2010 Title of each class Name of each exchange on which registered 11,281,625. Item 5. Item 11. banking, electronic funds transfers through ACH services, domestic and foreign wire transfers, travelers’ checks, cash management, vault services, loan and deposit sweep accounts and lock box services. Through our trust division, we offer personal trust services, employer retirement plan services and personal financial and retirement planning services. Porter Bancorp and PBI Bank must obtain the prior written consent of each of their primary regulators prior to declaring or paying any future dividends. 2010. At December 31, 2010, our unexhausted prepaid assessment was $5.4 million. ratings, may establish a banking office in Kentucky without the approval of the KDFI upon notice to the KDFI and any other state bank with its main office located in the county where the new banking office will be located. Branching by all other banks requires the approval of the KDFI, who must ascertain and determine that the public convenience and advantage will be served and promoted and that there is reasonable probability of the successful operation of the banking office. The Dodd-Frank Act permits de novo interstate branching by national banks and insured state banks by amending the state “opt-in” election. Applications for out-of-state de novo branches would be approved if, under the law of the state in which the branch is to be located, a state bank chartered by such state would have been permitted to establish the branch. allowance for credit losses is adequate. However, if our assumptions or judgments are wrong, our allowance for credit losses may not be sufficient to cover our actual credit losses. We may have to increase our allowance in the future in response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio. The actual amount of future provisions for credit losses cannot be determined at this time and may vary from the amounts of past provisions. earnings available to common shareholders. results of operations. as previously conducted or our results of operations or financial condition. Markets Main Office: 2500 Eastpoint Parkway, Louisville Eminence Office: 645 Elm Street, Eminence Hillview Office: 11998 Preston Highway, Hillview Pleasureville Office: 5440 Castle Highway, Pleasureville Shepherdsville Office: 340 South Buckman Street, Shepherdsville Conestoga Office: 155 Conestoga Parkway, Shepherdsville Lexington/Fayette County South Central Kentucky Brownsville Office: 113 East Main, Brownsville Greensburg Office: 202-04 North Main Street, Greensburg Horse Cave Office: 210 East Main Street, Horse Cave Morgantown Office: 112 West Logan Street, Morgantown Munfordville Office: 949 South Dixie Highway, Munfordville Northside Office: 1300 North Main Street, Beaver Dam Wal-Mart Office: 1701 North Main Street, Beaver Dam Owensboro/Davies County Southern Kentucky Campbell Lane Office: 751 Campbell Lane, Bowling Green Glasgow Office: 1006 West Main Street, Glasgow Other Properties Canmer Office: 2708 North Jackson Highway, Canmer Quarter Ended Fourth Quarter Third Quarter Second Quarter First Quarter Quarter Ended Fourth Quarter Third Quarter Second Quarter First Quarter Porter Bancorp has agreed with the Federal Reserve to obtain its written consent prior to declaring or paying any future dividends. 2010. (Dollars in thousands except per share data) Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Non-interest income Non-interest expense Income before minority interest and taxes Minority interest in net income of consolidated subsidiaries Income before income taxes Income tax expense Net income Less: Dividends on preferred stock Accretion on preferred stock Net income available to common Common Share Data (1): Basic and diluted earnings per common share Cash dividends declared per common share Book value per common share Tangible book value per common share Balance Sheet Data (at period end): Total assets Debt obligations: FHLB advances Junior subordinated debentures Subordinated capital note Notes payable Average Balance Data: Average assets Average loans Average deposits Average FHLB advances Average junior subordinated debentures Average subordinated capital note Average notes payable Average stockholders’ equity 2010. Gross interest income Gross interest expense Net interest income Provision for credit losses Non-interest income Gains (losses) on sale of securities, net Other than temporary impairment on securities Non-interest expense Net income before taxes Income tax expense Net income Dividends on preferred stock Accretion on preferred stock Net income available to common Gross interest income Gross interest expense Net interest income Provision for credit losses Non-interest income Gains (losses) on sale of securities, net Other than temporary impairment on securities Non-interest expense Net income before taxes Income tax expense Net income Dividends on preferred stock Accretion on preferred stock Net income available to common ASSETS Interest-earning assets: Loans receivables (1)(2) Real estate Commercial Consumer Agriculture Other U.S. Treasury and agencies Mortgage-backed securities State and political subdivision securities (3) State and political subdivision securities Corporate bonds FHLB stock Other debt securities Other equity securities Federal funds sold Interest-bearing deposits in other financial institutions Total interest-earning assets Less: Allowance for loan losses Non-interest-earning assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities Certificates of deposit and other time deposits NOW and money market deposits Savings accounts Federal funds purchased and repurchase agreements FHLB advances Junior subordinated debentures Total interest-bearing liabilities Non-interest-bearing liabilities Non-interest-bearing deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income Net interest spread Net interest margin Ratio of average interest-earning assets to average interest-bearing liabilities ASSETS Interest-earning assets: Loans receivables (1)(2) Real estate Commercial Consumer Agriculture Other U.S. Treasury and agencies Mortgage-backed securities State and political subdivision securities (3) State and political subdivision securities Corporate bonds FHLB stock Other debt securities Other equity securities Federal funds sold Interest-bearing deposits in other financial institutions Total interest-earning assets Less: Allowance for loan losses Non-interest-earning assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities Certificates of deposit and other time deposits NOW and money market deposits Savings accounts Federal funds purchased and repurchase agreements FHLB advances Junior subordinated debentures Other borrowing Total interest-bearing liabilities Non-interest-bearing liabilities Non-interest-bearing deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income Net interest spread Net interest margin Ratio of average interest-earning assets to average interest-bearing liabilities Interest-earning assets: Loan receivables U.S. Treasury and agencies Mortgage-backed securities State and political subdivision securities Corporate bonds FHLB stock Other debt securities Other equity securities Federal funds sold Interest-bearing deposits in other financial institutions Total increase (decrease) in interest income Interest-bearing liabilities: Certificates of deposit and other time deposits NOW and money market accounts Savings accounts Federal funds purchased and repurchase agreements FHLB advances Junior subordinated debentures Other borrowings Total increase (decrease) in interest expense Increase (decrease) in net interest income Service charges on deposit accounts Income from fiduciary activities Secondary market brokerage fees Title insurance commissions Gains on sales of loans originated for sale Gains (losses) on sales of investment securities, net Other than temporary impairment on securities Gain on sale of branch Other Total non-interest income Salary and employee benefits Occupancy and equipment FDIC insurance State franchise tax Other real estate owned expense Professional fees Postage and delivery Communications Advertising Office supplies Other Total non-interest expense December 2009. 2008. Type of Loan: Real estate: Commercial Construction Residential Home equity Commercial Consumer Agriculture Other Total loans Type of Loan: Real estate: Commercial Construction Residential Home equity Commercial Consumer Agriculture Other Total loans 2010. Loans with fixed rates: Real estate: Commercial Construction Residential Home equity Commercial Consumer Agriculture Other Total fixed rate loans Loans with floating rates: Real estate: Commercial Construction Residential Home equity Commercial Consumer Agriculture Other Total floating rate loans Past due 90 days or more still on accrual Loans on non-accrual status Total non-performing loans Real estate acquired through foreclosure Other repossessed assets Total non-performing assets Non-performing loans to total loans Non-performing assets to total assets Balances at beginning of period Loans charged-off: Real estate Commercial Consumer Agriculture Other Total charge-offs Recoveries: Real estate Commercial Consumer Agriculture Other Total recoveries Net charge-offs Provision for loan losses Balance acquired in bank acquisition Balance at end of period Allowance for loan losses to total loans Net charge-offs to average loans outstanding Allowance for loan losses to total non-performing loans 2009. real estate securing our loans. We continue to closely monitor real estate values for property that secures our loans to ensure our allowance is adequate. Real estate: Commercial Residential Construction Commercial Consumer Other Unallocated Total Real estate: Commercial Residential Construction Commercial Consumer Other Unallocated Total Securities available-for-sale U.S. Treasury and agencies Agency mortgage-backed: residential Private label mortgage-backed: residential State and municipal Corporate Other debt Equity Total U.S. Treasury and agencies Agency mortgage-backed Private label mortgage-backed State and municipal Corporate bonds Other debt Total Equity Total 2010: $704,000. impaired at this time. Demand Interest Checking Money Market Savings Certificates of Deposit Total Deposits Weighted Average Rate Certificates of Deposit Less than $100,000 $100,000 or more Total Maturity Period Three months or less Three months through six months Six months through twelve months Over twelve months Total Average balance outstanding Maximum amount outstanding at any month-end during the period End of period balance Weighted average interest rate: At end of period During the period Description (dollars in thousands) (dollars in thousands) Porter Statutory Trust II Porter Statutory Trust III Porter Statutory Trust IV Asencia Statutory Trust I after giving effect to the automatic conversion, the holder of such non-voting common stock (and its affiliates or any other persons with which it is acting in concert or whose holdings would otherwise be required to be aggregated for purposes of federal banking law) holds, directly or indirectly, beneficially less than 9.9% of the number of shares of common stock then issued and outstanding. 9.0% Tier 1 capital Total risk-based capital Tier 1 leverage ratio 2010: Commitments to extend credit Standby letters of credit Total Time deposits FHLB advances (1) FHLB borrowing (2) Subordinated capital note Junior subordinated debentures Total 2009. Change in Interest Rates + 200 basis points + 100 basis points Assets: Federal funds sold and short-term investments Investment securities FHLB stock Loans held for sale Loans, net of allowance Fixed and other assets Total assets Liabilities and Stockholders’ Equity Interest-bearing checking, savings, and money market accounts Certificates of deposit Borrowed funds Other liabilities Stockholders’ equity Total liabilities and stockholders’ equity Period gap Cumulative gap Period gap to total assets Cumulative gap to total assets Cumulative interest-earning assets to cumulative interest-bearing liabilities 30, 2011 Assets Cash and due from financial institutions Federal funds sold Cash and cash equivalents Interest-bearing deposits in other financial institutions Securities available for sale Loans held for sale Loans, net of allowance of $26,392 and $19,652, respectively Premises and equipment Goodwill Accrued interest receivable and other assets Total assets Liabilities and Stockholders’ Equity Deposits Non-interest bearing Interest bearing Total deposits Repurchase agreements Federal Home Loan Bank advances Accrued interest payable and other liabilities Subordinated capital note Junior subordinated debentures Total liabilities Commitments and contingent liabilities (Note 17) Stockholders’ equity Preferred stock, no par, 1,000,000 shares authorized, 35,000 issued and outstanding Common stock, no par, 10,000,000 shares authorized, 8,756,440 and 8,702,330 shares issued and outstanding, respectively Non-voting common stock, no par, 9,000,000 shares authorized Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total stockholders’ equity Total liabilities and stockholders’ equity OPERATIONS Interest income Loans, including fees Taxable securities Tax exempt securities Federal funds sold and other Interest expense Deposits Federal Home Loan Bank advances Junior subordinated debentures Subordinated capital note Notes payable Federal funds purchased and other Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Service charges on deposit accounts Income from fiduciary activities Secondary market brokerage fees Title insurance commissions Net gain on sales of loans originated for sale Net (loss) gain on sales of securities Other than temporary impairment on securities Gain on sale of branch Other Non-interest expense Salaries and employee benefits Occupancy and equipment FDIC insurance State franchise tax Other real estate owned expense Professional fees Postage and delivery Communications Advertising Other Income before income taxes Income tax expense Net income Less: Dividends on preferred stock Accretion on preferred stock Net income available to common shareholders Basic and diluted earnings per common share Balances, January 1, 2007 Issuance of stock in acquisition, net Issuance of unvested stock Forfeited unvested stock Shares repurchased Stock-based compensation expense Comprehensive income: Net income Changes in net unrealized gain (loss) on securities held for sale, net of reclassifications and tax effects Total comprehensive income Cash dividends declared ($0.73 per share) Balances, December 31, 2007 Issuance of preferred stock and a common stock warrant Issuance of unvested stock Forfeited unvested stock Shares repurchased Stock-based compensation expense Comprehensive income: Net income Changes in net unrealized gain (loss) on securities held for sale, net of tax effects Total comprehensive income Dividends on preferred stock Amortization of preferred stock discount Cash dividends declared ($0.77 per share) 5% stock dividend declared Balances, December 31, 2008 Issuance of unvested stock Forfeited unvested stock Stock-based compensation expense Comprehensive income: Net income Changes in net unrealized gain (loss) on securities held for sale, net of tax effects Total comprehensive income Dividends on preferred stock Amortization of preferred stock discount Cash dividends declared ($0.80 per share) 5% stock dividend declared Balances, December 31, 2009 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization Provision for loan losses Net accretion on securities Stock-based compensation expense Deferred income taxes Net gain on sales of loans Loans originated for sale Proceeds from sales of loans held for sale Net loss on other real estate owned Net realized (gain) loss on sales of securities Net gain on sale of branch Earnings on bank owned life insurance Federal Home Loan Bank stock dividends Net change in accrued interest receivable and other assets Net change in accrued interest payable and other liabilities Net cash from operating activities Cash flows from investing activities Net change in interest-bearing deposits with banks Purchases of available-for-sale securities Sales and calls of available-for-sale securities Maturities and prepayments of available-for-sale securities Proceeds from sale of other real estate owned Improvements to other real estate owned Loan originations and payments, net Purchases of premises and equipment, net Redemption of bank owned life insurance Acquisition of Ohio County Bancshares, net Acquisition of Paramount Bank, net Disposal of Burkesville branch, net Net cash from investing activities Cash flows from financing activities Net change in deposits Net change in federal funds purchased and repurchase agreements Repayment of notes payable Repayment of Federal Home Loan Bank advances Advances from Federal Home Loan Bank Proceeds from subordinated capital note Issuance of preferred stock, net Repurchase of common stock Cash dividends paid on preferred stock Cash dividends paid on common stock Net cash from financing activities Net change in cash and cash equivalents Beginning cash and cash equivalents Ending cash and cash equivalents Supplemental cash flow information: Interest paid Income taxes paid Supplemental non-cash disclosure Transfer from loans to other real estate Issuance of common stock in acquisition of Ohio County Bancshares, net 5% Stock dividend 2008 For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses. lives, which range from 7 to 10 years. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Outstanding, beginning Forfeited Outstanding, ending Stock options vested and currently exercisable: Weighted average exercise price Aggregate intrinsic value Weighted average remaining life (in years) Total Options Outstanding: Aggregate intrinsic value Weighted average remaining life (in years) 2009. Outstanding, beginning Granted Vested Forfeited Outstanding, ending 2010 2011 2012 2013 2014 & thereafter December 31, 2009 U.S. Government and federal agency State and municipal Agency mortgage-backed: residential Private label mortgage-backed: residential Corporate bonds Other Total debt securities Equity Total December 31, 2008 U.S. Government and federal agency State and municipal Agency mortgage-backed: residential Private label mortgage-backed: residential Corporate bonds Other Total debt securities Equity Total Proceeds Gross gains Gross losses Maturity Available-for-sale Within one year One to five years Five to ten years Beyond ten years Total Description of Securities 2009 State and municipal Agency mortgage-backed: residential Private label mortgage-backed: residential Corporate bonds Other Equity Total temporarily impaired 2008 State and municipal Agency mortgage-backed: residential Private label mortgage-backed: residential Corporate bonds Equity Total temporarily impaired impaired at this time. Commercial Real estate Agriculture Consumer Other Subtotal Less: Allowance for loan losses Loans, net Beginning balance Acquired in bank acquisition Provision for loan losses Loans charged-off Loan recoveries Ending balance Loans with no allocated allowance for loan losses Loans with allocated allowance for loan losses Total Amount of the allowance for loan losses allocated Average of impaired loans during the year Interest income recognized during impairment Cash basis interest income recognized Loans past due 90 days or more still on accrual Non-accrual loans The Company has allocated no specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010 and 2009. The Company has committed to lend additional amounts totaling up to $273,000 and $2.4 million as of December 31, 2010 and 2009 to customers with outstanding loans that are classified as troubled debt restructurings. Land and buildings Furniture and equipment Accumulated depreciation Beginning of year Acquired goodwill Adjustments Disposal of goodwill from sale of Burkesville branch End of year expected cash flows and profitability could have a material adverse effect on the outcome of the impairment evaluation. Amortized intangible assets: Core deposit intangibles Trust account intangibles year-end: 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Thereafter Balance at year-end Average daily balance during the year Average interest rate during the year Maximum month-end balance during the year Weighted average interest rate at year-end Fair value of securities sold under agreements to repurchase at year-end Single maturity advances with fixed rates from 0.38% to 4.96% maturing from 2010 through 2012, averaging 3.41% for 2009 Monthly amortizing advances with fixed rates from 0.00% to 9.10% and maturities ranging from 2010 through 2035, averaging 3.71% for 2009 Total 2010. 2010 2011 2012 2013 2014 Thereafter Description Porter Statutory Trust II Porter Statutory Trust III Porter Statutory Trust IV Asencia Statutory Trust I Current Deferred Federal statutory rate times financial statement income Effect of: Tax-exempt income Non taxable life insurance income Federal tax credits Other, net Total Deferred tax assets: Allowance for loan losses Net unrealized loss on securities available for sale Other than temporary impairment write-down Net operating loss carryforward Amortization of non-compete agreements Other Deferred tax liabilities: Fixed assets Net unrealized gain on securities available for sale FHLB stock dividends Net assets from acquisitions Originated mortgage servicing rights Other Net deferred tax asset 2007. Beginning balance New loans Repayments Ending balance $4.3 million, respectively. amortized up to the $35.0 million liquidation value of such preferred stock, with the cost of such amortization being reported as additional preferred stock dividends. This results in a total dividend with a consistent effective yield of 5.40% over a five-year period, which is the expected life of the Series A Preferred Stock. PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets of at least 12.0% and a ratio of Tier I capital to total risk-weighted assets of 9.0%. 2009 Total Capital to risk-weighted assets Consolidated PBI Bank Tier 1 (Core) Capital to risk-weighted assets Consolidated PBI Bank Tier 1 Leverage Ratio Consolidated PBI Bank 2008 Total Capital to risk-weighted assets Consolidated PBI Bank Tier 1 (Core) Capital to risk-weighted assets Consolidated PBI Bank Tier 1 Leverage Ratio Consolidated PBI Bank Porter Bancorp would be $8.8 million plus 2011 earnings to date. However, PBI Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends Commitments to make loans Unused lines of credit Standby letters of credit quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. We obtain updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and our assessment of deterioration of real estate values in the market in which the property is located. The first stage of our assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market makers to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal. warranted based on the specific circumstances of each property. Description Available-for-sale securities U.S. Government and federal agency State and municipal Agency mortgage-backed Private label mortgage-backed Corporate bonds Other debt securities Equity securities Total Description Available-for-sale securities U.S. Government and federal agency State and municipal Agency mortgage-backed Private label mortgage-backed Corporate bonds Other debt securities Equity Total Balance of recurring Level 3 assets at January 1, 2009 Purchases Transfers from Level 2 Net accretion (amortization) Principal paydowns Net change in unrealized gain (loss) Balance of recurring Level 3 assets at December 31, 2010: Description Impaired loans Other real estate owned, net Description Impaired loans 2009. 2010 and 2009, respectively. Financial assets Cash and cash equivalents Interest-bearing deposits with banks Securities available-for-sale Federal Home Loan Bank stock Loans, net Accrued interest receivable Financial liabilities Deposits Federal funds purchased and securities sold under agreements to repurchase Federal Home Loan Bank advances Subordinated capital notes Junior subordinated debentures Accrued interest payable Loans, net Goodwill Core deposit intangibles Other assets Total assets acquired Deposits Other liabilities Total liabilities assumed Net assets acquired Basic and diluted Net income Less: Preferred stock dividends Accretion of preferred stock discount Net income available to common shareholders Weighted average voting and convertible non-voting common shares outstanding Basic and diluted earnings per common share Finally, warrants for the purchase of 1,380,437 shares of non-voting common stock at an exercise price of $11.50 per share were outstanding at December 31, 2010, but were not included in the diluted earnings per share computation as inclusion would have been anti-dilutive. Unrealized holding gains (losses) on available-for-sale securities Less: Reclassification adjustment for gains (losses) realized in income Net unrealized gains (losses) Tax effect Net-of-tax amount ASSETS Cash and cash equivalents Securities available-for-sale Investment in banking subsidiaries Investment in and advances to other subsidiaries Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Debt Accrued expenses and other liabilities Shareholders’ equity Total liabilities and shareholders’ equity OPERATIONS Interest income Dividends from subsidiaries Other income Interest expense Other expense Income before income tax and undistributed subsidiary income Income tax expense (benefit) Equity in undistributed subsidiary income Net income Cash flows from operating activities Net income Adjustments: Equity in undistributed subsidiary income Loss on sale of assets Change in other assets Change in other liabilities Other Net cash (used in) from operating activities Cash flows from investing activities Investments in subsidiaries Purchase of securities Sales of securities Net cash (used in) from investing activities Cash flows from financing activities Repayment of borrowings Proceeds from sale of preferred stock, net Repurchase of common stock, net Dividends paid on preferred stock Dividends paid on common stock Net cash from (used in) financing activities Net change in cash and cash equivalents Beginning cash and cash equivalents Ending cash and cash equivalents 2009 First quarter Second quarter Third quarter Fourth quarter 2008 First quarter Second quarter Third quarter Fourth quarter Procedures Data. Descriptionx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 2009¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Kentucky 61-1142247 (I.R.S. Employer Identification No.) 2500 Eastpoint Parkway, Louisville, Kentucky 40223 (Address of principal executive offices) (Zip Code) Common Stock, no par value NASDAQ Global Market x¨ Smaller reporting company ¨x2009,2010, was $41,673,750$61,478,225 based upon the last sales price reported for such date on the NASDAQ Global Market.2010,2011, was 8,756,259.20, 201018, 2011 are incorporated by reference into Part III of this Form 10-K.1 1 11 20 21 21 21 PageNo. 22 1Item 1.1Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments17Item 2.Properties18Item 3.Legal Proceedings18Item 4.Reserved18PART II1922 1924 2225 2351 4453 4691 7791 7891 78 91 7891 Item 10.7891 7891 7891 7891 78 92 7992 7993 Signatures 79 94 80our ability to expanddeterioration in the financial condition of borrowers resulting in significant increases in loan losses and grow our business and operations, including the establishment of additional banking offices and acquisition of additional banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;provisions for those losses; changes in the interest rate environment, which may reduce our margins or impact the value of securities, loans, deposits and other financial instruments; changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; general economic or business conditions, either nationally, regionally or locally in the communities we serve, may be worse than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; the results of regulatory examinations; any matter that would cause us to conclude that there was impairment of any asset, including intangible assets; the continued service of key management personnel; our ability to attract, motivate and retain qualified employees; factors that increase the competitive pressure among depository and other financial institutions, including product and pricing pressures; the ability of our competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully than us; the impact of governmental restrictions on entities participating in the Capital Purchase Program of the U.S. Department of the Treasury; inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; and fiscal and governmental policies of the United States federal government.Item 1.Businesssixthseventh largest independent banking organization domiciled in the state of Kentucky based on total assets. Through our wholly-owned subsidiary PBI Bank, we operate 18 full-service banking offices in 12twelve counties in Kentucky. 