipal		36,432		1,415		(97	)		37,750
Corporate bonds		7,262		600		(49	)		7,813
Other		572		23		—			595
Total debt securities		168,061		5,195		(196	)		173,060
Equity		1,359		499		—			1,858
Total	$	169,420	$	5,694	$	(196	)	$	174,918

December 31, 2011
U.S. Government and federal agency	$	10,494	$	1,149	$	—		$	11,643
Agency mortgage-backed: residential		97,286		2,211		(22	)		99,475
State and municipal		35,456		2,610		(4	)		38,062
Corporate bonds		7,259		315		(242	)		7,332
Other		572		34		—			606
Total debt securities		151,067		6,319		(268	)		157,118
Equity		1,359		356		—			1,715
Total	$	152,426	$	6,675	$	(268	)	$	158,833

Sales and calls of available for sale securities were as follows:

	Three Months Ended
	March 31
	2012		2011
	(in thousands)
Proceeds	$	21,385	$	2,894
Gross gains		2,019		83
Gross losses		—		—

The amortized cost and fair value of the debt investment securities portfolio are shown by contractual maturity. Contractual maturities may differ from actual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are detailed separately.

	March 31, 2012
	Amortized		Fair
	Cost		Value
	(in thousands)
Maturity
Available-for-sale
Within one year	$	510	$	514
One to five years		11,282		12,048
Five to ten years		28,530		29,930
Beyond ten years		9,690		9,857
Agency mortgage-backed: residential		118,049		120,711
Total	$	168,061	$	173,060

Securities pledged at March 31, 2012 and December 31, 2011 had carrying values of approximately $55.8 million and $57.7 million, respectively, and were pledged to secure public deposits and repurchase agreements.

The Company evaluates securities for other than temporary impairment (OTTI) 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, underlying credit quality 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, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity.

At March 31, 2012, the Company held 40 equity securities. Of these securities, 1 had an unrealized loss less than $1,000 and had been in an unrealized loss position for less than twelve months. All other equity securities were in an unrealized gain position at March 31, 2012. Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. As of March 31, 2012, management does not believe any securities in our portfolio with unrealized losses should be classified as other than temporarily impaired. Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity.

Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months					12 Months or More				Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(in thousands)
March 31, 2012
State and municipal	$	11,181	$	(97	)	$	—	$	—	$	11,181	$	(97	)
Agency mortgage-backed: residential		7,063		(50	)		—		—		7,063		(50	)
Corporate bonds		975		(49	)		—		—		975		(49	)
Equity		2		—			—		—		2		—

Total temporarily impaired	$	19,221	$	(196	)	$	—	$	—	$	19,221	$	(196	)


December 31, 2011
State and municipal	$	508	$	(4	)	$	—	$	—	$	508	$	(4	)
Agency mortgage-backed: residential		2,159		(22	)		—		—		2,159		(22	)
Corporate bonds		2,805		(242	)		—		—		2,805		(242	)

Total temporarily impaired	$	5,472	$	(268	)	$	—	$	—	$	5,472	$	(268	)

Note 4 – Loans

Loans were as follows:

	March 31,			December 31,
	2012			2011
	(in thousands)
Commercial	$	69,185		$	71,216
Commercial Real Estate:
Construction		91,995			101,471
Farmland		87,036			90,958
Other		412,768			423,844
Residential Real Estate:
Multi-family		60,496			60,410
1-4 Family		328,541			337,350
Consumer		23,747			26,011
Agriculture		24,208			23,770
Other		736			993
Subtotal		1,098,712			1,136,023
Less: Allowance for loan losses		(53,953	)		(52,579	)
Loans, net	$	1,044,759		$	1,083,444

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
March 31, 2012:
Beginning balance	$	4,207		$	33,024		$	14,217		$	792		$	325		$	14		$	52,579
Provision for loan losses		89			772			2,506			224			161			(2	)		3,750
Loans charged off		(256	)		(919	)		(1,029	)		(237	)		(141	)		–			(2,582	)
Recoveries		42			105			26			33			–			–			206

Ending balance	$	4,082		$	32,982		$	15,720		$	812		$	345		$	12		$	53,953


March 31, 2011:
Beginning balance	$	2,147		$	24,075		$	7,224		$	701		$	134		$	4		$	34,285
Provision for loan losses		(106	)		3,457			1,618			122			5			4			5,100
Loans charged off		(79	)		(4,141	)		(1,434	)		(213	)		–			–			(5,867	)
Recoveries		12			5			43			21			–			–			81

Ending balance	$	1,974		$	23,396		$	7,451		$	631		$	139		$	8		$	33,599

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2012:

	Commercia		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	238	$	6,364	$	1,231	$	—	$	—	$	—	$	7,833
Collectively evaluated for impairment		3,844		26,618		14,489		812		345		12		46,120

Total ending allowance balance	$	4,082	$	32,982	$	15,720	$	812	$	345	$	12	$	53,953


Loans:
Loans individually evaluated for impairment	$	7,229	$	124,762	$	58,926	$	398	$	509	$	536	$	192,360
Loans collectively evaluated for impairment		61,956		467,037		330,111		23,349		23,699		200		906,352

Total ending loans balance	$	69,185	$	591,799	$	389,037	$	23,747	$	24,208	$	736	$	1,098,712

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2011:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	237	$	5,281	$	1,055	$	—	$	—	$	—	$	6,573
Collectively evaluated for impairment		3,970		27,743		13,162		792		325		14		46,006

Total ending allowance balance	$	4,207	$	33,024	$	14,217	$	792	$	325	$	14	$	52,579


Loans:
Loans individually evaluated for impairment	$	5,032	$	116,676	$	27,848	$	—	$	631	$	540	$	150,727
Loans collectively evaluated for impairment		66,184		499,598		369,911		26,011		23,139		453		985,296

Total ending loans balance	$	71,216	$	616,274	$	397,759	$	26,011	$	23,770	$	993	$	1,136,023

Impaired Loans

Impaired loans include restructured loans and commercial, commercial real estate, construction, residential real estate, and agriculture loans on non-accrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss had been provided.

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2012:

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
With No Related Allowance Recorded:
Commercial	$	4,367	$	4,169	$	—	$	4,061	$	25	$	1
Commercial real estate:
Construction		8,943		8,686		—		9,208		63		2
Farmland		5,686		5,602		—		4,874		14		2
Other		26,743		26,139		—		25,382		246		1
Residential real estate:
Multi-family		12,763		12,762		—		7,833		86		—
1-4 Family		32,017		31,562		—		21,173		173		22
Consumer		424		398		—		197		1		1
Agriculture		609		509		—		570		—		—
Other		536		536		—		538		4		—
With An Allowance Recorded:
Commercial		3,060		3,060		238		2,069		10		5
Commercial real estate:
Construction		18,042		14,981		2,245		14,030		47		3
Farmland		4,385		4,184		1,101		5,059		—		—
Other		69,993		65,171		3,018		62,166		396		33
Residential real estate:
Multi-family		1,891		1,412		670		1,413		—		—
1-4 Family		16,190		13,189		561		12,968		25		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—

Total	$	205,649	$	192,360	$	7,833	$	171,541	$	1,090	$	70

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	3,997	$	3,954	$	—	$	3,489	$	146	$	48
Commercial real estate:
Construction		8,381		8,288		—		9,635		57		4
Farmland		4,230		4,146		—		2,403		36		36
Other		26,590		26,068		—		19,606		459		99
Residential real estate:
Multi-family		2,904		2,904		—		1,029		35		—
1-4 Family		10,883		10,784		—		6,805		296		3
Consumer		—		—		—		—		—		—
Agriculture		637		631		—		253		5		5
Other		540		540		—		108		—		—
With An Allowance Recorded:
Commercial		1,078		1,078		237		1,125		69		69
Commercial real estate:
Construction		15,915		13,079		1,941		4,039		93		—
Farmland		6,375		5,934		532		6,302		322		—
Other		64,984		59,431		2,808		29,091		609		148
Residential real estate:
Multi-family		1,891		1,412		487		1,795		115		—
1-4 Family		15,342		12,478		568		9,651		352		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—

Total	$	163,747	$	150,727	$	6,573	$	95,331	$	2,594	$	412

Troubled Debt Restructuring

A troubled debt restructuring (TDR) is where the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Company’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Company has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the customer.

