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 June 30, 2009

¨	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 ¨ (Do not check if a smaller reporting company)		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.

8,339,213 shares of Common Stock, no par value, were outstanding at July 31, 2009.

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	20

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32

ITEM 4.	CONTROLS AND PROCEDURES	33

PART II –	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	34

ITEM 1A.	RISK FACTORS	34

ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	34

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	34

ITEM 5.	OTHER INFORMATION	35

ITEM 6.	EXHIBITS	35

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 June 30, 2009 and December 31, 2008

Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2009

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

Notes to Unaudited Consolidated Financial Statements

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)


	June 30, 2009			December 31, 2008
Assets
Cash and due from financial institutions	$	89,991		$	43,767
Federal funds sold		6,537			8,779

Cash and cash equivalents		96,528			52,546
Interest-bearing deposits in other financial institutions		600			600
Securities available for sale		178,161			173,077
Mortgage loans held for sale		214			—
Loans, net of allowance of $20,740 and $19,652, respectively		1,341,105			1,330,454
Premises and equipment		23,412			22,543
Goodwill		23,794			23,794
Accrued interest receivable and other assets		45,994			44,843

Total assets	$	1,709,808		$	1,647,857

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	91,630		$	92,940
Interest bearing		1,272,562			1,195,609

Total deposits		1,364,192			1,288,549
Federal funds purchased and repurchase agreements		11,232			10,084
Federal Home Loan Bank advances		126,350			142,776
Accrued interest payable and other liabilities		7,891			8,235
Subordinated capital note		9,000			9,000
Junior subordinated debentures		25,000			25,000

Total liabilities		1,543,665			1,483,644
Stockholders’ equity
Preferred stock, no par, 1,000,000 shares authorized, 35,000 issued and outstanding Liquidation preference of $35 million at June 30, 2009		34,219			34,131
Common stock, no par, 19,000,000 shares authorized, 8,339,617 and 8,287,933 shares issued and outstanding, respectively		76,897			76,897
Additional paid-in capital		13,648			13,483
Retained earnings		41,808			39,957
Accumulated other comprehensive income (loss)		(429	)		(255	)

Total stockholders’ equity		166,143			164,213

Total liabilities and stockholders’ equity	$	1,709,808		$	1,647,857

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)


	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
Interest income
Loans, including fees	$	21,102	$	23,385		$	42,372	$	47,177
Taxable securities		2,152		1,223			4,014		2,544
Tax exempt securities		223		205			444		390
Fed funds sold and other		168		228			317		604

		23,645		25,041			47,147		50,715


Interest expense
Deposits		9,468		11,152			19,386		23,593
Federal Home Loan Bank advances		937		1,434			2,086		2,757
Subordinated capital note		98		—			200		—
Junior subordinated debentures		209		318			460		743
Federal funds purchased and other		120		165			235		307

		10,832		13,069			22,367		27,400

Net interest income		12,813		11,972			24,780		23,315
Provision for loan losses		1,600		750			3,200		1,400

Net interest income after provision for loan losses		11,213		11,222			21,580		21,915

Non-interest income
Service charges on deposit accounts		788		902			1,476		1,731
Income from fiduciary activities		198		331			418		584
Secondary market brokerage fees		73		106			131		221
Title insurance commissions		44		54			64		94
Net gain on sales of loans originated for sale		241		—			241		—
Net gain (loss) on sales of securities		—		(139	)		1		(45	)
Other		551		534			1,050		1,021

		1,895		1,788			3,381		3,606


Non-interest expense
Salaries and employee benefits		3,813		3,892			7,691		7,716
Occupancy and equipment		981		904			1,979		1,817
FDIC Insurance		503		242			962		463
FDIC special assessment		781		—			781		—
State franchise tax		450		435			900		870
Professional fees		203		172			431		418
Postage and delivery		184		192			368		367
Communications		230		188			385		349
Advertising		125		140			283		301
Other real estate owned expense		226		120			353		347
Other		732		762			1,371		1,516

		8,228		7,047			15,504		14,164

Income before income taxes		4,880		5,963			9,457		11,357
Income tax expense		1,635		1,990			3,151		3,787

Net income		3,245		3,973			6,306		7,570
Less:
Dividends on preferred stock		437		—			875		—
Accretion on preferred stock		44		—			88		—

Net income available to common shareholders	$	2,764	$	3,973		$	5,343	$	7,570

Basic and diluted earnings per common share	$	0.33	$	0.48		$	0.64	$	0.91

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Six Months Ended June 30, 2009

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


	Shares		Amount				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Common	Preferred	Common		Preferred

Balances, January 1, 2009	8,287,933	35,000	$	76,897	$	34,131	$	13,483	$	39,957		$	(255	)	$	164,213
Issuance of unvested stock	51,684	—		—		—		—		—			—			—
Stock-based compensation expense	—	—		—		—		165		—			—			165
Comprehensive income:
Net income	—	—		—		—		—		6,306			—			6,306
Changes in accumulated other comprehensive income (loss), net of taxes	—	—		—		—		—		—			(174	)		(174	)

Total comprehensive income	—	—		—		—		—		—			—			6,132

Dividends on preferred stock	—	—		—		—		—		(875	)		—			(875	)
Amortization of preferred stock discount	—	—		—		88		—		(88	)		—			—
Cash dividends declared ($0.42 per share)	—	—		—		—		—		(3,492	)		—			(3,492	)

Balances, June 30, 2009	8,339,617	35,000	$	76,897	$	34,219	$	13,648	$	41,808		$	(429	)	$	166,143

See accompanying notes to unaudited consolidated financial statements.

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows

For Six Months Ended June 30, 2009 and 2008

(dollars in thousands)


	2009			2008
Cash flows from operating activities
Net income	$	6,306		$	7,570
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		1,867			1,881
Provision for loan losses		3,200			1,400
Net amortization (accretion) on securities		147			(70	)
Stock-based compensation expense		178			136
Net gain on loans originated for sale		(241	)		—
Loans originated for sale		(12,128	)		—
Proceeds from sales of loans originated for sale		12,076			—
Net (gain) loss on sales of investment securities		(1	)		45
Net loss on sales of other real estate owned		60			112
Earnings on bank owned life insurance		(142	)		(156	)
Federal Home Loan Bank stock dividends		—			(259	)
Net change in accrued interest receivable and other assets		938			2,506
Net change in accrued interest payable and other liabilities		(280	)		(1,429	)

Net cash from operating activities		11,980			11,736

Cash flows from investing activities
Purchases of available-for-sale securities		(23,272	)		(15,087	)
Sales and calls of available-for-sale securities		762			21,905
Maturities and prepayments of available-for-sale securities		17,013			13,899
Proceeds from sale of other real estate owned		6,737			4,342
Improvements to other real estate owned		(37	)		(150	)
Loan originations and payments, net		(23,550	)		(59,408	)
Purchases of premises and equipment, net		(1,678	)		(1,851	)
Redemption of bank owned life insurance		—			2,179
Acquisition of Paramount Bank, net		—			(5,215	)

Net cash from investing activities		(24,025	)		(39,386	)

Cash flows from financing activities
Net change in deposits		75,643			25,718
Net change in federal funds purchased and repurchase agreements		1,148			(532	)
Repayment of Federal Home Loan Bank advances		(66,426	)		(1,669	)
Advances from Federal Home Loan Bank		50,000			25,000
Repurchase common stock		—			(301	)
Cash dividends paid on preferred stock		(846	)		—
Cash dividends paid on common stock		(3,492	)		(3,313	)

Net cash from financing activities		56,027			44,903

Net change in cash and cash equivalents		43,982			17,253
Beginning cash and cash equivalents		52,546			42,987

Ending cash and cash equivalents	$	96,528		$	60,240

Supplemental cash flow information:
Interest paid	$	15,542		$	28,046
Income taxes paid		3,650			3,100
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	8,877		$	6,810

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. (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 condensed 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 six months ended June 30, 2009 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, 2008 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.