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. PBI Bank is both a traditional community bank with a wide range of commercial and personal banking products, with a focus on commercial real estateincluding wealth management and residential real estate lending,trust services, and an innovative on-line bank which delivers competitive deposit products and services through an on-line banking division operating under the name of Ascencia. As of December 31, 2009,2010, we had total assets of $1.8$1.7 billion, total net loans of $1.4$1.3 billion, total deposits of $1.5 billion and stockholders’ equity of $169$189 million.2004,2005, we began to streamline our operations by consolidatingcompleted a reorganization in which we consolidated our subsidiary banks under common control into a single bank. We completed our reorganization on December 31, 2005, when we acquired the interests of other shareholders in our three partially owned subsidiary bank holding companies in exchange for shares of our common stock, cash and indebtedness. Before December 31, 2005, our company and one of our subsidiary banks were S corporations for federal income tax purposes. Following the consolidation of our four subsidiary banks and the termination of our S corporation elections on December 31, 2005, all of our taxable income became subject to federal income taxes beginning in 2006, which caused our income tax expense to increase compared to the preceding years. See “Item 6. Selected Financial Data – Unaudited Pro Forma Selected Consolidated Financial Data” for more about the consolidation. On December 31, 2005, we also renamed our consolidated subsidiary PBI Bank to create a single brand name for our banking operations throughout our market area.On September 21, 2006, we completed an initial public offering of 1,550,000 shares of common stock. We sold 1,250,000 newly issued shares of common stock for an aggregate purchase price of $30.0 million, and J. Chester Porter and Maria L. Bouvette, our controlling shareholders, together sold 300,000 shares of common stock for an aggregate purchase price of $7.2 million for their own accounts. We received proceeds of $26.6 million, after deducting total expenses of $3.4 million, which consisted of $2.1 million in underwriters’ discounts and commissions and $1.3 million of other expenses.We completed the acquisition of Ohio County Bancshares, Inc., the holding company for Kentucky Trust Bank, effective October 2007. At the time of the closing, Kentucky Trust Bank operated six retail banking offices in three Kentucky counties, including the Bowling Green and Owensboro markets, and had assets of approximately $120 million. The total acquisition price paid was $12 million, approximately 50% in cash and 50% in Porter Bancorp shares totaling 263,409 shares.Louisville/Jefferson, Bullitt and Henry Counties:Our headquarters are in Louisville, the largest city in Kentucky and the sixteenth largest city in the United States. The Louisville metropolitan area includes the consolidated Louisville/Jefferson County and 12 surrounding Kentucky and Southern Indiana counties with an estimated 1.2 million residents in 2007. We also have banking offices in Bullitt County, south of Louisville, and Henry County, east of Louisville. Our six banking offices in these counties also serve the contiguous counties of Spencer, Shelby and Oldham to the east and northeast of Louisville. The area’s employers are diversified across many industries and include the air hub for United Parcel Service (“UPS”), two Ford assembly plants, General Electric’s Consumer and Industrial division, Humana, Norton Healthcare, Brown-Forman and YUM! Brands.Lexington/Fayette County:Lexington, located in Fayette County, is the second largest city in Kentucky with an estimated countywide population of over 270,000 in 2006, an increase of 3.9% since the 2000 census. Lexington is the financial, educational, retail, healthcare and cultural hub for Central and Eastern Kentucky. It is known worldwide for its Bluegrass horse farms and Keeneland Race Track, and proudly boasts of itself as “The Horse Capital of the World.” It is also the home of the University of Kentucky and Transylvania University. The area’s employers include Toyota, Lexmark, IBM Global Services and Valvoline.§ Owensboro/Daviess County:Owensboro, located on the banks of the Ohio River, is Kentucky’s third largest city. Daviess County had an estimated countywide population of approximately 94,000 in 2006. The city is called a festival city, with over 20 annual community celebrations that attract visitors from around the world, including its world famous Bar-B-Q Festival which attracts over 80,000 visitors giving Owensboro recognition as “The Bar-B-Q Capital of the World”. It is an industrial, medical, retail and cultural hub for Western Kentucky and the area employers include Owensboro Medical System, Texas Gas, US Bank Home Mortgage and Toyotetsu.Southern Kentucky:This market includes Bowling Green, the fourth largest city in Kentucky, located about 60 miles north of Nashville, Tennessee. Bowling Green, located in Warren County, is the home of Western Kentucky University and is the economic hub of an estimated labor market of over 425,000 in 2004. This market also includes thriving communities in the contiguous Barren County, including the city of Glasgow. Major employers in Barren and Warren Counties include GM’s Corvette plant and several other automotive facilities and R.R. Donnelley’s regional printing facility.§ South Central Kentucky:South of the Louisville metropolitan area, we have banking offices in Butler, Edmonson, Green, Hart, and Ohio Counties, which had a combined population of approximately 79,000 in 2006. This region includes stable community markets comprised primarily of agricultural and service-based businesses. Each of our banking offices in these markets has a stable customer base and core deposits that are less sensitive to market competition, which provide us a lower cost source of funds for our lending operations.§ § § 2009,2010, the Company had 278286 full-time equivalent employees. Our employees are not subject to a collective bargaining agreement, and management considers the Company’s relationship with employees to be good.such as ING Bank and E*TRADE Bank, and other banks such as Bank of America and Wells Fargo Bank that market their internet services to their customers nationwide. We believe that only the very largest of the commercial banks with which we compete offer the comprehensiveness of internet banking services that we are able to offer. However, many of the larger banks do have greater market presence and greater financial resources to market their internet banking services. Additionally, new competitors and competitive factors are likely to emerge, particularly in view of the rapid development of internet commerce. On the other hand, there have been some recently published reports indicating that the actual rate of growth in the use of internet banking services by consumers and businesses is lower than had been previously predicted andwe believe that many customers still prefer to be able to conduct at least some of their banking transactions at local banking offices. We believe that these findings support our strategic decision to complement our traditional community bank with our uniquely branded online bank to offer customers the benefits of both traditional and internet banking services. We believe that this strategy will contribute to our growth in the future.Section 4(2) of the Securities Act of 1933, (i) 35,000 shares of Porter Bancorp’ Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value and liquidation preference $1,000 per share ($35 million aggregate liquidation preference) (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 314,820330,561 shares (adjusted for stock dividend) of Porter Bancorp’s common stock, at an exercise price of $16.68$15.88 per share (adjusted for stock dividend), subject to certain anti-dilution and other adjustments for an aggregate purchase price of $35 million in cash. The securities purchase agreement, dated November 21, 2008, pursuant to which the securities issued to the U.S. Treasury under the CPP were sold, limits the payment of dividends on Porter Bancorp’s common stock to the current quarterly dividend level at the time of $0.20 per sharethe transaction without prior approval of the U.S. Treasury, limits Porter Bancorp’s ability to repurchase shares of its common stock (with certain exceptions, including the repurchase of our common stock to offset share dilution from equity-based compensation awards) and grants registration rights to the holders of the Series A Preferred Stock, the Warrant and the common stock of Porter Bancorp to be issued underupon any exercise of the Warrant certain registration rights.Warrant. new executive compensation and corporate governance obligations on all current and future CPP recipients, including Porter Bancorp, until the institution has redeemed the preferred stock. On June 10,15, 2009, under the authority granted to it under EESA and ARRA, the U. S. Treasury issued an interim final rule under Section 111 of EESA, as amended by ARRA, regarding compensation and corporate governance restrictions that would be imposed on CPP recipients, effective June 15, 2009. As a CPP recipient with currently outstanding CPP obligations, we are subject to the compensation and corporate governance restrictions and requirements set forth in the interim final rule. The restrictions and requirements provided for in the implementing regulations are generally as follows: (1) required us to establish an independent compensation committee, (2) required us to adopt a corporate policy on luxury or excessive expenditures; (3) requires our compensation committee to conduct semi-annual risk assessments to assure that our compensation arrangements do not encourage “unnecessary and excessive risks” or the manipulation of earnings to increase compensation; (4) requires us to recoup or “clawback” any bonus, retention award or incentive compensation paid by us to a senior executive officer or any of our next 20 most highly compensated employees, if the payment was based on financial statements or other performance criteria that are later found to be materially inaccurate; (5) prohibits us from making severance payments or “golden parachutes” to any of our senior executive officers or next five most highly compensated employees; (6) prohibits us from paying or accruing bonuses, retention awards or incentive compensation, except for certain long-term stock awards, to our five most highly compensated employees; (7) prohibits us from providing tax gross-ups to any of our senior executive officers or next 20 most highly compensated employees; (8) requires us to provide enhanced disclosure of perquisites to the FDIC and the U.S. Treasury; (9) requires us to disclose to the FDIC and the U.S. Treasury the use and role of compensation consultants; (10) requires our chief executive officer and chief financial officer to provide period certifications about our compensation practices and compliance with the interim final rule; and (11) requires us to provide an annual non-binding shareholder vote, or “say-on-pay” proposal, to approve the compensation of our named executives, consistent with regulations promulgated by the Securities and Exchange Commission. On January 12, 2010, the SEC adopted final regulations setting forth the parameters for such say-on pay proposals for public company CPP participants.2009,2010, our ratio of total capital to total risk-weighted assets was 13.8%16.3% and our ratio of Tier 1 capital to total risk-weighted assets was 11.9%14.4%, both ratios significantly above the required amounts. PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets of at least 12.0% and a ratio of Tier I capital to total risk-weighted asset of 9.0%.2009,2010, our leverage ratio of 9.6%11.1% was significantly above the required amount.and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete an institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under FDICIA,the Federal Deposit Insurance Corporation Improvement Act (FDICIA), an insured institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current operating earnings. A bank holding company may still declare and pay a dividend if it does not have current operating earnings if the bank holding company expects profits for the entire year and the bank holding company obtains the prior consent of the Federal Reserve.2009.current levelper share dividend amount at the time of $0.20 per share,the issuance of the Series A Preferred Stock, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (ii) dividends payable solely in shares of common stock and (iii) dividends or distributions of rights or junior stock in connection with a shareholders’ rights plan. by June 30,2010.. As of December 31, 2009,2010, PBI Bank’s ratio of total capital to total risk-weighted assets was 12.6%14.7% and its ratio of Tier 1 capital to total risk-weighted assets was 10.7%12.8%. PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets of at least 12.0% and a ratio of Tier I capital to total risk-weighted asset of 9.0%.2009,2010, PBI Bank’s leverage ratio was 8.6%9.9%. The leverage ratio operates in tandem with the FDIC’s risk-based capital guidelines and places a limit on the amount of leverage a bank can undertake by requiring a minimum level of capital to total assets.As of December 31, 2009, PBI Bank was “well capitalized” as defined by the FDIC. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. The degree of regulatory scrutiny increases and the permissible activities of a bank decreases, as the bank moves downward through the capital categories. Depending on a bank’s level of capital, the FDIC’s corrective powers include:DIFDepositors Insurance Fund (DIF) of the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance premium assessments of the DIF. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.On May 22, 2009, the FDIC also implemented a special assessment equal to five basis points of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than ten basis points multiplied by the institution’s assessment base for the second quarter of 2009. As a result, PBI Bank paid a special assessment of $781,000 on September 30, 2009.4thfourth quarter of 2009 and for all 2010, 2011, and 2012. An institution’s assessment is calculated by taking the institution’s actual September 30, 2009 assessment and adjusting it quarterly by an estimated 5% annual growth rate through the end of 2012. Further, the FDIC incorporated a uniform 3 basis point increase effective January 1, 2011. On December 30, 2009, PBI Bank prepaid $7.9 million of FDIC insurance premiums for the next three years. The entire amount of the prepaid assessment was recorded as a prepaid expense. As of December 31, 2009, and each quarter thereafter, each institution is to record an expense, or a charge to earnings, for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid assessment until the asset is exhausted.guaranteesguaranteed U.S. depository institutions’ transaction accounts and certain qualifying senior unsecured debt. We are a participantparticipated in the TLGP’s Transaction Account Guarantee Program (TAGP), which applies to, among others, all U.S. depository institutions insured by the FDIC and all United States bank holding companies, unless they have opted out. Under the TAGP,provided that all non-interest bearing transaction accounts maintained at PBI Bank arewere insured in full by the FDIC, until June 30, 2010, regardless of the standard maximum deposit insurance amounts. Although the TAGP was originally scheduled to expire on December 31, 2009, the FDIC implemented a final rule, effective asguarantee of October 1, 2009, extending thenon-interest bearing transaction account guarantee program by six months untildeposits under the TLGP ended on June 30, 2010, (subject to the optionDodd-Frank Act provides for unlimited FDIC deposit insurance coverage on non-interest bearing transaction accounts at all insured institutions, regardless of participating institutions to opt out of such six-month extension). PBI Bank chose to remainparticipation in the TAGP during the six month extension. Separately, Congress extended the temporary increase in the standard coverage limit to $250,000TLGP, until December 31,January 1, 2013.The TLGP’s Debt Guarantee Program guarantees certain qualifying senior unsecured debt of U.S. depository institutions. The program has been extended for senior unsecured debt issued after April 1, 2009 and before October 31, 2009 and maturing on or before December 31, 2012. On October 20, 2009, the FDIC established a limited, six-month emergency guarantee facility upon expiration of the Debt Guarantee Program. Under this emergency guarantee facility, certain participating entities can apply to the FDIC for permission to issue FDIC-guaranteed debt during the period starting October 31, 2009 through April 30, 2010. The fee for issuing debt under the emergency facility will be at least 300 basis points, which the FDIC reserves the right to increase on a case-by-case basis, depending upon the risks presented by the issuing entity. We have not participated in this program.On February 18, 2009 the U.S. Treasury outlined the Homeowner Affordability and Stability Plan, which includes measures that could impact Porter Bancorp, including measures to (i) implement a comprehensive homeowner stability initiative that incentivizes financial institutions to reduce homeowners’ monthly mortgage payments, (ii) develop clear and consistent guidelines for loan modifications that participants will be obligated to use and (iii) authorize judicial modifications of home mortgages in personal bankruptcy cases, which modifications must be accepted by the loan servicer or lender. During the course of 2009, the Treasury Department announced numerous programs in implementation of the plan, and sent various legislative proposals to the Congress for consideration. We continue to monitor these developments and assess their potential impact on our business.In November 2009, the Federal Reserve Board adopted its final rule under Regulation E regarding overdraft fees, which becomes effective for new accounts on July 1, 2010, and for existing accounts on August 15, 2010. This rule generally prohibits financial institutions from charging overdraft fees for ATM and one-time debit card transactions that overdraw consumer deposit accounts, unless the consumer “opts in” to having such overdrafts authorized and paid. The change will impact the amount of overdraft fees banks will be able to charge in the future.the Registrant fileswe file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC athttp://www.sec.gov. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on our web site athttp://www.pbibank.com, under the Investors Relations section, once they are electronically filed with or furnished to the SEC. A shareholder may also request a copy of our Annual Report oron Form 10-K free of charge upon written request to: Corporate General Counsel, Porter Bancorp, Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223.Item 1A.Risk Factorsfor more than a year.since 2008 In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. Reduced consumer spending and the absence of liquidity in the global credit markets during the current recession have depressed business activity across a wide range of industries. Unemployment has also increased significantly. Ongoing weakness in business and economic conditions generally or specifically in our markets has had, and could continue to have one or more of the following adverse effects on our business:A decrease in the demand for loans and other products and services offered by us;A decrease in the value of collateral securing our loans;· A decrease in the demand for loans and other products and services offered by us; An impairment of certain intangible assets, such as goodwill;· A decrease in the value of collateral securing our loans; An increase in the number of customers who become delinquent, file for protection under bankruptcy laws or default on their loans.· An impairment of certain intangible assets, such as goodwill; and Overall, during the past two years,· An increase in the number of customers who become delinquent, file for protection under bankruptcy laws or default on their loans. twothree years, the financial services industry as a whole, as well as the securities markets generally, have been materially and adversely affected by very significant declines in the values of nearly all asset classes and by a very serious lack of liquidity. Financial institutions in particular have been subject to increased volatility and an overall loss in investor confidence. The loss of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could continue to adversely affect our business, financial condition and results of operations. Further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provisions for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry.89.1%88.7% of our loan portfolio, as of December 31, 20092010, was comprised of loans collateralized by real estate. The declining economic conditions have caused a decrease in demand for real estate which has resulted in flat to declining real estate values in our markets. Further disruptions in the real estate market could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline further, it will become more likely that we would be required to increase our allowance for loan losses. If during a period of reduced real estate values, we are required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.21.5%15.3% of our loan portfolio as of December 31, 20092010, consisted of real estate construction and development loans. These loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and usually on the sale of the property. If we are forced to foreclose on a project prior to its completion, we may not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to complete the project or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect our profitability.If theseThese economic conditions and market factors have negatively affectaffected some of our larger loans, then we could see a sharp increase incausing our total net-charge offs to increase and also be requiredrequiring us to significantly increase our allowance for loan losses. If adverse economic conditions persist, these trends could continue to worsen. Any further increase in our non-performing assets and related increases in our provision expense for losses on loans could negatively affect our business and could have a material adverse effect on our capital, financial condition and results of operations.and therefore may result in an inabilitymaking us less likely to realize a full recovery in the event thatif a borrower defaults on a loan. Any additional non-performing assets, loan charge-offs, increases in the provision for loan losses or any inability by us to realize the full value of underlying collateral in the event of a loan default, could negatively affect our business, financial condition, and results of operations and the price of our securities.Our smallmedium-sized business target marketthe risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may have fewer resourcesnot be sufficient to weather the downturnassure repayment. Credit losses are inherent in the economy.Our strategy includes lending to smallbusiness of making loans and medium-sized businesses and other commercial enterprises. Small and medium-sized businesses frequently have smaller market shares than their competitors, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial variations in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay our loan. A continued economic downturn could have a more pronounced negative impacteffect on our target market, which could cause usoperating results. Our credit risk with respect to incur substantialour real estate and construction loan portfolio will relate principally to the creditworthiness of borrowers and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within our local markets.could materially harm our operating results.thissuch an offering as well as other sales of a large block of shares of our common stock or similar securities in the market after thissuch an offering, or the perception that such sales could occur.cannotdo not redeem the shares by that time.nowcurrently exercisable for 314,821330,561 shares at an exercise price of $16.68,$15.88, based on our 2009 and 2010 5% stock dividend paid on November 19, 2009.dividends. The terms of the transaction with the U.S. Treasury limit our ability to pay dividends and repurchase our shares. For three years after issuance or until the U.S. Treasury no longer holds any preferred shares, we will not be able to increase our dividends above the current quarterly amount nor repurchase any of our shares without the U.S. Treasury’s approval with limited exceptions, most significantly the repurchase of our common stock to offset share dilution from equity-based compensation awards. Also, we will not be able to pay any dividends at all unless we are current on our dividend payments on the preferred shares. These restrictions, as well as the dilutive impact of the warrant, may have an adverse effect on the market price of our common stock.liquidity.The American Recovery and Reinvestment Act of 2009 (“ARRA”) amended provisions of EESA relating to compensation and governance as they affect companies that have participated in the CPP. In some cases, these amendments require action by the U.S. Treasury to implement them. These amendments could have an adverse impact on the conduct of our business, as could additional amendments in the future that impose further requirements or amend existing requirements.2009,2010, J. Chester Porter and Maria L. Bouvette beneficially owned approximately 5,768,3986,057,606 shares, or 65.7%51.1% of our outstanding common stock. Mr. Porter and Ms. Bouvette each have made testamentary arrangements that provide for the other to retain voting control of his or her common stock in the event of death. Accordingly, they will be able to exercise control over our business and affairs and will be able to determine the outcome of any matter submitted to a vote of our shareholders, including the election and removal of our entire board of directors, any amendment of our articles of incorporation (including any amendment that changes the rights of our common stock) and any merger, consolidation or sale of all or substantially all of our assets. Mr. Porter and Ms. Bouvette could take actions or make decisions in their self-interest that are opposed to your best interests. They could remove directors who take actions or make decisions they oppose but are favored by our other shareholders. They may be less receptive to the desires communicated by shareholders. Neither our articles of incorporation, our bylaws, nor Kentucky law requires the vote of more than a simple majority of our outstanding shares of common stock to approve a matter submitted for shareholder approval, subject to the general statutory requirement that any transaction in which one or more directors have a direct or indirect interest (other than as a shareholder) must be “fair” to the corporation. Mr. Porter and Ms. Bouvette have a level of concentrated control that could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock. As a result, the market price of our common stock could be adversely affected.a majority of its board of directors consists of “independent directors,” which the NASDAQ rules define as persons who are not either officers or employees of the company and have no relationships that, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out their responsibilities as directors;decisions regarding the compensation paid to executive officers are made either by a compensation committee composed entirely of independent directors or by a majority of the independent directors;· a majority of its board of directors consists of “independent directors,” which the NASDAQ rules define as persons who are not either officers or employees of the company and have no relationships that, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out their responsibilities as directors; nominations for election to the board of directors are made either by a nominating committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or by a majority of the independent directors.· decisions regarding the compensation paid to executive officers are made either by a compensation committee composed entirely of independent directors or by a majority of the independent directors; and As a result of our controlled company status Mr. Porter, a non-independent director, serves on our nominating and governance committee. We expect Mr. Porter to continue to serve on our nominating and corporate governance committee for the foreseeable future. · nominations for election to the board of directors are made either by a nominating committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or by a majority of the independent directors. attracting funding to support additional growth;maintaining asset quality;· attracting funding to support additional growth; attracting and retaining qualified management; and· maintaining asset quality; maintaining adequate regulatory capital.