Edgar Filing: Porter Bancorp, Inc.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2007

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

For the transition period from to

Commission file number: 001-33033

PORTER BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky

61-1142247

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


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

(502) 499-4800

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

INDEX


		Page

PART I –	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29

ITEM 4.	CONTROLS AND PROCEDURES	29

PART II –	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	30

ITEM 1A.	RISK FACTORS	30

ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	30

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	30

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	30

ITEM 5.	OTHER INFORMATION	30

ITEM 6.	EXHIBITS	30

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

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

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

Notes to Unaudited Consolidated Financial Statements

PORTER BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(amounts in thousands except share data)


	September 30, 2007			December 31, 2006
	(unaudited)
Assets
Cash and due from financial institutions	$	19,541		$	15,306
Federal funds sold		7,387			40,957

Cash and cash equivalents		26,928			56,263
Securities available for sale		100,723			95,090
Loans, net of allowance of $14,500 and $12,832, respectively		1,060,569			841,535
Premises and equipment		14,935			13,774
Goodwill		12,881			12,881
Accrued interest receivable and other assets		39,044			31,463

Total assets	$	1,255,080		$	1,051,006


Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	71,038		$	69,180
Interest bearing		975,740			792,676

Total deposits		1,046,778			861,856
Federal funds purchased and repurchase agreements		11,569			1,134
Federal Home Loan Bank advances		50,207			47,562
Accrued interest payable and other liabilities		7,328			7,108
Junior subordinated debentures		25,000			25,000

Total liabilities		1,140,882			942,660

Stockholders’ equity
Preferred stock, no par, 1,000,000 shares authorized		—			—
Common stock, no par, 10,000,000 shares authorized, 7,628,967 and 7,622,447 shares issued and outstanding, respectively		64,820			64,820
Additional paid-in capital		11,208			11,036
Retained earnings		38,368			32,355
Accumulated other comprehensive income (loss)		(198	)		135

Total stockholders' equity		114,198			108,346

Total liabilities and stockholders’ equity	$	1,255,080		$	1,051,006

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income

(amounts in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Interest income
Loans, including fees	$	21,941	$	17,045	$	60,498	$	49,101
Taxable securities		1,054		918		3,123		2,768
Tax exempt securities		170		179		507		547
Fed funds sold and other		686		422		1,712		1,082

		23,851		18,564		65,840		53,498

Interest expense
Deposits		11,758		7,736		31,441		21,563
Federal Home Loan Bank advances		810		829		2,292		2,057
Junior subordinated debentures		488		543		1,433		1,564
Federal funds purchased and other		59		34		74		150
Notes payable		—		143		—		431

		13,115		9,285		35,240		25,765

Net interest income		10,736		9,279		30,600		27,733
Provision for loan losses		1,500		276		2,825		1,029

Net interest income after provision for loan losses		9,236		9,003		27,775		26,704

Non-interest income
Service charges on deposit accounts		669		615		1,852		1,963
Secondary market brokerage fees		67		88		232		122
Title insurance commissions		37		41		149		97
Net gain on sales of government guaranteed loans 15		53		30		152
Net gain on sales of loans originated for sale		—		44		—		284
Net gain on sales of securities		42		23		104		50
Other		476		453		1,423		1,345

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

Non-interest expense
Salaries and employee benefits		3,115		2,749		9,051		8,634
Occupancy and equipment		673		612		1,837		1,972
State franchise tax		326		267		976		807
Professional fees		149		164		485		643
Communications		113		121		322		404
Advertising		140		148		393		467
Other		1,013		592		2,532		2,013

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

Income before income taxes		5,013		5,667		15,969		15,777
Income tax expense		1,714		1,858		5,380		5,135

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

Basic and diluted earnings per share	$	0.44	$	0.59	$	1.40	$	1.67

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Nine Months Ended September 30, 2007

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


	Common Stock				Additional		Retained Earnings			Accumulated Other			Total
	Number of Shares		Amount		Paid-In Capital		Retained Earnings			Comprehensive Income (Loss)			Total
Balances, January 1, 2007	7,622,447		$	64,820	$	11,036	$	32,355		$	135		$	108,346
Issuance of unvested stock	7,500													—
Forfeited unvested stock	(980	)		—		—		—			—			—
Stock-based compensation expense	—			—		172		—			—			172
Comprehensive income:
Net income	—			—		—		10,589			—			10,589
Changes in accumulated other comprehensive income, net of taxes	—			—		—		—			(333	)		(333	)