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2012 and December 31, 2011:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2012
Commercial
Rate reduction	$	1,225	$	—	$	1,225
Principal deferral		894		—		894
Interest only payments		—		1,035		1,035
Commercial Real Estate:
Construction
Rate reduction		10,813		3,777		14,590
Farmland
Rate reduction		182		—		182
Principal deferral		744		3,884		4,628
Other
Rate reduction		39,397		26,840		66,237
Interest only payments		2,409		2,200		4,609
Residential Real Estate:
Multi-family
Rate reduction		10,625		1,412		12,037
Interest only payments		657		—		657
1-4 Family
Rate reduction		17,845		6,782		24,627
Principal deferral		—		241		241
Other
Rate reduction		536		—		536

Total TDRs	$	85,327	$	46,171	$	131,498

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2011
Commercial
Rate reduction	$	1,231	$	—	$	1,231
Principal deferral		898		—		898
Commercial Real Estate:
Construction
Rate reduction		11,155		3,767		14,922
Interest only payments		—		1,404		1,404
Farmland
Rate reduction		182		—		182
Principal deferral		746		5,101		5,847
Other
Rate reduction		42,946		20,446		63,392
Interest only payments		1,288		—		1,288
Residential Real Estate:
Multi-family
Rate reduction		2,247		1,413		3,660
Interest only payments		656		—		656
1-4 Family
Rate reduction		12,255		7,176		19,431
Principal deferral		—		247		247
Other
Rate reduction		540		—		540

Total TDRs	$	74,144	$	39,554	$	113,698

At March 31, 2012, and December 31, 2011, 65%, of the Company’s TDRs were performing according to their modified terms. The Company allocated $5.9 million and $5.4 million in reserves to customers whose loan terms have been modified in TDRs as of March 31, 2012, and December 31, 2011, respectively. The Company has committed to lend additional amounts totaling $192,000 and $317,000 as of March 31, 2012, and December 31, 2011, respectively, to customers with outstanding loans that are classified as TDRs.

The following table presents a summary of the types of TDR loan modifications by portfolio type that occurred during the three months ended March 31, 2012:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2012
Commercial
Interest only payments	$	—	$	1,035	$	1,035
Commercial Real Estate:
Other
Rate reduction		3,199		—		3,199
Interest only payments		2,284		2,200		4,484
Residential Real Estate:
Multi-family
Rate reduction		8,386		—		8,386
1-4 Family
Rate reduction		5,674		—		5,674

Total TDRs	$	19,543	$	3,235	$	22,778

As of March 31, 2012, 86% of the Company’s TDRs that occurred during the three months ended March 31, 2012, were performing in accordance with their modified terms. The Company has allocated $238,000 in reserves to customers whose loan terms have been modified during the three months ended March 31, 2012.

During the first three months of 2012, approximately $7.6 million TDRs defaulted on their restructured loan and the default occurred within the 12 month period following the loan modification. These defaults consisted of $6.6 million in commercial real estate loans and $1.0 million in commercial loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

Nonperforming Loans

Nonperforming loans were as follows:

	March 31,		December 31,
	2012		2011
	(in thousands)
Loans past due 90 days or more still on accrual	$	733	$	1,350
Non-accrual loans		97,230		92,020

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

The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of March 31, 2012, and December 31, 2011:

	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011
	(in thousands)

Commercial	$	3,062	$	2,903	$	—	$	109
Commercial Real Estate:
Construction		12,701		13,564		—		—
Farmland		8,860		9,152		—		26
Other		41,964		35,154		—		918
Residential Real Estate:
Multi-family		2,894		2,921		—		—
1-4 Family		26,905		27,375		714		265
Consumer		335		320		—		—
Agriculture		509		631		19		32
Other		—		—		—		—

Total	$	97,230	$	92,020	$	733	$	1,350

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Non-accrual		Total Past Due And Non-accrual
	(in thousands)
March 31, 2012
Commercial	$	1,508	$	38	$	—	$	3,062	$	4,608
Commercial Real Estate:
Construction		—		—		—		12,701		12,701
Farmland		1,041		948		—		8,860		10,849
Other		10,837		2,933		—		41,964		55,734
Residential Real Estate:
Multi-family		736		—		—		2,894		3,630
1-4 Family		6,067		911		714		26,905		34,597
Consumer		308		94		—		335		737
Agriculture		143		47		19		509		718
Other		—		—		—		—		—

Total	$	20,640	$	4,971	$	733	$	97,230	$	123,574

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Non-accrual		Total Past Due And Non-accrual
	(in thousands)
December 31, 2011
Commercial	$	2,792	$	91	$	109	$	2,903	$	5,895
Commercial Real Estate:
Construction		20		—		—		13,564		13,584
Farmland		1,353		305		26		9,152		10,836
Other		4,555		756		918		35,154		41,383
Residential Real Estate:
Multi-family		442		135		—		2,921		3,498
1-4 Family		7,568		2,511		265		27,375		37,719
Consumer		593		149		—		320		1,062
Agriculture		23		—		32		631		686
Other		—		—		—		—		—

Total	$	17,346	$	3,947	$	1,350	$	92,020	$	114,663

Credit Quality Indicators – We categorize loans into risk categories at origination based upon original underwriting. Subsequent to origination, we categorized loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. We do not have any non-rated loans. The following definitions are used for risk ratings:

Watch – Loans classified as watch are those loans which have experienced a potentially adverse development which necessitates increased monitoring.

Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.

Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of March 31, 2012, and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Watch		Special Mention		Substandard		Doubtful		Total

	(in thousands)
March 31, 2012
Commercial	$	48,608	$	10,655	$	3,590	$	6,231	$	101	$	69,185
Commercial Real Estate:
Construction		41,323		8,670		12,597		29,405		—		91,995
Farmland		63,466		6,937		2,139		14,295		199		87,036
Other		186,732		76,235		45,201		104,600		—		412,768
Residential Real Estate:
Multi-family		32,571		7,302		276		20,347		—		60,496
1-4 Family		224,060		37,805		3,037		63,613		26		328,541
Consumer		21,020		1,656		66		941		64		23,747
Agriculture		23,093		591		13		511		—		24,208
Other		200		536		—		—		—		736

Total	$	641,073	$	150,387	$	66,919	$	239,943	$	390	$	1,098,712

	Pass		Watch		Special Mention		Substandard		Doubtful		Total

	(in thousands)
December 31, 2011
Commercial	$	53,223	$	9,357	$	3,237	$	5,300	$	99	$	71,216
Commercial Real Estate:
Construction		45,407		13,132		7,777		35,155		—		101,471
Farmland		69,881		4,955		2,688		13,236		199		90,959
Other		213,406		80,149		30,787		99,502		—		423,844
Residential Real Estate:
Multi-family		37,807		4,619		2,100		15,884		—		60,410
1-4 Family		247,422		28,734		2,276		58,891		26		337,349
Consumer		23,721		1,418		43		762		67		26,011
Agriculture		22,502		343		14		911		—		23,770
Other		453		540		—		—		—		993

Total	$	713,822	$	143,247	$	48,922	$	229,641	$	391	$	1,136,023

Note 5 – Other Real Estate Owned

Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are taken.

For larger dollar residential and commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate owned. We obtain updated appraisals each year on the anniversary date of ownership unless a sale is imminent. We continue to explore opportunities to bulk sell a package of OREO. While the ultimate outcome of a transaction is uncertain, we determined in 2011 that we would be willing to sell certain OREO properties at an amount below their individual appraised values. Accordingly, we adjusted our valuations for these properties downward through additional provision of a valuation allowance to reflect a more aggressive disposition strategy. These properties are primarily single and multi-family residential land development properties. The following table presents the major categories of OREO at the period-ends indicated:

	March 31, 2012			December 31, 2011
	(in thousands)
Commercial Real Estate:
Construction	$	26,556		$	32,538
Farmland		285			744
Other		6,411			6,620
Residential Real Estate:
1-4 Family		4,004			3,214

		37,256			43,116
Valuation allowance		(1,682	)		(1,667	)

	$	35,574		$	41,449

	For the Three
	Months Ended
	March 31,
	2012			2011
	(in thousands)
OREO Valuation Allowance Activity:
Beginning balance	$	1,667		$	700
Provision to allowance		480			486
Write-downs		(465	)		(486	)
Ending balance	$	1,682		$	700

Net activity relating to other real estate owned during the three months ended March 31, 2012 and 2011 is as follows:

	2012			2011
	(in thousands)
OREO Activity
OREO as of January 1	$	41,449		$	67,635
Real estate acquired		4,216			8,812
Valuation adjustments		(480	)		(486	)
Improvements		1			1,037
Loss on sale		(402	)		(391	)
Proceeds from sale of properties		(9,210	)		(2,665	)

OREO as of March 31	$	35,574		$	73,942

Expenses related to other real estate owned include:

	Three Months Ended
	March 31, 2012		March 31, 2011
	(in thousands)
Net loss on sales	$	402	$	391
Provision to allowance		480		486
Operating expense		375		490

Total	$	1,257	$	1,367

Note 6 – Advance from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	March 31,		December 31,
	2012		2011
	(in thousands)

Monthly amortizing advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2011 through 2033, averaging 3.30% for 2012	$	6,789	$	7,116

Each advance is payable per terms on agreement, with a prepayment penalty. The advances were collateralized by first mortgage loans under a detailed loan listing requirement. The loan listing requirement is based on the market value of the underlying pledged loans. At March 31, 2012, our additional borrowing capacity with the FHLB under the detailed loan listing requirement was $25.1 million. Subsequent to March 31, 2012, our unused borrowing capacity with the FHLB under the listing requirement increased to $56.7 million.