Mortgage Loans Held for Sale – Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with mortgage servicing rights (“MSR”) retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the MSR. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Substantially all of the gain on sales of loans are reported in earnings when loans are locked. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs that we expect to receive on loans sold with servicing retained. MSRs are capitalized as separate assets.

The Company enters into interest rate lock commitments on a loan by loan basis for fixed rate mortgage loans, generally lasting 30 to 90 days and are at market rates when initiated.

Servicing Rights – Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recording in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with loan servicing fees, net on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income which is reported on the income statement as loan servicing fees, net is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Loan servicing income, late fees and ancillary fees related to loan servicing are not material.

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

New Accounting Standards

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. The adoption of this standard did not have a material effect on the Corporation’s results of operations or financial position.

FASB Staff Position (FSP) “SFAS 142-3, Determination of the Useful Life of Intangible Assets” amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The FSP provides that in addition to considering the entity specific factors in paragraph 11 of Statement No.142, an entity shall consider its own historical experience in renewing or extending similar arrangements. Alternatively, if an entity lacks historical experience, it shall consider the assumptions a market participant would use consistent with the highest and best use of the asset, adjusted for the entity specific factors in paragraph 11 of Statement No. 142. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Adoption of this FSP had no material impact on our results of operations or financial position.

FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and is to be applied retrospectively. This FSP requires share based compensation awards that qualify as participating securities to be included in basic EPS using the two-class method. A share based compensation award is considered a participating security if it receives non-forfeitable dividends. A non-forfeitable dividend would be a dividend that the participant receives before the award is vested and if the participant forfeits the actual shares awarded the dividends he/she has received do not have to be paid back to the company. This guidance was adopted in the first quarter and has been applied to all periods shown. See Note 7 for further discussion.

The FASB finalized four FSPs regarding the accounting treatment for investments including mortgage-backed securities. These FSPs changed the method for determining if an Other-than-temporary impairment (“OTTI”) exists and the amount of OTTI to be recorded through an company’s income statement. The changes brought about by the FSPs provide greater clarity and reflect a more accurate representation of the credit and noncredit components of an OTTI event. The four FSPs are:

•

FSP “SFAS 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” clarifies the application of SFAS 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.

•

FSP “SFAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Assets or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157, “Fair Value Measurements.”

•

FSP “SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-than-temporary impairments” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

•

FSP “SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments” enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

These staff positions are effective for financial statements issued for periods ending after June 15, 2009.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. Management evaluated events and transactions occurring after June 30, 2009 but before August 7, 2009. The impact of adoption did not have a material impact on the results of operations or financial position of the Company.

Effect of Newly Issued But Not Yet Effective Accounting Standards

In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140.” This statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to qualifying special-purpose entities. The objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Management is currently evaluating this standard but does not expect the impact of adoption to be material to the results of operations or financial position of the Company.

In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162.” This statement will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting

literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Management is currently evaluating this standard but does not expect the impact of adoption to be material to the results of operations or financial position of the Company.

Note 2 – Stock Plans and Stock Based Compensation

At June 30, 2009, 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 after assumption of the plan 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 June 30, 2009, the Company had granted outstanding options to purchase 199,809 shares under the 2000 option plan and 38,670 shares under the 2006 plan. The Company also had granted under the 2006 plan 105,813 unvested shares net of forfeitures and vesting. The Company has 236,868 shares remaining 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. 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. After May 22, 2008, unvested shares will be 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 outstanding options to purchase 45,150 shares and granted 4,073 unvested shares to non-employee directors. At June 30, 2009, 49,930 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 granted under the 2000 plan have a life of ten years while those granted under the 2006 plan have a life of five years.

The following table summarizes stock option activity:


	Six Months Ended June 30, 2009			Twelve Months Ended December 31, 2008
	Options	Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, beginning	283,629	$	24.03	298,784		$	23.97
Granted	—		—	—			—
Forfeited	—		—	(15,155	)		22.81

Outstanding, ending	283,629	$	24.03	283,629		$	24.03

The following table details stock options outstanding:


	June 30, 2009
Stock options vested and currently exercisable:		276,295
Weighted average exercise price	$	24.09
Aggregate intrinsic value	$	0
Weighted average remaining life (in years)		1.3
Total Options Outstanding:		283,629
Aggregate intrinsic value	$	0
Weighted average remaining life (in years)		1.3

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 June 30, 2009. There were no options exercised during the first six months of 2009. The Company recorded $30,000 of stock option compensation during the six months ended June 30, 2009 to salaries and employee benefits. Since the stock options are non-qualified stock options, a tax benefit of $11,000 was recognized. No options were modified during the period. As of June 30, 2009, no stock options issued by the Company have been exercised.

From time-to-time the Company grants 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 grant date provided the employee or director continues in such capacity at the vesting date. The fair value on the date of grant for the 2009 grants ranged from $11.39 to $14.20 per share. The Company recorded $148,000 of stock-based compensation during the first six months of 2009 to salaries and employee benefits. A deferred tax benefit of $52,000 was recognized related to this expense.

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


	Six Months Ended June 30, 2009				Twelve Months Ended December 31, 2008
	Shares		Weighted Average Grant Price		Shares		Weighted Average Grant Price
Outstanding, beginning	68,991		$	20.82	43,502		$	23.71
Granted	51,684			11.52	33,550			18.54
Vested	(10,789	)		20.08	(5,160	)		23.20
Forfeited	—			—	(2,901	)		22.16

Outstanding, ending	109,886		$	16.52	68,991		$	20.82

Unrecognized stock based compensation expense related to stock options and unvested shares for the remainder of 2009 and beyond is estimated as follows (in thousands):


July 2009 – December 2009	$	208
2010		357
2011		346
2012		334
2013 & thereafter		533

Note 3 – Securities

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
June 30, 2009
U.S. Government and federal agency	$	1,086	$	29	$	—		$	1,115
State and municipal		24,819		376		(365	)		24,830
Agency mortgage-backed		107,041		3,118		—			110,159
Private label mortgage-backed		31,210		449		(3,177	)		28,482
Corporate bonds		12,059		166		(540	)		11,685
Other debt securities		704		—		(123	)		581