Total comprehensive income	—			—		—		—			—			10,256

Cash dividends ($0.60 per share)	—			—		—		(4,576	)		—			(4,576	)

Balances, September 30, 2007	7,628,967		$	64,820	$	11,208	$	38,368		$	(198	)	$	114,198

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2007 and 2006

(dollars in thousands)


	2007			2006
Cash flows from operating activities
Net income	$	10,589		$	10,642
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		1,691			1,569
Provision for loan losses		2,825			1,029
Net amortization on securities		6			356
Stock-based compensation expense		172			106
Net gain on sales of loans		—			(284	)
Loans originated for sale		—			(8,825	)
Proceeds from sales of loans held for sale		—			9,109
Net (gain) loss on other real estate owned		119			(32	)
Net realized gain on sales of securities		(104	)		(50	)
Earnings on bank owned life insurance		(206	)		(190	)
Federal Home Loan Bank stock dividends		—			(369	)
Changes in other assets and liabilities
Net change in accrued interest receivable and other assets		(2,817	)		(982	)
Net change in accrued interest payable and other liabilities		396			(2,302	)

Net cash from operating activities		12,671			9,777


Cash flows from investing activities
Net change in interest-bearing deposits with banks		—			200
Purchases of available for sale securities		(22,280	)		(11,037	)
Sales and calls of available for sale securities		884			4,416
Maturities and prepayments of available for sale securities		15,352			15,136
Proceeds from sale of other real estate owned		3,958			1,018
Improvements to other real estate owned		(370	)		—
Loan originations and payments, net		(231,057	)		(27,923	)
Purchases of premises and equipment, net		(1,919	)		(248	)
Investment in bank owned life insurance		—			(1,100	)
Acquisition of Associates Mortgage Group, net		—			(250	)

Net cash from investing activities		(235,432	)		(19,788	)


Cash flows from financing activities
Net change in deposits		184,922			(4,161	)
Net change in federal funds purchased and repurchase agreements		10,435			(3,275	)
Repayment of notes payable		—			(9,600	)
Repayment of Federal Home Loan Bank advances		(27,355	)		(32,819	)
Advances from Federal Home Loan Bank		30,000			26,220
Issuance of common stock for initial public offering, net		—			26,634
Cash dividends paid		(4,576	)		(3,815	)

Net cash from financing activities		193,426			(816	)

Net change in cash and cash equivalents		(29,335	)		(10,827	)
Beginning cash and cash equivalents		56,263			52,281

Ending cash and cash equivalents	$	26,928		$	41,454

Supplemental cash flow information:
Interest paid	$	34,818		$	25,037
Income taxes paid		5,950			5,495
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	8,279		$	1,278

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

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

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

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

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

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

New Accounting Standards

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

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

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

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

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

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

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

Note 2 – Stock Plans and Stock Based Compensation

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

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

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

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

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

The following table summarizes stock option activity:


	Nine Months Ended September 30, 2007				Twelve Months Ended December 31, 2006
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, beginning	251,820		$	25.29	194,004		$	25.50
Granted	36,500			23.01	58,816			24.60
Forfeited	(1,392	)		25.50	(1,000	)		25.50

Outstanding, ending	286,928		$	25.00	251,820		$	25.29

The following table details stock options outstanding:


	September 30, 2007
Stock options vested and currently exercisable:		215,219
Weighted average exercise price	$	25.43
Aggregate intrinsic value	$	0
Weighted average remaining life (in years)		2.8
Total Options Outstanding:		286,928
Aggregate intrinsic value	$	0
Weighted average remaining life (in years)		3.1

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

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

The weighted-average assumptions used are summarized as follows:


Risk-free interest rate		4.85	%
Expected option life		3.5 years
Expected stock price volatility		22.0	%
Expected dividend yield		3.6	%
Fair value	$	3.67

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

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


	Nine Months Ended September 30, 2007				Twelve Months Ended December 31, 2006
	Shares		Weighted Average Grant Price		Shares		Weighted Average Grant Price
Outstanding, beginning	40,000		$	25.33	—		$	—
Granted	7,500			23.02	41,600			25.34
Forfeited	(980	)		25.50	(1,600	)		25.50
Vested	(3,720	)		25.50	—			—