Note 7 – Fair Values Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use various valuation techniques to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, we classify the fair value hierarchy on the lowest level of input that is significant to the fair value measurement. We used the following methods and significant assumptions to estimate fair value.

Securities: The fair values of securities are determined by market quoted prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans: An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

Impaired loans are evaluated quarterly for additional impairment. We obtain updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and our assessment of deterioration of real estate values in the market in which the property is located. The first stage of our assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market makers to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal market evaluation less cost to sell. Our quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. Based on these consultations, we determine asking prices for OREO properties we are marketing for sale. If the internally evaluated fair value is below our recorded investment in the property, appropriate write-downs are taken.

For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate owned. In some of these circumstances, an appraisal is in process at quarter end, and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We obtain updated appraisals on the anniversary date of ownership unless a sale is imminent.

We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our OREO. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

In 2011, management, with concurrence of the Board of Directors, determined that certain properties held in other real estate were not likely to be successfully disposed of in an acceptable time-frame using routine marketing efforts. It became apparent that certain properties were going to require extended holding periods to sell the properties at recent appraised values. These properties are primarily single and multi-family residential loan development properties. Given our change in strategy to reduce non-performing assets in an accelerated manner, management adjusted downward the valuations for these properties in our OREO portfolio to amounts below their individual appraised values.

Financial assets measured at fair value on a recurring basis at March 31, 2012 are summarized below:

			Fair Value Measurements at March 31, 2012 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities
U.S. Government and
federal agency	$	6,191	$	—	$	6,191	$	—
Agency mortgage-backed:
residential		120,711		—		120,711		—
State and municipal		37,750		—		36,997		753
Corporate bonds		7,813		—		7,813		—
Other debt securities		595		—		—		595
Equity securities		1,858		1,858		—		—
Total	$	174,918	$	1,858	$	171,712	$	1,348

There were no transfers between Level 1 and Level 2 during 2012 or 2011.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended March 31, 2012 and 2011:

	State and Municipal Securities					Other Debt Securities
	2012			2011		2012			2011
	(in thousands)
Balances of recurring Level 3 assets at January 1	$	1,173		$	—	$	606		$	572
Total gains for the period:
Included in other comprehensive income		(9	)		—		(11	)		—
Sales		(411	)		—		—			—

Balance of recurring Level 3 assets at March 31, 2012	$	753			—		595			572

Our Level 3 state and municipal securities valuations are supported by analysis prepared by an independent third party. Their approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities. As these securities are not rated by the rating agencies and trading volumes are thin, it was determined that these were valued using Level 3 inputs.

Our other debt security valuation is determined internally by calculating discounted cash flows using the security’s coupon rate of 6.5% and an estimated current market rate of 11% based upon the current yield curve plus spreads that adjust for volatility, credit risk, and optionality. We also consider the issuer(s) publicly filed financial information as well as assumptions regarding the likelihood of deferrals and defaults.

Financial assets measured at fair value on a non-recurring basis March 31, 2012 are summarized below:

			Fair Value Measurements at March 31, 2012 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)

Impaired loans:
Commercial	$	2,822	$	—	$	—	$	2,822
Commercial real estate:
Construction		12,736		—		—		12,736
Farmland		3,083		—		—		3,083
Other		62,153		—		—		62,153
Residential Real Estate
Multi-family		742		—		—		742
1-4 Family		12,628		—		—		12,628
Other real estate owned, net:
Commercial real estate:
Construction		25,357		—		—		25,357
Farmland		272		—		—		272
Other		6,122		—		—		6,122
Residential real estate:
1-4 Family		3,823		—		—		3,823

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $94.2 million, with a valuation allowance of $7.8 million, at March 31, 2012, resulting in an additional provision for loan losses of $1.3 million for the three months ended March 31, 2012.

Other real estate owned, which is measured at the lower of carrying or fair value less estimated costs to sell, had a net carrying amount of $35.6 million as of March 31, 2012, compared with $73.9 million at March 31, 2011. Write-downs of $480,000 and $486,000 were recorded on other real estate owned for the first three months of 2012 and 2011, respectively.

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2012:

	Fair Value	Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)

Impaired loans – Commercial	$ 2,822	Income approach	Capitalization rate	14% - 37% (26%)
Impaired loans – Commercial real estate	$ 77,972	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 62% (19%)
Impaired loans – Residential real estate	$ 13,370	Sales comparison approach	Adjustment for differences between the comparable sales	3% - 34% (14%)
Other real estate owned – Commercial real estate	$ 31,751	Sales comparison approach Income approach	Adjustment for differences between the comparable sales Capitalization rate Accelerated sales strategy	3% - 38% (18%) 16% - 18% (17%) 33% - 50% (45%)
Other real estate owned – Residential real estate	$ 3,823	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 32% (17%)

Financial assets measured at fair value on a recurring basis at December 31, 2011 are summarized below:

			Fair Value Measurements at December 31, 2011 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)

Available-for-sale securities
U.S. Government and
federal agency	$	11,643	$	—	$	11,643	$	—
Agency mortgage-backed		99,475		—		99,475		—
State and municipal		38,062		—		36,889		1,173
Corporate bonds		7,332		—		7,332		—
Other debt securities		606		—		—		606
Equity securities		1,715		1,715		—		—
Total	$	158,833	$	1,715	$	155,339	$	1,779

Financial assets measured at fair value on a non-recurring basis at December 31, 2011 are summarized below:

			Fair Value Measurements at December 31, 2011 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial	$	841	$	—	$	—	$	841
Commercial real estate:
Construction		11,138		—		—		11,138
Farmland		5,402		—		—		5,402
Other		56,623		—		—		56,623
Residential real estate:
Multi-family		925		—		—		925
1-4 Family		11,910		—		—		11,190
Other real estate owned, net:
Commercial real estate:
Construction		31,280		—		—		31,280
Farmland		715		—		—		715
Other		6,364		—		—		6,364
Residential real estate:
1-4 Family		3,090		—		—		3,090

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $73.9 million with a valuation allowance of $5.6 million.

Other real estate owned, which is measured at the lower of carrying or fair value less estimated costs to sell, had a net carrying amount of $41.4 million as of December 31, 2011.

Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:

			Fair Value Measurements at March 31, 2012 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	72,607	$	10,047	$	62,560	$	—	$	72,607
Securities available for sale		174,918		1,858		171,712		1,348		174,918
Federal Home Loan Bank stock		10,072		N/A		N/A		N/A		N/A
Mortgage loans held for sale		250		—		250		—		250
Loans, net		1,044,759		—		—		1,058,227		1,058,227
Accrued interest receivable		6,002		—		994		5,008		6,002
Financial liabilities
Deposits	$	1,253,747	$	114,304	$	1,146,963	$	—	$	1,261,267
Securities sold under agreements to repurchase		1,926		—		1,926		—		1,926
Federal Home Loan Bank advances		6,789		—		6,794		—		6,794
Subordinated capital notes		7,425		—		—		6,912		6,912
Junior subordinated debentures		25,000		—		—		19,655		19,655
Accrued interest payable		1,740		—		1,358		382		1,740

	Fair Value Measurements at December 31, 2011
	Carrying Amount		Fair Value

Financial assets
Cash and cash equivalents	$	105,962	$	105,962
Securities available for sale		158,833		158,833
Federal Home Loan Bank stock		10,072		N/A
Mortgage loans held for sale		694		694
Loans, net		1,083,444		1,093,456
Accrued interest receivable		6,682		6,682
Financial liabilities
Deposits	$	1,323,763	$	1,332,133
Securities sold under agreements to repurchase		1,738		1,738
Federal Home Loan Bank advances		7,116		7,015
Subordinated capital notes		7,650		7,110
Junior subordinated debentures		25,000		19,765
Accrued interest payable		1,732		1,732

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Noninterest bearing deposits are Level1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) mortgage loans held for sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(e) Deposits

The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in either a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in either a Level 1 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Securities Sold Under Agreements to Repurchase

The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.

(g) Other Borrowings

The fair values of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.

