Limestone Bancorp (LMST) 10-Q 2011 Q1 Quarterly report

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, 2011

Or

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

For the transition period from to

Commission file number: 001-33033

PORTER BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky	61-1142247
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2500 Eastpoint Parkway, Louisville, Kentucky	40223
(Address of principal executive offices)	(Zip Code)

(502) 499-4800

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant 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 ¨  No ¨

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

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company  x

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

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

11,838,428 shares of Common Stock, no par value, were outstanding at April 30, 2011.

		Page
PART I -	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
ITEM 4.	CONTROLS AND PROCEDURES	40
PART II -	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	41
ITEM 1A.	RISK FACTORS	41
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	41
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41
ITEM 4.	REMOVED & RESERVED	41
ITEM 5.	OTHER INFORMATION	41
ITEM 6.	EXHIBITS	42

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, 2011 and December 31, 2010

Unaudited Consolidated Statements of Income for the three months ended March 31, 2011 and 2010

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

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010

Notes to Unaudited Consolidated Financial Statements

1

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	March 31,		December 31,
	2011		2010
Assets
Cash and due from financial institutions	$	156,726	$	178,693
Federal funds sold		5,377		6,742
Cash and cash equivalents		162,103		185,435
Securities available for sale		163,032		106,309
Mortgage loans held for sale		330		345
Loans, net of allowance of $33,599 and $34,285, respectively		1,243,568		1,268,383
Premises and equipment		22,175		22,468
Other real estate owned		73,942		67,635
Goodwill		23,794		23,794
Accrued interest receivable and other assets		48,163		49,583
Total assets	$	1,737,107	$	1,723,952
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	106,772	$	98,398
Interest bearing		1,375,551		1,369,270
Total deposits		1,482,323		1,467,668
Federal funds purchased and repurchase agreements		11,429		11,616
Federal Home Loan Bank advances		14,564		15,022
Accrued interest payable and other liabilities		5,507		6,681
Subordinated capital note		8,550		8,550
Junior subordinated debentures		25,000		25,000
Total liabilities		1,547,373		1,534,537
Stockholders’ equity
Preferred stock, no par, 1,000,000 shares authorized,
Series A – 35,000 issued and outstanding;
Liquidation preference of $35 million at March 31, 2011		34,528		34,484
Series C – 317,042 issued and outstanding;
Liquidation preference of $3.6 million at March 31, 2011		3,283		3,283
Common stock, no par, 19,000,000 shares authorized, 11,840,176
and 11,846,107 shares issued and outstanding, respectively		112,236		112,236
Additional paid-in capital		19,526		19,438
Retained earnings		18,017		17,822
Accumulated other comprehensive income		2,144		2,152
Total stockholders' equity		189,734		189,415
Total liabilities and stockholders’ equity	$	1,737,107	$	1,723,952

See accompanying notes to unaudited consolidated financial statements.

2

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

	Three Months Ended
	March 31,
	2011		2010
Interest income
Loans, including fees	$	18,110	$	19,873
Taxable securities		1,042		2,335
Tax exempt securities		260		216
Fed funds sold and other		204		202
		19,616		22,626
Interest expense
Deposits		5,360		7,383
Federal Home Loan Bank advances		142		720
Subordinated capital note		73		75
Junior subordinated debentures		155		152
Federal funds purchased and other		118		119
		5,848		8,449
Net interest income		13,768		14,177
Provision for loan losses		5,100		3,000
Net interest income after provision for loan losses		8,668		11,177
Non-interest income
Service charges on deposit accounts		630		720
Income from fiduciary activities		255		252
Secondary market brokerage fees		76		60
Title insurance commissions		31		37
Net gain on sales of loans originated for sale		221		91
Net gain on sales of securities		83		57
Other		491		475
		1,787		1,692
Non-interest expense
Salaries and employee benefits		4,124		3,947
Occupancy and equipment		972		1,022
Other real estate owned expense		1,367		378
FDIC Insurance		855		705
State franchise tax		582		543
Professional fees		280		266
Loan collection expense		262		175
Communications		168		186
Postage and delivery		123		188
Advertising		102		96
Other		560		543
		9,395		8,049
Income before income taxes		1,060		4,820
Income tax expense		261		1,564
Net income		799		3,256
Less:
Dividends on preferred stock		438		438
Accretion on Series A preferred stock		44		44
Earnings allocated to participating securities		12		42
Net income available to common shareholders	$	305	$	2,732
Basic earnings per common share	$	0.03	$	0.30
Diluted earnings per common share	$	0.03	$	0.30

See accompanying notes to unaudited consolidated financial statements.

3

PORTER BANCORP, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Three Months Ended March 31, 2011

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

Accumulated

Shares

Amount

Additional

Other

Series A

Series C

Series A

Series C

Paid-In

Retained

Comprehensive

Common

Preferred

Preferred

Common

Preferred

Preferred

Capital

Earnings

Income

Total

Balances, January 1, 2011

11,846,107

35,000

317,042

$

112,236

$

34,484

$

3,283

$

19,438

$

17,822

$

2,152

$

189,415

Forfeited unvested stock

(5,931

)

–

–

–

–

–

–

–

–

–

Stock-based compensation expense

–

–

–

–

–

–

88

–

–

88

Comprehensive income:

Net income

–

–

–

–

–

–

–

799

–

799

Changes in accumulated other

comprehensive income,

net of taxes

–

–

–

–

–

–

–

–

(8

)

(8

)

Total comprehensive income

–

–

–

–

–

–

–

–

–

791

Dividends 5% on Series A preferred stock

–

–

–

–

–

–

–

(438

)

–

(438

)

Dividends on Series C preferred

stock ($0.01 per share)

–

–

–

–

–

–

–

(3

)

–

(3

)

Amortization of Series A preferred

stock discount

–

–

–

–

44

–

–

(44

)

–

–

Cash dividends declared on

common stock ($0.01 per share)

–

–

–

–

–

–

–

(119

)

–

(119

)

Balances, March 31, 2011

11,840,176

35,000

317,042

$

112,236

$

34,528

$

3,283

$

19,526

$

18,017

$

2,144

$

189,734

See accompanying notes to unaudited consolidated financial statements.

4

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2011 and 2010

(dollars in thousands)

	2011			2010
Cash flows from operating activities
Net income	$	799		$	3,256
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization		610			844
Provision for loan losses		5,100			3,000
Net amortization (accretion) on securities		321			(226	)
Stock-based compensation expense		118			99
Deferred income taxes		238			1,177
Net gain on loans originated for sale		(221	)		(91	)
Loans originated for sale		(7,188	)		(6,182	)
Proceeds from sales of loans originated for sale		7,234			5,588
Net gain on sales of investment securities		(83	)		(57	)
Net (gain) loss on sales of other real estate owned		391			(1	)
Net write-down of other real estate owned		486			240
Earnings on bank owned life insurance		(70	)		(70	)
Net change in accrued interest receivable and other assets		1,130			1,338
Net change in accrued interest payable and other liabilities		(1,169	)		(1,707	)
Net cash from operating activities		7,696			7,208
Cash flows from investing activities
Purchases of available-for-sale securities		(66,641	)		(23,105	)
Sales and calls of available-for-sale securities		2,894			8,163
Maturities and prepayments of available-for-sale securities		6,773			6,832
Proceeds from sale of other real estate owned		624			878
Improvements to other real estate owned		(1,037	)		(338	)
Loan originations and payments, net		12,951			3,582
Purchases of premises and equipment, net		(42	)		(35	)
Net cash from investing activities		(44,478	)		(4,023	)
Cash flows from financing activities
Net change in deposits		14,655			(45,056	)
Net change in federal funds purchased and repurchase agreements		(187	)		78
Repayment of Federal Home Loan Bank advances		(458	)		(35,695	)
Cash dividends paid on preferred stock		(441	)		(438	)
Cash dividends paid on common stock		(119	)		(1,765	)
Net cash from financing activities		13,450			(82,876	)
Net change in cash and cash equivalents		(23,332	)		(79,691	)
Beginning cash and cash equivalents		185,435			172,173
Ending cash and cash equivalents	$	162,103		$	92,482
Supplemental cash flow information:
Interest paid	$	5,861		$	8,744
Income taxes paid		—			—
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	8,812		$	52,214
Financed sales of other real estate owned		2,041			6,295

See accompanying notes to unaudited consolidated financial statements.