Outstanding, ending	42,800		$	24.91	40,000		$	25.33

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


October 2007 – December 2007	$	65
2008		230
2009		190
2010		133
2011 & thereafter		628

Note 3 – Securities

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


	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(dollars in thousands)
September 30, 2007
U.S. Government and federal agency	$	18,945	$	19	$	(177	)
State and municipal		18,962		124		(236	)
Mortgage-backed		55,959		174		(602	)
Corporate bonds		1,401		23		—
Other debt securities		704		—		—

Total debt securities		95,971		340		(1,015	)
Equity		4,752		618		(248	)

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

December 31, 2006
U.S. Government and federal agency	$	15,713	$	1	$	(345	)
State and municipal		17,918		280		(60	)
Mortgage-backed		54,848		150		(642	)
Corporate bonds		2,451		84		—

Total debt securities		90,930		515		(1,047	)
Equity		4,160		876		(140	)

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

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

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

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

Note 4 – Loans

Loans were as follows:


	September 30, 2007			December 31, 2006
	(dollars in thousands)
Commercial	$	82,239		$	59,113
Real estate		945,034			751,017
Agriculture		15,002			13,436
Consumer		31,822			29,709
Other		972			1,092

Subtotal		1,075,069			854,367
Less: Allowance for loan losses		(14,500	)		(12,832	)

Loans, net	$	1,060,569		$	841,535

Activity in the allowance for loan losses was as follows:


	September 30, 2007			September 30, 2006
	(dollars in thousands)
Beginning balance	$	12,832		$	12,197
Provision for loan losses		2,825			1,029
Loans charged-off		(1,345	)		(774	)
Loan recoveries		188			203

Ending balance	$	14,500		$	12,655

Impaired loans were as follows:


	September 30, 2007		December 31, 2006
	(dollars in thousands)
Loans with no allocated allowance for loan losses	$	778	$	2,048
Loans with allocated allowance for loan losses		2,622		3,090

Total	$	3,400	$	5,138

Amount of the allowance for loan losses allocated	$	497	$	896

Nonperforming loans were as follows:


	September 30, 2007		December 31, 2006
	(dollars in thousands)
Loans past due 90 days or more still on accrual	$	2,829	$	2,010
Non-accrual loans		5,536		6,930

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

Note 5 – Advance from the Federal Home Loan Bank

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


	September 30, 2007		December 31, 2006
	(dollars in thousands)
Single maturity advances with fixed rates from 4.48% to 5.64% maturing from 2009 through 2012	$	36,500	$	6,500
Single maturity advance with a variable rate of 5.37% maturing 2008		—		25,000
Monthly amortizing advances with fixed rates from 0.00% to 9.10% and maturities ranging from 2007 through 2035		13,707		16,062

Total	$	50,207	$	47,562

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

Note 6 – Earnings per Share

The factors used in the earnings per share computation follow:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands, except share and per share data)
Basic
Net income	$	3,299	$	3,809	$	10,589	$	10,642

Weighted average voting and non-voting common shares outstanding		7,586,167		6,454,730		7,585,063		6,373,656

Basic earnings per common share	$	0.44	$	0.59	$	1.40	$	1.67


Diluted
Net income	$	3,299	$	3,809	$	10,589	$	10,642

Weighted average voting and non-voting common shares outstanding		7,586,167		6,454,730		7,585,063		6,373,656
Add: dilutive effects of assumed exercises of stock options and unvested shares		—		—		22		—

Average shares and potential common shares		7,586,167		6,454,730		7,585,085		6,373,656

Diluted earnings per common share	$	0.44	$	0.59	$	1.40	$	1.67

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

Note 7 – Total Comprehensive Income

Total comprehensive income was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007			2006
	(dollars in thousands)
Net income	$	3,299	$	3,809	$	10,589		$	10,642
Change in unrealized gain (loss) on securities held for sale, net of reclassifications and tax effects		506		1,058		(333	)		363

Total comprehensive income	$	3,805	$	4,867	$	10,256		$	11,005

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

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

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

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

and Results of Operations

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

Cautionary Note Regarding Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to differences in our results include, but are not limited to the factors listed in Part 2, Item 1A – Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2006 Annual Report on Form 10-K.