· attracting and retaining qualified management; and · maintaining adequate regulatory capital. premiums increased significantly in 2009assessments. High levels of bank failures over the past three years and we expect to pay higher FDIC premiumsincreases in the future. Recent bank failuresstatutory deposit insurance limits have substantially depleted the insurance fund ofincreased resolution costs to the FDIC and reducedput pressure on the fund’s ratioDIF. In order to maintain a strong funding position and restore the reserve ratios of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009,the DIF, the FDIC also implementedincreased assessment rates on insured institutions, charged a special assessment equal to five basis points of eachall insured depository institution’s assets minus Tier 1 capitalinstitutions as of June 30, 2009 but no more than ten basis points multiplied by the institution’s assessment base for the second quarterand required banks to prepay three years’ worth of 2009. As a result, PBI Bank paid a special assessment of $781,000 on September 30, 2009.On November 12, 2009, the FDIC adopted a new rule which required insured institutions to prepaypremiums on December 30, 2009, an estimated quarterly risk-based2009. If there are additional financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels, or the FDIC may charge additional special assessments. Further, the FDIC recently increased the DIF’s target reserve ratio to 2.0 percent of insured deposits following the Dodd-Frank Act’s elimination of the 1.5 percent cap on the DIF’s reserve ratio. Additional increases in our assessment forrate may be required in the 4th quarter of 2009future to achieve this targeted reserve ratio. These recent increases in deposit assessments and for all 2010, 2011, and 2012. On December 30, 2009, PBI Bank prepaid $7.9 millionany future increases, required prepayments or special assessments of FDIC insurance premiums may adversely affect our business, financial condition or results of operations.next three years. See the “Supervision – PBI Bank – Deposit Insurance Assessment” section of Item 1. “Business.”We participate in the FDIC’s Transaction Account Guarantee Program, or TAGP, for non-interest-bearing transaction deposit accounts. The TAGP is a componentaverage total consolidated assets of the FDIC’s Temporary Liquidity Guarantee Program, or TLGP. Banks that participateinsured institution during the assessment period, less the average tangible equity of the institution during the assessment period. Currently, we are assessed only on deposit balances. The FDIC adopted a rule implementing this change, as well as adopting a revised risk-based assessment calculation in the TAGP paid the FDIC annualized fees of ten basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance through December 31, 2009.February 2011. The FDIC has established an extension periodalso proposed a rule tying assessment rates of FDIC-insured institutions to the institution’s employee compensation programs. The exact nature and cumulative effect of these recent changes are not yet known, but they are expected to increase the amount of premiums we must pay for the TAGP to run from January 1, 2010 through June 30, 2010. During the extension period, the fees for participating banks will range from 15 to 25 basis points, depending on the risk category to which the bank is assigned for deposit insurance assessment purposes.To the extent that assessments under the TAGP are insufficient to cover any lossFDIC insurance. Any such increase may adversely affect our business, financial condition or expenses arising from the TLGP, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLGP upon depository institution holding companies, as well. These charges would cause the premiums and TAGP assessments charged by the FDIC to increase. These actions could significantly increase our non-interest expense for the foreseeable future.which requiresand PBI Bank has agreed to obtain the prior consent of those regulators.regulators before it can pay dividends to us. See the “Supervision-Porter Bancorp-Dividends” section of Item 1. “Business” and the “Dividends” section of Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.offer higher interest rates on deposits and lower interest rates on loans than we can;offer a broader range of services than we do;· offer higher interest rates on deposits and lower interest rates on loans than we can; maintain more branch locations than we do; and· offer a broader range of services than we do; mount extensive promotional and advertising campaigns.· maintain more branch locations than we do; and · mount extensive promotional and advertising campaigns. operationoperational risk, which could cause us to incur substantial losses. Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by employees or persons outside of our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity or stock price.events inlegislation regarding the financial services industry and, more generally,may have a significant adverse effect on our operations.· new requirements on banking, derivative and investment activities, including the repeal of the prohibition on the payment of interest on business demand accounts, debit card interchange fee requirements, and the “Volcker Rule,” which restricts the sponsorship, or the acquisition or retention of ownership interests, in private equity funds; · the creation of a new Consumer Financial Protection Bureau with supervisory authority, including the power to conduct examinations and take enforcement actions with respect to financial institutions with assets of $10 billion or more; · the creation of a Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk; · provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended; · a provision that would broaden the base for FDIC insurance assessments; and · a provision that would require bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in assets as of December 31, 2009. financial marketsDodd-Frank Act remain subject to regulatory rule-making and implementation, the economy, have ledeffects of which are not yet known. As a result, it is difficult to various proposals for changes ingauge the regulationultimate impact of certain provisions of the financial services industry. Earlier in 2009, legislation proposing significant structural reformsDodd-Frank Act because the implementation of many concepts is left to regulatory agencies. For example, the financial services industry was introduced inCFPB is given the U.S. Congress. Among other things,power to adopt new regulations to protect consumers and is given control over existing consumer protection regulations adopted by federal banking regulators.legislation proposes the establishment of a Consumer Financial Protection Agency, which would have broad authorityDodd-Frank Act and any rules adopted to regulate providers of credit, savings, payment and other consumer financial products and services. Additionalimplement those provisions as well as any additional legislative proposals include the Federal Reserve’s proposed guidance on incentive compensation policies at banking organizations and the FDIC’s proposed rules tying employee compensation to assessments for deposit insurance. Proposals have also been introduced to limit a lender’s ability to foreclose on mortgages or make such foreclosures less economically viable, including by allowing Chapter 13 bankruptcy plans to “cram down” the value of certain mortgages on a consumer’s principal residence to its market value and/or reset interest rates and monthly payments to permit defaulting debtors to remain in their home.While there can be no assurance that any or all of these regulatory or legislative changes will ultimately be adopted, any such changes, if enacted or adopted, may impact the profitability of our business activities and costs of operations, require that we change certain of our business practices, materially affect our business model or affect retention of key personnel, require us to raise additional regulatory capital, including additional Tier 1 capital, and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to invest significant management attention and resources to make any necessary changes and could therefore alsomay adversely affect our ability to conduct our business and operations. TARP Capital Purchase Program, we are subject to significant restrictions on compensation payable to our executive officers and other key employees.TARPCPP participants. Among other things, these restrictions limitimpose limits on our ability to pay bonuses and other incentive compensation and to make severance payments. These restrictions will continue to apply to us for as long as the preferred stock we issued pursuant to the TARP Capital Purchase Program remains outstanding. These restrictions may negatively affect our ability to compete with financial institutions that are not subject to the same limitations.Markets Square Footage Owned/LeasedSquare Footage Owned/Leased Louisville/Jefferson, Bullitt and Henry Counties 30,000 Owned 1,500 Owned 3,500 Owned 10,000 Owned 10,000 Owned 3,900 Owned Lexington/Fayette County Lexington Office: 2424 Harrodsburg Road, Suite 100, Lexington 8,500 Leased 8,500 Owned 11,000 Owned 5,000 Owned 7,500 Owned 9,000 Owned 3,200 Owned 500 Leased Owensboro/Davies County Owensboro Office: 1819 Frederica Street, Owensboro 3,000 Owned Southern Kentucky Fairview Office: 1042 Fairview Avenue, Bowling Green 3,300 Leased 7,500 Owned 12,000 Owned Other Properties Office Building: 701 Columbia Avenue, Glasgow 19,000 Owned 5,000 Owned litigation in which an adverse decision could result in a material adverse change in our business or consolidated financial position.Item 4. Reserved(Removed and Reserved)All per share data hasMarket prices and dividends paid have been restated to reflect stock dividends. 2009 Market Value Dividend High Low $ 16.65 $ 13.61 $ 0.20 17.24 13.92 0.20 14.91 11.19 0.20 15.11 9.29 0.20 2008 Market Value Dividend High Low $ 17.91 $ 13.97 $ 0.20 17.84 13.33 0.19 16.87 13.62 0.19 18.12 15.52 0.19 2010 Market Value Quarter Ended High Low Dividend Fourth Quarter $ 10.89 $ 9.94 $ 0.01 Third Quarter 11.63 9.05 0.10 Second Quarter 14.02 12.02 0.19 First Quarter 14.30 10.21 0.19 2009 Market Value Quarter Ended High Low Dividend Fourth Quarter $ 15.86 $ 12.96 $ 0.19 Third Quarter 16.42 13.26 0.19 Second Quarter 14.20 10.65 0.19 First Quarter 14.39 8.85 0.19 2009,2010, we had approximately 9981,171 shareholders, including 208361 shareholders of record and approximately 790810 beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees. * $100 invested on 9/22/06 in stock or 8/31/06 in index, including reinvestment of dividends. Fiscal year ending December 31. current quarterly dividend level at the time of $0.20 per common sharethe transaction without the U.S. Treasury’s approval with limited exceptions, most significantly the repurchase of our common stock to offset share dilution from equity-based compensation awards. Also, we will not be able to pay any dividends at all unless we are current on our dividend payments on the preferred shares.PurchasesIn 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 December 31, 2009, Porter Bancorp had approximately $2.5 million remaining to purchase shares under the current stock repurchase program. The program authorizes Porter Bancorp to repurchase shares from time to time in open market transactions or privately negotiated transactions at its discretion, subject to market conditions and other factors. 2009. The terms of the $35 million senior preferred stock transaction with the U.S. Treasury limit our ability 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.20052006 to 2009.2010. You should read this information in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data.” Since 2004, we have combined several banks and bank holding companies in which we or our principal shareholders have held a controlling interest. Our company and its surviving bank subsidiary also terminated their elections to be subchapter S corporations as a result of this reorganization, which was completed effective December 31, 2005. Under U.S. generally accepted accounting principles (“GAAP”), entities that are more than 50% owned by another person or entity are generally consolidated for financial reporting purposes. Accordingly, for all periods presented, all of the assets and liabilities of our former subsidiaries, regardless of our previous percentage of ownership in these entities, are included in our consolidated balance sheet. Our consolidated net income, however, includes our subsidiaries’ net income only to the extent of our previous ownership percentage. In addition, financial data as of dates before and for periods ended through December 31, 2005 have been derived from both S corporations and C corporations within our consolidated group. Beginning on December 31, 2005, and for all subsequent periods, our financial data will reflect that our consolidated group consists entirely of C corporations. As of and for the Years Ended December 31, 2009 2008 2007 2006 2005 $ 94,466 $ 100,107 $ 91,800 $ 72,863 $ 62,054 40,412 52,881 49,404 35,622 25,665 54,054 47,226 42,396 37,241 36,389 14,200 5,400 4,025 1,405 3,645 7,094 6,868 5,556 5,196 5,433 30,456 27,757 22,474 19,785 20,047 16,492 20,937 21,453 21,247 18,130 — — — — 1,314 16,492 20,937 21,453 21,247 16,816 5,424 6,927 7,224 6,908 2,201 11,068 14,010 14,229 14,339 14,615 1,750 194 — — — 176 20 — — — $ 9,142 $ 13,796 $ 14,229 $ 14,339 $ 14,615 $ 1.05 $ 1.59 $ 1.68 $ 1.94 $ 2.26 0.80 0.77 0.74 0.73 1.52 15.34 14.85 14.07 12.89 10.30 12.01 11.74 11.61 11.29 8.45 $ 1,835,090 $ 1,647,857 $ 1,456,020 $ 1,051,006 $ 991,481 82,980 142,776 121,767 47,562 63,563 25,000 25,000 25,000 25,000 25,000 9,000 9,000 — — — — — — — 9,600 $ 1,714,131 $ 1,572,599 $ 1,221,649 $ 995,018 $ 942,733 1,371,034 1,324,658 1,019,628 814,202 776,207 1,385,572 1,250,614 997,287 810,419 771,677 106,259 138,954 69,276 57,847 54,342 25,000 25,000 25,000 25,000 25,000 9,000 4,525 — — — — — 14 7,329 100 168,752 131,706 114,797 83,428 68,922 As of and for the Years Ended December 31, (Dollars in thousands except per share data) 2010 2009 2008 2007 2006 Income Statement Data: $ 86,407 $ 94,466 $ 100,107 $ 91,800 $ 72,863 28,841 40,412 52,881 49,404 35,622 57,566 54,054 47,226 42,396 37,241 30,100 14,200 5,400 4,025 1,405 11,582 7,094 6,868 5,556 5,196 46,478 30,456 27,757 22,474 19,785 (7,430 ) 16,492 20,937 21,453 21,247 (3,046 ) 5,424 6,927 7,224 6,908 (4,384 ) 11,068 14,010 14,229 14,339 Less: 1,810 1,750 194 — — 177 176 20 — — (184 ) 97 94 — — $ (6,187 ) $ 9,045 $ 13,702 $ 14,229 $ 14,339 Common Share Data (1): $ (0.60 ) $ 1.00 $ 1.51 $ 1.60 $ 1.85 $ (0.60 ) 1.00 1.51 1.60 1.85 0.49 0.76 0.73 0.70 0.70 12.76 14.61 14.14 13.40 12.28 10.33 11.44 11.18 11.06 10.75 Balance Sheet Data (at period end): $ 1,723,952 $ 1,835,090 $ 1,647,857 $ 1,456,020 $ 1,051,006 Debt obligations: 15,022 82,980 142,776 121,767 47,562 25,000 25,000 25,000 25,000 25,000 8,550 9,000 9,000 — — Average Balance Data: $ 1,747,648 $ 1,714,131 $ 1,572,599 $ 1,221,649 $ 995,018 1,353,295 1,371,034 1,324,658 1,019,628 814,202 1,459,041 1,385,572 1,250,614 997,287 810,419 47,800 106,259 138,954 69,276 57,847 25,000 25,000 25,000 25,000 25,000 8,941 9,000 4,525 — — — — — 14 7,329 188,015 168,752 131,706 114,797 83,428 (1) Common share data has been adjusted to reflect a 5% stock dividend effective December 14, 2010, November 19, 2009 and November 10, 2008. (2)Efficiency ratio is computed by dividing non-interest expense by the sum of net interest income and non-interest income excluding gains (losses) on sales of securities.Item 7. We focus65.8%62.7% of our total loan portfolio as of December 31, 2009,2010, and 67.9%65.8% as of December 31, 2008, and contributed significantly to our earnings.2009. Commercial lending generally produces higher yields than residential lending, but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring.2009,2010, we reported a net incomeloss of $11.1$4.4 million compared to net income of $14.0$11.1 million for the year ended December 31, 2008. Basic2009. After deductions for dividends on preferred stock, accretion on preferred stock, and diluted earnings perallocated to participating securities, the net loss available to common share were $1.05shareholders was $6.2 million for the year ended December 31, 2009,2010, compared to $1.59net income available to common shareholders of $9.1 million for 2008. While we are pleasedthe year ended December 31, 2009. Basic and diluted loss per common share were $(0.60) for the year ended December 31, 2010, compared to report profitable resultsearnings per common share of $1.00 for 2009, we remain challenged by the overall economic environment and credit trends2009. The decline in our loan portfolio.financial performance in 2010 was due to the continued weakness in the real estate market and its effects on values of collateral securing our loans and other real estate owned, as well as on some customers’ ability to repay their loans. As a result of these trends we charged off a high level of construction and land development loans and wrote down other real estate owned (OREO) to reflect lower appraisal values. Non-performing loans climbed to 6.0%were 4.63% of total loans and nonperforming assets stand at 5.42%7.43% of total assets at December 31, 2009.2010. We remain diligent in the management of our portfolio and are striving to improve credit quality by working throughout our markets with our clients to balance selective new customer acquisition, customer service for our existing clients and prudent risk management.20092010 were:Loans grew 4.7% to $1.41 billion compared to $1.35 billion at December 31, 2008.Total assets increased 11.4% to $1.8 billion since the 2008 year-end.§ Loans decreased 7.8% to $1.30 billion compared to $1.41 billion at December 31, 2009. Deposits grew 18.7% to $1.5 billion compared with $1.3 billion at December 31, 2008.Our efficiency ratio improved to 50.1% for 2009 compared with 50.7% for 2008 and continued to outperform our peer group.§ Total assets decreased 6.1% to $1.7 billion since the 2009 year-end. Net interest margin increased to 3.33% for 2009 compared to 3.20% for 2009 as a result of increased average earning assets and decreased cost of funds.Provision for loan losses increased $8.8 million in comparison to 2008 as the result of loan growth, an increase in non-performing loans, and increased net loan charge-offs of $7.5 million, or 0.54% of average loans for 2009, compared with $3.5 million, or 0.27% of average loans for 2008.§ Deposits declined 4.1% to $1.47 billion compared with $1.53 billion at December 31, 2009. Porter Bancorp’s stock was added to the Russell 2000 and Russell 3000 indexes effective June 29, 2009.§ Our capital ratios were strengthened during 2010 with capital raises of approximately $32 million. At December 31, 2010, our total risk-based capital ratio rose to 16.3% from 13.8% at December 31, 2009, well above the 10.0% requirement for a well-capitalized institution. § Our efficiency ratio was 72.0% for 2010 compared with 50.1% for 2009. § Net interest margin increased to 3.59% for 2010 compared to 3.33% for 2009 as a result of lower average cost of funds. § Non-performing assets increased from $99.5 million at December 31, 2009, to $128 million at December 31, 2010. The bulk of our non-performing assets are the result of weakness in our construction and land development portfolio. We have made solid progress in reducing our exposure to higher risk construction and land development loans. Since year-end 2008, our construction and land development loans have been reduced by 46.3% and represented only 15.3% of our loan portfolio at year-end 2010. We also continue to be diligent in moving non-performing loans through the system of collection or foreclosure. § Provision for loan losses increased $15.9 million in 2010 compared to 2009 as the result of an increase in non-performing loans, and an increase in net loan charge-offs of $22.2 million, or 1.64% of average loans for 2010, compared with $7.5 million, or 0.54% of average loans for 2009. § Other real estate owned (OREO) expenses increased to $16.3 million for the year ended December 31, 2010, from $1.2 million for the year ended December 31, 2009. This increase was primarily attributable to $14.1 million in fair value write-downs tied to declining real estate values reflected in new appraisals, as well as the ongoing carrying and maintenance costs for the OREO portfolio. On October 1, 2007, we completed the acquisition of Ohio County Bancshares, and its wholly owned subsidiary Kentucky Trust Bank. The aggregate purchase price was $12 million paid in cash and stock. We acquired $120.1 million in assets and $94.5 million in deposits and recorded $5.3 million in goodwill and $3.0 million in core deposit intangibles. This acquisition established our presence in Ohio and Daviess counties and improved our market position in Warren County.On February 1, 2008, we completed the acquisition of Paramount Bank in Lexington, Kentucky, in a $5 million all cash transaction. We acquired $75 million in assets and $76 million in deposits and recorded goodwill of $6.0 million and $631,000 in core deposit intangibles. This acquisition established our physical presence in Lexington, Kentucky, Fayette County, the second largest market in the state.senior loan committeeboard of directors evaluates the adequacy of the allowance for loan losses on a quarterly basis. We evaluate the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and current economic conditions. While we evaluate the allowance for loan losses, in part, based on historical losses within each loan category, estimates for losses within the commercial real estate portfolio depend more on credit analysisconditions and recent payment performance.trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful.impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for currentenvironmental factors. The methodology for allocating the allowance for loan and lease losses takes into account our increase in commercial and consumer lending. We increase the amount of the allowance allocated to commercial loans and consumer loans in response to the growth of the commercial and consumer loan portfolios and management’s recognition of the higher risks and loan losses in these lending areas. We develop allowance estimates based on actual loss experience adjusted for current economic conditions.conditions and trends. Allowance estimates are a prudent measurement of the risk in the loan portfolio which we apply to individual loans based on loan type. If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, we may be required to materially increase our allowance for loan losses and provision for loan losses, which could adversely affect our results.will beare tested for impairment at least annually by comparing the fair values of those assets to their carrying values. Other identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over the years expected to be benefited, which we believe is 10 years. We review these amortizable intangible assets for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value to carrying value. Based on theour annual goodwill impairment test as of December 31, 2009,review, management does not believe any of the goodwill isour intangible assets are impaired as of that date. While management believes no impairment existed at December 31, 2009 under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the impairment evaluation and financial condition or future results of operations.benefits.benefits and does have sufficient taxable income in carry back years to realize the deferred tax asset. While there is a financial statement loss for 2010, the Company had net taxable income in each of the three previous years, 2008 through 2010. Examinations of our income tax returns or changes in tax law may impact the tax liabilities and resulting provisions for income taxes. Change from Prior Period 2010 2009 Amount Percent (dollars in thousands) $ 86,407 $ 94,466 $ (8,059 ) (8.5 )% 28,841 40,412 (11,571 ) (28.6 ) 57,566 54,054 3,512 6.5 30,100 14,200 15,900 112.0 7,027 6,779 248 3.7 5,152 315 4,837 1535.6 (597 ) – (597 ) (100.0 ) 46,478 30,456 16,022 52.6 (7,430 ) 16,492 (23,922 ) (145.1 ) (3,046 ) 5,424 (8,470 ) (156.2 ) (4,384 ) 11,068 (15,452 ) (139.6 ) 1,810 1,750 60 3.4 177 176 1 0.6 (184 ) 97 (281 ) (289.7 ) (6,187 ) 9,045 (15,232 ) (168.4 ) For the
Years Ended December 31, Change from Prior Period 2009 2008 Amount Percent (dollars in thousands) $ 94,466 $ 100,107 $ (5,641 ) (5.6 )% 40,412 52,881 (12,469 ) (23.6 ) 54,054 47,226 6,828 14.5 14,200 5,400 8,800 163.0 6,779 7,475 (696 ) (9.3 ) 315 (136 ) 451 331.6 — (471 ) 471 100.0 30,456 27,757 2,699 9.7 16,492 20,937 (4,445 ) (21.2 ) 5,424 6,927 (1,503 ) (21.7 ) 11,068 14,010 (2,942 ) (21.0 ) 1,750 194 1,556 802.1 176 20 156 780.0 9,142 13,796 (4,654 ) (33.7 ) Change from Prior Period 2009 2008 Amount Percent (dollars in thousands) $ 94,466 $ 100,107 $ (5,641 ) (5.6 )% 40,412 52,881 (12,469 ) (23.6 ) 54,054 47,226 6,828 14.5 14,200 5,400 8,800 163.0 6,779 7,475 (696 ) (9.3 ) 315 (136 ) 451 331.6 - (471 ) 471 100.0 30,456 27,757 2,699 9.7 16,492 20,937 (4,445 ) (21.2 ) 5,424 6,927 (1,503 ) (21.7 ) 11,068 14,010 (2,942 ) (21.0 ) 1,750 194 1,556 802.1 176 20 156 780.0 97 94 3 3.2 9,045 13,702 (4,657 ) (34.0 ) December.December 2009. In addition, FDIC insurance premiums rose significantly due to amendments made by the FDIC in 2007 to its risk-based deposit premium assessment systems and increases in premium rates and a special assessment in 2009. The increased dividends and accretion on preferred stock of $1.6 million and $156,000, respectively, from 2008 was the result of preferred stock being outstanding for 12 months during 2009 versus 41 days during 2008.The following table summarizes components ofand expense and the change in those components for 2008 compared with 2007: For the
Years Ended December 31, Change from Prior Period 2008 2007 Amount Percent (dollars in thousands) $ 100,107 $ 91,800 $ 8,307 9.0 % 52,881 49,404 3,477 7.0 47,226 42,396 4,830 11.4 5,400 4,025 1,375 34.2 7,475 5,449 2,026 37.2 (136 ) 107 (243 ) (227.1 ) (471 ) — (471 ) (100.0 ) 27,757 22,474 5,283 23.5 20,937 21,453 (516 ) (2.4 ) 6,927 7,224 (297 ) (4.1 ) 14,010 14,229 (219 ) (1.5 ) 194 — 194 100.0 20 — 20 100.0 13,796 14,229 (433 ) (3.0 ) Net income of $14.0was $57.6 million for the year ended December 31, 2008 decreased $219,000, or 1.5%, from $14.2 million for 2007. Net income available to common of $13.8 million for the year ended December 31, 2008 decreased $433,000, or 3.0%, from $14.2 million for 2007. This decrease in earnings was primarily attributable to increased provision for loan losses expense. Provision for loan losses expense increased $1.4 million, or 34.2%, in comparison to 2007 as a result of our loan growth,2010, an increase in non-performing loans, and increased net loan charge-offs of $3.5 million, or 0.27%6.5%, compared with $54.1 million for the same period in 2009. Net interest spread and margin were 3.38% and 3.59%, respectively, for 2010, compared with 2.99% and 3.33%, respectively, for 2009. The increase in net interest income was primarily the result of lower cost of funds. Our cost of interest bearing liabilities decreased 82 basis points for 2010 while our yield on average earning assets decreased 43 basis points.2008,2010, compared with $2.1$1.37 billion for 2009, a 1.3% decrease. Average investment securities were $158 million or 0.21%for 2010, compared with $171 million for 2009, a 7.9% decrease. Our total interest income decreased 8.5% to $86.4 million for 2010, compared with $94.5 million for 2009. The change was due primarily to lower interest rates on loan volume.loansvolume of certificates of deposit increased 6.1% to $1.16 billion for 2007. Non-interest income2010, compared with $1.09 billion for 2009. The average interest rate paid on certificates of deposits decreased to 2.02% for 2010, compared with 3.01% for 2009. Our average volume of FHLB advances decreased 55.0% to $47.8 million for 2010, compared with $106.3 million for 2009. The average interest rate paid on FHLB advances increased $2.0 million, or 37.2%,to 4.22% for 2010, compared with 3.47% for 2009. The decrease in comparison to 2007 primarily as acost of funds was the result of increased service charges onthe continued re-pricing of certificates of deposit accounts, income from fiduciary activities originating from the trust operation acquired with Kentucky Trust Bank, and the gain on sale of our Burkesville branch. These increases were partially offset by reduced gains on sales of investment securities and other than temporary impairment write-downs on investment securities. Non-interest expense increased $5.3 million, or 23.5%, in comparison to 2007 as a result of increased salary and benefits expense and an increase in occupancy and equipment expense primarily related to the Kentucky Trust Bank acquisition. In addition, FDIC insurance premiums rose significantly due to amendments made by the FDIC in 2007 to its risk-based deposit premium assessment systems. Dividends and accretion on preferred stock for 2008 resulted from our issuance of $35 million of preferred stock on November 21, 2008 in accordance with the Capital Purchase Program established under the Emergency Economic Stabilization Act of 2008.Net Interest Income – at maturity at lower interest rates.Our net interest income was $47.2 million for the year ended December 31, 2008, an increase of $4.8 million, or 11.4%, compared with $42.4 million for the same period in 2007. Net interest spread and margin were 2.79% and 3.20%, respectively, for 2008, compared with 3.11% and 3.67%, respectively, for 2007. The increase in net interest income was primarily the result of higher loan volume, but was partially offset by the reduction in net interest margin due to short-term pressure from the Federal Reserve’s actions to reduce short-term interest rates during 2008. The increase of $305.0 million in average loans for 2008, compared to the same period in 2007, was due to the acquisitions of Kentucky Trust Bank and Paramount Bank, and organic growth in our loan portfolio.Our average interest-earning assets were $1.5 billion for 2008, compared with $1.2 billion for 2007, a 28.1% increase primarily attributable to loan growth and the Kentucky Trust Bank and Paramount Bank acquisitions. Average loans were $1.3 billion for 2008, compared with $1.0 billion for 2007, a 30% increase. Our total interest income increased 9.0% to $100.1 million for 2008, compared with $91.8 million for 2007. The change was due primarily to higher loan volume.Our average interest-bearing liabilities also increased by 30.6% to $1.3 billion for 2008, compared with $1.0 billion for 2007. Our total interest expense increased by 7.0% to $52.9 million for 2008, compared with $49.4 million during 2007, due primarily to increases in the volume of certificates of deposit and FHLB advances. Our average volume of certificates of deposit increased 27.8% to $946.5 million for 2008, compared with $740.7 million for 2007. The average interest rate paid on certificates of deposits decreased to 4.31% for 2008, compared with 5.09% for 2007. Our average volume of FHLB advances increased 100.6% to $139.0 million for 2008, compared with $69.3 million for 2007. The average interest rate paid on FHLB advances decreased to 4.02% for 2008, compared with 4.71% for 2007. The decrease in cost of funds was the result of the continued re-pricing of certificates of deposit at maturity at lower interest rates, and decreased rates on FHLB advances.