Total debt securities		176,919		4,138		(4,205	)		176,852
Equity		1,902		17		(610	)		1,309

Total	$	178,821	$	4,155	$	(4,815	)	$	178,161

December 31, 2008
U.S. Government and federal agency	$	2,938	$	22	$	—		$	2,960
State and municipal		24,493		330		(415	)		24,408
Agency mortgage-backed		119,807		1,293		(118	)		120,982
Private label mortgage-backed		17,139		—		(494	)		16,645
Corporate bonds		6,489		39		(451	)		6,077
Other		704		—		—			704

Total debt securities		171,570		1,684		(1,478	)		171,776
Equity		1,900		28		(627	)		1,301

Total	$	173,470	$	1,712	$	(2,105	)	$	173,077

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Proceeds	$	261	$	21,862	$	762	$	21,905
Gross gains		—		431		1		525
Gross losses		—		570		—		570

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2009
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available-for-sale
Within one year	$	14,998	$	14,800
One to five years		111,638		113,220
Five to ten years		38,356		38,181
Beyond ten years		13,829		11,960

Total	$	178,821	$	178,161

Securities pledged at June 30, 2009 and December 31, 2008 had carrying values of approximately $67.6 million and $74.2 million, 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. 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. At June 30, 2009, all significant private label mortgage-backed securities were rated AAA.

At June 30, 2009, the Company held 44 equity securities. Of these securities, 7 had an unrealized loss of $74,000 and had been in an unrealized loss position for less than twelve months and 29 had an unrealized loss of $536,000 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 believes it is more likely than not that it will not be required to sell securities with unrealized losses until recovery, which for fixed income securities may be at maturity. As of June 30, 2009, management does not believe any equity securities in our portfolio should be classified as other than temporarily impaired.

Securities with unrealized losses at June 30, 2009 and December 31, 2008, 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)
June 30, 2009
U.S. Government and federal agency	$	—	$	—		$	—	$	—		$	—	$	—
State and municipal		8,588		(275	)		975		(90	)		9,563		(365	)
Agency mortgage-backed		59		—			—		—			59		—
Private label mortgage-backed		13,985		(3,092	)		4,942		(85	)		18,927		(3,177	)
Corporate bonds		2,005		(56	)		4,649		(484	)		6,654		(540	)
Other debt securities		581		(123	)		—		—			581		(123	)
Equity		176		(74	)		1,024		(536	)		1,200		(610	)

Total temporarily impaired	$	25,394	$	(3,620	)	$	11,590	$	(1,195	)	$	36,984	$	(4,815	)


December 31, 2008
U.S. Government and federal agency	$	—	$	—		$	—	$	—		$	—	$	—
State and municipal		12,240		(412	)		96		(3	)		12,336		(415	)
Agency mortgage-backed		34,119		(61	)		1,446		(57	)		35,565		(118	)
Private label mortgage-backed		9,730		(494	)		—		—			9,730		(494	)
Corporate bonds		2,266		(141	)		2,776		(310	)		5,042		(451	)
Equity		578		(315	)		447		(312	)		1,025		(627	)

Total temporarily impaired	$	58,933	$	(1,423	)	$	4,765	$	(682	)	$	63,698	$	(2,105	)

Note 4 – Loans

Loans were as follows:


	June 30, 2009			December 31, 2008
	(in thousands)
Commercial	$	90,899		$	90,978
Real estate		1,215,072			1,202,019
Agriculture		16,100			16,181
Consumer		36,903			37,783
Other		2,871			3,145

Subtotal		1,361,845			1,350,106
Less: Allowance for loan losses		(20,740	)		(19,652	)

Loans, net	$	1,341,105		$	1,330,454

Activity in the allowance for loan losses was as follows:


	June 30, 2009			June 30, 2008
	(in thousands)
Beginning balance	$	19,652		$	16,342
Acquired in bank acquisition		—			1,420
Provision for loan losses		3,200			1,400
Loans charged-off		(2,283	)		(1,217	)
Loan recoveries		171			188

Ending balance	$	20,740		$	18,133

Impaired loans were as follows:


	June 30, 2009		December 31, 2008
	(in thousands)
Loans with no allocated allowance for loan losses	$	3,668	$	3,479
Loans with allocated allowance for loan losses		1,721		2,624

Total	$	5,389	$	6,103

Amount of the allowance for loan losses allocated	$	76	$	224

	Six Months Ended June 30, 2009		Year Ended December 31, 2008
Average of impaired loans during the period	$	7,002	$	5,441
Interest income recognized during impairment		217		84
Cash basis interest income recognized		217		84

Impaired loans include 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.

Nonperforming loans were as follows:


	June 30, 2009		December 31, 2008
	(in thousands)
Loans past due 90 days or more still on accrual	$	8,405	$	11,598
Non-accrual loans		10,872		9,725

Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. At June 30, 2009 we had restructured loans totaling $8.4 million, compared with $13.6 million at December 31, 2008, with borrowers who experienced deterioration in financial condition. These loans are secured by 1 to 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.

Note 5 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:


	June 30, 2009		December 31, 2008
	(in thousands)
Single maturity advances with fixed rates from 0.20% to 5.64% maturing from 2009 through 2012, averaging 2.66% for 2009	$	111,500	$	126,595
Monthly amortizing advances with fixed rates from 0.00% to 9.10% and maturities ranging from 2009 through 2035, averaging 3.72% for 2009		14,850		16,181

Total	$	126,350	$	142,776

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 June 30, 2009, the Bank had unused borrowing capacity of $90.8 million with the FHLB.

Note 6 – Fair Values Measurement

SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy about the assumptions used to measure fair value. SFAS 157 describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of 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 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. Preferred stock issued by closely held financial institutions and privately issued mortgage-backed securities were historically priced using Level 2 inputs. The decline in the level of observable inputs in these classes of investments at the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely. As such, these investments are now priced using Level 3 inputs.

Impaired Loans: Impaired loans are evaluated at the time the loan is identified as impaired and are recorded at fair value. Market value is measured based on the value of the collateral securing these loans 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. If an appraisal is not available, the fair value of the collateral may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value on non-real estate collateral loans is determined using similar methods. In addition, business equipment may be valued by using the net book value from the business’ financial statements. Impaired loans are evaluated quarterly for additional impairment.

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. OREO is further evaluated quarterly for impairment. The aggregate fair value of OREO acquired and/or written down to fair value during the period is disclosed below.