5

PORTER BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

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

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for three months ended March 31, 2011 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, 2010 included in the Company’s Annual Report on Form 10-K.

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

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

New Accounting Standards

In January 2011, the FASB issued ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”  The provisions of ASU No. 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company’s reporting period ended March 31, 2011.  The amendments in ASU No. 2011-01 defer the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completes their project clarifying the guidance for determining what constitutes a troubled debt restructuring.  As the provisions of this ASU only defer the effective date of the disclosure requirements related to troubled debt restructurings, the adoption of this ASU will have no impact on the Company’s statements of income and condition.

In April 2011, the FASB issued ASU No. 2011-02, ‘A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in ASU no. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20.  The provisions of ASU No. 2011-02 are effective for the Company’s reporting period ending September 30, 2011.  The adoption of ASU No. 2011-02 is not expected to have a material impact on the Company’s statements of income and condition.

6

Note 2 – Stock Plans and Stock Based Compensation

The Company has a stock option plan and a stock incentive plan. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan. The 2006 Plan permits the issuance of up to 400,000 shares of the Company’s common stock upon the exercise of stock options or upon the grant of stock awards. As of March 31, 2011, the Company had granted outstanding options to purchase 13,324 shares.  The Company also had granted 121,251 unvested shares net of forfeitures and vesting. The Company has 194,798 shares remaining available for issue under the plan.  All shares issued under the above mentioned plans came from authorized and unissued shares.

On May 15, 2006, the board of directors approved the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, which was approved by holders of the Company’s voting common stock on June 8, 2006.  On May 22, 2008, shareholders voted to amend the plan to change the form of incentive award from stock options to unvested shares. Under the terms of the plan, 100,000 shares are reserved for issuance to non-employee directors upon the exercise of stock options or upon the grant of unvested stock awards granted under the plan. Prior to the amendment, options were granted automatically under the plan at fair market value on the date of grant.  The options vest over a three-year period and have a five year term.  Unvested shares are granted automatically under the plan at fair market value on the date of grant and vest semi-annually on the anniversary date of the grant over three years.  To date, the Company has granted options to purchase 45,155 shares and issued 3,651 unvested shares to non-employee directors. At March 31, 2011, 47,300 shares remain available for issue under this plan.

All stock options have an exercise price that is equal to or greater than the fair market value of the Company’s stock on the date the options were granted.  Options granted generally become fully exercisable at the end of three years of continued employment. Options have a life of five years.

The following table summarizes stock option activity:

	Three Months Ended					Twelve Months Ended
	March 31, 2011					December 31, 2010
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Options			Price		Options			Price
Outstanding, beginning		86,469		$	20.72		312,227		$	21.80
Forfeited		(291	)		22.03		(16,797	)		21.55
Expired		(27,699	)		22.03		(208,961	)		22.27
Outstanding, ending		58,479		$	20.09		86,469		$	20.72

The following table details stock options outstanding:

	March 31, 2011
Stock options vested and currently exercisable:		58,479
Weighted average exercise price	$	20.09
Aggregate intrinsic value	$	0
Weighted average remaining life (in years)		0.9
Total Options Outstanding:		58,479
Aggregate intrinsic value	$	0
Weighted average remaining life (in years)		0.9

7

The intrinsic value of stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date.  The intrinsic value of the vested and expected to vest stock options is $0 at March 31, 2011.  There were no options exercised during the first three months of 2011.  The Company recorded no stock option compensation expense during the three months ended March 31, 2011.  No options were modified during the period.  As of March 31, 2011, no stock options issued by the Company have been exercised.

From time-to-time the Company issues unvested shares to employees and non-employee directors.  The shares vest either semi-annually or annually over three to ten years on the anniversary date of the issuance date provided the employee or director continues in such capacity at the vesting date. No unvested shares were issued the three months ended March 31, 2011. The Company recorded $118,000 of stock-based compensation during the first quarter of 2011 to salaries and employee benefits.  A deferred tax benefit of $41,000 was recognized related to this expense.

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

	Three Months Ended					Twelve Months Ended
	March 31, 2011					December 31, 2010
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Shares			Price		Shares			Price
Outstanding, beginning		157,697		$	13.43		119,598		$	15.00
Granted		—			—		72,655			11.11
Vested		(26,909	)		12.25		(24,505	)		14.46
Forfeited		(5,886	)		14.08		(10,051	)		12.78
Outstanding, ending		124,902		$	13.65		157,697		$	13.43

Unrecognized stock based compensation expense related to stock options and unvested shares for the remainder of 2011 and beyond is estimated as follows (in thousands):

April 2011 – December 2011	$	355
2012		463
2013		377
2014		264
2015 & thereafter		169

8

Note 3 - Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
March 31, 2011
U.S. Government and federal agency	$	10,595	$	60	$	—		$	10,655
Agency mortgage-backed: residential		109,491		1,438		(375	)		110,554
State and municipal		30,427		1,315		(2	)		31,740
Corporate bonds		7,249		579		(23	)		7,805
Other		572		—		—			572
Total debt securities		158,334		3,392		(400	)		161,326
Equity		1,400		311		(5	)		1,706
Total	$	159,734	$	3,703	$	(405	)	$	163,032

December 31, 2010
U.S. Government and federal agency	$	5,973	$	37	$	—		$	6,010
Agency mortgage-backed: residential		60,270		1,590		(5	)		61,855
State and municipal		26,039		995		(32	)		27,002
Corporate bonds		8,744		507		(32	)		9,219
Other		572		—		—			572
Total debt securities		101,598		3,129		(69	)		104,658
Equity		1,400		254		(3	)		1,651
Total	$	102,998	$	3,383	$	(72	)	$	106,309

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

	Three Months Ended
	March 31,
	2011		2010
	(in thousands)
Proceeds	$	2,894	$	8,163
Gross gains		83		256
Gross losses		—		(199	)

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.

	March 31, 2011
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available-for-sale
Within one year	$	1,725	$	1,751
One to five years		14,640		15,404
Five to ten years		30,158		31,255
Beyond ten years		2,320		2,362
Mortgage-backed		109,491		110,554
Total	$	158,334	$	161,326

9

Securities pledged at March 31, 2011 and December 31, 2010 had carrying values of approximately $73.8 million and $73.1 million, respectively, and were pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances.

The Company evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition.  Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity.

At March 31, 2011, the Company held 41 equity securities.  Of these securities, 2 had unrealized losses of $1,500 and had been in an unrealized loss position for less than twelve months and 3 had an unrealized loss of $3,400 and had been in an unrealized loss position for more than twelve months.  Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. As of March 31, 2011, management does not believe any securities in our portfolio with unrealized losses should be classified as other than temporarily impaired.