The fair values of the Company’s subordinated capital notes and junior subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(h) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

Note 8 – Income Taxes

Deferred tax assets and liabilities were due to the following as of:

	March 31,			December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	18,884		$	18,403
Other real estate owned write-down		9,363			12,905
Net operating loss carry-forward		5,146			2,470
New market tax credit carry-forward		226			208
Alternative minimum tax credit carry-forward		692			685
Net assets from acquisitions		556			543
Other than temporary impairment on securities		374			374
Amortization of non-compete agreements		25			27
Other		644			827

		35,910			36,442

Deferred tax liabilities:
Fixed assets		409			445
Net unrealized gain on securities available for sale		1,925			2,242
FHLB stock dividends		1,276			1,276
Originated mortgage servicing rights		96			103
Other		638			659

		4,344			4,725

Net deferred tax assets before valuation allowance		31,566			31,717

Valuation allowance		(31,566	)		(31,717	)

Net deferred tax asset	$	—		$	—

Our estimate of the realizability of the deferred tax asset is dependent on our estimate of projected future levels of taxable income as all carryback ability was fully absorbed by our estimated tax loss of approximately $40 million for 2011. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets as of December 31, 2011. Our deferred tax assets and the related valuation allowance are analyzed and adjusted on a quarterly basis.

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the year ended December 31, 2011 related to unrecognized tax benefits.

The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the state of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2009.

Note 9 – Stock Plans and Stock Based Compensation

The Company has a stock option plan and a stock incentive plan. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan. 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 March 31, 2012, the Company had granted outstanding options to purchase 4,058 shares. The Company also had granted 72,044 unvested shares net of forfeitures and vesting. The Company has 224,980 shares remaining available for issue under the 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. On May 22, 2008, shareholders voted to amend the plan to change the form of incentive award from stock options to unvested shares. Under the terms of the plan, 100,000 shares are reserved for issuance to non-employee directors upon the exercise of stock options or upon the grant of unvested stock awards granted under the plan. Prior to the amendment, options were granted automatically under the plan at fair market value on the date of grant. The options vest over a three-year period and have a five year term. Unvested shares are granted automatically under the plan at fair market value on the date of grant and vest semi-annually on the anniversary date of the grant over three years. To date, the Company has granted options to purchase 25,472 shares and issued 3,943 unvested shares to non-employee directors. At March 31, 2012, 64,183 shares remain available for issue under this plan.

All stock options have an exercise price that is equal to or greater than 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 three years of continued employment. Options have a life of five years.

The following table summarizes stock option activity:

	Three Months Ended				Twelve Months Ended
	March 31, 2012				December 31, 2011
			Weighted					Weighted
			Average					Average
			Exercise					Exercise
	Options		Price		Options			Price
Outstanding, beginning		29,530	$	19.88		86,469		$	20.72
Forfeited		—		—		(9,557	)		19.49
Expired		—		—		(47,382	)		21.49
Outstanding, ending		29,530	$	19.88		29,530		$	19.88

The following table details stock options outstanding:

	March 31, 2012
Stock options vested and currently exercisable:		29,530
Weighted average exercise price	$	19.88
Aggregate intrinsic value	$	—
Weighted average remaining life (in years)		0.2
Total Options Outstanding:		29,530
Aggregate intrinsic value	$	—
Weighted average remaining life (in years)		0.2

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. The intrinsic value of the vested and expected to vest stock options is $0 at March 31, 2012. There were no options exercised during the first three months of 2012. The Company recorded no stock option compensation expense during the three months ended March 31, 2012. No options were modified during the period. As of March 31, 2012, 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. No options were granted in the first three months of 2012 or in 2011.

From time-to-time the Company issues unvested shares to employees and non-employee directors. The shares vest either semi-annually or annually over three to ten years on the anniversary date of the issuance date provided the employee or director continues in such capacity at the vesting date. No shares were issued during the first three months of 2012. The Company recorded $105,000 and $118,000 of stock-based compensation during the first three months of 2012 and 2011, respectively, to salaries and employee benefits. There was no significant impact on compensation expense resulting from forfeited or expiring shares. We expect substantially all of the unvested shares outstanding at the end of the period will vest according to the vesting schedule. A deferred tax benefit of $0 and $41,000, respectively, was recognized related to this expense.

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

	Three Months Ended					Twelve Months Ended
	March 31, 2012					December 31, 2011
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Shares			Price		Shares			Price
Outstanding, beginning		100,226		$	13.21		157,697		$	13.43
Granted		—			—		2,800			5.36
Vested		(21,869	)		12.25		(35,836	)		13.00
Forfeited		(2,370	)		18.00		(24,435	)		14.04
Outstanding, ending		75,987		$	13.33		100,226		$	13.21

Unrecognized stock based compensation expense related to stock options and unvested shares for the remainder of 2012 and beyond are estimated as follows (in thousands):

April 2012 – December 2012	$	316
2013		339
2014		235
2015		113
2016 & thereafter		31

Note 10 – Earnings per Share

The factors used in the basic and diluted earnings per share computations follow:

	Three Months Ended
	March 31,
	2012			2011
	(in thousands, except share and per share data)

Net income	$	1,502		$	799
Less:
Preferred stock dividends		(437	)		(438	)
Accretion of Series A preferred stock discount		(45	)		(44	)
Earnings allocated to unvested shares		(7	)		(4	)
Earnings allocated to Series C preferred		(28	)		(8	)
Net income (loss) allocated to common shareholders, basic and diluted	$	985		$	305

Basic
Weighted average common shares including
unvested common shares outstanding		12,156,452			12,178,845
Less: Weighted average unvested common shares		(88,107	)		(141,300	)
Less: Weighted average Series C preferred		(332,894	)		(332,894	)
Weighted average common shares outstanding		11,735,451			11,704,651
Basic earnings per common share	$	0.08		$	0.03

Diluted
Add: Dilutive effects of assumed exercises of common
and Preferred Series C stock warrants		—			—
Weighted average common shares and potential common shares		11,735,452			11,704,651
Diluted earnings per common share	$	0.08		$	0.03

Stock options for 29,530 shares of common stock for 2012 and 58,479 shares of common stock for 2011 were not considered in computing diluted earnings per common share because they were anti-dilutive. Additionally, a warrant for the purchase of 330,561 shares of the Company’s common stock at an exercise price of $15.88 was outstanding at March 31, 2012 and 2011 but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. Finally, warrants for the purchase of 1,380,437 shares of non-voting common stock at an exercise price of $11.50 per share were outstanding at March 31, 2012 and 2011, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive.

Note 11 – Capital Requirements and Restrictions on Retained Earnings

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

On June 24, 2011, PBI Bank entered into a Consent Order with the FDIC and the Kentucky Department of Financial Institutions. The consent order required the Bank to complete a management study, to maintain Tier 1 capital as a percentage of total assets of at least 9% and a total risk based capital ratio of at least 12%, to develop a plan to reduce our risk position in each substandard asset in excess of $1 million, to complete board review of the adequacy of the allowance for loan losses prior to quarterly Call Report submissions, to adopt procedures which strengthen the loan review function and ensure timely and accurate grading of credit relationships, to charge-off all assets classified as loss, to develop a plan to reduce concentrations of construction and development loans to not more than 75% of total risk based capital and non-owner occupied commercial real estate loans to not more than 250% of total risk based capital, to limit asset growth to no more than 5% in any quarter or 10% annually, to not extend additional credit to any borrower classified substandard unless the board of directors adopts prior to the extension a detailed statement giving reasons why the extension is in the best interest of the bank, and to not declare or pay any dividend without the prior consent of our regulators. We are also restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators.

On September 21, 2011, we entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, we made formal commitments to use our financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient capital

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:

										March 31, 2012						December 31, 2011
	Regulatory Minimums			Well- Capitalized Minimums			Minimum Capital Ratios Under Consent Order			Porter Bancorp			PBI Bank			Porter Bancorp			PBI Bank

Tier 1 Capital		4.0	%		6.0	%		N/A			9.68	%		9.38	%		9.23	%		8.86	%
Total risk-based capital		8.0			10.0			12.0	%		11.68			11.38			11.22			10.86
Tier 1 leverage ratio		4.0			5.0			9.0			7.30			7.07			6.53			6.23

At March 31, 2012, PBI Bank’s Tier 1 leverage ratio was 7.07% which is below the 9% minimum capital ratio required by the Consent Order and its total risk-based capital ratio was 11.38% which is below the 12% minimum capital ratio required by the Consent Order. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a materially adverse effect on our financial condition.

Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. PBI Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends. As a practical matter, PBI Bank cannot pay dividends for the foreseeable future.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a materially adverse effect on our financial condition.