Financial assets measured at fair value on a recurring basis are summarized below:


			Fair Value Measurements at June 30, 2009
			(in thousands)
Description	June 30, 2009		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	$	1,115	$	—	$	1,115	$	—
State and municipal		24,830		—		24,830		—
Agency mortgage-backed		110,159		—		110,159		—
Private label mortgage-backed		28,482		—		—		28,482
Corporate bonds		11,685		—		11,685		—
Other debt securities		581		—		—		581
Equity securities		1,309		1,309		—		—

Total	$	178,161	$	1,309	$	147,789	$	29,063

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


Available-for-sale securities	Six Months Ended June 30, 2009
Balance, January 1, 2009	$	0
Purchases		16,386
Transfers from Level 2		17,349
Net accretion (amortization)		334
Principal paydowns		(1,706	)
Net change in unrealized gain (loss)		(3,300	)

Balance, June 30, 2009	$	29,063

Assets measured at fair value on a non-recurring basis are summarized below:


			Fair Value Measurements at June 30, 2009
			(in thousands)
Description	June 30, 2009		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	4,608	$	—	$	—	$	4,608
Other real estate owned		8,877		—		—		8,877

Impaired loans had a carrying amount of $5.4 million and a valuation allowance of $781,000, resulting in an additional provision for loan losses of $103,000 for the first six months of 2009.

Other real estate owned write-downs recorded during the first six months of 2009 totaled $405,000.

Financial assets measured at fair value on a recurring basis are summarized below:


			Fair Value Measurements at December 31, 2008
			(in thousands)
Description	December 31, 2008		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	$	2,960	$	—	$	2,960	$	—
State and municipal		24,408		—		24,408		—
Agency mortgage-backed		120,982		—		120,982		—
Private label mortgage-backed		16,645		—		16,645		—
Corporate bonds		6,077		—		6,077		—
Other debt securities		704		—		704		—
Equity		1,301		1,301		—		—

Total	$	173,077	$	1,301	$	171,776	$	—

Assets measured at fair value on a non-recurring basis are summarized below:


			Fair Value Measurements at December 31, 2008
			(in thousands)
Description	December 31, 2008		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	4,854	$	—	$	—	$	4,854
Other real estate owned		5,816		—		—		5,816

Impaired loans had a carrying amount of $6.1 million and a valuation allowance of $1.2 million, resulting in an additional provision for loan losses of $1.06 million for 2008.

Other real estate owned write-downs recorded during 2008 totaled $478,000.

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


	June 30, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets
Cash and cash equivalents	$	96,528	$	96,528	$	52,546	$	52,546
Interest-bearing deposits with banks		600		600		600		600
Loans, net		1,341,105		1,353,724		1,330,454		1,342,446
Accrued interest receivable		9,412		9,412		10,228		10,228
Financial liabilities
Deposits	$	1,364,192	$	1,362,044	$	1,288,549	$	1,285,772
Federal funds purchased and securities sold under agreements to repurchase		11,232		11,232		10,084		10,084
Federal Home Loan Bank advances		126,350		127,627		142,776		144,030
Subordinated capital notes		9,000		7,753		9,000		8,216
Junior subordinated debentures		25,000		20,051		25,000		21,326
Accrued interest payable		3,052		3,052		3,722		3,722

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 banks, repurchase agreements, accrued interest receivable and payable, demand deposits, short-term borrowings, and variable rate loans or deposits that reprice frequently and fully. The fair value of loans is estimated in accordance with paragraph 31 of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, by discounting expected future cash flows using market rates on like maturity. 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. 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.

Note 7 – Earnings per Share

The factors used in the earnings per share computation follow:


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands, except share and per share data)
Basic
Net income	$	3,245	$	3,973	$	6,306	$	7,570
Less:
Preferred stock dividends		437		—		875		—
Accretion of preferred stock discount		44		—		88		—

Net income available to common shareholders	$	2,764	$	3,973	$	5,343	$	7,570

Weighted average voting and unvested common shares outstanding		8,338,008		8,283,916		8,316,376		8,279,178

Basic earnings per common share	$	0.33	$	0.48	$	0.64	$	0.91

Diluted
Weighted average voting and unvested common shares outstanding		8,338,008		8,283,916		8,316,376		8,279,178
Add: dilutive effects of assumed exercises of stock options and warrants		—		—		—		—

Average shares and potential common shares		8,338,008		8,283,916		8,316,376		8,279,178

Diluted earnings per common share	$	0.33	$	0.48	$	0.64	$	0.91

All historical data has been adjusted to reflect the 5% stock dividend paid on November 10, 2008.

In connection with our adoption of FSP EITF 03-6-1, weighted average voting and unvested common shares outstanding includes unvested shares issued through the 2006 incentive compensation plan of 109,886 at June 30, 2009 and 74,962 at June 30, 2008. This FSP requires share based compensation awards that qualify as participating securities to be included in basic EPS using the two-class method. A share based compensation award is considered a participating security if it receives non-forfeitable dividends. A non-forfeitable dividend would be a dividend that the participant receives before the award is vested and if the participant forfeits the actual shares awarded the dividends he/she has received do not have to be paid back to the company. Adoption of this FSP had no effect on current or prior period basic and diluted EPS. Reduced basic and diluted EPS for the second quarter and first six months of 2008, from previously reported EPS, by three and six cents per common share, respectively, was the result of the adjustment to reflect the 5% stock dividend paid on November 10, 2008.

Stock options for 283,629 shares of common stock for 2009 and 296,159 shares of common stock for 2008 were not considered in computing diluted earnings per common share because they were anti-dilutive. Additionally, a warrant for the purchase of 299,829 shares of the Company’s common stock at an exercise price of $17.51 was outstanding at June 30, 2009 (none at June 30, 2008) but was not included in the diluted EPS computation as inclusion would have been anti-dilutive.

Note 8 – Other Comprehensive Income (Loss)

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)
Unrealized holding gains (losses) on available-for-sale securities	$	(362	)	$	(2,744	)	$	(267	)	$	(1,490	)
Less: Reclassification adjustment for gains (losses) realized in income		—			(139	)		1			(45	)

Net unrealized gains (losses)		(362	)		(2,605	)		(268	)		(1,445	)
Tax effect		127			912			94			506

Net-of-tax amount	$	(235	)	$	(1,693	)	$	(174	)	$	(939	)

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 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 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 II, Item 1A – Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2008 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 basis underlying the forward-looking statement. The Company believes it has chosen these assumptions or basis in good faith and that they are reasonable. We caution you however, that assumptions or basis almost always vary from actual results, and the differences between assumptions or basis 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 19 full-service banking offices in 12 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.

For the three and six months ended June 30, 2009, respectively, the Company reported net income of $3.2 million and $6.3 million. This compares with net income of $4.0 million and $7.6 million, respectively, for the same periods of 2008. Net income available to common shareholders for the three and six months ended June 30, 2009 was $2.8 million and $5.3 million, respectively. Net income available to common shareholders was reduced by $481,000 and $963,000 for dividends and accretion on $35 million in preferred stock issued to the United States Treasury. There were no comparable preferred dividends in the second quarter or first six months of 2008. Basic and diluted earnings per common share were $0.33 and $0.64 for the three and six months ended June 30, 2009, respectively, compared with $0.48 and $0.91 for the same periods of 2008.

Significant developments during the quarter and six months ended June 30, 2009 consist of the following:

•

Earnings per common share increased 6.5% to $0.33 in the second quarter of 2009 compared with $0.31 in the first quarter of 2009. The growth in earnings benefited from an increase in net interest income, but was partially offset by a special FDIC assessment of $781,000, that was equivalent to $0.06 per diluted common share, net of tax.