Securities with unrealized losses at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
March 31, 2011
Agency mortgage-backed: residential	$	38,501	$	(375	)	$	—	$	—		$	38,501	$	(375	)
State and municipal		1,137		(2	)		—		—			1,137		(2	)
Corporate bonds		1,004		(23	)		—		—			1,004		(23	)
Equity		27		(2	)		19		(3	)		46		(5	)
Total temporarily impaired	$	40,669	$	(402	)	$	19	$	(3	)	$	40,688	$	(405	)
December 31, 2010
State and municipal	$	3,119	$	(32	)	$	—	$	—		$	3,119	$	(32	)
Agency mortgage-backed: residential		1,060		(5	)		—		—			1,060		(5	)
Corporate bonds		995		(32	)		—		—			995		(32	)
Equity		27		(1	)		74		(2	)		101		(3	)
Total temporarily impaired	$	5,201	$	(70	)	$	74	$	(2	)	$	5,275	$	(72	)

10

Note 4 – Loans

Loans were as follows:

	March 31, 2011			December 31, 2010
	(in thousands)
Commercial	$	76,521		$	90,290
Commercial Real Estate:
Construction		175,805			199,524
Farmland		86,161			85,523
Other		458,278			441,844
Residential Real Estate:
Multi-family		75,283			74,919
Other		349,247			353,418
Consumer		30,758			31,913
Agriculture		24,158			24,177
Other		956			1,060
Subtotal		1,277,167			1,302,668
Less: Allowance for loan losses		(33,599	)		(34,285	)
Loans, net	$	1,243,568		$	1,268,383

Activity in the allowance for loan losses was as follows:

	For the Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands)
Beginning balance	$	34,285		$	26,392
Provision for loan losses		5,100			3,000
Loans charged-off		(5,867	)		(2,906	)
Loan recoveries		81			57
Ending balance	$	33,599		$	26,543

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

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture		Other		Total
Beginning balance	$	2,147		$	24,075		$	7,224		$	701		$	134	$	4	$	34,285
Provision for loan losses		(106	)		3,457			1,618			122			5		4		5,100
Loans charged off		(79	)		(4,141	)		(1,434	)		(213	)		–		–		(5,867	)
Recoveries		12			5			43			21			–		–		81
Ending balance	$	1,974		$	23,396		$	7,451		$	631		$	139	$	8	$	33,599

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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, 2011:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	57	$	4,660	$	—	$	—	$	—	$	—	$	4,717
Collectively evaluated for impairment		1,917		18,736		7,451		631		139		8		28,882
Total ending allowance balance	$	1,974	$	23,396	$	7,451	$	631	$	139	$	8	$	33,599
Loans:
Loans individually evaluated for impairment	$	3,475	$	60,246	$	10,629	$	—	$	86	$	—	$	74,436
Loans collectively evaluated for impairment		73,046		659,998		413,901		30,758		24,072		956		1,202,731
Total ending loans balance	$	76,521	$	720,244	$	424,530	$	30,758	$	24,158	$	956	$	1,277,167

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, 2010:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	23	$	5,096	$	—	$	—	$	—	$	—	$	5,119
Collectively evaluated for impairment		2,124		18,979		7,224		701		134		4		29,166
Total ending allowance balance	$	2,147	$	24,075	$	7,224	$	701	$	134	$	4	$	34,285
Loans:
Loans individually evaluated for impairment	$	3,673	$	51,223	$	16,718	$	—	$	112	$	—	$	71,726
Loans collectively evaluated for impairment		86,617		675,668		411,619		31,913		24,065		1,060		1,230,942
Total ending loans balance	$	90,290	$	726,891	$	428,337	$	31,913	$	24,177	$	1,060	$	1,302,668

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Impaired loans were as follows:

	March 31, 2011		December 31, 2010
	(in thousands)
Loans with no allocated allowance for loan losses	$	40,019	$	41,885
Loans with allocated allowance for loan losses		34,417		29,841
Total	$	74,436	$	71,726
Amount of the allowance for loan losses allocated	$	4,717	$	5,119

	Three Months Ended March 31, 2011		Year Ended December 31, 2010
Average of impaired loans during the period	$	73,081	$	69,167
Interest income recognized during impairment		338		1,358
Cash basis interest income recognized		87		115

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

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	2,370	$	2,334	$	—	$	2,428	$	22	$	8
Commercial real estate:
Construction		3,901		3,901		—		6,917		11		3
Farmland		6,754		6,754		—		6,750		86		7
Other		19,435		16,315		—		14,692		44		14
Residential real estate:
Multi-family		3,912		3,912		—		3,920		46		—
Other		7,810		6,717		—		9,753		76		2
Consumer		—		—		—		—		—		—
Agriculture		86		86		—		99		—		—
Other		—		—		—		—		—		—
With An Allowance Recorded:
Commercial		1,141		1,141		57		1,145		24		24
Commercial real estate:
Construction		6,105		5,633		796		4,807		—		—
Farmland		1,234		1,234		90		1,234		—		—
Other		28,361		26,409		3,774		21,336		29		29
Residential real estate:
Multi-family		—		—		—		—		—		—
Other		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total	$	81,109	$	74,436	$	4,717	$	73,081	$	338	$	87

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The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2010:

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	2,559	$	2,523	$	—
Commercial real estate:
Construction		3,269		3,268		—
Farmland		6,745		6,746		—
Other		12,662		12,518		—
Residential real estate:
Multi-family		3,929		3,929		—
Other		13,303		12,789		—
Consumer		—		—		—
Agriculture		119		112		—
Other		—		—		—
With An Allowance Recorded:
Commercial		1,150		1,150		23
Commercial real estate:
Construction		13,314		10,645		1,923
Farmland		1,234		1,234		89
Other		16,912		16,812		3,084
Residential real estate:
Multi-family		—		—		—
Other		—		—		—
Consumer		—		—		—
Agriculture		—		—		—
Other		—		—		—
Total	$	75,196	$	71,726	$	5,119

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Troubled Debt Restructuring – At March 31, 2011 we had restructured loans totaling $28.3 million, compared with $25.5 million at December 31, 2010, with borrowers who experienced deterioration in financial conditions.  These loans are secured by 1-4 residential or commercial real estate properties. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms.  The Company allocated no specific reserves to customers whose loan terms had been modified in troubled debt restructurings as of March 31, 2011 or December 31, 2010.  The Company has committed to lend additional amounts totaling up to $188,000 and $273,000 as of March 31, 2011 and December 31, 2010, respectively, to customers with outstanding loans that are classified as trouble debt restructurings.

Nonperforming Loans

Nonperforming loans were as follows:

	March 31, 2011		December 31, 2010
	(in thousands)
Loans past due 90 days or more still on accrual	$	3,907	$	594
Non-accrual loans		65,964		59,799

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

The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of March 31, 2011 and December 31, 2010:

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	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	2011		2010		2011		2010
	(in thousands)
Commercial	$	2,575	$	2,778	$	394	$	432
Commercial Real Estate:
Construction		8,718		12,651		100		—
Farmland		2,836		2,811		314		143
Other		31,888		23,031		854		12
Residential Real Estate:
Multi-family		1,075		345		168		—
Other		18,554		17,778		1,873		—
Consumer		232		293		174		7
Agriculture		86		112		30		—
Other		—		—		—		—
Total	$	65,964	$	59,799	$	3,907	$	594

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Non-accrual		Total Past Due And Non-accrual		Loans Not Past Due		Total
March 31, 2011
Commercial	$	6,997	$	871	$	394	$	2,575	$	10,837	$	65,684	$	76,521
Commercial Real Estate:
Construction		3,757		6,997		100		8,718		19,572		156,233		175,805
Farmland		1,034		342		314		2,836		4,526		81,635		86,161
Other		7,056		13,205		854		31,888		53,003		405,275		458,278
Residential Real Estate:
Multi-family		1,897		1,100		168		1,075		4,240		71,043		75,283
Other		11,599		2,259		1,873		18,554		34,285		314,962		349,247
Consumer		755		219		174		232		1,380		29,378		30,758
Agriculture		272		31		30		86		419		23,739		24,158
Other		—		—		—		—		—		956		956
Total	$	33,367	$	25,024	$	3,907	$	65,964	$	128,262	$	1,148,905	$	1,277,167

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	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Non-accrual		Total Past Due And Non-accrual		Loans Not Past Due		Total
December 31, 2010
Commercial	$	477	$	110	$	432	$	2,778	$	3,797	$	86,493	$	90,290
Commercial Real Estate:
Construction		1,097		346		—		12,651		14,094		185,430		199,524
Farmland		1,232		145		143		2,811		4,331		81,192		85,523
Other		7,855		2,094		12		23,031		32,992		408,852		441,844
Residential Real Estate:
Multi-family		714		71		—		345		1,130		73,789		74,919
Other		8,239		3,218		—		17,778		29,235		324,183		353,418
Consumer		1,156		164		7		293		1,620		30,293		31,913
Agriculture		186		—		—		112		298		23,879		24,177
Other		—		—		—		—		—		1,060		1,060
Total	$	20,956	$	6,148	$	594	$	59,799	$	87,497	$	1,215,171	$	1,302,668