Note 12 – Contingencies

In 2010, the Company sold common shares, convertible preferred shares and warrants to purchase common shares to accredited investors for $32 million in a private placement. In the placement, an affiliate of Clinton Group, Inc. (“CGI”) purchased 456,524 common shares and warrants to purchase 228,262 common shares for $10.93 per share for $5,000,016. The numbers of shares and the warrant exercise price have been adjusted to reflect the Company’s 5% stock dividend in November 2010.

On July 11, 2011, CGI sent a letter to the Company, which was also attached as an exhibit to a Schedule 13D CGI filed with the Securities and Exchange Commission on the same date. In its letter CGI set forth concerns about the Company’s executive leadership team and its ability to properly manage the Bank's operations, compliance with GAAP, financial disclosures and relationships with regulators, referencing the consent order PBI Bank entered into with the Federal Deposit Insurance Corporation and the Commonwealth of Kentucky Department of Financial Institutions on June 24, 2011. CGI listed a number of steps it believed the Company must take to maximize shareholder value and comply with the consent order. In addition, CGI stated its belief “that it is likely that a number of representations and warranties made when the CGI affiliate entered into an agreement to purchase shares were false,” and demanded that the Company take immediate steps to “redress such breaches and make CGI and the other purchasers whole.”

On July 20, 2011, the Company’s board of directors established a new Risk Policy and Oversight Committee comprised of independent directors, to lead the Board’s oversight of the assessment and management of the risks of Porter Bancorp and PBI Bank. During the third quarter, the Oversight Committee undertook an investigation of the allegations raised in the CGI 13D to evaluate their merit and to ascertain the reasonableness of the Bank’s allowance for loan losses and OREO valuations at the time of Clinton’s investment.

The Oversight Committee reported its conclusions to the Company’s board of directors in October 2011. While recognizing opportunities for procedural improvements existed in the Bank’s lending and non-performing asset administration, the Oversight Committee concluded that this did not rise to a level that would result in the financial statements, or representations and warranties with respect to the financial statements, being misleading to investors in the 2010 private placement offering of the Company’s stock. The Oversight Committee further concluded that investors were afforded ample opportunity and access to information for their due diligence, including documentation involving asset valuation estimates, on-site management discussions and additional inquiries during visits to the Company headquarters, and access to loan files of their choosing and the appraisals contained therein, and that the Company’s disclosures were adequate in all material respects.

In a letter dated November 28, 2011 that was filed as an exhibit to its 13D amendment, CGI was critical of the Oversight Committee’s investigation and restated its belief the Company’s balance sheet was overstated. CGI called upon the independent directors to correct the balance sheet, replace the management team and raise capital. On January 30, 2012, CGI delivered a demand to inspect the Company’s records pursuant to the Kentucky Business Corporation Act. The Company is providing records to CGI in accordance with Kentucky law.

Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations

This item analyzes our financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

Cautionary Note Regarding Forward-Looking Statements

This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to differences in our results include, but are not limited to the factors listed in Part 2, Item 1A – Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2011 Annual Report on Form 10-K.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. We caution you however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The forward-looking statements included in this report speak only as of the date of the report. We have no duty, and do not intend to, update these statements unless applicable laws require us to do so.

Overview

Porter Bancorp, Inc. (NASDAQ: PBIB) is a Louisville, Kentucky-based bank holding company which operates 18 full-service banking offices in twelve counties through its wholly-owned subsidiary, PBI Bank. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt, and extend south along the Interstate 65 corridor to Tennessee. We serve south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is both a traditional community bank with a wide range of commercial and personal banking products, including wealth management and trust services, and an online banking division which delivers competitive deposit products and services under the separate brand of Ascencia.

The Company reported net income of $1.5 million for the three months ended March 31, 2012, compared with $799,000 for the same period of 2011. After deductions for dividends on preferred stock, accretion on preferred stock, and earnings allocated to participating securities, net income to common shareholders was $985,000 and $305,000 for the three months ended March 31, 2012 and 2011, respectively. Basic and diluted income per common share were $0.08 and $0.03 for the three months ended March 31, 2012 and 2011, respectively.

Significant developments during the quarter ended March 31, 2012 consist of the following:

●

Net income increased to $1.5 million for the three months ended March 31, 2012, compared with $799,000 for the first quarter of 2011. Earnings per diluted common share were $0.08 compared with $0.03 in the first quarter of 2011.

●

Net interest margin decreased 9 basis points to 3.45% in the first quarter of 2012 compared with 3.54% in the first quarter of 2011. The decrease in margin since last year was primarily due to elevated non-accrual loan levels and lower interest earning assets coupled with lower rates on those assets.

●

We continue to execute on our strategy to reduce our commercial real estate and construction and development loans. Average loans decreased 13.3% to $1.1 billion in the first quarter of 2012 compared with $1.3 billion in the first quarter of 2011. Net loans decreased 16.0% to $1.05 billion in the first quarter of 2012, compared with $1.24 billion at March 31, 2011. Construction and development loans totaled $92.0 million, or 77% of total risk-based capital, at March 31, 2012 compared to $101.5 million, or 85% of total risk-based capital, at December 31, 2011. Non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group totaled $398.6 million, or 331% of total risk-based capital, at March 31, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.

●

Loan proceeds received from the reduction of our commercial real estate and construction and development loans were used primarily to redeem maturing certificates of deposit during the quarter. Deposits decreased 15.4% to $1.25 billion compared with $1.48 billion at March 31, 2011. Certificates of deposit balances declined $72.8 million during the first quarter of 2012 to $951.5 million at March 31, 2012, from $1.02 billion at December 31, 2011. Demand deposits increased 2.9% during the first quarter of 2012 compared with the fourth quarter of 2011, and increased 7.1% compared with the first quarter of 2011.

●

Total assets decreased $65.8 million to $1.39 billion compared with $1.46 billion at December 31, 2011, and $1.74 billion at March 31, 2011.

●

Non-performing loans increased $4.6 million during the first quarter to $98.0 million at March 31, 2012, compared with $93.4 million at December 31, 2011. The increase was primarily in the commercial and residential real estate segments of our portfolio.

●

Non-performing assets decreased $1.3 million during the first quarter to $133.5 million at March 31, 2012. The decrease was primarily due to sales of other real estate owned, offset by a higher level of non-performing loans described above.

●

These items are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Section. For a discussion of our accounting policies, please see “Application of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the calendar year ended December 31, 2011.

Recent Developments and Future Plans

During the first quarter of 2012, we reported net income available to common shareholders of $985,000. This was an improvement from our 2011 results. During the year eneded December 31, 2011, we recorded a net loss to common shareholders of $105.2 million. This loss was primarily attributable to a $23.8 million goodwill impairment charge, the establishment of a $31.7 million valuation allowance on our deferred tax assets, OREO expense of $47.5 million related to valuation adjustments for our change in strategy related to certain properties, fair value write-downs related to new appraisals received for properties in the portfolio during 2001, net loss on the sale of OREO properties, and increase in carrying costs associated with carrying these higher levels of assets, as well as provision for loan losses expense of $62.6 million due to the continued decline in credit trends within our portfolio.

In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies including the following:

●

Addressing construction and development lending.

We recorded net construction and development loan charge-offs totaling $522,000 during the first quarter of 2012. This represented approximately 22% of our total net loan charge-offs for the first quarter of 2012. We recorded net construction and development loan charge-offs totaling $11.0 million and $11.4 million for the year eneded December 31, 2011 and 2010, respectively. This represented approximately 27% and 51% of our total net loan charge-offs in 2011 and 2010, respectively.

In summary, for the year eneded December 31, 2011 and 2010 respectively, we recorded net construction and development OREO fair value adjustments and loss on sale of OREO totaling $38.7 million and $10.4 million. This represents approximately 89% and 71% of our total OREO fair value adjustments and loss on sale in 2011 and 2010, respectively.

●

We are committed to reducing loan concentrations and balance sheet risk.

●

Raising capital by selling common stock through a public offering or private placement to existing and new investors.

●

Evaluating other strategic alternatives, such as the sale of assets or branches.

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 March 31, 2012, compared with the same period of 2011:

	For the Three Months				Change from
	Ended March 31,				Prior Period
	2012		2011		Amount			Percent
	(dollars in thousands)

Gross interest income	$	15,755	$	19,616	$	(3,861	)		(19.7	)%
Gross interest expense		4,301		5,848		(1,547	)		(26.5	)
Net interest income		11,454		13,768		(2,314	)		(16.8	)
Provision for loan losses		3,750		5,100		(1,350	)		(26.5	)
Non-interest income		3,445		1,787		1,658			92.8
Non-interest expense		9,647		9,395		252			2.7
Net income before taxes		1,502		1,060		442			41.7
Income tax expense		—		261		(261	)		(100.0	)
Net income		1,502		799		703			88.0

Net income for the first quarter of 2012 increased $703,000 to $1.5 million compared with $799,000 for the first quarter of 2011. The increase was primarily attributable to gains on sales of investment securities in the first quarter of 2012 totaling $2.1 million compared with $83,000 in the first quarter of 2011, and a decrease in our provision for loan losses in the first quarter of 2012 totaling $3.75 million compared with $5.85 million in the first quarter of 2011. We also did not record income tax expense for the first quarter of 2012 compared with income tax expense of $261,000 in the first quarter of 2011. The income tax effect on pre-tax income for the first quarter of 2012 decreased our deferred tax assets and related valuation allowance by $419,000.