Average Balance Sheets For the Years Ended December 31, 2009 2008 Average
Balance Interest
Earned/Paid Average
Yield/Cost Average
Balance Interest
Earned/Paid Average
Yield/Cost (dollars in thousands) $ 1,226,403 $ 73,843 6.02 % $ 1,164,892 $ 81,125 6.96 % 89,010 5,705 6.41 102,726 7,238 7.05 36,848 3,209 8.71 38,786 3,637 9.38 16,559 1,117 6.75 15,555 1,181 7.59 2,214 96 4.34 2,699 36 1.33 1,279 57 4.46 11,000 482 4.38 134,779 7,978 5.92 76,227 3,828 5.02 21,813 878 6.19 20,272 818 6.21 2,826 154 5.45 2,455 133 5.42 10,423 681 6.53 6,499 382 5.88 10,072 466 4.63 9,876 518 5.25 704 46 6.53 704 46 6.53 1,901 55 2.89 3,474 112 3.22 21,591 18 0.08 21,138 405 1.92 60,681 163 0.27 14,853 166 1.12 1,637,103 94,466 5.80 % 1,491,156 100,107 6.74 % (21,130 ) (18,087 ) 98,158 99,530 $ 1,714,131 $ 1,572,599 $ 1,089,798 $ 32,816 3.01 % $ 946,477 $ 40,811 4.31 % 162,221 1,962 1.21 176,812 3,822 2.16 34,386 310 0.90 33,969 440 1.30 11,042 476 4.31 14,045 555 3.95 106,259 3,691 3.47 138,954 5,589 4.02 34,000 1,157 3.40 29,525 1,664 5.64 1,437,706 40,412 2.81 % 1,339,782 52,881 3.95 % 99,167 93,356 8,506 7,755 1,545,379 1,440,893 168,752 131,706 $ 1,714,131 $ 1,572,599 $ 54,054 $ 47,226 2.99 % 2.79 % 3.33 % 3.20 % 113.87 % 111.30 % For the Years Ended December 31, 2010 2009 (dollars in thousands) ASSETS Interest-earning assets: $ 1,209,125 $ 67,960 5.62 % $ 1,226,403 $ 73,843 6.02 % 84,847 5,131 6.05 89,010 5,705 6.41 34,346 2,944 8.57 36,848 3,209 8.71 23,877 1,483 6.21 16,559 1,117 6.75 1,100 41 3.73 2,214 96 4.34 9,674 362 3.74 1,279 57 4.46 110,718 5,846 5.28 134,779 7,978 5.92 State and political subdivision securities (3) 21,331 854 6.16 21,813 878 6.19 2,947 161 5.46 2,826 154 5.45 12,906 875 6.78 10,423 681 6.53 10,072 441 4.38 10,072 466 4.63 694 46 6.63 704 46 6.53 1,623 48 2.96 1,901 55 2.89 12,633 16 0.13 21,591 18 0.08 Interest-bearing deposits in other financial institutions 82,648 199 0.24 60,681 163 0.27 1,618,541 86,407 5.37 % 1,637,103 94,466 5.80 % (27,836 ) (21,130 ) 156,943 98,158 $ 1,747,648 $ 1,714,131 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities Certificates of deposit and other time deposits $ 1,156,724 $ 23,415 2.02 % $ 1,089,798 $ 32,816 3.01 % 164,541 1,716 1.04 162,221 1,962 1.21 35,393 261 0.74 34,386 310 0.90 Federal funds purchased and repurchase agreements 11,734 484 4.12 11,042 476 4.31 47,800 2,015 4.22 106,259 3,691 3.47 33,941 950 2.80 34,000 1,157 3.40 Total interest-bearing liabilities 1,450,133 28,841 1.99 % 1,437,706 40,412 2.81 % Non-interest-bearing liabilities 102,383 99,167 7,117 8,506 1,559,633 1,545,379 188,015 168,752 Total liabilities and stockholders’ equity $ 1,747,648 $ 1,714,131 $ 57,566 $ 54,054 3.38 % 2.99 % 3.59 % 3.33 % Ratio of average interest-earning assets to average interest-bearing liabilities 111.61 % 113.87 % (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. For the Years Ended December 31, 2008 2007 Average
Balance Interest
Earned/Paid Average
Yield/Cost Average
Balance Interest
Earned/Paid Average
Yield/Cost (dollars in thousands) $ 1,164,892 $ 81,125 6.96 % $ 892,104 $ 73,667 8.26 % 102,726 7,238 7.05 80,795 6,727 8.33 38,786 3,637 9.38 31,453 2,969 9.44 15,555 1,181 7.59 14,187 1,262 8.90 2,699 36 1.33 1,089 56 5.14 11,000 482 4.38 21,529 927 4.31 76,227 3,828 5.02 59,507 3,016 5.07 20,272 818 6.21 16,578 684 6.35 2,455 133 5.42 2,458 133 5.41 6,499 382 5.88 2,259 143 6.33 9,876 518 5.25 9,155 604 6.60 704 46 6.53 217 23 10.60 3,474 112 3.22 3,911 163 4.17 21,138 405 1.92 26,575 1,331 5.01 14,853 166 1.12 2,031 95 4.68 1,491,156 100,107 6.74 % 1,163,848 91,800 7.92 % (18,087 ) (14,130 ) 99,530 71,931 $ 1,572,599 $ 1,221,649 $ 946,477 $ 40,811 4.31 % $ 740,693 $ 37,711 5.09 % 176,812 3,822 2.16 157,645 5,800 3.68 33,969 440 1.30 25,766 371 1.44 14,045 555 3.95 7,858 337 4.29 138,954 5,589 4.02 69,276 3,260 4.71 29,525 1,664 5.64 25,000 1,924 7.70 — — — 14 1 7.14 1,339,782 52,881 3.95 % 1,026,252 49,404 4.81 % 93,356 73,183 7,755 7,417 1,440,893 1,106,852 131,706 114,797 $ 1,572,599 $ 1,221,649 $ 47,226 $ 42,396 2.79 % 3.11 % 3.20 % 3.67 % 111.30 % 113.41 % For the Years Ended December 31, 2009 2008 (dollars in thousands) ASSETS Interest-earning assets: $ 1,226,403 $ 73,843 6.02 % $ 1,164,892 $ 81,125 6.96 % 89,010 5,705 6.41 102,726 7,238 7.05 36,848 3,209 8.71 38,786 3,637 9.38 16,559 1,117 6.75 15,555 1,181 7.59 2,214 96 4.34 2,699 36 1.33 1,279 57 4.46 11,000 482 4.38 134,779 7,978 5.92 76,227 3,828 5.02 State and political subdivision securities (3) 21,813 878 6.19 20,272 818 6.21 2,826 154 5.45 2,455 133 5.42 10,423 681 6.53 6,499 382 5.88 10,072 466 4.63 9,876 518 5.25 704 46 6.53 704 46 6.53 1,901 55 2.89 3,474 112 3.22 21,591 18 0.08 21,138 405 1.92 Interest-bearing deposits in other financial institutions 60,681 163 0.27 14,853 166 1.12 1,637,103 94,466 5.80 % 1,491,156 100,107 6.74 % (21,130 ) (18,087 ) 98,158 99,530 $ 1,714,131 $ 1,572,599 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities Certificates of deposit and other time deposits $ 1,089,798 $ 32,816 3.01 % $ 946,477 $ 40,811 4.31 % 162,221 1,962 1.21 176,812 3,822 2.16 34,386 310 0.90 33,969 440 1.30 Federal funds purchased and repurchase agreements 11,042 476 4.31 14,045 555 3.95 106,259 3,691 3.47 138,954 5,589 4.02 34,000 1,157 3.40 29,525 1,664 5.64 1,437,706 40,412 2.81 % 1,339,782 52,881 3.95 % Non-interest-bearing liabilities 99,167 93,356 �� 8,506 7,755 1,545,379 1,440,893 168,752 131,706 Total liabilities and stockholders’ equity $ 1,714,131 $ 1,572,599 $ 54,054 $ 47,226 2.99 % 2.79 % 3.33 % 3.20 % Ratio of average interest-earning assets to average interest-bearing liabilities 113.87 % 111.30 % (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. Year Ended December 31, 2009 vs. 2008 Year Ended December 31, 2008 vs. 2007 Increase (decrease)
due to change in Increase (decrease)
due to change in Rate Volume Net
Change Rate Volume Net
Change (in thousands) $ (12,421 ) $ 3,174 $ (9,247 ) $ (14,236 ) $ 22,772 $ 8,536 8 (433 ) (425 ) 16 (461 ) (445 ) 525 3,625 4,150 (28 ) 840 812 1 80 81 (20 ) 154 134 37 262 299 (11 ) 250 239 (62 ) 10 (52 ) (131 ) 45 (86 ) — — �� — (12 ) 35 23 (10 ) (47 ) (57 ) (34 ) (17 ) (51 ) (396 ) 9 (387 ) (696 ) (230 ) (926 ) (203 ) 200 (3 ) (121 ) 192 71 (12,521 ) 6,880 (5,641 ) (15,273 ) 23,580 8,307 (13,552 ) 5,557 (7,995 ) (6,343 ) 9,443 3,100 (1,513 ) (347 ) (1,860 ) (2,617 ) 639 (1,978 ) (135 ) 5 (130 ) (40 ) 109 69 47 (126 ) (79 ) (28 ) 246 218 (1,009 ) (889 ) (1,898 ) (534 ) 2,863 2,329 (731 ) 224 (507 ) (570 ) 310 (260 ) — — — — (1 ) (1 ) (16,893 ) 4,424 (12,469 ) (10,132 ) 13,609 3,477 $ 4,372 $ 2,456 $ 6,828 $ (5,141 ) $ 9,971 $ 4,830 Year Ended December 31, 2010 vs. 2009 (in thousands) Interest-earning assets: $ (5,337 ) $ (1,074 ) $ (6,411 ) $ (12,421 ) $ 3,174 $ (9,247 ) (10 ) 315 305 8 (433 ) (425 ) (804 ) (1,328 ) (2,132 ) 525 3,625 4,150 (2 ) (15 ) (17 ) 1 80 81 27 167 194 37 262 299 (25 ) — (25 ) (62 ) 10 (52 ) 1 (1 ) — — — — 1 (8 ) (7 ) (10 ) (47 ) (57 ) 7 (9 ) (2 ) (396 ) 9 (387 ) Interest-bearing deposits in other financial institutions (18 ) 54 36 (203 ) 200 (3 ) (6,160 ) (1,899 ) (8,059 ) (12,521 ) 6,880 (5,641 ) Interest-bearing liabilities: (11,295 ) 1,894 (9,401 ) (13,552 ) 5,557 (7,995 ) (281 ) 35 (246 ) (1,513 ) (347 ) (1,860 ) (58 ) 9 (49 ) (135 ) 5 (130 ) Federal funds purchased and repurchase agreements (21 ) 29 8 47 (126 ) (79 ) 667 (2,343 ) (1,676 ) (1,009 ) (889 ) (1,898 ) (205 ) (2 ) (207 ) (731 ) 224 (507 ) (11,193 ) (378 ) (11,571 ) (16,893 ) 4,424 (12,469 ) $ 5,033 $ (1,521 ) $ 3,512 $ 4,372 $ 2,456 $ 6,828 For the Years Ended
December 31, 2009 2008 2007 (in thousands) $ 3,112 $ 3,424 $ 2,760 875 1,079 206 235 365 296 130 157 186 411 — — 315 (136 ) 107 — (471 ) — — 410 — 2,016 2,040 2,001 $ 7,094 $ 6,868 $ 5,556 2010 2009 2008 (in thousands) $ 2,984 $ 3,112 $ 3,424 987 875 1,079 327 235 365 160 130 157 554 411 — 5,152 315 (136 ) (597 ) — (471 ) — — 410 2,015 2,016 2,040 $ 11,582 $ 7,094 $ 6,868 one-time gain of $410,000 on the sale of a branch and a one-timean other-than-temporary impairment charge of $471,000 related to equity securities that were not repeated in 2009.Non-interest income increased by $1.3 million to $6.9 million for 2008 compared with $5.6 million for 2007. Our non-interest income increased due to increased service charges on deposit accounts of $664,000, or 24.1%, attributable to the acquisitions of Paramount Bank in 2008 and Kentucky Trust Bank in 2007, increased income from fiduciary activities of $873,000 arising from the trust operation acquired with Kentucky Trust Bank, and gain of $410,000 on the sale of our Burkesville branch. These increases were partially offset by decreased gains on sales of investment securities and the $471,000 write-down of other than temporary impairment of financial market sector equity securities with an original cost of $832,000. Gains on sales of investment securities decreased $243,000, or 227.1%, to a net loss of $136,000 for 2008 compared with a net gain of $107,000 for 2007. For the Years Ended
December 31, 2009 2008 2007 (in thousands) $ 15,009 $ 14,792 $ 12,470 3,918 3,587 2,727 2,984 1,051 298 1,800 1,740 1,336 1,155 881 833 901 787 829 752 748 546 729 711 466 492 463 544 429 569 474 2,287 2,428 1,951 $ 30,456 $ 27,757 $ 22,474 2010 2009 2008 (in thousands) $ 14,903 $ 15,009 $ 14,792 4,095 3,918 3,587 16,254 1,155 881 2,971 2,984 1,051 2,172 1,800 1,740 1,067 901 787 737 729 711 722 752 748 408 492 463 388 429 569 2,761 2,287 2,428 $ 46,478 $ 30,456 $ 27,757 $27.8 million$27.8million for the same period last year. Salaries and employee benefits are the largest component of non-interest expense. This expense increased $217,000, or 1.5%, in comparison with the same period of 2008 as a result of staff additions and increased stock-based compensation expense.December.$140,000,140,000, or 24.6%, to $429,000 in 2009 from $569,000 in 2008 due to cost control measures.Non-interestthe year ended December 31, 2008 of $27.8 million represented2009. Our statutory federal tax rate was 35% in both 2010 and 2009. Our effective federal tax rate increased to 41.0% in 2010 from 32.9% in 2009. We had a 23.5% increase from $22.5 million in 2007. Salaries and employee benefits are the largest component of non-interest expense. This expense increased $2.3 million, or 18.6%, in comparison with 2007 as a result of cost of living wage increases, and the addition of staff from the Paramount and Kentucky Trust Bank acquisitions.Occupancy expense increased $860,000, or 31.5%, to $3.6 million in 2008 from $2.7 million in 2007 to support the addition of a new office opened in 2008 and the acquisitions of Paramount and Kentucky Trust Bank. State franchise taxes are based primarily on average capital levels. These taxes increased 30.2% from 2007 to 2008 as our capital grew. State franchisehigher than statutory tax increased $404,000 to $1.7 million in 2008 from $1.3 million in 2007. FDIC insurance premiums rose significantly in 2008rate for 2010 due to amendments made by the FDIC in 2007 to its risk-based deposit premium assessment systemour pre-tax loss, adjusted for tax exempt income and because we no longer had the deposit insurance credits which were used during the first nine months of 2007 thereby reducing deposit insurance payments in fiscal year 2007. FDIC insurance increased $753,000 to $1.1 million in 2008 from $298,000 in 2007.Other real estate owned expense increased $48,000, or 5.8%, to $881,000 in 2008 from $833,000 in 2007 due to higher costs related to foreclosing on nonperforming credits, repossessing collateral, and collecting amounts due. Postage and delivery expense increased $202,000, or 37.0%, to $748,000 in 2008 from $546,000 in 2007 as account statement mailings increased due to the Paramount and Kentucky Trust Bank acquisitions. Expenses also increased for communications from $466,000 in 2007 to $711,000 in 2008 due to additional costs related to communication lines with new and acquired branches. Office supplies increased $95,000 to $569,000 in 2008 from $474,000 in 2007 due to higher costs related to increased staff from the Paramount and Kentucky Trust Bank acquisitions.Non-interest expense increases were partially offset by decreases in professional fees and advertising expense. Professional fees decreased $42,000, or 5.1%, to $787,000 in 2008 from $829,000 in 2007 due to lower data processing fees as the data processing operations of Kentucky Trust Bank were merged with our data center in the first quarter of 2008. Advertising expenses decreased $81,000, or 14.9%, to $463,000 in 2008 from $544,000 in 2007. We decreased spending on media advertising in 2008 to focus more on internal programs designed to grow accounts through increased customer service and in-house marketing efforts.Income Tax Expense – other permanent tax adjustments.Income tax expense was $6.9 million for 2008 compared with $7.2 million for 2007. Our statutory federal tax rate was 35% in both 2008 and 2007. Our effective federal tax rate decreased to 33.1% in 2008 from 33.7% in 2007, as the percentage of our tax exempt income to total income increased.Total assets at December 31, 2008 increased to $1.65 billion compared with $1.46 billion at December 31, 2007, an increase of $191.813.2%. This increase was primarily attributable to an increase of $129.1 million in net loans from organic loan growth and the acquisition of Paramount Bank. We also had an increase of $45.0 million in securities available for sale.Loans Receivable –Loans receivable increased $62.8 million or 4.7%7.8%, during the year ended December 31, 20092010 to $1.4$1.3 billion. Our commercial, commercial real estate, and real estate construction portfolios increaseddecreased by an aggregate of $13.1$112.8 million, or 1.4%12.1%, during 20092010 and comprised 65.8%62.7% of the total loan portfolio at December 31, 2009.2010.$132.4$62.8 million, or 10.9%4.7%, to $1.4$1.41 billion at December 31, 20082009 compared with $1.2$1.35 billion at December 31, 2007.2008. Our commercial, commercial real estate, and real estate construction portfolios increased $67.4$13.1 million, or 7.9%1.4%, to $916.9$930.0 million at December 31, 2008.2009. At December 31, 2008,2009, these loans comprised 67.9%65.8% of the total loan portfolio compared with 69.8%67.9% of the loan portfolio at December 31, 2007. As of December 31, 2009 2008 Amount Percent Amount Percent (dollars in thousands) $ 535,843 37.93 % $ 454,634 33.68 % 304,230 21.53 371,301 27.50 387,017 27.39 342,835 25.39 32,384 2.29 33,249 2.46 89,903 6.36 90,978 6.74 36,989 2.62 37,783 2.80 25,064 1.77 16,181 1.20 1,488 0.11 3,145 0.23 $ 1,412,918 100.00 % $ 1,350,106 100.00 % As of December 31, 2007 2006 2005 Amount Percent Amount Percent Amount Percent (dollars in thousands) $ 422,405 34.69 % $ 324,354 37.96 % $ 305,099 38.52 % 318,462 26.15 211,973 24.81 190,080 24.00 288,703 23.71 195,591 22.89 177,683 22.44 25,382 2.08 19,099 2.24 22,707 2.87 108,619 8.92 59,113 6.92 50,626 6.39 38,061 3.13 29,709 3.48 30,808 3.89 14,855 1.22 13,436 1.57 13,625 1.72 1,211 0.10 1,092 0.13 1,323 0.17 $ 1,217,698 100.00 % $ 854,367 100.00 % $ 791,951 100.00 % As of December 31, 2010 2009 Amount Percent Amount Percent (dollars in thousands) $ 90,290 6.93 % $ 89,903 6.36 % Commercial Real Estate: 199,524 15.32 304,230 21.53 85,523 6.56 83,898 5.94 441,844 33.92 451,945 31.99 Residential Real Estate: 74,919 5.75 65,043 4.60 353,418 27.13 354,358 25.08 31,913 2.45 36,989 2.62 24,177 1.86 25,064 1.77 1,060 0.08 1,488 0.11 $ 1,302,668 100.00 % $ 1,412,918 100.00 % As of December 31, 2008 2007 2006 Amount Percent Amount Percent Amount Percent (dollars in thousands) $ 90,978 6.74 % $ 108,619 8.92 % $ 59,113 6.92 % Commercial Real Estate: 371,301 27.50 318,462 26.15 211,973 24.81 77,504 5.74 69,831 5.74 47,325 5.54 377,130 27.94 352,574 28.95 277,029 32.42 Residential Real Estate: 56,350 4.17 45,207 3.71 29,819 3.49 319,734 23.68 268,878 22.08 184,871 21.64 37,783 2.80 38,061 3.13 29,709 3.48 16,181 1.20 14,855 1.22 13,436 1.57 3,145 0.23 �� 1,211 0.10 1,092 0.13 $ 1,350,106 100.00 % $ 1,217,698 100.00 % $ 854,367 100.00 % $31.1$37.4 million at December 31, 2009.2009,2010, we had seventeenfifteen loan relationships each with aggregate extensions of credit in excess of $10 million. EightThree of the seventeenfifteen relationships include loans that have been classified as substandard by the Bank’s internal loan review process. For further discussion of classified loans refer to the asset quality discussion in our “Allowance for Loan Losses” section.$67$104.7 million from 20082009 to 20092010 as the result of construction projects werebeing completed and sold to end users or refinanced under permanent financing arrangements. We also hadarrangements; and loans in this category that werebeing transferred to OREO through the normal progression of collection, workout, and ultimate disposition. As of December 31, 2008, we had $21.4 million of participations in real estate loans purchased from, and $108.3 million of participations in real estate loans sold to, other banks. As of December 31, 2008, we had $6.0 million of participations in real estate loans purchased from, and $23.7 million of participations in real estate loans sold to, these affiliate banks.2009,2010, regarding the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity: As of December 31, 2009 Maturing
Within
One Year Maturing
1 through
5 Years Maturing
Over 5
Years Total
Loans (dollars in thousands) $ 104,951 $ 194,593 $ 28,677 $ 328,221 45,872 37,978 9,584 93,434 58,954 193,437 62,641 315,032 59 149 138 346 21,939 28,376 1,187 51,502 9,762 21,612 2,478 33,852 7,608 4,067 209 11,884 1,006 8 — 1,014 $ 250,151 $ 480,220 $ 104,914 $ 835,285 $ 72,206 $ 94,667 $ 40,749 $ 207,622 130,547 79,903 346 210,796 33,836 14,573 23,576 71,985 1,286 7,361 23,391 32,038 24,397 6,229 7,775 38,401 1,794 795 548 �� 3,137 11,793 919 468 13,180 — 427 47 474 $ 275,859 $ 204,874 $ 96,900 $ 577,633 As of December 31, 2010 (dollars in thousands) Loans with fixed rates: $ 30,261 $ 21,992 $ 640 $ 52,893 Commercial Real Estate: 39,601 14,006 10,144 63,751 18,220 26,822 5,397 50,439 108,798 162,191 23,954 294,943 Residential Real Estate: 21,053 38,835 8,089 67,977 62,967 132,520 72,636 268,123 7,154 19,684 2,117 28,955 6,809 2,748 162 9,719 622 4 — 626 $ 295,485 $ 418,802 $ 123,139 $ 837,426 Loans with floating rates: $ 23,546 $ 6,850 $ 7,001 $ 37,397 Commercial Real Estate: 96,889 36,462 2,422 135,773 8,616 6,096 20,372 35,084 45,312 78,533 23,056 146,901 Residential Real Estate: 2,136 2,330 2,476 6,942 25,704 19,279 40,312 85,295 1,766 753 439 2,958 12,556 1,407 495 14,458 400 — 34 434 $ 216,925 $ 151,710 $ 96,607 $ 465,242 automobile, motorcycleautomobiles and all terrainother motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is recorded at its fair market value less costscost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense. As of December 31, 2009 2008 2007 2006 2005 (dollars in thousands) $ 5,968 $ 11,598 $ 2,145 $ 2,010 $ 1,969 78,888 9,725 10,524 6,930 5,045 84,856 21,323 12,669 8,940 7,014 14,548 7,839 4,309 2,415 1,781 80 96 30 9 1 $ 99,484 $ 29,258 $ 17,008 $ 11,364 $ 8,796 6.00 % 1.58 % 1.04 % 1.05 % 0.89 % 5.42 % 1.78 % 1.17 % 1.08 % 0.89 % 2009 $ 594 $ 5,968 $ 11,598 $ 2,145 $ 2,010 59,799 78,888 9,725 10,524 6,930 60,393 84,856 21,323 12,669 8,940 67,635 14,548 7,839 4,309 2,415 52 80 96 30 9 $ 128,080 $ 99,484 $ 29,258 $ 17,008 $ 11,364 4.63 % 6.00 % 1.58 % 1.04 % 1.05 % 7.43 % 5.42 % 1.78 % 1.17 % 1.08 % $ 7,977 $ 7,266 $ 2,363 $ 1,443 $ 1,772 13.2 % 8.6 % 11.1 % 11.4 % 19.8 % $601,000 and $586,000$601,000 for the years ended December 31, 2010, 2009 2008 and 20072008 respectively. Interest income recognized on accruing non-performing loans was $222,000, $225,000, $181,000, and $140,000$181,000 for the years ended December 31, 2010, 2009, and 2008, and 2007, respectively.At December 31, 2009 we had restructured loans totaling $25.2 million with borrowers who experienced deterioration in financial condition. These loans are secured by 1 to 4 family residential or commercial real estate properties. Concessions generally take the form of a reduction in interest rate or temporary curtailment of contractual principal payments on amortizing loans for periods ranging from three to six months. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms.$5.6$5.4 million, and non-accrual loans decreased $19.1 million, respectively, from December 31, 20082009 to December 31, 2009, and non-accrual loans increased $69.2 million from December 31, 2008 to December 31, 2009.2010. The $84.9$60.4 million in nonperforming loans at December 31, 2009,2010, and $21.3$84.9 million at December 31, 2008,2009, were primarily construction, land development, other land, commercial real estate, and commercialresidential real estate loans. The protracted slowdown in housing unit sales and loss of tenants or inability to lease vacant office and retail space has placed inordinate stress on these customers and their ability to repay according to the contractual terms of the loans. As such, we have placed these credits on non-accrual and have begun the appropriate collection actions to resolve them. Management believes it has established adequate loan loss reserves for these credits. 2010 2009 (in thousands) Commercial Real Estate: $ 50,491 $ 7,526 1,904 442 6,504 1,938 Residential Real Estate: 823 – 7,913 4,642 $ 67,635 $ 14,548 OREO Activity (in thousands) $ 14,548 90,787 (14,062 ) 1,947 (25,585 ) $ 67,635 As of December 31, 2009 2008 2007 2006 2005 (dollars in thousands) $ 19,652 $ 16,342 $ 12,832 $ 12,197 $ 10,261 6,519 2,711 1,777 467 1,411 301 347 299 132 1,117 875 749 267 436 519 36 27 31 1 — — — — — 37 7,731 3,834 2,374 1,036 3,084 133 145 84 59 246 55 85 54 121 222 76 85 88 83 100 7 8 8 3 — — — — — — 271 323 234 266 568 7,460 3,511 2,140 770 2,516 14,200 5,400 4,025 1,405 3,645 — 1,421 1,625 — 807 $ 26,392 $ 19,652 $ 16,342 $ 12,832 $ 12,197 1.87 % 1.46 % 1.34 % 1.50 % 1.54 % 0.56 % 0.27 % 0.21 % 0.09 % 0.32 % 31.10 % 92.16 % 128.99 % 143.53 % 173.90 % As of December 31, 2010 2009 2008 2007 2006 (dollars in thousands) $ 26,392 $ 19,652 $ 16,342 $ 12,832 $ 12,197 Loans charged-off: 19,261 6,519 2,711 1,777 467 2,675 301 347 299 132 496 875 749 267 436 29 36 27 31 1 22,461 7,731 3,834 2,374 1,036 Recoveries: 114 133 145 84 59 28 55 85 54 121 104 76 85 88 83 8 7 8 8 3 254 271 323 234 266 22,207 7,460 3,511 2,140 770 30,100 14,200 5,400 4,025 1,405 — — 1,421 1,625 — $ 34,285 $ 26,392 $ 19,652 $ 16,342 $ 12,832 2.63 % 1.87 % 1.46 % 1.34 % 1.50 % 1.64 % 0.54 % 0.27 % 0.21 % 0.09 % 56.77 % 31.10 % 92.16 % 128.99 % 143.53 % isin comprised of three components: specific reserves general reserves and unallocatedgeneral reserves. Generally, all loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific allowance is required. A loan is considered impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as impaired, management measures impairment in accordance with ASC 310.10. When management’s measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of our loss exposure for each credit, given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves arehave been provided are excluded from the general reserve and unallocated allowance calculations described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.2009,2010, our allowance for loan losses to total non-performing loans decreasedincreased to 31.10%56.8% from 92.16%31.1% at year-end 2008.2009. 