LIMESTONE BANCORP, INC. - Quarter Report: 2015 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

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, 2015

¨	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.

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.

19,205,495 shares of Common Stock and 6,458,000 shares of Non-Voting Common Stock, no par value, were outstanding at April 30, 2015.

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		34

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		52

ITEM 4.	CONTROLS AND PROCEDURES		52

PART II –	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		53

ITEM 1A.	RISK FACTORS		53

ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS		53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		53

ITEM 4.	MINE SAFETY DISCLOSURES		53

ITEM 5.	OTHER INFORMATION		53

ITEM 6.	EXHIBITS		53

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, 2015 and December 31, 2014
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014
Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2015
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014
Notes to Unaudited Consolidated Financial Statements

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)


	March 31, 2015			December 31, 2014
Assets
Cash and due from banks	$	7,899		$	14,169
Interest bearing deposits in banks		101,872			66,011

Cash and cash equivalents		109,771			80,180
Securities available for sale		157,290			190,791
Securities held to maturity (fair value of $44,895 and $44,498, respectively)		42,263			42,325
Loans held for sale		—			8,926
Loans, net of allowance of $18,597 and $19,364, respectively		613,831			605,635
Premises and equipment, net		19,323			19,507
Other real estate owned		43,618			46,197
Federal Home Loan Bank stock		7,323			7,323
Bank owned life insurance		9,231			9,167
Accrued interest receivable and other assets		7,056			7,938

Total assets	$	1,009,706		$	1,017,989

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	108,011		$	114,910
Interest bearing		822,498			811,931

Total deposits		930,509			926,841
Repurchase agreements		1,145			1,341
Federal Home Loan Bank advances		3,597			15,752
Accrued interest payable and other liabilities		10,758			10,640
Subordinated capital note		4,725			4,950
Junior subordinated debentures		25,000			25,000

Total liabilities		975,734			984,524
Stockholders’ equity
Preferred stock, no par
Series B - 0 and 40,536 issued and outstanding, respectively		—			2,229
Series D - 0 and 64,580 issued and outstanding, respectively		—			3,552
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million		1,644			1,644
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million		1,127			1,127

Total preferred stockholders’ equity		2,771			8,552

Common stock, no par, 86,000,000 shares authorized, 19,205,495 and 14,890,514 voting, and 6,458,000 and 0 non-voting shares issued and outstanding, respectively		119,019			113,238
Additional paid-in capital		21,491			21,442
Retained deficit		(107,001	)		(107,595	)
Accumulated other comprehensive income (loss)		(2,308	)		(2,172	)

Total common stockholders’ equity		31,201			24,913

Total stockholders’ equity		33,972			33,465

Total liabilities and stockholders’ equity	$	1,009,706		$	1,017,989

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,
	2015		2014
Interest income
Loans, including fees	$	7,755	$	8,321
Taxable securities		1,126		1,173
Tax exempt securities		203		241
Federal funds sold and other		119		162

		9,203		9,897

Interest expense
Deposits		1,692		2,361
Junior subordinated debentures		152		152
Subordinated capital note		42		50
Federal Home Loan Bank advances		27		33
Federal funds purchased and other		—		1

		1,913		2,597

Net interest income		7,290		7,300
Provision for loan losses		—		—

Net interest income after provision for loan losses		7,290		7,300

Non-interest income
Service charges on deposit accounts		409		468
Bank card interchange fees		203		161
Other real estate owned rental income		357		7
Net gain on sales of securities		1,497		44
Other		230		235

		2,696		915

Non-interest expense
Salaries and employee benefits		3,847		3,741
Occupancy and equipment		870		892
Professional fees		979		289
FDIC insurance		570		540
Data processing expense		304		269
State franchise and deposit tax		285		425
Other real estate owned expense		733		662
Loan collection expense		283		539
Other		1,521		1,145

		9,392		8,502

Income (loss) before income taxes		594		(287	)
Income tax expense (benefit)		—		—

Net income (loss)		594		(287	)
Less:
Dividends and accretion on preferred stock		—		786
Earnings (loss) allocated to participating securities		185		(97	)

Net income (loss) attributable to common shareholders	$	409	$	(976	)

Basic and diluted earnings (loss) per common share	$	0.02	$	(0.08	)

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)


	Three Months Ended March 31,
	2015			2014
Net income (loss)	$	594		$	(287	)
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		(1,633	)		1,589
Reclassification adjustment for losses (gains) included in net income		(1,497	)		(44	)

Net unrealized gain/(loss) recognized in comprehensive income		(136	)		1,633
Tax effect		—			—

Other comprehensive income (loss)		(136	)		1,663

Comprehensive income	$	458		$	1,346

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three Months Ended March 31,

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


	Shares																		Amount
	Common								Preferred												Preferred										Common
	Common			Non-Voting Common		Total Common			Series B			Series D			Series E		Series F		Common and Non-Voting Common		Series B			Series D			Series E		Series F		Additional Paid-In Capital		Retained Deficit			Accumulated Other Compre- hensive Income (Loss)			Total
Balances, January 1, 2015		14,890,514			—		14,890,514			40,536			64,580			6,198		4,304	$	113,238	$	2,229		$	3,552		$	1,644	$	1,127	$	21,442	$	(107,595	)	$	(2,172	)	$	33,465
Issuance of unvested stock		800,000			—		800,000			—			—			—		—		—		—			—			—		—		—		—			—			—
Terminated stock		(538,479	)		—		(538,479	)		—			—			—		—		—		—			—			—		—		—		—			—			—
Forfeited unvested stock		(140	)				(140	)
Stock-based compensation expense		—			—		—			—			—			—		—		—		—			—			—		—		49		—			—			49
Net income		—			—		—			—			—			—		—		—		—			—			—		—		—		594			—			594
Net change in accumulated other comprehensive income, net of taxes		—			—		—			—			—			—		—		—		—			—			—		—		—		—			(136	)		(136	)
Conversion of preferred stock to common and non-voting common stock		4,053,600			6,458,000		10,511,600			(40,536	)		(64,580	)		—		—		5,781		(2,229	)		(3,552	)		—		—		—		—			—			—

Balances, March 31, 2015		19,205,495			6,458,000		25,663,495			—			—			6,198		4,304	$	119,019	$	—		$	—		$	1,644	$	1,127	$	21,491	$	(107,001	)	$	(2,308	)	$	33,972

See accompanying notes.

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2015 and 2014

(dollars in thousands)


	2015			2014
Cash flows from operating activities
Net income (loss)	$	594		$	(287	)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization		422			418
Provision for loan losses		—			—
Net amortization on securities		354			400
Stock-based compensation expense		49			133
Net loss (gain) on sales of loans held for sale		281			(24	)
Loans originated for sale		(433	)		(872	)
Proceeds from sales of loans held for sale		9,078			1,045
Net (gain) loss on sales of other real estate owned		(3	)		—
Net write-down of other real estate owned		300			250
Net realized gain on sales of investment securities		(1,497	)		(44	)
Earnings on bank owned life insurance, net of premium expense		(64	)		(70	)
Net change in accrued interest receivable and other assets		783			(879	)
Net change in accrued interest payable and other liabilities		118			(349	)

Net cash from operating activities		9,982			(279	)
Cash flows from investing activities
Purchases of available for sale securities		(4,927	)		(6,183	)
Sales of available for sale securities		34,138			329
Maturities and prepayments of available for sale securities		5,358			3,808
Proceeds from mandatory redemption of Federal Home Loan Bank stock		—			2,749
Proceeds from sale of other real estate owned		2,629			2,075
Loan originations and payments, net		(8,618	)		6,608
Purchases of premises and equipment, net		(63	)		(72	)

Net cash from investing activities		28,517			9,314

Cash flows from financing activities
Net change in deposits		3,668			(12,832	)
Net change in repurchase agreements		(196	)		(230	)
Repayment of Federal Home Loan Bank advances		(17,155	)		(172	)
Advances from Federal Home Loan Bank		5,000			25
Repayment of subordinated capital note		(225	)		(225	)

Net cash from financing activities		(8,908	)		(13,434	)

Net change in cash and cash equivalents		29,591			(4,399	)
Beginning cash and cash equivalents		80,180			111,134

Ending cash and cash equivalents	$	109,771		$	106,735

Supplemental cash flow information:
Interest paid	$	1,906		$	2,491
Income taxes paid (refunded)		—			—
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	347		$	17,351

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) 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 the three months ended March 31, 2015 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, 2014 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.

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

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 create substantial doubt about the Company’s ability to continue as a going concern.

During the first three months of 2015, we reported net income attributable to common shareholders of $409,000, compared with net loss attributable to common shareholders of $976,000 for the first three months of 2014. The increase in 2015 compared to 2014 is primarily attributable to an increase in non-interest income, specifically gains on sales of securities and other real estate owned (OREO) income.

At March 31, 2015, we continued to be involved in various legal proceedings in which we dispute the material factual allegations against us. After conferring with our legal advisors, we believe we have meritorious grounds on which to prevail. If we do not prevail, the ultimate outcome of any one of these matters could have a material adverse effect on our financial condition, results of operations, or cash flows. These matters are more fully described in Note 13 – “Contingencies”.

For the year ended December 31, 2014, we reported a net loss of $11.2 million. This loss was attributable primarily to loan loss provision of $7.1 million, OREO expense of $5.8 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, and ongoing operating expense, along with $3.0 million in loan collection expenses. 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. After deductions for dividends and accretion on preferred stock of $2.4 million, allocating losses to participating securities of $3.2 million, and the effect of the exchange of preferred stock for common stock of $36.1 million, net income attributable to common shareholders was $19.4 million for the year ended December 31, 2014, compared with a net loss attributable to common shareholders of $3.4 million for the year ended December 31, 2013.

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%. In October 2012, the Bank entered into a revised 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. The revised 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 revised Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of March 31, 2015, 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 the issuance of common stock to new and existing shareholders.

•

Continuing to operate the Company and Bank in a safe and sound manner. We have reduced our lending concentrations, and the size of our balance sheet while continuing to remediate non-performing loans, and reduce other noninterest expense through the disposition of OREO.

•

Evaluating and implementing improvements to 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.

•

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 $632.4 million at March 31, 2015.

•

We have reduced our construction and development loans to less than 75% of total risk-based capital at March 31, 2015.

•

We have reduced our non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans. These loans represented 243% of total risk-based capital at March 31, 2015, down from 262% at December 31, 2014.

•

Executing on our commitment to sell OREO and reinvest in quality income producing assets.

•

Our acquisition of real estate assets through the loan remediation process increased during 2014, as we acquired $32.3 million of OREO in 2014 compared with $20.6 million during 2013. We acquired $347,000 in the first three months of 2015. Additionally, nonaccrual loans totaled $36.5 million at March 31, 2015, and we expect to resolve many of these loans by foreclosure which could result in further additions to our OREO portfolio.

•

We incurred OREO losses totaling $297,000 during the first three months of 2015, comprised of $300,000 in fair value write-downs to reflect declines in appraisal valuations and changes in our pricing strategies, offset by $3,000 in net gain on sales of OREO.