Those improvements were partially offset by lower net interest income in the first quarter of 2012 compared with the first quarter of 2011.

Net Interest Income – Our net interest income was $11.5 million for the three months ended March 31, 2012, a decrease of $2.3 million, or 16.8%, compared with $13.8 million for the same period in 2011. Net interest spread and margin were 3.30% and 3.45%, respectively, for the first quarter of 2012, compared with 3.38% and 3.54%, respectively, for the first quarter of 2011. Average non-accrual loans were $92.0 million and $61.8 million in the first quarter of 2012 and 2011, respectively.

Average loans receivable declined approximately $171.7 million for the quarter ended March 31, 2012 compared with the first quarter of 2011. This resulted in a decline in interest revenue of approximately $2.3 million for the quarter ended March 31, 2012 compared with the prior year period. This decline in loan volume is attributable to soft loan demand in our markets as well as our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio.

Net interest margin decreased 9 basis points from our margin of 3.54% in the prior year first quarter due primarily to lower average earning assets relative to average interest bearing liabilities and an 8 basis point decline in net interest spread. The yield on earning assets declined 30 basis points from the first quarter of 2011, compared with a 22 basis point decline in rates paid on interest-bearing liabilities.

Net interest margin for the three months ended March 31 2012, increased 25 basis points from our margin of 3.20% in the fourth quarter of 2011 due primarily to lower yielding fed funds and deposits with financial institutions being used to fund maturing time deposits. In addition, our average rate on interest-bearing liabilities declined 7 basis points to 1.43% for the first quarter of 2012, from 1.50% for the fourth quarter of 2011. Interest-earning fed funds and deposits with financial institutions, with an average yield of 0.23%, declined from an average balance of $114.5 million in the fourth quarter of 2011 to an average balance of $67.8 million in the first quarter of 2012. These funds were used to redeem maturing certificates of deposit with an average cost of 1.55%. This was partially offset by an increase in interest foregone on non-accrual loans. Interest foregone on non-accrual loans totaled $790,000 in the first quarter of 2012, compared with $640,000 in the fourth quarter of 2011.

Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended March 31, 2012 and 2011, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Three Months Ended March 31,
	2012								2011
	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)	$	1,119,181		$	14,512		5.22	%	$	1,290,851		$	18,110		5.69	%
Securities
Taxable		125,502			826		2.65			111,893			1,029		3.73
Tax-exempt (3)		27,103			250		5.71			27,020			260		6.00
FHLB stock		10,072			114		4.55			10,072			114		4.59
Other equity securities		1,359			15		4.44			1,400			13		3.77
Federal funds sold and other		67,661			38		0.23			150,325			90		0.24

Total interest-earning assets		1,350,878			15,755		4.73	%		1,591,561			19,616		5.03	%

Less: Allowance for loan losses		(52,894	)							(34,233	)
Non-interest earning assets		114,622								180,925

Total assets	$	1,412,606							$	1,738,253

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	976,448		$	3,772		1.55	%	$	1,166,832		$	4,875		1.69	%
NOW and money market deposits		153,098			186		0.49			172,077			424		1.00
Savings accounts		37,085			42		0.46			36,188			61		0.68
Repurchase agreements		1,673			2		0.48			11,346			118		4.22
FHLB advances		6,906			57		3.32			14,725			142		3.91
Junior subordinated debentures		32,645			242		2.98			33,550			228		2.76

Total interest-bearing liabilities		1,207,855			4,301		1.43	%		1,434,718			5,848		1.65	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		112,656								106,095
Other liabilities		7,436								6,855

Total liabilities		1,327,947								1,547,668
Stockholders’ equity		84,659								190,585

Total liabilities and stockholders’ equity	$	1,412,606							$	1,738,253

Net interest income				$	11,454							$	13,768

Net interest spread							3.30	%							3.38	%

Net interest margin							3.45	%							3.54	%

(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.

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 March 31, 2012 vs. 2011
	Increase (decrease) due to change in						Net Change
	Rate			Volume			Net Change

Interest-earning assets:
Loan receivables	$	(1,306	)	$	(2,292	)	$	(3,598	)
Securities		(331	)		118			(213	)
Other equity securities		2			—			2
Federal funds sold and other		(6	)		(46	)		(52	)

Total decrease in interest income		(1,641	)		(2,220	)		(3,861	)

Interest-bearing liabilities:
Certificates of deposit and other time deposits		(349	)		(754	)		(1,103	)
NOW and money market accounts		(195	)		(43	)		(238	)
Savings accounts		(21	)		2			(19	)
Repurchased agreements		(59	)		(57	)		(116	)
FHLB advances		(18	)		(67	)		(85	)
Junior subordinated debentures		20			(6	)		14

Total decrease in interest expense		(622	)		(925	)		(1,547	)

Increase (decrease) in net interest income	$	(1,019	)	$	(1,295	)	$	(2,314	)

Non-Interest Income – The following table presents the major categories of non-interest income for the first quarter ended March 31, 2012 and 2011:

	Three Months Ended
	March 31,
	2012		2011
	(in thousands)
Service charges on deposit accounts	$	554	$	630
Income from fiduciary activities		251		255
Secondary market brokerage fees		17		76
Title insurance commissions		22		31
Gains on sales of loans originated for sale		45		221
Gains on sales of investment securities, net		2,019		83
Other		537		491
Total non-interest income	$	3,445	$	1,787

Non-interest income for the first quarter ended March 31, 2012 increased $1.7 million, or 92.8%, compared with the first quarter of 2011. This increase in non-interest income was primarily due to increased gains on sales of securities of $1.9 million, partially offset by lower service charges on deposit accounts of $76,000 due to lower transaction volume, and gains on sales of loans originated for sale of $176,000 due to fewer loans originated for sale.

Non-interest Expense – The following table presents the major categories of non-interest expense for the first quarter ended March 31, 2012 and 2011:

	Three Months Ended
	March 31,
	2012		2011
	(in thousands)
Salary and employee benefits	$	4,312	$	4,124
Occupancy and equipment		886		972
Other real estate owned expense		1,257		1,367
FDIC insurance		873		855
State franchise tax		592		582
Loan collection fees		360		262
Professional fees		356		280
Communications		180		168
Postage and delivery		122		123
Office supplies		110		111
Advertising		33		102
Other		566		449
Total non-interest expense	$	9,647	$	9,395

Non-interest expense for the first quarter ended March 31, 2012 increased $252,000, or 2.7%, compared with the first quarter of 2011. The increase in non-interest expense was primarily attributable to increased salaries and employee benefits expense due increases in staff, and increased loan collection expense. Our efficiency ratio was 74.9% for the first three months of 2012, compared with 60.7% in the first quarter of 2011. Our efficiency ratio increased primarily due to higher salary and employee benefits cost and lower net interest income.

Income Tax Expense – Income tax expense was $261,000, or 24.6% of pre-tax income, for the first quarter ended March 31, 2011. No income taxes were recorded for the first quarter of 2012. The income tax effect on net income before taxes for the first quarter of 2012 decreased our deferred tax assets and related valuation allowance by $419,000. See Footnote 8, “Income Taxes”.

Effective tax rates differ from the federal statutory rate of 35% applied to income before income taxes due to the following:

	Three Months Ended
	March 31,
	2012			2011
	(in thousands)
Federal statutory rate times financial statement income	$	526		$	371
Effect of:
Net operating loss carry-forward		(419	)		—
Tax-exempt income		(88	)		(91	)
Non-taxable life insurance income		(26	)		(24	)
Federal tax credits		—			(11	)
Other, net		7			16
Total	$	—		$	261

Analysis of Financial Condition

Total assets decreased $65.8 million, or 4.5%, to $1.39 billion at March 31, 2012, from $1.46 billion at December 31, 2011. This decrease was primarily attributable to decreases of $38.7 million and $5.9 million in net loans and other real estate owned, respectively, and $33.4 million in cash and cash equivalents. These decreases were partially offset by an increase of $16.1 million in securities available for sale. The decrease in net loans was due to loan payoffs outpacing loan funding, net loan charge-offs of $2.4 million, and efforts to move impaired loans through the collection, foreclosure, and disposition process. The decrease in other real estate owned was due primarily to sales of properties with book values of $9.6 million resulting in loss on sales of $402,000, offset by net additions of $4.2 million to the portfolio. The decrease in cash and cash equivalents was due to cash outflows related to maturing time deposits. The increase in securities available for sale was primarily related to the reinvestment of loan cash flows into securities available for sale rather than new loans.