•

Net income was $3.2 million for the three months ended June 30, 2009, compared with $4.0 million for the second quarter of 2008. Earnings per diluted common share were $0.33 in the second quarter of 2009 compared with $0.48 per share in the second quarter of 2008. Net income was $6.3 million for the six months ended June 30, 2009, compared with $7.6 million for the first six months of 2008. Earnings per diluted common share were $0.64 for the first six months of 2009 compared with $0.91 for the same period of 2008. The June 30, 2009, three and six months earnings per common share results included deductions of approximately $0.06 and $0.12, respectively, per common share attributable to dividends and accretion on $35 million in preferred stock issued to the United States Treasury and $0.06 per common share in both periods due to an FDIC special assessment. There were no comparable preferred dividends or FDIC special assessment in the second quarter or first six months of 2008.

•

Net interest margin for the second quarter of 2009 declined to 3.13% compared with 3.29% for the second quarter of 2008. For the first six months of 2009, net interest margin decreased to 3.08% compared with 3.25% for the same period of 2008. However, net interest margin increased 11 basis points to 3.13% in the second quarter of 2009 from 3.02% in the first quarter of 2009.

•

Net interest income increased 7.0% to $12.8 million for the three months ended June 30, 2009, and 6.3% to $24.8 million for the six months ended June 30, 2009, compared with the same quarter and six months of 2008, respectively. Net interest income benefited from an increase in average earning assets of 12.4%, to $1.7 billion for the second quarter of 2009, and 12.8%, to $1.6 million for the first six months of 2009, in comparison to the same quarter and six months of 2008, respectively.

•

Loans grew 1.4% to $1.4 billion, compared with $1.3 billion at June 30, 2008.

•

Deposits increased 7.6% to $1.4 billion compared with $1.3 billion at June 30, 2008.

•

Total assets increased 8.1% to $1.7 billion since the second quarter of 2008, due to growth in loans and the security portfolio.

•

Nonperforming loans declined $5.5 million, or 22.3%, to $19.3 million in the 2009 second quarter compared with the first quarter of 2009. Non-performing assets declined $6.5 million, or 18.3%, to $28.9 million compared with the first quarter of 2009.

•

Porter Bancorp’s stock was added to the Russell 2000 index effective June 2009.

The banking industry continues to experience very difficult times. Porter Bancorp is not immune from these difficulties. Real estate lending remains a core business for the Company, and we expect continued weakening in that sector during the second half of 2009. We have allocated more resources to resolve problem loans while also working with our real estate clients to help them get through these difficult times.

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 June 30, 2009 compared with the same period of 2008:


	For the Three Months Ended June 30,				Change from Prior Period
	2009		2008		Amount			Percent
	(dollars in thousands)
Gross interest income	$	23,645	$	25,041	$	(1,396	)	(5.6	)%
Gross interest expense		10,832		13,069		(2,237	)	(17.1	)
Net interest income		12,813		11,972		841		7.0
Provision for credit losses		1,600		750		850		113.3
Non-interest income		1,895		1,788		107		6.0
Non-interest expense		8,228		7,047		1,181		16.8
Net income before taxes		4,880		5,963		(1,083	)	(18.2	)
Income tax expense		1,635		1,990		(355	)	(17.8	)
Net income		3,245		3,973		(728	)	(18.3	)

Net income of $3,245,000 for the three months ended June 30, 2009 decreased $728,000, or 18.3%, from $3,973,000 for the comparable period of 2008. This decrease in earnings was primarily attributable to increased provision for loan losses expense, a special FDIC assessment of $781,000, and recurring FDIC insurance premiums increasing $261,000 from the 2008 second quarter due to amendments made by the FDIC in 2007 to its risk-based deposit premium assessment system. Increased expense was partially offset with increased net interest income and non-interest income. Net interest income benefited from an increase of 12.4% in earning assets from the prior year second quarter, and decreased cost of funds to 2.98% in the 2009 second quarter from 3.94% in the prior year second quarter. The increase in non-interest income was due to gains on sales of loans originated for sale, which were partially offset by lower income from fiduciary activities. Our subsidiary, PBI Bank, began originating residential real estate loans for sale in the secondary market late in the first quarter of 2009. The Bank retains servicing rights for the sold loans.

The following table summarizes components of income and expense and the change in those components for the six months ended June 30, 2009 compared with the same period of 2008:


	For the Six Months Ended June 30,				Change from Prior Period
	2009		2008		Amount			Percent
	(dollars in thousands)
Gross interest income	$	47,147	$	50,715	$	(3,568	)	(7.0	)%
Gross interest expense		22,367		27,400		(5,033	)	(18.4	)
Net interest income		24,780		23,315		1,465		6.3
Provision for credit losses		3,200		1,400		1,800		128.6
Non-interest income		3,381		3,606		(225	)	(6.2	)
Non-interest expense		15,504		14,164		1,340		9.5
Net income before taxes		9,457		11,357		(1,900	)	(16.7	)
Income tax expense		3,151		3,787		(636	)	(16.8	)
Net income		6,306		7,570		(1,264	)	(16.7	)

Net income of $6,306,000 for the six months ended June 30, 2009 decreased $1.3 million, or 16.7%, from $7,570,000 for the comparable period of 2008. This decrease in earnings was primarily attributable to increased

provision for loan losses expense, a special FDIC assessment of $781,000, and recurring FDIC insurance premiums increasing $499,000 from the first half of 2008 due to amendments made by the FDIC in 2007 to its risk-based deposit premium assessment system. Increased expense was partially offset with increased net interest income. Net interest income benefited from an increase of 12.8% in earning assets from the first half of 2008, and decreased cost of funds to 3.13% in the first six months of 2009 from 4.20% in the same period of 2008.

Net Interest Income – Our net interest income was $12,813,000 for the three months ended June 30, 2009, an increase of $841,000, or 7.0%, compared with $11,972,000 for the same period in 2008. Net interest spread and margin were 2.76% and 3.13%, respectively, for the second quarter of 2009, compared with 2.91% and 3.29%, respectively, for the second quarter of 2008. Net interest income was $24,780,000 for the six months ended June 30, 2009, an increase of $1,465,000, or 6.3%, compared with $23,315,000 for the same period of 2008. Net interest spread and margin were 2.69% and 3.08%, respectively, for the first six months of 2009, compared with 2.84% and 3.25%, respectively, for the first six months of 2008. Net interest margin increased 11 basis points from our margin of 3.02% in the first quarter of 2009 due primarily to lower cost of funds. Net interest margin decreased 17 basis points from our margin of 3.25% in the first half of 2008 due primarily to earning assets repricing downward more quickly in the falling rate environment than cost of funds. Our balance sheet is asset-sensitive, so our loan yields have responded more rapidly to the Federal Reserve rate cuts than our cost of funds. As a result, if interest rates remain stable, we expect our margin to continue to expand in 2009 based upon our expectations of continued downward liability repricing with limited repricing of assets.