•

To ensure we maximize the value we receive upon the sale of OREO, we continually evaluate sales opportunities. Proceeds from the sale of OREO totaled $2.6 million for the three months ended March 31, 2015, and $2.1 million for the three months ended March 31, 2014.

•

Real estate construction represents 42% of the OREO portfolio at March 31, 2015 compared with 40% at December 31, 2014. Commercial real estate represents 33% of the OREO portfolio at March 31, 2015 compared with 31% at December 31, 2014, and 1-4 family residential properties represent 14% of the portfolio at March 31, 2015 compared with 17% at December 31, 2014.

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 such as directing a bank to seek a buyer or taking a bank into receivership.

The Company’s liquid assets were $1.6 million at March 31, 2015. 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, interest on deposits with the Bank, the issuance of new debt, or the issuance of capital securities. Ongoing operating expenses of the parent company are forecasted at approximately $1.0 million for 2015.

Effective with the fourth quarter of 2011, we began deferring interest payments on the junior subordinated debentures relating to our trust preferred securities. Deferring interest payments on the junior subordinated debentures resulted in a deferral of distributions on our trust preferred securities. If we defer distributions on our trust preferred securities for 20 consecutive quarters, we must pay all deferred distributions in full or we will be in default. Our deferral period expires in the third quarter of 2016. Deferred distributions on our trust preferred securities, which totaled $2.3 million as of March 31, 2015, are cumulative, and unpaid distributions accrue and compound on each subsequent payment date. If as a result of a default we become subject to any liquidation, dissolution or winding up, holders of the trust preferred securities will be entitled to receive the liquidation amounts to which they are entitled, including all accrued and unpaid distributions, before any distribution can be made to our shareholders. In addition, the holders of our Series E and Series F Preferred Shares will be entitled to receive liquidation distributions totaling $10.5 million before any distribution can be made to the holders of our common shares.

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, 2015
Available for sale
U.S. Government and federal agency	$	30,073	$	235	$	(283	)	$	30,025
Agency mortgage-backed: residential		104,912		2,136		(92	)		106,956
State and municipal		7,118		408		—			7,526
Corporate bonds		12,052		258		(192	)		12,118
Other debt securities		572		93		—			665

Total available for sale	$	154,727	$	3,130	$	(567	)	$	157,290

Held to maturity
State and municipal	$	42,263	$	2,632	$	—		$	44,895

Total held to maturity	$	42,263	$	2,632	$	—		$	44,895


December 31, 2014
Available for sale
U.S. Government and federal agency	$	35,725	$	308	$	(590	)	$	35,443
Agency mortgage-backed: residential		121,985		1,970		(357	)		123,598
State and municipal		11,690		722		(8	)		12,404
Corporate bonds		18,087		853		(252	)		18,688
Other debt securities		572		86		—			658

Total available for sale	$	188,059	$	3,939	$	(1,207	)	$	190,791

Held to maturity
State and municipal	$	42,325	$	2,173	$	—		$	44,498

Total held to maturity	$	42,325	$	2,173	$	—		$	44,498

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


	Three Months Ended March 31,
	2015		2014
	(in thousands)
Proceeds	$	34,138	$	329
Gross gains		1,551		44
Gross losses		54		—

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, 2015
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	15,002	$	15,102
One to five years		7,466		7,802
Five to ten years		26,775		26,765
Beyond ten years		572		665
Agency mortgage-backed: residential		104,912		106,956

Total	$	154,727	$	157,290

Held to maturity
One to five years	$	10,840	$	11,377
Five to ten years		27,867		29,641
Beyond ten years		3,556		3,877

Total	$	42,263	$	44,895

Securities pledged at March 31, 2015 and December 31, 2014 had carrying values of approximately $62.1 million and $80.8 million, respectively, and were pledged to secure public deposits and repurchase agreements.

At March 31, 2015 and December 31, 2014, we held securities issued by the Commonwealth of Kentucky or municipalities in the Commonwealth of Kentucky having a book value of $18.2 million and $19.1 million, respectively. Additionally, at March 31, 2015 and December 31, 2014, we held securities issued by the State of Texas or municipalities in the State of Texas having a book value of $4.4 million at each period end. At March 31, 2015 and December 31, 2014, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Securities with unrealized losses at March 31, 2015 and December 31, 2014, aggregated by investment category and length of time the 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, 2015
Available for sale
U.S. Government and federal agency	$	2,576	$	(5	)	$	15,550	$	(278	)	$	18,126	$	(283	)
Agency mortgage-backed: residential		—		—			4,190		(92	)		4,190		(92	)
Corporate bonds		2,299		(145	)		1,750		(47	)		4,049		(192	)

Total temporarily impaired	$	4,875	$	(150	)	$	21,490	$	(417	)	$	26,365	$	(567	)

December 31, 2014
Available for sale
U.S. Government and federal agency	$	7,778	$	(60	)	$	18,681	$	(530	)	$	26,459	$	(590	)
Agency mortgage-backed: residential		6,960		(12	)		17,938		(345	)		24,898		(357	)
State and municipal		569		(8	)		—		—			569		(8	)
Corporate bonds		4,884		(119	)		1,660		(133	)		6,544		(252	)

Total temporarily impaired	$	20,191	$	(199	)	$	38,279	$	(1,008	)	$	58,470	$	(1,207	)

There were no held to maturity securities in an unrealized loss position at March 31, 2015 or December 31, 2014.

The Company evaluates securities for other than temporary impairment (OTTI) on a quarterly basis. 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. As of March 31, 2015, management does not believe securities within our portfolio with unrealized losses should be classified as other than temporarily impaired.

Note 4 – Loans

Loans were as follows:


	March 31, 2015			December 31, 2014
	(in thousands)
Commercial	$	76,954		$	60,936
Commercial Real Estate:
Construction		36,793			33,173
Farmland		77,948			77,419
Nonfarm nonresidential		159,276			175,452
Residential Real Estate:
Multi-family		43,150			41,891
1-4 Family		197,583			197,278
Consumer		10,831			11,347
Agriculture		28,673			26,966
Other		1,220			537

Subtotal		632,428			624,999
Less: Allowance for loan losses		(18,597	)		(19,364	)

Loans, net	$	613,831		$	605,635

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014:


	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
March 31, 2015:
Beginning balance	$	2,046		$	10,931		$	5,787		$	274		$	319		$	7		$	19,364
Provision for loan losses		269			7			(384	)		12			104			(8	)		—
Loans charged off		(375	)		(369	)		(482	)		(68	)		(33	)		—			(1,327	)
Recoveries		106			111			300			26			1			16			560

Ending balance	$	2,046		$	10,680		$	5,221		$	244		$	391		$	15		$	18,597

March 31, 2014:
Beginning balance	$	3,221		$	16,414		$	7,762		$	416		$	305		$	6		$	28,124
Provision for loan losses		445			(1,127	)		534			19			113			16			—
Loans charged off		(146	)		(1,474	)		(1,308	)		(128	)		(9	)		(17	)		(3,082	)
Recoveries		88			116			83			76			6			4			373

Ending balance	$	3,608		$	13,929		$	7,071		$	383		$	415		$	9		$	25,415

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, 2015:


	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	$	2	$	51	$	200	$	1	$	—	$	—	$	254
Collectively evaluated for impairment		2,044		10,629		5,021		243		391		15		18,343

Total ending allowance balance	$	2,046	$	10,680	$	5,221	$	244	$	391	$	15	$	18,597

Loans:
Loans individually evaluated for impairment	$	1,677	$	32,731	$	20,504	$	32	$	232	$	123	$	55,299
Loans collectively evaluated for impairment		75,277		241,286		220,229		10,799		28,441		1,097		577,129

Total ending loans balance	$	76,954	$	274,017	$	240,733	$	10,831	$	28,673	$	1,220	$	632,428

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, 2014:


	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	$	33	$	491	$	227	$	1	$	—	$	—	$	752
Collectively evaluated for impairment		2,013		10,440		5,560		273		319		7		18,612

Total ending allowance balance	$	2,046	$	10,931	$	5,787	$	274	$	319	$	7	$	19,364

Loans:
Loans individually evaluated for impairment	$	2,022	$	48,141	$	21,384	$	61	$	263	$	122	$	71,993
Loans collectively evaluated for impairment		58,914		237,903		217,785		11,286		26,703		415		553,006

Total ending loans balance	$	60,936	$	286,044	$	239,169	$	11,347	$	26,966	$	537	$	624,999

Impaired Loans

Impaired loans include restructured loans and 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 tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014:


	As of March 31, 2015						Three Months Ended March 31, 2015
	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	$	2,109	$	1,664	$	—	$	1,821	$	—	$	—
Commercial real estate:
Construction		4,514		3,938		—		4,019		4		1
Farmland		7,064		4,870		—		4,804		23		23
Nonfarm nonresidential		34,805		23,421		—		22,920		65		—
Residential real estate:
Multi-family		—		—		—		40		—		—
1-4 Family		16,813		14,570		—		14,918		134		47
Consumer		90		24		—		27		—		—
Agriculture		273		232		—		247		—		—
Other		368		123		—		123		2		2

Subtotal		66,036		48,842		—		48,919		228		73
With An Allowance Recorded:
Commercial		13		13		2		29		—		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		—		—		—		157		—		—
Nonfarm nonresidential		586		502		51		8,535		6		—
Residential real estate:
Multi-family		4,250		4,250		84		4,258		47		—
1-4 Family		1,684		1,684		116		1,727		25		—
Consumer		8		8		1		20		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—

Subtotal		6,541		6,457		254		14,726		78		—

Total	$	72,577	$	55,299	$	254	$	63,645	$	306	$	73


	As of December 31, 2014						Three Months Ended March 31, 2014
	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	$	2,546	$	1,978	$	—	$	2,679	$	1	$	1
Commercial real estate:
Construction		4,714		4,100		—		7,433		3		—
Farmland		6,636		4,739		—		7,322		17		17
Other		34,437		22,418		—		58,027		182		—
Residential real estate:
Multi-family		81		81		—		4,036		—		—
1-4 Family		18,496		15,266		—		29,053		286		169
Consumer		93		29		—		4		—		—
Agriculture		276		263		—		310		3		3
Other		367		122		—		408		7		7

Subtotal		67,646		48,996		—		109,272		499		197
With An Allowance Recorded:
Commercial		145		44		33		2,218		18		—
Commercial real estate:
Construction		—		—		—		1,117		6		—
Farmland		658		315		38		124		—		—
Other		19,454		16,569		453		16,564		109		—
Residential real estate:
Multi-family		4,266		4,266		91		4,659		37		—
1-4 Family		1,791		1,771		136		2,001		19		—
Consumer		32		32		1		65		1		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—

Subtotal		26,346		22,997		752		26,748		190		—

Total	$	93,992	$	71,993	$	752	$	136,020	$	689	$	197

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 borrower.