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 that the allowance for loan losses is adequate to absorb probable incurred losses. We also maintain a general reserve for each loan type in the loan portfolio. In determining the amount of the general reserve portion of our allowance for loan losses, management considers factors such as our historical loan loss experience, the growth, composition and diversification of our loan portfolio, current delinquency levels, the results of recent regulatory examinations and general economic conditions. Based on these factors, we apply estimated percentages to the various categories of loans, not including any loan that has a specific allowance allocated to it, based on our historical experience, portfolio trends and economic and industry trends. This information is used by management to set the general reserve portion of the allowance for loan losses at a level it deems prudent.Because there are additional risks of losses that cannot be quantified precisely or attributed to particular loans or types of loans, including general economic and business conditions and credit quality trends, we have established an unallocated portion of the allowance for loan losses based on our evaluation of these risks. The unallocated portion of our allowance is determined based on various factors including, but not limited to, general economic conditions of our market area, the growth, composition and diversification of our loan portfolio, types of collateral securing our loans, the experience level of our lending officers and staff, the quality of our credit risk management and the results of independent third party reviews of our classification of credits. As of December 31, 2009 and 2008, the unallocated portions of the allowance for loan losses were $282,000, or 1.1% of the total allowance, and $742,000, or 3.8% of the total allowance, respectively.used the same methodology and generally similar assumptions in assessing the allowance for both comparison periods. We increased the allowance for loan losses as a percentage of loans outstanding to 2.63% at December 31, 2010 from 1.87% at December 31, 2009 from 1.46% at December 31, 2008.2009. The level of the allowance is based on estimates and the ultimate losses may vary from these estimates.2009,2010, we had $138.2 million of loans classified as substandard, $18,000 classified as doubtful, $25.3 million classified as special mention and none classified as loss. This compares with $208.3 million of loans classified as substandard, $7,000 classified as doubtful, $15.5 million classified as special mention and none classified as loss. This compares with $84.1 million of loans classified as substandard, $10,000 classified as doubtful, $49.4 million classified as special mention and none classified as loss as of December 31, 2008.2009. The $124.3$70.1 million increasedecrease in loans classified as substandard is primarily attributable to the downgrademigration of credits displaying financial weakness indicatedsubstandard loans through the collection process. Many of these loans were repaid by inconsistent payments. Factors affecting each credit are specific toliquidation of the borrowers business or related to macro economic events and we continue to monitor these credits regularly. In particular, these credits are primarily construction, land development, and commercial real estate loans for projects in or adjacentunderlying collateral after migration to our market areas. While these credits have been properly managed through the construction phase and secured by collateral in accordance with our policies, the protracted slowdown in housing unit sales and loss of tenantsOREO portfolio or inability to lease up vacant office and retail space has placed inordinate stress on these customers and their ability to repay according to the contractualterms of the loans.were charged off. As of December 31, 20092010 we had allocations of $15.9$13.1 million in the allowance for loan losses related to these classified loans. This compares to allocations of $7.6$15.9 million in the allowance for loan losses related to classified loansloan at December 31, 2008.$14.2$30.1 million for the year ended December 31, 2009,2010, compared with $14.2 million for 2009 and $5.4 million for 2008 and $4.0 million for 2007.2008. The total allowance for loan losses was $34.3 million or 2.63% of total loans at December 31, 2010, compared with $26.4 million or 1.87% of total loans at December 31, 2009, compared withand $19.7 million or 1.46% of total loans at December 31, 2008, and $16.3 million or 1.34% of total loans at December 31, 2007.2008. The increased allowance is consistent with the increase in our loan portfolioclassified loans of $62.8$30.9 million from December 31, 20082009 to December 31, 2009, the increase of $63.5 million in non-performing loans to $84.9 million at December 31, 2009 from $21.3 million at December 31, 2008, and2010, increased loan charge-offs.charge-offs, and trends within the portfolio, in particular the protracted slowdown in housing unit sales and continued weakness in demand for residential land in our markets. Net charge-offs were $7.5$22.2 million for the year ended December 31, 20092010 compared with $7.5 million for 2009 and $3.5 million for 2008 and $2.1 million2008. Charge-offs for 2007. We acquired a banking office2010 were concentrated in 2008 and a financial institution in 2007, and applied generally accepted accounting principles in connection with these acquisitions. More specifically, we applied the provisionsloans secured by real estate category of the guidance issuedportfolio. In fact, charge-offs for loans secured by real estate increased from $6.5 million in 2009 to $19.2 million in 2010. This represents 86% of our charge-offs for 2010. These charge-offs were largely construction and land development loans for which the FASB with respectprimary source of repayment was the sale of residential lots or housing units. Declining sales volumes negatively impacted the ability of certain customers in this segment to accounting for certainrepay their loans or debt securities acquiredand the continued weakness in a transfer to the 2008 and 2007 transactions. We identified no substantial loan or homogenous group of loans having evidence of deterioration of credit quality as defined by the statement. As a result, the existing allowance for loan loss in the amount of $1.4 million and $1.6 million, respectively, were recorded asthis sector of the datesmarket continued to exert downward pressure on the value of acquisition. As of December 31, 2009 2008 Amount of
Allowance Percent
of
Loans
to Total
Loans Amount of
Allowance Percent
of
Loans
to Total
Loans (dollars in thousands) $ 9,266 37.93 % $ 6,770 33.68 % 4,662 29.68 2,271 27.85 8,215 21.53 5,907 27.50 2,040 6.36 1,623 6.74 539 2.62 603 2.80 1,388 1.88 1,736 1.43 282 — 742 — $ 26,392 100.00 % $ 19,652 100.00 % As of December 31, 2007 2006 2005 Amount of
Allowance Percent
of
Loans
to Total
Loans Amount of
Allowance Percent
of
Loans
to Total
Loans Amount of
Allowance Percent
of
Loans
to Total
Loans (dollars in thousands) $ 6,606 34.69 % $ 6,519 37.96 % $ 5,529 38.52 % 1,580 25.79 1,103 25.13 1,194 25.31 3,653 26.15 2,000 24.81 1,950 24.00 1,655 8.92 896 6.92 1,020 6.39 574 3.13 460 3.48 563 3.89 1,731 1.32 1,245 1.70 1,373 1.89 543 — 609 — 568 — $ 16,342 100.00 % $ 12,832 100.00 % $ 12,197 100.00 % As of December 31, 2010 2009 $ 2,147 6.93 % $ 2,040 6.36 % Commercial Real Estate: 11,164 15.32 8,215 21.53 702 6.56 643 5.94 12,209 33.92 9,266 31.99 Residential Real Estate: 517 5.75 578 4.60 6,707 27.13 4,662 25.08 701 2.45 538 2.62 134 1.86 163 1.77 4 0.08 5 0.11 — — 282 — $ 34,285 100.00 % $ 26,392 100.00 % As of December 31, 2008 2007 2006 $ 1,623 6.74 % $ 1,655 8.92 % $ 896 6.92 % Commercial Real Estate: 5,907 27.50 3,654 26.15 2,000 24.81 882 5.74 903 5.74 649 5.54 6,770 27.94 6,606 28.95 6,519 32.42 Residential Real Estate: 590 4.17 629 3.71 396 3.49 2,271 23.68 1,580 22.08 1,103 21.64 603 2.80 574 3.13 462 3.48 238 1.20 192 1.22 195 1.57 26 0.23 6 0.10 3 0.13 742 — 543 — 609 — $ 19,652 100.00 % $ 16,342 100.00 % $ 12,832 100.00 % $4.4$62.4 million, or 2.5%37.0%, to $106.3 million at December 31, 2010 compared with $168.7 million at December 31, 2009 compared with $173.1 million at December 31, 2008.2009. We focused new investments in 2009 primarily in themade a strategic decision to liquidate our private-label mortgage-backed securities category.portfolio, and certain other mortgage-backed securities and corporate bonds during 2010. December 31, 2009 December 31, 2008 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value (dollars in thousands) $ 586 $ 33 $ — $ 619 $ 2,938 $ 22 $ — $ 2,960 91,127 4,028 — 95,155 119,807 1,293 (118 ) 120,982 33,516 279 (2,156 ) 31,639 17,139 — (494 ) 16,645 24,537 955 (37 ) 25,455 24,493 330 (415 ) 24,408 13,054 760 (49 ) 13,765 6,489 39 (451 ) 6,077 704 — (175 ) 529 704 — — 704 1,885 75 (401 ) 1,559 1,900 28 (627 ) 1,301 $ 165,409 $ 6,130 $ (2,818 ) $ 168,721 $ 173,470 $ 1,712 $ (2,105 ) $ 173,077 December 31, 2010 December 31, 2009 Fair Value (dollars in thousands) Securities available-for-sale $ 5,973 $ 37 $ — $ 6,010 $ 586 $ 33 $ — $ 619 Agency mortgage-backed: residential 60,270 1,590 (5 ) 61,855 91,127 4,028 — 95,155 Private label mortgage-backed: residential — — — — 33,516 279 (2,156 ) 31,639 26,039 995 (32 ) 27,002 24,537 955 (37 ) 25,455 8,744 507 (32 ) 9,219 13,054 760 (49 ) 13,765 572 — — 572 704 — (175 ) 529 1,400 254 (3 ) 1,651 1,885 75 (401 ) 1,559 $ 102,998 $ 3,383 $ (72 ) $ 106,309 $ 165,409 $ 6,130 $ (2,818 ) $ 168,721 2009: Due Within
One Year After One Year
But Within
Five Years After Five Years
But Within
Ten Years After Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield $ — — % $ — — % $ 619 5.17 % $ — — % $ 619 5.17 % 370 4.54 2,003 4.76 17,858 4.76 74,924 4.82 95,155 4.81 — — — — 6,645 5.38 24,994 13.35 31,639 11.73 86 4.95 3,575 5.84 12,184 5.55 9,610 6.39 25,455 5.91 — — 2,875 7.50 10,890 6.59 — — 13,765 6.78 — — — — — — 529 6.50 529 6.50 $ 456 4.62 % $ 8,453 6.16 % $ 48,196 5.46 % $ 110,057 7.07 % $ 167,162 6.56 % 1,559 $ 168,721 After Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury and agencies $ — — % $ 1,989 2.99 % $ 2,625 2.81 % $ 1,396 3.39 % $ 6,010 3.01 % Agency mortgage-backed — — 1,183 4.41 6,903 5.08 53,769 4.02 61,855 4.14 State and municipal 367 6.96 5,965 5.51 13,216 5.64 7,454 6.31 27,002 5.82 Corporate bonds 1,503 6.81 1,319 8.14 6,397 5.66 — — 9,219 6.18 Other debt — — — — — — 572 8.00 572 8.00 Total $ 1,870 6.84 % $ 10,456 5.18 % $ 29,141 5.25 % $ 63,191 4.31 % $ 104,658 4.70 % Equity 1,651 Total $ 106,309 or private company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies.and private issuer mortgage-backed securities do not carry a government guarantee. We limit our purchases of these securities to bank qualified issues with high credit ratings. We regularly monitor the performance and credit ratings of these securities and evaluate these securities, as we do all of our securities, for other than temporary impairment on a quarterly basis. At December 31, 2009, 78.7%2010, 86.9% of the agency mortgage-backed securities we held had contractual final maturities of more than ten years with a weighted average life of 19.11 years, and 79.0%25.1 years.the private label mortgage-backed securities we held had contractual final maturities of more than ten years with a weighted average life of 26.4 years.4445 equity securities at December 31, 2009.2010. Of these securities, 10one had an unrealized loss of $12,000$1,000 and had been in an unrealized loss position for less than twelve12 months and 19seven had an unrealized loss of $389,000$2,000 and had been in an unrealized loss position for more than 12 months. Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. Management currently intends to hold allBased upon the relevant market information and stock price trends in July and early August 2010, we determined that we could not objectively assert that our basis in 21 equity securities withthat had been in an unrealized losses until recovery, whichloss position for fixed income securities may be at maturity. Duringmore than 12 months was recoverable in the 2008 fourth quarter,near term. As such, we recorded an other than temporary impairment charge totaling $471,000$465,000 for equity securities held in our portfolio with an original cost of $832,000.$1.3 million during 2010. The market prices of the stocks had been below our initial investment for more than twelve months and after consideration of the companiesissuers’ financial conditions and the likelihood the market value would recover to our cost basis in a reasonable period of time, the investment was written down to fair value. As of December 31, 2009,2010, management does not believe any of the remaining equity securities in our portfolio with unrealized losses should be classified as other than temporarily impaired.thatwhich are more responsive to market interest rates. We use forecasts based on interest rate risk simulations to assist management in monitoring our use of certificates of deposit and other deposit products as funding sources and the impact of their use on interest income and net interest margin in various rate environments.During 2008, total deposits increased by $122.0 million compared with 2007. The increasedecrease in deposits for 20092010 was primarily in certificates of deposit balances and money market accounts. The 20082009 increase was also primarily in certificates of deposit balances and non-interest bearing demandmoney market accounts. For the Years Ended December 31, 2009 2008 2007 Average
Balance Average
Rate Average
Balance Average
Rate Average
Balance Average
Rate (dollars in thousands) $ 99,167 $ 93,356 $ 73,183 75,602 0.84 % 92,496 1.71 % 60,600 2.05 % 86,619 1.53 84,316 2.66 97,045 4.69 34,386 0.90 33,969 1.30 25,766 1.44 1,089,798 3.01 946,477 4.31 740,693 5.09 $ 1,385,572 $ 1,250,614 $ 997,287 2.53 % 3.60 % 4.40 % For the Years Ended December 31, 2010 2009 2008 (dollars in thousands) $ 102,383 $ 99,167 $ 93,356 83,111 0.85 % 75,602 0.84 % 92,496 1.71 % 81,430 1.24 86,619 1.53 84,316 2.66 35,393 0.74 34,386 0.90 33,969 1.30 1,156,724 2.02 1,089,798 3.01 946,477 4.31 $ 1,459,041 $ 1,385,572 $ 1,250,614 1.74 % 2.53 % 3.60 % For the Years Ended December 31, 2009 2008 2007 Average
Balance Average
Rate Average
Balance Average
Rate Average
Balance Average
Rate (dollars in thousands) $ 611,011 3.03 % $ 607,420 4.28 % $ 529,114 5.04 % 478,787 2.98 339,057 4.36 211,579 5.22 $ 1,089,798 3.01 % $ 946,477 4.31 % $ 740,693 5.09 % For the Years Ended December 31, 2010 2009 2008 (dollars in thousands) Certificates of Deposit $ 579,978 2.00 % $ 611,011 3.03 % $ 607,420 4.28 % 576,746 2.05 478,787 2.98 339,057 4.36 $ 1,156,724 2.02 % $ 1,089,798 3.01 % $ 946,477 4.31 % 20092010 the amount of our time deposits of $100,000 or more by time remaining until maturity: Amount (dollars in thousands) $ 154,365 162,828 131,861 167,236 $ 616,290 Maturity Period Amount (dollars in thousands) $ 88,778 84,908 117,405 306,781 $ 597,872 20092010, we had $83.0$15.0 million in advances outstanding from the FHLB and the capacity to increase our borrowings an additional $138.3$101.6 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other member financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and certain of our home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided that we meet certain standards related to creditworthiness. December 31, 2009 2008 2007 (dollars in thousands) $ 106,259 $ 138,954 $ 69,276 142,583 146,021 121,767 82,980 142,776 121,767 3.46 % 3.31 % 4.58 % 3.47 % 4.02 % 4.71 % December 31, 2010 2009 2008 (dollars in thousands) $ 47,800 $ 106,259 $ 138,954 110,763 142,583 146,021 15,022 82,980 142,776 Weighted average interest rate: 3.87 % 3.46 % 3.31 % 4.22 % 3.47 % 4.02 % 20092010, our bank subsidiary, PBI Bank, had a subordinated capital note outstanding in the amount of $9$8.6 million. The note is unsecured, bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital. Interest only iswas due quarterly through September 30, 2010, at which time quarterly principal payments of $225,000 plus interest will commence.commenced. The note is due July 1, 2020. At December 31, 2009,2010, the interest rate on this note was 3.29%.2009,2010, we had four issues of junior subordinated debentures outstanding totaling $25.0 million as shown in the table below. Liquidation
Amount
Trust
Preferred
Securities Issuance
Date Optional
Prepayment
Date (2) Interest
Rate (1) Junior
Subordinated
Debt and
Investment
in Trust Maturity
Date $ 5,000 2/13/2004 3/17/2009 3-month LIBOR + 2.85% $ 5,155 2/13/2034 3,000 4/15/2004 6/17/2009 3-month LIBOR + 2.79% 3,093 4/15/2034 14,000 12/14/2006 3/1/2012 3-month LIBOR + 1.67% 14,434 3/1/2037 3,000 2/13/2004 3/17/2009 3-month LIBOR + 2.85% 3,093 2/13/2034 $ 25,000 $ 25,775 Description Issuance Date Interest Rate (1) Maturity Date Porter Statutory Trust II $ 5,000 2/13/2004 3/17/2009 3-month LIBOR + 2.85% $ 5,155 2/13/2034 Porter Statutory Trust III 3,000 4/15/2004 6/17/2009 3-month LIBOR + 2.79% 3,093 4/15/2034 Porter Statutory Trust IV 14,000 12/14/2006 3/1/2012 3-month LIBOR + 1.67% 14,434 3/1/2037 Asencia Statutory Trust I 3,000 2/13/2004 3/17/2009 3-month LIBOR + 2.85% 3,093 2/13/2034 $ 25,000 $ 25,775 (1) As of December 31, 20092010, the 3-month LIBOR was 0.25%0.30%.(2) The debentures are callable on or after the optional prepayment date at their principal amount plus accrued interest. iswould be includable in Tier 2 capital. The new quantitative limits will be fully effective March 31, 2011. As of December 31, 2009,2010, Porter Bancorp’s trust preferred securities totaled 15.1%13.4% of its Tier 1 capital.20092010 and 20082009 we utilized brokered and wholesale deposits to supplement our funding strategy. At December 31, 2009,2010, these deposits totaled $114.6$149.2 million. We also secured federal funds borrowing lines from major correspondent banks totaling $44$19 million on an unsecured basis and an additional $25.0 million on a secured basis.2009,2010, we had an unused borrowing capacity with the FHLB of $138.3$101.6 million. Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.“Business”“Business“ and the “Dividends” section of Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.$5.1$20.1 million to $189.4 million at December 31, 2010 compared with $169.3 million at December 31, 2009 compared with $164.2 million at December 31, 2008.2009. The increase was primarily due to the completion of a stock offering that raised $30.5 million in net income earned during 2009proceeds, reduced by the 2010 net loss and by dividends declared on common stock, cumulative preferred stock, and participating preferred stock.BothOn September 27, 2010, the Company issued an additional 64,784 shares of common stock and granted a warrant to purchase 32,392 shares of non-voting common stock, in connection with the exercise of the option granted in the supplemental private placement transaction discussed above. This issuance of the additional shares of common stock resulted in the conversion of 48,038 shares of Series C preferred stock into shares of common stock in accordance with the terms of the Series C preferred stock described below.companycommon stock. The Series C preferred stock will automatically convert into common stock on a 1:1.05 share basis at such time as, after giving effect to the automatic conversion, the holder of such Series C preferred stock (and its affiliates or any other persons with which it is acting in concert or whose holdings would otherwise be required to be aggregated for purposes of federal banking law) beneficially holds, directly or indirectly, less than 9.9% of the number of shares of common stock then issued and PBI Bank qualifiedoutstanding.well capitalized under regulatory guidelines at December 31, 2009.314,820330,561 shares (the “Warrant Common Stock”) of the Company’s common stock, no par value per share, at an exercise price of $16.68$15.88 per share.Prior to this date, theThe Series A Preferred Stock may not be redeemed earlier than this date unless the Company has received aggregate gross proceeds from one or more qualified equity offerings of any Tier 1 perpetual preferred or common stock of the Company (a “Qualified Equity Offering”) of not less than $8.75 million. Subject to certain limited exceptions, until November 21, 2011, or such earlier time as all Series A Preferred Stock has been redeemed or transferred by U.S. Treasury, the Company will not, without U.S. Treasury’s consent, be able to increase its dividend rate per share of common stock or repurchase its common stock. If the Company receives aggregate gross cash proceeds of not less than $35,000,000 from one or more Qualified Equity Offerings on or prior to December 31, 2009, the number of shares of Warrant Common Stock underlying the Warrant then held by the U.S. Treasury will be reduced by one half of the original number of shares underlying the Warrant.At December 31, 2009, without prior approval,During 2011, the amount available to be paid by PBI Bank had approximately $37.6to Porter Bancorp would be $8.8 million of retainedplus 2011 earnings that could be used to paydate. However, PBI Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends.minimum leveragerisk-based capital requirements for banking organizations. Banking organizations mustSee Item 1. Business – Supervision and Regulation – Porter Bancorp – Capital Adequacy Requirements and PBI Bank – Capital Requirements. In addition, PBI Bank has agreed with its primary regulators to maintain a minimumratio of total capital to total risk-weighted assets of at least 12.0% and a ratio of Tier 1 capitalI Capital to adjusted average quarterlytotal risk-weighted assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. At December 31, 2009, Porter Bancorp’s and PBI Bank’s ratios of Tier 1 capital and total capital to risk-adjusted assets, and leverage ratios exceeded the minimum regulatory requirements and the minimum requirements for well capitalized institutions.2009: Regulatory
Minimums Well-Capitalized
Minimums Porter
Bancorp PBI
Bank 4.0 % 6.0 % 11.93 % 10.65 % 8.0 10.0 13.83 12.56 4.0 5.0 9.59 8.57 4.0 % 6.0 % 14.4 % 12.8 % 8.0 10.0 16.3 14.7 4.0 5.0 11.1 9.9 20092010 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect our actual future cash funding requirements: One year
or less More than 1
year but less
than 3 years 3 years or
more but less
than 5 years 5 years
or more Total (dollars in thousands) $ 74,326 $ 24,775 $ 14,452 $ 23,904 $ 137,457 4,801 — — — 4,801 $ 79,127 $ 24,775 $ 14,452 $ 23,904 $ 142,258 Total (dollars in thousands) $ 53,244 $ 27,267 $ 4,902 $ 20,069 $ 105,482 3,795 27 — — 3,822 $ 57,039 $ 27,294 $ 4,902 $ 20,069 $ 109,304 2009:2010: One year
or less More than 1
year but less
than 3 years 3 years or
more but less