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

Overview

Porter Bancorp, Inc. (NASDAQ: PBIB) is a Louisville, Kentucky-based bank holding company which operates 13 full-service banking offices in ten counties through its wholly-owned subsidiary, PBI Bank. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt, and extend south along the Interstate 65 corridor to Tennessee. We serve south central and southern Kentucky from banking offices in Cumberland, Butler, Green, Hart, Edmonson, Warren and Barren Counties. In June 2007, we expanded into central Kentucky by opening a loan production office in the state’s second largest city Lexington, in Fayette County. Our market area has experienced annual positive deposit growth rates in recent years with the trend expected to continue for the next few years.

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

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

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

Results of Operations

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


	For the Three Months Ended September 30,				Change from Prior Period
	2007		2006		Amount			Percent
	(dollars in thousands)
Gross interest income	$	23,851	$	18,564	$	5,287		28.5	%
Gross interest expense		13,115		9,285		3,830		41.2
Net interest income		10,736		9,279		1,457		15.7
Provision for loan losses		1,500		276		1,224		443.5
Non-interest income		1,306		1,317		(11	)	(0.8	)
Non-interest expense		5,529		4,653		876		18.8
Net income before taxes		5,013		5,667		(654	)	(11.5	)
Income tax expense		1,714		1,858		(144	)	(7.8	)
Net income		3,299		3,809		(510	)	(13.4	)

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

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

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

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

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


	For the Nine Months Ended September 30,				Change from Prior Period
	2007		2006		Amount			Percent
	(dollars in thousands)
Gross interest income	$	65,840	$	53,498	$	12,342		23.1	%
Gross interest expense		35,240		25,765		9,475		36.8
Net interest income		30,600		27,733		2,867		10.3
Provision for loan losses		2,825		1,029		1,796		174.5
Non-interest income		3,790		4,013		(223	)	(5.6	)
Non-interest expense		15,596		14,940		656		4.4
Net income before taxes		15,969		15,777		192		1.2
Income tax expense		5,380		5,135		245		4.8
Net income		10,589		10,642		(53	)	(0.5	)

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

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

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

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

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

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

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

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

Average Balance Sheets

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


	Three Months Ended September 30,
	2007							2006
	Average Balance			Interest Earned/Paid		Average Yield/Cost		Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	1,039,355		$	21,941	8.38	%%	$	811,838		$	17,045	8.33	%
Securities
Taxable		81,373			1,008	4.91			77,240			882	4.53
Tax-exempt (3)		16,476			170	6.30			17,148			179	6.37
FHLB stock		8,978			147	6.50			8,720			127	5.78
Other equity securities		4,141			46	4.41			3,389			36	4.21
Federal funds sold and other		42,904			539	4.98			22,496			295	5.20

Total interest-earning assets		1,193,227			23,851	7.96	%		940,831			18,564	7.87	%

Less: Allowance for loan losses		(13,762	)						(12,791	)
Non-interest earning assets		67,684							60,225

Total assets	$	1,247,149						$	988,265


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	771,297		$	10,029	5.16	%	$	632,689		$	7,246	4.54	%
NOW and money market deposits		162,026			1,631	3.99			75,791			425	2.22
Savings accounts		25,153			98	1.55			24,202			65	1.07
Federal funds purchased and repurchase agreements		5,662			59	4.13			3,222			34	4.19
FHLB advances		67,149			810	4.79			67,063			829	4.90
Junior subordinated debentures		25,000			488	7.74			25,000			543	8.62
Other borrowing		—			—	—			9,414			143	6.03

Total interest-bearing liabilities		1,056,287			13,115	4.93	%		837,381			9,285	4.40	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		69,591							65,226
Other liabilities		7,921							7,248

Total liabilities		1,133,799							909,855
Stockholders’ equity		113,350							78,410

Total liabilities and stockholders’ equity	$	1,247,149						$	988,265

Net interest income				$	10,736						$	9,279

Net interest spread						3.03	%						3.47	%

Net interest margin						3.60	%						3.95	%

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

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

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

Average Balance Sheets

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


	Nine Months Ended September 30,
	2007							2006
	Average Balance			Interest Earned/Paid		Average Yield/Cost		Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	962,822		$	60,498	8.40	%	$	807,104		$	49,101	8.13	%
Securities
Taxable		81,688			3,002	4.91			79,835			2,650	4.44
Tax-exempt (3)		16,364			507	6.37			17,378			547	6.47
FHLB stock		8,978			434	6.46			8,598			370	5.75
Other equity securities		3,753			121	4.31			3,456			118	4.56
Federal funds sold and other		33,899			1,278	5.04			20,450			712	4.65

