LIMESTONE BANCORP, INC. - Quarter Report: 2013 March (Form 10-Q)

a50627738.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, 2013

¨	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 ¨	Accelerated filer ¨
	Non-accelerated filer ¨	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.

12,139,975 shares of Common Stock, no par value, were outstanding at April 30, 2013.

INDEX

		Page
PART I –	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS	36
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
ITEM 4.	CONTROLS AND PROCEDURES	51

PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	52
ITEM 1A.	RISK FACTORS	52
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	52
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	52
ITEM 4.	MINE SAFETY DISCLOSURES	52
ITEM 5.	OTHER INFORMATION	52
ITEM 6.	EXHIBITS	52

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, 2013 and December 31, 2012

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2013

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012

Notes to Unaudited Consolidated Financial Statements

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	March 31, 2013			December 31, 2012
Assets
Cash and due from financial institutions	$	68,497		$	46,512
Federal funds sold		2,691			3,060
Cash and cash equivalents		71,188			49,572
Securities available for sale		183,247			178,476
Mortgage loans held for sale		—			507
Loans, net of allowance of $39,839 and $56,680, respectively		787,237			842,412
Premises and equipment		20,667			20,805
Other real estate owned		44,192			43,671
Federal Home Loan Bank stock		10,072			10,072
Bank owned life insurance		8,472			8,398
Accrued interest receivable and other assets		7,794			8,718
Total assets	$	1,132,869		$	1,162,631

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	108,841		$	114,310
Interest bearing		927,519			950,749
Total deposits		1,036,360			1,065,059
Repurchase agreements		2,853			2,634
Federal Home Loan Bank advances		5,324			5,604
Accrued interest payable and other liabilities		10,069			10,169
Subordinated capital note		6,525			6,975
Junior subordinated debentures		25,000			25,000
Total liabilities		1,086,131			1,115,441

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, 2013		34,885			34,840
Series C – 317,042 issued and outstanding;
Liquidation preference of $3.6 million at March 31, 2013		3,283			3,283
Common stock, no par, 86,000,000 shares authorized, 12,139,975 and 12,002,421 shares issued and outstanding, respectively		112,236			112,236
Additional paid-in capital		20,386			20,283
Retained deficit		(127,069	)		(126,517	)
Accumulated other comprehensive income		3,017			3,065
Total stockholders' equity		46,738			47,190
Total liabilities and stockholders’ equity	$	1,132,869		$	1,162,631

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,
	2013			2012
Interest income
Loans, including fees	$	10,033		$	14,512
Taxable securities		867			841
Tax exempt securities		221			250
Fed funds sold and other		137			152
		11,258			15,755
Interest expense
Deposits		2,704			4,000
Federal Home Loan Bank advances		43			57
Subordinated capital note		58			71
Junior subordinated debentures		154			171
Federal funds purchased and other		1			2
		2,960			4,301
Net interest income		8,298			11,454
Provision for loan losses		450			3,750
Net interest income after provision for loan losses		7,848			7,704

Non-interest income
Service charges on deposit accounts		493			554
Income from fiduciary activities		517			251
Bank card interchange fees		172			177
Other real estate owned rental income		112			37
Title insurance commissions		13			22
Secondary market brokerage fees		15			17
Net gain on sales of loans originated for sale		58			45
Net gain on sales of securities		—			2,019
Other		267			323
		1,647			3,445
Non-interest expense
Salaries and employee benefits		4,139			4,312
Occupancy and equipment		931			886
Other real estate owned expense		791			1,257
FDIC Insurance		639			873
Loan collection expense		853			360
Professional fees		406			356
State franchise tax		537			592
Communications		175			180
Postage and delivery		113			122
Insurance expense		333			97
Other		647			612
		9,564			9,647
Income (loss) before income taxes		(69	)		1,502
Income tax benefit		—			—
Net income (loss)		(69	)		1,502
Less:
Dividends on preferred stock		438			437
Accretion on Series A preferred stock		45			45
Earnings (losses) allocated to participating securities		(28	)		35
Net income (loss) attributable to common shareholders	$	(524	)	$	985
Basic earnings (loss) per common share	$	(0.04	)	$	0.08
Diluted earnings (loss) per common share	$	(0.04	)	$	0.08

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Three Months Ended March 31,
	2013			2012
Net income (loss)	$	(69	)	$	1,502
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		(74	)		622
Reclassification of amount realized through sales		—			(2,019)
Included in net loss		(74	)		(1,397)
Tax effect		26			489
Net of tax		(48	)		(908)

Comprehensive income (loss)	$	(117	)	$	594

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, 2013

(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, 2013

12,002,421

35,000

317,042

112,236

34,840

3,283

20,283

(126,517

)

3,065

47,190

Issuance of unvested stock

142,663

–

Forfeited unvested stock

(5,109

)

–

Stock-based compensation expense

–

103

–

103

Net loss

–

(69

)

–

(69

)

Net change in accumulated other comprehensive income, net of taxes

–

(48

)

(48

)

Dividends 5% on Series A preferred stock

–

(438

)

–

(438

)

Accretion of Series A preferred stock discount

–

(45

)

–

Balances, March 31, 2013

12,139,975

35,000

317,042

112,236

34,885

3,283

20,386

(127,069

)

3,017

46,738

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2013 and 2012

(dollars in thousands)

	2013			2012
Cash flows from operating activities
Net income (loss)	$	(69	)	$	1,502
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization		548			570
Provision for loan losses		450			3,750
Net amortization on securities		610			632
Stock-based compensation expense		103			105
Net gain on loans originated for sale		(58	)		(45	)
Loans originated for sale		(1,190	)		(2,328	)
Proceeds from sales of loans originated for sale		1,744			2,802
Net gain on sales of investment securities		—			(2,019	)
Net loss on sales of other real estate owned		197			402
Net write-down of other real estate owned		307			480
Earnings on bank owned life insurance		(74	)		(74	)
Net change in accrued interest receivable and other assets		762			3,231
Net change in accrued interest payable and other liabilities		(537	)		3,881
Net cash from operating activities		2,793			12,889
Cash flows from investing activities
Purchases of available-for-sale securities		(15,294	)		(45,048	)
Sales of available-for-sale securities		—			21,385
Maturities and prepayments of available-for-sale securities		9,864			8,056
Proceeds from sale of other real estate owned		2,640			9,018
Improvements to other real estate owned		—			(1	)
Loan originations and payments, net		50,983			30,798
Purchases of premises and equipment, net		(160	)		(72	)
Net cash from investing activities		48,033			24,136
Cash flows from financing activities
Net change in deposits		(28,699	)		(70,016	)
Net change in repurchase agreements		219			188
Repayment of Federal Home Loan Bank advances		(280	)		(327	)
Repayment of subordinated capital note		(450	)		(225	)
Net cash from financing activities		(29,210	)		(70,380	)
Net change in cash and cash equivalents		21,616			(33,355	)
Beginning cash and cash equivalents		49,572			105,962
Ending cash and cash equivalents	$	71,188		$	72,607
Supplemental cash flow information:
Interest paid	$	4,992		$	4,296
Income taxes paid (refunded)		—			(2,000	)
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	3,680		$	4,216
Financed sales of other real estate owned		15			192

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, 2013 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, 2012 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.

New Accounting Standards – In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The provisions of ASU No. 2013-02 require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about these amounts. The provisions of this new guidance are effective for fiscal years beginning after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s statements of operations and condition.

Note 2 – Going Concern Considerations and Future Plans

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this Note raise substantial doubt about the Company’s ability to continue as a going concern.

During the first three months of 2013, we reported net loss to common shareholders of $524,000, compared with net income to common shareholders of $985,000 for the first three months of 2012. The decrease in net income compared to the first quarter of 2012 was primarily attributable to a $2.0 million gain on sale of investment securities in the first quarter of 2012. The decrease was also attributable to lower net interest margin due to lower average loans outstanding, loans repricing at lower rates, and the level of non-performing assets in our portfolio. These items were offset by a significant decrease in provision expense, which decreased from $3.8 million to $450,000.

For the year ended December 31, 2012, we reported net loss to common shareholders of $33.4 million. This loss was attributable primarily to $40.3 million of provision for loan losses expense. A continued decline in credit quality in our portfolio resulted in net charge-offs of $36.1 million, and OREO expense of $10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense. We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $33.4 million, for the year ended December 31, 2012, compares with net loss to common shareholders of $105.2 million for the year ended December 31, 2011.

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, 2013, cumulative accrued and unpaid dividends on this stock totaled $3.0 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 up to two 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 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. In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements.

We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan previously submitted by the Bank. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of March 31, 2013, the capital ratios required by the Consent Order were not met.

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

●

Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We have engaged a financial advisor to assist our Board in evaluating our options for increasing capital and redeeming our Series A preferred stock issued to the US Treasury in 2008 under the Capital Purchase Program.

●

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 adding resources to the management team. John T. Taylor was named President and CEO for PBI Bank and appointed to the board of directors in July 2012. Additionally, John R. Davis was appointed Chief Credit Officer of PBI Bank in August 2012, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization.

●

Evaluating our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment. To this end, we believe the opportunity exists for the centralization of key processes which will lead to improved execution and cost savings.

●

Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.