Credit Quality Indicators – We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  Loans are analyzed individually by classifying the loans as to credit risk.  This analysis includes loans with an outstanding balance greater than $500,000 and non-homogeneous loans, such as commercial and commercial real estate loans.  This analysis is performed on a quarterly basis.  The following definitions are used for risk ratings:

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans.  As of March 31, 2011, and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

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	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
March 31, 2011
Commercial	$	58,567	$	6,849	$	908	$	10,197	$	—	$	76,521
Commercial Real Estate:
Construction		107,468		29,348		6,280		32,709		—		175,805
Farmland		73,263		2,929		437		9,532		—		86,161
Other		289,040		83,023		2,555		83,660		—		458,278
Residential Real Estate:
Multi-family		53,300		7,545		449		13,989		—		75,283
Other		284,694		21,474		1,314		41,765		—		349,247
Consumer		28,819		1,273		43		609		14		30,758
Agriculture		22,788		91		203		1,076		—		24,158
Other		956		—		—		—		—		956
Total	$	918,895	$	152,532	$	12,189	$	193,537	$	14	$	1,277,167

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2010
Commercial	$	74,284	$	5,478	$	894	$	9,634	$	—	$	90,290
Commercial Real Estate:
Construction		137,631		15,397		12,968		33,528		—		199,524
Farmland		74,220		2,481		—		8,822		—		85,523
Other		280,091		82,548		2,334		76,871		—		441,844
Residential Real Estate:
Multi-family		65,482		3,493		1,328		4,616		—		74,919
Other		298,748		18,783		1,458		34,429		—		353,418
Consumer		30,197		1,069		6		623		18		31,913
Agriculture		22,923		1,086		—		168		—		24,177
Other		1,060		—		—		—		—		1,060
Total	$	984,636	$	130,335	$	18,988	$	168,691	$	18	$	1,302,668

Note 5 – Other Real Estate Owned

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

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For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate owned.  In some of these circumstances, an appraisal is in process at quarter end and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser.  We do not obtain updated appraisals on a quarterly basis after the receipt of the initial appraisal.  Rather, we internally review the fair value of the other real estate owned in our portfolio on a quarterly basis to determine if a new appraisal is warranted based on the specific circumstances of each property.  The following table presents the major categories of OREO at the period-ends indicated:

	March 31, 2011		December 31, 2010
	(in thousands)
Commercial Real Estate:
Construction	$	56,274	$	50,491
Farmland		1,989		1,904
Other		6,600		6,504
Residential Real Estate:
Multi-family		809		823
Other		8,270		7,913
	$	73,942	$	67,635

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

OREO Activity (in thousands)
OREO as of January 1, 2011	$	67,635
Real estate acquired		8,812
Valuation adjustments		(486	)
Improvements		1,037
Properties sold		(3,056	)
OREO as of March 31, 2011	$	73,942

Expenses related to other real estate owned include:

	Three Months Ended
	March 31, 2011		March 31, 2010
	(in thousands)
Net loss (gain) on sales	$	391	$	(1	)
Impairment write-downs		486		240
Operating expense		490		139
Total	$	1,367	$	378

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Note 6 – Advance from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	March 31, 2011		December 31, 2010
	(in thousands)
Single maturity advance with fixed rate of 4.48% maturing in 2012	$	5,000	$	5,000
Monthly amortizing advances with fixed rates from 0.00% to 6.49%
and maturities ranging from 2011 through 2035, averaging 3.55% for 2011		9,564		10,022
Total	$	14,564	$	15,022

Each advance is payable per terms on agreement, with a prepayment penalty.  The advances were collateralized by first mortgage loans, under a blanket lien arrangement.  At March 31, 2010, the Bank had unused borrowing capacity of $113.7 million with the FHLB.

Note 7 – Fair Values Measurement

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

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

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

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

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

Securities: The fair values of securities 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.

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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 percent.

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

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

For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate owned.  In some of these circumstances, an appraisal is in process at quarter end, and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser.  We do not obtain updated appraisals on a quarterly basis after the receipt of the initial appraisal.  Rather, we internally review the fair value of the other real

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estate owned in our portfolio on a quarterly basis to determine if a new appraisal is warranted based on the specific circumstances of each property.

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 percent.

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

			Fair Value Measurements at March 31, 2011 Using
			(in thousands)
Description	March 31, 2011		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	$	10,655	$	–	$	10,655	$	–
Agency mortgage-backed		110,554		–		110,554		–
State and municipal		31,740		–		31,740		–
Corporate bonds		7,805		–		7,805		–
Other debt securities		572		–		–		572
Equity securities		1,706		1,706		–		–
Total	$	163,032	$	1,706	$	160,754	$	572

Roll-forward of activity for our Significant Unobservable Inputs (Level 3) follows:

Available-for-sale securities	Three Months Ended March 31, 2011
Balance, January 1, 2011	$	572
Sales		—
Net accretion (amortization)		—
Principal paydowns		—
Net change in unrealized gain/loss		—
Balance, March 31, 2011	$	572

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

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			Fair Value Measurements at March 31, 2011 Using
			(in thousands)
Description	March 31, 2010		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	1,084	$	–	$	–	$	1,084
Commercial real estate:

Construction	4,837	–	–	4,837
Farmland	1,144	–	–	1,144
Other	22,635	–	–	22,635
Other real estate owned, net:
Commercial real estate:
Construction	56,274	–	–	56,274
Farmland	1,989	–	–	1,989
Other	6,600	–	–	6,600
Residential real estate:
Multi-family	809	–	–	809
Other	8,270	–	–	8,270

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $34.4 million, with a valuation allowance of $4.7 million, at March 31, 2011, resulting in no additional provision for loan losses for the three months ended March 31, 2011.  At March 31, 2010, impaired loans had a carrying amount of $54.3 million, with a valuation allowance of $4.4 million, resulting in an additional provision for loan losses of $728,000 for first three months of 2010.

Other real estate owned which is measured at fair value less costs to sell, had a net carrying amount of $73.9 million as of March 31, 2011, compared with $59.7 million at March 31, 2010.  Write-downs of $486,000 and $240,000 were recorded on other real estate owned for the first three months of 2011 and 2010, respectively.

Financial assets measured at fair value on a recurring basis at December 31, 2010 are summarized below:

			Fair Value Measurements at December 31, 2010 Using
			(in thousands)
Description	December 31, 2010		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Government and federal agency	$	6,010	$	–	$	6,010	$	–
Agency mortgage-backed		61,855		–		61,855		–
State and municipal		27,002		–		27,002		–
Corporate bonds		9,219		–		9,219		–
Other debt securities		572		–		–		572
Equity securities		1,651		1,651		–		–
Total	$	106,309	$	1,651	$	104,086	$	572

Financial assets measured at fair value on a non-recurring basis at December 31, 2010 are summarized below:

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			Fair Value Measurements at December 31, 2010 Using
			(in thousands)
Description	December 31, 2010		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	1,127	$	–	$	–	$	1,127
Commercial real estate:

Construction	8,722	–	–	8,722
Farmland	1,145	–	–	1,145
Other	13,728	–	–	13,728
Other real estate owned, net:
Commercial real estate:
Construction	50,491	–	–	50,491
Farmland	1,904	–	–	1,904
Other	6,504	–	–	6,504
Residential real estate:
Multi-family	823	–	–	823
Other	7,913	–	–	7,913

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $29.8 million and a valuation allowance of $5.1 million.

Other real estate owned which is measured at fair value less costs to sell, had a net carrying amount of $67.6 million.