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2015 and December 31, 2014:


	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2015
Commercial
Rate reduction	$	13	$	69	$	82
Principal deferral		—		869		869
Commercial Real Estate:
Construction
Rate reduction		267		3,237		3,504
Farmland
Principal deferral		—		2,365		2,365
Nonfarm nonresidential
Rate reduction		5,543		12,462		18,005
Principal deferral		660		—		660
Residential Real Estate:
Multi-family
Rate reduction		4,250		—		4,250
1-4 Family
Rate reduction		8,057		—		8,057
Consumer
Rate reduction		8		—		8

Total TDRs	$	18,798	$	19,002	$	37,800


	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2014
Commercial
Rate reduction	$	14	$	—	$	14
Principal deferral		—		869		869
Commercial Real Estate:
Construction
Rate reduction		268		3,379		3,647
Farmland
Principal deferral		—		2,365		2,365
Other
Rate reduction		8,622		13,894		22,516
Principal deferral		671		—		671
Residential Real Estate:
Multi-family
Rate reduction		4,266		—		4,266
1-4 Family
Rate reduction		8,112		—		8,112
Consumer
Rate reduction		32		—		32

Total TDRs	$	21,985	$	20,507	$	42,492

At March 31, 2015 and December 31, 2014, 50% and 52%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $253,000 and $579,000 in reserves to borrowers whose loan terms have been modified in TDRs as of March 31, 2015, and December 31, 2014, respectively. The Company has committed to lend no additional amounts to customers as of March 31, 2015 and December 31, 2014 to borrowers with outstanding loans classified as TDRs.

Management periodically reviews renewals/modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.

No TDR loan modifications occurred during the three months ended March 31, 2015 or March 31, 2014. During the first three months of 2015 and 2014, no TDRs defaulted on their restructured loan within the 12 month period following the loan modification. 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, 2015, and December 31, 2014:


	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
	(in thousands)
Commercial	$	1,663	$	1,978	$	—	$	—
Commercial Real Estate:
Construction		3,671		3,831		—		—
Farmland		4,871		5,054		—		—
Nonfarm nonresidential		17,719		26,892		—		—
Residential Real Estate:
Multi-family		—		80		—		—
1-4 Family		8,197		8,925		—		151
Consumer		24		30		18		—
Agriculture		232		263		—		—
Other		123		122		—		—

Total	$	36,500	$	47,175	$	18	$	151

The following table presents the aging of the recorded investment in past due loans as of March 31, 2015 and December 31, 2014:


	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, 2015
Commercial	$	465	$	4	$	—	$	1,663	$	2,132
Commercial Real Estate:
Construction		—		—		—		3,671		3,671
Farmland		343		230		—		4,871		5,444
Nonfarm nonresidential		356		221		—		17,719		18,296
Residential Real Estate:
Multi-family		—		42		—		—		42
1-4 Family		2,959		1,267		—		8,197		12,423
Consumer		156		5		18		24		203
Agriculture		91		—		—		232		323
Other		—		—		—		123		123

Total	$	4,370	$	1,769	$	18	$	36,500	$	42,657


	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, 2014
Commercial	$	86	$	—	$	—	$	1,978	$	2,064
Commercial Real Estate:
Construction		—		—		—		3,831		3,831
Farmland		400		14		—		5,054		5,468
Nonfarm nonresidential		241		318		—		26,892		27,451
Residential Real Estate:
Multi-family		—		—		—		80		80
1-4 Family		3,124		601		151		8,925		12,801
Consumer		109		47		—		30		186
Agriculture		—		—		—		263		263
Other		—		—		—		122		122

Total	$	3,960	$	980	$	151	$	47,175	$	52,266

Credit Quality Indicators

We categorize all 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. Additionally, loans are analyzed continuously through our internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely analyzed through our credit administration processes which classify the loans as to credit risk. 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 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, 2015, and December 31, 2014, 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, 2015
Commercial	$	67,239	$	4,422	$	—	$	5,293	$	—	$	76,954
Commercial Real Estate:
Construction		27,975		3,787		—		5,031		—		36,793
Farmland		63,761		6,834		—		7,353		—		77,948
Nonfarm nonresidential		107,808		26,755		797		23,916		—		159,276
Residential Real Estate:
Multi-family		34,093		5,090		—		3,967		—		43,150
1-4 Family		150,241		19,869		12		27,461		—		197,583
Consumer		9,805		370		301		355		—		10,831
Agriculture		18,526		9,749		—		398		—		28,673
Other		1,097		—		—		123		—		1,220

Total	$	480,545	$	76,876	$	1,110	$	73,897	$	—	$	632,428


	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2014
Commercial	$	49,440	$	5,063	$	—	$	6,433	$	—	$	60,936
Commercial Real Estate:
Construction		25,266		2,990		—		4,917		—		33,173
Farmland		61,672		7,922		—		7,825		—		77,419
Nonfarm nonresidential		111,426		21,017		3,747		39,262		—		175,452
Residential Real Estate:
Multi-family		31,526		6,039		—		4,326		—		41,891
1-4 Family		145,450		23,928		131		27,769		—		197,278
Consumer		10,115		537		311		384		—		11,347
Agriculture		25,816		704		—		446		—		26,966
Other		415		—		—		122		—		537

Total	$	461,126	$	68,200	$	4,189	$	91,484	$	—	$	624,999

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. Costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the fair value less the cost to sell exceeds the balance of the loan at the time of transfer to OREO. Examples of eligible costs to be capitalized are payments of delinquent property taxes to clear tax liens or payments to contractors and subcontractors to clear mechanics’ liens. 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 or have staff from our special assets group or in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. We typically obtain updated appraisals within five quarters of 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, 2015			December 31, 2014
	(in thousands)
Commercial Real Estate:
Construction, land development, and other land	$	18,319		$	18,748
Farmland		256			669
Nonfarm nonresidential		14,592			14,860
Residential Real Estate:
Multi-family		4,700			4,988
1-4 Family		6,243			7,998

		44,110			47,263
Valuation allowance		(492	)		(1,066	)

	$	43,618		$	46,197


	For the Three Months Ended March 31,
	2015			2014
	(in thousands)
OREO Valuation Allowance Activity:
Beginning balance	$	1,066		$	230
Provision to allowance		300			250
Write-downs		(874	)		(272	)

Ending balance	$	492		$	208

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $2.6 million and $3.6 million at March 31, 2015 and December 31, 2014, respectively.

Net activity relating to other real estate owned during the three months ended March 31, 2015 and 2014 is as follows:


	For the Three Months Ended March 31,
	2015			2014
	(in thousands)
OREO Activity
OREO as of January 1	$	46,197		$	30,892
Real estate acquired		347			17,351
Valuation adjustment writedowns		(300	)		(250	)
Gain/(loss) on sale		3			—
Proceeds from sale of properties		(2,629	)		(2,075	)

OREO as of March 31	$	43,618		$	45,918

Expenses related to other real estate owned include:


	For the Three Months Ended March 31,
	2015			2014
	(in thousands)
Net (gain) loss on sales	$	(3	)	$	—
Provision to allowance		300			250
Operating expense		436			412

Total	$	733		$	662

Note 6 – Deposits

The following table shows ending deposit balances by category as of:


	March 31, 2015		December 31, 2014
	(in thousands)
Non-interest bearing	$	108,011	$	114,910
Interest checking		86,614		91,086
Money market		102,349		109,734
Savings		36,418		36,430
Certificates of deposit		597,117		574,681

Total	$	930,509	$	926,841

Time deposits of $250,000 or more were $36.7 million and $34.4 million at March 31, 2015 and December 31, 2014, respectively.

Scheduled maturities of all time deposits at March 31, 2015 were as follows (in thousands):


Year 1	$	371,065
Year 2		161,220
Year 3		11,268
Year 4		11,505
Year 5		42,058
Thereafter		1

	$	597,117

Note 7 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:


	March 31, 2015		December 31, 2014
	(in thousands)
Monthly amortizing advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2017 through 2033, averaging 2.85% at March 31, 2015 and 1.02% at December 31, 2014	$	3,597	$	15,752

Each advance is payable based upon the terms on agreement, with a prepayment penalty. New advances are limited to a one year maturity or less. No prepayment penalties were incurred during 2015 or 2014. The advances are collateralized by first mortgage loans. The borrowing capacity is based on the market value of the underlying pledged loans. At March 31, 2015, our additional borrowing capacity with the FHLB was $23.4 million. The availability of our borrowing capacity could be affected by our financial condition and the FHLB could require additional collateral or, among other things, exercise its right to deny a funding request, at its discretion.

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 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 our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or 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 participants 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 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 or have staff in our special assets group or centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. In some of these circumstances, an appraisal is in process at quarter end, and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We generally obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent.

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

Financial assets measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014 are summarized below:


			Fair Value Measurements at March 31, 2015 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	$	30,025	$	—	$	30,025	$	—
Agency mortgage-backed: residential		106,956		—		106,956		—
State and municipal		7,526		—		7,526		—
Corporate bonds		12,118		—		12,118		—
Other debt securities		665		—		—		665

Total	$	157,290	$	—	$	156,625	$	665


			Fair Value Measurements at December 31, 2014 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	$	35,443	$	—	$	35,443	$	—
Agency mortgage-backed: residential		123,598		—		123,598		—
State and municipal		12,404		—		12,404		—
Corporate bonds		18,688		—		18,688		—
Other debt securities		658		—		—		658

Total	$	190,791	$	—	$	190,133	$	658

There were no transfers between Level 1 and Level 2 during 2015 or 2014.

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, 2015 and 2014:


	Other Debt Securities
	2015		2014
	(in thousands)
Balances of recurring Level 3 assets at January 1	$	658	$	632
Total gain (loss) for the period:
Included in other comprehensive income (loss)		7		12

Balance of recurring Level 3 assets at March 31	$	665	$	644

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 8.0% 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, 2015 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)
Impaired loans:
Commercial	$	11	$	—	$	—	$	11
Commercial real estate:
Construction		—		—		—		—
Farmland		—		—		—		—
Nonfarm nonresidential		162		—		—		162
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		1,568		—		—		1,568
Consumer		8		—		—		8
Other		—		—		—		—
Other real estate owned, net:
Commercial real estate:
Construction		18,114		—		—		18,114
Farmland		253		—		—		253
Nonfarm nonresidential		14,429		—		—		14,429
Residential real estate:
Multi-family		4,648		—		—		4,648
1-4 Family		6,174		—		—		6,174


			Fair Value Measurements at December 31, 2014 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)
Impaired loans:
Commercial	$	12	$	—	$	—	$	12
Commercial real estate:
Construction		—		—		—		—
Farmland		278		—		—		278
Other		15,825		—		—		15,825
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		1,635		—		—		1,635
Consumer		31		—		—		31
Other		—		—		—		—
Other real estate owned, net:
Commercial real estate:
Construction		18,325		—		—		18,325
Farmland		654		—		—		654
Other		14,525		—		—		14,525
Residential real estate:
Multi-family		4,875		—		—		4,875
1-4 Family		7,818		—		—		7,818

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.9 million at March 31, 2015 with a valuation allowance of $254,000, resulting in no additional provision for loan losses for the three months ended March 31, 2015. Impaired loans had a carrying amount of $15.6 million with a valuation allowance of $2.5 million, and no additional provision for the three months ended March 31, 2014. At December 31, 2014, impaired loans had a carrying amount of $18.4 million, with a valuation allowance of $752,000.