Our yield on earning assets decreased to 5.74% for the second quarter of 2009 compared to 6.85% for the second quarter of 2008. Our cost of funds also decreased to 2.98% for the second quarter of 2009 compared to 3.94% for the second quarter of 2008. Our yield on earning assets declined 122 basis points from 7.04% during the first quarter of 2008 and our cost of funds decreased 107 basis points from 4.20%. Interest rate cuts made by the Federal Reserve over the last year adversely affected our margin as we are asset sensitive. However, liabilities continued to reprice during the first half of 2009 lowering our cost of funds to a greater extent than the downward repricing of assets.

Our average interest-earning assets were $1.6 billion for the six months ended June 30, 2009, compared with $1.5 billion for the six months ended June 30, 2008, a 12.8% increase primarily attributable to growth in loan and securities. Average loans were $1.4 billion for the six months ended June 30, 2009, compared with $1.3 billion for the six months ended June 30, 2008, a 4.8% increase. Average securities were $173 million for the six months ended June 30, 2009, compared with $117 million for the same period of 2008, a 47.8% increase. Our total interest income decreased by 7.0% to $47.1 million for the six months ended June 30, 2009, compared with $50.7 million for the same period in 2008. The change was due to lower yield on interest earning assets resulting from the 175 basis point decrease in prime rate over the last twelve months.

Our average interest-bearing liabilities also increased by 9.8%, to $1.4 billion for the six months ended June 30, 2009, compared with $1.3 billion for the six months ended June 30, 2008. Our total interest expense decreased by 18.4% to $22.4 million for the six months ended June 30, 2009, compared with $27.4 million during the same period in 2008, primarily due to continued repricing of certificates of deposit at maturity at lower interest rates. Our average volume of certificates of deposit increased by 16.2% to $1.1 billion for the six months ended June 30, 2009, compared with $913.9 million for the six months ended June 30, 2008. The average interest rate paid on certificates of deposits decreased to 3.45% for the six months ended June 30, 2009, compared with 4.64% for the six months ended June 30, 2008. The certificate of deposit volume increase reflected organic growth from promotional efforts throughout the period.

Average Balance Sheets

The following table presents the average balance sheets for the three month periods ending June 30, 2009 and 2008, 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 June 30,
	2009							2008
	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)	$	1,360,191		$	21,102	6.22	%	$	1,326,996		$	23,385	7.09	%
Securities
Taxable		152,416			2,141	5.63			94,814			1,192	5.06
Tax-exempt (3)		21,909			223	6.28			20,492			205	6.19
FHLB stock		10,072			112	4.46			9,807			133	5.45
Other equity securities		1,901			11	2.32			4,069			31	3.06
Federal funds sold and other		112,900			56	0.20			19,634			95	1.95

Total interest-earning assets		1,659,389			23,645	5.74	%		1,475,812			25,041	6.85	%

Less: Allowance for loan losses		(20,581	)						(18,409	)
Non-interest earning assets		96,058							106,232

Total assets	$	1,734,866						$	1,563,635

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	1,086,698		$	8,869	3.27	%	$	923,586		$	10,060	4.38	%
NOW and money market deposits		166,469			517	1.25			186,871			980	2.11
Savings accounts		35,599			82	0.92			35,241			112	1.28
Federal funds purchased and repurchase agreements		10,624			120	4.53			18,011			165	3.68
FHLB advances		123,388			937	3.05			145,419			1,434	3.97
Junior subordinated debentures		34,000			307	3.62			25,000			318	5.12

Total interest-bearing liabilities		1,456,778			10,832	2.98	%		1,334,128			13,069	3.94	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		103,102							96,455
Other liabilities		7,818							6,841

Total liabilities		1,567,698							1,437,424
Stockholders’ equity		167,168							126,211

Total liabilities and stockholders’ equity	$	1,734,866						$	1,563,635

Net interest income				$	12,813						$	11,972

Net interest spread						2.76	%						2.91	%

Net interest margin						3.13	%						3.29	%

(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 six month periods ending June 30, 2009 and 2008, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.


	Six Months Ended June 30,
	2009							2008
	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)	$	1,360,192		$	42,372	6.28	%	$	1,298,407		$	47,177	7.31	%
Securities
Taxable		151,204			3,985	5.31			97,930			2,478	5.09
Tax-exempt (3)		21,969			444	6.27			19,263			390	6.26
FHLB stock		10,072			226	4.52			9,744			259	5.35
Other equity securities		1,901			29	3.08			4,260			66	3.12
Federal funds sold and other		95,245			91	0.19			25,324			345	2.74

Total interest-earning assets		1,640,583			47,147	5.82	%		1,454,928			50,715	7.04	%

Less: Allowance for loan losses		(20,304	)						(17,649	)
Non-interest earning assets		95,547							101,161

Total assets	$	1,715,826						$	1,538,440

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	1,062,412		$	18,185	3.45	%	$	913,930		$	21,106	4.64	%
NOW and money market deposits		164,867			1,037	1.27			189,502			2,258	2.40
Savings accounts		35,170			164	0.94			33,462			229	1.38
Federal funds purchased and repurchase agreements		10,652			235	4.45			15,734			307	3.92
FHLB advances		132,675			2,086	3.17			133,512			2,757	4.15
Junior subordinated debentures		34,000			660	3.91			25,000			743	5.98

Total interest-bearing liabilities		1,439,776			22,367	3.13	%		1,311,140			27,400	4.20	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		101,521							94,762
Other liabilities		8,063							7,421

Total liabilities		1,549,360							1,413,323
Stockholders’ equity		166,466							125,117

Total liabilities and stockholders’ equity	$	1,715,826						$	1,538,440

Net interest income				$	24,780						$	23,315

Net interest spread						2.69	%						2.84	%

Net interest margin						3.08	%						3.25	%

(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 June 30, 2009 vs. 2008									Six Months Ended June 30, 2009 vs. 2008
	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	$	(2,856	)	$	573		$	(2,283	)	$	(6,970	)	$	2,165		$	(4,805	)
Securities		183			784			967			134			1,427			1,561
FHLB stock		(25	)		4			(21	)		(42	)		9			(33	)
Other equity securities		(6	)		(14	)		(20	)		(1	)		(36	)		(37	)
Federal funds sold and other		(149	)		110			(39	)		(544	)		290			(254	)

Total increase (decrease) in interest income		(2,853	)		1,457			(1,396	)		(7,423	)		3,855			(3,568	)

Interest-bearing liabilities:
Certificates of deposit and other time deposits		(2,784	)		1,593			(1,191	)		(6,008	)		3,087			(2,921	)
NOW and money market accounts		(365	)		(98	)		(463	)		(957	)		(264	)		(1,221	)
Savings accounts		(31	)		1			(30	)		(76	)		11			(65	)
Federal funds purchased and repurchased agreements		33			(78	)		(45	)		36			(108	)		(72	)
FHLB advances		(300	)		(197	)		(497	)		(654	)		(17	)		(671	)
Junior subordinated debentures		(107	)		96			(11	)		(303	)		220			(83	)

Total increase (decrease) in interest expense		(3,554	)		1,317			(2,237	)		(7,962	)		2,929			(5,033	)