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

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)
Financial assets
Cash and cash equivalents	$	162,103	$	162,103	$	185,435	$	185,435
Securities available for sale		163,032		163,032		106,309		106,309
Federal Home Loan Bank stock		10,072		N/A		10,072		N/A
Mortgage loans held for sale		330		330		345		345
Loans, net		1,243,568		1,250,503		1,268,383		1,276,198
Accrued interest receivable		7,611		7,611		7,668		7,668
Financial liabilities
Deposits	$	1,482,323	$	1,488,845	$	1,467,668	$	1,472,677
Securities sold under agreements to repurchase		11,429		11,429		11,616		11,616
Federal Home Loan Bank advances		14,564		14,601		15,022		15,051
Subordinated capital notes		8,550		7,909		8,550		7,879
Junior subordinated debentures		25,000		21,571		25,000		21,474
Accrued interest payable		1,897		1,897		1,910		1,910

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing deposits with financial institutions, repurchase agreements, mortgage loans held for sale, accrued interest receivable and payable, demand deposits, short-term borrowings, and variable rate loans or deposits that reprice frequently and fully. As permitted under ASC 825-10-55-3, “Disclosures about Fair Value of Financial Instruments,” for purposes of the disclosures in this footnote, the fair value of loans has been determined using the contractual cash flows of loans discounted at interest rates currently offered for similar loans. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of subordinated capital notes and junior subordinated debentures are based on current rates for similar types of financing. The carrying amount is the estimated fair value for variable and subordinated debentures that reprice frequently. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.  The fair value of debt is based on current rates for similar financing.  The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements, which is not material.

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Note 8 – Earnings per Share

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

	Three Months Ended March 31,
	2011			2010
	(in thousands, except share and per share data)
Net income	$	799		$	3,256
Less:
Preferred stock dividends		(438	)		(438	)
Accretion of Series A preferred stock discount		(44	)		(44	)
Earnings allocated to unvested shares		(4	)		(42	)
Earnings allocated Series C preferred		(8	)		–
Net income allocated to common shareholders, basic and diluted	$	305		$	2,732
Basic
Weighted average common shares including
unvested common shares outstanding		12,178,845			9,212,054
Less: Weighted average unvested common shares		(141,300	)		(129,932	)
Less: Weighted average Series C preferred		(332,894	)		–
Weighted average common shares outstanding		11,704,651			9,082,122
Basic earnings per common share	$	0.03		$	0.30
Diluted
Add: Dilutive effects of assumed exercises of common
and Preferred Series C stock warrants		–			–
Weighted average common shares and potential common shares		11,704,651			9,082,122
Diluted earnings per common share	$	0.03		$	0.30

All historical data has been adjusted to reflect the 5% stock dividends.

Stock options for 58,479 shares of common stock for 2011 and 93,629 shares of common stock for 2010 were not considered in computing diluted earnings per common share because they were anti-dilutive.  Additionally, a warrant for the purchase of 330,561 shares of the Company’s common stock at an exercise price of $15.88 was outstanding at March 31, 2011 and 2010 but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. Finally, warrants for the purchase of 1,380,437 shares of non-voting common stock at an exercise price of $11.50 per share were outstanding at March 31, 2011, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive. These warrants were not outstanding at March 31, 2010.

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Note 9 – Other Comprehensive Income

Other comprehensive income components and related tax effects were as follows:

	Three Months Ended March 31,
	2011			2010
	(in thousands)
Unrealized holding gains on available-for-sale securities	$	71		$	3,525
Less: Reclassification adjustment for gains realized in income		83			57
Net unrealized gains		(12	)		3,468
Tax effect		4			(1,214	)
Net-of-tax amount	$	(8	)	$	2,254

Note 10 – Capital

Each of the federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets of at least 12.0% and a ratio of Tier 1 capital to total risk-weighted assets of 9.0%.

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

					March 31, 2011				December 31, 2010
	Regulatory Minimums		Well-Capitalized Minimums		Porter Bancorp		PBI Bank		Porter Bancorp		PBI Bank
Tier I capital	4.0	%	6.0	%	14.59	%	13.02	%	14.39	%	12.79	%
Total risk-based capital	8.0		10.0		16.52		14.96		16.32		14.72
Tier I leverage ratio	4.0		5.0		10.93		9.75		11.08		9.85

Note 11 – Contingencies

The nature of our business regularly results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. We believe we have meritorious defenses to the claims asserted against us in our currently outstanding legal proceedings and, with respect to such legal proceedings, intend to continue to defend ourselves vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of the Company and our shareholders.

On April 19, 2011, an Oldham County, Kentucky jury rendered a judgment against PBI Bank for $529,000 in compensatory damages and from $529,000 to $882,000 in punitive damages.  The case (PBI Bank, Inc. V Patricia S. Wilhoyte, Oldham Circuit Court, case no 08-CI-00674) concerns a dispute with a prior landowner in connection with a project for which PBI Bank provided development financing to a third party.  The verdict allocates comparative fault of 40% to the plaintiff and 60% to the defendant.  The final amount of the judgment is subject to additional proceedings regarding the allocation of punitive damages.  We intend to file motions to set aside the judgment, and if denied, to file an appeal.  Based on advice of legal counsel, we believe that we have several meritorious grounds for appeal and no amounts have been accrued for this matter as we expect a favorable outcome to the bank.

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We periodically assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For those matters where a loss is not probable or the amount of the loss is not estimable, we will not accrue any legal reserves. For those matters where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we will record a liability in our consolidated financial statements. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, our management believes that the liabilities arising from our legal proceedings will not have a material adverse effect on our consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to our consolidated financial position, consolidated results of operations or consolidated cash flows.

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

and Results of Operations

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

Cautionary Note Regarding Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to differences in our results include, but are not limited to the factors listed in Part 2, Item 1A – Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2010 Annual Report on Form 10-K.

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

Overview

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

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For the three months ended March 31, 2011, the Company reported net income of $799,000, compared with net income of $3.3 million for the first quarter of 2010.  Basic and diluted earnings per share were $0.03 for the three months ended March 31, 2011, compared with $0.30 for the first quarter of 2010.

Significant developments during the quarter ended March 31, 2011 consist of the following:

● Net income declined to $799,000 for the three months ended March 31, 2011, compared with $3.3 million for the first quarter of 2010.  Earnings per diluted common share were $0.03 compared with $0.30 in the first quarter of 2010.

● Net interest margin increased 22 basis points to 3.54% in the first quarter of 2011 compared with 3.32% in the first quarter of 2010. The increase in margin since last year benefited from a lower average cost of funds.

● Average loans decreased 8.1% to $1.29 billion in the first quarter of 2011 compared with $1.40 billion in the first quarter of 2010.  Net loans decreased 6.8% to $1.24 billion in the first quarter of 2011, compared with $1.33 billion at March 31, 2010.

● Deposits decreased 0.2% to $1.48 billion compared with $1.49 billion at March 31, 2010, and increased 1.0% from $1.47 billion at December 31, 2010. Demand and savings account deposits increased by 8.5% and 10.3%, respectively during the first quarter of 2011 compared with the fourth quarter of 2010.

● Total assets decreased 1.2% to $1.74 billion compared with $1.76 billion at March 31, 2010.

● Efficiency ratio was 60.7% for the first three months of 2011, compared with 50.9% for the first quarter of 2010. Our efficiency ratio increased primarily due to higher credit related costs and increases in other real estate owned (OREO) expense.

● Non-performing loans increased $9.5 million during the first quarter to $69.9 million at March 31, 2011, compared with $60.4 million at December 31, 2010. The increase was primarily in the commercial and residential real estate segments of our portfolio.

● Non-performing assets increased $15.8 million during the first quarter to $143.9 million at March 31, 2011. The increase was primarily due to a higher level of non-performing loans described above and non-performing loans moving through the collection and foreclosure process.

● Loans past due 30-59 days increased from $21.0 million at December 31, 2010 to $33.4 million at March 31, 2011.  Loans past due 60-89 days increased from $6.1 million at December 31, 2010 to $25.0 million at March 31, 2011.  These increases were primarily in the commercial and commercial real estate segments of the portfolio.

