Porter Bancorp Inc.'s largest outside shareholder says that the Louisville, Ky., company continues understate its level of problem loans despite its recent claims that its allowance for loan losses is sufficient.

In a letter to the company's board filed with the Securities and Exchange Commission Monday, Clinton Group Inc. of New York also demanded a management change, arguing that the $1.5 billion-asset company "has lost all credibility with investors."

Responding to earlier concerns from Clinton, Porter's board conducted an examination of the company's allowance for loan losses and concluded in mid-November that its accounting methods are sound.

But Clinton, which owns roughly 9.4% of Porter's outstanding shares, claimed in Monday's letter that the board's conclusions are incorrect and that Porter "continues to obfuscate problem assets on its balance sheet, [threatening] the safety and soundness" of its PBI Bank.

Porter set aside roughly $27 million for loan losses through the first nine months of 2011, compared to $14.6 million through same period in 2010. Year to date, the company has lost nearly $39 million.

In the letter, Clinton CEO George Hall wrote that while the company has the highest ratio of nonperforming to total loans among all Kentucky banks with at least $600 million of assets, it has one of the lowest ratios of reserves.

"We believe there will be more 'surprises' in the loan book," Hall wrote.

He also questioned the accuracy of its stated book value of $8.38 per share, given that its shares are trading in the $2.50 range.

Hall concluded the letter by urging the company's independent directors to quickly replace the management team and raise capital.

"This is not the time for further studying, slow steps or a lack of temerity," he wrote.

A call to Porter's CEO, Maria Bouvette, was not immediately returned.

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