than 5 years 5 years or
more Total (dollars in thousands) $ 947,704 $ 108,836 $ 181,444 $ 205 $ 1,238,189 65,000 5,000 — — 70,000 2,684 3,896 2,045 4,355 12,980 450 1,800 1,800 4,950 9,000 — — — 25,000 25,000 $ 1,015,838 $ 119,532 $ 185,289 $ 34,510 $ 1,355,169 Total (dollars in thousands) $ 638,962 $ 193,275 $ 334,383 $ 200 $ 1,166,820 — 5,000 — — 5,000 2,256 2,788 1,527 3,451 10,022 900 1,800 1,800 4,050 8,550 — — — 25,000 25,000 $ 642,118 $ 202,863 $ 337,710 $ 32,701 $ 1,215,392 (1) Includes singleSingle maturity fixed rate advancesadvance with rates ranging from 0.38% to 4.96%, averaging 3.41%a rate of 4.48%.(2) Fixed rate mortgage-matched borrowingborrowings with rates ranging from 0% to 9.10%6.49%, and maturities ranging from 20102011 through 2035, averaging 3.71%3.56%. While short-term interest rates are very low at present, we believe our 100 and 200 basis points scenarios remain appropriate in both rates up and rates down scenarios given that prime rate was 3.25% at year-end 2009. Assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.20092010 and December 31, 2008.2009. Given an instantaneous 100 basis point decrease in rates that was sustained for 12 months, our base net interest income would decrease by an estimated 4.5% at December 31, 2009 compared with a decrease of 7.6% at December 31, 2008. Given a 100 basis point increase in interest rates our base net interest income would increase by an estimated 4.9%7.8% at December 31, 20092010 compared with an increase of 5.1%4.9% at December 31, 2008.2009,2010, as calculated using the static shock model approach: Change in Future
Net Interest Income Dollar Change Percentage Change (dollars in thousands) $ 5,706 9.50 % 2,934 4.88 Change in Interest Rates Dollar Change Percentage Change (dollars in thousands) $ 8,997 15.81 % 4,445 7.81 2009,2010, because the Federal Reserve effectively lowered the federal funds target rate between 0.00% to 0.25% in December 2008. Therefore, no further short-term rate reductions can occur. As we implementsimplement strategies to mitigate the risk of rising interest rates in the future, these strategies will lessen our forecasted “base case” net interest income in the event of no interest rate changes.20092010 which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets and liabilities anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario within the selected time intervals. While we believe such assumptions are reasonable, we cannot assure you that assumed repricing rates will approximate our actual future activity. Volume Subject to Repricing Within 0 – 90
Days 91 – 181
Days 182 – 365
Days 1 – 5
Years Over 5
Years Non-
Interest
Sensitive Total (dollars in thousands) $ 157,091 $ — $ — $ — $ — — $ 157,091 21,469 6,847 13,123 83,644 41,550 2,088 168,721 10,072 — — — — — 10,072 334 — — — — — 334 835,304 112,129 154,597 290,933 19,955 (26,392 ) 1,386,526 — — — — — 112,346 112,346 $ 1,024,270 $ 118,976 $ 167,720 $ 374,577 $ 61,505 $ 88,042 $ 1,835,090 $ 194,644 $ — $ — $ — $ — $ — $ 194,644 308,346 345,130 291,418 291,586 1,709 — 1,238,189 50,993 20,479 30,972 21,256 4,797 — 128,497 — — — — — 104,426 104,426 — — — — — 169,334 169,334 $ 553,983 $ 365,609 $ 322,390 $ 312,842 $ 6,506 $ 273,760 $ 1,835,090 $ 470,287 $ (246,633 ) $ (154,670 ) $ 61,735 $ 54,999 $ 470,287 $ 223,654 $ 68,984 $ 130,719 $ 185,718 25.63 % (13.44 %) (8.43 %) 3.36 % 3.00 % 25.63 % 12.19 % 3.76 % 7.12 % 10.12 % 184.89 % 124.32 % 105.55 % 108.41 % 111.89 % Total (dollars in thousands) Assets: Federal funds sold and short-term investments $ 137,429 $ — $ — $ — $ — — $ 137,429 5,849 4,506 9,307 48,473 35,951 2,223 106,309 10,072 — — — — — 10,072 345 — — — — — 345 696,222 123,809 179,294 276,104 27,239 (34,285 ) 1,268,383 — — — — — 201,414 201,414 $ 849,917 $ 128,315 $ 188,601 $ 324,577 $ 63,190 $ 169,352 $ 1,723,952 Liabilities and Stockholders’ Equity Interest-bearing checking, savings, and money market accounts $ 202,450 $ — $ — $ — $ — $ — $ 202,450 182,054 183,472 271,604 528,075 1,615 — 1,166,820 35,600 437 886 19,657 3,608 — 60,188 — — — — — 105,079 105,079 — — — — — 189,415 189,415 Total liabilities and stockholders’ equity $ 420,104 $ 183,909 $ 272,490 $ 547,732 $ 5,223 $ 294,494 $ 1,723,952 $ 429,813 $ (55,594 ) $ (83,889 ) $ (223,155 ) $ 57,967 $ 429,813 $ 374,219 $ 290,330 $ 67,175 $ 125,142 24.93 % (3.22 %) (4.87 %) (12.94 %) 3.36 % 24.93 % 21.71 % 16.84 % 3.90 % 7.26 % Cumulative interest-earning assets to cumulative interest-bearing liabilities 202.31 % 161.96 % 133.12 % 104.72 % 108.75 % 20092010 was positive $223.6$290.3 million or 12.2%16.8% of assets. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time. Any gap analysis has inherent shortcomings because certain assets and liabilities may not move proportionally as interest rates change.2009,2010, in relation to the criteria described in the report, Internal Control — Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, Management concludes that as of December 31, 2009,2010, the Company’s internal control over financial reporting is effective based on those criteria. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.2009,2010, the Company’s internal control was effective in achieving the objectives stated above./s/ /s/ 15, 201020092010 and 2008,2009, and the related consolidated statements of income,operations, changes in stockholders’ equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009.2010. These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.20092010 and 2008,2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009,2010, in conformity with U.S. generally accepted accounting principles. 2009 2008 $ 169,328 $ 43,767 2,845 8,779 172,173 52,546 — 600 168,721 173,077 334 — 1,386,526 1,330,454 23,610 22,543 23,794 23,794 59,932 44,843 $ 1,835,090 $ 1,647,857 $ 97,263 $ 92,940 1,432,833 1,195,609 1,530,096 1,288,549 11,517 10,084 82,980 142,776 7,163 8,235 9,000 9,000 25,000 25,000 1,665,756 1,483,644 — — 34,307 34,131 83,104 76,897 — — 14,959 13,483 34,811 39,957 2,153 (255 ) 169,334 164,213 $ 1,835,090 $ 1,647,857 2010 2009 Assets $ 178,693 $ 169,328 6,742 2,845 185,435 172,173 106,309 168,721 345 334 1,268,383 1,386,526 22,468 23,610 67,635 14,548 23,794 23,794 49,583 45,384 $ 1,723,952 $ 1,835,090 Liabilities and Stockholders’ Equity Deposits $ 98,398 $ 97,263 1,369,270 1,432,833 1,467,668 1,530,096 11,616 11,517 15,022 82,980 6,681 7,163 8,550 9,000 25,000 25,000 1,534,537 1,665,756 — — Stockholders’ equity 34,484 34,307 Series C – 317,042 issued and outstanding; Liquidation preference of $3.6 million at December 31, 2010 3,283 — Common stock, no par, 19,000,000 shares authorized, 11,846,107 and 8,756,440 shares issued and outstanding, respectively 112,236 83,104 19,438 14,959 17,822 34,811 2,152 2,153 189,415 169,334 $ 1,723,952 $ 1,835,090 INCOME 2009 2008 2007 $ 83,970 $ 93,217 $ 84,681 8,971 4,983 4,405 878 818 684 647 1,089 2,030 94,466 100,107 91,800 35,088 45,073 43,882 3,691 5,589 3,260 795 1,368 1,924 362 296 — — — 1 476 555 337 40,412 52,881 49,404 54,054 47,226 42,396 14,200 5,400 4,025 39,854 41,826 38,371 3,112 3,424 2,760 875 1,079 206 235 365 296 130 157 186 411 — — 315 (136 ) 107 — (471 ) — — 410 — 2,016 2,040 2,001 7,094 6,868 5,556 15,009 14,792 12,470 3,918 3,587 2,727 2,984 1,051 298 1,800 1,740 1,336 1,155 881 833 901 787 829 752 748 546 729 711 466 492 463 544 2,716 2,997 2,425 30,456 27,757 22,474 16,492 20,937 21,453 5,424 6,927 7,224 11,068 14,010 14,229 (1,750 ) (194 ) — (176 ) (20 ) — $ 9,142 $ 13,796 $ 14,229 $ 1.05 $ 1.59 $ 1.68 2010 2009 2008 Interest income $ 77,559 $ 83,970 $ 93,217 7,338 8,971 4,983 854 878 818 656 647 1,089 86,407 94,466 100,107 Interest expense 25,392 35,088 45,073 2,015 3,691 5,589 639 795 1,368 311 362 296 484 476 555 28,841 40,412 52,881 57,566 54,054 47,226 30,100 14,200 5,400 27,466 39,854 41,826 Non-interest income 2,984 3,112 3,424 987 875 1,079 327 235 365 160 130 157 554 411 — 5,152 315 (136 ) Other-than-temporary impairment loss (597 ) — (471 ) — — — (597 ) — (471 ) — — 410 2,015 2,016 2,040 11,582 7,094 6,868 Non-interest expense 14,903 15,009 14,792 4,095 3,918 3,587 16,254 1,155 881 2,971 2,984 1,051 2,172 1,800 1,740 1,067 901 787 737 729 711 722 752 748 408 492 463 3,149 2,716 2,997 46,478 30,456 27,757 (7,430 ) 16,492 20,937 (3,046 ) 5,424 6,927 (4,384 ) 11,068 14,010 Less: Dividends on preferred stock (1,810 ) (1,750 ) (194 ) (177 ) (176 ) (20 ) 184 (97 ) (94 ) $ (6,187 ) $ 9,045 $ 13,702 $ (0.60 ) $ 1.00 $ 1.51 $ (0.60 ) $ 1.00 $ 1.51 Shares Amount Common Preferred Common Preferred Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total 7,622,447 — $ 64,820 — $ 11,036 $ 32,355 $ 135 $ 108,346 263,409 — 6,119 — — — — 6,119 7,500 — — — — — — — (2,150 ) — — — — — — — (10,000 ) — (192 ) — — — — (192 ) — — — — 234 — — 234 — — — — — 14,229 — 14,229 — — — — — — (214 ) (214 ) — — — — — — — 14,015 — — — — — (6,233 ) — (6,233 ) 7,881,206 — 70,747 — 11,270 40,351 (79 ) 122,289 — 35,000 — 34,111 889 — — 35,000 31,952 — — — — — — — (2,731 ) — — — — — — — (17,371 ) — (301 ) — — — — (301 ) — — — — 296 — — 296 — — — — — 14,010 — 14,010 — — — — — — (176 ) (176 ) — — —�� — — — — 13,834 — — — — — (194 ) — (194 ) — — — 20 — (20 ) — — — — — — — (6,711 ) — (6,711 ) 394,877 — 6,451 — 1,028 (7,479 ) — — Shares Amount Common Preferred Common Preferred Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total 8,287,933 35,000 76,897 34,131 13,483 39,957 (255 ) 164,213 51,684 — — — — — — — (515 ) — — — — — — — — — — — 388 — — 388 — — — — — 11,068 — 11,068 — — — — — — 2,408 2,408 — — — — — — — 13,476 — — — — — (1,750 ) — (1,750 ) — — — 176 — (176 ) — — — — — — — (6,993 ) — (6,993 ) 417,338 — 6,207 — 1,088 (7,295 ) — — 8,756,440 35,000 $ 83,104 $ 34,307 $ 14,959 $ 34,811 $ 2,153 $ 169,334 Shares Amount Balances, January 1, 2008 7,881,206 — — — $ 70,747 — — — $ 11,270 $ 40,351 $ (79 ) $ 122,289 Issuance of preferred stock and a common stock warrant — 35,000 — — — 34,111 — — 889 — — 35,000 Issuance of unvested stock 31,952 — — — — — — — — — — — Forfeited unvested stock (2,731 ) — — — — — — — — — — — Shares repurchased (17,371 ) — — — (301 ) — — — — — — (301 ) Stock-based compensation expense — — — — — — — — 296 — — 296 Comprehensive income: Net income — — — — — — — — — 14,010 — 14,010 Changes in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects — — — — — — — — — — (176 ) (176 ) Total comprehensive income — — — — — — — — — — — 13,834 Dividends 5% on Series A preferred stock — — — — — — — — — (194 ) — (194 ) Amortization of Series A preferred stock discount — — — — — 20 — — — (20 ) — — Cash dividends declared ($0.73 per share) — — — — — — — — — (6,711 ) — (6,711 ) 5% stock dividend declared 394,877 — — — 6,451 — — — 1,028 (7,479 ) — — Balances, December 31, 2008 8,287,933 35,000 — — 76,897 34,131 — — 13,483 39,957 (255 ) 164,213 Issuance of unvested stock 51,684 — — — — — — — — — — — Forfeited unvested stock (515 ) — — — — — — — — — — — Stock-based compensation expense — — — — — — — — 388 — — 388 Comprehensive income: Net income — — — — — — — — — 11,068 — 11,068 Changes in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects — — — — — — — — — — 2,408 2,408 Total comprehensive income — — — — — — — — — — — 13,476 Dividends 5%on Series A preferred stock — — — — — — — — — (1,750 ) — (1,750 ) Amortization of Series A preferred stock discount — — — — — 176 — — — (176 ) — — Cash dividends declared ($0.76 per share) — — — — — — — — — (6,993 ) — (6,993 ) 5% stock dividend declared 417,338 — — — 6,207 — — — 1,088 (7,295 ) — — Balances, December 31, 2009 8,756,440 35,000 — — 83,104 34,307 — — 14,959 34,811 2,153 169,334 Issuance of stock and warrants in private placement 1,820,531 — 597,000 365,080 17,429 — 6,182 3,780 3,149 — — 30,540 Conversion of Series B preferred to common 597,000 — (597,000 ) — 6,182 — (6,182 ) — — — — — Conversion of Series C preferred to common 48,038 — — (48,038 ) 497 — — (497 ) — — — — Issuance of unvested stock 69,182 — — — — — — — — — — — Forfeited unvested stock (9,566 ) — — — — — — — — — — — Stock-based compensation expense — — — — — — — — 482 — — 482 Shares Comprehensive income: Net loss — — — — — — — — — (4,384 ) — (4,384 ) Changes in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects — — — — — — — — — — (1 ) (1 ) Total comprehensive income (loss) — — — — — — — — — — — (4,385 ) Dividends 5% on Series A preferred stock — — — — — — — — — (1,750 ) — (1,750 ) Dividends on Series B preferred stock ($0.10 per share) — — — — — — — — — (60 ) — (60 ) Dividends on Series C preferred stock ($0.10 per share) — — — — — — — — — (40 ) — (40 ) Amortization of Series A preferred stock discount — — — — — 177 — — — (177 ) — — Cash dividends declared ($0.49 per share) — — — — — — — — — (4,706 ) — (4,706 ) 5% stock dividend declared 564,482 — — — 5,024 — — — 848 (5,872 ) — — Balances, December 31, 2010 11,846,107 35,000 — 317,042 $ 112,236 $ 34,484 — $ 3,283 $ 19,438 $ 17,822 $ 2,152 $ 189,415 2009 2008 2007 $ 11,068 $ 14,010 $ 14,229 3,464 3,664 2,485 14,200 5,400 4,025 (558 ) (53 ) (32 ) 386 280 234 (2,574 ) (486 ) (716 ) (411 ) — — (20,529 ) — — 20,439 — — 190 263 391 (315 ) 607 (107 ) — (410 ) — (283 ) (300 ) (296 ) — (393 ) — (5,031 ) 2,575 1,218 (2,398 ) (942 ) (853 ) 17,648 24,215 20,578 600 — — (36,979 ) (92,280 ) (37,171 ) 13,813 24,339 2,800 32,100 22,075 18,664 13,121 12,119 8,260 (293 ) (386 ) (1,066 ) (92,248 ) (82,186 ) (292,431 ) (2,605 ) (2,415 ) (4,544 ) — 2,179 — — — (5,881 ) — (5,215 ) — — (8,904 ) — (72,491 ) (130,674 ) (311,369 ) 241,547 59,416 210,222 1,433 (1,201 ) 7,641 — — (2,534 ) (299,796 ) (53,991 ) (30,984 ) 240,000 75,000 99,595 — 9,000 — — 35,000 — — (301 ) (192 ) (1,721 ) (194 ) — (6,993 ) (6,711 ) (6,233 ) 174,470 116,018 277,515 119,627 9,559 (13,276 ) 52,546 42,987 56,263 $ 172,173 $ 52,546 $ 42,987 $ 41,055 $ 53,322 $ 48,161 8,150 6,700 8,150 $ 20,534 $ 16,004 $ 9,725 — — 6,119 7,295 7,479 — 2010 2009 2008 Cash flows from operating activities $ (4,384 ) $ 11,068 $ 14,010 Adjustments to reconcile net income to net cash from operating activities 2,926 3,464 3,664 30,100 14,200 5,400 (9 ) (558 ) (53 ) 467 386 280 (7,898 ) (2,574 ) (486 ) (554 ) (411 ) — (28,165 ) (20,529 ) — 28,467 20,439 — 565 190 263 14,062 500 478 (4,555 ) (315 ) 607 — — (410 ) (296 ) (283 ) (300 ) — — (393 ) 3,667 (5,531 ) 2,097 (485 ) (2,398 ) (942 ) 33,908 17,648 24,215 Cash flows from investing activities — 600 — (55,750 ) (36,979 ) (92,280 ) 96,808 13,813 24,339 25,917 32,100 22,075 15,284 13,121 12,119 (1,947 ) (293 ) (386 ) 6,160 (92,248 ) (82,186 ) (368 ) (2,605 ) (2,415 ) — — 2,179 — — (5,215 ) — — (8,904 ) 86,104 (72,491 ) (130,674 ) Cash flows from financing activities (62,428 ) 241,547 59,416 99 1,433 (1,201 ) (307,958 ) (299,796 ) (53,991 ) 240,000 240,000 75,000 — — 9,000 (450 ) — — 11,064 — 35,000 19,476 — — — — (301 ) (1,847 ) (1,721 ) (194 ) (4,706 ) (6,993 ) (6,711 ) (106,750 ) 174,470 116,018 13,262 119,627 9,559 172,173 52,546 42,987 $ 185,435 $ 172,173 $ 52,546 Supplemental cash flow information: $ 29,637 $ 41,055 $ 53,322 4,850 8,150 6,700 $ 90,787 $ 20,534 $ 16,004 9,736 — — 5,872 7,295 7,479 2008 and 2007assets,fair value of other real estate owned, stock compensation, deferred tax assets, and fair values of financial instruments are particularly subject to change. on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.“Derivative “Derivative and Hedging” during the first quarter of 2009. Our commitments to deliver loans and our rate lock loan commitments were insignificant at year end.Management estimatesWe estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’sour judgment, should be charged off.impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.the scheduled payments of principal or interest whenall amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determinesWe determine the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.Commercial and commercial real estate loans are individually evaluated for impairment. NetWe recorded net servicing fee income of $5,000 for the year ended December 31, 2010, and net amortization expense wasof $1,000 for the year ended December 31 2009. Late fees and ancillary fees related to loan servicing were not material. the lower of cost or fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Other real estate owned of $14.5 million and $7.8 million is included in other assets on the balance sheet at December 31, 2009 and 2008, respectively.resultsresulting from business acquisitions andcombinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired tangible assets and liabilities assumed as of the acquisition date. Goodwill and identifiable intangible assets.assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30th as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.only intangible asset with an indefinite life on our balance sheet.lives.The Company adopted guidance issued by the FASB with respect to accounting for uncertainty in income taxes as of January 1, 2007. “more"more likely than not”not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more"more likely than not”not" test, no tax benefit is recorded. The adoption had no affect on the Company’s financial statements.1617 for more specific disclosure.)footnote 15Note 16 for a discussion of allthe terms and conditions of that transaction. The proceeds received in the offering were allocated on a pro rata basis to the Preferred Stock and the Warrants based on relative fair values. In estimating the fair value of the Warrants, the Company utilized the Black-Scholes model which includes assumptions regarding the Company’s common stock prices, stock price volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value of the Preferred Stock was determined using a discounted cash flow methodology. The value assigned to the Preferred Stock will be amortized up to the $35.0 million liquidation value of such preferred stock, with the cost of such amortization being reported as additional preferred stock dividends. Dividends are accrued and paid quarterly.18.19. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.In September 2006, the FASB issued New authoritative accounting guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Thisunder ASC Topic 810, “Consolidation,” amended prior guidance also establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The guidance was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued guidance that delayed the effective date of this fair value guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. (See Note 18 for more specific disclosure.)In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The guidance is effective for fiscal years beginning on or after December 15, 2008. The impact of adoption was not material.In December 2007, the FASB issued guidance that changes theestablish accounting and reporting standards for minority interests,the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling interest in a subsidiary, which is recharacterizedsometimes referred to as noncontrolling interests and classifiedminority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity withinin the consolidated balance sheets. The guidance was effective asfinancial statements. Among other requirements, ASC Topic 810 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the beginningconsolidated income statement, of the first fiscal year beginning on or after December 15, 2008.amounts of consolidated net income attributable to the parent and to the non-controlling interest. The impact of adoption was not material.In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with theFASB Accounting Standards CodificationTM (The Codification) as the source ofnew authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commissionguidance under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification wasASC Topic 810 became effective for financial statements issued for periods ending after September 15, 2009.In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per share (EPS) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. Management has adopted this statement for the period end December 31,Company on January 1, 2009, and did not have a significant impact on the impact has been retroactively presented in the 2008 and 2007 EPS disclosures.In April 2009, the FASB amended existingCompany’s financial statements. Further new authoritative accounting guidance for determining whether impairment is other-than-temporary for debt securities. Theunder ASC Topic 810 amends prior guidance requiresto change how a company determines when an entity to assess whether it intends to sell,that is insufficiently capitalized or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The impact of adoption was not material.In April 2009, the FASB issued guidance that emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weightcontrolled through voting (or similar rights) should be assigned to the indicationconsolidated. The determination of the asset or liability’s fair value. Adjustments to those transactions or prices should be applied to determine the appropriate fair value. The guidance, which was applied prospectively, was effective for interim and annual reporting periods ending after June 15, 2009 early adoption for periods ending after March 15, 2009. The impact of adoption was not material.In August 2009, the FASB amended existing guidance for the fair value measurement of liabilities by clarifying that in circumstances in whichwhether a quoted price in an active market for the identical liability is not available, a reporting entitycompany is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded asconsolidate an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with existing fair value guidance. The amendments in this guidance also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance was effective for the first reporting period beginning after issuance. The impact of adoption was not material.Effect of Newly Issued But Not Yet Effective Accounting StandardsIn June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (ASC 810). The new accounting requirement amends previous guidance relating to the transfers of financial assets and eliminates the concept of a qualifying special purpose entity. 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. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entitiesbased on, among other things, an entity’s purpose and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this Statement were also amendeddesign and apply to transfers that occurred both before and after the effective date of this Statement. 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.The FASB issued Statement of Financial Accounting Standards No. 167,Amendments to FASB Interpretation No. 46(R), which amended guidance for consolidation of variable interest entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the powercompany’s ability to direct the activities of a variable interestthe entity that most significantly impact the entity’s economic performanceperformance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and (1)any significant changes in risk exposure due to that involvement as well as its affect on the obligation to absorb lossesentity’s financial statements. The Company adopted the provisions of the entity or (2)new authoritative accounting guidance under ASC Topic 810 on January 1, 2010. Adoption of the rightnew guidance did not have a significant impact on the Company’s financial statementsreceive benefits fromenhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the entity. This Statementrisks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 860 on January 1, 2010. Adoption of the new guidance did not have a significant impact on the Company’s financial statements.enterprise’s involvement in variable interest entities. This Statementimpact on the Company’s statements of income and financial condition. The disclosures about activity that occurs will be effective 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. Early adoption is prohibited.after January 1, 2011, and will have no impact on the Company’s statements of income and financial condition.effectamendments do not affect the accounting for loans under the scope of adopting this new guidance is expectedSubtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be immaterial.subject to the troubled debt restructuring accounting provisions within ASC 310 Subtopic 310-40 Troubled Debt Restructurings by Creditors. The new authoritative accounting guidance under Subtopic 310-30 became effective in the third quarter of 2010 and did not have an impact on the Company’s financial statements.At December 31, 2009, the 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 December 31, 2009,2010, the Company had granted outstanding options to purchase 209,808 shares under the 2000 option plan and 40,037 shares under the 2006 plan.41,314 shares. The Company also had granted under the 2006 plan 110,397154,046 unvested shares net of forfeitures and vesting. The Company has 229,959160,922 shares remaining available for issue under the 2006 Plan.plan. All shares issued under the above mentioned plans came from authorized and unissued shares.47,41345,155 shares and granted 3,420issued 3,651 unvested shares to non-employee directors. At December 31, 2009, 47,4162010, 47,300 shares remain available for issue under this plan.granted under the 2000 plan have a life of ten years while those granted under the 2006 plan have a life of five years. December 31, 2009 Options Weighted