Loans Receivable – Loans receivable decreased $37.3 million, or 3.3%, during the three months ended March 31, 2012 to $1.10 billion. Our commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $26.5 million, or 3.9%, during the three months and comprised 60.2% of the total loan portfolio at March 31, 2012. The decline was attributable to net charge-offs of $2.4 million, transfers to OREO of $4.2 million, and loan payoffs outpacing loan funding by approximately $30.7 million.

Loan Portfolio Composition – The 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. Except for commercial real estate and residential real estate, there is no concentration of loans in any industry exceeding 10% of total loans.

	As of March 31,						As of December 31,
	2012						2011
	Amount			Percent			Amount			Percent
	(dollars in thousands)
Commercial		$	69,185		6.30	%		$	71,216		6.27	%
Commercial Real Estate
Construction			91,995		8.37				101,471		8.93
Farmland			87,036		7.92				90,958		8.01
Other			412,768		37.57				423,844		37.31
Residential Real Estate
Multi-family			60,496		5.51				60,410		5.31
1-4 Family			328,541		29.90				337,350		29.70
Consumer			23,747		2.16				26,011		2.29
Agriculture			24,208		2.20				23,770		2.09
Other			736		0.07				993		0.09

Total loans		$	1,098,712		100.00	%		$	1,136,023		100.00	%

Non-Performing Assets – Non-performing assets consist of 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 March 31, 2012 and December 31, 2011.

	March 31,			December 31,
	2012			2011
	(dollars in thousands)

Loans past due 90 days or more still on accrual	$	733		$	1,350
Non-accrual loans		97,230			92,020
Total non-performing loans		97,963			93,370
Real estate acquired through foreclosure		35,574			41,449
Other repossessed assets		11			5
Total non-performing assets	$	133,548		$	134,824

Non-performing loans to total loans		8.92	%		8.22	%
Non-performing assets to total assets		9.61	%		9.26	%
Allowance for non-performing loans	$	13,469		$	11,382
Allowance for non-performing loans to non-performing loans		13.75	%		12.20	%

Nonperforming loans at March 31, 2012, were $98.0 million, or 8.92% of total loans, compared with $69.9 million, or 5.47% of total loans, at March 31, 2011, and $93.4 million, or 8.22% of total loans at December 31, 2011.

Loans past due 30-59 days increased from $17.3 million at December 31, 2011 to $20.6 million at March 31, 2012. Loans past due 60-89 days increased from $3.9 million at December 31, 2011 to $5.0 million at March 31, 2012. This represents a $4.3 million increase from December 31, 2011 to March 31, 2012, in loans past due 30-89 days. These increases were primarily in the commercial real estate segment of the portfolio. We considered this trend in delinquency levels during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.

Troubled Debt Restructuring – A troubled debt restructuring (TDR) is where the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Company’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Company has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the customer. If the loan is considered collateral dependent, it is reported, net, at the fair value of the collateral.

We do not have a formal loan modification program. Rather, we work with individual customers on a case-by-case basis to facilitate the orderly collection of our principal and interest before a loan becomes a non-performing loan. If a customer is unable to make contractual payments, we review the particular circumstances of that customer’s situation and negotiate a revised payment stream. In other words, we identify performing customers experiencing financial difficulties, and through negotiations, we lower their interest rate, most typically on a short-term basis for three to six months. Our goal when restructuring a credit is to afford the customer a reasonable period of time to remedy the issue causing cash flow constraints within their business so that they can return to performing status over time.

Our loan modifications have taken the form of reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we restructure real estate secured loans in a bifurcated fashion whereby we have a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. Our restructured loans are all collateral secured loans. If a customer fails to perform under the modified terms, we place the loan(s) on non-accrual status and begin the process of working with the customer to liquidate the underlying collateral to satisfy the debt.

At March 31, 2012, we had 132 restructured loans totaling $131.5 million with borrowers who experienced deterioration in financial condition compared with 114 loans totaling $113.7 million at December 31, 2011. In general, these loans were granted interest rate reductions to provide cash flow relief to customers experiencing cash flow difficulties. Of these loans, 4 loans totaling approximately $5.8 million were also granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or commercial real estate properties, or farmland. Restructured loans also include $3.2 million of commercial loans.

In accordance with current guidance, we continue to report restructured loans as restructured until such time as the loan is paid in full, otherwise settled, sold, or charged-off. If the customer fails to perform, we place the loan on non-accrual status and seek to liquidate the underlying collateral for these loans. Our non-accrual policy for restructured loans is identical to our non-accrual policy for all loans. Our policy calls for a loan to be reported as non-accrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest has been in default for a period of 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses.

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructure. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) reduction or deferral of principal, or (iii) reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider that to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.

See Footnote 4, “Loans”, to the financial statements for additional disclosure related to troubled debt restructuring.

Foreclosed Properties – Foreclosed properties at March 31, 2012 were $35.6 million compared with $73.9 million at March 31, 2011 and $41.4 million at December 31, 2011. See Footnote 5, “Other Real Estate Owned”, to the financial statements. During the first quarter of 2012, we acquired $4.2 million of OREO properties, and sold properties totaling approximately $9.6 million. We value foreclosed properties at fair value less estimated costs to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.

Other real estate owned (OREO) is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are recorded.

For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate owned. In some of these circumstances, an appraisal is in process at quarter end and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We obtain updated appraisals on the anniversary date of ownership unless a sale is imminent.

Net loss on sales, write-downs, and operating expenses for other real estate owned totaled $1.3 million for the three months ended March 31, 2012, compared with $1.4 million for the same period of 2011.

Allowance for Loan Losses – The allowance for loan losses is based on management’s continuing review and 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 evaluated, 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 March 31, 2012, increased to 4.91% from 2.63% at March 31, 2011, and from 4.63% at December 31, 2011. Provision for loan losses decreased $1.4 million to $3.8 million for the first quarter of 2012 compared with the first quarter of 2011, and decreased $32.1 million compared with the fourth quarter of 2011. Net loan charge-offs for the first quarter of 2012 were $2.4 million, or 0.21% of average loans, compared with $5.8 million, or 0.45%, for the first quarter of 2011, and $22.7 million, or 1.91%, for the fourth quarter of 2011. Our allowance for loan losses to nonperforming loans was 55.07% at March 31, 2012, compared with 56.31% at December 31, 2011, and 48.09% at March 31, 2011. The change in this metric between periods is attributable to the fluctuation in historical loss experience, qualitative factors, non-accrual loans, and provision expense. We have assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses.

The majority of our nonperforming loans are secured by real estate collateral and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. Our allowance for non-performing loan to non-performing loans was 13.8% at March 31, 2012 compared with 11.2% at March 31, 2011, and 12.2% at December 31, 2011.

An analysis of changes in allowance for loan losses and selected ratios for the three month periods ended March 31, 2012 and 2011, and for the year ended December 31, 2011 follows:

	Three Months Ended						Year Ended
	March 31,						December 31,
	2012			2011			2011
	(dollars in thousands)
Balance at beginning of period	$	52,579		$	34,285		$	34,285
Provision for loan losses		3,750			5,100			62,600
Recoveries		206			81			340
Charge-offs		(2,582	)		(5,867	)		(44,646	)
Balance at end of period	$	53,953		$	33,599		$	52,579

Allowance for loan losses to period-end loans		4.91	%		2.63	%		4.63	%
Net charge-offs to average loans		0.21	%		0.45	%		3.56	%
Allowance for loan losses to non-performing loans		55.07	%		48.09	%		56.31	%

Liabilities – Total liabilities at March 31, 2012 were $1.31 billion compared with $1.37 billion at December 31, 2011, a decrease of $66.1 million, or 4.8%.This decrease was primarily attributable to a decrease in deposits of $70.0 million, or 5.3%, to $1.25 billion at March 31, 2012 from $1.32 billion at December 31, 2011. Certificate of deposit balances declined $72.8 million during the first quarter of 2012 to $951.5 million at March 31, 2012 from $1.02 billion at December 31, 2011. The decrease in deposits follows management’s strategy to match liability funding levels with lower loan balances.