Total interest-earning assets		1,107,504			65,840	7.98	%		936,821			53,498	7.68	%

Less: Allowance for loan losses		(13,394	)						(12,647	)
Non-interest earning assets		65,144							60,900

Total assets	$	1,159,254						$	985,074


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	713,241		$	27,161	5.09	%	$	631,396		$	20,086	4.25	%
NOW and money market deposits		141,831			4,015	3.78			83,613			1,335	2.13
Savings accounts		24,744			265	1.43			23,387			142	0.81
Federal funds purchased and repurchase agreements		2,801			74	3.53			4,694			150	4.27
FHLB advances		63,954			2,292	4.79			59,241			2,057	4.64
Junior subordinated debentures		25,000			1,433	7.66			25,000			1,564	8.36
Other borrowing		—			—	—			9,528			431	6.05

Total interest-bearing liabilities		971,571			35,240	4.85	%		836,859			25,765	4.12	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		68,499							65,173
Other liabilities		7,087							7,097

Total liabilities		1,047,157							909,129
Stockholders’ equity		112,097							75,945

Total liabilities and stockholders’ equity	$	1,159,254						$	985,074

Net interest income				$	30,600						$	27,733

Net interest spread						3.13	%						3.56	%

Net interest margin						3.73	%						4.00	%

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

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

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

Rate/Volume Analysis

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


	Three Months Ended September 30, 2007 vs. 2006									Nine Months Ended September 30, 2007 vs. 2006
	Increase (decrease) due to change in						Net Change			Increase (decrease) due to change in						Net Change
	Rate			Volume			Net Change			Rate			Volume			Net Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	93		$	4,803		$	4,896		$	1,658		$	9,739		$	11,397
Securities		77			40			117			284			28			312
FHLB stock		16			4			20			47			17			64
Other equity securities		2			8			10			(7	)		10			3
Federal funds sold and other		(11	)		255			244			63			503			566

Total increase (decrease) in interest income		177			5,110			5,287			2,045			10,297			12,342


Interest-bearing liabilities:
Certificates of deposit and other time deposits		1,063			1,720			2,783			4,267			2,808			7,075
NOW and money market accounts		496			710			1,206			1,410			1,270			2,680
Savings accounts		30			3			33			115			8			123
Federal funds purchased and repurchase agreements		—			25			25			(23	)		(53	)		(76	)
FHLB advances		(20	)		1			(19	)		67			168			235
Junior subordinated debentures		(55	)		—			(55	)		(131	)		—			(131	)
Other borrowings		—			(143	)		(143	)		—			(431	)		(431	)

Total increase (decrease) in interest expense		1,514			2,316			3,830			5,705			3,770			9,475

Increase in net interest income	$	(1,337	)	$	2,794		$	1,457		$	(3,660	)	$	6,527		$	2,867

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands)
Service charges on deposit accounts	$	669	$	615	$	1,852	$	1,963
Secondary market brokerage fees		67		88		232		122
Title insurance commissions		37		41		149		97
Gains on sales of government guaranteed loans, net		15		53		30		152
Gains on sales of loans originated for sale		—		44		—		284
Gains on sales of securities, net		42		23		104		50
Other		476		453		1,423		1,345

Total non-interest income	$	1,306	$	1,317	$	3,790	$	4,013

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

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

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands)
Salary and employee benefits	$	3,115	$	2,749	$	9,051	$	8,634
Occupancy and equipment		673		612		1,837		1,972
State franchise tax		326		267		976		807
Professional fees		149		164		485		643
Advertising		140		148		393		467
Postage and delivery		126		119		388		383
Office supplies		105		113		348		366
Communications		113		121		322		404
Other real estate owned expense		226		49		327		172
Other		556		311		1,469		1,092

Total non-interest expense	$	5,529	$	4,653	$	15,596	$	14,940

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

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

Analysis of Financial Condition

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

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

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; and other than commercial real estate, construction real estate and residential real estate; there is no concentration of loans in any industry exceeding 10% of total loans.