Average
Exercise
Price 297,810 $ 22.89 (552 ) 23.13 297,258 $ 22.89 December 31, 2010 Options 312,227 $ 21.80 (16,797 ) 21.55 (208,961 ) 22.27 86,469 $ 20.72 December 31, 2009 296,091 $ 22.90 $ 0 0.8 297,258 $ 0 0.8 December 31, 2010 86,412 $ 20.72 $ 0 0.8 86,469 $ 0 0.8 2009.2010. There were no options exercised during 20092010 or 2008.2009. The Company recorded $61,000$2,000 and $60,000$61,000 of stock option compensation during 20092010 and 2008,2009, respectively, to salaries and employee benefits. Since the stock options are non-qualified stock options, aA deferred tax benefit of $22,000$1,000 and $21,000,$22,000, respectively, was recognized.recognized related to this expense. No options were modified during either period. As of December 31, 2009,2010, no stock options issued by the Company have been exercised.20092010 or 2008.grantsissues 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 grantissuance date provided the employee or director continues in such capacity at the vesting date. The fair value on the date of grantissuance for shares issued during 2010 ranged from $10.85$11.05 to $13.52$12.81 per share. The Company recorded $325,000$465,000 and $220,000,$325,000, respectively, of stock-based compensation during 20092010 and 20082009 to salaries and employee benefits. There was no significant impact on compensation expense resulting from forfeited or expired shares. We expect that substantially all of the unvested shares outstanding at the end of the period will vest according to the vesting schedule. A deferred tax benefit of $114,000$163,000 and $77,000,$114,000, respectively, was recognized related to this expense. December 31, 2009 Shares Weighted
Average
Grant
Price 72,441 $ 19.83 54,268 10.97 (12,351 ) 19.19 (541 ) 23.13 113,817 $ 15.66 December 31, 2010 Shares 119,598 $ 15.00 72,655 11.11 (24,505 ) 14.46 (10,051 ) 12.78 157,697 $ 13.43 20092011 and beyond is estimated as follows (in thousands): $ 357 346 334 250 282 $ 487 477 389 273 174 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value (in thousands) $ 586 $ 33 $ — $ 619 24,537 955 (37 ) 25,455 91,127 4,028 — 95,155 33,516 279 (2,156 ) 31,639 13,054 760 (49 ) 13,765 704 — (175 ) 529 163,524 6,055 (2,417 ) 167,162 1,885 75 (401 ) 1,559 $ 165,409 $ 6,130 $ (2,818 ) $ 168,721 $ 2,938 $ 22 $ — $ 2,960 24,493 330 (415 ) 24,408 119,807 1,293 (118 ) 120,982 17,139 — (494 ) 16,645 6,489 39 (451 ) 6,077 704 — — 704 171,570 1,684 (1,478 ) 171,776 1,900 28 (627 ) 1,301 $ 173,470 $ 1,712 $ (2,105 ) $ 173,077 Amortized Cost Fair Value (in thousands) December 31, 2010 $ 5,973 $ 37 $ — $ 6,010 26,039 995 (32 ) 27,002 60,270 1,590 (5 ) 61,855 8,744 507 (32 ) 9,219 572 — — 572 101,598 3,129 (69 ) 104,658 1,400 254 (3 ) 1,651 $ 102,998 $ 3,383 $ (72 ) $ 106,309 December 31, 2009 $ 586 $ 33 $ — $ 619 24,537 955 (37 ) 25,455 91,127 4,028 — 95,155 33,516 279 (2,156 ) 31,639 13,054 760 (49 ) 13,765 704 — (175 ) 529 163,524 6,055 (2,417 ) 167,162 1,885 75 (401 ) 1,559 $ 165,409 $ 6,130 $ (2,818 ) $ 168,721 2009 2008 2007 (in thousands) $ 13,813 $ 24,339 $ 2,800 321 625 107 6 761 — 2010 2009 2008 (in thousands) $ 96,808 $ 13,813 $ 24,339 6,079 321 625 927 6 761 $(110,000)($1.8 million), ($110,000), and $48,000, and $(37,000), respectively.expectedcontractual maturity. ExpectedContractual maturities may differ from contractualactual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2009 Amortized
Cost Fair
Value (in thousands) $ 34,327 $ 34,203 87,276 90,638 26,122 27,260 15,799 15,061 $ 163,524 $ 167,162 December 31, 2010 (in thousands) Maturity Available-for-sale $ 1,855 $ 1,870 8,742 9,273 21,398 22,238 9,333 9,422 60,270 61,855 $ 101,598 $ 104,658 20092010 and 20082009 had carrying values of approximately $67,329,000$73,076,000 and $74,201,000,$67,329,000, respectively, and were pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances.20092010 and 2008,2009, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.20092010 and 2008,2009, 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 Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss (in thousands) $ 867 $ (5 ) $ 1,033 $ (32 ) $ 1,900 $ (37 ) 8 — — — 8 — 23,731 (1,977 ) 4,091 (179 ) 27,822 (2,156 ) — — 1,997 (49 ) 1,997 (49 ) 529 (175 ) — — 529 (175 ) 46 (12 ) 701 (389 ) 747 (401 ) $ 25,181 $ (2,169 ) $ 7,822 $ (649 ) $ 33,003 $ (2,818 ) $ 12,240 $ (412 ) $ 96 $ (3 ) $ 12,336 $ (415 ) 34,119 (61 ) 1,446 (57 ) 35,565 (118 ) 9,730 (494 ) — — 9,730 (494 ) 2,266 (141 ) 2,776 (310 ) 5,042 (451 ) 578 (315 ) 447 (312 ) 1,025 (627 ) $ 58,933 $ (1,423 ) $ 4,765 $ (682 ) $ 63,698 $ (2,105 ) The Company’s mortgage-backed securities portfolio includes non-agency collateralized mortgage obligations with a market value of $31.6 million which had unrealized losses of approximately $2.2 million at December 31, 2009. These non-agency mortgage-backed securities were rated AAA at purchase. The Company monitors to insure it has adequate credit support and as of December 31, 2009, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Less than 12 Months 12 Months or More Total Description of Securities (in thousands) 2010 $ 3,119 $ (32 ) $ — $ — $ 3,119 $ (32 ) 1,060 (5 ) — — 1,060 (5 ) 995 (32 ) — — 995 (32 ) 27 (1 ) 74 (2 ) 101 (3 ) $ 5,201 $ (70 ) $ 74 $ (2 ) $ 5,275 $ (72 ) 2009 $ 867 $ (5 ) $ 1,033 $ (32 ) $ 1,900 $ (37 ) 8 — — — 8 — 23,731 (1,977 ) 4,091 (179 ) 27,822 (2,156 ) — — 1,997 (49 ) 1,997 (49 ) 529 (175 ) — — 529 (175 ) 46 (12 ) 701 (389 ) 747 (401 ) $ 25,181 $ (2,169 ) $ 7,822 $ (649 ) $ 33,003 $ (2,818 ) As of2009, the Company holds 44 equity securities.2010. Of these securities, 101 had an unrealized loss of $12,000$1,000 and had been in an unrealized loss position for less than twelve12 months and 197 had an unrealized loss of $389,000$2,000 and had been in an unrealized loss position for more than 12 months. Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. DuringBased upon relevant market information and stock price trends in July and early August 2010, we determined that we could not objectively assert that our basis in 21 equity securities that had been in an unrealized loss position for more than 12 months was recoverable in the 2008 fourth quarter,near term. As a result, during 2010, we recorded an other than temporary impairment charge totaling $471,000$465,000 for equity securities held in our portfolio with an original cost of $832,000.$1.3 million. The market prices of the stocks hadhas been below our initial investment for more than twelve months and after consideration of the companiesissuers’ financial conditions and the likelihood the market value would recover to our cost basis in a reasonable period of time, the investment was written down to fair value. As of December 31, 2009,2010, management does not believe any of the remaining equity securities in our portfolio with unrealized losses should be classified as other than temporarily impaired. 2009 2008 (in thousands) $ 89,903 $ 90,978 1,259,474 1,202,019 25,064 16,181 36,989 37,783 1,488 3,145 1,412,918 1,350,106 (26,392 ) (19,652 ) $ 1,386,526 $ 1,330,454 2010 2009 (in thousands) $ 90,290 $ 89,903 Commercial Real Estate: 199,524 304,230 85,523 83,898 441,844 451,945 Residential Real Estate: 74,919 65,043 353,418 354,358 31,913 36,989 24,177 25,064 1,060 1,488 1,302,668 1,412,918 (34,285 ) (26,392 ) $ 1,268,383 $ 1,386,526 2009 2008 2007 (in thousands) $ 19,652 $ 16,342 $ 12,832 — 1,421 1,625 14,200 5,400 4,025 (7,731 ) (3,834 ) (2,374 ) 271 323 234 $ 26,392 $ 19,652 $ 16,342 2010 2009 2008 (in thousands) $ 26,392 $ 19,652 $ 16,342 — — 1,421 30,100 14,200 5,400 (22,461 ) (7,731 ) (3,834 ) 254 271 323 $ 34,285 $ 26,392 $ 19,652 Commercial Consumer Agriculture Other Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 23 $ 5,096 $ — $ — $ — $ — $ 5,119 Collectively evaluated for impairment 2,124 18,979 7,224 701 134 4 29,166 Total ending allowance balance $ 2,147 $ 24,075 $ 7,224 $ 701 $ 134 $ 4 $ 34,285 Loans: Loans individually evaluated for impairment $ 3,673 $ 51,223 $ 16,718 $ — $ 112 $ — $ 71,726 Loans collectively evaluated for impairment 86,617 675,668 411,619 31,913 24,065 1,060 1,230,942 $ 90,290 $ 726,891 $ 428,337 $ 31,913 $ 24,177 $ 1,060 $ 1,302,668 2009 2008 (in thousands) $ 21,373 $ 3,479 84,766 16,249 $ 106,139 $ 19,728 $ 5,453 $ 875 2009 2008 2007 (in thousands) $ 44,041 $ 19,066 $ 4,842 1,094 793 98 987 647 98 2010 2009 (in thousands) $ 41,885 $ 21,373 29,841 84,766 $ 71,726 $ 106,139 $ 5,119 $ 5,453 2010 2009 2008 (in thousands) $ 69,167 $ 44,041 $ 19,066 1,358 1,094 793 115 987 647 Nonperformingwere as follows: 2009 2008 (in thousands) 5,968 11,598 78,888 9,725 Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectivelyindividually evaluated for impairment. impairment by class of loan as of December 31, 2010: (in thousands) With No Related Allowance Recorded: $ 2,559 $ 2,523 $ — Commercial real estate: 3,269 3,268 — 6,745 6,746 — 12,662 12,518 — Residential real estate: 3,929 3,929 — 13,303 12,789 — — — — 119 112 — — — — With An Allowance Recorded: 1,150 1,150 23 Commercial real estate: 13,314 10,645 1,923 1,234 1,234 89 16,912 16,812 3,084 Residential real estate: — — — — — — — — — — — — — — — $ 75,196 $ 71,726 $ 5,119 20092010 we had restructured loans totaling $25.5 million, compared with $25.2 million at December 31, 2009, with borrowers who experienced deterioration in financial condition.conditions. These loans are secured by 1-4 residential or commercial real estate properties. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms. 2010 2009 (in thousands) $ 594 $ 5,968 59,799 78,888 Nonaccrual (in thousands) $ 2,778 $ 432 Commercial Real Estate: 12,651 — 2,811 143 23,031 12 Residential Real Estate: 345 — Other 17,778 — 293 7 112 — — — $ 59,799 $ 594 Commercial $ 477 $ 110 $ 432 $ 2,778 $ 3,797 $ 86,493 $ 90,290 Commercial Real Estate: 1,097 346 — 12,651 14,094 185,430 199,524 1,232 145 143 2,811 4,331 81,192 85,523 7,855 2,094 12 23,031 32,992 408,852 441,844 Residential Real Estate: 714 71 — 345 1,130 73,789 74,919 8,239 3,218 — 17,778 29,235 324,183 353,418 1,156 164 7 293 1,620 30,293 31,913 186 — — 112 298 23,879 24,177 — — — — — 1,060 1,060 Total $ 20,956 $ 6,148 $ 594 $ 59,799 $ 87,497 $ 1,215,171 $ 1,302,668 Pass Watch Substandard Doubtful Total (in thousands) $ 74,284 $ 5,478 $ 894 $ 9,634 $ — $ 90,290 Commercial Real Estate: 137,631 15,397 12,968 33,528 — 199,524 74,220 2,481 — 8,822 — 85,523 280,091 82,548 2,334 76,871 — 441,844 Residential Real Estate: 65,482 3,493 1,328 4,616 — 74,919 298,748 18,783 1,458 34,429 — 353,418 30,197 1,069 6 623 18 31,913 22,923 1,086 — 168 — 24,177 1,060 — — — — 1,060 $ 984,636 $ 130,335 $ 18,988 $ 168,691 $ 18 $ 1,302,668 2009 2008 (in thousands) $ 24,740 $ 22,363 17,253 16,581 41,993 38,944 (18,383 ) (16,401 ) $ 23,610 $ 22,543 2010 2009 (in thousands) $ 24,773 $ 24,740 17,541 17,253 42,314 41,993 (19,846 ) (18,383 ) $ 22,468 $ 23,610 $1,056,000 for 2009, 2008, and 2007, respectively. 2010 2009 (in thousands) Commercial Real Estate: $ 50,491 $ 7,526 1,904 442 6,504 1,938 Residential Real Estate: 823 — 7,913 4,642 $ 67,635 $ 14,548 OREO Activity (in thousands) $ 14,548 90,787 (14,062 ) 1,947 (25,585 ) $ 67,635 2010 2009 2008 (in thousands) $ 565 $ 190 $ 263 14,062 500 478 1,627 465 140 $ 16,254 $ 1,155 $ 881 2009 2008 (in thousands) $ 23,794 $ 18,174 — 5,986 — (334 ) — (32 ) $ 23,794 $ 23,794 Adjustments to 2010 2009 (in thousands) $ 23,794 $ 23,794 — — — — $ 23,794 $ 23,794 in 2008 resulted from finalizing evaluations relatedfor impairment by comparing the fair value of the reporting unit to the Ohio County Bancshares acquisitionbook value of the reporting unit. If the fair value, net of goodwill, exceeds book value, then goodwill is not considered to be impaired. We assessed goodwill for impairment during the fourth quarter of 2010 with the assistance of an independent valuation professional by applying a series of fair-value-based tests. While step 1 of the evaluation indicated potential impairment, the detailed step 2 test concluded that our goodwill was not impaired. Under prevailing accounting standards, different conditions, assumptions, or changes in 2007.year end: 2009 2008 Gross
Carrying
Amount Accumulated
Amortization Gross
Carrying
Amount Accumulated
Amortization (in thousands) $ 4,183 $ 1,207 $ 4,183 $ 748 100 23 100 13 In 2008, core deposit intangibles of $631,000 were acquired in the Paramount Bank acquisition and $48,000 of core deposit intangibles were disposed of in the sale of the Burkesville branch. 2010 2009 (in thousands) Amortized intangible assets: $ 4,183 $ 1,666 $ 4,183 $ 1,207 100 33 100 23 $115,000 for 2009, 2008, and 2007, respectively. $ 469 469 466 437 407 $ 469 466 437 407 345 78 – DEPOSITS$616,290,000$597,872,000 and $410,331,000$616,290,000 at year-end 2010 and 2009, and 2008, respectively. $ 947,704 40,114 68,722 8,238 173,206 205 $ 1,238,189 $ 638,962 167,077 26,198 155,325 179,058 200 $ 1,166,820 89 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 2009 2008 (in thousands) $ 11,517 $ 10,084 $ 10,912 $ 10,715 4.35 % 4.42 % $ 11,556 $ 11,369 4.21 % 4.45 % $ 11,517 $ 10,084 2010 2009 (in thousands) $ 11,616 $ 11,517 $ 11,529 $ 10,912 4.18 % 4.35 % $ 12,011 $ 11,556 4.20 % 4.21 % $ 11,616 $ 11,517 910 – ADVANCES FROM FEDERAL HOME LOAN BANK 2009 2008 (in thousands) $ 70,000 $ 126,595 12,980 16,181 $ 82,980 $ 142,776 2010 2009 (in thousands) Single maturity advance with fixed rate of 4.48% maturing in 2012, averaging 4.48% for 2010 $ 5,000 $ 70,000 Monthly amortizing advances with fixed rates from 0.00% to 6.49% and maturities ranging from 2011 through 2035, averaging 3.56% for 2010 10,022 12,980 $ 15,022 $ 82,980 $470,541,000$465,084,000 and $464,992,000$470,541,000 of first mortgage loans, under a blanket lien arrangement at year-end 20092010 and 2008.2009. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow up to an additional $138,304,000$101,624,000 at year-end 2009. Advances $ 67,684 2,183 6,713 1,208 837 4,355 $ 82,980 Advances $ 2,256 6,642 1,146 794 733 3,451 $ 15,022 2009,2010, the Company had approximately $69$19 million of federal funds lines of credit available from correspondent institutions, and $138.3$101.6 million unused lines of credit with the Federal Home Loan Bank.1011 – SUBORDINATED CAPITAL NOTE$9$8.6 million at December 31, 2009.2010. The note is unsecured, bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital. Interest only iswas due quarterly through September 30, 2010, at which time quarterly principal payments of $225,000 plus interest will commence.commenced. Scheduled principal payments of $900,000 per year are due each of the next five years with $4,050,000 due thereafter. The note is duematures July 1, 2020. At December 31, 2009,2010, the interest rate on this note was 3.29%.1112 – JUNIOR SUBORDINATED DEBENTURESThe trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption at the liquidation preference. Issuance
Date Optional
Prepayment
Date (2) Interest Rate (1) Junior
Subordinated
Debt Owed to
Trust Maturity
Date 02-13-2004 03-17-2009 3-month LIBOR + 2.85 % $ 5,000,000 02-13-2034 04-15-2004 06-17-2009 3-month LIBOR + 2.79 % 3,000,000 04-15-2034 12-14-2006 03-01-2012 3-month LIBOR + 1.67 % 14,000,000 03-01-2037 02-13-2004 03-17-2009 3-month LIBOR + 2.85 % 3,000,000 02-13-2034 $ 25,000,000 Description Interest Rate (1) 02-13-2004 03-17-2009 3-month LIBOR + 2.85% $ 5,000,000 02-13-2034 04-15-2004 06-17-2009 3-month LIBOR + 2.79% 3,000,000 04-15-2034 12-14-2006 03-01-2012 3-month LIBOR + 1.67% 14,000,000 03-01-2037 02-13-2004 03-17-2009 3-month LIBOR + 2.85% 3,000,000 02-13-2034 $ 25,000,000 (1) As of December 31, 20092010 the 3-month LIBOR was 0.25%0.30%.(2) The debentures are callable on or after the optional prepayment date at their principal amount plus accrued interest. 1213 – OTHER BENEFIT PLANS$295,000 in 2009, 2008, and 2007, respectively.$180,000,$264,000, $180,000 and $180,000 for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. The related liability was $1,161,000, $897,000 and $717,000 at December 31, 2010, 2009 and 2008, respectively, and is included in other liabilities on the balance sheets.Life insurance with a cash surrender value of $1,100,000 was purchased during 2006. The Company acquired life insurance with a cash surrender value in 2007 of $2,145,000 in the Ohio County Bancshares acquisition. The life insurance acquired in the Ohio County Bancshares acquisition was redeemed in 2008. It had a cash value of $2,179,000 at the time of redemption. The cash surrender value of all insurance policies was $7,509,000$7,805,000 and $7,227,000$7,509,000 at December 31, 20092010 and 2008,2009, respectively. Income earned from the cash surrender value of life insurance totaled $296,000, $283,000 $300,000 and $296,000$300,000 for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. The income is recorded as other non-interest income.1314 – INCOME TAXES 2009 2008 2007 (in thousands) $ 7,943 $ 7,413 $ 7,940 (2,519 ) (486 ) (716 ) $ 5,424 $ 6,927 $ 7,224 2010 2009 2008 (in thousands) $ 4,852 $ 7,943 $ 7,413 (7,898 ) (2,519 ) (486 ) $ (3,046 ) $ 5,424 $ 6,927 2009 2008 2007 (in thousands) $ 5,772 $ 7,328 $ 7,509 (303 ) (289 ) (210 ) (99 ) (112 ) (111 ) (45 ) (38 ) (38 ) 99 38 74 $ 5,424 $ 6,927 $ 7,224 2010 2009 2008 (in thousands) $ (2,600 ) $ 5,772 $ 7,328 Effect of: (302 ) (303 ) (289 ) (104 ) (99 ) (112 ) (45 ) (45 ) (38 ) 5 99 38 $ (3,046 ) $ 5,424 $ 6,927 2009 2008 (in thousands) $ 9,186 $ 6,757 — 137 165 165 92 154 59 79 1,019 691 10,521 7,983 575 424 1,159 — 1,276 1,276 1,679 1,720 55 — 716 724 5,460 4,144 $ 5,061 $ 3,839 2010 2009 (in thousands) $ 12,000 $ 9,186 5,316 501 362 165 31 92 43 59 652 518 18,404 10,521 Deferred tax liabilities: 508 575 1,159 1,159 1,276 1,276 1,666 1,679 98 55 739 716 5,446 5,460 $ 12,958 $ 5,061 20092010 related to unrecognized tax benefits.2006.1415 – RELATED PARTY TRANSACTIONS20092010 were as follows (in thousands): $ 1,655 14,135 (331 ) $ 15,459 $ 15,429 75 (13,781 ) $ 1,723 2008 were $4,300,000 and $9,775,000. As of December 31, 2008, we had $6.0 million of participations in real estate loans purchased from, and $23.7 million of participations in real estate loans sold to, these affiliate banks.1516 – PREFERRED STOCK314,820330,561 shares (the “Warrant Common Stock”) of the Company’s common stock, no par value per share, at an exercise price of $16.68$15.88 per share.executive compensation restrictions under the ARRA are more stringent than those currently in effect under the CPP, but it is yet unclear how these executive compensation standards will relate to the existing standards, or whether the standards will be considered effective immediately or only after implementing regulations are issued by the U.S. Treasury. The ARRA further provides that CPP recipients are permitted (subject to the U.S. Treasury’s consultation with the appropriate Federal banking agency, if any) to repay any assistance previously received without regard to any waiting periods and without regard to whether the financial institution has replaced the funds with funds from any other source. Upon repayment of assistance, the U.S. Treasury is to liquidate warrants associated with the assistance at the current market price and the financial institution will no longer be subject to any of the CPP compensation restrictions.1617 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS20092010 and 2008,2009, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. Actual Minimum Required
For Capital
Adequacy Purposes To be Categorized
As Well
Capitalized Under
Prompt Corrective
Action Provisions Amount Ratio Amount Ratio Amount Ratio $ 191.8 13.8 % $ 110.9 8.0 % N/A N/A 173.1 12.6 110.2 8.0 $ 137.8 10.0 % $ 165.3 11.9 % $ 55.5 4.0 % N/A N/A 146.8 10.7 55.1 4.0 $ 82.7 6.0 % $ 165.3 9.6 % $ 68.9 4.0 % N/A N/A 146.8 8.6 68.5 4.0 $ 85.6 5.0 % $ 187.6 14.1 % $ 106.8 8.0 % N/A N/A 159.7 12.0 106.5 8.0 $ 133.2 10.0 % $ 161.9 12.1 % $ 53.4 4.0 % N/A N/A 134.0 10.1 53.3 4.0 $ 79.9 6.0 % $ 161.9 10.1 % $ 64.1 4.0 % N/A N/A 134.0 8.4 64.0 4.0 $ 80.0 5.0 % The Company’s primary source of funds to pay dividends to stockholders is the dividends it receives from the Bank. The Bank is subject to certain regulations on Actual Amount Ratio Amount Ratio Amount Ratio 2010 Total Capital to risk-weighted assets $ 211.2 16.3 % $ 103.5 8.0 % N/A N/A 190.0 14.7 103.3 8.0 $ 129.1 10.0 % Tier 1 (Core) Capital to risk-weighted assets $ 186.3 14.4 % $ 51.8 4.0 % N/A N/A 165.1 12.8 51.6 4.0 $ 77.5 6.0 % Tier 1 Leverage Ratio $ 186.3 11.1 % $ 67.3 4.0 % N/A N/A 165.1 9.9 67.0 4.0 $ 83.8 5.0 % 2009 Total Capital to risk-weighted assets $ 191.8 13.8 % $ 110.9 8.0 % N/A N/A 173.1 12.6 110.2 8.0 $ 137.8 10.0 % Tier 1 (Core) Capital to risk-weighted assets $ 165.3 11.9 % $ 55.5 4.0 % N/A N/A 146.8 10.7 55.1 4.0 $ 82.7 6.0 % Tier 1 Leverage Ratio $ 165.3 9.6 % $ 68.9 4.0 % N/A N/A 146.8 8.6 68.5 4.0 $ 85.6 5.0 % itthat may declarebe paid to a holding company by its subsidiary banks without prior regulatory approval. Under these regulations,These laws limit the amount of dividends that may be paid in any calendar year is limited to thatcurrent year’s net profits,income, as defined in the laws, combined with the retained net profitsincome of the preceding two years, less any dividends declared during those periods. At year-end 2009, $37,575,000 of retained earnings wasDuring 2011, the amount available to thebe paid by PBI Bank to pay dividends.1718 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES 2009 2008 Fixed