We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010, to $1.1 billion at December 31, 2011, to $899.1 million at December 31, 2012, and $827.1 million at March 31, 2013. We have significantly improved our staffing in the commercial lending area which is now led by John R. Davis.

Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. We are now in compliance with construction and development loans totaling $62.5 million, or 73% of total risk-based capital, at March 31, 2013, down from $70.3 million, or 82% of total risk-based capital, at December 31, 2012.

Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group, to not more than 250% of total risk-based capital. While we have made significant improvements over the last year, we were not in compliance with this concentration limit at March 31, 2013. These loans totaled $299.4 million, or 351% of total risk-based capital, at March 31, 2013 and $311.1 million, or 362% of total risk-based capital, at December 31, 2012.

We are working to reduce our loan concentrations 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. We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $62.5 million at March 31, 2013. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $187.2 million at March 31, 2013.

●

Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.

We have incurred significant losses in disposing of this real estate. We incurred losses totaling $9.3 million, $42.8 million, and $13.9 million in 2012, 2011, and 2010, respectively, from sales and fair value write-downs attributable to declining valuations as evidenced by new appraisals and from changes in our sales strategies. During the three month period ended March 31, 2013, we incurred OREO losses totaling $504,000, which consisted of $197,000 in loss on sale and $307,000 from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies.

To ensure that we maximize the value we receive upon the sale of OREO, we continually evaluate sales opportunities and channels. We are targeting multiple sales opportunities and channels through internal marketing and the use of brokers, auctions, technology sales platforms, and bulk sale strategies. Proceeds from the sale of OREO totaled $2.7 million during the three months ended March 31, 2013 and $22.5 million, $26.0 million and $25.0 million during 2012, 2011, and 2010, respectively.

At December 31, 2012 the OREO portfolio consisted of 51% construction, development, and land assets. At March 31, 2013 this concentration had declined to 49%. This is consistent with our reduction of construction, development and other land loans, which have declined to $62.5 million at March 31, 2013 compared to $70.3 million at December 31, 2012. Over the past three months, the composition of our OREO portfolio has shifted toward 1-4 family residential properties, which we have found to be more liquid than construction, development, and land assets, while commercial real estate has declined slightly as a percentage of the portfolio. Commercial real estate of this nature represents 34% of the portfolio at March 31, 2013 compared with 35% at December 31, 2012. 1-4 family residential properties represent 15% of the portfolio at March 31, 2013 compared with 12% at December 31, 2012.

●

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 (loss) were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
March 31, 2013
U.S. Government and federal agency	$	23,697	$	511	$	(41	)	$	24,167
Agency mortgage-backed: residential		79,937		868		(472	)		80,333
State and municipal		53,542		2,277		(146	)		55,673
Corporate bonds		18,880		1,510		(8	)		20,382
Other		572		71		—			643
Total debt securities		176,628		5,237		(667	)		181,198
Equity		1,359		691		(1	)		2,049
Total	$	177,987	$	5,928	$	(668	)	$	183,247

December 31, 2012
U.S. Government and federal agency	$	5,603	$	530	$	—		$	6,133
Agency mortgage-backed: residential		94,298		1,141		(257	)		95,182
State and municipal		52,485		2,335		(87	)		54,733
Corporate bonds		18,851		1,150		(37	)		19,964
Other		572		46		—			618
Total debt securities		171,809		5,202		(381	)		176,630
Equity		1,359		487		—			1,846
Total	$	173,168	$	5,689	$	(381	)	$	178,476

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

		Three Months Ended March 31,
			2013		2012
	(in thousands)
Proceeds		$	—	$	21,385
Gross gains			—		2,019
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, 2013
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available-for-sale
Within one year	$	13,105	$	13,517
One to five years		14,663		16,123
Five to ten years		59,149		61,044
Beyond ten years		9,774		10,181
Agency mortgage-backed: residential		79,937		80,333
Total	$	176,628	$	181,198

Securities pledged at March 31, 2013 and December 31, 2012 had carrying values of approximately $60.4 million and $76.4 million, respectively, and were pledged to secure public deposits and repurchase agreements.

The Company evaluates securities for other than temporary impairment (OTTI) on at least 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, 2013, the Company held 40 equity securities. Of these securities, two securities had an unrealized loss less than $1,000. One had been in an unrealized loss position for less than twelve months, and one for more than twelve months. All other equity securities were in an unrealized gain position at March 31, 2013. Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. As of March 31, 2013, 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, 2013 and December 31, 2012, 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, 2013
U.S government & agency	$	6,499	$	(41	)	$	—	$	—	$	6,499	$	(41	)
Agency mortgage-backed: residential		30,351		(472	)		—		—		30,351		(472	)
State and municipal		11,225		(146	)		—		—		11,225		(146	)
Corporate bonds		1,284		(8	)		—		—		1,284		(8	)
Equity		2		(1	)		8		—		10		(1	)
Total temporarily impaired	$	49,361	$	(668	)	$	8	$	—	$	49,369	$	(668	)


December 31, 2012
Agency mortgage-backed: residential	$	23,375	$	(257	)	$	—	$	—	$	23,375	$	(257	)
State and municipal		7,961		(87	)		—		—		7,961		(87	)
Corporate bonds		3,777		(37	)		—		—		3,777		(37	)
Equity		2		—			—		—		2		—
Total temporarily impaired	$	35,115	$	(381	)	$	—	$	—	$	35,115	$	(381	)

Note 4 – Loans

Loans were as follows:	March 31,			December 31,
	2013			2012
	(in thousands)
Commercial	$	49,932		$	52,567
Commercial Real Estate:
Construction		62,535			70,284
Farmland		75,347			80,825
Other		289,211			322,687
Residential Real Estate:
Multi-family		49,590			50,986
1-4 Family		259,412			278,273
Consumer		18,129			20,383
Agriculture		22,214			22,317
Other		706			770
Subtotal		827,076			899,092
Less: Allowance for loan losses		(39,839	)		(56,680	)
Loans, net	$	787,237		$	842,412

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
		(in thousands)
March 31, 2013:
Beginning balance	$	4,402		$	34,768		$	16,235		$	857		$	403		$	15		$	56,680
Provision for loan losses		1,438			(445	)		(450	)		86			(178	)		(1	)		450
Loans charged off		(976	)		(12,312	)		(4,339	)		(318	)		(17	)		–			(17,962	)
Recoveries		126			158			94			91			202			–			671
Ending balance	$	4,990		$	22,169		$	11,540		$	716		$	410		$	14		$	39,839


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

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, 2013:

	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	$	695	$	6,138	$	1,295	$	21	$	—	$	12	$	8,161
Collectively evaluated for impairment		4,295		16,031		10,245		695		410		2		31,678
Total ending allowance balance	$	4,990	$	22,169	$	11,540	$	716	$	410	$	14	$	39,839


Loans:
Loans individually evaluated for impairment	$	5,668	$	114,558	$	56,342	$	212	$	170	$	522	$	177,472
Loans collectively evaluated for impairment		44,264		312,535		252,660		17,917		22,044		184		649,604
Total ending loans balance	$	49,932	$	427,093	$	309,002	$	18,129	$	22,214	$	706	$	827,076

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, 2012:

	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	$	263	$	16,046	$	4,641	$	68	$	5	$	11	$	21,034
Collectively evaluated for impairment		4,139		18,722		11,594		789		398		4		35,646
Total ending allowance balance	$	4,402	$	34,768	$	16,235	$	857	$	403	$	15	$	56,680


Loans:
Loans individually evaluated for impairment	$	5,296	$	125,922	$	56,799	$	212	$	55	$	524	$	188,808
Loans collectively evaluated for impairment		47,271		347,874		272,460		20,171		22,262		246		710,284
Total ending loans balance	$	52,567	$	473,796	$	329,259	$	20,383	$	22,317	$	770	$	899,092

Impaired Loans

Impaired loans include restructured loans and commercial, construction, agriculture and commercial real estate loans on nonaccrual 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 has 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, 2013:

	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	$	2,197	$	1,887	$	—	$	1,561	$	—	$	—
Commercial real estate:
Construction		948		800		—		955		5		5
Farmland		4,070		4,071		—		4,259		67		67
Other		1,930		1,816		—		1,854		4		4
Residential real estate:
Multi-family		640		640		—		641		—		—
1-4 Family		13,695		13,352		—		13,255		19		19
Consumer		13		13		—		41		—		—
Agriculture		170		170		—		107		—		—
Other		—		—		—		—		—		—
With An Allowance Recorded:
Commercial		4,303		3,781		695		3,921		30		—
Commercial real estate:
Construction		26,693		24,481		154		24,968		34		—
Farmland		8,362		6,050		270		6,253		11		—
Other		97,688		77,340		5,714		81,951		330		—
Residential real estate:
Multi-family		14,864		13,155		587		14,031		56		—
1-4 Family		33,389		29,195		708		28,644		103		—
Consumer		268		199		21		171		—		—
Agriculture		—		—		—		5		—		—
Other		522		522		12		523		4		—
Total	$	209,752	$	177,472	$	8,161	$	183,140	$	663	$	95

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2012:

	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	$	1,460	$	1,234	$	—	$	1,637	$	5	$	4
Commercial real estate:
Construction		1,155		1,109		—		1,745		2		2
Farmland		4,448		4,448		—		4,706		57		57
Other		2,134		1,892		—		3,436		3		3
Residential real estate:
Multi-family		643		643		—		910		—		—
1-4 Family		13,539		13,158		—		11,291		56		56
Consumer		70		70		—		219		8		5
Agriculture		45		45		—		366		2		—
Other		—		—		—		—		—		—

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With An Allowance Recorded:
Commercial		4,108		4,062		263		3,964		169		27
Commercial real estate:
Construction		26,645		25,455		1,543		19,514		348		5
Farmland		8,557		6,456		734		5,794		43		2
Other		97,699		86,562		13,769		83,087		2,011		185
Residential real estate:
Multi-family		14,906		14,906		1,643		11,187		468		—
1-4 Family		31,021		28,092		2,998		27,404		787		9
Consumer		142		142		68		29		—		—
Agriculture		10		10		5		6		—		—
Other		524		524		11		533		17		—
Total	$	207,106	$	188,808	$	21,034	$	175,828	$	3,976	$	355

Troubled Debt Restructuring

A troubled debt restructuring (TDR) occurs when 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, 2013 and December 31, 2012:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2013
Commercial
Rate reduction	$	2,000	$	—	$	2,000
Principal deferral		883		—		883
Interest only payments		—		362		362
Commercial Real Estate:
Construction
Rate reduction		3,437		6,078		9,515
Farmland
Rate reduction		150		—		150
Principal deferral		719		2,438		3,157
Other
Rate reduction		29,718		21,665		51,383
Principal deferral		1,188		—		1,188
Interest only payments		2,465		2,067		4,532
Residential Real Estate:
Multi-family
Rate reduction		4,727		6,946		11,673
Interest only payments		649		—		649
Other
Rate reduction		8,659		12,950		21,609
Consumer
Rate reduction		54		86		140
Other
Rate reduction		522		—		522
Total TDRs	$	55,171	$	52,592	$	107,763

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2012
Commercial
Rate reduction	$	1,972	$	—	$	1,972
Principal deferral		887		—		887
Interest only payments		—		958		958
Commercial Real Estate:
Construction
Rate reduction		4,834		4,459		9,293
Farmland
Rate reduction		150		—		150
Principal deferral		725		2,438		3,163
Other
Rate reduction		36,515		22,631		59,146
Principal deferral		1,195		—		1,195
Interest only payments		2,466		2,107		4,573
Residential Real Estate:
Multi-family
Rate reduction		13,087		—		13,087
Interest only payments		652		—		652
1-4 Family
Rate reduction		14,323		7,871		22,194
Consumer
Rate reduction		14		—		14
Other
Rate reduction		524		—		524
Total TDRs	$	77,344	$	40,464	$	117,808

At March 31, 2013, and December 31, 2012, 51% and 66%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $5.5 million and $15.1 million in reserves to customers whose loan terms have been modified in TDRs as of March 31, 2013, and December 31, 2012, respectively. The Company has committed to lend additional amounts totaling $123,000 and $259,000 as of March 31, 2013, and December 31, 2012, respectively, to customers with outstanding loans that are classified as TDRs.

The following tables present a summary of the types of TDR loan modifications by portfolio type that occurred during the three months ended March 31, 2013 and 2012:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2013
Commercial:
Rate reduction	$	47	$	—	$	47
Commercial Real Estate:
Construction
Rate reduction		—		1,291		1,291
Other
Rate reduction		1,428		—		1,428
Residential Real Estate:
Other
Rate reduction		819		—		819
Consumer:
Rate reduction		40		86		126
Total TDRs	$	2,334	$	1,377	$	3,711

	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

At March 31, 2012, 86% of the Company’s TDRs were performing according to their modified terms. The Company allocated $238,000 in reserves to customers whose loan terms had been modified in TDRs during the three months ended March 31, 2012. The Company committed to lend additional amounts totaling $192,000 as of March 31, 2012 to customers with outstanding loans that were classified as TDRs.

During the first three months of 2013, approximately $1.6 million TDRs defaulted on their restructured loan and the default occurred within the 12 month period following the loan modification. These defaults consisted of $1.5 million in commercial real estate loans, and $86,000 in consumer 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.

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 on 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 include impaired loans not on accrual 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, 2013, and December 31, 2012:

	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
	(in thousands)


Commercial	$	2,784	$	2,437	$	—	$	36
Commercial Real Estate:
Construction		21,845		7,808		—		—
Farmland		9,252		10,030		—		—
Other		45,680		46,036		—		—
Residential Real Estate:
Multi-family		8,132		1,516		—		—
1-4 Family		32,922		26,501		—		50
Consumer		158		135		—		—
Agriculture		170		54		—		—
Other		—		—		—		—
Total	$	120,943	$	94,517	$	—	$	86

The following table presents the aging of the recorded investment in past due loans as of March 31, 2013 and December 31, 2012:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
March 31, 2013
Commercial	$	388	$	82	$	—	$	2,784	$	3,254
Commercial Real Estate:
Construction		—		—		—		21,845		21,845
Farmland		920		176		—		9,252		10,348
Other		2,995		2,027		—		45,680		50,702
Residential Real Estate:
Multi-family		632		—		—		8,132		8,764
1-4 Family		2,795		592		—		32,922		36,309
Consumer		241		51		—		158		450
Agriculture		81		32		—		170		283
Other		—		—		—		—		—
Total	$	8,052	$	2,960	$	—	$	120,943	$	131,955

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
December 31, 2012
Commercial	$	1,279	$	90	$	36	$	2,437	$	3,842
Commercial Real Estate:
Construction		10,510		5,815		—		7,808		24,133
Farmland		922		58		—		10,030		11,010
Other		5,138		13,037		—		46,036		64,211
Residential Real Estate:
Multi-family		8,762		—		—		1,516		10,278
1-4 Family		11,145		1,221		50		26,501		38,917
Consumer		310		75		—		135		520
Agriculture		153		7		—		54		214
Other		—		—		—		—		—
Total	$	38,219	$	20,303	$	86	$	94,517	$	153,125

Credit Quality Indicators – We categorize loans into risk categories at origination based upon original underwriting. Thereafter, we categorize 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, 2013, and December 31, 2012, 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, 2013
Commercial	$	28,627	$	8,996	$	1,690	$	10,559	$	60	$	49,932
Commercial Real Estate:
Construction		21,537		11,262		2,810		26,926		—		62,535
Farmland		42,233		13,652		3,506		15,956		—		75,347
Other		109,294		60,987		15,443		103,224		263		289,211
Residential Real Estate:
Multi-family		18,417		14,990		—		16,183		—		49,590
1-4 Family		145,798		48,304		3,364		61,946		—		259,412
Consumer		16,018		1,271		32		808		—		18,129
Agriculture		19,276		1,408		922		608		—		22,214
Other		184		522		—		—		—		706
Total	$	401,384	$	161,392	$	27,767	$	236,210	$	323	$	827,076

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)

December 31, 2012
Commercial	$	27,085	$	10,153	$	6,495	$	8,772	$	62	$	52,567
Commercial Real Estate:
Construction		26,085		21,713		3,647		18,839		—		70,284
Farmland		47,017		13,461		3,532		16,815		—		80,825
Other		122,603		66,223		14,955		118,635		271		322,687
Residential Real Estate:
Multi-family		18,387		14,637		—		17,962		—		50,986
1-4 Family		159,975		47,030		5,167		66,101		—		278,273
Consumer		17,232		2,211		35		842		63		20,383
Agriculture		19,256		1,467		869		725		—		22,317
Other		246		524		—		—		—		770
Total	$	437,886	$	177,419	$	34,700	$	248,691	$	396	$	899,092

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.

The following table presents the major categories of OREO at the period-ends indicated:

	March 31, 2013			December 31, 2012
	(in thousands)
Commercial Real Estate:
Construction	$	21,960		$	22,912
Farmland		1,008			618
Other		15,333			15,577
Residential Real Estate:
Multi-family		200			200
1-4 Family		6,619			5,518
		45,120			44,825
Valuation allowance		(928	)		(1,154	)

	$	44,192		$	43,671

	For the Three Months Ended March 31,
	2013			2012
	(in thousands)
OREO Valuation Allowance Activity:
Beginning balance	$	1,154		$	1,667
Provision to allowance		307			480
Write-downs		(533	)		(465	)
Ending balance	$	928		$	1,682

Net activity relating to other real estate owned during the three months ended March 31, 2013 and 2012 is as follows:

	2013			2012
	(in thousands)
OREO Activity
OREO as of January 1	$	43,671		$	41,449
Real estate acquired		3,680			4,216
Valuation adjustments for declining market values		(307	)		(480	)
Improvements		—			1
Loss on sale		(197	)		(402	)
Proceeds from sale of properties		(2,655	)		(9,210	)
OREO as of March 31	$	44,192		$	35,574

Expenses related to other real estate owned include:

	Three Months Ended March 31,
	2013		2012
	(in thousands)
Net loss on sales	$	197	$	402
Provision to allowance		307		480
Operating expense		287		375
Total	$	791	$	1,257

Note 6 – Deposits

The following table shows deposits by category:

	March 31, 2013		December 31, 2012
	(in thousands)
Non-interest bearing	$	108,841	$	114,310
Interest checking		83,522		87,234
Money market		62,111		63,715
Savings		41,952		39,227
Certificates of deposit		739,934		760,573
Total	$	1,036,360	$	1,065,059

Time deposits of $100,000 or more were $316.1 million and $319.5 million at March 31, 2013 and December 31, 2012, respectively.