	As of September 30, 2007				As of December 31, 2006
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Type of Loan:
Real estate:
Commercial	$	329,032	30.60	%	$	277,029	32.42	%
Construction		284,114	26.43			211,973	24.81
Residential		243,774	22.68			195,591	22.89
Farmland		68,551	6.38			47,325	5.54
Home equity		19,563	1.82			19,099	2.24
Commercial		82,239	7.65			59,113	6.92
Consumer		31,822	2.96			29,709	3.48
Agriculture		15,002	1.39			13,436	1.57
Other		972	0.09			1,092	0.13

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

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

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


	September 30, 2007			December 31, 2006
	(dollars in thousands)
Loans past due 90 days or more still on accrual	$	2,829		$	2,010
Non-accrual loans		5,536			6,930

Total non-performing loans		8,365			8,940
Real estate acquired through foreclosure		6,862			2,415
Other repossessed assets		—			9

Total non-performing assets	$	15,227		$	11,364

Non-performing loans to total loans		0.78	%		1.05	%

Non-performing assets to total loans		1.42	%		1.33	%

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

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

Allowance for Loan 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.

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

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(dollars in thousands)
Balance at beginning of period	$	13,479		$	12,611		$	12,832		$	12,197
Provision for loan losses		1,500			276			2,825			1,029
Recoveries		40			49			188			203
Charge-offs		(519	)		(281	)		(1,345	)		(774	)

Balance at end of period	$	14,500		$	12,655		$	14,500		$	12,655

Allowance for loan losses to period-end loans		1.35	%		1.55	%		1.35	%		1.55	%

Net charge-offs to average loans		0.05	%		0.03	%		0.12	%		0.07	%

Allowance for loan losses to non-performing loans		173.34	%		126.91	%		173.34	%		126.91	%

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

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

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


	For the Nine Months Ended September 30, 2007				For the Year Ended December 31, 2006
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)
Demand	$	68,499	—		$	64,778	—
Interest checking		49,503	1.74	%		51,127	1.60	%
Money market		92,328	4.88			36,140	3.43
Savings		24,744	1.43			23,455	0.90
Certificates of deposit		713,241	5.09			634,919	4.40

Total deposits	$	948,315	4.43		$	810,419	3.73

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


	For the Nine Months Ended September 30, 2007				For the Year Ended December 31, 2006
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)
Less than $100,000	$	518,647	5.04	%	$	473,813	4.36	%
$100,000 or more		194,594	5.22			161,106	4.53

Total	$	713,241	5.09		$	634,919	4.40

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


Maturity Period	As of September 30, 2007		As of December 31, 2006
	(dollars in thousands)
Three months or less	$	55,156	$	49,079
Three months through six months		88,746		42,288
Six months through twelve months		69,393		61,690
Over twelve months		29,494		29,834

Total	$	242,789	$	182,891

Liquidity

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

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

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

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

Capital

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

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

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


	Regulatory Minimums		Well-Capitalized Minimums		September 30, 2007				December 31, 2006
	Regulatory Minimums		Well-Capitalized Minimums		Porter Bancorp		PBI Bank		Porter Bancorp		PBI Bank
Tier I capital	4.0	%	6.0	%	11.84	%	9.62	%	14.32	%	11.56	%
Total risk-based capital	8.0		10.0		13.09		10.87		15.57		12.81
Tier I leverage ratio	4.0		5.0		10.22		8.28		11.86		9.56

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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


	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	4,618		10.91	%
+ 100 basis points		2,471		5.84
- 100 basis points		(2,597	)	(6.13	)
- 200 basis points		(5,994	)	(14.16	)

Item 4. Controls and Procedures

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

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Default Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Securities Holders

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

(a)

Exhibits

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


Exhibit Number		Description of Exhibit
31.1		Certification of Principal Executive Officer, pursuant to Rule 13a – 14(a).

31.2		Certification of Principal Financial Officer, pursuant to Rule 13a – 14(a).

32.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	PORTER BANCORP, INC.
	(Registrant)

November 13, 2007	By:	/s/ Maria L. Bouvette
		Maria L. Bouvette
		President & Chief Executive Officer

November 13, 2007	By:	/s/ David B. Pierce
		David B. Pierce
		Chief Financial Officer and Chief Accounting Officer

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