● On April 19, 2011, an Oldham County, Kentucky jury rendered a judgment against PBI Bank for $529,000 in compensatory damages and from $529,000 to $882,000 in punitive damages.  The case concerns a dispute with a prior landowner in connection with a project for which PBI Bank provided development financing to a third party.  The final amount of the judgment is subject to additional proceedings. We intend to file motions to set aside the judgment, and if denied, to file an appeal.  Based on advice of legal counsel, we believe that we have several meritorious grounds for appeal and no amounts have been accrued for this matter as we expect a favorable outcome to the bank.

These items are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Section.  For a discussion of our accounting policies, please see “Application of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the calendar year ended December 31, 2010.

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

Results of Operations

The following table summarizes components of income and expense and the change in those components for the three months ended March 31, 2011 compared with the same period of 2010:

	For the Three Months Ended March 31,				Change from Prior Period
	2011		2010		Amount			Percent
	(dollars in thousands)
Gross interest income	$	19,616	$	22,626	$	(3,010	)		(13.3	)%
Gross interest expense		5,848		8,449		(2,601	)		(30.8	)
Net interest income		13,768		14,177		(409	)		(2.9	)
Provision for loan losses		5,100		3,000		2,100			70.0
Non-interest income		1,787		1,692		95			5.6
Non-interest expense		9,395		8,049		1,346			16.7
Net income before taxes		1,060		4,820		(3,760	)		(78.0	)
Income tax expense		261		1,564		(1,303	)		(83.3	)
Net income		799		3,256		(2,457	)		(75.5	)

Net income of $799,000 for the three months ended March 31, 2011 decreased $2.5 million, or 75.5%, from $3,256,000 for the comparable period of 2010.  This decrease in earnings was primarily attributable to increased provision for loan losses expense and higher non-interest expense.  Provision for loan losses expense increased as the result of increased net charge-offs and non-performing loans compared with the prior year first quarter.  Non-interest expense increased primarily due to other real estate owned expense increasing $989,000 from the 2010 first quarter, and FDIC insurance premiums and salaries and employee benefits expense increasing $150,000 and $177,000, respectively, from the 2010 first quarter.

Net Interest Income – Our net interest income was $13.8 million for the three months ended March 31, 2010, a decrease of $409,000, or 2.9%, compared with $14.2 million for the same period in 2010.  Net interest spread and margin were 3.38% and 3.54%, respectively, for the first quarter of 2011, compared with 3.09% and 3.32%, respectively, for the first quarter of 2010.  Net interest margin decreased 6 basis points from our margin of 3.60% in the fourth quarter of 2010 due primarily to lower yield on earning assets driven by loans repricing at lower rates and interest forgone on nonaccrual loans which totaled $732,000 during the first quarter of 2011. Net interest margin increased 22 basis points from our margin of 3.32% in the prior year first quarter due primarily to lower cost of funds.  The yield on earning assets declined 26 basis points from the 2010 first quarter, compared with a 55 basis point decline in rates paid on interest-bearing liabilities.

Our average interest-earning assets were $1.6 billion for the three months ended March 31, 2011, compared with $1.7 billion for the three months ended March 31, 2010, an 8.7% decrease primarily attributable to an 8.1% decrease in average loans. Average loans were $1.29 billion for the three months ended March 31, 2011, compared with $1.40 billion for the three months ended March 31, 2010. Our total interest income decreased by 13.3% to $19.6 million for the three months ended March 31, 2011, compared with $22.6 million for the same period in 2010.  The change was due to fewer average interest earning assets coupled with lower yield on interest earning assets.

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Our average interest-bearing liabilities also decreased by 7.9%, to $1.4 billion for the three months ended March 31, 2011, compared with $1.6 billion for the three months ended March 31, 2010. Our total interest expense decreased by 30.8% to $5.8 million for the three months ended March 31, 2011, compared with $8.4 million during the same period in 2010, primarily due to continued repricing of certificates of deposit at maturity at lower interest rates.  Our average volume of certificates of deposit decreased by 6.6% to $1.17 billion for the three months ended March 31, 2011, compared with $1.25 billion for the three months ended March 31, 2010. The average interest rate paid on certificates of deposits decreased to 1.69% for the three months ended March 31, 2011, compared with 2.23% for the three months ended March 31, 2010. The certificate of deposit volume decrease reflects a strategic decision to allow higher rate CDs to run off to match our intentional efforts to manage asset levels and capital.

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Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended March 31, 2011 and 2010, 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,
	2011								2010
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	1,290,851		$	18,110		5.69	%	$	1,404,486		$	19,873		5.74	%
Securities
Taxable		111,893			1,029		3.73			156,554			2,323		6.02
Tax-exempt (3)		27,020			260		6.00			21,546			216		6.25
FHLB stock		10,072			114		4.59			10,072			114		4.59
Other equity securities		1,400			13		3.77			1,885			12		2.58
Federal funds sold and other		150,325			90		0.24			148,966			88		0.24
Total interest-earning assets		1,591,561			19,616		5.03	%		1,743,509			22,626		5.29	%
Less: Allowance for loan losses		(34,233	)							(27,329	)
Non-interest earning assets		180,925								118,028
Total assets	$	1,738,253							$	1,834,208
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	1,166,832		$	4,875		1.69	%	$	1,248,704		$	6,864		2.23	%
NOW and money market deposits		172,077			424		1.00			163,510			451		1.12
Savings accounts		36,188			61		0.68			34,477			68		0.80
Federal funds purchased and repurchase agreements		11,346			118		4.22			11,606			119		4.16
FHLB advances		14,725			142		3.91			66,307			720		4.40
Junior subordinated debentures		33,550			228		2.76			34,000			227		2.71
Total interest-bearing liabilities		1,434,718			5,848		1.65	%		1,558,604			8,449		2.20	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		106,095								98,778
Other liabilities		6,855								7,067
Total liabilities		1,547,668								1,664,449
Stockholders’ equity		190,585								169,759
Total liabilities and stockholders’ equity	$	1,738,253							$	1,834,208
Net interest income				$	13,768							$	14,177
Net interest spread							3.38	%							3.09	%
Net interest margin							3.54	%							3.32	%

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

(2) Calculations include non-accruing loans in average loan amounts outstanding.

(3) Taxable equivalent yields are calculated assuming a 35% federal income tax rate.

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Rate/Volume Analysis

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

	Three Months Ended March 31, 2011 vs. 2010
	Increase (decrease) due to change in						Net Change
	Rate			Volume
	(in thousands)
Interest-earning assets:
Loan receivables	$	(168	)	$	(1,595	)	$	(1,763	)
Securities		(766	)		(484	)		(1,250	)
Other equity securities		5			(4	)		1
Federal funds sold and other		1			1			2
Total  decrease in interest income		(928	)		(2,082	)		(3,010	)
Interest-bearing liabilities:
Certificates of deposit and other time deposits		(1,562	)		(427	)		(1,989	)
NOW and money market accounts		(50	)		23			(27	)
Savings accounts		(10	)		3			(7	)
Federal funds purchased and repurchased agreements		2			(3	)		(1	)
FHLB advances		(73	)		(505	)		(578	)
Junior subordinated debentures		4			(3	)		1
Total decrease in interest expense		(1,689	)		(912	)		(2,601	)
Increase (decrease) in net interest income	$	761		$	(1,170	)	$	(409	)

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Non-Interest Income – The following table presents the major categories of non-interest income for the first quarter ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011		2010
	(in thousands)
Service charges on deposit accounts	$	630	$	720
Income from fiduciary activities		255		252
Secondary market brokerage fees		76		60
Title insurance commissions		31		37
Gains on sales of loans originated for sale		221		91
Gains on sales of investment securities, net		83		57
Other		491		475
Total non-interest income	$	1,787	$	1,692

Non-interest income for the first quarter ended March 31, 2011 increased $95,000, or 5.6%, compared with the first quarter of 2010.  The increase in non-interest income for the first quarter ended March 31, 2011 was primarily due to increased gains on sales of loans originated for sale, partially offset by lower service charges on deposit accounts.