OREO, which is measured at the lower of carrying or fair value less estimated costs to sell, had a net carrying amount of $43.6 million as of March 31, 2015, compared with $45.9 million at March 31, 2014 and $46.2 million at December 31, 2014. Fair value write-downs of $300,000 and $250,000 were recorded on OREO for the three months ended March 31, 2015 and 2014, respectively.

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
Impaired loans – Commercial	$	11	Market value approach	Adjustment for receivables and inventory discounts	16% - 32% (24%)

Impaired loans – Commercial real estate	$	162	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 62% (16%)

			Income approach	Discount or capitalization rate	8% - 9% (8%)

Impaired loans – Residential real estate	$	1,568	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 39% (11%)

Other real estate owned – Commercial real estate	$	32,796	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 45% (18%)

			Income approach	Discount or capitalization rate	8% - 20% (13%)

Other real estate owned – Residential real estate	$	10,822	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 10% (5%)

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, 2014:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
Impaired loans – Commercial	$	12	Market value approach	Adjustment for receivables and inventory discounts	16% -32% (24%)

Impaired loans – Commercial real estate	$	16,103	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 62% (14%)

			Income approach	Discount or capitalization rate	8% - 9% (8%)

Impaired loans – Residential real estate	$	1,635	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 39% (11%)

Other real estate owned – Commercial real estate	$	33,504	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 45% (18%)

			Income approach	Discount or capitalization rate	9% - 20% (13%)

Other real estate owned – Residential real estate	$	12,693	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 15% (6%)

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


			Fair Value Measurements at March 31, 2015 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	109,771	$	96,168	$	13,603	$	—	$	109,771
Securities available for sale		157,290		—		156,625		665		157,290
Securities held to maturity		42,263		—		44,895		—		44,895
Federal Home Loan Bank stock		7,323		N/A		N/A		N/A		N/A
Loans held for sale		—		—		—		—		—
Loans, net		613,831		—		—		622,241		622,241
Accrued interest receivable		3,036		—		1,072		1,964		3,036
Financial liabilities
Deposits	$	930,509	$	108,011	$	817,396	$	—	$	925,407
Securities sold under agreements to repurchase		1,145		—		1,145		—		1,145
Federal Home Loan Bank advances		3,597		—		3,604		—		3,604
Subordinated capital notes		4,725		—		—		4,558		4,558
Junior subordinated debentures		25,000		—		—		14,433		14,433
Accrued interest payable		2,864		—		606		2,258		2,864

			Fair Value Measurements at December 31, 2014 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	80,180	$	49,007	$	31,173	$	—	$	80,180
Securities available for sale		190,791		—		190,133		658		190,791
Securities held to maturity		42,325		—		44,498		—		44,498
Federal Home Loan Bank stock		7,323		N/A		N/A		N/A		N/A
Loans held for sale		8,926		—		8,926		—		8,926
Loans, net		605,635		—		—		615,914		615,914
Accrued interest receivable		3,503		—		1,389		2,114		3,503
Financial liabilities
Deposits	$	926,841	$	114,910	$	804,508	$	—	$	919,418
Securities sold under agreements to repurchase		1,341		—		1,341		—		1,341
Federal Home Loan Bank advances		15,752		—		15,758		—		15,758
Subordinated capital notes		4,950		—		—		4,765		4,765
Junior subordinated debentures		25,000		—		—		14,214		14,214
Accrued interest payable		2,858		—		751		2,107		2,858

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. Non-interest 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.

(c) Loans, Net

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) Loans Held for Sale

The fair value of loans held for sale is estimated based upon binding contracts and and/or 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, 2015			December 31, 2014
	(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	32,067		$	32,111
Allowance for loan losses		6,509			6,777
Other real estate owned write-down		9,899			10,000
Alternative minimum tax credit carry-forward		692			692
Net assets from acquisitions		670			668
Other than temporary impairment on securities		46			46
New market tax credit carry-forward		208			208
Nonaccrual loan interest		847			958
Amortization of non-compete agreements		13			14
Other		1,873			1,371

		52,824			52,845

Deferred tax liabilities:
FHLB stock dividends		928			928
Fixed assets		248			264
Originated mortgage servicing rights		48			53
Net unrealized gain on securities		530			579
Other		668			373

		2,422			2,197

Net deferred tax assets before valuation allowance		50,402			50,648

Valuation allowance		(50,402	)		(50,648	)

Net deferred tax asset	$	—		$	—

Our estimate of the realizability of the deferred tax asset is dependent on our estimate of projected future levels of taxable income. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets as of December 31, 2011. The valuation allowance remains in effect as of March 31, 2015.

The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and there is income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. For the year ended December 31, 2014, this resulted in $1.6 million of income tax benefit allocated to continuing operations. The December 31, 2014 tax benefit is entirely due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards. No tax benefit or expense was recognized for the three months ended March 31, 2015 or the three months ended March 31, 2014.

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, 2015 or March 31, 2014 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 2011.

Note 10 – Stock Plans and Stock Based Compensation

The Company has two stock incentive plans. The Porter Bancorp, Inc. 2006 Stock Incentive Plan permits the issuance of up to 1,563,050 shares of the Company’s common stock upon the grant of stock awards. As of March 31, 2015, the Company had issued and outstanding 1,056,243 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 three to ten years. The Company has 271,890 shares remaining available for issue under the plan.

The Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan permits the issuance of up to 700,000 shares of the Company’s voting common stock upon the grant of stock awards. The Plan awards restricted shares having a fair market value of $25,000 annually to each non-employee director. Unvested shares are granted automatically under the plan at fair market value on the date of grant and vest on December 31 in the year of grant. To date, the Company has issued and outstanding 5,052 unvested shares, net of forfeitures and vesting, to non-employee directors. At March 31, 2015, 301,512 shares remain available for issuance under this plan.

Upon the sale of our Series A preferred shares by the U.S. Treasury at a discount to face amount on December 4, 2014, restricted shares previously granted to senior executives became subject to permanent transfer restrictions. On March 25, 2015, the Compensation Committee modified the equity compensation arrangements with our four named executive officers to restore the incentive that was intended by including equity grants in their employment agreements. The Compensation Committee and the named executive officers mutually agreed to terminate 538,479 restricted shares that were subject to permanent restrictions on transfer. We then awarded 800,000 new service-based restricted shares to our named executive officers. The new awards are accounted for as a modification and vest over four years, with one-third of the shares vesting on each of the second, third and fourth anniversaries of the date of grant. The modification results in incremental compensation expense of approximately $233,000 and will be amortized in accordance with the vesting schedule.

The fair value of the 2015 unvested shares issued to employees was $712,000, or $0.89 per weighted-average share. The Company recorded $49,000 and $133,000 of stock-based compensation during the first three months of 2015 and 2014, respectively, to salaries and employee benefits. 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 for the Stock Incentive Plan:


	Three Months Ended March 31, 2015					Twelve Months Ended December 31, 2014
	Shares			Weighted Average Grant Price		Shares			Weighted Average Grant Price
Outstanding, beginning		770,440		$	1.33		787,426		$	1.56
Granted		800,000			0.89		122,220			0.93
Vested		(63,063	)		2.00		(133,227	)		2.20
Terminated		(450,994	)		1.25		—			—
Forfeited		(140	)		22.03		(5,979	)		4.21

Outstanding, ending		1,056,243		$	0.99		770,440		$	1.33

The following table summarizes unvested share activity as of and for the periods indicated for the Non-Employee Directors Stock Ownership Incentive Plan:


	Three Months Ended March 31, 2015				Twelve Months Ended December 31, 2014
	Shares		Weighted Average Grant Price		Shares			Weighted Average Grant Price
Outstanding, beginning		5,052	$	1.65		47,428		$	1.69
Granted		—		—		166,668			0.90
Vested		—		—		(154,222	)		0.98
Forfeited		—		—		(54,822	)		1.29

Outstanding, ending		5,052	$	1.65		5,052		$	1.65

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2015 and beyond is estimated as follows (in thousands):


April 2015 – December 2015	$	282
2016		263
2017		158
2018		149
2019 & thereafter		—

Note 11 – Earnings (Loss) per Share

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


	Three Months Ended March 31,
	2015		2014
	(in thousands, except share and per share data)
Net income (loss)	$	594	$	(287	)
Less:
Preferred stock dividends		—		786
Earnings (loss) allocated to unvested shares		21		(70	)
Earnings (loss) attributable to participating preferred shares		164		(27	)

Net income (loss) attributable to common shareholders, basic and diluted	$	409	$	(976	)

Basic
Weighted average common shares including unvested common shares outstanding		25,419,523		13,210,930
Less:
Weighted average unvested common shares		918,393		856,723
Weighted average Series B preferred shares		2,702,400		—
Weighted average Series C preferred shares		—		332,894
Weighted average Series D preferred shares		4,305,333		—

Weighted average common shares outstanding		17,493,397		12,021,313

Basic income (loss) per common share	$	0.02	$	(0.08	)

Diluted
Add: Dilutive effects of assumed exercises of common stock warrants		—		—

Weighted average common shares and potential common shares		17,493,397		12,021,313

Diluted loss per common share	$	0.02	$	(0.08	)

The Company had no outstanding stock options at March 31, 2015 or 2014. 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, 2015 and 2014 but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. Additionally, warrants for the purchase of 650,544 and 1,449,459 shares of non-voting common stock at an exercise price of $10.95 per share were outstanding at March 31, 2015 and 2014, respectively, 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.

The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement.

On June 24, 2011, the 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, not to extend additional credit to any borrower classified substandard unless the board of directors first adopts a detailed statement why the extension is in the best interest of the bank, and not to 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 in which 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, the Bank entered into a revised 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 cannot be considered well-capitalized while under the Consent Order. 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 capital investment into the Bank sufficient to fully meet the capital requirements. We have not been directed by the FDIC to implement such a plan.

The revised 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. As of March 31, 2015, the capital ratios required by the Consent Order were not met.