Increase (decrease) in net interest income	$	701		$	140		$	841		$	539		$	926		$	1,465

Non-Interest Income – The following table presents the major categories of non-interest income for the three and six months ended June 30, 2009 and 2008:


	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
	(in thousands)
Service charges on deposit accounts	$	788	$	902		$	1,476	$	1,731
Income from fiduciary activities		198		331			418		584
Secondary market brokerage fees		73		106			131		221
Title insurance commissions		44		54			64		94
Gains on sales of loans originated for sale		241		—			241		—
Gains (losses) on sales of investment securities, net		—		(139	)		1		(45	)
Other		551		534			1,050		1,021

Total non-interest income	$	1,895	$	1,788		$	3,381	$	3,606

Non-interest income for the second quarter ended June 30, 2009 increased $107,000, or 6.0%, compared with the second quarter of 2008. For the six months ended June 30, 2009 non-interest income decreased by $225,000 to $3.4 million compared with $3.6 million for same period of 2008. The increase in non-interest income for the second quarter ended June 30, 2009 was primarily due to gains on sales of loans originated for sale, which were partially offset by lower service charges on deposit accounts and lower income from fiduciary activities. Our subsidiary, PBI Bank, began originating residential real estate loans for sale in the secondary market late in the first quarter of 2009. The Bank retained servicing rights for the sold loans. In addition, the loss on sales of securities experienced in the 2008 second quarter was not repeated in the 2009 second quarter. The decrease in non-interest income for the six months ended June 30, 2009 was due to lower service charges on deposit accounts resulting from lower volume in non-sufficient funds transactions, lower secondary market brokerage fees, and lower income from fiduciary activities due to decreased account asset values caused by the downturn in the market. Trust fees are based on account asset values. These decreases were partially offset by gains on sales of loans originated for sale.

Non-interest Expense – The following table presents the major categories of non-interest expense for the three and six months ended June 30, 2009 and 2008:


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands)
Salary and employee benefits	$	3,813	$	3,892	$	7,691	$	7,716
Occupancy and equipment		981		904		1,979		1,817
FDIC insurance		503		242		962		463
FDIC special insurance assessment		781		—		781		—
State franchise tax		450		435		900		870
Professional fees		203		172		431		418
Communications		230		188		385		349
Postage and delivery		184		192		368		367
Other real estate owned expense		226		120		353		347
Advertising		125		140		283		301
Office supplies		114		181		218		338
Other		618		581		1,153		1,178

Total non-interest expense	$	8,228	$	7,047	$	15,504	$	14,164

Non-interest expense for the second quarter ended June 30, 2009 increased $1.2 million, or 16.8%, compared with the second quarter of 2008. For the six months ended June 30, 2009, non-interest expense increased $1.3 million, or 9.5%, to $15.5 million compared with $14.2 million for the first six months of 2008. The increase in

non-interest expense was primarily attributable to FDIC insurance assessments more than doubling following amendments made by the FDIC in 2007 to its risk-based deposit premium assessment system and to a special assessment of $781,000 assessed in the 2009 second quarter and payable September 30, 2009. Without this special assessment our efficiency ratio for the first six months of 2009 would have been 52.28%, an improvement from our ratio of 52.53% in the same period of 2008.

Income Tax Expense – Income tax expense was $1.6 million, or 33.5% of pre-tax income, for the second quarter ended June 30, 2009, and $3.2 million, or 33.3% of pre-tax income, for the first six months of 2009, compared with $2.0 million, or 33.4% of pre-tax income, for the second quarter of 2008, and $3.8 million, or 33.3% or pre-tax income, for the first six months of 2008.

Analysis of Financial Condition

Total assets increased $62.0 million, or 3.8%, to $1.7 billion at June 30, 2009 from $1.6 billion at December 31, 2008. This increase was primarily attributable to increases of $46.2 million in cash and due from banks and $10.7 million in net loans from organic growth. Total assets at June 30, 2009 increased $128 million from $1.6 billion at June 30, 2008, representing an 8.1% increase.

Loans Receivable – Loans receivable increased $11.7 million, or 0.9%, during the six months ended June 30, 2009 to $1.4 billion. Our commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $2.2 million, or 0.2%, during the six months and comprised 67.2% of the total loan portfolio at June 30, 2009.

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 June 30, 2009				As of December 31, 2008
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Type of Loan:
Real estate:
Commercial	$	491,160	36.07	%	$	454,634	33.68	%
Construction		332,608	24.42			371,301	27.50
Residential		359,029	26.37			342,835	25.39
Home equity		32,275	2.37			33,249	2.46
Commercial		90,899	6.67			90,978	6.74
Consumer		36,903	2.71			37,783	2.80
Agriculture		16,100	1.18			16,181	1.20
Other		2,871	0.21			3,145	0.23

Total loans	$	1,361,845	100.00	%	$	1,350,106	100.00	%

Non-Performing Assets – Non-performing assets consist of loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets.

The following table sets forth information with respect to non-performing assets as of June 30, 2009 and December 31, 2008.


	June 30, 2009			December 31, 2008
	(dollars in thousands)
Loans past due 90 days or more still on accrual	$	8,405		$	11,598
Non-accrual loans		10,872			9,725

Total non-performing loans		19,277			21,323
Real estate acquired through foreclosure		9,551			7,839
Other repossessed assets		80			96

Total non-performing assets	$	28,908		$	29,258

Non-performing loans to total loans		1.42	%		1.58	%

Non-performing assets to total assets		1.69	%		1.78	%

Nonperforming loans at June 30, 2009 were $19.3 million, or 1.42% of total loans, compared with $12.9 million, or 0.96% of total loans, at June 30, 2008, and $21.3 million, or 1.58% of total loans at December 31, 2008. The decrease of $2.0 million in non-performing loans from December 31, 2008 to June 30, 2009 is primarily attributable to the normal progression of troubled loans through workout, collateral repossession and ultimate disposition. At June 30, 2009, we had restructured loans totaling $8.4 million, compared with $13.6 million at December 31, 2008, with borrowers who experienced deterioration in financial condition. These loans are secured by 1 to 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.

Foreclosed properties at June 30, 2009 were $9.6 million compared with $6.6 million at June 30, 2008 and $7.8 million at December 31, 2008. The increase in foreclosed properties from year-end 2008 reflects the normal progression of troubled loans through workout, collateral repossession and ultimate disposition. 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.

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 June 30, 2009, increased to 1.52% from 1.35% at June 30, 2008, and increased from 1.46% at December 31, 2008. Provision for loan losses increased $850,000 to $1.6 million for the second quarter of 2009 compared with the second quarter of 2008. Provision for loan losses increased $1.8 million to $3.2 million for the six months ended June 30, 2009, compared with $1.4 million for the same six months of 2008. The increase in provision expense was primarily due to growth in our loan portfolio coupled with the increase in net charge-offs between periods. Net loan charge-offs for the second quarter of 2009 were $1.2 million, or 0.09% of total loans, compared with $684,000, or 0.05%, for the second quarter of 2008, and $881,000, or 0.06%, for the first quarter of 2009. Net loan charge-offs for the six months ended June 30, 2008 were $2.1 million, or 0.16% of average loans, compared with $1.03 million, or 0.08%, for the first six months of 2008. Our allowance for loan losses to nonperforming loans increased to 107.59% at June 30, 2009, compared to 92.16% at December 31, 2008, but decreased in comparison with 140.66% at June 30, 2008.