Federal Home Loan Bank advances decreased by $327,000, or 4.6%, to $6.8 million from $7.1 million at December 31, 2011. 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 Three Months					For the Year
	Ended March 31,					Ended December 31,
	2012					2011
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
			(dollars in thousands)
Demand	$	112,656		–		$	106,769
Interest checking		88,560		0.45	%		89,103		0.74	%
Money market		64,538		0.54			81,925		0.96
Savings		37,085		0.46			36,511		0.62
Certificates of deposit		976,448		1.55			1,120,154		1.65
Total deposits	$	1,279,287		1.26	%	$	1,434,462		1.40	%

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 Three Months					For the Year
	Ended March 31,					Ended December 31,
	2012					2011
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Less than $100,000	$	506,454		1.47	%	$	569,667		1.59	%
$100,000 or more		469,994		1.67	%		550,487		1.71	%
Total	$	976,448		1.55	%	$	1,120,154		1.65	%

The following table shows at March 31, 2012 and December 31, 2011 the amount of our time deposits of $100,000 or more by time remaining until maturity:

	As of		As of
	March 31,		December 31,
Maturity Period	2012		2011
	(in thousands)

Three months or less	$	63,690	$	77,118
Three months through six months		52,049		65,359
Six months through twelve months		162,496		167,811
Over twelve months		177,397		183,056
Total	$	455,632	$	493,344

Liquidity

Liquidity risk arises from the possibility 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 we meet the cash flow requirements of depositors and borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that we meet our cash flow needs 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. Our Asset Liability Committee continually monitors and reviews our liquidity position.

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, customer deposit inflows, brokered deposits and other wholesale funding. During 2012 and 2011, we utilized brokered and wholesale deposits to supplement our funding strategy. At March 31, 2012, and December 31, 2011, these deposits totaled $118.4 million. We are currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators. The following table shows at March 31, 2012, the amount of our brokered certificates of deposit by time remaining to maturity (in thousands):

Three months or less	$	2,083
Three months through six months		12,129
Six months through twelve months		89,167
Over twelve months		15,000

Total	$	118,379

Traditionally, we have borrowed from the FHLB to supplement our funding requirements. At March 31, 2012, we had an unused borrowing capacity with the FHLB of $25.1 million.

As a result of our 2011 financial results, the FHLB changed our collateral arrangements from a blanket pledge of residential mortgage loans to a detailed loan listing requirement. Our borrowing capacity under the detailed loan listing requirement is based on the market value of the underlying pledged loans rather than the unpaid principal balance of the pledged loans. The listing requirement also increases the level of collateral required for borrowings. Subsequent to March 31, 2012, our unused borrowing capacity with the FHLB under the listing requirement increased to $56.7 million.

We also secured federal funds borrowing lines from major correspondent banks totaling $15.0 million on an unsecured basis. Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future, however, the availability of these lines could be affected by our financial position and our lenders could exercise their right to deny a funding request at their discretion. We are also subject to FDIC interest rate restrictions for deposits. As such, we are permitted to offer up to the “national rate” plus 75 basis points as published weekly by the FDIC.

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. During 2011, Porter Bancorp contributed $13.1 million to its subsidiary, PBI Bank, which substantially decreased its liquid assets. The contribution was made to strengthen the Bank’s capital in an effort to help it comply with its capital ratio requirements under the consent order. Liquid assets decreased from $20.3 million at December 31, 2010, to $4.3 million at March 31, 2012. Since the Bank is unlikely to be in a position to pay dividends to the parent company for the foreseeable future, cash inflows for the parent are limited to management fees from affiliate banks, earnings on investment securities, sales of investment securities, and interest on deposits with the Bank. These cash inflows along with the liquid assets held at March 31, 2012, totaling $2.4 million, are needed to cover ongoing cash operating expenses of the parent company which have been reduced and are expected to be $1.5 million for 2012. We have elected to defer payments on our Series A preferred stock and on our trust preferred securities. The reduction in expected expenses for 2012 from actual cash expenses for 2011 is primarily the result of deferring payments on our Series A preferred stock issued to the U.S. Treasury and on our trust preferred securities. Parent company liquidity could be improved if a capital raise was accomplished.

Capital

In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock issued to the U.S. Treasury. At March 31, 2012, cumulative accrued dividends on this stock totaled $1.1 million. If we defer dividend payments for six quarters, the holder of our Series A Preferred Stock (currently the U.S. Treasury) would then have the right to appoint representatives to our Board of Directors. We will continue to accrue any deferred dividends, which will be deducted from income to common shareholders for financial statement purposes.

In addition, effective with the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes which resulted in a deferral of distributions on our trust preferred securities. Therefore, future cash dividends on our common stock are subject to the prior payment of all deferred distributions on our trust preferred securities. At March 31, 2012, cumulative accrued interest on our junior subordinated notes totaled $370,000.

Stockholders’ equity increased $262,000 to $82.8 million at March 31, 2012, compared with $82.5 million at December 31, 2011. The increase was due to income earned during the 2012 first quarter, reduced by dividends declared on cumulative preferred stock.

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. See Footnote 11, “Capital Requirements and Restrictions on Retained Earnings” for detailed regulatory capital ratios. In addition, PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets (“total risk-based capital ratio”) of at least 12.0%, and a ratio of Tier 1 capital to total assets (“leverage ratio”) of 9.0%. The Bank is currently not in compliance with this requirement.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at March 31, 2012, and December 31, 2011. Given a 100 basis point increase in interest rates, base net interest income would increase by an estimated 5.4% at March 31, 2012, compared with an increase of 5.8% at December 31, 2011, and is within the risk tolerance parameters of our risk management policy. Given a 200basis point increase in interest rates, base net interest income would increase by an estimated 10.3% at March 31, 2012, compared with an increase of 10.9% at December 31, 2011, and is within the risk tolerance parameters of our risk management policy.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following March 31, 2012, as calculated using the static shock model approach:

	Change in Future
	Net Interest Income
	Dollar Change		Percentage Change
	(dollars in thousands)
+ 200 basis points	$	4,890		10.32	%
+ 100 basis points		2,561		5.40

We did not run a model simulation for declining interest rates as of March 31, 2012, because the Federal Reserve effectively lowered the federal funds target rate between 0.00% to 0.25% in December 2008. Therefore, no further short-term rate reductions can occur. As we implement strategies to mitigate the risk of rising interest rates in the future, these strategies will lessen our forecasted “base case” net interest income in the event of no interest rate changes.

Item 4. Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of March 31, 2012, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

As a result of regulatory examination and audit processes applied to our loan grading activities near and subsequent to year end, we determined that our internal process for assigning loan grades did not always establish an accurate grade for credit risk. Our internal control processes surrounding loan grades, which consist of a combination of internal and external loan review activities, identified and corrected grades for the majority of loans that were not initially graded correctly. However, such loan review did not sufficiently cover all loans subject to potential grading error throughout the 2011 fiscal year. In preparing our annual report on Form 10-K, we identified the extent to which our loan review controls did not operate and expanded the scope to cover the remainder of the portfolio and adjusted our allowance for loan losses to take the additional findings into consideration. Accordingly, we determined the controls regarding the determination of loan grades were not operating effectively as of December 31, 2011. Our management, overseen by the Audit Committee, worked in March and April 2012 and continues to work to implement steps to improve the process for loan grading discovered in the closing process for the year and quarter ended December 31, 2011.

These enhanced procedures include:

●

Additional independent internal and external loan review of the portfolio to ensure accurate grading during March and April 2012.

●

A review of the portfolio by assigned loan officer for proper grading as of March 31, 2012.

●

An analytical review of the portfolio by management based upon payment performance as of March 31, 2012.

These enhanced procedures will include:

●

Implementation of a centralized loan administration and analysis team within the credit department to ensure more timely and regular review of grading, performance metrics, financial information, and collateral.

During the first quarter, we took steps to resolve the material weakness by changing our procedures for loan grading, as discussed above. Notwithstanding the steps taken during the quarter, the identified material weakness will not be considered remediated until the new procedures have been in operation for a sufficient period of time to be tested and concluded by management to be operating effectively. Based on our evaluation and the reasons described above, management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. There were no other changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 known legal proceeding pending which an adverse decision would be expected to result in a material adverse change in our business or consolidated financial position. See Footnote 12, “Contingencies” in the Notes to our consolidated financial statements for additional detail regarding ongoing legal proceedings.

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, 2011 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.

Mine Safety Disclosures

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.

101	The following financial statements from the Company’s Quarterly Report on Form 10Q for the quarter ended March 31, 2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

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)

April 30, 2012	By:	/s/ Maria L. Bouvette
		Maria L. Bouvette
		President & Chief Executive Officer

April 30, 2012	By:	/s/ Phillip W. Barnhouse.
		Phillip W. Barnhouse
		Chief Financial Officer and Chief
		Accounting Officer