The following table shows the ratios and amounts of Common Equity Tier 1, Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and the Bank at the dates indicated (dollars in thousands):


	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
As of March 31, 2015:
Total risk-based capital (to risk-weighted assets)
Consolidated	$	70,949		10.05	%	$	56,459		8.00	%
Bank		72,335		10.25			56,435		8.00
Total common equity Tier I risk-based capital (to risk-weighted assets)
Consolidated		33,232		4.71			31,758		4.50
Bank		58,672		8.32			31,745		4.50
Tier I capital (to risk-weighted assets)
Consolidated		41,513		5.88			42,344		6.00
Bank		58,672		8.32			42,326		6.00
Tier I capital (to average assets)
Consolidated		41,513		4.13			40,209		4.00
Bank		58,672		5.84			40,212		4.00


	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
As of December 31, 2014:
Total risk-based capital (to risk-weighted assets)
Consolidated	$	73,595		10.61	%	$	55,483		8.00	%
Bank		73,174		10.57			55,383		8.00
Tier I capital (to risk-weighted assets)
Consolidated		46,459		6.70			27,741		4.00
Bank		59,438		8.59			27,691		4.00
Tier I capital (to average assets)
Consolidated		46,459		4.51			41,193		4.00
Bank		59,438		5.78			41,143		4.00

The Consent Order requires the Bank to achieve the minimum capital ratios presented below:


	Actual as of March 31, 2015					Ratio Required by Consent Order
	Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	72,335		10.25	%	$	84,652		12.00	%
Tier I capital to average assets		58,672		5.84			90,476		9.00

At March 31, 2015, the Bank’s Tier 1 leverage ratio was 5.84%, and its total risk-based capital ratio was 10.25%, which are below the 9% and 12% minimum capital ratios required by the Consent Order. 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.

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

We are defendants in various legal proceedings. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. 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 have accrued approximately $2.2 million related to ongoing litigation matters for which we believe liability is probable and reasonably estimable. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. We disclose legal matters when we believe liability is reasonably possible and may be material to our consolidated financial statements.

Signature Point Litigation. On June 18, 2010, three real estate development companies filed suit in Kentucky state court against the 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. On July 16, 2013, a jury in Louisville, Kentucky returned a verdict against the Bank, awarding the plaintiffs compensatory damages of $1,515,000 and punitive damages of $5,500,000. The case arose from a settlement in which the Bank agreed to release the plaintiffs and guarantors from obligations of more than $26 million related to a real estate project in Louisville. The plaintiffs were granted a right of first refusal to repurchase a tract of land within the project. In exchange, the plaintiffs conveyed the real estate securing the loans to the Bank. After plaintiffs declined to exercise their right of first refusal, the Bank sold the tract to the third party. Plaintiffs alleged the Bank had knowledge of the third party offer before the conveyance of the land by the Plaintiffs to the Bank. Plaintiffs asserted claims of fraud, breach of fiduciary duty, breach of the duty of good faith and fair dealing, tortious interference with prospective business advantage and conspiracy to commit fraud, negligence, and conspiracy against the Bank.

After conferring with its legal advisors, the Bank believes the findings and damages are excessive and contrary to law, and that it has meritorious grounds on which it has moved to appeal. The Bank’s Notice of Appeal was filed on October 25, 2013. After a number of procedural issues were resolved, the Bank filed its appellate brief on September 30, 2014. Appellee’s brief was filed on December 1, 2014. We will continue to defend this matter vigorously. Although we have made provisions in our consolidated financial statements for this self-insured matter, the amount of our legal accrual is less than the original amount of the damages awarded, plus accrued interest. The ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations or cash flows.

SBAV LP Litigation. On December 17, 2012, SBAV LP filed a lawsuit against the Company, the 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, and on February 27, 2013, SBAV LP filed an Amended Complaint. On July 10, 2013, the New York federal district court granted the defendants’ motion to transfer the case to federal district court in Kentucky. SBAV LP v. Porter Bancorp, et. al., Civ. Action 3:13-CV-710 (W.D.KY). The Amended Complaint alleges a violation of the Kentucky Securities Act and negligent misrepresentation against all named defendants, and breach of contract against Porter Bancorp alone. 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. On September 13, 2013, defendants filed a motion to dismiss all claims in the complaint for pleading failures and for failure to state a claim upon which relief may be granted. On March 25, 2014, the judge ruled that SBAV had failed to state a claim against the Bank and dismissed the Bank from the case. The claims against the Company, the Estate of J. Chester Porter and Ms. Bouvette remain and have proceeded to discovery. On April 21, 2014, the Company filed a third-party complaint for contribution against SBAV’s investment adviser, the Clinton Group, Inc. On September 16, 2014, the Court dismissed the Third-Party Complaint, but held that, if proven, Clinton’s errors in conducting due diligence may lessen any recovery available to SBAV. Discovery is continuing. At the joint request of the parties, the Court vacated the previous schedule and trial date of October 20, 2015 in order to provide additional time for discovery and motion practice in the case. We dispute the material factual allegations made in SBAV’s complaint and intend to defend against SBAV’s claims vigorously.

Miller’s Health System Inc. Employee Stock Ownership Plan. On December 26, 2013, the United States Department of Labor (“DOL”) filed a lawsuit against the Bank in U.S. District Court for the Northern District of Indiana. Thomas E. Perez, Secretary of the United States Department of Labor v. PBI Bank, Inc. (Civ. Action 3:13-CV-1400-PPS). The complaint alleges that in 2007 the Bank, in the capacity of trustee for the Miller’s Health System’s Inc. Employee Stock Ownership Plan, authorized the alleged imprudent and disloyal purchase of the stock of Miller’s Health Systems, Inc. (“Miller’s Health”) in 2007 for $40 million, a price allegedly far in excess of the stock’s fair market value. The suit also alleges, among other things, that the Bank approved 100% seller financing for the transaction at an excessive rate of interest. On March 31, 2014, the Bank filed its answer, disputing the material factual allegations of the complaint. On April 10, 2014, the Bank filed a third-party complaint against Miller’s Health seeking to enforce its indemnity rights, as well as third party claims for contribution against named directors and officers of Miller’s Health. On March 12, 2015, the parties agreed to settle the litigation, subject to the execution of a written settlement agreement. The Bank has agreed to a settlement payment, which has either been previously reserved for or will be paid from insurance proceeds. We do not anticipate the settlement of this litigation will have a material adverse effect on the Company’s financial condition or operating results.

AIT Laboratories Employee Stock Ownership Plan. On August 29, 2014, the United States Department of Labor (“DOL”) filed a lawsuit against the Bank and Michael A. Evans in the U.S. District Court for the Southern District of Indiana. Thomas E. Perez, Secretary of the United States Department of Labor v. PBI Bank, Inc. and Michael A. Evans (Case No. 1:14-CV-01429-SEB-MJD). The complaint alleges that in 2009, the Bank, in the capacity of trustee for the AIT Laboratories Employee Stock Ownership Plan, authorized the alleged imprudent and disloyal purchase of the stock of AIT Holdings, Inc. in 2009 for $90 million, a price allegedly far in excess of the stock’s fair market value. The Bank’s responsive pleading was filed on November 4, 2014, disputing the material factual allegations that have been made by the DOL. Discovery is in the early stages. A trial date has been set for November 7, 2016. We intend to defend against DOL’s claims vigorously.

United States Department of Justice Investigation. On October 17, 2014, the United States Department of Justice (the “DOJ”) notified the Bank that the Bank was the subject of an investigation into possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred stock from the Company in November 2008. The Bank will respond to and cooperate with any requests for information from DOJ. At this time the investigation is ongoing, and DOJ has made no determination whether to pursue any action in the matter.

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 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 following:

•

Our inability to increase our capital to the levels required by our agreements with bank regulators could have a material adverse effect on our business.

•

A significant percentage of our loan portfolio is comprised of non-owner occupied commercial real estate loans, real estate construction and development loans, and multi-family residential real estate loans, all of which carry a higher degree of risk.

•

We continue to hold and acquire a significant amount of OREO properties, which could increase operating expenses and result in future losses.

•

Our decisions regarding credit risk may not be accurate, and our allowance for loan losses may not be sufficient to cover actual losses.

•

Our ability to pay cash dividends on our common and preferred stock and pay interest on the junior subordinated debentures that relate to our trust preferred securities is currently restricted. Our inability to resume paying interest on our trust preferred securities could adversely affect our common and preferred shareholders.

•

While we believe our provision for legal contingencies is adequate, the outcome of legal proceedings is difficult to predict and we may settle legal claims or be subject to judgments for amounts that exceed our estimates.

We also refer you to Part II, Item 1A – Risk Factors in this report and to the risks identified and the cautionary statements discussed in greater detail in our December 31, 2014 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 they are reasonable. We caution you however, forward looking statements relying upon such assumptions or bases almost always vary from actual results, and the differences between those statements 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. (the “Company”) is a bank holding company headquartered in Louisville, Kentucky. Our wholly owned subsidiary PBI Bank (“the Bank”) is the ninth largest bank domiciled in the Commonwealth of Kentucky based on total assets. We operate banking offices in twelve counties in Kentucky. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. 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 community bank with a wide range of commercial and personal banking products. As of March 31, 2015, we had total assets of $1.0 billion, total loans of $632.4 million, total deposits of $930.5 million and stockholders’ equity of $34.0 million.

The Company reported net income of $594,000 for the three months ended March 31, 2015, compared with a net loss of $287,000 for the first quarter of 2014. After deductions for earnings allocated to participating securities, net income attributable to common shareholders was $409,000 for the three months ended March 31, 2015, compared with net loss attributable to common shareholders of $976,000 for the three months ended March 31, 2014.

Basic and diluted income per common share were $0.02 for the three months ended March 31, 2015 compared with basic and diluted loss per common share of ($0.08) for the three months ended March 31, 2014.

The following significant items are of note for the three months ended March 31, 2015:

•

Net interest margin increased 25 basis points to 3.21% in the first three months of 2015 compared with 2.96% in the first three months of 2014. The increase in margin between periods was due to an increase in the yield on earning assets from 3.99% for the first three months of 2014 to 4.03% for the first three months of 2015, coupled with a decrease in the cost of interest bearing liabilities from 1.16% in the first quarter of 2014 to 0.91% in the first quarter of 2015. The decrease in cost of interest bearing liabilities was primarily driven by the continued repricing of certificates of deposit at lower rates. Average loans decreased 7.9% to $643.0 million in the first three months of 2015 compared with $698.2 million in the first three months of 2014. Net loans decreased 6.6% to $613.8 million at March 31, 2015, compared with $657.2 million at March 31, 2014.

•

No provision for loan losses was recorded in the first quarter of 2015 or 2014 because of improvements in asset quality and management’s assessment of risk in the loan portfolio. Net charge-offs of $767,000 were recognized for the first quarter of 2015, compared to $2.7 million for the three months ended March 31, 2014, respectively.

•

Non-interest income increased $1.8 million compared with $915,000 for the first quarter of 2014 driven primarily by gains on the sales of securities totaling $1.5 million in the first quarter of 2015, compared to $44,000 in the first quarter of 2014.

•

Non-interest expense increased $890,000 compared with $8.5 million for the first quarter of 2014, primarily due to increased professional fees related to legal fees and litigation expenses.

•

Deposits increased 0.4% to $930.5 million at March 31, 2015 compared with $926.8 million at December 31, 2014. Certificate of deposit balances increased $22.4 million during the first three months of 2015 to $597.1 million at March 31, 2015, from $574.7 million at December 31, 2014. Demand deposits decreased 6.0% during the first three months of 2015 compared with December 31, 2014.

•

Non-performing loans decreased $10.8 million to $36.5 million at March 31, 2015, compared with $47.2 million at December 31, 2014. The decrease in non-performing loans was primarily due to $10.8 million in paydowns, as well as a decrease in loans moved to nonaccrual during the quarter compared to the previous quarter. Net charge-offs were $767,000 for the three months ended March 31, 2015.