Non-interest Expense – The following table presents the major categories of non-interest expense for the first quarter ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011		2010
	(in thousands)
Salary and employee benefits	$	4,124	$	3,947
Occupancy and equipment		972		1,022
Other real estate owned expense		1,367		378
FDIC insurance		855		705
State franchise tax		582		543
Professional fees		280		266
Loan collection fees		262		175
Communications		168		186
Postage and delivery		123		188
Advertising		102		96
Office supplies		111		97
Other		449		446
Total non-interest expense	$	9,395	$	8,049

Non-interest expense for the first quarter ended March 31, 2011 increased $1.3 million, or 16.7%, compared with the first quarter of 2010. The increase in non-interest expense was primarily attributable to increased other real estate owned expense from increased losses on sales of OREO, OREO write-downs to reflect current market values, and OREO maintenance expenses, FDIC insurance assessments due to amendments made by the FDIC to its risk-based deposit premium assessment system, and salaries and employee benefits expense due to merit raises and increases in staff. Our efficiency was 60.7% for the first three months of 2011, compared with 50.9% in the first quarter of 2010.  Our efficiency ratio increased primarily due to higher credit related costs and increases in OREO expense.

Income Tax Expense – Income tax expense was $261,000, or 24.6% of pre-tax income, for the first quarter ended March 31, 2011, compared with $1.6 million, or 32.4% of pre-tax income for the first quarter of 2010.  The decrease in effective tax rate is attributable to an increase in tax exempt interest income and tax exempt interest income being a larger percentage of income before taxes in the 2011 first quarter than the 2010 first quarter.

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

	Three Months Ended March 31,
	2011			2010
	(dollars in thousands)
Federal statutory rate times financial statement income	$	371		$	1,687
Effect of:
Tax-exempt income		(91	)		(76	)
Non-taxable life insurance income		(24	)		(26	)
Federal tax credits		(11	)		(11	)
Other, net		16			(10	)
Total	$	261		$	1,564

Analysis of Financial Condition

Total assets increased $13.2 million, or 0.8%, to $1.74 billion at March 31, 2011 from $1.72 billion at December 31, 2010.  This increase was primarily attributable to increases of $56.7 million in securities available for sale and $6.3 million in other real estate owned, partially offset by decreases of $23.3 million in cash and cash equivalents and $24.8 million in net loans.  The increase in securities available for sale was primarily due to a strategic decision to reinvest certain cash and cash equivalents in higher yielding assets, resulting in lower cash and cash equivalents. The decrease in net loans was due to loan payoffs outpacing loan funding and efforts to move impaired loans through the collection, foreclosure, and disposition process, which contributed to the increase in other real estate owned. Total assets at March 31, 2011 decreased $20.2 million from $1.76 billion at March 31, 2010, representing a 1.2% decrease.

Loans Receivable – Loans receivable decreased $25.5 million, or 2.0%, during the three months ended March 31, 2011 to $1.28 billion. Our commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $21.1 million, or 2.9%, during the three months and comprised 55.6% of the total loan portfolio at March 31, 2011. The decline was attributable to net charge-offs of $5.8 million, transfers to OREO of $8.8 million, and loan payoffs outpacing loan funding by approximately $10.8 million.
 

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

	As of March 31,					As of December 31,
	2011					2010
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial	$	76,521		5.99	%	$	90,290		6.93	%
Commercial Real Estate
Construction		175,805		13.77			199,524		15.32
Farmland		86,161		6.75			85,523		6.56
Other		458,278		35.88			441,844		33.92

Residential Real Estate
Multi-family		75,283	5.89			74,919	5.75
Other		349,247	27.35			353,418	27.13
Consumer		30,758	2.41			31,913	2.45
Agriculture		24,158	1.89			24,177	1.86
Other		956	0.07			1,060	0.08
Total loans	$	1,277,167	100.00	%	$	1,302,668	100.00	%

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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, 2011 and December 31, 2010.

	March 31, 2011			December 31, 2010
	(dollars in thousands)
Loans past due 90 days or more still on accrual	$	3,907		$	594
Non-accrual loans		65,964			59,799
Total non-performing loans		69,871			60,393
Real estate acquired through foreclosure		73,942			67,635
Other repossessed assets		41			52
Total non-performing assets	$	143,854		$	128,080
Non-performing loans to total loans		5.47	%		4.64	%
Non-performing assets to total assets		8.28	%		7.43	%
Allowance for non-performing loans		7,835			7,977
Allowance for non-performing loans to non-performing loans		11.21	%		13.21	%

Nonperforming loans at March 31, 2011 were $69.87 million, or 5.47% of total loans, compared with $60.46 million, or 4.44% of total loans, at March 31, 2010, and $60.39 million, or 4.64% of total loans at December 31, 2010.  The increase of $9.5 million in non-performing loans from December 31, 2010 to March 31, 2011 is primarily attributable to the loss of tenants or the inability to lease vacant space by our commercial customers and continued weakness in housing unit sales. Included in this increase was a loan secured by a retail shopping center in the amount of $7.0 million.

Loans past due 30-59 days increased from $21.0 million at December 31, 2010 to $33.4 million at March 31, 2011.  Loans past due 60-89 days increased from $6.1 million at December 31, 2010 to $25.0 million at March 31, 2011.  This represents a $31.4 million increase from December 31, 2010 to March 31, 2011 in loans past due 30-89 days.  These increases were primarily in the commercial and commercial real estate segments of the portfolio.  We considered this trend in delinquency levels during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.

Troubled Debt Restructuring –We do not have a formal loan modification program. Rather, we work with individual customers on a case-by-case basis to facilitate the orderly collection of our principal and interest before a loan becomes a non-performing loan. If a customer is unable to make contractual payments, we review the particular circumstances of that customer’s situation and negotiate a revised payment stream. In other words, we identify performing customers experiencing financial difficulties, and through negotiations, we lower their interest rate, most typically on a short-term basis for three to six months. Our goal when restructuring a credit is to afford the customer a reasonable period of time to remedy the issue causing cash flow constraints within their business so that they can return to performing status over time. Our loan modifications have taken the form of reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we restructure real estate secured loans in a bifurcated fashion whereby we have a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. Our restructured loans are all collateral secured loans. If a customer fails to perform under the modified terms, we place the loan on non-accrual status and begin the process of working with the customer to liquidate the underlying collateral to satisfy the debt.

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At March 31, 2011, we had 42 restructured loans totaling $28.3 million with borrowers who experienced deterioration in financial condition compared with 45 loans totaling $25.5 million at December 31, 2010. All of these loans were granted interest rate reductions to provide cash flow relief to customers experiencing cash flow difficulties. Of these loans, 20 loans totaling approximately $10.9 million were also granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans. These loans are secured by first liens on 1-4 residential or commercial real estate properties. We do not hold a second or junior lien position on these restructured loans. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms.  As such, these restructured loans were on accrual status at the balance sheet date as payments were being made according to the restructured loan terms. These loans have not had a partial charge-off.

In accordance with ASC 310-50-2, we continue to report restructured loans as restructured until such time as the loan has developed a reasonable repayment history, the borrower displays the financial capacity to repay, and the loan terms return to the terms in place prior to the restructure. If the customer fails to perform, we place the loan on non-accrual status and seek to liquidate the underlying collateral for these loans. Our non-accrual policy for restructured loans is identical to our non-accrual policy for all loans. Our policy calls for a loan to be reported as non-accrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest has been in default for a period of 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses.

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan 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.  The primary example of a competitive modification would be an interest rate reduction for a performing customer to a market rate as the result of a market decline in rates.

Foreclosed Properties – Foreclosed properties at March 31, 2011 were $73.9 million compared with $59.7 million at March 31, 2010 and $67.6 million at December 31, 2010.  See Footnote 5, “Other Real Estate Owned”, to the financial statements. During the first quarter of 2011 we acquired $8.8 million of OREO properties, completed improvements to single family residential units of approximately $1 million, and sold properties totaling approximately $3.1 million.We value foreclosed properties at fair value less costs to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business. Net loss on sales, write-downs, and operating expenses for other real estate owned totaled $1.4 million for the three months ended March 31, 2011, compared with $378,000 for the same period of 2010.