Rate Variable
Rate Fixed
Rate Variable
Rate (in thousands) $ 17,690 $ 35,501 $ 14,274 $ 47,763 16,267 67,999 15,401 72,197 563 4,238 2,654 7,182 2010 2009 (in thousands) $ 8,973 $ 22,782 $ 17,690 $ 35,501 14,299 59,428 16,267 67,999 509 3,313 563 4,238 1819 – FAIR VALUESIn September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance also establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The guidance was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued guidance that delayed the effective date of this fair value guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Impaired loans are An impaired loan is evaluated at the time the loan is identified as impaired and areis recorded at the lower of cost or marketfair value. Fair value is measured based on the value of the collateral securing these loansthe loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.further evaluated quarterly for impairment. The aggregatebelow our underlying investment in the property, appropriate write-downs are taken.OREO acquired and/or written down tothe underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We do not obtain updated appraisals on a quarterly basis after the receipt of the initial appraisal. Rather, we internally review the fair value duringof the periodother real estate owned in our portfolio on a quarterly basis to determine if a new appraisal is disclosed below.recurringnon-recurring basis are summarized below:Fair Value Measurements at December 31, 2009 Using (in thousands) Carrying
Value Quoted Prices In
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 619 $ — $ 619 $ — 25,455 — 25,455 — 95,155 — 95,155 — 31,639 — — 31,639 13,765 — 13,765 — 529 — — 529 1,559 1,559 — — $ 168,721 $ 1,559 $ 134,994 $ 32,168 Fair Value Measurements at December 31, 2008 Using (in thousands) Carrying
Value Quoted Prices In
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 2,960 $ — $ 2,960 $ — 24,408 — 24,408 — 120,982 — 120,982 — 16,645 — 16,645 — 6,077 — 6,077 — 704 — 704 — 1,301 1,301 — — $ 173,077 $ 1,301 $ 171,776 $ — Fair Value Measurements at December 31, 2010 Using (in thousands) Quoted Prices In Significant Active Markets for Significant Other Unobservable Carrying Identical Assets Observable Inputs Inputs Description Value (Level 1) (Level 2) (Level 3) Available-for-sale securities $ 6,010 $ - $ 6,010 $ - State and municipal 27,002 - 27,002 - Agency mortgage-backed 61,855 - 61,855 - Corporate bonds 9,219 - 9,219 - Other debt securities 572 - - 572 Equity securities 1,651 1,651 - - Total $ 106,309 $ 1,651 $ 104,086 $ 572 Fair Value Measurements at December 31, 2009 Using (in thousands) Quoted Prices In Significant Active Markets for Significant Other Unobservable Carrying Identical Assets Observable Inputs Inputs Description Value (Level 1) (Level 2) (Level 3) Available-for-sale securities $ 619 $ - $ 619 $ - State and municipal 25,455 - 25,455 - Agency mortgage-backed 95,155 - 95,155 - Private label mortgage-backed 31,639 - - 31,639 Corporate bonds 13,765 - 13,765 - Other debt securities 529 - - 529 Equity securities 1,559 1,559 - - Total $ 168,721 $ 1,559 $ 134,994 $ 32,168 2009: Investment
Securities
Available-for-sale $ 0 23,168 17,349 1,084 (8,110 ) (1,323 ) $ 32,168 Balance of recurring Level 3 assets at January 1, 2010 $ 32,168 Sales (7,769 ) Net accretion (amortization) 606 Transfers to Level 2 (22,878 ) Principal paydowns (3,475 ) Other-than-temporary impairment write-down (132 ) Net change in unrealized gain (loss) 2,052 Balance of recurring Level 3 assets at December 31, $ 572 Fair Value Measurements at December 31, 2009 Using (in thousands) Carrying
Value Quoted Prices In
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 79,313 $ — $ — $ 79,313 14,548 — — 14,548 Fair Value Measurements at December 31, 2008 Using (in thousands) Carrying
Value Quoted Prices In
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 15,374 $ — $ — $ 15,374 Fair Value Measurements at December 31, 2010 Using Quoted Prices In Significant Active Markets for Significant Other Unobservable Carrying Identical Assets Observable Inputs Inputs Description Value (Level 1) (Level 2) (Level 3) Impaired loans Commercial $ 1,127 $ - $ - $ 1,127 Commercial real estate: Construction 8,722 - - 8,722 Farmland 1,145 - - 1,145 Other 13,728 - - 13,728 Other real estate owned, net Commercial real estate: Construction 50,491 - - 50,491 Farmland 1,904 - - 1,904 Other 6,504 - - 6,504 Residential real estate: Multi-family 823 - - 823 Other 7,913 - - 7,913 Fair Value Measurements at December 31, 2009 Using Quoted Prices In Significant Active Markets for Significant Other Unobservable Carrying Identical Assets Observable Inputs Inputs Description Value (Level 1) (Level 2) (Level 3) Impaired loans $ 79,313 $ - $ - $ 79,313 Other real estate owned, net 14,548 - - 14,548 $84.8$29.8 million, with a valuation allowance of $5.5$5.1 million, at December 31, 2009,2010, resulting in an additional provision for loan losses of $4.0 million for the year ended December 31, 2009.2010. At December 31, 2008,2009, impaired loans had a carrying amount of $15.4$84.8 million, with a valuation allowance of $875,000,$5.5 million, resulting in an additional provision for loan losses of $681,000$4.0 million for the year ended December 31, 2008.had a carrying amount of $67.6 million as of December 31, 2010, compared with $14.5 million.million at December 31, 2009. Write-downs of $14.1 million and $807,000 were takenrecorded on other real estate owned for the yearyears ended December 31, 2009. 2009 2008 Carrying
Amount Fair
Value Carrying
Amount Fair
Value (in thousands) $ 172,173 $ 172,173 $ 52,546 $ 52,546 — — 600 600 168,721 168,721 173,077 173,077 10,072 N/A 10,072 N/A 1,386,526 1,396,465 1,330,454 1,342,446 9,329 9,329 10,228 10,228 $ 1,530,096 $ 1,526,508 $ 1,288,549 $ 1,285,772 11,517 11,517 10,084 10,084 82,980 83,217 142,776 144,030 9,000 7,323 9,000 8,216 25,000 18,250 25,000 21,326 2,705 2,705 3,722 3,722 2010 2009 (in thousands) Financial assets $ 185,435 $ 185,435 $ 172,173 $ 172,173 106,309 106,309 168,721 168,721 10,072 N/A 10,072 N/A 345 345 334 334 1,268,383 1,276,198 1,386,526 1,396,465 7,668 7,668 9,329 9,329 Financial liabilities $ 1,467,668 $ 1,472,677 $ 1,530,096 $ 1,526,508 11,616 11,616 11,517 11,517 15,022 15,051 82,980 83,217 8,550 7,879 9,000 7,323 25,000 21,474 25,000 18,250 1,910 1,910 2,705 2,705 banks,financial institutions, repurchase agreements, mortgage loans held for sale, accrued interest receivable and payable, demand deposits, short-term borrowings, and variable rate loans or deposits that reprice frequently and fully. As permitted under ASC 825-10-55-3, “Disclosures about Fair Value of Financial Instruments,” for purposes of the disclosures in this footnote, the fair value of loans has been determined using the contractual cash flows of loans discounted at interest rates currently offered for similar loans. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. .At November 30, 2010, in conjunction with our assessment of the potential impairment of goodwill, the fair value of loans was estimated under ASC 820-10-35 which determines fair value using a market exit price concept. Under that method, the fair value of loans was $1.2 billion. Fair value of subordinated capital notes and junior subordinated debentures are based on current rates for similar types of financing. The carrying amount is the estimated fair value for variable and subordinated debentures that reprice frequently. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements, which is not material.NOTE 19 – BUSINESS COMBINATIONS AND BRANCH DISPOSALBurkesville BranchOn November 14, 2008, our subsidiary bank, PBI Bank, sold its branch located in Burkesville, Kentucky to First & Farmers National Bank of Somerset, Kentucky. The sales price was $800,000 and was paid in cash. The branch had approximately $13.1 million in deposits and $3.4 million in loans at the time of sale.Paramount BankOn February 1, 2008, the Company completed the acquisition of Paramount Bank in Lexington, Kentucky in a $5 million all-cash transaction. Operating results of Paramount Bank are included in the consolidated financial statements since the date of the acquisition. As a result of this acquisition, we expect to further solidify our market share in the Lexington market, expand our customer base to enhance deposit fee income, provide an opportunity to market additional products and services to new customers and reduce operating costs through economies of scale.The acquisition added approximately $73 million in loans and $76 million in deposits. The purchase price resulted in approximately $6 million in goodwill, and $631,000 in core deposit intangibles. The intangible assets will be amortized over 5-10 years, using an accelerated method. Goodwill will not be amortized but instead evaluated periodically for impairment. Goodwill and intangible assets will be deducted for tax purposes over 15 years using the straight-line method.The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition. (in thousands) $ 73,420 5,986 631 1,033 81,070 (75,657 ) (198 ) (75,855 ) $ 5,215 2009 2008 2007 (in thousands, except share and per share data) $ 11,068 $ 14,010 $ 14,229 (1,750 ) (194 ) — (176 ) (20 ) — $ 9,142 $ 13,796 $ 14,229 8,745,226 8,697,792 8,481,337 $ 1.05 $ 1.59 $ 1.68 2010 2009 2008 (in thousands, except share and per share data) $ (4,384 ) $ 11,068 $ 14,010 Less: (1,810 ) (1,750 ) (194 ) (177 ) (176 ) (20 ) 81 (97 ) (94 ) 103 — — Net income (loss) allocated to common shareholders, basic and diluted $ (6,187 ) $ 9,045 $ 13,702 Basic Weighted average common shares including unvested common shares and Series C preferred outstanding 10,640,872 9,182,487 9,132,682 (135,757 ) (97,831 ) (62,012 ) (171,616 ) — — 10,333,499 9,084,656 9,070,670 $ (0.60 ) $ 1.00 $ 1.51 Diluted Add: Dilutive effects of assumed exercises of common and Preferred Series C stock warrants — — — 10,333,499 9,084,656 9,070,670 $ (0.60 ) $ 1.00 $ 1.51 and 313,723 shares of common stock for 2007, were not considered in computing diluted earnings per common share because they were anti-dilutive. Additionally, a warrant for the purchase of 314,821330,561 shares of the Company’s common stock at an exercise price of $16.68$15.88 was outstanding at December 31, 2010, 2009 and 2008 (none at December 31, 2007) but was not included in the diluted EPSearnings per share computation as inclusion would have been anti-dilutive. 2009 2008 2007 (in thousands) $ 4,020 $ (878 ) $ (219 ) 315 (607 ) 107 3,705 (271 ) (326 ) (1,297 ) 95 112 $ 2,408 $ (176 ) $ (214 ) 2010 2009 2008 (in thousands) $ 4,553 $ 4,020 $ (878 ) 4,555 315 (607 ) (2 ) 3,705 (271 ) 1 (1,297 ) 95 $ (1 ) $ 2,408 $ (176 ) 2009 2008 (in thousands) $ 10,010 $ 24,148 7,554 2,005 174,647 160,439 776 777 2,733 3,277 $ 195,720 $ 190,646 $ 25,775 $ 25,775 611 658 169,334 164,213 $ 195,720 $ 190,646 2010 2009 (in thousands) ASSETS $ 18,064 $ 10,010 2,223 7,554 192,140 174,647 776 776 2,383 2,733 Total assets $ 215,586 $ 195,720 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 25,775 $ 25,775 396 611 189,415 169,334 $ 215,586 $ 195,720 INCOME 2009 2008 2007 (in thousands) $ 741 $ 402 $ 1,010 24 43 6,059 1,422 1,428 1,481 (819 ) (1,410 ) (1,984 ) (3,023 ) (3,461 ) (2,677 ) (1,655 ) (2,998 ) 3,889 (564 ) (1,081 ) (852 ) 12,159 15,927 9,488 $ 11,068 $ 14,010 $ 14,229 2010 2009 2008 (in thousands) $ 609 $ 741 $ 402 20 24 43 1,787 1,422 1,428 (659 ) (819 ) (1,410 ) (3,420 ) (3,023 ) (3,461 ) (1,663 ) (1,655 ) (2,998 ) (592 ) (564 ) (1,081 ) (3,313 ) 12,159 15,927 Net income (loss) $ (4,384 ) $ 11,068 $ 14,010 2009 2008 2007 (in thousands) $ 11,068 $ 14,010 $ 14,229 (12,159 ) (15,927 ) (9,488 ) 6 799 — 312 171 357 (76 ) (153 ) (1,388 ) 390 321 215 (459 ) (779 ) 3,925 — (12,000 ) (5,881 ) (5,075 ) — (3,823 ) 110 3,760 150 (4,965 ) (8,240 ) (9,554 ) 2009 2008 2007 (in thousands) — — (2,534 ) — 35,000 — — (301 ) (192 ) (1,721 ) (194 ) — (6,993 ) (6,711 ) (6,233 ) (8,714 ) 27,794 (8,959 ) (14,138 ) 18,775 (14,588 ) 24,148 5,373 19,961 $ 10,010 $ 24,148 $ 5,373 2010 2009 2008 (in thousands) Cash flows from operating activities $ (4,384 ) $ 11,068 $ 14,010 3,313 (12,159 ) (15,927 ) 84 6 799 (219 ) 312 171 225 (76 ) (153 ) 445 390 321 (536 ) (459 ) (779 ) Cash flows from investing activities (21,000 ) — (12,000 ) (514 ) (5,075 ) — 6,117 110 3,760 (15,397 ) (4,965 ) (8,240 ) Cash flows from financing activities 11,064 — 35,000 19,476 — — — — (301 ) (1,847 ) (1,721 ) (194 ) (4,706 ) (6,993 ) (6,711 ) 23,987 (8,714 ) 27,794 8,054 (14,138 ) 18,775 10,010 24,148 5,373 $ 18,064 $ 10,010 $ 24,148 Interest
Income Net Interest
Income Net
Income Earnings Per Share Basic Diluted (in thousands, except per share data) $ 23,502 $ 11,967 $ 3,061 $ .30 $ .30 23,645 12,813 3,245 .31 .31 23,802 14,374 4,536 .47 .47 23,517 14,900 226 (1) (.03 ) (.03 ) $ 25,674 $ 11,343 $ 3,597 $ .42 $ .42 25,041 11,972 3,973 .45 .45 25,106 12,433 4,100 .47 .47 24,286 11,478 2,340 .25 .25 Interest Net Interest Net Income Income Income Diluted (in thousands, except per share data) 2010 $ 22,626 $ 14,177 $ 3,256 $ .30 $ .30 22,126 14,727 (1,131 ) (2) (.18 ) (.18 ) 21,340 14,576 2,421 .16 .15 20,315 14,086 (8,930 ) (2) (.77 ) (.77 ) 2009 $ 23,502 $ 11,967 $ 3,061 $ .29 $ .29 23,645 12,813 3,245 .29 .29 23,802 14,374 4,536 .45 .45 23,517 14,900 226 (1) (.03 ) (.03 ) (1) Fourth quarter net income was lower than previous quarters due to increased provision for loan losses expense during the quarter. (2) Second and fourth quarter net income was lower than previous quarters due to increased provision for loan losses expense during the quarter and higher fair value write-down adjustments on other real estate owned. NOTE 24 – SUBSEQUENT EVENTSSubsequent to year end, we entered negotiations with a classified loan customer to obtain deedItem 9. Changes in lieu of foreclosure for a multi-unit residential condominium and patio home development located in our primary market area. The loans secured by this development totaled approximately $17 million at December 31, 2009Disagreements With Accountants on Accounting and were current at that time. The loans reached maturity in the first quarter of 2010Financial Disclosureduring the renewal process adverse conditions affecting our customer’s global financial condition came to light that warranted our actions to seek a deed to protect our collateral from potential liens and litigation arising from projects in which we were not involved.We received a deed to the property in March 2010 and transferred the property into Other Real Estate Owned at the carrying amount of our loans which approximated fair value less cost to sell. The transfer had no effect on our provision for loan losses and allowance for losses at December 31, 2009.Item 9.Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNoneItem 9A.Controls and Procedures2009.2010. Based on that evaluation, management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our Management’s Report on Internal Control Over Financial Reporting is set forth under Item 8 “Financial Statements and Supplementary Data,” identifies the framework used by management to evaluate the effectiveness of our internal control. This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.20092010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.Other InformationNoneItem 10.Directors and Executive Officers of the Registrant.2010,2011, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference.Item 11.Executive Compensation.2010,2011, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters2010,2011, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference.Item 13.Certain Relationships and Related Transactions.2010,2011, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference.Item 14.Principal Accountant Fees and Services.2010,2011, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference. (a) 1. The following financial statements are included in this Form 10-K: Consolidated Balance Sheets as of December 31, 2010 and 2009 Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009, and 2008 Consolidated Statements of Change in Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2010, 2009, and 2008 Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2009 and 2008Consolidated Statements of Income for the Years Ended December 31, 2009, 2008, and 2007Consolidated Statements of Change in Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2009, 2008, and 2007Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and 2007Notes to Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm (a) 2. List of Financial Statement Schedules Financial statement schedules are omitted because the information is not applicable. Financial statement schedules are omitted because the information is not applicable. (a) 3. List of Exhibits The Exhibit Index of this report is incorporated by reference. The compensatory plans or arrangement required to be filed as exhibits to this Form 10-K pursuant to Item 15(c) are noted with an asterisk in the Exhibit Index. The Exhibit Index of this report is incorporated by reference. The compensatory plans or arrangement required to be filed as exhibits to this Form 10-K pursuant to Item 14(c) are noted with an asterisk in the Exhibit Index.SIGNATURES PORTER BANCORP, INC.15, 201030, 2011 By: /s/ Maria L. Bouvette Maria L. Bouvette President & Chief Executive Officer Chairman of the Board of Directors March 15, 201030, 2011J. Chester Porter President and Chief Executive Officer March 15, 201030, 2011Maria L. Bouvette Chief Financial Officer March 15, 201030, 2011David B. Pierce Director March 15, 201030, 2011David L. Hawkins Director March 15, 201030, 2011W. Glenn Hogan Director March 15, 201030, 2011Sidney L. Monroe Director March 15, 201030, 2011Stephen A. Williams Director March 30, 2011 W. Kirk Wycoff Exhibit No. (1) 3.1 Amended and Restated Articles of Incorporation of Registrant.Registrant, dated December 7, 2005. Exhibit 3.1 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation.Incorporation, dated November 18, 2008. Exhibit 3.1 to Form 8-K filed November 24, 2008 is hereby incorporated by reference.3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation, dated June 29, 2010. Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference. 3.4 Articles of Amendment to the Amended and Restated Articles of Incorporation, dated June 30, 2010. Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference. 3.5 Articles of Amendment to the Amended and Restated Articles of Incorporation, dated October 22, 2010. Exhibit 4.8 to Form S-3 Registration Statement (Reg. No. 333-170678) filed November 18, 2010 is hereby incorporated by reference. 3.6 Bylaws of the Registrant.Registrant, dated November 30, 2005. Exhibit 3.2 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.4.1 Warrant to purchase up to 299,829 shares. Exhibit 4.1 to Form 8-K filed November 24, 2008 is hereby incorporated by reference. 4.2 Securities Purchase Agreement between the Registrant and the Purchasers thereto, dated as of June 30, 2010. Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference. 4.3 Registration Rights Agreement between the Registrant and the Purchasers thereto, dated as of June 30, 2010. Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference. 4.4 Letter Agreement between the Registrant and SBAV LP, dated as of July 23, 2010. Exhibit 10 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2010 is hereby incorporated by reference. 10.1+ USAccess Bank, Inc. (now known as PBI Bank) 2000 Stock Option Plan. Exhibit 10.1 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference. 10.2+ Amendment to PBI Bank 2000 Stock Option Plan. Exhibit 10.2 to Form 10-K filed March 26, 2009 is hereby incorporated by reference.10.3+ Porter Bancorp, Inc. Amended and Restated 2006 Stock Incentive Plan. Exhibit 10.2 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference. 10.4+ Form of Porter Bancorp, Inc. Stock Option Award Agreement. Exhibit 10.3 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference. 10.5+ Form of Porter Bancorp, Inc. Restricted Stock Award Agreement. Exhibit 10.4 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference. 10.6+ Form of Ascencia Bank (now known as PBI Bank) Supplemental Executive Retirement Plan. Exhibit 10.5 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference. 10.7+ Form of Amendment to PBI Bank Supplemental Executive Retirement Plan. Exhibit 10.7 to Form 10-K filed March 26, 2009 is hereby incorporated by reference.10.8+ Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, as amended May 22, 2008. Annex A Definitive Proxy Statement filed April 17, 2008 is hereby incorporated by reference. 10.9+ Amendment to Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, as amended May 22, 2008. Exhibit 10.9 to Form 10-K filed March 26, 2009 is hereby incorporated by reference.10.10 Promissory Installment Note of Maria L. Bouvette and J. Chester Porter, as borrowers, to David L. Hawkins, as lender. Exhibit 10.7 to Form S-1/A Registration Statement (Reg. No. 333-133198) filed May 24, 2006 is hereby incorporated by reference. Exhibit No. (1) Description 10.11 Letter Agreement, dated November 21, 2008 including the Securities Purchase Agreement – Standard Terms incorporated by reference therein, between the Company and the U.S. Treasury. Exhibit 10.1 to Form 8-K filed November 24, 2008 is hereby incorporated by reference. 10.12 Form of Waiver of Senior Executive Officers. Exhibit 10.2 to Form 8-K filed November 24, 2008 is hereby incorporated by reference. 10.13+ Porter Bancorp, Inc. 20082010 Incentive Compensation Bonus Plan. Exhibit 10.1310.14 to the Registrant’s Form 10-K/A10Q filed December 17, 2009with the SEC on May 11, 2010 is hereby incorporated by reference.10.14+ Porter Bancorp, Inc. 2011 Incentive Compensation Bonus Plan. 21.1 List of Subsidiaries of Porter Bancorp, Inc. 23.1 Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm.Firm31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14.15d-1431.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14.15d-1432.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350.135032.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350.135099.1 Certification of Principal Executive Officer pursuant to Section 30.15 of the U.S. Treasury’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance. 99.2 Certification of Principal Executive Officer pursuant to Section 30.15 of the U.S. Treasury’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance. + Management contract or compensatory plan or arrangement. (1) The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request. 80