•

Loans past due 30-59 days increased from $4.0 million at December 31, 2014 to $4.4 million at March 31, 2015 and loans past due 60-89 days increased from $980,000 at December 31, 2014 to $1.8 million at March 31, 2015. Total loans past due and nonaccrual loans decreased to $42.7 million at March 31, 2015 from $52.3 million at December 31, 2014.

•

Foreclosed properties were $43.6 million at March 31, 2015, compared with $46.2 million at December 31, 2014, and $45.9 million at March 31, 2014. During the first three months of 2015, the Company acquired $347,000 and sold $2.6 million of other real estate owned (“OREO”). In addition, we recorded fair value write-downs of $300,000 during the first three months of 2015 reflecting declines in appraisal valuations and changes in pricing strategies. Our ratio of non-performing assets to total assets decreased to 7.94% at March 31, 2015, compared with 9.19% at December 31, 2014, and 11.59% at March 31, 2014.

•

On February 25, 2015, shareholders approved the conversion of all mandatorily convertible Series B Preferred Shares into 4,053,600 common shares and the conversion of all mandatorily convertible Series D Preferred Shares into 6,458,000 non-voting common shares. The conversion reduced preferred stockholders’ equity by $5.8 million and increased common stockholders’ equity by the same amount. Total issued and outstanding common shares and non-voting common shares were 25,663,495 at March 31, 2015.

Going Concern Considerations and Future Plans

The Board of Directors and management continue to evaluate and implement strategies to meet the obligations of the Consent Order. These include:

•

Increasing capital through the issuance of common stock to new and existing shareholders.

•

Continuing to operate the Company and Bank in a safe and sound manner. We have reduced our lending concentrations and the size of our balance sheet, while continuing to remediate non-performing loans and reduce other noninterest expense through the disposition of OREO.

•

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

•

We have reduced our loan portfolio significantly from $1.3 billion at December 31, 2010 to $632.4 million at March 31, 2015.

•

We have reduced our construction and development loans to less than 75% of total risk-based capital at March 31, 2015.

•

Executing on our commitment to sell OREO and reinvest in quality income producing assets.

•

Effective with the fourth quarter of 2011, we began deferring interest payments on the junior subordinated debentures relating to our trust preferred securities. Deferring interest payments on the junior subordinated debentures resulted in a deferral of distributions on our trust preferred securities. If we defer distributions on our trust preferred securities for 20 consecutive quarters, we must pay all deferred distributions in full or we will be in default. Our deferral period expires after the third quarter of 2016. Deferred distributions on our trust preferred securities, which totaled $2.3 million as of March 31, 2015, are cumulative, and unpaid distributions accrue and compound on each subsequent payment date. If as a result of a default we become subject to any liquidation, dissolution or winding up, holders of the trust preferred securities will be entitled to receive the liquidation amounts to which they are entitled, including all accrued and unpaid distributions, before any distribution can be made to our shareholders. In addition, the holders of our Series E and Series F Preferred Shares will be entitled to receive liquidation distributions totaling $10.5 million before any distribution can be made to the holders of our common shares.

Application of Critical Accounting Policies

We continually review our accounting policies and financial information disclosures. Our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the calendar year ended December 31, 2014. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2015, there were no material changes in the critical accounting policies and assumptions.

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, 2015, compared with the same period of 2014:


	For the Three Months Ended March 31,					Change from Prior Period
	2015		2014			Amount			Percent
	(dollars in thousands)
Gross interest income	$	9,203	$	9,897		$	(694	)		(7.0	)%
Gross interest expense		1,913		2,597			(684	)		(26.3	)
Net interest income		7,290		7,300			(10	)		(0.1	)
Provision for loan losses		—		—			—			—
Non-interest income		2,696		915			1,781			194.6
Non-interest expense		9,392		8,502			890			10.5
Net income (loss) before taxes		594		(287	)		881			307.0
Income tax benefit		—		—			—			—
Net income (loss)		594		(287	)		881			307.0

Net income for the three months ended March 31, 2015 totaled $594,000, compared with net loss of $287,000 for the comparable period of 2014.

Net interest income decreased $10,000 from the 2014 first quarter as a result of a decrease in earning assets, offset by an increase in net interest margin. Net interest margin increased 25 basis points to 3.21% in the first three months of 2015 compared with 2.96% in the first three months of 2014. The increase in margin between periods was due to an increase in the yield on earning assets from 3.99% for the first three months of 2014 to 4.03% for the first three months of 2015, coupled with a decrease in the cost of interest bearing liabilities from 1.16% in the first quarter of 2014 to 0.91% in the first quarter of 2015. Average earning assets decreased from $1.0 billion as of March 31, 2014 to $936.0 at March 31, 2015. In addition, net interest income and net interest margin were adversely affected by $601,000 and $1.2 million of interest lost on nonaccrual loans in the first quarters of 2015 and 2014, respectively. Non-interest income increased by $1.8 million to $2.7 million from $915,000 in the first quarter of 2014 primarily due to an increase in gains on sales of securities of $1.5 million. Non-interest expense increased from $8.5 million at March 31, 2014 to $9.4 million at March 31, 2015 primarily due to increased professional fees of $690,000 driven by increased legal fees and litigation expenses.

Net Interest Income – Our net interest income was $7.3 million for the three months ended March 31, 2015, a decrease of $10,000, or 0.1%, compared with $7.3 million for the same period in 2014. Net interest spread and margin were 3.12% and 3.21%, respectively, for the first quarter of 2015, compared with 2.83% and 2.96%, respectively, for the first quarter of 2014. Net average non-accrual loans were $43.6 million and $90.9 million for the first quarters of 2015 and 2014, respectively.

Average loans receivable declined approximately $55.2 million for the quarter ended March 31, 2015 compared with the first quarter of 2014. This resulted in a decline in interest revenue of approximately $754,000 for the quarter ended March 31, 2015 compared with the prior year period.

Net interest margin increased 25 basis points from our margin of 2.96% in the prior year first quarter. The yield on earning assets increased four basis points from the first quarter of 2014, compared with a 25 basis point decline in rates paid on interest-bearing liabilities. The increase in net interest margin was offset by a decrease in earning assets which resulted in a $10,000 reduction in net interest income.

Net interest margin for the first quarter of 2015 increased five basis points from our margin of 3.16% in the fourth quarter of 2014, due primarily to increased yield on loans. Average loan receivables increased $8.1 million from the fourth quarter of 2014. Interest foregone on non-accrual loans totaled $601,000 in the first quarter of 2015, compared with $592,000 in the fourth quarter of 2014, and $1.2 million in the first quarter of 2014. Yield on average earning assets decreased slightly to 4.03% in the first quarter of 2015 from 4.06% in the fourth quarter of 2014, compared with an eight basis point decrease in rates paid on interest-bearing liabilities from 0.99% in the fourth quarter of 2014.

Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended March 31, 2015 and 2014, 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,
	2015								2014
	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)	$	642,959		$	7,755		4.89	%	$	698,184		$	8,321		4.83	%
Securities
Taxable		178,723			1,126		2.56			177,579			1,173		2.68
Tax-exempt (3)		26,756			203		4.73			31,086			241		4.84
FHLB stock		7,323			74		4.10			9,095			102		4.55
Other equity securities		—			—		—			87			—		—
Federal funds sold and other		80,276			45		0.23			103,142			60		0.24

Total interest-earning assets		936,037			9,203		4.03	%		1,019,173			9,897		3.99	%

Less: Allowance for loan losses		(19,264	)							(27,834	)
Non-interest earning assets		94,788								82,247

Total assets	$	1,011,561							$	1,073,586

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	588,907		$	1,496		1.03	%	$	670,270		$	2,191		1.33	%
NOW and money market deposits		194,129			176		0.37			166,424			147		0.36
Savings accounts		36,456			20		0.22			36,903			23		0.25
Repurchase agreements		1,029			—		—			2,356			1		0.17
FHLB advances		3,954			27		2.77			4,385			33		3.05
Junior subordinated debentures		29,948			194		2.63			30,848			202		2.66

Total interest-bearing liabilities		854,423			1,913		0.91	%		911,186			2,597		1.16	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		112,206								110,572
Other liabilities		10,961								14,836

Total liabilities		977,590								1,036,594
Stockholders’ equity		33,971								36,992

Total liabilities and stockholders’ equity	$	1,011,561							$	1,073,586

Net interest income				$	7,290							$	7,300

Net interest spread							3.12	%							2.83	%

Net interest margin							3.21	%							2.96	%

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

(2)	Calculations include non-accruing loans averaging $43.6 million and $90.9 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, 2015 vs. 2014
	Increase (decrease) due to change in						Net Change
	Rate			Volume			Net Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	99		$	(665	)	$	(566	)
Securities		(63	)		(22	)		(85	)
FHLB stock		(9	)		(19	)		(28	)
Other equity securities		—			—			—
Federal funds sold and other		(2	)		(13	)		(15	)

Total increase (decrease) in interest income		25			(719	)		(694	)

Interest-bearing liabilities:
Certificates of deposit and other time deposits		(450	)		(245	)		(695	)
NOW and money market accounts		4			25			29
Savings accounts		(3	)		—			(3	)
Federal funds purchased and repurchased agreements		—			(1	)		(1	)
FHLB advances		(3	)		(3	)		(6	)
Junior subordinated debentures		(2	)		(6	)		(8	)

Total decrease in interest expense		(454	)		(230	)		(684	)

Increase (decrease) in net interest income	$	568		$	(578	)	$	(10	)

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2015 and 2014:


	For the Three Months Ended March 31,
	2015		2014
	(in thousands)
Service charges on deposit accounts	$	409	$	468
Bank card interchange fees		203		161
Other real estate owned rental income		357		7
Net gain on sales of securities		1,497		44
Other		230		235

Total non-interest income	$	2,696	$	915

Non-interest income for the first quarter ended March 31, 2015 increased by $1.8 million, or 194.6%, compared with the first quarter of 2014. The increase in non-interest income between the three month comparative periods was primarily driven by gains on sales of securities totaling $1.5 million in the first quarter of 2015, compared to $44,000 in the first quarter of 2014 and increased OREO income totaling $357,000 in the first quarter of 2015 compared to $7,000 in the first quarter of 2014.

Non-interest Expense – The following table presents the major categories of non-interest expense for the three months ended March 31, 2015 and 2014:


	For the Three Months Ended March 31,
	2015		2014
	(in thousands)
Salary and employee benefits	$	3,847	$	3,741
Occupancy and equipment		870		892
Professional fees		979		289
FDIC insurance		570		540
Data processing expense		304		269
State franchise and deposit tax		285		425
Other real estate owned expense		733		662
Loan collection expense		283		539
Other		1,521		1,145

Total non-interest expense	$	9,392	$	8,502

Non-interest expense for the first quarter ended March 31, 2015 increased $890,000, or 10.5%, compared with the first quarter of 2014. This increase from the first quarter of 2014 was primarily due to an increase in professional fees of $690,000 driven primarily by increased legal fees and litigation expenses.