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

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

Our loan loss reserve, as a percentage of total loans at March 31, 2011, increased to 2.63% from 1.95% at March 31, 2010, and was unchanged from 2.63% at December 31, 2010.  Provision for loan losses increased $2.1 million to $5.1 million for the first quarter of 2011 compared with the first quarter of 2010, and decreased $10.4 million compared with the fourth quarter of 2010.  Net loan charge-offs for the first quarter of 2011 were $5.8 million, or 0.45% of average loans, compared with $2.8 million, or 0.20%, for the first quarter of 2010, and $10.6 million, or 0.81%, for the fourth quarter of 2010. Our allowance for loan losses to nonperforming loans decreased to 48.09% at March 31, 2011, compared with 56.77% at December 31, 2010, and increased in comparison with 43.90% at March 31, 2010.  The change in this metric between periods is attributable to the fluctuation in non-accrual loans.  We have assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses.

The majority of our nonperforming loans are secured by real estate collateral. While our nonperforming loans have trended upward since 2008, the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. Our allowance for non-performing loan to non-performing loans was 11.2% at March 31, 2011 compared with 13.2% at March 31, 2010, and 13.2% at December 31, 2010.

An analysis of changes in allowance for loan losses and selected ratios for the three month periods ended March 31, 2011 and 2010 follows:

	Three Months Ended March 31,						Year Ended December 31,
	2011			2010			2010
	(dollars in thousands)
Balance at beginning of period	$	34,285		$	26,392		$	26,392
Provision for loan losses		5,100			3,000			30,100
Recoveries		81			57			254
Charge-offs		(5,867	)		(2,906	)		(22,461	)
Balance at end of period	$	33,599		$	26,543		$	34,285
Allowance for loan losses to period-end loans		2.63	%		1.95	%		2.63	%
Net charge-offs to average loans		0.45	%		0.20	%		1.64	%
Allowance for loan losses to non-performing loans		48.09	%		43.90	%		56.77	%

Liabilities – Total liabilities at March 31, 2011 were $1.55 billion compared with $1.53 billion at December 31, 2010, an increase of $12.8 million, or 0.8 %.This increase was primarily attributable to an increase in deposits of $14.7 million, or 1.0%, at March 31, 2011 to $1.48 billion from $1.47 billion at December 31, 2010. The increase in deposits was primarily due to increased demand and savings account deposits.  Demand and savings account deposits increased 8.5% and 10.3% respectively during the first quarter of 2011.

Federal Home Loan Bank advances decreased due to paydowns from normal maturities by $458,000, or 3.0%, to $14.6 million from $15.0 million at December 31, 2010.  These advances are used from time to time to fund asset growth and manage interest rate risk in accordance with our asset/liability management strategies.

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

	For the Three Months					For the Year
	Ended March 31,					Ended December 31,
	2011					2010
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	106,095		–		$	102,383		–
Interest checking		90,716		0.89	%		83,111		0.85	%
Money market		81,361		1.12			81,430		1.24
Savings		36,188		0.68			35,393		0.74
Certificates of deposit		1,166,832		1.69			1,156,724		2.02
Total deposits	$	1,481,192		1.47	%	$	1,459,041		1.74	%

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

	For the Three Months					For the Year
	Ended March 31,					Ended December 31,
	2011					2010
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Less than $100,000	$	581,490		1.67	%	$	579,978		2.00	%
$100,000 or more		585,342		1.72	%		576,746		2.05	%
Total	$	1,166,832		1.69	%	$	1,156,724		2.02	%

The following table shows at March 31, 2011 and December 31, 2010 the amount of our time deposits of $100,000 or more by time remaining until maturity:
 

	As of		As of
	March 31,		December 31,
Maturity Period	2011		2010
	(in thousands)
Three months or less	$	84,064	$	88,778
Three months through six months		77,895		84,908
Six months through twelve months		113,380		117,405
Over twelve months		307,037		306,781
Total	$	582,376	$	597,872

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Liquidity

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

Funds are available from a number of sources, including the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities and other wholesale funding. During 2010 and the first three months of 2011, PBI Bank utilized brokered and wholesale deposits to supplement its funding strategy. At March 31, 2011, these deposits totaled $149.1 million compared with $149.2 million at December 31, 2010. PBI Bank also secured federal funds borrowing lines from major correspondent banks totaling $19.0 million on an unsecured basis.

Traditionally, PBI Bank has utilized borrowings from the FHLB to supplement our funding requirements.  At March 31, 2011, the Bank had an unused borrowing capacity with the FHLB of $113.7 million.  Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

We use cash to pay dividends on common stock, if and when declared by the board of directors, and to service debt. The main sources of funding include dividends paid by PBI Bank, management fees received from PBI Bank and affiliated banks and financing obtained in the capital markets. PBI Bank must obtain the prior written consent of its primary regulators prior to declaring or paying any future dividends.

Capital

Stockholders’ equity increased $319,000 to $189.7 million at March 31, 2011 compared with $189.4 million at December 31, 2010. The increase was due to net income earned during the 2011 first quarter reduced by dividends declared on common stock, dividends paid on 5% cumulative preferred stock, dividends paid on participating preferred stock, and decreased unrealized net gains on available-for-sale securities.

See Footnote 10, “Capital” for detailed regulatory capital ratios.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at March 31, 2011, and December 31, 2010. Given a 100 basis point increase in interest rates, base net interest income would increase by an estimated 7.4% at March 31, 2011, compared with an increase of 7.8% at December 31, 2010 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 three months following March 31, 2011, as calculated using the static shock model approach:

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		Change in Future
		Net Interest Income
		Dollar Change	Percentage Change
		(dollars in thousands)
+ 200 basis points	$	8,592	14.76	%
+ 100 basis points		4,276	7.35

We did not run a model simulation for declining interest rates as of March 31, 2011, because the Federal Reserve effectively lowered the federal funds target rate between 0.00% to 0.25% in December 2008.  Therefore, no further short-term rate reductions can occur.  As we implement strategies to mitigate the risk of rising interest rates in the future, these strategies will lessen our forecasted “base case” net interest income in the event of no interest rate changes.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934).  Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  Additionally, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The nature of our business regularly results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. We believe we have meritorious defenses to the claims asserted against us in our currently outstanding legal proceedings and, with respect to such legal proceedings, intend to continue to defend ourselves vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of the Company and our shareholders.

On April 19, 2011, an Oldham County, Kentucky jury rendered a judgment against PBI Bank for $529,000 in compensatory damages and from $529,000 to $882,000 in punitive damages.  The case (PBI Bank, Inc. V Patricia S. Wilhoyte, Oldham Circuit Court, case no 08-CI-00674) concerns a dispute with a prior landowner in connection with a project for which PBI Bank provided development financing to a third party.  The verdict allocates comparative fault of 40% to the plaintiff and 60% to the defendant.  The final amount of the judgment is subject to additional proceedings regarding the allocation of punitive damages.  We intend to file motions to set aside the judgment, and if denied, to file an appeal.  Based on advice of legal counsel, we believe that we have several meritorious grounds for appeal and no amounts have been accrued for this matter as we expect a favorable outcome to the bank.

We periodically assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For those matters where a loss is not probable or the amount of the loss is not estimable, we will not accrue any legal reserves. For those matters where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we will record a liability in our consolidated financial statements. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, our management believes that the liabilities arising from our legal proceedings will not have a material adverse effect on our consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to our consolidated financial position, consolidated results of operations or consolidated cash flows.

Item 1A. Risk Factors

Information regarding risk factors appears in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 under Item 1A – Risk Factors.  There have been no material changes from the risk factors previously discussed in our Form 10-K.

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

Not applicable.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. (Removed & Reserved)

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

(a)       Exhibits

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

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

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 16, 2011		By:	/s/ Maria L. Bouvette
			Maria L. Bouvette
			President & Chief Executive Officer
May 16, 2011		By:	/s/ David B. Pierce
			David B. Pierce
			Chief Financial Officer and Chief Accounting Officer

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