Scheduled maturities of total time deposits at March 31, 2013 for each of the next five years are as follows (in thousands):

	Retail		Brokered		Total
Year 1	$	377,218	$	15,000	$	392,218
Year 2		234,060		—		234,060
Year 3		94,199		—		94,199
Year 4		8,542		—		8,542
Year 5		10,839		—		10,839
Thereafter		76		—		76
	$	724,934	$	15,000	$	739,934

Historically, the Bank has utilized brokered and wholesale deposits to supplement its funding strategy. At March 31, 2013, and December 31, 2012, these deposits totaled $15.0 million. As stipulated in the Consent Order, PBI Bank is 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.

Note 7 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	March 31,		December 31,
	2013		2012
	(in thousands)
Monthly amortizing advances with fixed rates from 0.00% to 5.25% and
maturities ranging from 2013 through 2033, averaging 3.19% for 2013	$	5,324	$	5,604

Each advance is payable per terms on agreement, with a prepayment penalty. The advances are collateralized by first mortgage loans. The borrowing capacity is based on the market value of the underlying pledged loans rather than the unpaid principal balance of the pledged loans. At March 31, 2013, our additional borrowing capacity with the FHLB was $17.9 million. The availability of our borrowing capacity could be affected by our financial position and the FHLB could require additional collateral or, among other things, exercise its right to deny a funding request, at its discretion. Additionally, any new advances are limited to a one year maturity or less.

Note 8 – 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 available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated 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. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. 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. This valuation method is classified as Level 3 in the fair value hierarchy. 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 the date of the appraisal of the collateral predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 30% for real estate that is determined (1) to have a thin trading market or (2) to be for unique use. This is in addition to estimated discounts for cost to sell of ten percent.

We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation of foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. We have utilized discounts ranging from 10% to 33% in our impairment evaluations when applicable.

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 fair value 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 to 30% for real estate that is determined (1) to have a thin trading market or (2) to be for unique use. This is in addition to estimated discounts for cost to sell of ten percent.

Financial assets measured at fair value on a recurring basis at March 31, 2013 and December 31, 2012 are summarized below:

			Fair Value Measurements at March 31, 2013 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	$	24,167	$	—	$	24,167	$	—
Agency mortgage-backed: residential		80,333		—		80,333		—
State and municipal		55,673		—		55,673		—
Corporate bonds		20,382		—		20,382		—
Other debt securities		643		—		—		643
Equity securities		2,049		2,049		—		—
Total	$	183,247	$	2,049	$	180,555	$	643

			Fair Value Measurements at December 31, 2012 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Government and
federal agency	$	6,133	$	—	$	6,133	$	—
Agency mortgage-backed: residential		95,182		—		95,182		—
State and municipal		54,733		—		54,733		—
Corporate bonds		19,964		—		19,964		—
Other debt securities		618		—		—		618
Equity securities		1,846		1,846		—		—
Total	$	178,476	$	1,846	$	176,012	$	618

There were no transfers between Level 1 and Level 2 during 2013 or 2012.

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, 2013 and 2012:

	State and Municipal Securities					Other Debt Securities
	2013		2012			2013		2012
	(in thousands)
Balances of recurring Level 3 assets at January 1	$	—	$	1,173		$	618	$	606
Total gain (loss) for the period:
Included in other comprehensive income (loss)		—		(9	)		25		(11	)
Sales		—		(411	)		—		—
Balance of recurring Level 3 assets at March 31	$	—	$	753		$	643	$	595

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 securities of this type are not rated by the rating agencies and trading volumes are thin, it was determined that these were valued using Level 3 inputs. We sold our Level 3 municipal securities in the second quarter of 2012 and had no securities of this nature at March 31, 2013.

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 9.0% 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 are summarized below:

			Fair Value Measurements at March 31, 2013 Using
			(in thousands)
			Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

	Carrying Value
Description	Carrying Value
Impaired loans:
Commercial	$	3,086	$	—	$	—	$	3,086
Commercial real estate:
Construction		24,327		—		—		24,327
Farmland		5,780		—		—		5,780
Other		71,626		—		—		71,626
Residential real estate:
Multi-family		12,568		—		—		12,568
1-4 Family		28,487		—		—		28,487
Consumer		178		—		—		178
Other		510		—		—		510
Other real estate owned, net:
Commercial real estate:
Construction		21,508		—		—		21,508
Farmland		987		—		—		987
Other		15,018		—		—		15,018
Residential real estate:
Multi-family		196		—		—		196
1-4 Family		6,483		—		—		6,483

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

	Carrying Value
Description	Carrying Value
Impaired loans:
Commercial	$	3,799	$	—	$	—	$	3,799
Commercial real estate:
Construction		23,912		—		—		23,912
Farmland		5,722		—		—		5,722
Other		72,793		—		—		72,793
Residential real estate:
Multi-family		13,263		—		—		13,263
1-4 Family		25,094		—		—		25,094
Consumer		74		—		—		74
Agriculture		5		—		—		5
Other		513		—		—		513
Other real estate owned, net:
Commercial real estate:
Construction		22,323		—		—		22,323
Farmland		602		—		—		602
Other		15,175		—		—		15,175
Residential real estate:
Multi-family		195		—		—		195
1-4 Family		5,376		—		—		5,376

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $154.7 million at March 31, 2013 with a valuation allowance of $8.2 million. This resulted in no additional provision for loan losses for the quarter ended March 31, 2013. At December 31, 2012, impaired loans had a carrying amount of $166.2 million, with a valuation allowance of $21.0 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 $44.2 million as of March 31, 2013, compared with $43.7 million at December 31, 2012. Fair value write-downs of $307,000 were recorded on other real estate owned for the three months ended March 31, 2013.

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, 2013:

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

Impaired loans – Commercial	$	3,086	Market value approach	Adjustment for receivables and inventory discounts	16% - 32% (24%)

Impaired loans – Commercial real estate	$	101,733	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 69% (20%)

Impaired loans – Residential real estate	$	41,055	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 50% (15%)

Other real estate owned – Commercial real estate	$	37,513	Sales comparison approach Income approach	Adjustment for differences between the comparable sales Discount or capitalization rate	3% - 50% (18%) 9% - 16% (12%)

Other real estate owned – Residential real estate	$	6,679	Sales comparison approach	Adjustment for differences between the comparable sales	4% - 31% (12%)

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 December 31, 2012:

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

Impaired loans – Commercial	$	3,799	Market value approach	Adjustment for receivables and inventory discounts	16% - 32% (24%)

Impaired loans – Commercial real estate	$	89,461	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 69% (19%)

Impaired loans – Residetial real estate	$	38,357	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 38% (15%)

Other real estate owned – Commercial real estate	$	38,100	Sales comparison approach Income approach	Adjustment for differences between the comparable sales Discount or capitalization rate	3% - 50% (18%) 9% - 16% (12%)

Other real estate owned – Residential real estate	$	5,571	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 30% (9%)

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

			Fair Value Measurements at March 31, 2013 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	71,188	$	64,495	$	6,693	$	—	$	71,188
Securities available for sale		183,247		2,049		180,555		643		183,247
Federal Home Loan Bank stock		10,072		N/A		N/A		N/A		N/A
Mortgage loans held for sale		—		—		—		—		—
Loans, net		787,237		—		—		798,265		798,265
Accrued interest receivable		4,316		—		1,100		3,216		4,316
Financial liabilities
Deposits	$	1,036,360	$	108,841	$	930,566	$	—	$	1,039,407
Securities sold under agreements to repurchase		2,853		—		2,853		—		2,853
Federal Home Loan Bank advances		5,324		—		5,326		—		5,326
Subordinated capital notes		6,525		—		—		6,503		6,503
Junior subordinated debentures		25,000		—		—		19,390		19,390
Accrued interest payable		2,083		—		1,058		1,025		2,083

			Fair Value Measurements at December 31, 2012 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	49,572	$	41,938	$	7,634	$	—	$	49,572
Securities available for sale		178,476		1,846		176,012		618		178,476
Federal Home Loan Bank stock		10,072		N/A		N/A		N/A		N/A
Mortgage loans held for sale		507		—		507		—		507
Loans, net		842,412		—		—		853,996		853,996
Accrued interest receivable		5,138		—		1,150		3,988		5,138
Financial liabilities
Deposits	$	1,065,059	$	114,310	$	955,216	$	—	$	1,069,526
Securities sold under agreements to repurchase		2,634		—		2,634		—		2,634
Federal Home Loan Bank advances		5,604		—		5,607		—		5,607
Subordinated capital notes		6,975		—		—		6,599		6,599
Junior subordinated debentures		25,000		—		—		13,821		13,821
Accrued interest payable		2,104		—		1,173		931		2,104

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 Level 1 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 a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 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 9 – Income Taxes

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

	March 31,			December 31,
	2013			2012
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	13,944		$	19,838
Other real estate owned write-down		10,165			10,408
Net operating loss carry-forward		21,184			15,051
New market tax credit carry-forward		208			208
Alternative minimum tax credit carry-forward		692			692
Net assets from acquisitions		618			592
Other than temporary impairment on securities		374			374
Amortization of non-compete agreements		18			19
Other		926			936
		48,129			48,118

Deferred tax liabilities:
Fixed assets		380			409
Net unrealized gain on securities available for sale		1,841			1,858
FHLB stock dividends		1,276			1,276
Originated mortgage servicing rights		94			98
Other		535			549
		4,126			4,190
Net deferred tax assets before valuation allowance		44,003			43,928
Valuation allowance		(44,003	)		(43,928	)
Net deferred tax asset	$	—		$	—

Our estimate of the realizability of the deferred tax asset depends on our estimate of projected future levels of taxable income as all carryback ability was fully absorbed by our 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 continue to maintain a valuation allowance for all deferred tax assets as of March 31, 2013. 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 three months ended March 31, 2013 or the year ended December 31, 2012 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 Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2009.