Income Tax Expense – No income tax expense or benefit was recorded for the first three months of 2015 or 2014. The income tax effect on net income before taxes for the three months ended March 31, 2015, decreased our deferred tax assets and related valuation allowance by $294,000. See discussion in the results of operations above.

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


	For the Three Months Ended March 21,
	2015			2014
	(in thousands)
Federal statutory rate times financial statement income	$	208		$	(100	)
Effect of:
Valuation allowance		(294	)		182
Tax-exempt income		(70	)		(82	)
Non-taxable life insurance income		(24	)		(26	)
Other, net		180			26

Total	$	—		$	—

Analysis of Financial Condition

Total assets decreased $8.3 million, or 0.8%, to $1.010 billion at March 31, 2015, from $1.018 billion at December 31, 2014. This decrease was primarily attributable to a decrease in available for sale securities of $33.5 million, the sale of our loans held for sale of $8.9 million, and a decrease in OREO of $2.6 million, offset by an increase in interest bearing deposits in banks of $35.9 and an increase of $8.2 million in net loans receivable. The decrease in available for sale securities was driven by management’s decision during the quarter to reduce interest rate risk and credit risk in the portfolio by selling various securities. This resulted in a net gain on sale of approximately $1.5 million and drove the increase in interest bearing deposits in banks. The increase in net loans was due to loan funding outpacing loan payoffs. The decrease in OREO was due sales outpacing additions to the portfolio during the quarter.

Loans Receivable – Loans receivable increased $7.4 million, or 1.2%, during the three months ended March 31, 2015 to $632.4 million. The increase in loans receivable was attributable to loan funding outpacing loan payoffs by approximately $8.5 million, offset by net charge-offs of $767,000 and transfers to OREO of $347,000.

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 1-4 family residential real estate, there is no concentration of loans in any industry exceeding 10% of total loans, with the exception of loans for retail facilities (included in nonfarm nonresidential commercial real estate below). Those loans totaled $68.0 million at March 31, 2015 and $71.1 million at December 31, 2014.


	As of March 31, 2015					As of December 31, 2014
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial	$	76,954		12.18	%	$	60,936		9.75	%
Commercial Real Estate
Construction		36,793		5.82			33,173		5.31
Farmland		77,948		12.33			77,419		12.39
Nonfarm nonresidential		159,276		25.18			175,452		28.07
Residential Real Estate
Multi-family		43,150		6.82			41,891		6.70
1-4 Family		197,583		31.24			197,278		31.56
Consumer		10,831		1.71			11,347		1.82
Agriculture		28,673		4.53			26,966		4.31
Other		1,220		0.19			537		0.09

Total loans	$	632,428		100.00	%	$	624,999		100.0	%

Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.


	March 31, 2015					December 31, 2014
	Loans		% to Total			Loans		% to Total
	(dollars in thousands)
Pass	$	480,545		76.0	%	$	461,126		73.8	%
Watch		76,876		12.1			68,200		10.9
Special Mention		1,110		0.2			4,189		0.7
Substandard		73,897		11.7			91,484		14.6
Doubtful		—		—			—		—

Total	$	632,428		100.0	%	$	624,999		100.0	%

Our loans receivable have increased $7.4 million, or 1.2%, during the three months ended March 31, 2015. All loan risk categories have decreased since December 31, 2014, with the exception of pass and watch loans. The pass category increased approximately $19.4 million, the watch category increased approximately $8.7 million, the special mention category declined approximately $3.1 million, and the substandard category declined approximately $17.6 million. The $17.6 million decrease in loans classified as substandard was primarily driven by $18.2 million in principal payments received, $348,000 in migration to OREO, and $1.3 million in charge-offs, offset by $3.7 million in loans moved to substandard during the quarter.

Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.


	March 31, 2015		December 31, 2014
	(in thousands)
Past Due Loans:
30-59 Days	$	4,370	$	3,960
60-89 Days		1,769		980
90 Days and Over		18		151

Total Loans Past Due 30-90+ Days		6,157		5,091
Nonaccrual Loans		36,500		47,175

Total Past Due and Nonaccrual Loans	$	42,657	$	52,266

During the three months ended March 31, 2015, nonaccrual loans decreased by $10.7 million to $36.5 million. This decrease was due primarily to $10.8 million in paydowns and $337,000 transferred to OREO, offset by $1.4 million in loans moved to nonaccrual status. During the three months ended March 31, 2015, loans past due 30-59 days increased from $4.0 million at December 31, 2014 to $4.4 million at March 31, 2015. Loans past due 60-89 days increased from $980,000 at December 31, 2014 to $1.8 million at March 31, 2015. This represents a $1.2 million increase from December 31, 2014 to March 31, 2015, in loans past due 30-89 days. 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.

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, 2015 and December 31, 2014.


	March 31, 2015			December 31, 2014
	(dollars in thousands)
Loans past due 90 days or more still on accrual	$	18		$	151
Nonaccrual loans		36,500			47,175

Total non-performing loans		36,518			47,326
Real estate acquired through foreclosure		43,618			46,197
Other repossessed assets		—			—

Total non-performing assets	$	80,136		$	93,523

Non-performing loans to total loans		5.77	%		7.57	%
Non-performing assets to total assets		7.94	%		9.19	%
Allowance for non-performing loans	$	780		$	1,253
Allowance for non-performing loans to non-performing loans		2.14	%		2.65	%

Nonperforming loans at March 31, 2015, were $36.5 million, or 5.77% of total loans, compared with $47.3 million, or 7.57% of total loans at December 31, 2014, and $77.3 million, or 11.33% of total loans at March 31, 2014. Net loan charge-offs in the first three months of 2015 totaled $767,000 compared to $2.7 million for the first three months of 2014, and were primarily the result of charging off specific reserves for loans deemed to be collateral dependent, in accordance with regulatory guidance.

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 borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

We do not have a formal loan modification program. Rather, we work with individual borrowers 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 borrower is unable to make contractual payments, we review the particular circumstances of the borrower’s situation and negotiate a revised payment stream. In other words, we identify performing borrowers 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 borrower a reasonable period of time to remedy the issue causing cash flow constraints within their business so 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 borrower fails to perform under the modified terms, we place the loan(s) on nonaccrual status and begin the process of working with the borrower to liquidate the underlying collateral to satisfy the debt.

At March 31, 2015, we had 48 restructured loans totaling $37.8 million with borrowers who experienced deterioration in financial condition compared with 52 loans totaling $42.5 million at December 31, 2014. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. Of these loans, three loans totaling approximately $3.9 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 $951,000 of commercial loans. At March 31, 2015, $18.8 million of our restructured loans were accruing and $19.0 million were on nonaccrual compared with $22.0 million and $20.5 million, respectively, at December 31, 2014. There were no new TDRs during the first three months of 2015 or 2014.

The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.


	March 31, 2015			December 31, 2014
	(dollars in thousands)
Total non-performing loans	$	36,518		$	47,326
TDRs on accrual		18,798			21,985

Total non-performing loans and TDRs on accrual	$	55,316		$	69,311
Real estate acquired through foreclosure		43,618			46,197
Other repossessed assets		—			—

Total non-performing assets and TDRs on accrual	$	98,934		$	115,508

Total non-performing loans and TDRs on accrual to total loans		8.75	%		11.09	%
Total non-performing assets and TDRs on accrual to total assets		9.80	%		11.35	%

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 borrower’s loan to a market rate as the result of a market decline in rates.

Management periodically reviews renewals/modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan after the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.

At March 31, 2015 and December 31, 2014, TDRs totaled $37.8 million and $42.5 million, respectively. During the three months ended March 31, 2015, TDRs were reduced as a result of $4.5 million in payments along with charge-offs of $239,000.

If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral for these loans. Our nonaccrual policy for restructured loans is identical to our nonaccrual policy for all loans. Our policy calls for a loan to be reported as nonaccrual 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. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.

See “Note 4 - Loans,” of the notes to the financial statements for additional disclosure related to troubled debt restructuring.

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 consideration 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.

An analysis of changes in the allowance for loan losses and selected ratios for the three month periods ended March 31, 2015 and 2014, and for the year ended December 31, 2014 follows:


	Three Months Ended March 31,						Year Ended December 31, 2014
	2015			2014			Year Ended December 31, 2014
	(dollars in thousands)
Balances at beginning of period	$	19,364		$	28,124		$	28,124

Loans charged-off:
Real estate		851			2,782			17,943
Commercial		375			146			1,099
Consumer		68			128			354
Agriculture		33			9			30
Other		—			17			—

Total charge-offs		1,327			3,082			19,426


Recoveries:
Real estate		411			199			2,726
Commercial		106			88			614
Consumer		26			76			213
Agriculture		1			6			13
Other		16			4			—

Total recoveries		560			373			3,566

Net charge-offs		767			2,709			15,860

Provision for loan losses		—			—			7,100

Balance at end of period	$	18,597		$	25,415		$	19,364

Allowance for loan losses to period-end loans		2.94	%		3.72	%		3.10	%
Net charge-offs to average loans		0.48	%		1.55	%		2.39	%
Allowance for loan losses to non-performing loans		50.93	%		32.86	%		40.92	%

Allowance for loan losses for loans individually evaluated for impairment	$	254		$	2,453		$	752
Loans individually evaluated for impairment		55,299			122,158			71,993
Allowance for loan losses to loans individually evaluated for impairment		0.46	%		2.01	%		1.04	%
Allowance for loan losses for loans collectively evaluated for impairment	$	18,343		$	22,962		$	18,612
Loans collectively evaluated for impairment		577,129			560,433			553,006
Allowance for loan losses to loans collectively evaluated for impairment		3.18	%		4.10	%		3.37	%

Our loan loss reserve, as a percentage of total loans at March 31, 2015, decreased to 2.94% from 3.72% at March 31, 2014, and from 3.10% at December 31, 2014. The change in our loan loss reserve as a percentage of total loans between periods is attributable to the fluctuation in historical loss experience, qualitative factors, fewer loans migrating downward in risk grade classifications, charge-off levels, and provision expense. Our allowance for loan losses to non-performing loans was 50.93% at March 31, 2015, compared with 40.92% at December 31, 2014, and 32.86% at March 31, 2014. Net charge-offs in the first three months of 2015 totaled $767,000 of which $371,000 were the result of charging off the allowance for individually evaluated loans deemed to be collateral dependent during the period. This resulted in the decline in our allowance for loan losses for loans individually evaluated for impairment and our allowance for loan losses to non-performing loans to current levels.

The following table sets forth the net charge-offs (recoveries) for the periods indicated:


	Three Months Ended March 31, 2015			Year Ended December 31, 2014			Year Ended December 31, 2013
	(in thousands)
Commercial	$	269		$	485		$	1,616
Commercial Real Estate		258			11,878			20,045
Residential Real Estate		182			3,339			7,212
Consumer		42			167			507
Agriculture		32			17			(124	)
Other		(16	)		(26	)		—

Total net charge-offs	$	767		$	15,860		$	29,256

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 2.14% at March 31, 2015 compared with 2.65% at December 31, 2014, and 2.11% at March 31, 2014. The decrease in this ratio from December 31, 2014 to March 31, 2015 was primarily attributable to the improving non-performing loan trends during the period.