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.

An analysis of changes in allowance for loan losses and selected ratios for the three and six month periods ended June 30, 2009 and 2008 follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(dollars in thousands)
Balance at beginning of period	$	20,371		$	18,067		$	19,652		$	16,342
Acquired in bank acquisition		—			—			—			1,420
Provision for loan losses		1,600			750			3,200			1,400
Recoveries		69			114			171			188
Charge-offs		(1,300	)		(798	)		(2,283	)		(1,217	)

Balance at end of period	$	20,740		$	18,133		$	20,740		$	18,133

Allowance for loan losses to period-end loans		1.52	%		1.35	%		1.52	%		1.35	%

Net charge-offs to average loans		0.09	%		0.05	%		0.16	%		0.08	%

Allowance for loan losses to non-performing loans		107.59	%		140.66	%		107.59	%		140.66	%

Liabilities – Total liabilities at June 30, 2009 were $1.54 billion compared with $1.48 billion at December 31, 2008, an increase of $60.0 million, or 4.0%. The increase was primarily attributable to an increase in deposits of $75.6 million, or 5.9%, at June 30, 2009 to $1.4 billion from $1.3 billion at December 31, 2008. The increase in deposits was in both time deposits and transactional accounts from promotional efforts throughout the period.

Federal Home Loan Bank advances decreased $16.4 million, or 11.5%, to $126.4 million from $142.8 million at December 31, 2008. 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 Six Months Ended June 30, 2009				For the Year Ended December 31, 2008
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)
Demand	$	101,521	—		$	93,356	—
Interest checking		77,408	0.87	%		92,496	1.71	%
Money market		87,459	1.62			84,316	2.66
Savings		35,170	0.94			33,969	1.30
Certificates of deposit		1,062,412	3.45			946,477	4.31

Total deposits	$	1,363,970	2.87	%	$	1,250,614	3.60	%

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 Six Months Ended June 30, 2009				For the Year Ended December 31, 2008
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)
Less than $100,000	$	613,392	3.46	%	$	607,420	4.28	%
$100,000 or more		449,020	3.44	%		339,057	4.36	%

Total	$	1,062,412	3.45	%	$	946,477	4.31	%

The following table shows at June 30, 2009 and December 31, 2008 the amount of our time deposits of $100,000 or more by time remaining until maturity:


Maturity Period	As of June 30, 2009		As of December 31, 2008
	(in thousands)
Three months or less	$	162,600	$	88,133
Three months through six months		139,036		142,760
Six months through twelve months		117,102		120,165
Over twelve months		44,308		59,273

Total	$	463,046	$	410,331

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, brokered deposits and other wholesale funding. During 2008 and the first six months of 2009, PBI Bank utilized brokered and wholesale deposits to supplement its funding strategy. At June 30, 2009, these deposits totaled $54.2 million. PBI Bank also secured federal funds borrowing lines from major correspondent banks totaling $46.5 million on an unsecured basis and an additional $25 million on a secured basis.

Traditionally, PBI Bank has utilized borrowings from the FHLB to supplement our funding requirements. At June 30, 2009, the Bank had an unused borrowing capacity with the FHLB of $90.8 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 $1.9 million to $166.1 million at June 30, 2009 compared with $164.2 million at December 31, 2008. The increase was due to net income earned during the first six months of 2009 reduced by dividends declared on common stock and dividends paid on 5% cumulative preferred stock. Both the Company and PBI Bank qualified as well capitalized under regulatory guidelines at June 30, 2009.

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:


					June 30, 2009				December 31, 2008
	Regulatory Minimums		Well-Capitalized Minimums		Porter Bancorp		PBI Bank		Porter Bancorp		PBI Bank
Tier I capital	4.0	%	6.0	%	11.98	%	10.36	%	12.13	%	10.06	%
Total risk-based capital	8.0		10.0		13.89		12.27		14.05		11.99
Tier I leverage ratio	4.0		5.0		9.62		8.30		10.10		8.37

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at June 30, 2009, and December 31, 2008. Given an instantaneous 100 basis point decrease in rates that was sustained for 12 months, base net interest income would decrease by an estimated 3.1% at June 30, 2009 compared with a decrease of 7.6% at December 31, 2008. Given a 100 basis point increase in interest rates, base net interest income would increase by an estimated 2.5% at June 30, 2009, compared with an increase of 5.1% at December 31, 2008 and is within the risk tolerance parameters of our risk management policy.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following June 30, 2009, as calculated using the static shock model approach:


	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	2,788		4.96	%
+ 100 basis points		1,398		2.49
- 100 basis points		(1,752	)	(3.11	)
- 200 basis points		(4,650	)	(8.27	)

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 June 30, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Additionally, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

In the normal course of operations, we are defendants in various legal proceedings. 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, 2008 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

Purchases of Equity Securities by Issuer

In December 2006, the Company’s Board of Directors approved the repurchase of shares of Porter Bancorp’s common stock in an amount not to exceed $3 million, exclusive of any fees or commissions. As of June 30, 2009, Porter Bancorp had approximately $2.5 million remaining to purchase shares under the current stock repurchase program. The shares may be repurchased from time to time in open market transactions or privately negotiated transactions at its discretion, subject to market conditions and other factors. The Company did not repurchase any shares in the second quarter of 2009. The terms of the $35 million senior preferred stock transaction with the U.S. Treasury limit our ability to repurchase shares of common stock until after November 21, 2011, unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to an unaffiliated third party.

Item 3.

Default Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Securities Holders

On May 21, 2009, we held our annual meeting of shareholders to consider and act upon a proposal to elect six directors of Porter Bancorp to serve until the 2010 Annual Meeting of Shareholders.

The following directors were elected, receiving the votes as noted:


	For	Withhold
Maria L. Bouvette	7,557,537.92	326,019.12
David L. Hawkins	7,793,031.92	90,525.12
W. Glenn Hogan	7,869,882.30	13,674.74
Sidney L. Monroe	7,793,529.92	90,027.12
J. Chester Porter	7,558,035.92	325,521.12
Stephen A. Williams	7,793,307.72	90,249.32

The shareholders also considered a resolution to approve, in a non-binding advisory vote, the compensation of the company’s executives. The resolution to approve the compensation of the company’s executives was approved by the shareholders with 7,599,726.64 votes for, 33,934.40 votes against, and 249,896 votes abstaining.

No other proposals were voted upon at the annual meeting.

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)

August 7, 2009	By:	/s/ Maria L. Bouvette
		Maria L. Bouvette
		President & Chief Executive Officer

August 7, 2009	By:	/s/ David B. Pierce
		David B. Pierce
		Chief Financial Officer and Chief Accounting Officer

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