Note 10 – Stock Plans and Stock Based Compensation

The Company has two stock incentive plans. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan. The 2006 Plan permits the issuance of up to 463,050 shares of the Company’s common stock upon the exercise of stock options or upon the grant of stock awards. As of March 31, 2013, the Company had granted 273,878 unvested shares net of forfeitures and vesting under the stock incentive plan. Shares issued under the plan vest annually on the anniversary date of the grant over five to ten years. The Company has 68,159 shares remaining available for issue under the plan.

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.

On May 16, 2012, holders of the Company’s voting common stock voted to further amend the 2006 Non-Employee Directors Stock Ownership Incentive Plan to award restricted shares having a fair market value of $25,000 annually to each non-employee director, and to increase the number of shares issuable under the Directors’ Plan from 100,000 shares to 400,000 shares. Shares issued under the amended plan vest semi-annually on the anniversary date of the grant over three years.

To date, the Company has issued 80,078 unvested shares to non-employee directors. At March 31, 2013, 295,712 shares remain available for issuance under this plan.

The fair value of the 2013 unvested shares issued to certain employees was $111,000, or $0.78 per weighted-average share. The Company recorded $103,000 and $105,000 of stock-based compensation during the first three months of 2013 and 2012, 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. No deferred tax benefit was recognized related to this expense for either period.

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

	Three Months Ended					Twelve Months Ended
	March 31, 2013					December 31, 2012
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Shares			Price		Shares			Price
Outstanding, beginning		233,394		$	4.49		100,226		$	13.21
Granted		142,663			0.78		191,140			1.69
Vested		(16,992	)		11.97		(44,781	)		8.89
Forfeited		(5,109	)		14.64		(13,191	)		15.22
Outstanding, ending		353,956		$	2.49		233,394		$	4.49

As of March 31, 2013, all stock options issued to non-employee directors had expired and none were exercised during their grant term. The Company's stock-based incentive awards have exclusively been restricted stock grants since 2008.

The following table summarizes stock option activity:

	Three Months Ended				Twelve Months Ended
	March 31, 2013				December 31, 2012
			Weighted					Weighted
			Average					Average
			Exercise					Exercise
	Shares		Price		Shares			Price
Outstanding, beginning		—	$	—		29,530		$	19.88
Forfeited		—		—		—			—
Expired		—		—		(29,530	)		19.88
Outstanding, ending		—	$	—		—		$	—

No options were issued, outstanding, or exercised during the first three months of 2013. The Company recorded no stock option compensation expense during the three months ended March 31, 2013. No options were modified during the period. As of March 31, 2013, no stock options issued by the Company had been exercised, and all granted options had expired.

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2013 and beyond are estimated as follows (in thousands):

April 2013 – December 2013	$	308
2014		313
2015		175
2016		77
2017 & thereafter		44

Note 11 – Earnings (Loss) per Share

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


	Three Months Ended
	March 31,
	2013			2012
	(in thousands, except
	share and per share data)

Net income (loss)	$	(69	)	$	1,502
Less:
Preferred stock dividends		438			437
Accretion of Series A preferred stock discount		45			45
Earnings (loss) allocated to unvested shares		(13	)		7
Earnings (loss) allocated to Series C preferred		(15	)		28
Net income (loss) allocated to common shareholders, basic and diluted	$	(524	)	$	985

Basic
Weighted average common shares including
unvested common shares outstanding		12,474,476			12,156,452
Less: Weighted average unvested common shares		293,675			88,107
Less: Weighted average Series C preferred		332,894			332,894
Weighted average common shares outstanding		11,847,907			11,735,451
Basic earnings (loss) per common share	$	(0.04	)	$	0.08

Diluted
Add: Dilutive effects of assumed exercises of common
and Preferred Series C stock warrants		—			—
Weighted average common shares and potential common shares		11,847,907			11,735,451
Diluted earnings (loss) per common share	$	(0.04	)	$	0.08

The Company had no outstanding stock options at March 31, 2013. 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, 2013 and 2012 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, 2013 and 2012, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive.

Note 12 – 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 in advance 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.

In October 2012, PBI Bank entered into a new consent order with the FDIC and KDFI. The new consent order requires the Bank to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan previously submitted by the Bank. The new consent order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 consent order, and includes the substantive provisions of the June 2011 consent order.

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, 2013						December 31, 2012
	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			6.77	%		8.21	%		6.46	%		7.71	%
Total risk-based capital		8.0			10.0			12.0	%		10.16			10.29			9.81			9.82
Tier 1 leverage ratio		4.0			5.0			9.0			4.91			5.95			4.50			5.37

At March 31, 2013, PBI Bank’s Tier 1 leverage ratio was 5.95%, which is below the 9% minimum capital ratio required by the Consent Order, and its total risk-based capital ratio was 10.29%, which is below the 12% minimum capital ratio required by the Consent Order. Failure to meet minimum capital requirements could result in 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 to Porter Bancorp for the foreseeable future.

Note 13 – 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 that 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.

On January 30, 2012, CGI delivered a demand to inspect the Company’s records pursuant to the Kentucky Business Corporation Act. The Company provided records to CGI in accordance with Kentucky law.

On December 17, 2012, SBAV LP filed a lawsuit against Porter Bancorp, PBI Bank, J. Chester Porter and Maria L. Bouvette in New York state court. The proceeding was removed to New York federal district court on January 16, 2013. SBAV LP v. Porter Bancorp, et. al., Civ. Action 13 Civ. 0372 (S.D.N.Y). The complaint alleges violation of the Kentucky Securities Act, negligent misrepresentation and, against defendants Porter Bancorp and Bouvette, breach of contract. The plaintiff seeks damages in an amount in excess of $4,500,000, or the difference between the $5,000,016 purchase price and the value of the securities when sold by the plaintiff, plus interest at the applicable statutory rate, costs and reasonable attorneys’ fees. The defendants have filed motions to dismiss the suit or, in the alternative, to transfer it to federal district court in Kentucky. We dispute the material factual allegations made in the complaint and intend to defend the plaintiff’s claims vigorously. We have not accrued liability related to this matter as we believe we have meritorious defenses.

On June 18, 2010, three real estate development companies filed suit in Kentucky state court against PBI Bank and Managed Assets of Kentucky (“MAKY”). Signature Point Condominiums LLC, et al. v. PBI Bank, et al., Jefferson Circuit Court, Case No 10-CI-04295. The plaintiffs had borrowed funds from PBI Bank to finance a real estate development project in Jefferson County, Kentucky. In March 2010, PBI agreed to release the plaintiffs and the guarantors on the loans related to the project, and in exchange the plaintiffs conveyed the real estate securing the loans to PBI Bank. PBI Bank also granted the plaintiffs a right of first refusal to repurchase a +/- 30 acre tract of land within the project. In May 2010, PBI Bank submitted to plaintiffs the required notice of its intent to sell the land subject to the right of first refusal. After plaintiffs declined to exercise their right of first refusal, PBI Bank sold the land to MAKY in June 2010 for $3.8 million.

Plaintiffs filed suit shortly before the closing of the sale and recorded a lis pendens claiming an interest in the land, effectively preventing MAKY from taking clear title. Plaintiffs have asserted claims of fraud, breach of fiduciary duty, breach of the duty of good faith and fair dealing, tortuous interference with prospective business advantage and conspiracy to commit fraud, negligence, and conspiracy against PBI Bank and MAKY. Plaintiffs are seeking to rescind the agreement conveying the project to PBI Bank, but only with respect to the +/- 30 acre tract of land. PBI has filed a counterclaim against the plaintiffs and a third party complaint against the guarantors, asserting claims of fraud. MAKY has asserted claims against the plaintiffs for slander of title and interference with business opportunities. PBI’s position is that if the conveyance agreement is rescinded, then PBI’s notes, mortgages, and guarantees as well as the obligations of the plaintiffs and guarantors under the loans, which total more than $26 million, would all be reinstated. PBI would then seek to enforce its rights under such instruments. The matter is scheduled for trial in July 2013. We have not accrued liability related to this matter as we believe we have meritorious claims and defenses.

In the normal course of operations, we are defendants in various legal proceedings. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations.

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 II, Item 1A – Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2012 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 a traditional community bank with a wide range of commercial and personal banking products, including wealth management and trust services, with an online banking division which delivers competitive deposit products and services under the separate brand of Ascencia.