The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of March 31, 2015 and December 31, 2014.


	March 31, 2015						December 31, 2014
	Commercial Real Estate			Residential Real Estate			Commercial Real Estate			Residential Real Estate
	(in thousands)
Unpaid principal balance	$	46,969		$	22,747		$	65,899		$	24,633
Prior charge-offs		(14,238	)		(2,243	)		(17,758	)		(3,249	)

Recorded investment		32,731			20,504			48,141			21,384
Allocated allowance		(51	)		(200	)		(491	)		(227	)

Recorded investment, less allocated allowance	$	32,680		$	20,304		$	47,650		$	21,157

Recorded investment, less allocated allowance/ Unpaid principal balance		69.58	%		89.26	%		72.31	%		85.89	%

Based on previous charge-offs, our current recorded investment in the commercial real estate and residential real estate segments is significantly below the unpaid principal balance for these loans. The recorded investment and allocated allowance were 69.58% and 89.26% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at March 31, 2015.

The following table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio segment:


	March 31, 2015							December 31, 2014
	Loans		Allowance		% to Total			Loans		Allowance		% to Total
Commercial	$	75,277	$	2,044		2.72	%	$	58,914	$	2,013		3.42	%
Commercial real estate		241,286		10,629		4.41			237,903		10,440		4.39
Residential real estate:		220,229		5,021		2.28			217,785		5,560		2.55
Consumer		10,799		243		2.25			11,286		273		2.42
Agriculture		28,441		391		1.37			26,703		319		1.19
Other		1,097		15		1.37			415		7		1.69

Total	$	577,129	$	18,343		3.18	%	$	553,006	$	18,612		3.37	%

Our allowance for loan losses for loans collectively evaluated for impairment declined to 3.18% at March 31, 2015 from 4.10% at March 31, 2014 and 3.37% at December 31, 2014. This decline was driven primarily by an improving loan risk category classification mix and volume as well as improving historical loss trends which are key factors for estimating general reserves. Other factors include the consideration of growth, composition and diversification of our loan portfolio, current delinquency levels, the results of recent regulatory communications and general economic conditions.

Provision for Loan Losses – Because of ongoing improvements in asset quality and management’s assessment of risk in the loan portfolio, no provision for loan losses was recorded in the first quarter of 2015 or 2014. All loan risk categories have decreased since December 31, 2014, with the exception of pass and watch loans. The pass category increased approximately $19.4 million, the watch category increased approximately $8.7 million, the special mention category declined approximately $3.1 million, and the substandard category declined approximately $17.6 million. The decreased allowance is consistent with the decrease in our classified loans by $115.6 million from March 31, 2014 to March 31, 2015 and our loan charge-off trends. Net charge-offs were $767,000 for the three months ended March 31, 2015, compared with $2.7 million for March 31, 2014. We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.

Foreclosed Properties – Foreclosed properties at March 31, 2015 were $43.6 million compared with $45.9 million at March 31, 2014 and $46.2 million at December 31, 2014. See “Note 5 - Other Real Estate Owned,” of the notes to the financial statements. During the first three months of 2015, we acquired $347,000 of OREO properties, and sold properties totaling approximately $2.6 million. We value foreclosed properties at fair value less estimated costs to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.

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 or have staff in our special assets group or centralized appraisal department evaluate the latest in-file appraisal 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 typically obtain updated appraisals on the anniversary date of ownership unless a sale is imminent.

Net gain (loss) on sales, write-downs, and operating expenses for OREO totaled $733,000 for the three months ended March 31, 2015, compared with $662,000 for the same period of 2014. During the three months ended March 31, 2015, fair value write-downs of $300,000 were recorded to reflect declining values evidenced by new appraisals and our reduction of marketing prices in connection with our sales strategies compared with $250,000 for the three months ended March 31, 2014.

Liabilities – Total liabilities at March 31, 2015 were $975.7 million compared with $984.5 million at December 31, 2014, a decrease of $8.8 million, or 0.9%. This decrease was primarily attributable to a decrease in Federal Home Loan Bank advances of $12.2 million, offset by an increase in deposits of $3.7 million from $926.8 million at December 31, 2014 to $930.5 million at March 31, 2015. Federal Home Loan Bank 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 Ended March 31, 2015					For the Year Ended December 31, 2014
	Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Demand	$	112,206				$	113,150
Interest checking		89,024		0.14	%		83,504		0.15	%
Money market		105,105		0.56			96,194		0.55
Savings		36,456		0.22			36,803		0.24
Certificates of deposit		588,907		1.03			632,020		1.29

Total deposits	$	931,698		0.74	%	$	961,671		0.92	%

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 Ended March 31, 2015					For the Year Ended December 31, 2014
	Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Less than $100,000	$	323,415		0.99	%	$	354,250		1.22	%
$100,000 or more		265,492		1.08	%		277,770		1.37	%

Total	$	588,907		1.03	%	$	632,020		1.29	%

The following table shows at March 31, 2015 the amount of our time deposits of $100,000 or more by time remaining until maturity (in thousands):


Maturity Period
Three months or less	$	42,580
Three months through six months		54,796
Six months through twelve months		74,548
Over twelve months		102,066

Total	$	273,990

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 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 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, and other wholesale funding. Our available for sale investment portfolio totaled $157.3 million at March 31, 2015 and within that portfolio, $26.4 million of our securities currently have an unrealized loss of $567,000.

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, 2015, our additional borrowing capacity with the FHLB was $23.4 million. Any new advances are limited to a one year maturity or less.

We also have federal funds borrowing lines from 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 are also precluded from accepting brokered deposits without the pre-approval of our primary regulators.

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 for the Company include dividends paid by the Bank and financing obtained in the capital markets. During 2011, Porter Bancorp contributed $13.1 million to its subsidiary, the 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. The Company’s liquid assets decreased from $20.3 million at December 31, 2010, to $1.6 million at March 31, 2015. 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. Ongoing cash operating expenses of the parent company are expected to be approximately $1.0 million for 2015. We have elected to defer payments on our trust preferred securities.

Capital

In the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes, which resulted in a deferral of distributions on our trust preferred securities. Therefore, we will not be able to pay cash dividends on our common shares until such time that we have paid all deferred distributions on our trust preferred securities. If we defer interest payments on our trust preferred securities for 20 consecutive quarters (through September 30, 2016), we must pay all deferred interest or we will be in default. At March 31, 2015, cumulative accrued and unpaid interest on our junior subordinated notes totaled $2.3 million.

Stockholders’ equity increased $507,000 to $34.0 million at March 31, 2015, compared with $33.5 million at December 31, 2014 due to current year net income of $594,000.

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. In addition, the 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 the Company and the Bank at the dates indicated:


										March 31, 2015						December 31, 2014
	Regulatory Minimums			Well-Capitalized Minimums			Minimum Capital Ratios Under Consent Order			Porter Bancorp			PBI Bank			Porter Bancorp			PBI Bank
Tier 1 Capital		6.0	%		8.0	%		N/A			5.88	%		8.32	%		6.70	%		8.59	%
Common equity Tier I capital		4.5			6.5			N/A			4.71			8.32			N/A			N/A
Total risk-based capital		8.0			10.0			12.0	%		10.05			10.25			10.61			10.57
Tier 1 leverage ratio		4.0			5.0			9.0			4.13			5.84			4.51			5.78

At March 31, 2015, the Bank’s Tier 1 leverage ratio was 5.84%, and its total risk-based capital ratio was 10.25%, both of which are below the minimum capital ratios 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was liability sensitive at March 31, 2015 and December 31, 2014. Given a 100 basis point increase in interest rates sustained for one year, base net interest income would decrease by an estimated 0.09% at March 31, 2015, compared with a decrease of 3.15% at December 31, 2014, 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 decrease by an estimated 0.22% at March 31, 2015, compared with a decrease of 5.86% at December 31, 2014, 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, 2015, as calculated using the static shock model approach:


	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	(59	)		(0.22	)%
+ 100 basis points		(26	)		(0.09	)

We did not run a model simulation for declining interest rates as of March 31, 2015 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

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of March 31, 2015, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Management determined that a material weakness existed in the Company’s internal control over financial reporting at June 30, 2014. The Company utilized information to record the fair value of other real estate owned at June 30, 2014 which was obtained prior to taking possession of commercial real estate through a settlement agreement with a contentious borrower on June 24, 2014, rather than promptly obtaining new information material to the fair value of the properties before the filing of the financial statements as of and for the three and six month periods ended June 30, 2014. We determined, after the filing of those financial statements, that our initial estimate of fair value was significantly higher than the actual fair value as it was not based upon the best information available. Based upon the restatement of the Company’s financial statements as of and for the three and six month periods ended June 30, 2014, the Company determined that our internal controls for recording other real estate owned at estimated fair value less costs to sell did not in this instance establish an accurate initial book value and were not effective. Our management, overseen by the Audit Committee, worked throughout the fourth quarter of 2014 to implement controls, procedures, and processes to remediate this control weakness.

These enhanced controls, procedures, and process improvements include:

•

The Special Assets Group promptly and thoroughly reviews new information material to the fair value of the property and analyzes key assumptions relevant to the fair value conclusion and cost to sell estimate. New information includes, but it not limited to, updated appraisals, site visits performed by the Special Assets Group, and discussions with current tenants.

•

Personnel, including senior management, consult with the Special Assets Group and external experts, such as property management professionals, to evaluate the new information material to the fair value of the property including comparable sales, income and expenses, and other relevant valuation factors.

•

Finance and accounting personnel engage in detailed discussions regarding valuation issues and review other real estate owned, including additions, with the Special Assets Group throughout each reporting period and through the subsequent period up to the filing of the financial statements.

During the fourth quarter of 2014, we took steps to resolve the material weakness by changing our controls, procedures, and processes for recording other real estate owned at estimated fair value less cost to sell, as discussed above. Notwithstanding the steps taken during the fourth quarter of 2014, the identified material weakness will not be considered remediated until the new procedures have been in operation for a sufficient period of time to be tested and determined by management to be operating effectively. Based on our evaluation and the reason described above, management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. There were no other changes in our internal control over financial reporting that occurred during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are defendants in various legal proceedings. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See Footnote 13, “Contingencies” in the Notes to our consolidated financial statements for additional detail regarding ongoing legal proceedings.

Item 1A. Risk Factors

We refer you to the detailed cautionary statements and discussion of risks that affect our Company and its business in “Item 1A – Risk Factors” of our December 31, 2014 Annual Report on Form 10-K. There have been no material changes from the risk factors previously discussed in those reports.

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

10.1		Porter Bancorp, Inc. 2015 Incentive Compensation Bonus Plan incorporated by reference in the Definitive Proxy Statement filed April 17, 2015.

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, 2015, 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 11, 2015	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

May 11, 2015	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer