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

Cautionary Note Regarding Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to differences in our results include, but are not limited to the factors listed in Part 2, Item 1A - Risk Factors in this report and the more detailed risks identified, and the cautionary statements included in our December 31, 2011 Annual Report on Form 10-K.

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

Overview

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

The Company reported net income of $151,000 and $1.7 million, respectively, for the three and six months ended June 30, 2012, compared with net loss of $40.0 million and $39.2 million, respectively, for the same periods of 2011. After deductions for dividends on preferred stock, accretion on preferred stock, and earnings/loss allocated to participating securities, net loss to common shareholders was $319,000 for the three months ended June 30, 2012, and net income to common shareholders was $661,000 for the six months ended June 30, 2012, compared with net loss to common shareholders of $39.0 million and $38.6 million, respectively, for the three and six months ended June 30, 2011. The 2011 results were negatively impacted by a non-recurring 100% goodwill impairment charge of $23.8 million, and higher provision for loan losses and OREO expense.

Basic and diluted income (loss) per common share were ($0.03) and $0.06 for the three and six months ended June 30, 2012, respectively, compared with basic and diluted loss per common share of ($3.33) and ($3.30) for the three and six months ended June 30, 2011, respectively.

Significant developments during the quarter and six months ended June 30, 2012 consist of the following:

? Net interest margin decreased 10 basis points to 3.40% in the first six months of 2012 compared with 3.50% in the first six months of 2011. The decrease in margin between periods was primarily due to lower interest earning assets coupled with lower rates on those assets and elevated non-accrual loan levels. Average loans decreased 14.1% to $1.1 billion in the first six months of 2012 compared with $1.3 billion in the first six months of 2011. Net loans decreased 18.3% to $989 million at June 30 2012, compared with $1.21 billion at June 30, 2011.

? We continue to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction and development loans totaled $81.8 million, or 68% of total risk-based capital, at June 30, 2012 compared to $101.5 million, or 85% of total risk-based capital, at December 31, 2011. Non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group totaled $376.6 million, or 313% of total risk-based capital, at June 30, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.

? Loan proceeds received from the reduction of our commercial real estate and construction and development loans were used primarily to redeem maturing certificates of deposit during the quarter. Deposits decreased 16.1% to $1.20 billion compared with $1.44 billion at June 30, 2011. Certificate of deposit balances declined $114.8 million during the first six months of 2012 to $909.5 million at June 30, 2012, from $1.02 billion at December 31, 2011. Demand deposits increased 1.5% during the first six months of 2012 compared with the fourth quarter of 2011, and increased 9.7% compared with the first six months of 2011.

? Non-performing loans decreased $11.6 million during the first six months of 2012 to $81.7 million at June 30, 2012, compared with $93.4 million at December 31, 2011. The decrease was primarily in the commercial and residential real estate segments of our portfolio.

? Loans past due 30-59 days decreased from $17.3 million at December 31, 2011 to $6.7 million at June 30, 2012. Loans past due 60-89 days increased from $3.9 million at December 31, 2011 to $4.4 million at June 30, 2012. The net decrease in loan past dues 30-89 days was primarily in the 1-4 family residential real estate, commercial real estate, and commercial segments of the portfolio.

? Foreclosed properties at June 30, 2012 increased to $54.4 million compared with $35.6 million at March 31, 2012, and $49.9 million at June 30, 2011. The Company acquired $23.9 million of OREO and sold $4.8 million of OREO during the second quarter of 2012. Our ratio of non-performing assets to total assets increased to 10.2% at June 30, 2012, compared with 6.65% at June 30, 2011.

These items are discussed in further detail throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" Section. For a discussion of our accounting policies, please see "Application of Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the calendar year ended December 31, 2011.

Recent Developments and Future Plans

During the first six months of 2012, we reported net income available to common shareholders of $661,000. This was an improvement from our 2011 results. During the year ended December 31, 2011, we recorded a net loss to common shareholders of $105.2 million. This loss was primarily attributable to a $23.8 million goodwill impairment charge, the establishment of a $31.7 million valuation allowance on our deferred tax assets, OREO expense of $47.5 million related to valuation adjustments for our change in strategy related to certain properties, fair value write-downs related to new appraisals received for properties in the portfolio during 2011, net loss on the sale of OREO properties, and increase in carrying costs associated with carrying these higher levels of assets, as well as provision for loan losses expense of $62.6 million due to the continued decline in credit trends within our portfolio.

In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. As of June 30, 2012, these capital ratios were not met.

In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies including the following:

? Continuing to operate the Company and Bank in a safe and sound manner. This strategy will require us to continue to reduce the size of our balance sheet, reduce our lending concentrations, consider selling loans, and reduce other noninterest expense through the disposition of OREO.

? Continuing with succession planning and add resources to management team. On March 29, 2012, the Board of Directors announced that it had formed a search committee comprised of its five independent directors to identify and hire a President and CEO for PBI Bank. On July 19, 2012, we reported that the Company had successfully filled this key position.

? Addressing other real estate owned.

o In 2011, management determined, with the concurrence of the Board of Directors, that certain properties held in OREO were not likely to be successfully disposed of in an acceptable time-frame using routine marketing efforts. It became apparent due to weakness in the economy and softness in demand for housing that certain land development and residential condominium projects would require extended holding periods to sell the properties at recent appraised values. Accordingly, management determined to market these properties more aggressively to retail and bulk buyers. In June 2011, the Company sold, in a single transaction, 54 finished condominium property units from condominium developments held in our OREO portfolio with a carrying value of approximately $11.0 million, for $5.2 million, resulting in a pre-tax loss of $5.8 million.
o Although we were carrying our OREO at fair market value less estimated cost to sell, we subsequently adjusted our valuations for land development and residential development properties held in OREO similar to the properties we sold earlier in 2011. Our 2011 fair value adjustments totaled approximately $25.6 million to reflect our intent to market these properties more aggressively to retail and bulk buyers. Additionally, we recorded approximately $9.3 million of fair value adjustments related to new appraisals received for properties in the portfolio during 2011.
o In summary, for the years ended December 31, 2011 and 2010 respectively, we recorded net construction and development OREO fair value adjustments and loss on sale of OREO totaling $38.7 million and $10.4 million. This represents approximately 89% and 71% of our total OREO fair value adjustments and loss on sale in 2011 and 2010, respectively.
o For the first six months of 2012, we recorded net construction and development OREO fair value adjustments and loss on sale of construction and development OREO of $280,000. This represents approximately 16% of our total OREO fair value adjustments and loss on sale of OREO in the first six months of 2012.

? We are committed to reducing loan concentrations and balance sheet risk.

o We recorded net construction and development loan charge-offs totaling $1.3 million during the first six months of 2012. This represented approximately 15% of our total net loan charge-offs for the first six months of 2012. We recorded net construction and development loan charge-offs totaling $11.0 million and $11.4 million in for the years ended December 31, 2011 and 2010, respectively. This represented approximately 27% and 51% of our total net loan charge-offs in 2011 and 2010, respectively.

o Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. We were in compliance at June 30, 2012 with construction and development loans representing 68% of total risk-based capital. These loans totaled $81.8 million, or 68% of total risk-based capital, at June 30, 2012 and $101.5 million, or 85% of total risk-based capital, at December 31, 2011.

o Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group, to not more than 250% of total risk-based capital. We were not in compliance at June 30, 2012 with non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group representing 313% of total risk-based capital. These loans totaled $376.6 million, or 313% of total risk-based capital, at June 30, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.

o We are working to reduce these loans by curtailing new construction and development lending and new non-owner occupied commercial real estate lending. We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale. We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $81.8 million at June 30, 2012. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $234.9 million at June 30, 2012.

? Raising capital by selling common stock through a public offering or private placement to existing and new investors.

? Evaluating other strategic alternatives, such as the sale of assets or branches.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.

Results of Operations

The following table summarizes components of income and expense and the change
in those components for the three months ended June 30, 2012, compared with the
same period of 2011:

                                   For the Three Months             Change from
                                      Ended June 30,                Prior Period
                                    2012           2011         Amount       Percent
                                                (dollars in thousands)

Gross interest income            $    14,812     $  19,198     $  (4,386 )      (22.8 )%
Gross interest expense                 4,017         5,757        (1,740 )      (30.2 )
Net interest income                   10,795        13,441        (2,646 )      (19.7 )
Provision for loan losses              4,000        13,700        (9,700 )      (70.8 )
Non-interest income                    3,018         2,865           153          5.3
Non-interest expense                   9,662        54,759       (45,097 )      (82.4 )
Net income (loss) before taxes           151       (52,153 )      52,304       (100.3 )
Income tax expense (benefit)               -       (12,164 )      12,164       (100.0 )
Net income (loss)                        151       (39,989 )      40,140       (100.4 )

Net income for the three months ended June 30, 2012 increased $40.1 million to $151,000 compared with net loss of $40.0 million for the comparable period of 2011. Second quarter 2011 results were negatively impacted by a non-recurring 100% goodwill impairment charge of $23.8 million. OREO expense decreased $20.9 million from the 2011 second quarter due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expense. Provision for loan losses expense decreased $9.7 million in the second quarter of 2012 compared with the same period in 2011 primarily as the result of lower net charge-offs and a decrease of $208.9 million in outstanding loan balances between periods. These decreases were partially off-set by a $55.3 million increase in internal loan downgrades between periods. Additionally, gain on sales of investment securities was $1.5 million for the second quarter of 2012 compared with $1.0 million in the second quarter of 2011. These improvements were partially offset by a decrease of $2.6 million in net interest income from the 2011 second quarter due to a 10 basis point decline in net interest margin.

The following table summarizes components of income and expense and the change in those components for the six months ended June 30, 2012 compared with the same period of 2011:

                                   For the Six Months             Change from
                                     Ended June 30,               Prior Period
                                   2012          2011         Amount       Percent
                                               (dollars in thousands)

Gross interest income            $  30,567     $  38,814     $  (8,247 )      (21.2 )%
Gross interest expense               8,318        11,605        (3,287 )      (28.3 )
Net interest income                 22,249        27,209        (4,960 )      (18.2 )
Provision for credit losses          7,750        18,800       (11,050 )      (58.8 )
Non-interest income                  6,463         4,652         1,811         38.9
Non-interest expense                19,309        64,154       (44,845 )      (69.9 )
Net income (loss) before taxes       1,653       (51,093 )      52,746       (103.2 )
Income tax expense (benefit)             -       (11,903 )      11,903       (100.0 )
Net income (loss)                    1,653       (39,190 )      40,843       (104.2 )

Net income of $1.7 million for the six months ended June 30, 2012, was an increase in earnings of $40.8 million from net loss of $39.2 million for the comparable period of 2011. A non-recurring 100% goodwill impairment charge of $23.8 million was recorded during the first half of 2011. OREO expense decreased $21.0 million from the first half of 2011 due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expense. Provision for loan losses expense decreased $11.1 million in the first six months of 2012 compared with the same period in 2011 primarily as the result of lower net charge-offs and a decrease of $208.9 million in outstanding loan balances between periods. These decreases were partially off-set by a $55.3 million increase in internal loan downgrades between periods. Additionally, gain on sales of investment securities was $3.5 million for the first six months of 2012 compared with $1.1 million for the first six months of 2011. These improvements were partially offset by a decrease of $5.0 million in net interest income from the first six months of 2011 due to a 10 basis point decline in net interest margin.

Net Interest Income - Our net interest income was $10.8 million for the three months ended June 30, 2012, a decrease of $2.6 million, or 19.7%, compared with $13.4 million for the same period in 2011. Net interest spread and margin were 3.20% and 3.35%, respectively, for the second quarter of 2012, compared with 3.30% and 3.45%, respectively, for the second quarter of 2011. Net interest income was $22.2 million for the six months ended June 30, 2012, a decrease of $5.0 million, or 18.2%, compared with $27.2 million for the same period of 2011. Net interest spread and margin were 3.25% and 3.40%, respectively, for the first six months of 2012, compared with 3.34% and 3.50%, respectively, for the first six months of 2011. Net average non-accrual loans were $90.9 million and $63.9 million in the first six months of 2012 and 2011, respectively.

Average loans receivable declined approximately $189.7 million for the quarter ended June 30, 2012 compared with the second quarter of 2011. This resulted in a decline in interest revenue of approximately $3.9 million for the quarter ended June 30, 2012 compared with the prior year period. Average loans receivable declined approximately $180.6 million for the six months ended June 30, 2012 compared with the first six months of 2011. This resulted in a decline in interest revenue of approximately $7.5 million for the six months ended June 30, 2012 compared with the prior year period. This decline in loan volume is attributable to soft loan demand in our markets as well as our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio.

Net interest margin decreased 10 basis points from our margin of 3.45% in the prior year second quarter. The yield on earning assets declined 32 basis points from the second quarter of 2011, compared with a 22 basis point decline in rates paid on interest-bearing liabilities. Net interest margin for the first six months of 2012 decreased 10 basis points from our margin of 3.50% in the first half of 2011 due primarily to lower average earning assets relative to average interest bearing liabilities. The yield on earning assets declined 31 basis points from the first six months of 2011, compared with a 22 basis point decline in rates paid on interest-bearing liabilities.

Net interest margin for the second quarter of 2012 decreased 10 basis points from our margin of 3.45% in the first quarter of 2012 due primarily to lower average loan receivables and lower yield on loans, coupled with lower yield on investment securities. Average loan receivables declined $40.7 million from the first quarter of 2012 due to our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio and increased foreclosures. Yield on loans was adversely affected by an increase in interest foregone on non-accrual loans. Interest foregone on non-accrual loans totaled $1.3 million in the second quarter of 2012, compared with $790,000 in the first quarter of 2012. The decrease in yield on investment securities was the result of reinvestment of scheduled principal and interest payment proceeds and securities sales proceeds at lower rates. Yield on average earning assets for the second quarter of 2012 decreased 14 basis points from 4.73% in the first quarter of 2012, compared with a 4 basis points decrease in rates paid on interest-bearing liabilities from 1.43% in the first quarter of 2012.

Average Balance Sheets

The following table presents the average balance sheets for the three month
periods ended June 30, 2012 and 2011, along with the related calculations of
tax-equivalent net interest income, net interest margin and net interest spread
for the related periods.

                                                                Three Months Ended June 30,
                                                  2012                                              2011
                                Average         Interest          Average         Average         Interest          Average
                                Balance        Earned/Paid      Yield/Cost        Balance        Earned/Paid      Yield/Cost
                                                                  (dollars in thousands)
ASSETS
Interest-earning assets:
   Loan receivables (1)(2)    $ 1,078,497     $      13,689            5.10 %   $ 1,268,196     $      17,589            5.56 %
   Securities
Taxable                           149,482               783            2.11         120,738             1,126            3.74
Tax-exempt (3)                     22,977               196            5.28          27,722               268            5.97
   FHLB stock                      10,072               107            4.27          10,072               112            4.46
   Other equity securities          1,359                14            4.14           1,400                13            3.72
   Federal funds sold and
other                              45,133                23            0.20         152,057                90            0.24

Total interest-earning
assets                          1,307,520            14,812            4.59 %     1,580,185            19,198            4.91 %

Less: Allowance for loan
losses                            (53,546 )                                         (34,287 )
Non-interest earning assets       109,366                                           162,655

Total assets                  $ 1,363,340                                       $ 1,708,553

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
   Certificates of deposit
and other time deposits       $   930,012     $       3,517            1.52 %   $ 1,159,610     $       4,802            1.66 %
   NOW and money market
deposits                          149,174               169            0.46         172,300               408            0.95
   Savings accounts                39,181                40            0.41          37,338                62            0.67
   Repurchase agreements            2,121                 2            0.38          11,169               118            4.24
   FHLB advances                    6,538                54            3.32          18,015               139            3.09
   Junior subordinated
debentures                         32,421               235            2.92          33,325               228            2.74

Total interest-bearing
liabilities                     1,159,447             4,017            1.39 %     1,431,757             5,757            1.61 %

Non-interest-bearing
liabilities:
   Non-interest-bearing
deposits                          112,914                                           104,211
   Other liabilities                6,992                                             5,983

Total liabilities               1,279,353                                         1,541,951
Stockholders' equity               83,987                                           166,602

Total liabilities and
stockholders' equity          $ 1,363,340                                       $ 1,708,553

Net interest income                           $      10,795                                     $      13,441

Net interest spread                                                    3.20 %                                            3.30 %

Net interest margin                                                    3.35 %                                            3.45 %

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

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

Average Balance Sheets

. . .