The Company reported net loss of $69,000 for the three months ended March 31, 2013, compared with net income of $1.5 million for the same period of 2012. After deductions for dividends on preferred stock, accretion on preferred stock, and loss allocated to participating securities, net loss to common shareholders was $524,000 for the three months ended March 31, 2013, compared with net income to common shareholders of $985,000 for the three months ended March 31, 2012.

Basic and diluted loss per common share were $(0.04) for the three months ended March 31, 2013 compared with basic and diluted income per common share of $0.08 for the three months ended March 31, 2012.

The following significant developments occurred during the quarter ended March 31, 2013:

●

Provision for loan losses expense was $450,000 for the first quarter of 2013, compared with $3.8 million for the prior year first quarter. The decrease was primarily attributable to the reduction in the loan portfolio size, the slower pace of loans migrating downward in risk grade classification, and stable collateral values for collateral dependent loans. Net charge-offs of $17.3 million were recognized for the first quarter. These elevated charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent in accordance with regulatory guidance.

●

Net interest margin decreased 38 basis points to 3.07% in the first three months of 2013 compared with 3.45% in the first three months of 2012. The decrease in margin between periods was primarily due to a reduction in interest earning assets coupled with lower rates on those assets and elevated non-accrual loan levels. Average loans decreased 22.0% to $872.5 million in the first three months of 2013 compared with $1.1 billion in the first three months of 2012. Net loans decreased 24.7% to $787.2 million at March 31, 2013, compared with $1.0 billion at March 31, 2012.

●

We continued to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction and development loans totaled $62.5 million, or 73% of total risk-based capital, at March 31, 2013 compared with $70.3 million, or 82% of total risk-based capital, at December 31, 2012. Non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group totaled $299.4 million, or 351% of total risk-based capital, at March 31, 2013 compared with $311.1 million, or 362% of total risk-based capital, at December 31, 2012.

●

Loan proceeds received from the repayment of our commercial real estate and construction and development loans were used primarily to redeem maturing certificates of deposit during the quarter. Deposits decreased 17.3% to $1.0 billion compared with $1.3 billion at March 31, 2012. Certificate of deposit balances declined $20.6 million during the first three months of 2013 to $739.9 million at March 31, 2013, from $760.6 million at December 31, 2012. Demand deposits decreased 4.8% during the first three months of 2013 compared with the fourth quarter of 2012, and the first three months of 2012.

●

Non-performing loans increased $26.3 million to $120.9 million at March 31, 2013, compared with $94.6 million at December 31, 2012. The increase was primarily attributable to loans for two significant borrowing relationships being placed on non-accrual during the quarter. At December 31, 2012 one of these relationships was past due 30-59 days and totaled $23.5 million; the other was past due 60-89 days and totaled $12.7 million. The increase in non-performing loans was partially offset by net loan charge-offs in the first quarter of 2013 which totaled $17.3 million. These elevated charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent, in accordance with regulatory guidance.

●

Loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $8.1 million at March 31, 2013 and loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $3.0 million at March 31, 2013.

●

Foreclosed properties were $44.2 million at March 31, 2013, compared with $43.7 million at December 31, 2012, and $35.6 million at March 31, 2012. The Company acquired $3.7 million of OREO and sold $2.9 million of OREO during the first quarter of 2013. In addition, fair value write-downs of $307,000 were recorded during the first quarter of 2013 to reflect declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies. Our ratio of non-performing assets to total assets increased to 14.58% at March 31, 2013, compared with 11.89% at December 31, 2012, and 9.61% at March 31, 2012.

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, 2012.

Going Concern Considerations and Future Plans

During the first three months of 2013, we reported net loss to common shareholders of $524,000, compared with net income to common shareholders of $985,000 for the first three months of 2012. This loss was primarily attributable to reduced net interest income, with a lower net interest margin due to lower average loans outstanding, loans repricing at lower rates, and the level of non-performing assets in our portfolio. Also, a gain on sale of securities of $2.0 million was recognized in the first quarter of 2012, while no securities were sold in the first quarter of 2013.

For the year ended December 31, 2012, we reported net loss to common shareholders of $33.4 million. This loss was attributable primarily to $40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of $36.1 million, OREO expense of $10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense. We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio. We had a net loss to common shareholders of $33.4 million for the year ended December 31, 2012 compared with net loss to common shareholders of $105.2 million for the year ended December 31, 2011.

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

●

Continuing with succession planning and adding resources to the management team. In March 2012, the Board of Directors formed a search committee comprised of its five independent directors to identify and hire a President and CEO for PBI Bank. John T. Taylor was named to these positions and appointed to the board of directors in July 2012. Additionally, John R. Davis was appointed Chief Credit Officer of PBI Bank, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization.

●

Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.

●

Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.

The remediation process for loans secured by real estate has led the Bank to acquire significant levels of OREO in 2012, 2011, and 2010. This trend has continued at a slower pace in 2013. The Bank acquired $33.5 million, $41.9 million, and $90.8 million during 2012, 2011 and 2010, respectively. For the first three months of March 31, 2013, we acquired $3.7 million of OREO. We have nonaccrual loans totaling $120.9 million at March 31, 2013. We expect to resolve many of these loans by foreclosure which could result in further additions to our OREO portfolio.

We have incurred significant losses in disposing of this real estate. We incurred losses totaling $9.3 million, $42.8 million, and $13.9 million in 2012, 2011 and 2010, respectively, from sales and fair value write-downs attributable to declining valuations as evidenced by new appraisals and from changes in our sales strategies. During the three month period ended March 31, 2013, we incurred OREO losses totaling $504,000, which consisted of $197,000 in loss on sale and $307,000 from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies.

To ensure that we maximize the value we receive upon the sale of OREO, we continually to evaluate sales opportunities and channels. We are targeting multiple sales opportunities and channels through internal marketing and the use of brokers, auctions, technology sales platforms, and bulk sale strategies. Proceeds from the sale of OREO totaled $2.7 million during the three months ended March 31, 2013 and $22.5 million, $26.0 million and $25.0 million during fiscal 2012, 2011 and 2010, respectively.

●

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

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, 2013, compared with the same period of 2012:

	For the Three Months					Change from
	Ended March 31,					Prior Period
	2013			2012		Amount			Percent
	(dollars in thousands)

Gross interest income	$	11,258		$	15,755	$	(4,497	)		(28.5	)%
Gross interest expense		2,960			4,301		(1,341	)		(31.2	)
Net interest income		8,298			11,454		(3,156	)		(27.6	)
Provision for loan losses		450			3,750		(3,300	)		(88.0	)
Non-interest income		1,647			3,445		(1,798	)		(52.2	)
Non-interest expense		9,564			9,647		(83	)		(0.9	)
Net income (loss) before taxes		(69	)		1,502		(1,571	)		(104.6	)
Income tax expense (benefit)		—			—		—			—
Net income (loss)		(69	)		1,502		(1,571	)		(104.6	)

Net loss for the three months ended March 31, 2013 decreased $1.6 million to a net loss of $69,000, compared with net income of $1.5 million for the comparable period of 2012. Provision for loan losses expense decreased $3.3 million in the first quarter of 2013 compared with the same period in 2012. This decrease in provision expense is primarily attributable to the reduction in the loan portfolio size, the lower pace of loans migrating downward in risk grade classification, and stable collateral values for collateral dependent loans. Net charge-offs of $17.3 million were recognized for the first quarter. Those charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent in accordance with regulatory guidance. Net interest income decreased $3.2 million from the 2012 first quarter due to a 38 basis point decline in net interest margin due to lower earning asset levels and lower average rates on earning assets. In addition, net interest income and net interest margin were adversely affected by $1.5 million and $790,000 of interest lost on nonaccrual loans in the first quarters of 2013 and 2012, respectively. These results were partially off-set by a decrease in OREO expense of $466,000 for the first quarter of 2013 compared with the same period of 2012 due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expense.

Net Interest Income – Our net interest income was $8.3 million for the three months ended March 31, 2013, a decrease of $3.2 million, or 27.6%, compared with $11.5 million for the same period in 2012. Net interest spread and margin were 2.93% and 3.07%, respectively, for the first quarter of 2013, compared with 3.30% and 3.45%, respectively, for the first quarter of 2012. Net average non-accrual loans were $111.4 million and $92.0 million in the first three months of 2013 and 2012, respectively.

Average loans receivable declined approximately $246.7 million for the quarter ended March 31, 2013 compared with the first quarter of 2012. This resulted in a decline in interest revenue of approximately $3.0 million for the quarter ended March 31, 2013 compared with the prior year period. The decline in loan volume is attributable to our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio, as well as soft loan demand in our markets.

Net interest margin decreased 38 basis points from our margin of 3.45% in the prior year first quarter. The yield on earning assets declined 58 basis points from the first quarter of 2012, compared with a 21 basis point decline in rates paid on interest-bearing liabilities. This resulted in a net $1.1 million reduction in net interest income.

Net interest margin for the first quarter of 2013 decreased 12 basis points from our margin of 3.19% in the fourth quarter of 2012, due primarily to lower average loan receivables and lower yield on loans, coupled with lower yield on investment securities. Average loan receivables declined $56.5 million from the fourth quarter of 2012, due to our efforts to reduce concentrations in our construction and development loan portfolio and in our non-owner occupied commercial real estate loan portfolio, and increased charge-offs. Yield on loans was adversely affected by an increase in foregone interest on non-accrual loans. Interest foregone on non-accrual loans totaled $1.5 million in the first quarter of 2013, compared with $1.3 million in the fourth quarter of 2012, and $790,000 in the first quarter of 2012. The decrease in yield on investment securities was the result of our reinvestment of scheduled principal and interest payment proceeds into lower-yielding securities. Yield on average earning assets for the first quarter of 2013 decreased 23 basis points from 4.38% in the fourth quarter of 2012, compared with a 10 basis points decrease in rates paid on interest-bearing liabilities from 1.32% in the fourth quarter of 2012.

Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended March 31, 2013 and 2012, 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,
	2013								2012
	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)	$	872,505		$	10,033		4.66	%	$	1,119,181		$	14,512		5.22	%
Securities
Taxable		145,171			852		2.38			125,502			826		2.65
Tax-exempt (3)		28,470			221		4.84			27,103			250		5.71
FHLB stock		10,072			108		4.35			10,072			114		4.55
Other equity securities		1,359			15		4.48			1,359			15		4.44
Federal funds sold and other		53,892			29		0.22			67,661			38		0.23
Total interest-earning assets		1,111,469			11,258		4.15	%		1,350,878			15,755		4.73	%
Less: Allowance for loan losses		(55,340	)							(52,894	)
Non-interest earning assets		95,687								114,622
Total assets	$	1,151,816							$	1,412,606

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	749,832		$	2,537		1.37	%	$	976,448		$	3,772		1.55	%
NOW and money market deposits		153,524			133		0.35			153,098			186		0.49
Savings accounts		40,390			34		0.34			37,085			42		0.46
Repurchase agreements		2,566			1		0.16			1,673			2		0.48
FHLB advances		5,424			43		3.22			6,906			57		3.32
Junior subordinated debentures		31,745			212		2.71			32,645			242		2.98
Total interest-bearing liabilities		983,481			2,960		1.22	%		1,207,855			4,301		1.43	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		110,138								112,656
Other liabilities		10,448								7,436
Total liabilities		1,104,067								1,327,947
Stockholders’ equity		47,749								84,659
Total liabilities and stockholders’ equity	$	1,151,816							$	1,412,606

Net interest income				$	8,298							$	11,454

Net interest spread							2.93	%							3.30	%

Net interest margin							3.07	%							3.45	%

(1)	Includes loan fees in both interest income and the calculation of yield on loans.

(2)	Calculations include non-accruing loans averaging $111.4 million and $92.0 million, respectively, 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, 2013 vs. 2012
	Increase (decrease) due to change in						Net Change
	Rate			Volume			Net Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	(1,519	)	$	(2,960	)	$	(4,479	)
Securities		(142	)		139			(3	)
FHLB stock		(6	)		—			(6	)
Other equity securities		—			—			—
Federal funds sold and other		(2	)		(7	)		(9	)
Total decrease in interest income		(1,669	)		(2,828	)		(4,497	)

Interest-bearing liabilities:
Certificates of deposit and other time deposits		(430	)		(805	)		(1,235	)
NOW and money market accounts		(54	)		1			(53	)
Savings accounts		(12	)		4			(8	)
Federal funds purchased and repurchased agreements		(2	)		1			(1	)
FHLB advances		(2	)		(12	)		(14	)
Junior subordinated debentures		(23	)		(7	)		(30	)
Total decrease in interest expense		(523	)		(818	)		(1,341	)
Increase (decrease) in net interest income	$	(1,146	)	$	(2,010	)	$	(3,156	)

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2013:

	Three Months Ended March 31,
	2013		2012
	(in thousands)
Service charges on deposit accounts	$	493	$	554
Income from fiduciary activities		517		251
Bank card interchange fees		172		177
Other real estate owned rental income		112		37
Title insurance commissions		13		22
Secondary market brokerage fees		15		17
Gains on sales of loans originated for sale		58		45
Gains on sales of investment securities, net		—		2,019
Other		267		323
Total non-interest income	$	1,647	$	3,445

Non-interest income for the first quarter ended March 31, 2013 decreased $1.8 million, or 52.2%, compared with the first quarter of 2012. The decrease in non-interest income between the three month comparative periods was primarily due a $2.0 million reduction in gains on sales of investment securities as there were no sales in the first quarter of 2013, as well as lower service charges on deposit accounts, primarily due to decreased overdraft fees due to lower volumes than in the past period. These decreases were partially offset by increased other real estate owned rental income and income from fiduciary activities. We expect income from fiduciary activities to decrease over the near term as we work to transition away from non-traditional trust services, such as ESOP and employee benefit plan services, to more traditional trust services throughout our markets.

Non-interest Expense – The following table presents the major categories of non-interest expense for the three months ended March 31, 2013:

	Three Months Ended March 31,
	2013		2012
	(in thousands)
Salary and employee benefits	$	4,139	$	4,312
Occupancy and equipment		931		886
Other real estate owned expense		791		1,257
FDIC insurance		639		873
Loan collection expense		853		360
Professional fees		406		356
State franchise tax		537		592
Communications		175		180
Postage and delivery		113		122
Office supplies		73		110
Advertising		59		33
Insurance expense		333		97
Other		515		469
Total non-interest expense	$	9,564	$	9,647

Non-interest expense for the first quarter ended March 31, 2013 decreased $83,000, or 0.9%, compared with the first quarter of 2012. The decrease in non-interest expense for the first quarter ended March 31, 2013, was primarily attributable to decreased other real estate owned expense due to lower loss on sales of OREO, lower valuation write-downs and lower property maintenance expense, as well as lower FDIC insurance. These improvements were partially offset by higher loan collection expenses and insurance expense.

Income Tax Expense – No income taxes were recorded for the first quarter of 2013. The income tax effect on net loss before taxes for the three months ended March 31, 2013, increased our deferred tax assets and related valuation allowance by $58,000. See Footnote 9, “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,
	2013			2012
	(in thousands)
Federal statutory rate times financial statement income	$	(24	)	$	526
Effect of:
Valuation allowance		123			(419)
Tax-exempt income		(79	)		(88)
Non-taxable life insurance income		(26	)		(26)
Other, net		6			7
Total	$	—		$	—

Analysis of Financial Condition

Total assets decreased $29.8 million, or 2.6%, to $1.1 billion at March 31, 2013, from $1.2 billion at December 31, 2012. This decrease was primarily attributable to a decrease of $55.2 million in net loans, and was partially offset by increases of $4.8 million and $21.6 million in securities available for sale and cash equivalents, respectively. The decrease in net loans was due to loan payoffs outpacing loan funding and efforts to move impaired loans through the collection, foreclosure, and disposition process. The increase in cash and cash equivalents was due to cash inflows related to loan payments and maturities of securities.

Loans Receivable – Loans receivable decreased $72.0 million, or 8.0%, during the three months ended March 31, 2013 to $827.1 million. Our commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $49.3 million, or 9.4%, during the three months and comprised 57.7% of the total loan portfolio at March 31, 2013. The decline in loans receivable was attributable to net charge-offs of $17.3 million, transfers to OREO of $3.7 million, and loan payoffs outpacing loan funding by approximately $51.0 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,
	2013					2012
	Amount		Percent			Amount		Percent
			(dollars in thousands)

Commercial	$	49,932		6.03	%	$	52,567		5.85	%
Commercial Real Estate
Construction		62,535		7.56			70,284		7.82
Farmland		75,347		9.11			80,825		8.99
Other		289,211		34.97			322,687		35.89
Residential Real Estate
Multi-family		49,590		6.00			50,986		5.67
1-4 Family		259,412		31.36			278,273		30.95
Consumer		18,129		2.19			20,383		2.27
Agriculture		22,214		2.69			22,317		2.48
Other		706		0.09			770		0.08
Total loans	$	827,076		100.00	%	$	899,092		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, 2013 and December 31, 2012.

	March 31, 2013			December 31, 2012
	(dollars in thousands)
Loans past due 90 days or more still on accrual	$	—		$	86
Non-accrual loans		120,943			94,517
Total non-performing loans		120,943			94,603
Real estate acquired through foreclosure		44,192			43,671
Other repossessed assets		—			—
Total non-performing assets	$	165,135		$	138,274
Non-performing loans to total loans		14.62	%		10.52	%
Non-performing assets to total assets		14.58	%		11.89	%
Allowance for non-performing loans	$	5,838		$	13,250
Allowance for non-performing loans to non-performing loans		4.83	%		14.01	%

Nonperforming loans at March 31, 2013, were $120.9 million, or 14.62% of total loans, compared with $98.0 million, or 8.92% of total loans, at March 31, 2012, and $94.6 million, or 10.52% of total loans at December 31, 2012. The increase from December 31, 2012 to March 31, 2013 was primarily attributable to loans for two significant borrowing relationships, which together totaled $36.2 million, being placed on non-accrual. At December 31, 2012, these relationships were past due 30-59 days and 60-89 days, respectively. The increase in non-accrual loans was partially offset by net loan charge-offs in the first quarter of 2013 which totaled $17.3 million. These elevated charge-offs were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent, in accordance with regulatory guidance.

Loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $8.1 million at March 31, 2013. Loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $3.0 million at March 31, 2013. This represents a $47.5 million decrease from December 31, 2012 to March 31, 2013, in loans past due 30-89 days. These decreases were primarily in the 1-4 family residential real estate, and construction segments 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.

A troubled debt restructuring (TDR) occurs when 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 of allocated reserves, 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, 2013, we had 126 restructured loans totaling $107.8 million with borrowers who experienced deterioration in financial condition compared with 123 loans totaling $117.8 million at December 31, 2012. In general, these loans were granted interest rate reductions to provide cash flow relief to customers experiencing cash flow difficulties. Of these loans, 5 loans totaling approximately $5.2 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. At March 31, 2013, $55.2 million of our restructured loans were accruing and $52.6 million were on nonaccrual.

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 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, 2013 were $44.2 million compared with $35.6 million at March 31, 2012 and $43.7 million at December 31, 2012. See Footnote 5, “Other Real Estate Owned,” to the financial statements. During the first three months of 2013, we acquired $3.7 million of OREO properties, and sold properties totaling approximately $2.9 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 OREO. 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, our 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 OREO totaled $791,000 for the three months ended March 31, 2013, compared with $1.3 million for the same period of 2012. During the three months ended March 31, 2013, fair value write-downs of $307,000 were recorded to reflect declining values evidenced by new appraisals and our reduction of marketing prices in connection with our sales strategies.

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, 2013, decreased to 4.82% from 4.91% at March 31, 2012, and from 6.30% at December 31, 2012. Provision for loan losses decreased $3.3 million to $450,000 for the first quarter of 2013 compared with $3.8 million for the first quarter of 2012. The decrease in the first quarter was primarily attributable to the reduction in the loan portfolio size, net loan charge-offs of $17.3 million, the lower pace of loans migrating downward in risk grade classification, and stable collateral values for collateral dependent loans.

Net loan charge-offs for the first quarter of 2013 were $17.3 million, or 1.98% of average loans, compared with $2.4 million, or 0.21% of average loans, for the first quarter of 2012, and $4.3 million, or 0.47% of average loans, for the fourth quarter of 2012. Our allowance for loan losses to non-performing loans was 32.94% at March 31, 2013, compared with 59.91% at December 31, 2012, and 55.07% at March 31, 2012. Additionally, the elevated charge-offs in the first quarter were primarily the result of charging off specific reserves for loans that were deemed to be collateral dependent during the quarter in accordance with regulatory guidance. The change in this metric between periods is attributable to the fluctuation in historical loss experience, qualitative factors, non-accrual loans, and provision expense.

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. 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. Our allowance for non-performing loans to non-performing loans was 4.8% at March 31, 2013 compared with 13.8% at March 31, 2012, and 14.0% at December 31, 2012. The decline in this metric from December 31, 2012 to March 31, 2013 was primarily attributable to charging off specific reserves for loans that were deemed to be collateral dependent during the quarter in accordance with regulatory guidance.

An analysis of changes in the allowance for loan losses and selected ratios for the three month periods ended March 31, 2013 and 2012, and for the year ended December 31, 2012 follows:


	Three Months Ended March 31,						Year Ended December 31, 2012
	2013			2012			Year Ended December 31, 2012
	(in thousands)
Balance at beginning of period	$	56,680		$	52,579		$	52,579
Provision for loan losses		450			3,750			40,250
Recoveries		671			206			1,366
Charge-offs		(17,962	)		(2,582	)		(37,515	)
Balance at end of period		39,839			53,953			56,680

Allowance for loan losses to period-end loans		4.82%			4.91%			6.30%
Net charge-offs to average loans		1.98%			0.21%			3.50%
Allowance for loan losses to non-performing loans		32.94%			55.07%			59.91%

Allowance for loan losses for loans individually evaluated for impairment	$	8,161		$	7,833		$	21,034
Loans individually evaluated for impairment		177,472			192,360			188,808
Allowance for loan losses to loans individually evaluated for impairment		4.60%			4.07%			11.14%

Allowance for loan losses for loans collectively evaluated for impairment	$	31,678		$	46,120		$	35,646
Loans collectively evaluated for impairment		649,604			906,352			710,284
Allowance for loan losses to loans collectively evaluated for impairment		4.88%			5.09%			5.02%

Liabilities – Total liabilities at March 31, 2013 were $1.1 billion compared with $1.1 billion at December 31, 2012, a decrease of $29.3 million, or 2.6%. This decrease was primarily attributable to a decrease in deposits of $28.7 million, or 2.7%, to $1.0 billion at March 31, 2013 from $1.1 billion at December 31, 2012. Certificate of deposit balances declined $20.6 million during the first three months of 2013 to $739.9 million at March 31, 2013 from $760.6 million at December 31, 2012. The decrease in deposits follows management’s strategy to match liability funding levels with lower loan balances.

Federal Home Loan Bank advances decreased by $280,000, or 5.0%, to $5.3 million at March 31, 2013, from $5.6 million at December 31, 2012. 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,
	2013					2012
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	110,138				$	113,325
Interest checking		88,173		0.28	%		89,820		0.37	%
Money market		65,351		0.45			63,212		0.49
Savings		40,390		0.34			38,665		0.40
Certificates of deposit		749,832		1.37			912,061		1.52
Total deposits	$	1,053,884		1.04	%	$	1,217,083		1.20	%

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,
	2013					2012
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Less than $100,000	$	432,682		1.31	%	$	478,502		1.40	%
$100,000 or more		317,150		1.46	%		433,559		1.64	%
Total	$	749,832		1.37	%	$	912,601		1.52	%

The following table shows at March 31, 2013 the amount of our time deposits of $100,000 or more by time remaining until maturity:

Maturity Period	Retail		Brokered		Total
	(in thousands)
Three months or less	$	39,605	$	15,000	$	54,605
Three months through six months		45,301		—		45,301
Six months through twelve months		59,882		—		59,882
Over twelve months		156,332		—		156,332
Total	$	301,120	$	15,000	$	316,120

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 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 regularly 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. Historically, we have utilized brokered and wholesale deposits to supplement our funding strategy. At March 31, 2013, and December 31, 2012, these deposits totaled $15.0 million and mature in May 2013. 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. We intend to redeem the brokered deposits at maturity in the normal course of business.

Traditionally, we have borrowed from the FHLB to supplement our funding requirements. The advances are collateralized by first mortgage residential loans. The borrowing capacity is based on the market value of the underlying pledged loans. At March 31, 2013, our additional borrowing capacity with the FHLB was $17.9 million. Any new advances are limited to a one year maturity or less.

We also have federal funds borrowing lines from major correspondent banks totaling $5.0 million on a secured 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 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 $3.5 million at March 31, 2013. 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 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, 2013, totaling $3.5 million, are needed for the ongoing cash operating expenses of the parent company which have been reduced and are expected to be $1.1 million for 2013. We have elected to defer payments on our Series A preferred stock and on our trust preferred securities. Parent company liquidity could be improved if a capital raise was completed.

Capital

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. We have the option to defer interest payments from time-to-time for a period not to exceed 20 consecutive quarters. Thereafter, we must pay all deferred interest and resume quarterly interest payments or we will be in default. 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, 2013, cumulative accrued and unpaid interest on our junior subordinated notes totaled $1.0 million.

Stockholders’ equity decreased $452,000 to $46.7 million at March 31, 2013, compared with $47.2 million at December 31, 2012. The decrease was due to the current year net loss, further reduced by dividends declared on cumulative preferred stock and net reduction in unrealized gain on available for sale securities.

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. 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 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, 2013						December 31, 2012
	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			6.77	%		8.21	%		6.46	%		7.71	%
Total risk-based capital		8.0			10.0			12.0	%		10.16			10.29			9.81			9.82
Tier 1 leverage ratio		4.0			5.0			9.0			4.91			5.95			4.50			5.37

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at March 31, 2013, and December 31, 2012. Given a 100 basis point increase in interest rates sustained for one year, base net interest income would increase by an estimated 3.6% at March 31, 2013, compared with an increase of 4.11% at December 31, 2012, and is within the risk tolerance parameters of our risk management policy. Given a 200 basis point increase in interest rates sustained for one year, base net interest income would increase by an estimated 7.1% at March 31, 2013, compared with an increase of 8.11% at December 31, 2012, 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, 2013, as calculated using the static shock model approach:

	Change in Future Net Interest Income
	Dollar Change		Percentage Change
	(dollars in thousands)
+ 200 basis points	$	2,151		7.06	%
+ 100 basis points		1,097		3.60

We did not run a model simulation for declining interest rates as of March 31, 2013, because the Federal Reserve effectively lowered the federal funds target rate between 0.00% to 0.25% in December 2008. Therefore, no significant further short-term rate reductions can occur.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Additionally, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the 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. Except as described in Footnote 13, “Contingencies” in the Notes to our consolidated financial statement, 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 13, “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, 2012 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, 2013, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (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)

May 15, 2013	By:	/s/ Maria L. Bouvette
		Maria L. Bouvette
		Chairman & Chief Executive Officer

May 15, 2013	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer and Chief
		Accounting Officer